A green recession and full employment | Brussels Blog

A green recession and full employment

posted by on 27th Dec 2014
27th,Dec

Preface

To save the world from climate catastrophe we need a recession because we have to cut consumption that pollutes. We need a green recession.

Below I describe how a green recession can have full employment. I have changed the title from “Poverty, equality, climate and growth” to “A green recession with full employment”.

 Post-crash economics

In university economics  departments there are  courses in “free market theory” but to my surprise  a Google search for a “free market theory courses” at UK universities gave results that were mostly critical.  The 2008 crash seems to have had an impact. For example Economics students aim to tear up free-market syllabus

Economics undergraduates at the University of Manchester have formed the Post-Crash Economics Society, which they hope will be copied by universities across the country. The organisers criticise university courses for doing little to explain why economists failed to warn about the global financial crisis and for having too heavy a focus on training students for City jobs. Joe Earle, a spokesman for the Post-Crash Economics Society and a final-year undergraduate, said academic departments were “ignoring the crisis” and that, by neglecting global developments and critics of the free market such as Keynes and Marx, the study of economics was “in danger of losing its broader relevance”.

Personally, I hope the students don’t take Keynes or Marx too seriously. Economists with a Keynesian bent will lean to expanding the economy at a time when we must cut consumption to avoid a climate disaster. Current consumption might lead to the end of most life on Earth. Marxists believe in the labour theory of value. This links labour value to the right to consume. This has been expressed as “He who does not work, neither shall he eat“.  As far as I remember, Marxists have clever but awkward ways of rigging their theories to make labour the basic measure of value but this needs hard counter-intuitive argument. It also undermines the  non-labour sources of value, such as the air we breathe. Anyway, I shall not  discuss further Marxism here: We are stuck in a capitalist market system of sorts and we should look for ways to change it to make the world a better place, with less poverty and avoid the impending climate disaster. An obvious starting point to discuss the current capitalist “free market” system is the ideas of Milton Friedman and his followers. He has outlined an approach to three key issues: Poverty, equality and climate change.

Poverty and Equality

In  Poverty and Equality, a video from LibertyPen Milton Friedman says

So far a poverty is concerned there has never in history been a more effective machine for eliminating poverty than the free enterprise system and the free market… If you look at the real problems of poverty and denial of freedom of people in this country almost every one of them is a result of government action. Even the poorest people in [the USA] are relatively well-off compared to the conditions in many other countries in the world. What we take as our standard of poverty is above the average income of all the people in the Soviet Union, let alone the people of India and China and many other countries.

He depricated policies aimed at making societies more equal

A society that aims for equality before liberty will end up with neither equality nor liberty but a society that aims first for liberty will not end up with equality but will end up to a closer approach to equality than any other system that has ever been developed.

You can only aim at equality by giving some people the right to take things from others and what ultimately happens when you aim at equality is that A & B should decide what C should do for D except that they take a little bit of commission off on the way.

However, Friedman also proposed reducing poverty with a negative income tax, as Robert H. Frank reported in a New York Times obituary

[Friedman’s] proposal, which he called the negative income tax, was to replace the multiplicity of existing welfare programs with a single cash transfer — say, $6,000 — to every citizen. A family of four with no market income would thus receive an annual payment from the I.R.S. of $24,000.

In Milton Friedman on Income Inequality  Julio H. Cole discusses this

There is a certain tension in Milton Friedman’s views on the issue of freedom versus equality, which was much more nuanced than is commonly assumed. On the one hand, he argued that economic policy should focus on freedom as a primary value; stressing equality per se could lead to economic inefficiency as well as jeopardizing freedom itself.
On the other hand, he famously advocated government-sponsored poverty alleviation by way of the negative income tax, a form of income redistribution that is inconsistent with his general theory of the free-market economy. His justification for this policy, however, was not on egalitarian grounds. Rather, his main motivation seems to have been compassion.
Summary: Milton Friedman believed governments should not try to make society more equal e.g. by taking from the rich to support the poor. However, he believed it right to tax the rich to raise the poor out of poverty thus making society more equal.

 Climate change

The Forbes Magazine article, What Would Milton Friedman Do About Climate Change? Tax Carbon outlined Friedman’s view and how it might have developed. This reported an interview on a radio show where Phil Donahue asked Milton Friedman: “Is there a case for the government to do something about pollution?” Friedmann answered

There’s always a case for the government to do something about it… And the best way to do it is not to have bureaucrats in Washington write rules and regulations saying a car has to carry this that or the other. The way to do it is to impose a tax on the cost of the pollutants emitted by a car and make an incentive for car manufacturers and for consumers to keep down the amount of pollution.

Followers of Friedman elaborated. Michael Greenstone, the Milton Friedman Professor of Economics at the University of Chicago and the director of the Energy Policy Institute of Chicago

What’s happening when we turn on the lights, when the power is derived from a coal plant, or when we drive our car, is that carbon dioxide is emitted into the air, and that’s sprinkling around damages in Bangladesh, London, Houston.

Steve Cicala, an assistant professor in the Harris School of Public Policy said that the market for energy operates without compensating people throughout the world for damages caused by their carbon emissions and says

[Carbon emissions are] theft. That’s a loaded term, but if anyone can come up with a better term for taking something from people without their consent and without compensating them, I’m happy to use that term.

If a carbon tax were used to compensate, those using the most energy (the rich) would pay most and those that suffered most damage (the poor) would receive most compensation. Summary: Milton Friedman believed a carbon tax was the best way to deal with carbon pollution.This would promote equality by taking from the rich to give to the poor.

Taxes, fines, employment and growth

A carbon tax is one way of reducing carbon pollution but is “tax” the best term. After the oil spill in the Gulf of Mexico, the Telegraph reported BP faces up to $18bn fines after Gulf of Mexico ‘gross negligence’ ruling. The oil spill pollution was fined not taxed. Carbon emissions are similarly pollution. A better word to use here is “fine” not “tax”. If we use “carbon fine” rather than “carbon tax” the economics may not change but the political framing does. We can lift some of the guilt about spending “tax payers money” taken from “hard working families”  and be happier spending the “pollution fines” from carbon polluting activities like motoring, eating beef and flying in planes. I don’t want to take issue with substance of proposals from the Citizens Climate Lobby. They have taken a stance with better framing for the  Libertarians in the USA. They argue their preferred scheme is not a “carbon tax” but should be should be called a “carbon fee”

A tax has the primary purpose of raising revenue. By contrast, a fee recovers the cost of providing a service from a beneficiary. Since the CCL advocates for revenue-neutrality and a policy that doesn’t grow the government, we are advocating for a fee, not a tax. However, for purposes of discussion you will find carbon tax and carbon fee used interchangeably, and referring to the same type of legislation.

Their “carbon fee” is my “carbon fine”. Their proposal has be framed so that it “doesn’t grow the government”. The proposals I advocate below are framed to show that it is possible to reduce economic output and have low levels of unemployment. The economic effects of the two schemes may well be more-or-less the same.

 Employment and growth

The Kaya identity predicts global CO2 emissions in relation to population,energy and world economic output. An important term in the identity is the one that relates CO2 emissions and energy (CO2/energy). This term may be reducing but this is not reducing fast enough to offset the effect of increased world economic output. Economic growth is causing increased carbon emissions. If we are to curb carbon emissions quickly we must almost certainly have a period of significantly reduced economic activity (as measured by conventional means) i.e. a recession. Need a recession increase unemployment?

Combining Value Added and Carbon Taxes

I had proposals to create jobs in 1968 (before I was aware of climate change). At that time I lived in Liverpool where a large study, the Merseyside Area Land and Transport Study (MALTS) recommended that a six lane motorway should be built through Liverpool’s nicest park, Sefton Park.  The study’s reports made a pile a metre high with key assumptions buried at near the beginning of the pile.

I was interested in the idea of separate developments for motorists and non-motorists. (I still am. See The parable of the smoking carriages.) This means fewer cars. I was challenged by “If we have less cars what are we going to do with the unemployed car workers?” and developed a revenue-neutral proposal to modify Value Added Tax by giving firms a flat rate rebate for every worker they employ. (See A macroprudental proposal for employment for more details.)  This proposal increases demand for labour at the low-paid end of the labour market. As we know, it is  mostly the low-paid that are unemployed.

This proposal could be combined with a carbon tax and still constrained to be revenue neutral. The Carbon, Value Added and Rebate (CVR) scheme has enough parameters to control an economy for carbon emissions and unemployment at the same time.  A high enough carbon tax will cut carbon emissions and a high enough tax rebate will reduce unemployment – for the low-paid at least.

Compared to our current situation, the proposals can reduce economic output and keep unemployment low. Society would become less unequal. Economic output and inequality may (or may not) be positively linked but more equal societies may be beneficial.

In How economic inequality harms societies, Richard Wilkinson shows that societies that are more equal are happier ones. The CVR scheme can mak societies more equal. A bigger big bonus of less consumption (in its current form) is that a reduction would increases the chance of  the world surviving catastrophic climate change. Do take a quick look at Last Hours and if you have a hour to spend watch the presentation by John Jackson, Common Hour: Ocean Apocalypse Now.

It is now time to place more emphasis on policies that can cut consumption and still maintain good levels of employment. Taxing carbon to subsidise jobs will create more employment – but, if the carbon tax isn’t enough, an increase in the nominal rate of VAT can pay for the subsidies.

(Sorry for mentioning the “S” word again but surely the economics of “rebate” and “subsidy” are the same. Unsurprisingly, the political framing is different.)

Stop Press:

If Oil Really Is Headed For $20 Then Now’s The Time For A Carbon Tax

comment

This is a part of a comment on Neven’s Sea Ice Forum
(https://forum.arctic-sea-ice.net/index.php/topic,1006.msg42483.htm)…

Geoff,

While most people think of a recession as a job killer, the linked website discusses a USA based tax neutral carbon fee & dividend that: (a) redistributes wealth (see the first image), (b) leads to increased employment (see the second & third attached image); and (c) limits domestic consumption associated with fossil fuels.

http://climatecolab.org/web/guest/plans/-/plans/contestId/1300404/planId/2802

Best,
ASLR

My reply…

Thanks for the earlier reply. I hadn’t seen that linked page before. It’s very succinct. I like the quote from George P Shultz

“It’s not a tax if the government doesn’t keep the money.”

I am aware of Carbon Fee with Dividend from the Citizens Climate Lobby and mention it in the section “Taxes, fines, employment and growth” in the piece “We need a green recession and full employment”
http://www.brusselsblog.co.uk/free-markets-poverty-and-equality-and-climate/

Since fininshing the piece a few days ago, I have come to the provisional conclusion (OK, it’s a bit of a guess) that piling on a carbon tax at the required rate will initially cause a contraction in total consumption because green consumption (plus green capital investment) cannot replace the necessary loss of polluting consumption quickly enough. This means GWP (Gross World Product) would fall and cause unemployment.

I propose combining a carbon tax with VAT (a tax on consumption) and a tax rebate (to the employer) to make low-paid labour less expensive to employ. This supports employment in the low-paid section of the community.

However, if a carbon tax/fee/fine could succeed by itself that would be fine. The Citizens’ Climate Lobby do make some of these points (e.g. pricing people into jobs) but they do not go as far as saying that we must actually reduce consumption.

As Neven earlier said “We need to replace consumer culture”. It’s best to do that without creating mass unemployment.

Geoff ( December 31, 2014 at 11:25 am )

You assert that
“If we are to curb carbon emissions quickly we must almost certainly have a period of significantly reduced economic activity (as measured by conventional means) i.e. a recession.”

That doesn’t completely rule out not having a recession, but you don’t explore it further. Suppose instead of unemployment benefits we get unemployed and underemployed people working for companies manufacturing solar panels, inverters, wind turbines, installing these green electricity generation technologies etc.

The cost of the technology is getting close to the point where we can set guaranteed subsidy prices at less than the marginal cost of burning fossil fuels, allow sufficient return for the investors and not make electric cost any more than at present.

Not sure if sufficient investors can be found who are willing to go for a fairly low but guaranteed return. There are job losses in the fossil fuel industries many being well paid, but I would expect lots more jobs in the rapid building stage of these green energy generation.

I could be wrong, but this doesn’t sound like a recession during this rapid building stage. After it is mainly built then there aren’t many jobs in maintaining it and I am not sure what all those people then do.

crandles ( December 31, 2014 at 1:51 pm )

Crandles

Thanks. Avoiding a recession may me possible but by “recession” I did mean deceased Gross World Product (GWP) with significantly less consumption but I believe the CVR proposal could be used to avoid mass unemployment.

You could be right and a fall in GWP could be avoided. That migh not be a fall in global happiness (to use a term that economists seem to be redicovering after 70 odd years). e.g. less cars means more peace.

Your optimism on the rate at which electricity can be decarbonised, I suspect is correct but what about flying and eating beef. Tourism and ruminant farming employ a lot of people. The aim of cutting the cost of labour to the employer is to encourage alternative employment. That would include labour used on green investment schemes.

I think the CVR scheme is more market savvy than simply directing the unemployed to work on green investment but that might not be what you meant.

I sense your reluctance to see higher energy prices. Until energy has a low carbon content, it should be high cost. With decent schemes the tax/fine/fee on pollution would raise the standards of living of low paid who consume and pollute less.

Geoff Beacon ( December 31, 2014 at 2:41 pm )

I think I was saying we might be wise to delay going for a fall in GWP until after we have built a lot of the green energy generation infrastructure we need.

Flying certainly needs high energy density fuels. I am not sure how well this can come from biofuels. Assuming it remains a problem, should be taxed to increase its price. Aviation fuel should be taxed more heavily not less heavily than other fuels as it is now. (Similarly for shipping.)

I would like to know more about whether deserts covered with solar panels might make the land more productive for food and/or biofuels. Seems worth investigating?

Your reply mentions tourism and beef:
Tourism can develop in other ways to reduce use of high cost of flying due to taxes. If beef remains a problem a fee or fine can reduce red meat consumption and increase consumption of grown plant food which I think would create more jobs in agriculture.

The problem, as I see it, is finding enough investment to pour into the green power generation section to get the conversion done quickly rather than needing to create recession and jobs with taxes and subsidies respectively.

After the power conversion, then there are still climate issues: concrete production, land use change … but hopefully the level of problems are more manageable. Recession may also follow if we are not creative in finding new activities. I really don’t know how that would play out and maybe it is just too far ahead to worry too much about it now.

If the main problem is finding sufficient investment, then inducing a recession may not seem the right way forward. However, I could easily be wrong – perhaps recession makes investors go for safe investments rather than speculative ones. Green energy investment with suitable guaranteed subsidies to ensure a safe return might be seen as ideal in a recession and attract the investment necessary. In this case I would suggest you don’t need your job subsidies for quite a while as these safe green investments would create lots of jobs for a decade or two. So carbon fee/fine and dividend might fit this scenario better than your carbon fee/fine and job subsidies?

crandles ( December 31, 2014 at 4:01 pm )

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