Lawrence Summers as Fed Chair: The View From Climate Policy
Lots of debate in Blogistan and elsewhere about President Obama’s apparent desire to appoint Larry Summers as Fed Chair. We know (or at least we think we know) that he is brilliant, but he has a strange tendency to get matters of judgment wrong. He supported the abolition of Glass-Steagall, endorsed deregulation of the financial industry, and seems to have little desire to admit that he got these things wrong. Plus, there are sexist overtones to the seeming refusal to want to appoint current Fed vice-chair Janet Yellen, an outstanding economist in her own right.
All right. But for the Legal Planet reader, why would this be relevant?
Interestingly, a few years ago, Summers participated in a Council on Foreign Relations task force regarding climate policy options. Like all CFR task forces, this one was self-consciously centrist, chaired by former New York Governor George Pataki (relatively moderate Republican, especially on climate issues) and former Iowa Governor (and now Agriculture Secretary) Tom Vilsack (moderate Democrat). Its report, Confronting Climate Change: A Strategy for US Foreign Policy, is a quite comprehensive view of the stakes of climate policy, at least as of June 2008, when it was written. It recommends putting a price on carbon, reducing emissions to the Kyoto level, and several other policy options. Summers signed it.
But interestingly, Summers also appended a very short “comment” to the report, which says something about potential behavior as Fed Chair (how much is up to the reader).
Here are the two key graphs of his comment:
I have signed this report because it makes the need for urgent action on climate change clear and presents a smart and thoughtful agenda for reducing U.S. emissions, building international consensus, and promoting international action, with which I broadly concur.
The Task Force rightly notes that the costs of addressing climate change are highly uncertain, but I remain concerned that many policymakers do not sufficiently appreciate how large these uncertainties are or the consequences of paying them insufficient attention. Environmental certainty enjoys much attention while uncertainty over the cost of cutting emissions receives too little. This balance is
wrong, particularly in the short term, since emissions in any given year matter little, while high costs, even for a short period, can cause substantial economic
harm, particularly to the most vulnerable.
A few things jump out here:
1) Summers gets the politics of climate change exactly 100% wrong. The gravamen of his argument, i.e. “we are hurtling toward overregulation in the climate sphere” was wrong at the time and has been proved to be completely inaccurate. To the extent that a Fed Chair has to be cognizant of political trends, this is not a good sign. Anyone can get political prognostication wrong: but to go out of your way to get it wrong is a black mark.
2) Summers makes no real substantive contribution in his comment. He seems simply to want to emphasize, “I am thinking about things that no one else is.” This on a task force with some of the leading thinkers in the field. This does not bode well for a position like Fed Chair, which requires building consensus.
3) He was wrong about what other people are thinking about. Scholars and policymakers have been thinking about uncertainty all the time and had done so for more than a decade.
4) To the extent that his emphasis on short-term costs and long-term benefits is a sub silentio call for a carbon tax, he was also wrong about its salience: the carbon tax idea was being promoted literally by dozens of scholars and policymakers.
5) To the extent that his emphasis on short-term costs and long-term benefits is a restatement of the need of a high discount rate, it is not backed up by any facts or reasoning. It also is wrong on the absence of short-term costs.
I keep hearing that Summers is a very brilliant man, and would do a wonderful job as Fed Chair. To the extent that his intervention in climate policy is any indication, there is absolutely no evidence of this, and in fact the evidence demonstrates the opposite. I’m assuming for the time being that the Emperor has clothes: but it would be nice to see them eventually.
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2 Replies to “Lawrence Summers as Fed Chair: The View From Climate Policy”
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About Jonathan
Jonathan Zasloff teaches Torts, Land Use, Environmental Law, Comparative Urban Planning Law, Legal History, and Public Policy Clinic – Land Use, the Environment and Loc…
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Not to say that Summers is a good pick for Fed Chair – I actually think he’s a bad choice – but I think you misread the context and the intent of his comment. This is all about carbon tax versus cap and trade. Remember that the official report endorsed a cap and trade along the lines of Waxman-Markey in the belief that it was (a) the best hope for domestic policy and (b) consistent with the shape of likely international commitments.
Summers is saying, like so many economists (see Mankiw’s Pigou Club), that for a stock pollutant like CO2, a tax is the preferred policy tool. He’s quoting Weitzman Price vs Quantities chapter and verse. This is nothing to condemn him for in the context of a report that is focused on building support for domestic cap and trade legislation.
At the time and in Washington, your point (4) was definitely not the case. It was cap and trade all the way. The only people supporting carbon taxes were in the pay of the oil majors and had, as a consequence, suspect motives. So I think a fair interpretation of his comment is that (a) he is not one of those people, thus signing on to this consensus proposal for cap and trade but (b) he thinks that a carbon tax is the better option given the tradeoffs between abatement cost uncertainty and marginal damages. In a way, the very fact that he signed on to the CFR study despite his misgivings tends to demonstrate that he is in fact, willing to compromise to get consensus on this important issue.
All that being said, Summers habit of saying exactly what he thinks when he thinks it, no matter who it offends, strikes me as exactly the wrong sort of personality to be interacting with the markets in the role of Fed Chairman. Janet Yelen all the way!
Best,
MW
Michael, that is an extraordinarily generous view of Summers’ comments – a generosity that Summers himself would not have granted anyone else. If he thought/thinks that a carbon tax is preferable to cap-and-trade, then 1) he should have said so; and 2) actually have made a serious argument concerning it. What actually would a carbon tax have looked like once it got through the sausage maker? Doesn’t the question of prices and quantities have a lot to do with where you put the price and how you phase in the cap? If you have a $100/ton tax, then that is whole lot more onerous then cap-and-trade with a lot of head room, phased in slowly, and with a lot of producers grandfathered. As you know, there are serious specifics here, which cannot be reduced to “we should think more about uncertainties.” The report itself made clear that we can push the cap-and-trade versus carbon tax argument way too far precisely because of this. If Summers disagreed, then he could have said so.
4 is NOT wrong: in 2008, Bjorn Lomborg supported it. Lots of economists supported it: Mankiw’s Pigou Club manifesto appeared in 2006. Jeff Flake wrote a bill supporting it! Waxman-Markey had not appeared yet. Everything was up for grabs, and influential people like Larry Summers could have changed things. He could have very easily said something along the lines of, “I think a carbon tax approach is better, but cap-and-trade has achieved a consensus and I support that in the absence of anything else, especially given political realities.” He chose not to, mainly because he was more interested in telling everyone that he was smarter than everyone else.