“Economics is haunted by more fallacies than any other study known to man. This is no accident. The inherent difficulties of the subject would be great enough in any case, but they are multiplied a thousand fold by a factor that is insignificant in, say, physics, mathematics or medicine – the special pleading of selfish interests.”
– Henry Hazlitt, Economics in One Lesson (1946)
A year ago, the American Wind Energy Association (AWEA) was desperately fighting against the scheduled expiration of its most prized federal subsidy, the wind production tax credit (PTC). As I wrote at that time, AWEA’s argument–please government, keep our activity going for job creation and other economic gain–rested on a basic, long-debunked fallacy of economics.
AWEA believes that wind’s “is” equals “ought”–that recorded activity is a per se good. But there is an opportunity cost of action–what is not seen but known to exist from the economic law of scarcity.
Wind interests conclude that resources expended by them come from thin air rather than from the productive sector (taxpayers, ratepayers). Resources that do not go to wind, in other words, are resources lost to the economy as a whole.
This is wrong. A free-market redirection of resources away from wind power would free land, labor, and capital (the factors of production) for goods and services as determined by consumers, not government.
Henry Hazlitt explained as much in Economics in One Lesson, first published in 1946. It builds on Frederic Bastiat’s 1848 essay What Is Seen and What Is Not Seen. The wisdom in Hazlitt’s book is so sound and relevant that it bears repeating for the energy-policy debate today.
To this end, I again bring to your attention how the wind industry can be substituted for Hazlitt’s “X” industry in Chapter 14, “Saving the X Industry” to completely refute AWEA’s central argument.
The lobbies of Congress are crowded with representatives of the Wind industry. The Wind industry is sick. The Wind industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores and local motion picture theaters will lose business, and depression will spread in ever-widening circles. But if the Wind industry, by prompt action of Congress, is saved – then it will buy equipment from other industries; more men will be employed; they will give more business to the butchers, bakers and neon-light makers, and then it is prosperity that will spread in ever-widening circles.
American manufacturing jobs are coming back, with tens of thousands of new jobs from wind power… But these jobs could vanish if Congress allows the Production Tax Credit to expire, in effect enacting a targeted tax increase, and sending our jobs to foreign countries. Congress must act now to keep this American manufacturing success story going.
Failure to extend the PTC would cost 37,000 jobs immediately, and put the brakes on the progress America has made to diversity its electricity portfolio.
Unfortunately, Congress did extend the PTC another year. But AWEA is not content with last year’s fleecing, as it continues to lobby for another extension and name-call any organization that speaks out against it. Recently, AWEA responded to an Institute for Energy Research study on the distributional effects of the PTC (full disclosure: I was co-author) with the same economic fallacies. Among AWEA’s mix of personal attack, political spin, and economic fallacy, AWEA wrote:
American wind power supports 80,000 full-time jobs and according to a Department of Energy analysis, with the right policies in place, wind power could support 500,000 full-time domestic jobs by 2030.
Lucky for us, Hazlitt already refuted AWEA along with all the other political favor-seekers — all we have to do is fill in the blanks:
[A direct subsidy] would be nothing more than a transfer of wealth or income to the Wind industry. The taxpayers would lose precisely as much as the people in the Wind industry gained…
It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the Wind industry gains. It should be equally clear that, as a consequence, other industries must lose what the Wind industry gains. They must pay part of the taxes that are used to support the Wind industry. And consumers, because they are taxed to support the Wind industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the Wind industry may be larger.
But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as the Wind industry has expanded.
The result is also (and this is where the net loss comes in to the nation considered as a unit) that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been. These results are virtually inherent, in fact, in the very arguments put forward to subsidize the Wind industry. The Wind industry is shrinking or dying by the contention of its friends. Why, it may be asked, should it be kept alive by artificial respiration?
These arguments from 1946 certainly applied to AWEA in 2012/13, and will always apply to crony industries. Economics in One Lesson is a book that belongs on every thinking person’s bookshelf, including those at trade associations who forget that the opportunity cost of cronyism leaves the economy poorer, not richer.