Even a broken clock is right twice a day, and here’s the proof.  Way back in 2008 — just three days after Barack Obama was elected, and way before he took office — I critiqued the idea of using federal stimulus dollars on renewable energy projects.  I wrote

Governments are pretty bad at “picking winners” when it comes to making investments. This is something markets are better at. Entrepreneurs, who have their own personal wealth at stake when making business decisions, are motivated to figure out which forms of alternative energy investments are likely to pay off. This is a setting where markets are likely to make better investments than governments.

And here’s a link from the Washington Post to their coverage of the Solyndra scandal, where a green energy startup collapsed after having been granted $535 million in federal loan guarantees.  Governments — whether Democrat or Republican — are just really bad at this sort of thing.

I wonder how many elementary schools you can build with $535 million?

It’s Earth Day, so I thought I’d liven things up with some concerns about the environmental movement. I know I’m a wet blanket, but economics isn’t called the dismal science for nothing.

Before I do this, I’ll issue a disclaimer. I’m not a global-warming denier, or an anti-environmentalist. My concerns are more along the lines of questioning whether we’re taking the right approaches in trying to change behavior to make it more environmentally friendly. So here goes:

I opened the SL Tribune today to this article. A Dutch scientist has coined the term “water footprint” to capture the notion that water is an input to the production of many of the goods and services that we consume every day. And if we’re trying to conserve water, then we can’t just be satisfied by turning off the tap. We should also think about reducing our consumption of other goods and services that use a lot of water.

From the article:

A middle-class American woman who eats an average amount of meat consumes 3,245 cubic meters of water each year in her diet, according to the Dutch quick calculator. If the same woman is an ovo-lacto vegetarian (who avoids meat, but does eat eggs and dairy products), her footprint drops to 2,514 cubic meters.

It takes a lot of water to raise livestock, which makes sense although I hadn’t really thought about it.

And so what should we do about this? What the “H20 Conserve” folks have done is put together a web site that allows you to compute your water footprint.

This is a fine thing to do, and I’m not criticizing the H20 Conserve people for putting this information out there. More information is better, and it’s obviously a huge effort to put this site together.

Is it the best way to conserve this resource?

My answer is no. Why?

One of the problems with this approach is that environmentally committed consumers need to keep enormous mental lists of what products use what resources. We know, for example, that we’re supposed to conserve water. And so if you’re really serious about conserving water, you need to know what products use a lot of water (so you can reduce use thereof) and what products don’t use a lot of water. We also know that we’re supposed to reduce carbon. So we need to keep lists of what products use less carbon, and what products don’t. The list of environmentally harmful by-products of modern life is long, and the resulting computational burden on the environmentally conscious consumer is large.

There must be a better way, right? And there is.

The better way is to use prices.

For example, let’s imagine that we implement a carbon tax. If you emit carbon, you pay. What will this do to the prices of the goods and services we consume? Products that generate substantial carbon emissions will become more expensive to produce. Basic microeconomics says that the prices of these products (to the end user) will rise. Consumer demand will shift — exactly to the products that don’t use a lot of carbon, because prices for these products will stay low! (Which is exactly the consumer behavior we’re trying to generate with the “mental lists” approach outlined above!)

Under the “price appropriately” approach, we don’t tell consumers “avoid products that use a lot of water, and by the way here’s the list”. Instead, we tell them “Water is scarce and high-priced as a result. If you want to consume a product that uses a lot of water, you can. But you’ll find it’s in your own financial best interest to shift consumption to less-water-intensive products.”

The “price appropriately” approach has three big benefits over the “mental lists” approach.

Benefit #1: Doesn’t rely on public-spiritedness The efficacy of the “mental lists” approach depends on the willingness of people to ignore their own economic interests and instead do what’s best for the planet because it’s the right thing to do. A lot of people are willing to do this, but not everyone is. If instead we tax environmentally harmful activities, then we won’t be relying on public spirit; we’ll be aligning self-interest with what’s best for the planet.

Benefit #2: Doesn’t require mental lists It’s hard to be gentle on the planet. You have to do a lot of research into what products use a lot of resources and what products don’t. Even for the committed, this can be a big burden.

Benefit #3: Might actually work Did the American people know before the summer of 2008 that consumption of gasoline was environmentally harmful? If so, then why didn’t we reduce usage? The fact is that people respond to changes in prices in way that they don’t respond to hearing the message “it’s really best if you drive less.” Yes, gasoline prices rose to frightful levels last summer. But gasoline consumption fell for the first time in years. And it didn’t just fall because of people driving less — it fell because the price increases trickled through the rest of the economy, landing heavily on goods and services that use a lot of gasoline as part of the production process.

So, if you want to fix our planet, fix our markets. And this is why environmentalists should undertake serious study of economics.

So unfortunately I won’t be able to go listen to Thomas Friedman tonight. A work-related dinner came up and I have to go to that. I’m sending my brother-in-law and his friend instead; perhaps he’ll report back.

Meanwhile, Rebecca Walsh of the SL Trib criticized the Utah Museum of Natural History and the Hinckley Institute of Politics over the whole thing in her column last Sunday.

While I often like Walsh’s work, I disagree with her on this. (And I should say that I’m in no way affiliated with either the UMNH or the Hinckley Institute, although both are affiliated with the U of Utah.)

It’s certainly the case that Friedman is earning a lot of money for this visit. And it’s also the case that the message he’ll deliver isn’t that different from what a lot of people are saying. The UMNH could, for example, hire yours truly to deliver an insightful lecture on carbon taxes vs. cap-and-trade systems — and I’d probably do it for a just bit less than the $75,000 Friedman is going to make.

But the local media wouldn’t cover a talk from me like they’ll cover a talk from Friedman.

And let’s keep in mind that the UMNH’s mission is to “illuminate the natural world and the place of humans within it.” Paying me (or other U faculty) will get you a lecture, but no “illumination” because my talk wouldn’t be in the news. Paying Friedman gets you a lecture plus a lot of illumination.

Given that the Museum has a budget, it seems like we should let them spend in the way that they think will have the biggest impact with respect to their mission. Friedman’s a high-impact guy. It seems completely reasonable to me to have one expensive-but-high-impact guy, rather than ten cheap-but-low-impact guys. I don’t know that Walsh would criticize if the Museum was spending $7,500 each on ten low-profile speakers. (Or $750 each on a hundred really-low-profile speakers, like me.)

Perhaps the Museum shouldn’t have a budget at all in these lean times, but that strikes me as a somewhat different conversation.

A former student wrote this week to ask some questions about an old lecture. I directed him to what I think is one of the very most important ideas in economics: The notion that a fundamental role of prices is to convey information that guides individuals’ choices in a socially productive direction.

I can’t improve on what Nobel-laureate Friedrich Hayek wrote about this in 1945, so I’ll just link to it.

Focus on H.21 through H.24, in particular. (H.24 might be my favorite paragraph of economics ever. It totally rocks!)

Thomas Friedman, the NYT columnist, will be speaking in SLC next month, and a frequent theme of his columns is that we need to get the price signals right so that people will make socially efficient investments in energy technology. He supports higher taxes on carbon-based fuels.

This notion of getting the price signals right is straight out of Hayek. Now, there’s nothing in Hayek about taxes and further Hayek’s work is often held up as an intellectual justification for free markets not government taxation. How do we get from Hayek to “tax carbon”?

In Hayek’s conception, prices come from perfectly competitive markets with no externalities. His discussion of tin, for example, fits this. Perfectly competitive markets without externalities “work”, in the sense that they achieve a socially efficient allocation.

My interpretation of Hayek is that when markets “work” — which they very frequently do — we should be really, really careful about messing with them. Because government interference can mess up the price signals, which will mess up individuals’ choices. Government subsidies for housing loans, for example, can mess up the prices (that is, interest rates) for home loans, and cause people to make poor choices. (Sound familiar?)

But, economists have learned a lot about when markets “work” and when they don’t. Markets can fail to achieve the best outcome when externalities are present. In cases like this, prices will send the wrong signals, and we’ll get a not-the-best outcome. Friedman’s point is that we need to use the power of markets (with a boost from tax policy) to send the right signals.

So, go listen to Friedman (and look for me there), and read Hayek.