The Peterson Institute for International Economics has published an interesting assessment of the American Power Act. As Michael Levi notes, a particularly interesting feature of the policy brief is that it uses a hybrid economic model to estimate the employment effects of the American Power Act. The authors find that the employment effect is slightly positive until 2020 and slightly negative between 2020 and 2030.

Overall, the effect is slightly positive. But even this effects depends on the current, high employment levels. Under full employment, they probably would not have found a positive effect.

According to the analysis, and somewhat surprisingly to many, nuclear power is the main reason why the net employment effect is positive. The authors assume that the utilities constructing nuclear plants pass the cost to consumers only after the lengthy construction phase. Thus, nuclear power would temporarily increase demand for labor (positive employment effect) without increasing energy prices (negative employment effect).

Why the discrepancy between the “millions of jobs” that clean energy advocates promise and the meager effect that the authors found? The most optimistic estimates of green job creation are usually based on bottom-up models. These models estimate the gross effect of clean energy investment on employment, which is obviously positive. They do not allow for negative effects elsewhere in the economy, however, so they are bound to produce optimistic predictions.

Does it follow that green jobs are a myth? Not necessarily. As the authors themselves write, even the state-of-the-art hybrid model used cannot capture three key elements that the green jobs camp emphasizes:

1) The model does not incorporate changes in international competitiveness. Given the rapidly increasing demand for clean energy elsewhere in the world, the benefits might be significant. Of course, heavy public investment in the energy sector could also crowd out private research and development in other sectors. So this could get very complicated.

2) Market failures. The energy sector, both on the production and consumption side, is notorious for market failures. Consumers do not have enough information to choose products that are energy-efficient and barriers to entry are very high in the energy sector. Additionally, the government subsidizes fossil fuels. Standard economic models assume that markets operate flawlessly.

3) Innovation externalities. Since innovation produces positive spillovers, companies invest too little in it. Public investment might spur innovation, and this innovation could increase economic growth. But on the other hand, it is also true that they could crowd out innovation in other sectors.

In sum, the analysis is certainly a credible one — and thereforeĀ  a welcome addition to the debate on the American Power Act. But the fact remains that standard economic models ignore the most important questions regarding green jobs — especially market failures and innovation externalities. It will be interesting to see whether economists find a way to address these questions in a rigorous fashion.

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