More News on the Economy
Geoge Mobus
I hate to be one of those snarky ‘I-told-you-so’ kind of people, but I did. I also explained why.
Now some of the mainstream economists (you know, the ones who are supposed to see these things coming) are thinking dismal thoughts as well. Welcome to the party gents.
Nouriel Roubini, who, to be fair, was one of the few who did see the 2007/08 debacle approaching before it actually arrived, has upgraded the chances of a “double-dip” recession to 40%. People tend to take notice when he speaks.
And then there is this from Robert Reich, Forget a Double-Dip, We're Still in One Long Big Dipper, who notes that the real problem is the joblessness that keeps consumers from buying goods and services. By the logic of economics, if consumers have income (jobs) they will buy and firms that make the stuff or provide the service will hire workers, and everybody will be happy again. And by classical Keynesian economic thinking, the government has to provide a jobs stimulus by spending money that will be used to jump start this process.
You know, I always considered Reich a very smart guy. I found his book, Supercapitalism to provide some very useful insights into how we got to where we are in the tradeoffs between democratic process, consumerism, and capitalism. In a nutshell, democracy loses out to our penchant to want the best prices for goods and services — and thus the WallMart effect — and to want to make money in markets, especially the housing and stock markets — the latter through the pressure that mutual fund managers and stock analysts bring on companies to keep their stock prices up at any cost. Enron ring any bells? We want low prices and high returns and this has led to corporate ascendancy over our democracy. Hence, lobbyists rule the Congress, and the people be damned. Reich nailed this, in my opinion.
But how he misses two extraordinarily important facts about the economy that completely demolish his arguments is a mystery to me. First, he is calling for a return to the consumer-based economy where jobs creation depends on everyone buying more stuff, creating a positive feedback loop that means perpetual growth. In other words, the business as usual scenario that created this messed up economy in the first place. The second fact of life is that the decline in net energy available to actually do the work of building stuff and providing services is working against everything. Energy (work) goes into everything we do. Less energy available over time means that we do less over time. There will be fewer goods and services and a lot less work (jobs) as a result. The only way this has been seemingly successfully thwarted to date is that jobs were shipped to low-energy consuming economies where corresponding wages were low, or by the importation of cheap labor (illegal aliens inherently consume less energy because they cannot demand higher wages to live the American dream).
This is actually pretty easy to see when you roughly compare worker lifestyles in various countries. Americans require higher wages to live their lifestyles because the sum of what they buy to support those lifestyles represents a significant amount of embodied energy. And since we know that money should be based on energy (actually exergy) we can see that wages will track the energy content of products and services. Currently, the average Chinese or Indian worker consumes much less and hence their embodied energy use is far lower and their wage requirements are lower. The costs to manufacture a ‘widget’ reflect the labor input and the amortized investment (in plant and equipment). The latter is lower in developing countries because much of the labor and materials that went into the plants came from local (low wage) sources. Consequently, it is no mystery why globalization has appeared to stave off the demon of inflation but at the cost of jobs for Americans. See Fig. 1 below.
This comparative advantage in labor can't last long, however. Even now some Chinese workers are becoming restless, wanting higher wages so they can buy more stuff. Once the consumerist lifestyle gets a toehold in a society the game is up. What we are witnessing is actually a consequence of the Second Law of Thermodynamics, in its entropy guise. We are seeing energy spread out, or diffuse from regions of higher potential (e.g. the US) to regions of lower potential (e.g. China) and eventually equilibrating. Everywhere will eventually have an equivalent energy density.
Figure 1. Why things cost more if made in America (or any OECD) vs. low energy consuming countries.
There are still many want-to-be-developing nations in the world where labor is going to be dirt cheap. As long as bunker oil doesn't get too expensive companies can always use container cargo ships to take the raw materials to where the labor is the best buy and haul the finished products to the consuming countries. However, there is a significant question as to whether corporations will have enough capital, or can borrow enough, to invest in new plants and equipment in some of these regions to take advantage of the cheap labor. And an even more significant question is who, among these consuming nations is actually going to be consuming (buying). China, maybe? How many customers that still have jobs will be able to take advantage of the cheap prices?
In truth there is no solution to this conundrum. Economies based on consumption and growth are doomed to failure because these two factors require increasing flows of net energy over time and on a global scale we will have less and less energy in the future. There will still be some shifting around for a while as energy supplies just manage to keep ahead of demand in different regions. But that won't be much longer. The end is in sight. The effects are already taking over in the US and other OECD countries that depend heavily on imported oil (Germany seems to be doing OK, marginally, but for how much longer?*). Switching to coal (in the US) in those energy generation applications where it is actually feasible, or natural gas, may prolong the agony a bit longer. But it won't change the basic dynamic. The energy cost of obtaining the next unit of usable energy is steadily climbing. The BP debacle in the Gulf of Mexico will undoubtedly cause the costs of deep water drilling to go up and oil deposits in deep water is about all we have left to exploit (tar sands are every bit as expensive as deep water extraction).
I have yet to see one main stream economist, no matter of what school, point out the fundamental fallacies of our economic system. Not one. Most of these folks are not dumb but they sure are blind. They are blinded by their core ideology that sees growth of GDP as the solution to all problems. Even those few who are aware that there ‘might’ be an oil shortage problem believe that when the prices go up we'll switch to substitutes and get on with business as usual. We've always done that in the past so that is what we will do now.
You know, a minimum of two semesters of physics ought to be a requirement to major in economics.
--------------------------------------------------------------------------------
* My gym buddy, Rudi, showed me an article from the New York Times, Saturday, entitled “Defying Others, Germany Finds Economic Success” by Nicholas Kulish. The author noted that the German people are still skitterish about their supposed success and maintain a very cautious, if not gloomy, outlook.
questioneverything.typepad.com |
