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$500 a barrel for oil?
With energy five times as expensive ... we would take a substantial hit to incomes. Our living standard would decline by about 11 percent. But we would still be fantastically rich compared to the pre-industrial world. ... Our income would still be above the current living standards in Canada, Sweden or England. Oh, the suffering humanity! At current rates of economic growth we would gain back the income losses from having to convert to solar power in less than six years....
That is Greg Clark, link here.
Posted by Tyler Cowen on December 23, 2007 at 10:11 AM in Economics | Permalink
Comments
I think it's very quaint that Americans still feel they have a higher standard of living than those in Canada or Sweden.
Posted by: Stephen Downes at Dec 23, 2007 10:35:42 AM
The environmentalists and anti-environmentalists who assume that addressing global climate change will hurt the economy don't understand economics. It's shallow to only look at monetary costs and benefits.
As Nobel Laureate Ken Arrow points out, mitigating negative externalities, like pollution, makes us better off if properly done. It does not "reduce our living standards" nor do we take a "substantial hit to incomes" as long as real incomes are correctly measured.
Thus, climate change is not environment vs. economics as it's often portrayed. Instead, it's simply a matter of doing the right thing in the most cost-effective way.
Here's Arrow's analysis: ( http://economistsview.typepad.com/economistsview/2007/12/kenneth-arrow-t.html ).
It shows that addressing climate change is likely to be a positive NPV activity, as long as our discount rates are less than 8.5%. The case for acting now is only made stronger if there is greater uncertainty about the outcomes.
That said, $500 a barrel oil is almost surely too high a price in the short term, but the broader point is to change the framing of the debate and think about the question in economic terms. Mitigating externalities is economics 101.
Posted by: A student of economics at Dec 23, 2007 10:51:01 AM
Standard of living in the traditional economic sense would be 11% lower. But think of this. What if oil was that expensive to us because we imposed a $410 to $490 tax per barrel? My guess is that the world price would drop (go, monopsony power!) a lot. Who would be hurt? The Saudis, Iraqis, Iranians, Russians, Venezuelans, Nigerians, Texans.... With all our enemies having significantly reduced resources, we could make up half the drop in our standard of living by reducing military spending. Ask the troops what they think of a $400 tax on oil.
Posted by: Bill at Dec 23, 2007 11:29:52 AM
That's a bold statement, because it is hard to transcribe it for reality. First, there is the issue of transition from fossil fuels (30% of world power) to solar power. If you do it ad hoc, there will be a shock and I think the time frame to adapt will be a lot more than 6 years.
Then we have multiple technical and political issues. Where do we built the solar panels (probably where there is much sunlight) and what do we do during nights. How can we transfer power from the day side of earth to the night side? Can we have battery towers that can store enough power for the winter month?
Would the ecological destruction resulting of converting huge areas into solar-panel-farms really be worth the effort?
The comparison of Energy per square meter built power plant is much higher for coal and nuclear power!
Also, how would major global players like Russia/USA/Europe react to the altered power structure, where they are suddenly dependent of sun-rich countries? Will this set-off a new age of colonialism and imperialism to claim and secure energy-spots?
Posted by: Max at Dec 23, 2007 11:37:14 AM
Why not nuclear power? Look at the hard numbers guys! Wind and solar power just dont cut it: Capital investment, seasonality, low power densities and a million other factors.
Man is a very irrational risk assessor and unfortunately Greenpeace, Sierra-Club and other misguided, ill-informed lobby-groups keep the doomsday propaganda hyped up.
Posted by: anon at Dec 23, 2007 1:49:05 PM
"I think it's very quaint that Americans still feel they have a higher standard of living than those in Canada or Sweden."
Please explain.
Posted by: J. at Dec 23, 2007 2:32:00 PM
Well you can always count on EV to argue that forcing us to do the "right thing" can be good for us.
Furthermore, wouldn't the supply of energy be increased mightily by a sustained increase to even $100?
Posted by: Rich Berger at Dec 23, 2007 2:37:18 PM
Stephen Downes, is there net migration from America to Canada and Sweden or the other way around?
Posted by: TGGP at Dec 23, 2007 2:54:34 PM
Our living standard would decline by about 11 percent.
How exactly was this figure arrived at? At best it's just an (optimistic?) estimate. He also sounds just a little too gleeful at the demise of the suburbs -- is this a dispassionate analysis or a sociopolitical wet dream?
He's also not including the enormous one-time costs and disruption of the transition. New infrastructure won't build itself.
Anyway, let's hope he's right.
Posted by: at Dec 23, 2007 4:22:08 PM
Fallacious logic. It's not as easy to emigrate to Sweden as it is from Sweden to the US.
And yes, the (socialist) Swedish enjoy a higher standard of living that we in the US. I wouldn't argue that Canadians do, but Scandinavian countries do.
Posted by: meter at Dec 23, 2007 4:25:48 PM
Even if we're facing peak oil, we're centuries away from peak coal. As Daniel Gros argues (via Naked Capitalism), switching to coal will worsen global warming.
Posted by: at Dec 23, 2007 4:27:59 PM
So life after peak oil should hold no terror for us – unless, of course, you have invested in a lot of suburban real estate.
His ending clues us in to what this really is ----- a Lefty anti-suburban social engineering rant.
Posted by: Varangy at Dec 23, 2007 4:53:05 PM
@Stephen Downes
Looking at GDP (PPP), the USA bests both Sweden and Canada. To reiterate another poster's point, people vote with their feet, what do the net migration patterns tell us?
Posted by: Varangy at Dec 23, 2007 4:59:34 PM
Not to mention that there are less than 10 MM Swedes and about 35 MM Canadians.
Posted by: Rich Berger at Dec 23, 2007 5:08:49 PM
Offhand I was not able to find any stats on migration
between the US and Sweden and Canada. Quite aside from
adjusing for relative populations and differences in rules,
it is far from obvious that the claim made by several here
about the net direction of such migration is all that obvious.
I know people who have moved from the US to both Sweden and
Canada, more to the latter than the former, which as has been
noted is not so easy to do.
Regarding living standards, these are indeed hard to measure.
The US is ahead of both countries on measured real per capita
income. But then both of them beat the US on life expectancy,
infant mortality, and measured happiness levels, and Sweden
beats the US on the UN's Human Development Index, which takes
education into account along with health and real per capita
income. Not so obvious here.
Posted by: Barkley Rosser at Dec 23, 2007 6:18:09 PM
I guess some people think that it's possible to *objectively* state whether the standard of living is higher in the US, Canada, and/or Sweden, is that right? That strikes me as such a weird thing even to want to do.
I guess you can objectively state that in many ways, and by many standards, Canada, the US, and Sweden are all near the top. But once that's been objectively established, doesn't the answer to the question "which is the best?" depend an awful lot on individual preference? Maybe even completely on individual preference? Perhaps you like living among fair-haired people who drive Volvos, maybe I prefer to spend my life among in the American Southwest. Deal with it.
There's such a thing as asking economics to answer questions that economics isn't really suited to answer, no?
Posted by: MIchael Blowhard at Dec 23, 2007 7:04:37 PM
America is so much larger (in population) than Sweden and Canada, I don't see how you can compare them. There are certainly small countries with higher standards of living than the USA, just as there are small states with higher standards of living than the rest of the USA. So what?
Although I do get the impression than America has very bad government compared to other industrialized nations. Libertarians don't argue that all forms of socialism are equally bad, of course. If we must have Big Government, there are certainly large differences between the best (Sweden maybe?) and the worst (North Korea?).
Posted by: G at Dec 23, 2007 8:06:15 PM
re: "I think it's very quaint that Americans still feel they have a higher standard of living than those in Canada or Sweden."
Awwww look, the cute little Canuck is trying to be snarky!
Posted by: Michael at Dec 23, 2007 8:49:36 PM
There's such a thing as asking economics to answer questions that economics isn't really suited to answer, no?
Heresy.
Posted by: Bernard Yomtov at Dec 23, 2007 9:18:07 PM
The higher lifespan and infant mortality of swedes has everything to do with them being ... swedes.
That's a common red herring. America has a large black and hispanic population which lowers our stats in those areas. While raising other stats like fertility rate.
Comparing a state like Minnesota or Wisconsin directly would be much more enlightening.
And, of course draconian enviro policies will lower our standard of living.
Anytime you run policy according to religious dictates (ie Environmentalism) the people suffer. In the case of environmentalism, that's actually the point.
Most of the people I know are enviros. I often feel like the lone scientist at a revival meeting. I think human nature is inherently attracted to crazed apocalyptic fantasies. Luckily we have Pope Gore to save us. :-)
Posted by: jim at Dec 23, 2007 9:21:45 PM
ABSOLUTELY SPOT ON with the immigration question...Canada to USA is over twice as high as the reverse, even in raw numbers (so it's much greater in percentage terms). Sweden to USA is about the same as the reverse in raw numbers which means it too is much higher in percentage terms.
The USA must be really great to attract all those Canucks and Swedes despite such a lower standard of living, eh?
Source: http://www.migrationinformation.org/datahub/countrydata/country.cfm
Posted by: Michael at Dec 23, 2007 9:38:15 PM
"The higher lifespan and infant mortality of swedes has everything to do with them being ... swedes.
That's a common red herring. America has a large black and hispanic population which lowers our stats in those areas. While raising other stats like fertility rate."
I fail to see why this is a red herring. Why should the black and hispanic population not be counted as part of the American? Are blacks not Americans?
Posted by: tom s. at Dec 23, 2007 10:40:21 PM
Michael, you need to think a bit harder about your conclusions: "Sweden to USA is about the same as the reverse in raw numbers which means it too is much higher in percentage terms." Given your data, revealed preference does not indicate that either nation is preferred overall by the citizens of the other.
After all, Americans are a much bigger share of immigrants in Sweden than Swedes are of immigrants in the USA. It's higher in percentage terms in the reverse way when you look at it in the other direction.
But either way, the net flow is zero, and that's the bottom line. Another way to see this is to substitute "Peoria" (or any other town) and "the rest of the U.S." for "Sweden" and "the U.S." If people are indifferent, then random movements will lead to zero net flows regardless of the units being compared.
That said, there may of course be other factors like weather that affect immigration, yet have nothing to do with the aspects of living standards that policies can affect.
Jim, it's true that "of course draconian enviro policies will lower our standard of living." It's also true that lack of reasonable environmental policies will lower our standard of living. The quasi-religious free marketers want to believe this isn't true, regardless of the overwhelming scientific evidence to the contrary. I hope you aren't one of them.
Posted by: A student of economics at Dec 23, 2007 11:24:04 PM
michael,
I just tried to go the url you provided. I got "object not found."
I suggest that you should cool it on the ethnic and national smears,
especially when your data is not there and your logic is full of holes,
as student of economics just accurately pointed out.
Posted by: Barkley Rosser at Dec 23, 2007 11:28:51 PM
I managed to find the data source in question.
While indeed flow from Canada to the US is about
twice that going the other way, the numbers going
from the US to Sweden exceed the numbers going the
other way, although not by a whole lot.
Posted by: Barkley Rosser at Dec 23, 2007 11:41:19 PM
