David R. Henderson  

Krugman on Climate

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Today, Paul Krugman's New York Times column is one that I don't hate. I don't love it either, but it actually has some strengths as well as weaknesses.

Strengths

Krugman writes:

Yes, limiting emissions would have its costs. As a card-carrying economist, I cringe when "green economy" enthusiasts insist that protecting the environment would be all gain, no pain.

I know that it's basic for economists to admit that there are opportunity costs, but, unlike with his writing in the 1990s, Krugman often leaves that out. It's nice to see it in again.

He also gets specific about these costs, pointing out how widespread they would be:

A cap-and-trade system would raise the price of anything that, directly or indirectly, leads to the burning of fossil fuels. Electricity, in particular, would become more expensive, since so much generation takes place in coal-fired plants.

And finally:

Consumers would end up poorer than they would have been without a climate-change policy.

Weaknesses

Krugman writes:

Needless to say, people like Newt Gingrich, who says that cap-and-trade would "punish the American people," aren't thinking that way. They're just thinking "capitalism good, government bad." But if you really believe in the magic of the marketplace, you should also believe that the economy can handle emission limits just fine.

Well, sure. We can handle it. We will adjust. But that doesn't mean the American people won't be punished. And Krugman doesn't deny that they will be and, in fact, made the point himself with his admission that consumers would be punished. But he leaves the careless reader thinking that he has refuted Gingrich.

Then Krugman comes perilously close to committing the broken-window fallacy that Bastiat refuted almost 200 years ago. He writes:

To put it another way, a commitment to greenhouse gas reduction would, in the short-to-medium run, have the same economic effects as a major technological innovation: It would give businesses a reason to invest in new equipment and facilities even in the face of excess capacity. And given the current state of the economy, that's just what the doctor ordered.

Krugman is thinking about investment purely from a Keynesian aggregate demand viewpoint and not thinking about the productivity of the investment. But what we need is investment that is productive. If investment is good just because it's investment, no matter what it's invested in, then one could just as easily argue that the money spent for greenhouse gas reduction could instead be spent on driving Caterpillars into the ocean.

Finally, the biggest weaknesses are the two things Krugman leaves out. First, recall that he made his reputation and won his Nobel prize for his excellent work on international trade. Specifically, the Nobel committee highlighted his analysis of trade patterns "and the location of economic activity." (italics added) Krugman must realize that if the United States government makes fuels more expensive here, a major effect will be that fuel-intensive production shifts to other countries that do not imposed these regulations, countries like China. So the net effect will be much less of a reduction in use of carbon-based fuels than he thinks. Second, he gives no hint that there is controversy about how much effect various reductions in usage of carbon-based fuels will have. He's looked at the cost of these measures but seems implicitly to have assumed that the benefits are high. What's his basis?


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COMMENTS (15 to date)
MikeP writes:
To put it another way, a commitment to greenhouse gas reduction would, in the short-to-medium run, have the same economic effects as a major technological innovation:

Change the word 'innovation' to 'setback', and the rest of the paragraph is still as true -- but it is much more accurate.

MikeP writes:

Krugman must realize that if the United States government makes fuels more expensive here, a major effect will be that fuel-intensive production shifts to other countries that do not imposed these regulations, countries like China. So the net effect will be much less of a reduction in use of carbon-based fuels than he thinks.

It is far worse than that.

1. Production in China is much less energy efficient than production in the US.
2. The marginal power plants that would absorb increased production in China are coal fired.
3. The higher the carbon footprint of the production, the greater the probability it will be exported to China.

It is very easy to believe that raising carbon costs in the US will raise atmospheric CO2 by exactly these mechanisms.

The only thing worse than unilaterally raising carbon costs in the US is restricting trade based on carbon costs. I don't doubt, however, that that's where we are headed. Wealth destruction all around.

Bill Kruse writes:

David, your last sentence is:

"He's looked at the cost of these measures but seems implicitly to have assumed that the benefits are high. What's his basis?"

Krugman has completely swallowed the CAGW (Catastrophic Anthropogenic Global Warming) argument, that's his basis, and, like the worst of its adherents, he calls everyone who expresses the slightest doubts an idiot or craven or both. CAGW is the Democratic Party line, after all, so why wouldn't he?

Another huge flaw in Krugman's position is, I believe it's called, "the nirvana fallacy." The whole cap and trade thing will be carried out with complete selfless, noble, unbiased, high-efficiency devotion, it won't degenerate into crass political favortism as in Europe, and it won't give protectionists an opening to restrict international trade with "polluting, CO2-using" countries (e.g., China). But, since the Democrats now control the Executive and Legislative branches, I suppose Krugman would consider political favoritism an unalloyed good!

Plus, all you said about the broken window fallacy IS there, as it has been in several of Krugman's earlier NYT pieces (e.g., immediately post-9/11). Finally, as you point out, Krugman doesn't even see the implications of his own area of expertise.

So, to characterize this as a piece that "has some good points and some bad points" is very misleading. If I wrote a piece supporting US sugar quotas and I happened to mention along the way that sugar prices were influenced by both supply and demand, presumably you wouldn't give me any credit. Why give Krugman credit for a few things he says in passing that happen to be correct?

No, this is just another piece of junk from Krugman, shot through with fallacies, which will shoot to the top of the most forwarded articles in the NYTimes.

H writes:

"It is very easy to believe that raising carbon costs in the US will raise atmospheric CO2 by exactly these mechanisms."

So what? Climate policy is not based on short-term effects.

Eventually we all have to reduce carbon emissions. What happened to America's moral leadership?

Larry writes:

@MikeP - It is very easy to believe that raising carbon costs in the US will raise atmospheric CO2 by exactly these mechanisms.

Not to mention lower US economic growth. The only way out is innovation. We have to develop energy that is cheaper than oil, natural gas, and coal. Otherwise, only a global regime avoids the pernicious side-effects.

@Bill Kruse The whole cap and trade thing will be carried out with complete selfless, noble, unbiased, high-efficiency devotion, it won't degenerate into crass political favortism as in Europe, and it won't give protectionists an opening to restrict international trade with "polluting, CO2-using" countries (e.g., China). But, since the Democrats now control the Executive and Legislative branches, I suppose Krugman would consider political favoritism an unalloyed good!

He does at least advocate distributing permits via auctions rather than as pork, so he's not hypocritical in that way, albeit naive. Obama says the same. Unfortunately, if cap and trade comes at all, coal-dependent states will get the auction idea neutered, so we will in the end look like Europe's worthless program. Since that program is having very little effect on carbon use or much else, maybe that's the least bad achievable outcome.

Dan Weber writes:

If the government has to raise money via taxes, isn't it better to raise it via consumption taxes (like a carbon tax) instead of production taxes (like an income tax)?

Lord writes:

It will cost, but doing nothing will also cost. Who will bear that cost would as would the value placed on the result. Whether the former will be less or more than latter is hard to say, but probably can't be estimated without trying. What right does anyone have to pollute their neighbor property? Most energy used is by buildings and transportation and is not amenable to offshoring.

Jeremy, Alabama writes:

Obama won, OK? And the NYT is on the hairy edge of going out of business.

Good time for a skosh of realism from Krugman?

Greg Ransom writes:

Once again Krugman does what he always does -- he smears the motives and arguments those "on the otherside", dishonestly mischaracterizing where they are coming from and why.

Thanks for pointing out that Krugman used deception to pretend to "win" the argument.

Krugman writes:


"Needless to say, people like Newt Gingrich, who says that cap-and-trade would "punish the American people," aren't thinking that way. They're just thinking "capitalism good, government bad.""

Yancey Ward writes:

Perilously close? I read that section five times, and it looks like an explicit violation, but then many of the Keynesian prescriptions for recession are clear violations of the Broken Windows Fallacy. Do you think Krugman believes Bastiat was wrong?

Vangel writes:

"Eventually we all have to reduce carbon emissions. What happened to America's moral leadership?"

Why do we need to do that? There is absolutely no evidence that CO2 emissions have a material impact on warming or that warming is harmful. There is nothing immoral about pretending that we know what the planet's temperature should be or to prefer the temperatures of the Little Ice Age, which brought poverty, death and misery, over the 0.7C higher temperatures that we have today or over the still higher temperatures during the MWP.

The AGW argument is mostly religious except that it has nothing to do with the advancement of positive moral sentiments. Frankly, it is a waste of time that is diverting precious time, energy and resources towards an issue that will have no negative impact on human beings or the planet.

Babinich writes:

Vangel writes:

"Why do we need to do that? There is absolutely no evidence that CO2 emissions have a material impact on warming or that warming is harmful. There is nothing immoral about pretending that we know what the planet's temperature should be or to prefer the temperatures of the Little Ice Age, which brought poverty, death and misery, over the 0.7C higher temperatures that we have today or over the still higher temperatures during the MWP."

Spot on... Though I believe we should pursue a goal of polluting less. How about nuclear powers, or natural gas, or using science to find a way to burn clean coal?

Why is science viable for wind, solar, and ESC research but not good for ASC research, clean coal, and nuclear?

Boonton writes:

Two things:

1. Many things cannot be produced overseas. We are not going to buy electricity from China nor can we by transportation. Yes maybe China will build our cars but we will drive them here.

2. Innovation goes down the chain.

3. Probably more importantly, you could counter the international aspect with cap'n'trade. Simply allow overseas producers that achieve lower emissions than their local laws require to sell credits in the cap'n'trade system. Of course such an 'achievement' needs to be independently audited....but I don't see why it should be impossible to get good results. After all, plenty of foreign companies are able to be properly audited enough to trade on US stock exchanges.

It very well might be that US companies will end up getting their credits by bringing wasteful and highly inefficient factories overseas up to par.

Boonton writes:

Sorry that was 3 things, feel free to concentrate on #1 and #3 though.

El Presidente writes:

So, how do you get electricity to the US from China? Will we use their coal fired powerplants to power our buildings and cars?

Sure, industry can relocate, and probably will. However, I seem to recall that it is the libertarian tradition as it relates to economics that suggests the process of adaptation/innovation produces a mover advantage, a technological edge, a profitable efficiency. Creating more efficient means of capturing and using energy can reduce the real cost of it and reduce the environmental impact. Yes, others will lag; but how far behind, and for how long? Saying that we should not do it (and you haven't quite said this) because it places us at an immediate disadvantage is too short-sighted given the environmental constraints we are working under. Constrained optimization works best when you actually apply the constraints that exist in the real world, from which Gingrich picks and chooses. Consumers will pay now for gains later; this is true. But there will be people to receive the gains where there otherwise would not be . . . unless libertarians would like to withdraw their belief in innovation and the entrepreneurial spirit.

I know this is supposed to be an economics blog, but since we are talking about climate change I think you might want to consider the research of F. Sherwood Rowland, who won the Nobel for his work in atmospheric chemistry. I had the privilege of hearing him lecture and seeing his research on the issue. It is simple and compelling. It's hard to dispute the basics of atmospheric change. We can argue that we've misunderstood the long run effects, but they aren't all that difficult to understand. Anyone who has passed collegiate chemistry courses can understand the science. We can argue that they are not anthropogenic, but we know they are because we can calculate the effects of our behavior fairly well. We can argue that the cost is too high right now, but this is where we begin to require the assistance of our normative principles. We don't know how long we can wait. We don't know how long it will take to have a significant effect. We would want to know these things before engaging in other types of investment. We would like to know them now. Pretending this isn't a problem doesn't get us any closer to knowing this information. We will probably have to act with incomplete information, and failing to do so could portend a catastrophic risk from which we cannot recover. No boogie men, just difficult choices.

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