Economists' cold forecast Assumptions: Expect their dire predictions about the impact of the global warming treaty on the United States. Ignore all of them.

December 28, 1997|By Elaine Kamarck

There's an old joke about three men on a sinking ship without a lifeboat. They are discussing what to do. One is a priest. He says, "Let us pray to God." Another is a politician. He says "Let's vote." The third is an economist. He says, "Assume a lifeboat."

We are about to begin a yearlong debate on the global climate change treaty recently negotiated in Kyoto, Japan. In the course of that debate, we will hear all manner of dire predictions about the impact of this treaty on the U.S. economy. Ignore them all. Similar predictions were wrong in the past, and they will be wrong in the future.

Here's why:

These predictions are made by economists. Assumptions are at the core of economists' predictions.

Because it is hard to come up with assumptions about the future, economists rely on the past when building their models.

So, for instance, economists attempting to predict the increase in energy costs under a global warming treaty will look at the increase in energy efficiency improvement over the past 10 years (which has been about 1 percent a year) and assume that that is the likely rate of improvement for the future.

Not surprisingly, assumptions like these lead many economists to conclude that the goal of limiting heat-trapping gases is the work of a bunch of tree huggers determined to wreck the economy.

But wait. What if the conjectures are wrong? What if, as has been the case in the past, economic assumptions will not or cannot take into consideration the most important factor in modern economic growth -- innovation?

The doom-and-gloom prophesies in the next year will be built without taking into account American innovative power.

Look at some recent examples. Five years ago, two opponents of the ban on chlorofluorocarbons, usually called Freon, predicted a collapse of food-storage capacity worldwide and a dramatic increase in the death rate from hunger, starvation and food-borne diseases.

Did you miss that news story? No.

Well, it never happened. Instead, technological advances in refrigeration, solvents and mobile air conditioning happened so much more quickly than the economists predicted that industry is now producing energy-efficient alternatives and you, the public, don't even notice.

Or look at sulfur dioxide emissions. In 1990, Congress approved a law to limit them. At the time, the government estimated that reductions would cost about $750 per ton. The business community estimated that it would cost about $1,500 per ton, and even the environmentalists estimated that it could cost as much as $350 per ton.

By 1996, innovation in the utility industry had defied even the most optimistic cost assumptions. The cost of the law was down to $66 per ton, a price so small that once again the public didn't even notice.

If you doubt the power of the market to respond to change with innovation just take note of the following.

This month, as the auto industry was waging an expensive ad campaign to convince Americans that the Kyoto treaty would force us into small cars we wouldn't want, it was showing off a new product at an international auto show in Orlando, Fla.

The hybrid car combines an electric motor with a smaller gasoline engine. These cars pollute less and have much greater fuel efficiency than those now on the market -- and they require no sacrifice in driving power or range.

In other words, industry is poised to prove the gloomy scenarios of its own economists wrong.

Elaine Kamarck, former adviser to Vice President Al Gore, heads the program on 21st-century governance at the Kennedy School of Government at Harvard University.

Pub Date: 12/28/97

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