Paul Krugman’s latest venture into self-parody starts with a recent paper on the cost of air pollution, which finds that said costs are big and heavily concentrated in a few industries. Krugman then links to a New York Times article surveying Rick Perry’s past clashes with the EPA. With no further argument, he concludes that
Today’s American right doesn’t believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right. Faced with evidence that market prices are in fact wrong, they simply attack the science.
Where to begin?
First: Krugman tells us that
Externalities like pollution are one of the classic forms of market failure, and Econ 101 says that this failure should be remedied through pollution taxes or tradable emissions permits that get the price right.
Yes, that oversimplification is indeed sometimes taught in Econ 101. What Krugman doesn’t tell you is that it gets corrected in Econ 102, where students learn that taxing the source of an externality might or might not be efficient policy, depending on the available alternative remedies. It would, for example, be tragic to tax coal plants out of existence if it proved substantially cheaper to clean up their emissions after the fact, or to relocate the victims of those emissions.
I’m tempted to say that this is just Krugman being true to his principle that economics stopped advancing somewhere around the middle of the 20th century (something I certainly believe about music), so that just as Keynes had the last word on macroeconomics, Pigou had the last word on externalities. (Pigou, writing in 1920, is the source of the Econ 101 analysis; Ronald Coase, writing forty years later, advanced us to the level of Econ 102.) Except I know that Krugman knows better, because he once wrote a pretty good piece on green economics for the New York Times, where he made the Coasian argument tolerably well.
Second: the Times article is about Rick Perry’s past criticisms of the EPA, whereas Krugman is citing a brand new paper from the current issue of the American Economic Review. Apparently, his complaint is that Perry failed to account for this research before it existed. Perhaps he’s overestimated the import of fast neutrinos.
Third: I do not think it is beyond Krugman’s analytical powers to recognize that there is no inconsistency between the positions that a) some industries should be more heavily taxed and b) the EPA is often wrong.
Fourth: it is rarely the case that a single journal article is sufficiently definitive that it ought to dictate policy to the point that any dissension would be laughable. (Krugman’s comment on the whole affair is “Hahahahahahaha”.) One possible exception to that rule is Coase’s paper on social cost, which was quite definitive indeed in its refutation of Krugman’s argument from “Econ 101″.
Fifth: Even if we all agreed that the EPA is a paragon of economic efficiency, some of its policies might still be objectionable on some other grounds. Or does Krugman now want to retract every column and every blogpost in which he has appealed to compassion, equity, justice, fairness, etc., etc.?
Sixth: Krugman concludes that
What this tells us is that we are not actually having a debate about economics. Our free-market advocates aren’t actually operating from a model of how the economy works; they’re operating from some combination of knee-jerk defense of the haves against the rest and mystical faith that self-interest always leads to the common good.
What this tells me is that we are not actually having any sort of debate about policy. Krugman isn’t actually operating from a model of how government works; he’s operating from some combination of knee-jerk defense of redistribution and mystical faith that government always serves the common good.
After all, even if we all agreed that stricter environmental policies are desirable in principle, it would not follow that stricter environmental policies are desirable in a world where those policies will be formulated and enforced by politicians and bureaucrats with decidedly parochial agendas.
Today’s American right doesn’t believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right.
It would indeed be naive to believe that there are no market failures. It would be equally naive to believe that there are no government failures, which is what Krugman seems to be assuming.
The choice, all too often, is not between market failure on the one hand and government success on the other; instead it’s between market failure on the one hand and government failure on the other. That calls for some hard thinking about the costs and benefits of the various policy options, thinking that is not advanced by pointing one’s finger and saying “Hahahahaha.” Economists can contribute to this discussion with an honest attempt to illuminate the tradeoff. Tradeoff! Now there’s a concept Krugman ought to recognize. It is, after all, at the core of Econ 101.