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Testing Tony Seba’s EV Predictions 11 (Follow the Money Part One)

In my last post, I focused on the dynamic nature of lithium reserves and resources and the fact that as demand for lithium shoots up, the demand side shouts out to the supply-side to get its act together through the price mechanism. Accordingly, there is no fixed cake of lithium. We don’t just eat one fixed lithium cake in front of us until it has all gone.

The authoritative United States Geological Survey in its latest round-up of the world’s metals and minerals says we have 53 million tonnes of lithium resources available to be exploited as of 2017, compared with 13 million tonnes in 2005. As the table below shows, however, recorded resources do not include unconventional sources, sources that are too low grade (not concentrated enough) or undiscovered resources. The vast majority of lithium within the earth’s crust is either inaccessible deep below ground, at the bottom of the sea, or far too expensive to extract due to its diffuse nature.

USGS Reserve Base

Yet that leaves a bunch of lithium that is perfectly usable but remains undiscovered. How much? Who knows. We can get some sense of what is out there by looking at the annual flow of lithium from ‘undiscovered’ to ‘identified’, and (with my economist’s hat on again) seeing how much money is being expended to help that process along.

If you read each year’s edition of the USGS’ Mineral Commodity Summaries, you do get some sense of annual tends, but the USGS doesn’t look forward into the future. For that, we need to listen to “Deep Throat”s advice to Bob Woodward (played by Robert Redford) in “All the President’s Men”. That advice was “Just, follow the money”.

And it was through “following the money” that it suddenly dawned on me that perhaps Tony Seba’s predictions were not so crazed as I had orginally thought four years ago. Now let us see how much money is going into lithium mining expansion and, even more interestingly, where it is coming from.

But before we start, let me give you a bit of context. In my last post, I referred to the assumption by ‘peak lithium’ advocate William Tahil that one kilowatt hour (kWh)’s worth of EV battery storage required 1.4 kilogram (kg) of lithium carbonate equivalent (LCE). More modern estimates are closer to 1kg per 1kWh, which thankfully makes the maths a bit easier too. New generation EVs with a decent range have around 75kWh-sized batteries. From this, we can calculate that to produce one million good specification EVs you need 75 million kgs of LCE, or 75,000 tonnes. Also, keep that lithium carbonate equivalent (LCE) abbreviation in mind, we are going to use it a lot!

The Big Three (SQM, Albermarle and FMC)

Perhaps, we can divide our time line between  the ‘Electric Vehicle Era” (EVE) and the “Before Electric Vehicle Era’ (BEVE). Once upon a time in the BEVE there lived three happy oligarchical lithium producers who carved up the market amongst themselves. Because they had access to a relatively cheap source of lithium extracted from brine lakes, no other entrant could enter the market without making a loss.

What is brine in this context? Water with super concentrated amounts of minerals that can include lithium. Due to its higher density, it sinks to the bottom of ordinary bodies of water. The Big Three operators have their core base in the lithium triangle of Chile-Argentina-Bolivia. They pump brine out into evaporation pools and then let the sun remove the water, leaving a mineral sludge. And for your added edification, here is a video of an eel having an unfortunate encounter with a deep sea brine lake as narrated by David Attenborough in Blue Planet 2:


And for a seriously sized evaporation pond, look at this one belonging to SQM:


Sociedad Química y Minera de Chile (SQM) 

One of the biggest of the oligarchs is SQM, which in 2017 had revenues of $2.2 billion, a third of which come from lithium. The company’s web site is here. The company has a somewhat murky pedigree, with the son-in-law of former strongman and ruler of Chile General Pinochet being a key shareholder.

The company is allowed by the government of Chile to extract 350,000 tonnes of lithium metal from one of the largest brine lakes in the world called the Salar de Atacama. This lithium budget is good until 2030 under an agreement reached in January 2018 following a very fractious round of negotiations. Chilean lithium companies have to broker agreements with CORFO, the Chilean government entity that licenses extraction rights to Chile’s lithium resources in exchange for royalties. The new deal translates into 2.2 million tonnes of lithium carbonate equivalent (LCE, see my last post for an explanation of contained lithium metal and lithium carbonate equivalent).

In 2017, SQM produced 48,000 tonnes of lithium carbonate and 6,000 tonnes of lithium hydroxide, which amounted to 23% of world supply according to them.

Under the agreement with CORFO, these numbers will rise to 100,000 and 13,500, respectively over the next two years, and could in aggregate rise again to 180,000 per annum while staying within the extraction budget set by CORFO through to 2030. Simplistically, that equates to about 2.5 million decent specification EVs worth of lithium, assuming that SQM suddenly stopped supplying lithium for any other end use. In reality battery quality LCE needs a certain level of purity that other applications don’t necessarily need. But we will keep hold of this quick and dirty equivalence; that is, 75,000 tonnes of LCE equates to one million EVs.

SQM also have a number of joint ventures in other countries, but they are not yet at the stage of producing lithium. We will come back to that.


The US-stock market listed Albemarle (web site here) is also active in Chile with operations at the same brine lake as SQM, the massive Salar de Atacama. In addition, it has a much smaller brine operation in Clayon Valley, USA, together with a bigger hard rock joint venture at Greenbushes Australia (49% Albemarle, 51% Tianqi Lithium of China). In 2017, the company produced 65,000 tonnes of LCE, which it plans to raise to 165,000 in 2021 and 265,000 sometime thereafter.

The company has considerable downstream processing capabilities, added to after purchasing Jianxi Jiangli New Material in 2016. As a reminder, lithium brines and lithium ores (spodumene) are at the top of the lithium supply chain, and from these feedstocks various processing stages take place in order to obtain a variety of useful lithium-based products. For battery production, the most important of such intermediate materials are lithium carbonate and lithium hydroxide. An Albemarle slides gives you a sense of the complexity:


With so much lithium in Chile being produced by SQM and Albemarle, battery component and module makers have been drawn to the country like a dog to a pool of sick.

The Chilean government has a development strategy based around capturing more of the lithium value chain in-country by, in effect, guaranteeing supply to only those processing companies that promise to set up lithium plants in Chile. So far, COMFO has indicated that 25% of Chile’s production (basically 25% of SQM and Albemarle‘s Chile production) will be preferentially allocated to Chilean-based processing plants.

Currently, the following companies are proposing in-country operations in exchange for guaranteed lithium supply:

  • TVEL Fuel Company of Rosatom of Russia.
  • Suchuam Fulin Industrial Group Co. Ltd of China.
  • Shenzheng Matel Tech. Co. Ltd. and Jiangmen Kanhoo Industry Co. Ltd. of China.
  • Molymet from Chile.
  • Gansu Daxiang Energy Thecnology Co. Ltd. of China.
  • SAMSUNG SDI Co. Ltd. and POSCO of Korea.

So we can see a host of battery component makers desperate to nail down their lithium supply, and they are happy to spend a lot of money setting up processing plants in Chile to achieve such an aim.


FMC (web site here) started out in life as the US-goverment founded Lithium Corporation of America, which was purchased by the New York Stock Exchange-listed FMC in the late 1980s. In 2017, the company produced 18,500 tonnes of LCE from its brine operations based in Argentina at the wonderful sounding Salar del Hombre Muerto. It aims to raise output to 21,000 tonnes in 2018, 31,000 tonnes in 2020 and 41,000 tonnes in 2022.

FMC has a wide range of chemical business and lithium only makes up less than 10% of revenue. Since lithium is viewed as a growth area, the company intends to spin out its lithium segment in an IPO in the autumn of 2018 as it believes a separate listing will get a premium stock market valuation.

Big Three Signal Capital Intentions

LCE production in 2017 was around 215,000 tonnes according to FMC. From the company presentations of the Big Three, we can therefore work out market shares.


From the expansion plans published by the Big Three, we also know that they intend to increase LCE production from 125,000 tonnes in 2017 to 485,000 tonnes sometime after the year 2022. That is almost a fourfold increase. If we take that growth rate and apply it to the entire world, we should expect to see global LCE production of around 825,000 tonnes in and around 2023. That is a useful date, as it allows me to recycle this chart, which I haven’t done for a while:



At the top of the post, I said my ranging shot for LCE to EVs was this equality: 1 million EVs = 75,000 tonnes of LCE. My lithium production extrapolation above has us producing 825,000 tonnes of LCE around 2023. This amount of lithium could outfit about 11 million EVs in 2023: not enough for us to keep on Tony’s S curve. Of course, this assumes that the entire global lithium supply is dedicated to EVs (no more iPhones).

Therefore, the numbers don’t add up. To get them to match we need to alter things around. We have four choices: 1) don’t make so many EVs, 2) change the size of the batteries, 3) use less lithium by changing battery chemistry or 3) mine more lithium.

Let’s take a slide out of FMC‘s presentation to the Barclays Electronics Chemicals Conference May 14, 2018 (find the presentation here):


There are a lot of interesting things we can pull out from this. First, the most bullish broker has 938,000 tonnes of LCE being produced in 2025. That would be in line with my extrapolation. Second, there is a general consensus that average battery size will be 50kWh. If true, that gives us 50% more EVs per million tonnes of lithium than I had, getting my ranging shot estimate of EV sales numbers up to 16 million. That is close to where we need to be on Tony Seba’s S curve. Moreover, that same broker is only using 0.7kg of LCE per kWh. I think that is too ambitious, but we will come back to that when we delve more into battery chemistry.

Overall, the supply response from the lithium miners looks pretty good from the chart above. But is it good enough? At the beginning of the post I invited you to “follow the money”. We can see the Big Three intend to quadruple production over the next few years and that takes a lot of money. But the Big Three are doing the investment internally. To really see the tidal wave of new money coming into the sector you need to look outside of the Big Three. Moreover, for me, this wave of money suggests we could get to well above 1 million tonnes of LCE by the year 2025. That will be the subject of my next post.

For those of you coming to this series of posts midway, here is a link to the beginning of the series.

Back from Hibernation

Well, it’s two years since I have posted on this blog. Since then,  I have dealt with death, divorce and disease on the personal front. Apologies for the silence: when you are being emotionally clubbed over the head, then you lack the bandwidth to write.

Meanwhile, the replacement of man by machine has continued apace, Arctic sea ice extent is flirting with new lows (so climate change remains the spectre at the feast) and commodities have demonstrated abundance not scarcity. Politics and economics, the two loves of my life, are all over the place. The science of well-being evolves, but the political establishment generally looks back for truths instead of forward.

Individuals aware of the existential threats to the existing order wrestle over whether to retreat into a narrow, local world (look inward) or challenge the existing orthodoxies (look outward).

So, yes, we are living though interesting times. Technology as Diamandis and Kotler’s biblical ‘abundance’ or Kunstler’s technology as false magic. We may be sitting on an exponential curve of technology, but we are certainly sitting on a similar curve of climate change. And all this is taking place against a backdrop of political, economic, legal and social institutions designed for the 1900s. A lot to talk about.

Happy New Year (It Likely Will Be a Hot One—They All Are Now)

Both NASA and NOAA have come out with confirmation that 2014 was the warmest year on record (here). The temperature anomaly (difference from the 1951-1980 mean) was 0.68 degrees Celsius, ahead of 2010 (0.66), 2005 (o.65), 2007 (0,62) and 1998 (o.61). Data set is here.

While we have only just popped above the past record, 2014 is notably for one key fact: it is not an El Nino year. In short, we are at a stage where a typical year’s temperature is now in line with the climate skeptics favourite year: 1998. Most climate skeptic blogs cherry pick 1998 as the starting point of any analysis since this then suggests we have been in a temperature change hiatus. In reality, the year 1998 encompassed a record-breaking El Nino event, in itself an anomaly due to its sheer size.

Against this background, when the next El Nino does arrive, expect the temperature record to be smashed by a wide margin. Will it be 2015? I don’t know. But I do know that 1998 will soon seem insignificant in the historical temperature record (click for larger image).

Annual Temperature Anomaly jpeg

Accompanying the announcement, NASA also released a short video showing data visualisations of the changing global temperatures:

Unfortunately, the main driver of temperature rise is CO2, and CO2 concentrations in the atmosphere continue to rise (Source: NOAA here):

Atmospheric CO2 jpeg

On a longer time scale than that show in the chart above, we have seen atmospheric CO2 levels rise from around 280 parts per million (ppm) in the pre-industrial age to around 400 ppm now. Further, the scientific community have calculated that to keep global temperatures from rising 2 degrees Celsius above pre-industrial levels, a change deemed dangerous, we should put a maximum of 1,250  tonnes of carbon dioxide into the atmosphere going forward.

Given that we have a limited budget of carbon that we must stay within to keep temperature change below 2 degrees Celsius, how are we doing? According to the International Energy Agency (IEA), the answer is “not good”. Every year, the IEA publishes its flagship report World Energy Outlook (WEO), and every year they assess whether we are on track to move sufficient energy generation away from fossil fuels so as not to outspend our carbon budget.

2 Degree Carbon Budget jpeg

Unfortunately, the IEA believes that on the current emissions trajectory we are going to use up the entire budget by 2040. This means that after 2040 we will have to stop burning fossil fuels completely—obviously impossible.

Moreover, in order to turn the emissions trend around we will need to quadruple investment in energy efficiency, renewables, nuclear and carbon capture and storage from current levels.

Another major problem also exists. In order to stay below the 2 degree warming threshold, a large percentage of current oil, gas and coal reserves will need to stay in the ground. According to a study by University College London published in Nature, a third of oil, half of coal and 80% of coal reserves must not be burnt (see here):

It has been estimated that to have at least a 50 per cent chance of keeping warming below 2 °C throughout the twenty-first century, the cumulative carbon emissions between 2011 and 2050 need to be limited to around 1,100 gigatonnes of carbon dioxide (Gt CO2)2, 3. However, the greenhouse gas emissions contained in present estimates of global fossil fuel reserves are around three times higher than this2, 4, and so the unabated use of all current fossil fuel reserves is incompatible with a warming limit of 2 °C.

In particular, nearly all of the recently identified unconventional oil and gas reserves must not be used if we are to have any chance of avoiding dangerous climate change (click for larger image).

Unburned Fossil Fuels jpeg

There is an irresistible logic in these numbers that demands a step change in thinking by politicians and policy makers. The United Nations Climate Change Conference to be held in Paris at the end of the year presents a chance to try to change the trajectory of carbon emissions.

Every concerned citizen should be putting pressure on government to address what in undoubtedly the greatest risk humanity has ever faced: climate change. Here in the UK, the Campaign Against Climate Change’s Time to Act” campaign has a day of action on March 7th.  Elsewhere, continues to act as clearing house for events around the world. Personally, I believe that the campaign to prevent climate change will evolve to become the largest and most important social movement in modern times. Don’t be a bystander: get involved. To quote Churchill:

It’s not enough that we do our best; sometimes we have to do what’s required.

Links for the Week Ending 27 April 2014

  • The success or failure of greenhouse gas emission mitigation really rests on Chinese coal consumption. The BP Statistical Review of World Energy 2013 showed global coal consumption rising 2.5% in 2012, with China accounting for all of the net growth. China alone now accounts for more than 50% of global coal consumption. (Note: BP’s 2014 edition containing 2013 numbers will be released in June.) The Financial Times (free access to articles after registration) highlights new talks between the US and China on emission reductions (here) and also has a good piece of analysis looking at the efforts China is making to cap coal production and consumption (here).
  • The launch of by Ezra Klein and colleagues will, I hope, give us a new platform to access decent news analysis. The start looks promising, with a solid article by Brad Plummer on the disappearing two degree Celsius global warming target. The site promises continuity of analysis (see a good review of the concept behind Vox by The New York Times here), and I wish them well.
  • Thomas Piketty’s “Capital in the 21st Century” has received extensive coverage in almost every heavy-weight newspaper and magazine, plus, of course, on the blogosphere. If you want to get acquainted with his arguments (and his critics), then a great place to start would be this article by Vox again.
  • The inequality question is squaring up to be central to the UK general election, now only a little over a year away. The economist David Blanchflower has a good article in The Independent looking at the issue. Like Blanchflower, I would prefer Labour to come up with a coherent set of policies that deal with low growth, energy, inequality and sustainability. I haven’t seen anything yet.
  • The probability of an El Nino event starting this summer is growing as can be seen in this review of the situation by The Carbon Brief. Against this background, expect food prices to remain volatile, a trend already highlighted by this article in The Financial Times.

Links for the Week Ending 20 April 2014

Apologies for the lack of posts over the last few weeks. The demands on my time have been intense recently, and I have found little time to read, let alone write.

  • The third instalment of The Intergovernmental Panel on Climate Change’s (IPCC) Fifth Assessment Report (AR5) was published on 12th April, hot on the heels of the second instalment  which came out on 31st March. The latest report is from Working Group III and is titled “Mitigation of Climate Change”. “The Summary for Policy Makers”, which pulls out the most pertinent points, can be found here. With mankind currently emitting around 50 giga tonnes of CO2 equivalent, it looks almost impossible to constrain end-of-century warming to 2 degrees Celsius.
  • Real Climate has an interesting commentary on this IPCC report by Brigitte Knopf (which you can find here). It highlights the fact that mitigation strategies remain relatively low cost. To avoid dangerous climate change would likely only require a reduction in global GDP growth from 2.0% to 1.94% per annum. Further, the Real Climate post also contains the infamous chart that was excluded from the original “Summary for Policy Makers” since it showed upper middle income countries (led by China) driving emission growth.
  • I am still skeptical over the Chinese growth story remaining intact for decades to come. The Q1 GDP release saw growth slowing to 7.4% (see here). Business Insider has a series of ugly charts on China here, while a Morgan Stanley report suggesting that China may be reaching a Minsky Moment (a credit inflexion point) has received a lot of comment (for example, here). Barry Ritholtz at The Big Picture has a series of charts showing the credit madness here. Personally, I still think China will ‘do a Japan’; that is, experience a sudden and sharp drop in GDP growth. Not good for China, but certainly good for climate change.
  • More generally, the upbeat ‘hiatus’ mentality is everywhere. We have a ‘hiatus’ in global mean temperature rise, a ‘hiatus’ in oil price increases (although the oil price is certainly not going down despite the shale story) and a ‘hiatus’ in the global financial crisis. The International Monetary Fund in its April “World Economic Outlook” publication (WEO) publication, sees global growth of 3.6% in 2014 and 3.9% in 2015, up from 3.3% in 2013. More important, it puts the risk of a near-term global recession close to zero. The Federal Reserve Board-led super monetary ease and abundant access to credit has, for the time being, proved victorious. I still believe that there are longer term forces at work which will confront the average household with a whole new world of risk by the end of the decade. The current ‘hiatuses’ provide a golden opportunity to prepare for the  future, but are generally seen as a confirmation of good times are here again. For the vast majority of people, including the educated, global warming is dead, peak oil is dead, and financial/economic risk is dead. We shall see.


Links for the Week Ending 30 March 2014

  • The second instalment of The Intergovernmental Panel on Climate Change (IPCC)‘s Fifth Assessment Report (AR5), titled “Impacts, Adaption and Vulnerability”, is to be released in Tokyo tomorrow. There have been lots of leaks, but I would prefer to read the actual report before commenting on it further. Nonetheless, we have seen some good climate change reporting over the last week in the run-up to IPCC publication; for example, “Borrowed Time on Disappearing Land” in The New York Times, an article looking at the plight of Bangladeshis displaced by rising sea levels.
  • I frequently quote Joseph Tainter‘s “The Collapse of Complex Societies” and now NASA has created a research project that tackles the same theme. The Guardian has a good introductory article here, and the academic paper introducing the HANDY model looking at ‘collapse’ is here. It is not a million miles away from the World3 model which sat behind “The Limits to Growth” report to the Club of Rome way back in 1972.
  • The economist Tim Hartford is a past master at doing a hatchet job on the latest intellectual fad. Here he is in The Financial Times (access to the article after free registration) putting the boot into ‘Big Data’, in particular, its claim to be both more accurate yet still remove the need for statistical sampling, model building and an understanding of causation. I will quote Hartford: “Unfortunately, these four articles of faith are at best optimistic oversimplifications. At worst, according to David Spiegelhalter, Winton Professor of the Public Understanding of Risk at Cambridge university, they can be “complete bollocks. Absolute nonsense.”” I have blogged on Robert Gordon before (here), an economist who takes the hype behind these new technologies with a pinch of salt. Big Data, driverless cars, nano-technology, 3D printer— the list goes on. The first and second industrial revolutions produced steam power and the internal combustion engine, which together have put us into a climate crisis. I am still to be convinced that the technologies of the third industrial revolution (encompassing everything from the integrated circuit to Big Data) will get us out.
  • There was a time when economists looked down their noses at psychologists as being ‘woolly’; this is ironic since psychology, rather than economics, is far more amenable to the application of controlled experiments, a key component of the scientific method.  Daniel Kahneman and Amos Tversky were pioneers in applying psychological experiments to economic questions, and together they helped invent the discipline of behavioural economics. Tversky died in 1996, but Kahneman is still going strong and has just passed his 80th birthday. His influence has never been higher, helped by the success of his book “Thinking, Fast and Slow” which brought his ideas to a general audience outside of economic academia. The Edge has an interesting article in which a series of thought leaders from a variety of disciplines explain how they were influenced by Kahneman’s work. For myself, Kahneman made me reevaluate how I look at risk and also helped me understand why humans find themselves unable and unwilling to respond to the clear and present danger of climate change.
  • Salon has lovely article by a son trying to deal with a father lost in the hatred and bile of Fox News. Thankfully, I never experienced such a dilemma with my dad; he was a mildly grumpy conservative, but with a lasting affection for the NHS within which he worked as a doctor for the best part of 40 years. Of course, The UK has The Daily Mail, which thrives on a diet of righteous indignation (and stories of how the country is going to the dogs), but the UK has no real broadcast equivalent of Fox News. Thankfully.

Links for the Week Ending 16 February 2014

  • Just as Hurricane Sandy brought climate change back into the political debate in the United States, the floods in southern England have made climate change a topic for public discourse again in the U.K. Indeed, opposition leader Ed Milliband has felt sufficiently emboldened by the floods to put climate change back onto the agenda of any incoming Labour government as witnessed by his interview in The Observer newspaper, In this, he claims that Britain is “sleepwalking into a climate crisis”.
  • Meanwhile, the British right still appears unconscious of the potential damage its recent embrace of climate skepticism could do to its political fortunes. There are those on the right who are perfectly aware that a belief in British political conservatism does not require unquestioning adherence to climate skepticism. And it is to The Daily Telegraph‘s credit that the thoughtful veteran environmental journalist Geoffrey Lean is still given a platform (he would have been taken behind the wood shed and shot in the head by The Daily Mail long ago). Yet Lean and has views have been increasingly marginalised on the right over the past five years—as the pages of The Daily Telegraph attest. Instead, we have such nutters as James Delingpole being given a voice in both The Telegraph and The Spectator. For an example of Delingpole’s American style hard-right shock-jock journalism attacking Geoffrey Lean see here. And Christoper Booker appears to be the most prolific Telegraph commentator on the floods, with never a chance missed to bash the ‘warmists’ (people who believe in global warming). See, for example, here. Message to Tory strategists: “What if the skeptics are wrong?, What if the planet warms? What if extreme weather events grow more frequent and severe? What if climate skeptics appear increasingly unhinged from reality? What if a Conservative Party that embraces climate skepticism looks ridiculous?” It doesn’t have to be this way: you can be right-leaning and still believe in climate change. The two concepts are not mutually exclusive.
  • Meanwhile, the U.S. is dealing with its own major extreme weather events, not least of which is the drought in California. National Geographic asks whether we are seeing a structural change in a piece called “Could California’s Drought Last 200 Years?“. And The New York Times looks at the difficulties farmers are facing in an article called “California Seeing Brown Where Green Used to Be“.
  • During my series of posts titled “Hiding from the Computers” (starting here), I wrote on the emergence of a Downton Abbey style economy. The Financial Times has former Chief Economist of the World Bank Larry Summers riffing on the same theme in an Op-Ed piece here (free registration gives access).
  • The Financial Times has also been chronicling the differing fortunes of typical middle-class professions since the 1970s. This is an example of not just increasing inequality between classes, but also within classes. Just to think, once upon a time engineers used to earn more than bankers!
  • Finally, I entered adulthood reading The Economist and The Financial Times and latter added The Wall Street Journal, Barrons and The Nihon Keizai Shimbun (the Japanese FT). So who would have thought that one of my favourite bloggers would now be—well—a druid. Here is John Michael Greer writing on David Holgrem’s “Crash on Demand” article that I flagged in last week’s links, but everything he writes is well worth reading.

Links for the Week Ending 2 February 2014

  • A year ago, the U.S. was suffering from a major drought in the Great Plains area. This year, it is California that is experiencing an unprecedented lack of rainfall. The US Drought Monitor shows the situation here, and The New York Times reports on the implications for California here. If you want to put this drought in some perspective, then I recommended looking at a series of charts published by the National Climatic Data Center (NCDC) that can be found here. In particular, look at the time series chart half-way down the post that shows drought categories for the contiguous U.S. changing over time. The U.S. does appear to be experiencing more exceptional (D4) droughts in recent years but the overall drought picture looks more mixed.
  • Preliminary figures suggest that the U.K. economy grew 1.9% in 2013. Much of the media has now accepted a narrative of continued recovery, but there are a few dissenting voices. The Telegraph‘s Liam Halligan in an article titled “Britain’s shaky growth is papering over cracks” points to missing fixed capital investment, a worsening external balance, more debt and a growing real estate and financial asset bubble as all suggesting that the expansion will end in tears. Halligan also quotes a pamphlet by Douglas Carswell at Potiteia (here), which links every credit boom since the 1970s with a subsequent real economy bust.
  • John Cassidy, a staff writer at the New Yorker, wrote one of the better books about the Great Recession and utopian economics called “How Markets Fail: The Logic of Economic Calamities“. His articles for The New Yorker are similarly perceptive, such as this recent one suggesting “Ten Ways to Get Serious about Rising Inequality”.
  • On a similar theme, I have talked a lot about stagnating median incomes in the U.S. that date back to the 1970s (such as here), but have rarely referred to the experience in the U.K. The Office for National Statistics (ONS) published a report on this topic on January 31 called “An Examination of Falling Real Wages, 2010 – 2013″, which has drawn a lot of press comment, such as this in The Guardian. It came out just a day after a study by the Institute of Fiscal Studies looking at the same theme (here), with commentary by The Financial Times (access free after registration) here. I intend to post on this issue soon.
  • And in The Telegraph again, Jeremy Warner argues that Britain has “A broken schools system wholly unprepared for march of the machines“. It’s good to see that the mainstream press has started having an intelligent discussion on how technology is transmogrifying the workplace.
  • Time for some interesting eco counter-culture thinking with David Holmgren’s “Crash on Demand” paper, in which the permaculture guru upgrades ‘brown tech’ as his mostly likely scenario for the future—that is, one of severe climate change but a slow decline in energy usage. He then goes on to suggest that a global economic crash is in the interest of the sustainability community, and that it should be positively encouraged. All provocative stuff and sufficient to give rise to a flurry of posts within the ‘descent’ blogosphere, including comments by Dmitry Orlov (here), Nicole Foss (here) and Rob Hopkins (here).

On Sustainability and Happiness (Part 2)

In my last post (here), I looked at the mounting evidence that GDP per head is correlated with happiness when tracked for individual countries through time—a finding that goes against the previous orthodoxy that went under the moniker of the Easterlin Paradox (if we all get richer, none of us get happier).

The U.S. and China are sometimes argued as key countries that show no such improvement in happiness, but anti-Easterliners explain away the U.S. by pointing to stagnant median income growth through time (GDP per head has risen, but it has all gone to an elite, so most people haven’t secured any income-induced extra happiness), and view the China findings as irrelevant due to a lack of sufficient data.

The situation is ironic since it is only recently that advocates of the Easterlin Paradox have made headway in transferring their ideas out of academia and into the public domain, so catching the attention of politicians. Here is the economist Andrew Oswald in an Op-Ed in The Financial Times in 2006 (here):

But today there is much statistical and laboratory ­evidence in favour of a heresy: once a country has filled its larders there is no point in that nation becoming richer.

The hippies, the Greens, the road protesters, the downshifters, the slow-food movement – all are having their quiet revenge. Routinely derided, the ideas of these down-to-earth philosophers are being confirmed by new statistical work by psychologists and economists.

Justin Wolfers, the Easterlin Paradox’s great nemesis, would beg to differ. Accordingly to him, GDP per capita has captured human welfare as encapsulated in the idea of self-evaluated happiness quite well. Indeed, he views the happiness literature as maturing to a stage where it aligns well with GDP and, indeed, the old stalwarts of economic analysis ‘utility‘ and its first cousin ‘revealed preference‘—as such happiness has become respectably boring and quite neo-classical economics in tone.

“Utility’ and ‘revealed preference’ are the two trump cards of orthodox economists when confronted by arguments from non-economists that money can’t buy you happiness. Such economists will say “don’t listen to what people say, look at what they do”. And what people frequently do is buy, buy, buy—or work like hell so they are able to buy, buy, buy— to the exclusion of all those things that are supposed to bring happiness like hanging out with the kids, communing with nature, going for a jog, catching up with old school friends and taking up charity work.

Nonetheless, while Wolfers appears to relish his bar fight with Richard Easterlin, he has been very reluctant to take on the titan of behavioural economics, Nobel Laureate in Economics Daniel Kahneman. In Wolfers last major paper on happiness written with his wife Betsey Stevenson, the conclusion purposefully avoided any confrontation with Kahneman:

To be clear, our analysis in this paper has been confined to the sorts of evaluative measures of life satisfaction and happiness that have been the focus of proponents of the (modified) Easterlin hypothesis. In an interesting recent contribution, Kahneman and Deaton (2010) have shown that in the United States, people earning above $75,000 do not appear to enjoy either more positive affect nor less negative affect than those earning just below that. We are intrigued by these findings, although we conclude by noting that they are based on very different measures of well-being, and so they are not necessarily in tension with our results.

This is interesting, because Kahneman says some quite specific things about the use of the word ‘utility’ by economists in his magnum opus “Thinking Fast and Slow”.

As economists and decision theorists apply the term (utility), it means “wantability”—and I have called it decision utility. Expected utility theory, for example, is entirely about the rules of rationality that should govern decision utilities; it has nothing to say about hedonic experiences.

Kahneman goes on to make a distinction between the ‘remembering self’ and the ‘experiencing self’. The latter is concerned with the immediate emotions of joy, love, hate, sadness and so on and is completely distinct from the former’s happiness calculus gleaned from a balancing of a perceived life’s worth.

The book highlights an example of this dichotomy: the contemplative question of whether one’s happiness would increase if one moved to sunny California from the weather-challenged Midwest. The example is played out as a husband and wife spat. The wife believes that all will alter in a move to a sunnier clime, the curmudgeon of a  husband says nothing will change. And on this occasion, the data suggests that Kahneman is right. Weather (and climate) is the wallpaper of our lives: it is something that we will barely give thought to for more than a few minutes per day—and most often we see it as a given in our lives: neither a subtracter of happiness nor an additor.

Here is Kahneman filling out the different concepts of happiness:

So what happens if we start to measure experiential happiness rather than remembered happiness? The former is sometimes divided into positive affect—joy, love, hope, amusement and so on—and negative affect—pain, sadness, hate, regret and so on. What we find out, accordingly to Kahneman, is that the correlation between the remembering self and the experiential self is only 0.5. Events that will maximise self-evaluation of happiness will not necessarily maximise experiences. That is why people choose to take a job with a long commute or work for a bulge bracket investment bank like Goldman Sachs, even though both choices may be very negative in terms of experiential happiness.

In a classic paper with Angus Deaton, Kahneman actually teased out the impact of a rise in income for the remembering self and experiencing self. He came up with this chart (click for larger image) from this seminal 2010 paper (here):

Positive affect, blue affect, stress and life evaluation jpeg

And for those who like numbers, we have this table below from the same paper. What you see is a reasonably high correlation between income and how we perceive our lives (the Cantril ladder of life satisfaction from one to 10) but a very low correlation with positive affect (joyish kind of stuff) and blue affect (sadness kind of stuff).

Life evaluation jpeg

So Justin Wolfers may have felt he had won the war, but has he in fact just won an insignificant battle? More to come on this.

On Sustainability and Happiness (Part 1)

The last few years has seen a big bust-up within the academic economist community over whether higher income makes you happy. Since the experimental and survey data are still immature—albeit expanding and deepening year by year—even the seminal papers on happiness remain open to attack. And battle has certainly commenced over the so called Easterlin Paradox, named after the economist Richard Easterlin. For the sustainability community, the debate is important because it deals with the link between happiness and economic growth.

Somewhat simplistically, the Easterlin Paradox refers to the phenomenon whereby the level of happiness in a society doesn’t grow with absolute income but rather with relative income. The landmark paper which first promoted this idea is Easterlin’s “Does Economic Growth Improve the Human Lot? Some Emperical Evidence” published in 1974.

Easterlin’s paradox rested on the fact that in-country income disparities (the rich and poor within a particular country) corresponded closely with life satisfaction, yet between-country comparisons (rich country, poor country) showed a much smaller-than-expected happiness gap. Moreover, if you tracked a specific country through time, life satisfaction did not improve even as the country grew richer. Easterlin asked the question: “Will raising the income of all, increase the happiness of all?” And his answer was “no”, or rather “not so much”. This is one of the tables printed in the paper as evidence for his thesis:

U.S. and Happiness jpeg

As to why this should be the case? This came to rest on the theory that our lot in life is to live on a hedonic tread mill, ever resetting our happiness to the income and wealth of a particular time and place. So the thrill of a brand new car, house or holiday will always dull and pale.

In the following decades, Easterlin and his disciples amassed further evidence to support the income paradox, and, critically, it become one of the lynchpins of the new heterodox strands of economic thought that questioned the wisdom of neo-liberal growth without end. As such, it showed up in such canonical texts as Herman Daly and Joshua Farley’s “Ecological Economics” and Tim Jackson’s “Prosperity Without Growth.” Daly, Farley and Jackson believe (as do I) that there exist both resource and pollution limits to growth.  Critically, if the Easterlin Paradox is correct, you can have your cake and eat it, since a steady-state, or no-growth, society can be just as happy as one emphasising rampant consumerism and exponential expansion.

Almost inevitably, a counter-attack was launched in the form of a 2008 paper by the husband and wife team of Betsey Stevenson and Justin Wolfers titled “Economic Growth and Subjective Well-Being: Reassessing the Easterlin Paradox” and a subsequent follow-up in 2013 called “Subjective Well-Being and Income: Is There Any Evidence of Satiation“.

In this post, however, I will pull out the abstract and a chart from a third paper which Stevenson and Wolfers wrote together with  Daniel Sachs titled “The New Stylized Facts About Income and Subjective Well-Being” since it gives more prominence to the question of whether happiness increases with an individual country’s income through time.

The abstract to the paper blasts a broadside into the Easterlin Paradox.

Economists in recent decades have turned their attention to data that asks people how happy or satisfied they are with their lives. Much of the early research concluded that the role of income in determining well-being was limited, and that only income relative to others was related to well-being. In this paper, we review the evidence to assess the importance of absolute and relative income in determining well-being. Our research suggests that absolute income plays a major role in determining well-being and that national comparisons offer little evidence to support theories of relative income. We find that well-being rises with income, whether we compare people in a single country and year, whether we look across countries, or whether we look at economic growth for a given country. Through these comparisons we show that richer people report higher well-being than poorer people; that people in richer countries, on average, experience greater well-being than people in poorer countries; and that economic growth and growth in well-being are clearly related. Moreover, the data show no evidence for a satiation point above which income and well-being are no longer related.

And here are a set of charts purporting to show that growth in life satisfaction and growth in per capital GDP are linked through time (click for larger image).

Life Satisfaction and GDP jpeg

It’s worth hearing the argument directly from the horses’ mouths, so here is a podcast over at EconTalk ,with Stevenson and Wolfers taking about happiness and growth to Russ Roberts. And below we hear Wolfers debating happiness with Robert Frank at the Aspen Institute’s Ideas Festival:

Right-wing politicians love to characterise anti-growth advocates as out-of-touch ‘hippies’, so the attack on the Easterlin Paradox has met with a warm reception in such quarters. So is this the revisionist counter-revolution that will put the anti-growth ‘hippies’ back in their box? Well, not really. But I will leave that to my next post.