The Role of Government in Advancing the Green Economy

Last week, I wrote a sizable check to the IRS. I wasn't exactly happy about it, but I was happy for the fact that it stemmed from a nice payday in 2008 from one of my investments. Ah, the joys of capitalism, and the obligations of responsible citizenship.

This particular investment is advancing the cause of clean energy, as it involved the sale of interests in a pre-development windfarm to another firm that will (hopefully) take the project to fruition.

Clearly, the public sector played some factor in the fundamentals of my investment. States have imposed renewable portfolio standards driving the market for new windfarms to be developed, and the Federal production tax credit represents a significant portion of the financial value of an operating windfarm to its owner.

But, by and large, it was the forces of the marketplace -- entrepreneurs, suppliers, landowners, financiers, customers -- that drove the underlying business opportunity, the transaction, and its associated value-creation.

I hope that those days aren't long gone.

Over the past year, there has unquestionably been a shift towards more government intervention in virtually all markets. It's far beyond the scope of one blog post to delve into all of the causes and effects and all of the pros and cons of this shift.

In the cleantech realm, the tendency for increased intervention has been especially aggressive. The chatter in political circles is the notion of pushing forcefully towards the new energy economy - to achieve the admirable environmental benefits, but more for the prospect of creating some arbitrarily-large number of so-called "green jobs".

Though I admire visionaries like Van Jones who newly brought the green job notion to the forefront of the public discourse just a few years ago, I've decried the excessive hype and the weak analytics behind the claimed magnitudes of green jobs that may or will emerge. I don't doubt that many new green jobs will emerge, and I think they will be great for this country. It's just that I don't put any validity on any of the estimates of job creation, and I also acknowledge that there will be some job losses in other sectors that also need to be considered (but often aren't).

I also lament the way in which many public sector leaders talk about "creating" green jobs, as if the job positions can somehow be invented by the government itself through the stroke of a pen or the wave of a wand.

Unless we want to move to a command-and-control economy where the government dictates the majority of all economic activity (remember the Soviet Union?), large-scale job creation is a private-sector phenomenon. In turn, the private sector (i.e., investors) must spot an opportunity to earn favorable returns, to generate attractive profits, in order for them to incur the costs of hiring people to perform work. In other words, value-creation (or at least the promise thereof) must precede job creation.

If a government throws money at inventing jobs that the market won't somehow sustain after they're created, this can't be legitimately called job creation; it's "make-work". (And, never forget: the government doesn't have any money of its own; it's actually your money that the government is spending.)

In my humble opinion, the role of government is not to try to create jobs. Rather, governments should establish the playing field in such a way that the private sector will operate in its ruthlessly efficient manner to exploit -- and, in so doing, hire a lot of people.

Governments can never match the intensity and the innovation of millions of properly-motivated private sector actors. Instead, governments should focus on aligning and harnessing these interests in ways that drive the system towards outcomes that are good for the public.

To be sure, the government has a key role -- indeed, a responsibility -- for setting policies that serve, advance and protect the public's interests in transitioning towards an energy system that is more sustainable from both a supply and environmental standpoint. But, in the name of green jobs, the case is sometimes being stretched too far. An article in the April 4 edition of The Economist is particularly illuminating.

Spain is often touted as a model for how the public sector can exert leadership in setting a whole host of progressive policies (mainly generous subsidies) for rapidly pushing a move to green energy and creating many jobs while doing so. Yet, according to a recent study by a professor at King Juan Carlos University in Madrid, this way of building an industry is more than twice as costly on a per-job basis than if the private sector were to act on its own. Put another way, the study finds that, for every green job created by public sector prodding in Spain, more than two run-of-the-mill jobs were destroyed in the private sector. Ouch.

There's a lot of talk in Washington about industrial policy these days. I'm a skeptic. I see Japan, and while it's true that the Japanese industrial sector was the world's envy in the 1980's due to its strong government intervention, I also see nearly 20 years of uninterrupted economic stagnation now.

In sum, I just don't think the public sector can actually build an industry better than the private sector can. In my ideal world, I would like to see the government intervene in the energy markets, for environmental and supply security, in one (and only one) simple way: high taxes on fossil fuel burn, to account for the social costs of climate change and dino-resource depletion.

High fuel taxes! The horror! The horror!

It's lonely for me to write this, but the biggest problem facing the U.S. energy system is the enduring insistence of a "low price at any cost" energy policy, and the customer entitlement that bestows.

I see public service announcements (PSAs) about the little things that a viewer can do to become green, like changing from incandescent to fluorescent light bulbs, or using a reusable canvas shopping bag instead of use-and-chuck plastic bags. I understand that the average American needs to get engaged and feel like they can do something, even if it's something simple and small, to contribute to the solution, but.... Please. Really. Enough feel-good talk about these piddling things.

I'd like to see some frank PSAs that confront the big issue head-on: higher energy prices, get used to it.

Obviously, a move to higher energy taxes will be unpopular, so we need some set of respected or well-liked voices in the public starting to lay the groundwork for its actual desirability, if not inevitability. In the grand scheme of things, shifting the U.S. mindset on the topic of energy taxes is much more important than urging people to put a recycling bin in the garage.

With energy prices that are predictably much higher, via a big jump in fossil fuel taxes, the private sector can go to work, busily eliminating wasteful energy consumption and developing new technologies that reduce fossil fuel requirements.

The twist is that the revenues collected from higher energy taxes can be offset by dramatic reductions in income and capital gains taxes. The way I figure it: we shouldn't be heavily taxing things that are supposed to be good -- such as income and savings -- while undertaxing things that are supposed to be bad -- like burning non-repletable fossil fuels that damage the atmosphere.

In the future, I want to get more good-sized checks from my cleantech investments, and I want all of you to get some checks from cleantech investments too. I also don't want to send as big a chunk of those checks to the IRS. In return, I am willing to spend a lot more at the gas pump and in my utility bills.

Besides, I use my credit card when I buy those things, so higher energy prices means accumulating more points. In the move to the green economy, it's important to always looking for the silver lining in every cloud encountered.

Comments

[RaviVesely]

You talk about "value-creation" in a green marketplace, Richard, but really it's just 'value-discovery.' You undercut Spain's public subsidy programs for sustainable energy implementation and its subsequent job creation, but you don't mention how Spain is third in the world behind only the Danes and the Germans for its use of renewables. (Which, by the way, if it weren't for Germany's 'feed-in tariff', they wouldn't be leading the world right now in solar technology production and sales along side a guaranteed 20-year price-fix on utilities for their customers; and, besides Denmark, France is the only other banking system in Europe weathering this global maelstrom of capitalism's inherent dialectics­--precisel­y because most of its GDP is public investment!) You mention what you call Japan's "20 years of uninterrupted economic stagnation," yet you fail to include how the Japanese are the most energy-efficient culture on the planet, BY FAR--that their manufacturing of energy-efficient electronic components (ya know, actually putting something into existence for profit, rather than shuffling files around inside a meaningless stock portfolio) will be a $9 billion/year industry in the next few years. But then again, the fact that one of Japan's patriotic rubrics is 'efficiency' must boil down to either that horrible notion called 'political correctness', or a government influencing its people to recall that the Earth PRECEDES economics. The Earth is intrinsically valuable, Richard, whereas the value of that precious 'invisible hand' is arbitrarily assigned.

Be well.

[intercon]

While I agree that our country functions as an efficient capitalistic marketplace, I think we can be too efficient for our own good. Now the government needs to help expedite some choices that are simply smart in the long term.

I am a fan of an efficient free market system, but it bumps its head encountering resources with no established monetary value. The required approach to the environment and its resources has a hard time factoring in the efficiency model because air quality, old growth forests and aquifer levels don't make an appearance on a balance sheet. Our market doesn’t realize that there may be necessary shifts that do not make "business sense." That does not mean they cannot happen.

When it comes to stimulus project creation and unsustainable jobs, I agree with you. But I do believe that policy changes can instantly re-balance the efficiency models of how business works--and affect green jobs. Legally phasing out the incandescent bulb, mandating recycled content, or requiring building efficiency levels all cause the market to permanently shift and recalibrate.

Would the market phase out the incandescent bulb given enough time? Probably, but if lighting is 30% of building energy usage and buildings comprise 40% of our nation's energy load should we really wait for the consumer to get wise just to not blemish the conceptual integrity of our marketplace?

I think we need to move faster than profitability and if the government has to help, so be it.

[melmoid]

Richard -- You might be interested in a book called Capitalism 3.0 by Peter Barnes. He describes a system that allows the best of capitalism to work while protecting the commons and giving every citizen an ownership stake and a dividend. Living out West where all of our infrastructure came from federal intervention going back to the Great Depression, I have mixed emotions about what you are saying. We would not have railroads, highways, airways, dams, irrigation systems, rural electrification, nuclear power plants where I live without the government getting them started. On the other hand private enterprise has certainly been successful in creating wealth at least for some. I think government/private partnerships are the way to go with each doing what they do best.

[FearlessFreep]

If government creates jobs, is that so terrible?

[drkazmd65]

The short answer is no Fearless,... but it depends on the types of jobs the Government is creating.

If they are NOT jobs that are sustainable, in areas where a recovering free market can take them over, then it is just 'making work' as the author points out.

Spending Govenment money (or IOUs) on things like updating the electric grid, kick-starting wind or solar energy projects, increasing incentives for home-owners to install their own diffuse power generators, and increased energy efficiency, IS cost effective in the long run.

Add in some money for further edumactaion - and we are at a good start.

[peterg76]

Government must have a role because the private sector is enough. Often a private enterprise cannot break out of bad practices because it is too disadvantageous to do so unless the competitors are compelled to do so also. As long as there is a level playing field, government can set the standards.

[pm247]

I'm much in favor of a new industrial policy with government leading us out of the unsustainable Ponzi economics. Wealth should once again be derived from domestic productivity / manufacturing and not from asset bubbles and on-paper investment schemes. I would call it green-neo-­mercantili­sm.