Second-Class Solar Panels?

Sun-soaked New Orleans should be a great place for solar power. Yet according to TÜV Rheinland PTL, a testing lab, up to 30 percent of photovoltaic panels installed in such steamy areas of the U.S. are likely to fail in less time than the 25 years manufacturers typically specify in their warranties. Homeowners will be covered, of course, but it will still be a hassle. Even in hot, dry areas failure rates could hit 12 percent.

The same producers’ panels probably won’t fail as quickly in Europe, where vendors agreed to performance and quality standards back in 1999. In the U.S., only the state of Florida has followed suit. As a result, “manufacturers make two grades of panels: one for the U.S. and another for Europe,” says Mani Tamizhmani, TÜV’s president. Panels do have to pass federal tests for safety in the U.S. but “consumers here don’t yet know to ask for quality certifications,” he says.

In other words, contrary to all that we’ve been told by the economic pundits for decades, it is the ABSENCE of regulations and regulatory performance standards that costs consumers money. This is a great case for the contribution of performance standards to overall economic efficiency.

Markets work very efficiently, indeed, but not in the ways we would like to see them work: In the absence of any quality standards and the presence of growing demand for a product, especially if there is any shortage of supply, it is efficient for a manufacturer or supplier to provide the lowest cost product possible, even if the quality is inferior to what could be produced. Buyer beware!!

Especially when the public sector is massively subsidizing demand for a product or service — in this case demand for photovoltaic panels — there is a need to assure value for money. In the absence of any quality standards, the government is asking to be taken for a ride by those quickest to market with the lowest cost (and potnetially lowest quality) products and services possible.

We saw this was true with Blackwater and Wackenhut security services in Iraq and Afghanistan … and now we are seeing the same thing with PV panel providers to homeowners and businesses in the United States itself.

Given a choice between stimulating the economy and protecting the environment, 58 percent of Americans said it was more important to stimulate the economy, compared with 33 percent who chose protecting the environment. In April 2007, 36 percent said it was more important to stimulate the economy, compared with 52 percent who chose the environment.

No doubt the priority given the economy today would be greater, given Friday’s numbers on job losses and unemployment.

But it’s a silly question and a false, unnecessary choice. It hides the most rational course of action: doing both simultaneously.

The question ignores the fact that a public dollar — or $1 trillion such dollars — can be spent in ways that simultaneously:

• produce new jobs and incomes,
• help fight global warming, and
• save money for people on tight budgets.

Public investment in the energy efficiency of homes and other buildings can do all of that — and might even make it easier for budget-strapped homeowners to pay their mortgages, so it could stabilize neighborhoods and help unfreeze the lending system as well. That’s a pretty powerful answer to those who say we can’t afford green concerns because of economic problems.

A dollar can accomplish more than one objective at a time. The problem is that we have come to think of “efficiency” as pursuing a single objective at the expense of all others, even those that might logically be complementary. Environmental advocates see industry only as sacrificing the environment to the efficient pursuit of profit maximizing. Industry for too long has seen environmentalists only as regulating and constraining their pursuit of profits. Of course, it is difficult for private parties — businesses pursuing profits, or neighborhood residents protecting their air or well water quality — to pursue multiple objectives at once. That’s a role for government. It’s a role government plays exceptionally well.

This brings us to the U.S. in 2009: facing huge government deficits, uncertain energy costs, rising unemployment and growing poverty, and a threat from global warming that requires action sooner rather than later. The spending legacy from 2008 includes a $700 Billion “Toxic Assets Relief Fund,” of which half has been spent in ways that seem to have had no effect, and plans going forward include spending the other $350 Billion of TARF money and implementing a massive, ~$800 billion stimulus plan.

If there was ever a time we needed efficiency in pursuit of multiple goals, it’s now.

Economists are well aware of the need to make each dollar do more. See Principles For Economic Recovery And Financial Reconstruction From Progressive Economists (PDF). Among the most efficient ways to do so are investments in energy efficiency and related infrastructure, as well as in technology development to promote renewables and new forms of efficiency not yet imagined. This is not news: The Political Economy Research Institute and Center for American Progress released Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy (PDF) way back in September 2008. My background is in state and local economic development as well as environmental protection, and I find their arguments appealing.

Yes, we can have economic revitalization that serves long-term sustainability. But we need to transition carefully and avoid generating unnecessary economic, political, social, and environmental costs in the process. Like it or not, that is likely to mean:

• Not closing all coal mines and coal and nuclear generating plants tomorrow, or next week, or next year. (Yes, we can stop building them, but we need to be building their alternatives.)
• Not calling for federally mandated congestion pricing or anti-sprawl measures or other actions as conditions for federal aid to states and cities (at least not yet … the time will come).
• Not telling people to drastically change their lifestyles now (though eventually they probably will have to, and we should shift technology priorities to make it easier).
• Not spiking CAFE standards for auto fuel efficiency as far as we’d like and know to be technologically feasible, because U.S. manufacturers will find it harder to jump that high than will their competitors, and we can’t afford more U.S. job losses right now.
• Not taxing carbon or oil or gas anywhere near what their externalities (economic as well as environmental) would suggest, unless we can protect households and businesses from additional costs when they don’t have the capital to invest in avoiding them.
• Recognizing that the distributional consequences of proposed environmental policies are important, that environmental justice has to be pursued, and that equity breeds efficiency by, at a minimum, lowering resistance from possible allies.

Change is coming, folks, and I’m all for that … but it won’t be easy, and ideological or environmental purity won’t get us where we need to go, not without autocratic control. (Do you want that? We had a taste of tendencies in that direction for the past eight years.)

So let’s not forget some long-standing and well-worn advice from the consummate politician:

“It must be considered that there is nothing more difficult to carry out … than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who could profit by the new order, this lukewarmness arriving partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had an actual experience of it.”

You’ve may well have seen the first sentence of that quote from Niccolo Machiavelli in The Prince. It’s the most quoted section. But it is the rest of the argument that is the key to moving forward on climate change and economic redevelopment in the Obama era.

The event marked the first public speech by new EPA Administrator Lisa Jackson, who laid out the nation’s new environmental-justice and climate-change priorities. President Obama echoed Jackson’s sentiments and made a statement to the Muslim world by giving his first TV interview to Al Arabiya television.

Civilized, reasoned discussion and debate on environmental health and inequality, on the complexities of climate change economics, on cap-and-trade, cap-and-dividend, carbon charges, and on greening the economy as we invest in new infrastructure framed the formal content. But those substantive sessions were just the subtext.

The real text was the energy, the drive, the initiative, and the breadth of coalitions and commitment evidenced throughout the two day event, with participants from across the nation, sponsorship and involvement from mainline environmental organizations, multiple federal agencies, and an array of foundations. The Live blog from the event gives a hint of the dynamics, the dynamism, and the hope generated.

Energized? Pumped up? We could have run the lights in the conference venue off the energy in those breakout and plenary sessions … while we still don’t have the renewable energy power storage systems we might want for the future, those of us who had the privilege of attending now have the energy stored up in our hearts and minds for the coming struggles.

Whether it’s some variant of a cap-and-trade system, which the administration seems to favor, as do members of the U.S. Climate Action Partnership, or a carbon charge, as advocated by the Environmental Justice Climate Change Initiative, federal action is coming. The need for grassroots activism to pressure every single member of Congress to resist the special interest lobbies that will weaken the controls and incentives as they pursue their narrow, short-term economic interests is acute.

The conference helped launch what will need to be a massive national effort. Let’s go!

Wrong! This is exactly what the domestic car industry needs. No “car czar” or other federal regulator would be able to push as hard to get more fuel-efficient and lower-emissions vehicles produced in the U.S. faster than regulation-constrained market demand.

That $17 billion provided as emergency support to GM and Chrysler had no real strings on fuel efficiency and emissions attached. Anyone who thinks the U.S. manufacturers could continue to compete with European and Asian car makers whose products are more energy efficient and less polluting — and who are ahead of the domestic producers in their command of the new technologies — is dreaming.

We needed something to shake them up fast. This action by the Obama administration will do just that, without having to spend any of the new White House political capital on working new regulations through Congress.

Quoting that Times article, the automakers claimed that allowing the 14 states to impose the California standard “would require them to produce two sets of vehicles, one to meet the strict California standard and another that could be sold in the remaining states.”

How stupid do they think we are? Or, how stupid are they? Why not produce one set of vehicles that meets the California standard with all their products? If they couldn’t make a profit producing vehicles to meet the stricter standards, then they could just abandon sales in those states. (They were doing that anyway, in effect, by not producing what the citizens of those states wanted, as expressed by their legislatures.)

So, perhaps the California standard will provide a needed kick-in-the-pants to the auto industry. It might hurt economic revitalization efforts in the core states of the U.S. auto industry, but it also is a potential boon to economic development efforts in urban centers across the nation.

Why? Simply because we have national air quality standards — many urban counties are in “non-attainment” status relative to the Clean Air Act. If their local vehicular emissions — often 40 percent or more of the emissions that violate particulate and ozone precursor standards — were to fall, then they might be able to attract manufacturing jobs that now go out of the country or into rural areas (causing new environmental and transportation problems there) back to the nation’s metropolitan centers, where the vast majority of our population lives.

For most states, then, economic development may be stimulated by the stricter emissions standards pioneered by California and blocked by the Bush administration. That’s growing the green economy!

Everyone keeps asking the members of President Barack Obama’s energy and environment team if the U.S. can “afford” their agenda in light of the economic condition of the nation. (Witness the Washington Post interview with Carol Browner as one example.)

Silly question … and they get simplistic answers, such as “we will.” It’s a silly question because it assumes a conflict that isn’t there, as do the typical mainstream surveys of public opinion. The New York Times reports on Jan. 18:

Given a choice between stimulating the economy and protecting the environment, 58 percent of Americans said it was more important to stimulate the economy, compared with 33 percent who chose protecting the environment. In April 2007, 36 percent said it was more important to stimulate the economy, compared with 52 percent who chose the environment.

That’s a false, unnecessary choice; and simply posing the proposition may generate opposition to the most rational course of action, which is not making the choice.

The way out lies through applying a little concept in economics that many in the environmental community have tended to abhor, at least until attention became focused on energy consumption: efficiency.

Pursuit of efficiency came to be associated with exploitation of workers, despoliation of landscapes and environments, abandonment of community roots and commitments, and many abusive actions of companies large and small in the 20th century.

But most climate change agendas today start with the pursuit of what everyone seems to agree is the low-hanging fruit of efforts to lower emissions: energy efficiency. Many who challenged the necessity of efficiency in the past are now trying to increase it today and into the future.

What gives?

It’s pretty simple: Companies pursue efficiency in the generation of private profit for their owners and shareholders. Climate change advocates pursue efficiency in the utilization of energy resources.

The issue, then, is not whether efficiency is good or bad. The question is not whether or not to be efficient. (Do you really want to waste any effort in pursuing your goals?) The questions need to be addressed to the goals: Are they good or bad? Are different goals always in conflict or might they complement each other?

This brings us to the Obama administration and the U.S. in 2009 — a massive stimulus plan, huge government deficits, uncertain energy costs, rising unemployment and growing poverty, and a threat from global warming that requires action sooner rather than later. If there was ever an era in which we needed ultimate efficiency in pursuit of multiple goals, it’s today.

And economists — or at least some of us — are well aware of the need to make each dollar do more. See “Principles For Economic Recovery And Financial Reconstruction From Progressive Economists” [PDF].

And, glory, glory, among the most efficient possible things to do to address those multiple problems are investments in energy efficiency and related infrastructure as well as in technology development to promote progress for renewables and new forms of efficiency not now even imagined. This is not news: The Political Economy Research Institute and Center for American Progress released “Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy” [PDF] way back in September 2008.

My background is economic development (not “growth”) as well as environmental protection, and I’m licking my chops over our prospects …

Yes, we can have economic revitalization that serves long-term sustainability in the process. But we need to transition carefully and to avoid generating unnecessary economic, political, social, and environmental costs as we change. Like it or not, that means:

• Not closing all coal mines and coal and nuclear generating plants tomorrow, or next week, or next year (Yes, we can stop building them, but we need to be building their alternatives.)
• Not calling for federally mandated congestion pricing or anti-sprawl measures or other actions as conditions for federal aid to states and cities (at least not yet … the time will come)
• Not telling people to drastically change their lifestyles now (though eventually they will)
• Not spiking CAFE standards for auto fuel efficiency as far as we’d like and know to be technologically feasible, because U.S. manufacturers will find it harder to jump that high than will their competitors, and we can’t afford more U.S. job losses right now
• Not taxing carbon or oil or gas anywhere near where it should rationally be taxed to include their externalities (economic as well as environmental), unless we can protect households and businesses from those additional costs when they don’t have the capital to invest in avoiding them
• Recognizing that equity breeds efficiency by, at a minimum, lowering resistance from possible allies.

Change is coming, folks, and I’m all for that … but it won’t be easy, and ideological — or environmental — purity won’t get us where we need to go, not without autocratic control. (Do you want that? We had a taste of tendencies in that direction for the past eight years.)

So let’s not forget some long-standing and well-worn advice from the consummate politician:

It must be considered that there is nothing more difficult to carry out … than to initiate a new order of things. For the reformer has enemies in all those who profit by the old order, and only lukewarm defenders in all those who could profit by the new order, this lukewarmness arriving partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had an actual experience of it.

You’ve probably seen the first sentence of that quote from Niccolo Machiavelli in The Prince. It’s the rest of the argument that is the key to how we move forward on climate change and economic redevelopment in the new Obama era.

Normal Accidents is a 25-year-old book by Charles Perrow, subtitled “Living with High-Risk Technologies.” Perrow, reflecting on the Three Mile Island nuclear incident and other accidents, argued that modern advanced technologies are so complex, and require such careful monitoring and management, that accidents, including potentially massive system failures, have to be considered “normal,” not exceptional, events.

The technologies he wrote about included many we consider commonplace today, but climate change and other global environmental impact risks were not among the "accidents" he anticipated.

Economists seem to have learned precious little from the book, highly acclaimed as it was. Economic calculations still get made on the basis of “expected values” — the statistically most likely outcomes — despite the fact that these values do not accommodate the virtual certainty of unexpected events.

Analyses like Environmental Impact Statements — required for major federal investments under the National Environmental Policy Act — are still based on what economists call “expected utility theory” (EUT). Based on past experience and recorded data, we project the probability of different events and use those odds in combination with the “utility” or value associated with each alternative event to arrive at an expected value for a course of action.

That doesn’t make sense … or does it?

Think of it this way. On a given day, it could rain or be sunny. You have to decide whether or not to carry an umbrella. The utility of having an umbrella if it rains is high, but if it’s sunny, the umbrella’s nothing but a pain — a negative utility. Whether you carry the umbrella is a function of what you think the odds are of rain.

Great … except that you don’t know if you can trust the weatherman’s forecasts. And you’ve failed to consider a whole mess of possible outcomes: High wind makes the umbrella useless even in rain; there’s hail or snow; if you bring your umbrella, it is sunny, and you forget it somewhere and lose it.

Not only that, but you’ve also assumed that none of the negatives are too terrible, and none of the positives too spectacularly good. If you were like the Wicked Witch of the West in The Wizard of Oz and melted if you got wet, wouldn’t you carry your umbrella no matter what the odds were?

Now let’s get back to coal ash and normal accidents.

If we buy Perrow’s line of argument, we’d have to incorporate possibilities other than rain or sun in our umbrella calculations. The logic of normal accidents is that something unexpected will happen if the technology or system is complex enough (and enough time has passed). The same way, when the coal-fired power plants were built and the ash storage designed, some allowance for a spill or other accident should have been included in the calculations of the expected value of new power plants.

Assuming that no spill will occur is not reasonable. There must have been some calculation made of the probability of accidents and the damage they might cause. But did anyone plan for or calculate the loss associated with a complete collapse of the retaining wall and a spill of the entire containment, not just a slow leak? I don’t know, but the New York Times coverage of the spill at the Kingston, Tenn., plant noted that the TVA had struggled for years to control small leaks.

They had to have known better, right?

Not quite. We also have excellent evidence on the TVA’s assumption about the likelihood of a massive spill and the costs involved. From the NYT article:

In 2003, it [the TVA] considered switching to dry disposal, but balked at the estimated cost of $25 million, according to a report in The Knoxville News Sentinel. That is less than the cost of cleaning up an ash spill in Pennsylvania in 2005 that was a 10th of the size of the one in Tennessee.

So, that tells us the TVA figured the probability of a spill multiplied by the likely cost to clean up was less than $25 million in current dollars in 2003.

They were badly wrong. Why?

The expected value calculation appears to have assigned a zero probability to a spill as massive as the one that occurred. That’s as if you carried an umbrella in the rain even though you might melt  if you got wet, and assigned a zero probability to the possibility of high winds or hail. That’s not rational.

Assigning that zero likelihood also meant that there was no serious effort to calculate the cost of such a massive failure.

What this helps to see is that the expected value calculation — and all our NEPA-mandated Environmental Impact Statements for federal projects — depend on key assumptions that are unlikely to be true even if we make conscious allowance for normal accidents we tend to ignore:

• We know the possible outcomes or conditions (the weather states that can occur),
• we know the probability of each those outcomes will occur within some time frame, and
• we know the impacts on “utility” of each of those outcomes.

If we don’t know all possible outcomes, or if there is uncertainty about the likelihood of each outcome, or if we don’t fully understand or can’t measure the effects of each outcome, then the expected value calculation is a guess, not an empirically-based forecast.

The weather forecast for tomorrow, and its effects on the ability to do outdoor construction work, doesn’t meet these standards for a full empirical projection. Yet the designers of those power plants claim to be able to give us good forecasts of the stability of the ash storage facilities for the decades that a new plant will be in operation.

Good luck. Any power company planners — or state and local government regulators and oversight agency personnel — out there: Did you ever hear of the Precautionary Principle?

But the current economic downturn often drowns out calls for major spending to lower emissions or otherwise address climate change. Still, the reality is that the two — economic and environmental revitalization — can and should go hand in hand.

A great introduction to why is available from Frank Ackerman in Dollars & Sense magazine. “Climate Economics in Four Easy Pieces” doesn’t even need five full pages of English to make a strong case for action that stands up to climate change deniers.

How many of those did you create today?

Well, you created a whopper of an environmental externality if you were in any way tied to the electricity grid that includes a certain TVA plant in Tennessee — the Kingston Fossil Plant that produced the fly-ash slurry spill in Harriman, Tenn. Given interlocking power grids, odds are if you lived in the U.S. you helped create that mess when you turned on the computer.

Unless your electricity bills include a charge on the risk that such an accident could occur, they failed to internalize that externality.

Your utility bill also likely fails to internalize the greenhouse gas emissions associated with generating and delivering your power.

But the slurry spill and the massive damage to water and soils it has produced also helps us remember that we miss externalities even when we are looking for them and might be willing to pay for them. It should remind us how much we have benefited from ignoring externalities in the past. Yes, benefited.

Harriman, Tenn. now has a new contaminated site. Pity. But there are, by most estimates, well over 500,000 “brownfields” — sites that are abandoned or underutilized due to real or perceived contamination — across the U.S. So why all the noise about one more contaminated site?

It’s because we can no longer ignore the externality — the spill risk posed by all the coal-fired power plants storing fly-ash slurry on-site (see “Who will be the next victims?“). We have to admit that coal is not clean and that the price we pay for power does not cover all the costs generated by the power generating process. (We still do not have enough publicity for a real national debate over the social, economic, and environmental external costs of coal, but that is another story.)

But what if we had known all those costs when we built the first coal-fired power plants? Would we have built them? Would we have charged far more for the power? What would our society and economy be like now if we had charged more for power?

Extend those questions to those 500,000 brownfields. They include old power plants, coal gasification plants, steel mills, factories making any of the thousands of products that drove American technological progress in the 19th and 20th century, and all those machine shops, appliance and sewing machine repair shops, dry cleaners, paint stores and others that polluted the soil and water in the course of doing business, mostly out of ignorance. Would we be better off today had they never existed?

Would we be better off if the externalities had been recognized at the time and the products far more expensive, with fewer made?

Would our current incomes be higher or lower? Would our ability to pay more for cleaner power to avoid further greenhouse gas emissions or to invest in energy efficiency be higher or lower?

Are we sure that we would not have done as much damage either way?

There’s no hard evidence. There’s a lot of argument and speculation grounded in assumptions. You can’t have hard evidence on the “might have beens,” as there is no source.

Except perhaps for automobiles. There are other high-income industrialized countries that rely far less on cars and trucks than the United States. Western Europe offers empirical evidence for the “might have been” if the U.S. had internalized auto externalities — vehicles would have been more expensive and bought in fewer numbers, and mass transportation systems would be stronger.

If that evidence seems weak, think how much less there is for arguments about incorporating externalities into the prices for other products and services developed in the 20th century. Speculate on the full cost of a computer today, including all externalities — even those associated with the computers of the mid-20th century, which helped make those of today possible. Would I be blogging? Would you be reading this?

We probably have to admit to ourselves that we are, on balance, benefiting today from past pollution without putting price tags on it or paying for it.

We owe a debt. But to whom, or what? And how do we discharge it?

Christmas, in other words, is an Institutional Reality.

There’s nothing scientific about it — in ecological or cosmological terms, it’s just another revolution of the planet. But an economic model that assumes Christmas Day is business as usual across the globe is simply not being realistic.

I don’t know of any mathematical model of the global economy that takes into consideration holidays in different countries and cultures, and incorporates those data into sales projections, output expectations, or other such forecasts. There was some effort by those opposing the creation of a Martin Luther King holiday to demonstrate the economic losses of a new holiday — and there were reasonable arguments that another vacation day resulted in lost GDP.

But the loss of GDP didn’t prevent the creation of a day honoring an icon of the U.S. civil rights movement. Why not? It’s interesting. Assuming most U.S. workers work 5 days per week, that’s 260 days a year. Allow for (a measly) two week’s vacation and we’re down to 250 days of work, excluding holidays. Loss of one of those days means 1/250th of our productivity is lost — a full 0.4% of GDP!

Doesn’t sound like much to you? Hey, many opponents of efforts to mitigate climate change are up in arms over the fact that major investments in mitigation and associated regulations might (note: might, not "will") cost as much as 0.4 to 0.5% of GDP! If we can declare a holiday and lose that much GDP to honor one man, surely we can rationally allocate as much GDP growth loss to an effort to avoid a possibly disastrous change in the global climate and massive population migrations (and probably wars) associated with rising seas due to shrinking ice caps.

Ah, but here we come up against Motivational Realities.

Change is difficult. Declaring a holiday is easy, and adjusting to it is a minor accounting problem: pay overtime for those who work, accept some productivity loss for those who do not, otherwise not much else has to change. Altering how we do business, how we consume, and how we live our lives requires far greater motivation — and that has not yet been stimulated, at least not in most of the U.S. as of late 2008.

Back in the 1970s, the U.S. consciously saved energy. We were motivated by an oil embargo (a real shortage), federal regulations, and a president who made a public display and a virtue of wearing sweaters indoors. The context — shortages and leadership — provided motivation. What we have just learned is that price swings, even unexpected and historically unprecedented price increases, do not motivate as well. (There is some evidence that U.S. demand for large SUVs softened substantially when the price of oil ran up to $140/barrel and gas cost over $4.00/gallon, but there is also evidence that the demand started to climb a bit once again as the price fell — before it became almost impossible to get a car loan.)

This brings us around to Assumptions and Reality.

We are blessed/cursed today with a pair of seemingly unrelated news stories, both belying some of the assumptions underlying economic models.

First, we’ve just had the nation’s largest spill of coal ash, a dubious present from the Tennessee Valley Authority and reminder of the assumptions behind "clean coal." There is argument over how toxic the coal ash is in its relatively solid form, how badly it has polluted drinking water sources, for how many people. But what is not subject to argument is a physical relationship: if we require that the smoke from burning does not contain some products of combustion, then those substances will end up as solids or liquids instead. This is a reality, not an assumption.

When we model the costs and benefits of emissions controls and forget about those residual solids and liquids, we are assuming that they pose no costs. When we decided not to regulate the disposal of those leftovers because doing so would cost $5 billion — according to an Edison Electric Institute report in 2000 — we assumed the benefits were less than the costs. When we translate that $5 billion into an estimated increase in the cost of electricity and ask consumers if they are willing to pay that for the regulation, we are asking the people surveyed to assume that, if the wastes are not regulated, there will never be costs that could drive up the cost of power — or undermine their quality of life.

The reality is that we routinely make such assumptions. Good economic analysis requires that all calculations about future costs of actions:

1. also calculate the costs of inaction (doing nothing is always an option, but it has costs);
2. explicitly state their assumptions about the probability that certain possibly undesirable events might occur and calculate the costs of them (since excluding them is really a hidden assumption that the events will never occur, a pretty extreme position); and,
3. refrain from using consumer preference or other "willingness to pay" survey results when those studies do not clearly explain the risks and associated costs of unexpected events of the seemingly cost-free alternatives presented.

But, you ask, what about future benefits? We’ll come to that, but most efforts to discourage taking action or intervening focuses on costs and forgets about benefits altogether.

Our second example comes from the advance of science, in this case the capacity to predict climate change and its effects. The U.S. Geological Survey has just released a report that predicts a 4.0 foot rise in sea levels by 2100, rather than the previously expected 1.5 foot rise. The report contains an important lesson about the uncertainty of science — a finding that the previously expected sea rise was off by more than 100 percent. We were modeling costs and benefits of action based on sea-level rise only 37.5% of what we now expect it to be!

We severely underestimated the impact. Many more houses and other property will be lost, more ports will have to be totally rebuilt, and the likelihood that ports will have to be relocated and require much more inland infrastructure investment (rail and roads) is much higher.

But a sea-level rise more than 2.5 times what we had anticipated would have off-shore effects as well: vastly greater climate-driven population displacements in the Third World and resulting increases in the likelihood of wars. Should we now include in our cost models the likelihood that land loss in India would result in wars that might escalate into nuclear conflicts, given that both India and Pakistan have such weapons? (Actually, we probably should have done so even for the 1.5 foot sea rise, but now odds are even greater that we need to consider such disasters.)

The real lesson here is that scientific findings are not certainties and cannot be taken as fully reliable predictions. We need to allow for the risk of error — and unavoidable uncertainties — in the science on which our cost and benefit calculations are made. This is, of course, the rationale for the precautionary principle. But that is a principle governing appropriate courses of action, and we are (or at least I was) looking at principles for good economic analysis.

The economists’ equivalent of the precautionary principle might be called the Fat Tail Principle. It is a reference to what is called a "normal curve" of probability distributions (you’ve seen it; it looks like a broad-brimmed hat) and the possibility that the curve does not drop to zero at either end, but has a fat tail (the brim might extend forever). That is a visual representation of the fact that we do not know how extreme the effects of certain scientific or human events might be.

Economists looking at the uncertainty represented by the fat tail — an accurate measure of the reality of scientific exploration — say that we should not use the logic of discounting future costs and benefits when considering options that are low probability but possibly catastrophic. Temporarily, then, until we explore the principles of discounting further, let’s add a fourth item to the requirements for good economic analysis:

4. As an application of the precautionary principle, the future should not be discounted.

When public policy is guided by economic analysis, the environment is under threat, and the economy is in a hole, not knowing the answer to these questions creates a big problem.

Unfortunately there is no one "economics," not in the sense that there is a mathematics (2+2 does = 4, and does not = 5), or physics, or biology, or …

Two examples of the weakness of economic analysis have hit me over the head recently. One is a matter of interest to environmentalists. But the other offers wonderful insight into the "logical processes" of mainstream economists, so I’ll start there. (Note those quotes — please.)

On December 17, The New York Times ran “Finding Good News in Falling Prices,” which discussed "sticky wages" — the observed fact that wages overall do not seem to fall in recessions. Quoting the piece:

Businesses routinely lay off 10 percent of their workers to cut costs. They almost never cut pay by 10 percent across the board.

Traditional economic theory doesn’t do a good job of explaining this.

The last sentence is entrancing — or, perhaps, terrifying. Why can’t traditional theory explain this observation about wages during recession? Let’s start with the supposed fact itself. Just ask yourself whether you ever heard of union "give-backs" when companies were in trouble. (Today’s Washington Post carried a piece about the auto bailout and workers’ pay and job cuts with the headline UAW’s “Sacrifices Look to Some Like Surrender.”) Obviously the "fact" is not always true — and many of the basic assumptions of economics includes similar falsehoods.

Ignore that for a moment (if you can). Now, consider the claim of economics to be an empirically-based, scientific discipline. How good is a theory that does not explain something as fundamental as what people get paid over time, or that cannot determine how different combinations of the characteristics of employer and workplaces and the state of the national economy determine wage trends?

Hey, wages are paid — we can observe the funds involved. What about clear air, clean water, a stable climate, or just a nice view? We don’t buy those in a market, the way workers’ time is bought in labor markets. So how can economics price those environmental phenomena if it can’t even explain and predict wages? There is something lacking in the "traditional theory" and we cannot simply trust its findings.

I’ll be addressing that theory, some of its weaknesses, and some alternatives in future posts, but let’s get back to the environment — or rather, to the terrestrial ecology in which we live.

That’s not unnecessary repetition. Not in light of the comment I got a while back from a professor of "environmental economics" in response to my praise for some material in an academic journal called Ecological Economics.

She loudly exclaimed, "They’re the enemy!"

If those publishing ecological economics are the enemies of those claiming to be environmental economists, then we do not have one "economics." Something serious is afoot.

And you wondered why you couldn’t understand economics? You thought it was your problem. But what if the problem lies in the economics?

Don’t worry if two analyses don’t seem to be consistent. Accept that they are not, and look for the assumptions that lead them in different directions.

(The devil is not in the details, but in the assumptions … but finding those devils requires digging into the details.)

When we make policy decisions without looking at which economics is guiding us, we have a problem. We make inconsistent decisions, we make foolish decisions, and, perhaps worst, we defer decisions because the results confuse us so much we can’t decide which way to turn.

So, please join me in some explorations of the logic of economics, and the assumptions of different schools of economists, in my posts here at Grist. I’ll try to generate something useful at least once a week.

In the meanwhile, if you have the appetite — and the stomach — for it, you can do your own exploring at ClimateChangeEcon.net, starting for now with some "Legislators’ Tools" I assembled to help state legislators cut through assumptions underlying some of the economics they have to read.