The debate over the repeal of California’s global-warming regulation, AB32, has degenerated into a shouting match, each side claiming economic ruin if the other side wins. A couple of long-dead French economists can help us think about the debate.
The great French economist Leon Walras (1834-1910) showed that perfect markets result in an allocation of goods and services that can’t be improved on, in the sense that no one could be made better off without someone else being made worse off.
Of course, we don’t have completely unfettered markets. In fact, they have never existed. They will never exist. In particular, we economists like to talk about what we call negative externalities. These occur when I do something, but an unintended consequence is that it hurts you, and you have no recourse.
An example may make things clearer. Suppose I have a factory that spews out a deadly chemical, one that destroys all life downwind for ten miles. Obviously I’ve reduced the property values for the downwind property owners. (We’re simplifying here. There are many other issues.) There is no market for the damage I’ve done, and downwind landowners may not be able to afford to sue me, and there was a time when they would have likely lost such a case.
Society’s solution to the problem of negative externalities has been regulation. Until recently, the concept of negative externalities has been the rationale for most environmental regulation. Negative externalities’ victims have also been extended to include non-humans: flora, fauna, and “mother earth.”
Climate change regulation, though, is a bit different. In the first place, we don’t know how much of its justification, the claim of manmade global warming with long-term negative economic impacts, is accurate. Some, the “non-believers” completely deny the possibility of man-caused global warming. Others, “the believers” believe in man-caused global warming with a fervor that matches that of any religious zealot. Another group, me included, believes that manmade global warming is a possibility that should be considered as a factor in making long-term economic policy.
If manmade global warming was a certainty, you could reasonably argue that negative externalities justify regulation, the parties being hurt are just not yet born. That’s essentially what the believers are trying to say when they point to the imminent destruction of all life on earth.
However, once the existence of manmade global warming becomes a probability, it becomes an insurance question. This dramatically increases the level of complexity of the problem, and it dramatically complicates the political problem of reaching consensus about what to do.
So, proponents of climate-change regulation have tried to simplify the issue. One approach has been to turn everyone into believers, either by attempting to convince the skeptical—as it turns out by using gross exaggeration if necessary—or, failing conversion, excommunicating even the mildest skeptics from civil society.
Climate-change regulation proponents have also tried, with success, to use the novel argument that climate-change regulation is not only costless but will generate economic growth. The most enthusiastic proponents of this argument, California’s Governor Schwarzenegger among them, describe a utopian future of happy people enjoying previously-unknown prosperity in a pristine earthly heaven.
Sadly, this better-than-a-free-lunch deal is not likely to materialize. It is true that clever economists have constructed models where such an outcome is possible—models having to do with large-scale inefficiencies existing because of historical accident—but large-scale unrecognized opportunities are unlikely in today’s economy.
It is also true that some economists have found some evidence of small un-captured gains. I’ve participated in this literature. However, those gains are also unlikely to be of the scale necessary to achieve the promised new economic age. Indeed, most economists doubt their existence, arguing, reasonably, that the researchers failed to measure all of the relevant costs. Economists have a hard time believing that markets are so bad that unrecognized profitable opportunities exist in abundance.
Today, California is considering the repeal or postponement of its landmark global-warming regulation, AB32. Oddly, both sides are using the same argument. The forces arguing against the repeal of AB32 argue that the repeal will cost jobs. Those arguing for the repeal argue that failure to repeal will cost jobs.
They are both correct, and they can both prove it with their warring models, which brings us to our second great dead French economist.
Frederick Bastiat (1801-1850), not long before his death, wrote a piece What is Seen and What is Not Seen. In the essay, Bastiat gives the example of jobs created by breaking windows. The broken window creates work for the glazier, a multiplier is attached to that work, and it looks as if economic activity has increased. However, society is not better off. The problem is that we see, and account for, the work, but we do not see or count the costs associated with the initial destruction of capital.
So it is with California’s regulation. Proponents of the regulation have research to support their claim of job creation. The “green jobs” created by the regulation are seen and counted. The jobs lost to the regulation are not seen and are not counted.
The opponents of California’s regulation have estimated the jobs lost to the regulation, mostly a consequence of higher energy costs, but that research—the portion I’m aware of at least—has been criticized for ignoring the jobs created by the regulation. More importantly, they do not see the jobs that might be lost if global warming kills jobs. They only see, and show, the jobs lost to failure to repeal the regulation.
Creating jobs is easy; creating real economic growth is harder. Banning the use of any productivity-enhancing technology will create jobs, but this could occur at the cost of societal well being. We could achieve full employment by banning all agricultural technology created after the 17th century. There is no unemployment in a Malthusian economy. We’d all have “idyllic” jobs on the farm, yet this would in reality be back-breaking work. Many people would live on the edge of starvation. I don’t think anyone really wants that outcome. It is also easy to create subsidized jobs, even if those jobs add nothing to, or worse detract from, society’s well being.
Instead of jobs, the argument should focus on such things well being, consumption, income, probabilities, and the like. It is complicated by the uncertainty surrounding the theory of manmade global warming, and the uncertainty surrounding the economic impacts of any warming. But, the stakes are high. People’s lives will be changed. The debate deserves a higher-level of discourse than we’ve seen. Frenetic predictions of job losses or overly optimistic projections of employment created by a green economy will not do. Instead, let’s recognize the complexity of the issue and have a reasoned discussion.
Bill Watkins is a professor at California Lutheran University and runs the Center for Economic Research and Forecasting, which can be found at clucerf.org.
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This is probably why I quit taking New Geography seriously.
The problem is that if we are to acknowledge climate change as an insurance problem - which, I think is wise, given that it is largely a speculative proposition - the only way to adequately ensure ourselves is to assess our level of risk is to try to determine what the probability is that it will become a serious issue.
To do that, insurance companies hire engineers and scientific experts to research, observe, and report the level of risk we face. Say we do this for climate change, which is hardly a hypothetical because we already have. But - hypothetically - let's ask scientists to give us a calculated probability of the likliehood of climate change occuring, and the probability of its consequences.
If we do this, and they come back with a pretty consistently-held opinion that the problem is one of high enough probability to justify an expensive insurance policy, would this argument then end? No, it would not, as we would then have to descend into the probability of that probability being accurate.With respect to climate change, this is basically an article that suggests we must assess the probability of a probability that has already been calculated by actuaries.
Then there's this: "Economists have a hard time believing that markets are so bad that unrecognized profitable opportunities exist in abundance."
I see where this argument is coming from, but it ignores the fact that "unrecognized profits" are possible because the opportunities for them have not yet been created. Thus, they will be unrecognized by the market until they are created.
This reminds me of the time that Charles Duell, Commissioner of Patents in 1899, suggested that the office might be closed because "everything has always been invented." Profitable opportunities are unrecognized because they have not yet been invented. The potential for human ingenuity, though, does exist in abundance. Once invented, they will be recognized. Or do you think the internet was the end of it, and we'll see no inventions of that economic magnitude going forward? I'll get to this more later.
And finally, we have this: "The opponents of California’s regulation have estimated the jobs lost to the regulation, mostly a consequence of higher energy costs, but that research—the portion I’m aware of at least—has been criticized for ignoring the jobs created by the regulation. More importantly, they do not see the jobs that might be lost if global warming kills jobs. They only see, and show, the jobs lost to failure to repeal the regulation."
Which is actually a pretty good point. But there's a couple issues that aren't mentioned, that I think should be brought up: rising energy costs, which, as you point out, are at the core of the opponent argument, may be rising for reasons other than increased regulation.
Energy supplies might become more limited, another probability we can ask scientists to calculate if they hadn't done that for us already. Additionally, as the supply of energy decreases, the cost of harnessing it grows as well: finding and harvesting fossil fuels requires more advanced technology and grows more dangerous. So there's significant potential that jobs lost to the regulatory cost of energy would be lost anyway.
However, an "efficiency invention" on the scale of say, a system that makes it possible to read books, listen to music, and file business reports without ever consuming the resources involved with making paper, printing on it, transporting it to another place, and then disposing of it. Imagine the impact such a system - let's call it "the Netweb" - might have. it might make possible previously-unknown levels of prosperity on fewer and fewer resources. It could even create jobs. More important than that, such a system would totally reformat the entire economic equation upon which your cost/benefit analysis might rely.
How could it be possible to enjoy previously-unknown prosperity (like reading books and listening to music) without more profit, more energy? Clearly, there are few unexploited profits in the marketplace. Such a utopian ideal would only be the fantasy of the Bay Area greenies! Outside of their fantasies, it's unlikely we'll ever seen more people reading books and more people listening to music while using fewer resources. These things they fantasize, after all, they will never figure out how to make them reality.
Oh, wait. What if they do? Yeah, I think this article is interesting because it was sort of obsolete before it was even written. It's because the Internet, as big a deal as it has been, is only the starting point. Hyper-efficiency could, with a little imagination, define the next Industrial Revolution. And The Internet could be one of many inventions in this industrial revolution - just as steam power was one of many inventions in the last. I think this concept - hyper-efficiency on the level that utility remains constant or increases while energy and material supplies rapidly decrease - is a powerful and necessary frame to understanding what is going on in the American economy today.
It is necessary because makes it possible, after all, that you could do climate-change regulation and not cause cost increases - lowering demand while you increase the cost of supply. In other words, climate-change regulation would have been much more painful before the Internet became a viable alternative to shipping records, books, movies, and academic journals all over the country. Now, that landscape is dramatically changed, because we figured out how to do more with less.
PS. New Geography owes me $17.90 for this article, plus 4.8% of any ad revenues it might generate. I'm just saying.
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after all, that you could do climate-change regulation and not cause cost increases - lowering demand while you increase the cost of supply. In other words, climate-change regulation would have been much more painful before the Internet became a viable alternative to shipping records, books, movies, and academic journals all over the country. Now, that landscape is dramatically Vacation Rentals Oahu
To sum that up concisely, for readers that don't like to read:
IN OTHER WORDS: You misunderstand when you suggest that the jobs created by climate-change regulation are not the jobs created by the government in buying upgraded, more efficient infrastructure, or "subsidized jobs."
This is wrong. The jobs created by climate legislation are the jobs created by the invention of the efficient infrastructure in the first place. Invention is less likely to be viable if the government continues to subsidize inefficiency in the market by bailing out obsolete fuels and industries - a subsidy phenomenon we're witnessing right now in the Gulf of Mexico as our Federal tax dollars race to the aid of the inefficient. It's a phenomenon we saw months ago in Detroit.
Climate change regulation is intended to end the public subsidy of the inefficient so that the efficient can prosper in a free marketplace. Nothing more, nothing less.
In other words, our resources are limited. Our imagination is not.