States, Businesses Filling the Leadership Void on Climate
Both stock and bond markets finished the quarter with solid gains. Large company stocks in the U.S. were up 3.1%, while smaller companies gained 2.5%. Foreign stocks were in the black as well, up 6.1%. Bonds advanced 1.4%, even as the Fed raised interest rates.
Federal Reserve officials forged ahead with another interest rate hike in June, the third in six months, and maintained their outlook for one more hike this year. The Fed announcement struck a careful balance between showing resolve to continue increasing interest rates toward more historically normal levels, and acknowledging concern over unexpectedly low inflation this year. While we may think of inflation as a bad thing, the Fed sees benefits in it—in the right measure.
Inflation allows companies to charge more for their products. These added revenues then allow businesses to invest in new factories, hire workers, etc. These investments and wages put money back into the economy, helping to stoke demand and stimulate growth. As such, economists see a relationship between inflation and unemployment—as inflation rises, unemployment may decline. The Fed can aim to reduce one, if they’re willing to accept more of the other. To both keep unemployment in check, and let the economy grow (but not too fast), the Fed reckons 2% is about the right target inflation rate. Since the recession, however, the U.S. economy has stubbornly resisted rising to that level, which creates concerns about its potential going forward. There are other reasons the Fed likes a little inflation, though the economic theory can get a little dense.
The economic rebound from the recession has carried on for more than eight years now, well above average for a recovery uninterrupted by another recession. Unemployment is now at a sixteen-year low; low unemployment generally leads to wage growth, as employers must pay more to attract qualified workers. Also, in a “fully employed” economy (as we arguably have) prices generally edge higher as more workers have more to spend, thus spurring inflation. However, neither that elusive 2% inflation goal, nor any meaningful wage growth, has yet been achieved. Looking forward, the Fed hopes that both will move higher as the year progresses.
In early June, the president announced that he will withdraw the U.S. from the Paris Climate Accord, which 195 other countries have endorsed. (Syria and Nicaragua are the only other countries in the world not on board.) The president’s action was not a surprise, but it was still hard to comprehend for environmentalists, business people, and many others across the nation. According to recent polls, most Americans think the U.S. should remain in the accord.
The move delivers on a campaign promise, though it will not deliver the results that his supporters may expect. It won’t revive coal jobs in the United States, nor will it allow Americans to drive dirtier cars or cut down on their bills if they run air conditioners all summer. This was an intentionally provocative move by a polarizing president. While the wide range of implications are substantial from this abdication of responsibility by the federal government, it appears that organizations from many quarters of society and state and local government are coming together to take up the climate issue.
California’s Governor Brown said, “Donald Trump has absolutely chosen the wrong course. He’s wrong on the facts. The Paris Agreement boosts America’s economy. He’s wrong on the science. California will resist this insane course of action. Trump is AWOL, but California is on the field, ready for battle.”
A newly formed organization called the Climate Leadership Council (clcouncil.org), which includes a range of environmental and corporate organizations and leaders, has presented a carbon tax plan which is still being evaluated, but has been endorsed by many editorial boards. The Citizens Climate Lobby has put forward a similar proposal called the Carbon Fee and Dividend Policy. And smaller grassroots organizations too numerous to mention are all coming at the problem from many angles in a groundswell of action.
Rather than conceding to the White House on this issue, the business community is taking action and filling the leadership void. Private sector initiatives on a broad scale may actually turn out to be an even more effective agent than the federal government in the effort to combat global warming. The central premise of socially responsible investing is that businesses can lead the way in fostering social benefit and environmental protection. We believe that the proactive role of social investors has never been more important or more promising.
This article first appeared in the Summer 2017 issue of Natural Investment News.