Streetwise Professor

February 13, 2019

Brave Green World

Filed under: Climate Change,Economics,Politics,Regulation — cpirrong @ 11:21 am

I was considering not commenting on the Green New Deal, given the largely negative–and often incredulous and scathing–response that its release evoked. Including from mainstream Democratic politicians, notably Nancy Pelosi. But most of the cast of thousands currently seeking the Democratic presidential nomination have embraced it to some degree or another, and the criticism has spurred a counterattack from many media precincts. The plan will therefore not be consigned immediately to oblivion, so I will weigh in.

In a nutshell (emphasis on the “nut”), the proposal aims at making the US “carbon neutral” in a mere decade by eliminating the internal combustion engine, retrofitting every existing building in the US, largely eliminating air travel and replacing it with high speed rail, and reducing, er, flatulence from cows by sharply reducing our consumption of meat. No biggie, right?

I find it somewhat ironic that hard on the heels of the announcement of the basics of the GND, the hard left governor of California, Gavin Newsome, said it was necessary to “get real” and recognize that the state’s high speed rail project was a disaster, and to eliminate most of the route.

But “getting real” is not on the GND agenda.

If implemented, the GND would effectively destroy a vast amount of the existing US capital stock, or require its replacement with less productive capital. This will make Americans poorer, in terms of consumption of goods and services.

The proponents of the GND commit the fundamental economic fallacy of arguing that this destruction of productive resources will bolster the economy because of all the jobs that will be created to build a fossil-fuel free power system, electric autos, massive rail systems, etc. The reality (sorry, but I can’t help dealing in reality) is that jobs are a cost, as is the decline in consumption required to make massive investments in new capital to replace existing capital.

The point of producing–including through the use of labor which entails the cost of foregone leisure–is to consume. The GND will unambiguously reduce consumption of goods and services, and make us poorer. GND is crypto-Keynesianism at its worst.

Then there is the detail of paying for this. Here advocates of GND invoke MMT–Magical Monetary Theory. Sorry, MMT actually stands for “Modern Monetary Theory” but my description is far more accurate. MMT is free lunch economics writ large, mistakes accounting identities for economic substance, and commits errors that would be embarrassing for someone in their first session of Econ 101 at one of your more backward community colleges.

The Magical Monetary Theorists argue that an endeavor as massive as the GND can be paid for by printing money.

Really. Don’t believe me? Consider this (rather conclusory) tweet by a major MMT advocate, Stephanie Kelton:

Q: Can we afford a #
? A: Yes. The federal government can afford to buy whatever is for sale in its own currency.

What follows (as is usually the case with MMT arguments) is a verbal discussion of a game of financial Three Card Monte.

Read that again: ” The federal government can afford to buy whatever is for sale in its own currency.” But at what price, dear? At what price? Venezuela has been operating on this principle, and is on pace to achieve record inflation of more than a million percent per year.

All of which obscures the economic essence. Investment today requires people to reduce consumption of goods and services. They only do so in anticipation of consuming more in the future–the “more” is the interest/return on capital from the investment. In private capital markets, the interest rate/return on capital adjusts so that the additional consumption people demand to fund investment is just paid for by the additional production flowing from the assets invested in.

In GND, as noted above, the massive investment will not result in a greater flow of goods and services in the future that will make people willingly reduce their consumption today. Indeed, future consumption in goods and services will decline. The private rate of return will be negative.

And indeed, GND implicitly acknowledges this. Its entire rationale is to reduce carbon emissions, under the theory that these are a “bad.” That is, the payoff from the massive investment (the sacrifice of private consumption) is a lower level of bad carbon emissions.

But to the extent that the reduction of this particular bad is a good, it is a public good. Everyone benefits from a decline in this putative pollutant, regardless of their contribution in paying for the reduction. Meaning that it cannot be financed voluntarily via private capital market transactions, but must be compelled, and paid for through massive taxation.

Printing money only changes the form and/or the timing of the taxation. Inflation is a tax. Moreover, if you borrow/print to pay for investment today, the investment cost not covered by the inflation tax must be paid for by higher taxes in the future. Like the old oil filter commercial: you can pay me now, or you can pay me later. But you must pay.

This is not hard. But reality is not magical.

Furthermore, given that it will be the most massive government program in history, it will entail all of the rent seeking and waste inherent in such programs.

I should also note that it will entail massive redistribution, most notably from rural, exurban, and suburban areas to urban ones as it will dramatically raise the costs of transportation and mobility which are borne disproportionately by those living outside cities. If a few Euro cents/liter fuel tax in France sparked massive protest in non-metropolitan France, just think of what would be in store in the far more sprawling US in response to taxes orders of magnitude larger than those imposed by Manny Macron.

These costs could be justified if the cost of carbon is sufficiently high, in which case the social rate of return could be substantially higher than the private rate of return, and the cost of capital. But even if one believes the most alarmist estimates of the cost of carbon, the adoption of GND by the US would have a modest–and arguably trivial–impact on emissions and temperatures, given the level and growth of emissions elsewhere, especially in China and India. Thus, the social rate of return is almost certainly far below the cost of capital.

The advocates of GND argue that the US needs a grandiose mission. The analogies that they draw are to NASA’s moon landings, or–get this–World War II and the defeat of the Nazis.

But neither Apollo nor even WWII envisioned the radical transformation of society–which is an explicit goal of GND. Apollo was a focused, and by comparison with GND, a relatively moderate expenditure financed in the ordinary course of government business and intended primarily as a campaign in the Cold War, undertaken at a time when the Johnson administration waged another Cold War campaign–Vietnam–with the specific objective of minimizing disruption to US society and the economy. World War II definitely altered every aspect of American life, but these disruptions were also viewed as temporary sacrifices necessary to win the war, to be reversed at its conclusion. Which happened in the event: the US demobilized rapidly, and most wartime expedients (e.g., rationing, the massive employment of women in manufacturing) were scrapped precipitously at its conclusion. As happened in WWI as well: Harding’s 1920 campaign slogan was “return to normalcy” after the extraordinary measures adopted during the war. But GND proposes to be the new normalcy, deliberately destroying the old normalcy.

The original New Deal as implemented was also not intended to be as transformative as its latter day green version (though the more Bolshi elements of the Roosevelt administration did harbor such ambitions).

What are the politics here? This is being pushed by the urban progressive left, epitomized by Alexandria Ocasio-Cortez, D-Brooklyn. (Sorry, Tatyana!) The ubiquitous AOC is the face and voice of the movement, though frankly I doubt it would get the same attention if her face looked like, say, Debbie Wasserman-Schultz, and I wonder whether her Munchkin voice will eventually grate on even her fellow travelers, not to mention the rest of us.

But the main political effect here is to cause deep fissures in the Democratic party. Mainstream elements are in a state of near panic, which they are attempting to conceal, with little success.

And this will redound to the benefit of Donald Trump. Opposition insanity is the greatest gift an incumbent can receive. And methinks this is a gift that will keep on giving, through November 2020.

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  1. The Great Leap Greenward. Careful what you say, you bourgeois running dog. They’ll hunt you down.

    Comment by dearieme — February 13, 2019 @ 2:22 pm

  2. @dearieme. Thanks for your concern. I’m heavily armed. If I go down, I’m not going down alone.

    Comment by cpirrong — February 13, 2019 @ 3:09 pm

  3. I interpreted the Green New Deal as a leftist version of The Wall – a symbol that is not intended to interact with reality.

    Of course it is looking increasingly likely that Trump is actually going to build his wall (arguably a fence) so what do I know?

    Comment by Ryan — February 13, 2019 @ 4:32 pm

  4. When you are a marginally employed as a barmaid becoming a General in a planet-changing crusade is a life affirming event. You’re suddenly Jeanne d’Arc. It’s like becoming an ISIS warrior instead of a schmuck harvesting eggplants and making hummus.

    Comment by The Pilot — February 13, 2019 @ 4:44 pm

  5. @Pilot. To quote Churchill, who said of de Gaulle: “He thinks he’s Joan of Arc, but I can’t get my bloody bishops to burn him.” I can relate.

    Comment by cpirrong — February 13, 2019 @ 9:28 pm

  6. Note, though, that CA governor stopped a little too late – they already spent ~ $6BN on that rail. About the price of that Wall…

    Comment by ETat — February 13, 2019 @ 10:12 pm

  7. There is a whole lot going on on the left in the USA. Sitting on the other side of the big pond, as I do, you sort of see it in a reverse telescope.

    My interpretation of what’s going on is that the centre ground of US politics is colonised by Trump and the Republicans plus a few Democrats. Someone will say, what of the midterms? Well, ruling political parties always seem to do poorly in these half-way elections. The Democrats failed with their Blue Tsunami. But at the margin they did enough to flip the house.

    So, what I see going on here is some fracture by the left as to where to position themselves in order to get over the block of the centre. Go further left. Go wildly left. In terms of politics GND seems like a good idea. How can anyone disagree with the premise?

    We’ve seen similar things in Europe: France’s left is now more Marxist than ever before; same in the UK with Labour. In Germany the SPD lost ground to Greens and AFD. Italy is run by, well an Italian version of the extremes given what’s been going on there.

    As things stand it seems that the Democrats will go into 2020 with a left-leaning candidate. Will that wash with most Americans? I have no idea. Perhaps saving the planet (not ranked highly in any poll of “worries”) is what will get those precious votes. But history suggests otherwise.

    The one thing that could change things is if Trump goes about interrupting his enemy in the midst of making a mistake.

    Interesting times, indeed.


    Comment by Peter Moles — February 14, 2019 @ 3:17 am

  8. The entirely predictable result of electing children to Congress.

    Comment by Andrew Stanton — February 14, 2019 @ 8:16 am

  9. Peter Moles;

    Indeed; tempted to draw a parallel with the 70s in the UK and (our) elections in ’79 and ’83. But, what are the equivalent drivers in the US for the Sterling crisis, inflation, the unions and the Gang of Four?

    It does look like the SDP equivalent has left the Democrat building, with the remaining occupants bickering about how best to turn the lights out.

    Comment by Ducky McDuckface — February 14, 2019 @ 9:45 am

  10. The Green Nut Deal sounds, looks, and feels exactly like the 5-year plans they used to have in the workers’ paradise sovok union

    based on false facts, false reports, and false results

    the idiots on left are happy in their idiocy

    but – There Ain’t No Such Thing As A Free Lunch

    Ocasio-Cortez, the airhead bimbo who is now the World’s Foremost Expert all of a sudden – like Prof. Irwin Corey used to be – still has checks left, so she can’t be out of money

    not even when she couldn’t pay her rent

    Long Live the Cow Farts!

    Comment by elmer — February 14, 2019 @ 10:02 am

  11. Also interesting is that just this week the reports from the dino oil front are all positive. Huge new oil reserves found near a backward, small independent nation which will make it oil rich in a few years. The OPEC market is in the throes of collapse as we continue to over-produce fuels for which there is less and less demand. Our known oil reserves now will last the world until at least 2150, given the current consumption models. We are – awash in fuel. But oh no, we can’t actually burn that oil/fuel, except to build MASSIVE and extremely cost-inefficient new sources of electric power. OBTW, also ‘no nukes’. So a reduction to near zero in carbon burning, and all will be provided by wind, solar, hydro. What a plan, I’m glad the GND and the progs are all on board. Should ensure Republican controlled prez and senate for decades, until I won’t matter anymore.

    Comment by doc — February 14, 2019 @ 11:59 am

  12. “If a few Euro cents/liter fuel tax in France sparked massive protest in non-metropolitan France, just think of what would be in store in the far more sprawling US in response to taxes orders of magnitude larger than those imposed by Manny Macron”

    Worth noting as well that, as a percentage of the previous price, the Macron increases were tiny. And that European care are, in general, far more fuel efficient. So the end-user impact of adding a few cents to US fuel prices is proportionately far higher.

    Comment by HibernoFrog — February 15, 2019 @ 3:47 am

  13. All the counterarguments in all countries to any plan to reduce carbon emissions are always the same: 1) Our emissions are tiny compared to [insert a big country here], 2) it will cost money and ruin our economy, 3) people will not stand for required lifestyle changes (this I do believe – I think stopping climate change globally and having a free, democratic society are at odds). And in the second comment at the latest you get the doubters of climate change in general.

    This post leaves open the two questions I think anyone blogging about climate change should be required to take a stand on. The first should be answered upfront and it is: “Do I believe that climate change is real and is caused by emissions of CO2 and other greenhouse gases into atmosphere by humans?” If you don’t think it’s a problem, why spend your time sniping at the solution? You could just blog about the climate hoax and the rest of us would know right away whether the post is worth reading.

    The second question is: “If I believe climate change is something we should do something about, what is my preferred solution?”

    Comment by Taneli Nevalla — February 15, 2019 @ 7:55 am

  14. Sounds very much like the bright future Vladimir Ulyanov would envision for the proletariat.

    Comment by Ivan — February 15, 2019 @ 11:07 am

  15. @dearieme- thanks for pointing this out: AOC and NGD is right out of Mao’s Great Leap Forward playbook. And instead of mobilizing every peasant (oops, I meant to say Democratic voter)to contribute to the great Party vision with their own backyard steel furnace (and which made useless “steel” anyway), our equivalent contribution will be some sort of renewable energy widget in every house. It’s time to deploy The Perpetual Motion Machine. Isn’t that a zero emission device?

    Comment by Woody — February 15, 2019 @ 1:53 pm

  16. I often find myself falling into the trap of judging Socialists by how well their declared means achieve their declared ends. I know better; their ‘ends’ – whatever fantasies they think will sell – are only excuses for seizing power, and their ‘means’ – more power and pelf and position for themselves in the process of not achieving their ‘ends’ – is always the true end. And by those standards, social parasitism works, however destructive it may be to the host organization.

    Comment by Lark — February 15, 2019 @ 4:42 pm

  17. @Nervalla. It’s self-evident the climate is changing; human activity likely plays a role in that change. The question is it worthwhile to influence human activity in ways likely to reduce living standards; condemn billions to lesser opportunities and cause economic damage by many if the suggested “fixes”? I don’t th8nk so, the money better spent to adapt to change.

    Comment by The Pilot — February 16, 2019 @ 5:48 pm

  18. @Ivan–Old Lenin: “Communism is Soviet Government with electrification of the entire country.” New Lenin: “Communism is progressive government and renewable electrification of the entire country.”

    They will work out about equally as well.

    Comment by cpirrong — February 16, 2019 @ 11:48 pm

  19. They don’t care about real economic analysis. Any means justify the end. See Governor Pritzker in IL. $15 min wage. No cost to that. Abortion on demand. No cost. Sanctuary state and cities. No cost. Failure to pay for pensions, no cost. Their cause is righteous. We are mere peons that are heartless and hate people. Like you, I am well armed. It pays to be well armed in Chicago. you never know if the Machine is coming for you.

    Comment by jeff — February 17, 2019 @ 1:15 pm

  20. populism at its best.

    Comment by alex vugman — February 17, 2019 @ 5:33 pm

  21. An interesting tidbit I got to know recently – AOC was funded by a group called Justice Democrats. Her brother had responded to a JD ad looking for candidates and that’s how her story began. The politics is essentially that of JD which is led by Cenk Uygur and Saikat Chakrabarti and AOC simply happens to be its most charismatic spokesperson.

    Comment by Surya — February 21, 2019 @ 8:35 pm

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