climate change
7 Oct 2008
These Economists Are Making Me Thirsty
Built on flawed Treasury modelling, Garnaut's final Report shows that Canberra still believes in economic models that don't work, rather than climate models that do
Before Kevin Rudd became Prime Minister, he promised a rather interesting thing: "evidence-based policy".
This caused quite a stir within Australia's public services. After more than 11 years of a Howard government in which critical decisions on the future of the country increasingly seemed to depend on the advice of the Prime Minster's spouse, here was an incoming government led by a man who had previously sat at the top of the Queensland bureaucracy, apparently committing to make decisions based on fact.
Early actions of the Rudd Government seemed to fuel the fire of hope. The 2020 Summit, on one level clearly a piece of cunning political spin-doctoring, also showed at least a superficial commitment to listening to a range of different opinions on important matters of public policy.
And then there is the Rudd Government's love of enquiries. There have been literally hundreds announced, some of them even before Labor won government, on issues ranging from the very big (climate change, defence, the nation's tax system) to the very small (visual arts and music education).
Why is this important? Because it offered a chance to reform the way Australia's public policy is made. Instead of the 24-hour news cycle driving cravenly political decision making, perhaps we could look forward to a government that would make policy by examining the facts, in consultation with ordinary citizens as well as highly paid lobbyists, and after taking in the best advice.
So far, that hasn't happened.
To see why, we need look no further than the Garnaut Review on Australian climate change policy. Now we have most of the reports and releases associated with the Garnaut Review, including the all-important Treasury modelling assumptions, we can see how Australia's policy is really made.
It's made by faceless men and women in the central departments of government (Treasury, Finance, Prime Minister and Cabinet) who are in the thrall of a particular belief system. Some have called it "economic rationalism", others the "neoclassical synthesis", and still others "neoliberalism". For the sake of brevity, let's just call it "economics".
"Economics" needs a pair of inverted commas because it's a particular kind we're talking about here: the neoclassical model, as propounded by the economics schools of most of our nation's universities, including the ones that provide many of the recruits to the Treasury, like ANU's. Its ubiquitous textbook is by Harvard economist N Gregory Mankiw.
We've heard all the criticisms of this kind of "economics" before. It assumes that markets are generally competitive, the average person is a rational calculator of costs and benefits, and that nearly everything can be explained by supply and demand. It assumes that problems like climate change or bank failures are really just instances of market failure. Fix the market — by, say, recapitalising banks, or by creating a carbon price — and you fix the problem. Voila.
"Economics" in this broad sense dominates the thinking of policy makers in Canberra, Washington and London. When Kevin Rudd claimed he was a "fiscal conservative", what he was really proclaiming was that he would cleave to the economic orthodoxy as practiced by the Departments of Finance and Treasury.
And "economics", in this sense as a shared belief system or orthodoxy, is the dominant force behind the Government's emerging climate change policy. You could sum it up by saying "economics is more important than science", or perhaps more bluntly, "money is more important than the planet".
If this sounds harsh, then let us examine the conclusions of Ross Garnaut's Review. Garnaut accepted the science that tells us the planet is warming rapidly and calamitously. But he argues that the politics and economics of getting the world to agree to limit greenhouse gas emissions makes it unlikely we'll be able to do anything. So Garnaut suggests Australia shoot for an emissions target that guarantees destructive climate change. As I pointed out at the time, it's one of the most depressing policy documents ever produced in this country.
Now the assumptions behind the Treasury modelling that will inform the official Government response to climate change have been published. These are detailed in the recently released Treasury Department's "Climate Change Mitigation Policy Modelling: Assumptions and Data Sources". This is the first tidbit of the long-awaited Treasury modelling that was promised long ago, and as Malcolm Turnbull pointed out, was not previously released.
The assumptions behind the Treasury modelling are even more depressing than Garnaut's document. Why? Because they subscribe to the very religion of "economics" that is turning out to be so deeply flawed. Worse, it turns out some of the modelling is from agencies intimately linked to the fossil fuel industry.
One of the models is the GTEM model, developed by ABARE, the Australian Bureau of Agriculture and Resource Economics. ABARE is a notoriously backward agency whose stance throughout the Howard government's reign was openly pro-pollution and climate change denialist.
Under its long-term boss, Dr Brian Fisher, ABARE was responsible for the infamous "MEGABARE" model that made Australia a laughing stock in connection to the Kyoto negotiations, as Clive Hamilton details in his book Scorcher. ABARE is not truly independently funded: it routinely takes money from the corporate sector to fund its activities. Fisher has since left ABARE to head up a fossil fuel lobby group, Concept Economics.
The second model the Treasury is using is by academics Warwrick McKibbon and Peter Wilcoxen. McKibbon and Wilcoxen are world experts in climate change economics, and Garnaut built on many of their ideas in his Review recommendations.
But McKibbon and Wilcoxen are far from disinterested and unbiased. They are, in fact, activist academics who have long been highly sceptical of the scientific facts of climate change and highly critical of the entire UN Framework Convention on Climate Change.
Instead, they are enthusiastically promoting their own solution to this global problem, which they not immodestly call "the McKibbin-Wilcoxen Hybrid, also known as the "McKibbin-Wilcoxen Blueprint".
Will it work? Who knows? What we do know is that they propose the junk the current system and replace it with their own. To put it mildly, that's not very likely to happen.
The third model that Treasury is using is a highly neoclassical framework developed by Monash's Centre for Policy Studies. This centre specialises in developing what the economists called "Computable General Equilibirum" or CGE models.
What are CGE models? Well, it's complex. They can be traced back to the work of mathematical economists like Kenneth Arrow and Leon Walras. CGE models are now the backbone of micro-economic analysis. When Wayne Swan and Malcolm Turnbull talk about "modelling," this is what they are talking about.
But as mentioned above, CGE models are based on some important assumptions: perfect competition, perfect information, complete markets and rational individual consumers. Unfortunately, these assumptions are wrong. As Nobel Prize winner Joseph Stiglitz points out, "these models have serious inadequacies."
In other words: they don't work.
The reputation of neoclassical economic models in general is currently in tatters. Take risk modelling at major merchant banks. The 1990s and 2000s saw the much-praised development of so-called "Value at Risk" models which were meant to calculate how much money a bank or hedge fund could lose on any one day.
These much-touted models, some of them developed by Nobel Prize winners, didn't predict the crisis that brought down Long-Term Capital Management in 1998, and they didn't predict the subprime meltdown either. As risk expert Jon Danielsson writes in a forthcoming paper, blame the models.
But in the halls of power in Canberra, the stubborn hegemony of neoclassical economics means that Australian policy will be based primarily on economic models that don't work, rather than climate models that actually do.
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Rather than climate models that do…..
Who do you think you are kidding (other than yourself and the truly gullible)?
http://environmentalresearchweb.org/cws/article/opinion/35820
http://landshape.org/enm/misleading-and-deceptive-conduct/
Ben I think you may have been a little harsh on Garnaut’s own economic approach. He repeatedly stressed during the year that it was important not only to measure what could be measured, but to value what can’t be measured. And, admirably for someone from an ‘economic rationalist’ background, he refused to apply a discount rate in his work (i.e. to assume that because we’ll be richer in a hundred years we’ll be in a better position then to afford to pay for the costs we’re incurring today).
The tragedy of Garnaut’s final report was not that he got the economics (or the science) wrong, but the politics. He assumed, as Clive Hamilton wrote in NM a few weeks back, that Australians wouldn’t be willing to wait an extra 6 months for their income to double for a chance to make a difference on climate change. Actually, in his political assumptions I think he did exhibit a flaw that many economists are susceptible to - assuming that the future will look about the same as the past. The politics of climate change can (and must) be different to politics-as-usual.
Way to go Ben!
Give them heaps mate.
Mim, to clarify, I don’t think I’m being hasrh on Garnaut’s economic approach per se. I think he says some very true things. My issue with Garnuat is the profound pessimism of his conclusions. And these were indeed economic conclusions in the "political economy" sense of economics: in other words, he expects that the economic costs of climate change will be the cause of the political failure.
But my real issue is with policy making based around economic models, and the models themselves. As Steve Keen writes today in Crikey in respect of the financial crisis:
"Central Banks are run by economists, and the dominant "neoclassical" faction within economics ignored the real lessons of the Great Depression.
The false lesson that neoclassical economics preaches is that the market economy is fundamentally stable, and the Great Depression was caused by the monetary authorities tightening credit in the aftermath to the Stock Market Crash, rather than loosening it.
The real lesson of the 1930s is that a credit-driven market economy is fundamentally unstable, and a great depression occurs when debt-financed speculation results in excessive private debt at the same time as inflation is low. The excessive debt causes a chain reaction of bankruptcies, and falling prices mean that the real burden of debt rises, even as borrowers desperately tried to reduce their debt.
Central banks, under the misguidance of conventional economic theory, instead reinterpreted their charters — which emphasised full employment — as a mandate to keep inflation low. With their neoclassical eyes fixated on the rate of inflation, they ignored the expansion of private debt. This is why the sudden collapse of the world economic order took economists by surprise. They were looking at their mathematical models, which ignore private debt (and indeed money!), rather than at the real world, where debt is king."
great article Ben.
As Chomsky points out in various articles, one of the significant failings of economic models is the failure to take into account the very real potential for system collapse and therefore risk is undervalued.
In the case of Climate Change the type of economic modelling used is irrelevant because if a worst case scenario (looking increasingly likely) does occur then it doesn’t matter how comparatively well off we are, we’ll be dead, destitute, at war or on the run.
Also, climate change so clearly affects our economic situation regardless of any debate about its cause or ultimate affect, so if the climate change models are unreliable then the economic models (which must utilise climate change models - or assume a static environment - to measure potential energy and food production) are also, by definition, unreliable.
There is a serious case of collective stupidity at work and asking an economist to deliver a climate change response is a classic example of how inept/scared/deluded our government is.
Climate change is a collective problem requiring a collective solution; economic rationalism, by definition, cannot even come to grips with the problem let alone solve it.