||Earth in the Balance
Economists go for the green.
By Paul Krugman
posted Thursday, April 17; to be composted Thursday, April 24)
Earth Day is upon us once again. Like most people who think at all about
how much burden their way of life places on Spaceship Earth, I feel a bit
guilty. But my conscience is clearer than usual this year--and so are those
of 2,500 other economists.
Let me explain.
A few months ago an organization called Redefining Progress enlisted five
economists--the Nobel laureates Robert Solow and Kenneth Arrow, together
with Harvard's Dale Jorgenson, Yale's William Nordhaus, and myself--to
circulate an "Economists' Statement on Climate Change," calling
for serious measures to limit the emission of greenhouse gases. To be honest,
I agreed to be one of the original signatories mainly as a gesture of goodwill,
and never expected to hear any more about it; but the statement ended up
being signed by, yes, more than 2,500 economists. Whatever else may come
of the enterprise, it was an impressive demonstration of a little-known
fact: Many economists are also enthusiastic environmentalists.
this is just because of who economists are: Being by definition well-educated
and, for the most part, pretty well-off, they have the usual prejudices
of their class--and most upper-middle-class Americans are sentimental about
the environment, as long as protecting it does not impinge on their lifestyle.
(I'm happy to reuse my grocery bags--but don't expect me to walk to the
supermarket.) But my unscientific impression is that economists are on
average more pro-environment than other people of similar incomes and backgrounds.
Why? Because standard economic theory automatically predisposes those who
believe in it to favor strong environmental protection.
This is not, of course, the popular
image. Everyone knows that economists are people who know the price of
everything and the value of nothing, who think that anything that increases
gross domestic product is good and anything else is worthless, and who
believe that whatever free markets do must be right. (A recent example
of how this stereotype gets perpetuated is the article by garden-shop entrepreneur
Paul Hawken in the current Mother Jones. I'm sorry to say that some
of the people at Redefining Progress published an impressively ill-informed
diatribe along the same lines in the Atlantic back in 1995.)
the reality is that even the most conventional economic doctrine is a lot
more subtle than that. True, economists generally believe that a system
of free markets is a pretty efficient way to run an economy, as long
as the prices are right--as long, in particular, as people pay the
true social cost of their actions. Environmental issues, however, more
or less by definition involve situations in which the price is wrong--in
which the private costs of an activity fail to reflect its true social
costs. Let me quote from the textbook (by William Baumol and Alan Blinder)
that I assigned when I taught Economics 1 last year: "When a firm
pollutes a river, it uses some of society's resources just as surely as
when it burns coal. However, if the firm pays for coal but not for the
use of clean water, it is to be expected that management will be economical
in its use of coal and wasteful in its use of water." In other words,
when it comes to the environment, we do not expect the free market to get
So what should be done? Going all
the way back to Paul Samuelson's first edition in 1948, every economics
textbook I know of has argued that the government should intervene in the
market to discourage activities that damage the environment. The usual
recommendation is to do so either by charging fees for the right to engage
in such nasty activities--a k a "pollution taxes"--or by auctioning
off rights to pollute. Indeed, as the extraordinary response to the climate-change
statement reminds us, the idea of pollution taxes is one of those iconic
positions, like free trade, that commands the assent of virtually every
card-carrying economist. Yet while pollution and related "negative
externalities" such as traffic congestion are obvious problems, in
practice, efforts to make markets take environmental costs into account
are few and far between. So economists who actually believe the things
they teach generally support a much more aggressive program of environmental
protection than the one we actually have. True, they tend to oppose detailed
regulations that tell people exactly how they must reduce pollution, preferring
schemes that provide a financial incentive to pollute less but leave the
details up to the private sector. But I would be hard pressed to think
of a single economist not actually employed by an anti-environmental lobbying
operation who believes that the United States should protect the environment
less, not more, than it currently does. (The signers of the climate-change
statement, incidentally, included 13 economists from the University of
won't protecting the environment reduce the gross domestic product? Not
necessarily--and anyway, so what?
At first sight, it might seem obvious
that pollution taxes will reduce GDP. After all, any tax reduces the incentives
to work, save, and invest. Thus a tax on exhaust emissions from cars will
induce people to drive cleaner cars or avoid driving altogether. But since
it will also in effect lower the payoff to earning extra money (since you
wouldn't end up driving the second car you could buy with that money anyway),
people will not work as hard as they would have without the tax. The result
is that taxes on pollution (or anything else) will, other things being
equal, tend to reduce overall monetary output in the economy--which is
to say, GDP.
things need not be equal, because there is already a whole lot of taxing
and spending going on. Even in the United States, where the government
is smaller than in any other advanced country, about a third of GDP passes
through its hands. So existing taxes already discourage people from engaging
in taxable activities like working or investing.
What this means is that the revenue
from any new taxes on pollution could be used to reduce other taxes, such
as Social Security contributions or the income tax (but not, of course,
the capital-gains tax). While the pollution taxes would discourage some
activities that are counted in the GDP, the reduction in other taxes would
encourage other such activities. So measured GDP might well fall very little,
or even rise.
this constitute an independent argument for taxing pollution, quite aside
from its environmental payoff? Would we want to have, say, a carbon tax
even if we weren't worried about global warming? Well, there has been an
excruciatingly technical argument about this, mysteriously known as the
"double dividend" debate; the general consensus seems to be no,
and that on balance pollution taxes would be more likely to reduce GDP
slightly than to increase it.
But so what? "Gross domestic
product is not a measure of the nation's economic well-being"--so
declares the textbook as soon as it introduces the concept. If getting
the price of the environment right means a rise in consumption of nonmarket
goods like clean air and leisure time at the expense of marketed consumption,
so be it.
this amazing? Not only do thousands of economists agree on something, but
what they agree on is the warm and cuddly idea that we should do more to
protect the environment. Can 2,500 economists be wrong? Well, yes--but
this time they aren't. The Great Green Tax Shift--a shift away from taxes
on employment and income toward taxes on pollution and other negative externalities--has
everything going for it. It is supported by good science and good economics,
as well as by good intentions.
Inevitably, then, it appears at the
moment to be a complete political nonstarter. The problem, as with many
good policy ideas, is that the Great Green Tax Shift runs up against the
there is Ignorance. Only last year Congress rushed to cut gasoline taxes
to offset a temporary price rise. Not many voters stopped to ask where
the money was coming from. So what politician will be foolish enough to
take the first step in trying to institute new taxes on all-American pollution,
even with the assurance that other taxes will be lowered at the same time?
(My friends in the administration tell me that the word "taxes"
has been banned even from internal discussions about environmental policy.)
Then there are Interests. It is hard
to think of a way to limit global warming that will not gradually reduce
the number of coal-mining jobs. As labor-market adjustment problems go,
this is a pretty small one. But the coal miners and the energy companies
are actively opposed to green taxes, while the broader public that would
benefit from them is not actively in support.
Finally, there is Ideology. It used
to be that the big problem in formulating a sensible environmental policy
came from the left--from people who insisted that since pollution is evil,
it is immoral to put a price on it. These days, however, the main problem
comes from the right--from conservatives who, unlike most economists, really
do think that the free market is always right--to such an extent that they
refuse to believe even the most overwhelming scientific evidence if it
seems to suggest a justification for government action.
So I do not, realistically, expect
the Economists' Statement to change the world. But then I didn't expect
it to go as far as it has. Certainly those of us who signed it did the
right thing; and maybe, just maybe, we did our bit toward saving the planet.