Tuesday, December 1, 2009

Economics in One Lesson

No wonder people don't trust economists. When people tell you that cap-and-trade will lead to job growth, it doesn't fit common sense. Of course, a new government program on this magnitude will certainly create jobs, exactly as claimed: "research and development in new technologies, new factories to produce solar panels and wind turbines, and energy-efficiency retrofits of commercial and residential real estate." But the question is, will it be a net increase in jobs? Because even the authors of this article admit that "some businesses that rely on dirty energy will be hurt." (Why not all of them? Are some of them getting permits for free?)

Things get the most confusing when they involve money, because money is a very slippery subject. According to the article cited above, "almost all of the revenue from the permit auction is returned to the American public." Therefore, even though the authors admit that energy prices will rise, they assert that "the refund can make up and even exceed the additional expenses for most Americans." Is that true? If so, we can make our economy infinitely cleaner simply by returning the costs paid by business back to consumers. Why tolerate any pollution at all?

Of course it's not true, as most people will recognize intuitively. To see why, let's take money out of the equation. Let's take out jobs, too, while we're at it. Our economy's productivity is not based on how much money we have or how many jobs it creates. Banks can print money without adding any value, and we can create jobs -- temporarily, at least -- by downgrading technology. If we outlawed the transport of goods by motor vehicles, there would be an explosion of jobs for people to portage goods on their backs, but no one would think this was good for the economy.

No, our economy's productivity is based on the goods and services that we get out of it, regardless of nominal prices or labor inputs. And the one thing we can be sure of is that changing to cleaner energy sources will require more inputs per unit of electricity -- in other words, we will have to work harder to get the same amount of juice. A new Berkeley study admits as much, although Barbara Boxer touts it as evidence that clean energy is a jobs producer (scroll down to "Barbara Boxer's Good News"). The problem is that the additional people and resources devoted to producing electricity will not be available to produce other things, like televisions, health care, and blogs. That's something that even liberals would not be happy about.

This is not to say that mandating cleaner energy is necessarily bad; clean air and water provide health benefits as well as intangible advantages. But they also, always, require tradeoffs. It would be best if our politicians acknowledged the tradeoffs openly rather than pretending that we can improve the environment for free.

The title of this post comes from Henry Hazlitt's wonderful book, still popular after all these years. And if more politicians would read it, they would not keep making the same mistakes.

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