This week heads of government are convening in Paris to work on plans to slow global warming. This meeting comes against a backdrop of weak worldwide economic growth. Many argue that poor growth prospects and tight government budgets preclude aggressive steps to curb greenhouse gas (GHG) emissions. In fact, the exact opposite is true. The weakness of the world economy provides an extraordinary opportunity for bold actions to reduce emissions.
There continues to be enormous confusion in policy circles about the cause of slow growth and continuing high unemployment. Most governments seem to be acting as though the problem is somehow one of excessive government spending. The argument is that if we further cut spending and reduce budget deficits, this will spur private sector investment and consumption.
There was never much of a case for this argument. We entered into a worldwide recession in 2008 because the housing and credit bubbles that were driving growth across most of the world collapsed. This is a demand side story. The housing bubbles in the United States and elsewhere led to a surge in housing construction, with the most affected countries like Spain, Ireland, and the U.S. seeing residential construction reach record shares of GDP. Construction plummeted when the bubble burst and prices came back to earth.
Similarly, the bubble fueled a surge in consumption, as people seeing their house prices double in value suddenly found themselves to be much richer than they expected. The consumption fueled by the bubble-generated housing wealth also disappeared when the bubble burst.
The combined effect of the loss of construction and consumption spending left a huge gap in demand which could not be easily filled. Governments originally sought to fill this gap with stimulus in 2009. By all accounts this stimulus helped to boost growth and reduce unemployment, but by 2010 austerity had come back into style. Governments across the world focused on cutting spending and reducing budget deficits, with the idea that somehow this would sustain growth.
Now that we can look back at five years in which governments have been promoting austerity, we can say conclusively that this is not a path to growth. There has been no uptick in private sector investment or consumption to offset the drop in demand from the government sector. If policy were based on evidence, the idea that austerity was the way to boost private sector demand in a weak economy would be as dead as the argument for a flat earth.
This brings us back to the Paris summit on global warming. The fact that most major economies around the world continue to experience slow growth and lower than normal rates of employment means that they have plenty of room for expansion. If there were more demand in the economy, there would be more growth and employment.
This is exactly the time when we can conduct large-scale spending to reduce greenhouse gas emissions. If the world economy were near full employment, and governments were running modest deficits or even surpluses, then the money spent to curb global warming would have to come at the expense of existing production. At full employment, economies cannot substantially increase output, so if we decide to devote more resources to energy conservation or subsidizing solar and wind energy, we have to reduce other areas of consumption or investment.
The obsession with government budget deficits conceals this basic economic reality. The ability to commit economic resources to curbing global warming depends on the state of the economy, not the accounts of governments.
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When we realize this fact, the need to address global warming presents an economic opportunity. If governments commit themselves to rapidly transitioning to clean energy sources for electricity, to retrofitting homes and businesses to reduce energy use, and to promote mass transit and/or electric cars, they can collectively generate trillions of dollars of additional demand and employ millions of workers who would otherwise be unemployed. We have the idle resources to make these commitments in 2015. That was not true in 2007, before the bubbles burst.
There is one other area where clear thinking would be helpful. Global warming is of course a global problem. This means that a reduction of a ton of carbon emissions is equally valuable regardless of which country does it. If we want to minimize the cost of hitting our emissions targets we should want the reductions to take place in whichever country can do it at the lowest cost.
This will mean in most cases that developing countries like India and China should be doing the most to reduce emissions. However it doesn't make sense that these relatively poor countries should bear the cost. After all the problem is overwhelmingly the result of the GHG that rich countries have spewed into the atmosphere over the last two centuries.
The obvious answer is that rich countries should be paying poor countries to reduce their emissions. In effect, this would mean that we would be willing to provide developing countries with consumption and investment goods to sustain their living standards and growth path even as they divert resources to reducing emissions levels. This is not a matter of altruism; it is a question of simple economic logic. It also happens to be fair.
If our leaders go to the summit next week with clear eyes, much can be accomplished in Paris to protect the planet for future generations.