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What is Wrong with a Zero Interest Rate?

by Herman Daly

Herman DalyThe stock market took a dip, so the Fed will likely continue to keep the interest rate at zero, in conformity with its goal of supporting asset prices by quantitative easing. What is wrong with a zero interest rate? Doesn’t it boost investment, growth, and employment?

There are many things wrong with a zero interest rate. Remember that the interest rate is a price paid to savers by borrowing investors. At a zero price, savers will save less and receive less return on past savings. Savers and pensioners are penalized. At a near zero price for borrowed funds, investors are being subsidized and will invest in just about anything, leading to many poor investments and negative returns, furthering the economy’s already advanced transition from economic to uneconomic growth. Zero interest promotes an infinite demand for savings with zero new supply. But the “supply” is provided artificially by the Fed printing money. The infinite demand would be checked by the rising costs of natural resources and environmental damage if those costs were internalized, but they are not. Yet the environmental costs are real and do not disappear just because they are not counted. With free money and uncounted environmental costs, why not invest heavily in fracking? A very unequal distribution of income does check demand, at least for non-luxury goods. Rich people have an increasing surplus of money to invest, which also helps hold down the interest rate. Yes, mortgage rates fall, and that benefits citizens as home buyers, but they lose more in terms of their retirement accounts. And there is still a significant spread between the zero rate paid to savers and the positive rates charged on credit card and other debt, so the banks are doing quite well.

Also think for a moment about the calculation of present value in finance—a perpetual stream of future income divided by the interest rate gives its capitalized value. If the interest rate is zero, then the capitalized present value of any positive perpetual income stream becomes infinite. To put it another way, a zero interest rate is equivalent to saying that a hypothetical stream of income into the infinite future is all totally available today. Supply of financial capital in terms of its present value is infinite. But financial capital is supposed to be a measure of real capital, which is not infinite. Furthermore, the interest rate, to a significant degree, reflects the risk of loss. With infinite capital it matters little if you lose some, so risk too is uncounted.

U.S. Treasury.Elfboy

U.S. Department of the Treasury, Washington, D.C. Photo Credit: Elfboy

Zero interest rates encourage aggregate growth in scale of the macro-economy to ecologically unsustainable, as well as uneconomic, levels. Zero interest rates also neglect risk of loss, while encouraging microeconomic misallocation to stupid projects. At the same time, it redistributes income inequitably. Does all this make you think that something might be screwy with the policy of zero interest rates? Economists pride themselves on their knowledge of advanced mathematics, but they don’t seem to mind the fact that their policies imply dividing by zero!

Granted that with severe unemployment it is worthwhile, as Keynes said, to hire people just to dig holes and fill them up again in order to increase spending. However, this would better be done by the Treasury paying the hole diggers with new Treasury money than by the Fed doing it by distorting the scale, distribution, and resource allocation of the whole economy with zero interest rates in order to create new bank money. Also, the money created by the Treasury costs no interest to the public, while the money created by the Fed costs us the positive rate charged to borrowers, not the zero rate paid to depositors. Money is a public utility like a road. Should private banks be allowed to set up a tollbooth and charge us for using public roads? By the way, the Fed is owned by its member private banks.

How does the Fed keep the interest rate at zero? By printing money—quantitative easing, so called. Some hyper-Keynesians want a negative nominal interest rate (we already have a negative real rate when corrected for inflation) because we still don’t have full employment even at a zero interest rate. But this is so crazy that it requires a separate discussion of its own.

Why has this huge monetary expansion not led to more inflation? For one, because the dollar is a reserve currency and other nations hold large dollar assets. Also, other major currencies, following the same expansionary policy, have been depreciating relative to the dollar. This will not likely continue. Furthermore, there really has been inflation, but of a hidden kind. Instead of stimulating new production and employment, the new money has increased the demand for existing assets such as stocks, houses, art, etc., providing little employment and leading to speculative bubbles. The Consumer Price Index (CPI), the official measure of inflation, does not include capital assets. And concurrent cheap-labor policies—off-shoring of production and tolerance of illegal immigration—depress wages, holding inflation in check. In addition, the externalization of increasing environmental costs keeps prices lower than they should be. Further, as any consumer can testify, the quantity per package of food is getting less, and the quality of service of airlines, internet providers, public utilities, etc. is deteriorating. Our leading newspaper, the New York Times, now repeats many of the same articles over and over for weeks at a time. Getting less quantity or quality or more repetition for the same price is equivalent to a price increase—hidden inflation. So the claim that quantitative easing has not yet led to inflation is at best only half true—it has certainly led to inflationary substitutes not measured by the CPI. Some official versions of the CPI even exclude such basics as energy, food, and housing (too “volatile” is the excuse). Do you ever feel that you are being lied to?

It is a bad idea to manipulate the interest rate as a policy variable—it has too many side effects cutting in too many different directions, especially in a fractional reserve monetary system. Better to control the money supply directly by moving to a full reserve banking system. We should abolish the Fed, let the Treasury directly control the money supply, constrained by avoiding inflation, not by a budget. An entity that can create money does not face a budget constraint, and has no need to borrow. But it does have a price-index constraint, and must be disciplined by avoidance of inflation (or deflation). As long as the public wants to hold more money, the Treasury can keep creating and spending it. When the public wants to hold more real goods and less money, they will exchange money for goods driving the price index up, which is the signal to the Treasury to stop issuing money, and if necessary to withdraw some. Money, in a full reserve banking system, becomes non interest-bearing government debt rather than interest-bearing private debt. Seigniorage (profit from creating token money at negligible cost and receiving its face value in exchange) will go entirely to the government, not largely to private banks. Also, banks no longer have the extortionary power to crash the entire payments system that fractional reserves gives them. The interest rate, like other prices, can take care of itself, determined by supply and demand. The policy focus should be to manage the money supply, constrained by a constant price index. In effect, the real value of the dollar is backed by all the commodities in the price index, rather than gold, or the “full faith and credit of the US government.” (See Nationalize Money, Not Banks)

Policies of this general kind, but elaborated on in much more detail, are currently suggested by the British NGO known as Positive Money. They are reviving and updating the sound monetary economics of Frederick Soddy, Irving Fisher, Frank Knight, and other leading economists of the 1920s. Fractional reserve banking supports the whole pyramid structure of Ponzi finance, and we badly need to move toward a full reserve banking system to escape instability.

 

Climate Change: The Wrong Top Priority for Environmentalists and Conservation Professionals

by Brian Czech

BrianCzechYou read that headline right, so let’s start with a disclaimer: Climate change is one of the biggest threats of the 21st century. Only idiots, ignorami, and certain categories of the insane dismiss the abundant science pointing to climate change, its causes, and its ongoing and future effects.

To stave off a pack of strawman-hungry wolves, let’s double down on the disclaiming: Climate change is an issue that warrants substantial attention. The crux of the matter is how much to prioritize it. Priorities have to be balanced, and the current balance is way out of kilter.

Environmental organizations and conservation agencies took a big gamble by putting all their beans in the top-priority pot. Yes, the perils of climate change are profound. And it’s true that planning for climate change is politically feasible, finally. The level of acceptance is “good enough for gubment work,” in the case of state and federal agencies. The same can be said for coffee-table conservation outfits like the National Wildlife Federation. Public acceptance of climate change is high enough to “work it.” Budgets can be built around climate change. Funding can be found and grants can be grabbed without a lot of political savvy or guts. Everybody can get credit for trying to save the world without having to deal with the harsh realities of what that really takes.

Some legitimate credit belongs to those who thought prioritizing climate change might unify an environmental conservation community that has long divided its efforts among such issues as clean air, clean water, fish and wildlife conservation, and wilderness preservation. The “envirocons,” to loosely lump all the environmental and conservation activists and professionals, have seldom reached critical mass to make a substantial difference in domestic policy. Some think climate change will rewrite the calculus of environmental politics by providing a unified front issue.

So what exactly is wrong with making climate change the top priority? First, although the political correctness of climate change is good enough for gubment work — that is, muddling around in the bureaucracy — it’s nowhere near high enough for effective law-making, and may never be. That’s because climate change is two degrees removed from the known reality of too many Americans. It’s not like the simple problem of overhunting during the early 20th century, when the passenger pigeon went extinct. Everybody saw it, either directly or in the papers. Laws were passed and the problem was solved, at least for the remaining species.

The next major conservation problem of the 20th century was habitat loss. Again it was easy to see: the bulldozers came and the wetlands were drained, forests were cleared, prairies were plowed, etc. The ducks and geese, most noticeably, disappeared from vast areas. Hunters (a much more prominent segment of society at the time), birdwatchers, and nature lovers in general got mad and lots of others were concerned. Laws were passed to keep the bulldozers out of the wetlands. The problem was solved, at least for the remaining wetlands, and to the extent the laws were upheld.

Climate change is different, and how. You might see its effects and sense it happening, but you don’t see climate change itself. And no matter how much you think you know about climate change, it requires dealing with a lot of uncertainty. You may have seen a hurricane, but was it caused by climate change? Maybe? To what degree? Prove it.

Even for those who can drink uncertainty with a fire hose, climate change requires connecting some challenging dots. It’s at least a two-step dance with an unwelcome partner. Step one is acknowledging that the climate is changing, and changing more rapidly than it normally might, whatever “normally” should mean. Just enough folks have taken this first step to put climate change on the political map.

But then comes step two, the connection of this abnormal pace of climate change to human economic activity. Now you’re messin’ with some minds. For starters, there are those who simply have a difficult time understanding the concepts, and don’t feel like making the effort to begin with. While the greenhouse gas effect is simple enough, and greenhouse gases readily identified, the combinations and permutations of causes and effects are complicated enough to lose readers by the score. Not everyone finds this stuff interesting, either. Americans love NASCAR and the Super Bowl, and find their news-hour attention riveted to mass shootings at home, terrorist activities overseas, and the latest scandal wherever. Who’s got time to read about emissions scenarios and climate modeling?

Then you’ve got the “religious wrong” preaching from evangelical pulpits that puny little man — proverbial dust in the wind — could never have an effect on God’s own climate. (Why only those godless liberals could offend God with such hubris!) We’re not talking about a handful of kooks here; the collective anti-science, anti-sustainability, holier-than-thou congregation is big enough to keep mean-spirited know-it-alls like Rush Limbaugh in business.

Then you have the millions who’ve been brainwashed into thinking that there is no conflict between growing the economy and protecting the environment. They’re a slightly more “sophisticated” crowd and more left-leaning than right. They haven’t been snowed by some pass-the-plate preacher at the big-box church, but by secular Big Money itself. Wall Street, Madison Avenue, and their parades of politicians have been selling the public a bill of goods for decades. Starting no later than with Ronald Reagan, economic growth was supposed to be unlimited, and if we really wanted to protect the environment, or the climate, all we needed to do was grow the economy. That way we’d have enough money to throw at the problem.

This cultural landscape of very odd bedfellows is like a minefield separating climate change talk from action. (And then, if we make it through the minefield, what action do we take?)

And what about all the regular old environmental issues we felt were so urgent before we prioritized climate change? Like clean air and water, wildlife conservation, wilderness preservation, soil conservation, invasive species, Superfund, the ozone layer, green space, threatened and endangered species, environmental quality and ecological integrity at large? We were already scrambling for scraps of funding for these issues, and now the collective scraps have been taken away to feed all the climate change research, modeling, planning, and a heavy load of education and outreach.

So then what should we prioritize to unify the envirocons and save the world? It should be obvious. The natural progression from market hunting to habitat loss was also a progression from a microeconomic issue to a meta-economic issue. The next stage in this progression is to the macroeconomic issue of economic growth. As the bumper sticker says, “Growing the economy is shrinking the planet.”

This isn’t the article to go into detail on the fundamental conflict between economic growth and environmental protection. Numerous authors have described that conflict in impeccable detail. Probably one paragraph is in order, though…

Economic growth means a lot more than all the good things we hear about it in the news. It’s not a gravy train or a silver bullet. To put it in dispassionate terms, economic growth means increasing production and consumption of goods and services in the aggregate. Economic growth means a growing population and/or growing per capita consumption (aka “affluence”). It means growing GDP. It means environmental impact. It’s the underlying, overarching, all-encompassing cause behind virtually every environmental problem you can think of, including climate change in a fossil-fueled economy. Meanwhile society falls asleep to the tune of “green-growth” lullabies. The notion of replacing those powerful hydrocarbons with “clean” fuels to support ever-growing GDP is a dream, alright. It’s the kind of dream that turns into a nightmare as the realization hits that pulling out all the stops for economic growth is a handcart to hell.

Climate change is harder spot than the troubles of an overgrown economy.

It’s tough to spot the elevated levels of greenhouse gases on the left; it’s easier to spot the trouble with runaway growth on the right.

With one paragraph on the conflict between economic growth and environmental protection, the common sense should be engaged. Common sense can probably give you an inkling of the corruption of economics, too, and why economists on Wall Street and in the Fed tell you only about the benefits of economic growth without mentioning the costs, despite the fact that the costs are now exceeding the benefits for most Americans — and for virtually all their grandkids.

With the conflict between economic growth and environmental protection left to your common sense or further reading elsewhere, what’s left of this article should focus our attention on the properties of economic growth as a viable issue for government agencies as well as for NGO priorities and eventually public policy. At least five key properties separate economic growth from climate change.

First, just like market hunting and habitat loss — and unlike climate change — economic growth is readily observable. Look around you and wherever you see an environmental problem, note the cause. It’s not a mystery. It’s “human activity” as some like to say, but even that is an inadequate phrase, lacking policy implications. Humans and their activities should not be made to sound like a blight on the planet. It’s not spiritual activity, or family activity, or civic activity that threatens our water supplies, endangers other species, and changes our climate. To be precise, it’s human economic activity: the energy sector, agriculture, natural resource extraction, manufacturing, services. All the sectors — every single one of them in an integrated economy — plus all the infrastructure (roads, power lines, dams, etc.), plus the byproducts (pollutants including greenhouse gases) and incidental effects including climate change.

Second, economic growth can serve as an even better unifying front issue than climate change. Climate change doesn’t cause all other environmental problems or the vast majority of conservation challenges. Economic growth does. All those issues faced by envirocons prior to climate change were being caused by an increasing population and its economic activities. Now we can add climate change to that list of the effects of a constantly growing human economy. Fix the growth problem, and you go a long way toward fixing the climate change problem. Mountain-top removal and Keystone pipelines wouldn’t be so tempting if we weren’t hell-bent on GDP growth.

Third, economic growth is already entrenched in the American lexicon. The phrase itself elicits no immediate backlash from the pulpit, Wall Street, or conservative radio shows and politicians. Economic growth is expected to be in the news every day. It’s a welcome topic. Now when the dialog starts, with the rest of the story about the problems caused by economic growth, debate will begin of course. But that’s exactly what we need. At least economic growth is not a non-starter, as climate change is in many circles.

Fourth, when it comes to really doing something, economic growth can be dealt with immediately at a fully developed policy table. It’s not like climate change where plenty of well-intentioned effort has manufactured almost no policy machinery. No new conventions or treaties are needed for real effects on the rate of economic growth. At the economic policy table, fiscal, monetary, and trade policy is already being crafted, but always in pursuit of growth. This policy table is set and waiting for chairs to be occupied by experts better-informed than the usual lineup of Chicago School economists.

The need for well-rounded expertise at the economic policy table points to an immediate role for environmental bureaucrats and political appointees at the highest levels. For every economist from the Council of Economic Advisors, there should be an EPA administrator or conservation agency director explaining the costs of further growth. We need a long-overdue and ongoing discussion about the conflict between economic growth and: 1) environmental protection, 2) economic sustainability, 3) national security, and 4) international stability. Then lawmakers and presidents can make informed decisions about balancing economic and other goals. Hopefully in the coming decades we’ll be pursuing the establishment of a sustainable, steady state economy rather than unsustainable and increasingly destructive economic growth.

Fifth, addressing the threat of economic growth is a far more practical alternative than the wishful thinking about climate change action. This is easy to understand, but only when we remember that practicality is not a concept reserved for politics. Just because the acceptance of climate change is good enough for gubment work doesn’t make climate change a practical matter for spending taxpayer money or NGO dues on. Prioritizing climate change is like chopping at kudzu leaves instead of the roots. It’s not going to do a significant bit of good as long as the overriding policy goal is economic growth.

In short, climate change is the wrong issue for environmentalists and conservation professionals to collectively prioritize above all others. While climate change is a legitimate threat, prioritizing climate change was driven largely by (relative) political convenience and the constant jockeying for agency funding, NGO membership dues, and foundation grants. Meanwhile the failure to prioritize economic growth, the mother of 21st century threats, is driven by shallow political thinking and the personal interests of “leaders” getting paid the big bucks at the heads of conservation agencies and environmental NGOs.

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Duck Dynasty, the Green Party, and Steady Statesmanship

by Brian Czech

BrianCzechI’ve never seen an episode of Duck Dynasty, and I’m not a member of the Green Party, at least not any more. But who hasn’t seen the news, and the Duck Dynasty reminds me why I left the Green Party. I’m not sure the Green Party will give a quack, but I do think anyone concerned with political strategy should.

Back in 2000 I was actually quite involved with the Greens. The Green Party of the United States was so desperate for qualified candidates that I was approached to run for office; for President of the United States no less! At last count, I had about six votes, not including my own. (I was still undecided.) Needless to say, we failed to git ‘er done.

Yet it wasn’t a complete waste of time, as we did manage to insert a plank calling for a steady state economy — stabilized population and per capita consumption, in simplest terms — which was a first not only for the Green Party but for any political party on the national scene. In fact, it may have been the first formal act of steady statesmanship in the United States.

But my experience with this effort ultimately caused me to flee the Green Party, because it was worse than like pulling teeth. It was like pulling teeth while dodging spitballs — hastily chewed ones — spit from the left and the right.

Which leads us to the Duck Dynasty and its “patriarch” Phil Robertson. With just a few words about you-know-what, this fella opened up a spitball free-for-all. Just think, a duck caller from the Louisiana swamp opened so many cans of worms that the worm population will double before it can be stuffed back into cans. Why there’s gay rights, civil rights, and the First Amendment for starters. Sure enough, politicians from Arkansas to Alaska are jockeying for position, trying to associate themselves with the baby (Innocent Baby Phil) while bailing out the bathwater (Adult Phil and the ZZ Top Shotgunners).

I suppose it all makes for unique entertainment — God knows every other form of entertainment has been beat to death in the country of America’s Got Talent. But for those who are serious about public policy and the prerequisite politics, all the newly escaped worms and the entertainment buzz is another big distraction, sapping the focus and wasting precious time.

Which leads us back to the Green Party. Have you ever wondered how the Green Party got its name? Back in the day when I signed up, I assumed “Green” meant or at least implied that this was a political party all about environmental protection and its obvious aspects such as wildlife conservation, clean air and water, and (by now) climate stability. For me, fresh out of my Ph.D. research, protecting the environment was rapidly becoming the most important endeavor of the 21st century. This was no tree hugger’s tiddlywinks either. A long hard look will clarify for most that a healthy, stable environment is the foundation of a sustainable, prosperous economy, which in turn is the lifeblood of national security and international stability.

So when I joined the Green Party, I did so because I assumed this would be the party with an undeniable, indefatigable focus on environmental protection. Furthermore, also because of my research plus lengthy experience in environmental management and civil service, I had realized that environmental protection was all about stabilizing the human presence on the planet including the United States. I had realized that environmental protection entailed the establishment of a steady state economy.

And really that’s common sense, no?

Can you imagine my chagrin as the Green Party turned out to know quite little about environmental matters, less yet about natural resource management, and next to nothing about steady state economics? Worse, there didn’t seem to be much focus at all on the environment. The knowledge, passion, and focus was instead meted out to issues that I’m only going to describe, euphemistically, as “off center.” In other words it was a party for the disaffected of all sorts.

Most of us can empathize with the underdog. But there is a time and a place for everything, and as they say, all in moderation.

If your favorite pastime is empathizing with underdogs and you’d like to join a whole team of them, then by all means you should join the Green Party, at least if it hasn’t changed much since 2000. Just don’t expect any political success. On one issue after another, the Green Party goes way to the end of the political spectrum, usually the “left” end in American parlance. It doesn’t take a highly imaginative sense of geometry to realize that such a strategy quickly boxes you into the tiniest corner of the political world. It’s political suicide.

Now I have no interest in running for office, but if I were running with the Green Party, we’d be adopting a new slogan: “First Things First.” Everyone would know what that meant, by virtue of the Green Party’s name. The slogan would be intended to convey a new-found sense of focus on environmental protection.

Bayou

It’s about the bayou, not what’s said on the bayou (photo by Tom Haymes)

First things first — protect the environment and all the awesome potential of the United States can be achieved. Lose focus on the environment and the rug will be pulled from posterity’s future. It won’t matter if the grandkids are gay, duck hunters, or America’s Idol. They’re all gonna need clean air, clean water, a sustainable climate, healthy farms, forests and fisheries, and a bit of wild country for inspiration. They’ll all depend on what we do today for environmental protection.

First things first. Let the Huckabees and the Jindals and the Palins go picking up the worms let loose by Phil Robertson. Let the Charlie Sheens do their liberal lamenting and the A&E’s do their public relations dancing. Meanwhile, let Obamacare sap the energy of its ardent supporters and opponents alike. While you’re at it, let the NRA have at it with the police unions. None of those are dogs in your fight.

First things first. The Green Party is supposed to be about protecting the environment, and we need it. Democrats and Republicans aren’t doing it. Democrats tend to go with the “green growth” propaganda, claiming “there is no conflict between growing the economy and protecting the environment,” while Republicans just say heck with the environment and “drill baby drill.” Both parties are so tight with Wall Street and pro-growth, neoclassical economics that we can never expect sustainable economic policy, and therefore environmental protection, from them.

So at this point in history, Green Party, as you contemplate the New Year, and despite all prior shortcomings, it looks like you’re still the only game in town for providing a significant alternative to politics as usual. It remains up to you to focus on environmental protection. Regarding all those cans of worms, the default response of the Green Party ought to be adopting a central position so that environmental protection can come to the forefront as a decisive issue for the voters.

First things first! Time’s a wasting as green turns to brown, shade by shade. Forget about Ol’ Phil, metaphor for political distraction. Keep your focus on protecting the environment and saving the green space, and even the duck hunters down in Louisiana might vote for you.

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Selecting “Surrogate Species” for Conservation: How About an 800-Pounder?

by Brian Czech

These days the American conservation community is abuzz with the “surrogate species” approach to conservation. That’s where certain species are selected to represent all the others. Older conservation biologists see it as another iteration of the “umbrella species” concept, where managing for a critter like the grizzly bear would automatically protect a long list of species, simply because the grizzly bear occupies a vast sweep of terrain and habitats.

The rationale for taking this approach is clear enough. State and federal wildlife conservation agencies are tasked with conserving thousands of species of concern, including threatened and endangered species, migratory birds, marine mammals, all sorts of fishes and other “aquatic resources,” and biodiversity in general. These species are under pressure from left and right, above and below. Mountaintop removal, shale oil excavation, fracking, helicopter logging, stern trawling, factory farming, manufacturing, road construction, dams, invasive species, air pollution, water pollution, BP oil spills, climate change, genetically modified crops… all greased by the information sectors. “It’s the economy, buddy.”

To protect the thousands of accosted species, one by one, entails dealing with threat after threat after threat, in place after place after place. For a while during the first decade of the 21st century, notions were entertained of doing precisely that! Theoretically we could have worked up some computerized flowchart of species’ population goals, converted all the goals into habitat objectives, melded them all together, and spit out maps identifying precisely which parcels on the landscape were necessary to conserve.

And then of course we would have had to actually go out on the land and protect those parcels. Details!

This whole pipe dream was impossibly complicated, and wouldn’t be possible in the best of fiscal environments. It’s not even close to feasible today as we encounter limits to growth and declining budgets. That’s why we’re back to the umbrella species approach, bottling old wine with a new label, “surrogate species.”

There is another, mostly unspoken rationale for the surrogate species approach. The alternative approach to simplifying conservation — the “coarse filter” approach of conserving various ecosystem types — doesn’t connect so well with publics and politicians. It’s a lot easier to generate political support for a real live critter with fur or feathers than for a “submontane broad-leaved drought-deciduous woodland” or a “succulent extremely xeromorphic evergreen shrubland,” examples of ecosystem types.

Yet either way amounts to basically the same thing. You identify some conservation target — critter or ecosystem — then go out and protect it from the onslaught. Sure, you might have a marginally easier time of it politically by saying you want to protect the bear, wolf, eagle, salmon, black duck, or even some cold-blooded fella such as a desert tortoise. But whether it’s a species or an ecosystem, you either have to stop the economic sectors in their tracks, or buy some land out ahead of the bulldozer and then hope to stop the sectors (and their pollutants) when they reach the gates. That turns out to be not so simple after all. You still have to deal with the mountaintop removal, shale oil excavation, fracking, helicopter logging, stern trawling, factory farming… you get the picture. It’s still the economy, buddy, and it’s getting more unwieldy every day.

It’s time for the conservation community to wake up and smell the notoriety it’s courting for fiddling while Rome burns. If there is a surrogate species in need of attention, it’s the 800-pound gorilla called the economy. It sits there in the corner, growing bigger and more menacing by the day, while conservationists either pretend it doesn’t exist, claim it can grow forever without impacting the environment, or say it’s too big to mess with. None of these three approaches is worth a taxpayer’s dime.

How can we keep ignoring the 800-pound gorilla of economic growth?

If we really want to conserve wildlife and protect the environment, we’d better do exactly the opposite of what we’ve done so far with regard to the 800-pound gorilla. We had better acknowledge the critter, explain to the public why it can’t be reconciled with biodiversity conservation, and not shrink at the thought of it. It is, after all, nothing more than increasing production and consumption of goods and services in the aggregate. It’s measured by the supremely secular GDP. It’s not God, Godzilla, or even (despite the metaphor) King Kong! There’s plenty of precedent in American history for questioning the merits of economic growth, with real effects on public opinion (the demand side of the economy). Real, bold conservationists such as Aldo Leopold and Rachel Carson played a part in this history, as did real politicians such as Robert F. Kennedy and Jimmy Carter.

Conservationists need to learn this history and add a new chapter. Somebody has to lead the way to a new paradigm, away from economic growth and toward the balance of nature. This leadership is just not going to come from Wall Street, the Federal Reserve, or the World Bank. Big-picture leadership is required from conservationists — especially conservation professionals who get paid the big bucks — for developing clear and nuanced public understanding of the trade-off between growing the gorilla and conserving the rest of our fish and wildlife heritage.

Everyone knows that conservation professionals don’t make economic policy. They’re better off not even talking economic policy. But neither did Rachel Carson regulate DDT. Her leadership came in the form of telling the inconvenient truth about organochlorines. The policy implications were obvious. Likewise, leadership to address the 800-pound gorilla starts with rigorous public education. With enough such leadership, citizens will temper consumption from the demand side and economic policy engineers won’t be pulling out all the stops from the supply side. Together — conservationists, citizens, policy makers — we can get that surrogate critter on a sustainable diet!

Negative Externalities Are the Norm

by Rob Dietz

Here’s a crazy but true fact: negative externalities are the norm — not the exception — in our current economic setup. Failure to recognize this fact has created a wild divergence between theory and practice when it comes to managing harm caused by economic activity.

The Backstory

When I was a kid, my family took a one-week vacation each summer. In the middle of August, we always went to the same place — the beach at Nags Head, North Carolina. The trip was a yearly highlight, and I could always tell it was approaching by the heap of towels, beach toys, and fishing gear that would accumulate by the door that led to the garage. On the day of departure, my dad would come home early from work, and my sister and I would wedge ourselves into the backseat of the car, which was already close to full capacity on account of the cooler hogging half of the seat space and the bags of food and sundries on the floor.

I had to steel myself for the ten- to twelve-hour drive from Atlanta to Nags Head. Although fighting for real estate with my sister in the cramped backseat was bad, the boredom of highway travel was worse. But worst of all, both of my parents smoked — Marlboro Lights for mom and Dutchmaster cigars for dad. When one of them would light up, I’d let out an overly dramatic sigh and ask them to open the window. They’d comply by cracking the window ever so slightly, trying to maintain the air conditioner’s advantage in its battle against the late-summer heat of the South. The haze that hung inside the car made it seem like one of those “designated smoking areas” in an airport.

It was a rough journey, but it was well worth it. The Outer Banks of North Carolina held a mystical quality in my childhood mind. It was the land of endless waves, the Wright Brothers, towering dunes, and pirate stories, all steeped in the smells of salt air and sunscreen. When I was eleven years old, something happened to sweeten the deal. My father invited me to attend the early morning fishing expeditions with the men. That was hallowed ground. Prior to the invitation, I had been relegated to the inspection crew. I’d wait for the crusty fishermen to return at mid-morning from their trip to the secret fishing hole, and I’d rush to the car when they arrived to survey their catch, which often included speckled trout, croaker, flounder, red drum, bluefish, and spot.

That invitation was the start of improved relations between me and my dad. We developed a better understanding of one another through the easy conversations that fill the downtime during a slow morning of fishing. We also developed a shared attachment to place — a mostly unspoken appreciation for where we were and what we were able to do there. Like many other fathers and sons, I bonded with my dad during the simple act of throwing a line in the water and hoping to catch a fish.

The Negative Externality

Arrrrgggghhhh!!!!

I get visibly upset when I see a sign that warns about the dangers of eating a fish caught from a given body of water. A fish consumption advisory has an uncanny ability to launch me into a scathing diatribe. Really? Have we become so reckless and so complacent that we accept polluted waters and toxic fish — that our best course of action is to stick a warning sign in the ground?

These days I live near the banks of the Willamette River, which tumbles down from central Oregon’s Cascade Mountains and flows gently north to its confluence with the Columbia River in Portland. The Oregon Department of Human Services issues the following warnings about resident fish in the Willamette:

Children 6 years of age or younger should not eat more than one 4-ounce fish meal every 7 weeks.  Women of childbearing age, especially those who are pregnant or planning to become pregnant and breastfeeding mothers, should not eat more than one 8-ounce fish meal per month.  Women past the age of childbearing, children older than 6 years and all other healthy adults may safely consume up to one 8-ounce fish meal per week.

The agency issues these warnings because the fish store dangerous levels of mercury, PCBs, dioxins, and chlorinated pesticide residues in their bodies. Given one word to summarize why these fish are contaminated, I’d say, “externalities.”

The Definition

N. Gregory Mankiw, a prominent professor of economics and textbook author, writes that an externality “arises when a person engages in an activity that influences the well-being of a bystander and yet neither pays nor receives any compensation for that effect” (Mankiw, Principles of Economics, Fourth Edition, p. 204). So a negative externality occurs when an economic activity produces harm, and the people suffering from that harm receive no compensation. A good synonym for “negative externality” is “side effect” — an unintended but unmitigated consequence.

Toxic fish in the Willamette River are the result of externalities from a host of economic activities, including mining, electricity production, farming, manufacturing, and urban development. These activities (at least the way we do them today) generate pollution, a cost that is externalized by the polluters, and that pollution finds its way into the river and into the bodies of the fish. As a result, I’m less inclined to fish in the Willamette, less inclined to take my daughter fishing there, and less likely to have the same bonding experience with her that I had with my dad.

The Theory for Managing Externalities

Economists tend to cast negative externalities as an unfortunate, but fixable, part of the market economy. The standard suggestion for fixing them is to impose taxes on externality-producing activities. For example, burning coal in a power plant causes mercury pollution. The cost of this mercury pollution is externalized by the power company and born by society (e.g., those of us who want to go fishing with our children). If the government places a tax on the amount of coal burned, the power company will burn less, and depending on the size of the tax, the government can force the power company to internalize the full costs associated with burning coal (assuming we can put a cost on the pollution, and that’s a BIG assumption).

Another possible fix is to arrange for the polluter to compensate those who bear the cost of the pollution. In the example of the power plant causing mercury pollution, the power company would pay compensation to my family (in theory, the compensation should be equal to the dollar amount at which my daughter and I value the experience of catching clean fish from a clean river). The compensation acts in the same way as the tax to internalize the costs for the polluter.  In an economics textbook, you’d see something like the following diagram, which shows how supply shifts in response to a tax.

MSB = marginal social benefit; MPC = marginal private cost; MSC = marginal social cost. A tax or compensation scheme moves supply from MPC to MSC, which increases price and lowers the quantity supplied.

Theory and Reality Diverge

The theory sounds good, but it rarely makes its way into reality. In the market, as firms work to maximize their profits, they strive to maximize revenues while minimizing costs. A sure-fire way to minimize costs is to externalize as many of them as possible. In practice, if a corporation wants to minimize the costs of environmental protection, it can move its operation to a nation with lax environmental laws. It can do the same or find various “innovative” ways to avoid paying other costs, while passing them on to the rest of society. In the context of today’s economic game, this is a sound strategy. If the objective of the game is profit maximization, then a winning player will externalize as many costs as possible.

As corporations have gotten better and better at this game, they have accrued higher and higher profits, and gained more and more influence. This influence often extends into the legislative bodies and regulatory agencies that could, in theory, prevent the inefficiency and injustice associated with negative externalities. It has become politically challenging, to say the least, for a government to place an externality-correcting tax on a corporate activity.

What about the other path proposed by economists — the path of compensation? This path falls apart for several reasons when trying to make the leap from the classroom to the real world. First and foremost, a profit-maximizing firm has a strong incentive to avoid paying such compensation. Even if a “good corporate citizen” wanted to pay compensation, it would be taking a risk — its competitors would be able to charge a lower price and potentially outcompete it in the quest for market share and profits.

Second, think about the complexity of tracing a negative externality back to its source. In the case of the river and fish, many economic entities have played a role in causing the pollution. Which ones should offer compensation? Which people should receive compensation?

Third, compensation may do very little to solve the problem. Even if the power company offered me monetary compensation, I’d still be upset that I can’t take my daughter fishing. I’m one of those people (the 99% in my estimation) who would rather have a modest income coupled with full opportunities for health and happiness, instead of a huge income coupled with degraded environmental and social conditions.

The Real Solution

In today’s cultural setting, my parents never would have smoked in the car on our trip to Nags Head. The external costs of their habit (i.e., increased odds of health problems for their children) have become much more present in the public consciousness. The dangers of secondhand smoke are now well known, and smoking, especially around children, has become frowned upon. Cultural change, therefore, can play a role in curbing negative externalities, but it is often slow to arrive and incomplete. For example, when society got fed up with the worst cases of water pollution (e.g., rivers catching on fire), the culture of environmentalism generated the political will to pass new water quality laws. Over the years, the cultural change and laws have prompted big improvements to water quality, but we still have plenty of waterways that are unsafe for swimming and fishing.

So the question is “What can we do besides wait for the culture to evolve?” For starters, let’s stop viewing externalization of costs as a small flaw that can be fixed with a few taxes or minor governmental interventions. It’s a huge flaw that’s built into the system. And that means we need to change the system.

In the boardroom, instead of working to minimize private costs, business leaders need to be working to minimize social costs. It doesn’t strengthen the economy or society when a company inflicts long-term environmental or social harm to maximize short-term profits. The game needs to be revised, therefore, to free businesses from this constraint of profit maximization. A vast accounting infrastructure exists to measure profits — there are rules, highly paid accountants, and entire corporate departments dedicated to counting up revenues and costs. But there is no such infrastructure for counting up a firm’s social and environmental impacts. We need to rethink the basic model of commerce to prevent and clean up the negative externalities that flow from today’s model.  This rethinking process is more important now than ever before — negative externalities are piling up and becoming increasingly threatening (e.g., global warming) as nations and corporations continue their pursuit of unending economic growth on our finite planet.

I hope we can speed up the cultural shift and change the economic framework. I really want to go fishing with my daughter.

Presenting the Economic Policy of the Occupy Movement

by Brian Czech

If there is one thing the Occupy Wall Street movement has generated, it’s the opinion that there is no unifying agenda or policy being advanced by the Occupiers. Perhaps that explains why we (CASSE) have been asked repeatedly to contribute to that agenda and identify that policy. And perhaps the time has come to oblige.

No one can claim to represent the entire Occupy movement or all its concerns. The wide-ranging movement has taken on local, grassroots issues as much as national, systemic concerns. I got a taste of that recently during a visit to Bloomington, Indiana, where the local Occupiers were camped out on the perimeter of Indiana University. I was in Bloomington to give a talk about steady state economics at the university, and happened upon the Occupiers’ camp my first night in. They had little to say about Wall Street, GDP, or national unemployment. Maybe it was just my timing — which happened to correspond with Halloween– but the Bloomington Occupiers seemed pre-occupied with surviving the annual student “Zombies” march that apparently threatens the security of Indiana University every Halloween. The Occupiers were equally concerned with aggressive Zombies and the police assembled to confront said Zombies. (They feared the police would use the Zombies as an excuse to clean house all around the campus.)

It’s hard to blame the Occupiers for focusing on local issues and forces. Police suppression alone saps the energy from many movements, as I recall from the days of World Bank demonstrations. Yet despite the inevitable localization of Occupier concerns, the Occupy movement needs a national identity to survive, and it needs a macroeconomic policy goal to unite around. That policy goal should be a sustainable and fair steady state economy. Let’s see why.

The Occupy movement is, first and foremost, an objection to the rule of Big Money; big corporations, big banks, and big-time rip-offs of the taxpaying public. It’s all about economic justice. But at this point in history, economic justice is complicated by limits to economic growth. The old notion that a “rising tide lifts all boats” has become morally inadequate and physically irrelevant. In a world of over 7 billion people and an economy over $73 trillion in gross world product, the Wall Street Bull is tromping through an ecological china shop with increasingly endangered glassware. It’s not only that the Wall Street Bull is kicking Occupiers and the rest of the 99% out of the way; the Bull is destroying the planet. It spans the globe but the globe is full.

The Occupiers need to get this, discuss it, and emphasize it. Otherwise, they could be unfairly portrayed as just the latest brand of populists seeking to expropriate the expropriators. Wall Street could point out that everybody has always wanted “theirs,” including Nazis, Bolsheviks, and French revolutionaries known today as “The Terror.”

The Occupiers can do better. They are better.

The Occupy movement can do better especially by adopting the steady state economy as its macroeconomic policy goal. That means an economy with stabilized levels of production and consumption, which means stabilizing population and per-person consumption. It means an economy that fits on Earth without threatening present and future generations with its overbearing, bloating size. It means an economy of stable size that, when accepted by national governments and sought in international diplomacy, replaces war as a mode of getting “theirs.”

Only sound economic diplomacy — steady statesmanship — can ensure that everyone gets enough without killing thy neighbor. Wall Street doesn’t get that. To the corporations and banks, the world is a china shop to buck around in, and good luck to the kicked.

The ball is in the Occupiers court. They’ve got to concern themselves with more than the local food, zombies, and police. Occupiers must decide if they really want to distinguish themselves from the growth-at-all-costs corporations, banks, Democrats and Republicans that really and permanently occupy Wall Street. Can they distinguish themselves with steady statesmanship?

I think they can, and I’m one of them!