James K. Boyce is a senior fellow at the Political Economy Research Institute and professor emeritus of economics, University of Massachusetts Amherst, USA. His previous books include Economics, the Environment, and Our Common Wealth (2013), Reclaiming Nature (2007), Natural Assets (2003) and The Political Economy of the Environment (2002).

Economics for People and the Planet

Inequality in the Era of Climate Change

Wimbledon Publishing Company

Contents

LIMITS TO GROWTH – OF WHAT?

Environmentalism needs a new banner: Grow the good and shrink the bad.

Average national income is a notoriously imperfect measure of the average person's well-being. The 2010 BP oil spill in the Gulf of Mexico – with clean-up and damage costs of $90 billion – added about $300 to the average American's 'income'. But it added nothing to the nation's well-being. The world's most expensive prison system, costing almost $40 billion per year, adds another $125 per person. This doesn't make the country's residents better off than people living in countries that don't incarcerate one in every 100 adults.

Of course, national income includes many good things, too. Growing food and building homes add to national income. So does public spending on education and healthcare. Unlike oil spills and jails, these really do add to human well-being.

Along with good stuff and bad stuff, national income includes a third category of stuff that is just useless – goods and services that neither add to our well-being nor subtract from it but still get counted in the income pie. A prime example is what the economist Thorstein Veblen called 'conspicuous consumption' – items consumed not for their intrinsic worth but simply to impress other people and jockey for a higher rung on society's pecking order. These goods and services have zero net effect on national well-being, since for every person who climbs a rung, someone else slips one.

Of course, not all bad or useless things are counted as national income. But neither are all good things. Unpaid work caring for children, the elderly and the disabled doesn't count. Clean air, clean water and climate stability don't count. Free, open-source information and culture don't count.

The national income pie is an odd subset of the good, the bad and the useless. All three slices get lumped together when economists tell us that average income in the United States is roughly $56,000 per person.

Researchers in the emerging field called 'happiness studies' have devised other ways to measure well-being. They find that beyond the level of income that is needed to satisfy basic wants, such as food and shelter, there is little or no correlation between a country's average income and the happiness of the average person. Past some threshold, increases in the good and bad appear to cancel each other out, and the useless slice of the income pie can get pretty fat.

Since national income isn't the same as well-being, growth in national income isn't the same as improvement in well-being. All too often, this crucial distinction gets lost in acrimonious debates about the relationship between the economy and the environment (see Figure 1.1).

Forty years ago, a report called The Limits to Growth drew attention to the indisputable fact that our planet does not have an infinite capacity to serve as a source for raw materials and a sink for waste disposal. In choosing to call this idea the 'limits to growth', however, the authors fell into a rhetorical trap that has haunted environmentalism ever since.

The problem is that most people believe that growth is good. When they think about the national income pie, they think about the good slice, unlike environmentalists who think about the bad slice.

Because they're really talking about different things, proponents and opponents of growth often talk right past each other. And when they assume that the good and bad are inseparable, both sides buy into the myth that there is an inexorable tradeoff between economic well-being and environmental quality. If the good and the bad must go together, they must grow together.

The result: growth wins, and environmentalists play damage control.

To find a way out of this impasse, we need better measures of economic well-being, better public policies and better language.

A growing number of economists recognize the need to develop new measures of well-being that count the good as positive, subtract the bad as negative, and ignore the useless. In 2009, the Commission on the Measurement of Economic Performance and Social Progress, chaired by Joseph Stiglitz, Amartya Sen and Jean-Paul Fitoussi, produced a powerful and wide-ranging critique of the conventional measure of national income. In the United States, dozens of state-level initiatives are now experimenting with different ways to measure well-being.

In the policy arena, we need to both advance human well-being and protect the environment on which it ultimately rests. This requires not only sound regulations but also true-cost prices to orient investment and consumption decisions to the full range of costs and benefits. In climate policy, for example, although regulations such as fuel economy standards for automobiles can help to promote the clean energy transition, in the absence of a price on carbon emissions there will always be strong incentives to burn cheap fossil fuels.

Last but not least, we need better language. We need to move beyond the stale 'pro-growth' versus 'anti-growth' rhetoric of the past. It's time to raise a new banner: Grow the good and shrink the bad.

THE TWIN TRAGEDIES OF OPEN ACCESS

Open access – in the sense of a complete absence of property rights and regulations – leads not only to the abuse of natural resources but also to the abuse of the poor by the rich. Climate change is a case in point.

To combat global warming, we must confront two tragedies of open access. The first is sometimes called the 'tragedy of the commons', a misnomer since societies often devise rules to manage common property sustainably. This tragedy is that when there is open access to a scarce resource, individuals have no incentive to conserve it and instead will overexploit it even to the point of collapse. In the case of climate change, the scarce resource is the limited capacity of the biosphere to absorb and recycle our emissions of carbon dioxide and other greenhouse gases.

The second tragedy of open access is less widely recognized but no less real. Although in theory open-access resources are equally available to all, in practice some people are, in George Orwell's haunting phrase, 'more equal than others'. Open access often generates short-run benefits for those who least need them and long-run costs for those who can least afford them. Global warming is a good example. Rich countries burn more fossil fuels than do poor countries, generating more carbon dioxide emissions. And within any given country, richer people benefit most from the fossil-fuelled economy by virtue of the fact that they consume more goods and services.

Meanwhile, it is poor countries and poor people who stand to bear the greatest costs of global warming. They are less able to invest in air conditioners, sea walls and other adaptations. They live closer to the edge: while the rich can weather a 20 per cent decline in their real incomes with relative ease, for the poor the same decline may push them over the margin between life and death. And the places that climate models show will be hit hardest by global warming – including drought-prone regions of sub-Saharan Africa and typhoon-vulnerable South and South East Asia – are home to some of the world's poorest people.

Effective climate solutions will demand that we address both tragedies. At the international level, the key to a comprehensive agreement to reduce emissions is the principle that every person in the world has an equal right to the planet's limited carbon-storage capacity. In exempting developing countries from emission targets, the Kyoto Protocol implicitly embraced this principle. But by basing its targets for industrialized countries on past emissions, the agreement instead rewarded countries for their past pollution. To craft an accord that is acceptable to all nations, it will be necessary to build it around the principle of equal carbon entitlements.

Does this mean that the majority of people in the industrialized countries must endure a cut in their standards of living to safeguard the global environment? Not if the same egalitarian principle is applied within countries, too. The creation of national 'sky trusts' that receive revenue from carbon taxes or the sale of carbon permits to firms that bring fossil fuels into the economy, and then recycle the money equally to every woman, man and child, would protect the real incomes of lower-income and middle-income households. The cost of carbon taxes or permits ultimately are passed to consumers: households pay the price, with the amount per household depending on its carbon footprint. Upper-income households, who generally consume the most, will pay the most; low-income households generally will pay the least. Since everyone receives the same carbon dividend, households that consume less than the average come out ahead financially. Because in every country income and consumption are skewed towards the rich, carbon-revenue recycling protects the purchasing power of the middle class and raises the real incomes of the poor.

Policies that combine environmental protection with income protection for the majority of the world's people are not only ethically desirable but also politically necessary to ensure broad and durable public support for the fight against global climate change.

PURSUING PROFITS – OR POWER?

In corporations, the pursuit of power often trumps the pursuit of profits.

Do corporations seek to maximize profits? Or do they seek to maximize power? The two may be complementary – wealth begets power, power begets wealth – but they're not the same. One important difference is that profits can come from an expanding economic 'pie', whereas the power often is a zerosum game: more for me means less for you. And for corporations, the pursuit of power sometimes trumps the pursuit of profits.

Power versus Profits

Take public education, for example. Greater investment in education from preschool through college could increase the overall pie of economic well-being. But it also would narrow the educational advantage of corporate oligarchs and their privately schooled children – and diminish the power that comes with it. Although corporations could benefit from the bigger pie produced by a better-educated labor force, there's a tension between what's good for business and what's good for the business elite.

Similarly, the business elite often supports economic austerity instead of full-employment policies that would increase growth and profits. This may have something to do with the fact that austerity widens inequality, while full employment narrows it by empowering workers. If we peel away the layers of the onion, at the core again we find that those at the top of the corporate pyramid put power before profits.

As one more example, consider the politics of government regulation. Corporations routinely pass along to consumers whatever costs they incur as a result of regulation. In the automobile industry, for instance, the regulations that mandated seat belts, catalytic converters and better fuel efficiency added a few hundred dollars to the price of a vehicle. They didn't cut automaker profit margins. If the costs are ultimately borne by consumers, why do regulations face such stiff resistance from the corporations? The answer may have less to do with profits than with power. Corporate chieftains are touchy about their 'management prerogatives'. They simply don't like other folks telling them what to do.

Corporate Power versus Government Power

In a famous 1971 memorandum to the US Chamber of Commerce, future Supreme Court Justice Lewis Powell wrote, 'The day is long past when the chief executive office of a major corporation discharges his responsibility by maintaining a satisfactory growth of profits.' To counter what he described as an attack on the American free-enterprise system by labour unions, students and consumer advocates, Powell urged CEOs to act on 'the lesson that political power is necessary; that power must be assiduously cultivated; and that when necessary, it must be used aggressively and with determination'. He was preaching to a receptive choir.

The idea that firms single-mindedly maximize profits is an axiom of faith in today's orthodox Econ 101, but alternative theories have a long history in the broader economics profession. Thorstein Veblen, John Maynard Keynes and Fred Hirsch all saw an individual's position relative to others as a key motivation in economic behavior. A sound-bite version of this idea is encountered on bumper stickers: 'He Who Dies with the Most Toys Wins'.

In his 1972 presidential address to the American Economics Association, titled 'Power and the Useful Economist', John Kenneth Galbraith juxtaposed the crucial role of power in the real-world economy to its neglect in orthodox economics: 'In eliding power – in making economics a nonpolitical subject – neoclassical theory [...] destroys its relation with the real world.'

On the free-marketeer end of the ideological spectrum, the pursuit of power reappears but is depicted as a pathology entirely distinctive to the State. Chicago school economist William Niskanen theorized that public-sector bureaucrats seek to maximize the size of their budgets, taking this as a proxy for 'salary, perquisites of the office, public reputation, power, patronage, ease of managing the bureau, and ease of making changes'. He called this 'the peculiar economics of bureaucracy'.

The pursuit of power is not unique to government bureaucracies, however. It is commonplace in corporate bureaucracies, too. In his presidential address, Galbraith made the connection: 'Between public and private bureaucracies – between GM and the Department of Transportation, between General Dynamics and the Pentagon – there is a deeply symbiotic relationship.'

Democracy versus Oligarchy

Recognizing the real-world pursuit of power not only helps us understand behaviour that otherwise may seem peculiar but also redirects our attention from the dichotomy between the market and the state toward the more fundamental divide between oligarchy and democracy.

Real-world societies lie somewhere on a continuum between the hypothetical extremes of absolute democracy (here taken to mean a perfectly equal distribution of power) and absolute oligarchy (a one-person dictatorship), as well as on a continuum between the polar extremes of an economy ruled only by the market or only by the state (see Figure 3.1).

In the nineteenth and twentieth centuries, contending ideologies on the 'right' and 'left' often sought to conflate these two continuums into a single axis, the right identifying the market with democracy and the state with oligarchy, the left making the opposite equation. In reality, the two axes are different.

Much ink, and even blood, has been spilled in disputes over the proper balance between the market and the state as ways to run the economy. But where a society is situated on the democracy-oligarchy axis arguably is more important for the welfare of its people. History has demonstrated that when power and wealth are concentrated in few hands, neither markets nor states can be relied upon to generate good outcomes for everyone else.

If it is natural that corporations pursue power, then it is equally natural that sustaining a democratic society requires public vigilance and action to hold their power in check.

RENT IN A WARMING WORLD

To combat climate change, we need to shift from extractive rent to protective rent.

What's rent got to do with climate change? More than you might think.

Rent isn't just the monthly check that a tenant writes to her landlord. Economists use the term 'rent seeking' to mean using political and economic power to get a larger share of the national pie, rather than to grow the pie. In the United States, Nobel laureate Joseph Stiglitz observes, such dysfunctional activity has metastasized alongside deepening inequality.

When rent inspires investment in useful things like housing, it's productive. The economic pie grows, and the society gets something in return. When rent leads to investment in unproductive activities, like lobbying to capture wealth without creating it, it's parasitic. The society gets nothing in return.

Two other types of rent originate in nature rather than investment. Extractive rent comes from nature as a source of raw materials. The difference between the selling price of crude oil and the cost of pumping it from the ground is an example.

Protective rent comes from charging for the use of nature as a sink for our wastes. In the northeastern states of the United States, for example, the Regional Greenhouse Gas Initiative requires power plants to buy carbon permits at quarterly auctions. In this way, power companies pay rent to park carbon dioxide emissions in the atmosphere. Similarly, pollution taxes now account for more than 5 per cent of government revenue in some European countries. When polluters pay to use nature's sinks, they use them less than when they're free, helping to prevent their overuse and abuse.

Extractive and protective rents both originate in nature, but they differ sharply in that one promotes resource depletion, the other conservation. The tension between these two types of rent from nature is increasingly evident in our warming world.

A daunting obstacle to climate policy arises from the vested interests of fossil fuel corporations in continuing to reap extractive rent. The value of the world's oil, coal and natural gas reserves has been estimated at $27 trillion. Much of this will have to be written off if we phase out fossil fuels. 'You can have a healthy fossil- fuel balance sheet, or a relatively healthy planet,' Bill McKibben observes. 'You can't have both.'