Seven States of Energy Debt

Out here on Cottage Grove it matters. The galloping
Wind balks at its shadow. The carriages
Are drawn forward under a sky of fumed oak.
This is America calling:
The mirroring of state to state,
Of voice to voice on the wires,
The force of colloquial greetings like golden
Pollen sinking on the afternoon breeze.
In service stairs the sweet corruption thrives;
The page of dusk turns like a creaking revolving stage in Warren, Ohio.

–from Pyrography, by John Ashbery 1987

The inevitable coming of the sovereign debt panic finally engulfed Europe this week as the derisively (or perhaps affectionately) named PIGS spilled their slop on the continent. But Portugal, Ireland, Greece, and Spain are hardly worthy of so much attention. In truth, they are little more than the currently favored proxies among the leveraged speculator community (cough) for the larger problem of all sovereign debt. Indeed, the credit default swaps on these smaller European satellite states were not alone this week in making large moves higher. UK sovereign risk rose strongly, and so did US sovereign risk. With a downgrade warning from Moody’s to boot.

Notable among three of the PIGS are their relatively small populations, and small contributions to either world or European GDP. While Spain has a population over 45 million, Portugal and Greece have populations roughly equal to a US state, such as Ohio–at around 10 million. And Ireland? The Emerald Isle has a population similar to Kentucky, at around 4 million. While the PIGS are without question a problem for Europe, whatever problems they present for Brussels are easily matched by the looming headache for Washington that’s coming from large, US states such as California, Florida,  Illinois, Ohio, and Michigan.

I’ve identified seven large US states by four criteria that are sure to cause trouble for Washington’s political class at least for the next 3 years, through the 2012 elections. These are states with big populations, very high rates of unemployment, and which have already had to borrow big to pay unemployment claims. In addition, as a kind of Gregor.us kicker, I’ve thrown in a fourth criterion to identify those states that are large net importers of energy. Because the step change to higher energy prices played, and continues to play, such a large role in the developed world’s financial crisis it’s instructive to identify those US states that will struggle for years against the rising tide of higher energy costs.

First, let’s consider a large state that didn’t make my list. Texas didn’t make the list because its unemployment rate has not risen high enough to reach my cutoff: a state must register broad, U-6 underemployment above 15%, and currently Texas has only reached 13.7% on that measure. Also, Texas’s total energy production nearly perfectly matches its total energy consumption. Of course, Texas has indeed had to borrow more than billion dollars so far to pay unemployment claims, thus technically bankrupting its unemployment trust fund. That meets my criteria. But, it’s instructive to note Texas’ energy production capacity in this regard, as that produces dollars. And one of the big reasons US states are under so much pressure, like their European counterparts, is that they cannot print currency. Being able to produce oil and gas is the next best thing to printing currency. So, Texas doesn’t make my list.

The seven states to make my list are California, Florida, Illinois, Ohio, Michigan, North Carolina, and New Jersey. Each has a population above 8 million people. Each has had to borrow more than a billion dollars, so far, to pay claims out of their now bankrupt unemployment insurance fund. Also, each state currently registers broad, underemployment above 15% as indicated by the U-6 measure for the States. And finally, each state is a large net importer of either oil, natural gas, electricity, or all three of these energy sources.

Let’s consider the overall predicament for residents of states like California, with its epic housing bust, Ohio and Michigan at the end of the automobile era, or North Carolina and New Jersey in light of the financial sector’s demise. Not only have states such as these permanently lost key sectors that once drove their economies, but, residents in these states are over-exposed to structurally higher energy costs. The prospect for wage growth in the United States is now dim. We are already recording year over year wage decreases in real terms. The culprit? Energy and food costs. My seven states are squeezed hard at both ends: no wage growth at the top, and no relief through cheaper energy costs at the bottom.

US wage growth in real terms has been stagnant for years. And the most recent decade of higher oil prices has been particularly punishing to states over-leveraged to the automobile like California, Florida, and North Carolina where highway and road systems dwarf public transport. While it’s true that states like Ohio and California produce some oil and gas, the size of their populations overwhelm any production with outsized demand for electricity and gasoline. In contrast, and as I mentioned, it will be revealing to see how this depression ultimately plays out in such states as Colorado, New Mexico, Wyoming, Oklahoma, North Dakota, and Louisiana which are all net exporters of energy.

Were it not for peak oil, gasoline prices would have fallen to a dollar during this depression as oil returned to the lows of the late 1990’s–if not even lower. Petrol at 90 cents a gallon would begin to chip away at the  painfully decreasing spread between punk wages and energy input costs, currently endured by underemployed Americans. Natural gas and coal prices are also much higher than they were at the lows of the 1990’s. And I need not remind: while energy prices are very 2010, the American workforce has lost so many jobs that our labor force has indeed returned the 1990’s.

21st century energy prices overlaid on a 20th century economy? That’s no fun at all. The mainstream economics profession, perhaps unsurprisingly, still does not pay enough attention to the interweaving of long-term stagnant wage growth, higher energy inputs, and the resulting credit creation that OECD countries took as the solution to resolve that squeeze. Given that one of out of eight Americans takes food stamps, a visit to states like Illinois, Florida, Ohio, and North Carolina would reveal that the difference between 15 dollar oil and 75  dollar oil, and 2 dollar natural gas and 5 dollar natural gas is large.

My seven states of energy debt represent a full 35% of the total US population. As with other US states, they face looming policy clashes between protected state and city workers on one hand, and the growing ranks of the private economy’s underemployed on the other. The recent circus at the LA City Council meeting was a nice foreshadowing that the days of unlimited borrowing by governments–against future growth based on cheap energy–is coming to an end. Washington can print up dollars and fund these states for years, if it so chooses. But just as with the 70 million people in Portugal, Italy, Greece and Spain, the 108 million people in these seven large states are probably facing even higher levels of unemployment as austerity measures finally slam into their cashless coffers, and reduce their ability to borrow.

-Gregor

Photograph: from FREZNO, a new book of photos by Tony Stamolis, available now at Process Books.  (I bought a copy and it’s brilliant. For those who study California, it’s a must-have addition to your bookshelf)

  • http://realityzone-realityzone.blogspot.com/ REALITYZONE

    I can see a time where the 50 states are parted out into 3-4-5 separate regions. Many states can no longer exist on their own. The U.S.A. is not too big to fail. The times they are a changin, and many will have to adapt or pay the consequences.

  • burkbraun

    Hi. Gregor-

    Sorry, but fiat-currency issuing countries (US, Britain) have zero threat of default. Absolutely none. Their only concern is inflation.. not a concern right now. On the other hand, Greece, Spain, and the other small Euro countries do not issue their own currency, and thus function effectively as sub-states, like my own unfortunate state of California. Totally different situations. That anyone takes the credit rating agencies seriously at this point is a matter of psychiatry, not of reason.

    Sincerely yours, Burk

  • pacpost

    “As with other US states, they face looming policy clashes between protected state and city workers on one hand, and the growing ranks of the private economy’s underemployed on the other.”

    I wonder how this is going to play out, both in the US and in Canada.

    As you tweeted (http://bit.ly/9dYmIf), these sorts of tax measures are covering these sorts of salaries (http://bit.ly/anVdra): “The two highest-paid public-safety officials in the city are among 180 police and fire staffers paid more than $100,000 each…”

    There's the particularly egregious case of Vallejo (http://bit.ly/cojPql): “Vallejo's base pay for firefighters is more than $80,000 a year. Last year, 21 of them topped $200,000 in salary and overtime, according to city payroll records.”

    And this (http://bit.ly/9Ad7kd): “Under the current labor agreement, the average police officer walking the beat in Vallejo will be paid $122,000 this year before overtime, according to city documents. An average sergeant will make $151,000; a captain, $231,000. The average firefighter, meanwhile, will bring in $130,000 before overtime.”

    Up here in Vancouver, salaries are similarly high (http://bit.ly/cApjel): “More than 900 people on the Vancouver Police Department's payroll earned more than $75,000 dollars last year, according to internal documents.”

    They've also been rubbing their hands in glee at the overtime pay coming their way during the Olympics, where security costs have gone from an estimated $175 million to more than $900 million today.

    Again, how is this going to play out in the coming years? Protests? Politicians being voted out of office? What else?

    In any case, an excellent article and an excellent blog. Keep up the good work.

  • Nexus_7

    offtopic,
    but i would like to share a nice video by Jeff Rubin
    http://www.youtube.com/watch?v=wYuLjGQQ-jg

  • Gnoll110

    I've also seen PIGS spelt PIIGS, that is, also incliding Italy.

    What's the state of play there?

  • rjs0

    if they ever get around to using all the gas in the marcellus shale, thatll change the energy profile of NY, PA, & OH considerably…

  • http://globalglassonion.blogspot.com/ rjs0

    this article has goldman debt charts for the piigs:
    Goldman: If Greece Is Handled Wrong, All Of Southern Europe Will Fall Like Dominos And 30% Of Euro GDP Would Be At Risk…

    http://www.businessinsider.com/goldman-if-they-

  • Doug Augenthaler

    How on earth did NY not make this list?

  • gregor.us

    NY did not make my cut because its measure of broad unemployment has not yet risen above 15.00% I will update my list in April when the next U-6 measure is published for individual states. Until then, let's root for NY!

    G

  • gregor.us

    Indeed. Sadly, the US economy may be moribund for years, thus preventing economic extraction of Shale NG *on a large scale*.

    Best,

    G

  • gregor.us

    That is simply Jeff at his best, thankyou.

    G

  • Ian_M

    At least in California, I can't see the big gov't-employee unions losing any major policy battles. They are simply too entrenched in our calcified political system for that to happen. Protests will happen, politicians will rise and fall, but the unions will win. I can easily see a sort of feudalism evolving, with a millionaire/politician upper crust and a police/gov't worker gentry enforcing the system and getting privileged access to gasoline.

  • john

    Hi Gregor—Which do you think is the worse problem for the next few years, high oil prices or the unionized public sector workers and the rent they extract. The States you selected are also poster children for overpaid and over pensioned public sector workers.

  • Martin Hanson

    I wish people would learn that 'criteria' is plural. 'a fourth criterion' is what the author should have said.

  • gregor.us

    Thanks so much! Yes, I took Latin and am usually pretty good on the singular and plural of these types. God forbid that I used the reprehensible criterions!

    Thanks again,

    Best,

    G

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  • mthomas1818

    that was a very interesting article. unfortunately I think that the govt's policies are going to cause a lot of pain for the economy moving forward because they have failed to deal with the fundamental problem of too much leverage and not enough savings. and on a somewhat related topic, I recently came across this page, which has a really good collection of articles from many well known economics blogs and finance sites around the web:

    http://www.goldalert.com/gold-commentary.php

    One story I especially liked was Marc Faber's discussion where he says that if the US were a corporation, its credit rating would be junk

  • liquidsnake2010

    I believe North Dakota is moving ahead with Hemp cultivation. At the very least, they won't starve, At most, they will be the example for the rest of the states to do the only thing that can hope to mitigate peak oil.

    If Hemp hadn't been criminalised, which itself is the biggest crime i have seen against humanity, there would be a diverse range of liquid fuel sources to ramp up if oil takes a tumble, which it is.

    The problem everyone has at the moment is inertia, everyone is expecting everyone else to do something, resulting in nothing being done. Its the height of dysfunction. Government won't do anything because it will come out that they were complicit in criminalising hemp, and will be vaporised by the electorate, and the electorate won't do anything because they ae mentally and physically retarded and most of all, don't have the guts to stand up for their own livelihood.

    Unless you claim back Hemp, you will be talked about in a history class hundreds of years from now and people will say 'why didn't they just legalise this plant'.

  • timada

    Nice article!

  • moon815

    Clearly the world needs to rethink its economy strategies, after all money is just numbers and calculations, humanity shouldn't be killing it's self by allowing numbers, something we created, to rule over us and create such depression and chaos. I have found IVAs to be very helpful in improving my financial situation but some government support with free debt advice would have really helped me and I'm sure many other in similar difficult situations.

  • moon815

    Clearly the world needs to rethink its economy strategies, after all money is just numbers and calculations, humanity shouldn't be killing it's self by allowing numbers, something we created, to rule over us and create such depression and chaos. I have found IVAs to be very helpful in improving my financial situation but some government support with free debt advice would have really helped me and I'm sure many other in similar difficult situations.

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