This is not intended as a political post. Given the moderator called Trump on the unrealistic option of economic growth to avoid growing debt levels in real time, this post isn’t about debunking the candidate’s untenable stance (any further). But the material covered at last night’s debate could use some context and interpretation for anyone confused about GDP growth, trade, the environment, and well-being. We are at a crossroads – with even more serious stakes than presented by the candidates. The bigger questions covering how the earth might continue to sustain any growth at all deserve attention. The stark environmental consequences associated with ‘growth’ policies and the tensions surrounding them also help illuminate the related consequences of free or fettered trade more generally.
The environment, climate change, energy policy, sustainable growth and other important ‘intangibles’ all got rather unfortunately left aside (from all three debates). What WAS said about it was hidden in misunderstanding of basic economics and lack of appreciation of economic history. So let’s clear a few things up from last night, in the hopes of not repeating what we can understand.
WHAT WAS SAID (Abbreviated, link to full transcript)
Moderator Wallace: “But the nonpartisan Committee for Responsible Budget says …debt would rise… Mr. Trump, under your plan… to 105 percent of GDP over the next 10 years. Question is, why are… you ignoring this problem?”
Trump: “I say they’re wrong because I’m going to create tremendous jobs. And we’re bringing GDP from really 1 percent, which is what it is now.[Fact check, real GDP GROWTH was 2.6% for 2015 and 1.4% for Q2 2016, Real GDP at the end of Q2 2016 was 16.58 trillion US dollars – the numbers from the Federal Reserve graphed below)] … But we’re bringing it from 1 percent up to 4 percent. I think you can go higher, to 5 or 6 percent…. To do that,… I’m going to create a kind of country that we were from the standpoint of industry. We used to be there. We have given it up…
Moderator Wallace: “Growth is unrealistic. And they say you talk a lot about growing the energy industry. They say with oil prices as they are right now, that’s unrealistic as well. Your response?”
Trump: “So I just left some high representatives of India. They’re growing at 8 percent. China is growing at 7 percent…We’re not making things anymore, relatively speaking, our product is pouring in from China, pouring in from Vietnam, pouring in from all over the world.”
Paraphrasing the rest: Build a trade wall, bring back manufacturing.
Implicit: Jobs Trump the Environment.
Let’s set aside this perceived trade-off for a moment to consider some economic realities (Interpreted with some economic history).
FOCUSING ON GDP MISSES THE POINT
GDP is a flawed measure of well-being. It only captures final output value produced in a year by US firms. It doesn’t capture environmental quality, unpaid work, many aspects of innovation and quality, and other important factors impacting quality of life. And it is getting WORSE as such a measure, as summed up in this Economist article from the spring. This worsening of GDP as a potential measure of the trade-offs exacerbates the tensions.
WE’VE “SPENT” A LOT ON ENVIRONMENTAL QUALITY ALREADY —
And there’s a lot to show for it.
Our environmental regulations and expenditures have achieved significant improvements in air and water quality, safety and improved conditions for workers, and other hard-to-measure gains (though the US still lags behind other developed countries in important areas of well-being and progress, including health care access and parental leave, which have at least been on the table in this election). The above are all services that China is now interested in acquiring – for good reason, as shown in these images and reports from CNN (air quality costs and lessons to learn from LA).
THESE ACTIONS AIM TO CORRECT MARKET FAILURES –
And are the purview of government, not just business.
The United States has chosen these changes, over the course of more than a century of increasing federal action regarding environmental quality. A good portion of these regulations and governing bodies even came into being under the Republican Nixon administration – including The National Environmental Policy Act (1970), the Endangered Species Act (1973), the EPA and Clean Air Act (1972). Later Republican administrations and congresses pushed to reduce not so much the benefits of these actions but their costs – resulting in successful programs like the tradeable permit market for phasing out leaded gasoline from 1982-1984 with significant improvements in health.
Of course the executive branch is not the only important decision-maker. Over the century, my research with Louis Cain shows that, for critical votes in the House of Representatives determining wildlife resource uses (and representing local views on federal actions), votes have moved from conservation-oriented actions to actions favoring economic development over the environment.
BACKLASH ON THIS “SPENDING” IS VISIBLE IN LEGISLATIVE EFFORTS –
particularly when costs are concentrated and benefits dispersed.
This long run shift in preferences of the House of Representatives, representing more local economic interests than other branches of federal activity, captures one side of the growing gap between the gains from federal and international actions aimed at such global challenges as carbon and HFC emissions and the costs for those left behind. But the environment is a normal good – increasing income increases demand. And world incomes are rising. Note that it was India whose ratification of the Paris Agreement on CO2 emissions recently pushed the treaty into effect!
We can use an expanded version of the economic theory (Cushing-Daniels and Kaiser, 2006) of the Environmental Kuznets Curve (EKC) to explore these conflicts further. In this expanded view, the theory sets up an understanding of when bargaining over the tradeoffs between environment and economic growth is necessary. The figures below illustrate.
BARGAINING IS INEVITABLE.
Case 1: Environmental quality is a normal good but pollution and production (GDP) are not separable (e.g. with technology). The more connected pollution and production, the greater the bargaining needed – that is, the bigger the costs – to shift from production and pollution to environmental quality.
Here, we can see that growth and environmental quality cannot be produced jointly – and any growth past the intersection of the demand for environmental quality at a given level of output (D1) and the income level as a function of environmental quality (E0, E1) requires bargaining over the level of environmental quality in order to accept the losses in environmental quality. Bargaining likely favors the producers, but starts fairly early in the economy’s development.
This point might likely occur at a higher level of output (production) and lower level of environmental quality in cases where environmental quality is first treated as an inferior good (so that less of it is demanded as incomes grow) at low levels of production and then switches to become a normal good as production increases and environmental quality falls (becoming more noticeable? better understood?), as illustrated in case 2:
This increases the stakes through delay in action, and raise the threats from loss of environmental quality that are not captured in demand due to lack of information (e.g. climate change), lack of ability to act due to commons problems (e.g. climate change) or lack of ability to bargain due to appropriation of property rights by producers (e.g. Standing Rock).
These increased stakes risk pushing any bargaining such as possible in the legislature – where losers might be compensated by winners and mutually beneficial trades might increase overall well-being – with first impasses that result in stalemates and then, eventually, with violence. Consider in this context the newly filed lawsuit against Statoil’s expansion northward in the Barents Sea and the violence at Standing Rock). Both aim to preserve environmental quality. While in the Norwegian case, high in trust and with a reputation for high environmental standards, it is still possible to pursue legal channels, the long history of legal failures pertaining to Native American rights has moved the situation to direct (peaceful) protest met with unacceptable violence.
On the other hand, if pollution and production are separable, then even without bargaining, environmental quality can begin to rise again as incomes rise (case 3):
This captures cases like leaded gasoline or ozone depletion, where technological solutions can separate production from pollution. The U-shape of the EKC can be realized with increases in both environmental quality and growth. This is the promise and hope of sustainable development. As one can see, the demand for environmental quality still leaves scope for bargaining to obtain even more environmental quality. Here, inequality in the distribution of gains will become significant in the success or failure of that bargaining.
THE ANALYSIS EXTENDS TO TRADE
Trade opens doors to the benefits of comparative advantage, using resource bases more efficiently, and increasing the well-being of all, on net. The IMF and World Bank, acknowledging distributional challenges of these benefits, are working hard to show how much worse conditions would be if free trade falters. The continued success of global free trade will depend on addressing these distributional challenges with appropriate bargaining. The ability to bargain effectively will depend on clearly defined property rights not only to the traditional factors of production but also to the environment and its services.
Leaving the environment out of this debate does a significant disservice to both the challenges we face and the outcomes we can achieve as we try to move forward and build a stronger, more resilient economic system in the future.
Street Sign Image Credit: Image was originally posted to Flickr by U.S. Department of the Interior athttps://flickr.com/photos/42687493@N06/14422389975. It was reviewed on 3 December 2015 by the FlickreviewR robot and was confirmed to be licensed under the terms of the cc-by-sa-2.0.
Mereconomics 