Archive for the ‘monetary policy’ Category
Another reposting of a Monbiot essay.
I’m preparing this post on Sunday; i.e. three days ago. Reason is that my sister, Elizabeth, and friend, Merle, are arriving on Monday afternoon (as in two days ago) bringing us up to three guests in the house. My mother leaves on tomorrow morning and then Elizabeth and Merle depart on Friday morning. So for all the right reasons, Learning from Dogs is taking a backstage. Hence me doing as much as I can ahead of time.
In Monday’s post, The tracks we leave, towards the end I wrote, “The utter madness of mankind’s group blindness is beyond comprehension.” Many know that there is something very badly wrong with the way politics is operating today. Yet, at the same time, many intuitively know the political changes that mankind has to see if there is to be any chance of a sustainable future for mankind on this planet.
Thus George Monbiot’s essay published on the 29th July makes encouraging reading in the context of the growing confidence of the UK Green Party. It is republished here with the kind permission of George Monbiot.
July 29, 2014
The justifications for extreme inequality have collapsed. But only the Green Party is prepared to take the obvious step
By George Monbiot, published in the Guardian 30th July 2014
When inequality reaches extreme and destructive levels, most governments seek not to confront it but to accommodate it. Wherever wealth is absurdly concentrated, new laws arise to protect it.
In Britain, for example, successive governments have privatised any public asset which excites corporate greed. They have cut taxes on capital and high incomes. They have legalised new forms of tax avoidance (1). They have delivered exotic gifts like subsidised shotgun licences and the doubling of state support for grouse moors (2). And they have dug a legal moat around the charmed circle, criminalising, for example, the squatting of empty buildings (3) and most forms of peaceful protest (4). However grotesque inequality becomes, however closely the accumulation of inordinate wealth resembles legalised theft, political norms shift to defend it.
None of this should surprise you. The richer the elite becomes, and the more it has to lose, the greater the effort it makes to capture public discourse and the political system. It scarcely bothers to disguise its wholesale purchase of political parties, by means of an utterly corrupt and corrupting funding system (5,6). You can feel its grip not only on policy but also on the choice of parliamentary candidates and appointments to the cabinet. The very rich want people like themselves in power, which is why we have a government of millionaires (7).
But that describes only one corner of their influence. They fund lobby groups, thinktanks and economists to devise ever more elaborate justifications for their seizure of the nation’s wealth (8). These justifications are then amplified by the newspapers and broadcasters owned by the same elite.
Among the many good points Thomas Piketty makes in Capital in the 21st Century – his world-changing but surprisingly mild book – is that extreme inequality can be sustained politically only through an “apparatus of justification.” (9) If voters can be persuaded that insane levels of inequality are sane, reasonable and even necessary, then the concentration of income can keep growing. If they can’t, then either states are forced to act, or revolutions happen.
For the notion that inequalities must be justified sits at the heart of democracy. It is possible to accept that some can have much more than others if one of two conditions are met: either that they reached this position through the exercise of their unique and remarkable talent; or that this inequality is good for everyone. So the network of think tanks, economists and tame journalists must make these justifications plausible.
It’s a tough job. If wages reflect merit, why do they seem so arbitrary? Are the richest executives 50 or 100 times better at their jobs than their predecessors were in 1980? Are they 20 times more skilled and educated than the people immediately below them, even though they went to the same business schools? Are US executives several times as creative and dynamic as those in Germany? If so, why are their results so unremarkable?
It is, of course, all rubbish. What we see is not meritocracy at work at all, but a wealth grab by a nepotistic executive class which sets its own salaries, tests credulity with its ridiculous demands and discovers that credulity is an amenable customer. They must marvel at how they get away with it.
Moreover, as education and even (in the age of the intern) work becomes more expensive, the opportunities to enter the grabbers’ class diminish. The nations which pay the highest top salaries, such as the US and Britain, are also among the least socially mobile (10). Here, you inherit not only wealth but opportunity.
Aha, they say, but extreme wealth is good for all of us. All will be uplifted by their god’s invisible hand. Their creed is based on the Kuznet’s curve, the graph which appears to show that inequality automatically declines as capitalism advances, spreading wealth from the elite to the rest.
When Piketty took the trouble to update the curve, which was first proposed in 1955, he discovered that the redistribution it documented was an artefact of the peculiar circumstances of its time. Since then the concentration of wealth has reasserted itself with a vengeance (11). The reduction in inequality by 1955 was not an automatic and inherent feature of capitalism, but the result of two world wars, a great depression and the fierce response of governments to these disruptions.
For example, the top federal income tax rate in the US rose from 25% in 1932 to 94% in 1944. The average top rate throughout the years 1932 to 1980 was 81%. In the 1940s, the British government imposed a top income tax of 98% (12). The invisible hand? Hahaha. As these taxes were slashed by Reagan and Thatcher and the rest, inequality boomed once more, and is exploding today. This is why the neoliberals hate Piketty with such passion and poison: he has destroyed with data the two great arguments with which the apparatus of justification seeks to excuse the inexcusable.
So here we have a perfect opportunity for progressive parties: the moral and ideological collapse of the system of thought to which they were previously in thrall. What do they do? Avoid the opportunity like diphtheria. Cowed by the infrastructure of purchased argument, Labour fiddles and dithers (13).
But there is another party, which seems to have discovered the fire and passion that moved Labour so long ago: the Greens. Last week they revealed that their manifesto for the general election will propose a living wage, the renationalisation of the railways, a maximum pay ratio (no executive should receive more than 10 times the salary of the lowest paid worker), and, at the heart of their reforms, a wealth tax of the kind Piketty recommends (14).
Yes, it raises plenty of questions, but none of them are unanswerable, especially if this is seen as one step towards the ideal position: a global wealth tax, that treats capital equally, wherever it might lodge. Rough as this proposal is, it will start to challenge the political consensus and draw people who thought they had nowhere to turn. Expect the billionaires’ boot boys to start screaming, once they absorb the implications. And take their boos and jeers as confirmation that it’s onto something. You wanted a progressive alternative? You’ve got it.
3. Clause 144, Legal Aid, Sentencing and Punishment of Offenders Act 2012.
9. Thomas Piketty, 2014. Capital in the Twenty-First Century. Harvard University Press.
10. Thomas Piketty, as above.
11. Thomas Piketty, as above.
12. Thomas Piketty, as above.
Want to know some more about the UK Green Party? Their website is here.
Yes, I find them annoying too!
When you are a WordPress user, as is Learning from Dogs, you can pay $30 a year to stop advertisements from appearing on one’s blogsite.
This is how WordPress explain their policy on advertising:
We sometimes display advertisements on your blog to help pay the bills. This keeps free features free! We only run them in limited places, and we do not show ads to logged-in readers, which means only a very small percentage of your page views will actually contain ads. To eliminate ads on your blog entirely, you can purchase the No-Ads Upgrade for a single blog (per year).
I choose not to pay that upgrade, despite the ads being annoying; of that I have no doubt.
For this reason.
WordPress pay an amount of their advertising income to the owner of the blog. Thus twenty-four hours ago, WordPress sent me an email:
Just thought you’d like to know WordPress.com sent you $106.23 USD.
I’m not sure but I think that covers the last twelve months.
That $106 will be divided into two with $53 staying with Jean and me and $53 going to our nearest humane society; Rogue Valley Humane Society.
Just wanted to let you know.
How the foreclosure crisis was a boon for the super wealthy.
For some time now, must be quite a few years, I have subscribed to Yves Smith’s Naked Capitalism blog. I do so for a number of reasons.
Thus it was that a few days ago I read with a mixture of anger and disgust an article about the consequences of the foreclosure crisis on the wealthy. Within a few hours of me requesting by email permission to republish that article on Learning from Dogs came the reply from Yves granting such permission.
Try not to get too angry!
SUNDAY, OCTOBER 6, 2013
This is Naked Capitalism fundraising week. 53 donors [now well over 400, Ed.] have already invested in our efforts to shed light on the dark and seamy corners of finance. Join us and participate via our Tip Jar or another credit card portal, WePay in the right column, or read about why we’re doing this fundraiser and other ways to donate, such as by check, as well as our current goal, on our kickoff post.
It’s a welcome departure to see Adam Davidson’s weekly column in the New York Times, which usually puts a happy face on how the 1% are winning the class war in America, have a guest writer look at the other side of the story.
Catherine Rampell has a short but compelling piece on how the foreclosure crisis was wealth transfer from lower and middle income families to the rich. Her points are simple: the typical person who lost their home wasn’t a greedhead who bought too much house or refied to buy flat panel TVs and go on cruises (if you hang out with mortgage types, you’ll get a big dose of profligate consumer urban legend). The people who were like that (and there were some) for the most part were in subprime loans that reset in 2007 and 2008 and were in the early wave of foreclosures. The people who’ve lost their homes in later foreclosures were overwhelmingly people who had the bad fortune to buy late in the housing bubble (so when the bust hit, they had negative equity and couldn’t use lower rates to refi into cheaper payments) and took economic hits as a direct result of the crisis (hours cuts and job losses; other people who were hurt were in the more typical “shit happens” categories, like suffering medical problems, with their situation made much worse by their inability to sell or refinance their home).
Rampell’s contribution is to look at the phenomenon of investors, both big and small, and how they’ve bought properties at foreclosure and then flipped them. Separately, Josh Rosner recently released the astonishing statistic: that sales of owner-occupied properties showed only a 1% gain in the last 12 months. The gains that have been driving the indexes were all in investor owned properties. Some flipped to other investors. In hot markets, local investors have been doing “mini-bulks,” acquiring small portfolios to sell to private equity investors, some without renovating them, others with modest fix-ups. Others sold them to homebuyers.
Rampell uses the example of a couple who believed that renting was throwing away their money, and had the bad luck to buy a moderately-priced fixer-upper in early 2007. Each wage earner saw their income drop and unable to get a loan modification, they lost their home. Their $309,000 Seattle home went to an investor for $155,000 in the summer of 2011. That investor just sold it to a homeowner for $290,000, not far below what the hapless couple paid for it. But the new buyer paid all cash.
Rampell tells us:
Of the 87,062 foreclosures in the last five years that were bought by corporate investors and have been flipped, about a quarter were sold for at least $100,000 more than what the investor originally paid, according to [an online real estate listings site] Redfin (Although it’s impossible to know how much investors spent on upgrades or renovations.)….
The boom-bust-flip phenomenon is just one of the most obvious ways that research suggests the financial crisis has benefited the upper class while brutalizing the middle class. Rents have risen at twice the pace of the overall cost-of-living index, partly because middle-class families can’t get the credit they need to buy. That means “landlords can raise rents with impunity,” says Glenn Kelman, chief executive of Redfin. And according to a report by David Autor, the M.I.T. economist, job losses during and after the recession were concentrated in midskilled and midwage jobs, like white-collar sales, office and administrative jobs; and blue-collar production, craft, repair and operative jobs. Employment for higher-skilled workers, on the other hand, has grown substantially.
There is a second way foreclosures have served as a wealth transfer to the capitalist classes. Foreclosures don’t necessarily result in evictions. Banks often leave properties in a “zombie” state, starting foreclosures but not completing them, leaving the owner who thought he was foreclosed on still on the hook for property taxes. Another variant which is much less damaging is to leave the homeowner in place. I recently met an investor who is acquiring homes in Atlanta. The day after he buys a house, he goes to introduce himself to the former homeowner to see if he can work out a deal to keep them in place as tenant. In the overwhelming majority of cases, he can. “They were paying $1100 on their mortgage and the bank wouldn’t give them a mod. I’ll let them rent for $700, which is way above what they’d have gotten if they wrote the principal down to the price at which I bought the house. And I tell the tenants I’d be happy to sell the home to them.” We didn’t discuss details, but it sounded as if he’d be willing to structure rent to own deals (where part of the rent would go to a down payment on the house).
He was clear that his business depended on what he saw as value destroying behavior by banks. He described how he’d recently bought a home and when he went for his usual visit to the house, a well-dressed black man met him and invited him in, saying he’d be out in 30 days and assumed it wasn’t a problem. The new owner saw the house was in impeccable shape. He chatted with the owner a bit and found out he was a bodybuilder with a high-end training business. He asked the homeowner: “You look like you take good care of yourself and the house. You’d been paying on time. What happened?”
The trainer told him that he’d bought the house at the peak of the cycle for $160,000. The house was clearly now worth way less. He tried to get the bank to modify it to a principal balance of $100,000. The bank wouldn’t consider it. “So I bought a house which is comparable to this one for $50,000 and gave this one up.”
In this case, the homeowner had enough cash to arbitrage himself. The investor told me he’d bought the foreclosed home for $40,000. Had the bank cut a deal for $100,000 (and who knows, the homeowner might have accepted a higher number), it would have come out way ahead. But that also assumes that the bank owned the mortgage. It’s pretty much a given that the bank was a servicer, and as we’ve seen again and again, servicers don’t have the incentives or the infrastructure to do mods. So investor in the mortgages lose, homeowners lose. The winners are the banks as inefficient looters (the money they skim off the servicing is chump change relative to the damage done by negligent and predatory servicing) and the investors who profit by picking up the pieces. This is isn’t a well-functioning economic system, it’s rentier capitalism. And it’s looking more and more like a doomsday machine for what remains of the middle class.
Can’t add anything polite to this! Except, to say it’s a very long way from integrity!
That pesky ‘law’ regarding the power of unintended consequences.
As many of you are aware, last week was an unusual format for Learning from Dogs in that the whole of the week was dedicated to republishing Dr. Samuel Alexander’s essay The Sufficiency Economy – Envisioning a Prosperous Way Down. If you missed that, the first chapter was a week ago today under the title of Where less is so much more.
Moving on. Many living in Northern California and South-West Oregon will have had a timely reminder that nature is tapping mankind on the shoulder in new and challenging ways. I’m referring to the massive storm that was featured in a recent Climate Crocks article that delivered over a foot of rainfall in recent days. Here in Southern Oregon we received over 10 inches! Hence the growing awareness that we have to do something!
I am an actuary interested in finite world issues – oil depletion, natural gas depletion, water shortages, and climate change. The financial system is also likely to be affected.
I’m very grateful to Gail for so promptly giving me written permission to republish her work. It is very relevant to all of us.
World leaders seem to have their minds made up regarding what will fix world CO2 emissions problems. Their list includes taxes on gasoline consumption, more general carbon taxes, cap and trade programs, increased efficiency in automobiles, greater focus on renewables, and more natural gas usage.
Unfortunately, we live in a world economy with constrained oil supply. Because of this, the chosen approaches have a tendency to backfire if some countries adopt them, and others do not. But even if everyone adopts them, it is not at all clear that they will provide the promised benefits.
The Kyoto Protocol was adopted in 1997. If emissions had risen at the average rate that they did during the 1987 to 1997 period (about 1% per year), emissions in 2011 would be 18% lower than they actually were. While there were many other things going on at the same time, the much higher rise in emissions in recent years is not an encouraging sign.
The standard fixes don’t work for several reasons:
1. In an oil-supply constrained world, if a few countries reduce their oil consumption, the big impact is to leave more oil for the countries that don’t. Oil price may drop a tiny amount, but on a world-wide basis, pretty much the same amount of oil will be extracted, and nearly all of it will be consumed.
2. Unless there is a high tax on imported products made with fossil fuels, the big impact of a carbon tax is to send manufacturing to countries without a carbon tax, such as China and India. These countries are likely to use a far higher proportion of coal in their manufacturing than OECD countries would, and this change will tend to increase world CO2 emissions. Such a change will also tend to raise the standard of living of citizens in the countries adding manufacturing, further raising emissions. This change will also tend to reduce the number of jobs available in OECD countries.
3. The only time when increasing natural gas usage will actually reduce carbon dioxide emissions is if it replaces coal consumption. Otherwise it adds to carbon emissions, but at a lower rate than other fossil fuels, relative to the energy provided.
4. Substitutes for oil, including renewable fuels, are ways of increasing consumption of coal and natural gas over what they would be in the absence of renewable fuels, because they act as add-ons to world oil supply, rather than as true substitutes for oil. Even in cases where they are theoretically more efficient, they still tend to raise carbon emissions in absolute terms, by raising the production of coal and natural gas needed to produce them.
5. Even using more biomass as fuel does not appear to be a solution. Recent work by noted scientists suggests that ramping up the use of biomass runs the risk of pushing the world past a climate change tipping point.
It is really unfortunate that the standard fixes work the way they do, because many of the proposed fixes do have good points. For example, if oil supply is limited, available oil can be shared far more equitably if people drive small fuel-efficient vehicles. The balance sheet of an oil importing nation looks better if citizens of that nation conserve oil. But we are kidding ourselves if we think these fixes will actually do much to solve the world’s CO2 emissions problem.
If we really want to reduce world CO2 emissions, we need to look at reducing world population, reducing world trade, and making more “essential” goods and services locally. It is doubtful that many countries will volunteer to use these approaches, however. It seems likely that Nature will ultimately provide its own solution, perhaps working through high oil prices and weaknesses in the world financial system.
Elastic Versus Inelastic Supply
It seems to me that many bad decisions have been made because many economists have missed the point that crude oil supply tends to be very inelastic, while other fuels are fairly elastic. Let me explain.
Elastic supply is the usual situation for most goods. Plenty of the product is available, if the price is high enough. If there is a shortage, prices rise, and in not too long a time, the market is well-supplied again. If supply is elastic, if you or I use less of it, ultimately less of the product is produced.
Coal and natural gas usually are considered to be elastic in their supply. To some extent, they are still “extract it as you need it” products. Supply of natural gas liquids (often grouped with crude oil, but acting more like a gas, so it is less suitable as a transportation fuel) is also fairly elastic.
Crude oil is the one product that is in quite short supply, on a world-wide basis. Its supply doesn’t seem to increase by more than a tiny percentage, no matter how high the price rises. This is a situation of inelastic supply.
Even though oil prices have been very high since 2005 (shown in Figure 3, below), the amount of crude oil has increased by only 0.1% per year (Figure 2, above).
In the case of oil, both supply and demand are quite inelastic. No matter how high the price, demand for oil doesn’t drop back by much. No matter how high the price of oil, world supply doesn’t rise very much, either.1
In a situation of inelastic supply, the usual actions a person might take appear to work when viewed on a local basis, but backfire on a world basis, if not everyone participates. When one country tries to conserve crude oil (whether through a carbon tax, gasoline tax, or higher automobile mileage requirement), it may reduce its own consumption, but there are still plenty of other buyers in the market for the oil that was saved. So the oil gets used by someone else, perhaps at a slightly lower price. World oil production remains virtually unchanged. Thus, a reduction in oil usage by an OECD country can translate to more oil consumption by China or India, and ultimately more development of all types by those countries.
Adding Substitutes Adds to Carbon Emissions
If we don’t have enough crude oil, one approach is to create substitutes. Because crude oil supply is inelastic, though, these substitutes aren’t really substitutes, though. They are “add ons” to world oil supply, and this is one source of our problem with increasing world emissions.
What do we use to make the substitutes? Basically, natural gas and coal, and to a limited extent oil (because we can’t avoid using oil). The catch is, that to make the substitutes, we need to burn natural gas and coal more quickly than we would, if we didn’t make the oil substitutes. Since the supply of coal and natural gas is elastic, it is possible to pull them out of the ground more quickly. Thus, making the substitutes tends to increase carbon dioxide emissions over what they would have been, if we had never come up with the idea of substitutes.
The increased use of coal and natural gas is pretty clear, if a person thinks about coal-to-liquids or gas-to-liquids. Here, we need to first build the plants used in production, and then with each barrel of substitute made, we need to use more natural gas or coal. So it is very clear that we are extracting a lot of additional coal and natural gas, to make a relatively smaller amount of oil substitute. There is often a substantial need for water to make the process work as well, adding another stress on the system.
But the same issue comes up with biofuels, and with other renewables. These too, are add-ons to the world oil supply, not substitutes. While theoretically they might produce energy with less CO2 per unit than fossil fuel systems, in absolute terms they lead to natural gas and coal being pulled out of the ground more quickly to be used in making fertilizer, electricity, concrete, and other inputs to renewables.2
Carbon Taxes and Competitiveness
Each country competes with others in the world market place. Adding a carbon tax makes products made by the local company less competitive in the world marketplace. It also signals to potential coal users that the countries adopting the carbon taxes are willing to a leave a greater proportion of world coal exports to those who are not adopting the tax, thus helping to keep the cost of imported coal down.
Asian countries already have a competitive edge over OECD countries in terms of lower wages and lower fuel costs (because of their heavy coal mix), when it comes to manufacturing. Adding a carbon tax tends to add to the Asian competitive edge. This tends to shift production offshore, and with it, jobs.
China joined the World Trade Organization in 2001. Figure 4 shows clearly that its fuel consumption ramped up rapidly thereafter. It seems likely that the number of Chinese manufacturing jobs and spending on Chinese infrastructure increased at the same time.
Economists seem to have missed the serious worldwide deterioration in CO2 emissions in recent years by looking primarily at individual country indications, including CO2 emissions per unit of GDP. Unfortunately, this narrow view misses the big picture–that total CO2 emissions are rising, and that CO2 emissions relative to world GDP have stopped falling. (See my posts Is it really possible to decouple GDP growth from energy growth and Thoughts on why energy use and CO2 emissions are rising as fast as GDP. See also Figure 1 at the top of the post.)
The Employment Connection
I have shown that in the US there is a close correlation between energy consumption and number of jobs. (For more information, including a look at older periods, see my post, The close tie between energy consumption, employment, and recession.)
There are several reasons why a connection between energy consumption and the number of jobs is to be expected:
(1) The job itself in almost every situation requires energy, even if it is only electricity to operate computers, and fuel to heat and light buildings.
(2) Equally importantly, the salaries that employees earn allow them to buy goods that require the use of energy, such as a car or house. (“Energy demand” is what people canafford; jobs allow “demand” to rise.)
(3) The lowest salaried people can be expected to spend the highest proportion of their salaries on energy-related services (such as food and gasoline for commuting). The wealthy spend their money on high priced goods and services, such as financial planning services and designer clothing that require much less energy per dollar of expenditure.
The thing I find concerning is the close timing between the ramp-up of Asian coal use and thus jobs using coal, and the drop-off of US employment as a percentage of US population, as illustrated in Figure 6 below. Arguably, the ramp up in world trade is just as important, but some aspects of programs that are intended to save CO2 emissions also seem to encourage world trade.
Of course, the US did not sign the Kyoto Protocol or enact a carbon tax, and it is its jobs that I show falling as a percentage of population. It is more that the CO2 solutions act as yet another way to encourage more international trade, and with it more “growth”, and more CO2.
Using More Biomass is Not a Fix Either
Burning more wood for fuel and creating “second generation” biofuels from biomass seems like a fix, until a person realizes that we are reaching limits there, as well.
In June 2012, twenty noted scientist published a paper in the journal Nature called Approaching a State Shift in the Earth’s Biosphere. This report indicates that humans have already converted as much as 43% of Earth’s land to urban or agricultural uses. In total, 20% to 40% of Earth’s primary productivity has been taken over by humans. The authors are concerned that we may now be reaching a tipping point leading to a state shift, because of loss of ecosystem services as use of biological products increases. With this state change would come a change in climate. Simulations indicate that this tipping point may occur when as little as 50% of land use is disturbed. This tipping point may be even lower, if world-wide synergies take place.
On Our Current Path – Lacking Good Solutions
While this list of problems relating to current proposed solutions is not complete, it gives a hint of the problems with reducing CO2 emissions using approaches suggested to date. There are many issues I have not covered.
One issue of note is the fact the cost of integrating intermittent renewables (such as wind and solar PV) increases rapidly, as we add increasing amounts to the grid. This occurs because there is more need to transport the electricity long distances and to mitigate its variability through electricity storage or fossil fuel balancing. (See for example, Low Carbon Projects Demand a New Transmission and Distribution Model, Grid Instability Has Industry Scrambling for Solutions, and Hawaii’s Solar Power Flare-Up.)
While the problems noted in these articles are probably solvable, the cost of these solutions has not been built into energy balance analyses. Energy balances (or EROEI estimates) as currently reported do not vary with the proportion of intermittent renewables added to the grid. If energy balance analyses were adjusted to reflect the high cost of adding an increasing proportion of wind or solar PV to the grid, they would likely show a rapidly declining energy balance, above a certain threshold. This would indicate that while adding a little intermittent renewables (as we have done to date) can be a partial solution, adding a lot is likely to have serious cost and energy balance issues.
Another issue that is difficult to deal with is the fact that we are not dealing with a temporary problem with CO2 emissions. The idea is not to slow down the burning of fossil fuels, and burn more later; what we really need to do is to leave unburned fossil fuels in the ground for all time. This is a problem, because there is no way that we can impose our will on people living 10 or 50 years from now. The Maximum Power Principle of H. T. Odum would seem to indicate that any species will make use of whatever energy sources are available to it, to the extent that it can. Even if we temporarily defeat this tendency with respect to humans’ use of fossil fuels, I don’t see any way that we can defeat this tendency for the long term.
Considering all of these issues, it does not appear that most of the “standard” solutions will really work.3 What other options do we have?
The Earth has been handling the problem of shifting conditions for over 4 billion years. The earth is a finite system. Nature provides that finite systems, such as the Earth, will cycle to new states of equilibrium over time, as conditions change. While we would like to defeat Earth’s tendency in this regard, it is not at all clear that we can. Part of this cycling to a new state is likely to be a change in climate.
A state change is a cause for concern to humans, but not necessarily to the Earth itself. The Earth has moved from state to state many times in its existence, and will continue to do so in the future. The changes will bring the Earth back into a new equilibrium. For example, if CO2 levels are high, species that can make use of higher CO2 levels (such as plants) are likely to become dominant, rather than humans.
Exactly how this state change might occur is subject to different views. One view is that changing CO2 levels will be a primary driver. The Nature article referenced previously suggested that increased disturbance of natural ecosystems (as with greater use of biomass) might force a state change. My personal view is that a financial collapse related to high oil price may be part of Nature’s approach to moving to a new state. It could bring about a reduction in world trade, a scale back in CO2 emissions, and a general contraction of human systems.4
However the change takes place, it could be abrupt. It will not be to many people’s liking, since most will not be prepared for it.
Steps That Might Work to Slow CO2 Emissions
It would be convenient if we could slow CO2 emissions by working to produce energy with less CO2. This option does not seem to be working well though, so I would argue that we need to work in a different direction: toward reducing humans’ need for external energy. In order to do this, I would suggest two major steps:
(1) Reduce the world’s population, through one-child policies and universal access to family planning services. This step is necessary because rising population adds to demand. If we are to reduce demand, lower population needs to play a role.
(2) Change our emphasis to producing essential goods locally, rather than outsourcing them to parts of the world that are likely use coal to produce them. I would suggest starting with food, water, and clothing, and the supply chains necessary to produce these items.
Changing our emphasis to producing essential goods locally will have a multiple benefits. It will (a) add local jobs, and (b) lead to less worldwide growth in coal usage, (c) save on transport fuel, and (d) add protection against the adverse impact of declining world oil supply, if this should happen in the not too distant future. It should also help reduce CO2 emissions. The costs of goods will likely be higher using this approach, leading to less “stuff” per person, but this, too, is part of reaching reduced CO2 emissions.
It is hard to see that the steps outlined above would be acceptable to world leaders or to the majority of world population. Thus, I am afraid we will end up falling back on Nature’s plan, discussed above.
 Michael Kumhof and Dirk Muir recently prepared a model of oil supply and demand (IMF working paper: Oil and the World Economy: Some Possible Futures). In it, they assume a long run price-elasticity of oil supply of 0.03, and remark that a paper by Benes and others indicates a range of 0.005 to 0.02 for this variable. The long term price elasticity of oil demand is assumed to be .08 in the Kumhof and Muir analysis.
 I would argue that standard EROEI measurements are defined too narrowly to give a true measure of the amount of energy used in making a particular substitute. For example, EROEI measures do not consider the energy costs associated with labor (even though workers spend their salaries on clothing, and commuting costs, and many other good and services that use fossil fuels), or with financing costs, or of indirect impacts like wear and tear on the roads by transporting corn for biofuel.
Other types of analysis have ways of dealing with this known shortfall. For example, when the number of jobs that a new employer can be expected to add to a community is evaluated, the usual approach seems to be to take the number of jobs that can be directly counted and multiply by three, to estimate the full impact. I would argue that with substitutes, some similar adjustment is needed. This adjustment which would act to increase the energy use associated with renewables, and reduce the EROEI. For example, the adjustment might divide directly calculated EROEI by three.
A calculation of the true net benefit of renewables also needs to recognize that nearly the full energy cost is paid up front, and only over time is recovered in energy production. When renewable production is growing rapidly, society tends to be in a long-term deficit position. Typically, it is only as growth slows that society reaches as net-positive energy position.
 I obviously have not covered all potential solutions. Nuclear power is sometimes mentioned, as is space solar power. There are new solutions being proposed regularly. Even if these solutions would work, ramping them up would take time and require use of fossil fuels, so it is wise to consider other options as well.
 The way that limited oil supply could interfere with world trade is as follows: High oil prices cause consumers to cut back on discretionary goods. This leads to layoffs in discretionary sectors of the economy, such as vacation travel. It also leads to secondary effects, such as debt defaults and lower housing prices. The financial effects “concentrate up” to governments of oil importing nations, because they receive less tax revenue from laid-off workers at the same time that they pay out more in unemployment benefits, stimulus, and bank bailouts. (We are already at this point.)
Eventually, countries will find that deficit spending is spiraling out of control. If countries raise taxes and cut benefits, this is likely to lead to more lay offs and debt defaults. One possible outcome is that citizens will become increasingly unhappy, and replace governments with new governments that repudiate old debt. The new governments may have difficulty establishing financial relationships with other governments, given that most are major debt defaulters. Such issues could reduce world trade substantially. With the drop of world trade would come much more limited ability to maintain our current systems, such as electricity and long distance transport.
So long overdue to saying ‘no’ to more drilling for oil and gas!
Just five days ago, I republished an essay from Tom Engelhardt of TomDispatch fame called The more it changes, the more it’s the same thing. Despite Tom’s permission for me to republish any of the essays that appear on TomDispatch, I do try to be very selective and not republish too often.
However, what was published by Tom on the 18th, just three days ago, is so powerful that it requires the widest readership possible. That’s why Tomgram: Ellen Cantarow, “Little Revolution,” Big Fracking Consequences is being republished on Learning from Dogs today and tomorrow. The reason I have split the essay into two parts is because I want to add some other material. Tom’s publication is in one part so if you can’t wait for my sequel tomorrow, then click here.
Here’s something that I want to draw your attention to:
If you’re 27 or younger, you’ve never experienced a colder-than-average month
This image sums up 2012, temperature-wise.
Nowhere on the surface of the planet have we seen any record cold temperatures over the course of the year so far. Every land surface in the world saw warmer-than-average temperatures except Alaska and the eastern tip of Russia. The continental United States has been blanketed with record warmth — and the seas just off the East Coast have been much warmer than average, for which Sandy sends her thanks.
I saw this on the Grist website yesterday. Here are the next couple of paragraphs from that Grist article:
The National Oceanic and Atmospheric Administration summarizes October 2012:
The average temperature across land and ocean surfaces during October was 14.63°C (58.23°F). This is 0.63°C (1.13°F) above the 20th century average and ties with 2008 as the fifth warmest October on record. The record warmest October occurred in 2003 and the record coldest October occurred in 1912. This is the 332nd consecutive month with an above-average temperature.
If you were born in or after April 1985, (i.e. now 27 years old or younger), you have never lived through a month that was colder than average. That’s beyond astonishing.
You might want to go to the NOAA State of the Climate report just issued to read more. Indeed, go to read this: (my emboldening)
The average temperature across land and ocean surfaces during October was 14.63°C (58.23°F). This is 0.63°C (1.13°F) above the 20th century average and ties with 2008 as the fifth warmest October on record. The record warmest October occurred in 2003 and the record coldest October occurred in 1912. This is the 332nd consecutive month with an above-average temperature. The last below-average month was February 1985. The last October with a below-average temperature was 1976. The Northern Hemisphere ranked as the seventh warmest October on record, while the Southern Hemisphere ranked as second warmest, behind 1997.
So with all that in mind, here’s the first half of Ellen Cantarow‘s essay including the ‘must-read’ introduction from Nick Turse.
Tomgram: Ellen Cantarow, “Little Revolution,” Big Fracking Consequences
[Note for TomDispatch Readers: Back in May 2005, this site posted “Against Discouragement,” a graduation speech by the late, great Howard Zinn. Though it hardly needs be said, it was, of course, inspiring. I also interviewed him for TomDispatch and hewrote for the site. A last book of his has just been published, Howard Zinn Speaks: Collected Speeches (1963-2009). How could I not recommend it? After all, he still speaks to us all.
Also a reminder for TD readers: we don’t encourage you to become Amazon customers, but if you already are, and you go to that site via a TomDispatch book link like the one in the previous paragraph (or any book cover image link on the site), we get a modest cut of anything you buy, book or otherwise. It’s a way to support this site at absolutely no cost to you! Tom]
To say the Central Intelligence Agency has had an uneven record over its 65 years would be kind. It found early “success” in plotting to overthrow the legitimate governments of Iran and Guatemala (even if it did fail to foresee the Soviet Union going nuclear in 1949). Then, it had a troubled adolescence. The Bay of Pigs. Vietnam. Laos. Spying on Americans. As the Agency matured, it managed to miss all signs of the oncoming Iranian revolution — the natural endpoint of its glorious 1953 coup that brought the Shah to power — and the Soviet invasion of Afghanistan. (It did, however, manage to arm America’s future enemies there, sowing the seeds of 9/11.) Then there was the Reagan era Iran-Contra affair, the failure to notice the fall of the Berlin Wall until it was on CNN, the WMD “intelligence” of the Iraqi leaker codenamed “Curveball,” the Iraq debacle that followed, and…
Well, you get the picture. Recently, however, things seemed to be looking up. The most popular general in a generation or two, a soldier-scholar-superman who could do no wrong, became its director. Just before that, the Agency helped take out America’s public enemy number one in a daring night raid about which Hollywood is soon to release a celebratory movie.
But just as things were looking up, the rock star general was caught with his pants down, resigning in disgrace after an extramarital affair became public. That titillating development overshadowed another more serious one: a cry for help about a looming threat from the Agency and its brethren in the American intelligence community (IC). In late October, the National Research Council was toissue a report commissioned by the CIA and the IC. Superstorm Sandy intervened and so it was only recently released, aptly titled “Climate and Social Stress: Implications for Security Analysis.” And what a dire picture it painted: security analysts should, it explained “expect climate surprises in the coming decade… and for them to become progressively more serious and more frequent thereafter, most likely at an accelerating rate… It is prudent to expect that over the course of a decade some climate events… will produce consequences that exceed the capacity of the affected societies or global systems to manage and that have global security implications serious enough to compel international response.”
Think failed states, water wars, forced mass migrations, famine, drought, and epidemics that will spill across borders, overwhelm national and international mitigation efforts, and leave the United States scrambling to provide disaster response, humanitarian relief, or being drawn into new conflicts. That’s bad news for everyone, including the intelligence community. Even worse, the 206-page report calls for more study, more analysis, and more action — and yet none of that is likely to happen without the assent of Congress.
Keep in mind that Republican members of Congress opposed even the creation of a CIA climate change center and tried starve it of funding while, as Kate Sheppard of Mother Jones noted last year, “Republican lawmakers — including the chairman and ranking member of the House and Senate intelligence committees, respectively — have also expressed skepticism about the CIA’s climate work.”
In other words, add Republicans to the list of those who, like Cuban and Laotian communists of yore, have worked to thwart the Agency. And cross the CIA off any list of potential environmental saviors. In fact, when it comes to the health of this planet, saviors seem distinctly in short supply. As TomDispatch regular Ellen Cantarow reports from the frontlines of a full-scale climate conflict, the only hope for the environment may come from unlikely groups of people in the unlikeliest of places fighting a shadow war more important than any ever waged by the CIA. Nick Turse
A Secret War of Activists — With the World in the Balance
By Ellen Cantarow
There’s a war going on that you know nothing about between a coalition of great powers and a small insurgent movement. It’s a secret war being waged in the shadows while you go about your everyday life.
In the end, this conflict may matter more than those in Iraq and Afghanistan ever did. And yet it’s taking place far from newspaper front pages and with hardly a notice on the nightly news. Nor is it being fought in Yemen or Pakistan or Somalia, but in small hamlets in upstate New York. There, a loose network of activists is waging a guerrilla campaign not with improvised explosive devices or rocket-propelled grenades, but with zoning ordinances and petitions.
The weaponry may be humdrum, but the stakes couldn’t be higher. Ultimately, the fate of the planet may hang in the balance.
All summer long, the climate-change nightmares came on fast and furious. Once-fertile swathes of American heartland baked into an aridity reminiscent of sub-Saharan Africa. Hundreds of thousands of fish dead in overheated streams. Six million acres in the West consumed by wildfires. In September, a report commissioned by 20 governments predicted that as many as 100 million people across the world could die by 2030 if fossil-fuel consumption isn’t reduced. And all of this was before superstorm Sandy wreaked havoc on the New York metropolitan area and the Jersey shore.
Washington’s leadership, when it comes to climate change, is already mired in failure. President Obama permitted oil giant BP to resume drilling in the Gulf of Mexico, while Shell was allowed to begin drilling tests in the Chukchi Sea off Alaska. At the moment, the best hope for placing restraints on climate change lies with grassroots movements.
In January, I chronicled upstate New York’s homegrown resistance to high-volume horizontal hydraulic fracturing, an extreme-energy technology that extracts methane (“natural gas”) from the Earth’s deepest regions. Since then, local opposition has continued to face off against the energy industry and state government in a way that may set the tone for the rest of the country in the decades ahead. In small hamlets and tiny towns you’ve never heard of, grassroots activists are making a stand in what could be the beginning of a final showdown for Earth’s future.
The second part of Ellen’s essay will be published tomorrow.
Ellen Cantarow first wrote from Israel and the West Bank in 1979. A TomDispatch regular, her writing has been published in The Village Voice, Grand Street, Mother Jones, Alternet, Counterpunch, and ZNet, and anthologized by the South End Press. She is also lead author and general editor of an oral-history trilogy, Moving the Mountain: Women Working for Social Change, published in 1981 by The Feminist Press/McGraw-Hill, widely anthologized, and still in print.
Follow TomDispatch on Twitter @TomDispatch and join us on Facebook. Check out the newest Dispatch book, Nick Turse’s The Changing Face of Empire: Special Ops, Drones, Proxy Fighters, Secret Bases, and Cyberwarfare.
Copyright 2012 Ellen Cantarow
Civilizations die from suicide, not by murder. Arnold J Toynbee
I’m not sure where to start but as a result of finishing a particular book, plus a recent essay on Tom Dispatch, then another recent essay from Simon Johnson of Baseline Scenario fame, there were so many thoughts bumping around this aged brain that I had no alternative than to offer them to you, dear reader. You should also be warned that this is going to be two posts, covering today and tomorrow.
So let’s start with the book: The United States of Fear by Tom Engelhardt. To be brutally honest, I purchased the book more as a gesture of support to Tom who has been very supportive of Learning from Dogs, in particular allowing me permission to reproduce any essays that were published on TomDispatch, as a number have so been. What an error of judgment! Tom’s book provided another one of those rare but inspirational occasions where you know the world will never look quite the same again!
The back cover page of the book sets out the theme, thus,
In 2008, when the US National Intelligence Council issued its latest report meant for the administration of newly elected President Barack Obama, it predicted that the planet’s “sole superpower” would suffer a modest decline and a soft landing fifteen years hence. In his new book The United States of Fear, Tom Engelhardt makes clear that Americans should don their crash helmets and buckle their seat belts, because the United States is on the path to a major decline at a startling speed. Engelhardt offers a savage anatomy of how successive administrations in Washington took the “Soviet path”—pouring American treasure into the military, war, and national security—and so helped drive their country off the nearest cliff.This is the startling tale of how fear was profitably shot into the national bloodstream, how the country—gripped by terror fantasies—was locked down, and how a brain-dead Washington elite fiddled (and profited) while America quietly burned.
Think of it as the story of how the Cold War really ended, with the triumphalist “sole superpower” of 1991 heading slowly for the same exit through which the Soviet Union left the stage twenty years earlier.
One of the fascinating aspects of the book is that it was put together from 32 essays previously published online by Tom; the complete list with titles and dates is on pps. 205 & 206. So giving you a real feel for the book is easy! I’m going to do that by linking to one of those essays available in the archives of TomDispatch here. That essay was called Washington’s Echo Chamber and appears in the book starting on page 170 under the sub-heading of Five Ways to Be Tone Deaf in Washington. Let me quote you a little,
So much of what Washington did imagine in these last years proved laughable, even before this moment swept it away. Just take any old phrase from the Bush years. How about “You’re either with us or against us”? What’s striking is how little it means today. Looking back on Washington’s desperately mistaken assumptions about how our globe works, this might seem like the perfect moment to show some humility in the face of what nobody could have predicted.
It would seem like a good moment for Washington — which, since September 12, 2001, has been remarkably clueless about real developments on this planet and repeatedly miscalculated the nature of global power — to step back and recalibrate.
As it happens, there’s no evidence it’s doing so. In fact, that may be beyond Washington’s present capabilities, no matter how many billions of dollars it pours into “intelligence.” And by “Washington,” I mean not just the Obama administration, or the Pentagon, or our military commanders, or the vast intelligence bureaucracy, but all those pundits and think-tankers who swarm the capital, and the media that reports on them all. It’s as if the cast of characters that makes up “Washington” now lives in some kind of echo chamber in which it can only hear itself talking.
As a result, Washington still seems remarkably determined to play out the string on an era that is all too swiftly passing into the history books. While many have noticed the Obama administration’s hapless struggle to catch up to events in the Middle East, even as it clings to a familiar coterie of grim autocrats and oil sheiks, let me illustrate this point in another area entirely — the largely forgotten war in Afghanistan. After all, hardly noticed, buried beneath 24/7 news from Egypt, Bahrain, Libya, and elsewhere in the Middle East, that war continues on its destructive, costly course with nary a blink.
That was published by Tom a little over 18 months ago! Seems as relevant today as then! Let me stay with perspectives from 2011.
On the 24th August 2011 Noam Chomsky wrote an essay entitled American Decline: Causes and Consequences. Chomsky, as Wikipedia relates, is Professor (Emeritus) in the Department of Linguistics & Philosophy at MIT, where he has worked for over 50 years. Here is how that essay opens,
In the 2011 summer issue of the journal of the American Academy of Political Science, we read that it is “a common theme” that the United States, which “only a few years ago was hailed to stride the world as a colossus with unparalleled power and unmatched appeal — is in decline, ominously facing the prospect of its final decay.” It is indeed a common theme, widely believed, and with some reason. But an appraisal of US foreign policy and influence abroad and the strength of its domestic economy and political institutions at home suggests that a number of qualifications are in order. To begin with, the decline has in fact been proceeding since the high point of US power shortly after World War II, and the remarkable rhetoric of the several years of triumphalism in the 1990s was mostly self-delusion. Furthermore, the commonly drawn corollary — that power will shift to China and India — is highly dubious. They are poor countries with severe internal problems. The world is surely becoming more diverse, but despite America’s decline, in the foreseeable future there is no competitor for global hegemonic power.
So, according to Chomsky, it’s not as ‘black and white’ as Engelhardt sets out. But do read the full essay.
Nevertheless, the idea that the USA is ‘fiddling while Rome burns’ is supported in an essay published by Mattea Kramer on TomDispatch on the last day of September. I’m going to end Part One by republishing the essay in full. (Note that this is being published here after the first ‘debate’ had taken place.)
Tough Talk for America
A Guide to the Presidential Debates You Won’t Hear
By Mattea Kramer
Five big things will decide what this country looks like next year and in the 20 years to follow, but here’s a guarantee for you: you’re not going to hear about them in the upcoming presidential debates. Yes, there will be questions and answers focused on deficits, taxes, Medicare, the Pentagon, and education, to which you already more or less know the responses each candidate will offer. What you won’t get from either Mitt Romney or Barack Obama is a little genuine tough talk about the actual state of reality in these United States of ours. And yet, on those five subjects, a little reality would go a long way, while too little reality (as in the debates to come) is a surefire recipe for American decline.
So here’s a brief guide to what you won’t hear this Wednesday or in the other presidential and vice-presidential debates later in the month. Think of these as five hard truths that will determine the future of this country.
1. Immediate deficit reduction will wipe out any hope of economic recovery: These days, it’s fashionable for any candidate to talk about how quickly he’ll reduce the federal budget deficit, which will total around $1.2 trillion in fiscal 2012. And you’re going to hear talk about the Simpson-Bowles deficit reduction plan and more like it on Wednesday. But the hard truth of the matter is that deep deficit reduction anytime soon will be a genuine disaster. Think of it this way: If you woke up tomorrow and learned that Washington had solved the deficit crisis and you’d lost your job, would you celebrate? Of course not. And yet, any move to immediately reduce the deficit does increase the likelihood that you will lose your job.
When the government cuts spending, it lays off workers and cancels orders for all sorts of goods and services that would generate income for companies in the private sector. Those companies, in turn, lay off workers, and the negative effects ripple through the economy. This isn’t atomic science. It’s pretty basic stuff, even if it’s evidently not suitable material for a presidential debate. The nonpartisan Congressional Research Service predicted in a September report, for example, that any significant spending cuts in the near-term would contribute to an economic contraction. In other words, slashing deficits right now will send us ever deeper into the Great Recession from which, at best, we’ve scarcely emerged.
Champions of immediate deficit reduction are likely to point out that unsustainable deficits aren’t good for the economy. And that’s true — in the long run. Washington must indeed plan for smaller deficits in the future. That will, however, be a lot easier to accomplish when the economy is healthier, since government spending declines when fewer people qualify for assistance, and tax revenues expand when the jobless go back to work. So it makes sense to fix the economy first. The necessity for near-term recovery spending paired with long-term deficit reduction gets drowned out when candidates pack punchy slogans into flashes of primetime TV.
2. Taxes are at their lowest point in more than half a century, preventing investment in and the maintenance of America’s most basic resources: Hard to believe? It’s nonetheless a fact. By now, it’s a tradition for candidates to compete on just how much further they’d lower taxes and whether they’ll lower them for everyone or just everyone but the richest of the rich. That’s a super debate to listen to, if you’re into fairy tales. It’s not as thrilling if you consider that Americans now enjoy the lightest tax burden in more than five decades, and it happens to come with a hefty price tag on an item labeled “the future.” There is no way the U.S. can maintain a world-class infrastructure — we’re talking levees, highways, bridges, you name it — and a public education system that used to be the envy of the world, plus many other key domestic priorities, on the taxes we’re now paying.
Anti-tax advocates insist that we should cut taxes even more to boost a flagging economy — an argument that hits the news cycle nearly every hour and that will shape the coming TV “debate.” As the New York Times recently noted, however, tax cuts might have been effective in giving the economy a lift decades ago when tax rates were above 70%. (And no, that’s not a typo, that’s what your parents and grandparents paid without much grumbling.) With effective tax rates around 14% for Mitt Romney and many others, further cuts won’t hasten job creation, just the hollowing out of public investment in everything from infrastructure to education. Right now, the negative effects of tax increases on the most well-off would be small — read: not a disaster for “job creators” — and those higher rates would bring in desperately-needed revenue. Tax increases for middle-class Americans should arrive when the economy is stronger.
Right now, the situation is clear: we’re simply not paying enough to fund the basic ingredients of prosperity from highways and higher education to medical research and food safety. Without those funds, this country’s future won’t be pretty.
3. Neither the status quo nor a voucher system will protect Medicare (or any other kind of health care) in the long run: When it comes to Medicare, Mitt Romney has proposed a premium-support program that would allow seniors the option of buying private insurance. President Obama wants to keep Medicare more or less as it is for retirees. Meanwhile, the ceaseless rise in health-care costs is eating up the wages of regular Americans and the federal budget. Health care now accounts for a staggering 24% of all federal spending, up from 7% less than 40 years ago. Governor Romney’s plan would shift more of those costs onto retirees, according to David Cutler, a health economist at Harvard, while President Obama says the federal government will continue to pick up the tab. Neither of them addresses the underlying problem.
Here’s reality: Medicare could be significantly protected by cutting out waste. Our health system is riddled with unnecessary tests and procedures, as well as poorly coordinated care for complex health problems. This country spent $2.6 trillion on health care in 2010, and some estimates suggest that a staggering 30% of that is wasted. Right now, our health system rewards quantity, not quality, but it doesn’t have to be that way. Instead of paying for each test and procedure, Medicare could pay for performance and give medical professionals a strong incentive to provide more efficient and coordinated care. President Obama’s health law actually pilot tests such an initiative. But that’s another taboo topic this election season, so he scarcely mentions it. Introducing such change into Medicare and the rest of our health system would save the federal government tens of billions of dollars annually. It would truly preserve Medicare for future generations, and it would improve the affordability of health coverage for everyone under 65 as well. Too bad it’s not even up for discussion.
4. The U.S. military is outrageously expensive and yet poorly tailored to the actual threats to U.S. national security: Candidates from both parties pledge to protect the Pentagon from cuts, or even, in the case of the Romney team, to increase the already staggering military budget. But in a country desperate for infrastructure, education, and other funding, funneling endless resources to the Pentagon actually weakens “national security.” Defense spending is already mind-numbingly large: if all U.S. military and security spending were its own country, it would have the 19th largest economy in the world, ahead of Saudi Arabia, Taiwan, and Switzerland. Whether you’re counting aircraft carriers, weapons systems, or total destructive power, it’s absurdly overmatched against the armed forces of the rest of the world, individually or in combination. A couple of years ago, then-Secretary of Defense Robert M. Gates gave a speech in which he detailed that overmatch. A highlight: “The U.S. operates 11 large carriers, all nuclear powered. In terms of size and striking power, no other country has even one comparable ship.” China recently acquired one carrier that won’t be fully functional for some time, if ever — while many elected officials in this country would gladly build a twelfth.
But you’ll hear none of this in the presidential debates. Perhaps the candidates will mention that obsolete, ineffective, and wildly expensive weapons systems could be cut, but that’s a no-brainer. The problem is: it wouldn’t put a real dent in national defense spending. Currently almost one-fifth of every dollar spent by the federal government goes to the military. On average, Americans, when polled, say that they would like to see military funding cut by 18%.
Instead, most elected officials vow to pour limitless resources into more weapons systems of questionable efficacy, and of which the U.S. already owns more than the rest of the world combined. Count on one thing: military spending will not go down as long as the U.S. is building up a massive force in the Persian Gulf, sending Marines to Darwin, Australia, and special ops units to Africa and the Middle East, running drones out of the Seychelles Islands, and “pivoting” to Asia. If the U.S. global mission doesn’t downsize, neither will the Pentagon budget — and that’s a hit on America’s future that no debate will take up this month.
5. The U.S. education system is what made this country prosperous in the twentieth century — but no longer: Perhaps no issue is more urgent than this, yet for all the talk of teacher’s unions and testing, real education programs, ideas that will matter, are nonexistent this election season. During the last century, the best education system in the world allowed this country to grow briskly and lift standards of living. Now, from kindergarten to college, public education is chronically underfunded. Scarcely 2% of the federal budget goes to education, and dwindling public investment means students pay higher tuitions and fall ever deeper into debt. Total student debt surpassed $1 trillion this year and it’s growing by the month, with the average debt burden for a college graduate over $24,000. That will leave many of those graduates on a treadmill of loan repayment for most or all of their adult lives.
Renewed public investment in education — from pre-kindergarten to university — would pay handsome dividends for generations. But you aren’t going to hear either candidate or their vice-presidential running mates proposing the equivalent of a GI Bill for the rest of us or even significant new investment in education. And yet that’s a recipe for and a guarantee of American decline.
Ironically, those in Washington arguing for urgent deficit reduction claim that we’ve got to do it “for the kids,” that we must stop saddling our grandchildren with mountains of federal debt. But if your child turns 18 and finds her government running a balanced budget in an America that’s hollowed out, an America where she has no chance of paying for a college education, will she celebrate? You don’t need an economist to answer that one.
Copyright 2012 Mattea Kramer
Let me close with another quote from Arnold J. Toynbee:
Of the twenty-two civilizations that have appeared in history, nineteen of them collapsed
when they reached the moral state the United States is in now.
Part Two continues tomorrow.
Promoting the thoughts of Per Kurowski.
A few days ago, I published a delightful story sent to me by Richard Maugham about Helga’s Bar. It was a tongue-in-cheek look at the crazy world of finance and banking that we seem to be living in at present.
One of the regular readers of Learning from Dogs is Per Kurowski and he left a couple of comments. The first being,
As a former ED at the World Bank, 2002-2004, living close to Washington, writing articles and being an assiduous blogger, I’ve been in the middle of many discussions about those many of the challenges our world faces. And my friend, I am sorry to say, our prospects to solve these problems, do not seem good.
One of the main reasons for that negative outlook, is that I have been able to witness how the discussion of many of these problems, no matter how urgent these are, so often get hijacked by a political agenda, or by a group that decides making a business, or a living, out of it.
If we cannot break out of this mold, unfortunately, the world is toast, and this, not only from a global warming perspective.
which was then followed up by,
By the way, I managed to sit down a prominent and important bank regulator in my chair yesterday, though he was invisible and quite silent!
I then replied,
Per, just love that. Any chance of you penning a guest post that could set the background to that video in terms that make it easy for the punter to understand?
So here is Per’s interview (sound volume is a little low) and his views.
Paul… well here is “a brief summary of my thoughts on banks and risks”
Capital requirements for banks which are lower when the perceived risk of default of the borrower is low, and higher when the perceived risk is high, distort the economic resource allocation process. This is so because those perceptions of risk have already been cleared for, by bankers and markets, by means of interest rates and amounts of exposures.
All the current dangerous and obese bank exposures are to be found in areas recently considered as safe and which therefore required these banks to hold little capital. What was considered as “risky” is not, as usual, causing any problems. This is not a crisis caused by excessive risk taking by the banks, but by excessive regulatory interference by naïve and nanny type regulators.
And, if that distortion is not urgently eliminated, all our banks are doomed to end up gasping for oxygen and capital on the last officially perceived safe beach… like the US Treasury or the Bundesbank.
Bank regulators have no business regulating based on risk perceptions being right, their role is to prepare for when these perceptions turn out to be wrong.
A nation that cares more for history, what it has got, the haves, the “not-risky”, the AAA rated or the “infallible” sovereigns, than for the future, what it can get, the not-haves, the risky, the small businesses or the entrepreneurs, is a nation on its way down.
A delightful tale sent to me by Richard Maugham.
Richard and I go back too many years! He has been a dear friend despite the obvious hurdle that when we first met, he declared that he was a typewriter salesman for Olivetti in the UK with me admitting that I was a typewriter salesman for IBM UK! Here’s the story.
WHAT WENT WRONG IN EUROPE – SIMPLY EXPLAINED!
Helga is the proprietor of a bar. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem she comes up with a new marketing plan that allows her customers to drink now, but pay later.
Helga keeps track of the drinks consumed on a ledger (thereby granting the customers’ loans).
Word gets around about Helga’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Helga’s bar. Soon she has the largest sales volume for any bar in town.
By providing her customers freedom from immediate payment demands, Helga gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer – the most consumed beverages.
Consequently, Helga’s gross sales volumes and paper profits increase massively. A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Helga’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.
He is rewarded with a six figure bonus.
At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS. These “securities” are then bundled and traded on international securities markets.
Naive investors don’t really understand that the securities being sold to them as “AA Secured Bonds” are really debts of unemployed alcoholics. Nevertheless, the bond prices continue to climb and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.
The traders all receive six figure bonuses.
One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Helga’s bar. He so informs Helga. Helga then demands payment from her alcoholic patrons but, being unemployed alcoholics, they cannot pay back their drinking debts. Since Helga cannot fulfil her loan obligations she is forced into bankruptcy. The bar closes and Helga’s 11 employees lose their jobs.
Overnight, DRINKBOND prices drop by 90%. The collapsed bond asset value destroys the bank’s liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.
The suppliers of Helga’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations; her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.
Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multibillion dollar no-strings attached cash infusion from the government.
They all receive a six figure bonus.
The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers who’ve never been in Helga’s bar……………………….!
I can add not a single word to this!
An original idea that shouldn’t be regarded as innovative.
We live in interesting times! Whenever I use that phrase, and it seems to slip from my lips too often these days, I am reminded of the ancient Chinese curse, “May you live in interesting times!“
There are a goodly number of countries that have legislation that ‘impose’ a minimum wage for employees. Here in the USA, the Federal level for 2012 is $7.25 per hour but it isn’t necessarily the same across all States. Based on a 40-hour working week, 50 weeks a year, that comes to a gross of $14,500 for the full year.
Let’s contrast that with a person who has been in the news recently, Mr. Bob Diamond, Chief Executive of Barclays.
As the BBC reported on the 2nd July,
Mr Diamond has said he will not take a bonus for this year as a result of the scandal.
It is not the first time the 60-year-old Boston-born former academic – he began his career as a university lecturer – has made the headlines.
Mr Diamond was previously best-known for his huge wealth: last year he topped the list of the highest-paid chief executives in the FTSE 100.
In 2011 Mr Diamond earned £20.9m, comprising salary, bonuses and share options, and he is reported to have a personal wealth of £105m.
There has long been controversy about the amount he earns.
In 2010, Lord Mandelson described him as the “unacceptable face of banking”, saying he had taken a £63m salary for “deal-making and shuffling paper around”.
Barclays dismissed the figure as “total fiction” saying that his salary as head of Barclays Capital was actually £250,000.
BBC business editor Robert Peston said he believed Mr Diamond had earned £6m in 2009 from a long-term incentive scheme and £27m from selling his stake in a Barclays-owned business that had been sold.
So whether he earns £20.9m, £6m or even £250,000 frankly makes no difference to the fact that the gap between what the poorest may earn and the sorts of monies that are given to Mr. Diamond and his like is just plain wrong. [And since writing this on Monday, the news broke on Tuesday morning that Mr. Diamond is now unemployed.] Don’t often quote the bible in Learning from Dogs but 2 Corinthians 8:13-15 is irresistible (King James Version),
Our desire is not that others might be relieved while you are hard pressed, but that there might be equality. At the present time your plenty will supply what they need, so that in turn their plenty will supply what you need. The goal is equality, as it is written: “The one who gathered much did not have too much, and the one who gathered little did not have too little.” [my emphasis]
SUNDAY, JULY 1, 2012
France Pushing for a Maximum Wage; Will Others Follow?
A reader pointed out a news item we missed, namely, that the new government in France is trying to implement a maximum wage for the employees of state-owned companies. From the Financial Times:
France’s new socialist government has launched a crackdown on excessive corporate pay by promising to slash the wages of chief executives at companies in which it owns a controlling stake, including EDF, the nuclear power group.
In a departure from the more boardroom-friendly approach of the previous right-of-centre administration, newly elected president François Hollande wants to cap the salary of company leaders at 20 times that of their lowest-paid worker.
According to Jean-Marc Ayrault, prime minister, the measure would be imposed on chief executives at groups such as EDF’s Henri Proglio and Luc Oursel at Areva, the nuclear engineering group. Their pay would fall about 70 per cent and 50 per cent respectively should the plan be cleared by lawyers and implemented in full…
France is unusual in that it still owns large stakes in many of its biggest global companies, ranging from GDF Suez, the gas utility; to Renault, the carmaker; and EADS, parent group of passenger jet maker Airbus.
Of course, in the US, we have companies feeding so heavily at the government trough that they hardly deserve the label of being private, but the idea that the public might legitimately have reason to want to rein in ever-rising executive pay is treated as a rabid radical idea.
From Doug’s post:
For those, however, receiving bailouts, deposit insurance, government guarantees, tax breaks, tax credits, other forms of public financing, government contracts of any sort – and so on – the top paid person cannot receive more than twenty-five times the bottom paid person. This ratio, by the way, is what business visionary Peter Drucker recommended as most effective for organization performance as well as society. It also echoes Jim Collins who, in his book Good To Great, found that the most effective top leaders are paid more modestly than unsuccessful ones. And, critically, it is a ratio that is in line with various European and other nations that have dramatically lower income inequality than the United States.
In other words, the French proposal isn’t that big a change from existing norms, at least in most other advanced economics (ex the UK, which has also moved strongly in the direction of US top level pay). But despite the overwhelming evidence that corporate performance is if anything negatively correlated with CEO pay, the myth of the superstar CEO and the practical obstacles to shareholder intervention (too fragmented; too many built in protections for incumbent management, like staggered director terms; major free rider problems if any investor tries to discipline extractive CEO and C level pay, which means it’s easier to sell than protest) means ideas like this are unlikely to get even a hearing in the US. Let the looting continue!
As Patrice Ayme commented on that Naked Capitalism article, “France will pass the 20 to 1 law, as the socialists control the entire state, senate, National Assembly, Regions, big cities, etc. Only the French Constitutional Court could stop it. That’s unlikely, why? Because one cannot have a minimum wage, without a maximum wage. It’s not a question of philosophy, but of mathematics.“
Let me go back and requote this,
…. the top paid person cannot receive more than twenty-five times the bottom paid person. This ratio, by the way, is what business visionary Peter Drucker recommended as most effective for organization performance as well as society. It also echoes Jim Collins who, in his book Good To Great, found that the most effective top leaders are paid more modestly than unsuccessful ones. And, critically, it is a ratio that is in line with various European and other nations that have dramatically lower income inequality than the United States.
Thus if society was to embrace this approach to fairness, in America the top paid person in 2012 in the USA would be on 25 times the minimum wage level of $14,500 a year or, in other words, $362,500 a year.
I’m not a raving liberal but I am bound to say that this sits pretty well with me. How about you?
As I opened, an original idea that shouldn’t be regarded as innovative.
The story that could run for an awfully long time!
I rather revealed my newness as a US resident by posting my review of David Kauders’ book The Greatest Crash over 2 days last week, one of them being Thanksgiving Day. Despite that 1,895 people viewed my review which was entitled The end of an era.
A week has now passed since that review. I was curious to see what sorts of headlines had been making the news in the last 7 days. It’s just a random trawl through those items that have captured my attention.
Let’s start with the Financial Times, November 27th,
The eurozone really has only days to avoid collapse
By Wolfgang Münchau
In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action.
Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.
Wolfgang concludes his article thus,
Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.
Then my print copy of The Economist that arrived on the 26th had this lurid cover page,
Unless Germany and the ECB move quickly, the single currency’s collapse is looming
The leader article contains this paragraph,
Past financial crises show that this downward spiral can be arrested only by bold policies to regain market confidence. But Europe’s policymakers seem unable or unwilling to be bold enough. The much-ballyhooed leveraging of the euro-zone rescue fund agreed on in October is going nowhere. Euro-zone leaders have become adept at talking up grand long-term plans to safeguard their currency—more intrusive fiscal supervision, new treaties to advance political integration. But they offer almost no ideas for containing today’s conflagration.
and a few paragraphs later, this,
This cannot go on for much longer. Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up within weeks. Any number of events, from the failure of a big bank to the collapse of a government to more dud bond auctions, could cause its demise. In the last week of January, Italy must refinance more than €30 billion ($40 billion) of bonds. If the markets balk, and the ECB refuses to blink, the world’s third-biggest sovereign borrower could be pushed into default.
Then on Sunday, 27th, MISH’s Trend Analysis blogsite reveals,
ICAP Plc, the world’s largest inter-dealer broker (one that carries out transactions for financial institutions rather than private individuals), is now Testing Trades In Greek Drachma Against Dollar, Euro
ICAP Plc is preparing its electronic trading platforms for Greece’s potential exit from the euro and a return to the drachma, senior executives at the inter-dealer broker said Sunday.
ICAP is the latest firm to disclose such preparations, joining the growing ranks of banks, governments and other key players in the global financial system whose officials are worried enough about the stability of the common currency to be making contingency plans for a possible break-up.
Investors sent Europe’s politicians a painful message last week whenGermany had a seriously disappointing government bond auction. It was unable to sell more than a third of the benchmark 10-year bonds it had sought to auction off on Nov. 23, and interest rates on 30-year German debt rose from 2.61 percent to 2.83 percent. The message? Germany is no longer a safe haven.
Ultimately, an integrated currency area may remain in Europe, albeit with fewer countries and more fiscal centralization. The Germans will force the weaker countries out of the euro area or, more likely, Germany and some others will leave the euro to form their own currency. The euro zone could be expanded again later, but only after much deeper political, economic and fiscal integration.
Tragedy awaits. European politicians are likely to stall until markets force a chaotic end upon them. Let’s hope they are planning quietly to keep disorder from turning into chaos.
Finally, on the 29th the BBC News website carried details of the Autumn Statement made by British Chancellor, George Osborne, to Parliament.
Osborne confirms pay and jobs pain as growth slows
Chancellor George Osborne has said public sector pay rises will be capped at 1% for two years, as he lowered growth forecasts for the UK economy.
The number of public sector jobs set to be lost by 2017 has also been revised up from 400,000 to 710,000.
Borrowing and unemployment are set to be higher than forecast and spending cuts to carry on to 2017, he admitted.
Just look at that figure of public sector job losses – 710,000!
Well that’s more than enough from me but it does surely endorse the opening views that David Kauders expounded in his book, as carried in my review, and reproduced here,
Starting with the first sentence, David sets out the core problem;
This book argues that it is impossible to expand the financial system much further.
expanding this a few paragraphs later,
This is the financial system limit: lack of new borrowing plus excessive weight of debt obligations from past borrowing combine to slow economies down. This is the barrier whichever way policy makers turn. It is like the lid on a boiling kettle. Enough steam can lift it for a while but it always snaps back into place. The financial system limit is a roadblock preventing growth.
A few pages later in this opening chapter ‘The roadblock preventing growth‘ this limit is explained thus,
Policy contradictions also show us that the financial system has reached a roadblock. The glaring conflict between bailout and austerity is at the core. Each bailout or stimulus requires creation of more credit, leading to false financial speculation, and for a short while markets recover their poise. The threat of inflation returns. Later, bad debts rise, the markets tumble again and a new crisis emerges. Austerity, the alternative policy, cuts spending thereby cutting the immediate level of economic activity and bringing economic decline more quickly than the stimulus alternative. Whichever way they turn, the authorities are damned.
You can understand why I called this Post a ‘footnote’ not an endnote.