Category Archives: Economics

Green Gone Wrong: Or, Why We Can’t Buy Our Way Out of Global Warming

Green Gone Wrong, written by journalist Heather Rogers, is an expose of the green industry–organic food, carbon offsets, electric cars and their ilk–from the left. The author’s argument can be shaped like this:

Global warming is a real threat. Something needs to be done. But most of what’s being done under the guise of green isn’t solving the problem. In fact, it’s actually obscuring real solutions.

Take the hybrid car. CO2-spewing internal combustion engines  in cars have been replaced by hybrid electric engines, which at face value is a good thing. Score one point for the greens. But research has shown that Prius drivers actually drive farther, up to 25% more, once they own a hybrid. When people feel like they’re using less gas per mile, they often compensate by driving more miles. Net-net: They often end up using a similar amount of petroleum as they did when driving a car with an internal combustion engine.

And that leads to the book’s main point: The green industry as we know it is based on consumerism–switching from dirty products to green products–when in fact what we should be doing from an ecological standpoint is using less. That’s not a laine that goes over well in board rooms, and understandably so. The incentives of green capitalism, a term that Rogers uses throughout the book, are misaligned with what actually needs to be done to reduce atmospheric carbon in hopes of reversing–or at least stabilizing–climate change.

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Filed under Book Review, Economics, Green, Science

Paul Krugman to World: Look Out!

For the past few months, I’ve been watching the growing debate among economists and policymakers trying to make sense of which direction the economy is going. Is inflation what we should be worried about? Or is it deflation? If the latter, it’s high time to begin the austerity measures, slashing spending and paying down debt; if the former, slashing spending and paying down debt is the last thing we should do. Instead, it’s all stimulus all the time until the paddles jolt this global economy back to life.

People are divided on this one. Earlier this month (and July is still a few minutes away here on the West Coast, so bear with me), The Economist’s Buttonwood blogger wrote that a forum on The Economist’s website was turning up a solid 50/50 split on the issue. This last weekend, however, the G20 met in Toronto, with most leaders showing a lot more fear that inflation is the real bogeyman. (And needless to say, the opinions of G20 finance ministers matter a hell of a lot more than people commenting on The Economist’s finance blog.)

So what did they decide? Well, not much, it turns out. Chastened by the Greece finance crisis, European leaders pushed for an assault on debt, while Barack Obama and Tim Geinther warned against stopping stimulus efforts too early. In the end, the parties walked away with an “agreement” to pursue deficit reduction at their own pace, and efforts to ensure that governments continue to pump money into their economies went nowhere. On the global stage, it appears that the arguments of Republicans carried the day, though those arguments were certainly aided by the horrific debt scenarios facing countries like Britain and Spain.

Flat is the new up.

How you responded to this probably says a lot about your political affiliation, though if you believe the stock market (it plunged early this week), this wasn’t the right move. Writing in his weekly New York Times column, David Leonhardt described the G20’s move as a “dangerous social experiment” by taking a play out of the 1930s handbook (more on that in a moment) and hoping it turns out differently. By withdrawing stimulus efforts simultaneously, the world’s leading economic powers are moving in lockstep, but potentially in a direction that will take wind out of the economy’s sails when it least needs it, and without the evidence that the private sector is able to pick up the slack.

And that brings us to Paul Krugman (talk about burying the lede). Krugman has been banging the stimulus drum for months, arguing that the number one thing we cannot do right now is to turn our focus to deficit reduction when the economy is still hobbling along. He’s made the case that Franklin Roosevelt turned too quickly to tackling the deficit after the economy turned around in the mid-1930s, only to push the company into a second recession and stretch the Depression into a decade-long event. Only World War II saved us from that one. In his column this week, after weeks of prior columns warning of a Japan-style “lost decade” and debating critics who have chided him for ignoring the threat of long-term deficits, he pulled out his trump card–he warned that we’re entering a depression.

When the most recent winner of the Nobel Prize for Economics tells you that we’re entering only the third depression in U.S. history, your ears should perk up. Krugman starts his column thusly:

Recessions are common; depressions are rare. As far as I can tell, there were only two eras in economic history that were widely described as “depressions” at the time: the years of deflation and instability that followed the Panic of 1873 and the years of mass unemployment that followed the financial crisis of 1929-31.

Neither the Long Depression of the 19th century nor the Great Depression of the 20th was an era of nonstop decline — on the contrary, both included periods when the economy grew. But these episodes of improvement were never enough to undo the damage from the initial slump, and were followed by relapses.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

The real threat isn’t inflation; it’s deflation. With unemployment rates at levels that were unthinkable only two years ago, the private economy lacks sufficient demand to maintain steady growth. Tamping down on deficits now–which here in the U.S. will likely be done by slashing benefits for the unemployed–borrows from the present to give to the future, and the future won’t exist, so to speak, if we can’t get the economy working again now. It’s hard for us to get our heads around how deflation works (I just had to look it up to make sure I was describing it right), but the truth is that it happens. Japan has been in a deflationary trap for over two decades. Home values in Japan are still less than they were 20 years ago. While price drops for overvalued assets–and I think housing in America is still overvalued–may not be an inherently bad thing, at a certain point it begins to feast on itself.

Paul Krugman

Krugman has taken a lot of flak from folks like Michael Kinsley, and not unjustly, for his continued argument that when it comes to government spending in a recession, we can spend now and pay later. That seems counter-intuitive, especially when we got into this mess due to people applying “spend now, pay later” to overpriced homes and vacations to Mexico paid by home equity loans. But when we’re talking on a global scale, it’s different. If I put off buying a new TV and sock that money away in a savings account, that’s a personal financial virtue; but when it happens across an economy, we get a decline in GDP unless someone can step in to fill the gap.

And that’s what we’re talking about now–keeping enough money flowing in the system so that it doesn’t fall apart. It doesn’t need to happen forever, and at some point we’ll change gears to tackle the debt before inflation takes over. But if we make our move too early, we might end up getting sacked rather than threading the pass for a first down. Sometimes patience–and a steady hand at the tiller–pays off. If anything, it beats having a Third Depression.

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