Monday, May 27, 2013

The Keystone XL Pipeline Scenario

Kaushik Rao is a political theory student at Johns Hopkins University working on capitalism and ecology.

Last year, oil companies such as TransCanada, Valero, and others pushed for the completion of the Keystone XL oil pipeline. The Keystone XL pipeline would carry heavy crude oil from the Alberta tar sands in Canada, through several Midwestern U.S. states, and down into the oil refineries of the Gulf of Mexico. Since the pipeline crosses the U.S.-Canadian border, it is an international project and therefore needs to be approved by the State Department and the White House Administration. A decision on the approval of the permit to build the pipeline is expected by July. The United States government needs to prevent construction of the Keystone pipeline because it would have extremely negative consequences for America on economic and environmental grounds.

One of the main sources of pressure to approve the pipeline is the oil lobby’s marketing campaign that aims to convince Americans that increasing domestic oil production will decrease gas prices here in the U.S. But the fact of the matter is that increasing domestic oil production does not decrease oil prices. Those in the oil lobby that argue for increased oil production in the U.S. conveniently neglect to mention that oil is a globally traded commodity that is highly manipulated by the Organization of Petroleum Exporting Countries (OPEC). Oil markets do not act in the same way that markets for other commodities do, such as corn and steel. The OPEC cartel controls the supply of oil in the world at any one time by increasing or decreasing its production.

The U.S. is left with two scenarios: 1) America starts to buy less oil from foreign countries, which results in OPEC cutting production to decrease the supply of oil which increases prices. 2) America increases its own domestic production of oil to the point where it no longer needs to import oil. This would also be met with subsequent cuts in production by OPEC which would keep world oil prices high. In both scenarios, Americans will be left paying the higher OPEC price because American oil companies would rather export at the higher OPEC price than to sell the oil domestically at the lower U.S. price.

This brings us back to exactly why the Keystone XL pipeline will not help the U.S. economy. If the pipeline is built, American refineries will be pumping out more refined oil than ever before. But this will not increase the supply of oil because of the anticipated cuts in production by OPEC, and thus will not decrease the price of gas in the U.S. If anything, the pipeline would increase the price of gas in the United States because the Keystone pipeline is first and foremost an export pipeline. It would divert oil from the Midwestern states and send it to the Gulf of Mexico where it will then be sent overseas. Since Midwestern refineries would have less oil to work with, gas prices will be expected to increase in the region if the pipeline is built.

The oil lobby also argues that the Keystone pipeline will bring 20,000 permanent jobs and 118,000 “spinoff” jobs to the United States. But this study was entirely funded by an amalgamation of oil companies and thus cannot be fully without bias. In an audit of the same study by the State Department, it was found that the Keystone pipeline would only create 5,000 temporary jobs for two years and at most 20 permanent jobs. Furthermore, the Keystone pipeline would destroy countless more jobs because of spills and leaks from the pipeline. The portion of the pipeline that has already been built has experienced 14 leaks to date. Each of these leaks destroys farmlands and businesses which are then required to shut down which in turn eliminates jobs. 

Exxon pipeline spill in Arkansas, 2013

The Keystone pipeline will have disastrous effects on the United States and will increase the world wide greenhouse gas effect. The type of oil that would travel through the Keystone pipeline is called bitumen, which is a tar-like type of oil. Since bitumen is extremely viscous and flows slowly, it needs to be diluted with natural gas and other hydrocarbons. This diluted bitumen is highly corrosive to pipelines because of its high sulfur concentration, and its high viscosity which increases the friction and temperature inside pipelines. Thus, Keystone XL will be highly susceptible to oil pipeline ruptures which will cause environmental disasters. Another issue with diluted bitumen is that federal regulations are currently not stringent enough to monitor what types of chemicals are added to the oil during the transportation process. In a traditional oil spill, some of the oil can be skimmed off the top of water. But in a diluted bitumen oil spill, the chemicals make the oil heavier which causes the bitumen to sink to the bottom of rivers as we saw in the Mayflower Exxon Mobil oil spill in Arkansas. 

Exxon pipeline spill in Arkansas, 2013

Current greenhouse gas effects have already been the cause of extreme weather events such as Superstorm Sandy which inflicted nearly $80 billion in damages and cut 86,000 jobs from the United States. Burning the recoverable tar sands in Alberta will increase the Earth’s temperature by a minimum of 2 degrees Celsius. The increase in greenhouse gas emissions from the Keystone pipeline will contribute to climate change and create more severe weather events just like Superstorm Sandy which will ruin our nation’s infrastructure and destroy hundreds of thousands of jobs in the future. And this pipeline will lock the United States into an expensive and environmentally harmful form of energy for decades to come.

America needs to move away from an economy that is so dependent on oil, which is a job-killing course. Alternative energy is the future and the U.S. government needs to invest more in its development of different types of energy sources such as wind and solar power. They will create far more permanent jobs and support the future of an economy built around sustainable energy. The money that we as a country put in to develop alternative energy sources will be paid back many times over in the forms of new jobs that can’t be outsourced and through less frequent extreme weather events which will reduce the damage to our infrastructure. Oil is the past. Blocking the Keystone pipeline is the first step towards preventing damage to our country’s future.

Wednesday, May 8, 2013

The Austerity Trap

John Buell is a columnist for The Progressive Populist and a faculty adjunct at Cochise College. His most recent book is Politics, Religion, and Culture in an Anxious Age.

The Eurozone is in a deep recession. Some members even face conditions not seen since the Great Depression. Spanish unemployment tops 27 percent, with half of its youth unemployed. Not to worry, say the elites of the European Central Bank. Spain, Italy, Ireland, Portugal, and Greece, aptly abbreviated as the PIIGS, are getting what they deserve. They have spent beyond their means. Once they reduce their deficits—preferably by cutting benefits and services—confidence in the markets will increase and investments will flow in. Swallow your medicine, eat your vegetables, and all will be okay. Here in the US, despite persistent unemployment, budget deficits remain an obsession, at least with the elites. This conventional wisdom now has a new name, expansionary austerity. Austerity in its various forms and guises is the subject of a comprehensive and provocative new study, Austerity: The History of a Dangerous Idea by Brown University political economist Mark Blyth.

Blyth cites the many failings in this diagnosis and prognosis. Some of these will not be unfamiliar to regular readers of Paul Krugman's New York Times column and blog, but Blyth more fully acknowledges the importance of uncertainty in economic life, attributes more significance to the role of investment banking, and develops an interdisciplinary approach to the crisis.

With the exception of Greece, none of the PIIGS had levels of debt that disturbed markets in earlier eras. Ireland and Spain were models of fiscal rectitude. The sovereign debt crisis emerged only after their private sector banks had inflated a massive real estate bubble. This process was driven by a major transformation in the private banking world. In the eighties, as banks lost customers to the corporate short-term capital markets, they needed another business model. That model evolved to include consolidating and offloading mortgage securities. These securities bundled many homes at different levels of borrower economic strength. Risk calculations for each level were based on sophisticated mathematical models. These assumed a normal, bell curve shaped, distribution with Texas housing losses during the 1980s S & L meltdown of 40%, the worst in their sample, as the outer bound, lowest probability event. This market was further pumped up by a new form of security, the Credit Default Swap (CDS). These allowed purchasers of these multilayered securities to obtain insurance against their default.

Assuming a normal distribution, bank economists argued that a 40% decline in value of all mortgages in one of these synthetic securities was a once in a third of the life of the universe event. But as Blyth points out, "if you haven't been around for a third of the life of the universe, then how can you know what is possible over that time period? It is the assumed distribution that tells you what is possible, not your experience." (Emphasis mine) In addition, the providers of the CDS securities were unregulated, allowing them to become enormously overextended. This concoction had an unforeseeable dynamism not reducible to the sum of the parts. Its creators could not imagine that "the meshing of elements that were each intended to make the world safe, such as mortgage bonds, CDSs, and banks' risk models, could make the world astonishingly less safe. "

In Europe, this model had even worse consequences. Its banks were more concentrated and leveraged than even US banks. They soon became insolvent, threatening the complete collapse of national economies. In order to avoid such disaster, the governments of Ireland and Spain absorbed the debt, thus staining their own once pristine balance sheets.

If government deficits did not cause the problem, public sector retrenchment will not end the financial crisis. Households, having lost much of their net worth in the collapse of the real estate bubble, are reluctant to spend. If governments also slash expenditures, from where does the spending upon which the economy depends come? Your spending is my income. Advocates of expansionary austerity argue that confidence will be restored when governments shrink, thus assuring businesses that future profits will not be taxed away. But business is likely to respond only to tangible demand in the market place rather than to uncertain promises.

But the evolution of mainstream economics from the fifties on had left policy makers with few tools to address the uncertainty and unpredictability of markets. These economists, Paul Samuelson most prominent among them, had reduced Keynes to the contention that economies can be fine tuned by interest rate adjustments or at worst by discrete, specifiable in advance, injections of fiscal stimulus. Market economies were thought to display steady and predictable tradeoffs between inflation and unemployment and policy makers could choose the most desirable point. When the stagflation of the seventies came along, with high unemployment accompanied by high rates of inflation, Chicago school economists had an entry to argue that Keynes was wrong and that markets should thus be left to do their own thing.

Chicago had, however, slayed a paper tiger. Keynes was far more than an advocate of "fine tuning" via fiscal stimulus. He emphasized the uncertainty and unpredictable dynamism of markets. Capital, commodity, and even labor markets can be governed by self-reinforcing swings both internally and with each other in a climate where the future is uncertain. No single fiscal injection or interest rate adjustment can be sure to work. Thus post Keynesian economists like Nicholas Kaldor advocated international commodity reserves, especially for oil and wheat, to limit the damage of commodity speculation. In labor markets, governments could make full employment guarantees, using as much spending as it takes and even direct government hires to restore full employment. Such policies would not abolish capitalism but would rather mitigate its self-destructive potential.

The world, however, has moved in the opposite direction. The Eurozone has no central government with the power to tax and spend. When a bubble in Spain collapses, the Spanish government cannot devalue its currency. Nor can it spend more to reflate its economy and recapitalize its banks without seeing interest rates soar to unsustainable levels. And once markets see this process unfolding in one nation, speculators look around for the next most vulnerable. Their actions often provoke the next crisis. This is a true doomsday machine, as Blyth argues.

The Future of Austerity

Austerity advocates, who like to deem themselves as orthodox scientists swayed by the data, are unmoved by a totality of evidence that would surely prove persuasive in other contexts. How can a doctrine that has consistently failed in practice survive so many reverses? Perhaps the greatest strength of Blyth's work is his explanation of austerity as a leading example of what John Quiggin calls zombie economics. Despite having been killed repeatedly, it lives among us. There is an intellectual and a moral or even identity component to the survival of this bankrupt idea. Lockean notions of government's limited role as defender of individual property and the right to individual appropriation and accumulation of nature's bounty, made possible by money, is a key and deeply embedded theme in American culture. Adam Smith admits the need for government, if only to protect the rich against the envy and ambitions of the poor. But he worries about how to pay for it and is concerned that debt will lead to default and inflation that will erode the wealth of lenders.

Most telling and enduring in Smith is the morality play that so resonates today: "Saving is a virtue, spending is a vice." According to Blyth, Northern European savers "are juxtaposed with profligate Southern Europeans, despite the fact that it is manifestly impossible to have overborrowing without overlending... The conditions of austerity's appearance, parsimony, frugality, morality, and a pathological fear of the consequences of government debt—lie deep within economic liberalism's fossil record from its very inception."

Austerity will not continue forever. The reason for its demise is not its unfairness, though it is. It simply does not work. Continuing rounds of fiscal cuts depress net wealth faster than debt. Eventually populations revolt, not always in sensible and humane ways, as the experience of the Thirties suggests. Blyth makes a powerful case that austerity was a principal cause of the rise of fascism in Japan and Germany and thus of World War II.

Members of Greece's neo-Fascist party, Golden Dawn 
There are alternatives. Blyth guardedly speculates that the current investment bank business model is on its last legs. There may not be any remaining asset classes for investment bankers to "pump and dump." If that is the case, how sad that we have pursued a long, painful austerity to preserve this parasitical creature. Iceland may have been a better role model. Faced with its own banking crisis, it allowed its banks, with assets equal to ten times the nation's GDP, to fail. It recapitalized its banking system at far less cost than keeping its troubled ones alive. It devalued its currency and imposed capital controls so that speculators could not take their funds out of the country. In addition, it stimulated its economy at least until the worst downturn had been prevented. And once the economy started to right itself, government turned toward taxation of the wealthy. Iceland has far outperformed Ireland, which has followed the orthodox austerity course.

Neither Keynes nor Blyth ever said that debt does not matter. But today's heavy debt load is not a result of an irresponsible democratic government. Nor is a deep recession the time for cuts in an already inadequate welfare state. And once growth resumes, taxes would be appropriate—especially on those who have profited most from the bailout of the banks, tax avoidance, or tax rates lower than those paid by typical working citizens. But taxation alone as a path toward economic justice may be a difficult sell in America, where the prevalent mindset is "I earned it and I should get to keep it." Policy should thus also aim for reforms that foster more justice in labor markets. Over the last forty years workers have seen gains in their productivity unmatched by any increase in their real income. In a full employment economy labor can demand its just rewards. And as Dean Baker has pointed out, intellectual property holders and high income professionals use the law to extract monopoly pricing power even as blue collar workers face the perils of the free market.

Banks also merit special attention. Even if their business model is dying, steps might be taken to hasten this process. Blyth suggests financial repression, forcing them to hold low interest government bonds, thus gradually eroding their assets until total national debt is reduced to tolerable levels. In Debunking Economics, Australian economist Steve Keen presents a related idea. He acknowledges that debt forgiveness can hurt creditors, a class that might include workers' pension funds as well as affluent investors. He advocates instead a simple one-time grant of say $50,000, which can be spent only after it has been used to pay down any personal debt. This proposal has several merits. Because it is universal, it would help the thrifty homeowners sufficiently who have paid off most of their mortgage while also aiding those under water from home or student loans.

Other post Keynesian economists have advocated changes in banking law that would make bank executives doubly liable for losses in investment schemes, a measure that would surely change the whole incentive structure of banking. Banks must be returned to their role as handmaidens of industry rather than as parasitical speculators. With such changes the corrosive inequalities of the last decade can be mitigated.

One final thought I draw from Blyth is that combating the dangers of austerity may require more than economic arguments. It will also need an ethical critique, one that awards consumption its place. Such a message may seem dangerous in an era of environmental limits. Consumption, however, need not be limited to the corporate driven consumerism of our era. We might revisit John Kenneth Galbraith's moral critique of two generations ago, with his contrast of private affluence and public squalor. Especially necessary is public sector spending on a new green infrastructure, on preventive health care, university education. Equally important would be public and private art. The gains from technological progress can also be "spent" on more leisure, with all its possibilities, rather than more goods. Austerity is a passionate opponent and demands a multifaceted response.