Do we need more enviromacroeconomists?

There’s an ongoing spat between Joe Romm’s Climate Progress and Tim Habb’s and John Whitehead’s excellent and well-visited Env-Econ blog. The link here connects the spit balls.

Joe Romm started it, saying things like “economists can‘t walk an chew gum at the same time” and "economists don't understand climate science." The first broad swipe was actually a retort to Rob Stavins who argued that environmental policy and macro stimulus policy were different things that needed different policy tools; the second a retort to Robert Mendehlson, who, well, can say some provocative and controversial things about climate change. Obviously those guys are speaking for themselves, not the profession.

Anyway. I don't care much about the cat fight but I do think there might be something interesting and relevant beneath the surface of Stavins' point and Romm's attack.

John Whitehead and Tim Habb jumped to Stavins’ and profession’s defense. Here's Tim trying to clarify the point:

Joe [Romm] summarizes Rob [Stavins]'s argument as follows:

In short, whatever we do to address climate must not attempt to create jobs. And whatever we do to create jobs should make no effort whatsoever to get off our self-destructively unsustainable economic path. That would not be a Pareto optimum, I guess.

Seriously, Dr. Stavins, just because you haven’t figured out how to walk and chew gum at the same time, doesn’t mean nobody else can.

WRONG. At the risk of putting my words in Rob's mouth (and I have no intention of doing so because that would significantly decrease Rob's intelligence), the point is not that we shouldn't try to meet both goals--good dinner and good shower--but rather, the policy of addressing both at once is STUPID. Determining the best way to make dinner in the shower will result in a bad shower and bad dinner (both outcomes will be suboptimal). There are better ways to reach both goals.

Targeting climate change under the mask of stimulus policy may result in suboptimal stimulus, and targeting stimulus under the mask of climate policy may result in suboptimal climate outcomes.

The critics of Stavin's argument seem to be arguing that the only acceptable way to stimulate the economy is by addressing climate change. The irony is that their own recommendations may very well be counter to their ultimate goal. Good intentions--unintented consequences. That (I think) was Stavin's point. A soggy dinner indeed.


Certainly Rob Stavins doesn’t speak for all economists. I don't understand or appreciate Joe Romm's tone any more than Tim and John do.

But is Rob Stavins (and John and Tim) right about keeping the policy goals separate? For most kinds of market failures I think he would be. This is a classic result in micro: optimal policy dictates that you need as many instruments as you have policy failures. Let’s take an example from environmental economists who are accustomed to externalities. Say you have two of them, pollution and traffic congestion. The best policy taxes pollution at its marginal social cost and driving at it’s marginal congestion cost. One might try to deal with both using a single tax on gas, but that’s an imperfect solution to the problem—it wouldn’t do much to entice people to spread out their commuting times in order to reduce traffic congestion.

But in this case, I wonder: macro and micro are different animals. So different, in fact, that many and perhaps most non-marco economists don’t understand it. For example, here is Eugene Fama, widely believed to be on the short list for the Nobel Prize, mistaking an accounting identity for a behavioral macro theory. And here is Tim Habb applauding the non-bailout of Lehman Bros., a policy decision that pushed the financial crisis and whole macro-economy over the brink. (Macroeconomists were wary, and for good reason, it turned out). These guys are great in their respective micro fields. But they seem way out of their element when it comes to macro.

In the current case there do seem to be synergies between macro and the environmental policy. A good place for the government to spend is on public goods, the realm where environmental economics lives. Of course, it’s always a good idea for government to spend on public goods that pass a basic cost-benefit test. But now we’re in an unusual time when there are additional benefits to government spending, all else the same. This means we should work down the list, toward projects with some public benefits that might not exceed cost in normal times but are worthwhile today when we are at less-than-full employment and monetary policy seems to have its brick wall (unconvential monetary policy, like the Fed monetizing long-term debt nonwithstanding). This, it seems to me, is the way we maximize bang-for-the-buck in government spending.

There are, of course, other considerations, like the size of the multiplier. Projects with more public goodness may or may not have multipliers larger than other spending possibilities. I’m no expert on multipliers—I just know what I read in macro textbooks—that multipliers increase with the marginal propensity to consume. That means multipliers are higher if money is given to poorer people who tend to save very little.

All this suggests an interesting set of tradeoffs when considering stimulus policy, and that public goodness, including environmental public goods, are surely an important consideration. In this case, I think, the market failures cannot be entirely separated. To consider these tradeoffs well we need someone who is both a good environmental economist and a good macroeconomist. To my knowledge, that is a rare animal.

Maybe we need more enviromacroeconomists.

Update: I have not done justice to the nuanced view in Rob Stavins' original quote. In the original quote Rob said "that is an illustration of the fact that it is not always best to try to address two challenges with what in the policy world we call a single policy instrument.” He was far from absolute. Tim Habb was a little less nuanced in defending Stavins' from Romm's attack. I probably should have quoted Stavins, not Habb in my post. And like I said, I agree with Stavins: usually we don't want to address two challenges in a single instrument. I found the debate interesting only because I think the current macro situation may be an exception.

Comments

  1. I'm sure Env-Economics is an excellent blog but I stopped reading it regularly on this point.

    A wind-turbine subsidy is justified in the absence of a carbon price and/or cap, and maybe as an excuse to make up for harder to remove coal/oil-sands subsidies.

    The question was, in the absence of a carbon tax, is a wind production tax credit an okay surrogate? Env-economics answers: no. This answer is pointless all-or-nothing posturing. It shouldn't matter whether the accounting happens before budgets are tabled, or whether the budgets themselves have 3 categories: employment, carbon costing, and overlap. The same pointless arguments are used to suggest NASA should only be about sending people to space or probably that soldiers shouldn't build houses and dykes.

    Fine. call a WPTC targetted to affect employment or grid stability, a new word. But if the absence of a new word prevents recognizing the merits of WPTC, you need to grow up.

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