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.

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Letters to Editor

  1. Brad Johnson says

    I’m with you on this one David! LOL!!!!

  2. Thank you, Mr. Montgomery,
    Have you had a chance to look at the bi-partisan bill H.R. 763 The Energy Innovation and Carbon Dividend Act of 2019? https://www.congress.gov/bill/116th-congress/house-bill/763 James Hanson, the Climate Scientist, whose 1988 Congressional testimony on climate change helped raise broad awareness of global warming has endorsed this bill with many other individuals, organisations, and municipalities. https://energyinnovationact.org/supporters/ Would you consider endorsing it?
    This policy will reduce America’s emissions by at least 40% in the first 12 years. It puts a fee on fossil fuels like coal, oil, and gas. It starts low and grows over time. It will drive down carbon pollution because energy companies, industries, and consumers will move toward cleaner, cheaper options. The money collected from the carbon fee is allocated in equal shares every month to the American people to spend as they see fit. Program costs are paid from the fees collected. The government does not keep any of the money from the carbon fee.
    I think we need to talk about the viable solutions we have now and support them with all our might.

    • David Montgomery hit the nail on the head in terms of the difficulty transitioning out of fossil fuels quickly – how do we do it without being subversive to “every institution that has supported the unprecedented prosperity of the United States”?
      The answer that many economists have agreed upon is to place a price at the source of fossil fuel extraction, starting out low so as not to shock the economy we depend upon, but set to increase steadily for 20 years so that all these institutions we depend upon have time to prepare for this energy transition. This market signal would provide the innovative environment needed to transition to 21st century energy sources since those who transition faster would win economically. Border correcting the carbon fee would protect American businesses. And allocating the fee equitably to all households helps ordinary families in this transition. That is what the bipartisan Energy Innovation and Carbon Dividend Act does. Please look up H.R. 763. It’s effective, good for people, good for the economy, bipartisan, and revenue neutral.

    • Important. I will check out the link that you provided.

  3. Michael McDowell says

    Well, no surprise at all to read Mr. Montgomery’s alarmist the-sky-will-fall commentary on GND. Mr. M touts himself as a “recognised expert on energy, environmental and climate policy.” Well here’s another one, far more credible and credentialed; a Nobel Economics Laureate, who has held chairs at both MIT and Princeton, and is now at the City University of New York Graduate Center, as Distinguished Professor of Economics, and also holds a prestigious chair at the London Sch0ol of Economics. Dr. Paul Krugman had a far more balanced view of GND, in his New York Times column in December.

    “Is (Green New Deal) actually a good idea?

    Yes, it is. But it’s important to go beyond the appealing slogan, and hash out many of the details. You don’t want to be like the Republicans, who spent years talking big about repealing Obamacare, but never worked out a realistic alternative.

    So what does the Green New Deal mean? It’s not entirely clear, which is what makes it a good slogan: It could mean a number of good things. But the main thrust, as I understand it, is that we should make a big move to tackle climate change, and that this move should accentuate the positive, not the negative. In particular, it should emphasize investments and subsidies, not carbon taxes.

    But wait, shouldn’t we be considering a carbon tax? In principle, yes. As any card-carrying economist can tell you, there are big advantages to discouraging pollution by putting a price on emissions, which you can do either by imposing a tax or by creating a cap-and-trade system in which people buy and sell emission permits.

    It’s Economics 101: A pollution tax or equivalent creates broad-based incentives in a way less comprehensive policies can’t. Why? Because it encourages people to reduce their carbon footprint in all possible ways, from using renewable energy, to conservation, to shifting consumption away from energy-intensive products.

    A carbon tax is, however, a tax — which will upset the people who have to pay it. Yes, the revenue from a carbon tax could be used to cut other taxes, but convincing enough people that they will be better off over all would be a very hard sell. And claims that a carbon tax high enough to make a meaningful difference would attract significant bipartisan support are a fantasy at best, a fossil-fuel-industry ploy to avoid major action at worst.

    The point is that going for a less-than-ideal but salable policy, at least initially, is better than letting the best be the enemy of the good. That was the lesson of health care reform: Single payer had no chance of being enacted under President Barack Obama, but a somewhat awkward public-private hybrid system that preserved employer-based insurance was (just) doable — and 20 million Americans gained coverage.

    Now that the principle of universal coverage is out there, a gradual transition to some version of Medicare for all is starting to look politically possible; but it was important to start with policies that achieved big progress without greatly disrupting people’s lives.

    Can we similarly make big progress on climate change without disrupting Americans’ lives too much? My read of the data says yes.

    The majority of U.S. greenhouse gas emissions come from electricity generation and transportation. We could cut generation-related emissions by two-thirds or more simply by ending the use of coal and making more use of renewables (whose prices have fallen drastically), without requiring that Americans consume less power. We could almost surely reduce transportation emissions by a comparable amount by raising mileage and increasing the use of electric vehicles, even if we didn’t reduce the number of miles we drive each year.

    These are gains that could be achieved with a combination of positive incentives like tax credits and not-too-onerous regulation. Add in investments in technology and infrastructure that supports alternative energy, and a Green New Deal that dramatically reduces emissions seems entirely practical, even without carbon taxes. And these policies would visibly create jobs in renewable energy, which already employs a lot more people than coal mining.

    Of course, some people would be hurt. The 53,000 Americans still employed in coal mining would eventually have to find other employment (and aid for workers in transition industries should be a part of the Green New Deal). Profits of fossil-fuel companies would also go down, although these companies now give almost all their money to the G.O.P., so it’s not clear why Democrats should care.

    Over all, however, Democrats can surely do for climate change what they did for health care: devise policies that hugely improve the situation while producing far more winners than losers. They can’t enact a Green New Deal right away — but they should start preparing now, and be ready to move in two years.”

    A solid intelligent forward looking positive assessment, not the gloomy we-can-do-next-to-nothing scaremongering and demonising by Mr. Montgomery.

  4. Re: “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.”

    Impossible?

    Here are some impossibilities…

    The world’s First Transcontinental Railroad was built between 1863 and 1869 to join the eastern and western halves of the United States. Its completion in six years was considered to be one of the greatest American technological feats.

    The Panama Canal is still considered to be one of the largest and most difficult engineering projects ever undertaken. The United States took over the project from France in 1904. After literally moving mountains, the canal opened 10 years later in August, 1914.

    Uranium fission was discovered in December 1938. The Einstein–Szilárd letter to Franklin Roosevelt warning that Germany might build a fission weapon was sent on August 2, 1939. Only six years later, the US dropped two operational atomic bombs on Japan.

    The WWII-era B-29 Superfortress featured state-of-the-art technology. It was more complex and cost 50% more than the Manhattan Project. The first B-29 prototype made its maiden flight in September, 1942; operational B-29s were ready to go by the spring of 1944.

    When President Kennedy set the goal of landing a man on the moon in September, 1962, the US was far behind the Soviet Union in the nascent space race and most all of the technology needed to get to the moon and back didn’t even exist. Seven years later, the US landed a man on the moon in July, 1969.

    Extrapolating from Mr Montgomery’s crepe-hanging over the supposed impossibilities in Green New Deal, none of these monumental government programs should ever have happened, let alone succeed. But fanatical devotees of modern conservative dogma like Mr Montgomery have made it their primary mission to convince all of us that any sort of public spending is Socialism (OMG!) and is therefore wasteful and doomed to failure, by definition. Their ultimate fear is that success would legitimize the role of government. Proposals in the GND are Kryptonite to them because some version of the initiatives might actually make the world safer, the human condition better, and people will like them.

    But this is déjà vu all over again. It is the same resistance conservatives had, and continue to have, towards virtually any fill-in-the-blank progressive initiative for the last 100 years. It seems we are doomed to repeat these same ideological battles over and over again every generation.

  5. Howard McCoy says

    I seem to remember a certain musician/poet/singer/songwriter penning the following words many, many years ago (and, yes, I’m showing my age now…). Sounds to me like these words are just as important (if not more so) now as they were then.

    Come senators, congressmen, please heed the call
    Don’t stand in the doorway, don’t block up the hall
    For he that gets hurt will be he who has stalled
    The battle outside ragin’
    Will soon shake your windows and rattle your walls
    For the times they are a-changin’

    At least let’s get the dialogue going before it’s too late (or is it too late already?) We must do better than those folks on the other side of the aisle who would rather sit and do nothing or when they do something it eliminates decades of progress and positive-thinking. Enough of the negativity, Professor!!

    Please get out of the new one if you can’t lend your hand
    For the times they are a-changin

    Thank you, Alexandra Octavio-Cortez and Ed Markey for trying to move the dialogue (and us) forward.

  6. Sure we lost the planet, but for a wonderful period we created real stockholder value.

    Egads.

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