No one likes to see prices going up, especially people with little money saved or who live paycheck to paycheck because they rarely have ability to pay more for their basic costs of living (housing, food, utilities, clothing, child care, transportation, and healthcare). Our modern global economy has been built on plentiful fossil energy. Now as climate change threatens our livelihood and lifestyle, we face a dilemma. How do we transition to a low carbon energy system when plentiful resources are no longer available? Our past Horn of Plenty has become a trap from which we in the developed nations increasingly find difficult to extract ourselves.
Throughout history the U.S. has experienced large swings in the price of goods, but trying to determine the Consumer Price Index (how prices are changing and who is being affected) is a complicated task. Inflation and deflation were a common reoccurring problem in our early history and had much wider swings in prices than today. Governments are concerned with prices, inflation, and the cost of living because wild swings in any of these can destabilize a country. When people cannot afford to buy necessities they begin to question their leadership. Revolutions begin when people cannot afford to buy food.
So how does the U.S. measure and report changes in prices?
“The Consumer Price Index (CPI) is a measure of the average change over time in the prices of consumer items-goods and services that people buy for day-to-day living. The CPI is a complex measure that combines economic theory with sampling and other statistical techniques and uses data from several surveys to produce a timely and precise measure of average price change for the consumption sector of the American economy.”
Our government reports something called ‘core inflation’ that excludes items such as food and energy, because they don’t want to include items with high transitory price changes. Items such as gasoline are more volatile in price than cars or appliances (i.e. durable goods). Prices for durable goods tend to change more slowly and supposedly reflect a truer indication of inflation. Using the measure for core inflation governments adjust their domestic policies in order to maintain stable prices. Regular periods of deep inflation and deflation was the reason that the U.S. created the Federal Reserve, to smooth out the money supply and control inflation.
The banking system provides people with access to money and loans and has a great deal of influence over economic activity in our modern world. Prior to the Industrial Revolution most goods and services came from farming and most people lived and worked on farms. Farm tenants had a place to live and food to eat. Landlords took a portion of the profit as ‘rent’. Farm products moved to the cities and more slowly around the world. The Industrial Revolution created centers of manufacturing and dramatically expanded transportation by railroad and steam ships. Manufacturing also provided jobs for people who once were tied to the land. Jobs provided money and people living in cities could afford to buy manufactured goods. The movement away from farms towards cities was due to manufacturing jobs and ushered in more economic activity. Industrialization and the exploitation of fossil energy helped some countries such as Britain and the U.S. to expand economically and dramatically changed the standard of living and consumption of manufactured goods.
The Great Depression
For more than two centuries Western countries have enjoyed an abundant supply of manufactured goods and services. The problem with this system is that it relies on abundant, relatively cheap, portable fuels along with good paying jobs. A consumer economy also relies on available money, both loans for new businesses and manufacturing as well as payment for labor. The movement of money in an economy also impacts the amount of tax collected, which in turn controls a government’s ability to perform its functions. The importance of money became very apparent during the Great Depression, which was the most severe worldwide economic depression thus far in modern history.
The Great Depression started “in the United States after a major fall in stock prices that began around September 4, 1929, and became worldwide news with the stock market crash of October 29, 1929, (known as Black Tuesday). Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%. By comparison, worldwide GDP fell by less than 1% from 2008 to 2009 during the Great Recession. Some economies started to recover by the mid-1930s. However, in many countries, the negative effects of the Great Depression lasted until the beginning of World War II.”
The Great Depression saw trade plummet across the U.S. and eventually around the world as countries struggled to prop up their economies. Economies stopped working because money supplies and investment declined dramatically. People lost their jobs and stopped spending money. Businesses were forced to close due to lack of sales and more people lost their jobs. The reduced spending of money limited economic activity and the economy spiraled downward and consumer confidence plummeted.
A severe drought developed across the Great Plains, the agricultural heartland of our country. The “Dust Bowl” added to people’s fears. People stopped spending money even if they had it out of fear that it would run out. Many people had goods to sell but were forced to either decrease prices or not sell it. My grandparents lived through the Great Depression and my grandmother told me about her experiences. As farmers they were able to continue producing food but the cost to sell it was higher than the cost they were paid for it. For example, my grandparents had milk cows and continued to milk them, but the expense they were charged for the local dairy to pick up the milk was higher than what the dairy would pay for the milk and so they were forced to stop producing milk. Once you stop milking a cow it requires at least a year or more to impregnate the cow and after she delivers a calf to begin milking again.
During the Great Depression
“Personal income, tax revenue, profits and prices dropped, while international trade fell by more than 50%. Unemployment in the U.S. rose to 23% and in some countries rose as high as 33%. Cities around the world were hit hard, especially those dependent on heavy industry. Construction was virtually halted in many countries. Farming communities and rural areas suffered as crop prices fell by about 60%. Facing plummeting demand with few alternative sources of jobs, areas dependent on primary sector industries such as mining and logging suffered the most.”
Banks cut interest rates by the mid-1930 hoping to stimulate borrowing and investment,
“but expected deflation and the continuing reluctance of people to borrow meant that consumer spending and investment remained low. By May 1930, automobile sales declined to below the levels of 1928. Prices, in general, began to decline, although wages held steady in 1930. Then a deflationary spiral started in 1931. Farmers faced a worse outlook; declining crop prices and a Great Plains drought crippled their economic outlook. At its peak, the Great Depression saw nearly 10% of all Great Plains farms change hands despite federal assistance.”
When prices decrease most governments try to shore up their economy through protectionist policies – such as the 1930 U.S. Smoot–Hawley Tariff Act and retaliatory tariffs in other countries. These policies exacerbated the collapse in global trade and by 1933 world trade was a third of its level compared to four years earlier. The U.S. began to recover after the government stimulated the economy by creating jobs and putting money back into the hands of people.
The lesson learned by economists was that when recessions hit governments must keep money flowing in order to prevent the economy from collapsing. A very interesting paper at the time suggested a radical idea of how to solve the problem. The best way to ensure this never happened again was for the government to mandate “planned obsolescence” because it would force people to keep buying goods and services.
“Frank V. Vanderlip, former President of the National City Bank, of New York, characterized this as a stupid depression. He emphasized the fact that millions were suffering midst glutted markets and surpluses. The new paradox of plenty constitutes a challenge to revolutionize our economic thinking. Classical economics was predicated on the belief that nature was niggardly and that the human race was constantly confronted by the specter of shortages. The economist Malthus writing in 1798 warned that the race would be impoverished by an increase in population which he predicted would greatly exceed gains in the production of foodstuffs. However, modern technology and the whole adventure of applying creative science to business have so tremendously increased the productivity of our factories and our fields that the essential economic problem has become one of organizing buyers rather than of stimulating producers. The essential and bitter irony of the present depression lies in the fact that millions of persons are deprived of a satisfactory standard of living at a time when the granaries and warehouses of the world are overstuffed with surplus supplies, which have so broken the price level as to make new production unattractive and unprofitable.”
Too much stuff, not enough money
The economic catastrophe of the Great Depression was seen as a problem of too much stuff but not enough money to buy it. The solution…planned obsolescence, would force people to buy new appliances and other durable goods even if its use was not up. As long as resources are plentiful this notion may have seemed sound, but as resources become limited and the accompanying pollution due to consumption worsens, we need to rethink the idea of encouraging people to buy more, to consume more.
The problems today are different. The world is facing the consequences of rising temperatures largely driven by green house gas emissions from the burning of fossil fuels. Mining, transporting, processing, and manufacturing products are largely done with fossil energy. Transforming our economy into a low carbon system by eliminating the use of fossil energy will require energy, metals, transportation, and skills to install renewable energy. It will require manufacturing electric vehicles, charging stations, and overhauling our national electric grid. It will require massive investment in upgrading infrastructure. It will mean new and different jobs along with job training. It will require the most dramatic and disruptive transformation in U.S. history.
As the U.S. economy opens post pandemic we face many challenges; a tight labor market, steeply rising prices on real estate, automobiles, lumber, and food, as well as vaccination avoidance. We face rising geopolitical challenges such as China moving to establish its global dominance. We face increasing challenges from cyber attacks committed by criminal agents protected by Russia. We also face increasing destruction of democratic norms by an aberrant political party still under the sway of Trump. Inflation is rising and it remains to be seen whether it is a temporary blip as supply chains are reestablished and the economy restarts, or it indicates something more problematic; a broken global economy and a decline in resources available.
The classic economic theory of supply and demand is based on the idea that prices rise as demand for products rises and supply is limited. Can our economy provide what we want and need in a timely fashion? Have we become susceptible to panic buying as a result of the pandemic? During the early months of the global shutdown people saw empty grocery store shelves, with items such as toilet paper being rationed. The same thing happened when computer hackers attacked the Colonial Pipeline and encrypted their software demanding a ransom. People rushed to the gas stations and filled tanks and containers fearing a long term shortage. The hackers were paid a ransom and gasoline supplies were back to normal within a few weeks. It was panic buying that caused the shortages, not actual shortages of gasoline.
Resource supplies and a changing climate
In addition to fresh water, fertile soil to grow healthy food, and forests and fisheries we also need mineral resources. If we are going to transform our fossil energy system to renewable energy sources it will require significantly more metals.
“ An energy system powered by clean energy technologies differs profoundly from one fueled by traditional hydrocarbon resources. Solar photovoltaic (PV) plants, wind farms and electric vehicles (EVs) generally require more minerals to build than their fossil fuel-based counterparts. A typical electric car requires six times the mineral inputs of a conventional car and an onshore wind plant requires nine times more mineral resources than a gas-fired plant. Since 2010 the average amount of minerals needed for a new unit of power generation capacity has increased by 50% as the share of renewables in new investment has risen.”
The Biden Administration and democratic progressives want to implement the New Green Deal, a shift to a clean energy systems which may increase the demand for metals over next two decades to over 40% for copper and rare earth elements, 60-70% for nickel and cobalt, and almost 90% for lithium. Electric Vehicles (EVs) and battery storage have already displaced consumer electronics to become the largest consumer of lithium and are set to take over from stainless steel as the largest end user of nickel by 2040.
“As countries accelerate their efforts to reduce emissions, they also need to make sure that energy systems remain resilient and secure. Today’s international energy security mechanisms are designed to provide insurance against the risks of disruptions or price spikes in hydrocarbons supply, oil in particular. Minerals offer a different and distinct set of challenges, but their rising importance in a decarbonising energy system requires energy policy makers to expand their horizons and consider potential new vulnerabilities. Concerns about price volatility and security of supply do not disappear in an electrified, renewables-rich energy system.”
We don’t know what the future holds. Unlike the Great Depression when money was limited, today’s post pandemic shortages are likely due to break down in supply chains. Restarting the global economy takes time. In response to the Great Recession and the Global Pandemic central banks around the world pumped money into their economies. Today we have a flood of money being given out by our government to stimulate our economy in the hope that it will recover. The problem isn’t too little money (savings rates rose for most Americans during the Pandemic) but shortages of goods as a result of broken supply chains. Unfortunately it will take more than money to fix our supply chain especially if the US-China relationship becomes more strained. Transforming our nations energy supply to solar and wind will require a large supply of metals, many of which currently come from China.
International cooperation vs Nationalism
The modern economy has been dependent on cheap, plentiful fossil fuels for more than a century and a half. The U.S. has been dependent on China for several decades for the import of inexpensive goods. In the 1990’s we began to outsource our manufacturing to Asian countries where labor was cheap and environmental standards lax. Check the items you purchase to see where they have been manufactured and the majority of the time it is China. Our European partners in NATO are developing relationships with both Russia and China, particularly since the Trump Administration. Germany continues to build a natural gas pipeline (Nordstrom II) that will import gas from Russia. Many in our country express concerns about what this may mean for Russian influence in Europe. Neither Russia nor China appear to show much interest in democracy or human rights. Both countries have become more nationalistic and authoritarian, expanding their military capability and showing increasing military and political aggressive behaviors. Both countries have moved to secure their access and control of resources in developing countries. During the Trump Administration America was also moving towards nationalism and authoritarian control.
The U.S. believes we can address climate change and transform our economy but we will not be able to do so if we allow our democracy to fail. The Republican party is moving towards authoritarianism. If you are a Republican who disagrees with Trump ideology (and Trump’s lie that the election was stolen) you are labeled RINO (Republican in name only) and will be removed from power in the party. The Republican party in Congress blocks efforts to address climate change, to improve access to resources, to make communities more resilient and if they take control of elections in swing states they will control our what our future looks like.
If we are going to transform our economy to renewable energy supplies we must work together to prioritize funding and projects. As the atmosphere and oceans continue to warm we are seeing changes in weather patterns including deep droughts in the Western US, more active hurricane seasons on the Gulf coast. Even if we cut fossil fuel emissions dramatically over the next 10 years we are going to see continued warming already baked into the atmosphere, exacerbating climate changes. The decline in fresh water will reduce food production in major agricultural areas in the U.S. and around the world. There will be even greater pressure on our borders from climate migration, and within our borders from communities devastated by weather disasters.
We can be sure that resources will be limited in the future. Planned obsolescence is no longer an advisable strategy for maintaining an economy. What an actual sustainable economic system will look like remains to be seen, but I suspect it will require significantly less material consumption, less energy use, less travel, and more work by hand. There will be fewer jobs that pay salary or wages but more work needed to provide food and shelter. Local resources will become increasingly important and particularly control of those resources. No one wants to become serfs living in poverty so landlords can confiscate the profit of our our labor. Who will own the land? Who will control the distribution of resources such as fresh water? Who will own access to seed banks and medicine? Who will decide the lifestyle we are allowed to live? We don’t know what our future holds, but the more democratic our leadership, the more self-reliant we become, the less debt we carry, the more vocal we are about our democratic values, the better our collective future will be.
Teaser photo credit: By Johann Joachim Kändler – Daderot, Public Domain, Personification of the Americas with an alligator, a parrot, and a cornucopia, all symbols of the New World https://en.wikipedia.org/wiki/Cornucopia#/media/File:The_Four_Continents_(America),_Johann_Joachim_Kaendler_and_assistants,_Meissen_Porcelain_Factory,_c._1760,_hard-paste_porcelain_-_Wadsworth_Atheneum_-_Hartford,_CT_-_DSC05373.jpg