Why Economists Don’t Get Technology

Beyond Behavior Change

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Neoclassical assumptions make many economists biased in favor of behavior changes and against the large-scale government interventions required to advance nascent energy technologies.

January 14, 2013 | Michael Lind

The gap between the cultures of technology and academic economics was on display at the 2013 meeting of the American Economic Association in San Diego last Friday and Saturday. On Saturday, January 5, Rice University’s Kenneth Barry Medlock moderated a panel entitled “The Future of Energy: Markets, Technology and Policy” that featured Jim Sweeney of Stanford, Dale Jorgenson of Harvard, and Adam Sieminski of the US Energy Information Administration.

Jim Sweeney’s presentation was on “The Future Role of Energy Efficiency and Technology” but he focused on the narrow topic of using incentives or behavioral “nudges” to get people to conserve electricity. He demonstrated that decades of attempts to get people to change their behavior to conserve more electricity had shown meager results—mainly because the savings are such a negligible amount of personal disposable income—but called for renewed efforts anyway.

Harvard’s Dale Jorgenson spoke about “Comprehensive Tax Reform and Energy Policy.”  He pointed out that the externalities of conventional energy generation include health-related effects (mostly caused by pollution from the burning of coal) as well as emissions of CO2 that could contribute to global warming. His prescription, repeating what he had earlier told the Senate Finance Committee, was to abolish all subsidies to particular forms of energy and create a single tax integrating a carbon tax with a tax on unhealthy pollution.

Without intending to, no doubt, the third speaker, Adam Sieminski of the US Energy Information Administration, repudiated what the two speakers had just said—or so I concluded. According to Sieminski, energy efficiency in electricity has risen significantly, chiefly as a result of the Energy Star program and advances in manufacturing. In other words, the problem of excessive electricity use identified by Sweeny is arguably a non-problem, and if it were a genuine problem, direct technological change and/or regulation would be a more effective way of approaching it than the fashionable, variable price-based “nudges” favored by Sweeney.

Sweeney then unwittingly undercut what Jorgenson had just said by pointing out that CO2 emissions by the United States as a whole are expected to remain below 2005 levels until 2040. Yes, you read that correctly—the next forty years! This is chiefly the result, not of the kind of taxation of externalities favored by Jorgenson and other academic economists, but of the technological innovations associated with fracking, which has allowed lower-carbon natural gas to be rapidly substituted for coal in the electrical utility industry. (Readers interested in more data from the EIA can find their latest annual report here).

I don’t mean to be too critical of Professor Sweeney or Professor Jorgenson, both distinguished scholars who are at the top of their fields. But the contrast between their schemes for behavior-based energy conservation and the reality of technology-driven efficiency and CO2 emissions reduction was quite striking. In theory, there is no reason why academic economists should prefer price incentives (“nudges”) or taxes on externalities to other methods of rigging markets to produce efficiency and/or innovation, such as regulation and subsidies. But a deep and widespread bias against direct government action leads today’s neoclassical economists to minimize or reject regulation and subsidies, in favor of tax-based incentives, a category that includes both a carbon tax and cap-and-trade and “nudges” or rewards for conservation-minded electricity consumers.

Here is an example of this bias. If particulate coal pollution causes health problem, an outright ban would seem to be a more straightforward way of dealing with it than a tax, but Jorgenson did not bother even to argue against a regulatory ban. A former leading White House economist expressed the dogmatism of the economic profession a few years ago, when he told a group of which I was a member: “As an economist, I prefer transparency and incentives to regulation.”

This matters because the major progress that has been made toward the goals addressed by Sweeney and Jorgenson, respectively—electrical efficiency and CO2 mitigation—has been achieved overwhelmingly by direct regulation and direct subsidy of particular energy technologies, rather than by the behavior-manipulating, tax-based Rube Goldberg schemes that professors of economists are fond of dreaming up. Indeed, if Congress a few decades ago had done what Professor Jorgenson recommends and eliminated subsidies for particular energy technologies, the government assistance for the oil and gas industry in the development of fracking, the importance of which the Breakthrough Institute has documented, might never have occurred. There might never have been a fracking revolution, there might never have been large-scale substitution of natural gas for coal, and CO2 emissions levels by the US might now be climbing, instead of below 2005 levels for decades to come.

This is not to say that rational people should simply invert the prejudices of academic economists, and favor regulation and subsidy over incentives and taxation of externalities. My point is that if we want guidance about how to achieve progress in energy efficiency and mitigation of climate change, we need to bear in mind the professional biases of today’s academic economics discipline.

 

Photo Credit: Dreamstime


Comments

  • Conservation won’t be enough.  Breakthrough innovations, Black Swans, are needed, but they get no money for development because economists discourage innovation by the way they keep score.  Discounted cash flow and net present value analysis are improperly applied to nonlinear, disruptive tech.  That’s why GE and other giants are impotent in the face of this challenge, and work only on timid incremental tweaks.  Clayton Christensen’s article in the Harvard Business Review “Innovation Killers: How financial tools destroy your capacity to do new things” is explained by prominent Silicon Valley VC Vinod Khosla here http://www.khoslaventures.com/wp-content/uploads/2012/02/InnovatorsEcosystem_12_19_111.pdf

    By Wilmot McCutchen on 2013 01 15

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  • Carbon taxes don’t address the issue of emissions, they merely penalize emitters, who then pass these ‘fines’ on to their consuming customers. Incentives for innovation in GHG reduction is key in encouraging serious research and ‘outside-the-box’ thinking. For instance, while the discussion rambles on about the pros and cons of fossil fuels vs. nuclear power, wind & solar power and others, the world sits on a vast storehouse of energy in various forms of waste we produce.  Whether its a municipally run landfill, agricultural residue in the form of mountains of coffee husks, oilfield cuttings and tailings, or acre upon acre of decomposing trees from pinebeetle infestation, it all represents an enormous global storehouse of energy.  By converting this energy to power, in an efficient and effective manner, with very low GHG emissions and small ecological footprint, we can at very least make progress in the transition and weaning from dependence on fossil fuels.  The other major key, of course is the funding and implementation of an efficient ‘smart grid’ system.  The current grid structure is hopelessly inadequate and inefficient.  Imagine the tremendous impact if a deliverable efficiency of 75% could be achieved!  While we unfortunately do not yet have a grasp on this second half of the equation, our company, FireBox Energy Systems is making great strides towards a comprehensive waste-to-energy power generation solution.  Gradual strengthening of regulation and the political will to implement and enforce will also promote innovation, if coupled with reasonable incentives such as a comprehensive carbon credit program..

    By Glen Kindellan on 2013 01 30

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  • I agree that “behavior-manipulating, tax-based Rube Goldberg schemes” are inane, and that “direct regulation and direct subsidy” are preferable.  However, Lind’s counterfactual argument—-for the benefit of reduced CO2 emissions due to fracking—-is pathetic, because fracking causes a greater number of more intense local environmental problems.  Since fracking is increasingly widespread, these local environmental problems now affect more people at a greater severity than local problems associated with coal combustion.  Furthermore, since fracking permanently poisons aquifers, some of which sustain major cities, the problem is neither local nor reversible.  So, while direct regulation is preferably, it has so far been implemented horribly.

    By Paul on 2013 02 03

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  • I agree that regulation based change is direct and preferable, but it always causes resentment and, groups adversely impacted inevitably fight back. EPA’s long frustrating experience in the regulation driven process is what led them experiment with voluntary programs like the, cap and trade for acid rain, and the hugely successful “energy smart” program for energy efficiency. So, I feel that incentive based “behavior modifying"systems do work when properly designed and implemented.

    The other point in the article is very important. The role of technology in forcing change. Whether, I agree with the risk/benefit issue related to shale gas is irrelevant. There is no question,  that the shale gas technology has been a game changer in terms of power generation and emissions.  I have worked with DOE in energy efficiency and renewable energy. There are numerous and, often not acknowledged, advances DOE funded research has accomplished in those areas. What changes technology will bring in the future is always very difficult to predict and, I believe, it is for that reason that economists and forecasters have such a difficult time in dealing with the technological impacts.

    By Rajat Sen on 2013 02 08

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About Michael Lind

Michael Lind is the Policy Director of the Economic Growth Program at the New America Foundation in Washington, D.C., editor of New American Contract and its blog Value Added, and a columnist for Salon magazine. He is also the author of Land of Promise: An Economic History of the United States. Lind was a guest lecturer at Harvard Law School and has taught at Johns Hopkins and Virginia Tech. He has been an editor or staff writer at the New Yorker, Harper's Magazine, the New Republic and the National Interest. Lind has published a number of books on US history, political economy, foreign policy and politics as well as fiction, poetry and children’s literature.

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