Posted by: bmeverett | October 22, 2008

Myth #6: Energy transformation will create millions of new jobs!


Here’s probably the last installment in my discussion of Barack Obama’s energy plan before the election.

Myth #6: Energy transformation will create millions of new jobs!

Senator Obama tells us in his Lansing speech:

Creating a new energy economy isn’t just a challenge to meet, it’s an opportunity to seize — an opportunity that will create new businesses, new industries, and millions of new jobs. Jobs that pay well. Jobs that can’t be outsourced. Good, union jobs.

One of the biggest problems in the United States today is our failure to learn our own history. Today’s energy myth is a variation on the foremost misconception in American economic history: the Myth of the New Deal. According to this myth, the stock market crashed in 1929. President Herbert Hoover, a free-market ideologue, refused to act, allowing the situation to deteriorate into a downward spiral. FDR, who understood that massive government intervention was necessary, was elected and ended the Depression through his New Deal policies. (Joe Biden’s New Deal narrative is that the stock market crashed in 1929, and FDR immediately went on TV to reassure the American people. A little embarrassing, since FDR wasn’t President in 1929 and we had no TV at the time, but no matter.)

The problem with the New Deal Myth is that it’s not true. Hoover was a Republican, but he was not a believer in free markets. One of his major campaign promises in 1928 was an increase in agricultural tariffs – a decidedly unfree market idea. In 1930, Hoover signed the Smoot-Hawley Tariff Act (named after two Republican Senators) which immediately set off a devastating round of retaliatory trade restrictions around the world, resulting in a sharp contraction of international trade. Exactly what we didn’t need.

Roosevelt merely continued the process of impeding economic recovery by sharp tax increases and excessive regulation which stifled the ability of the private sector to recover. The Great Depression ended only when the US entered World War II, which quickly got everyone back to work. The Dow Jones Industrial Average reached a high of 344 on July 1, 1929. In October, the average began to slide, falling more than 85% to 43 by April 1, 1932. FDR took office in January of 1933. How did he do? Initially, not too badly. The Dow recovered to just over 100 by January, 1934, 150 by January, 1936 and 186 by January, 1937. By the beginning of 1938, however, the Dow was back under 100. A second recovery brought the Dow back to 132 by January of 1939 and 150 by January, 1940. When FDR was inaugurated for the third time in January of 1941, the Dow was at 123. When Roosevelt died in April of 1945, the Dow stood at 165 – less than half its 1929 peak and below the level of his second inauguration.

How about unemployment? In 1929, civilian unemployment stood at 3.1%. By the time of Roosevelt’s first inauguration, unemployment was over 25% – truly catastrophic. By 1937, unemployment had fallen to around 13% – better but not very good – and stayed in the 13-16% range until the war. By today’s standards, when 6% unemployment is considered high and 7% intolerable, FDR’s accomplishment seems pretty meager.

Maybe so, but at least FDR put half the unemployed back to work. Or did he? FDR was known for his public works projects such as the Civilian Conservation Corps, which hired people to clean up parks and do other public service work. Here’s where the problem comes in. How did FDR get the money to pay these people? Since the government doesn’t have any money. he taxed and borrowed. Government increased from 8% of GDP under Hoover to over 10% by 1936. The national debt increased from 34% of GDP in 1932 to 41% by 1936. All these funds, whether from taxes or from borrowing, came straight out of our capital markets. If the money had been left in the private sector, much of it would have been invested in new productive capacity and new employment. The question therefore is not whether FDR created jobs (he did), but whether he was able to create more jobs than the private sector would have if the money had been left in private hands. We have no way to know the answer to this question, since we cannot recreate history with different conditions. It is interesting to note that US unemployment was considerably below New Deal levels after World War II, when the free market was once again permitted to operate.

(For a superb discussion of the Great Depression, read The Forgotten Man by Amity Shlaes.)

The concept of “green jobs,” so beloved of Barack Obama and Tom Friedman, re-raises this issue. Of course, subsidizing wind, solar and ethanol creates jobs. The issue is how many jobs these subsidies destroy – first by draining funds from capital markets and second by suppressing economic growth.

Senator Obama also sees these jobs as high-paying union jobs. Remember that he made this speech in Michigan, which has been in prolonged economic distress in large part because the big auto companies made bad deals with the unions regarding health care and retirement benefits that the companies cannot now pay for. Apparently, Obama wants to create new green industries that will make the same mistakes.

As a brief aside, it’s interesting that Senator Obama knows that these jobs would be union jobs, when American workers supposedly have the right to choose whether or not to form a union where they work. The reason for Obama’s confidence is the Employee Free Choice Act, which the Congress will pass quickly if Obama is elected. This law would essentially remove the right of workers to have a secret ballot in the unionization process, allowing unions to browbeat workers into publicly signing cards supporting the union. It’s difficult to understand how any American can subscribe to the view that public voting is less susceptible to manipulation than secret ballot, but there we have it.

If new energy technologies, such as solar, wind and ethanol, were economically viable today, they would not require any subsidies. The government cannot achieve net gains in employment by robbing the private sector Peter to pay the public sector Paul.

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Responses

  1. I’m feeling a bias here…

  2. I think this is a valid conclusion, not a bias!

  3. Oh, I agree with much of it and I’m just ribbing you a little. There’s a lot of fluff from BOTH candidates on energy. Summer gas tax holiday? “Free from Middle East oil”? We can agree on those, right? McCain trotted up to Michigan (not Lansing though) and told them the Volt could save Detroit and all we need are 45 new nuclear facilities. I’m all for more nuclear, but remember that McCain called for an additional 3 billion in loan guarantees on TOP of the 13 billion in subsidies already awarded the industry in 2005’s Energy Policy Act. Give me a free market, yes please, but the timeline of climate change doesn’t fit into the budget forecast of any firm I know of…

    Side note, a pro-union Republican? What’s the world coming to! Didn’t those unions help bring Detroit to its knees?

  4. I really enjoyed your blog. Its always nice when you find something that is not only informative but entertaining. Greet.


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