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Green Jobs: Making Society Poorer (Basic math can show interesting things)

A key element of the current administration’s approach to recovery from our current economic and financial crises is a fundamental reorientation of the kinds of work performed in our economy. But a proposed shift to “green” jobs in the name of well-paying, high-impact employment that cannot be outsourced overlooks the essential nature of how human labor fosters economic well-being.

Simply put, the key to prosperity is high productivity per worker. There is simply no other way to be rich unless you sit on top of a gold mine (or oil well) and have few mouths that need to feed off that source of wealth.

Discarding the vain hope that a nation of 300 million can live well off a raw materials-based economy, we are left with productivity as the wellspring of affluence. If work is productive then it adds value to the raw materials and machinery used, whether these are oil molecules, computer keyboards, wind currents, or trainloads of corn.

The more value each worker can add to the raw materials, the more productive that worker is and the better off society will become as a result. In the energy business, productivity means that the value of converted energy products – electricity, refined oil products, natural gas – is greater than the cost of the labor, machinery and primary energy used to produce that converted product.

So the belief, or hope, of the proponents of prosperity through green jobs must rest on the determination that those working at “green” jobs add significant value to the input raw materials and machinery that is used to convert corn, wood, wind or sunlight to a usable (and salable) energy product. Suppliers of such energy can hire workers, buy machinery and generally participate in a virtuous economic cycle that permits continued employment and investment. Society will extract its claims on this productive cycle through the tax system, used to pay for public goods. Such a system is self-sustaining and can last for a long time.

On the other hand, if value added is negative (value-subtraction in economics jargon), then the value of the usable energy will require additional resources in order to induce consumers to purchase it. The system is not self-sustaining, since it can exist only with a continued injection of outside resources, gathered, presumably, from more productive sectors of the economy.

A Simple Proof

This is a testable hypothesis. We can compare the value added by a worker in energy with the cost of the labor, machinery and materials used to produce usable energy. If value added to the primary energy is positive, then the market value of output will be greater than the cost of producing the usable energy.

The average productivity of labor in electric power generation in US = 6024 MWh annually. This means that each worker in the power generation sector produces electricity worth roughly $300,000, based on a generation cost of $50/MWh ($0.05/KWh). This sum covers the cost of fuel, generating equipment and emissions control/waste disposal. The companies generating this electricity are normally profitable, meaning that all costs are covered and there is a residual profit that is returned to the owners at each stage of the process – fuel production, fuel transportation/transmission, machinery manufacturing, and operation of the equipment.

According to industry studies, the average worker in power generation earns about $68,000 per year. These workers pay taxes and contribute to pension plans and social security, so the “loaded” cost of a utility worker is probably closer to $75,000-80,000 per year. Indeed, workers in all stages of the electricity supply chain pay taxes, as do their employers, and economic value is created for the rest of the economy, permitting jobs to be created throughout the economy, including government. Since consumers purchase this electricity willingly, and government subsidies are a negligible proportion of the bill for conventional electricity supply, at just 0.5% of the average cost of supply, it is safe to conclude that conventional electricity generation is a value-adding, and therefore self-sustaining activity for the US economy.

Wind and solar, on the contrary, receive subsidies that average $24/MWh currently. If we assume that all of the excess costs of wind and solar occur in the equipment fabrication stage (probably not true) and that electric utility workers can produce the same number of MWh per employee per year, then the excess cost of renewable energy works out to $154,080 annually per employee. The money to fund these subsidies, the equivalent of two average utility jobs, has to come from somewhere. Without recourse to the tooth fairy, it must be the case that funding such green energy must come from taxes on other segments of the economy where value continues to be added to raw materials and machinery, not subtracted.

Conclusion

The arithmetic or green jobs is ineluctable and grim. For each utility worker who moves from conventional electricity generation to renewable generation, two jobs at a similar rate of pay must be foregone elsewhere in the economy, otherwise the funds to pay for the excess costs of renewable generation cannot be provided. Moreover, by raising costs throughout the economy, high cost green energy will reduce the competitiveness of US exporters, thereby destroying (presumably well-paying) jobs in such industries.

The job-destroying nature of renewable energy is not unique to the US. A recent study in Spain, where both conventional generation costs and wind subsidies are higher than in the US, found that each new job in green industries in that country cost $774,000 and led to the loss of at least 2.2 jobs elsewhere in the country’s economy.

There is another way to fund the excess costs of renewable energy, and that is to pay less to those engaged in its supply. According to a recent study at the University of Massachusetts, workers in “green” occupations earned an average of $41,114 annually, less than two thirds what a conventional utility employee earns and less than one half the average earnings of oil industry “roughnecks.”

So we can have our green energy, with fewer jobs and higher taxes, or we can have our green energy with more jobs at lower wages, but we cannot have our green energy with higher wages and lower taxes. If workers are not engaged in activities that produce true value for the economy then there is simply no way to pay for lots of them without producing problems elsewhere in our system.

Once again, the promise of a free lunch is unmasked by examining the true costs that someone has to pay to put food on the table.

5 comments

1 Noah Flower { 04.07.09 at 12:04 am }

All true, to be sure, and I doubt much of America really understands what Obama means when he talks about “green jobs” except that it means he’s going to create jobs that somehow help the environment.

But are you that deeply anti-Keynsian? I’m no economist, but from what I gather the only known way to create growth in a down economy is for the government to spend a lot of the tax dollars it’s collected (or just run up the debt) on hiring people or contracting to businesses who will hire people. Isn’t that part of the point of the “green jobs” agenda?

Also, do you have no interest in seeing the price of solar and wind come down? Both would benefit greatly from economies of scale and the potential innovation that solar technology companies could create with the resulting capital.

Finally, isn’t there benefit to increasing the number of low-skilled jobs? I’m with you all the way when it comes to increasing productivity, but you still have to keep the whole country employed, and you’re never going to get everyone a college education and a high-paying white-collar “information worker” job. Isn’t it helpful to have enough jobs around for those without a degree that they have reasonable options and don’t have to turn to lucrative but damaging gray and black market?

2 Donald Hertzmark { 04.07.09 at 11:08 am }

The debates about whether FDR’s (and Hoover’s) original “Keynesianism” was actually effective has been long debated. If there is a professional consensus among economists it comes down to something along the lines of this: some deficit-financed government projects in the 1930s provided infrastructure and public goods of positive value could be justified on the same terms as ordinary spending on public goods – they had long-lasting benefits that exceeded the initial costs and the private sector was unable to provide the funds at that time; other “make work” projects never produced anything of lasting value and their impacts faded once the work was completed. The latter not only did not contribute to recovery but drained funds from more worthwhile expenditures, expanded deficits and, ultimately, had to be paid for with higher taxes.

The key for energy projects is the “something of long lasting value,” the vital element missing if the project requires, as does wind, continuing subventions by government to maintain its viability.

In the meantime, there is a lot of idle capital sitting with energy companies that can be deployed profitably if obstacles to investment are swept away. The economy is far better off relying mainly on these private investment to provide energy infrastructure than on government programs that cannot generate enough extra output in the economy to pay for themselves.

3 Green Job Destruction: The Spain Study (Netting to negative via government) — MasterResource { 04.10.09 at 7:01 am }

[...] Hertzmark at MasterResource, putting the pencil to government-side costs as well as private costs, and evaluating the Spain [...]

4 E.M.Smith { 04.22.09 at 11:38 am }

Keynes basically said that when private parties stop spending (as money velocity drops toward zero) the only party left standing that can keep velocity up is the Government (since it can print and spend without limit). He did not address how to best spend that money…

To the extent that it is done by digging holes to fill them again, it is a net loss to the real economy and detrimental. To the extent it is an investment with net gain (and preferably the optimized net gain from the options available to fund…) then it is beneficial and a good thing.

BTW, folks in government like to forget the second half of Keynes: When demand is in surplus and money velocity too high: governments are supposed to reduce spending and save more to dampen the bubble… Keynes cuts both ways, but government policies only swing left. This leads to inflation and the destruction of monetary value in subsequent swings as the spiral begins…

Per solar and wind ‘creating jobs’: There is a major presence of solar manufacture in China already. The basic materials for wind turbines is energy intensive and cost pressures are driving chemical and metals makers to lower cost markets. The ability of America to be the continued low cost producer of these products is put seriously in doubt by Carbon Cap and Tirade policies. They, like all industrial goods, will be subject to the same cost driven outsourcing pressures; they are not immune…

So the end game will be that mandates for solar and wind may have a short term blip in manufacturing jobs, but very very quickly we will be buying solar panels and turbines from China and India. So much for ‘green jobs’… A panel gets bolted to a roof once every 20 years or so (if they work as advertised) and that takes a few hours. Not exactly a strategy for long term high employment and not exactly a high paying job.

5 McGuinty’s “desperation” for election makes his “Job Creation” announcements “ludicrous”! « The Big Green Lie { 07.05.11 at 10:00 am }

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