Limits We are Reaching – Oil, Debt, and Others

The world is clearly reaching many limits. This graphic below shows how I see man interacting with natural systems, back before man discovered fire and back before man became intelligent enough to kill off whole species.

Figure 1. My view of man’s relationship to natural systems, in the beginning.

In these earliest days, human systems were a part of the natural system. Humans behaved like other animals, and fit easily into the natural order. There weren’t many humans–probably under 100,000 total in the whole world.

This is the way I see man’s systems interacting with the natural system now:

Figure 2.My representation of relationship of systems created by humans to the natural system, at the present time.

In my illustration, human systems are sufficiently interrelated that they combine to form one single interrelated “humans’ system”. This system draws its power from the natural system. It also puts its waste products back into the natural system. Because of entropy, we know that everything we create eventually ends up as waste products. In order to keep the humans’ system going, we need to keep adding new energy to the system, partly to offset entropy and partly to support the growing world population.

What limits are the human and natural systems reaching now?

Oil Limits

According to EIA data, crude oil production in 2005 averaged 73.6 million barrels a day. It has grown very little since then. Crude oil production for 2011 averaged 74.0 million barrels a day. In the first two months of 2012, crude oil production was higher yet, averaging 75.6 million barrels a day.

Figure 3. Crude oil production vs Brent oil spot price, in US $, based on EIA data.

Even with the higher production in 2012, and with growing “other liquids” production (not shown), crude oil production has not been sufficient to bring oil prices back to the $60 a barrel or less range that we were comfortable with prior to 2006.

The Wall Street Journal recently reported, Oil Price Likely to Stay Buoyed by Marginal Costs. Thus, part of the limit we are reaching is that the cheap-to-produce oil has mostly been produced. No matter how much oil is produced, it is hard for the price to drop very much. According to the article, Bernstein Research estimates that the marginal cost of production was $92.26 a barrel for the 50 largest oil and gas companies in 2011, and will exceed $100 barrel in 2012. These high oil prices put strains on the economies of oil-importing nations.

Debt Ratios

Clearly debt ratios are a problem for many countries.

Figure 4. European debt to GDP ratios, from This in MONEY.co.uk.

Debt ratios tend to rise, as oil importing countries have more and more problems with high oil prices. People who are laid off from work don’t pay taxes; instead, they expect to get payments from government-funded programs. The combination tends to force debt levels of governments higher.

The US government is paying out a great deal more than it is taking in. Based on Bureau of Economic Analysis data, the US government ratio of outgo to income was 146% in calendar year 2011.

Figure 5. US government expenditures divided by receipts, based on US Bureau of Economic Analysis data.

This wide gulf between income and expenditures is being used to try to prevent recession in the United States. Legislation which was passed last year requires that this gap be fixed, starting the beginning of 2013. The Congressional Budget Office is now warning that the United States is likely to enter recession when this happens.

Over-Promised Social Security and Other Benefit Programs

If a person looks at the information underlying the US budget for 2013 (see page 208), it becomes clear that the big gap between income and outgo is in “Mandatory Programs,” in other words, Social Security, Medicare, Unemployment, and Other Mandatory Programs.  It is hard to see any way the spending gap can be cut without cutting these programs.

The reason why this issue has been overlooked is because Social Security is supposedly funded on an accrual basis in accounting for the program, but in fact the funding goes through the US budget program, which is on a cash basis. While some funds were collected in advance to smooth out the baby boom bulge, these funds have already been spent. Thus, the huge payouts as the baby boomers retire look at though they will directly affect the US budget. (This issue deserves a separate post.)

Europe can be expected to have even more problems with mandatory programs than the United States because their programs have generally been more generous. Europe also has a lower birth rate, and the benefits for the old are paid by the young. If there are not enough young people, the system doesn’t work.

Low Interest Rates

Artificially low interest rates are one way of making borrowing more attractive, so that businesses will take the opportunity to expand and individuals will be able to purchase homes and cars. Low interest rates also make the load of governmental debt more bearable. But at this point, interest rates are about as low as they can go–the only direction they can go is up from here.

One problem with artificially low interest rates is that they make it almost impossible for pension plans to make good on their promises (unless they are mostly invested in stocks, and the stocks miraculously go up). The US government guarantees pensions plans up to certain limits through the Federal Pension Guarantee Corporation. This program doesn’t have much in the way of real funds behind it–if there are widespread defaults, somehow enough funds must be provided through “printing money” or higher taxes.

Fresh Water Shortages

Fresh water shortages are a problem in many parts of the globe. The World Bank issued a report on the subject saying, “In 1997 only 47 countries borrowed for water [projects], but by 2007 there were 79 borrowers, and lending for water had increased by over 50 percent.” Besides drinking and sanitation, water is needed for irrigation and for the cooling of electrical power plants. While it is possible to convert salt water to fresh, the cost is very high. Thus, what looks like a physical problem (a shortage of water) can be “fixed,” but through an approach that affects the financial system, and uses more energy supplies.

Food Supplies That Can’t Keep Expanding

The green revolution allowed agricultural yields to increase in the 1940s through 1960s, through greater use of fertilizer and irrigation, and the development of disease resistant types of seeds, but we don’t have any follow-on major improvements now. In fact, problems with high salt levels and declining water tables where irrigation has been used make it clear that expansion of irrigation cannot continue indefinitely. Sandra Postel in “Piller of Sand: Can the Irrigation Miracle Last?” writes, “The overriding lesson of history is that most irrigation-based civilizations fail.”

Apart from difficulties in raising per-acre yields, there is also competition for land from rising biofuel production. To the extent that food shortages arise, prices can be expected to be higher, and the poor will face more difficulty in getting an adequate diet.

Pollution 

Pollution occurs in many forms and in many ways. The best-known is excessive carbon dioxide, which leads to ocean acidification and climate change. There are clearly many, many kinds of pollution, since everything that is made degrades with time, becoming pollution of sorts. Once concern is that much pollution may be hidden. A recent article in Science Daily reports, Today’s Environment Influences Behavior Generations Later: Chemical Exposure Raises Descendants’ Sensitivity to Stress. This is truly disturbing news, since it would appear that conditions of our children (autism, ADHD, weight gain) might be influenced by chemicals that we or our mothers were exposed to.

Climate Change

The activities of humans have been affecting the climate for many years, since humans started cutting down and burning forests to meet their own needs, thousands of years ago. The changes we are now seeing (higher carbon dioxide levels and ocean acidification) parallel some of those that took place in the Permian extinction 252 million years ago. We don’t know exactly how things will develop from this time forward, but climate models give one indication.

Many Other Limits

This list is far too short. A person could argue that population is now reaching a limit. The concentration of nearly all ores is becoming lower and lower. Ocean acidification and overfishing are problems by themselves. Soil is eroding at higher than the rate that new soil is being formed. Loss of humus and loss of soil nutrients are issues as well.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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70 Responses to Limits We are Reaching – Oil, Debt, and Others

  1. Pingback: Limits We are Reaching – Oil, Debt, and Others | Sustain Our Earth | Scoop.it

  2. donsailorman says:

    As usual, I entirely agree with your financial and economic analysis. One point on which we may differ slightly is probable global oil production in the future with oil at $100 or more per barrel. Note that the U.S. has increased production rates of oil for every year of the past three years. This trend may continue. Also, if the U.S. (which has been SO extensively explored and drilled) can increase production, why not expect–over time–for other countries also to increase their production of oil, so long as the price of does not fall much below $100 a barrel, except briefly during recessions or depressions.

    IMHO, the binding constraint on increasing oil production is not geology right now. My opinion (with only anecdotal evidence to support it) is that that shortage of petroleum engineers, chemical engineers, and also other engineers is what is now limiting production. There even is a considerable shortage of experienced roughnecks in places like the Bakken formation, and I think this will develop into a global shortage pretty darn quick–and indeed, this may already have happened. Of course there is no good data on this issue, except long (years) after the fact. It takes four years of investment in human capital to create a petroleum engineer. It takes very roughly seven years to create a Ph.D. in petroleum engineering to teach the undergraduates. In other words, I think limits on human capital are far more serious than limits on financial capital or physical capital such as drilling rigs.

    • I don’t know about limits on human investment. It does take a while to train new workers, and I understand a lot of older ones are retiring. I heard that a lot of people who were earlier trained in the field dropped out when the price of oil dropped and job opportunities disappeared.

      I know that it takes a whole lot of drilling and fracking to get a relatively small amount of “tight” oil. Oil is high enough priced, though, that all this effort makes sense–less clear about natural gas. It seems to me that we start running short on horizontal drilling rigs and fracking equipment too, before we get a huge amount of drilling done. Of course, new equipment can be built. The other issue is whether the investment capital for all of the drilling and fracking will be available.

      • donsailorman says:

        I think the financing will be available, for two reasons:
        1. Historically the oil business has been exceedingly profitable, and
        2. Banks and other financial institutions are used to leanding to the oil and gas industry. In other words, if you have solid numbers for your project, you can get as much money as you need.
        Even during the Great Depression, few oil companies defaulted on their loans, except for one year, when oiil prices went down to a dime a barrel. If memory serves, that was 1931. Since then the oil companies–especially the major ones but also independents–have been exceptionally good credit risks.

        • David Harney says:

          Hi Don,

          the binding constraint on increasing oil production is not geology right now.

          We all know how oil came into being (religious nuts aside) and we all know that the supply of this stuff is finite. We are pretty sure that we have exhausted the “easy to extract” stuff. We can be reasonably confident that there will be no vast new reservoirs discovered that will fuel our BAU for hundreds of years. We have sufficient evidence that extracting FFs and converting them to CO2 is compromising the biosphere in a manner that is endangering many species, including humans. We also know that the use of FFs enables all sorts of other negative environmental consequences.

          Although I’m pretty sure that you are as environmentally concerned as I am, and I doubt that you are arguing for more PHDs devoted to FF extraction, however I would argue that we should actively discourage training more people in this craft. Rather, we should encourage training in Paleontology and fund public school education that teaches real science – science that is free of board school member bias. I don’t think I could really have understood Gail’s first two graphics until I was in my 60s and had the time to read about our actual human history. I suspect that a major component of our current predicament is this simple understanding of our actual role in the scheme of life on this planet. Ultimately, geology is a constraint – along with many other realities of our little planet.

          • donsailorman says:

            If engineers do not come out of U.S. universities, then thousands or tens of thousands of them will emigrate from their native countries (e.g. India) to wherever in the world the pay is best for petroleum engineers and chemical engineers. Thus it would make little difference to the U.S. if all our engineering schools shut their doors today and kept them shut.

            In my strong opinion, I am convinced that we are going to produce all the oil, coal, and natural gas we (the whole globe) that can be produced at a profit. Politically it is poison to try to do anything that would tend to reduce real GDP growth, because–without any
            exceptions at all–falling, or even stable GDP results almost immediately in an increase in unemployment. This linkage of rate of growth in GDP to number of jobs available is an “iron law” of economics.

            If there were any politically possible way to reduce greenhouse gas emissions, somebody would by now have figured it out. Political limits are every bit as powerful and fundamental as the three laws of thermodynamics. For example, can you think of any possible way to get China to stop its very rapid increases in both production and consumption of fossil fuels?

      • Don Stewart says:

        Gail
        On the last ASPO webinar we heard Art Berman say that tight oil, currently at a little over one million barrels per day, will probably never exceed two million barrels per day. There is also a discrepancy between Texas Railroad Commission data and EIA data-the RRC data does not show increasing production in Texas, despite the Eagle Ford tight oil. Art also said that only one county in the Eagle Ford had clearly profitable wells. A day or so later, Occidental, which pioneered tight oil production, dropped out of the Bakken play, and gave as reasons many of those covered by Art. (I am not an oil expert, so take all this for what it is worth.)

        Don Stewart

        • I’d like to wait and see a bit, or maybe do a little more investigating. I am not sure exactly who is right.

          When technology is changing rapidly, it is possible to jump to wrong conclusions by looking a year or two old data. Also, one concern I have with Texas Railroad Commission data is that it may not be complete until a few months after the date of drilling (but I haven’t studied this enough to see whether this is the case here–missing recent information is a problem with insurance data, and can lead to misleading conclusions about how recent experience compares to older experience).

          One thing I find disturbing is that consulting firms come up numbers that are more in line with EIA data. This is a graph the EIA posted in March.

    • wotfigo says:

      Don, The last thing in the world we need is more petroleum engineers extracting more fossil carbon.
      We need engineers to extract the carbon from the atmosphere to prevent catastrophic global warming. And we need this real soon (see Fatih Birol’s recent comment on 2 degree warming http://www.desdemonadespair.net/2012/05/door-to-2-degree-temperature-limit-is.html ) ,
      We need Engineers to ramp up sustainable carbon free energy sources. And we need economists to manage economic degrowth.
      As long as we follow the mantra of growing GDP we will continue to destroy the planet & our own civilisation
      Kevin.

      • Don Millman says:

        There is an immense gap between what I think will happen and what I believe SHOULD happen. I have been writing about what I think will happen–an extension of Business As Usual for the next twenty years or more. Of course, this is a path of folly, but for political reasons I am pretty sure that we will follow that path.

        • wotfigo says:

          Don, Sadly I agree with you. As the climate talks in Bonn fail the consumption of coal reaches new levels with global CO2 emissions at a new high. see http://www.desdemonadespair.net/2012/05/global-co2-emissions-hit-record-in-2011.html We will burn every last chunk of coal to keep the economies of the world going. Sadly BAU to the end.

          • Don Millman says:

            There is nothing worse than coal for generating electricity. Work the numbers however you like, coal is more evil than nuclear energy. Not only does coal add to the CO2 burden in the atmosphere, it emits particulates and mercury among other nasty elements and compounds. The bad results at Fukushima are a comparative drop in the bucket compared the amount of coal burnt just in China alone.

            IMO, we will probably make the Faustian bargain and do a rapid buildup of nuclear energy plants when the cost of coal about triples (in real terms) from where it is now.
            I am no big fan of nuclear energy; my own philosophy is to conserve, to economize, then economize some more. For example, yesterday in the Twin Cities temperatures went up to 94 degrees with high humidity. I did not run my air conditioner at all; indeed I did not even use my fan.
            We are not in a dilemma: We are in a trilemma.
            1. Conserve drastically (political poison)
            2. Build more nuclear plants (politically acceptabe in some parts of the U.S., e.g. South Carolina.)
            3. Produce considerably more coal for coal-fired electricity (Politically acceptable except for a few states such as California) The humongous costs of burning coal are mainly negative externalities, which means that traditional accounting ignores these extremely large costs. My forecast: We (the globe population) will be burning twice as much coal per year by the year 2025 than is being burned in 2012. To some extent, many regions will become like those in the huge cities of China, where people suffer a multitude of illnesses from breathing in the pollutants caused by coal burning.

  3. kiwichick says:

    gail
    re usa finances isn’t the biggest current spend on killing people, ie the military

    surely that spend could be reduced

    • donsailorman says:

      Compared to military budgets since 1945, current U.S. spending on the military is well below average. The budget problem is entitlements (especially Medicare and Medicaid), not military spending. Just check the numbers.

      • David Harney says:

        Hi Don,

        Your military budget statement may be factually correct, but I don’t think your conclusion is the only way to look at this. There are many other factors to consider – starting with the level of taxation. It is undeniable that we have experienced better economic times in past periods when marginal tax rates were much higher (however, this can really lead to a very intense debate that I’m not qualified to deal with). Then there is the issue of wealth equality and how various societies/cultures/nations have fared when wealth is shared or not. It seems in vogue to denigrate the contractual agreements of social security as some kind of greedy “entitlement”. I suggest that violating these contractual agreements for the sake of more wealth accumulation by a minority is a risky undertaking.

        And then we have the military expenditures themselves – I’d suggest that a measure of relative spending is not the right perspective. The broader question is how should the USA fit into the world community in the most optimal manner both for our own self interest and the interests of the planet (or more personally, our great grandchildren)? I’m not at all convinced that our military budget serves our interests as the best possible investment of our capital to achieve our long term stability. I think we need much more creative thinking as regards our foreign policy.

        • Don Millman says:

          I completely agree with your statement about military spending being misallocated. For example, the F-35 is a trillion dollar disaster. It is out and out folly if you know much at all about the history of warfare. The Navy should have about half the number of aircraft carrier task forces than it currently has. However, IMO, the U.S. Navy needs about triple the number of small fast boats and ships than it now has. We need a fleet of about three or four times its present size of minesweepers–which can be made of wood and skippered by a Navy 1st Lt. Also I think we should have almost as many World War 2 style PT boats, the same kind that JFK commanded. They are very fast and are made out of marine plywood.

          After reading many many books on the subject, I am convinced that the U.S. needs to have a strong navy. Note that in the Constitution, the creation of a Navy department was written into the document. However there is no provision for a War Department in the U.S.
          Constitution. (Before there was a U.S. Department of Defense there was “the War Department”–don’t recall when the name change was made, but it would be easy and interesting to google to find the year.)

    • According to page 208 of the 2013 budget, Outlays for 2011 were as follows:

      Defense 699 billion
      Non-Defense 600 billion
      Mandatory Programs (Social Security, Medicare, Unemployment, etc) 2,073 billion
      Net Interest 230 billion
      Total Outlays 3,603 billion

      For Receipts We Have:

      Individual Income Taxes 1,091 billion
      Corporate Income Taxes 181 billion
      Other Taxes ex Social Programs 212 billion
      Social Insurance and retirement Receipts: 818 billion
      Total Receipts 2,303 billion

      The shortfall is 1,300 billion.

      Mandatory programs paid out $2,073 billion, but only collected $818 billion in receipts, so generated a shortfall of 1,255 billion, which is pretty much the whole deficit. Even if we could get rid of the entire 699 billion outlay for defense, it wouldn’t fix the deficit problem.

      • David Harney says:

        Hi Gail,

        I don’t know if it is your intention or not, but you seem to be supporting a particular conservative political agenda with your budget analysis and comment. It seems to me what is missing here is a perspective that looks at all sides of the issue. Why do we need a military budget that is almost bigger than all the other military budgets in the world? Why don’t we collect more taxes when the wealth inequity factor is one of the worst in the so-called “developed” world? What kinds of measures could reduce medical costs when we know that Medicare’s administrative costs are about one third of private insurance administrative costs? Why is it in such vogue to hate government when some of the best places to live on the planet have a very healthy government-citizen relationship? There are many such debates that we are simply unable to conduct in a reasonable fashion due to ideological stances.

        • Hi two wheel Dave,

          In today’s game of American capitalism, it is important that the surfs don’t understand the value of their labor. The haves need to cook the books to make it appear that the surfs are over feed. This maximizes the haves ownership.

          America’s problems are not mandatory entitlements which have been bought and paid for with hard labor. Rather it’s the use of fear and religion on the masses to accept the control of the haves that is destroying the middle class. Education and a regulated free market is what America needs, not home schooling, flag pins and magnet ribbons on their Toyota’s supporting the troops.

          Name me a CEO who can not be replaced or makes their large income without the use of others labor ? That’s right, they need us worker bees for them to be wealthy, They also need to go back to kindergarten to relearn how to share and end their personal greed.

          America’s elite have shipped the goose that laid the golden eggs offshore. Entitlements bashers need to stop and realize how America got into this mess.

          Oh, ya. 35 mph max for a better tomorrow

          • One of the issues now that I see is that with globalization, lower level workers are effectively competing with workers from around the world. These workers form elsewhere have lower standards of living. They often come from warmer countries (including China and India) that really do not need much heating or cooling, so people in these countries can have much less substantial homes, with virtually no heating or cooling, and still be relatively comfortable. They can also use bicycles year around, without problems with snow. So their cost of living is much lower than ours. These countries also get their energy use from coal, and provide little in retirement and health benefits. Our workers cannot get along competing with these workers.

        • I didn’t intend to say anything one way or the other about military spending.

          Entirely getting rid of the military program does not look like it would be sufficient to get rid of the deficit problem.

          People shooting at other people seems like an extremely stupid thing to do. As a woman, I could never understand why we would have a military operation to begin with–it is more of something men have an interest in. The issue that is problematic though is that as long as the armed conflict is not occurring locally and damaging our own infrastructure, spending on military seems to be very much a type of “stimulus” spending. It offers jobs and promise of higher education to young people who are often the least educated and lowest on the socioeconomic ladder. Purchase of munitions, airplanes, and other supplies stimulates the economy, both directly and indirectly, even though it is with goods and services of dubious value. Much of the materials are things we make ourselves rather than outsource. Also, somehow the United States has managed to buy far more goods and services from abroad than it exports, since the 1970s. Military spending seems to support this as well.

          So while reducing military spending would be a good thing, it is not without its downside. As it becomes clear that we cannot support everything, I expect military spending to shrink.

      • tmsr says:

        Social security was self supporting before the payroll tax rate was lowered from 12% to 10%. It is still close to self funding. And has 2500 billion in the “bank”. It is the medical program that is not funded.

        • You are right, the medical program is a lot worse off than Social Security, and that is a big part of the problem. And lowering the combined employer/employee tax rate from 12.4% to 10.4% is another part of the current funding shortfall. The disability portion of the program is underfunded, and of course unemployment and other programs don’t have much/any funding at all. So maybe I shouldn’t say Social Security–it is all of the programs rapped around Social Security. And as Social Security payments go up with more baby boomers retiring, they are still going to hit the calculations.

          The US government accounting is different from that of Social Security–its accounting is on a cash basis while Social Security is on an accrual basis. The fact that Social Security has 2.6 trillion of IOUs in the bank doesn’t really help on a cash flow basis, except to the extent that there is an interest payment credited. Thus, if there is a shortfall, it needs to be made up taxes, or it will show up in the US deficit.

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  5. Gidon Gerber says:

    The work on planetary boundaries by the Stockholm Resilience Centre may be of relevance to this discussion.
    (http://www.stockholmresilience.org/research/researchnews/tippingtowardstheunknown/thenineplanetaryboundaries.4.1fe8f33123572b59ab80007039.html)

    • Thanks! One of the reasons I put the post up was to get some input from others on what items I am overlooking, from reliable sources. The list you put up includes nine planetary boundaries:

      Stratospheric Ozone Layer – Montreal Protocol seems to have circumvented immediate problems.
      Biodiversity – High recent rates of extinction
      Chemicals Dispersion – Emission of persistent toxic chemicals at sublethal levels (sounds like my “pollution” issue)
      Climate Change
      Ocean Acidification
      Freshwater Consumption and the Global Hydrological Cycle – Humans are using too much of the fresh water, interfering with the normal cycle
      Land System Change – Reduces biodiversity and impacts water cycles (This also leads to erosion, which they didn’t mention)
      Nitrogen and Phosphorous Inputs to the Biosphere and Oceans – Impacts of fertilizer
      Atmospheric Particulate Loading – Increase to particles in atmosphere, affecting climate and health

      • Don Stewart says:

        Gail
        I know an MD living in a 12X12 (144 sq ft) with no heat, no air conditioning, no electricity, no running water, right here in North Carolina. She could not build her house legally because of code restrictions. So she promised that she would not live there and the house is classified as an agricultural outbuilding. She also keeps her income low enough that she doesn’t have to pay income taxes because she doesn’t want to support the war machine.

        I think that the flat statement that ‘Americans can’t compete’ is wrong because it fails to consider all the insanities which make it very difficult for poor people to function. And also because our extreme inequality in income makes it easy for the super rich to buy up the essential resources that the poor people need–such as land. I will also agree that most poor Americans are not nearly as flexible as the MD when it comes to defining ‘a good life’.

        But I think that the systematic destruction of the factors that make it so hard to be poor in the US should be at the top of any agenda. Sharon Astyk points out that if you make 34,000 dollars per year, you are in the global 1 Percent. But if you make 34,000 dollars per year in Connecticut you are likely to be poverty stricken. Asking ourselves how that can be, and whether it must continue, should be one of our priorities.

        Don Stewart

  6. Paul Stahnke says:

    Curious and looking for a few answers…

    I get the Social Security shortfall in the US, but wasn’t the money collected and set aside for it spent on general budget items due to low taxation rates and no other funding options? Or, was there simply inadequate funding from day 1? And/or, was the whole plan based on tooh fairy growth projections? From an outsiders view it looks like it got raided and is now demonized to hide this fact.

    As an aside, as a Canadian my eventual cpp (Canada Pension) will be about 1/2 of my sisters Social Security (WA resident and US Citizen), yet I have worked more years and paid into CPP longer and more rigorously (working male with no family breaks). Our pension plan is supposedly quite solid, excluding the unforseen, of course. It also helps to have decent universal single payer health coverage and low prescription prices…so I suppose the payout doesn’t have to be as large.

    Thanks in advance.

    Paulo

    • Don Millman says:

      Social Security has always been a “pay as you go” system. When Franklin Roosevelt and the New Deal Congress during the early 1930 jointly created Social Security, there were sixteen workers paying into Social Security for every person receiving benefits.

      Currently there are approximately 2 workers paying into Social Security for each person receiving SS benefits. As the Baby Boomers leave the labor force and start receiving SS benefits, clearly the financing of Social Security will have to be drastically altered. We have known that would happen for more than twenty years, but for the last two or three or maybe even four decades, Social Security has become the “third rail” of U.S. politics. In other words, touch it and you die.

      IMO, the most intransigent force fighting against change is the institution of government. Both Plato and Aristotle knew precisely why various forms of government tended to self-destruct over time. Suggestions for further reading: Plato, “The Republic,” “The Laws,” and Aristotle, “Ethics,” and “Politics.”

    • As I understand it, pretty much all government pensions world wide are close to “pay as you go”. In other word, today’s workers pay for today’s retirees. The idea of prefunding doesn’t really work, because the dollar amounts get to be so massive that they would overwhelm stock markets and bond markets. The issue gets to be simply “How much does it cost to pay for today’s pensions and health care for seniors?” and “How do we divide up the cost?”

      Funding on this basis is, in a sense, very safe, because there is none of the speculative aspect of traditional pension plans. Traditional plans put stocks and bonds and perhaps other investments into a fund. Contributions are made based on actuarial assumptions of how many people will contribute for how long, how many will die when, and how much the fund will earn. The assumptions that actuaries made regarding how much funds will earn have, in retrospect, proven to be way too high. (My background is as a casualty actuary, working with Medical Malpractice, Workers Compensation, and other “casualty lines”. I am not a pension actuary, so I have seen these things only from a distance.) In the past, some pension plans assumed average rates of return of 10% per year; I understand that these assumptions are more in the 8% or 8.5% range now, but this is still far higher than bond interest yields.

      There was supposed to be a bit of prefunding with the US Social Security system, because of the problem with the baby boom coming about now. It looks to me that the benefit of this prefunding has pretty much been lost, though, because the money has been spent on other things. What happens is that Social Security collects the money from workers and employers according to the schedule. If there is an overage (which there was for quite a few years) the excess is simply used for other purposes, and a non-salable government bond issued instead. Since the government guarantees that it will return the money it too, the money is supposedly “100% safe”. This is where the statements that the program is funded until the year 20xx come from–by including estimated future contributions plus government bond backing. This is a link to a recent report on Social Security Funding.

      The federal government budget rolls together all of the “regular” government spending plus the “entitlement” programs, funds the necessary shortfall on a “cash” (pay as you go) basis. In early years, there were excess funds from Social Security, which were spent, and replaced with the bonds mentioned earlier (which are not included in some estimates of the US debt). Now, we are getting to a shortfall situation for Social Security (OASI), adding to total taxes needed.

      I don’t know how the funding in Canada works. If the promised benefit is lower than the US, it is likely easier to fund. Medicare is a big part of US problems, because doctors tend to over-treat patients (my view) especially in the last year of life, when it is clear that they are headed downhill, and there is little that can be done.

      • Don Millman says:

        I predict that over the next twenty to forty years the internal rate of return on assets in pension funds will be in real (corrected for inflation) terms either 0% or somewhat below 0%. In my strong opinion, the pension actuaries who came up with 8.5% or 8% simply failed to study American economic history–or if they studied it they did not understand it. I further predict double digit inflation within ten years. I have studied a great deal of American economic history, and I strongly recommend the book by Milton Friedman and Anna Schwartz titled “A Monetary History of the United States.” (I may be slightly off by a word in the title, but if you search at amazon.com just under “Friedman Schwartz” they will quickly present you with the title and price list for used copies.
        The book is quite readable, and they rely on simple arithmetic rather than fancy math. IMO, this is the most important book on economics and the history of U.S. monetary facts and policies that was published during the second half of the twentieth century.

        Another good book is “4,000 Years of Inflation,” though I cannot recall the author.

        • At least some of us casualty actuaries thought the pension actuaries were off in never-never land. I think that many of the pensions assumptions were decided quite early, not long after WWII, when real rates of return were higher and when inflation rates were higher. The rate of return was supposed to include both. I know for a while, pensions moved money from bonds to stocks, arguing that if bond returns were not high enough, stock returns would make up the shortfall. Once a high rate of return is assumed, it is hard to bring it down, because it means big increases in funding for the organization with the plan.

          I left actuarial consulting when I decided to write about the issues we are facing. The firm I worked for (Towers Perrin, which is now Towers Watson) did both casualty and pension consulting. I didn’t think my views would be appreciated, especially by those on the pension side of things.

          • Don Millman says:

            Divergent views are never welcome. I twice failed my oral examinations for defense of my Ph.D. dissertation because I called the shots as I saw them and not according to the conventional wisdom. For example, I claimed the long-run Phillips Curve is vertical, which was heresy back in 1969. Of course, now the conventional wisdom has changed, and all economists (with no or tiny exceptions) claim the Phillips Curve in the long-run is vertical. Another claim I maid was that a very well known economist (maybe a Nobel Laureate, I do not remember) had written an artical in which he had differentiated a discontinuous function–which made the whole artical bunk. Unanimously, my committee said to me: “You can’t say that!” But I am much happier being honest without a Ph.D. than getting down on my knees and bowing to dogma. Oh, one other thing: I asserted that Modern Portfolio Theory (MPT) is bunk. That was a direct attack at a core belief of professors in finance during the 1960s.

          • Don Stewart says:

            The only two ways society can ‘save’ value to pay out later are:
            1. creating a long lived capital good such as a house
            2. creating debt in the younger generation to be paid to the older generation.

            For example, an older couple may have built a house and paid for it and plan to live in it when they retire. For simplicity, let’s assume they do no work after they retire. If the house needs maintenance, they must call a working person (plumber, electrician, carpenter, etc.) to do it for them. Since they are creating nothing in retirement, they have nothing to trade for the work. Unless they begin to sell off the house in the form of a home equity loan and the bank gives some money to the worker and keeps title to part of the house.

            Alternatively, the older couple may have collected some promises to pay from the government or private business (social security or pensions). These are implicit debts owned by the younger generation. So the younger generation will be taxed (or will have their wages reduced by the private company) in order to give money to the older couple so that they may pay for the home repair.

            If something new is being created (e.g., a fixed leaky pipe or a repaired house wiring), then it is obvious that the working generation has to do it, and the retired couple have nothing to trade unless they have managed to collect promises to pay which are owed by the working generation.

            If we think of the physical flows, it is obvious that the workers support the retirees. It gets obscured by financial instruments–but that doesn’t change the physical reality.

            In a traditional society, the retired generation raised the working generation and relies on family ties to encourage the working generation to do the hard work. Usually the retired generation also helps out with child care and harvest season on the farm and the like.

            I visited an Amish community many years ago. At about the age of 45-50 the older couple sells most of their worldly possessions at auction and moves upstairs in the farmhouse. The younger generation takes over responsibility for running the farm, with the older couple helping out–but not working as hard as they did when they were 30.

            As financial instruments and government promises fail, I predict we will see a re-emergence of the traditional model.

            Don Stewart

            • All of the current generations create a problem, though. I know a woman in her mid-80s, who until recently was living with her daughter and son-in-law (in their mid 60s). The son-in-law died, and the daughter told the woman in her 80s to move to a retirement home, so the woman in her 60s could move in with her own daughter and their family.

              It is fairly easy to have two generations of retirees, given how long many people live now. This messes up the traditional model. If nothing else, it gets to be too expensive to take care of so many older folks, unless they do a reasonable share of the work as well.

            • Don Stewart says:

              Gail
              I think one big mistake is that people listen to all those annuity salesmen talking about how you need a lot of income when you retire. If you have no debts, and you are living with one of the children, how much do you need? That impressed me about the Amish. They didn’t have very much stuff when they were 30, but they got rid of most of that when they moved upstairs. And they were definitely helpful–just not running the farm or getting up at 4am to milk the cow.

              I think we need to make a careful distinction between what people will vote for in terms of politicians’ promises and what they can adapt to and live a reasonably happy life. We make things very much harder on ourselves and others when we rigidly adhere to previous, now unattainable, standards.

              For example, a friend of mine–who is poor–lives in a rented house with a shed out back. He met a homeless man through a mutual friend. The homeless man isn’t addicted to anything–he’s just down on his luck. He needs a place to stay. My friend let him stay in the shed at night. Then a neighbor saw the man leaving the shed early in the morning and called the police: ‘black man with hood snooping about’, etc. Neighbors get in an uproar and the landlady is furious. My friend explains that the man has nowhere to go and is diligently looking for work and has good character references. Neither the neighbors nor the police will listen. So the man is driven away.

              These kinds of senseless persecution are going to make the Long Descent just that much more difficult.

              Don Stewart

          • Don Millman says:

            One extremely important but little known fact is that the cost of living adjustment to Social Security is capped at 3 1/2%. That means that an inflation rate of 10% would enormously reduce real Social Security benefits in only five or six years. I expect this scenario to happen.

            Medicare has compensation to providers rigid limitations. As inflation approximates 10% per year the inevitable result is a rationing of care by Medicare. In my strong opinion we will see this within ten years.

  7. Lee Smith says:

    Gail,
    Thanks for becoming a voice in the dialectic of sustainability. Actuaries have much to add to the discussion but have largely avoided it. If you haven’t seen it, Mitch Waldrop’s book Complexity lays out six transitions Murray Gell Mann identifies in the quest for sustainability. They line up pretty well with your thoughts.
    Lee

  8. robindatta says:

    The Economics wizards believe that the provision of more symbols (green pieces of paper bearing pictures of dead prestnents) which they call capital, will promote the acquisition of more resources and channel those resources into the process of their conversion to products. But exchangeability of symbols for resources and products does not result in creation of those resources and products even when a torrent of such symbols are unleashed. The squeeze is ever more critical when the master resource – energy – is constrained.

    • I think the only way that the provision of more symbols can help is in a situation such as after World War II. There were a lot of soldiers coming home, but without jobs. There was also a lot of cheap oil available, and idle manufacturing capacity with the ability to make cars to use it. By extending credit to potential buyers of cars (and refrigerators and houses), people were able to buy things that they otherwise had not saved up enough money for. The system “worked” then, because there the system was starting from a very low credit base and because there was a plentiful supply of oil and manufacturing capacity. Wages were rising, so the higher wages covered up potential problems related to offering more credit. Now we are facing a very different situation, with stagnant wages, people who already have more debt already than they can repay, and a constrained supply of oil.

  9. Hi Gail
    There is another layer of macro economic cooperation / intrigue.
    Events are still being manipulated while actors realise the ship is sinking a good salvage expert knows how to board a ship when firmly on the rocks removing its cargo of whiskey before the next high tide lifts it off.
    Whisky Galore!
    So why have I posted this link?
    Thinking cap on Gail ;¬)

    http://www.usatoday.com/news/washington/story/2012-05-18/federal-deficit-accounting/55179748/1

    • Don Millman says:

      In my strong opinion, conspiracy theories are all bunk. Why? Because it is essentially impossible to keep the conspiracy going. Please Goggle “oligopoly theory”

      • Don Millman says:

        Please Google “oligopoly theory” before you respond again.

      • Don Millman says:

        You just don’t get it. With few exceptions, oligarchies do not rule oligopolies. For example, ancient Sparta was a pure olicarchy for about seven hundred years. At no time during this seven hundred years did ancient Sparta restrict or otherwise control its oligopolies. Ancient Athens was a democracy. Sometimes it regulated is oligopolists and sometimes it didn’t, depending on which party was in power.

        If you would like to read a really good book on American economic history, try amazon.com with the search words “Faulkner American economic history” The edition does not matter.

  10. Ed Pell says:

    Gail, I would start with covering over spending by the war department. I would include the social security money that is spend for military retirement as war spending, and interest payments of the prorated part of the debt that was used for war as war spending, off budget war spending, etc I would put war spending at more like 1500 billion per year. Only then would I cover social security and medicare.

    Ed Pell.

    • Don Millman says:

      Your numbers look about right. However, for political purposes they are meaningless. Economists advise, politicians decide. It has ever been thus.

    • I agree that there are different ways of counting war spending but I find it hard to believe it would be as high as 1500 billion per year. One calculation I saw claimed it was over 900 billion, which sounds more reasonable.

      • Don Millman says:

        Gail,
        It is a question of what you include. I think all veterans’ pensions should be included. I think all Veterans’ health care should be included. I think all the interest paid on the National Debt to finance military and veterans expenses should be included. That results in a humongous number.

    • David Harney says:

      Hi Ed,

      I think the book “The Three Trillion Dollar War” (re: Iraq) makes a solid case.

      • Don Millman says:

        As usual, we agree. It is an outrage the way the mainstream media understates the true costs of the Iraq (and Afghanistan) war.

      • David Harney says:

        Dear Lucy,

        Gail’s “Our Finite World” has distinguished itself from many other internet forums by the civil manner in which most participants debate ideas and avoid personal attacks – even when we strongly disagree with some of those ideas. Up-thread you questioned my motives for challenging the role of religion in the predicament facing humanity and “our finite world”. I think it is pretty clear that human behavior is strongly influenced by our ideologies – whether they spring from economic, political, or religious beliefs. It is also clear that these belief systems are often handed down from one generation to the next without much critical examination of how well they are actually serving our current needs. One of the refreshing aspects of this forum is the manner in which most of the participants are willing to examine these drivers of human behavior without animosity. Most of us don’t think in terms of being “a nice person” by avoiding “sensitive issues” – this forum is all about sensitive issues. For example, Gail and I have some differences of opinion about the role of religion going forward, but we also have areas of agreement and I very much respect her perspective.

        I’ve mentioned before that my motive is not to offend anyone but to simply explore ideas. If I’ve chosen my words poorly on occasion and they have personally offended someone, then I apologize for that – however, I don’t apologize for trying to explore the causes of our predicament. For example, I submit that our planet can’t sustainably support a 7B -> 9B human population. If one agrees with this proposition (which, of course you may not) then I think it is legitimate to question the role of religion as regards population growth. I would argue that a truly moral religion would encourage its followers to consider this sustainability issue and adopt practices that would significantly reduce human population numbers over the remainder of this century. If a realistic human population would be something in the range of 4B, then those practices would need to be very extreme by today’s standards.

        If you have an interest in offering your opinion of the level of sustainable human population and the role of religion in getting there – and you can do so in a civil manner – then your comments will be appreciated. Otherwise, don’t expect any further response from me.

      • David Harney says:

        Hi Don,

        It’s probably impractical for you to travel to SE WI for a bike ride but the WI MS 150 is my annual challenge. If, by some chance, you could make it I’ll be your personal guide for the 150 miles over 2 days. it is a great event for a very good cause and really a lot of fun. Here is the national link and you can click on Wisconsin to get details on the ride in August.

        http://www.nationalmssociety.org/raceMap.aspx

        • Don Millman says:

          Thank you for your invitation. However I’m all booked up for June and most of July–sailing lessons, long road trip, visiting relatives, etc.

          If you ever get to the Twin Cities area, let me know. I can teach you to sail safely in only two or three afternoons.

  11. Don Stewart says:

    Farmers of Forty Centuries
    Here is a link to a PDF with the book text, written around 1910 based on intensive observation in China, Korea, and Japan.

    http://www.permaculture.org.au/files/farmers_of_forty_centuries.pdf

    I particularly call your attention to this passage at the bottom of page 74 and continuing on 75:
    Had the Mongolian races spread to and developed in North America instead of, or as well as, in eastern Asia, there might have been a Grand Canal, something as suggested in Fig. 148, from the Rio Grande to the mouth of the Ohio river and from the Mississippi to Chesapeake Bay, constituting more than two thousand miles of inland water−way, serving commerce, holding up and redistributing both the run−off water and the wasting fertility of soil erosion, spreading them over 200,000 square miles of thoroughly canalized coastal plains, so many of which are now impoverished lands, made so by the intolerable waste of a vaunted civilization. And who shall venture to enumerate the increase in the tonnage of sugar, bales of cotton, sacks of rice, boxes of oranges, baskets of peaches, and in the trainloads of cabbage, tomatoes and celery such husbanding would make possible through all time; or number the increased millions these could feed and clothe? We may prohibit the exportation of our phosphorus, grind our limestone, and apply them to our fields, but this alone is only temporizing with the future. The more we produce, the more numerous our millions, the faster must present practices speed the waste to the
    sea, from whence neither money nor prayer can call them back.

    King’s forecasts assume increased importance as we face the end of the ‘extraction’ era and search for a sustainable economy.

    Don Stewart

  12. I am staying where I don’t have regular internet access (only from my phone) so I can’t see and respond to readers comments right now. My apologies. Hopefully I will be able to find a regular connection in a couple of days.

  13. Reaching and passing our limits is not the ultimate danger we face.
    The danger lies in our collective refusal to accept that there is a limit at all. We have enjoyed a century or so of plenty (in the terms of our western developed society), now we know no other way of life. Our century of excess has allowed 7 billion people to live on a planet that can support 1 or 2 billion at most.
    In brutal terms, our lives literally depend on those very resources that are in depletion.
    Our answer to that problem is either reliance on as yet undiscovered technology, or on a diety returning to ‘restore’ the planet to pristine condition.
    As humanity enters a period of privation during the coming decades, it will become obvious that neither of those solutions are going to work. Yet we will still refuse to accept the truth, particularly among those inclined towards godbothering. That is going to set off conflict far worse than we are seeing right now, as we fight for diminishing resources in order to stay alive

    • Bicycle Dave says:

      Hi Medieval,

      we will still refuse to accept the truth

      For a long time, I was of the opinion that the most pressing need was to find a highly charismatic, high profile person to give voice to a brilliant presentation of the basic facts regarding the state of planet Earth. The belief being that a broad understanding of the true nature of our predicament would surely lead to the development of beneficial goals and constructive solutions – a kind of faith that humanity will rise to the occasion once the evidence is abundantly clear and logically convincing.

      I’m no longer very optimistic about this approach as it is becoming painfully obvious that factual evidence and rational argument can’t overcome irrational and illogical ideological belief systems. Currently, we are even hearing from some authors and pundits that focusing on these global issues is bad for our mental health – we are advised to focus on happier thoughts.

      I always find it fascinating how some people are able to employ facts, reason and logic to accomplish such an extraordinary feat like travel to the moon, and yet can’t (as you mention) accept the truth about a simple concept like “limits to growth” or as you also mention ” that there is a limit at all”.

  14. eugene12 says:

    I continue to be amazed at the misrepresentation of the “Social Security problem.” And I fully understand the concept of “mandatory/entitlement” programs but “Social Security” is the predominant word. Why is it so called intelligent people refuse to present a problem for what it is. Social Security was not a pay as you go proposition. Why do you continue to ignore the 2.7 trillion or so dollars that were collected, spent and, consequently, owed to the people who paid it in. It’s the repayment of the money the country borrowed from the Social Security fund that is the problem. To state it otherwise is pure fiction and used only by those who have an agenda. As it is represented in this article as well as by many of the comments, it appears to the THE budget problem. As far as I can tell the budgetary issues are everywhere, and I mean everywhere, in the system. Singling out a particular area is an error and selecting out segments of the population as scapegoats when the problems are system wide. Everyone of you commenting paid less in taxes as you spent my money. Oh, I know, it wasn’t “you”. Funny how people avoid the concept of republic or democracy and blame the “government”.

    In addition, I find it interesting that people continue to use government figures to discuss the budget problem. There are considerable numbers of military programs that are buried in other budgets. Those who take the time to seriously investigate the military budget come up with figures well over a trillion a yr.

    If we are going to discuss the budget issue, ALL of the budget needs to be on the table. The vast number of “subsidies” given to wide segments of the population such as farm subsidies, pork barrel projects, off budget military programs, housing interest deductions, etc. need to be addressed. The list is long.

    I can only assume the real complexity of the US budget is either beyond the comprehension of the average American or simply too difficult to address on a one shot basis. America has a long, long history of throwing those most vulnerable off the boat first and rationalizing it with arguments that appeal to the resentments of the voting public.

    • You are mistaken, I am afraid. I have talked to the actuaries involved with funding Social Security, and the intent is pretty much “pay as you go”. While there is a “little” $2.7 dollar IOU on the books of the Social Security Trust Fund, this IOU comes nowhere near putting it on a true “prefunded” basis. It is intended only to smooth out the big jump in funding that comes because of the big increase in births after World War II. But even that seems iffy to me, because all programs are rolled together and treated on a cash basis in the Federal Government funding. Thus, if there are excess funds relative to cash payments collected by Social Security (as there were in the past) they are used for other programs, and the IOU (which is now $2.7 trillion) put in their place. This is the graph of income and outgo I showed in an Oil Drum post a while back.

      Regarding military budgets, I believe that it is quite possible that part of the $2.7 trillion funds collected for Social Security funds were used for things like Military programs (I haven’t looked in to the numbers). It had already been collected, but wasn’t really needed because the federal government in total is on a “pay as you go basis”, so was easy-game to be spent for pet projects. Now that there are no longer excess Social Security funds collected, it becomes a problem.

  15. Don Millman says:

    Is there any chance we could get together in August?

  16. OldStone50 says:

    The problem of supporting non-working members of society (a.k.a. social security, in all its forms) is not caused by age demographics, although there may be some degree of correlation. Rather it is due to one or more of three problems: product distribution is skewed; and/or per capita productivity is insufficient; and/or population size exceeds productive potential.

    The skewing of product distribution is self-evident.

    If people capable of working are denied the opportunity to work, or refuse to work, then per capita productivity is below its potential.

    If there are too few resources for people to work with, then clearly population size is too large. (It may also be too large on the basis of other factors as well.)

    I would argue that we face all three problems and that the population size problem is the most devastatingly pressing one, followed by poor product distribution systems. I suspect that if these two problems could be ameliorated, the opportunity to work/refusal to work problem would largely solve itself.

    There is a tendency to become obsessed with the existing financial/actuarial structures when discussing how to support non-working populations, but if we forget the underlying problems then there is a real possibility that any financial/actuarial solution we come up with, whether inside or outside existing structures, will fail to address the underlying causes.

    • Don Stewart says:

      I think that we also have issues which are seldom mentioned. For example:

      http://www.sciencedaily.com/releases…0521163853.htm

      Commonly used pesticides can change the epigenetics of each succeeding generation and create problems. Why are we seeing so much more chronic disease now than we were even 15 years ago? It isn’t because the diet has grown dramatically worse (it’s as bad now as it was then). I suspect that one thing that is catching up with us is the epigenetic inheritance which now predisposes the young to disease. And so we get enormous numbers of veterans with PTSD and we get large numbers of schoolchildren with mental problems and we get huge numbers of working age adults going on disability. ALL of them aren’t lying. We have to admit that we have created an environment which fosters sickness.

      Don Stewart

      • You are right. I think the environment that fosters sickness is especially case in the United States. If everyone had to bike to work or school, it might partly counteract the bad food. But without enough exercise, the bad food issue is especially a problem.

    • I agree that the at a certain point, the problem is not just financial/actuarial, and that we are probably well past that point. I am not sure if I would exactly agree with your breakdown, although it is an interesting way of looking at it.

      If each person could support, say, 50 others, and if having unemployed members of society were not a problem, then the working few could support the unemployed many. Having a fossil fuel subsidy seems to make it appear that the working few can support more than they really can. Without a fossil fuel subsidy, though, this ability for a few to support many others will disappear.

      One of our problems is that having many people working at tilling the soil tends to lead to erosion. Having many people working at extracting fossil fuels leads to depletion of the fossil fuels available, and having many people pump water from aquifers tends to lead to depletion of these aquifers. Even if having people work at various jobs seemed to work in the past, it can stop working.

      • Don Stewart says:

        Gail
        You ought to just glance at Farmers of Forty Centuries, written a century ago. In it, FH King from Wisconsin travels to Japan, China, and Korea to try to figure out why the Asians were able to sustain agriculture when, in the US, agriculture was an extractive industry.

        You will find that sustainability was achieved by having a very large percentage of the population engaged in intensive agriculture with an obsessive focus on preventing erosion and improving soil fertility.

        This solution is probably NOT what anyone wants to hear because it implies hard, physical work combined with enormous amounts of knowledge. But it can be made to work to support a large population (400 million at that time in China). So far as I know, nobody has proposed a better post-fossil fuel solution.

        Incidentally, there was still a surplus of labor. Ship passengers, for example, were besieged by men offering to carry baggage. And wages were very low. Perhaps the population which would have avoided the surplus of labor would have been 300 or 350 million.

        Don Stewart

        • Thanks! I think besides the obsessive attention to taking care of the soil, their probably has to be a serious focus on keeping the population low, so that food supply will be adequate, even in years with poor weather. Trying to figure out how to keep population down is a big problem, though, because no one wants to think about the possibility that tomorrow will not be as good as today.

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