Carbon Taxes and Keynesian Insanity

By: Gerard Jackson | Sun, Feb 17, 2008
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One of the craziest arguments for cutting CO2 emissions is that the policy would promote jobs and clean economic growth by investing in alternative energy sources. Anatole Kaletsky, an economics writer for the London Times, is an excellent example of this Keynesian idiocy. This so-called economist argued that that severely restricting CO2 emissions would stimulate economic growth and employment because they would, now this is a good one, "have the effect on the world economy comparable to a large-scale war". (Digging beneath the gloom, Rupert Murdoch's Australian 29 November 2000).

What lunacy: war and destruction bring prosperity, peace brings stagnation. In case anyone thinks this nonsense is held only by ignorant journalists allow me to point out that in his New York Times 14 September column 2001 the eminent economist Paul Krugman made the same claim about the 9/11 atrocity. Fred Bergsten, who runs the Institute for International Economics in Washington, is another 'economist' who thinks bombing our cities is a great way to raise living standards. According to this genius and former assistant secretary of the US Treasury the tsunami tragedy was a good thing for its victims, at least those that survived it, because:

Like any disaster, you get negative effects through destroying existing properties and people's health, but you do get a burst of new economic activity to replace them, and, on balance, that generally turns out to be quite positive. (Dismal failure to count the true cost).

What Bergsten's absurd fallacy amounts to is that destruction spurs investment and employment by cranking up the economy. It follows that wholesale destruction leads to greater and more advanced investments and thus raises living standards even further. This is Keynesianism gone mad. Wholesale war leads to the wholesale destruction of life and capital. This obviously lowers living standards. Does anyone think living standards were higher in Germany and Japan in 1948 than in 1938? (No wonder economics has such a lousy reputation among the public).

Per capita consumption in Britain in 1948, for example, was lower than in 1938 despite 6 years of continuous warfare -- or should I say because of the effects of 6 years of war compounded by post-war socialist policies? (John Jewkes, Ordeal by Planning, Macmillan & Co. LTD, 1948, pp. 147-8). As Hazlitt pointed out with the example of his broken-window fallacy, the likes of Kaletsky, Bergsten and Krugman only concern themselves with the immediate effects, they cannot see that for anything to be replaced something must be sacrificed. Economists -- real ones, that is -- call this opportunity cost.

A competent economist will readily admit that when capital goods are destroyed by war living standards must fall. Basically there are only three sources from which producer goods can come: a) Existing capital goods must be withdrawn from other lines of production, thus lowering output there, or b) savings must increase which also means a further fall in consumption, or c) capital goods must be imported.

Economic growth basically means capital accumulation. Capital comes out of savings which in turn comes from forgone consumption. In other words, to save means to give up some present consumption in favour of greater future consumption. It should be patently obvious that bombing factories cannot increase the quantity of savings. In fact it lowers them because capital goods are also savings. Even after a devastating war a country can raise its living standings, Germany and Japan are proof of that. But the point is that it was not the war that did it but their high savings rates and comparatively free-market post-war policies.

If the likes Kaletsky and Krugman are right it would pay a country to thoroughly wreck its factories, offices, transport systems and even housing stock every few years. Looked at from this angle the absurdity of the idea that destruction creates prosperity becomes immediately obvious. One doesn't need wars, thank God, to accelerate capital replacement and expand the capital structure. One just needs plenty of savings and entrepreneurship. Greater savings provides the necessary capital while entrepreneurship dissolves and recombines capital combinations in a way that increases efficiency and lowers the costs of production -- and all without the need for mass air raids.

What the likes of Kaletsky obviously don't understand is that market processes are continuously destroying inefficient capital combinations and even destroying obsolete capital goods. This is part and parcel of the market process that raises living standards. Kaletsky's silliness brings us to global warming. According to this economic wiz kid raising the cost of energy "will boost employment, investment and economic activity. . ." But how can it boost investment when investment can only come out of savings?

Did Kaletsky mean that raising costs and lowering output raises savings? Or was he seriously suggesting that investment can exist without savings? After all, investment consists of the material means of production which can only come from forgone consumption, i.e., savings, which is the real cost of economic growth. This man's stuff is unbelievably bad. But on the basis of his outrageous nonsense he argued that we would all be better off materially if we swallowed green propaganda, as he seems to have done, and took a massive cut in living standards. Drop dead, mate.

The test of a good economist is to be able to follow the secondary consequences of an economic decision. He is one who is not captured by immediate effects and so ignores the long run. Kaletsky is not a good economist. So what does this also say about the mighty Krugman? But this fallacy has taken a more subtle form. In his defence of a destructive carbon tax John Humphreys argues that the best way to encourage the growth of "alternative energies" is to "put a price on carbon". The market will respond by discovering "new energy sources". (Exploring a Carbon Tax for Australia, Centre for Independent Studies, 2007).

The fallacy here should be obvious:

Taxes do not result from a market process, nor do they reflect allocation decisions of resource owners . . . In other words, taxation is a method of intervening, not an alternative to intervention or nonmarket allocation. (O'Driscoll and Rizzo, cited in Efficiency and Externalities in an Open-Ended Universe, Ludwig von Mises Institute, 2007, p. 13).

Moreover, so-called alternative energy sources would savage our living standards*. Callous European bureaucrats and politicians have taken the carbon tax to its logical conclusion and are now planning to "reduce the carbon footprints" of human beings by imposing what they call "global warming tariffs". This would be a direct attack on developing nations and if successful would lead to an enormous loss of life. (I have no doubt that Asians would rightly interpret this as economic warfare designed to them in their proper place). It does, however, have the unintended effect of revealing the carbon tax as an outrageous tax on energy consumption that would drastically slash living standards if implemented.

One should note that the green movement is contemptuous of the wellbeing and lives of others. This is why they don't have a problem with policies that reduce our 'carbon footprint' by reducing the number of human beings. The notorious Professor Paul Ehrlich made this clear when he stated: "Giving society cheap, abundant energy . . . would be the equivalent of giving an idiot child a machine gun". (An Ecologist's Perspective on Nuclear Power', May/June 1978 issue of Federation of American Scientists Public Issue Report).

What we have here is bad economics, bad science and questionable ethics. So what is the CIS doing supporting a policy that would lead to capital consumption and a catastrophic drop in living standards? I think Greg Lindsay, Executive Director of the CIS, has a little explaining to do.

*These alleged alternatives suffer enormous diseconomies of scale that can never be overcome. This makes them horribly uneconomic. On the other hand, centralised power generation enjoys economies of scale, meaning that they enjoy long run falling costs. Therefore, 'investing' in energy sources amounts to a policy of capital consumption.

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Author: Gerard Jackson

Gerard Jackson

Gerard Jackson is Brookes economics editor.

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