Tuesday, 22 July 2014

Nobel Economist Joseph Stiglitz Hails New BRICS Bank Challenging U.S.-Dominated World Bank & IMF

A group of five countries has launched its own development bank to challenge the U.S.-dominated World Bank and International Monetary Fund. Leaders from the so-called BRICS countries — Brazil, Russia, India, China and South Africa — unveiled the New Development Bank at a summit in the Brazilian city of Fortaleza. The bank will be headquartered in Shanghai. Together, BRICScountries account for 25 percent of global GDP and 40 percent of the world’s population. To discuss this development, we are joined by Nobel Prize-winning economist Joseph Stiglitz, a professor at Columbia University and the World Bank’s former chief economist. "It’s very important in many ways," Stiglitz says of the New Development Bank’s founding. "This is adding to the flow of money that will go to finance infrastructure, adaptation to climate change — all the needs that are so evident in the poorest countries. It [also] reflects a fundamental change in global economic and political power. The BRICS countries today are richer than the advanced countries were when the World Bank and the IMF were founded. We’re in a different world — but the old institutions haven’t kept up."

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This is a rush transcript. Copy may not be in its final form.
JUAN GONZÁLEZ: A group of five countries have launched their own development bank to challenge the United States-dominated World Bank and International Monetary Fund. Leaders from the so-called BRICS countries—Brazil, Russia, India, China and South Africa—unveiled the New Development Bank at a summit in Brazil. The bank will be headquartered in Shanghai. Chinese President Xi Jinping said the agreement would have far-reaching benefits for BRICS members and other developing nations.
PRESIDENT XI JINPING: [translated] Through the concerted effort from all sides, we have managed to reach a consensus in the creation of the BRICSdevelopment bank today. This is the result of the significant implications and far reach of BRICScooperation and is therefore the political will ofBRICS nations for common development. This will not only help increase the voice of BRICS nations in terms of international finance, but, more importantly, will bring benefits to all the people in the BRICScountries and for all peoples in developing countries.
AMY GOODMAN: That was Chinese President Xi Jinping. Together, BRICS countries account for 25 percent of global GDP and 40 percent of the world’s population.
For more, we’re joined now by Joseph Stiglitz, the Nobel Prize-winning economist, professor at Columbia University, author of numerous books. His new book is called Creating a Learning Society: A New Approach to Growth, Development, and Social Progress.
We welcome you to Democracy Now!
JOSEPH STIGLITZ: Good to be here.
AMY GOODMAN: Talk about the significance of this bank.
JOSEPH STIGLITZ: Oh, it’s very, very important, in many ways. First, the need globally for more investment—in the developing countries, especially—is in the order of magnitude of trillions, couple trillion dollars a year. And the existing institutions just don’t have enough resources. They have enough for 2, 3, 4 percent. So, this is adding to the flow of money that will go to finance infrastructure, adaptation to climate change—all the needs that are so evident in the poorest countries.
Secondly, it reflects a fundamental change in global economic and political power, that one of the ideas behind this is that the BRICS countries today are richer than the advanced countries were when the World Bank and the IMF were founded. We’re in a different world. At the same time, the world hasn’t kept up. The old institutions have not kept up. You know, the G-20 talked about and agreed on a change in the governance of the IMF and the World Bank, which were set back in 1944—there have been some revisions—but the U.S. Congress refuses to follow along with the agreement. The administration failed to go along with what was widely understood as the basic notion that, you know, in the 21st century the heads of these institutions should be chosen on the basis of merit, not just because you’re an American. And yet, the U.S. effectively reneged on that agreement. So, this new institution reflects the disparity and the democratic deficiency in the global governance and is trying to restart, to rethink that.
Finally, there have been a lot of changes in the global economy. And a new institution reflects the broader set of mandates, the new concerns, the new sets of instruments that can be used, the new financial instruments, and the broader governance. Realizing the deficiencies in the old system of governance, hopefully, this new institution will spur the existing institutions to reform. And, you know, it’s not just competition. It’s really trying to get more resources to the developing countries in ways that are consistent with their interests and needs.
JUAN GONZÁLEZ: And the importance of countries like China, which obviously has huge monetary reserves, and Brazil, which had developed its own development bank now for several years, their being key players in this new financial organization?
JOSEPH STIGLITZ: Very much. And that illustrates, as you say, a couple interesting points. China has reserves in excess of $3 trillion. So, one of the things is that it needs to use those reserves better than just putting them into U.S. Treasury bills. You know, my colleagues in China say that’s like putting meat in a refrigerator and then pulling out the plug, because the real value of the money put in U.S. Treasury bills is declining. So they say, "We need better uses for those funds," certainly better uses than using those funds to build, say, shoddy homes in the middle of the Nevada desert. You know, there are real social needs, and those funds haven’t been used for those purposes.
At the same time, Brazil has—the BNDES is a huge development bank, bigger than the World Bank. People don’t realize this, but Brazil has actually shown how a single country can create a very effective development bank. So, there’s a learning going on. And this notion of how you create an effective development bank, that actually promotes real development without all the conditionality and all the trappings around the old institutions, is going to be an important part of the contribution that Brazil is going to make.
JUAN GONZÁLEZ: And how has that bank functioned differently, let’s say, than other development banks in the North?
JOSEPH STIGLITZ: Well, we don’t know yet, because it’s just getting started. The agreement—it’s been several years underway. The discussions began about three years ago, and then they made a commitment, and then they—you know, they’ve been working on it very steadily. What was big about this agreement was—there was a little worry that there would be conflicts of the interests. You know, everybody wanted the headquarters, the president. Would there be enough political cohesion, solidarity, to make a deal? Answer was, there was. So, what it is really saying is that in spite of all of the differences, the emerging markets can work together, in a way more effectively than some of the advanced countries can work together.
AMY GOODMAN: Joe Stiglitz, you’re the former chief economist of the World bank. What’s your assessment of the World Bank under the tenure of Jim Yong Kim, who is the former Dartmouth president? We just passed the second anniversary of his tenure there.
JOSEPH STIGLITZ: Well, it’s still too soon to say.
AMY GOODMAN: When it comes to issues of debt and other issues.
JOSEPH STIGLITZ: You know, because it takes a while for somebody to get in charge of the bank and to—you know, it’s like a big ship, and you’re trying to shift it. I think there’s a broad concern that he brings certain very positive strengths to the bank—a focus on health and other social issues—but successful development will have to continue to have a focus on some of the old issues. So, you know, you have to grow. And he has a little bit less experience in the fundamentals of economic growth. I think he has probably more sensitivity to some of the problems that have plagued these international financial institutions in the past, the high conditionality. But he faces a governance problem. And that’s what this issue is about, a governance problem, where the head of the World Bank is chosen by the U.S., even though the U.S. is not playing the economic role and the leadership role that it did at one time. And we all believe in democracy, but a democracy says it shouldn’t be just assigned to one country.
One of the interesting aspects of the discussions that I’ve heard is, you know, during the East Asia crisis, one of the senior, very senior U.S. Treasury officials said, "What are you complaining about, about our telling countries what to do? He who pays the piper calls the tune." And what I hear now is the developing countries, emerging markets, China and the other countries, saying, "We’re paying the tune. We’re the big players now. We have the resources. We’re where the reserves are. And yet, you don’t want to let us play even a fair share in the role, reflecting the size of our contributions in the economy, in trade." And so, that’s one of the real grievances—I think valid grievances. And it’s hard for an institution where the governance is so out of tune with current economic and political realities to be as effective as it could be.
JUAN GONZÁLEZ: I wanted to ask you about a subject we just had on—were discussing in an earlier segment: immigration and this whole issue of the world economy and financial systems. You have the contradiction that, on the one hand, globalization is breaking down barriers to capital everywhere, and yet, in the advanced countries especially, you have the growth of anti-immigrant movements, not just in the United States, but in Europe, in England and in Holland. And so you have a situation where there’s an effort to erect barriers to labor and to the free flow of labor. And the impact of these kinds of debates—just a few days ago, you had Warren Buffett, Bill Gates and Sheldon Adelson, a conservative Republican, all blasting Congress for not being able to achieve some kind of comprehensive immigration reform. The impact of this on the world economy?
JOSEPH STIGLITZ: Well, I think there are a couple of aspects of this that one has to appreciate. On the one hand, it’s absolutely true that free mobility of labor would have an impact on global incomes that is an order of magnitude greater than the free mobility of capital. So, the agenda that the U.S. has pursued, that free mobility of capital, has been driven not by on the grounds of global economic efficiency. It’s really special interests. It’s the banks that wanted this. On the other hand, both the movement of capital and labor can have disturbing effects. You know, we saw how free mobility of capital, short-term capital, especially, going in and out, can cause crises. We also know that migration of labor has—social adjustment processes have to occur. One of the real concerns, increasing concern, say, in a country like the United States, is that—how do you share the benefits of globalization? And there are wages are driving—been driven down. You know, the median income, income in the middle, of the United States today is lower than it was a quarter century ago. Median income of a full-time male worker is lower than it was 40 years ago. Productivity of workers has gone up over 100 percent in, say, the last 40 years—
AMY GOODMAN: We have 15 seconds.
JOSEPH STIGLITZ: —but wages are down by 7 percent.
AMY GOODMAN: We’re going to have to continue this conversation off air, and then we will post it at democracynow.org. I also want to ask you about the Trans-Pacific Partnership—you talk about it being on the wrong side of globalization—your assessment of President Obama when it comes to the growing gap in inequality in this country. Joe Stiglitz is the Nobel Prize-winning economist, professor at Columbia University, former chief economist of the World Bank. He is author of many books; his latest, Creating a Learning Society: A New Approach to Growth, Development, and Social Progress.
That does it for our show. I’ll be speaking at the Mark Twain House in Hartford, Connecticut, Monday, July 21st, at 7:00 p.m.; in Martha’s Vineyard, Saturday, July 26, 7:00 p.m. at Katharine Cornell Auditorium in Vineyard Haven. Check out democracynow.org.

with Amy Goodman & Juan González

Are students revolting, or is it economics?

Last week I made my first overseas trip on which I ticked the box 'Australian resident departing permanently'. It’s given me cause to reflect on my career as an academic economist (and part-time journalist) in Australia.
Today I commence a new role as Head of the School of Economics, History and Politics atKingston University, London, 41 years after my life as an economist began in 1973. That’s not when my PhD was approved, nor when I got my first academic job, but the date on which I participated in the student revolt over the teaching of economics in a dispute that led to the formation of the Department of Political Economy at Sydney University in 1975.
This dispute has always been tagged with a left-wing brush. Australia’s current Prime Minister Tony Abbott, when he was President of the Students Representative Council at Sydney University in 1979, supported cutbacks to University funding on the grounds that they would force Universities to stop running courses like political economy:
Abbott: “Quite frankly I think that these courses are not only trivial, but they are attempts by unscrupulous academics to impose simplistic ideological solutions upon students, as it were to make students the cannon fodder for their own private versions of the revolution. And I think that if there were further cuts to the education budget well then we would certainly see the Universities cracking down on that sort of course. The fact that they can offer that sort of course is to me proof that there is room for further cuts.”
Interviewer: “You also suggest cutting out political economy?”
Abbott: “That’s right”
There’s no doubt that the vast majority of the activists in Political Economy Movement were left-wing. But my core motivation for taking part in that dispute was that mainstream economic theory was simply wrong.
The next 40 years of reading economic literature confirmed that gut feeling. Mainstream ‘neoclassical’ economics had a multitude of flaws, all of which had been documented in the academic literature, yet almost none of them were discussed in economics textbooks.
Instead, textbook authors either ignored the problems, or did the mother of all Photoshop jobs on the frankly ludicrous assumptions that were made to paper over problems in the theory, so that the flawed models could sound halfway reasonable to someone who only read the textbooks.
I decided that the best way to reform economics was to explain the technical problems in economic theory in a way that a non-mathematical audience could understand, and to “read aloud the dirty bits” as well: to publish the unsanitised assumptions as they were made in the journals themselves. Statements like the following, for example:
The necessary and sufficient condition quoted above is intuitively reasonable. It says, in effect, that an extra unit of purchasing power should be spent in the same way no matter to whom it is given. (Gorman 1953 , p. 64)
“Intuitively reasonable”? Delusional is closer to it.
But explaining that the theory was unsound wasn't enough. There had to be an alternative way of thinking about the economy too that actually made sense, and there also had to be a reason for the public to actually worry about the state of economic theory in the first place.
I found the explanation that in Hyman Minsky’s John Maynard Keynes, which is not a biography. Most non-orthodox economics portrayed capitalism as having a tendency towards stagnation. In contrast, Minsky saw the fundamental instability in a capitalist system as upwards: “The tendency to transform doing well into a speculative investment boom is the basic instability in a capitalist economy.”
Banks, private debt, asset markets and money played essential roles in Minsky’s vision of capitalism, but they were completely ignored in mainstream economic models before the crisis. This is where Abbott was and is wrong: just because left-wing economists are ideological, it doesn’t follow that mainstream economics was logical. Crucially, its illogical decision to model capitalism as if banks, private debt and money didn’t exist led it massively astray when it came to perceive grave risks to the real economy.
Minsky’s realistic vision of capitalism instead indicated that a pure free market economy --one with no government sector at all -- could collapse into a terminal debt-deflation after a series of debt-driven booms and subsequent slumps. On the other hand, a mixed economy in which government was a substantial economic force whose net spending rose when the economy went into a slump would avoid a debt-deflation, but it would necessarily be cyclical, though with milder booms and slumps.
In 1992, I modelled Minsky by adding two elements of realism to Richard Goodwin’s highly stylised model of a cyclical economy. In Goodwin’s model, capitalists invested all their profits, while workers made wage demands depending on the level of employment. I added the reality that capitalists invest less than profits during a slump, but more than profits than a boom, with the extra finance being created by bank lending.
Figure 1: The "black hole of debt" in my 1992 model
Graph for Are students revolting, or is it economics?
My mixed economy model included a government sector that defended a target level of employment spent more than taxes during slumps and less than taxes during booms, and financed this by its own money-creation capability.
The two models generated the outcomes Minsky anticipated, but the real world fitted neither of these models precisely. So I expected the real world to display a mixture of the results of the two models. As I put it in my 1995 paper: "Increased government spending during slumps would enable recovery in the aftermath to lesser booms; larger booms, however, could result in the rate of growth of accumulated private debt exceeding net profits for some time, thus leading to a prolonged slump."
Figure 2: The cyclically stable mixed economy 1992 model
Graph for Are students revolting, or is it economics?
So I had an alternative way of thinking about the economy, which cautioned against the many radical ‘reforms’ of capitalism that the neoclassical school was gung-ho about: deregulating finance, reducing the size of the government sector, eliminating trade unions, driving inflation towards zero.  From my “Minskian” perspective, what they were doing was making the real world less like the cyclical but stable system shown in Figure 2and more like the superficially stable but ultimately catastrophic system shown in Figure 1. I therefore felt that the economy could quite possibly fall into a serious economic crisis which would take the mainstream utterly by surprise. One look at the private debt data for Australia and the USA in 1995 (see Figure 3) convinced me that a crisis was certain in the near future -- and too soon to tolerate the lengthy publication delays that occur in the academic press. So I turned to the media and to the blogosphere.
Figure 3: Australian & US private debt ratios when I started to warn of an impending crisis
Graph for Are students revolting, or is it economics?
That crisis duly occurred about two years later, and took mainstream economics completely by surprise, because neoclassical economic models then completely ignored the role of banks, private debt, and money. They instead focused on the levels of employment and inflation, and saw the apparent stability of the ‘Great Moderation’ as indicators that they have finally tamed the business cycle:
"There is evidence for the view that improved control of inflation has contributed in important measure to this welcome change in the economy." (Bernanke 2004, “What Have We Learned Since October 1979?”)
Figure 4: The crisis began when the rate of growth of private debt slowed down
Graph for Are students revolting, or is it economics?
The crisis shook mainstream policy economists to the core, and led to the biggest government economic rescue operation since the Great Depression. It was a scale of engagement that took me by surprise, until I realised that the rescue policies were driven not by economic theory but by sheer, blind panic:
“We need to buy hundreds of billions of assets”, I said. I knew better than to utter the word trillion. That would have caused cardiac arrest. “We need an announcement tonight to calm the market, and legislation next week,” I said.
What would happen if we didn’t get the authorities we sought, I was asked.
“May God help us all,” I replied. (Paulson 2010, p. 261)
As it turned out, sheer blind panic was a better guide to what to do in a crisis than was economic theory. The immense injection of government money stopped the downward plunge into Depression—as Minsky had argued that it would.
But then the human psyche came into play. Mainstream academic economists excused themselves from their failure to anticipate the crisis with the mantra that “no-one could have seen this coming”, politicians and policy economists went back to obsessing about the level of government debt, and ignoring the dynamics of private debt, and another private-debt-driven boom began in the Anglo countries (see Figure 5).
Figure 5: Today's recovery is driven by rising private debt from an unprecedented level after a slump
Graph for Are students revolting, or is it economics?
So business-as-usual has returned. But it won’t be business-as-usual at Kingston. I’ve been hired with the express mandate to take a University that is open to non-orthodox thought in economics and make it even stronger. We will teach neoclassical economics as well, warts and all. And we will teach the many non-orthodox streams of thought (post Keynesian, evolutionary economics, econophysics) too.
In doing so, we’ll be responding to the successors of those students who, 41 years ago, fought for a different approach to economics at Sydney University. There are now at least 65 student organizations around the world calling for a new approach to economics in what they have titled ISIPE: the "International Student Initiative for Pluralism in Economics”.
Today’s mainstream economists will surely regard them as hopelessly ill-informed about economic theory. They are not. They simply want a realistic approach to economics, as I did when I was in their shoes 41 years ago.
Steve Keen is author of Debunking Economics and the blog Debtwatch and developer of the Minsky software program. A longer version of this article will be published on Debtwatchlater this week.

Tuesday, 8 July 2014

Extreme climate engineering strategies will not work

Research suggests that geoengineering should be used in conjunction with abatement to reduce climate change

A new study indicates that climate engineering may not be as effective as previously believed, and that the only way to combat climate change is to reduce the amount of carbon being released into the atmosphere.
A recent report conducted by Canadian and American researchers from six universities, including SFU assistant professor of resource and environmental management Jonn Axsen, analyzed several climate engineering strategies and their potential for minimizing climate change.
The team found that some climate engineering options were decidedly poorer choices than others, given the assessment of other criteria, such as ecological risk, public perception, and the abilities of governments to control technology.
They looked at the advantages, disadvantages, and limitations of some approaches already widely in place, such as forest and soil management, as well as more controversial ideas, such as ocean fertilization and solar radiation management.
The proposed climate engineering strategies use direct, large-scale actions to reduce the carbon already present in the atmosphere or actively lower the Earth’s temperature by reflecting the solar energetic input — better known as the heating effect of the Sun.
On the other hand, these approaches may bring about undesirable consequences. In one approach, misplaced forest regrowth in high altitude, snow-covered regions could potentially darken the Earth’s surface. In another, reforestation of previously non-forested locations, could change the surface roughness and increase water transpiration into the atmosphere, thereby altering weather patterns.
One example of an ‘extreme’ solution is solar radiation management, also called ‘global cooling.’ This strategy aims to reduce solar energetic input by increasing albedo through the use of technologies such as stratospheric aerosols, outer-atmosphere reflectors, and whitening of the surfaces of cities, oceans, and deserts.
Axsen told The Peak that such an extreme solution “paints a pretty dreary picture of a future world,” continuing, “I really hope that the negative impacts of climate change don’t become so extreme that solar radiation management becomes a desirable option.”
“In light of the limitations and risks, climate engineering strategies would be best served as a complement — rather than replacement for — abatement, and the latter should remain a focus of climate-change policy for the foreseeable future,” explained the study.
Presently, several climate emissions abatement strategies serve to aid in reducing carbon emissions made by human activities. These strategies include turning off the lights upon leaving a room, using energy efficient light bulbs, or switching to hybrid vehicles, all of which attempt to decrease energy consumption.
Other abatement strategies that are still under debate include policies surrounding low-carbon fuels, including the possible implementation of emission limits and taxes on carbon or fuels.
“Emissions reduction should remain the primary efforts. More extreme strategies should be avoided, such as ocean iron fertilization and solar radiation management,” said Axsen.
According to Axsen, the only solution to climate change would involve a massive rejection of toxic fossil fuels, vastly improved energy efficiency and substantially altered human behaviour.

The Peak

“We need stringent climate policy,” Axsen stated. “As much as we can get.”

Dubai to build climate-controlled 'city', largest mall



Dubai (AFP) - Dubai is planning to build a temperature-controlled city featuring the world's largest mall and an indoor park, as well as hotels, health resorts and theatres, the developer said.
Already home to one of the globe's biggest indoor shopping complexes, Dubai Mall, the glitzy emirate known for its love of grandiose projects said it is now planning to build the "Mall of the World".
The all-pedestrian complex would occupy a total area of 48 million square feet (4.45 million square metres), said Dubai Holding, the developer owned by Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum.
The project "will comprise the largest indoor theme park in the world" under a glass dome that would be opened during winter, it said in a statement.
The seven-kilometre (4.35 mile)-long promenades connecting the facilities would also be covered and air-conditioned during summer, it added.
"Our ambitions are higher than having seasonal tourism. Tourism is key driver of our economy and we aim to make the UAE an attractive destination all year long," said Sheikh Mohammed.
"This is why we will start working on providing pleasant temperature-controlled environments during the summer months."
The statement issued late on Saturday did not say when construction would begin, nor did it reveal the cost of the project.
Dubai hopes the "Mall of the World" can attract more than 180 million visitors each year.
The emirate is known for its numerous malls and many hotels, including the Dubai Mall, touted as the world's largest shopping, leisure and entertainment destination. It is also home to the world's tallest tower, Burj Khalifa.
Dubai has established itself as a global hub for air transport and transit trade, as well as a regional financial centre.
And it beat off opposition from Brazil, Russia and Turkey in November to win the right to host the World Expo trade fair in 2020.
The emirate's economy was hit in 2009 by the global financial crisis, but it has since made a strong comeback, thanks to growth in the trade, transport and tourism sectors.

Climate Change will "costworld far more than estimated"

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A bulldozer operates atop a coal mound at the CCI Energy Slones Branch Terminal in Shelbiana, Kentucky

Lord Stern says current models do not adequately reflect the science and the impact on global economies  

Lord Stern, the world’s most authoritative climate economist, has issued a stark warning that the financial damage caused by global warming will be considerably greater than current models predict.
This makes it more important than ever to take urgent and drastic action to curb climate change by reducing carbon emissions, he argues.
Lord Stern, who wrote a hugely influential review on the financial implications of climate change in 2006, says the economic models that have been used to calculate the fiscal fallout from climate change are woefully inadequate and severely underestimate the scale of the threat.
As a result, even the recent and hugely authoritative series of reports from the UN Intergovernmental Panel on Climate Change (IPCC) are significantly flawed, he said.
“It is extremely important to understand the severe limitations of standard economic models, such as those cited in the IPCC report, which have made assumptions that simply do not reflect current knowledge about climate change and its ... impacts on the economy,” said Lord Stern, a professor at the Grantham Institute, a research centre at the London School of Economics.
Professor Stern and his colleague Dr Simon Dietz will today publish the peer-reviewed findings of their research into climate change economic modelling in the The Economic Journal.
Lord Stern says the fiscal fallout that has been calculated is woefully inadequate Lord Stern says the fiscal fallout that has been calculated is woefully inadequate (AFP/Getty)
Their review is highly critical of established economic models which, among other things, fail to acknowledge the full breadth of climate change’s likely impact on the economy and are predicated on assumptions about global warming’s effect on output that are “without scientific foundation”.
Professor Stern, whose earlier research said it is far cheaper to tackle climate change now than in the future, added: “I hope our paper will prompt ... economists to strive for much better models [and] ... help policy-makers and the public recognise the immensity of the potential risks of unmanaged climate change.”
“Models that assume catastrophic damages are not possible fail to take account of the magnitude of the issues and the implications of the science,” he said.
Professor Stern and Dr Dietz say their findings strengthen the case for strong cuts in greenhouse gas emissions and imply that, unless this happens, living standards could even start to decline later this century.
For the study, they modified key features of the “dynamic integrated climate-economy” (Dice) model, initially devised by William Nordhaus in the 1990s. The changes take into account the latest scientific findings and some of the uncertainties about the major risks of climate change that are usually omitted.
The standard Dice model has been used in a wide range of economic studies of the potential impacts of climate change, some of which have been cited in the most recent IPCC report which has been released in three parts over the past nine months.
Dr Dietz said: “While this standard economic model has been useful for economists who estimate the potential impacts of climate change, our paper shows some major improvements are needed before it can reflect the extent of the risks indicated by the science.”
Dr Dietz said his aim was to show how a new version of the model could produce a range of results that are much more representative of the science and economics of climate change, taking into account the uncertainties.
“The new version of this standard economic model, for instance, suggests that the risks from climate change are bigger than portrayed by previous economic models and therefore strengthens the case for strong cuts in emissions of greenhouse gases,” he said.
The new model differs in that it considers a wider temperature range when estimating the impact of doubling the atmospheric concentration of greenhouse gases – a measure of “climate sensitivity”.
Whereas the standard model usually assumes a single temperature for climate sensitivity of about 3C, the new model uses a range of 1.5C to 6C, which the authors say more accurately reflects the scientific consensus.
The standard model also “implausibly” suggests a loss of global output of 50 per cent would only result after a rise in global average temperature of 18C, even though such warming would likely render the Earth uninhabitable for most species, including humans, Dr Dietz contends.
The new model includes the possibility that such damage could occur at much lower levels of global warming. Standard economic models rule out the possibility that global warming of 5-6C above pre-industrial levels could cause catastrophic damages, even though such temperatures have not occurred on Earth for tens of millions of years. Such an assertion, he says, is without scientific foundation and embodies a false assumption that the risks are known, with great confidence, to be small.
The new model also takes into account that climate change can damage not just economic output, but productivity. The standard model assumes that rising levels of greenhouse gases in the atmosphere only affect economic growth in a very limited way, according to Dr Dietz.

Friday, 4 July 2014

Taking information seriously in economic policy

Earlier this month I wrote about Joe Stiglitz’s Jean-Jacques Laffont speech at the Tiger Forum, which was based on his new book with Bruce Greenwald, Creating A Learning Society: a new approach to growth, development and social progress.
Stiglitz won his Nobel Prize for his massively important work on asymmetric and missing information – how this shapes institutional structures, including markets. His Nobel Lecture is well worth the read.
This book builds on the information-based approach, and links it to other work on endogenous growth theory, which sees the process of growth as a cumulative process in which knowledge builds on earlier knowledge. This makes ideas (including those formalized as ‘intellectual property’) and people (to whom ideas are attached) the key to economic development. Stiglitz and Greenwald introduce industrial policy to endogenous growth models. They cover, among other areas, trade policy, intellectual property regimes, industrial strategy, and competition policy. It’s a somewhat technical book – there are quite a few equations and models at I would say advanced undergraduate level -  although one could skip those bits and still follow the argument.
I agree with the authors’ motivation for this book. They write: “Everyone today speaks of the innovation economy or the knowledge economy, and there have been important advances in the analysis of, say, patents and patent races, and network externalities, to take but two examples. But the full implications …. for the neoclassical model have still not been taken on board. And the implications for policy have been even less absorbed into mainstream thinking.” They go on to point out that it is 40 years since Stiglitz’s work on information questioned fundamentally standard economics results such as the existence of equilibrium, or the uniqueness of equlibrium, but little has changed in the standard approach. I doubt that any ‘mainstream’ economist would challenge the importance of the results on asymmetric information, non-linearities in growth and so on, so it is a puzzle that so few have taken the implications seriously. No doubt the answer lies in the sociology of the profession and academic incentive structures. My sense is that this is now changing.
This book takes the implications of information externalities forward into specific policy areas. It argues that not only can we not presume that a market economy is efficient, but also that industrial and trade policies can demonstrably increase social welfare. “Learning externalities are pervasive and it is a mistake not to take them into account.”
While not agreeing with every specific policy prescription they make, information, knowledge, learning – whatever you want to call it – definitely does change the prism for assessing structural economic policies. Maybe Prof Stiglitz will next write the popular book that makes this shift in perspective accessible to the policy world.

Prof Stiglitz and me at the TSE TIGER Forum

The Above from

The Enlightened Economist

Economics and business books


Cautious giant leaps

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The argument of Why Government Fails So Often and How It Can Do Better by Peter Schuck is set out wonderfully succinctly in the title, and the book does an excellent job of telling half of the story about the role of governments and markets in delivering economic outcomes.

The chapters cover a range of reasons for ‘government failure’. To list them, they are: incentives not aligned with the policy’s aims; non-rational choice; lack of information; lack of flexibility in delivering outcomes when circumstances change or things don’t work out; lack of government credibility so essential co-operation is not forthcoming; mismanagement including fraud and abuse. Schuck argues that these barriers to policy success have a “deep, structural, endemic nature.”
The book has many examples of policy failure – it’s an American and to be honest far less amusing version of The Blunders of Our Governments by Anthony King and Ivor Crewe. It’s hard to argue with the examples. This book cites also Clifford Winston’s Government Failure versus Market Failure, which has many more. indeed, there have been loads of policy failures, in all kinds of places and contexts.
An aspect of the argument here that I strongly agree with is the failure of policy analysts to build themselves into their ‘impact analysis’ or whatever framework they use for assessing the likely success of the initiative. In other words, the incentives the policy will create for the people affected to change their behaviour are hardly ever incorporated. Economists often think of themselves as being ‘outside’ the society, in a benign deus ex machina role.Yet all policies alter people’s behaviour and have many side-effects.
Schuck’s book does end with a chapter on policy successes – in fact it finds nine, including Airline Deregulation in 1978, the 1975 Earned Income Tax Credit, the food stamp program, the interstate highway system and the 1965 Voting Rights Act. However, it concludes: “It is hard to know for sure why these (and other) policies have succeeded when so many others have failed. Low costs, simple implementation, strong public good characteristics, and replacing far worse policies are all given as potential explanations. However, Schuck also concludes: “To succeed, the programs needed to engage the actors’ self-interest; they did not need to create new values or transform behaviors.” But he believes that the ‘low hanging fruit’ has gone.
Hence his main recommendation – be cautious. “Realistic meliorism” – make things a little bit better but keep your ambitions modest. The policy ‘doing better’ bit of the book’s title is doing far less.
I’m all for realism. There’s a missing half of the story here, though, which is how government actions unavoidably shape markets, so that to argue ‘don’t do much and just leave it to the market’ is in itself a policy. Collective choices are inevitable and government is how we make those choices. Why Government Fails So Often should be read alongside Colander and Kuper’s  recent book Complexity and the Art of Public Policy, which is about policy as determining the structure of a complex, and uncontrollable (in the old-fashioned policy sense) economy and society.
That approach is hard to get right too, but as it’s impossible not to have a structure within which markets operate, because here we are at a point in history where we have actually existing markets, it surely makes sense for governments to think about that structure. And while caution, in the face of the record of policies ranging from the inept to the horribly counter-productive, is surely sensible, thinking about structure does not automatically point to incrementalism.  Sometimes a cautious giant leap might be just the thing.

The Above from

The Enlightened Economist

Economics and business books