Tag Archives: economic growth

September 2014 in Review

At the end of August, my Hope for the Future Index stood at +1.  As I did last month, I’ll sort selected posts that talk about positive trends and ideas vs. negative trends, predictions, and risks. Just for fun, I’ll keep a score card and pretend my posts are some kind of indicator of whether things are getting better or worse. I’ll give posts a score from -3 to +3 based on how negative or positive they are.

Negative trends and predictions (-8):

  • The drought in California’s Central Valley and on the Great Plains continues to get worse. (-1)
  • There are signs that Europe may be in a long-term economic depression. The term “new normal” is being batted around to describe a possible long term slowdown in growth affecting the entire world. (-2)
  • Governments and corporations are starting to use armed drones in crowd control. (-1)
  • In a new simulation of a society with increasing resource scarcity and technological innovation, increasing resource scarcity wins. (-1)
  • Meat and dairy consumption can’t continue rising at their current rate forever. (-1)
  • Herman Daly reminds us that the most common measure of economic growth does not distinguish between costs and benefits. Benjamin Friedman, in arguing that there is a moral imperative for economic growth, also used a more socially inclusive definition of growth than the most common one in use today. (-1)
  • The Ebola outbreak continues to get worse and worse, although people are arguing that this is not the type of plague that could threaten civilization itself. (-1)

Positive trends and predictions (+8):

  • Some countries have more sustainable policies than others, and the world could become more sustainable if we all copy the best examples. But even then, the world would probably not be sustainable enough. (+0)
  • People have come up with some novel ideas for backyard wildlife habitat. (+1)
  • Big companies are figuring out how to set up units that innovate more like startups. (+1)
  • Walkable cities with green infrastructure may help boost creativity and problem solving. There is plenty of evidence that walkability might be the single most important key to more sustainable cities. (+1)
  • There have actually been small advances in telepathy. Too soon to say if this will be used for good or evil. (+0)
  • There is a new generation of robot vacuum cleaners. Anything that can free humanity from the drudgery of house work has to be a good thing – almost any other use of our time has to be more productive, creative, or at least more fun. (+1)
  • There is some buzz about sustainable consumption. I just don’t know – the whole concept of “consumption” as an end in itself seems unsustainable to me. (+0)
  • There is also continuing buzz about “green growth” and “de-growth”, but in my opinion very little evidence that these ideas are catching on. (+0)
  • We were reminded that green infrastructure is more than just stormwater management. It’s a beautiful vision to link stormwater management, urban trees and parks, corridors and rural reserves together. But we need more people to share the vision and make it happen. (+1)
  • Another way to make cities a lot more sustainable is to have the price of parking actually reflect its total economic, social, and environmental cost, including the opportunity cost of the oceans of land that are just wasted. (+1)
  • Worldwide child mortality has dropped almost by half just since 1990. (+2)

Hope for the Future Index (August 2014): +1

August 2014 change: -8 + 8 = 0

Hope for the Future Index (September 2014): +1

growth, sustainability, and employment

This article in Ecological Economics looks at economic growth, sustainability, and employment together:

Two empirical correlations are studied: one between economic growth and environmental impacts, and the other between the lack of economic growth and unemployment. It is demonstrated that, at a global level, economic growth is strongly correlated with environmental impacts, and barriers to fast decoupling are large and numerous. On the other hand, low or negative growth is highly correlated with increasing unemployment in most market economies, and strategies to change this lead to difficult questions and tradeoffs. The coexistence of these two correlations – which have rarely been studied together in the literature on “green growth”, “degrowth” and “a-growth” – justifies ambivalence about growth. To make key environmental goals compatible with full employment, the decoupling of environmental impacts from economic output has to be accompanied by a reduction of dependence on growth. In particular, strategies to tackle unemployment without the need for growth, several of which are studied in this article, need much more attention in research and policy.

I get it – growth and employment are often looked at together in the mainstream economic literature, obviously. Employment is pretty important to living standards and social/political stability. Sustainability and growth are often looked at together in the sustainability literature (which is “mainstream” to some, but not really to most economists). There is an obvious tradeoff between the two as long as our economy devours large amounts of natural resources and produces enormous amounts of waste and pollution. The idea of “decoupling” is that each unit of growth gets slightly greener and cleaner over time. But unfortunately, that process does not seem to be nearly fast enough to prevent eventual collapse. Damage to natural ecosystems is increasing and will eventually threaten the ecosystem services that our human civilization depends on. That is the trend we are on. The only two ways out are to slow growth or to accelerate the decoupling process. This article seems to focus on the former. My opinion is that this path is politically impossible unless it is precipitated by some serious crisis, which we can’t just sit around and wait for because it could cause enormous pain and suffering. So the latter option is the only hope. It is hard but entirely possible if enough people understand the situation and dedicate their efforts to make it happen.

oil prices

It’s interesting that oil prices have slipped back below $100 a barrel ($92.92 for West Texas Intermediate, $96.65 for Brent Crude as I write this on September 15). An NPR article blames this mostly on weak demand, but also maybe on unexpectedly higher supply from North America. Some people are predicting this trend will actually continue:

The International Energy Agency made that point last week, when it said a weaker economic outlook in China and Europe is causing a remarkable slowdown in global demand growth. And demand is declining, West says, as global supplies surge due to the energy boom in North America — including shale oil production from North Dakota and Texas.

“There’s another 3 billion barrels a day that’s coming into the market and staying in the market,” he says. “This has really changed the global supply-demand balance very substantially” — and helped bring more stability to the market…

Fadel Gheit, managing partner and head of oil and gas research at Oppenheimer & Co., says oil prices will still spike higher when severe disruptions occur. But he thinks global supply will continue to grow and keep prices in check.

He predicts that will happen as fracking technology improves, reducing the costs of production.

“The break-even point continues to decline. Yes, we needed $80 [per barrel] oil for the North Dakota Bakken oil development to continue,” he says. “Now, it’s about $65. Five years from now, it could be $50, or even $40.”

In the quote above, I skipped over plenty of dissenting voices in this fair and balanced coverage. Nobody really knows why markets do what they do in the short term, and anything can be rationalized. Then when you go back and look at the data later, often the longer-term trend is staring you in the face. Over the past 10 years or so, the longer-term trend is oil hanging out around $100 or so, whereas it used to be $20-40 for decades and decades before that (this is all adjusted for inflation.) So we’ll see, but I’m not ready to pronounce $100+ oil dead yet just because we’ve been at $96 for a few weeks.

The Moral Consequences of Economic Growth

The Moral Consequences of Economic Growth

There’s a free excerpt of this 2006 book posted here. Basically, Benjamin Friedman argues that there is a moral argument to strive for as much economic growth as possible. Not only does it increase material wellbeing, it improves health, adds years to people’s lives, and allows people to have more leisure time. He also believes that it tends to support development of peace, tolerance, and stable, democratic institutions over time.

The value of a rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political and, ultimately, the moral character of a people.

Economic growth—meaning a rising standard of living for the clear majority of citizens—more often than not fosters greater opportunity, tolerance of diversity,
social mobility, commitment to fairness, and dedication to democracy. Ever since the Enlightenment, Western thinking has regarded each of these tendencies positively, and in explicitly moral terms.

This is a different definition than just increasing GDP, which makes no implicit moral judgment about equity or fairness. If we define economic growth as growing a more equal (or at least, truly equal opportunity), just, sustainable society, then no rational person will have any objection to it. But I don’t think that is the most common definition in daily use today.

Bill Gross on the new normal

In this 2009 essay, after an incomprehensible and irrelevant introduction involving golf, Bill Gross from PIMCO gives us his reasons why we may be in a “new normal” of lower economic growth:

  1. American-style capitalism and the making of paper instead of things. Inherent in the “great moderation” of the past 25 years was the acceptance of a sort of reverse mercantilism. America would consume, then print paper assets and debt in order to pay for it. Developing (and many developed) countries would make things, and accept America’s securities in return. This game is over, and unless developing countries (China, Brazil) step up and generate a consumer ethic of their own, the world will grow at a slower pace.
  2. Private vs. public-driven growth. The invisible hand of free enterprise is being replaced by the visible fist of government, a temporarily necessary, but (if permanent) damnable condition itself in terms of future growth and profits. The once successful “shadow banking system” is being regulated and delevered. Perhaps a fabled “110-pound weakling” may be an exaggeration of where our financial system is headed, but rest assured it will not be looking like Charles Atlas anytime soon. Prepare to have sand kicked in your face, if you believe you are a “child of the bull market!”
  3. Global economic leadership. It’s premature to award the 21st century to the Chinese as opposed to the United States, but if the last six months have been any example, China is sort of lookin’ like Muhammad Ali standing over Sonny Liston in 1964 yelling, “Get up, you big ugly bear!” Not only has China spent three times the amount of money (relative to GDP) to revive its economy, but it has managed to grow at a “near normal” 8% pace vs. our “big R” recessionary numbers. Its equity market, while volatile and lightly regulated, has almost doubled in twelve months, making ours look like that ugly bear instead of a raging bull.
  4. United States housing and employment. Old normal housing models in the U.S. encouraged home ownership, eventually peaking at 69% of households as shown in Chart 1. Subsidized and tax-deductible mortgage interest rates as well as a “see no evil – speak no evil” regulatory response to government Agencies FNMA and FHLMC promoted a long-term housing boom and now a significant housing bust. Housing cannot lead us out of this big R recession no matter what the recent Case-Shiller home price numbers may suggest. The model has been broken if only because homeownership is declining, not rising, sinking to perhaps a New Normal level of 65% as opposed to 69% of American households.

As usual, no acknowledgment that ecological limits could play a role. If they are playing a role, my thought is that the boom times leading up to 2007 could easily have masked a weaker, but more permanent, signal being sent to us by our planet. Then following the bust, that signal could make a recovery harder than it should have been if we were simply reverting to a long-term mean. So during each boom, we forget about the underlying signal, then after each bust it gets harder and harder to recover to the previous trend, and we scratch our heads as to why. If my hypothesis is correct, eventually there will come a bust that we don’t recover from. Maybe this is even it – there is essentially no growth in Europe or Japan, and we are celebrating a very low growth rate in the U.S. It will be difficult to discern the long-term signal from the noise in real time. In hindsight, it may be obvious.

Robert Shiller on the new normal

Here’s Robert Shiller in Project Syndicate talking about the “new normal” of slow economic growth:

There is a name for the despair that has been driving discontent – and not only in Russia and Ukraine – since the financial crisis. That name is the “new normal,” referring to long-term diminished prospects for economic growth, a term popularized by Bill Gross, a founder of bond giant PIMCO.

The despair felt after 1937 led to the emergence of similar new terms then, too. “Secular stagnation,” referring to long-term economic malaise, is one example. The word secular comes from the Latin saeculum, meaning a generation or a century. The word stagnation suggests a swamp, implying a breeding ground for virulent dangers. In the late 1930s, people were also worrying about discontent in Europe, which had already powered the rise of Adolph Hitler and Benito Mussolini.

The other term that suddenly became prominent around 1937 was “underconsumptionism” – the theory that fearful people may want to save too much for difficult times ahead. Moreover, the amount of saving that people desire exceeds the available investment opportunities. As a result, the desire to save will not add to aggregate saving to start new businesses, construct and sell new buildings, and so forth. Though investors may bid up prices of existing capital assets, their attempts to save only slow down the economy.

“Secular stagnation” and “underconsumptionism” are terms that betray an underlying pessimism, which, by discouraging spending, not only reinforces a weak economy, but also generates anger, intolerance, and a potential for violence.

So this is the old “animal spirits” argument. There is almost never commentary from economists or financiers about the possibility of ecological limits having something to do with this. There are two ways ecological limits could manifest themselves. One is by making us gradually poorer through high prices of food, energy, and various raw materials. That could happen slowly and gradually, be obscured by the ups and downs of business/credit cycles and geopolitics, and not be obvious until it is too late. We could theoretically innovate our way out of the problem, but there might be a downward spiral where as we get poorer and poorer, we devote less effort to innovation and more to making ends meet. The second way ecological limits could manifest themselves would be through a sudden, catastrophic tipping point or climate shift. This would be a point where supplies of food, energy, water, and critical raw materials get so tight they cause a catastrophic breakdown of the systems of civilization, rather than just high prices. Of course, if you are poor enough, high prices and system breakdown have roughly the same consequences for you and your family. If you are rich enough, you can withstand the former just fine, but not the latter.

National Geographic “Greendex”

National Geographic has developed an index that tracks the green-ness of consumer behavior worldwide.

“Greendex 2012: Consumer Choice and the Environment—A Worldwide Tracking Survey” measures consumer behavior in areas relating to housing, transportation, food, and consumer goods. Greendex 2012 ranks average consumers in 17 countries according to the environmental impact of their consumption patterns and is the only survey of its kind.

The top-scoring consumers of 2012 are in the developing economies of India, China, and Brazil, in descending order. Those in emerging economies continue to round out the top tier of the Greendex ranking, while the lowest scores are all earned by consumers in industrialized countries. American consumers’ behavior still ranks as the least sustainable of all countries surveyed since the inception of the study, followed by Canadian, Japanese, and French consumers.

Meanwhile, consumers in developing countries with the highest Greendex scores are the most likely to agree that they “feel guilty about the impact [they] have on the environment,” despite having the lightest footprint as individuals. The research finds a positive relationship between the extent to which people feel guilty about their impact and the Greendex scores of average consumers in the same countries. Consumers with low Greendex scores, i.e., those demonstrating the least sustainable behavior as consumers, are least likely to feel guilty about the implications of their choices for the environment.

I don’t doubt the validity of their conclusion that the average person in China, India, and Brazil has a much lower environmental impact than the average person in Canada, Japan, France, and the United States. I am surprised though by their finding that people in developing countries express more guilt about their own personal ecological footprints. That is not my impression based on some time living and working in Asia. The small, unscientific sample of people I have interacted with are definitely concerned about air and water pollution, for health and safety reasons, and if they belong to a generation that still remembers the land they tend to feel some sadness about urbanization. But concern about health and safety is not the same thing as guilt. People are demanding cleaner air, water, and food for themselves and their families, but that doesn’t mean they are thinking much about their impact on the environment for the environment’s sake. It’s a great story to tell that as these billions of people catch up in wealth and spending to their more industrialized, urbanized neighbors, they will do so without adopting those neighbors much larger ecological footprint. I want to believe it, but I don’t believe that is the path we are on.

 

Herman Daly

Herman Daly has a graph explaining his concept of “uneconomic growth”.

From the graph it is evident that increasing production and consumption is rightly called economic growth only up to the economic limit. Beyond that point it becomes uneconomic growth because it increases costs by more than benefits, making us poorer, not richer. Unfortunately it seems that we perversely continue to call it economic growth! Indeed, you will not find the term “uneconomic growth” in any textbook in macroeconomics. Any increase in real GDP is called “economic growth” even if it increases costs faster than benefits.

 

my favorite non-fiction books

Somebody asked me recently for a list of my favorite non-fiction books. It was tough to come up with a short list, but I came up with one based on two criteria – they had to have a significant effect on my mental model of the world, and more importantly they had to be a thoroughly enjoyable read. So, understanding that not everyone has the same taste in books and would love the books I love, here are some of my all-time favorites in no particular order:

How Much is Enough?: Money and the Good Life

The Song of the Dodo: Island Biogeography in an Age of Extinctions

Guns, Germs, and Steel: The Fates of Human Societies

Collapse: How Societies Choose to Fail or Succeed

Cradle to Cradle: Remaking the Way We Make Things

The Singularity Is Near: When Humans Transcend Biology

Engines of Creation: The Coming Era of Nanotechnology (Anchor Library of Science)

 

the “greater depression”

This article from Project Syndicate is very pessimistic about prospects for the global economy. It focuses mostly on low inflation:

Draghi began by acknowledging that, in Europe, inflation has declined from around 2.5% in mid-2012 to 0.4% today. He then argued that we can no longer assume that the drivers of this trend – such as a drop in food and energy prices, high unemployment, and the crisis in Ukraine – are temporary in nature.

In fact, inflation has been declining for so long that it is now threatening price stability – and inflation expectations continue to fall. The five-year swap rate – an indicator of medium-term inflation expectations – has fallen by 15 basis points since mid-2012, to less than 2%. Moreover, as Draghi noted, real short- and medium-term rates have increased; long-term rates have not, owing to a decline in long-term nominal rates that extends far beyond the eurozone…

A year and a half ago, those who expected a return by 2017 to the path of potential output – whatever that would be – estimated that the Great Recession would ultimately cost the North Atlantic economy about 80% of one year’s GDP, or $13 trillion, in lost production. If such a five-year recovery began now – a highly optimistic scenario – it would mean losses of about $20 trillion. If, as seems more likely, the economy performs over the next five years as it has for the last two, then takes another five years to recover, a massive $35 trillion worth of wealth would be lost.

When do we admit that it is time to call what is happening by its true name?

This discussion doesn’t really get at potential root causes (a valid criticism of most economic and financial reporting, I think) – is it just a lack of confidence feeding on itself? Is it lack of innovation causing productivity to fall? Is it automation causing productivity to rise but lining too few pockets? Is it climate change or some other manifestation of environmental degradation?

The reference to falling food and energy prices wouldn’t seem to support that last hypothesis. But I don’t quite get it – Brent crude is at $102 a barrel compared to its historic inflation-adjusted level of $20-40 for most of the last century. Meat and grain prices in the U.S. are definitely up due to one of the worst droughts ever in some key farming states. And that’s the U.S., not the tropics where the bulk of humanity now lives and the bulk of food needs to be grown in the future. So if I am right and there are serious pressures on water, energy, and food, we better hope that we are innovating at the same time to do something about it.