California: the make-believe state

California: the make-believe state

“If I am elected, the bald will grow thick hair.” Alas, I am not a candidate for anything, and so the bald will have to continue their suffering in silence. And, frankly, were I campaigning for a position of public trust, I would lose badly, for reasons entirely separate from my utter lack of schmoozing skills. The real reason is quite simple: In no universe would I be able to out-promise any randomly-selected opponent here in the land of Hollywood fantasies, San Francisco nuttiness, and 12.4 percent unemployment.

Well, you ask, why not? After all, anyone can make promises. Not really: One has to make promises with a straight face, a rather different skill. And here in California, one loud promise made in 2006 with the enactment of the Global Warming Solutions Act (“AB32”) — which requires a reduction in the emissions of so-called greenhouse gases to 1990 levels by 2020, or about 25-30 percent — was that this legislation would increase aggregate employment, particularly in the form of (undefined) “green” jobs. And that promise was made with uniformly straight faces by a broad spectrum of California pols, prominent among them Governor Arnold Schwarzenegger, bodybuilder, terminator, and political wuss.

What about the fact that green energy must be subsidized heavily, whether through the tax system or by regulation, in order to compete, even in regulated energy markets? Irrelevant. What about the dismal experience in Spain, where each green job has cost $791,000 (over 571,000 Euros) and has resulted in the loss of 2.2 ordinary jobs? Irrelevant. What about the German experience, where each green job has cost as much as $244,000 (about 175,000 Euros)? Irrelevant.

And since any reduction of greenhouse emissions by necessity must be achieved by cutting the use of conventional fuels, total energy use must fall because renewables cannot and never have replaced conventional fuels on a Btu basis. Since energy and employment are complementary inputs in any sensible aggregate economic model, a reduction in total energy use can be predicted to yield a reduction in total employment; the question is whether that effect is large or small.

A new study from the Pacific Research Institute (author: yours truly) examines that question for California, where voters next month will decide (Proposition 23) whether to suspend the implementation of AB32 until the state unemployment rate reaches 5.5 percent for four quarters. The econometric analysis is based upon the California Air Resources Board estimates of the decline in total California energy use attendant upon implementation of AB32 for 2010-2020, and the historical energy/employment relationship for the state.

In brief: Suspension of AB32 would yield increases in total California employment of almost 150,000 in 2011, over 500,000 in 2012, and over 1.3 million in 2020. The following figure displays the alternative projected employment paths.

Suspension of AB32 would increase long-term annual employment growth by 1 percentage point, and would increase total employment in 2020 by about 5 percent of the working-age population.

Needless to say, these effects are not trivial. The environmental left can blather all it wants about technological advances and “efficiency”; but the reality is that since the mid-1970s, the labor intensity of California energy use — in effect, the employment “supported” by each increment of total energy consumption — has increased almost monotonically. There is no evidence that the employment/energy relationship is becoming weaker.

This is not surprising. Like all geographic entities, California has certain long-term characteristics — climate, available resources, geographic location, trading partners, ad infinitum – that determine in substantial part the long-run comparative advantages of the state in terms of economic activities and specialization.

The original justification for AB32 was — I am not kidding — “California has to be a leader,” a rationale shallow even by the standards of political sloganeering. With the state reeling under massive budget deficits, an unemployment rate at 12.4 percent, and among the worst tax/regulatory environments in the U.S., it will be interesting to see if the voters in this deep-blue state will choose to turn away from a regulatory juggernaut promising massive costs and, literally, no benefits.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.