Friday, March 16, 2012

Natural Born (Economy) Killers

When it comes to the use of certain kinds of fuels, myths abound and especially myths created and nurtured by Progressives in academe, government, and the media. Given that Paul Krugman is a card-carrying Progressive, one might expect him to propagate such myths, and he does in his usual Pavlovian style.

Some months ago, he claimed that the use of oil and coal creates such huge negative externalities that the very use of these fuels actually destroys overall wealth. In other words, according to Krugman, if we stopped using coal and oil, we would be wealthier than we are now, our economy more productive, and we would be healthier. Granted, that might sell in the salons of the Progressives, but if one steps back and applies simple logic to what he is saying, the outcome might be different.

(One is reminded of Sen. Harry Reid's "Oil makes us sick. Coal makes us sick," line a few years back. Reid makes us sick.)

In his recent column, Krugman makes the claim that Republicans claim that if the Obama administration were to allow more drilling, the economy would boom. He writes:
...Mitt Romney claims that gasoline prices are high not because of saber-rattling over Iran, but because President Obama won’t allow unrestricted drilling in the Gulf of Mexico and the Arctic National Wildlife Refuge. Meanwhile, Stephen Moore of The Wall Street Journal tells readers that America as a whole could have a jobs boom, just like North Dakota, if only the environmentalists would get out of the way.
Since I am not following the political speeches by the Republicans, I don't know if Romney has made such claims or not, and I have no idea of Moore is saying what Krugman says he is. (Yes, I have reason to doubt the veracity of Krugman's claims, given that the guy has told us that the late 1970s were a golden age of the American economy, that Teddy Kennedy, the authors of a lot of deregulation, actually were conservative Republicans, and that World War II brought prosperity to America.)

Now, if Romney and Moore actually said those things and in the context of which Krugman makes his claims, then I would agree in part with Krugman. Even a much larger energy boom (with coal, oil, and natural gas) than what we see now would not lower unemployment levels across the country by all that much, but certainly we would be better off economically than we are now.

Unfortunately, Krugman makes two major errors involving simple opportunity cost, neither of which surprise me, given that Keynesians want us to claim that in a liquidity trap, the opportunity cost of using factors of production is near-zero (yet, those factors are well-paid when a government "stimulus" magically brings them to employment).

The first is something that Krugman has ignored throughout his writings on energy: the rapid expansion of the dollar. Oil worldwide is priced in U.S. dollars, and when the Federal Reserve System "fights" the downturn by showering the world with that money, one should expect oil prices to rise regardless of how much turmoil there is in the Middle East.

Yes, the saber-rattling HAS made oil markets more unstable and more volatile, but when Krugman declares that the two-ton elephant in the living room really is a tea cozy, he is not being honest. For that matter, I find it interesting that an economist of Krugman's stature is claiming that supply issues matter in oil but don't matter in money.

Krugman's second problem comes with the following statement:
And this tells us that giving the oil companies carte blanche isn’t a serious jobs program. Put it this way: Employment in oil and gas extraction has risen more than 50 percent since the middle of the last decade, but that amounts to only 70,000 jobs, around one-twentieth of 1 percent of total U.S. employment. So the idea that drill, baby, drill can cure our jobs deficit is basically a joke.

Why, then, are Republicans pretending otherwise? Part of the answer is that the party is rewarding its benefactors: the oil and gas industry doesn’t create many jobs, but it does spend a lot of money on lobbying and campaign contributions. The rest of the answer is simply the fact that conservatives have no other job-creation ideas to offer.
The impact of ANY industry is not simply the number of jobs that are directly created within that industry. Does Krugman argue that agriculture is insignificant in this country because only about two percent of the population is involved directly in farming? For that matter, he recently argued that higher education is extremely vital to our society, yet the number of people employed in that field is tiny.

No, what he is saying is that he does not like the energy industries, so he is free to apply different standards to them than he does elsewhere. That is not economic analysis; it is political hackery, period.


American Patriot said...

Spot on, professor. Krugman is nothing but a political hack. That much is clear to everyone but LK and his ilk.

William L. Anderson said...

Thanks. But I do appreciate LK and the others posting, as it does bring about lively discussions!!

Lord Keynes said...

"Yes, I have reason to doubt the veracity of Krugman's claims, given that the guy has told us that the late 1970s were a golden age of the American economy, "

Oh, really.
Where actually does he assert this statement? Given your own proven track record of straw man arguments, I wouldn't give much credence to many of the charges you make.

William L. Anderson said...

Here is one post I had dealing with Krugman and his claims about deregulation and the late 1970s and early 1980s:

The guy is on the record as claiming that deregulation came about because ideological conservative Republicans wanted it. He leaves out the role of the Democrats, but most of his loyal readers will believe anything he says, even those things that clearly are not true.

American Patriot said...

Told ya, professor.
LK had to live up to his reputation.
Sure Republicans like Phil Graham were involved in repealing Glass Steagal but who pushed as hard if not even harder? Try the following names--Clinton, Cuomo, Scty. Rubin, Sen. Hollings, etc..
And why?....simply because Democrats (and some big government Republicans) wanted to clear the private sector roadblocks to implementing all the glories of CRA (thus social engineering and pandering to the masses for their votes)

Anonymous said...

Please dont let Krugman off the hook for his "edited" chart showing oil rig numbers vs gas prices and claiming that represents oil production. When, in fact the following source shows that production continues to decline in spite of increased number of rigs.

farmland investments said...

Forget about the amount of direct employment. The spin-off is amazing. I bet you for every one job directly, there are five others created! Besides, isn't that how they justified the bail-out of the auto companies??

macroman said...

Prof Anderson, aren!t you ignoring the velocity of money, when you speak of the huge increase in the quantity of money. If large quantities oil was stored in reserves and never released the price of oil would be high. If money is stored in reserves and rarely spent, the price of money would be higher? The old cAn,tt push on a string view of monetary policy.

macroman said...

Prof Anderson,

A giant leap forward when you say “The impact of ANY industry is not simply the number of jobs that are directly created within that industry.” Almost an admission that external effects and synergies exist. But when you say according to Krugman, if we stopped using coal and oil, we would be wealthier than we are now, our economy more productive, and we would be healthier you have gone off the rails in two ways.

1) Krugman actually implies we would be better off if we use less oil and gas, not necessarily no oil and gas, and the difference is not trivial. It is standard that the price of goods should reflect the true costs of production in order to maximum wealth. We say this all the time to argue against subsidies, which lead to an overuse of scarce resources.

2) You base your implied opinion that less consumption of oil and gas would be bad, on what? Intuition? You don’t say. Krugman based his article on a published study Muller, Nicholas Z., Robert Mendelsohn, and William Nordhaus. 2011. "Environmental Accounting for Pollution in the United States Economy." American Economic Review, 101(5): 1649–75. From the abstract: … The paper estimates the air pollution damages for each industry in the United States … The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added.

So the authors are implying that wealth would indeed be improved by less use of oil and gas. If they are wrong, if their estimates of air pollution damage are wrong, you could publish your refutation in the AER, couldn’t you?

macroman said...

farmland investments I bet you for every one job directly, there are five others created! Besides, isn't that how they justified the bail-out of the auto companies??

Yes that sounds similar to how they justified the auto company bail-out. But these things have to be based on rational studies of the job effects, not gut feelings, or what you are prepared to bet.

Lord Keynes said...

William L. Anderson@March 16, 2012 2:30 PM

I asked you to provide evidence that Krugman ever said "that the late 1970s were a golden age of the American economy."

It's an eloquent testimony to my original statement about your use of straw man arguments that you're incapable of providing any such evidence.

You instead switch to defending a statement whose truth I never actually disputed.

Don Tillman said...


Here's how Krugman beclowns himself in the first paragraph:

Drilling locally is far more environmentally sound than importing oil from the mideast because of better drilling technology, because of the more stringent environmental regulations here, and because we don't have to burn lots of fuel transporting the oil halfway around the planet in tankers.

A true environmentalist would be in favor of drilling locally.

macroman said...

Don Tillman,

The study on which Krugman based his remarks was not about oil drilling, but oil burning (for electricity production) in the USA. The damage from pollution (excluding any global warming effects), in the USA, is claimed to be almost as large or greater than the value added.

JG said...

"The impact of ANY industry is not simply the number of jobs that are directly created within that industry."

Again, you're quoting PK outside of the full context of his argument. The full context is that for months conservatives have been lying about how the Keystone pipline will create hundreds of thousands or even millions of new jobs. Krugman's comment is meant to counter the false claims of conservatives who say that oil/gas/coal extractions will rain down jobs on the economy if only progressives would get out of the way. Krugman wasn't using job creation as a metric for detmining an industry's value to society.

Don Tillman said...


Krugman cites no study in his article, nor does he mention burning oil for electricity production. Let's stick to the actual topic, shall we?

My point is that, regardless of how much oil the US uses, when you limit drilling, that oil not drilled then has to be imported, and importing oil is more environmentally damaging than drilling it locally.

macroman said...

Don Tilman
Sorry, our wires were crossed. I was referring to this from Anderson: "Some months ago, [Krugman] claimed that the use of oil and coal creates such huge negative externalities that the very use of these fuels actually destroys overall wealth." Indeed in a column a few months ago Krugman did quote a study which was about the costs to Americans, of pollution from burning coal in America.

I suppose Krugman, on your argument, can be faulted for wanting to protect the US from drilling-related pollution by shifting it to other countries. However your argument relies on stricter environmental controls in the US than elsewhere, and Krugman was, by implication, referring to those who want to abolish the very environmental protections you mention.

Don Tillman said...


Oh yeah, Krugman is also wrong about Republicans not protecting the environment. It was, in fact, a Republican who created the EPA; Richard Nixon.

Nobody wants to "abolish" environmental controls. But... the current EPA system has no feedback mechanism to assure that the current environmental controls really do have a positive effect on the environment at a reasonable cost, or a mechanism to take those controls that have a marginal effect on the environment and adjust them in such a way that they perform better, or a mechanism to remove those controls that actually make things worse. Without such a feedback system the EPA is open to all sorts of political bribery, fraud, favoritism or socialist-style central planning. And there's certainly no feedback mechanism for the EPA to scale back its own operations when its job is done.

No matter...

Even if you remove the stricter environment controls, which you really can't, there are still the issues of the higher technology drilling equipment and the extra fuel required to transport the oil half-way around the planet in tankers. That's significant; and it's very easy to ignore for someone steeped in academia and their own weird abstractions.

macroman said...

Don Tilman If no one is saying the environmental controls should be lifted, then I have misunderstood Krugman's post and Anderson's response.

Krugman's post was mainly about jobs but it did mention "giving oil companies carte blanche" which sounded like removing stricter environmental controls. No doubt the "mechanisms of the EPA" could be improved as you say, but that also sounds like it might be code for removing some environmental controls.

I just can't see how your "transport half-way round the planet" fits in to all this. If you are talking about conserving oil, I think the market can take care of that and factor in new technology and transport costs.

Fearsome Pirate said...

The claim that more energy has a negative net effect on the economy if it's produced by burning something doesn't even pass the laugh test.

I mean, really? There's not a single expansion of any productive capacity whatsoever that would be a net positive for the economy if it involves consuming more electricity than is currently produced, or requires more motor transport than is currently used?

Krugman further reveals he's not a real economist with this line:

"The rest of the answer is simply the fact that conservatives have no other job-creation ideas to offer."

If you think it's the job of politicians to figure out how labor can be used productively, not entrepreneurs, you're not an economist. You're a communist.

macroman said...

Fearsome Tycoon It isn't too difficult to understand. If the pollution from burning oil imposes enough costs, cleaning costs, health costs, corrosion/replacement costs on buildings and so on, it is theoretical possible that burning oil is a bad thing and less of it should be burnt. If all those costs fell directly on the one burning the oil, that is what would happen: the person burning oil (to get positive results) would balance it against the negative results the costs, and burn less of it. Just the market at work in that case.

Charlie Schnickelfritz said...

Yes, macroman, it is theoretically possible that a particular means of generating energy does more harm than good. One could generate a lot of energy by crashing the moon into Asia. The costs would outweigh the benefits in that case. Likewise, one could generate a lot of energy by dropping nuclear bombs on populated areas. But I doubt we'd see an increase in overall wealth.

What you apparently don't understand is that energy is used to do things, and that literally nothing is possible in an economy without energy. If a kilowatt of energy is a net negative, then the losses imposed by externalities are not just canceling out the profit of the power plant that matters, but the profit of every single entity who does something with the energy generated by that plant.

Since "things made possible by using energy" includes "everything," and fossil fuels make up the vast majority of the world's energy (nuclear is nearly all of the rest), that's equivalent to the claim that the world has become progressively poorer and poorer every year since the Industrial Revolution.

macroman said...

Fearsome Pirate

The argument is that less energy should come from polluting sources and some more from other sources - this will cost energy consumers more but those previously bearing the costs of pollution will benefit and the benefits outweigh the costs, according to empirical research which Krugman quoted.

Once you acknowledge that costs of burning oil are borne not just by people directly benefited by burning the oil, then it follows that overall welfare will be less than optimal because too much oil will be burnt. The people bearing the costs are subsidizing the oil burning. Every economist, including the Austrians, uses a similar argument to show that government subsidies distort the market. Lack of pollution pricing is a subsidy which does the same thing.

I can understand an argument that says we all have to put up with pollution because society or the government has decided that the pollution costs are bearable and equitably distributed and worth the benefits, and I have empirical results to back my assertions about the distribution of pollution costs.

But it is hardly an argument that can be made with a straight face by an Austrian economist.

Fearsome Pirate said...

No, macroman. In typical Krugman style, you have changed the argument. The argument is that the damage caused by burning things exceeds the value created by it, not that there is some more economical alternative. The claim that there exist more economically efficient energy alternatives is plausible. But that is not what you initially claimed.

I've noticed you Keynesians are quite adept at changing your initial claims once you've lost an argument. JMK did the same thing himself (often within the pages of the same book), so you're in good company.

macroman said...

Hiram J Goldstein II

The argument is that the damage caused by burning things exceeds the value created by it.

And that is exactly the claim that a research paper cited by Krugman makes with regard to oil-fired electricity generation. Feel free to read the paper and show the authors are wrong.

Note that not all oil-burning causes the same damage or has the same energy efficiency, so that if the most damaging and least efficient uses are eliminated the cost/benefit ratio can to swing back to net value creation by burning oil.

I had moved on to next stage of the discussion because people seemed to be saying this can't be true because it must mean we should use no oil and we don't like that, and other silly responses.