Green Subsidies

The public bearing the burden of green subsidies.

I recommend that my readers check out the economist Max Schulz's article on the Obama administration's costly push for "green jobs."

The author doesn't doubt the need to address global warming, but he is skeptical of Obama's claims that government subsidized "green industries" will be a net producer of jobs.

He points out that in 2008 the government subsidized solar energy at $24.34 per megawatt-hour (mw/hr) and wind power at $23.37. Whereas natural gas generates energy at $ 0.25 mw/hr, coal at $0.44 and hydroelectricity at $0.67. Given the relatively low energy output of renewable energy sources, they currently provide 0.5% of our nation's energy needs. The economic implications of this are:

1. Barring aside exponential increases in energy output via wind and solar power, a government mandated shift towards renewable energy sources will dramatically raise the cost of production through higher energy costs.

2. Or, if the government makes the widespread use of renewable energy sources feasible through heavy subsidies, these subsidies will result in a higher tax burden of productive industries, which also will raise the cost of production.

3. Any economist will tell you that raising the cost of production will result in a loss of jobs. And the author does not believe that the loss in private sector industrial jobs will be offset by gains in heavily subsidized "green jobs."

4. The author correctly points out that locals with higher energy costs (such as California) drive out jobs to areas with lower energy costs (such as North Carolina) and even straight out of the country.

And I would like to ad that the history of government subsidies shows that:

1. Inevitably the prime determinant of which companies (in any given field) are the recipients of government subsidies are not which are the most innovation. Rather, political connections and influence via lobbying determines who receives public funds.

2. Government subsidies limit market competition and market entry for new companies. And in the case of agricultural subsidies we see that public funds are often used by large, corporate recipients to buy out their smaller competitors.

3. By reducing market competition, subsidies reduce incentives to innovate or become more cost and energy effective.

4. Government mandated social goals (minority ownership etc.) that usually accompany government subsidies further erodes the efficiency of subsidized industries.

5. In general, when private finance is not willing to provide capital for a company, we should be very skeptical of the soundness and sustainability of that company and its goods and services.

6. On the rare occasion in which a subsidy is wisely conceived and administered, it will inevitably outlive its economic and social usefulness. Just look at the farm subsidies that were introduced by FDR during the Great Depression to assist poor farmers - not only have they outlived their usefulness by over 60 years, they have continued to grow and skew towards larger agro-corporations.

So, while I see the merits of fighting environmental degradation, I am very skeptical of the power of government subsidies to produce positive economic outcomes, including the creation of jobs. Max Schulz believes that the best way to a greener and more prosperous future would be for the government to simply set goals and parameters for the private sector (such as carbon caps) and let market competition do the work. But, what can we expect from an administration that claims that birth control and bridges to nowhere are economic stimuli?

http://www.city-journal.org/2009/19_1_green-jobs.html