AB32's echoes failed policy

JUNE 16, 2010

By JOHN SEILER

Industrial policy is defined as government “policies that stimulate specific activities and promote structural change.” It’s intended to create businesses and jobs by government favoring one or more sectors of the economy through tax breaks, regulatory changes and subsidies.

AB32, the Global Warming Solutions Act of 2006, commonly is known for its mandate that greenhouse gas emissions in California must be reduced by 25 percent by 2020. But its authors and promoters also crafted it to create jobs.

As Gov. Arnold Schwarzenegger said as he signed the bill, “Some have challenged whether AB32 is good for businesses. I say unquestionably it is good for businesses. Not only large, well-established businesses, but small businesses that will harness their entrepreneurial spirit to help us achieve our climate goals. ”

AB32 also established a new bureaucracy, the Economic and Technology Advance Advisory Committee (ETAAC). It’s part of the California Air Resources Board (CARB) of the California Environmental Protection Agency (Cal/EPA).

According to ETACC, its mission is to…

[A]dvise (ARB) on activities that will facilitate investment in and implementation of technological research and development opportunities including, but not limited to, identifying new technologies, research, demonstration projects, funding opportunities, developing state, national, and international partnerships and technology transfer opportunities…

In an article linked to from the CARB site, CARB Chairman Mary D. Nichols wrote on May 21, 2010 in Sustainable Industries magazine:

The promise of AB 32 extends well beyond the next generation of fuels to the next wave of energy-efficient lighting, appliance standards and industrial refrigerants, providing alternatives to chemicals such as sulfur hexafluoride that are thousands of times more potent than carbon dioxide in trapping heat in the atmosphere.

California’s climate law is transformative and far-reaching, right down to the carbon intensity of ubiquitous concrete, and the chemistry of rubber and the design and inflation of tires to lower rolling resistance and improve fuel economy.

It’s clear that AB32 established an industrial policy for California.

It’s worth looking at how industrial policies have fared elsewhere as the gubernatorial race begins in earnest between Republican Meg Whitman and Democrat Jerry Brown. And as a measure to effectively repeal AB32, the California Jobs Initiative, will be contested on the November ballot.

Michigan industrial blues

The best example of industrial policy in America is Michigan. The Michigan Economic Growth Authority (MEGA) was established in 1995 by Republican Gov. John Engler to advance targeted tax cuts to worthy industries. A 2009 study by the Mackinac Center for Public Policy, a state think tank, found found that in its then-14 years of existence:

MEGA data shows that the authority has approved more than 500 tax credit deals since its inception in 1995. Of the MEGA packages meant to produce new jobs, 219 should have yielded sufficient jobs and investment to claim tax credits by 2009, since these deals were all concluded by the end of 2004, providing the companies a full five years since that time to claim the credits. It can be safely assumed that companies that have not claimed credits at this point will never do so.

These 219 deals were projected to produce 61,043 jobs. But of the 219 deals, only 122, or about 56 percent, led to companies receiving credits. Ultimately, the 219 deals led to the creation of just 17,971 jobs. Thus, the actual job count was just 29 percent of the expected total — less than one-third.

Michigan’s economy faltered even before the recession began in 2007. Today, its unemployment rate is the highest in the nation, at 14 percent in April, even worse than California’s 12.6 percent. The national rate was 9.9 percent that month.

“We haven’t found anything showing that MEGA has benefited the industries it was targeting,” Michael Hicks told me; he’s a scholar at the Mackinac Center and director of the Bureau of Business Research at Ball State University.

He said that a big problem is many businesses are leaving the state for fear that they’ll have to pay the higher taxes needed to make up for the tax credits given to the favored industries. The Michigan industrial policy, he added, “punishes the business that already are there to fund those that might come. The state is saying to these businesses: ‘If you’re already here and already successful, we’re going to treat you differently than those that aren’t here and aren’t successful.’ That seems to me to be a very backward public policy.”

Even companies that get a tax credit for one area of production still fear that “they might get a surtax” on other areas of their businesses.

Indeed, that has happened. In recent years, Michigan has raised taxes several times, including $1.35 billion in 2007.

Michigan, of course, has other problems, including the overall crash of the auto industry in recent years. But Hicks pointed out that “Michigan is the first state since the Great Depression that had no growth over a decade,” that of 2000-2009. It was a lost decade for the Great Lake State. And the decade of 2010-2019 is starting out as if it might be another.

The following graphic from the Mackinac Center study shows how the expensive MEGA program produced a paltry 0.45 percent of jobs, as of 2006:

Economic seppuku

Japan’s industrial policy also is well known. Its economy is the second largest in the world, after the United States. And like the economy here, it’s also diverse and highly industrialized. Japan’s economic recovery, from the nuclear-bomb devastation of 1945 to 1980s industrial powerhouse, is one of the most remarkable in history. But in the 1990s it suffered what’s called its “lost decade” of no economic growth.

John H. Makin, a scholar at the American Enterprise Institute, explained:

Japan’s large fiscal stimulus packages, which became legendary during the 1990s, were ineffective for several reasons. First of all, the packages were not as large as advertised, often inflated by double counting as stimulus government programs that were already slated to be undertaken. More importantly, the packages were poorly directed–largely toward unproductive public works projects and credits to small businesses that were no longer economically viable. It would have been far better to have reduced tax rates and allowed households to employ the increase in disposable incomes as they saw fit.

Japan made fiscal and monetary errors as well, just as the U.S. government has done in recent years. But the point is that government direction of economic production incentives didn’t help.

A decade after the “lost decade,” Japan still has major economic problems. As the Japan Times wrote on May 18, 2010:

Japan’s industrial power is so stagnant that it seems a crisis is in store for our economy. Even as it lags far behind the United States in creating intelligent information systems, Japan is finding that South Korea, Taiwan and China are catching up with it in manufacturing….

The government clings to a policy of reducing greenhouse-gas emissions 25 percent by 2020 from 1990 levels, but the severity of this policy has prompted many Japanese and foreign enterprises to plan moving their operations to other countries.

Interestingly, the Japanese greenhouse-gas emission-reduction policy is similar to that of California.

California manufacturing jobs crash

As to creating green jobs, Jack Stewart told me, “I’m all for any kind of job we can create in California.” He’s president of the California Manufacturers and Technology Association. “But trying to create jobs that are not market-based won’t last. It’s foolish. AB32 is just one more set of regulations that only California companies must comply with.”

He added that, since World War II, “California is the number one manufacturing state in the country. We had a great manufacturing climate. But right now, California is producing 1.5 percent of new manufacturing and expansion, even though we’re 12 percent of the population.”

He said that the old jobs that have left the state paid an average of $69,000 per year. But the new jobs now being created pay only $43,000 per year. “Middle-class jobs are leaving California, replaced with lower-paying jobs. The destruction of the middle class is what has happened.”

When manufacturing jobs began departing in the 1990s, he said, service-sector jobs of equally elevated pay were supposed to replace them, but that never happened. He warned, “My prediction is that the green jobs will prove as illusory as the service sector jobs.”

John Seiler, an editorial writer with The Orange County Register for 19 years, is a reporter and analyst for CalWatchDog.com. His email: [email protected].