Economic development is widely accepted as a prerequisite for a stable society. Yet, industrial production contributes to the massively destabilizing phenomenon of global warming. This blog documents the research of SCEPA economists Duncan Foley and Lance Taylor as they investigate how nations can reconcile their needs for growth, stability and sustainability. This project is generously supported by the Institute for New Economic Thinking (INET).
On October 25, 2013, Lance Taylor, economics professor emeritus at The New School for Social Research, gave a presentation at a Berlin conference hosted by the Research Network Macroeconomics and Macroeconomic Policies (FMM) titled, "The Jobs Crisis: Causes, Cure, Constraints."
Taylor's presentation provides a long-run analysis of economic growth and CO₂ emissions from his research paper, "Greenhouse Gas Accumulation and Demand-Driven Economic Growth," coauthored by Duncan Foley, Jonathan Cogliano and Rishabh Kumar.
His demand-driven growth model analyzes how economic growth through capital accumulation requires an increase in energy consumption. Increased energy consumption releases harmful greenhouse gases and reduces growth through the adverse effects of climate change, such as natural disasters and an increasing business costs. A possible solution would be increased spending on mitigation to reduce climate change damages. The model shows that investment in mitigating greenhouse gases to a "good," steady-state would cost 1.25% of the global GDP, roughly equal to military spending. On the distribution side, greenhouse gases cut into the profit share in any scenario - moderately in a mitigated scenario, but precipitously on an unmitigated, "business-as-usual" path.
Materials: Conference on Sustainable Growth in the 21st Century at the New School on April 25-26, 2014
INET and SCEPA will host a conference on Sustainable Growth at The New School in New York City on April 25-26, 2014.
The purpose of the event is to discuss issues of growth theory emerging from the current travails of the world economy. One focus will be the treatment of distribution and climate change in models of growth and stability, but the conference will not be limited to that agenda.
Below are links to the preliminary program and target papers for the three sessions of the conference.
Target Paper 2:
US Size Distribution and the Macroeconomy, 1986–2009
Lance Taylor, SCEPA Faculty Fellow and emeritus Professor of Economics at The New School, analyzes Paul Krugman's "IS/LM" macroeconomic model. His analysis includes a discussion of the theory's origins in the history of economic thought and ends in a critique that the policy implications may not be robust.
In the United States, there is ongoing debate about how the positions of the “poor” (say households in the bottom one or two quintiles of the size distribution of income), the “rich” (the top decile or top percentile), and the “middle class” (households “between” these two groups) will be affected by fiscal and other initiatives such as raising the minimum wage.
In a new SCEPA/INET paper prepared for the Eastern Economics Association (EEA) conference in May, 2013, "U.S. Size Distribution and the Macroeconomy, 1986-2009," the authors use a social accounting matrix, or SAM, and a simple demand-driven model to investigate rising inequality and the effects of redistributive economic policies. The database for the paper is made available as a spreadsheet.
They find that the resulting simulations of macroeconomic policy measures do not markedly affect the distribution of household disposable income. Only policies directed at explicit wage equalization in the form of rising wages at the bottom lead to significantly greater equality.
In principle, the social cost of carbon emissions measures the overall impact of greenhouse gas emissions on societal well-being. The U.S. government uses estimates of the social costs of carbon (SCC) to perform cost-benefit analyses of proposed emission-control legislation, giving this number a significant role in the economic analysis – and subsequent decision-making – regarding climate change policy.
“The Social Cost of Carbon Emissions,” is a joint Policy Note by SCEPA and the Institute of New Economic Thinking (INET) that reviews the welfare economics theory fundamental to the estimation of the SCC.
Several key points are raised:
- The SCC concept is meaningless unless the economy is presumed to be at full microeconomic equilibrium. In that case, society’s willingness to pay for mitigating the adverse effects of greenhouse gas emission must be equal to the marginal cost of mitigation. Many estimates of the SCC are inconsistent, based either on willingness to pay or marginal costs. A discrepancy between the two estimates signals that reducing current consumption to pay for more mitigation is unnecessary.
- Most calculations of the SCC are based on the assumption that the social rate of discount is constant. In full dynamic micro equilibrium, however, the discount rate will change over time, meaning that such estimates make no sense.
- Numerical estimates of the SCC along a fully optimal path suggest that the marginal cost and benefit of mitigation would be around $200 per ton of carbon. The total annual cost would be around 2% of world GDP, roughly the same amount as spending on defense. As consumption growth slows over time, the discount rate would decline. At the same time, there should be relatively high mitigation spending in the near future to reduce the base level of atmospheric carbon concentration in anticipation of years to come.
On November 15, 2012, SCEPA Faculty Fellow and Professor Emeritus, Lance Taylor presented at the "False Dichotomies: The Ideas of Economics Against the Challenges of our Time," sponsored by the Institute for New Economic Thinking (INET) and The Centre for International Governance Innovation (CIGI). The presentation, Accounting, Distribution, (Un?)stable Dynamics, and Fundamental Uncertainty, was part of a series that highlighted and questioned the analytical divisions embedded in economic discourse. Analysis of current economic problems requires an understanding of the fundamental distinctions between macroeconomics and microeconomics, capital markets and money markets, or developed and developing economies.
The decision of the Ford Motor Company to raise wages from $2 a day to $5 a day inspired economists to theorize about the efficiency wage – how much to pay workers to ensure productivity and profitability. At the same time as this dramatic wage increase, Ford Motor Company also invested in large-scale, state-of-the-art machinery for assembly line production. The legacy of the Ford Motor Company and their tactics to ensure high productivity raises deeper questions about what firms can do to motivate workers to maximize profits.
The SCEPA Working Paper, “Work Effort, Firm Closure and Signaling through Excess Capacity Investment,” by New School PhD candidate Johann Jaeckel, addresses these questions. Are workers still motivated to work hard if they believe the company may close? How does the motivation of workers change when they have more or less information about the probability that a company will close? Does the purchasing of new equipment signal to workers that a firm is unlikely to go out of business and therefore impact the effort of workers?
This research is part of the Sustainability, Distribution and Stability Project supported by the Institute for New Economic Thinking (INET) and seeks to contributes to our understanding of motivations for technical change.
NSSR Economics Professors Duncan Foley and Lance Taylor were awarded a four-year grant to investigate the effects of economic growth on sustainability, distribution and stability. The project is funded by the Institute for New Economic Thinking (INET), a non-profit think tank founded by George Soros to support the development of a new generation of economic scholars working to shift economic thought to new paths and away from the theories that helped create the recent global financial crisis. The project will be administered through the Schwartz Center for Economic Policy Analysis (SCEPA), the policy research arm of the New School for Social Research's economics department.
INET Executive Director Rob Johnson characterized their new grants as "challeng(ing) conventional economic thinking in important ways. They emphasize inductive reasoning to escape the straightjacket of deductive reasoning founded on implausible assumptions....We are also supporting creative research in sustainable economics for the first time."
According to Professors Foley and Taylor, who have spent the last 40 years questioning key presuppositions of textbook models of growth, mainstream economics has not adequately dealt with the long-term consequences of economic growth, including the effects on climate change, the shift toward a service-centered economy, and the potential for financial and fiscal instability.
(Read more to find out how the project aims to correct this gap.)