Broken Windows: Destroying Wealth To Create Green Jobs

25 Saturday Feb 2023

Posted by Nuetzel in Industrial Policy, Renewable Energy

Tags

Broken Windows Fallacy, Consumer Surplus, Dispatchable Power, Fossil fuels, Frederic Bastiat, Green Energy, Green Jobs, Job Creation, Keynesians, London’s Great Fire, Market Intervention, Michael Munger, Milton Friedman, Planned Obsolescence, Renewable Power, Societal Wealth

Investments in “green energy” create jobs, just like any other form of investment in physical assets. We’re told, however, that the transition to renewable energy sources will create a veritable jobs bonanza! Apparently, this is believed to be a great selling point for everyone to get behind. Sure, promoting job creation is always popular with politicians, and it is very popular with private actors seeking to win public funding of one kind or another.

The heavy emphasis on jobs creation brings to mind an old Milton Friedman story about a visit to China during which dignitaries brought him to a construction site, no doubt thinking he’d be impressed with their progressive investments in infrastructure. At the site, Friedman noticed workers digging a large trench or arroyo with shovels. When he asked why bulldozers or backhoes weren’t used, he was told that the jobs were too valuable. His response was something like, “Then have them use spoons!” The lesson, of course, is that merely creating jobs is not a prescription for building wealth and prosperity. But there is more at stake here than the low productivity of construction workers who lack the best tools.

There are some bad rationales for heavy investment in renewable energy sources, and I’ve addressed those at length previously. The appeal to job creation, however, is awful on simple economic grounds. It emphasizes a thing that is easily counted while ignoring massive costs that are generally untallied.

In the U.S. we have a huge base of productive capital that meets our energy needs, the bulk of which is built to utilize fossil fuels. That plant constitutes wealth to society, and not just to those with an ownership interest. Dispatchable power is available to the public at a rate below that at which they value the power. That ability to deliver consumer surplus on demand is a major aspect qualifying power capacity as societal wealth. The push for renewables, if wholly successful, would make the existing base of generating capacity redundant. There is no doubt that the ultimate goal of renewable energy advocates is to destroy existing capacity reliant on fossil fuels. They simply have not come to grips with the reality that it meets energy needs far more efficiently than intermittent renewables like wind and solar power. In spirit, the effort bears a strong similarity to destroying bulldozers to replace them with shovels, or spoons!

Recently, Michael Munger discussed the mistaken notion that renewable investments are justified based on job creation. He noted that with a coincident dismantling of the existing base of power generation, it amounts to exactly what Frederic Bastiat called the broken window fallacy, which insists that breaking windows is a great way to keep glaziers fully employed. There are many examples and variations on this idea, including so-called “planned obsolescence”.

Bastiat poked fun at an elite French government official who had marveled at the economic gains reaped in England with the rebuilding of London following the “Great Fire” of 1666. Bastiat engaged in some satire by suggesting that France could greatly benefit from burning Paris to the ground. But his point was serious: we often hear that reconstruction provides a silver lining for workers following hurricanes or other disasters. Fair enough: rebuild we must. The Keynesians among us would say it works out well for workers who are otherwise unemployed. Disasters destroy wealth, however, and often lives, not to mention opportunities for incremental wealth creation that are lost forever. The reconstruction jobs are not “good news”!

Unfortunately, people get carried away with broken windows arguments, using them to justify their own pet projects. The addition of new competing products and technologies is unquestionably healthy, but not when one side enlists the state as a partner in destroying viable incumbents and existing public or private wealth. For that matter, the state and its allies seem intent on destroying invested physical capital even before it’s services can come on line… if it’s viewed as the “wrong” kind of capital.

The costs of a transition to renewables is massive. The “big ask” for green energy involves not just taxpayer support for the build and usage, with all the inefficiencies endemic to taxation and market interventions. So-called green energy also entails huge environmental costs, and it calls for the wholesale destruction of an embedded industry. That means decommissioning invested assets having many years of useful life. And that goes for physical plant all the way from the wellhead to final use, including the destruction of stoves, cars, and other machines too numerous to mention. Those machines, by the way, still account for roughly 80% of our power use.

I leave you with part of Munger’s closing:

“Once you are duped into believing destruction is productive, almost everything that a rational public policy would label as a cost becomes, by some judo move of seraphic intuition, a benefit. … The problem is that jobs are not wealth. Wealth is access to the goods, products, and services that make our lives better. It is true that ‘studies show’ that wiping out all our productive wealth based on fossil fuels … would create jobs. Those ‘studies’ are among the best arguments against doing anything of the sort.”

Taking The Air Out Of The Deflation Scare

25 Wednesday Mar 2015

Posted by Nuetzel in Macroeconomics

≈ 1 Comment

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Deflation, Demand-driven deflation, Federal Reserve, John Cochrane, Keynesians, Malinvestment, Mises Daily, negative interest rates, Public debt, rate of time preference, Science Times, Supply-driven deflation, Thorsten Polleit, Underconsumption, ZIRP

Deflation is not the evil so many journalists have been taught to believe. The historical evidence does not support the contention that deflation is always a consequence of “underconsumption”, that it leads to a self-reinforcing spiral, or that it is destructive in and of itself. A new academic paper on the costs of deflation is reviewed here by John Cochrane, who reproduces some of the interesting evidence from the paper showing that deflation is not correlated with output growth historically. Cochrane quotes the paper’s authors:

“‘The almost reflexive association of deflation with economic weakness is easily explained. It is rooted in the view that deflation signals an aggregate demand shortfall, which simultaneously pushes down prices, incomes and output. But deflation may also result from increased supply. Examples include improvements in productivity, greater competition in the goods market, or cheaper and more abundant inputs, such as labour or intermediate goods like oil. Supply-driven deflations depress prices while raising incomes and output.’”

The Science Times has a succinct review of the same paper:

“After analyzing figures going back to 1870 from 38 countries, Borio [one of the co-authors] concludes that declines in consumer prices are not actually the problem. He argues that the negative effects associated with deflation are in reality caused by huge declines in real estate prices and equity values. All this time, he posits, economists have been deceived by the fact that prices for goods and services have at times decreased at the same time that asset prices have gone down, especially during the Great Depression.”

An earlier op-ed on deflation by Cochrane was the subject of this Sacred Cow Chips post a few months ago, which noted an unfortunate tendency among traditional Keynesian economists related to the statist agenda they often support:

“Quick to blame insufficient private demand for economic ills, they propose to ratchet government to higher levels to make up for the supposed shortfall. That diagnosis is often debatable; the prescription may be a palliative at best and destructive at worst.”

Deflation is usually a symptom of other, more primary economic phenomena. Whether it can be taken as a sign of economic malaise depends on the underlying cause. Certainly, as noted above, deflation is quite welcome when it results from supply-driven growth of output, especially if wages are supported by advances in labor productivity.

On the other hand, deflation may be a demand-side symptom of weakness engendered by restrictive monetary policy, fragile confidence among consumers or employers, trade restrictions, excessive taxation, over-regulation, or adjustments to a binge of malinvested capital. It does not follow, however, that a resulting deflation is unhealthy. Quite the opposite: Downward price adjustments help to clear the economy of excesses and pave the way for renewal, as excess goods, capital and other resources are repriced to levels at which purchases become gainful. This may involve more severe declines in some relative prices due to specific excesses, such as real estate. Some recent examples of deflation and reversals of economic weakness are discussed in this post at The Mises Daily.

One consequence of expected deflation is that market interest rates are driven below “real” interest rates, or the rates at which economic agents are indifferent between present and future consumption (abstracting from risk and liquidity premia). The latter is sometimes called the rate of time preference, the natural interest rate, or the originary interest rate. Recently, some short-term market interest rates in Europe have been negative, prompting some to offer arguments that the natural rate may have turned negative. This post by Thorsten Polliet reveals these arguments as nonsense:

“If the originary interest rate was near-zero [let alone negative], it means that you prefer two apples available in, say, 1,000 years over one apple available today. A truly zero originary interest rate implies that the actor’s planning horizon or “period of provision” is infinitely long, which is another way of saying that he would never act at all but would continually push the attainment of his goals into the future.”

Polleit discusses the fact that market real interest rates may be negative, but that is a consequence of central bank manipulation of nominal market rates, including the Federal Reserve’s so called ZIRP, or zero interest-rate policy. Polleit has this to say about the destructive consequences of this kind of behavior, albeit in extreme form:

“Should a central bank really succeed in making all market interest rates negative in real terms, savings and investment would come to a shrieking halt: as time preference and the originary interest rate are always positive, “capitalistic saving” — the accumulation of goods designed for improving the production process — would come to an end.”

While Keynesians imagine that expansive government policy can rescue the economy from the ravages of weak private demand, they also know that accumulation of public debt is an unavoidable by-product. That reveals an underlying motive for policies such as ZIRP, as Polite explains:

“It is an actually perfidious policy for debasing the real value of outstanding debt; and it is a recipe for wreaking havoc on the economy.”

An otherwise innocuous supply-side deflation, or a deflation corrective of demand-side forces, may well be accompanied by intervention by an activist central bank. The ostensible purpose would be to stimulate the demand for goods, but a more direct consequence is a reduction in the government’s interest costs. If the policy succeeds in pushing real market interest rates to zero or below, the intervention may well undermine capital formation and economic growth.

Dismal Implications of Aggregate Analysis

12 Thursday Feb 2015

Posted by Nuetzel in Macroeconomics

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Aggregate demand, Aggregation, Collectivism, FEE, Gary Galles, I Pencil, incentives, Interventionism, Keynesians, Leonard Read, Macroeconomics, Mises Institute, Scarcity, Stabilization policy, statism

Economic aggregation is basic to traditional macroeconomic analysis, but it distorts and drastically oversimplifies the enormous number of transactions and the vast network of decision-makers that comprise almost any economic system, especially a market economy. There are some basic problems with aggregating across individuals and markets, but these are typically glossed over in macro-policy analyses. Instead, the focus is on a few key outcomes, such as aggregate spending by sector and saving, masquerading as collective “decisions” amenable to behavioral analysis. In this kind of framework, the government sector occupies an equal place to consumers and business investors. It is usually depicted as a great exogenous demander of goods and services, capable of “stabilizing” demand in the event of underconsumption, for example.

An insightful post by Gary Galles at the Mises blog drives home the inherent distortion involved in the analysis of macro-aggregates: “How Economic Aggregation Hides the Problems of Interventionism“. The problems start with a nearly complete misapplication (if not neglect) of the basic problem of scarcity, as if that problem can be solved via manipulation of aggregate constructs. Galles offers a simple example of the macro distortion of “net taxes,” or aggregate taxes minus government transfer payments. Both taxes and transfers are complicated subjects, and both are subject to negative incentive effects. The net-tax aggregation is of little use, even if some rudimentary supply function is given treatment in a macro model.

By its very nature, aggregate government activity is distorted by the prices at which it is valued relative to market activity, and intervention in markets by government makes market aggregates less useful:

“For example, if government gives a person a 40 percent subsidy for purchasing a good, all we know is that the value of each unit to the buyer exceeded 60 percent of its price. There is no implication that such purchases are worth what was paid, including the subsidy. And in areas in which government produces or utilizes goods directly, as with defense spending, we know almost nothing about what it is worth. Citizens cannot refuse to finance whatever the government chooses to buy, on pain of prison, so no willing transaction reveals what such spending is worth to citizens. And centuries of evidence suggest government provided goods and services are often worth far less than they cost. But such spending is simply counted as worth what it cost in GDP accounts.”

Galles article emphasizes the unintended (and often unpleasant) consequences that are bound to flow from policies rationalized on the basis of aggregate macro variables, since they can tell us little about the impact on individual incentives and repercussions on the ability of markets to solve the problem of scarcity. In fact, the typical Keynesian macro perspective lends itself to slow and steady achievement of the goals of collectivists, but the process is destined to be perverse: more G stabilizes weak aggregate demand, or so the story goes, but as G expands, government entwines itself into the fabric of the economy, and it seldom shrinks. Taxes creep up, dependencies arise, regulation grows and non-productive cronies capture resources bestowed by their public sector enablers. At the same time, the politics of taxes almost ensures tat they grow more slowly that government spending, so that the government must borrow. This absorbs saving that would otherwise be available for productive, private investment. As investment languishes, so does growth in productivity. When economic malaise ultimately appears, we hear the same policy refrain: more G to stabilize aggregate demand! All the way down! Perhaps unemployed dependents are simpler to aggregate.

Aggregation masks the most basic issues in economics. A classic lesson in the complexity of creating even a simple product is told in “I, Pencil“, by Leonard Read. In it, he allows the pencil itself to tell the story of it’s own creation:

“Here is an astounding fact: Neither the worker in the oil field nor the chemist nor the digger of graphite or clay nor any who mans or makes the ships or trains or trucks nor the one who runs the machine that does the knurling on my bit of metal nor the president of the company performs his singular task because he wants me. Each one wants me less, perhaps, than does a child in the first grade. Indeed, there are some among this vast multitude who never saw a pencil nor would they know how to use one. Their motivation is other than me. Perhaps it is something like this: Each of these millions sees that he can thus exchange his tiny know-how for the goods and services he needs or wants. I may or may not be among these items.

There is a fact still more astounding: The absence of a master mind, of anyone dictating or forcibly directing these countless actions which bring me into being. No trace of such a person can be found. Instead, we find the Invisible Hand at work. This is the mystery to which I earlier referred. “

How many individual decisions and transactions are involved, throughout all intermediate and final stages of the process? How many calculations of marginal value and marginal cost are involved, and ultimately how many prices? While the consumer may think only of the simple pencil, it would be a mistake for a would-be “pencil czar” to confine their planning to final pencil transactions. But macro-analysts and policymakers go a giant leap further: they lump all final transactions together, from pencils to pineapples (to say nothing of the heroics involved in calculating “real values”, an issue mentioned by Galles). They essentially ignore the much larger set of decisions and activities that are precedents to the final transactions they aggregate.