Michael Meeropol: Economists And Climate Change

There is a joke that defines an economist as a person who knows the price of everything and the value of nothing. Economist jokes often suggest that they are just ivory tower professors --- not to be taken too seriously. Yet in fact, the opposite is true. Economists are everywhere. (For example, the entire Federal Reserve is run by economists – both as members of the Board of Governors and as staffers.) Economists as intellectual hired guns provide supposedly “scientific” rationalizations for most policies. They are more powerful than we might think.

But the joke has a point. Economists focus on the superficial that can be easily measured and ignore the underlying value – the importance – of what they are studying. A most significant example is the concept of Gross Domestic Product. As a measure even of “economic well-being” it is woefully inadequate. Suggesting that it is even an approximation of the totality of human well-being is ludicrous. Yet in fact, Presidents are often judged by whether the GDP is rising sufficiently fast during their time in office. The inadequacy of GDP has recently been underscored by an undertaking in 2008 and 2009 by the French Government to convene a Commission on the Measurement of Performance and Social Progress. Chaired by Nobel Prize winning economists Joseph Stiglitz and Amartya Sen it produced a 292 page report proposed what called a multi-dimensional approach covering eight separate standards of well being. Beyond material living standards (income, consumption and wealth) they emphasized health, education, personal activities, political influence over government, social connections and relationships, the environment (in the future as well) and finally, insecurity, both economic and physical. [The entire report can be accessed at http://www.insee.fr/fr/publications-et-services/dossiers_web/stiglitz/doc-commission/RAPPORT_anglais.pdf. The English version is available on that website for those who do not read French!]

But the narrow focus of economists can also be revealed when we consider the prices of oil, natural gas and coal. Economists argue that if markets are competitive and consumers have accurate knowledge about the products they are considering buying, then the “market price” will accurately reflect the benefits to society (the willingness of people to voluntarily purchase the product at that price) and the costs to society (the willingness of the suppliers of the product to accept that price – which means it covers their costs and gives them some incentive). The problem is that the markets for fossil fuels are nowhere near as pure as the textbook descriptions of price settings would indicate. The actual prices for these fossil fuels jump around a lot. They are determined by many factors that change quite rapidly – obscuring the most important costs associated with the utilization of these products. Remember that during the summer of 2008 the price of regular gasoline spiked at over $4 a gallon. Today it is down near $2 a gallon while prices in general have risen about 10% since 2008. The true VALUE of fossil fuels should reflect the actual benefits people derive from using them (the ability to heat our homes, drive places, etc.) and the true COST of using them. It is a well-known principle of economics that the price paid for many goods does not reflect either the true VALUE of the product or the total costs imposed on society. These social costs and benefits are called spillovers. A perfect example of a positive spillover is the benefit that every other driver on a particular highway experiences when, say, 30% of the people who normally drive to work, take a train instead. The remaining drivers get a faster ride. Yet only the people who take the train pay for their ticket. That is one reason why it is reasonable to have taxpayers in general subsidize rapid transit – because the benefits “spill over” to people who do not ride the train. Of course the major example of a dangerously high spillover cost of using gasoline (and all fossil fuels) is global warming. If the gasoline price truly reflected the cost that gasoline imposed on society, then we could be confident that the market would encourage behavior to reduce our use of that product to power our vehicles. In fact, neither the $4 nor the $2 tells us the real value of oil (and the same argument applies to the prices of other fossil fuels.)

Scientists tell us, that the true cost of continuing to burn those fuels at the current rate is approaching infinity. Aside from all the challenges to humanity resulting from the rise in sea levels over the next 50 to 100 years, the changes to agricultural production, more extreme weather events, there is a real danger that if the permafrost in the northern hemisphere melts, the methane released will accelerate the rate of global warming irrevocably. Humanity itself might not be able to survive – either because of the heat or the balance of chemicals in the air. 250 million years ago, there was a massive release of methane into the atmosphere and 90 percent of all species could not cope with that and became extinct. For details, see Michael J. Benton, When Life Nearly Died: The Greatest Mass Extinction of all Time (London, Thames & Hudson Ltd: 2003)

But we also need to recognize that even if pumping carbon dioxide into the atmosphere were to cease today, it will take thirty years for all of the temperature increases to end. Thus, the threat to humanity posed by just the global warming that we have already caused, may be catastrophic. Despite all of this information from the scientists, virtually the entire economics profession discounts the possibilities of catastrophe -- assigning it such a low probability that they do not bother plugging such costs into their equations as they seek to measure the impact of various proposed environmental policies. [There are notable exceptions. See Martin Weitzman and Gernot Wagner Climate Shock, the Economic Consequences of a Hotter Planet (Princeton: Princeton University Press, 2015). These two economists argue that even with an extremely low probability, when the possible catastrophe is dramatic (I say the cost is infinite) it is essential to take steps to avoid even that very low probability event.]

Economists’ focus on prices rather than true underlying values has dangerous consequences. The great British economist John Maynard Keynes once wrote that “The ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.” Keynes’ point is that economists are very influential. Because they have such prestige, they have the ability to come up with justifications for whatever a politician (or business owner or any other supporter of a particular interest group) wants to get done. And these justifications, because they have the aura of “economic science” about them, carry great weight with journalists who then translate that into important information for the public at large.

Unfortunately, though economics has the AURA of science, it does not have sufficiently scientific standards to disprove nonsense. Geologists know the earth isn’t flat astronomers know the earth revolves around the sun rather than vice versa. Doctors know that AIDS cannot be transmitted by sitting on toilet seats. However, economists can legitimately continue espousing nonsense and still find outlets to publish it without being laughed out of the profession. A perfect example is the continued support by hired gun economists for austerity (called “fiscal responsibility”) as a key to prosperity despite all the evidence that has been demonstrated since the onset of the financial crisis in 2008 of the failure of austerity policies in Europe to restore prosperity and the failure of the too weak fiscal stimulus to create a robust recovery in the US. (If readers want to see how economists argue on the one hand versus the other hand re austerity policies, see my textbook co-authored by Howard Sherman Principles of Macroeconomics: Activist vs Austerity Policies.)

Why is there so much opposition in the US today to our government taking steps to curb climate change? Because the owners of businesses who stand to lose money if these policies are enacted have hired scores or economists and advertising experts to convince too many of us that the costs imposed on the population would be astronomical. Forget about the fact that in fact, the costs of doing nothing will during the lifetimes of our grandchildren be totally catastrophic. They are convincing us to worry about a rise in taxes and the continued loss of jobs in coal mining and generating electricity in coal fired plants.

[In the December 7, 2014 New Yorker James Surowiekei’s Financial Page article entitled “Money to Burn” details the irrationality of US government policy of leasing government owned land for coal mining keeping the price of coal artificially low, thereby working against the stated long run policies of the Obama Administration to phase out coal-burning electricity generation. (See p. 28)] We need to get our eyes on the ball --- it is a scientific certainty that the current prices of oil, natural gas and coal are reducing the long term viability of our earth. Economists should be focused on the value of human life over the next generations, not on the short run benefits we are currently receiving from $2 a gallon gasoline. Non-fossil fuel methods of generating power must become economically viable. A shift to these methods is essential to preserving our earth. Most fossil fuels not already mined must stay in the ground. Economists know the price of oil, natural gas and coal. They underestimate the cost of continuing to use them. And they seriously ignore the value of leaving most of them in the ground.

 
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