• Robert Reich has done his best to explain the problems with America's current economy in two minutes and it's definitely worth your time, especially if you haven't read his book "Supercapitalism". In this video he makes six key points:


    • Since 1980 wages for most Americans have been flat despite a doubling in American GDP
    • The wealthiest top 1% have 40% of the nation's entire wealth
    • Money=power and therefore control of the government
    • Low tax rates for 40% of our nation's wealth = huge deficits
    • Middle class is broke and in conflict as a result
    • The low purchasing power of the middle class means low employment and an anemic recovery


    Needless to say, it's an impossible task he has taken on here so it's necessarily oversimplified and if you're interested I can't recommend "Supercapitalism" highly enough.

    However, he omits a few critical points that could have made a much more impactful four or five minute video.


    • There was no description or analysis of the methods of money creation that have driven "a doubling of America's economy."
    • Americans deserve to be reminded of how fundamental natural resources are to our economy. Can they/should they be monetized, and if so who owns them and who has the right to despoil them?
    • Lastly, there were no discussions of the biophysical constraints we face as we wrestle with how to get America’s economy growing again. When economic growth leads to accelerated top-soil erosion, depleted groundwater and ever more catastrophic weather, perhaps it’s time to re-think growth.


    What would you put in a 5-minute video on today's American economy if you could? Capital Institute would love to share your video, so post a link in the comments below!

  • For some time a small group of ecological economists has been suggesting that we switch the tax base from income (value added to natural resources by labor and capital), and on to natural resources themselves. Value added to resources is something we want more of, so don’t tax it (either at each stage of production as in Europe, or at the final stage as income as in the U.S.). The resource throughput, beginning with depletion and ending with pollution (both real costs), is something we want less of in a full world economy, so let’s tax it. Even though resources in the ground and waste absorption services are free gifts of nature in the cost of production sense, they are nevertheless increasingly scarce in a full world. They need a price to be efficiently allocated and not overused. So let’s give them the needed price by taxing them, and use the revenue from the tax (or equivalent cap-auction-trade system) to substitute for the revenue lost from no longer taxing value added. The resource tax should be levied at the point of extraction (severance) so that the higher price will stimulate increased efficiency of use at all upstream stages of production, as well as in the final stages of consumption and recycling. Also depletion is spatially more concentrated than pollution, so in most cases a depletion tax is easier to monitor than a pollution tax.

    In addition to this economic argument there is a political one. People do not like to see value that they added taxed away. They resent it, even while accepting it as necessary to fund public goods. But value that no one added, the original in situ value of natural resources and services, many people think should be common property, and most people think should at least be taxed for public purposes. If there is popular resentment it is against the resource owners who receive an unearned income (scarcity rent) over and above the value they truly add to the in situ resource by extraction and purification (echoes of Henry George). Of course oil and coal companies, and other extractive industries, will resist resource taxation (they currently enjoy government subsidies in addition to scarcity rents!), even though they would be expected to legitimately pass the tax on to consumers to the extent that markets allow. It is necessary that consumers, as well as producers, also get the higher price signal and become more efficient and frugal in consumption.

     

    The resource throughput, beginning with depletion and ending with pollution (both real costs), is something we want less of in a full world economy, so let’s tax it.

     

    I have been told that we could not substitute resource taxes for value-added taxes because resource rents are a small portion of GDP while value added accounts for nearly all of GDP. You have to put the tax where the money is, I am told. But this is confusion between what is taxed and what the tax is paid with. All taxes are paid out of total income (money is fungible). But the question is, what is the tax proportional to — income or resource use? It makes much more sense for taxes to fall on resource use than on income. A resource tax falls on all citizens in proportion to their resource consumption, how much of a burden they impose on the biosphere, and not according to how much value they add to the resources necessarily extracted. Also, resource taxes are harder to evade than income taxes because, unlike resource depletion, income is not an easily measured physical quantity, but an abstract concept subject to manipulation by lawyers and accountants.

    As to the reasonable objection that a resource tax is regressive with respect to income, that can easily be remedied by some combination of the following: (a) retaining an income tax on higher incomes, (b) spending the tax revenue progressively, including by abolishing existing regressive income taxes such as the payroll tax, (c) instituting a significant and progressive inheritance tax. Some object, less reasonably, that higher resource prices due to a resource tax will put us at a competitive disadvantage in international trade. But then so does an income tax, and it is not clear that there would be any net difference between the two in raising the same amount of revenue. In fact, any internalization of environmental and social costs would also raise prices and thereby create a trade disadvantage relative to countries that did not internalize those costs. However, the first rule of efficiency is to count all costs, not to run a trade surplus based on standards-lowering competition to externalize costs.

    So why not shift the tax base from value added (earned income) and on to that to which value is added (natural resource throughput)? This would help us to count all costs and minimize depletion and pollution. It would stop penalizing the desired creation of value added by taxing it. It would reduce unemployment. It would use the revenue from natural resource taxes to substitute that from the eliminated value added taxes. The first value-added taxes to be eliminated would be the most regressive ones, thereby serving both efficiency and equity. This seems such an obvious improvement that one wonders why economists remain so in thrall to value-added taxation?

     

     Herman Daly is a professor emeritus in economics at the University of Maryland, School of Public Policy. He is a member of Center for the Advancement of the Steady State Economy (CASSE). Visit the Daly News for more essays by Professor Daly and CASSE staff.

  • - A $20 trillion “externality” appears to present civilization with its BIG CHOICE: economic destruction or ecological destruction, both with chilling global security implications.  Here’s why, along with a practical and more hopeful alternative to “Sophie’s Choice.”

    Carbon Tracker has released an illuminating report, “Unburnable Carbon – Are the world’s financial markets carrying a carbon bubble?”[i]

    The report nicely describes the potential "stranded asset risk" to resource company investors, and calls for a regulatory response on disclosure.  What the report does not make explicit is the BIG CHOICE:  Barring a miracle technology advance in the next decade (keep working brilliant scientists and entrepreneurs), if we want to avoid civilization-transforming and global  security threatening climate change, we must absorb a global security threatening $20 trillion write off (that’s 40 percent of global GDP) into our already stressed global economy.  Even if gradually spread over a decade or more, with partial offsetting value creation in sustainable energy industries, this is an unprecedented challenge. 

    First the essential facts as per the report: 

    • The Potsdam Institute calculates that in order to reduce the risk of exceeding 2 degrees Celsius warming to a 20 percent chance (not all that comforting), the global carbon budget for 2000 – 2050 cannot exceed 886 GtC02.  Minus emissions in the first decade of the century, this leaves a budget of 565 GtC02 over the next 40 years.
    • Total “proved” fossil fuel reserves listed on public company balance sheets and State reported reserves is estimated at 2795 GtC02, nearly 5 times the remaining budget, implying 80 percent of these reserves should be left in the ground. 
    • Seventy four percent of these reserves are State owned (Russia, China, Saudi, Venezuela, Iran, Iraq, etc.) or owned by private companies, 26 percent are owned by the 200 largest public energy companies.

    According to James Leaton at Carbon Tracker, the market value of the top 100 public oil and gas companies and the top 100 public coal companies listed in the report exceeds $7 trillion, approximately 12% of the global public equity market.  Making a simple assumption[ii] that State-owned companies and reserves have an equivalent market value per unit of carbon would suggest the global market value of proved fossil fuel reserves equals $27 trillion. 

    A real cap on carbon emissions designed to limit warming to two degrees implies sovereign states and public corporations will need to strand 80 percent of their $27 trillion of proved reserves.  Rounding down, this implies a potential $20 trillion write off[iii].

    The risk of systemic collapse of an already fragile, interconnected global economy is high if we incur a write off of this magnitude.  Fossil fuel intensive economies and investors would be severely damaged, no doubt triggering a deep and prolonged recession while the losses were absorbed.  Some, like Saudi Arabia where energy represents 75% of government revenues, and Venezuela (50% of government revenues) would face economic devastation leading to widespread social unrest. 

    Not surprisingly, the markets are ignoring this risk today as the Carbon Tracker report makes clear.  Why would they do otherwise when, as Bill McKibben pointed out, the US House of Representatives recently defeated a resolution stating simply that “climate change is occurring, is caused largely by human activities, and poses significant risks for public health and welfare”?  Why listen to the broad scientific consensus when we can invent a more accommodating (and remarkably partisan) physics?  No surprise that this week, American Electric Power announced that it is shelving plans for its $668-million, full-scale carbon capture plant at Mountaineer in West Virginia, the nation’s most prominent effort to capture carbon dioxide from a coal-burning power plant in the United States, “until economic and policy conditions create a viable path forward.”

    Rising fossil fuel stock prices coupled with no game-changing promise of carbon sequestration technologies (the present reality) implies the markets assume we blow past the 2 degree warming limit into catastrophic climate change.

    Is there an alternative to the BIG CHOICE between ecological destruction and economic destruction?  I think the answer is “yes,” but not with the simple happy talk of “CSR” and “growing the green economy.”  A viable plan will entail real costs, unprecedented commitment, and shared sacrifice. 

    Costs:  The seminal “Stern Review”[iv] on the economics of climate change suggests that for a range of manageable costs centered around a 1% reduction of GDP growth, greenhouse gasses can be stabilized at 500 to 550 ppm by 2050.  While this modeling exercise is highly complex, it contains at least two fundamental flaws.  First, it presumes 500 ppm is consistent with the 2 degree goal, when the scientific consensus, propelled by increasingly disturbing new evidence of climate change, is calling for a limit of only 350 ppm, what Bill McKibben calls “the most important number in the world.”[v]  And second, it appears to ignore the $20 trillion stranded asset write down and associated economic spillovers by assuming carbon sequestration capabilities will allow us to continue burning fossil fuels largely unabated. 

    I can only speculate on what portion of the $20 trillion stranded cost potential will need to be incurred.  It will depend on the success of carbon sequestration technologies (unknowable), and their cost (also unknowable).  But it will not be cheap.  Prudence suggests we should plan to incur at least half of these costs, still a profound multi-decade economic challenge.  We must also determine what combination of caps, taxes, and regulation will best manage the difficult carbon-limiting prioritization decisions among coal, various qualities of oil, and gas, and among the resource bases of sovereign states (with armies) and multinational corporations that we decide to burn, all having profound financial, political, social, and security implications.

    Unprecedented commitment:  At the core, our challenge and our greatest chance to mitigate the most horrendous consequences of the BIG CHOICE boils down to a capital allocation decision.  We must of course invest aggressively in the “green economy” of clean technologies including carbon sequestration, energy efficiency, and alternative energy.  Indeed this process has begun as documented by Ethical Market’s Green Transition Scoreboard[vi], which now documents over $2 trillion of private sector investments in, and commitments to, the “Green Transition.”  We must accelerate low technology paths such as avoided deforestation and grassland restoration[vii] to sequester carbon.  But we must also remove subsidies and divest from the destructive fossil-fuel- based energy, transportation, and industrial agriculture systems, and from the destabilizing and counterproductive speculation of the Wall Street financial system.   Only if we marshal unprecedented private and public resources to the great energy system transition can we hope to manage the BIG CHOICE.

    Shared sacrifice:  It’s time for true leadership around shared sacrifice.  This must start with the richest half billion people, less than 10% of the human race, whose consumption and investment decisions will determine the fate of civilization.  It’s time we awaken to the burden we bear.  Seeking justice, our children will ask -- What did you do, once you knew?



    [ii] This assumption is somewhat flawed because the market capitalization of a resource company should and usually does exceed the present value of its “proved reserves” because as a going concern, it is expected to create incremental value beyond its current reserves.  However, my assumption remains conservative because it also ignores all “unproved” reserves whose values are only partially reflected in company valuations, and ignores reserves held by all private companies and public companies not in the top 100 lists.  World recoverable reserves certainly exceed by a wide margin, some argue by multiples, the current quantity of “proved reserves” on the books, meaning the total potential for stranded reserves is far greater than indicated here.

    [iii] Yes this analysis ignores the potential of carbon sequestration technologies, but they are probably at least a decade away and uncertain.  It also probably overstates the sovereign value of reserves, given the widely held belief that some governments overstate their reserves for political reasons.  But it also ignores the value of many refining assets, power plants, shipping, rail, and pipeline infrastructure that will be devalued if we decide to leave fossil fuels in the ground in order to limit carbon pollution.  It ignores the value of all private and smaller energy companies.  It ignores the value to dependent governments of all associated production and consumption tax receipts associated with fossil fuels which have tremendous economic value.  And, it only achieves an 80 percent confidence that we don’t exceed the 2 degrees warming target. Overall, we believe the $20 trillion estimate of aggregate economic exposure is reasonable.

  • The debt limit negotiations are 99% political and 1% economic, so I have little directly to say about them.  But I do have some related thoughts to share as we stumble toward the deadline, with much wasted tax payer money paying for amateur hour in Washington while real challenges are left to smolder and in some cases burn.

    I was surprised to learn that Americans for Tax Reform (ATR) has been around since 1985, founded by a 20-something Grover Norquist at the request of Ronald Reagan.  I never heard of the guy until the recent debt limit debacle, which seems to have given him a nice platform, most recently with a feature op-ed in the NY Times, “Read my Lips:  No New Taxes.”

    ATR’s goal is to reduce the size of government as a percentage of GNP -- simple, clear.   Reasonable people will debate the proper scale and functions of government.  If ATR is serious, it should have two priorities in addition to wrestling with our demographics challenged entitlements spending, both missing from what I have seen:  the military budget and financial reform.  Let me explain.

    The US is the largest economy in the world.  There is no reason why we shouldn’t realize some “economies of scale” with our military might.  But for some reason, no one ever suggests that as GNP grows, our military should shrink in comparison.  Of course there are many reasons why this does not happen, but the chart below suggests there’s some room for progress.  By the way, these numbers do not include the cost of the Iraq War, and our decade-long involvement in Afghanistan, wars that Nobel economist Joseph Stiglitz estimated back in 2008 to have costs in excess of $3 trillion if one includes the life long medical obligations to our service men and women, and the interest cost on the related debt.

    Is ATR up to their stated goal?  To quote Norquist himself, “There is only one fix for a spending problem, spend less.”  The United States’ grotesquely outsized military budget is the natural place for ATR to focus.  In discussing the need for a fresh look at US military spending priorities, Bush-appointed Secretary of Defense Gates noted that the Navy’s battle fleet “is still larger than the next 13 navies combined—and 11 of those 13 navies are U.S. allies or partners.”  Go at it ATR, and don’t be mislead into comparing spending as a percent of GNP.  Look at dollars!
     

     

    Of course, Norquist is wrong when he says the only way to tackle our spending problem is to cut spending.  The second priority if one is serious about restraining the scale of government spending is to aggressively manage the risk of a catastrophic economic collapse of the nature we just experienced as a result of Wall Street’s irresponsible (and worse) behavior.

    The recession exploded the budget deficit.  That’s why we’re in the bind we’re in.  So if ATR’s goal is to reduce government spending as a share of the economy, then we should see them sitting across the table from the banks demanding much more stringent capital requirements, restrictions on liability mismatches, and demanding restructuring of the industry to truly eliminate “too big to fail”...  Where are you when we need you Mr. Norquist?  The banks are kicking our rear ends, again, setting us up for an even greater collapse when our economy is far less resilient than it once was.

    Real tax reform has nothing to do with the absurd Washington manufactured charade around the debt ceiling.  It’s embarrassing to watch.  Real tax reform must grasp the great transition our economy faces at the beginning of the Anthropocene.  ATR would do well to study Herman Daly and many other thoughtful economists’ calls for shifting the tax burden away from income (a good) and onto unsustainable resource depletion (a bad).

    An income tax on the wealthiest among us, who no doubt have benefited most from the many great opportunities this great country provides, is the exception to Daly’s proposal to shift the tax burden to resource throughput.  Given the well documented evidence that a wide and worsening wealth gap is associated with numerous social costs, and at the extreme leads to political instability, a highly progressive income tax on the top one or two percent of income earners is good for America and just.  It is for this reason that I joined the call from Patriotic Millionaires for Fiscal Strength for a tax hike on those fortunate Americans who earn more than $1 million a year.

  • Capital Institute welcomes this guest post from our first Fellow, David Nicola.  David will bring a year of Capital Institute experience to the Fuqua School of Business at Duke University where he will be studying for his MBA, while keeping his ties to us.

     

    Last week the above headline flashed across my blackberry. I was excited at first glance, thinking “finally, an article from a mainstream economist that will bring clarity to the debate about endless economic growth on a finite planet.” I was even more excited that this article appeared in the Wall Street Journal–-a bastion of the current economic paradigm, which operates under the assumption that continual, limitless growth is the only goal 21st century human beings should embrace.

    The article by John Taylor, a professor of economics at Stanford and the author of "Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis,” is a refreshingly non-partisan editorial from one of the most partisan media empires in the world. The author contends that bi-partisan, non-interventionist policies of the US government in the 1980s and 1990s were behind the much larger economic growth of that time period versus the feeble “recovery” since the 2008 crash. He also maintains that the bi-partisan “interventionist” policies of both the Bush and Obama administrations have hampered the current recovery. He concludes that if we unwind “interventionist” policies of the Bush and Obama eras that our economy will grow faster. This argument sounds plausible and most would agree that counterproductive intervention is one of the many problems our country faces. The US needs smart government, not big government. Taylor’s article, however, misses an important point when comparing, as the author deems it, the “period of unprecedented economic stability and growth in the '80s and '90s” to today. The omission of this crucial point is where my enthusiasm turned to disappointment. When comparing these two periods, Taylor’s editorial fails to recognize the importance of our planet’s physical limitations and how those boundaries affect our economic endeavors.

    The economy relies on non-renewable resources to generate economic growth. These resources are inherently limited and in a market economy the price of these resources has increased significantly as supplies become constrained. Perhaps the difference in growth between the 1980s and 1990s versus today resulted from our failure to recognize and accept these ecological limits. The elimination of government bureaucracy, while a necessary step, does nothing to address the rapid depletion of non-renewable resources that fuel our current economic endeavors.

    Oil illustrates this point most effectively, but we can also look to other resources and see a similar effect (graph). For the “two year” periods Taylor compares (1983-1984 versus 2009-2010), the differences in inflation-adjusted oil prices are negligible (graph). When looking at this data, some may conclude that my aforementioned argument does not hold water: How can oil prices help explain the difference in growth if they are similar on an inflation-adjusted scale?

    Let’s look more deeply into the data. Oil was an inflation-adjusted average of $42.42 from 1980 to 1999 (table) and $34.31 from 1983 to 1999, the exact time frame that Mr. Taylor deems the “period of unprecedented economic stability and growth in the '80s and '90s.” From 2008 to 2010 the inflation-adjusted average was $74.88 and we know that the average price of oil will only increase when 2011 data is factored in. That amounts to a 76.5 to 118.2 percent inflation-adjusted increase in the price of a single barrel of oil. Do we really think ignoring this price action, which results directly from resource constraint, has no effect when comparing these two time periods?

    Conventional economists and political leaders continually turn a blind eye to resource constraint, which has already proven, and will continue to prove, troublesome in the future. The US and the rest of the world will not be able to return to an era of “unprecedented economic stability and growth” if our current economic system, which is based on intense consumption of oil and other limited resources, continues. For the record, I do not believe it will be possible for the US to ever return to another “period of unprecedented economic stability and growth” as in the 1980s and 1990s. (You can read why visit the Capital Institute website.)

    Adding to the current pain is the Chindia effect. In the 1980s and 1990s the economies of China and India were a blip on the radar screen (China GDP chart, India GDP Chart). Now the US is competing against these giants for non-renewable resources, thereby increasing demand pressure as China and India pursue the same misguided, oil-dependent economic growth. The numbers speak for themselves: global oil demand is up 40 percent from 1980-2009 (graph). We must begin the transfer to a carbon-free economy. The US should lead the charge in this endeavor.

    Let’s also examine Taylor’s argument from another perspective. Perhaps the bi-partisan, non-interventionist tendencies of the 1980s and 1990s caused our current dilemma. The American consumer, government, and leading economist squandered an era of cheap oil by failing to reduce our addiction to this limited resource. The weak “recovery” since 2008 is an unintended consequence of failing to deal with this addiction. We traded growth in the 2008 to 2010 period, and beyond, for growth in the 1980s and 1990s. Our society refuses to see the long-term implications of these choices as politicians live from election to election and Wall Street lives from quarter to quarter.

    John Taylor clearly made a strong attempt at a non-partisan economic argument for helping the US navigate our current economic condition. However, we must strive for a different outcome -- understanding and preserving earth’s limited resources is a place to start. Instead of asking: “How can we prop up the economy in the short term?” we should ask: “How can we reduce our impact on the world while preserving resources for the future, and promoting smart and balanced economic activity?” This shift in thinking must begin with the renowned economists of the world. Realizing that our economic endeavors are grounded in the physical and biological principles of the earth will allow for a transition to a “new growth consensus.”
    Taylor’s recommendations that we should eliminate government waste and rid this country of counterproductive government “intervention” are spot on. The US, however, must go much further than this initial step. Our leaders and foremost academics should take a fresh look at reducing our reliance on limited resources and must embrace smart government action that guides our economy onto a trajectory that is in balance with the boundaries of a finite planet.--David J Nicola is a Capital Institute Fellow and a student at Duke University’s Fuqua School of Business