Paul Krugman:
Ross Douthat attempts to justify the reform conservative backdown on climate policy; John Quiggin isn’t persuaded. But there’s one argument Quiggin, somewhat surprisingly, doesn’t make: Douthat has the economics all wrong.
Douthat’s essential point, as I understand it, is that economic troubles make this a bad time to take on the burden of climate adjustment, that they strengthen the case for waiting to see if we can get by doing less and using cheaper approaches.
But that’s exactly backwards. Yes, we’re having tough times — but the toughness stems from insufficient demand, which has led to an oversupply of both labor and capital. Here’s the real cost of government borrowing:
Climate action would mainly involve investment — especially investment in new or retrofitted power plants, replacing coal-fired plants with lower-emission sources. In good times such investment would mean diverting labor and capital from other useful activities. But in the post-2008 economy we’ve been awash in unemployed labor and capital with no place to go. This is an ideal time to be doing a lot about climate!
There is alot not to like here, beginning with the notion that U.S. economy is in a depession. Whether we call December 2007 to June 2009 the lesser depression or the great recession doesn't matter, what matters is the 2014 economic isn't depressed. It can be described as lousy but not depressed. So Krugman's post title is just inflated rhetoric.
Second, it is a reach to say that environmental policy can act as Keynesian stimulus. In it's simplest terms the GDP of an economy can be expressed by Y = C + I + G + (X-M), where Y is GDP, C is consumption spending, I is investment spending, G is government spending and (X-M) is net exports. Keynes argued that an increase in government spending (G) could raise a country from a depression. Krugman is arguing that environmental policy, which imposes constraints on firms, will increase investment spending (I).
On the surface this sounds perfectly reseasonble. But this is not the type of investment spending that leads to new products and lower costs of production. It is investment spending that replaces a broken window (here is what I said last June [and here] when Krugman made a similar claim about environmental policy and Keynesian stimulus). In short, the productive capacity of the economy hasn't much changed after the additional spending and so it isn't really an investment. Further, prices on energy-intensive goods will rise and consumers will have less money to spend on ordinary goods and services. In effect, consumer spending shifts over to cover increased investment spending and nothing really changes to the overall economy. In fact, there might be small negative effects because of the constraints on the production process (Krugman doesn't really disagree but says that the negative impact would be small).
I tend to agree with the conservatives that you'd rather impose environmental policiy during good macroeconomic times. But, it doesn't seem like the only good time for environmental policy is when the economy is peaking.
