Taxation, Recession & Recovery

October 5, 2011

Excellent summary of comments from the March 8th, 2011 hearing on Principles of Efficient Tax Reform before the Senate Finance Committee.  The statement comes from a powerful group within academia, and generally offers prudent, insightful and seemingly sound advice.  In fact some of it looks very familiar given recent proposals from Washington.  These are the people you want informing decisions.

However the more I read and hear, the more I am convinced that our democratic process may in fact be fueling our economic fire.  Partisan politics will be the only thing that gets in the way of meaningful reforms in time to help get our economy back on track in time to have an opportunity to “grow” our way out of all of this.

These notes are a must read for anyone interested in knowing where US Tax Policy may be headed under Obama.  Among the proposals I favor and have written about in the past is a larger estate tax with a higher minimum for enforcement and a VAT tax on carbon in some form.  These notes argue strongly against VAT taxes in general, but with some understanding that such a tax on carbon would dually encourage domestic energy security as well as help impact the US effect on Climate Change.  I would go further to uncover more VAT taxes on other externalities that currently exacerbate misallocation of capital and resources.  Cigarette smoking is already under assault by layers of taxes and yet these high levels of taxation have not impinged tobacco company profitability due primarily to the inelastic demand of cigarettes .  I think we could find similar programs that could directly fund areas in dire need of support.  i.e. carbon related taxation should subsidize grid parity (which is now on the horizon) for a host of alternative energy sources.  Nicotine, alcohol, junk food, and even drugs provide inelastic demand that would serve as great platforms for VAT taxes to support local sustainable food development and healthcare costs directly impacted by the negative health affects of consumption of those items.

Additionally, we ought to consider taxing post consumer waste to better account for the end of life and cost of land of retiring natural resources that will never be reclaimed (in anyone’s lifetime).  A better understanding of the cost of buying, owning and disposing of consumer goods would enhance R&D into cradle to cradle manufacturing processes and indirectly incentivize both corporations and consumers to make better capital allocation decisions in a more sustainable manner.

My extrapolation from an open dialogue in taxation is that taxes ought to be used to dis incent the unsustainable economy, and used to accelerate the sustainable economy.  Rethinking taxation on debt would likely have to be a large part of that kind of thinking.

Hearing on Principles of Efficient Tax Reform, March 8, 2011



What if Solar Energy was Subsidized like Fossil Fuels? [Infographic]

September 11, 2011

Self Explanitory


Lessons from Solyndra

September 6, 2011
There has been a lot of press around Solyndra, most of it has been creating more noise than anything else.  I don’t have time to research the statistics of how many companies fail each day, nor do I know how many alternative energy companies have failed since the initial boom in the mid 2000’s, but there is nothing new about dead bodies on the road to innovation and the creation of new industries.
Of course what is selling this newsprint is that the government was counted as a large investor in the company, and the failure of Solyndra has become a touchstone for failed Keynesian spending.
I take a bit of offense to those seeking click-through for the easy “headline” story here.  True this is a good example of wasteful spending, I will not argue that this was terribly wasteful.  However, I do not think the lesson should be that the government has wasted money on “solar energy”.  I think the lesson should be the government has no business making direct investments in any private corporation.
What the government does need to do, is to appropriate taxpayer money in a manner that is in line with possible public benefits rather than private ones.  Any business student can tell you that among Porter’s Five Forces is a satellite force often noted as missing from Porter’s original approach.  The sixth (or five and a half) “force”, after buyer power, supplier power, barriers to entry, substitution and rivalry is government.  Two of the ways governments exert influence on the competitive dynamics of industries are through regulation, subsidies.  There is plenty of literature to support the thesis that sovereign industry winners (i.e. home country advantages) are often a function of sovereign investment and support for those industries either due to national security concerns, or economic importance.  Consider nuclear energy in Japan, oil in the middle east, automobiles of defense in the United States, airlines in almost every country, etc….  These are all areas where at the end of the day, the sovereign will support (or bail out) an entire industry because of perceived importance to the domestic economy (jobs) or national security.  Anywhere you see close government support or intervention in an industry you generally have competitive advantages.  At its core this is due to lower costs of capital for companies nurtured by sovereign support for their industry.
The boondoggled Solyndra investment is the result of Obama’s “shovel ready” approach which I have commented on before.  Whenever the government makes “shovel ready” a requirement, you are going to see a lot of wasteful spending on every halfwit with a political connection and a shiny new shovel.
Our country does need to make new investments in energy infrastructure.  I am sure someone has done more recent math, but I know that for a fraction of the trillions of dollars we have spent in Afghanistan and Iraq, and even possibly Afghanistan OR Iraq, we would currently be entirely energy independent.  It’s absurd that we have waged two decade long wars over oil which has finite capacity, and which we do not have much jurisdiction over.  Moreover, as has often been said, when we convert US Dollars into Petro Dollars we increase our trade deficit, subsidize directly or indirectly our enemies, export jobs,  and further entrench deteriorating legacy infrastructure.  What the government does need to do is to use money it would have spent on individual projects to support entire new industries, not individual new companies. Rookie mistake I guess.
Government spending in the space program resulted in a proliferation of technological advancement that inspired entirely new industries, including computing and telecommunications.  No one company is large enough to make that kind of investment.  No one company can think big enough to take on that kind of challenge.  Additionally, no one company would probably have turned a profit developing our original space program.  I’m sure the direct accounting resulted in billions of “wasteful” spending.  The endeavor was one of national security and during the cold war the space program was also about national pride.  Nonetheless every American could get their hands around the common benefit (even if they did not conceive of the actual outcomes) of putting a man on the moon.
China just a year ago offered to provide $80 billion dollars to backstop their domestic solar industry.  This lowered the cost of capital for all participants, and helped lead to the massive cost savings that Chinese manufacturers have developed, and which in turn have put companies like Solyndra out of business.  I don’t want to point to China’s model as a best practice, because they still allocate capital along socialist lines, and not by free markets.  However, many advanced economies have created subsidy programs to incentivize alternative energy development, which is what truly catalyzed the industry in the first place.  Europe was on the forefront of solar and wind technologies, and Germany in particular with its large energy intensive manufacturing base heavily subsidized the development of alternative energy.  Q-Cells was the original large solar panel manufacturer, not coincidentally from Germany.  However with the massive sovereign investment from China in domestic solar industries, and the rapid rise in the Euro further exacerbating Q-Cells cost issues for buyers, the company now teeters on the brink of insolvency.   China is well aware that alternative energy is the future for the global economy and China has had both the political authority and capital to see that they “win” the great solar race.  In the future oil will inevitably rise again to levels that make alternatives even more attractive than they are today.  At that time our US Dollars will no longer be converted to Petro Dollars, but will eventually be supporting China’s Red Solar Dollars.
Ironically I am totally for the development of US leadership in alternative energy infrastructure, and while I do think that we should probably siphon big oil support into scalable alternative energy industries (to include natural gas and nuclear to some extent), I am not totally opposed to carbon solutions in the medium term.  We need to take a portfolio approach to domestic energy needs, based on domestic supply considerations and topographical opportunities.  Every part of the US has unique advantages and disadvantages, and the clear winner for domestic energy will be a safer more independent grid and energy network, not an individual company or technology.
It’s not the government’s role in a capitalistic democracy to pick the winners and losers within an industry, but to the extent that new technologies can advance the local economy, aid national security and create spillover benefits to other industries (lower energy costs), it is the government’s role to see that those technologies are incubated and succeed at home.
Article from the New York Times
September 6, 2011

A Third Solar Company Files for Bankruptcy


WILMINGTON, Del. (Reuters) — Solyndra, a solar panel maker that received $535 million in federal loan guarantees, filed for bankruptcy on Tuesday.

Solyndra, which also received more than $700 million in venture capital financing, said it would try to find a buyer quickly to avoid a fire sale liquidation.

The solar industry has been in turmoil this year as a glut of panels has sent prices plummeting 25 percent. Manufacturing capacity expanded just as government austerity measures in Europe eliminated subsidies and undercut demand.

Solyndra cut prices to try to compete but said in court papers that it had been unable to match the extended payment terms offered by foreign competitors.

The company, based in Fremont, Calif., said last week it had suspended operations and laid off 1,100 workers.

Solyndra’s bankruptcy filing followed similar filings by Evergreen Solar and SpectraWatt, a private company that was backed by the Intel Corporation.

Solyndra said in documents filed in Delaware’s bankruptcy court that it planned to spend the next four weeks trying to drum up interest among potential buyers to avoid shutting down permanently and selling its assets piecemeal to repay its creditors.

If it finds a buyer, it could lead to the rehiring of some of its laid-off workers. One of those workers filed a class-action lawsuit against the company in the bankruptcy court, accusing Solyndra of violating the federal law that requires larger companies to give 60 days’ notice of layoffs.

Solyndra did not return a call seeking comment.

United States USD Policy is Misguided

September 27, 2010

I begain writing this about a week ago, and am beginning to see some media reports supporting my argument below, thankfully. Hopefuly, these opposing opinions to current US Policy are not too late.

Recent media reports indicate a growing strain between US-Sino relations over the Chinese policy on currency valuation. The fervor of Chinese currency manipulation is once again bubbling within the United States.

The US, or at least those proponents of this agenda believe China’s cheap currency is artificially low and therefore is creating unnatural imbalances in global reserves and global trade.

In layman’s terms these folks think the shit we import from China is too cheap, giving Chinese manufacturers an unfair pricing advantage in global trade. As a result, dollars flow (as well as the currencies of other developed countries) into China and just stay there.

The logic being espoused now is that in order to correct these imbalances the Chinese should be letting their currency appreciate (at least against the dollar) by as much as 20-40% as of recent reports. This is a large movement as it pertains to currencies, and normally would be something that might happen naturally over the course of years, if not the better part of a decade.

Recent reports claim that a growing consensus of US policy makers want to see this kind of movement in the Chinese currency over a far shorter time frame.

For more than two decades US consumers have benefited directly and indirectly from a relatively weak Renminbi (Yuan). We were able to consume more Chinese imported / manufactured goods for less money. Indirectly this helped to keep inflation in check, and benefited industries who were able to capitalize on China’s relentless demand for natural resources and those companies who were able to arbitrage the cheap cost of Chinese labor.

Now that US unemployment stands as high as it has been in over a generation, America seems abruptly convinced that part of our troubles have arisen from the fact that our finished goods cannot compete with the prices of Chinese finished goods and therefore China is “keeping a good man down”. Funny we don’t consider our legacy cost structures part of the problem.

If not absurd, the evangelical approach supporting a rapid rise in the Renminbi is at least short sighted, and may actually dangerous for the US.

The end result of a rapid rise in the Renminbi (RMB) against the US Dollar would certainly help US manufacturers compete better on price in the global market place, this would particularly benefit our durable goods industries like cars that are assembled here. However increasing the purchasing power of the Chinese consumer dramatically and quickly seems to me might have other adverse consequences.

For one, despite continued commentary that inflation is not an issue, anyone who does grocery shopping in the United States can tell you otherwise. Food prices have not benefited from the deflationary recession that took home prices and the prices of other durable goods down. As per-capita purchasing power increase for the Chinese consumer, we here at home will be competing with them more heavily for grains, dairy and protein which will surely drive up global prices.

The same scenario that is described for food would also apply ubiquitously across all commodities and natural resources. In fact a fast rise in Chinese purchasing power might incentivize stockpiling, creating additional pressure on the prices of all natural resources.

In addition a stronger RMB relative to the USD specifically implies not only an increase in the relative purchasing power for the Chinese but concurrently a relative decrease on the purchasing power for Americans, a major double whammy. In the areas where we compete to consume natural resources this could have dramatic, adverse and even rapid consequences.

The direct impact would be modest to severe rise in price driven inflation, particularly for “headline” CPI. Core CPI would be less impacted in the near term as it excludes food and energy prices. I won’t explore how the government gooses these numbers anyway.

The political agenda out of Washington is currently misguided, if not dangerous. An article today appearing in Bloomberg alludes to this as well. In the article Nobel-Prize winning economist Robert Mundell says that U.S. legislation to press China to raise the value of the yuan [RMB] would be a “disaster” and fail to narrow the trade deficit between the two nations. He goes on to say:

The bill “would create a very damaging thing to the world economy and the stability of Asia,” Mundell said. “This would have a wounding effect on the stability of international relations. There’s never been any precedent in economic history where a country through any legal system was forced to appreciate its currency relative to another country.”

“It’s not going to have much of a dent in the U.S. deficit,” he said. “America has had a huge deficit since the 1980s. None of that is going to change if China changes its exchange rate.”

Policy makers should try to keep the currencies within a range to prevent “huge swings” in the price of raw materials such as oil, he said.

The euro-dollar fluctuation “is a terrible thing for the world economy,” Mundell said. “We’ve never been in this unstable position in the entire currency history of 3,000 years.”

I agree with Mundell. What he doesn’t say directly but he alludes to is that US policy smacks of protectionism, and at a time and with a trading partner that could undermine the global recovery. A protectionist policy agenda with China could easily and quickly escalate to stimulate a new geopolitical divisiveness that in its worst form could lead to war(s).

This week in fact the House of Representatives is voting on a China trade tariff that would inflate the cost of more Chinese goods imported into the US. This comes after a handful of other trade tariff disputes since Obama took office on things such as tires and gift boxes. In retaliation earlier this year China proposed a tariff on US chicken going into China.

There is no good that can result from an escalation of trade tariffs, a system that was mostly dismantled through globalization. It is only a matter of time before the US/China trade was draws allies inspired to align their home interests by protecting their own major industries.

At home in the US, the result would further squeeze the middle-class American budget that Obama so adimantly wants to protect. It’s not the wealthy that rely on cheap products from China Mr. Obama, its the men and women who are trying to stretch every dollar.

My alarmist comments are not unfounded by anyone who knows a little bit of history and has a little bit of vision. But the future of human survival will depend on social order. A major imbalance in global resource production and consumption (particularly in food and energy) could tip a boat that has been running evenly for more than half a century. If you want to consider what happens when people cannot eat, consider the Middle East and Africa where poverty rates and lawlessness run hand in hand.

What makes this policy misstep so dangerous in my opinion is that it is driven not by rational thinking that can be tested and rebuffed, but instead by dogmatic Middle-Class zealotry. The administration in its effort to return middle-class Americans to work, may incite the worst bout of protectionism seen since before World War II, an action that could certainly inspire a new Cold War, and as mentioned before possibly a real one. I am not a Republican, nor do I consider myself to be overly conservative, but I think they have got this RMB agenda all wrong.

I believe the Obama Administration has done a tremendous job with what was left behind by the Bush Administration. However, I see forcing China on its currency as having the potential to undermine everything accomplished thus far, and with the potential to recreate a level of global instability far in excess of what was left behind by the Bush Administration.

It seems to me that a better agenda for the administration would be to focus on USD stability instead on RMB parity. The vast majority of the World’s commodities are priced in USD. In addition, US corporations are faced with the onerous task of calculating their currency exposures on a regular basis. Even small and medium sized business who may not have significant overseas sales are victims of price instability caused by commodity fluctuations. Consider the chart below.

DXY: US Dollar Index Spot Summary - USDI Chart 2006-2010

DXY: US Dollar Index Spot Summary - USDI Chart 2006-2010

The USD index has made moves of 10-15% three times now in the last two years. This is unprecedented volatility in the world’s largest reserve currency. The USD Index has spiked when fear spiked, and sank when fear subsided. The US currency has effectively become the beneficiary/victim of the global risk on/risk off trade. With equity and bond markets now chasing highs, the dollar is again heading downward.

At some point, however, I suspect unless we stabilize our currency, it will begin to lose its place as the preferred store of value. Not to mention what this volatility has done to commodity prices effecting everything from food and fuel, to industrial goods. Companies who bare the brunt of controlling costs or raising prices are force to make decisions today that may be totally obsolete a few months from now, based on currency movements alone. Regardless of the structural imbalances between China and the US, and despite objective (or subjective) relative valuations of the RMB vs the USD, I have to believe that price stability predicated by US Dollar stability is the more immediate issue rather than the RMB/USD exchange ratio.

In a world of uncertainty and unprecedented volatility, we need stability. We are so focused on China’s proported currency manipulation when the truth is we ought to be more concerned over our own.

Remember China has about four times the population as the US. The more the RMB appreciates, the greater the increase in 1.2 billion people’s purchasing power. Are we really sure we want to force that agenda? Seems idiotic to me.

Reduce, Reuse, Recycle, Renew

June 14, 2009

Our leveraged economy made it easy to fill two car garages, put a flat screen in every room in the house, and to have a 2:1 computer to user ratio in most middle-income homes.  It allowed us to wait in line to buy iPhones that cost 5x another utilitarian cell phone, while sipping $5 cups of coffee just for the “experience”.  Leverage and all its ignominious glory put a Starbucks on nearly every crowded corner, allowed every Best Buy to sit across the street from a Circuit City, and allowed people who would otherwise shop at thrift shops–for furniture with character–to fill their SUV’s up with an abundance of home furnishings at Ikea.   Cheap money offered by leverage boosted the success of throw-away fashions and throw-away lifestyles. We ate out more than cooked, and as a result more and more five star restaurants flourished.  Leverage provided a level of corporate earnings and personal spending that fueled one another.  The symbiosis was a tango for airline companies, helping to spawn a brand new airline into a national player in less than five years.  JetBlue’s rapid ascent was fueled by a peripatetic population of work-hard, play-hard types who longed for leather seats and televisions wherever they jetted.  Leverage and all its misgivings provided economists the opportunity to dust off the century old phrase conspicuous consumption.  In short, until credit markets seized, we had no idea how leveraged we really were, and how much we over-bought, over-developed, over-retailed and over-consumed.

With New York City apartment prices dropping in half over the last year, the expression that $5 million is the new $10 million carries some weight, at least in and around Manhattan.  Today people no longer gloat about how much they have made in the market.  Today we gloat about who has lost the least.  Asset values of all shapes and sizes are deflating, and with less leverage at the consumer and corporate levels, demand for excess is being rightsized.  But we are at a crossroads.

The quantitative easing being provided by the current administration is a strategy to stop the insanity of deflation.  With few market participants willing to take or provide credit, the United States is using its own balance sheet to be the lender (and borrower) of last resort.  The hope is that the Treasury will begin to fill the shoes of now defunct investment banks, strained commercial banks, hedge funds, pension plans, and other large institutional investors, and lenders.

But what is the end game of such policy?  Sure stabilizing the pricing mechanism is an important goal, but is doing so without changing our pre-existing habits the best way to move forward?  We are and we have been a service economy for quite some time.  American wages grew along with our post WWII economy, fueling spending and leisure. Wages grew so much in fact that we realized we could no longer afford the goods we wanted if we had to make them ourselves.  We became so dependent on the the mass production model that instead of curtailing our consumption we learned to exploit cheap labor around the world.  As our standards of living improved, we could afford to “lift standards of others”.   Thus we began outsourcing to countries whose standards of living were low enough to attract the quantities of labor necessary for an economic model based on mass production and mass consumption.

Eco-doomsdayers like to note that at present we currently consume more natural resources than the earth can produce.  Considering that the top 20 countries ranked by GDP per capital by the IMF account for 50% of global per capita GDP, that leaves no room for sustainable growth in living standards around the rest of the world.  There is physically no way the whole planet can live the way Americans have over the last half century.  What is more important, is that Americans cannot afford to live the same way they have into the future.  The global compression of credit and asset values is really just a warning shot around the developed world that our lifestyles are not sustainable.

A bright side that I see is that we are adept in building and running a service economy.  The future of consumption is sure to be through subscription and through the pooled use of durable assets.  The planet cannot afford to waste resources, and as such we cannot afford to waste assets for conspicuous under-consumption.  A car that sits in a garage 80% of the year wastes materials and real estate that are precious and limited.  Washing machines, excess technology, and the billions of throwaway products are not efficient uses of resources.  Not to mention non-renewable energy sources and unsustainable sources and methods of food production.

Why not build on our service economy?  Cooperative models can be successful, moreover they will be successful.  Reduce, reuse, recycle was a lifestyle choice of yesterday.  Tomorrow these movements will become the standard of living.  Cars need not be owned by individuals.  Fleet ownership is a much more efficient and effective use of materials and real estate.  I began writing this in March of 2009, but as I edit it today, I am inspired to note that last week ZipCar announced it will be going public in the next year.  Capital will be forced to flow into new business models, because as we put Chrysler and GM to sleep, we are now keenly aware that we no longer need that many new cars.  Mass transit is wildly more efficient than customized transit, and today’s technology is already providing an integration of the two through advanced car pooling social networks.  In the new economy, the government, national or local, needs to subsidize the fleet business model and mass transit.  It should be difficult and expensive to justify individual car ownership.  It should be financially burdensome and socially awkward for a single family under one roof to own multiple automobiles. Conspicuous consumers should be subsidizing sustainable consumption.  Employers should be supportive.

We are at a cross roads to permanently affect behavior and consumption patterns.  We need to seize this moment to change the economic model in this country from one of mass production and mass consumption, to one of sustainable production and cooperative sustainable consumption.  The transition will breed new growth industries, new business models, and ultimately create a sustainable middle class.  Car sharing clubs should be as common as individual car ownership is today.  Cradle to cradle product development can be accomplished if manufacturers are forced to dispose of the products they make.  Ownership should be through subscription for most products, and certainly those which are toxic to the planet.  We cannot be mass consumers and individuals.  Said another way, we cant have every emerging economy live the way we’ve lived for the last almost century.  We need to refine and enhance our systems of consumption.

The mass consumption model will need to accommodate aggregate consumption in a less individualized way.  Technology can help us feel like we are not dramatically changing our habits and patterns, but we cannot continue as we have.  We have to begin to understand that idle assets are wasted resources.

More than stimulus, and more than price stability, what we need from our leaders is the courage to help us all understand where we’ve been, where we are, and where we are going economically speaking.  Global crises don’t occur all that often.  When they do, global leaders have the opportunity to bend ears around the world.  At those moments in time global constituents are willing to consider change.  We maybe get one or two chances a century to educate the entire society, we cannot let this opportunity pass us by.  We need to replace our civilization with one that understands how to grow and succeed in a manner that is economically, socially, and environmentally sustainable.

When you finish reading this, start helping to create change, one person at a time.  Turn off your unused electronics, lights or other devices, when you leave the room (even if its not in your house).  Instead of throwing out things that may have value, try selling them on eBay or Amazon.  Before buying something brand new, see if you can find a decent used alternative.  Use the money you make from selling old items to buy new ones.  Take care of the things you own so that they retain more of their value.  Turn off the water while you are brushing your teeth. Before you buy a new car, consider leasing it.  Consider buying a used car.  Consider first if you even really need or want the car.  Today that is probably easier since so many people are forced to cut back.  Consider investing in a digital device if you don’t have one and choose to receive your favorite periodicals electronically.  If you have a digital device, consider canceling all of your paper subscriptions.  Make sure to cancel catalogs you don’t want or use.  Make sure to recycle as much as your local area will permit, and be bold enough to encourage new initiatives for the things that you know should not end up in a landfill. Give things away, don’t throw them away. If it is available find an ESCO for your electricity consumption.  Some utilities now allow you to choose the source of power you want to consume.  In New York City for instance you can choose wind and hydroelectric power over coal through Con Ed who now contracts with independent energy providers.  If you can afford it, eat organic, fair trade, and locally produced foods.  Choose to consume goods and services from companies whose business model is working towards a sustainable future, and boycott or try to avoid the most unsustainable companies on the planet.  When furnishing a home, the best thing is not to over-buy, the next best thing is to try to buy materials that have not, and will not hurt the planet, and that ultimately could be reused one day.  If you eat out, find restaurants that are environmentally conscious.  If you order in, ask them not to put in items you don’t need (cutlery, napkins, condiments).  Moreover, ask the worst offenders to start a new policy of asking customers if they want cutlery, napkins and condiments, so that they don’t automatically provide them to people who simply throw them out. Volunteer once in a while to keep your neighborhood clean.  Trash in the garbage can is less likely to end up in a waterway.  If your employer or town does not recycle, ask them to.  If you already watch what you put in your body, start watching what you choose to put in your home or office.  If you’ve learned not to overeat, try not to over-consume.  If you’ve learned to eat healthfully, then try to consume sustainably. If you see a business or industry that is run unsustainably, start your own company and build a model that is more sustainable, you will likely find a cost advantage and you will immediately have a loyal customer base.

All in all, at this point there is nothing terribly revolutionary that has to be created or invented.  All we need now is the revolution to begin.

The Economist Has No Clothes

March 20, 2009

Stumbled on this old article from March 2008, one year ago.  The research here is deeper than my own, but the sentiment is the same as I have noted before such as I laid out in Syndicate This: Carbon Bonds.  The article I pasted below from the Scientific American is a very worthy read on the unsustainability of the neo-classical economics model.

In a close loop world, where resources are constrained, you cannot externalize environmental waste, damage or pollution.  The invisible hand has only allowed those with means and access to markets to steal resources from those with little or no knowledge.

The Economist Has No Clothes, March, 2008 in Society & Policy

Unscientific assumptions in economic theory are undermining efforts to solve environmental problems

By Robert Nadeau

The 19th-century creators of neoclassical economics—the theory that now serves as the basis for coordinating activities in the global market system—are credited with transforming their field into a scientific discipline. But what is not widely known is that these now legendary economists—William Stanley Jevons, Léon Walras, Maria Edgeworth and Vilfredo Pareto—developed their theories by adapting equations from 19th-century physics that eventually became obsolete. Unfortunately, it is clear that neoclassical economics has also become outdated. The theory is based on unscientific assumptions that are hindering the implementation of viable economic solutions for global warming and other menacing environmental problems.

The physical theory that the creators of neoclassical economics used as a template was conceived in response to the inability of Newtonian physics to account for the phenomena of heat, light and electricity. In 1847 German physicist Hermann von Helmholtz formulated the conservation of energy principle and postulated the existence of a field of conserved energy that fills all space and unifies these phenomena. Later in the century James Maxwell, Ludwig Boltzmann and other physicists devised better explanations for electromagnetism and thermodynamics, but in the meantime, the economists had borrowed and altered Helmholtz’s equations.

The strategy the economists used was as simple as it was absurd—they substituted economic variables for physical ones. Utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. A number of well-known mathematicians and physicists told the economists that there was absolutely no basis for making these substitutions. But the economists ignored such criticisms and proceeded to claim that they had transformed their field of study into a rigorously mathematical scientific discipline.

Strangely enough, the origins of neoclassical economics in mid-19th century physics were forgotten. Subsequent generations of mainstream economists accepted the claim that this theory is scientific. These curious developments explain why the mathematical theories used by mainstream economists are predicated on the following unscientific assumptions:

  • The market system is a closed circular flow between production and consumption, with no inlets or outlets.
  • Natural resources exist in a domain that is separate and distinct from a closed market system, and the economic value of these resources can be determined only by the dynamics that operate within this system.
  • The costs of damage to the external natural environment by economic activities must be treated as costs that lie outside the closed market system or as costs that cannot be included in the pricing mechanisms that operate within the system.
  • The external resources of nature are largely inexhaustible, and those that are not can be replaced by other resources or by technologies that minimize the use of the exhaustible resources or that rely on other resources.
  • There are no biophysical limits to the growth of market systems.

If the environmental crisis did not exist, the fact that neoclassical economic theory provides a coherent basis for managing economic activities in market systems could be viewed as sufficient justification for its widespread applications. But because the crisis does exist, this theory can no longer be regarded as useful even in pragmatic or utilitarian terms because it fails to meet what must now be viewed as a fundamental requirement of any economic theory—the extent to which this theory allows economic activities to be coordinated in environmentally responsible ways on a worldwide scale. Because neoclassical economics does not even acknowledge the costs of environmental problems and the limits to economic growth, it constitutes one of the greatest barriers to combating climate change and other threats to the planet. It is imperative that economists devise new theories that will take all the realities of our global system into account.

The Economist Has No Clothes
Robert Nadeau, Scientific American, March 2008

Suburbia R.I.P.

March 19, 2009
David Dees: Foreclosure Street (

David Dees: Foreclosure Street (

Nice article in Fast Company about the end of Suburbia.  While I think to the extreme the end of suburbia is far fetched, I do think that suburbia as we know it will be transformed over the next 40 years or so from commuter living to community living.  The same mechanics driving sustainable distributed energy will also pave the way for a new suburbanism one built on almost-off-the -grid living combined with the necessary acreage for micro farming.  With home prices in Detroit averaging $7,500, this idea is not all that far fetched or expensive.   In any event the Fast Company article pays homage to New Urbansim, a movement that I think will also succeed in transforming America’s largest cities.

Does the downturn spell the beginning of the end for suburbia? Some experts say yesterday’s cul-de-sac is tomorrow’s ghost town.

The downturn has accomplished what a generation of designers and planners could not: it has turned back the tide of suburban sprawl. In the wake of the foreclosure crisis many new subdivisions are left half built and more established suburbs face abandonment. Cul-de-sac neighborhoods once filled with the sound of backyard barbecues and playing children are falling silent. Communities like Elk Grove, Calif., and Windy Ridge, N.C., are slowly turning into ghost towns with overgrown lawns, vacant strip malls and squatters camping in empty homes. In Cleveland alone, one of every 13 houses is now vacant, according to an article published Sunday in The New York Times magazine.


The demand for suburban homes may never recover, given the long-term prospects of energy costs for commuting and heating, and the prohibitive inefficiencies of low-density construction. The whole suburban idea was founded on disposable spending and the promise of cheap gas. Without them, it may wither. A study by the Metropolitan Institute at Virginia Tech predicts that by 2025 there will be as many as 22 million unwanted large-lot homes in suburban areas.

The suburb has been a costly experiment. Thirty-five percent of the nation’s wealth has been invested in building a drivable suburban landscape, according to Christopher Leinberger, an urban planning professor at the University of Michigan and visiting fellow at the Brookings Institution. James Howard Kunstler, author of “The Geography of Nowhere,” has been saying for years that we can no longer afford suburbs. “If Americans think they’ve been grifted by Goldman Sachs and Bernie Madoff, wait until they find out what a swindle the so-called ‘American Dream’ of suburban life turns out to be,” he wrote on his blog this week.


So what’s to become of all those leafy subdivisions with their Palladian detailing and tasteful signage? Already low or middle-income families priced out of cities and better neighborhoods are moving into McMansions divided for multi-family use. Alison Arieff, who blogs for The New York Times, visited one such tract mansion that was split into four units, or “quartets,” each with its own entrance, which is not unlike what happened to many stately homes in the 1930s. The difference, of course, is that the 1930s homes held up because they were made with solid materials, and today’s spec homes are all hollow doors, plastic columns and faux stone facades.

There is also speculation that subdivision homes could be dismantled and sold for scrap now that a mini-industry for repurposed lumber and other materials has evolved over the last few years. Around the periphery of these discussions is the specter of the suburb as a ghost town patrolled by squatters and looters, as if Mad Max had come to the cul-de-sac.

If the suburb is a big loser in mortgage crisis episode, then who is the winner? Not surprisingly, the New Urbanists, a group of planners, developers and architects devoted to building walkable towns based on traditional designs, have interpreted the downturn as vindication of their plans for mixed-use communities where people can stroll from their homes to schools and restaurants.

Richard Florida, a Toronto business professor and author of “Who’s Your City?: How the Creative Economy Is Making Where to Live the Most Important Decision of Your Life,” argues that dense and diverse cities with “accelerated rates of urban metabolism” are the communities most likely to innovate their way through economic crisis. In an article published in this month’s issue of The Atlantic, he posits that New York is at a relative advantage, despite losing a chunk of its financial engine, because the jostling proximity of architects, fashion designers, software writers and other creative types will reenergize its economy.


Suburbia R.I.P.

Michael Cannell, Fast Company, March 11, 2009

Artwork “Foreclosure St.”

David Dees,