Economic Dreams - Economic Nightmares

Willem Buiter's Doubts on Continuing China/India's Meteoric Rise

After airing his positive Moring Coffee spin on China and India's remarkable growth, Brad DeLong highlights Willem Buiter's pessimism re: China and India's recent stellar rise. Buiter identifies financial "credit boom" risks, political risks, and most importantly environmental risks going forward. In follow-up commentary, DeLong adds a fourth, intertwined with Buiter's first: "The People's Bank of China is acting like the world's most enormous hedge fund in reverse."

Willem Buiter
[comment following Ft.Com Economists' forum post, 3/20/07]
Both India and China are in the terminal stages of a credit boom…. If the monetary and fiscal authorities act in time (they appear to be well behind the curve in both countries) and if they have the right instruments and the political will and freedom to use them (doubtful in both countries) the credit boom can end with a whimper. A hard landing seems more likely, however.

Second, a domestic political question mark… political risk to growth is seriously under-priced by the domestic and global communities of investors. In China economic liberalisation is proceeding side by side with continued political repression through the monopoly on political power of the Communist Party…. The sustainability of such a social-political-economic configuration has never been tested. India has had an open and representative form of government for sixty years. I believe this to be an important socio-political safety valve….

Third and probably most importantly, an environmental question mark. Environmental supply-side constraints on growth in Chindia… invalidates the growth accounting exercise by Bosworth and Collins, reported by Martin [Wolf]…. [O]utput is seriously mis-measured and a key input - the services yielded by the stock of environmental capital - is ignored completely. For Chindia, this omission matters even in the medium run…. It is the local (national) natural resources of clean fresh water and fertile land (some would add clean air as well) that are not only important domestic 'consumer durables' but also key inputs into the production of the goods and services that are captured by conventionally measured GDP indices…. The water constraint is likely to be the first one to become binding in both China and India, certainly within 10 years. It will impair even the production of those goods and services included in conventional GDP measures….

Chindia urgently needs to re-orients its growth policies towards environmental sustainability. Pricing all water and power use (including agricultural) at long-run marginal social cost would be a good start. Without such a radical re-orientation, the 21st century may well become the century of China and India for a very different reason from the one prophesied by the current uncritical Chindia cheerleaders…

Brad DeLong, again in follow-up comments to the FT.com Economists' Forum post, says:

Brad DeLong
I would add a fourth worry, in addition to the environmental, infrastructure, education, and political legitimacy worries that have already been aired. The People's Bank of China is acting like the world's most enormous hedge fund in reverse. Unless there is significant inflation in China or a rapid reversal of global imbalances, the PBoC is likely to have to write off the largest amount of capital of any institution anywhere, anytime, anyhow—with either China's savers or China's taxpayers holding the bag. The political consequences of that may be a further important source of risk.

Finally, a DeLong reader points to Bill McKibbon's recent Mother Jones commentary, Reversal of Fortune, and highlights:

Bill McKibben
… If we do try to keep going, with the entire world aiming for an economy structured like America's, it won't be just oil that we'll run short of. Here are the numbers we have to contend with: Given current rates of growth in the Chinese economy, the 1.3 billion residents of that nation alone will, by 2031, be about as rich as we are. If they then eat meat, milk, and eggs at the rate that we do, calculates ecostatistician Lester Brown, they will consume 1,352 million tons of grain each year—equal to two-thirds of the world's entire 2004 grain harvest. They will use 99 million barrels of oil a day, 15 million more than the entire world consumes at present. They will use more steel than all the West combined, double the world's production of paper, and drive 1.1 billion cars—1.5 times as many as the current world total. And that's just China; by then, India will have a bigger population, and its economy is growing almost as fast. And then there's the rest of the world.

Trying to meet that kind of demand will stress the earth past its breaking point in an almost endless number of ways ….

So many environmental concerns, so little time!

Herman Daly on Immigration, Population, Migration, Globalization

Blogs and more traditional news are full of immigration-related stuff these days. But I've seen little discussion interrelating globalization, population dynamics, and the environment. In Population, migration, globalization, Ecological Economics (2006: forthcoming) , Herman Daly attempts it, arguing that we rightfully ought to be as concerned over unfettered capital flight, and outsourcing, as we right now seem to be over immigration here in the US. Daly contrasts globalization ("global economic integration of many formerly national economies into one global economy, mainly by free trade and free capital mobility, but also by somewhat easier or uncontrolled migration) to internationalization (which retains a substantive nation-state presence while highlighting "increasing importance of international trade, international relations, treaties, alliances, etc.").

Was NAFTA supposed to help with the US/Mexico problem? Did it fail in this regard? In other regards? If so, will CAFTA fail too? And if we are to get serious here in the US about limiting immigration, how are we to do so with the 1000 mile long US/Mexico border separating the two countries? Machine-gun turrets (or 9000 new border guards) don't seem prudent political choices. Or maybe they are. Are there really any "rising tides to lift all boats" out there? Or are we just whistling past the graveyard, hoping to ride out the impending storm and somehow then being able to bootstrap the global economy and polis toward a better world. Or maybe there is no storm, just massively enhanced productivity and trickle-down profits that allow the poor to get rich, while the rich get richer.

Daly's thoughts, highlighting links to immigration:

Ethanol: Whose subsidy? At what cost?

Foreign Policy, March 7, 2006 features The Green Bullet by Lester B. Lave, W. Michael Griffin. The authors begin: "There's a straightforward way for Washington to end America’s addiction to foreign oil, while reducing greenhouse gas emissions and resolving the impasse on international trade: Turn farm subsides into fuel subsides." Then they offer up minor "economic" and "environmental" roadblocks, that they easily dismiss:

...So what’s the catch? Corn farming is rough on the environment. Soil erosion due to wind and water is rampant. Fertilizer and pesticide runoffs produce algae blooms that result in “dead zones,” including one in the Gulf of Mexico that is so polluted it cannot support aquatic life. Furthermore, building the ethanol processing plants will take 3–4 years, and gas stations would have to commit to providing ethanol. And, because ethanol uses only the starch in corn, not the oil, protein, or other components, converting corn into ethanol is attractive only if there is a market for the byproducts. Opinions differ, but some estimate that byproduct markets could saturate well short of 11 billion gallons of production.

Fortunately, the surplus corn that isn’t economic to convert to ethanol doesn’t have to be grown, because it could easily be replaced with switchgrass. The prairie grass that President Bush mentioned in the 2006 State of the Union Address is naturally resistant to many pests and diseases, requiring far smaller amounts of chemicals and fertilizers. It’s also drought-tolerant and can grow in poor soil. Most important, it can be used to produce ethanol. If the current federal subsidy given to corn were extended to switchgrass, farmers would realize approximately the same income per acre as they do growing corn today. The new crop would use less fertilizer and pesticides, resulting in less erosion. Fertilizer and pesticide runoff would be dramatically reduced, and much of our motor fuel would be renewable.

To be sure, producing ethanol from switchgrass uses new technology that isn’t fully developed. There are pioneer plants in Canada and Brazil, but the costs of commercial production are unclear.

… And the best part: It can be done without Washington spending a dime more than it already does.

Others are not so sanguine. Robert Bryce's Corn Dog, Slate, July 19, 2005, is subtitled "The ethanol subsidy is worse than you can imagine." Bryce cuts quickly to the chase:

...The stickiest question about ethanol is this: Does making alcohol from grain or plant waste really create any new energy?

The answer, of course, depends upon whom you ask. The ethanol lobby claims there's a 30 percent net gain in BTUs from ethanol made from corn. Other boosters, including Woolsey, claim there are huge energy gains (as much as 700 percent) to be had by making ethanol from grass.

But the ethanol critics have shown that the industry calculations are bogus. David Pimentel, a professor of ecology at Cornell University who has been studying grain alcohol for 20 years, and Tad Patzek, an engineering professor at the University of California, Berkeley, co-wrote a recent report that estimates that making ethanol from corn requires 29 percent more fossil energy than the ethanol fuel itself actually contains.

See also Science Daily, April 1, 2005 , Study: Ethanol Production Consumes Six Units Of Energy To Produce Just One,
And, especially, Ted Patzek's collection of Biofuel Literature.

Obviously my bias lies with the skeptics. Are we wrong?

Posted first on Ecological Economics

Economics and Politics of Global Warming

On today's ABC News "This Week" George Stephanopoulos interviewed Gov. Brian Schweitzer, D-Mont. about global warming, after they touredGlacier National Park via helicopter. Then Stephanopoulos put together a panel including Katrina vanden Heuvel (The Nation), George Will ( ABC News), and Fareed Zakaria (Newsweek) to discuss the issue. The discussion follows on the heels of, Time spotlighting global warming on the cover of their April 3, 2006 issue with the catchy title: Be Worried. Be Very Worried.

Montana's Gov. Schweitzer is a "global warming" believer and advocates a massive effort to develop coal liquefaction as a means to both wean us from what George W Bush elsewhere referred to as our addiction to foreign oil, and to help in the battle against global warming. Schweitzer stressed that CO₂ released in the liquefaction process could be effectively sequestered underground so as to negate one frequently noted drawback to coal liquefaction. Schweitzer too stressed the need to help the China and India to avoid adding the number of currently planned power generation plants using conventional technology, warning that we just can't afford, environmentally, to add that amount of carbon to already stressed planetary systems.

As usual, George Will was steadfast in his opposition to global warming, saying that even if we were experiencing human caused warming, we couldn't afford to do anything about it.

The other two panelists considered global warming a high-priority policy issue, and didn't allow Will the upper hand in the discussion. Katrina vanden Heuvel thought that a carbon tax might help in the weaning process. Fareed Zakaria noted that he believes scientists have declared the debate to be over, that only the "loonly" are found among those scientists still debating whether or not we humans are causing a major problem with our continued carbon loading.

Problems in Measuring Efficiency

I have been engaging folks over at Environmental Economics on matters of analysis and decision-making methods. Today, in a post titled "More on Benefit Cost Analysis," I noticed, among other things, this line:

[Since the benefits of the project exceed the costs], the environmental economist would conclude that siting the plant is a good idea (i.e., it improves economic efficiency). This information is advisory. Politicians and other decision makers are free to make whatever decision they'd like.

I expect that my and other comments on an earlier post led to the disclaimer. But what struck me as odd was the allegation that "it improves economic efficiency." How so?

Suppose I am a business owner and I decide that a particular investment will improve my bottom line by by X. Does that mean that I’ve improved the efficiency of my operation by X? Does it mean I've improved the efficiency of my opertion at all? I don’t think so. Would it do so for a government agency? I don’t think so. How does one then jump to a place where I could claim I’ve improved “economic efficiency?” Strange jargon from these environmental economists methinks.

My ongoing concerns are detailed in a little thing I worked up this spring for my Forest Service economist counterparts. Since it, like most my writing is not published (neither polished), here it is:

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Problems in Measuring Efficiency: A chronology
Dave Iverson

Criticisms abound relative to the measurement and meaning of economic efficiency. I will point to a few of these and invite others to counter my claims that we need to rethink our practice in what is frequently called "efficiency analysis." Maybe we don’t need to rethink our practice, but rather we need to “better explain what we do and why we do it.” Or maybe we are just fine the way we are. First let me lay out a bit of the history that led us to where we now stand.

Storm Clouds Gather Around “Efficiency”
In the early part of 20th Century USA there was a near-consensus social movement toward “growth and development.” Calls for “efficiency” were heard throughout the land, and no wonder given how wasteful we had been with our nation’s natural resources.

In 1959 Samuel Hays shed light on this era in Conservation and the Gospel of Efficiency: 1890-1920. In a chapter titled, “The Conservation Crusade,” under a heading “The Gospel of Efficient Planning,” Hays says:

The conservation movement was closely associated with other organizations which attempted to promote efficiency. …. They applauded heartily when [President Theodore Roosevelt] sought to bring order, efficiency, and business methods into government. ….

Concern for the elimination of natural resource waste contributed to a wider gospel of efficiency in every phase of human life. Joseph N. Teal, a prominent Oregon conservationist, for example, declared, “I hope that the time will come when efficiency in all directions will be given consideration. When that time comes we will begin to get our money’s worth for what we spend.” ⁷ … The editor of an engineering journal which heartily supported resource conservation proclaimed: “The Millennium will have been reached when humanity shall have learned to eliminate all useless waste…. When humanity shall have learned to apply the common sense and scientific rules of efficiency … then indeed will we be nearing the condition of perfect.” ⁸ And Theodore Roosevelt declared … in May 1908, “Finally, let us remember that the conservation of natural resources … is yet but part of another and greater problem … the problem of national efficiency, the patriotic duty of ensuring the safety and continuance of the Nation.” ⁹ (pp. 124-125, citations in original)

But the “near-consensus” was fleeting at best, and never all that real since, as Hays points out in concluding his book:

This conflict between the centralizing tendencies of effective economic organization and the decentralizing forces inherent in a multitude of geographical interests presented problems to challenge even the wisest statesman. The Theodore Roosevelt administration, essentially hostile to the wide distribution of decision-making, grappled with this problem but failed to solve it. Instead of recognizing the paradoxes which their own approach raised, conservationists choose merely to identify their opposition as “selfish interests.” Yet the conservation movement raised a fundamental question in American life: How can large-scale economic development be effective and at the same time fulfill the desire for significant grass-roots participation? How can the technical requirements of an increasingly complex society be adjusted to the need for the expression of partial and limited aims? This was the basic political problem which a technological age, the spirit of which the conservation movement fully embodied, bequeathed to American society. (pp 275-276).

Hays' questions have haunted us since, but we were often distracted:

• 1920s – We believed wrongly that we had a new economy on our hands and threw ourselves a great big party.
• 1930s – We suffered from the inevitable irrational pessimism that follows on the heels of irrational exuberance.
• 1940s – We forgot ourselves in the midst of World War Two, that some argue had roots, among other roots, in the mismanagement of American economy and society in the Twenties and Thirties, including the aftermath of World War One.
• 1950s – We were caught up in The American Dream that followed from being the only major county not bombed into the “stone age” in World War Two.
• 1960s – Then-latest attempts to homogenize American life during the Forties and Fifties came crashing down on our collective heads and shoulders as we grappled with pent-up issues of racial inequality, women’s rights, and student unrest.
• 1970s – We got Earth Day and a host of environmental laws and regulation to enhance our ability to deal with “externalities,” the social costs of industrial waste and unbridled development. Such regulatory framing served also to cloud the dream of “efficient resource use.”
• 1980s, 1990s – We seemed to be more oriented toward either getting rich or surviving as best we could while others we’re hell-bent on getting rich.
• 2000s – At the dawn of the New Century, the New Millennium, we seem to be fear-filled, and anxious on many levels as to how things will go from here. Nobody trusts government much, neither business corporations, neither one another.

Efficiency, Sustainability, Collaboration, Civic Engagement
Today, in the midst of what we are and what we’ve become, we grapple more with terms like sustainability, collaboration, and civic engagement than we do with efficiency. Mary Clark said it well, in 1990, at the first gathering of the clan that calls itself the International Society for Ecological Economics. Clark said, paraphrasing, “It’s time for a Gestalt Shift. It’s time to change the topic of conversation from growth and development, to sustainability.”

The quest for efficiency is still with us, as it should be. But we increasingly question our ability to come to terms with it in any algorithmic way. Some of us have rightly recognized that we deal with efficiency as a means to given social ends, rather than as an end in itself. To some extent is has always been such, but for a long time the ends seemed more as a given, than as something to be fought over in defining “public good.” Private good, or “individual good” does not go away and is grappled with alongside collective good as the body politic deals with defining itself.

Paradox On Many Levels
As Sustainability becomes the watchword for society and culture we find it hard to deal with. Sustainability tends toward paradox. So does collaboration, along with efficiency, productivity, ecosystem management, ecological economics, and a host of other popular terms and composites when we take time to delve into them. It seems that all we deal with these days is the stuff of paradox, interdependence, cross-scale interactions, etc. Maybe it’s time we learn to live with paradox and embed it into our practice. See, for example: Lance H. Gunderson and C.S. Holling’s Panarchy: Understanding Transformations in Human and Natural Systems, Hanna J. Cortner and Margaret A. Moote’s The Politics of Ecosystem Management.

Grappling with Economic Dilemmas

Today I ran across an interesting blog. It’s called Catallaxis: An Integral Economics Weblog

I found refreshing stuff about organizational learning applied to the framing of markets and market functioning embedded in social and political structures. I learned a bit about Daniel O’Connor’s struggle to better understand both the crisis and possibilities of economics in our emergent world, including insight into economic dilemmas: freedom vs. fairness, efficiency vs. effectiveness, and growth vs. sustainability.

I found much that compliments my own journey of understanding. And I found some interesting application of double- and triple-loop learning in an economics and market framework, particularly in his most recent post, “Asset Price Bubbles: Monetary Inflation and Leveraged Speculation” and in his background paper “Stable Instability”

Below find a few snippets from O’Connor’s site and his book: "A Crisis of Vision" (an introduction to Market Learning: Toward a more Integral Economics)

Environmentalism Without Government: Good or Bad Idea?

As I was looking through the RGE Economics blog rollup (see sidebar) today I found this dandy at the Ludwig von Mises Institute blog: “Environmentalism without Government” by Tibor R. Machan. I should have quit then and there, but I didn’t. I read the article knowing what to expect. Still, I was surprised by the narrowly focused reasoning and conclusions.

Maybe it’s the literature and commentary I read and watch. Or maybe it’s true that we polarizing, turning everything into good v. evil, right v. wrong, etc. I always thought that we were transcending that tendency. I thought a decade ago that we were moving into the space of both/and rather than either/or?

Maybe it’s just too scary to admit that some things just don’t sort out into convenient taxonomic form. Maybe it’s too scary to admit that some problems are wicked enough that they can’t be solved without society and politics. Or maybe we are now so dumbed-down by TV that we have little capability to deal with complexity, nuance, ambiguity, and so on.

Markets are fine for what they do. I hope we can find means to adequately bound them, and keep them from doing more environmental and social harm than good. Voluntary cooperative efforts are also good, but limited in application. Machan see the world differently. He begins with, and pretty much ends with:

A free market, capitalist, exchange, political, economic system is far more environmentally friendly than any statist system, including the welfare state, socialism (whether democratic or centrally planned), or fascism. To demonstrate this, I would like to engage in some conjectural history, that is, to imagine how the world might be different had government never intervened to protect the environment but rather left all matters to property owners to sort out.

Most of us sometimes engage in conjuring up a utopian fantasyland. My usual fantasyland is that of organizational cultures along the lines of organizational learning and betterment in public and private institutions. Machan’s fantasyland is to conjure up a utopian scene where government gets the hell out of the way, allowing markets to work unfettered magic on all fronts. If markets aren’t to be the solution, then perchance all of us can find the will to work up what Machan calls “a great variety of voluntary cooperative efforts.”

Both of us would be more credible, I suspect, if we would offer up dark side scenarios, counter arguments to accompany our cheerleading. For my organizational learning stuff, it would be good to recognize that people, particularly those who seek power in public and private bureaucracies, tend to thwart the noble intentions and simple schemes often described by learning organization theorists. (See, e.g the collective works of Chris Argyris and Donald Schön, who advocate organizational learning, but go to great lengths to explain how very hard it is to get people to change behavior).

In Machan’s case it would be good to note that only a handful of practicing economists believe in the unfettered goodness voluntary cooperative efforts, free markets and private property rights as end-all, be-all solutions to every social problem. Most economists believe that markets work and do much good, but have to be bounded by the norms and customs of the cultures they work in. Similarly for cooperative efforts. They are good, but hard to effect. I suspect that Ronald Coase was right in that transaction costs tend to make cooperation on all, all the time, a bit difficult. Most economists also believe that there is a role in all this for government. Unless I misread Frederich Hayek (von Mises’ Austrian sidekick) he too held out a role for government.

None of this would be even of passing interest, except that Machan’s views are shared by high-level Bush Administration officials. If the views are unnecessarily narrow or off-base, then we all ought to stand up and take note. It could be that contrary views like those of Richard Behan (Plundered Promise: Capitalism, Politics, and the Fate of the Public Lands) and David Bollier ( Silent Theft: The Private Plunder of our Common Wealth) deserve more attention both in the press and in governance.

Governmental practices ought to be moving us toward sustainability both in terms of awareness and actions to get us on a path toward it. If indeed we need more environmental awareness and action both at the individual and institutional level, as both Machan and I believe, then we should be talking more about this and just maybe a little less about how we can chase yield and make our individual pocketbooks fatter.

Supply-Side Sustainability

I should have added Supply-Side Sustainability (T.F.H. Allen, Joseph A.Tainter, and Thomas W. Hoekstra) to my list of books on Globalization.

Allen, Tainter, and Hoekstra's supply-side sustainability bears no resemblance to the trickle-down, supply-side economics of the Reagan era (seemingly in vogue once-again today, although wrapped up in “free market” rhetoric). Instead the book helps us better understand how far we need to go to begin to embrace sustainability as an ordering principle for civilization. And it helps us to get a feel for what we might do to slow our progress away from what we might call a path to sustainability, as well as what we might do to approach such.

When developing principles for ecosystem management in public lands management, we learned that we must work across various spatial and temporal scales in order to begin to get a better grasp on the wicked problems we face. Confucius knew this well and said something like, “Those who give no thought to that which is distant will find trouble close at hand.” We seem to be living in a whole society that has forgotten ancient wisdom.

In public lands ecosystem management, we used to talk of looking up a scale to address context and down a scale to address contribution of various ecosystem or social systems components in complex adaptive systems. In Supply-Side Sustainability, the authors admonish us to look up a scale for both context AND management.

In particular the authors focus on roles of hierarchy and complexity in sustaining ecological systems, human societies, and problem solving. They argue that being sustainable consists, in part, of using approaches that:

• Manage for productive systems rather than for their outputs.
  
• Manage systems by managing their contexts.
  
• Identify what dysfunctional systems lack and supply only that.
  
• Deploy ecological processes to subsidize management efforts, rather than conversely.
  
• Understand the problem of diminishing returns to problem solving.

Allen, Tainter, and Hoekstra say that,

We will achieve sustainability when it becomes a transparent outcome of managing the contexts of production and consumption rather than consumption itself. If we shift our management emphasis to managing from the context for whole ecosystem functions, rather than for resources, the cost of problem solving will diminish and the effectiveness of management greatly increase. When a manager gets the context right, the ecosystem does the rest. Because the material ecosystem supplies renewable resources and makes them renewable, we call our approach supply-side sustainability. (p. 14)

At the first international conference on Ecological Economics, educator Mary Clark suggested that our culture needed to undergo what she termed a Gestalt Shift. Specifically, Clark suggested that we need to reorient our cultural focus away from growth and development and toward sustainability. And we needed new economic and new ecological thinking to help us get there. Allen, Tainter, and Hoekstra’s Supply-Side Sustainability is a beginning.

Back in 1990, when I attended the first Ecological Economics conference I believed we had a better short-term chance than I do now of that cultural reorientation. But the world works in mysterious ways and we may be closer now than then, with but a generation-long crisis needed to trigger a cultural reawakening—the subject matter of a book already on my list, The Fourth Turning.