The facts of life

June 15, 2010

It’s been nearly 5 months since I started DOTE. The traffic stats are very encouraging. The number of visitors has increased almost every week during that whole period, although there has been a great deal of volatility. But DOTE is still a minor league blog, and will remain so for some time to come. I am about halfway to my initial goal of 1000 real visitors a day (as measured by Google Analytics).

I want you, my readers, to be very well-informed, even if you are relatively few in number. So today I will lay out The Facts Of Life. A great debate is going on at present, not least because it’s an election year. Here are the opposed views—

  1. America’s public debt is out of control. We need to rein in government spending now to prevent soaring interest rates on our bonds (U.S. Treasuries) in the future. As our borrowing costs go up, the interest we pay on the debt will rise to 6-7% of GDP or more. Moreover, we can not depend on the Chinese, the UK, the Japanese, the Gulf oil states, etc. to lend us money forever. We’re in a tight spot. If we get our fiscal house in order, we will set the stage for a revival of private spending in the United States. Eventually, after a very painful period of adjustment, an era of strong economic growth is assured. (Niall Ferguson espouses this view, although he also believes, as I do, that we are Empire in Decline.)
  2. America’s public debt doesn’t matter because the alternative, another Great Depression, is much, much worse. Without additional public spending, even if we must borrow the money, we will have nothing. Moreover, our borrowing costs are low, and are likely to remain so. The threat of deflation is upon us (CPI is expected to be -0.2% in May). We’re in a tight spot. More government spending, if it’s done right, will create new infrastructure and jobs, which will lead to more consumption, which will revive the private sector. Eventually, after a painful period of very large deficits, an era of strong economic growth is assured. That growth will allow us to pay off the accumulated public debt. (Paul Krugman and Brad DeLong, among others, espouse this view.)

I deliberately wrote up these opposed views to emphasize what they have in common: we’re in a tight spot, but after we take actions X, Y and Z, an era of strong economic growth is assured. Krugman, who is a strong believer in option #2, likes to cite the era after World War II, which was the last time we had anything like the public debt we have today. I too will rely on that comparison. Let’s assume the economy gets back on its feet by 2015, via path #1 or path #2. The economy would then be poised for take-off.

To keep things simple, I will ignore some obvious but very important differences between 1945 and 2010: our huge private debt, the fact that previous growth was driven by bubbles in the stock & housing markets, the fact that a net zero jobs were added in the private sector during the last decade, our enormous wealth inequality, etc. I will simply pretend these problems don’t exist.

I will further ignore the fact that we are an Empire in Decline, and so will disregard our political paralysis & corruption, the dominance of 6 Big Banks in Finance & government decision-making, the increasing separation of the Real World (where you and I live) and what I call The Money World where Jaime Dimon lives, the destructive trends (e.g. unaffordable health care, lack of innovation) in every aspect of American life—that is to say, I will ignore almost everything I write about daily on this blog.

Having swept all these problems under the rug, the question then becomes—

  • Is it possible that economic growth in the period 2015-2035 can duplicate the growth the United States enjoyed in the period 1945-1965 after World War II?

Remember, the standard assumption underlying both view #1 and view #2 states that the answer to this question is Yes. But we have good reasons to believe the answer is No, to wit—

  • There is strong evidence the world has reached, or will shortly reach, peak oil flows. As of now, no scalable, reasonably priced alternatives exist. Until they do, we can expect a boom & bust cycle of recessionary oil price shocks. During the period 1945-1965, domestic oil production covered almost all of American consumption. Today we import 2/3rds of the oil we use. Domestic production of conventional crude will continue to decline throughout the period 2015-2035 and by the end, we will be producing a relative trickle compared to today.
  • Fresh water is any nation’s lifeblood. Yet the Ogallala acquifer that serves America’s agricultural breadbasket is being depleted at an alarming rate. The effects of global warming on our fresh water supplies in the period 2015-2035 is unknown, but prolonged droughts, heat waves and destructive floods—more frequent extreme weather events—may affect not only the heartland, but also other parts of the country. You can probably expect more Katrina-like moments in the future (e.g. the recent heavy flooding in Tennessee).
  • Species die-off is reaching epidemic proportions all over the world. Here in the United States and elsewhere, honey bee populations have been in rapid decline for some years now. It is unclear how this will turn out, but if current trends continue, the U.S. will be importing most (if not all) its crop pollinators in coming years.
  • The world has already reached peak wild-caught fish, and there won’t be any wild fish in the oceans by the 2040s at current rates. Unless there is a miraculous change in human behavior, our destruction of the oceans, including the continental shelves off the east coast, the west coast and the Gulf of Mexico, will be almost complete by the end of the period in question (2035). The oil spill in the Gulf just exacerbates an environmentally destructive trend that was well underway.

This list is seriously incomplete. I put it together off the top of my head. I’m sure many of you could add other factors I left out. For example, we do not control the supplies of many elements (e.g. lithium, phosphorus) that are essential to our economy. Mexico’s oil exports are going to dwindle down to practically nothing in about a decade at current decline rates. If you think we have an immigration problem now, what about then, when Mexico, without the oil revenue, becomes a failed state?

An economist would no doubt say that I have underestimated the technological know-how that could be applied to solve many of these problems. And my response would be Show Me. But no one can demonstrate what does not exist.

Others would say that we simply haven’t created the right incentives (e.g. a carbon tax) to fix the global warming or other problems (e.g. liquid fuels scarcity). Growing economies need more and more energy. It is pure fantasy to believe that we can eliminate fossil fuels to the extent required (by climate change or peak oil) and still produce more and more energy to support economic growth (regardless of what Al Gore says). If I have to choose between Physics and Economics, I choose Physics, despite fantasies economists harbor that the two fields of study are comparable.

These are The Facts of Life. If you’ve made it this far, dear reader, I believe you are now well-informed. As you watch the video below on the great debate between spending and cutting back, bear in mind everything I’ve said here.