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Part 2. Chapter 6:
Energy Independence and jobs too?
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The American Jobs Creation Act of 2004, a law entirely
concerned with tax breaks for business, extended the 51˘ per gallon
tax break for ethanol blenders through 2010 and
created new biodiesel tax subsidies. What a great idea. Keep this up and
America can become energy independent while creating two or three million jobs
in the process. Unemployment will hit unheard of lows in good times and will
remain at acceptable levels even during recessions. Left, right and center,
everyone is on board.
Keeping our money at
home
The heart of the ethanol-jobs argument is putting the breaks on oil imports.
That will keep our money at home instead of letting it flow out to foreign,
oil-producing countries. This will make America richer and bring the energy
producing jobs back home to produce ethanol, biodiesel or some other synfuel.
This works even if ethanol costs 50˘ more than gas
because of all the money not wasted on imports. This is one of the most potent
arguments for subsidizing alternative fuels. With subsidies approaching $10
billion per year, it deserves a closer look.
The job-creation argument is captured by the following example. Suppose that
OPEC gasoline costs $3.00 per gallon, but that a certain state can manufacture
and distribute the perfect synfuel substitute for an all-in cost of $3.40 per
gallon. The government should subsidize its production to the tune of, say,
50˘ per gallon. That brings the subsidized cost of
synfuel down to $2.90 so it can undercut gasoline and still make a profit. (For
simplicity, this example takes US refineries out of the picture by assuming
refined gasoline is imported from OPEC.)
Paying the subsidy requires a tax on the rest of us, and that will reduce the
number of jobs in the rest of the country. But, the $3.40+ per gallon
flowing to the synfuel state, is about seven times more than the tax. So, seven
times more jobs will be created in the synfuel state than are lost elsewhere.
The employment gain is enormous.
If nothing major has been left out of this example, the conclusion is correct. A
huge number of jobs will be created and motorists will buy just as much fuel and
pay slightly less. The magic here, is the money saved by not paying OPEC for
oil. Instead of flowing out of the country that money stays at home and is sent
to the synfuel state. Obviously it is better to send it there than to OPEC. So,
although synfuel costs more than OPEC gasoline, it is still a tremendous
bargain, or so the story goes.
Follow the money—all of it, all
the way
The problem with this example is that something big has been left out. Suppose
about half of imports, or 200 million gallons per day, has been replaced. This
will stop OPEC from receiving $600 million per day. That's great but where was
that money going? Surely OPEC has not been just been stuffing it in a mattress
all these years.
There is one thing agreed upon by all who study foreign exchange: the flow of
money out of a country very precisely equals the flow of money into a country.
This means that the $600 million per day that used to flow out, also used to
flow back in. Stop the flow out and you stop the flow back. The money might have
been spent in Germany on BMWs before it returned to the US, but it would have
returned, every bit of it. The $600 million per day return flow is missing from
the example. So is the stopping of that flow by synfuel production.
What will happen to American workers when the $600 million stops coming back
from abroad every day? Here the story gets a bit complicated. There are two
kinds of international money flows. Money that buys things like oil and
BMWs—that's the trade balance, and money that buys things like T-bills and IBM
stock—that's investment. When the $600 million per day stops, will that reduce
exports, or reduce investment in the US assets? According to Berneke, Chairman
of the Federal Reserve Board (FRB), mainly exports will be hurt when the oil
money stops returning.
Exports. Suppose that the returning $600 million had all been buying our
exports. When synfuel stops the oil-import money, it stops $600 million per day
of exports. This will cost a lot of jobs. In fact, between the taxes to pay the
subsidy and the loss of export money, the rest of the US will lose just as much
money and just as many jobs as the synfuel state gains. All that has been
accomplished is to shift jobs from exports to synfuels and impose a tax on
everyone to pay the 50˘ per gallon subsidy. The country is poorer by the extra
cost of synfuel.
Investment. Suppose that the returning $600 million had all been coming
back to invest in the US. It would have bought T-bills, stocks, and bonds.
It seems that no one loses a job when foreigners stop buying stocks or bonds.
But keep following the money. When a T-bill is purchased, the government gets
the money. It does not sell T-bills just for fun, it needs the money and it
spends it right away on salaries, goods and services. Similarly if a stock or
bond is purchased, someone sold it because they wanted the money. They might
turn around and reinvest, or they might spend it. But if they reinvest, the
money just keeps going from one investor to the next until it finally does get
spent. So investment money is harder to track, but if you keep following it, you
will see that, in the end, it is spent on goods and services. This keeps people
employed. Even if the $600 million per day had all come back as investment,
cutting it off would cost just as many jobs (more or less) as cutting off the
money for exports.
The Fed has the last
word
Admittedly, tracking down who's hurt when the $600 million per day stops flowing
back to the US is complicated. So here's is an easier way to find the same
answer. Creating lots of new permanent jobs is not allowed by the FED. That's
right; the Fed it always busy keeping the economy from "over heating" or sliding
into recession. Creating more jobs causes over-heating. Now don't get me wrong,
the Fed likes unemployment to be low, but it hates inflation. So it keeps the
economy rolling along with as many jobs as possible up to the point of
overheating and inflation. If the jobs could just be added when the economy is
cool and taken away when it over heats, the Fed would go along. But any attempt
at changing the average level of employment will just cause the Fed to steer the
economy back to its comfort zone, and the number of jobs will be the same.
Isn't foreign investment in the US
bad?
There's one more fear about importing oil that deserves consideration. When we
buy oil, and foreigners take our money and buy American stocks and bonds, and
they keep doing this, won't they end up owing America, and won't we all be
working for them and all be poor? Surprisingly it's simplest to answer this
concern by looking in the mirror.
More often than not it's the US that is doing the investing in foreign
countries. We build factories over there, hire people and make things to sell.
What do we say then? We say, that's hurting American workers and helping the
foreign workers. This is correct. Now if our investing in those countries helps
their workers, why doesn't foreign investing in our country help our workers?
Well it does. Foreign capital coming into the US will compete with local capital
and reduce the return on US capital, but it will provide more capital for our
workers and make them more productive. So if there is any harm, it is to US
capital and not US labor. But, in reality, investment flows are balanced enough
that the net affect has probably been quite small.
The bottom line
Some may read this chapter as unsympathetic to labor. In fact I believe a good
labor policy is more important than a good energy policy. But jobs programs that
simply eliminate jobs one place to create them somewhere else are of no net
benefit to workers. There is no magic bullet for unemployment in a policy to
produce expensive alternative fuel. Spending more on such fuel will make us
slightly poorer, but if the policy successfully reduces GHG and our dependence
on foreign oil, those benefits will be worth the cost.
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http://zfacts.com/p/843.html | 01/18/12 07:26 GMT
Modified: Thu, 12 Nov 2009 06:30:02 GMT
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