Hope from the left

One ray of hope in the current political scene comes from the land of deep blue.  However one views the immense expenditure on solar panels, windmills and electric cars, (produced in the US by US union labor, of course), plus forced electrification of heat and cooking, a portion of the blue-state left has noticed that this program cannot possibly work given laws and regulations that have basically shut down all new construction. And a substantial reform may follow.  

I am prodded to write by Ezra Kleins' interesting oped in the New York Times, "What the Hell Happened to the California of the ’50s and ’60s?," a question repeatedly asked to Governor Gavin Newsom. The answer is, of course "you happened to it." For those who don't know, California in the 50s and 60s was famous for quickly building new dams, aqueducts, freeways, a superb public education system, and more.   

Gavin Newsom states the issue well. 

"..we need to build. You can’t be serious about climate and the environment without reforming permitting and procurement in this state.”

You can't be serious about business, housing, transportation, wildfire control, water, and a whole lot else without reforming permitting and procurement, but heck it's a start. 

Hitting these [climate] goals requires California to almost quadruple the amount of electricity it can generate — and shift what it now gets from polluting fuels to clean sources. That means turning huge areas of land over to solar farms, wind turbines and geothermal systems.

or, heaven forbid, nuclear, which among other things works at night.  I don't think most of San Francisco's progressive gentry really understand how massive their envisioned "transition" really is. 

It means building the transmission lines to move that energy from where it’s made to where it’s needed. It means dotting the landscape with enough electric vehicle charging stations to make the state’s proposed ban on cars with internal combustion engines possible. Taken as a whole, it’s a construction task bigger than anything the state has ever attempted, and it needs to be completed at a speed that nothing in the state’s recent history suggests is possible....John Podesta, a senior adviser to President Biden on clean energy, said in a speech last month. “We got so good at stopping projects that we forgot how to build things in America.”

Newsom:

“I watched as a mayor and then a lieutenant governor and now governor as years became decades on high-speed rail,” he said. “People are losing trust and confidence in our ability to build big things.

Losing? That train left long ago, unlike the high speed one. 

The part that really caught my eye: Klein complains that Newsom's current proposal is 

 a collection of mostly modest, numbingly specific policies. When a lawsuit is brought under the California Environmental Quality Act, should all emails sent between agency staff members be part of the record or only those communications seen by the decision makers? Should environmental litigation be confined to 270 days for certain classes of infrastructure? Should the California Department of Transportation contract jobs out by type, or does it need to run a new contracting process for each task? Should 15 endangered species currently classified as fully protected be reclassified as threatened to make building near them less onerous? And on it goes.

Maybe, as Klein suggests, this is a measure of the bill being small and marginal. But I think the point is deeper: this is what regulatory reform is all about. Which is why regulatory reform is so hard. "Stimulus" is easy to understand: Hand out money. Regulatory reform, especially reform to stop the litany of lawsuits and dozens of veto points which are the central problem in the US, is all about the mind-numbing details.  "should all emails sent between agency staff members be part of the record" sounds like a mind-numbing detail. But think how these lawsuits work. Is discovery and testimony going to allow this entire record to be searched for an email where staffer Jane writes to staffer Bob one line that can be used to restart the whole proceedings? "Only" 270 days rather than 10 years? That matters a lot. Contracting process, which can be the basis for a lawsuit. 

I'll retell a joke. Fixing regulation is a Marie-Kondo job; long hard and unpleasant, each drawer at a time. 

The article is also interesting on the fight within the left. There is really a deep philosophical divide. On the one hand are basically technocrats who really do see climate as an issue, and want to do something about it. They believe their own ideology that time matters too. If it takes 10 years to permit every high power line, Al Gore's oceans will boil before anything gets done. 

On the other side are basically conservatives and degrowthers. "Conservative" really is the appropriate word -- people who want to keep things exactly the way they are with no building anything new. Save our neighborhoods they say, though those were built willy nilly by developers in the 1950s. (Palo Alto now applies historic preservation to 1950s tract houses, and forbids second stories in those neighborhoods to preserve the look and feel. How can you not call this "conservative?") "Degrowth" is a self-chosen word for the Greta Thunberg branch of the environmental movement. Less, especially less for the lower classes, not really for us who jet around the world to climate conferences. Certainly do not allow the teeming billions of India and Africa to approach our prosperity. I think "deliberate impoverishment" is a better word. Some of it has an Amish view of technology as evil. And some is, I guess, just habit, we've been saying no to everything since 1968, why stop now. 

Klein characterizes the opponents: 

More than 100 environmental groups — including the Sierra Club of California and The Environmental Defense Center — are joining to fight a package Newsom designed to make it easier to build infrastructure in California.

... opposition groups say that moving so fast “excludes the public and stakeholders and avoids open and transparent deliberation of important and complicated policies.”

...The California Environmental Justice Alliance sent me a statement that said, in bold type, “Requiring a court to resolve an action within 270 days to the extent feasible is harmful to low-income and EJ” — which stands for environmental justice — “communities.” It doesn’t get much clearer than that.

I am delighted to see in the New York Times, finally, the word "communities" adorned with scare quotes. But there is the tension: You can't both be really serious that climate change is a looming existential threat to humanity that demands an end to carbon emission by year 20X in the near future, and the view that in 270 days we cannot possibly figure out how to do so in a way that protects "communities." Climate must not really be that bad, or perhaps it was just an unserious talking point in a larger political project. 

These are the beginning stages of a transition from a liberalism that spends to a liberalism that builds. It’s going to be messy. Until now, progressives have been mostly united in the fight against climate change. They wanted more money for clean energy and more ambitious targets for phasing out fossil fuels and got them. Now that new energy system needs to be built, and fast. And progressives are nowhere near agreement on how to do that.

The last three sentences are telling. Did they really want just to announce goals and spend a few hundred billions and feel good? Or did they actually want all the windmills, solar cells, and power lines involved?  

But the fight isn’t just about this package. Everyone involved believes there are many permitting reforms yet to come, as the world warms and the clock ticks down on California’s goals and the federal government begins to apply more pressure.

Once something becomes partisan in the US, it freezes and little gets done. I am hopeful here, because it plays out within one party. California is a one-party state, but that does not put it above politics. It does mean that progress is more likely. Can we hope that "a liberalism that builds," in reasonable time and somewhat less than astronomical cost, projects that might be actually useful, could emerge from all this? 

In the larger picture, a movement among good progressive democrats in places like California has figured out that if we want more housing at more reasonable prices, just letting people build houses might be a good idea. Houses, apartments, any houses and apartments, not just dollops of incredible expensive government-allocated ("affordable") and homeless housing. This is the YIMBY movement in California. It is sadly instantly opposed by Republicans, but maybe that's for the better given how reviled that brand is in Sacramento. And it is also making slow headway. 

Cost Benefit Comments

The Biden Administration is proposing major changes to cost-benefit analysis used in all regulations. The preamble here, and the full text here. It is open for public comments until June 20. 

Economists don't often comment on proposed regulations. We should do so more often. Agencies take such comments seriously. And they can have an afterlife. I have seen comments cited in litigation and by judicial decisions. Even if you doubt the Biden Administration's desire to hear you on cost-benefit analysis, a comment is a marker that the inevitable eventual Supreme Court case might well consider. Comments tend only to come from interested parties and lawyers. Regular economists really should comment more often. I don't do it enough either. 

You can see existing comments:  Search for Circular A-4 updates to get to https://www.regulations.gov/docket/OMB-2022-0014, then select “browse all comments.” (Thanks to a good friend who sent this tip.) 

Take a look at comments from an MIT team led by Deborah Lucas here and by Josh Rauh. These are great models of comments. You don't have to review everything.   Make one good point. 

Cost benefit analysis is useful even if imprecise. Lots of bright ideas in Washington (and Sacramento!) would struggle to document any net benefits at all. Yes, these exercises can lie, cheat, and steal, but having to come up with a quantitative lie can lay bare just how hare-brained many regulations are. 

Both Josh and the MIT response focus on the draft proposal's use of ultra-low discount rates, ranging from historic TIPS yields to arguments for zero or negative "social" discount rates. Josh emphasizes a beautiful compromise: always show the annual stream of costs and benefits. Then it's easy enough to apply different discount rates. No Black Boxes. 

Discount rates seem like a technical issue. But they matter a lot for climate policies, or for policies with substantial cost but putatively permanent benefits, because of the long horizons. For example, climate change is alleged to create costs of 5% of GDP in 100 years. So, let's assume a 0% discount rate -- treat the future just like the present. How much is it worth spending this year to eliminate additional climate change in 2100? Spend means real spending, real reductions in everyone's standard of living, not just funny money billions on twitter. 

If you answered "5% of GDP" (roughly $3,500 per person) that's wrong, for two crucial reasons. First, the economy grows over time. At a modest 2% real growth, US GDP will be 7.4 times as large in 100 years as it is today, or 640% greater. (e^2=7.4). Thus, 5% of GDP in 100 years, discounted at 0%,  is 7.4 x 5% or 37% of today's GDP, or $17,500 per person today. Second, the gain is forever -- 5% of 2123 GDP, but 5% of 2124 GDP, and so on. Discounted at a zero rate, 5% of 2123 forever after that is worth... an infinite amount today. But GDP keeps growing after 2123. If you discount at anything less than the growth rate of GDP -- 2% in my example -- 5% of (growing) GDP forever is worth an infinite amount!  So what if $250 billion subsidizing huge battery long range electric cars made by union labor in the USA from hypothetical US made lithium mines might, all in, save a thimbleful of carbon per car (is it even positive?), if the benefits are infinite, go for it. 

If you discount by a low, but somewhat more reasonable number like 7%, then a dollar in 100 years is worth 0.09 cents today (100 x e^-7). Now you know where to put your thumb on the climate scales! 

You might be wondering, if our great grandchildren are going to be so fantastically better off than we are, let them deal with it. Or you may be wondering that maybe there are other things we could do with money today that might speed up this magical growth process and do 5% better. For an infinite amount of money, is there nothing we can do to raise the growth rate from 2% to 2.05%? 

The latter opportunity cost question is, I think, a good way to think of discount rates. The average real return on stocks is something like 5%, at least. The average pre-tax marginal product of capital is higher; pick you number but it's in the range of 10% not 1%. The right "discount rate" is the rate of return on alternative uses of money. Josh and the MIT team are exactly right to point out that using the rate of return on risk free government bonds is a completely mistaken way to discount the very risky costs of climate damage -- that 5% is a very poorly known number -- and the even riskier benefits of the government's shifting climate policy passions. But I think phrasing the experiment in terms of opportunity costs rather than proper discounting of risky streams makes it more salient, despite the decades I have spent (and an entire book!) on the latter approach. Businesses can take $1 today and turn it in to, on average, $1.07 next year. Why take away that money for a project that yields $1.00 or $1.01 next year? 

The former question has a deeper consequence. Why should we suffer to help people, even our grandchildren, who will be on average 7.4 times better off than we are? How much would you ask your great grandparents to sacrifice to make you 5% better off than you are today? 

Here the low discount rate clashes interestingly with another part of the proposal: equity and transfers. 

From the preamble p. 12: 

A standard assumption in economics, informed by empirical evidence (as discussed below), is that an additional $100 given to a low-income individual increases the welfare of that individual more than an additional $100 given to a wealthy individual. Traditional benefit-cost analysis, which applies unitary weights to measures of willingness to pay, does not usually take into account how distributional effects may affect aggregate welfare because of differences in individuals’ marginal utility of income. Related to the topic of distributional analysis is the question of whether agencies should be permitted or encouraged to develop estimates of net benefits using weights that take account of these differences.26 The proposed revisions to Circular A-4 suggest that agencies may wish to consider weights for each income group affected by a regulation that equal the median income of the group divided by median U.S. income, raised to the power of the elasticity of marginal utility times negative one.

Now wait a darn-tootin' minute. The "standard" doctrine in economics is that you cannot make intra-personal utility comparisons. Utility is ordinal, not cardinal. Here cardinal-utility utilitarianism with equal Pareto-weights is about to be carved into federal stone. (To decide social benefit of taking from A and giving to B, you construct a social welfare function \(u(c_A) + \lambda u(c_B)\). This needs you to use the same \(u()\) for A and B, and agree on a Pareto-weight \(\lambda\) implicitly one here.) 

Imagine a simple regulation: take a dollar from Joe ($100,000 income) and give it to Kathy ($50,000 income). By this standard such a straightforward transfer passes a cost-benefit test.  

But this does not get applied over time. Taking a dollar from you and me, and at a discount rate of 0% giving it to our great grandchildren who will be 7.4 times better off should set off massive inequity alarm bells. Nope. 

Indeed, you can deduce a discount rate from the inequality goal. Pure undiscounted intergenerational equity requires a discount rate proportional to the economic growth rate. 

(With power utility, an intervention that costs A $1 to give B $\(e^{rt}\) just passes a cost-benefit test if \[c_A^{-\gamma} = e^{rt} (c_B)^{-\gamma}.\]  If B is \(e^{gt}\) times as well off as A, \(c_B=e^{gt} \times c_A\) then we need  \(r=\gamma g\). \( \gamma\) is usually a number a bit bigger than one.  The preamble's discussion of \(\gamma\) values is pretty good, settling on a number between one and two. However, they haven't really heard of the finance literature: 

Evidence on risk aversion can be used to estimate the elasticity of marginal utility. In a constant-elasticity utility specification, the coefficient of relative risk aversion is the elasticity of marginal utility. There are numerous different estimates of the coefficient of relative risk aversion (CRRA), using data from a variety of different markets, including labor supply markets,29 the stock market,30 and insurance markets.31 Relevant estimates vary widely, though assumed values of the CRRA between 1 and 2 are common.32

30 Robert S. Pindyck, “Risk Aversion and Determinants of Stock Market Behavior,” The Review of Economics and Statistics 70, no. 2 (1988): 183-90 uses stock market data and estimates the CRRA to be “in the range of 3 to 4"

Since then, of course, the whole equity premium literature sprang up with coefficients 10 to 50. Shh. That would justify insane levels of equity. 

The draft also encourages all sorts of unquantifiable non-economic "benefits," but I'll leave that for another day. 

Read and comment. 

BTW, despite my negative tone and picking on these elements, much of the draft is quite good. Here is a particularly nice piece, from p. 26 of the full text 

j. A Note Regarding Certain Types of Economic Regulation

In light of both economic theory and actual experience, it is particularly difficult to demonstrate positive net benefits for any of the following types of regulations:

 price controls in well-functioning competitive markets;

 production or sales quotas in well-functioning competitive markets;

 mandatory uniform quality standards for goods or services, if the potential problem can be adequately dealt with through voluntary standards or by disclosing information of the hazard to buyers or users; or

 controls on entry into employment or production, except (a) where needed to protect health and safety (e.g., Federal Aviation Administration tests for commercial pilots) or (b) to manage the use of common property resources (e.g., fisheries, airwaves, Federal lands, and offshore areas).

Well, FAA tests and rules for commercial pilots is not actually quite so obvious and really needs a cost benefit test. "Commercial pilot" does not mean "airline pilot," it means can you do anything in an airplane and get money for it. But leave that for another day, these principles if applied could clean out a lot of mischief. Well, I guess many on the progressive left or nascent national-conservative right would deny there is such a thing as a "well-functioning competitive market." 

Update: 

I should have added: It's insane to make a once and for all cost benefit analysis, especially for projects with 100 year horizons. All regs should be re evaluated every 5 to 10 years, and use experience to update costs and benefits.