Saturday, September 16, 2006

Betting California

Earlier this month, the California Legislature and Governor Arnold Schwarzenegger decided to put up the economic future of their state’s citizens as proof of what can perhaps best be called their personal “good global citizenship.” In a move reminiscent of television’s popular “World Poker Tour,” in which a player announces that he is “all in,” their new law mandates that by the year 2020, California will emit 25 percent less carbon dioxide than it now does. The bet is that somehow, merely by virtue of the bet’s having been made, new technologies will be developed that will make it possible to comply with the law without any great increase in cost or major economic loss.

In fact, the law’s authors are so confident of their good luck that they took pains to prevent their law from being largely circumvented by the simple device of building conventional power plants outside the state which would then transmit their power to customers within the state. The law makes it illegal for any new power to be sold within the state that, in the words of Michael R. Peevey, the president of the state’s Public Utilities Commission, is not comparable to that produced from “the newest combined-cycle gas turbine.” It will be interesting to see if California again has brownouts and blackouts like it did a few years ago, but this time will refuse to allow power produced outside the state to enter, and how much such power will then even be available in the absence of California as a normal market for it.

In a poker game, when an intelligent player makes a bet, he generally takes into account not only the odds of winning the hand, but also the size of the pot that he will collect if he does win. In this case, the pot is absurdly small. California accounts for about 2.5 percent of the world’s man-made carbon-dioxide emissions. Thus, if the new law achieves its objective, then, other things being equal, global man-made carbon dioxide emissions will be reduced by slightly more than six-tenths of one percent. This is an amount which would scarcely be noticeable in any case and will be utterly lost alongside the vastly greater increases in emissions that are almost certain to take place in China, India, and elsewhere.

But never mind. California’s officials apparently believe that they have a proverbial “ace up their sleeve.” That ace, according to The New York Times, is the hope that its action will inspire other states to follow suit. If that were to happen and the whole United States, which accounts for roughly 25 percent of global man-made carbon dioxide emissions, mandated the same percentage reduction as California, the reduction would amount to a about six and a quarter percent of global man-made carbon dioxide emissions. This is an amount more significant but still one that will be far more than offset by increases in emissions from the rest of the world. And, of course, it would require betting the whole American economy.

Continuing with the analogy to poker, it is not possible in this case to compute any actual odds, because the development or lack of development of new technology is simply not the same thing as a given card turning up or not turning up. It’s a matter of the intelligence and motivation of scientists, inventors, and businessmen operating in the context of the facts of reality. That the officials of the state of California want an invention or, indeed, a whole series of inventions, to be made does not add anything worthwhile into this mix. The market is already fully motivated to make and implement cost-saving inventions and has done so with spectacular success since the beginning of the Industrial Revolution. It has done so because such inventions add to profits—until competition passes the lower costs on to consumers. All that the government can do is subsidize the making and implementing of inventions that the market would not make, namely the kind that increase costs rather than decrease them. Already, California’s electricity rates are 40 percent above the national average because of its government’s intervention. And because the effect of the new legislation is likely to be to rule out all sources of power but natural gas, California’s electricity rates are likely to go much further above the national average.

Imagine a publicly traded private corporation treating its stockholders’ capital with such reckless disregard of facts and rational calculation. Imagine that it invested its stockholders’ capital based on the hope that technologies not yet in existence would somehow come into existence to make the investment worthwhile. Imagine further that if those technologies somehow did come into existence, the return would still be virtually nil. Wouldn’t the officers and directors of that corporation be bombarded with lawsuits by stockholders? Wouldn’t they be summarily dismissed for their behavior as soon as the case came before any reasonable judge?

That’s what should happen to most of the officials of the state of California. Unfortunately, it’s not likely to. That’s because the role of judge is exercised by an electorate that is largely the product of the state’s system of public education. As a result, it apparently has no more capacity to judge that it is being led to the slaughter than does a herd of sheep.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.