Proposition 23 and California Employment

Proposition 23 and California Employment

Proposition 23, on next Tuesday’s ballot, would suspend the implementation of the California Global Warming Solutions Act of 2006 (AB 32) until the state unemployment rate, now 12.4 percent, declines to 5.5 percent for four quarters. A new study published by the Pacific Research Institute examines the employment implications of that initiative, finding that it would increase total state employment by more than 500,000 in 2012, and more than 1.3 million in 2020, when that employment effect would be about 5 percent of the working-age population.

Labor and energy are economic complements; an increase in the cost of one will reduce its use and the demand for the other. That complementarity is an eternal truth that even the alchemists in Sacramento cannot change: For the period 1976-2008, during periods of energy prices low and high, changes in total California energy consumption and changes in employment have been correlated highly. Moreover, the labor intensity of California energy use—in effect, the employment supported by each increment of total energy consumption—has increased virtually every year during that period.

Correlation, of course, is not causation. The PRI study examines that historical relationship while controlling for other relevant factors, and finds that a reduction in energy use of 10 percent would yield an adverse employment effect of 8 percent.

AB 32 requires a reduction in the emissions of so-called greenhouse gases to 1990 levels by 2020, or about 25-30 percent. That legislation both explicitly and implicitly is a tax on conventional energy use; the state Air Resources Board estimates that the resulting decline in total energy consumption would be about 4.5 percent in 2012, rising to 9.4 percent in 2020.

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. Opponents of Proposition 23 can talk all they want about “green jobs,” but the larger reality is that such employment represents less than 3 percent of state employment even under an absurdly expansive definition.

More fundamentally, without a dramatic change in the state’s industrial mix – and, therefore, a hugely expensive replacement of the fixed nonresidential capital stock (more than $200 billion for a replacement of “only” 10 percent) – there is no evidence that the central employment/energy relationship is changing. Translation: “Green” employment cannot become important without massive subsidies.

That is a hard reality discovered by the Germans, who have spent about $244,000 for each green job. That is a bargain compared with the Spanish experience, in which each green job has cost about $791,000 and has resulted in the loss of 2.2 ordinary jobs. “Clean” energy is massively expensive and unreliable even apart from its own considerable environmental problems; and, in any event, the evidence is clear that the combination of taxes on conventional energy and subsidies for renewables yields a net loss of employment that is very large.

AB 32 originally was justified on the grounds that “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 United States, 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.

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.