Fallacies die hard, if ever.

With the Environment, Paul Krugman Forgets the Poor

By Jeffrey Dorfman

President Obama gave a major environmental speech this week, laying out proposals to force more environmental regulation on the U.S. economy in order to allegedly save the world from the dangers of climate change. Essentially admitting that no environmental proposal is going to pass the Republican-controlled House, Obama has apparently decided that he will take action on his own. Given that he does not face any future elections, this presumably makes some sense from his point of view. The question is: will it be good for either the economy or the environment?

The environmental question is somewhat trickier than people think. Even if one accepts that human-related greenhouse gas emissions are causing global warming, this is not all bad for all people. More people die of cold-related causes than heat-related ones every year. Colder regions will gain longer growing seasons, lower heating costs in the winter, and fewer cold-related deaths. Advocates for action in response to global warming should at least acknowledge that even according to their own models there are some people and places in the world that would be winners from climate change. When we combat it, we harm those groups.

Then there is the question of whether new technologies designed to replace fossil fuel as energy sources are really better for the environment. For example, everybody except American presidential candidates knows that corn ethanol does not generate a gain for the environment. It is really a slight negative in terms of total energy balance, and then adds major negative effects on land use patterns and global food prices that are bad for the environment and burdensome on poor people. Electric cars are not zero-emission vehicles. They just separate the emissions from the car, moving them to the power plant used to generate the electricity that goes into charging the car. Whether a hybrid car is really better for the environment over its entire lifecycle is still a matter of debate. Wind power causes additional bird deaths, noise that impinges on the lifestyles of nearby residents, and certainly changes the viewscapes in many beautiful natural areas that just happen to be windy.

However, since I am not an environmental scientist, let's focus more on the economic side of this question. Paul Krugman analyzed the economic side of the issue in Friday's New York Times. He argued that the President's proposals will admittedly raise energy costs, but will also help the economy by forcing utility companies to invest in new capital to produce electricity by cleaner methods. For a progressive, he went past that first admission very quickly and for a Nobel Prize-winning economist the second is a very embarrassing mistake.

First, rising energy prices. A fascinating part of the special-interest coalition that makes up the Democratic Party is how many of its groups have aims which are at odds with another coalition partner. Environmental groups advocate a set of policies that uniformly hurt poor people. Environmental protection is essentially a luxury good. If you have enough money to provide food, clothing, and shelter for your family, then you start to care about the environment.

Krugman and I can both afford to pay a little more on our electricity bill and when we fill up our gas tanks, but those higher energy costs are regressive. Poor people spend a higher percentage of their income on energy bills, so raising those costs in order to improve the environment means that the poor will feel more pain than those with higher incomes. If we were talking about tax policy, no liberal would forget to mention the poor and how the rich should carry more of the burden. Yet, somehow, on environmental policy most liberals favor policies which hurt the very people they normally want to help.

Finally, let's discuss Krugman's mistake. He says that economic good can come out of retooling our electric generating capacity because "Suppose that electric utilities, in order to meet the new rules, decide to close some existing power plants and invest in new, lower-emission capacity. Well, that's an increase in spending, and more spending is exactly what our economy needs."

Now if we build a brand new power plant while continuing to operate all the ones we have, that can lead to economic growth because we are increasing the productive capacity of the economy. But shutting down a plant that is fine in every way except for producing emissions that worry some people is the same as when a natural disaster destroys property. Something that had value no longer exists. The idea that replacing the previous item leads to economic growth is one of the most basic fallacies in all of economics, known as the broken window fallacy.

This fallacy gets its name from a story in which townspeople, upon seeing a bakery with a broken window, comment on how the baker's spending to fix the window will help the local economy. After all, he will have to hire a glazier to repair the window and that craftsman will see an increase in income. His income will become new spending on something else, and a ripple of spending will multiply through the local economy, creating jobs and growth.

The obvious problem with this fallacy is that the money spent on repairing a window, or to build a new power plant, would have done something else productive in the alternative. Perhaps without a broken window the baker would have bought some new shoes from the cobbler down the street. Perhaps the electric company would have installed a more efficient grid system yielding actual gains for the economy by reducing electricity lost in transmission. The money for the new window or power plant does not come out of thin air. It is diverted from some other use, perhaps a more productive one.

If you will excuse my bragging for a moment, my daughter just finished her first year of college. Having taken two introductory economics classes, when presented with Krugman's column this morning, she immediately noticed the error and shouted "broken window fallacy." Given that Krugman wrote an introductory economics textbook, I was surprised he would make such an error. Upon checking his textbook's index, I could find no reference to the broken window fallacy. Maybe it is a gap in knowledge, although my hunch is he just reflexively claims more spending from anywhere would be stimulative.

Perhaps American-style liberals are so enamored of the idea of spending multipliers they do not even know such basics as the broken window fallacy. It is also possible that Prof. Krugman may not have much respect for me as an economist since I have not won the Nobel Prize, nor am I likely to. However, if he reads the introduction to Gregory Mankiw's introductory economics textbook, he can read all about the broken window fallacy. I know Mankiw is a conservative, but he is a professor at Harvard, so that should count for something.