The Real Debt Crisis

sinkhole

Gil Friend included this info about the recent GreenBiz forum in his periodic newsletter.

One big idea: The standout idea at GreenBiz Forum last week was TruCost’s assessment that paying for environmental and social costs would take out 40-50% of corporate profits.

We have always known that externalizing public costs was a standard business practice, but have had few estimates of the scope of this practice. The size of the hit is stunning. The number put forth at the Forum can be found in Green Biz/Trucost’s “State of Green Business” 2013 report. These costs are real, and will be paid eventually. It’s the eventuality that allows firms to continue operating in a business-almost-as-usual mode without much of a response from either the investment community or environmental/social interests. It doesn’t show up on current balance sheets.

This cost is just as, or more, important than the national debt we hear so much about. According to some economists, there is no urgent problem there. Robert Solow wrote a piece about this recently in the NYTimes arguing that the crisis being bandied about is not real. Here is his summary.

THE significance of America’s national debt is a serious question, but you would not know this from the current political rhetoric, which consists mostly of vague apocalyptic warnings. I want to present a calmer view, by emphasizing six facts about the debt that many Americans may not be aware of.

He goes on to say that we can cope with the situation calmly and deliberately without the sturm und drang characteristic of today’s political talk. But the unpaid social and natural capital costs are an entirely different matter. We cannot pay them off in inflated dollars—one of Solow’s (and others) remedies. He concludes with this advice, also argued by many other economists.

But for now the best chance to reinvigorate the economy, spur business investment and encourage consumer spending is through public borrowing and spending.

Perhaps this will help the current national accounts, but it will only exacerbate the outflow of natural capital. Solow won his Nobel Prize, in part, on the basis of his theories about the economics of natural resources. He argued that scarcity through depletion was not a problem because as the price rose (due to the scarcity), technological innovation, driven by the promise of higher prices, would solve associated problems. Substitutes would be found or more efficient, but costlier, methods would be found to extract the scarce resource.

But this kind of thinking does not seem, according to my non-economist’s ears, to fit natural resources like air and water. Unless genetic- or bio-engineering can “improve” the human physiology to subsist without air or water (unlikely), his model doesn’t work. There are no substitutes to come, only the inexorable rise in the cost of this essential resources. That cost will not only be felt in the global economy as a drag, but also in terms of threats to human life and well-being. We are creating the conditions for a huge sinkhole on the Earth that will cause more than the loss of a single life as that one in Florida just did. And it will probably appear just as unpredictably as that one did.

Few people will become aware of and appreciate the costs reported by TruCost/Greenbiz and others. So nothing much is going to happen; the real reduction in the essential natural resources needed for future generations will go mostly unnoticed. It’s time, as has been argued, to recast our national and global accounting systems to incorporate these costs in the same way they handled in standard business accounting frameworks. Then maybe politicians and other leaders will start to perk up their ears.

Those who attend GreenBiz events talk a lot about sustainability, primarily in some way related to sustainable development. Sustainable development or, on a lesser scale, sustainable business means finding ways to continue to grow or at least maintain the status quo with concomitant lower social and environmental impacts, that is costs. By ignoring the externalized costs in their calculations, virtually all of their so-called sustainability activities, are, in fact, producing negative results.

I have always argued that this way of thinking about and acting toward sustainability is self-defeating. As the indices being used to assess the performance of the economy show apparent improvements, the reality is that the Planet is getting worse off. Only if we abandon this sustainable development and its many equivalent constructs, will there be any possibility of realizing even its goal of affording future generations the opportunities for well-being (defined as we do currently). The only ray of light I see here is that the information is now coming forth to a large audience, capable, but mostly reluctant, to act upon it.

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