Politick

The Illusion of Green Jobs

The Washington Post published a report on the bleak outlook for green jobs. Many have eagerly gone through training programs, only to find that there are no jobs to be had:

The Obama administration channeled more than $90 billion from the $814 billion economic stimulus bill intoclean energy technology, confident that the investment would grow into the economy's next big thing. ...

But the huge federal investment has run headlong into the stubborn reality that the market for renewable energy products - and workers - remains in its infancy.  ...

The industry's growth has been undercut by the simple economic fact that fossil fuels remain cheaper than renewables. [A]dministration officials acknowledge that it is likely to be years before the spending on green energy produces large numbers of jobs. 

There is a lot of potential in the green revolution, particularly around the "cradle to cradle" concept of building technology which has a recycle cycle similar to biology. A lot of folk believe you either accept the whole package, or are a denier of some sort. I rather think one should discriminate between the fact and the phantasm, the promising and the promoted. An important question is whether the diffusion of green technology throughout the developed countries can provide the foundation for coming out of the Great Recession. Are green jobs the ace in the hole for the future? 

The promise of green jobs, looked at critically, unfortunately comes up a joker. 

The Warning From Spain

Spain warned us of their failure with a green jobs program. You can download their report here. For every job created, 2.2 jobs were lost, or 9 jobs lost for every 4 created. And this does not even include opportunity cost - new jobs if the money had been spent elsewhere. Worse, only one out of ten green jobs were permanent. 

The White House response to this report was pretty awful and did nothing to treat this issue with seriousness, only spin. 

Bogus Claims 

The White House response to the Spanish warning is a striking example of how the proponents for green jobs often seem to have flown to Fantasy Island. 

The White House claimed close to 200,000 green jobs, but many of them turn out to be spurious, such as counting reporters who write about green jobs. The Dept of Energy claims around 80,000 jobs, but it is likely to be even less than that: of the $20B spent so far on green initiatives in the Stimulus, 80% of some programs went overseas (eg. to Chinese makers of wind turbines or solar cells). While it is hard to know what "some programs" encompass, it nonetheless means some or perhaps many of the green jobs were created outside the US. Paying $20B for 20-50,000 US jobs is $500k to $1m per job, a pretty steep price to pay, especially if most turn out to be temporary. 

California put out the results of a survey claiming 500k green jobs in the State, but most appear to be existing activities (recycling, insulation, etc.) and not an estimate of new venture-created jobs.

Arnold Schwarzenegger likes to say "as goes California, so goes the nation." Stephen Moore looked into his claims for California green jobs, and concluded it was not a dream of a green future, but a green nightmare: 

A new 2010 study by the University of California-Berkeley comes to the sobering conclusion that "the green economy accounts for just 1 percent of California's jobs." That's right: of the roughly 15 million California workers, only about 159,000 have green jobs (and this was an expansive definition of green jobs, including trash sorters at the dumpsters). ...

Gov. Schwarzenegger's own economics team concluded this year that the state's green regulatory structure is a menace to the state's economy. The governor's office study concluded that California's already iron-fisted environmental and workplace regulations translate into about $176 billion in lost output and nearly 4 million lost jobs. ...

Joseph Vranich, a business relocation expert, has a database of firms that move in and out of California. "Thanks mostly to California's hostile regulatory climate," he says, "for every three new businesses that move into the state of California, about 100 move out." ...

One former manufacturer in Los Angeles complained that "the regulators come onto your facility, and they want to shut you down. They view businesses as enemy combatants." Earlier this year, the EPA chased out of town the last steel foundry in Los Angeles, a firm that had hired hundreds of Southern California workers with good wages for decades. ...

Perhaps even more embarrassing is that when California's investments do generate new jobs, they are increasingly located outside the state. In June, the hot Silicon Valley firm MiaSolé reported that its planned home for one of the largest solar factories in North America, a 500,000-square-foot 1,000-worker plant, will be built in Atlanta. ...

Similarly, CalStar Products has erected its newest green plant in Wisconsin. Since then, it has been awarded nearly $2.5 million in federal clean energy tax credits through the American Recovery and Reinvestment Act, and the company said, "We expect to build additional plants down the Mississippi Valley and East Coast over the next couple years" -- and conspicuously, not in California.

The Promise of Venture Capital

Stepping back, the bigger dilemma is what new industry sector or factor of production will drive us out of the Great Recession. In past depressions something pulled us out, like railroads, autos, or the jet age. Green jobs have a surface appeal of applying to construction, manufacturing, installation and other blue collar professions. But is the promise real?

Dian Chu took a look at the math of green jobs. The immediate problem is that the new, venture-capital type of green job is at the wrong side of the Industry Life Cycle curve - at the R&D side, not the growth & maturity side (see chart). 

The venture capital industry has experience with launching new industries, such as PCs, which grew fast and created many new jobs, but the green industries are not expected to show any similar sort of growth; instead they require large-scale, long-term infrastructure changes that eventually could become large, as the energy industry is very big.

Unfortunately, this means it will take too long to have enough green jobs to make the type of impact on an economy as large as the US to pull us out of the Great Recession. Worse, the US lacks a comparative advantage in many of these jobs, and ramping up projects to create demand for green products may benefit manufacturing in China as much as in the US - as we have already seen.

The Trap of Subsidies

Certainly a number of new green jobs have been funded by the venture capital industry, although I have not seen solid estimates of how many. Venture-backed job growth is promising, but to too great an extent these jobs depend upon continued government subsidies, and thus are at huge risk of evaporating. The green jobs of the '80s were gone by the '90s when the subsidies ran out. Already Europe and Japan are cutting back their subsidies to get their budget deficits under control. Are we that far behind?

Spain's green dream is turning into a nightmare for families who invested on the promise of those subsidies. Bloomberg ran a story on how the government is about to stiff green investors by pulling the subsidies they had promised:

Solar investors such as Vilimelis were lured by a 2007 law passed by the government of Prime Minister Jose Luis Rodriguez Zapatero that guaranteed producers a so-called solar tariff of as much as 44 cents per kilowatt-hour for their electricity for 25 years -- more than 10 times the 2007 average wholesale price of about 4 cents per kilowatt-hour paid to mainstream energy suppliers.

Thanks to the incentives, the family met the monthly cost of the loan and even earned a small profit. Once the debt was paid off in 2018, Vilimelis looked forward to making even more money during the 15 additional years of subsidies guaranteed under Spanish law.

Now Vilimelis and more than 50,000 other Spanish solar entrepreneurs face financial disaster as the policy makers contemplate cutting the price guarantees that attracted their investment in the first place.

“You feel cheated,” he says. “We put our money in on the basis of a law.”

The potential size of the losses is an astounding: Euro126 Billion. The goal of sustainable green jobs never materialized, as the solar panels and wind turbines were imported.  What is left is the wreckage of lost life savings, expensive energy, collapsed projects, and few green jobs. 

Too Cheap to Meter

There is something fundamentally different about green jobs than prior sectors like autos or railroads that pulled us into prosperity and growth. We used to have a goal of energy "too cheap to meter." Now we see innumerable steps to make energy more expensive, to encourage conservation and close the gap with high-cost renewable energy (wind, solar). It is hard to see how making energy expensive can drive growth in the economy and make the US more competitive with Asian rising powers. Worse, it is abject nonsense to believe a subsidized industry can pull us out - all we are doing is pulling money from profitable industries and sinking them in an unprofitable one.

The cleantech venture firms will say the subsidies are needed to get the new approaches to scale, where they can run down a cost curve and be viable without subsidy. Perhaps, but until the green industry gets to profitability on its own merits without subsidy, the jobs created will come at the expense of other jobs driven out by more expensive energy, and like Spain, we might find we lose more than we gain. 

Obama is an Economic Illiterate UPDATED

 He went to G20 to ask all major nations to borrow and stimulate.  If everyone in the world does this at the same time, who lends to them?  Fact is we have to borrow $1T in the next 4 months and the major sources (China, Russia, Middle East) are selling not buying.  Bernanke had no choice but to pursue Quantitative Easing, which means the Federal Reserve prints money to finance the deficit, since the Fed is the only lender left. 

We got away with this in WWII by forcing US citizens to save a huge % of their earnings as part of a war effort.  Instead this time Obama wants the American consumer to spend spend spend and not save.

The numbers do not add up.  It is as if Obama is living in an academic fantasyland where he can apply Keynesian stimulus and Monetarist easing at the same time, whereas both schools thought their approach were mutually exclusive.  You do both and you blow up the economy into hyperinflation. 

Then his plan for balancing the horrific deficits is to nationalize healthcare.  Let's see, increase coverage, increase benefits, encourage usage - and overall costs go down?? 

This is utter nonsense. Even his own budget does not swallow this tripe: it has a $600B "down payment" increase in healthcare for his plan.  The CBO doubles that.  That extra $1.2T is NOT included in the deficit projections in this chart.  The deficit stretches out, widening in the out years - a completely untenable and irresponsible situation.

UPDATE 5/31:  John Taylor, the respected economist from Stanford, has calculated how bad an inflation will be needed to get deficits back in line:

To understand the size of the risk, take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?

Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.

[An] 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar. Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change; rather it is an indication of how much systemic risk the government is now creating.

To summarize, we either need to raise taxes 60%, or debase the USD in half.  Both are disasters for the US economy.  Or, we could wake up and cut spending! 

We got into this pickle because Obama is over his head.  He thinks like a Community Organizer: how to shake down "The Man" for goodies for his constituents.  I guess that is all he knows, since that is all he ever did.  But now he is The Man!  So he is shaking down himself!  Which means, the rest of us.  He will soak the innocent and the prudent to take care of the hucksters and the reckless, and bring down the US Global Economy in the process. 

Why The Stimulus Won't Work: The Marginal Productivity of Debt

This chart should give you pause about stimulating the US economy with more debt.  What it says is that for every Dollar of new debt (private or public) we have had diminishing returns.  According to Antal Fekete, if you take this chart further back, we used to get $3 of GDP for every $1 of debt.  Sometime in the late '60s, the line crossed below $1, meaning every new Dollar of debt returned less than that in GDP.  Antal thinks we actual went negative in 2006, but regardless of whether his data is the same as this chart, we are approaching that point. 

This is truly a point of no return.  This means every new $1 borrowed reduces GDP.  We borrow ourselves into collapse.  If we are at that point, the $2T expected deficit in 2009 means we drop GDP by some percent of $2T - if for example we lose $1 of GDP for each $1 of new debt, the deficit itself would cause a $2T in GDP, or a 14% drop, on top of the already declining GDP - collectively a level of destruction not seen since the Great Depression.  I guess it is fortunate that the line would not immediately go to a negative $1 of GDP for each new $1 of debt; but as the curent Federal deficit is unprecedented in peacetime, we might find the fall below the trendline to be serious. As usual, Karl Denninger gives an entertaining and informative rant on this topic. 

It is also worth noting that PPI was down 3.5% year over year - the largest drop since 1950.  Deflation is here. Bernanke has tried to reflate with around $9T of easy credit, but it is like pushing a wet noodle.  All around him credit is being destroyed faster than the central bank can reflate.  We are living the Austrian School argument, that after a credit bubble bursts, you cannot reflate it.  Deflation is inevitable. And so it has arrived. 

Greenspan's Defends His Grand Experiment With History

An extremely important debate is being carried out in the WSJ.  First, Anna Schwartz (co-author of Milton Friedman's most important book) criticized Bernanke for fighting the wrong war (link to WSJ editorial in this post).  Then John Taylor criticized Greenspan for having caused the credit bubble (link to WSj editorial in that post).  Now Greenspan offers his defense as a direct rebuttal to John Taylor: the problem was not holding short term rates too low for too long, but the unusually low long term rates due to the savings glut of mercantilist economies like China.  These low long term rates then fed a worldwide housing bubble.  Greenspan acknowledges the critical importance of this issue on policy:

"How much does it matter whether the bubble was caused by inappropriate monetary policy, over which policy makers have control, or broader global forces over which their control is limited? A great deal.

"If it is monetary policy that is at fault, then that can be corrected in the future, at least in principle. If, however, we are dealing with global forces beyond the control of domestic monetary policy makers, as I strongly suspect is the case, then we are facing a broader issue."

Greenspan then shoots his cannon across the bow of the Obama administration and the mantra of 'deregulation' having caused the bubble:  "[T]he appropriate policy response is not to bridle financial intermediation with heavy regulation. ... The solutions for the financial-market failures revealed by the crisis are higher capital requirements and a wider prosecution of fraud -- not increased micromanagement by government entities."

We cannot rewind history, but we can conduct a thought experiment to test Greenspan's argument: absent his reflation of US credit, plus his coterminous relaxing of requirements (such as bank reserve levels), would the exponential growth of credit have exploded in 2004-8?  Specifically to Greenspan's defense, since he focuses on the housing bubble, would housing have exploded? 

Methinks Greenspan protests too much.  Before the Greenspan reflation, global housing was rising but not exponentially.  Fannie & Freddie had already been pushing subprime mortgages and relaxed lending requirements, but the bubble had not emerged.  Globalization and the savings glut had begun in the early '90s, and may have contributed to the dot-com bubble; but even that one was sparked by Greenspan pumping liquidity in 1997 after the Asian Flu, in 1998 after the failure of Long Term Capital Management, and in 1999 to avoid the spurious Y2K problem.  Does he really want to argue that the well-recognized Greenspan Put (to bail out investors of their excesses) did not enbolden an environment of "euphoria" and excessive risk-taking? 

As a coda to his argument, the policy solutions he proposes, of higher capital requirements for banks and prosecution of fraud, are entirely consistent with Taylor's contention that excessive easing caused the bubble.  If Greenspan really thought the mercantilist Asian economies caused the problem, he should propose counters to that.  But he welcomes globalization and believes it caused prosperity in the US.  Hence his defense contains its own rebuttal. 

The Root Causes of the Current Financial Crisis

Last October I summarized a trenchant analysis by Anna Schwartz, co-author with Milton Friedman of the seminal A Monetary History of the United States.  She pointed out that Bernanke was solving the wrong problem - in a misguided attempt to replay history and prevent the last Great Depression, he was treating the banking crisis as a liquidity problem when instead it was a solvency problem.   Today in the WSJ the Stanford economist John B. Taylor explains how we got into this mess in How Government Created the Financial Crisis.  For those who do not get the online version of the Journal, let me summarize:

The Bailout Won't Prevent Deflation - A Look at Our Prior Great Depressions

The Bagehot remedy is to inject liquidity at a banking panic, and withdraw it during the boom times; but while we usually do the former, we constantly neglect the latter.  Hence the boom/bust cycle continues. This bailout is not so different that it hasn't been tried before, but it is coming at such a rush and in such a charged political atmosphere that its flaws may escape fixing until well into the next phase of the crisis.  In particular, this political dynamic may embolden the 'foxes' who got us into this mess to continue with reckless government lending while gaining political support for much increased intervention in the financial sector. 

Partly as a consequence, the bailout will not prevent deflation.  Let's look at the history of bailouts and financial panics, and why deflation is now inevitable.

The Bailout Bailout UPDATED

After all those shenanigans around the Bailout Rescue Plan, the market has spoken: down 20%+, huge spread between LIBOR and the 90 day T-bill, frozen interbank lending, frozen commercial paper market.  Government at its best!  Lots of noise, no solution.  Why?  The bailout is too slow acting: it requires the Government to bid and buy toxic debt at a discount, and the banks are reluctant to sell.  Although this bailout hasn't really gotten started, we had a similar bailout over the summer - the now forgotten $300B homeowner rescue plan, which had a similar buy-out-at-a-discount focus.  Well, the mortgage holders aren't selling at a loss.  So that plan has barely gotten off the ground. 

UPDATE 10/18:  A trenchant analysis by the co-author of the late Milton Friedman of their definitive study of the Great Depression, says that the Fed is fighting the last war: trying to provide liquidity, which was the problem in 1931, since the runs on banks took deposits out.  Instead, the problem today is solvency, since the toxic debt lowers the value of the banks loans.  In other words, the problem is on the asset side of the balance sheet (loans), not the liabilities side (deposits).  

Time for Plan B: recapitalize the banks. Save the sound ones, let the reckless ones fail.

Explaining Tax Cuts With Beer

A really funny exposition of tax cuts.  As the Professor says:

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible

Worth reading. 

A Distant Peak? Exxon Speaks on Peak Oil!

Peak Oil refers to peak production of oil - the peak in getting it out of the ground, not the end of oil.  We have previously discussed Peak Oil.   After Hurricane Karina, Peak Oil Cassandras spoke out that the Peak was Near.  Are they right?  In the past two years global production has peaked, for essentially the first time since oil was discovered.  Is it peak oil yet?  The oil industry believes peak oil will happen, but not yet.  The Daily Reckoning reported on Exxon's opinion.  Read on. 

Flexing Our Oil Muscle With Green Gold

Al-Zawahri, Al-Qaida's No. 2, says he has broken the US Army in Iraq.  It is rather the time for us to break the back of his insurgency.  Tom Friedman, author of "The World Is Flat" and a well-known New York Times columnist, likes to say that we are funding both sides of the war on terror.  He also is about to publish an analysis that shows that freedom is inversely related to oil prices - as prices fall, oil-nations are more dependent on the world community, and open up; as prices rise, they thumb their noses at the world community and fund mischief at home and abroad.   No surprise that with rising oil prices, we see Bolivia nationalizing gas wells, Chavez joining with Castro in anti-American actions, and repression increasing in the Middle East. 

We need to break the price of oil, and therefore turn off the spigot funding terrorism, with a long-term solution to American dependency on oil that can be implemented fairly quickly.  Surprisingly, such a solution does exist. It does not rely on exotic fuels like hydrogen, nor does it require a wholesale change in the infrastructure of cars, trucks, gas stations and gas distribution.  It has been demonstrated to work, and work quickly.  If President Bush had pursued this direction after 9/11, its impact would already be felt.