We have an energy problem in this country. Our government, like our businesses, looks to the next political quarter instead of the long term. A few weeks ago, President Obama spoke to reporters about the need to create a long-term energy strategy, and reduce our dependence on oil. Unfortunately, each of the last seven Presidents has said exactly the same thing. I personally defended Persian Gulf Oil in the Middle East, enforcing United Nations sanctions against Iraq, which amounted to an oil embargo. I saw the United States Fifth Fleet, based in Bahrain, up close. I can say that maintaining a base in Bahrain does not come cheap. Why do I bring this up? Our government spends a substantial amount of money subsidizing energy. Additionally, the government does not regulate carbon, which means the external costs of the greenhouse gas emissions are borne by the general public. Finally, fossil fuels have significant health impacts. Over 10,000 people a year die from the particles emitted by coal-fired plants. Additionally, hundreds of miners die quietly around the world. As we watch the nuclear calamity that is taking place in Japan, it would be wise for us to consider the role of the Federal Government in creating this energy policy, and the failure of President after President to chart a new course for the United States with regards to energy policy.
We have an elaborate electricity grid, an infrastructure that badly needs modernized. Consumers are ignorant for the most part about where their electricity comes from, they just want to be able to flip the switch and power their gear, without having to pay too much. Unfortunately, the myth of cheap energy has Americans convinced that it is our divine right to $.99/gallon gasoline and cheap electricity. Our development in sprawled across the country, and people still pine for that isolated lot with two acres and a great view. Unfortunately, without cheap energy, our house of cards will fall apart.
The Federal Government is positioned to help bring our country into the 21st Century. First of all, our electricity infrastructure needs updated. One agency that has a big role in the energy sector is the Federal Energy Regulatory Commission (FERC). FERC has jurisdiction over interstate electricity transmission, through the Public Utilities Regulatory Policy Act (PURPA). FERC is attempting to build new, modernized high power transmission lines for renewable energy; however, they face opposition at both the state level as well as from utility trade groups like the Coalition for Fair Transmission Policy. The commission represents utilities that want to make sure the costs of those lines are borne by the folks getting the power. Ultimately, between NIMBY concerns over siting new lines, and fights over who will pay, these are many obstacles to creating a new infrastructure capable of empowering large-scale clean energy production. The Federal Government can also nurture decentralized, local renewable power generation through policies like Feed-in Tariffs.
With energy consumption in transportation, our sprawled development is problematic. Government needs to encourage smart growth, as it will pay dividends on lowering per capita energy consumption. For example, in Southeastern Massachusetts, a commuter rail line is being designed to consider smart growth when planning station locations. However, transportation consumption revolves around the automobile. The Obama administration did a good job of getting automobile manufacturers to support a significant increase in CAFE standards. While it is not as progressive as Europe or Asia’s standards, it is still a significant improvement over Bush policies, and the rare effort that is supported by all stakeholders. One long-term issue for our transportation sector is what fuel will be used, and the infrastructure to use it. Right now we are invested in a gasoline infrastructure. Electricity is a more sensible step, but the authors here advocate for hydrogen. Hydrogen would require a significant investment in infrastructure; additionally, as a fuel, to provide the range expected of modern consumers, it must be highly pressurized – making it very difficult to use as a transportation fuel, especially in automobiles. Whatever route we go, it will be incumbent on the Federal Government to work with stakeholders to build the infrastructure necessary to support whatever becomes the ‘new’ fuel.
Ultimately, the main hurdle to the Federal Government charting a long-term energy policy is political will. President Clinton hit the third rail when he proposed a Carbon tax early in his first term. Both parties define prosperity around energy consumption. The Democrats frame clean energy development as “Green Jobs” but haven’t challenged the Republican Party, or the American people, to seriously confront climate change, peak oil, or the various external costs of fossil fuels. The myth of cheap energy goes on. As it does, so does the piecemeal Federal energy policy, from President to President.
On the cover of the paperback version of George Akerlof and Robert Schiller’s Animal Spirits, the blurb, from Time’s Michael Grunwald, is “Animal Sprits [is]… the new must read in Obamaworld.” In March of 2011, two years after President Obama took office and Animal Spirits was first published, it is clear that the President and his economic team were reading from this playbook. However, it is also clear that the President missed an opportunity to communicate to the public why he took the actions that he did. As the United States moves forward in a so-called jobless recovery, and divisiveness and friction rule across D.C. and the country, our economic policy is hobbled and scattershot. Support for the American Recovery and Reinvestment Act has wavered in the last two years, and the public’s drop in support killed any political will for more stimulus spending. The public apprehension and political failures are ironic, actually, because in Animal Spirits, Akerlof and Schiller write about an earlier misinterpretation of Keynesian economics, during the Great Depression.
In 1936 John Maynard Keynes’ The General Theory of Employment, Interest, and Money was published. Keynes charted a course between classical economists that argued that less regulation would allow private markets and rational actors, via the famous ‘invisible hand,’ to create jobs, and socialists that argued for the state to direct the economy. Instead, Keynes took issue with the idea that only rational actors governed the economy; he believed that noneconomic, non-rational, animal spirits actually caused involuntary unemployment and economic fluctuation. The government should not be too authoritarian, like the socialists argued, but it should also not be too permissive, like the classical economists argued. Unfortunately, in an effort to create consensus with classical economists, supporters of Keynes removed most of the animal spirits, hoping that they could convince the broad public as quickly as possible to adopt Keynes’ fiscal policy prescriptions (just like President Obama allowed political expediency to rule his economic platform). Unfortunately, this watered down theory was vulnerable to critique by neo-classical economists like Milton Friedman. The central thesis of Akerlof and Schiller’s book is that these animal spirits, cast off in the midst of the Great Depression, remain a prime cause of our contemporary economic difficulties. In fact, these ideas have emerged once again in the field of behavioral economics.
There are five animal spirits that the authors resurrect from The General Theory:
1) Confidence, the trust and belief that leads rational actors to make some irrational decisions, which amplifies business cycles
2) Fairness, often pushed to the backburner in economic textbooks, often trumps economic concerns and impacts both wages and prices
3) Corrupt Behavior and Bad Faith, economic activity with sinister motivation, was clearly evident in the recent economic crisis and recession, but can be clearly traced back through all of the major economic bumps in our past
4) Money illusion, disavowed by neo-classical economists like Milton Friedman, remains a contemporary concern as people continue to be confused about the impact of inflation and deflation
5) Stories, the narratives we create to describe human experience, often seem true and nurture speculative bubbles (like the housing bubble) until the bubble pops and the story changes
In the aftermath of the global economic shock, when many of the great economies of the world continue to stumble towards recovery, Akerlof and Schiller’s analysis is perfectly timed. They clearly trace the impact of these animal spirits on the economy, from the Great Depression through the stagflation of the 1970s, through the recessions and the Savings & Loans crises of the 1980s, the recession and the tech bubble of the 1990s, and finally to the Enron debacle, the housing bubble, and the jobless recoveries of our recent past. Akerlof and Schiller are true Keynesians; they appreciate the power of the free market to create economic opportunity, but they also appreciate the damage that these animal spirits can make in the economy. The vast neo-classical deregulation that started in the 1970s and continued through the last decade did not take into account these Animal Spirits, and the vast economic turmoil was the result.
Confidence is one of the most important animal spirits – it leads ‘rational actors’ to what Federal Reserve Chairman Alan Greenspan described as “Irrational exuberance.” If one looks back to the stock market of the 1890s or the 1920s, or the tech and housing bubble of our recent past, confidence is clearly evident. Remember in 2004 when some of your friends said that housing prices could never fall? That is confidence gone astray, irrational exuberance. That is also a story that we all told each other, which seemed irrefutable logic, until it wasn’t.
Fairness has a big impact on unemployment. The neo-classical theories about how a labor market would clear itself revolve around wage efficiency, the idea that employers will pay the lowest wage and employ as many people as possible. Unfortunately, the labor contract is more complicated than that, and the transaction only starts when the wage is agreed upon. Schiller and Akerlof show that wages vary a great deal, and employers often pay more than they need to, to secure a motivated and skilled workforce. Fairness affects both the employer and the employee. The wage that workers deem fair is almost always above the market-clearing wage; this ensures that wages will remain sticky even during economic downturns, despite the fact that the ranks of the unemployed grow.
Money illusion also impacts wages; neo-classical economists argue that there is a Natural Rate of unemployment, but wage rigidity is partly due to the fact that people are largely unaware of the impact of inflation or deflation on their purchasing power. A survey they conducted with a group of economists and a second group representing the general public shows the money illusion clearly: reacting to the statement “I think if my pay went up I would feel more satisfaction… even if prices went up as much,” 90% of the economists disagreed, while 59% of the general public agreed. Fairness and money illusion clearly affect the setting of wages, behind the scenes of economic logic. Akerlof and Schiller argue that we should “fire the forecaster,” and forget, once and for all, the myth that capitalism is pure. They argue that safeguards must be built to protect the general public from the excesses of capitalism. They also make clear that the stories that we tell each other are often irrational and exaggerated, and we must be protected from these exaggerations.
Like I mentioned above, it is clear the Obama Administration used Animal Spirits as a playbook in their efforts to prevent the economy from falling into a Depression. Schiller and Akerlof advocated the use of the Discount window, as well as other provisions taken by both the Federal Reserve as well as the Treasury Department to prop up the banks. To their credit, they also predicted that “the injections may make the banks richer, and therefore less likely to become insolvent, but they will not necessarily lend more money.” As a result, the Government ended up taking extraordinary measures to ensure that money was available for mortgages and loans.
Ultimately, the actions taken by the Administration fell short of what Keynes, or Schiller and Akerlof would advocate. The stimulus was insufficient, and the government did not act aggressively enough to regulate the banks. But like the Gulf Oil spill last summer, I think the biggest loss was the failure to take advantage of the moment to educate the General Public of the external costs of our capitalist economy. If a better effort were made to explain to the general public the Animal Spirits, how they impact the economy, and the logic of the stimulus and TARP, our response could have been more sustained, more consistent, and less contentious. Keynesian economics could have stepped into the clear light of day, but instead the lessons of these animal spirits and their impact on the economy remain lost to much of the general public. Because the problem of Too Big To Fail was not confronted, we will undoubtedly once again be in a position to deal with the consequences of leverage and risk that these global institutions create.
The 2011 Academy Awards, hosted this year by acting ingénues James Franco and Anne Hathaway, was an attempt by the Academy of Arts and Sciences to reach out to a new, younger audience. By that measure, the Academy failed miserably, reaching 12% less viewers in the 18-49-age bracket. Ultimately, the Academy’s strategy, to reach all audiences at once, was baldly transparent and ineffective. The projected image of Bob Hope, who produced the funniest lines of the night, represented the Academy jumping the shark.
While The King’s Speech, a film about a British monarch overcoming a speech impediment, took the biggest honors of the night, the most competitive and interesting race was for Best Documentary. Presenter Oprah Winfrey said that, “It has never been more important for us to see these stories to help us try to make some sense of the world we live in.” Five strong films entered, including Sebastian Junger’s Restrepo and Josh Fox’s Gasland. Inside Job, Charles Ferguson’s searing inquiry into the roots of the financial crisis, took the Oscar. As Ferguson accepted his Oscar, he started by saying, “Forgive me, I must start by pointing out that three years after our horrific financial crisis caused by financial fraud, not a single financial executive has gone to jail, and that’s wrong,”
One can’t help but think that JP Morgan Chase (JPMC) foresaw Inside Job’s victory and the speech by Ferguson, as no less than four times during the Oscar broadcast, their “New Way Forward” commercial appeared, promoting JPMC as a key driver of our ‘recovery:’
Conveniently, JPMC released their annual 10-K financial statement one day after the Oscars, so we can put their claims in perspective. In 2010, JPMC held just over $50 Billion in wholesale commercial loans to United States businesses, a significant drop from their commercial commitments in 2007 and 2008. While they are committed to making $10 Billion available to small businesses, that doesn’t mean that they will actually make the loans. Additionally, their offer of a second review seems reminiscent of the situation when you aren’t getting the assistance you need on the phone and ask to speak with a customer service representative’s manager. Why is this process necessary, and what does it actually offer to the small businessperson? More importantly, why are small businesses having trouble getting access to money in the first place?
The quandary over small business loans goes to a larger question: what did the bailout of our financial institutions, through the Troubled Asset Relief Program (TARP) and FED actions, accomplish, if we don’t yet have a strong recovery? After the financial crisis the Federal Reserve and the Treasury Department bailed out many of our largest banks, including investment banks, through funds from TARP and through access to cheap money from the discount window at the FED. Many of the banks were overleveraged, and these programs allowed them to recapitalize. In essence, the government allowed these banks to repair their balance sheet by printing money, and forcing the public to take the loss through devalued currency. The actions in late 2008 and early 2009 by Hank Paulson, Ben Bernanke, and Tim Geithner certainly prevented a collapse of our banking sector. The TARP program remains universally unpopular, despite reports that even losses from loans to AIG won’t top $14 Billion, a significant drop from earlier estimates.
During the last few years, banks like JPMC and Goldman Sachs have made tidy profits and made tidy bonus payments, but that hasn’t necessarily translated into an economic recovery. We have stronger banks, but not a stronger recovery. The Excess Reserves of Depository Institutions (EXCRESNS) is a valuable lens with which to view this quandary. In 2009, after nearly 50 years of being near zero, meaning that banks lent out as much as they could based on their reserves, the data jumps to hockey stick proportions. You don’t have to believe me, you can see the data yourself on the FED’s website. Many banks are standing pat on reserves that they could be lending.
While JPMC isn’t actually saying much in their Oscar ad, they do sound earnest and committed to a recovery. I wonder how much that ad cost? JPMC paid to lobbyists $6.2 Million in 2009 to help make the Dodd-Frank Financial Reform Bill to their liking. What if JPMC lent that money out to small businesses in 2009, instead? In retrospect, I think the Oscar voters missed out on an award-winning acting performance by JPMC.
What can key an economic recovery? Lets look at the stimulus efforts to date, made up of both tax cuts and direct government expenditures. John Maynard Keynes argued that both tax cuts and government spending would help to increase the GDP, but that government investments were far more effective, driving a more powerful Keynesian multiplier. In essence, the expenditures recycle themselves more directly into the economy and have a larger impact, whereas tax cuts are often put into savings or used to pay off debt meaning that less money gets recycled back into the economy.
Republicans often argue that tax cuts ‘pay for themselves,’ relying on the unsubstantiated and discredited ‘Laffer curve;’ for example, the Republican House does not require tax cuts to be paid for in regards to the deficit. With Republican governors continuing to reject direct government stimulus, as Wisconsin and Florida governors recently did with high-speed rail money, this means that our efforts to stimulate the economy will still hurt the deficit, but they will not be very effective.
However, the recent ‘Obama’ tax cuts, the extension of the Bush tax cuts including those on the top 2% of wage earners, amounts to Supply Side economics redux. Capital gains cuts are similar in their effect to tax cuts, as the windfalls go to wealthy taxpayers who won’t spend the money immediately. Supply Side economists argue that by reducing tax rates and eliminating regulation, businesses will be able to hire more workers, and increase the GDP. To date, after many rounds of tax cuts for businesses, unemployment (and more importantly, underemployment) remains high. Looking at the big picture, the actions of our government in response to the financial crisis is a bit like the Academy – trying to please a lot of different audiences at once, without delivering a clear, concise, and effective message.
Marjorie Kelly, in her book The Divine Right of Capital, constructs a bold critique of the role that stockholders play modern corporations. She compares stockholders to the aristocratic feudal lords of yore, who made rent on “assets” into perpetuity without lifting a finger. Instead, Kelly argues that both the employees who work to create corporate wealth, and the communities that provide the resources necessary to create that wealth, should earn a larger share of the wealth. Kelly examines the framework of the corporation as it was first conceived, how the corporations in the United States were initially granted state charters to only serve the public good, and how that public purpose was eroded in our courts. Examining the state of affairs today, Kelly concludes that all players, including stockholders, CEOs, Wall Street firms, and even you and I, are all complicit, but no one is guilty:
“We fool ourselves if we think we can find the enemy somewhere. Our anger at the system leaves us like the farmer in The Grapes of Wrath, who when his farm was repossessed couldn’t find anyone to shoot. There isn’t anyone to shoot. The problem is our internal maps, and rethinking those can require some vilification of outmoded views. But we must remember that we’re vilifying the value system of wealth discrimination – not the wealthy themselves. Respect for the right to attain wealth is integral to the American psyche.” (Kelly 99)
Kelly is absolutely right here; we all operate based on the internal maps, with their arbitrary assumptions and logic, to try to make a good life for ourselves. Certainly, when one examines the litany of shenanigans that occurred in the recent financial crisis, it is easy to spot villains like Bernie Madoff; when reading deft accounts of the crisis, like Michael Lewis’s The Big Short, it is easy to ask how our economic game could be rigged as it is, and how we could have been so blind to the massive speculative bubble that would take down the global economy. However, Lewis’s narrative is perhaps the most relevant to Kelly’s critique here, because the 20 or so people that saw the asset bubble for what it was were outliers, consistently critiqued by the establishment. Their mental models were slightly off from the mainstream, most memorably Michael Burry, the one-eyed medical school graduate who was obsessed with the stock market from the age 12, and built a successful stock-picking blog that he wrote in the wee hours as a resident into his own hedge fund. However, the majority of operators in our economy are simply following the rules of the game, to the best of their ability. The idea of the American dream, which is echoed whenever a mother tells a child, ‘you can do anything you want,’ is a critical part of the American psyche. Kelly is attempting to shift our mental models, so that we can see that our current paradigm doesn’t quite live up to the ideals of that American Dream; we are not the ‘Land of Opportunity’ we think we are.
Kelley identifies a critical fault in the current paradigm: the idea that shareholders ‘own’ the company, and the companies they own are required to maximize shareholder return above all other concerns. Employees, who’s knowledge and ideas create the wealth of the 21st century, should under that paradigm be paid as little as possible. However, Kelly brings a different mental model to bear:
“The principle is simple: efficiency is best served when gains go to those who create the wealth. Thus, instead of aiming to pay employees as little as possible, corporations should distribute employee rewards based on contribution – while recognizing that in any humane social order, a living wage is the basic minimum. Likewise, corporations might aim for a decent minimum stockholder gain but drop their focus on maximum gain. The legitimate goal is reward based on contribution. Since the contribution of stockholders has shrunk dramatically, their gains should shrink also. It simply defies market principles to continue giving speculators the wealth that employees create.” (Kelly 108)
In light is the recent Global Financial Meltdown, it is helpful to consider what role those speculators played in the inflating asset bubbles, and the growth of subprime mortgage bonds into the dominant investment vehicle between 2005-7. But step back for a moment and consider what would have happened if the rising productivity of the last decade were not entirely bequeathed to stockholders, but if employees got their share? What if communities, instead of giving tax breaks to draw corporations like Boeing to move, instead received their share, and invested it in our crumbling infrastructure and public schools? In short, both individuals and communities would bear some of the fruit of their own industry. The system would be more efficient, and given the recent speculative disasters, we certainly wouldn’t be any worse off.
Kelly, Marjorie. The Divine Right of Capital. San Francisco: Berrett-Koehler, 2003. Print.
In the United States, the concept of the American Dream is accepted as the natural state of order, in which citizens are not tied down by caste, class, or family background, but can go as far as their ambition, initiative, hard work, and discipline will take them. The growth of the American economy throughout the 19th and 20th Centuries provided opportunities that inspired immigrants the world over to travel to Ellis Island, and nurtured the development and dominance of capitalist economies around the world. John Rawls, philosopher and author of A Theory of Justice, wrote in 1971 that:
“No one knows his place in society, his class position or social status, nor does anyone know his fortune in the distribution of natural assets and abilities, his intelligence, strength, and the like. I shall even assume that the parties do not know their conceptions of the good or their special psychological propensities. The principles of justice are chosen behind a veil of ignorance. They are the principles that rational and free persons concerned to further their own interests would accept in an initial position of equality as defining the fundamentals of the terms of their association.” (Rawls)
Rawls echoes the idea of the American Dream, that in a free, capitalist society, justice is opportunity, through the effort put forth by individuals, to improve their station in life. Rawls believed that each individual should have a right to the maximum amount of liberty, but that any economic inequality should be arranged so that they are the greatest benefit to the least advantaged members of society. In short, Rawls was egalitarian, consistent with the concept of the American Dream.
After the fall of the Berlin Wall and the dissolution of the Soviet Union, economists like Francis Fukuyama, who wrote The End of History and the Last Man, argued that an unending era of prosperity and peace under capitalism was upon us. However, despite the rapid growth of capitalism during the last 50 years, and despite the end of the Cold War, inequality continues to grow globally. In the United States, the percentage of total income that went to the top 1% of Americans increased from 8.9% in 1976 to 23.5% in 2007. In 2007, the combined net worth of the Forbes 400 Wealthiest Americans was $1.5 Trillion, while the combined net worth of the poorest 50% of American households was $1.6 Trillion (IPS). Globally, the Gini Index, which measures the degree of income inequality in countries, shows that the level of global inequality is very high, and has risen during the last four decades (Anand). This global inequality brings into question the concept of justice espoused by Rawls, and embodied in the idea of the American Dream. What is it about capitalism that precludes equality?
Successful countries have advantages over developing countries that include superior educational institutions, superior and patented technology, and greater capital that allows for economies of scale and efficiency of production. These same advantages hold true when you look at income groups instead of countries; even in the United States, the ‘land of opportunity,’ the son of a Harvard educated investment banker has significant advantages over the daughter of a working class family. A recent examination by the New York Times of the epidemic of law school graduates, unable to find work and saddled with debt, featured a telling quote:
“Many Thomas Jefferson [School of Law] students are either immigrants or, like [Michael] Wallerstein, the first person in their family to get a law degree; statistically those are both groups with generally little or modest means. When [Beth] Kransberger [Associate Dean of Students at Thomas Jefferson] meets applicants engaged in what she call ‘magical thinking’ about their finances, she advises them to defer for a year or two until they are on stronger footing. ‘But I don’t think you can act as a moral educator,’ she says. ‘Should we really be saying to students who don’t have family help, No, you shouldn’t have access to law school? That’s a tough argument to make.’” (Segal)
The problem experienced by Mr. Wallerstein and many other law school graduates is a lack of capital; he overleveraged himself, with the American dream that he would get a job in a high-powered law firm. Unfortunately, he made a bad bet. John Perkins, author of Confessions of an Economic Hit Man, has written about the systematic overleveraging of developing nations through massive loans from the International Monetary Fund and the World Bank; like Mr. Wallerstein, those developing nations, such as Panama and Indonesia, were not positioned to undergo the kind of economic development that took place in the United States. They are inherently at a disadvantage, and stunted by the game that is capitalism. Unfortunately, the equality that Rawls proposed is not fundamental in our global economic system. The American Dream, and by extension our globalized economy, is inherently rigged towards those that are already successful.
Anand, Sudhir and Paul Segal. “What Do We Know About Global Income Inequlity?” University of Oxford, 2006. PDF. Worldbank.org. January 12, 2011, Web.
The Institute for Policy Studies (IPS). “Inequality By the Numbers” wealthforcommongood.org, November 2009, PDF. January 12, 2011, Web.
Rawls, John. A Theory of Justice. Cambridge: Belknap, 1999.
Segal, David. “Is Law School a Losing Game?” New York Times, Jan. 8 2011. Nytimes.com, Jan. 12 2011, Web.
As the last two years of the Obama Administration have made clear, crafting effective policy is complicated, difficult, and divisive; the proverbial comparison of the process of crafting laws with that of making sausage still rings true. However, the challenges which our President confronted in the first two years of his Administration, health care reform chief among them, pale in comparison to ‘Mount Sustainability,’ as Interface, Inc. CEO Ray Anderson likes to call the change required to make our consumption patterns, and more broadly, our lifestyles, sustainable. Sustainability is not an academic exercise; as the throughput of resources in our economies continues to grow, as those resources become more scarce, and as the ability of the Earth’s ecosystems to provide services like fresh water and carbon sinks diminishes, we are confronted with a huge challenge: in a world of inequality, how do we craft policy that will help to move us onto a path of sustainability?
In the United States today, environmentally friendly choices are framed as the “Green” thing to do. However, Americans like to frame these decisions around choice; each individual is free to make their own choice, to live their own lives as they see it. As a result, sustainably-minded businessmen and policymakers provide information to consumers, and empower them to make their own decisions. Companies like Seventh Generation make the case that their products are the better choice because they use less toxic chemicals, or use recycled materials. The growth of these types of products, and the efforts of multi-national companies to begin to “Green” their products is undoubtedly a good start. However, when it comes to toxic chemicals and the harm that they have on human lives, there is much disagreement. It becomes difficult for the consumer to know what the responsible decision is, for their family’s health, for their community’s watershed, for their planet. We don’t fully understand the impact of certain carcinogens, or products like cellular phones, on long-term human health. As Barry Schwartz writes, too much choice can confuse consumers, and make them feel unsatisfied:
“So whereas a life without any freedom of choice would not be worth living, and whereas giving people choices enhances their freedom and their welfare to some degree, it appears not to be the case that more choice means more freedom and more welfare. Indeed, a point may be reached at which choice tyrannizes people rather than liberating them. And we may be at that point. The significant implication of this news, both for individuals andfor policy makers, is that even if wealth is a proxy for freedom of choice, it does not follow that wealth is a proxy for well-being.If well-being is what we ultimately care about in setting social policy, we will have to look elsewhere. And if we cant assume that we can make people better off just by giving them more to choose from, we can no longer avoid addressing difficult questions about what enhances human welfare by throwing options at people and letting them find their own answers.”
Schwartz argues for a kind of “libertarian paternalism,” whereby consumers would face simple choices, with information about the impact and benefit of each decision. Clear and common-sized information about the impacts of our economy and our consumption on resources is certainly needed. For example, water and fossil fuel use could be provided for each product sold on the marketplace, in a standardized, visible format. Communities should mandate home energy inspections which provide consumers with a clear indication of the costs of their resource use, where resources are being wasted, and how investments in insulation and more efficient systems could help consumers save money over time. States and cities should publicly finance installation of renewable energy systems, so that the long term cost and benefit of those systems can be passed onto a new homeowner when a house is sold.
Efficiency is not enough, though. As resources become more scarce, there will be economic pressure on consumers to reduce their consumption. People will eventually have to live closer to their workplace, and to live more simply. Today, when many Americans still believe that exponential growth is a guaranteed right, it is difficult to get them to make decisions and investments for the long term. The challenge to policy makers is to change that paradigm. It is not enough to simply be more efficient, we need to maximize the benefit we get from the resources we have. Consumers need to realize that the choices they make today will impact the way we live in the coming decades, and the world that their grandchildren will inherit.
This Monday morning, I have one thing on my mind: coal. Tennessee Ernie Ford’s Sixteen Tons is ringing through the air:
“I was born one mornin’ when the sun didn’t shine
I picked up my shovel and I walked to the mine
I loaded sixteen tons of number nine coal
And the straw boss said “Well, a-bless my soul”
You load sixteen tons, what do you get
Another day older and deeper in debt
Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store”
Why am I thinking about coal, you might ask? It is not just Ford’s sweet voice. In the December issue of The Atlantic, James Fallows examines efforts in China and the United States to create “clean coal.” To many environmentalists, that is a dangerous oxymoron. You probably saw this ad, filmed by the Coen Brothers:
That ad was in response to ads like this, from General Electric:
Well, on one hand you have folks that say clean coal is impossible. On the other hand you have General Electric saying that “coal is looking more beautiful every day.” Who is right? Well Fallows’ article gets to the heart of that question. He identifies some of the basic math that makes coal inescapably part of our immediate energy future:
“Precisely because coal already plays such a major role in world power supplies, basic math means that it will inescapably do so for a very long time. For instance: through the past decade, the United States has talked about, passed regulations in favor of, and made technological breakthroughs in all fields of renewable energy. Between 1995 and 2008, the amount of electricity coming from solar power rose by two-thirds in the United States, and wind-generated electricity went up more than 15-fold. Yet over those same years, the amount of electricity generated by coal went up much faster, in absolute terms, than electricity generated from any other source. The journalist Robert Bryce has drawn on U.S. government figures to show that between 1995 and 2008, “the absolute increase in total electricity produced by coal was about 5.8 times as great as the increase from wind and 823 times as great as the increase from solar”—and this during the dawn of the green-energy era in America. Power generated by the wind and sun increased significantly in America last year; but power generated by coal increased more than seven times as much.”
An article today in the New York Times shows that China’s hunger for coal has now resulted in coal imports from Australia, the United States, Indonesia, Canada, Columbia, and South Africa; new mines are even being planned in Washington State. Fallows interviewed Ming Sung, a geologist who worked in the United States for many years for the Department of Energy and Shell Oil, and now works in China for the Boston-based Clean Air Task Force:
“People without a technical background think, ‘Coal is dirty! It’s bad, but will you turn off your refrigerator for 30 years while we work on renewables? Turn off the computer? Or ask people in China to do that? Unless you will, you can’t get rid of coal for decades. As [U.S. Energy Secretary] Steven Chu has said, we have to face the nightmare of coal for a while.”
Sung’s Clean Air Task Force is working to create partnerships between American and Chinese businesses to develop new technologies like underground coal gasification (UCG). Here is a description of UCG from the CATF:
“UCG processes coal where it lies, eliminating the environmental hazards of mining. In the process, coal is converted into a syngas through partial oxidation, creating the same reactions as surface gasifiers. The syngas generates “feedstocks” for several products, including electric power, chemicals, liquid fuels, hydrogen, and synthetic natural gas. UCG allows for extensive pollution control and costs less to construct and operate than equivalent plants using surface gasifiers. The process has the potential to greatly enhance energy security, environmental sustainability, and economic competitiveness.”
In the United States, only one UCG plant is being constructed, the Texas Clean Energy Project, in Odessa, Texas. However, in China, the development is occurring much faster. In fact, development in all areas of energy research is occurring much faster:
‘In the search for “progress on coal,” like other forms of energy research and development, China is now the Google, the Intel, the General Motors and Ford of their heyday—the place where the doing occurs, and thus the learning by doing as well. “They are doing so much so fast that their learning curve is at an inflection that simply could not be matched in the United States,” David Mohler of Duke Energy told me. “In America, it takes a decade to get a permit for a plant,” a U.S. government official who works in China said. “Here, they build the whole thing in 21 months. To me, it’s all about accelerating our way to the right technologies, which will be much slower without the Chinese. “You can think of China as a huge laboratory for deploying technology,” the official added. “The energy demand is going like this”—his hand mimicked an airplane taking off—“and they need to build new capacity all the time. They can go from concept to deployment in half the time we can, sometimes a third. We have some advanced ideas. They have the capability to deploy it very quickly. That is where the partnership works.”’
So lets go back to the beginning. How do we create a sustainable future, with sustainable energy consumption? There are a lot of perspectives out there; I see them every day. I happen have faith in the potential of nuclear power, whereas some of my colleagues would sooner eradicate nuclear power and rely on solar and wind. The geologists and businessmen in Fallows’ article believe that coal is inescapably part of our future. Who is right?
In part, I suppose, it depends on how you envision energy consumption developing, globally. Coal, natural gas, nuclear power, and oil provide the majority of our energy today. To stop using them, and rely exclusively on wind, solar, geothermal, and other developing clean energy possibilities, will require us to consume energy locally instead of systemically, and it will require us to reduce the scale of our consumption significantly. More importantly, to get there, it will require time, energy, and financial investments on a significant scale. Additionally, it will require a sea change in the way we live. Alternatively, the people in Fallows’ article look for a game changing technology that will create a ‘clean coal.’ Similar to those efforts, Bill Gates and others are looking to the next generation technology of Travelling Wave Reactors (TWR), which promise to produce almost zero waste with lower costs, a significant progression from 1960s nuclear energy technology. The big problem in following either path seriously is that like our political gridlocks, we face ideological inflexibility in developing climate solutions. Fallows identifies the problem we face in America:
“But China’s very effectiveness and dynamism, beneficial as they may be in this case, highlight an American failure—a failure that seems not transient or incidental but deep and hard to correct. The manifestation of the failure is that China is where the world’s “doing” now goes on, in this industry and many others. If you want to learn how the power plants of the future will work, you must go to Tianjin—or Shanghai, or Chengdu—to find out. Power companies from America, Europe, and Japan are fortunate to have a place to learn. Young engineers and managers and entrepreneurs in China are fortunate that the companies teaching the rest of the world will be Chinese. The deeper problem is the revealed difference in national capacity, in seriousness and ability to deliver. The Chinese government can decide to transform the country’s energy system in 10 years, and no one doubts that it will. An incoming U.S. administration can promise to create a clean-energy revolution, but only naïfs believe that it will. “The most impressive aspect of the Chinese performance is their determination to do what is needed,” Julio Friedmann told me. “To be the first, to be the biggest, to have the best export technology for cleaning up coal.” America obviously is not displaying comparable determination—and the saddest aspect of the U.S. performance, he said, is that it seems not deliberate but passive and accidental, the product of modern America’s inability to focus public effort on public problems. “No one in the U.S. government could ever imagine a 10-year plan to ensure U.S. leadership in solar power or batteries or anything else,” Joseph Romm, a former Department of Energy official who now writes the blog Climate Progress, told me. “It’s just not possible, so nobody even bothers to propose it.” The Chinese system as a whole has great weaknesses as well as great strengths. Its challenges, as I have reported so often in these pages, make the threats facing America look trivial by comparison. But its response to the energy challenge—including its commitment to dealing with the dirty, unavoidable reality of coal—reveals a seriousness about facing big problems that America now appears to lack.”
The reality is that we need to look to everything: we need to reduce our energy consumption, become more efficient, increase the development of wind and solar, and pursue new technologies like UCG and TWR. With growing energy consumption globally, with the coming age of electric vehicles, we will need to have all of the solutions we can get our hands on. There is no one Holy Grail here. We need strict environmentalists to work with climate change denialists, and everyone in between, to increase investment in new technology, to increase efficiencies, to guard precious resources like rare earth metals, and to reduce the throughput of energy and resources in our economy. We need to get over our disagreements and find common ground, pronto. Clean coal? I am willing to embrace the possibility.
Are we at war with Islam? George W. Bush, author of the “War on Terror,” said this about some American statements critical of Islam, way back on November 13, 2002, after a meeting with UN Secretary General Kofi-Annan:
“Some of the comments that have been uttered about Islam do not reflect the sentiments of my government or the sentiments of most Americans. Islam, as practiced by the vast majority of people, is a peaceful religion, a religion that respects others. Ours is a country based upon tolerance and we welcome people of all faiths in America.”
The current controversy over the so called “Ground Zero Mosque” shows that the sentiments of a vocal minority of Americans are not so welcoming of Islam. They may claim that they only oppose the Islamic Center being built on “hallowed ground,” but you see Americans protesting mosques all over the country. Is that just NIMBY? Or, do they have a problem with all Mosques and Islam?
When you have Christians in Florida creating a Burn the Quran day on September 11, it is hard not to see a War on Islam from this vocal minority. The danger of this rhetoric is that it may be feeding the radical minority of jihadist Muslims from groups like Al Queda. By grouping those extremist few with the global Islamist whole, the rhetoric may be helping the radicals recruit and fundraise. The Wall Street Journal, bastion of Rupert Murdoch, seems to agree. They quoted independent terrorism consultant Evan Kohlman of Flashpoint Partners saying “We are handing al Qaeda a propaganda coup, an absolute propaganda coup.”
In the same breath, those that view President Obama as a secret Muslim without a birth certificate feed into the same rhetoric. It shows an America that is intolerant of religious freedom, despite our Bill of Rights and our Constitution. This whole “controversy” is a disgrace. David Brooks has an excellent column today in the New York Times, where he talks about the “underlying” problem in America:
“In this atmosphere, we’re all less conscious of our severe mental shortcomings and less inclined to be skeptical of our own opinions. Occasionally you surf around the Web and find someone who takes mental limitations seriously. For example, Charlie Munger of Berkshire Hathaway once gave a speech called “The Psychology of Human Misjudgment.” He and others list our natural weaknesses: We have confirmation bias; we pick out evidence that supports our views. We are cognitive misers; we try to think as little as possible. We are herd thinkers and conform our perceptions to fit in with the group. But, in general, the culture places less emphasis on the need to struggle against one’s own mental feebleness… There’s a seller’s market in ideologies that gives people a chance to feel victimized…To use a fancy word, there’s a metacognition deficit. Very few in public life habitually step back and think about the weakness in their own thinking and what they should do to compensate. A few people I interview do this regularly (in fact, Larry Summers is one). But it is rare. The rigors of combat discourage it. Of the problems that afflict the country, this is the underlying one.”
Unfortunately, American attitudes towards Islam are often wrongheaded. Before the Iraq War, most Americans did not know the difference between a Shiite and a Sunni, let alone a Sufi Muslim. We tend to view Islam through the lens of the Iran Hostage Crisis, Al Queda, and the violent historical intersections between the minority of extremist Muslims and American foreign policy. If we are really so serious about the Constitution that we inherited, and the freedoms encapsulated in the Bill of Rights, we need to reaffirm those freedoms by respecting Islam and the Muslim community in America.
- Protests, Rhetoric Feed Jihadists’ Fire (online.wsj.com)
Yesterday in the Times Japanese Professor Norihiro Kato reflected on the news that China recently overtook Japan as the World’s second biggest economy. Surprisingly, Kato reacted with “relief,” as if a “load [was] off my shoulders.” In fact, he calls the new Japanese reality a maturity:
“The rest of the world’s population is still exploding, and we are coming to see the limits of our resources. The age of ‘right shoulder up’ is over. Japan doesn’t need to be No. 2 in the world, or No. 5 or 15. It’s time to look at more important things, to think more about the environment and people less lucky than ourselves… Freshly overtaken by China, Japan now seems to stand at the vanguard of a new downsizing movement, leading the way for countries bound sooner or later to follow in its wake. In a world where limits are increasingly apparent, Japan… may well reveal what it is like to outgrow growth.”
Some economists, those of the ‘right shoulder up,’ neo-classical province, would argue that limitless growth is possible, especially if you remove all regulation and government interference. These neo-classical economists do not recognize limits, they do not account for the stock of natural resources that is blindly being used. Of course, Kato points out that in Japan the new 20-somethings are revolting against the old logic of limitless growth. He calls them non-consumers, frugal, savers. Will the United States follow Japan?
Inevitably, yes. Japan is mired in deflation, where “consumer demand has become so weak – and deflationary expectations are now such the norm – that the economy seems no longer to respond to such monetary tools.” Sound familiar? Interest rates are at record lows here in the United States, and the economy is responding sluggishly, if at all. Economists are arguing that the era of inevitably rising house prices is over. That housing wealth was the engine for the nacent growth in the past decade. With health care costs continuing to rise, our current economic model is unsustainable.
Of course, when you consider looming resource limits, where oil, minerals, and even fresh water will become more scarce and more expensive, and you have a recipe for a sea change. The old guard will continue to argue for exponential growth, but sooner or later, the kids won’t buy the same tired argument.
- China Overtakes Japan as No. 2 Economy (time.com)
- Op-Ed Contributor: Japan and the Ancient Art of Shrugging (nytimes.com)