Wednesday, February 24, 2010

Can "Green Technology" Lead Us Out of the Recession?

Paul Krugman claims that "green technology" can help lead to an economic recovery, at least judging from this blog post. He writes:
What we really need now is (a) higher spending and lower trade surpluses in surplus nations, China especially but also Germany (b) some big driver of investment, such as green technology. Absent those things, it’s hard to see how we get a durable recovery.
I hate to be the spoiler here, but I cannot understand how the implementation of technologies that require huge subsidies just to survive is going to lead to recovery. This is like saying that the Anderson household can lead an economic recovery if we decide to have lots of car repairs and fix the plumbing.

Now, what is my point here? Obviously, if I have to get the car fixed and the plumbing goes bust, that means I have take money from things I had hoped to do (like go on a vacation) in order to do the repairs.

In order to fund "green technologies," we have to cannibalize the healthy and profitable industries to throw money at this perpetual loser, which also gives us inferior fuel and inconsistent electricity flows, something that consumers, if given their own choices, given the real costs, would not purchase these "green technologies" at all.

So, according to Krugman, we cannot have a real recovery unless the government taxes healthy industries and subsidizes unhealthy ones. This is something out of "The Twilight Zone."

15 comments:

steve B said...

“I hate to be the spoiler here, but I cannot understand how the implementation of technologies that require huge subsidies just to survive is going to lead to recovery”

I do not understand this comment? Is your issue with investment in Green technologies? Or with investment in general? Are you saying investment is bad for economic growth? Clearly investment has fallen off the cliff; I do not understand why an investment boost would not be helpful.

http://3.bp.blogspot.com/_pMscxxELHEg/S2L4qTRxyAI/AAAAAAAAHYU/Fu989SRSuL4/s1600-h/Q4NonRIGDP.jpg

“Obviously, if I have to get the car fixed and the plumbing goes bust, that means I have take money from things I had hoped to do (like go on a vacation) in order to do the repairs.”

But in terms of economic growth, spending is spending. Does it really matter if you spend your income on plumbing or a trip? It still adds to aggregate spending. Actually, if your trip is to Europe, spending on the plumber is clearly more beneficial to domestic growth. Like the grocer analogy, I do not get this one, but it could be me. A better explanation would be helpful.

“In order to fund "green technologies," we have to cannibalize the healthy and profitable industries to throw money at this perpetual loser,”

Is this really accurate? Many (most) industries in our economy began as a subsidy from the government. Mobile communications, the internet, drug research, medical devices – all started out as some form of government subsidies. I do not recall investments in defense crowding out other investment in the 80’s. Any research to support this statement?

Overall, this seems like an overly simplistic criticism of Krugman. What he is saying (simplisticaly) is to jump start the economy we need excessive savers to invest, and invest in new technology, similar to the investment boom of the 90’s. Is the overall point that spending and investment is bad for economic growth? That seems to run counter to all economic ideologies.

Hard said...

Robert Murphy: Busting the Myth of Green Jobs: http://www.youtube.com/watch?v=IvVpQbDUNss

jason h said...

However as a Keynesian, Krugman is not simply suggesting 'excessive savers' invest. He advocates increasing public spending/debt to offset the drop in private spending. AKA, stealing from savers with taxation and inflation and forcing them to fund projects through gov't subsidies. Savers should be allowed to allocate their capital as they see fit and if green tech offers them an acceptable return then so be it. Although a project needing a subsidy indicates that the market offers a better return elsewhere.

Yes, many gov't funded projects eventually became robust industries. But that doesn't mean the market couldn't develop those industries on ts own. The gov't doesn't produce, so every gov't dollar comes from someone who is productive. Moreover, the gov't isn't concerned with efficient capital allocation because it can always tax, borrow, and print. Capital is scarce; gov't subsidy always crowds out private investing.

William L. Anderson said...

The purpose of investment is not to add to "aggregate spending." Instead, we want investment in things like producers goods that will make more goods (using fewer resources per unit than before). Logically speaking, an economy grows when we can produce more goods using fewer resources, which means that we then can apply the formerly "unemployed" resources to other uses.

So-called green investments require us to use more resources to create fewer goods, and the products made are inferior to what we had before. For example, ethanol is nothing more than low-quality Jack Daniels. Would you pour JD into your car? In order to ensure that producers of ethanol (which will sell at roughly $2.50 a gallon) can make a profit, the government must take resources from elsewhere, and the only "elsewhere" would be profitable entities.

So, in the end, we have used a lot of resources to make an inferior fuel, a fuel that none of us would pour into our cars if the government did not make us do it. That is NOT an "investment." It's highway robbery.

By the way, Steve, I appreciate your comments and I will say that I had hoped this blog would have such dialogues. So many times, people use blogs to be absolutely rude and insulting to each other, and I would like for real-live economic discussions to occur, and that is what has been happening so far.

So, please feel welcome to make comments and to ask questions. We don't have to agree in order to have fun, and I do want this blog to be fun and entertaining -- and educational -- for readers.

steve B said...

“He advocates increasing public spending/debt to offset the drop in private spending.”

True, but under specific circumstances. As Keynes/Krugman advocate, “the whole stimulus debate is supposed to be about what happens when interest rates are up against the zero bound”.

“AKA, stealing from savers with taxation and inflation “

This is not Keynesian.

http://krugman.blogs.nytimes.com/2010/02/06/alesina-on-stimulus/

“Yes, many gov't funded projects eventually became robust industries. But that doesn't mean the market couldn't develop those industries on ts own”

I disagree somewhat w/ the last statement. Private industry does not support long term (decades) funding for drug research, medical device research, spectrum related technologies, etc. Governments often fill this gap. What the VA is funding for vets that lost limbs in Iraq is truly amazing; an area the private sector has long ignored (vets lost limbs in other wars as well). Why is that?

“Capital is scarce; gov't subsidy always crowds out private investing”

If this were true, long term rates would be higher than they are today. Instead, during a period of massive government stimulus and deficits, rates are lower now then when we had a surplus. Why? Clearly, crowding out is not currently taking place. I would agree with this statement if we were in a growing, normally functioning economy. Your statement would be 100% accurate if it was 1996.

“The purpose of investment is not to add to "aggregate spending." “

Understood. My original question was more towards if you thought an overall increase in investment would be beneficial in current environment, which is what Krugman is advocating (putting aside his suggestion of where that investment should be directed).

“For example, ethanol is nothing more than low-quality Jack Daniels.”

Could not agree more. Ethanol was a dim witted idea. If we strip politics out of the equation (I know, impossible) ethanol would have never happened. However, a blanket generalizing that all Green investment is value destroying is not entirely true. There have been many value creating Green projects in Pittsburg, Norway, and Canada, most of which originated as government subsidies. So the question to me comes back to how we make the subsidy process more efficient, not eliminate it (I’m sure you’ll disagree w/ that comment as a pure free marketer, and I'm not sure it's possible given our politcal system. I am just recognizing the markets limitations.).

“I appreciate your comments and I will say that I had hoped this blog would have such dialogues”

Could not agree more! It’s not often I get frequent responses from a college professor. And I completely agree civility is a lost art in the blogosphere. I hope you will continue the dialogue. And just for the record, I am not a Krugman student, nor am I Krugman groupie. I find myself siding w/ him on your blog because you happen to focus on areas where I believe he is correct or is being misinterpreted (and Keynes/Krugman is constantly misinterpreted for political reasons (not implying by you, but in general)). Frankly, I believe Keynes, the Austrians, supply siders, monetarist, etc. are all wrong more than they are right. Subscribing purely to just one philosophy, ideology, political party, etc to me, is being intellectually simple minded, and short changing ones self and you are bound to lose money if they are utilizing macro analysis in your investing style (which I do).

"We don't have to agree in order to have fun

Agreed!

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