Weekly John Locke Foundation research division newsletter focusing on environmental issues.
This newsletter highlights relevant analysis done by the JLF and other think tanks as well as items in the news.
1. Suffolk University’s Beacon Hill Institute responds to critics of their RPS studies
Back in 2009 the Beacon Hill Institute, an economic research institute located at Suffolk University in Boston, did an economic analysis of North Carolina’s renewable portfolio standard, often simply referred to as Senate Bill 3 (SB3), which had been passed two years before. The law sets minimum requirements for the amount of electricity that is to be generated from renewable sources like wind and solar. In their study, they concluded that SB3 will cost the state over $140 million in gross state product and over 3500 jobs. This study turned out to be the first of many the BHI did assessing similar mandates in states across the country. All of these studies showed similar results. It should be noted that the BHI institute is made up of highly qualified cost-benefit economists and its president and founder is the chairman of Suffolk University’s economics department.
Given that in case after case their analysis shows net economic harm coming to state economies as a result of mandatory renewable portfolio standards, it is no surprise that the BHI and the economic model that it employs, a model that it developed called STAMP (State Tax Analysis Modeling Program), is coming under sharp criticism.
So who is leading the charge? An equally qualified economist or team of economists from a prestigious think tank or university economics department? Think again. The critic of BHI’s studies and their STAMP model is an employee of the Union of Concerned Scientists named Jeff Deyette whose credentials are listed as "a master’s degree from Boston University in energy resource and environmental management & international relations, and a bachelor’s degree from St. Lawrence University in environmental science and government;" in other words, he has no apparent expertise in economics. And what is this highly qualified critic’s main complaint? Basically it’s that the STAMP model is not a Keynesian model. Keynesian economics argues, among other things, that increasing government spending and deficits will reduce unemployment and stimulate economic growth. It was the basis for Obama’s failed 2009 stimulus package.
The Keynesian model is based on the idea that the economy is driven by what is called aggregate demand, i.e. total spending, in an economy. So if there is direct or mandated government spending on green energy, or anything else for that matter, it will show up in a Keynesian model as a benefit to the economy. The relative economic efficiency of the spending and the opportunity costs of the spending are ignored. This is the approach used by green energy advocates. They always assume that demand is somehow too low and needs to be pumped up by government supported spending on, of course, things like solar or wind power. Interestingly enough, you could substitute for green energy pretty much anything into their models, including spending on pyramid building or digging ditches and filling them back in, and you would get the same result.
So BHI has published a response to its critics with a focus on the criticisms of the Union of Concerned Scientist’s non-economist. In response to the complaint that their model is not a Keynesian model BHI notes that:
Even if we take the best economic analysis by green energy advocates, job creation figures work on the assumption that there will be a shortfall in aggregate demand for decades. That makes no sense historically or theoretically…Practically speaking, the reason why RPS would increase investment is by legally mandating the purchase of more expensive equipment. Any number of alternative projects or regulations would have identical effects. In other words, projects that have nothing to do with green energy would have the same effect on jobs [my mention of pyramids above]. The interesting question (and what BHI’s methodology is better at doing) is examining whether making these specific investments are worthwhile in comparison.
As BHI points out, their STAMP model looks at how taxes and regulations impact the cost of production. The higher are production costs the more negative the impact on economic growth and therefore job creation. In this sense it is what might best be referred to as a supply side as opposed to a demand side model. As they point out:
…the effects derived from STAMP always apply; i.e., there are always supply side job effects to higher imposed costs or tax increases, regardless of aggregate demand.
The BHI economists correctly berate their critics for not even correctly understanding their own cherished Keynesian model. It is a well-known tenant of Keynesianism that government subsidies will only lead to actual economic stimulus if they are financed with deficits:
"We also believe that green energy advocates must be more careful in communicating the economic rationale for the job creation. Government spending will not increase overall spending unless it is financed with deficits."
Of course state government generally requires a balanced budget.
In their response to the Union of Concerned Scientists, BHI addresses a number of other less important criticisms. All of their responses are equally devastating. Their entire response, which is only a few pages long, is worth reading.
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