Wayne Winegarden

Since Krupp argues that cap and trade legislation is a necessary precondition for these technologies to come to market, it must be the case that consumers are not willing to purchase electricity generated from solar energy in lieu of electricity generated from coal energy. This unwillingness must arise because solar energy is currently an inferior product compared to coal energy. Because of the economic inferiority of solar energy, cap and trade legislation is necessary to “handicap” coal energy in order to make solar energy viable in the competitive marketplace. Handicapping our use of coal energy, or the many other efficient technologies that would be impacted by cap and trade legislation, creates the very economic impact the environmentalists are claiming does not exist.

This brings us to the fundamental flaw with Krupp’s argument, the EPA study, Professor Kammen, or the many other advocates claiming that cap and trade legislation is good for the economy. Henry Hazlitt, writing in 1946, clearly laid out the errors of these arguments in his aptly named book, “Economics in One Lesson”. While a quick summary cannot do justice to the book, the book opens with the one crucial less of economics that is always forgotten: the fallacy of the broken window.

Hazlitt tells the following story: Some rambunctious teenagers throw a brick through a store front window, breaking it. At first, the crowd that gathers expresses sorrow for the unfortunate shop owner. But, then they begin to think. The shop owner must now replace the window. This creates new revenues for the window maker. Now that the window maker needs to repair the window, he needs to purchase more supplies, creating new revenues for other shopkeepers in town. Continuing with this reasoning, the townsfolk realize that the town is now better off because the teenagers broke the window.

Of course, this is ridiculous. Wealth is not enhanced by breaking windows. But, it is the same argument that environmental activists are making when they claim global warming regulations will create economic growth. Environmental activists focus on the “new green jobs” that will emerge if greenhouse gas emissions are capped. What is forgotten, and not taken into account, are all of the current jobs that are lost in order to create the green jobs as well as the jobs that will no longer be created due to the higher energy prices and reduced energy availability.

Regardless of the environmental merits, the economic impact from global warming regulations, per se, will be negative. Pretending these costs do not exist will not lead to better environmental policies; nor will it lead to better economic policies. When we make decisions based on self-deceptions, things rarely work out as planned.

Wayne Winegarden

Wayne H. Winegarden Ph.D. is a partner in the firm Arduin, Laffer & Moore Econometrics.

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