Europe, Global Warming and the Current Economic Crisis: As Seen From Prague

Václav Klaus, World Leaders Forum Series, Columbia University, New York, March 9, 2009.

I would like, first of all, to express my thanks for giving me the opportunity to be here today and to address this distinguished audience. Some of you may know that this is not my first visit to the Columbia University. I was here eight years ago, in April 2001, at the invitation of Prof. Padma Desai and her Center for Transition Economies. It was at the end of the first post-communist decade in my country and in the entire Central, Eastern and Southern Europe and we were still preoccupied with our deep and far-reaching transition from communism to free society and market economy. At that time, my speeches abroad focused mostly on the discussion of the basic elements of this historically unique experience.
This year we will celebrate the 20th anniversary of the fall of communism, of our Velvet Revolution as we used to call it, and we can say with full confidence that the transition is over. We have become a normal - whatever it means - European country and as a consequence of this, we have already standard "European" problems, not the specific problems of a country in transition. This is, however, a mixed blessing.

Gradually adjusting our political, social and economic system to the rules and institutions of the European Union, we imported both its positive and its less positive attributes and features. Even though our post-communist era was characterized by a complete disbelief in the ability of the government to intervene in the economy and by a radical deregulation, liberalization, privatization and desubsidization of the economy, we - with some resistance - slowly came to accept the very rigid and demotivating European economic and social system and are - nowadays - confronted with problems connected with it. Specific problems result from the European unification process itself. It turned out not to be a slowly going, natural, genuine, authentic, evolutionary process, as some of you may expect, but a - from above orchestrated - fundamental change of the whole European institutional framework.

And this is not the only serious challenge we have to face. Like you, we also have to deal with the artificially created global warming problem and with the consequences of the ongoing economic crisis. I will shortly touch upon all of these topics now.

First to our European problem. As President of a country currently presiding over the EU-Council, two weeks ago I got an exceptional chance to address the European Parliament - and together with it millions of Europeans - and used it to express some rather critical remarks on the situation in Europe. Some of the parliamentarians did not want to hear them, but I knew it was necessary to say it because the ordinary people did want to hear it.
We became EU-members in May 2004 because we wanted to participate in the European integration process. We did not want to stay aside, as we were forced to throughout the communist era. However, for many of us in Europe, and especially for those who spent most of their lives in a very authoritative, oppressive and non-functioning communist regime, the undergoing weakening of democracy and free markets on the European continent is a most undesirable development.

This development is not accidental and easily reversible and there are several reasons for it. One of them being the reconstruction of European institutions, which can be summarized as the marching towards an ever-closer Union. This phenomenon has been around for some time, at least since the Maastricht Treaty, and became the main idea behind the rejected European Constitution and lately also behind its new version, the Lisbon Treaty. For me, it is a mistaken project which - by suppressing the role of nation states - paves the way to a postdemocratic Europe.
The other, easily observable and well documented reason is a gradual shift from liberalizing and removing all kinds of barriers towards a massive introduction of regulation and harmonization from above, towards the ever-expanding, overgenerous welfare system, towards the new and more sophisticated forms of protectionism, towards the continuously growing legal and regulatory burdens on business, towards the markets undermining quasicompetition policies, etc. All of that weakens and restrains freedom, democracy and democratic accountability, not to speak about economic efficiency, entrepreneurship and competitiveness.

The Czech EU Presidency slogan "Europe without barriers" attempts to bring the original ambitions of the European integration - the liberalization, the opening-up, the getting rid of barriers and of protectionism - back to our agenda. And rightly so, because this is very much needed.
For me and my country, the EU membership has never had any alternative. Yet, saying that does not imply that we are willing to accept that the forms and the methods of the EU institutional arrangements don.t have alternatives. To take one as sacrosanct, as the only permitted and politically correct one, is unacceptable. The right of the people to say "yes" or "no" to the European Constitution or to the Lisbon Treaty or to any other similar document should be considered sacred.

I said it is not accidental. As usually, ideas have consequences. All of the developments I mentioned are connected with the currently dominant European ideology I call Europeism. In the last couple of years, this loosely structured, rather heterogeneous, not coherently described, formulated, analyzed and defended "conglomerate of ideas" has achieved an enormous strength, supported by vested interests of politicians and their "fellow-travellers". Its main aspects can be summarized in the following way:
  • the belief in the so called social market economy (it deserves to be in German, die soziale Marktwirtschaft) and the demonization of free markets;

  • the reliance on NGOs, on social partnership, on corporatism, instead of on classical parliamentary democracy;

  • the aiming at very activist social constructivism as a consequence of the disbelief in spontaneous evolution of human society;

  • the indifference towards the nation state and blind faith in internationalism;

  • the promotion of the supranationalist model of European integration, not its intergovernmental model.
All of this is something most Americans don.t pay sufficient attention to. Europe is usually discussed here in the context of European pro- or anti-Americanism, or by means of the now fashionable distinction between old and new Europe. A serious dialogue between Europe and America is long overdue. 1

As I have already indicated, I see another big problem in environmentalism and in its currently most aggressive form - global warming alarmism. The problem is not global warming, but the ideology which uses or misuses it. It has gradually turned into the most efficient vehicle for advocating extensive government intervention into all fields of life and for suppressing human freedom and economic prosperity. I will not discuss it extensively here now. I refer to my book "Blue Planet in Green Shackles" 2 and to my yesterday's keynote address at the 2009 International Climate Change Conference here in New York City. 3

The problem is that we keep hearing one-sided arguments only. I am frustrated that the global warming propaganda has not been sufficiently challenged both inside and outside of climatology. It should be stressed that the global warming debate is a complex issue and climatology is only a part of it.

As an economist, I have to claim that there is in this debate a special role for the economic profession, which has been developing its own scientific sub-discipline called "the economics of global warming". The economists should come up with arguments about the inexhaustibility of resources, including energy resources, on condition they are rationally used, which means with the help of undistorted prices and well-defined property rights. They should supply us with comprehensive studies about the costs and benefits of the currently proposed "green" measures and policies. They should explain - even to non-specialists - the very complicated relationship between different time horizons (discussed in the economic theory by means of discounting). They should return to the elementary economic argumentation about the rational risk aversion (which would help to undermine the fuzzy and indefinable precautionary principle, used by the environmentalists), and they should bring back the arguments about the positive role of markets, prices, property rights and about the tragic consequences of the unavoidable government failure connected with ambitions to do such things as controlling global climate. The main arguments are developed in my book.

The last issue, I would like to mention here today, is the current financial and economic crisis. A month ago, I spent three days discussing this topic with many leading politicians at the World Economic Forum in Davos and my depressing feeling from these discussions is that both the elementary rationality and the economic science have been excluded, suppressed or forgotten. The very unpleasant, day by day deeper economic crisis should be treated as a standard, cyclically repeated economic phenomenon, as an unavoidable consequence and hence a "just" price we have to pay for the long-term playing with the market by the politicians and their regulators. Their attempts to blame the market, instead of themselves, should be resolutely rejected. Their activities, aiming at "reforming", which means re-regulating the economic system world-wide, are all very doubtful and I as said in Davos: "I am getting more afraid of reforms bringing in more rules and increased international regulation than of the crisis itself." A large increase in the scope of financial regulation and protectionism, as is being proposed these days, will only prolong the recession.

My country has not, luckily, experienced any financial crisis so far. We had one ten years ago, in the moment of the Asian financial disturbances, and it motivated our banks to become very cautious. We did, however, import an economic crisis. This happened partly because of the fall of demand for our exports, and partly because of the behaviour of foreign banks which own our local banks. Due to the problems in their mother countries, and in the attempts to rebalance their portfolios, they dangerously restricted credits even in countries without apparent financial vulnerabilities. This is the effect of globalization and of our rapid selling of our state-owned banks after the fall of communism when there was no domestic capital at our disposal.

Aggregate demand needs strengthening. One traditional way to do this is to increase government spending, mostly on public infrastructure projects, on condition these are available and the country is ready to massively increase its indebtedness. The Czech government has not yet decided to do so because we do not believe in this procedure. Not all of us are Keynesians, even now. It would be much more helpful to initiate a radical reduction of all kinds of restrictions on private initiatives introduced in the last half a century during the era of the brave new world of the "social and ecological market economy". The best thing to do right now would be to temporarily weaken, if not permanently repeal, politically correct labour, environmental, social, health and other "standards", because they block human activity more than anything else.

I did not come here to comment on your economic policies or to give advice. This is my first visit to the U.S. after the last year.s presidential elections and the change of the administration. We are looking forward to working with the new President. I am convinced his visit to the Czech Republic at the beginning of April will be a good opportunity for it. We hope this administration will - under his leadership - try to find an optimal mix of continuity and discontinuity both in American foreign and domestic policy. I hope it will include
  • not endangering the basic institutions of the market economy while fighting the current crisis;

  • staying involved in international affairs but listening more to friends and partners.
In the moment of the fall of communism, almost 20 years ago, I did not expect to experience such an extent of government intervention into my own life as I see now. I am, therefore, convinced that fighting for freedom and free markets, something we always appreciated here, in this country, remains the task of the day.

(Earlier version of the speech was held as part of Foreign Policy Lecture Series, Paris, February 11, 2009.)

1 - I held a speech on this topic at the World Forum, organized by the American Enterprise Institute, Beaver Creek, Colorado, June 20, 2003.

2 - "Blue Planet in Green Shackles. What is Endangered: Climate or Freedom?" Competitive Enterprise Institute, Washington D.C., 2008. Originally published in Czech language in 2007 under the title "Modrá, nikoli zelená planeta. Co je ohroženo: klima nebo svoboda?", published by Dokořán, Prague, Czech Republic.

3 - The 2009 International Climate Change Conference, Heartland Institute, Marriott Marquis Hotel, New York, March 8, 2009

No Progress in the Climate Change Debate

Václav Klaus, The 2009 Heartland Institute International Climate Change Conference, Marriott Marquis Hotel, New York, March 8, 2009

When preparing my today.s remarks, I took into my hands - looking for an inspiration - my last year's speech here, at the Heartland Institute's Conference. It did not help much. It is evident that the climate change debate has not made any detectable progress and that the much needed, long overdue exchange of views has not yet started. All we see and hear are uninspiring monologues.

It reminds me of the frustration people like me felt in the communist era. Whatever you said, any convincing and well prepared arguments you used, any relevant data you assembled, no reaction. It all fell into emptiness. Nobody listened, especially "they" did not listen. They didn't even try to argue back. They considered you a naive, uninformed and confused person, an eccentric, a complainer, someone not able to accept their only truth. It is very similar now.

A few weeks ago, at the World Economic Forum in Davos, I spent three hours at a closed session of about sixty people - heads of states and governments with several IPCC officials and "experts" like Al Gore, Tony Blair and Kofi Annan. The session was chaired by the Danish Prime Minister because its main topic was how to prepare the new Kyoto, the December 2009 UN-Copenhagen summit.

It was a discouraging experience. You looked around in vain to find at least one person who would share your views. There was no one. All the participants of the meeting took man-made global warming for granted, were convinced of its dangerous consequences and more or less competed in one special discipline - whether to suggest a 20, 30, 50 or 80% CO2 emissions cut as an agreed-upon, world-wide project. It was difficult to say anything meaningful and constructive. Among other things I tried to turn their attention to was the argument that they made such radical proposals even though their own countries had not fulfilled even the relatively modest Kyoto Protocol obligations. There was no reaction to that. After the session, one friendly looking president of a relatively large non-European country told me that he had never heard anything like my views, but was interested and wanted to hear more. I gave him my book "Blue Planet in Green Shackles".

Nevertheless, we have to continue speaking to those people because they have a very strong voice in popularizing the global warming alarmism and in making decisions with far-reaching consequences. I try to do it permanently. The politicians are, however, not alone. They succeeded in creating incentives which led to the rise of a very powerful rent-seeking group. Very much like the politicians, these people are interested neither in temperature, CO2, competing scientific hypotheses and their testing, nor in freedom or markets. They are interested in their businesses and their profits - made with the help of politicians. These rent-seekers profit:
  • from trading the licenses to emit carbon dioxide;

  • from constructing unproductive wind, sun and other similar equipments able to make only highly subsidized electric energy;

  • from growing non-food crops which produce non-carbon fuels at the expense of producing food (with well-known side effects);

  • from doing research, writing and speaking about global warming.
It is always the same story with the same results. On the one hand, a highly concentrated and easily organized rent-seeking group and, on the other, widely dispersed, and therefore politically unorganizable individuals, the usual silent majority. I am frustrated that the economists and other social scientists do not try to enter the current debate. For us, in the former communist countries, the discovery of the works of the public-choice school scholars was a revealing experience. I somewhat naively assumed that their views belonged to the "conventional wisdom" in the Western world. This was not and is not true.

How to educate and enlighten those who make decisions? The politicians - hopefully - sometimes look at the very condensed versions of the IPCC's Summaries for Policymakers but these documents do not represent science, but politics and environmental activism. It is difficult to change their minds. They did fully subscribe to the idea that the IPCC publications represent "the" climate science. We know that is not true and that there is no scientific discipline of climate science. Climate is such a complex system that it has no "science" of its own. There are, of course, very respectable sciences that deal with some parts of it. And they tell us quite persuasively that:
  1. there is no one unique, unprecedented climate change just now, but permanent climate changes. The climate system of our planet has a significant internal variability. The past data are in this respect quite convincing;

  2. the current climate changes cannot be subsumed under the hypothesis of anthropogenic global warming. This claim is based exclusively on the results of experiments with the very imperfect computer models;

  3. the Earth's climate sensitivity to carbon dioxide is lower than is assumed by the IPCC. For a doubling of carbon dioxide concentration the global average surface temperature will increase not more than by about 0,5 °C;

  4. there is no fixed and stable relationship between measured temperature and CO2 emissions. The believers in this hypothesis are not able to explain why the global temperature increased from 1918 to 1940, decreased from 1940 to 1976, increased from 1976 to 1998 and decreased from 1998 to the present, irrespective of the fact that the people have been adding increasing amounts of CO2 to the atmosphere.
I would be able to continue presenting further arguments of that kind but this is not a field in which I do possess any comparative advantage. Perhaps in Davos, but not here. I am, therefore, looking forward to new ideas, arguments and data coming out of this conference.

Let me make a few short comments from "my" fields.
I am puzzled by the environmentalists' approach to technical progress. On the one hand, there is a huge difference between our technology optimism, based on our belief in secular improvements in technology on condition the free and unregulated, unconstrained, unmanipulated economic system makes them possible, and environmentalists' technology skepticism along traditional Malthusian lines. On the other hand, the environmentalists are, at the same time technology naivists who freely and irresponsibly operate with miraculous technologies which have only one defect: they have not yet been invented. This is an apparent schizophrenia on their side. They should tell us how it really is. I am afraid they are not so naive as they pretend to be. They, probably, "only" do not want to reveal their true plans and ambitions: to stop economic development and return mankind centuries back. In that case technologies are unimportant.

Their attack on today's technologies is an irrational practice with fatal consequences. As far as I know the existing and functioning technologies had never been abandoned before they were genuinely replaced by better ones. There arises - for the first time in history - a threat that the old technologies will be abandoned before new technologies become available. This should also be explained to the politicians in alternative "summaries for policymakers", but they should be written by economists. We should also tell them that there is no known and economically feasible method or technology by which industrial economies can survive on expensive, unreliable, clean, green, renewable energy.

Another issue which bothers me is the exceptional absence of rational thinking as regards intertemporal decision making, especially when time-horizons are so long as in this case. The despotically ruling, politically correct aprioristic moralism (based on the disagreement with the infamous Keynes' dictum "in the long run, we are all dead" or with the not less famous Madame De Pompadour's maxim - "aprés nous le déluge") is basically flawed. The questions which need to be answered are serious and non-trivial. Should we make radical decisions now? Should we tax today's generations to benefit future generations? Should we be generously altruistic? Should we give preference to future generations and not to the people living in undeveloped countries today? My answer is no. We could have made such far-reaching decisions only on the absolutely unrealistic assumption that we know all relevant parameters of the future economic system, including the level of wealth and technology, and that we know all the parameters in an adequately discounted form. The controversy about Nicolas Stern's and Ross Garnaut's irrationally low discount rates used in their very influential models suggests that such transfers are not justifiable.

To conclude, it is evident that the environmentalists don't want to change the climate. They want to change us and our behavior. Their ambition is to control and manipulate us. Therefore, it should not be surprising that they recommend "preventive", not "adaptive" policies. Adaptation would be our voluntary behavior which is not what they aim at. They do not want to recognize that - to quote Nigel Lawson - "the capacity to adapt is arguably the most fundamental characteristic of mankind" and that our "adaptive capacity is increasing all the time with the development of technology".

The environmentalists speak about "Saving the Planet". From what? And from whom? One thing I know for sure: we have to save it - and us - from them.

(publikováno dne 9. března 2009 v českém překladu a ve zkrácené verzi v Lidových novinách)

1 - Blue Planet in Green Shackles, Competitive Enterprise Institute, Washington, DC, May 2008. It has been published already in eight languages. In a week from now, the Italian edition will be launched in Milan.

2 - Nigel Lawson: An Appeal to Reason - A Cool Look at Global Warming, Duckworth Overlook, London, 2008, pp 39.

Notes for Santa Barbara: "Is Environmentalism a Bigger Threat to Humanity than Global Warming?"

(distributed before the Q&A session with President Klaus at the Wall Street Journal ECO:nomics Conference in Santa Barbara)

Many thanks for the invitation to participate in this important and timely gathering of business people, economists, environmentalists and politicians. In this rather confused era, the organizing institution, the Wall Street Journal, remains one of the last pillars of reason and of healthy and so much needed stability and continuity of thoughts and attitudes.

As someone who spent most of his life in a communist regime, I am getting nervous when I see a serious-looking article with the title "Rethinking Karl Marx" in a January edition of the Time Magazine, attempting to convince us that Marx's analysis of capitalism was correct and that we should, therefore, study it very carefully right now.

For me, one of the main symptoms of unreason in our era and of our returning before the Age of Enlightenment is the current global warming debate and the futile ambitions to control climate. In its arrogance and immodesty, it reminds me of many unrealistic and all of us damaging and hurting plans and projects the communist propaganda kept supplying us with all the time. My answer to the question in the title of this session "Is environmentalism a bigger threat to humanity than global warming?" is clear and straightforward: Environmentalism is a much bigger threat and what is endangered is freedom and prosperity, not climate. Climate is OK. This is also expressed in the subtitle of my book devoted to this topic, published two years ago.1

I have spent years studying this issue, which is only a new variant of the many times discredited and disproved Neomalthusian pessimistic and interventionistic environmentalist doctrine. This ideology, if not religion, should not be confused with scientific climatology in spite of the fact that it uses, or better to say, misuses some of its terms, concepts, hypotheses. Structurally, they belong to two, totally different fields. One is science, the other is politics.

It is difficult to quickly summarize my rather complex views about this issue in just a few sentences. For those who want to get acquainted with them in more detail, I recommend my book which is also available here. Nevertheless, a few most important points can be made:
  1. science does not give us clear and strong evidence that dangerous and even measurable human-caused global warming is occurring. Besides the views of the IPCC, which is a group of people for several reasons fully committed to the idea of man-made global warming, there exists a more balanced, non-alarmist view held by thousands of serious scientists. The claims made by the alarmists about an undisputable scientific consensus about global warming and about the factors influencing it are not justified;

  2. before discussing the currently circulated and - among politicians and some business people - very popular alarmist policy prescriptions, everyone should carefully study the economics of global warming, a field of economics which uses elementary tools and concepts of economic science such as

    - the cost-benefit analysis,
    - the risk aversion analysis,
    - intertemporal analysis based on the idea of discounting,
    - standard price theory and microeconomics, etc.

    to be able to put the global warming debate into a proper perspective;

  3. human experience, "deposited" and assembled both in our knowledge and in serious social sciences, tells us that human behavior is sufficiently adaptive, that both wealth and technical progress change the parameters of our decision making in the direction of environment protection, that spontaneous reactions of billions of people are better than political governance and centralized masterminding of human fates. It warns us against attempts to introduce radical, extremely costly, human freedom and prosperity endangering mitigation measures based on a totally futile idea of changing the climate by limiting CO2 emissions.
I am surprised to see that many Americans support cap-and-trade legislation to reduce greenhouse gas emissions. I am convinced this is a wrong project for both the uncertainty about the real dangers of global warming and the certainty of the damage done by this policy.

Europe is several years ahead of the US in implementing these policies. The EU member countries all ratified the Kyoto Protocol and have undertaken a wide range of policies to lower the emissions and meet the promised targets. These policies include a cap-and-trade program known as the Emissions Trading Scheme, very high fuel taxes and ambitious programs to build windmills and other renewable energy sources. These policies were undertaken at a time when the EU economy was doing well and the irony is that emissions were not going down now as a result of these policies, but started to decrease as the economy moves into recession.

This is not a surprise for someone like me, who was very actively involved in the transition from communism to a free society and market economy. The old outmoded heavy industries that had been the pride of our Communist regime were - practically overnight - shut down because they couldn't survive the introduction of rational economic policies. The secret behind cutting emissions was economic decline. As the economies of the Czech Republic and other central and eastern European countries were rebuilt and began to grow again, emissions have naturally started to go up. It is clear to everyone who looks that there is a very strong connection between economic growth and energy.

Cap-and-trade can only work by raising energy prices. Consumers who are forced to pay higher prices will have less money in their pockets to spend on other things. While the individual companies that provide the higher-priced "green" energy may do well, the net economic effect must be negative. It is necessary to look at the bigger picture. Profits can be made when energy is rationed or subsidized, but only within an economy operating at lower, or even negative, growth rates. This means that over the longer term, everyone will be competing for a piece of a pie that is smaller than it would be without energy rationing.

Being often with many leading politicians, I feel frustrated that they do not listen. They already know. They fully subscribed to the idea that talking about "saving the planet" is an effective way to show their "caring" for humanity and that it is the easiest way to maximize votes irrespective of any relevant activity which would aim at the real needs of people. The global warming dogma has become a very easy form of escapism from the current reality. We should keep resisting it.

Václav Klaus, Wall Street Journal ECO:nomics Conference, Bacara Resort, Santa Barbara, California, March 6, 2009

1 - "Blue Planet in Green Shackles. What is Endangered: Climate or Freedom?" Competitive Enterprise Institute, Washington D.C., 2008. Originally published in Czech language in 2007 under the title "Modrá, nikoli zelená planeta. Co je ohroženo: klima nebo svoboda?", published by Dokořán, Prague, Czech Republic.