Green Stimulus

An Interview with Robert Pollin

Robert Pollin is professor of economics and founding co-director of the Political Economy Research Institute (PERI) at the University of Massachusetts, Amherst. He most recently co-authored A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States (2008) and An Employment-Targeted Economic Program for Kenya (2008).

Multinational Monitor: Your September 2008 report, "Green Recovery," called for a major public investment in energy efficiency and renewable energy. What scale of investment did you recommend, and what were the key components of your recommendations?

Robert Pollin: Our proposal was for a $100 billion program of public spending spread over two years. Those funds were divided about equally between direct spending by the government and tax incentives for private businesses. In addition, our program included government guaranteed loans that were aimed to encourage private investors to spend additional amounts in green investments. We assumed the loan guarantee program would generate another $20 billion in new clean energy investments by the private sector. So the full amount of clean energy investments we worked with in green recovery was $120 billion over two years.

The overall breakdown in spending that we proposed was 70 percent for energy efficiency and 30 percent for renewables. Within the 70 percent for efficiency, we started with building retrofits, at 40 percent of the total spending initiative. We allocated 20 percent for public transportation and freight rail. Ten percent went to smart grid electrical transmission systems. Of the 30 percent that we allocated for renewables, we assumed an even split - 10 percent for wind, solar and biomass energy each. But you could just as easily give a good chunk of that overall renewable budget to geothermal power, hydroelectric or other potentially promising technologies.

MM: How much money does the enacted stimulus plan commit to green investments, and in what form? How do these measures compare to your proposals?

Pollin: The Obama stimulus program that is being enacted is very similar to our proposal. Overall direct government spending, tax credits and government matching fund programs on all energy-related programs also comes to $100 billion over two years. But in the Obama program, about $15 billion goes to programs other than the ones we proposed - $6 billion for nuclear decontamination and site clean up, $3.4 billion for clean coal, and another $3 billion for non-energy environmental projects, such as brownfield restoration and wildlife protection. The Obama program also assumes that the loan guarantee program will generate $60 billion in private clean energy investments, as against the $20 billion we assumed.

MM: Your report argued for green investments as a stimulus measure. Why are green investments attractive as a stimulus measure, as opposed to other possible stimulus expenditures?

Pollin: During the debate around the first stimulus program, Republicans claimed that the measure was merely a "spending" program. For example, John McCain contended that certain types of government programs could stimulate job creation while others could not.

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 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 we need to judge these alternative spending programs by two criteria - how well they will work as a short-term stimulus, and how well we judge their long-term benefits in promoting our well-being as U.S. taxpayers. For now, let's focus on relative short-term effects of alternative possible spending targets.

In fact, there are large differences in the relative job-creating effects of different types of spending. 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. With the same amount of money, spending on the military will produce only 8,500 jobs, 50 percent less than green investments. Spending an addition $1 billion in the oil industry - the "drill baby drill" agenda advanced by McCain/Palin in 2008 - will produce only 4,500 jobs for a billion dollars of spending, 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? The two main factors are, first, that the green investments are more labor intensive - more money is spent on hiring workers and less on buying equipment, land and energy; and the second is that green investment have higher domestic content, i.e., less money goes to buy imports.

MM: What kinds of jobs would be generated by your proposals, and in what numbers?

Pollin: The overall level of job creation generated by the green investments will depend heavily on the success of the incentive programs for private investors. Right now, the only thing we can count on for the green stimulus agenda - as well as for the overall Obama stimulus program - is the direct government spending component. That should generate something like 350,000 jobs per year over two years. But if the private sector responds very favorably to the incentive programs offered in the stimulus, this could bring total job creation to around 900,000 per year over two years. Maybe a more realistic, if still somewhat optimistic figure, would be around 600,000 jobs per year over two years, including both direct government spending plus private sector investments encouraged by the Obama program.

A high proportion of the overall job creation will be in construction, first, and manufacturing, second. But keep in mind that if we spend on a construction project, that also creates jobs for truck drivers, secretaries, accountants, lawyers and waitresses serving lunch at diners.

My co-workers and I estimate that 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 will mean more job creation at lower average wages - stretching out a given pie of wage and benefit payments.

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. All told, the green investment agenda does still create far more jobs paying over $16 an hour than either the military or the oil industry - 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 janitors, waiters and healthcare assistants.

MM: What energy/carbon reduction benefits did you project from your proposals?

Pollin: We didn't estimate this, at least not in a way that was satisfactory. It is easy to estimate the benefits per dollar of spending on building retrofits. Here we think you can get something like a 30 percent reduction in energy consumption through fairly modest spending levels - for example, an average home could spend only $2,500 total and save about 30 percent per year on its energy bills. In terms of spending in the renewable areas, things get much more murky, since what we are still mainly trying to do there is accelerate development and commercialization of new technologies, not work with known technologies, as with retrofits.

MM: Why did you settle on the $100 billion figure? Why not something larger? Especially given payback for building retrofitting, shouldn't the country just spend whatever is needed for comprehensive retrofitting of buildings, carried out as fast as possible?

Pollin: First, when we wrote the proposal last summer, neither we nor anybody else had any idea that the country would be in the depths of such a severe crisis. At the time, the $100 billion figure seemed quite large, especially given that, at the time, the premise underlying all government spending initiatives was that they had to be matched dollar for dollar by tax increases. We are now in a totally different world, in which the government is - correctly - spending trillions to get the economy out of the disaster created by Wall Street.

Given our current situation, we could indeed include more direct government spending for green investments. But there is of course a limit as to how much new large-scale spending initiatives can get up to speed before you start hitting supply constraints - i.e., not enough workers or companies around to do the jobs. We aren't close to hitting such limitations now, given that we have shed about one million construction jobs over the past two years. But if, for example, we tripled the amount of annual spending on retrofits, we would hit up against such problems.

At the same time, you are raising an important general point regarding retrofits. There are 120 million occupied private homes in the U.S. and a similar number of other types of buildings. Buildings, of course, are located in each and every community, spread out evenly relative to population levels and the level of economic activity going on in communities. Most of the buildings in every community could benefit substantially from energy retrofits. So we have a huge job just there.

I have made the point repeatedly - including to the Obama transition team - that building retrofits are the single most effective clean energy program we have in terms of combining its short- and long-run benefits, providing benefits evenly throughout the country, working with known and certain technologies that have fast payoffs, and in terms of helping an industry - construction - that has been decimated by the housing bubble collapse.

MM: Is it fair to say that focusing on the stimulus effect of green investments necessarily biased you to shorter-term investments? If you were making proposals with a longer time horizon, would your proposals differ? How so? Would your recommendations differ if you had in mind longer-term economic performance, or longer-term carbon reductions?

Pollin: Building a clean energy economy is going to be a massive, generation-long project. We will need to combine lots of strategies and areas of focus. I think the mix we proposed, and that was more or less adopted within the Obama stimulus, is about right. The main focus is on quickly advancing in areas such as retrofits, public transportation and a smart grid, where the payoffs are relatively fast and known. Over the next decade, we need to see which of the renewable technologies we can advance most rapidly, to the point where they provide clean energy at low prices for everyone.

We also need to be careful about negative unintended consequences. The obvious case here is using food products such as corn to produce ethanol. This has led to rising food prices, which hurts low-income people substantially. We will figure out the most effective mix of renewable technologies only through lots of effort. We aren't there yet. So for now, it makes more sense to keep most of the money on promoting efficiency.

MM: One potentially attractive feature of efficiency and alternative energy investments is the possibility of moving away from centralized technologies and highly concentrated industries. Do you have proposals for preferable institutional forms to carry out the investments you recommend? For example, should retrofitting be carried out by public or private enterprises - and if private, in whole or part, do you favor any particular kind of means of organizing the enterprises?

Pollin: I have had discussions on this with people around the country. I have gotten all kinds of interesting and surprising answers. At a meeting of a regional planning board, I suggested that, perhaps, the local utilities would be one good vehicle for helping homeowners to pay for retrofits. Most of the people disagreed. They didn't seem to like the local utility much. Some people also thought this job should be done by community organizers, not by for-profit businesses of any kind. I also heard similar thoughts even at one chamber of commerce discussion. Then when I was in Milwaukee, meeting with community leaders and environmentalists, they had a different take. My own view is that we have to see how this plays out, and give people and communities lots of both incentives and latitude. The main thing is to advance the agenda. This will inevitably happen through some combination of public sector spending, efforts by community groups, labor organizations and environmentalists, and businesses who fully expect to do well - i.e., make a nice profit - as well as do good.

All such efforts will be needed. My guess is that the primary driver will be private investors being encouraged to try to make profits from opportunities created by government incentives. These incentives will be of two types: first, either a carbon tax or carbon cap to raise the prices of oil, coal and natural gas, to reflect the environmental costs of consuming fossil fuels; and second, the range of public spending and private sector incentives for energy efficiency and developing renewables.

MM: How would you like to see decisions made about the kinds of public transit that would be supported? Are there good models?

Pollin: In addition to using public transportation as a tool for encouraging energy efficiency, there should be two other main considerations. The first is to significantly lower the cost of living for low-income people. Right now, low-income people, like everybody else, rely almost entirely on cars, even though it costs about twice as much to travel by car than public transportation. Low-income people rely on cars for the obvious reason that, in most communities, public transportation is just not convenient. The second consideration, which is longer-term, is to transform our models of community development, so that they aren't so thoroughly focused on cars, highways and parking lots. A clean energy economy is also a community that provides a lot more green space, and where people spend a lot less time in traffic jams. The solution here is clearly to dramatically improve the quality of public transportation.

MM: What is a smart grid? Who would/should own, control and operate it?

Pollin: A smart grid electrical transmission system, as opposed to our current not-so-smart grid, would accomplish two main things. First, it would transmit all forms of electricity more efficiently across the grid. Second, the smart grid would be much more amenable to incorporating renewable energy sources into the grid. The smart grid, for example, would be able to store and transmit energy from the sun and wind, that, by their nature, supply energy on an intermittent basis (i.e., when it is sunny or windy). The smart grid would also be able to effectively absorb and transmit the energy supplied by small-scale sources. This would include private homes that are generating a surplus of solar energy at certain times.

Who should own, control and operate the smart grid? Especially given that the smart grid will be much more integrated into the small-scale operations of homeowners and businesses relying on renewable energy, this would suggest much more public supervision - if not ownership - of the grid itself. But beyond this, as I mentioned earlier, I am not committed to any single ownership form. Let's see how different communities work their way through this.

Of course, we need to recognize that big utilities will try to dominate the implementation of smart grid systems, and that should be counterbalanced by public ownership and community involvement. But what should be the right mix? I don't think there is a single correct answer.

MM: For solar and wind, you recommend relying on tax credits and incentives. Who is likely to use these credits and incentives, and what kind of industry are they likely to create/expand? Would other means of support for solar and wind lead to different technologies being deployed or developed, or different kinds of enterprise development?

Pollin: I do also think there should be lots of public spending on research, development and commercialization. And as mentioned earlier, I think there is an important role for public ownership of utilities under a smart grid system. Solar, wind and other forms of clean energy do lend themselves much more readily to small-scale enterprises than do fossil fuels. So let's design the incentives so that such small-scale operations - including cooperatives and community groups - can get in on the mix and flourish. But I also want to be realistic. We have a massive transformation before us, of moving from a fossil-fuel based to a clean energy economy. We have to do this within one generation to defeat the threat posed by global warming. I don't think this can be done effectively by leaving large-scale profit-seeking businesses out of the mix.

MM: Do you have any thoughts on how public support for the auto industry should be connected to the green investment agenda you are promoting?

Pollin: This is a very difficult problem, and so far, I think Obama is handling it pretty well. At the moment, if GM and Chrysler were simply allowed to fail, this would be a devastating blow to the recovery efforts, which, at the moment, are only in their very early, very fragile stages. At the same time, these companies have been completely out of touch with reality for a long time by resisting energy efficiency. Their performance has been reminiscent of the cigarette companies who, for a generation, denied any link between smoking and cancer.

Obama is now trying to force the U.S. automakers to finally get serious about energy efficiency. They may not make it. But at least, through this one final reprieve and effort by Obama to push them in the right direction, GM and Chrysler are not going to collapse within the next six months - adding another blow to the ones already inflicted by the Wall Street crowd.

But Obama now should get just as tough on Wall Street as he has been with the car makers. That hasn't happened yet.