Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

12 December 2008

Our Global Paradigm Shift

[For a prescription for the holidays, click here.]

One reason why the current “recession” promises to be particularly severe is that two things are happening at once. We have a severe short-term problem, but our long-term challenge is even more serious.

The short-term problem is a burst asset bubble—in housing prices. That bubble coincided roughly with a commodities bubble, making it twice as dangerous. These two nearly simultaneous bubbles followed a high-tech bubble, which in turn followed bubbles of varying duration in Japan, Russia, the rest of Asia, and elsewhere.

Asset bubbles like these are older than the Dutch tulip craze of 1624. We can’t foresee an end to them. If two can burst simultaneously in twenty-first century America, despite a vibrant free press, universal literacy, and a presumably skeptical population, they can inflate and burst anywhere at any time.

Boys will be boys. Perhaps if women had a greater role in economic decisions, bubbles might occur less often or might inflate less grotesquely before bursting. That’s why the remarks that got Larry Summers fired as president of Harvard were so unfortunate. Women in positions of economic power might give unproven economic dogma less credence, show a little less raw greed, and maybe exercise more common sense. That approach is certainly worth a try.

But without the saving grace of as-yet-unexploited gender differences, asset bubbles may be part of the human condition. We may be stuck with them forever. We’ll get through these bursting as we have all the others—slowly, painfully and suitably chastened, until irrational exuberance strikes again.

What’s new is the long-term challenge. For the first time in human history, we are running out of planet to plunder.

By “we” I mean the human race. We simply can’t go on living as we have, and we know it. As I’ve explained at length in another post, the recent run-up in oil’s and other commodities’ prices is just a series of classic market signals warning that we are reaching our limits. (Don’t worry about the recent pseudo-“crash;” commodities’ prices will resurge as soon as there is any sign of economic recovery.)

Signs of dawning realization are everywhere. It’s not just Al Gore’s new status as prophet. Nor is it President-Elect Obama’s honest affirmation—after eight years of moronic denial—that global warming is “a matter of urgency and national security.” It’s everything from the “eat local” movement to the dramatic global explosion in wind energy. It’s the understanding—at least in our scientific community—that exploding destruction of native forest is ruining the global oxygen-carbon dioxide balance that not only keeps our climate cool but supports all animal life on Earth, including us.

Slowly we are beginning to understand that a lot of things we’ve done without thinking don’t make much sense. Things like burning coal and oil for heat and power provide short-term benefits but threaten our species’ long-term survival.

Even speaking of “long-term“ consequences may be a misnomer. The consequences of our collective folly are “long term” only to people accustomed to reading quarterly reports. In fact, absent a paradigm shift, dramatic consequences will appear in your grandchildren’s lifetimes, if not in your children’s. We Boomers are not just throwing the most reckless party in human history and leaving the bill to our kids. We also may be destroying the House we evolved in. What a party!

But look at the world outside the dance hall. If you do, you can easily spot three of the most destructive global trends. The first is burning coal, a folly in which China and India have overtaken us. The second is deforestation, especially in Southeast Asia and the Amazon Valley, where most of our pristine forest remains. The third is our own American auto industry—the most needlessly wasteful collective industrial endeavor in human history. (It is needlessly wasteful even as compared with coal plants in China and India because those nations have no other way to industrialize rapidly. Anyway both nations are working hard on converting to nuclear and renewable energy; China’s Three Gorges Dam and hydroelectric plants are one example.)

That’s why what happened last night in the Senate may not be such a bad thing. We have no direct control over China’s or India’s power plants, nor over what happens to forests in Indonesia, Borneo, or Brazil. But we do control our own auto industry.

By now it should be obvious to anyone who can read that our auto industry is clueless. Even with the hangman’s noose concentrating their minds, its leaders just don’t get it. The strongest of our Big Three (Ford) has a CEO who just can’t wait to exploit falling gas prices by selling big gas guzzlers again. As animator Ann Telnaes brilliantly illustrated, he and the cars he makes are dinosaurs begging for their meteoric coup de grace.

For all the wrong reasons, Congress gave it to them last night. Senate Republicans, who killed the bill, blamed the little guy: the worker. But the fault lies with the managers who ran the industry into the ground and the politicians who believed in and encouraged them. One of the many reasons our industry is failing is that it still follows the Henry Ford model of industrial autocracy. Our industry badly lags Japan’s and Germany’s in engaging workers’ minds and hearts as much as their limbs.

But our car industry’s imminent fate is just a small part of a much larger picture. We have to learn to live sustainably on the planet on which we evolved. If we don’t, we will suffer the common fate of every animal species that outgrows its habitat. We will suffer what ecologists euphemistically call “catastrophic population decline.” Ordinary folk call it war, famine and pestilence.

Our future needn’t be that bleak. We don’t have to waste energy extracting scarce fuels like oil or coal and transporting them thousands or hundreds of miles, only to burn them so as to poison our air and cook our planet. Instead, we can take as much energy as we need from the wind, sun, and water, essentially for free (in marginal cost). We can still have our busy lifestyle—even our individual vehicles—and intercontinental travel. All we need do is use our species’ chief evolutionary advantage, our intelligence, to make a paradigm shift.

This week alone, two of our best pundits highlighted separate aspects of that shift. Tom Friedman wrote of the coming trend in electric cars, charged at plug-in stations as ubiquitous as gas stations today and run on low-marginal-cost wind and solar power. He cited that trend as reason why no bailout can save our auto dinosaurs from extinction. Just the day before, David Brooks had written of the trend toward “localizing” suburban communities in centers of work and leisure, minimizing commuting and making life more sociable and livable. Both essays reflected a new world in which cheap fossil fuels are no longer the foundation of whole societies or the basis for city and regional planning.

Yet the consequences of the coming global paradigm shift go far beyond commuting. Among many other things, international trade will change beyond recognition.

For several hundred years (since the Hanseatic league), the global economic system has lived on free trade. We all accepted the dogma of “comparative advantage.” That dogma taught that some areas and people are better than others at growing or making certain things, and trade in what each produces better makes everybody better off.

During the halcyon days of international trade, that was a good assumption. Things like spices, pearls, gold and jewels were perfect objects for long-distance trade. They had high value-to-weight ratios, so their sellers could afford to transport them across the globe. Moreover, the sailing ships that brought these goods back to colonial powers ran on wind, which is free. Even accounting for piracy and inclement weather, the marginal cost of transporting these goods (as distinguished from the fixed cost of building the ships) was low compared to the value of the cargo.

As we became addicted to cheap coal and oil, we learned to ship more and heavier stuff. We now transport steel, cars, minerals, coal and oil itself thousands of miles. People in New York City eat New Zealand lamb and mussels. Men in Europe give ladies flowers from Africa. Companies make huge, heavy parts for aircraft in Europe and Japan and ship them to Boeing in Seattle for assembly. (The reasons for this intercontinental transport are more political than economic.) Insofar as trade is concerned, we live in a global village held together by cheap energy.

There are two problems with this paradigm. First, the dogma of comparative advantage is limited if not flawed. New York Times columnist and economist Paul Krugman recently won the Nobel Prize for explaining its flaws. It doesn’t always work in practice; that’s why the developed world does a brisk trade in cars although every part of it makes passable ones. (Even Detroit’s dinosaurs get you from Point A to Point B and last years.)

Second, and far more important, cheap oil is running out. Even if fully accurate in the abstract, which it is not, comparative advantage only works if transportation costs are low. Unless the difference in value between a lamb grown in New Zealand and one grown in upstate New York exceeds the intercontinental transportation cost of lamb meat, it makes no economic sense for New Yorkers to eat New Zealand lamb.

Up to now, cheap oil kept transportation costs low. But oil is no longer cheap. There are too many of us, creating too great a demand, for fossil-fuel prices to stay low. That’s why the mere possibility of an auto-industry bailout (and presumably an economic recovery to follow) sent oil futures up over ten percent.

As I’ve explained in another post, the inelasticity of demand for these basic commodities is the highest in the commercial world. That’s why their prices have dropped so rapidly during the current economic slowdown. That’s why their prices will skyrocket just as quickly as the global economy picks up again. And as our global population increases from 6.5 billion to nine billion (as predicted by 2050), the gas prices of last summer will look cheap by comparison. If we humans don’t change our ways, we could have gasoline at twenty or thirty dollars a gallon within thirty years. With oil prices like that, international trade in heavy commodities will become unsustainable.

The law of supply and demand is not the only thing making our current paradigm unworkable. There are also so-called “external” costs: the effect of burning fossil fuels on our environment and our planet.

Even if we could produce all the fossil fuels we needed, the cost of burning them, including pollution and global warming, would be astronomical. We can continue our low-transportation-cost “comparative advantage” paradigm only at the cost of losing our Eden, the planet on which we evolved.

So if we are smart, both trade and transportation will change radically as our paradigm shifts. We will trade ideas, written work and designs over the Internet. Light, compact, high-value products like computer chips, human organs, and antibodies will continue to move between continents. But most people and most heavy things will stay home.

This is the new awakening that we see all around us. It lies behind such diverse phenomena as electric cars, the “eat local” movement, attempts to save endangered species, the burgeoning extractive industries in the developing world (which are closer to their customers), our auto industry’s pleas for a bailout, and the cries of people from the Maldives and the South Pacific that they’d rather not live under water.

The Chinese word for “crisis” has two characters: “danger” and “opportunity.” Our new global paradigm shift offers both.

The danger is of large-scale social dislocation, even war—possibly even nuclear war. Lest we forget, the quest for scarce, localized energy and natural resources helped motivate the last century’s cataclysms. It is no accident that Japan and Germany, both of which came late to the colonial party, were instigators of humanity’s greatest self-induced catastrophe. Nor is it any accident that, once war began, Japan went straight for Southeast Asia’s rubber plantations and oil fields, and Germany went for the Caucasus’ oil fields, breaking its treaty with Stalin. Economically, World War II was the last, greatest spasm of exploitive military colonialism.

What restored international stability after the cataclysm was the present worldwide trading system. It gave Japan and Germany (and others) access to the same resources they had tried to conquer by force, through free markets, on an equal footing with the rest of the world. Now the fearsome Axis is at peace.

And therein lies the opportunity in the new global paradigm. Wind, sun and biofuels are neither scarce nor localized. They are ubiquitous and available to all. We need not fight over them. Nor need we fight over means to exploit them. We can trade in the means to exploit them or in better ideas for making those means. Blueprints for high-tech windmills, for example, can span the globe in seconds and for pennies, with agreed royalties to follow in exchange.

Now we can see what a stable world will look like in the long run. We will reserve irreplaceable fossil fuels for making plastics and medicines and for unavoidable uses like blast furnaces. Our “operating” energy will come from renewable wind, solar and hydroelectric power, supplemented by nuclear power and carbon-neutral biofuels like cane-derived ethanol. Every town and suburban district will have its own local generators, including windmills and solar cells. Good batteries will store power for later use. Air pollution will be minimal or non-existent, and people in cities will be much healthier. Global warming will be curbed.

For air transport we will use electricity-derived hydrogen or hydrogen-bearing fuel, generated by carbon-neutral means. As compared to today, air travel will be a relative luxury, reserved for high-social-value missions. Most intercontinental travel will revert to the sea, largely in stately sailing ships with computer-designed hydrodynamic hulls. But these ships won’t have sails. They’ll have high-strength polymer-fabric airfoils trimmed automatically by computers. They’ll make fifteen or twenty knots in a good wind (about what oil-fueled ocean liners now make), with zero fuel cost and no air pollution.

Business will neither slow down nor suffer from the change. Business people will meet instantaneously in cyberspace, in full-sized, full-motion, three-dimensional holographic images. Negotiators continents apart might even have electronic means to smell each others’ pheromones of greed and fear.

International business “travel” will take seconds, with no discomfort, jet lag or lost baggage. The only people to travel in the flesh will be those going for extended visits—mostly visiting artists, musicians, scholars, or scientists, plus millions of happy tourists. All will ride on the wind or renewable fuel.

Life in the fast lane will be a bit slower and more fun. Who wouldn’t prefer a stately sailing ship to a crowded 747 cabin, anyway?

But getting to this grand vision from here won’t be easy. Vested interests galore—including whole nations—will resist the change. Among them will be the Saudis, Russia, Iran, Venezuela, and our own coal, steel, oil and auto industries. Whole populations may feel the agony of transition. War, famine and pestilence may result. We will have to find international political mechanisms to share the pain and the benefit, just as the international free-trading system does today.

Where we’re going is not the problem. Except for the pheromone smelling, we have all the technology needed to implement this grand vision right now, today. We are working on the good batteries.

But everything depends upon the transition and how smoothly it goes. Preparing a gentle rest for our obsolete auto industry and saving its pieces that still have value (like the Chevy Volt) are just the beginning.

P.S.: Coming Soon: The Yin and Yang of Steve Chu, or How Obama’s Scientist and Engineer Might Promote the New Paradigm

P.P.S. Luffing Time

As every sailor knows, the maneuver called “coming about” has its critical moments. Its goal is to change the boat’s heading so the wind passes over the bow and begins to blow from the boat’s other side.

If the helmsman fails to act decisively, the boat can get stuck “in irons,” with its bow in the wind. Then the sails don’t work as designed. They “luff,” or flap loudly and uselessly. The boat goes nowhere, drifting backward aimlessly. The helm loses control for lack of headway.

That’s where we are now as a nation. We are caught in irons with our sails luffing.

We all thought we heard the order to come about on November 4. We expected the wind to cross from starboard to port, from ideology to evidence, from cronyism to competence. We were thrilled when a new crew, with high qualifications and even higher expectations, rushed on board.

Many of us wanted to throw the relieved captain overboard and begin anew. But our law doesn’t countenance mutiny. Old hands are still at the helm.

In the past two months, we have spent over half a trillion dollars. We have nothing to show for it but mistrusted experts’ assurances that things could be worse. We couldn’t decide to save our auto industry, although it asked for less than one-twentieth of what we already have spent on Wall Street—all with virtually no oversight or control. The reasons sounded much like what we’ve heard repeatedly over the last eight years: workers are at fault, and markets will cure themselves.

Getting out of irons takes patience and finesse. You can curse and thrash about all you want. But the bow won’t move until you gain enough headway—even moving backwards!—for the helm to respond.

Diagnosis suggests prescription. Our economy took years to get this bad. It won’t complete its self-destruction overnight. Perhaps we should all take an extended seasonal holiday while the new Congress takes the nation’s pulse and Obama’s transition team prepares to get us out of irons.

Maybe Treasury should disgorge enough money to keep GM and Chrysler afloat until the transition. Enough of the first $350 billion of TARP money remains for that purpose. But Treasury shouldn’t even ask for the second $350 billion. If it does, Congress should rescind its authority with alacrity.

We’ve all worked frenetically during the last eight years. During the last two months we’ve shared panic and taxpayers’ money with equal abandon. And we’re still headed towards multiple, highly visible reefs.

Yet at this precise moment we’re in no immediate danger. We’re caught in irons, aimlessly adrift.

So let’s take this luffing time and enjoy the winter holidays. Let firms losing money shut down for the holidays but lay no more workers off. Let’s all sit by our firesides and enjoy what really matters: our families, our friends, our hard-won freedom, and the promise of a new direction.

Let us all think hard about what made us great as a nation and can again. It wasn’t caution or timidity that brought the Pilgrims to our shores, won the West, built the transcontinental railways, or forged a new nation in a new land.

If our only goal is avoiding further risk, we will surely fail. We must decide what risks are worth taking, for what rewards, and prepare ourselves to take them come what may. Only bold action can cure a helmsman’s failure to act decisively. More drift cannot.

Then, on January 6, renewed by our rest, let us begin anew. Let the new Congress get us out of irons and chart a new course. If it can’t, then on January 20 our new Captain and his crew surely will. Having the old captain and crew flail about when they have utterly lost both the wind and the people’s confidence will only make things worse.


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