Democracies are ill-suited to deal with climate change

It is tempting to say the problem is too abstract but the focus should be on the economy

Edward Luce
World Environment Inaction
© Matt Kenyon

Around my parents’ home on England’s south coast, global warming is proceeding so benignly that French champagne houses are buying up tracts of local hillsides. Trends like this have helped to temper the global north’s response to climate change over the last 30 years.

“Global warming is a terrible thing,” we tell ourselves. “But its main victims will tragically be in the poorer countries. Canadian mangoes anyone?”

Harrowing images of Australian bushfires and Californian wildfires should be blowing a hole in such complacency. But they also crystallise how hard it is for democracies to mobilise public action.

If images of Sydney enshrouded in smoke, or Napa Valley in flames, cannot arouse the voter’s imagination, what will?

Those hoping the world’s wealthiest countries will take more of a lead on climate change must confront three hard truths.

The first is that politicians struggle to look beyond the electoral cycle. It is hard enough for a government to invest in education, which can take years to show results. It is that much more difficult to take unpopular actions to reduce carbon dioxide output that might take generations to bear fruit, and even then go unrecognised.

In contrast to spending on education, investing in carbon reduction poses a free-rider problem.

If the US banned coal while Canada went ahead with its trans-mountain oil pipeline, the former would feel bamboozled. There is enough carbon in Canada’s oil sands to outweigh every virtuous action taken by the rest of the planet. It would take a very special country to do the right thing in the knowledge that selfish actions by its neighbours could render its sacrifices futile.

Consider Australia. Even if the Labor party had won last year’s general election, it would have had trouble making the case for radical action on climate change. Australia could cut its emissions to net zero and still suffer decades of record drought and fire.

As it happened, the Liberal party led by Scott Morrison, who mocks environmentalists, snatched victory and helped sabotage last month’s climate talks in Madrid. They broke up without agreeing on a global carbon-trading system chiefly because of objections from Australia and the US.

The second obstacle to climate change action is uncertainty. It is impossible to establish that any single disaster is entirely man-made. Despite the summer fires in Siberia, heat deaths in Pakistan and two once-in-a-century storms hitting Houston in two years, natural disasters occurred before the era of climate change. Scientists can give high probabilities that climate change is real but rarely certainty.

Even our vocabulary occludes clear thought. In the early 2000s, pollster Frank Luntz advised the Republicans to drop “global warming” in favour of “climate change” to drain it of urgency.

The latter sounded more like you were “going from Pittsburgh to Fort Lauderdale”, he wrote.

Perhaps green activists should take a leaf out of Mr Luntz’s book and stop saying “natural” before “disaster”. There is nothing natural about rapidly receding polar ice caps. Scientists should also do a better job of explaining that science rarely deals in absolutes. It is not certain that you will fall sick if you drink tap water in a cholera zone.

But you would be 100 per cent foolish to forgo the vaccine. Likewise, we should take a pinch of salt every time a politician raises statistical doubts. Climate change denial has largely been replaced with talk about scientific uncertainties.

The third obstacle is — how to put it? — human nature.

Few people want to confront a massive problem when there are petty scores to settle. This works on a global level as well as a personal one. I have spoken to people who are more exercised by Greta Thunberg’s mannerisms than with the content of her message. They find the fact that a 17-year-old girl is lecturing grown-ups on climate change more grating than the likely extinction of the Great Barrier Reef. We filter what we want to see.

Fox News viewers hear very little about the science that links climate change to Australia’s bush fires. Had a transgender activist started a fire one-thousandth the size, it would no doubt be dominating conservative airwaves. Yet Fox chairman Rupert Murdoch’s Bel Air home came close to being burnt by one of California’s 2017 fires.

How can we stave off fatalism?

In The Uninhabitable Earth, David Wallace-Wells says the world has pumped out more carbon dioxide since the 1992 Earth Summit in Rio de Janeiro than in the whole of preceding human history.

Meanwhile, Donald Trump, the US president, is more concerned about wind energy.

Last month he railed against the “tremendous fumes” generated when turbines are manufactured and said they “look like hell”.

If we want action, the best response is to talk about the economy. The age of abstract climate change is over. The 2018 fires cost California an estimated $400bn, according to Accuweather.

That is more than half the annual US defence budget. Even before the latest fires, Deloitte estimated that the economic costs to Australia of natural disasters would rise to A$39bn ($27bn) a year by 2050, equivalent to almost 2 per cent of the country’s current gross domestic product.

No amount of English champagne could make up for that.

The Dollar Is Even More Important Than You Know

Some official financial statistics don’t account for the use of foreign-exchange derivatives to create synthetic greenbacks

By Mike Bird

The growth of foreign-exchange swaps leaves more of what is effectively dollar debt hiding off balance sheets. Photo: Andrew Harrer/Bloomberg News

The share of the Japanese yen in global currency reserves hit a multidecade high last year.

Paradoxically, that may be a symptom of the world’s ravenous appetite for U.S. dollars.

According to International Monetary Fund data released at the end of the year, yen-denominated reserves reached 5.6% of the world’s total in the third quarter of 2019, the highest amount since the late 1990s.

But part of the reason for the uptick in holdings isn’t that investors have fallen in love with Japan. There is effectively money lying at the side of the road for investors who want to swap those yen into dollars.

An instrument called a cross-currency basis swap lets an investor holding a Japanese government bond swap the yen-denominated interest and principal for a dollar-denominated interest and principal received by their counterparty.

Simply put, buying short-term Japanese government debt and swapping it into dollars has provided greater returns than buying U.S. Treasurys of equivalent maturity.

Before the financial crisis, these persistent opportunities rarely existed: A U.S. Treasury bond would yield the same amount as a Japanese government bond swapped into U.S. dollars, as supply and demand changed the prices of the swaps.

But tighter regulations on bank balance sheets postcrisis have changed that, limiting the ability of financiers to arbitrage away the difference. The most common trade is in short-term bonds because the maturity of swaps is typically short too.

Unsurprisingly, foreign investors have piled into short-term Japanese government bonds.

Bills issued with a maturity of one year or less have shrunk as a portion of Japan’s overall debt, but the share owned by foreigners has risen from about 5% at the turn of the century to more than two-thirds today.

Most central banks don’t break down their holdings of foreign-exchange derivatives. But Goldman Sachs analysts note that the Reserve Bank of Australia does: It records 40.36 billion Australian dollars (US$28.04 billion) in yen-denominated assets, as of June 2019.

After accounting for its derivative holdings, its net yen exposure falls to just A$2.61 billion, while its U.S. dollar exposure more than doubles.

So though the data suggests that the yen’s share of global reserves is growing, and the U.S. dollar share has declined, it’s more difficult to tell for sure what’s happening. It’s likely that much of the accumulation of yen reserves masks synthetic U.S. dollar holdings.

The growth in foreign ownership of short-term Japanese debt is a particularly obvious form of financial engineering, but it isn’t the only source of yield pickups. Investors who really want dollars can construct a higher-yielding asset by pairing many European bonds with a cross-currency basis swap too.

The use of outright foreign-exchange forwards and swaps for dollars has ballooned in the past decade. The notional amount outstanding has risen 64% since its pre-financial crisis peak, to about $53 trillion in the first half of 2019.

The growth of foreign-exchange swaps leaves more of what is effectively dollar debt hiding off balance sheets around the world.

So when you hear about the potential decline of the greenback in international finance, remember the share that’s hidden in plain sight.

Can Latin America Avoid Another Lost Decade?

As Latin America enters the 2020s, it must take steps to ensure that the next five years are not lost. Yes, the international context will make a difference. But the region’s governments have it within their power to improve economic performance significantly.

José Antonio Ocampo

ocampo36_blackdovfx Getty Images_latinamericamap

BOGOTÁ – In the 1980s, Latin America endured a debt crisis so severe that the entire decade was “lost” to poor economic performance. Since then, other economies – most notably, Japan – have endured their own “lost decades.”

But, today, it is again Latin America that is facing difficulties. In fact, it has already lost five years.

Latin America has suffered through a half-decade of anemic growth for the second time since the 1980s, and its lowest-performing quinquennium since World War II.

In the region’s previous lost half-decade, after the 1997 East Asian crisis, annual GDP growth averaged 1.2%.

In 1980-1985 – the worst five years of the debt crisis – average growth amounted to 0.7%. Over the last five years, it reached a mere 0.4%.

This is partly the result of an unfavorable global environment, reflected in Latin America’s deteriorating terms of trade since 2014, the virtual stagnation of international trade overall, and two years of renewed financial turbulence in emerging economies.

But other developing regions have faced the same external headwinds, and every one of them has outperformed Latin America, not only in the last five years, but since 1990 – a period during which annual GDP growth in the region averaged just 2.7%.

Clearly, long-term domestic and regional factors are also contributing to Latin America’s underperformance. They have economic origins, but also reflect political crises and complex political transitions in several countries.

Nowhere are these political challenges more apparent than in Venezuela, which, despite having the world’s largest proven oil reserves, is in economic free fall. Since 2014, Venezuela’s GDP has contracted by more than 60% – one of the sharpest economic contractions in history for a country not at war.

Recent international sanctions have exacerbated Venezuela’s economic travails. But the problems began long ago, and have been fueled by the sharp political polarization and catastrophic economic policies of President Nicolás Maduro, the late Hugo Chávez’s handpicked successor.

Excluding Venezuela, Latin America’s average GDP growth rises, but only to 1% per year – still worse than the region’s last lost half-decade. This partly reflects the fact that the region’s largest economy, Brazil, experienced its deepest recession since WWII in 2015-2016, and has been recovering very slowly.

In Mexico, Latin America’s second-largest economy, President Andrés Manuel López Obrador (widely known as AMLO) pledged, upon taking office in December 2018, to achieve 4% annual GDP growth. Instead, the economy has stagnated, and even slipped into recession in the first half of 2019. Concerns about AMLO’s economic management have contributed to this outcome.

Elsewhere, Argentina has struggled with domestic macroeconomic imbalances, in addition to global financial turbulence and, more recently, concerns about the return of a Peronist government. Political turmoil in Ecuador, and more recently in Bolivia and Chile, has also undermined economic performance.

But Latin America’s economic problems began long before the current wave of economic and political instability. Latin America achieved faster growth – a 5.5% average annual rate – in the 30 years that preceded the lost decade of the 1980s, when state-led industrialization was the order of the day, than in the 30 years that followed it.

The economic orthodoxy that took hold three decades ago derided the state-led approach and urged Latin American countries to undertake market reforms that, so far, have failed to fulfill their promise.

On the contrary, countries’ dismantling of their industrial policies – together with the repercussions of the debt crisis, the “Dutch disease” effects of the commodity-price super-cycle after 2003, and rising competition from China – led to premature de-industrialization.

Specifically, manufacturing’s share of GDP has been declining fairly consistently since the 1980s, to the point that current levels are similar to those in the 1950s. While a shift away from manufacturing is a natural upshot of economic development, it began in Latin America at much lower income levels than in the developed countries, making it far more difficult for the region to escape the “middle-income trap.”

Though Chinese demand for Latin American commodity exports has boomed over the last decade, it remains insufficient to offset manufacturing losses.

Undermining Latin America’s prospects further are its low levels of investment in research and development: about 0.7% of GDP, on average.

That is about one-third of what China (2.1%) and the OECD countries (2.6%) spend.

In Latin America, only Brazil invests more than 1% of GDP in R&D.

During the Fourth Industrial Revolution, no economy can compete, let alone rise from middle- to high-income status, without a strong capacity for innovation.

Latin America’s lost half-decade has had severe social consequences. From 2002 to 2014, poverty declined rapidly in the region, and inequality – which had risen during the 1980s and 1990s – was on a downward trend. Since then, progress on inequality has stalled – income distribution has remained relatively constant since 2010-2011 – and poverty has increased.

As Latin America enters the 2020s, it must take steps to ensure that the next five years are not lost. Yes, the international context will make a difference. But the region’s governments have it within their power to improve economic performance significantly.

They can foster re-industrialization (including by pursuing greater regional economic integration, thereby supporting intra-regional trade in manufactured goods) and invest in science and technology.

Together with active social policies, such growth-enhancing measures can enable Latin America to regain its economic footing and lay the foundations for a better future for its people.

José Antonio Ocampo is a board member of Banco de la República, Colombia’s central bank, a professor at Columbia University, and Chair of the UN’s Committee for Development Policy. He was Minister of Finance of Colombia and United Nations Under-Secretary-General for Economic and Social Affairs. He is the author of Resetting the International Monetary (Non)System, and co-author (with Luis Bértola) of The Economic Development of Latin America since Independence.

 The horrible housing blunder

The West’s biggest economic policy mistake

Its obsession with home ownership undermines growth, fairness and public faith in capitalism


Economies can suffer both sudden crashes and chronic diseases. Housing markets in the rich world have caused both types of problem. A trillion dollars of dud mortgages blew up the financial system in 2007-08. But just as pernicious is the creeping dysfunction that housing has created over decades: vibrant cities without space to grow; ageing homeowners sitting in half-empty homes who are keen to protect their view; and a generation of young people who cannot easily afford to rent or buy and think capitalism has let them down.

As our special report this week explains, much of the blame lies with warped housing policies that date back to the second world war and which are intertwined with an infatuation with home ownership. They have caused one of the rich world’s most serious and longest-running economic failures. A fresh architecture is urgently needed.

At the root of that failure is a lack of building, especially near the thriving cities in which jobs are plentiful. From Sydney to Sydenham, fiddly regulations protect an elite of existing homeowners and prevent developers from building the skyscrapers and flats that the modern economy demands.

The resulting high rents and house prices make it hard for workers to move to where the most productive jobs are, and have slowed growth. Overall housing costs in America absorb 11% of GDP, up from 8% in the 1970s. If just three big cities—New York, San Francisco and San Jose—relaxed planning rules, America’s GDP could be 4% higher.

That is an enormous prize.

As well as being merely inefficient, housing markets are deeply unfair. Over a period of decades, falling interest rates have compounded inadequate supply and led to a surge in prices.

In America the frenzy is concentrated in thriving cities; in other rich countries average national prices have soared, especially in English-speaking countries where punting on property is a national sport.

The financial crisis did not kill off the trend. In Britain inflation-adjusted house prices are roughly equal to their pre-crisis peak, while real wages are no higher. In Australia, despite recent falls, prices remain 20% higher than in 2008. In Canada they are up by half.

The soaring cost of housing has created gaping inequalities and inflamed both generational and geographical divides. In 1990 a generation of baby-boomers, with a median age of 35, owned a third of America’s real estate by value.

In 2019 a similarly sized cohort of millennials, aged 31, owned just 4%. Young people’s view that housing is out of reach—unless you have rich parents—helps explain their drift towards “millennial socialism”.

And homeowners of all ages who are trapped in declining places resent the windfall housing gains enjoyed in and around successful cities.

In Britain areas with stagnant housing markets were more likely to vote for Brexit in 2016, even after accounting for differences in income and demography.

You might think fear and envy about housing is part of the human condition. In fact, the property pathology has its roots in a shift in public policy in the 1950s towards promoting home ownership. Since then governments have used subsidies, tax breaks and sales of public housing to encourage owner-occupation over renting. Politicians on the right have seen home ownership as a way to win votes by encouraging responsible citizenship. Those on the left see housing as a conduit for redistribution and for nudging poorer households to build wealth.

These arguments are overstated. It is hard to show whether property ownership makes better citizens. If you ignore leverage, it is usually better to own shares than to own homes. And the cult of owner-occupation has huge costs. Those who own homes often become nimbys who resist development in an effort to protect their investments.

Data-crunching by The Economist suggests that the number of new houses constructed per person in the rich world has fallen by half since the 1960s. Because supply is constrained and the system is skewed towards ownership, most people feel they risk being left behind if they rent.

As a result politicians focus on subsidising marginal buyers, as Britain has done in recent years. That channels cash to the middle classes and further boosts prices. And it fuels the build-up of mortgage debt that makes crises more likely.

It does not have to be this way. Not everywhere is afflicted with every part of the housing curse. Tokyo has no property shortage; between 2013 and 2017 it put up 728,000 dwellings—more than England did—without destroying quality of life. The number of rough sleepers has dropped by 80% in the past 20 years.

Switzerland gives local governments fiscal incentives to allow housing development—one reason why there is almost twice as much home-building per person as in America. New Zealand recoups some of homeowners’ windfall gains through land and property taxes based on valuations that are frequently updated.

Most important, in a few places the rate of home ownership is low and no one bats an eyelid. It is just 50% in Germany, which has a rental sector that encourages long-term tenancies and provides clear and enforceable rights for renters. With ample supply and few tax breaks or subsidies for owner-occupiers, home ownership is far less alluring and the political clout of nimbys is muted.

Despite strong recent growth in some cities, Germany’s real house prices are, on average, no higher than they were in 1980.

A home run

Is it possible to escape the home-ownership fetish?

Few governments today can ignore the anger over housing shortages and intergenerational unfairness. Some have responded with bad ideas like rent controls or even more mortgage subsidies. Yet there has been some progress.

America has capped its tax break for mortgage-interest payments.

Britain has banned murky upfront fees from rental contracts and curbed risky mortgage lending.

A fledgling yimby—“yes in my backyard”—movement has sprung up in many successful cities to promote construction. Those, like this newspaper, who want popular support for free markets to endure should hope that such movements succeed.

Far from shoring up capitalism, housing policies have made the system unsafe, inefficient and unfair. Time to tear down this rotten edifice and build a new housing market that works.

Dystopia Is Arriving in Stages

Science fiction has a warning about developing mind-reading technology without any proper framework for how to control it. It should be heded.

Alexander Friedman

afriedman17_Matjaz Slanic Getty Images_brainwavesmindreaddata

NEW YORK – It is commonly believed that the future of humanity will one day be threatened by the rise of artificial intelligence (AI), perhaps embodied in malevolent robots.

Yet as we enter the third decade of the millennium, it is not the singularity we should fear, but rather a much older enemy: ourselves.

Think less The Terminator, more Minority Report.

We are rapidly developing literal mind-reading technology without any framework for how to control it.

Imagine, for a moment, if human beings had evolved to be able to read each other’s minds.

How would that have gone for us?

To answer this question, consider your own internal dialogues. It is safe to assume that every one of us has had thoughts that would be shocking even (or especially) to those closest to us. How would those who might not wish us well have reacted to being able to hear what emotional rants go through our heads from time to time?

Would they have had the judgment to let them pass, recognizing them as just flashes of emotion? Or would some have responded opportunistically, taking advantage of thoughts we would otherwise not wish to betray?

Evolution did not enable us to read minds because that power might have ended our existence as a species. Instead, as our ancient ancestors organized into groups for protection, most of us learned what could be said and what was best left unspoken.

Over time, this became a highly evolved human trait that enabled societies to form, cities to rise, and even hundreds of stressed out people to be jammed into a flying tube, usually without attacking their seat-mates. It forms a core part of what we now call EQ, or emotional intelligence.

And yet technology is now beginning to threaten this necessary evolutionary adaptation in a fundamental way.

The first stage has taken place in social media. Facebook underscored this trajectory, when Russian manipulation of the platform affected the United States’ presidential election in 2016.

And Twitter, which empowers a user to dash off a passing thought or emotion that might then be shared with millions, amplifies this trend.

Imagine how North Korean leaders struggled to interpret President Donald Trump’s tweet of nuclear “fire and fury.”

Was it a real threat from a new and erratic US leader, or just a spur-of-the-moment exhalation, a mental flash without a filter that would best be ignored?

Back in the days of the bipolar superpower world, the iconic US-Soviet hotline phone was installed as a way to clarify each side’s intentions, lest through some misunderstanding the world might otherwise disappear beneath a nuclear mushroom cloud.

Today, in our much more complicated multipolar and asymmetric-threat-driven world, social media offers all who are willing a giant, unedited megaphone. Social media has become a tool that can undermine democracy; and yet it is mere child’s play compared to what is now barreling our way.

Companies ranging from start-ups to multinational conglomerates have recently announced startling innovations that enable mind reading.

Elon Musk’s company Neuralink is seeking approval for human trials of a device implanted in users’ brains to read their minds.

Nissan has developed “Brain-to-Vehicle” technology that enables a car to read instructions from a driver’s mind.

Facebook has funded scientists that use brainwaves to decode speech.

A recent paper in the science journal Nature explains how AI can create speech by analyzing brain signals.

Researchers at Columbia University have developed technology that can analyze brain activity to determine what a user wants and vocalize those desires via a synthesizer.

Clearly, these kinds of advances can offer real benefits, including helping those suffering from paralysis or neurological disorders.

Early examples of neuroprosthetics, such as cochlear implants, which enable a deaf person to hear, or promising devices that could allow the blind to see, are already in use.

But there are also darker potential applications, like enabling advertisers to micro-hone their offerings to individuals’ unspoken desires, or employers to spy on their workers, or police to monitor citizens’ possible criminal intent on a vast scale, akin to the way London residents today are tracked on CCTV.

An early warning is ToTok, one of the most downloaded social-media apps, which, it was recently revealed, the United Arab Emirates government had been using to spy on users. And what happens if mind-reading devices are hacked? It is difficult to imagine a more relevant area of data privacy than that which exists in the human brain.

Musk believes that brain interfaces will be necessary for humans to keep up with AI.

This brings us back to Philip K. Dick’s science fiction horror story “The Minority Report” (the basis of the 2002 film).

Consider the myriad of thorny ethical, legal, and social-order implications of a policeman stopping a crime before it takes place because he or she could “assess” an individual’s likely intent by reading their brainwaves.

When is a crime committed? When the thought takes place? When actions begin that manifest the thought in reality? When the gun is pointed? When the trigger finger tightens?

A principal challenge of technological innovation is that it usually takes society a long time to catch up, understand the broader implications of how the new technology can be used and abused, and provide appropriate legal and regulatory frameworks to regulate its conduct.

In the second decade of this millennium, social media moved from a tool to connect to a platform with immense power to spread lies and manipulate elections.

Society is now grappling with how to harness the best of this innovation, while mitigating its potential for abuse.

Perhaps, before we have even figured that out, the third decade of the millennium will confront us with far more consequential technological challenges.

Alexander Friedman, an investor, is a former Chief Executive Officer of GAM Investments, Chief Investment Officer of UBS, Chief Financial Officer of the Bill & Melinda Gates Foundation, and White House Fellow.