Earn What You Spend

Tonight at the New York Public Library I attended a discussion between award-winning columnist and author Thomas Friedman and Nandan Nilekani, Co-Chairman and one of the founders of Infosys Technologies, Ltd.  These are two immensely interesting and well-spoken men, so I jumped at the opportunity to hear them live.

The discussion at first centered on well-known facts: the world is flat, Infosys is an amazing company that was formed at the juncture of once-in-a-lifetime changes in technology and politics, India is a country filled with unique contradictions, and so on.  But there was one exchange I found so interesting I had to scramble for a pad and paper to take note.  

First, a little background.  

Friedman has stated before he thinks 2008 and 2009 will be remembered as the time we hit a wall in two concurrent crises (one environmental, the other economic) in what he is calling the Great Disruption.  He wrote in early March:

We have created a system for growth that depended on our building more and more stores to sell more and more stuff made in more and more factories in China, powered by more and more coal that would cause more and more climate change but earn China more and more dollars to buy more and more U.S. T-bills so America would have more and more money to build more and more stores and sell more and more stuff that would employ more and more Chinese …

He notes our system is unsustainable both environmentally and economically: we now know the economic growth we’ve experienced has largely been illusory, yet it has still resulted in the near destruction of a livable climate.  We are facing what we hope will only be a severe recession (instead of that other feared ‘D’ word) and a climate that is in peril.  So tonight Friedman asked Nilekani for his opinion. 

The problem, Nilekani said, is that in both crises, we’ve had companies privatize the profits while socializing the losses.  CO2 emissions are economic outputs whose costs are not borne by the company that produces them, but rather by society as a whole.  That is, they are externalized, and there is no incentive (outside of a moral conscious) for a private company to curb these emissions - the risk they bear is socialized.  The same is true in our financial meltdown: companies have reaped massive profits (look at those bonuses!), yet socialized all of the risk.  How?  We’ve bailed them out!  It’s what is called moral hazard - companies can take massive bets, take the profits when times are good, and then take the bailout when the tide turns against them. All risk-free. 

Too many companies have privatized the profits while socializing the costs.  To this, Friedman had a simple but poignant observation:

CO2 emissions are the moral equivalent of financial derivatives.  

Both have resulted in large profits for a number of companies.  And their true costs are now felt by all of us.