Does rapid credit and asset price growth predict financial crises?
Core argument: When credit and asset prices grow rapidly over three years, the probability of a financial crisis within the next three years rises to 40%, versus 7% in stable periods, according to historical data.
Historical data indicates that rapid credit and asset price growth significantly increases the likelihood of financial crises. Specifically, when credit and asset prices grow rapidly over three years, the probability of a crisis within the next three years rises to 40%, compared to 7% in stable periods. The "R-zone" indicator, identifying periods of potential credit-market overheating, shows a 13% crisis probability at a 1-year horizon for business credit growth and 14% for household credit growth. This predictability suggests that macro-financial policies should counteract credit booms. Notably, 63% of crises were preceded by an R-zone event, and global R-zone variables enhance crisis predictability. For instance, Germany's crisis probability was 37% in 2007 due to global factors, leading to a crisis in 2008. Additionally, R-zone events forecast GDP contractions, with rapid credit growth predicting lower GDP growth over the medium term.
Ed Comment::…Add to global warming. I don't know how much of the research the author who is reviewing Stiglitz's review of lomborg's book) cites is propaganda from the fossil fuel industry and other dubious sources, but it's pretty shocking if it's half true. The cost of remediation is astronomical. As discussed below, Stiglitz considers the IPCC report “Global Warming of 1.5°C” to be a pillar of rigorous analysis. And so let us quote the supporting documentation (page 2-78) on the cost of climate policy: The midpoint of the range for 2030 is $3,156 per ton in year 2017 dollars. That works out to a tax of over $29 per gallon of gasoline. (Combustion of a gallon of gasoline/ethanol 10 percent blend emits about 18.9 pounds of CO2.) The impact of extraordinary effort to reduce emissions is near zero. The entire Paris agreement, if implemented immediately and enforced strictly: 0.17 degrees C. There are no warming trends. The Northern and Southern Hemisphere sea ice changes tell different stories. Manmade impact on global warming accounts for only a third of the temperature rise. The latest research in the peer-reviewed literature suggests that mankind is responsible for about half a degree of the global temperature increase of about 1.5 degrees C since 1850. We will make the 2 degree C target if we do nothing The standard argument from the international advocates of climate policy for years was a need to limit ACC to 2 degrees C by 2100, officially reduced by the IPCC in 2018 to 1.5 degrees C, for the obvious reason that given ongoing and likely trends, the 2 degree C limit is going to be achieved without any climate policies at all. Thus has the climate left moved the policy goalposts, a dynamic that has received vastly less critical attention than it deserves. …”
In a recent New York Times review of Bjorn Lomborg’s new book, “False Alarm: How Climate Change Panic Costs Us Trillions, Hurts the Poor, and Fails to Fix the Planet” (Basic Books, 2020), Joseph E. Stiglitz, winner of the Nobel Memorial Prize in Economic Science in 2001, performs a real public service. Not in terms of his criticisms of the book; as discussed below, virtually every argument Stiglitz made is incorrect. But instead, Stiglitz’s review provides us with a distilled encapsulation of the determined avoidance of evidence, the weak arguments, and the mendacity that for decades have defined the climate alarmist camp.
Let us review Stiglitz’s complaints about Lomborg’s book:
The cost of limiting anthropogenic climate change (ACC) to 1.5-2 degrees C would not be high, but instead “moderate.”
Lomborg underestimates the damage caused by ACC: rising sea levels (“Wall Street could be underwater by 2100”); “more intense hurricanes, more droughts, more floods”; and the like.
Lomborg’s analysis fails to take “due account of risk.” Accordingly, “caution” requires us to take steps now to reduce greenhouse gas (GHG) emissions, because we do not have “another planet we could all move to.”
It is required “ethically” that we evaluate the future costs and benefits of climate policies at a low discount rate to avoid imposing large damages on “our children in 50 years.”
The Intergovernmental Panel on Climate Change (IPCC) report of 2019, titled “Global Warming of 1.5°C,” is a serious guide for evaluating climate policy.
Yes, we face many problems, but “as the advocates of the Green New Deal point out, investments that reduce climate change can usher in a new era of prosperity.”
The “moderate” cost of climate policies
The sine qua non of climate policies is a substantial increase in the cost of energy. No other outcome is possible because any effort to reduce GHG emissions must be driven by reductions in the use of fossil fuels, that is, a policy-induced reduction in the supply of energy. It is no accident that Congress has never been willing politically to enact serious (or any) limits on emissions of GHG, and so the Obama administration attempted to impose such constraints by regulatory fiat.
As discussed below, Stiglitz considers the IPCC report “Global Warming of 1.5°C” to be a pillar of rigorous analysis. And so let us quote the supporting documentation (page 2-78) on the cost of climate policy:
estimates for a Below-1.5°C pathway range from 135-5500 USD tCO2-eq in 2030, 245-13000 USD tCO2-eq in 2050, 420-17500 USD tCO2-eq in 2070 and 690-27000 USD tCO2-eq in 2100.
The midpoint of the range for 2030 is $3,156 per ton in year 2017 dollars. That works out to a tax of over $29 per gallon of gasoline. (Combustion of a gallon of gasoline/ethanol 10 percent blend emits about 18.9 pounds of CO2.) Put aside the higher figures among the ranges and the upward shifts as the end of the century approaches: Can anyone believe that such taxes on conventional energy are feasible politically anywhere in the world? Does Stiglitz? Does Stiglitz view the Green Climate Fund — an integral part of the Paris climate agreement ostensibly intended to compensate the less-developed economies for the costs of reducing GHG emissions — as unneeded on the grounds that those costs will be “moderate”?
The economic downturn attendant upon the COVID-19 pandemic has reduced global GHG emissions by about 17 percent. Assume that reduction to be permanent; the temperature effect by 2100 would be a decline of about 0.1 degrees C, as predicted by the Environmental Protection Agency (EPA) climate model. (Given the standard deviation of the surface temperature record, about 0.11 degrees C, that effect would be barely detectable.) The global cost thus far in terms of lost gross domestic product (GDP) has been roughly 5 percent. Yes, the long-run GDP effect might be smaller than the recent experience, as markets find ways to make the adjustment process easier, but the argument that substantial reductions in GHG emissions would not impose massive costs is not to be taken seriously. What evidence supports Stiglitz’s assertion that the cost of a “net-zero” emissions policy would be “moderate”?
Sea levels, hurricanes, droughts, etc.
Stiglitz’s failure to provide any systematic evidence on climate phenomena is telling but unsurprising. ACC incontrovertibly is “real” in that increasing GHG concentrations are having detectable effects. But that does not tell us the magnitude of the observable impacts on climate phenomena. Temperatures are rising, but as the Little Ice Age ended around 1850, it is not easy to separate natural from anthropogenic effects on temperatures and other climate parameters. The latest research in the peer-reviewed literature suggests that mankind is responsible for about half a degree of the global temperature increase of about 1.5 degrees C since 1850.
There is little trend in the number of “hot” days for 1895-2017; 11 of the 12 years with the highest number of such days occurred before 1960. The National Oceanic and Atmospheric Administration has maintained since 2005 the US Climate Reference Network, comprising 114 meticulously maintained temperature stations spaced more or less uniformly across the lower 48 states, 21 stations in Alaska, and two stations in Hawaii. The reported data show no trend over the available 2005-20 reporting period. A reconstruction of global temperatures over the past one million years, using data from ice sheet formations, shows there is nothing unusual about the current warm period.
Global mean sea level has been increasing for thousands of years at about 3.3 mm per year; it may or may not be accelerating, and any such acceleration might be the result of anthropogenic or natural causes. The Northern and Southern Hemisphere sea ice changes tell different stories.
US tornado activity shows either no trend or a downward trend since 1954. Tropical storms, hurricanes, and accumulated cyclone energy show little trend since satellite measurements began in the early 1970s. The number of US wildfires shows no trend since 1985, and global acreage burned has declined over past decades. The Palmer Drought Severity index shows no trend since 1895. US flooding over the past century is uncorrelated with increasing GHG concentrations.
The available data do not support the ubiquitous assertions about the dire impacts of declining pH levels in the oceans. Global food availability and production have increased more or less monotonically over the past two decades on a per capita basis. As noted above, the IPCC itself in its Fifth Assessment Report was deeply dubious (page 12-78) about the various severe effects often asserted to be looming as impacts of anthropogenic warming.
“Risk,” “caution,” and steps to be taken now
Stiglitz’s rhetoric about the unavailability of “another planet” to which humanity could move tells us nothing about the prospective effects of the policies he favors. His implicit assumption is that his favored policies would yield significant climate effects. The reality is that even policies aggressive in terms of reducing GHG emissions would have effects either small or effectively equal to zero by the end of the century, using the EPA climate model under highly favorable assumptions, in particular an equilibrium climate sensitivity of 4.5 degrees C.
Full implementation of the Obama administration climate action plan would have reduced temperatures in 2100 by 0.015 degrees C. The most prominent recent proposals for a US carbon tax are those promoted by the Alliance for Market Solutions and the Climate Leadership Council; the temperature reduction in 2100 yielded by each proposal would be 0.015 degrees C. The entire Paris agreement, if implemented immediately and enforced strictly: 0.17 degrees C. The contemporaneous agreement between the Obama administration and China, if one were to take the agreement seriously: an additional 0.01 degrees C. The electricity component of the Green New Deal: 0.17 degrees C. A net reduction of GHG emissions to zero by the entire Organisation for Economic Co-operation and Development: 0.35 degrees C.
Assume a truly serious international effect to reduce GHG emissions: a 20 percent reduction by China, a 30 percent reduction by the rest of the industrialized world, and a 20 percent reduction by the rest of the developing world, all in addition to the US reductions as envisioned in the Obama climate action plan, and all by 2030. The temperature effect by 2100: a bit more than 0.5 degrees C. Does Stiglitz believe that policies yielding such reductions in emissions — or ones even greater — are remotely plausible politically?
Ethics and the interests of future generations
Stiglitz’s argument that an artificially low discount rate is appropriate as a tool with which to give sufficient weight to the interests of future generations is not correct. Consider a baby born in a cave some tens of thousands of years ago, in a world with environmental quality virtually unaffected by mankind. That child at birth would have had a life expectancy of about 10 years; had it been able to choose, it willingly would have given up some environmental quality in exchange for a longer life expectancy engendered by better housing, food, water, medical care, and safety, ad infinitum.
In other words, the central interest of future generations is a bequest from previous generations of the most valuable possible capital stock, of which environmental quality is one important dimension among many. There always are unavoidable trade-offs among them. Satisfaction of that bequest preference on the part of future generations requires efficient resource allocation by the current generation, a process not consistent with the use of an artificially low discount rate. If regulatory and other policies implemented by the current generation yield less wealth currently and a smaller total capital stock for future generations — defined broadly to include environmental values — then some additional emissions of pollutants and GHG by the current generation would be preferred (efficient) from the viewpoint of those future generations.
The IPCC 1.5 degree report
The problems inherent in the report cited favorably by Stiglitz are legion, but let us consider here only one among them: The application of only the most extreme among the IPCC scenarios of atmospheric concentrations of GHG, “Representative Concentration Pathway (RCP) 8.5.” For the period 1959-2019, the average annual increase in GHG concentrations was about 1.6 parts per million (ppm). For 1985-2019, the figure is about 1.9ppm. For 2000-19: about 2.2ppm. Under RCP 8.5, the assumed annual average for 2018-2100 is 11.9ppm — that is, over six times the average since 1985 and over five times the average since 2000, in a world transitioning from coal to natural gas, however slowly and unevenly. RCP 8.5 is a scenario approaching impossibility.
At a more political level, Stiglitz merely repeats the recent alarmist position that the “safe” limit for ACC now is 1.5 degrees C. The standard argument from the international advocates of climate policy for years was a need to limit ACC to 2 degrees C by 2100, officially reduced by the IPCC in 2018 to 1.5 degrees C, for the obvious reason that given ongoing and likely trends, the 2 degree C limit is going to be achieved without any climate policies at all. Thus has the climate left moved the policy goalposts, a dynamic that has received vastly less critical attention than it deserves.
The “new era of prosperity”
Consider a massive earthquake that destroys a substantial part of a nation’s capital stock, including facilities producing and consuming energy. Humans being what they are, the destruction will lead to new investment, rebuilding, expanded employment in construction, and the like. Can anyone believe that society is wealthier because of all this, compared with a world in which the destruction did not take place?
Of course not. Such an outlook is an example of the age-old “broken windows” fallacy: A broken window, by providing employment for the window repair sector, increases economic activity and aggregate wealth. Obviously, that cannot be correct, as it ignores the uses to which the resources devoted to the window repair would have been used had the window never been broken.
Climate policies, again by definition efforts to increase sharply the cost of conventional energy, would destroy some nontrivial part of the economic value of the energy-using and -producing capital stock. Many impacts would ensue, but a “new era of prosperity” is not among them.
This is as basic as economics can be. But Stiglitz — not merely an economist, but a Noble laureate — is happy to endorse it as part of his ideological drive to support the policy imperatives of the climate left. Can he possibly believe this? That the answer is not obvious is deeply troubling.
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Lomborg’s book is an important review of the benefits and costs of policies to reduce GHG emissions, but it and his general outlook on ACC are subject to wholly reasonable criticisms. He believes, and has stated numerous times, that it is a real problem with negative prospective consequences. What evidence supports that assertion? How does he know that the net effects of ACC will be negative? After all, the “greening” phenomenon — carbon dioxide fertilization — is very real, and far more humans are killed by cold than by heat. A future glaciation is a virtual certainty, however distant in time, and ACC might provide an important benefit. Moreover, the pitfalls of such government policies as carbon taxes are no secret, as Lomborg recognizes explicitly, and his willingness to rely on model projections for a century or more does not inspire confidence.
But those are mere quibbles in the context of Lomborg’s book and obviously are not Stiglitz’s concerns in any event. Lomborg is no skeptic of mainstream climate science, but that is not nearly enough, in that his policy argument — which Stiglitz does not attempt even superficially to refute — fails to provide support for the ideological preferences of the climate alarmists. That is why Stiglitz studiously avoids a systematic review of the evidence, an evaluation of the future climate effects of his preferred policy prescriptions — as predicted by the climate models he cites — and an honest discussion of costs and benefits. Instead, Stiglitz’s central stance is that a crisis is upon us, we do not have “another planet we could all move to,” the costs of dealing with the crisis would be “moderate,” and anyone in disagreement with that outlook is engaged in “mind pollution.” That is a stance deeply unserious.
One would think The New York Times would have found a way to obscure more effectively its obvious intent to publish a scathing review of Lomborg’s book. One would think the same about The New York Times’ ideological opposition to fossil fuels, its support for a massive increase in central planning by the federal and international bureaucracies, and its anti-human stance against the alleviation of grinding poverty among the world’s poorest. One would think The New York Times editors could have found a reviewer a bit more subtle and more willing to offer a few relevant facts, even if unrepresentative of systematic realities. One would think the climate left would adopt a stance of greater modesty after decades of apocalyptic warnings that have failed to come to pass. And in all those dimensions: One would be wrong.