Thursday, September 8, 2011

Green Tech And The Broken Window Fallacy

FLG has long maintained that environmental policies, like the tax credits to replace windows with more efficient ones, are akin to the broken windows fallacy.

Via Noah Millman, FLG learns that Krugman argued that in a liquidity trap the broken windows fallacy ceases to be a fallacy:
something that forces firms to replace capital, even if that something seemingly makes them poorer, can stimulate spending and raise employment. Indeed, in the absence of effective policy, that’s how recovery eventually happens: as Keynes put it, a slump goes on until “the shortage of capital through use, decay and obsolescence” gets firms spending again to replace their plant and equipment.

FLG doesn't think Krugman explains why it's no longer a fallacy. Liquidity trap or no, if you break a window it stimulates spending and raises employment and makes society poorer. In fact, FLG would argue that destroying wealth is one of the easiest ways to stimulate economic activity. The problem is society is worse off because of it.

Noah Millman then makes the point that environmental regulation isn't like the broken windows fallacy at all:
this isn’t a “broken” windows situation at all, where you’re destroying something in order to force someone to spend money to repair it. This is what you might call a “storm windows” situation – you’re ordering people to spend money to make what amounts to a capital improvement with a positive return (assuming you believe the ozone regulations will lead to better health and a more pleasant environment).

FLG's usual response is that if there were a positive return, then people wouldn't need an incentive. They'd do it.

Millman writes:
the long-term returns from improved air quality matter to the decision.

This is the most obvious rebuttal to my reply. Rational, utility maximizing individuals aren't going to fully internalize an externality like improved air quality. Thus, we get a suboptimal investment in this infrastructure.

Here is where FLG states that it's far better to internalize that externality through a carbon tax and let people and companies make their own decisions about how to adapt. Maybe they invest in more efficient equipment. Maybe they dial back on their energy in some other way. But that, not government subsidies and regulations, is the best way to maximize the probability that the investments made have a positive return.

Than again, and in fairness, FLG's solution is looking at it from the perspective of what would be, in his opinion, the most efficient and effective economic means of dealing with the environmental issue. It would take time and the introduction of a carbon tax would depress rather than stimulate the economy.

Krugman and Millman, on the other hand, are arguing that we need to stimulate, for reasons entirely unrelated to the environmental issues, but if that is the case then might as well get some environmental bang for our stimulus buck. That makes sense. FLG guesses his greatest concern would be that the environmental policies designed with the priority of short-term stimulus would create a distortionary path dependency that would be unhelpful for long-term environmental regulation. However, it may be that this issue, balancing short-term versus long-term issues, is always present and FLG is worried about nothing.


Anonymous said...

Krugman, Millman, bollocks.

It’s a shortsighted world without visionaries that takes its cues from history, human nature/action and remains enslaved to the basic laws of economics. Going beyond broken down broken windows theories here is JJ Jr. a thinker and problem solver for the ages - and “one of these days we’re going to get there”.

George Pal

FLG said...

I'm on-board only if we can get a right to a Ferrari included.

Anonymous said...

As Uncle Joe was wont to say, you can't make a jobs plan without breaking a few windows....

Meanwhile, this am's big, big news...

Federal agents are executing a search warrant Thursday morning at the Solyndra headquarters in Fremont, according to an FBI spokeswoman.

The search is part of a joint operation by the Federal Bureau of Investigation, Department of Energy and the Office of Inspector General, according to Julianne Sohn, a spokeswoman for the FBI.

The action by federal agents comes a week after the solar manufacturer abruptly closed, laying off about 1,000 workers.

Sohn would not comment on the purpose of the search or for what they might be looking.

"Everything is under seal," she said.

Solyndra spokesman Dave Miller said the search came as a surprise, but he emphasized the company is "fully cooperating" with federal officials. He said he did not know the purpose of the search, but he speculated it could have something to do with the $535 million in loan guarantees the Department of Energy awarded to Solyndra.

There are indications that the agents are in the process of interviewing Solyndra employees.

Miller said there is a "wind-down" team still working at the company's facilities, including human resources, accounting and fabrication engineers shutting down equipment. There are about 100 employees still on the job this week, but that number will continue to decrease, he said.

Solyndra filed for Chapter 11 bankruptcy Tuesday in Delaware, saying it plans to seek a

Bloomberg reported that at the bankruptcy hearing, the company said it may have two bidders for the Fremont plant financed by the federal loan guarantees. The U.S. Energy Department is concerned that the potential buyer may buy and move the equipment and technology out of the country, Justice Department attorney Matthew Troy said in court Wednesday.

One of the laid-off employees, Mohammed Walahi of Fremont, showed up to file worker's compensation paper work for a repetitive stress injury and was surprised to see FBI agents instead of security guards.

Walahi, who was a process technician with the company for five years, lashed out at his former bosses.

"There wasn't good management in the company," he said. "We bought four buildings and how much did we spend, $50 million? We only needed one or two buildings."

Agents began executing their search about 7:30 a.m., Sohn said. Most of the activity appears to be concentrated at the old Solyndra buildings located at 901 Page Ave., as agents wearing FBI vests and jackets are scurrying back and forth in one of the parking lots.

More agents arrived in SUVs at 8:40 a.m.

Mrs. P

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