I get emails every day from Tyler Cowen and I enjoy them. This one, How economists use GDP to think, is useful for a couple of reasons.
We don’t understand large numbers. The U.S. GDP at $23 trillion is just a number. By itself, completely meaningless. Even 1% of GDP is vast number, $230 billion. That is about the value of all economic activity for a year in Greece. A big amount. One percent of the US economy is about the sales for for Amazon during 2020. You need to be big to capture 1% of U.S. GDP.
When we study growth in the economy. 2% in a year, a not so special rate, is huge in absolute form. Growth of two Amazons in a year. Not child’s play.
Sometimes thinking in percentage change has value. We have a sense of that.
The article points out a familiar fact. The estimate for climate change effects is that if we do little or nothing, by 2100, (the article uses 2200, but I think that is a misprint) there will be 10% of GDP missing. We know $2.3 trillion today would be a serious setback and it is unlikely to be meaningless in 2100.
The author points to the expectation that spending in the present is likely to generate a “profit” in terms of GDP. I didn’t see the reasoning so I built a model.
The question is how much spending each year would cost the same loss of GDP and get an environmental benefit.
If we look at the American economy at $23 trillion and estimate growth to be 2% annually, we can guess 2100 will be about $110 trillion. If we are going to be missing $11 trillion, it would make sense to address it.
Critical thinking says we must spend less than $11 trillion to avoid loss. But that doesn’t deal with the long time sequence. A good question, I think, is how much each year should we spend so the spending that reduces the climate change affect costs no more than $11 trillion over 79 years.
If we assume we could get 2% GDP growth then if we spend some money each year and end up at $110 trillion less 10%, $99 trillion, then we are no worse off and have helped the environment. That means we grow at just 1.864% instead of 2%.
So spending 0.136% of GDP will result in a financial loss of the same amount we would lose if we did nothing. We help the environment though at that should be worth something. So a profit. Any amount bigger means the loss to spend as we go exceeds the economic value. That does not necessarily imply we should not spend more, it just means we need to assess the future cost more completely. Given how hard it is to do, and how hard it would be to estimate the effect of new technology over eight decades, it seems unlikely there will be anything other than rhetoric.
The annual expenditure
If 0.136% of GDP is the breakeven financial number, how much should the United States spend next year? Well, 0.136% of $23,000,000,000 would be right. That is $31,280,000,000.
The current thought on this subject is spending should be higher than $31 billion next year. Maybe we are over-solving the problem. Not uncommon. The federal budget proposal in the U.S. is $36 billion. In the range of reasonable, Given we know next to nothing of how technology will evolve and we are relying on the current science being settled. “Settled science” is an oxymoron. It has never happened in history. Some of the money should be going to clarifying the problem and the possible solutions.
Worst of all, states spend money too. I didn’t add that up, but it’s safe to say the current response is far more than the breakeven suggests.
Maybe we are not doomed. Of course, it depends on how good the 2100, 10% estimate is, how many other effects there could be, and how effectively the money is spent. We can’t know that yet. A reasonable guess.
In Canada the federal spending alone is forecast at $15 billion. Based on a GDP of $2 Trillion the spending should be about $2.5 billion. The budget is 6 times more than reasonable. Plus the provincial spending on top of that. Are they serious? More likely virtue signalling worth $12 billion.
Canada isn’t going to change anything by much, but spending money always looks good to some. Wasteful.
If we believe the solve it in 10 years or less rhetoric, 2022 spending must be $251 billion. Before doing that, there are a few other things we might want to know.
Based on reasonable answers to the six questions, much more than the current spending request would be irresponsible. As we learn more we may be able to spend even less, or maybe we must spend more. Patience is a seldom-seen virtue in politics.
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