Alan Greenspan is Very Overrated: Part I, Energy
UPDATE: Greenspan is no polymath, to go by the discussions of energy and climate in his instant bestseller, The Age of Turbulence. During his nuclear power love-fest, he writes:
Nuclear power is not safe without a significant protective infrastructure. But then, neither is drinking water. (p. 453)
Wow! That’s an analogy I bet you never heard before. Greenspan is actually comparing drinking water infrastructure — which is needed mainly to protect the water from us (i.e. from human pollution) — with nuclear power’s infrastructure–which is needed to protect us from nuclear material, which (unlike water) is inherently dangerous. I guess this economic guru is the only person in the country who would rather live next to a nuclear power plant than a reservoir.
Even more annoying:
For example, after the initial surge in the fuel efficiencies of our light motor vehicles during the 1980s, reflecting the earlier run-up in oil prices, improvements slowed to a trickle. (p. 446)
Seriously. This statement sums up everything that is wrong with conservative economists. Greenspan hates government mandates like fuel economy standards, so they can’t be the reason why fuel efficiency surged (as the law required) and then stopped (since we haven’t toughened the law in two decades).
Greenspan’s thoughts on global warming are equally annoying and confused, but that will have to wait until Part II. The reason I interrupted my multi-part thrashing of Lomborg is that Greenspan’s book is perhaps more damaging, since he is far, far more respected and this book will be read by many more people–it has already leaped to #1 on Amazon.
Greenspan does have more to say on the issue of oil and fuel economy a few paragraphs later. He notes parenthetically
(In the United States, of course, mandated fuel-efficiency standards for cars and light trucks induced the slower growth of gasoline demand. I, and a number of my colleagues at the Council of Economic Advisers, believed, however, that even without government-enforced standards, market forces would have led to increased fuel efficiency.) [pp. 446-447]
Well, of course that is what you believed. You dislike regulations so much you could only force yourself to talk about them in parentheses!
But relying on oil price has two problems. First, oil prices go up and down. If Greenspan were right that market forces were the most important thing, then when oil prices collapsed in the 1980s and then again in the 1990s, fuel economy would have collapsed too. Thankfully, fuel economy regulations stopped such a collapse from happening.
Second, gasoline has a relatively low price elasticity of demand (as this post by Shannon explains). Even big price changes only have a small effect on demand, as we have seen in recent years. And Greenspan knows this! In a footnote he writes, “Having observed that rapid gains in US consumption before 1973 seemed insensitive to price change, I feared the oil price rise required to bring demand down to the level of output implied by a long embargo would not be politically acceptable.”
The intellectually honest conclusion is that fuel economy standards are in fact a viable and valuable strategy for reducing oil consumption. But Greenspan can’t accept that. He acknowledges that
To achieve the twin goals of enhanced national security and curtailed global warming, the growth rate of US petroleum consumption must flatten, and eventually consumption must decline outright. The big opportunity for displacement is on America’s highways…. (p. 460)
So what is his answer? He has “come very reluctantly to taxes as an alternative way to accomplish what competitive markets could do.” He proposes “a gasoline tax of, say, $3 or more per gallon, phased in over five or 10 years with the resulting revenue used to lower income or other taxes.” (p. 460)
Well, it has a certain intellectual consistency, if we ignore the political impossibility — which Greenspan does:
I consider the argument that gasoline tax hikes are politically infeasible irrelevant. Sometimes the duty of political leadership is to convince constituencies that they are just plain wrong. Leaders who do not do that are followers. (p. 462)
I never heard Greenspan speak up for doubling the price of gasoline when he was in a position of power, let alone when he was trying to get reappointed. But it just shows you how much he hates government mandates.
Personally, I think oil prices will take care of themselves, as supply is going to have a harder and harder time meeting demand in the coming years. But we need higher fuel economy now, and standards are clearly the best strategy from a practical, political perspective.
Bizarrely, while Greenspan proposes the U.S. unilaterally raise gasoline prices $3 to solve our oil problem, he opposes any such increase in carbon prices to deal with global warming, as we’ll see in Part II.
September 19th, 2007 at 9:37 am
I remember reading that there are 2 kinds of economists, those that believe markets work when they don’t and those that believe that markets don’t work when they do. Economics only teaches people how to count things, not to understand the value of things, which they will admit. A person has to go outside economics for morals, ethics, values, etc. To apply those things to markets means to go outside economics for the values needed for a society to value things other than money.
That he would now say that we should have a 3 dollar per gallon of gasoline, I first thought, was incredible. But after thinking about it, he was in a position where he had to keep respect for the office that the held. Wading into energy arguments would have distracted him from his main job as the interest rate man.
At least he has come out now to say what he has. Lets hope that some of main stream media picks it up, although I have not heard it yet.
September 19th, 2007 at 11:06 am
In 2004, a gallon of gasoline cost about $1.20. It hit $3.20 earlier this year, and no doubt it will again (and then some). So in effect, we’ve already seen a $2.00 “tax” on gas. The effect on driving and consumption was negligible.
Neoclassical economists prefer a Pigouvian tax because they believe it is the least intrusive means of intervening in markets. Problem is, they don’t work — at least not at any level that is politically feasible.
But then, reality has never been high on economist’s agenda.
September 19th, 2007 at 2:01 pm
One major justification for government is to help markets see the true costs of things when there is market failure. (Every Economics text talks about such things, often called “externalities”–there is no question that markets have problems that must be corrected if markets are to give good results.) In that sense, a tax is often preferable to a mandate because it more directly reflects the underlying externalities. A mandate may be appropriate however when the amount of the tax is uncertain, which is probably the case with gasoline. Given the uncertainties, either government would constantly need to adjust the tax to bring greenhouse emissions to zero on some sane timescale, or it would use a different mechanism. Given the downsides to failure, I think different mechanisms are called for with global warming externalities. Perhaps in 1990 a tax would have worked, but we don’t have the luxury for that now, given the urgency of the problem. So I disagree with Greenspan here. Similarly, CAFE standards are less certain than a cap-auction-rebate system. Imagine carmakers having to buy at auction greenhouse gas emission rights for the expected lifetime of any vehicle they produce (e.g. 10+ years). Emissions are capped and decline each year. The auction fees are divided equally by car buyers in any given year as a rebate, making this revenue neutral. This is superior to CAFE standards, because (1) the effect is more certain (because of the cap), and (2) buyers of gross emitters pay more up front for their vehicle choice, whereas buyers of efficient vehicles get a rebate, encouraging the right choice.
September 19th, 2007 at 2:29 pm
Greenspan , never was for anybody but himself.
September 19th, 2007 at 4:23 pm
Thanks for the link!
When I saw Greenspan on the Daily Show last night, I was impressed by his gravity and his ability to explain complicated concepts in a simple way. But his positions on carbon taxation and on fuel economy standards show that intelligence can easily be overruled by loyalties.