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Cost-Disease Environmentalism

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Cost-Disease Environmentalism

Subsidizing demand for low-carbon technology without easing supply constraints is asking for trouble. March 25, 2022
Infrastructure and energy

What happens when federal subsidies for low-carbon infrastructure collide with federal regulations against infrastructure construction? The United States appears intent on finding out.

Call this phenomenon “cost-disease environmentalism.” The phrase is a reference to the work of economist William Baumol, who observed that economy-wide productivity improvements cause labor-intensive parts of the economy to become disproportionately more expensive. The canonical example is the string quartet, which is no more productive today than it was in the nineteenth century, but whose wages have risen—not in response to any increase in the marginal productivity of its labor but to compensate for the opportunity cost of forgone earnings in other, more productive sectors of the economy. It was one thing to pay a violinist a given wage in 1850, when competition for his labor was scarce. It is another to pay a comparably skilled violinist a given wage today, when he could easily become a construction worker, computer programmer, or fitness instructor, among countless other remunerative options unavailable to his nineteenth-century counterpart.

Last year, Steve Teles, Samuel Hammond, and Daniel Takash from the Niskanen Center expanded Baumol’s framework in a report titled “Cost-Disease Socialism.” The authors aimed their critique not at classical musicians but at the modern welfare state. They describe efforts to address the rising costs of living and essential services—housing, childcare, health insurance, and education—as subsidizing demand while doing little to expand supply. “This can result in a vicious cycle,” they write, “in which subsidies for supply-constrained goods or services merely push up prices, necessitating greater subsidies, which then push up prices, ad infinitum.” It’s a useful riff on the original concept:

It is worth relaxing Baumol’s definition of cost disease to include other areas of spiraling cost growth such as housing. Much like other “diseased” sectors, the high cost of rent in many U.S. cities is a function of regulations that restrict supply and limit housing innovation, leading to a demand for subsidies or additional regulations like rent control. Unlike genuine cost disease, however, rents show up in the national accounts as a form of profit, not labor income, and as such there is no inherent incompatibility in a high-wage, low-rent economy.

Under this more expansive understanding, cost disease is everywhere. Housing vouchers and rent control socialize the cost of housing without expanding the overall supply. Child tax credits subsidize the cost of child care without addressing the supply or productivity shortcomings of the overall sector.

One can’t help but be reminded of cost-disease socialism when looking at popular policy attempts to invigorate the low-carbon economy. Energy and other infrastructure are still labor-intensive sectors of the economy and made ever more so by the encroaching regulatory and legal labor necessitated by the policy environment.

Consider Democrats’ attempt to advance over $500 billion in clean energy spending in the Build Back Better Act. Much can be said for this spending. Making clean technology cheaper through innovation, learning, and economies of scale can attract further investment. Support for technologists, entrepreneurs, and investors creates new civil constituencies for reducing emissions. All of this raises the salience, and lowers the overall cost, of climate policy.

But subsidizing demand for low-carbon technology comes with serious risks if policymakers don’t attend to the supply side by dismantling the regulatory bottlenecks that make it hard to build anything in this country. For decades, clean-energy deployment has been undergirded by federal tax credits, state-level renewable-portfolio standards, and other subsidies. Democrats’ climate agenda broadly extends and expands this subsidy regime. Yet the projects these subsidies support encounter regulatory hurdles imposed by the same governments that provide the subsidies.

Public enemy number one has to be the National Environmental Policy Act, or NEPA. Passed in 1970 as part of a wave of environmental regulatory reform, NEPA created regulatory standards and hurdles for infrastructure projects, industrial facilities, and more. NEPA’s practical effect has been the proliferation of environmental impact statements (EISs) for projects that could “significantly affect” the environment, including everything from denser housing supply in cities and high-speed electric rail to large-scale renewable-energy projects and, infamously, bike lanes. The constraints on breaking ground, let alone completing, projects like these are notorious. As Niskanen’s Hammond and Brink Lindsey have noted, the average EIS today runs over 600 pages in length and takes 4.5 years to complete.

This twentieth-century environmental policy may have been appropriate in an era of widespread air and terrestrial pollution, but it’s counterproductive nowadays. From land-use regulation and zoning in cities to overly burdensome regulatory standards for emerging technologies, supply restrictions obstruct the deployment of cleaner and lower-carbon alternatives to existing fossil-fueled infrastructure. This presents problems not just for the pace of clean infrastructure deployment but also for its cost, and, as a result, its economic and political sustainability.

Maybe if we build projects first, the regulatory reform will come—but don’t count on it. While both the broader clean-energy industry and most of the environmental-advocacy community support increased clean-energy spending, only the industry supports regulatory reform, while the advocates oppose it. Indeed, opposition to specific clean-energy projects often comes from the contemporary environmental movement. Environmentalists have become a powerful interest group blocking the technology and infrastructure deployment necessary to reduce emissions substantially—whether it’s a transmission line delivering clean electricity to New England, large solar and wind projects, or dense housing construction.

The same problems show up in the regulation and deployment of novel technologies, such as advanced nuclear reactors, genetically modified organisms, alternative proteins, carbon removal, and seaweed farming. Environmentalists make various arguments against these innovations, citing the alleged moral hazard of relying on technologies not yet widely available and empirically debatable public-health risks, or demonizing the coalitions supporting the technologies. The result: a heavier regulatory burden for improving and deploying innovative technologies.

Spending billions or even trillions subsidizing demand for these low-carbon technologies without clearing these regulatory hurdles could create more problems than it solves. As the Center for Growth and Opportunity’s Eli Dourado put it, “Order matters.” If the government subsidizes geothermal energy without fixing the paperwork burden, subsidies will be wasted on unnecessary applications and bottlenecks as the Bureau of Land Management struggles to keep up with permit approvals. If the government subsidizes transmission lines without fixing the siting regime, it will be paying people to wade through delays and legal expenses.

The culprit is a partially reconstructed environmentalism, one that has embraced the virtues of certain technological investments without jettisoning the deep-seated technophobia that powered the emergence of the postwar environmentalist movement. Absent a comprehensive philosophical reckoning within this large, influential, and well-endowed movement, solving environmental problems is likely to get more expensive and difficult even as clean-energy innovations get cheaper.

This cost-disease environmentalism is just one among a number of pressures pushing the price of climate action upward. The vogue of environmental, social, and governance (ESG) investment in the private sector, highly questionable carbon-offset programs, and other well-intentioned environmental initiatives threaten to balloon costs with little promise of environmental or social returns.

Ezra Klein recently wrote that the Niskanen paper “is largely an appeal to Republicans to rethink their approach” on deficit spending, an urge to move beyond “starve-the-beast” politics that does little to expand the supply of essential goods, services, and infrastructure. But if the political Left doesn’t develop what Klein calls a “supply-side progressivism” that attends to such obstacles, the U.S. is likely not only to miss its environmental and economic goals but also to hasten the erosion of its civic institutions. The window for major federal climate spending is rapidly closing. Facing Democrats’ narrow congressional majorities, high inflation, and the closing spigot of post-Covid federal spending, advocates want to pass ambitious climate investments as quickly as possible. But if Democrats push through world-historic spending on low-carbon technology and infrastructure without addressing the regulatory regime, they may slow the momentum for sustained spending and climate action for years.

That creates an opening for Republicans. As my colleague Ted Nordhaus recently wrote, “In the not unlikely event that Republicans take control of Congress after the midterm elections, they could strike a blow for taxpayers and the climate by leading an effort to reform the nation’s broken approach to building critical infrastructure.” The risk of such a move would be to polarize progressives against such a deregulatory agenda, but the upside would be the concrete deployment of low-carbon technology.

Politics aside, though, Americans would be better served by a climate politics that saw the two parties competing to address cost-disease environmentalism, instead of pointing fingers at one another over the nation’s inability to build anything.

Photo: Ivan Bajic/iStock

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