Why Economists Don’t Get Technology

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.

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