I gathered these two examples of the genre from the blog of Brad deLong, economics professor at Berkeley. I hope Prof. deLong will not be offended if I describe him as the packrat of economic theory (net-net, it's a compliment); he seems to publish both the realistic alarms of Joe Romm and the examples I am about to cite with equal gusto, and to do the same with some of the more dubious efforts of Milton Friedman and Martin Feldstein in other areas. In this case, I am going to use the screeds of Robert Pindyck and Martin Weitzman, cited over the last month, as examples of this kind of pseudo-reasonable economic analysis.
Weitzman: The Black Swan Is a Red HerringWeitzman's recurring argument, which he has been making for a long time now, is that a "serious" effect of climate change is unlikely -- he calls it a "black swan" event -- but that because it could have unspecified catastrophic consequences, we should try to plan for it, just as a business plans for unlikely concerns like Hurricane Sandy in its "risk management" policies. Sounds reasonable, doesn't it? Except that, by any reasonable analysis of climate change's fundamental model and how it has played out over at least the last five years, merely catastrophic consequences are far more likely than uncatastrophic ones, and catastrophic consequences beyond what Prof. Weitzman seem to be contemplating are the likeliest of all.
When I first began reading up on the field 6 years ago, it was still possible to argue that the very conservative IPCC 2007 model (whose most likely scenario assuming everyone started doing something about climate change projected a little less than 2 degrees Celsius global temperature increase) was at least plausible. After all, back then, the data on Arctic sea ice, Greenland ice melt, and Antarctic ice melt was still not clearly permanently above the IPCC track -- not to mention the fact that permafrost had not clearly started melting.
However, even at that time it was clear to me from my reading that, in all likelihood, the IPCC and similar models were understating the case. They were not considering feedback effects from Arctic sea ice melt that was well in advance of "around 2100, if that" predictions, nor the effects of permafrost melt that was very likely to come. I would also admit that I thought the effects of climate change on weather in the US and Europe would not be visible and obvious enough for political action until around 2020. Meanwhile, Weitzman (2008) was publishing a paper that argued that climate science simply couldn't provide enough exact predictions about temperature increase and the like to make catastrophic climate change anything but a highly unlikely event in economic modeling.
Well, here we are 7 years later. Prof. Hansen has crystallized the most likely scenario by analyzing data on the last such event, 55 million years ago, and showing that a doubling of atmospheric carbon translates to a 4 degrees Centigrade increase in global temperature, two-thirds from the carbon itself, and 1/3 from related greenhouse-gas emissions and feedback effects. Moreover, a great deal has been done to elaborate on the more immediate weather and "catastrophic" effects of this increase, from Dust-Bowl-like drought in most of the US and much of Europe by the end of this century to sea level rises of at least 10+ feet worldwide -- and extension of salt-water poisoning of agriculture and water supplies to an additional 10 feet due to more violent storms.
I cannot say that I am surprised by any of this. I can also say that I see no sign in Prof. Weitzman's comments that he has even noticed it -- despite the fact that, according to Hansen's analysis, we have already blown past 2 degrees Celsius in long-run temperature increases and are beginning to talk about halting emissions growth at 700 ppm or about 5.5 degrees Celsius. No, according to Prof. Weitzman, catastrophic climate change continues to be a "black swan" event.
So the fundamental assumption of Weitzman's statistical analysis is completely wrong -- but why should we care, if it gets people to pay attention? Except that, as our entire history has confirmed and the last 6 years have reconfirmed, when people are told that something is pretty unlikely they typically take their time to do something about it. As temperature increases mount, the amount of catastrophe to be coped with and the amount to do to avoid further increases mounts exponentially. Just as with comets or asteroids striking the Earth -- but with much less justification -- appeals to "risk management" and "black swans" give us license to do just that. No, when you deny for six years the ever-clearer message of climate science that the climate-change forces causing catastrophic effects are likely, quantifiable on average, and large, you might as well be a climate change denier.
Pindyck: The Discount Rate of DeathI must admit, when I saw the name Pindyck but not the conclusions of his paper, I was prepared to be fascinated. I have always regarded his book on econometric modeling, which I first read in the late 1970s, as an excellent summary of the field, still useful after all these years. You can imagine my surprise when I found him echoing Weitzman about how "climate science simply isn't sure about the extent and impacts of climate change, and therefore we should treat those impacts as unlikely". But my jaw almost became unhinged when I read that "we really have no idea what the discount rate [for a given climate-change-inspired policy action in a cost-benefit analysis] should be", and so we should not even attempt to model the costs and benefits of climate change action except in wide-range probabilistic terms.
Iirc, the discount rate in a business-investment analysis is the rate of return that will justify investing in a project. Now, there are workarounds to estimate probabilities and therefore at least approximate return on investment for a particular investment -- but that isn't the source of my bemusement. Rather, it's the notion that one cannot come up with a discount rate for a climate-change-mitigation investment compared with an alternative, and therefore, one cannot do model-based cost-benefit analysis.
Here's my counter-example. Suppose a company must choose between two investments. One returns 5% per year over the next 5 years. The second contains exposed asbestos; it returns 10% over 5 years, and 20 years from now, everyone in the company during that period will die and the company will fold. What is the discount rate under which the company should choose investment 2? It's a trick question, obviously; the discount rate for investment 2 must be infinite to match its infinite costs, and therefore there is no such discount rate.
But that's my point. The costs of climate change are likely and catastrophic, and so you need a really high discount rate to justify the alternative of "business as usual". The only way you can get a low enough discount rate to justify "business as usual" is to assume that climate change catastrophe is very unlikely. And so, as far as I'm concerned, the "we don't know the discount rate" argument takes us right back to Weitzman's and Pindyck’s "climate change catastrophe is unlikely."
Thus, Pindyck's discount-rate argument is also a red herring, and a particularly dangerous one: It seems to move the playing field from climate science, which climate scientists can easily refute, to the arcana of econometrics. Not only does Pindyck fail on the climate science; he uses that failure to cloak inaction in pseudo-economic jargon. And so, when Pindyck's "analysis" winds up making it even harder than Weitzman's to argue for climate-change action, I regard it as particularly poisonous in effect.
The So-Called deLong SmackdownProf. deLong occasionally publishes an article called a “smackdown” in his blog that seems to correct him on something he clearly views himself as having erred on. Frankly, I don't view the above as a smackdown; although I wish he and Prof. Krugman would admit that they underestimated gold's disadvantages by comparing it to the S&P 500 index rather than the S&P 500 total return index. Rather, I view this as a wake-up call to both of them, if they truly want economics to deal with the real world. As Joe Romm points out, underestimation of effects for the sake of absolute sureness of a minimum effect by the IPCC is not new, nor is an extensive body of literature giving a picture both far more somber and far better reflected in current real-world weather and climate.
But what are we to make of Weitzman and Pindyck, who apparently have been denying that literature, and then using that denial to peddle a far weaker reason for action, for the last six years or so? 3 years, maybe, as the Arctic sea ice shrank to a new dramatic low only in 2012; but six? No; unless we succumb entirely to the old NPR comedy routine “It’s Dr. Science! He’s smarter than you are!”, this behavior is disingenuous and has poisonous effects. And, because any sort of modeling of the medium-term future should take account of economic effects, it hinders real-world planning just as much as real-world action. Heckuva job, economists – not.