David R. Henderson  

Krugman Defends Price Theory

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One of my frustrations when reading Paul Krugman's blog is that I often get the feeling that I'm not reading a post by an economist. We economists tend to talk about relative prices, how prices motivate behavior (incentives), etc. Krugman knows all that, but way too often it doesn't come across in his blog the way it does in, say, his and Robin Wells's textbooks

Well, there's some good news. Today Paul has a very good blog post. In it, he takes on the claim of Roger Pielke, Jr. that we can't limit carbon without either limiting GDP growth to zero or getting large gains in technology.

Specifically, Pielke writes:

Carbon emissions are the product of growth in gross domestic product and of the technologies of energy consumption and production.
. . .
Thus, by definition, a "carbon cap" necessarily means that a government is committing to either a cessation of economic growth or to the systematic advancement of technological innovation in energy systems on a predictable schedule, such that economic growth is not constrained. Because halting economic growth is not an option, in China or anywhere else, and because technological innovation does not occur via fiat, there is in practice no such thing as a carbon cap.

It's this kind of reasoning that in the past I have, following the lead of Al Harberger, labeled "priceless." And, as I've noted, I, like Harberger, do not mean that as a compliment.

And Krugman catches it. Of course, he does his usual sarcastic schtick, but look beyond that and he does the price theory very well. He writes:

Yes, emissions reflect the size of the economy and the available technologies. But they also reflect choices - choices about what to consume and how to produce it, choices about which of a number of energy technologies to use. These choices are, in turn, strongly affected by incentives: change the incentives and you can greatly change the quantity of emissions associated with a given amount of real GDP.

Take, as an example we're all familiar with, auto emissions. In a wealthy economy, people will want to move around. But some of them might use public transit if the price and quality is [sic] right; they could drive fuel-efficient cars rather than big SUVs; they could use diesel, or hybrid vehicles. All these choices would impose some cost, and reduce real income to some extent -- but the effect wouldn't remotely be that real GDP would fall one-for-one with emissions.


It would have been nice to then see Krugman point out something that economists who have studied the issue know very well: that the best way to get the "right" kinds of cars and trucks, if you're worried about global warming, is not to impose CAFE standards but to have the carbon tax that Krugman has written about elsewhere. Alas, he doesn't. Instead, he writes:
As it happens, by the way, the Obama administration's tightening of fuel economy standards is by some measures as important a move as its power-plant regulations.

This isn't mistaken. It's just that he missed an opportunity to take his reasoning about prices and incentives all the way.

Still, his piece is a nice antidote to "priceless" thinking.

HT to Mark Thoma.


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COMMENTS (10 to date)
Handle writes:

Pielke's claim is pretty sloppy.

That being said, the real question that is always lurking behind these debates is of one of comparing policy to various RGDP pathways.

When the government imposes a quota on any input to, or output resulting from, some form of production, then we typically say that this introduces distortions into the alternative free market equilibrium, and the claim that those distortions do not reduce the RGDP path is exceptional and requires some extraordinary evidence to support the argument.

That is to say that imposing carbon quotas sacrifices some fraction of short term growth rates in exchange for benefits in the long term, or perhaps in favor of some other value besides RGDP.

That trade-off shouldn't be controversial, but people spend a lot of energy trying to confuse the issue.

David R. Henderson writes:

@Handle,
That is to say that imposing carbon quotas sacrifices some fraction of short term growth rates in exchange for benefits in the long term, or perhaps in favor of some other value besides RGDP.
True.
That trade-off shouldn't be controversial, but people spend a lot of energy trying to confuse the issue.
Some people do; Krugman didn’t. See his statement above.

Dan JJ writes:

"As it happens, by the way, the Obama administration's tightening of fuel economy standards is by some measures as important a move as its power-plant regulations."

Important to who?

Imposing GCC religious fundamentals on others is no different than "banning gay marriage" in the name of other religions.

Mark Bahner writes:

Hi David,

Paul Krugman's post is disgraceful. Read Roger Pielke's response on his blog.

Roger never wrote that, "real GDP would fall one-for-one with emissions".

Roger simply wrote that the Kaya Identity must hold. (Which it must. It's an identity.) Specifically for China, he said that if the economy grew, and emissions were constant, it must be that the emissions per unit of GDP are decreasing at the same rate the economy is increasing.

Or to use Paul Krugman's example, if emissions decrease, then it has to be because the percentage rate of decrease in emissions per unit of GDP is faster than the rate of economic growth.

For example, let's suppose emissions fall by 10 percent. Then, if the economy has increased by 10 percent, then the emissions per unit of GDP must decrease by (approximately) 20 percent.

And Roger's letter in the Financial Times was exclusively about China. So Paul Krugman's bringing in the United States and saying that Roger's letter was provoked by events in the U.S. was profoundly dishonest.

Paul Krugman's post would be better suited to a banner of "Liberal Without a Conscience."

Bob Murphy writes:

David,

Obviously I would have to recuse myself if I were ever a judge in a trial involving Krugman, but I think you are being too kind here. I agree that Pielke Jr. is probably a little bit confused in the way he's using "technology," but some points:

1) When Pielke Jr. refers to a "cap" on Chinese emissions, he doesn't mean "a limit on the growth." No, he means a hard ceiling that stops emissions growth immediately.

2) My description might surprise you, because Krugman matter-of-factly asserts that Pielke's letter was motivated by the Obama Administration EPA power plants rules, and also tells that Pielke "is actually committed to undermining the case for emissions limits any way he can." But, Krugman just made up both "facts." If you look at Pielke's letter, he says in the beginning that he is responding to this earlier FT piece about a Chinese academic who wants an absolute halt in growth of Chinese emissions to kick in in 2016. Also, if Krugman had bothered to check Pielke's blog, he'd say that Pielke *endorsed* the EPA's power plant rules on Tuesday.

3) It's extremely gracious of you to praise Krugman for finally writing like an economist, when he endorses top-down controls (power plant rules, CAFE standards) and talks about "saving the planet" as the policy goal, without tongue in cheek. (And by the way, he's not just being ironic in referencing leftist environmentalists. In several recent posts, Krugman has non-ironically talked about what needs to be done to "save the planet.') What happened to enacting policies such that MC = MB?

* * *

None of this is a criticism of you, David; I realize you probably want to praise Krugman when you can, so people trust you when you criticize him. I'm just pointing out that Krugman was particularly slippery in this post, simply inventing positions and attributing them to Pielke, and then he ended it up with this gem: "I guess I should thank Pielke for his intervention, which has helped clarify how we should think both about energy issues and about him."

David R. Henderson writes:

@Mark Bahner,
Thanks for the correction.
That’s too bad. One of the few times recently that I thought Krugman was making a good price theory argument--which he was--he was deploying it against a straw man.

David R. Henderson writes:

@Bob Murphy,
Thanks. As you can see, we were writing at the same time. Please see my answer to Mark Bahner. Also, as I’m sure you noticed, I did criticize Krugman on CAFE standards.

Mark Bahner writes:

Hi,

While I think Paul Krugman's post was absolutely disgraceful, both in tone and especially in its misrepresentations of what Roger Pielke had written, I think it is possible to honestly and respectfully criticize what Roger wrote.

For example, Roger wrote: "Because halting economic growth is not an option, in China or anywhere else, and because technological innovation does not occur via fiat, there is in practice no such thing as a carbon cap."

This seems clearly wrong. In the United States, CO2 emissions peaked in 2007, but the economy has grown since then:

U.S. energy-related CO2 emissions peaked in 2007...but economy has grown since 2007

I think 2007 will mark the peak of U.S. CO2 emissions...that they will never exceed that 2007 value. Therefore, Congress *could* "cap" CO2 emissions at the 2007 level. They could simply declare that U.S. CO2 emissions must never exceed that level. It would be relatively painless for them, if I'm right that CO2 emissions will never exceed that level again anyway.

But Paul Krugman should have made it clear that Roger Pielke's letter was about China...and that the place where Roger was wrong was appearing to extend the discussion of China to make it seem like no country ever can have a cap on CO2 emissions.

Mark Bahner writes:

Hi,

Oops...I meant to refer to this graph, which has both U.S. CO2 emissions and U.S. GDP:

U.S. CO2 emissions and GDP

ConnGator writes:

For reference, here is Pielke's response. I found it quite interesting, and my opinion of Krugman was lowered once again.


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