Paul Krugman’s Errors and Omissions

Richard Heinberg of the Post Carbon Institute replies to Paul Krugman's "Errors and Emissions" Op-ed.

The War Against Asymmetric Information: The Case of Subprime Auto Lending

This story in today’s New York Times about the use of remote technology to track and repossess cars by subprime auto lenders is, above all, very, very sad.  Life is hard for a lot of people, and it just gets harder.

But note the mention of geo-tracking to check up on borrowers:

Spireon [a technology provider] says it can help lenders identify signs of trouble by analyzing data on a borrower’s behavior. Lenders using Spireon’s software can create “geo-fences” that alert them if borrowers are no longer traveling to their regular place of employment — a development that could affect a person’s ability to repay the loan.

It’s not difficult to imagine the loan contract of the future, in which the borrower agrees to certain restrictions on travel, spending and other activities, as monitored by the lender.  Your whole life could be in receivership.

Four More Planets!

"In theory GDP growth could continue indefinitely – if it weren't linked to something real."

William Rees, who along with Mathis Wackernagel developed Ecological Footprint analysis, commented on Paul Krugman's flippant slur on "degrowth" as an odd bedfellow of "the prophets of climate despair." The bottom line for Rees is that it is not really a choice between growth or degrowth but between planned, orderly degrowth or painful, chaotic degrowth imposed by nature. Growth in GDP could, "in theory," go on indefinitely ONLY if it wasn't linked to the biophysical world, which historically and currently it is. With permission, I reproduce Bill's comments below:

One might like to think that 'de-growth' is a non-issue – that somehow the human enterprise can continue to expand – but this is not a realistic proposition. De-growth will happen probably in the next few decades; the relevant question is ‘by what means?’ 

Here’s why: 

First, any analysis of this type should be based on available data, not mere assertion of preferences or beliefs. "Show me the numbers" is the first commandment of sustainability assessment. 

Second, we should clarify what we are talking about and what we are not talking about. Here I am not talking about increases/decreases in income or GDP per se. Income growth or GDP/growth per capita is a money measure with no physical dimensions. Money is mere abstraction – in fact, most money today is mere 'number money' or electronic money that exists only in computers and whether the number is $1 or $1,000,000,000 makes no difference to the planet whatsoever. In theory, then, GDP growth could continue indefinitely – if it weren't linked to something real. 

But it is linked to something real, the biophysical world. People buy real wealth (food, clothing, shelter, autos, electronic toys, etc.) with money wealth and there has never been a period when increases in money income were not accompanied by increases in real energy and material consumption. At higher income levels the relationship begins to level out because of greater ‘factor productivity’ (efficiency) and as more discretionary income goes to purchasing services (economists call this ‘decoupling’), but: a) decoupling is, so far, a marginal trend even in rich countries and; b) most of the world’s people have not nearly satisfied their material needs, let alone wants. Consequently, global material and energy throughput is generally increasing in both per capita and gross terms. Remember too that, from a biophysical perspective, all economic production is mostly consumption—a vastly larger quantity of available energy/matter is processed or consumed than is contained in the products produced (and the ratio is deteriorating because of diminishing returns)

And herein lies the problem. Energy and material production and consumption has material consequences for ecosystems that are vital for sustainability, i.e., survival. Consider just one fact: all food and fibre flows through the economy are produced by ecosystems and all the wastes of both our bio-metabolism and industrial metabolism must be assimilated and neutralized by ecosystems.

These are measurable processes with measurable consequences. Ecological footprint analysis shows that to produce the bio-resources consumed, and to assimilate just the carbon wastes of the average European requires about five hectares of ecosystems of global average productivity (5 gha). Typical North Americans use the ecological services of 7-8 gha/capita. Meanwhile, people in the most impoverished African countries get by on the life support of perhaps half a gha. (As I said, there is a clear positive relationship between income and the consumption of ‘nature’.) By the way, these are underestimates because we use the more optimistic data where there are conflicts between sources, not all material/waste flows are included and because we assume sustainable land and water use which it is not the case.

The problem is that there are only 12 to 13 billion hectares of land and water ecosystems productive enough to support economic activity on Earth. That’s about 1.7 gha per capita (at the present population of 7.2 billion). This means that Europeans are using three times and North Americans five times their ‘fair Earthshares’. Put another way, we’d need several more Earth-like planets to support just the present world population at European or North American material standards with current technologies. (Poor people don’t get nearly their fair Earthshare because they don’t have enough money to compete in the marketplace.)

Now, the average human ecological footprint is about 2.7 gha so even at today’s average levels of material consumption, the human enterprise is in overshoot by about 50%. This means humans are consuming faster than ecosystems can regenerate and producing waste faster than ecosystems can assimilate. (Climate change is driven, in part, by carbon dioxide emissions. CO2 is the largest waste by weight of industrial economies so, in this sense, climate change is a waste-management problem.) Economic growth and accompanying increases in energy and material consumption today are based, in part, on the depletion of so-called ‘natural capital’ and on filling waste sinks to over-flowing. The continuation and expansion of these trends will precipitate significant changes in, or even the collapse of biophysical systems, including the climate system. Dependent human economies and societies will not be far behind (this constitutes unplanned de-growth).

This is not fantasy. Eco-failure is already happening regionally and, without global agreements leading to major reductions in human energy and material demand (i.e., planned de-growth), will happen globally. Indeed, globalization and trade ensure that that the next collapse will be global—many densely populated high-income countries have long since overshot their domestic carrying capacities and would long ago have collapsed without access to the resources/sinks of less developed regions. Globalization blinds citizens of nations in overshoot to the perils of over-population and over-consumption, since it eliminates any direct ‘negative feedback’ from their having exceeded national limits. (Japan, for example, despite its recent economic stall, still uses 5-7 times its domestic biocapacity, so far with impunity.) Keep in mind that that, absent access to distant sources, the destructive over-exploitation of regional ecosystems contributed to the collapse of many previous civilizations on all continents from Sumer to the Maya.

Summary and bottom line:

Historic and contemporary evidence suggests that global de-growth (meaning significant reductions in aggregate and per capita energy and material consumption and in the human population) is inevitable. If it is imposed by nature, it could be painful and chaotic; but a planned contraction of the human enterprise (both population and per capita consumption) to a sustainable steady-state could be relatively smooth and orderly. The plan might require accelerated de-growth in high-income consumer countries to accommodate greater consumption in poor regions for the sake of greater material equality.

Which form of de-growth would you prefer?

Which is the more likely to occur?

PS: Eco-footprint analysis is based on real data from the most reliable sources available for ecosystems productivity and for national production, consumption, and material trade. Some people do not like the results of such analyses, particularly the documentation of over-shoot and the support this provides for the notion of biophysical limits to growth and the need for material de-growth. Fair enough, but those who reject the findings on these grounds have an obligation to provide an alternative explanation and solution. The questions are: How can the human enterprise, as a fully-contained, dependent growing sub-system of the finite non-growing ecosphere (tip o' the hat to Herman Daly), continue to expand indefinitely? Once in severe overshoot, is a sustainable recovery possible without significant material de-growth?

The Kinder And Gentler Call To Cut Social Security Benefits

In today's Washington Post (well now yesterday's), the intelligent and articulate Catherine Rampell weighs in on cutting Social Security benefits, and also probably Medicare benefits as well, in a column entitled, "Kids' shrinking share."  She bases her argument on a new report from the Urban Institute by Eugene Steuerle.  The thrust of this report is that the share of government spending at all levels, although also at each one individually, that goes to children will be shrinking in the future.  This is almost certainly the case, and Rampell recognizes that a major reason for it is that the ratio of old people in the population to children in numbers is going to rise.  However, she asserts without providing any evidence of it that this decline in share for children will be even worse than what will be implied by this population change, which she recognizes.  While she does not come out fully and explicitly to say it, she strongly implies that this shift should be held back by cutting those benefits to those nasty and selfish old people, given that of course raising taxes is simply out of the question.

This of course puts her in line with what has been a solid party line for the Washington Post editorial page.  One simply does not find columns by people like Dean Baker who shred all this nonsense quite thoroughly (although I think they did let him on there once).   Instead we get this steady drumbeat, often brought up in columns that are barely related to the subject, from Fred Hiatt, Robert Samuelson, and Ruth Marcus, with occasional others pitching in.  Now Catherine Rampell joins the chorus, throwing in guilt trips about deprived children without two live-in parents and who are ethnic or racial minorities, against a bunch of married old white farts, along with her being a loudly self-proclaiming millennial.  As it is, I fear that we shall continue to see this line pushed as WaPo seems to be moving right politically since Jeff Bezos bought it from the Meyer-Graham-Weymouth clan.  Bezos is a libertarian and has recently appointed a publisher who used to advise Ronald Reagan, and he is not Bruce Bartlett.  So, Hiatt and crew will probably try to keep the dogs of pushing the ed page even further right at bay by pointing out their wonderful credentials at trying to cut those "entitlements" that are so awful.

Now, Rampell does make an excellent point later in her column that the more serious danger for children in the future is coming from state and local governments, where we have seen lots of cuts in spending for children, particularly for education, in the recent years of recession and slow recovery.  And she probably accurately sees little effort to be put forth to undo the past cuts, and with old retirees in many communities, maybe even more cuts.  This is a real issue, but has nothing to do with federal payments for Social Security and Medicare, although if all those states resisting expanding Medicaid would get off their inane partisan opposition to doing so, we could see some expansion of support for poorer children in particular for something very important.

Indeed, I suspect that Rampell does not get the con game being pulled by all the VSPs on the sucker millennials.  They keep being sold this bill of goods that since there is this danger that somewhere down the road there might be a cut in their future benefits from Social Security, by gosh by gum they must have those future benefits cut now, since we all know there will be no cuts for current beneficiaries (or for those likely to become beneficiaries pretty soon).  All the proposals for cuts by GOPsters have been very loudly proclaimed not to mess with current beneficiaries.  They are all for the future benefits of those millennials and some of the Gen-Xers, although exactly where the cut comes in the age distribution depends on whose proposal one looks at.

In any case, there is a complete disconnect here.  Cuts in benefits for old people, even if they are done now to current recipients, will be at the federal level, while the worst cuts for children are happening at the state and local levels.  So cutting those benefits may not help the kids at all.  What is needed is to increase spending for children at all levels, not to cut benefits for old people. If this implies tax increases, well, most polls show that the public in fact supports tax increases for such things.

Barkley Rosser

Later Note:  I previously described Eugene Steuerle as a former CBO Director.  That was inaccuate and has been removed.  He has previously been at both Brookings and AEI.  He also was part of putting together the 1986 tax simplification during the Reagan adminstration.  I thank Bruce Bartlett for correcting me on this matter, who was also involved in that, I think.  In any case, for anybody who does not know, Bartlett is a former Reagan Treasury official who is now highly critical of most Republican policy proposals.

Who Rules Aleppo?

Aleppo is the largest city in Syria and its commercial capital.  It is to the political capital, Damascus, as New York is to Washington, Shanghai  is to Beijing, Mumbai is to Delhi, Toronto is to  Ottawa, Milan is to Rome, Amsterdam is to The Hague, and I could go on.  However, few know of it, and it has all but disappeared from the western media.  But, now that the US is entering into the Syrian conflict, it behooves people to pay more attention to it, for the idea that the US can build up the Free Syrian Army, or any "moderate" secular opposition that will not introduce Shari'a if it overthrows Assad after defeating ISIS/ISIL, depends very much on who controls Aleppo.

The quick answer is that as of now, nobody does.  It is split nearly in half between government control, mostly in the south and west, with "rebels" controlling in the north and east, although the zones of control are not separated by a neat line, with a small area controlled by Kurdish forces.

In terms of the what Obama says he wants and is being pushed by Sunni Arab allies such as Saudi Arabia and Qatar to do, it becomes important who the non-Kurdish "rebels" are.  This is a very complicated matter, and who they are has changed over time.  However, as of now, it looks like by far the largest group among them is the Liwaa al-Tawhid Brigade, a group that at one time was allied with the Free Syrian Army, the group that Obama favors.  However, last fall it declared that it supported imposing Shari'a law and has joined the Syrian Islamic Front, which originally had 11 groups in it, but is now down to 7, with those most closely linked to al-Qaeda, such as Nusrat, leaving the group.  ISIS/ISIL (and the newly publicized Khorezan) never belonged to this group, which has pushed them out of Aleppo.

It must be kept in mind that there has been near constant war in Aleppo since 2012.  This was the period when neocon critics claim Obama could have tilted things against Assad and ISIS/ISIL if he had supplied more aid to the Free Syrian Army.  Maybe. But what is striking if one looks at a detailed history of the Battle of Aleppo, is that there have not been any major shifts of control since the battle started, although there have been minor shifts here and there.  It should also be kept in mind that throughout, most of the Christians in Aleppo have supported the Assad government against all the rebel forces.  Christians did not do well in Iraq when a US-backed Muslim sectarian regime took over, although there a Shi'i one rather than a Sunni one that would take over in Syria.

It is al-Tawhid that is the most serious non-ISIS/ISIL group in Aleppo, and they are Islamist, supporting the imposition of Shari'a law, if they win.  The only larger group in the Islamic Front is Ahrar al-Sham, a hardline Salafist group more radical than al-Tawhid, although they are mostly operating in other parts of Syria.  Obama is kidding himself if he thinks that aiding the "moderate" Free Syrian Army is going to take ground from these strong Islamists, much less ISIS/ISIL.  At most, the FSA controls only about 20% of the anti-Assad rebel forces.

I suspect that Obama feels pushed by the neocons to try to support the Free Syrian Army, with the videos of the beheadings by ISIS/ISIL pushing him as his polls have collapsed.  As it is, the Saudis and Qataris are fine with the gainers being the Islamic Front, which they are backing.

For an account of the Islamic Front and its sub-groups, see the excellent report by Aaron Lund for the Carnegie Endowment.  For an exhaustingly blow by blow account of the Battle of Aleppo, Wikipedia has a pretty good account under that name.

Barkley Rosser

André Orléan on the Legitimacy Crisis in Economics

From the Introduction to The Empire of Value (2014)

The economics profession is presently experiencing a grave crisis of legitimacy. There was a time when it sought to provide sound guidance for democratic societies by improving the effectiveness of reasoned public policy. But now, through its own negligence, it has shown itself to be a source of confusion and error. It allowed a suicidal scheme of financial deregulation to be put into effect, without any prior attempt having been made to assess the scope of the risks involved or to devise appropriate precautions against them. Instead of awakening minds, economics has put them to sleep; instead of enlightening them, it has cast them into darkness. The disrepute in which the profession is held today stands in proportion to its own failure, which is extreme and without precedent. 

The reaction of economists to the scathing criticism that has been directed at them is striking above all for its lack of intellectual courage. Even if a majority is prepared to admit that very harmful mistakes have been made, most economists also persist in warning against throwing out the baby with the bathwater. To be sure, they say, undue reliance on a type of modeling that recklessly overrates the virtues of competition, together with a dogmatic insistence on the hyperrationality of economic actors, is indefensible. But these shortcomings give a distorted picture of the discipline. Economics is perfectly capable of correcting its excesses, by drawing upon new fields of research such as multiple equilibrium theory and experimental economics, even neuro-economics. So say the economists. And yet instruction at the university level remains the same as it was before the crisis; research likewise proceeds on the same assumptions as before, using the same methods as before. However many newspapers and magazines announce the return of Marx, Schumpeter, and Keynes, the fact of the matter is that nothing has really changed. 

None of this should come as a surprise. Science obeys its own rhythms. Economists are not like weathervanes, pointing this way or that with every shift in the winds; they cannot be expected today to teach the opposite of what they professed yesterday. Nor is economic theory a mere collection of recipes that can be sampled in response to changing tastes; it is a highly structured body of propositions built up from falsifiable hypotheses, rigorous methods of proof, and a vast archive of established results—what the historian and philosopher of science Thomas Kuhn famously called a paradigm. Kuhn showed that it is in the very nature of paradigmatic inquiry to resist challenges to its view of the world. For a paradigm to be overturned at a moment of crisis, not only must a persistent series of anomalies have been observed, in contradiction of the accepted wisdom, but, no less importantly, there must be a new paradigm ready to take the place of the old one. Now, the fact that an economic crisis brings previously unsuspected problems to light does not mean that fresh solutions are available on demand. It is true that economists today quote Keynes, Minsky, and Kindleberger more often than they used to. But this ought not fool anyone. No matter that economists now find it convenient to distance themselves from the neoclassical assumption of efficient financial markets, the theoretical framework that organizes their thinking and their teaching remains unchanged. It has been kept in place exactly as it was. 

The present work proposes to make a new beginning. It proceeds from the conviction that the difficulties encountered by economic theory owe nothing to momentary circumstances, but are the consequence of a fundamentally mistaken conception of economic behavior.

“The economics profession is presently experiencing a grave crisis of legitimacy.”

I've just started reading The Empire of Value by André Orléan and I am very impressed. As was Jamie Galbraith in his blurb for the book:

“In lucid, accessible language, André Orléan resurrects and explores the vital (but neglected) problem of value, grappling along the way with some fundamental defects of conventional theory. Through his mimetic hypothesis, the role of money emerges in the central role that both classical political economy and neoclassical economics denied to it. The Empire of Value is a bold argument, and a deep rejection of the justification for reliance on markets, except as a device for obtaining consent.”

First sentence in the introduction to Empire of Value: “The economics profession is presently experiencing a grave crisis of legitimacy.” This proves to be understatement, not hyperbole.

In the long run we are all Baroque

Terence Hutchison concluded his appendix on "Some postulates of economic liberalism" in Significance and Basic Postulates of Economic Theory with the admonition, "It is high time to put these theories [laissez faire and equilibrium doctrines] firmly back in their place as Utopian constructions." He cited S. Bauer's 1931 article, "Origine utopique et métaphorique de la théorie du “laissez faire” et de l’équilibre naturel."

Prominent in Bauer's discussion is the role of Baltasar Gracian's Oráculo Manual, which was translated into French by Amelot de la Houssaie in 1684, in popularizing both the notion and the term, laissez faire. Pierre le Pesant Boisguilbert is credited with introducing the term into political economic thought in a book published in 1707. It is conceivable that Keynes knew of the Gracian maxim because he used the image Gracian had used of tempestuous seas in his famous rejoinder about "the long run" being "a misleading guide to current affairs."

In his book Hutchison noted that "several writers have argued that some such postulate as 'perfect expectations' is necessary for equilibrium theory." This observation lends a special note of irony to Gracian's coinage of laissez faire. In his discussion of Gracian's Oráculo, Jeremy Robbins highlighted the observation that:

Gracián’s prudence rests firmly on a belief that human nature is constant... In Gracián’s case, human nature is viewed as a constant in so far as he believes it to act consistently contrary to reason."

In fact, Robbin's chapter on Gracian is titled "The Exploitation of Ignorance." Gracian's maxims establish "a sharp distinction between the elite and the necios [that is, fools]." Assuming that most people are fools who act contrary to reason is obviously something quite different from assuming perfect expectations. For that matter, the prudence of a courtier seeking to gain power over others is something quite distinct the foresight required of a policy professional acting ostensively on behalf of the public welfare.

That metaphorical and Utopian notions of laissez faire and natural equilibrium have managed to persist and even prevail in economics -- impervious to Hutchison's warning (or Keynes's) -- is testimony to the perceptiveness of Gracian's estimate of human nature.
_______________________

John Maynard Keynes, A Tract on Monetary Reform (1923)

Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.

Baltasar Gracian, Oráculo Manual y Arte de Prudencia, Maxim 138 (1647), English translation: The Art of Prudence.

The Art to let things go as they can go, especially when the Sea is tempestuous. 

There are Tempests and Hurricanes in the life of man. It is Prudence to put into a Haven, to let them blow over. Most commonly the Remedies increase the Evil. When the Sea of humours is in agitation, let Nature work; if it be the Sea of Manners, leave it to Morality. There is as much skill required in a Physician, in not prescribing, as in prescribing; and sometimes the excellency of the Art consists in applying no Remedy. The way then to calm popular gusts, is to be quiet. Then to yield to the times, will get the victory afterwards. A Well will be troubled if it be in the least stirred, and its water becomes clear again, by ceasing to dabble in it. There is no better remedy for some disorders, than to let them alone. For at long run they stop of themselves.

Gracian,  Oráculo, French translation: « L'homme de cour »

L’art de laisser aller les choses comme elles peuvent, surtout quand la mer est orageuse.

Il y a des tempêtes et des ouragans dans la vie humaine; c’est prudence de se retirer au port pour les laisser passer. Très souvent les remèdes font empirer les maux. Quand la mer des humeurs est agitée, laissez faire la nature ; si c’est la mer des mœurs, laissez faire la morale. Il faut autant d’habileté au médecin pour ne pas ordonner que pour ordonner ; et quelquefois la finesse de l’art consiste davantage à ne point appliquer de remède. Ce sera donc le moyen de calmer les bourrasques populaires, que de se tenir en repos ; céder alors au temps fera vaincre ensuite. Une fontaine devient trouble pour peu qu’on la remue, et son eau ne redevient claire qu’en cessant d’y toucher. Il n’y a point de meilleur remède à de certains désordres que de les laisser passer, car à la fin ils s’arrêtent d’eux-mêmes.

Gracian, Oráculo

Arte de dexar estar. 

Y más quando más rebuelta la común mar, o la familiar. Ai torbellinos en el humano trato, tempestades de voluntad; entonces es cordura retirarse al seguro puerto del dar vado. Muchas vezes empeoran los males con los remedios. Dexar hazer a la naturaleza allí, y aquí a la moralidad. Tanto ha de saber el sabio médico para recetar como para no recetar, y a vezes consiste el arte más en el no aplicar remedios. Sea modo de sossegar vulgares torbellinos el alçar mano y dexar sossegar; ceder al tiempo aora será vencer después. Una fuente con poca inquietud se enturvia, ni se bolverá a serenar procurándolo, sino dexándola. No ai mejor remedio de los desconciertos que dexallos correr, que assí caen de sí proprios.

Why the Popularity of Piketty?

The contributors to the Guardian symposium on this question all missed what I think is the main reason: people who buy (and may also read) books in the US (at least) love fact-filled disquisitions about the long sweep of history.  Remember Guns, Germs and Steel?  On a more econ-ish note, This Time Is Different?  The length and factual detail of Capital in the Twenty-First Century, combined with its multi-century and multi-country scope, makes it that much more attractive.

If Angus Maddison had ever written a tome for the general reader, it would probably have been a mega-success.

In other words, while the style and politics of Piketty may have played a part, these aspects alone predict thousands of best-sellers.  Other filters are more important.

Of course, luck always plays a role too.  Avoid overfitting, especially when n is very small.

The Hours of Labour and the Problem of Social Cost

Peter Dorman commented:

[T]here has been unprecedented economic growth (as I and other textbook writers have defined it) over the last few centuries, and there have been massive increases in environmental stress over the same period. Does this mean that the two are necessarily yoked, and that the hypothetical possibility of increased growth and decreased environmental burden is a chimera? Well, if you want to make that argument you have to make it, not just assert it.... 

No, I don't want to argue that it's an unalterable causal relationship. I want to argue something much more subtle -- that the relationship is institutionally constrained. We can't keep doing the same things and expect different results. Nor can we solve a problem using a discourse that systematically excludes a key variable -- one might say the key variable.

Here is my explanation of the exclusion of that variable. I hope you are open-minded enough to give serious consideration to my explanation of the argument I have made rather than demand an explanation of an assertion I didn't make.

The Hours of Labour and the Problem of Social Costs outlines what I call an ellipsis (...) in the conventional analysis of what are called externalities, social costs and/or market failures. A proper ellipsis leaves out words that are unnecessary to the meaning of the passage. The paper is concerned with a theoretical ellipsis that leaves out the core variable and substitutes "simplifications" that evade one of the most crucial issues, especially with regard to cumulative effects over the long period.

I have expanded on the analysis and particularly on the historical context in my "supply creates its own demon" series here over the past few months. I can't expect you to have read or to agree with everything I have written but if you want to challenge my assertions, you are welcome to criticize things I have actually asserted.

Misunderstanding What Economic Growth Means

I would probably have no argument with Peter Dorman if he said that "degrowthers" have a different understanding of what economic growth means, with which he takes issue. By the way, I don't consider myself a "degrowther" -- I consider myself a critic of the growth paradigm. The growth critics I know have a very sophisticated understanding of what economic growth means. Please leave the condescension in the country club locker room where it belongs.

Roefie Hueting, for example, is the former head of the Department for Environmental Statistics of Statistics Netherlands. He developed the Sustainable national income, (SNI) indicator. Peter Victor's book, Managing without Growth, starts out with a comprehensive discussion of the idea of economic growth, including a section reviewing economists who question growth, such as John Kenneth Galbraith, H. W. Arndt, Ezra Mishan, E. F. Schumacher, Kenneth Boulding and Herman Daly. I would add, very prominently, Nicolas Georgescu-Roegen and Simon Kuznets.

Not all these economists have the same understanding of economic growth or the same objections to what it means, how it is calculated and whether it is sustainable. But on the other side there is this kind of claim that seems to typify standard economic thinking:

If the elasticity of substitution is not constant, what is crucial is what happens to the elasticity asymptotically as resource input goes to zero. In these cases the produced input is sufficiently substitutable for the natural resource that the decrease in supply of the natural resource can be compensated for by an increased supply of capital. Of the two cases, the Cobb-Douglas case is clearly the most interesting for there natural resources are essential in the sense that some input of the natural resource is required for production (the isoquants never do hit the axes). But a small input of natural resource can be compensated for by a sufficiently large input of capital, and whether that is feasible for the economy depends simply on the relative shares of the two. -- Joseph Stiglitz, "Neoclassical Analysis of Resource Economics."

Notice how much work the word "capital" does in that paragraph without a clear definition of what "capital" means?

One of the "misunderstandings" I repeatedly hear attributed to critics of the growth paradigm is that we don't take into account "dematerialization" and the value of intangible products and services. That is pure bunk. These magical solutions have been studied intensely by critics. To make a long story short, the issue is an empirical one and the proponents of dematerialization and intangibility haven't delivered the goods. Miniaturization may seem like a form of dematerialization but, in fact, the manufacturing process often involves more, not less material throughput.

The shift from products to services is also no magic bullet because the service providers come from households that use the income from service work to purchase products made from stuff (possibly in China). Many of the presumably "new" services in the economy are actually old services that used to be performed directly by households and the industrial provision of services, even though it is less material intense than the manufacture of products is usually MORE material intense than the direct household production of those services.

I hear these refrains of substituting capital for natural resources, miniaturizing products and substituting services for manufactured goods all the time. And I read empirical analyses by critics of growth that question the sweeping claims about how easy it is to dematerialize the GDP. And let's be clear, we are talking about less material throughput, period, not only less material throughput per unit of GDP. If absolute material throughput increases while relative throughput decreases the bottom line is that absolute throughput has increased. This is a relentlessly empirical question. What counts is what happens not what "could" happen (ceteris paribus).

Why Paul Krugman Is Wrong about the Cost of Climate Protection, and Why it Matters

Who’s right, those who think that economic growth can’t coexist with protection of the climate, or Paul Krugman who says “saving the planet would be cheap and maybe even come free”?  Alas, neither, but for different reasons.

I’m completely on Krugman’s side when it comes to debunking the degrowthers.  I’ve already written on this before; here I’ll just say that this view, prominent in parts of the Left, is based on a misunderstanding of what economic growth means.  Those who cling to this belief could benefit from reading either Krugman’s introductory textbook or mine.  This is an issue we agree on.

But can it be true that carbon policy practically pays for itself?  Have renewable sources of energy come down so far in cost and availability, and are the co-benefits of mitigating climate change so large, that staying under 2º is virtually a freebie?  Krugman cites two recent studies, one from The Global Commission on the Economy and Climate, the other by a team of researchers at the IMF, that say yes.

Let’s take them one at a time.  The GCEC, a blue ribbon panel under the leadership of political and business leaders as well as economists, comes to its conclusion by estimating the cost of a set of investments that they believe will achieve an emissions level in 2030 consistent with a longer run 2º path.  It’s not possible to fully evaluate their claims, since their report is based on technical papers that haven’t been made public yet, but even a quick reading reveals a number of telltale elisions and misconceptions.

The first and most important is that they don’t model a program to keep expected global temperature increases within 2º, not even over the next 15 years (which take us to 2030).  This would depend on staying within our carbon budget, and cumulative carbon emissions are measured by the area under the annual emissions curve, not by the emissions at some point in time, like 2030.  Thus the program being costed is not the same as the one the IPCC says we need to be on.  Since the putative GCEC mitigation impacts are the result of a large and gradually developing investment program, they are backloaded—meaning that their pathway to 2030 greatly over-accumulates greenhouse gases during the interim.  (For a somewhat fuller explanation, see this.)

Second, like most in the this-will-be-cheap crowd, they get a lot of their climate mitigation from forest and agricultural policies that sequester carbon in trees and soils.  It’s funny: everyone seems to think this is a great idea but forest ecologists, who have pointed out for years that the true sequestration benefits of forests depend on changes in the steady-state forest cover, which is absolutely unknown, and that both forest and soil carbon sinks will be altered by climate change itself.  I’ve written about this too.  Add to these observations new evidence concerning the impact of forest cover on the earth’s albedo and the greenhouse effects stemming from the interaction between forest-generated volatile organic compounds and atmospheric fossil fuel emissions, and the case for reforestation as climate mitigation collapses.  More forest and healthier soils are great, but to forestall catastrophic climate change you’ve got to keep fossil fuels in the ground.

Third, this report puts a lot of stress on the co-benefits of reduced fossil fuel use.  That’s excellent in itself and important to broadcast, but they take it a step further.  Using monetary measures of the value of lives saved due to reduced pollution, they turn this into an “economic” benefit which they then deduct from the economic costs of measures to cut fuel use.  Now, it happens I wrote a book some time back about the problems with the methods used to produce these numbers, and nothing has transpired since to cause me to change my views.  In addition, however, it is misleading to treat the costs economists attach to premature deaths that are said to reflect our diminished utility from risk as equivalent to real, honest to god money.  No money will actually change hands because you don’t like to breathe polluted air.  No one will be able to pay bills with it, purchase assets with it or do any of the other things people do with the stuff we call money.  When you make claims about the economic impacts of policy—its effect on jobs and economic growth—it’s a distinction you want to take note of.  Again: the health benefits of burning less carbon are real, and we need to spread the word, but converting everything to dollars is misleading and actually stifles the message.

Finally, costing a carbon mitigation program on the basis of the cost of additional investments is suspect.  For one thing, it appears to assume that each extra BTU of renewable energy means one less BTU of fossil fuel, but that is an improbable upper limit.  The truth is, the only way we’ll keep carbon in the ground is either by taxing it or requiring permits to extract it; cranking out renewables by themselves, virtuous as it is, doesn’t do the job.  In fact, it is unlikely that the timetable that results from going on a carbon diet—if it adheres to a meaningful budget constraint—will match the timetable of expanded renewable supply; we’ll have to cut back on the first faster than we can fill in with the second.  So what gives?  That’s precisely where the conflict between economic convenience and the climate imperative lies.  But it’s worse than that.  The most disruptive cost of dramatically and quickly reducing our use of fossil fuels is its effect on a wide range of existing capital assets, not only fossil fuels but investments that begin to pay a negative return when energy costs shoot up.  The question is whether the world economy is better prepared for the effects of a price crunch of this sort today than it was in the 1970s when OPEC set off a massive shock.  Yes, we are all more efficient today, but we are far less efficient compared to where we need to be to deal with climate change than we were pre-OPEC compared to where we needed to be to cope with subsequent oil price volatility.  And the OPEC squeeze was a one-off, where the screws of carbon policy, if they’re applied correctly, will tighten and tighten for decades.  As far as I can tell, GCEC assumes that no existing investments, except for a small amount in the energy extraction sector, will need to be written down or off.  Good luck with that.

Now on to the IMF.  Guess what?  They do the same thing with co-benefits.  Yes, it’s important to note that burning less coal in particular (and particulate) will be wonderful for our lungs and the bodies that house them.  Unfortunately, the researchers also take the step of monetizing these benefits using the same dubious value of life numbers, and then treating them as if they could be deducted from the financial costs of higher fuel prices.  No: health is not fungible the way money is fungible.  Sorry.

Meanwhile, a huge source of the economic benefit they ascribe to carbon levies is the opportunity they offer to cut income and business taxes.  Their general equilibrium models tell us that we’ll get trillions of dollars of economic growth from this.  Of course, since the models assume that all economies would be perfectly efficient in the absence of income and similar taxes and suffer lamentably as a result, they generate large gains from tax cuts.  In the real world, however, the weight of evidence does not support the proposition that countries with lower taxes, ceteris paribus, perform better economically.  (And the very use of ceteris paribus here is questionable, since the determinants of political and economic outcomes are many and intricately interconnected.)  In short, the IMF’s economic benefit from taxing carbon and cutting taxes on everything else is the product of an ideology that reasonable people—like Paul Krugman—would no doubt reject if it were put to them directly.

My apologies for piling on so much detail, but (1) it’s not nearly as much as these questions really need, and (2) that’s where the devil is.

So what does it all mean?  And do arguments like mine just end up playing into the propaganda of the Koch brothers and other climate villains?  Wouldn’t it be better just to say that protecting the climate will be cheap and leave it at that, whether or not it’s true?

Believe me, I truly wish we could get climate protection on the cheap.  It would so much easier that way, and to be honest, I don’t want to pay the price any more than anyone else does.  Every time I fly somewhere in a plane or hop in my car to get to a distant trailhead, I think about what I might have to give up if the world gets serious about minimizing the risk of a climate catastrophe.  And if I turn out to be wrong—if it can be shown that my analysis is based on poor information or faulty thinking, and the costs we will all have to pay are minimal—I will gladly, happily admit to error.

If I’m right, though, there are two reasons for not downplaying the true costs of keeping carbon in the ground.  One is that we will miss the opportunity to anticipate and manage economic disruption, thereby making it that more disruptive.  There is a small army of smart, talented economists wasting their time trying to calculate a specious “social cost of carbon”, and we would all be a lot better off if they could switch to making realistic forecasts of where carbon budget constraints will likely pinch, so we can plan ahead.  Over the next several decades, the need to proactively adapt to climate policy will be as great as the need to adapt to climate impacts.

The other cost is political.  If Krugman is right, once we get past the denialists the coast is clear.  Since policy will be cheap, maybe even a net contributor to profits and growth, opposition will melt away.  Businesses will be happy, workers will be happy, and the only question will be, why did it take us all so long to get happy?  If I’m right, getting past denialism is just the beginning.  As rapid fuel price increases loom, businesses will mobilize to stop them, or at least to try to game the policies so that other people have to pay but not them.  Workers, facing the threat of dislocation, will join these demands, as those in the coal sector have already done—coal currently being on the front lines of policy.  We will need a permanent, massive mobilization of forces fighting on behalf of the common interest.  That’s a challenging political forecast, but if a substantial portion of private wealth is vulnerable to writedown if climate policy gets real, there’s no other way to do it.

POSTSCRIPT: For those who think I'm exaggerating, that I'm just a doom and gloomer looking for an issue, please explain the bipartisan support in Congress for and Obama's signature of the 2012 European Union Emissions Trading Scheme Prohibition Act.  The EU ETS is widely acknowledged to be too weak to have a measurable impact on fossil fuel use, but it's way too strong for business interests in the US.  I guess they hadn't read the studies showing how taxing carbon practically pays for itself.

Don't Pay Any Attention -- Paul Krugman edition

"Don't pay any attention..." [correction: this is not a quote from Krugman but Mark Thoma's characterization (correct, in my view) of Krugman's argument]

This is advice from Paul Krugman in his column Errors and Emissions. Professor Krugman obviously hasn't paid any attention to the analysis underlying the critique of "growth".

Lovely.

I teach this stuff at university. I pay a great deal of attention to arguments that the "strong measures to limit carbon emissions would have hardly any negative effect on economic growth, and might actually lead to faster growth."

Krugman says "This may sound too good to be true, but it isn’t. These are serious, careful analyses." If, as Krugman suggests you don't pay any attention to the critiques, you can just take his word for it that these are "serious careful analyses."

The fact is, though, that "serious careful analysis" would pay close attention to criticism. These too-good-to-be-true sounding arguments don't pay any attention to the criticism. They are not serious and careful analyses.

Don't pay any attention to what Roefie Hueting wrote about asymmetric accounting entries 20 years ago. Don't pay any attention to what Nicholas Georgescu-Roegen wrote about energy and materials 40 years ago. Don't pay any attention to what Simon Kuznets wrote about national income accounting 60 years ago. Don't pay any attention to what John Maurice Clark wrote about overhead cost shifting 90 years ago. Don't pay any attention to what Jevons wrote 150 years ago about fuel efficiency and consumption. Don't pay any attention to what Tim Jackson and the U.K.'s Sustainable Development Commission wrote about prosperity without growth 5 years ago.

Just don't pay any attention.

The corporate bureaucrats have your best interests at heart and have everything under control. Nothing can go wrong... go wrong... go wrong...

Move along, now. Nothing to see here.

Update: David Nemerson of Baltimore, MD posted the following comment to Krugman's column. It has received 67 "recommends", so far (don't pay any attention to David or to what Bobby Kennedy said 46 years ago):

Until we break the fetish of growth, we are in for a very bumpy ride indeed. Bobby Kennedy's critique of GDP stated it beautifully in 1968: 

"It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman's rifle and Speck's knife, and the television programs which glorify violence in order to sell toys to our children. 

Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.

It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country, it measures everything in short, except that which makes life worthwhile.
And it can tell us everything about America except why we are proud that we are Americans."

Rest of the quote here.