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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.

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Posted in Climate Change, Macroeconomics | 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)

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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 »