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Diary of a Tree Stump

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  “I would vote for a tree stump if it could beat Donald Trump”

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How to Reconcile July’s Rising Markets with July’s Dismal Economic News

Thursday July 29, 2010

-Eugene Linden The question has been posed many times recently: Why are the markets rising when the economy seems to be heading back into the tank. Simple, the markets have been going up in part because the economy is going back into the tank. One major factor that has stalled the recovery – job losses – earlier provided a temporary boon for companies. Unit labor costs have been falling rapidly, roughly 5% since the fourth quarter of 2009. This has boosted productivity and earnings, but what is a cost for employers is livelihood for households. Yes, over 80% of reporting companies are beating earnings estimates, only 68% have been beating top-line estimates, which, notes David Rosenberg of Gluskin Sheff, is less than when the economy was free-falling in 2008. Companies have been making their numbers by cutting costs, not increasing sales. Martin Feldstein, President Emeritus of the National Bureau of Economic Research, the organization that officially calls recessions, pointed out during a Bloomberg interview that the group has not called the end of the recession in part because final sales have been lame at best: if first quarter GDP had been based on final sales, it would have risen 1.2% not the revised 3.7% (and Feldstein points out that the 1.2% is an annualized figure so that the final sales contribution to GDP in the quarter was negligible). This is not good news either for future S&P earnings or the future of the economy. Those laid off employees are going to be consuming less in the coming years. Jacob Hacker of Yale made news recently with a study sponsored by the Rockefeller Foundation and Yale University on economic security that argued that in the past year, one in five American households suffered income losses greater than 25%. After suffering this type of shock, it usually takes several years to get back to even, and during those years a household’s budget will be stretched to the breaking point, particularly since the typical American household has very little savings and diminishing access to credit. So while the market, or at least the infernal robots that now seem to constitute the market, embraced the earnings, these nice results are coming to some degree at the cost of future consumption which constitutes more than 70% of GDP. Question: how many times can that card be played?

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Short Take



An oped involves extreme compression, and so I thought I’d expand on why I think the initial IPCC reports so underestimated the threat. Make no mistake, the consensus in the summaries for policy makers in the first two assessments did underestimate the threat. The consensus was that permafrost would be stable for the next 100 years and also that the ice sheets would remain stable (there was even a strong sentiment at that time that the East Antarctic sheet would gain mass). Moreover, in 1990, the concept of rapid climate change was at the periphery of mainstream scientific opinion. All these things turned out to be wrong

Of course, there were scientists at that time who raised alarms about the possibility of rapid climate change, collapse of the ice sheets, and nightmare scenarios of melting permafrost, but, fairly or not, the IPCC summary for policy makers was and is taken to represent the consensus of scientific thinking.

In my opinion such documents will always take a more conservative (less dramatic) position than what scientists feel is justified. For one thing the IPCC included policy makers, most of whom were more incentivized to downplay the threats. For another, many of the national governments that were the customers for these assessments barely tolerated the exercise and gave strong signals that they didn’t want to see anything that called for dramatic action, and this being the UN, there was a strong push to present a document that as many governments as possible would accept.

And then there is the nature of science and the state of climate science at that point. There is an inherent structural lag built in to the nature of science. For instance, the 1980’s were marked by the rapid development of proxies to see past climate changes with ever more precision. By the mid-late 80’s the proxies and siting had been refined sufficiently that the GISP and GRIP projects could confidently get ice cores from Greenland that they felt represented a true climate record and by then they also had the proxies with the resolution to see the rapid changes that had taken place in the past. Given the nature of data collection, interpretation, peer-review and publishing, it wasn’t until 1993 that these results were published.

It took nearly another decade for this new, alarming, paradigm about how rapidly global climate can change to percolate through the scientific community, and, even today, much of the public is unaware that climate can change on a dime.

As for the ice sheets, when I was on the West Antarctic Ice Sheet in 1996, there was talk about the acceleratio of  ice streams feeding the Thwaites and Pine Island glaciers, but the notion that there might be a significant increase in runoff from the ice sheet over the next hundred years was still very much a fringe idea.

With permafrost, the problem was a sparsity of data in the 80s and early 90s and it is understandable that scientists didn’t want to venture beyond the data.

The problem for society as a whole was that the muted consensus on the scale of the threat diminished any sense of urgency about dealing with the problem. Perhaps the best example of this was the early work of William Nordhaus. Working from the IPCC best estimates in the early 1990s Nordhaus published one paper in which he predicted the hit to the US GDP from climate change in 2100 would be about ½ of 1%. Nobody is going to jump out of their chair and demand action if the hit to the economy was going to be 0.5% of GPD a hundred years laterLibertarians such as William Niskanen seized on this and testified before Congress that there was plenty of time to deal with global warming if it was a threat at all.  

And then there was the disinformation campaign of industry, particularly fossil fuel lobbyists, as well as pressure from unions (the UAW in particular) and the financial community. These highly motivated, deep-pocketed interests seized on scientific caution to suggest deep divisions among scientists and that the threat was overplayed. Little wonder then that the public failed to appreciate that this was a looming crisis that demanded immediate, concerted action.


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