A Few Thoughts About Economic Growth as a Climate Change Adaptation Strategy

 John Cochrane has posted an important blog post about adapting to climate change.  His piece mainly focuses on macroeconomic issues.  For decades, John was colleagues with Bob Lucas and those familiar with Robert Lucas’s optimistic work on economic growth will see a correlation.  While John makes many points, his main point is;  “if a world’s economy grows by 3% per year out to the year 2100 — it will be rich enough to handle any of Mother Nature’s shocks at that point or along the way”.   He points to the growth of China’s economy as an example.  John is optimistic about our future;

“The share of the world population in extreme poverty is plummeting. No plausible estimate of climate damage comes close to this kind of change.  And this change comes in part from increasing diffusion of fossil fuels. People who used to hoe by hand now use tractors.”

John’s piece really focuses on misallocation.  He wants nations to remove misallocation road blocks such as land use restrictions to unleash economic growth so that more nations and their citizens have the income to take the steps they deem necessary to handle the harder punches thrown by Mother Nature.  

As a macroeconomist, John views decarbonization as one strategy that raises our real income in the year 2100 and he wants this strategy to compared to other pro-growth strategies.  Another quote from JC;

“But reducing carbon is thus, logically, just one item on the list of answers to “What can we do to raise GDP in 2100?,” and especially “What can we do to raise GDP in currently-poor countries by 2100?” Asked that way, you can see that “lower carbon emissions” is about #100 on the list, even admitting the 5-10% of GDP thumb-on-the-scale estimates. It’s like asking whether removing that “Go Bears” flag from your radio antenna will improve your gas mileage and lower your overall expenses. Well, yes, maybe, but it’s hardly first on the list.” 

My Thoughts;

1.  Take a look at David Sattherthwaite’s 2010 tough review of my 2010 Climatopolis book.  You will see that John and I share many thoughts in common on this topic.  I have working on the costs of climate change for 15 years now going back to my 2005 Death Toll paper.    Once I estimated that richer nations suffer fewer deaths per-capita in natural disasters , I immediately saw the implications for climate change adaptation.  Robert Lucas hadn’t connected his economic growth work to a nation’s non-market quality of life. He was implicitly assuming that there are complete markets and was not incorporating ideas from his buddy Sherwin Rosen on non-market quality of life.  

2.   John does not discuss rare disasters.  Martin Weitzman’s key research was really about macro-economics.  Marty argued that rising global GHG emissions pose new ambiguous risks for economy.  Such fat tails could be quite disruptive if there are supply chain networks to the economy (intuitively think of a domino chain).  While I greatly respect Marty’s work here, here is my response.   Marty was my friend and we would debate.  I am a microeconomist and I said to Marty; “Many of us know that we do not know what risks climate change will pose.  Those of us who are risk averse will seek out implicit insurance schemes and those that feature option value so that we can move ourselves and our capital to “higher ground” (i.e safer places) if climate change turns out to be as bad as you claim.  Firms can build in redundancies in supply chains and use hedging markets to reduce their risk exposure. “ 

Weitzman’s great work didn’t engage with Townsend’s work on risk sharing and Ehrlich and Becker’s work on self protection. Climate change represents a set of spatial shocks and we can always re-optimize as we learn.  This is a key theme of my Climatopolis book and my 2021 Yale University Press book Adapting to Climate Change.

3.  John sets society’s goal as maximizing per-capita income in the year 2100.  Would Greta agree with him?  The answer hinges on whether there are complete markets. If there are complete markets then the separation theorems hold.  If there are incomplete markets, then one must be more explicit about whether the loss of natural capital imposes losses on us that $ can’t offset.  An example. The recent heat wave may have killed a billion creatures.    Is this loss of natural capital reflected in market prices?  Yes, if these are market commodities.

4.  John’s blog post doesn’t sketch out any Gary Becker household production functions, what does extra $ in 2100 buy us in terms of safety, comfort or health or protection of our children?  This is a key theme of my 2021 book.  John’s optimism (that I share) hinges on knowing that money will buy inputs that can offset Mother Nature’s stronger punches caused by climate change.  The Beatles sang that “money can’t buy me love”.  IO economists continue to try to estimate structural production functions of making goods. In the year 2021, what do we know about structural production functions of producing health and safety?  At a conference in 2019 that honored Frank Wolak, I presented these slides to make these points clear.  

5.  John does not bother to discuss the feedback loop.  If economic growth accelerates, then GHG emissions will accelerate (given current technologies).   See the paper by Davis and Gertler in PNAS 2015 for an example.  John would counter that per-capita income growth will accelerate decarbonization as the Paul Romer green innovation effect will kick in so that Universities such as Uchicago and Stanford do more basic research and this leads more Elon Musks in the future to launch more green firms selling great green products that richer people voluntarily buy.

My Bottom Line

For 15 years, I have argued that capitalism caused climate change (the GHG Engel Curve associated with fossil fuel consumption) and capitalism will solve the climate change challenge through fueling innovation and accelerating our adaptation capacity.    The old generation of Uchicago economists think alike.  Here is 2012 video where I elaborate.  

My 2009 piece; “Urban Growth and Climate Change” fleshes this out.