Krugman on British Debt/GDP levels

Finite Commodities in a Deflationary Era

On Keynes and Coalmines

Paul Krugman reminds us of this thought experiment from Keynes:

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

It seems to me not very much of a stretch beyond current technology to imagine a fully automated digging machine that would find the bottles in the dirt (via figuring out where the soft dirt is from the machine effort feedback combined with processing sonar images say - those glass bottles with mostly air in must show up once you get close).  The machine could then crack them open and shoot the banknotes back up a pneumatic tube to the surface.

Given that, Keynes' scheme might not result in very much employment any more.

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.

Note to Krugman

Paul Krugman complains about the Ryan plan (in which he has exposed massive quantitative flaws in a series of recent blog posts):

I’m in an airport lounge, for my sins, and there’s no avoiding the TV running CNN. And there’s David Gergen, telling me that the Ryan plan, whatever its flaws, is “serious”. So I guess that’s the Very Serious People line.

...

So, we have a plan that proposes to cut spending to Calving Coolidge levels, without explaining how it will do that; that includes $2.9 trillion in tax cuts, but asserts that it will make that up by broadening the base — yet says literally nothing about what that means; and has as its centerpiece a Medicare plan that will collapse as soon as seniors start getting their grossly inadequate vouchers.

Oh, and it directs us to a totally ludicrous Heritage Foundation analysis for support.

There’s nothing serious about this plan. And the way our pundit class swooned over this fantasy document suggests that all those people lecturing the American people about our unwillingness to face up to reality and make hard choices should spend some time looking in the mirror.

The reason for this is that the pundit class is by and large innumerate.  And the reason for that is that journalists and TV producers are by and large innumerate.  I don't mean that they can't add or subtract, but they can't look at numbers or statistics and begin to ask or answer the most elementary but important questions: how big is this number as a fraction of other important numbers in the problem space?  How does the current instance of the number compare to the trend over time?  What would happen if I corrected this for inflation or economic growth?

The blogosphere is the best hope of this improving over time.  At a minimum, it has meant that some of us now have access to expert opinion that is not filtered through the lowest common denominator of what a news culture dominated by one-time english or journalism majors thinks the public wants to know.  And hopefully, over time it will elevate to more prominence thinkers who are extremely savvy and quantitative (Calculated Risk comes to mind).

Expensive Potatoes, Cheap French Fries

Paul Krugman commented the other day on this article in Commodities Now by John Kemp.  The article's main thesis is:

Leading commentators such as Martin Wolf in the Financial Times and Paul Krugman in the New York Times argue the problem facing the global economy is lack of sufficient demand; the remedy is some combination of fiscal and monetary expansion. But sharply rising commodity prices suggest global growth is already hitting supply-side limits. The problem is not aggregate demand but its distribution.

Until firms significantly raise productivity, especially resource efficiency, the painful remedy is likely to involve increased competitiveness and reduced living standards across North America and Western Europe (through a combination of commodity price inflation, weaker exchange rates, higher import prices and falling real wages and incomes).

There is not much Keynesian demand management can do in the face of this sort of structural shift. Central bank policies are simply shuffling costs around (from borrowers and banks to savers and pension funds) while stoking further increases in food and energy prices.

This is the implication of the syndrome I christened misflation the other day (and since I haven't see any other term in general circulation yet, I'm going to stick with mine for now).

Anyway, Krugman responds:

Krugman, Output Gaps, and Oil Prices

Carbon Prices are a Very Blunt Tool

Deep Energy Retrofits

It Can't Possibly Be That Easy

Over the weekend, I read Paul Krugman's big essay on climate economics, Building a Green Economy.  In it, he makes the following claim:

Just as there is a rough consensus among climate modelers about the likely trajectory of temperatures if we do not act to cut the emissions of greenhouse gases, there is a rough consensus among economic modelers about the costs of action. That general opinion may be summed up as follows: Restricting emissions would slow economic growth — but not by much. The Congressional Budget Office, relying on a survey of models, has concluded that Waxman-Markey “would reduce the projected average annual rate of growth of gross domestic product between 2010 and 2050 by 0.03 to 0.09 percentage points.” That is, it would trim average annual growth to 2.31 percent, at worst, from 2.4 percent. Over all, the Budget Office concludes, strong climate-change policy would leave the American economy between 1.1 percent and 3.4 percent smaller in 2050 than it would be otherwise.

And what about the world economy? In general, modelers tend to find that climate-change policies would lower global output by a somewhat smaller percentage than the comparable figures for the United States. The main reason is that emerging economies like China currently use energy fairly inefficiently, partly as a result of national policies that have kept the prices of fossil fuels very low, and could thus achieve large energy savings at a modest cost. One recent review of the available estimates put the costs of a very strong climate policy — substantially more aggressive than contemplated in current legislative proposals — at between 1 and 3 percent of gross world product.

Such figures typically come from a model that combines all sorts of engineering and marketplace estimates. These will include, for instance, engineers’ best calculations of how much it costs to generate electricity in various ways, from coal, gas and nuclear and solar power at given resource prices. Then estimates will be made, based on historical experience, of how much consumers would cut back their electricity consumption if its price rises. The same process is followed for other kinds of energy, like motor fuel. And the model assumes that everyone makes the best choice given the economic environment — that power generators choose the least expensive means of producing electricity, while consumers conserve energy as long as the money saved by buying less electricity exceeds the cost of using less power in the form either of other spending or loss of convenience. After all this analysis, it’s possible to predict how producers and consumers of energy will react to policies that put a price on emissions and how much those reactions will end up costing the economy as a whole.

There are, of course, a number of ways this kind of modeling could be wrong. Many of the underlying estimates are necessarily somewhat speculative; nobody really knows, for instance, what solar power will cost once it finally becomes a large-scale proposition. There is also reason to doubt the assumption that people actually make the right choices: many studies have found that consumers fail to take measures to conserve energy, like improving insulation, even when they could save money by doing so.

But while it’s unlikely that these models get everything right, it’s a good bet that they overstate rather than understate the economic costs of climate-change action. That is what the experience from the cap-and-trade program for acid rain suggests: costs came in well below initial predictions. And in general, what the models do not and cannot take into account is creativity; surely, faced with an economy in which there are big monetary payoffs for reducing greenhouse-gas emissions, the private sector will come up with ways to limit emissions that are not yet in any model.

Now, it's important to note that the goal of the Waxman Markey bill is to reduce US carbon emissions by 83% by 2050 (from 2005 levels, so even more than that from 2010 levels). So essentially, the CBO is saying, and Krugman is endorsing, that this level of emissions reduction will have so small an effect on economic growth that it's going to be indistinguishable from noise. I don't dispute that environmental economists think this, but I find it to be a completely facially implausible conclusion. I want to lay out two arguments for why these economists cannot possibly be right. The first is a common-sense argument about what actually has to happen at the level of the lives of individual citizens to bring about such a large reduction in carbon emissions. The second argument is based on looking at what was required to cause significant changes in energy efficiency in past episodes.