Financial Reporting Council (FRC) on effective stewardship reporting: "The UK Stewardship Code rightly sets a high standard for investor stewardship. At the same time, the FRC recognises that signatories will have different approaches to fulfilling their responsibilities. The purpose of stewardship reporting is for investors to demonstrate how they are protecting the hard-earned pensions and savings entrusted to them, by ensuring that they are managed responsibly, creating long-term value for their clients and beneficiaries.
The FRC published the first list of signatories in September. We received 189 reports and assessed 125 applicants as successful. This represents £20 trillion of assets under management across a range of asset classes and markets. We have received over 100 applications for our October deadline – significantly more than we expected. This demonstrates the growing importance and attention paid to stewardship issues – particularly by clients and beneficiaries.
We are now assessing the recent applications and will announce the successful applicants in the first quarter of 2022. Today’s publication, Effective Stewardship Reporting identifies good examples of reporting and areas where we wish to see improvement next year. We saw some good reporting on governance, resourcing, the integration of stewardship with investment and on stewardship activities.
We would like to see improvements to reporting on how signatories are managing market-wide and systemic risks as well as their approach to stewardship in asset classes other than listed equities. As the FRC transitions to the Audit, Reporting and Governance Authority (ARGA), both the #Stewardship Code and the Corporate #Governance Code remain key to maintaining trust and integrity in how UK companies are led and run, and enhancing the UK’s position as a destination for longterm, sustainable investment, bringing wider benefits for the economy, the environment and society. Demonstrating effective stewardship and governance builds the trust that is necessary to continue to attract investment in the UK and improve access to capital."
Zeke Hausfather: state of climate science, energy systems, post COP26, tipping points, tail risks | Podcast
Zeke Hausfather is a climate scientist and energy systems analyst whose research focuses on observational temperature records, climate models, and mitigation technologies. He spent 10 years working as a data scientist and entrepreneur in the cleantech sector, where he was the lead data scientist at Essess, the chief scientist at C3.ai, and the cofounder and chief scientist of Efficiency 2.0. He also worked as a research scientist with Berkeley Earth, was the senior climate analyst at Project Drawdown, and the US analyst for Carbon Brief. Follow his Twitter for his climate thoughts.
We discuss:
What is most misunderstood about climate science today.
Why many doomsday scenarios are unlikely but yet serious damage from climate is happening now.
Why scientists have been poor in communicating what is mean by tipping points with respect to climate.
How he thinks about climate “tail risk” and how tail risk diminishes the less heating happens.
The problems with “averages” and how there is uncertainty not only about our amount of emissions, but the sensitivity of the climate to our emissions.
Why climate is better thought of as a gradient rather than point thresholds.
The problem with climate economics due to time horizons, long time horizons and the discounting models economists use.
Zeke’s thoughts on the range of different projections coming out post COP26 and what they mean. (Article link here)
Zeke’s view and under-rated/over-rated on:
degrowth
carbon tax
techno-optimists
nuclear power
carbon offsetting
divestment movement
gas as a transition fuel
green New Deal
Bjorn Lomborg
Zeke finishes with advice for people who want to be involved in climate.
Listen to the podcast below or in your favourite podcast app. Transcript below.
PODCAST INFO
Spotify: https://sptfy.com/benyeoh
Anchor: https://anchor.fm/benjamin-yeoh
Zeke Hausfather Transcript (transcript is only lightly edited and not fully proof read for typos and errors)
Ben Yeoh (00:00): Hey everyone, I’m super excited to have Zeke Hausfather speaking with me today. Zeke is a climate scientist, so we're going to get all into climate. Zeke, welcome!
Zeke Hausfather (00:15): Thank you. It's great to be here.
Ben Yeoh (00:17): So, what do you think is most misunderstood about the state of climate science today. I guess I read a lot of stuff about what previously was thought of as business as usual. A lot of people referred to this kind of rcp 8.5 and it seems to me that the consensus of climate scientists is probably saying that that's not likely to happen as the kind of central case but I don't know whether what you thought about what maybe most misunderstood or perhaps most being challenged at the moment.
Zeke Hausfather (00:52) Sure. It's always hard to communicate all the nuances of climate science to a general audience. It's a very complicated field. The earth is an incredibly complicated system and there are a lot of big uncertainties in how the climate responds based on our emissions and so with that said, there are sort of two areas where I think there are often common misconceptions around climate. One is the extent to which climate change is inevitable. So, one area where there has been a lot of progress in recent years and this is something that was featured fairly heavily in the most recent intergovernmental panel on climate change report or IPCC report, is this question of how much warming is in the pipeline; how much warming is locked in today based on our past emissions of greenhouse gases.
Zeke Hausfather (01:42): What's interesting is that previously there was a fairly widespread understanding that a certain amount of warming was locked in, and that's based on the fact that if you were to keep the amount of CO2 in the atmosphere constant for the next 100 years or so, you would indeed have another half a degree or so of warming on top of what we've already had today. The reason for that is because the oceans buffer the rate of warming of the earth's surface. Water can absorb an enormous amount of heat; upwards of 90 percent of all the heat being trapped by greenhouse gases today is going into the oceans and so the earth has warmed up considerably less than it would if it didn't have these oceans that are absorbing a ton of the extra heat that's being trapped by greenhouse gases.
Zeke Hausfather (02:24): So, because of that, at current levels of greenhouse gases, as the oceans continue to heat up the surface will also continue to heat up but the important part of that and where it leads to some confusion is at current levels of greenhouse gases. Now the amount of greenhouse gases that are in the atmosphere depend in part on our historical emissions of greenhouse gases but also in our future emissions and so if we can actually get co2 emissions, in particular, all the way down to zero then the amount of co2 in the atmosphere doesn't stay flat it actually starts declining and the reason for that is because the oceans and the land is absorbing some of the co2 emitted in the past on an ongoing basis. The system will eventually reach a new equilibrium which will be higher than it was before we started emitting co2 but there still is a decent amount of co2 currently in the atmosphere that will be absorbed by natural sinks if we can get co2 emissions to zero. It turns out that the cooling that would cause falling levels of co2 in the atmosphere due to absorption by land and ocean carbon sinks is almost perfectly balanced out by the additional warming you get as the ocean come up to an equilibrium with the atmosphere and so the [Inaudible: 3:36] and across many different earth system models that we've run is that once you get co2 emissions all the way down to zero, global warming stops and that's good news and bad news.
Zeke Hausfather (03:46) The bad news is, the earth does not cool back down, at least for many centuries to come once we get emissions to zero. So, we're sort of stuck with whatever level of warming we had when we finally get to net zero emissions. The good news though is that it means there's not any amount of warming that's inevitable. We can control how much warming we end up experiencing by when we get to net zero emissions. Now, I should note that there is some warming inevitable not for physical reasons but for economic reasons simply because we can't wave a magic wand and get all of our emissions to zero tomorrow. We're probably not going to be able to get global co2 emissions to zero before 2050 and so there's probably going to be about half a degree more warming simply because we can't reduce emissions fast enough due to technological and economic reasons but from a climate system perspective there's no additional warming that we experience once we get emissions all the way to zero. So, that's an area that I think we can help clear up some misunderstandings around and that is potentially pretty empowering for folks because it means we ultimately have control over the degree of warming that the earth experiences.
Zeke Hausfather (04:53) Then the other area which you sort of teed up earlier is around where we're headed in terms of emissions. About a decade ago, which is when the previous IPCC report came and a little before that in particular when the previous generation of emission scenarios were being created by researchers, it seemed we're in for a pretty dark climate future. Global emissions have increased by 30 percent over the 2000s and were increasing by three percent a year. Global coal use had almost doubled. China was building a new coal plant every three days and the idea that the 21st century would be dominated by coal and we could end up with doubling or even tripling emissions by the end of the century didn't seem that far-fetched and so
those were scenarios where scientists thought we could end up at four or five C warming.
Zeke Hausfather (05:42) Flash forward about a decade and we're in a very different world right now. Global coal use peaked back in 2013 and the IAA has recently estimated that it's in structural decline going forward. Clean energy like wind and solar is the cheapest new form of energy of the margin in many places around the world and global emissions have been relatively flat for the last decade. Fossil fuel emissions have been increasing by only about one percent compared to three percent for the prior decade and emissions from land use, according to our most recent estimates, have actually been slightly decreasing. Mostly balancing out the increase in fossil fuel use. So, it seems like the world is now entering a long plateau in emissions rather than continuing increasing emissions driven by a combination of falling clean energy prices and governments enacting stronger policies to actually start dealing with climate change in a much more meaningful way than they were a decade ago.
Zeke Hausfather (06:36) Now, flat emissions still means that the level of co2 in the atmosphere is increasing. In fact, flat emissions means that the rate of warming stabilizes. So, the world keeps warming at not 0.2 C per decade rather than the warming accelerating, which is still not a very good outcome. We don't want warming to continue at its same pace. We want warming to slow down and ultimately stop and for that to happen we don't just need to flatten our emissions; we need to get them all the way down to zero. But this flattening of emissions means that the world we're heading toward right now is probably one of around three degrees warming or a little below three degrees under policies in place today rather than the four or five degrees that seems plausible a decade ago and that's good news. A three-degree world is certainly still not one we want to live in. It would have catastrophic impacts for some human and natural systems and the world doesn't end in 2100 even though our models do. The world of flat emissions after 2100 would still reach 4 degrees by 2150 and potentially even 5 degrees by 2200.
Zeke Hausfather (07:38) So, it doesn't change the fact that we ultimately need to get emissions down to zero. But it is good news and it means that it's much easier to envision a world where we sort of further bend the curve of emissions down to meet Paris agreement goals of limiting warming to well below two degrees than it was in a world where we were still headed for four or five degrees warming. So, I think that's been a really big change over the last few years a really big realization by the sort of climate science and energy modeling community and it has led to us starting to focus a bit more in terms of the impacts of a three-degree world rather than a four- or five-degree worlds that we tended to focus on a lot in the last decade.
Ben Yeoh (08:19): Okay, that makes a lot of sense. It's a kind of nuanced message actually from climate science because on the one hand you don't want to play down the fact that these are serious risks and we need to take them very seriously because you still have climate denial and people who are not. On the one hand you also don't want to say that actually those doomsday scenarios which were actually looking plausible 10 or 20 years ago are no longer looking so plausible, because from my view you often get these people who have what I would call learned-helplessness. If you think you're going to be doomed then you kind of do nothing and you see some of this in surveys where you're saying “oh some children are thinking it's doomsday and so why should we try anything?” So, it's kind of like we need to take them seriously but actually we have done a lot of progress in 10 years. Is that kind of a reasonable summation of what something is a little bit more nuanced?
Zeke Hausfather (09:15): I think so. It's important to emphasize that we already are seeing dangerous effects of climate change today; at 1.2 c in global warming. Where I live in California, we now have a smoky season and a fire season because every year we're seeing worse and worse catastrophic wildfires. We've seen extreme heat waves beyond anything people predicted in the pacific northwest earlier this year, flooding across Europe and China and parts of the U.S. We're really already starting to see climate impacts in a big way where we are today and so if you double that amount of warming or more than double that amount of warming too close to three degrees, it's not a world we want to live in. It's not one that's probably the end of the world or like the end of the human civilization or anything quite that dramatic but it certainly is not a world we want to leave to future generations.
Zeke Hausfather (10:08): It's also worth emphasizing that our emissions are only one of three different uncertainties that we as scientists grapple with when we're trying to figure out how the planet will warm in the future. The other two are the sensitivity of the climate to our emissions, so essentially how much warming do you get as the amount of [green house gases] increases in the atmosphere and the reason that is uncertain is because there's lots of different feedbacks of the earth system. So, as the planet warms you have more evaporation, you have more water vapor in the atmosphere that can stay there before it precipitates out, water vapors, greenhouse gas, it enhances the amount of warming we get, you have melting ice sheets and sea ice that reveal darker surfaces underneath that absorb more of the sun's rays and change what we call the albedo of the planet. You have changes in cloud formations that depending on how they interact, can either lead to more or less warming and so none of these things are known precisely. We have a good understanding of many of them, but it still means that when we're trying to estimate how much the climate will warm as a result of increasing co2 in the atmosphere, we end up with this range and we've narrowed that range in recent years but it still has a range.
Zeke Hausfather (11:14): For example, in the most recent IPCC report we said that if we double the amount of co2 in the atmosphere and wait till the system reaches equilibrium as the ocean warms up to match that we'll end up with somewhere between 2.5 and 4 degrees of warming. That's sort of our likely range, so one sigma if you will, the two-sigma range is, I think two to five degrees warming and so we still don't know precisely where in that range we’ll land and then the other uncertainty we have to deal with is what we call carbon cycle feedbacks. So, right now when we emit co2 into the atmosphere about half of it or a little bit more than half that actually is absorbed by the oceans and the land and that's a really good thing. Climate change would be more than twice as bad if the earth was not absorbing some of the emissions that we're putting up today but the ability of the earth to absorb those emissions, the ability of the ocean to keep taking up some of our extra co2, the ability of the land to increase forested area, increase leaf size as a response to just a quest for more co2 in the soil. All of that can be affected by the warming of the planet.
Zeke Hausfather (12:19): For example, when the oceans become more acidic as they're absorbing co2 that can actually decrease the ability of surface waters to absorb more co2 from the atmosphere. Similarly, as the land warms, we see more catastrophic wildfires as we're having here on the west coast. We see more soil moisture evaporation which can lead to carbon loss from soils and so we expect the ability of the biosphere and the oceans to absorb our extra emissions will decrease as the earth warms. Exactly how much, however, is a little bit uncertain. So, when you put together those different uncertainties, even though we say we're on track for a world of just under three degrees warming today under current policies, we can't rule out the chance that that might be 40 degrees warming instead. It might only be a five percent chance we end up at four degrees under current policies today but that’s a pretty big risk to take and so it's not just the central warming estimates that we should talk about, even though we tend to focus on them a lot. It’s these tail risks that can really dominate the potential impacts because the damages associated with climate change are very non-linear. Three degrees is much worse than two degrees, four degrees is much, much, much, worse than three degrees across many different systems.
Zeke Hausfather (13:33): Finally, I should mention that when we talk about these global average warming levels, we're doing ourselves a little bit of a disservice. No one lives in the global average. In fact, the global average is mostly oceans and on the land areas where we all live, the rate of warming we've experienced has been much higher. In fact, over the last 150 years the land areas have warmed about 50 percent faster than the world as a whole and almost twice as fast or 70 or so percent faster than the oceans and so even though the world as a whole has warmed by only about 1.2c since pre-industrial times, the land areas on average have warmed by about 1.9 degrees and we expect that difference to continue as the world warms. So, that means a three-degree c future is really a four and a half degrees c future on average of the land areas where people tend to actually live and even more than that in high latitude areas. So, you can start seeing some really big changes associated with these. What seems at least when you hear them are relatively modest changes in the global mean. I like to use to ground myself on this like the last ice age which I think everyone would recognize as a very different planet than we have today. It was only about five to seven degrees c cooler in terms of global average temperatures than our current climate today and so we could end up sort of half an ice age unit difference in warming under current policies or more by the end of the century which is a huge change for our planet.
Ben Yeoh (15:08): Sure. I mean that puts a lot in perspective, that’s risen so many questions in my head which is great. So, I work a lot with models and we kind of know that every single model is always wrong so I sometimes get a bit worried about this point estimate. I think the things you sort of said are actually giving us a slight guide to something which is quite complex. One question which comes up that I’m asked is what are the chances of a kind of feedback loop which gets too so-called I guess people call these tipping points but something which is so bad that we kind of end up in another kind of another kind of phase. My reading of the literature suggests that within a say at least a three-degree band sort of the tipping points which would seem to be very catastrophic that some people talk about, don't seem to be likely. I’m not sure if I’ve read that properly and then are there tail risks on either side of that and then my second one on the tail risks is, I guess this is on the slightly hopeful as well as the other side is I can't tell and there seems to be things about how symmetrical or not these tell risks are and I guess people don't really know but is it plausible that we could also hit some really good things as well as some really bad things although I guess the good things are more likely to come from innovation breakthroughs but they I might also happen on the landmark side. Maybe I’ll stop there because I’ve got something about the differences also and the fact that it's not equal over the land mass either.
Ben Yeoh (16:39): Some places are going to be really hit hard and actually some places might even do a little bit better which is one of the really difficult things to grapple with across the whole globe but maybe the first one is yeah, this idea on tipping points is a kind of tipping point risk to the downside likely within a three degree or four-degree sort of range or what's your view of the reading of the science yeah
Zeke Hausfather (17:01): So, tipping points is an area where I think we as a scientific community have not done a great job of communicating to the general public because when people think of tipping points, they think of sort of everything is fine. You suddenly pass a point where everything falls apart, we go to hell in a handbasket of runaway global warming, the earth becomes Venus, the oceans evaporate. Wow it’s us, that's not going to happen but at the same time there are real points where you start to see big changes, particularly to specific ecosystems and I think the story around tipping points is less a global snowballing of climate change then the more a series of very impactful regional effects that can happen as the earth warms. Some of them then contribute to additional warming going forward. Some tipping points that we have a lot of confidence about are things like coral reefs, so coral can only generally survive in a fairly narrow temperature band that's adapted to. Corals can evolve over time but the rate of change we're seeing right now is much faster than has been experienced in much of the earth's history and so if you have more than 1.5 to 2 degrees warming most reefs in the world are going to be gone and reefs provide a huge benefit to fisheries, to coastal protection, tourism revenue for islands uh there's a lot of really negative impacts uh when coral reefs disappear uh and at 1.5 degrees many of them are in great peril and at two degrees most of them are gone barring a few specific locations that have unique characteristics like cold water upwelling or other things that can lead the reefs to be more preserved.
Zeke Hausfather (18:38) A similar type of regional effect is that areas of the Amazon that are already under a lot of pressure from deforestation. With a two degree plus warming world could start to transition into more of a savannah type ecosystem, it could be tough to restore back to a tropical rainforest in the future and that’s due to the interaction of climate change and deforestation and so by tackling either of those you can reduce the risk of that but certainly you could see some sort of ecosystem phase shifts like that. Similarly, Boreal forests are subject to a lot of stressors. Wildfires are going to reach further and further north as the world warms. Vegetative cover is going to change in those regions which can have big effects on the local climate there. There are potential changes in monsoon patterns that are a lot more uncertain. There's a slowdown of the thermohaline circulation that's been observed that's projected to continue even if an abrupt collapse seems unlikely and that can have a big effect on regional rainfall patterns. It can actually lead to some regional cooling in parts of northern Europe though that would be overwhelmed by the longer term warming we'd experience in that world. So, you'd have a bit less warming in those regions. Arctic sea ice is likely to disappear in the summer around 1.5 degrees or a little below which kind of has big effects on the ecosystems there and then, the permafrost in the arctic. So, there's an enormous amount of carbon and sort of vegetative matter in the soils that's frozen in the north and as those regions warm those start to melt and release methane and carbon dioxide.
Zeke Hausfather (20:11): Now in most cases these are somewhat gradual processes so it's not like you reach a certain point and suddenly there's the methane bomb and all the methane and carbon dioxide from permafrost goes up in the air at once. It's more the lower latitude areas start falling faster than the higher latitude areas south facing surfaces thought faster than north facing surfaces and so you get a more gradual response than the popular conception would lead you to believe but importantly a lot of these systems that we call tipping points are characterized by hysteresis and what hysteresis means is that once you start changing it, it's much more difficult to reverse it so ice sheets are good example here. There's a lot of ice sheet dynamics where you could have very rapid ice sheet loss in places like Antarctic and Greenland as the world warms and you'd have to cool temperatures back well below pre-industrial levels to get most of those ice sheets back once they’ve started to disintegrate so again it's less about a cliff we fall off and more a slippery slope we start going down. The net effect of all these changes is going to have a lot of big regional impacts. It's going to lead to some long-term additional global climate change due to things like more CO2 emissions and to a lesser extent methane emission but because the methane is slowly emitted the CO2 effect is much bigger from permafrost. Changes in albedo associated SIS los though a lot of that is already included in our models and our future projections but a few of these tipping points that we've identified really have the likelihood to lead to a substantial amount of additional warming beyond what is already in our models today at least in worlds that warm say three degrees or less.
Zeke Hausfather (22:11): It becomes a little bit more challenging to project exactly what will happen once we start getting beyond that. The last interglacial period was probably about a degree warmer than where we are today so a little under three degrees and we didn't see obviously C levels are 80 meters higher or whatever than they were today we saw some very long-term major earth system changes. But we didn't see any sort of runaway temperature change or very large temperature feedbacks in the last interglacial and so that kind of gives us a reasonable amount of hope that we're not going to see similar types of very large changes at under three degrees warming. Once you get past that you sort of get more into the world of the unknown. You're in a climate that is sort of unprecedented at least for the last three to 12 million years and then the odds of bigger surprises become larger.
Zeke Hausfather (23:04): An example of this is there's a paper by Tapio Schneider and his team at Caltech a couple years back where they looked at what happens under very high warming scenarios so say a world of 1200 parts per million co2 5c warming above pre-industrial and what they found is that beyond a certain point you start losing much of the stratocumulus cloud decks that cover the world's oceans over the course of a few years and that leads to another 6c warming on top of the 5z warming you already have over the course of a decade or two. That's the sort of catastrophic tipping point. Now obviously that was a very simple model that didn't have global coverage and there's a lot of scientific debate over how accurate those sorts of things are but the odds of those sorts of surprises become notably higher in a world of four or five degrees warming than the worlds under three degrees warming. It's a very good incentive to try to limit warming as much as possible. They're also and I should mention this because I think it's an important point, as we reduce our emissions the tail risks fall faster than the mean risk. That is to say the odds of four degrees warming fall faster than the odds of three degrees warming where sort of the 95th percentile of warming outcomes falls faster than the 50th percentile which is good and it means we can minimize these tail risks by reducing our emissions in a way that's important.
Zeke Hausfather (24:34): As to your other question about good surprises, certainly when we talk about uncertainties in the climate system, like climate sensitivity and carbon cycle feedbacks, those uncertainties work both ways. We run our models based on; at least for carbon cycle, feedback, the central estimate and the models themselves of a wide range of client sensitivities but it certainly is possible that we could think we're in store for a three-degree world and end up in a two degree one. Just like we could think we're in store for a three-degree world and end up in a four degree one. The challenge is that because the damages of warming are so asymmetric, that risk of four degrees influences our calculus in a way that's much more important than a risk of getting lucky and only ending up two degrees. So, when it comes to climate change uncertainty is decidedly not our friend even if it means we could get lucky and end up beating our climate goals when we don't expect to.
Ben Yeoh (25:30): Yeah, okay. That makes a lot of sense.
Zeke Hausfather (25:32): I’m sorry, I forgot your last question.
Ben Yeoh (25:33): Well, we have referred to it a little bit. It was the downsides of having just point estimates and I partly think of that because I had a couple of people tell me “oh if we don't hit 1.5 like well that's it then isn't it” and this is idea of like no actually 1.6 is better than 1.7 and it's better than 1.8 for the reasons that you give because not only is your mean temperature down but your tail risk has gone from being fat tails to hopefully thin tails or non-existent tails so that everything matters and the kind of the simplicity of the message of a number I can see has really resonated and has got people through. But, then that has partially overclouded some of the nuance which is then led to these kind of interesting other kind of debates and I didn't really know whether we’re to pull down on it except that it did seem that some people and I guess some people not in good faith but then some also in good faith are slightly just misinterpreting about how you can use a point estimate because you need to use it in the context of everything else and that doesn't go easily within a tweet or something like that.
Zeke Hausfather (26:45): Yeah, okay. So, what I like to say is that climate change is ultimately a matter of degrees rather than thresholds. There are no specific points that we know of where things go from fine to bad or bad to catastrophic. It's a gradient and that's true across most of the things we consider tipping points for that matter. There's not a single point where the system goes from fine to bad. It gets progressively worse with more and more hysteresis in some of these systems I think it's a bit of an unfortunate side effect of the way that we've created these global climate targets that they've become interpreted by a lot of people as thresholds, whereas in reality they are somewhat arbitrary constructs. We have a lot of literature about how two degrees is worse than one point five degrees and three degrees is worse than two degrees. But again, it doesn't go from there's none of these impacts to suddenly there's all these impacts when you pass 1.5 or when you pass 2.5. They're all getting gradually worse between those and so we really need to try to emphasize to people that every tenth of a degree matters. That even if we can't limit warming to 1.5 degrees which, if I’m going to be perfectly honest, we're not going to limit warming to 1.5 degrees and we can dive into that in a little bit if you want, it doesn't mean the world's going to end, it doesn't mean we should give up hope. It means it's all the more important that we limit warming to 1.6, 1.7, 1.8, wherever we can get that isn't three degrees or four degrees.
Zeke Hausfather (28:07): Again, part of that is around the minimization of tail risks because a best estimate of 1.8 could be 2.5 degrees if we're really unlucky with some of these climate system uncertainties. So, the further we can bring that point estimate down, the more we're minimizing these tail risk outcomes.
Ben Yeoh (28:25): Sure, that makes a lot of sense. We'll come back to your 1.5 and maybe also to cop 26 as well but one extension of this which I was intrigued from your view because it's a little bit further along from your work is what I would call climate economics and to tell you the truth I haven't been super impressed by some of the economics papers but maybe that's because I also don't really understand what they're trying to say. Some of the economics suggest, when they try and pass this into something like GDP, that you're talking about kind of a 10 percent impact on GDP or global GDP which is actually quite a lot but kind of seems manageable particularly if you mitigate and adapt. But it doesn't seem to have accounted for some of the things that you've talked about like localized tipping points or the fact that some countries might be completely devastated that that falls unequal on the world. Plus, when I look at their models, I’m just like well there's so many assumptions in there. I just feel it's even more uncertain than where we've got from some of the climate model stuff which actually in essential scenarios and a lot of you guys are doing the modeling kind of agreeing about where we're pointing. Whereas, that doesn't seem to be when they're trying to translate that into the kind of economics part. Do you have any view on how it's translating into economics or how climate economics are thinking about this?
Zeke Hausfather (29:49): Climate economics is a challenging field because you're looking at such long-time horizons and such big uncertainties, both in terms of how the climate will change but also in terms of how our societies will change. I think it can be instructive at times, but like a lot of applications of economics, there's a danger in interpreting it and over emphasizing certain economics outcomes for these very distant futures. It's really hard to model the impacts of climate change in the economy. Historically a lot of economic assessments of climate damages have been dominated by agricultural impacts because they're one of the easier things to try to model through climate change. Sometimes, sea level rise impacts but we don't really have good estimates on like what are the cause of increased wildfires, what are the costs of increased tropical cyclone intensities and rainfall, what are the cost of tree mortality from like prime bark beetles spreading or disease vectors increasing or any of the myriad of other impacts of climate change, both known and potentially unknown as we rapidly end up in a future world.
Zeke Hausfather (31:03): There's also these very thorny issues you get into when you're looking at climate impacts in the economics literature around discounting. There is certainly a justification in economics to discount future earnings versus current earnings and discount future damages versus current damages with the assumption the world is going to be richer in the future and those will be relatively smaller in terms of their welfare impacts but it gets tricky when you start talking about intergenerational problems like this. There have been some big thinkers, Kenneth Arrow comes to mind, and a few other folks have really written compellingly on this question of intergenerational discounting and equity and how to best treat that. Oftentimes, the discount rate, more than any other factor in these sorts of economic models of climate change really dominates the solution space, in terms of does your optimal outcome become two degrees warming or 3.6 degrees warming or whatever and so I think it can be a useful exercise but I think we should take it with a veritable boulder of salt particularly when we look at very long-time horizons.
Zeke Hausfather (32:03): The other thing that has been useful coming out of the economics literature is the interesting interactions of socioeconomics and climate damages. So, in the latest IPCC report, we introduced a new set of scenarios called the shared source economic pathways or the SSP’s and what's interesting about them is they look at five different sort of socio-economic and technological futures for the planet and within each of those different pathways, we look at what would the world look like under different mitigations. So, what if we do nothing about climate change all the way down to what if we try to limit warming to one and a half degrees. By doing that you can look at the impacts of a particular level of climate change across different sets of possible futures. So, if you're looking at a three-degree warming world, you look at a three-degree warming world in the context of a world where everyone is rich and equal. Where we have almost no poverty, where there's really very little difference between rich and poor countries by the end of the century, where everyone is very technologically advanced, there's a lot of adaptive capacity. A three-degree world still ranks havoc on natural systems. Humanity can mostly adapt to that, whereas if you look at a different pathway a world that has very high population growth, low economic growth there's very high inequality regional conflicts isolationism. That's a world where three degrees is much more damaging because there's huge amounts of the world that does not have access to adaptive capacity, that doesn't have access to the resources needed to build sea walls, to install air conditioning, to genetically engineer crops to be heat tolerant, to keep people indoors and out of the sun on extreme heat events. So, I think the economic literature does help us in terms of those interactions because they are very important and we can't really ignore them but at the same time it does a disservice when we interpret it too literally, given the huge uncertainties and what the damages of climate change will ultimately be and how societies will respond to them.
Ben Yeoh (33:56): That makes a lot of sense although I do know a couple of economists who basically, say if you don't really discount future generations, you treat future generations how you'd want to treat yourself, like you treat your children grandchildren and great friend, how yourself then that slightly answers the solution because you get to this same answer which is actually you want to do an awful lot because you want to give future generations essentially what you want to give yourselves.
Zeke Hausfather (34:23): I didn't mean to paint all the plain economists with the [same brush]
Ben Yeoh (34:26): Well, it's complicated like you say.
Zeke Hausfather (34:27): Like Fran Moore and Gary Wagoner and a number of those other folks are doing really good work around these tough issues.
Ben Yeoh (34:35): Like say long term discounting, you get a certain set of answers from it which is what the models and things say but it's very hard like discounting up to 2100 right? You learn a lot of things which we are definitely going to be wrong about. Maybe, that's a good segue into cop 26 and perhaps my question here would be is what did you take away from it which was kind of positive or and what did you take away which was maybe a little bit disappointing? I was kind of intrigued by some of the analysis there's been a couple of kind of snap analysis one by IEA another by climate resources and things saying well if we meet all of these commitments and things we could be looking at a sub two degree world like 1.8, 1.9 and then you had a lot of critics saying well a lot of those commitments just don't seem to be really realistic so that probably means we're not going to hit and we're not going to hit sub two and then counter to that would be kind of what you've suggested is but direction of travel is really good and 10 years ago we wouldn't have thought that we were there. So, that's perhaps a segue into why you may or may not think 1.5 is achievable, actually sub 2 might be plausible but may be seen through the lens of any positive things coming out of cop 26 and any things you thought were a bit more disappointing.
Zeke Hausfather (35:52) Yeah, I should mention that I was in Glasgow and I actually put together an analysis with Piers Forster at the University of Leeds where we looked at all of these different projections that were coming out from climate action track or the IA, climate resources, the United Nations Environmental program et cetera during COP26. Instead of comparing and contrasting them and discussing these sorts of different scenarios, I’m happy to tie to link to that but ultimately, I think cop26 moved the needle in the right direction in an important way even if it wasn't a breakthrough moment in the way that say Paris wants but I also think people had somewhat unrealistic expectations going into it. The cop process was never set up to be, the world sits around it does nothing and suddenly we all get together and announce some giant breakthrough.
Zeke Hausfather (36:42): The way the system is set up is that countries update their commitments in the lead up to cop 26 and then there might be some small new announcements during the cop itself but it's mostly sort of working through all these thorny issues around climate finance and adaptation funding. The way carbon markets are going to work and be managed, the way you deal with forest accounting and emissions reporting and all these other sorts of gnarly details, some of which are quite important around the implementation of the Paris framework. And so, we did see some meaningful new commitments a cop. The global methane pledge definitely moved the needle more than most things. There’s an important pledge by Vietnam and South Korea and other countries to accelerate their coal phase out schedules. There was a compact and deforestation, and there were some announcements around electric vehicles that were important. There are some updates to NBDC’s (Nationally Determined Contributions) the sort of promises countries makes under the Paris agreement to reduce their emissions.
Zeke Hausfather (37:48) In particular we saw some new net zero commitments that were quite impressive from India, that if implemented, can move the needle and so sort of where we are coming out of cop is that going into the conference, the world was on track for about 2.6 or 2.7 C warming best estimate, plus or minus one degree c based on climate system uncertainties. Under policies in place today and under sort of 20, 30 commitments under the Paris agreement, we're on track for probably around 2.4 degrees warming globally, if all countries met their 2030 pledges and then maybe about two degrees warming if countries met their sort of longer term 2050, 2060 net zero commitments or net zero promises. Again, those latter categories should be heavily discounted. It's easy for leaders to say they're going to do something 30, 40, 50 years in the future when they're not going to be in power or in most cases even alive, it's a lot harder to actually deliver on that and the extent to which we should take those long-term promises seriously really depend on the extent where they're reflected in near-term commitments and there we definitely have seen a big gap between these sort of long-term promises countries have made and their near-term commitments but sort of coming out of cop26 we moved the needle in a few different ways.
Zeke Hausfather (39:00): In terms of these near-term commitments, so back in 2020, a year ago, the climate action tracker which is probably the best source for these projections said that 2030 commitments put us on track for about 2.60 warming by 2100. Going into cop26, updates over the past year as countries submitted new NDC’s brought that down to about 2.4 degrees if you add on top of that some small NDC updates at cop26, the new methane fledge, the coal phase out, the deforestation pledge that might shave another tenth of a degree C off 2100 outcomes, you're down to about 2.3 c and again every 10th of degree matters. Similarly, if you look at these long-term net zero pledges going into cop our best estimate was around 2 or 2.1 c outcome in 2100 with the new commitment by India and a few other countries, that's dropped down to about 1.8 degrees c if all of these net zero commitments are met. Which would be the first time we've really seen pledges by countries to do things on the ground that would result in less than two degrees warming globally and about a two and three chance of avoiding two degrees warming globally, which is significant.
Zeke Hausfather (40:15): There is some good news in that front but again it's this gap between long-term ambition and near-term commitments that's really worrying and countries like China, Like India in to an extent even rich countries like Japan, Australia, the U.S. need to do more in terms of near-term commitments to put us on track to get to these sort of net zero promises and I think that's going to be really the task in the lead up to cop 27 next year is firming up these short-term commitments and really bringing them in line with the emission reduction pathways needed to meet these long-term net zero promises. So that's the good news. The bad news is that I think coming into cop 26, the idea of limiting warming to 1.5 degrees on life support, nothing's impossible but I think it's becoming harder to imagine a world where we actually take action fast enough to limit warming to 1.5 degrees. At least in the absence of a very large amount of negative emissions later in this century or next century. So, if we want to limit global temperatures to 1.5 degrees with a reasonable chance of doing so, ends not overshooting it by much and even these scenarios have some overshoot they usually end up peaking temperatures at 1.60, we would have to reduce global emissions by about 45 percent in the next decade and no one is making commitments to that today.
Zeke Hausfather (41:47) Some rich countries like the US, the EU and the UK have committed to reduce their emissions by 50 percent but you can't expect countries like India or sub-Saharan Africa or Indonesia or even Brazil to make similar types of commitments given the rapidly growing economies given the need to lift hundreds of millions of people out of poverty. So, a world where you actually had a 45 reduction by 2030 involved much greater reductions in the rich world and bigger reductions in the developing world than we're seeing today and no one seems to be willing to commit to that right now and so in the absence of those sort of commitments it's just really hard to see a scenario where 1.5 stays alive. Now what you could have been a world where we do end up having some strengthening of commitments. We end up in a pathway for maybe 1.7c by the middle of the century and then the rich world promises in a big way to invest in carbon removal. So actively sucking carbon out of the atmosphere such that by the end of the century we're maybe removing half of what we emit today in addition to minimizing our emissions globally and getting that as close to zero as possible. In that sort of world, you could have an overshoot by a couple tenths of degree in the middle of the century and then ultimately end up around 1.5 by the end of the century and to be honest that's what a lot of the models in the IPCC for example that actually get to 1.5 degrees tend to do.
Zeke Hausfather (43:06): Of course, the challenge with that is you're talking about a sort of planetary scale engineering challenge later in the century with technology that's very needed today and so while it would be great if that ends up panning out then I think we should invest a lot more money and see if we can make that technology cheaper because it is going to have to be part of the solution. It's also very dangerous to bet on and to sort of give people false hope that we'll necessarily have a route to get there. So, in my view we're so close to 1.5 degrees, today we're at 1.2, today the remaining carbon budget is so small that at this point limiting warming to below 1.5 degrees without overshooting the target is pretty much dead and I think the extent to which we do have hope to ultimately get temperatures down to 1.5 degrees is going to end up depending a lot on carbon removal technologies and how fast we can get our emissions to zero to minimize the amount of overshoot we have.
Ben Yeoh (44:00): Sure, that makes a lot of sense. I guess then I’d be interested in your thoughts on what the degrowth movement would think. They came at it saying well we've got to do that and de-growth is the answer but it seems to me, particularly seeing through the pandemic and seeing that and seeing the fact that you've got to lift so many people out of poverty, I guess the kind of economic consensus is that d growth really doesn't work for that and then you end up maybe on the super optimistic end of a kind of I guess what would the d-growth people say. They'd say oh you just got tech bros where innovation saves the world and I guess you had a little bit of a pushback from d-growth with the sort of eco-modernist type of ideas and things coming up and like the tension between the two. Maybe you would have some comments on that from your position about to what elements d growth is just really unrealistic or are there any things we can take away from that and what elements are we too optimistic or not optimistic enough from what innovation and tech could maybe bring us.
Zeke Hausfather (45:08): Yeah. I mean on the question of degrowth what is ultimately limiting our ability to reduce emissions today is not the scenarios that climate scientists are putting together or energy modelers putting together. It's both the cost of clean energy technologies and the political willingness to take action rapidly to reduce emissions if it comes at a cost to society and I think the biggest problem with degrowth is it's hard to see how that moves the needle in that problem. It's not a popular thing. There's not a huge movement to support policies that shrink our economy and reduce jobs or otherwise. So much of what makes our politicians popular today is promises of growth and so it just strikes me as kind of a dead end, in terms of actually getting near-term action on climate change barring some sort of global consciousness shift around the issue that we're seeing very little signs of today.
Zeke Hausfather (46:10): I think there's a real challenge on political salience that has to be addressed. The other challenge of course is that most future emissions growth comes from countries that are poor today where economic growth is in fact essential to lift hundreds of billions of people out of poverty and so we actually have seen most rich countries starting to reduce their emissions over the past decade. I think 32 countries have now seen falling emissions despite rising GDP and in some cases like the UK they've fallen close to 50 percent already. So, I think we do have a pathway where we can reduce emissions in a way that isn't politically toxic, in a way that doesn't lead to hardship for people and in a way that can potentially create a path for countries that are poor today to follow in the footsteps. Countries like India are only going to make a net zero commitment or even a country like China for that matter. If they see a way to do so that does not put at risk their development trajectory and I think the fact that they are willing to make those commitments now is in many ways due to the fact that climate mitigation is seen as much cheaper today and much less damaging to the economy today than it was a decade ago, in large part, due to the progress we've made in reducing the cost of clean energy and I’m not going to defend excess consumption in rich countries per se, it's not the hill I choose to die on.
Zeke Hausfather (47:46): Certainly, if people want to create a movement for people to fly less, for people to drive smaller cars, for people to take voluntary measures to reduce their own environmental impact by eating less meat that's all-good stuff. I don't think we're going to have the political buy-in to actually ban hamburgers, for example, in rich countries anytime soon and so I’m much more optimistic about changing emissions in those sorts of sectors by creating viable alternatives for people. Personally I have switched from eating beef for the most part to eating impossible beef because I think it tastes just as good, might cost a dollar more per patty but it's an alternative that I can stick into the same dishes that doesn't involve a huge change and that has a tiny fraction of the climate impact of eating beef and so the more we can develop those sort of solutions that can sort of slot into our lives as they are today, I think the more seamless and rapid transition we'll see rather than asking people to fundamentally change their way of life and in some cases we may have to push bigger shifts in sectors where there are no other alternatives but I think so far we've had a pretty good track record of finding alternatives that have many of the same benefits of the uses of fossil fuels that people enjoy today.
Zeke Hausfather (49:02): At the same time, I think there definitely is a risk of being sort of too techno-optimists. There is a column by Thomas Friedman, times yesterday that definitely fell into this trap it's like we need more Elon Musk and nuclear fusion is the future which is not to say that we don't need more innovators and throwing tons of money around into clean energy solutions and even long-term things like fusion is a bad idea. It's just that looking at those in isolation and seeing technology and sort of entrepreneurship in the free market is somehow divorced from the policy context is problematic and dangerous. A lot of or almost all of the technologies that are mature today that reduce our emissions from wind to solar to electric vehicles to nuclear fusion, which is potentially on the rise in the next two decades out of an enormous amount of government research policy support. And so, yes, we need to spend more money on innovative technology and the fact that the private sector is throwing a tsunami of money at this technology right now is a good thing. Just last week, Rivian, an electric automobile company went public here in the US. Despite having never sold a vehicle they now are more valuable than Ford Motor company in terms of their valuation.
Ben Yeoh (50:23): 180 billion market value.
Zeke Hausfather (50:24): Yeah, which is ridiculous uh but it’s certainly a sign that the market sees this as the future they're willing to throw huge amounts of money after it and it's going to accelerate your transition. But in the absence of policy, it's not going to happen fast enough and so I think if you're a techno optimist you can make the case for maybe 2.5-degree world or maybe even 2.3, 2.2-degree world is something that could come out. In a world where we had relatively limited policy but a huge amount of innovation and sort of optimism around technology but it's going to be very hard to go below two degrees without real government action to internalize externalities to subsidize the adoption of these technologies and to build a lot of the sort of support systems necessary for these technologies to scale. Renewable energy is actually a great example here. Wind and solar costs have fallen tremendously but they face real challenges to scaling up in the absence of large-scale public investments in transmission, for example and reform to environmental laws to more easily permit those and accelerate them. Investments in battery storage and other ancillary grid services so there is a need for more innovation and more private sector work in this and we are seeing a lot of positive science there but we also need a lot more government policy support to really get us the speed of the transition that we need to meet our client goals.
Ben Yeoh (51:45): Great! Okay, that makes a lot of sense to me. My son now eats impossible meat rather than normal burgers because he thinks it's pretty much the same and I guess Bill Gates has been going on and on about this although maybe he's a tiny bit techno-optimist as well. Maybe we'll have a quick-fire kind of overrated or underrated section or you could just do a quick comment because some of it is some kind of either or not. If you find it interesting, we can do it, so I’ll shoot out a phrase or an idea and you can go oh I think that's overrated because of X or underrated because of Y so we'll start with maybe one that you mentioned which is nuclear power but maybe particularly mini nukes. Do you think this is maybe overrated or underrated or any thoughts?
Zeke Hausfather (52:34): Depends a lot on who you talk to. Yeah, I’d say, probably overall a little underrated in part because one thing that's come out of the energy modeling world in the last few years is that there is a real need for what we call clean verb generation. So, renewables, variable renewables in particular can go a long way. At the end of the day, you're going to need 20 to 30 percent of your power to come from sources that can be available when needed, that are not subject to the whims of when the wind is blowing and when the sun is shining even in a world where you have a lot of transmission and storage and so nuclear is not the only option there. There's a huge amount of advances happening in geothermal, there's a lot of people very excited about green hydrogen as sort of a way of firming up variable renewables and doing seasonal storage though there's a lot of challenges there. But certainly, nuclear is one of the best technologies we have for that purpose today. So, I’d say it's a little underrated overall but the jury's still out in terms of if we can manage to build them on time and on a budget and see the same sort of learning curves, we've seen with renewable energy technologies.
Ben Yeoh (53:38): Sure, that seems very fair. Carbon offsetting.
Zeke Hausfather (53:45): It’d say it's overrated. There are a lot of companies today that are carbon neutral companies that have maybe reduced their actual emissions by 20 percent and then have bought a whole bunch of dirt-cheap forestry related offsets to call themselves carbon neutral to cover the other eighty percent and the problem is, if you take carbon out of the atmosphere and store it in the biosphere, it's not going to stay there forever. A lot of the wildfires we've seen in California this year were burning through corporate carbon offset projects and so, I think if companies were actually paying $600 a ton to do direct air capture and verifiably put that carbon into geologic storage, it would be a very different story but to the extent that carbon offsetting today is dominated by often to be honest, bullshit forestry offsets. I think it's a real problem and a lot of it is green washing and I think we need better differentiation in that market between permanent carbon removal, which is actually what's needed to counteract a ton of carbon that's emitted which is going to stay in the atmosphere for tens of thousands of years versus sort of temporary removal and to the extent that we are planting trees. We need very good systems to ensure that they stay in that location or that location remains forested for thousands of years to come to be equal to avoiding a ton of CO2 emitted which is a big challenge in a warming world which has much stronger stressors for the biosphere.
Ben Yeoh (55:10): Yeah. Even the higher quality nature-based solutions are less different between low quality offsets and high quality but even the high-quality ones are not necessarily set in stone. Like you say, if they're in the biosphere. That seems very fair.
Zeke Hausfather (55:23): So, we should actually try to set more of them in stone quite literally.
Ben Yeoh (55:28): Yeah, exactly. I guess this is a sort of an investment thing but I guess the movement is a divestment movement or maybe an engagement movement. What do you think about divestment strategies?
Zeke Hausfather (55:43): I have mixed feelings about them. I think they've been very successful in mobilizing people. I think they've certainly had a big effect on the economics of some projects in terms of the ability to get capital but I think we're also starting to see a little bit of a challenge right now in the strategies of targeting supply rather than demand. If you make it tough for people to get money to develop fossil fuel projects and you end up having production fall and prices rise, then there's huge amounts of political blowback and you end up with the US pressing for dramatic expansions of oil production despite going all in on climate and so I think it is useful and I think particularly when it comes to coal. It's quite useful because there's very little justification for investing anything in coal today but I think we need to make sure that all of these sorts of supply-side interventions are happening in conjunction with demand side reductions as well. Subsidizing electric vehicles so people are less sensitive to the cost of oil, subsidizing heat pumps so people are less affected by swings and natural gas prices and those sorts of things and I think there's a definite danger of political blowback if we focus too much on the supply side and not enough on the demand side.
Ben Yeoh (57:02): Sure. Carbon tax or I guess carbon prices markets, that whole area of trying to price carbon
Zeke Hausfather (57:12): Overrated. I mean a carbon price is a necessary but not sufficient condition to keep decarbonization. By that, I mean, at the end of the day there are some things that you're probably going to want a carbon price to do but at the same time we have swings in terms of fossil fuel costs that are much bigger than any price on carbon that we're talking about imposing frequently in terms of gasoline prices or petrol prices and it has a relatively small effect on people's actual behavior and so I think that carbon prices have been a little oversold in terms of their, at least near-term effectiveness certainly if we're focusing on meeting targets. They don't have any sort of guarantees of actual efficacy in terms of reductions but also, there's just particularly here in the US, not much political salience for carbon pricing. Even progressive Washington state which tried to get a tax dividend revenue neutral carbon tax, failed miserably on a popular referendum and there's no appetite at all to pass carbon taxes today either from the left or the right in the US in politics and so it would be nice and I understand why economists love it and as a someone who's dabbled in economics over the years; I did my uh master's thesis at Yale a decade ago on sort of making tradable permit systems more tax-like but at the end of the day we need to go with what can actually be done and so yes to an extent, we can do a carbon price good but we shouldn't rely on it as our primary mechanism to reduce emission.
Ben Yeoh (58:46): Sure, that makes a lot of sense. Gas as a transition fuel or gas place within our energy systems.
Zeke Hausfather (58:55): A decade ago, it was not overrated. Today it's overrated in part because we have, at least, in the rich world transitioned away from coal in a large way. US coal use is down 60 percent in the last 12 years, UK coal use is pretty much zero now. Europe, some countries are doing a little worse in that transition but even there we're quickly running into a case where gas is becoming the sort of the worst marginal emitter as coal is phased out of many areas and so yes, we reduced emissions by replacing a lot of coal plants with gas but today increasingly renewable energy is cost competitive. There's much less of a justification today to the new gas infrastructure given the alternatives available. In particular, in many places like the US we already have too much gas infrastructure today which will play a role in helping balance out renewable generation, in the near term, until we get other sort of clean energy, clean form technologies available and more battery storage and transmission and all these other things but today I just think there's much less of a role for gas replacing coal than there was a decade ago. We've already replaced most of what we can, economically, there.
Ben Yeoh (01:00:11): Yeah, that also makes a lot of sense and it’s the fact that things have changed and changed quite quickly within a decade.
Zeke Hausfather (01:00:19): It's also worth pointing out that with methane leakage, gas is better than coal but not as brilliant as we thought.
Ben Yeoh (01:00:27): The data we have on it is not so good so it could well be underestimated from what we've seen and stuff, I guess that's an issue as well. The idea of a green new deal, does a lot of these innovations and things really come with new jobs or is that kind of a separate issue so green new deal.
Zeke Hausfather (01:00:52): So, I think in the US context, the green new deal was an interesting political exercise. I think there is a certain amount of danger to sort of attaching a wide range of other unrelated social policies to climate measures like a guaranteed jobs program or universal health care, all these other things which are good in their own right but to the extent that we want climate policy to be something that can be durable. Ultimately it can't just be a big left issue. A permanent leftist majority is not a replacement for effective climate policy and countries that have done the best to reduce emissions like the UK are countries where climate is not so much a polarized issue, at least acceptance of the basic science is certainly not. And so, I think there's definitely some challenges there on the jobs front there are a lot of jobs in installing clean energy, there's a lot less jobs in maintaining clean energy than there are fossil fuels and I think that distinction is important and certainly there are a lot of regions where many of the jobs today are tied up in fossil fuel production where you're not going to be able to see a one-to-one replacement particularly in terms of geographic concentration of future clean energy jobs. So, I think as we're moving toward a world of more clean energy and less fossil fuels, we do need to always keep in mind sort of the need for a just transition and to help those who will be most impacted by these changes and not just sort of say “well we're going to create more jobs by installing solar panels so we don't have to worry about it right it's a much more complicated issue than that”
Ben Yeoh (01:02:30): Excellent, that makes a lot of sense to me as well. Perhaps coming through to the last couple of questions then. I was wondering if you had any view on the Bjorn Lomborg position, we’re concentrating on the wrong things that actually if we invested in all of these other areas you would get a much better deal for all of this and that the over emphasis on some of this climate thing. It’s a kind of like a misallocation of resources and maybe I would extend the sort of the commentary if you would to the fact that this just still seems to be maybe unhelpfully for an outsider looking in, quite a lot of heated debates. I guess you get this in a lot of sciences in general but you get people and they're kind of commentating against one another and it doesn't seem like that they're very aligned which I guess causes some confusion and I can see this in when I speak to some of my friends but be interested generally on the Lomborg position and then whether the consensus around where science can be. You can never get to a position where you're not going to get these kinds of heated debates or seemingly striping at one another.
Zeke Hausfather (01:03:43): Yeah. I mean on the Lomborg position, I think fundamentally his mistake is assuming that everything is zero-sum. When it comes to climate mitigation and poverty alleviation and all these other pressing issues that the world faces, we can sort of walk and chew gum at the same time so to speak. Certainly, if your criticism was misallocation of resources, you could make a much stronger claim around say military spending than climate mitigation spending in terms of reallocation to humanitarian measures of poverty alleviated. I think we're increasingly realizing that climate impacts and climate mitigation are tied into development in a way where you can have mutually beneficial outcomes particularly if rich countries can get their act together and actually help subsidize the adoption of clean energy technologies by poor countries in a big way and that's been a huge area of battle in the international. It's one of the biggest flash points, in Glasgow, is sort of around this question of what extent should rich countries be paying poor countries to help both adapt to climate change but also to mitigate climate change and I think poor countries have a very strong argument there. They're like look you rich countries destroyed the environment in your development process and now you want to slam the door behind you and I think that balancing that out and ensuring that poor countries have a way to meet their development goals robustly while transitioning to clean energy is critically important but again going back to the point I made earlier, I think that that's become much less of a trade-off now than it was a decade ago and I think the fact that we are starting to see all these big net zero commitments and even some more near-term commitments by poor countries is really an acknowledgement that there is not necessarily a large net cash cost or even in some cases a net cost to transitioning away from fossil fuels.
Zeke Hausfather (01:05:32): Obviously, it depends how rapidly you do it. If you ask India to get its emissions to zero in 20 years that would impose a huge cost and have a big conflict with development priorities but I think we now see a pathway to at least a below two-degree world where countries are not really bearing much of a cost in the transition. In part, because we've seen such dramatic cost declines in fossil fuel alternatives. So, I don't think there is nearly as much of a trade-off as folks like Bjorn would emphasize. Lomborg also is just to be honest a bit of a consummate cherry picker on these issues, my favorite example of his work is, he did a paper looking at the impact of the Paris agreement which I think we'd all recognize now along with these longer-term technology trends this had a big impact in changing our future warming trajectories. Back then he argued that well countries will just meet their 2030 pledges and then in 2031 they'll go back up to rcp 3.5 emission pathways and therefore Paris will only cut global temperatures by like not .2c or something. Yes, and in that very tortured construction it would, but it's sort of ignoring everything else that's going on and so I think you often need to take some of Yorn's work with a grain of salt and those sorts of things because he does have a bit of an extra grind in these issues. He’s not always wrong but he's often cherry-picking.
Ben Yeoh (01:06:53): Yeah, he makes his point and then finds the model to back it up.
Zeke Hausfather (01:06:58): Yeah, in terms of sort of scientist consensus on climate, there's not much fundamental disagreement in the scientific community around the basics here. The earth is warming, co2 is a greenhouse gas, we're responsible for c2 emissions. Therefore, we're responsible for most of the warming the world has experienced. Where there are big scientific disagreements is what is climate sensitivity exactly, how much is the earth going to warm in the future, what are these various tipping elements or feedbacks? There's a lot of different views there and I think the way that science happens in academic journals and at conferences is fairly divorced from the way it gets presented in the media. It's gotten a little bit better but you still see a lot of both sides’ presentations in the media in a way that isn't really reflective of the scientific literature or the scientific community. Certainly, not the way I’ve experienced at conferences and we actually have some pretty good mechanisms for reaching consensus and communicating that consensus through the IPCC process and if you ever read IPCC reports. They are very cautious; in fact, some people criticize them for being too cautious on emphasizing what we know and where the remaining uncertainties are and I think that that process has really been helpful for the community to sort of synthesize their knowledge to talk across the many different disciplines to make up climate science and get a much more unified voice from the scientific community on this issue.
Zeke Hausfather (01:08:19): Then to be honest, you even see in other scientific fields like medical science could really use an IPCC for example, as we've seen with all of the fights over masking and vaccination and everything else involved with Covid. I feel like in some ways climate scientists are a bit ahead of the game.
Ben Yeoh (01:08:36): Yeah, I know. Like extending that into economics and readings on macroeconomics they can't agree on inflation or interest rates. You would have thought some of their very basic building blocks are massive disagreements still going on there. Great and so maybe then the last question would be what advice do you have for people who want to be involved in climate?
Zeke Hausfather (01:09:14): I mean build a useful skill that fits into a good niche. Be that data analytics, be that communication and writing, be that climate modeling or economic modeling and find an organization that's aligned with your interest on that. One of the challenges with working in the climate world is you’re not going to make as much money as if you work for google right. The fact that so many people want to make a positive impact on the future, means that organizations particularly environmental and nonprofits tend to have relatively low salaries in part because they have a flood of interested and highly qualified people wanting to do that work. So, unless you're working for a hot cleantech startup, you're probably not going to make a huge amount of money out of doing climate work but nevertheless, you're going to have a much bigger impact than you would if you were optimizing the advertising algorithm for some web-based company. So, there are trade-offs there when you're thinking about careers but I think at the end of the day the quality of life you have knowing that your work is making a difference in the world is much more valuable than maximizing your 401k. So, I’d say find a niche. Find an organization aligned with your values and see the biggest impact you can make there.
Ben Yeoh (01:10:32): Great! Well, that strikes me as being excellent advice. So, with that, Zeke, I would like to say thank you very much
Zeke Hausfather (01:10:41): Thank you. It's great to be on.
Jason Mitchell on Poetry, Sustainable Investing, Regulation, Carbon Tax, Activism, Stakeholder Capitalism | Podcast
Jason Mitchell is Co-Head of Responsible Investment at Man Group. He was a hedge fund manager. He is a poet. He is a deep thinker on all things sustainable and finance. He hosts a brilliant podcast on sustainability, A Sustainable Future.
We chat on his poetry and how he witnessed refugees in the Mediterranean sea. We dicussed what poetry has taught him.
“rescued by our boat one morning, the man asked me, is it true what they tell us, the traffickers, about these waters, that the sea has no bottom? I told him no, there is indeed a floor, half a mile or more below us. And Europe is a much farther, more difficult journey than the traffickers promised you”.
I asked whether fund managers on average know enough outside finance and about his journey into sustainability.
Jason discussed the Jevons paradox. How we use something more the more efficient it becomes.
Jason gives his views , overrated/underrated, on:
Carbon Tax
Divestment as a social political tool
Shareholder activism as a theory of change
Carbon offsets (and shorting as a tool)
Sustainable finance regulation
Stakeholder capitalism
We end with Jason’s favourite podcasts that he has hosted, what people misunderstand and his advice for others.
“no doesn't mean never”
PODCAST INFO
Spotify: https://sptfy.com/benyeoh
Anchor: https://anchor.fm/benjamin-yeoh
Click below or wherever you get podcasts.
Jason Mitchell podcast with Ben Yeoh (transcript, only lightly edited, expect typos etc)
Ben Yeoh (00:00): Hello, and welcome to Ben Yeoh Chats. If you're curious about the world, this show is for you. How can you be a poet and a sustainable hedge fund manager? On this episode, I speak to Jason Mitchell. We talk about his poetry, his journey through sustainability and asset management, and he gives his views on a range of topical subjects, such as carbon tax, divestment strategies, sustainable finance regulation, carbon offsets, and stakeholder capitalism. These are personal views only, and there is no organizational endorsement or any investment advice to be taken in this educational conversation. If you enjoy the show, please like and subscribe as it helps others find the podcast. Thank you. Be well. Hey everyone, I'm super excited to be speaking to Jason Mitchell. Jason is co-head of Responsible Investment at Man Group. He was a hedge fund manager and he is a poet. He's a deep thinker on all things sustainable and finance and he hosts a brilliant podcast himself, A Sustainable Future, which you should check out. Jason, welcome.
Jason Mitchell (01:12): Thank you so much. I'm really looking forward to this. It's great to see you, Ben.
Ben Yeoh (01:15): Great to see you. So, you've been on a small boat in the middle of the sea witnessing refugees in the Mediterranean and you've produced poetry and photography on the experience. You bore witness. And I think I quote “rescued by our boat one morning, the man asked me, is it true what they tell us, the traffickers, about these waters, that the sea has no bottom? I told him no, there is indeed a floor, half a mile or more below us. And Europe is a much farther, more difficult journey than the traffickers promised you”. What did the experience teach you and what should we know more about the situation?
Jason Mitchell (02:03): Yeah, so you're referring to my experience on a 26-meter decommissioned German lifeboat that was designed for the north, the Barents Sea. I and a group of six, seven other Germans were on it for several weeks off the coast of Libya in late 2016 during the absolute height of the migrant crisis. It was interesting. I think it's actually worth just giving a little bit of back story to that. Cause I think, and I suspect probably like you, my interests were…they tend to be guided by climate. Right now, the climate, particularly in sustainable finances, is just such a powerful issue. And certainly, now with net zero and the mass media, into COP26, the prevalent issue, I think what was interesting for me was coming out of COP21 in Paris in 20, at the end of 2015 and feeling pretty brilliant about the state of the world, about what the Paris Accord meant.
Jason Mitchell (03:25): I think coming out of that, I had a friend who was doing some work at an NGO around the Calais and Dunkirk migrant crisis in France. And he was just doing a quick run from London out there with secondhand clothes. And I said that I would join. So, we did the trip, dropped off the clothes and I ended up staying for several weeks and it kind of blew me away that climate, and justifiably because of the existential risk of climate change, but it's the predominant theme that captures everything. But there are these other crises, in this case this migrant crisis, that was less than 300 miles away from Paris, in London happening in Western Europe reflecting, obviously, the crisis in Syria and the persistent migrant flows from West and Central Africa. And so, for me, it was kind of fascinating to have to switch lenses from climate to this kind of humanitarian crisis. And I think from thereafter, I found it kind of fascinating and overlooked in a relative sense. And so, I ended up dedicating a good part of that year working in Calais then working in Lesvos with an NGO that worked alongside Medecins Sans Frontieres. Then ultimately hooking up with these German NGOs and working off the coast of Libya. Does that answer your question?
Ben Yeoh (05:10): Yes. I guess it puts a real human face onto climate crisis and everything about that. Was the experience informing your thinking around sustainability and the messages that we need to talk about? Or, you were kind of hinting about it, that actually there is this climate thing and it's all pervasive. But there are many crises that are kind of right there and these people and it was kind of interesting that this is intersectional, so that there's this crisis happening. But your work, your poetry and your photography seem to be so powerful out of it. I couldn't help, but think that this was something other in terms of your own journey.
Jason Mitchell (05:55): Yeah. No, no, you're right on that point. Because I think it was, it was interesting to kind of think about this crisis outside of the lens of finance. That said, I still think that you can make some pretty powerful linkages about this crisis… what the implications were on stability, the political stability, and even the financial stability of areas. By that, I mean, look at to what degree the migrant crisis… Think about how that has shaped the political landscape and the move far right within Germany and certainly in Italy, following in 2017 and 2018. So it's had certain implications politically from a fiscal perspective. And I think to a certain degree, within markets as well. I think what was fascinating to me was to acknowledge those, but also see this different issue. I had done this podcast episode with Mary Robinson, the former president of Ireland. Who's been phenomenal, her work around the SDGs in particular. She's a member of The Elders and she does a lot of advocating particularly around the SDGs. But one of the themes that she constantly goes back to, and it's so intangible and abstract, it's hard to really unpick it, I found until I had some of this experience, was this issue of pride, of self-worth and I think that's the thing that really-- what resonated with me, when you find that you have families landing on the beach of Lesvos with a few backs or in the story that I wrote--
Jason Mitchell (07:44): So you read a poem but there's another story I wrote for the Leonard Review of books, where I talk about the first death that happens on our boat and this man who was just incredibly young, incredibly strong from somewhere we think Western or central Africa. I just remember bright teeth, right. I mean, he was just in the prime of his life. And he ended up dying because he had spent 12 plus hours on the bottom of a boat, ingesting and inhaling this toxic mix of fuel and saltwater, which is quite acidic, so even his skin was peeling off in many places. To witness that … and the handover that we ultimately did to an Irish warship, surreally called the Samuel Beckett. But just a strange experience because we handed him over with nothing more than a piece of paper, which were the coordinates of where he passed away, in not the middle of the Mediterranean, but obviously 20, 25 miles north of Sabratah in Libya. But there was nothing more. There were no familial clues, no shoes, nothing about his name for where he was from. It was sort of a strange experience to see these people, trying to find a better life, snuffed out and not even a sense of remembering them.
Ben Yeoh (09:27): And you and your group really bore witness to that. And I think that something which comes through, which is that there was always an element when I hear you speak about that very human part to it. We talk about finance and these markets, and there's a lot of numbers on screens, but ultimately, it's hitting what economists like to say is the real economy, which is people in the middle of the sea, trying to make a better life for themselves. And I was interested. Is that perhaps how your poetry and your essay writing and your photography has informed your work in life, that it comes through this on a very human aspect, although we've ended up in finance and services like that. Does it inform that or does it work on a more parallel thread?
Jason Mitchell (10:09): No, no. I think it does inform. It's always interesting too, because I tend to think I'm very cognizant of voice in describing this, either through the lens or through essays or through my poetry. And I find that mine tends to be very impersonal. It tends to be a very neutral voice. It's not confessional, for instance, in describing those. I'm actually working on an essay right now that speaks to climate change over the long arc of my own family, which is set against another crisis, the cold war crisis. My father was in the Air Force and I spent most of my childhood on Air Force bases all across Europe. There are these certain kinds of arcs or circles of crises that are always over the horizon.
Ben Yeoh: (11:15): What else do you think poetry has taught you?
Jason Mitchell (11:21): A degree of empathy. Certainly, there has been…Being able to connect to experiences, obviously I'm not privy to, but to try and sort of understand certain experiences, cultures, et cetera, as an outsider. That's been particularly powerful. I would say mechanically too. I would say some of the economy of language. I wonder if you’re the same case, but I tend to value the economy of words. And I think that really manifests itself in poetry where each word each line breaks is sort of intentional and thoughtful, rarely is it arbitrary or ill-thought-out.
Ben Yeoh (12:26): No, I agree. And I think finance could do with more of that. In fact, that's one of the other questions I have, which is, there are many thinkers you've suggested that deep knowledge about art or aspects of culture is really related to a sign of good, call it human capital talent, and the lack of that. And I was wondering whether you think most hedge fund managers would believe that, or even fund managers in general. And do you think fund managers, or maybe finance in general knows enough outside the world of finance? I sometimes think even some of the best investors are very curious about the world and kind of know quite a lot. And over the last few years I worry that it's gotten narrower and narrower. And now you've got people who are very good with spreadsheets, but have lost that real economy or the human connection, or just the understanding about how this happens. So, yeah, I was just wondering about the effect of arts and cultural or the wider thinking on whether you think finance people know enough about outside finance.
Jason Mitchell (13:34): I don't think they do. I completely agree, I don't think they do at all. And I would say that for most of my life, I was probably in the same position. It's very easy to get comfortable around spreadsheets and looking at things analytically and to at the worst have to risk adjusting for certain positions, hedge fund roles et cetera within your life. But you're constantly looking and motivated by the light noises of Bloomberg or of markets. I remember this was actually a pretty profound decision for me in 2008 where it felt like it was increasingly obvious that the market was heading for reckoning. I mean, particularly in sort of early ‘08 and I ended up taking a few years out because I wanted to actually, per your point, understand the physicality of the world. The physicality of businesses or of other experiences outside of sitting at a desk and making decisions and just speaking to management at arm's length.
Jason Mitchell (14:54): So that actually led me in 2008 to end up leaving and working for advising for a number of private equity funds and for the UK government and really starting my path down sustainability. So I ended up working for something called the Commonwealth Business Council, which is a Commonwealth UK government project. They don't have their own balance sheet, but they're effectively coordinating finance around projects. It could be water, agriculture, energy for many of the Commonwealth countries. In particular, some of the big countries, Sub-Saharan Africa are areas and then as well as India.
Ben Yeoh (15:39): 2008 onwards you have a change of career partly and you go into development finance and that type of area. What did you learn from that stage in your journey?
Jason Mitchell (15:50): I learned that building a business… In my experience during that time, it was building out a business in water distribution and advising the UK government. But it was incredibly hard. It was very political in a sense. In order to make things happen, you really had to solve for a lot of different factors and personalities in many cases. It was fascinating but also somewhat disheartening. I think over that time, what was interesting is with the backdrop of the global financial crisis happening, what to me was fascinating was you have a real showdown between different development theories. The Western theory, which obviously Dambisa Moyo, which I'd interviewed, in her book Dead Aid, talks about, is very problematic, the fact that the West is through aid, not necessarily creating positive outcomes. But that juxtaposed to the Chinese development model, which was to go into countries and vendor finance, vast amounts of a number of different projects and effectively outbid others. I thought it was fascinating to see those two compete, and more often than not, to see the Chinese model win and actually have to think through the trade-offs in that, because there certainly are, to be frank.
Ben Yeoh (17:37): And then how did that evolve into becoming a fund manager, hedge fund manager, again, and then into sustainability and responsible investing?
Jason Mitchell (17:46): Sure. That period of my life was one of great personal growth. I was reading a lot. I was exposed, particularly in politics or political theory, development theory. I was exposed to a lot that led me to really reconsider where I wanted to go in life. At one point I really wanted to head to and work for the IFC which is the commercial part of the World Bank, particularly within emerging markets perspective. To do that, the World Bank tends to be, and for good reason, but they tend to be pretty orthodox about some of the hiring and insist on a post-grad, like a Master's Degree. So I ended up doing a Masters at LSC with the intention of trying to find work at the IFC or another DFI. And I think along that way, ended up rekindling conversations with Man Group then it was GLG Partners, Man had acquired it in 2011 or 2012. And I think there was an opportunity to shift my focus from the long-short side to the long-only side. And think about it a bit more constructively. There was an opportunity to kind of rejoin, look at finance through climate strategies. So I was managing a climate strategy and I ended up launching the global sustainability long-only strategy as well. And so, for me, that was actually pretty interesting. It's still very similar to that original goal, but obviously in a listed context.
Ben Yeoh (19:36): I often feel a bit of dissonance between investing work and speaking with these companies. And then, as we spoke about in the beginning, that real world migration crisis, climate crisis and all of those. Do you feel that dissonance often, and how do you manage through that? Maybe bringing some more real world into expanding into… I'm often speaking with peers, maybe peers who are a little bit more, how should I put it, skeptical about what we do in the real world or whether we should. But when it actually hits them and when they hear these stories and things, it does often jolt them into a slightly different… Nudge them onto a path where I think they then start to feel more fulfilled and more holistic around that. But it comes from this area of dissonance where I sometimes have to shut it off for a bit because it almost feels… I almost get a little paralyzed from it sometimes. And do you feel this kind of dissonance and how do you work that through and what do you do with that?
Jason Mitchell (20:34): Well, first I kind of want to throw it back to you. Can you give me an example where that's happened? Because this is interesting. I know what you're saying but I'm curious and want to tailor it to an example of your own.
Ben Yeoh (20:47): Sure. So I haven't had so much one on say climate recently. Because I do a lot within health care and ultimately in health, it is kind of really interesting, is that one way of thinking about it is you save a patient's life in some respect or extend their life. And actually, the side effect of saving a patient's life, depending on how you do it, is profit for something else. But your primary effort is saving patients' lives and things. And then when you go through and you see you're in a hospital, or I had this when I was looking at some robotics and you think about how many robotic surgeries start all things. And then you're there and then there's an emergency and someone's life are saved. And it's like, well, that is the real-world impact of this thing. And you get this right. More people will live longer and their lives will be saved. And you misallocate the capital that you don't understand what they're doing and they're just widgets or numbers, and it feels less real and more divorced. I feel the climate one is sometimes a little bit more distant than that, but you do have a… That's why I was referring to the back because you had on the front, the refugee crisis and someone right there on your boat, which is connected to everything we're having. And I feel that dissonance sometimes is… It's just interesting to see how that plays out. Does that make sense?
Jason Mitchell (22:08): Yeah. No. I think it does. I know what you're saying. I think it was less apparent to me during the migrant crisis. They seem like two very distinct things. Whereas in the climate crisis because of government policies, because of thematic investing, they kind of conjoin where there's obviously not so much. And then I think it becomes sort of this bigger problem or this other problem of not so much. Well, it's a different kind of dissonance. So for instance, I mean the one… I'm a big fan of paradoxes and I think it's the Jevons paradox, but it might be the Jevons paradox, J E V O N S. But it's this efficiency paradox. And you find that many thematic investors are always talking about kind of efficiency metrics. But the reality is when you look at kind of efficiency, particularly resource efficiency, it's not necessarily a good thing. I mean, you can go back to the history of resource use around coal, right, and the efficiencies around coal use. And all it's done is made coal a more prevalent input in economic activity, right. And so, these are the kind of these dualities of these dissonances that I struggle with, in that you think that you're making progress around something, around let's say, an efficiency issue, but all you're doing is basically supporting the greater use of it, albeit at a more efficient metric.
Ben Yeoh (23:57): Yeah. No, exactly right. And that is exactly the Jevons.
Jason Mitchell (24:00): Is it? Okay, good.
Ben Yeoh (24:01): It is. You've got it right. And call it a common example. Although the one I always think about is actually light. So we went from candles to light bulbs and we just exponentially increased our use of life because it was that. And that's what you see in light. Arguably obviously there's an energy thing you can conoscere in a more positive tone. But obviously coal has all of these other huge side-effects on that. So you become running a long-only sustainability fund. And then that kind of evolved into your current role, which is more strategy oversight and policy and things like that. What have you learned from both and others and either the pros and cons. Is there some stuff you miss about that direct exposure to investing and you'd wish you'd known more about when you're investing now that on the policy side or vice versa?
Jason Mitchell (24:54): One thing I absolutely do miss is being able to go deep around stories, around themes. Sitting across three or four management teams within a sector and really trying to understand where the industry is heading, to me that was really fulfilling. I think now, particularly at a policy level, it's a different kind of competency, frankly, different kinds of skill sets. So I do miss going deep. I would say as a portfolio manager and this was…Frankly, this was true, both for the long-short and the long-only side. It was also a different kind of pressure. I'm sure you're familiar with it, right? You wake up and if you're not doing well, if your PNL’s running at a loss in a long-short perspective, or if you're running a couple of hundred basis points below benchmark in long-only format, there's a certain degree of just pressure and it's constant until you can fix that. But there's a certain degree of freedom and feeling that you can fix it, you can turn it around next month with a better idea, right? I think on the side I am now particularly given the just dramatic reshaping from a regulatory perspective around sustainable finance. It's a different kind of pressure. So it's not that 4:00 AM waking up in the morning wondering what's going to happen next year, what firm you're going to work at if you ended up getting fired. It more trying to juggle just this stack of applications whether it's at a policy level, whether it's at a fund level. And that fund level can take a whole number of different whether it's the prospectuses, whether it's the investment framework around an element of SFTR that use sustainable finance disclosure regulation, how that sort of fits with some sort of disclosure regulation or rule from an SEC. I think it's a different kind of problem solving and a different kind of pressure.
Ben Yeoh (27:21): Yeah. No, I agree. And there's something great about markets and the investment side where you get relatively immediate feedback. And so even if you're not doing well, you can see it and you can plot a path. And you have end results, whether you're looking at it annually or whatever timeframe you're looking at and feedback. Whereas on the policy level, you're just constantly working very rarely do you get the ideal policy that you wanted because there's obviously a lot of other people and other things involved, and it's kind of this long, slow thing that you don't get as much feedback, which I think I would find, that I do when I dipped into it, somewhat frustrated.
Jason Mitchell (27:59): And if anything, I would actually say that I've just been surprised at how much more mired you are and this interpretational swamp. Swamp is probably unfair, but think about the notion of greenwashing, a term that I don't tend to like very much because many people are able to call out greenwashing, but what's the opposite of green... It's hard to sort of look at the universe of it and call out what's good practice. And there's a lot of difference around greenwashing nonetheless. I mean, think about it in the European context the USFDA, sustainable finance disclosure regulation does go to great effort to draw protections against greenwashing. That's a really, really good thing. I think what's problematic is that over this development, suddenly you have a national notion of what greenwashing is. I think France has its own ISR label. Belgium has its own label towards sustainability and to a certain degree, these run not counter, but there are certainly more rigorous forms of it versus others. And there are trade-offs you can make, there are ways that, unfortunately, I think asset managers can game no one wants to see bad behavior. I'm not certainly condoning it but I think there are ways that some asset managers can gain this, particularly from a passive ETF perspective. But yeah, I think it's a bit… It's problematic. What I expected would be more defined is actually much more interpretational.
Ben Yeoh (29:53): Yeah, much more slippery. I find this particularly looking at the US which has a very, what we call literalistic view on legal or policy terms. And you fight over these meanings of individual words, which actually can pivot you in one direction or the other. And that's, sometimes it misses the picture. And like you say, on this notion of greenwashing, it's obvious to everyone in the world. In fact, in legal terms, you have this idea of corporate puff, which is when a corporation says something; you just obviously can't believe them. I think the classic one is the advent of saying this is the best beer in the world, or whatever is like, obviously can't be. And so, I think there was a court case where someone-- There was a litigation where someone said, we are the best something else in the world. And they said, well, that sounded too similar. And I think the judge threw it out because he says, you're obviously neither the best anything in the world because it's corporate puff. And so, with greenwashing, you're always going to want to look your best to some extent…. you kind of want a little bit of that because you want people to ratchet it upwards and in which case you've got to try to show things in your good light for that. So I definitely hear you on that. Okay. I thought maybe do a small section of Underrated or Overrated. You can pass, or you could say it's neutral, or you could dive into what the kind of thing or the concept is, if you like. So underrated or overrated: Carbon Tax.
Jason Mitchell (31:24): Underrated.
Ben Yeoh (31:26): Underrated. And why is that?
Jason Mitchell (31:27): Absolutely underrated.
Ben Yeoh (31:28) Conventional underpinning that all economists say, right?
Jason Mitchell (31:31): Yeah, look I agree. It sounds very reductionist, but we need a price on carbon. I mean, whether it's a…
Ben Yeoh (31:42): Tax price adjustment.
Jason Mitchell (31:43): Yeah, a price… Exactly, right.
Ben Yeoh (31:45): []
Jason Mitchell (31:46): We need some way to price that on a global level. That externality, we don't have that. I think it's article six within the COP26 that's coming out. I could be mistaken, but I think it's article six. But that is the one problematic issue that's never been resolved over the last several COPs, which is the Paris Accord really, really tried… made an effort to create this international UN governed carbon market. And obviously the US has been one of the big holdouts, but we've seen a tremendous amount of progress from China, from Korea, from Canada, from many other countries. So it'll be interesting to see. I'm not particularly optimistic, given the mood in the US. But it'll be interesting to see if there's any progress made on that front at COP26.
Ben Yeoh (32:47): Yeah. It's interesting if you look at economists, whether they're left or right. There's some huge agreement, like 80 or 90% of them think of carbon tax innovation, carbon tax--
Jason Mitchell (32:56): Incentives.
Ben Yeoh (32:58): Yeah. And it's kind of remarkable. I think you had one left/center progressive economist, Jason Furman, who said, he thinks it's like 80, 85% of the economic solution to this is within that. Because it sparks everything else. Okay.
Jason Mitchell (33:14): And further to that, I think one of the unfortunate things is there was the Baker-Schultz effort within the US.
Ben Yeoh (33:23): That was the carbon tax and dividend one.
Jason Mitchell (33:26): Yes, exactly. And that was quite well known because it was bipartisan. Unfortunately, Baker and Schultz now have both passed away, sadly. But I think that's the unfortunate part where that bipartisan effort even within the US is to some degree diminished that section.
Ben Yeoh (33:42): I'm veering more and more it being what they would so-called political economy problem. So it's a problem of politics. And I think particularly in the US, if you look at the surveys, like the Yale Climate Change Survey one, 30 to 35% of Americans do not believe in man-made climate change. And so that's a big chunk to deal with. And therefore, even a bipartisan carbon tax when wanted in another way, preserved as an elite technocratic solution. And you're dealing with 35%. You can gauge with that but cross which doesn't really think that that's suitable is where… For me that's an obvious log jam about trying to do something there, and that's where we kind of got to.
Jason Mitchell (34:28) I mean to some degree, not to keep going on this because it is such a fascinating issue, but I wonder how much of it is inevitable. I forget the author that talked about this but when we think about political regimes and monetary regimes. Think Bretton Woods, the post-world Bretton Woods, open markets, liberalism, that project. What is in this long wave of regime change, what happens next? And I think there was a really compelling theory to say that, given the financial existential damage that climate change represents, that the next regime might well be a climate regime rather than a Bretton Woods. So it organizes itself around survival of climate change. And you get a whole different reordering of the values from the previous regime. So certain values for better, for worse are subordinated by just this imperative to survive climate change.
Ben Yeoh (35:38): Yeah. And I think you've seen in the long cycle of history when slaves were made illegal or women got votes or go back on things you do get this kind of… I guess it is like this step change as a regime change and suddenly you just really quite fundamentally changed the rules somehow because society needs or wants to for whatever reason. So I think that's possible. It’s interesting that the people I call the crypto bros also think about it within that from crypto, which you probably won't go into, but part of their theory of changes that it's a regime change. So whether it ends up there or not, it does seem that it is quite a plausible thing to happen. Okay, next one. Underrated or overrated: Divestment as a social political tool.
Jason Mitchell (36:32): I understand both sides very well. I do, and I note there's a really good piece of research that came out called The Impact of Impact Investing, which talks about the ineffectiveness of divestment relative to engagement.
Ben Yeoh (36:55): Specifically, only on cost of capital, which I think is obviously an interesting lens to look at it. The divestment people would not say that's necessary there transmission mechanism, but I wouldn't actually go into an argument on that. But yes, please go on.
Jason Mitchell (37:10): But I'm a little bit more sympathetic and I've only looked at this in discreet ways. I think the one area that was incredibly compelling to me that I'd done a lot of work was to say look, what are the discreet areas where there's been a lot of divestments over the last five to seven years? One of those was tobacco. Tobacco was easy because it was a discreet business. You didn't have conglomerate businesses where it got messy. And you could follow this shadow of divestment announcements from particularly asset owners, so not managers, not double counting. And so, you had this shadow of announcements. And so, what I ended up doing was kind of going out really trying to track several years ago but the AUM for those asset owners, and then trying to kind of back into what that meant. And you found there were a few data points, effectively public, where you could back into the implied investment or kind of a range. So if you took an asset owner's total investment, you found that out of their total assets, roughly around anywhere from 0.25% to as much as 1% of that was invested in tobacco. And that was dependent on if you were UK or US, where tobacco was a big part of it as a constituent of the benchmarks you tended to be up on the bigger part of that.
Jason Mitchell (38:39): If you were to say Australia where you don't have a tobacco constituent in Essex it was on the lower end of that. But you had sort of a spectrum. And I think what was interesting was, you could sensitize that against these flows. And I got to a figure that was somewhere between 50 and 60 billion of outflows relative to… at least when I did it. So I have not re-run these numbers to the market cap of global tobacco. There's an MSCI index and that index is roughly around 350 to 380 billion. So 60 out of call it 350, 360 is meaningful, right? I mean, that's a big sucking noise. And I think what you could make is an argument in this case that with this kind of sustained outflows, you might see a structural de-rating relative to the market. That's not to say that in a risk off market suddenly tobacco outperforms, it probably would, right? It just wouldn't sustain that outperformance. And so, then you had these arguments. You've actually seen this with coal right now from hedge funds. But this idea that as people divest the expected returns are too enticing for particularly hedge funds not to get involved, right? But expected returns are kind of a tricky thing, right? Expected returns are not realized returns. Expected returns are the sum of expected returns plus unexpected returns equals realized returns. And I think what people forget is what is in the unexpected return element, right? And I would say that the impact of negative of outflows from divestment could be, in some cases, and I would point to tobacco, pretty meaningful and would re-base the expected element. So expect that it's unrealized, right? Does that make sense?
Ben Yeoh (40:54): That does. Pretty sophisticated argument, but I buy into that. I'm also very suspicious that some of these hedge funds are not a… Long story short, the commodity price has gone up a lot in an unexpected way. That is actually not that connected to divestment either way, like harking back to that end paper. So it's not particularly that they've seen something go on and some people divest it and they bought it. But when your underlying commodity price has gone up 600% in a few months where that's iron or whatever, that's a huge, as you put it, unexpected return. It's really divorced from this other mechanism. So I feel that’s very financially unsophisticated for some of those hedge funds to claim that, which … means that actually they're just maybe skillful or lucky traders or traders rather than something about what's the transmits mechanisms and what's really happening there. So then the opposite side, Underrated or Overrated or commentary on: Shareholder activism as a theory of change.
Jason Mitchell (41:58): I think it's massive. Well, I don't think it's fair to call it underrated because I think people… To be clear, I do think it's underrated. I’m a huge proponent of it. And I'll give you some of my background. I think just my own experience from the firm that I work at, Man, we have not… When it comes to stewardship, we've always tried to struggle with two issues. One: A big part of the firm is Quant. And so, while we do a lot of systematic voting, that's fine. And you can recalibrate that however you want. I’m a more greenish cheese flavor versus a vanilla flavor. You're never really engaging with companies particularly among that amount of breadth within a given portfolio. On the discretionary side, you run into issues that are very different. So you run into the alternative problem. So you have depth, you don't have breadth, so you're engaging a lot. The question is to what degree are you voting? And that is somewhat contingent on your mix of ordinary shares versus synthetics. CFDs -- Contracts for Differences or swaps.
Jason Mitchell (43:16): And so, when you own those synthetics there's certain advantages particularly around transaction, costs, friction because you're basically not owning the org, you're owning a contract through your prime broker. It comes at a lower cost. So its performance enhancing, and more importantly, it allows you, and this is important for hedge funds, you're borrowing at margin. So it allows you to level up and that's how you accomplish leverage returns. The problem is when you engage in those kinds of contracts, you forfeit your right to vote. So you lose voting rights, so different problems on different sides of the businesses. I think for context, and I think where we have and in particular-- I've spent a lot of time helping develop the team on this, to get compensation for these problems. I would say that you've got to increasingly build better, stronger stewardship capabilities at the firm level and not speak at an underlying subgroup level or at a fun level. And so that's what we have gone about doing to the point that in our 238-year history, I like to point out that this year was the first time where we ended up voting or filing on our-- This year was the first time in our 238-year history where we co-filed on a climate shareholder resolution with HSBC, which I think actually turned out very well.
Jason Mitchell (44:47): We worked via 15 other investors in share action, who I could not have stronger thoughts and support for, but worked constructively with the board and management to effectively level up or upsize their net zero commitments. So to basically turn what was an ambiguous ambition 12 months ago that lacked a lot of flesh, a lot of real detail into something that was a hardened commitment. I do think language matters around this into a commitment where that was time-bound in terms of phase outs around fossil fuels, coal, et cetera.
Ben Yeoh (45:35): And you got mostly what you wanted and withdrew the filing, so it was kind of like an ultimate win, right?
Jason Mitchell (45:41): So the question is to what degree was that… We've talked about this before, to what degree was this an anomaly? Or does it sort of represent a change, a shift? There have been others, obviously with investors working on changing the board composition for Exxon. But it does feel like since the emergence of … and kind of coordination in what was generally a pretty atomistic system of financial players. There's a lot more, there's a lot greater coordination in advancing progressive ESG policies.
Ben Yeoh (46:25): Great. And then overrated, underrated or comments on: Carbon Offsets.
Jason Mitchell (46:31): Yeah, this is a super controversial one. So I want to be very careful. Can you re restate the language of the question?
Ben Yeoh (46:43): Okay. I've just put carbon offsets as a word out, not thinking too deeply. The two angles you could think about is using carbon credits or offsets in the ones you can buy in the market to decarbonize portfolios or operations. So you could comment on all of that. And I guess the controversy is that some of those offsets have not been seen to maybe be as reliable as we thought. And then the other counter argument is that that is not having such a real economic effect in terms of actually getting people to reduce things. On the other hand, other people would argue that if you are doing additional projects and stuff, which are helping, then that is something that is worth investing in. So you could take either side or not on that. But the idea is, are we overrating, underrating? And I can start, I have lowered-- So I still think they're helpful, but I'm probably less convinced about them now than maybe I was five years ago. And either that was five years ago, I was a little bit more naive or today it's come true on some of those. Except I do see some projects in, I guess you'd call it maybe even negative emissions or very what is actually quite high prices, but quite… And we don't know whether they'll work, but would look quite interesting. And I do feel that we should probably still incentivize and try some of those. You don't want to put people off like Stripe in their negative emissions. You want them to try it out. So yeah, Carbon offsets, thoughts?
Jason Mitchell (48:21): I'm going to maybe controversially say that they are underrated. I get the criticism. I think the question or the debate needs to be more reframed, right? It's not whether we should be using carbon offsets in the abstract, but how do we actually start using a better higher quality version of offsets? How do we move from avoidance to genuine removal technology nature-based solutions? The reason I say this is so controversial is, and I've seen the IGCC has the investor framework where they recommend against using offsets. It has been widely recommended against by a number of NGOs. I think the thing that I struggle with is that it runs counter to all the policy signals that I see coming out. So you mentioned a sustainable future, my podcast, I had chairman acting, chairman Rostin Benham of the US CFTC, the Commodities Futures and Trading Commission, so the sister of the SCC. Carbon is a commodity, right? And, and I think they have an interest in developing bigger, higher quality carbon offsets markets. And that's key, right? I mean, how do you create things that are more authentic or higher quality and specifically removal based?
Jason Mitchell (49:52) I had another conversation with Elizabeth Maruma Mrema, who's the executive secretary of the Convention on Biological Diversity for the United Nations. And I think from a biological or biodiversity perspective, I think it was interesting because I asked this question as well. I sense she did not say it overtly or explicitly. But I definitely got the sense that there should be, or may be an opening for offsets and to some degree they already are. But to explicitly solve the biodiversity issue the funding problem there. So I would say it seems naive to throw them out when policy signals seem to say this is going to be a bigger part. I read a really interesting Barclay's research report yesterday that talked about offsets markets growing from 500 million annually today, to 250 billion by 2030 and to 1 trillion annually by 2050. And so, I think it feels like this can be a constructive source of offsetting. It shouldn't be some dispensation to say, I can meet all I want, but I'm just going to use offsets. But it can be a powerful tool to take care of. Certainly, the residual that we can't genuinely remove towards the tail end, but it feels like there's a use case over the next 10 to 15 years in this transition.
Jason Mitchell (51:30): Microsoft is a great example of this, where they talk about their kind of journey from 2010, where they widely used avoidance offsets, have transitioned now to removal offsets and are heavily using those to get to carbon negative by 2030. I think the interesting part is that I remember listening to a podcast with Lucas Joppa, the Chief Environmental Officer. But I found it really interesting where one of their big problems and they've been one of the most progressive around this area, is effectively just trying to find liquidity in high quality offsets. So that's the thing we should be solving for. I don't want to get these numbers wrong, but I do recall them in the market trying to buy something greater than 1 million tons of offsets. And the market was only 1.3 or 1.4 million tons. I mean, effectively, they were buying the market for offsets, in these high-quality offsets. And if that's the case, how do we grow that market and try and remove as much as possible? But not to go on this, but I think there's also another, not perfidious, but there's this sort of strain too in the long-short area where a number of managers are trying to make the case that shorting can support your path towards net zero. In my mind, those are completely distinct, right?
Ben Yeoh (53:07): Like getting paper from AQR. I think even Cliff Asness might have written it.
Jason Mitchell (53:10): Yeah.
Ben Yeoh (53:12): Talking about this, if people want to see that side of the argument. Yeah. But the short book is that issue with it being where the real economy is. But you can get to a finance portfolio where it looks net zero, so your thoughts.
Jason Mitchell (53:25): I think we're conflating a couple different things. Because I think what they're trying to do is address it from a carbon accounting perspective. But look, the point of net zero, despite problematic, that it's called “net zero” by taking your gross emissions and netting them with offsets, is ultimately you're trying to take offsets or you're trying to take emissions out of the atmosphere, right? Shorting, at least in my mind, doesn't do that. Nature based offsets, technology solutions would do that as, as genuine offsets. Personally, I don't buy that argument that shorting actually would solve the big problem that we're trying to address. That's not to say it's not useful. I do think that expressing your fund on a net emissions basis has its values. Look, if I was an investor in a long-short fund and I really cared about climate first, I'd want to see to what degree is-- How are they kind of addressing the big problem of managing emissions, right? And that's on the gross long-basis. But I'm also an investor in the fund. I'd be naturally interested in my economic exposure. If there's a carbon shock, if you see ETS or carbon allowances up X amount what would be the impact on my portfolio, right? And so I think that net figure can supplement in terms of the economic exposure alongside it. So it's not without its uses, but I think it's wrong to switch them.
Ben Yeoh (55:12): So that's a pretty sophisticated answer, probably the most sophisticated I've heard, so that's great. And so, it is not…We want better projects not to throw out all of the projects. There's the biodiversity angle, which I've heard few people talk about, but I think could be quite important potentially when you think about it. And then actually this loop back to the very first things we were saying, whether you are having a real economy impact or thinking where a need to base offset or technology might be doing something as opposed to pure carbon accounting, which might have its place, but is a different thing and you don't want to conflate the two. So yeah, really well articulated. Couple more on the overrated underrated, we're getting quite a lot out of these ones is I guess sustainable finance regulation. I guess people are thinking particularly of SFDR, but then U has come out with a load.
Jason Mitchell (56:06): SFDR.
Ben Yeoh (56:07): You've got-- Yes, SFDR,… You've had corporate governance codes, stewardship codes, I guess and things like that. I guess critics tend to, what do they argue over prescriptive. If you've got this sort of taxonomy, you can't go from dark brown to light brown maybe that's too restrictive and you've got all of these different nationalistic ones, which actually you refer to. On the other hand, what do you do about the fact that you have no standards, nowhere to start also protecting the real Intel investor, but also trying to funnel money into roughly the right buckets of area and arguably there has been a kind of market failure because there hasn't been enough done in which case, well, then you need more regulation, I guess, the two sides of that. So, any thoughts on sustainable finance regulation? You think it's overrated, underrated, or just some comment?
Jason Mitchell (56:58): Yeah, I'm going to say it's massively underrated, massively and not to say it's the panacea, I think it's going to probably get worse interpretationally before it gets better. I think the EU SFDR has been incredibly helpful for at least making an effort to address these difficult questions and I actually found it interesting that commissioner Allison Herren Lee on my podcast mentioned this as well that there's a place for principles-based approaches. I think in this space they tend to be too abstract, too broadly interpreted. It feels like we are increasingly headed to something more as a matter of necessity prescriptive, particularly in terms of defining protections against greenwashing, right? I mean, we've got to define what greenwashing is and I think one thing that has been probably overlooked, but where the US FDR has been incredibly helpful is introducing this contractual legalistic term, binding. So, I think in sort of my day doing ESG, I think I was always a little bit offended by other PMs that were trying to do it, but were doing it on an ad hoc basis. Like when it makes sense, they do it, but not really, not systematically and I think where the EU comes in is, I mean, they want something that is systematic, it's a binding term that you're measured by. So the attributes of your portfolio are determined by a certain kind of process, or you're doing this to your investment universe, which reshapes your portfolio in certain ways and this is something that, again, is binding.
Jason Mitchell (59:00): So, I think that's powerful. I think what's interesting in my mind though is just these issues that still need to be reconciled, which is this question around disclosure and I think we want better disclosure, but how do you make it happen? There have been critics for it. I actually applaud their decision. I think it was pragmatic and actually quite effective but how do you solve for getting better disclosure among all companies, not just companies with more than 500 employees. It's hard to kind of go to them and put a big reporting kind of burden on them just giving costs, resources, et cetera. One way of doing that is kind of creating these layers of legislation, but also attacking the investors. So getting the investors to actually drive that. So they've kind of inverted the disclosure cycle. So they've gone to investors first, placing pressures on investors and those investors then will place a lot of pressure on the underlying companies. It'll be interesting in the US where again, I think that they want to follow a much more linear path, so they want to go to the investors. I mean, sorry, so they want to go to the companies, improve disclosure and ultimately sort of have that lead to better disclosure at the product level.
Jason Mitchell (01:00:34): The other issue too is this sort of question of materiality and kind of what it represents. I think, as I talked about in that podcast, one of the things that has been interesting to me is and I know that you've read some of this stuff, but when you look at the speeches and statements coming out of the SEC and the SEC is composed of five commissioners, the balance of it tends to change per political cycle. So now it's Democrat heavy, but you find a lot of big philosophical, even ideological differences around principles based, more lenient or more prescriptive and views around things like materiality in particular. So we're watching that happen right now and there's certainly some antagon-- not antagonistic, but there are certainly some differing opinions between commissioners, particularly commissioner Pierce and commissioner Lee in terms of how to kind of calibrate this. In the EU process, a lot of that stuff was bureaucratically set, so we never really got to see a lot of it. So I think it's been sort of interesting to kind of see the teething pains of that legislation from an EU perspective, but effectively the seeds of it from a US perspective start to work out.
Ben Yeoh (01:02:07): Yeah, that's fascinating and I think you just articulated the case for regulation better than I've ever heard a regulator articulate it. So they could do with some of that. Okay, last couple on this one. Oh, actually, and I should tell everyone, if you want to hear more about that, do check out Jason's podcast with the SEC commissioner on that. That's a really fascinating one. Stakeholder capitalism, underrated, overrated, or any comments?
Jason Mitchell (01:02:34): Yeah, I feel like it's unfair to say it's underrated maybe because that's in the circle, I think, that you and I are in. I mean, we kind of-- Alex Edmond or Paul Pullman or others speak so widely about that. I mean, perhaps it's a European kind of UK thing. I would still call it underrated, but I feel like it's really starting to hit the mainstream. I think if I were a US investor, I would probably take a different view because it's still much of a shareholder kind of centric kind of perspective over there.
Ben Yeoh (01:03:15): Sure. What's a recent favorite podcast you've done, or one that you learned the most? Obviously, we had one with the SEC commissioner, which obviously was really recent and really fascinating, but any others over the time you've done it that you thought, oh, I really learned a lot from that one.
Jason Mitchell (01:03:31): Yeah. One of my recent favorite ones was with Chris Stark, the CEO of the climate change committee who is the independent advisor to the UK on their net zero plan and the work around it. And so, I think it was refreshing particularly some of the questions around how the role of the climate change committee is changing a little bit. They're having to become more of a moderating voice for the boosterism of the Boris Johnson sort of a cabinet and more of a kind of a factual check against some of the UK's claims. They are actually working on a new report for the recent treasury report that just came out. So it'll be interesting to hear from that. I think there have been a whole bunch of really interesting episodes. I mean, one that actually surprised me, and this happened several years ago, quite unexpectedly, was when I interviewed the CEO of a Spanish bank and this was probably about two and a half, three years ago and that is changing, but, but at least several years ago, they were kind of seen as a laggard in terms of the east G momentum across Europe, certainly behind, the Dutch, Nordic countries and Belgium and French.
Jason Mitchell (01:05:04): And so, I wasn't quite sure what to expect. I knew that he had a kind of keen interest in this and so we started the interview and it was clear he actually knew-- as a CEO, he actually knew quite a lot, particularly around climate and I made a quick remark about that on the tape. I said, "I'm actually quite surprised that you're so conversant and articulate around climate risk." And he looked at me, and this is in a room full of four or five other very senior people and he looked at me ungraciously for like seconds uncomfortably. He looked at me and he said, "Why?" And I kind of stammered and he said, "Barcelona," and this was in Barcelona, "Barcelo is X meters below sea level. We will be one of the first victims of climate change." And it was kind of unexpected, this realization that for certain cities like Barcelona, for instance, that this was actually really striking home in a real sense, not in a kind of a conceptual research report sense and that people were having to kind of plan around it their businesses or their lives, maybe. I thought that was really, really interesting.
Ben Yeoh (01:06:30): Yeah. That was really real. Cool and last two questions then. One is, what do you wish people understood more about the world? Or is there something that you think you really understand and that people haven't quite got?
Jason Mitchell (01:07:41): Yeah. I would actually have to go back to-- we began this episode talking about the work around the migrant crisis and in particular, and I sort of misstated the word but I mentioned Mary Robinson, the former president of Ireland and her work around the SDGs and her empathy for migrants, refugees and so I use pride. It's not just pride, it's this idea of dignity and I think that's the exact word that she used and that is the exact word that I sort of independently on that boat and across my experiences of which I hope to do more kind of realized, which was just very, very different from our working environment. Dignity has a lot of different connotations. In the work environment, you want a safe, good working environment no matter what. I think in a situation where people are voluntary or involuntary migrants, they've given up a lot and sacrificed a lot. They don't have a lot. The little things they have, dignity is actually a very large part of that. And it was something that I was very, very, very sensitive to on that boat, that particularly some of the families I'd seen that had kind of forfeited pretty much everything, treating them with dignity and speaking to them meant a lot.
Ben Yeoh (01:09:25): Yeah. Be kind, have dignity. Great. And the last question is do you have any advice for people listening? This could be advice for young people who want to be activists, some people thinking about finance as a career, somebody who might want to think about being a poet or a poet and an investor. Any advice for people?
Jason Mitchell (01:09:49): Yeah. So, my favorite piece of advice that a mentor had told me once was no doesn't mean never. I've got boxes 20 or 30 years ago when I was kind of a struggling poet at university and thinking about getting a master in Fine Arts, where I was sending self-addressed stamped envelopes with five to eight poems to every literary journal in the US and abroad and effectively getting 95% rejection receipts back. I feel like that was fortified in a sense. There's a lot of talk about failure porn, this idea of using it to fortify, but I'm a big believer in this. If you keep trying around areas, you should not accept no as sort of this final determinant for what you want to do.
Ben Yeoh (01:10:57): Yeah. That's a really good piece. No does not mean never. So with that, Jason Mitchell, thank you very much.
Jason Mitchell (01:11:05): Thanks so much for having me.
Ben Yeoh (01:11:08): If you appreciate the show, please like and subscribe as it helps others find the podcast.
The Great Quitting, many industries are going to be hard hit
The great quitting is impacting all industries
People in bad jobs have realised they are bad jobs and are not going back
People remember how they were treated before
Many business/organisations barely work even with low labour prices
This is a massive challenge to eg theatre, truck drivers, cheap food retail etc.
Well-paid jobs also have good non-monetary benefits, are basically good jobs
This strengthens the case for certain Big Businesses eg tech, high skilled services
I’m having thoughts on the great quitting. No one is quite sure what is going on. But I am moved by this idea for US (and EU) workforce that low wage workers now can see how crap their jobs were and the current level of incentives is not enough - way not enough - to induce them back to work. It combines these observations:
Status Quo bias. We get stuck in a rut until we get knocked out of this rut by an outside force.
Workers in crappy jobs did not fully appreciate how crap those jobs were until they stopped doing them.
This we can see on the study on commuting patterns. See eg economist Tim Hardford here on how people needed to be forced to change commuting patterns to realise their main commute was flawed.
Harford draws a different conclusion on remote work patterns, but he offers no comment on what I see as the potentially more major observation
“ A few hours of disruption were enough to make them realise that they had been doing commuting wrong their entire adult lives.”
This is not about “remote” but about these workers now can see how crap their jobs were and the current level of incentives is not enough - way not enough - to induce them back to work.
It’s not only pay/incentives now but how they were treated before…
You can see this in what Alice Saville has said on the “theatre hiring crisis” she writes:
As an anonymous senior backstage professional who’s struggling to hire technical roles put it, “It’s a perfect storm. People were made redundant during the pandemic and have found other roles. People have retired. And people who are still working in theatre don’t want to work the same hours as before, because the working conditions are worse and the money is less.” When the pandemic hit, theatres made redundancies swiftly and often painfully: many chose not to take advantage of the furlough scheme which would have allowed them to retain staff. And now, they’re feeling the burn. They’re committed to staging productions planned before the pandemic hit, but often with less money and less time. And their once-dedicated permanent staff have been replaced with a scramble to find workers, often on short-term contracts.
TV and film opened up before theatre, and they soaked up large numbers of talented technicians. Not everyone has fallen into new jobs they actually want to keep longterm. But workers who want to return are faced with a stark choice: stick with their secure non-theatre job, or chance it on a badly-paid, short-term theatre contract that may not be followed up by more work. One anonymous designer explained that a leading Scottish theatre can’t persuade its casuals to return after it programmed a series of short run works coming out of the pandemic: “it’s heartbreaking to me that there are workers getting more out of a full-time job in a supermarket chain than they do by going back to coming back to this industry.”
Where salaried roles are being offered, they can’t hope to compete with other sectors. Leeds Playhouse are currently advertising a senior lighting technician job at £18,000 – a surprisingly low salary for a role that requires a high level of experience and specific expertise. Meanwhile, the average salary for a professional electrician is £35,000, and a lighting technician in film or TV can hope for a similar or higher rate – as can similarly experienced staff in other departments of many theatres. As one designer said of the role: “the application package for the role talks in detail about the importance of diversity but we’ve seen again and again and again that the biggest barrier to diversity backstage is money.”
The current situation definitely isn’t the “building back better” scenario a lot of people hoped for during the pandemic.
I can also tell you that London based electricians can earn much more and have a better time than #35K at the moment.
One counter argument is… was it not the furlough money? But, this doesn;t seem to be true:
“...Earlier this year many people insisted that enhanced unemployment benefits were reducing the incentive to accept jobs. But those extra benefits were eliminated in many states as early as June, and nationally in early September; this cutoff doesn’t seem to have had any measurable effect on employment or labor force participation. …”
Possibly you can argue this:
“...Another story, which is harder to refute, says that the extensive aid families received during the pandemic left many with more cash on hand than usual, giving them the financial space to be choosier about their next job…”
If this insight is correct and not fully appreciated then this is the start of a transition in human capital…
And at least for theatre, I am not hopeful at the moment and for a whole array of industries, I am very uncertain how this pans out.
UK government behavioural insights team secret report on NetZero
This fascinating "secret report"* from the UK government behavioural insights team on #NetZero "principles for successful behaviour change initiatives". "When we view ‘behaviour change’ narrowly as an exercise in asking citizens to make different choices, the scale of change required to reach Net Zero is daunting, and an enormous political challenge. Moreover, the evidence from past case studies and decades of behavioural science research shows that awareness-raising and calls to action will not get us there. Though everyone has a degree of agency in changing their behaviour, and well-crafted messages from government can certainly be influential, behaviour is simply too profoundly driven by factors in the environment rather than in hearts and minds. As it stands, low-carbon behaviours are often more costly, less convenient, less available, less enjoyable, and rarely the default choice.
But this is ultimately an opportunity, because the more politically feasible approach is also the far more effective approach – to move further upstream and change these contextual factors. By focusing less on individual behaviour, towards bold policy targeting choice environments, institutions, businesses, and markets, it becomes an exercise in ‘world building’ more than ‘behaviour change’ per se. ...
...There are various degrees to which public engagement will be necessary, from more passive to more active (acceptance of policy or infrastructural changes; willing adoption of new technologies; or direct individual action). Building a compelling and positive narrative, with clear asks, can help to do this effectively, despite communications on their own tending to have a very modest impact on behaviour change. ...
...we do not have all the answers and evidence on ‘what works’ is continuing to grow. It will be more critical than ever to maintain an agenda of evidence-generating policy, as well as evidence-based policy: testing as we go and trialling new approaches. Behavioural science is far from exhausted, with many original ideas waiting to explored. ...
If we can impart one lesson, the first law of behaviour change would be this: reduce the burden of action for the greatest number.
*This is a public domain license, but note: ... A government spokesperson said: “This was an academic research paper, not government policy. We have no plans whatsoever to dictate consumer behaviour in this way. For that reason, our net zero strategy published yesterday contained no such plans.”
And therefore the report is no longer available on the government website making the report a sort of "secret". Story here:https://www.theguardian.com/environment/2021/oct/20/meat-tax-and-frequent-flyer-levy-advice-dropped-from-uk-net-zero-strategy
Diane Coyle: Cogs and Monsters, book review
-Defends economics while highlighting many challenges economics have not grappled with
-Outlines the challenges of an intangible, natural and social world
-Remains skeptical of macroeconomics
-Discusses how economics itself is being disrupted
Diane Coyle has been a leading part of making economics relevant today. Diane has done this through public lectures aimed at real world problems grounded in present challenges but conscious of historic learning. She has emphasised the importance of a diversity of thinking across a range of dimensions such as culture, gender and class. Her public policy thinking has tackled big technology anti-trust and competition challenges as well as the difficulty in measuring an economic world so rich in unmeasured intangibles such as technology, the environment and social relationships.
Her previous works have tackled elements of her thinking. Weightless World on intangibles (and a forerunner to the work of Westlake and Haskel*, Capitalism without Capital), GDP: A brief but affectionate history, on measuring intangibles; Markets, State and People covering public policy, inequality, markets and social welfare. This work, in part, dives much deeper into the philosophy of economics itself.
“…this book reflects on the broader character of economics, not only its lack of inclusivity, and how the subject needs to change to be relevant for the rest of the twenty-first century. The issues covered here concern the fundamental paradigm—the subject’s philosophical roots in utilitarianism, the validity of the distinction between positive and normative economics, the character of dynamic socio-economic systems that do not conform to the standard assumptions, the role of social influence in a discipline built on methodological individualism, and the scope for a powerful social science to alter its own subjects of study…”
I interpret her arguments as:
A defence against many straw man arguments against economics that are unhelpful as they disguise from real problems.
Those problems include the diversity of economic thinking, measuring intangibles, dealing with nature and inequality and a focus on real world problems.
Diane explains:
“some key philosophical issues in economics itself: to what extent is economics performative, or self-fulfilling? Can a social science ever aspire to objectivity when its practitioners are part of society? What policy conclusions can we possibly draw from economics when it assumes people have fixed preferences—an assumption torpedoed by the existence of the advertising industry? Has methodological individualism run out of road as the structure of the economy shifts to activities involving every greater externalities and non-linear dynamics? A second thread is that the way in which the economy is changing, particularly because of digitalisation, means that our analysis of it needs to change. These threads explain the title of this book, Cogs and Monsters: the cogs are the self-interested individuals assumed by mainstream economics, interacting as independent, calculating agents in defined contexts. The monsters are snowballing, socially-influenced, untethered phenomena of … the territory where so much is still unknown (labelled ‘Here be monsters’, on mediaeval maps). In treating us all as cogs, economics is inadvertently creating monsters, emergent phenomena it does not have the tools to understand.”
Diane starts off discussing to what extent economics itself impacts the economy. This sounds like the meta verse but answers whether the economic agenda set by economists has a role in the financial crisis of 2008-2009 and why so many economists failed to see the crisis coming. Diane remains broadly skeptical of macroeconomic thinking which chimes with many a lay persons' views.
My long term pension fund manager boss remains highly skeptical on macroeconomics as well. Although to acknowledge the other side, macroeconomic forecasts are rarely meant to be forecasts in the betting sense, and she does gives the arguments from a macroecon correspondant.
Diane raises the idea that certain economic thinking led to “self-fulfilling outcomes” and in that sense critics are correct in blaming in part of the GFC (Great Financial Crisis) on economists. But wrong in underappreciating how broad a church economic thinking now is.
(As an aside, I would have liked to know her views on a range of other thinking eg, Hyman Minksy and a behavioural cycle; and the latest debates from investment practitioners over sustainability and environment social governance investing).
She distinguishes pro-business from pro-market and argues for markets as an important organising force that has proved better than central planning. (Pro-business can be very anti-market, as business dislikes competition). The benefits of markets as a discovery force are counterbalanced by their failure to value correctly in many instances.
Diane articulates an important distinction about when how to use markets and civic values describing the market innovation (no prices) of a kidney exchange (Roth) and how debaters on the role of the NHS may misunderstand the differing arguments on civic values over using market mechanisms to inform more efficient price discovery.
Diane extends this philosophical thinking into what it means to be “better” how to define that and for whom?
Before this, she does argue for a special role for the church of economics in government and policy due to the use of ideas on opportunity cost and cost-benefit analysis (even if flawed) and including Coase’s ideas of the analysis including the cost of the economist herself. She highlights many successful applied micro economic insights such as Irish taxi licenses, transport economics, telecommunications spectrum license and certain methodological innovations (such as random control trials although I note these had use in healthcare decision making decades of not a century earlier). She does emphasise “the map is not the territory it.”
She continues discuss a multitude of economic failings as well as successes, and the technocratic assumptions behind the profession. She expands on the idea that economists are not politically neutral and therefore “performative” on the system they are analysing.
One observation is that while aimed at the general reader and Diane gives a decent amount of background to her ideas, I do think it may lose a reader typically uninterested in these topics. My activist theatre friends, who I would encourage to read this, might (I think probably would) feel a little at sea. I note this only because not only should a classical male liberal or neoliberal read this to reflect on the arguments Coyle poses but those on the left who perceive economics to be too far divorced from their real challenges and concerns.
Diane on digital reveals the scope and breadth of her reading encompassing knowledge about drugs Avastin and Lucentis (which have similar biological mechanisms but different approved uses in cancer and eyes; and which most non-specialists would not have heard about), dark kitchens (how food delivery comes from specific kitchens that don’t serve as restaurants but for online), amd Andreessen’s view on software eating the world, this shows an economist grappling with the “digital reality” that modern life faces (and to my mind a good breadth).
Diane outlines how economics itself is being “disrupted” like book sellers have been and she suggests:
“… For economics itself, the agenda is clear. We need to build on the work that already exists to incorporate as standard externalities, non-linearities, tipping points, and self-fulfilling (or self-averting) dynamics. We need to revive and rethink welfare economics…We need a modern approach to the public provision and regulation of information goods, applying the rich literature on asymmetric information and older network industries to the non-linearities and externalities of the digital world. And we need to put the social, not the individual, at the heart of the study of economics, taking seriously the line often-stated about the importance of institutions and trust to economic outcomes. This means above all returning to the origins of economics as political economy….”
I’ve considered Diane Coyle potentially a radical centrist. She does not abandon markets so can not claim home with the left and the degrowth thinkers. She is critical of utilitarian and neoliberal answers although perhaps she may have more in common with a notion of state capacity Libertarianism (cf. Tyler Cowen) that it may at first seem. Many of her ideas are not mainstream ergo radical. Perhaps this makes her a radical centrist of our times.
Pre-Order for October 2021 (Amazon link)
I read an uncorrected advanced proof as I recently hosted Diane on my podcast.
State capacity Libertarianism (Cowen)
Capitalism without Capital. (Heskal, Westlake)
You can find my podcast (and video) with Diane below. On reflection after reading this book, I should have asked her more on her critiques of macroeconomics!
Apple Podcasts: https://apple.co/3gJTSuo
Spotify: https://sptfy.com/benyeoh
Anchor: https://anchor.fm/benjamin-yeoh
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Climate, political economy challenges
There were many superb questions called at the Sustainability UnConference. I will be detailing more later on the whole event. The circles I hosted were about the (un)success or not of social/political movements and what questions or change theories of the political economy were there.
My brief notes are:
-XR is different to anti-slavery, LGBQT+, suffragettes, and minority/black rights because the “ask” is less clear (cf. Ban slavery, a clear ask]
-[Open] Does a protest movement need an ask?
-Policy(Overton) window (and influenced on corporates) may have moved, and that would be a success
-While energised some young, it has antagonised other population segments
-Degrowth not considered by majority of economists/policy makers as viable
-XR opens doors for change makers to influence corporates, policy
-cf. Outrage and Stonewall, (LGBTQ+)
-XR negative - is ZR now chipping out change makers and entrenching incumbents.
(Novel) are “leaders” emergent properties of complex systems. (eg a Greta would have emerged somehow in any case)
Cf. CFCs/Ozone, Nuclear.
Note how green party in Germany is now mainstream
Four theories/frameworks to note:
-Overton Window
-Swing Voter
-Median Voter
-Arrow’s Impossibility Theorem
And two challenging economic realities:
Economic growth will be needed to lift the poor (intra and inter-country) our of poverty
Decarbonisation across all areas of human life (Land/Food, Industry, Power, Building, Transport etc.) needed and low-carbon growth is not (yet) reality in most sectors.
Mainstream Economic Policy:
Carbon tax/price solves 80% of problem (eg Jasion Furman view)
(Vast) Innovation needed (subsidy helpful for early stage tech)
Standards can help raise the bar
Challenging political realities:
Poor/Middle class don’t want to pay (maybe no one wants to pay)
Poor countries don’t want to pay vs rich countries
[Open] Swing voter unlikely converting soon
[Open] Median voter moving slowly
[Open] Arrow suggests a plurality needs to be an answer.
Median voter might suggest that education, activism in converting population may work. May push both window and policy in more green directions.
Swing voter might suggest that this is not possible as swing voter not being converted on climate matters. Geography of the swing voter also important.
(It did not occur to me so clearly until this conversation that the tactics for converting “swing” voters are likely different to the “median” voter strategy)
Alternative strategy: ignore/bypass voters
Carbon pricing/tax not viable to majority of swing and current median voters. (This does not ignore voters but essential complies with both views here)
Utilise “Industrial Strategy” policy for the major sectors that can slip by voters
eg raise standards, subsidise and go super large on innovation investment (but can govt do this? And what about health, education etc)
May be slow, but might be a political economy solution ?? (One that elites and technocrat always use and so at risk of backlash)
[Aside] Importance of weak social ties or social network [cf. VC cf. UK COVID vaccine strategy]
Does XR/activist movement have a policy strategy?
Can economists propose anything better than carbon price?
Must it be techno-optimism that saves us?
[Open] Limits to markets
[Open] Do we need strong political vision
Diane Coyle: innovation, intangibles, inequality, sustainability and measuring beyond GDP | podcast
Economist Diane Coyle is the Bennett Professor of Public Policy Cambridge University. She co-directs the Bennett Institute where she heads research under the themes of progress and productivity. Her work has touched innovation, technology and intangibles; sustainability, inequality and measuring beyond GDP. Her latest book, Cogs and Monsters is published in October 2021.
We discuss the challenges of the current narrowness in economics both in terms of the diversity of people it attracts and the paucity of wider ranging interdisciplinary thinking.
Diane’s 1997 book (The Weightless World) was prescient over many technology, innovation and intangibles trends but sustainability was a missing hole. We discuss sustainability and what she felt she missed and what she got right.
Diane critiques degrowth ideas while noting the challenges which catalyse that type of thinking.
We chat about measurement challenges in an intangible world and how while GDP might have measured more usefully in the past but that in the present it misses many areas of value. In passing, Diane critiques happiness indices and elements of the human development index.
We address the UK’s productivity challenges (but don’t expect we have solved it?!) and conclude it is not only a measurement challenge.
We discuss inequality and “superstar earners” across all sectors and possible solutions.
Diane over-rates / under-rates:
Universal Basic Income
A Job guarantee policy
Industrial Policy
Arrow’s impossibility theorem
Running the economy hot.
The New Zealand Prime Minister
We discuss minimum wage and tax policy. Win-win investment ideas and end with what a productive day looks like and advice for would-be economists. You can follow her on Twitter here and her blog can be found here.
PODCAST INFO
Apple Podcasts: https://apple.co/3gJTSuo
Spotify: https://sptfy.com/benyeoh
Anchor: https://anchor.fm/benjamin-yeoh
Transcript (unedited, typos likely)
Ben Yeoh (00:03): Hey everyone. I am super excited to be speaking to Diane Coyle. Diane is the Bennett professor of public policy at Cambridge university, and she co-directs the Bennett Institute where she heads research under the themes of progress and productivity. Her work has touched innovation, technology and intangibles, sustainability, inequality, and measuring beyond GDP. Her latest book, Cogs and Monsters, is published in October 2021. Diane, welcome.
Diane Coyle (00:32): Well, it's great to be here talking to you. Thank you.
Ben Yeoh (00:36): Great. So is there such a thing as a radical centrist and perhaps are you one?
Diane Coyle (00:45): Well, that's a difficult question to start off with. I don't think of myself as being left or right party political at all. So I suppose that ticks the centrist box. Am I radical? Well, I hope so but particularly if that means thinking in new ways about how to solve some of the challenges society's facing, which are big and complicated, social scientists causing wicked problems. What we've been trying so far very obviously hasn't worked. So I suppose by kind of deconstructing it, I'd have to answer yes to the question.
Ben Yeoh (01:23): Great. And so you've worked with Jason Furman reviewing competition markets but did you know he is also a fairly prolific book reviewer, which is another thing you might have in common with him?
Diane Coyle (01:37): I believe he reviews on Good Reads--
Ben Yeoh (01:39): Yeah, he does review [on Good Reads]
Diane Coyle (01:41): --Which I don't use very much and I review books on my blog. I read many more than I review. The blog is about economics and business books and technology and a bit of politics and I read lots of fiction and pop science and other things too.
Ben Yeoh (01:56): What's brought you to review so many books on your blog? Is it kind of just a way of remembering or are you trying to kind of reach a wider audience with your reading?
Diane Coyle (02:05): It's a bit of both. It's a bit of a service, so people who might be interested in reading some non-technical economics and business books can get a quick readout on what I think about them and if they know anything about what interests me that might help them. So it's a bit of that, and it's a bit as you suggest remembering myself, what it's all about. So it's a short note. I mean, obviously if it's a book I'm going to use in my work, I've got much more extensive notes on it and little stickies from the pages and these are quite short as they have to be blog posts and people can seem to find it quite useful.
Ben Yeoh (02:40): Yeah, I do particularly, and to me it also gives a glimpse of the kind of breadth of your work and thinking and I think this breadth is notable as I observe you've been critical of some of the narrowness of certain economic thinking, both in terms of output and thought, but also where economists are drawn from and like finance, economist seem to be fairly white, fairly male and not working class. Whereas you have working class roots and have kind of this kind of more broad outreach. As economics as a social science, how big a problem do you think this is and do you have any ideas on what can be done?
Diane Coyle (03:23): There are two big questions in there. I think one is about economics and one is about joining up thinking across silos more broadly than that. So starting with economics, as you say, it has become a very socially narrow subject, particularly, I think in the Anglo-Saxon world and I'm less sure about the kind of sociology of economics in other countries. I think it's a little bit different, but not much because it's a very international subject and you're not a social science if all your people are drawn from quite affluent white male, people asking the research questions, deciding what they think is important. You just don't know what questions to ask if everybody comes from the same background, that diversity of background is really important for social sciences. And a little bit of the problem with academic subjects more broadly but not entirely. There are some other subjects, computer science could be one or philosophy is actually quite male dominated and posh as well. And so that narrowness is a real problem and I think it maps on to a narrowness in a way of thinking about what good economics involves. I'm a really strong defender of economics. It's a very powerful mode of analysis. It's very empirical now and it's driven by logic and it has some really great insights, but it's very focused on maximizing models and a certain limit about how you think the world changes and very, very little looking outside the subject. It's really hard to understand how markets operate if you don't know anything about the sociology of markets or even the ethnography of markets and after the financial crisis, there was some great sociology published on the financial markets, economists had ignored them.
So there's all of that. How does it change? I think it's partly the good things that the professional associations are doing to go and talk to people in school and communicate better and put a lot of emphasis, particularly on women economics, but now more broadly on people from different minority groups or different kinds of backgrounds. But I think the subject itself has to accept a wider definition of what a good economics is about and it's not just the same top five journals doing the same kind of narrow small questions study with limited range of technique. Open economists don't even rate qualitative research techniques when they're equally rigorous and it's just a different form of data, really. So that's all the economics bit. I'm rabbiting on a bit, but I'll just go onto the other bit, which I feel really passionately about and that's joining up knowledge across silos because the university have become very departmentally siloed and all of the promotion prospects depend on publication, which is in disciplinary journal, but it's really hard to address global warming, loss of biodiversity grotesque income inequality, conflict. Any of these subjects, you can't do that just from one discipline. So everybody's sort of burrowing away, plowing their own furrow to mix the metaphors and we're not going to make progress and all of that money that gets spent on research will not deliver all it could if we don't manage to find ways to work together across subjects. And so our Institute here, the Bennett Institute is all about interdisciplinary working.
Ben Yeoh (06:59): Yeah, I think that's really valuable. I see this in my world of investing that too many, particularly of the older generation, but even now I'm taught sustainability investment techniques, I'm taught about thinking about intangibles. It was all sort of a very standard, let's do an accounting model, let's do a DCF discount and see what comes out at the end of that and therefore have missed all of these, let's call them extra financial capitals as well. And without people kind of challenging and thinking about them, it's quite hard to get that into a sort of mainstream thinking and techniques. I was rereading your, I think, 1997 book The Weightless World and it showed a lot of great foresight on many of the technology and tangible innovations we've had today but it seemed noticeable to me fast forward to today that there weren't so many words on sustainability and the environment. So I'd be interested in reflecting back what you feel you might've got most right and maybe some of those trends which are continuing and maybe what you think about what you might have missed and what, again, that is important for today and thinking about the longer term.
Diane Coyle (08:14): It's a real coincidence you should raise that because I was thinking about it as a gap in the book yesterday. I was rereading a book by John Urry and Scott Lash called Economies of Signs and Space and it's a sociology book that came out a few years before my book, The Weightless World but was on exactly the same territory about how digital was changing society. And I read it after I'd published mine, but they did pick up on sustainability actually and it does feature in there. As you say, I completely missed that. I think I did get some things right about the way the world of work might become more precarious and you couldn't use companies to deliver government policy so easily, or the welfare state would have to change its structure. The geography of the agglomeration economies, the way that things were clustered together, and some of the potential for digital currencies, which is, I guess, just starting to take off big time. And so there are quite a few things I think I did identify as a future trend but with that one huge exception and I suppose I just had it in a separate bucket in my head having talked about how hard it was to cross silos. It's just quite hard to join things up and I didn't do it.
Ben Yeoh (09:41): And you think obviously from those comments, that is probably going to be one of the major themes for the next decade or two going forward.
Diane Coyle (09:50): It'll have to be when you see what's already happening in terms of weather events and the financial world as you know better than I do is starting to pick up on this with things like bank of England and other central banks getting in on taking account of climate risk or hopefully biodiversity risks as well, which also matters a lot. My colleague Matthew Agarwala has done some work on climate adjusted Sovereign [bond/debt] ratings. So the finance world is getting there, I think but I worry that people aren't really getting their heads around how big the changes need to be or will be. If we see these kinds of extreme weather events every year, we are going to have climate refugees, we're going to have conflict and all of the spillovers that implies for us and it's very easy for policymakers to do some small fixes, but not to realize that there's going to be a big change in the world and they need to do big fixes. So that's one of the things that preoccupy me at the moment.
Ben Yeoh (10:50): Yeah. It's not an intersectional challenge. I mean, sticking with sustainability wider and the climate challenge. My observations are there's a multitude of economists who backed some form of carbon price in either a tax or a cap and trade continue to remain less popular with the public and thus with politicians but given those intersectional challenges that we see everything, I talked to a lot of people and they kind of think is this the best that current economic thinking can do with some of these challenges. Obviously there is research and happening and more than that. Would you point to anything else that you think economists are offering in terms of the climate challenge, or do you think without some sort of carbon price in that market mechanism, a part as a sort of underlying foundation, some of these other ideas are not going to get through.
Diane Coyle (11:44): I think we have to throw everything at it and one tool won't be enough. So, of course, I think a carbon price could be a powerful tool, but we'll have to see government step in and mandate things or ban things and we'll have to see businesses changing their practices and figuring out quickly how not to use plastics in packaging and how to move away from using any internal combustion engines in their transportation. All of those things have to happen. So it's a question of how do you align all of that on a big enough scale that you tip things toward a different model of production and consumption in the economy? One of the most powerful things I think is, and this is very nerdy, it's about economic statistics because that's the way you understand what's happening in the world and my colleague here in Cambridge. [ Dasgupta] did a review for the treasury on biodiversity where he just made a really powerful case that the big failing of economists has been leaving nature outside of the economy. We've not put it inside what we call the production boundary, so we haven't counted it and there's not enough data on all of these things that are going on. We're just getting to the point where statisticians are measuring natural capital on an aggregate national scale and being able to track what happens with that.
UN is accepting it which is great, but we've got to step up gear and measure in detail, what are the climate damages, what are the carbon impacts of consumption as well as production, what's happening to biodiversity in different ecosystems with all the implications that might or might not have for human health and the food system and joining up those dots again as you're saying, Ben, because seven million people die each year from pollution, WHO says, which is more than who has died during the pandemic to date. And we haven't been paying attention to the costs of pollution, the human capital costs, the economic costs of that and so we've got to bring that into our thinking about how we run the economy and the statisticians can do it, I think.
Ben Yeoh (13:58): Yeah, I agree. I mean, we've only just really started tracking particulate matter, these small PMI, 2.5 type things. And I think WHO you know, the limit, they actually don't give a sort of limit of what they think is healthy because they kind of think all of this particular matter is probably damaging. I wonder, there's a little bit of pushback I hear on natural capital in the sense that people worry about whether the economic trick techniques are sort of sophisticated enough in the round to sort of measure and deal with this. So you feel they are and is that intersection, I guess with say systems biology or ecology there that actually the picture we paint is probably good enough, you don't want to get into this case we're going to seven decimal places where you've got the kind of order of magnitude of things right? Or is there still research which needs to be done in terms of getting these techniques robust enough that we feel that we can have some sort of natural capital accounting, because then I think if that feels robust, there is no theoretical reason that might not start to flow into corporate accounts of some sort, which obviously financial accounting, but if there was some natural capital accounting and accounts, then that's something where investors and other stakeholders can then start to hold businesses somewhat accountable to, or could even vote certain ways with a business model. But it's so absent at the moment that it's very hard to know where to start.
Diane Coyle (15:26): That's really interesting because I often get a different kind of pushback, which is that you shouldn't be trying to quantify and put a monetary value on things that are intrinsically valuable to which my answer is that if you don't do some kinds of accounting, you're putting a value of zero, which we know is the wrong answer. And I suppose I'd give the same answer to your question, which is we probably don't have the right answer, but it's a broad brush one better than none. I think it is. There's obviously a need for more data and more granular data and there are definitional challenges about that, particularly with ecosystems and biodiversity but the big problem it seems to me it's not so much technique as integrating different disciplines and the climate and the economic and political changes, for instance. I talked about Matthew's paper with his co-authors and they run a climate model and look at GDP impacts but what ideally you want to do is say, well, this means that the countries in the middle east are going to become uninhabitable. So what does that imply? What do the people there do? And what are the social and political spillovers from that? There's a really nice Paul Krugman article from years and years ago, where he talks about why he became an economist and it was about the idea of psycho history in the Asimov foundation trilogy and that takes you towards that grand ambition of integrated knowledge, which is probably complete nonsense
Ben Yeoh (17:01): We can aspire to the science fiction world or the solar science fiction world. Another debate I kind of hear around this comes from, I guess so-called de-growth thinkers such as maybe Kate Roth or Jason Hickle and it seems to me that many other thinks that de-growth is very challenging because of the idea of lifting the poor in a country, or even between countries, between richer countries or poor countries, or the poor within richer countries. Where do you see the role for growth and is therefore a de-growth economy, anything we can learn from that, or is it going to go down the wrong path because of the challenges about raising people up from poverty?
Diane Coyle (17:48): A couple of weeks ago, I took part in a round table with African economists who were very critical of the growth for exactly the reason that you just explained. They don't see it as a model for their thinking at all, so they were pushing back a lot against those models and so on. So there's definitely that. And I think some of the de-growth advocates don't really articulate clearly what the implications of their approach are, but I have a different objection to it, which is a kind of misunderstanding of what economists mean by growth. And as we were talking about the weightless world, there has been a separation between growth of material used in the economy and creation of value in the economy but if you say to me, we want to keep GDP as it is or reduce GDP, it's not saying to me you can't buy 5 handbags, you can only have one. It's saying to me, actually, we can't invent a vaccine because that's valuable and it would add to GDP. A lot of GDP is ideas, it's services. So I think it really requires a much more sophisticated understanding of what growth is and how that translates into economic measures like GDP. So I'm not a fan of de-growth while at the same time completely respecting the imperative to do something about sustainability.
Ben Yeoh (19:14): Yes. I think Mark Carney said something similar - he was challenged [on growth] as in, do you think you can have sort of infinite growth and that type of thing, and his reply is that, well, you could have carbon light growth, you can have physical capital, not intensive type of growth and talking about sort of the digital world you can have things on Fortnight. You're buying digital clothes to show off where it's not necessarily physical clothes.
Diane Coyle (19:44): And of course that uses energy, so there's no physical cost, but that's the kind of calculation you need to make. In the end thermodynamics will kick in. So infinite growth and that's because it's not possible.
Ben Yeoh (19:56): Sure. Yeah. But perhaps a long way out or not. That kind of brings me to thinking about this aphorism, which we got two halves of already, which is what gets measured gets managed. But then there's another one, which is this idea that not everything that can be counted really counts and then the opposite about some things which are really important, but are really hard to count. And your book on GDP seems to me to argue that GDP did measure something fairly useful in the last 100 years, 200 years, and maybe going back, but as the world has moved much more intangible and we've had to address ideas like natural capital, social capital, human, intellectual, and the like, that current thinking about what GDP encompasses is somewhat inadequate. So where do you think that what we're measuring at the moment is getting it right and where do you think we're really falling short?
Diane Coyle (20:58): Yeah, I do, as you say, see the gap between GDP and what we might care about in terms of economic wellbeing or welfare is growing and making the GDP less and less useful. There was a paper by an economist called Vegra Licas who taught me at Harvard many years ago and he calculated what proportion of the US economy he thought was unmeasurable, or hard to measure. And it was, I think it was something like 43% in 1994 and I redid the calculation and I think it's something like 23% now is easy to measure and therefore 77% is hard to measure. And it's because ideas are creating so much more of the value and that might be because it's in services and the quality of the service really matters. And so the price there is a signal of quality and you can't use it to calculate real GDP in the same way all those quality changes and all the electronics goods that we buy all the time. There are new goods, like new vaccines, and it's really hard to figure out how to incorporate those. So just generally the way the economy has changed makes it hard to do this deficient that we always do between here's the pounds or dollars amount spent in the economy and here's what we think about it in real terms or volume terms, because although it's called real, it's an abstraction. GDP isn't a natural thing anyway and that abstraction that we use and we get the growth figures, 9.2% or whatever it is each quarter, it's very hard to interpret what it means now, I think.
Ben Yeoh (22:36): And so there's a lot of talk in the media and, I guess, economists about so-called UK productivity challenge or the global productivity challenge but I guess there's been some pushback about how much of that challenge is really a measurement challenge, partly measurement, and how much it's been based on some causal factors which no one quite understands. From your point of view do you think much of it is a measurement challenge and what do you think are the root causes of it in your opinion?
Diane Coyle (23:09): So there are definitely measurement issues to think about. That doesn't mean that there are no headwinds against productivity. [There is a] hangover from the financial crisis, demographic change the time it takes companies to adopt new technologies and there are lots of historical examples of how slow that can be, and it's now being called a productivity [challenge]. So all of that's real if I can use that word. It doesn't mean that GDP is getting worse at measuring what GDP measures, but that's different from what you might be interested in measuring. And so we might become much more interested in measuring a different meaning of productivity. If I can think of an example, I'm trying to think about time and productivity now because in services and actually a lot of manufacturing, productivity gains have been about saving time, doing routine things faster, or squeezing out unproductive time from processes and logistics system but there are also services where time spent will increase the quality and therefore arguably the productivity, the service. So if I'm getting a blood test done, I want it to be quick, no time wasted. If I'm in intensive care, I want to have a dedicated ICU nurse who can spend all their time looking after me. So I'm playing around with this idea about is there just a completely different way of thinking about productivity than taking GDP and doing some things to it to calculate what the productivity level would be. But that's a very long-winded way of saying, I think there is a puzzle, I think there are some good reasons to believe in it. It's not all about measurement, but that doesn't mean the measurement questions aren't really interesting because they're about concepts really.
Ben Yeoh (25:04): And I think that you've been relatively critical of some happiness indexes as a sort of alternative and there's some other things out there like a peace index you've got human development index and things like that. I'd be interested in what currently you're thinking might replace or supplement some thinking around GDP and whether you continue to remain slightly critical of what sort of perhaps happiness economics or some of the claims that happiness economics makes versus GDP.
Diane Coyle (25:39): I am still critical about them. One reason being that they're kind of black box theories, that you can do econometrics, regressions that show you that well-being measures, stated life satisfaction measures are positively correlated with various things. But there's no kind of theory that has been tested about it. So you can certainly advocate cognitive behavioral therapy for mental health reasons. That might be a really good thing to do, but if the person suffering the mental health problems is living in a dump flat with no money, then it's not really good to solve the problems for them. It's also the same challenge as with GDPs, you're trying to reduce a complex assessment of how things are going into one number and the thing about GDP is there's a whole load of economic theory about how you combine things to get that one number. And a lot of the alternatives are just quite arbitrary and the human development index, for example, has some really unpleasant implications about how you value life in different countries, just because of the way it meshes together incomes and life expectancy. And then the other issue I have about some of the happiness advocates is that they're kind old fashioned utilitarian. It's doing it top down to people. We will do happiness to you. There's that flavor about it that I just, as a [Inaudible:00:27:05], I don't particularly like.
Ben Yeoh (27:10): Great. Yeah, that's food for thought. Yeah, I think that's right. So I studied some neuroscience and experiments in psychology, and there was always this more suspicion about if you couldn't tie it into a kind of testable model or a theory about what was coming about, it's all fine to have your empirical data and something else, but it's so much stronger when it is actually backed in something biological or real world in basis.
Diane Coyle (27:38): Well, we might get there, but I think it's not there yet. There's a lot of strong policy claims being made.
Ben Yeoh (27:44): So circling back to Jason Furman we've had at the start. So you've been interested in competition policy and part of the review and I guess one strand of thinking is that we have some of these mega corporations or particularly technology corporations and they're stifling competition much harder to these tech startups and things like that and therefore that's bad for consumers. And then I guess they argue that they don't have as much, I guess, what is it vertical sort of competition so these startups can't happen in a sort of horizontal place, and yes, they might buy them up, but they're still appearing and going and aren't we giving so much value to consumers by providing our products and some of these for free or for what the things like that. And I think the review tended to sort of say, no, actually there probably is an issue with sort of competition and fluidity and dynamism and that would actually be better for the economy and consumers. Have I kind of read that right from your point of view, kind of now a couple of years down the line, post pandemic where a lot of companies kind of have been very helpful, but it has been quite concentrated as well? Has that changed your view?
Diane Coyle (29:05): These are clearly services that people really value. I started a piece of work with co-author David Nguyen looking at what people say they would need to be paid to give up different free services. We included parks, but we will set it to online shopping, search, Facebook [ ] and we managed to run it in February 2020, May 2020 and February, 2021. So the timing was very lucky and people state high median values for a lot of these services, particularly search and personal email, they stand out compared to all the others but parks as well. And they changed in the ways that you'd expect with a lockdown. So online shopping became much more valued by particularly older groups of people. So, they are highly valued and as a policymaker, you should interfere with that cautiously. So I'm not a fan of the idea that you break up these companies, because a lot of the value that they deliver to people is that they have the network effects and they link up all kinds of different things. But the issue is can people with better technologies get into the market in the way Google took over from Yahoo or Facebook took over from My Space. And I still think, no, they can't now. So personally, I think data access is one of the barriers to competition and finding some way to make the services more interoperable seems quite important. If you think about it, we can all text each other, use SMS and mobile calls because the barriers were not engineered in and they have been engineered in social media, for instance.
So thinking about that and thinking about rights of data access seems important to me, but also scrutinizing mergers much more and thinking about the whole raft of things; kills zone acquisitions, the things that might make startups hesitate to go into a certain area if they think Amazon is going to get into it ahead of them and all of those things need looking at. So all the competition authorities, EU, US, China also, and the UK are looking at ways to tackle this and I don't see it as a settled view about the right thing to do. So, things will get tried and we'll see how it goes. I don't know what the chances of success are. Do I think Google will not be a big and powerful company in 10 years time? I suspect it will be.
Ben Yeoh (31:46): Maybe touching on thoughts on inequality maybe just through the lens of share of capital, labor and potentially pay. I know there's been commentary and you made some comments as well that senior management pay at a lot of companies has really escalated, particularly when you look at it as multiples of average worker pay. On the other hand, you also see this across all sectors of children's book authors at the very top also making more money sports people, footballers. So it seems to be a cross sector wide phenomenon. And I'm actually often asked to think about sort of these pegs, we have these concepts of fairness as well. On the other hand, some of these companies are now just sort of an astonishing number of a trillion dollars of market cap, and they would claim if you're increasing that 10%, you're making a hundred billion dollars of value. So to get 1% of that value might seem reasonable, even though it might not seem that reasonable to a worker. So I was wondering what you're thinking about inequality and what me might want to do about that and whether, I guess this is a side effect of that capitalistic incentive route and is there other ways of sort of modifying that, which doesn't destroy the incentive system as well, or do you think it needs a more thorough examination overall?
Diane Coyle (33:15): I think it's become socially toxic that there are people who do earn so much money and I'm very skeptical that an individual makes so much difference to corporate outcomes that they deserve 1% of the gain and there's been an upward ratchet. And in my consultancy days when I tried helping companies write their annual reports, you would see the remuneration committee say, well, we want to attract the best people so we'll pay in the top quartile of our peer group. And then the next year, everybody does the same thing and the next year everybody does the same thing and so it just doesn't reflect. So it's supposed to be about incentives, but it's not really, it's just about the structure of the way that they fit the incentives and the other pernicious effect of it all is that stock options plans give companies an incentive to buy back and that means they're not investing in better products and new activities, but all in all, I think the system really is problematic. As you say in your question, the superstar phenomenon pushes the other way and it's a genuine phenomenon. The way I think about it is there's a Milton Friedman essay from the 60s where he talks about why inequality is perfectly acceptable and he goes through all of these thought experiments. So somebody who spends a long time training, do they not deserve higher pay? Well, most people say yes, of course they do. Somebody's got a particular natural talent, they're brilliant actors. Do you resent them becoming a movie star even if the economics of technology of movies mean that they're getting so much more money than Betty Davis used to back in the day? And people don't really mind that. And you get through this list and it's all very reasonable and then at the end, he says, but if it becomes so unequal that it's socially divisive then you tear up all of those things and you fix it.
So I think if Milton Friedman said inequality can become too divisive, then we should probably take that seriously and there are people who lead lives that are so totally separate. They've got no idea how the rest of the community, how their fellow citizens are living. I think it's really unhealthy and many rich people seem to think that they don't owe society. Why should they pay their taxes? So they've become a kind of group part and it seems to me really unhealthy. What would you think?
Ben Yeoh (35:58): Well the counter arguments or some of the counter arguments, I guess, are that-- Okay, I'll say one thing that it seems to be when you ask people, people mind less about entrepreneurs than they do about corporate managers, although even there is a thing. So we mind less about the Richard Bransons and the Jeff Bezos of the world because like you pointed out, like a sports person, they kind of did it all themselves as opposed to someone who's come up, not the founder or put their own life in risk capital, but came up as a manager. So there's a kind of interesting question about does society view those people differently. CEOs and very market-based people would also sometimes argue that, oh, we are worth more than 1% because when we leave, we see our stock price goes down 5%. That would be one argument and then the argument people make with the stock buyback is that actually you're meant to do stock buybacks and dividends after you've done all of your productive investment in long-term R&D and things like that. There's obviously counter arguments about maybe there was not long-term or short term enough, but at least that's the argument there. I think, to the points that you alluded to, because the problems are across so many sectors and also non sort of corporate as well as corporate maybe I think you alluded to we simply kind of need higher taxes that people actually pay and actually there is an increasing amount of people, I think even in senior managers to do on a lot who would be prepared to do that. And interestingly, circling back to something that Jason Furman said recently.
He was saying that higher taxes is one of those areas where he doesn't think it'll particularly help growth or productivity or anything, but the fairness aspect was the fact that it should be, he thinks broadly neutral to where he's seeing growth and productivity would be a positive and that would allude to your point that you were making via Friedman that that sense of fairness means you don't get those divisions because the systematic second or the point around-- aside from the people and the structure, which again, that's what you allude to is the social contract or the social capital. And there are signs trust has gone down, maybe social capital is eroded and to the extent that this sense of fairness is eroding that then on a systems level a little bit like a lot of these things we're talking about sustainable and climate, on the systems level that can be and continues to be actually quite troubling and maybe destructive. And so you do have to lean against that, even though you can look at the individual case and that seems fair, but I don't know whether you can just do it through the corporate arm when you have the issue across non-corporate and you see it within inequality. So actually maybe we should just do these higher taxes and then we actually know from my reading of it, again, I'm not actually a trained economist, I do this from a [investing] lens, but things like investing in education, investing in our children, investing in our natural capital, all of those are kind of win-wins on a long-term basis that get really high returns, whether they're social returns or financial returns.
So it seems as capital allocation, it's not that we lack good ideas for where we could put that tax money, we have them. So that would seem to me to make sense, but the actual pressure on individual company votes, which is the lens that we see it, is currently quite fraught because of that. And therefore, I do think this is something where the system, and by that it will probably have to be government needs to notch it a little bit harder than just trying to let the-- Well, no markets are completely free, right? There's social contracts and regulations. It is not something that this form of market can actually solve by itself.
Diane Coyle (39:52): Yeah, I agree and I suppose if that doesn't happen and you're pessimistic, we're in the world of [Thomas Piketty{?} ] or [Walter Schiedel] where the thing that does bring about a reversal and an equalization is some kind of catastrophe, more of [a disaster of some kind] and if we want to avoid that, maybe we should try doing something else.
Ben Yeoh (40:13): Yeah, exactly. Fall of the Roman empire (ref: to Scheidel book and cf. Four Horseman]and all of that. Maybe, just touching on a couple of other of your experiences, I'm kind of thinking boards and maybe BBC and also investor Chronicle. I was thinking about your work on the BBC at that very high level. Maybe you can give us a glimpse into what boards actually do and the kind of challenges they have managing big complex organizations where you have some see-through, but you obviously won't have everything. I mean, the BBC seems really interesting to me, public good. When I have a glimpse on social media, it seems to be attacked from both the right and the left. It seems to me that maybe they're doing a kind of balancing job because they can attack from both sides and you've got the strategic board, which has got a lot of different challenges to handle. Can you give a glimpse of what that is actually like and how hard it is?
Diane Coyle (41:13): I can try, it's a big question. I think the BBC is a really important institution in the UK for social and cultural and educational reasons, the public service broadcasting that it does, but also as an industrial policy and I think this is underappreciated. It's got a great engineering department. It started out as a deliberate industrial policy to make sure this country had a foothold in the emerging radio industry and it has through investing in R&D, through training a lot of people who work in the industry and laterally through providing a market for all kinds of broadcast content, but also bringing new music to the audience and commissioning classical music. So we're one of the few net exporters of music in the world and I think that industrial policy that nobody talks about through the BBC is part of that. Having said that I found being on the BBC trust the predecessor to the current board and dealing with the management just unbelievably frustrating and I think it's for all the reasons that you're hinting at about non-executive roles and it's partly an information problem because you can set up all kinds of processes and board packs to try and make sure you know what's going on. You're never going to know what's going on in the same way that the executives are and that's an inherent challenge to which you can only make sure that you talk to lots of other people outside as well. Part of the process for me was a kind of formal approval process that involved working with Ofcom and talking to industry stakeholders.
So I heard all the complaints that they always made about BBC being too dominant in the market and the Ofcom perspective, which is very different. But that's one of the challenges. The other though it just goes back to the previous bit of our conversation is that these are really clever, really highly paid confident executives and we were part time [Inaudible:00:43:23] public sector much, much, much less well paid non-executives. I think my pay for it was something like 20, 30000 pounds a year. I can't quite remember, but that ballpark order of magnitude difference. So that correlation is quite challenging as well and you've got a confident board who've got something that they want to do and they're going to advocate for it and they're going to present the information to you in a particular way. You've really got to have a lot of courage to say no, so you can ask questions, but stopping something happening is really difficult. I think our big success was having huge fights with the BBC management about their executive pay. And it's a difficult thing because they are in a very competitive market where people are really highly paid, so they can't cut it too far, but they were overpaying themselves. It was an attitude with the political climate. We had a standup rouse, but we won that one. And I think that was one of the merits of that governance system, which was much criticized, it was kind of [Inaudible:00:44:38] and in the end they got scrapped and replaced to the unitary board. I doubt they have stand up fights between their non-execs and their executives and I doubt Ofcom gets into that kind of detail. So I don't think that could happen again.
Ben Yeoh (44:54): That's fascinating. So the first part was probably one of the best articulations of a defense of the BBC that I've heard. I think it's very interesting that I don't hear that many people defend the BBC as articulately as that and plus you can see it [in iplayer] and all of these other things and from my work in theater world, I know people going to BBC learn a lot of skills and then move into private sector or film or wherever and much, much more valuable from it. In that sense, they are definitely providing training and R&D. But to your point, there are these and I think BBC kind of epitomizes it in a sort of public way, but this problem with non-execs and boards and compensation and all of that-- It did bring to mind that there is a comparison actually within Sweden where you have Swedish domestic, more local CEOs or senior management. Their pay is decided at a lower level by their boards and sometimes it's more boards as well. But where you have Swedish companies, in fact, generally applies Nordics, which are much more global in nature. So they make the claim that we could go to an American company and do this job and get paid 10 times more. They have much more trouble, but where you feel like either because it's purpose driven or because no, we're only selling something relatively more domestic, they actually have less of this issue and then some of it is cultural. They're much more prepared to say, okay, well, if this is the medium worker, I will cut myself at X because I don't really need another 10 million Swedish krona on that. Great. Well, I thought we'd do a small section of overrated, underrated, and then finish with maybe a couple of pieces of advice if that's good for you. So you can pass, you can say things are correctly rated or not. But overrated or underrated then UBI universal basic income.
Diane Coyle (46:53): Overrated. Seems to me it's a neoliberal answer to a neoliberal problem. The problem is people are being employed on precarious contracts, low wages, minimum wage is not enforced, all of that stuff. Pay them properly, make labor market regulation work. But you can't buy a good school with your individual basic income. You can't buy a bus service that will get you into work. So I'm not a strong advocate of universal basic infrastructure, give people good schools, good hospitals, and good transport.
Ben Yeoh (47:28): So do you find it strange that so many people who I think would consider themselves progressive or therefore left leaning or maybe even anti market do something, which I think it's-- I don't know if it's Peter Thiels' actual idea, but he's definitely a proponent of that quite libertarian Silicon valley bent on UBI.
Diane Coyle (47:48): I find it absolutely incomprehensible, I must say. Yeah. You know why it's so popular?
Ben Yeoh (47:57): I think so there is the libertarian bent in Silicon valley. Actually in the US, this is my own personal pet theory, as they see something akin in the way that their disability benefits work. So their disability benefits are almost like very low substandard, higher barrier UBI cause if you can claim them, you often never go off them. So there's a certain way of doing that and I feel that through that lens, they felt well, this is a way that the welfare could work. Plus they have this culture of this sort of the individual, you give something and you can make it go for you and therefore they've come to that and also because Silicon valley that kind of Californian thinking is this sort of little bubble in itself. I don't know if you've been to San Francisco recently, but you could see these pictures. You've got some of the richest people in the world and they walk past a sort of homeless and homeless drugs and housing and all of that infrastructure problems. So there's a particular-- and we all suffer it in our hometown, so I know. I live in London and I will walk past similar, I am sure. But as an outsider, you can see even in a degree and I think that is something which does discolor our thinking.
Diane Coyle (49:21): If it demands to make the benefits system work better and be simpler, then it's hard to argue with it but you know, that's not really universal basic income.
Ben Yeoh (49:31): No, I agree. But I think that's where their thinking is. That's my pet theory on it. Anyway, it's probably much more complex than that. So maybe moving one step on UBI this policy idea of a job guarantee.
Diane Coyle (49:48): Underrated because there are lots of things that need doing in public service and if you're paying people unemployment benefits, then the marginal return on paying them a little bit more to do a job. It seems like a no-brainer to me.
Ben Yeoh (50:05): Yeah. And there's a lot of, in my view, what we would call it soft skills to actually turning up and being at work, which is very valuable to future employers and it's also very valuable to yourself, actually, both mental resilience and these other soft skills that you need to sort of go, oh, I have to turn up on time and do whatever this is. Maybe it's planting new flowers in our community gardens. So something where you have the incremental, although I do think a kind of upskilling general idea program might work similarly, but I guess they're cousin ideas. Okay. Overrated, underrated the idea of running the economy hot, which is topical at the moment.
Diane Coyle (50:51): I'm not sure I really know what people mean when they say that or how they would--
Ben Yeoh (0:56): I guess they're meaning, particularly in the US it's this fiscal stimulus where you might be giving people fiscal money, as well as monetary stimulus by these lower interest rates so that you are trying to maximize where you are with employment and everything else and maybe even cause inflation or these nominal inflation in order to kickstart or continue growth. I think that's kind of the cluster of ideas, but like you say, people say slightly different things about it.
Diane Coyle (51:28): Yeah. Well, I'm not a macro person. I find it a little bit mysterious sometimes, but to know that you're running the economy hot, you would have to know what the speed limit or what its capacity is and I don't think that's known, and I don't think it's a fixed number. It depends on all kinds of things, including what demand is.
Ben Yeoh (51:50): Sure. Okay. Industrial policy or a government actually having an industrial policy might be it, but industrial policy overrated or underrated?
Diane Coyle (52:01): Well, underrated. Since Thatcher and Reagan, we have dismissed the idea of industrial policy. It gets called picking winners and people stop thinking about it but there are all kinds of what we call in a jargon horizontal policies, including competition policy, including skills and apprenticeships, infrastructure, investment that can be industrial policy. The key is you've got a government that thinks strategically about where they want the economy to go, what the economy's strengths are and where those strengths are and we don't have that. We have a [UK] government that thinks about the next tweet, if we're lucky.
Ben Yeoh (52:40): Yes. Arrow's impossibility theorem?
Diane Coyle (52:48): Underrated or overrated, underrated, I think. But I don't think people think about it very clearly. And so, you obviously know that it says you have these few kinds of vanilla assumptions about people's choices, and it turns out that mathematically that says that you can't aggregate for society across all the individual choices. And a lot of economists go, that's really smart and clever, what a fantastic theory. Okay, let's now ignore it and let's decide that we can calculate the improvement in social welfare that will come about for policy A, B and C. And so I think that means that it's underrated because they don't think about the implications which for me are more about what some would call the restricted domain, what's the scope in which you are thinking about whether a policy is an improvement or not, and who is that affecting? And so it goes back to what we were talking about earlier, Ben, about it's so hard to have one number that tells you what the answer is and I think Arrow's impossibility theorem is in effect saying there's not just one number.
Ben Yeoh (54:07): And that would hint to, I guess, some of the themes we talked about thinking about things in a more pluralist way, and also thinking about these interdisciplinary things, because one number, whether that's happiness or GDP is not going to give it to you. And therefore trying to maximize that one number is certainly not going to give it to you. And the last one on this is the New Zealand prime minister Jacinda.
Diane Coyle (54:35): She's probably accurately rated, don't you think?
Ben Yeoh (54:38): Well, I think she might still be underrated. I think she's slightly underrated in her own country and I wonder whether she will be-- So strong female leader with a lot of interesting ideas and why I might think she's still underrated is because she's pushed through this idea of what do they call it, the New Zealand living budget and therefore to me, one of the first sort of substantial-- Okay, it's a smaller economy and it's got its own special quirks, but it's one of the first attempts to put in some of the capitals we talked about, calling them capitals or whatever, natural capital or health, social, and other things in a way of forming policy, but by putting it kind of for treasury to think about, or whoever's in charge of that part because of what we've talked about is I don't know whether treasury has been thinking about this enough because of everything that we said, because of their training and because of where their data comes and therefore if they can, or she can prove that something about that is going to increase the welfare of her people that will end up being a pretty, I think, significant jump in thinking about how governments can think. And therefore I go underrated. I'd be interested in what you think about the New Zealand living budget and that whole area.
Diane Coyle (56:03): I think it's a really analytically rigorous good framework and to be quite interesting to see how it develops over time and also whether, if any, political implications it has. But I was going to ask you, if you think as a small country, a scale thing here in that it's easier to take these approaches in smaller places, like Scotland and Wales or some English local authorities, Iceland? They are all quite small and I just wonder if there's something about the kind of cohesion you can get in a smaller place that makes it more feasible to try these kinds of policies?
Ben Yeoh (56:42): I think so as you could probably even add, [ ] Taiwan, South Korea, Singapore but to me it riffs on something to do with that trust and social contract where if that remains strong, I think you can do it potentially in some larger countries. Obviously Scandinavia is a little bit larger, but I mean, if we think about the UK, I wonder whether if we're prepared to do things by less central planning, so devolve a little bit more localism and that localism-- I mean, they're still quite big areas, big economies, but they might be more New Zealand style and you have that to be able to set that. I kind of think at least in theory that they could therefore work. So I guess that is a little bit more federal now and maybe there's a little bit more like Switzerland. I mean, maybe that's going to be really hard in places like India, Indonesia, China, Russia, US, but I kind of feel like the UK, which sits slightly in between that, has a chance of enacting some of those things. And it still, to me, I know we talk about a more polarized society in all of this, but I still feel I've traveled around the country and even into Wales and Scotland quite a lot over the last 10 or 20 years. There are still things about Britishness that bind us together. Our love of the NHS, the underdog sort of quirkiness, other aspects of British culture, which although were quite hard to sort of define, I think people do put their finger on it.
So to me that means there's enough social trust and cohesion even whether you want to be multicultural or not, which is foundational to let some of this happen. But perhaps we need to push forward a little bit more in terms of innovation. Well, I guess it's innovation within the government, right? And that's what New Zealand have done and I guess the problem is that some of it won't work out. By its nature some of it will have to fail and if you can fail and then pivot, that will be good. But at the moment, we're stuck in this thing where we dare not try anything new and therefore in this kind of slow and steady-- Well, I guess if you look at it, some of these metrics, GDP or HDI [Human Development Index] , the UK has got this slow and steady decline, although from a very high base. So I kind of would like to remain cautiously optimistic with some of those inklings coming through. So maybe with a final couple of questions. So, maybe because he's on the record on some of this we can say coming back to Jason Furman again, he suggested a few things which he feels can help growth, productivity and inequality. So there's kind of a win-win things. And I was wondering what you would have thought about them. So he names, I think education and investing in children. He would also name enabling work which I think solutions to getting people in the workplace, but particularly females, minorities and that more competition and more fluidity or dynamism. So people moving cities, I guess that's a particular US thing but see there's some in the UK. Would you disagree with any of those points and would you add anything into your own policy recipe?
Diane Coyle (1:00:06): I think I might disagree with getting people to move around more. I think people just quite like to stay where they are and although we've had that sort of pattern of mobility that you leave your small town and you go to university in a city and then you go and work in London, that one kind of mobility. Most people want to stay where they are. So we've got to make things work for where they are and that's why I think geographic policies are really important. So that's the one thing I might disagree with and even the US is not that mobile anymore. Are there other win-wins? I mean, I think there's a lot of investments that would be win-win. So I think that you could call it investing in natural capital, but reducing air pollution and the health benefits of that. So all of that stuff, that's definitely a win-win and particularly the kinds of green technologies where government coordination can de-risk markets and make them grow faster than they otherwise would and therefore that stimulates the private investment and that's all good dynamic win-wins as well. So I think there are plenty of them, they just need doing..
Ben Yeoh (1:01:19): And then, he's got a smaller category of what you call “win neutral” or “win, tiny bit lose” but you're losing so much tiny that the win makes more up for that. And he puts higher taxes and minimum wage in that bucket. Although I guess they have enacted at least one of those. Would you agree with those and would you add anything else in that bucket? I guess this is the kind of fairer society we're looking at, some of the extra capital things more.
Diane Coyle (1:01:53): Minimum wage, I don't think you can say in generic terms it's going to either have positive or negative effects. It depends on the context of the labor market in which it's being applied and there is obviously a level of minimum wage that will reduce employment. But equally there are increases in the minimum wage that will increase demand and through the multiplier effects have positive outcomes. US minimum wage got to be so low that they're in that territory I think, going to $15 minimum wages seems to be wholly beneficial once you abstract from the effects of the pandemic on employment levels. So I don't think I agree with that. I've forgotten the other one already. I'm sorry.
Ben Yeoh (1:02:38): It was higher taxes.
Diane Coyle (1:02:40): Higher taxes, so they're efficiency costs of increasing taxes but that says you design a tax system as well as you can and there are going to be trade offs and you're going to have some inefficiencies and that's just too bad. If you want to have any public goods, you're going to have taxes and given that, I think in general, private and public sector in the UK in particular have under-invested for a long time, then we're going to have to raise taxes
Ben Yeoh (1:03:11): And on the natural capital, whether that's biodiversity or sustainability, what do you think should be highest on the policy agenda?
Diane Coyle (1:03:22): Well, COP26 and some global action finding a way through the politics of that. It's obviously really important and then actually paying more attention to biodiversity questions and that cluster of issues about land use, zoonotic diseases, soil quality, agricultural productivity, all of those but for understandable reasons have been kind of second order to climate change but actually we need to think about those as well.
Ben Yeoh (1:03:52): Sure. A lot of it seems to me that actually economists or economic thinking does have some of the answers, but the sort of what we would call it, the political economy or the political leadership is not really following any of that and therefore there's this growing gap. So it kind of almost seems to me that some of this is now a political economy question, or maybe it always has been obviously that it's intersectional.
Diane Coyle (1:04:16): I think it always has been but the politicians were, I suppose, more like economists previously in that they thought they were right answers to problems. But as an economic analyst you're saying we've got this great policy, if only the politicians would implement it, then your policy is not a great policy. You've got to incorporate that.
Ben Yeoh (1:04:40): Yeah and I think this is the point and we lead it to that. This is why I think I see the climate assembly and that kind of work is very important because you have to bring your people along with you. There's a lot of things which only exist because humans caused them to exist in their mind, call them into subjective thoughts and if you don't put that into your calculus, you don't have a policy because that is only a kind of idea.
Diane Coyle (1:05:06): That's right. And we have a lot of language for it; multiple equilibrium focal points in games, narrative, economics. We've got the tools to think about that but it somehow doesn't get translated into what should this government do in this place at this time.
Ben Yeoh (1:05:22): Right. And so final two questions. One is what does a productive day or week look like for you with the work that you do? And the second question is, do you have any advice for maybe say young people thinking about being an economist or particularly if you're not from a kind of middle-class background who would think of being economist as potentially the job to do, what would might spark in a young people's mind about why this would be a great thing to do, or your observations about the career that you've had?
Diane Coyle (1:06:03): Oh, well, a productive day I try to make them all productive I suppose. It's very busy and I've just in the past, a few months really for the first time in my career, apart from a six month period as acting chair at the BBC trust, have somebody to look after my diary for me and that's made me so much more productive. So that's been fantastic, but it's always a mix and some of the most productive moments are walking to work or walking in the Botanic garden or walking the dog and the thoughts are jostling around in your head and something falls into place. So that's good and every day needs some of that, just not thinking or doing anything in particular, but letting the thoughts run around in your head. That's productive day. Economics is a great subject, it's intellectually powerful, it's interesting. You don't have to be an economist to study economics and enjoy it and get a lot out of it. The downside is that lots of places still teach economics in a mathematical way that's too mathematical. I think the math is important, the empirics is important, but they overdo it and that's the downside.
But I think my advice would be if you're interested in big challenges, how to make society fairer, how to make sure that there are enough jobs, how to bring about climate sustainability, then it's one of the most powerful disciplines that you can study to think about those kinds of questions. And although economists have a bad reputation for being selfish or all about the money, actually, most economists are really highly motivated by what can we do to make things better and that's the driving force in lots of what we do. I've done pretty much everything you can do as an economist. I've worked in the private sector. I've worked in the treasury. I've been a journalist. I've been a consultant. I've done public service roles and I've done academic stuff. And so that's the other benefit that you can do all kinds of other things, all kinds of variety of things with this pulpit that you get from studying economics.
Ben Yeoh (1:08:16): Great. So with that final question I'll say thank you very much.
Diane Coyle (1:08:22): It's been really interesting chatting to you. Thank you so much for inviting me on.
Ben Yeoh (1:08:27): Great.