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Lights-Out Economics
"Tax breaks for the rich" caused the blackout! Of course!


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Donald L. Luskin

Paul Krugman began his Tuesday column for the New York Times — inevitably, about the blackout — with one of the few truthful statements I can ever recall him uttering: “We still don’t know what started the chain reaction on Thursday.”

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But after that admission, he proceeded to spend the next 649 words of his column telling us exactly what caused the blackout. Can you guess?

On Monday, Krugman explained it to the German magazine Der Spiegel:

According to American economics professor Paul Krugman, public services have been cut back in many areas to the benefit of “tax breaks for the rich.” By now, government agencies spend virtually no money on repairing the dozens of dilapidated bridges in major American cities, not to mention streets filled with potholes. Washington is withdrawing from more and more public services. Bush’ [sic] credo is that the market will take care of things.

Of course, of course … why didn’t I make that connection? I knew the Department of Homeland Potholes was facing a funding crisis, but I never realized that “tax breaks for the rich” caused the blackout! But wait. Come to think of it, the famous New York blackout of 1965 did follow shortly after the phase-in of the Kennedy tax cuts that lowered the top U.S. marginal income-tax rate on “the rich” from 91 percent to 70 percent! Maybe Krugman’s really onto something here.

But by the time he’d gotten to his Tuesday column, he’d toned things down a bit. No mention of “tax breaks for the rich.” None of the usual gloating that America is becoming a “banana republic.” Not even a mention of the oft-asserted “denial and deceit” of the Bush administration. Nope. The culprit fingered in this column is “faith-based deregulation.”

Deregulation … privatization … having real people act for themselves instead of expecting government (preferably government run by Democrats) to do it for them … that’s Krugman’s new target.

Recall that his column last Tuesday (as I described in a Truth Squad column last week) was all about how a supposed logistical collapse in Iraq is due to privatization of military support services. For one of his examples, Krugman quoted a soldier in Iraq who said that “each soldier is limited to two 1.5-liter bottles a day,” and that inadequate water rations were leading to “heat casualties.”

That Krugman claim has probably caused a lot of anxiety for American parents with sons and daughters serving in Iraq. All it takes is common sense to know that a soldier on the desert simply can’t survive on that little water. Indeed, the US Army Survival Manual states that something more like ten liters a day is a minimum requirement. But, astonishingly, Krugman had the gall to defend this irresponsible claim after I questioned it here. On his own website last week, he reproduced in full the soldier’s letter that had been his source. As Krugman Truth Squad member Phil Carter pointed out on his Intel Dump blog (Aug. 14, 06:00 entry) ”Quotation does not necessarily equal fact-checking.” But it’s enough for Krugman. He concluded his self defense with an arrogant injunction to the Krugman Truth Squad: “Critics, do your homework!”

Okay, professor, how about this. As I reported on my blog, The Conspiracy to Keep You Poor and Stupid, I called the Department of Defense and talked to a spokesman, Army Lieutenant Colonel James Cassella. He told me that not only is there no water shortage in Iraq, but just the opposite: “Most units employ forced hydration.” Soldiers are regularly required to stop their work and have a drink of water, whether they want it or not. The only shortage? Bottled water. By acting as though a limit on bottled water were the same thing as a limit on any water, Krugman pulled off a Maureen Dowd-style elision of a key fact.

Cassella admitted that soldiers prefer bottled water, simply “because it just tastes better.” In other words, they prefer “privatized” water to water produced by the military. No doubt it’s a lot like the kind that Paul Krugman likes (French?). And you know what Evian is spelled backwards.

So Krugman, do your homework! And, hey, Gail Collins — Paul Krugman’s boss at the Times editorial page who recently told the Chicago Tribune that she is not looking for columnists “who would be shrill or who would put people off” — don’t you think it’s about time you ran a correction of Krugman’s claim about the water rations? Don’t you think the parents of America’s soldiers should stop worrying?

But I digress. Back to the blackout and “faith-based deregulation.” Of course, it doesn’t have anything whatsoever to do with President Bush’s idea of using faith-based institutions to privatize the delivery of government social services. Krugman just used that expression to sideswipe Bush in the process of criticizing the advocates of deregulation. His point is that as the partial deregulation of the electricity industry progressed over the last decade, the transmission grid did not properly adapt, and “politicians and deregulation enthusiasts simply had faith that somehow ‘the market’ would take care of the problem.”

And what exactly is the problem? Krugman’s confused explanation is apparently the best he can do to illuminate it:

… energy experts have long warned that deregulation would lead to neglect of the grid. Under the old regulatory system, power companies had strong incentives to ensure the integrity of power transmission — they would catch the flak if something went wrong. But those incentives went away with deregulation: because effective competition in transmission wasn’t possible, the companies providing transmission still had to be regulated. But because regulation limited their profits, they had little financial incentive to invest in maintaining and upgrading the system. And because of deregulation elsewhere, responsibility was diffused: nobody had a strong stake in keeping the system reliable. The result was a failure not just to add capacity, but to maintain and upgrade capacity that already existed.

To unravel all this, I had a long conversation with Lynne Kiesling, director of economic policy at the Reason Foundation, and a senior lecturer in the department of economics at Northwestern University. (Lynne runs the Knowledge Problem blog, which focuses on power policy issues, and of course she is now an honorary member of the Krugman Truth Squad. Incidentally, she has a wonderful op-ed on this subject in today’s Wall Street Journal, co-authored with Nobel Prize-winning free-market economist Vernon Smith).

While Kiesling comes solidly from the deregulation tradition, she agreed with several things that Krugman wrote. For one, the problem is not that electricity transmission has been deregulated. Kiesling noted that, indeed, it’s more heavily regulated than ever — and as Krugman himself conceded, that’s part of the industry’s financial problem. As Rebecca Smith reported Monday in the Wall Street Journal, “Many power companies have simply stayed away from building new towers and high-power lines because they don’t want the hassle of a public fight. Another concern is split jurisdiction: States control where lines can be built, but the federal government usually sets rates.” Or as Kiesling put it, “Our regulatory institutions were not built for a cross-border industry, but the industry has become cross-border.”

And Kiesling agreed with Krugman that the deregulation of power generation has put new demands and stresses on power transmission. But where Kiesling and Krugman part company is in what to do about it. While Krugman conceded that the regulation of transmission imposes financial hardships on it, his solution is to impose even more regulation (and he strongly implied that he would favor re-regulation of the generation side of the business, too).

And according to Krugman, what stands in the way of that needed regulation? The Bush administration and the Republican party, of course. Krugman griped that

despite the blackout, the administration will bow to pressure from Senate Republicans and drop the only part of its energy plan that had any relevance to the blackout, a FERC proposal for expanded oversight of the transmission system.

He was referring to the Federal Energy Regulatory Commission’s proposed Standard Market Design (SMD), a federalized regulatory framework for the transmission industry. It’s an out-and-out lie to suggest that SMD is being delayed because of “pressure from Senate Republicans.” The truth is that SMD is a sweeping regulatory regime-change that has both friends and enemies on both sides of the aisle.

For example, Kiesling told me that the state of Washington would be disadvantaged under SMD relative to the status quo ante thanks to its current reliance on the heavily federally subsidized New Deal-era Bonneville Power Administration. So Washington’s Democratic Senator Maria Cantwell has worked aggressively to delay SMD implementation — “despite the blackout,” as Krugman might say.

So this is where Krugman and Kiesling sharply part company. Kiesling would hold that politicians of both parties are correct not to want to rush into a regulatory regime change — because if the blackout has taught us anything, it is that the stakes are high in making the right decision. And according to Kiesling, we can’t make the right decision, because as long as regulation fixes the retail price of electricity, “we don’t know bupkis.”

What she meant is that, without price signals to tell producers what to supply and at what level of reliability, and to tell consumers what to demand and with what usage patterns, we really have no idea how to design an electricity industry. In Kiesling’s framework, the challenge is to develop an environment in which an electricity industry can safely design itself.

With regulation, we have — as Krugman himself admitted! — a necessarily subsidized world in which there is “little financial incentive to invest in maintaining and upgrading the system.” We have a government-induced reality-distortion field in which electricity consumers can write atta-boy letters to the New York Times praising Krugman’s column, whining that “We shouldn’t have to make choices about electricity. It should be there for all of us, like air and water.”

That’s what Krugman wants more of? Talk about faith-based!



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