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Tuesday, February 28, 2012

Green energy subsides create ghost jobs

This week I read an article on the Wall Street Journal about the overestimations made by the government about the jobs that would be generated by the $10 billion stimulus given to renewable energy companies to expand their operations. In a study surveying many of the companies and communities recipients of the money injection, the results were far from the 2 to 4 million jobs projected by the President's Council of Economic Advisers. As a matter of fact, the net jobs were often negative after the stimulus package.
I'll leave the discussion of whether the Keynesian concept that an increase in Government spending serves as a catalyst for economic recovery through the multiplier aside and discuss the stimulus on efficiency grounds.

Unless there is a market failure associated with the matter, Government intervention will leave the market at a worse condition than previously. On this particular case, the President could argue that the reasoning behind the stimulus was based on the fact that there are externalities involved, and I think it could be a successful claim if the implementation and his message were different.The pollution generated by oil-based energy companies is definitely an externality, since it generates an unintentional non-market interdependency between market actors. If the government implemented a Deposit Refund System, where they impose a tax to reduce pollution, then they could in turn provide a subsidy for companies that are developing cleaner technologies. For this reasoning to be economically sound, I think that the Government would have to make it clear that they are not trying to create jobs through it but reduce pollution, and the money for the subsidies is coming from a pollution tax.

As it stands currently, the stimulus is not justified on efficiency grounds, since I don't see a positive externality on the creation of new jobs. Jobs create a market interdependence between actors, and the results are reflected on the wages paid to workers, so there is not a market failure involved here. Therefore, the disastrous results obtained by the package leading to the worsening of local economies does not come as a surprise.

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