Green New Deal Part 1: Why aren’t we building more infrastructure?

Apr 7 JDN 2458581

For the next few weeks, I’ll be doing a linked series of posts on the Green New Deal. Some parts of it are obvious and we should have been doing them for decades already; let’s call these “easy parts”. Some parts of it will be difficult, but are definitely worth doing; let’s call these “hard parts”. And some parts of it are quite radical and may ultimately not be feasible—but may still be worth trying; let’s call these “very hard parts”.

Today I’m going to talk about some of the easy parts.

“Repairing and upgrading the infrastructure in the United States, including [. . .] by eliminating pollution and greenhouse gas emissions as much as technologically feasible.”

“Building or upgrading to energy-efficient, distributed, and ‘smart’ power grids, and working to ensure affordable access to electricity.”

“Upgrading all existing buildings in the United States and building new buildings to achieve maximal energy efficiency, water efficiency, safety, affordability, comfort, and durability, including through electrification.”

Every one of these proposals is basically a no-brainer. We should have been spending something like $100 billion dollars a year for the last 30 years doing this, and if we had, we’d have infrastructure that would be the envy of the world.
Instead, the ASCE gives our infrastructure a D+: passing, but just barely. We are still in the top 10 in the World Bank’s infrastructure ratings, but we have been slowly slipping downward in the rankings.

 

Where did I get my $100 billion a year figure from? Well, we have about a $15 billion annual shortfall in highway maintenance, $13 billion in waterway maintenance, and $25 billion in dam repairs. That’s $53 billion. But that’s just to keep what we already have. In order to build more infrastructure, or upgrade it to be better, we’re going to need to spend considerably more. Double it and make it a nice round number, and you get $100 billion.

 

Of course, $100 billion a year is not a small amount of money.
How would we pay for such a thing?

 

That’s the thing: We wouldn’t need to.

 

Infrastructure investment doesn’t have to be “paid for” in the usual sense. We don’t need to raise taxes. We don’t need to cut spending. We can just add infrastructure spending onto other spending, raising the deficit directly. We can borrow money to fund the projects, and then by the time those bonds mature we will have made enough additional tax revenue from the increased productivity (and the Keynes multiplier) that we will have no problem paying back the debt.

 

Funding investment is what debt is supposed to be for. Particularly when interest rates are this low (currently about 3% nominal, which means about 1% adjusted for inflation), there is very little downside to taking out more debt if you’re going to plow that money into productive investments.

 

Of course debt can be used for anything money can, and using debt for all your spending is often not a good idea (but it can be, if your income is inconsistent or you have good reasons to think it will increase in the future). But I’m not suggesting the government should use debt to fund Medicare and Social Security payments; I’m merely suggesting that they should use debt to fund infrastructure investment. Medicare and Social Security are, at their core, social insurance programs; they spread wealth around, which has a lot of important benefits; but they don’t meaningfully create new wealth, so you need to be careful about how you pay for them. Infrastructure investment creates new wealth. The extra value is basically pulled from thin air; you’d be a fool not to take it.

 

This is also why I just can’t get all that upset about student loans (even though I personally would personally stand to gain a small house if student debt were to suddenly evaporate). Education is the most productive investment we have, and most of the benefits of education do actually accrue to the individual who is being educated. It therefore stands to reason that students should pay for their own education, and since most of us couldn’t afford to pay in cash, it stands to reason that we should be offered loans.

 

There are some minor changes I would make to the student loan system, such as lower interest rates, higher limits to subsidized loans, stricter regulations on private student loans, and a simpler forgiveness process that doesn’t result in ridiculous tax liability. But I really don’t see the need to go to a fully taxpayer-funded higher education system. On the other hand, it wouldn’t necessarily be bad to go to a fully taxpayer-funded system; it seems to work quite well in Germany, France, and most of Scandinavia. I just don’t see this as a top priority.

 

It feels awful having $100,000 in debt, but it’s really not that bad when you realize that a college education will increase your lifetime earnings by an average of $1 million (and more like $2 million in my case because I’m going for a PhD, PhDs are more valuable than bachelor’s degrees, and even among PhDs, economists are particularly well-paid). You are being offered the chance to apy $100,000 now to get $1 million later. You should definitely take that deal.

 

And yet, we still aren’t increasing our infrastructure investment. Trump said he would, and it seemed like one of his few actual good ideas (remember the Stopped Clock Principle: reversed stupidity is not intelligence); but so far, no serious infrastructure plan has materialized.

 

Despite extremely strong bipartisan support for increased infrastructure investment, we don’t seem to be able to actually get the job done.
I think I know why.

 

The first reason is that “infrastructure” is a vague concept, almost a feel-good Applause Light like “freedom” or “justice”. Nobody is ever going to say they are against freedom or justice. Instead they’ll disagree about what constitutes freedom or justice.

 

And likewise, while almost everyone will agree that infrastructure as a concept is a good thing, there can be large substantive disagreements over just what kind of infrastructure to build. We want better transportation: Does that mean more roads, or train lines instead? We want cheaper electricity: When we build new power plants, should they use natural gas, solar, or nuclear power? We want to revitalize inner cities: Does that mean public housing, community projects, or subsidies for developers? Nobody wants an inefficient electricity grid, but just how much are we willing to invest in making it more efficient, and how? Once the infrastructure is built, should it be publicly owned and tax-funded, or privatized and run for profit?
This reason is not going to go away. We simply have to face up to it, and find a way to argue substantively for the specific kinds of infrastructure we want. It should be trains, not roads. It should be solar, wind, and nuclear, not natural gas, and certainly not coal or oil. It should be public housing and community projects, not subsidies for developers. Most of the infrastructure should be publicly owned, and what isn’t should be strictly regulated.

 

Yet there is another reason, which I think we might be able to eliminate. Most people seem to think that we need to pay for infrastructure the way we would need to pay for expanded social programs or military spending. They keep asking “How will this be paid for?” (And despite a lot of conservatives frothing about it—I will not give them ad revenue by linking—Alexandria Ocasio-Cortez was not wrong when she said “The same way we pay for everything else.” We tax and spend; that’s what governments do. It’s always a question of what taxes and what spending.)

 

But we really don’t need to pay for infrastructure at all. Infrastructure will pay for itself; we simply need to finance it up front. And when we’re paying real interest rates of 1%, that’s not a difficult thing to do. If interest rates start to rise, we may want to pull back on that; but that’s not something that will happen overnight. We would see it coming, and have a variety of fiscal and monetary tools available to deal with it. The fear of possibly paying a bit more interest 30 years from now is a really stupid reason not to fix bridges that are crumbling today.

 

So when we talk about the Green New Deal (or at least the “easy parts”), let’s throw away this nonsense about “paying for it”. Almost all of these programs are long-term investments; they will pay for themselves. There are still substantive choices to be made about what exactly to build and where and how; but the US is an extraordinarily rich country with virtually unlimited borrowing power.

 

We can afford to do this.

 

Indeed, I think the question we should really be asking is:
How can we afford not to do this?

The extreme efficiency of environmental regulation—and the extreme inefficiency of war

Apr 8 JDN 2458217

Insofar as there has been any coherent policy strategy for the Trump administration, it has largely involved three things:

  1. Increase investment in military, incarceration, and immigration enforcement
  2. Redistribute wealth from the poor and middle class to the rich
  3. Remove regulations that affect business, particularly environmental regulations

The human cost of such a policy strategy is difficult to overstate. Literally millions of people will die around the world if such policies continue. This is almost the exact opposite of what our government should be doing.

This is because military is one of the most wasteful and destructive forms of government investment, while environmental regulation is one of the most efficient and beneficial. The magnitude of these differences is staggering.

First of all, it is not clear that the majority of US military spending provides any marginal benefit. It could quite literally be zero. The US spends more on military than the next ten countries combined.

I think it’s quite reasonable to say that the additional defense benefit becomes negligible once you exceed the sum of spending from all plausible enemies. China, Russia, and Saudi Arabia together add up to about $350 billion per year. Current US spending is $610 billion per year. (And this calculation, by the way, requires them all to band together, while simultaneously all our NATO allies completely abandon us.) That means we could probably cut $260 billion per year without losing anything.

What about the remaining $350 billion? I could be extremely generous here, and assume that nuclear weapons, alliances, economic ties, and diplomacy all have absolutely no effect, so that without our military spending we would be invaded and immediately lose, and that if we did lose a war with China or Russia it would be utterly catastrophic and result in the deaths of 10% of the US population. Since in this hypothetical scenario we are only preventing the war by the barest margin, each year of spending only adds 1 year to the lives of the war’s potential victims. That means we are paying some $350 billion per year to add 1 year to the lives of 32 million people. That is a cost of about $11,000 per QALY. If it really is saving us from being invaded, that doesn’t sound all that unreasonable. And indeed, I don’t favor eliminating all military spending.

Of course, the marginal benefit of additional spending is still negligible—and UN peacekeeping is about twice as cost-effective as US military action, even if we had to foot the entire bill ourselves.

Alternatively, I could consider only the actual, documented results of our recent military action, which has resulted in over 280,000 deaths in Iraq and 110,000 in Afghanistan, all for little or no apparent gain. Life expectancy in these countries is about 70 in Iraq and 60 in Afghanistan. Quality of life there is pretty awful, but people are also greatly harmed by war without actually dying in it, so I think a fair conversion factor is about 60 QALY per death. That’s a loss of 23.4 MQALY. The cost of the Iraq War was about $1.1 trillion, while the cost of the Afghanistan War was about a further $1.1 trillion. This means that we paid $94,000 per lost QALY. If this is right, we paid enormous amounts to destroy lives and accomplished nothing at all.

Somewhere in between, we could assume that cutting the military budget greatly would result in the US being harmed in a manner similar to World War 2, which killed about 500,000 Americans. Paying $350 billion per year to gain 500,000 QALY per year is a price of $700,000 per QALY. I think this is about right; we are getting some benefit, but we are spending an enormous amount to get it.

Now let’s compare that to the cost-effectiveness of environmental regulation.

Since 1990, the total cost of implementing the regulations in the Clean Air Act was about $65 billion. That’s over 28 years, so less than $2.5 billion per year. Compare that to the $610 billion per year we spend on the military.

Yet the Clean Air Act saves over 160,000 lives every single year. And these aren’t lives extended one more year as they were in the hypothetical scenario where we are just barely preventing a catastrophic war; most of these people are old, but go on to live another 20 years or more. That means we are gaining 3.2 MQALY for a price of $2.5 billion. This is a price of only $800 per QALY.

From 1970 to 1990, the Clean Air Act cost more to implement: about $520 billion (so, you know, less than one year of military spending). But its estimated benefit was to save over 180,000 lives per year, and its estimated economic benefit was $22 trillion.

Look at those figures again, please. Even under very pessimistic assumptions where we would be on the verge of war if not for our enormous spending, we’re spending at least $11,000 and probably more like $700,000 on the military for each QALY gained. But environmental regulation only costs us about $800 per QALY. That’s a factor of at least 14 and more likely 1000. Environmental regulation is probably about one thousand times as cost-effective as military spending.

And I haven’t even included the fact that there is a direct substitution here: Climate change is predicted to trigger thousands if not millions of deaths due to military conflict. Even if national security were literally the only thing we cared about, it would probably still be more cost-effective to invest in carbon emission reduction rather than building yet another aircraft carrier. And if, like me, you think that a child who dies from asthma is just as important as one who gets bombed by China, then the cost-benefit analysis is absolutely overwhelming; every $60,000 spent on war instead of environmental protection is a statistical murder.

This is not even particularly controversial among economists. There is disagreement about specific environmental regulations, but the general benefits of fighting climate change and keeping air and water clean are universally acknowledged. There is disagreement about exactly how much military spending is necessary, but you’d be hard-pressed to find an economist who doesn’t think we could cut our military substantially with little or no risk to security.

Forget the Doughnut. Meet the Wedge.

Mar 11 JDN 2458189

I just finished reading Kate Raworth’s book Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist; Raworth also has a whole website dedicated to the concept of the Doughnut as a way of rethinking economics.

The book is very easy to read, and manages to be open to a wide audience with only basic economics knowledge without feeling patronizing or condescending. Most of the core ideas are fundamentally sound, though Raworth has a way of making it sound like she is being revolutionary even when most mainstream economists already agree with the core ideas.

For example, she makes it sound like it is some sort of dogma among neoclassical economists that GDP growth must continue at the same pace forever. As I discussed in an earlier post, the idea that growth will slow down is not radical in economics—it is basically taken for granted in the standard neoclassical growth models.

Even the core concept of the Doughnut isn’t all that radical. It’s based on the recognition that economic development is necessary to end poverty, but resources are not unlimited. Then combine that with two key assumptions: GDP growth requires growth in energy consumption, and growth in energy consumption requires increased carbon emissions. Then, the goal should be to stay within a certain range: We want to be high enough to not have poverty, but low enough to not exceed our carbon budget.

Why a doughnut? That’s… actually a really good question. The concept Raworth presents is a fundamentally one-dimensional object; there’s no reason for it to be doughnut-shaped. She could just as well have drawn it on a single continuum, with poverty at one end, unsustainability at the other end, and a sweet spot in the middle. The doughnut shape adds some visual appeal, but no real information.

But the fundamental assumptions that GDP requires energy and energy requires carbon emissions are simply false—especially the second one. Always keep one thing in mind whenever you’re reading something by environmentalists telling you we need to reduce economic output to save the Earth: Nuclear power does not produce carbon emissions.

This is how the environmentalist movement has shot itself—and the world—in the foot for the last 50 years. They continually refuse to admit that nuclear power is the best hope we have for achieving both economic development and ecological sustainability. They have let their political biases cloud their judgment on what is actually best for humanity’s future.

I will give Raworth some credit for not buying into the pipe dream that we can somehow transition rapidly to an entirely solar and wind-based power grid—renewables only produce 6% of world energy (the most they ever have), while nuclear produces 10%. And nuclear power certainly has its downsides, particularly in its high cost of construction. It may in fact be the case that we need to reduce economic output somewhat, particularly in the very richest countries, and if so, we need to find a way to do that without causing social and political collapse.

The Dougnut is a one-dimensional object glorified by a two-dimensional diagram.

So let me present you with an actual two-dimensional object, which I call the Wedge.

On this graph, the orange dots plot actual GDP per capita (at purchasing power parity) on the X axis against actual CO2 emissions per capita on the Y-axis. The green horizonal line is a CO2 emission target of 3 tonnes per person per year based on reports from the International Panel on Climate Change.

Wedge_full

As you can see, most countries are above the green line. That’s bad. We need the whole world below that green line. The countries that are below the line are largely poor countries, with a handful of middle-income countries mixed in.

But it’s the blue diagonal line that really makes this graph significant, what makes it the Wedge. That line uses Switzerland’s level of efficiency to estimate a frontier of what’s possible. Switzerland’s ratio of GDP to CO2 is the best in the world, among countries where the data actually looks reliable. A handful of other countries do better in the data, but for some (Macau) it’s obviously due to poor counting of indirect emissions and for others (Rwanda, Chad, Burundi) we just don’t have good data at all. I think Switzerland’s efficiency level of $12,000 per ton of CO2 is about as good as can be reasonably expected for most countries over the long run.

Our goal should be to move as far right on the graph as we can (toward higher levels of economic development), but always staying inside this Wedge: Above the green line, our CO2 emissions are too high. Below the blue line may not be technologically feasible (though of course it’s worth a try). We want to aim for the point of the wedge, where GDP is as high as possible but emissions are still below safe targets.

Zooming in on the graph gives a better view of the Wedge.

Wedge_zoomed

The point of the Wedge is about $38,000 per person per year. This is not as rich as the US, but it’s definitely within the range of highly-developed countries. This is about the same standard of living as Italy, Spain, or South Korea. In fact, all three of these countries exceed their targets; the closest I was able to find to a country actually hitting the point of the wedge was Latvia, at $27,300 and 3.5 tonnes per person per year. Uruguay also does quite well at $22,400 and 2.2 tonnes per person per year.

Some countries are within the Wedge; a few, like Uruguay, quite close to the point, and many, like Colombia and Bangladesh, that are below and to the left. For these countries, a “stay the course” policy is the way to go: If they keep up what they are doing, they can continue to experience economic growth without exceeding their emission targets.

 

But the most important thing about the graph is not actually the Wedge itself: It’s all the countries outside the Wedge, and where they are outside the Wedge.

There are some countries, like Sweden, France, and Switzerland, that are close to the blue line but still outside the Wedge because they are too far to the right. These are countries for whom “degrowth” policies might actually make sense: They are being as efficient in their use of resources as may be technologically feasible, but are simply producing too much output. They need to find a way to scale back their economies without causing social and political collapse. My suggestion, for what it’s worth, is progressive taxation. In addition to carbon taxes (which are a no-brainer), make income taxes so high that they start actually reducing GDP, and do so without fear, since that’s part of the point; then redistribute all the income as evenly as possible so that lower total income comes with much lower inequality and the eradication of poverty. Most of the country will then be no worse off than they were, so social and political unrest seems unlikely. Call it “socialism” if you like, but I’m not suggesting collectivization of industry or the uprising of the proletariat; I just want everyone to adopt the income tax rates the US had in the 1950s.

But most countries are not even close to the blue line; they are well above it. In all these countries, the goal should not be to reduce economic output, but to increase the carbon efficiency of that output. Increased efficiency has no downside (other than the transition cost to implement it): It makes you better off ecologically without making you worse off economically. Bahrain has about the same GDP per capita as Sweden but produces over five times the per-capita carbon emissions. Simply by copying Sweden they could reduce their emissions by almost 19 tonnes per person per year, which is more than the per-capita output of the US (and we’re hardly models of efficiency)—at absolutely no cost in GDP.

Then there are countries like Mongolia, which produces only $12,500 in GDP but 14.5 tonnes of CO2 per person per year. Mongolia is far above and to the left of the point of the Wedge, meaning that they could both increase their GDP and decrease their emissions by adopting the model of more efficient countries. Telling these countries that “degrowth” is the answer is beyond perverse—cut Mongolia’s GDP by 2/3 and you would throw them into poverty without even bringing carbon emissions down to target.

We don’t need to overthrow capitalism or even give up on GDP growth in general. We need to focus on carbon, carbon, carbon: All economic policy from this point forward should be made with CO2 reduction in mind. If that means reducing GDP, we may have to accept that; but often it won’t. Switching to nuclear power and public transit would dramatically reduce emissions but need have no harmful effect on economic output—in fact, the large investment required could pull a country out of recession.

Don’t worry about the Doughnut. Aim for the point of the Wedge.

Our biggest oil subsidy is called the Interstate Highway System


August 13, JDN 2457979

In last week’s post I proposed an infrastructure project that probably sounded quite expensive. $410 billion for maglev lines? We’ve never spent anything like that on infrastructure, have we?

Actually, we have. The Interstate Highway System, in inflation-adjusted dollars, cost $526 billion. Of course, road is a lot cheaper than maglev rail, so that covers a lot more miles than the maglev system I’m proposing.

Of course, the maglev system would produce a lot less carbon emissions and be a great deal safer; while the Interstate Highway System has about 60% (91 log points) fewer traffic fatalities than the road system that came before it, the Shinkansen high-speed rail system in Japan has not had a single passenger fatality in over 50 years and 1 billion passengers. No system built by humans will ever be perfect, but the Shinkansen comes about as close as we’re ever going to get.

Assuming we could even get close to that level of safety, replacing the highway system with high-speed rail would save about 2,000 American lives every year. (Of course, we’d still lose over 30,000 Americans every year to non-interstate car accidents.)

But what I really want to talk about this week is how the Interstate Highway System is in fact an implicit oil subsidy. We currently spend over $140 billion per year in public funds to maintain highways (about one-fourth of which is specifically the Interstate Highway System). For those of you playing along at home, that’s about half what it would take to end world hunger.

The choice to spending this money maintaining highways instead of bike lanes, rail lines, or subway systems makes this spending an implicit subsidy for the car industry and the oil industry.

Of course, that’s only half the story; there’s also the gasoline tax, which is a pretty obvious tax on the oil industry. But the federal gasoline tax only raises about $35 billion per year, and state taxes add up to a comparable amount; so only about half what we spend on highways is actually covered by gasoline taxes. This means that even if you never drive a car, you are paying for the highway system.

Even including the gasoline tax, this means that this implicit oil subsidy may be the largest oil subsidy in the United States. Standard estimates of oil subsidies in the US range around $30 to $40 billion per year. Assuming that 3/4 of the benefit from the $140 billion in highway spending goes to the oil industry (the other 1/4 to the car industry), and then subtracting the roughly $70 billion paid in gasoline taxes leaves about $35 billion per year in net oil subsidy from the Interstate Highway System—which is to say about as much as all other oil subsidies combined.

Moreover, when you do drive on the highway, you usually don’t pay. You pay for gasoline, but that’s quite cheap, especially if your car is at all fuel-efficient; and most of us (in an entirely economically rational way) avoid toll roads when we have the time. Most of what you spend on driving is paying to buy, insure, and maintain your car—because cars are extremely complicated and expensive machines that take an awful lot of knowhow to build. The annual cost of driving a typical midsize sedan 15,000 miles per year is about $8,500. Of that, about $3,000 is depreciation (I’m assuming half the depreciation was inevitable, and the other half was due to mileage), registration fees, and finance charges that just come from owning the vehicle and would still happen even if you hardly ever drove it. This means that your marginal cost of driving is only about $0.36 per mile. (This makes the $0.54 per mile deduction the IRS will give small business owners actually quite generous.) You have a strong economic incentive not to drive at all, but in many places it’s hard to even get by without a car; and once you have one, a substantial portion of the cost is already sunk and you may as well drive it.

Compare this to how we fund public transit. Most of the spending on public transit is privatized, and federal funds for public transit are about 1/6 of federal funds for interstate highways. Then we charge every single passenger for every single trip. Except for the recent transition to transit cards instead of cash, this whole system almost seems designed to minimize the salience of the cost of driving and maximize the salience of the cost of public transit.

We also spend far more on our public transit projects than is really necessary, because corruption and excess bureaucracy in the subcontracting system dramatically raises the price. This is actually rather strange, as overall the US has less corruption than Spain or France, yet we pay substantially more for our infrastructure than they do. Indeed, capital costs per kilometer for US urban rail lines consistently rate above all but the most expensive European projects—notably, usually above that $100 million per mile threshold I estimated for maglev rail done right.

This combination of high prices and low funding means our public transit system provides far worse service. Combined with the fact that the rent is too damn high, this gives Americans some of the longest commute times in the world.
What we should actually be doing of course is taxing the oil industry, at the social cost of carbon—the monetary value of the marginal ecological damage done by extracting and burning oil. If we did this, it would raise the price of gasoline by about $0.20 per gallon; since the $70 billion in gasoline taxes is currently raised by a tax of about $0.50 per gallon, that means we would raise an additional $30 billion from gasoline alone (not quite, as people would reduce their gasoline consumption a little). This means that by not doing this, we are effectively subsidizing oil by an additional $30 billion—making our total oil subsidies over $100 billion per year.

Of course, there is a case to be made that this is not the largest US oil subsidy after all. There is one quite plausible candidate for US oil subsidies that might actually be larger, and that is US military spending. Obviously not all military spending is an oil subsidy; but when you include both the absurd amounts of fuel that tanks and fighter jets consume (the DoD accounts for 93% of all US government fuel consumption!) and the fact that several of our most recent wars were at least partly about securing oil reserves, it’s not hard to see how this might be benefiting the oil industry. Estimating this effect quantitatively is very difficult, but if even 5% of the US military budget amounts to an oil subsidy, that’s over $25 billion per year—just shy of the Interstate Highway System.

We need to be honest about free trade’s costs, and clearer about its benefits

August 6, JDN 2457607

I discussed in a post awhile ago the fact that economists overwhelmingly favor free trade but most people don’t. There are some deep psychological reasons for this, particularly the loss aversion which makes people experience losses about twice as much as they experience gains. Free trade requires change; it creates some jobs and destroys others. Those forced transitions can be baffling and painful.

The good news is that views on trade in the US are actually getting more positive in recent years—which makes Trump that much more baffling. I honestly can’t make much sense of the fact that candidates who are against free trade have been so big in this election (and let’s face it, even Bernie Sanders is largely against free trade!), in light of polls showing that free trade is actually increasingly popular.

Partly this can be explained by the fact that people are generally more positive about free trade in general than they are about particular trade agreements, and understandably so, as free trade agreements often include some really awful provisions that in no way advance free trade. But that doesn’t really explain the whole effect here. Maybe it’s a special interest effect: People who hate trade are much more passionate about hating trade than people who like trade are passionate about liking trade. If that’s the case, then this is what we need to change.

Today I’d like to focus on what we as economists and the economically literate more generally can do to help people understand what free trade is and why it is so important. This means two things:

First, of course, we must be clearer about the benefits of free trade. Many economists seem to think that it is simply so obvious that they don’t even bother to explain it, and end up seeming like slogan-chanting ideologues. “Free trade! Free trade! Free trade!”

Above all, we need to talk about how it was primarily through free trade that global extreme poverty is now at the lowest level it has ever been. This benefit needs to be repeated over and over, and anyone who argues for protectionism needs to be confronted with the millions of people they will throw back into poverty. Most people don’t even realize that global poverty is declining, so first of all, they need to be shown that it is.

American ideas are often credited with fighting global poverty, but that’s not so convincing, since most of the improvement in poverty has happened in China (not exactly a paragon of free markets, much less liberal democracy); what really seems to have made the difference is American dollars, spent in free trade. Imports to the US from China have risen from $3.8 billion in 1985 to $483 billion in 2015. Extreme poverty in China fell from 61% of the population in 1990 to 4% in 2015. Coincidence? I think not. Indeed, that $483 billion is just about $1 per day for every man, woman, and child in China—and the UN extreme poverty line is $1.25 per person per day.

We need to be talking about the jobs that are created by trade—if need be, making TV commercials interviewing workers at factories who make products for export. “Most of our customers are in Japan,” they might say. “Without free trade, I’d be out of a job.” Interview business owners saying things like, “Two years ago we opened up sales to China. Now I need to double my workforce just to keep up with demand.” Unlike a lot of other economic policies where the benefits are diffuse and hard to keep track of, free trade is one where you can actually point to specific people and see that they are now better off because they make more selling exports. From there, we just need to point out that imports and exports are two sides of the same transaction—so if you like exports, you’d better have imports.

We need to make it clear that the economic gains from trade are just as real as the losses from transition, even if they may not be as obvious. William Poole put it very well in this article on attitudes toward free trade:

Economists are sometimes charged with insensitivity over job losses, when in fact most of us are extremely sensitive to such losses. What good economics tells us is that saving jobs in one industry does not save jobs in the economy as a whole. We urge people to be as sensitive to the jobs indirectly lost as a consequence of trade restriction as to those lost as a consequence of changing trade patterns.

Second, just as importantly, we must be honest about the costs of free trade. We need to stop eliding the distinction between net aggregate benefits and benefits for everyone everywhere. There are winners and losers, and we need to face up to that.

For example, we need to stop saying thinks like “Free trade will not send jobs to Mexico and China.” No, it absolutely will, and has, and does—and that is part of what it’s for. Because people in Mexico and China are people, and they deserve to have better jobs just as much as we do. Sending jobs to China is not a bug; it’s a feature. China needs jobs particularly badly.

Then comes the next part: “But if our jobs get sent to China, what will we do?” Better jobs, created here by the economic benefits of free trade. No longer will American workers toil in factories assembling parts; instead they will work in brightly-lit offices designing those parts on CAD software.

Of course this raises another problem: What happens to people who were qualified to toil in factories, but aren’t qualified to design parts on CAD software? Well, they’ll need to learn. And we should be paying for that education (though in large part, we are; altogether US federal, state, and local governments spend over $1 trillion a year on education).

And what if they can’t learn, can’t find another job somewhere else? What if they’re just not cut out for the kind of work we need in a 21st century economy? Then here comes my most radical statement of all: Then they shouldn’t have to.

The whole point of expanding economic efficiency—which free trade most certainly does—is to create more stuff. But if you create more stuff, you then have the opportunity to redistribute that stuff, in such a way that no one is harmed by that transition. This is what we have been failing to do in the United States. We need to set up our unemployment and pension systems so that people who lose their jobs due to free trade are not harmed by it, but instead feel like it is an opportunity to change careers or retire. We should have a basic income so that even people who can’t work at all can still live with dignity. This redistribution will not happen automatically; it is a policy choice we must make.

 

In theory there is a way around it, which is often proposed as an alternative to a basic income; it is called a job guarantee. Simply giving everyone free money for some reason makes people uncomfortable (never could quite fathom why; Donald Trump inherits capital income from his father, that’s fine, but we all inherit shared capital income as a nation, that’s a handout?), so instead we give everyone a job, so they can earn their money!

Well, here’s the thing: They won’t actually be earning it—or else it’s not a job guarantee. If you just want an active labor-market program to retrain workers and match them with jobs, that sounds great; Denmark has had great success with such things, and after all #ScandinaviaIsBetter. But no matter how good your program is, some people are going to not have any employable skills, or have disabilities too severe to do any productive work, or simply be too lazy to actually work. And now you’ve got a choice to make: Do you give those people jobs, or not?

If you don’t, it’s not a job guarantee. If you do, they’re not earning it anymore. Either employment is tied to actual productivity, or it isn’t; if you are guaranteed a certain wage no matter what you do, then some people are going to get that wage for doing nothing. As The Economist put it:

However, there are two alternatives: give people money with no strings attached (through a guaranteed basic income, unemployment insurance, disability payments, and so forth), or just make unemployed people survive on whatever miserable scraps they can cobble together.

If it’s really a job guarantee, we would still need to give jobs to people who can’t work or simply won’t. How is this different from a basic income? Well, it isn’t, except you added all these extra layers of bureaucracy so that you could feel like you weren’t just giving a handout. You’ve added additional costs for monitoring and administration, as well as additional opportunities for people to slip through the cracks. Either you are going to leave some people in poverty, or you are going to give money to people who don’t work—so why not give money to people who don’t work?

Another cost we need to be honest about is ecological. In our rush to open free trade, we are often lax in ensuring that this trade will not accelerate environmental degradation and climate change. This is often justified in the name of helping the world’s poorest people; but they will be hurt far more when their homes are leveled by hurricanes than by waiting a few more years to get the trade agreement right. That’s one where Poole actually loses me:

Few Americans favor a world trading system in which U.S. policies on environmental and other conditions could be controlled by foreign governments through their willingness to accept goods exported by the United States.

Really? You think we should be able to force other countries to accept our goods, regardless of whether they consider them ecologically sustainable? You think most Americans think that? It’s easy to frame it as other people imposing on us, but trade restrictions on ecologically harmful goods are actually a very minimal—indeed, almost certainly insufficient—regulation against environmental harm. Oil can still kill a lot of people even if it never crosses borders (or never crosses in liquid form—part of the point is you can’t stop the gaseous form). We desperately need global standards on ecological sustainability, and while we must balance environmental regulations with economic efficiency, currently that balance is tipped way too far against the environment—and millions will die if it remains this way.

This is the kernel of truth in otherwise economically-ignorant environmentalist diatribes like Naomi Klein’s This Changes Everything; free trade in principle doesn’t say anything about being environmentally unsustainable, but free trade in practice has often meant cutting corners and burning coal. Where we currently have diesel-powered container ships built in coal-powered factories and Klein wants no container ships and perhaps even no factories, what we really need are nuclear-powered container ships and solar-powered factories. Klein points out cases where free trade agreements have shut down solar projects that tried to create local jobs—but neither side seems to realize that a good free trade agreement would expand that solar project to create global jobs. Instead of building solar panels in Canada to sell only in Canada, we’d build solar panels in Canada to sell in China and India—and build ten times as many. That is what free trade could be, if we did it right.

Should we give up on growth?

JDN 2457572

Recently I read this article published by the Post Carbon Institute, “How to Shrink the Economy without Crashing It”, which has been going around environmentalist circles. (I posted on Facebook that I’d answer it in more detail, so here goes.)

This is the far left view on climate change, which is wrong, but not nearly as wrong as even the “mainstream” right-wing view that climate change is not a serious problem and we should continue with business as usual. Most of the Republicans who ran for President this year didn’t believe in using government action to fight climate change, and Donald Trump doesn’t even believe it exists.
This core message of the article is clearly correct:

We know this because Global Footprint Network, which methodically tracks the relevant data, informs us that humanity is now using 1.5 Earths’ worth of resources.

We can temporarily use resources faster than Earth regenerates them only by borrowing from the future productivity of the planet, leaving less for our descendants. But we cannot do this for long.

To be clear, “using 1.5 Earths” is not as bad as it sounds; spending is allow to exceed income at times, as long as you have reason to think that future income will exceed future spending, and this is true not just of money but also of natural resources. You can in fact “borrow from the future”, provided you do actually have a plan to pay it back. And indeed there has been some theoretical work by environmental economists suggesting that we are rightly still in the phase of net ecological dissaving, and won’t enter the phase of net ecological saving until the mid-21st century when our technology has made us two or three times as productive. This optimal path is defined by a “weak sustainability” condition where total real wealth never falls over time, so any natural wealth depleted is replaced by at least as much artificial wealth.

Of course some things can’t be paid back; while forests depleted can be replanted, if you drive species to extinction, only very advanced technology could restore them. And we are driving thousands of species to extinction every single year. Even if we should be optimally dissaving, we are almost certainly depleting natural resources too fast, and depleting natural resources that will be difficult if not impossible to later restore. In that sense, the Post Carbon Institute is right: We must change course toward ecological sustainability.

Unfortunately, their specific ideas of how to do so leave much to be desired. Beyond ecological sustainability, they really argue for two propositions: one is radical but worth discussing, but the other is totally absurd.

The absurd claim is that we should somehow force the world to de-urbanize and regress into living in small farming villages. To show this is a bananaman and not a strawman, I quote:

8. Re-localize. One of the difficulties in the transition to renewable energy is that liquid fuels are hard to substitute. Oil drives nearly all transportation currently, and it is highly unlikely that alternative fuels will enable anything like current levels of mobility (electric airliners and cargo ships are non-starters; massive production of biofuels is a mere fantasy). That means communities will be obtaining fewer provisions from far-off places. Of course trade will continue in some form: even hunter-gatherers trade. Re-localization will merely reverse the recent globalizing trade trend until most necessities are once again produced close by, so that we—like our ancestors only a century ago—are once again acquainted with the people who make our shoes and grow our food.

9. Re-ruralize. Urbanization was the dominant demographic trend of the 20th century, but it cannot be sustained. Indeed, without cheap transport and abundant energy, megacities will become increasingly dysfunctional. Meanwhile, we’ll need lots more farmers. Solution: dedicate more societal resources to towns and villages, make land available to young farmers, and work to revitalize rural culture.

First of all: Are electric cargo ships non-starters? The Ford-class aircraft carrier is electric, specifically nuclear. Nuclear-powered cargo ships would raise a number of issues in terms of practicality, safety, and regulation, but they aren’t fundamentally infeasible. Massive efficient production of biofuels is a fantasy as long as the energy to do it is provided by coal power, but not if it’s provided by nuclear. Perhaps this author’s concept of “infeasible” really just means “infeasible if I can’t get over my irrational fear of nuclear power”. Even electric airliners are not necessarily out of the question; NASA has been experimenting with electric aircraft.

The most charitable reading I can give of this (in my terminology of argument “men”, I’m trying to make a banana out of iron), is as promoting slightly deurbanizing and going back to more like say the 1950s United States, with 64% of people in cities instead of 80% today. Even then this makes less than no sense, as higher urbanization is associated with lower per-capita ecological impact, which frankly shouldn’t even be surprising because cities have such huge economies of scale. Instead of everyone needing a car to get around in the suburbs, we can all share a subway system in the city. If that subway system is powered by a grid of nuclear, solar, and wind power, it could produce essentially zero carbon emissions—which is absolutely impossible for rural or suburban transportation. Urbanization is also associated with slower population growth (or even population decline), and indeed the reason population growth is declining is that rising standard of living and greater urbanization have reduced birth rates and will continue to do so as poor countries reach higher levels of development. Far from being a solution to ecological unsustainability, deurbanization would make it worse.

And that’s not even getting into the fact that you would have to force urban white-collar workers to become farmers, because if we wanted to be farmers we already would be (the converse is not as true), and now you’re actually talking about some kind of massive forced labor-shift policy like the Great Leap Forward. Normally I’m annoyed when people accuse environmentalists of being totalitarian communists, but in this case, I think the accusation might be onto something.

Moving on, the radical but not absurd claim is that we must turn away from economic growth and even turn toward economic shrinkage:

One way or another, the economy (and here we are talking mostly about the economies of industrial nations) must shrink until it subsists on what Earth can provide long-term.

[…]

If nothing is done deliberately to reverse growth or pre-adapt to inevitable economic stagnation and contraction, the likely result will be an episodic, protracted, and chaotic process of collapse continuing for many decades or perhaps centuries, with innumerable human and non-human casualties.

I still don’t think this is right, but I understand where it’s coming from, and like I said it’s worth talking about.

The biggest mistake here lies in assuming that GDP is directly correlated to natural resource depletion, so that the only way to reduce natural resource depletion is to reduce GDP. This is not even remotely true; indeed, countries vary almost as much in their GDP-per-carbon-emission ratio as they do in their per-capita GDP. As usual, #ScandinaviaIsBetter; Norway and Sweden produce about $8,000 in GDP per ton of carbon, while the US produces only about $2,000 per ton. Both poor and rich countries can be found among both the inefficient and the efficient. Saudi Arabia is very rich and produces about $900 per ton, while Liberia is exceedingly poor and produces about $800 per ton. I already mentioned how Norway produces $8,000 per ton, and they are as rich as Saudi Arabia. Yet above them is Mali, which produces almost $11,000 per ton, and is as poor as Liberia. Other notable facts: France is head and shoulders above the UK and Germany at almost $6000 per ton instead of $4300 and $3600 respectively—because France runs almost entirely on nuclear power.

So the real conclusion to draw from this is not that we need to shrink GDP, but that we need to make GDP more like how they do it in Norway or at least how they do it in France, rather than how we do in the US, and definitely not how they do it in Saudi Arabia. Total world emissions are currently about 36 billion tons per year, producing about $108 trillion in GDP, averaging about $3,000 of GDP per ton of carbon emissions. If we could raise the entire world to the ecological efficiency of Norway, we could double world GDP and still be producing less CO2 than we currently are. Turning the entire planet into a bunch of Norways would indeed raise CO2 output, by about a factor of 2; but it would raise standard of living by a factor of 5, and indeed bring about a utopian future with neither war nor hunger. Compare this to the prospect of cutting world GDP in half, but producing it as inefficiently as in Saudi Arabia: This would actually increase global CO2 emissions, almost as much as turning every country into Norway.

But ultimately we will in fact need to slow down or even end economic growth. I ran a little model for you, which shows a reasonable trajectory for global economic growth.

This graph shows the growth rate in productivity slowly declining, along with a much more rapidly declining GDP growth:

Solow_growth

This graph shows the growth trajectory for total real capital and GDP:

Solow_capital

And finally, this is the long-run trend for GDP graphed on a log scale:

Solow_logGDP

The units are arbitrary, though it’s not unreasonable to imagine them as being years and hundreds of dollars in per-capita GDP. If that is indeed what you imagine them to be, my model shows us the Star Trek future: In about 300 years, we rise from a per-capita GDP of $10,000 to one of $165,000—from a world much like today to a world where everyone is a millionaire.

Notice that the growth rate slows down a great deal fairly quickly; by the end of 100 years (i.e., the end of the 21st century), growth has slowed from its peak over 10% to just over 2% per year. By the end of the 300-year period, the growth rate is a crawl of only 0.1%.

Of course this model is very simplistic, but I chose it for a very specific reason: This is not a radical left-wing environmentalist model involving “limits to growth” or “degrowth”. This is the Solow-Swan model, the paradigm example of neoclassical models of economic growth. It is sometimes in fact called simply “the neoclassical growth model”, because it is that influential. I made one very small change from the usual form, which was to assume that the rate of productivity growth would decline exponentially over time. Since productivity growth is exogenous to the model, this is a very simple change to make; it amounts to saying that productivity-enhancing technology is subject to diminishing returns, which fits recent data fairly well but could be totally wrong if something like artificial intelligence or neural enhancement ever takes off.

I chose this because many environmentalists seem to think that economists have this delusional belief that we can maintain a rate of economic growth equal to today indefinitely. David Attenborough famously said “Anyone who believes in indefinite growth in anything physical, on a physically finite planet, is either mad – or an economist.”

Another physicist argued that if we increase energy consumption 2.3% per year for 400 years, we’d literally boil the Earth. Yes, we would, and no economist I know of believes that this is what will happen. Economic growth doesn’t require energy growth, and we do not think growth can or should continue indefinitely—we just think it can and should continue a little while longer. We don’t think that a world standard of living 1000 times as good as Norway is going to happen; we think that a world standard of living equal to Norway is worth fighting for.

Indeed, we are often the ones trying to explain to leaders that they need to adapt to slower growth rates—this is particularly a problem in China, where nationalism and groupthink seems to have convinced many people in China that 7% annual growth is the result of some brilliant unique feature of the great Chinese system, when it is in fact simply the expected high growth rate for an economy that is very poor and still catching up by establishing a capital base. (It’s not so much what they are doing right now, as what they were doing wrong before. Just as you feel a lot better when you stop hitting yourself in the head, countries tend to grow quite fast after they transition out of horrifically terrible economic policy—and it doesn’t get much more terrible than Mao.) Even a lot of the IMF projections are now believed to be too optimistic, because they didn’t account for how China was fudging the numbers and rapidly depleting natural resources.

Some of the specific policies recommended in the article are reasonable, while others go to far.

1. Energy: cap, reduce, and ration it. Energy is what makes the economy go, and expanded energy consumption is what makes it grow. Climate scientists advocate capping and reducing carbon emissions to prevent planetary disaster, and cutting carbon emissions inevitably entails reducing energy from fossil fuels. However, if we aim to shrink the size of the economy, we should restrain not just fossil energy, but all energy consumption. The fairest way to do that would probably be with tradable energy quotas.

I strongly support cap-and-trade on fossil fuels, but I can’t support it on energy in general, unless we get so advanced that we’re seriously concerned about significantly altering the entropy of the universe. Solar power does not have negative externalities, and therefore should not be taxed or capped.

The shift to renewable energy sources is a no-brainer, and I know of no ecologist and few economists who would disagree.

This one is rich, coming from someone who goes on to argue for nonsensical deurbanization:

However, this is a complicated process. It will not be possible merely to unplug coal power plants, plug in solar panels, and continue with business as usual: we have built our immense modern industrial infrastructure of cities, suburbs, highways, airports, and factories to take advantage of the unique qualities and characteristics of fossil fuels.

How will we make our industrial infrastructure run off a solar grid? Urbanization. When everything is in one place, you can use public transportation and plug everything into the grid. We could replace the interstate highway system with a network of maglev lines, provided that almost everyone lived in major cities that were along those lines. We can’t do that if people move out of cities and go back to being farmers.

Here’s another weird one:

Without continued economic growth, the market economy probably can’t function long. This suggests we should run the transformational process in reverse by decommodifying land, labor, and money.

“Decommodifying money”? That’s like skinning leather or dehydrating water. The whole point of money is that it is a maximally fungible commodity. I support the idea of a land tax to provide a basic income, which could go a long way to decommodifying land and labor; but you can’t decommodify money.

The next one starts off sounding ridiculous, but then gets more reasonable:

4. Get rid of debt. Decommodifying money means letting it revert to its function as an inert medium of exchange and store of value, and reducing or eliminating the expectation that money should reproduce more of itself. This ultimately means doing away with interest and the trading or manipulation of currencies. Make investing a community-mediated process of directing capital toward projects that are of unquestioned collective benefit. The first step: cancel existing debt. Then ban derivatives, and tax and tightly regulate the buying and selling of financial instruments of all kinds.

No, we’re not going to get rid of debt. But should we regulate it more? Absolutely. A ban on derivatives is strong, but shouldn’t be out of the question; it’s not clear that even the most useful derivatives (like interest rate swaps and stock options) bring more benefit than they cause harm.

The next proposal, to reform our monetary system so that it is no longer based on debt, is one I broadly agree with, though you need to be clear about how you plan to do that. Positive Money’s plan to make central banks democratically accountable, establish full-reserve banking, and print money without trying to hide it in arcane accounting mechanisms sounds pretty good to me. Going back to the gold standard or something would be a terrible idea. The article links to a couple of “alternative money theorists”, but doesn’t explain further.

Sooner or later, we absolutely will need to restructure our macroeconomic policy so that 4% or even 2% real growth is no longer the expectation in First World countries. We will need to ensure that constant growth isn’t necessary to maintain stability and full employment.

But I believe we can do that, and in any case we do not want to stop global growth just yet—far from it. We are now on the verge of ending world hunger, and if we manage to do it, it will be from economic growth above all else.

What happened in Flint?

JDN 2457419

By now you’ve probably heard about the water crisis in Flint, where for almost two years highly dangerous levels of lead were in the city water system, poisoning thousands of people—including over 8,000 children. Many of these children will suffer permanent brain damage. We can expect a crime spike in the area once they get older; reduction in lead exposure may explain as much as half of the decline in crime in the United States—and increase in lead exposure will likely have the opposite effect. At least 10 people have already died.

A state of emergency has now been declared. Governor Snyder of Michigan will be asked to testify in Congress—and what he says had better be good. We have emails showing that he knew about the lead problems as early as February 2015, and as far as we can tell he did absolutely nothing until it all became public.

President Obama has said that the crisis was “inexplicable and inexcusable”. Inexcusable, certainly—but inexplicable? Hardly.

Indeed, this is a taste of the world that Republicans and Libertarians want us to live in, a world where corporations can do whatever they want and get away with it; a world where you can pollute any river, poison any population, and as long as you did it to help rich people get richer no one will stop you.

Every time someone says that our environmental regulations are “too harsh” or “stifle business” or are based on “environmentalist alarmism”, I want you to think of lead in the water in Flint.

Every time someone says that we need to “cut wasteful government spending” and “get government out of the way of business”, I want you to think of lead in the water in Flint.

This was not a natural disaster, a so-called “act of God” beyond human control. This was not some “inexplicable” event beyond our power to predict or understand.

This was a policy decision.

The worst thing about this is that people are taking exactly the wrong lesson. I’ve already seen a meme going around saying “government water/free market water” and showing Flint’s poisoned water next to (supposedly) pristine bottled water. I even saw one tweet with the audacity to assert that teacher pensions were the reason why Flint was so cash-starved that they had no choice but to accept poisoned water. The spin doctors are already at work trying to convince you that this proves that government is the problem and free markets are the solution.

But that is exactly the opposite lesson you should be taking from this.

This was not a case of excessive government intervention. This was a case of total government inaction. This was not the overbearing “nanny state” of social democracy they tell you to fear. This was the passive, ineffectual “starve the beast” government you have been promised by the likes of Reagan.

There were indeed substantial failures by governments at every level. But these failures were always in the form of doing too little, of ignoring the problem; and the original reason why Flint moved away from the municipal water supply was to reduce government spending.

(There were also failures of journalism; but does anyone think this means we should get rid of journalism?)

Nevermind that any sane person would say that clean water should be a top priority, one of the last things you’d even consider cutting spending on. Flint’s government found a way to save a few million dollars (which will now cost several billion to repair—insofar as it is even possible), so they did it. Institutionalized racism very likely contributed to their willingness to sacrifice so many people for so little money (would you poison someone for $100? Snyder and his “emergency manager” Earley apparently would).

I say “they”, and I keep saying the “government” did this; but in fact this was not a government action in the usual sense of a democratically-elected mayor and city council. The decision was made by a so-called “emergency manager”, personally appointed by the Governor and accountable to no one else. This is supposed to be a temporary office to solve emergencies, just like the dictator was in Rome until Julius Caesar decided he didn’t like that “temporary” part. Since it’s basically the same office with the same problems, I suggest we drop the “emergency manager” euphemism and start calling these people what they are—dictators.

This is actually a remarkable First World demonstration of the Sen Hypothesis: Famines don’t occur under democracies, because people who are represented in government don’t allow themselves to be starved. Similarly, people who are represented in government are much less likely to allow their water to be poisoned. It’s not that democratic governments never do anything wrong—but their wrongness is bounded by their accountability to public opinion. Every time we weaken democracy in the name of expediency or “efficiency”, we weaken that barrier against catastrophe.

MoveOn has a petition to impeach Snyder and arrest him on criminal charges. I’ve signed it, and I suggest you do as well. This perversion of democracy and depraved indifference must not stand.

The good news is that humans are altruistic after all, and many people are already doing things to help. You can help, too.