Labor and Employment

Large numbers of unemployed youth have been behind the protests for change in the Middle East. Demographics expert Ragui Assaad says the region must move toward democracy and open economic systems to turn the youth bulge into an opportunity.

Outsourcing remains a contentious political issue as lawmakers, analysts, and business leaders debate its effect on U.S. job creation and the role of corporate tax policy in shipping jobs overseas, explains this Backgrounder.

As European leaders gather to discuss eurozone reforms, German labor union expert Mehrdad Payandeh discusses the benefits of more European integration, but warns austerity policies could tip Germany and the continent back into recession.

The New York Times “Room for Debate” asked seven smart experts whether the United States can compete with China on green technology. Their responses, published yesterday, are well worth reading. I worry, though, that they reflect a peculiar, and increasingly unproductive, debate. The four participants who aren’t academic economists all offer some variation on the claim that green energy can be a central driver of economic growth, and that the United States thus needs a green industrial strategy. I’ve explained on many occasions why I’m skeptical of both assertions. Green technology is important, but there isn’t compelling evidence that it will have big direct consequences for economic growth. I suspect that’s what motivated the three academic economists who were invited to contribute to all offer variations on a similar theme in response: in a free market, countries specialize in areas where they have comparative advantage; as a result, everyone wins. If China’s gaining market share in certain technologies, they argue, that’s ultimately good for all. Here’s the massive problem with that: The global economy is nowhere close to being a free market. Barriers to trade and investment abound. Governments frequently use their power to promote favored firms and discriminate against others. The current situation isn’t the consequence of the free market. Saying “the free market works” is no way to defend it. I have a new article up at Foreign Policy that comes to more mixed conclusions. The central point of my piece is that we ought to stop freaking out so much about supposed Chinese strength in clean energy. Like the academic economists in the New York Times debate, I’m sensitive to the fact that a lot of cleantech migration to China is the result of genuine comparative advantage, and thus doesn’t deserve to be demonized. But I also argue that that’s not the whole picture: in some cases, the shift is the result of anticompetitive Chinese policies that are anything but economically beneficial for the world. That’s not the sort of behavior that should be supported or ignored in the name of free market sensibilities.

Keith Bradsher has a largely excellent article in Wednesday’s Times that’s focused on the (possibly illegal) advantages that the Chinese government is providing its clean energy firms. In reporting the piece, though, he falls prey to a deceptive story about the success of Chinese solar at the expense of U.S. industry. Since it’s a story that regularly shows up in one form or another, it’s important to understand why there’s less than meets the eye. (I’ll have more to say on the broader trade issues in several upcoming articles and posts.) Here’s the basic outline: Chinese solar businesses are booming. In this particular story, Hunan Sunzone Optoelectronics, which exports 95% of its panels, is held up as an example. U.S. businesses, meanwhile, are being hurt. Here the example is Evergreen Solar, which, we’re told, “plans to move the final manufacturing steps for its solar panels from Devens, Mass., to China next summer, eliminating 300 American jobs”. It’s a simple story: China wins, the United States loses. But let’s take a more careful look at what’s going on. There are four basic stages in solar module manufacturing: silicon purification, ingot and wafer manufacturing, cell production, and module assembly. Evergreen Solar, according to its website, derives its competitive advantage through a proprietary low-cost technology for making wafers. Hunan Sunzone Optoelectronics, meanwhile, advertises its focus as being on cell production and module assembly. The two types of firms are not entirely, or even mostly, in competition. This should not be particularly surprising. In what is quickly become one of my favorite obscure academic papers, Arnaud de la Tour and his colleagues at MINES ParisTech took a careful look (PDF) earlier this year at the structure of the Chinese solar industry. They found that China (circa 2008) was strong in the later stages of the solar value chain (27% of the cell and module market), but that it lagged far behind in the earlier stages (2.5% of the ultrapure silicon market and less than 5% of the ingot and wafer market). Those two later stages accounted for 60% of the cost of a module but only 18% of its profit. That’s because they’re less technologically sophisticated than the earlier stages, which accounted for only 40% of the cost but a whopping 82% of the profit. Those higher-value-added steps, in turn, support higher-wage jobs. Seen from this vantage, the Sunzone/Evergreen story is decidedly less depressing. U.S. firms are unable to hold on to cell and module manufacturing (“the final manufacturing steps”) but still have an edge in wafers and silicon, where there is far more profit to be made. Indeed by lowering the cost of turning Evergreen Solar’s wafers into finished solar products, companies like Hunan Sunzone Optoelectronics help grow the market for the things that Evergreen Solar makes. Evergreen may have lost 300 cell and module manufacturing jobs to China, but it’s quite possible – indeed even likely – that it’s gaining (or retaining) high-wage jobs elsewhere in its value chain because of the same low-cost Chinese developments. Indeed if the United States were to insist that all parts of the solar value chain stay in the United States, the result might not be more jobs – it might be less. Unable to reduce the cost of cell and module manufacturing, the cost of solar might stay too high, reducing the overall solar market, and with it jobs in wafer and silicon production too. This dynamic is no different from what happens in many other sectors. China assembles computers that used to be made in the United States. Does anyone think that this means America is losing from the computer and IT revolutions? Of course not: the United States is making its contributions primarily in areas that yield far greater profits, while cheap Chinese computer assembly is enlarging the market for everything computer and IT-related. The same is true in solar: it’s quite possible for the United States and China both to win, with China lowering the cost of relatively low-tech parts of the value chain, in turn growing the market for the higher-tech parts that are still handled by the United States. Of course, this state of affairs isn’t guaranteed to last forever. The MINES ParisTech study looks at 2008 data; things have probably tilted in China’s direction since then, and they may continue to do so, particularly given unfair trade policies from China. But the lesson remains: just because cleantech products don’t get stamped “Made in the USA” in the finishing stages doesn’t mean that the United States can’t win from the clean energy race.

This is a guest post from Jason Scott, Managing Partner and Co-Founder of EKO Asset Management Partners. Thanks to Michael for the opportunity to guest post. I consistently enjoy his often contrarian analysis, but in this case – re the politics of green jobs – I think he’s wrong. First of all, on the pure messaging front, we (the pro “price on carbon” crew) hardly even tried to share the jobs message broadly until the desperate last few weeks. We can argue back and forth on the strategy and tactical shifts but my evidence is this: the media narrative after the bill died was that “enviros” were disappointed. That’s just bunk - INVESTORS AND LARGE PARTS OF THE BUSINESS COMMUNITY RE DISAPPOINTED TOO. Large corporates holding up cap ex for regulatory certainty, sellers of equipment, private equity firms financing projects (think Blackstone not John Doerr) and small businesses starting nascent energy efficiency and manufacturing companies were all very disappointed. Not just greens. Their businesses might die and their access to capital and therefore ability to hire will go away. The fact that the media still thinks it was just “greens” are disappointed means we never broke through on the economic message to the media, much less the general public. Second, putting aside the substance of whether or not one can "prove" the bill would have created jobs, lets talk about the politics of the typical left-right dynamics. Frankly, I’m a bit puzzled by the opposition to carbon pricing from some conservatives. Nothing is more conservative than a market-based solution. Pricing carbon as the economic externality makes sense - it is obstructionism and plain politics, not truly ideological. But most conservatives are painting a market-based solution as a liberal, big government tax on the economy.  (Never mind that today’s seemingly “cheap” gasoline is heavily subsidized by dozens of hidden taxes on consumers from the cost of our military in the Middle East and providing security for oil tankers to the BP Gulf Coast disaster). If politicians are so concerned that putting a price on carbon will hurt taxpayers’ wallets, we have a simple solution: Return the money that the government collects through carbon pricing to taxpayers.  Businesses will become more efficient, pollution will drop, and taxpayers – not government -- will get the revenues. What conservative could oppose that? Now, can I talk about substance just a little bit? THIS REALLY REALLY IS ABOUT JOBS. Regulatory Certainty = Investment = Jobs. And before this November, had we passed a price on carbon, the jobs could have started. Surely by 2012, there will be REAL results from a price on carbon. If that’s dead, in the short term, if we don’t pass extensions of tax and grant programs for efficiency and renewables, the clean economy as we know it in America will die. Every dollar that would have been invested here will go to China, India or Europe and they will get the resulting jobs and we will never get them back. Capital flows like a river, looking for highest returns for a given risk. It doesn’t wait for the US Senate to decide what to do!!! Finally, whether we like cap and trade or not, or the jobs argument or not, a price on carbon would create the revenue (“polluters pay”) to fund energy R&D, Carbon Capture and Storage and address regional disparities in any energy and climate legislation. Plus carbon offsets lower compliance costs and create revenues in impacted sectors like agriculture. But many of the "good guys" thought we could pass an energy bill with a renewable energy standard if we just gave up on the price on carbon. Looks like they were wrong. A price on carbon creates the revenues to pass a real energy climate bill. Dozens of well meaning pieces of legislation that look easy to pass, aren’t. Putting a cap on some carbon emissions is the best chance we have to pass meaningful climate and energy legislation. Messaging snafus be damned!

The demise of the climate bill has me thinking about green jobs again. I’ve never been a big fan of the green jobs argument on its substance. But set that aside for now. The public seems to like green jobs (or at least clean energy jobs). So here’s my question: Why did it not work on the politics? Two answers come to mind. First, voters don’t care about net job creation during a recession. If they’re unemployed, they care about creating new jobs, but if they’re employed , they just care about saving the ones they already have. Say that a climate bill could be shown to yield a net 200,000 jobs by creating 1.2 million new jobs while destroying 1 million others. (These are just made up numbers.) Voters who currently have jobs will focus on the downside risk, and they will really not like it. The fact that a climate bill is a net job creator will not matter to them. Voters without jobs might like the deal, but they are much fewer in number. Basically, cap-and-trade introduces uncertainty at an individual level (though it does the opposite for actual investors); in the current economic climate, that scares people into thinking that they will lose their jobs. Second, once you turn climate policy into jobs policy, you should expect to get stuck with all the traditional left-right orthodoxies that come with it. Conservatives tend to believe that the only tax policies that can generate employment are tax cuts, that the only regulations that can generate employment are ones that you get rid of, and that the only government spending that can generate jobs is spending that doesn’t happen in the first place. (I’m obviously caricaturing a bit.) The climate bill would have combined all three. Is it any surprise that so much of the country had a hard time believing that it would create lots of jobs? This suggests two lessons going forward. First, until the economy recovers considerably, cap-and-trade is going to be a very hard sell. Anything that the public is unfamiliar with adds to uncertainty – and that is precisely what people don’t want. Second, green jobs may poll well across a wide spectrum of voters, but that doesn’t mean that selling regulation or taxation with a jobs message will work.

Andrew Chamberlain has responded at length in two blog posts to my critique of his study of Kerry-Lieberman for the Institute for Energy Research. He gives some useful examples of how utilities might try to game regulators that I’ll engage with below. I’m going, however, to take his points in order, which means that I’ll be negative for a while before I get to that point. The bulk of our debate is over who will benefit from the “public purposes” allowances that are distributed through LDCs. I said that they’d go to public purposes. Chamberlain argues that they’ll actually accrue to Local (electricity) Distribution Company (LDC) shareholders, which would make the bill regressive. I should start by tempering my original comment. I shouldn’t have been so unequivocal: I have no doubt that utilities will find ways to game the system at the margins. That’s life in the world of regulation. The question is whether they will be able to do so in a big way. I still doubt it. That said, I think Chamberlain’s analysis suggests a few ways that the bill could be improved without major changes in order to curb potential abuses. I should also note – and this is very important for the IER bottom line – that while Chamberlain presents a case for why not all of the allowance value routed through the LDCs will necessarily go to public purposes, which is hard to disagree with, he proceeds to model the bill as if none of that value goes to public purposes, which is a far more extreme statement. He never even tries to justify this crucial assumption. On to the specifics. Chamberlain asks (in his first post): “Why not distribute allowance values directly to electricity and natural gas consumers, rather than first granting them to utilities? […] Why not make the system as simple as possible, rather than leaving it open to the possibility of regulatory failure? As we make clear in our study, lawmakers did not follow this approach. That suggests there exists instead a political dynamic at work that has more to do with compensating industries for losses from cap-and-trade than actually compensating consumers, as claimed by advocates of the bill.” The logic, as I understand it, was that distributing revenues through LDCs would correct for regional disparities. I’d personally much rather use the revenues to fund a lump sum rebate, a tax cut, or deficit reduction. But it’s wrong to pretend that no public interest case was made for this approach. “Levi’s argument that shareholders will not economically benefit from free allowances is simply inconsistent with the fact that LDCs and their parent companies themselves have lobbied heavily for these provisions. U.S. Senate records show electricity LDCs have spent millions lobbying for provisions in cap-and-trade bills in recent years. […] If shareholders are expected to receive zero benefit from free allowances, what explains these tremendous lobbying expenditures?” Last I checked, utilities got a lot of cash from the bill other than from free public purpose allowances. More importantly, the bill has huge consequences for their industry, regardless of what’s done with the allowance value. Millions of dollars on lobbying is chump change compared to the stakes involved when Congress is deciding the future of your industry. I don’t doubt that they had an interest in influencing the free allowances – after all, they lobbied for more. But the other impacts on their business is plenty of explanation for their lobbying efforts. “The American Power Act leaves open the possibility that utilities could simply be forced to offer households a credit on a utility bill. That is, rather than allowing consumers to choose how best to spend these benefits, LDCs would have the ability to restrict it for use on utility bills only—guaranteeing LDCs additional revenue they wouldn’t otherwise enjoy. Thus, even in the unrealistic scenario in which regulators are able to perfectly force LDCs to pass benefits on to consumers, the bill does this in a highly inefficient way that favors utilities over consumers.” This doesn’t make sense. Let’s accept the scenario where people received their allowance value in the form of a credit on their utility bills. Chamberlain seems to think that they’d be forced to use it to buy extra electricity, or maybe some widgets, from the LDC. Why wouldn’t they just apply that money to their next bill? Of course, if they did so (which is the reasonable response), the utility wouldn’t benefit at all. (Well, there are some psychological issues to do with framing of electricity consumption decisions, but that’s is not what Chamberlain is getting at.) “In our study, we argue lawmakers cannot control the economic incidence of regulatory policy any more than revenue officials can control the economic incidence of business taxes. Levi argues this analogy is inaccurate since ‘those firms aren’t regulated.’ But from the standpoint of revenue officials, they are very much regulated.” This intentionally misses the point. Businesses are regulated by tax officials like utilities would be regulated by the federal government under cap-and-trade in that they would both be able to insist that their regulated entities paid their bills. But LDCs are also regulated by the states, which control how much they’re allowed to charge customers, while most businesses are not limited by the government in how much they can charge their customers. That is why these two situations are fundamentally different. Pretending that these situations are comparable is wrong. Now to the more interesting and constructive point: “Levi argues that since regulators will know the dollar value of the subsidy granted to each LDC, they can simply verify that an identical amount has been spent on ‘public purposes.’ But this view is highly unrealistic. […] Consider a simple example. Suppose that an electric utility receiving $12 million of free allowances is required by regulators to increase expenditures on ‘public purposes’ by $12 million, as Levi argues. Suppose further that prior to cap-and-trade, this utility operated a $15 million energy conservation program, distributing energy-efficient light bulbs to households and conducting public education campaigns. What in the language of the American Power Act prevents utility managers from simply shifting funds internally, scaling back the energy conservation program to $3 million, freeing up $12 million of existing budget authority for ‘public purposes?’ “ There are enough moving parts here that I find it plausible that the utilities will get away with some slight of hand. But I can’t see anything this extreme happening. Why not? One has to ask why the utility is spending $15 million on an energy conservation program in the first place. It is not usually out of the goodness of their hearts. Typically, it’s because of two things: first, it faces some sort of legal mandate to promote energy conservation, and second, its regulator allows it to pass on the cost of its program to ratepayers. If the utility decides to scale back its program to $3 million, the regulator will also make it scale back the amount it passes through to ratepayers. The total revenue accrued by the utility will still be the same, only this time, $3 million will come directly from the ratepayers, and $12 million will come from the value of the free allowances. Meanwhile, ratepayers will be getting the same energy conservation program. So nothing changes. (I should add that I’d rather not have to deal with such a mess, and a potentially inefficient one at that – it would be better if LDCs were forced to do cash rebates, which seems to be Chamberlain’s preference too.) Perhaps there’s another scenario that’s more persuasive. If there is, I’d be genuinely interested. “Levi argues utilities can be forced to spend the value of free allowances for ‘public purposes.’ But what qualifies as a ‘public purpose’? The text of the American Power Act provides only vague guidelines, and does not require that utilities actually provide rebates to consumers as has been widely assumed by advocates of the bill. Does investing in clean energy sources qualify as a ‘public’ purpose? What if doing so leads to somewhat higher profit margins for utilities?” I find it hard to believe that companies would be allowed to do this. That said, it should be easy to clarify in the bill that LDCs cannot spend the public purpose allowance value on capital investments. “What if the value of free allowances is instead used to establish a ‘rate stabilization fund’ to shield consumers from rate volatility?” This is kind of wacky. Everyone’s suddenly going to start a “rate stabilization fund” and the PUCs are going to allow it? In any case, LDCs aren’t supposed to provide rebates based on the quantity of electricity provided. It’s not clear how a rate stabilization fund could work except in this way. (Yes, the bill says “based solely on the quantity of electricity provided”, but the intent, and hence the likely legal interpretation, is pretty clear.) “What if consumers are granted only a partial rebate check, with the remainder used to upgrade capital equipment that lowers costs and thus increases profits for the firm?” First, if the upgrades lower costs in a way that increases profits, the regulator should force a rate cut. It is not at all clear that the net result of that would be increased profits. Second, this seems like another good reason to explicitly prohibit LDCs from spending the allowance value on themselves. And, by the way, this is decidedly not the sort of scenario that Chamberlain models, given his model assumption that 100% of the allowance value goes to shareholders. On to Chamberlain’s second post, which responds to my concerns about his study’s calculation of employment impacts: “As we make clear in our study, our figures for potential job losses are only order-of-magnitude estimates designed to give a general idea of the size of the employment effects we can expect from a policy that reduces GDP by the amounts predicted by EPA in various years. We don’t model the entire American Power Act bill. Instead, we show about how many jobs can reasonably be expected to disappear if GDP falls by a given amount, holding all else constant.” Fair enough. But when you issue your study with a press release whose headline touts job numbers that include decimal places (and whose body uses three significant figures to talk about the 2015 numbers), the fact that you say something about orders of magnitude deep in the actual study (or use the word “roughly” in the press release) isn’t worth much. If you really mean “100,000-500,000”, then you should say that. “In our study, we assume overall GDP reductions will be felt by industries in proportion to the fossil-fuel carbon intensity of their products. Levi is right that if industries are affected in different proportions than what we assumed, the pattern of employment losses — and potentially the overall total job losses — will differ from our estimates. But it’s easy to see that they won’t differ by much.” Chamberlain then goes on to look at what would happen if sector-by-sector output losses where scaled by sectoral capital intensity, and concludes that job losses would be even higher. Perhaps I should have been clearer: I never said that this was the case. I said that the hardest-hit sectors tend to be more capital intensive. That does not mean that all capital-intensive sectors are harder hit. The impact on the economy is highly heterogeneous. In any case, it’s not actually “easy to see” that the employment impacts “won’t differ by much” if the estimates are done correctly. Chamberlain derives his employment estimates for 2015 from the fact that EPA projects a $39 billion cut from business-as-usual GDP by then. Let’s take a look at a much more careful study of what a bigger $59B GDP cut due to cap-and-trade (ie an even bigger one) might mean for employment: the EIA modeling of what happens in 2020 under Waxman-Markey. What does the EIA project? On the order of 100,000 jobs lost – way less than in the Chamberlain study. (In 2019, by the way, it projects roughly zero jobs lost, despite a bigger hit to GDP than the Chamberlain study works off for 2015.) Why are the numbers so different? Because of how the economic impacts are distributed. In the EIA modeling, energy-intensive sector job losses are largely offset by service sector job increases. Take a look at the Chamberlain Economics sector-by-sector jobs numbers. Every single sector sees a loss. This is implausible, and suggests that there is something wrong with the modeling. In any case, I hope we can keep this conversation going. It’s too rare in the climate world for people who disagree over big picture policy decisions to engage on actual substance, and I appreciate Andrew Chamberlain’s long responses to my original post. I’ll look forward to some replies to this one.

Trevor Houser and his colleagues at the Peterson Institute have a sharp economic analysis of the Kerry-Lieberman energy and climate bill out this morning. Take a look here. (There’s a lot more in it – on emissions, oil consumption, and energy prices – than I discuss here.) This is the first analysis of any climate bill I’ve seen that actually tells a plausible story of the “green jobs” front. Their conclusion is that the bill would add modestly to job growth during the next decade, while depressing it slightly in the decade after, but still leaving a (tiny) net gain over the two-decade period. This is a big deal if it holds up. I’ve been skeptical of green jobs arguments in the past, and still have some big questions about the sensitivity of the authors’ conclusions to a few important assumptions. But the authors make the first serious quantitative case I’ve seen for net job creation from a climate bill. Moreover, they tell a new sort of green jobs story (which will make many environmentalists uncomfortable): the bill, by their estimates, would create 165,000 jobs in the nuclear industry (averaged annually over the 2011-2020 period) but only 19,000 jobs in renewable power. I’ve been quite critical of most “green jobs” analyses for missing the big picture: they normally count jobs created in clean energy and jobs lost in fossil fuels but ignore the negative impacts of higher energy prices and of macroeconomic distortions. They thus tend to inflate job projections, tipping those from negative to positive. Typical economic models, in contrast, incorporate these effects. Those models conclude, I still think correctly, that for an economy at or near full employment, carbon pricing will probably send employment numbers down a smidge. But the problem with those models is that we aren’t anywhere near full employment – and the EIA doesn’t think we’ll be back there until the end of this decade. As Houser and his colleagues argue, this provides an opportunity. If we use carbon pricing to spur replacement of old power plants with new (low-carbon) power generation in the near term, it will create jobs building those plants.  Since there is a lot of slack in labor markets, those won’t necessarily come at the expense of other jobs. The same is true, they argue, for capital: there is a lot of money on the sidelines, and there will be for a while, minimizing the capital market distortions that would normally arise from a big push for new investment in one sector. These arguments have been made at a qualitative level before. But they always needed quantitative analysis to see whether there would be more jobs created than destroyed. Houser and his colleagues conclude that, for 2011-2020, the answer is yes, to the tune of 203,000 on average for any year. For 2021-2030, when the economy is back to normal, the answer reverses (as intuition suggests it should), with an average of 190,000 shaved back off (a number which presumably would increase after 2030). (The authors don’t actually give a number for 2021-2030; they give a net average annual gain of 6,300 for 2011-2030, from which one can infer the 2021-2030 number.) I have one big worry about the analysis: its results appear to be sensitive to some very important assumptions about nuclear power. (I have similar concerns, for roughly the same reasons, about its treatment of carbon capture and sequestration.) Page 12 of the report has an extraordinary plot that shows how jobs are created and destroyed. Here it is: More than half of the clean energy jobs created over 2011-2020 are in nuclear power – the model projects 165,000 average annual jobs added in that sector. (Another 31% are in CCS; CCS and nuclear together yield 85% of the clean energy jobs.) This has a special and potentially big impact on the analysis. Nuclear plants are expensive and take a long time to build. (Ditto for CCS.) The model that the authors use (which is the EIA’s own model) assumes that utilities aren’t allowed to pass on the costs of power plant construction to their customers until the plants are in operation. This means that while construction jobs are created in the coming decade, while the plants are being built, the economy doesn’t feel the hit from higher energy prices until after 2020, when they go into operation. That juices the jobs numbers for the 2011-2020 time period. I can imagine two ways, though, that this assumption might turn out to be wrong. The first is if nuclear construction turns out not to be feasible at the scale and pace that the authors predict. (Same, again, for CCS.) In that case, the bill would presumably need to spur more renewable energy investment (and greater use of offsets). Wind and other renewable facilities are quicker to build. Their costs would thus be passed on to consumers sooner; the net result would be greater near-term job destruction through higher energy prices, and, perhaps, a tipping of the net jobs numbers into negative territory (though one would need to rerun the model to find out). The second way that the nuclear math could prove wrong is if regulators allow utilities to pass on some of their construction costs to ratepayers before the new plants go online. (Yes, once again, this applies to CCS too.) This practice (which is allowed in some states) has been the subject of much debate in the regulatory community. It is also high on the wish list of the nuclear energy lobby. To the extent that it is allowed, higher energy prices would come sooner, just as would be the case with renewable energy investment. The net result would be the same too: bigger numbers in the negative jobs column. Again, it’s impossible to know what the net jobs outcome would be; the authors would need to rerun their model with different assumptions to find out. The biggest take away for me, though, is that you can actually do analysis that acknowledges the investment-pull benefits of carbon pricing in an economy that’s well away from full capacity while respecting the negative effects of higher energy prices, as well as the macroeconomic limits that real labor and capital markets impose. If this holds up to scrutiny by serious economists (a club that I’m not a member of) then it’s an important advance in how we model climate legislation. The EIA, EPA, and CBO need to seriously study this analysis, and make any necessary modifications to their own models, before they pronounce their own judgments on this and future bills.

Paul Krugman’s essay in tomorrow’s New York Times Magazine is generating a lot of buzz. I like it more than most of what’s written on climate and economics these days, but I’ve still got a few reservations. I’ll write about those in a later post (whose title you should be able to guess). But first, here’s what I think Krugman gets right. The basics. All the fundamental on how cap-and-trade works, why its better than command-and-control alternatives, why a perfect carbon tax only exists in theory, why cap-and-trade costs are likely to be limited, etc, are basically perfect. There’s really no need to expand. He focuses on risk and uncertainty as the main reason for action. Advocates of serious action on climate have been burned for so long by people who use uncertainty as an excuse for doing nothing that they’re afraid to talk about the flipside: uncertainty about potentially catastrophic consequences is the biggest reason to act now. People talk about balancing a 2% cost of action with a 5% cost of inaction decades from now (and Krugman goes through those arguments, though see the Stern Review for Exhibit A), but it’s hard to see how stakes like that could justify making climate change a national priority. (Try to think of all the other things that could swing GDP by 5% by the end of the century; it’s a long list.) Krugman makes a far more important point: the costs of serious action are pretty easy to bound, but the potential consequences of not acting are not. That’s a great case for getting moving. It’s also robust to controversy over the finer details of climate science, something that if people didn’t appreciate a year ago, they should now. He doesn’t play into the green jobs / free lunch theme. A climate economics article by a Democrat that doesn’t talk about green jobs or win-win-win-win-win solutions! (Yeah, I’m talking about you, Tom Friedman, but you’re far from alone.) Krugman doesn’t pretend that cap-and-trade will solve our oil problems, yield net job gains, or create extra GDP growth, because none of those claims can be supported by serious economic studies. That’s not to say that none of that is possible – it’s just that we don’t have models that do a good enough job of combining the micro aspects of the energy world with macro constraints on the economy to resolve most of this one way or the other. Krugman admirably sticks to what we know, rather than endorsing speculations that fit with his bottom line. In the next installment, I’ll get to the bad, and maybe the ugly. So stay tuned for some thoughts in carbon tariffs, international action, and perhaps a few other things.