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March 28, 2016

The Climate Change Central Planners

March 28, 2016
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Oren Cass, senior fellow at the Manhattan Institute, has a wonderful essay in the spring edition of National Affairs. Titled “The New Central Planners,” the piece points out how the federal government’s attempt to fix alleged “market failures” in the realm of climate change assumes away all the traditional problems of socialism. In other words, if we could trust officials at the EPA to tell us the “social cost of carbon” and to levy subsidies and mandates to move us to an efficient energy mix, then we could likewise have those officials plan the rest of the economy too. (Remember, EPA’s highest-paid official felt it was his duty to “modify the DNA of the capitalist system.”) But if you don’t trust EPA officials to pick the proper mix of restaurants and movie theaters in your town, then you shouldn’t let them dictate the proportion of solar and natural gas either.

Austrian Economics and the Critique of Socialism

Before quoting from Cass’ eloquent article, some background: The traditional 19th century arguments against socialism focused on corruption and incentives. That is, conservatives warned that “power corrupts” and nobody could be trusted with control of the whole economy, and they also worried that laborers wouldn’t work as hard if their standard of living were determined by something other than contribution to the output.

However, the socialist theorists of the 1800s countered that democratic safeguards would ensure that only the “right people” took power in a socialist regime, and furthermore that people growing up in a Socialist society would not be as greedy and backstabbing as those growing up in a dog-eat-dog world of capitalism. Therefore, the socialist writers argued, we could look forward to a new type of altruistic ruler and citizenry in the socialist age.

In this context, the arguments put forth by Austrian School economists Ludwig von Mises and Friedrich Hayek in the early 20th century were totally different. In what has become known as the “socialist calculation debate,” Mises and Hayek argued that even if we stipulate for the sake of argument that central planners had good intentions and all of the relevant technical knowledge, they would still not know economically what was the best use of society’s resources.

Consider: Engineers and physicists could tell central planners numerous ways to build an apartment complex capable of housing 500 citizens. They could build it using mostly wood, or bricks, or stone for that matter. But neither engineering nor physics alone could tell them which design made the most sense, or indeed whether there should be a new apartment building at all at the particular location. These are not scientific issues but economic ones. The issue is whether those resources—wood, bricks, glass, labor-hours—are better devoted to other possible projects.

In a market economy, such issues are solved daily by recourse to profit-and-loss calculations. Various entrepreneurs enter the market and bid on wood, bricks, glass, workers with varying skills, and every other resource. Resources flow into those channels where the consumers, through their spending decisions, implicitly “vote” on the configuration of retail goods and services that they enjoy the most. Competition filters this information up through the pipeline, so that the dollar-figures attached to a ton of steel, a barrel of crude oil, and so on signify the relative scarcity of those resources, helping to ensure that they are allocated to the proper channels.

The market economy isn’t foolproof, to be sure. But Mises and Hayek stressed that at least it was a coherent system with a built-in feedback mechanism. In contrast, central planners per se would be “groping in the dark,” unable to determine even after the fact whether their grandiose Five Year Plans made wise use of society’s scarce resources.

Oren Cass and the New Central Planners

With the backdrop of the broader debate over socialism, we can appreciate Cass’ new article. Here he explains the connection between traditional central planning and the modern climate change socialists:

Analyses like [those of the IMF and EPA] are the counterfeit currency of the administrative state. To disguise the value judgments inherent in their regulatory agendas, economists and policymakers justify their proposals as hyper-rational, politically neutral responses to “market failures.” To prove these proposals enhance economic efficiency and societal welfare, they produce “cost-benefit analyses.” Free markets and price signals work better, they tell us, when we embrace their recommended taxes, subsidies, and mandates. Any rule that requires $1 million of equipment to reduce by 1% the risk of death for 100 people is just common sense; one requiring $1 billion of equipment to reduce by less than 1% the emission of carbon dioxide for one year is the only responsible choice.

By asserting that their frameworks, tools, and data prove government action will enhance market efficiency, economists are engaging in a new form of central planning. It differs in degree from traditional command-and-control socialism, but not in kind. It is less absolute — the market economy provides a baseline until an intervention occurs. It is less totalitarian — plans are executed through rules and incentives that alter the behavior of market actors instead of through the direct assignment of resources. But it is rooted in the same conceit that technical expertise can outperform market forces and deserves deference where applied. It suffers from the same challenges of incomplete information, heterogeneous preferences, and subjective values. It relies on the same refusal to acknowledge the inherent tradeoffs that underlie the allocation of scarce resources. And, as a result, it also reduces democratic accountability, economic efficiency, and total welfare. [Bold added.]

To give just one example of the problems with hiding behind “cost-benefit analyses,” Cass points out how an economist who wants the government to levy a large carbon tax can of course add up all sorts of “negative externalities” from activities that emit CO2. But what assurance do we have that this analysis is complete? Someone motivated in the other direction could of course find dozens of ways that emitting CO2 confers positive externalities on the world, even if we stipulate that this will result in a warmer planet in the middle of the IPCC’s latest estimates. These benefits include enhanced fertilization, longer growing seasons in colder regions, and avoided cold deaths among the elderly in the winter.


It is an unbelievable act of hubris to suppose that a group of natural scientists and economists, armed with computers, can today make quantitative predictions of how much massive new taxes and draconian regulations will make people better off in the year 2150. And yet this is precisely what today’s central planners do from 9-to-5 in the office. Although I do not endorse all of his views, I definitely recommend reading Oren Cass’ National Affairs article for a thorough critique of the modern socialist mindset.

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  • Larry Coble

    Somehow, the author believes in the absurd notion of “free markets.”Governments set up the rules of the game known as the economic system. And since this is true, all sorts of different factions compete to have the table holding the game tilted in their favor through having laws created or changed to provide them with advantage over other existing or potential competitors.

    If you care to read the above report by the IMF, the most subsidized sector of our economy is fossil fuels. Remove those subsidies for fossil fuels and they would not be able to compete with renewable sources, mainly because wind and sun are really free once you build the infrastructure to capture it. Yes, repairs will be needed from time to time, but there is more energy falling on the earth everyday from sunlight than exists in energy companies proven reserves. In comparison, oil, coal and gas companies have to continue mining and exploring for their reserves with billions in costs. On top of it all, fossil fuels create pollution of various sorts with some quite nasty outcomes for those living in the so called sacrifice zones. Look at Cancer Alley in Louisiana with the numbers of people so adversely affected by the petrochemical industry. And the most dire consequences of burning fossil fuels is the release of CO2 into the atmosphere and the potential consequences to our climate and the ability for current inhabitants to continue existing on the planet. If the planet warms beyond 3.6F, our current world will undergo catastrophic climate change with all sorts of terrible outcomes for humans and other creatures alike. Just keep snorting that Koch money!

    • Bob

      The author of this article and I both agree that subsidies (fossil or otherwise) distort incentives and are an example of central planning or cronyism (etc), not a free market where individuals are making their own choices free from coercion. On that point I think I agree with you as well. End all the subsidies and spurious regulations and let free people choose for themselves. Protect individual people and their property rights. If people are getting cancer from the actions of others that shouldn’t have anything to do with the EPA or “allowable emissions” set by corrupt politicians / bureaucrats / captured regulators. It should have to do with demonstrating personal or property damage to a jury of our peers and justice should be quickly and efficiently served to individuals above all, not dismissed as a secondhand concern in deference to corporate or government favoritism, whether explicit in the form of taxpayer subsidies and regulatory capture or implicit in the form of biasing the success of judicial outcomes to favor the rich and powerful. It can’t be piecemeal either. We probably need constitutional amendments to create a strong barrier between economy and state that is at least as strong as the barrier between church and state. If the state has any legitimate role it’s justice. Not central planning. Not endless favoritism. Not setting a state religion or a state policy that implements price controls on inter-bank overnight credit (like the Fed does in setting the Federal Funds Rate by their fiat control). The state shouldn’t be giving taxpayer money to big oil or big finance or anyone else. So-called “green energy” also receives a lot of subsidies (in various forms) and those should go as well. Politicians handing out taxpayer money to private companies in a way that tries to bias the winners and the losers is immoral and arguably unconstitutional, across the board. And two wrongs don’t make a right, either. It doesn’t matter if X was subsidized previously, that’s not a valid argument for subsidizing Y now. Same applies to subsidy issues that cross borders: if X country subsidizes a good, that’s no justification for Y country to also steal from their citizens to prop up their preferred local company. If other countries want to sell their goods at a taxpayer-funded discount, then let’s buy up their goods until it hurts them enough that they’re forced to eliminate subsidies. Subsides are wrong. Even well-intentioned ones. People can rationalize their favorite subsidies all day long, “at least temporarily” — humans are expert rationalizers, especially activists and ideologues and politicians. But our rationalizations are mostly lies: subsidies really are often knowingly corrupt, have numerous unintended consequences, and frankly are immoral to begin with. Subsidies are a way of making a lie more popular by giving it artificial preference (funded by threat of force through the state). It distorts the truth about market supply and demand, scarcity, innovation, etc. A subsidy is a way of using state violence to take money from taxpayers and use it to distort the costs of something. Subsidies are forcing people to pay a premium for being lied to about the true costs of something.

      As to your claim about renewables becoming the clear winner in a truly free market, I’m unsure either way. And to be honest I don’t really mind either way — I agree they should all be competing on a level playing field free from the distortions caused by violent actions of government such as preferential taxation, regulation, subsidies, tariffs, etc. Quit taking taxpayer money (and using regulation) to artificially subsidize the companies you want to pick as the winners and losers — let free people make their own choices, unbiased by the favoritism of the state (in its myriad forms).

      We can and should blame companies for their bad behavior, though we should be focusing our blame on the state because they’re the ones actually taking our money and handing it out to their friends, and they’re the ones that are currently perceived as being the ones deciding what’s legal or not. It’s the state doing the stealing from taxpayers to fund their friends and declaring it to be legal. The state may just be a puppet for corporate interests in any particular case and so whatever corporate interests are at play in taking money by force from taxpayers deserves scorn as well — no doubt. But it’s government that makes it possible. Without the benefit of government power, companies wouldn’t be able to get away with this. Can you imagine Exxon sending agents with guns to your house to take your money by force like the state (implicitly) does? Of course not. The state is ostensibly the group we count on for justice, so if they’re the ones serving as a conduit for and enabler of evil, that’s a serious problem we need to solve that’s much bigger than any particular corporate interest.

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