President Barack Obama's economic-stimulus program that passed Congress in February, despite being too small and too loaded with tax breaks for corporations, is among the most progressive pieces of economic legislation since the 1960s. The green-investment features alone stand as a major advance toward building a clean-energy economy. The total amount of clean-energy spending in the measure ranges between $50 billion and $140 billion, depending on how one counts the patchwork of direct public spending and private-sector incentives. These funds support such projects as retrofitting buildings, improving public transportation, and building "smart grid" electrical transmission systems, as well as promoting research, development, and commercialization of wind, solar, biomass, and other renewable-energy sources.
Doubly significant is that this legislation represents the first large-scale attempt to combine protection of the environment with development of a clean-energy economy, job creation, and economic opportunity. For a generation, the opposite was assumed: You could protect the environment, or you could promote economic growth and job creation, but not both.
We have known since World War II ended the Great Depression of the 1930s that large-scale government spending can generate millions of jobs and push the economy out of a slump. But of course, in the 1940s, expansion of military spending, not social or environmental programs, was the engine of job creation. Can we expect that a green-investment program today can have an effect comparable to military spending in the 1940s?
Another basic question is whether there will be a net job gain given that many jobs will be lost as we reduce demand for oil, natural gas, and coal. And how will we pay for it? For the next two years, the Obama administration will borrow in the range of $1 trillion to finance the stimulus program. But building a clean-energy economy is the work of a generation and takes only its first baby steps within the two-year Obama stimulus program. Over the longer haul, the project will have to be financed.
All Spending Creates Jobs, But How Many?
During the debate over the first stimulus program, Republicans claimed that the measure was merely a "spending" program. Sen. John McCain contended that certain types of government programs could stimulate job creation while others could not. McCain's overall argument was muddleheaded. But, amid his errors, he did nevertheless stumble on a significant point: Alternative kinds of spending will have different impacts both on job quality and quantity.
Let's start where McCain was entirely wrong. In fact, any and all forms of increased spending, public or private, will create more jobs, unless the economy is already operating at full employment. The reason military spending on World War II ended the 1930s Depression had nothing particularly to do with the circumstances of war or the nature of military spending per se. Millions of jobs were created simply because government began a deficit-spending program -- as high as 29 percent of gross domestic product in one year -- on a scale far beyond what had been politically feasible prior to the attack on Pearl Harbor. As of 1940, unemployment stood at nearly 15 percent, and private businesses were unwilling to risk their money on new investments. The domestic-spending programs of the 1930s, including infrastructure programs such as the Tennessee Valley Authority as well as the Civilian Conservation Corps -- the green-investment program of the time -- were on the right track but were too small relative to the crisis.
A comparable situation holds today. The economic collapse caused by Wall Street speculators requires a massive injection of public spending as a counterforce. Private investors are hunkered down, protecting their remaining wealth by purchasing minimally risky U.S. Treasury bonds. In this situation, any form of government spending -- health and education programs, traditional infrastructure, green investments, and yes, the military -- will all generate jobs.
But McCain was right on one count: There are indeed large differences in the relative employment effects of different types of spending. However, McCain and fellow Republicans will not be happy to know what those large differences are. In fact, the green-investment agenda is a highly effective engine of job creation, much more so, for example, than two favored Republican forms of spending, military outlay and the oil industry.
Thus, for a given billion dollars of spending, the Obama green-investment program will generate about 17,000 jobs. Spending the same amount on the military will produce only 8,500 jobs, 50 percent less than green investments. Spending an additional $1 billion on the oil industry -- the "drill, baby, drill" agenda advanced by the McCain/Palin campaign -- will produce only 4,500, about one-fourth the total created by green investments.
Why does investment spending devoted to the green economy create so many more jobs than military or oil spending? Three factors are at play:
Relative labor intensity. This means more spending on people and less on machines, buildings, supplies, and energy. In weatherizing a home, the machinery and supplies needed are relatively low, while the demand for construction workers is high. Drilling for oil requires huge amounts of sophisticated machinery and relatively few people to operate that equipment. A military base employs lots of people. But it also involves heavy equipment purchases and consumes lots of energy.
Domestic production versus imports and spending abroad. With Obama's green-investment agenda, well over 90 percent of total spending will occur within the U.S. economy. Energy-efficiency measures, such as building retrofits, public transportation, and upgrading the electrical grid, can only occur on-site. Weatherization projects for buildings in North Dakota can only be done in North Dakota. The New York City subway system must be upgraded in New York. By contrast, the U.S. now imports about 50 percent of all the oil it consumes, and about 20 percent of total spending within the oil industry occurs abroad. The proportion of the military budget spent abroad is even higher.
Differences in pay levels. The average annual pay for employees associated with the green investment, including both wages and benefits, is about $52,000. This is roughly 20 percent below the $65,000 average for both the military and oil industries. This means that a given amount of spending for workers in the green-investment areas yields more job creation at lower average wages -- stretching out a given sum of wage and benefit payments.
Can Green Investments Match Up on Job Quality?
So, is it better to generate more jobs, even if they are slightly lower-paying? Or should public outlay create fewer but better-paying jobs? Consider the range of factors. Even though green investment creates jobs with lower average wages, the total amount of money going into all workers' pockets is far higher, because so many more jobs overall are being created. Thus, $1 billion in spending would yield about $750 million for workers engaged in the green-investment activities, $560 million for those tied to military spending, and $300 million for those connected to the oil industry. All told, the green-investment agenda still creates far more jobs paying over $16 an hour than either the military or the oil industry does -- 75 percent more than the military and three times more than the oil industry.
And in the green economy, even many of the relatively low-paying jobs in construction and manufacturing offer decent job ladders for entry-level workers. There are fewer such prospects for advancement in even lower low-paying service-sector jobs, such as those of janitors, waiters, and health-care assistants.
As Brentin Mock discusses in this issue, we have to make sure that minorities have access to jobs in manufacturing and construction. The construction and other unions need to fully open their apprenticeship programs and fight discriminatory barriers throughout the industry, building on commitments some unions have been advancing now for decades.
Beyond the issues tied specifically to the construction industry, the transition from a fossil-fuel economy to a clean-energy economy will entail shifts out of some sectors and an expansion of others. What will be the effect on employment?
In the oil industry, employment is spread fairly evenly across a range of sectors, including extraction, manufacturing, utilities, transport, and administrative and professional occupations, such as lawyers, accountants, and technical/scientific personnel. In terms of military spending, about half of the jobs created are with the government itself, but the range of opportunities provided within the military is fairly wide, including a full range of transportation-related occupations, scientists and engineers, electricians, and those stationed for combat readiness.
Different parts of the green economy generate different combinations of job creation. Building retrofitting is dominated by the construction industry, with some economic activity in manufacturing and professional services. In wind- and solar-power generation, the largest proportion of new jobs created will be in manufacturing, with construction second. Wind and solar also draw heavily on independent professionals, including research and development personnel.
For a green investment program to provide a range of new employment opportunities comparable to what is made available through military spending and the oil industry, it will be necessary to promote the full array of clean-energy initiatives. The range of job opportunities available within the oil industry and military cannot be duplicated by any single clean-energy activity alone.
WHERE TO FIND THE MONEY?
Constructing a clean-energy economy will require spending trillions of dollars over the next 20 years. If a green-investment program were in the range of $150 billion per year (about 1 percent of U.S. GDP or equal to the 2008 level of spending on the wars in Iraq and Afghanistan), we would create about 2.5 million new jobs.
We often think of such a large-scale economic policy initiative as being funded by the federal government alone. In fact, a wide range of public and private sources of funds will be needed to build a clean-energy economy. Most of the major energy-efficiency measures -- retrofitting the existing building stock, expanding public-transportation systems, and upgrading the electrical grid -- will need to be led by state and local government, with the federal government mainly providing financing. But even with all the public outlay, both regulations and positive financial incentives are needed for private businesses and homeowners to commit their money into green investments.
Public Funding. Deficit spending to finance the green-investment agenda is entirely warranted now. But over the long term, public funds for clean-energy investments require increased revenues or shifted spending priorities, of around $150 billion per year. There are three possible revenue sources: increased general taxation through progressive tax reform; dedicated revenues from green taxes; and a peace dividend. Each has its possibilities and limitations.
After the worst of the recession is over, we will need a large tax increase tilted to the top, to finance all of the administration's long-term investment initiatives, including green ones. One important source of funds will be green taxation itself. The government would raise money through a cap-and-trade system that sets limits on total carbon emissions, by selling the permits at auction for the right to produce oil, natural gas, or coal. This could raise serious new revenue, ranging from $75 billion to $200 billion per year.
However, cap-and-trade will also raise industry costs, which will raise prices. There will be legitimate pressures to rebate some, if not most, of these increased costs to consumers. People working in the oil, gas, and coal industries would also have fair claims to significant adjustment support, after cap-and-trade requirements force these industries to contract. The money left over to finance green development might be in the range of $50 billion.
The $600 billion military budget is an obvious pot to raid. However, even if there were, say, a $150 billion peace dividend from ending the Iraq War, there would be other claimants on these funds, including universal national health insurance, education, poverty reduction, and non-energy infrastructure projects, including major upgrades of our stock of bridges and levees. So even with support from a general tax increase, public funds cannot do the job alone.
Private Funding. Government has long mobilized private credit markets to support social purposes. For example, broad middle- and working-class homeownership became a reality during the New Deal, after the U.S. government created a highly subsidized and regulated market for home mortgages. Our present-day Wall Street high rollers wrecked this system. But if we follow the principles of the old housing-finance model, a combination of regulations and subsidies -- sticks and carrots -- we can induce private investors to become the major funding source for the clean-energy transition. The sticks would be asset-based reserve requirements, while the carrots would be loan guarantees and tax incentives.
With reserve requirements, the government establishes that banks increase their cash holdings as a cushion against losses. This same regulatory tool could also prod financial institutions to channel credit to green investments. Regulations could stipulate that, say, at least 5 percent of financial institutions' loan portfolios be channeled to green-investment projects. Financial institutions that failed to reach this 5 percent quota would then be required to match the shortfall with cash reserves. Government loan guarantees are already fully integrated into the Obama stimulus program as a means of encouraging green investments by private businesses. The government's expectation is that, over two years, $10 billion in government support could leverage as much as $100 billion in private green investments.
The other method for leveraging up public funds is through tax incentives and matching grants that would go directly to private investors. These measures have already had a significant impact on a small scale, both in encouraging and discouraging investors, as they were sporadically offered and withdrawn under the Bush administration. Thus, additions to wind-power capacity fell between 2003 and 2004 to 389 megawatts from 1,687 megawatts due to a lapse in tax credits, but when the tax credits were renewed in 2005, wind-power capacity then rose sharply, to 2,431 megawatts. The fact that the Obama program is offering these incentives on a longer-term basis should dramatically expand their effectiveness.
With a goal of an annual green-energy investment program of about $150 billion, we could reasonably get about $50 billion directly from government and the other $100 billion from private investments. Through the channeling of a steady large-scale flow of investment funds into energy efficiency and renewable-energy sources, the transformation of the United States into a clean-energy economy can also be a major source of new industries and good jobs.