Two hundred years ago the level of carbon in the atmosphere was 275 parts per million. It had been that way all through the Holocene. Then we learned this new trick, burning coal and gas and oil. In essence we took millions and millions and millions of years of biological history, filed away there in oil wells and coal mines, and tossed it all up in the atmosphere at once. That 275 has gone now to 390.Today, Economics, What is it? Then taking lessons from Libya and oil, a few notes on Ireland, consumer sentiment, and GDP v. GDI, and finally the closing comments of Nouriel Roubini at the MIPIM conference.
Today, the new data shows that we enter the Arctic ice melt season this year with lowest amount of ice we’ve ever recorded. It looks quite possible that we’ll have an ice-free Arctic within the decade. These changes are already enormous. What we do in the next ten, twenty, thirty years really decides what happens ten thousand, twenty thousand years down the pike.
This just turns out to be this incredible geological hinge. The question is, “Can we keep what’s left of that coal and oil and gas in the ground. Ultimately that is a political question. Two days ago the President announced that they were opening up 750 million tons worth of coal in Wyoming under federal land, most of which will end up in China fueling their power plants if we don’t keep it in the ground.
That’s the kind of unbelievably tragic and short-sighted mistake that people make when they don’t pay attention. This is not one on a kind of endless list of problems that we’re always dealing with. You know, the drug crisis, the war in whatever. This is the only geological scale crisis that we’ve ever come up against. But because it plays out over tens of thousands of years, the politically relevant timeframe is tens of years, not tens of thousands. All of that is just the aftermath. We’re in the middle of the drama right now.
We led today with the planetary health situation laid bare by Bill McKibben speaking to Tom Ashbrook. The society’s major challenge and its best opportunity to create value in a depression lie in this climate crisis. Yet it is virtually off the screen of public policy. Why is that? Our answer is, Economics. McKibben calls them political decisions, but it is Economics. Economic power is driving political power.
So, Let’s visit the question,
What is Economics?
Robert Heilbroner defined economics as the study of how we provision ourselves.
Paul Samuelson’s classic text tried out several:
Economics is the study of those activities which, with or without money, involve exchange transactions among people.
Economics is the study of how men choose to use scarce or limited productive resources (land, labor, capital goods, technical knowledge) to produce various commodities (wheat, beef, overcoats, concerts, roads, bombers, yachts) and distribute them to various members of society for their consumption
Economics is the study of men in their ordinary business of life, earning and enjoying a living.
Economics is the study of how mankind goes about the business of organizing its consumption and production activities.
Economics is the study of wealth.
Samuelson, the high priest of economics when it had its greatest credibility, finally settled on “Economics is the study of how men and society choose, with or without the use of money, to employ scarce productive resources, which could have alternative uses, to produce various commodities over time and distribute them for consumption, now and in the future, among various people and groups in society.”
That’s nice. But none of them adequately convey the muscle and sinew, nor do they describe how basically economic processes are leading to fundamental and potentially catastrophic destruction. The bland definitions conceal more than they disclose.
Commodities and material production are essential, but they are not primary. The fact that a rich person buys a yacht is far less important to economics than the fact that as a rich person, he or she finds income flowing in and wealth accumulating in such amounts. The bread that a poor person can or cannot buy is less important in an economics sense, than the fact that such an individual has trouble marshalling the income.
To us it is not the product, but the organization that is key.
The fact that one person spends a quarter of a million going to Harvard is less important economically than the fact that he or she can afford it, and not so important, either, as the utility of the education. A Harvard economics education, for example, produces a tool that cannot form a functioning policy. At the same time, the Harvard economics education assures that the tool will be employed in the attempt.
So there are institutional aspects and effectiveness and coordination.
Economics is neither individual nor volitional. It is organic and it is evolutionary. Economics is nothing less than the character and organization of the social structure of humanity. This structure is organic and evolutionary. Its skeleton, nervous system, muscles, circulatory system and intelligence mirrors the human body. There may be psychological, religious, biological, artistic and other structures. And notwithstanding the fact that each will influence all, the social organization is economics.
Now that is a beginning to a much longer discussion, and some of the questions for that discussion might be: Where is politics? Where is money? How about the basics of provisioning?
But scarcity, individuals, business, transactions? Components but not definers. Least of all is economics a kind of huge game where the actions of individuals for their own self-interest is independent, but generating a harmonious and efficient outcome.
Take some cases for consideration.
An enterprising Kenyan can work hard, save, invest, entrepreneur himself six ways from Sunday, and if he gets a bit luck he can rise above the poverty of his society. Another enterprising Kenyan can emigrate to the U.S., take a job as janitor in a county building, and do much better.
Free market fundamentalists preach the primacy of the individual, an absurd contention when so very few manufacture and produce in isolation. It is sun worship. In our community, one of the great critics of public goods and government action is Kemper Freeman, whose fortune was based on paving public roads. Question mark.
And consider the triumphant figure of capitalism -- the CEO, whose individual exploits must pale compared to his ability to motivate a workforce to march in lockstep. Often you see these CEO’s try to take their success to the public sector, saying “Vote for me, I made Jack Rendering a successful company, I can run state government like a successful business. Turns out it doesn’t work that way. Jack Rendering took roads, schools, courts, police, the workforce as given inputs – and complained about the cost in taxes – and Jack Rendering produced a narrowly targeted private consumption good, sold into a market similarly dependent on public goods as inputs. Most often the fullness of the businessman’s self-congratulation is exceeded only by his delusion. Effective economics is a lot more about cooperation and coordination and planning than about individual self-interest,
The best smallest metaphor for an economy is not the individual, but the family farm. Here you have infrastructure, a workforce, management, old people, young people, sick people, decisions about what to do in downtimes and emergencies, and so on. You can trade eggs for beef or even money to buy this and that. On a farm, for example, when the weather is bad, or the fields are not amenable to planting or tilling, a recession as it were, you don’t lay off the kids and cut rations to grandma, you turn to repairing, building, learning, planning and so on. Activities that have no immediate market payoff, but without which life is and will be poorer. These are productive activities, and there are plenty of parallels in the current recession. They produce, in fact, the ultimate well-being.
We are, instead, letting the barn that grandpa built fall apart and eating the seed corn. We are not adapting to changing times, and we are failing a moral and practical duty to empower the kids and protect the old.
The greatest betrayal of the society by economics lies in the notion of self-interest and the dominance of self-interest. Greed is not good. It is an embolism or tumor if left unchecked. The famous study of economics undergraduates which showed that two years after beginning their studies they demonstrated markedly greater selfishness is proof enough that economics as taught is fundamentally wrong.
What is economics? We’ll come back to that in a future podcast. Leave your own thoughts on in the comments section of the transcript, or drop us a line at demandside one word at live dot com.
It is not so unnatural a segue from this into the economics dimension of the current revolution in the Middle East and North Africa.
Point One, very few saw it coming in the dimensions it has.
Point Two, this does not mean popular mass action sprang out of nothing, nor that it is not substantial and world-changing. Evidence is quite the contrary.
Point Three. Having failed to forecast it does not mean we should ignore a study of its causes. That would be like ignoring the obvious causes and best fixes for the Great Financial Crisis and going on with the same old paradigms.
Oops. Bad example. I guess that’s what we are doing.
So maybe that makes it a good example. In any event, hindsight is 20-20. There is plenty of light in that direction, even if the future is dark.
Can we not agree that instability arose from the following sources
One, an unemployed population of young people.
Two, rising food and commodity prices.
Three, repressive, autocratic regimes which
Three – A: Promoted and nourished corruption in economic activity
Three – B: Failed to provide and in some cases privatized and withdrew basic public goods.
Four: Regimes were financed by oil.
We’ll get back to this someday soon. Today, we need to move on.
In Ireland, stress tests conducted by Blackrock prompted announcement of a radical overhaul of the banking sector, forcing EBS into the bank AIB, among other things. Earlier reports had Finance Minister Michael Noonan describing haircuts needed from bondholders as also necessary in the restructuring process. If so, and those comments were notably absent from today’s coverage, what a welcome change it would be. Earlier descriptions were to “share bank losses with bondholders.” Much better than the practice of completely protecting finacial investors. It is unclear whether the dreaded term “default” will be applied to such arrangements.
Calculated Risk reports that Gross Domestic Income (GDI) is still 0.25% below the pre-recession peak. The U.S. produces two conceptually identical official measures of its economic output, GDI and GDP. These two measures have shown markedly different business cycle fluctuations over the past twenty five years, with GDI showing a more-pronounced cycle than GDP. GDI is by our accounts, a more accurate description of the economy. Numbers are not as immediately available, however.
And before we get to Nouriel Roubini, just a note that Consumer Sentiment declined in March. The final March Reuters / University of Michigan consumer sentiment index declined to 67.5 from the preliminary March reading of 68.2 - and down from 77.5 in February. This is the lowest level since November 2009.
And now, the Nouriel Roubin’s closing comments in his keynote to the MIPIM conference. The entire presentation is available as a Demand Side relay. We put that up last Sunday.
My final observation will be the following one, which will be another downside risk. I said at the beginning that the glass is half full. But it is half full because for the last two or three years we have had on one side a massive amount of monetary liquidity injections in the global economy, near zero policy rates in advanced economies, Quantitative Easing I, Quantitative Easing II in the U.S., in Japan, in other economies. So the glass has become full because liquidity has been huge chasing assets and leading to asset reflation. And on the fiscal side, until recently, we had massive fiscal stimulus in the U.S., in Japan, in emerging markets.\
But if you look at the road ahead, there is going to be less monetary and fiscal stimulus. On the fiscal side, the Eurozone is already retrenching -- cutting spending, raising taxes -- because the bond vigilantes are forcing it in the Eurozone and United Kingdom. But even in the United States, where we are kicking the can down the road, there will be fiscal consolidation. It is already occurring at the state and local level. It is going to start to occur at the federal level as the
Republicans in Congress are pushing for spending cuts. So even in the U.S., the fiscal side is going to be a drag on economic growth. Not just in the Eurozone. Not just in the United Kingdom.
On the monetary side, with rising inflation, the European Central Bank has already signalled that they are going to start to increase interest rates, because they are worried about inflation. Inflation is already well above target in the United Kingdom, and the pressure on the Bank of England to raising interest rates if not today, in the next few months is going to be significant. And even in the United States, where policy rates are going to remain at zero, after the end of QE II in June, we are not going to have QE III, most likely. We are not going to have QE III because growth is positive, because inflation at the headline is rising, because Republicans are in control of the House and they are bashing the Fed, saying that the Fed is threatening to debase the currency and lead to inflation. And because a larger number of the members of the FOMC of the Fed, the three new governors are all more hawkish than Ben Bernanke (Kocher Lakota, Prosser, Fisher) and therefore even the Fed is going to be more cautious.
So the closing question is the following one: If the glass is half full because we had monetary and fiscal injections, but in the next few years, we are going to have fiscal austerity and exit from zero rates in the U.K, in the Eurozone, and eventually next year even in the United States, is there enough resilience in the private markets.
Is there enough resilience of consumption, of the corporate sector, of capex, to have resilient economic growth, when part of the monetary and the fiscal stimulus is going to go away.
I think that is an open question. So there are strengths, there are upside risks.
The real economies are doing well, and they are recovering, but certainly some of the downside risks I talked about, certainly those coming from the political risk in the Middle East, the risk of rising food and energy prices, may lead to a slowdown of growth and increasing inflation, and some of the downside risks that I referred to.
So the glass is half full, but it is also half empty, and we are going to still be in a world in which there is macro uncertainty and volatility, not just micro, financial, fiscal, political, policy, and also geopolitical. So it is still an uncertain world in which there are upside risks as well as downside risks.