Responding to the financial and economic crisis.

John AbellProfessor of Economics

Randolph College

Definitions• Oikonomia:1. The wisdom of household management.

2. The art of efficiently producing and maintaining

concrete use values for the household and community over the long run.

• Chrematistics:The art of maximizing the accumulation by

individuals of abstract exchange values in the form of money in the short run.

Aristotle

First Bank of Berne, Indiana-Ranked best performing bank in Indiana in 2009 by Financial Mgt. Consulting Group-Founded: 1891-Assets: $415 million-Employees: 115-Shareholders: 322-2009 earnings: $8.9 million, a bank record

Washington Mutual Bank-September 2008: Collapsed. $180 billion in failed mortgage-related loans. -Seized by federal regulators. Sold to JPMorgan for $1.9 billion, 5% of its peak value a year earlier.-Company policy? Issue loans to anyone or anything real-estate related, especially sub-prime loans.

State of the economy

“Fundamental challenges to the fixation on growth” Bill Mckibben (Deep Economy)

1. Growth produces more inequality than prosperity.

2. Growth has not led to a reduction in poverty.*

3. Growth is not making us happy.4. Growth is contributing to an

environmental crisis.

Reminder of what it is we wish to grow

• GDP (Gross Domestic Product):• A Dollar measure of all currently produced

final goods and services.

Inequality

Poverty

Happiness

Robert F. Kennedy

GDP… measures everything… except that which makes life worthwhile. 3/18/68 University of Kansas

Environmental stress

Econ 101: Circular flow model

Economic growth

Throughput

• Definition #1: The flow beginning with raw material inputs, followed by their conversion into commodities, and finally into waste outputs.

• Definition #2: Entropic physical flow from nature's sources through the economy and back to nature's sinks.

Herman Daly

Econ 101: Circular flow model

The three questions all economic systems need to answer:

1. What to produce?2. How to produce?3. For whom to produce?But… Two additional questions that are rarely

asked in Neo-Classical economics:4. How much (is optimal) to produce?5. What is the ecologically sustainable way to

produce?

Scale I

Scale II

Report on Global Ecosystems Calls for Radical Changes. Earth's Sustainability Is Not Guaranteed Unless Action Is Taken to Protect Resources, Experts SayBy Shankar VedantamWashington Post Staff WriterWednesday, March 30, 2005; Page A02

More than 1,300 authors from 95 countries participated in the Millennium Ecosystem Assessment, whose results are being made public today by the United Nations and by several private and public organizations.

Source: James Hansen, NASA Goddard Institute for Space Studies (Nov 2007) http://www.giss.nasa.gov/research/features/200711_temptracker/

Global warming? +.9 C (+1.6 F) since 1880; +.5 C (+.9 F) since 1980 alone.

The Arithmetic of Growth• Ehrlich equation: • I = P x A x T• I = Impact of human activities (for example,

CO2 emissions)• P = Population• A = Affluence or scale (Income per capita)• T = Technological intensity of human

activities (CO2 emissions per $ of economic activity)

Basic concepts…• I = P x A x T• I needs to go down. For this to happen:• Ideally we would like for P to go down as

well.• Ideally, we’d like for A to go up, especially for

the poorest of countries. For A to increase, though, then scale must increase as well!

• If we can’t get P to go down, and if A is going to continue to go up, then T must come down!

Here’s what has to happen…

I↓ = P↑ x A↑ x T↓↓

Could we even consider…?

I↓ = P↑ x A ↓ x T↓

CO2 example (2007 data)• I = P x A x T• CO2 emissions (I) = Population x Income per

capita x Carbon intensity• CO2 = 6.6 billion people (P) x $5900 per

person (A) x .00076 metric tons (or 760 grams) per $ of economic activity (T)

• CO2 = 30,000,000,000 or 30 billion metric tonnes (global emissions).

Past trends• From 1990 - 2007:• World population increased 1.3%/yr.• Average per capita income increased 1.4%/yr.• Carbon intensities declined 0.7%/yr.• CO2% = 1.3% + 1.4% -0.7%• CO2 = 2%/yr for 17 years, taking total CO2

emissions from 21.7 billion tons to 30 billion tons; a total increase of 40%!

Sustainability goals

• IPCC’s (Intergovernmental Panel on Climate Change) 4th assessment recommends a maximum of 450 CO2 atmospheric ppm stabilization target.

• Bill McKibben and others recommend only a 360 CO2 ppm target.

• To achieve 450 CO2 ppm, it is necessary to reduce annual total CO2 emissions from 30 billion tons to only 4 billion tons by 2050.

How to get there?

• Annual CO2 emissions would need to decline by 4.9%/year, rather than rising at 2%/year to achieve this goal!

• UN mid-range population growth rate of .7%/yr has us reaching 9 billion people by 2050.

• UN estimate of average per capita income growth (business as usual): 1.4%/yr.

• Suppose CO2 intensities decline only at 0.7%/yr.

Continued…• Erhlich equation math:• CO2 = .7%yr + 1.4%yr -.7%yr• CO2 = 1.4%/yr resulting in an increase of CO2

emissions of 80% by 2050!• To achieve the 2050 CO2 goal of 4 billion tons

(or a reduction per year of 4.9%) requires:• -4.9% = .7%yr + 1.4%yr - ?• T = -7%/yr; a 7% reduction per year in carbon

intensities!

Continued…

• This would represent a carbon intensity reduction from 760g/$ (1.7 lbs/$) to only 40g/$ (.09 lbs/$), a 19-fold improvement.

• For other scenarios: faster population growth or higher economic growth, carbon intensities would have to improve to the point where nearly all economic activity would take place with a zero carbon footprint!

Alternatives?• Reduce the scale; reduce the impact!• Local: Human and community centeredness• Increase happiness• Sustainable• Organic• Reduce, recycle, reuse• Dignified work• Use tax policy to redirect resources

Climate Change 2007: Synthesis ReportWarming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice and rising global average sea level.

Eleven of the last twelve years (1995-2006) rank among the twelve warmest years in the instrumental record of global surface temperature (since 1850).

http://www.ipcc.ch/publications_and_data/ar4/syr/en/spms1.html

Spring comes 10 days earlier in changed U.S. climate.By Deborah Zabarenko, Environment CorrespondentWASHINGTON | Tue Apr 20, 2010 2:05pm EDT

(Reuters) - Spring comes about 10 days earlier in the United States than it did two decades ago, a consequence of climate change that favors invasive species over indigenous ones, scientists said on Tuesday.

February 8, 2009

Polar ice caps melting faster.Jonathan Leake, Environmental editor

THE ice caps are melting so fast that the world’s oceans are rising more than twice as fast as they were in the 1970s, scientists have found.

The effect is compounded by thermal expansion, in which water expands as it warms, according to the study by Anny Cazenave of the National Centre for Space Studies in France.