Energy Policy Is Not About “Creating Jobs”

While the word “climate” has been conspicuously absent from the 2012 presidential campaign, the candidates sure do want to talk about energy. President Obama touts the expansion of domestic oil and gas production during his administration and extols his investments in wind and solar technologies to power the future. Governor Romney scoffs that fossil fuel production has risen despite the President’s best efforts to stop it. He shakes his head wistfully at the billions of dollars he says have been wasted on failed clean energy projects. But the candidates do agree about one thing: energy policy is about creating jobs. In 2008, Obama promised five million of them from promoting clean energy. Romney, more modestly, estimates that his administration would create three million. Either way the message is clear, the more energy jobs the better!

In a country racked by four straight years of historic joblessness, this overwhelming focus on employment makes sense intuitively. With unemployment continuing to ravage communities across America for years now, of course we want energy jobs! But this sentiment is only partially right: we do need jobs, but energy policy is the wrong place to look for a solution. Energy policy has real objectives to address — like facilitating affordable availability or mitigating the associated environmental and health damages — but unemployment is not one of them. The unemployment we face is a macroeconomic issue that requires macroeconomic solutions. Treating energy as a way to “create jobs” misinterprets our current unemployment problems while also doing a disservice to the pursuit of sensible energy policy.

To see this disconnect, it is useful to begin by assessing the source of America’s unemployment woes. Economists traditionally divide unemployment into three categories: structural unemployment, defined as mismatch between the available jobs and the skills of available workers, frictional unemployment, which refers to temporary periods workers spend between jobs, and cyclical unemployment, caused by disruptions to the macroeconomy that reduce the overall demand for goods and services and, hence, the demand for labor. Some observers have claimed that the United States faces a decline in employment that is primarily structural. If this were the case, policies to support employment in particular industries, perhaps including energy, that match the existing distribution of worker skills could plausibly be supported as a useful method of targeted job-creation. However, structural unemployment is not the problem. Multiple academic analyses, as well as Federal Reserve projections and commentary from economists on opposite sides of the political spectrum, confirm the idea that cyclical factors are causing our persistently high unemployment. In the long run, therefore, the unemployment rate is expected to return to its much lower natural rate.

So what exactly does “cyclical” mean? It means that the labor market hasn’t recovered because the economy still hasn’t recovered from its freefall and GDP remains far below its trend, or “potential,” level. In simpler language, this means that people are buying fewer goods and services than we are capable of producing, leaving some people without work. This shortfall of aggregate demand, as economists call it, has many potential remedies including monetary policy, fiscal policy, improvements in the world economy that support American exports, or reductions in consumer debt that restore the ability to spend. While the lingering effects of financial crises can take years to overcome, we can confidently expect the economy to return to its long-run equilibrium of full employment when aggregate demand finally recovers.

It is in that long-term context of full employment that energy policies enacted today will play out and in that context that the focus on job creation makes so little sense. In a normal economy, the purpose of jobs is not simply to have make-work for people to do, but rather to create as much value for society as possible at the lowest feasible cost. Wealth creation, not job creation, is the goal. And while some argue somewhat convincingly that “targeted” jobs strategies can be important to ensure the jobs we do have are good jobs with high wages, a subtle point on this matter is often overlooked. If wages equal productivity, then the quality and quantity of employment in a sector actually work in opposite directions. For a given amount of value created in the energy sector, wages would be higher if fewer people were creating that value. That is what defines productivity. Unless energy consumption were to increase or the capital intensity of energy production were to change, a plan to “create energy jobs” can equivalently be considered a plan to lower productivity in the energy sector.

Two allegories help illustrate this point. In Frederic Bastiat’s famous 19th century parable, producers of candles argued that free light from the sun ought to be restricted to avoid the threat that such unfair competition posed to their jobs. And if employment in the candle industry were a policy goal, they would be right. Similarly, consider whether it would really make sense to turn down an analogous hypothetical stream of endless free energy in the name of preserving employment in the energy sector. As another example, imagine we faced an environmental problem where toxic sludge constantly fell from the sky in large quantities, but many people were employed in the toxic sludge cleanup industry. Would it really make sense not to shut off the flow of toxic sludge because we wanted to avoid reducing employment in the toxic sludge cleanup industry?

These examples all share a key underlying assumption: that freeing up labor will allow workers to do other, more useful, things. This is the hallmark of economic growth: producing what we already use more efficiently and allowing people to innovate new goods and services to make the best use of the remaining supply of available labor. But in our seemingly endless economic rut, this mentality seems to have faded. Instead, our rhetoric has embraced the Luddite fear, contradicted by centuries of experience, that continued increases in productivity will suddenly leave us with no jobs left to do. We have lived in a high unemployment world for so long that we have forgotten the dynamism that characterizes the healthy churn of jobs in a functioning economy. And as international headwinds and political failures prolong our macroeconomic problems to keep these fears at the forefront of our minds, we continue to look in the wrong places, like energy policy, for solutions to the jobs deficit.

The best argument for job creation as energy policy is a political one. In the 2012 Presidential election, jobs are the defining issue and any advantage a candidate can gain by claiming that his policies will create more jobs is one worth exploiting. But informed voters should recognize these claims as political sales jobs that run contrary to the remarkable consensus among academic economists that sector-specific policies do not have major effects on aggregate levels of employment. There are legitimate and stark differences between Mitt Romney’s incessant focus on expanding the supply of fossil fuels and Barack Obama’s broader strategy that includes promoting efficiency and alternative energy sources. But when it comes to claims about energy policy creating jobs, five million green ones or three million brown ones might as well be ten million pink ones for all the sense these statements make as analysis of economic policy.