The annual CERAWeek meeting is underway in Houston, promoted as the world’s “premier” annual climate and energy event where a parade of corporate and political heavyweights, such as U.S. climate czar John Kerry, spar over the future of the global energy system.
Terence Corcoran: Shattered windows and the broken economy fallacy
Smashing carbon energy will not bring a ‘just transition’ to better growth
A famous economic parable from the work of French economist Frederic Bastiat in 1850 outlines what is known in economic circles as the Broken Window Fallacy. In the parable, a boy smashes the window in a town shop, creating an expense and loss for the shopkeeper. But a bystander observes that there is an economic benefit to smashing windows: Glassmakers get more business, a conclusion glibly summarized in one commentary: “It’s a good thing to break windows — money gets circulated and the industry thrives.”
That’s the fallacy: Destructive acts of man or nature create economic opportunity that trumps the loss. Even acts of war have big payoffs. The Second World War has often been seen as the catalyst for American prosperity and a model for governments today. Why not use the same government interventions and policies to mobilize industry and the private sector to reshape the economy to fit some new pre-conceived idea of economic perfection. We don’t have a war, but we could act as if we had a war.
At CERAWeek, Kerry is reported to have dragged in the war-climate analogy, calling for a global mobilization to fight climate change. It was a milder replay of his claim earlier this year that the global effort to achieve net-zero carbon emissions was comparable to fighting the Nazis; it requires setting the global economy on a war footing.
Bastiat, in his summary of the original broken window parable, said his story “contains an entire theory … which, unhappily, regulates the greater part of our economical institutions.” That was 1850, but it’s even more true in 2023 as governments in the Western world attempt to smash the windows of the energy system and replace it with an all-new net-zero energy regime.
The broken window fallacy in such thinking, if I can presume to condense Bastiat, is that the real cost of breaking windows is ignored. The window repair company will make $2,000 from the repair costs and the new spending will be incorporated into GDP as a source of growth. Missing in that summary is the fact that the shop owner has lost $2,000 and has nothing to show for it. He has, moreover, lost the opportunity to buy $2,000 worth of clothing for his kids or to invest in a new lunch counter that would increase his shop’s sales and his income.
If window smashing advances the economy, why not break millions of windows and see their replacement as a source of growth — the production of glass, frames, manufacturing, distribution, installation? That, unfortunately, is exactly the plan now being proposed by the build-back-better proponents and the great net-zero energy resetters at the helm of Canada’s just transition plan and the industrial subsidy regime now being installed in the United States.
Theorists such as Mark Carney see the push to carbon net-zero, through the massive reduction in fossil-fuel use, as a golden growth opportunity. “If you are making investments, coming up with new technologies, changing the way you do business, all in service of reducing and eliminating that threat, you are creating value.”
When Ottawa recently outlined its “just transition” action plan to achieve net-zero by 2050 the overriding message could have been taken from Bastiat’s parable. Governments, workers and industry need to join together to harness the opportunity of a net-zero low-carbon energy future that “represents a generational economic opportunity for every region of this country — a shift that will secure the future of our energy sector and create more good jobs for Canadians.”
As critics have noted, the planning document is a waffling load of bureaucratese. It also neatly changes the slogan of the plan from the “Just Transition” plan to the “Sustainable Jobs” plan, likely in recognition that the “just transition” slogan has its 1970s roots in the U.S. labour movement and has been enthusiastically endorsed by the socialist left and radical environmental groups.
The fallacy also looms large in consultancy and financial institution reports that see the great transition away from carbon emissions as a grand $2-trillion opportunity. But the cost of breaking all those fossil fuel windows are rarely mentioned, let alone systematically calculated.
Some observers, though, have attempted to measure costs. In a paper last year for the Public Policy Forum, British Columbia analyst Don Wright asked: “Do We Really Want to Make Canadians Poorer? What Shutting Down Its Oil and Gas Sector Would Cost Canada.” Wright’s effort to nail the costs of decarbonization turns up some big numbers. Shutting down oil and gas production would cut GDP by six per cent, for example.
But that’s just a rough start on exposing the broken economy fallacy behind the energy decarbonization transition plans under discussion at CERAWeek in Houston. Much more needs to be done before they start deliberately smashing all our energy windows.
US revises down last quarter's economic growth to 2.6% rate – ABC News
WASHINGTON — The U.S. economy maintained its resilience from October through December despite rising interest rates, growing at a 2.6% annual pace, the government said Thursday in a slight downgrade from its previous estimate. But consumer spending, which drives most of the economy’s growth, was revised sharply down.
The government had previously estimated that the economy expanded at a 2.7% annual rate last quarter.
The rise in the gross domestic product — the economy’s total output of goods and services — for the October-December quarter was down from the 3.2% growth rate from July through September. For all of 2022, the U.S. economy expanded 2.1%, down significantly from a robust 5.9% in 2021.
The report suggested that the economy was losing momentum at the end of 2022.
Consumer spending rose at a 1% annual rate last quarter, downgraded from a 1.4% increase in the government’s previous estimate. It was the weakest quarterly gain in consumer spending since COVID-19 slammed the economy in the spring of 2020. Spending on physical goods, like appliances and furniture, which had initially surged as the economy rebounded from the pandemic recession, fell for a fourth straight quarter.
More than half of last quarter’s growth came from businesses restocking their inventories, not an indication of underlying economic strength.
Most economists say they think growth is slowing sharply in the current January-March quarter, in part because the Federal Reserve has steadily raised interest rates in its drive to curb inflation.
The resulting surge in borrowing costs has walloped the housing industry and made it more expensive for consumers and businesses to spend and invest in major purchases. As a consequence, the economy is widely expected to slide into a recession later this year.
The central bank has raised its benchmark interest rate nine times over the past year. The Fed’s policymakers are betting that they can stick a so-called soft landing — slowing growth just enough to tame inflation without tipping the world’s biggest economy into recession.
Yet as higher loan costs spread through the economy, analysts are generally skeptical that the United States can avoid a downturn. The main point of debate is whether a recession will prove mild, with only minor damage to hiring and growth, or severe, with waves of layoffs.
The financial conditions that led to the collapse of Silicon Valley Bank on March 10 and Signature Bank two days later — the second- and third-biggest bank failures in U.S. history — are also expected to slow the economy. Banks are likely to impose stricter conditions on loans, which help fuel economic growth, to conserve cash to meet withdrawals from jittery depositors.
“The economy ended 2022 with marginally less momentum,” Oren Klachkin and Ryan Sweet of Oxford Economics wrote in a research note. ”Looking ahead, the economy will face the full brunt of tighter credit conditions and Fed policy this year, and inflation is set to stay above its historical trend.”
They added: “We expect a recession to hit in the second half of 2023.”
In the meantime, the job market remains robust and has exerted upward pressure on wages, which feed into inflation. The pace of hiring is still healthy, and the unemployment rate is near a half-century low. The confidence and spending of consumers remain relatively solid.
Thursday’s report from the Commerce Department was its third and final estimate of GDP for the fourth quarter of 2022. On April 27, the department will issue its initial estimate of growth in the current first quarter. Forecasters surveyed by the data firm FactSet have estimated that growth in the January-March quarter is decelerating to a 1.4% annual rate.
Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 – Bloomberg
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Zimbabwe Becomes Second African Nation to Cut Rates Twice in 2023 Bloomberg
Anomalies abound in today's economy. Can artificial intelligence know what's going on? – The Globe and Mail
All the fuss today is about machine learning and ChatGPT. The algorithms associated with them work well if the future is similar to the past. But what if we are at an inflection point in economic and political conditions and the future is different from the past? Will record profit margins, inflated asset prices and low inflation and interest rates of the past 30 years be an accurate reflection of the future? Is this time different?
Maybe we’re already there. Things do not seem to make sense anymore. Have you noticed that economic indicators seem to have stopped working as well and as predictably as they have in the past?
Here are some examples of the puzzling behaviour of economic statistics of recent months.
An inverted yield curve has historically been a good indicator of recessions. For several months now the yield curve has been inverted and yet the U.S. economy has been adding millions of jobs, leading to an historic low unemployment rate. Employment is booming while the economy at large is not.
Consumer sentiment, as reflected in the University of Michigan surveys, and consumer spending have tended historically to move together. But this time around, while consumer sentiment took a nosedive, consumer spending and credit card balances keep growing, reaching record highs.
Construction employment and homebuilder stocks are rising while housing permits and housing starts are falling. Normally, homebuilder stock prices would reflect the collective wisdom of financial markets about housing activity. Not this time.
Bond markets are expecting inflation to recede to the Fed’s target rate of 2 per cent. In this case, the real interest rate, implicit in the 10-year treasuries yield of between 3.5-4 per cent, is 1.5-2 per cent, which is close to historical averages. But prior to the Silicon Valley Bank debacle, some surveys pegged expected inflation to about 3 per cent going forward. Assuming the real rate is the same, this implied a 10-year treasuries yield of between 4.5-5 per cent. Either the bond market was out of line or forecasters’ inflation models do not work as well as in the past.
And oil prices are around US$70 a barrel despite the recent banking crisis and at a time when the economy is slowing down and believed to be entering a recession. Based on past experience at this point in the business cycle oil prices should be at US$50 or less. But they are not. Which begs the question: What will happen to oil prices when the economy enters a growth phase, especially with the opening of China after the COVID-19 lockups?
And the list of puzzling contradictions goes on. Having said that, someone may argue that the labour statistics, for example, are a lagging indicator and show where the economy was, not where it is going. While this is true, the magnitude of divergence between labour statistics and economic activity is so much higher than they’ve been historically. That makes one wonder what is going on.
It could be that many of these puzzling statistics are the result of “survey fatigue,” as Bloomberg Businessweek calls it. The publication reports that there has been a decline in response rates for many surveys government agencies use to collect economic data.
For example, employer response to the Current Employment Statistics survey, according to the publication, which collects payroll and wage data each month, has declined to under 45 per cent by September, 2022, from about 60 per cent at the end of 2019. The issue here is the non-response bias: that people who are not responding to the survey are systematically different from those who do, and this skews results. Could weakening trust in institutions and governments be behind the decline in response rates in recent years? If this is the case, the problem is serious and difficult to reverse or eliminate.
As a result, machine learning algorithms that need massive and good quality data about the past and assume that the future will look pretty much like the past may not work. Then what? Should we re-examine our old models? Or will human intervention always be required? Machine learning will not be able to replace investor insight and “between the lines” reading of nuanced economic numbers.
George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Ivey Business School, University of Western Ontario.
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