Conservative Principles Now

President Obama declared in the State of the Union address that the United States must be a leader in clean energy production. Why? “Because I’m convinced that the country that leads in clean energy is also going to be the country that leads in the global economy,” the president reiterated today in a speech at Savannah Technical College. That’s a good reason if it were guaranteed to be true, but doesn’t it depend on the cost? If a manufacturer in another country can produce these technologies more cheaply than a manufacturer in the United States, doesn’t that benefit both economies? President Obama went on to say,

“[W]e have the potential to create millions of jobs in this sector. These are jobs building more fuel-efficient cars and trucks to make us energy independent. These are jobs producing solar panels and erecting wind turbines. These are jobs designing and manufacturing and selling and installing more efficient building materials. ”

“We” meaning the government. This assumes, of course, that the money to build clean energy falls freely from the sky. But it doesn’t; the money is taken from other sectors of the economy where it could be put to more efficient use. So far, the green stimulus hasn’t produced the results initially purported when the American Reinvestment and Recovery Act became law.

In Baltimore, for instance, stimulus dollars have been spent to patch roads, install newer furnaces and painting rooftops white to conserve energy. According to the Washington Post’s Alec MacGillis, none of these projects, as well as others, have created a single job. Another example is in the state of Indiana, where companies have “weatherized 82 homes out of its three-year goal of 25,000, and reported zero new jobs from the spending.” ABC News reports that at the end of 2009, only 9,100 have been weatherized to save energy through the stimulus as part of a $5 billion program. $522 million of the $5 billion has been spent thus far, which equates to over $57,000 per home.

President Obama also emphasized the importance of government run energy efficiency rebate program for appliances saying that it will save consumers money on their electricity bill. If it will save consumers money, why does it need a rebate? While these products use less energy, they also cost more up front and if forced into the market too quickly by the hand of government, can be much less reliable. More importantly, these decisions should be left to the consumer – not influenced by the government – writes Heritage Analyst James Gattuso:

“Congress [or the government] is in no position to determine whether consumers would be better off if they bought more expensive, but more efficient, appliances. Consumers are in the best position to do this, and to decide whether they prefer to save money now on the purchase price, or later, in lower energy bills. A consumer who uses an air conditioner for just a few weeks each summer, for instance, generally would prefer a low purchase price. Poorer consumers, who already must minimize appliance use, would benefit least from higher efficiency and would especially prefer lower purchase prices.”

President Obama certainly isn’t marching to this drumbeat alone. Today California Governor Arnold Schwarzenegger pushed for more green job creation and for state legislators to pass his California Jobs Initiative. “It will send a clear message to every CEO, entrepreneur and innovator if you invest in California, we will invest in you,” Governor Schwarzenegger said.

If the CEOs, entrepreneurs and innovators make a successful product, California won’t have to invest in them as taxpayers. They’ll simply buy their products.

The Congressional Budget Office (CBO) has produced a new report estimating that the $862 billion stimulus has thus far saved or created 1.5 million jobs.

Yet the CBO’s calculations are not based on actually observing the economy’s recent performance. Rather, they used an economic model that was programmed to assume that stimulus spending automatically creates jobs—thus guaranteeing their result.

Logicians call this the begging-the-question fallacy. Mathematicians call it assuming what you are trying to prove.

The CBO model started by automatically assuming that government spending increases GDP by pre-set multipliers, such as:

• Every $1 of government spending that directly purchases goods and services ultimately raises the GDP by $1.75;
• Every $1 of government spending sent to state and local governments for infrastructure ultimately raises GDP by $1.75;
• Every $1 of government spending sent to state and local governments for non-infrastructure spending ultimately raises GDP by $1.25; and
• Every $1 of government spending sent to an individual as a transfer payment ultimately raises GDP by $1.45.

(note that all CBO figures in this post represent the midpoint between their high and low estimates)

Then CBO plugged the stimulus provisions into the multipliers above, came up with a total increase in gross domestic product (GDP) of 2.6 percent, and then converted that added GDP into 1.5 million jobs.

The problem here is obvious. Once CBO decided to assume that every dollar of government spending increased GDP by the multipliers above, its conclusion that the stimulus saved jobs was pre-ordained. The economy could have lost 10 million jobs and the model still would have said that without the stimulus it would have lost 11.5 million jobs.

The debate over the efficacy of Keynesian stimulus is essentially a debate over the correct multipliers. Some believe the multipliers are high, others believe they are as low as zero (or even negative). Testing the stimulus requires testing the multipliers. Yet by simply assuming large multipliers, CBO effectively pre-ordained its conclusion that the stimulus worked, regardless of what actually happened in the economy.

Cross-posted at National Review’s The Corner.