Dec 04 2011

The End of Growth in the United States

December 4, 2011

With one month to go in the data series, US Total Non-Farm Payrolls have averaged 131.08 million in 2011. The problem is that the US is a Very Large System, and needs growth to support its array of future obligations, primarily Social Security and the debt it incurs to run its military budget, and other entitlements. If you had told someone ten years ago that Total Non-Farm Payrolls would be at similar levels in 2011, that likely would have sounded impossible, or extreme. But the fact is, US Total Non-Farm Payrolls averaged 131.83 million ten years ago, in 2001. The implications for this lack of growth are quite dire. | see: United States Total Non-Farm Payrolls in Millions (seasonally adjusted) 2001-2011.

With less economic growth, and no growth in global oil production leading to permanently higher oil prices, the United States is trying to operate its Empire at previous levels. Now you know why the country along with the rest of West has gone more deeply into debt. The population keeps growing, obligations keep expanding, inputs costs keep rising. But growth keeps slowing. | see: Global Average Annual Crude Oil Production mbpd 2001 – 2011.

Care to forecast the US will return to economic growth, given energy prices and aggregate levels of debt in the OECD nations? Good luck with that. The US could certainly increase taxes, and reduce government spending. But that won’t restore economic growth. How about increasing annual government deficits more rapidly, to double our debt even faster? Good luck with that too. As I have written before, the energy limit and total debt now trump the tiresome argument between Austrians and Keynesians, rendering the conversation moot.

There was a time when many “experts” forecast that oil prices would come back down, and that global oil production would increase. Six years later, you don’t hear much from these people anymore. Their books, asserting there never was or would be an oil crisis, can now be had for .99 cents through used bookstores on the Amazon network. I expect them to be joined by economic revival advocates, no later than mid-decade. Growth in real terms, in the OECD nations, has now basically come to an end.

–Gregor

• Comments (17)
Author: Gregor Macdonald   Posted in: Americas  OECD  Oil   Tagged:            
  • http://twitter.com/nelderini Chris Nelder

    But….but…”Much more dramatic than anything on the demand side, though, has been our stunning record at increasing supply, which has been a true testament to the power of human ingenuity.” I heard it on Freakonomics! 

  • http://www.postlinearity.com gregorylent

    i look at the concept of “growth” and wish to revisit first principles .. why is growth a good thing, again please?

  • Russell Bradshaw

    Chris

    Unfortunately many people still presume that human ingenuity produces the supply, as if we ourselves CREATE the energy inputs.

    We don’t. Our ingenuity is in our ability to EXPLOIT resources and energy inputs for our exclusive pleasure.

    An unholy combination of ignorance and arrogance, that presumes ingenuity will triumph and always deliver us some new sources to exploit.

  • http://biophilic.blogspot.com/ Burk

    Again, you seem to be fixated on energy as the limiting or even only input to economic growth. But there are many more, while our sensitivity to energy has steadily diminished over the decades. Admittedly we have far to go to wean ourselves from fossil fuels, but in pure economic terms, engaging in the investments required for that transition will be a net GDP positive, if we ever have the courage to do so. If ever there was a positive need for a WWII-style level of spending, this is it.

    On the Keynesian question, the dismissal of “double our debt even faster” is without merit. The limit on debt is inflation, and, if we are unwise enough to go to the bond markets to sell sovereign debt, the rates they are willing to pay, which relate directly to expected future inflation. Right now.. these are not problems, and fiscal deficits are and would be necessary to fix the employment deficiency that you cite very appropriately at top. Keynes has won that debate. You can’t cut your way to growth in the short term.

    As soon as net fiscal spending (deficits) begin to cause inflation, the federal budget should be pulled back, and the monetary screws (short rates) tightened- Keynes has no problem with that in any way. The level of outstanding debt is simply not an issue, in a properly managed system. Japan is the contemporary example.. is their sky falling? No.

  • http://www.facebook.com/people/David-Mason/1338954891 David Mason

    energy is the most vital component to any economy. That’s why they call it “work”

    a “WWII-style level of spending” requires a WWII-style level of resources and economic postion 

    as “soon as net fiscal spending (deficits) BEGIN to cause inflation” ???

    Japan’s debt levels are about as healthy as their radioactive ones

  • David Fitzsimmons

    Historically, fossil fuels have been the preponderate source of energy, it is true. That need not be the case – indeed,  this state of affairs cannot continue – and this is not being taken into account in the presented analysis.

    I say there will be growth in the technologically-advanced world, precisely because there must be more energy derived from non-chemical energy sources. Or else Olaf Stapledon was right (in First and Last Men), and civilization collapses.

  • Anonymous

    What are you smoking Burk?  Energy is the basis for our entire western civilization.  Without energy you can’t get or convert raw materials into something consumable. Period.  Oil is the energy that allows us to dream about other alternative energies.  Put down your economic books and read a few books on thermodynamics and energy.  Economics are human abstractions, thermodynamics and energy are rules of the universe.

  • http://alephblog.com David_Merkel

    Review the 1970s.  When energy prices rise, we get really good at reducing demand for energy.  After that, we did well.

  • Anonymous

    Dave, its amazing how people think we can just come up with another energy source. First nothing replaces the utility of liquid fuel.  You can transport it, move the work it creates around, puts us in the skies, cars, farms, and the list goes on.  Once you study energy, you realize we are in a major pickle.  Our civilization will collapse, hopefully a long linear descent.  A good book on energy is “Sustainable Energy” put out by MIT press.  The bottom line however is that nothing replaces oil.  Our energy future will be one that does not rely on oil in any sense.  I’m too old for that future.

  • gregor.us

    David, my work takes place in full knowledge of the 1970′s example, and I find no analogy now to that time period. Not only did Jevons paradox come into effect for the US once we made some efficiency gains, but, the tectonics of global oil supply changed dramatically since that time. I think you might pointing instead to the overall issue of energy transition, which I am confident will take place. However such transitions usually last at least 40 years.

    G

  • gregor.us

    Not fixated. Just following the path of 250 year of fossil-fuel powered industrial growth, and a century of scholarship on the decline of systems and economies.

    Burk you are simply restating your view once again, as you have done for several years, with no data and without any indication that you have a full appreciation of the topic you dispute. Please cite Tainter, Diamond, et al or at least cite some developed world economic data in your rebuttals. As it stands, you are only offering a thematic, almost political view of how these systems actually work.

    Please start with a direct rebuttal of the main thesis: that energy is the key input–and the key limiter— to industrial economies, and therefore its disposition has observable outcomes.

    G

  • gregor.us

    That’s right. We can observe the same phenomenon in the Age of Wood (or Biomass). To the extent humans used innovation to bank/store resources prior to fossil fuels, then some gains in carrying capacity could be achieved. That said, prior to fossil fuels (dense, stored energy) humanity was largely tied to the seasonal cycles. Or as some have called “real-time solar” :-)

    I am confident we will exploit renewable energy (diffuse sources such as wind and solar) in a highly beneficial way and with impressive solutions. However, I am pretty firm that this will not compose the same kind of industrial economy as was powered by dense fossil fuels. And frankly that is fine with me.

    G

  • http://biophilic.blogspot.com/ Burk

    G-

    Your main thesis is that employment stagnation is directly attributable to rising energy prices. You imply that “debt” is due to high oil prices.

    - Debt is the problem in our economic crisis, but as anyone can tell you, the bulk of debt has very little to do with oil prices. The oil market in toto is perhaps $2 trillion per year, globally. Real estate mortgage debt in the US alone is about $8.4 trillion, let alone the banks’ huge CDS and other instruments which brought on such volatility and loss of wealth. The debt problem was one of boom-and-bust, best explained by the Minsky cycle that affected regulators as well as banksters and speculating buyers. 

    Likewise in Europe, they encountered a private lending binge to the fringe, as it were, which they are trying to reel back by extreme austerity on the fringe without adjusting currency values/trade flows. It will not work. While some of this may have been sparked by blips in the oil market, the fundamental dynamic has little to do with oil or other fuels.

    - The lagging employment clearly is mostly due to the Minsky cycle / bust above. It also has a great deal to do with rising inequality and the general OWS critique in the long term, but that is another matter. If fuel use level were determinative, how would anyone at all have been employed a century ago?

    - Our economic growth and future certainly do depend on energy, in the broad sense. No one denies that. But just as many people can be employed in a low-energy environment as a low-energy one. The overall standard of living is just lower, as in, perhaps, India. As you say, economic growth is critical for meeting our ongoing obligations to ourselves, as legislated and generally expected. 

    This Fed slide stack notes (2002), as you do, that the US economy is highly sensitive to oil prices. But is that sensitivity increasing or decreasing? It is decreasing, so the current enormous downturn can not be fuly explained by a relatively small increase in fuel prices, by a long shot.

    “Employment is one-half as sensitive to oil price shocks than in the 70′s.”

    Thus we need to produce more well-being with less fossil fuel. How can that be done?

    1- Define well-being in sustainable ways. Perhaps a high-tech & efficient 1200 sq foot home will be more appreciated and marketable at some point then a 3400 sq foot Flue-sy McMansion.

    2- Increase efficiency of energy use. As you say, the transition will come. But your 40-year put-offism does a great disservice to the possibilities of now, which is to say, that with extra systemic incentives (carbon tax), the transition could be speeded up dramatically. This would contribute to absolute GDP as well as sustainable GDP. The big difference between a carbon tax and an oil price shock is that the money from a tax would recycle into the economy, reducing the need for the Fed to loosen in response (causing stagflation), and building infrastructure and jobs at the same time. It would have a smoother trajectory as well, allowing more efficient economic adjustment, and to some degree dampen the impact of actual fuel price volatility.

    3. Most importantly, the long view is that we are killing ourselves and the rest of the planet with coal especially- its cost must be priced into our current practices. The problems around doing this are not economic growth problems, but political public goods problems. 

  • Anonymous

    I’ll give you some numbers Gregor, according to the EIA, oil production in the U.S. decreased every year from 1985 to 2008. It has since increased every year since, from 10.5 to over 11.5 quad BTU. Ipso facto, not the reason for America’s lack of growth. If you include the natural gas boom and increase in renewables you will see that net imports decreased from 30 quad BTU in 2005 to around 19 quad BTU this year. There is no shortage of energy to fuel economic growth in America. The problem is misuse of financial resources, nothing more.

  • Russell Bradshaw

    Perhaps the best academic demonstration of the role of “useful work” (derived from available energy) is that of Robert Ayres from INSEAD:

    http://www.fraw.org.uk/files/economics/ayres_2005.pdf

    His book is an excellent re-buttal of the mainstream ignorance of thermodynamic principles:

    http://www.amazon.com/Economic-Growth-Engine-Prosperity-International/dp/1849804354/

    A comprehensive debate about the role of energy is covered in this link, with the specific comment outlining a framework for falsifiability testing between the traditional economic model (e.g. Solow) and an energy / resource based model:

    http://forensicstatistician.wordpress.com/2011/05/27/is-economics-a-real-science/#comment-77

  • Anonymous

    So the price of energy goes up…so what? Don’t you realize that your spending on energy is just someone else’s income? Some people will just spend a greater percentage of their income on energy while energy producers will increase their income. I think Norway is just fine with $110 oil. As for all the debt accumulated from the purchase of paper, so what if it just vaporizes? At some point economies will come together and just wipe it off the books and we’ll start over. How’s Russia’s debt? Whoops, what debt? Worst case there’s a large war that kills off a lot of surplus labour or mass starvation in the poorest countries. (terrible outcomes for sure) but

  • gregor.us

    Thanks for the thoughtful reply. We don’t disagree that there are multiple and important factors that account for our present dilemma. Indeed, it is not the position of my writing that energy is the only factor, it’s just that this is the emphasis of my writing. And, it’s also my view that energy is the primary limit to what can happen next.

    If humanity desires to resume industrial growth, then it is indeed my position that energy is the primary limit to that quest.

    If however, humanity desires to reorganize itself along more equitable contours, if we wish to de-externalize all the huge costs to health and the environment of the present system, thus forcing participants to share more equitably in costs and benefits, than we can choose that pathway instead. It would be a slower economy, less industrial, with much less opportunity for parasitic players.

    The simplest description of how we arrived here is that the incredible forward motion of western economies, powered by cheap energy and technology from the 19th C, created an enormous amount of surplus capital. But when the ability of that system to continue growing started to run into headwinds, as early as 30 years ago, mitigating factors such as debt growth and societal tendencies towards inequality began to thrive. The 2008 crisis, which really started in 2000, is the grand coming together of two longer cycles: wage inequality/debt growth and the steeper decline of cheap energy.

    My point: no amount of equitable rearrangement of the system will yield a return to economic growth. It will yield more equality only.

    Finally, I take the position that my pessimism about the duration of energy transition is actually more positive and helpful to the overall cause of the changes you and I would like to witness, than, the optimism that normally attends these discussions. When we study carefully the actual process by which large undertakings actually come to fruition, whether it be war, new policies, or industrial plans, I take the view that an engaged skepticism is more constructive than a reflexive optimism.

    BTW, I may decide to write more in this vein in 2012. So, stay tuned for a tonal change from me next year. :-)

    G