Will “Clean Energy” Lead an Economic Recovery?

Can Pigs Fly?

Free Enterprise Zone, The Freeman, William L. Anderson

Keynesians and semi-socialists claim that “clean energy” supposedly will create jobs and net economic growth. From Al Gore to the New York Times, “green energy” is almost religious in scope, as advocates claim that not only will it give us better air and weather, but it also will be a fundamental building block of economic recovery.

To speak out against this is tantamount to treason in some quarters, and people who dissent are vilified in the media; organizers wanting California’s recent “clean energy” law repealed recently were attacked by the New York Times. Indeed, it almost seems to be self-evident that a “key” to economic recovery is government “investment” in “green technologies,” so anyone who might look differently at this new government-led venture not only opposes progress but new jobs as well.

The technologies leading the way in this effort include biofuels, such as corn-based ethanol and biodiesel; wind power; and solar photovoltics. Not surprisingly, Gore partners with a venture capital fund that helps to finance many of these things.

Of course, these are ventures are not profitable on their own. In other undertakings, entrepreneurs find new ways to apply existing resources in hopes of making a profit. They rarely have the luxury of being targeted for success by governing bodies; rather, they have to deal with all the roadblocks and difficulties that any business venture might find in its way.

With green technologies we have a situation in which entrepreneurs purchase various factors of production, put together a product, sell it, and then chronically fall short of making a profit. Then they lobby for subsidies or mandates. This is not the same kind of situation that faced a capital-intensive operation like Federal Express, which went five years without making a profit. The goal was to be profitable in the future, knowing the company would not receive special government benefits.

As Robert Bryce notes in his eye-opening book, Gusher of Lies, much of what proponents claim about these “new technologies” not only is untrue but will remain untrue because of the first and second laws of thermodynamics: The laws of science stand in the way of these projects ever becoming profitable on their own, and Congress cannot repeal either economic or scientific laws.

Some green energy proponents understand this, but counter that if governments limit consumer choices, people will be forced to purchase these products at prices that will make them appear profitable. That means government coercion is enlisted to create the illusion that “green technologies” are viable when in reality people must use them under threat of state-sponsored violence. One cannot build a prosperous economy on that footing.

Why can’t a good that must be subsidized be the basis of an economic recovery? The answer would seem obvious on its face, but people often don’t see it. The answer is based on this fact: The very presence of subsidies and targeted favors for a particular good means that the real value of the resources being used to create that good is greater than the value of the good itself. No economy can grow under such circumstances. The reality is that “green energy” actually causes the economy to contract.

Part of the misunderstanding comes because people see only one side – new jobs being created in the subsidized industry – but fail to see the entire picture. This hardly is limited to alternative energy — the “broken window fallacy” permeates our body politic and even more so when we suffer economic downturns, as governments seek “solutions” that only make things worse.

If there ever were an example of the “broken window fallacy” in energy, it is the notion that “green energy” in its present circumstances will help the economy grow. That is a logical impossibility, but governments (and, sadly, many economists) don’t do economic logic.

William L. Anderson is an associate professor of economics at Frostburg State University. He blogs at Krugman-in-Wonderland.Copyright © 2010 Foundation for Economic Education. Used with permission.