Good horse sense and economic impact studies
Published March 1, 2016
[caption id="attachment_3435" align="alignleft" width="83"] Jon Sanders[/caption]
by Jon Sanders, John Locke Foundation, March 1, 2016.
Destroying property and taking things from people doesn’t grow the economy. Sounds rather obvious? That’s why lobbyists come armed with “economic impact” studies.
Consider what a hard sale it would be for lobbyists to make to legislators if they argued You have to close down those businesses and force people to pay to open up our businesses instead. It’d be only a little less difficult to say the last part: You gotta force people to pay to open up our businesses.
Trim away all the bad stuff, put a gloss on the rest, and you get Hey, investing in our businesses creates jobs! That’s a positive sales pitch. Yes, “investing” means forcing the public to pay, but it sounds good, and that’s what lobbyists need.
“Economic impact” also sounds impressive. Technically speaking, however, it’s an empty phrase. The term “impact” could be something with a positive effect, like a piece of good advice or a raise, or it could be a meteor strike. Unlike the rather clunky “costs and benefits,” which also requires acknowledging there are costs, “economic impact” sounds good and doesn’t bring costs to mind at all.
Speaking of bringing costs to mind, the modeling software those “economic impact” reports use doesn’t. Often the models (input/output models like IMPLAN, JEDI, etc.) are designed to translate costs into benefits. Costs, benefits — hey, they’re all “economic impacts” of some kind or other, right?
As my colleague Roy Cordato, an economist, explained:
In large part these studies take a measure of the value of resources that go into production and count the payment of these costs to resource owners as benefits when, in fact, from the perspective of economics, they are costs. Benefits come from the value of outputs, not the cost of inputs.
The impact modeling software is especially averse to opportunity costs. If you want to include opportunity costs, you need an economist, not “user-friendly” plug-‘n’-play software designed for economic “novices.”
If you’re an industry lobbyist, you don’t want to include opportunity costs. Not only are opportunity costs costs, which are minus signs in the model, but they are quite large minus signs. They could well render the whole endeavor in the negative.
As economists at the Beacon Hill Institute have explained, “any one dollar of investment” — remember what investment means in the context of “economic impact” studies — “in the [targeted] sector must come at the expense of a dollar spent elsewhere.” Using a model that doesn’t account for opportunity costs means, as the economists put it,
In other words, they are robbing Peter to pay Paul, and claiming the program increased total spending because now Paul spends more, but they ignore accounting for Peter.
People (a.k.a. “Peter”) spend their money voluntarily on things people want. The special interest behind the lobby (“Paul”) can’t earn money to spend on things Paul specifically wants. So Paul lobbies the state to take it from Peter.
Peter’s ex-amount no longer gets spent on things that people want.
It makes sense, then, that people are — all things considered — a little worse off when Paul gets their resources and spends their money on Paul’s wants. If people wanted what Paul did, they would be directing their own resources and money Paul’s way along with the other things that people want.
The Paul lobby wants public officials to focus on what makes Paul happy. That’s why they have to avoid drawing attention to Peter’s plight.
Of course, if you’re a responsible public official, you’d want to be warned beforehand if a public reordering of people’s resources is going to make people worse off overall. That way you could avoid a huge mistake.
If you’re a lobbyist working for that public reordering of people’s resources, you don’t want responsible public officials warned beforehand. You might not want to look too closely, either.
Deploying Horsepower vs. Employing Horses
Who has looked closely is the Energy Policy Institute. The EPI is part of the Center for Advanced Energy Studies, a public/private partnership between the Idaho National Laboratory, Boise State University, the University of Idaho, Idaho State University, and private industry.
In March 2013 the EPI did a literature review of job estimates from nearly 100 economic impact studies prepared for energy projects. As EPI explains in the first paragraph, most are “reports from universities, national laboratories, and consulting entities,” with only a “few peer-reviewed journal publications.”
Also, there were “substantially more estimates related to renewable energy sources” than traditional energy sources. This would not surprise anyone familiar with the output from the renewable energy lobby in North Carolina, which annually puts forth “economic impact” studies promising massive riches from “investing” in their industry.
How massive? They would have you — strike that, they would have policymakers believe that every dollar “invested” in their industry returns nearly $18. They would have policymakers believe that by adding “indirect and induced impacts” (i.e., even more expansive “impacts” for which the models assume no opportunity costs at all), their industry has returned $6.3 billion to the state.
(Which also means they need policymakers to believe that investment professionals — people whose job it is to spot money-making opportunities — are everyone of them missing out on perhaps the biggest ROI in their professional lives. They should all be fired, and gosh, the state has to force people to “invest” instead. Nigerian e-mail scams are more convincing, one would think.)
Those annual reports rely on the same methodology that was destroyed in peer review. This methodology is so bad that the economists reviewing it at one point threw up their hands and exclaimed:
If the authors believe they have overturned the fundamental basis for microeconomic theory, they should specify why.
In its literature review, EPI found that “renewable energy technologies produce more jobs per dollar and more jobs per megawatt of effective capacity than fossil fuel generation sources.” Renewable energy sources were more labor-intensive than traditional energy sources, they found. Furthermore, “The greater number of wind and solar jobs per effective megawatt is primarily the result of the low capacity factors characteristic of intermittent generation sources.”
In other words, solar and wind are so unreliable and inefficient, they wind up employing more people per actual unit of power produced. “Economic impact” models calculate this as very lucrative.
It’s a bit like saying the greater number of horses employed by the Pony Express as opposed to UPS and FedEx is primarily the result of the low horsepower capacity of actual horsesrelative to, say, delivery trucks or airplanes. But that would hardly be an argument in favor of the Pony Express.
An economist would think requiring more labor or capital to meet a business need was more costly. The “economic impact” study highlights those things as benefits.
So an “economic impact” study would project wonderful results of transitioning to the Pony Express because of all the new uses for horses and projected growth in related horse industries. More inefficient service means more labor and capital, which means … more jobs. I.e., Hey, investing in our businesses creates jobs!
EPI looks at other aspects of a forced transition to renewable sources that their lobby’s “economic impact” studies avoid:
Compared to renewable sources, fossil fuel based generation is generally cheaper in terms of dollars spent per effective megawatt of capacity. This creates a potential conflict in which job creation may be at odds with the long-term goals of increasing efficiency and reducing production costs (CEE, 2008). The basic supply and demand argument suggests that we should expect the consumption of electricity to be inversely correlated to the price of electricity.Given that electricity is a primary input for nearly every good and service produced in the country, a rise in price should be expected to have a negative impact throughout the national economy.
If residential consumers reduce consumption in response to higher prices, the result would be jobs lost in the electricity generation sector due to decreased need for fuel, construction, and operation. Increased cost to industry and commerce would result in increased cost of production, resulting in more expensive goods and services. Consumption would decline because goods are more expensive and consumers have less money in their pocket due to higher electricity bills. The result could be job losses in all good- and service-producing sectors. The basic argument would be:
- Jobs are created by increasing the share of electricity produced from renewable sources.
- Jobs are destroyed through the economic impact of higher electricity prices.
But with their “economic impact” studies calibrated to avoid acknowledging lower productivity, greater inefficiency, increasing electricity rates, higher costs of production, more expensive goods and services, less consumption, and jobs destroyed, it’s no wonder they bray out such horse-laughers as returning nearly $18 for every dollar “invested” and a $6.3 billion “economic impact.”
Jon Sanders (@jonpsanders) is director of regulatory studies for the John Locke Foundation.