Lawrence Summers, economist with a knack for the nifty turn of phrase, former US treasury secretary and former president of Harvard University, speaks in complete sentences, without hemming and umming, dispensing with notes, a PowerPoint presentation or a teleprompter.
He spoke in New Delhi on September 23 at a forum organised by the Confederation of Indian Industry (CII) and the Department of Economic Affairs of the Government of India, delivering a lecture with the provocative title, The World is on Fire, the same headline he had used for a newspaper article on climate change. His central thesis was that development banks have to grow bigger and better to finance climate tech and development, so as to avoid a world-damaging conflict between the compulsions of combating global warming and the compulsions of growth for developing countries.
Summers abandoned the nostrums of free-market fundamentalism not only to the extent of seeing a vital role for states to act to expand development banks, but also by stretching his apostasy to the admission that combating climate change confronts two coordination problems that the market would not solve on its own.
The two are both chicken and egg problems: one, car makers making electric vehicles while charging station makers build the charging infrastructure, neither assured of the complementary production, without which the investment of either would go down the drain; and, two, investment in renewable energy and investment in power storage, caught up in a similar tension of uncertainty that the essential complementarity would materialise.
Such recognition of market failure, he admitted, amounted to a major departure from his earlier stand that all that was needed was minor regulatory intervention to internalise the externality of greenhouse gas generation by putting a price on carbon and creating a market for carbon.
This is all to the good. Yet, Summers, enthused as he is by the possibility of sustaining the rapid economic progress the world has seen since globalisation took off in the 1990s, errs in his approach to climate change and underdevelopment on two counts, at least.
He fails to recognise the centrality of carbon dioxide removal (CDR) from the atmosphere in combating climate change, still laying emphasis on reining in the generation of fresh emissions. And he ignores the challenge to development posed by coordinated policy rate increases in the developed world, and the failure to draw immigration into the toolkit of combating inflation.
Capturing carbon dioxide
Till now, removing carbon dioxide from the atmosphere has been seen as a costly way of buying carbon offsets, useful only for producing carbon dioxide for pumping down into oil wells to increase the pressure and pump out crude more completely from depleted wells.
Now, new technology is diversifying the use of the captured carbon dioxide, to produce things ranging from the building blocks of synthetic fibre, synthetic fuels and other chemicals traditionally derived from crude oil by petrochemical industries.
Carbonfree and LanzaTech recycle carbon dioxide removed from the air or flue gases into assorted useful organic chemicals. The ultimate goal is to mine the air for the starting block for petrochemicals, instead of mining the earth for crude, refining most of it into carbon-spewing fuels and converting the rest into useful chemicals.
CDR is the only hope humanity has for containing the rise in global temperatures below 1.5 degrees Celsius above pre-industrial times, the Paris climate accord goal.
The world has already warmed, on average, 1.1 degree Celsius since 1850. Merely by reducing additional emissions, we cannot avert a future of droughts, floods, unseasonal rain, cloudbursts, forest fires and heatwaves across the world, alongside associated human misery, all the more acute in the developing world.
The Biden administration’s Inflation Reduction Act allocates, for the first time, serious money to carbon capture and use technologies and industrial processes. The world should not just be prepared to absorb these technologies but insist that the rich world remove their historical contribution of carbon dioxide to the atmosphere and transfer the tech to developing countries.
Coordinated rate action
The other piece missing from Summers’s address was the constraint on growth posed by coordinated policy rate hikes in the rich world and the upward pressure this put on interest rates in the developing world as well.
If developing country central banks let the spread between American and domestic rates move, by not following the Fed’s lead in raising rates, it likely would depreciate the local currency against the dollar.
Energy is priced in dollars. So, even without a rise in the dollar price of energy, the local-currency price of imported energy would go up. To avoid importing inflation, policymakers raise rates, when the Fed raises rates. This crimps growth. And since this happens across the world, demand shrinks across the world, removing exports as a growth stimulant.
The reason why the US Fed has been constrained to raise its policy rate 11 times since March 2022, from zero to 5.25-5.5 percent, is the drum-tight labour market in the US.
Unemployment is at about 3.5 percent. In this labour market, companies are forced to raise wages to offset the inflation-induced rise in the cost of living. Higher wages allow consumption to stay unchanged, instead of being dampened by higher prices. Healthy consumption encourages unflagging production, undiminished demand for labour, steady rates of unemployment and ready offsets to further jumps in the cost of living. Unyielding inflation forces the Fed to raise rates again.
Immigration dampens inflation
The way out of this vicious cycle is immigration, to increase the supply of labour, which alone can ease the pressure on wages. That would lead on to moderation of inflation. Yet immigration is not part of the discussion on inflation, and not part of the central bank’s toolkit.
Unemployment is at near-historic lows in not just the US but in Germany, Britain and other European countries, too. Easier immigration alone can lead to an end to the pressure to raise interest rates to combat inflation, and suppress growth around the world.
On the possibility of the US and China cooperating on common threats such as pandemics and global warming, Summers was optimistic.
He recounted a story about US president Ronald Reagan’s meeting with his Soviet counterpart Mikhail Gorbachev. The two of them took a stroll, with just an interpreter for company, leaving Reagan’s minders terrified as to what all he would commit US policy to, in the absence of sage counsel at hand.
As it transpired, what Reagan did was to put a question to Gorbachev: Would the Soviet Union come to America’s help in the event of an attack by Martians? Gorbachev was startled by this otherworldly poser, but recovered quickly to say yes, of course, the Soviet Union would help the US defend itself against the Martians. He then asked Reagan if the US would help the Soviet Union in case the Martians attacked the Soviet Union. Regan said, yes, it would. This recognition of shared humanity laid the ground for the Strategic Arms Reduction process.
Summers hopes, against the evidence of Trump calling SARS-Cov-2 the China virus, as part of his Make-America-Great-Again xenophobia, that against common enemies such as pandemics and climate change, the US and China would be able to find common ground.
He would like them to come together to enlarge and improve multilateral lending organisations such as the World Bank. He would also like multilateral development banks to create policy instruments and financing to involve the private sector in climate and development activity.
If we begin to feel woozy, holding our breath for China and the US to hold hands and begin to move and sway and step and clap in a dance of global development, we should blame ourselves rather than Larry Summers.
(TK Arun is a senior journalist. Views are personal and do not represent the stand of this publication.)
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