Strategic View: In the Long Run, Macroeconomics is Dead

Strategic View: In the Long Run, Macroeconomics is Dead[1]

Adam Seitchik

Published in Investing for a Better World

Trillium Asset Management Corporation

Winter 2007

Seventy years ago John Maynard Keynes invented modern macroeconomics in response to the crisis of the Great Depression and the mass unemployment that it engendered. His solution was to create high levels of economic activity – not necessarily for the goods this produced, but for the jobs. To this day, economy-wide (GDP) growth remains the central yardstick by which we gauge economic performance. Traditionalists worried that Keynes’s spending focus would risk long-term government indebtedness. His famous defense: “in the long run, we’re all dead.”

Today we face a new crisis which is absent from the national growth and employment accounts: global warming. Keynes should have quipped that in the long run the environment may be dead, because our very successful economy will have killed it. According to the best science we have, carbon levels in the atmosphere must be capped at no more than double the pre-industrial level if we are to avoid what could be irreversible, catastrophic climate change (atmospheric carbon concentrations are 35% above pre-industrial levels now, and rising sharply). Yet the CO₂ emissions most responsible for global warming are generated by the very production that is the lifeblood of the economic system: liquid fuels for transportation, and providing energy for residential and commercial use.

To confront head-on today’s crisis will require a new macroeconomics, and modernized metrics to go along with it. Hard environmental limits on greenhouse gas emissions condition our economic options, and cannot be traded off against fossil-fueled growth. However, the political challenge is profound. Even to hold atmospheric carbon concentrations to no more than double pre-industrial levels will require a 70% reduction in greenhouse gas emissions, while the difficult-to-negotiate Kyoto treaty only called for reductions of about 5% from 1990 levels, and only in developed countries.

Economic textbooks ask: how clean an environment can we afford? New economic models must determine what kinds of growth and investment are unacceptable or required within a carbon-constrained world. Once the biosphere is understood as necessary for production and not a luxury good, the benefits of decisive action are obvious. The recent voluminous report on the economics of climate change commissioned by the UK government puts our options in stark terms. Beyond the devastating biodiversity loss, doing nothing is estimated to cause economic disruption equal to 5-20% of GDP per year. Alternatively, the report predicts that investments to reduce greenhouse gas emissions and avoid the worst impacts of climate change would cost only a tiny fraction as much -- about 1% of GDP per year. What are we waiting for?

As owners of companies, investors need to make clear that corporate efforts to dramatically reduce carbon emissions are in our long-term financial interest. The Investor Network on Climate Risk is making this case, and the millions of smaller investors at mutual fund companies should join the chorus. Today’s challenges require a new bio-economics for the long run, an economic model that respects our planet’s non-negotiable constraints.

[1] Thanks to the Global Development and Environment Institute at Tufts University for their groundbreaking work on sustainable economics, including an innovative on-line introductory text, Macroeconomics in Context, http://www.ase.tufts.edu/gdae/publications/textbooks/macroeconomics.html.