Shadow Elite: Derivatives, A Horror Story

By Janine R. Wedel
Huffington Post

Strange as it sounds, my experience mapping under-the-radar power in Communist Poland, as a social anthropologist, helped me identify a new breed of modern-day power broker here in the U.S. Unaccountable operators are increasingly shaping public policy to suit their own interests, a disturbing trend I examine in my book Shadow Elite.

But perhaps not as strange as this sounds: Gillian Tett’s fieldwork studying marriage rituals in a mountain village in Tajikistan helped her, years later, understand how risky derivatives proliferated, and went unnoticed, until they helped detonate the global financial system. Tett is also a social anthropologist by training. Now she’s a top editor/journalist for the Financial Times, by trade, and she joins others with anthropological know-how offering crucial insights on derivatives and the “dark markets” that have been key areas of combat in the financial reform fight being waged on Capitol Hill.

Tett is the author of Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe. Last fall in Anthropology News, she made this comparison:

…bankers (like Tajik villagers) operate as a tightly defined group, with specific cultural patterns and a quasi language (or jargon) of their own. Also like Tajik villagers, bankers are generally trained to think in rigid “silos” and, as a result, find it hard to see how their overall system operates, or to see the contradictions in their own rhet­oric and internal organizations.

From the outside and with hindsight, the contradictions now seem glaring. Inside this closed culture, the ideals of the free market are repeatedly espoused, but not upheld. Derivatives, the exotic financial contraptions that vastly enrich the banking business, have flourished in the shadows, not in the open marketplace.

As I discuss in Shadow Elite, bankers capitalized on this aura of unmatched complexity, ever-changing technologies, and unstoppable financial “innovation”, all during an era when deregulation had become the norm. They used jargon, as Tett points out, and also a stranglehold on information as weapons to obscure, making effective oversight very difficult. She elaborated in the FT on the warring Wall Street “tribes” within a single firm, and how the derivatives tribe came to dominate.

Groups such as Citi or Merrill appear to have developed a more hierarchical pattern, in which the different business lines have existed like warring tribes, answerable only to the chief. Moreover, the most profitable tribe has invariably wielded the most power – and thus was untouchable and inscrutable to everyone else. Hence the fact that, in this tribal culture, nobody reined in the excesses….

No one reined them in within the firm, the ratings agencies, or Washington. Anthropologist of finance Bill Maurer explained to me the ‘complexity’ narrative.

[It is one] that empowers the [bankers and their lobbyists] who can say, ‘listen Congress, listen policymakers, we’re the ones who know what’s going on. So just back off. There’s no way you can understand unless you have a degree in advanced math or advanced physics.’

Damning evidence of this kind of hubris can be seen in a statement to Congress in 1998 – when the derivatives timebomb might have been defused – from then-deputy Treasury Secretary Lawrence Summers. He clearly internalized the idea that the Wall Street pros knew best.

….the parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies.

Who else was backing off? Gillian Tett takes a hard look at her own adopted field, journalism. After sketching out how the financial banking “village” operated, she then tried to understand, as both a reporter and anthropologist, why the media largely disregarded derivatives, even as their significance and threat was growing bigger minute by minute, trade by trade. While working at the Financial Times, she began to see a similar narrative taking hold in newsrooms: that derivatives were too hard to report on, and too boring to read about.
She says this:

…in the debt and derivatives world …. bankers generally loathed publicity and would rarely give “on the record” quotes. Moreover, it was difficult to get price or trading data since deals were typically made in private, not on public exchanges, and discrete events seemed few and far between. The debt and derivatives markets did not create “stories”–or not as defined by the Western press.

Shadow Elite column editor Linda Keenan, who worked in TV financial news in the earlier days of derivatives, seconds this assessment, pointing out that in television, there’s the added barrier of needing visuals: how do you put a picture to a derivative?

With journalists stumped, could anyone in the Washington power “village” stand in the way of runaway derivatives, and the banks that wanted to keep them unregulated? Ironically, there were few policymakers more capable of understanding derivatives or their real world impact than Clinton Treasury Secretary Robert Rubin and his deputy Lawrence Summers. And both were there when derivatives could have been at least partially reined in before they became, to quote Warren Buffett, “financial weapons of mass destruction.” Instead they did exactly the opposite, blocking key regulation at pivotal moments, as we saw in Summers’ remarks above, with Rubin going on to benefit from this deregulated Wild West when he left Washington and returned to Wall Street as a top executive.

Here again, taking an anthropological view can be instructive. Consider the elite conclaves both came from, and the biases and potential conflicts attached to them. Rubin originally came to Washington after decades at Goldman Sachs, a firm renown for its culture of invincibility. Summers came from a somewhat similar culture – Harvard – with ample faith in both himself and the efficacy of the free market.

Their boss, President Clinton, was intent on being the pro-business “New” Democrat. In the last two months, all three have tried to distance themselves from their roles in letting derivatives go unchecked. (And in true shadow elite fashion, none of them have faced the consequences of their actions. In fact, the only ones to really suffer from the failure of the elite are the non-elite, millions of regular people who’ve lost their jobs, houses or savings.)

And derivatives remain unchecked. Just because the economy cratered doesn’t mean that all these money-printing machines have disappeared. According to calculations by Bernstein Research, Goldman Sachs could lose 41 percent of its profits if the new derivatives regulations pass. Banks generally don’t break down their figures on this part of their business (surprised?), but it seems fair to estimate the percentage of the bank revenue that comes from derivatives is solidly in the double-digits (at some it could be more than 50%) To put this in perspective, imagine a food company that gets half its revenue from selling products that go totally unregulated by the FDA, and whose practices are hidden from both regulators and journalists.

Tett notes sociologist, philosopher and anthropologist Pierre Bourdieu as arguing,

…elites …. invariably try to hang onto power–not so much by controlling the physical means of production, but by also dominating the cognitive map, or social discourse. What really matters …is not what is publicly discussed, but what is not discussed. Social silences, in other words, are crucial.

Her message: when the people in power insist a little too hard that there’s no story to be found, start digging in. Tett says this should be a wake-up call for journalists and anthropologists, to question the people drawing that cognitive map. One reviewer dismissed this as “preachy” advice. It might be, if she wasn’t dead right.

Linda Keenan edits the Shadow Elite column.

Source: Huffington Post

Was the Social Security Money “Borrowed” or “Stolen”?

By Allen W. Smith
Dissident Voice

In December, the Obama deficit-reduction commission will make recommendations for budget cuts that will then be voted on, with an up or down vote, by the lame-duck Congress. Already, there is much speculation that Social Security will be one of the big targets. The rationale for cutting Social Security seems to be that, during such difficult economic times, everything should be a candidate for the chopping block, and that the public should support such cuts out of a sense of patriotism.

The flaw in this argument is that Social Security has not contributed a dime to the budget deficits or the soaring national debt. Social Security is funded exclusively by payroll taxes (also known as FICA taxes), paid into the fund by working Americans. In 1983, the payroll tax was increased substantially in response to the recommendations, the previous year, of the Greenspan Commission on Social Security Reform.

Prior to 1983, Social Security had operated on a “pay-as-you-go” basis with each generation responsible for paying for the benefits of the generation that preceded them. The 1983 legislation changed the nature of Social Security funding. In addition to paying for the benefits of the preceding generation, as was customary, the baby boomers were also required to pay additional taxes to partially pre-fund their own retirement. The net result is that the baby boomers have paid more into Social Security than any other generation. Yet they are often made scapegoats and blamed for the Social Security funding problem. I am not a baby boomer, but I am very sympathetic to them. They are getting a bum rap.

The intent of the 1983 legislation was to generate large Social Security surpluses for the next 30 years that were supposed to be saved and invested, in order to build up a large reserve in the trust fund that could later be drawn down to pay benefits to the baby boomers. The 1983 payroll tax hike has generated more than $2.5 trillion that is supposed to be in the trust fund. If the trust fund actually held this amount in real assets, full Social Security benefits could be paid until at least 2037 without any changes. Unfortunately, none of the surplus revenue was saved or invested in anything. It was all spent by the government on wars and other government programs without making any provisions for repaying the money.

Over the past 25 years, five presidents, and the members of Congress, have participated in the great Social Security scam. All Social Security contributions made by working Americans, except the amount which was needed to pay current retirement benefits, has been funneled into the general fund and used for non-Social Security purposes. Some like to say that the government just “borrowed” the money during the time period when it was not needed to pay benefits.

But borrowing implies repayment, and no provisions for repayment have been made. The government did not enact future tax increases that would automatically kick in when the Social Security money was needed. Neither did they enact legislation that would end other spending programs once the Social Security money was needed so the money could be transferred to the trust fund. The government spent the Social Security money, pure and simple, without making any provisions for future repayments. The IOUs in the trust fund are not marketable, and they could not be sold to anyone even for a penny on the dollar. The Social Security trustees confirmed the worthlessness of the IOUs in the 2009 Social Security Trustees Report with the following words:

“Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.”

In order for Social Security to pay full benefits after 2016, it will be necessary for the government to begin repaying the money it has spent on other things. This will mean increased taxes and/or additional borrowing. Neither of these is politically popular, and there is no assurance that future politicians will be willing to raise taxes to pay for the irresponsible behavior of past politicians. If the money is not repaid in full, with interest, it will have been stolen by the government from working Americans who paid into the fund.

Since Social Security would be fully funded until at least 2037 if the government had not used the money for other things, the only reason that politicians are advocating cuts in Social Security benefits is the fact that the government does not have the money with which to pay its debt to Social Security. Given the fact that Section 13301 of the Budget Enforcement Act of 1990 made it a violation of federal law to use Social Security revenue for non-Social Security purposes, it is hard to justify using the word “borrow” to refer to any of the Social Security money spent after 1990, even if it is eventually paid back.

Dr. Allen W. Smith is a Professor of Economics, Emeritus, at Eastern Illinois University. He is the author of seven books and has been researching and writing about Social Security financing for the past ten years. Read other articles by Allen, or visit Allen’s website,

Source: Dissident Voice

Will Drinking Water for Millions be Devastated by Natural Gas Drilling?

From Colorado to New York, natural gas drilling is putting drinking water at risk.

By Jeff Deasy

The ordinary tap water available to 12 million residents in the New York Metropolitan area has been reliably clean and flavorful since 1842, when an aqueduct was built to bring pristine water from upstate to the city. For years the prideful city’s water is a consistent winner in blind taste tests. Easy to take for granted, it comes as a shock to learn it is now endangered by natural gas drilling.

For a couple of years there have been media reports from Pennsylvania to Texas of drinking water so tainted that folks are able to light the water from their kitchen tap on fire. There have been more than 300 instances of contaminated water in Colorado since 2003, and more than 700 instances in New Mexico, according to Bruce Baizel, senior staff attorney with Earthworks’ Oil & Gas Accountability Project. In West Virginia a once lushly forested area has been transformed into a dead zone.

Fracking in Gasland

Josh Fox made the Sundance award-winning documentary “Gasland” after he was asked to lease his land for gas drilling. That led him to embark on a cross-country odyssey. As the website for the show “Now” on PBS explains, his journey led to a film that “alleges chronic illness, animal-killing toxic waste, disastrous explosions, and regulatory missteps.” It will be broadcast on HBO through 2012. The DVD goes on sale in December of 2010.

“Gasland” shows tap water being set ablaze and explores the drilling process known as fracking, or hydraulic fracturing, a technology developed by Halliburton. Millions of gallons water, chemicals and sand are injected into the ground under high pressure, cracking shale and tight rocks to allow gas to flow more freely from the well. It is a toxic mixture and believed to be the prime culprit in the pollution of groundwater in areas surrounding drilling sites. Even drinking water hundreds of miles from a well can be contaminated.

Hundreds of Thousands of New Wells Coming

It is hard to believe that risking the health of millions in order to extract natural gas would even be considered, but the N.Y.S. Department of Environmental Conservation is close to issuing a final Supplemental Generic Environmental Impact Statement on gas drilling using hydraulic fracturing near a major watershed in upstate New York. The SGEIS is expected to facilitate the process for fracking near a vital watershed. Concerned citizens are asking for a delay until DEC can study and integrate the conclusions of a full report on gas drilling from the U.S. Environmental Protection Agency.

Residents of New York are not alone in facing a future threat to the safety of their drinking water. According to an article published by ProPublica in December of 2009:

In the next 10 years, the United States will use the fracturing technology to drill hundreds of thousands of new wells astride cities, rivers and watersheds. Cash-strapped state governments are pining for the revenue and the much-needed jobs that drilling is expected to bring to poor, rural areas.

Keep Drinking Water Safe

Incredibly, a loophole exempts natural gas drilling from the Safe Drinking Water Act. Drilling companies don’t even have to disclose the almost 600 chemicals that might be used in fracking and find their way into drinking water. Fortunately, our friends at Food & Water Watch have provided a way for concerned citizens to make their voices heard by contacting elected representatives. Food & Water Watch is a nonprofit consumer organization that works to ensure clean water and safe food. The organization challenges abuse of food and water resources by empowering people to take action.

Source: AlterNet

Calling All Future-Eaters

By Chris Hedges

The human species during its brief time on Earth has exhibited a remarkable capacity to kill itself off. The Cro-Magnons dispatched the gentler Neanderthals. The conquistadors, with the help of smallpox, decimated the native populations in the Americas. Modern industrial warfare in the 20th century took at least 100 million lives, most of them civilians. And now we sit passive and dumb as corporations and the leaders of industrialized nations ensure that climate change will accelerate to levels that could mean the extinction of our species. Homo sapiens, as the biologist Tim Flannery points out, are the “future-eaters.”

In the past when civilizations went belly up through greed, mismanagement and the exhaustion of natural resources, human beings migrated somewhere else to pillage anew. But this time the game is over. There is nowhere else to go. The industrialized nations spent the last century seizing half the planet and dominating most of the other half. We giddily exhausted our natural capital, especially fossil fuel, to engage in an orgy of consumption and waste that poisoned the Earth and attacked the ecosystem on which human life depends. It was quite a party if you were a member of the industrialized elite. But it was pretty stupid.

Collapse this time around will be global. We will disintegrate together. And there is no way out. The 10,000-year experiment of settled life is about to come to a crashing halt. And humankind, which thought it was given dominion over the Earth and all living things, will be taught a painful lesson in the necessity of balance, restraint and humility. There is no human monument or city ruin that is more than 5,000 years old. Civilization, Ronald Wright notes in “A Short History of Progress,” “occupies a mere 0.2 percent of the two and a half million years since our first ancestor sharpened a stone.” Bye-bye, Paris. Bye-bye, New York. Bye-bye, Tokyo. Welcome to the new experience of human existence, in which rooting around for grubs on islands in northern latitudes is the prerequisite for survival.

We view ourselves as rational creatures. But is it rational to wait like sheep in a pen as oil and natural gas companies, coal companies, chemical industries, plastics manufacturers, the automotive industry, arms manufacturers and the leaders of the industrial world, as they did in Copenhagen, take us to mass extinction? It is too late to prevent profound climate change. But why add fuel to the fire? Why allow our ruling elite, driven by the lust for profits, to accelerate the death spiral? Why continue to obey the laws and dictates of our executioners?

The news is grim. The accelerating disintegration of Arctic Sea ice means that summer ice will probably disappear within the next decade. The open water will absorb more solar radiation, significantly increasing the rate of global warming. The Siberian permafrost will disappear, sending up plumes of methane gas from underground. The Greenland ice sheet and the Himalayan-Tibetan glaciers will melt. Jay Zwally, a NASA climate scientist, declared in December 2007: “The Arctic is often cited as the canary in the coal mine for climate warming. Now, as a sign of climate warming, the canary has died. It is time to start getting out of the coal mines.”

But reality is rarely an impediment to human folly. The world’s greenhouse gases have continued to grow since Zwally’s statement. Global emissions of carbon dioxide (CO2) from burning fossil fuels since 2000 have increased by 3 per cent a year. At that rate annual emissions will double every 25 years. James Hansen, the head of NASA’s Goddard Institute for Space Studies and one of the world’s foremost climate experts, has warned that if we keep warming the planet it will be “a recipe for global disaster.” The safe level of CO2 in the atmosphere, Hansen estimates, is no more than 350 parts per million (ppm). The current level of CO2 is 385 ppm and climbing. This already guarantees terrible consequences even if we act immediately to cut carbon emissions.

The natural carbon cycle for 3 million years has ensured that the atmosphere contained less than 300 ppm of CO2, which sustained the wide variety of life on the planet. The idea now championed by our corporate elite, at least those in contact with the reality of global warming, is that we will intentionally overshoot 350 ppm and then return to a safer climate through rapid and dramatic emission cuts. This, of course, is a theory designed to absolve the elite from doing anything now. But as Clive Hamilton in his book “Requiem for a Species: Why We Resist the Truth About Climate Change” writes, even “if carbon dioxide concentrations reach 550 ppm, after which emissions fell to zero, the global temperatures would continue to rise for at least another century.”

Copenhagen was perhaps the last chance to save ourselves. Barack Obama and the other leaders of the industrialized nations blew it. Radical climate change is certain. It is only a question now of how bad it will become. The engines of climate change will, climate scientists have warned, soon create a domino effect that could thrust the Earth into a chaotic state for thousands of years before it regains equilibrium. “Whether human beings would still be a force on the planet, or even survive, is a moot point,” Hamilton writes. “One thing is certain: there will be far fewer of us.”

We have fallen prey to the illusion that we can modify and control our environment, that human ingenuity ensures the inevitability of human progress and that our secular god of science will save us. The “intoxicating belief that we can conquer all has come up against a greater force, the Earth itself,” Hamilton writes. “The prospect of runaway climate change challenges our technological hubris, our Enlightenment faith in reason and the whole modernist project. The Earth may soon demonstrate that, ultimately, it cannot be tamed and that the human urge to master nature has only roused a slumbering beast.”

We face a terrible political truth. Those who hold power will not act with the urgency required to protect human life and the ecosystem. Decisions about the fate of the planet and human civilization are in the hands of moral and intellectual trolls such as BP’s Tony Hayward. These political and corporate masters are driven by a craven desire to accumulate wealth at the expense of human life. They do this in the Gulf of Mexico. They do this in the southern Chinese province of Guangdong, where the export-oriented industry is booming. China’s transformation into totalitarian capitalism, done so world markets can be flooded with cheap consumer goods, is contributing to a dramatic rise in carbon dioxide emissions, which in China are expected to more than double by 2030, from a little over 5 billion metric tons to just under 12 billion.

This degradation of the planet by corporations is accompanied by a degradation of human beings. In the factories in Guangdong we see the face of our adversaries. The sociologist Ching Kwan Lee found “satanic mills” in China’s industrial southeast that run “at such a nerve-racking pace that worker’s physical limits and bodily strength are put to the test on a daily basis.” Some employees put in workdays of 14 to 16 hours with no rest day during the month until payday. In these factories it is normal for an employee to work 400 hours or more a month, especially those in the garment industry. Most workers, Lee found, endure unpaid wages, illegal deductions and substandard wage rates. They are often physically abused at work and do not receive compensation if they are injured on the job. Every year a dozen or more workers die from overwork in the city of Shenzhen alone. In Lee’s words, the working conditions “go beyond the Marxist notions of exploitation and alienation.” A survey published in 2003 by the official China News Agency, cited in Lee’s book “Against the Law: Labor Protests in China’s Rustbelt and Sunbelt,” found that three in four migrant workers had trouble collecting their pay. Each year scores of workers threaten to commit suicide, Lee writes, by jumping off high-rises or setting themselves on fire over unpaid wages. “If getting paid for one’s labor is a fundamental feature of capitalist employment relations, strictly speaking many Chinese workers are not yet laborers,” Lee writes.

The leaders of these corporations now determine our fate. They are not endowed with human decency or compassion. Yet their lobbyists make the laws. Their public relations firms craft the propaganda and trivia pumped out through systems of mass communication. Their money determines elections. Their greed turns workers into global serfs and our planet into a wasteland.

As climate change advances, we will face a choice between obeying the rules put in place by corporations or rebellion. Those who work human beings to death in overcrowded factories in China and turn the Gulf of Mexico into a dead zone are the enemy. They serve systems of death. They cannot be reformed or trusted.

The climate crisis is a political crisis. We will either defy the corporate elite, which will mean civil disobedience, a rejection of traditional politics for a new radicalism and the systematic breaking of laws, or see ourselves consumed. Time is not on our side. The longer we wait, the more assured our destruction becomes. The future, if we remain passive, will be wrested from us by events. Our moral obligation is not to structures of power, but life.

Source: Truthdig

Why financial reform might not work as intended

The Senate passed financial reform Thursday, and President Obama will sign it, but many of the tough decisions will be made by federal regulators. How they interpret the bill will be key.

By Gail Russell Chaddock
Christian Science Monitor

Even before the Senate passed sweeping finance reform Thursday, House Republicans – now within range of taking back the majority in fall midterm elections – called for its repeal.

It’s the latest sign of how election-year politics dominated the debate over financial regulation – and how tough it could be to sustain reform over the years it will take for all elements of the law to take effect.
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The law, which passed the Senate today by a vote of 60 to 39:

• Sets up an advance warning system for banks deemed too big to fail.

• Ends taxpayer-funded bailouts.

• Imposes new transparency and rules on a $600 trillion unregulated derivatives market.

• Sets new limits on speculation by banks.

• Launches a consumer protection agency with broad powers.

“Because of this reform, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts, period,” said President Obama in remarks at the White House after the Senate vote.

Commenting on House GOP threats to repeal the bill, he added: “I would suggest that American can’t afford to go backwards. And I think that’s how most Americans feel as well. We can’t afford another financial crisis just as we’re digging out from the last one.”

Wall Street reform is the second leg of an ambitious three-point legislative agenda that Democrats are rushing to complete by midterm elections. The president signed health-care reform into law March 23. House Democrats passed a climate-change bill in June 2009, but it has since languished in the Senate. Senate majority leader Harry Reid (D) of Nevada is drafting a scaled-down energy bill that he hopes to bring to the floor as early as next week.

Unlike health-care reform, Wall Street reform is broadly popular with American voters. But Republican leaders oppose it as a potential job killer. At the 11th hour, Republican Sens. Susan Collins and Olympia Snowe of Maine and Scott Brown of Massachusetts came to terms with Democrats over “fixes” to the bill, allowing Democrats to break a GOP filibuster today. “This bill would not have happened without them,” said Senator Reid, after the vote.

But the 2,300 page overhaul also requires drafting some 200 regulations, as well as studies and extended timelines before many features of the law take effect. The fight to ensure that the intent of Congress is reflected in regulations could be as protracted as the two-year battle to pass reform.

Responding to charges that Congress had punted all the important decisions to regulators, Sen. Christopher Dodd (D) of Connecticut, who chairs the Senate Banking, Housing, and Urban Affairs Committee, said: “Those are things you cannot legislate: getting good people, committed people, who then in turn hire good people, attract good people to come into these regulatory bodies to do the job.

“I’ll plan on having oversight hearings as early as September to bring in the regulatory bodies to ask them exactly what their plans are on how they intend to move forward with the regulatory obligations bill that this bill has imposed,” he added.

Senator Snowe, who agreed to back the bill after concessions for small and seasonal businesses, says that she is considering proposals to ensure that the rules produced by the Treasury Department and agencies to implement the law are in line with such agreements. “The next phase is a regulatory one, and Congress must be sure that that is truly reflective of the legislative intent,” she says.

Public interest groups – a key partner in drafting the finance reform bill – praised the finance reform legislation as providing a strong framework for regulators. “But Congress is going to have to do a better job of oversight than it did over the last eight years [of the Bush Administration], when the regulators aided and abetted [those abusing the system] and Congress let them,” says Ed Mierzwinski, director of consumer advocacy for the National Association of State Public Interest Research Groups (PIRG).

For example, the bid to regulate a highly riskly $600 trillion derivatives market depends critically on how the rules are written and enforced, experts say.

“Dodd-Frank sets the contours that have the potential of converting that entire market into a fully transparent and fully capitalized environment. But, dozens of rulemakings, studies, and reports stand in the way,” says Michael Greenberger, a professor at the University of Maryland School of Law.

If “well-funded Wall Street advocacy” wins out in the regulatory process, the bid to clamp down on an unregulated derivatives market could fall short, he adds.

The lobbying for the future of financial reform doesn’t end when Mr. Obama signs the law. In fact, it could be just beginning, as regulators and congressional overseers get down to the business of writing the high-stakes rules.

“This bill represents the most significant overhaul of the financial system since the 1930s. But serious work remains: the proof of the bill’s worth will come not from what is written in the bill, but how the regulators interpret the bill, write the rules and then enforce them,” says John Taylor, president and CEO of the National Community Reinvestment Coalition. “Based on the job they did for the past decade, I will believe reform is here when I see it.”

“By delegating so much to the regulators, Congress is inviting everyone interested in the outcome to make more campaign contributions, as they intervene in the regulatory process to influence the regulators,” says Thomas Ferguson, a professor of political science at the University of Massachusetts, Boston. “Nothing is settled. It’s a gold mine for members of Congress.”

Source: Christian Science Monitor

Which Would You Rather Cut: Social Security, or Interest for Foreign Governments and Rich Bondholders?

By letsgetitdone

Alan Simpson and Erskine Bowles, the Co-Chairs of “the National Commission on Fiscal Responsibility and Reform,” would have us believe that a deficit and debt crisis threatening the fiscal future of the United States is upon us, that “This debt is like a cancer,” and that unless we begin to make across the board cuts in expenditures, and also raise taxes in a way that distributes the pain across all segments of the population, there is no way we will return to fiscal sustainability. This view is false and also alarmist for many reasons. One is that Bowles’s view that: “We could have decades of double-digit growth and not grow our way out of this enormous debt problem”, is ridiculous, even if one thinks there is “a debt problem.” I’ve shown elsewhere, that all the US needs to do to “grow our way out of the problem” is to return to the historical average decade-long growth rate we experienced between 1940 and 2000 to begin producing surpluses by 2017 and bring the public debt-to-GDP ratio down to 37% by 2020.

A second reason is that there is no “debt problem,” if someone means by that, that our debts can grow so large that there is a solvency risk for the US Government. As I and others, have written before, there is no solvency risk, and so there is no “debt problem.” A third reason why the views of Simpson, Bowles, and other deficit terrorists on the “Catfood Commission,” are false and alarmist is that their conclusion that we are in a crisis, is based on assumptions, that will only be true if we choose to make them so. There are two kinds of assumptions, that, if true, would account for large deficits, and, also, the “debt problem” that is scaring our co-Chairmen out of their wits sufficiently that they want to take a hatchet to Social Security and other entitlement programs, such as Medicare and Medicaid. The first kind of assumption relates to revenue projections. The second kind relates to interest costs.

Revenue assumptions first. Revenue projections are a function of assumptions about future US GDP growth and also the percentage of projected GDP that will be tax revenues. The “Catfood Commission” seems to be relying on CBO’s assumptions used in its recent projections of the Federal Government’s fiscal state from 2010 – 2020. The Commission is then extending projections based on these assumptions out further to 2025, and probably even further to 2050. I’ve pointed out numerous times in previous posts that such long-range projections are just a fairy tale. However, it’s still worthwhile to show how the ending of this fairy tale is dependent on assumptions that have no basis in evidence or valid economic modeling.

CBO’s annual GDP change ratios (not adjusted for inflation) between 2010 and 2020 ranged from a low of 1.027 to a high of 1.060 and averaged 1.044 over the period. These are considerably below historical averages over the decades since 1940 which are about 1.07 – 1.08. So, the CBO economic growth projections are very conservative, taken in historical perspective. Also, tax revenues taken as a proportion of GDP, from 2011 to 2020, vary from a low of 0.164 to a high of 0.196, and are either virtually the same, or increase by a small amount throughout the decade, with an average increase from 2010 to 2020 of 0.003. That is, the CBO projections of tax revenue as a percent of GDP constantly increase from 2011 to 2020.

Now, even though the “Catfood Commission’s” own projections haven’t been released yet, it’s pretty clear, given their limited budget, and their reliance on the Peter G. Peterson Foundation for staff funding that they’ll have to rely on extensions of CBO projections already calculated by staff from other Peterson organizations, such as AmericaSpeaks. However, we already know something about the projections AmericaSpeaks has made because they used these in their recent “Our Budget, Our Economy” national event.

AmericaSpeaks, claiming its projections are an extension of CBOs and are based on them, projects a deficit of $2.46 Trillion in 2025, and says that is 9% of GDP. This means that their GDP projection is roughly $27.33 Trillion, compared to CBO’s 2020 projection of $22.544 Trillion. In turn, interpolation of the intervening year GDP projections between 2020 and 2025, yields estimates of $23.423 T, $24.337 T, $25.286 T, $26.297 T, and $27.331 T. This projects an average annual GDP growth ratio of 1.039 from 2020 – 2025, which is a bit more conservative than the 1.044 that CBO projected from 2010 to 2020. This small difference translates to an expectation of about $125 Billion more in revenue in 2025, improving the deficit picture a bit relative to the $2.46 Trillion projection.

Why does AmericaSpeaks project an average annual growth rate slightly less than CBO’s own very conservative average? I don’t know. But I do know that they claim their projections are based on CBO’s, so they ought be explaining any deviation from the CBO pattern. They don’t explain this one, of course.

When we look at tax revenues as a percentage of GDP, we find that there, also, the AmericaSpeaks projections deviate from CBOs in a direction that makes the projected deficit and national debt worse in 2025. Specifically, the CBO ratio of tax revenue to GDP in 2020 is 0.196, if we were to continue the trend of increase in this ratio to 2025, we’d get something like 0.198, 0.200, 0.202, 0,204, and 0.206 in 2025, an average increase 0.002 per year. Using the AmericaSpeaks GDP projection at $27.33 T, the 0.206 ratio translates to revenue of $5.63 T in 2025, a difference from the AmericaSpeaks projection of $870 Billion in revenue in 2025. When we interpolate the revenue ratios that AmericaSpeaks must have developed for the years 2021 – 2025 in order to get their very low estimate of $4.76 T in tax revenue in 2025, the picture looks something like this: 0.191, 0.187, 0.183, 0.178, and 0.175 for 2025. This means that their estimates of the tax revenue as a proportion of GDP declines over the 5 year period and the decline is an average of 0.004 per year, a much larger average decline than the CBO average increase of 0.003 during 2010 – 2020, and a much larger decline than my assumption that the average increase in the tax revenue proportion would be 0.002

What accounts for this change in both the magnitude and direction in the proportion of tax revenue collected? AmericaSpeaks doesn’t say, but it is clear that this difference in assumptions needs to be explained because 1) it departs from CBO’s projections, and 2) this departure results in an $870 Billion increase in the deficit projected for 2025 than would otherwise have been the case if they had followed the CBO pattern. Also, the higher deficits resulting from both deviations from the CBO pattern I’ve covered, total nearly $ 1 T in projected revenue in 2025, meaning that if AmericaSpeaks had followed the CBO pattern strictly, it would have projected a deficit of roughly $1.465 T, rather than $2.46 Trillion, which, of course, would make those 2025 projections look a lot better than they do now. Also, even though I haven’t troubled to compute the annual deviation of the AmericaSpeaks projection from a CBO-based projection during 2021 – 2024, it’s also pretty clear that the sum of these deviations would total about $2 T, added to the $1 T for 2025, that’s a total of $ 3 T. The Peterson Foundation allied organizations including AmericaSpeaks have been using a national debt to GDP ratio of 114% in 2025 to underline the seriousness of the US’s debt problems. However, taking the $27.33 T estimate for GDP and multiplying by 1.14 gives us a projected national debt figure of $31.15 T, and subtracting $3 T from that gives us a new debt-to-GDP ratio projection of 103%, somewhat less scary than the earlier figure, I think.

So, in short, this analysis suggests that a sizable part of the big “debt problem” the ”Catfood Commission” and its allies see for 2025, is due to assumptions that, without explanation, depart from the pattern of CBOs projections. Whether these are due to errors, or to a deliberate bias toward pessimism even greater than CBO’s, I cannot say. But when the leaders of a National Commission are so committed to the idea that there is a “deficit problem,” one has to assume that any analysis produced by allies of that Commission is likely to make assumptions that produce the kind of results that those leaders want to hear. That, in fact, is what has happened here.

Now, let’s move on to the question of interest costs. CBO estimated that interest costs from 2011 – 2020 would total $5.64 T, extending its projection to 2025 using an annual rate of increase of 1.1, roughly the rate used by CBO in 2019 and 2020, we get AmericaSpeaks projection that interest costs will be $1.49 T in 2025. We also get total interest costs from 2011 to 2025 of $11.8 T. Without these costs, and assuming we take into account the roughly $3 T difference resulting from using CBOs assumptions rather than AmericaSpeaks’s, the projected national debt in 2025 would be projected at: $16.35 T in 2025, not $31.15 T, or even $28.15 T. And even assuming the very pessimistic GDP figure of $27.33 T, we come out with a public debt to GDP ratio of about 60% in 2025, not very different from what we have now. Also, the projected deficit of $1.465 T in 2025 is completely wiped away and turns into a small surplus if we have no interest costs at all. So, where’s the “deficit problem”?

Well, of course, this analysis has shown that it is partly in shading the CBO assumptions so that they are even more conservative than CBO’s, without even telling people that’s what you’re doing. And it has also shown that the heavy majority of the problem is in the interest costs the US would pay on its debt instruments. So how do we get rid of this ‘deficit problem.” Well, first, we need to quit making assumptions that shade the CBO’s assumptions in an even more pessimistic direction simply because we want to believe that there really is a deficit problem. And second, the Federal Government must stop issuing debt instruments when it spends money. If it does the latter, Federal interest costs will approach zero percent of GDP in a very short time, and we can avoid spending that $11.8 T over the next 15 years.

Alan Simpson, Erskine Bowles, Alice Rivlin, and our other deficit terrorist friends are fond of talking about how we all have to make sacrifices to solve our “deficit problem,” and that entitlements, among other expenditures, will have to be cut in order to solve our problem. But, even if we believe (which I don’t), along with them, that there is, or may one day be, a deficit problem that we need to bring under control, there is no need to solve that fantasy problem either by raising taxes, or by cutting entitlement programs like Social Security, Medicare, and Medicaid. If you insist on believing in either the fantasy of solvency risk, or the fantasy of the bond markets imposing high interest rates on the United States, then the solution to both of these fantasies is the same. It is to stop issuing debt instruments, and, consequently, paying foreign nations and rich investors needing a safe harbor for their funds, interest that we need not pay on debt that a country, sovereign in its own currency, like the United States need not incur.

If you believe that cuts must be made to bring the deficit problem under control, then see clearly the real choice here. Would you rather cut Social Security and other entitlements, as well as other valuable Federal programs, and also raise taxes; or would you rather take care of the whole “crisis” by ceasing to issue debt and stopping interest payments to the wealthy, the Chinese and other foreign creditors who are parking their USD in Treasury Securities rather than spending them on American products? Whose side are you on — the side of the American people who need their social safety net programs to remain in place for themselves, their children, and their grandchildren, or the side of the wealthy, and the foreign nations who want us to continue to pay them interest?

Source: FDL

Pentagon Spending on the Chopping Block

For the first time in years, there’s serious discussion about the size of our military budget.

By Christopher Hellman

The current economic crisis, coupled with concerns about spiraling deficits and our staggering national debt, is, at long last, bringing military spending to the forefront of the budget debate. Not since the end of the Cold War and the discussion of a “peace dividend” has the Pentagon budget—generally considered sacrosanct—received such scrutiny.

In January 2010, President Obama’s formed the National Commission on Fiscal Responsibility and Reform to advise the administration on options for addressing the U.S. national debt. In response, Congressman Barney Frank (D-MA) convened a bi-partisan panel of national security experts to generate a series of recommendations on how to cut the defense budget while preserving U.S. national security. The Sustainable Defense Task Force released its report, “Debt, Deficits and Defense: A Way Forward,” on June 11, in Washington, D.C.

The Task Force report does not include any recommendations related to the cost of the wars in Iraq and Afghanistan. It looks only at the Pentagon’s annual “base” budget. The report’s combined recommendations would cut $960 billion over ten years, an average annual reduction of roughly 17 percent below current spending levels.
The signers will pledge not to support any major deficit reduction package considered by Congress unless it includes defense spending cuts.

Defense spending accounts for more than half of the federal government’s entire discretionary budget. At a time when virtually every community in the country is facing critical budget shortfalls, defense spending has continued to grow. While the White House has announced a freeze on all non-security related discretionary spending over the next three years, the Obama Administration’s proposed budget for Fiscal Year 2011 (which will begin on September 30) includes a two percent increase in the Pentagon’s budget. This puts increasing pressure on most domestic spending programs. Over the last decade, total federal discretionary spending has grown by 28 percent and military spending (not including the wars in Iraq and Afghanistan) by over 40 percent. Meanwhile, federal grants to state and local governments have grown by only 14 percent.

The Task Force’s report proposes cuts such as reducing the number of deployed nuclear weapons to 1,000 and cutting the number of submarines and missiles which carry them; cutting the total number of active duty members of the Army and Marine Corps to 50,000 below their levels before the Iraq and Afghanistan wars; cutting certain weapons programs including the Joint Strike Fighter, the V-22 “Osprey” tilt-rotor aircraft, and the total number of Navy aircraft carriers; and reforming the Pentagon’s health care and compensation systems.

As one might expect, reaction to the Task Force Report has been mixed, with traditional Pentagon supporters attacking it for being poorly timed, given that the nation is at war, and claiming it will lead us toward a military ill-prepared to meet our nation’s security needs. Meanwhile, moderates and fiscal conservatives view it as a responsible way to make defense cuts in a time of severe budget austerity. Those who have spent years arguing that military spending is a drain on more important domestic priorities welcome it as a step towards a more common sense approach to military budgeting.

Congressman Frank and a bi-partisan group of House members plan to circulate a letter to their colleagues regarding the defense budget and the deficit. While the final text of the letter has not been released at the time of this writing, it is not expected to endorse the Task Force report specifically. It is expected, however, that the signers will pledge not to support any major deficit reduction package considered by Congress unless it includes defense spending cuts. A similar letter is also expected to circulate in the Senate.

Regardless of the impact this or any other letter has on the deficit debate in Congress, the Task Force report insures one important thing: supporters of reduced military spending now have an answer to the question, “how do you cut Pentagon spending without undermining our nation’s security?” At a time when all areas of federal spending should be subject to the budget cutter’s knife, it can no longer be said, even within the mainstream debate, that it’s impossible to identify significant savings in the Pentagon budget.

Christopher Hellman wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Christopher is communications liaison at the National Priorities Project in Northampton, Massachusetts. He was previously a military policy analyst for the Center for Arms Control and Non-Proliferation, a Senior Research Analyst at the Center for Defense Information, and spent ten years on Capitol Hill as a congressional staffer working on national security and foreign policy issues. He is a frequent media commentator on military planning, policy, and budgetary issues.

Source: YES! Magazine

Maryland Launches Genuine Progress Indicator

By changing their measurement of progress, Marylanders can see for themselves whether chasing the benefits of continued economic growth is worth the costs.

By Scott Gast
YES! Magazine

When it comes to economic growth, bigger is better. Or so says the mainstream wisdom. But more and more people—including, increasingly, governments—are realizing that equating growth with quality of life is to follow a broken compass toward a host of social and ecological problems. The state of Maryland is the latest government to look for a better way to measure progress: Governor Martin O’Malley’s office recently announced the launch of the Genuine Progress Indicator (GPI), an alternative economic indicator that will allow the state to keep track of which activities actually contribute to quality of life—and which detract from it.

As University of Maryland researcher Dr. Matthias Ruth, with whom the state collaborated in the development of the GPI, told the UM NewsDesk, “The calculation of a Genuine Progress Indicator begins to correct the picture of how well-off we actually are. It counts as positive that which is actually positive—time spent with family, volunteer work in our communities, restoration of the environment, for example—and it subtracts the negative—time spent in our cars or loss of wetlands.”

The GPI will take into account 26 different quality of life indicators, putting price estimates, in dollars, on the negative—and positive—impacts of economic growth. The indicator considers, for example, the future costs of climate change and the strain of income inequality on social services; it also accounts for the value created by volunteerism and forest preservation. Taken together, the measurement should equip citizens and policymakers with a more clear-eyed picture of the costs and benefits of the state’s economic activity.

Already, the GPI is telling a very different story about the connection between economic growth and quality of life. A cross-sector partnership between the University of Maryland and several state agencies looked at data all the way back to 1960 and found that, by the early 1980s, Maryland’s growing gross state product (GSP—the state’s version of GDP, the traditional measure of economic health) no longer reflected an increase in genuine progress. In other words, while economic activity increased, quality of life didn’t. By 2000, GSP estimates were nearly 50 percent higher than what’s reported by the GPI—a measurement that, Ruth maintains, is closer to the real experience of citizens.

Maryland can now use the GPI to forecast the impact of various future policy scenarios on the lives of residents. With full-tilt investments, for example, in things like green jobs, renewable energy, and compact urban planning, the GPI starts to outpace the GSP around 2025. By 2060, the difference between the two metrics is in the hundreds of billions of dollars.

The GPI is meant to complement the traditional economic indicator, the GSP, and is accompanied by a web-based interactive tool that allows Marylanders to forecast future scenarios for themselves.

Maryland isn’t the only government to reconsider its use of GSP (or gross domestic product, GDP, on a national scale) as a measure of progress. These indicators simply track the total amount, in dollars, of all the goods and services produced and paid for within an economy. A growing GDP has long been assumed to translate into new jobs, more wealth, and greater happiness—leading economists, politicians, and the mainstream media to scrutinize the jumping tick of dollar flow—but there’s a growing consensus that that’s not always the case. In 2009, for example, President Nicolas Sarkozy of France announced a new plan for that country to begin measuring social progress in terms of the happiness of its citizens. And Bhutan, in Southern Asia, has been reporting its Gross National Happiness since 1972—during which time, despite low per capita incomes, levels of clean drinking water, literacy, and life expectancy have been on the rise.

The notion of an alternative economic indicator has been kicking around sustainability circles for years. An early ancestor to the GPI emerged, probably not coincidentally, from the work of University of Maryland economist Herman Daly in the 1980s. Subsequent iterations have caught on in the United Kingdom, where the New Economics Foundation has published their Happy Planet Index, a measurement of “the ecological efficiency with which human well-being is delivered.”

According to its critics, the GDP is too blunt an instrument to be useful; it merely lumps together the frenzy of activity within an economy into a not-so-meaningful number that convinces us things are going well when they’re not. Without a means of separating economic good from bad, they say, undesirable events that stimulate the flow of money and stuff—like paving over a forest, spending a night in the hospital, or imprisoning a criminal—get lumped into the GDP and filed under “progress” as well. As Jonathan Rowe put it in a 2009 article for this magazine, “Sickness and the consequent medical treatment is good for the GDP. Health is not.”

Whatever the outcome of the GPI, Maryland should be applauded for taking a bold and transparent step toward a working relationship between nature, people, and the economy. No other state, in fact, has achieved anything quite like it.

Scott Gast wrote this article for YES! Magazine, a national, nonprofit media organization that fuses powerful ideas with practical actions. Scott is an online editorial intern at YES!

Source: YES! Magazine

Cut Social Security? Are they crazy in Washington, DC?

The National Commission on Fiscal Responsibility and Reform is sounding the alarm around deficit spending. While many economists are calling for more spending to energize the economy, this commission is using exaggerated rhetoric to heighten deficit fear. They are talking about cuts to Social Security, Medicare and middle class benefits like the home mortgage deduction.

The time is now to build opposition to these recommendations and urge Congress and the administration to cut programs that will not make the economy worse for most Americans. When I testified before the commission I urged:

* Cuts in military spending as this makes up half of U.S. discretionary spending and is filled with waste and bloat.

* Cuts to corporate welfare, especially to the oil and gas industry which is scheduled to received billions in tax breaks despite massive profits.

* Taxes on the purchase of stocks, bonds and derivatives where even a tiny micro tax could raise tens of billions annually.

* Taxes on the estates of the wealthiest 2.5% of Americans which could raise more than $10 billion annually.

Read my full testimony

These are just a few of the areas where cuts in spending and taxes on wealth could balance the budget and avoid the need to cut Social Security and Medicare or tax the middle class. Social Security is in good financial shape for upcoming decades and merely raising the cap on Social Security taxes will make the program secure for the 21st Century. Medicare’s challenge is not the Medicare program but the cost of health care. Cuts to Medicare will make health problems and the cost of health care more expensive. The real solution for health care is ending the waste of the private insurance industry by making improved Medicare available to all Americans.

Please write to President Obama and your representatives in Congress now!

In addition, please share this message with everyone you know.

The commission is preparing its report for after the election. But, with the mid-term elections coming this is the time when voters have the most power. We need to ask elected officials to protect Social Security and Medicare by cutting spending for weapons and war, and tax dollars to corporations first. We also need to urge them to consider taxes on wealth before considering taxes on workers.

We need to build this movement now. We cannot wait until after the election.

Please take action today.

And, please support our ongoing efforts by making a donation today.

Thank you for your support.

Water: Will There Be Enough?

By Sandra Postel
YES! Magazine

For at least three decades, Americans have had some inkling that we face an uncertain energy future, but we’ve ignored a much more worrisome crisis—water. Cheap and seemingly abundant, water is so common that it’s hard to believe we could ever run out. Ever since the Apollo astronauts photographed Earth from space, we’ve had the image of our home as a strikingly blue planet, a place of great water wealth. But of all the water on Earth, only about 2.5 percent is freshwater—and two-thirds of that is locked up in glaciers and ice caps. Less than one hundredth of one percent of Earth’s water is fresh and renewed each year by the solar-powered hydrologic cycle.

Across the United States and around the world, we’re already reaching or overshooting the limits of that cycle. The Colorado and Rio Grande Rivers are now so overtapped that they discharge little or no water to the sea for months at a time. [1] In the West, we’re growing food and supplying water to our communities by overpumping groundwater. This creates a bubble in the food economy far more serious than the recent housing, credit, or dot-com bubbles: We are meeting some of today’s food needs with tomorrow’s water. [2]

The massive Ogallala Aquifer, which spans parts of eight states from southern South Dakota to northwest Texas, and provides 30 percent of the groundwater used for irrigation in the country, is steadily being depleted. [3] As of 2005, a volume equivalent to two-thirds of the water in Lake Erie had been pumped out of this water reserve. Most farmers will stop irrigating when the wells run dry or the water drops so far down that it’s too expensive to pump.

At the same time, climate change is rewriting the rules about how much water we’ll have available and when. Climate scientists warn of more extreme droughts and floods, and of changing precipitation patterns that will make weather, storms, and natural disasters more severe and less predictable. [4] The historical data and statistical tools used to plan billions of dollars worth of annual global investments in dams, flood control structures, diversion projects, and other big pieces of water infrastructure are no longer reliable. [5]

While farmers in the Midwest were recovering from the spring flood of 2008 (in some areas the second “100-year flood” in 15 years), farmers in California and Texas fallowed cropland and sent cattle prematurely to slaughter to cope with the drought of 2009. In the Southeast, after 20 months of dryness, Georgia Governor Sonny Perdue stood outside the State Capitol in November 2007 and led a prayer for rain, beseeching the heavens to turn a spigot on for his parched state. Two years later, Perdue was pleading instead for federal aid after intense rain storms near Atlanta caused massive flooding that claimed eight lives. [; “Governor Sonny…” href=”#-iowa-flood-midwest”>6]

Although none of these disasters can be pinned directly on global warming, they are the kinds of events climate scientists warn will occur more often as the planet heats up. It’s through water that we’ll feel the strains of climate change—when we can no longer count on familiar patterns of rain, snow, and river flow to irrigate our farms, power our dams, and fill our city reservoirs.

In answer to the climate crisis, the economy will need to move away from fossil fuels toward solar, wind, and other non-carbon energy sources. But there is no transitioning away from water. Water has no substitutes. And unlike oil and coal, water is much more than a commodity: It is the basis of life. A human being can only live for five to seven days without water. Deprive any plant or animal of water, and it dies. Our decisions about water—how to use, allocate, and manage it—are deeply ethical ones; they determine the survival of most of the planet’s species, including our own.
Shifting Course

For most of modern history, water management has focused on bringing water under human control and transferring it to expanding cities, industries, and farms. Since 1950, the number of large dams worldwide has climbed from 5,000 to more than 45,000—an average construction rate of two large dams per day for half a century. [7] Globally, 364 large water-transfer projects move 105 trillion gallons of water annually from one river basin to another—equivalent to transferring the annual flow of 22 Colorado Rivers. Millions of wells punched into the Earth tap underground aquifers, using diesel or electric pumps to lift vast quantities of groundwater to the surface.

Big water schemes have allowed oasis cities like Phoenix and Las Vegas to thrive in the desert, world food production to expand along with population, and living standards for hundreds of millions to rise. But globally they have also worsened social inequities, as poor people are dislocated from their homes to make way for dams and canals, and as downstream communities lose the flows that sustained their livelihoods.

Such approaches also ignore water’s limits and the value of healthy ecosystems. Today, many rivers flow like plumbing works, turned on and off like water from a faucet. Fish, mussels, river birds, and other aquatic life no longer get the flows and habitats they need to survive: 40 percent of all fish species in North America are at risk of extinction.

As we face the pressures of climate change and growing water demands, many leaders and localities are calling for even bigger versions of the strategies of the past. By some estimates the volume of water moved through river transfer schemes could more than double globally by 2020. But mega-projects are risky in a warming world where rainfall and river flow patterns are changing in uncertain ways.

Such big projects also require giant quantities of increasingly expensive energy. Pumping, moving, treating, and distributing water takes energy at every stage. Transferring Colorado River water into southern California, for example, requires about 1.6 kilowatt-hours (kWh) of electricity per cubic meter (about 264 gallons) of water; the same quantity of water sent hundreds of kilometers from north to south through California’s State Water Project takes about 2.4 kWh. As a result, the energy required to provide drinking water to a typical southern California home can rank third behind that required to run the air conditioner and refrigerator. [8]

Planners and policy-makers are eyeing desalination as a silver-bullet solution to water shortages. But they miss—or dismiss—the perverse irony: By burning more fossil fuels and by making local water supplies more and more dependent on increasingly expensive energy, desalination creates more problems than it solves. [9] Producing one cubic meter of drinkable water from salt water requires about 2 kWh of electricity.
Water for People and Nature

As the limitations of big?infrastructure strategies have become more apparent, a vanguard of citizens, communities, farmers, and corporations are thinking about water in a new way. They’re asking, what do we really need the water for, and can we meet that need with less? The upshot of this shift in thinking is a new movement in water management that is much more about ideas, ingenuity, and ecological intelligence than it is about big pumps, pipelines, dams, and canals.

Drinking dog

These solutions tend to work with nature, rather than against it. In this way, they make effective use of “ecosystem services”—the benefits provided by healthy watersheds and wetlands. And through better technologies and more informed choices, they seek to raise water productivity—to make every drop count.

Communities are finding, for example, that protecting watersheds is the best way to make sure water supplies are clean and reliable. A healthy watershed can do the work of a water treatment plant—filtering out pollutants, and at a lower cost to boot. New York City, for instance, is investing some $1.5 billion to restore and protect the Catskill-Delaware Watershed (which supplies 90 percent of its drinking water) in lieu of constructing a $6 billion filtration plant that would cost an additional $300 million a year to operate. [10] A number of other cities across the United States—from tiny Auburn, Maine, to Seattle—have saved hundreds of millions of dollars in avoided capital and operating costs by opting for watershed protection over filtration plants. [11]

Communities facing increased flood damage are achieving cost-effective flood protection by restoring rivers. After enduring 19 flood episodes between 1961 and 1997, Napa, Calif., opted for this approach over the conventional route of channelizing and building levees. In partnership with the U.S. Army Corps of Engineers, the $366 million project is reconnecting the Napa River with its historic floodplain, moving homes and businesses out of harm’s way, revitalizing wetlands and marshlands, and constructing levees and bypass channels in strategic locations. In addition to increased flood protection and reduced flood insurance rates, Napa residents will benefit from parks and trails for recreation, higher tourism revenues, and improved habitat for fish and wildlife. [12]

Similarly, communities facing increased damage from heavy stormwater runoff can turn roofs, streets, and parking lots into water catchments. Portland, Ore., is investing in “green roofs” and “green streets” to prevent sewer overflows into the Willamette River. [13] Chicago now boasts more than 200 green roofs—including atop City Hall—that collectively cover 2.5 million square feet, more than any other U.S. city. The vegetated roofs are providing space for urban gardens and helping to catch stormwater and cool the urban environment. [14]

Many communities are revitalizing their rivers by tearing down dams that are no longer safe or serving a justifiable purpose. Over the last decade more than 500 dams have been removed from U.S. rivers, opening up habitat for fisheries, restoring healthier water flows, improving water quality, and returning aquatic life to rivers. [15] In the 10 years since the Edwards Dam was removed from the Kennebec River near Augusta, Maine, populations of alewives and striped bass have returned in astounding numbers, reviving a recreational fishery that adds $65 million annually to the local economy. [16]

Conservation remains the least expensive and most environmentally sound way of balancing water budgets. Many cities and towns have reduced their water use through relatively simple measures like repairing leaks in distribution systems, retrofitting homes and businesses with water-efficient fixtures and appliances, and promoting more sensible and efficient outdoor water use. Motivated by a cap on groundwater pumping from the Edwards Aquifer in south-central Texas, San Antonio has cut its per capita water use by more than 40 percent, to one of the lowest levels of any Western U.S. city. [; water use from 2008 Annual Report, San Antonio Water System; the 130 gallon…” href=”#edwards-aquifer-authority-website”>17] Even more impressive, a highly successful conservation program started in 1987 in Boston cut total water demand 43 percent by 2009, bringing water use to a 50-year low and eliminating the need for a costly diversion project from the Connecticut River. [18]

But the potential for conservation has barely been tapped. It is especially crucial in agriculture. Irrigation accounts for 70 percent of water use worldwide and even more in the western U.S., so getting more crop per drop is central to meeting future food needs sustainably. In California, more famers are turning to drip irrigation, which delivers water at low volumes directly to the roots of crops. Between 2003 and 2008, California’s drip and micro-sprinkler area expanded by 630,000 acres, bringing its total to more than 2.3 million acres—62 percent of the nation’s total area under drip irrigation. [19]

As individuals, we’ll also need to make more conscious choices about what and how much we consume. Some products and foods—especially meat—have a high water cost. It can take five times more water to supply 10 grams of protein from beef than from rice. So eating less meat can lighten our dietary water footprint (while also improving our health). If all U.S. residents reduced their consumption of animal products by half, the nation’s total dietary water requirement in 2025 would drop by 261 billion cubic meters per year, a savings equal to the annual flow of 14 Colorado Rivers. [20]

We’ll need to change how we use water in and around our homes and neighborhoods. Turf grass covers some 40.5 million acres in the United States—an area three times larger than any irrigated farm crop in the country. [21] Particularly in the western United States, where outdoor watering typically accounts for 50 percent or more of household water use, converting thirsty green lawns into native drought-tolerant landscaping can save a great deal of water. Las Vegas now pays residents up to $1.50 for each square foot of grass they rip out, which has helped shrink the city’s turf area by 125 million square feet and lower its annual water use by 7 billion gallons. [22, 23] Albuquerque, New Mexico, has reduced its total water use by 21 percent since 1995, largely through education and rebates to encourage water-thrifty landscapes. [24]

Energy and water are tightly entwined, and all too often public policies to “solve” one problem simply make the other one worse. For example, the 2007 congressional mandate [25] to produce 15 billion gallons of corn ethanol a year by 2015 would require an estimated 1.6 trillion gallons of additional irrigation water annually (and even more direct rainfall)—a volume exceeding the annual water withdrawals of the entire state of Iowa. [26] Even solar power creates a demand for water, especially some of the big solar-thermal power plants slated for the sunny Southwest. [27]

It’s still possible to have a future in which all basic food and water needs are met, healthy ecosystems are sustained, and communities remain secure and resilient, even in the face of climate disruptions. Just as the economic crash is forcing Americans to reassess what they value financially, the water crisis requires us to pay attention to how we value and use water. Across the country, communities will need to learn to take care of the ecosystems that supply and cleanse water, to live within their water means, and to share water equitably.

Sarah Postel MugSandra Postel adapted this article for Water Solutions, the Summer 2010 issue of YES! Magazine. Sandra is director of the Global Water Policy Project, a fellow of the Post Carbon Institute and the first freshwater fellow of the National Geographic Society. She is the author of numerous books and articles, including the award-winning Last Oasis: Facing Water Scarcity, which became the basis of a PBS documentary.

This article is an adaptation of a longer essay from The Post Carbon Reader: Managing the 21st Century’s Sustainability Crises, forthcoming in Fall 2010 from Watershed Media.


1. Where Have All the Rivers Gone?, Sandra Postel, World Watch 8, May/June 1995; When the Rivers Run Dry, Fred Pearce, Boston, Beacon Press, 2006.

2. Pillar of Sand: Can the Irrigation Miracle Last? Sandra Postel, New York, W.W Norton & Co., 1999.

3. Ground Water Depletion in the High Plains Aquifer, Predevelopment to 2005, V.L. Mcguire, U.S. Geological Survey, USGS Fact Sheet 2007-3029, 2007.; 30 percent figure from “High Plains Regional Ground Water (HPGW) Study,” USGS,

4. Climate Change 2007 – The Physical Science Basis, Intergovernmental Panel on Climate Change (IPCC); and Climate Change 2007 – Impacts, Adaptation and Vulnerability, “Summaries for Policymakers,” IPCC, Cambridge, U.K., Cambridge University Press, 2007.

5. “Stationarity is Dead: Whither Water Management?,” P.C.D. Milly et al., Science, February 1, 2008.

6. “Iowa Flood, Midwest Flooding: Videos, Maps, News and Background,”,; “Governor Sonny Perdue Prays for Rain in Georgia,, November 14, 2007; “Rain Stops, but 8 are Dead in Southeast Floods,” Robbie Brown and Liz Robbins, The New York Times, September 22, 2009

7. Number of large dams (those at least 15 meters high) from Dams and Development, World Commission on Dams, London, Earthscan Publications, 2000; “Interbasin Water Transfers and Water Scarcity in a Changing World—A Solution or a Pipedream?,” Jamie Pittock et al., Frankfurt, World Wildlife Fund Germany, August 2009.

8. Methodology for Analysis of the Energy Intensity of California’s Water Systems, and an Assessment of Multiple Potential Benefits Through Integrated Water-Energy Efficiency Measures, Robert Wilkinson, Environmental Studies Program, University of California, Santa Barbara 2000; Electricity Efficiency Through Water Efficiency, Report for the Southern California Edison Company, QEI, Inc., Springfield, NJ, 1992.

9. Debbie Cook, former Mayor of Huntington Beach, Calif., has said “The next worst idea to turning tar sands into synthetic crude is turning ocean water into municipal drinking water.”, quoted in “Desalination – Energy Down the Drain,” The Oil Drum, March 2, 2009.

10. Liquid Assets: The Critical Need to Safeguard Freshwater Ecosystems, Sandra Postel, Worldwatch Paper 170, Washington, D.C.: Worldwatch Institute, 2005.

11. “Watershed Protection: Capturing the Benefits of Nature’s Water Supply Services,” Sandra Postel and Barton H. Thompson, Jr., Natural Resources Forum 29, no.2, May 2005.

12. Valuing Ecosystem Services: Toward Better Environmental Decision-Making, National Research Council, Washington, D.C., The National Academy Press, 2005; $366 million figure from “Sacramento District Project Wins Public Works Project of the Year,” David G. Killam, website of the U.S. Army, February 12, 2009.

13. Natural Security: How Sustainable Water Strategies are Preparing Communities for a Changing Climate, Will Hewes and Kristen Pitts, Washington, DC: American Rivers, 2009.

14. “Chicago Green Roof Program,” Emily Pilloton, Inhabitat, August 1, 2006

15. Figure from Serena McClain at American Rivers, April 26, 2010.

16. $65 million figure from Natural Security, Hewes and Pitts; for more on dams and rivers, see Rivers for Life: Managing Water for People and Nature, Sandra Postel and Brian Richter, Washington, D.C., Island Press, 2003.

17. Edwards Aquifer Authority website, at; water use from 2008 Annual Report, San Antonio Water System; the 130 gallon figure is an approximate average of recent years since per capita water use varied considerably between rainy and dry years; see the informative website of the San Antonio Water System at

18. For conservation methods and examples, see Handbook of Water Use and Conservation: Homes, Landscapes, Businesses, Industries, Farms, Amy Vickers, Amherst, MA, WaterPlow Press, 2001; Boston example from Liquid Assets, Sandra Postel and “Lessons from the Field–Boston Conservation,” Sandra Postel, National Geographic, March 2010

19. USDA, National Agricultural Statistics Service, 2007 Census of Agriculture: Farm and Ranch Irrigation Survey, 2008, Volume 3, Special Studies, Part I, November 2009; updated February 2010.

20. Dietary water requirement from “Nutritional Water Productivity and Diets,” D. Renault and W.W. Wallender, Agricultural Water Management 45, 2000; calculation assumes average annual dietary water requirement drops from 1,971 cubic meters per person to 1,242; U.S. 2025 population of 358.7 million is the medium variant estimate of the Population Division of the Department of Economic and Social Affairs of the United Nations, World Population Prospects: The 2008 Revision.

21. “Mapping and Modeling the Biogeochemical Cycling of Turf Grasses in the United States,” Cristina Milesi et al., Environmental Management 36, September, 2005; “Our Love Affair With Our Lawns is Hurling the U.S. Toward Water Crisis,” Dara Colwell, AlterNet, October 2, 2009.

22. Southern Nevada Water Authority, accessed on April 20, 2010.

23. Personal communication with Kristen Howe, Public Information Coordinator, SNWA

24. Personal email communication with Katherine M. Yuhas, Water Conservation Officer, Albuquerque Bernalillo County Water Authority, Albuquerque, NM, October 12 -13, 2009.

25. Energy Independence and Security Act of 2007, U.S. Congress, 110th Cong., 1st session, 2007.

26. “The Water Footprint of Biofuels: A Drink or Drive Issue?” R. Dominguez-Faus et al., Environmental Science & Technology, May 1, 2009.“

27. Alternative Energy Projects Stumble on a Need for Water,” Todd Woody, The New York Times, September 30, 2009.

Source: YES!