The Sustainability Transition

to a New Green Economy

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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.

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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.

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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.

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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.

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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?”

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