Here are a couple projections of climate change impacts.
The World Health Organization projects “Between 2030 and 2050, climate change is expected to cause approximately 250 000 additional deaths per year, from malnutrition, malaria, diarrhoea and heat stress.” This sounds awful, and of course it is. But if you compare this to other preventable causes of death like traffic accidents, smoking and air pollution, you could probably save a lot more lives with a given amount of money focusing on the latter group than exclusively on climate change.
A more sobering projection, at least to me, comes from an organization called DARA. Although the report includes some truly awful and incomprehensible infographics, there is a very clear graphic on p. 21. Under a “no action” scenario, climate change subtracts about 3% from world economic growth in 2050 and 7-8% in 2100. If you believe technology will lead to a massive acceleration of economic growth, we may be able to afford even this (although our children will be learning about Earth’s original native ecosystems in history class). If long-term growth stays in the sub-5% range where it has been recently, this will mean the decline and fall of civilization as we know it.
It’s interesting how economists talk about money, debt, investment, and growth. If you’re not an economist, you have to tie your brain lobes in a few knots to make sense of it. This is Michael Spence from NYU:
high unemployment, high and rising debt levels, and a global shortage of aggregate demand are constraining growth and generating deflationary pressures. And now, as then, the level and quality of investment have been consistently inadequate, with public spending on tangible and intangible capital – a critical factor in long-term growth – well below optimal levels for some time.
Of course, there are also new challenges. The dynamics of income distribution have shifted adversely in recent decades, impeding consensus on economic policy. And aging populations – a result of rising longevity and declining fertility – are putting pressure on public finances.
Nonetheless, the ingredients of an effective strategy to spur economic growth and employment are similar: available balance sheets (sovereign and private) should be used to generate additional demand and boost public investment, even if it results in greater leverage. Recent IMF research suggests that, given excess capacity, governments would probably benefit from substantial short-run multipliers. More important, the focus on investment would improve prospects for long-term sustainable growth, which would enable governments and households to pursue responsible deleveraging.
Here’s what I think it means. “Global shortage of adequate demand” means people aren’t spending enough money to support productive activity in the economy. Either they don’t have the money or they are saving it instead of spending it. Of course, we need a productive economy to generate the jobs and wages that get people money to spend. So it’s a chicken and egg problem that can spiral downwards once it gets started (“deflationary pressures”). Governments also aren’t investing in productive activity, either because they are afraid of debt or aren’t taking in enough taxes, or both. “Available balance sheets” means they should just wish new money into existence (governments can do that!) and spend it on investments like infrastructure, education, and research that tend to support long-term growth, which would get people more money, which they could spend to support more productive activity, and so on in a virtuous cycle. Money isn’t really real, as long as we think it is real. Debt doesn’t matter, as long as we believe it does matter. Belief in money and fear of debt usually stops us short of the absolute physical limits placed on us by our physical environment.
This study says the relationship between aging and deflation (as seen in Japan, but possibly coming to many more countries in the future) depends on whether the aging is driven by falling fertility (which shrinks the work force in absolute terms) or longevity (which shrinks it only in relative terms).
Negative correlations between inflation and demographic aging were observed across developed nations recently. To understand the phenomenon from a politico-economic perspective, we embed the fiscal theory of the price level into an overlapping-generations model. In the model, successive short-lived governments choose income tax rates and bond issues considering the political influence of existing generations and the policy response of future governments. The model sheds new light on the traditional debate about the burden of national debt. Because of price adjustments, the accumulation of government debt does not become a burden on future generations. Our analysis reveals that the effects of aging depend on its causes. Aging is deflationary when caused by an increase in longevity but inflationary when caused by a decline in birth rate. Numerical simulation shows that aging over the past 40 years in Japan generated deflation of about 0.6 percentage points annually.
Here is another study that concludes “a larger share of dependents (ie young and old) is correlated with higher inflation, while a larger share of working age cohorts is correlated with lower inflation.” So maybe it depends to what extent the aging population is dependent on the working population, and whether the working population has additional dependents in the form of children (who will become the next working population). It’s complex, dynamic stuff that is hard to puzzle out.
Move over Agenda 21, we have a new contender for the world’s most boring urban planning related conspiracy theory, Resolution 24/3! Seriously, don’t read it. It’s boring. However as a supporting study, the UN has put together a book of case studies on planning best practices in cities around the world, which is actually interesting. I found the Melbourne case study particularly interesting, and would like to dig into it more:
Melbourne developed a new approach to urban planning, through an ecosystem-based climate adaptation programme, embracing what the City refers to as ‘nature sensitive’ urban design and planning. This approach emphasises the services that nature provides to the city and focuses on how it can be protected, restored, created, enhanced and maintained within the urban setting. The urgency posed by the current impacts of climate changes resulted in the City creating a multi-million dollar integrated ecosystem-based climate change adaptation program in 2010 – the ‘Urban Landscapes Adaptation Program’.
The primary goal of this programme was to reduce drought vulnerability and to cool the city by 4°C in an effort to safeguard its citizens and the ecosystem services of its environmental assets from the impacts of climate change. The programme is underpinned by two strategies: the Open Space Strategy, which aims to increase green space by 7.6% and the Urban Forest Strategy, which is projected to double the City’s tree canopy to 40%.
Slate talks about El Nino, a “blob” of warmth in the Pacific ocean, and climate change.
Positive stories:
Mr. Money Mustache brought us a nice post on home energy efficiency projects. This was a very popular post.
Biotechnology may soon bring us the tools to seriously monkey with photosynthesis. (This is one of those stories where I struggle between the positive and negative columns, but clearly there is a potential upside when we will have so many mouths to feed.)
Donald Shoup, author of The High Cost of Free Parking, is retiring. That might sound bad, but his ground-breaking ideas are continuing on and actually seem to be going mainstream.
Lee Kuan Yew, who took Singapore “from third world to first” in one generation, passed away (in March, but I wrote about it in April. Let me be clear – I am an admirer and it is his life I am putting in the positive column, not his death.)
Donella Meadows explained how your bathtub is a dynamic system.
Robert Gordon offers a clear policy prescription for the U.S. to support continued economic growth.
I explain how a cap-and-trade program for stormwater and pollution producing pavement could work.
Joel Mokyr talks about advances in information technology, materials science and biotechnology.
Some U.S. cities are fairly serious about planting trees.
Saving water also saves energy. It’s highly logical, but if you are the skeptical type then here are some numbers. Also, urban agriculture reduces carbon emissions.
Peter Thiel thinks we can live forever. (positive, but do see my earlier comment about mouths to feed…)
MIT is warning that U.S. investment in R&D has dropped enormously. I find this idea very disturbing, that in an age of accelerating science and technology, which corporations and governments should have every incentive to take advantage of, they are failing to do so.
Declining U.S. federal government research investment — from just under 10 percent in 1968 to less than 4 percent in 2015 — in critical fields such as cybersecurity, infectious disease, plant biology, and Alzheimer’s are threatening an “innovation deficit,” according to a new MIT report to be released Monday, April 27.
U.S. competitors are increasing their investment in basic research. The European Space Agency successfully landed the first spacecraft on a comet. China developed the world’s fastest supercomputer and has done research in plant biology uncovering new ways to meet global food demand and address malnutrition. Meanwhile, U.S. investment in basic plant-related research and development is far below that of many other scientific disciplines, despite the fact that the agricultural sector is responsible for more than 2 million U.S. jobs and is a major source of export earnings.
The report, entitled “The Future Postponed: Why Declining Investment in Basic Research Threatens a U.S. Innovation Deficit,” highlights opportunities in basic research that could help shape and maintain U.S. economic power and benefit society.
I’m still reading about secular stagnation. Joel Mokyr from Northwestern University is one of the few optimistic voices in the book:
…digitalisation has penetrated every aspect of science. It has led to the re-invention of invention. It is not just ‘IT’ or ‘communications’. Huge searchable databanks, quantum chemistry simulation, and highly complex statistical analysis are only some of the tools that the digital age places at science’s disposal. Digital technology is everywhere, from molecular genetics to nanoscience to research in medieval poetry. Quantum computers, still quite experimental, promise to increase this power by orders of magnitude. In much recent writings, the importance of ICT on output and productivity has been stressed, and it is clearly of great importance. What needs to be kept in mind, however, is that the indirect effects of science on productivity through the tools it provides scientific research may, in the long run, dwarf the direct effects. A striking example is the growing use of high-powered computers and radically new software in material science.
Materials are the core of our production. The terms Bronze Ages and Iron Age signify their importance; the great era of technological progress between 1870 and 1914 was wholly dependent on cheap and ever-better steel. In many ways, core-materials can be viewed as general-purpose technologies made famous by Bresnahan’s and Trajtenberg’s (1995) seminal paper on the topic. But what is happening to materials now is nothing short of a sea change, with new resins, ceramics, and entirely new solids designed in silico, being developed at the nano-technological level. These promise the development of materials nature never dreamed of and that deliver custom-ordered properties in terms of hardness, resilience, elasticity, and so on. Graphene, the new super-thin wonder material, is another substance that promises to revolutionise production in many lines. The new research tools in material science have revolutionised research. Historically, progress in material science had been always the result of tedious and inefficient ‘trial and error’ or highly uncertain serendipity. The classic example is William Perkin’s discovery of aniline purple in 1856 and Henry Bessemer’s invention of the eponymous steel-making process the same year. Compare those with the situation today: researchers can now can simulate in silico the quantum equations that define the properties of materials, using high-throughput super-computers, and experiment with materials having pre-specified properties.
But not all research tools depend wholly on computational capacity. Of perhaps even more revolutionary importance is the powerful technology developed by Stanley Cohen and Herbert Boyer in the early 1970s, in which they succeeded in creating transgenic organisms through the use of micro-organisms. Genetic selection is an old technology; nature never intended to create poodles. But genetic engineering is to artificial selection what a laser-driven fine-tuned surgical instrument is to a meat axe. The potential economic significance of genetic engineering is simply staggering, as it completely changes the relationship between humans and all other species on the planet. Ever since the emergence of agriculture and husbandry, people have ‘played God’ and changed their biological and topographicalenvironment, creating new phenotypes in plants and animals. Genetic engineering means we are just far better at it.
In Robert Gordon’s chapter in the e-book Secular Stagnation: Facts, Causes and Cures, which I reviewed recently, he claims that he never said technological progress is slowing down, but only that future progress will be similar to the rate of the 1970s to now, not the faster rate that happened before the 1970s.
His main argument is that technology will not grow fast enough to offset economic “headwinds”, including population aging, inequality, government debt, and poor education. I don’t deny that these are all problems that we should be trying to address with better policy, and that addressing them would yield benefits. Gordon gives a policy presciption for the U.S. to address them:
My standard list of policy recommendations includes raising the retirement age in line with life expectancy, drastically raising the quotas for legal immigration, legalising drugs and emptying the prisons of non-violent offenders, and learning from Canada how to finance higher education. The US would be a much better place with a medical system as a right of citizenship, a value-added tax to pay for it, a massive tax reform to eliminate the omnipresent loopholes, and an increase in the tax rate on dividends and capital gains back to the 1993-97 Clinton levels.
However, where he doesn’t convince me is his argument that a constant rate of technological progress can’t lead to big gains. If the rate of increase in technology is constant in percentage terms, that means the level of technology is growing exponentially. We are constantly building on the advances of the past. There may be long periods when it seems like nothing is happening, but progress is actually happening behind the scenes, and then it suddenly seems to burst onto the commercial scene. Gordon actually talks about how the technologies that led to very fast productivity growth in the mid-20th century were actually inventions of the late 19th century (electricity, the telephone, etc.). It took a few decades for the technology to kick into everyday life. The 1970s to the present have been a time of huge advance in computer technology, so even if the lag times are not decreasing it should be about time for that to kick in. Biotechnology would be another couple decades behind, since the big advances in genomics started to happen in the 1990s. But there are reasons to be hopeful that the lag time between advances tends to decrease over time. So technology may be increasing not only at a constant percentage rate, which means exponential growth, but the rate of exponential growth itself may be accelerating. Ultimately, this lag time determines whether we are in for a lost decade or two as Gordon’s “headwinds” kick in before the next wave of technology-driven improvement. Of course, Gordon like most economists leaves out some other possible headwinds such as climate change, energy, and food, not to mention the really bad stuff like wars and pandemics.
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, 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.