Irrational Exuberance and the Need for a Balanced Portfolio


In 1996 Alan Greenspan uttered the words “irrational exuberance” to describe the speculative fervor of the 1990’s economy. Assets in the days were over priced and value was driven by talk rather then demonstrated performance. We learned some lessons and forgot others from that time.

I am deeply concerned that state and local governments are being flooded by irrational exuberance of a different industry, the Shale play. Let me be clear, I think that having a U.S. sourced energy supply can prove to be a great catalyst for supporting our pursuit of energy independence. The concerns however come from the lack of honest planning and conversation about how the economic opportunity of Shale fits into any coordinated economic and business growth strategy for the state.

Shale Matters

There have been two articles in the past few weeks that have highlighted my concern about ‘truthiness’ in the Shale industry.

First, there was an article by a research group, Keystone Research based in Harrisburg, PA that raised questions about the reports of job creation by the Shale industry in the Commonwealth. Keystone Research claims the industry has created less than 10,000 jobs while the Marcellus Shale Coalition cites a Pennsylvania Department of Labor Report that claims over 72,000 new hires. The spat even received coverage in the Wall Street Journal and will most likely continue to spur news coverage for months to come as the issue becomes one of what’s being counted and how you define a new job.

There has been a lot of debate and dialogue over job counts in other sectors including information technology, life sciences and more recently green jobs. The conversations have produced more standard and realistic ways of identifying industry contributions. For either side in these arguments to make the dialogue a political issue does not help the process and in fact impedes structured thinking.

Then this weekend an article in the New York Times, “Insiders Sound an Alarm Amid a Natural Gas Rush,” raised a number of questions about reported and real data. The article, citing numerous internal sources and external analysts indicates that there may be an unhealthy amount of hype driving the exuberance being placed on the gas industry by shareholders and politicians. If the amount of gas and the profits from it are not as great as we have been led to believe, then investors and the state may end up paying more for infrastructure and support costs than we get in benefits – whether they are jobs or revenue from gas production.

A Balanced Portfolio Survives the Bubble Bursts

So we have two articles that are highlighting issues around data and perceived differences between excitement and reality. The flaw in all of this rhetoric especially by our political leaders is that this is but one industry sector in a state that has learned painful lessons about economic peaks and valleys. Places like Pittsburgh have only recently turned the corner from an economically disastrous domination by a single industry sector.

Just a few years ago Pennsylvania maintained a healthy economic investment strategy, supporting programs and companies that ran from the life sciences, to information technology and robotics to advanced manufacturing. In addition, the state supported the redevelopment of communities to pave the way for new investments by public and private sector entities. I would argue that it was that strategy that has positioned us to do better than most during the latest financial downturn.

Today though we seem to lack any defined economic development strategy and have become tone deaf to the needs of many of the state’s core industries. If your industry is not related to the Shale play and yet to be defined upstream and downstream opportunities, then you really don’t seem to have a place within the current economic development plans. Putting the needs of one industry, whatever it is, above all others not only risks losing current growth opportunities in those industries, but also forces them to work harder in the future to make up the lost ground.

This should be a lesson learned to my friends in many other states that have political leadership that are deciding it is easier to focus on one industry sector in these tight budget times. The reality of this lack of a balanced economic portfolio won’t impact us for at least a few years and will become a different Governor’s issue. Unfortunately for the state’s residents it will be a another set back to recovery that could have been avoided with just a little planning and honest dialogue about what are opportunities are.

Numbers Behind the News: The Regional Greenhouse Gas Initiative

The Numbers Behind the News series features a short dive into numbers, facts and stats surrounding current economic stories.

The idea of a federal cap and trade program for carbon has died. Now New Jersey is pulling out of the Regional Greenhouse Gas Initiative. You may think that cap and trade is a government intervention destined for failure. If we had data from a functioning cap and trade system, we could see actual data on whether it works or not.

On Figure 1, there are three components of acid rain. Can you tell which have been subject to a federal cap and trade program?

Cap and Trade did not originate from the environmental lobby, in fact many environmentalists initially opposed the program. The support of then President George H.W. Bush and his administration for what was then known as emission or allowance trading used the “power of the free market to meet public goals. Bush’s support swayed sufficient Republican support to include cap and trade in the 1990 Clean Air Act.

What a difference a few decades make. Republicans have turned against what they now call Cap and Tax. We should be clear that the Cap and Trade system does function like a tax. It takes an externality – a cost that is not translated into a price mechanism – and it puts it on the balance sheet. The Cap and Trade system sets a cost that may or may not reflect the true price, but it also harnesses the power of the market to find a solution that may well be at a lower cost.

The success of the original Cap and Trade program, and our failure to establish a national Carbon Cap and Trade led the development of a number of regional greenhouse compacts between states. These programs are not likely to be as effective as a national system, but they have shown progress.


Name Geographic Region Effective Date
Regional Greenhouse Gas Initiative (RGGI) CT, DE, ME, MD, MA, NH, NJ, NY, RI, VT January 2009
Western Climate Initiative (WCI) AZ, CA, MT, NM, OR, UT, WA (US) and BC, MB, ON, QC (CAN), plus 13 observers (US, CAN, MEX) TBD
Midwest Regional GHG Accord IL, IA, KS, MI, MN, WI, MB (CAN) TBD
State of California (CCAR now CAR) CA 2012

While there has not been enough time to really evaluate these programs, RGGI has been around longer. The RGGI states have reduced CO2 more than the rest of the nation (Figure 3). How much of that is due to the RGGI program is open to debate, but that is the debate we should be having.

Our Fourth Economy Survey asks your opinion of Cap & Trade Systems. Share your thoughts here.