Friday, March 13, 2015

Fred Thompson: Musings about Economic and Environmental Sustainability

Another dispatch from Fred Thompson:

A friend wrote: “For the sake of the planet's future, we must find a way to restrain our impulse to breed.  A target population number needs to be objectively determined and a finger kept on the scale so that attrition finally reaches that number. Let's assume that the planet can comfortably sustain 3 billion people (I think that number is too high).  That means we must lose 4 billion people in a relatively short time. If we get to a fertility rate of 2.1 or replacement, the population still rises for a time. The fertility rate has to be greatly curtailed until we reach the target population before we allow it to return to the replacement rate. But attrition would be sufficient to reduce the population; all we have to do is breed less.”

If that were that simple, China's population would have stabilized after 1960 and dropped significantly after 1980. Indeed, world population growth would now be a historical curiosity.

Population growth is not just about fertility. It depends upon the difference between the birth rate and the death rate. The problem, from my friend’s perspective, is that, for the past 200 years, death rates have consistently fallen faster than birth rates. As long as infant mortality continues to fall and life expectancy continues to increase, so too will population.

Worldwide, you have to get the fertility rate to less than 1.4 to stabilize population (given current trends in the death rate) and below 1.2 for it to fall any time soon. As the world’s population-bulge ages, in about 30 years or so, the death rate will rise and the fall in population will accelerate. That is where Japan is now; its population has been stable for 15 years. After 25 years of birthrates below 1.5 (dropping as low as 1.1) and already low infant mortality rates and high life expectancy, its population is beginning to fall. I think that’s where we are going – many rich countries with egalitarian income distributions are there already.

Nevertheless, in recent times, the only countries that have actually lost population are those like the Russian Republic, where, for some reason, both fertility and life expectancy declined and infant mortality increased (I say for some reason in this case because in Russia these trends started in the late 70s and continued through the 90s and, evidently, the oughts’), or where there was a ton of outmigration (like Ireland in the mid-19th Century).

What are the economic effects of a falling population? Any answer I could give to this question would be mostly guesswork. Historically, war, famine, and disease have been the drivers of population collapse. Their effects have not been good for productivity /income growth/consumption /investment, with the possible exception of the Black Death in the 14th Century. 

The best model for the effects of a dramatic reduction in the birthrate is, perhaps, Alvin Hansen's notion of secular stagnation. I remain enough of a hydraulic Keynesian to believe that we know how to mitigate the shortfalls in aggregate demand this would induce, but I have two big concerns. The recent evidence in Europe and, to a lesser extent, here suggests that there might be insufficient effective political demand for such policies. More seriously, I am concerned that an aging population will become increasingly unwilling to support or even actively oppose technological change and the replacement and expansion of plant, equipment, and infrastructure needed to exploit technological change sufficiently to allow high levels of productivity growth (in part simply because of the social cost of supporting increasing numbers of unproductive old people).

Of course, productivity growth is the sine qua non of income/consumption growth. Which takes me to the environment. The evidence is that environmental amenities are normal or superior goods; our demand for them increases with increases in income and tends to fall with reduced income growth. As is generally the case, richer is better, safer, healthier, and cleaner. Supply is a little harder, but, generally speaking, the less costly things, like environmental quality, are, the more of them people will want/supply, which also depends upon productivity/income growth (and in a democracy, where the preferences of the median voter are more or less decisive, the degree to which income growth is shared).

Another acquaintance said: “I think humanity could live sustainably on the earth, if our collective behavior and choices changed. I believe we could change if we decided to, however right now most of us accept the status quo. Basically, we seem OK with a model that promotes exploitation, of each other and our natural world, in order to provide a few people with great wealth—the basic change would be to an ‘all in this together’ model that creates wealth as well as general prosperity.”

“What are the choices we should make:

—Transfer most wealth and resources currently devoted to war into peacetime works, such as nutrition, education, housing, health care and transportation.

—Collect taxes fairly, eliminate offshore havens, improve collections, raise taxes on wealthy, tax negatives like carbon.

—End corruption in business and government.

—Set wages, benefits and social security at a minimum that ensures working families can live decently.

—Replace ‘you are what you own’ consumerism with tolerance, self-worth, community, inclusiveness.

—Have manufacturers accept cradle-to-grave product life cycles.

—Stop exploiting natural resources for short-term gains (for example, industrial hemp could replace most wood fiber uses and take pressure off forests).

—Redirect energy development into low-carbon options.

—Plan ahead and invest for impacts of climate change.”

“While I appreciate the barriers to making such changes, I also believe our situation demands comprehensive change. I vacillate between pessimism and optimism. Portland makes me believe big changes in a relatively short period are feasible—the progressive city of today did not exist 50 years ago, yet here it is now, and changes are gathering pace.”  

OK. While I am skeptical of the claim that rich were the main beneficiaries of the industrial revolution, these are not unreasonable proposals. Take #1, transfer resources devoted to war and the preparation for war into peacetime works. We are doing that; worldwide, military expenditures are at their lowest level as a share of total output in over 100 years. Even, in the US, one must go back 75 years to see a lower share devoted to the military.

#2. Americans invented confiscatory income and inheritance taxes. Indeed, we still have one of the more progressive tax structures in the developed world (transfers are another matter). Tax havens could be largely eliminated by getting rid of income taxes on C corps, making them pass-through entities. And, carbon taxes are a fine idea. It is altogether better to tax bad things than good things like working and saving.

#6. Most countries in N Europe already require manufacturers to accept cradle-to-grave product life cycles.


Would these proposals, the practical ones anyway (end corruption, really? How, exactly?), insure environmental/economic sustainability? No Way!

Playing with a few differential equations makes it pretty clear that there is only one thing that will permit sustained consumption going forward: endogenous technological development/deployment fast enough to offset resource depletion and to avoid or mitigate environmental degradation; otherwise no matter what you do, it all collapses eventually.

Of course, if endogenous technological development/deployment is fast enough, sustained growth is also feasible.

My point is that one cannot talk about economic dynamics meaningfully without thinking about the environment and, of course, the reverse is also true. The corollary is that we need to understand that our future is entirely hostage to the development and deployment of productive technologies. Nearly every other issue is trumped 

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