Time to rethink monetary policy

15 02 2019

How this great article went under my radar, I do not know……. another classic from the Consciousness of Sheep.

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When the first stuffed platypus was presented to European scientists, they dismissed it.  “What we have here,” they opined, “is some unfortunate lutrinae onto which some scoundrel has attached various anatidae parts.”  And so the innocent little platypus, which had been minding its own business until the European explorers arrived, was placed on the same zoological shelf as the Yeti.

The European scientists, you see, had a model.  A map of how the world’s animal species were ordered.  At the apex, predictably, were humans themselves.  Beneath them were anatomically similar apes and monkeys; followed by cats, dogs, pigs, etc.  What all of these “higher” species had in common, however, was that they were all mammals – creatures that carry their young in an internal womb, and that suckle them with milk.  This distinguished them from other, dissimilar species like birds, reptiles, amphibians and insects.

Then along comes this upstart platypus, not just looking like it possesses bird parts, but having the audacity to lay eggs!  For several decades, despite growing evidence that platypuses were real, European scientists continued to dismiss these reported sightings as fake news.  The platypus was an unfortunate intrusion into the scientists’ neatly ordered model of how the world worked.  Despite the philosophy of science demanding that a fact – like the existence of a platypus – that disproves a model is the very essence of falsifiability, the scientists chose to reject the fact rather than deconstruct and rebuild their model.

The same European scientists later – and infamously – rejected evidence for the existence of one of the platypus’s neighbours… the black swan… which brings us to a modern pseudoscience that also famously rejects reality in order to preserve the models that it has spent decades finessing.

Economic models have already proved their – very negative – worth in the worst possible way in the shape of the 2008 financial crash and the ensuing global depression.  This ought to have been enough for the entire economics profession to be given their marching orders and afforded their true place alongside aromatherapists, astrologers and homeopaths.  However, in 2008, governments lacked any acceptable alternative.  So despite knowing that an economic forecast was of equal value to flipping a coin, they put the same economists who had broken the system in charge of fixing it.

The economists did no such thing, of course.  The financial crisis of 2008 was the platypus of our age; something so out of step with the models that it could not reasonably be incorporated into them.  They even used the term “black swan” to describe it.

Any examination of the real economy over centuries, however, demonstrates that cyclical period of boom and bust – frequently punctuated by major financial crashes – are in fact the norm.  It is the so-called “Great Moderation” in the economists’ model that is the aberration… the thing so out of step with reality that it can reasonably be dismissed as fake news.

This, however, is merely the most obvious flaw in an economic model that is based on anomalies.  Most importantly, almost everything that economists are taught about how the economy works is based on what happened in the course of the two decade long mother of all anomalies; the post war boom 1953-1973.  As historian Paul Kennedy explains:

“The accumulated world industrial output between 1953 and 1973 was comparable in volume to that of the entire century and a half which separated 1953 from 1800.  The recovery of war-damaged economies, the development of new technologies, the continued shift from agriculture to industry, the harnessing of national resources within ‘planned economies,’ and the spread of industrialization to the Third World all helped to effect this dramatic change.  In an even more emphatic way, and for much the same reasons, the volume of world trade also grew spectacularly after 1945…”

In other words, economic modelling based on how the economy operated in the decades prior to the First World War might provide a closer fit to the real world in 2018.  The same is true for interest rates. As political economist Mark Blyth has shown, economists have modelled interest rates on the two decades around the historical high point in 1981.  However, for the entire period following the introduction of derivatives by the Dutch in the sixteenth century, the average interest rate is below four percent.

This is no trifling academic issue.  Interest rates have become the primary means by which economists – to whom our politicians have handed the leavers [I can’t make up my mind whether this is a typo, a Freudian slip, or a very clever pun!] of power – seek to manage the economy.  The aim of “monetary policy” being to raise interest rates sufficiently high to prevent a recurrence of the inflation of the 1970s, while keeping them sufficiently low that they do not trigger or exacerbate a repeat of the 2008 crash.

The problem with this as of 2018 is that despite close to zero percent interest rates – and trillions of dollars, euros, pounds and yen in stimulus packages – the rate of inflation has barely moved.  Indeed, with growth rates stalling in the USUK and Eurozonedeflation is more likely than inflation.  Despite this, the Federal Reserve, Bank of England and European Central Bank remain committed to raising interest rates and reversing quantitative easing… because that is what their model tells them that they should do.

Central to the model is a belief – based on those anomalous decades when we had growth on steroids and interest rates to match – that employment causes inflation.  So with the official rate of unemployment in the USA standing at 4.1 percent and the UK at 4.2 percent, the model is telling the economists at the central banks that inflation is already running out of control… even though it isn’t.  As Constance Bevitt, quoted in the New York Times puts it:

“When they talk about full employment, that ignores almost all of the people who have dropped out of the economy entirely. I think that they are examining the problem with assumptions from a different economic era. And they don’t know how to assess where we are now.” [It’s occurred to me that lots of baby boomers, such as myself, have now retired and dropped out of ‘the workforce’, and none of this is taken into account…]

Larry Elliott at the Guardian draws a similar conclusion about the UK:

“Britain’s flexible labour market has resulted in the development of a particular sort of economy over the past decade: low productivity, low investment and low wage. Since the turn of the millennium, business investment has grown by about 1% a year on average because companies have substituted cheap workers for capital. Labour has become a commodity to be bought as cheaply as possible, which might be good for individual firms, but means people have less money to buy goods and services – a shortfall in demand only partly filled by rising levels of debt. The idea that everyone is happy with a zero-hour contract is for the birds.

“Workers are cowed to an extent that has surprised the Bank of England. For years, the members of Threadneedle Street’s monetary policy committee (MPC) have been expecting falling unemployment to lead to rising wage pressure, but it hasn’t happened. When the financial crisis erupted in August 2007, the unemployment rate was 5.3% and annual wage growth was running at 4.7%. Today unemployment is 4.2% and earnings are growing at 2.8%.”

This is a very different economy to the one that operated between 1953 and 1973; a time when the workers’ share of productivity rose consistently.  In those days a semi-skilled manual worker had a sufficient wage to buy a home, support a family, run a car and afford a holiday.  In 2018, a semi-skilled manual worker living in the UK depends upon foodbanks and tax credits to remain solvent.

In short, despite mountains of evidence that the economists’ model bears no relation to the real world, like their nineteenth century zoological counter parts, they continue to reject any evidence that disproves the model as fake news.  One obvious reason for this is that all of us – whatever our specialisms – get a sinking feeling of despondency when some inconvenient fact comes along to tell us that it is time to go back to the drawing board.  Understandably, we test the inconvenient fact to destruction before deconstructing our models.  But even when the fact proves sufficiently resilient to be considered to be true, there remains the temptation to sweep it under the proverbial carpet and pretend that nothing is amiss.

There is, however, another reason why so many economists spend so many of their waking hours studiously ignoring reality when it whacks them over the head with the force of a steam hammer.  They simply do not see it.  That is, if you are on the kind of salary enjoyed by a member of one or other monetary policy committee, your lived experience will be so removed from the experience of ordinary working (and not working) people that you simply refuse to believe them when – either by anecdote or statistic – they inform you of just how bad things are down on Main Street.

The two proposed solutions to this latter problem involve the question of diversity.  Among its other work, the campaign group Positive Money has highlighted the race and gender disparity at the Bank of England.  However, were we to just swap some white male mainstream economists for some equivalent BME and female mainstream economists, this is unlikely to have much impact.  A second approach to diversity from radical economists such as Ann Pettifor is to break up the neoclassical economists’ monopoly by bringing in economists from different schools of economics.

Arguably, however, neither of these proposed solutions would be sufficient to solve the problem of economists refusal to allow facts to stand in the way of their models.  For this, something even more radical is required – a complete rethink of the way monetary policy is made.  The 2008 crash and the decade of near stagnation for 80 percent of us that followed has demonstrated that the approach of handing economic policy to technocrats has failed.  The unelected Bank of England or Federal Reserve Chairman can no longer be allowed to be the final authority.  Policy must ultimately reside with elected representatives  whose jobs are on the line if they mess up.

Of course it is entirely reasonable that our representatives base their decisions on the advice and recommendations of experts.  It is here that real diversity is required.  Not merely swapping white male economists for black female ones, or opening the door just wide enough for some token contrarian economists.  Rather, what is needed is for monetary policy committees to encompass a range of specialisms far beyond economics and the social sciences, together with representatives from trades unions, charities and business organisations that are more in touch with the realities of life in the real economy.

None of this is about to happen any time soon; not least because nobody voluntarily relinquishes power and privilege.  But another crisis is brewing; and there are signs that it will be bigger than 2008.  And when that crisis bursts over us, this time around we need to put these changes in place before the economists rally round and persuade our craven politicians that there is no alternative… because there is.





467 ways to die on a warming planet

17 12 2018

A new study published in Nature has found evidence for 467 ways in which climate hazards due to global warming are making life on the planet harder for humans. It confirms that we are witnessing a shift in the functioning of the Earth system as a whole, a shift to a new state that is unsympathetic to the continued flourishing of human life.

A changing climate is only one feature of a warming globe. Human activity has bounced the Earth into a state that has no equivalent in its 4.5 billion year history.

Clive Hamilton

The Earth’s new trajectory as it spins into the future has led scientists to tell us we have entered a new geological epoch, the Anthropocene. We have crossed a threshold and the geological clock cannot be turned back. The disruption we have caused is increasingly unpredictable and uncontrollable, and it has no endpoint.

There are, therefore, two questions humankind must face. What must we do to prevent serial disasters becoming existential catastrophe? And how can we make our social and economic systems flexible enough to cope with the new dispensation?

There are several reasons an international agreement has proven so hard. The leading one is sabotage by climate science deniers. Can it be countered? Climate science denial was invented and propagated mainly in the United States by the fossil fuel industry in the 1990s and early 2000s.

Activists know how to thwart an industry lobbying campaign. But then something calamitous happened – rejecting climate science became caught up in the culture war. The Tea Party and Fox News were largely responsible for the shift. Before then, even a conservative like Sarah Palin accepted the science and called for action. But after 2009, rejecting climate science became a badge of political identity for conservatives.

From that point onwards, facts no longer mattered.

So the challenge is no longer how to use information to change people’s minds. The challenge is how to change a culture. No one knows how to do that.

Yet it’s too easy to blame the world’s slowness to act on crazy American deniers. Because, in a way, we are all climate science deniers.

The full truth of what humans have done is almost impossible to take in. To fully embrace the message of the climate scientists means giving up the deepest presupposition of modernity – the idea of progress. Relinquishing our belief in progress means we must let go of the future, because we have been taught from infancy that the future is progress.

In our minds, replacing the old future defined by progress with a new future defined by endless struggle requires a period of grieving. Not many people have the stomach for that.

While most people in most countries accept the truth of climate science, they don’t accept its implications. What can be done to change that?

When it comes to communicating the science’s message to the public, there is no magic potion to be found. A lot has been tried and some of it works reasonably well, up to a point. The scientists must keep doing their research and putting it out. Accusing them of alarmism is a calculated political slander; in truth, they have consistently been too cautious in their warnings, especially in IPCC reports.

Yet the meaning of their reports has not sunk in. It’s clear that an Earth warmer by four degrees – and after the unwinding of the 2015 Paris agreement that is the path we have returned to – will impose enormous stresses on all societies.

In poorer countries, it will lead to mass migrations, many deaths and violent conflict. The effects in wealthy countries will depend on who holds power and how they govern. Disasters, food shortages and waves of immigration will magnify resentment against the rich, who will be attempting to insulate themselves from the turmoil around them.

But they too depend on the infrastructure of urban life – electricity and water supply, sewerage and waste disposal, transport systems for food and so on. And they can’t insulate themselves from social upheaval.

Some communities will learn to adapt more effectively. Smaller, cooperative communities will be best placed to adapt themselves to endure the troubles.

But however humans live or die on the new Earth we have made, we are approaching the endpoint of modernity and must accept that it is finally true that man is the environment of man.

• Clive Hamilton is professor of public ethics at Charles Sturt University in Canberra and author of Defiant Earth: The fate of humans in the Anthropocene





How a single word sparked a four-year saga of climate fact-checking and blog backlash

13 07 2016

Joelle Gergis, University of Melbourne

In May 2012, my colleagues and I had a paper accepted for publication in the Journal of Climate, showing that temperatures recorded in Australasia since 1950 were warmer than at any time in the past 1,000 years.

Following the early online release of the paper, as the manuscript was being prepared for the journal’s print edition, one of our team spotted a typo in the methods section of the manuscript.

While the paper said the study had used “detrended” data – temperature data from which the longer-term trends had been removed – the study had in fact used raw data. When we checked the computer code, the DETREND command said “FALSE” when it should have said “TRUE”.

Both raw and detrended data have been used in similar studies, and both are scientifically justifiable approaches. The issue for our team was the fact that what was written in the paper did not match what was actually done in the analysis – an innocent mistake, but a mistake nonetheless.

Instead of taking the easy way out and just correcting the single word in the page proof, we asked the publisher to put our paper on hold and remove the online version while we assessed the influence that the different method had on the results.

Enter the bloggers

It turned out that someone else had spotted the typo too. Two days after we identified the issue, a commenter on the Climate Audit blog also pointed it out.

The website’s author, Stephen McIntyre, proceeded to claim (incorrectly) that there were “fundamental issues” with the study. It was the start of a concerted smear campaign aimed at discrediting our science.

As well as being discussed by bloggers (sometimes with a deeply offensive and sexist tone), the “flaw” was seized upon by sections of the mainstream media.

Meanwhile, our team received a flurry of hate mail and an onslaught of time-consuming Freedom of Information requests for access to our raw data and years of our emails, in search of ammunition to undermine and discredit our team and results. This is part of a range of tactics used in Australia and overseas in an attempt to intimidate scientists and derail our efforts to do our job.

Bloggers began to accuse us of conspiring to reverse-engineer our results to dramatise the warming in our region. Former geologist and prominent climate change sceptic Bob Carter published an opinion piece in The Australian claiming that the peer-review process is faulty and climate science cannot be trusted.

Checking the facts

Meanwhile, we set about rigorously checking and rechecking every step of our study in a bid to dispel any doubts about its accuracy. This included extensive reprocessing of the data using independently generated computer code, three additional statistical methods, detrended and non-detrended approaches, and climate model data to further verify the results.

The mammoth process involved three extra rounds of peer-review and four new peer-reviewers. From the original submission on 3 November, 2011, to the paper’s re-acceptance on 26 April, 2016, the manuscript was reviewed by seven reviewers and two editors, underwent nine rounds of revisions, and was assessed a total of 21 times – not to mention the countless rounds of internal revisions made by our research team and data contributors. One reviewer even commented that we had done “a commendable, perhaps bordering on an insane, amount of work”.

Finally, today, we publish our study again with virtually the same conclusion: the recent temperatures experienced over the past three decades in Australia, New Zealand and surrounding oceans are warmer than any other 30-year period over the past 1,000 years.

Our updated analysis also gives extra confidence in our results. For example, as the graph below shows, there were some 30-year periods in our palaeoclimate reconstructions during the 12th century that may have been fractionally (0.03–0.04℃) warmer than the 1961–1990 average. But these results are more uncertain as they are based on sparse network of only two records – and in any event, they are still about 0.3℃ cooler than the most recent 1985–2014 average recorded by our most accurate instrumental climate network available for the region.

Comparison of Australasian temperature reconstructions. Red: original temperature reconstruction published in the May 2012 version of the study; green: more recent reconstruction published in Nature Geoscience in April 2013; black: newly published reconstruction; orange: observed instrumental temperatures. Grey shading shows 90% uncertainty estimates of the original 2012 reconstruction; purple shading shows considerably expanded uncertainty estimates of the revised 2016 version based on four statistical methods. The recent 30-year warming (orange line) lies outside the range of temperature variability reconstruction (black line) over the past 1,000 years.

Overall, we are confident that observed temperatures in Australasia have been warmer in the past 30 years than every other 30-year period over the entire millennium (90% confidence based on 12,000 reconstructions, developed using four independent statistical methods and three different data subsets). Importantly, the climate modelling component of our study also shows that only human-caused greenhouse emissions can explain the recent warming recorded in our region.

Our study now joins the vast body of evidence showing that our region, in line with the rest of the planet, has warmed rapidly since 1950, with all the impacts that climate change brings. So far in 2016 we have seen bushfires ravage Tasmania’s ancient World Heritage rainforests, while 93% of the Great Barrier Reef has suffered bleaching amid Australia’s hottest ever sea temperatures – an event made 175 times more likely by climate change. Worldwide, it has never been hotter in our recorded history.

Speed vs accuracy

There are a couple of lessons we can take away from this ordeal. The first is that it takes far more time and effort to do rigorous science than it does to attack it.

In contrast to the instant gratification of publishing a blog post, the scientific process often takes years of meticulous evaluation and independent expert assessment.

Yes, we made a mistake – a single word in a 74-page document. We used the word “detrended” instead of “non-detrended”. Atoning for this error involved spending four extra years on the study, while withstanding a withering barrage of brutal criticism.

This brings us to the second take-home message. Viciously attacking a researcher at one of Australia’s leading universities as a “bimbo” and a “brain-dead retard” doesn’t do much to encourage professional climate scientists to engage with the scores of online amateur enthusiasts. Worse still, gender-based attacks may discourage women from engaging in public debate or pursuing careers in male-dominated careers like science at all.

Although climate change deniers are desperate to be taken seriously by the scientific community, it’s extremely difficult to engage with people who do not display the basic principles of common courtesy, let alone comply with the standard scientific practice of submitting your work to be scrutinised by the world’s leading experts in the field.

Despite the smears, a rummage through hundreds of our emails revealed nothing but a group of colleagues doing their best to resolve an honest mistake under duress. It wasn’t the guilty retreat from a flawed study produced by radical climate activists that the bloggers would have people believe. Instead, it showed the self-correcting nature of science and the steadfast dedication of researchers to work painstakingly around the clock to produce the best science humanly possible.

Rather than take the easy way out, we chose to withdraw our paper and spent years triple-checking every step of our work. After the exhaustive checking, the paper has been published with essentially the same conclusions as before, but now with more confidence in our results.

Like it or not, our story simply highlights the slow and unglamorous process of real science in action. In the end, this saga will be remembered as a footnote in climate science, a storm in a teacup, all played out against the backdrop of a planet that has never been hotter in human history.

The Conversation

Joelle Gergis, ARC DECRA Climate Research Fellow, School of Earth Sciences, University of Melbourne

This article was originally published on The Conversation. Read the original article.