The Breaking Point
Page 37
10 Ibid., 173–74.
11 Ibid., 178.
12 Mill, John Stuart, Principles of Political Economy 1848, repr. (Amherst, NY: Prometheus, 2004), 688.
13 Denhart, Chris, “How The $1.2 Trillion College Debt Crisis Is Crippling Students, Parents and the Economy,” Forbes, August 7, 2013.
14 Gould, Elise, “Even the Most Educated Workers Have Declining Wages,” Economic Policy Institute, February 20, 2015.
15 Jevons, The Coal Question, 173–74.
16 http://www.safehaven.com/article/20785/ben-bernankes-press-conference-we-dont-control-emerging-markets.
17 Sprott Money, “U.S. Retail Sales Fall, Again—the Next Crash Is Near,” Zero Hedge, July 21, 2015.
18 Summers, “U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the Zero Lower Bound,” Business Economics, http://econpapers.repec.org/article/palbuseco/v_3a49_3ay_3a2014_3ai_3a2_3ap_3a65-73.htm.
19 Morgan, Tim, “Perfect Storm: Energy, Finance and the End of Growth,” Strategy Insights 9 (London: Tullett Prebon), http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf.
20 Summers, op. cit.
21 Gordon, Robert, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds” (NBER working paper no. 18315, August 2012). JEL No. D24,E2,E66,J11,J15,O3,O31,O4,Q43.
22 MacDonald, Gregor, “Paper vs. Real: Exit from Normal, Ecological Economics, and Probabilistic Regimes in One Chart,” Gregor. US: Energy and Economics.
23 Wiedemer, Robert, Aftershock Investor Report 3, no. 7 (July 2015), 2.
24 Ibid.
25 Jevons, The Coal Question, 174.
26 Gordon, “Is U.S. Economic Growth Over?”
27 O Grada, Cormac, “Ready for Revolution? The English Economy before 1800,” September 24, 2014, http://www.lse.ac.uk/economicHistory/seminars/EconomicHistory/Papers14-15/READY-FOR-REVOLUTION.pdf.
28 Boulding, “The Shadow of the Stationary State,” 95.
29 Ibid.
30 http://ourfiniteworld.com/2015/05/06/why-we-have-an-oversupply-of-almost-everything-oil-labor-capital-etc/.
31 Schoon, Darryl, “China, 2012 and Von Mises’ Crack Up Boom,” January 4, 2012, http://www.financialsense.com/contributors/darryl-schoon/2012/01/04/china-2012-and-von-mises-crack-up-boom.
32 Keynes, John Maynard, “Economic Possibilities for Our Grandchildren,” in Essays in Persuasion, by John Maynard Keynes (New York: W. W. Norton, 1963), 358–73.
33 Ibid.
34 http://theworldisfinite.com.
35 Balakrishnan, Gopal, “Speculation on the Stationary State,” Occasion: Interdisciplinary Studies in the Humanities 3 (March 15, 2012).
Chapter Eighteen
The Declining State
From a Downward Spiral of Retrenchment to Mad Max
In their own ways, both bureaucratic socialism and its vastly more affluent neoliberal conqueror concealed their failures with increasingly arbitrary tableaux economique. By the ’80s the GDR’s (German Democratic Republic’s) report of national income was revealed to be a statistical artifact that grossly inflated its cramped standards of living . . . The coming depression may reveal that the national income statistics of the period of bubble economics were fictions, not wholly unlike those operative in the old Soviet system.
—Gopal Balakrishnan, “Speculations on the Stationary State”
There is No Tomorrow-Morrowland.
—Mad Max, Mad Max Beyond Thunderdome
Has Growth in the Real Economy Ceased?
In this chapter, we consider Dr. Tim Morgan’s apparently wild-eyed conjecture, prominently quoted in the epigraph in chapter 16, that “growth in the real economy ceased quite some years ago” as the energy intensity of the economy declined. Dr. Morgan is hardly as wild-eyed as Mad Max, the fictional hero of four movies whose adventures in the postgrowth world have been played out before audiences of millions over the past thirty-six years.
Mad Max appeals because he is a survivor in a world that mainstream economists can’t even imagine. His is the world of multidimensional collapse, where financial collapse has been compounded by industrial collapse and commercial collapse (the breakdown of supply chains), followed by political collapse, and ultimately culminating in social collapse. We first meet Max Rockatansky as a police officer in the Main Force Patrol of a future and rapidly collapsing version of Australia.
Science fiction is an attempt to imagine the future, just as history is the attempt to reimagine the past. Much that was seen in the past and then forgotten can be recognized in the present. Both history and science fiction may help us better understand our current dilemmas. As you will have recognized, the argument of this book draws mainly on history. But I am always open, as I hope you are, to whatever science fiction can tell us.
“It’s the Oil, Stupid”
The Mad Max movies provide a good vantage for a thought exercise—to learn what you can from the imaginative people who make films. They have a way of reflecting and clarifying themes that are too serious to be tackled by the editorial board of the New York Times.
Meanwhile let’s take a closer look at Tim Morgan’s contrarian claim that growth in the real economy “ceased quite some years ago.” This, of course, betrays skepticism on Morgan’s part about the validity and usefulness of official measurements of “growth in the real economy.” If you believe what you read in the newspapers, this may disqualify Morgan from further consideration.
Rather than dismiss his thesis out of hand, let’s drill in to see what he is talking about and whether it could possibly be true. Of course, you have had a warm-up in previous chapters for the idea that declining energy inputs could inform a slowdown and even a decline in the economy.
A Measurement Adventure
It is important to recognize that measuring economic growth is more of an adventure than measuring your pants size. For one thing, in almost every circumstance you can imagine, the person with the tape measure has lively incentives to say that you are bigger than you really are. And further to that, there are nontrivial questions about what should be counted and what excluded.
The anonymous blogger FSK, who specializes in posts debunking supposed GDP growth (not the Fork Spoon Knife FSK of the cooking blog that famously featured a recipe for “Gluten Free Blueberry Pound Cake”)—questions a feature of GDP accounting. In a July 2010 post, he gave the example of a toy imported from China for sale in the United States. When the toy arrives in the United States, it may have a value of three dollars, but after retailing for twenty dollars, the difference of seventeen dollars goes toward US GDP. FSK argues that even though the US company selling the product imported, marketed, transported, and sold the toy, it didn’t add any tangible value.1
Another way of looking at it is to see the offshoring of manufactured production to China as a way of circumventing US environmental regulations that have sharply raised the cost of otherwise relatively low-cost energy from coal. For example, US utilities have to install flue gas desulfurization equipment, or “scrubbers,” which cost hundreds of millions of dollars each. China’s coal consumption has grown by leaps and bounds, while US plants are closing. In 2012, 10.2 gigawatts of coal-fired capacity was retired in the United States, while the World Resources Institute reported that China’s government was planning to build 363 coal-fired power plants across China, with a combined generating capacity of more than 557 gigawatts.2 China now consumes about as much coal as the rest of the world combined. Because American companies could not access energy from coal directly in the United States, they were content to do so indirectly in China.
If 100 percent of products sold in the United States were made in China, with profit margins like those on the toy example discussed, 83 percent of the sales would count as domestic product. If seen by a casual viewer with an unmindful squint, domestic production, as measured in national income accounts, would appear to be robust. As it happens, national income accounting is such that it accommodates the disintermediation of cos
tly US regulations quite smoothly. The profits of US companies renting access to Chinese energy, and environmental regulations, count in US GDP.
The profits from subprime auto loans issued to finance used car sales may count in GDP tallies—fee-based net income from financial services is included as value-added and thus boosts GDP—but whatever fraction of the 15.6 million used cars sold for cash in 2014 otherwise did not show up in GDP accounts. However, some surprising things did.
Such as promises.
No. I am not joking. Currently, the government counts in GDP totals, under “wages paid,” corporate promises to someday, maybe fund pension obligations.
As reported by the Zero Hedge blog, Elliott Management’s Paul Singer explains that the BEA’s GDP calculation includes the amount of money companies promise to pay into pension plans in the future, even though these promises are not fully funded.
We have commented in the past on government statistical fakery and fudges, in the inflation numbers, in employment and long-term budgeting. But recent changes to the national GDP accounts by the Bureau of Economic Analysis may “take the cake.” As part of the revisions, they change the way pension payments are counting in GDP. Previous to the change, when a company paid money into a pension plan, the money was counted as wages in the GDP calculation. After the change, what companies have promised to pay in the future, not what they are actually paying, will be added to GDP. This is fantastic. The bigger the unpayable promise made to unsuspecting retirees (promises that are not fully funded), the more GDP supposedly goes up!3
Amazing intellectual dishonesty. It is pertinent that a standout expert among those who have studied national income accounting most closely, John Williams of Shadow Government Statistics, accords little credibility to the official narrative loudly proclaimed by Obama in his State of the Union speech: “We’ve seen the fastest economic growth.” To the contrary, Williams says we are in the midst of “an unfolding, multiple dip economic collapse.”4 I agree.
In addition to methodological shenanigans, it is well known that politicians go to great lengths to distort the headline numbers. Dr. Carsten Holz, a visiting scholar in the Department of Economics at Harvard, points to both former president Lyndon Johnson and former president George H. W. Bush as guilty of this practice. If Johnson didn’t like the GNP reports, he was known to send the estimates back to the Commerce Department until they came up with a number that he considered “correct.” During Bush’s administration, a senior member of the executive branch requested that a computer company exaggerate its sales in its report to the BEA: “Thanks to the heavy leverage of computer deflation, reported GDP growth enjoyed an artificial spike.”5
Note another facet of the deception: today, you are told that GDP is the proper measure of prosperity. But as Dr. Holz reminds us, when Lyndon Johnson was forcing bureaucrats in the Commerce Department to fiddle the numbers, he wanted them to exaggerate Gross National Product (GNP). In the years since Johnson left the White House, GNP has been more or less forgotten while GDP has taken center stage.
Why?
It is simple.
Notwithstanding all that Johnson did to put the United States on the road to bankruptcy, with the Vietnam War and his Great Society programs, the United States was still a creditor nation in those days. Because GNP includes the total of incomes earned by residents of a country, regardless of where they earn it, the GNP of a creditor country is always higher than its GDP, which includes the total of all economic activity in the country, regardless of who owns the productive assets, and without deducting for interest and dividends paid abroad.
The United States now owes at least $6.2 trillion to other countries, and unlike the 1960s, a significant portion of US production is owned by companies domiciled abroad. For example, as of 2006, 36.4 percent of US automobile production came from foreign-owned plants.6 If the United States were still using GNP as the yardstick of economic growth, whatever number the bean counters conjured up would be smaller than an equivalent GDP number.
According to John Williams, even though GDP is the most widely followed business indicator reported by the US government, it has become nearly worthless as an actual indicator of economic activity due to upward growth biases built into GDP modeling since the ’80s.7 Today, GDP reporting has become a political propaganda tool. The most fevered huckster of used cars is a personification of credibility compared to the bureaucrats who assemble and report data on the economy. The GDP measurement standards are so squirrely that Morgan’s thesis that growth in the real economy ceased some years ago is by no means incredible.
A Morsel of Nonsense
The point that should stand out in this quick tutorial on national income accounting is that GDP is an intellectually dishonest propaganda construct. It has become one of those morsels of nonsense, like celebrity gossip disguised as news, that diverts infatuated people from thinking about what is really going on. In my view, the official propaganda about GDP has about as much substance as the latest twaddle about the Kardashians.
Look to the Footnotes, Not the Headlines
Look around: What do you see unfolding on a daily basis but the aftermath of the end of growth? Is it not a symptom of economic decline when the labor force participation rate of college graduates recedes to an all-time low and Ivy League schools have a higher acceptance rate than McDonald’s?
Look to the footnotes for your bearings, not the headlines. They are less likely to be fiddled. The fact that the Social Security’s Disability Insurance Trust Fund has gone bust after more Americans secured permanent disability status than found full-time work during the Obama presidency says that you are living in a declining retrograde economy.
But that is only one dismaying footnote. If you look closely, you can see that from 2007 through 2014, during the period of the imaginary recovery, workers in all education categories showed flat or declining real average hourly wages. During that time, the number of Americans living in poverty increased by 9.4 million, from 37,276,000 to 46,657,000.
That helps explain why the prospect of retirement is rapidly fading away. Witness the ordeals of legions of superannuated “workcampers,”8 senior migrants who put in twelve-hour shifts in Amazon warehouses or hold down other menial jobs. As Harper’s reports in “The End of Retirement,” “Each successive generation is now doing worse than previous generations in terms of their ability to retire.”
A similar hint of downward mobility: the officially reported Q2 2015 worker pay increase was the smallest on record, decidedly lower at 0.20 percent, than even at the depths of the Great Recession. This negative turn helps explain why labor force participation rates since 2000 have plunged for all age cohorts under the age of fifty-five, with the steepest drop, of about 17 percent, for workers aged sixteen to twenty-four. This also says that the world we knew of rapid economic growth is gone.
To be clear, Morgan’s case is not merely a premonition that someday, in the by-and-by, growth may come to a halt if we don’t balance the budget and eat our vegetables—his stark message is that the economy stopped growing years ago. Your challenge is to recognize what is really happening, think as clearly as possible about how to survive, and position yourself to succeed in a bankrupt world.
Another hint that we are caught in a downward spiral of retrenchment: companies aren’t investing in the physical expansion of their businesses or in their employees because they don’t believe the recovery is real. They see a consumer economy locked in a downward spiral where the average American is stretched too thin, saddled with too much debt, and has too little income to recover.
America’s economy is teetering on an edge. The consumer is largely absent, and companies aren’t investing either, except in share buybacks and financialization. You will wait in vain for official channels to concede that the status quo is shot. No established political system ever concedes that it is in the process of being superseded.
Look at more of the footnotes that attest to the long-term economic
collapse happening all around you.
Recession or Worse?
I have no doubt that the economy is in decline. But it is not at all evident that the decline so vividly expressing itself is likely to be of “temporary” duration. For perspective, consider the etymology of “recession.” The word made its first appearance in 1929, as “a noun of action” derived from “recess,” meaning a temporary retreat or decline in economic activity. In that sense, a downturn that is not temporary is something other than a recession.
Consider the compelling evidence that median income is not merely in a temporary dip but in a long-term secular downtrend that shows no sign of reversing. Shadow Government Statistics has deflated the average weekly earnings of production and nonsupervisory employees from 1965 until today. Using the Shadow Stats CPI-W deflator, current real average weekly earnings are just half of what they were fifty years ago. And even the government’s own fishy data (deflated by the official CPI-W) show the real average weekly earnings are lower than in 1965. This is not merely a recession. It is economic regression, a prelude to collapse.
A 2016 study by the Pew Charitable Trusts (“Household Expenditures and Income”) shows the weakness in consumer spending power is even greater than a comparison of inflation-adjusted median income suggests. Why? My guess is that the ZIRP policies of the Federal Reserve have been too successful in raising inflation, while emptying the savings accounts of poorer Americans who no longer earn enough from interest income to offset the cost of bank fees. And don’t forget the impact of political schemes like Obamacare that have emptied the already thin wallets of lower-income Americans, vastly increasing the cost of health care.