Archive for March, 2011

  • Annual Report 2015

    March 31st, 2011 by ewalsh
  • The President’s Counsel on Jobs and Competitiveness … and Tax Avoidance

    March 27th, 2011 by John Fullerton

    The NY Times report by David Kocieniewski on GE’s aggressive tax strategies under the leadership of John Samuels, a former Treasury Department tax lawyer, which enabled the company to pay no income taxes to Uncle Sam on their $5.1 billion of US-based income has many >> Read more

  • Guest Post: Fitting the Name to the Name

    March 26th, 2011 by Herman Daly

    There may well be a be a better name than “steady-state economy” (SSE), but both the classical economists (especially John Stuart Mill) and the past few decades of discussion, not to mention CASSE’s good work, have given considerable currency to “steady-state economy” both as concept and name. Also both the name and concept of a “steady state” are independently familiar to demographers, population biologists, and physicists. The classical economists used the term “stationary state” but meant by it exactly what we mean by steady-state economy—briefly, a constant population and stock of physical wealth. We have added the condition that these stocks should be maintained constant by a low rate entropic throughput, one that is well within the regenerative and assimilative capacities of the ecosystem. Any new name for this idea should be sufficiently better to compensate for losing the advantages of historical continuity and interdisciplinary familiarity. Also, SSE conveys the recognition of biophysical constraints and the intention to live within them economically—which is exactly why it can’t help evoking some initial negative reaction in a growth-dominated world. There is an honesty and forthright clarity about the term “steady-state economy” that should not be sacrificed to the short-term political appeal of vagueness. A confusion arises with neoclassical growth economists’ use of the term “steady-state growth” to refer to the case where labor and capital grow at the same rate, thus maintaining a constant labor to capital ratio, even though both absolute magnitudes are growing. This should have been called “proportional growth”, or perhaps “steady growth”. The term “steady-state growth” is inept because growth is a process, not a state, not even a state of dynamic equilibrium. Having made my terminological preference clear, I should add that there is nothing wrong with other people using various preferred synonyms, as long as we all mean basically the same thing. Steady state, stationary state, dynamic equilibrium, microdynamic-macrostatic economy, development without growth, degrowth,post-growth economy, economy of permanence, “new” economy, “mature” economy. These are all in use already, including by me at times. I have learned that English usage evolves quite independently of me, although like others I keep trying to “improve” it for both clarity and rhetorical advantage. If some other term catches on and becomes dominant then so be it, as long as it denotes the reality we agree on. Let a thousand synonyms bloom and linguistic natural selection will go to work. Also it is good to remind sister organizations that their favorite term, when actually defined, is usually a close synonym to SSE. If it is not then we have a difference of substance rather than of terminology.

    Some say it is senseless to advocate a steady state unless we first have attained, or can at least specify, the optimal level at which to remain stationary. On the contrary, it is useless to know the optimum unless we first know how to live in a steady state.

    Out of France now comes the “degrowth” (decroissance) movement. This arises from the recognition that the present scale of the economy is too large to be maintained in a steady state—its required throughput exceeds the regenerative and assimilative capacities of the ecosystem of which it is a part. This is almost certainly true. Nevertheless “degrowth”, just like growth, is a temporary process for reaching an optimal or at least sustainable scale that we then should strive to maintain in a steady state. Some say it is senseless to advocate a steady state unless we first have attained, or can at least specify, the optimal level at which to remain stationary. On the contrary, it is useless to know the optimum unless we first know how to live in a steady state. Otherwise knowing the optimum level will just allow us to wave goodbye to it as we grow beyond it—or as we “degrow” below it. Optimal level is one thing; optimal growth rate is something else. Once we have reached the optimal level then the optimal growth rate is zero; if we are below that level the temporary optimal growth rate is at least known to be positive; if we are above the optimal level we at least know that the temporary growth rate should be negative. But the first order of business is to recognize the long run necessity of the steady state, and to stop positive growth. Once we have done that, then we can worry about how to “degrow” to a more sustainable level, and how fast. There is really no conflict between the SSE and “degrowth” since no one advocates negative growth as a permanent process; and no one advocates trying to maintain a steady state at the unsustainable present scale of population and consumption. But many people do advocate continuing positive growth beyond the present excessive scale, and they are the ones in control, and who need to be confronted by a united opposition! Nicholas Georgescu-Roegen, adopted by the “degrowth” movement as its posthumous founder, indeed recognized that the very long run growth rate must be negative given the entropy law and the final dissolution of the universe. But he did not advocate speeding up that cosmic result by negative growth as an economic policy, nor for that matter did he in the least advocate a steady-state economy! In fact he speculated that the destiny of mankind might be to have a short, fiery, and exciting life rather than a long and uneventful one. He did, however, tentatively suggest a “minimal bio-economic program”[1] that would surely reduce growth. In general he was interested in what is possible more than in what is desirable. The question—given the limits of the possible, what is the most desirable policy for mankind?—was not his main focus, although he did not entirely ignore it. The closest he came to explicitly dealing with that question was in the following footnote[2]:

    Is it not true that mankind’s problem is to economize S (a stock) for as large an amount of life as possible, which implies to minimize sj (a flow) for some “good life?”

    In other words, should we not strive to maximize cumulative lives ever to be lived over time by depleting S (terrestrial low-entropy stocks) at an annual rate sj that is low, but sufficient for a “good life”? There is no point in maximizing years lived in misery, so the qualification “for a good life” is important. I have always thought that Georgescu-Roegen should have put that question in bold in the text, rather than hiding it in a footnote. True enough, eventually S will be gone and mankind will revert to what he called “a berry-picking economy” until the sun burns out, if not driven to extinction sooner by some other event. But in the meantime, striving for a steady state at a resource use rate sufficient for a good (but not luxurious) life, seems to me a worthy goal, a goal of maximizing the cumulative life satisfaction possible under limited total resource constraints. This puts at the very center of economics the questions:

    Needless to say these questions have not been central to modern economics—indeed, not even peripheral! Georgescu-Roegen did not like the idea of “sustainability” any more than that of a steady-state economy because he interpreted both to mean “ecological salvation” or perpetual life for our species on earth—which of course flies in the teeth of the entropy law. And he was right about that. So sustainability should be understood as longevity, not eternal species-life in the sense of perpetuity. Clear scientific thinking about “forever” seems, interestingly, to lead to the religious model of death and resurrection, new creation, not perpetual continuation of this creation. Perpetuity in this world is just a glorified perpetual motion machine! To think about forever we must cross from science into theology. But longevity (a long and good life for both individual and species), even if it falls short of forever, or “ecological salvation”, is still a worthy goal both for scientists and theologians, not to mention economists. A steady-state economy is arguably the best strategy for achieving longevity—regardless of what we call it.

    [1] N. Georgescu-Roegen, “Energy and Economic Myths”, reprinted in H. Daly and K. Townsend, Valuing the Earth, MIT Press, 1993, p. 103-4. [2] Ibid. p. 107, fn 11. DalyHerman 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.

  • Guest Post: ‘The Toll Road to Serfdom’- Privatization Takes Us Back to the Future

    March 20th, 2011 by Peter Kinder

    In the last quarter century, states from Virginia to Colorado to California have seen privatizing roads as a great source of immediate cost savings and cash. But what do these deals mean in the long term? What effects will they have on our society? And what does the nineteenth century experience with privatized roads and bridges teach us? Penn State law professor Ellen Dannin argues in a must-read on the American Constitution Society blog (via Truthout) the states have chosen ‘The Toll Road to Serfdom’.

    Today’s deals still include … terms intended to make the toll road drivers’ only alternative. Commonly found “noncompete” terms forbid building or improving “competing” road or mass transit systems. They may also require what is called “traffic calming” but which means by narrowing lanes or making other changes to make alternative routes unpleasant or less useful. Other contract terms require that the government “partner” compensate private contractors for “adverse actions,” such as promoting car pooling to lower air pollution and urban congestion that could affect revenues. For the next 40 years, the HOT lanes contract with Transurban of Australia and Fluor Corporation of Texas requires Virginia to reimburse the private companies whenever Capital Beltway carpools exceed 24 percent of the traffic on the carpool lanes – or until the builders make $100 million in profits.

    That these deals are bad financially and environmentally is clear. But those may be the least important of their effects. In a very readable and well-documented law journal article (Crumbling Infrastructure, Crumbling Democracy: Infrastructure Privatization Contracts and Their Effects on State and Local Governance.), Prof. Dannin shows the corrosive effects of public facilities – highways, parking garages, parking meters, etc. – privatization on our political and social systems: Missing from public discussion and scrutiny have been the contract terms that make government parties to infrastructure privatization contracts the insurer of the private contractor‘s financial success. The three most commonly found provisions that can require governments to reimburse private contractors for lost anticipated revenue are (1) compensation events; (2) noncompetition provisions; and (3) adverse action. or stabilization. clauses. Failing to have a national conversation about these terms and their effects has left the public ignorant as to how these contract terms shift power over government policy and actions to private contractors. [Crumbling Infrastructure ¶15] What does a ‘compensation event’ look like? And what might its implications be? Says Prof. Dannin: DSC_0456.SycamoreOH.elevator-197x300For example, in 2008, the State of Indiana reimbursed the private Indiana Toll Road operator $447,000 for waiving tolls of people evacuated during severe flooding. Had the road not been privatized, the state would have waived the tolls and simply collected less revenue. The contract, however, put the contractor in a much better financial situation than the state, because it did not lose toll revenues. In effect, these reimbursement terms make government the contractor‘s insurer and guarantor. The terms may even create financial disincentives to government‘s taking life-saving action. That is, a state or local government that is so short of money that it must sell valuable public infrastructure has more to consider in a disaster than just saving lives. If it needs to ask how much protection it can afford, it may, on the margins, be tempted to decide against taking actions that will require reimbursing the contractor. [Crumbling Infrastructure ¶18 (footnote omitted)] The effects of the March 15 tsunami on Japan give this example an uncomfortable palpability. The implications of other aspects of public facilities privatization, Prof. Dannin shows, are equally frightening. Prof. Dannin focuses on the effects of the present on the future. She does not point out that we’ve been here before. It is only a slight exaggeration to say that the charters given private companies – for profit corporations – to provide bridges, canals, highways, etc., defined the American law of corporations from the Constitution’s adoption well into the twentieth century. For example: Charles River Bridge v. Warren Bridge, 11 Pet. (36 U.S.) 420 (1837). Reliance on private facilities for public travel led to inconveniences, at best, and extortions, at worst. This system drove an ever-increasing public outrage through out the nineteenth century. With the banks, these companies were the ‘special interests’ the Jacksonians and, later, the Populists fought. The tangible results of that long fight were the twentieth century systems of US Highways (e.g., US 40, ‘the National Road’) and Interstate Highways (e.g., I-90) free (originally) of tolls. Public facilities privatizations return us to the nineteenth century. They are, indeed, ‘The Toll Road to Serfdom’, the express lane to a past no one has ever thought was a golden age – especially those who endured it. peter_kinder Peter Kinder is a Capital Institute Board Member and a contributor to the Future of Finance Blog. As a founder and former President of KLD Risk Analytics, Peter is a highly respected pioneer in the socially responsible investment movement. To read the rest of his entries, visit The Bell blog.

  • Annual Report 2013

    March 15th, 2011 by ewalsh
  • Annual Report 2014

    March 15th, 2011 by ewalsh
  • Finally, a Discussion of Scale

    March 14th, 2011 by John Fullerton

    Adair Turner, Chairman of the FSA (the SEC of the United Kingdom) is smart, articulate, and more aware than any senior regulator or finance official currently in power on this side of the Atlantic in my judgment. His 2011 Clare Distinguished Lecture in Economics and Public Policy on Reforming Finance is worth reading. In it, he discusses three interrelated ongoing responses to the financial crisis:

    • A need to challenge the Anglo-Saxon model of financial capitalism;
    • A need to question the rising scale of the financial sector as a percent of the total economy, and the apparently related rise of inequality;
    • A need to rethink economics itself, particularly the free-market simplicities of rational expectations and the efficient market hypothesis.

    I’d like to draw attention to just one subtle but critical insight Turner raises within this sweeping 30-page lecture, namely the issue of scale. Turner is not the first to question the aggregate scale of the financial sector as a proportion of the real economy in the lead up to the crisis, accounting for over 40% of corporate profits by some estimates. This phenomenon can also be seen in the astonishing growth of derivative contracts traded, debt securitizations of numerous varieties, and importantly, the growth in financial sector debt as a percentage of GDP (bank claims on other banks), which is up by a factor of 4 since 1980. Bank balance sheets today are dominated by such claims on other financial institutions. So the question of the scale of the financial sector, and the related question of its social value, is now firmly on the table. Turner then takes the scale issue further in his discussion of financial system stability from a regulator’s perspective, beyond the stability of individual firms. “Aggregate levels of debt and leverage in the real economy, and trends in those levels, are key determinants of financial stability.” This implies that even if (or hopefully when) we resolve the problem of too big to fail banks, “the total amount of credit extended to the real economy could be larger than optimal” and further, it is “the scale of new claims itself, which might require regulatory attention.” Most importantly, he focuses this question on individual markets, the subsystems of the financial system. He declares, “we many need to regulate leverage at the contract specific level within the market, rather than at the institutional bank level. The central question being how much equity and how much leverage, but now within markets rather than within specific institutions.” His reference to “contract specific level” refers in this instance to futures contracts in financial markets, but the idea is generalizable to all markets. This is a profound breakthrough with broad implications that run far beyond the macroprudential regulation of the financial system which is central in Turner’s thinking. It is a shift to thinking about systems, rather than individual institutions. And once we understand we are dealing with systems, it is only a matter of time before we begin to ask “what system?” Just as individual markets are subsystems of the financial system, which is the focus of the FSA and other financial regulators, and just as Turner and everyone else now understands the damage that boom/bust cycles in the financial system can cause to the real economy, so too does finance and the real economy impact the social systems, the regional ecosystems, and ultimately the entire geophysical system called the biosphere, within which our economy operates. It’s all one system! Turner has introduced the notion of limits in markets, not just in firms. This is new. This is in direct conflict with our naïve notion of “free markets” and even individual freedom. If there are scale limits to individual markets, how do we impose them? Who gets what share? And if there are scale limits, how do we differentiate which activities generate the most social welfare in order to give preference to such activities? Here are some examples of the choices our financial system will need to grapple with in a world of limits:

    • Which gets preference, a pensioner’s investment in a long maturity fixed income investment or Goldman Sachs’ speculative trading interest (or any other speculator for that matter) in that same long maturity investment?
    • General Mills’ investment in wheat futures to hedge the cost of next year’s cereal production or a pension fund’s desire to “invest” in commodities as an asset class uncorrelated with their financial assets?
    • A private equity firm’s desire to tap bank debt capacity to do a leveraged buyout of a staid manufacturing firm in order to “enhance shareholder value” through outsourcing manufacturing to China or a series of small businesses needing that same bank debt capacity to fund their desire for incremental if unexciting low-margin growth in their regional markets?

    Our natural instinct is to suggest that we let market participants compete for resources. However, we already know that “competitive markets” are not really truly competitive in many instances due to information asymmetries, hidden and not hidden subsidies, and a multitude of market power distortions and externalities that have lead to all kinds of unattractive social and environmental outcomes. We will learn that in a world of limits, such distortions will only accelerate, leaving even more unacceptable social and environmental outcomes if competitive market forces are left to determine the outcomes. We know in real life the importance of discipline to manage within limits or we face “systems collapse.” Too much ice cream and we get fat and sick. Too much speculation and we undermine financial system resiliency. Too many nuclear power plants near major earthquake fault lines and we put whole societies at unacceptable risk. Too much carbon in the atmosphere and civilization faces catastrophic climate risk. Systems behave like fractals. People, firms, markets, finance, economy, society, biosphere. All are connected. By introducing the notion of scale limits in financial markets, Adair Turner has, perhaps unwittingly, invited us into a whole new level of inquiry about finance and its proper place as a sub-system of the real economy, which in turn, by the laws of physics and chemistry, not theories old or new of economics, is bound by the geophysical limits of the biosphere.