This is not a trick question. You would choose Builder B, right? But Robert Pollin, James Heintz, and Heidi Garrett-Peltier would select Builder A if they employ the same reasoning they exhibit in their recent monograph The Economic Benefits of Investing in Clean Energy. Pollin is a respected professor of economics at the University of Massachusetts-Amherst, where Garrett-Peltier is a doctoral student, and the three are staffers at the university’s Political Economy Research Institute. Given their expertise in economics, it is surprising that their monograph confuses benefits with costs, counting it as a benefit that a shift to “clean energy” would create lots of high-paying jobs.

In this, Pollin, Heintz, and Garrett-Peltier are not alone; many non-economists (especially ones with “Rep.,” “Senator,” or “President” in front of their names) make the same mistake. They regard a make-work project as a good project because, in their minds, it “creates jobs” for people who otherwise would not have jobs. Such thinking ignores a basic economic concept: opportunity costs. Every worker employed could have been employed elsewhere, doing something of value. One of the huge advantages of a free market in labor is that, whether the employer is a private firm or a government entity, it must recognize this opportunity cost in the price it pays for labor. That causes employers, especially for-profit employers, to be careful about how much labor to hire. That is a good thing.

If It’s Good, Then Costs Are Benefits The monograph’s gist is that because burning carbon-based fuels is causing global warming and, therefore, hurting the environment, we need to reduce our use of such fuels and use what the authors call “clean energy.” Even economists who accept these views — that global warming is happening, that it is harmful, and that we should shift from lower-cost to higher-cost fuels to reduce this harm — will admit that shifting from lower-cost carbon-based fuels to higher-cost alternative fuels will cost more. That is what moving from lower-cost to higher-cost means.

But Pollin et al. say that there is a silver lining: the shift will use more labor, and that is good. Why is it good? Because, they say, many more workers will have jobs. What they have actually done is regard costs — the added jobs — as benefits.

Almost no one spending his own money makes this mistake. The prospective homebuyer above could employ twice as many workers, but he chooses not to do so because it would double the cost of the house. As Dwight R. Lee pointed out in his modern classic, “Creating Jobs vs. Creating Wealth” (The Freeman, January 2000), what matters is the wealth that workers produce for themselves and their employers. Our goal as employers or customers is to maximize the value of what we get for a given outlay.

Response Surely, I thought, at some point in this 65-page monograph, the authors will recognize their error. They do, sort of. About halfway through, they have a section titled, “Low productivity is not the result of clean-energy investments.” They refer to some unnamed critics and state their criticism as follows:

By definition, if we increase labor intensity through clean-energy investments — if we generate about 17 jobs per $1 million through clean-energy investments versus about five jobs through fossil fuel spending — then we reduce labor productivity in the energy sector through shifting spending toward clean energy.

Lower productivity, of course, is another way of saying lower output or higher cost for a given output.

How do the authors answer? This criticism, they write, “ignores two crucial and widely understood considerations.” The first allegedly ignored consideration is that “clean-energy investments provide new opportunities to previously unemployed workers,” thus raising “the productivity level of millions of workers from zero to a positive number.” In other words, their whole analysis is based on the idea that all the net jobs created by switching to “clean energy” would be filled from the ranks of the unemployed. That does not seem likely. What does seem likely is that a substantial number of the news jobs would be filled by people moving from other jobs, with very little effect on the overall number of unemployed.

Moreover, even if Pollin et al. were right that the new “clean energy” jobs would be filled solely by the unemployed, this is a short-run situation. When the current recession is over, the high cost from more people being employed in these jobs would rear its ugly head. But the authors do not sell their proposals as short-term. They want a permanent shift in the U.S. economy. Even Paul Krugman, who believes we are currently in a liquidity trap, would admit that we will be out of that trap in the long run.

The authors seem aware that they need to deal with this issue. They write: “[T]he economy has not approached full employment since the late 1990s.” They seem to be suggesting that full employment is something we will never reach. But many economists would disagree. Many of us have thought that the unemployment rate at full employment was five or six percent; yet the U.S. economy had an unemployment rate below six percent from the late 1990s to the middle of 2008. So even if their plan carries a low opportunity cost now because many of the jobs will be filled by the currently unemployed (again, something that is doubtful), in the long run the output foregone as a result of labor being allocated to “clean energy” jobs is a problem.

The authors’ second response to the criticism is to change the subject. They write that because of what they believe is a global climate crisis, “we need to begin incorporating environmental effects into the measurement of output and productivity.” Their argument is basically that an uncounted benefit of clean energy is the reduction of the harm generated by burning carbon-intensive fuels.

This argument is correct, assuming that their premise is correct: if burning carbon-intensive fuels hurts the environment, then it is true that moving to “clean” energy could create a net improvement in well-being. But that argument is beside the point. The benefit from the improved environment is not the jobs created. In fact, the jobs created are a cost of improving the environment. Suppose that we could get the same “clean energy” results by using half the number of workers that the authors estimate. That would be a good thing, as the benefit would be achieved at a lower cost. But with their methodology, the authors would say that it would be a bad thing. Thus are costs disguised as benefits.

Trade Is Bad? Confusing costs with benefits is not the only economic error that Pollin et al. make. They also argue that reducing international trade is good:

Reducing the U.S. trade deficit through cutting oil imports means, by definition, a higher proportion of spending by U.S. households, businesses, and governments will happen within the domestic U.S. economy. This promotes faster U.S. GDP growth.

But if reducing oil imports is good for the reasons they state, then trade economists from James Mill and David Ricardo to the present have been wrong. Suppose that we were to promote even faster growth by cutting off all trade. Let’s forbid imports of bananas so that people will build hothouses and grow them in the United States.

Of course, reducing trade is not good; it’s bad. Pollin et al. have already argued that the shift to clean energy would reduce negative climate externalities. Point taken (though not necessarily agreed with). But then the benefit of the shift is that negative externalities are reduced, not that we trade less.

Coda One of the big benefits of economics is that it restrains the enthusiasm of zealots who want government to have a big say in how our resources are allocated. Economics reminds us that there are no free lunches. It not only humbles the wild-eyed supply-sider who thinks that we can cut tax rates by 50 percent without reducing government spending by a dime, but also reminds us that even things we strongly want have costs. It is a sign of the zealotry of even some economist-advocates of “clean energy” that they throw off this discipline of economics. But opportunity costs are stubborn things.