Tuesday, December 7, 2010

Green Economy

FLG has received an influx of new readers lately, so he'll just state at the outset of this post that he has long maintained that the "Green Economy" as a path forward for future economic growth is a bunch of shit. He equates it to the old adage of breaking windows to kick start economic activity. Put simply -- destroying wealth to artificially create demand. It gets people moving, but society is worse off after it. Now, in fairness, given the externalities associated with climate change, it's possible that these policies could make us better off overall (although FLG isn't so sanguine, but it is certainly possible), it's just that we won't be better of in strictly economic terms.

Anyway, there's a sort of ignorance or cognitive dissonance required to make the case for green economy growth. Marketplace offers up an example almost every week. Last night, it was this:
President Felipe Calderon voiced hope the outcome will put to rest what he called the "false dichotomy," that dealing with climate change conflicts with economic growth. He insisted it's not just possible to battle global warming without harming the economy -- it's good business.

There's the common refrain, but then jump to the end of the story:
But it's the Kyoto Treaty on climate change that makes this investment possible. And renewing that treaty is on shaky ground at the U.N. talks here this week. That uncertainty could limit Mexico's ability to get a good return on the climate change investments it's already made.

If it were good business, then an international treaty wouldn't be required. There'd be what FLG calls organic demand, meaning demand created by individual and firm wants and needs, not by government fiat and regulation. If it would make people better off, at least from a strictly economic individual perspective, then they'd do it without international treaties. When the politics has to come together to ensure good returns, then the probability that it provides a good return to society is pretty nil.

Just to be clear, this doesn't mean that individual firms can't profit from this. Numerous firms will profit as a result of these regulations. What FLG objects to is the idea that this is a path for society to be better off economically. It's just doesn't make any sense. It's possible that with the right regulation that we could all be better off as a society, FLG agrees with that and perhaps that ought to be the point of public policy anyway, but the idea that green technology and green jobs will increase the economic pie is, as far as FLG can tell, logically false.

8 comments:

The Ancient said...

Completely off-topic (maybe):

When Al Gore, then still in the Senate, decided he wanted to learn all he could about environmental issues, he hired a "tutor." The poor fellow, who I will not name out of a passing sense of decency, spent hundreds of hours with Al, trying to explain the complexity and interconnectedness of various issues. But here's the interesting part: The whole thing was done with audio-visual equipment because Al had a hard time digesting and remembering the written word.

(Later, when he was getting ready to run for President in 1992, he tried to do the same thing with economics; my impression is that he couldn't find anyone willing to help.)

P.S. I agree that "investing in a green economy" is something of a sideshow. New, environmentally-friendly products are obviously a good thing, but government lacks the competence to do more than stand out of the way when they come along.

Anonymous said...

"The whole thing was done with audio-visual equipment because Al had a hard time digesting and remembering the written word."

(Later, when he was getting ready to run for President in 1992, he tried to do the same thing with economics; my impression is that he couldn't find anyone willing to help.)

hahahahahahhahahahahahaha

Mrs. P

nadezhda said...

[I'll break this one up into parts to see if that will make Blogger happier with me.]

Since one of your favorite themes is making assumptions explicit, here's a go at mine, and why I still think your ideal types require multiple dimensions.

1. Your "broken window fallacy" is a stock effect -- it doesn't apply to carbon pricing.

2. A carbon price is designed explicitly to allow producers and consumers to make their own preference trade-offs. Takes the gumnit entirely out of the allocation mechanism -- a big improvement over the ad hoc system of subsidies we're using which IMHO is mostly rewarding rent-seeking or buying votes in the corn belt or coal belt and producing a bunch of dreadful unintended consequences.

With carbon pricing, the clean-tech folks like GE can go about their business of developing products that respond to market preferences, not lobbying for huge R&D subsidies on Capitol Hill. It's not politically possible to get rid of all subsidies, but if we've got a carbon pricing mechanism, it makes the politics easier to reduce subsidies to where they're not producing all sorts of distortions.

Since I believe that we're going to have to eventually reduce carbon emissions, then it's basically a timing matter. Pay now or pay later, when the current state of scientific evidence strongly suggests the cost is going to be a whole lot higher -- and some of the negative effects are simply going to be irreversible.

The price signal creates an incentive to move timing forward -- like an investment tax credit or accelerated depreciation does. For someone like you who claims that incentives are key and values the future over the present, you should find carbon pricing an attractive policy option relative to do-nothing. Read Olson's Logic of Collective Action, stuff in the Elinor Ostrom research program for alternative ways at looking at collective action solutions, and anything by Stiglitz on the failure of the neoclassical model of markets.

nadezhda said...

[part deux]

3. I agree that too many politicians sound like Underpants Gnomes when they talk about the "Green Economy." However, that's because they're just not articulating certain assumptions and intermediate steps. As with various investment incentive tax policies that bring forward investment, the economic pie only gets bigger if the economy has underused capacity (capital or labor). However, for the next few years it looks like underused capacity is going to remain a huge problem, so that's not going to constrain the potential growth effect of advancing investment.

In a world in which manufacturing is inevitably going to continue to shed labor (technology-driven even if no jobs move overseas), we're going to continue to have a lot of underused capacity that has to be absorbed in (mostly non)-manufacturing sectors. Health care has been doing a great job of absorbing labor, but we simply can't afford in the long run to have health care take a whole lot larger share of our economy. So structurally, where's growth/labor absorption going to come from?

If you think, as I do, that eventually we're going to need a lot of low-carbon production capacity and products, then the Green Economy (services and manufacturing) is one potential area for structural adjustment. Not enormous, but fairly significant at the margin, where structural adjustments with consequences for growth are going to occur. But it's only going to emerge when prices make it attractive. Read Olson's Logic of Collective Action, stuff in the Elinor Ostrom research program, and Stiglitz.

4. An international treaty (or some sort of fairly binding consensus on carbon targets) is needed to make carbon reduction policies effective, since climate effects are global. It also avoids a "race to the bottom" in which jurisdictions compete for business by permitting high volumes of carbon emissions. It's why the states in the US can do only accomplish so much on their own without federal minimum standards. Same thing of course applies in health insurance or financial sector regulation, etc.

Less important on my personal list of collective action problems, but still a not inconsiderable factor, is the basic distributionist equity dilemma -- in the absence of a global agreement, great swaths of humanity (see Bangladesh) are powerless to effect changes that would reduce the horrific costs they're going to experience due to other peoples' behavior. Read Olson's Logic of Collective Action, stuff in the Elinor Ostrom research program, and Stiglitz. (You may notice a certain repetitive theme emerging.)

nadezhda said...

[Blogger is really cranky. I broke this up into 3 parts, and it accepted the longer part 2, but though it told me it had accepted part 1, it hasn't appeared. Here goes again.]

Part 1

1. Your "broken window fallacy" is a stock effect -- it doesn't apply to carbon pricing.

2. A carbon price is designed explicitly to allow producers and consumers to make their own preference trade-offs. Takes the gumnit entirely out of the allocation mechanism -- a big improvement over the ad hoc system of subsidies we're using which IMHO is mostly rewarding rent-seeking or buying votes in the corn belt or coal belt and producing a bunch of dreadful unintended consequences. With carbon pricing, the clean-tech folks like GE can go about their business of developing products that respond to market preferences, not lobbying for huge R&D subsidies on Capitol Hill. It's not politically possible to get rid of all subsidies, but if we've got a carbon pricing mechanism, it makes the politics easier to reduce subsidies to where they're not producing all sorts of distortions.

Since I believe that we're going to have to eventually reduce carbon emissions, then it's basically a timing matter. Pay now or pay later, when the current state of scientific evidence strongly suggests the cost is going to be a whole lot higher -- and some of the negative effects are simply going to be irreversible. The price signal creates an incentive to move timing forward -- like an investment tax credit or accelerated depreciation does. For someone like you who claims that incentives are key and values the future over the present, you should find carbon pricing an attractive policy option relative to do-nothing. Read Olson's Logic of Collective Action, stuff in the Elinor Ostrom research program for alternative ways at looking at collective action solutions, and anything by Stiglitz on the failure of the neoclassical model of markets.

nadezhda said...

[part 3

5. This is another example of where I think your "time horizon" theory is backwards. Why do I prefer a carbon price now? Relative to someone who opposes carbon pricing now, my preferences to pay something today to reduce the likelihood of a large loss tomorrow are due to some combination of:
(1) I place a higher value on the future
(2) as a moderately skeptical empiricist, I take the evidence of AGW trends seriously, including the range of possible economic and human costs
(3) my probability calculus generates a higher risk of us coming out on the worst end of the range of projected costs
(4) as a modestly skeptical empiricist about the process of technology development and about government capacity to design and implement gigantic technology projects, I have strong doubts that we'll eventually be able to geo-engineer our way out of the problem. Or at least not in any way that's significantly preferable to a gradualist program of carbon reduction.
(5) I'm a Trimmer.

The folks who insist that we can rely on human ingenuity for future technology solutions whenever things get bad enough seem to be radical Pyhrronists when it comes to current scientific evidence of AGW or its risks but radical fideists when it comes to belief in technology. From my perspective, they're just another version of Underpants Gnomes (or Star Wars missile defense, if you want a concrete example of magical thinking).

I'm actually a technology optimist. But I'm not an optimist about geo-engineering. It certainly wouldn't be a market-based solution -- it would require complex government decision-making and a huge government command-and-control commitment of both resources and management. When was the last time we had a successful major technology initiative? The Apollo program? Just look at the dysfunction of the defense procurement process. Furthermore, geo-engineering solutions would present a whole host of both domestic and international collective action dilemmas. To say nothing of unintended geo-physical consequences about which we can only speculate.

So relative to my earlier proposal that you need more than a simple dichotomy of ideal types for your "time horizon" theory -- to use my policy preferences relative to those who oppose carbon pricing policies as an example -- you seem to need a model that takes account not just of empiricism/rationalism-idealism but type of skepticism (both how do we know and what is knowable) and how one views/calculates probability of risks.

nadezhda said...

[Blogger ate part 3, so here's the 1st section of part 3]

5. This is another example of where I think your "time horizon" theory is backwards. Why do I prefer a carbon price now? Relative to someone who opposes carbon pricing now, my preferences to pay something today to reduce the likelihood of a large loss tomorrow are due to some combination of:
(1) I place a higher value on the future
(2) as a moderately skeptical empiricist, I take the evidence of AGW trends seriously, including the range of possible economic and human costs
(3) my probability calculus generates a higher risk of us coming out on the worst end of the range of projected costs
(4) as a modestly skeptical empiricist about the process of technology development and about government capacity to design and implement gigantic technology projects, I have strong doubts that we'll eventually be able to geo-engineer our way out of the problem. Or at least not in any way that's significantly preferable to a gradualist program of carbon reduction.
(5) I'm a Trimmer.

The folks who insist that we can rely on human ingenuity for future technology solutions whenever things get bad enough seem to be radical Pyhrronists when it comes to current scientific evidence of AGW or its risks but radical fideists when it comes to belief in technology. From my perspective, they're just another version of Underpants Gnomes (or Star Wars missile defense, if you want a concrete example of magical thinking).

FLG said...

nadezhda:

I don't have time right now, but I did want to say:

I actually like a carbon tax. I'd much prefer to specify P and have Q determined by the market than to specify Q and have P determined by the market.

But I certainly don't think it is going to lead to economic growth. Many of the subsidies, like the one to replace windows, are just breaking windows.

 
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