Back in March, Charlie Rose had on Erskine Bowles and Alan Simpson, co-chairs of the National Commission on Fiscal Responsibility and Reform a/k/a the Deficit Reduction Committee. Their view is that spending cuts and tax increases alone are not enough to get us out of our fiscal hole. We must make difficult choices as a nation in order to pull through this. However, those choices are not politically feasible and the plan was discarded. Here is a clip from the 3/29/2012 interview where Mr. Bowles states why the Simpson-Bowles plan has not been adopted. I can only urge you to watch the full interview at http://www.charlierose.com/view/interview/12265
Alright, let’s get back to the economics associated with climate change here. More specifically, the economics of oil and how the accumulation of petro-dollars by oil-producing nations (almost in some cases, did in others) bring about their downfall. Most everyone remembers the “Arab Spring” that began in December 2010 when a 26-year-old street vendor named Mohamed Bouazizi set himself on fire to protest his continued harassment by the authorities. As the protest spread among the arab world, the grievances highlighted the lack of opportunity for the youth, state corruption, economic decline, human rights violations, censorship, and other wrong doings on behalf of the ruling party or dictators of these countries . By March 2011, protest had erupted in 17 countries in the region.
(Black = Government Overthrown; Dark Blue = Sustained Civil Disorder and Governmental Changes; Light Blue = Protests and Governmental Changes; Red = Major Protests; Beige = Minor Protests)
Now we know the reasons for the protests and the scale of the uprisings, lets take a look behind the scenes at the conditions that set the stage for this upheaval.
In Economics, the Current Account is the broadest accounting of a country’s trade and investment with the rest of the world. The Current Account measures 4 areas of trade – Merchandise Trade (goods), Services, Investment Income Flows, and Unilateral Transfers such as foreign aid or remittances from workers sending money back home. The Current Account provides a snapshot on the financial health of the country, and of how much the country is importing and exporting of each area measured. While there is no direct impact on the stock or bond markets, the Current Account does show how much money is coming in (surplus) or leaving (deficit). Consistent and increasing deficits could impact the value of the dollar if creditor nations begin to doubt our ability to pay back the borrowing. If other countries balk at our debt levels, the dollar will depreciate. Below is a graph of our current account since 1980.
Now when you think of the America’s current account deficit, you probably think of China’s account surplus. Images of container ships filled with cheap, disposable goods probably came to mind. But in fact, the largest creditors of America’s current account deficit have been oil-producing nations. I was recently brushing up on some economic terminology and this theory was confirmed by my Macroeconomics textbook from 2008. Amazing that the problem was identifiable even back then. Recently, The Economist published an article called Petrodollar Profusion that contained the graph outlining the current account surpluses as a percentage of GDP for these oil-producing countries.
So what is the problem? The problem is that the oil exporting countries have been hoarding these dollars instead of spending them. They could either spend them on imported goods from oil importing countries (machinery from USA for example) or they could put them to use by investing in their own economies and building out infrastructure, improving education, healthcare, housing, or agriculture, thereby creating jobs and building a middle class. Spending on imports from other countries would grease the wheels of the global economy and balance out the payments. After all, that is what keeps the world trading. Instead, most of this wealth was transferred to sovereign wealth funds who further line the pockets of the ruling class. For more info on sovereign wealth funds and the rise of state capitalism, please see the book The End of the Free Market by Ian Bremmer. The point is that building the middle class was not what they chose to do, and the protests continued.
One of the most prominent cries coming out the protests was the lack of opportunities for the young population. In many of these countries there is a young (age 15-24) and growing population but a disproportionate lack of jobs for them. Throughout the Middle East, the unemployment has historically hovered around 12% overall, but the unemployment rate for the youth is averaging 27%. Aside from the high unemployment rate, there is the mysterious fact that there is an inverse relationship between education level and employment. This means that the most highly educated young people are also the most likely to be unemployed. Of those with jobs, many find themselves working in the public sector instead of the private sector where market forces would spur innovation and growth and thus create more jobs. Across the region, the labor force participation rate is at 48%, compare that to 63.6% in the US, our lowest level since 1981.
Over a year later we have seen significant changes in the mid-east (except Syria where the fighting continues) but only time will tell what results the arab spring ushered in. One thing is certain, the oil keeps pumping and the money keeps flowing.
I know it is horrible to think about, but every time we fill up at the pump, we are sending our dollars overseas to strengthen these regimes and prolong the behavior that has kept them in power for so long. It is a brutal reality, but it is the world we live in. Until we develop a clean and renewable source of power, our money is going to chase the fossil fuels that power our lives. But when you follow the money to the source, it isn’t a very pretty picture at all.
Near the polar cap, waterways are opening that we could not have imagined a few years ago, rewriting the geopolitical map of the world. Rising sea levels could lead to mass migrations similar to what we have seen in Pakistan’s recent flooding. Climate shifts could drastically reduce the arable land [available that is] needed to feed a burgeoning population as we have seen in parts of Africa. As glaciers melt and shrink at a faster rate, crucial water supplies may diminish further in parts of Asia. This impending scarcity of resources compounded by an influx of refugees if coastal lands disappear not only could produce a humanitarian crisis, but also could generate conditions that could lead to failed states and make populations more vulnerable to radicalization. These troubling challenges highlight the systemic implications – and multiple-order effects – inherent in energy security and climate change.
Admiral Mike Mullen
Chairman of the Joint Chiefs of Staff
Joint Forces Quarterly, January 2011