When Theory and Evidence Collide

When Theory and Evidence Collide

Joint computer modeling at the University of California, University of Illinois and Yale University claims that large-scale technology subsidies and heavy-handed clean energy and climate protection legislation stimulates economic growth by increasing consumer income and creating jobs. According to economic models constructed by the three institutions, such wide-ranging legislation can strengthen not only the U.S. economy as a whole, but invigorate Michigan’s economy in particular.

In reality, this theoretical economic modeling is in direct conflict with actual evidence that aggressive clean energy policies damage economies, reduce employment and harm competitive markets. Nowhere is this more evident than in Spain and Denmark, ironically the two nations most widely touted as examples of government-mandated clean energy. In fact, there is no real-world example where such policies have succeeded.

According to the university models, between 2010 and 2020 these mandates would:

On a national level, create between 918,000 (moderate efficiency case) and 1.9 million (high efficiency case) new jobs; increase annual household income by $487 to $1,175 per year; and boost gross domestic product between $39 billion and $111 billion — with all of those benefits measured relative to a scenario without such legislation.

Create between 37,000 and 42,000 jobs in Michigan — on top of an increase of 933,000 jobs that the models forecast would otherwise occur over the same timeframe through free-market growth.

Increase Michigan’s real GDP between $2 billion and $2.4 billion more than without legislation. That is a 0.4 percent to 0.5 percent increase on top of cumulative baseline growth of 35.1 percent.

Lead to average real household income in Michigan that is $667 to $750 higher per year than without the legislation (2008 dollars).

However, what sounds good in theory isn’t necessarily true.

For a long time, fans of renewable electricity mandates have made their case by running computer simulations. Input the right data and (more importantly) the right assumptions, impose a renewable portfolio requirement, carbon plan or exorbitant subsidies, compute anywhere from 10 to 30 years forward and walk into a clean, fully employed future. Then reality intervened in the form of two nationwide case studies.

According to the U.S. Bureau of Labor Statistics, manufacturing productivity decreased in 2008 in almost all of the 17 economies it tracked. Productivity is a measure of the efficient use of labor and reflects higher skills, more efficient use of time and other wealth-creating factors. The computer models used in the university simulations account poorly for labor productivity or technological innovation, both critical to future emissions and economic growth.

Denmark experienced the second largest productivity decline in 2008, (negative 4.5 percent) as well as overall loss of production and employment. Spain, also with a strong green economic policy, saw steep declines in all three of the above-named factors. Both countries have had poor to negative productivity records since about 1995. The Republic of Korea and the United States led productivity growth in 2008 with slight increases of 1.2 percent each, but without the negative focus of “green.” In fact, the U.S. has been improving its carbon intensity (a measure of production per unit of carbon emitted) annually over the past 20 years, along with labor productivity, and is doing better than those countries with strong climate change policies — we are emitting less and less as we make more and more. While other factors are also involved in the poor productivity records of Denmark and Spain, the fact that they’re paying high prices for energy and high taxes to subsidize favored technologies cannot be ignored.

Denmark’s 20 percent wind generation and green policy is often used as the shining example we should follow. The country actually uses less than half of that green power, but can keep the machines and the rest of the economy spinning thanks to connections with the coal-based German grid and the nuclear- and hydro-based Scandinavian grids. For all their green policy and wind turbines, Denmark experiences the highest power costs in Europe. There is now an excellent report by Danish think-tank CEPOS, which points out that in a few years Denmark’s neighbors will be producing so much of their own wind power that their grids will have difficulty accepting Denmark’s, even if it’s given away for free. This will further erode Denmark’s productivity, because factors of production will be spent producing something of zero value. Using higher cost sources of energy reduces overall productivity of an economy and competitiveness while at the same time negatively impacting employment levels and pay rates.

Spain is a more tragic story. The country’s bill for incredibly expensive solar- and wind-generated energy has become so high that the government is now limiting the size of its renewables handouts. Spain’s recession is magnified by its green mandates. Their lowered productivity reduces their competitiveness, which in turn decreases exports and contributes to the current collapse of the country’s industries, including wind and solar.

Luckily for Spain, one of its companies is receiving some of our stimulus dollars. Troubled wind producer Iberdrola has thus far received $545 million from U.S. taxpayers for building wind farms here.

Economics professor Gabriel Calzada Alvarez, of King Juan Carlos University, illustrated the enormous inefficiency and ineffectiveness of Spain’s green jobs policy. His recent study demonstrates that each job created or saved by renewables subsidies resulted in the destruction of 2.2 other jobs.

Spain’s July unemployment rate was 18.5 percent, the highest in Europe and well beyond the Eurozone average of 9.5 percent, but not much higher than Michigan’s. Denmark was not far behind. The overemphasis on green jobs at the expense of improved productivity is the culprit. Improve productivity and jobs and wealth follow. That’s always been the way for every wealthy country, and nothing has changed. Michigan policymakers should look at real-world experiences and not opaque computer simulations for guidance. Most importantly, Michigan should only adopt policies that enhance productivity, avoiding those policies, like green mandates, that produce the opposite.

Tom Tanton is a senior fellow in energy studies at the Pacific Research Institute.

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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.