In a new mini-documentary released by the Center for Freedom and Prosperity, I explain several of the ways that government spending hinders economic growth.
In a new mini-documentary released by the Center for Freedom and Prosperity, I explain several of the ways that government spending hinders economic growth.
One of Conor Clarke’s comments was that my analysis did not extend beyond the 21st century. He found this problematic because, as Conor put it, climate change would extend beyond 2100, and even if GDP is higher in 2100 with unfettered global warming than without, it’s not obvious that this GDP would continue to be higher “in the year 2200 or 2300 or 3758”. I addressed this portion of his argument in Part I of my response. Here I will address the second part of this argument, that “the possibility of ‘catastrophic’ climate change events — those with low probability but extremely high cost — becomes real after 2100.”
The examples of potentially catastrophic events that could be caused by anthropogenic greenhouse gas induced global warming (AGW) that have been offered to date (e.g., melting of the Greenland or West Antarctic Ice Sheets, or the shutdown of the thermohaline circulation) contain a few drops of plausibility submerged in oceans of speculation. There are no scientifically justified estimates of the probability of their occurrence by any given date. Nor are there scientifically justified estimates of the magnitude of damages such events might cause, not just in biophysical terms but also in socioeconomic terms. Therefore, to call these events “low probability” — as Mr. Clarke does — is a misnomer. They are more appropriately termed as plausible but highly speculative events.
Consider, for example, the potential collapse of the Greenland Ice Sheet (GIS). According to the IPCC’s WG I Summary for Policy Makers (p. 17), “If a negative surface mass balance were sustained for millennia, that would lead to virtually complete elimination of the Greenland Ice Sheet and a resulting contribution to sea level rise of about 7 m” (emphasis added). Presumably the same applies to the West Antarctic Ice Sheet.
But what is the probability that a negative surface mass balance can, in fact, be sustained for millennia, particularly after considering the amount of fossil fuels that can be economically extracted and the likelihood that other energy sources will not displace fossil fuels in the interim? [Remember we are told that peak oil is nigh, that renewables are almost competitive with fossil fuels, and that wind, solar and biofuels will soon pay for themselves.]
Second, for an event to be classified as a catastrophe, it should occur relatively quickly precluding efforts by man or nature to adapt or otherwise deal with it. But if it occurs over millennia, as the IPCC says, or even centuries, that gives humanity ample time to adjust, albeit at a socioeconomic cost. But it need not be prohibitively dangerous to life, limb or property if: (1) the total amount of sea level rise (SLR) and, perhaps more importantly, the rate of SLR can be predicted with some confidence, as seems likely in the next few decades considering the resources being expended on such research; (2) the rate of SLR is slow relative to how fast populations can strengthen coastal defenses and/or relocate; and (3) there are no insurmountable barriers to migration.
This would be true even had the so-called “tipping point” already been passed and ultimate disintegration of the ice sheet was inevitable, so long as it takes millennia for the disintegration to be realized. In other words, the issue isn’t just whether the tipping point is reached, rather it is how long does it actually take to tip over. Take, for example, if a hand grenade is tossed into a crowded room. Whether this results in tragedy — and the magnitude of that tragedy — depends upon how much time it takes for the grenade to go off, the reaction time of the occupants, and their ability to respond.
Lowe, et al. (2006, p. 32-33), based on a “pessimistic, but plausible, scenario in which atmospheric carbon dioxide concentrations were stabilised at four times pre-industrial levels,” estimated that a collapse of the Greenland Ice Sheet would over the next 1,000 years raise sea level by 2.3 meters (with a peak rate of 0.5 cm/yr). If one were to arbitrarily double that to account for potential melting of the West Antarctic Ice Sheet, that means a SLR of ~5 meters in 1,000 years with a peak rate (assuming the peaks coincide) of 1 meter per century.
Such a rise would not be unprecedented. Sea level has risen 120 meters in the past 18,000 years — an average of 0.67 meters/century — and as much as 4 meters/century during meltwater pulse 1A episode 14,600 years ago (Weaver et al. 2003; subscription required). Neither humanity nor, from the perspective of millennial time scales (per the above quote from the IPCC), the rest of nature seem the worse for it. Coral reefs for example, evolved and their compositions changed over millennia as new reefs grew while older ones were submerged in deeper water (e.g., Cabioch et al. 2008). So while there have been ecological changes, it is unknown whether the changes were for better or worse. For a melting of the GIS (or WAIS) to qualify as a catastrophe, one has to show, rather than assume, that the ecological consequences would, in fact, be for the worse.
Human beings can certainly cope with sea level rise of such magnitudes if they have centuries or millennia to do so. In fact, if necessary they could probably get out of the way in a matter of decades, if not years.
Can a relocation of such a magnitude be accomplished?
Consider that the global population increased from 2.5 billion in 1950 to 6.8 billion this year. Among other things, this meant creating the infrastructure for an extra 4.3 billion people in the intervening 59 years (as well as improving the infrastructure for the 2.5 billion counted in the baseline, many of whom barely had any infrastructure whatsoever in 1950). These improvements occurred at a time when everyone was significantly poorer. (Global per capita income today is more than 3.5 times greater today than it was in 1950). Therefore, while relocation will be costly, in theory, tomorrow’s much wealthier world ought to be able to relocate billions of people to higher ground over the next few centuries, if need be. In fact, once a decision is made to relocate, the cost differential of relocating, say, 10 meters higher rather than a meter higher is probably marginal. It should also be noted that over millennia the world’s infrastructure will have to be renewed or replaced dozens of times – and the world will be better for it. [For example, the ancient city of Troy, once on the coast but now a few kilometers inland, was built and rebuilt at least 9 times in 3 millennia.]
Also, so long as we are concerned about potential geological catastrophes whose probability of occurrence and impacts have yet to be scientifically estimated, we should also consider equally low or higher probability events that might negate their impacts. Specifically, it is quite possible — in fact probable — that somewhere between now and 2100 or 2200, technologies will become available that will deal with climate change much more economically than currently available technologies for reducing GHG emissions. Such technologies may include ocean fertilization, carbon sequestration, geo-engineering options (e.g., deploying mirrors in space) or more efficient solar or photovoltaic technologies. Similarly, there is a finite, non-zero probability that new and improved adaptation technologies will become available that will substantially reduce the net adverse impacts of climate change.
The historical record shows that this has occurred over the past century for virtually every climate-sensitive sector that has been studied. For example, from 1900-1970, U.S. death rates due to various climate-sensitive water-related diseases — dysentery, typhoid, paratyphoid, other gastrointestinal disease, and malaria —declined by 99.6 to 100.0 percent. Similarly, poor agricultural productivity exacerbated by drought contributed to famines in India and China off and on through the 19th and 20th centuries killing millions of people, but such famines haven’t recurred since the 1970s despite any climate change and the fact that populations are several-fold higher today. And by the early 2000s, deaths and death rates due to extreme weather events had dropped worldwide by over 95% of their earlier 20th century peaks (Goklany 2006).
With respect to another global warming bogeyman — the shutdown of the thermohaline circulation (AKA the meridional overturning circulation), the basis for the deep freeze depicted in the movie, The Day After Tomorrow — the IPCC WG I SPM notes (p. 16), “Based on current model simulations, it is very likely that the meridional overturning circulation (MOC) of the Atlantic Ocean will slow down during the 21st century. The multi-model average reduction by 2100 is 25% (range from zero to about 50%) for SRES emission scenario A1B. Temperatures in the Atlantic region are projected to increase despite such changes due to the much larger warming associated with projected increases in greenhouse gases. It is very unlikely that the MOC will undergo a large abrupt transition during the 21st century. Longer-term changes in the MOC cannot be assessed with confidence.”
If one wants to develop rational policies to address speculative catastrophic events that could conceivably occur over the next few centuries or millennia, as a start one should consider the universe of potential catastrophes and then develop criteria as to which should be addressed and which not. Rational analysis must necessarily be based on systematic analysis, and not on cherry picking one’s favorite catastrophes.
Just as one may speculate on global warming induced catastrophes, one may just as plausibly also speculate on catastrophes that may result absent global warming. Consider, for example, the possibility that absent global warming, the Little Ice Age might return. The consequences of another ice age, Little or not, could range from the severely negative to the positive (if that would buffer the negative consequences of warming). That such a recurrence is not unlikely is evident from the fact that the earth entered and, only a century and a half ago, retreated from a Little Ice Age, and that history may indeed repeat itself over centuries or millennia.
Yet another catastrophe that greenhouse gas controls may cause is that CO2 not only contributes to warming, it is also the key building block of life as we know it. All vegetation is created by the photosynthesis of CO2 in the atmosphere. In fact, according to the IPCC WG I report (2007, p. 106), net primary productivity of the global biosphere has increased in recent decades, partly due to greater warming, higher CO2 concentrations and nitrogen deposition. Thus , there is a finite probability that reducing CO2 emissions would, therefore, reduce the net primary productivity of the terrestrial biosphere with potentially severe negative consequences for the amount and diversity of wildlife that it could support, as well as agricultural and forest productivity with adverse knock on effects on hunger and health.
There is also a finite probability that costs of GHG reductions could reduce economic growth worldwide. Even if only industrialized countries sign up for emission reductions, the negative consequences could show up in developing countries because they derive a substantial share of their income from aid, trade, tourism, and remittances from the rest of the world. See, for example, Tol (2005), which examines this possibility, although the extent to which that study fully considered these factors (i.e., aid, trade, tourism, and remittances) is unclear.
Finally, one of the problems with the argument that society should address low probability high impact events (assuming a probability could be estimated rather than assumed or guessed) is that it necessarily means there is a high probability that resources expended on addressing such catastrophic events will have been squandered. This wouldn’t be a problem but for the fact that there are opportunity costs associated with this.
According to the 2007 IPCC Science Assessment’s Summary for Policy Makers (p. 10), “Most of the observed increase in global average temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations.” In plain language, this means that the IPCC believes there is at least a 90% likelihood that anthropogenic greenhouse gas emissions (AGHG) are responsible for 50-100% of the global warming since 1950. In other words, there is an up to 10% chance that anthropogenic GHGs are not responsible for most of that warming.
This means there is an up to 10% chance that resources expended in limiting climate change would have been squandered. Since any effort to significantly reduce climate change will cost trillions of dollars (see Nordhaus 2008, p. 82), that would be an unqualified disaster, particularly since those very resources could be devoted to reducing urgent problems humanity faces here and now (e.g., hunger, malaria, safer water and sanitation) — problems we know exist for sure unlike the bogeymen that we can’t be certain about.
Spending money on speculative, even if plausible, catastrophes instead of problems we know exist for sure is like a starving man giving up a fat juicy bird in hand while hoping that we’ll catch several other birds sometime in the next few centuries even though we know those birds don’t exist today and may never exist in the future.
Obama Considering Another Round of Stimulus
With unemployment continuing to climb and the economy struggling along, some lawmakers and pundits are raising the possibility of a second stimulus package at some point in the future. The Cato Institute was strongly opposed to the $787 billion package passed earlier this year, and would oppose additional stimulus packages on the same grounds.
“Once government expands beyond the level of providing core public goods such as the rule of law, there tends to be an inverse relationship between the size of government and economic growth,” argues Cato scholar Daniel J. Mitchell. “Doing more of a bad thing is not a recipe for growth.”
Mitchell narrated a video in January that punctures the myth that bigger government “stimulates” the economy. In short, the stimulus, and all big-spending programs are good for government, but will have negative effects on the economy.
Writing in Forbes, Cato scholar Alan Reynolds weighs in on the failures of stimulus packages at home and abroad:
In reality, the so-called stimulus package was actually just a deferred tax increase of $787 billion plus interest.
Whether we are talking about India, Japan or the U.S., all such unaffordable spending packages have repeatedly been shown to be effective only in severely depressing the value of stocks and bonds (private wealth). To call that result a “stimulus” is semantic double talk, and would be merely silly were it not so dangerous.
For more of Cato’s research on government spending, visit Cato.org/FiscalReality.
Sarah Palin Resigns as Governor of Alaska
Alaska Governor Sarah Palin resigned from office last week with 18 months left in her term, setting off weeklong speculation by pundits.
Cato Vice President Gene Healy comments:
Palin’s future remains uncertain, but it’s hard to see how her cryptic and poorly drafted resignation speech positions her for a presidential run. Nonetheless, her departure presents a good opportunity to reflect on the Right’s affinity for presidential contenders who - how to put this? - don’t exactly overwhelm you with their intellectual depth.
It’s one thing to reject liberal elitism. It’s another thing to become so consumed with annoying liberals that you cleave to anyone they mock, and make presidential virtues out of shallow policy knowledge and lack of intellectual curiosity.
Writing at Politico, Cato scholars David Boaz and Roger Pilon weigh in on what her resignation means for the former Vice-Presidential candidate’s political future:
Will we one day say that her presidency was ‘born on the Fourth of July’? I doubt it. This appears to be just the latest evidence that Sarah Palin is not ready for prime time. The day McCain chose her, I compared her unfavorably to Mark Sanford. Despite everything, I’d still stand by that analysis. At the time I noted that devout conservative Ramesh Ponnuru said ‘Palin has been governor for about two minutes.’ Now it’s three minutes.
Running for president after a single term as governor is a gamble. Running after quitting in the middle of your first term is something else again. If this is indeed a political move to clear the decks for a national campaign, then she needs adult supervision soon. But I can’t really believe that’s what’s going on here. I suspect we’re going to hear soon about a yet-unknown scandal that was about to make continuing in office untenable.
It seems that since her return to the state following the campaign, activist opponents and bloggers have bombarded the governor’s office with endless document requests. And she’s faced 16 ethics inquiries, with no end in sight. All but one have since been resolved, but the politics of personal destruction has cost the state millions, as Palin noted. Add to that the unrelenting, often vicious and gratuitous attacks on her and even on her family, and it’s no wonder that she would say ‘Enough.’ It has nothing to do with ‘quitting’ or with being ‘unable to take the heat.’ It has everything to do with stepping back and saying you’re not willing to put your family and your state through any more. She seems confident that history will judge her more thoughtless critics for what they are. I hope she’s right.
Honduras’ President Is Removed from Office
In reaction to Honduran President Manuel Zelaya’s attempt to stay in power despite term limits set by the nation’s Constitution, armed forces removed him, sending the Latin American nation into political turmoil.
Juan Carlos Hidalgo, an expert on Latin American affairs, comments:
The removal from office of Zelaya on Sunday by the armed forces is the result of his continuous attempts to promote a referendum that would allow for his reelection, a move that had been declared illegal by the Supreme Court and the Electoral Tribunal and condemned by the Honduran Congress and the attorney general. Unfortunately, the Honduran constitution does not provide an effective civilian mechanism for removing a president from office after repeated violations of the law, such as impeachment in the U.S. Constitution. Nonetheless, the armed forces acted under the order of the country’s Supreme Court, and the presidency has been promptly bestowed on the civilian figure — the president of Congress — specified by the constitution.
To be sure, Hidalgo writes, the military action in Honduras was not a coup:
What happened in Honduras on June 28 was not a military coup. It was the constitutional removal of a president who abused his powers and tried to subvert the country’s democratic institutions in order to stay in office.
The extent to which this episode has been misreported is truly remarkable.
The Heritage Foundation has a chart up on its blog, showing defense spending as a percentage of gross domestic product and declaring that “Obama plan cuts defense spending to pre-9/11 levels.”
This is a standard rhetorical device for defense hawks (see the Wall Street Journal editorial page, Mitt Romney and lots of others) so it’s worth pointing out that it’s misleading. The unfortunate truth is that Obama is increasing non-war defense spending this year and seems likely to increase it at least by inflation in the near future.
It’s true that defense spending will probably decline as a percentage of GDP, assuming the economy recovers. But that’s because GDP grows. Ours is more than six times bigger than it was in 1950. Meanwhile, we spend more on defense in real, inflation adjusted terms, than we did then, at the height of the Cold War. The denoninator has grown faster than the numerator.
By saying that defense spending needs to grow with GDP to be “level,” you are arguing for an annual increase in defense spending without saying so directly. That’s the point, of course.
To be straight with readers, charts that show defense spending as a percentage of GDP should either show GDP growth over time or include a line that shows defense spending in real terms. Otherwise they fail to demonstrate that the decline in defense spending as a percentage of GDP is a consequence of growing GDP, not lower spending.
Here’s a chart from the Congressional Budget Office’s report, “The Long Term Implications of the Current Defense Plans,” that does this.
The assumption in analysis like Heritage’s is that defense spending should be a function of economic growth, not enemies and strategies for defending against them. It’s easy to point out that this is strategically and fiscally foolish. And it’s worth noting, as I have on many occasions, that we face a benign threat environment and can cut defense spending massively as a result.
But there is something weirder going on here that warrants mention. Arguing that wealth creation should drive defense spending is to attempt to divorce the military from its strategic rationale. That’s an implicit acknowledgement that defense spending is not for safety. High military spending in this worldview is either an end in itself or a partisan or cultural tool. That’s not much of a revelation, I guess.
Speaking to Bloomberg News, President Obama explicitly embraces a central tenet of supply-side economics, which is the common-sense observation that a growing economy generates additional tax revenue. That’s the good news. The bad news is that almost all of the policies being advocated by the White House expand the burden of government, thus making it more likely that the economy will experience subpar growth. This, of course, will give the politicians in Washington more excuses to further raise tax rates:
President Barack Obama said he is “confident” that he won’t have to raise taxes on most Americans to close the budget deficit as long as the economy picks up steam. “One of the biggest variables in this whole thing is economic growth,” the president said in an interview with Bloomberg News at the White House. “If we are growing at a robust rate, then we can pay for the government that we need without having to raise taxes.”
Desperate for fresh revenues to feed the giant spending appetite of President Obama, Democratic policymakers are talking up ‘tax reform’ as a way to reduce the deficit. Some are considering a European-style value-added tax (VAT), which would have a similar effect as a national sales tax, and be a large new burden on American families.
A VAT would raise hundreds of billions of dollars a year for the government, even at a 10-percent rate. The math is simple: total U.S. consumption in 2008 was $10 trillion. VATs usually tax about half of a nation’s consumption or less, say $5 trillion. That means that a 10% VAT would raise about $500 billion a year in the United States, or about $4,300 from every household. Obviously such a huge tax hit would fundamentally change the American economy and society, and for the worse.
Some fiscal experts think that a VAT would solve the government’s budget problems and reduce the deficit, as the Washington Post noted yesterday. That certainly has not happened in Europe where the average VAT rate is a huge 20 percent, and most nations face large budget deficits just as we do. The hard truth for policymakers to swallow is that the only real cure for our federal fiscal crisis is to cut spending.
Liberals like VATs because of the revenue-raising potential, but some conservatives are drawn to the idea of using VAT revenues to reduce the corporate tax rate. The Post story reflected this in noting “A 21 percent VAT has permitted Ireland to attract investment by lowering the corporate tax rate.” That implies that the Irish government lost money when it cut its corporate rate, but actually the reverse happened in the most dramatic way.
Ireland installed a 10% corporate rate for certain industries in the 1980s, but also steadily cut its regular corporate rate during the 1990s. It switched over to a 12.5% rate for all corporations in 2004. OECD data show that as the Irish corporate tax rate fell, corporate tax revenues went through the roof – from 1.6% of GDP in 1990, to 3.7% in 2000, to 3.8% in 2006.
In sum, a VAT would not solve our deficit problems because Congress would simply boost its spending even higher, as happened in Europe as VAT rates increased over time. Also, a VAT is not needed to cut the corporate income tax rate because a corporate rate cut would be self-financing over the long-term as tax avoidance fell and economic growth increased.
The Pew Research Center has come out with the report of its latest survey on trends in political values. There is much interesting stuff here. For example:
The public continues to broadly support stricter environmental laws and regulation, but its willingness to pay higher prices, and suffer slower economic growth for the sake of environmental protection has declined substantially from two years ago. In the new poll, 51% agree that protecting the environment should be given priority even if it causes slower economic growth and some job losses, down from 66% in 2007. At the same time, the share saying that people should be willing to pay higher prices in order to protect the environment has dropped from 60% in 2007 to 49% currently. This represents a 17-year low point on this measure. Surprisingly, declines since 2007 in support for economic sacrifices to protect the environment have been particularly large among young people and political independents.
These results suggest one reason cap-and-trade is having trouble in Congress. Imagine what might happen if the public actually had to pay more for Obama’s green agenda.
The results are also consistent with the hypothesis that support for government spending should begin to decline almost immediately after Obama took office.
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