Category: Economics

Matters of money

The End of Nature

In The End of Nature, Middlebury College professor and 350.org founder Bill McKibben makes the case that humanity has put an end to nature by altering the climate, and then goes on to consider the implications. McKibben’s book – first published in 1989 – briefly explains why human activities are increasing the quantity of greenhouse gasses in the atmosphere, and why this will produce change on a planetary scale. His tone is mostly one of lamentation. He expresses sadness about that which is already doomed to destruction, before progressing extensively into the question of what can still be saved, and what means might achieve it. Reading The End of Nature in 2012 is dispiriting. It proves how everything important about climate change was well understood decades ago, including why our political and economic systems have done nothing serious to slow it down. Nonetheless, McKibben’s appeal is a poignant and effective one. By putting humanity’s current activities in context, McKibben conveys the reality that what happens to the Earth now will mostly be a matter of human choices, and that the philosophies we adopt in the decades ahead will affect the prospects of all the life forms that depend upon this planet.

The basic idea of the book is that humanity has no so thoroughly altered the planet that nothing can be considered ‘nature’ in the sense of ‘unpopulated wilderness’ anymore. Climate change is the most important and dramatic change humanity has produced, but our chemical signature is also written in the form of novel isotopes from nuclear tests, changes to the ozone layer, and in the legacy of pollution and pesticides. According to McKibben’s definition, nobody my age has ever seen nature – only nature as modified through human industrial activity.

Along with climate change, McKibben devotes a fair bit of space to talking about genetic engineering. He sees it as a possible way of keeping humanity’s billions alive in a world that is increasingly damaged by our choices. But it is also another step away from ‘nature’. He envisions a world of trees and fish and animals modified to tolerate a changed climate, and modified further to better serve human needs. Reading these passages in 2012, it seems like he over-estimated the importance of genetic engineering, or at least under-estimated how long it would take to arrive. For instance, he imagines custom organisms that draw in nutrients through tubes and produce the parts of chickens many humans enjoy eating. Margaret Atwood’s ‘ChickieNobs’ from the dystopian 2003 novel Oryx and Crake are described in basically identical terms in McKibben’s book, but nothing remotely like them seems to exist in the real world. So far, genetic engineering has been more about experimentation than implementation, and nothing too world-changing seems to have arisen from it. Perhaps that perspective reflects ignorance on my part, especially given the evolving character of the global ‘agribusiness’ and biotechnology industries.

Because I borrowed a copy of the book from a library, rather than buying one, I didn’t take the detailed marginal notes that I usually do when reading a book. I did, however, pick out a few passages that I think are especially evocative and worthy of discussion:

On the habits of humanity

“The problem, in other words, is not simple that burning oil releases carbon dioxide, which happens, by virtue of its molecular structure, to trap the sun’s heat. The problem is that nature, the independent force that has surrounded us since our earliest days, cannot coexist with our numbers and our habits. We may well be able to create a world that can support our numbers and our habits, but it will be an artificial world, a space station.

Or, just possibly, we could change our habits.” (p.144 2006 Random House trade paperback edition)

Timing

“I have tried to explain, though, why [dealing with climate change] cannot be put off any longer. We just happen to be living at the moment when the carbon dioxide has increased to an intolerable level. We just happen to be alive at the moment when if nothing is done before we die the world’s tropical rain forests will become a brown girdle around the planet that will last for millennia. It’s simply our poor luck; it might have been nicer to have been born in 1890 and died in 1960, confident that everything was looking up. We just happen to be living in the decade when genetic engineering is acquiring a momentum that will soon be unstoppable. The comforting idea that we could decide to use such technology to, in the words of Lewis Thomas, cure “most of the unsolved diseases on society’s agenda” and then not use it to straighten trees or grow giant trout seems implausible to me: we’re already doing those things.” (p.165)

On caring for future generations

“We flatter ourselves that we think of the future. Politicians are always talking about our children, our grandchildren, and, as individuals, we do think about them, but in the same way we think about ourselves. We lay aside money for them, or land. But we do not really think of grandchildren in general. “Future generations do not vote; they have no political or financial power; they cannot challenge our decisions,” said a perceptive introduction to the United Nations report on Our Common Future. Future generations depend on us, but not vice versa. “We act as we do because we can get away with it.”” (p.170)

Beyond what one person can deal with

“The inertia of affluence, the push of poverty, the soaring population – these and the other reasons listed earlier make me pessimistic about the changes that we will dramatically alter our ways of thinking and living, that we will turn humble in the face of our troubles.

A purely personal effort is, of course, just a gesture – a good gesture, but a gesture. The greenhouse effect is the first environmental problem we can’t escape by moving to the woods. There are no personal solutions. There is no time to just decide we’ll raise enlightened children and they’ll slowly change the world. (When the problem was that someone might drop the Bomb, it perhaps made sense to bear and raise sane, well-adjusted children in the hope that they’d help prevent the Bomb from being dropped. But the problem now is precisely too many children, well adjusted or otherwise.) We have to be the ones to do it, and simply driving less won’t matter, except as a statement, a way to get other people – many other people – to drive less. Most people have to be persuaded, and persuaded quickly, to change.” (p.174)

So McKibben lays out the challenge that has been occupying some of the most capable and driven people in the world for decades (occupying them, but not yet producing even the beginnings of success) and which seems likely to be the defining activity for humanity as a whole for the decades and centuries ahead.

Since 2007, McKibben has been an important organizer of environmental campaigns and the founder of 350.org, an organization that aims to keep the atmospheric concentration of carbon dioxide below 350 parts per million. Beyond that level, the sensitivity of the Earth to greenhouse gasses is such that we would likely see the disappearance of nations like the Maldives along with large parts of nations like Bangladesh and the Netherlands, accompanied by profound changes to physical and biological systems around the world. Keeping the level of greenhouse gas pollution in the atmosphere below 350ppm is incredibly ambitious and far beyond what any large country on the planet is meaningfully aiming for now. If implemented globally, Canada’s policies would probably put us more in the territory of 1000ppm by 2100 – territory that involves changes so profound that they might threaten the future of the human species, as well as the future of countless other less resilient species in the ecosystems of the world.

The End of Nature is a reminder of the scale of the fight we have on our hands, as well as of the stakes involved. If we are to have any chance of succeeding, we must be committed, passionate, strategic, self-sacrificing and willing to do what has never been done before.

Gambling with high stakes

As with other high-risk activities, I think gambling on climate change is irresponsible and reckless, even if the people making that bet turn out to be right.

If a person runs across a minefield in order to experience the thrill of danger, few people are likely to congratulate them for their bold choice in the face of uncertainty. Even if you get away with it, it is foolish to run careless risks, especially when the consequences of getting it wrong are severe. This is why Russian Roulette is commonly regarded as an absurdly irresponsible pastime.

Say there is some powerful negative feedback that climate scientists haven’t yet identified. And say it manages to reduce the severity of climate change substantially. Imagine it is 2100 and we are looking back at 2012. I think the people considering the problem from that vantage would be quite willing to recognize how scary climate change looked in 2012. I also think they would be willing to chastise us for our inactivity on the problem, even in a scenario where it worked out that our most extreme fears for what climate change might mean weren’t recognized. Rather than being concerned about climate change ‘alarmists’ who called for action, I suspect impartial citizens in 2100 would be critical of the people who wanted us to plow heedlessly on with fossil fuel development, despite the serious outstanding questions on what effect that would have on the future of human civilization.

From any rational perspective, it makes sense for the world as a whole to take serious action to reduce the seriousness of climate change and the probability of extremely bad outcomes. The problem is that this course of action is not in the short-term interests of many individuals, including powerful people whose wealth and influence is rooted in the status quo.

The real question, when it comes to climate change, is how to make individuals, companies, and countries behave more like they would if they were taking the rights and welfare of everybody seriously. Something like the Categorical Imperative (or even the Harm Principle) provides the moral backing for this view. The question is how to discourage selfish and destructive behaviour while encouraging the cooperation and sacrifice that are required to protect the planet and discharge our duties with respect to future generations.

Margin Call

I saw Margin Call yesterday – an interesting fictionalized depiction of the start of the mortgage-backed security meltdown of 2008. The film depicts one fundamental cause effectively enough, namely models that understimated the level of risk associated with mortgage-backed collateralized debt obligations, though what I have read about the crisis suggests that this may not have come as such a total surprise to the investment banking community as was depicted in the film.

Overall, I found the film accessible and interesting – an uncharacteristic portrayal of the internal dynamics of a large company. People who know a lot more about the subject than I do have called it realistic.

The film is also an interesting illustration of a complex strategic position, in which one company suddenly realizes that a major new asset class is toxic and needs to decide how to respond. Threatened with bankruptcy if they take modest losses on their highly leveraged portfolio, they decide to sell off as much as they can in one day, knowing the assets to be worse than useless, and knowing that they will spread chaos through the American financial system. One of the managers makes this point with another: “And you’re selling something that you *know* has no value” and gets the response: “We are selling to willing buyers at the current fair market price”. Among other things, this reveals the experimental nature of financial innovation, the scale of some of the risks associated with it, and the temptation to behave in intensely self-interested ways even when that is costly to others.

The main question raised by the film, as well as by the real-world crisis that inspired it, is probably whether we would be better off with a simpler and less innovative financial system. At one point, the most senior staff member depicted describes the history of American financial crises in this way:

Its just money; its made up. Pieces of paper with pictures on it so we don’t have to kill each other just to get something to eat. It’s not wrong. And it’s certainly no different today than its ever been. 1637, 1797, 1819, 37, 57, 84, 1901, 07, 29, 1937, 1974, 1987-Jesus, didn’t that fuck up me up good-92, 97, 2000 and whatever we want to call this. It’s all just the same thing over and over; we can’t help ourselves. And you and I can’t control it, or stop it, or even slow it. Or even ever-so-slightly alter it. We just react. And we make a lot money if we get it right. And we get left by the side of the side of the road if we get it wrong.

Another lower-level manager also discusses the ethics of the business:

Listen, if you really wanna do this with your life you have to believe you’re necessary and you are. People wanna live like this in their cars and big fuckin’ houses they can’t even pay for, then you’re necessary. The only reason that they all get to continue living like kings is cause we got our fingers on the scales in their favor. I take my hand off and then the whole world gets really fuckin’ fair really fuckin’ quickly and nobody actually wants that. They say they do but they don’t. They want what we have to give them but they also wanna, you know, play innocent and pretend they have know idea where it came from. Well, thats more hypocrisy than I’m willing to swallow, so fuck em. Fuck normal people. You know, the funny thing is, tomorrow if all of this goes tits up they’re gonna crucify us for being too reckless but if we’re wrong, and everything gets back on track? Well then, the same people are gonna laugh till they piss their pants cause we’re gonna all look like the biggest pussies God ever let through the door.

All told, the film offered what seemed like worthwhile insight into the culture of investment banks and the origins of the financial crisis, and did so in a way that was skillful and entertaining.

2012

No matter what else we achieve, if the generations alive now fail to prevent catastrophic climate change we will be seen as failures by the generations that will suffer after us. We will be remembered as the people who had all the knowledge and technology required to preserve a habitable Earth, but who were too ignorant or distracted or greedy to actually do it. We will be the generation that breaks the chain of inheritance – which has links extending back through all of human history – and that passes on a degraded and dangerous world after having received a promising and prosperous one.

It’s remarkable to read Bill McKibben’s The End of Nature, published in 1989 when I was six years old. In it, he describes everything that is happening now: the growing scientific certainty accompanying increasingly perceptible changes in the outside world, the body of scientific research and understanding being assembled over decades and centuries. And yet, despite how the message has been clear and compelling for decades, the world hasn’t even started moving in the right direction yet, much less started moving that way quickly enough to avoid disaster.

The stupidity of what we are doing is startling.

What to do about climate change

Recently, I suggested that perhaps there is a division between ethical questions that are hard to answer and those where the answers are merely deeply inconvenient.

Something a bit similar is probably true of climate change policies. There are a few things we should obviously do, but many large questions outstanding.

Something clear: carbon pricing

For example, I think it’s clear that we need an economy-wide price on carbon. Every activity that produces greenhouse gas (GHG) pollution causes harm that isn’t reflected in its price. When you buy a car, or gasoline, or a laptop, or airline tickets, the cost should include some reckoning of how much harm is being done by the GHG pollution you are causing. As I mentioned before, the purpose of this extra cost isn’t to pay compensation to the victims, but rather to discourage the harmful behaviour. As such, the price on carbon needs to be set high enough to drive people to change their behaviour.

There are those who object to the idea of pricing carbon at all – often because they distrust capitalism and market mechanisms. I can understand the sentiment, but I think the urgency of climate change obligates us to develop mechanisms that are capable of working within the general systems we have. Carbon pricing fits the bill. (More on my fantasy climate policy is here).

Something uncertain: nuclear power

One question with no clear answer is what ought to be done with nuclear power. In a weird reversal of their stereotypical roles, The Economist is now calling nuclear power “the dream that failed” while George Monbiot is emphatically encouraging the British government to stick with nuclear because of the importance of cutting GHG pollution.

I have written before about the tricky balance involved in the nuclear decision (PDF). I don’t think the answer is clear. Nuclear power stations have certainly played a role in making GHG pollution levels lower than they would have been in a world without nuclear power. At the same time, nuclear power stations are dangerous, both in terms of accidents and the proliferation of nuclear weapons. In terms of cost, I still think the figures that are available are too contradictory and untrustworthy to be used as the basis for sound decision-making.

One shot

In the end, humanity only has one shot at this. We have one planet that we will warm to a greater or lesser degree and one global civilization that we will power to a greater or lesser degree in one way or another. We have options with varying levels of risk and types of risk (risks of doing nothing, risks of geoengineering, etc). Finally, we have governments that have largely failed to appreciate the seriousness of the issue, and a powerful assortment of industries dependent on fossil fuels that have been very effective at pressuring governments to do nothing major about the problem of climate change.

One way or another, the people who are young today will probably live to see which way the world will go. If we keep burning fossil fuels in the way we are now, the best science suggests that we are headed for a world more than 4°C warmer with sea levels several metres higher and other serious unpredictable effects. Alternatively, if we get serious about the multi-decadal project of decarbonizing the global energy supply, people who are young today may live to see the emergence of a global civilization that runs on renewable forms of energy within a stable climate.

P.S. I think the question of what individuals can most productively do in response to climate change is pretty clear: lobby your elected representatives. If you really want to focus on reducing your personal impact instead of changing the system, the best choice may be to travel less, eat less meat, and avoid having children.

Index tracker three years in

Three years ago, a discussion began on this site about which investments might do the best job of growing faster than the rate of inflation. It’s a pretty important question for anyone who hopes to attain a reasonable degree of financial security. Bank accounts, government bonds, and GICs all pay well below the rate of inflation, meaning that those who are prudent enough to set money aside actually pay a penalty for doing so.

Based on the way in which equities have consistently outpaced commodities and bonds over the last few decades, my guess was that a low-fee index-tracking mutual fund was probably the best bet for ordinary investors hoping to achieve growth at a reasonable level of risk.

I bought some units of the ING Direct Streetwise Balanced Growth Fund for $8.18 each on 20 May 2009. The unit price has since risen to $9.61 – an increase of 17.5% over three years, after fees. That almost certainly beats the pace of inflation, but I am not sure how it compares to alternative investments that could have been made at the same time. Given how much the price of gold has shot up lately, I suspect it would have been a better investment for the 2009-2012 span. That said, given that gold doesn’t actually produce any return, I suspect the index tracker will dramatically outperform it over a multi-decadal timescale. Time shall tell.

P.S. I really wish there was a low-fee index tracking option that didn’t include investments in the oil, gas, and coal industries. It is particularly troubling that every major Canadian financial institution seems to invest in oil sands development.

Timex Expedition

Recently, the Mondaine watch I got at the Museum of Modern Art in New York stopped working. It was under warranty, so I sent it to the address listed on the warranty card as an expedited parcel. It was returned to me as undeliverable.

While I am figuring out how to convey it to them, I got an inexpensive Timex Expedition watch as a replacement. I used very similar watches back in elementary school. I remember getting a new one every time the battery on one died, for about $40 apiece. They are about the same price now and – after a couple of days of using it – I can say that it is the best watch I have used in a while.

It has three alarms, and it very easily lets you set one for weekdays and one for weekends. It has an accurate chronometer and countdown timer. The controls are intuitive (or perhaps I remember from elementary school). You can press one button to display an alternate timezone (I have mine on GMT / UTC.). It has a big button on the front that makes it light up in an effective but unobtrusive way (much less annoying than checking your cell phone). And it’s good to 100m underwater – a position that if I ever reach, I will probably have already died reaching. It shows the time, day, date, and day of the week at a glance, and I think it takes less thought to comprehend the time expressed digitally. Analog watches always make me pause a moment to interpret them.

The watch is small and light and comes with a comfortable and reasonably attractive-looking strap. It definitely isn’t dressy, but it is highly functional and attractively priced.

We’re made of cheap stuff

As a child, I visited Vancouver’s Science World on what was probably a monthly basis. I knew most of the stage shows by heart (‘Arcs and sparks’ was the most energetic, complete with exploding pickle), along with the dramatic vocal introduction at the OMNIMAX theatre.

One display I remember well was located in the main atrium area. It was a scale that weighed you and then told you in a robot voice how much it would cost to buy lab-grade versions of all the chemicals that comprise you. It would say: “You contain $1.24 worth of carbon” or “You contain $0.03 worth of iron”. At the end, it said that you had a monetary value of X amount “give or take a few cents”.

In a way, the display illustrates that is remarkable about biology. You can take utterly mundane stuff – air and soil – and turn it into astonishingly complicated chemicals and structures, everything from the complex fragrances of flowers to DNA to the core of an oak tree to a human brain. Botany and plant cultivation are a kind of alchemy precisely because of how they allow the transformation of garden-variety raw materials into complex products. You can have all the materials necessary to make a wombat, but there is really no way to put them together in the right way unless you have a couple of fertile wombats on hand as well.

The same reality intersects with the practice of organ donation. Right now, a mass of a few kilograms located inside my thoracic cavity might be a highly-valuable liver or kidney. Without the benefit of a functioning circulatory and immune system – or, failing that, proper care and refrigeration – it becomes a near-worthless lump of meat in just a few hours. We’re made of cheap stuff; the added value is in the organization.

Ending drug prohibition

Earlier, I wrote about whether the phrase ‘greenhouse gas pollution’ is accurate, and whether it might be useful for building political will to do something about climate change. The phrase is accurate – CO2 is an unwanted by-product of various processes and it does harm to people all over the world – and it may be a useful way to remind people that ‘greenhouse gas emissions’ are a real problem that needs to be dealt with. It calls to mind phrases like “make the polluter pay [for the cost of cleaning up pollution]”.

I wonder whether a similar change in language might be helpful for opposing unreasonable drug laws. Mention ‘marijuana legalization’ and the eyes of the people around you will glaze over. They have heard the debate, they have their view, and they probably don’t care about it too strongly one way or the other.

Maybe we can do better by saying things like: “End marijauana prohibition” or “End the prohibition of drugs”.

People remember the prohibition of alcohol, the way it failed, and the problems it caused. It enriched organized crime and pushed alcohol use underground. It led to inferior and dangerous kinds of alcohol being sold. It cost tax revenues, crowded the prisons, and so on. All this is true of drug criminalization today. Most of the problems associated with drugs only exist because they are illegal, or are made much worse because they are illegal. Drug prohibition turns the drug trade into a violent, dangerous business and it turns ordinary people who use substances that are often more benign than alcohol or tobacco into criminals.

Al Capone was the natural consequence of alcohol prohibition. His successors created by the drug war may be less famous – and they may kill more people in Mexico than in Chicago – but their business has arisen for exactly the same reason, and operates according to the same logic. Stratfor describes what has been happening recently in Mexico as “a stalemate” “between the Sinaloa Federation, Los Zetas and the government” and argue that it has produced 50,000 deaths. That is more than 16 times the number of people killed in the terrorist attacks of September 11th, 2001. It’s about 6% of the number of deaths associated with the 1994 Rwandan genocide.

Ending drug prohibition just makes sense. It is both unethical and ineffective for governments to try to control what consenting adults do with their bodies. Their efforts to assert that control are doing demonstrable harm. Perhaps by speaking about the situation in terms of ‘ending prohibition’ rather than ‘legalizing’ this or that, the political debate can be moved forward just a little.

The government that hammers tent pegs up our noses

A pattern seems to have developed in the legislative politics of a certain northern country.

The people in power boast that they are going to do something dramatic but somewhat foolhardy: “Watch! I am going to hammer this tent peg up your nose!” or “Let’s make the census optional!” or “Let’s throw people in jail for harmless marijuana offenses!” or “Let’s allow the police and spies to watch everybody’s internet use!”.

After this declaration is made, both the political opposition and experts in the field bring up some of the very reasonable objections to the proposal: “What about my brain?” or “The whole point of a census is that everyone completes it” or “That’s pointless vindictiveness for a non-offence to society” or “That’s an insanely over-reaching way to catch only the stupidest criminal web users”.

But the issue has already become a matter of pride and honour for the government of the day, so they cannot back down or change plans. Occasionally, public and political opposition to the proposal are strong enough to stop it, at which point the government becomes bitter and petulant, stressing how everyone will need to live with the terrible consequences of not following the government’s plan. Often, however, they are able to circle up successfully around their bad idea and turn it into law.

This pattern of behaviour is likely to persist for as long as the opposition is leaderless and split.

Even those who favour the party in power probably realize that the political system only works properly when there is a credible opposition. If there is nobody else who looks capable of forming a government, there are few real checks on the power of the people in charge. That leads to them expressing their own psychological excesses and frustrations in ill-conceived legislation, which is bad for everybody.