I want to reply to this Paul Krugman post on mercury regulations, but let me start with some important caveats. First, I have no idea if the new regulations are desirable, but if he’s correct that “it will save tens of thousands of lives every year and prevent birth defects, learning disabilities, and respiratory diseases” then I have a hard time imagining the costs exceeding these benefits. Also, Krugman is correct that there have been big successful environmental regulations in the past where the benefits clearly and largely exceed the costs. So to be clear: this post isn’t really about the mercury regulations at hand. What I really want to discuss is his more abstract and general point about when the best time to make these sorts of large regulatory changes is.

Krugman argues:

…if we’re going to have to scrap some power plants and replace them, it’s hard to think of a better time to do it than now, when the workers and resources needed to do the replacing would largely have been unemployed otherwise.

There’s certainly a valid point here. Spending like this, or any spending, in non-recessionary times has a crowding out cost, in that the resources being used to make new power plants would have gone to some other use and must be diverted. Labor and capital that had some other use must be bid away from those uses.

In a recession this is not necessarily true, as lots of capital and labor lays unused. Thus you are bringing unused inputs into use rather than diverting inputs from another use. Or at least you might, if you use the right inputs.

And here is one problem with big regulatory changes in a recession that Krugman ignores: the workers who are displaced from dirty factories may not be the same ones hired to build the new, cleaner factories. Are the skills necessary to build a new power plant the same as those necessary to run it? For that matter will clean power output replace dirty power output one-for-one, or will higher costs shift the supply curve leftward and increase prices? Both of these are possible reasons why workers at the dirty plant could become unemployed as a result of this policy.

And for these disemployed workers the costs are much higher if the regulatory change happens in a recession than if it happens out of a recession. I have voiced this concern about simplifying taxes right now: if you’re going to undertake large structural change that will require capital and labor to shift to different firms, and especially if it is to different industries, then those adjustment costs will be higher for the unemployed if the changes happen during a recession.

I am a big fan of creative destruction, and that’s kind of what we’re talking about when we talk about better policies causing industrial shifts. And even given the added costs of doing this in a recession, there are many policies where the benefits of doing it now outweigh the costs. This mercury regulation may very well be one of them. So too might tax simplification. Also the benefits of lower opportunity costs might outweigh the higher adjustment costs for workers.  But we shouldn’t pretend that making big changes like this is better along every dimension during a recession than during times of healthy economic growth.

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