Saturday, May 14, 2011

Interesting Contrast

Krugman this morning
Oh, and about commodity prices: rises on the order of what we’ve seen lately aren’t at all unusual, even during periods now considered to have been characterized by low and stable inflation. Here’s the IMF commodity price index...

Just not something to get frantic about.
Meanwhile, here's a UN press release about this report from a couple of days back:
Global consumption of natural resources could almost triple to 140 billion tons a year by 2050 unless nations take drastic steps, the United Nations warned Thursday.

A UN environment panel said the world cannot sustain the tearaway rate of use of minerals, ores and fossil and plant fuels. It called on governments to "decouple" economic growth from natural resource consumption.

With the world population expected to hit 9.3 billion by 2050 and developing nations becoming more prosperous, the report warned "the prospect of much higher resource consumption levels is far beyond what is likely sustainable."

A UN Environment Programme (UNEP) panel said the world is already running out of cheap and quality sources of some essential materials such as oil, copper and gold, which in turn need rising volumes of fuel and water to produce.

It said governments must find ways to do more with less, at a faster rate than economic growth -- the notion of "decoupling".

"We must realize that prosperity and well-being do not depend on consuming ever-greater quantities of resources," said the report.

"Decoupling is not about stopping growth. It's about doing more with less. Global resource consumption is exploding. It's not a trend that is in any way sustainable."
Count me with the UNEP.


Burk said...

Hi, Stuart-

With all due respect, they are both right and are talking about quite different things. Krugman's time horizon is short, focused on the current inflation-under-the-bed hysteria on the right, which is ideologically driven if not wholly cynical.

On the other hand, anyone can see that key materials are more and more difficult to extract, and economic development across the world is destined to raise living standards and demand in the long run.

Even if you factor in substantial commodity shortages and price rises, you still won't get the kind of monetary-driven ongoing inflation that is putatively worrisome to the right. A rise in the price of gas doesn't mean that the Fed should be damping economic growth and putting even more people out of work.

And overall, commodity price rises will affect us a good deal less than poorer economies, which bear much larger relative costs. Perhaps with their newly emerging wealth, they can afford higher bidding against us, but for the moment, they will face higher conservation pressures than we will.

But we will all face such pressures, and I for one welcome price-induced conservation as a sad final station, after we failed to plan ahead with policies like carbon taxes. After all, the environment will be taking much more of a beating than we will.

nick said...

Well sure. But even if this decoupling is possible it would require a level of coordination and control that today's elite will never put up with.

Dan Miller said...

I don't think there's as much of a contrast as you think--Krugman is talking specifically about the impact of commodity prices on broader inflation in the short term, while the UNEP is taking a much longer term approach and talking about a much broader range of problems than inflation as measured by CPI.

RobM said...

"Decoupling is not about stopping growth. It's about doing more with less."

Sorry. Not gonna happen. Physics is a bitch. See Timothy Garrett. It's about doing less with less and having fewer kids.

John said...

Hmm, depends what Krugman means by 'lately'. If we're talking the last few weeks, then I agree. However, Lomborg was right when he wrote in the year 2000 that commodity prices had been in decline for the previous 100 years (1.2% CAGR by some calculations - see Exhibit 2 in Grantham's article). Trouble is that this has reversed in the last 10 years. Unprecedented, I would say. I'm with you and UNEP.

Alexander Ac said...


have you seen this TED talk?

Radical experiment: Empathy

I think that should be spread all around the globe...



Fixed Carbon said...

Decoupling indeed! Decoupling is a means of regulation of industry by government. It has been especially effective in reducing per capita use of resources in regulated utilities such as electricity. Decoupling couples profit to efficiency rather than to volume used/sold. The attraction of decoupling is in its more reliable projections of income and profit than in less regulated markets. California is a leader in decoupling electricity and has very low per capita usage

kjmclark said...

Come on Stuart. That's apples and oranges. Sure they're both fruit...

Krugman is responding to folks on the right to seem to think that the Fed is destroying America with quantitative easing. They keep pointing out rising interest rates as proof that the markets are freaking out about QE. He keeps pointing out they're nuts. They keep saying that our 'drastic' inflation shows that the Fed is destroying the dollar. He keeps pointing out they're nuts.

The UNEP report says demand and supply are heading for imbalance (and higher prices) because of increasing demand and poorer quality (and less) supply. Unless the Fed's quantitative easing is causing this problem, the two points are only marginally related. Krugman has said that we are probably headed for resource problems - he's not a cornucopian, though he's not a doomer either. But unless the UN is saying that the US Fed is impurifying the world's precious bodily fluids through QE, these are mostly talking about two different things

Stuart Staniford said...

Burk, Kjm, et al:

I understand what you are saying, but I think the complete lack of caveats or distinctions in Krugman's original post is a problem. "Not something to get frantic about" is a particularly clear-cut case, but I think it pervades his recent writing.

Furthermore, while I agree that raging inflation is not a near term concern, and that the sort of hard money views increasingly dominating right wing thought are seriously misguided, I also think that the conventional left-Keynesian view that if we just stimulate the economy enough everything will be fine are equally flawed. There's a serious failure to recognize that continued economic growth/health from here on out depends on steadily improving resource efficiency.

Anonymous said...

My read (based on posts like this - is that Krugman understands the gravity of resource constraints pretty well: "the exception used to be Saudi Arabia ... there are real questions about whether the Saudis can or will fill the gap."

My suspicion is that he calculates that being any more explicit than this would give too much fodder to folks arguing he's out of the mainstream, and so he's sticking to employment and rates, where he thinks he can do some good. That much focus on employment may be misguided; on the other hand, if that problem is not solved, the electorate may be in even worse shape to make rational decisions in a few years...

Burk said...

Hi, Stuart-

It's not that "everything will be fine", but that the resources available, principally labor, will be utilized instead of being left to rot. And that the various injustices and assymetries consequent to letting white collar criminals keep running the system they ran into the ground could be mitigated, instead of amplified by giving employers unchecked power over labor.

The inflation debate is really a labor vs capital debate. It is orthogonal to the resource limitation. There are always economic limitations. There is never enough money. No matter how big/small the pie, the political and monetary question is how it gets divided up. Inflation hurts capital, helps labor and especially indebted labor (put most crudely). You could think of it as the old silver vs gold debate.

This is not to speak in favor of inflation per se, but against the zero-bound/deflationary policy we are seeing. It wasn't that bad in Japan, which has far more social solidarity and public goods. But here, it is destroying millions of workers.

Stuart Staniford said...

Burk: "but that the resources available, principally labor, will be utilized instead of being left to rot"

But the resource slack only exists at intermediate levels of production, not at the stage of extracting crude materials. Since (short term) you can't make more finished goods without requiring more raw materials, stimulation of the economy will just tend to push up raw material costs, which will then act to both increase headline inflation and drag down growth. So I think statements like Krugman's are directly unhelpful. Going forward, we in the developed world can only grow to the extent that we can decouple.

Burk said...

But that is precisely the point of price rises.. to decouple (or rebalance) a resource relative to other factors of production. It is not something to be afraid of, but something to welcome, insofar as limiting fossil fuel use is important from other perspectives as well, not just its own economic shortage. As Krugman has also pointed out, commodity price rises are transient. A doubling of all commodity prices would still only raise inflation by relatively small amounts, (in the US), and for a short time.

Labor can be utilized with minimal fuel use. People could be paid to blog(!) The question is whether monetary policy encourages full employment while at the same time differential price signals force resource conservation, or whether we rely on bad, pro-cyclical monetary policy to accomplish conservation through economic depression.

I agree that pro-growth policy would tend to raise resource prices relative to what they would otherwise be. That is what China doing right now. Would we rather they were in an economic slump as well? No- the price rises are fine- they compartmentalize the pain to where it should be.

James said...

Krugman's views on the subject are perhaps well illustrated here:

He says that he is broadly sympathetic to the view that we have entered a new era of resource scarcity, but is relatively optimistic that we can combine a shift toward conservation with continuing economic growth.

I actually quite enjoyed the Jeremy Grantham piece he links to. It will be interesting to see if more and more of the hedgies "get it".

I do think that resource scarcity is an exogenous variable in the Keynesian model. Nevertheless, I think Krugman should perhaps read Hall's "Energy and Resource Quality".

Seth said...

"There's a serious failure to recognize that continued economic growth/health from here on out depends on steadily improving resource efficiency."

Absolutely. But it is unfortunate that you expend energy on knocking Krugman on this topic while giving all the cornucopian right-wing economists a free pass.

So if we imagine Krugman sitting behind the big desk in the Oval, you would be a lefty critic complaining that Krugman is ignoring this huge resource problem, while your commenters are channeling Rahmbo in chorus calling you a &*(^ retard for undermining him. (Rahmbo will never live that down)

Of course, there's value in pulling Krugman over to the correct side of the resource question, while there may not be such value in pestering economists further to the right. The EROEI on educating Krugman is far higher ... unless ...

Have you plugged 'Club Pigou' here yet?