The (Re)Greening of the Planet

Climate change is happening. It is not a threat, it is a reality. It will become more evident not less. Climate change will impose huge costs. Floods and fire have already been seen. Extreme temperatures will become more frequent and more extreme. Hurricanes will become more violent and most likely more frequent. Stable regions will be destabilised by climate change. Large scale population movements will be precipitated. The cost of allowing unrestricted climate change will be huge and possibly existential as a far as organic life is concerned. Talk of action by 2050 is simply avoidance and denial. The time frame for action has to be compressed. The targets need to be in the 2030s or even sooner.

The cost of slowing global warming ( I am not sure if it can be stopped or reversed) will also be high, but not quite as high. Moreover, action puts humans back in control and this will have important social psychological benefits. The central problem is CO2 emissions. However, pollution of all kinds is implicated. Particulates in the atmosphere and plastics in the sea to name but two. Nevertheless it is CO2 that is the immediate threat and needs to be the central focus. CO2 emissions need to be dramatically reduced. I heard yesterday from one expert the figure of 7% a year. This figure means little until you compound it. It means by about 97% in ten years. We are not on course to achieve this rate of reduction. The other figure I heard was that emissions would increase by 16% in the next ten years. Planet earth, we have a problem…

The source of our dilemma is materialism. We measure well being and wealth through material things. This does not mean simply physical things. Everything that uses energy to produce is material. A focus on GDP growth has meant we have ignored population growth. We have lamented ageing populations and many communities have even encouraged population growth. People use energy and the energy we primarily use is fossil fuel that, on use, releases CO2 into the atmosphere. The cult of GDP growth and laissez-faire attitudes to population is the source of our existential threat from global warming. Life may be a human right given to humans by human society but the planet does give a fig about human rights. It has its own rules and it trumps human society.

The key to salvation is clean energy. This is energy that does not warm the planet or have any known adverse side effects on the weather. There is plenty of it about. We just have to find ways to collect it, store it, and use it. Simples! Well, perhaps not so simple. The problem is, in the transition to clean energy we have to burn a lot of fossil fuel. If we are going to reduce CO2 emissions in the transition we have to cut back consumption of energy elsewhere by a dramatic amount. That means our obsession with GDP and cavalier attitude to population needs to be revised. Telling people that see material wealth as their goal (and we have all been conditioned this way) and that maybe do not have ‘enough’ to cut back is politically tricky. This may explain why politicians have baulked at the hard decisions. More images of cars floating down the street and homes going up in flames or getting blown away by hurricanes may be necessary to make the point politicians are avoiding. Or maybe extreme temperatures will do the trick. Unfortunately this approach means there is an element of shutting the stable door after the horse has bolted.

The political approach has been to leave the transition to the market. This has not only been evident in the west but also Russia and China. The market clearly cannot, by definition, resolve this issue alone. Climate change is an externality. Markets fail to correctly price externalities. This is why they are externalities! Where collective action has been tried it has run into the instinct to ‘free ride’. The free rider problem is common in public good provision. The provision of low CO2 emissions can be viewed as a public good which collectively we can attain. However, policing collective provision is difficult and free riders can benefit at no cost. You cannot stop countries enjoying low emissions and still burning coal. Except that, if they burn coal, emissions will not be low and it may be their nation that suffers most. Climate change is quite arbitrary in which countries it afflicts. Free riding is really a false strategy in the case of this public good.

The EU has opted to confront the externality of CO2 emissions in a conventional way; carbon pricing. Basically it has created a market for the right to emit CO2 and people can buy the right. It has also introduced regulations on allowable emissions. More broadly the concept of carbon offset has been introduced which gives CO2 emission rights to those that do something to reduce emissions, like plant a tree. The problem is trees burn in forest fires and are washed away by floods and hurricanes and coastal erosion. The situation is too far gone for such ‘solutions’ and really we just have to stop emissions not try to offset them. The only way to do this is cut back material consumption. The Covid-19 pandemic demonstrated how emissions fall when GDP falls. Unfortunately everybody was jumping for joy when they could drive to the pub and material consumption became possible again. It appears the general public still do not get it. Quite a few of them don’t get the point of a vaccine either so what can one say…

There is however a growing, strident, minority that does get it. Some have always been passionate about this and are not johnny-come-lately types (like me) that have woken up to the existential risk. In my defence I have always favoured clean energy but not specifically because of the climate change issue. We always fussed about running out of fossil fuel (it is finite) and brought up on ‘The China Syndrome, Three-mile Island, and Chernobyl, were sceptical of nuclear. The advent of OPEC convinced me that clean energy was the way forward because this way everyone has control over their energy source and it is less effective as a geo-political weapon. The behaviour of Russia and gas prices may be reinforcing my point! I always felt that promoting clean energy as a sovereignty issue was the best way to convince the public. Unfortunately the oil majors had other ideas and huge wealth to promote their narrative. The rest as they say is history (which may yet come to an end).

So what is the way forward? Well COP26 is taking place in Glasgow from 31/10 until 12/11/2021. It will bring together experts and representatives from all nations that give a damn to review the climate change issue and put forward proposals and plans to deal with it. If the targets are 2050 and beyond it will be an unmitigated disaster. If it is all left to the market it will fail. What is required is direct and co-ordinated state action to reduce emissions and deal with the economic and political fall-out from the implied drop in global material consumption in the transition. It will require the rich to help the poor. The redistribution requirements alone make me sceptical of success.

The failure of COP26 (which I assume) will swell the ranks of the strident minority and start to strengthen the Green movements in many sovereign states. In the UK this could have wide political significance. I can see a scenario in which the Green Party holds the balance of power in parliament and forces the introduction of proportional representation as well as Green policies. This could fundamentally change the shape of UK politics. However in the great scheme of things this is a side-issue. What is required is a concerted effort to transition to clean energy. The distribution consequences need to be confronted and resolved. The general loss of material consumption must be faced. I hope one silver lining of Covid-19 is that it has prepared us for changes in our material existence. The evidence is not good though. Material conditioning is hard to eradicate in the human culture. If you think high gas prices and petrol station queues are temporary think again. Disruptions of this nature, though not necessarily these disruptions, will punctuate your existence in the next decade. Pay attention to COP26. Think carefully about how you next cast your vote. If global warming does not guide your decisions you may not be making them much longer…

Inequality

Discussion of inequality typically takes place in a philosophical quagmire. Observed inequality is an outcome of the social and economic process. It is an ex post concept. However some see it a social good (or bad). Wealth equality, it is argued, is a social good and more of it desirable whatever the cost. Indeed many argue that not only is more wealth equality desireable but it brings gains not costs. The evidence is however somewhat lacking. In part this is because no one is asking the right questions.

Inequality of wealth is an outcome in market economies. Even if everybody could somehow start from the same position, inequality of wealth would result. Differences in effort, skill, and luck would ensure differential wealth outcomes. For those that see wealth equality as a social good, restricting the set of possible outcomes is desirable even if the restriction demonstrably reduces economic growth. The question that needs to be posed and answered is does restricting wealth inequality outcomes reduce economic growth? This is a question that never seems to be posed in economics. It is assumed that it does, but this is not self-evident.

The issue comes down to motivation to work hard and take risk. It is likely that effort and risk taking are not linked to specific wealth outcomes. It is likely however that motivation is linked to the ability to keep the fruits of ones labour, whatever they happen to be, and dispose of such fruit as one sees fit. The question then becomes what happens to motivation if one is told ex ante that only x% of the fruit will be available and the accumulation of fruit will be capped at K. There might be a first generation effect on motivation as social narratives adjust but it is likely that the motivation would be unaffected for a range of values for x and K. It would be useful if economists and psychologists could generate some data on this range of values.

Less wealth inequality most likely would not affect the long run steady state of growth in a closed economy. It may well do in an open economy where acceptable levels of equality vary across economic jurisdictions. Hence we had the ‘brain drain’ to the USA at one point. Nevertheless, from a global perspective, less inequality, from current levels, may not have a material impact on growth. Indeed it might well boost global growth. One of the problems with too much inequality is that it limits demand growth and reduces incentives for risk taking. Beyond a relatively low-level of wealth accumulation it becomes about power (buying people) and not consumption (buying things). The motivation for power may not lead to optimal risk taking from an economic growth perspective. However the power aspect also makes acting on inequality quite challenging.

The marxist approach is to eliminate the market mechanism and centralise all economic decisions. There is no wealth inequality because there is no personal wealth. This does not eliminate inequality just inequality of wealth. Power inequality remains and can even become more extreme. Moreover, the elimination of the market mechanism creates problems in determining how to organise the economy. In simple terms, what should be produced? The Soviet system failed because it could not adequately address this problem. To my knowledge no one has adequately addressed this issue (we were taught about comparative economic systems at UCL when I was an undergraduate). For those that are quick to attack the market system be sure you have something that works with which to replace it other than fine words. It is not in any event necessary in order to reduce inequality.

The issue of inequality can be addressed within market based economies so long as the values of x and K are made clear ex ante and are not varied arbitrarily. What people hate most is adverse surprises. What is required is more emphasis in economics on the optimal ex ante level of inequality. Indeed it should be made the central question in modern economics. It is unlikely the optimal values x and K are zero but they are most likely smaller than the ex post outcomes that we observe today. Indeed a reduction in inequality from currently observed levels would probably boost growth and possibly even productivity.

 

The Underclass

Sociologists and economists often speak of an underclass but definition is imprecise. I have my own definition. You are a member of the underclass if you have ever availed yourself of a payday loan (or a loan shark). The interest rates are usurious. The only reason anyone uses such credit is because they are desperate. They are fundamentally living beyond their means. Borrowing from a payday loan is not a solution. It is to compound (literally) the income/expenditure mismatch.

If you go to a payday lender it means you cannot get credit elsewhere. Normal credit criteria state you are not a suitable customer for (more) credit. Payday companies will lend you for a short while but at usurious rates. It comes as something of surprise then to read that Wonga, a payday lender, is considering insolvency because of claims for loans that should not have been made. The precise criterion for whether a payday loan should have been made is lost on me. Surely none of these loans should have been made. By definition, if you need a payday loan, you cannot afford one.

The regulator ( and claims companies) are about to force a sharp contraction in this sector. If it is possible to make inappropriate payday loans (what is an appropriate loan?) then the whole business model seems unsound and the industry will contract. At one level this is a good thing. Usury should not be sanctioned. However, what then happens to the underclass that avails itself of this credit?

The hitherto growth of this payday sector suggests there are many people who have no savings, no access to credit or a social group that can help out, and are living below the poverty line. There may be some who could tighten their belts and just manage their resources better but I suspect most in this underclass cannot tighten their belts without severe deprivation. Imagine what this means. The UK has free heath care, free education, free advice (Citizens Advice), a proliferation of food banks, credit unions, and a welfare system. Yet still people need payday loans! Something is not quite right here.

The two categories most likely to use payday loans seem to be benefit claimants and those on zero hours contracts. The changeover to Universal Credit has left many short which implies the welfare system is no longer an effective safety net. Zero hours contracts suggest many struggle to make rent and if one lives in London, making rent may be tough even if one has a decent job and regular pay. Becoming homeless is not advisable. It is not difficult to imagine how desperate people resort to payday loans. It is a short-term fix that makes matters worse. What happens if payday lenders withdraw from the market? What happens to those that cannot make rent?

The desire of successive Tory governments to eliminate moral hazard has punched huge holes in the UK’s safety net, whether by design or incompetence. People that fall through this net are the underclass and will struggle to get back above it. One reason is their enforced use of payday loans. The regulator is bailing the existing generation out by allowing reclaims based on inappropriate lending. This may kill the sector, which is good on one level, but still leaves the economic need that has driven people to use payday loans in such numbers. What happens now? One prediction I make with some confidence is that evictions and homelessness may jump.

 

 

Inequality and Relative Poverty

The Joseph Rowntree Foundation has published a report alleging that “Four million more people living on inadequate incomes in modern Britain”. An article in the FT reports on this study with the sub-heading “Growing numbers do not have enough money for food, clothes and housing”. The implication of the media presentation is that absolute poverty is growing and is a problem. It may well be but one cannot conclude this from the study.

The reference from this study is the Minimum Income Standard (MIS). It is calculated by the Centre for Research in Social Policy by engaging with groups of members of the public to identify which items they think are essential for an acceptable minimum standard of living. The reference for the study is thus a social norm or expectation. The study is measuring how income is varying relative to this expectation. Any conclusions from this study are thus very dependent upon the nature of this expectation.

It is very difficult to conduct such studies over long periods of time because the nature and quality of the reference social norm varies. What was deemed acceptable when I was a child would be deemed inadequate today. This is as it should be if income standards, and thus expectations, are continuously improving. It does however rather limit the scope of these studies. They tell us about recent trends in the dispersion of income around social expectations. They tell us about trends in income inequality. They tell us little or nothing about absolute poverty.

The media presentation tends to imply absolute poverty because it is more newsworthy. It has an emotional appeal and catches the eye. If the headline was about relative poverty changes over the last few years I expect much less readership. To imply significance for absolute poverty is borderline false news and demonstrates how this process works. There is a duty on you, the reader, to not take news reports at face value. However, this duty is all too often shirked.

The report also speaks to my blog Inequality: Deception and Consequences. In this I reframe the inequality debate in terms of consumption and highlight the implicit assumption that consumption is good and more consumption is even better. This is clearly embedded in the reference social norm used in this study. Perhaps the trick is to change expectations.

The growing use of charity shops for clothing and food banks for essential nutrition is I suspect impacting absolute poverty levels positively. The social stigma of using such outlets however may be one reason the report finds declining minimum standards of income. But why should society stigmatize these outlets? Recycling and eliminating waste is a good thing. Indeed consuming less is a good thing. Where social norms seem to enter is on whether you are consuming less as a choice or because of a budget constraint. In a world in which consuming less is a good thing this distinction starts to fade.

There is a problem with absolute poverty and it is entirely located in the housing sector. It is much more serious than this study seems to imply. The real haves and have-nots today are defined by property ownership. The owners are extracting more and more from the non-owners because everyone needs to live somewhere. It is being exacerbated by council house sales, housing association sales, and cuts in housing benefit. One does not need to do very much research to conclude this is the case.

Inequality: Deception and Consequences

The subject of inequality is getting a new lease of life having been neglected by economics for most of my career. It is the subject that attracted me to economics so I was most puzzled by the almost complete absence of the concept from all my degrees. Economics, as taught to my generation, had nothing to say about the subject other than how to measure it. It was treated as a residual and, at best, there might be some consideration on the economic consequences of trying to alter the residual outcome. The implication was that whatever level of inequality emerged, this was in some sense ‘optimal’, and that messing with this outcome would always entail ‘costs’, so best not do it. This conclusion is easily visible in the policies of the ‘right’ of politics.

I have ploughed through Piketty’s Capital in the Twenty-First Century and am about to finish reading Tony Atkinson’s Inequality: what can be done? I still have Joseph Stiglitz’s The Price of Inequality and  Amartya Sen’s Collective Choice and Social Welfare. However, as I read I have a sense of a great deception being perpetrated. The subject is inequality of wealth. Why do we care so much about the inequality of wealth?

Wealth ultimately provides the ability to consume goods and services. Those that have more than they need for consumption can use wealth to exercise power over those that could consume a bit more. It allows intergenerational transfers of consumption. It gives those holding wealth the power to determine what is produced and thus available to consume. Nevertheless, in the last analysis wealth, and the inequality of distribution, only matters because it facilitates consumption in some way and for someone. Surely then we should be concerned with the inequality of consumption, not wealth?

Restating the inequality debate in terms of consumption changes the debate profoundly. Wealth accumulation has no upper limit (see Warren Buffet, Bill Gates etc) but it is possible to be satiated by consumption. Humans do not have an infinite capacity to consume goods and services and ‘excess’ consumption does have moral consequences in many cultures. Implicit in the framing of inequality in terms of wealth is that consumption is ‘good’ and more consumption is always ‘better’ and for everyone. The arguments in favour of inequality of wealth do not carry over to inequality of consumption. Moreover, morality has a direct bearing on inequality of consumption. Morality only enters the wealth inequality debate indirectly because of consumption and is successfully kept out by ‘positive ‘economics’. So let us ask the question what kind of consumption inequality is acceptable?

Proposition 1: Everyone should be guaranteed a minimum standard of consumption.

The ‘everyone’ in the question is best defined as all citizens of a nation-state for the purpose of this blog, though clearly this is inadequate. No one asks to be born and no one asks to be born into a specific society. If the society allows/encourages the birth, it has a duty of care for the offspring of its citizens. This proposition has some odious unintended consequences. The society may, when confronted with this duty of care, decide to legislate on who can propagate. At the moment most societies allow the decision to propagate to sit with the couple (or carers) and leave the responsibility for the consumption of the offspring largely in the hands of the parents. This freedom to propagate is often implicitly used to minimise the consumption safety net provided to couples and children. One can see a Corollary to P1. The higher the minimum standard of consumption guaranteed, the greater the motivation for the society to intrude into family size and fertility. Everything has consequences.