Davos Dynamism vs End-of-Growth

   As we have discussed many a time, many ecological economists share the idea popularized by Herman Daly that Steady State Economics is the answer to all our environmental woes. This concept is starting to make more meaningful inroads into the mainstream thinking as evident by the following article from Bloomberg Markets. The ideas expressed are not in total conformity with those of Daly but they do represent a step in the right direction. Read and comment.

********************************************************************************

 By Jeremy Kahn - Jan 16, 2013   Bloomberg Markets Magazine

Over the course of 2012, the U.S. economy rebounded with all the vitality of a slug waking from a long nap. In debt-strapped, recession-hit Europe, investors fret about a Spanish bailout, a Greek default and whether the euro itself will shatter.

In Asia, slowing growth in China and India has called into question the national narratives of the two emerging-markets giants -- and dragged down earnings and commodities prices around the globe.

If all of that weren’t bad enough, last summer saw the publication of a much-talked-about paper by Northwestern University economics professor Robert Gordon titled, “Is U.S. Economic Growth Over?”

Gordon doesn’t mean over in some happy-days-aren’t-quite- here-again-yet-just-wait-another-quarter kind of way. He means over as in finished, finito, happy days ain’t never coming back.

“Future growth in real GDP per capita will be slower than in any extended period since the late 19th century,” he writes.

The 72-year-old macroeconomist elaborated on his argument in an e-mail exchange with Bloomberg Markets.

“The inevitable decline in future growth required by the need to reduce government and consumer debt will guarantee a contentious political landscape not just over the next year but over the next several decades,” he said.

Resilient Dynamism

With all of this evidence of crushing stagnation, it’s surprising, or at least contrarian, that this year’s high- powered World Economic Forum in Davos, Switzerland, should take place under the cheery rubric Resilient Dynamism.

The logic of the organizers, as spelled out in the program for the Jan. 23 to 27 event, is that hard times require “successful organizations to master strategic agility and to build risk resilience.”

The corporate leaders of those organizations won’t find much cause for optimism in Gordon’s work.

He starts out with a base-line projection for growth in U.S. real gross domestic product per capita of 1.4 percent per year during the next 15 years. That’s more than one full percentage point lower than the average growth rate the U.S. experienced from 1928 to 1950 and 0.4 percentage point lower than the average annual growth from 1987 to 2007.

Wait, it gets worse. In his paper, Gordon identifies six “head winds” that he says will subtract from U.S. growth: an aging population, declining educational attainment, rising income inequality, increasing offshoring and automation, climate change and the prospect of a carbon tax to combat it, and the high debt burden on both households and the government.

Alarm Bells

Together, he says, these head winds could flatten 1.4 percent growth to near zero.

Gordon argues that extremely low growth rates were the norm in earlier periods of human history -- he cites data from British researchers showing that England’s GDP grew only 0.2 percent per year on average from 1300 to 1750 -- and could be the norm again. Other economists extend Gordon’s thesis to Europe and beyond.

The forecast sets off alarm bells for Bill Gross, co-chief investment officer at Pacific Investment Management Co., the world’s largest bond investor.

“A 1 percent differential means a lot in terms of unemployment, and it means a lot in terms of profits,” Gross says. “Corporate profits grow more after overall economic growth hits 2 percent. Below that, they stall out.”

Gross is among those who think Gordon is onto something. He says he worries that as growth ebbs, the U.S. and most developed economies will be tempted to paper over the problem by printing money, as they have with recent quantitative-easing policies.

Chicken Littles

That will eventually mean higher inflation, the nemesis of bond investors, which is why Gross says he’s looking for returns in frontier markets and in real assets, such as commodities.

The idea that the world has reached the limits of growth has a long pedigree, running from Thomas Malthus in the late 18th century to the Club of Rome in the early 1970s. All of these doomsayers wound up looking like Chicken Littles.

Concerned primarily with resource scarcity and overpopulation, they underestimated mankind’s capacity to innovate and find new ways to stretch supply -- be it food or fossil fuels -- to meet demand.

In contrast, Gordon puts innovation at the center of his thesis; it’s just that he thinks we’ve smashed headfirst into a technological brick wall.

At first glance, this claim might seem ludicrous. Hardly a month goes by without the rollout of some slick new device that promises to transform the way we live -- and that’s just the stuff from Apple Inc. (AAPL)

Angry Birds

What about carbon fiber? MRI scanners, heart stents and new cancer treatments? What about Angry Birds? Well, Gordon says, all that stuff may be cool; it just doesn’t change living standards half as much as indoor plumbing did.

Tyler Cowen, an economist at George Mason University in Fairfax, Virginia, shares Gordon’s belief in a technological plateau.

In his 2011 book The Great Stagnation (Dutton), Cowen references the work of Pentagon physicist Jonathan Huebner, who looked at innovations per capita throughout history. Huebner found that the rate peaked around 1873, in the early years of the Second Industrial Revolution.

Declining innovation slows per capita productivity gains and, in turn, economic expansion. From 2004 to March 30, 2012, U.S. labor productivity growth averaged 1.33 percent per year, well below the 2.33 percent from 1891 to 1972, according to Gordon.

‘Value Destruction’

From 1972 to 1996, despite the information technology revolution, productivity growth slowed to 1.38 percent. This led Nobel laureate Robert Solow, the doyen of growth economists, to quip as far back as 1987 that “you can see the computer age everywhere but in the productivity statistics.”

Total factor productivity growth, which counts both labor and capital, tells a slightly more encouraging story.

Yet even taking into account the gains seen since 1996, when the Internet started to become a commercial phenomenon, average annual total factor productivity growth from 1996 to 2012 in the U.S. remained 1.08 percentage points below the average level from 1947 to 1969.

Hang on, you say. Didn’t U.S. labor productivity spike to record levels from 1996 to 2004? Well, as Cowen argues, this surge coincided with a period in which the financial sector’s share of the U.S. GDP rose rapidly from about 6 percent to more than 8 percent. Then came 2008.

“What we measured as value creation may actually have been value destruction,” he writes.

Austerity Programs

Cowen and Gordon argue that many real productivity gains, be it from electrification or women entering the workforce, can happen only once -- and already have.

Gordon, an early and prominent skeptic of the late 1990s dot-com boom, confines his end-of-growth argument to the U.S. Still, given that the U.S. economy constitutes 20 percent of world GDP, that might be little consolation to the rest of world.

Daniel Gros, director of the Centre for European Policy Studies in Brussels, says public debt and the austerity programs designed to address it will be particular drags on Europe.

“Growth rates in southern Europe are likely to be close to zero for the next decade,” he says.

Unilever NV (UNA) chief executive Paul Polman has expressed a similar view, telling Bloomberg News in December that his company isn’t expecting Europe to recover for 10 years.

‘Tremendous Wave’

In China and India, despite hand-wringing about the slackening pace of economic activity during 2012, there are few reasons to think the party is over. Although China’s one-child policy has resulted in a rapidly aging population, the country’s economy has plenty of pent-up domestic savings and demand.

“There is a tremendous wave of consumerism coming in China,” says Mark Mobius, the globe-trotting stock picker for Franklin Templeton Investment Funds, citing fast-rising wages.

India has problems -- too much red tape, too much protectionism, too much corruption and too little infrastructure -- and yet it is trying to address them, says Jagdish Bhagwati, an economist at Columbia University in New York.

“In India, just three quarters of lower growth have created a huge debate about what to do,” he says.

Other less-developed countries are also charging ahead. Mobius says the best growth may come from frontier markets such as Egypt, Kazakhstan, Nigeria and Vietnam.

Asia’s Impact

Even if Gordon is right about declining productivity in the U.S., he may still be wrong about the future, says former Morgan Stanley (MS) chief global economist Stephen Roach, a longtime student of productivity who researches Asia’s impact on the global economy at Yale University.

Gordon’s head winds will fade in importance, Roach says.

“None of them are permanent,” he says. “They are potentially long lasting, like deleveraging, but bringing debt levels down to lower levels is a good thing and lays the foundation for future growth.”

Daron Acemoglu, an economics professor at the Massachusetts Institute of Technology, counsels against despair.

“We don’t know what the next big thing is going to be,” he says. “But there is no reason to think there won’t be a next big thing.”

Stephen Broadberry, a professor at the London School of Economics and Political Science whose research on pre-industrial Britain was used by Gordon in his paper, says that averaging growth rates from 1300 to 1750, as Gordon does, misses the point: Innovation during those years set the stage for the Industrial Revolution that followed.

Gloomy Sentiment

Economic historian Paul David showed that it took decades for the invention of electricity to create productivity growth: At first, manufacturers simply swapped one power source for another without fundamentally altering their processes.

Robert Johnson, executive director of the New York-based Institute for New Economic Thinking, says economists tend to extrapolate from the present.

“That tends to amplify current sentiment,” he says. “We are in a slump, so sentiment is a little gloomy right now.”

To pierce the gloom, Roger Pielke Jr., a political scientist who specializes in environment and innovation policy at the University of Colorado in Boulder, sifted through the same historic data as Gordon.

His conclusion: Although its pace may vary, economic growth is irrepressible.

Through contagions, wars and economic downturns, the potential for managing risk while fostering growth is an enduring feature of human history.

The World Economic Forum leitmotif of Resilient Dynamism echoes that conviction. Beyond the Alpine slopes of Davos, the challenge is to figure out how to turn a slogan into reality.

To the Rich Man The Spoils

by   R. Kerry Turner¹ & Brendan Fisher¹

Global economic growth during the past century has lifted many into lives of unprecedented luxury. The cost has been the degradation of vital ecosystems — a cost borne disproportionately by the world's poor.

Through our rapacious exploitation, ecosystems and the benefits they bring to us are disappearing at an unprecedented and alarming rate. Qualitative evidence suggests that the rich world is profiting from this process, whereas poorer countries are bearing the brunt of the resulting environmental degradation. Srinivasan et al.¹, writing in Proceedings of the National Academy of Sciences, provide a quantitative basis for that claim, calculating the distribution of costs and benefits over a range of indicators of ecosystem change. The results might, in an ideal world, lead to a radical reassessment of who is in debt to whom.

Measured in terms of gross domestic product (GDP), the size of the world's economy has doubled almost three times since 1950. But the proposition that aggregate economic growth alone is the most important and powerful force for human progress and poverty reduction has increasingly been questioned^{2, 3}. Economic growth fuelled by international trade relies on the consumption of heavily advertised and marketed goods and services. Poorer people and the natural world, marginalized by the market economy, lose out.

Besides basic economic needs, a high quality of human life must include satisfactory human relationships, communities, freedoms and opportunities^{4, 5}. Well-functioning ecosystems are even more fundamental. The buzz-word is 'ecosystem services': the favours such as food and fuel; protection from storms, disease and solar radiation; regulation of water and climate; creation of soils; and inspiration for art, literature, religion and culture that the natural world bestows on us. Current economic models undervalue this provision, because many ecosystem services are 'public goods', historically provided for free. This leaves them prone to overexploitation, a trend exacerbated by global population growth: 15 of the 24 ecosystem services identified in the seminal Millennium Ecosystem Assessment initiated by the United Nations in 2001 were found to be in decline at the global scale⁶.

The current political focus on climate change has brought this pressure on our ecological support systems into sharper relief. Sustaining ecosystem processes is all the more difficult because many change abruptly and nonlinearly when pressed beyond a certain threshold. Qualitative or context- and case-specific evidence indicates that poorer countries bear most of this pressure⁷. An example is the widespread conversion of tropical mangrove forests to shrimp aquaculture. These farms supply Europe and North America with cheap shrimp, but nearby residents must pay the costs: the loss of the storm regulation, fish nurseries, and fuel and fibre sources that the mangrove forests provided⁸.

This type of unequal exchange has been termed an 'ecological debt' owed by rich countries to the poor⁷. As raw materials — whether they be shrimp, palm oil, or crude oil and gas — become scarcer, and exploitation of them advances into new territories, this debt will probably increase. The prices at which exports are sold do not include compensation for the goods' local — or sometimes global — environmental costs. That problem is exacerbated by rich countries' disproportionate use of environmental sinks, such as the atmosphere, to take up their higher carbon emissions.

Srinivasan et al.¹ present for the first time a global-scale quantitative analysis of the distribution of major environmental costs across nations in three income groups: low (representing 32% of the world's population), middle (50%) and high (18%). The timescale of the study is 1961–2000, and it covers six categories of environmental change: climate change; stratospheric ozone depletion; agricultural intensification and expansion; deforestation; overfishing; and mangrove conversion. In the case of climate change, the authors calculate that nations in the low, middle and high income groups were responsible for 13%, 45% and 42% of greenhouse-gas emissions, respectively. The resulting climate damages were estimated to be distributed 29%, 45% and 25%. The same pattern of cost transfer to the poorest nations is observed for ozone depletion, overfishing and aquaculture. In the case of agricultural change and deforestation, the authors find that arguably the costs were largely generated and borne within nations.

When the figures for the six categories are aggregated and adjusted for different currency purchasing power, the low-income group of nations bears 20% of the total costs, the middle-income group 60% and the high-income group 20%. Taking into account equity weighting (the fact that a unit of income is not the same to a poor as to a rich person, making costs a heavier burden to shoulder) the percentages are 45%, 52% and 3%. A significant proportion of the cost burden of the low-income group is caused by the activities of the other groups: looking at climate-change damage alone, rich countries might already have imposed costs on poor countries greater than the poor countries' existing foreign debt. The people bearing these costs include the one billion or so who already lack daily access to safe drinking water, electricity, secure food supplies and basic education.

Several caveats are needed to put these striking results into context. First, any study is only as good as the available data. Globally robust data sets on environmental externalities are incomplete, and therefore the results are indicative, not absolute. Some significant environmental changes have been omitted: the destruction of coral reefs, the dispersal of persistent pollutants and the costs of biodiversity loss. The authors are up-front about these limitations. But they justly suggest that the omissions indicate that their estimates of ecological debts are conservative.

Furthermore, the study does not look at the benefits of increased trade to material wealth and human health. But it is unlikely that this would change the balance of the results: the available, albeit partial, evidence indicates that, despite some gains by poorer countries through the liberalization of trade and finance, the number of people living in poverty has increased or stayed the same during the past 25 years, and the gains of economic globalization have been heavily skewed towards wealthy nations² (Fig. 1). One of the most detailed studies on global inequality concludes⁹ that income divergence between rich and poor nations has "at best ... decelerated after 1950, but [has] not reversed". Large areas of Central and South America, and almost all of sub-Saharan Africa, have been left behind.

Figure 1: Inequality in economic growth.

a, Although gross world product and the value of exports throughout the world rose steadily during the period 1981–2001 (values relative to 1990 = 100), the number living below the US$2 per day poverty line has increased slightly¹⁰. b, Whereas in 1820 the difference between the mean incomes of the poorest 60% of countries and of the richest 10% was fourfold, by 1992 the disparity was tenfold (value of mean income of poorest countries in 1820 = 1)⁹.
High resolution image and legend (33K)

(Above appeared in Nature 2008)

Green Capitalism: A failure

The following is a powerpoint of a presentation that I did at the Left Forum 2011.
The outline is very condensed and I will be glad to respond to any requests for additional information.

The left forum

View more presentations from guston1.

Isit time to adopt global Happynomics?

The following was written by Roger Cohen for the NYT. It is interesting that the call for a measure of happiness and quality instead of the traditional growth oriented but flawed GDP is no longer limited to academicians.

*************************************************************************************
The Brits don’t go in much for happiness. Stiff upper lip is more the thing, and a good laugh if warranted. Trying to be happy just seems like piffle to a practical people. Undeterred, Prime Minister David Cameron has decided to create a national happiness index providing quarterly measures of how folks feel.

His foray into “happynomics” has prompted a deluge of criticism — “woolly-headed distraction” was a mild commentary — at a time when Brits face a year of cuts in everything from public-sector jobs to child benefits. The consensus seems to be that Cameron is going touchy-feely because in reality he’s wielding an ax.

That may be so. But the case for trying to measure the happiness of a society, rather than its growth and productivity alone, has become compelling. When Western industrialized societies started measuring gross domestic product, the issue for many was survival. Now most people have enough — or far more than enough by the standards of human history — but the question remains: “What’s going on inside their heads?”

Little that’s good, it seems. Stress has become the byword for a spreading anxiety. This anxiety’s personal, about jobs and money and health, but also general: that we can’t go on like this, running only to stand still, making things faster and faster, consuming more and more food (with consequent pressures on prices); that somehow a world of more than seven billion people is going to have to “downshift” to make it, revise its criteria of what constitutes well-being.

Just what goes into well-being is confounding. Many of the variables — like love and friendship and family relations — are hard to pin down. But British research has suggested that money itself does not confer happiness, although wealthier people tend to be happier; that employment is critical to self-esteem; that women tend to be happier than men; and that people need something beyond the material for fulfillment.

Starting next month, the government will pose the following questions and ask people to respond on a scale of zero to 10: How happy did you feel yesterday? How anxious did you feel yesterday? How satisfied are you with your life nowadays? To what extent do you feel the things you do in your life are worthwhile?

Scarcely extraordinary, but Andrew Oswald, a happiness economics expert at the University of Warwick, suggested the questions were a good start, although he would have added, “How well have you been sleeping?” — an important mental health indicator — and “How pressurized do you feel your time is?”

The important thing, he argues, it to shift “from the concept of financial prosperity to the idea of emotional prosperity.” Perhaps that’s the 21st-century indicator we need: gross emotional prosperity, or G.E.P.

The Office for National Statistics, which will do the survey, has been conducting an online debate. Answers suggest Brits link happiness to bird song, knowing themselves, the environment, responsible pet ownership, contributing to society, going out into the wild and reading Socrates.

Clearly, happynomics is no precise science, and how the happiness index will link to policy remains to be seen. But the idea is to put value on things that don’t have price tags. Open spaces, clear air, security, release from pressure — these are things of growing importance and scarcity. Then the question becomes: How do you promote them while at the same time creating the jobs needed in all Western societies? Growth is of course a large part of the answer, but it can’t be all the answer any longer.

I was thinking about some recent moments of happiness in my own life. One came walking across Regent’s Park, my skin tingling at the first brush of spring. Another came kissing my daughter goodnight as she slept and seeing how peaceful she was. A third came in Cairo seeing the powerful dignity of the Egyptian people coalescing to bring peaceful change.

These moments were linked to nature, to finding time, to feeling the transcendent power of the human spirit. Emotional prosperity is not the next e-mail in a relentless life.

So I’m ready to give Cameron the benefit of the doubt and even give a wary nod to his related “Big Society” project, also the source of much guffawing. The essence of this idea is that people can give more to one another — British A.T.M.s, for example, would automatically give customers an option of donating to charity. It’s a tough sell in a grim economy, but it captures a need among dislocated people to connect more.

That’s also true in the United States. Liberty is an inalienable right of Americans, along with the “pursuit of happiness.” Note the distinction here, evidence of the wisdom of the founding fathers. The Declaration of Independence guarantees freedom but, when it comes to happiness, only the quest for it is underwritten. Still, perhaps it’s time to measure just how that quest is going.

Carbon Tax and Competitivness

The following brief article about the potential effect of a proposed carbon tax in Australia was posted on Bloomberg.

*************************************************************************************

BlueScope Steel Ltd., Australia’s biggest steelmaker, said the government’s planned
carbon tax will reduce its competiveness as it battles high raw-material costs and the stronger Australian dollar.

“That is clearly economic vandalism,” Chief Executive Officer Paul O’Malley said on Australian Broadcasting Corp.’s Inside Business program yesterday. “It clearly says we don’t want manufacturing in Australia.” Imports must also be taxed if the carbon tax is introduced to ensure Australian steel producers can compete, he said.

Australia will set a price on carbon emissions next year in preparation for a trading program that could begin as early as 2015 and is aimed at curbing greenhouse gases, Prime Minister Julia Gillard said last week. Revenue from the pricing plan will be used to assist households, help companies adjust to the changes and for future climate change programs.

“We will get to the end goal -- the most efficient mechanism I’ve always wanted and Labor has always advocated for, which is a full emissions trading scheme, a cap on carbon pollution and the market sets the price,” Gillard said on Channel 9’s Today program. “We have to cut carbon pollution. The best way to do that is price carbon.”

The Australian currency gained 13 percent in the past year, the best performer after the Swiss franc and Mongolian Tugrik among 172 currencies tracked by Bloomberg.
‘Bit More Pressure’

“More costs being thrown at us by the government just really do put a bit more pressure on the business than we’d like to have,” O’Malley said. The policy would cost BlueScope A$300 million ($304 million) a year if there was no assistance provided, he said. The Melbourne-based steelmaker last week reported a widening of its first-half loss because of higher costs and lower domestic demand.

“Anything that is going to be hard on BlueScope is going to be seen as an extra negative when there are so many other headwinds they are facing,” said Chris Weston, an institutional dealer at IG Markets in Melbourne. While they have a fundamentally strong business in the long run, “the near-term warrants people staying away from the company.”

BlueScope’s shares have dropped 12 percent in the past year, compared with a 19 percent gain in the S&P/ASX 200 Materials Index. The stock closed unchanged at A$2.13 on the Australian Stock Exchange on Feb. 25.

‘Important Step’

Adelaide-based Santos Ltd., Australia’s third-largest oil and gas producer, said last week’s announcement was an “important step” to a well-designed price. New York-based Alcoa Inc., the biggest U.S. aluminum producer, said it supported a “carefully designed” carbon price that doesn’t damage the industry.

“Regardless of the approach taken, it is critical that the government’s climate change response ensures the sustainability and growth of what are world-class alumina and aluminum assets in Australia,” Alcoa Australia Managing Director Alan Cransberg said in an e-mailed statement.

The levy would need to be at least A$25 ($25.20) a ton to be effective, Origin Energy Ltd. Managing Director Grant King said last week.

Countries are already spending billions of dollars to reduce emissions and promote renewable energy. Low-carbon energy investment surged to a record $243 billion last year, Bloomberg New Energy Finance said on Jan. 11.

Gillard established a Multiparty Climate Change Committee, a measure proposed by the Australian Greens party, to consider how to reduce emissions. That committee still needs to discuss incentives to industries and households as well as setting the level of the tax.

Opposition leader Tony Abbott said his Liberal-National coalition wouldn’t support the laws. He said it would add A$300 per year to household electricity bills and that a voter backlash would prevent it getting parliamentary approval.

The Value of Nature?

Kenneth Boulding is reputed to have said that “Economists know the price of everything and the value of nothing”. There is no place where this statement would be more appropriate than in environmental issues. Economics is at the stage where it treats relative market prices as proxies for value. Our aim in this short post is not to challenge whether there ought to be a better measure of value but simply to point out that this metric poses tremendous challenges in environmental economics since so many of the environmental services do not get captured by the market. We have acted for a long time as if these huge environmental costs do not exist simply because we have chosen not to recognize them.

Well, this has changed a bit. Such major externalities lead to inefficient allocation of the resources and so many environmentalists and non environmentalists have been asking that we find ways to value these non-market activities that are usually on the cost side. As a result we have developed many mechanisms such as Contingent Valuation methodology and created property rights ; permit to pollute, that will force corporations to take these external costs into account.

The problem worldwide could be huge. A recent estimate by a study co-sponsored by the United Nations Environmental Programme, UNEP, has shown that if the worlds’ 3000 largest corporations were to account for the environmental damage that ensues from their activities then at least 1/3 of their profits would have to be wiped out. That would amount to over $2.2 trillion. In some cases the value of these negative externalities will more than compensate for all the profits. In a study by the New Economics Foundation it was estimated that the combined profits of Shell and BP for the year 2006 ; $40 billion; would cover just 57% of the damage bill; $70 billion.



How would we value the marginal ton of carbon that might act as a tipping point to the delicate climate balance? Is it possible that the whole exercise of valuing natural services is a vulgar one?

It Is Not Too Late If We Act Now

It is not very often that we get credible ecological news that is not full of bad news and projections. Well, I am glad to say that the following is a recent study that actually suggests that humans have not lost the race yet. Yes we are on our way towards catastrophic outcomes but we are not there yet and interestingly enough we can avoid the worst outcome if we are smart enough to change our ways and work meaningfully towards redemption.
The Stockholm Resilience Center, at Stockholm University is self described as a center of Research for Governance of Social-Ecological Systems. The Centre released a few months ago a major study undertaken by 28 world renown scientists in which they have established a new area in planetary management. Their first study describes nine planetary boundaries (listed at the bottom of this entry) that they believe humanity must not cross . The study goes on to say that human activity has thus far resulted in breaching three of these boundaries (the stared ones)but not the other six.
We are currently living in the geologic era known as the Holocene which started around 10,000 years ago. As we all know, it was during the Holocene that agriculture was developed, civilization prospered and industrialization became the norm. But unfortunately we are entering the Anthropocene, a new geological age in which human activities have grown as to form a major threat to the health of the earth.
Will we have the wisdom to adopt the right policies and change our behavior so as to avoid catastrophy? Yes we still can do that but time is quickly running out.

The nine Planetary Boundaries:
1 Strategic ozone layer
2 Biodiversity
3 Chemical Dispersion
4 Climate Change ***
5 Ocean Acidification ***
6 Freshwater consumption & the global hydrological cycle
7 Land System Change
8 Nitrogen & Phosphorus inputs to the biosphere & ocean ***
9 Atmospheric aerosol loading
*** Transgressed boundary.

Pigouvian Taxes

Sovereign debt , as a potentially crippling fiscal problem world wide, has risen to the forefront over the past few months. Whether it is the US, Europe, Japan or many other developed and developing countries the sovereign debt watch is on.

The major metrics of a pending sovereign debt crisis that have been in vogue for decades used to be applied only to developing countries. Unfortunately this is no longer the case. The Herculian efforts by governments all over the world; the developed in particular; to avoid a repeat of the debilitating depression of the 1930's has forced these countries to increase substantially their fiscal stimulus programs. In a sense the monetary and fiscal policies adopted by the officials of all of these countries have been very successful. A worst case scenario has been avoided.

But as economics has always taught us, There Ain't No Such Thing AS A Free Lunch; TANSTAAFL. Yes we avoided a deep recession and the top officials can pat themselves on the back for this. But maybe not. Is the cure at least as expensive or maybe even more so than the ailment that it saved us from? That is , currently, the $64,000 question or maybe I should say the $64 billion question?:-)

Often, our efforts at prescribing remedies are counter productive because of what is inherent in problem solving. We always seem to target the symptom rather than the disease. As a result we inevitably move from one crisis to the next as a result of the law of unintended consequences.

In our efforts to save the system and to prevent a major economic depression we proceeded to throw money at the problem in order to generate more final demand and thus put more people to work. What we did not stop to consider is the major question of how are we going to pay back all of these funds that we have borrowed? It seems that we did what we always do, shift the burden onto the future generations. The debt will not come due for some decades ,right? Wrong.Well informed individuals know that more debt implies more taxes in the future and so they take corrective by refusing to own the highly risky debt. Once we find out that the debt service is too large and that we cannot keep on rolling the debt unto the future then we will have no choice but to become deadbeats. That is where we are at the moment. The question is which country is going to go under first? Would it be Greece or would it be one of the other PIIGS? How about the UK, or evn Japan or the US? If any of these countries default would they set up a contagion that will devastate all the current international financial sytem as we know it?

Believe it or not there is a potential mechanism that if adopted could go a long way towards addressing the real cause of this issue and not only the surface phenomenon. The solution that I am about to propose is not new, actually,N.G Mankiw wrote about it in 2007.

"The scientists tell us that world temperatures are rising because humans are emitting carbon into the atmosphere. Basic economics tells us that when you tax something, you normally get less of it. So if we want to reduce global emissions of carbon, we need a global carbon tax. ...

The idea of using taxes to fix problems, rather than merely raise government revenue, has a long history. The British economist Arthur Pigou advocated such corrective taxes to deal with pollution in the early 20th century. In his honor, economics textbooks now call them “Pigovian taxes.”...some taxes align private incentives with social costs and move us toward better outcomes."


I would love to see a carbon tax levied not only in the major industrial countries but all over the globe with all the proceeds dedicated to lowering the sovereign debt. Such a tax could be a first step towards internalizing the negative externalities of all the production inthe world economy. If that leads to less and more efficient production then all of us will be winners.