Tag Archives: economic growth

Secular Stagnation

The “secular stagnation hypothesis” has now been around long enough that it has a nickname – SecStag. The basic idea is that the world may have entered a period of low economic growth that is going to persist for a long time, and governments need to start responding to it. This long ebook has chapters from a number of famous economists, including Larry Summers, Barry Eichengreen, Robert Gordon, Paul Krugman, and Edward Glaeser.

It’s hard for the non-economist to summarize, but I’ll try. Some of the ideas are:

  • The real interest rate is essentially the price of borrowing money. When people want to save (loan it out) more than other people want to borrow (invest it in new capital, infrastructure, inventions, business activity), it suggests that the rate of innovation, or profitable new investment possibilities, might have slowed down.
  • One way the rate of new profitable investments would slow down is if the rate of technological progress has slowed down compared to what it was over the past 50 years or so. Some are suggesting that.
  • Another possibility is that the type of technological progress that is occurring is harder to turn into profits than in the past, meaning it is not showing up in the traditional tracking numbers.
  • Another way is if governments are investing too little in infrastructure, and companies are investing too little in research and development because they are uncertain whether it will pay off.
  • Another way is if people are saving more for a rainy day, because there are more people nearing retirement as a fraction of the population than there used to be, and/or people and firms are saving because they are uncertain about the future, for example because they fear losing their jobs or having to may large health care bills.
  • Another possibility is that innovation is occurring, but only benefiting a few rich people and corporations at the top of the income scale, so that the average person is not benefiting.
  • A final possibility is that workers’ skills became obsolete because they were idle for too long after the recession hit. The idea that education is inadequate is also similar to this.

I think the explanation for the recent low GDP growth could be some combination of all of these, although I have a lot of trouble buying the lack of innovation hypothesis. Corporate profits and stock markets seem to be up, suggesting to me that profitable innovation is occurring but benefiting only a chosen few.

The automation vs. employment debate isn’t mentioned very much here, and climate change is mentioned only once in the 179 page book.

Lee Kuan Yew

Lee Kuan Yew, the founder and long-time leader of modern Singapore, passed away on March 23. I regret I never saw him in person, but I did live in Singapore from 2010-13 and read his memoir From Third World to First. His accomplishments are extraordinary whatever you think of him. The western press is a little unfair in constantly calling him an “autocrat”. It’s true that he outlawed short skirts and long hair for a time, censored foreign publications, and locked up a few Communists for decades without a proper trial. But that was the Cold War, and before you judge, you have to consider the utter chaos and climate of fear that was going on all around Singapore in Indonesia, Malaysia, Vietnam, Korea, China, and pretty much the rest of Asia at the time. Singapore stayed relatively calm, peaceful, safe, and eventually became prosperous on his watch. Singapore has a parliament with regular elections. They are dominated by one party that only considers a narrow range of policies, partly because that party is popular and has served the people well, and partly because there are strong barriers to entry built into the system for opposition parties that might consider a wider range of policies. But replace that one party with two parties that are only slightly apart on the narrow range of policies they consider, keep the barriers to entry, and you have the U.S. system.

Economically, Singapore took full advantage of its critical location in the global shipping network. They focused on foreign direct investment to build industry first in low wage manufacturing, and gradually built up to advanced industries today such as refining, chemicals, drugs, technology, finance, etc. They have something called the “central provident fund” – this is a personal social security account that people save their money in (it’s not optional) for retirement, housing, and medical care. This money gets invested in the local and global economies and earns a good rate of return. Almost all housing is developed by the government and subsidized – but it is not exactly “public housing” as we think of it in the U.S., because it is owned rather than rented. So it’s more like a condo where the government is your condo association. You can buy your first unit at a discount to the market price, then resell it later at the market price, although the government puts some limits on who can buy where and when. So the combination of this housing scheme and savings scheme has built a fairly broad base of wealth for the population without resorting to a large income redistribution or social insurance scheme like we see in Europe and the Anglo-American countries. Lee famously believed that this would be counter to “Asian values”, part of which is maintaining very tight family units that take care of each other in times of need.

Although I enjoyed my personal time in Singapore, it was a little too cold and corporate for my taste. Too many people seemed to view accumulating wealth and designer handbags as the primary objective of everyday life. Although I agree that people were tolerant of religious and ethnic diversity, I perceived a coldness between strangers on the street, and even between neighbors, that I found disturbing compared to the way people treat each other in the U.S. and elsewhere in Southeast Asia. People sometimes expressed petty racial and class-based attitudes that would at least engender some guilt in other places. Sometimes I felt that Singaporeans have allowed themselves to become the perfect example of the new Homo economicus species described in the economics textbooks. The country also has some demographic challenges – fertility rates are low partly because women have so many more career and life options available to them than in the past. This is great, but because Singapore is so small it is going to mean a dramatic drop in the native-born population. Immigration can compensate in terms of numbers, but the culture and sense of nationhood will somehow have to adjust to this. A shared love of designer handbags is not a good cultural foundation for a nation.

Singapore has an unbelievable PR machine. You should assume that things there are never quite as rosy as the propaganda they put out, nor as bad as the western press sometimes accuses. Regardless, it is pretty amazing to think how far it has come since the ashes of World War II, and hard to point to another figure who has created a prosperous modern country through sheer force of will like Lee Kuan Yew.

Chinese “Crackup”

The Wall Street Journal is predicting the “crackup” of the Chinese government.

We cannot predict when Chinese communism will collapse, but it is hard not to conclude that we are witnessing its final phase. The CCP is the world’s second-longest ruling regime (behind only North Korea), and no party can rule forever.

Looking ahead, China-watchers should keep their eyes on the regime’s instruments of control and on those assigned to use those instruments. Large numbers of citizens and party members alike are already voting with their feet and leaving the country or displaying their insincerity by pretending to comply with party dictates.

I don’t find any of the evidence the author gives all that convincing. For example, part of his evidence is that people are traveling, investing, and studying abroad, while I wouldn’t consider any of those things unpatriotic. He interprets facial expressions at a party meeting to mean people are bored and insincere, but my own experiences trying to interpret facial expressions in cultures other than my own have been humbling. Finally, he suggests that restrictions on political speech are incompatible with a modern, innovation-driven economy. I think that may be true if “innovation” means truly creative system-based problem solving. But if it just means inventing new patentable objects that can be profitably sold, then I think narrow, highly specialized thinking may suffice, and the education system may be able to produce that without sparking a high level of political engagement.

water and social unrest

This interview with “British-born novelist and author Rana Dasgupta” talks briefly about economic growth, inequality, and water in India:

There is the potential for immense wealth creation in India in the next 40 or 50 years, so there will be money and resources to redistribute and resources and as long as the tides of poverty and violence are not too catastrophic, then I think probably the system can readjust itself. Right now, within India, without anything else happening outside, there’s enough prospects for growth. In 40 to 50 years, economies of the West are going to be in dramatic decline, and in the longer term, I think the global system as a whole will face some sort of crisis and that will affect India, too. But in the medium term, India has pretty good growth prospects and hopefully there’s the quality of leadership and ideas that can redistribute some of that wealth and find livable solutions to some of these problems.

But inequality and the environment are going to be massive in Indian politics. Really, no one is talking about water, but giving 1.3 billion people clean water to drink is becoming very difficult. And you can’t survive for very long without it, so if a city of 25 million people — and there are at least two Indian cities that have that kind of number — has no water, the effects are immediate. When there’s no housing the effects could be years away, but when there’s no water, there are water riots immediately. People who don’t have it will steal it because they have to.

So water could be one of the triggering events in Indian cities for how a sort of mini-political revolution might happen and realization on the part of the middle classes that there is actually a wider world that is up against its limits.

2014 Report Card

It’s taken me a while to get out a “year in review” post for 2014, but anyway, here it is. This won’t be a masterpiece of the essay form. I’m just going to ramble on about some interesting trends and themes from the year, along with a few relevant links.

The critical question this blog tries to answer is, is our civilization failing or not? I’ll talk about our human economy, our planetary system, and make some attempt to tie the two together.

Overall Human Health and Wellbeing. First, there are some very happy statistics to report. For example, worldwide child mortality has dropped almost by half just since 1990. What better measure of progress could there be than more happy, healthy childhoods? And it’s not just about increasing wealth – people in developing countries today have much better health outcomes at the same level of wealth compared to developing countries of the past (for example, Indonesia today vs. the United States when it passed the same income level). It’s hard to argue against the idea that economic growth and technological change have obviously eliminated a lot of human suffering. So, I think the important questions are, will these trends continue? Is the system stable? Can the natural environment continue to support this trend indefinitely? There may also be an important question of whether we had the right to exploit the natural environment to get us to the point where we are now, but that is an academic question at this point.

Financial System Instability. Let’s talk about the stability of our human economic system. The U.S. economy may finally seem to be picking up from the aftermath of the severe 2007-8 financial crisis, but it is certainly far below where it would be if that hadn’t happened and the prior growth trend had just continued since then. The rest of the world isn’t doing so well, however – Europe and Japan are looking particularly slow if not in an outright deflationary spiral, at the same time developing countries appear to be slowing down. Some are calling this a “new normal” for the world economy. More scary than that, the industry-written regulations and perverse incentives allowing the excessive risk taking that caused the crisis have not been fully addressed and the whole episode could recur in the short term.

Thoughts on Ecosystem and Economic “Pulsing”. 2007-8 was a textbook financial crisis – although it was caused by novel forms of money and risk taking beyond the direct reach of government regulators and central banks, it was not that different from crises caused by plain old speculation and over-lending back when there were no central banks around. It’s hard to draw a direct link from the financial crisis to ecosystem services, climate change, or natural resource scarcity. However, if we think about natural ecosystems, they are resilient to outside stressors up to a point – say, moderate fluctuations in temperature, hydrology, or pressure from non-native species. However, say a major fluctuation happens such as a major flood or fire that causes serious damage. In the absence of major outside stressors, the system will eventually recover to its original state, but in the presence of major outside stressors, even if they did not cause the flood or fire, it may never bounce back all the way. In the same way, our human economy may appear resilient to the effects of climate change, ocean acidification, soil erosion, and so forth for a long time, but then when something comes out of left field, like a major financial crisis, war, or epidemic, we may not be able to recover to our previous trend. This probably also applies to the effects of technology on employment, as discussed below. In the absence of major shocks coming from outside the system, we’ll see a long, slow slide in employment and possibly a long, slow rise in energy and food prices, with so much noise in the signal that it will be easy for the naysayers to hold sway for long periods of time. But when those major events happen, we may see sudden, painful changes that we have no obvious way of mitigating quickly.

Technological Change: Artificial Intelligence, Robots, Automation, and Employment. After decades of slow but steady progress, these technologies are really coming into their own. Robots are being used to keep miners in line and to drive cars, for example. Manufacturing has become a high-tech industry. As computers and machines get better at performing more and more skilled jobs (book-keeping is one example), there is gradually less demand for the medium-skilled workers who used to do those jobs. High-skilled workers like computer programmers are doing very well, although I presume the automation will gradually creep higher and higher up the chain, so today’s safer jobs will be less safe tomorrow. At the same time these medium-skilled workers in developed countries are getting squeezed out, developing countries are not benefiting like they used to from their large pools of low-skilled workers as manufacturing becomes more and more automated, and can be done cost-effectively closer to consumers in richer countries.

Will our society recognize and solve this employment problem? American corporate society, and its admirers around the world, are unlikely to. Something very similar to this happened with agricultural automation in the early- to mid-20th century, and with globalization in the mid- to late-20th century. As agriculture became more automated, many displaced workers moved from rural areas in the U.S. southeast to urban areas in the U.S. northeast, looking for factory work. Unfortunately, the factory jobs that existed previously were being moved to developing countries with abundant low-wage labor. The pockets of poverty, unemployment, and social problems created by these forces have not been adequately addressed to this day. To the individual worker, it doesn’t much matter whether your job is being taken by a local robot or an overseas human. Unemployment created by technological forces today could resemble what was created by globalization yesterday, only on a much larger scale. We can only hope that the larger scale will drive real political solutions, such as better education and training, sharing of available work, and more widespread ownership of the labor-saving technology.

Of course, one of the earliest and probably the most shameful example of a modern capitalist system generating wealth for an elite few at the expense of workers is the American slavery system of the 18th and 19th centuries. We just can’t trust amoral, self-interested private enterprise to maximize welfare in the absence of a strong moral compass coming from the larger society. Let’s stop pretending otherwise.

Another example of extreme corporate immorality: Public apathy over climate change in the U.S. may have been manufactured by a cynical, immoral corporate disinformation campaign over climate change taken right out of the tobacco companies’ playbook.

The Gospel of Shareholder Value. There is an important debate over whether people who run corporations have any ethical responsibility to anything other than profit seeking. Well duh, everyone on Earth has an ethical responsibility. Case closed, as far as I’m concerned. There is even evidence that the ideology of profit maximization is a drag on innovation. Except billions of people out there who have worshiped at business schools would disagree with me. And I don’t want to offend anyone’s religion. Noam Chomsky had a quote that I particularly loved, so I am going to repeat it here:

In market systems, you don’t take account of what economists call externalities. So say you sell me a car. In a market system, we’re supposed to look after our own interests, so I make the best deal I can for me; you make the best deal you can for you. We do not take into account the effect on him. That’s not part of a market transaction. Well, there is an effect on him: there’s another car on the road; there’s a greater possibility of accidents; there’s more pollution; there’s more traffic jams. For him individually, it might be a slight increase, but this is extended over the whole population. Now, when you get to other kinds of transactions, the externalities get much larger. So take the financial crisis. One of the reasons for it is that — there are several, but one is — say if Goldman Sachs makes a risky transaction, they — if they’re paying attention — cover their own potential losses. They do not take into account what’s called systemic risk, that is, the possibility that the whole system will crash if one of their risky transactions goes bad. That just about happened with AIG, the huge insurance company. They were involved in risky transactions which they couldn’t cover. The whole system was really going to collapse, but of course state power intervened to rescue them. The task of the state is to rescue the rich and the powerful and to protect them, and if that violates market principles, okay, we don’t care about market principles. The market principles are essentially for the poor. But systemic risk is an externality that’s not considered, which would take down the system repeatedly, if you didn’t have state power intervening. Well there’s another one, that’s even bigger — that’s destruction of the environment. Destruction of the environment is an externality: in market interactions, you don’t pay attention to it. So take tar sands. If you’re a major energy corporation and you can make profit out of exploiting tar sands, you simply do not take into account the fact that your grandchildren may not have a possibility of survival — that’s an externality. And in the moral calculus of capitalism, greater profits in the next quarter outweigh the fate of your grandchildren — and of course it’s not your grandchildren, but everyone’s.

Our Ecological Footprint. WWF issued an updated Living Planet Report in 2014 suggesting that our annual consumption of natural resources (including the obvious ones like energy and water extraction, straightforward ones like the ability to grow food, but also the less obvious ones like ability of the oceans and atmosphere to absorb our waste products) is continuing to exceed what the Earth can handle each year by at least 50%. We’re like spoiled trust fund babies – we have such incredible resources at our disposable, we never learn to live within our means and one day the resources run out, even if that takes a long time. As we recover from the financial crisis, we have a chance to do things differently, but the connections are not being made to the right kinds of investments in infrastructure, skills, and protection of natural capital that would set the stage for long-term sustainable growth in the future.

Other Big Stories from 2014:

  • World War I. 100 years ago, World War I was in full swing. Remember The Guns of August? Well, that was August 1914 they were talking about. Let’s hope we’re not about to blunder into another conflict. But (and I’m cheating a little here because I read this in 2015), the World Economic Forum named “interstate conflict” as both high probability and high consequence in its global risk report.
  • Ebola. Obviously, Ebola was a very bad thing that happened to a whole lot of people. To those of us lucky enough that we weren’t directly in its path, it is a chance to selfishly reflect whether Ebola or something even worse could be coming down the pike. Let’s hope not.
  • Severe Drought and Water Depletion in the Western U.S.: California has been in the midst of a historic drought, although they got some rain recently. Some are describing this as the new normal. Besides rainfall, glaciers, snowpack, and groundwater all seem to be disappearing in some important food-growing areas.
  • Solar grid parity is here! At least some places, some times…

Conclusion. Yes, I think we are on a path to collapse if nothing changes. And I don’t see things changing enough, or fast enough. There are glimmers of hope though. Lest you think I offer only negatives and no solutions, here are two solutions I harp on constantly throughout the blog:

  • Green infrastructure. This is how we fix the hydrologic cycle, close the loop on nutrients, begin to cleanse the atmosphere, protect wild creatures and genetic diversity, and create a society of people with some sense of connection to and stewardship over nature. Don’t act like it’s such a big mystery. It’s known technology. There has been plenty written about trees, design of wildlife corridors and connectivity, for examples. There is simply no excuse for cities to do such a crappy job with these things.
  • Muscle-Powered Transportation. Cars are clearly the root of all evil, the spawn of Mordor, as I pointed out several times (sorry, I just sat through 6+ hours of Hobbit movies). Unless you are perhaps that rare hobbit who can own a car without your morals being completed corrupted by its evil powers. But for the rest of us, I explained several times why getting rid of cars would be good. Here is just one example:

One of the most important things we can do to build a sustainable, resilient society is to design communities where most people can make most of their daily trips under their own power – on foot or by bicycle. It eliminates a huge amount of carbon emissions. It opens up enormous quantities of land to new possibilities other than roads and parking, which right now take up half or more of the land in urban areas. It reduces air pollution and increases physical activity, two things that are taking years off our lives. It eliminates crashes between vehicles, and crashes between vehicles and human bodies, which are serial killers of one million people worldwide every year, especially serial killers of children. It eliminates enormous amounts of dead, wasted time, because commuting is now a physically and mentally beneficial use of time. There is also a subtle effect, I believe, of creating more social interaction and trust and empathy between people just because they come into more contact, and creating a more vibrant, creative and innovative economy that might have a shot at solving our civilization’s more pressing problems.

supply and demand

Mohamed El-Erian says that Saudi Arabia won’t cut its pumping to counteract falling oil prices, for fear of losing market share. He says the normal textbook rules of supply and demand will apply:

Low prices will lead to the gradual shutdown of what are now unprofitable oil fields and alternative energy supplies, and they will discourage investment in new capacity.  At the same time, they will encourage higher demand for oil.

This will all happen, but it will take a while. In the meantime, as oil prices settle at significantly lower levels, economic behavior will change beyond the “one-off” impact.

As costs fall for manufacturing and a wide range of other activities affected by energy costs, and as consumers spend less on gas and more on other things, many oil-importing nations will see a rise in gross domestic product. And this higher economic activity is likely to boost investment in new plants, equipment and labor, financed by corporate cash sitting on the sidelines.

This is where I should say something smart about natural capital or climate change or innovation. Well, maybe I’m just tired tonight.

December 2014 in Review

At the end of November, my Hope for the Future Index stood at -2.  I’ll give December posts a score from -3 to +3 based on how negative or positive they are.

Negative trends and predictions (-12):

  • When you consider roads, streets, and parking, cars take up more space in cities than housing. (-2)
  • The latest on productivity and economic growth: Paul Krugman says there is risk of deflationary spirals in many countries, and the U.S. economy is nothing to right home about. (-1)
  • There are a few legitimate scientists out there warning of sudden, catastrophic climate change in the near future. (-1)
  • Automation (meaning robots and AI) is estimated to threaten 47% of all U.S. jobs. One area of active research into automation: weaponry. Only one negative point because there are also some positive implications. (-1)
  • Margaret Atwood’s Year of the Flood is a depressing but entertaining reminder that bio-apocalypse is possible. (-2)
  • Before the recent rains, the drought in California was estimated to be a once-in-1200-years event. Major droughts in major food growing regions are not good news, especially with depletion of groundwater, and loss of snowpack and glaciers also in the news. (-2)
  • William Lazonick argues provides evidence that the rise in the gospel of shareholder value correlated with the growth slowdown that started in the 1970s – his explanation is that before that, retained earnings were a cornerstone of R&D and innovation in the economy. Loss of a point because it’s good to hear a dissenting voice, but the economy is still run by disciples of the profits for now. (-1)
  • Elizabeth Warren and Bernie Sanders are warning that the U.S. financial system may still be dangerously unstable. (-2)

Positive trends and predictions (+6):

  • There are some new ideas out there for teaching computer programming, even to young children: Loco Robo, Scratch, and for-profit “programming boot camps”. (+1)
  • You can now get genetically customized probiotics for your vagina. (+1)
  • There are plenty of ideas and models out there for safe, walkable streets, some as simple as narrower lanes. But as I point out, the Dutch and Danish designs are pretty much perfect and should just be adopted everywhere. (+1)
  • I linked to a new video depicting Michael Graves’s idea for “linear cities“. These could be very sustainable ecological if they meant the rest of the landscape is left in a mostly natural condition. I am not as sure about social sustainability – done wrong, they could be like living in a mall or subway station. This was one of my all-time more popular posts. (+1)
  • There are new algorithms out there for aggregating and synthesizing large amounts of scientific literature. Maybe this can increase the returns to R&D and help boost innovation. (+1)
  • There will be several international conferences in 2015 with potential to make real progress on financial stability and sustainability. The phrase “deep decarbonization” has been uttered. (+1)
  • Some evidence suggests that the oceans have absorbed a lot of global warming over the past decade or so, preventing the more extreme range of land surface warming that had been predicted. This is a good short- to medium-term trend, but it may not continue in the long term. (+0)

change during December 2014: -12 + 6 = -6

Hope for the Future Index (end of December 2014): -2 -6 = -8

A realistic leverage point for one-planet living: more compulsory vacation in the rich world

This article in System Dynamics Review advocates requiring more vacation time as a tool to decelerate growth in humanity’s ecological footprint. The idea is logical enough, but politically very hard if you ask me. The only way it might be politically possible is in the wake of a crisis, like a famine or sudden shift in climate, that is big enough to be a major wakeup call to the rich countries but small enough that it doesn’t kill a big fraction of humanity (which would decrease our ecological footprint footprint of course, but at an obviously horrible cost.)

As envisioned by Keynes in Economic Possibilities for our Grandchildren, reducing work hours could make sense if it is done in parallel with productivity and wealth increases, and policies that address a fair distribution of the new wealth created by those productivity increases. This brings us back to trying to steer economic and technological growth in a more sustainable direction, trying to at least postpone and limit the next crisis, but having some ideas on how we might take advantage of the next crisis when it happens, while hoping it is not the one that wipes us out.

Elizabeth Warren, Bernie Sanders, and financial stability

Elizabeth Warren continues to warn that another financial crisis may be in the making as big financial companies are able to influence laws shifting large risks onto the taxpayer:

Bernie Sanders also is worried that the big banks have too much influence over policy:

“Over the last several days, it has become abundantly clear that Congress does not regulate Wall Street but Wall Street regulates Congress,” Sanders said. “If Wall Street lobbyists can literally write a provision into law that will allow too-big-to-fail banks to make the same risky bets that nearly destroyed our economy just a few years ago, it should be obvious to all that their incredible economic and political power is a huge danger to our economy and our way of life.”

Sanders said, “Enough is enough…. If Congress cannot regulate Wall Street, there is just one alternative.  It is time to break these too-big-to-fail banks up so that they can never again destroy the jobs, homes, and life savings of the American people.”

Die, Cobb-Douglas Production Function, Die!

Here Herman Daly unleashes a savage attack on the innocent Cobb-Douglas production function:

A large residual indicates weak explanatory power of the theory being tested–in this case the Cobb-Douglas theory that production increase is due only to capital and labor increase. But instead of being embarrassed by a large unexplained residual, some economists were eager to “explain” it as an indirect measure of technological progress, as a measure of improvement in total factor productivity. But is technology the only causative factor reflected in the residual? No, there are surely others, most especially the omitted yet rapidly increasing flow of natural resources, of energy and concentrated minerals. The contribution of energy and materials from nature to production is also part of the residual, likely dwarfing technological improvement. Yet the entire residual is attributed to technology, to total factor productivity, or more accurately “two-factor” productivity, in the absence of natural resources, the classical third factor.