Sometimes I really am just taken aback by Paul Krugman’s condescension. Look at this, from a post called “Gratuitous Ignorance”:
The PEN/New York Review panel discussion on the economy is online. I’ll outsource the discussion of what went down to Brad DeLong. Just this to add: it’s bad enough to have people resurrecting 75-year old fallacies about macroeconomics right in the middle of a crisis in which knowledge is our only defense against catastrophe. What’s really bad, however, is when they do so believing that these fallacies are deep insights that have somehow eluded those of us who have, you know, been studying these issues for a while, and saw some (not all) of this crisis in advance.
If you follow the link, you see that Krugman is referring to a panel discussion in which he was a participant. So he’s not talking about random people here, he’s talking about people he just had a discussion with! (Someone correct me if I’m misunderstanding what happened.)
I think I need to stop this post now, lest I venture into hypocrisy.
In my (intended) nightly reading of a Bible chapter, I was paying extra special attention to the book Deuteronomy. When Jesus was tempted by Satan, His defense consisted of quoting scripture. And every single quotation came from Deuteronomy! (What’s really interesting is that the Devil uses scripture too, by quoting from Psalms.) So if (the person I believe was) the Lord incarnate faces off against the Devil himself, and goes into battle armed with just His knowledge of one book…it seems like a good idea to familiarize myself with that book!
Anyway, there certainly were some very powerful passages in Deuteronomy. However, Chapter 30 really jumped out at me. But in particular check it out starting at verse 11:
11 “For this commandment which I command you today is not too mysterious for you, nor is it far off. 12 It is not in heaven, that you should say, ‘Who will ascend into heaven for us and bring it to us, that we may hear it and do it?’ 13 Nor is it beyond the sea, that you should say, ‘Who will go over the sea for us and bring it to us, that we may hear it and do it?’ 14 But the word is very near you, in your mouth and in your heart, that you may do it.
15 “See, I have set before you today life and good, death and evil, 16 in that I command you today to love the LORD your God, to walk in His ways, and to keep His commandments, His statutes, and His judgments, that you may live and multiply; and the LORD your God will bless you in the land which you go to possess. 17 But if your heart turns away so that you do not hear, and are drawn away, and worship other gods and serve them, 18 I announce to you today that you shall surely perish; you shall not prolong your days in the land which you cross over the Jordan to go in and possess. 19 I call heaven and earth as witnesses today against you, that I have set before you life and death, blessing and cursing; therefore choose life, that both you and your descendants may live; 20 that you may love the LORD your God, that you may obey His voice, and that you may cling to Him, for He is your life and the length of your days; and that you may dwell in the land which the LORD swore to your fathers, to Abraham, Isaac, and Jacob, to give them.”
I don’t have too much to say, except a Chris Farleyesque “Wow that was awesome.”
This is indeed spooky, and Maddow nails it. (HT2 Chris Brunner.) President Obama wants to lock people up indefinitely against whom we do not have enough evidence to prosecute, but whom we believe pose a threat to society. He doesn’t give too many details, but it sounds like he’s saying such people could be held for ten years. Spooooo-ky.
I was the lead author in this IER blog post. The main thing in this one was to explain (to a first approximation) why handing free allowances to emitters will not lower energy prices, but instead represents a simple transfer of wealth from the general public to the emitters. Here’s the meat of it:
It’s difficult for some non-economists to understand why handing back allowances to producers wouldn’t significantly alter energy price increases, but the point is crucial so we’ll walk through it: Suppose the government auctioned off 100 percent of the carbon allowances, and the resulting market price for a ton of emissions was (say) $25. If the government spent all of the auction receipts to pay for universal health care, leaving the burden of the cap and trade system to fall entirely on the energy sector, it is clear that prices for consumers would rise. Ultimately, it wouldn’t be the utilities, but rather their customers, who would foot the bill. Because of the cap on emissions, the costs of producing energy rise, and so the price of electricity for consumers rises as well.
Now suppose instead of spending all of the auction revenues on health care, the government chose to give, say, $10 million to every major electricity producer. Would that push down electricity prices? In general the answer is probably “no.” In order to push down prices, more electricity would need to be produced (because consumers would try to buy more after the price cut). But that means firms would have to use some of their $10 million handout to enter the carbon allowance market and buy the rights to emit more CO2, or to invest in a larger capacity for carbon-free generation, in order to ramp up their operations and sell more electricity (at a lower unit price).
But why would firms use their $10 million handouts in this way? If it made sense to buy more carbon permits (at the going price of $25 each), or to invest in a larger carbon-free capacity, the producers could have relied on private sources of capital to make these changes. But the firms chose not to, because on the margin the $25 price for each ton of carbon emissions made it sensible to scale back their operations. This logic doesn’t change just because the government writes them a check for $10 million (unless the subsidy is somehow tied to market share).
Even though it is counterintuitive, the important point is that even if the allowances are handed out for free to utilities, they still see their costs of production go up because of cap and trade. A coal-fired power plant still “loses” $25 per ton of emissions, because it could choose to scale back operations and sell its allowances into the market at $25 each. The logic is inescapable: the consumers will ultimately pay for cap and trade through higher energy (and other) prices. By giving some of the potential auction revenues to individual firms in the form of free allowances, the government doesn’t thereby prevent price hikes, all it does is lay subsidies to these beneficiaries on top of the other effects of Waxman-Markey.
If you want to divorce yourself from the carbon context, just imagine that you run a grocery store that’s been losing money for years. No matter how you advertise or try to cut costs, you check the books and realize that you lose money with every item you sell. So you decide to go out of business and stop the bleeding.
Ah, but that very same day you get notified that your rich uncle died, and left you $100,000. Does that mean you now decide to keep the store open?
Of course not, the logic of your decision is still the same. On the margin, you are poorer by staying in business. Obviously the new information makes you richer–$100,000 richer to be precise–but becoming richer doesn’t make you more willing to sell grocery items at a loss.
So it’s similar with handing out free allowances to emitters. Unless there are strings attached–e.g. if the number of allowances is based on last year’s market share of the electricity market or something like that–then generally speaking handing the allowances to producers will just mean a transfer of wealth to them.
Some producers, such as owners of coal-fired power plants, might still be worse off than under the status quo, but the point is that very few of these free allowances are devoted to protecting the general public. This just shows how naive those people were–and I truly am not implicating any of the readers of the this blog–who agitated for either a cap and trade or a carbon tax with dollar-for-dollar cuts in other taxes.
Folks, I really do like Glenn Beck, especially when he and Stu (sp?) get into an argument over something absurd and spend 20 minutes analyzing it from 18 vantage points. (“In fairness to General Zod, Glenn, Jor El did condemn him to the Phantom Zone, when Krypton wasn’t that far from extinction. That was just unnecessary cruelty. So I think we need to think about that, when we discuss waterboarding.”)
But anyway Beck was talking about the growing danger of the Fed, and how the people need to make it accountable. He said something like, “I mean, we don’t even know what’s on its books. All these Treasurys they’ve been buying from the government? For all we know, we could force them to open their drawers, and find nothing but a bunch of IOUs.”
Swing and a miss.
So argues Dallas Fed president Richard Fisher in today’s WSJ. Apparently the Chinese have been reading my blog (though from my traffic reports, presumably only 0.00001% of them), because the WSJ reports:
[Fisher] has just returned from a trip to China, where “senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature.” He adds, “I must have been asked about that a hundred times in China.”
Although Fisher is pretty cool for a Fed official, this part cracked me up:
He surprises me by siding with the deflation hawks. “I don’t think that’s the risk right now.” Why? One factor influencing his view is the Dallas Fed’s “trim mean calculation,” which looks at price changes of more than 180 items and excludes the extremes. Dallas researchers have found that “the price increases are less and less. Ex-energy, ex-food, ex-tobacco you’ve got some mild deflation here and no inflation in the [broader] headline index.”
I love how Fed officials take out energy and food prices and then talk about what a great job they’re doing in stabilizing “the price level.”
Ever since I tackled Joe Romm’s argument (in which he is just reproducing the IPCC’s own statement) of how “cheap” it will be to stabilize greenhouse gas (GHG) emissions at safe(r) levels, I have been trying to dig up the IPCC’s estimates of future GDP losses from climate change in the absence of new government policies.
You see, the trick the IPCC used to downplay the cost of the policies, was to convert large future reductions in the level of GDP (relative to baseline) into a lower annualized growth rate. So for example, the high-end estimates are that GDP in 2050 will be up to 5.5% lower because of policies that governments put in place to curb GHG emissions. But that works out (at the time of the IPCC AR4 report) to only a 0.12% reduction in annual GDP growth, which doesn’t seem like a big deal. Who but shareholders of Big Coal would object to that?
So what I wanted to do was the same trick. Even the really scary projections of huge damages from business-as-usual don’t kick in until after 2100. So for example, let’s say that if we continue on our suicidal path, that global GDP in the year 2150 is 50% lower than it would be, if there were no such thing as the greenhouse effect. (Well, if there were no greenhouse effect we’d all freeze I think, but you get what I’m saying.)
OK now that’s pretty severe; I’m considering a scenario where literally half of the entire earth’s productive capacity is destroyed because of our destructive emissions. Now it’s true, some of the possible damages are unquantifiable; but if we’re going to go through the farce of a cost/benefit analysis, then we have to come up with a number. So to repeat, I don’t think I’m being a “denier” or a “skeptic” by discussing a case in which half of global GDP gets wiped out by 2150.
Yet using the IPCC trick, that works out to only a 0.5 percentage point reduction in growth rates. For example, if real GDP would have grown at 3% annually in the absence of climate damage from unrestrained emissions, then the “inconvenient truth” of anthropogenic global warming means real GDP will grow only at an annualized rate of 2.5% between now and 2150. Over that course of time, the gap between the two GDP series will have grown to 50%.
So even in this fairly nightmarish scenario, it means that someone who earns $10,000 per year today, would earn “only” $325,000 per year, in 2150. (Actually it’s less because of population growth, but you get the idea.) In contrast, were it not for the inconvenient truth of climate change, this representative person would be earning twice as much, i.e. $646,000 per year, in 2150. (My spreadsheet is rounding the numbers.) It is to avoid the nightmare scenario of condemning our great-great-…-great-grandchildren to earning only $325,000 per year, that we must immediately hand over the energy sector to the federal government.
But I digress. As you can see from the discussion above, it would take some pretty fantastic projections of GDP losses in the distant future, in order to make immediate action seem necessary for any cost/benefit test that isn’t completely rigged. (By completely rigged, I mean one that says, “The risks of doing nothing are essentially infinite, so any mitigation policy is justified.”)
Yet I was having real trouble finding the IPCC’s numbers. I know what Nordhaus’ DICE model says, but that’s because I’ve been studying his model thoroughly. In contrast, I hadn’t examined the Second Working Group report of the AR4; I had focused mainly on WGI’s discussion of the physical science of climate change.
But look what I just stumbled upon, from the overall Synthesis of the AR4. This comes from the 3rd last paragraph in the entire summary [.pdf]. Is this saying what I think it’s saying? Seriously, those of you who are big fans of the IPCC–or at least, who think that the “deniers” and “skeptics” are making mountains out of molehills–please explain the following paragraph.
Limited and early analytical results from integrated analyses of the costs and benefits of mitigation indicate that they are broadly comparable in magnitude, but do not as yet permit an unambiguous determination of an emissions pathway or stabilisation level where benefits exceed costs.
I think we can all see now why Joe Romm et al. are taking such pains to ridicule the very notion of applying a cost/benefit test to climate policies.
UPDATE: OK I think that the IPCC statement really is poorly worded. I just waded through Chapter 3 of the AR4 Working Group III book, and I didn’t see anything about comparing abatement costs with the benefits of avoided climate damage. (Nordhaus does this very clearly in his book discussion [.pdf] of the latest DICE model results.) What I did see was a discussion showing that the range of estimated prices for carbon emissions (under various policies like cap and trade) roughly overlapped with the estimated values of the “social cost” of carbon emissions.
I’ll post more on this stuff later in the week, but for now let me just say that this isn’t at all what the quotation above is saying. In the absence of enforcement costs and other frictions, the optimal policy would set the price of emitting a ton of carbon equal to its social cost. But even though this would equate the (marginal private) cost with the (marginal social) benefit, it’s not true to say the “costs and benefits” of this policy are the same. On the contrary, there would be large net benefits because emitters would scale back their output of GHGs to the socially optimal point.
Rereading the IPCC quotation, I am still not sure what’s going on. Surely they wouldn’t have let some non-economist write the summary, right? And yet, they are clearly saying that the policies don’t yield net benefits. Hmmmm.
At moments like this, we go back to Milton Friedman’s adage, “To spend is to tax.” I cannot really come up with a better word than juvenile for the tea parties — don’t protest the taxes unless you can identify the specific cuts in expenditures that you would make to bring the budget into balance. If you think taxes are bad, then you should think deficits are worse, because they raise the taxes of people who were not represented in the decisions to spend the money.
That’s the real lesson from the Revolutionary War period that should be drawn. And the danger for the Libertarians is that if they don’t put the reduction in expenditures ahead of the reduction in taxes on their agenda, they are destined for another abusive relationship down the road.
This is rich. First and foremost, the Tea Party protests were complaining about spending, not taxes. Samwick wants them to identify “the specific cuts in expenditures”? Did he read their signs–the ones that said “End the Bailouts” and “Let Wall Street Fail”? Do Samwick and DeLong not remember the inventor of the idea? It was Rick Santelli, who was protesting not marginal tax rate hikes, but bailouts for people who couldn’t make their mortgage payments!
If my only points were the above, I wouldn’t have even blinked when reading DeLong’s post, quoting Samwick. But what makes this amazing is that I recall quite vividly some very smug reporter interviewing some hickish guy at one of the Tea Parties. The reporter (I think a woman but not sure) said something like, “How can you call this a tax protest when the president is going to cut most people’s taxes?” And the guy was momentarily stumped, but then he said, “It’s the spending! Those taxes will go up to pay for all this!” (BTW I may be botching the letter of these quotes, but this was 100% the spirit of the exchange.) I think I may have seen this clip during Daily Show mocking, or perhaps Rachael Maddow / Keith Olbermann. Those are the only things I ever watch (in brief snippets over the Internet; I don’t have a mind-destroying box in my house). But the tenor was definitely, “Ha ha look at these racist idiots. When faced with the undeniable fact that their taxes are going down, they grasp at the straw of some hypothetical connection between current spending and future taxes.”
And now they are being mocked for the exact opposite reason.
If anyone can find either (a) the video that I am referring to above or (b) Brad DeLong linking with approval to anyone making the same point, I will send him or her a signed copy of my new book. (I have to get rid of these things somehow.)