Will A Big US Stock Market Crash or Correction Hinder or Help the Forging of a Green New Deal?

Markets detest uncertainty. Climate change is a source of great uncertainty. There are at least 9 current possible sources of uncertainty (see below), including climate change, making global markets skittish.

My central concern: if the U.S. stock market continues to meaningfully correct, or even crashes, will there be a major negative wealth and budgetary impacts, which limit our ability and willingness to pay for some New Green Deal or Big Plan, one which would meaningfully decarbonize our energy system, and place us firmly on a path of real climate change mitigation?

At first blush, the prospect of near-term financial dislocations should cause worry for many reasons. No one wants a recession or financial distress. The Great Recession clearly negatively impacted the healthy lives of many. We don’t want that again. But I am concerned about the possible negative effects of financial dislocation on progress and plans to address climate change, in particular on the emerging prospects of an actual Big Plan.

I believe that one way or another, the U.S. and the rest of the world will soon need to, and will, seriously address climate change, in the interests of national security, healthy economic growth and justice, quality of life, and intergenerational equity. In the long-term, this will benefit all. Admittedly in the short-term, there will be losers, in particular those with fossil fuel investments and other stranded assets, probably the beneficiaries of recent tax cuts, and certainly others who are too fossilized to adjust to positive change.

There is growing realization that we need a fundamental “reboot” at several dimensions: environmental, economic, political and more. We need a Big Plan to decarbonize, one which is bipartisan and trully beyond politics.

Such a Big Plan would aggressively and simultaneously pursue economic growth and environmentally sustainability. If it takes a negative financial shock to induce, then cause the agreement and launch of the Big Plan, that would be really unfortunate. But it may be necessary given the current divided political landscape in the U.S. and elsewhere. I do hope that a Big Plan can be agreed without a financial crisis, and that a central majority of the U.S. citizenry can come together and devise a large, rational and balanced plan, overcoming the powerful, vocal and selfish minority of presentist climate-change nay-sayers.

The concept of a “Green New Deal” is not new. But in the aftermath of three (IPCC Link , UN Link and US Link ) grisly climate change reports, the concept of a “Green New Deal” has been rebooted by various political leaders, including Bernie Sanders Link, members of the youth-led Sunrise Movement, and Rep-elect Alexandria Ocasio-Cortez Link. And support for some Big Plan is now growing across the spectrum of interests. The so-called Green New Deal calls for massive global energy system decarbonization via a rapid shift from fossil fuels to 100% renewable energy, carbon emissions reduction, infrastructure spending, job creation and more. See one version here Link.

“New Deal” because the magnitude of any economic Plan must be very large, as was the New Deal in the 1930s to counter the Great Depression, and the Zero Interest Rate and Quantitative Easing Plan in the late 2000s to counter the Great Recession.

“Green” because real environmental results must come from aggressive energy system decarbonization, increasing circular economic activities, less toxic pollution, and much more.

Meanwhile Popeye the Sailor has been recently rebooted in YouTube videos and comics strips as a more youthful, environmentally resourceful fellow who collects rainwater and grows his own spinach Link. As we all know, spinach makes Popeye strong.

There must be lots of Spinach in any Green New Deal. The critical line of thinking behind a Big Plan is that there is an intrinsic and existential link between economic growth and environmental sustainability. Recognizing this “eco-enviro” link, embracing the rational framework of “natural capital”, and launching a large, coordinated, federal government-led Big Plan, in concert with public-private partnerships and citizen participation, will make us strong.

By definition, spending on “environmental sustainability” would now be embraced as being much broader than past spending on “the environment”, because it will double and triple as critical forms of spending on and support for national security, economic development and healthcare.  

What is this Spinach? Energy system decarbonization, emissions reduction, infrastructure spending including modernizing of the electric grid, a reinvention of utility business models, reduction of toxic waste, improving agriculture, cleaning fresh water and the oceans, husbanding and nurturing resources, and more. As is the case for our hero Popeye, Spinach will make us stronger.

Here in early December 2018 global stock markets are super jittery for a variety of pretty darn good reasons:

1.    US domestic political uncertainty, including a possible end to the current administration, or even a constitutional crisis, if the Mueller investigation effectively strips more clothes off would-be Emperor Trump. As Warren Buffet once said “You only find out who is swimming naked when the tide goes out.” Link We are going to know more soon on this front.

2.    Unnecessary and counter-productive trade wars with China and others

3.    Upending of a relatively stable world geo-political order

4.    Possible global economic recession, as the steroids of Great Recession low interest rate and quantitative easing monetary policy finally wear off

5.    The bursting of asset price bubbles, most notably the stock markets

6.    A growing fiscal deficit exacerbated by unaffordable, non-revenue-neutral tax cuts, which were ill-advisedly handed out like candy at the peak of the economic cycle

7.    Short-termism by many players on many fronts. For example, the U.S. owes roughly $21 trillion in debt: yet Trump recently downplayed concerns about the size of the national debt saying: "Yeah," Trump told his aides, "but I won't be here." Link Similarly for example, there was Trump’s recent ludicrous conclusion that not only is Climate Change real, but that it is too late to fix the problem!

8.    Trumpian unwinding, even blatant sabotage, of energy and environmental policies favored by a majority of Americans, from dismantling of the Clean Power Plan, to weakening controls on methane emissions, to promotion of dirty coal and additional drilling for oil and gas, to ending federal subsidies and tax credits for electric cars, etc. I don’t think the markets like these unilateral, almost imperial actions

9.    The possible sudden, more widespread realization that the true cost of carbon pollution mitigation is going to hit thresholds which will make it increasingly expensive to NOT aggressively attack it now with large, immediate and ongoing actions

We do not know which of these many reasons, or combinations thereof, are causing these current financial market jitters. While I am interested in all of them, the initial focus here is on the public and market perception of the true present and future cost of decarbonization and carbon emissions reduction. The next focus then is on how the perception of these costs and opportunities could vitally influence the possibilities of a Big Plan, some form of Green New Deal, in the very near future.

Perhaps a “step function” is occurring in public awareness and in market discounting of the costs of climate change such that it is increasingly and correctly perceived that not doing more now to combat climate change is economically irrational?

If indeed this is occurring, I doubt this is mere sentimental realization or some fuzzy “we are the world” and “think about the children” moment. Instead, it may be real progress along the continuum toward a deeper and wider understanding of the serious threats posed to our national security and global economic growth.

It may even be part of the ongoing and painful process of upending the limited and traditional ways of thinking about and modeling the economics of climate change and sustainability. Here I turn to Jeremy Grantham who in The Race of Our Lives Revisited wrote: “Capitalism also has a severe problem with the very long term because of the tyranny of the discount rate. Anything that happens to a corporation over 25 years out doesn’t really matter to them. Therefore, in that logic, grandchildren have no value.” Link

Even while continuing to use of the simplistic and inherently limited “present-value theorem” for valuing certain assets and modeling certain financial activities, more people may simply be concluding there that we need to embrace and harness different and more dimensional economic models to assess climate change, ones which incorporate tipping thresholds and runaway points, scenarios and probabilities, optionalities, and natural capital accounting, regardless of, or because of the impact on, grandchildren!

If indeed there is a sudden “awakening”, where previously in the minds of too many, the concentration levels of those little, tasteless, non-odorous and invisible CO2 molecules were not seen to be a driving physical, economic or security issue, but now they are, then we could be at a more interesting and meaningful inflection point for sustainability management and a Green New Deal in one form or another.

Climate change has generally been viewed as a “long-term” problem. But the financial markets may now be changing how they are “discounting” the problem. Maybe the “long-term” is simply seen to be much shorter than previously thought? Maybe the discount rate or cost estimates are rising?

Financial markets are currently unsettled for many reasons. There is something going on here. Maybe it is about the uncertainty about an abrupt transition to more economically and environmentally sustainable paths. Maybe the markets detest the uncertainty of fat-tailed, negative outcomes. More likely, some potent new combination of forces is brewing wherein economic short-terminism, moral presentism and climate change naysayism are all in the process of being inundated with a flood of common sense, paired with human awareness.

My concern is that if there are falling Trumps, rising interest rates, falling stock prices, global trade wars and more, will we be more or less able to agree on some Big Plan? If we tip into a synchronized global recession or descend into political chaos, will we think that we can indeed structure, execute and afford a Big Plan? Will near-term financial market outcomes improve or diminish the near-term odds of an appropriately scaled and urgently timed Big Plan to decarbonize the energy system?

On the hand, we know that under conditions of national and financial stress, spending priorities often have to be realigned, and often we have to do much more with less. Maybe we just do it differently. Maybe we do more with what we have. Big things do happen, like the New Deal or the successful effort to defeat Fascism in WW2. Those were worthy enterprises to say the least.

There are of course some bigger possibilities with regard to this grand but possibly jarring transition to sounder economic and environmental sustainability paths:

·     We have no choice but to afford a Big Plan

·     Only a crisis will create the impetus to structure and execute a Big Plan

·     Despite the negative wealth effects of financial market corrections, the road to economic recovery, and then prosperity, lies in the Big Plan itself

I think we would all prefer a visionary “moonshot” to an existential “Pearl Harbor” as the near-term catalyst for a Big Plan a la Green New Deal. Unfortunately, maybe something nasty like a severe market correction is needed here. I hope not.

After all, a majority of Americans support environmental spending and decarbonization of the energy system, regardless of geographic, demographic or political affiliation. I don’t think that the majority is currently being heard. It is not unreasonable to expect, and I hope that the 2020 US elections will prominently include deep and raging debates, diverse platforms and policy proposals, and then eventual broad consensus, related to some form of Green New Deal. I am looking forward to these dialogues.

A Big Plan will only most likely occur and succeed when a new large U.S. Political Center coalesces around sustainability, and the need for a lot of Spinach. Only then will the narrow political interests be pushed to the side and out of power.

Tomorrow’s heroes on this front are most likely to be many: women who value healthy lives; centrists in the vein of a John McCain or Republicans who break away from their current Trumpian prisons; idealist young leftists; independents with open minds; minorities who yearn for more opportunity; and above all citizens who rise above politics. It will take more than “an army of young people”: it will take people of all ages and stripes; technologies old and new; public, private, public/private and individual funding mechanisms; large corporations and small businesses… It will take all of the capitalists, socialists, libertarians, environmentalists, greens, etc. It will take Rationalists who support the pursuit of shared health and wealth.

Most of the time I am optimistic about how all of this is going to unfold. But right now I admit that I am quite nervous about what’s happening on several fronts. Usually markets don't crash, but sometimes they do. Still I am excited by the emerging Green New Deal movement. I can see the dawn’s early light on the horizon.