I have to add one more thought on the environment and the economy.

Paul Krugman likes to say that it depression economics the rules are turned topsy-turvy. This type of talk irks me. The world is what it is. That you had an understanding of reality that was rooted in empty tropes and simplistic aphorisms is a statement about yourself not the world.

That notwithstanding, I agree with thrust of Krugman’s point. The rules of thumb that many economists push on a regular basis do not apply when Fed policy is unable to maintain stable prices and employment.

So one of these rules-of-thumb is that pricing externalities improves efficiency. However, underneath the hood of this rule-of-thumb is that resources will move out of the dirty sector and into clean sectors.

One of the issues that we have in recessions is that resources are not smoothly transferring to the sectors where they would be most efficiently used. So that you are pushing resources out of coal extraction for example, does not automatically mean you are pushing them into yoga instructors.

I use the yoga instructor example to point out that in general equilibrium the sectors need not be related to one another in any conceivable way except that they are bought and sold by folks who have some means of creating a chain of exchange between them. Usually this chain is created using money. However, money being all messed up is the essence of a recession

Since, however, I bothered kick environmentalists for a third time today, I’ll not that this post by Steve Sexton has a few issues with it as well.

Here is the punchline

When one considers that which is unseen—the loss of expenditures and jobs by businesses without substantial cash reserves and the loss of jobs among potential entrants—it becomes clear that Krugman’s prescription for job growth [stricter EPA regulations] may not be the antidote to an ailing economy. And even among those businesses sitting on cash reserves, it is likely that regulatory compliance costs would crowd out other expenditures (and thus other employment) as those firms sought to maintain the cash reserves they deemed optimal in the first place as a hedge against an uncertain economic future.

Not to be too coy, but if you want to summarize all of the what-ifs and how-about-this situation, the question you want to ask is would more EPA regulations increase or decrease liquidity demand. My gut reaction is that its going to increase it.

To get a different answer the story you’d have to tell is about decreases in the final demand for electricity or whatever these plants are producing. Otherwise, profit maximization is going to demand that higher costs of capital lowers your demand for liquid assets. Which in turn means that the regulations are expansionary.