Two Ways in Which I Disagree With Prof. Krugman

It seems to be a season in which lots of people want to call attention to themselves by disagreeing with Prof. Paul Krugman.  I have no doubt that I won’t succeed in attracting any attention at all; but the whole thing sounds like fun.  Especially the part where you actually manage to get Prof. Krugman to pay attention and then point out why you’re totally, devastatingly wrong.

So here are two ways in which I disagree with my understanding of Prof. Krugman’s economics.  I should note that I am not a professional economist, and so my two points of disagreement are about what I think is important, not necessarily what economists think is important.  Oh, yes, it also means that I may not know what I’m talking about.  However, I have been reading Prof. Krugman, along with an eccentric collection of other writers on economics ranging from Thurow to a British economic historian’s history of the world’s economy from ancient times, since the late 1980s.  So I do have some vague idea of what he has been saying.

Disagreement 1:  Climate Change Economics

Prof. Krugman is surprisingly well informed on climate change science, for an economist – it was he who pointed me in the direction of a superb resource, Joe Romm at www.climateprogress.com.  However, there is little consideration in his work of the medium-term effects of our present disastrous “business as usual” (see my last two blog posts, among others).  Specifically, Prof. Krugman assumes that the food and energy portions of the CPI have fluctuated widely up and down in the past but over the long run have paralleled more stable prices, so that using a “core” CPI without these gives a better picture of inflation and therefore of such things as how close we are to a liquidity trap or the likely real rate of growth of the economy, not just now but in the next 2-3 years.

However, some preliminary research suggests that climate change already is costing the economy 0.1% per year in coping with disasters, and this should be expected to grow exponentially every decade or two, since the violence of storms and other related factors will do so as well.  Since infrastructure spending continues to “fight the last battle”, we may anticipate that we will not decrease disaster costs by pre-adaptation. And so, Prof. Krugman should be anticipating a significant drag on the world’s economy as well as the US’ within the next 2-3 years.

More importantly, droughts of Dust Bowl proportions should be anticipated over the next few years as the antecedent to worldwide droughts over much of the arable land 35 years from now.  This constitutes a much larger and permanent effect on food prices.  Less food, higher prices, a divergence of food from the rest of the CPI are the minimum things that it seems to me will happen at some point in the next 5 years, and they may very well happen this year. 

It’s not enough to say that Krugman is more aware of climate change than most economists -- he implicitly says that economic theories do not need to change much to accommodate climate change.  I respectfully (well, not really, but it sounds good) disagree.

Disagreement 2:  The Income Effect on Labor and “Spending One’s Time on Leisure”

Briefly, the income effect on labor, as Prof. Krugman has quoted it approvingly several times, is that when you raise someone’s wages, they choose to “spend” part of the added income on “leisure”, so the productivity of the employee goes down, hastening the point where increasing pay decreases profit. There is also a variant that says that the employee responds by working more hours, but those hours are less productive, hence it makes more sense to start up a new firm with new people at lower wages.  This is the microeconomic view.

Where it comes into play in macroeconomics appears to be in relation to things like the minimum wage, and why employers often seem to think it maximizes profit to drive down typical wages below the “living wage”.  That is, both the neoclassical and neoKeynesian views appear to feel that there is merit in “labor supply/demand” terms to such a business approach, and that at a certain point there is a tradeoff between wage floors and unemployment.

My first point of disagreement is that I have never, in my 30-plus years of working in all sizes of firms, seen “spending on leisure”.  On the contrary, most employees I know see the world as one of steadily ratcheting expectations for the same amount of pay, added work that is not refusable because there is a thin line between having a job and being fired for someone else who will work those extra hours, and pay that has no clear relation to productivity.  It is, in fact, pay that is determined by “what everyone else is paying” with an emphasis on the downside (because surveys are typically of last year’s pay), fixed budgets, and the urge to reengineer to reduce headcount.  When employees get a raise in pay, they spend it on work – because they have to.  If you want to take a reduction ad absurdum, take a CEO or Executive VP, and see if they work less because they make more money.  I don’t say that these are productive; I just say that, at least for show purposes, they put in long hours compared to most other employees.

All right, then, does it matter in macroeconomic terms, since it is now apparently agreed that much of microeconomics is fiction, but it does provide useful approximations to drive macroeconomic analysis and forecasting?  Well, in this case, I would argue that an approach more like what Piketty and Saez appear to be groping towards is useful, and the income effect theory isn’t.  That is, one distinguishes between workers with negative wealth, those with growing positive wealth, and the top 0.1% or so who have wealth enough that they can live off investment income for the rest of their lives.  Which of the three is impacted most determines the effect of increasing wages. A negative-wealth person, if this tips them into positive wealth, will be far more productive than otherwise. A growing-wealth person will be marginally more productive, since that person will be able to spend less time on basic-needs spending (handling a mortgage).  For the top-wealth person, a higher income has no effect at all.

In other words, I suspect that the income effect is a poor approximation of what’s really going on, and leads to policy conclusions on what to do about wages vs. unemployment that are the opposite of what really should be done.  Prof. Krugman, I respectfully (or whatever) disagree with you on that one.

Conclusion

Well, I had fun with this one, even if no one else did.  And I didn’t even include some of the nitpicks, such as whether there’s a way to make interplanetary trade pay if it doesn’t involve actual transport of goods, but rather communication via quantum physics of the specs of the desired goods, to be produced via transmuters on site – something like leGuin’s vision.  Maybe if someone actually reads this …

Three Climate Change Numbers To Think About

As long as I’m posting on climate change, let me note three numbers that recently surfaced in that regard:

1. 1.       400 (ppm)
2. 2.       98.4 (%)
3. 3.       Minus 4.2 (%)

Each of these numbers moves the “center of probability” of how climate change is proceeding significantly – but each is really a confirmation of what we should have known already.

Number 1:  400 ppm

This one is perhaps the most widely known – it’s the time a couple of weeks ago when the Mauna Loa record of carbon in the atmosphere reached 400 ppm for the first time since ML started recording in 1950, and almost certainly for the first time in the last 3 million years – when carbon content in the atmosphere was headed in the opposite direction, i.e., down.

What is notable about this event is that had we been doing even a slightly improved job of dealing with carbon emissions, that event would have occurred in 2014 or even in 2015.  Because we did things like shift economic activity to places like China with lagging mitigation strategies, slight decreases in US and somewhat more substantial decreases in European emissions translated into much larger jumps in the last two years in overall emissions.  And so, what this number really tells us is that with the possible exception of Europe, “business as usual” translates into overall acceleration of carbon emissions and thus of climate change. 

Number 2:  98.4%

For years, the one survey on the subject said that 97% of published climate scientists find that human-caused climate change is real – which any good climate scientist should be able to conclude for themselves, without the need for “safety in numbers.”  That, in turn, raised the question:  what about the remaining 3%? 

Well, a follow-up survey is providing the answer to that.  Some of that 3% has been persuaded (which raises the question of why they needed persuading in the first place).  While the most widely quoted figure from the follow-on study says 97.1% now conclude human-caused climate change is what it’s all about, that represents an average over the years; in fact, 98.4% of published climate scientists now see climate change as real, significant, and effectively human-caused.  The 3% are going away.

I suppose this is good news, since some people seem to need convincing that reputable scientists do indeed see matters this way.  But to me, rather, it is simply some of that 3% finally acting like scientists; in which case the next step is for them to join the chorus saying this is serious. And as any shred of support for climate denial continues to shrink, politicians may find themselves more uncomfortable in their belief that issues are balls to play with.

Number 3:  -4.2 %

The sad fact about US emissions measurements is that (probably due to funding) incomplete measurements for a year that increasingly seem to understate them come out immediately, while the best estimates come out 1 ½ years later (in the case of 2011, in mid-2013).  And now we know that 2011, instead of representing a 7% drop from the 2007 booming-economy high, is actually a 4.2% drop.  Much of that, in turn, comes from a real drop in the economy – our actual use of carbon per unit of energy (i.e., a turn away from oil and gas) is only 3.2% down.

Again, this should have been understood – certainly, Joe Romm among others suggested this was going on.  But we may anticipate that 2013, with its housing rebound, is going to wind up as close to an increase in carbon emissions in the US.  And that means that there is no comfort in these US numbers, and no significant trend downwards as the economy recovers slightly.  We are still squarely in the middle of “business as usual”.  The urgency of doing something meaningful continues to increase.  The number of numbers that people can use to justify doing nothing continues to decrease.

Who knows what it will take to spur effective action?  Just know that excuses continue to get shabbier – even as the consequences of inaction that are already locked in get more dire.

Yet Again, More Thoughts About Climate Change

Brad deLong just pointed to an article about an interview with Marty Weitzman, an economist who apparently continues to peddle the notion that climate-change-related effects are very uncertain and catastrophic effects very unlikely, but we should do something because the costs of such an unlikely event are very large.

Here's what I said:

With regard to Weitzman:  This might have been a valid point 10 years ago.  Instead, the science has moved on far beyond the 2002 assessment codified as "conservative conclusions" in the 2007 IPCC report.  So let's summarize:

1.  IPCC was not the most likely scenario, merely the minimum scenario of which they could be scientifically certain.  Better assessments have shown that 400 ppm corresponds to an increase of 1 degree F beyond what has happened now globally and 14 degrees in the Arctic, causing a cascade of effects which 3 million years ago resulted in a 100-foot rise in sea level. This would wipe out at least 1/2 the Earth's arable land (in deltas).

2.  It will effectively not be possible to return to a 350 ppm (similar to 1990) climate within the next 1000 years.

3.  The follow-on effects of Arctic melting (e.g., more albedo-related absorption of the sun's heat) will lead to an additional 1 degree F heating due to permafrost melt within the next 70 years, with an additional 1 degree possible from methane release.

4.  Increased water vapor absorption in the atmosphere leads to an increase of perhaps 10 feet higher storm surge and double the wind power of storms per 1 degree Celsius, as already reflected in Hurricane Sandy and to some extent in recent tornadoes.  Movement of the "temperate zone" north in the next 40 years leads to catastrophic drought over almost all of the area from Canada/Soviet Union south to about Argentina/South Africa.  As in the Dust Bowl, periodic torrential rains merely bounce off the hard dirt. Loss of snow cover removes much of the runoff for agriculture, with aquifers now in danger from over-use. Present projections are that this will occur by between 2050 and 2070.

5.  Following on to the September melting of the Arctic ice cap on or before 2016, accelerated Greenland and West Antarctic melting leads to a rise in sea level of 1 foot by 2050 and 15 feet by 2100.  The 100-foot rise in sea level would therefore occur by about 2200.

6. Failure to cut carbon emissions in absolute terms compared to today (that includes the 4.2 reduction by the US -- pathetically inadequate -- over 2008-2011 and the more-than-offsetting increase by China) will lead to 1000 ppm by 2100.  Reaching 550 ppm would lead to an additional 2 degrees C of warming and reaching 1000 ppm would add almost 2.8 degrees beyond that.  We are thus talking about perhaps 13 degrees Fahrenheit rise by 2100, the way we are going.  Sea level would therefore be on a track for a total 220-foot rise, while acidification of the oceans would kill off most sea species and foster iron blooms that might periodically release toxic sulfur fumes on sea-bordering land.

7. "Adaptation" is not a solution by itself, and especially because we are consistently finding solutions that are outdated by the time they are implemented. Cf., again, Sandy and the proposed fixes.  Extremely rapid "mitigation" -- reduction in absolute terms of carbon emissions -- is the only thing that will avoid a situation worse than the one described in 1-4, and somewhere around 2035 the "business as usual" scenario cited in 5 and 6 above becomes the most likely outcome, if we continue as we are.

8. Natural gas (due to methods of production) yields very little mitigation.  Nuclear power is not feasible on a large scale in the next 20 years, and will have difficulties with sea rise and water temperature rise.  Use of all tar sands and oil shale will not only create a worse picture than the one I have painted for 2100, but will put us in serious danger of a "runaway greenhouse gas" effect that would end all life on Earth forever (cf. Venus). 

9. Under "business as usual", today's 0.1% decrease in world GNP growth per year due to climate change would reach the 2-3% level by about 2060, due especially to loss of food supply, but also to governmental coping with disaster.  From then on, the world's economy (including in developed countries) would decrease and the ability of the world to take action about climate change will also decrease. 

10.  There is one possible "magic bullet" (injection of sulfur in the air) via geoengineering, but it would have serious health side-effects and would need to be calibrated and escalated for the next 1000 years, at best.

I repeat, 1-4 is the minimum scenario and 5-10 the presently most likely scenario.  And by misrepresenting the science by casting things in terms of "very low risk of anything bad happening", Weitzman makes his economic analysis wrong and useless.

If you want a reasonable summary of the science, Joe Romm at www.climateprogress.com is probably as close as you're going to get.  Rather than quoting Weitzman as if he offered any useful economic analysis, I suggest that you think carefully about what Joe is saying and develop your own economic analysis.

I suppose I have to repeat yet again the obvious:  this is the opposite of an excuse to throw up your hands and say it's all hopeless.  The longer we delay doing something, the worse it gets, faster and faster.