Green New Deal: An Economist’s Perspective by David Montgomery

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One of the newest and one of the oldest radicals in the U.S. Congress, Alexandra Octavio-Cortez and Ed Markey, unveiled a so-called “Green New Deal (GND)” in resolutions they filed in the House of Representatives and the Senate. The rhetoric and expansiveness of the revolution they propose makes their proposal more of a manifesto that a resolution. The areas of public policy that they address include climate change, workplace regulation, universal healthcare, and guaranteed income. More troubling, the manifesto also envisions radical changes in governance, elevating the politics of identity and victimization to the guiding principle of American government.

Since I am an economist and have tried to quantify the impacts of most major energy and environmental policies over the past 40 years, friends have asked how I would go about trying to assess the potential costs and economic impacts of the GND, in particular its determination to eliminate greenhouse gas emissions within 10 years.

Despite the ability of creative analysts to put a number on almost anything, I think that it is impossible to make a reasonable estimate of the cost of the Green New Deal in its envisioned time frame of 10 years using any kind of existing economic model. There are three reasons why this is so:

Having excluded nuclear power, it is impossible to achieve zero greenhouse gas emissions in 10 years without drastic reductions in the availability and reliability of energy

The commitment of the GND to government planning and regulation guarantees that existing economic models will grossly underestimate the cost of achieving its goals

The vision of using climate and other policies to achieve radical redistribution of income and political power will cause changes far outside the data and experience on which models are based.

Economic models are systems of equations and constraints. If one of them is used to estimate the cost of an internally contradictory program, it will simply report that the equations cannot be solved.

What GND calls renewable energy (which excludes nuclear and large scale hydro) now comprises under 10% of U.S. energy supply. Replacing 90% of electric generating capacity, gasoline and diesel fuel, and all natural gas with wind and solar, which are all that is left, is literally impossible. There is no way to store enough energy to maintain supply when the wind is not blowing and the sun is not shining, and diverting enough land to produce biofuels would drastically reduce food supply.

Even if it were possible, diverting enough resources to replacing the existing energy capital stock with renewable assets would reduce our ability to produce consumption goods. This is exactly what happened in the investment-driven 5-year plans of Chairman Mao and Stalin, starving their people along the way. Thus achieving, rather than just imagining, zero emissions would require a combination of starvation, blackouts, and rationing.

The costs of starvation, blackouts and rationing are literally impossible for economic models to capture. Some models, which impose realistic constraints on how rapidly new technologies can be introduced, would simply report that there is no solution to their equations. Others, that allow for extreme changes in consumption of energy and other goods, would give misleadingly optimistic answers about how consumers will substitute purchases of clothing and bicycles for energy. Rationing would be indistinguishable from an extremely high carbon tax, and mortality from lack of energy or food would be ignored except for the effect of a smaller labor force on GDP.

The commitment to central planning and government regulation that pervades the GND would make matters even worse. Case studies that compare specific regulatory approaches to market incentives like carbon taxes, studies have found that assuming that optimal market-based policies are used leads to gross underestimates of costs. For example, studies published in leading journals find that fuel economy standards cost 6 to 10 times more than a carbon tax designed to achieve the same reductions in CO2 emissions.

Since economic models are basically computer programs, they require a very precise description of the policies being modeled. Just like typing an email address, a small error in that specification can be fatal. The GND is vague about specific policies, and achieving its climate goals alone would require a regulatory net covering every decision about energy use and supply. We have collected mountains of data on energy since the 1970s, but still fall far short of the ability to calculate the total cost of retrofits to improve energy efficiency in every building in the country or modifications of all manufacturing processes to reduce emissions.

In the absence of specific details of the policies to be implemented and extensive data on affected economic sectors, models default to assuming that government is omniscient and adopts policies that achieve the same result as a perfect market. That leads inevitably to gross underestimation of the cost of universal government planning envisioned by the GND.

And energy policy is the subject on which we probably have the most information. Other areas of life that the GND would affect include intrusive workplace regulations, free health care, guaranteed income regardless of effort or ability and other proposals that radically change incentives for consumption, investment and labor supply. Modeling the cost of these changes is orders of magnitude harder than energy.

The vision of governance found in the GND compounds the problem. The GND resolutions introduced in Congress establish that the primary goal of GND is income redistribution and transfer of power to what it labels “frontline and vulnerable communities.’’ The beneficiaries of this enshrinement of the politics of identity and victimization as a new form of governance are to include “indigenous communities, communities of color, migrant communities, deindustrialized communities, depopulated rural communities, the poor, low-income workers, women, the elderly, the unhoused, people with disabilities, and youth.” In other words, if you are a healthy white male between 18 and 65 earning a decent living, do not apply.

Not only are policies to be designed to redistribute income toward these groups: they are to be designed by “democratic and participatory processes that are inclusive of and led by frontline and vulnerable communities and workers to plan, implement, and administer the Green New Deal mobilization.” Sounds like the Great Cultural Revolution to me.

What this implies is not just that the GND would implement regulatory approaches with costs far higher than economic models can capture. It implies that climate, health care, labor and other regulations will be designed not just to correct specific concerns, but to achieve income redistribution and empowerment of favored constituencies.

The empirical evidence that the result cannot be modeled adequately is overwhelming. Environmental justice movements have multiplied the cost of achieving California’s climate goals, by demanding inefficient choices and compensation payments in every new initiative. Developing countries demands for compensation and environmentalists objections to cost-effective ways of reducing greenhouse gas emissions have hamstrung global climate negotiations.

Economic models are neither designed for nor capable of being modified to capture the effects of changes in underlying political institutions and property rights. Historical examples can give some idea of the magnitude of harm that might be brought about: Venezuela under Chavez, Argentina under Peron, or Zimbabwe under Mugabe come to mind. Only in retrospect has it been possible to calculate the cost of socialism to the people of those countries.

One particular form of redistribution that would be likely under any policies designed to drive greenhouse gas emissions to zero over a single decade is the bankruptcy of most businesses that now own the capital equipment used to generate and distribute electricity, produce and refine petroleum, or deliver natural gas.

Getting to zero emissions in just 10 years would require shutting down all fossil-fueled power plants, oil refineries, and oil and gas production, and emptying natural gas pipelines and distribution systems. These assets would become valueless, bankruptcies would spread the loss to lenders as well as shareholders, and the financial system would suffer a major shock.

Those bankruptcies would certainly achieve some of the leveling goals of the GND, by destroying the savings and assets of every lender and equity investor in non-renewable energy. Based on the ratio of energy to total domestic investment, that would be destruction of at least 6% of the wealth of the country. The shock would likely be comparable to the recent financial crisis, as financial institutions revised their balance sheets and restricted credit, individual investors retrenched due to their reduced assets, and courts were swamped with bankruptcy filings.

Someone once said that some arguments are best refuted by a good laugh. That was my first reaction on reading descriptions of the GND. Any effort to quantify its costs would have to invent concrete programs to achieve the largely ideological goals of the GND. The harm likely to be done by the GND would greatly exceed any estimates that might be made of the cost of sensible programs. Making those estimates would only give credibility to a program that is at best a flight of fancy and more likely subversive of every institution that has supported the unprecedented prosperity of the United States.

David Montgomery is retired from a career of teaching, government service and consulting, during which he became internationally recognized as an expert on energy, environmental and climate policy.  He has a PhD in economics from Harvard University and also studied economics at Cambridge University and theology at the Catholic University of America,   David and his wife Esther live in St Michaels, and he now spends his time in front of the computer writing about economic, political and religious topics and the rest of the day outdoors engaged in politically incorrect activities.

Letters to Editor

  1. Forest Hansen says

    David Montgomery quite rightly describes implications of the Green New Deal that concerned citizens should be wary of. But while the GND is vulnerable to many of his assessments, he fails to recognize that many of the issues addressed by the GND–global warming, huge–and recent–disparities of wealth, growing costs of health care, businesses not caring for the welfare of their employees–have resulted from the very laissez-faire economic policies that he espouses. It would be interesting to read something positive from him concerning what he thinks could be preferred ways of dealing with these problems (if he even recognizes them as problems).

  2. A well written summary of a lunatic policy. Thank you for your view. Please continue to explain in your clear, concise words, why this will never work! And continue to enjoy your writing (of which I hope to read more) and time outdoors engaged in politically incorrect activities

  3. Alan Boisvert says

    There are NO issues to be argued with the Green New Deal. We simply have NO choice. Any more debate is useless BS.

  4. Accept for the moment the conclusions of the author. Next, consider the conclusions of most scientists with respect to the increasing speed of global climate change and the impact of that change. Rule out anything that government might do to mitigate the magnitude of the change. Accept “that some arguments are best refuted by a good laugh.” What exactly is left? More specifically, is there anything to be done to alter the course of global climate change? If the New Green Deal is so inept an idea, what – if anything – is to be done? Ought we resign ourselves to the status quo, accept that the course of events is immutable, or wait for some invisible hand of market forces to address the environment’s degradation and its consequences?

    The Clean Air Act and the Environmental Protection Agency came into being in 1970 and the howls of outrage about government regulation reverberated. Between 1980 and 2015, total emissions of the major pollutants included in the Act dropped by over 60 per cent and Gross Domestic Product increased.

    One need not be hallucinatory, a socialist, or even an extremist to think that global climate change is immune to efforts to slow or contain its worst effects. Dismissing those ideas without suggesting alternatives to those one finds to be silly changes nothing.

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