Reposted from The Daly News

European leaders recently met in Brussels and, like sophomores cramming before a final, pulled an all-nighter. Their exam was a real-world project: restore investor confidence in the Eurozone. A lot of pressure was put on David Cameron to bring the UK into the new agreement; he was adamant in his refusal. Even without the UK, the measures that the Eurozone nations have announced may restore investor confidence, but one thing is certain: they shouldn't, because they'll fail miserably at staving off future financial crisis.

That's because "restoring investor confidence" and "fixing the broken system" are two very different goals.

front-paged by afew

The government of Minnesota shut down thanks to a $5 billion budget gap.   Wisconsin public employees have been de-unionized so their salaries and benefits can be cut to close a budget gap.  New Jersey just missed shutting down as a Democratic legislature and a Republican governor agreed that austerity cuts are needed (though there's still going to be some wrangling over how the pain will be distributed).  Last week the Italian cabinet signed off on $68 billion in austerity cuts.  Demonstrations in Britain and riots in Athens, prompted by government cuts in pensions and social security, suggest what may lie in Italy's future.  In the U.S., we've got gridlock-and-extortion in Congress over  raising the Federal debt limit, even as both sides are generally agreed that  the era of ever-rising deficits is over.

Though not a single politician or mainstream economic analyst has ever made the connection, the new world-wide austerity in public spending traces to a physical cause, as measured by change in something called EROI--Energy Return on Energy Invested.

All of economics is divided into two schools:  steady-state theory and infinite planet theory.  They can't both be right.  You'd think the choice between them would be obvious, but infinite planet theory still holds sway in classrooms and in the halls of power where policy is made.   Last month, though, brought a significant development:   the manager of a major hedge fund registered a carefully reasoned dissent from Infinite Planet Theory.  And in doing so, Jeremy Grantham offered a glimpse of how and why steady state economic theory will ultimately come to prevail.

The regime changes in Egypt and Tunisia have been hailed as victories for democracy, as proof of the liberalizing power of social networking media, as testimony to the power of nonviolent political action. All of that they may indeed be; but the events in Egypt and Tunisia also illustrate a major defect in our economic thinking, one from which we should draw a very different and much more cautionary conclusion.

Strong, passionately held opinions have frequently divided Americans and the politicians that represent them.  The divisions have been cut by fundamental, yes-or-no questions:  should some humans be allowed to hold others as slaves?  Can states secede from the Union?  Should money be coined in silver, easing the deflation that benefits banks and lenders and hurts farmers and borrowers?  Is society responsible for establishing a minimum standard of living for its members, or should it be every man for himself?  Will capital and corporations be brought under social control, or should there be free markets and less regulation?  What's it to be, less government or more?  
    These lines of cleavage don't admit of much compromise, and they've propelled Americans into sharp, sometimes violent division more than once in the history of their Republic.  
    The recent midterm Congressional elections show us that there is now a new line of cleavage emerging, although only one side of the division seems to have recognized and capitalized on the change.  

Back in the 1940s Austrian economist F. A. Hayek published a book that has been enormously influential: The Road to Serfdom.  In it he made a strong argument that centralized planning of an economy is incompatible with maintaining democratic freedoms.  There's just one large and consequential flaw in his argument:  he assumes the planet is infinite. Once we admit that it isn't, we  discover that what Hayek gave us with his defense of (relatively) unregulated capitalism was just The Other Road to Serfdom.  

GDP is a deeply foolish measure of how the economy is doing, and if we're ever going to have an ecologically sustainable economy, we need to dump it and devise another measurement of economic well-being.

That's the gist of an op-ed I have in the New York Times today:  G.D.P. R.I.P.

The published piece is long, but the original was longer; it gave a little more detail. I've posted the original here.

Dump GDP

If there's a silver lining to our current economic downturn, it's this: It brings with it a spasm of what economist Joseph Schumpeter called "creative destruction," the process by which outmoded economic structures fail and new, more suitable structures replace them.   Downturns have often given a last, fatality-inducing nudge to dying industries and technologies.  Very few buggy manufacturers made it through the Great Depression.  We see the same dynamic at work today:  in the auto industry SUV builders are in collapse while makers of smaller, more fuel-efficient cars muddle through, and in the energy industry firms developing renewable energy sources (photovoltaics, windmills) are gaining market share on the old fossil-fuel energy companies.  

Creative destruction can apply to economic concepts, as well.  And this downturn offers us an excellent opportunity to get rid of one economic concept that has long outlived its usefulness:  Gross Domestic Product. GDP is a deeply foolish measure of how the economy is doing and it ought to join buggy whips and domestic coal furnaces on the dust-heap of history.  

Read on... Front-paged with a slight edit by afew

You can't overstate the historic importance:  for the first time ever, the US Senate came to the verge of taking up a far-reaching bill (The Boxer substitute to the Lieberman-Warner Climate Security Act) that deals with global climate change. Republicans have been engaging in procedural tricks to try to kill the bill without actually voting on it (see "Shameful Obstructionism Stymies Climate Bill", a Sierra Club press release, for an account), and just a few minutes ago a motion for cloture--to bring the bill to a vote--failed to achieve the 60 necessary votes.  

For the past few weeks environmentalists and progressives have debated whether this was the best bill that could be gotten, whether it could have been improved through amendments, whether a better bill might be gotten out of a different, presumably more Democratic, Senate next year.  In all that discussion there was one point that was overlooked:  

Global climate change is ONE EXAMPLE of the ecological problem our industrial culture faces.  It's not the whole problem, not by a long shot.

What is the problem?  Well, here's how I frame it:

Those of us interested in saving industrial civilization from cooking itself to death with climate change face an uphill slog:  the Republican base doesn't cotton to environmental types.  But there is a way to turn these voters into carbon cappers.  What they need to appreciate is the connection between controlling carbon and the "family values" that was their watchword last presidential election season.

The subprime mess is generally treated as a crisis, a catastrophe, one of those unpredictable pathologies that happen in our economy because the ingenuity of corporate and financial types outpaces regulatory understanding and control.  Sure, innovative self-interest will always be out ahead of regulation, as it was here.  But what the subprime mess isn't is unpredictable or pathological.  

When you understand the thermodynamic roots of economic life, and when you understand how our financial system flouts thermodynamic law, you can see that regular crises like these are a structural requirement of our system.