Tag Archives: economy

Between the hammer and the anvil: the Federal Reserve’s plan to solve inflation at a 30-year high

Jerome H. Powell, governor of the Federal Reserve Board. Credit: Brookings Institution.

In September, consumer prices rose by 5.4% compared to exactly a year before. This kind of inflation hasn’t been seen since 1991 and is more than double the Federal Reserve’s (Fed) long-term target of 2%.

The reasons why prices have hiked in the United States are manifold, and many are obviously tied to the pandemic. For one, supply problems are causing shortages that are driving prices across various industries, from the auto market that is scrambling for semiconductor chips to furniture factories that are desperate for wood.

Besides a raw material shortage, there is also a perplexing labor shortage. The United States is still missing five million jobs compared to employment levels seen right before the pandemic hit. If at the beginning of the pandemic, many people were terrified by the surges in layoffs, now more Americans than ever are quitting their jobs — an exodus some call “The Great Resignation”.

The vaccines have also had a huge effect on the economy, acting like a light switch, instantly opening up the economy and spending. Americans saved a lot during the lockdowns, especially since they had help from the government in the form of extra unemployment and stimulus checks. The sudden flood of cash into the economy has further caused shortage problems and has driven prices up.

In testimony before Congress at the end of June, Powell said it was no secret that inflation was up in recent months and blamed it on base effects, higher oil prices, consumers reopening their wallets, and supply chain issues.

“As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal,” Powell said at the time.

Whilst these inflationary forces have been described as “transitory” by Fed policymakers, there are now reasons to believe that inflation is here to stay for at least a year. Federal Reserve Chairman Jerome Powell now seems to acknowledge this himself after meeting with Fed policymakers on Wednesday, stating that supply-chain bottlenecks that underlie price hikes will likely persist well into the next year.

Surveys of American factory managers confirm the harsh reality from the field, with many complaining that they struggle to find parts and raw materials to keep up with rising demand. As a result, many manufacturers are making their third or fourth price increase this year. Meanwhile, workers’ pay is also rising, although not as fast as prices. In September, companies used their paystub maker to raise wages by 4.2% compared to the year before.

The Fed’s plan

For inflation to decrease, interest rates — currently virtually zero — would have to climb. However, if the Fed would use this weapon, it would hurt employment rates.

“We want to see the labor market heal further,” Powell said.

The Fed is basically stuck, having to choose the lesser of two evils. On the one hand, it can raise interest rates and lower inflation, which would hurt jobs and spending. On the other hand, it can keep interest rates zero which would drive more inflation.

On Wednesday, Powell said that the Fed chose the latter option. For the time being, interest rates are expected to hover near zero for the next 12 months, although this is subject to change depending on how the economy rebounds and whether or not supply chain shortages continue unabated. Moreover, if the Fed determines that jobs can never rebound to pre-pandemic levels, it may decide to raise interest sooner as there would be no point anymore in keeping them this low.

However, the Fed did announce that it will basically crank down on the money printing. The central bank claims it will wind down its current purchase of $120 million worth of bonds each month. Bond purchasing is aimed at keeping borrowing costs low but the Fed can only keep it up for so long. By the middle of next year, bond purchases will be phased out.

“What it really boils down to is something that is common sense and that is risk management,” Powell said. “We have to be humble about what we know about this economy, which is still very COVID-affected.”

Bottom line: we may expect to see another 5% of inflation over the next 12 months.

How your sewage reflects how wealthy you are

There’s a lot you can learn from a person’s sewage sludge. In the past, researchers have employed wastewater epidemiology to study trends in drug consumption based on a community’s urine and poop that drains in the sewer. One such study, for instance, found that London has the highest concentration of cocaine in its sewage out of 50 large European cities. Now, a new study used similar methods to gauge the socioeconomic status of different urban communities.

Credit Pixabay.

Researchers in Australia analyzed samples from 22 water treatment plants in six of the country’s states in 2016. The chemicals they found were correlated with 40 different socioeconomic factors for each area, like education, rent price, etc.

Inverse reports that the researchers eventually learned that the wastewater from wealthier communities (where rent was over $470/week) showed higher levels of vitamins, citrus, and fiber, while poorer communities showed higher levels of prescription pain relievers and antidepressant medications.

Some of the prescription drugs that were more present in poorer communities included tramadol, desvenlafaxine, mirtazapine, pregabalin, atenolol. Meanwhile, sewage from wealthier households contained higher levels of proline betaine, a component of citrus flesh, as well as enterodiol and enterolactone, which are plant by-products. These signatures suggest that these households consume more fresh fruits and vegetables than lower-income communities.

The sewage of high-income households also had higher levels of vitamins B3, E, and B6 than lower-income communities.

“Our study shows that chemicals in wastewater reflect the social, demographic, and economic properties of the respective populations and highlights the potential value of wastewater in studying the sociodemographic determinants of population health,” the authors wrote in the journal Proceedings of the National Academy of Sciences.

Waste-water epidemiology is still in its infancy, but studies such as these show just how powerful this method can be to tease out all sorts of trends — so powerful that some have criticized it for infringing on people’s privacy, not unlike mass surveillance.

Other scientists are looking at the untapped potential of sewage in different ways. One group has found a cost-effective and environmentally-friendly method that can produce energy from sewage using purple bacteria. Sewer sludge may also be a literally golden opportunity. One study estimated that a city with 1 million inhabitats has as much as $13 million worth of valuable metals, including gold and silver, in its sewage sludge.

Trickle-down economics just doesn’t work, and this study shows it

Here’s a crazy idea: let’s give tax cuts for wealthy people and companies and that will benefit the poor. According to a recent study, this approach (recently advocated by the Trump administration, among others) is just that: a crazy idea that doesn’t work — all it does is increase inequality.

Image credits: Mathieu Stern.

In 2017, President Trump sold his tax cuts as “rocket fuel” for the economy. The idea is that tax cuts on the wealthy would free up money that would allow companies to hire more people, ultimately helping those in need. Trump is far from the only one to propose this approach. Several leading US politicians (typically on the Republican side) have advocated measures along this line.

It seems counterintuitive, but economics isn’t always intuitive. It seemed to work during the Reagan years, and the supporters of trickle down economics (initially used as a pejorative term) saw it as a win. Like a pyramid of champagne glasses, they said, you just need to fill the top glass, and then it will flow naturally to the others. But the top glasses have been getting bigger and bigger, and next to nothing is flowing to the glasses below.

Simply put, economic inequality is steadily on the rise in the US. The poorer 80% of the country only own 7% of its wealth. Productivity has increased constantly for US workers and for a time, the median income increased with it — but after the measures in the late 80s, things changed.

In the late 1980s, multiple countries implemented tax cuts for the well-off. The latest study analyzed data from 18 developed countries, including the US, looking at the connection between trickle-down tax cuts and economic growth. Their conclusions leave little to interpretation:

“The results also show that economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich. The estimated effects for these variables are statistically indistinguishable from zero,” the study reads.

This is far from the first study to come to these conclusions. A 2017 working paper found that the effects of tax cuts are “heterogeneous” — tax cuts on the poor do help the poor. Tax cuts on the rich do little for the poor. A 2015 analysis from the International Monetary Fund also concluded that the benefits don’t really trickle down, and a recent analysis also found the same thing.

The recent study shows that trickle down tax cuts aren’t just useless, they can be harmful. Economic inequality isn’t just a moral problem — it’s a practical one. A number of studies have highlighted the negative effects of inequality, from higher crime and lower social cohesion to health problems and political instability.

So where does this leave us? Tax cuts on the rich, believe it or not, benefit the rich — not the rest. In theory, trickle down economics works; in practice, it doesn’t. David Hope, one of the study authors and Visiting Fellow at the London School of Economics sums it up:

“Our research shows that the economic case for keeping taxes on the rich low is weak. Major tax cuts for the rich since the 1980s have increased income inequality, with all the problems that brings, without any offsetting gains in economic performance.”

For governments looking to genuinely improve the economy, this should be very helpful: it shows what doesn’t work, and suggests what does. Julian Limberg, the other study author, comments:

“Our results might be welcome news for governments as they seek to repair the public finances after the COVID-19 crisis, as they imply that they should not be unduly concerned about the economic consequences of higher taxes on the rich.”

Economic inequality and decline fracture society, says a new study

New research at the Princeton University sheds light on how economic hardship and inequality can stoke polarization among social groups. According to the findings, such divisions keep festering even after financial conditions improve.

Image credits Paolo Trabattoni.

We’ve obviously been having a populist problem lately, and it is in no way limited to the US. A key driver of such movements has always been dissatisfaction with how things are being carried out right now, or feelings of anger at the perceived wrongdoings of the elites. But economic hardship also plays a large role in shaping such social woes. Worse yet, the divides seem to persist over time and promote inter-group conflicts.

Not enough to go around

“Times arise when national unity is needed, like we’re seeing now with COVID-19, but we shouldn’t wait for a public health crisis or war to bring people together” says Nolan McCarty, the Susan Dod Brown Professor of Politics and Public Affairs at the Princeton School of Public and International Affairs and lead author of the paper.

“Policymakers and those in government should act now by investing in and protecting social safety nets that can prevent widening social and political divisions.”

The paper explores the theory that social polarization (or ‘tribalism’) between different groups has the tendency to rise during times of economic hardship. Under this theory, overall economic decline, rising inequality, and social conflict come hand-in-hand.

McCarty, together with Alexander Stewart of the University of Houston and Joanna Bryson of the Hertie School in Berlin developed a computer model meant to test the theory. This was built starting from models meant to explore evolution and game theory, but the team designed it to look at people’s willingness to interact with members outside of their own social group. Based on the findings, the authors argue that strengthening our social safety nets can help reduce this type of social conflict.

All of this, however, hinges on a few assumptions that the team baked into their model. The first is that an individual’s economic standing is tied to both interactions with others as well as the general health of the economy. The second assumption was that people tend to take after successful people, mimicking their behavior — which can thus spread through large areas of the public. Lastly, they modeled in-group interactions to be generally less risky with lower rewards, and those with out-group individuals to be riskier and more rewarding.

What the team expected to see was a shift in preference from out-group interactions during good times to in-group interactions during times of economic hardship, as people hedge their bets and avoid risk. Overall, this would lead to a sharp decline in interactions across groups. The results matched their expectations.

Our understanding so far is that economic shocks tend to lead to a rising of far-right movements that cash in on public frustrations by vilifying other groups. High levels of inequality, on the other hand, work to favor groups on the left, who will seek wealth redistribution. However, the model didn’t find proof of these mechanisms — but it did find that all people, in general, become less likely to interact with members from other social groups when times get tough. This, in turn, leads to everyone getting poorer, as in-group interactions tend to generate less value.

“Rather than continue the unproductive debate over whether ‘economic anxiety’ or group conflict is most responsible for our deeply divided politics, scholars should spend more effort considering the debilitating feedback between economics and identity,” said McCarty.

The paper “Polarization under rising inequality and economic decline,” has been published in the journal Science Advances.

COVID-19 pandemic caused $16 trillion in damage — the greatest threat to the economy since the Great Depression

Credit: Pixabay.

Seemingly overnight, much of the world shut down in March and April in order to limit the spread of a virus whose behavior was still very much enigmatic at the time. But this came at a huge cost, as stay at home orders also slowed down the gears and cogs of the economy to a crawl. Everybody knows this virus caused a great deal of economic damage, but how much exactly?

According to a new study by David Cutler, Professor of Applied Economics at Harvard University, and Lawrence Summers, President Emeritus of Harvard University, the total cost of the pandemic in the US alone is estimated at $16 trillion. That’s approximately 90% of the annual GDP of the United States.

Four times more lost output than during the Great Recession of 2008

The estimate aggregates both direct and indirect economic losses on the optimistic assumption that the virus will be contained through vaccination by the end of fall 2021.

Job losses in the country have been unprecedented. For 20 weeks straight, from March until September, more than one million claims have been filed for unemployment insurance every week. In total, 60 million Americans filed for unemployment since the effects of the pandemic began to be felt in March 2020.

Fewer jobs means less disposable income, which means less spending, which in turn affects the bottom line of businesses, so even more jobs are lost when companies default. The Congressional Budget Office estimates a total of $7.6 trillion in lost output during the next decade.

The situation could have been disastrous, much worse than the Great Depression were it not for the federal government, which injected funds back into the economy, buying bonds and issuing stimulus checks to the population worth trillions of dollars. But that’s not all.

Although it might sound inhumane to put a price on human life, economists routinely gauge the economic cost of death and reduced quality of life. In the United States, a so-called ‘statistical life’ is worth around $7 million.

More than 200,000 Americans have lost their lives as a direct consequence of COVID-19 infections. At a rate of 5,000 COVID-19 deaths per week, the researchers estimate that another 250,000 deaths can be expected on American soil in 2021, supposing no working vaccine is distributed in time to the population.

Besides deaths due to coronavirus infections, the pandemic is responsible for indirect deaths as a result of disruptions to the health system. Studies suggest that increased deaths from other causes amount to 40% of COVID-19-related deaths. This means that 625,000 cumulative deaths owed to the pandemic will occur by the end of 2021. As such, the economic cost of all these premature deaths is estimated at $4.4 trillion.

For each death, there are about 7 survivors of severe or critical COVID-19, who face impairment that may significantly reduce their potential lifelong economic output. The researchers estimate the economic loss due to long-term complications to be around $2.6 trillion through the next year.

Additionally, the researchers estimate the cost of mental health problems incurred by the pandemic at $1.6 trillion.

According to the Harvard researchers, a family of four could see nearly $200,000 of their household income lost. Half of this loss is directly owned to COVID-19-recession, while the remainder can be attributed to lost output due to shorter and less healthy lives.

All in all, these costs amount to $16 trillion — more than twice the total cost of all the wars the US has fought since September 11, 2001.

Some of this unprecedented economic damage can be averted throughout the next year by investing in mitigation measures. According to the authors of the new opinion piece, which was published in the journal JAMA, the highest return on investment is from more testing and contact tracing. Every dollar spent on these two measures should return at least $30 in economic benefits. However, currently the US government is investing most in acute treatment. 

Book review: The Infinite Desire for Growth

How did we get from subsistence farming to living long, prosperous, and entertaining lives — but wanting more? Is our current economic paradigm of an always-increasing GDP a viable option for the future, given issues such as climate change, social unrest, growing inequality? Why do we want it so much in the first place, and can we afford to keep yearning for it?

The Infinite Desire for Growth tackles these very questions in a light, accessible way, while still managing to provide surprising breadth on the topic.

“The Infinite Desire for Growth”
By Daniel Cohen
Princeton University Press, 165 pages | Buy on Amazon

Economic growth always has a spot in our headlines these days — be it to celebrate good news, or report on a bad year. It’s not hard to see why: economic growth, more than any other metric, is used by officials to showcase their achievements to the public. It is, in effect, the chief indicator that we check to see if everything is alright in our countries.

Which, when you think about it, doesn’t really add up. More wealth is nice, sure, but wouldn’t happiness levels be a better indicator of how well our lives are going? Wouldn’t net worth be a better indicator of how rich we are?

Why are we looking to the growth of the economy when life expectancy, access to goods and services, and the amount of useful free time we have are much more impactful on our lives? Especially when you consider that economic growth doesn’t mean everyone gets to enjoy more wealth, due to income inequality. This growth is also responsible for more and more environmental damage — we are knowingly hurting the planet and all life on it in our pursuit. So what gives?

Daniel Cohen, a French economist, chips away at this question in his very-aptly named The Infinite Desire For Growth. And you might be surprised to hear that, in his eyes, what lies at the root of this tendency isn’t want of riches or greed — it’s hope, and a search of meaning.

Economic growth, Cohen argues, has taken the place of religion. We may not pray to the Big Dollar in the Sky, but the hope of a good afterlife in Heaven as reward for a good life has been replaced by the hope of a good life on Earth, as reward for working hard.

Growth offers the promise of a better life to all of us. Despite rarely delivering on it (due mostly to a growing inequality gap), the promise in itself is enough to keep us happy. This transition is surprisingly new, made possible mostly by secularization and industrialization.

The Infinite Desire for Growth is a very unusual book about economics, in my eyes, because I actually enjoyed reading it. Cohen doesn’t start his analysis from those tropes economists so easily fall into — such as the idea that people are always rational actors when it comes to money. His book doesn’t look for the best way to maximize wealth, offers no tips and tricks on how to increase your company’s bottom line. It looks at how culture, society, politics, science, and geography influenced the birth and development of economies.

But most fascinating to me is that he describes these through the lens of individual desires, how they compound to create supply and demand, and dictate how they’re handled.

He examines how we’ve come to virtually worship the idea of economic growth, to take for granted that there will always be more wealth to share, that we will be enjoying a better quality of life than our parents if we’re willing to work for it. And then, of course, Cohen asks what this means for today, when economic growth is stuttering, sometimes absent, and humanity is damaging the very planet that keeps it alive.

It takes a very wide look at economies and the people who create them. The cost of this is that Cohen doesn’t always go into deep detail about the concepts he discusses, but he does supply us with ample references to support his claims.

The Infinite Desire for Growth asks how we’ll contend with a simple fact: working hard no longer guarantees social inclusion or income. Automation is increasingly encroaching in the workforce, lowering the price of work (wages), and making the wealthy wealthier. Ecological degradation is threatening all of us, but the poorest will suffer the most.

Cohen ends his book by arguing that today’s selfish economic model isn’t sustainable in the future. There simply isn’t enough Earth for all of us to always be wealthier than we were yesterday. Our obsession with economic growth, he argues, has run its course. In the 21st century, humanity will have to wean itself off material gain, and rethink what “progress” actually means.

The world’s poorest are escaping extreme poverty faster than ever — but not everything is getting better

Here’s an encouraging thought: extreme poverty has been largely alleviated. In 1820, 94% of the world’s population lived in extreme poverty (the equivalent purchasing power of under US $1.9/day). In 1990, the figure had dropped to 34.8%, which is already a big improvement. But since 1990, in just 30 years, the figure has dropped to 9.6%. The world’s poorest are taking strides towards escaping extreme poverty.

Not only is the proportion of people living in extreme poverty at a record low — but despite adding 2 billion people to the planet’s population in the past few decades, the overall number of people living in extreme poverty has still fallen. In the last 25 years alone, 1.25 billion people escaped extreme poverty — a whopping 138,000 people every day. This is an enormous achievement that

But we shouldn’t pat ourselves on the back just yet. In between extreme income inequality, climate change and pollution, and decreased social freedom, there has been a great price to pay for this progress — and many economists believe we could have done even more.

Poor, but not extremely poor

It’s always hard to define poverty. The extreme poverty threshold was updated in 2015 to the equivalent of $1.9 — which, most people would agree, is an extremely low figure.

Extreme poverty is meant to be, well, extreme. Conceptually, it is meant to be the limit at which you have problems satisfying even the most basic of human needs.

But that doesn’t mean that once you’re out of it, all is fine and dandy. People living at $2 and $5 per day also face severe hardships.

We should also be paying attention to what happens to other low-income brackets, and things are less encouraging there.

The majority of the world is still living at under $10 per day — 2 out of 3 people worldwide are under this threshold. The proportion of “rich” people, who can afford to spend more than $10 per day has increased from approximately 25% to 35% in the past 40 years.

That’s positive, but less encouraging –especially since $10 per day is not exactly a very high standard. Overall, however, the world is taking important steps towards reducing and eliminating poverty.

The poverty gap, another common measure of global poverty, has also steadily decreased in recent years.

However, one macroeconomic area is still greatly lagging behind.

Poverty has changed dramatically everywhere in the world — except Africa

In 2013, there were 746 million people living in extreme poverty. Out of these, 380 million resided in Africa, and 327 million resided in Asia. That means that around 95% of people in extreme poverty live in Asia and Africa. However, Asia and Africa aren’t exactly similar in this regard.

The world’s most populous country, China, has only 25 million people living in extreme poverty — an impressive improvement from just 20-30 years ago. In fact, 218/327 of Asia’s poorest people live in India.

Meanwhile, aside from North Africa, the entire continent seems to struggle with extreme poverty.

Indeed, much of the progress with global poverty has come from East Asia and the Pacific area, where poverty rates went from 81% four decades ago to 2.3% in 2015.

Meanwhile, in sub-Saharan Africa, the number of people (note: the total number of people, not the percentage) has increased since 1990. In sub-Saharan Africa, there is also a correlation between the incidence of poverty and the intensity of poverty — in other words, it’s not just that the people are more likely to live in extreme poverty, but this is also the region where people tend to fall furthest below the line.

Poverty was not concentrated in Africa until very recently. Even in 1990, more than a billion people in extreme poverty lived in India and China. However, the rapid progress in these areas has left Africa behind.

Population growth is also most accelerated in African areas. According to the World Bank, 87% of the world’s poorest are expected to live in sub-Saharan Africa by 2030.

This being said, the percentage of people in Sub-Saharan Africa is also decreasing — it’s just decreasing

The sacrifice?

No doubt, alleviating global poverty is one of the loftiest achievements mankind can pursue. There’s no denying that. However, whether the end justifies all means is a completely different question.

The strongest example of this is China. China embraced the free market, but it also embraced authoritarianism; they prioritized economic development at the cost of social freedom. China ranks 153/167 in the Global Democracy Rank, being as democratic as countries such as Eritrea, Burundi, and Iran. A quarter of a century later, China’s transformation is shocking, and human rights are little more than an afterthought for the Asian giant.

It’s not just democracy that was sacrificed in some cases — the environment also had to suffer. Much of this economic growth was powered by coal and other fossil fuels, rising atmospheric greenhouse gas emissions to unprecedented levels. Per capita, developed countries still heavily outweigh developing areas, but China has become the world’s largest emitter. If economic growth is to become sustainable, it must decouple from greenhouse gas emissions. Currently, carbon emissions and prosperity seem to be linked, but we are are seeing some progress in the area.

The rich get (much) richer

Income inequality is also a burning topic. After all, the entire world is getting richer, so the proverbial pie is getting bigger — are impoverished areas getting substantial portions of that, or is it just scraps?

Income inequality is a complex process to analyze, and it’s not uniform. An income over $14,500 in 2013 was sufficient to put you in the global top 10% richest — and yet, in the world’s richest countries, that would be considered a very low figure.

However, income inequality estimates are not fully comparable across countries in different world regions. Even with these differences

Global income inequality is currently high, but as mentioned, there are both similarities and major differences across different countries. In the first part of the 20th century, inequality decreased in most of the developed world. But in the second part of the century, global inequality started to increase, and this is especially prevalent in English speaking countries, whereas in countries like France, Germany, or Japan, inequality has remained more stable.

The long-term increase in income inequality raises social and political concerns, as well as economic ones, tending to make it more difficult for people to escape poverty and bridge the economic gap.

What’s next?

There has been remarkable progress in the past few decades, but there is absolutely no reason to get complacent about poverty.

No matter how you look at it, the share of people living in extreme poverty has decreased — and if things go as planned (which is likely, but not guaranteed), the share will continue to decrease throughout the next decades.

However, if people are simply moving from ‘extreme poverty’ to ‘poverty’, that’s not sufficient. The world has gathered tremendous wealth in the past few decades, and the free market has created a tremendous opportunity to escape poverty — but if this opportunity is not backed by responsible social policy, we will continue to see income inequality rise while the poorest struggle.

Furthermore, tackling poverty in a way that’s sustainable, equitable, and democratic remains as challenging as ever. We have our work cut out for us the future.

What will the economy look like after the pandemic? Past crises suggest rising inequality

We’re in a truly unprecedented situation. It’s not the first pandemic mankind has been faced with, but it’s by far the most acute one in modern history. In addition to the health crisis, the pandemic also brings an economic and social crisis — and if we’re being perfectly honest, no one really knows how this will all shape the future. But perhaps, past events can give us a few lessons for what can work and what doesn’t.

Image credits: Steve Johnson.

Trickle-down fuels inequality, oil is vulnerable, and “safe” industries aren’t safe

In the post-WWII period, life gradually improved in many parts of the world. For Americans, the period from the late 1940s to the 1970s was a booming economic period.

But the boom didn’t last forever.

The 1970s were rattled by not one but two oil crises. Economic growth started wavering, and people were faced with the reality that accelerated growth isn’t always sustainable. Some traditional industries, even ones once thought to be rock-solid, went into decline. Many never recovered.

The US government reacted, and the most notable shift was brought in by Ronald Reagan. Reagan implemented a series of reforms that would put the US on a decisive course for decades to come.

Reagan pushed for deregulation, getting rid of state-owned companies and moving to cut back taxes for higher incomes. This decision was based on the belief that the money would be reinvested and then “trickle down” to everybody.

The effects of this trickle-down economy are widely felt to this day: on one hand, the practice was successful in creating a culture of entrepreneurship and overall, the country’s GDP continued to grow, but unemployment and inflation also steadily grew.

Here’s a problem: much of that growth went into the pockets of the few. In fact, if you look at the poorest group, their cumulative incomes have actually decreased compared to the 1980s — which is crazy considering how much the richest group’s earnings increased.

There are many ways to look at how the trickle-down economy fuels inequality, but here’s a very simple and clear graph, illustrated by Mirko Lorenz, co-founder of Datawrapper: people’s productivity continued to increase, but their income remained stable.

There are of course other factors at play here, such as automation. But automation and industry changes alone cannot explain this — especially as the trend was not nearly as extreme in other countries.

Even before the pandemic, the current US administration had granted tax cuts for the country’s richest, so the trend is expected to exacerbate. If we’re looking at relief programs that will only help the top of the economic pyramid in the hope of it trickling down, we can expect rising inequality.

As for industries traditionally considered stable and reliable, we’ve already seen that this is not nearly a guarantee. For the first time in history, oil prices turned negative, and the economic forecasts project that this is only the first in a number of shakeouts that the oil industry will face. The rise of renewables is also expected to accelerate the decline of oil companies, though this is far from a guarantee. Another mainstay industry that has been heavily affected by the pandemic is the meat industry, where thousands of infections have been detected.

With the distancing measures likely to remain active in the future, it’s hard to say which industries will suffer the most and which will require the most support.

More workers, more debt

When wages stagnate (which has happened following Reaganomics and is likely to happen in the following years), more women go into the workforce — especially mothers. That’s good on one hand because it favors equality and independence, but on the other hand, the US is the only OECD country without a national statutory paid maternity, and many of the working mothers have small children without anyone to care for them.

Another issue to consider is that despite more people going into the workforce, household debt has increased dramatically. Ironically, it was the 2008 crisis that ultimately brought the debt levels to sustainable levels.

Lessons from the Spanish Flu: You save the economy by saving lives

There is only one event in recent history that carries a resemblance to the current situation: the Spanish Flu pandemic.

A recently-published study analyzed the economic effect of the Spanish Flu on American cities. The researchers found that it was the pandemic itself that caused the economic damage, and the public health measures, while disruptive, had a net positive impact by saving lives. In other words, the benefits these measures provide by saving lives is greater than the damage done through disruption.

“Altogether, our evidence implies that it’s the pandemic and the associated spike in mortality that constitute the shock to the economy,” the authors write.

The bottom line

Few things are certain in the coming period, but one of the certainties is that the global economy will be subjected to massive stress — and this stress is very likely to exacerbate what is an already very pressing inequality, both in the US and outside of it. We are already seeing major macroeconomic areas coming up with stimulus plans, and these plans could set a direction for decades to come.

It’s very easy for these plans to chase economic growth and leave behind certain groups, specifically disadvantaged groups. It’s not difficult to envision a post-pandemic world with economic inequality on steroids.

Much of the world is already struggling with inequality — and extreme inequality has been shown to increase health and social problems, crime rate, and increasing political instability.

In our understandable hurry to restart the economy, we must not forget that saving lives is also saving the economy, and leaving people behind can create even more trouble down the line.

Artificial Intelligence is helping economists devise a fairer tax system

Rivers of ink have been spilled on taxes. They are an important part of the very foundation on which our society is built, with former U.S. Supreme Court Justice Oliver Wendell Holmes Jr. proudly declaring, “I like to pay taxes. With them, I buy civilization.”

But taxes are, almost universally, hated — and it’s easy to understand why. You pay a significant part of your income to a rather abstract administration, and you don’t always get to see the fruits of your labor. You can’t exactly point to a tree or a sidewalk and say “my taxes built this”, and it can be pretty demoralizing to not know what your money is spent on. Plus, taxes cost a lot. Mark Twain once famously complained that ” The only difference between a tax man and a taxidermist is that the taxidermist leaves the skin.”

The real problem with taxes, aside from easily understandable inconveniences, is that they’re often unfair — and the simplest proof of that is rising income inequality.

Homo economicus

Income inequality is one of the most pressing economic problems of our times. As the old saying goes, the rich get richer, and an alarmingly high portion of the population gets left behind, often in poverty. In the US, 11.8% of the population (38.1 million people) live in poverty. Meanwhile, the world’s richest have gained $1.2 trillion in wealth in 2019 alone. Taxation is the main mechanism through which inequality can be addressed, but devising a tax system that works for everybody is not an easy task.

Tax too little and you’ll end up with rampant inequality. Tax too much and you’ll discourage people from working or seeking wealth. Finding a custom-tailored balance is not an easy task. Economists have long searched for ways to satisfy both needs, but the balance is difficult to achieve.

Economics is further complicated by human behavior. For centuries, economists have developed theories based on Homo economicus — the idea that humans are perfectly rational beings, taking rational decisions. That is, of course, not the case. It may often be a satisfactory approximation, but it is becoming increasingly apparent that Homo economicus will just not do in our modern times.

People’s economic behavior is complex, unpredictable, and it’s very hard to get data on this. Economists too have varying opinions on this. Place 10 economists in a room and ask them to come up with a taxation system, and you’ll end up with 11 solutions.

This is why Artificial Intelligence (AI) can help — or so a group of scientists believes.

The scientists, working at US technology company Salesforce, devised an artificial intelligence system charged with developing the ideal tax system.

Beating us at chess, Starcraft, and now, economics

The new program, called AI Economist, uses the same technique behind AIs such as AlphaGo or AlphaZero. These algorithms are famous for defeating humans (and other algorithms) at chess, Go, and more recently, Starcraft.

Reinforced learning is a system of punishment and reward used in machine learning. You set a reward system for the program, and then, based on the decision it takes, it receives more or less reward. This incentivizes the algorithm to find the solutions that offer the most desirable outcomes

So far, AI Economist is still a pretty simplistic approximation. In it, four AI workers are each controlled by their own reinforcement learning models. They interact with a simplified 2D world which only includes basic resources such as wood or stone. The workers either gather resources, trade them (which can earn them money), or build houses. The AIs also have different skill levels, which incentivizes them to focus on different things. Lower-skilled workers do better if they focus on gathering resources, while higher-skilled ones fare better if they build houses.

At the end of a simulated year, they are all taxed by an AI policymaker, running its own algorithm. The policymaker’s goal is to boost the productivity and income of workers.

It’s a very simple model, but it can be repeated millions of times until the optimal behavior in the scenario is found. Then, as the general strategy is discovered, it can be scaled to more complex scenarios.

There is surprisingly much you can learn from only 4 AI workers. The fact that both workers and policymakers have their own incentive is key to mimicking a more dynamic situation where the workers and policymaker AI constantly adapt to each other. For instance, some workers learned to avoid tax by reducing their productivity to qualify for a lower tax bracket and then increasing it again. The policymaker AI had to adapt to this, and every iteration, the system would be optimized.

The simulation also showed that some strategies developed by workers only worked in some strategies adopted by the policymaker, so worker AIs also had to adapt to the policymaker.

AI tax policy

In the end, the tax policy developed by the AI Economist was an unusual hybrid.

Most taxation policies are either progressive (with high earners being taxed more) or regressive (with high earners being taxed less), but the AI implemented a bit of both. It applied the highest tax rates to the rich and the poor and the lowest to middle-income workers.

If that seems weird, well, it is. But it doesn’t necessarily mean it’s wrong. Reinforced-learning AI often comes with completely non-intuitive, almost non-human solutions. In the Go game between AlphaGo and world champion Lee Sedol, the AI made a move at one point that had all commentators thinking it was a software glitch. It was so counterintuitive and weird that no one could believe it was real — and it was the move that ended up winning the game. Similarly, AlphaZero has created completely new trends in chess, such as pushing the side pawns, which was traditionally considered to be a mistake.

AlphaGo has proved its worth, often deploying completely unintuitive moves.

Of course, this doesn’t mean that the AI Economist is necessarily right — but it’s exactly this type of out-of-the-box solution that economists were looking for.

Taxing both the rich and the poor and supporting the middle class is not something that most humans would be comfortable with, but this approach led to a smaller gap between the rich and the poor workers.

Then, researchers put this optimized approach to the test — with humans this time. They hired 100 human people through Amazon’s Mechanical Turk and asked them to play the role of workers in the simulation. They found that the policy encouraged people to behave in much the way the worker AIs did, hinting that the strategy could have a real influence in a real, human situation.

It’s still early days and it’s still far too soon to draw any conclusions. The number of interacting agents needs to be increased dramatically before we can talk about practical insights, as does the number of resources. But once all that is done, and the economic model is tweaked, the model could become instantly useful. Then, the model could be tweaked to mimic particular scenarios and situations and ran millions of times until optimal strategies are found.

Whether or not the approach will have practical insights remains to be seen. Even if it does, it will still need to convince economists, politicians, and voters — and that is a completely different ball game. Leading economists are already calling for a tax on carbon, for instance, and that is something that very few politicians are even willing to consider, let alone implement.

Reopening the US economy would cripple the economy

While people around the world are doing their best to bear with the economic burden of COVID-19, a handful of politicians, including US President Donald Trump, are arguing for “reopening the economy”.

Image credits Marco Verch // Flickr.

A new study led by researchers City University of New York (CUNY) along with the Infectious Disease Clinical Outcomes Research Unit (ID-CORE) at the Los Angeles Biomedical Research Institute reports that a wider spread of the coronavirus could cost hundreds of billions of dollars in direct medical expenses alone as the current number of hospital beds and ventilators won’t be enough to cover demand.

The cost of change

“Some have suggested herd immunity strategies for this pandemic,” explained Sarah Bartsch, lead author of the study and project director at the Public Health Informatics, Computational, and Operations Research (PHICOR) at CUNY. “These strategies consist of allowing people to get infected until herd immunity thresholds are reached and the virus can no longer spread. However, our study shows that such strategies could come at a tremendous cost.”

“This also shows what may occur if social distancing measures were relaxed and the country were to be ‘re-opened’ too early,” said Professor Bruce Y. Lee, executive director of PHICOR and the study’s senior author. “If the virus is still circulating and the infection rates surge as a result, we have to consider the resulting health care costs. Such costs will affect the economy as well because someone will have to pay for them. Any economic argument for re-opening the country needs to factor in health care costs.”

The authors also note that these costs can be reduced substantially if the spread of COVID-19 is contained to any degree — but the more the better.

For the study, they used a computer model to simulate the entire U.S. population and see what would happen if different proportions of its citizens caught the virus. As part of the model, simulated individuals could develop symptoms of different severity levels over time (as per our current data on case severity in the real world) and, based on those symptoms, either visit a clinic, an emergency department, or a hospital. The resources each patient would then require from the medical system (such as health care personnel time, medication, hospital beds, and ventilators) would then be gauged based on their health status. The model then tracked the resources involved, the associated costs, and the outcomes for each patient.

Overall, it showed that the associated costs of a widespread coronavirus in the U.S. would be substantial:

  • For 20% of the U.S. population infected, the model estimates an average of 11.2 million hospitalizations and 1.6 million ventilators used, leading to around $163.4 billion in direct medical costs. The worst outcome for this scenario would be 13.4 million hospitalizations and 2.3 million ventilators used, with an average direct cost of $214.5 billion.
  • A 50% infection rate among the U.S. population would lead to an estimated 27.9 million hospitalizations, 4.1 million ventilators used and 156.2 million hospital bed days accrued — and $408.8 billion in direct medical costs.
  • For an 80% infection rate, the team estimates 44.6 million hospitalizations, 6.5 million ventilators used, and 249.5 million hospital bed days (general ward plus ICU bed days) incurred — which would cost an average of $654 billion.

On the one hand, the price tags alone should show that lifting measures such as social distancing and quarantine too early won’t do that much good in an economic sense, because any upticks in profits would quickly be drained by the direct costs of caring for the people who become infected. On the other, the team only looks at direct medical costs. Indirect ones, for example, those incurred by reopened businesses whose employees can’t actually work because they’re in the hospital, aren’t quantified — so the ultimate cost of reopening the economy would be even greater than what the team estimates here.

The currency we pay in

In the end, policymakers and the public will have to decide for themselves whether they’d rather bear the economic costs of preventive measures or the costs in lives and medical spending associated with re-opening the economy.

 Coronavirus protests in Columbus, Ohio Statehouse, 2020-04-18.
Image via Wikimedia.

The team underscores that a single symptomatic COVID-19 coronavirus infection costs an average of $3,045 in direct medical costs during the course of the infection alone, which is 4 times higher than the costs associated with a symptomatic influenza case and 5.5 times higher than a symptomatic pertussis case. They further estimate that total costs associated with a symptomatic COVID-19 case (when factoring indirect costs such as organ damage too) increased the average cost to $3,994.

“This is more evidence that the COVID-19 coronavirus is very different from the flu,” said Bartsch. “The burden on the health care system and the resources needed are very different.”

“Factoring in the costs incurred after the infection is over also adds to the costs. It is important to remember that for a proportion of the people who get infected, health care costs don’t end when the active infection ends,” Lee warned. “This pandemic will have its lasting effects and taking care of those who will suffer continuing problems is one of them.”

Only looking at costs also leaves out an important part of the discussion: resources aren’t infinite in the healthcare system, and there’s a limit beyond which throwing dollars at the problem just won’t help anymore. If healthcare systems or any single link in the chain (such as personnel, ventilators, or hospital beds) become overwhelmed, patients won’t be able to receive the care they need. According to the Society of Critical Care Medicine, there are approximately 96,596 ICU beds and 62,000 full-featured mechanical ventilators in America, a country of 328.2 million people — meaning that if even only 0.03% of the country needs hospital care, these resources will be overwhelmed.

The paper “The Potential Health Care Costs And Resource Use Associated With COVID-19 In The United States” has been published in the journal Health Affairs.

Current coronavirus economic crisis mirrors 1930s Great Depression, says the manager of the world’s largest hedge fund

During a remote TED talk, world-renowned investor and entrepreneur Ray Dalio said that the economic fallout due to the pandemic needs to be seen from the perspective of income and balance sheets. Essentially, there are holes in income that generate losses on balance sheets.

Dalio thinks the crisis we’re currently experiencing has existed before during the 1930 to 1945 period, in that now we’re seeing the production of a lot of debt (government debt in particular) and zero interest rates.

“American printing of money and the borrowing will leave us with a lot of debt and monetization. That’s something interesting to talk about — and we need to talk about that,” said Dalio in a TED interview.

“Who will pay these bills and how will that be shared?”

When asked when whether we’re headed towards a global depression, Dalio paused for a couple of seconds before hesitantly answering ‘Yes’, fully aware of the implications of his words.

“From 1929 to 1932 there was a fall in the economy, double-digit unemployment rates, and magnitude of fall in the economy of about 10%. Do I think we’re in that? Yes.”

“How was that dealt with in 1932 is they printed a lot of money and the government came with the same type of programs that we’re having now.”

“Same thing: zero interest rates, same thing, same dynamics. And then that money causes an expansion from that point. How long does it take for the stock market to exceed its high or how long does it take for the economy to exceed its former highs? A long time.

“Okay, do I think that’s what we’re in? Yes, that’s what we’re in. We’ve seen that happen repeatedly in history. This is just the most recent one and there’s a structure to that.”

According to Dalio, markets have plunged 25%-50% accounting for about 20 trillion dollars in losses.

The solution: human ingenuity

Ray Dalio, Founder, Co-Chief Investment Officer & Co-Chairman, Bridgewater Associates. Credit: Flickr, Web Summit.

In his books, Dalio talks about four levers to recovery after a financial recession or depression: cutting spending (austerity), debt restructuring, redistribution of wealth through taxes, and printing of money.

“I think what you’re seeing is a combination of printing money and redistribution. These things happen pretty quickly, they last a couple of years in that process, and then you have a rebuilding. And, they’re dealt with creativity.”

“The greatest force through time is human inventiveness. You’re going to see these restructurings happen. It’s the power of that adaption that is the greatest power.”

Dalio goes on to note that such restructurings aren’t necessarily bad and may actually be necessary. As a stress test, albeit an extremely challenging one in the case of the coronavirus crisis, such events expose weaknesses and flaws at both an individual level (low savings, emphasis on luxury over necessities ) and a societal level (inequality). History suggests that people come out stronger after a stress test and more appreciative of the basics of life.

Life after coronavirus

Dalio envisions a great restructuring that is going to transform the global economy and financial system.

“This is bigger than what happened in 2008. In 2008 we had banks, you have a certain amount of leverage, things go down, too much leverage means you’re broke in accounting terms.”

To avoid a systemic failure, during the 2008 financial crisis, the US government and federal reserve bailed out banks who secured the mortgages.

“This is more complex than that because there are the banks and then there are all of those that are beyond banks. It’s a bigger crisis and we have less effective monetary policy because interest rates declines have reached their limits and just by buying financial assets by the central bank and buying the normal financial assets won’t work.”

Concerning capitalism, Dalio is of the opinion that our current economic system will also suffer great reforms to create productivity. Dalio mentions that those in the top 40% income bracket spend five times as much money on their children’s education than those who are in the bottom 60%. “So, everything is self-perpetuating,” he added.

“It doesn’t mean just giving money away. It means how do you make those people productive so that they are also psychologically productive, as well as physically productive in producing output.”

“Now we are restructuring it. It is the inevitable consequence of what we’re doing here.”

“There’s a been a tremendous transfer of wealth whether people realize it or not through the production of all of that borrowed money and all of that producing of money — that is a big force.”

It’s official: soda tax offers “net good” to society

Despite opposition from the soda industry, studies consistently show that sugary drinks need to be taxed.

Want a simple way to improve society? Tax soda, researchers say.

For kids and adults alike, sugary drinks (soda drinks, fizzy drinks — call them as you will) have become nigh ubiquitous — they’re just everywhere. The world loves them and can’t get enough, but there is a cost to all of this. The vast majority of such drinks are essentially devoid of any useful nutrients or fiber and are very rich in sugar, which aside from being notoriously bad for your teeth, is also one of the main culprits of the ongoing global obesity crisis.

In this regard, soda drinks are very similar to alcohol or cigarettes: you don’t drink them because they offer something useful, you drink them as a very small luxury, and an unhealthy one like that. So if cigarettes and alcohol are taxed for these reasons, why shouldn’t sugary drinks be taxed in the same way?

In recent years, economists have been arguing more and more for a soda tax. It makes perfect sense — on the one hand, you reduce the consumption of unhealthy substances, improving society’s quality of life and reducing the burden associated with being overweight, and on the other hand, you raise a lot of money which can be used to develop health programs that add further benefits. A new study analyzed that idea at a fundamental level, and found that a soda tax adds a net benefit in society, if implemented correctly.

“The research is clear that sugary drinks are bad for our health,” explain Hunt Allcott, Wharton’s Benjamin Lockwood, and Dmitry Taubinsky, the papers’ authors. “Our study takes a next step to evaluate the overall economic rationale as to whether we should impose a tax. Using an economic framework, we show that taxing soda generates net benefits to society–taking into account the health effects, the enjoyment that people get from drinking the drinks they enjoy, the value of the tax revenues, and other factors.”

Americans are aware that they drink a lot of soda, the study finds. Just over half of Americans say they drink “more often than I should,” so at least at some level, many people would like to drink less. Previous studies have shown that people with higher nutritional awareness also tend to drink less soda, which suggests that if people were fully informed, they would make better, healthier decisions.

A nationwide soda tax in the US would yield $7 billion in net benefits to society each year, and national (or at least regional) taxes work best. Currently, several cities in the US have implemented such a sugar tax, but the tax impact is limited by the fact that people can simply go outside of town and buy cheaper soda.

Much like the cars emitting pollution that harms others, sugar can cause a wide array of health issues, including diabetes, obesity, and heart disease. This translates into medical bills which are paid by taxpayers or (in some cases in the US) by private insurers. At any rate, having healthier people also translates into reduced costs, but the opposite is also true: unhealthy people will produce a financial cost to society. In this case, researchers estimate that drinking an average 12-ounce can of Coke will impose about 10 cents on others.

These health issues disproportionately affect low-income people, but opponents of a sugar tax have claimed that applying an extra cost will also disproportionately affect this category. This new study finds that this is not the case.

“We estimate that soda taxes benefit both low- and high-income people,” the researchers say. “While low-income people drink more sugary drinks and thus pay more in soda taxes, their health also benefits more from drinking less.”

The study also finds that taxing the actual sugar is more effective than taxing the liquid which contains sugar. A tax of 0.5 cents per gram of sugar would work much better than the 1 cent per ounce of liquid, which is often discussed in practice. This is because, although all sugary drinks are dangerous, some have much more sugar than others, and should be taxed accordingly.

Lastly, the team also discusses diet drinks. The city of Philadelphia, for instance, implemented a sugar tax that also applies to replacements of sugary drinks. While there have been concerns regarding the effects of such drinks on human health, the results are much less clear. Simply put, we’re sure sugary drinks do a lot of damage, and we’re not exactly sure how much damage replacements do. For now, the team recommends taxing sugar.

“Soda taxes should be limited to sugary drinks, where the health evidence is more clear,” the economists conclude.

The study has been published in the Quarterly Journal of Economics and the Journal of Economic Perspectives.

China and India on track for world’s largest economies by 2030. US could lose first place as soon as next year

Many will be surprised to hear this but, for the better part of the last 2,000 years, China and India were the world’s largest economies. Up until the Industrial Revolution, output was directly proportional to population size, so these countries naturally came on top. It wasn’t until steam engines, railroads, and mass production entered the picture that industrialized countries with much larger productivity per capita overtook the populous Asian powerhouses.

For more than a century, not long after the Civil War ended, the United States has held the crown as the world’s foremost economy. Now, history is about to reach a new turning point, with China and India set to soon reclaim their previous positions on the world economic stage.

Data compiled by Angus Maddison, an economist who died earlier this year, suggest that China and India were the biggest economies in the world for almost all of the past 2000 years. Credit: The Economist.

Data compiled by Angus Maddison, an economist who died earlier this year, suggest that China and India were the biggest economies in the world for almost all of the past 2000 years. Credit: The Economist.

According to Standard Chartered Bank, China will likely become the world’s largest economy at some point in 2020, overthrowing the United States. By 2030, the standings of the world’s top 10 economies will look radically different from today: the United States will claim only 3rd place, and six of the top ten countries on the list will hail from Asia.

The researchers at Standard made their projections by combining purchasing-power-parity exchange rates — so-called GDP (PPP) — and nominal gross domestic product (GDP).

[panel style=”panel-success” title=”What is GDP (PPP)” footer=”Source: Wikipedia / Purchasing Power Parity.”]Purchasing Power Parity (PPP) is measured by finding the values (in USD) of a basket of consumer goods that are present in each country (such as pineapple juice, pencils, etc.). If that basket costs $100 in the US and $200 in the United Kingdom, then the purchasing power parity exchange rate is 1:2.

For example, suppose that Japan has a higher GDP per capita ($18) than the US ($16). That means that someone in Japan would, on average, make $2 more than someone in American. However, they are not necessarily richer. Suppose that one gallon of orange juice costs $6 in Japan and only $2 in the US; then $6 in Japan exchanges to only $2 worth of US goods.

Let’s use 1 gallon of orange juice as a reference basket of goods. Based on it, we can establish a PPP index of 1 to 3 between Japan and the US. Therefore, in terms of orange juice, the Americans are richer, and in this example, the US has a GDP (PPP) of $16, unchanged since it is the reference currency. Japan, however, has GDP (PPP) of only $6 since $18 in Japan can only buy 3 gallons of orange juice, which represents only $6 of US goods.

Source: Wikipedia / Purchasing Power Parity

[/panel]

By PPP alone, China is already the world’s largest economy. On a nominal basis, however, the US is still leading the pack.

In the future, emerging markets are expected to catch up with historically-developed countries, driven by the convergence of per-capita GDP. In other words, as a country’s output starts matching the size of its population, this can mean a lot as far as hugely populated nations are concerned. For instance, Indonesia, Turkey, Brazil, and Egypt are expected to experience massive growths in their economies. To get a better idea of the bigger picture, Visual Capitalist compared Standard’s 2030 projections with the IMF’s most recent data on GDP (PPP) for 2017. It’s a bit of a case of counting apples and oranges, since the Standard assessment also includes nominal GDP in its formula, but the table gets the job done.

Rank Country  —- Proj. GDP (2030, PPP) —- GDP (2017, PPP)  —- % change
#1 China $64.2 trillion $23.2 trillion +177%
#2 India $46.3 trillion $9.5 trillion +387%
#3 United States $31.0 trillion $19.4 trillion +60%
#4 Indonesia $10.1 trillion $3.2 trillion +216%
#5 Turkey $9.1 trillion $2.2 trillion +314%
#6 Brazil $8.6 trillion $3.2 trillion +169%
#7 Egypt $8.2 trillion $1.2 trillion +583%
#8 Russia $7.9 trillion $4.0 trillion +98%
#9 Japan $7.2 trillion $5.4 trillion +33%
#10 Germany $6.9 trillion $4.2 trillion +64%

According to economists from Standard Chartered, Asian GDP will account for about 35% of the world’s GDP, up from 28% in 2018 and 20% in 2010. That’s equivalent to the combined output of the US and the European Union.

How the cryptocurrency boom could make or break Iceland’s economy

As cryptominers are drawn to Iceland’s abundant and cheap energy, economic woes loom over the country.

Iceland is a country like no other — a true land of ice and fire, a frigid but stunningly beautiful area, who for the longest time has struggled with poverty and isolation, but is now one of the richest and safest countries on Earth. Iceland truly is a remarkable place, but it’s not without its problems.

For starters, the country is still recovering after the economic crash that left the country near-bankrupt a decade ago. Although the country is flourishing now, this was not always the case — in fact, it was never the case before. But thanks to careful planning, healthy policies, and an essentially endless supply of geothermal energy, the 330,000 inhabitants of Iceland have built an enviable economy.

Yet because the island is so small and unique, its economy is very volatile. Iceland is the world’s largest electricity producer per capita, which plays a central role in its economic status. For instance, the biggest (and pretty much only) heavy industry in the country is aluminum smelting. Because energy is so easily available in Iceland, having an energy-intensive industry makes a lot of sense, and despite having as many people as a mid-sized town, Iceland is the world’s 11th biggest aluminum producer. But more recently, the country has started to develop another energy-intensive industry: crypto mining.

Cryptocurrencies — the likes of Bitcoin and Ethereum — have already moved on from their infancy — mining them is only feasible for large-scale scale operations. The “mining” process is essentially a validation of extremely complex transactions. The miners verify these transactions (a process that requires immense amounts of computation) and for this effort, successful miners obtain new cryptocurrency as a reward. All this required computation consumes massive amounts of energy and as a result, cryptocurrency miners have flocked to areas where energy is cheapest — including Iceland.

“We receive multiple requests per week from them,” says Styrmir Hafliðason, security and quality manager at Verne Global data centre, near the country’s capital Reykjavik.

According to a recent report by KPMG, 90% of the power used for Icelandic data centers goes to cryptocurrency mining, and the figure is expected to surge even further. If the trend keeps up, it might not be long before crypto mining consumes more energy than all of Iceland’s homes, according to Johann Snorri Sigurbergsson, a spokesperson for Icelandic energy firm HS Orka.

This has proven a boon for Iceland’s energy companies, but the industry is as fragile as it gets. As cryptocurrencies get harder and harder to mine (a process that is essential to all forms of cryptocurrency), the energy per coin ratio gets higher and higher — and at one point, it’s simply not going to be worth it. Furthermore, as recent events have shown, the value of currencies like Bitcoin is anything but stable — and as a result, this newly-developed industry could collapse at any moment. The crypto threat “cannot be excluded as a risk factor”, warns the country’s finance minister Bjarni Benediktsson.

In December 2017, Bitcoin reached a record high of $19,783, after dropping by more than 50% by February, to about $8,000. As I’m writing this, the price of one Bitcoin is $6,370. Bitcoin is no exception — the price of 1 Ethereum surged to a record high of $1,417 in January, whereas now, the price has dropped to $456.

Such fluctuations are regarded as normal in the cryptocurrency world, yet for an industry that plays a significant part in a country’s economy, that’s hardly acceptable.

But is this any different from Iceland’s big industry, aluminum smelting? Iceland’s crypto mining only uses up 2-3% of the country’s overall energy consumption, whereas aluminum smelting gobbles up 70%. So in terms of overall energy consumption, crypto is still a ways away from even nearing Iceland’s heavy industry, but in terms of financial stability, you can’t really compare the two.

Iceland’s been badly burned before, and the last thing it wants is to get burned again. So for now, although several Icelandic companies welcome this new type of industry, the country’s government will treat this surging “mining” industry with a healthy dose of pragmatic skepticism.

As China continues to reduce its emissions, scientists call for “cautious optimism”

If the current trend is maintained, then China’s emissions will continue to drop, a new study concludes — but the dust is not yet settled.

Have China’s emissions finally peaked?

As the world’s biggest polluter, China certainly has a lot to account for. Also the world’s most populous country, China has enjoyed a massive economic surge, but that surge was built on polluting fossil fuels — especially coal — so its economic success came at a cost.

China has also become one of the most polluted countries in the world, with many of its major cities battling smog and abysmal air quality. However, in recent years, things have started to change for the better.

For starters, China has slowed down its economic growth, which made it much easier to reduce emissions. This doesn’t really really mean much by itself, as it means that a potential renewed economic impetus would also bring about more emissions. In addition, China has invested massively into renewable energy and implemented ambitious eco-friendly policies. Is this enough to ensure a continuous reduction in emissions, or is it simply a fluke?

Prof. Dabo Guan and Dr. Jing Meng from University of East Anglia ’s Schools of International Development and Environmental Sciences and their colleagues wanted to see what we can expect from China in the future.

“As the world’s top emitting and manufacturing nation, this reversal is cause for cautious optimism among those seeking to stabilise the Earth’s climate,” said Prof Guan, professor of climate change economics. “Now, the important question is whether the decline in Chinese emissions will persist.

Similar to previous studies, they found that although China’s emissions are still quite volatile and can rise or drop significantly in the short run, the decrease seems to be stable for the long run.

There also seems to be a trend of decoupling emissions from economic rise — which means that even if China’s economy accelerates again, emissions will not rise accordingly (they would still rise, just not as much). This also suggests that China is shifting from a heavily industrial economy to a more service-based developed economy.

“We conclude that the decline of Chinese emissions is structural and is likely to be sustained if the growing industrial and energy system transitions continue. Government policies are also a sign that the decline in China’s emissions will carry on,” Guan comments. Furthermore, we can expect China to play a more pivotal role on the global scene

“In response to the US withdrawal from the Paris Agreement, China has increasingly assumed a leadership role in climate change mitigation, and its five-year progress reports under the agreement will be heavily scrutinised by the rest of the world.”

Direct policies also played an important role. For instance, a recent Chinese policy directive to cap coal at four billion metric tonnes per year requires its proportion in the energy mix to decrease from 64% in 2015 to around 58% by 2020. Furthermore, China also plans to introduce a nationwide emissions trading scheme by the end of the year.

It’s also worth noting that although China is the world’s biggest polluter, it also boasts the world’s biggest population — per capita, the US emits about 200% more than China.

So there are reasons for optimism, but it should still be a cautious optimism. Dr. Meng said:

“Both emissions and their underlying drivers will need to be carefully monitored, but the fact that China’s emissions have decreased for several years – and more importantly the reasons why – give hope for further decreases going forward.”

Journal Reference: ‘Structural decline in China’s CO2 emissions through transitions in industry and energy systems’, Dabo Guan, Jing Meng, David M Reiner, Ning Zhang, Yuli Shan, Zhifu Mi, Shuai Shao, Zhu Liu, Qiang Zhang and Steven J Davis, is published in Nature Geosciences on Monday July 2. DOI: 10.1038/s41561-018-0161-1

How much you’d pay for something depends on what prices you’ve seen recently

The value of products we encounter will influence how much we’re willing to pay for subsequent items, a new study suggests.

Price Tag.

Image via Pixabay.

People are willing to pay more for products after coming across low-priced ones and would be more stringy after encountering or browsing high-priced items, new research reveals. The paper points to a previously undiscovered element that guides consumer behavior.

“How people value an item is not a simple function of that item alone,” explains Kenway Louie, a research assistant professor at New York University’s Center for Neural Science and paper co-author.

“The valuation process is inherently relative, with people valuing the same exact item more or less depending on the environment they recently inhabited. Our study shows that rewards cannot be evaluated in isolation, but instead must be viewed through the lens of the recent past.”

Our brains heavily rely on comparisons when processing information instead of drawing on absolute judgments. In sensory data processing, for example, our perception of the stimuli is highly dependent of context: a gray square will appear darker to someone coming in from a bright environment than to someone in a dark room.

Cost blindness

However, the influence of sensory processing on decision-making is less well understood. That’s what the team behind the paper, which also included co-authors Paul Glimcher, a professor of neuroscience at the New York University (NYU) and Mel Khaw, now a post-doctoral researcher at Columbia University, wanted to find out. So they set about studying the impact different environments had on how people valued food items.

Towards that end, they set up an experiment where participants were shown 30 different items of food on a computer screen, and would then report how much they’d be willing to pay for each. The researchers then pooled all the responses, ranking them from highest to lowest price based on the answers.

The team wanted to see if the price of encountered items would change how much the participants were willing to pay for subsequent items. As such, participants were asked to look at the items again, but this time they were only shown the 10 lowest-valued items (a low “adapt block”). Then, they were asked how much they would pay for each of the 30 items. The reported prices were lower across the board following this step, for all participants and all of the 30 items, compared to the baseline trial.

Next, the researchers repeated the adapt block, but this time kept it high and only showed the 10 highest-rated items. After viewing them, the participants were willing to pay less for all 30 items in the study than they reported during the baseline phase.

The findings showcase how fundamental comparisons are in our decision-making process, even in situations where we think we’re perfectly objective.

“Collectively, these findings provide the first evidence that adaptation extends to the economic value we place on products,” explains Louie.

“Moreover, they suggest that adaptation is a universal feature of cognitive information processing.”

The paper “Normalized value coding explains dynamic adaptation in the human valuation process” has been published in the journal PNAS.

Gas cannister.

Aggressive driving burns up to 40% more fuel and can waste one dollar per gallon

Researchers from the DOE’s Oak Ridge National Laboratory say you should drive more sensibly — if you like saving money, that is. They’ve recently published a paper analyzing the impact patterns of aggressive driving, such as speeding and forceful breaking, have on fuel economy.

Gas cannister.

Image via Pixabay.

Aggressive driving doesn’t pay — unless you’re a gas pump. Oak Ridge National Laboratory researchers report that aggressive driving can slash fuel efficiency by between 10 to 40% in stop and go traffic, or between 15 to 30% at highway speeds in light-duty vehicles. All in all, it could end up costing you about $0.25 to $1 per gallon in wasted gas.

A burning question

The team started by analyzing previous studies to develop a new energy model that would be used for the paper. It was applied to two similar mid-sized sedans, one being a hybrid-electric vehicle (HEV) and the other a conventional gasoline vehicle. Both were run through driving experiments at the lab’s National Transportation Research Center, to see what difference in fuel consumption an aggressive driving style would cause. A point of particular interest for the team was to evaluate an HEV’s limitations when recapturing energy to replenish the battery during different levels of hard braking.

“The new vehicle energy model we created focused on the limitations of regenerative braking along with varying levels of driving-style aggressiveness to show that this could account for greater fuel economy variation in an HEV compared to a similar conventional vehicle,” said ORNL’s John Thomas, lead author of the paper.

“Our findings added credence to the idea that an aggressive driving style does affect fuel economy probably more than people think.”

In the end, the team’s result confirmed popular wisdom, often self-reported by drivers — aggressive driving does impact fuel economy. They also showed that HEVs are more sensitive to driving style than conventional gasoline vehicles, although HEVs almost always achieve much better fuel economy. All in all, driving aggressively could take up to one dollar from your pocket per gallon of gas burned.

So if you like money (of course you do), driving more sensibly could be just the thing to put save up. Plus, you and yours will be safer on the road and you’ll also go to sleep with a smile knowing you helped save the penguins. Win-win-WIN!

You can see the team’s full dataset on the government site fueleconomy.gov, a platform maintained by the ORNL for DOE’s Office of Energy Efficiency and Renewable Energy with data provided by the Environmental Protection Agency. The project aims to help consumers make informed fuel economy choices, along with other simple fuel-saving measures such as obeying posted speed limits, avoiding excessive idling or carrying too much weight, and using cruise control.

The paper “Fuel Consumption Sensitivity of Conventional and Hybrid Electric Light-Duty Gasoline Vehicles to Driving Style” has been published in the journal SAE International Journal of Fuels and Lubricants.

Shrinking economy.

Too much innovation wrecks weak economies, too much competition paralyzes strong ones, paper reports

Lacking in efficiency and stability, burgeoning economies might actually suffer if innovation comes too fast, or at too large a scale, a new paper reports. At the same time, highly mature economies put themselves at risk of collapse as they become too efficient and streamlined, it warns.

Shrinking economy.

Image credits Gerd Altmann.

Moderation seems to be the skeleton key to every aspect of life — including policy and economics. Changes that overshoot on what a country’s economic systems can actually deliver risk backfiring completely, and developing economies seem to be especially at risk in this regard. That’s why for them, innovation can actually grind the economy to a halt when dealt in large heapings rather than manageable spoon-fulls. But even fully-fledged economies aren’t safe, warns a paper led by Charles Brummitt, a postdoctoral research fellow at the Center for the Management of Systemic Risk at Columbia University, New York.

Buffer up!

Drawing on their background in economy and economical system modeling, the authors developed a theoretical framework that models how disruptions propagate in a modern economy. They found that such disruptions are the effect of “poverty traps” which limit the ability of emerging economies to develop — especially when there’s a big push to do so. At the same time, large economies tend to slowly fall back into these traps as a direct consequence of the market’s tendency to promote efficiency via competition.

And the Achilles’ heel of all these systems is the supply chain.

The paper started from the observation that while poor economies have lower outputs, as well as shorter supply and production chains, they’re much more prone to disruptions than mature economies — and experience them more often. Stronger economies, by contrast, have robust supply chains and complex economies but “are not immune to disruptions,” either. Here, problems usually arise because “competition drives firms to build lean supply chains,” so a single hitch in the chain can cause “large aggregate losses” across the whole system.

The authors report that hiccups in the supply chain can spread “contagiously” throughout the whole economy. This way, even a tiny original disruption can end up leaving a deep mark in an economy through a cascade effect that propagates the damage with every step.

Too big to rise

For under-developed economies, disruptions can be traced back to a host of factors associated with immature industrial and economic systems, such as faulty machinery, power shortages, logistical issues associated with poor infrastructure, work absenteeism, and so on.

Faced with such constraints, agents naturally scale back on their operations. They roll-back on their technological base (no need for cutting edge computers when there’s no reliable power in the grid) or shorten logistical chains to mitigate the impact of infrastructure, for example, all of which translate into a scale-down of production — both in regards to the quantity and quality of goods produces.

The flip-side is that this constant scaling-down process means that disruption sources become chronic — if the economy is bad, there’s no money to invest in power or infrastructure. If production chains are kept short to avoid issues, there’s no reason (and economic means) for longer and more stable chains to develop.

In this context, when an economic or industrial actor tries to scale up too much, the rest of the economy simply can’t sustain it. The enterprise either fails or scales back down. The authors use this argument to point out that our current way of trying to help such systems develop actually dooms them to constant under-development cycle. The best way to go about it, they argue, is to promote incremental improvements in the sustainability and stability of an economy, not its scale or scope.

“The big technological push that for a long time was the standard policy recommendation for underdeveloped countries is not the solution”, says paper co-author and University of Bocconi’s Department of Decision Sciences Prof. Vega-Redondo.

“Pushing these economies beyond the functionality of their system makes them even more dysfunctional. The solution is to proceed by gradual increases in technological complexity”.

Too small to stand

In mature economies, it’s actually too much efficiency that causes problems. Companies are in constant competition, and over time one actor imposes itself on the market. The more market share in its particular field it gathers, the more it pushes competitors out of business — and this weakens supply chains. Any issue with that one company will impact others who depend on its product or service, no matter what field they operate it. In turn, companies that depend on these latter ones will be impacted, and so on.

“Once the economy develops, these buffers are considered redundant and shrink. Eventually, the flip side of the coin is that, by becoming too lean, an economy becomes also more fragile,” Vega-Redondo explains.

“This is something you can see in our modern developed economies – think, for example, about the consequences of the 2011 earthquake off Japan‘s Pacific coast. Disruptions that had a relatively limited geographical and productive scope ended up imposing a major burden on the overall Japanese operations, both in Japan itself and abroad”.

Overall, the team argues that increasing the resilience of these supply chain “buffers” helps eliminate disturbances and promote general system health. For example, such measures might include having several suppliers instead of one for key industrial commodities — how that goal is reached is up for us to decide.

The paper “Contagious disruptions and complexity traps in economic development” has been published in the preprint journal ArXiv.

City sunset.

Urban heat island effect could almost triple the cost of climate change in cities, burn economies to a crisp

Cities might feel the heat of climate change almost twice as worse as the rest of the world due to the urban heat island effect, a new paper reports. Unless cities adapt to ensure more incoming energy is reflected or absorbed, this effect will put a huge dent in the economy, it further reads.

Tokyo.

Tokyo, one of the densest urban centers in the world. Not a place you want to be in on a warm day.

It’s a hot day, your apartment is stiffing, and the AC just doesn’t cut it — so you decide to take a stroll in the park by the water to cool down. Or maybe go on that long overdue hike and get a break from the city altogether. Congratulations! You’ve unknowingly felt the effects of and then counteracted the urban heat island effect.

There are millions more who, just like you, are feeling the heat. And that’s actually part of the problem. The ‘urban heat island effect’ is just what it sounds like. These areas of higher ambient temperatures form when natural surfaces like vegetation or water that tend to reflect or use incoming energy are replaced by artificial surfaces such as concrete or asphalt, that trap incoming natural heat (sunlight). The high concentration of cars, air conditioning heat sinks, people, and so on in cities also means there’s a lot of anthropic heat which further drives up ambient temperatures.

Throw climate change in the mix, and it’s only going to get worse. Worse enough, in fact, that it’s going to tank the economy.

Paying the cooling bills

Published by an international team of economists, the study is the first to look at how major cities will fare under global as well as local changes in climate — and it’s not at all encouraging. This analysis included 1,692 cities around the world to quantify the effects of rising temperatures throughout climate zones (and across countries and cultures) on urban GDP, the backbone of modern economies, and found that the costs of climate change for cities this century could be 2.6 higher than we’ve believed once you factor in the heat island effect.

Overall, the team reports that we’re likely looking at a decrease of 5.6% of Gross World Product product by the end of the century, but the effects won’t be distributed uniformly. In the worst-affected cities, for example, climate change-induced losses could shave off as much as 10.9% of GDP by the end of the century.

City sunset.

You could say the profits will melt away.
Image credits Rogerio Rogeriomda.

Particularly bad news since cities, although they cover only around 1% of Earth’s surface, churn out about 80% of Gross World Product, consume about 78% of the world’s energy, and house more than half of the world’s population.

So how do the two tie together?

Well, on the one hand, mean temperatures exceeding 13 degrees Celsius (or 55 Fahrenheit) seem to reduce human productivity, and unstable climate will also eat away at entrepreneurship, meaning that there’s less going into the lump sum we call GDP. On the other hand, higher temperatures mean higher expenses. We’ll use up more energy (which translates to costs) for cooling, there will be higher medical care costs due to falling air quality, lower productivity, even rioting, and healthcare costs associated with social unrest over lack of food and higher levels of aggression — all very nice stuff.

As a side-note, a lot of very important cities might not be viable anymore — no city, no city’s GDP.

The research puts the issue of climate change into perspective. The discussion today revolves around tackling this change — as it well should be. But at the same time, it’s easy to lose sight of the fact that local interventions to mitigate the effects of warming climate are equally important for our economies and quality of life.

“Any hard-won victories over climate change on a global scale could be wiped out by the effects of uncontrolled urban heat islands,” said Professor Richard S.J. Tol MAE, Professor of Economics at the University of Sussex, in a statement.

“We show that city-level adaptation strategies to limit local warming have important economic net benefits for almost all cities around the world.”

The paper further looks at the measures which could limit the costs of this effect, and whose implementation should, therefore, be a top priority for ruling bodies.

De-islanding

To find the most desirable solution, the team performed a cost-benefit analysis for a number of local policies including ‘cool’ pavements and roofs, which are designed to reflect sunlight and thus absorb less heat, increasing vegetation cover including green roofs, and so on.

One Central Park facades.

One Central Park, Sydney — because you can do good for the climate, bring down temperature, and look awesome while doing it.

Medium-scale implementation of cool pavements and roofs came out on top, echoing finds regarding climate change in general that mitigation is the best policy. Turning 20% of a city’s roofs and pavement surface to the cool variety would save up to 12 times their installation and maintenance costs and reduce ambient temperatures by 0.8 degrees Celsius over the following century — not a bad result. The 20% point is just the peak — implementing this policy on a wider scale will provide even more benefits but at a lower cost-efficiency. Another thing to keep in mind is that successful global climate change mitigation efforts, in general, will compound the effects of these local policies, so we should really be working on both fronts here. As Professor Tol concludes:

“It is clear that we have until now underestimated the dramatic impact that local policies could make in reducing urban warming. However, this doesn’t have to be an either/or scenario. In fact, the largest benefits for reducing the impacts of climate change are attained when both global and local measures are implemented together.”

“And even when global efforts fail, we show that local policies can still have a positive impact, making them at least a useful insurance for bad climate outcomes on the international stage.”

The full paper “A global economic assessment of city policies to reduce climate change impacts” has been published in the journal Nature Climate Change.

The world’s richest 8 people have more wealth than the world’s poorest 3,500,000,000

New estimates show that only eight people own more wealth than the world’s poorest 50%. As the global economy continues to develop, it mostly benefits the richest, while the poorest continue to suffer.

Poverty in Colombia. Image credits: Luis Pérez.

Oxfam is one of the world’s largest charity organizations, focused on the alleviation of poverty. In a new report, they highlight some highly disturbing facts about global economy — namely, the inequality and poverty running rampant through the world. Although it’s not peer-reviewed in a scientific journal, Oxfam has a long history of well-documented and thorough studies. Here are just some of the striking facts they found:

  • Since 2015, the richest 1% has owned more wealth than the rest of the planet.
  • Eight men now own the same amount of wealth as the poorest half of the world.
  • Over the next 20 years, 500 people will hand over $2.1 trillion to their heirs – a sum larger than the GDP of India, a country of 1.3 billion people.
  • The incomes of the poorest 10% of people increased by less than $3 a year between 1988 and 2011, while the incomes of the richest 1% increased 182 times as much.
  • A FTSE-100 CEO earns as much in a year as 10,000 people in working in garment factories in Bangladesh.
  • In the US, new research by economist Thomas Piketty shows that over the last 30 years the growth in the incomes of the bottom 50% has been zero, whereas incomes of the top 1% have grown 300%.
  • In Vietnam, the country‟s richest man earns more in a day than the poorest person earns in 10 years.

Governments and companies

As it so often happens, policy makers are at least partly to blame. Recent political events have brought an even bigger divisiveness in the planet, and this is something we must address fast if we want to tackle inequality.

“From Brexit to the success of Donald Trump‟s presidential campaign, a worrying rise in racism and the widespread disillusionment with mainstream politics, there are increasing signs that more and more people in rich countries are no longer willing to tolerate the status quo,” the report reads. “Why would they, when experience suggests that what it delivers is wage stagnation, insecure jobs and a widening gap between the haves and the have-nots? The challenge is to build a positive alternative – not one that increases divisions.”

Sign from the Occupy movement. Image credits: takomabibelot / Wiki Commons.

But it’s not just policymakers – big corporations are just as much to blame. For instance:

  • Apple allegedly paid 0.005% of tax on its European profits in 2014.
  • The world‟s 10 biggest corporations together have revenue greater than that of the government revenue of 180 countries combined.
  • In the UK, 10% of profits were returned to shareholders in 1970; this figure is now 70%.
  • one-third of the world‟s billionaire wealth is derived from inherited wealth, while 43% can be linked to cronyism – the practice of awarding your friends or relatives with high paying positions despite them not having the proper qualifications.
  • $7.6 trillion of wealth is hidden offshore.
  • Countries compete to attract the super-rich, selling their sovereignty. For an investment of at least £2m, you can buy the right to live, work and buy property in the UK and benefit from generous tax breaks. In Malta, a major tax haven, you can buy full citizenship for $650,000.

Myths and economy

Although it doesn’t tackle this issue directly, the report highlights some issues with capitalism itself – or rather with the way we are applying capitalism today. There are several myths held by numerous people, both from the general public and in high ranking positions (ie in national Parliaments). Oxfam argues that the current economy of the 1% is built on a set of false assumptions which lie behind many of the policies, investments, and activities of governments, business and wealthy individuals. These activities not only don’t help the poor, but further exacerbate the issues they are facing.

The report showcases 6 false beliefs, which we must overturn as soon as possible — or we risk social and economic inequality tearing our world apart.

False assumption #1: The market is always right, and the role of governments should be minimized.

This has been proven wrong time and time again. Privatization of public services (most notably health, education, and water) has repeatedly shown to exclude the poor and promote growing inequality and dissatisfaction with most of the population. Even worse, rampant corruption and cronyism distort markets at the expense of ordinary people

False assumption #2: Corporations need to maximize profits and returns to shareholders at all costs.

As shown above, shareholder profits have grown tremendously in recent decades, and the trend has been to grow them further at all costs. in 2010 almost three-quarters of revenue from Apple’s iPhone went to profits.

This puts a vast and unnecessary pressure on workers, farmers, consumers, suppliers, communities and the environment. Instead, there are many more constructive ways to organize businesses that contribute to greater prosperity for all, and plenty of existing examples of how to do this. Businesses need not be a funnel to concentrate wealth into the hands of the few at the expense of others; the wealthy few can grow their profits while also contributing to the prosperity of others.

Image credits: torbakhopper / Flickr.

False assumption #3: Extreme individual wealth is benign and a sign of success, and inequality is not relevant.

The amounts of wealth concentrated in too few hands – the majority male – is economically inefficient, politically corrosive, and undermines our collective progress. Inequality is detrimental to the progress of a society

False assumption #4: GDP growth should be the primary goal of policy making.

GDP fails to count the huge amount of unpaid work done by women across the world. It fails to take into account inequality, meaning that a country like Zambia can have high GDP growth at a time when the number of poor people actually increased. Last year, the Economist stated that GDP “is a deeply flawed gauge of prosperity, and getting worse all the time”. Because it is an average, using GDP per capita does nothing to take into account inequality

False assumption #5: Our economic model is gender-neutral.

Women are disproportionately in the least secure and lowest-paid jobs and they also do most of the unpaid care work – again, something which is not counted in GDP, but without which our economies would not function. The pay gap between the genders is significant.

False assumption #6: Our planet’s resources are limitless. This is not only a false

This is not only a false assumption, but one which could lead to catastrophic consequences for our planet. Our economic model is based on exploiting our environment and ignoring the limits of what our planet can bear. It is an economic system that is a major driver of runaway climate change. It now takes the planet one year and six months to replenish the stocks of renewable resources that humanity uses each year.

What we need in order to address these issues is governments that work for the people, and not for the rich elite. This could also be facilitated if companies collaborated more instead of competing. We have the technology and efficiency to ensure a prosperous future for the vast majority of the planet and yet we choose to concentrate this in the hands of few, while many suffer.

It boils down to one thing: the economy must work for the people, and not the other way around. As Oxfam puts it:

“We can and must build a more human economy before it is too late.”