Bruno Prior: Employment for economists

Justifying make-work investment and jobs is employment for economists. We’d be better off without.

There was some incredible news a couple of weeks ago: We used to think that the Low Carbon and Renewable Energy sector was worth around £42bn annually, supporting around 200,000 jobs and 66,000 businesses. But with a different methodology, kMatrix estimate that the Low Carbon Environmental Goods and Services sector is much bigger than that: £206bn p.a. supporting 1.28 million jobs and 76,000 businesses. That’s over 10 per cent of our GDP in 2020.

But that’s not enough! The government wants more of the economy to be in that sector, and will spend to make it so. “Over 1,340 jobs will be created and protected across the Humber region”, they announced on Monday, through the subsidised investment of £264m by two offshore-wind businesses.

That’s 200 created and 880 “protected” at the Siemens plant. And the government is coy about how much subsidy they are providing, except that it comes from the £160m Offshore Wind Manufacturing Investment Support scheme. But still, if you want something, you have to pay for it. Nanny knows best. Don’t we all want what government wants for us?

You and I might think that making work would be a low priority when we are short of 100,000 HGV drivers. But we lack the politician’s perspective. A politician knows that there can never be too many jobs, especially of the “right” kind, and the money to create them grows on trees (i.e. on the Bank of England’s infinitely elastic balance sheet).

We ought to be more grateful. A lot of this spending is meant to regenerate the benighted north, where nothing would happen if the government didn’t subsidise it. The Humber gets to be the world centre for offshore wind, while the old mining areas get to suck heat out of their abandoned mines. Yet Red Wall Tories complain about the cost of the government’s make-work environmentalism. They are stuck in the old economic mindset, where resources are scarce and the best jobs are the ones that people create to meet other people’s demands.

The value of the renewable energy sector

To be fair, the modern style of economics can be hard to understand. Take the kMatrix study. They are creditably transparent in their methodology, but their data are not available publicly (naturally – they are their IP), nor are they feasible to recreate and inspect. All we can do is sanity-check them by comparing their published, summary data with other published data.

For example, they differentiate between three sub-sectors: Environmental, Low Carbon, and Renewable Energy. Under Renewable Energy, they give their estimate for the annual sales of businesses involved with each technology (broadly categorised). We can compare this with the amount of energy used by each technology, to get a sense of the proportionality of these sales estimates.

The data don’t align perfectly:

• kMatrix’s period is the financial year 2020/21. The energy figures are for calendar year 2020.

• Geothermal is distinct from heat pumps in the government’s energy statistics, but that would make the ratio so ridiculous that we assume that geothermal means heat pumps plus geothermal to kMatrix.

• kMatrix list “Alternative Fuels” as a substantial proportion of the Low Carbon sub-sector, rather than categorising them under Renewable Energy. The energy data include biofuels under Biomass. If kMatrix’s “Alternative Fuels” are primarily biofuels, then Biomass sales in the table above should be £41,030, which would make the value 27.6 p/kWh.

But it’s good enough for a rough judgment.

Some of this looks improbable. 11 GWh of wave and tidal energy production is not supporting an industry with sales of £156m, at a cost of 1,386 p/kWh. Perhaps it’s exports, but the global growth-rate for marine energy of a few MW per year says not. Maybe it’s research contracts, although consultancy is listed separately. More likely, it’s simply wrong.

Others are not inconceivable, but the assumptions you have to make to reconcile these ratios are revealing. Take wind. The direct income (sales and subsidy) is worth around 10p/kWh (more offshore, less onshore, based on actual, not promised values).

We should consider what economists call the “multiplier”, i.e. if I spend £10 with you, and you spend that £10 on something else, and so on down the chain, then my £10 produces more than £10 of economic activity. There are plenty of things to debate about this, but let’s say there must be some element of economic activity in these sectors besides the direct value of the energy. All the same, we know that most of the revenue flows out of these categories, into (for example) Carbon Finance (a large proportion of the income from high-capex, low-opex technologies like wind and solar goes to the finance for that high-capex).

I can only think of one big factor that would help to account for a large discrepancy between the value of the energy and the value of total sales in the sector: capital expenditure. The cost of the installation greatly exceeds the value of the energy produced in one year. If the capital cost is (say) 10 times the annual revenue, then if we add 10 per cent to the existing capacity in a year, the combined economic activity is roughly double the value of the energy in that year.

In the right column in the above table, if the value of the sector’s sales is many times the value of the sector’s energy, I can only think that the main explanations are error and high levels of capital expenditure in the sector.

Value or cost?

But think what the latter explanation implies. The capital expenditure is by-and-large a one-shot thing. If we want to maintain the sector’s jobs and contribution to the economy, we have to build the same amount next year, and the year after that, and so on.

The amount of subsidy required by these projects is contentious. I agree with the GWPF that the lower prices bid for recent offshore-wind Contracts for Differences cannot be taken for granted until the projects are operating and proving economic. At the least, we can say that the subsidy is not zero, or developers would not require Contracts for Differences (“de-risking” is a subsidy).

To “protect” the jobs in the sector, we have to keep increasing the generation capacity requiring subsidy, not just in that year, but for many years ahead (indeed, SSE have recently revealed that the subsidy may be never-ending if projects are to continue beyond the end of their initial subsidy period). So just to tread water on jobs and sector-size, we have to keep racking up new subsidy obligations for new installations every year. It’s effectively an employment Ponzi scheme.

Even if we ignore the subsidy, what are the prospects for protecting jobs where they depend on never-ending expansion? We don’t need an infinite amount of renewable energy. Until recently, the capacity was below the level of demand most of the time, so we could accommodate the output by varying the output of “dispatchable” technologies (like gas- and coal-fired generation). Now, renewable output exceeds demand increasingly frequently, the government wants to go a lot further, and the plan is to reduce the amount of low-cost dispatchable capacity on the network (scrapping coal by 2024 and reducing gas to 10 GW of CCS-equipped generation by 2035). The renewable capacity we add each year isn’t worth as much as the existing capacity, because an increasing proportion of it is surplus to requirements. We can’t do that endlessly just to support installation jobs.

So store the output to use it when we need it, say the economic architects. It would take a book, not an article to cover why that is simplistic. We can say at least that it adds cost. The storage systems and round-trip losses have to be paid for. But they don’t add any energy (in fact, the losses cost energy). This is all cost, in order to use almost as much of the output from this year’s renewable installations as we were able to use when there was a smaller capacity. So that’s extra cost for no extra value. It may or may not mitigate increasing losses (e.g. curtailment). But it doesn’t create additional value.

But it would look good in analysis like kMatrix’s. The values of the sectors will get even bigger as we add more expenditure.

Economics as she is spoke

A topsy-turvey view has taken hold of economic assessments. They are not measuring value, they are measuring costs. If we spend twice as much to have the same amount of energy or jobs, have we doubled the value or halved it?

If we want to double the amount of jobs needed in the economy, we could simply impose regulations that make each person half as productive. We will not be richer.

Monetary delusions have undergirded this confusion. We can print the money to create jobs in favoured activities, but we can’t print the people to do the jobs. We can conjure money on to the central bank’s balance sheet to lend to the government to build whatever white elephants it has planned, but we can’t conjure extra land, building materials, equipment and workers to service those projects without impacting other construction work.

It was never that it can’t be done. It was always that it shouldn’t be done. Money is a medium of exchange, unit of account and store of value. Its scarcity forces us to consider how we can deploy our resources most effectively. The rate of interest under a stable money supply lets us know whether our resources are strained or slack. We can undermine money’s scarcity, but if we do, we also undermine the process of economising.

Government is usually closest to that influx of money, so we skew economic activity in favour of government-favoured investments. It doesn’t make government any more right. It just gives it an advantage over the rest of the economy in securing resources for its favoured activities. It becomes harder to invest away from the government’s winners, and makes businessmen more concerned about securing government favour than innovation, outside the narrow confines of improving the government’s winners.

It’s the root of corporatism, and the death of entrepreneurship.

Economists used to know all this, but if they still do, they don’t talk about it as much. Perhaps that’s because most of the work available to them is to justify expenditure. Economists respond to incentives as much as they are supposed to understand them. We need fewer economists, so it returns to a seller’s market.

Justifying make-work investment and jobs is employment for economists. We’d be better off without.

Bruno’s experiences of a nationalised energy sector, and then (since privatisation) of the descent into ever greater corporatism, inept policy design, and regime uncertainty, lit a passion for classical-liberal economics, which led him to the Institute of Economic Affairs, where he is now a trustee. He is writing here in a personal capacity.