Paul Krugman’s latest venture into self-parody starts with a recent paper on the cost of air pollution, which finds that said costs are big and heavily concentrated in a few industries. Krugman then links to a New York Times article surveying Rick Perry’s past clashes with the EPA. With no further argument, he concludes that
Today's American right doesn't believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right. Faced with evidence that market prices are in fact wrong, they simply attack the science.
Where to begin?
First: Krugman tells us that
Externalities like pollution are one of the classic forms of market failure, and Econ 101 says that this failure should be remedied through pollution taxes or tradable emissions permits that get the price right.
Yes, that oversimplification is indeed sometimes taught in Econ 101. What Krugman doesn’t tell you is that it gets corrected in Econ 102, where students learn that taxing the source of an externality might or might not be efficient policy, depending on the available alternative remedies. It would, for example, be tragic to tax coal plants out of existence if it proved substantially cheaper to clean up their emissions after the fact, or to relocate the victims of those emissions.
I’m tempted to say that this is just Krugman being true to his principle that economics stopped advancing somewhere around the middle of the 20th century (something I certainly believe about music), so that just as Keynes had the last word on macroeconomics, Pigou had the last word on externalities. (Pigou, writing in 1920, is the source of the Econ 101 analysis; Ronald Coase, writing forty years later, advanced us to the level of Econ 102.) Except I know that Krugman knows better, because he once wrote a pretty good piece on green economics for the New York Times, where he made the Coasian argument tolerably well.
Second: the Times article is about Rick Perry’s past criticisms of the EPA, whereas Krugman is citing a brand new paper from the current issue of the American Economic Review. Apparently, his complaint is that Perry failed to account for this research before it existed. Perhaps he’s overestimated the import of fast neutrinos.
Third: I do not think it is beyond Krugman’s analytical powers to recognize that there is no inconsistency between the positions that a) some industries should be more heavily taxed and b) the EPA is often wrong.
Fourth: it is rarely the case that a single journal article is sufficiently definitive that it ought to dictate policy to the point that any dissension would be laughable. (Krugman’s comment on the whole affair is “Hahahahahahaha”.) One possible exception to that rule is Coase’s paper on social cost, which was quite definitive indeed in its refutation of Krugman’s argument from “Econ 101″.
Fifth: Even if we all agreed that the EPA is a paragon of economic efficiency, some of its policies might still be objectionable on some other grounds. Or does Krugman now want to retract every column and every blogpost in which he has appealed to compassion, equity, justice, fairness, etc., etc.?
Sixth: Krugman concludes that
What this tells us is that we are not actually having a debate about economics. Our free-market advocates aren't actually operating from a model of how the economy works; they're operating from some combination of knee-jerk defense of the haves against the rest and mystical faith that self-interest always leads to the common good.
What this tells me is that we are not actually having any sort of debate about policy. Krugman isn’t actually operating from a model of how government works; he’s operating from some combination of knee-jerk defense of redistribution and mystical faith that government always serves the common good.
After all, even if we all agreed that stricter environmental policies are desirable in principle, it would not follow that stricter environmental policies are desirable in a world where those policies will be formulated and enforced by politicians and bureaucrats with decidedly parochial agendas.
Krugman says:
Today's American right doesn't believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right.
It would indeed be naive to believe that there are no market failures. It would be equally naive to believe that there are no government failures, which is what Krugman seems to be assuming.
The choice, all too often, is not between market failure on the one hand and government success on the other; instead it’s between market failure on the one hand and government failure on the other. That calls for some hard thinking about the costs and benefits of the various policy options, thinking that is not advanced by pointing one’s finger and saying “Hahahahaha.” Economists can contribute to this discussion with an honest attempt to illuminate the tradeoff. Tradeoff! Now there’s a concept Krugman ought to recognize. It is, after all, at the core of Econ 101.
As Don Boudreaux often points out, Dr. Krugman (economist) and Mr. Krugman (blogger/shill for the Democrats) often do not see eye to eye.
I do not think it is beyond Krugman's analytical powers to recognize that there is no inconsistency between the positions that a) some industries should be more heavily taxed and b) the EPA is often wrong.
You don’t?! Oh, yes you do. You know Krugman better than that.
Re: “it gets corrected in Econ 102, where students learn that taxing the source of an externality might or might not be efficient policy, depending on the available alternative remedies. It would, for example, be tragic to tax coal plants out of existence if it proved substantially cheaper to clean up their emissions after the fact, or to relocate the victims of those emissions.”
Well, I haven’t taken Econ 102, but couldn’t you still achieve efficient policy by taxing the source of an externality if you tax exactly the right *form* of the externality?
So in your example, rather than taxing “air pollution”, tax “air pollution that doesn’t get cleaned up and actually reaches people’s lungs”. Then, the coal plant would in fact clean up the emissions after the fact, or pay people to move away, if either of those options were cheaper than reducing the emissions.
An excellent post. As for music though, I guess I won’t bother recommending the minimalists (I assume you have heard and disliked them) but seek out Robert Simpson’s symphony 9 from 20 years ago. He is very much an heir of Sibelius & Bruckner, and his 9th is a masterpiece.
“It would be equally naive to believe that there are no government failures, which is what Krugman seems to be assuming.”
Thank you.
The link to Coase’s paper should go to http://www.thebigquestions.com/coase.pdf At the moment it has a forward slash in place of the final dot.
Incidentally, what is the legal status with hosting copies of papers obtained from JSTOR, or other online articles on your own site? I’ve noticed quite a few people seem to do it, and none of them have problems, but is this just because the journals don’t bother to do anything about it? Or is there some clause allowing you to do this? If not – why doesn’t someone just host an entire copy of the JSTOR archive for free somewhere?
Great!
May I make a request for a blog post about market failures? You’ve given some examples in the past but an in-depth treatment with unassailable examples would be very helpful for those of us who continue to believe, naively or not, that a market failure is an oxymoron (at least in a world with fully defined property rights).
Wouldn’t think a guy as bright as Krugman has shown himself to be in the past would be subject to the Nirvana Fallacy, but what the hell do I know?
Also, I like the Kling and Schultz perspective, “Markets fail; we need more markets.”
And then way later in econ (300 level?) you discover that the incentives for government actions often lead in a direction quite different from efficiency-maximizing policy.
I don’t think you are wrong, but also Krugman is not totlly wrong either. He jusy has not actually made his case. One must try to see the main point, and not get too lost in minor diversions. As I see it, the point is that Krugman thinks Perry does not believe in regulation because the market will always be better, and Krugman disagrees. First, the Econ 101 is a reasonable first point to get the point across. The debate highlighted is between no regulation and some sort of regulation. Econ 101 suggests this should be taxes on pollution. The more thorough approach of Coase suggests it is more complicated, but will still need some other regulatory framework. The fact is that efffcient contracts between polluter and pollutee are not going to happen on their own. Some form of Government enforcement will be needed. I believe Krugmans econ 101 is a good enough summary here to get his point across, and the more thorough approach of Coates does not substantially alter the argument. Second, the brand new paper is new in matters of detail, but hardly new in principle. This does not alter his criticism of Perry, which is that he does not believe in market failures. Third, Krugman did not say the EPA is never wrong. Fourth, his point is that there are externalities, which is supported by more than a single paper – the cited one is an example, not the definitive one on which all policy should be based. Fifth, Krugman does not say that EPA policies are never objectionable. Sixth, Krugman concludes that “this” tells us that our free market advocates are not operating from a model of how the economy works. This is where he fails. This seems to be based on assumption that the free market advocates do not accept the existence of externalities. He may be right in some cases, but he has not shown it here. I have a feeling that Perry is not arguing from a nuanced, Coatsian view, but that Krugman more or less has summed him up correctly. I may be wrong, but I don’t remember Perry saying “sure, there are externalities – we should find the most efficient way to correct for them” or anything similar.
For practical purposes, there are no externalities for believers in this type of free market.
In order for there to be an externality would require each and every harmed individual to be able to *prove* harm from each and every source that harmed them–AND they would be required to prove “how much harm” each one did. For practical purposes, this is impossible because each plant produces pollutants that affect hundreds of thousands of square miles–with a lot of overlap between pollution sources. The pollutants are NOT tagged–so they generally can NOT be traced back to the true origin.
Thus, the only way to effectively control the producers is to impose federal regulations. Their pollutants have been shown to impact people across state borders–but individual states do NOT have the authority to interfere with the choices of other states other than through the federal govt.
@Jerry:
There actually are alternatives. For instance, environmental groups could raise funds and pay companies to install and maintain air-scrubbers. They could also try to impose a cost on companies that refuse to install air scrubbers by organizing boycotts.
You could imagine very large class-action suits against companies that release pollutants in the air.
There are plenty of possibilities apart from Piguvian taxes and federal regulations.
Name (required)
Mail (will not be published) (required)
Website
XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>
Read Full Article »
