Breathing Room Economics

When I graduated from college, I was trapped underneath a mountain of debt. I had no money in the bank, $25,000 worth of student loans, and an interesting, but low-paying job doing research on economic and environmental policy. I’m sure many students today look at that $25,000 figure longingly, as they struggle with debts upwards of $100,000. But for me, the $25,000 was huge. After adding up rent, food, loan repayment, and other basic expenses, I didn’t have any money left at the end of each month. It became obvious very quickly that I was stuck – I didn’t have something that I truly desired: breathing room.

In order to reclaim some breathing room, I decided to make paying off my student loans a top priority. I worked hard, cut expenses to the bone, and put as much extra money as possible toward those loans. I paid them off in 3 years and found myself with that much-desired and often elusive breathing room. How did I use it? I took an entire summer off from work and rode a tandem bicycle with my girlfriend (now wife) across the country – a trip that changed my life for the better, but that’s a story for another day.

The search for breathing room drives much of what we do in the economy as households, businesses and governmental organizations. We have pursued economic growth (increasing production and consumption of goods and services) as a policy to gain breathing room. But, paradoxically, economic growth is now using up the very breathing room that we’ve been chasing and hoping to save for the future.

Every person, perhaps even every living organism, is interested in a little bit of breathing room – a chance to live life away from the edge of the cliff. In his book, The Beak of the Finch, Jonathan Weiner has written:

The lucky individual that finds a different seed, or nook, or niche, will fly up and out from beneath the Sisyphean rock of competition. It will tend to flourish and so will its descendants – that is, those that inherit the lucky character that had set it a little apart.

Weiner’s quote provides an eloquent evolutionary perspective on the benefit of establishing some breathing room. Nature imposes a lattice of limits upon life; there is only so much energy available, so many non-renewable resources, and a fixed speed at which renewable resources can be regenerated. Figuring out how to secure leeway within this lattice is a grand goal of all creatures, be they sunflower sprouts, chickadees, or human beings.

The story of human striving, whether considered in the context of an individual or an entire economy, features the quest for breathing room as a central theme. Attainment of breathing room bestows a greater level of security, a wider array of choices for how to spend time and allocate resources, and greater possibilities for meeting needs. Early economists such as Adam Smith and Francois Quesnay recognized the importance of breathing room in the form of agricultural surplus. It is precisely this agricultural surplus that allows for the division of labor. Without being occupied by hunting, gathering, growing, or otherwise obtaining sustenance, people can spend their time and energy on other productive activities. Division of labor, in turn, has generated efficiencies and economic growth that have, in the past, provided even greater quantities of breathing room.

The emergence of breathing room in the economy has given rise to a choice, not unlike the financial situation I created when I paid off my student loans: what do we do with it? In the economy of a single household, this choice might take the form of purchasing more goods and services. It might also take the form of working fewer hours, spending more time on leisure activities, and sharing extra resources with family, friends or community members.

What about the whole economy, then? An economy is essentially a very large household (the word economy actually derives from the Greek for household). A household contains a small number of people interacting with one another and consuming a quantity of goods and services. An economy is simply a larger number of people (the entire population of the economy) consuming a larger quantity of goods and services (the measure of the size of an economy, GDP, can be calculated by multiplying population by per capita consumption). The same choices that exist for a household also exist for the economy as a whole when deciding what to do with breathing room.

The economy of the United States and many other nations around the globe, however, don’t recognize the range of choices. We tend to spend our breathing room the same way in an unending and unsound cycle of economic growth. When we have breathing room, we use it to expand the scale of the economic enterprise; we plow it right back into economic growth, and we have to stare down the possibility of running out of air.

The cycle is composed of these steps:

1. We grow the economy by increasing the production and consumption of goods and services (generally indicated by increasing real GDP).

2. As the economy grows, it begins to bump up against ecological limits, and we experience the negative effects of that growth. Examples include excessive and unhealthy pollution, loss of natural resources, degradation of ecosystems, poverty and famine.

3. We use technological innovation, which is intimately connected to economic growth, to push back the limits to growth. The most stunning example of this step in the cycle is the green revolution, in which Norman Borlaug and colleagues developed a variety of farming techniques to increase agricultural output and world food supplies.

4. We establish breathing room. In the case of Borlaug’s innovations, malnutrition, famines and starvation were avoided.

5. We use our breathing room to go on growing the economy and the cycle repeats itself. After the green revolution, human population, production and consumption continued their exponential upward march.

A critical change, however, occurs each time through the cycle. Ecological limits become more imposing, as the consequences of growth shift from the local to the global scale – instead of worrying about a local river catching fire, we are now worried about destabilizing the climate of the entire planet. In turn, the technological innovation needed to deal with these consequences becomes more complex. As population continues to increase, stocks of natural capital continue to decline, and technological solutions require increasing complexity, the prospects of achieving lasting breathing room become more and more precarious.

Why, then, must we spend our breathing room on growth? What about short-circuiting this cycle of growth? The economy is a human construct, and growth of the economy is not an ironclad natural law – it is a human choice to grow the economy. Granted our institutions and culture are geared for growth. Cessation of growth is avoided at all costs for fear of unemployment and social instability, but with growth working like a huge vacuum cleaner sucking up all our breathing room, perhaps it is time to get to work on changing our institutions and culture. With the right economic framework in place, we can take our breathing room and cut out steps one and two of the cycle. In a steady state economy, we can use our breathing room for innovation and development, rather than for growth.

Breathe easy and move beyond growth. Credit: Saguaro Pictures

Progress and prosperity are not about ever-increasing consumption of goods and services. True progress and real prosperity are about meeting needs, achieving a high quality of life for all people, and sustaining natural resources and useful infrastructure to provide opportunities for future generations. Breathing room is the main ingredient in the recipe for progress and prosperity. Unmindful pursuit of economic growth is eating up this main ingredient before we can even finish preheating the oven. Establishing a steady state economy, with stable population and stable throughput of energy and materials, is the way to protect our breathing room. The sooner we get started on the transition, the sooner we can all breathe a little easier.

Two “Robin Hood” Taxes for the Price of One

Linking Climate Justice to Tax Justice

Co-authored by James S. Henry, economist, lawyer, and author of The Blood Bankers (Basic Books, 2005) and Dr. Brent Blackwelder, president emeritus of Friends of the Earth

The subject of taxes certainly isn’t the most riveting topic for cocktail party conversations. Most people don’t like thinking about the labyrinthine tax code or filling out convoluted forms. They certainly don’t enjoy paying taxes. But we believe that the time has come to reframe the debate on taxes and build up some popular passion and energy for a few basic adjustments to the tax code. With these simple, easy-to-implement changes, it turns out that we could move the economy in a direction that works much better for people and the planet, including a more stable climate.

We badly need to recapture the public discussion and debate on tax codes from the technical specialists and special interests, as well as the diehard anti-government reactionaries. The tax system is so critical to the functioning of any nation that as concerned citizens, it is essential for us to insist on making values like justice, fairness, and shared responsibility central to any political debate on this issue.

By framing all discussions of taxation with the jaundiced view that “politicians just want to raise your taxes,” critics have actually ended up promoting a tax system that rewards pollution and disproportionately exempts the wealthy from paying their fair share. Since more careful discussions of tax policy have become taboo, governments have ended up being deprived of revenues that are essential to provide services. Thus, the anti-government forces have created a vicious, self-perpetuating cycle: their programs to curtail revenues have often crippled government programs, helping, in turn, to reinforce the notion that government can’t get anything done.

The issue of government revenues has come to the fore as developing nations have tried to grapple with climate destabilization. Quite reasonably, they’ve been asking for assistance from the wealthy nations that, over the long haul, have undeniably been the biggest contributors to the problem, to help them pay the costs of adaptation.

The huge Copenhagen climate summit in December failed to achieve breakthrough results to reduce greenhouse gas emissions, but it did result in a pledge by the U.S. Secretary of State, Hillary Clinton, for $100 billion per year in climate adjustment assistance to poor countries by 2020. The actual amount required may turn out to be even larger, but if we start early and build up a reserve fund, we can be prepared – much like insurance. And the good news is, there is a way to obtain such large sums even in today’s difficult economic climate, while simultaneously helping to clean up and stabilize the global financial system.

The tragic earthquake in Haiti, although not caused by climate destabilization, graphically illustrates the sheer magnitude of physical and monetary magnitude of relief and adaptation measures that scientists predict may well be needed by poor nations as the earth’s climate is disrupted.

Our revenue plan involves two very modest, complementary transnational “climate change surcharges” on groups that not only could readily pay them, but also richly deserve to pay them: major banks and their superrich, often tax-dodging global corporate and individual clients.

The first component is a variation on the well-known “Tobin tax” on foreign currency transactions, originally suggested by Keynes in the 1930s. The version of the Tobin tax that we are proposing would be even less intrusive. It would only apply to wholesale foreign exchange transactions, not to retail customers. Nor would it really be an international tax, imposed on countries by some faceless OECD bureaucracy. Each country signatory would agree to introduce legislation to adopt its own national version of a “model” tax. Each country’s own tax authorities would be responsible for collection and enforcement. Given the astonishing $4 trillion per day of such transactions, a tax of less than a dime per $1,000 of transactions would yield at least $50 billion per year. A similar low marginal tax rate on all international financial transactions, including stocks, bonds, options, and derivatives, could readily collect at least twice that amount.

The second new revenue stream that we propose is an “anonymous wealth” tax. This involves levying a modest 0.5% annual “climate aid” withholding tax on the estimated $15 to $22 trillion of liquid private financial assets — bank deposits, money-market funds, mutual funds, public securities, and precious metals — that we and other analysts have estimated now sit offshore, almost entirely untaxed, in anonymous accounts, trusts, and foundations. This tax could raise at least $25 billion to $50 billion per year.

Furthermore, the administration of all these “private banking” assets is heavily concentrated in the hands of a comparative handful of leading First World banks, including all of the key players in the wholesale currency market, as well as the leading players in the recent financial crisis, and the largest recipients of “too big to fail” assistance.

This means that the anonymous wealth tax and the transactions tax complement each other neatly. The first one addresses the huge stock of undisclosed offshore wealth and income that has fallen through the cracks, while the other addresses the ongoing speculative activity that has been fueled by the accumulation of all this restless, internationally mobile private capital. From an administrative standpoint, major international banks, the “systems operators” for this highly problematic global financial industry, are perfectly positioned to help clean up its “bads.” In that sense, we can view these two modest taxes as “financial pollution” taxes, which will help to compensate the rest of us for bearing the costs and the risks of easy tax avoidance and excessive speculation.

In sum, we believe that these two modest tax proposals constitute a bold new potential solution to the problem of paying for climate adaptation, and a way of linking “climate justice” to “tax justice.” They not only are administratively and politically feasible, but most important, they also happen to be the right things to do on ethical grounds.

Administrative feasibility. This year the G20 and the IMF have already had very serious discussions of several variations on the Tobin tax, and just this week the European Parliament passed a resolution supporting it. Nevertheless, for reasons that are unclear, the U.S. Treasury Department and White House economists have been resisting. Apparently the economists are concerned about “market efficiency,” while the Treasury is still concerned about Wall Street.

These concerns are overblown. Of course all taxes interfere with perfect markets to some extent, but no one except radical anarchists are proposing that we all return to the mythological Eden of a tax-free world. This is especially true in a world with highly imperfect markets, where facts of life like imperfect information, excess financial speculation, financial crimes, ineffective law enforcement, and pollution often justify tax policies that offset these market imperfections.

The question in any real world situation is always whether the revenue generated is worth the price of any extra inefficiencies. We believe that in the case of our two specific proposals, the revenue gains dwarfs the inefficiency, if any. For example, in the case of the .005% levy on all wholesale and interbank foreign currency transactions among major currencies and cross-currency derivatives, such a tax could be implemented at very low cost, with limited opportunities for evasion. The wholesale foreign exchange market is already completely electronic, and highly concentrated. Indeed, in 2009, for example, more than 60 percent of all trading was handled by just five global banks — Deutsche Bank, UBS, Citigroup, RBS, and Barclays. This growing market generated over $4 trillion of transactions per day, more than twice the volume in 2004.

Similarly, in the case of the withholding tax on anonymous offshore wealth, the top 50 private banks in the world have more than $8 trillion in private financial assets under management, and another $4 to $5 trillion in assets under custody. Indeed, the top 10 alone account for nearly half of this amount. So long as the taxes were implemented uniformly across anonymous customers, it would be simple for these institutions to levy .5% annual withholding taxes on these assets.

Political feasibility. In principle, the revenue plan proposed here should be by far the most politically pain-free way of fulfilling Secretary Clinton’s Copenhagen climate aid pledge. It concentrates the costs on a very tiny, privileged group that is supremely able to afford them — the world’s wealthiest 10 million people on a planet with 6.8 billion humans.

From this angle, this proposal should attract widespread support from religious congregations and other nongovernmental organizations that are concerned about equity and global development. It should also attract support from national tax authorities, law enforcement agencies, and homeland security agencies that continue to see a large share of proceeds from international tax evasion and the underground economy slip through the cracks, despite their best efforts. Of course it should also attract support from environmental groups, and from public officials who are concerned about finding ways to pay for essential government activities without going deeper into debt.

Finally, this proposal could gain traction from the public outrage over the lingering effects of the financial crisis and the taxpayer bailouts that have been received by wealthy financial institutions that were “too big to fail.”

Moral justification. The moral foundation of this proposal is the idea of combining “global climate justice” with “global tax justice.” Global climate justice reflects the polluter pays principle — the judgment that it is fundamentally fair for rich countries to pay for most of the costs of adapting to climate change, since they have been overwhelmingly responsible for greenhouse gas emissions in the first place.

The concept of “global tax justice” reflects the judgment that it is fundamentally fair for the financially wealthiest citizens and corporations in both poor and rich countries alike to pay at least some taxes on their worldwide incomes and/or wealth to support their home countries.

One key source of the trillions in private funds that we propose to tax is underreported capital flight — money that is secreted offshore and invested abroad beyond the reach of domestic tax authorities. A second major source is under-taxed corporate profits and royalties that have been parked offshore in tax havens by way of rigged transfer pricing schemes. A recent report by the charity Christian Aid estimated the annual cost of these transfer pricing schemes to developing countries, in terms of lost tax revenues, at $160 billion per year. A third source is the myriad illicit activities that constitute the global underground economy — corruption, fraud, insider trading, drug trafficking, “blood diamonds,” and innumerable other big-ticket, for-profit crimes.

The ownership of the trillions in untaxed financial wealth is incredibly concentrated. At least 30 percent of all private financial wealth, and nearly half of all offshore wealth, is owned by world’s richest 91,000 people — just 0.001% of the world’s population. The next 51 percent is owned by at most 10 million people, comprising only 0.15% of the world’s population. About a third of all this offshore wealth has been accumulated from developing countries, including many of the largest “debtors.” And almost all of it has managed to avoid any income or estate taxes, both in the countries where it has been invested and the countries where it originated.

Tax policies are at their best when they provide the right incentives, secure funding for needed public goods and services, place the burden of payment on the right parties, and make progress toward a more equitable society. The proposed “Robin Hood” taxes on anonymous wealth and foreign exchange transactions meet all these criteria, and they are easy to administer. They are precisely the kind of progressive tax changes that we should all be happy to discuss, even at a cocktail party.

Forty Shades of… “Less Brown?”

BrianCzechVarious subjects compete for this week’s Daly News, coming on the heels of the Eastern Economic Association conference in Philadelphia. “Forty Shades of Green” comes to mind, with all that we hear these days about “greening” the economy. Green jobs, green technology, green sectors… even “green growth.”

Sure enough, at the outset of the EEA conference was a talk on “Green Consumerism.” However, I took special note of the subtitle, “A Path to Sustainability?” The most noteworthy part was the question mark. In a political economy seemingly drunk on green beer, the question mark suggested some sobering skepticism.

I wondered if the question mark was just a typo. After all, this was a conference of professional economists, widely known for denying any conflict between economic growth and environmental protection. Yet the authors, Paula Cole and Valerie Kepner, described in some detail the inanity of spending our way into a sustainable economy, as well as the shenanigans pulled with the word “green.” They questioned the use of “green” to describe any kind of consumption. They concluded that “greening” an economy really entailed a lessening of consumption.

So maybe it’s time to employ another portion of the color spectrum in reference to economic growth. If green sends the wrong message, perhaps “brown” is the word. Instead of green growth, brown bloating.

Some consumable goods are less brown than others – think Honda vs. Hummer – but even a unicycle requires natural resources for its production. Manufacturing the unicycle entails pollution, too. It just doesn’t square to call an expanding unicycle sector a “green” phenomenon. Even compared to Hummers, unicycles are less brown, not green.

The service sectors fit in with the browning process of economic growth. From driving trucks (quite a brown service) to answering phones (less brown, on the surface), material inputs and pollution are part of the deal. We also have to remind our green beer-drinking friends that much of the phone answering is in service to the trucking sector. In more general terms, the “information economy” is an economy where growing quantities of information feed the already-brown sectors. If we don’t remember this, the Green Sheen Machine will continue to get away with talk of “de-materializing” the economy, lulling citizens and policy makers into leaving environmental concerns for tomorrow, while we experiment with “greening” our growth today.

We shouldn’t be surprised if they start talking about “green population growth” for green jobs and green consumerism. After all, cheaper labor and more consumers is what the corporate marketer wants. So we also have to remind our green-beer guzzlers that Hummer drivers and unicycle riders alike – indeed any producer or consumer of any good or service – must be fed, clothed, and sheltered. Population growth, which is often encouraged or defended for the sake of economic growth, entails the production and consumption of more food, clothing, and shelter. It’s not always and everywhere bad, but it’s never, nowhere green.

What about technological progress? The development of new technology in the brownest sectors might slow the slide toward dirty-coal black, but it doesn’t move us to the green part of the spectrum. That is because of the overlooked, tight linkage of research and development with economic growth at pre-existing, admittedly brown levels of technology. This ballooning, brownward spiral is more fully described here. New technology can be a very good thing, but in the service of economic growth, it does no better than lessen the rate of browning.

From the supply side and the demand side, then, economic growth starts with a tinge of brown and gets browner by the unit. We might call this the principle of increasing marginal brownness. If we must get “green” into the terminology, we may refer to economic growth as exhibiting the principle of diminishing marginal greenness.

But back to the Eastern Economic Association… Although I was right about the intent of Cole and Kepner, I turned out to be wrong about many other authors at the conference. I thought that, aside from a few strays, they would all be pumping their growth fists, “green” or not. Instead, almost all of the economists I spoke with – and I spoke with dozens – agreed that there is in fact a fundamental conflict between economic growth and environmental protection! These were professional economists, economics professors, and top-notch grad students in economics. They agreed that in large, wealthy economies, a steady state economy has become a more appropriate goal than economic growth.

“Prove it,” you say? I’ll do just that, next month in The Daly News.

Two Meanings of “Economic Growth”

Herman DalyThe term “economic growth” has two distinct meanings. Sometimes it refers to the growth of that thing we call the economy (the physical subsystem of our world made up of the stocks of population and wealth; and the flows of production and consumption). When the economy gets physically bigger we call that “economic growth”. This is normal English usage. But the term has a second, very different meaning – if the growth of some thing or some activity causes benefits to increase faster than costs, we also call that “economic growth” – that is to say, growth that is economic in the sense that it yields a net benefit or a profit. That too is accepted English usage.

Now, does “economic growth” in the first sense imply “economic growth” in the second sense? No, absolutely not! Economic growth in the first sense (an economy that gets physically bigger) is logically quite consistent with uneconomic growth in the second sense, namely growth that increases costs faster than benefits, thereby making us poorer. Nevertheless, we assume that a bigger economy must always make us richer. This is pure confusion.

That economists should contribute to this confusion is puzzling because all of microeconomics is devoted to finding the optimal scale of a given activity – the point beyond which marginal costs exceed marginal benefits and further growth would be uneconomic. Marginal Revenue = Marginal Cost is even called the “when to stop rule” for growth of a firm. Why does this simple logic of optimization disappear in macroeconomics? Why is the growth of the macroeconomy not subject to an analogous “when to stop rule”?

We recognize that all microeconomic activities are parts of the larger macroeconomic system, and their growth causes displacement and sacrifice of other parts of the system. But the macroeconomy itself is thought to be the whole shebang, and when it expands, presumably into the void, it displaces nothing, and therefore incurs no opportunity cost. But this is false of course. The macroeconomy too is a part, a subsystem of the biosphere, a part of the Greater Economy of the natural ecosystem. Growth of the macroeconomy too imposes a rising opportunity cost that at some point will constrain its growth.

But some say that if our empirical measure of growth is GDP, based on voluntary buying and selling of final goods and services in free markets, then that guarantees that growth consists of goods, not bads. This is because people will voluntarily buy only goods. If they in fact do buy a bad then we have to redefine it as a good. True enough as far as it goes, which is not very far. The free market does not price bads, true – but nevertheless bads are inevitably produced as joint products along with goods. Since bads are un-priced, GDP accounting cannot subtract them – instead it registers the additional production of anti-bads, and counts them as goods. For example, we do not subtract the cost of pollution, but we do add the value of the pollution clean-up. This is asymmetric accounting. In addition we count the consumption of natural capital (depletion of mines, well, aquifers, forests, fisheries, topsoil, etc.) as if it were income. Paradoxically, therefore, GDP, whatever else it may measure, is also the best statistical index we have of the aggregate of pollution, depletion, congestion, and loss of biodiversity. Economist Kenneth Boulding suggested, with tongue only a little bit in cheek, that we re-label it Gross Domestic Cost. At least we should put the costs and the benefits in separate accounts for comparison. Not surprisingly, economists and psychologists are now discovering that, beyond a sufficiency threshold, the positive correlation between GDP and self-evaluated happiness disappears.

In sum, economic growth in sense 1 can be, and in the United States has become, uneconomic growth in sense 2. And it is sense 2 that matters.

Read All About It

The Daly News, your source of information for innovative ideas about building a better economy, is set to launch. Each week, The Daly News will provide a thought-provoking feature essay that challenges the predominant economic paradigm and explores creative solutions to our profound economic and environmental problems. The first essay by Herman Daly will appear March 1. In addition to Professor Daly, the core rotation of authors at The Daly News includes Brian Czech (wildlife biologist, ecological economist, and author of Shoveling Fuel for a Runaway Train), Brent Blackwelder (former president of Friends of the Earth and founder of American Rivers), and Rob Dietz (environmental scientist and executive director of CASSE).

The Daly News also will present guest posts and news briefs about economic growth and sustainability. Readers are invited to subscribe to the RSS feed.