Topic: Government and Politics

Nordhaus vs. Stern

When the Stern Review on the Economics of Climate Change was released a few weeks back, I got a bevy of calls from reporters asking what I thought of it.  Of course, it’s hard to say anything intelligent about a 700+ page report that was released only hours earlier, so all I could do was quickly peruse the executive summary, speed-glance through the most pertinent sounding chapters, and opine like the wind.  While I thought I did a reasonable enough job summarizing the main issues at hand given the circumstances, the experience demonstrates a fundamental problem with journalism that is unlikely to ever go away.  To wit, reporters demand an immediate reaction when some new study or paper comes out, and the news cycle doesn’t last long enough to allow for particularly informed and/or careful review of many of these said studies or papers.  By the time that informed and careful response is ready, reporters have moved on to something else.  The deck is stacked in favor of the authors, who seldom have to defend against anything but superficial or relatively poorly-informed criticism in the popular press.

One of the things I was most interested in at the time was what economists who specialized in the economics of climate change had to say about the Stern Review.  The leading academic on this subject is William Nordhaus, an economist at Yale (another is Prof. Robert Mendelsohn at the same university.  Prof. Mendelsohn’s response to the Stern Review will be published in the next issue of Cato’s Regulation magazine).  When I emailed Prof. Nordhaus about the Stern Review, I got a rather short and vague reply.  Nicholas Stern is a good economist, Prof. Nordhaus said, and the report looked like a serious undertaking; the right questions were asked and the answers provided looked interesting.  Beyond that, little else.  Reporters I talked to told me this is what he had sent them as well.  Apparently, Nordhaus was not ready to jump into the discussion yet.

Reporters moved on, but Nordhaus did not.  Over the next several weeks, he apparently went to work on the document and by last week he was ready to offer up some thoughts.  Despite the fact that this highly credentialed economist finds that ”it is impossible for mortals outside the group that did the modeling to understand the detailed results of the Review,” his analysis is illuminating.  While no reporter is likely to write about Nordhaus’ take on Stern now, it is worth your time if you wonder whether an economic disaster of epic proportions really awaits us lest we do something drastic to reduce greenhouse gas emissions.  The answer; probably not.

The gist of the matter is this:  Academic economists who specialize in climate change generally agree that warming - if the “consensus” of scientific opinion as reported by the Intergovernmental Panel on Climate Change is correct - will only reduce global GDP by 0-3% per year and that those costs won’t be evident until well into the future.  The Stern Review, however, reports that losses may total as much as 20% of global GDP if warming is left unaddressed.  Why the disagreement?

While there are a number of issues in play, the main thing explaining the differing calculations is the extent to which future warming is discounted into the present.  Most economist use discount rates ranging from 3-5% when trying to put a price tag on future damages.  Stern argues that this is ethically indefensible - losses tomorrow, or even 200 years from tomorrow, are just as worth worrying about as losses today.  If you apply a 0.1% discount rate (Stern’s figure) rather than, say, a 5% discount rate (my suggestion, which matches the return on Treasury bills - or, put another way, the figure people apply themselves when considering the value of money today versus the value of money tomorrow) or a 3% discount rate (Nordhaus’s figure, although he is happy to confess that other figures are perfectly defensible), then you’re going to get a huge price tag for global warming.  Apply higher discount rates, and the price tag deflates to such an extent that it’s impossible to justify spending anything near what Stern wants us to spend to reduce greenhouse gas emissions.

Is Stern right to argue that we are morally required to treat losses to future generations in exactly the same manner that we treat losses to present generations?  Not necessarily:

Quite another ethical stance would be to hold that each generation should leave at least as much total societal capital (tangible, natural, human, and technological) as it inherited.  This would admit a wide array of social discount rates.  A third alternative would be a Rawlsian perspective that societies should maximize the economic well-being of the poorest generation.  Under this policy, current consumption would increase sharply to reflect likely future improvements in productivity.  Yet a fourth perspective would be a precautionary (minimax) principle in which societies maximize the minimum consumption along the riskiest path; this might involve stockpiling vaccines, grain, oil, and water in contemplation of possible plagues and famines.  Without choosing among these positions, it should be clear that alternative perspectives are possible.

Note that if you are an admirer of political philosopher John Rawls - as most of the Left most definitely is - then you should probably embrace the use of a high discount rate. 

Anyway, what if we use Stern’s discount rate regardless?  Nordhaus thinks it leads to palpably ridiculous policy prescriptions:

Suppose that scientists discover that a wrinkle in the climatic system will cause damages equal to 0.01 percent of [global] output starting in 2200 and continuing at that rate thereafter.  How large a one-time investment would be justified today to remove the wrinkle starting after two centuries?  The answer is that a payment of 15 percent of [the] world’s consumption today (approximately $7 trillion) would pass the [Stern] Review’s cost-benefit test.  This seems completely absurd.

Still happy with a near-zero discount rate?  What if we applied that philosophy in other policy arenas where the same issue arises - like, say, foreign policy?  Nordhaus echoes an argument I made myself several years ago:

While this feature of low discounting might appear benign in climate-change policy, we could imagine other areas where the implications could themselves be dangerous.  Imagine the preventative war strategies that might be devised with low social discount rates.  Countries might start wars today because of the possibility of nuclear proliferation a century ahead; or because of a potential adverse shift in the balance of power two centuries ahead; or because of speculative futuristic technologies three centuries ahead.  It is not clear how long the globe could long survive the calculations and machinations of zero-discount rate military powers.

Nordhaus’s commentary on Stern is only 21 pages double-spaced, and there’s more intellectual goodies therein.  Read it.  Learn it.  Live it.   

New Mexico: Land of Dependence

Found on a New Mexico state web site…

My father-in-law runs the Santa Fe chapter of Habitat for Humanity, a voluntary charity that measures success in terms of how many people it helps to achieve financial independence.  Odd that the state government appears to take pride in doing the opposite. 

The Free Lunch Project may have found its new home.  Crescit eundo, indeed.

Hagel Makes the Case for an Exit Strategy

Sen. Chuck Hagel (R-NE) penned an important op ed in Sunday’s Washington Post Outlook section calling on President Bush to fashion an exit strategy from Iraq.

Hagel’s candor is refreshing, but I have come to expect this from Hagel. Equally impressive is his brevity. He manages to say in a short 739 words what so few of his fellow senators have been willing or able to articulate in twice or three times as many: “The United States must begin planning for a phased troop withdrawal from Iraq.”

The gist of the editorial explains that we must exit Iraq because it is in our interest to do so. He notes the “devastating” costs “in terms of American lives, dollars and world standing.” He points out that ”We are destroying our force structure, which took 30 years to build.” This cost to our military – and therefore to our national security – cannot be quantified. Neither can the cost in lives. But this much we do know: in dollar terms alone, war costs now exceed $300 billion, and are accumulating at a rate of $8 billion per month.

As to Hagel’s pragmatic understanding of the limitations of military force to achieve noble ends, the following passages are instructive:

Militaries are built to fight and win wars, not bind together failing nations. We are once again learning a very hard lesson in foreign affairs: America cannot impose a democracy on any nation – regardless of our noble purpose.

We have misunderstood, misread, misplanned and mismanaged our honorable intentions in Iraq with an arrogant self-delusion reminiscent of Vietnam. Honorable intentions are not policies and plans.

Well said, Senator Hagel. Here’s hoping that some of your fellow senators took time off from leftover turkey and stuffing to read the newspaper.

Janet Reno’s Late-Blooming Concern for Justice

Noted civil libertarian Janet Reno has signed an amicus curiae brief objecting to indefinite detention of alleged enemy combatants.

Maybe Reno would have a more positive attitude if the Bush administration sentenced the detainees to live under Castro’s tyranny, sent them to jail for decades on bogus charges, or simply launched a military assault on the Guantanamo prison and killed everyone inside.

Hoyer’s a Liberal

In at least two stories today (here’s one), the Washington Post described new House Majority Leader Steny Hoyer (D-MD) a “moderate.”

Nonsense. National Journal scores for votes on economic issues show that Hoyer is a consistent liberal. His percentile rank in the House for favoring conservative economic policies was toward the bottom end at 26 percent, 20 percent, and 26 percent for 2003, 2004, and 2005, respectively. His voting record also shows a strong preference for “liberal” social and foreign policy positions.

In his latest Almanac, Michael Barone calls him “fairly liberal,” but does note the exception of Hoyer’s votes in favor of free trade agreements.

What Do They Call the Republican Party?

The New York Times reports:

Stan Greenberg, the Democratic pollster, …said that Republicans held 14 seats by a single percentage point and that a small investment by [Howard] Dean [head of the Democratic National Committee] could have put Democrats into a commanding position for the rest of the decade…”There was a missed opportunity here,” he said. “I’ve sat down with Republican pollsters to discuss this race: They believe we left 10 to 20 seats on the table.”

Rahm Emanuel, the architect of the Democratic victory, “More resources brings more seats into play. Full stop.”

The Democrats did not have the resources to fund both an all-out congressional effort and Howard Dean’s party-building work in red states.

In 2002, 90 percent of Democrats in Congress voted to prohibit fundraising of so-called soft money by the parties. Had that ban not been enacted, both parties would have had millions more to spend in 2006.*

I conclude McCain-Feingold cost the Democrats 10 to 20 seats in the House.

* If we simply compare 2006 Democratic party receipts to their 2002 fundraising for the pre-general election period, the sums are nearly identical. However, that is a false comparison. From 1994 to 2002, the sum of party soft money raised by the two parties doubled for each midterm election. Hence, if we compare 2006 Democratic party funding as it is to 2006 Democratic party funding as it would have been without the soft money ban, we can safely conclude the Democratic party would have millions more to spend in 2006 absent McCain-Feingold.