Good Economics for Hard Times

by Abhijit V. Banerjee

  THE GREENPEACE ANSWER

  This is not what our colleagues in economics like to hear. First, because of economists’ ongoing love affair with material consumption as a marker of well-being, and second because they are suspicious of attempts to change behavior, especially when changing preferences is involved. Many economists have a philosophical objection to manipulating preferences.

  The reason for this reluctance is the economists’ long-standing belief that there is something “true” about people’s preferences, and that their actions reflect deep-seated desires. Any attempt to convince people to do something different (such as consume less or consume differently) would then encroach on those preferences. But as we saw in chapter 4, there are really no such things as true well-defined preferences. If people don’t know how they feel about something as quotidian as a box of chocolates or a bottle of wine, why do we expect them to have clear preferences about climate change? Or what kind of world their grandchildren should live in? Or whether the people of the Maldives deserve to have their islands washed away by a rising sea? And to know how much are they willing to alter their own lifestyles to prevent those disasters?

  Economists typically assume most people would not voluntarily sacrifice anything to affect the lives of unborn people or those who live very far away. But this is probably not true, for example, of you, the reader (or you would have shut this book a long time ago). Or for that matter of most economists themselves. Many of us probably do care about a whole range of outcomes that don’t affect us directly, even if we have a hard time assigning money values to them.

  The reason this is important is that it changes the way we should think about policy interventions. If everyone has well-defined preferences and acts on them (for example, they don’t care at all about the damage to other people), the ideal environmental policy is one that sets a price for damaging the environment but otherwise lets the market do its job. This is the idea behind the carbon tax, which is something most economists, including us, have now embraced. It was key to the work of William Nordhaus, who was rewarded with the Nobel Prize in 2018. Having to pay an explicit price for polluting is certainly something firms take seriously. Allowing firms to buy the right to pollute from other firms that are actually actively reducing pollution, the idea of tradable carbon credits, may also be a good idea because it creates incentives for nonpolluting firms to find ways to actively “unpollute,” say, by planting trees. And the revenues from taxes on polluters is useful because we need to pay for new environment-friendly technologies.

  But there is a strong case for going beyond carbon credits. Take someone who thinks of themselves as having a strong commitment to fighting climate change but ends up never buying energy-efficient LED lightbulbs. The reason could be that he does not know about LEDs, or that he forgets to buy them when he goes to the shop, or that he cannot make up his mind about just how much a premium he is willing to pay for the LEDs because he has a hard time putting a number on how much he really cares about preventing climate change. Would such a person be better or worse off if the government banned non-LED bulbs?

  Or if bans seem too extreme, the government could “nudge” people gently toward choices that are better for the environment. For example, smart meters now afford the possibility of charging higher prices for electricity during peak hours, compensated by lower prices the rest of the time; this would be better for the environment. A recent study in Sacramento, California, found that only 20 percent of users actively chose such plans when they were made available.23 And yet when a plan like this was made the default for (randomly chosen) users who then had the option of switching back to the traditional plan, 90 percent of them stayed on it, and those who stayed indeed used less energy. What did they truly prefer then, the option they actively chose or the one they did not choose but were willing to stick to? A government may decide that since there is no clear answer to this question, it may as well go with the one better for the environment.

  A larger open question is the extent to which energy consumption is a matter of habit. A particular way of consuming could become almost like an addiction simply because this is what people are used to. At the Paris School of Economics, the new “green” building provides very little heating. When we worked there, we were always cold in the winter and spring, and complained regularly about it. But somehow the simple tactic of leaving a thick sweater in the office eluded us for many months. Yet it was really not so difficult. We just were suffering from many years of overheated American offices. And once we had managed to transport the sweater, we did not feel worse off than we would have had the building been warmer. The moral brownie points from doing our bit to save the planet was enough compensation.

  Many of the behaviors that influence energy consumption are repeated and habitual: taking the train rather than the car, turning off the lights when leaving a room, and so on. For such behaviors, doing what we have always done in the past is easiest. Changes are costly, but once we switch it is easy to keep going. Even more mechanically, if we buy a thermostat we can set it up once and for all to heat more in the morning and at night and less when we are away. This means today’s energy choices also affect future energy consumption. Indeed, there is direct evidence that energy choices are persistent. In an RCT, some randomly chosen households received regular energy reports telling them how much energy they were using relative to their neighbors. The report recipients began to consume less energy than the households that never got them, even after the reports stopped. And this seems largely a result of changes in their habits.24

  If energy consumption is a bit like an addiction, in that using a lot of energy today makes us use a lot in the future, then the appropriate response is high taxes, like those on cigarettes. High taxes would discourage the behavior initially, and then once the proper behavior was learned the taxes could continue to be high without really hurting anyone, since everyone had changed their habits in order to avoid them.

  Of course, our energy consumption is not only caused by how we heat, cool, or transport ourselves. Everything we purchase contributes to it. There again, tastes probably do not fall from the sky. Economists have begun to recognize the role of “habits” in our preferences: what we grew up consuming forms our tastes today. Migrants continue to eat what they grew up eating, even when the food that was cheap in their home country is expensive in their new country.25 Habits mean it is painful, in the short run, to change your behavior. But they can be changed. People even seem willing to modify their behavior in order to get ready for some future change.26 Thus announcing a future tax hike on goods gobbling up energy could be an easier way for people to get used to the idea.

  POLLUTION KILLS

  Rich countries have the enormous advantage in that much of the energy consumption they need to sacrifice is inessential (driving to the supermarket when you could walk, sticking to your old bulbs instead of switching to LEDs, etc.). Where the rubber really hits the road is in the developing world. In the last two decades, coal consumption has trebled in India and quadrupled in China while declining slightly in the United States and other developed countries. In the decades to come, growth in energy consumption is forecast to be four times higher outside the OECD than within.

  But for most Indians, additional consumption and additional energy consumption in particular is not a luxury. The very low energy consumption in rural India today is due to a mode of existence that is often unpleasant and dangerous. They cannot possibly use less, and ought to have a right to use more. In that case, is there a rationale for poor countries to stay completely outside of the climate conversation? Or, at a minimum, to limit any sacrifice to their richest citizens, who have the lifestyles and the emissions of rich Americans?

  It is hard to say no. There is certainly something deeply unfair about the world’s poor paying for the past and present indulgence of the world’s rich. Unfortunately, there are two problems with taking this position. The first, which we already discussed, is that the co
nsequences of a temporary let-off for the developing world may encourage many years of life for the world’s most polluting technologies. The temporary let-off may not be that temporary. Most victims will be in the developing world, so people in the developed world may be all too happy to go along with that.

  But, second, the real crux of the issue is whether the developing world can afford to continue at its current pollution levels (or grow them), even without the threat of global warming. CO2e emissions are strongly correlated with something else that directly affects their citizens today: air pollution. The environment in China and India has degraded so fast that pollution has become a massive and urgent public health hazard, and it is also becoming worse in other emerging economies.

  This pollution kills. In China, coal-fired indoor heating is subsidized on the north side of the river Huai but not on the south, on the grounds that it is colder in the north. One can see a precipitous drop in the quality of the air when crossing the river from south to north. Correspondingly, there is a similar drop in life expectancy.27 Estimates imply that moving China to the worldwide standard for the concentration of particulate matter in the air would save the equivalent of 3.7 billion years of life.

  China’s skies are, however, positively pristine compared to those of many big Indian cities. Several Indian cities, including the capital New Delhi, top the list of most air polluted cities on earth.28 In November 2017, the chief minister of Delhi compared the city to a gas chamber. According to the US embassy’s measurements, at that time the air in New Delhi reached pollution levels forty-eight times the guideline value established by the World Health Organization. As in China, this level of pollution is undoubtedly deadly.29 Admissions to hospitals surge every November when pollution skyrockets. Globally, the Lancet Commission on pollution and health estimates that 9 million premature deaths were caused by air pollution in 2015.30 More than 2.5 million of those deaths were in India, the most in any single country.31

  Pollution in Delhi in the winter is due to a combination of several factors (including pure geographical bad luck), but some of it is due to behaviors that could be changed. One important pollutant comes from burning the stubble left after crop-cutting in states neighboring Delhi. The smoke from the burning outside the city is then mixed with various pollutants produced inside the city: dust from construction, exhaust from vehicles, residue from the burning of trash and the open fires the poor use to cook and keep warm in winter.

  The smog in Delhi is so bad there is a clear impetus to act immediately. There is no trade-off between the quality of life today and in the future, since people are dying now. The only trade-off is between consuming less or choking. And even this trade-off may be mostly illusory. Two different studies, one involving workers in a textile manufacturing firm in India32 and one on travel agents in China have shown that on days when ambient pollution is high, productivity is low. So more pollution may mean less consumption.33

  Delhi is a relatively rich city. City dwellers can easily afford to pay the farmers not to burn their crops, and to instead use machines to bury them and ready the soil for the next planting. The government could ban open fires in the city and create heated rooms where the poor could gather on cold nights. It could replace trash-burning with a more modern trash collection and treatment system. It could ban old cars (or in fact ban diesel-fueled cars altogether) and introduce congestion pricing or another form of congestion management.34 It could enforce more vigorously the tough industrial pollution standards on the books but not typically respected. It could improve the public transportation system. It could shut down or upgrade the large thermal plants operating within the city. Perhaps none of these would be sufficient individually, but combined they would surely improve the situation.

  None of this is out of reach. For example, a “friends of the court” brief submitted to India’s supreme court suggested that a subsidy of Rs 20 billion (about $300 million) would be enough for the farmers of Punjab and Haryana to purchase the equipment needed to prepare their fields. This is only approximately Rs 1,000 ($14 at the current exchange rate, a little over $70 at PPP) per inhabitant of greater Delhi. Surprisingly (and frustratingly), despite the urgency of the bad air, the political demand for such a response is not overwhelming. Part of the problem may be that curbing pollution would require a lot of people to cooperate. But there is also a lack of awareness that air pollution is a health issue. A recent Lancet study found that a large part of the deaths due to outdoor air pollution can be attributed to the burning of biomass (leaves, wood, etc.).35 But a significant part of this biomass is burnt on indoor stoves, which also generate a tremendous amount of indoor air pollution. It would therefore seem there would be a strong private demand for better cooking devices, which would improve both indoor and outdoor air. But there appears to be no such demand. Study after study finds that the demand for cleaner stoves is very low.36 Even when an NGO distributed cleaner stoves for free, people were not interested enough to get them fixed when they broke.37 Low demand for clean air may come from a failure of many of the poorest households to connect clean air to a healthy, happy, and productive life.

  This may change. Slum dwellers asked to compare the conditions of life in the city to what they had experienced in their villages mostly reported they preferred Delhi.38 The only thing they really complained about was the environment and, in particular, the air. In the winter of 2017–2018, there was finally some outrage in Delhi. Schoolchildren took to the streets when their schools were shut down due to the dangerously high pollution levels. Even in China, which is not a democracy, the pressure of public opinion is said to have contributed to the government’s desire to do something about pollution. In India, it may soon become enough of a public issue to lead to some change. The priority should then be to enact policies that will lead to cleaner consumption patterns, even if they come at some cost. The costs may not be very large. In many cases, India would be able to leapfrog to the cleaner technology (e.g., when the poor finally get electricity, they get LED bulbs). In some cases, the new technology may be more expensive than the old (e.g., clean cars may be more expensive than dirty cars). This means the poor will need to be compensated. But the total cost of this is small, and could easily be borne by the elite if the political will was there.

  A GREEN NEW DEAL?

  With the Green New Deal, the talk of the town in the winter of 2018–2019, Democratic politicians in the United States were trying to link the fight against climate change with an agenda for economic justice and redistribution. They had an uphill political battle in front of them. From Paris to West Virginia and Delhi, fighting climate change is often presented as a luxury for the elites, funded by taxes on the less privileged.

  To take an example we encountered firsthand, at the end of 2018 the agitation of the “Yellow Vests” protesting a planned increase in the tax on gasoline closed down the streets of Paris every Saturday, putting the French government under severe strain. Eventually, the tax increase had to be postponed. The argument the Yellow Vest protesters were making was that the increase in the gasoline tax was a way for rich Parisians (who can take the subway to work) to buy themselves a conscience at the cost of people from the suburbs and countryside who had no choice but to drive their cars. They did have a point, given that the same government had removed the wealth tax. In the United States, the specter of a “war on coal” became the rallying cry against the liberal elite, a symbol of their lack of empathy for the poor. And, of course, politicians in the developing world routinely (and rightly) rail against having to pay for previous choices made by rich countries.

  The Green New Deal is an attempt to bridge precisely this divide, by emphasizing the fact that building new green infrastructure (solar panels, high-speed railroads, etc.) will both create jobs and help in the fight against climate change. It de-emphasizes the idea of a carbon tax, viewed by many on the left as being too reliant on market mechanisms and, as in France, just another way to make the poor pay.

&
nbsp; We understand that a carbon tax is not an easy sell (taxes that hit most people never are), but our view is that it should be possible to make it politically acceptable by making it absolutely explicit that the carbon tax is not a way to raise revenues. The government should structure the carbon tax in a revenue-neutral way, such that tax revenues would be handed back as a compensation: a lump sum to all those at the lower end of the income scale, who would therefore come out ahead. This would preserve the incentive to conserve energy, drive less or drive electric cars, but make it very clear that the less wealthy would not pay for it. Given that energy consumption is a matter of habit, the tax should also be announced well in advance to give people time to get ready for it.

  More generally, we are quite aware that it will cost money to prevent climate change and to adapt to the part already on its way. There will have to be investments in infrastructure, and meaningful redistribution to those whose livelihoods are affected. In poor countries, money could help the average citizen achieve a higher quality of life in a way less threatening to the future of the world. (Think of the air-conditioning debate, for example; why doesn’t the world simply pay India to leapfrog to the better technology?) Given that the poor do not consume very much, it would not take a lot to help the world’s poor consume a bit more, but also get better air and produce less emissions. The richest countries in the world are so rich they can easily pay for it.

  The question is to frame the debate in a way that does not pitch the poor in poor countries against the poor in rich countries. A combination of taxes and regulations to curb emissions in rich countries and pay for a clean transition in poor countries may well reduce economic growth in the rich country, though of course we don’t know for sure, since we don’t know what causes growth. But if much of the cost is borne by the richest in the rich countries and the planet benefits, we see no reason to shy away.