Long term economic assumptions

[Jon Henke]

In a post criticizing inaction on global warming, the Heritage Foundry writes:

Respectable economists don’t pretend to know what the world will look like much beyond 25 years, let alone 90.

While modeling requires assumptions like that, it’s probably true that "respectable economists" don't put a lot of faith in their assumptions over the very long term. But then, shouldn’t it also be the case for, say, economists who write about the long-term fiscal situation?

Medicare presents the greatest challenge to Congress and taxpayers, accounting for $36.3 trillion of the $46.9 trillion 75-year projected shortfall. Congress should take both short- and long-term approaches to solving the Medicare crisis.

Etc, etc, etc.

Certainly, the long-term economic outlook is extremely uncertain, but I’m not sure what “who knows!” is a better answer to cumulatively worsening climate problems than to cumulatively worsening fiscal problems.

Comments

If GLOBAL climate change is an issue, it is a GLOBAL issue, amenable only to a GLOBAL solution. Anything less is doomed to failure. No state, nation or subset of nations can resolve a global issue.

Any nation which embarks on an effort to resolve global climate change in the absence of similar efforts on the part of all other nations in the world is naive at best; and, suicidal at worst.

Kyoto, "Son of Kyoto", Kyoto Lite, etc. were doomed to failure at conception. Lieberman/Warner is similarly doomed. However, it will be costly and disruptive which, it appears, is all that matters.

Posted by Ed Reid | May 30, 2008 10:31 AM

If GLOBAL climate change is an issue, it is a GLOBAL issue, amenable only to a GLOBAL solution. Anything less is doomed to failure. No state, nation or subset of nations can resolve a global issue.

Nonsense. The vast majority of carbon dioxide is being emitted by a few countries - the United States, China, and India. If these three countries can be commit to reducing their carbon emissions by only a few percent, then that'll have the same impact as far more drastic reductions from smaller countries.

Posted by quanticle | May 30, 2008 10:45 AM

Ponzi schemes fail when the number of potential new "marks" available falls below the number necessary to continue expanding the scheme. Government-run, mandatory participation Ponzi schemes fail more predictably because the "marks" don't have the freedom not to participate. The life of the government-run schemes can be extended by changing the rules "on the fly" as required.

However, while both SS and Medicare have followed the government-run Ponzi scheme model, I am sure US National Health Care will work as perfectly as the Canadian and European models. (Hope springs eternal; and, I won't live to see the day of reckoning anyway.)

Posted by Ed Reid | May 30, 2008 10:49 AM

quantic,

US emissions are relatively stable. China increased its emissions by ~10% in 2006; and, likely, also in 2007. India's emissions are also growing rapidly. While you are correct that small reductions by the largest emitters would accomplish more than large reductions by the smallest emitters, neither would be sufficient to resolve the perceived issue.

Atmospheric CO2 concentrations have been increasing since ~1900. So has the population of humans and domestic animals (CO2 and methane emitters all). Halting the increase in atmospheric CO2 concentrations would thus require reducing global CO2 emissions to pre-1900 levels, adjusted downward to compensate for the increase in population of CO2 and methane emitters.

Posted by Ed Reid | May 30, 2008 11:00 AM

Actually, the Heritage Foundation is criticizing action to curb global warming, not inaction.

Posted by rickm | May 30, 2008 11:13 AM

rickm,

As well they should!

Posted by Ed Reid | May 30, 2008 11:16 AM

cumulatively worsening climate problems

Can someone please demonstrate that climate changes cause more harm than good? +CO2 should increase photosynthetic efficiency and most starvation still seems linked to political problems.

If GLOBAL climate change is an issue, it is a GLOBAL issue, amenable only to a GLOBAL solution

A single nation can produce a commodity more efficiently or develop and export alternative energy. This is likely to be much more effective, efficient and easier to implement.

Efficiency = waste = unneeded pollution when you get down to it.

Posted by Ryan W. | May 30, 2008 11:27 AM

What Ms. McArdle says about the reliability of long-range projections is true but, interestingly enough, it is almost impossible to find anyone (except Ms. McArdle, I think) who advocates vigorous immediate action to resolve the long-range problems of both entitlement programs and climate change. The average liberal says that Social Security and Medicare will sort themselves out, while the average conservative says that global warming probably won't be a problem.

Mind you, I think Ms. McArdle is wrong on both issues, and that inaction is the preferred course in both cases. But she at least is consistent in her wrongness.

Posted by y81 | May 30, 2008 11:32 AM

While we're discussing predictions, what happened to the recession?

Posted by sam | May 30, 2008 11:39 AM

"Efficiency = waste"

Also,

War=Peace

Posted by rickm | May 30, 2008 11:41 AM

Another parallel is that both sides have a different definition for what it means for the problem to "sort itself out":

Conservative: Okay, let's say you're right. Worst case scenario? Some people will have to move and we'll have to come up with different agricultural methods. Big deal.
Liberal: !!!

Liberal: Okay, let's say you're right. Worst case scenario? We double taxes and cut benefits to virtually nothing. Big deal.
Conservative: !!!

Posted by Person | May 30, 2008 11:48 AM

This is a false parallel.

When talking about the environment, the overriding concern is preventing, if possible, largescale disasters, perhaps cataclysmic.

The uncertainty with regards to the environmental question hits at the core -- is there anything we can actually do to prevent future disasters? If so, what is it?

When talkign about Medicare, the uncertainty is not about whether we can do anything to present economic disaster, the question is the degree of the disaster and what form we would like our intervention to take.

With economic issues, the uncertainty is about how exactly we want to build the bridge to get where we want to go. To wit, economic uncertainty is akin to not being sure you have the best route to your destination, but you know generally how to get there.

With the environment, we don't know where we're going or how we can get there, but we think we need to go North.

Posted by Publius | May 30, 2008 11:54 AM

This is a false parallel.

When talking about the environment, the overriding concern is preventing, if possible, largescale disasters, perhaps cataclysmic.

The uncertainty with regards to the environmental question hits at the core -- is there anything we can actually do to prevent future disasters? If so, what is it?

When talkign about Medicare, the uncertainty is not about whether we can do anything to present economic disaster, the question is the degree of the disaster and what form we would like our intervention to take.

With economic issues, the uncertainty is about how exactly we want to build the bridge to get where we want to go. To wit, economic uncertainty is akin to not being sure you have the best route to your destination, but you know generally how to get there.

With the environment, we don't know where we're going or how we can get there, but we think we need to go North.

Posted by Publius | May 30, 2008 11:55 AM

I'm not quite sure what Ms. McArdle is criticizing here; she seems to be equating 'know what the world will look like' with any long-term projection based on policy. Applying the principle of charity, I fail to see the inconsistency.

Re: y81.
Funny thing is, I'm of a like mind with Ms. McArdle on both entitlement reform and climate change (though as a Canadian, the former is irrelevant and the latter potentially beneficial to me.) Yet I'd consider myself an anti-libertarian.

--Devin

Posted by Devin Carless | May 30, 2008 12:01 PM

Megan, the primary difference in these two forecasts is that a projection for Medicare maybe involves six major assumptions, each of which is pretty simple to evaluate based on historical trends, while a forecast for the global climate might involve 600,000 assumptions, including various feedback loops, only a minority of which we have any real handle on.

The problem with any of the proposed plans to address global climate change is that, like many a political football, they're focused first awarding new powers to the proposers and punishing one's enemies rather than solving the actual problem. I'd be happy to sign on to any type of pact that actually addressed limiting emissions and changing consumption patterns. The two main proposals right now, cap-and-trade structures and CO2 taxes, won't do either of those things and would be so littered with exemptions and favoritism as to be useless.

Glad you're back.

Posted by stc1 | May 30, 2008 12:56 PM

I remain generally skeptical of any long-term predictions about real-world situations, since the real world is so complex. When I hear news stories that begin "a new study shows that in 15 years, the rate of - " I stop listening to the rest of the sentence.

Outsourcing to India, currency strength, oil prices, sure - climate change, any of it. If the person releasing today's prediction can show me a reliable record of their prediction, 15 years ago, about what today would look like, and it matches pretty well, then I'm all ears.

On the other hand, some things are fairly simple or consistent, when you limit the scope enough. I'm pretty sure the sun will still be rising, and people will still be walking around on two legs. Again, the "what did you say about today, 15 years ago?" rule is a decent guide for reliability. Anybody know how stable the US fiscal predictions have been?

Posted by Geoff | May 30, 2008 1:07 PM

stc1,

"The two main proposals right now, cap-and-trade structures and CO2 taxes, won't do either of those things and would be so littered with exemptions and favoritism as to be useless."

"By Jove, I think you've got it!"

NOTE: Useless, but not free, or even cheap.

Posted by Ed Reid | May 30, 2008 1:30 PM

I think what everyone meant is "Welcome back!"

Posted by Joe Bingham | May 30, 2008 2:24 PM

I'm not quite sure what Ms. McArdle is criticizing here; she seems to be equating 'know what the world will look like' with any long-term projection based on policy. Applying the principle of charity, I fail to see the inconsistency.

Re: y81.
Funny thing is, I'm of a like mind with Ms. McArdle on both entitlement reform and climate change (though as a Canadian, the former is irrelevant and the latter potentially beneficial to me.) Yet I'd consider myself an anti-libertarian.

--Devin

Posted by Devin Carless | May 30, 2008 3:37 PM

The thing about the "long term fiscal situation" is that it isn't long term any more.

Moody's and S&P project that on current law the credit rating of the US government will start falling in 2017 -- that's only nine years away.

S&P projects that from then credit rating of the US will fall to "junk" by 2027. That's only 19 years.

Just last week CBO projected that to keep revenue even with rising Social Security and Medicare spending (and so prevent the collapse of the US credit rating) income tax rates will have to increase across-the-board (on both personal and corporate income) by 54% by 2030, by 91% by 2050... forget 2082.

For perspective, I've compared this CBO-projected tax increase for 2030 in % of GDP terms to tax increases of the past from World War II on.

It's 25 times larger than the increase that bailed out Social Security in 1983, the first time it went broke, and which paralyzed Washington politics to the very last moment ... it's 7 times larger than the Clinton 1993 tax increase that passed the Democratic House by one vote and the Democratic Senate only with Al Gore's VP tie-breaker vote ... it's just about as large as all the tax increases enacted post-Pearl Harbor to fight WWII (which were temporary and 2/3rds repealed by 1948). And the increases only go up from there.

The year 2030 is only about 2/3rds of a typical home mortgage length away, 22 years. Not 75 years.

My personal take on the "long term budget situation" is that, to paraphrase Butch and Sundance, we don't have to worry any more about long-term solvency to 2082 because our fall to 2030 is going to kill everything as we know it.

Posted by Jim Glass | May 30, 2008 3:38 PM

Jim,

Wow, US credit rating at "junk" in 19 years, shocking!

And now, applying my previously stated standard: What did S&P predict about today's economy, 19 years ago?

Posted by Geoff | May 30, 2008 3:52 PM

Freeman Dyson has a take on the global warming issue in the NY Review of Books

He cites Nordhaus as projecting the net cost of global warming over 100 years at present value in today's dollars in the case of...
[] No action taken: $23 trillion.
[] Optimal policy, a best-case carbon tax: $20 trillion ($3 trillion of benefit).
[] Kyoto protocol, everybody playing: $22 trillion ($1 trillion of benefit).
[] Stern proposals followed: $38 trillion (things made worse by $15 trillion).
[] Al Gore's proposals: $45 trillion (Go Al!!).

100-year projections might have some margin of error in them, but that being as it may, Dyson is a giant and this article, which is a review of Nordhaus's book and another recent one by Zedillo, is entirely worth reading for his own thinking on the subject.

Posted by Jim Glass | May 30, 2008 4:13 PM

Jim Glass,

Thanks for the Freeman Dyson reference. It was a very worthwhile read. Nordhaus, like Lomborg, will make no friends or converts within the environmental religion. :-)

Posted by Ed Reid | May 30, 2008 4:38 PM

"Jim ...And now, applying my previously stated standard: What did S&P predict about today's economy, 19 years ago?"

It predicted a AAA credit rating for the US gov't, of course. Because there was no scheduled increase in spending of >6 points of GDP by now, with no provision made to pay for it.

I mean, it is really not a difficult concept that if you schedule an increase in spending by 6 points of GDP (and rising from there forever after) starting with an income tax base line of 11.2 points of GDP (which is still leaving you with a significant deficit to start with) you are going to get either:

[] Massive deficits rapidly rising forever as compound interest creates an exponentially growing national debt, OR

[] Tax increases on the order of 6 points of GDP (via a 54% income tax increase or other revenue-raising equivalent).

That's merely arithmetic. Projecting this increase in spending only 22 years ahead isn't so difficult either. Everyone involved is already walking around. You just count the heads who will be of an age to be collecting 22 years from now, and tally up the amount you've promised to pay for each one. That's just arithmetic too.

And there's not really any way to reduce that liability significantly without a huge political fight that very obviously nobody is going to make before the last minute. (Soylent Green, slashing Social Security benefits, slashing Medicare would all do it -- but AARP and the senior lobby would be about equally cooperative with all three.)

CBO projected last week that absent these tax increases GDP starts falling permanently in the late 2040s and its 75-year projection "ends" circa 2060, because compounding interest on the exploding national debt consumes the entire economy. With these tax increases, by 2050 GDP is reduced by up to 20% compared to without them -- but that's certainly the lesser evil.

Now, if you think CBO is just boneheaded wrong, you can reach its full letter of last week through the link I provided on my prior comment. Read it and then send Orszag an e-mail explaining all the obvious mistakes in it.

But applying your own previously stated standard, remember: Neither CBO nor anyone else was projecting a 6 point of GDP increase in govt spending from 22 years ago to today. Because the politicians hadn't promised any such thing for today.

Posted by Jim Glass | May 30, 2008 4:56 PM

The thing about the "long term fiscal situation" is that it isn't long term any more.

Moody's and S&P project that on current law the credit rating of the US government will start falling in 2017 -- that's only nine years away.

The thing about "Global Warming" is that it isn't long term any more.

Surely the point is obvious - one must be consistent. And if, as Heritage maintains, "Respectable economists don’t pretend to know what the world will look like much beyond 25 years, let alone 90.", then one must be consistent in applying this maxim with regards to the "long term fiscal situation" as well.

One thing that is consistent however, is that the Heritage Foundation has always been against spending money (or costing their donors money) to ameliorate the effects of increased global temperatures, and as always been for tearing down programs like SS, Medicare, etc.

So purely on consistency grounds, which explanation as to Heritage's behavior is more plausible?

Posted by ScentOfViolets | May 30, 2008 6:52 PM

Efficiency = waste = unneeded pollution when you get down to it.

This should have read 'inefficiency = waste'

Posted by Ryan W. | May 30, 2008 7:22 PM

Certainly, the long-term economic outlook is extremely uncertain, but I’m not sure what “who knows!” is a better answer to cumulatively worsening climate problems than to cumulatively worsening fiscal problems.

This might be a good point (it's hard to tell) if you could actually point to any "cumulatively worsening climate problems" in the actual world. Of course, you cannot. There is not a history of "cumulatively worsening climate problems" that you can point to.

There are projections of cumulatively worsening climate problems. Those projections, however, are of dubious accuracy. And that is the point. "who knows!" may not be a good answer to cumulatively worsening climate problems but it actually is a decent answer to computer-generated cartoons (which is what these models, when they do anything, ultimately create) depicting cumulatively worsening climate problems.

Posted by Sonic Charmer | May 30, 2008 10:08 PM

Sigh. You're missing the point. The point turns of matters of consistency. If inaction on global warming is excused by the fact that no respectable economist pretends to know what the world will look like in 25 years, let alone 90, then by the same token, no respectable economist would pretend to know that state of various programs 25 years and more into the future.

That's it. Anything else is special pleading.

Posted by ScentOfViolets | May 30, 2008 11:03 PM

If inaction on global warming is excused by the fact that no respectable economist pretends to know what the world will look like in 25 years, let alone 90, then by the same token, no respectable economist would pretend to know that state of various programs 25 years and more into the future.

That may not be a fair characterization of the claims at stake. Economists, just like anyone else, fancy themselves to have ideas about what things might look like in 25+ years, and do like to discuss them. However, since economists don't pretend to know what the world will look like in 25 years, let alone 90, they are generally not in the habit of making their most negative claims about the possible outcomes into expensive doomsday cults.

Paul Ehrlich famously tried to place his money where his mouth was on a moderately pessmistic claim with just a ten year maturation date, and that didn't work out so well, in spite of an enormous growth in population during the same time period. He was only out about $600 for that one, but proposals invovling trillions of dollars of diverted resources without a strong possibility of a big payout will, understandably, be scrutinized with a heavily jaundiced eye.

Posted by aMouseforallSeasons | May 31, 2008 1:45 AM

Climate Change Q & A:
Q: If the US signed on to Kyoto and then all 176 signatories actually met their obligations under the Accords by 2012, would global annual CO2 emissions decline in absolute terms?
A: No (unless China and India stopped increasing their emissions now).
Q: If the US passed Lieberman/Warner into law and scrupulously observed its requirements, would global annual CO2 emissions decline in absolute terms?
A: No (unless China and India stopped increasing their emissions now).
Q: Even if China and India din't stop the growth of their CO2 emissions, wouldn't the reductions by other countries cause the global annual CO2 emissions to be less than they would otherwise have been, even if they are not lower in absolute terms?
A: Yes, in the short term; questionable, in the long term. (The industry driven out of the developed world, which operated relatively efficiently, would move to China or India, where it would likely operate less efficiently.)
Q: Wouldn't that be enough to stop AGW?
A: No (if CO2 is actually driving warming, since CO2 concentrations would continue to increase, albeit more slowly than they would otherwise have increased, temperature would also continue to increase).
Q: What would it take to stop CO2-driven AGW?
A: Stop adding CO2 to the atmosphere; or, at least, stop adding CO2 faster than the natural sinks can remove it. (The last time this was the case was apparently prior to 1900, when world population was ~1.6 billion and the domesticated animal population was more than correspondingly smaller as well.)
Q: What would it take to reverse the CO2-driven AGW which has already occurred?
A: First, stop adding CO2; then, either begin actively removing the excess CO2 which has accumulated or wait about 100 years.
Q: What if completely eliminating fossil fuel consumption is not enough to stop CO2 accumulation, because of the increased human and domesticated animal populations (CO2 and methane emitters all)?
A: Veganism and population control. (Megan is "ahead of the curve" here.)
Q: Isn't that somewhat Draconian?
A: Your call.

Posted by Ed Reid | May 31, 2008 8:41 AM

Re: Moody's and S&P project that on current law the credit rating of the US government will start falling in 2017 -- that's only nine years away.

Is the unstated assumption that the next two administrations continue to follow Bush's tax and spending policies? Granted, we can't know what policies will be followed, but I think we can be fairly confident that "Bushonomics" will not be in force much after Jan 2009.

Re: That's merely arithmetic.

Based on all sorts of assumptions, most of them no doubt static (meaning that they assume current conditions do not alter in any substantial way). By the way, why do you insist on a "54% income tax increase"? Might not revenues be increased by some other means? A VAT perhaps? Also, might not reform of Medicare (the truly major money problem; Social Security itself is fairly trivial) also alter the need for higher revenues?

Re: CBO projected last week that absent these tax increases GDP starts falling permanently in the late 2040s and its 75-year projection "ends" circa 2060, because compounding interest on the exploding national debt consumes the entire economy.

Any conclusion like that is inherently absurd. Interest on the debt will stay within tolerable levels. If it begins to reach intolerable levels then it won't be tolerared. As other have said, unsustainable trends will not be sustained, simple. Or the older saying I favor: Trees do not grow up to the sky. If math shows this this sort of thing happening then the math is wrong somehow and you need to go back to the equations and find the mistake-- most likely it's in the assumptions.

Posted by JonF | May 31, 2008 6:56 PM

Jim, we could also have a baby boom and increase the supply of medical services by providing more training.

Posted by aaron | May 31, 2008 11:08 PM

Personally, I like pointing out the inconsistancy in opposing the Iraq war an supporting GHG reductions.

Posted by aaron | May 31, 2008 11:16 PM

Chuckle. Thanks for the laugh, aaron.

Posted by ScentOfViolets | June 1, 2008 12:18 AM