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2018 in Review

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Most frightening and/or depressing stories:

  • JANUARY: Cape Town, South Africa looked to be in imminent danger of running out of water. They got lucky, but the question is whether this was a case of serious mismanagement or an early warning sign of water supply risk due to climate change. Probably a case of serious mismanagement of the water supply while ignoring the added risk due to climate change. Longer term, there are serious concerns about snowpack-dependent water supplies serving large urban populations in Asia and western North America.
  • FEBRUARY: Cape Town will probably not be the last major city to run out of water. The other cities at risk mentioned in this article include Sao Paulo, Bangalore, Beijing, Cairo, Jakarta, Moscow, Istanbul, Mexico City, London, Tokyo, and Miami.
  • MARCH: One reason propaganda works is that even knowledgeable people are more likely to believe a statement the more often it is repeated.
  • APRIL: That big California earthquake is still coming.
  • MAY: The idea of a soft landing where absolute dematerialization of the economy reduces our ecological footprint and sidesteps the consequences of climate change through innovation without serious pain may be wishful thinking.
  • JUNE: The Trump administration is proposing to subsidize coal-burning power plants. Meanwhile the long-term economic damage expected from climate change appears to be substantial. For one thing, Hurricanes are slowing down, which  means they can do more damage in any one place. The rate of melting in Antarctic ice sheets is accelerating.
  • JULY: The UN is warning as many as 10 million people in Yemen could face starvation by the end of 2018 due to the military action by Saudi Arabia and the U.S. The U.S. military is involved in combat in at least 8 African countries. And Trump apparently wants to invade Venezuela.
  • AUGUST: Noam Chomsky doesn’t love Trump, but points out that climate change and/or nuclear weapons are still existential threats and that more mainstream leaders and media outlets have failed just as miserably to address them as Trump has. In related news, the climate may be headed for a catastrophic tipping point and while attention is mostly elsewhere, a fundamentalist takeover of Pakistan’s nuclear arsenal is still one of the more serious risks out there.
  • SEPTEMBER: A huge earthquake in the Pacific Northwest could be by far the worst natural disaster ever seen.
  • OCTOBER: The Trump administration has slashed funding to help the U.S. prepare for the next pandemic.
  • NOVEMBER: About half a million people have been killed in Iraq, Afghanistan, and Pakistan since the U.S. invasions starting in 2001. This includes only people killed directly by violence, not disease, hunger, thirst, etc.
  • DECEMBER: Climate change is just bad, and the experts seem to keep revising their estimates from bad to worse. The Fourth National Climate Assessment produced by the U.S. government is not an uplifting publication. In addition to the impacts of droughts, storms, and fires, it casts some doubt on the long-term security of the food supply. An article in Nature was also not uplifting, arguing that climate change is happening faster than expected due to a combination of manmade and natural trends.

Climate change, nuclear weapons, and pandemics. If I go back and look at last year’s post, this list of existential threats is going to be pretty much the same. Add to this the depressing grind of permanent war which magnifies these risks and diverts resources that could be used to deal with them. True, we could say that we got through 2018 without a nuclear detonation, pandemic, or ecological collapse, and under the circumstances we should sit back, count our blessings, and wait for better leadership. And while our leadership is particularly inept at the moment, I think Noam Chomsky has a point that political administration after political administration has failed to solve these problems and this seems unlikely to improve. The earthquake risk is particularly troublesome. Think about the shock we felt over the inept response to Katrina, and now think about how essentially the same thing happened in Puerto Rico, we are not really dealing with it in an acceptable way, and the public and news media have essentially just shrugged it off and moved on. If the hurricanes, floods, fires and droughts just keep hitting harder and more often, and we don’t fully respond to one before the next hits, it could mean a slow downward spiral. And if that means we gradually lose our ability to bounce back fully from small and medium size disasters, a truly huge disaster like an epic earthquake on the west coast might be the one that pushes our society to a breaking point.

Most hopeful stories:

I believe our children are our future…ya ya blahda blahda. It’s a huge cliche, and yet to be hopeful about our world I have to have some hope that future generations can be better system thinkers and problem solvers and ethical actors than recent generations have been. Because despite identifying problems and even potential solutions we are consistently failing to make choices as a society that could divert us from the current failure path. And so I highlighted a few stories above about ideas for better preparing future generations, ranging from traditional school subjects like reading and music, to more innovative ones like meditation and general system theory, and just maybe we should be open to the idea that the right amount of the right drugs can help.

Fossil fuels just might be on their way out, as alternatives start to become economical and public outrage slowly, almost imperceptibly continues to build.

There is real progress in the fight against disease, which alleviates enormous quantities of human suffering. I mention AIDS, diabetes, and Alzheimer’s disease above. We can be happy about that, of course. There are ideas about how to grow more food, which is going to be necessary to avoid enormous quantities of human suffering. Lest anyone think otherwise, my position is that we desperately need to reduce our ecological footprint, but human life is precious and nobody deserves to suffer illness or hunger.

Good street design that lets people get around using mostly their own muscle power. It might not be sexy, but it is one of the keys to physical and mental health, clean air and water, biodiversity, social and economic vibrancy in our cities. Come to think of it, I take that back, it can be sexy if done well.

Good street design and general systems theory – proof that solutions exist and we just don’t recognize or make use of them. Here’s where I want to insert a positive sentence about how 2019 is the year this all changes for the better. Well, sorry, you’ll have to find someone less cynical than me, and/or with much better powers of communication and persuasion than me to get the ball rolling. On the off chance I have persuaded you, and you have communication and/or persuasion super powers, let me know.

Most interesting stories, that were not particularly frightening or hopeful, or perhaps were a mixture of both:

Whatever else happens, technology and accumulation of human knowledge in general march on, of course. Computer, robotics, and surveillence technology march on. The human move into space is much slower and painful than many would have predicted half a century ago, and yet it is proceeding.

I’ll never drop the waterless sanitation thing, no matter how much others make fun of me. It’s going to happen, eventually. I don’t know whether we will colonize Mars or stop defecating in our water supply first, but both will happen.

The gene drive thing is really wild the more I think about it. This means we now have the ability to identify a species or group of species we don’t want to exist, then cause it not to exist in relatively short order. This seems like it could be terrifying in the wrong hands, doesn’t it? I’m not even sure I buy into the idea that rats and mosquitoes have no positive ecological functions at all. Aren’t there bats and birds that rely on mosquitoes as a food source? Okay, I’m really not sure what redeeming features rats have, although I did read a few years ago that in a serious food crunch farming rats would be a much more efficient way of turning very marginal materials into edible protein than chicken.

The universe in a bottle thing is mind blowing if you spend too much time thinking about it. It could just be bottles all the way down. It’s best not to spend too much time thinking about it.

That’s it, Happy 2019!

Michael Boskin and the golden rule

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A few serious economists, like Michael Boskin at Stanford, are defending the Republican tax plan. Basically, the argument is that the economic growth benefits of stimulating corporate investment in “equipment” outweighs the outright bribery of wealthy campaign donors.

Summers’s own research results dramatically drive home that point. Using data from a variety of countries and time periods, some as short as five years, he and Brad DeLong of the University of California, Berkeley, (who also opposes the current tax bill) have made the strongest case I know that equipment investment can have a large impact on GDP growth. Moreover, the effect they estimate is much larger than in the conventional models used in most studies, including those relied on by government revenue scorers.

“The analysis suggests a strong and causal relationship between equipment investment and economic growth,” according to Summers and DeLong. They concluded that, “an increase of three or four percentage points in the share of GDP devoted to equipment investment is associated with an increase in GDP per worker of one percent per year.” So, to achieve the 0.3% increase in annual GDP growth that is now being debated, equipment investment would need to rise by 1% of GDP per year, sizeable to be sure, but well within the range of historical experience.

Summers and DeLong also calculate that the social returns from equipment investment are far larger than private returns. Thus, they concluded that “a strong case seems to exist for making sure economic policy does not penalize, and in fact, rewards, investors in equipment”; and that “measures that reduce the tax burden on new equipment investment are likely to be especially potent in maximizing the equipment investment engendered per dollar of government revenue forgone.” Finally, they noted that, “policies with an anti-equipment bias include tax rules that subsidize assets that can easily be levered … [and] pieces of equipment are frequently more difficult to use as collateral for debt than are investments in structures.”

This fits with the “golden rule level of capital” you learn about in economics 101, where “capital” is the “plants and equipment” mentioned above. If as a society you are investing too little in capital (and you have to invest just to hold it steady as it wears out, let alone increase it) your rate of growth is lower than it could be. Deficit spending to increase capital is a sort of free lunch in this case, because growth will offset the expenditures. It is not too hard to imagine this sort of logic extending to investments in research and development, education, and public infrastructure. (By the way, if you really care about economic growth, WHERE IS OUR TRILLION DOLLAR INFRASTRUCTURE BILL YOU LYING SONS OF BITCHES!)

Maybe reducing the corporate tax rate in the U.S. really is a good, efficient policy that will boost growth. My questions are first, how do we know the corporate tax cut will be invested in capital rather than just pocketed? Second, are the lost tax revenues hurting investments in education and infrastructure which could be equally or more beneficial? Third, how can the Republicans torpedo the health care system that was finally starting to help the working class and small business owners, and still sleep at night? It’s hypocritical and immoral. And finally, how can we just accept the rot of institutionalized corruption where politicians are elected by dollars rather than votes, when other advanced countries (a club we may not belong too much longer) don’t do that?

economic “derailment”

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David Lipton, a deputy director at the IMF, gave a speech on March 8 in which he stated, “Global economic recovery continues, but we are clearly at a delicate juncture, where risk of economic derailment has grown.”

Why?

In many parts of Europe, for instance, sovereign and private sector balance sheets remain highly leveraged and banks’ non-performing loans high. In the US, aging-related spending pressures and unfulfilled infrastructure needs diminish economic prospects. And in Japan, deflation is putting the recovery at risk.
At the same time, we are witnessing an emergence of new risks. The global economic slowdown is hurting bank balance sheets and financing conditions have tightened considerably. In emerging markets, excess capacity is being unwound through sharp declines in capital spending, while rising private debt, often denominated in foreign currency, is increasing risks to banks and sovereign balance sheets.

Concerns about the global outlook have weighed heavily on world financial markets. The decline in equity price indices in 2016 so far this year has averaged over 6 percent, implying a loss of global market capitalization of over US$ 6 trillion (or 8.5 percent of global GDP). This is roughly half the US$ 12.3 trillion loss incurred in the most acute phase of the global financial crisis. Some Asian markets, such as in China and Japan, have been particularly hard hit, with losses of over 20 percent since the beginning of the year. Meanwhile, emerging market currencies have weakened, while their sovereign credit spreads have continued to widen—in Latin America and Africa by over 300 basis points over the past year.

What may be most disconcerting is that the rise in global risk aversion is leading to a sharp retrenchment in global capital and trade flows. Last year, for example, emerging markets saw about $200 billion in net capital outflows, compared with $125 billion in net capital inflows in 2014. Trade flows meanwhile are being dragged down by weak export and import growth in large emerging markets such as China, as well as Russia and Brazil, which have been under considerable stress.
Furthermore, inflation has fallen to historical lows. Headline inflation in advanced economies in 2015, at 0.3 percent, was the lowest since the financial crisis, and in emerging markets core inflation remains well below central bank targets.

The solutions proposed are mostly things you might expect from the IMF – free trade, free capital flows, floating exchange rates, and reduced regulation of big business. But buried in the fuzzy language, they are nowhere near as hawkish on debt as they once were and are talking about richer countries reducing taxes on labor, and taking on debt to invest in infrastructure, education, and research.

carbon pricing

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Here is Christine Laguarde on The Path to Carbon Pricing.

The transition to a cleaner future will require both government action and the right incentives for the private sector. At the center should be a strong public policy that puts a price on carbon pollution. Placing a higher price on carbon-based fuels, electricity, and industrial activities will create incentives for the use of cleaner fuels, save energy, and promote a shift to greener investments. Measures such as carbon taxes and fees, emissions-trading programs and other pricing mechanisms, and removal of inefficient subsidies can give businesses and households the certainty and predictability they need to make long-term investments in climate-smart development.

At the International Monetary Fund, the focus is on reforming its member countries’ fiscal systems in order to raise more revenue from taxes on carbon-intensive fuels and less revenue from other taxes that are detrimental to economic performance, such as taxes on labor and capital. Pricing carbon can be about smarter, more efficient tax systems, rather than higher taxes.

Carbon taxes should be applied comprehensively to emissions from fossil fuels. The price must be high enough to achieve ambitious environmental goals, in alignment with national circumstances, and it must be stable, in order to encourage businesses and households to invest in clean technologies. Administering carbon taxes is straightforward and can build on existing road fuel taxes, which are well established in most countries.

This is one of the few policies that probably almost all economists would agree on – taxing externalities. Instead of allowing businesses individuals to profit while imposing a cost or harm on others, you make them pay that cost as a tax. This has dual benefits – first, it creates an incentive to reduce the negative behavior, second it raises revenue that can replace a tax on work or income. It’s good for the economy, the environment and people.

We do have politicians from one of the two major U.S. parties talking about climate change, and we have a big international summit coming up. So there are opportunities. We should get something done, and then build on it by finding other harmful materials and behaviors we can tax, like fuels that cause air pollution, building materials that cause water pollution, packaging that is not designed to be recycled, and dangerous consumer goods like motor vehicles that kill a million people a year. This is not unprecedented – we did it with cigarettes. By the way, to get this done, we need a constitutional amendment making it crystal clear that a person is a human and a human is a person, and a corporation is not a person for the purposes of political speech.

 

how U.S. taxes are spent

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In a poll of U.S. taxpayers, 95% of respondents had no idea how much the country spends on foreign aid, which is much less than 1%. It just shows that although rational people can disagree on how our tax money should be spent, we are not having a rational debate because most of us have no clue what it is really being spent on. A taxpayer receipt is a simple idea to help cure this problem. Ideally this should be done by the IRS or Treasury Department, but the White House has stepped in to do it since nobody else will.

I picked a hypothetical married couple with children making an income of $80,000 per year. There are a million different ways you can slice it. But no matter what you do, the biggest categories jump out at you. Income tax is only about 40% of what the government takes in from this family, with Social Security and Medicare taxes making up the other 60%. Pensions for retired people make up the majority of how the money is spent, with Social Security alone making up almost half. Even without an offical public health care system, the federal government spends a lot on health care – almost 20% of all the money spent between Medicare (for older people) and programs to help lower-income people (Medicaid and children’s health insurance programs mostly). Of course, state and local governments also tax and spend on health care, which is not reflected here.

The military makes up around 10% of all federal spending. If you add veteran’s benefits (I’m double counting here, since these include retirement and health care) and homeland security, that number comes to more like 13%.

So however you slice it, the big numbers are retirement, health care, and defense. If we want to make significant changes in either the amount of tax, or the outcomes of government programs, we should focus most of our debating energies in these areas.