20 March 2019

Alan Krueger and the economics of pollution


If the recent school strikes across the country are anything to go by, the environment is on the political agenda like never before. Unfortunately, a sinister narrative has managed to weave its way into this otherwise positive trend.

Too many in the environmental movement sadly buy into the myth that the perceived lack of action on climate change which has prompted pupils to march on Westminster is predicated upon the principles of laissez-faire capitalism, and the economic growth it invariably confers.

Pointing out what is wrong with that view was one of the many important contributions of the distinguished Princeton economist Alan Krueger, who tragically died last week aged just 58.

In the mid-1990s, Krueger served as the Labor Department’s chief economist under Bill Clinton, having made a name for himself studying, among other things, the impacts of minimum wage policies. After the 2008 financial crash, he went on to work as the chairman of President Barack Obama’s Council of Economic Advisers.

His wide-ranging body of work also includes a smattering of papers on environmental economics, including Economic Growth and the Environment, which he co-authored with Gene M. Grossman in 1995. This paper examined the relationship between national gross domestic product and a series of environmental indicators, including urban air pollution and river basin water quality.

What it found was the exact opposite of what most people on recent protests probably assumed was the case: that economic growth tends to be accompanied by an initial deterioration of the environment, but that a phase of sustained improvement quickly follows.

Krueger and Grossman even managed to isolate how rich a country needs to become in order to witness improvements in the environmental indicators they studied: roughly $8,000 per capita.

The findings of their paper may appear counter-intuitive. Admittedly, even for believers in free-market economics, the idea that there exists a finite amount of resources on Earth which will one day be exhausted is so straightforward that it can be difficult shake. It goes without saying that this mindset is certainly more prevalent on the left of politics – where zero-sum thinking pervades, and calls for limiting economic output for the sake of the environment have been trumpeted loudly for decades.

Yet, Krueger and Grossman’s conclusions are not as far-fetched as they first appear. When individuals within a country become richer, they are effectively more readily securing the essentials of life: food, water, shelter, and clothing. Once these basic necessities have been dealt with, it therefore seems obvious that any additional income can be devoted to a whole manner of things, including restoring and protecting the environment. In other words, they show that the environment is what an economist would call a ‘luxury good’, whereby an increasing proportion of income is spent on it as said incomes rise.

Becoming richer does not simply mean watching more and more cash pile up in our current accounts. More often than not, it means utilising that extra income to invest in, among other things, environmental improvements.

Consider, for example, Poland – a country which, since shaking off the shackles of Soviet rule, has seen per capita income levels soar from around $1,600 to just shy of $15,300. Over that same period, its death rate from ambient particulate air pollution has collapsed from 109 deaths per 100,000 to 42 per 100,000. This is doubtless due to an increased ability to invest in cleaner technologies – for instance renewable energy sources and better transport options – which emit fewer or no harmful particulates into the atmosphere.

Krueger’s fundamental logic is not without precedent. Indeed, another American economist, Simon Kuznets, theorised in the mid-20th Century that as countries get richer, inequality initially grows, before reducing as things become more equal – which plots onto a graph as an inverted u-shaped ‘Kuznets Curve’. The principle of this insight has been applied with rigour to a number of parts of the natural world, such as forest cover, various chemical pollutants, and biodiversity.

From plastic pollution in the oceans, to toxic air quality, there are certainly no shortage of environmental problems afflicting the world. Climate change, however fast or slow you think it is occurring, threatens the entire global ecosystem in the long run.

No wonder calls for action are getting louder. Sadly, too many of those shouting the loudest seem to have arrived at the conclusion that it is our current economic system – which has made and continues to make the preponderance of humanity increasingly wealthy – which is the problem.

One of Alan Krueger’s great contributions was to demonstrate just how mistaken that view is. Not only is prosperity not the problem when it comes to the environment, it’s actually part of the solution.

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Eamonn Ives is a Researcher at the Centre for Policy Studies.