After the release of a study showing solar now employs more than oil, gas and coal combined.
William Nordhaus has long relied on traditional economic cost-benefit analysis to minimize the costs to the world economy from potential climate change impacts. This article discusses how he now views the increasing risk, the continuing uncertainty, and the likely increasing costs from delayed responses as driving the need for a more rapid effort.
By Richard McCann
Why are we not using Davis’ wealth of human capital to our advantage? Why don’t we assign, and even hire or retain, these individuals to prepare these analyses for commission review?
A recent article in the New York Times by Dierdre McCloskey boldly states that the answer to income inequality is to allow unfettered growth through free market forces. Unfortunately, this thesis comes straight out of the anti-Communist 1950s. McCloskey puts up a strawman that proponents of addressing inequality directly want to redistribute all wealth via grabbing all assets of the wealthy. Her version of how the economy has worked, and the policy proposals to address inequality are incorrect.
As I posted previously, we’ve already run the experiment comparing the performance of a market-based economy (West Germany) to a centrally-planned socialist economy (East Germany), and the market-based more than doubled the output of the socialist one. That said, the past West German (and the current German) is a far cry from a “free market” economy. It was and is heavily regulated with substantial redistributive policies. No one is seriously advocating that the U.S. move to a Communist economy (at least not since the 1950s)–they are suggesting that the U.S. consider policies that could redistribute wealth to improve the welfare of almost everyone.
Increased inequality has been found to decrease economic growth, contrary to McCloskey’s implied assertion. Both the OECD and IMF found negative consequences from increased wealth in the top 20% of households. Other studies show that historic U.S. GDP growth has not been impeded by high marginal tax rates, either for individual or corporate taxes.
She also misses the real reason as to why inequality is a concern. She dismisses it as simple envy. But it’s really about relative political and economic power. The wealthy are able to exert more bargaining power in economic transactions, and their greater influence on the political process is well documented.
As a side note, McCloskey appears to grossly underestimating the share of wealth and income held by the wealthiest segment of U.S. society. Her calculation appears to assume that wealth is distributed evenly across all of the income quintiles (“If we took every dime from the top 20 percent of the income distribution and gave it to the bottom 80 percent, the bottom folk would be only 25 percent better off.”) In fact, a recent estimate by the Federal Reserve Board shows that the top 0.1% of U.S. households hold over 40% of the wealth. That means that redistributing the wealth of just 0.1% will lead to a 40% increase in the wealth of everyone else. I’m not advocating such a radical solution, but it does demonstrate the potential scale of redistributive policies. For example, redistributing just 25% of the wealth of the richest 1% could lead to a 10% increase in the wealth of the remaining 99.9%.
When it’s measured against $18,675 billion ($18.7 trillion) produced by the U.S. economy. The Heritage Foundation issued a report claiming the Obama Administration imposed $107 billion in new burdens over seven years. That sounds like a huge amount, but that’s only 0.6% (six-tenths of a percent) of the economy. And that’s spread over seven years which means that this the reduction in the GDP growth rate was only 0.08% (eight hundredths of a percent) per year. Against an annual average growth rate of over 2%, that’s a trivial amount. Another way to think of it is this way: if you had a dinner bill from Applebee’s for $19, would you not by dinner it if cost a dime more? Probably not–you wouldn’t even notice.
Plus, the HF’s estimate ignores the benefits of those regulations. This graphic from the OMB that shows the estimated relative benefits to costs of regulation.
I won’t dig too deeply into the Heritage Foundation’s analysis other than to make a couple of notes about about alternative perspectives that I am familiar with:
- Heritage Foundation claims that the Clean Power Plan has cost $7.2 billion as the single largest increment. Yet Lawrence Berkeley National Laboratory (which is much better qualified on this issue than the HF) just released a study showing the net financial “costs” of the various renewable portfolio standard (RPS) requirements is actually a benefit $47 to $109 billion. (And that ignores the environmental benefits identified in the report.)
- After the 2008 financial debacle, the industry was going to face increased regulation to reign in its behavior during the previous decade. So increased regulation under Dodd-Frank is to be expected. And the better question might be what is the drag on the economy from high financial-related transaction costs? One study found that transaction costs may be as high at 45% in the U.S. economy. The financial and legal sectors likely are a bigger drag than government regulation.
- On FCC net neutrality, see a previous post about how bigger corporations and economic concentration reduces innovation, which leads to reduced growth. Net neutrality is intended to fight that concentration.