The bulk of the week was devoted to Krugman on green economics, with posts here, here, and here.
Although I agreed with Krugman on some points and disagreed on others, there were two places where I not only disagreed but thought he had the economics wrong. First, he is wrong when he suggests that if we’re more risk averse, it follows that we should spend more on climate control. The reason is that risk averse people don’t like income inequality (because it boosts the risk of being born poor), and spending more on climate control exacerbates income inequality across generations. Therefore risk aversion cuts both ways on this issue. Second, Krugman is wrong when he gives (some) credence to James Hansen’s economically illiterate belief that altruism is somehow less effective under a cap-and-trade regime than under an emissions tax.
To round out the week, we had two posts about shameless hucksters trying to gull the public. Those posts are here and here.
As always, I’ll be back on Monday.
I’m confused, Steve. First you say you had two posts about Krugman. Then you say you had two posts about shameless hucksters trying to gull the public.
Surely there’s some double counting going on here…
Steve,
I can’t really understand your argument. What is the “risk of being born poor”? By definition, at the moment an agent makes a decision, he is already alive, and thus, already knows if he was born poor or rich and has no risk of this. Moreover, his children will have the money he has when he has them, so there is no “risk of being born poor” here either, only perhaps a risk of the parent becoming poor.
Presumably, the shameless hucksters he is referring to are the purveyors of subliminal messaging (who are selling products that don’t work) and Steve Landsburg (who is making a poorly-worded and incensive argument in hopes of boosting site traffic).
Douglas: When economists think about policymaking, the standard approach is to adopt the stance of someone who doesn’t know which of the various affected lives he’s going to lead. There are arguments for and against this approach, but it’s the default standard and it’s clear from context that Krugman has adopted it (as would most economists writing about this topic). From the point of view of that agent—the one who doesn’t know who he is—income inequality adds to risk, so in a world with more risk aversion, you’d want less income inequality.
Aaron:
I would have thought it difficult to be more “poorly-worded” than “incensive”.
It does seem that applying the criterion that our descendents will be fabulously wealthy, and that risk averse people should minimise difference between rich and poor, we should be planning to run up a huge deficit to even things out a bit (if we are risk averse). Lets increase public spending and sting those future wealthy folk with some taxes! They can afford it.
Harold:
You are absolutely correct, with some caveats. 1. As the magic of compounding applies to debt as well, strongly affecting future income, I’d be delighted to see your cost-benefit analysis of debt servicing versus economic growth. 2. By running a huge deficit now (and do you mean one-time, or ongoing?), we are making it more difficult for us to borrow more money in the very immediate future. 3. You won’t find many 100-300 year bonds. If you are, say, 80 years old, then you might not have much to worry about, actuarily, but most of the current electorate does. How does that figure into your calculations?
Bob, I think you may have mistaken me for someone who knows what they are talking about! My analysis may have been a bit simplistic. After the Napoleonic wars in the UK, the huge debt seemed impossible to service, but eventually it became small. These were then heady days of the industrial revolution, and there is no guarantee these growth rates will continue. If we could be absolutly certain of continued economic growth of 2-3%, should we be running things differently, or is that how we are actually running things now?
Good point, Bob. If the real economic growth rate is equal to the real interest rate at which we discount (which is approximately true if we take the after-tax interest rate but not the return on capital), it seems we should treat a dollar of deferred taxes today as equivalent to a dollar of real income to those rich future generations.