The Sustainability Transition

to a New Green Economy

The Tobin Tax Debate

Posted by Maggie Winslow on November 14, 2011

The EU and UK are currently contemplating instating a financial transaction tax, sometimes called a “Robin Hood” or Tobin Tax.  The Tobin Tax was first proposed by Nobel Prize-winning, brilliant economist James Tobin in 1974 (I like his work so much, I named my son Tobin).  The original proposed tax was on international financial transactions to help curtail exchange rate speculation, which could lead to tremendous volatility in the international exchange market.  One tenth of one percent of the value of the transaction would be the taxed amount.  The proceeds from the tax would be used to pay down the growing debt of developing countries.

In some incarnations, the Tobin Tax, or what the Brits call the Robin Hood Tax when the revenues are used for aid projects, would be on a much broader array of financial transactions, not just international currency transactions, to help limit speculation and high volume, small margin bets. The revenue raised could be used for a variety of aid projects, both international and within the country where the tax is collected.  You can read a bit about the pros and cons of a Tobin Tax here and here.

The European Commission has proposed that a financial trasaction tax be adopted and it has received broad support.  Wolfgang Schauble, the German minister of finance, Angela Merkel, the German Chancellor, French President Nicolas Sarkozy, and former UK prime Minester Gordon Brown all support the tax and have suggested that a financial transaction tax is needed to reduce speculative trading and that the Eurozone should go ahead with the tax even if the UK rejects the tax.

The tax also has serious detractors including UK Chancellor George Osborne who has argued that the tax will cost jobs and not affect banks but will fall on pensioners, and, if it is imposed, it needs to be global.

Last month, the EU seemed to have  on the verge of passing the tax but one important concern, that became a stumbling block, was that an EU tax will benefit banking centers where there is no tax, such as Wall Street.  The proposal appears to be stalled in Europe right now.  It probably will be for a while given all the other issues that European finance ministers need to focus on.

And in the U.S.?  In the first week of November, Representative Peter DeFazio (D – Oregon) and Senator Tom Harken (D – Iowa) introduced similar bills in the House and  Senate calling for a 0.03% tax on financial transactions involving stocks, bonds, and derivatives, to take effect in 2013.   It seems somewhat unlikely that Congress will pass any sort of financial transaction tax in the near future.  In addition, President Obama said that he does not support a financial transaction tax.   Unfortunately, the lack of support for a Tobin Tax in the US makes the tax less palatable in Europe.

Although the idea of a financial transaction tax is yet to gain much traction in the U.S., it is not going away either.   A slew of both US and global groups support financial transaction taxes of one form or another.

With increased awareness of the power of financial institutions, thanks to the Take Back Wall Street movement as well as the Move Your Money movement, the Tobin tax might find ever-greater support.  Who knows what the future may hold.

Posted in Uncategorized | Leave a Comment »

Neoclassical Neanderthals

Posted by Maggie Winslow on November 14, 2011

Neoclassical economics envisions a Homo Economicus who is, among other things, independent, selfish, and self-centered.  The selfish acts of these Homo Economici together lead to a rational and optimal outcome for society as a whole.  Each person acting to maximize his or her outcome will end up benefiting society as a whole. The average person acting in his own best interest will purchase best goods for the price. Efficient industries and producers are then promoted, and to maximize profits, these efficient firms produce goods in the most cost effective manner possible.

Behavioral Economists have found that people are not as selfish or as rational as neoclassical economics suggests, that altruism is real, and that people often think of others in their purchasing and production decisions.    Many of us can verify this from our own personal experiences.

Recent discoveries about Neanderthals confirm that they were larger, stronger, more resilient than Homo Sapiens but Homo Sapiens out-competed Neanderthals (after a bout of interbreeding).  How and why did this happen?  DNA testing is still looking for clues about what makes us different from Neanderthals.   One likely theory is that Neanderthals did not work together.  They were self-focused rather than community focused. Humans have worked together since early on, as ancient temples can attest.  Our ability to work together towards common goals has allowed us to dominate other species on Earth (at least for now).  Imagining a Homo Economicus who is selfish and self-centered is to deny a fundamental human characteristic that has allowed us to thrive.    The success and ‘sustainability’ of our species depends on our culture (shared language, values, norms, institutions, etc.) far more than on any individual, selfish traits.

Posted in Uncategorized | Leave a Comment »

Increasing Labor Productivity and Unemployment

Posted by Maggie Winslow on November 14, 2011

How are we going to return to full employment in the U.S.?  We can’t just keep producing more and different consumer goods, hoping jobs will come from their production and consumption.  We don’t have the natural capital for that plan.  But, what if everyone could afford to work fewer hours so that the work could be spread around?

As Juliet Schor has documented, labor productivity has increased tremendously over the past 50 years yet this has not translated into fewer work hours.  In fact, since the 70s, work hours have increased.  In addition, only a fraction of the associated wealth, the value created by labor, has gone to the workers.  The lion’s share has gone to capital, in the form of increased profits, and higher wages for top management.

Increased productivity has translated into lower prices for many consumer goods and more material wealth for the average family.  Yet, U.S. workers have far less vacation time than workers in other OECD nations.

Increased labor productivity is also contributing to high levels of unemployment.  Many production processes have become automated, requiring far fewer workers for the same level of output.  Also, facilitated by technological advances, many jobs are being done by the customer, such as pumping gas and scanning groceries, also reducing the need for workers.  Unemployment has been further increased in the U.S. through the globalization of production.  There are over 200 million unemployed people worldwide, many competing for the same jobs.

When the competition for jobs increases, the power of labor decreases, especially for unskilled labor.  It’s hard for a worker to argue for higher wages or a shorter workweek when there are many unemployed people who would gladly take his or her  job.  This helps to explain why workers aren’t getting a fair share of their contribution to production.

So what is the solution? Decreasing labor productivity across the board is not a good solution.  Why work more hours for the same output when this time could be spent elsewhere?  What about increasing the fraction of income that goes to workers, letting workers work a shorter work week, and hiring unemployed people to make up for the lost hours?

The health of our economy depends on high employment levels and a more equal distribution of income so that people have money to spend.  While most all firms would benefit from higher national employment levels and a more equal distribution of income, most firms are not willing to hire more workers nor pay higher wages to workers than profit maximization dictates. (Some firms do pay higher than market wages, or “efficiency wages,” to keep workers motivated and maintain high retention levels. This is part of their profit calculation.) Due to the high costs of providing benefits, firms also have an incentive to get as much work from one worker as possible and to avoid allowing job-shares.  It is far cheaper for a company to have one more-than-full-time worker than two part-time workers.  We end up with a situation where all firms could benefit from higher national employment levels but no single firm has an incentive to work towards these goals individually.  There is a coordination problem.

The solution lies in government intervention: provide incentives for companies to hire more workers or to allow job sharing to counter the high costs of benefits.  Germany does this and it works.  Even better, the government could provide healthcare so companies would not need to bear this burden.  Then the many people who would love to work part-time and spend more time with their children, but can’t because they need health insurance, could work less.   More part-time workers would mean more jobs available for people without work.  That would be better for everyone.

Posted in Uncategorized | Leave a Comment »

The Global Economy: Just a Trough in the Business Cycle?

Posted by Maggie Winslow on November 4, 2011

What should we be thinking about the state of the global economy?  Are we just in the bottom of a very deep business cycle and, once housing asset bubbles clear out of the system and consumers regain confidence and lenders start lending again, all will be well?  Or is the situation more profound than that?   Here are some features of the situation as it stands:

High global unemployment stemming from both the globalization of production, population growth, as well as increased labor productivity.

Environmental degradation due largely to unregulated growth.  This leads to poor health, lower worker productivity, migration, social unrest, and potential disruptions in manufacturing.

Resource depletion, which can lead to manufacturing disruptions, price spikes, migration, food shortages.

Increasing inequality and too much wealth going to a few people.  This results in decreased demand by cash-strapped consumers, bidding up of asset prices by those looking for a place to store their wealth, poor health, social unrest (Occupy Wall Street for example), apathy, and constrained democracy.

Debt and global financial imbalances.  There is large and increasing debt in the US and much of Europe and South America, which can curtail consumer spending and economic growth.  There is excess savings in China and the oil producing nations.  These imbalances can lead to instability in global markets.

Fragility of the financial system. Trillions of dollars flow through the global economy daily, somewhat unmanaged and unregulated.  This situation is ripe for major and sudden shifts in the financial markets, crashing a county’s currency or a stock market for no profound underlying reason.

Obviously, these problems are interrelated.  For example, high unemployment results in less power for workers, which leads to increasing income disparities.   Increased inequality leads to concentrations of wealth that allow for greater swings in the financial system.  Increased concentration of wealth also allows for more investment in capital, reducing the need for labor.

Of greater concern is that the traditional prescribed solutions for some problems hit up against the problem of ecosystem limits.  Can we spend our way out of unemployment?  Not if we are buying consumer goods, the manufacturing of which require increased resource depletion and degradation.  What about the global imbalances? Can China shift to a domestic based economy.  Again, resource shortages could impinge on this solution.

With the ever-growing population, the shrinking availability of resources, and the skewed distribution of income, this is not just a deep business cycle.  Full employment in the US is not going to come about through price adjustments.   Global population in the early 1930’s was one third of what it is today, global trade was a mere fraction of today’s trade, resources were more abundant and climate change was not a pressing issue.  Today’s recession is far more intractable than the recession of the 30s even though that was a deeper recession.

An excellent report titled “The Way Forward” by Daniel Alpert, Robert Hockett, and Noriel Roubini of the New America Foundation presents a three-pronged recovery plan consisting of public investment in infrastructure improvements, debt-restructuring, and a variety of global reforms to rebalance global finances.  These are all valuable and probably necessary strategies.  However, we focus on remedies that ignore resource scarcity, degradation, and climate change at our own peril.

Posted in Climate Change, Macroeconomics | Leave a Comment »

The Coming Ecological Crisis

Posted by Maggie Winslow on June 9, 2009

As our economy reels from the financial crisis, we can look back to the 1980s and 1990s and wonder why the government and banks and other financial institutions let this happen. How could we have been so blind or so willing to ignore the risks we were taking? In 2060, when the world is experiencing climate chaos, people will look back on the current decade and wonder why we did so little to reduce greenhouse gas emissions. The science is clear. We are playing roulette with one of nature’s most important services, climate stability. Why the complacency?

1. There are entrenched interests who stand to lose out financially with green house gas regulation.
2. It is hard to turn around an economy that has been growing based on fossil fuels for many decades.
3. Every country wants other countries to invest in controlling GHGs. A classic free-rider problem. The biggest in history.
4. Short-term thinking. Companies think about short-term profits, politicians think about reelection. Individuals are concerned about the immediate needs of their families. Therefore it is hard to motivate changes that have some costs now but tremendous benefits in the future.

Yet change we must if we plan to continue to inhabit this Earth as we have been for the past century.

Posted in Uncategorized | Leave a Comment »

Time for a New Economy

Posted by Maggie Winslow on June 9, 2009

The financial crisis that began in 2008, and the efforts to remedy the crisis, lay bare a troubling dichotomy. Our economy depends on increasing levels of consumption to maintain its health. However, the planet we live on is finite. Decreased consumption that has resulted from the crisis is a blessing for ecosystems and dwindling resources. However, it has also led to rising unemployment and all of the related negative social result of increased unemployment levels.

In the United States, 70% of GDP is made up of consumer spending, symbolized by C in the commonly used equation for GDP (GDP = C + I + G + X), as you may remember from a college macroeconomics class. This has two important implications. One, when consumer confidence decreases and spending slows, the economy falters, unemployment increases, we move into a recession or worse, as we are now witnessing. This is why citizens have been exhorted to go shopping to help the economy. The steady consumption of goods and services keeps and creates jobs. A huge portion of the jobs in the US are based on providing consumer goods and services.

The second implication is that we need to keep the economy strong through maintaining high consumption levels. Not all of C is made up of the consumption is of goods. Much of it is for services. Nonetheless, the portion of C that is composed of goods creates a conundrum: How can we have continued growth in material goods on a finite planet?

Thus we find our economic system in a bind. We need to keep buying new goods to keep employment levels high and the economy strong. But buying all of these goods is not sustainable and is actually deleterious to the ecosystem upon which all life depends. This material wealth is arguably making us happier, although not necessarily. But we have reached a point where the importance of consumption is more for the sake of the economy than for the sake of the enjoyment of the goods. Politicians are not promising that if they get elected, they will provide more goods for people to buy. They promise more jobs, better education, security, and sometimes environmental protection. We are awash in consumer goods and many of these goods are not necessary. This has been demonstrated by the current economic climate where people are not buying them.

We need to restructure our economy so that it is not so dependent on consumer goods. There are plenty of other forms of employment than the designing, manufacturing, transporting, and selling of consumer goods.

The debate on jobs vs. the environment is over. Environmental protection is not antithetical to job creation but can be synonymous. We are seeing a current trend in job creation in renewable energy, energy conservation , green buildings, and climate protection. This is a small but growing sector of the economy.

We are seeing incremental changes to the economy which reflect new thinking about the importance of resource conservation, environmental protection, and, most of all, limiting the emissions of greenhouse gases (GHG). Some of these changes include aspects of the Obama administration stimulus package which support renewable energy, public transportation, and energy research, as well as efforts to preserve resources.

However, these marginal efforts are not enough. We need a full transformation in the way the market economy is structured to change incentives away from selling and buying more disposable goods to providing the services people need with the minimal impact on the viability of ecosystem services , including climate stability.

While increasing renewable energy use is essential, if people are heating larger homes and the population keeps growing, these efforts might only allow us to keep out fossil fuel use from growing. This isn’t enough.

It might seem difficult to imagine a different type of economy. Capitalism is the dominant paradigm in today’s world. It is an excellent method for stimulating production and allowing for an allocation of resources that it somewhat based on citizen’s desires. But capitalism does not exist in a vacuum. It requires a variety of government institutions to allow it to function: rule of law, property rights, and cultural norms. Private prosperity is also facilitated through the provision of public goods such as transportation infrastructure, communication infrastructure, environmental regulations, and labor laws. Government revenue though taxation is essential for capitalism to flourish.

Most states tax income to provide this revenue. What would happen if instead of taxing income, land were taxed and Henry George suggested more than one hundred years ago? We would see a very different type of development.

What is carbon were taxed instead of labor? What would our society look like then?

Economist since Adam Smith have seen the deleterious effects of unbridled capitalism and have made recommendations for ways to curb the negative aspects. Many of these recommendations are still relevant today. These are not new ideas. They are just ideas that never received buy-in from the most powerful and wealthiest members of society so they were not implemented.

Again, while the financial crisis may be the crisis of the moment, it is nothing compared to the looming environmental crisis. It is time to envision a new type of economy and work towards this goal so that our grandchildren don’t look back at this time and ask us, “What were you doing?”

Posted in Uncategorized | Leave a Comment »

Why Taxes Are Good

Posted by Maggie Winslow on March 17, 2009

“Cut taxes.  Let people decide how they want to spend their money.”  This has been the rallying cry of the small-government advocates for the last few decades.  It is a very appealing idea.  However, letting people decide how the bulk of our national income is spent is not necessarily good for social welfare nor even for individual welfare.

Here’s why:

There are many things that people would like to have that they can not purchase on the market, such as better public schools, safety, clean air and water, climate stability, natural areas for recreation.   These are public goods that individuals can only purchase collectively.  This is one of the main reasons to have a government – to provide public goods.  When we reduce taxes in favor or more private disposable income, we are giving up these public goods for more private goods.

Many consumer purchases are imported goods.  Buying these goods does little to help provide jobs in the US, so we are poorer as a society.  Incomes are lower.  Our future economy is also weaker because, as we import more goods, the trade deficit is balanced with a surplus of foreigners buying our assets (stocks, bonds, real estate for example).  The payment on these assets will be sent abroad in the future, rather than staying in the US.  So our children will be poorer as well.

Studies have found that buying more stuff doesn’t make most people happier.  Wanting more things is perhaps natural, but not to the level we see in modern society.  If this were natural, why did producers spend an approximately $130 billion on advertising their goods and services in 2007?  The country is awash in unwanted consumer goods.

Increasing evidence suggests that the ever-increasing rate of producing and disposing of goods is polluting our planet and harming our health.

Europeans pay more taxes than Americans.  They tend to have fewer consumer goods, it’s true.  However, they also have better retirement benefits, medical benefits, and more security if they have some economic misfortune.

What would it mean for us to pay more taxes?  It would allow for increased government spending (not deficit spending).  This spending could create jobs, improve our education system making us more competitive in the future, increase our level of innovation, improve our environment.  It might even increase our salaries ultimately by allowing for a stronger economy.

It goes without saying that the governemnt can also use tax receipts in ways we don’t like.  That’s the kicker.

Posted in Taxes | Leave a Comment »

Creative Destruction

Posted by Maggie Winslow on November 12, 2008

Creative destruction is the term the economist Joseph Schumpeter used to describe how capitalism stays vital and strong through constant evolution. Innovation allows for the replacement of old industries with new one, creating new markets and employment opportunities. There is actually a revolution within the system where new technologies and sectors replace old ones. Schumpeter writes in Capitalism, Socialism and Democracy (New York: Harper, 1975, orig. pub. 1942), “The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.” (pg 85)

One of the remarkable things about capitalism is that it can evolve and change to fit new constraints and situations.

The world is in a time of crisis. Climate change is changing the face of the globe and is leading to potentially severe environmental and social disasters. Many areas of the world are running out of fresh water. Non-renewable resources are being rapidly depleted, including fossil fuel stocks. Environmental toxins are starting to have more noticeable effects on our health.

At the same time, the economy is retrenching and consumer confidence is at its lowest point in twenty years, which could lead to a prolonged recession.  Why is consumer confidence so important to a healthy economy?  Because 70% of the nation’s GDP comes from consumer spending.  As people curtail their spending, production slows, workers are laid-off, unemployment levels creep up and spending is further reduced, leading to more unemployment.

Depending on consumer spending to keep the economy strong is problematic even in good times.   Many of these goods are made with resources that are being used faster than they can be replaced.  There cannot be endless growth in production and consumption in a finite world.  At some point, consumption will have to slow if we want to maintain the ecosystem services that allow for the earth to stay healthy and provide for human needs for clean water and climate stability.

At this point in time, many Americans can’t afford to keep spending. With the recession and increased economic insecurity, many families have less disposable income to spend on anything but the necessities.  Many families have been buying on credit for a couple of decades and the credit crisis has slowed that down and halted it in some cases.

It is not so much that people need these goods as the jobs created through the production and consumption of these goods. Politicians are never promising to provide more stuff if elected, but to provide more jobs.   The drop I consumer confidence isn’t a problem due to the fact that people will have less things, but due to the increase in unemployment that will result from lower consumption levels.

What we need is an economy where we create the employment without needing to create so much stuff.  We need a new economic sector that protects and improves the natural foundation of our economy, rather than depleting it.

An important area where this change in focus must occur is the energy sector.  A movement away from fossil fuels and towards energy conservation and renewable energy production promises to create thousands of jobs while making our planet more livable.(see below)

Moving to a more energy-efficient and renewable-energy based economy is not counter to capitalism.  It is capitalism at its finest.  Fossil fuels have received enormous subsidies and tax breaks for the as 50 years.  It is time to level the playing field.  Give renewable energy resources the same advantages given to fossil fuels in the past and then let the market take over.  Thousands of jobs will be created in the process.

We will be forced to change our ways at some point in the future.  How much better to make a smooth transition to a more efficient and renewable economy than an abrupt one that could involve even more economic and social turmoil.

A November 2, 2008 article in the New York Times finds that the development of renewable energy technologies and equipment is creating jobs in the Heartlands. (http://www.nytimes.com/2008/11/02/business/02wind.html?scp=2&sq=jobs%20renewable%20energy&st=cse)

A study by U C Berkeley professor Daniel Kammen finds that reducing carbon output will create far more jobs than will be lost through this reduction.  (http://www.unep.org/civil_society/GCSF9/pdfs/karmen-senate.pdf.   Read his posts on GreenBiz at http://www.greenbiz.com/blogs/user/daniel-kammen.)

An October 2008 study by another U C Berkeley professor, David Roland-Holst, finds that thousands of jobs can be created in California though the promotion of energy efficiency and innovation.  (The study can be found here: http://are.berkeley.edu/~dwrh/CERES_Web/index.html)

A 2008 study by the California Air Resources Board also finds that reducing California’s greenhouse gas emissions, as required by AB 32, the Global Warming Solutions Act of 2006, will create jobs and help the California economy.  (Read more here: http://www.arb.ca.gov/cc/scopingplan/document/scopingplandocument.htm)

Posted in Climate Change, Macroeconomics | Leave a Comment »

A Climate-Appropriate Fiscal Stimulus Package

Posted by Maggie Winslow on November 1, 2008

After 9/11, we were exhorted to go shopping to keep the economy on track. Since consumer spending is about 70% of the nation’s GDP, if shopping slows, so does the economy. Stores and manufacturers start to lay off employees. These laid off employees then decrease their spending leading to further unemployment.

However, shopping is not the best way to help the economy. Much of what is purchased is made abroad, so most of the money spent leaves the country. Some of the money also goes to corporate profits, rather than workers who would spend most of their income. Also, in a world of finite resources, depending on consumerism to keep employment high is ultimately a dead-end.

Asking people to shop now to help the economy might be unsuccessful anyhow. Some folks are saving due to fear of what is ahead. Some folks can’t afford to shop. What is needed for the economy is for the government to step in a do some spending – a “fiscal stimulus” package.

To get the most stimulus bang for our government dollar, tax cuts and other policies which encourage across the board spending are not very effective. Far better for both speed and impact is direct government spending. Already proposals are on the table from both sides of the aisle for infrastructure spending. However, the infrastructure spending we really need to make if we wish to truly invest in our future is that which will help the economy now AND solve other problems that are a drag on the economy even in good times. Two related areas where the government should focus spending are developing renewable energy and climate change prevention.

If you think the financial crisis was bad for the economy, it is nothing compared to the approaching environmental crisis. The natural world is the foundation of the economy. Depleted and degraded resources make doing business more expensive, and increase costs to the federal, state and local governments left the task of providing clean water, recreation opportunities, and health care. Climate change has the potential to drain resources from the productive economy to deal with the myriad of problems we can expect to see, from rising sea levels, melting permafrost, changes in agricultural productivity, and crazy weather pattern.

A number of studies have now been published which show that reducing our carbon emissions will be a win-win proposition. This effort will create jobs while reducing the risk of climate change. It will also help our competitive position in the world by focusing out attention on energy efficiency and renewable energy technologies.

This crisis is also an opportunity for redirecting our economy in a necessary and effective manner. Let’s put our national resources to work for all of us.

Posted in Macroeconomics | Leave a Comment »

The New Economic Sector

Posted by Maggie Winslow on November 1, 2008

The financial crisis has made abundantly clear what many economists have been arguing for decades: The free market can not be depended on to maximize social welfare. Free markets can be very efficient for allocating resources in certain types of markets. The promise of free-markets hold when certain conditions are met. However, free markets have proven to be poorly adapted to protecting the natural world, the basis of our collective wealth. Obviously now, they are also unable to successfully work in the financial economy, where most of the ‘goods’ have no actually value, rather a perceived value. One of the problems the government experienced with the bail-out plan was at what price to value credit default swaps. Their value is derived from other values and also depends on perception and expectations. Adam Smith differentiated between real value and perceived value. Goods with real value can be more easily prices through the forces of supply and demand. Goods with perceived value are likely to experience bubbles and crashes and wreak havoc on markets. This is one reason why the head of the central bank of Mexico called the marketing of ‘derivatives” – those financial instruments that derive their value from other goods – unethical. The financial economy is supposed to lubricate the real economy, allowing for savings to be efficiently transformed into investments and to provide for insurance to mitigate swings of fortune in the real economy. Allowing the financial economy to become a market in its own right and lightly regulated at that was an invitation to disaster.

So why a New Economy? The financial crisis has highlighted the need for a reconsideration of how our economy works and part of this rethinking must entail consideration of how the natural world links to our economy. It is not simply a source of resources and a dumping ground. It is the foundation of wealth. The financial crisis is relatively easily solvable because it just related to money. An environmental crisis will be much more intractable and profound. It is harder to solve sea levels rising, massive species die-offs and changing weather patterns which make large areas of agricultural land more tenuous.

Rather than relying on disposable consumer goods to prop up our economy and maintain employment, we need a new economic sector – natural capital maintenance. This sector would include economic activity related to increasing energy efficiency and renewable energy development, preserving water resources, and preventing further environmental degradation such as soil run-off. This sector could create millions of jobs, make our society richer and stronger in the future.

Posted in Macroeconomics | Leave a Comment »