Paul Krugman’s Faux Realism

Paul Krugman begins a post on James Hansen the way that I’d normally begin a post on Paul Krugman.

James Hansen is a great climate scientist. He was the first to warn about the climate crisis; I take what he says about coal, in particular, very seriously.

Unfortunately, while I defer to him on all matters climate, today’s op-ed article suggests that he really hasn’t made any effort to understand the economics of emissions control.

Paul Krugman is a great economist. And while I’m guessing that he has made an effort to understand the economics of emissions control, he offers a political argument that is tendentious in the extreme, if not more than a little obtuse. Basically, Hansen has sensibly come out against cap-and-trade, recognizing that it is vastly inferior to a more transparent carbon tax. Krugman than “explains” that cap-and-trade and a carbon tax are functionally equivalent in the frictionless world that exists entirely in the imagination of economists. (This is the same very useful frictionless world that non-economists attack in the guise of the efficient-market hypothesis.)

But of course no serious critics of cap-and-trade deny that this is true. Rather, they raise the not-so-remote possibility that the federal government is not very good at doing the hard work of designing a marketplace. This requires a high level of institutional sophistication that we don’t necessarily possess. Recall that this is one reason why the Obama administration was reluctant to engage in large-scale nationalization of the major bank holding companies. Interestingly, Krugman also criticized this decision — it could be that he genuinely doesn’t understand that while American federal bureaucrats might be very smart and well-intentioned, they are not omnipotent.

Krugman goes on to argue that cap-and-trade works because it worked for the far smaller sulfur dioxide cap. I could argue that a single-rate tax “works” because it has performed admirably in Estonia and Hong Kong. My guess is that Krugman would object, and for good reason. There are “confounding variables” at work in all of these cases.

Hilariously, Krugman now assumes that a government-created marketplace would not be exploited by privileged insiders.

Oh, and the argument that if you create a market, you’re opening the door for Wall Street evildoers, is bizarre. Emissions permits aren’t subprime mortgages, let alone complex derivatives based on subprime; they’re straightforward rights to do a specific thing. It will truly be a tragedy if people generalize from the financial crisis to block crucially needed environmental policy.

At first I was struck by the fact that Krugman employed such a narrow example. Note the use of “Wall Street evildoers” rather than the broader notion of “access capitalists,” e.g., rich, politically-connected actors gaming the regulatory regime to strengthen themselves relative to new entrants. Why? Krugman presumably knows that he’d embarrass himself by arguing that access capitalists have not and would never use the cap-and-trade regime to their advantage. Tim Carney has made this case to great effect in Obamanomics, a book that is well worth your time.

Krugman and other cap-and-trade advocates airily dismiss the notion that cap-and-trade is more susceptible to rent-seeking than a carbon tax the way that Iraq hawks like myself airily dismissed the idea that Iraq was a divided society that would make post-conflict stabilization expensive and time-consuming.

For here’s the way it is: we have a real chance of getting a serious cap and trade program in place within a year or two. We have no chance of getting a carbon tax for the foreseeable future. It’s just destructive to denounce the program we can actually get — a program that won’t be perfect, won’t be enough, but can be made increasingly effective over time — in favor of something that can’t possibly happen in time to avoid disaster.

In a similar vein, one could argue that in 2001, we had a real chance of reforming the tax code. But because Democrats did not want steep tax cuts, they refused to play ball and improve the tax cut that was eventually passed by pressing for the closing of various loopholes. “But tax cuts are terrible and destructive,” progressives will object. “We had to stop them or stand against them.” Believe it or not, some of us believe that pervasive rent-seeking is terrible and destructive, and we are not eager to help the process along. And we don’t think rent-seeking is wrong because it constitutes a complex financial instrument. Massively subsidizing FutureGen is not all that complex, and that’s exactly what we’ll see more of.

Krugman writes that “hard-science guys tend to assume that we’re [i.e., economists] witch doctors with nothing to tell them.” Interestingly, it is Krugman who has engaged in this kind of character assassination against economists — that is, people who are still producing economic research — calling them witch doctors and worse, questioning their motives. It’s nice to see him wrestle with Hansen. Though I disagree with Hansen at least as much as I disagree with Krugman, I do get the sense that Hansen is a man with ironclad integrity. The debate highlights the extent of Krugman’s efforts to deliberately misrepresent, and condescend to, those who disagree with him.

Honestly, I think Paul Krugman is the best columnist in America. If conservatives and libertarians had a polemicist of his caliber, with his clarity and reach, the country would be a better place. He deserves some respect for that.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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