Saturday, February 20, 2016

Alan Krueger and the "Environmental Kuznets Curve."

In 1994 Krueger -- one of the former CEA chairs who signed the Sanders letter -- and Gene Grossman published a paper titled "Economic Growth and the Environment." They studied four kinds of environment pollution and the countries' per capita income. They found "no evidence that environmental quality deteriorates steadily with economic growth. Rather, for most indicators, economic growth brings an initial phase of deterioration followed by a subsequent phase of improvement."

This finding subsequently became known as the "Environmental Kuznets Curve" by analogy with the Simon Kuznets's finding, once upon a time, of income inequality first rising with economic growth and then subsequently decreasing as growth continues. Ask Thomas Piketty about the robustness of that empirical theory.

A couple of years later, David Stern and associates published a critique of the Environmental Kuznets Curve theory. They pointed out that the inverted U shape relationship between environmental degradation and economic growth depends on the unrealistic assumptions that there is "no feedback from the quality of the environment to production possibilities" and "trade has a neutral effect on environmental degradation." Furthermore, the inference from some studies "that further development will reduce environmental degradation is dependent on the assumption that world per capita income is normally distributed when in fact median income is far below mean income."

This is not to disparage Krueger and Grossman's research or their findings but to point out that the implications of those findings were subsequently blown out of proportion by people who ignored the study's limitations. That enthusiasm has fostered an industry of unwarranted EKC optimism. Again, ask Piketty how that Kuznets Curve thing is working out.

There does appear to be an inverted U curve for SOME pollutants. Other pollutants get exported by rich countries to poor countries -- see the infamous 1991 Summers/Lant Pritchett  memo on toxic waste for a sarcastic commentary on that potential. And, last but not least there is no Environmental Kuznets Curve for global greenhouse gas concentrations.

Nevertheless, wishful thinking based on the EKC concept perennially fuels optimism about the prospects for "decoupling" GHG emissions from economic growth. Some of the boosters of decoupling even talk about "stabilizing" GHG emissions at current levels while growth continues. The decoupling fantasy sidesteps the reality that massive reductions in emissions -- not just stabilization -- are required to stop the continued increase in atmospheric GHG concentrations.

12 comments: said...

Two comments.

The first is that from the beginning most observers have noted that GHGs were the main pollutants not following the EKC, although in fact with declining emissions of CO2 in the US, maybe it is finally kicking in. The most important pollutant that has followed it, and inspired the whole concept in the first place, was SO2.

Grossman and Krueger got their paper out first, but the person who first thought up the idea and coined the term was the much less well known Thomas Selden. Grossman got it from seeing a draft of Selden's work before it was published.

Sandwichman said...


Krueger says he and Grossman didn't coin the term:

Alan B. Krueger ‏@Alan_Krueger Jan 29
1/2 Thanks for the plug @TimHarford but actually others called our finding the Environmental Kuznets Curve

Alan B. Krueger ‏@Alan_Krueger Jan 29
2/2 And Grossman & I found that pollution is less responsive to GDP growth in communist countries, so China is not an outlier. @TimHarford said...

Except that it was not their finding, they just managed to beat the less well known Selden to publishing punch. It was his finding, and he coined the term for his own finding. His paper gets cited, but far less frequently than theirs. He has since become a health economist. (I am getting this from him personally, who is an old friend of mine.) said...

G&K's first paper on this was an NBER WP in 1991, with their main paper appearing in 1995 in the QJE.

Selden did not move fast enough to beat the NBER WP, but his fist pub on this was Thomas M. Selden and Daqing Song, "Environmental Quality and Development: Is there a Kuznets Curve for Air Pollution Emissions?," Journal of Environmental Economics and Management, 1994, 27, 147-162.

Sandwichman said...

What concerns me is the reception of the concept. It is an interesting finding that some pollutants may follow an inverted U shaped curve over the course of increasing per capita GDP. More interesting is which pollutants and why. Totally unwarranted and unscientific is "here is evidence the market contains a built-in mechanism of self-adjustment that fixes environmental externalities!"

The built-in mechanism was Solow's argument in the 1970s against the Limits to Growth. And Stiglitz's. Mainstream economists have latched on to the EKC concept BECAUSE it appears to vindicate their built-in mechanism, equilibrium prejudice.

There is a residue of built-in-mechanism-ism in Keynes's critique of the concept of the self-adjusting economic system and also in Marx's crisis theory: the contradictions of capitalism give rise to the built-in mechanism -- the Proletariat -- that will overthrow the system.

How convenient to find an inverted U-shaped curve that indicates an invisible hand is busy cleaning up the environment although we pursue only our own selfish interests! said...

Actually I think that a lot of the fans of EKC did not say that this was natural market forces at work at all. Many of them pointed to political factors, with part of the argument being that environmental quality is a superior good that people focus on more as their incomes rise, and in a democracy their rising demand for clear air against especially noxious SO2 emissions leads to laws to force changes in how coal is burned, etc. This in fact fits the story of many high income nations passing major environmental laws in the early 70s, although none of those addressed CO2, which is why it has continued to rise with inocme, in contrast to SO2 and some others. Not at all a free market thing and not argued as such by most observers.

Sandwichman said...

"Not at all a free market thing and not argued as such by most observers."

I would agree with that but add that the EKC fans present a naive and utilitarian/preference/rationality concept of democracy -- a democracy in which there clearly is no Citizens United or T. cruzi parasites polluting the public policy decision-making process. Peeps want clean air, they vote for clean politicians who promise clean air, the politicians enact legislation to regulate clean air and there is no regulatory capture by the dirty air cost-shifting lobby.

So yeah, not a free market but a democratic "free market" of policy ideas. Ah, yes the 1970s, three and a half to four and a half decades ago and a couple of decades before the EKC concept started its rise to popularity.

Sandwichman said...

Jesus, Barkley, I remember working on a research project back in 1993 with Bill "footprint" Rees, looking at the "social indicators" movement of the 1970s. Cue "Morning in America," January 1981, and federal funding for that shit was cut off cold turkey like it was degenerate art (I might be exaggerating a bit for emphasis but you get the drift). James Watt was secretary of the interior. said...

Not sure what this last comment is about, S-man. Yeah, RR was a reactionary who cut funding for lots of socially desirable things and whose attitude about the environment was given by his famous remark that "trees cause pollution" (which is technically correct in a limited and unimportant way).

Regarding the recognition of the EKC, it was a matter of data coming in that showed it, which did not happen overnight for SO2, given that the initial restrictions on it came in gradually over the 1970s. Selden has described to me how he first saw it in data and was surprised and then formulated the hypothesis. But we are talking about after Reagan was out of office.

Sandwichman said...

Sorry, Barkley, I wasn't trying to be clear, just exclaiming. You don't need a weatherman to tell which way the wind blows, as Dylan sang.

My point was really that economists can get too wrapped up in the data. As you say, it takes time for the regulations to be phased in and for the results to show up in the data. But meanwhile there are current events happening and it is just downright blinkered to ignore large scale political changes when you are looking at data that presumably reflects earlier political changes.

Already in 1993, 15-years earlier looked like bygones. There was an earthquake here a few week ago. I said right away, "that feels like a 5." Fifteen minutes later the reports said it was a 4.9. People are usually looking at data to confirm or disconfirm a hunch. said...

Probably more often than not, you are right. But sometimes people actually do get ideas simply from looking at data that shows them something they did not expect. I have no reason to believe that Tom Selden, who is an old and good friend of mine, lied to me when he described to me getting the idea for the EKC after seeing data of SO2 emissions declining among high income nations.

Sandwichman said...

I don't doubt that Selden got the idea from the data. I'm just saying it is prudent to take a broader view. The last word in trend is end.