Bob Hancké, PEACS
11 February 2025
Just as in any other transition, the losses that we incur today are extremely clear; the gains, however, are both in the distant, unknown and uncertain future, and at best only partially imaginable. The dramatic drop in output in the transition from a planned economy cum one-party state to capitalist democracies in CEE was easily visible – it happened almost overnight – and led to high unemployment, deep existential insecurity for average households, and a plethora of catastrophic social consequences: life expectancy and health collapsed, basic rights for women and workers were jettisoned, and life chances for the average person fell sharply as a result. While the promised gains exceeded all possible expectations, the actual gains, once the transition was in full swing, were uncertain for many, probably exaggerated (as in Helmut Kohl’s ‘blühende Landschaften’, the blooming landscapes without serious costs), and applied to everyone, even (or perhaps especially) to the young and future generations that are not (yet) voting and are not even part of the discussion today.
This constellation of subjectively large losses now and vague, diffuse though possibly larger gains much later is a key characteristic of a well-known dynamic problem in political economy and is called time inconsistency. It shows up everywhere: sugary fruitcakes are bad for you in the long run, but give you immense satisfaction now; guess what most of us do when offered a piece of cake? The idea that gains and losses are not symmetrically distributed over time – high costs today and (the perception of) vague benefits tomorrow – is at the heart of time inconsistency. Macroeconomics offers one of the paradigmatic examples of time inconsistency in political economy: axiomatically every government will do what it can to get re-elected, including inflating the economy to manufacture popular satisfaction, and since all actors are (again, axiomatically) aware of the expansionary bias of the government, the economic policy of an incumbent party or government will always have an inflationary bias. However, since everyone anticipates the inflationary boost, it will not have lasting real effects: after a short period, real economic activity will settle at the old, lower, level, but with higher prices because of the inflationary shock (Lucas & Sargent 1978). In more general terms, governments will always be tempted to choose a bad policy today, with positive immediate effects on their chances of re-election, over the good policy with mitigated effects on re-election. As a result, a permanently rising price level above a benign 2% is almost baked into democratic politics. The upshot is that, since we cannot trust governments with the long-term health of the economy and the welfare of society – inflation erodes assets for the wealthy and purchasing power of the poor – elected officials should hand over the levers of monetary policy to an independent, conservative central bank, whose decision-makers can decide the optimal macroeconomic policy that keeps inflation in check without any serious concern for other factors. This has become the operational policy in macroeconomics in all advanced capitalist democracies since 1980. While this orthodox position has not gone unchallenged (Iversen & Soskice 2006), there is little doubt about the time-inconsistency dynamics underlying it. Jam today always beats the promise of jam tomorrow.
The green transition shares many of these time-inconsistency characteristics. A transition from a brown, fossil-based, economy to a green one will have deeply negative short-term effects on assets that are specific to the brown economy. Many of the skills in industries such as energy or automotive, for example, will be worthless overnight: building a car with an internal combustion engine is in many aspects very different from building an electric vehicle. Much of the capital associated with the brown economy will also become worthless – ‘stranded’, in the jargon – after a green transition. The factories, organisational models, supply chains and R&D centres, for example, differ dramatically between these two basic technologies. Moreover, the transition has many lumpy moments, which exacerbates the steep costs. Imagine, for ease of exposition, that capital ranges from A to Z and labour from 1-9. Instead of gradually moving from a combination A1 of the production factors in the brown economy over A2 and B2 etc. to Z9, you simply must abandon everything associated with A1, forget the gradual steps A2, B2, B4, etc., and start anew with combination Z9 in the green economy. Exactly in the same way that a gradual walk along the possibilities curve (reflecting gradually changing combinations of capital and labour) was not feasible in the transition away from the state-socialist economies in the 1990s, you face a green transition process that requires you to destroy much of the brown economy and start with a new combination elsewhere in the space of possibilities.
Such a transition has obvious steep social and economic costs with clearly identifiable losers and currently still vague winners. While the winners will become clearer in the future, the endemic uncertainty surrounding the green transition – more on that in a few weeks – suggests not only that this may take a while, but also that many probably do not even exist. It is therefore impossible to identify and very difficult to mobilise them as the social basis of the green transition. The politics of the green transition are, in other words, disproportionately skewed towards the losers of the transition – and turkeys usually do not vote for Christmas. This juxtaposition between sharp, clearly identifiable losses now and an uncertain (though undoubtedly positive) future is what the green transition shares with every other transition: the different time frames between the losses and the gains, and their effects on existing and future economic actors makes a negotiated transition difficult.
One way out of the conundrum may be to adopt the solution to the dynamic inconsistency problem in macroeconomics, and institute an independent, progressive authority that imposes and enforces green targets. For that to work, we would have to have a pretty good idea of what the targets should be, i.e. we need to have access to all the relevant information, both about substantive outcomes and about tools to get us there. If we knew which skills are needed, how to move energy mixes, etc. so that we could meet the carbon targets that should be falling to zero, and we knew more or less exactly over which period this (linear) reduction would take place, such an independent technocratic agency could work. But, we do not have that detailed information (the topic of a forthcoming essay in this series), and we often do not know how to obtain it, other than through trial and error. Think of the parallel with the central bank: monetary policy has one, at most two, clear policy targets (usually inflation, with some consideration for growth thrown in). Green policy has hundreds of policy targets, each with its own information issues. That makes the independent agency solution to the green transition technically very hard, probably impossible.
But it is also problematic because it ignores democratic decision-making. While there may be an argument in favour of central bank conservatism and independence because of its limited mandate – though that argument is possibly not as strong as many orthodox economists and political scientists think, as my colleague David Woodruff has pointed out – that logic collapses in the case of a green transition: there are legitimate technical and political debates about the nature and speed of the green transition. For example, is electricity the single or most important road forward, or are there viable alternative non-fossil energy sources? How do we organise the transition of regions that are highly dependent on brown economic activities without imposing catastrophic social costs? How do we avoid static and dynamic bottlenecks that agencies with broad central authority may produce? Central planning, with which this system has some affinity, failed because everybody was lying to everybody else about targets and means. In democracies, in short, we have no choice but to debate these broad policy targets, work to persuade others, take on board legitimate concerns, entertain reasonable alternatives and find compromises.
In addition to these epistemological and normative considerations, there are political-institutional concerns. In democracies losers and winners have access to and can mobilise different institutional arsenals. That is the topic of the next essay in this series: the need to understand collective action problems in the green transition.
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