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Nuclear Power: Our High Costs Benefits! (Bastiat, call your office)

“It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented.

- Frédéric Bastiat (1850)

Making the news last week was a new “economic impact” study funded by a trade association representing the nuclear industry. The study purports to show that the nuclear industry in North and South Carolina generates $25 billion dollars annually and supports 29,000 jobs. The study funded by the industry group Carolinas Nuclear Cluster would like to believe that such activity is a per se good, the marketplace notwithstanding.

So much for economics, which stresses that ends are greater than means and that good activities should be done at least cost.

Not surprisingly, the study was not done by an economist or even someone whose credentials are in a related field. The lead researcher has a Ph.D in industrial engineering and is a professor in the department of industrial engineering at Clemson University.

Clemson has a first-rate, Ph.D.- granting economics department. Yet all of its economic expertise was bypassed in favor of using industrial engineers to do the study. Could it be that a real economic analysis done by qualified economists may not have given the results that the Carolinas Nuclear Cluster was looking for?

IMPLAN Engineering Model

The study is done using a proprietary statistical package called IMPLAN. IMPLAN is widely used by consultants who are hired by industry groups to demonstrate the “benefits” of an industry’s economic activities in a particular geographic area. Studies using this package are quite common, and they all suffer from the same flaw — they don’t actually measure economic impact.

The attractiveness of IMPLAN is that users do not need to know anything about economics. They only need to know how to manipulate and make use of IMPLAN. Hence, it is almost always the case that when IMPLAN is used the results that are reported say little about what an economist would describe as the real economic impact.

Enter Economics

A calculation of the true economic impact on an economy of any investment activity has to consider both benefits of that activity and costs. The benefits arise from the productive output generated by the investment, and the costs arise from the use of resources that are employed in producing that output.

The only kinds of studies that can measure actual economic impact are those that invoke cost-benefit analysis, where the value of the productive output generated by the investments is balanced against the opportunity costs, i.e., the alternative uses of the resources that are taken out of the economy to generate it.

This industry study, and the IMPLAN statistical package that it invokes, does none of this.

First of all, there is no attempt to ask the most basic, freshman econ class question: how else might the resources — land, labor, steel, energy, lumber, technology, etc. — that are going into the nuclear industry have been used?

Indeed, if one simply reads through the study, it would be easy to conclude that all the resources used by the industry would have been sitting idle had it not been for these nuclear industry investments. In other words, the study seems to assume zero or close to zero opportunity cost.

For example, an obvious fact is that, if Duke Power or another electric utility company didn’t use their resources to build a nuclear power plant, they probably would have used them to build another kind of electricity generating plant — maybe a natural gas plant.

So an important question to ask in considering the actual economic impact of nuclear power is what the economic effects would have been if a gas fired plant had been built instead of the existing nuclear plant whose economic effects are being considered. Might electricity users be better off today, would they possibly be paying lower rates, if the electricity being generated was coming from a different source?

I’m not suggesting that they would be, but this is the kind of information that would have to be analyzed in order to assess the real economic impact of the nuclear power plant.

Reversing the Logic of Scarcity

What this study does is turn costs and benefits on their heads. People should be aware that this is true of all IMPLAN based studies. What they do is consider the expenditures made by the industry under examination, in this case the nuclear industry, and then attempt to follow how those expenditures generate more expenditures in other industries and businesses in the region.

From the perspective of economics, all of these expenditures are a measure of the resources being used to produce the industry’s output. An economist would ask how else these resources might have been used. What these studies refer to as “direct” and “indirect” effects are actually measurements of costs that need to be weighed against the benefits that they generate. They do this while at the same time saying nothing about the actual benefit, which is the value of the output being produced by the industry.

Turning Bad into Good: Nuclear Waste

Consider the absurdities that the IMPLAN methodology leads to. As reported in the Charlotte Observer, the nuclear industry study counts the expenditures and employment generated at a plant devoted to the disposal of nuclear waste as part of the positive economic impact of the study.

Clearly nuclear waste is a cost, not a benefit, of generating nuclear power. (Hint: they call it waste for a reason.) The implication of this study, then, is that the more nuclear waste that is generated, the better off we are.

Yes, nuclear waste is good for the economy according to IMPLAN.

Frédéric Bastiat, call your office! (For those of you who do IMPLAN studies, Bastiat was an economist.)

3 comments

1 Tom Tanton { 12.04.13 at 8:27 am }

IMPLAN is no better, nor much worse than other ‘models’ be they economic modedls or otherwise. To me what is most troubleing is how people (economists and non-economists alike) try to use ‘models’ to find answers, when the models at best provide new questions (as intended.) Similarly, models tend to be based on regression analysis which of course requires some fidelity in the underlying data.
Well said, Roy. We run into these absurdities daily in the ‘green jobs’ fight. I wonder how many of POTUS ‘green jobs’ are new firemen hired to fight Tesla’s condition.

2 Eddie Devere { 12.04.13 at 4:39 pm }

Well put.
The US federal gov’t has even worse models that it uses to justify the Recovery Act in 2009. (such as this report on smart grids I found on the web.
https://www.smartgrid.gov/sites/default/files/doc/files/Smart%20Grid%20Economic%20Impact%20Report.pdf)

I think that the important question always is: what is the unsubsidized rate of return on investment? (when including positive externalities and negative externalities…such as pollution.) And what is the rate of return on investment of other projects with similar risk-factors?

Idea: if you want to show the absurdity of the IMPLAN software, I suggest using it to model the economic “benefit” of using all goods in the US towards an unproductive activity, such as digging holes in the ground just for the sake of digging holes.

You are absolutely correct to state that cleaning up nuclear waste does not add benefit…even though it adds “nuclear related jobs.” The rate of return on investment of the nuclear plant would be higher (and hence slightly help to increase the overall GDP growth rate of the economic) if the company could find a cheaper solution to the waste problem.

But of course, if you were a nuclear engineer trained to clean up nuclear waste and not trained in economics, then you probably care more about keeping food on the table than losing your job so that the overall economy can grow.
It’s a problem of short-term vs. long-term thinking. So, I applaud your fight against economic-illiteracy. Only if people are educated about the long-term benefits of living in a society with high GDP growth rates can we expect them not to fight against actions that cause them to lose their job (while helping the economy as a whole.)

3 Weekly Climate and Energy News Roundup | Watts Up With That? { 12.09.13 at 12:02 pm }

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