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Greening The Stimulus
I think we should at least keep in mind the possibility that we won't really get out of this economic crisis -- that far from being a cyclical downturn, it may be a signal of something more remarkable: the confluence of forces, like peak oil, finally starting to bring our growth era to an end. If so, it makes sense to push at least a little investment in the direction of infrastructure that would support a different kind of economy than the one we've spent the last hundred years building, i.e., globalized, centralized and always growing. I'd put some money into decentralized and local renewable energy and into rebuilding the local agricultural infrastructure that's been allowed to rot away. A few billion dollars would buy a bunch of slaughterhouses and small food processors, and it would serve as a kind of insurance that we may need -- especially since, however many green jobs we create, we're not going to entirely ward off climate change.
As for green jobs, even if all you're thinking about is resuming rapid expansion of our economy, green energy strikes me as the one plausible driver for real growth -- endlessly bigger even than IT or biotech. One key is going to be to make sure some of that money goes to the people who've been left out of even the last economic booms. This should be centered on the kinds of jobs that come from community colleges and vocational technology schools: weatherization of houses, installation of solar panels, etc., etc.
President-elect Obama has made clear that a key component of his stimulus package will be near-term investments that also save energy and reduce pollution. Let's look at a list of specific proposals that meet the criteria for being both near-term and green, from the Center for American Progress Action Fund's "A Strategy for Green Recovery":
- Provide $2 billion in assistance to transit agencies to reduce transit fares and expand services.
- Fully fund the Weatherization Assistance Program at $900 million, the amount Congress is authorized to spend on the program in fiscal year 2009, and build toward a goal of weatherizing 1 million homes.
- The Federal Energy Management Program: $1.3 billion to fully fund energy efficiency programs.
- Appropriate $250 million for the Green Jobs Act, authorized in the Energy Independence and Security Act of 2007, to provide job training and workforce investment in energy efficiency and renewable-energy installations.
- Increase funding for refundable residential energy efficiency tax credits to $5 billion and raise the maximum credit for household efficiency upgrades to $2,000.
- Provide $3.5 billion to install 2,000 megawatts of solar power on federal rooftops, and amend federal electricity contracting to allow for 30-year power purchasing agreements.
- Provide $5 billion to partially bridge the anticipated shortfall in federal transit capital funding for fixed-guideway projects approved in the Federal Transit Administration New Starts pipeline.
- Fund the Smart Grid Title of the Energy Independence and Security Act of 2007 to support $1.3 billion for infrastructure investment and demonstration projects.
- Expand existing programs by $800 million to restore parkland, forests, wetlands, wildlife refuges and rural ecosystems.
- Expand the capacity of domestic manufacturing modernization efforts by increasing The Manufacturing Extension Partnership funding to $200 million.
- Provide $5 billion for both public housing and federally subsidized, privately owned units. This could be distributed through public-housing agencies and the HOME program, and used to increase energy efficiency, reduce energy operating costs and bring empty homes back into use.
- Immediately support state and local school green modernization, renovation and repair at a cost of $7.25 billion.
- Provide $10 billion for cities to address issues with water and wastewater treatment.
While 99 out of 100 economists, it seems, are calling for a big fiscal stimulus, "big fiscal stimulus" makes me nervous. Basic Keynesian macroeconomic theory states that deficit spending can be used to help an economy recover from a downturn. We've been applying deficit spending for the past eight years or so and we are staring at an ugly recession. Deficit spending did not prevent the recession, so it may be that further deficit spending is not the answer.
The Wall Street Journal's economic forecast survey concludes that a big fiscal stimulus will lead to positive economic growth by the third quarter of 2009. But without the fiscal stimulus positive economic growth will be restored by the beginning of 2010. Speeding up the recovery is important in the short run, but there are also long-run risks associated with excessive government spending. At some large debt to gross domestic product ratio, lenders may no longer buy our government bonds and interest rates could spike.
Having said all this, the answer to the "what sort of fiscal stimulus is needed question" seems clear. If government is going to spend a bunch of money, the money should be well spent. Government should pursue spending that leads to the largest difference between benefits and costs (i.e., largest net benefit), where benefits and costs are broadly defined.
If the government projects are ranked in terms of net benefits, whether the ranking is done with explicit monetary values does not really matter at this point, and those projects with the highest net benefits are pursued, then the efficiency of the U.S. economy will be enhanced and we will be in a better long-term economic situation. Creating make-work jobs, digging holes and filling them back in, does little to enhance the long-run prospects of the U.S. economy.
Which brings us to green jobs.
The first thing to understand from a microeconomic perspective is that new jobs represent costs to society. Green jobs, therefore, are a metric for the costs of improving the environment. The benefits are the improved health, recreational opportunities, visibility and other metrics that arise from environmental policy. Green jobs are simply the wrong metric for the positive impacts of environmental policy.
Another concern with green jobs is that many of these jobs created by environmental policy will simply replace jobs in other sectors of the economy, leading to little net change in the overall number of jobs. Some sectors of the economy might overcome this inherent trade-off, for example, idle workers hired to weatherize 1 million homes, but these aren't the sort of job sectors that lead to big macroeconomic improvements.
Further, the cost differential between clean renewable energy and dirty nonrenewable energy is large enough that government mandates are necessary to jump-start the demand for renewable energy. Government mandates are the sort of policies that are most expensive and inefficient. The opportunity cost of these green jobs might be high.
There is one place where environmental policy can lead to a net increase in jobs, but this is a long-run proposition and not the sort of right-now-jobs that we would demand from a fiscal stimulus. A cleaner environment improves the health of workers and ecosystems, which increases labor productivity. Increasing labor productivity leads to an increase in the productive capacity of the economy. A healthier economy will, therefore, support more jobs, albeit in the long run.
Mixing the notion of fiscal stimulus with the pursuit of environmental quality is misguided. Both outcomes are likely to fall short of goals. It makes much more sense to pursue fiscal policy without a green jobs constraint and pursue environmental policy without a macroeconomic constraint.