Every Economic Cloud Has a Silver Lining


National Geographic argues the need for balance across the world population in this motion graphic video.

Or at least a green one…

Dan Loeb

America is slowly coming out of a recession. That is good news.

Or is it?

Officially, the U.S. economy is in a recession when our Gross Domestic Product as measured by the U.S. Department of Commerce declines for two consecutive quarters. In other words, our economy has “failed” when we stop producing quite as much stuff as we used to. Apparantly, we Americans are not living up to our patriotic duties and through our consumption encouraging manufacturers to produce quite as much stuff.

Part of the problem with this analysis is that we are not including the depletion of our natural resources in our calculations. If we produce consumer products but deplete our national treasure of irreplaceable resources, consume natural resources at an unsustainable rate and ruin the environment for generations to come, are we really better off?

Some politicians would like a more robust recovery. However, if we keep the GDP growing at 5% per year, year after year, then the economy is growing exponentially.  This growth can only be supported so long in a finite world. At some point, the growth can no longer be sustained, and with a global population of over seven billion people can that day of reckoning be that far away,.

All publically traded companies aspire to build value for their shareholders. They try to maximize the discounted present value of their future revenue.

For example, suppose I own a piece of wooded land, I could clear cut the land, sell the wood to a lumber mill and the land to a real estate developer for an immediate payment of one million dollars. Alternatively, I could harvest only the maximum sustainable yield annual tree growth and thus produce, in a sustainable manner, a permanent revenue of, say fifty thousand dollars per year.

Anne Leonard’s Story of Stuff is a provocative tour of our consumer-driven culture – from resource extraction to iPod incineration – exposing the real cost of our use-it and lose-it approach to stuff.

Which is better?

If the million dollars in sales are invested at an interest rate of 7%, they produce permanent revenue of seventy thousand dollars per year, so a corporation mindful of their shareholders will cover the forest with asphalt as soon as they can.

If the country is in a recession and interest rates go down to 3%, the million dollars only return thirty thousand dollars per year, so a smart corporation will engage in sustainable development preserving the forest for future generations.

By this logic, people do not plan as carefully for the future if interest rates are high. However, should our stewardship of our resources and indeed this planet truly depend on interest rates? The stakes are quite high. This logic applies not only to timberland in the Northwest United States but to the Amazon rain forest as well.

Deficit hawks tells us that by running a deficit and running up a debt which future our children and grandchildren will have to pay, we are stealing from future generations. If so, then we can make an even stronger argument about our environment. Non-renewable resources such as petroleum are like bank accounts from which we are withdrawing assets but never make any deposits. The oil we withdraw from our proven reserves are gone forever and will not be available to future generations. Similarly, when we pollute, we are saddling future generations with an environmental debt, depreciating the value of our oceans and our atmosphere to our children and grandchildren.

The Gross Domestic Product should not the be-all and end-all of our society.

  • In this calculation, we fail to address the cost to the environment of removing the carbon dioxide producing forest, and burning the trees.
  • Reusing consumer goods by repairing them or reselling them on Ebay does not contribute to the GDP, but it does just as much to maintain our American standard of living without as heavy a toll on the environment.
  • If a company pollutes the environment producing a product and then spends money partially cleaning up their own mess, the GDP is increased not only by the cost of the product but also by the cost of the cleanup. Focusing on the GDP literally encourages the creation of new “Superfund” sites.

We should act as if the interest rate were truly zero. By valuing future generations – our children and our children’s children – at the same level as current generations, we may slightly reduce our gross domestic product, but we ensure adequate supplies for future generations and protect the environment.

Daniel E. Loeb publishes the Philadelphia Jewish Voice. He is also a mathematician working in mathematical finance.

Happiness does not necessarily come in a box of fast food

Dr. Daniel E. Loeb

To fight the national epidemic of childhood obesity, San Francisco recently passed a resolution forbidding toys being bundled with children’s meals such McDonalds’ “Happy Meal” unless they do not meet certain basic nutritional standards as an effort. This law has been criticized as denying parents the right to chose how to raise their children. Critics bring up the specter of an “overprotective nanny state.”

On the contrary, this law opens up choices for parents. They can buy the toy by itself,  the “happy meal” by itself, a “healthy meal” by itself, or buy a toy along with either meal and slip it inside before giving it to their child instead of being trapped into McDonalds’ logic of all-or-nothing.

This a great win for parents, healthy children, freedom of choice, and capitalism.

Redistricting Florida Redux

Dan Loeb

Yesterday, Florida voters overwhelming approved two Constitutional amendments proposed by Fair District Florida to change the rules for redistricting on the state and federal level. Last April, I wrote in opposition to these “reforms”.

While I am deeply concerned about the problems with the current system, I believe that the  amendments do not achieve the goal of creating balance, competitive Congressional districts . I fear that passing well-intentioned but poorly-designed referendums will delay any serious attempts at meaningful redistricting reform.