David R. Henderson  

Krugman's On-Again, Off-Again Analysis

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Krugman's bashing gets in the way of clear thinking.

In his most recent New York Times column, "Pollution and Politics," Paul Krugman fluctuates between claiming one doesn't need to do the analysis and actually doing the analysis. The issue: the Environmental Protection Agency's Thanksgiving-timed proposal for substantial regulations on ozone. He briefly mentions the objections of some Republicans, writing:

Republicans went on the attack, claiming that the new rules would impose enormous costs.

So this reader, David Henderson, who is used to reading about governments actually imposing large costs, wonders: Is it true that the regulations impose large costs? One would expect, given Krugman's attitude to Republicans, that he would reject their claim, maybe even by trying to claim that the regulations don't impose huge costs.

But he doesn't try to do that. Instead, Krugman writes:

There's no reason to take these complaints seriously, at least in terms of substance.

No reason? Really? Why? But, of course, if one asks why, one is asking for a reason. And Krugman has already told us that he doesn't need to give any stinkin' reasons.

Still, Krugman is an economist and so in the last part of his article, he does get to costs and benefits. He writes:

In the case of the new ozone plan, the E.P.A.'s analysis suggests that, for the average American, the benefits would be more than twice the costs.

I have no idea whether the EPA's analysis is correct. To his credit, though, Krugman does seem to understand that he needs to justify not worrying much about costs.

It's just a strange order of argument, though, for someone who, when he wants to, can make a very solid argument. See "Ricardo's Difficult Idea" for one of my favorite of his arguments and, indeed, one of the best pieces of economic exposition since Bastiat.

The way to understand this piece, I think, is as an attempt to dissuade people from questioning the EPA's proposed regulations and an attempt to dissuade people from judging the EPA's cost/benefit analysis.

That would also explain his bizarre statement of fact. In trying to explain why he thinks Republicans are against this new regulation, Krugman writes:

But the modern conservative movement insists that government is always the problem, never the solution

Krugman has to know that this is a false claim. I wish it weren't. But conservatives, unless they have changed in the last 24 hours, are often the biggest advocates of government "solutions," whether on drugs like marijuana and cocaine, on immigration, on terrorism, or on U.S. invasions of foreign countries, to name four off the top of my head.

I don't want to leave this without pointing to some unintentional humor and some bad economics.

First the humor. Krugman writes:

the rich are different from you and me.

I trust that you see the humor. I'm not referring to the claims, that have spread like wildfire around the Internet, that his net worth is $2.5 million. His net worth, unless he's a horrible saver, has to be a multiple of that. A few years ago, to be in the top 1 percent by wealth, one had to have a net worth of $8.4 million. Even if the threshold is now $10 million, I'm willing to bet that he's above that. And even if he isn't, and his net worth is "only" $5 million, that still makes him rich.

The bad economics:

Everyone breathes the same air, so the benefits of pollution control are more or less evenly spread across the population.

Everything we know about environmental quality says that it is a strongly normal good. That is, the amount we demand increases as our income and wealth increase. That means that the amount that wealthy people are willing to pay for environmental quality is greater than the amount non-wealthy people are willing to pay. Which means that the benefits of environmental quality to the wealthy exceed the benefits to the non-wealthy.

This doesn't mean that the regulations are a bad idea. But it does undercut Krugman's argument about the wealth. And he is a good enough economist that he would have noticed not only this mistake but also his other poor reasoning if his goal had been to inform and not to bash.


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COMMENTS (10 to date)
Tom West writes:

I think your criticisms of the Krugman piece are accurate, but this struck an odd chord.

That means that the amount that wealthy people are willing to pay for environmental quality is greater than the amount non-wealthy people are willing to pay. Which means that the benefits of environmental quality to the wealthy exceed the benefits to the non-wealthy.

By this measure, if I am near penniless and homeless, are the benefits to me of shelter zero because I'm unwilling to pay for it as I'd prefer not to starve instead?

Willingness to pay is a decent rationing system for many things, but it can break down when *ability* to pay is ignored.

Scott Sumner writes:

Good post. It would be nice to have an answer to the question of how Krugman can write sentences like this:

"the rich are different from you and me"

Perhaps he forget about his textbook income?

TMC writes:

Just to see more info on what the standards are .. google turns up this. http://www.powerlineblog.com/archives/2014/11/epa-lost-in-the-ozone-as-usual.php

Mostly about new mercury rules. Dishonest is a charitable way to describe the EPA.

Christophe Biocca writes:
By this measure, if I am near penniless and homeless, are the benefits to me of shelter zero because I'm unwilling to pay for it as I'd prefer not to starve instead?
To some extent yes. Someone that poor would probably be against laws that make shelter less expensive, but food more expensive (in equal proportions). Whereas people who only spend a tiny fraction of their income on food will be more supportive of a whole host of tradeoffs that make food more expensive, but increase the availability of other things. People who want mandatory GMO labelling, or a GMO ban, probably aren't on the brink of starvation.
BMan writes:

Krugman: "And the reason pollution has become partisan is that Republicans have moved right."

What a ridiculous explanation. One of the NYT commenters put his finger on it: what has changed is the law of diminishing returns. Republicans, like most Americans, have supported pollution control up to a point. For the most part, we are well past the point where additional controls make sense. But the ambitions of regulatory bureaucracies know no bounds.

For Democrats who have embraced the cause of environmentalism as an electoral strategy, rather than of a sensible part of governance, there is also no stopping point. It was not always so. President Kennedy was urged to create a federal environmental agency, and he dismissed the idea as absurd. Contra Krugman, all of our political thinking on this topic has moved far to the left. But some of us have stopped thinking altogether and gone off the deep end.

Charlie writes:

He clearly give a reason not to take the claims seriously. He says the Republicans have a history of bad predictions on the costs of environmental regulation. It is extremely bizarre that you would ignore this given that it is the very next sentence.

"Polluters and their political friends have a track record of crying wolf. Again and again, they have insisted that American business — which they usually portray as endlessly innovative, able to overcome any obstacle — would curl into a quivering ball if asked to limit emissions. Again and again, the actual costs have been far lower than they predicted."

So, he is speaking directly to reader David H 'a concern saying, "don't be worried. It's the same argument they've used to fool you many times. And they've been wrong over and over."

It's fine it reject that argument, if for no other reason given how the story of the boy crying wolf ends. But it's bizarre that you would cut the piece up that way and say PK gives no reasons.

Nathan W writes:

Re: claims that Conservatives always claims that government is the problem

I think it would be accurate enough to say that Conservatives insist that the government is always the problem unless discussing some way in which they seek for the government to impose their way of thinking and acting on everyone else. For example, by sanction of the ultimate theft of freedom: prison. Even death is not such an injustice as systematically imprisoning otherwise innocent people for failing to adhere to various rules; rules which very often have zero scriptural reference in any major religion and/or which repeatedly fail to demonstrate social harm except for the fact of punishing this act which offends certain groups. In death at least the "perpetrators" would be free. Instead, every effort is made to grind them into dust until the end of their days unless they accede to enjoying freedom in the prescribed manner.

I know I'm wrong about the feeling of many Christians. But this is in fact the kind of policy outcome that is effectively achieved. "Tough love" should be loving people who do things that you disagree with (but which are not known to harm other people, whether materially, psychologically or socially), not insistence on grinding into dirt those lucky recipients of your "tough love".

Jim Glass writes:
By this measure, if I am near penniless and homeless, are the benefits to me of shelter zero because I'm unwilling to pay for it as I'd prefer not to starve instead?

Environmentalism is a luxury good. Peasant subsistence farmers burn down the rain forest because they have to, to eat and keep their families alive. Americans who drive to Whole Foods in their Priuses lobby and contribute to preserve the rain forests.

Your question seems an attempt to pose an extreme reductio ad absurdum of sorts as some kind of debunking -- but before putting up such a question one should look to see if the answer to it exists in real life. And here it does.

Throughout recorded history up to the Industrial Revolution (and well into its start) the masses have packed 10-into-a-room (or shack) quite literally, so that they'd have ample food to eat, while only the few rich have had what we'd call houses and ample food too -- very clearly showing the priority between food and housing. Would *you* starve your own family to have a nicer house?

BTW, here is a warning: Whenever an argument involving economics invokes infinities or absolutes...

"if I am near penniless and homeless, are the benefits to me of shelter zero because"

... one is entering bogus-land. Economic analysis is marginal and involves trade offs. Of course the value of shelter is not zero. The proposition is empty rhetoric. Your question should be re-posed as...

"if I am near penniless and homeless, are the benefits to me of improving my shelter greater or less than those of obtaining food so as to not starve instead"

... in which case I think your answer will be that you, the poor, will keep putting your marginal dollar into food to avoid starving while the rich who have full larders are far more likely to put their marginal dollar into improving their housing.

And in that case you will agree that the marginal provision of more food and more housing each bestow different amounts of benefits to the poor versus the rich, and see how environmentalism does too, exactly as per the Professor's statement ...

"Which means that the benefits of environmental quality to the wealthy exceed the benefits to the non-wealthy."

... and understand why environmentalism is so clearly a luxury good that appeals so much more to the Prius-as-a-second-car-crowd than to the blue-collar working classes.

To save the rain forests, make the whole world rich. That's the only way to do it.

David R. Henderson writes:

@Jim Glass,
On my mental to-do list today was to answer Tom West above. You did a better job than what I had in mind. Thanks. One item crossed off the list. Now I can watch the Golden State Warriors beat the Detroit Pistons.

Tom West writes:

Jim, I understand your point, and I agree with it.

the masses have packed 10-into-a-room quite literally, so that they'd have ample food to eat, while only the few rich have had what we'd call houses and ample food too -- very clearly showing the priority between food and housing.

Okay, this is where I may have misinterpreted David's comment. If he is saying that the *proportion* that someone is willing to pay reflects the *relative* welfare to them, then I agree, and I apologize for the misinterpretation.

However, that does mean that the absolute price someone is willing to pay for an item is no guide to the importance of that item to their welfare. (Possibly important in times of shortages!)

If he is saying that the absolute amount spent can be used to compare the welfare between two individuals, then I think my point stands. Spending $200 out of my $200 on food may well mean that food is more important to my welfare than the person who spends $1,000 out of $10,000.

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