The economic ramifications of continuing the 20th century’s economic model, where unsustainable extraction and pollution conveys competitive advantage, are coming into sharp focus. Citigroup now projects a staggering $72 trillion global cost tied to man-made climate change during the 21st century. This is an almost incomprehensible scale of economic damage that is equal to losing four years of the United States’ entire gross domestic product.
The agriculture and food manufacturing industries also confront similar staggering economic consequences. The industrial fast food complex is directly tied to a global obesity and diabetes epidemic that now costs $2 trillion annually, or almost 3 percent of world gross domestic product. If this cost remains constant it will represent $170 trillion in economic cost through the rest of the 21st century.
These staggering economic costs don’t even take into account human suffering and premature death. A telling example is that 4,000 people per day, or 1.6 million per year, are estimated to die prematurely in China due to air pollution. This is a morbidity population that is 33 percent larger than the entire population of San Diego. In terms of the morbidity rate tied to our food system, in the U.S. alone over 75,000 people die each year due to diabetes.
Consumers, markets, politics and sustainable economics
The scale of the numbers tied to unsustainable human and environmental impacts are now too large to be wrong or ignored. Continued purchases of fossil fuels in the quantities now being consumed is an exceedingly poor economic decision. Health research now documents that sugary drinks are the 21st century’s tobacco, in terms of negative human health and cost consequences. The question is why consumers and the political system are comparatively unresponsive to numbers that can only be described as staggering.
The answer is based on the distinction between traditional economics and behavioral economics. Traditional economics is based on the concept of rational consumers and markets. It assumes that people will not borrow more than they can pay back and that lenders will not optimize short-term profits by aggressively promoting high risk, highly leveraged loans. Based on these assumptions, traditional economics would not forecast the 2007-2008 Great Recession. But it did happen because people and markets are not rational. The study of behavioral economics is based on the assumption that people and markets make decisions that reward themselves in the short term by ignoring or grossly underestimating long-term consequences until they become too large to ignore any longer.
The irrational consumer, market and voter now define our economy. For example, it is political suicide to propose raising pump prices to discourage the scale of fossil fuel consumption that is projected to create $72 trillion of climate change costs. Raising gasoline prices was also political suicide in 1974 when it was proposed as a solution to an OPEC oil embargo and continued entanglement in Middle Eastern wars. Imagine our national history if we had the economic will to accept higher pump prices as a cost alternative to Middle Eastern wars and pollution.
Another example is the attempt to regulate sugary drink consumption through public policy, taxes or both. Politically, such actions garner consumer and political responses that appear tantamount to a “live free or die” defense of the U.S. Constitution. But public policy designed to limit consumption of sugary drinks to reduce obesity levels is proving to work in Mexico, where a 10 percent tax on soda generated a 6 percent drop in first-year consumption. The economics appear compelling. Taxing sugary drinks will reduce consumption, and reduced consumption is the solution to reducing the staggering cost of obesity and diabetes. Fundamentally the consumer and political issue is not knowing what to do but rather having the consumer and political will to act on behalf of our economic, human health and environmental long-term interests.
The implications of adopting sustainable economics
The sobering reality is that issues like removing lead from gasoline, mandating automobile seat belts and limiting tobacco sales have historically taken approximately 50 years to move from initial activism for change to the adoption of change. Applying this same time-scale to the issues of climate change and obesity would create staggering losses in human health and economics.
We are now at a decision-making crossroads. The study of behavioral economics recognizes that consumers, politicians and businesses will make decisions resulting in substantial economic loss and human health costs based on a bias toward maintaining the status quo. It recognizes that consumers and voters will make decisions that reject science and statistics to protect strongly held beliefs. People and businesses will delay or procrastinate in taking actions that will advance their long-term welfare because change can be hard or discomforting. These behavioral economics factors are now threatening to generate staggering economic and human suffering damage.
In economics there is no such thing as a free lunch, and the pain from not adopting sustainability will eventually be overwhelming. This level of pain will generate mega-shifts in stock valuations, a restructuring of market share away from companies that gain competitive advantage through pollution, and the emergence of new companies that win customers by delivering price competitive and sustainable solutions. The scale of these ramifications will be surfaced in my next article entitled “The $250 Trillion Green Economic Revolution.”
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