Economics and Global Warming

Economic forecasting serves only to make astrology seem more respectable.

                                                                    John Kenneth Galbraith                                                    

      Some precious tenets of classic economic theory must yield to the necessity of reducing human impact on climate.  Persuading individuals, businesses, and governments to change their thinking and behavior may prove more difficult than devising the many needed engineering solutions. Fortunately some economists have contributed massively to the new thinking.  Here are the findings of a non-economist attempting to extract these useful concepts from economics.  

       Soon after my marriage in 1946, I ran into my wife’s economics textbook left over from her college course.  I had never studied  the subject and decided to read her book to fill the gap in my education.  My program did not work out as planned because the textbook seemed to be saying that maximizing production was the key to economic development regardless of the value of what was being produced.  My rapport with economists took a large turn for the better when I read John Kenneth Galbraith’s The Affluent Society in 1958.  I was very glad that I made another attempt because the author spoke to my biases—here was an economist that I could trust.  I soon found a detailed discussion of advertising perceived consumer “needs” of unnecessary products and the consequences of maximizing production of these less than vital products. Sure, it kept the labor force working and avoided depression, but resulted in the wage-price spiral of inflation (not to mention trashing the planet).  Galbraith actually stated that the most efficient production of not very necessary goods might  be no production at all (obvious in the case of land mines).  The electric can opener for individual households is succumbing to frozen vegetables (do you know anyone who still uses one?).  Education helps us identify surviving “electric can openers.”  Or perhaps the carbon footprint of holding whole seasons of produce in the frozen state may resurrect the domestic can opener.  Education is a two-edged sword—and I also neglected canned dog food.   

       We should prepare for the transition to the post-global warming economy to aggravate, at least temporarily, some classic economic problems.  Therefore we need better remedies for inflation, depression, and stagflation.  Instead of accepting the evils of unemployment on the one hand and inflation from the wage-price spiral on the other, Galbraith suggested CGC, cyclically graduated [unemployment] compensation.  It was such a good idea that I have remembered it ever since and wondered why it has not been tried.  His idea started with recognizing John Maynard Keynes (a grandson of Charles Darwin!) for suggesting reduced taxes and increased public works instead of accepting unemployment and depression as inevitable.  So, why not make an adequate compensation to the unemployed when the unemployment was an involuntary result of the business cycle and reduce it to just above subsistence level when unemployment was low and more “voluntary”?  Galbraith did mention that CGC would work in stabilizing the business cycle if applied sufficiently promptly, but that politicians would wait until too late, so it would have to be triggered automatically. This would be close to what Herman Daly calls for, a stiff tax on very high incomes and a negative tax on very low incomes. Galbraith also explained why monetary policy (fiddling with interest rates) was too slow for the purpose.  Finally, the opposite of Keynes’ fiscal policy--raising taxes to combat inflation—would also work. Galbraith goes on to explain that in the real world it would fail because of politicians’ and the public’s reluctance to accept a tax increase sufficiently promptly.  So, neither the politicians nor the public have given much thought to raising taxes to fight inflation, but it would succeed by reducing the money supply.  Explanations and remedies for “stagflation” (inflation and economic depression occurring simultaneously) may be beyond the scope of this essay, but let us give it a try. 

      Since stagflation refers to a recession occurring simultaneously with inflation of the currency, the remedies for recession seem to conflict with those for inflation.  The recession seems to be the primary problem with the inflation superimposed by a wage-price spiral.  So, why not take care of the inflation by sopping up the excess money supply (too much money chasing too little goods) with increased taxes and take care of the reduced employment by increased public expenditures?  Quite possibly the experts already know what to do—they just haven’t done it yet. So, we should write to our congressmen and newspaper editors at appropriate times. 

       A related idea: why not give the Federal Reserve Board (FED) additional leverage in controlling the economy by permitting them to raise or lower taxes incrementally the way they are already doing with interest rates?  Tax withholding rates could be adjusted promptly nationwide.  My recent reading, especially of John Kenneth Galbraith, indicates that manipulating interest rates is much weaker and slower than changing tax rates.  Congress and the public are both slow to accept any action about taxes except for reducing them.  Therefore the new authority for the FED should start as a small experiment.  Some computer modeling of the effects on the economy could show the way for more effective interventions by the FED—or ultimately by a semiautonomous computer program after the models are debugged.

      My final, or anyway most recent encounter with academic economists, occurred during two years in Afghanistan in the late 1960s with my observation that if the underdeveloped world succeeded in living as we do in the US, we collectively (mankind) would trash the planet quite promptly.  Herman Daly’s Book, Beyond Growth, Beacon Press, !996, has confirmed my surmise and greatly clarified my thinking along with Shumacher’s, Small is Beautiful, 1973.  Schumacher was an early advocate of the fact that economic growth without concern for people’s wellbeing is self defeating, Amory Lovins’ and Paul Hawken’s Natural Capitalism, 1999, emphasizes the difference between capital and income as does Daly.  For example, increased farm revenue at the expense of soil erosion is obviously not sustainable because part of the money is from expenditure of natural capital, topsoil in this instance.  The Land Institute, Salina, Kansas is a center for research for sustainable agriculture with emphasis on perennial (as opposed to annual) crops for preventing soil erosion and conserving fertilizer. They are part of a consortium of farm and environmental organizations, and five mid-western state universities that participate in the research.  Collectively their website is  < www.greenlandsbluewaters.org >  The books mentioned in this essay have educated me about economics including the insight that free trade as presently practiced has feet of clay. Examples of these details follow. Here are the main issues in roughly their order of importance.

     1) Don’t confuse income from production with sale of resources that represent withdrawal of natural capital.  The traditional measure of economic productivity of a country, gross national product (GNP), includes sales of renewable and nonrenewable natural resources.  Sales of natural resources are actually reductions of assets just like a bank withdrawal.  It is worse than misleading to include them as income.  Take lumber as an example: only value added in a sawmill belongs in the GNP total.  Costs of environmental degradation incidental to obtaining income should also be deducted from what we think we have been measuring as GNP. The ultimate examples are global degradation such as carbon dioxide accumulation or radioactive contamination such as Chernobyl.  Global warming is a worldwide example of a “tragedy of the commons” (no single individual pursuing his immediate interest is motivated to preserve a public asset). 

     2) Human population needs to be controlled  at a level permitting the earth to support its inhabitants.  Witness the alternating population explosions of moose and wolves on Isle Royale.  Consider that we are already approaching the carrying capacity of the environment to support the existing human population. We are blunting this problem in developed countries, but we haven’t begun to deal with the high birthrate in the least developed countries.  “Sustainable development requires fundamental changes in the conduct of government, private institutions, and individuals.” (Herman Daly)

     3) In order to avoid irreversible environmental degradation prudent action may be required in spite of some scientific uncertainty. For instance, there has long been no significant scientific controversy about the reality of human induced global warming. In 1896 Svante Arrhenius (the father of physical chemistry) predicted that rising atmospheric carbon dioxide would induce global warming!

    4) Progress towards elimination of poverty will permit all segments of society to share the environmental costs and benefits and enlist market forces to protect and improve the environment. Too much consumption by the rich does not leave enough sustainable production capacity to provide a reasonably good life for the world’s poor.  A starter suggestion from my recent reading: permit business to deduct as an expense executive pay only up to twenty-five times the amount paid to the lowest paid employee of the enterprise.  The firm could pay more, but the excess would come out of profits and be doubly taxed—stockholders would get the message and think deeply about the level of executive compensation. And, while we’re at it, make the minimum wage about one half the average national hourly rate.  A steeply graduated inheritance tax but with an exemption indexed to inflation to protect small (family) businesses and farms is also necessary to avoid a few families ultimately owning almost everything, a veritable recurrence of feudalism.

    5) Education is crucial to our goals. It succeeds everywhere it is applied.  Fortunately it is self-correcting as is science.  Islamic universities preserved learning during the Dark Ages of Europe.  Our sectarian colleges are similarly rising above the prejudices that motivated their founding.  Education, including higher education to all who could benefit from it regardless of ability to pay will enhance sustainable development and the needed fundamental changes in how we behave as individuals, institutions and governments.  An outstanding example is Ireland.  They were backward and poor until universal education regardless of an individual’s wealth “lifted all boats”.  Their population problem also quickly came under control.  Education is so important that if the rich would not agree to pay for it, the poor would be better of to pay by a regressive tax like a sales tax than to forego the benefit.

      Here is a quotation from Daly in the introduction to his book, Beyond Growth:

Nearly all policies for sustainability involve internalizing environmental and social costs at the national level [e.g. a depletion tax on nonrenewable resources].  This makes prices higher.  Therefore, free trade with countries that  do not internalize  these costs, or do it  to a much lesser extent, is not feasible. In such cases  there is  every reason for protective tariffs……The power vacuum created by weakening of national communities [by free trade] will be filled by international corporations, which in the absence of a world government, will be unconstrained by any community interests.

 

      A good first step in restraining international corporations would be campaign finance reform in our country (it has already happened in Maine).  The Supreme Court got it wrong when they stated that money is the equivalent of free speech, thus inhibiting campaign finance reform and preventing prohibition of tobacco advertising.  We need a new category of items that are neither legal nor illegal.  This would permit us to prohibit advertising of this new category.  I suggest starting with marihuana, tobacco, hard liquor, (perhaps jet skis), and prescription drugs. Amphetamines enhance performance in people without a diagnosis of attention deficit disorder. Or suppose that Prozac makes an already world-class salesman even more convincing (quite possibly true).  Should we permit stimulating demand for “speed” or Prozac by the general public? Please remember that we are talking about limiting advertising, not about prohibition.  Promoting environmentally harmful and frivolous activities and products would become similar to “shouting ‘fire’ in a  crowded theater” (Justice Oliver Wendell Holmes about limits to free speech).

      I close with an excerpt from a very pertinent brief article about climate change entitled All in the Game

by Thomas Pfeiffer and Martin A. Nowak from the British science journal Nature for June 1, 2006:

     It is in the public interest to keep Earth’s climate on an even keel—the public, in this case, being all the world’s population.  Are you prepared to stake your own reputation on helping to improve things?……The Earth’s climate is a ‘public good’…..It faces a “tragedy of the commons” [no single individual pursuing his own immediate interest is motivated to protect a public asset].  Experiments with public goods games are a way of exploring how such a tragedy might be avoided.

    …..[In such games the experimenter can achieve] cooperation between group members…by changing the rules of the game.  For example, if the players can punish or reward other players  based on their behaviour,….a high level of investment [in the public good] can be maintained.  Players who are known to make investments in the public good gain a good reputation; and that reputation translates into direct benefits of either receiving rewards or avoiding punishment…..

     The experiments revealed that reputation is essential in maintaining a high level of investment.. In rounds where the investment was anonymous, the degree of cooperation was much smaller than where the investment was made public……The main message of this study, then, is that whenever individual behaviour is relevant to the public good, it should be made public….

      How might these principles work in practice?  Energy costs of individual households could, for example, be published by local authorities.  Companies could be ranked according to their emissions….The large costs that may arise from global climate change have to be communicated, even if the details are not yet fully understood.  And even small investments in climate protection may help…

      Let no one underestimate the difficulty in persuading individuals around the world, let alone businesses and entire nations about the necessity of putting the brakes on the human impact on climate.  And cynics may sneer at the prospect of applying the principles of an academic exercise on a world stage.  But like it or not , we are all involved in the very real game of climate change.  It is one of the few games we cannot afford to lose.                                                                                                                                                                                        

 

       Even less than 60 years of reading and discussions with informed friends could have sufficed to replace formal course work in economics.

 

John A. Frantz, MD, August 22, 2007

 

While technology is unrolling the carpet of increased choice before us by the foot, it is often simultaneously rolling it up behind us by the yard.               E. J. Mishan

 

 

 

 


 



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