Climate Change and the Economy
The U.S. faces three major problems:
· Climate Change (the worst one)
· Income Disparities
· Reforming Healthcare
Do these major systems problems require comprehensive solutions? Yes
Are comprehensive solutions presently feasible in a highly divided nation? No
It is said that politics is the art of the possible. We need good leadership that will enable Americans to reach broadly acceptable solutions to problems. What follows is an analysis of climate change, that will affect the future economic growth and future generations.
In the American Museum of Natural History, New York there is a climate change exhibit. It graphs the increasing concentration of atmospheric carbon dioxide since the beginning of the industrial revolution.
This graph indicates that atmospheric CO2 concentrations grew (280 parts per million in 1750) to 406 ppm in 2017. 1 What does this mean for future economic growth? The following analysis says we better do something, we hope swiftly, because the science of climate change details the consequences if we don’t. The following is somewhat quantitative because it involves the measurement and prediction of present and future CO2 concentrations and temperatures. It is somewhat like stock market analysis, because it involves a crucial increasing variable (temperature or maybe earnings) and then the contingencies and complications along the way.
Why is it possible to even read this on the Internet? This is due to the technical progress since the industrial revolution, in particular the progress of energy capture. Stanford historian, Ian Morris (2010), writes “…in Britain, technology jumped from industry to industry, stimulating yet more technology….Boulton and his competitors had taken the lid off energy capture. Even though their revolution took several decades to unfold (in 1800, British manufacturers still generated three times as much power from waterwheels as from steam engines), it was nonetheless the biggest and fastest transformation in the entire history of the world (see this graph on the growth of world per capita GDP)….By 1870, Britain’s steam engines generated 4 million horsepower, equivalent to the work of 40 million men, who – if industry still depended on muscles – would have eaten more than three times Britain’s entire wheat output. Fossil fuel made the impossible possible.” 2
Since the 1750s, economic growth has been almost all about energy capture and transformation. Steam, internal combustion, and jet engines and many kinds of turbines extract work from heat differentials. In engineering, the first law of thermodynamics precisely states:
∆W = ∆Q - ∆U
where: ∆W is the amount of external work done, such as raising a weight.
∆Q is the amount of heat energy added (the production of heat involves the combustion of fossil fuels).
∆U is the change in the internal energy of the system
Fossil fuel technologies, comprising 79.6 % of the world’s energy production. 3 They produce CO2 concentrations that greatly exceed the earth’s absorption capacity. The direction of this analysis is clear; the climate will become warmer. But the detailed effects of increased concentrations of CO2 on the earth’s temperature is a question that lies at the heart of climate science.
Industrial activities have increased global temperatures by about 1° C since 1860. Sophisticated computer models can then approximately 4 project the large amounts of global warming caused by a doubling of CO2 concentrations. What concerns us is a major new Intergovernmental Panel on Climate Change (IPCC) Report, 2018 that details the effects of only another .5° C average increase in global temperatures, with a high confidence that this level will be reached between 2030 and 2052, assuming that CO2 emissions will decline from 2010 levels about 45% by 2030 (this is well within the 36 year+ duration of the S&P 500). The effects of this average increase in world-wide temperatures are highly uneven due to cascades 5 and climate feedback loops. The study predicts:
· About 14% of the world’s population will be exposed to severe heat waves at least once every five years, like the one that blanketed Europe in 2003 causing 35,000 deaths. 6
· 350 more million people will be exposed to severe drought.
· 31-69 million people living on the coasts worldwide will be exposed to flooding from sea level rise.
· Economic growth decreasing by 0.5% in developed countries, we estimate this from the below.
The consequences of this slight amount of average global warming are biblical.
If CO2 emissions don’t decline to the above levels, David Wallace-Wells (2019) details in his well-researched book the consequences of another .5°C in global warming, in addition to the above. We are already very close “…to the threshold of 2 degrees of warming (above the pre-industrial baseline), long thought to be the border separating a livable future from climate catastrophe.” 7 At 2° C global warming, he writes the following are likely:
· Major cities in the equatorial band of the planet will become unlivable (causing also massive migrations).
· 40 more million people will suffer from severe drought.
· The ice sheets will begin to collapse. Total ice sheet collapse would raise sea levels by 200 feet. 8
· Every degree of global warming will reduce economic growth on average by 1% in developed countries. 9 (At 2°C economic growth in the U.S. will be brought to a halt, resulting in a subsistence economy.)
The Lancet is a British medical journal that in its 12/8/18 issue outlines a very (of course) practical set of measures we can take to deal with climate change:
· Phase out coal power.
· Establish the framework for a strong and predictable carbon pricing mechanism. *
· Rapidly expand access to renewable energy.
· Agree and implement an international treaty that facilitates the transition to a low-carbon economy.
· Scale up financing for climate-resistant health systems.
* See below “Additional Comment”
Why is the country so polarized, making solutions to climate change presently impossible? The 3/21/19 PBS Newshour visited Louisiana with the University of California Berkeley sociologist, Arle Hoschschild, whose book (2016) we reviewed in, “The Limitations of Very Limited Government.” The “Red State Paradox” notes that the poorest rural states receive more money from the federal government in aid than they pay in taxes. Why do they hate government so much? Look at the visible benefits of jobs in the extractive industries and the common costs of pollution.
Louisiana is the second poorest state in the union; 44% of the state budget comes from federal government aid. But the people she visited with in Calcasieu parish hate government, because they feel betrayed by it at the state level. The polluting petrochemical industry, at least, gives them jobs. But the state that is being paid to protect them from the very real ravages of pollution, doesn’t. Ms. Hochschild says, “Louisiana is a colonized state, colonized by oil, gas, petrochemicals. Government does what it does at the behest of larger interests.”
Add to this a set of cultural values that causes voters, in this case, to strongly disdain, “the establishment,” who historically were the well-to-do planters – but who during the Reconstruction were not above playing on social divisions - in order to preserve their property interests. They are now the petrochemical companies that emit wide-spread pollution that the people she interviewed have to live with.
There are Trump supporters in whom these sort of viewpoints are strongly ingrained, and to whom he appeals. However, there are also others who can recognize practical policies that will improve their lives; but it will also be very important not to disappoint them. We think these are the people who the Democrats should appeal to with practical programs that give hope, that can help them and the whole country. The radical left of the party may propose ideological programs; but these ideas are not politically feasible with the country so divided.
This is the observed average monthly world temperature from 1960-2017. Climate change is not a “hoax”. It will require concerted, systematic actions to remedy.
A 3/17/19 NYT article details the additional agricultural and trade policies that are needed for the Democrats to appeal to rural America, which will be most affected by climate change in the form of reduced crop yields and weather extremes. “Years of low commodity prices (are) a nightmare, and President Trump’s tariffs made a bad situation worse.”
· What lies ahead for rural America is county consolidation and more school mergers.
· “A helpful federal plan would work with local and state governments to direct infrastructure improvements and the like to ‘opportunity zones’ with growth potential. Those communities are often the ones that have a thriving hospital and an institution of higher learning.”
· In areas with a strong rural manufacturing base, housing can be scarce. But developers do not like to build in those areas due to the small scale. A federal plan would encourage such housing.
· Rural hubs will survive with investment. Partner with regional development efforts.
· Do smart immigration. “Manufactures and farm operations need workers but President Trump has so demonized the immigrant work force that Republicans won’t soon offer anything like a solution.”
A 3/29/19 NYT article describes the present inability of Western democracies to act for the common good. “Across Western democracies, politics are increasingly defined by opposition – opposition to the status quo, to the establishment and to one’s partisan rivals. People have always organized more easily around what they’re against than what they’re for, but this is different. (The author notes that Brexit has been animated by opposition to the European Union, rather than any clear alternative to membership in it.) Politics have grown viscerally tribal and voters instinctively destructive.
This trend, driven by social change, economic upheaval and technological disruption, is worsening some of democracy’s gravest problems.”
American politics has traditionally been described as an orderly process: “interest articulation” by groups and then “interest aggregation” by political parties. The latter is necessary in order for voters to choose among coherent programs. The rise of social media and the ability of anyone to run for office have weakened the influence of parties.
Direct democracy is not feasible beyond the confines of the city-state. Political parties are necessary to govern large nations, and they matter by providing democratic government with coherent and popularly supported plans that will survive the passions of the moment. The alternative is eventually authoritarian rule, presiding over a formless mass base.”
We live in a civilization where we believe in continued progress; material, certainly, and maybe even moral. However, a historian will disagree, noting that civilizations rise and fall. A question that has nagged us for many years is, what brought an end to the bronze age world of the Iliad and the Odyssey? The broader question is what also happened to Egypt’s Old Kingdom (that built the pyramids) and the Hittite Empire in modern-day Turkey (that built Troy)?
In “Climate and the Late Bronze Collapse: New Evidence from the Southern Levant,” Langutt, Finkelstein, and Litt (2013) studied carbon-dated pollen grains in cores taken from the Sea of Galilee, borne by winds from the north. They affix the dates of the droughts that ended these three civilizations between 1300 BCE and 1100 BCE.
Before the droughts, Egypt’s terrain was an African savannah; afterwards, Egypt was a desert. A 2013 National Geographic article, “Drought Led to Collapse of Civilizations…” notes their broader consequences:
“‘I think that climate change can be seen as a sort of a ‘prime mover’ that initiated other processes’ says Finkelstein… ‘For example, groups of people in the northern regions were uprooted from their homes because of destruction of the agricultural output, and [they] started moving in search of food They could have pushed other groups to move by land and by sea. This in turn caused destructions and disruption of the delicate trade systems of the eastern Mediterranean.’
The tumultuous period ended only when rains returned and uprooted groups began to settle down again.”
People have been moving to find a better life throughout history. This is now especially true in Honduras, where people are being forced to move north by a combination of political reasons and famine. On 4/2/19 the PBS Newshour aired a segment, “Drying fields, dying livelihoods push Honduran farmers north.” They interviewed a farmer in the western Honduran province of Lempira who noted that 10 years ago, he could harvest 4,000 pounds of corn from his land. Now he is lucky to get 500. He lost 90% of his crop due to drought and has no money for an irrigation system. He says, “We’ll have to get out of here, to find a place where we can get a better life.” According to the UN, there has been a surge of migration from the rural areas of Honduras where farmers lost an estimated 82% of their corn and bean crop last year.
Climate change is already affecting Central America, and this is just the beginning. The U.S. can’t just react to the consequences of climate change and other events. It has to deal with the carbon dioxide concentrations and help people adapt to the new world that will be upon us, sooner rather than later.
According to Thomas Pickering, former U.S. ambassador to the U.N., the world is becoming increasingly “disheveled,” with the attractiveness of authoritarian alternatives growing that aren’t good for anyone except a few. The allies are now trying to sustain stability without the U.S. present. In “Manias, Panics and Crashes,” the economist Charles Kindleberger (1978-2011 eds.) essentially wrote that complex systems require a stabilizer. The U.S. will have to go through an increasing period of trust rebuilding to regain that role.
In a 4/9/19 NYT article, “The Problem With Putting a Price on the End of the World,” David Leonhardt writes. “Economists and other policy experts have long focused on (the) idea of carbon pricing…the underlying concept is simple. When a product becomes more expensive, people use less of it. Carbon pricing is an elegant mechanism by which market economics can work on behalf of the climate rather than against it. But if the idea’s straightforwardness is its great economic advantage, it has also proved to be its political flaw. Energy, for utilities and transportation, is a major cost of living. And across the industrialized world, the middle class and the poor have been struggling with slow income growth.
“…carbon pricing…is losing favor and being supplanted by ideas that seek to invert the political logic. Rather than broadcast the necessary sacrifices, as taxes and cap-and-trade schemes do, the alternatives try to play them down and instead emphasize the benefits of less pollution. (We can think of the positive economic changes that can occur by using energy more efficiently.) These alternatives like clean-energy mandates, performance standards, “…focus voters on the end goal, rather than on the technocratic mechanisms for achieving it….‘If we’re going to succeed on climate policy, it will be by giving people a vision of what’s in it for them, a positive vision of how it matters for their life and their kids.’
“…Organize a climate movement around meaningful policies with a reasonable chance of near-term success, but don’t abandon the hope of carbon pricing.”
For those who are still skeptical about global warming, it would be at least prudent to take out a solid insurance policy – given the above evidence.
Additional Comment +
We consider beyond the very short-term aspect of the market. How do markets handle the long-term like climate change, they hedge. This is not at all the way we would run our life, because then you know the price of everything (“Whatever it takes.”) and the value of nothing; but this is how short-term markets operate and therefore how many businesses think. Here is a 4/11/19 NYT article, “How Big Business in Hedging Against the Apocalypse,” Jesse Barron writes:
“Because the global economy depends on hydrocarbons, practically every asset in the world relates in some way to oil and gas. [Jeremy] Grantham believes hydrocarbons will be priced, or regulated, into submission. In light of that belief, not only oil companies’ stock but practically everything else on the market looks falsely inflated.”
Here is what the situation looks like on the ground, or as they say, “In the vineyards.”
“Frosty Gilliam, an independent oilman in the Permian, greeted me at the reception desk of his office, on a sparse stretch of business highway in Odessa, Tex., and beckoned me into a conference room decorated in what he described as a ‘Tuscan feel,”…The atmosphere in the office was convivial, and I hesitated to raise a question that would poison it but after half an hour I asked how he thought about climate change. (These are the “C” words.) For 14 seconds, Gilliam stared at me across the table, the hint of a smirk on his mouth.
“‘Now you’re setting me up for bunch of hate mail,’ he said. Personally, he didn’t believe climate change as an important issue. He said that when he saw data about rising sea levels or scorching temperatures, he suspected it was falsified or manipulated in order to further a political agenda. (Nothing like short-term personal interest.) Gilliam knew that many of the big energy companies were investing in renewables, and he viewed their maneuvers skeptically. ‘The politically correct path is, ‘We’re going to increase our renewable energy production by 10 percent a year. O.K.? But in reality they make their business selling oil and gas, right?’
(But the reporter notes) “Seeing the whole problem…as a result of an economic arrangement rather than an unsparing fate or a flaw in human character, is exceedingly grim but also kind of optimistic. One system can dominate for a while, then another can sneak up and take its place.
“At the far end of Gilliam’s conference table, a surveyor’s map lay open, its corners secured by brown leather document weights. The map depicted a mineral play in which Gilliam had an interest, perhaps a few hundred thousand barrels’ worth of oil. PROVISIONAL AND CONFIDENTIAL was stamped in red along the bottom. The map depicted the typical hydrocarbon infrastructure, like well locations and the large drums known as tank batteries, shown as blue and yellow rectangles. But a checkerboard of gray lines had been drawn over these features, dividing the 3,700 acres into clean, even squares. I asked Gilliam what the squares were, ‘Solar farm,’ he said, casually.”
Mr. Gilliam is being “provisional” or maybe "smart"; but government is not like that. The role of government is to encourage change in the right direction, and markets will follow. We will discuss the implication of all this for investment policy in our 5/19 posting.
Our 5/19 Posting – What Must Be Done