Biden Energy Plan: $841 Billion in Broken Windows

T he U.S. sits on $5 trillion of wealth in the form of fossil-fuel reserves. But President-elect Biden promises to “transition” these deposits out of the U.S. economy. This agenda would, by design, decrease the economic value of fossil-fuel deposits. But how much of this $5 trillion portfolio, exactly, would be wiped out by the implementation of a Biden energy agenda?

Some former colleagues of mine from the White House Council of Economic Advisers have a partial answer. They modeled the impact of Biden’s plan for 80 percent of American electricity generation to come from sources that do not emit carbon by 2050. According to their estimate, if enacted, this proposal would decrease the present value of proven fossil-fuel reserves by $841 billion, or about 4 percent of annual GDP. That is equivalent to an $841 billion loss in the market, today, in a $5 trillion portfolio of stocks. The number effectively represents the loss of the income that would otherwise accrue as a return on the assets you already have. Whether those assets are minerals in the ground or shares in a brokerage account, the economic concept is the same.

However, as the chart above shows, these prospective losses concentrate in certain parts of the United States, including some where their impact is likely to be overwhelming. For instance, the estimated $63 billion worth of losses in income generated by North Dakota’s reserves would exceed the state’s $56 billion annual output.  Texas, which produces $1.8 trillion annually, would see the largest losses in raw dollar terms at $275 billon. And the geographic concentration of the costs sharpens yet further within already hard-hit states, because not all counties are equally dependent on oil.

Yet the Biden administration appears to have a blind spot to these looming costs. The blind spot emerges because, wittingly or unwittingly, they’re indulging the broken-windows fallacy that economists (at least some of them) have understood since the mid-19th century.

If you measure local output based simply on the dollar value of transactions in your town, breaking every window on your block increases local GDP, because homeowners have to spend money to repair the damage. But your neighborhood is no richer than before: You’re out of the cash for the replacements, and your houses are no different. To discern this in the data, however, you would need to account for the destruction of economic value that occurs when your window, a physical asset, shatters.   Otherwise, vandalism would be seen as a highly effective stimulus measure. The government might even be tempted to pass a law requiring window-smashing. Maybe they’d require you to replace them with the windows they thought were best for the environment. Behold, my friend, the intuition behind Biden’s energy policy.

Biden is staffing his administration with those in the thralls of the conventional wisdom among wonky Beltway insiders. And the conventional wisdom on energy policy is a profligate indulgence of the broken-windows fallacy. The analysis of the Biden agenda performed by the Penn Wharton Budget Model, a center-left think tank at the University of Pennsylvania, is a case in point. They model Biden’s proposed federal spending increases, including those on clean energy, “as contributing to ‘public capital’ which complements private capital and labor.” Subsidies for clean energy may well “complement” the private capital and labor that produces clean energy. But a policy of transitioning away from fossil fuels is fated to destroy, if only partially, the existing private capital and labor that relies on fossil fuels to produce energy. Yet Penn Wharton’s model has no way of accounting for the value of these deliberately broken windows. Only for adding up the value of the new, environmentally friendly windows.

To be fair, this doesn’t mean Biden’s energy agenda is necessarily wrong. Environmental and climate issues are important for policymakers to address. And there are real benefits to Biden’s proposed policies, environmental and otherwise. But the question of whether those benefits exceed their costs requires you to actually look at the full range of economic costs.

The failure of Biden’s team to consider these costs hints at the potential contents of their future tell-all memoirs. Even “the best” analysis available at the time, they may earnestly explain, could not possibly discern what hindsight subsequently revealed. But they’ll be wrong to say that no one could have reasonably predicted their blunders. If, as many in the Biden administration are prone to do, you live by the conventional wisdom embodied in think-tank white papers, you should expect to die in its blind spots. And the blind spots are plain to see even now. Look no further than the $841 billion worth of windows they’re about to break, wittingly or unwittingly.