Environmental Economics

Ten Years of Select Economic Data in Graphs

A pet peeve of mine as an economist is giving too much credit to the current quarterback , er...President for [economic] wins and too much blame for [economic] losses.  To give a better picture of what's going on with the economy, here are some graphs of the past decade of select economic data from the St. Louis Federal Reserve.  

I'll leave it to others to draw conclusions.

1) Median Household Income in the U.S. 2007-2017:

2) The Dow Jones Industrial Average 2007-2017:

3) Initial Jobless Claims 2007-2017:

4) Consumer Price Index 1950-2017:

5) Gross Domestic Product 2007-2017

5b) GDP Growth Rate (quarterly--seasonally adjusted) 2007-2017:

6) Unemployment 2007-2017:

6b) Labor Force Participation Rate 2007-2017

Larry Summers: "Republican attacks on the official tax scorekeepers is on par with their climate change denial and support for creationism."

Republican attacks on the official tax scorekeepers is on par with their climate change denial and support for creationism.

— Lawrence H. Summers (@LHSummers) December 4, 2017

When the benefits of regulation are perceived to be zero

Alan Krupnick:

A striking feature of President Trump’s recent energy speech for me is that there is not a word to be found about the environment and health protections. The regulations President Trump wants to rollback are there for that reason. ...

via www.rff.org

The guiding principle for the current administration seems to be to abandon benefit-cost analysis in favor of macroeconomics (i.e., monthly job reports from the BLS) and there is no short-term macroeconomic benefit from environmental regulations. In the long run, however, there are macroeconomic implications. Imagine that the production of goods and services, Q, in the U.S. is governed by an aggregate production function: Q = f(L,K,N) where L is labor, K is physical capital and N is natural capital (i.e., resources). Labor productivity, measured by Q/L, is one of the major indicators of long-term economic growth potential. Labor productivity rises with increases in the physical and natural capital stocks. The quantity of the labor resource depends on worker health, H, which depends on environmental quality. A decrease in environmental quality reduces L which reduces Q (e.g., air pollution makes people sick, sick people take sick days off from work, less work gets done). The health of the labor resource also depends on the access and use of health care. So, sick people could go to the doctor and get well quicker and starting working again.

What? The current administration also wants to cut health care? Well then, nevermind. 

"Massive job losses. Lower wages. Shuttered factories. Brownouts and blackouts."

Human sacrifice, dogs and cats living together... mass hysteria! That last bit is from Ghostbusters, of course, but it fits with the President's vision of the climate-regulated future.The rhetoric is kind of funny except that it isn't funny: 

That's the grim future that President Trump said he was trying to avoid when he announced that the United States will withdraw from the Paris climate change deal.

NERA is a well known economic research firm that is part of Marsh & McLennan, an insurance brokerage and risk management firm.

The study was done on behalf of a conservative public interest group, the the American Council for Capital Formation.

But the author of the study says the conclusions of the report are its own, and were not dictated by the sponsor.

"We never rely on [sponsors] to say what the results will be," said Sugandha Tuladhar, the study's primary author.

NERA's study looked at a variety of scenarios. Trump cited what the report calls the most likely outcome, which was the one that would hurt the economy the most.

For example, according to the report's best-case scenario, the Paris Treaty would wipe out 12,000 manufacturing jobs by 2025 along with 2.3 million jobs overall. Trump had cited the worst outlook -- a loss of 440,000 and 2.7 million overall.

The NERA study doesn't say anything about widespread blackouts and brownouts that would shut down factories. ...

Environmental experts also say the NERA study overestimates how much it will cost to cut carbon emissions.

The problem, these critics argue, is that the study assumes that efforts to cut emissions would fall almost exclusively on heavy industry, such as autos, chemicals, iron and steel and petroleum.

"Those are expensive sectors to get the emissions reductions." said Marc Hafstead, a fellow at Resources for the Future, a think tank that concentrates on energy issues. "There are costs to reducing emissions. And there will be winners and losers. But when those costs are distributed equally, there's a lot less job losses."

Hafstead conducted his own study, which found that the Paris deal wouldn't cause much of a net change in jobs, since losses in sectors such as coal would be balanced by job gains in alternative energy.

"The NERA study grossly overstates the changes in output and jobs in heavy industry," he said.

via money.cnn.com

The problem with sponsor bias is that, even if the sponsor doesn't tell you explicitly the results that they want, they tell you implicitly or you learn from experience. A consulting firm that doesn't deliver on those results doesn't get the next job. Full-time consultants who work for industry or other special interest groups tend to get captured along the way. Even when one does a credible job, the sponsors might cherry pick the results that they like best. 

"U.S. Chamber of Commerce’s Energy Institute Misleads on Climate Action Costs"

It seems that many economists don't think the Paris climate agreement would cost that much but the President, 22 Senators and much of the Republican Party think that it will. The latter group are using a NERA study funded by the usual suspects to suggest that the costs are huge (2.7 million to 6 million in job losses have been quoted by various politicians). Here is the World Resources Institute on three things that are wrong with the NERA study:

A wide body of research shows that well-designed policies achieve reductions in greenhouse gas emissions at reasonable costs. A recent article from the U.S. Chamber of Commerce’s Institute for 21st Century Energy (“Chamber Energy Institute”) uses a NERA Economic Consulting study as evidence that meeting U.S. climate change commitments under the Paris Agreement will cause economic hardship, particularly in the manufacturing sector. High-profile opponents of climate action— such as U.S. Sen John Barrasso — are using the results of this study to attempt to make a case for withdrawing the United States from the global climate accord.

As part of our ongoing effort to promote credible and independent economic modeling, WRI reviewed the Chamber Energy Institute’s article and the associated NERA study. We found that the Chamber’s conclusions are based on a decarbonization pathway that is unrealistic and unnecessarily costly. Rather than providing support for the Chamber Energy Institute’s claim, the NERA study in fact provides further evidence that a market-driven approach can enable the United States to achieve its emissions-reduction targets at a relatively low cost.

Here are three things you need to know:

1. The Chamber Energy Institute’s claims are based on a highly unrealistic and unnecessarily expensive pathway to achieving the U.S. 2025 target. ...
2. The full NERA study shows that the United States can achieve its 2025 targets at a relatively low cost. ...
3. The NERA study assumes that innovation in clean energy slows considerably, which makes climate action appear artificially costly, particularly for 2040 results. ...

Number 1 says that the NERA cost estimates are based on a policy where all of the regulations are in the industrial sector, instead of the lower cost electricity and transportation sectors. Number 2 says that the politicians are cherry picking the worst case scenarios. NERA finds that a carbon tax would trim economic growth from 2.5% to 2.44% (similar to an RFF study). NERA uses the most pessimistic Department of Energy assumption about technological progress in clean energy. 

Talking about saving jobs is good politics but bad economics

The President is expected to announce that the U.S. is pulling out of the "195-nation agreement on climate change reached in Paris in 2015" at 3 pm:

The United States, with its love of big cars, big houses and blasting air-conditioners, has contributed more than any other country to the atmospheric carbon dioxide that is scorching the planet. ...

A decision to walk away from the [Paris] accord would be a momentous setback, in practical and political terms, for the effort to address climate change.

An American exit could prompt other countries to withdraw from the pact or rethink their emissions pledges, making it much harder to achieve the agreement’s already difficult goal of limiting global warming to a manageable level.

It means the United States — the country with the largest, most dynamic economy — would give up a leadership role when it comes to finding solutions for climate change. ...

Mr. Trump, his Environmental Protection Agency administrator Scott Pruitt and Stephen K. Bannon, a top White House adviser, argue that meeting the terms of the Paris accord will strangle the American economy and lead to major job losses. Many in manufacturing and fossil fuel industries also want the United States to leave the pact, but corporate opinion is deeply split. Quitting Paris was a central Trump campaign pledge.

One should add the phrase, "in spite of the available evidence," to the beginning of the last paragraph. On the other hand there is an economic study [pdf] that estimates 6 million in job losses (hat tip: Sen. Rand Paul). Given sponsor bias, my opinion of that study is not high. 

"Analysts: Leaving climate deal likely wouldn't add US jobs"

Associated Press via Fox Business

President Donald Trump has declared that abandoning the Paris climate agreement would be a victory for the American economy.

Many economists have big doubts.

They say the agreement would likely help create about as many jobs in renewable energy as it might cost in polluting industries. Should the United States pull out of the pact and seek to protect old-school jobs in coal and oil, it would risk losing the chance to lead the world in developing environmentally friendly technology — and generate the jobs that come with it. What's more, over the haul, climate change itself threatens to impose huge costs on the economy.

"Withdrawing from the Paris agreement is hardly going to create jobs in the U.S.," says Cary Coglianese, professor at the University of Pennsylvania and editor of the book "Does Regulation Kill Jobs?" ''While specific environmental regulations can sometimes lead to job losses, they also can and do lead to job gains — with the result being roughly a wash." ...

Economists say that leaving the Paris deal and easing efforts to control emissions would hardly deliver a big payoff in jobs. A 2001 study by Eli Berman and Linda Bui, both then at Boston University, found "no evidence that local air quality regulation substantially reduced employment" when Los Angeles imposed stricter environmental restrictions.

"There's no doubt that regulations have costs, but they are not the primary driver of employment," says Michael Greenstone, an economist at the University of Chicago.

"A naïve belief that growth will take care of environmental problems should be questioned"

Following Tim's CNN Politics link:

"The previous administration devalued workers by their policies," the [White House official briefed on the plan] said. "We are saying we can do both. We can protect the environment and provide people with work." 

 

The White House official went on to argue that the best way to protect the environment is to have a strong economy, noting that countries like India and China do less to protect the environment. 

 

"To the extent that the economy is strong and growing and you have prosperity, that is the best way to protect the environment," the official said.

To begin, let's:

1. allow the White House official his/her rhetoric that Obama hates people (since workers are people and you only devalue things that you hate) (and by implication, Trump loves people); 
2. ignore the fact that the U.S. economy was basically at full employment with Obama environmental policies at Trump's January inauguration (people had work); and
3. assume that the Trump budget cuts to the EPA are designed to protect the environment.

Once we've gotten past that (and I really haven't) we can examine the environmental policy being adopted by the Trump administration. And, it turns out that the Trump administration is adopting the Environmental Kuznets Curve as its environmental policy. From Krishna Paudel (pp. 134-135):

As an economy transforms from agrarian-based to industrial-based, the increased concentration of industry causes more pollution. As an economy grows further, the service industry becomes the mainstay, international trade and pollution havens become more prominent, diminishing returns prevail, and more efficient pollution reduction techniques are used in the production process. ...

The body of literature on EKCs suggests that a naïve belief that growth will take care of environmental problems should be questioned. Stock pollutants result in cases of irreversible and sometimes catastrophic impact on the environment. In such cases, one may even see a degenerative EKC. Even if growth can address environmental problems, the cost can be significant if the time frame for abatement adoption is too slow. One also needs to consider the intergenerational welfare implications in choosing the optimal abatement time and policy.

So, the Trump administration considers the U.S. economy to be in its developing stage and ignoring the research on stock pollutants (like climate) and intergenerational welfare. 

A more modern economy faces a tradeoff between environmental quality and economic activity. If people value the environment, then they are willing to accept a loss of economic activity in order to gain more environmental quality. But, the Trump Administration, led by the guys in the Freedom Caucus (yep, the same guys), are placing zero value on the environment. 

"Nation's Economists Quietly Evacuating Their Families"

Is a strong dollar a good thing for the U.S. economy or a bad thing?

As employment stagnates, manufacturing continues its slump, and overall confidence in the U.S. financial system wavers, the nation’s economists have begun abandoning their homes and sending their loved ones overseas. “We’ve noticed a trend among the leading economic thinkers, be they Keynsians, supply-siders, or students of the Austrian school—they’re putting their families on one-way flights out of the country, often leaving half-finished survival bunkers behind them,” Paul Klement, an analyst with the Brookings Institute, told reporters Tuesday. “The flights aren’t on domestic carriers, either. I think they saw something in that last transportation industry report that really spooked them.” At press time, none of the nation’s economists could be reached for comment

via www.theonion.com

I looked it up ... and it turns out a strong dollar makes exports more expensive and imports less expensive. If you are a mercantilist (one who thinks a trade surplus is good for the economy because the national income accounting identity shows that GDP is smaller with a trade deficit) then you think this is a bad thing for the U.S. economy. But, if you have a more nuanced view of the social welfare of people in the U.S., you might consider inexpensive imports to be a good thing for U.S. consumers. Also, you might consider that a trade deficit is a symptom of a strong U.S. economy. If imports are normal goods then higher U.S. income leads to increased demand. Weak export demand might be symptomatic of a weak global economy. 

Greg Mankiw's Blog: You are not entitled to your own facts

Mankiw's title is quaint, given that we are now aware of "alternative facts." :

Readers of this blog will surely want to know about a new website: econofact.org, non-partisan publication designed to bring key facts and incisive analysis to the national debate on economic and social policies. It is written by leading academic economists from across the country who belong to the EconoFact Network, and published by the Edward R. Murrow Center for a Digital World at The Fletcher School at Tufts University."

via gregmankiw.blogspot.com

There are a handful of issues posted there. None of these are focused on environmental economics but they are all very important to the workings of the U.S. economy.