Sunday, October 29, 2017

Devolution everywhere: Spain, Italy, Britain and the problems of complexity

The narrative about Catalan independence is that two major cities, Madrid and Barcelona, are competing for power, and one has decided that the best path forward is to declare independence from Spain and free itself of Madrid's dominance.

There is certainly something to this narrative. As CNN reports:

Catalonia accounts for nearly a fifth of Spain's economy, and leads all regions in producing 25% of the country's exports.

It contributes much more in taxes (21% of the country's total) than it gets back from the government.

Independence supporters have seized on the imbalance, arguing that stopping transfers to Madrid would turn Catalonia's budget deficit into a surplus.

Catalonia has a proven record of attracting investment, with nearly a third of all foreign companies in Spain choosing the regional capital of Barcelona as their base.

But the spread of independence-seeking across Europe points to something more than just sibling rivalry. In 2016 British voters shocked the world by voting narrowly to withdraw from the European Union (EU). Just this month two of Italy's richest regions held non-binding referendums on seeking increased autonomy from the central government. More than 95 percent of those voting said yes.

The immediate effects of Britain withdrawing from the EU and of Catalonia becoming independent (if, in fact, either actually ends up happening) could be quite negative economically, cutting both off from established trade arrangements that power their economies. (The vague desire for more autonomy among the provinces of Veneto and Lombardy in Italy does not yet spell economic and political divorce.)

Given this outcome, why would the people of Britain and Catalonia seek to disconnect from central authorities? For Britain perhaps the impetus was that most of the people of Britain did not feel they were sharing in the prosperity generated by the country's affiliation with the EU. Certainly the financial elite centered in and around London have prospered, but not necessarily the rest of the country.

In Catalonia, the problem seems reversed. The Catalans are prospering just fine. But Madrid is siphoning off the fruits of Catalan labor and ingenuity and providing little in return.

Both complaints point to a larger and yet conceptually invisible problem. Joseph Tainter in his momentous study entitled The Collapse of Complex Societies explains that complexity is a strategy for societies to respond to challenges. At first complexity works well to solve problems. Later in the life of a society, complexity—a new bureaucracy here, another layer of complexity in the infrastructure there—continues to work but with diminishing returns. Finally, a society now used to solving its problems successfully with greater and greater complexity is blinded by this success and cannot see the point when the returns from complexity turn negative.

The key here is that the returns from complexity are not evenly distributed. And, when such returns go negative, those implementing the changes that increase complexity—usually the people in power—may, in fact, benefit while the majority suffer. And, the negative returns may not just be economic. They may also have to do with perceived status, the workings of justice, public safety, and any number of other civic functions.

When people perceive these reductions in their well-being compared to others, they seek common cause with those closest to them whom they assume feel similarly aggrieved.

Here in the United States I frequently ask friends how much they think San Francisco, Portland and Seattle listen to the dictates coming out of Washington, D.C. The dispute over so-called sanctuary cities for undocumented immigrants is but one example of failure to cooperate with federal authorities. Gov. Jerry Brown sounded more like the president of California than its governor when in the wake of Donald Trump's victory he told the American Geophysical Union that if the federal government shut down satellite collection of climate data,“California will launch its own damn satellites.”

In an age which seems to call out for transnational solutions to climate change, pollution, deforestation, species extinction, and myriad social, economic, and health issues including wealth inequality, cybercrime, and possible pandemics—in such an age we are faced with the strange centrifugal force of devolution as many people lose faith in centralized authorities to solve their problems.

The hugely complex, tightly networked systems within which we live now in communications, trade, transportation and finance have provided unparalleled (but poorly distributed) wealth. They exhibit the economies of scale that attract us because they produce low prices for the goods and services we want. But more and more people are coming to believe that these systems lack the responsiveness needed to address their daily problems.

What they don't necessarily understand is that these systems because of their high efficiency are also very fragile. Their very efficiency means they have little redundancy, and it is redundancy which creates resilience. For this reason, the devolution we see emerging politically may someday be forced upon us in other areas of our lives whether we are prepared for it or not.

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Le Monde Diplomatique, Oilprice.com, OilVoice, TalkMarkets, Investing.com, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He is currently a fellow of Arthur Morgan Institute for Community Solutions. He can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 22, 2017

An ecological view of Trump's trade war

Whether you regard President Donald Trump's rejection of America's trade agreements as a good thing or a bad thing, few people understand what canceling them would mean. From an ecological point of view, abruptly pulling out of trade agreements, agreements which have resulted in innumerable long-term investments and commitments, is the ecological equivalent of a reduction in scope.

A reduction of scope means that occupational niches which arise specifically to facilitate trade in shipping by land, sea and air, manufacturing for export, warehousing, finance, insurance, government employment (such as customs officials and coast guard forces) and other trade-related occupations, all are endangered when the scope of their activities is reduced as a result of new trade restrictions.

To understand what this means, we need to understand the flipside of scope reduction, scope enlargement. From an ecological perspective the increase in world trade over the last few centuries has in a manner of speaking allowed local populations to escape the tyranny of Liebig's Law of the Minimum. In the mid-19th century, Justus von Liebig observed that plant growth was strictly governed by the least available of a plant's necessary nutrients. Adding other essential nutrients simply wouldn't overcome the limitation imposed by the least available one.

In the absence of trade, Liebig's Law acts like a brake on a local community, preventing it from expanding beyond the carrying capacity afforded by its least available essential resources. In dry areas, it might be water. In others it might be arable land. In yet others farmland might be plentiful, but a lack of metal mines might prevent the widespread use of metal tools that could enhance agricultural and manufacturing productivity.

All of this can be overcome if, for example, dry areas rich in mineral deposits trade with agriculturally endowed areas that have plenty of water. In essence, the dry areas are importing water and fertile soil in the form of food in exchange for minerals needed to make metal tools. Something like this goes on today. Countries rich in oil but poor in farmland trade their oil for food to supplement inadequate supplies grown domestically.

This type of illustration will seem familiar as a standard explanation for the wisdom of trade. But Liebig's Law does not cease to apply because we have global trade. It now applies to global carrying capacity rather than just local carrying capacity. Because this carrying capacity depends heavily on trade in finite energy sources, that is, fossil fuels, its stability cannot be guaranteed indefinitely. Without a substantial replacement of fossil fuels, which supply more than 80 percent of the world's energy, the current system will collapse into a lower state of organization with far less carrying capacity.

Collapse or at least a partial collapse can also happen if the scope available for obtaining essential goods and services shrinks due to political or economic circumstances. During the Great Depression the decline of global trade was magnified by measures designed to protect domestic industries from foreign competition, mostly through import tariffs adopted by many countries. The effect was a reduction in scope that created even more unemployment through the destruction of occupational niches associated with trade.

We may now face something like this—though whether it becomes severe depends on how far the Trump administration proceeds in withdrawing America from the world trading system and whether other countries retaliate.

Regardless of the Trump administration's trade policy choices, the ecological perspective allows us to see that almost all of the modern world's trade-oriented occupational niches are temporary rather than permanent. In the short run, they depend on a general agreement among nations not to engage in trade wars that result in a reduction of scope, that is, nations forced to live on their own resources. This would, for example, be problematic for the American electronics industry that is heavily dependent on China which produces more than 80 percent of the world's rare earth metals. Those metals are necessary for the production of computers, cellphones or other communications and computing devices. And, this is but one example in our highly interconnected world.

In the long run the limiting factor for trade-oriented occupations is energy because so much of our energy comes in the form of fossil fuels. Those fuels are central to every economy and are critical to sustaining the global logistics system. To assume that world trade at the scale it exists today can continue far into the future without a dramatic reshaping of the world's energy system is a failure to understand that the laws of nature, in this case Liebig's Law, cannot be overcome by optimistic pronouncements about our energy future.

On our current energy trajectory the human race is likely to be headed for a reduction in scope as fossil fuel resources ultimately decline and renewables fail to expand quickly enough in type and scale to address the mismatch between our desires and the supply of energy needed to maintain global networks of exchange.

According to the International Energy Agency, despite the rapid growth of renewables in recent years, combined geothermal, solar, wind, and tide/wave/ocean energy output provides less that 1.5 percent of total world energy. Hydroelectric power makes up another 2.5 percent but is growing quite slowly. Percentages for renewables would have to rise dramatically and soon if we are to avert the twin crises of climate change and fossil fuel depletion.

Ideas for changing our current trajectory abound. But they will not matter unless they are shown to be both technically and economically feasible and until they are widely deployed. A felicitous outcome is by no means assured within a time frame that avoids a reduction in scope and its attendant effects.

This piece draws heavily from William Catton's book Overshoot, the relevant section of which has been reproduced here.

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Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has appeared in The Christian Science Monitor, Resilience, Common Dreams, Le Monde Diplomatique, Oilprice.com, OilVoice, TalkMarkets, Investing.com, Business Insider and many other places. He is the author of an oil-themed novel entitled Prelude and has a widely followed blog called Resource Insights. He is currently a fellow of Arthur Morgan Institute for Community Solutions. He can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 15, 2017

Taking a short break - no post this week

An exceptionally heavy workload has forced me to take a short break from posting. I expect to post again on Sunday, October 22.

Sunday, October 08, 2017

The Italian experiment and the truth about government debt

Money is a slippery concept. Today we think of it as paper certificates and coins. But actually, anything that is generally accepted in trade can be considered money. The rise of cryptocurrencies is demonstrating this truth. In wartime scarce but desirable and easily transported commodities such as cigarettes, alcohol, jewelry and valuable paintings can act as currency.

Debt is defined as money owed to another person or entity such as a corporation. It is an obligation to pay the money back, usually by a specified date at an agreed rate of interest. Certain kinds of debt, especially government bonds, are traded daily in the world's money markets. So confident are investors that some government bonds, especially U.S. Treasury bonds, will pay the agreed interest and be redeemed in full at maturity that they treat them as if they were cash—because they can be converted into cash in an instant in world markets.

But is government debt what we think it is? Consider the poor Italians who recently announced that they will try paying for government services with tax credits—essentially reducing a person's tax bill in exchange for services rendered or products delivered. The reason is simple. The Italian government is hard pressed for revenue which is paid in Euros, a currency which the government does not control and therefore cannot create more of.

The tax credit scheme gets around this inconvenience. But it also makes possible a far more interesting possibility. As the writer of the linked piece points out, what if instead of making book entries in a taxpayer's account, the Italian government issued paper tax credit certificates that could be used to pay taxes?

At first this seems unimportant unless one imagines that everyone who is doing work for the government receives tax credits in the form of paper tax credit certificates. Furthermore, what if those certificates were available in convenient denominations much like paper Euros? Since most Italians have taxes to pay, these certificates could be traded for goods at the local grocery store which also has taxes to pay. And the grocery store could pay its suppliers in certificates because they too have taxes to pay and so on.

Pretty soon this form of government obligation starts to look just like money. And while it essentially borrows the work of others, it does not borrow money from them. The government's obligation is then extinguished when the recipient pays his or her taxes with the certificates. (Eventually, with so many businesses accepting such certificates, banks would be persuaded to accept them as deposits into savings and checking accounts.)

All this implies that the Italian government could get back into the currency creation business to help finance its operations—even if it were to print more certificates than it had taxes due. So long as people were willing to trade them for goods and services among themselves, some portion of the certificates would remain in circulation and never be redeemed to pay taxes.

Of course, the government could overdo the issuance of such certificates, and the author offers up several ways in which the amount in circulation could be managed.

Whether the European Central Bank (ECB) would allow things to get to this point is an intriguing question. After all, the whole point of the Euro is to unify the countries using it under one currency, and in the Euro area agreement, only the ECB can issue currency.

This Italian experiment—if it were to be fully realized—would come tantalizingly close to what so-called Modern Monetary Theorists say is possible: Government finance without debt or the necessity of taxation. A government that controls its own currency can simply issue what it needs to pay for its operations. The only reasons to tax anything are 1) to carry out certain social and economic policies favoring some activities over others and 2) to create demand for the currency being issued. If government taxes can only be paid using the currency issued by the government, nearly everyone will have to have at least some of that currency.

In practice, such a currency becomes a convenient medium of exchange and is therefore almost universally adopted.

All of this may seem improbable upon first blush. But two examples suggest that it is broadly possible and even desirable. First, the United States government financed the Civil War through the issuance of Greenbacks, paper money with no gold or silver backing, only the assurance that the government would accept it in payment for taxes. Such money lives on today in what are now called Federal Reserve Notes which the U.S. Federal Reserve Bank will not redeem for anything other than more Federal Reserve Notes.

Second, many people have long predicted that the vast and mounting U.S. federal debt would cripple the country's finances and lead to an inflationary economic calamity. And yet, even as the debt mounts to a previously unimaginable size, the country seems no closer to that calamity than it did 10 or 20 years ago—at least not one associated with the federal government's debt.

What's happening is that the U.S. government is doing something through its borrowing operations that is in its ultimate effects roughly the equivalent of issuing currency. It borrows its own currency from private individuals and institutions and then uses that currency (or rather book entries denoting currency) to call upon the productive capacity of the United States (and to a certain degree the world) to satisfy its needs. Because it has not unduly strained that capacity, this spending has not pressured prices very much. (If the buying power of the currency in circulation electronically or otherwise does not exceed the productive capacity of the economy, evidence suggests that there is little reason to expect general price inflation.)

With the U.S. federal debt approaching $20 trillion and rising, many are saying that a crisis cannot be far away. But the Modern Monetary Theorist would propose an easy fix: Issue currency to buy back whatever amount of the debt is necessary to calm markets. Better yet, buy all of it and never issue debt again. (Doing this over an extended period of time would probably be best in order not to bring chaos to world money markets. And, it would demonstrate that the U.S. government is not "going broke" nor could it ever go broke as long as it issues its own currency.)

Given that the United States and many other countries issue their own currency, why should wealth in the form of interest payments be transferred to the rich who hold most of that debt, when these countries could be debt free?

What the Italian experiment highlights is that governments that issue their own currency do not have to be dependent on private credit or taxation for their spending needs. In fact, as the author of the piece linked above proclaims, it's downright crazy for such governments to borrow their own currency from private institutions and individuals when those governments can simply issue currency as needed. Only those who hold the strings of private credit and therefore benefit from current arrangements have a stake in getting the rest of us to believe that the world can be run in no other way than the one they prescribe.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, October 01, 2017

Puerto Rico: When the electricity stops

When the electricity stops in modern civilization, pretty much everything else stops. Not even gasoline-powered vehicles can get far before they are obliged to seek a fill-up—which they cannot get because gas pumps rely on electricity to operate.

When I wrote "The storms are only going to get worse" three weeks ago, I thought the world would have to wait quite a while for a storm more devastating than hurricanes Harvey and Irma. But instead, Hurricane Maria followed right after them and shut down electricity on the entire island of Puerto Rico except for those buildings with on-site generators.

Another casualty was drinking water because, of course, in almost every location, it must be moved using pumps powered by electricity. In addition, the reason we remain uncertain of the full scope of the damage and danger on the island is that the communications system (powered by electricity, of course) failed almost completely.

The Associated Press reported that as of September 30, 10 days after Maria's landfall, about 30 percent of telecommunications had been restored, 60 percent of the gas stations were able to dispense fuel and half of the supermarkets were open.

Presumably, these figures represent mostly urban areas where any single act of repair can restore services to many more people than in the countryside where conditions by all accounts remain desperate.

Unless power is restored soon to those areas still without it, many of life's daily necessities—food, water, medicine—will remain beyond reach for substantial portions of Puerto Rico's residents. The consequences of this are both predictable and dire. But the expectations are that weeks and months may pass before electricity again reaches the entire island.

If that turns out to be the case, then those who are able will simply leave their homes and migrate elsewhere, most probably to the U.S. mainland—something they are entitled to do as American citizens. The United States is unprepared for such a massive wave of migration if it develops.

Electricity is the essential pillar upon which the operations of all modern industrial societies depend. And yet, it is something that remains impossible to stockpile in large amounts; nearly all electricity is consumed as it is produced. Its transmission remains all too vulnerable to bad weather which we now know is only going to get worse—not only hurricanes but also ice and snow storms which will increase in frequency and severity as the atmosphere becomes more saturated with water vapor (because warmer air can hold more moisture).

Part of the question the United States and the world will be answering when deciding on how and what to rebuild in Puerto Rico is how much are we willing to spend on making infrastructure climate-change proof when climate change is a moving target. We do not now know how "hard" we will have to make any rebuilt infrastructure in Puerto Rico because we do not know for certain the ultimate severity of climate change through the lifetime of the infrastructure being built. It would be foolish to rebuild infrastructure that will simply blow down or flood out in the next major hurricane or one just 10 years from now.

While contemplating such dangers, the world remains largely oblivious to an unparalleled danger to the electric grid, one that dwarfs what climate change is ever likely to threaten: electromagnetic pulse or EMP.

Two sources of EMP, a coronal mass ejection from the Sun and the detonation of a nuclear bomb at high altitude are real threats. What makes North Korea such a menace is not the few nuclear weapons which the country apparently has, but the possibility that it could detonate one at high altitude and thereby cripple much of the electrical infrastructure of the country targeted. (Whether it has a weapon of sufficient power and the ability to deliver it high into the atmosphere above the United States or another country is unknown. Not surprisingly, the nuclear facilities of the U.S. military have been hardened against such an attack so as to assure a retaliatory capability in the event of a first strike.)

The possibility of a coronal mass ejection of sufficient power to cripple the world's electrical system, however, is not theoretical. Just such an event, known as the Carrington Event, took place in 1859. Back then it dazzled viewers of the sky worldwide while burning up telegraph lines. Today, it would shut down much if not most of the globe's electrical infrastructure.

What Hurricane Maria has done to Puerto Rico reminds us of how vulnerable systems critical to the daily operation of industrial society remain. We have options: one is a more decentralized, renewable energy system hardened against EMP. But we do not yet have the foresight and the will to realize such a system anytime soon.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.