Subsidies almost never create jobs

May 5 JDN 2458609

The most extreme examples of harmful subsidies are fossil fuel industries and stadiums.

Fossil fuels are obviously the worst: The $1 trillion per year in direct and indirect government subsidies to fossil fuel corporations are second only to the $4 trillion in climate change externalities produced by the fossil fuel industry. Instead of subsidizing these corporations $1 trillion, the world should be taxing them $4 trillion—so we are off by $5 trillion, every single year. This is 6.5% of the world’s GDP. In the United States, our largest oil subsidy is called the Interstate Highway System, but other countries have us beat: Iran, Uzbekistan, and Libya each give more than 10% of their GDP in subsidies to the fossil fuel industry.

Most stadiums receive some kind of subsidy, and many are outright publicly funded—and yet banks still get the naming rights. The largest teams with the most wealth of their own are typically also the most subsidized. The benefits of building a new stadium are not even particularly large, which is probably why over 85% of US economists agree that these subsidies don’t make sense.

But subsidies are all over the place, and one of the most common reasons given for them, if not the most common reason, is that they will “create jobs”.

This is the reason Trump gave for trying to subsidize coal (which isn’t even working). It’s the reason people give for subsidizing huge filmmaking conglomerates in making films (which costs the government about $90,000 per job created). Why are we handing money to rich people? It will create jobs!

This is almost never actually true. We have known that this kind of subsidy doesn’t work since at least the 1980s.

The states and cities that create the most jobs aren’t the ones that offer the most generous handouts to corporations. They are the ones that have the cleanest air, the best infrastructure, and above all the most educated population. This is why there have been months when the majority of US jobs were created in California. California is the largest state, but it’s not that large—it’s only about 12% of the US population. If as many as 70% of the new jobs are being created there, it’s because California is doing something right that most other states are doing very, very wrong.

And then there is the rent-seeking competition that megacorporations like Amazon engage in, getting cities to bid higher and higher subsidies, then locating where they probably would have anyway but with billions of dollars in free money. This is a trick we need to stop falling for: The federal government should outright ban any attempt to use subsidies to get an existing corporation to locate in a specific state or city. That’s not contributing to American society; it’s just moving things around.

There are a few kinds of industries it makes sense to subsidize, because they have high up-front costs and large public benefits. Examples include research and development and renewable energy. But here the goal is not to create jobs. It’s to create wealth, typically in the form of scientific knowledge. We aren’t trying to get them to hire people; we’re trying to get them to accomplish something that’s difficult and important.

Why don’t subsidies create jobs? It’s really quite simple: You need to pay for those subsidies.

The federal government doesn’t face a hard budget constraint like businesses do; they can print money. But state and municipal governments don’t have that power, and so their subsidies need to be made up in either taxes or debt—which means either taxes now, or taxes later. Or they could cut spending elsewhere, which means losing whatever benefits they were getting from that spending. This means that any jobs you created with the subsidies are just going to be destroyed somewhere else, by higher taxes or lower government spending.

Most state and local governments have really tight budgets. Allen, Texas was running a $30 billion budget deficit and cutting salaries for public school teachers, but still somehow found $60 billion to subsidize building a stadium. The stadium might “create jobs” by moving some economic activity from one place to another, but the actual real economic benefit of a stadium is very small. Public schools are the foundation of a highly-developed economy. Without widespread education, this high a standard of living is simply impossible to sustain. Cutting public education is one of the last things you should be willing to do to balance a government budget—and yet somehow it seems to be one of the first we actually do.

It is true that we spend a great deal on education, and that spending could be made a lot more cost-effective (we can start by cutting athletic coaches and administrators); but every $1 spent on education yields between $4 and $6 in additional long-run wealth for our society. This means that at quite reasonable tax rates (17% to 25%) a public education system can directly pay for itself. Compare this to subsidizing a stadium, which gets back less than $1 of benefit per $1 spent, or subsidizing oil companies, which actively harms the world.

People don’t seem to understand that a capitalist economy basically just creates as many jobs as it needs. In a financial crisis, that mechanism falters; that’s when the federal government should step in and print money to get it running again. But when the economy is running smoothly, trying to “create jobs” is just not a useful thing to do. Jobs will be created and destroyed by the market. Policy should be trying to increase welfare. Educate your population. Improve your healthcare system. Build more public transit. Invest in fighting poverty and homelessness. And if you don’t think you can afford those things, then you definitely can’t afford handouts to megacorporations that won’t even make back what you paid.

Our biggest oil subsidy is called the Interstate Highway System


August 13, JDN 2457979

In last week’s post I proposed an infrastructure project that probably sounded quite expensive. $410 billion for maglev lines? We’ve never spent anything like that on infrastructure, have we?

Actually, we have. The Interstate Highway System, in inflation-adjusted dollars, cost $526 billion. Of course, road is a lot cheaper than maglev rail, so that covers a lot more miles than the maglev system I’m proposing.

Of course, the maglev system would produce a lot less carbon emissions and be a great deal safer; while the Interstate Highway System has about 60% (91 log points) fewer traffic fatalities than the road system that came before it, the Shinkansen high-speed rail system in Japan has not had a single passenger fatality in over 50 years and 1 billion passengers. No system built by humans will ever be perfect, but the Shinkansen comes about as close as we’re ever going to get.

Assuming we could even get close to that level of safety, replacing the highway system with high-speed rail would save about 2,000 American lives every year. (Of course, we’d still lose over 30,000 Americans every year to non-interstate car accidents.)

But what I really want to talk about this week is how the Interstate Highway System is in fact an implicit oil subsidy. We currently spend over $140 billion per year in public funds to maintain highways (about one-fourth of which is specifically the Interstate Highway System). For those of you playing along at home, that’s about half what it would take to end world hunger.

The choice to spending this money maintaining highways instead of bike lanes, rail lines, or subway systems makes this spending an implicit subsidy for the car industry and the oil industry.

Of course, that’s only half the story; there’s also the gasoline tax, which is a pretty obvious tax on the oil industry. But the federal gasoline tax only raises about $35 billion per year, and state taxes add up to a comparable amount; so only about half what we spend on highways is actually covered by gasoline taxes. This means that even if you never drive a car, you are paying for the highway system.

Even including the gasoline tax, this means that this implicit oil subsidy may be the largest oil subsidy in the United States. Standard estimates of oil subsidies in the US range around $30 to $40 billion per year. Assuming that 3/4 of the benefit from the $140 billion in highway spending goes to the oil industry (the other 1/4 to the car industry), and then subtracting the roughly $70 billion paid in gasoline taxes leaves about $35 billion per year in net oil subsidy from the Interstate Highway System—which is to say about as much as all other oil subsidies combined.

Moreover, when you do drive on the highway, you usually don’t pay. You pay for gasoline, but that’s quite cheap, especially if your car is at all fuel-efficient; and most of us (in an entirely economically rational way) avoid toll roads when we have the time. Most of what you spend on driving is paying to buy, insure, and maintain your car—because cars are extremely complicated and expensive machines that take an awful lot of knowhow to build. The annual cost of driving a typical midsize sedan 15,000 miles per year is about $8,500. Of that, about $3,000 is depreciation (I’m assuming half the depreciation was inevitable, and the other half was due to mileage), registration fees, and finance charges that just come from owning the vehicle and would still happen even if you hardly ever drove it. This means that your marginal cost of driving is only about $0.36 per mile. (This makes the $0.54 per mile deduction the IRS will give small business owners actually quite generous.) You have a strong economic incentive not to drive at all, but in many places it’s hard to even get by without a car; and once you have one, a substantial portion of the cost is already sunk and you may as well drive it.

Compare this to how we fund public transit. Most of the spending on public transit is privatized, and federal funds for public transit are about 1/6 of federal funds for interstate highways. Then we charge every single passenger for every single trip. Except for the recent transition to transit cards instead of cash, this whole system almost seems designed to minimize the salience of the cost of driving and maximize the salience of the cost of public transit.

We also spend far more on our public transit projects than is really necessary, because corruption and excess bureaucracy in the subcontracting system dramatically raises the price. This is actually rather strange, as overall the US has less corruption than Spain or France, yet we pay substantially more for our infrastructure than they do. Indeed, capital costs per kilometer for US urban rail lines consistently rate above all but the most expensive European projects—notably, usually above that $100 million per mile threshold I estimated for maglev rail done right.

This combination of high prices and low funding means our public transit system provides far worse service. Combined with the fact that the rent is too damn high, this gives Americans some of the longest commute times in the world.
What we should actually be doing of course is taxing the oil industry, at the social cost of carbon—the monetary value of the marginal ecological damage done by extracting and burning oil. If we did this, it would raise the price of gasoline by about $0.20 per gallon; since the $70 billion in gasoline taxes is currently raised by a tax of about $0.50 per gallon, that means we would raise an additional $30 billion from gasoline alone (not quite, as people would reduce their gasoline consumption a little). This means that by not doing this, we are effectively subsidizing oil by an additional $30 billion—making our total oil subsidies over $100 billion per year.

Of course, there is a case to be made that this is not the largest US oil subsidy after all. There is one quite plausible candidate for US oil subsidies that might actually be larger, and that is US military spending. Obviously not all military spending is an oil subsidy; but when you include both the absurd amounts of fuel that tanks and fighter jets consume (the DoD accounts for 93% of all US government fuel consumption!) and the fact that several of our most recent wars were at least partly about securing oil reserves, it’s not hard to see how this might be benefiting the oil industry. Estimating this effect quantitatively is very difficult, but if even 5% of the US military budget amounts to an oil subsidy, that’s over $25 billion per year—just shy of the Interstate Highway System.

What are the limits to growth?

JDN 2456941 PDT 12:25.

Paul Krugman recently wrote a column about the “limits to growth” community, and as usual, it’s good stuff; his example of how steamships substituted more ships for less fuel is quite compelling. But there’s a much stronger argument to made against “limits to growth”, and I thought I’d make it here.

The basic idea, most famously propounded by Jay Forrester but still with many proponents today (and actually owing quite a bit to Thomas Malthus), is this: There’s only so much stuff in the world. If we keep adding more people and trying to give people higher standards of living, we’re going to exhaust all the stuff, and then we’ll be in big trouble.

This argument seems intuitively reasonable, but turns out to be economically naïve. It can take several specific forms, from the basically reasonable to the utterly ridiculous. On the former end is “peak oil”, the point at which we reach a maximum rate of oil extraction. We’re actually past that point in most places, and it won’t be long before the whole world crosses that line. So yes, we really are running out of oil, and we need to transition to other fuels as quickly as possible. On the latter end is the original Mathusian argument (we now have much more food per person worldwide than they did in Malthus’s time—that’s why ending world hunger is a realistic option now), and, sadly, the argument Mark Buchanan made a few days ago. No, you don’t always need more energy to produce more economic output—as Krugman’s example cleverly demonstrates. You can use other methods to improve your energy efficiency, and that doesn’t necessarily require new technology.

Here’s the part that Krugman missed: Even if we need more energy, there’s plenty of room at the top. The total amount of sunlight that hits the Earth is about 1.3 kW/m^2, and the Earth has a surface area of about 500 million km^2, which is 5e14 m^2. That means that if we could somehow capture all the sunlight that hits the Earth, we’d have 6.5e17 W, which is 5.7e18 kilowatt-hours per year. Total world energy consumption is about 140,000 terawatt-hours per year, which is 1.4e14 kilowatt-hours per year. That means we could increase energy consumption by a factor of one thousand just using Earth-based solar power (Covering the oceans with synthetic algae? A fleet of high-altitude balloons covered in high-efficiency solar panels?). That’s not including fission power, which is already economically efficient, or fusion power, which has passed break-even and may soon become economically feasible as well. Fusion power is only limited by the size of your reactor and your quantity of deuterium, and deuterium is found in ocean water (about 33 milligrams per liter), not to mention permeating all of outer space. If we can figure out how to fuse ordinary hydrogen, well now our fuel is literally the most abundant substance in the universe.

And what if we move beyond the Earth? What if we somehow captured not just the solar energy that hits the Earth, but the totality of solar energy that the Sun itself releases? That figure is about 1e31 joules per day, which is 1e27 kilowatt-hours per day, or seven trillion times as much energy as we currently consume. It is literally enough to annihilate entire planets, which the Sun would certainly do if you put a planet near enough to it. A theoretical construct to capture all this energy is called a Dyson Sphere, and the ability to construct one officially makes you a Type 2 Kardashev Civilization. (We currently stand at about Type 0.7. Building that worldwide solar network would raise us to Type 1.)

Can we actually capture all that energy with our current technology? Of course not. Indeed, we probably won’t have that technology for centuries if not millennia. But if your claim—as Mark Buchanan’s was—is about fundamental physical limits, then you should be talking about Dyson Spheres. If you’re not, then we are really talking about practical economic limits.

Are there practical economic limits to growth? Of course there are; indeed, they are what actually constrains growth in the real world. That’s why the US can’t grow above 2% and China won’t be growing at 7% much longer. (I am rather disturbed by the fact that many of the Chinese nationals I know don’t appreciate this; they seem to believe the propaganda that this rapid growth is something fundamentally better about the Chinese system, rather than the simple economic fact that it’s easier to grow rapidly when you are starting very small. I had a conversation with a man the other day who honestly seemed to think that Macau could sustain its 12% annual GDP growth—driven by gambling, no less! Zero real productivity!—into the indefinite future. Don’t get me wrong, I’m thrilled that China is growing so fast and lifting so many people out of poverty. But no remotely credible economist believes they can sustain this growth forever. The best-case scenario is to follow the pattern of Korea, rising from Third World to First World status in a few generations. Korea grew astonishingly fast from about 1950 to 1990, but now that they’ve made it, their growth rate is only 3%.)

There is also a reasonable argument to be made about the economic tradeoffs involved in fighting climate change and natural resource depletion. While the people of Brazil may like to have more firewood and space for farming, the fact is the rest of need that Amazon in order to breathe. While any given fisherman may be rational in the amount of fish he catches, worldwide we are running out of fish. And while we Americans may love our low gas prices (and become furious when they rise even slightly), the fact is, our oil subsidies are costing hundreds of billions of dollars and endangering millions of lives.

We may in fact have to bear some short-term cost in economic output in order to ensure long-term environmental sustainability (though to return to Krugman, that cost may be a lot less than many people think!). Economic growth does slow down as you reach high standards of living, and it may even continue to slow down as technology begins to reach diminishing returns (though this is much harder to forecast). So yes, in that sense there are limits to growth. But the really fundamental limits aren’t something we have to worry about for at least a thousand years. Right now, it’s just a question of good economic policy.