The Delayers

When, years from now, the errors and follies of the economics profession are disdainfully listed, the object of greatest derision will not be the finance theorists for whom efficient and complete markets were as real as "actually existing socialism" was to fanatics of a different stripe; it will not be regulators who thought regulation was uncool. No, the biggest failure of economics in these two decades will have been on climate change.

After all, we economists may already have screwed up the planet beyond repair. The Kyoto agreement, fashionable now to deride, was nevertheless the best hope to move the United States' emissions to a permanently lower level; but a well-publicised revolt by Bill Clinton's economists, who claimed the benefits would not outweigh the costs, effectively stalled its ratification.

That's a phrase that economists use often: the balancing of benefits and costs. On almost every occasion, it is useful. Why is this one of the occasions where it is not?

Mainly because we have real trouble quantifying — especially in terms of money — the costs of climate change. Economists chronically undercount things they can't monetise. So those things are ignored or minimised. Strangely, the years of worrying about how to account for non-monetary household work in national income haven't taught us anything. So we scoff at "exaggerated" future costs from warming. For years mocked as dismal killjoys by everyone else, we have picked on solemn, doom-prophesying climate scientists like the second geekiest kid at school sneers at the geekiest. A profession central to which is working out the cost of the opportunity foregone has a massive failure of imagination when it comes to climate change costs.

A classic example: a much-discussed article written recently in The Washington Post by Marty Feldstein of Harvard, the head of the National Bureau of Economic Research, in some ways the dean of the US economics profession. A new emissions-reduction bill "would have a trivially small effect on global warming while imposing substantial costs on all American households," Marty warns. Except he's wrong. As practically everybody noticed (except his editor at the Post) "the trivially small effect" compared future emissions after the bill with emissions now — instead of projected future emissions without the bill.

Feldstein needs to take a tip from Harvard economics' other Marty, Marty Weitzman. Weitzman's isolated one reason why economists fail at this particular large-scale cost-benefit analysis. If, (i) global warming might feed back into itself raising temperatures further; (ii) how much we care about the future is uncertain; and (iii) we add everything up, mathematically we have to wind up with infinite costs. Normal translation: regular macro-level cost-benefit analysis doesn't work here. Economist translation: it all depends on arbitrary choice of parameters! Throw in whatever numbers we want! For economists, that's like summer vacation. And if the numbers are arbitrary, then why take the problem seriously?

But an underpowered imagination about costs isn't the whole story. There's also overpowered imagination about technology. For economists in love with growth models, technological change explains everything. So climate change "delayers" will assume that technological innovation — and tech transfer — will come along to fix it all. This is an article of faith, rather than an intelligent guess: if you ask them for an occasion outside the movies when technology has come in advance of the crisis rather than well after, they won't answer. And they'll spend more time than anyone thinks is warranted on absurd, patently uneconomic plans to change the earth's reflective index or building giant solar arrays.

So first: you can't make sensible comparisons if you add things up, so there's no problem. And second: even if there is, innovation will take care of it without us breaking a sweat. Both are classical signs of fanaticism in economics. And both make basic, Economics 101 errors.

There are other examples of a deeply-ingrained fanaticism getting the better of common sense. Take the furore surrounding the Stern Report, a big cost-benefit analysis that argued acting now on climate change was economically wise.

But economists undermined the report politically by attacking Stern's choice of the "rate of time preference" — how much we in the present value the future. In particular, they said Stern committed the cardinal sin of not using the rate at which the markets valued the future, because the financial markets are efficient about information like that. (Seriously. This is true.)

Then there's a more recent paper, by Dell, Jones and Olken, of Feldstein's NBER. In some ways sensible, it tried to disentangle who lost more and who less from climate change, to make the point that climate change shouldn't be seen only in GDP terms. Worthy aims. But the paper's been torn apart by climate scientists, with good reason. First, it says the link between temperature and GDP is "linear" — because that's what it's been in the past. But climate change by definition is a break from past trends. A failure of imagination again. Then there are the footnotes! One admits that they completely ignore the effect of rising sea levels. Another classifies China and India as "rich" countries that escape the worst economic effects. And this isn't some fly-by-night working paper either; it was one of the more-talked about presentations at the American Economic Association meeting in 2009.

There are two consequences to this culture of wilful blindness.

The first is that being taken in by pious platitudes that all that awaits a climate change deal is for "China and India" to cut till it hurts would be an act of truly awesome naοvetι. Those who make that claim, and have been making it for these lost decades, are exactly the same as those who would, using the blinkered methods outlined above, choose to deny the problem or delay response. (Feldstein's Post piece ends with blaming "India and China.") If you believe the economists, there's always tomorrow, so you go first, please. Don't let them define the debate. Don't give an inch if you're expecting anything in return. (You want to cut unilaterally, that's a different argument.)

The second is that arguing about macro-costs and benefits and growth paths won't help. Get micro-economists on the job instead. Get them meticulously working out how much it'll cost to green each sector, to get rid of open coal fires, to bribe farmers into not burning agri-waste. (Then demand someone pays for it.)

But don't trust the economics profession on climate change. On everything else, sure — we're a helpful, well-informed lot. But not on this.

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