Economic policy

Prosperity in Today’s Economy

/ ontheoutside / 8 Comments

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The title of this article sounds rather ordinary, but in fact there’s more to say than you might expect.   There aren’t a lot of new facts here, but we bring together several strands of argument that don’t tend to be followed to conclusion.  It’s useful to think step-by-step about prosperity today and going forward.

  1. Our national standing today is largely determined by technology.

There are many aspects to this.  The most obvious one is the role of high-tech companies in the economy.  The NYTimes had an article a few months ago (on the occasion of Apple’s becoming the first $1 T company) with graphic displays showing the size of Apple (as well as Google, Microsoft, Amazon, and many others) in the US economy.  The dominance of high-tech is unmistakable. That’s what supports our standard of living and always has. Railroads, steel, automobiles were all high-tech in their day.  (Note this is not saying that Google or Facebook are angels, it’s our national strength in technology that matters.)

It is only because we are on top of that heap that we have the money that supports the rest of the economy.  That includes much of small business and service industries.  It is from the strength of our competitive economic position that we can pay for the non-competitive industries we choose to support.  The aluminum and steel tariffs are being paid by us from the industries that don’t need them.  To state this somewhat differently—we are not going to build a dominant economy by selling each other stuff anyone can make at artificially high prices.

It’s also worth pointing out, given all the discussions of the military budget, that the technology argument applies in spades for the military.  Building new aircraft carriers is not going to make us safe.  One only has to think, theoretically of course, about the effect of a North Korean virus disabling the military’s command and control.  From the chart below, it is obvious that our level of military spending ought to quash everyone else hands down if money were the only object.  But it’s not doing the job, because that’s not the game anymore.  And it’s not just AI, it’s across the board.

20170424_Military_Expenditure

What all this means is that the people who support our technology position are critical resources who matter to all of us.

This is a lot less elitist than it sounds, because it’s not saying we shouldn’t care about or value everyone else (more on that later).   The point is that we shouldn’t be spending our time worrying about who is or isn’t supplanting whom.  Our success depends on nurturing and exploiting the best and the brightest—at least for these skills—and we had better spend our time trying to find them and encourage them, regardless of race, gender, or sexual orientation.  And if foreigners choose to come here and establish successful startup companies—mostly in high tech—we should be happy they do.  It is a major strength of the US economy that people find the US to be the best place to realize their ambitions.  We erode that strength at our peril.

Anger at elite technologists may be natural, but they are the wrong targets.  Their effect on the rest of us is positive.  What we need to avoid is a two-tiered society of haves and have-nots, as we’ll discuss later.

  1. Businesses today are different from the past in important ways.

Since we’ve identified the key role played by the tech sector, it’s worth thinking about what kind of businesses those are.  So let’s take a quick look at Google, Apple, Amazon, Microsoft, and Facebook.

– A first point to notice is that they are all some form of monopoly.  This is not surprising as they are all (even Amazon and Apple) essentially software companies.  Software businesses invite monopoly, because costs of production are minimal. In such cases, research and development costs become primary, and the company with largest market share can afford to offer products with more features than a smaller competitor can.  As automation continues, particularly with AI, similar arguments will apply to much of the rest of the economy.

Managing monopolies is a serious issue:

Monopolies squelch competition.   It is imperative for our success that established companies can’t limit the innovative power of new entrants.  That has been our historical advantage over foreign competitors and is a major factor in any discussion of how we deal with the rise of China.  This is not just a problem with Google, etc.  The demise of Net Neutrality is a classic case of giving in to established players, in this case the major telecom carriers.

Monopolies take more than their share of our money.  Monopoly power limits price sensitivity. Since the determining feature of competition is more often uniqueness more than price point, products are priced at what the market will bear—as with the iPhone or patented drugs.   Furthermore, through manipulation of assets including intellectual property, hi-tech monopolies have been tough to tax.   Apple’s success in this is legendary.   Their windfall from the recent corporate tax cuts is something to behold (and unnecessary as a spur to investment).  It is imperative we learn how to tax monopoly-level profits.

– Next, personal success in these companies requires a high-level of technical competence.   Amazon is obviously a case in point, with two completely different populations:  the mass of box fillers versus the corporate staff.  Note that technical competence is not just a matter for developers, but is also required for the many people in management, support, administration, and even sales.  As just noted, as automation proceeds, this trend will extend well outside of high-tech.

This represents the threat of a two-tiered society, as discussed earlier.  As a country this implies at the very least a basic responsibility for broad-based solid education and a livable minimum wage.

It should be emphasized that strengthening of education is required for both national success and personal prosperity.   Regardless of what advantages we have for staying on top of the heap, we cannot succeed if we don’t have the people to do it.

– Third, all of these business are intrinsically international.  With the growth of the world economy (and China in particular) economies of scale are such that we have to think in global terms.

– Finally our fourth and last comment for this section is about a different trend not limited to high-tech—the institutionalized irresponsibility of business.  It has become gospel that businesses have responsibility only to their investors, and all other considerations are more or less theft.  Businesses used to care about retirement, healthcare, training, even local charity.  But current reality is that if someone is going to care about those things, it’s out of the question for it to be them.

In addition, because of the sheer size of the country, the US more than anywhere else has to deal with the phenomenon of towns or regions where the economic base can just disappear. Company town are the obvious example. In an age of accelerating technology change, we can’t stop such things from happening.   And we can’t expect rescue to happen by all by itself.

However we emphasize this isn’t just about charity.  In the current state of affairs, the private sector is not be doing what’s necessary even to provide the environment for its own success.

That leads to the next topic—what do we need for national success?

  1. Our infrastructure problems mean more than we thought.

Infrastructure has to be thought of as whatever is necessary for national success and personal welfare.  I.e. much more than roads and bridges.  The educational system fits in this category as it is required for both personal and national success.  Declining upward mobility and the student loan crisis are two indications that there is a lot that needs to be done.

Support for theoretical research is in the same category.  It is precursor work for new technologies before they are ready for business. A point worth stressing it that it is not only the research itself that is important—research work assures that there will be a population ready to exploit new opportunities as they arise.

Continuing on, we list a few more significant infrastructure projects needing immediate attention.

– The American Society of Civil Engineers keeps a web site with a break down of national infrastructure requirements.  We currently rate a D+.

– To that we add the urgent needs of combatting climate change, which will be considerable, regardless of how the final plans work out.

– Healthcare is currently in flux with ACA under attack and nothing to replace it.

– Finally we have the general specter of a two-tiered society, with all the misery and threat of conflict that represents.  That too needs to be dealt with as a national problem, and there’s no one in this picture other than government to do it.

Government’s role in this picture is three-tiered:

i. Government needs to make sure everyone has the education and access to the opportunities to succeed.

ii. Government needs to support what is necessary for national infrastructure, much of which will not happen spontaneously in the private sector.

iii. Government needs to supply a last-line safety net for those who fall through the cracks.

This is a non-trivial task, and we emphasize that the biggest part of it is not charity.   We have a current mismatch between a dearth of good jobs and a growing backlog of infrastructure needs of all kinds.

From the point of view here our much-discussed infrastructure needs—back to the roads and bridges—have to be viewed as bellwethers.  The fact that we can’t deal even with roads and bridges means that we have a fundamental problem funding the common good, and we have to take that head on.

  1. There is a mismatch between the needs of our country and the forces that currently control it.

The governing ideology of this country is simple to summarize:  let the private sector do it and get out of the way.  All government regulation is bad, and taxes are just a brake on the private sector’s ability to make everything great.

The chief beneficiaries of this policy are the ultra-rich funders of the Republican Party, although the problem of money in politics (especially after Citizens United) transcends parties. In this enterprise Trump is largely a front man for the real forces running things.

For these people, with fortunes going back even into the nineteenth century, it’s natural to regard the country as a money-machine.  Taxes, regulations, and government services—except for the military—are deductions off the bottom line.

The problem with that view, even for them, is that it is the wrong model for the world we just described.  That set of policies would make sense in an extractive economy, where all that is necessary for success is a cadre of imported experts to arrange for pumping oil with purchased technology.  In that case you don’t need much from the national population in order to collect the proceeds.

That’s not our situation.  As described, we live in a technology-dominated world where the population must earn our national success.  For that world we’re currently going in the wrong direction.  Devaluing education, denying climate change, cutting research, encouraging xenophobia will get to us sooner than we’d like to think.  China is a formidable challenger.

However, it not so hard to be optimistic if we can just be serious about what needs to be done.  We have all the tools for success:  the money, the work to be done, even the means to avoid a two-tiered society.

The story is not complicated.  If we can return to exploiting our strengths, then we should be able to remain in the technological forefront for our chosen areas of focus.   If we can control the monopolies, then the associated margins in an expanding world economy should yield money enough (if we can collect it) to produce a workable society for everyone ready to participate.

There is certainly no shortage of work in the infrastructure area, and it needs all kinds of people.  In this respect the Green New Deal may be too glib in pinning everything on climate change, but their basic idea is correct.   If we play our cards right, the high technology future will provide the funds to support the infrastructure for its own success and for the prosperity of the nation.

We should not underestimate the job.  Careful and transparent planning is critical—defining exactly what needs to be done to support both the economy and the population.  And then determining how that work can be best supplied.

It should be emphasized is that we’re NOT talking about socializing away the free market economy.  If there’s one bad misconception that needs to be hammered down everywhere, it’s the idea that the private sector is magic for all problems.  We’ve just gone down a long list of things it’s not going to do.

Even Adam Smith was clear about this from the beginning.  The private sector is a participant in the public economy, but that economy will deliver the benefits of a free market only if #1 government keeps the private sector from corrupting the markets (e.g with monopolies and bribes) and #2 government provides the resources (e.g. education and other infrastructure) necessary for success.  That’s the definition of our job.

This will necessarily require a renewed focus on government and public service.  It’s interesting that a couple of recent mainstream books (Volker, Lewis) have recognized public service as an important issue.  In that respect “Green New Deal” isn’t a bad term:  we need to be as serious as Roosevelt’s brain trust in planning for the next stage for our country’s future.

This is a battle both old and new.   In Smith’s words, “The interest of [businessmen] is always in some respects different from, and even opposite to, that of the public …The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.”  Wealth of Nations is only achieved when government does its job.

Climate Change is Not Complicated

/ ontheoutside / 11 Comments

The reason for this note is that discussions of climate change have splintered into so many directions that the subject appears more daunting than it ought to be.  Neither the current status nor the path to success is actually hard to see.  The main things we need are commitment and a real plan.

  1. Current status

– Evidence for climate change is clear and unambiguous.

The increase in global temperature levels goes back decades, as shown in the following chart (Temperature Anomaly just means the temperature increase over 19th century levels).

noaa_temp

Further the relation of temperature and CO2 in the atmosphere is unmistakable (see the straight line below) and pushing up inexorably toward the identified 1.5 ºC danger zone:

temp_ppm

Scientists have even demonstrated (using isotopes of carbon) that the increased carbon dioxide in the atmosphere is due to burning of fossil fuels, not some natural process.  Arguments to the contrary have been largely funded by the Koch organization or the oil companies themselves and typically involve doctored data.  Accusations of conspiracy have been debunked, but are still repeated by interested parties.

– Problems are already happening.

There are two kinds of examples.   For temperature alone, as the first chart showed, we’re continuing to set new records for average global temperature.   The effect on sea ice has been dramatic, and farmers are becoming well-aware of changes in growing seasons.

Individual catastrophic events are harder to pin down, just because it’s hard to develop statistics around rare events.  However, scientists have been able to work through the statistics to show the extent to which extraordinary storms, such as hurricane Harvey, were made worse by climate change.

– Role of climate models.

We don’t need climate models to say there is a problem.  We do need climate models to assess specifically what is going to happen.  For example, we can see that glaciers in Greenland and Antarctica are melting, but we need to figure out how quickly this can happen and what the effects will be on weather and ocean currents.  Since the earth hasn’t been here before (i.e. rapid C02 increase like this has never happened), we have to try to figure it out.

A particular concern is that climate change feeds on itself to accentuate the effects of CO2.  An example is melting of permafrost in the arctic.  That releases methane, which is also a greenhouse gas and adds to the increase expected with CO2.  Climate models are extremely detailed to deal with such effects.  The modeling work is supported by a global effort to get data on what is happening now.  This is a major effort by many independent researchers worldwide to get the best possible handle on what’s coming.

– It’s going to get a lot worse unless we start acting now.

An important fact to be emphasized is that carbon dioxide in the atmosphere just adds up.  So even if we stabilize global production of carbon dioxide, things will just get worse as we add to the total.  For a few years 2014-2016 it looked like CO2 production was stabilizing, but then the trend turned worse, and last year accelerated it.  Here is the current chart.

s09_2018_FossilFuel_and_Cement_emissions_1990

As we just noted, even a stable value of CO2 emission means things are getting worse, because it is the total amount of CO2 in the atmosphere that drives temperature change.  The stable value was attractive, because it seemed to indicate that CO2 had finally peaked and might start to decline.  And the decline might mean the total CO2 could be bounded.  We’re now back to worrying about the peak, with no idea how bad things will get.

Scientists have given us a so-called carbon budget—the maximum amount of CO2 we can add to the atmosphere and still escape dangerous, irreversible changes.  Every bit we add counts against the budget.  We have to find a way to get carbon dioxide production down toward zero, and things will continue getting worse until we get all the way there.   According to the last international climate study, CO2 production needs to drop 45%  by 2030 and reach 0 by 2050 if we want to keep the temperature increase under 1.5 ºC.

– Can’t we just pull the carbon dioxide back out later?

There is currently a lot of work in progress on how to capture and store carbon dioxide.  For now, capturing carbon dioxide even in exhaust flues is expensive—it can double the cost of electricity from a coal power plant.  Pulling it out of the air is substantially harder.  Further some effects, like movement of glaciers, are hard to stop even if we pull out the carbon dioxide later.  Sea level changes are irreversible.

Earliest use of this kind of technology would be for flue-based solutions in particular industries.  That’s getting cheaper, but it’s no miracle solution.  Large-scale pulling carbon out of the air is not yet available, and the cheapest estimates for a worldwide solution would cost on the order of 10 trillion dollars annually.  Nonetheless, current climate models assume that some use of this technology (expensive or not) will be needed if we are to keep the temperature increase under 1.5 ºC.

– What about geoengineering?

This approach, which gets sporadic publicity, involves adding chemicals to the atmosphere to block the sun—cutting temperature by putting the whole world in the shade.  A number of different substances have been investigated to do this, and any of them would need to be constantly injected into the atmosphere under supervision by some international body.

As an approach this is much cheaper than carbon capture, but it is regarded as a dangerous last resort even by the people who do the research.  All photosynthesis worldwide would be affected. The closest natural phenomenon, the Mount Pinatubo volcanic eruption in 1991, resulted in a worldwide drought.  It does not address acidification of the oceans, which would continue to disrupt life in the seas.  Further it is a time bomb, as carbon dioxide concentrations would continue to build up, so that the shading and its effects would have to keep increasing, and any interruption would be catastrophic.

The bottom line is that there is no silver bullet here; we have to get off burning carbon.   However it’s worth pointing out that this is NOT a death sentence (as we’ll see) and it is also NOT committing us all to a grim world of scarcity.  Even today people buy Teslas because they like them—among other things they’re performance cars—not as sacrifices for the good of mankind.  That’s the right way think about the whole transition.

  1. What to do about it

To understand what we need to do about climate change, we first have to think about the kind of world we would be going toward.

A point worth emphasizing is that the future is electric.  If we’re getting off fossil fuels, we’re not going to have people burning stuff all over the place.  So we will be generating power by suitable technology (more on that in a minute), and electricity is the means of storing and distributing that energy.  All renewable sources today generate electricity as the common currency of power.

Since the electric grid is the core for what we need to do about energy, we have two primary tasks:  strengthening the electric grid and getting all users of energy on that grid.  Each needs to be discussed separately.

– Strengthening the electric grid

This is about generating and distributing power.   We of course need a grid that is reliable and safe, but for climate change we’ll need more.  There will have to be considerable growth in electrical power generation (since we’re taking on new roles), and we will want to optimize opportunities for renewables even in the near-term.

At present there are ongoing activities to strengthen our current patched-together national electric infrastructure, but these are long-term projects and not primarily driven by climate change.  Power generation is largely a per-state matter and is quite literally all over the map.  For climate change we have benefited from the near-term improvement of substituting natural gas for coal, but there are still many coal plants and nothing says we have optimized opportunities for renewables.  Ideally we should have a nation-wide plan for growth and modernization that would allow renewable power to be generated where appropriate and used wherever needed.

It’s also worth saying something about the longer-term picture.  Ultimately this is not a story about scarcity and conservation; it’s about alternative power.  Renewables will improve, and there will be other significant new sources of power.  Fusion power in particular has been slow to develop, but should be taken seriously.  It has had a recent impetus with higher-temperature superconductors (for the magnets that contain the fusion reaction), and current international projects target 2033 for a demo system and 2050 for commercial system deployment.  Initial systems will be heat-based, like conventional power plants, but later generation systems may generate electricity directly —a mind-boggling concept.  (Interestingly, this may even involve mining on the moon.)  We have a near-term job to do in saving the planet, but there’s no reason to fear we will ultimately lack for power.

– Making electricity the universal power source

The point of departure here is the following chart showing energy use by sector and energy source.  Our task is a prioritized migration to renewably-generated electricity in all sectors, with the maximum possible bang for the near-term buck.  In this transportation is an obvious target. It is a large consumer of energy (28% of US energy usage) with negligible current penetration of renewables.  Electric cars can be a big win.

consumption-by-source-and-sector

Given the complexity of energy usage overall, the single most important step to encourage migration is to stop pretending that carbon dioxide production is free, i.e. to stop subsidizing the fossil fuel industry.

We can be pretty specific about what CO2 costs us.  We are rapidly reaching the point where each new ton of CO2 in the atomosphere is a ton that will have to be removed.  The cheapest estimates of what it takes to remove CO2 from the air (average of upper and lower bound estimates) is $163 per ton.  Multiply that by the US annual production of CO2 = 5.4 B tons, and the silent subsidy to the fossil fuel people falls out as $880 B annually.  That’s no small distortion of our economy.  Essentially a trillion dollars a year.  Another way to say the same thing (when you work out the math) is that every gallon of gasoline sold gets a silent subsidy of $1.47.

The usual approach to this subject goes by the name of a carbon tax, but that’s actually a misnomer.  A tax is money collected to fund some government activity, and that’s not the point here.   We’re stopping a government-funded subsidy of products that produce CO2, and any money raised should be used to mitigate the effect of fuel price increases on the population.

Because raising fossil fuel prices is regressive, balancing costs and benefits is tricky and has led to voter rejection (spurred by massive Koch campaign spending) of several carbon tax proposals.  (The yellow-vest protest in France was from something worse, a budget-balancing regressive tax masquerading as a climate measure.)  The magnitude of the silent subsidy is such that it is necessary to get this right.

One example proposal worth discussing is the Carbon Fee and Dividend from the Citizens Climate Lobby.  They start with a low fee of $15 per ton of generated CO2 at fuel production or port of entry, but raise the value $10 per year afterwards.  That money gets returned per adult with an added allowance for children.  The gradual increase is in part a low entry but it also allows for increasing maturity of competing technologies.

That proposal is now a bill in Congress, and there was a recent endorsement by a number of economists and other public figures.  It may or may not become part of the Green New Deal from the Congressional Democrats.  One way or another carbon pricing is so fundamental it just has to be fixed.

  1. Outline of a plan

The energy use chart from the last section says a lot about how this has to work.  Going down the chart, we can say the following:

– Transportation

Thus far this sector has had virtually no penetration of renewable energy sources, so its importance cannot be overestimated.   The only alternative is electric power, so we need incentives to finally get a non-trivial market share.  Carbon pricing will help, but we may need more. We’ve had incentives in the past to help electric car makers get into business.   Now the issue is the continuing cost of carbon.

– Industrial

The ongoing migration to natural gas shows the price sensitivity of this sector.  That trend toward gas should continue, and we need to start more movement onto the electric grid.  Carbon pricing should help here too, and there should be active discussion with industry to determine what form it should take.  Flue-based CO2 capture may also be appropriate in some cases.

– Electric power

We already noted the major contribution from this sector in the conversion from coal to natural gas.  That should continue with the non-trivial number of remaining coal plants, but we still have to get to renewables.   Everything that happens in this sector should flow out of a national plan for evolution of the power grid, as discussed before.  Coal plants and also gas-powered plants may be supplanted by renewables elsewhere.

– Residential and Commercial

We should recognize that this sector is significantly smaller and with many subsectors to be considered.  The conversion to natural gas is already well-underway and the remaining petroleum sectors (e.g. New England) may not be easy to change.  So we need to map out conversion to electric or possibly even flue-based CO2 capture.   The first step is a more detailed plan.

We also need to call out the need to support research, as it is an unavoidable part of the picture.  That applies both for new energy sources and storage, and to the various activities underway to understand climate change and how we will have to adapt.

  1. International coordination

Thus far our discussion has focused on the US, but we’re only one piece of the puzzle.  Despite the nationalist rhetoric, there is only one atmosphere for everyone.   Helping other countries helps us, and poorer countries have fewer resources.  The following chart underlines the importance of that effort—the “others” are becoming the biggest piece.

s11_2018_Projections

There are actually two points to be made.   First, the Paris Agreement included an initial arrangement between rich and poorer countries, so that progress could be made.  That codified a fund (trashed by Trump) to help poor countries meet their targets.  However the issue will continue to be contentious, and one way or another we will have to contribute.  The just-completed Madrid meeting ended without agreement.

Second, our contribution may turn out to be more than just money.  Other countries will have energy use charts that won’t look anything like the one we’re been considering.  They may need different forms of technology to support different evolution plans.  We should use our resources to see what can be done.

In the past the US recognized a responsibility to lead this process.  With the US now firmly committed to cheating, it’s hard to keep things going.

The world needs our contribution to leadership. That means it is doubly important to put our own house in order .  We need to know where we’re going for ourselves, and so that we can help the rest of the world in this effort to preserve our common future.

Saving the Country

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This note grows out of a comment made during the election night coverage of the midterms.  Analysts were breaking down the vote in various categories, and one of them remarked that if you just look at white voters, this seems like a completely different country:  Republican voters outnumbered Democrats 3 to 2.  They were all-in for the Trump program.

It’s worth paying attention to what that means.  Diversity is not a matter of tolerance; it’s a matter of national success.

Immigrants and their families are assets by any statistical measure.  They need to work harder to succeed, and they do it.   As the various waves of immigration entered this country, they have adapted and prospered, and the country as a whole has benefited.  It’s no accident that the most prominent players in our new economy—Google and Apple—were founded by an immigrant and the son of an immigrant.

But there is another aspect to this as well.   Outsiders (and not just immigrants) are not so easily tempted by images of an idealized past paradise.  Those siren-song images are not from their past, so they can keep focused on reality and the future.

Despite the many similarities between the Trump regime and the early stages of the “illiberal democracies” of Poland and Hungary, our diversity provides perhaps a degree of protection.  White voters have not called all the shots in the midterm election.  And it’s possible to believe that we’ve taken a first step back from the brink.

The problems of the Trump regime affect everyone.  First and foremost, we are squandering our strongest economic advantages out of ignorance and arrogance.  And we are at each other’s throats by conscious choice.  Dictatorships are not just bad for outside groups, they are historically bad for everyone.

So we should give credit where it’s due.  Three cheers for diversity in all of its shapes and colors—the saviors of the country!

 

A Logical Trap

/ ontheoutside / 2 Comments

This note is occasioned by Elizabeth Warren’s recent proposal on corporate governance—to add labor representation on corporate boards and expand the scope of corporate responsibility.  Regardless of what happens to her bill, she has done an important service by calling attention to a fundamental problem.

In recent decades American business has been taken over by the so-called Milton Friedman view of corporations.   That view has a simple prescription for how companies should operate: the world is best-served when businesses focus exclusively on business.  I.e. the role of a corporation should be to generate the maximum possible return to its investors.  Any other concerns (the workforce, community responsibility, etc.) are a perversion of the engine that makes capitalism great.

There are lots of reasons why that is suspect.  Clearly in this world labor has little to say, and in fact even a business’ own interests are not necessarily well-served—investors can walk away if the business gets pillaged for their benefit.  The percentage of business profits returned to investors has gone up dramatically with this philosophy, to the disadvantage of both labor and capital investment in the companies themselves.

The point we want to emphasize here is how damaging the Milton Friedman view is in the environment of today.   We have just passed a massive tax cut that has taken so much out of the federal budget that there is (particularly with the deficits) essentially nothing left for the other problems of the society.  As justification we’re told that private enterprise is the engine that makes everything great.

That is of course a logical trap.   Businesses in this world have no responsibility for the well-being of the country—and the government doesn’t either, because the private sector is always the answer!

As a consequence we’re not investing in our people, we don’t have to think about their welfare, and we’re not preparing for the future, because there is no one on the hook to do it.  Even Adam Smith had no illusions about the private sector’s ability to police itself or prepare the population for personal and national success.

Everyone should recognize the true symbolism of the following chart:

stock buyback2b

The one significant result of the tax cuts is the huge surge in stock buybacks, essentially returning taxpayer money to corporate investors.  We set a record in Q1, and then almost doubled it in Q2!

Capital investment, by contrast, was relatively flat—little touched by all that money:

cap_ex2

In other words the tax cuts have siphoned off the resources of the country, so that there is nothing left for issues like education, infrastructure, the opioid crisis, climate change—and has delivered that money to corporations who have in turn just passed it through to their wealthy investors via buybacks.

So we’ve become like one big predatory private equity investment, being sucked dry for the benefit of the happy few who are running the show.

Tesla as Example

/ ontheoutside / 2 Comments

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However distasteful Elon Musk seems to be, the nuttiness of Tesla’s treatment nonetheless deserves comment.

Tesla was the first (as far as I know) to figure out that current battery technology is practical to power a car.  They have also been the best thus far at figuring out how such a car can be made uniquely attractive.

This is an intensely competitive business, and they have been trying to maintain first-mover advantages in features, battery technology, and the manufacturing process.  That is a very tall order, and it involves enough risk-taking that there is no surprise that it is tough to keep commitments.  Until they reach some sort of stable state vis-à-vis their auto competitors, Tesla has to be regarded as still in a kind of startup phase.  That applies both to risks and rewards.  No one expected iPhone penetration to grow as fast as it did (I can still remember articles talking about mobile phones as a mature, saturated market), and the same kind of thing could happen with electric cars.

Unless you’re a deliberate non-believer in climate change (and these days you have to try hard), the role of electric cars can hardly be overestimated.    Transportation accounts for 28% of carbon dioxide production, and there is no one proposing to put carbon dioxide scrubbers in every car.  Tesla is trying to become the Apple of transportation, with perhaps an even bigger impact on the US economy.

How are we helping Tesla in that undertaking?  Well, we haven’t cut out the electric vehicle subsidy entirely (as the House Republicans proposed to do), but there’s no evidence we’re trying very hard either. The administration is just not interested in anything that raises even the suspicion of climate change.  A carbon tax for example.  We are minimizing Tesla’s value in its home market, while the rest of the world catches up.

As for the business community, everyone seems eager to predict the Tesla’s demise.  Certainly the traditional auto companies would like that, and Musk’s antics make it exciting for the press to think about a deserved fall of arrogance.

However as an indication of what that might mean, people should recognize that all of the core technology in the Chevy Bolt comes from South Korea.  And that story can hold for the rest of the multi-trillion-dollar investment that will be needed to combat climate change.

Tesla and Ice

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This is a short note on a couple of issues related only in that they say something relevant about the future we should be planning for.

The first relates to Tesla and its production difficulties with the new, lower-priced model 3.  The highly-automated production of the model 3 is well-behind schedule, to the point where it is a big hit to the cash flow of the company.  We mention it here, though, because the delay is an indication that mass production of electric cars is something fundamentally new.

An electric car is a much simpler machine than an ordinary, gas-powered vehicle.  In principle the construction should be both cheaper and easier to automate.  Current production of Teslas is intrinsically a low-volume operation.  The model 3 will be the first indication of what newly-imagined electric car production is like.

I don’t know if we’re in for a shock or not (this is after all a first go at it), but this could be another big change to conventional middle-class employment.  And there will be follow-on effects for gas stations, and especially maintenance and repair.  This is another of many indications that broad, technology-based disruption of jobs is going to happen.

 

The other story is about the commissioning of a new class of Russian icebreaker—targeted at clearing northern ship lanes freed up by the retreat of polar ice with global warming.  The phenomenon is already clear, although the amount of traffic is still small.  The Russians are preparing for the opportunity with multiple classes of new machines planned for release up to 2025.  The Chinese have announced cooperation with the objective of reducing shipping times to Europe by a third.

The US is of course uninterested in consequences of climate change.  The only Coast Guard ice breaker is 40 years old, and they have a hard time getting authorization to get a new one.  The Bering strait, however, could be a shipping lane.

This is a very small example, but climate change affects many things, and as a country we’re trying to avoid finding out about them.

 

The current federal budget is put together for a world where the private sector will take care of everything.  That has always been a fantasy—the efficiency of the private sector comes in large part from its ability to ignore everything not relevant to immediate financial success.  It is particularly false for a world undergoing fundamental change.  We either recognize it and help people through it, or we fall behind and revert to the nightmares of the nineteenth century.

Update on Climate Change

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This note is an update to the climate change article from last year.  The story hasn’t gotten any better, but there is enough that’s new to warrant a revisit.

The most fundamental piece of bad news is the opening figure, which comes from the Global Carbon Project.  After three years of seeming stability, the world production of carbon dioxide increased significantly in 2017.  (The figure says “projection” just to indicate that the final computations are in process.)  Without too much evidence we might as well call that the Trump bump.  As we noted last time, worldwide unanimity on climate change is important precisely because the advantages of cheating are so obvious.  We—with probably the most to gain from the Paris Agreement process—are the cheaters in chief.  So it’s not surprising others will have fewer second thoughts as well.

We have to put this change into perspective.  Even a stable value of CO2 emission means things are getting worse, because it is the total amount of CO2 in the atmosphere that drives temperature change, and it all adds up.  The stable value was attractive, because it seemed to indicate that CO2 had finally peaked and might start to decline.  And the decline might mean the total CO2 could be bounded.  We’re now back to worrying about the peak, with no idea how bad things will get.

Two more new slides from the Global Carbon Project show what we stand to gain from Paris Agreement unanimity.  The first shows the current per capita production of carbon dioxide.

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As has been true for many years US per capita usage sits way above everyone else, more than twice both Europe and China.  That is a direct expression of our carbon-powered standard of living.

The second slide shows who is going to have to make changes to protect that US standard of living from the effects of climate change.

s11_Projections

This shows that the major growth in carbon dioxide production is not from the biggest economies (note that even China has stabilized), it’s from the have-nots trying to achieve some fraction of our standard of living.   We are asking them to ignore not only our past exploitation of fossil fuel resources but even our current high per capita use and to delay their own immediate hopes for a better life in order to make the world a safer place for everyone.  So much for the question of who benefits from the Paris Agreement process!

That introduces the next topic—public attitudes to climate change.  There were enough strange weather events in the past year to give people pause, so we’re getting close to—but still not over—the hump.  The latest poll numbers have both good news and bad.  First the good news:

Overall, 45 percent of those surveyed said global warming would pose a serious threat in their lifetimes, the highest overall percentage recorded since Gallup first asked the question in 1997. Despite partisan divisions, majorities of Americans as a whole continue to believe by wide margins that most scientists think global warming is taking place, that it is caused by human activities and that its effects have begun.

Then the bad—the improvement is only partisan:

Gallup asked whether people agreed that most scientists believe global warming is occurring, and 42 percent of Republicans said yes, down from 53 percent a year earlier and back to a level last seen in 2014. Just 35 percent of Republicans said that they believe global warming is caused by human activities, down from 40 percent.

This seems like another proof of a much-discussed feature of human nature—when people are confronted with proof that their beliefs are wrong, they double down on defending those beliefs.   Unfortunately those are the people running the show.

How can that turn around?  A recent Steven Pinker book made an interesting point.  Much of the rhetoric around climate change focuses on conservation and a new world view of collective responsibility.  But conservation actually isn’t the main point—since we’re not repealing the industrial revolution, the main point has to be new energy sources.  We’re not creating a new world where no one drives Chevy Suburbans anymore, we’re just changing the power source.  Conservation, however important, is about buying time until we can get there.  Perhaps that’s one way to get climate change out of the culture wars (as it should be).

In any case the focus has to be on the reality of climate change, and everything else is tactics. With tactics it’s easier to be bipartisan.   One indication is that Congress, over Trump’s objection, passed a bill continuing tax breaks for solar, nuclear, geothermal, and carbon-capture projects.  This effort united left-wing and right-wing approaches to climate change largely under the radar.  However, it must be recognized that even with such efforts the US is now lagging far behind in support for the technology of climate change.

Carbon capture (separating out CO2 and storing it underground or elsewhere) deserves some special mention, because it has become a bigger topic in the past year.  On one hand this is an idea that has been around for decades without going very far, and what’s more the coal industry supports it as a lifeline.  On the other hand the technology seems to be improving, the Obama administration supported it as a transitional technology, and even the IPCC climate studies assume some form of it will be used.  It currently exists as an expensive add-on for power plants, and some still-speculative variants have been proposed to pull carbon dioxide straight out of the air.  Both the power plant and out-of-the-air applications have a common need for CO2 storage technology, of which there are many variants.

The biggest issue with carbon capture is that it can be (and is being) used to delay doing anything about climate change—why worry about carbon getting into the atmosphere if we’ll pull it all out later.  The problem is that the technology still has such big questions about cost and scaling, that “later” could be very late or never (and some effects, such as melting glaciers, are irreversible).  Even the cheapest estimates say it will cost continuing trillions.  What you have to say is that the technology investment is necessary and at worst it at least gets the climate dialog past the hoax stage.  And if we could just get the Kochs interested in that business (which is largely oil industry technology), it would settle the Republican perception of climate change once and for all!

Returning to reality, we have to conclude the past year seems like a pause for progress.  After Trump took the US out of the Paris Agreement, many wanted to talk about all that could be done to maintain momentum nonetheless.  The chart at the beginning shows the limits of that point of view.  There are other indicators as well:

– The auto industry’s step back from future fuel efficiency standards

– Exxon’s declaration that climate change is no risk to their profits

– Business as usual in the International Energy Agency’s World Energy Outlook:

iea_weo

– Even the new preoccupation with carbon capture has to be viewed as a vote of no-confidence in the progress of conservation.   If prevention isn’t going to happen, then repair is all we’ve got.

What’s more than there has even been a preoccupation with a more drastic step, so-called geo-engineering.  This means injecting chemicals or particles into the atmosphere so as to dim the sun and cool the earth despite the increasing CO2 concentration.  There are many risks:  continuing ocean acidification, reduced photosynthesis and food supply, and weaponization of the technology.  Since CO2 would continue to accumulate, any loss of protection would have disastrous effects.  These are desperate measures.

As to what we should be doing, the picture is not too different from last year, but we can be perhaps more explicit.

  1. Because burning carbon is now recognized to have definite costs (i.e. whatever is necessary to counteract the CO2 increase), we need some kind of carbon tax so that the free market economy can react correctly. Since that cost is not currently captured, our economy is incurring a significant distortion that needs to be fixed.
  2. We need to get back into the Paris Agreement process to return focus to the goal. To repeat the obvious, the Paris process was always intended to be iterative—with countries readjusting their goals to eventually reach the target. We’re only at step one, so we had better help the world get back on-track.
  3. We have to recognize that at this stage we’re in no position to judge winners and losers among contributing technologies. So the solution has to be all of the above: nuclear, solar, wind, geothermal, batteries, carbon capture, even substituting gas for coal as a temporary measure.  The IPCC gave us what they called a carbon dioxide budget—the amount of CO2 we can add and still stay below a global temperature rise of 2 ⁰ C.  In 2014 (the year of the report) it was 800 giga-tons.  It is now below 700.
  4. People have to recognize that despite confusing news reports, we are all in this together. Some people will be hit by sea-level rise, some by drought, some by sheer temperature, some by storms, some by an effect we haven’t seen yet. Some may even be a little later.  But ultimately there’s nowhere to hide, and even “later” comes fast.
  5. There is no excuse for not funding research in all the contributing technologies and also research to understand the climate effects we are going to live with for however many years it takes to get past fossil fuels.
  6. Ideally all elements of society should be involved in planning such major changes. The carbon tax will help make that happen, but it’s not the whole story. We can’t keep fighting about this.

This administration likes to talk about itself as bringing business practices to government.   The evidence for climate change is such that any reasonable business would be doing its best to quantify the risk, so as to take appropriate action.   Businesses that choose to ignore disruptive new technologies or entrants are the ones that disappear—along with their disparaging comments on how the new stuff will never amount to anything.

Unless we choose to wake up—that’s us.  We’ll act now or pay far more dearly later.

 

Private Sector Fantasies

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This note is about a subject with perhaps more deliberately-sown confusion than any other:  the role of government in a market economy.

We start with the saint of free markets Adam Smith.   Adam Smith had no delusions that the free market system would somehow manage itself.   He saw three roles for government in a market economy:  defense, justice, and education.  Further he understood that the private sector and the free market were not the same thing—one of the roles of justice was to prevent the private sector from creating monopolies and thus perverting the free market.  In other words even as an ideal, the free market was neither self -policing (it needed to be protected against its own tendency to create abuses) nor self-sustaining (it needed government to create the population of educated workers).

With that as introduction, we want to talk more about the relations of business and government.  There are three sections.  The first two expand on policing and sustaining of the free market, as just discussed.  The third talks about scope—what objectives for society are in or out of scope for the free market. The Trump administration has positioned itself as the defender of free markets against government.  Instead they are defenders of something rather different, with real dangers as a result.

 

Policing the free market

Monopolies are bad.  they raise prices and stifle progress.  They are also by many measures growing in power.  But they are not the only area where the free market needs to be protected from itself.   For example, lack of business transparency perverts the capital markets, so the SEC plays a crucial role.

A more complicated but equally crucial role is regulation of the boom and bust cycles (with bank failures and human misery) that used to be endemic to capitalism.  Government has two responsibilities for controlling those cycles:

  1. It needs to act “countercyclically”. Despite the jargon term, this is so basic as to be biblical—save in good times to prepare for bad. In a recession the government is the only party able to stop the spiral of low sales -> layoffs -> even lower sales-> even more layoffs.  It does that by injecting money into the economy to stabilize sales.  But in a recession, tax revenues are down, and the money has to come from somewhere–preferably savings but if necessary debt.  In 2008 George W. Bush had just fought an off-budget 3 trillion-dollar war, so the cupboard was bare.  Republicans screamed about increasing the deficit, even proposing constitutional amendments for balanced budgets.  Their line “real people tighten their belts when they have to” was a deliberate misrepresentation.  Real people save for bad times; otherwise they have to borrow to put food on the table.
  2. Government needs to recognize and control the excesses that can creep in to cause havoc in the business cycle. While many factors contributed to the 2008 crash, the most spectacularly deadly was the perversion of the banking system caused by mortgage-backed securities. In the giddiness of deregulation no one was looking.  The aftermath produced the Dodd-Frank legislation as an antidote.

Finally, as a last example, there are categories of risk where you can’t count on the business decision-making process to do the job.  Low-probability/high costs events (plane crashes, oil rig blow-outs) should in theory be prevented by rational decision-making, but in practice it’s hard to refrain from increasing profits by ignoring something that “really isn’t going to happen”.  So there is a role for government there too—protecting both the public and the businesses.

Current status:

– The administration’s anti-trust position remains to be seen.  Trump campaigned against mergers, but appointed an industry-representing trust lawyer to head the anti-trust division.

– There seems to be no recognition of business cycle issues.  Trump’s tax plan runs a big deficit to stimulate an economy close to full employment.  This runs the risk of repeating 2008 with an even worse debt position to fight it.  He also wants to repeal Dodd-Frank and says he won’t enforce it now.

– The general rule is that any regulation opposed by any business is bad.

=>  There is no serious recognition that the financial system needs policing.  Trump runs the show based on what he has wanted to see for his own businesses.  This is a blind dash into another 2008 or worse.

 

Sustaining the free market

Adam Smith pointed out the need for government to supply a suitably-trained workforce.   In the eighteenth century that meant simply literacy.   The definition of suitably-trained has changed over time.  By 1940 a then astounding 50% of American students finished high school.  In that era no other country approached that level of broad education support.   Then the GI bill made college possible for veterans, and public colleges expanded widely throughout the 1960’s and 70’s.  This coincided with unquestioned American economic dominance.  An educated workforce (at all levels) remains a critical national requirement.

You can take that one step farther.  Equality of opportunity is usually discussed in terms of social effects, but there is a corresponding benefit to the free market.   Business and the market benefit when all persons are able to achieve up to their capabilities.  The United States used to lead the world in upward mobility, but with rising inequality it now ranks behind most developed countries.

There is one more government role that fits here as well, namely research.  Government support of research produces people to be hired by cutting-edge businesses, and also supports the creation of new businesses to exploit the progress of science and technology.

Current status:

– For college, the student debt crisis speaks for itself.  A whole generation of students can’t imagine when they will be able to get out of debt.  This is compounded by De Vos’ support of shady lenders and weakening of controls on fraudulent educational institutions.

– For K- 12 education, states have retreated in funding, and De Vos is proposing a voucher system that will abandon the broader population.  Vouchers will be fixed in dollar value, to be augmented by surcharges at the now-privatized schools.   If you want a good education you pay for it; if you can’t, there is no guarantee of what you get.  This is institutionalized separate and unequal.

– Trump’s budget essentially abandons the government’s role in research, and his appointees have attempted to minimize the role of science.

=> There is surprisingly little recognition that government has an important role here at all–except to privatize it!

 

Scope of the free market

Adam Smith felt that the private sector could not be trusted even to defend free markets.  So it is not surprising that there are other aspects of society that need defending as well.

We give a few examples:

– Well-being of workers.   Smith describes effects of supply and demand on workers, and he even points out that adequately-paid workers may be more productive, but he makes no claim of utopia from the free market.   In fact in Smith’s description, workers’ welfare depends on a market for labor in which individuals have little bargaining power.

– Resources and the environment

Enterprises will use the environment for their own benefit, unless there are rules to the contrary.

– Infrastructure

Public resources such as roads, bridge, airports, internet, etc. should be built and maintained as needed by everyone.

Current status:

– Trump has pushed to limit OSHA workrules, opposes unions, and has no plans to raise the minimum wage.

– The EPA is being severely cut and redirected to helping businesses.

– The stated approach to infrastructure is via private investment, which will go where the money is.

=> There is no recognition that areas such as these can be out of scope for the private sector.  Instead there is a blind belief that growth solves everything.

 

From this summary it should be clear how far we are from free market economics.

The current national policy is that the private sector just needs to be encouraged to go do its thing.   We don’t have to care about policing its risk, we can let it take care of education and research, and nothing other than its success is needed to solve every other problem in society.  Just make sure it’s flush with cash and let it go.

That was the history of the nineteenth century, and for vast part of the population it was no picnic.  And it is worth remembering that 1929 really did happen.

Even thinking of the more recent past there’s an eerie familiarity about our situation.  We have a supremely confident lunatic fringe with the power to run amok.  The last lunatic fringe to take control of our government (remember the neocons?) gave us the Iraq war—which destabilized the Middle East and bankrupted the country—and the crash of 2008.

This time it could well be worse.