Climate activist, Greta Thunberg (left) and US Treasury Secretary, Steve Mnuchin (right). Source: Wikipedia. License: CC BY 2.0

At this week’s World Economic Forum in Davos, US Treasury Secretary, Steven Mnuchin, came under a lot of flak (unfairly, in my opinion) for saying¹, “After [Greta] goes and studies economics in college, she can go back and explain [the economics of climate change] to us”. This post explains why Mnuchin was correct and Greta was wrong.

(I use the word “Greta” not out of any sense of familiarity with her but because it’s how she’s referred to in the media.)

My argument is that while Greta is correct to worry about Climate Change and that the future of humanity hinges on the world’s nations taking strong steps to address its threat, these concerns are, categorically, not economic concerns. This fact is borne out by the evidence and I present some arguments from the Real World™ of economics in which Mnuchin resides.

Briefly put: ensuring the survival of humanity is not an economic concern. A moral concern, perhaps², but not an economic one.

Economics-in-the-Real-World™

The real members of the class (pun intended) of those who belong to the Economic world are the media, CEOs, and economists. Let’s consider each of them in turn.

(Note: I don’t pretend to be substantive in my coverage here but I do believe it is a representative sample.)

The media

On Sep 4, 2019, India’s premier business newspaper, The Economic Times had a front-pager where they defended Brazil’s deforestation efforts in the pursuit of economic growth. The only conclusion I drew from the article was that “economic growth trumped human survival”.³

In another example, again from The Economic Times, I concluded that the editors wanted “human extinction”.

These two examples were instructive because they illustrates how economics functions in the Real World™.

Addendum, Feb 21, 2020 The Wall Street Journal obliged and gave another datapoint along the above lines. In a Feb 14 piece by Harriet Torry titled, “U.S. Consumer Spending Picks Up, While Manufacturing Declines”, after observing that January 2020 was the fifth hottest month on record (over 141 years of record-keeping, the four warmest Januaries have been since 2016), they quickly move on to the consequences of this information: “Mild winter weather was a boon to consumer spending in certain categories, such as home-improvement stores, restaurants and bars. But it hurt spending in other categories, such as apparel, as consumers held off on purchases of winter coats and boots. Clothing sales dropped 3.1% from December, the largest month-over-month decrease in that category since March 2009.” Put succinctly: yes, we’re all going to die because of global warming but look at the impact this has on the economy! </addendum>

Simply stated, the primary concern of real-world economics is “to create value for shareholders”. The New Yorker captured this spirit beautifully in the below comic.

Source: The New Yorker, https://www.newyorker.com/cartoon/a16995.

CEOs

The premier consultancy firm, Pricewaterhouse Coopers (PwC), conducts an annual survey of CEOs. In their 22nd report⁴, for the year 2019, they surveyed 1,378 CEOs from around the world on a variety of topics. Below I share the CEO responses to one specific question.

You might ask: are CEOs ideal representatives of Economics in the Real World™? (Yes, pun intended.) Here’s what PwC say:

When it comes to global economic growth…we found that CEO survey responses over the past decade reveal a strong correlation between chief executives’ expectations for their own organisations’ revenue growth and actual global GDP growth the following year. In other words, CEOs’ revenue confidence can be considered a leading indicator of the direction of the global economy.

In other words, yes.

PwC’s survey question to the CEOs was, “How concerned are you, if at all, about each of these potential economic, policy, social, environmental, and business threats to your organisation’s growth prospects?” Below are the ones, in ranked order, that CEOs were “extremely concerned” about:

⒈ Over-regulation (35%)
⒉ Policy uncertainty (35%)
⒊ Availability of key skills (34%)
⒋ Trade conflicts (31%)
⒌ Cyber threats (30%)
⒍ Geopolitical uncertainty (30%)
⒎ Protectionism (30%)
⒏ Populism (28%)
⒐ Speed of technological change (28%)
⒑ Exchange rate volatility (26%)
…
⒔ Climate change and environmental damage (19%)

The good news is Climate Change actually made it into the survey. Of course, it isn’t important enough to break into the top ten which shows, just like the business press, CEOs value economic growth over and above human survival.

This is quite instructive because just last week, on Jan 23, 2020, the Bulletin of the Atomic Scientists moved⁵ the Doomsday Clock, 100 seconds closer to midnight. The Doomsday Clock symbolizes how close humanity is to annihilation. If the Clock strikes midnight, it means we, as a species, face imminent destruction. When Trump took office in 2017, the Doomsday Clock moved to two minutes to midnight — the closest it had been since 1953. Last week, the Clock moved even closer to midnight. The closest it’s ever been.

In their report, the Board highlight humanity’s “two simultaneous existential dangers [as] nuclear war and climate change”.

While 17 year old Greta and the scientists behind the Doomsday Clock, are concerned with Climate Change, it’s obvious neither she nor the scientists understand economics. And, as one might expect, Mnuchin and the CEOs are on the same page.

Economists

There are economists and there are economists.

“Over-regulation” has been the #1 concern for all CEO since 2008—when PwC first included it as a choice in its survey question. Now, there are economists like Dean Baker who argue that the governments using regulations⁶ to protect the environment are merely “acting to protect the property rights that are the foundation of the market”. Baker’s argument is that if I dump my sewage on your yard, you would expect the government to take action against me. The flaw in Baker’s argument is he fails to consider the important part: what if I’m rich and you’re poor? Real economists think along such practical lines.

This Real World™ attitude was shown by then-Chief Economist of the World Bank and later Bill Clinton’s Treasury Secretary, Larry Summers. (And later still, president of Harvard University.) In a 1991 memo written during his time at the World Bank, Summers argued in favor of (what’s now called) outsourcing of manufacturing. His argument, quite simply, was poor countries didn’t have many environmental regulations, and their laborers were unlikely to protest deteriorating health conditions because they died early anyway. Thus, shifting production to poor countries made great sense. One gem from the memo:

The concern over an agent that causes a one in a million change in the odds of prostrate[sic] cancer is obviously going to be much higher in a country where people survive to get prostrate[sic] cancer than in a country where under 5 mortality is 200 per thousand. ⁷

Summers later claimed his memo was “a mistake… a big one” ⁷. However, the last paragraph of his memo explains the logic behind polluting poor countries most cogently. It describes how the arguments against outsourcing could easily be dealt with because “the problem… of… more pollution in [Least Developed Countries] (intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.”

Current history bears out Summers’s memo. Manufacturing shifted from the developed to the poorer countries. It’s why, today, China is the world’s largest emitter of green-house gases even though it isn’t the largest consumer of goods which emit green-house gases. That honor belongs to the West as the bulk of China’s manufacturing is exported, keeping, once again, with the theme of Summers’s memo.

To repeat, then, Steven Mnuchin was correct. The economies of the real world do not concern themselves with matters such as Climate Change. Greta’s concerns with it are factually correct but are economically unsound.

Footnotes

¹ One sample report from ABC News is available at https://abcnews.go.com/Business/steve-mnuchin-tells-greta-thunberg-study-economics-discussing/story?id=68478525.

² I use “perhaps” in “perhaps morally correct” because there are philosophical positions which hold that the earth would be better off without humanity. Two notable examples are VHEMT (Voluntary Human Extinction Movement, http://vhemt.org/) founded by Les U. Knight from (where else?) Portland, Oregon; and the philosopher Todd May who, in an Op-Ed in The New York Times’s philosophical section, The Stone, asked “Would Human Extinction Be a Tragedy?”. In typical philosophical fashion, he says, “it would be a tragedy and… it might just be a good thing”. Source: https://www.nytimes.com/2018/12/17/opinion/human-extinction-climate-change.html.

³ My earlier posts are accessible at https://medium.com/galileo-onwards/economic-growth-trumps-human-survival-846077937db0 and https://medium.com/galileo-onwards/the-economic-times-wants-human-extinction-2a7c105f6b7a.

⁴ You can see more about PwC’s CEO Survey at their website https://www.pwc.com/gx/en/ceo-agenda/ceosurvey.html. Results from their previous surveys are posted on their website too. https://www.pwc.com/gx/en/ceo-agenda/ceosurvey/report-archive.html

⁵ The Bulletin of the Atomic Scientists full 2020 report is available at https://thebulletin.org/wp-content/uploads/2020/01/2020-Doomsday-Clock-statement.pdf. Their website has their page to, by default, always show the “current-time”. https://thebulletin.org/doomsday-clock/2020/#about-the-bulletin might work but the PDF above is better.

⁶ Dean Baker, Dec 25, 2019, Brave New Europe, https://braveneweurope.com/dean-baker-greenhouse-gas-emissions-and-the-right-to-dump-sewage-on-your-lawn.

⁷ Larry Summers’s pollution memo is available on Wikipedia at https://en.wikipedia.org/wiki/Summers_memo. His statements to the US Senate are available at https://www.finance.senate.gov/imo/media/doc/hrg103-41.pdf.