Gloomy about climate change? Take a look at the big picture

When it comes to “thinking like an economist”, the usual ideas are about supply and demand, prices and incentives, and opportunity cost. That is all well and fine, but there is another important yet neglected component of the economic way of thinking: an intuitive understanding of the size of gross domestic product, and a preference for assessing magnitudes as a fraction of GDP.

While economics has a reputation for being pessimistic (“the dismal science”), most economists I know are pretty optimistic, and tend to see most systems as being robust.

In part, this is because they have some understanding of the size of the US GDP — about $23-trillion (R336-trillion) — and of the GDP of many other countries.

An appreciation of GDP helps keep things in perspective. Say there is some social or economic trend you dislike or think dangerous. One inclination would be to try to visualise that trend as a share of GDP.

Most things are a pretty small fraction of GDP, reflecting the scope and the robustness of the US economy.

In one sense, the country is a vast and sprawling system of shopping malls, restaurants, factories, coffee shops, construction sites, art galleries and much, much more.

So even if the social or economic trend you find disturbing is in fact a bad thing, the US — as defined by its GDP — will proceed unperturbed.

People who get annoyed at small changes in America tend not to appreciate the true magnitude of its GDP. This also works the other way: the latest positive trend may also take a long time to truly affect GDP.

It is not easy to grasp just how large $23-trillion is. That is one reason economists should travel a great deal, engaging in what I call “economic tourism”: that is, going to see what an economy produces. Getting some intuitive sense of the size and scope of American production and consumption gives you a better grasp of GDP and, in turn, the world.

The GDP comparison is especially apt for large changes which will cost a noticeable percentage of GDP. Consider climate change. The instinct of the economist is to try to pin down exactly what these costs are as a percentage of global and national GDP.

One recent estimate suggests that climate change is likely to destroy about 10% of global welfare (a GDP effect plus an amenities effect) by the year 2200. To the economist, that is a truly significant quantity of resources. Furthermore, the distribution of those losses may be unfair — and just how unfair is more easily judged if one has a sense of the magnitudes involved.

The upshot is that, all of a sudden, it is pretty easy to see that a system of carbon pricing and research & development subsidies is very likely to more than pay for itself, at least if the policies are executed with reasonable competence.

Climate change is a difficult topic to study and predict, and I am far from sure that percentage estimate is the right number. Nonetheless, it is an important step in mapping some structure onto the problem. As an economist, I am sceptical of analysis that doesn’t try to produce any number at all. Once you understand the size and scope of GDP, you understand that any list of climate disasters that destroyed 10% of GDP would be a very long list of disasters.

I was struck by a recent 10-country study showing the fears of young people about climate change. Four in 10 are afraid to have children. Almost half said that fears about climate change caused them stress and anxiety in their daily lives.

Economics also helps to put these worries in perspective. If the costs of climate change are 10% of global welfare, that is roughly equal to a few years of (non-pandemic) global economic growth. The world economy plausibly can be expected to grow about 3% a year.

These kinds of simple points are missing from most climate change debates, again noting the need for better estimates of the actual forthcoming costs.

On one hand, economics helps you see that “a few years of global growth” is truly an enormous sum of great significance — it’s worth fighting big battles over. On the other hand, economics also helps you see that losing a few years of global growth is not a reason to stop having children.

Of course, those points may vary for those who live in especially vulnerable regions. But there are also people who live in less vulnerable regions.

“Thinking like an economist” can be very helpful. Improving your intuitive grasp of GDP is one of the best ways to understand where the world is headed.