The potential for secular stagnation has been a consistent theme of this blog; in other words, we should entertain the idea of slow (or even zero growth) as a possible norm–and plan our lives so that we fully recognise this risk. Meanwhile, the discussion of permanently slower growth has migrated from ‘crankdom’ to mainstream in five short years, and now even the IMF is humming the same tune.
This week, the IMF pre-released a chapter from its flagship World Economic Outlook publication. The chapter is titled “Where Are We Headed? Perspectives on Potential Output“. It starts off by pointing out that in advanced economies growth was coming off even before the Great Recession hit in 2008 (on all charts, click for larger image):
As the above chart shows, potential output growth can be divided into three components: 1) employment growth (more people or longer hours), 2) capital growth (more machines and computers) or 3) total factor productivity (better educated people plus innovation). The big decline was in the last category, which flies in the face of all the breathless cornucopian stories we here: tales of technology abolishing every human ill or want.
Furthermore, the IMF now increasingly recognises two stark realities. First, ageing societies will act as an increasing drag on growth in not only advanced but also emerging market economies and, second, total factor productivity gains are slowing in emerging economies as these countries get closer and closer to the innovation frontier of the advanced economies (moving from catch-up to caught-up). Continue reading
The UK is in the midst of a productivity panic. The country has exhibited a solid economic recovery measured in terms of GDP, but not one in terms of being able to do more with less. In short, the country is pumping out a larger amount of stuff and services because a) more people are working and b) those who are working are putting in longer hours.
Likewise, the US faces a similar productivity conundrum (if not quite so pronounced). Take this chart from the Federal Reserve Bank of Atlanta (here, click for larger image):
The US appears to be productivity-challenged as well. And productivity is the thing that is supposed to make us rich (sort of). What is going on? Well, we could surmise that we are suffering from the early symptoms of diminishing returns to technology, an idea advanced by the growth economist Robert Gordon (see here).
Sometimes it is best just to pilfer other people’s work– any other action feels rather pointless. This from Andy Skuce’s blog Critical Angle (click for larger image):
Bang! Marty McFly goes back to 1955 to persuade Doc to save the world from fossil fuel emissions (one can but dream).
Then again can we ask ourselves whether the relatively low energy intensity economies of the 1950s had a higher level of well-being than those that exist now (of course development has widened and population has grown). I’ll let my readers have a think about that.
Anyway, check out the Critical Angle blog here.
I’ve been mulling a name change for the blog for some time. The name the “The Rational Pessimist” was a riposte to Matt Ridley’s book “The Rational Optimist“. Ridley’s book is a paean to global free markets and human innovation–and in parts is correct. Since the industrial revolution commenced, technology coupled with capitalism has lifted the bulk of the world’s population out of a Hobbesian life that was “nasty, brutish and short”. But where I differ from Ridley is in believing that a 200-year data set of economic growth can fully capture all future risk.
Ridley’s book is Panglossian. He believes that every problem we face–from climate change to resource depletion–is relatively minor, just waiting to be solved by a technological fix. For him, price always trumps scarcity. Whenever something looks like it is running out, the magic of markets will always lead to new discoveries or acceptable substitutes.
As an economist by training, I accept that the everlasting dance between supply, demand and price is something of beauty. But I also believe that it has its limitations. A backward-looking empirical observation that things haven’t run out is different from a forward-looking theoretical prediction that things won’t ever run out. North Sea oil is running out regardless of price, and a global supply of oil is not qualitatively different from a local one.
Of course, technology may provide a perfect, or dare I say it better, substitute for fossil fuels. But then again it may not. That is uncertainty, and the consequences of that uncertainty is the concept of risk.
Posted in Climate Change, Happiness, Peak Oil, Post Growth, Resource Constraints, Technology
Tagged Daniel Kahneman, decision utility, experiencial utility, Richard Dawkins, Richard Thaler, wantability
I regularly report on the Energy Information Administration‘s monthly US oil production statistics, which show no slowdown in output as yet (see here for latest numbers). Bloomberg, however, has a series of multimedia offerings giving more colour as to what is going on.
First, a nice chart juxtaposing production and rig count numbers (source: here).
And for a great animated graphic showing rig count through time and space, this offering (again from Bloomberg) is superb. Below is my screen shot, but to get the full effect click this link here.
Finally, an animation explaining why the crashing rig count has yet to stop production rising. In Bloomberg‘s view, the divergence between rig count and production has many months to run.
National Geographic recently had an article titled “How Long Can the US Oil Boom Last?” which emphasises the longer view. They argue that the US fracking boom is a multi-year phenomenon not a multi-decade one.
But in the long term, the U.S. oil boom faces an even more serious constraint: Though daily production now rivals Saudi Arabia’s, it’s coming from underground reserves that are a small fraction of the ones in the Middle East.
Both the EIA and the International Energy Agency see US oil production peaking out by the end of the decade regardless of short-term oil price fluctuations. Nonetheless, both organisations have underestimated the upswing in tight oil production to date. Overall, it is very difficult to gauge where US production will be in five years time. This is a bigger story than the current spectacular rig count crash, and one I intend to return to in future posts.
In previous posts (here and here), I was rather rude about the World Economic Forum (WEF)‘s Global Competitiveness Index (GCI). To me, the method of compilation of the index appears dishonest. Most people understand ‘competitiveness’ to relate to some kind of competition. Yet the WEF defines competitiveness to mean prosperity, measured by GDP head. The word ‘competitiveness’ is used as just a hook.
Further, no evidence is given to suggest that maximising one’s GCI scores would later lead to higher prosperity. In short, we are implicitly encouraged to pursue WEF‘s political goals (basically neoliberalism), with the completely unsubstantiated promise that they will make us prosper.
This criticism notwithstanding, economic indexes have their uses if they are transparent and honest. The big daddy of them all is the United Nations Development Programme‘s Human Development Index (HDI). Now 25 years old, HDI was introduced to counter the shortcomings of GDP. Simplistically, a developing country may have a relatively high GDP per capita number (due perhaps to some large resource endowment like oil) but a low level of development. As the chart below shows, human development encompasses diverse dimensions that go beyond a decent standard of living (click for larger image).
The strength of the HDI itself is its simplicity. It is an equally weighted composite of only three factors: life expectancy, education (with two sub components of adult literacy and school enrolment) and GDP per capita. Nonetheless, it serves its purpose: to advertise to the world that politicians need to look at the capabilities of their populations, not just the level of wealth. Continue reading