Is there an antinomy between a low-carbon future and Keynesian theory?

By Glenn Stehle

In the comments section to my last post Thomas Bergbusch supplied a link to an outstanding series of posts published by a heterodox Canadian blog, The Progressive Economics Forum.  It deals with “A Staple Theory of Economic Growth.”   The theory was originally articulated by Mel Watkins in 1963.

Amongst the many important questions the series raises are two which for me stand out:

1)      Is a low carbon future necessary?

2)      If so, is there an antinomy between a low carbon future and Keynesian theory?

I admit that I find myself conflicted over these two questions.  I suppose one of the reasons for this is that I am caught in the crossfire between warring opinion leaders.  One easily gets swept away in a tidal wave of conflicting empirical and moral claims.

Amongst the more optimistic of the opinion leaders we find Dr. Bert Metz, who at the UN’s ongoing annual climate summit in Poland argues that “alternatives to fossil fuels are already available and affordable.”

UNFCCC executive director Christiana Figueres is also optimistic, but doesn’t believe a low carbon future is necessary.  What is necessary, in her estimation, is for the carbon industries to clean up their act.  For instance,  

The coal industry faces a business continuation risk that you cannot afford to ignore. Like any other industry, you have a fiduciary responsibility to your workforce and shareholders … And by now it is abundantly clear that further capital expenditures on coal can only go ahead if they are compatible with the 2 degree Celsius limit.

One of the authors of The Progressive Economics Forum series, Gordon Laxter, hits a more pessimistic note in “Alberta’s Sands, Staples and Traps.”  But it’s only slightly more pessimistic.  For him, conservation is the key, the pursuit of which can yield plenty of new jobs:

I used to support the staples diversification model. Upgrade the resources in Alberta. Don’t export ‘our’ jobs. Use way less energy, but get way more value added from it. Now I think it’s a dead-end. It bets that the age of fossil fuels will unproblematically continue, and that we can blithely continue to spew out carbon without limit.

As we saw, the staples theory views the final demand linkage as the best way to fully escape a staple trap. It’s based on consumer spending and economic growth.

The Keynesian post-war bargain went like this. If workers and their political allies agreed to forget their long-held dream of replacing capitalism with a more just system and accept annual pay raises instead, they would stay in alienated jobs with long work hours, but reap the rewards of middle-class, consumer lifestyles as compensation. The grand bargain led to a mass society fixated on over-consumption. It will bury us in carbon and climate change chaos.

A better path is deep conservation. A unit of fossil fuel energy saved and not burned is much better than one extracted, used up and emitted. Many more jobs can be created in saving a unit of carbon energy – through things like building LRTs, a high-speed, intercity train between Calgary and Edmonton, and retrofitting buildings and houses.

So is it true that “many more jobs can be created in saving a unit of carbon energy” than in extracting and burning a unit of fossil fuel energy?  My answer is:  I don’t know.  And I think there are a lot of people who feel they don’t know.

What seems imperative to me is that the externalized costs of any form of energy production and consumption, whether it be carbon or otherwise, should be charged back to that energy source.  I don’t know if this is within the realm of political possibilities, but it seems like it is not outside the realm of economic possibilities.   In my way of thinking the economy should be able to bear this cost.   For instance, in the United States in 2010, total energy expenditures – gasoline, natural gas, electricity, diesel, heating oil, coal, etc. – amounted to only 4.7% of gross output and 8.3% of GDP and the U.S. is one of the biggest energy hogs in the world.

But here’s where the pessimists come in.   Some argue that increases in energy costs have and will completely shipwreck the economy.   Here, for instance, is Robert Lenzner writing for Forbes:

I was reminded by Kirk Spano, the founder of Bluemound Asset Management today that spiking oil prices in 1973, 1980, 1991, 2001 and 2007 contributed to a greater or lesser degree to the economic recessions of 1973-4, 1980-81, 1991-92, 2001-2003 and 2007-08….

—ROBERT LENZNER, “The Recessions of 1973, 1980, 1991, 2001, 2008 Were Caused By High Oil Prices”

Rick Santorum in The Atlantic, backed up with a paper published by economist James Hamilton, carries Lenzner’s argument to an even greater extreme:

“We went into a recession in 2008. People forget why,” Rick Santorum told an audience recently. “They thought it was a housing bubble. The housing bubble was caused because of a dramatic spike in energy prices that caused the housing bubble to burst … People had to pay so much money to air condition and heat their homes or pay for gasoline that they couldn’t pay their mortgage.”

[….]

In 2009, economist James Hamilton published a paper that retroactively forecast what an oil shock, like the one we experienced in 2007-08, would do to GDP. And guess what? His model accurately predicated much of the collapse in GDP that resulted from the Great Recession — as if there had been no housing bubble or financial crisis! The oil spike was that bad.

—DEREK THOMPSON, “Rick Santorum Is Right:  Gas Prices Caused the Great Recession”

I generally mark up arguments like those of Santorum, Thompson, Hamilton and Lenzner under the heading of Peak Oil fundamentalism.

The intellectual author of Peak Oil fundamentalism, according to John Kenneth Galbraith, was Richard Nixon.  It provided Nixon a scapegoat on which to blame stagflation, something which had been caused by the implementation of Nixon’s own lobotomized version of Keynesianism.  As Galbraith explains:

In the autumn of 1973 came the Yom Kippur war, the oil embargo and a very large increase in petroleum prices. These were widely blamed by the Administration economists, among others, for the inflation. Around three fourths of the price increases of 1973 occurred before the war and before the oil prices went up appreciably.

[….] 

Beginning in 1973, but with full effect in 1974, came the great petroleum price squeeze. In keeping with much else in this history this too was extensively misunderstood….

Everywhere the higher oil price was considered highly inflationary; in the United States it served invaluably as an excuse for official inadequacy in the control of inflation. In fact, it was deflationary. Especially in the Arab countries but also in Iran and elsewhere, the revenues accruing from the higher prices were far greater than could immediately be spent for either consumers’ or investment goods. So they accumulated in unspent balances.  Thus they represented a withdrawal from current purchasing power not different in immediate effect from that of levying a large sales tax on petroleum or its products.23 The effect, increasingly evident as 1974 passed, was the predictable effect of fiscal astringency. As demand faded, prices in competitive markets — those for food, commodities, services — began to weaken. Prices subject to corporate market power continued to rise. So did unemployment. The oil-producing countries had provided the industrial countries with a surrogate tax increase. Its effect, like any general fiscal or monetary action against inflation, was to increase unemployment well before acting to arrest inflation.

What we have seen since Nixon gave birth to Peak Oil fundamentalism, however, is that it resonates just as much with certain factions of the left as it does with the right, and fits just as well with some left-wing ideologies as it does with right-wing ones.  So we have to be wary of allowing ourselves to be swayed by an ideological taint.

Michael Hoexter in one of his posts alluded to this ideological taint:

[M]any with pre-existing visions of a social utopia have congregated to the climate issue and present versions of their utopia as the standard vision that we all should pursue….

In the category of social visions, one common set of approaches might be called “neo-primitivism”, within which there is a broad spectrum of views….

[….]

While neo-primitivists are justified in asserting that earlier societies used less natural resources and emitted less greenhouse gases, their insistence that modernity in all its forms is necessarily a dead end for humanity is a product of personal and social preferences. They are fatalistic about the adaptability of human beings to the energy and climate challenge, even though those humans have adapted themselves in the last hundred years to the modern society they criticize.

There is nothing new about neo-primitivism.  The doctrine of asceticism – the principles and practices of self-denial and austerity — runs through Western civilization like a thread, and it has become a distortional mainstay of New Left thought.  Here’s how Bryan Ward-Perkins describes it:

My conception of Roman civilization, and its demise, is a very material one, which in itself probably renders it unfashionable.  The capacity to mass-produce high-quality goods and spread comfort makes the Roman world rather too similar to our own society, with its rampant and rapacious materialism.  Instead of studying the complex economic systems that sustained another sophisticated world, and their eventual demise, we seem to prefer to read about things that are wholly different from out own experience, like the ascetic saints of the late and post-Roman worlds, who are very fashionable in late-antique studies.  In their lifetimes, the attraction of these saints was their rejection of the material values of their own societies, and our world, which is yet more materialistic and ‘corrupt’, seems to find them equally compelling….  This is a much more beguiling vision of the past than mine, with its distribution maps of peasant settlements, and its discussion of good- and bad-quality pottery.

–BRYAN WARD-PERKINS, The Fall of Rome and the End of Civilization

Evenhandedness requires us, however, to recognize that on the other side of the ideological divide are what Hoexter calls the “technological utopians.”  As John Gray explains, there are many ways of being modern, and

the belief that there is only one way and that it is always good has deep roots.  From the eighteenth century onwards, it came to be believed that the growth of scientific knowledge and the emancipation of mankind marched hand in hand.  This Enlightenment faith – for it soon acquired the trappings of religion – was most clearly expressed in an exotic, sometimes grotesque but vastly enduring influential early nineteenth-century intellectual movement that called itself Positivism.

The Positivists believed that as societies came to be based on science they were bound to become more alike.  Scientific knowledge would engender a universal morality in which the aim of society was as much production as possible.  Through the use of technology, humanity would extend its power over the Earth’s resources and overcome the worst forms of natural scarcity.  Poverty and war could be abolished.  Through the power given it by science, humanity would be able to create a new world.

–JOHN GRAY, Al Qaeda and What It Means to Be Modern

There doesn’t seem to be a clear answer as to whether an antinomy exists between a low carbon future and Keynesian theory.  And here’s the rub:  getting hung up on the horns of this sort of dilemma – a paradox not unlike the antimony between liberty and equality – makes unified and decisive action of any political movement difficult.