Krugman on Climate
By David Henderson
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.
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.
Consumers would end up poorer than they would have been without a climate-change policy.
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?