Finance and greenhouse gas emissions

The world faces three particularly awkward economic issues over the next fifty years:  how global living standards can be maintained with lower greenhouse gas emissions; how poor people in countries that still have high population growth rates can be brought out of poverty; and how the impact of population ageing in higher income nations can be managed.

In this post I will discuss how the solution to these three issues can be linked. In a follow up I’ll use the example of New Zealand to show how policy settings may be making the third issue worse than it needs to be.

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Do old people hurt growth?

A new paper (PDF) claims that ageing populations will hinder growth by both dis-saving and dragging down innovation, thus reducing productivity. Using a VAR model, they relate the age structure to measures of growth, saving, investment, and other macroeconomic variables over the 1990-2007 period. They use those coefficients to predict the effect of demographic change on growth rates in the current decade. The results are dramatic, predicting that an ageing population will knock over a percentage point off some countries’ growth rates.

In a ray of light, this morning’s FT (£) reported a study of over 15,000 German employees that examined the relationship between ageing and productivity. One of the authors is quoted saying:

As workforces age, employers are concerned that productivity will decrease. That is not so. What matters is not chronological age but subjective age.

The research suggests that older people are systematically excluded from training activities, and are relegated to less creative and meaningful work, which renders them less productive. As the workforce ages, that may begin to change. As it changes, the relationship between growth and age structures is likely to weaken.

Christmas reading: McCloskey on Piketty

It’s taken me a month to read it but Deirdre McCloskey’s essay on Piketty’s Capital is just as persuasive as you’d expect. Print it and read it with your family over Christmas!

The review doesn’t break any new ground but it is eloquent and engaging. Her central themes are: Read more

QOTD: Delong on targets and the ‘great stagnation’

Golden passage from Brad Delong.  For once I’m going to put up a quote and not add my thoughts – as they’d just get in the way:

The focus on real GDP growth and its possible–or likely–slowing is a setup to panic us into making policy decisions we really do not want to make. The “great stagnation” literature as it is currently constituted seems to me at least to guide our attention in the wrong direction–and to quite possibly stampede us into making policy decisions we really would not want to make if we thought more deeply and calmly. The chain of logic is that measures to reduce inequality have a cost in terms of reducing the growth rate of the economy–that the bucket of redistribution is, in the terms of Arthur Okun’s Equality and Efficiency: The Big Tradeoff, a leaky bucket–and that when growth is slower we can no longer afford to engage in redistribution. This seems to me to be the wrong way to conceptualize it: the evidence that the bucket is leaky is weak–or, rather, there are many buckets, some very leaky, some not leaky at all, some anti-leaky–and in any event whether we should tradeoff potential growth for other objectives is not something the depends on how fast growth is. Policies that make sense if underlying GDP per worker growth is 3% probably still make sense if underlying GDP per worker growth is 1%. Policies that don’t make sense if underlying GDP per worker growth is 1% probably still don’t make sense if underlying GDP per worker growth is 3%.

But my aim here is simply to lay down a marker as far as point is concerned: to enjoin you not to get stampeded into going someplace you really do not want to go.

 

Was Summers right in saying “pollute the LDCs”?

Back in 1991, Larry Summers upset a lot of people as Chief Economist at the World Bank.  His memo has been viewed as morally reprehensible, was cited in the second chapter of this book as indicative of the way economists ignore moral values, and was used as a key example in a philosophy class I sat in of the untenable nature of economic arguments.

But, as a description of what would happen if people in LDC’s (least developed countries) had the choice, was he actually correct?

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The excel error in Rogoff-Reinhart

I see the Rogoff-Reinhart figures regarding the correlation between GDP growth and the size of the debt stock are currently under attack – due largely to an unfortunate excel error discovered reported by Mike Konczal.  Here are the list of posts about it at the moment:

All very nice.  Depending on the message people were trying to sell they either said the result was meaningless, or central, so I don’t think this makes any actual difference.  Honestly, without clear causal drivers there just were not good evidence based claims for actual policy adjustments – a lot of people were actually just saying we need to do X based on their preconceptions.  And they found this correlation either something that supports that (somehow) or something they need to rule out.

Over the last few years I have seen authors, at different times, use R-R as central to their argument on one thing, and then dismiss it for arguments regarding other issues (I’m not going to name names).  For example, you can’t use this result to say we need more savings policy because the stock of debt is to high, then complain that the study is flawed when you want more government borrowing … just focus on the actual core elements of your frikken argument instead!

My problem with the result isn’t the excel errors, or anything R-R appear to have said – it is the way it has been used as an inconsistent marketing tool by people for selling their own unrelated ideological policies.  I’m just hoping that this shuts that up.

As a side note, here are my feelings on twitter:

People who think the R&R result caused austerity overestimate the impact evidence has on government policy.