Tag Archives: James Howard Kunstler

Lack of Growth Economics

Various individuals have been writing about ‘no growth’ or ‘negative growth’ economics in recent years: Richard Heinberg of the Post Carbon Institute springs to mind; or for those who like to ski off piste, James Kunstler at Clusterfuck Nation or Nicole Foss at Automatic Earth. But don’t expect to find any hypertext links to Heinberg et al’s writings at Economist’s Viewthe highest profile aggregator of economic commentary collated by economics professor Mark Thoma—since the CVs of all three can best be described as lacking gravitas in the area of formal economics.

Then something strange happened back in September 2012. Heinberg, Foss and Kunstler unknowingly recruited the most unlikely of allies.

The doyen of growth economists Robert Gordon wrote a short commentary for the Centre for Economic Policy Research suggesting that the glory days of economic growth in the U.S. were gone for good. Gordon’s “Is US Economic Growth Over? Faltering Innovation Confronts the Six Head Winds” is still an important read and can be found here. In the paper, Gordon  suggested that the last 250 years of high growth could be considered an exception rather than the rule:

Since Solow’s seminal work in the 1950s, economic growth has been regarded as a continuous process that will persist forever. But there was virtually no economic growth before 1750, suggesting that the rapid progress made over the past 250 years could well be a unique episode in human history rather than a guarantee of endless future advance at the same rate.

The unique nature of recent growth can be put in perspective by looking at the following chart from Gordon’s paper that splices together a times series from the U.S. and England (obviously data doesn’t go as far back as 1300 for the U.S.):

Growth in Real GDP per Capita jpeg

Gordon then went on to make what he calls a “fantasy forecast”, under which growth in GDP per head declines to the rate of 0.2% per annum by the end of the century.

Real GDP Fantasy Forecast jpeg

By fantasy, he meant a hypothetical growth rate that would be consistent with the six headwinds to growth that he identified, albeit accepting a degree of uncertainty in the chosen variables. The six head winds are as follows:

  1. Poor demographics
  2. Faltering educational attainment
  3. Rising inequality
  4. Globalisation
  5. Energy depletion and environmental degradation
  6. The burden of household and government debt

Each headwind is given a rough value that subtracts from the 1.8% average GDP per head growth rate that was sustained for the two decades up until the credit crisis of 2007.

Growth Subtraction Gordon jpeg

For some additional colour on his thinking, you can find a TED talk of Gordon’s here.

Eighteen months on and Gordon is back with a paper for the National Bureau of Economic Research (NBER) called “The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections”. It’s behind a paywall (here), although you can buy a copy for $5, but I will pluck out a few charts and the main points. First, this critical chart:

Disposable Real Income Growth jpeg

At first glance, it looks similar to Figure 6 from the original commentary that I reproduced above, but actually there are some substantive differences.

First, our starting point is the average GDP growth rate from 1891 until 2007, encompassing the entire Second Industrial Revolution (to use Gordon’s terminology) and its aftermath;  the growth figure (GDP per head) he gives for this period is 2.0% per annum. We then subtract bad demographics (-0.3%), the stagnation in education attainment (-0.2%), rising inequality for the bottom 99% of the income distribution (-0.5%) and debt transfers (-0.2%).

The last bar is critical since it captures faltering innovation (-0.6%), which Gordon sees as a central concern for all advanced economies. He contrasts the three general purpose technologies—electricity, the internal combustion engine and remote communications by telegraph and then telephone—developed during the Second Industrial Revolution with the lesser value information technologies of the so called Third Industrial Revolution currently taking place.

Gordon is lukewarm with respect to the degree to which the current information and communication technology revolution have contributed to human welfare. Here are the main fruits of the so called IR3 as he sees them (click for larger image):

Third Industrial Revolution

Yet, despite these innovations, productivity has already slowed substantially:

Annualised Growth Rates of Output per Hour jpeg

Gordon is at pains to stress that he is not forecasting a new slowdown in productivity, just extrapolating one that has already taken place:

There is no need to predict any faltering or slowdown in the rate of innovation over the next 40 years. My baseline productivity growth forecast (for the total economy) of 1.30 percent per year starts from the realised growth rate over 1972-2012 of 1.59% and subtracts Jorgenson’s 0.27% precent for the likely effect of the slower advance of education attainment.

He is also highly skeptical of those techno-optimists like Brynjolfsson and McAfee who see a technical nirvana.

They remind us Moore’s Law that predicts endless exponential growth of the performance capability of computer chips, without recognising that the translation from Moore’s Law to the performance-price behaviour of ICT equipment peaked in 1998 and has declined ever since.

Moreover, all those new technologies beloved by newspaper columnists receive short shrift including small robots, AI, 3-D printing, gene-based medicine, Big Data and driverless cars. In Gordon’s view, most of these are merely refinements of existing technologies that date back decades. Further, although there was a short-lived jump in technology led productivity during the tech boom of 1996-2004, such gains have since slumped. So why should the future be any different?

Lastly, and critically, the new paper leaves out two head winds to growth from his older analysis: globalisation and energy/environment. If you add these into the new new forecast, then it is easy to take future growth into negative territory.

Factor in some geopolitical instability, and a low level class war as the 99% bite back, and things could get even worse. And this is without any consideration of Joseph Tainter-style fragilities. Our complex societies have been built on the assumption of ever-lasting growth. Reverse growth and our socio-economic institutions look weak—just look at the challenges facing health provision and pensions in the West.

In total, it may not all add up to Kunstler’s dystopian vision of the future chronicled in his “Made by Hand” series of novels, where society cannot even maintain the necessary technology to sustain transport by bicycle, but it could certainly be a very different world from the one which we inhabit today.

Technology, the One Percent and Happiness

One of the central themes of this blog is the pressure that low, zero or negative growth places on economic and social institutions. Technology, however, appears to be ramping up the pressure on these institutions through directing the fruits of whatever growth there is toward an ever-smaller pool of winners. As a result, trickle down appears to be dead, which ultimately means that the current market structure could be gradually undermining the post-war political consensus.

This sounds all very Marxist, but a recent paper by Emmanuel Saez of the University of California shows the amazing extent to which top earners in the U.S. are taking an accelerating share of total income. True, the Great Recession saw a short hiccup in this trend, but the bounce-back since then has been extraordinary: all the gain has been captured by the top one percent (click for larger image).

Real Income Growth jpeg

Saez also puts current income concentration in the context of the historical trends since 1917. As things stand, the rich (top 10%) are pulling away from their 1920s equivalents let alone the average household of the post-war period.

Top Decile Share jpeg

And even within the rich, there is a further level of concentration:

Top Decile Income Share jpeg

Further, even within the 1%, there are relative winners: the top 0.01% (households with earnings of just under $8 million a year) is taking close to 5% of total income.

The Top 0.01% jpeg

Given that there are around 120 million households in the U.S., we are talking about only 12,000 families in this category. Forget Russia, the U.S. has also become a society of plutocrats and oligarchs.

What is even more surprising to me is that despite the economic disruption of the Great Recession, increased unemployment and greater concentration of income (and wealth), indices of ‘happiness’ show no downward trend. The chart below taken from a paper by Graham, Chattopadhyay and Picon shows Gallup’s ‘Best Possible Life (blp) index (using data from a daily survey of 1,000 U.S. adults) plotted against the Dow Jones Industrial Average. At the height of the crisis, when Lehman Brothers went bankrupt, recorded happiness did slump but has since bounced back to levels even higher than those pre-recession; this is despite the fact that a slew of economic indicators show that many households are still struggling.

Best Possible Life jpeg

The ‘best possible life’ question is based on the Cantril Ladder that I blogged on previously here and is phrased in this way (source here):

Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top.

The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you.

On which step of the ladder would you say you personally feel you stand at this time? (ladder-present)

On which step do you think you will stand about five years from now? (ladder-future)

There is lots of evidence that ‘happiness’ reverts to previous levels when subject to either positive (for example a lottery win) or negative shocks, but I still find the resilience of the U.S. population very strange given the rise in unemployment, food stamp recipients and homeless families. For example, the chart below shows the number of recipients of the U.S. Supplemental Nutrition Assistance Programme (SNAP, data from here), better known as food stamps. As of January 2013, 47.8 million Americans (23.1 million households) were receiving benefitting from SNAP, up from 27.8 million individuals in December 2007, when the crisis was just commencing.

SNAP Recipients jpeg

Carol Graham, an economist who specializes in the field of happiness, postulates in her book “The Pursuit of Happiness: An Economy of Well-Being” that the less-than-expected correlation between poverty and happiness may be due to a phenomenon she calls ‘happy peasants, frustrated achievers’. In short, those who have less opportunity or ability to effect their surroundings reset their happiness within the constraints that control them. Further, she differentiates between current opportunity and future opportunity. Food stamp recipients may believe that their situation is temporary and that they will have an opportunity to achieve the American Dream at some point in the future. The fact that social mobility has been falling in recent decades is irrelevant according to her line of thinking: happiness is perception.

I am not entirely convinced. Indeed, I wonder if Gallup does actually capture those Americans really struggling at the bottom. Can they contact those whose place of residence is in a state of flux or are completely homeless? Do the very poor respond to surveys? I don’t know the answer to these questions, but would love to see some empirical work on the happiness of those receiving food stamps.

Which takes me back to the beginning of the post where I wondered whether falling growth and burgeoning inequality could set the scene for social instability. Perhaps Graham is showing us a version of Aldous Huxley’s “Brave New World” where the masses are kept quiescent and content through the use of the drug soma. But in our case, soma is replaced with Jim Kunstler‘s Nascar, junk food, internet porn, tatoos, piercings, and day-time TV (oh, and of course, belief in the American Dream). Or perhaps not.

Sex, Violence, the Amish and the IMF

If you like your Peak Oil raw, the blogosphere provides plenty of sustenance. At sites such as The Archdruid Report, Casaubon’s Book and The Automatic Earth, we see a small section of society actively preparing for a major discontinuity in the type of lives we lead. One of my favourite representations of this meme is provided at Clusterf**k Nation, a blog run by the author James Howard Kunstler. Kunstler jumps the divide between hard analysis of the perceived problem and fictional representations of how things could unfold. You may not agree with Kunstler, but you will not be bored.

In the non-fiction book The Long Emergency, Kunstler gives an explanation of how the global economy could reverse as oil production peaks. But for me, Kunstler’s fiction leaves a more enduring memory. In the World Made by Hand series we see society shrinking in upon itself. The death of distance lauded in the 1990s has become a cruel joke:  the principal means of transport are reduced to foot, horse or boat (bicycles even fall by the wayside through a  lack of tires). And political relationships relapse to those existing in the pre-modern period. We are faced with feudalism: medieval free towns, lords of the manor (or their scrap-yard equivalents), serfs, self-contained religious sects and marauding bands of muggers.

At its best, life appears to resemble an Amish country idyll but with a lot more sex. At its worst, the break-down in social order and frequent bouts of extreme violence place us in the pages of Cormac McCarthy’s ‘The Road’.

For the majority of neoclassical economists, such visions are nothing but dystopian fantasies: doomer porn for those with a disposition toward the depressive. Nonetheless, the historical record gives one pause f0r thought: economies do suffer from shocks, which can in turn lead to political dislocations. Within living memory, we saw an economic discontinuity in the 1930s lead to social mayhem throughout Europe and the death of around six million Jews. People still living became unwilling participants in adaptations of Schindler’s Ark and Sophie’s Choice.

So is there any way to get from the existing economic consensus to the type of economic breakdown that Kunstler professes to see?

In my last post, I argued that there was no inherent contradiction between Peak Oil and neoclassical economic thought from a theoretical perspective. The argument was purely over the shape and dynamics of supply and demand curves. To take us into Kunstler’s ‘World Made by Hand’ would require a massive economic contraction sufficient to fracture our global political institutions, in turn setting off a second round of economic deterioration that demolishes our domestic political and social structures. Can Peak Oil take us into the first stage of this process? To do so, a neoclassical economic analysis would be looking for three things: 1) highly inelastic supply and demand curves for oil, both in the short and long term, 2) a supply curve that moves to the left and 3) a key role for oil in economic growth.

Surprisingly, the IMF published a section (entitled “Oil Scarcity, Growth, and Global Imbalances“) within its flagship Word Economic Outlook back in April 2011 that set out some scenarios that indirectly dealt with all these three things.

As regards the elasticity of oil demand to price, the IMF was not the first international organisation to warn of the world’s vulnerability to an oil price shock. In the International Energy Agency’s flagship 2010 World Energy Outlook report, the Executive Summary had a section entitled “Will peak oil be a guest or the spectre at the feast?” which led off with the following paragraph:

The oil price needed to balance oil markets is set to rise, reflecting the growing insensitivity of both demand and supply to price. The growing concentration of oil use in transport and a shift of demand towards subsidised markets are limiting the scope for higher prices to choke off demand through switching to alternative fuels. And constraints on investment mean that higher prices lead to only modest increases in production.

What this statement means is that the oil supply and demand curves are looking highly inelastic. In other words, when the oil price goes up there is not that much room to either substitute out of oil into alternative sources of energy or bring more oil into production.

For the demand elasticity, the IMF went further and applied some numbers to the problem. Over the short term, the IMF sees the demand curve as almost vertical. In their words “a 10 percent increase in oil prices leads to a reduction in oil demand of only 0.2 percent”. This is a pretty frightening statement: it says we have almost no ability to adapt to an oil price shock over the short term. So god help us if a) Iraq plummets into an internecine civil war, b) Israel attacks Iran or c) Nigeria descends into internal chaos. The short-term supply elasticity is also seen as very low at between 1 and 10 percent, and mostly consists of the production buffer held by Saudi Arabia. Should this buffer go, the short-term supply curve becomes in effect vertical (no increase in supply at any price).

Nonetheless, this is not the core of the peak oil doomer scenario; for us to approach collapse, we must see viciously steep long-term supply and demand curves, against which both substitution and technological invention appear ineffectual. And this, in effect, is what the IMF at least suggests on the demand side. It calculates a long-term price elasticity of oil demand (long term defined as a 20-year time horizon) of 7%. This again appears incredibly small. You can double the price but you can hardly make a dent in demand. How could this happen?

For this, we must understand the unique attributes of oil: energy density and transportability. These characteristics are incredibly difficult to replicate. Accordingly, where it has been possible to substitute out of oil, much of the transformation has already taken place. In other words, the shift to gas and coal for electrification previously provided price elasticity for oil, but that has now gone.

Now the IMF’s  baseline scenario for oil production is for 1.5% annual growth. However, in Scenario 2 of the report a contraction in supply of 2% per annum is also considered. The 2% decline number is taken from a paper by Sorrell et al in Energy Policy (that is unfortunately behind a pay wall). In this scenario, we move into a world where the supply curve is moving to the left as opposed to a cornucopian view of the world where technology always pushes the supply curve to the right.

Moreover, if you take this Peak Oil decline scenario and combine it with the IMF’s previously calculated demand and income elasticities, global capitalism suffers a significant shock. In their words:

The most striking aspect of this scenario is, however, that supply reductions of this magnitude would require an increase of more than 200 percent in the oil price on impact and an 800 percent increase over 20 years. Relative price changes of this magnitude would be unprecedented and would likely have nonlinear effects on activity that the model does not adequately capture. Furthermore, the increase in world savings implied by this scenario is so large that several regions could, after the first few years, experience nominal interest rates that approach zero, which could make it difficult to carry out monetary policy.

It should be noted that ‘several regions’ are already experiencing nominal interest rates approaching zero. Thus if we are already entering the foothills of a Peak Oil shock, monetary policy is already incapable of easing the blow over large swathes of the globe including the United States.

Unfortunately, the IMF’s Scenario 3 paints an even bleaker picture since it recognises some of the more recent work on energy’s role in GDP growth. Under traditional approaches, the contribution of oil to economic output has been pegged at around 5% for the tradeables sector and 2% for the non-tradeables based on the cost of oil within the economy. New methodology suggests that these figures could be as high as 25% and 20%, respectively. The argument runs thus: certain technologies are premised on access to energy. Reduce the access to energy and the technology becomes defunct.

As an example, take the first Newcomen steam engine, developed around 1710, that allowed water to be pumped out of coal mines; in so doing, mines were opened up to exploitation at a hitherto unprecedented scale. But the Newcomen engine relied on a bountiful supply of coal. If the coal hadn’t been there, the steam engine could not be operated. The machine technology and the energy can therefore be thought of as a single package: remove one and you cease to have the other.

In a more up-to-date context, think of a sophisticated airline routing algorithm that minimises the number of empty aircraft seats and reduces ticket prices. Doubling the price of jet aircraft fuel not only reduces the number of planes in the air but also reduces the optimisation potential of the algorithm, so setting off second round effects. Oil scarcity can therefore lead to what is, in effect, the disinventing of technology.

Overall, a neoclassical framework built on a slightly more pessimistic premise can have some quite alarming implications. In the words of the IMF:

But if the reductions in oil output were in line with the more pessimistic studies of peak oil proponents or if the contribution of oil to output proved much larger than its cost share, the effects could be dramatic, suggesting a need for urgent policy action.

Nonetheless, even if we pile an oil supply contraction (IMF Scenario 2) on top of a greater role for oil in the economy (IMF Scenario 3), we still are not reduced to the existence of Kunstler’s post apocalypse Amish. The IMF does not give a compound figure for one scenario placed on top of another, but for the US we are probably looking at a 20-25% decline in GDP over a 20 year period against trend and a lot steeper drop for emerging Asia. Assuming trend is for modest growth, this type of oil shock would flat line growth overall.

The relatively benign worst-case outcome of no growth (but no descent), however, assumes that massive price and income shocks can be smoothly absorbed both within and between societies. Unfortunately, we have already seen financial systems struggle with shocks an order of magnitude smaller.

In conclusion, the IMF’s formal neoclassical analysis could easily take us to the brink of Kunstler’s descent, but we would still need something beyond a traditional economic shock to push us over. For that we would need to turn to the science of complex systems or to geopolitics, topics that I intend to return to in future posts.

The Dystopian Dance

The issues of peak oil and climate change can both come across as having a certain millennial taint. Humanity, in its stupidity, is punished by nature. Or, as James Lovelock would put it, we are seeing the ‘Revenge of Gaia’. The Millennialists, however, see a happy ending at the other end of the tumult—at least for the chosen, enlightened few—while those of an atheistic or agnostic view of the world are condemned to a permanent descent into dystopia. No escaping ‘the end of days’ for them in a society under collapse.

Nonetheless, the fact that dystopias have frequently been the province of cranks does not mean they are not worthy of closer inspection. Prose writers have traditionally been the first ‘unto the breach’ when it comes to contemplating what the man (or woman) on the street deems unmentionable. Wells, Huxley, Orwell and Burgess come immediately to mind when we think of technological or political dystopias. Who having read Orwell’s ‘Animal Farm’ and ‘1984’ could not be a little more aware that a government (from any part of the spectrum) offering a political utopia may not instead transform our lives into a permanent dystopia.

Back in the 1970s, I read Nevil Shute’s ‘On the Beach’ and the completely abstract concept of a nuclear exchange had a little more meaning in one teenager’s mind.

With a novel, it is very difficult to throw the epithet ‘alarmist’; the writer is not telling us with certainty what will be but rather imagining what can be. And it is the description of a possibility that will alter our brain’s cognition of risk more than any number of reports from the Intergovernmental Panel on Climate Change report (as I touch on in my last post here).

To date Peak Oil has brought out better works of fiction than climate change (although usually climate change has a walk on part). James Howard Kunstler’s ‘World Made by Hand’ and ‘The Witch of Hebron’ both bring home in vivid colours the day-to-day struggles in a world with no easy access to cheap oil. Like many such works, though, there is a strong thread of the irrational. Religion (although not as we traditionally know it) and magic become a greater part of life’s mix in the author’s eyes, as a result of the failure of rationalism as embodied in science.

Kunstler is still somewhat a cult figure and has not acquired the literary fame of two other novelists that have dealt with dystopias head on: Cormac McCarthy and Margaret Atwood. The environmental campaigner and journalist  George Monbiot even had these words to say about McCarthy’s ‘The Road’:

“It could be the most important environmental book ever. It is a thought experiment that imagines a world without a biosphere, and shows that everything we value depends on the ecosystem.”

Both McCarthy’s ‘The Road’ and Atwood’s ‘The Year of the Flood’, however, start their stories after some unknown cataclysmic event. The reader may be left with a sense of unease, as was my teenage mind with Shute’s ‘On the Beach’, but an unease with what (with Shute I knew exactly)? Genetic engineering, global capitalism, advanced technology, pandemics, climate change? Tellingly, the publicity shot below from the movie ‘The Road’ has recently been wheeled out to accompany press articles on the potential impact of a euro break-up; the movie has become a generic metaphor for collapse, and climate change has to get in the queue.

Personally, I believe climate change has yet to find its Tolstoy. We see such luminaries from the world of science as Martin Rees openly contemplating the catastrophic potential of climate change, but this has had little resonance in the arts—or at least art that has caught the public’s imagination. Bill McKibben, the founder of the campaigning organisation 350.org, contrasts the situation with HIV, which produced “a staggering outpouring of art that, in turn, has had real political effect” (here). McKibben’s frustration is palpable:

Here’s the paradox: if the scientists are right, we’re living through the biggest thing that’s happened since human civilization emerged. One species, ours, has by itself in the course of a couple of generations managed to powerfully raise the temperature of an entire planet, to knock its most basic systems out of kilter. But oddly, though we know about it, we don’t know about it. It hasn’t registered in our gut; it isn’t part of our culture. Where are the books? The poems? The plays? The goddamn operas?

McKibben goes on to lists some of the reasons artists have not effectively engaged: diffuse perpetrators, disbursed victims, different time frames—in fact, a nightmare plot to narrate. But despite the difficulties, I believe that until we get the ‘goddamn operas’ communicators of climate chance science will have an uphill battle in changing people’s minds.