Note: I have also revised part 2 to present the the IS-LM model of interest rates more clearly.
Here I will discuss two other areas where Paul Krugman feels he is arguing with bearers of zombie ideas—climate change and social inequality.
Krugman targets three familiar objections to doing anything about climate change: “Climate change is a hoax. Climate change is happening, but it’s not man-made. Climate change is man-made, but doing anything about it would destroy jobs and kill economic growth.” Economists have most to say about the third objection, but all three may be perpetuated out of economic self-interest. Krugman notes that the most prominent climate change deniers are profiting in some way from fossil-fuel industries. Economic ideology is also a factor. “Rigid free-market ideologues don’t want to believe that environmental concerns are real” because the solutions require some form of government intervention in the market. Krugman considers the issue so pressing that it requires a moral as well as scientific response. Because “climate denial is rooted in greed, opportunism, and ego,” it is both foolish and downright evil.
From the standpoint of economics, the most straightforward way to stop people from doing something is to make it more costly. Like many economists, Krugman recommends a carbon tax on fossil fuels. He does not want to rely on it exclusively, however, because its costs to the public make it a hard sell politically. Also, more positive incentives can be useful in encouraging the transition to renewable forms of energy. He welcomes the general approach of the “Green New Deal” proposed by progressive Democrats, which emphasizes investments and subsidies rather than taxes. He argues that reductions in carbon emissions:
…could be achieved with a combination of positive incentives like tax credits and not-too-onerous regulation. Add in investments in technology and infrastructure that support alternative energy, and a Green New Deal that dramatically reduces emissions seems entirely practical, even without carbon taxes. And these policies would visibly create jobs in renewable energy, which already employs a lot more people than coal mining.
The deniers, of course, support neither new taxes nor incentives, preferring to do nothing about the problem.
Krugman seems most interested in technological fixes facilitated by economic incentives, and less interested in the possibility of new lifestyles that consume less energy. Some environmentalists may contest his claim that carbon emissions can be cut by two-thirds without any reduction in energy consumption. But whether or not we consume less energy, I think there will be plenty of goods and services we can consume, so I agree with Krugman that intelligent responses to climate change are compatible with continued economic expansion.
Krugman complains about an “inequality-denial industry” comparable to climate change denial. Too many economists and politicians have ignored or minimized the evidence of rising economic inequality, which is especially a problem in the United States. What has been happening for the past forty years is in sharp contrast to the “broad-based prosperity” of the decades following World War II. “Over that period incomes of all groups rose at roughly the same rapid clip, more than 2.5 percent annually.” Since then, not only has income growth been slower overall, but what growth has occurred has been much more concentrated at the top of the distribution.
What has become known as the “Krugman calculation” asks what percentage of the overall rise in average income has gone to the top 1 percent. The answer is about 70 percent. He argues that other ways of presenting the income numbers obfuscate rather than clarify the issue. In contrast to our cherished notions of a classless society or land of opportunity, it is the rich who are mainly getting richer, and “America stands out as the place where economic and social status is most likely to be inherited.”
In various essays in his chapter on inequality, he attacks popular explanations for inequality that fail to address what he thinks is the real problem. The first attributes it to the widening wage gap between more and less educated workers. There is some truth to that, but the college educated constitute a much larger percentage of the population—35% counting bachelors degrees and above—than the 1% who are really thriving. He attributes the “rise of a narrow oligarchy” not to increasing education, but to increasing power.
Similarly, technological change is not mainly what is holding back the average American worker. Technological change used to translate into increasing productivity and higher wages. That connection has been broken, but not by industrial robots. “There is a growing though incomplete consensus among economists that a key factor in wage stagnation has been workers’ declining bargaining power–a decline whose roots are ultimately political.” American workers have become far less unionized than workers in many other democracies, although Krugman does not get into the specific reasons for that.
A third explanation Krugman rejects is a decline in working-class family values, with fewer men marrying or staying married and supporting their families. Although today’s working-class families are indeed troubled in many ways, he argues that “the symptoms of social decline we see in working-class America are the result, not the cause, of declining opportunity.”
Krugman agrees with Enrico Moretti, author of The New Geography of Jobs, that structural changes in the economy have congregated more educated workers together in thriving regions, leaving many parts of the country behind. But even there, political policies have aggravated the inequality. Republican states have been making cuts in education and refusing to expand Medicaid. “Trumpland is in effect voting for its own impoverishment.”
Krugman introduces the concept of power relations to account for the inequality that more traditional economic variables fail to explain. He uses the term three times, most notably when he says that “the idea that free markets remove power relations from the equation is just naive.” Yet none of the essays in this collection discuss it in any depth, analyzing the dynamics of power or its possible redistribution. I also noticed that the index to his 600-page Macroeconomics text has no entry for the words power, power relations, bargaining power or oligarchy. This suggests a new frontier for mainstream economics, even for liberal economists like Krugman. The modern field of economics developed out of what used to be called “political economy.” Is it time to revive that broader perspective?