Hours and Gases

A few years ago, the Sandwichman started wondering why nobody paid attention to the energy intensity of employment. People talk about "decoupling" GDP from energy consumption but not about decoupling work. I guess the explanation for that is that there are no half-full hourglasses there to crow about -- they're all more than half empty and getting emptier.

Just yesterday I was headed to work and thinking about social accounting when the idea struck me of a "cap and trade" for hours of work. Without getting too pedantic the basic idea would be to set some aggregate "lump of labor" target, divide that figure by the adult population and then allocate the resulting number of hours credits to each adult.

Voila! Full employment! People who didn't want to work so many hours -- or at all -- could sell their hour credits to workaholics and so on. No need for a minimum wage because the price of the hour credits would set a floor for wages. Who would want to work for less than they could get by selling their hours credits to some high-paid person?

What would be the point? Getting back to the matter of the energy intensity of employment, the data show very little improvement for the U.S. over the last 30 years or so. Globally, the energy intensity of employment in 2006 was about 5% higher than it was in 1980. That means it takes about 5% more energy to power each job and of course the number of jobs has to increase roughly proportional to population. So things are not improving relatively, they're getting worse faster.

In terms of greenhouse gases, there has been a modest improvement in the U.S. over the last 20 years in emissions per hour of work. If I may put it crudely, in 2011, the average worker emitted about a ton of GHGs per week compared to about 1.12 tons in 1990. Of course the workers didn't emit the GHGs but when you look at the historical relationship between hours and emissions it's easy to get that impression. There is a very strong correlation between hours of work and GHG emission -- stronger than the correlation between population, labor force or GDP and emissions. Here's a little chart I cobbled together to illustrate:

What I see when I look at that picture is a red line (GHG emissions) that is more strongly attracted upward by the blue line (aggregate hours of work) than downward by the green line of emissions per dollar of GDP. In fact, I don't think it would be going out on a limb to say that greenhouse gas emissions are virtually yoked to hours of work.

David Rosnick of the Center for Economic Policy and Research wrote a report last month on Reduced Work Hours as a Means of Slowing Climate Change. David mentions the difficulty of reducing work hours "in an economy where inequality is high and/or growing." In his paper, he assumes that "the gains from productivity growth will be more broadly shared in the future..." and envisions taking more of those productivity gains as leisure rather than as increased consumption. He also, of course, assumes that there will be productivity gains to be taken as leisure.

Although I would agree with David's intention, his assumptions are wishful thinking. During World War II, the U.S. government rationed consumer goods. There is nothing unprecedented about the idea of rationing the privilege of emitting greenhouse gases into the atmosphere. It's  just commons sense.

Overwhelming Senate Support Not to Tax Fat Profits

Sahil Kapur reports on more disappointing news from the U.S. Senate:

Thirty-four Democratic senators joined every Republican Thursday night in voting for a nonbinding budget amendment to repeal the law’s 2.3 percent sales tax on medical devices. It passed 79-20 — a victory for the powerful device industry, which has raised hell over the tax … While opponents of the fee contend that it’ll stifle innovation and cost jobs, supporters argue that it’ll have a minimal effect on employment or manufacturing, and that the device industry wasn’t singled out.

I’ve seen those “studies” that claimed that the Medical Device Excise Tax (MDET) would stifle jobs. These studies were not even worth space over at the National Review. And I doubt the tax would affect employment or production that much. What it would likely do is to cut in the profits of companies like Medtronic and Johnson & Johnson. I just looked at both of their Annual Reports. Note MDET applies only to US sales and is a 2.3% on a constructive price which is tax law speak for the intercompany price between the manufacturing division and the wholesale distribution division. My guess is that the Big Four hacks representing the large medical device companies will argue that the constructive price = 50% of sales while the IRS will argue that it should equal 70% of sales. Not to get into the technicalities here but let’s assume they settle at 60% so the effective tax rate = 1.4% of sales. Medtronics had $16.2 billion in sales last year with $8.9 billion being domestic sales. So let’s assume they paid $125 million in MDET. Its profits before taxes were $4.1 billion of which they paid only 17.5% in income taxes (more transfer pricing games). So MDET represents an increase in taxes that is less than 3% of profits. Johnson & Johnson had about $12 billion in US sales of medical devices so its MDET would be around $170 million. Its profits before taxes were $13.8 billion of which they paid only 23% in income taxes. MDET represents an increase in taxes that is only 1.2% of taxes. But hey – the Senate will not stand for taxing the fat cats!

Cyprus, Taxes, and Russian Transfer Pricing

The Russian government is irate over the proposal to levy a tax that is almost 10 percent on Cyprus bank deposits:

For years, Russian firms -- both private and state-run -- have been using Cyprus as a tax haven. Attracted by a corporate tax rate of 10% -- half that of Russia's -- Russian investors have funneled money into Cyprus shell companies since the early 1990s. The money is then repatriated through investments in Russian ventures. Cyprus is actually the leading source of foreign investments into Russia, according to data from the Russian central bank. The tax-dodging scheme is similar to ones used by corporations and individuals from a host of nations in tax shelters worldwide.

What is this tax dodge? Paul Krugman points us to a Financial Times post:

This link occurs through CIS [Commonwealth of Independent States] commodity-based shell companies that deposit transactional balances of their CIS-based legal subsidiaries engaged in oil, mineral, and metals exports, often involving transfer pricing and other tax minimization strategies.

It’s interesting that some of the Big Four accounting firms had recent trainings on the new Russian transfer pricing rules Cyprus of all places. I noted a few years ago that transfer pricing related to Russian oil exports was a big deal. The Russian government has never been all that adapt at enforcing its transfer pricing rules so it is of no surprise that a lot of Russian companies have shifted income into Cyprus, which is a low tax jurisdiction. What this new tax effectively does is to raise the tax rate on these offshore funds. Russia should be less upset with this proposal and more aggressive at stopping this transfer pricing manipulation.

Who Got Iraq's Oil Ten Years After the War Started?

As of the 10th anniversary of the beginning of that war the answer is China, defnitely not the US, irony of ironies.

While the war was still in full swing, I used to post a lot about the details of what was going on in the oil sector in Iraq, possessor of the fifth largest oil reserves in the world.  Most of those posts date back to when MaxSpeak was operating as the predecessor of this blog, with them unfortunately largely inaccessible, although I did sometimes here on Econospeak as well.  In any case, this anniversary seems an appropriate time to revisit that issue.  I shall strut a bit and note that most of what is true now, I called from soon after the war started and largely held to as the situation progressed, with a few minor  amendments needed, mostly having to do with Kurdistan.

Many readers of this blog, and many very sophisticated and knowledgeable observers around the world, Juan Cole being just one example, argued from the beginning and occasionally still argue, that the war was "all about oil," or more precisely, the control of Iraqi oil.  I argued that this was not the case at the proximate level, that it was about George W. Bush proving that he was more of a man, a Ronald Reagan even, than his father, who did not have the balls to go to Baghdad like Dick Cheney and other hawks wanted.  But at a higher level, oil was very much the ultimate root of it because Bush, Sr. fought the first Gulf war due to there being so much oil there.  He and the Saudis were afraid that Saddam was not going to stop in Kuwait, but was going to go for the whole oil well by rolling down the coast into Saudi Arabia to get al-Ghawar, by far the largest pool in the world.  However, once Saddam was not only stopped from doing that, and was also pushed back from Kuwait and its large Burgan pool, there was no need to go to Baghdad since Saddam provided a useful balance to Iran, an argument made by the Saudis to both him and his son, although the son would ignore that advice, only to end up with a very pro-Iran regime in power after the war.

As it was, while there were neocons like Wolfowitz who seemed to be more concerned about Saddam's support for the Palestinians, and others who were worked up about possible links to al-Qaeda, and of course even more worked about the non-existent Weapons of Mass Destruction, there was at least one member of the administration who fit the image seen by those who thought that the war was really All About Oil, and immediate control of Iraqi oil by US oil companies.  That would be then Vice President Dick Cheney, who also played on the fears about al-Qaeda.  We still do not know what went on in the meeting Cheney had with oil company executives soon after the Bush administration came to power.  Maybe they discussed Iraq; maybe they didn't.  But Cheney clearly had in mind that US oil companies would get to make money in Iraq, and his own company Halliburton certainly made lots of money from the war, if not directly from the oil sector in Iraq.  In any case, the fact that the US military went out of its way not to damage the Oil Ministry building in Baghdad in the initial invasion led many to think that this plot of Cheney's was what was key, although this was also consistent with the Paul Wolfowitz delusion that the Iraqis themselves would pay for the war like the Kuwaitis had for the first Gulf war out of their oil revenues, which most definitely did not transpire.

A curious thing at the time, despite this push by Cheney, is that the major US oil company executives did not in general join the war whooping that was going on then, and even expressed some cautious reservations.  They foresaw disruption in the world oil markets and feared possible repercussions on their activities in other parts of the world.  They were right about that, although it turned out that for quite a few years they made money from those disruptions, which included most significantly a major collapse of Iraqi oil production, which led to much higher oil prices and thus higher oil company profits.  When I pointed all this out years ago, some commented that this proved that the conspiracy by them and Cheney was successful and that this is what they plotted.  I do not know really what the oil company execs thought would happen, but I do not think this was what Cheney had in mind, who I am reasonably certain saw them at least getting preferential treatment on oil contracts, if not some more direct ownership or control of the Iraqi oil industry, none of which has remotely come to pass.  And to the extent the oil motive was mentioned by anybody in the Bush administration, it was to "guarantee secure oil supplies" and thus to keep the price of oil down, not to push it up, thus harming voting American consumers.

So, more precisely, what has happened, and how do I need to modify my study and predictions about the oil sector in Iraqi Kurdistan?  For what is the situation in the main non-Kurdish part of Iraq, let me quote from an article in yesterday's (March 18) Financial Times, "Hottest ticket in town cools for western groups," by Guy Chazan:

"When Iraq held its first round of postwar oil licensing in June 2009, groups such as ExxonMobil, Royal Dutch Shell and BP flocked to Baghdad for what was one of the most eagerly anticipated events in the oil industry calendar.
At the fourth round last May, none of them bid.
The poor attendance epitomizes a general disenchantment with Iraq's oil sector...the widely predicted bonanza for western oil companies in postwar Iraq has failed to materialize.
Political instability, poor contractual terms and infrastructure bottlenecks have sharply reduced the country's appeal to Big Oil.  Many companies have shifted their attention to the semi-autonomous Kurdistan region, angering Baghdad."
Among those very recently has been ExxonMobil, the biggest of all the US oil companies, indeed, the biggest US company period.
In non-Kurdish Iraq, the biggest players by far are CNPC and PetroChina, both of China.

Which brings us to the question of Kurdistan.  I am one who accurately warned of many of the bad things that happened in Iraq as a result of the invasion when it happened, although not all of them (not going to dredge through that whole list here).  One item I did not forecast that has turned out to be more or less a good thing, and not much mentioned in the current discussions, is what happened in the Kurdish region.  In contrast with the rest of Iraq, the Kurdish region is reasonably well governed and reasonably prosperous, and certainly in much better condition than when Saddam was oppressing and gassing its citizens, although there are problems and the ongoing possibility of the region getting into war with the rest of Iraq.

One of the sources of its prosperity is its growing oil industry.  While all of this is declared to be illegal by the central Iraqi government, the Kurds have been arranging deals and contracts with foreign oil companies.  In the beginning while the war was still going on, although largely finished in the Kurdish region, most companies stayed away due to the declarations from Baghdad.  Small foreign companies made the deals, such as ones from Norway and Canada.  The one US company in there was Hunt Oil, which raised some hackles at the time as one of the senior Hunts was on Bush's Foreign Intelligence Advisory Board, which led many to conclude that he was using inside information to decide that the US government was going to support the Kurds against Baghdad in the end, not something that was officially stated US policy at the time.  Nevertheless the deals have continued.

Where I was wrong was that I did not foresee that eventually even Big Oil would follow, that the central Iraqi government simply never would get it together sufficiently to cut deals with western Big Oil, although some deals were made, with the large Rumaila field being co-developed by BP along with CNPC.  But most, particularly the US majors, never really got in there.

As it is, most of the US majors are still not going into Kurdistan, but with ExxonMobil breaking the ice, I shall not be surprised if we now start to see some others getting in where they previously feared to tread, and Chevron is now joining the rush as well.  There is no question that the Kurds are a lot easier to deal with than the bunglers in Baghdad.  And other major companies and operators are in there as well, including companies that were operating in Iraq under Saddam from France and Russia, such as Total SA and Gazprom Neft.

So, there you have it.  The big winners in the oil industry in Iraq are the Chinese, followed by the old Saddam era operators from France and Russia, along with upstarts from Norway and Canada.  The US companies are only now beginning to get any pieces of the action, but not in the largest producing areas in the main parts of Iraq, but in the one part of Iraq that clearly can be said to be in better shape now than prior to the US invasion, the semi-autonomous Kurdish region of Iraq that was not on anybody's radar screen before as a major possible oil producing region.  I am quite certain this is not what Cheney either expected or hoped for.

Income, GDP Growth and Double Counting

The last time I saw Jonathan Rowe was in October, 2010. I was on a writer's retreat at the Mesa Refuge in Point Reyes, California and Jonathan dropped by to borrow the pick-up truck. We got into one of those intense conversations you can only have with someone who has cared and thought long and deep about the things you have cared and thought long and deep about.

Jonathan died on March 20th of the following year. On a Saturday he came home from the gym with a fever. The fever got worse so he went the hospital. Sunday morning he died.

Last week, when I heard that Jonathan's book, Our Common Wealth, was out, I ordered a copy right away. Then I searched around on the web and pinched a galley proof so I wouldn't have to wait for the shipping. I was especially eager to read Chapter 12, "Accounting for Common Wealth" and Chapter 17, "Reallocating Time."

Back in 1995 Jonathan was one of the co-authors of an Atlantic Monthly article, "If the GDP is up, Why is America Down," a great riff on the title of Richard Fariña's novel, Been Down So Long, It Looks Like Up To Me. I don't usually hoard old magazines – in fact, I rarely even buy magazines. But I still have that October 1995 issue of the Atlantic.

Jonathan's article explained a lot of what's wrong with the economy and what's wrong with economics: "Once you start asking 'what' as well as 'how much' -- that is, about quality instead of just quantity -- the premise of the national accounts as an indicator of progress begins to disintegrate, and along with it much of the conventional economic reasoning on which those accounts are based."

Governor Christie Selling the New Jersey Lottery Off Cheap

John Celock reports on another controversy in New Jersey:

Organized labor is attacking New Jersey Gov. Chris Christie's plan to privatize the state lottery with a new ad that began airing statewide on Monday.

I’ll let Governor shouts a lot do battle with this labor union as we focus on the long-run finances of this deal. The AP reports:

New Jersey is considering privatizing the state's lottery in a move that could bring the state $120 million up front….The contract to run the New Jersey Lottery, the 8th-largest in the country, would begin as early as March 2013 and last until 2029. It would be a gamble for the company. The more the lottery brings in, the higher percentage of the income the company would be able to keep. But if income projections are not met, the company would have to pay a penalty. The state estimates that a company could make more than $1 billion over the life of the contract. It's not clear how many of the New Jersey Lottery's 150 employees would lose their jobs. But the state estimated that expenses would drop to $13 million a year from the current $37 million.

Another discussion notes:

The single bidder was a joint venture composed of GTECH and Scientific Games International — two lottery operating companies — and the Ontario Municipal Employees Retirement System, a large pension fund … Beginning in August, the Treasury sought proposals for a company to oversee the lottery’s sales and marketing operations. The winning company would have to pay $120 million up front and follow a state law that requires at least 30 percent of lottery revenues to be paid to the state’s social and educational programs. In exchange, the company could take as much as 5 percent of the lottery’s net income … The lottery took in $2.7 billion of revenue in the last fiscal year – about $313 for every resident of the state – with $950 million of that going to support state social and educational programs.

$120 million up front is all the state government gets? $10 million per year for 17 years discounted at 4% is approximately $120 million. This is an exchange for a lottery program that generates $2.7 billion in revenue. OK – profits will be a lot less than revenues but these stories still suggest the joint venture may get $50 million a year in profits. Why does this remind me of the privatization of toll roads? A few years, I wrote about the Indiana plan to privatize its toll roads. I still think Daniel Gross got this controversy right:

What's in it for the foreign companies? Huge potential profits. Gigantic, steady profits. Toll roads are an incredible asset class … According to Cintra, the Indiana Toll Road generated $96 million in revenues in 2005, and Cintra expects a 12.5 percent internal rate of return on its investment. The heavy lifting has already been done: The state or federal governments have acquired the land and rights of way, built the roads and maintained them for years, and enacted toll increases. All the private companies have to do is deliver cash upfront, maintain the roads, and collect the windfall.

The essence of his argument is that what the state received upfront from the private company that purchased these rights was far below the present value of future states receipts. Is Governor Christie playing the same fraudulent accounting with New Jersey taxpayers than Governor Daniels may have pulled in Indiana? Sure – the current state deficit falls but only at the expense of losing even more in future state revenues. And the beneficiaries will be the private companies that were allowed to rip the state off in these deals sanctioned by these Republican governors.

The Spin on Tires

It would be nice to have economic literacy in journalism.  Take this morning’s story in the New York Times about a pair of tire factories in Amiens.  One is managed by Dunlop; its workers agreed to a schedule of constantly shifting workweeks and shift work, and it is still operating.  The other is managed by Goodyear.  There the workers rejected the disruptive schedule, and the factory is shutting down.  The comparison is presented as a morality tale, where the responsible workers, recognizing the new demands of productivity and competitiveness in a globalized economy, did the right thing, while their obstinate counterparts, representative of all that’s wrong with France, preferred heroic self-annihilation.

Reading the article, I couldn’t help but think that this analysis of The Real Reason the French Economy is Sputtering was there all along, looking for a story to attach itself to.

But an economist might ask a few simple questions.  First, what is the elasticity of the total production cost of a tire with respect to the changes in work hours?  I realize the reporter wants to emphasize the symbolism, the importance of workers bending to the employer’s will as a virtue in and of itself, but perhaps there is a factual dimension worth looking into.  Just a suggestion.

Second, what is the market for these tires?  In particular, who if anyone will pick up the market share being abandoned by Goodyear?  Is this about outsourcing of a portion of tire production to lower-cost producers in developing countries?  Or is it about a shrinking domestic market that no longer needs the output of both plants?  Or some combination of the two or something else?

In particular, it is interesting that both factories, despite their different nameplates, are owned by the same company, Goodyear Dunlop.  Thus, this story describes a consolidation.  The very least an enterprising journalist can do is to inquire into the company’s overall capacity.  Is it cutting back elsewhere in Europe?  Are they shifting production geographically?  Is it possible that they might want only one operation in Amiens in any case, and that the only result of the contest over worker concessions is which plant it will be?

All of this is speculative, because I don’t know the tire market in France.  That’s what I would want to learn from a newspaper story, a rather long one at that, on the subject.  This might also help me understand why the US, where few workers are unionized and none have the will or ability to resist whatever schedule is dictated to them, is not blanketed in tire factories.

Incidentally, there has been a ton of research in the past decade documenting the health effects of exactly the sort of work schedule being imposed at Dunlop.  It is associated with significantly elevated levels of a wide range of diseases; arguably it represents the single greatest occupational safety and health threat experienced in developed countries.  An informed journalist might want to weave that into the story too.

Old and New Keynesian Economics and Abenomics, or: Does the Phillips Curve of Japan Look Like Japan?

Flipped around, of course, and with the kink at the zero inflation rate level.  That is what some Abenomics supporters appear to believe in the new drive to push the Japanese economy from its current deflationary state into an inflationary one, and both Old and New Keynesian models seem to support this, although the OK view thinks that the PC is downwardly sloping in the longer run, while the NK view seems to go with the PC going vertical once Japan gets into positive inflation territory, or, more specifically, a clear yes to the full question.

These are my thoughts on discussing the matter with various folks and listening to some papers at the 17th conference of the Japan Association for Evolutionary Economics at Chuo University in Tokyo, from which I am planning to return home tomorrow.  A leading voice for the OK view is Toichiro Asada, incoming prez of the association and an old associate of the Bielefeld School of macroeconomics, which includes such people as Peter Flaschel, Carl Chiarella, Reiner Franke, Willi Semmler, and some others, most of whom only visit Bielefeld from time to time.  They are arguably somewhat Post Keynesian, but they mostly eschew that label, being more mathematical than most PKs, and Asada is calling himself here and now an Old Keynesian.  Curiously, the loudest advocates of the New Keynesian view at this conference that the Phillips Curve of Japan looks like Japan (flipped around) are some former students of Asada's.

According to Asada, he is the person who changed the mind of Koichi Hamada on this matter.  Hamada, a former student of Tobin's, is now Emeritus at Yale and was also at the Univerity of Tokyo.  He is now the top economic adviser of new Japan Prime Minister, Shinzo Abe, and reputedly the person who convinced Abe to adopt "Abenomics," although Asada claims it should be named for him or Hamada, with Asada now on Japanese TV pushing it.  He and quite a few others are enthusiastic, with Abenomics supporter and Hamada associate, Haruhiko Kuroda, taking over the Bank of Japan on March 20.  Even the NKs support it, although they are worrried about shutting it off sooner than the OKs such as Asada once the inflation rate goes positive (if it does). 

Asada also says that there is really no difference between Abenomics and "Bernankenomics."  In the end in both Japan and the US, the debate gets down to when to pull back from the policy rather than whether to do it or not.

Shame on Mom

So it will be the policy of New York City to publicly shame teenage mothers, and this is a good thing, writes Richard Reeves of Brookings in today’s New York Times.  I don’t want to argue with a professional moralist, being a mere amateur myself, but wouldn’t this make more sense in a world of parthenogenesis?  I mean, there are guys involved somewhere, right?  And, last time I looked, we still lived in a society in which sex was not exactly a realm of pure equality and equally shared responsibility.

Climate Change: The 90% Solution (Not)

I wish Joe Nocera would stop writing about climate change, so I can get on with my life.  Unfortunately, he keeps spouting nonsense—aggressively malicious nonsense directed at climate activists—and, like the saying has it, silence is acquiescence.  And we certainly don’t want to do that.

So here we go again.  This time Nocera is talking up “A Real Carbon Solution”, which turns out to be a coal gasification program in Texas.  It is the very future of energy, the soul of sustainable development.  You see, they will turn the coal into gas before they burn it, capture 90% of the carbon and use it either for fertilizer or to pump out more oil from hard-to-get deposits.  Everyone who is enlightened is on board.

But there is a serpent in the garden, and his name is Bill McKibben, the same guy Nocera has repeatedly attacked for his opposition to the Keystone pipeline.  We are told that McKibben is so deluded that he is unable to understand what causes greenhouse gas accumulation and what doesn’t.  He just doesn’t get that fossil fuels aren’t the problem; we just have to burn them better, so that energy companies and environmentalists can be reunited in a circle of joy.  McKibben has dustheap of history written all over him, right?

Of course, as you may have already suspected, McKibben, who has been booking up on the topic for over 20 years and consults with leading climate scientists, actually has a pretty good handle on what causes what, and it’s Nocera who glaringly exposes his ignorance.

Take the carbon we extract from the goal gas and spread on our fields.  It will just stay there, right?  After all, how can you pollute the atmosphere if you sprinkle the stuff on topsoil?  And what’s wrong with pumping more oil?  What does that have to do with climate change?

If, on the off chance, Nocera has a glimmer of doubt and wants to see if there’s an aspect of the science he may have overlooked, I would recommend that he search under “carbon cycle” and “carbon exchange”.  It’s part of an obscure field of study called “ecology”.  He might be surprised to find out that chemical substances actually move through soil, water, atmosphere and living organisms, and that clever humans haven’t found a way yet to build a wall around any piece of the system and keep carbon where we put it.  Unless you truly pump the stuff back into the deep earth and keep it isolated for eons, extracting carbon is the problem.  What you do with it after you extract it is strictly second-order, because it, well, cycles.

But don’t take it from me.  Read up on it yourself.  In particular, ground yourself in the study of biogeochemical cycling.  You just might avoid making statements in public that are simply ignorant and mean.

What I Learned About Climate Change this Year

I just finished teaching a two-quarter class on climate change, and here is my most important takeaway.  Going in, I knew the main aspects of the science and how much risk we face.  I also knew the main policy levers and, in general terms, the pluses and minuses of each.  What I didn’t know then, but know now, is the enormous mismatch between the obligatory greenhouse gas mitigation timetable and the energy transition timetable.

The first is about the targets we need to reach in order to keep climate change unpleasant but manageable.  For a very stringent version, see this analysis by Kevin Anderson.  Here is one of his mitigation scenarios:

This is a set of global pathways.  Reductions begin in 2020 (riotous optimism in my opinion, but why not?) and reach their goal by 2040 or so at the latest.  The different colored lines represent different assumptions about climate sensitivity.  If we're lucky and the least sensitive relationships apply, we get the purple line.  If the news on the science front turns out to be worse, we could end up with the red or blue, which basically fall off a cliff in 2020.  That is not a representation of policy but catastrophe.  It is unimaginable, in fact.  So stick to your optimism and color the science purple or green.

The second timetable is about the replacement of carbon-based energy and the infrastructure it rests on with carbon-free energy, along with its infrastructure, and expanded to meet the needs of the hundreds of millions of people who lack adequate energy supplies today but will acquire them tomorrow.  I haven’t seen a particular visualization that jumps out at me, but everyone who studies energy systems agrees that it will take many decades to innovate, deploy and scale up new energy sources, along with the investments we need to make to achieve greater efficiencies in using energy to meet human needs.

If our reduction in fossil fuel use is limited to the progress we make in substituting non-carbon energy, we’re cooked.  Literally.

Before teaching this course I didn’t realize how bad this mismatch truly is.

So, if we want to avoid carbonapocalypse, we will have to do without some stuff for a while.  This was one motivation for my Green Keynesianism post: one of the goals of economic policy around climate and the macroeconomy is to make it possible for people to do the kind of expenditure-switching that can maintain incomes and employment—and quality of life—even as the energy-dependent part of our economy is pinched.

It is also behind the posts I’ve written to more carefully distinguish mitigation from adaptation in carbon policy.  Unless we turn to geoengineering or sequestration, there is only one form of mitigation: leaving fossil fuels in the ground.  Supplying clean energy and improving the efficiency of energy use are not mitigation.  They can lead to mitigation if they result in more carbon staying put in the lithosphere, but only then, and only to that extent.  This is important not because I like to split hairs, but because energy transition alone will not be enough to do the job.  To understand this, and to feel it deeply enough to get you to do something about it, you need to have an absolutely clear sense of what the job actually is.

To repeat what I’ve said before, none of the above should be taken as criticism of all the activism and policy intelligence around energy transition.  We absolutely need to replace carbon-based fuels with clean ones and revolutionize our heating, transportation and other systems as quickly and massively as possible.  This is for two tightly connected reasons, to preserve and enhance our quality of life in the face of the climate challenge and to promote the political will we must somehow summon to enact the restrictions that will force most of the carbon now buried to stay buried.  Adaptation, which is what energy transition comes down to, is not a dirty word.  The problem is, mitigation demands more.

Jeffrey Sachs Accuses Paul Krugman of Being a Closest Republican

Jeffrey Sachs has a long argument that can be basically summed as suggesting that had we relied more on increases in public investment than on tax cuts four years ago, this smarter fiscal stimulus would have had more bang for the buck in the short-run and been better for long-term growth as well. A lot of us were saying the same thing four years ago. The sad thing about this post was that it was designed as an attack on Paul Krugman for being a crude Keynesian. I know Paul is a big boy who can ably defend himself but has to remember that Paul was saying the exact same thing four years ago. It was the Republicans who were advocating tax cuts and yet Jeffrey teamed up with Republican Joe Scarborough recently to attack Paul for advocating any form of demand stimulus. It’s funny because Scarborough has vacillated between arguing for austerity versus arguing for smart fiscal stimulus. We saw the exact same thing from the Team Romney economists who claimed they were for policies that both promoted short-term stimulus and long-term growth. Yet when push came to shove, their policy recommendations continued to be tax cuts for the rich, which of course is what Jeffrey is not calling for.

Does the UK Prime Minister Know the Difference Between Shift Along an IS Curve Versus Shift of the IS Curve?

I hear that David Cameron has made another pathetic defense of his fiscal austerity. Lots of good rebuttal including a nice summing up from Paul Krugman:

I was particularly struck by the way Cameron is still claiming that Britain’s low interest rates show that his policy is successful and necessary. This is a bit like the high priest sacrificing a virgin once a month to ensure that the sun keeps rising, then claiming that the fact that the sun has risen proves that the sacrifice was indeed necessary. The obvious test is to compare Britain with other countries; if Britain’s 2.07 percent bond yield validates his policies, does America’s 2.05 percent yield validate Obama’s? Or better yet, does France’s 2.10 percent yield validate Hollande’s? Or is the point, perhaps, that every country that borrows in its own currency (or, in the case of France, finally has a central bank willing to do its job by providing liquidity) can now borrow cheaply?

OK, the ECB, Federal Reserve, and the Bank of England are all doing all they can to reverse their weak economies as the fiscal policy decision makers are doing all they can to screw things up. Cameron’s defense of austerity may be pathetic but we hear similar silliness from Republicans in Congress. While I admire Krugman’s tenacity in pointing out how the evidence vindicates the good old fashion Keynesian IS-LM model, let’s do something we do even in our classrooms with college freshmen. Interest rates can be low for a couple of different reasons. The Cameron version is consistent with a full employment view where very modest fiscal austerity is offset with a very effective monetary expansion – aka something akin to a shift along an IS curve. Krugman’s view is consistent with a massive inward shift along a flat LM curve. Either way – interest rates fall. So what’s the difference? Well considering how weak the UK economy is – no intelligent person could describe this situation using Cameron’s view of the world – at least with a straight face. Since I’m told Cameron is an intelligent person, I really have to wonder how he can make this most recent statement.

Sinnlos, Part II

Just when you thought it might be possible to have a rational discussion about the Eurozone situation that included mainstream German opinion, along comes Hans-Werner Sinn, this time in the company of Akos Valentinyi, to prove that you can’t.  Let’s take a look at their latest, and truly clueless, post on VoxEU.

They begin by announcing, “There is a large body of literature on global imbalances. To date, however, little attention has been paid to the imbalances within the EU or the Eurozone...”  Yes, why stoop to read Paul Krugman, George Soros, Martin Wolf or any of the thousands of less prominent writers on this topic, who have been fixated on these imbalances from the moment peripheral bond spreads exploded?  This keeps our thinking pure.

But let’s not get distracted.  Their real point is that they have discovered something new and significant: there are large trade imbalances within Europe, augmented by capital flight!  Who could have imagined?  And the solution is for the deficit countries to devalue, which they can do either externally (leave the euro) or internally (deflation).  Both are difficult-to-impossible.  Such a pity.

Perhaps if these worthies (and Sinn is by far the most influential economic voice in Germany) had deigned to read Krugman, Soros, Wolf or one of the others, they might have learned that one country’s deficit is another’s surplus, and that adjustment is necessarily relative.  This is a matter of macroeconomic identities, but it appears that Sinn wouldn’t recognize an identity if it were staring at him from a mirror.  The point: for the purpose of rebalancing, it doesn’t matter whether peripheral prices go down or German prices go up.  If the first is virtually impossibly, then, just maybe, it might make sense to take a look at the second.

In fact, German wage repression, as many have noted, was an important part of the story over the course of the 00's.  Because of the Hartz reforms, and cautious wage bargaining in general, German wages remained essentially flat for nearly a decade.  This is great for generating a massive trade surplus, but, and here’s that pesky identity, Germany’s surplus within Europe was also the peripheral deficit.  Germans could save like crazy from the earnings inflow, which is simultaneously the outflow that forced their trading partners to borrow.

So, if you know a bit about economics and are able to follow an argument like this, you can imagine a third possibility, unmentioned by Sinn and Valentinyi: German could reflate.  They could run a looser fiscal policy and pump up domestic demand, drawing in imports from the deficit lands.  They could give themselves a big pay raise, and allow their price advantage over the peripherals to erode.

By the way, none of this is about “reducing performance”.  In Germany one hears the argument, if others are losing the race, that’s not a reason for you to slow down.  By all means, Germany should continue to improve its institutions for investment, innovation and building worker skills.  No reasonable person wants their productivity to go down.  But the point of all this improvement should be the possibility of living better, not amassing an unsustainable surplus that requires their customers to borrow their way to destitution.

Riding a Bike Causes Climate Change

Thus saith state representative Ed Orcutt, who represents the Kalama area of Washington State and is the ranking Republican on the House Transportation Committee.  To quote:

...the act of riding a bike results in greater emissions of carbon dioxide from the rider.  Since CO2 is deemed to be a greenhouse gas and a pollutant, bicyclists are actually polluting when they ride.

Before you lose yourself in mirth, stop to think for a moment about where this idea comes from and how other versions of it might be more widespread than you think.  Behind Orcutt’s statement lies the notion that pollution is when a substance goes from one place, where it is relatively harmless, to another, where it causes damage.  So a farmer, for instance, applies nitrogen fertilizer which increases crop yields, but a lot of it gets washed into lakes and rivers and then into the ocean, where it helps create a dead zone.  Pollution is what we call this process of moving chemicals to places where they cause harm, and the farmer is guilty of it.  The same, says Orcutt, with bike riders and CO2.  The carbon doesn’t do any harm when it’s in your body, but it creates environmental havoc when you breathe it out.

The reason why Orcutt is wrong is that bike riders, and the rest of us, are essentially way stations in the carbon cycle that courses through all living things.  We eat plant and animal matter (carbon), incorporate it into our own tissue, and release it when we exhale, secrete or decay after our death.  The carbon goes round and round.

Now think of a logical corollary to the Orcutt bicycle hypothesis: the couch potato solution.  Maybe we could reduce the buildup of greenhouse gases by encouraging everyone to eat junk food, watch TV and put on as much weight as possible.  Think of all the carbon we could store that way!  It would be fixed in our fat rolls and no longer floating in the atmosphere where it alters the earth’s radiative heat balance.  The problem, alas, is the same as with the bike rider story: all that carbon is going to be released.  It is in our bodies only temporarily.  We can alter the global distribution of carbon only by the difference between the total body mass before and after fattening up—a one-time effect—and only to the extent that this increase in aggregate human tissue is permanent.

Note that this is analogous to the role of forestry.  Bulking up our forests removes carbon from the atmosphere in exactly the same way as fattening up ourselves.  Of course, more carbon can be stored in trees than in people: there are more of them than us, and they are way bigger.  Still, the logic is no different, and the problem is the same.  Addressing climate change through forestry is measured by the one-off increase in stored carbon, and it works only if this difference is permanent, for which we have no guarantees.  Future people may cut down the trees we grow today, or the trees may not survive in the future climate.  (Couch potatoes may not last too long either.)

The moral of this whole tale is that the carbon problem is not a pollution problem in the familiar sense, because there is massive ongoing carbon exchange throughout the biosphere.  Atmospheric carbon is incorporated into plant and animal tissue; plants and animals release the carbon into water, soils and air.  Released carbon finds its way back into the atmosphere.  You can’t build walls between the different elements of the system to keep carbon from moving around.

But there is a point of pollution all the same, which is when carbon that has been stored deep in the earth—where it doesn’t move around very much—is extracted and burned, so that it enlarges the carbon cycle in toto.  We are talking here about fossil fuels, of course.  Humans can tweak the carbon cycle at the margin, through activities like forestry, but the future of our climate depends almost entirely on how much fossil fuel we manage to leave in the ground.

So go ride your bike, and don’t feel guilty about it, even if it means you’ll lose some weight.