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Fred Smith and Bob Pollin debate a proposal for a massive investment in the production of clean energy

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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. And welcome to another episode of a Real News debate. Today we’re debating: would a massive investment in clean energy transform the American economy and create jobs? Joining us to debate today is Fred Smith. Fred is president and founder of Competitive Enterprise Institute, a free-market public policy group in Washington. And from ’72 to ’78, Fred served as senior analyst at the Environmental Protection Agency (EPA). And Bob Pollin. Bob’s the codirector of the PERI institute in Amherst, Massachusetts. And Bob is one of the economists who’s been leading the charge on modeling and researching what a massive investment in clean energy would mean to the US economy. Thank you both for joining us.


JAY: So, Bob, let’s start. What has your research shown?

POLLIN: Well, the basic point is if you spend money on anything–anything, don’t even mention green–you will create jobs. So if you spend on green investments such as retrofitting buildings, other energy efficiency investments such as public transportation, as well as renewable energy–solar, wind power–my research shows that on average you will create about 17 jobs per million dollars of expenditure. So it’s not a question of creating jobs; it’s how many. So 17 jobs per $1 million. And then you also get the environmental benefits. By contrast, if you continue with the fossil fuel structure that we have, we just keep running it, we spend $1 million on fossil fuels, we get five jobs per $1 million of expenditure. So the transition to a clean energy economy will generate three times more jobs per dollar of expenditure than maintaining our existing energy structure.

JAY: Fred?

FRED SMITH, PRESIDENT, COMPETITIVE ENTERPRISE INSTITUTE: I think that that argument would be a great argument for going back to organic gardening rather than that–because organic gardening certainly will involve many more jobs per unit of food produced. The question of investment and how do you allocate it across an economy, it’s not per se creating jobs, it’s creating wealth, because wealth is the–after all, we’re trying to be a wealthier society. And whether–and we use that wealth to buy things we don’t have today, and that creates investment opportunities. The economies of the world that have tried to politicize those investment decisions–. And maybe you’re not trying to politicize it. Maybe you’re just saying you think green’s better than non-green. That’s a market issue.

POLLIN: I mean, I don’t really think there’s much debate at this point, because if we accept as serious what, say, 80 percent of climate scientists say, that we face potential ecological catastrophe if we don’t dramatically reduce our carbon emissions over the next generation–I mean, they could be wrong, but I’m not willing to gamble. Okay?

SMITH: But that’s not your point, I think. You’re not arguing that we could waste money because you’re frightened of climate change. You’re arguing, you believe, independently of climate change, this issue should be resolved in a green direction rather than a market direction.

POLLIN: No, no, it’s not green or market. And, by the way, I’m not against using private market incentives at all. I’m for it. What my fundamental point is: we have to undergo this transition to a green economy. We have to. And that therefore, it so happens, in doing so, it is going to be a large generator of jobs. And so the–.

SMITH: But why do we have to? Why do we have to?

POLLIN: Because if you take science seriously–.

SMITH: Okay. You believe that environmental issues require us to do it. So, independently of whether it makes sense or not, we ought to do it.

POLLIN: I believe that–as an economist, I take it as an insurance issue. I don’t know that the 80 percent of the climate scientists are right. And maybe it’s 98 percent. They could be wrong. But I take what they say seriously enough. So then I say, well, how much am I willing to pay for insurance?

SMITH: One of the worst problems with these debates is the idea that their side is for insurance, and those who are questioning politicization of energy economy are wrong, is the insurance argument–is I–the analogy I would draw is, when the Titanic hit the iceberg and sunk, obviously, we had to think careful and insure against those risks in the future. We didn’t do it by getting the US and British navies to go out and sink icebergs. We did it by rerouting ships, by being better about where icebergs were, and by adapting to a world where icebergs were a risk. The way we need to address the change, climate change, any other change, is essentially freeing up the genius of the peoples, not by having politicians second-guess and divert resources from where you can make money to resources where you lose money.

POLLIN: Except, as we know, the environmental effects of burning fossil fuels are not captured in market prices.

SMITH: This is what we always hear.

POLLIN: It’s just true.

SMITH: Externalities are an excuse.

POLLIN: It’s not an excuse. It’s true. I mean–.

SMITH: Externality–no, externalities are an excuse for expanding government. Externalities are a fact of a relationship. And the question of what to do about them does not necessarily mean expanding government.

POLLIN: As I said, I agree, and I think–and it’s a fact that most of the green economy is going to be built through private investment, and I support supporting private investment. But we also have to recognize that burning fossil fuels is ruining the economy, and that is not–.

SMITH: Well, you believe that. You believe that. I don’t believe that.

POLLIN: I believe that–I believe that, you know–.

SMITH: And most Americans don’t believe that, as you now know from the polling. But that aside, that’s not your point. Yeah.

JAY: Okay. Let’s take–you disagree on the underlying science, but the thesis here is that there should be government-led policy that facilitates both government and private investment, and if you do that in a clean energy sector, the net consequences on the economy–Bob’s argument–are positive. So just give us some specific examples of what that would be, and then Fred can respond.

POLLIN: Well, the most obvious example sitting there right now is investing in energy efficiency in buildings. Buildings consume about 40 percent of all of our overall energy in the United States now. And it’s–I think it’s pretty well demonstrated across various kinds of studies that investing in energy efficiency now will pay for itself in a matter of two to three years or four years. The problem as to why it hasn’t happened is we don’t have an adequate system of risk sharing, of incentivizing and getting the market going. Once the market gets going, I think it’ll be self-generating, and as a result we’ll save a lot in terms of oil consumption, energy consumption. We will do the environment well by reducing fossil–by reducing carbon emissions. And it’s a big generator of employment. And so I think that should be the single focus, the biggest focus of a recovery program. And that’s–I wrote that in a study, Green Recovery, a couple of years ago.

SMITH: This is the argument, I think, that we hear over and over again, not just this debate, but a whole array of debates. The market is not perfect, the market has its failures, and, therefore, prudent and wise intervention by brilliant intellectuals and government officials can guide us in a better direction towards a more perfect world. It’s a wonderful theory. But those same reasons that make it hard for all efficiency gains to be realized right away–. One reason, of course, is–is that the vintage of all technologies, building being one of the examples, spans over 100 years. Buildings built today will be built very much more energy efficient, because now we know a lot more. The cost of energy has become more obvious in groups and so those buildings. That does not mean that retrofitting all the buildings in the world is a good idea. And it also means that our goal should be to ensure that we do nothing to slow down the replacement of existing technologies, buildings, and so forth with new ones. When we go in with a politicized strategy first, we always have the fact that I’d be an idiot to invest my money today: Congress is considering a subsidy program; I’ll wait a year or two years and so forth, and then I’ll get it free. And that’s–that can–that–.

JAY: By “politicized strategy”, you mean any strategy driven by government.

SMITH: No, I mean a strategy that basically says, we don’t think you’d do it unless we bribed you to do it, so we’ll use taxpayer money to get you to do something which we think is in your best interest, but you’re too stupid or too unwise to do it.

JAY: Okay. Go ahead.

POLLIN: Well, again, the underlying problem with the environment is that market forces do not capture the severity of the effects. I mean–.

SMITH: And government can?

POLLIN: Well, we don’t have any other choice. I’m with you. I mean, I don’t think government does things perfectly, and I don’t think brilliant intellectuals are going to do a whole lot better.

SMITH: We’re both aware of the fatal conceit problem, right? Exactly.

POLLIN: There you go. Okay. So we have, you know, screwup intellectuals, we have screwup government, but we also have this massive environmental problem. And you need some public policy, you need some market force to establish standards as to how we’re going to protect the environment for the future. And it so happens–and I don’t actually think it’s really debatable at this point, I don’t think you debated it–is that by them doing these investments in clean energy, they are more labor-intensive, they will engage people in, and therefore it’s a good recovery program. I have heard the argument many times that, okay, well, then, let’s go back to horse and buggies to create a lot of jobs. But that’s–you know, that’s kind of trivializing what is for years a serious–.

SMITH: Well, it–not totally trivializing it. When I was at EPA–we were–talked about earlier, my formative experience, and maybe government doesn’t work as well as I thought when I was right out of graduate school. You’d be–.

JAY: I tell you what, just for the audience, too, if you look at me, you get a better camera angle over here. Otherwise, it’s good you’re talking to each other, but I want people to see your eyes.

SMITH: One of the areas–and this goes back to my formative experience as a young, Utopian planner in EPA. We were into the energy program then, too. We were going to create a whole new source of energy things–trash to gas, methane recovery, pyrolysis, a whole–biomass. We spent the–quite a program, the synfuels program, synthetic fuels–synfuel‘s a nice term. We spent $8 billion over a number of years trying to create energy–green jobs, energy from waste, and so on. We created maybe eight barrels of oil. It was one of the greatest boondoggles in history in all the things I’ve talked about. We slowed down innovation, because nobody was going to invest their own money–.

JAY: But I want you to respond to Bob’s point that market mechanisms on their own do not capture the consequences of successful businesses that are making money, but the consequences of what they’re doing harms the environment. So that–so the only thing that’s going to make them change is public opinion, but public opinion has to be exercised through government. I assume that’s what you’re saying. So you’ve got to respond to that.

SMITH: It’s a wonderful argument. It doesn’t work in practice because no institution captures all the benefits or suffers all the negatives of what they do. Markets–let’s look at energy efficiency, which I think is–.

JAY: No, but hang on. If McDonald’s has a bad hamburger, somebody will sue them over the bad hamburger. It’s not so easy for someone to sue some energy company.

POLLIN: And, by the way, suing McDonald’s over a hamburger, you need to have a justice system that will enable them to get some reward.

SMITH: Let me explain. A system of legal–a legal structure and property rights is a way to address all issues, including environment. For the last–this is a much longer debate, but the progressive era in the 1890s essentially diverted the evolution of property rights and wildlife, streams, lakes, which was beginning to happen in both England and the United States–same phenomena occurred. And then after that we decided for a while that the resources were to be exploited–Gifford Pinchot. This–this was the whole natural resource. And then, 100 years later, we look at it and we say the market doesn’t seem to be adequately compensating for this. Markets without property rights are an illusion, and our refusal to allow the evolution of property rights certainly has weakened our ability to handle environmental problems.

JAY: So you’re saying sooner or later the market will deal with this.

SMITH: No, only if the institutions that make it possible for markets to do that–. And the issue [inaudible] climate change, where you’ve got a very difficult question. But simple little areas like species, wildlife, why hasn’t wildlife been incorporated [inaudible]

JAY: But the Great–would the Great Lakes have been cleaned up without regulation?

SMITH: Well, let’s be–let’s look at what has actually happened. The clean air in America was cleaned up a long time before EPA came in. It happened partly because of technological change, as we went from inconvenient fuels like coal in your fireplace to natural gas and electricity and other things, and local governments and local jurisdictions moved in with clean air ordinances and so on.

POLLIN: Local–I didn’t [inaudible] government.

SMITH: No, no, no, I know that. I know. You’re not–. But the thing is, to a large extent, by overly centralizing policy, we make it–we run the great risk that–. When you make lots of little mistakes, you correct them. When you make one gigantic mistake at the federal government level, which we’re about to do by [inaudible] green energy–.

JAY: Okay. But there’s a very specific point here which you’ve got to respond to–or, Bob, maybe you want to go at it again. The issue is–I mean [inaudible] put it back to you. Fred’s saying that government can’t interfere in this. It’s not effective when government intervenes. And so this issue that you’re raising isn’t necessarily [inaudible] ’cause obviously I’m not understanding it.

POLLIN: Well [inaudible] we also have some very powerful counter—. Government doesn’t always screw up.

SMITH: Not always.

POLLIN: In terms of the development of technologies in this country, government has played the central–the central role in the formation of a jet aviation industry and in the computer and the internet. The–you know, if we had to pick three of the most important technical innovations–and this is not my work; I mean, this is work by, you know, leading researchers on the issue of technical change.

SMITH: [inaudible] a little fine point there. I–when I started my professional career, this issue was hot. It comes up and goes. Should government fund basic research, or should government fund applied research? In a way, you’re talking about applications of research, energy efficiency. The Department of Defense and the National Science Foundation each had their hobbyhorse. NSF wanted basic research. DOD wanted applied research, ’cause that was sort of what they were most interested in. They did two wonderful reports [inaudible] What are the origins of innovation? And not surprising that each came up with the answer that benefited their agency. The point is that innovations occur in a extremely complicated way, but we know one thing: they come about best when the individual making the innovation gains the benefits and suffers the–. Residual claimants are critical. When you bring subsidies into it, you still may or may not realize the benefits, but you now realize much less [inaudible] it weakens the incentives to make innovation work. Green technology has lots of promise. It might actually become part of the world’s future. But when you force feed it, when you allow people to get–. Profit-side capitalism and alongside socialism, whether it’s green or anything else, is a very dangerous model for piloting America into the future, and I’m very much afraid this whole green job thing is so already beset with corruption–the ethanol crisis, where corruption is totally rampant; the European situation where there’s been all kinds of backfilling and failures; or the synfuels thing, which was a total disaster–.

POLLIN: Well, I don’t know that the green agenda has been a total failure. I mean, I think the green agenda that came–.

SMITH: No, ethanol. I said ethanol.

POLLIN: Well, look, governments will fail. Private businesses will fail. Government policy is not always right, but government policy can be frequently right. I mean, government policy created, for example, public universities, which is not a bad set of institutions, which is the foundation of research in this country, applied and basic, which in turn is the foundation for technical innovation. Private businesses, when we talk about long–like, the internet, the Defense Department was subsidizing the internet for 40 years before it became commercialized. Then they handed it to the Bill Gateses of the world.

SMITH: These are an interesting argument. But does–this is–I don’t know if you’ve read Eisenhower’s farewell address.

POLLIN: About the military-industrial complex?

SMITH: That’s the one everyone knows. You know what the other warning he gave?

POLLIN: Not really.

SMITH: You know, he has two. He said because of the military-industrial complex we were going to be investing a lot in R&D, and government would be funding that. And he warned that there was a risk that a government grant might substitute for intellectual curiosity, and the trust which we’ve long placed in our intellectuals might be subverted, and we might end ourself up with a technocratic, scientific elite destroying democracy. And I think we’ve seen that in the whole area of environmental policies, but other areas, too. There was a [inaudible] in the ’30s.

JAY: Well, but I still–I’m not clear on your answer on this. If you have an industry, say fossil fuel production, that–consequences on society are damaging, but there’s no immediate effect from the market to punish or capture that consequence, what are you going to do about it if you don’t have government intervention?

SMITH: Well, government–we’re not–.

POLLIN: There is no choice.

SMITH: But we’re not talking about–

JAY: What else is there?

SMITH: –we’re not talking about government intervention here. We’re talking about green jobs. And his argument is that subsidizing green energy will somehow address externalities. Where? Ethanol, we subsidize ethanol, and we ended up with a worse economy and a worse ecology.

POLLIN: Okay. If we–let’s say we don’t subsidize positive green investments, but at the very least we have to punish. We have to increase the costs of burning fossil fuels to recognize the social cost, because there are severe social costs that are not getting captured in the price.

SMITH: That’s–that’s–look, CO2 is very different. You think CO2‘s a pollutant. I think it’s a residual byproduct of efficient energy use.

POLLIN: Well, I’m not–I’m not a climate scientist. I don’t claim to be.

SMITH: I know. I know. We’re not–that’s not the–. Your purpose is you think green energy has value, and above everything else. Look. But, you know, we talked about the Spanish before the program, and Spain was the green jobs model. Spain was applauding this. They had windmills, they had solar. It was going to be the new future for Spain and then for Europe, and backed away from that now because on analysis it didn’t work very well.

POLLIN: [inaudible] there’s a small problem that they’ve had a massive recession, final crunch.

SMITH: Well, in a recession you would want to have your better industries surviving, not closing them down.

POLLIN: Well, we–in a recession, we have all kinds of weird things going.

SMITH: What do you–what is your read on Spain? ‘Cause you mentioned you’d investigated it yourself.

POLLIN: Well, no, I know that well-known study. I mean, number one–.

SMITH: That was the study that criticized the program about a year or two years later that has created controversy.

POLLIN: Right.

JAY: Which criticized the Spanish clean energy program.

POLLIN: Yeah, in particular investment–

SMITH: Yes, green energy program.

POLLIN: –investments in wind energy.

SMITH: Right.

POLLIN: And the point is this. Number one is–that’s why I emphasized energy efficiency, because right now we know the technologies are known, the returns are known. This is across the board. It’s true that the system of banking, intermediation, risk sharing is not mature enough. And so I think in that sense the role of the government is to encourage the private activity. Now, with wind energy and–wind and solar are also very, very different, because wind energy is almost to the point at which it’s cost-competitive in terms of generating electricity relative to coal. And if you actually tacked on a tax or a cap to recognize the social costs of coal, wind energy would be competitive today with coal. Solar is not. And so I don’t think we should subsidize solar to the extent that we subsidize efficiency, because the main investment should be in getting the solar technology to the point it’s competitive. But, again, if you don’t have some vehicle for capturing those social costs–and this is not me; this is–as you acknowledge, this is actually a pretty conservative argument, that if you’re going to have a market, you also have to have some measure, some means to address these problems of what we call externalities, the fact that the market isn’t capturing these costs. And it’s clear that we’re not capturing the cost.

JAY: Okay. Quick, final word.

SMITH: Well, the whole question [inaudible] The question I think we have to address is whether an economy which has been producing energy efficiencies steadily for the last century–. Every year the US uses less energy to produce $1 million of output. We’ve been doing that steadily. It takes–to argue that government can accelerate that process, no evidence at all that’s true, and lots of evidence, when governments are picking winners and losers, it can put us on a faster efficiency-gain path, rather–I mean, a slower than a faster one. And ethanol illustrates that. We put a lot of emphasis on ethanol and we’ve slowed down the process.

JAY: Okay. But this–we haven’t debated ethanol, and that’s a different debate, ’cause I think that–.

SMITH: That’s green jobs. That’s green jobs.

JAY: Yeah. Well, I think–I don’t know, though. A lot of people for green jobs will probably agree with you on ethanol.

SMITH: But they wouldn’t have 10 years ago.

JAY: Thanks for joining us.

POLLIN: Well, we learn. We learn. I’m willing to learn, you know?

SMITH: I am too.

JAY: Thank you both for joining us. And thank you for joining us on The Real News Network.

End of Transcript

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Fred Smith is President and Founder of the Competitive Enterprise Institute, a free market public policy group in Washington. From 1972-1978, Fred served as a Senior Policy Analyst at the Environmental Protection Agency.

Robert Pollin is Professor of Economics and founding Codirector of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst. His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. He co-authored the reports, Job Opportunities for the Green Economy (June 2008), and Green Recovery (September 2008), exploring the broader economic benefits of large-scale investments in a clean-energy economy in the US.

Robert Pollin is Professor of Economics at the University of Massachusetts in Amherst. He is the founding co-Director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include: A Measure of Fairness: the Economics of Living Wages and Minimum Wages in the United States, and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.