Donald Trump's 'Carbon Bubble' Economy Is Bound to Pop - the Only Question Is How Bad It Will Be
Donald Trump’s “policies” don’t really exist in any conventional or coherent sense, but his promises, pledges and appointments so far tell us enough to know that he’s devoted to the kind of bubble economics that ultimately can only burst. First, there’s the “carbon bubble,” pursuing economic growth through fossil fuel investments that can never pay off because 80 percent of the fuel can never be burned. (Sean McElwee wrote about it here three years ago.) Second, there’s Trump’s reliance on vastly accelerated economic growth to wave away budget concerns and other reality-based question about what he wants to do on multiple policy fronts. Third is a more fantastical bubble — the imagined resurgence of traditional working-class jobs in mining and manufacturing, at a time when even China is losing manufacturing jobs to cheaper labor markets.
Each of these bubbles just might expand for a while in the short run — which so-called balanced and objective journalists will report as signs that Trump’s policies are “working.” But they’ll have to join with Trump in denying reality in order to do so. Let’s examine each of these bubbles to see why.
The most troubling aspect is Trump’s commitment to the “carbon bubble,” a commitment to expanding the production of fossil fuels, despite the fact that 80 percent of existing reserves are unrecoverable or unusable —worth absolutely nothing — if we’re to survive as a civilization. Treating those reserves as if they will actually be used vastly overvalues them, creating a carbon asset bubble, just as multiple factors overvalued housing in the Bush years, in turn creating strong incentives for a wide range of foolish, destructive and even criminal acts.
The carbon bubble does exactly the same thing. It’s not just fossil fuel reserves that are overvalued by the bubble, but everything associated with the sector — pipelines, power plants, refineries, etc. — as well as assets at risk from climate change, such as waterfront property (see Miami Beach, still in deep denial).
The carbon bubble risk is only made worse by the fact that renewable energy costs have dropped dramatically in recent years, and become increasingly competitive. Thus, even if those reserves were not unburnable because of their potential impact on climate change, they will become so for economic reasons in the next few decades. For example, the World Economic Forum’s recently released “Renewable Infrastructure Investment Handbook: A Guide for Institutional Investors” reported:
[T]he unsubsidized, levellized cost of electricity (LCOE) for utility scale solar photovoltaic, which was highly uncompetitive only five years ago, has declined at a 20% compounded annual rate, making it not only viable but also more attractive than coal in a wide range of countries. By 2020, solar photovoltaic is projected to have a lower LCOE than coal or natural gas-fired generation throughout the world.
Add to this the fact that renewable energy — particularly solar and wind — is a new technology sector, in which large efficiency gains are to be expected. That’s quite unlike the fossil fuel industry, whose costs are increasing because the cheap, easy-to-get fuel has already been burned. By 2030, renewables could well leave fossil fuels in the dust. Which is why Trump’s embrace of the carbon bubble is particularly foolish.
There’s also the rapidly-growing carbon divestment movement, intensifying pressure on the bubble. One year after the Paris climate accords, a new report found that “the value of assets represented by institutions and individuals committing to some sort of divestment from fossil fuel companies has reached $5 trillion. To date, 688 institutions and 58,399 individuals across 76 countries have committed to divest from fossil fuel companies, doubling the value of assets represented in the last 15 months.”
United Nations Secretary-General Ban Ki-moon issued a strongly positive response. “One year after the adoption of the historic Paris Climate Agreement, it’s clear the transition to a clean energy future is inevitable, beneficial and well underway, and that investors have a key role to play,” he said. “I commend today’s announcement that a growing number of investors are backing a shift away from the most carbon intensive energy sources and into safe, sustainable energy.”
Divestment makes even more sense to the wider business world, given how much climate change costs them already. The reinsurance giant Swiss Re issued its first pamphlet on climate change in 1994, perhaps the first sign of an emerging alliance with environmentalists, which Ross Gelbspan wrote about in 1997, in “The Heat Is On.” Three years later, he wrote:
During the 1980s those insurance losses to extreme weather events averaged $2 billion a year; in the 1990s they are averaging $12 billion a year. Since 1980, the US has absorbed more than a billion dollars in losses from each 42 separate weather events. And the $89 billion in losses to extreme events just in 1998 exceeds the total of all such losses for the entire decade of the 1980s.
The losses have been mounting ever since, with reinsurers keeping careful track. The more they rise, the more other businesses have reason to ally with renewable energy, and invest in it.
What’s more, the broad-based disinvestment movement dovetails with activism focused on dangerous major projects, such as the Dakota Access pipeline, which has seen a pair of major investors — Enbridge Energy Partners and Marathon Petroleum — hold back on a $2 billion stake in the project. This reflects economic pressures felt within the fossil fuel energy sector itself. Energy analyst and author Antonia Juhasz (“The Tyranny of Oil") pointed out, “If Enbridge and Marathon thought that completion of the pipeline was a done deal, the money would have been a done deal too. This means they are worried and are not feeling secure enough to turn over their cash, putting even more financial pressure on Energy Transfer Partners.”
Futurist Alex Steffen summed up the situation recently in “Trump, Putin and the Pipelines to Nowhere.”
There is no long game in high-carbon industries. Their owners know this. They don’t need a long game, though. … All they need is the perception of the inevitability of future profit, today. That’s what keeps valuations high. … The Carbon Bubble will pop not when high-carbon practices become impossible, but when their profits cease to be seen as reliable.
That’s where Trump and his announced administration comes in. “For high-carbon industries to continue to be attractive investments, they must spin a tale of future growth,” Steffen writes. No one is spinning that tale harder than Trump, with “a cabinet and chief advisors in which nearly every member is a climate denialist with ties to the Carbon Lobby.” No one except, of course, Vladimir Putin. Italy is one of Europe’s troubled southern economies, but its 2015 GDP was almost 40 percent more than Russia’s. Without oil and gas, the Russian economy would collapse altogether. Hence, perhaps, the most fundamental reason for the Trump-Putin bromance.
But the carbon bubble isn’t alone. Trump’s economic plan, with its extravagant claims of producing 4 percent growth — or, a bit more conservatively, 3.5 percent growth for more than a decade — is both wildly unrealistic and ultimately bubble-based. The plan’s lack of realism was neatly summarized by Chad Stone, chief economist at the Center for Budget and Policy Priorities, in a September blog post, “Trump’s Unrealistic Expectations for Economic Growth.” Except for short-term bursts after a recession, actual GDP (demand for goods and services) is limited by potential GDP (the goods and services the economy could supply with full employment and all businesses at full capacity). The Great Recession not only sharply dropped actual GDP, it permanently lowered the growth path of potential GDP, as determined by the Congressional Budget Office.
“The Congressional Budget Office could be wrong,” Stone noted, “but if it’s right about the potential growth path, we don’t have much room for rapid growth over the next decade.” Trump has offered no argument as to why the CBO might be mistaken, and until he does so, his plan is starkly unrealistic — especially with an aging population and restricted immigration slowing the growth of the labor force. As Stone explained:
The Congressional Budget Office estimates that potential GDP rose at a 4 percent annual rate from 1950-1973, with labor force growth of 1.6 percent and labor productivity growth of 2.4 percent (the highest on a sustained basis in the whole postwar period). Its estimate for 2016-26 is 1.8 percent, with 0.5 percent coming from labor force growth and the rest from productivity. To achieve 4 percent growth without immigration, productivity would have to grow at 3.5 percent — almost 50 percent faster than its record-setting 1950-73 rate.
But Trump’s prospects look even worse when one considers how poorly the economy does under Republicans compared to Democrats over time. The only presidents to manage 3.5 percent growth or better since the Great Depression were Franklin D. Roosevelt (three complete terms), Harry Truman (one term), John F. Kennedy and Lyndon Johnson (one combined term and one that was LBJ’s alone), Ronald Reagan (one term) and Bill Clinton (one term). Clinton came within a whisker of doing it twice, while Dwight Eisenhower and Jimmy Carter both topped 3.4 percent within one term.
Thus, the only Democrats to preside over less than 3.4 percent growth were Truman, during the post-WWII recession, and Obama, during and after the Great Recession, whereas the only Republican presidents to reach that level were Reagan and Eisenhower, both in their second terms.
Reagan was the only Republican to top 4 percent growth, but only with the help of significant growth in the female labor force — which ran counter to his social agenda far more than it was a product of his economic policies. What Reagan did do, economically, was to increase demand by running massive federal deficits, which another form of unsustainable bubble economics. It isn’t unsustainable because the federal government can’t run such deficits — the British government ran larger deficits for centuries — but because sooner or later, Republicans won’t allow it. Clinton managed significantly stronger growth (4.73 percent, vs 4.08 percent for Reagan), while piling up a budget surplus.
Finally, Trump’s promise to restore mining and manufacturing jobs represents an even more fantastical bubble. In response to a New York Times article on support for Trump in West Virginia, Dean Baker, co-director of the Center on Economic Policy Research asked “How Far Back Does He Want to Take West Virginia?” The mining jobs there have been gone for a very long time:
Employment in coal mining had fallen from a peak of more than 130,000 in 1940 to just over 21,000 in 2000, roughly its current level. Employment did rise somewhat in the last decade, reaching 35,700 in December of 2011. (This was a bit less than 5.0 percent of total employment in the state.) However, it began to decline back to its current level the following year, largely due to the availability of cheap natural gas from fracking.
There are two fundamental truths here: first, coal is a sector in long-term decline, and second, Trump’s bubble enthusiasm for fossil fuels isn’t even likely to help people who work in fossil fuel industries. His over-enthusiasm for blindly pushing competition helped to destroy the United States Football League (a 1980s rival of the NFL), as well as his New Jersey casino holdings. The same sort of blindness is at work here. Unregulated fracking has only made matters worse for coal generally and coal miners in particular. Blaming Obama is just fanciful scapegoating.
Things are more complicated in manufacturing, though it helps to remember how bitterly Obama was attacked for saving millions of auto-industry jobs, while Trump breaks his arm patting himself on the back over a few hundred at Carrier. Obama’s example shows that job-protection policies are possible on a significant scale. At the same time, manufacturing jobs have been declining across the developed world for some time — and China faces similar pressures in the near future — even as productivity increases. It’s difficult to draw a bright line defining the limits of economic possibility. But it’s not difficult to say that a bigger share of a declining global pie can only be a bubble at best, and is more likely an out-and-out fantasy.
In fact, Trump’s prospective boom can be thought of as another sort of capital asset bubble, where the asset is white working-class masculine identity. Trump the pseudo-billionaire pretending to be the great champion of that asset is the stuff of which bubbles are made. It’s only a question of how soon it bursts, and who gets hurt when that happens.