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**AUGUST 31, 2022**
Kuttner on TAP
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**** Climate Costs Are Not 'Inflation'
Climate disruption will raise prices to consumers. The Fed, seconded by
orthodox economists, misunderstands what's happening-needlessly
adding to economic pain.
Economists need to fundamentally change the way they comprehend
inflation. The reason is climate change. Many items in the household
budget, like food, that have been relatively cheap, will become more
expensive.
This has nothing to do with supply and demand in the usual sense, and
everything to do with the ravages of climate disruption. In discussing
inflation and calling for higher interest rates at the Jackson Hole
Conference last week, Fed Chair Jay Powell did not say word one about
the impact of climate on prices. Nor did the usual chorus of inflation
hawks in the economics profession.
Exhibit A is the American West, which is in a deepening water
catastrophe. Likewise much of the Third World.
It is only a matter of time before factory farms in irrigated
semi-deserts such as California's Imperial Valley, which provide much
of the nation's cheap food, cease to be viable. They have underpriced
traditional family farms serving regional markets such as New England,
driving many out of business.
A kind of silver lining is that sustainable farm-to-table agriculture on
a regional basis may get a renaissance. But as anyone who loyally buys
such food can attest, it is far more expensive than the factory food
available in supermarkets.
It would also be good for the environment to shut down disgusting and
polluting mass-production hog, chicken, and beef operations. But that,
too, will raise prices.
Demand for food, as economists say, is inelastic. When prices go up,
people don't stop eating; they just pay more. Creating a recession
doesn't lower food prices.
Food is only part of the story of climate costs. What will it cost to
write off and replace, say, Norfolk or Miami? Or to truck in drinking
water to much of the Southwest?
The Office of Management and Budget estimates
the cost of climate damage at about $2 trillion a year. Even without the
more forward-looking climate investments of the Inflation Reduction Act,
the cost of dealing with floods, fires, storms, and other weather events
keeps rising.
Many long-overdue, environmentally sound investments will eventually
reduce costs to consumers. Electric cars will be cheaper and more
reliable than ones powered by gasoline. An all-renewable power grid will
eventually be cheaper and more sustainable than one powered by oil, gas,
or coal. But in the meantime, there are transition costs.
Our fossil fuel economy has been borrowing from the future, enjoying low
prices that fail to factor in true costs. Now that bill has come due,
and it will not be cheap. To understand this shift as "inflation" in the
usual sense is to be willfully blind-even more than so much of
standard economics.
~ ROBERT KUTTNER
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