Unemployment and the Environment?

Filed Under (Environmental Policy, U.S. Fiscal Policy) by Don Fullerton on Jan 9, 2010

I would never ever want to be a macroeconomist charged with making economic predictions.  In fact, I’m sorry that anybody makes macroeconomic predictions, because they can’t always be right, and the fact that they turn out wrong gives all economists a bad name!   Yet I particularly like it when some non-economist friend of mine asks  “Do you think the economy is going to improve, or worsen?”  That just gives me a chance to respond, “YES!  That is, yes, I think the economy will improve or worsen.”

So I’m particularly reluctant to write any blog about the poor state of the macro-economy, what should be done about it, and when we are likely to see any turnaround.   But today’s article in the Washington Post is about macroeconomics and environmental policy!  It is called “Obama laments job losses, announces tax credits for clean energy”.   How are those connected to each other?   Only through rhetoric.

Basically, all of the points are valid, as presented by the article and even by the Obama Administration spokespersons.   The economy is bad, and we don’t know when it will improve.  We don’t even know what is the effect of last year’s stimulus bill, because we’ll never know what would have happened without the stimulus bill!  And it’s also true that we might need more stimulus.  And it is furthermore true (even if unrelated) that it might be a good idea to spend more money on green investments, to aid the transition away from burning fossil fuels that worsen global warming, and towards energy efficiency and alternative sources of energy such as solar power.

More specifically, the Washington Post article says:

“The unemployment rate was unchanged at 10 percent, the Labor Department said. Forecasters had expected zero net change in the number of jobs on U.S. payrolls, and some had had expected job growth to return. Those expectations were dashed by a report that — while not without bright spots — suggested that the long slog toward an improved labor market continued in December.”

That paragraph seems unrelated to the prior one:

“As part of an effort to ‘close the clean-energy gap,’ he announced the awarding of $2.3 billion in tax credits to American manufacturers of technologies such as wind turbines, solar panels and cutting-edge batteries. The credits — destined for 180 projects in 40 states — will generate 17,000 jobs and help leverage $5 billion in private-sector investment that would create tens of thousands of additional jobs, while doubling the amount of renewable power over the next three years, Obama said.  …  Since there are far more qualified applicants for the credits than the federal funding will cover, he said, he is calling for investment of an additional $5 billion in the program.”

Yet the Administration might as well link the two, at least to appear to be doing something, and to make headway on another important agenda item.  Just as stated by Obama’s Chief of Staff, Rahm Emanuel, “You never want a serious crisis to go to waste — and what I mean by that is an opportunity to do things that you think you could not do before”.  You can even listen to it on You-Tube, if you click here!

Speaking of “unrelated”, I have another link to suggest.  If you are interested in hearing about progress in Copenhagen toward international agreements on climate change, in the style of Dr. Seuss, click here!

“The Sunk Cost Fallacy” and President Obama’s Decision about the War in Afghanistan

Filed Under (Other Topics) by Jeffrey Brown on Dec 1, 2009

This evening, President Obama will make a prime-time address to the nation announcing his decision about whether or not to send more troops to Afghanistan.  This decision will fundamentally shape the future of that conflict, the world’s perception of our war on terrorism, the lives of those who live there as well as those who are sent to fight there, and, of course, our nation’s economic commitment.  

 

I do not pretend to be an expert on foreign policy in general or on Afghanistan in particular.  So I write this post today with no intention whatsoever of speculating about what course President Obama will choose or of critiquing whatever decision he does make.  I do, however, think it is worth making a simple observation about one possible rationale that is often used to justify a continued commitment to a conflict.  This is not a rationale that I have heard this President use – it will be interesting to see if he does so tonight – but it is one that has been uttered by many other elected officials.  The “rationale” is that we must continue fighting so that those who have given their lives in the war thus far “will not have died in vain.”

 

I, like the overwhelming majority of Americans, have tremendous respect, admiration and gratitude for all of the men and women who are willing to sacrifice so much to defend our nation.  These sacrifices are not limited to those who give their lives, but also include physical and psychological injuries, tremendous strain on families, and financial sacrifices, among many others.  As a nation, we should honor and provide assistance to all of those who have served in uniform as well as their families.

 

But do we need to continue fighting in order that those who died did not do so in vain? 

 

Believe it or not, the economics discipline provides a useful perspective on this issue.  (And it is a perspective that does not require that one think in terms of quantifying lives lost in dollar terms – an idea that economists often find useful, but that non-economists typically find extremely distasteful).

 

The idea from economics is known as the “sunk cost fallacy.”  One definition of this fallacy is “when we have a greater tendency to continue an endeavor once an investment in money, effort, or time has been made.”  More importantly, it is the tendency to do so even when the past investment of time, effort or money is completely irrecoverable.  This is fundamentally irrational, because if the costs cannot be recovered, then they should be irrelevant for making decisions about how to proceed.  Rather, future decisions should be based only on future benefits and costs. 

 

In the context of Afghanistan, the idea that “we must continue to fight so that those who died did not die in vain” is a manifestation of the sunk cost fallacy.  The rational counter-argument to this is that there is no decision that can be made on the future of Afghanistan that will bring our loved ones back.      

 

Those who bravely fought and died in Afghanistan did so in the service of their country, and nothing about President Obama’s decision this evening will change that.  To borrow Abraham Lincoln’s famous line in the Gettysburg Address, it is “far above our poor power to add or detract” from the honor that is due to those who died there.

 

So whatever decision is announced this evening, let us hope it is justified on the basis of whether it is the right decision for our nation going forward.  And let’s honor those who have died, rather than using their memory as a justification for supporting or criticizing whatever path we choose.