A little follow up from my post the other day: It's probably going too far to say investment to curb climate change, if made during a depression, is a free lunch. But certainly the basic benefit-cost analysis for what constitutes the most efficient policy with respect to climate change, or any other environmental or public good, changes when there is another massive market failure at play. Spending to reduce emissions would seem to have two benefits: reduced externalities plus closing the macro output gap.
some ways it feels a little like the so-called "double-dividend"
hypothesis: the idea that taxing pollution can solve the environmental
externality while raising revenue that can reduce distortionary income
or sales taxes. That rather compelling idea still gets kicked around a
lot, and there is probably a small truth to it, although the calculation
turns out to be more subtle (see Goulder's review, for example).
At first blush, the macro double dividend seems like it could be much larger. As the late James Tobin apparently used to say,
it takes a lot of Harberger triangles to fill and Okun gap. The old
double dividend literature dabbles with the former, and now we're
talking about the latter. I'm not familiar enough with the literature
to know whether that have been attempts to bridge these vastly different
areas of economics. It strikes me as a difficult thing to do. And
even if it were done well, likely hard to publish due to the macro wars.
if environmental policy were to be structured with macro multipliers in
mind, it could change the entire calculus about the relative benefits
of standards versus prices, especially if one would induce more spending
in the near term. It might also alter the implications of
uncertainty. Standard micro analysis, which is fashionable in
environmental economics, favors delayed timing of investments, but with
small economic values at stake. The macro effect would strongly favor
investment now, with presumably big economic stakes.
course, there are public goods besides reducing environmental
externalities. Spending on basic infrastructure like roads, bridges,
tunnels and railways might have similar double dividends. So how do we
more generally evaluate the costs and benefits of public policies in a
depressed economy, assuming (as I would) that macro output gaps are real
may be with us for awhile?
I don't know the answer to
this question. But there would seem to be a lot more to it than
measuring multipliers. So, who are the brave, inquisitive souls willing
to dive in?