Climate Change: Why Fatalism Could Be Fatal (Part III of Climate Science)

As we’ve seen, humans have been putting immense ingenuity into finding and extracting carbon-dense fuels, in the process reversing millions of years of earth history.  Once all that carbon finds its way into the carbon cycle, it will go wherever the cycle takes it—into, out of, beneath, around, and back into the atmosphere as it fluxes according to natural processes we humans have minimal ability to deflect.  Today’s topic is, what could go wrong with this?

Very generally, the direct causation between carbon and climate goes like this:

First, global warming causes global warming.  It gets hotter, especially at or near the poles.  Temperate areas see more punishing heat waves in the summer.  A few areas in Canada and Siberia might benefit from this; most regions will not.  The poorer tropical countries in particular really don’t need to be any hotter than they already are.

Second, changes in the greenhouse effect will alter the temperature differences in the air and ocean that cause the system of currents that govern our weather.  These currents are produced by convection, which is when warm gases or fluids rise, pulling in others to take their place.  Some currents, like the global ocean flows (thermohaline currents) that make us forget that Hamburg is at the same latitude as Edmonton, are fairly stable.  Others, like those that cause the oscillation between El Niño and La Niña over the Pacific, are highly sensitive.  But all of them could be altered if global temperatures change enough.

Third, changes in air and ocean currents cause precipitation patterns to change.  Some regions, like the US southwest, will experience chronic drought, while others will get heavier rains, such as more intense monsoons.

Finally, the combination of changed convection patterns and warmer oceans will likely cause more powerful storms.  Once in a century storms will hit once in a decade, and once in a decade events will become commonplace.  This is really beginning to concern insurance companies.

Meanwhile, when the climate changes, so do terrestrial ecosystems.  Many forests, for instance, will become unsustainable and evolve into grasslands or savanna.  “Evolve” is possibly not the right word: the transition will often take the form of raging forest fires.  Species, lovable like polar bears (not so lovable at close range) and less charismatic like thousands of varieties of plants and insects, will become extinct.  It’s difficult to predict what the long-range effect of ecosystem changes will be on us humans.

A different impact that has gotten a lot of attention is sea level rise.  This will happen for two reasons.  First, when you heat water it expands.  This effect is absolutely certain, and it provides the basis for conservative predictions of sea-level rise—less than a meter over the course of the twenty-first century.  More speculative is the effect of melting glaciers and ice sheets that sit on top of land masses.  (Only ice with land under it raises sea levels when it melts.)  To be precise, the progressive melting of major ice formations is fairly certain as the earth warms, as underscored by the recent findings concerning the massive West Antarctic ice sheet, but it will probably take a century or more before these larger impacts are felt.  The West Antarctic melt appears to be irreversible, and it guarantees an additional sea level rise of 12-15 feet—several hundred years from now.

Equally worrisome, however, is a quite different ocean event, a progressive, unstoppable decline in its pH.  Chemical reaction between the increasingly carbonized atmosphere and ocean surfaces is causing ocean water to become more acidic.  This is already a problem for commercial shellfish growers in my region, and it is likely to lead to the disappearance of the world’s coral reefs.  Worst case scenario: as acidification progresses plankton, the tiny (really tiny) shellfish on which the marine food chain depends, could collapse.

Now on to the serious stuff: feedback loops.  Human-induced (anthropogenic) climate change will produce various side effects that can either dampen or amplify the original effect of feeding additional carbon into the global carbon cycle.  One possible negative feedback would be increased cloud cover.  When you look down on them from an airplane, clouds are white, which means they reflect most of the light streaming at them from the sun.  The technical term for this is that they strengthen the earth’s albedo.  At one time scientists thought this might be a useful counterforce to human carbon-spewing.  Currently, however, the view seems to be that clouding over will not be our salvation.  So it goes.

So let’s worry about the positive feedback loops.  One that is probably already kicking in is the melting of the glaciers and ice caps themselves.   After all, they’re white, and after they disappear, whatever is underneath them is darker.  The biggest effect so far is likely to be the dramatic summer melting of arctic ice.  It’s great for shipping but not good in the way it reinforces climate change.

Albedo feedbacks are small change, however, compared to the really, really massive potential embodied in stored methane.  Recall from two posts ago that, while some organic carbon was sequestered over the millennia in the form of fossil fuels, another portion was stashed away as buried or frozen methane.  (To be precise, methane is natural gas, but the methane deposits we’re talking about now are not recoverable with current technologies.  Fortunately.)  How much methane are we talking about, and how does it compare to fossil fuels?  Let’s take a look:

Time out for a few technical notes: (1) The unit is tons of carbon.  (2) The source for fossil fuels is the latest Global Energy Assessment; for clathrates it’s the latest World Ocean Review.  (3) The fossil fuel numbers combine reserves (currently recoverable) and resources (potentially recoverable) and both conventional and unconventional sources.  (4) All amounts are reported as ranges; I took the midpoint of each range.  (5) There are large gas and oil deposits that will never be recoverable; I omitted these.  (5) Ocean clathrates consist of methane deposits located in portions of the ocean that are near enough to the land to capture lots of nutrients but deep enough so that the methane will condense and not rise to the surface.

The key point is the relationship between stored methane and carbon stored in fossil fuels.  As you should realize by now, the majority of fossil fuel deposits need to remain undeveloped if we want to avoid catastrophic climate impacts.  The precise amount is a point of dispute, but the IPCC, governed by a consensus process, says we should burn no more than 600 billion additional tons, and that’s less than 30% of the sum of all known fossil fuel reserves—leaving out resources altogether.

Now look at the methane.  Adding up ocean clathrates and peat deposits, it comes to about 27% of all potentially recoverable fossil fuels and about 1.8 times known reserves.  Here are two things you want to know right away.  One is that the fossil fuel budgets the IPCC and other scientific bodies propose are based on the assumption that none of this methane will escape and enter the carbon cycle.  The second is that, whatever the source, when a fossil fuel is burned it releases CO2, but a ton of methane release has about twenty times the greenhouse effect as a ton of CO2 because it targets a range on the light spectrum that CO2 misses.  In other words, if just a relatively small proportion of stored methane is released into the atmosphere, no matter how diligent we are in our own carbon budgeting, all bets are off.

As you can see, about 400 billion tons of carbon are biding their time in peat bogs.  This alone is equal to almost a fifth of all fossil fuel reserves, it is subject to the 20x amplification factor, and it doesn’t take all that much heat to release methane from a peat bog.  In fact, it’s probably begun to happen on a small scale and will increase (uncontrollably) as the earth continues to warm.  One of the reasons the IPCC and others want to set a 2ºC limit on average temperature rise is to prevent most of this peat methane from escaping.

But now take a look at its elder brother.  A carbon vault more than half again larger than all the world’s reserves of fossil fuels can be found in frozen methane deposits, known as clathrates, located in portions of the ocean that are near enough to the land to capture lots of nutrients but deep enough so that the methane will condense and not rise to the surface.  I should add, some of these methane deposits are also found in deeper freshwater bodies at arctic and subarctic latitudes.  Well, what do you suppose might happen as the greenhouse effect gets into high gear?  The risk is that the most vulnerable clathrates, the ones closest to the temperature tipping point at which they will expand and rise to the surface, will do exactly that.  Being methane—fierce greenhouse instigators—they will quickly kick global warming into an even more advanced phase.  And this will tip the next layer of clathrates, and so on.  The result would be an immense increase in greenhouse gas concentrations over a relatively short period time—perhaps measured in years rather than decades, much less centuries.  It would be alligators in the arctic all over again.  This, friends, is the risk of runaway climate change.

How likely is this to happen?  What’s the critical temperature increase that could set off such a process.  Damned if I know.  In fact, no one really knows.  There are teams of scientists monitoring arctic clathrate sites.  They have reported burps but not yet belches, if that’s reassuring.  Authorities in this field say that the likelihood of a catastrophic clathrate event remains small, but it’s not zero, and whatever the level of risk, it will increase as global temperatures increase.  This is the scenario that scares the bejesus out of everyone who studies it, although there’s no point in being paralyzed by the fear of something that hasn’t happened yet and might well never happen at all.  On the other hand, a small, measured dose of energizing fear could be quite valuable.

Incidentally, there is some evidence that massive, sudden clathrate releases have occurred at other points in earth history.

The final thing to bear in mind—and this is either good news or bad news depending on how you look at it—is that there is a very long lag between human activities that add carbon to the carbon cycle and impacts felt by those humans.  It takes decades for carbon to make its way into the atmosphere where it can do its heat-trapping thing.  Many of the processes this sets in motion, like the melting of ice sheets, take decades longer.  It is said that climate change is not in the future, but now: we are seeing hotter weather, longer droughts, bigger storms.  This is true, but these are the result of fossil fuel extraction that occurred decades ago, back in the days of Vince Lombardi and Mick Jagger.  (Hmmm.)  What we’re doing today will alter the world of our children and grandchildren.

If you’re an economist and you live and breathe present value calculation, that’s a benefit, since any bad stuff that happens a century from now is much less costly after you discount it back.  If you worry about the political capacity of contemporary society to act on the basis of consequences that won’t be felt until today’s citizens are dead and gone, it’s not so wonderful.

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In the Future, All Spell-Checkers Will Recognize Biogeochemical Cycling (Part II of Climate Science)

We haven’t done justice to carbon.  So far we’ve talked about it as a component of the atmosphere, the substance of living tissue and in sequestered deposits underwater or underground.  But carbon gets around a lot more than that.

The term you want to know is biogeochemical cycling.  This refers to the movement of carbon throughout terrestrial and marine ecosystems, propelled by the growth and decomposition of organisms, precipitation, chemical reactions and various other interesting processes.  Let’s begin with a picture:

There are lots of carbon cycling graphics on the web, but this one is nice because it provides some numbers.  I can’t vouch for their precision, but the orders of magnitude are about right.

To talk knowledgeably about the carbon cycle we need a couple more terms.  Carbon sinks are the locations where carbon accumulates and decumulates; think of them like reservoirs in a water management system.  Carbon fluxes are the movements of carbon from one sink to another, with the analogy to pipes that transport water.  Sometimes people refer to the back and forth movement of carbon between sinks as carbon exchange.

So let’s take a look at all this fluxing.  Begin with atmospheric carbon.  Some of it is fixed through the process of photosynthesis into living tissue, where it shows up as either land or marine organisms.  If it’s on land, it can readily migrate into the soils; if it’s at sea it can become dissolved carbon or make its way to ocean sediments.  But carbon can also be exchanged directly between atmosphere and ocean in both directions.  Soils too, as they weather, can release carbon.

It’s important to recognize that carbon exchange is everywhere.  Here is where the water management analogy breaks down.  A water system has a fixed number of pipes; control them and you control everything.  The global carbon cycle moves through every surface and interface, in every gust of wind, drop of water, in every leaf—everywhere.  Human beings can influence it to some degree, for instance through land use policies, but only to a limited extent.  It is a massive, pervasive natural process that transcends us in every respect.  In fact, we ourselves, physically, are just tiny elements in that process, temporary carbon sinks that exchange constantly with the environment and are destined to release their carbon after death.

Does this sound benign?  There is a limit to how much carbon can be concentrated anywhere in the system, because fluxes will restore a degree of equilibrium.  If the carbon concentration in the atmosphere gets out in front of the carbon in the ocean, for instance, fluxes from air to sea will be greater than those in the opposite direction, and a new equilibrium will arise.  This is a force for stability.

Alas, there is another force that destabilizes this cycle—us.  Clever creatures that we are, our fossil fuel operations reintroduce carbon that had been kept out of the cycle for eons.  We mine or pump this stored carbon, and then it joins all the rest of the carbon in its many sinks and fluxes.  The critical moment is when carbon that had been excluded from the cycle is returned to it.  Once this happens, it simply increases the amount that cycles through the system: the sinks all get bigger carbon loads (if they can handle them), and the fluxes get bigger too.

This is one of the fundamental truths of the carbon cycle—one that many policy-makers and opinion-molders misunderstand—so it bears repeating: don’t blame the carbon cycle!  The problem is not that carbon moves from the plants to the soils, or the soils to the atmosphere, or the atmosphere to the ocean, or wherever.  It will do that.  The problem is that we’ve made the cycle bigger by adding additional carbon to it that had been locked out for millions of years.  Once we do this, our ability to steer it is limited in the short run and nearly zero in the long run.  As we’ll see, a lot of what people talk about in the realm of climate policy consists of exactly this misguided approach.

To sum up, today’s message is simple: carbon cycles through our world propelled by biological, geological and chemical forces.  It doesn’t like to sit still.  It is folly to try to control its movements.  If you want less carbon in the atmosphere, don’t try to prevent fluxes into it—stop adding to the amount of carbon that flows through the cycle.  Until we figure out a feasible way to withdraw carbon from its cycle completely, through artificial sequestration (and this is very iffy), keeping fossil fuels in the ground is what it’s all about.

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Piketty and the Capital Theory Dustup

I’ve been thinking some more about the odd treatment Piketty gives the capital theory debate on pp. 230-232 of K21.  Its strangeness is summed up in the following sentence:

Controversy continued, however in the 1950s and 1960s between economists based primarily in Cambridge, Massachusetts (including Solow and Samuelson, who defended the production function with substitutable factors) and economists working in Cambridge, England (including Joan Robinson, Nicholas Kaldor and Luigi Pasinetti), who (not without a certain confusion at times) saw in Solow’s model a claim that growth is always perfectly balanced, thus negating the importance Keynes had attributed to short-term fluctuations.  (p. 231)

Anyone who has studied this debate knows that this summary bears no relation at all to what was actually argued over.  Piketty seems like a smart, open-minded guy, so I would have to assume that he hasn’t read the original documents; his take must have been formed by what he was told in grad school.  If so, this passage can be read as a reflection of how the Two Cambridges battle has been turned into official history.  That’s a discouraging thought.

As for myself, I think I disagree with both sides.  The UK Cantabrigians said that the value of capital is determined by its cost of reproduction, which is a function of its composition, the technology of production and the division of income between labor and capital.  Thus the value of capital depends on its return, and this circularity is what makes aggregate valuation underdetermined.  The upshot is that this return is necessarily a political, not a technical factor.  (Cue Marx.)

The Massachusetts Cantabrigians said that the value of capital is determined in general equilibrium, which encompasses cost of production and the productivity of capital goods.  The reproduction constraint of the UK crowd doesn’t apply, because agents can rationally incorporate their expectations of capital’s productivity in market transactions that pertain to future economic states that differ from the present.  (Cue Arrow-Debreu.)

On this issue I would side with Keynes, for whom profitability does depend on the future, but who viewed the future as truly, radically unknowable.  The result is that there is a cost price for capital goods and a constantly fluctuating market valuation of capital-in-use, and there is no theoretically determinate relationship between the two.

Or to put it differently, the owl of realized capital valuation flies at dusk.

The Wannabe Caliphate Openly Declares Itself

So I earlier argued here that ISIS(ISIL) or DAEESH was not yet claiming itself to be a caliphate, and that its leader, Abu Bakr al-Baghdadi was only calling himself "al Hakim," or "Ruling Emir," even as I recognized that he had turned over this title to someone else, preparing the way for possibly declaring himself caliph (khalifa), while the media was already doing so inaccurately.

Well, now it has happened.  Yesterday his group declared that henceforth they are to be called "The Islamic State," no more ISIS vs ISIL vs DAEESH.  And his followers have sworn fealty to him as, yep, khalifa, or caliph.  They are now a genuine wannabe caliphate. As usual, Juan Cole provides the best current and historical discussion at this location.

Compared to my previous piece, he has a few differences.  He claims the Ummayyads were just "Arab kings" rather than caliphs, although that disagrees with most of what I have read.  He claims that most Muslims accept that the caliphate died in 1258 with the Mongol conquest of Baghdad.  He also claims that it was only in the 1880s that the Ottoman sultans claimed to be caliphs.  Finally, he says that Taliban leader, Mullah Omar also has claimed to be caliph as well as al-Hakim, Ruling Emir, and he speculates on what would happen if he and al-Baghdadi were to end up in the same jail cell arguing over who is really the caliph.  To that I have no answer, although I note that Cole also reports on details of some truly horrific behavior of al-Baghdadi prior to being thrown into Camp Bucca for 2005-2009, that he would bomb weddings and then bomb the funerals coming out of the bombed weddings.  Such is our current world.

Addendum:  The tale of the history of caliphates is more complicated than is presented in any of my posts or in those of Juan Cole either, with quite a few self-proclaimed caliphs running around out there in different periods, most of them with little power, and also ongoing controversies about just who was a caliph or not and how much secular versus religious power they had.

So, just to add a bit, there was another fairly serious rival caliphate to the Abbasids during 1130-1269 based in Morocco, which ruled portions of Spain for awhile as well.  It may be that in the later stages of the Abbasid caliphate, there was a separation of religious from secular authority.  And for the Ottoman sultans, whatever their claims earlier, it is clear that in 1880 Sultan Abdulhamid II made a major effort to assert that he was a full caliph, with this partly to make claims for ruling Muslims in India rather than the British (with some there actually recognizing his authority), as well as offsetting modernizing/Europeanizing "Young Turks," who would in the end overthrow both the sultanate and the caliphate in 1924 when Mustafa Ataturk was i power.

And for those of you for whom it matters, Ramadan Karim, really (and apparently the now "IS" chose the first day of Ramadan to make their announcement, for better or worse).

Barkley Rosser

Defending "Reform Conservatism" With Derpitude

The new book that many conservative commentators are touting as representing a supposedly new and innovative set of conservative policy proposals is Room to Grow: Conservative Reforms fo a Limited Government and a Thriving Middle Class, put out by the YG Network and edited by Yuval Levin.  Aside from a couple of general bloviatory chapters by Peter Wehner, Levin, and Ramesh Ponnuru, most of the rest of the essays do provide some proposals on various issues, with families the focus of three of the essays.  Some of the proposals are not unreasonable, but only a few of them are really new, with many being old Republican standbys, in some cases going back as far as at least a half century.

James Capretta wants to replace ACA with tax credits on top of the employment system.  If these are supposed to work through the fed income tax system, then how will those without employer insurance who are in the 47% that do not pay fed income taxes gain from this.  Supposedly the system will "guarantee continuous coverage for all Americans," although how this is to be achieved is not made clear, all of this to be achieved with lower costs due to using free markets...

Robert Stein opposes cutting marginal income tax rates, but wants larger child allowances. Not necessarily unreasonable, but more like a marginal adjustment rather than a wild innovation.

Frederick Hess wants school reforms, a hodge podge of online courses and education savings accounts and requiring schools to be more transparent about their "return on investment metrics."  Aren't we already doing the latter with SOLs?  Oh, and he wants to reduce regulations on teachers, which might not be a bad idea, but not again wildly innovative.

Andrew Kelly wants to reform higher ed by changing the student-loan program for give incentives for higher ed programs to "remain affordable."  I am all for restraining costs in higher ed, which have gotten way out of control, but attacking this through the student loan program strikes me as a no-go.  The problem seems to be higher admin salaries and numbers, but how does messing with student loans do anything about that?

Scott Winship advocates using block grants to  states for anti-poverty programs.  Now this is a proposal that is a good half century old, if not older, and an old perennial of conservatives.

Michael Strain wants to increase employment by reducing licensing requirements, providing relocation assistance, and lowering the minimum wage for the long-term unemployed.  The first looks good to me, but this is mostly controlled at state levels, although there has been a surge of this sort of rent seeking at state levels that should be stopped.  I note that relocation assistance might cost money, ahem, although I think it is a good idea.  No comment on the final one.

Adam J. White wants to reform energy by encouraging fracking.  The word "environment" appears once with policymakers urged to "take seriously the concerns that Americans voice regarding the new energy infrastructure's environmental impacts," although he clearly wants the infrastructure for  fossil fuels to go through anyway.  Not a whisper about climate change.

Carrie Lukas is back with families, although opposing fed support of childcare, which she says parents do not like.  She wants resources returned to  parents that will be gained by "consolidating government spending programs," and she wants "policymakers...creating an environment so that women can pursue their vision for happiness and raise their children as they see fit, and target assistance on those truly in need."  Does this mean that she opposes increasing the child exemption that Stein proposes?  I do not know what specific policies lead to this outcome.

James Pethokoukis wants financial reforms and an end to "cronyism," but is amazingly vague on how this is to be achieved, although he want "to limit regulation, reform the financial system, and allow for 'permissionless innovation,'" which this last I might support, but the rest looks like just total mush.

Finally, W. Bradford Wilcox is back on the pro-family schtick, repeating Stein's call for increasing the child tax credit  (to $4.000, how revolutionary!!!), and he also wants to end the marriage penalty in various means-tested programs and the tax code, which I am also OK with, I think.

Some of this is not unreasonable, while some is vague, and some is just worn out old stuff around forever (block grants to states again???).  I will grant that this is better than the usual stuff one hears coming out of commentators on Fox News, so  I suppose we should applaud all this reasonableness.

So, what am I really picking on and where does the derpitude come in?  Well, I had heard about this book previously, but one of my more scholarly libertarian FB friends posted a link to it through a piece in "The Week," by Pascal-Emmanuel Gobry, "Vox, derp, and the intellectual  stagnation of the left," in which this book is touted as showing how conservatives are all innovative and new and underpy, while "the left," especially as shown by Ezra Klein's Vox and also the New Republic are suffering from "epistemic closure" and "derp."  The comments for my friend's post were worse than even Gobry's with nobody realizing how, well, derpy they were all coming across as.

Gobry claims that "the left" only supports three things, all of them supposedly showing "stagnation" (and derp) due to being "from the 60s."  These are demanding higher marginal taxes on the rich, rasing the minimum wage, and tightening environmental regulation.   Well, actually it was in the 60s that the top marginal income tax rates in the US began to be cut with the Kennedy-Johnson tax cut, but Gobry is too full of derp to apparently know that.  Raising them is an old idea of the 30s and 40s.  Minimum wages have been around since earlier as well, and it is true that in real terms they reached a max in the 60s, so anybody calling for increasing them would be heading vaguely back to then when we had lots of job growth in spite of those supposedly job killing high minimum wages (and while Strain wants to cut min wages, so innovative he is, although that has been going on since the 60s in real terms, so looks like another policy dating from the 60s, derp again).  Finally, it was the 70s when major environmental legislation dates from, but Gobry (and the reform conservatives) do not seem to care at all that much of the world is worried about global warming.  Not a problem for him or his people.  Frack on, derp derp derp!

Finally, as for Gobry's criticism of Klein's Vox, which I pay no attention to myself, his big criticism there is to dump on them having a bunch of posts defending Obamacare and saying that it works.  How dare they?  Somehow I do not think that Gobry has noticed Krugman's point that of 6 famous forecasts of doom about ACA by its opponents, not a one of them has come true.  And in fact that this is what these articles in Vox are about.  But, hey, Gobry is handing out a party line, even when it is screamingly false, while accusing those he is criticizing of engaging in derp.  Sorry, but all the derp appears to be on the side of the one calling it out, which he thought he was being so clever to do.  Instead, he is just engaging in derp, derp, derp all the way.

Barkley Rosser

"Say's Law sank without trace."

Money: Whence It Came, Where It Went, J. K. Galbraith (1975), pp. 218-220:

The belief that the economy would find its equilibrium at full employment depended partly on what had long been called Say's Law — for J. B. Say, the French counterpart and interpreter of Adam Smith — and partly on the corrective movement of wages, prices and interest rates when there was unemployment. Say's Law, not a thing of startling complexity, held that, from the proceeds of every sale of goods, there was paid out to someone somewhere in wages, salaries, interest, rent or profit (or there was taken from the man who absorbed a loss) the wherewithal to buy that item. As with one item, so with all. This being so, there could not be a shortage of purchasing power in the economy. Movements in prices, wages and interest rates then validated J. B. Say and also ensured that the fundamental tendency of the economy would be to operation at full employment. People and firms saved from their income, and this saving had, obviously, to be spent. This happened when it was invested in housing, plant, capital equipment. If people saved more than was invested, the surplus of savings would bring down interest rates. Investment would thus be stimulated and saving (at least in theory) discouraged. So the excess of savings would be eliminated and Say sustained. Prices of goods would also fall in consequence of any short-fall in purchasing power that resulted from an excess of savings. This would encourage buying and, by reducing the income from which savings were made, also reduce savings. Again Say was sustained. Until Keynes, Say's Law had ruled in economics for more than a century. And the rule was no casual thing; to a remarkable degree acceptance of Say was the test by which reputable economists were distinguished from the crackpots. Until late in the '30s no candidate for a Ph.D. at a major American university who spoke seriously of a shortage of purchasing power as a cause of depression could be passed. He was a man who saw only the surface of things, was unworthy of the company of scholars. Say's Law stands as the most distinguished example of the stability of economic ideas, including when they are wrong. 

Supplementing Say, as noted, were the forces that kept the economy at full employment. These too were relatively straightforward. Were there unemployment, the competition for jobs would bring a fall in wage rates. Prices would be less immediately affected by the unemployment. The relationship of prices to costs would thus be made more attractive — real wages would fall — and workers whose employment was previously unprofitable to employers would now be hired. The fall in wages would not affect purchasing power; because of Say, that was always sufficient. Employment would continue to expand until the approach to full employment raised wage costs and arrested the hiring. Thus did the economy find its equilibrium at or very near full employment. From this also came the one decisive recommendation of the orthodox economists for ending unemployment. Do nothing to interfere with the reduction of wages in a depression. Resist all siren voices, including that of Herbert Hoover, who, it will be recalled, urged against wage cuts. On no matter was compassion so softheaded, for to keep up wages merely perpetuated the sorrow of unemployment and the sorrows of the unemployed. This was the doctrine, perhaps more accurately the theology, that Keynes brought to an end. There are numerous points of entry on his argument; perhaps the easiest is by way of the rate of interest. Interest, he held, was not the price people were paid to save. Rather it was what they got for keeping their assets in plant, machinery or similarly unliquid forms of investment — in his language, what was paid to overcome their liquidity preference. Accordingly, a fall in interest rates might not discourage savings, encourage investment, ensure that all savings would be used. It might cause investors to retreat into cash or its equivalent. So interest rates no longer came to the support of Say's Law to ensure that savings would be spent. And if Say's Law was no longer a reliable axiom of life, the notion of a shortage of purchasing power could no longer be excluded from calculation. It might, among other things, be the consequence of a reduction in wages. 

What people sought to save, in Keynes's view, had still to be brought to equal what they wanted to invest. But the adjustment mechanism, he argued, was not the rate of interest but the total output of the economy. If efforts to save exceeded the desire to invest, the resulting shortage of purchasing power or demand caused output to fall. And it kept falling until employment and income had been so reduced that savings were also reduced or made negative. In this fashion savings were brought into line with investment — which also, meanwhile, would have fallen but by not so much. The economic equilibrium so established, it will be evident, was now one in which there was not full employment but unemployment. Thus unemployment for Keynes was a natural condition of the economy. There was much else. And not all of Keynes's argument survived. The liquidity-preference theory of interest, for example, though it served Keynes's argument, did not gain permanent acceptance as a description of reality. But on two things Keynes was immediately influential. Say's Law sank without trace. There could, it was henceforth agreed, be oversaving. And there could, as its counterpart, be a shortage of effective demand for what was being produced. And the notion that the economy could find its equilibrium with unemployment — a thought admirably reinforced by the everyday evidence of the '30s — was also almost immediately influential.

Carbon and Climate in the Very Long Run

Before taking up today’s topic, let’s begin with the ground rules.  Scientists like to be precise and comprehensive.  They want to get the details right.  For them, it’s important to know exactly how evidence was acquired and how reliable it is.  It’s also important to use scientific terminology, since the words embody the conceptual structures that define and contextualize them.

I’m not going to do science.  My goal is much more limited, to summarize the main themes as they relate to the nature of the carbon problem and possible solutions to it.  This wouldn’t be enough if we wanted to get concrete and quantitative—for instance, if we wanted to calculate potential impacts of various policies in parts per million (ppm) carbon concentrations or warming effects in fractions of a degree Celsius.  As you’ll see, the objectives this time around are much more limited.

With that behind us, let’s consider how carbon in the atmosphere, on land and water, and under the surface of the earth have interacted over the long haul.

The earth is about 4.5 billion years old.  (This would be a lot of birthdays if we knew what day it came into being.)  Picture the scene 8/9 of the way to the present, about 500 million years ago.  There was a lot of carbon in the atmosphere, about 25 times the level of 200 years ago, before humans started playing around with it.

This carbon has the now-famous greenhouse effect of refracting the sun’s light so that infrared radiation can’t bounce back off the earth as fully as it comes streaming in.  The result is that our atmosphere traps heat, and with so much more carbon the long ago earth was a much warmer place.  That was useful, however, since the sun was also a weaker energy-source back then, sending about 4% less our way compared to today.  Nevertheless, overall average temperatures were way higher than today.  (Even just 50 million years ago there were alligators in the arctic.)

It was at this time that complex forms of life began to appear on this planet.  What is life?  Life as we know it (a Trekkie-ism) is built on molecules whose core is made up of carbon bonded with hydrogen and oxygen.  The growth of organic matter depends on photosynthesis, which looks like this:

Through this process, carbon from the atmosphere makes its way into plant tissue and the tissue of organisms that feed on plants directly or indirectly, which is all of us.  Of course, where there’s life there’s death, and dead tissue decomposes, releasing its carbon.  The familiar smell of methane signals a gas (CH4) that returns organic carbon to the atmosphere.

So with the emergence of life, carbon starts to go back and forth between living organisms and the atmosphere.  In itself this should not alter atmospheric carbon concentration, except for one detail: every now and then, rather than releasing its carbon back into the environment, a decomposing organism will get buried in sediment, and sometimes these carbon-rich sediments get pushed down into the earth’s crust as tectonic plates do their bumping and grinding act.  (In addition, as we’ll see later, some of the methane created by decomposition gets smothered or frozen and doesn’t escape back to the atmosphere either.)

In short, most carbon cycles back and forth, but a tiny bit doesn’t: it gets sequestered.  Give this process a few hundred million years, and it can add up to something.  Here is the picture of atmospheric carbon in the very long run:

The red line is atmospheric carbon concentration as a multiple of its level 200 years ago.  The black line is the percentage of oxygen in the atmosphere, which has varied inversely, more or less, with carbon.  (Nitrogen makes up the rest.)  In case you're wondering, planet Earth today is at 2x baseline carbon, another 1 is probably baked in, and 4 or more is guaranteed unless we change course.  But I'm getting ahead.

To be sure, it’s not a simple, predictable downward trend, since there are lots of other factors at work, which we will gloss over.  The main point, however, is that, across the many ups and downs, the conversion of atmospheric carbon into living tissue and the sequestration of a portion of that tissue has had a systematic effect.  It’s given us an earth today that is quite different from the one multicell organisms encountered half a billion years ago.

So where did this carbon go?  Some of it can be found in carbon-based minerals, but most was either buried in the earth’s crust or in sequestered methane.  The pressurized underground stuff is what we call fossil fuels—coal, petroleum and natural gas.  These deposits were formed over millions, even hundreds of millions, of years, and the carbon they embody is what was once in the atmosphere when the world was younger and a whole lot hotter.

We’ll end this little review with our first takeaway: the problem of climate change stems from the exceptional cleverness of human beings, who have developed sophisticated methods to locate and extract fossil fuels.  These are fantastic energy sources, dense and versatile.  But in less than two centuries, humans have begun making noticeable progress toward undoing the last half-billion years of earth history.  As you might expect, that could have consequences.

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Back to School on the Quality of American Higher Education

Today’s New York Times carries an op-ed piece by Kevin Carey about the sorry state of America’s colleges and universities.  Carey is the head of the Education Policy Program at the New American Foundation, which, in conjunction with the Gates Foundation and others, wants to restructure higher ed along the lines of market and market-like incentives.  The evidence he offers is indirect: adults in the US who graduated from four-year institutions of higher education perform worse on a standardized exam, the Program for the International Assessment of Adult Competencies or PIAAC, than did similar adults in other countries.

Of course, the US scores poorly at lower grade levels, as we know from the PISA comparisons.  Presumably the students who enter college in the US come in with worse preparation than students elsewhere.  The proper indirect test of higher ed quality, then, would be whether the US relative standing for students who attend college rises, falls or remains about the same between when they enter and after they leave.  Indeed, if college grads in the US are less behind their peers in other countries post- compared to pre-college, that’s a gold star for American higher ed.  You can’t tell if this is the case from Carey’s piece because his reporting on PISA doesn’t separate out college-bound students; he just gives averages for the entire population taking the test.

If Carey ever decides to return to the shabby institutions of higher education he describes in his column, I’ll invite him to study economics with me.  He can learn about an obscure concept called “value added”.

The Road from Carbonville: A New Series on the Misconceptions Surrounding Climate Policy and How to Avoid Them

This post begins a new series on policies to combat climate change, with an emphasis on clearing away the misconceptions that have grown up around the subject and now practically strangle it.  While it would take a much bigger effort—a book really—to develop and document all the ideas to come, I’ll do what I can with a series of short, bite-size mini-essays.  Given the format, they will sidestep most of the scholarly detail to make their case in the simplest, most direct possible way.  I'd love to do a longer-form version of this series: maybe later.

Here is the plan:

First, any discussion of carbon and the climate has to begin with the scientific basis of the problem, covering the minimum of geology, chemistry and biology necessary to understand why we face a climate crisis and what its potential dimensions may be.  Of course, in a presentation as brief as this it's necessary to cut lots of corners; be forewarned.  For the science read:

Carbon and Climate in the Very Long Run

In the Future, All Spell-Checkers Will Recognize Biogeochemical Cycling (Part II of Climate Science)

Climate Change: Why Fatalism Could Be Fatal (Part III of Climate Science)
After this come the misconceptions:

1. Climate change is a pollution problem.
2. We need to set an emission target for 2030/2040/some other year to limit climate change.
3. Measures that reduce our dependence on fossil fuels mitigate climate change.
4. Reforestation can play a big role in combating climate change.
5. Personal change will solve the climate problem.
6. People who drive SUV’s are causing climate change; people who drive electric cars are the ones helping to solve the problem.
7. The goal is for every organization to become carbon neutral.
8. Local direct action against carbon-emitting projects will stop climate change.
9. Investing in clean technologies will solve the climate problem.
10. To set the proper climate policy we need to know the social cost of carbon.
11. Done right, climate policy can be nearly costless.
12. Economic growth is the underlying problem behind climate change.
13. Population growth is the underlying problem behind climate change.
14. Greedy oil companies are preventing action on climate change.
15. Carbon permits will just be a new source of financial speculation.
16. Carbon taxes are so much better than carbon permits as a basis for climate action.
17. Carbon taxes are a great way to raise money for green projects.
18. All we need to do is put a price carbon; the rest of the problems will take care of themselves.
19. Unless all countries agree to act on climate change, any national action is useless.

At the end, it’s necessary to go beyond criticizing other views and stake out my own, what I modestly refer to as a non-misconceived agenda for combating climate change.

Why am I doing this?  Because no one else has.  I'd love to be able to recommend a book that covers this terrain to friends, colleagues, students, and especially climate activists, but it doesn't exist.  A series of blog posts is the easiest way for me to put these arguments in play, pending something weightier and more comprehensive.

If you find problems with any of the arguments I make or the way I make them, let me know!  I've been continually learning about these issues over the years, and I don't assume that I'm “all learned up” today.  And if you think what I'm trying to do is worth doing, encourage me!  It's easier to make an effort like this if you get the message that it's appreciated.

Two concluding notes: First, the tone of most of these posts is pretty negative: they are about criticizing other people's thinking, after all.  I'm not happy with this, especially since many of those who may feel under assault by what I'm writing are, for the most part, on the same side I'm on.  Perhaps the tone is exacerbated by the agonistic culture of blogging.  But to some extent it's the unavoidable result of adopting a format based on identifying and critiquing misconceptions.  I've adopted this approach because it gets right to the point.

Second, I'll admit to a certain amount of exaggeration in the way I've characterized these misconceptions.  They're presented in an extreme form, without the nuance, qualification or context that usually accompany them.  That's because I want to set them in relief and simplify the rebuttals.  In real life, people usually hold more complicated views, but I hope that the logic behind the arguments I'm going to make will still be useful.

UPDATE: This post has been significantly revised to reflect how the series has evolved.

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Supply Creates Its Own Demon II: You Don't, Say!

Karl Marx could hardly bring himself to utter the name of J. B. Say without affixing to it some contemptuous description or sarcastic remark:

"Say’s earth-shaking discovery…" 

"…adopted by Ricardo from the tedious Say (and to which we shall return when we discuss that miserable individual)…" 

"…his authority, Say, is playing a trick on him here... " 

"…we shall criticise Say’s theories later, when we deal with this humbug himself." 

"The constant recurrence of crises has in fact reduced the rigmarole of Say and others to a phraseology which is now only used in times of prosperity but is cast aside in times of crises." 

"This is the childish babble of a Say…" 

"Say, who tries to hide his dull superficiality by repeating in absolute general phrases Smith’s inconsistencies and blunders…" 

"Storch says of this trash of Say’s… 

"After Garnier appeared the inane Jean-Baptiste Say’s Traité d’économie politique." 

"This is his kind of originality, his kind of productivity and way of making discoveries, And with his customary logic, he refutes himself again…" 

"Say replies with his characteristic profundity…"  

"…the absurdity of J. B. Say, who pretends to account…" 

"…as it does to J. B. Say in the vulgarisation of Adam Smith." 

"The result he arrives at, is precisely that proposition of Ricardo that he aimed at disproving. After this mighty effort of thought, he triumphantly apostrophises Malthus…" 

"A disciple of Ricardo, in reply to the insipid nonsense uttered by J. B. Say…"

Curiously, in "The compensation theory, with regard to the workers displaced by machinery," Section 6, Chapter 15, Volume 1 of Capital, Marx performed the ultimate insult by snubbing Say, almost entirely. The first sentence includes "James Mill, McCulloch, Torrens, Senior and John Stuart Mill" among those bourgeois political economists claiming that machinery sets free enough capital to reabsorb the workers displaced by it. Say is relegated to a footnote citing the anonymous pamphlet in which the author refutes "the insipid nonsense uttered by J. B. Say" by pointing out:

Where division of labour is well developed, the skill of the labourer is available only in that particular branch in which it has been acquired; he himself is a sort of machine. It does not therefore help matters one jot, to repeat in parrot fashion, that things have a tendency to find their level. On looking around us we cannot but see, that they are unable to find their level for a long time; and that when they do find it, the level is always lower than at the commencement of the process.

Thus, the anonymous author of An Inquiry into Those Principles Respecting the Nature of Demand, and the Necessity of Consumption, Lately Advocated by Mr. Malthus, neatly summed up in a paragraph the rebuttal to the so-called compensation theory. This succinct reply makes a mystery of Marx's exclusion of Say from his listing, at the start of the section, of bourgeois political economists.

The mystery is solved in Chapter 20 of Theories of Surplus Value, "Disintegration of the Ricardian School," where Marx discussed the pamphlet he described as "one of the best of the polemical works of the decade." "What the author writes about Say is very true," Marx observed. Following a quotation from the pamphlet about the hazard arising from the difference in timing between consumption by workers and their production, Marx exclaimed that this was, "indeed the secret basis of glut." Several paragraphs later, Marx concluded:

Over-production, the credit system, etc., are means by which capitalist production seeks to break through its own barriers and to produce over and above its own limits. Capitalist production, on the one hand, has this driving force; on the other hand, it only tolerates production commensurate with the profitable employment of existing capital.

Medtronic’s Effective Tax Rate

The Citizens for Tax Justice were kind enough to let me know of their new blog:

Already facing criticism for its plans to become an Irish company to avoid U.S. taxes, Medtronic, the Minnesota-based medical device maker, disclosed this week that it pays very little in taxes in the foreign countries where it claims to have profits.

Medtronic plans to merge with Covidien which is tax domiciled in Ireland. Covidien was a spin-off of Tyco, which has been battling with the IRS since it went offshore. But I should stop interrupting:

In Medtronic’s just-released annual financial report, the fine print reveals that the company’s total “permanently reinvested” foreign profits—that is, income they have said they have no intention of bringing back to the U.S.—rose from $18.1 to $20.5 billion in the past year. And the total amount of cash and cash equivalents that the company holds abroad rose abruptly from $10.9 to $13.9 billion in just one year.

Over half of Medtronics income is reported overseas which is a combination of the fact that over half of its activities occur overseas and very low royalty rates paid back to the U.S. parent for the use of intangible assets. It turns out that the IRS has challenged these low royalty rates with a trial set in early 2015. But again, I’ve interrupted:

We’re willing to bet that just like Medtronic the other profit-shifting U.S. multinational companies know exactly how much it will cost to repatriate those earnings, but don’t want to let the public know of their tax-dodging ways.

Actually, this should be no mystery for anyone who wants to go here and type in the company name (Medtronic in our case). In the financial footnotes under income taxes, one can see how much of Medtronic’s income was sourced abroad as well as how much they provided for foreign taxes. Foreign taxes relative to foreign income was about 10 percent, which is why Medtronic is able to report effective tax rates near 18 percent.

Nortel Bankruptcy and Transfer Pricing

Michael Lewis reports on what is emerging to be a complex issue over who gets the value from the sale of certain assets from the now bankrupt Nortel:

Claims on proceeds from a lucrative patent auction dominated opening arguments Monday in the bankruptcy trial of former tech giant Nortel Networks. The proceeding follows mediation and other failed attempts to divvy up remaining assets of the Ontario-based telecom that have rang up more than $1 billion (U.S.) in professional fees so far ... Nortel, once North America’s largest telecom equipment maker, filed for protection from creditors in the U.S. and Europe after an acquisition spree built debt and in the wake of an accounting scandal and financial restatements. At its peak Nortel posted $30 billion in annual revenue, a stock market value of $250 billion (U.S.) and had more than 90,000 employees. But the fallen tech giant left tens of thousands of pensioners fighting for a share of its assets, with retirees pitted against hedge funds, governments, former suppliers and other creditors in Europe, the U.S., Africa and the Middle East. Before dealing with claims from pensioners and other creditors, however, the courts must decide on how to divide assets among debtors, referring to the company’s former head office in Canada and its subsidiaries around the world. Canadian creditors argued in depositions filed with the courts that the Canadian Nortel operation legally owned the patents and is therefore entitled to the bulk of the sale proceeds. U.S. bondholders say U.S. businesses held licenses for the patents and are thus entitled to a fair share, while lawyers for Nortel’s European units argued in court that the patents covering technologies for mobile phones and tablet PCs were largely developed in Europe and sale revenue should accrue where it was produced.

Nortel was a Canadian based multinational with operations in the U.S. and Europe. It had complex and confusing transfer pricing arrangements which could be questioned in terms of whether they were arm’s length. Professional fees here mean the cost of lawyers and expert witnesses who are debating how much of the value of $7.3 billion in assets should accrue to Canada versus the U.S. versus Europe. Alas the professionals get rich “while the debtors fight like jackals over the carcass.”

Historical Butterflies: Richard Cohen Version

For once I am not going to be too critical of a column in the Washington Post, this one two days ago by the sometimes execrable Richard Cohen on The Lessons of World War I.  Indeed, I applaud his noticing that we are coming up on the centennial this Saturday of the assassination of Austrian Archduke Ferdinand by Gavrilo Princip in Sarajevo that touched off World War I and all the horrors that came out of it, including WW II.  I completely agree with him that this is as good an example in history of a butterfly that flapped its wings and caused a hurricane, as in the old Edward Lorenz story from climatic chaos theory that a butterfly flapping its wings in Brazil could cause a hurricane in Texas.  As an old chaotician, I like these sorts of analogies and simply remind everybody that this most famous of ideas associated with chaos theory is formally known as "sensitive dependence on initial conditions."

Of course, I do have some criticism, albeit mild this time around, more a matter of taste.  Cohen spends part of the column comparing that awful event to the current situation in the Middle East, particularly in light of the ISIS successes in Syria and especially Iraq, with it very unclear how far this will go, although I seriously doubt it will result in anything as ultimately destructive and awful as World War I.  My fuss  is with what he suggests is the equivalent "butterfly flapping its wings."  His candidate is the "uprising in Syria."  I beg to disagree and figure that this is just more neocon whining that Obama did not support the moderate opposition in 2012, although there is near zero reason to believe that his doing so would have led to either the overthrow of Assad or preventing the rise of ISIS in Syria.

As it is, I do think that there is a much more obvious butterfly flapper than that on two grounds, both on being much smaller and more buttefrly-like and also in terms of being more fundamental in terms of causation.  That butterfly flapper would be the self-immolation of the small vendor in Tunisia somewhat earlier (sorry, do not have his name).  This was really a small event, arguably smaller even than the assassination of Ferdinand.  But it set off the Arab Spring, and I think it is pretty straightforward that the uprising in Syria started out inspired by the Arab Spring, whatever one thinks of either the Arab Spring or the uprising in Syria.  As it is, the uprising in Syria is already a pretty big deal, not just some butterfly flapping its wings, it is already at least a substantial windstorm, if not a full-blown hurricane.

I remind that at least in Tunisia, where it started, the Arab Spring has turned out not so badly, with the corrupt dictatorship of Ben Ali overthrown, and after a period of rule by a moderate Islamist government now a largely secular democracy in place, just the sort of thing people in the US like.  I would also note that Tunisia is just about the only nation in the Arab world where this has been the outcome.

Barkley Rosser

An Easy Call: The Norwegian SWF Should Divest from Fossil Fuels

Forget about social responsibility.  It's a matter of simple risk diversification principles.  Norway's sovereign wealth fund should not invest at all in assets tied to fossil fuels.  If anything, it should lean toward assets that move in the opposite direction from fossil fuel prices.

This fund, of course, is entirely financed by Norway's North Sea oil royalties.  Its future revenues from this source, then, are dependent on oil prices.  These fluctuate with short run events like the pace of global economic growth (demand) and civil unrest in petrostates (supply).  The biggest long term factor, however, is whether there will be significant movement toward climate change mitigation.  At present next to nothing is being done.  The problem is immense, however, and there is an obvious risk, from the point of view of an oil producer like Norway, that new evidence of climate sensitivity will frighten governments into action before deposits are exhausted.  If there is a major intensification of policy, it will result in massive earnings reductions for oil and coal, and possibly also natural gas—of which Norway is also a significant exporter.  (Prices will shoot up, but this effect will be captured either by governments or by resource-using businesses if permits are given away.)  To put it differently, the point of mitigation measures is to leave fossil fuels in the ground, which would mean that resource owners like Norway would simply have to write off these assets.

Given that risk, the prudent thing to do is to avoid any investments whose returns are positively correlated with it.  That means divesting from Shell and any other fossil fuel companies.  A rational hedging strategy, on the other hand, would call for investments in companies whose prospects are tied to aggressive carbon policy, such as those in the renewables sector, public transportation, and whose products compete with fossil fuel-intensive goods.

Sometimes social responsibility points in one direction and sound finance in another; here they converge.  It’s remarkable there should be any debate at all.

Bacon Vodka

You may be tempted by the novelty.

Just don't.