We see endless fighting between the Democrats and Republicans about the budget, but no real explanation as to what the issues are. My view is that there is a structural imbalance between government revenues and expense that is likely to get much worse in the years ahead. This structural imbalance is related to too few people with jobs, growing limits on oil supply, and the inability of the economy to continue growing as rapidly as required to maintain our current financial system. Let me explain the issues as I see them.
Too Few People with Jobs
Between 1970 and 2000, the percentage of the US population with jobs rose, at least partly because more women entered the work force. Since 2000, the percentage of people with jobs has been declining as jobs are increasingly sent to offshore locations, and economic growth stagnates.
Clearly, it is easier to keep a balanced budget when the percentage of the population employed is rising than when it is falling. When it is rising, there are more people to pay taxes, and fewer needing support benefits of various types. The reverse happens when the percentage of people employed is falling.
The Connection Between Jobs and Oil Demand
If we look at historical numbers (Figure 2), there seems to be a close tie between the number of US jobs and the amount of oil consumed in the US. One connection is that jobs often use oil in some way–operating machinery, or transporting goods. Anther connection is that people with good paying jobs can afford to buy goods and services (like vacations) that use oil, so the demand for oil stays high, even with high oil prices.
Unfortunately, even with rising prices, the amount of oil extracted in the world has been been approximately flat since 2005. The share of the oil that has been going to the US and other OECD countries has been falling.
Figure 3 shows that the countries that have been able to obtain an increasing share of oil are the “Other” category–(that is, excluding Former Soviet Union and OECD countries). These countries include OPEC oil exporting countries, plus China, India, and many other countries who use little oil on a per capita basis. Major oil importers like the US have tended to see recession as oil prices rise, cutting back demand for high-priced oil, and the jobs that go with this demand. Economist James Hamilton has determined that in the US, 11 out of 12 post-World War II recessions were preceded by oil price shocks.
When we look at US per capita oil consumption, we see it has been dropping since 2005, and especially since 2007 (Figure 4). This is as expected, based on Figure 3.
Demand for cheap oil is quite different for demand for expensive oil. Many potential buyers want and can use cheap oil. US infrastructure was built on cheap oil. Expensive oil tends to be a problem, causing recession for countries that import very much of it. The risk is that rising oil prices will again cause major recession among the major oil importers, and with it a further drop in demand for oil, and more loss of jobs.
Unfortunately, there is good reason to believe that there will not be a major uptick in oil supply that will ease the high price problem. The International Energy Agency says, “The Age of Cheap Oil is Over”. The Wall Street Journal published an article called IMF: ‘Increased Scarcity’ Ahead for Oil Markets which says:
Governments should brace for “increased scarcity” in global oil markets and the risk of additional sharp price increases in the coming years, the International Monetary Fund warned Thursday.
Private Industry Wages and Salaries Have Fallen
If we look at private industry wages and salaries (Figure 5), we find that as of the latest available data (February 2011), total wages and salaries were still below peak levels in the first part of 2008. These numbers have not been adjusted for inflation. If they were, the fall would be even more pronounced.
If there are not enough private industry jobs to go around, various approaches can be used to try to remedy the situation. One possibility is transfer payments, like unemployment insurance, Medicaid, and Social Security. Another is by hiring more government employees, including state and local employees. In this graph, the red line is private industry wages and the blue line is transfer payments plus government payrolls. While there are other sources of tax funds than private industry payroll (taxes on businesses, for example, and taxes on government employees’ wages) the narrowing of the gap between these two lines since 2008 is a major reason for the current budget problems.
Social Security Funding Issues
Social Security benefit payments have been escalating rapidly, at the same time that contributions have declined, since so few people have jobs (Figure 7). Interest credited by the Federal Government has been flat recently, because of declining interest rates. Despite all of the assurances the government makes, Social Security is on close to a pay-as-you-go funding basis. Each year, the government takes whatever excess revenue has been collected from recipients, and uses it for whatever purposes it deems fit (having nothing to do with Social Security). It replaces the funds it takes with non-tradable IOUs, which don’t show up in most compilations of US debt. It is the presence of these IOUs that allows the government to say that the program is funded until some distant year. See my Oil Drum post from a year ago, called Social Security and Medicare Funding Issues: Even Worse when One Considers Resource Constraints.
In calendar year 2011, Social Security contributions were reduced from 12.4% of taxable wages to 10.4%, a reduction of about 16%. This drop pretty much guarantees a funding shortfall for Social Security (even with investment income on the IOUs). This shortfall won’t show up in budget calculations, however, because it is an off-balance sheet item.
Growing Mismatch between Tax Revenues and Expenses
While government receipts have been rising, spending has been rising much faster.
Government receipts and expenditures shown in Figure 8 are broadly defined–they include state and local programs as well as federal programs, and programs like Social Security as well as ones that are budgeted yearly. I have used data on this basis, because all the programs are interrelated. If the federal government cuts back on its funding, state and local taxes will need to be higher.
Figure 9 shows that compared to private industry wages, government receipts have remained relatively level since 2000. What has grown is government expenditures (broadly defined, including state and local government expenditures, and including Social Security), relative to private industry wages.
Slight of Hand Approaches
There are various slight of hand approaches that governments can use to improve reported economic growth.
GDP is a measure of how an economy is faring. It can be temporarily increased in many ways: by debt-based government stimulus spending, or by artificially low interest rates, or by excessively loose lending standards, allowing people who cannot really afford to buy homes to do so. It is difficult (or impossible) to tell exactly how much benefit actions such as these have.
Theoretically, there ought to be a multiplier effect, beyond the direct additional spending. For example, if additional federal government spending allows a teacher who would not otherwise be employed to have a job, she will probably by more goods and services than she would have without a job, and the people who obtain money for those goods and services she buys will again spend the money she gives them.
In Figure 10, I made a rough estimate of what the effect of additional debt might be on US GDP, assuming a multiple of 1.0 to 2.0 is appropriate with respect to additional federal debt. With either multiple, the effect is quite large. Other indirect stimulus attempts, such as Alan Greenspan’s artificially low interest rates after the Dot-com bubble, and the later the encouragement of loose lending standards by banks, could also be expected to help reported GDP.
I would consider Quantitative Easing (between November 2008 and June 2010 and again between August 2010 and June 2011) to be another slight-of-hand approach. According to Bill Gross of PIMCO, the effect of QE recently has been to reduce interest rates on bonds by as much as 150 basis points. Because of the low interest rates available on bonds, interest in buying other asset classes, such as buying stocks and commodity futures is enhanced. The same article quotes Ben Bernanke as talking about how equity prices have risen significantly and volatility in the equity market has fallen in response to QE.
While approaches such as these have helped keep reported growth rosy, it is hard to see how creative approaches such as these are long-term solutions, especially if things continue to get worse.
There are two trends that are easy to spot:
1. Baby boomers are reaching retirement age, and the number of people drawing Social Security and Medicare benefits can be expected to grow significantly, without adding correspondingly to the number of people paying taxes (or Social Security premiums). Furthermore, many of these people will want to sell their large homes, adding to the oversupply of homes for sale.
2. Oil supplies are likely to get increasingly tight, causing prices to rise further, until recession brings prices down. More recession can be expected to bring further job loss.
The combination of these two trends suggests strongly that the imbalance between government receipts and expenditures (shown in Figures 8 and Figure 9) is likely to get much worse in the future than it is currently. Even more exotic “slight of hand” approaches are likely to be needed, to maintain the appearance of reasonable economic growth.
Exponential Growth in a Finite World
One reason for concern is the fact that our financial system needs economic growth to function properly. Our economy is debt-based, meaning that money is created by lending it into existence. This money needs to be paid back with interest, but the interest component is not created at the same time. When the economy is growing, there is little difficulty, since by the time the loans come due, on average, there is enough growth to pay back the debt with interest. In a flat or declining economy, there tend to be huge numbers of debt defaults. Artificially low interest rates can partially fix the problem, the system really needs economic growth to function as planned.
The long term basis for economic growth tends to be fossil fuel use. Fossil fuel use has been growing for 200 years–about as long as the US has been in existence, so economists have tended to assume this growth is the natural state, and can be counted on indefinitely. Unfortunately, this assumption is not true.
If we look at a graph of world population (Figure 11) and compare it with a graph of fuel use overlaid on the same graph (Figure 12), it is pretty clear that the huge spike in population occurred at the same time as growth in fuel use (first coal, then oil, natural gas).
The reason for the connection is clear, if a person thinks about what fossil fuels, and in particular oil, are used for. Oil is used to power farm machinery; to power irrigation equipment; to make herbicides, pesticides, and fertilizer; to refrigerate food after production; and to transport food to market. If a farmer has to do all the work himself or herself, or with only the aid of animal power, his productivity is much less, and he is able to support many fewer people who are not farming. Additionally, oil is used to make many other things, such as medicines, which have allowed life expectancies to be much longer than in the past.
My blog is called Our Finite World. The world has a finite number of atoms; the amount of oil, natural gas, and coal that is economically extractable is also finite. The problem now is that we are reaching limits in their extraction, especially for oil. This causes oil production to stop rising, and prices to spike.
There is a parallel in the biological world. When organisms find an exhaustible food supply (for example, yeast eating sugars in a bottle of grape juice), their population tends to grow exponentially, then collapse, as the limited food source is exhausted. Oil and other fossil fuels enable the current very large food supply we have on earth. If we exhaust the fossil fuels that we can reach (even if this exhaustion comes because prices are too high for the economy to support), collapse in the world population can also be expected.
There are three views as to how the current human predicament can be expected to work out:
1. Continued Exponential Growth. This is what most economist assume, and what the scientist putting together climate change models assume. Fossil fuel use is expected to grow for the lifetime of the models, despite rising oil prices and investment cost. The big long-term issue is viewed as climate change.
2. Standard Peak Oil Theory. The belief here is that the supply of oil and other fuels is limited by geological factors, with economics making little difference. The expectation is that oil, gas, and coal supply will decline slowly over, say, the next 100 years or so. When Hubbert made projections of this type, he did it in the context of other fuels keeping the economy going on a “business as usual” basis, so that economics did not play a major role.
3. End to Growth and Collapse. This is my view of the major risk, in the years ahead. High oil prices are likely to bring on recession and a reduction in oil demand. The financial system cannot withstand the lack of economic growth that is likely to occur in such a situation, and many debt defaults and layoffs are likely to occur. The underlying cause is that it is becoming non-economic to extract oil–we are using more and more energy to extract oil, so that net energy from what is being extracted is dropping below the level needed to keep society operating. The result is likely to be collapse, as there are more and more debt defaults, and it becomes more difficult to keep financial institutions afloat.
If I am correct, we could see a major collapse in the next few years, relating to a significant extent to our ability to keep funding all of the programs we currently have, with a declining tax base.
We really don’t know what is ahead. Three scenarios come to mind as possibilities:
1. Somehow, political powers will figure out a way to reign in spending, by substantial cuts to military expenditures, Social Security, Medicare, Medicaid, government employment, road paving, education, medical research, and many other programs we have considered essential to date. Ben Bernanke (or his successor) will figure out a way to create major inflation, so we don’t formally default on our debt. Somehow, we will transition to a much lower energy economy through our normal political process, without actual collapse.
2. Huge infighting will continue between the Democrats and Republicans, until some outside force causes the current system to stop working. For example, it may become necessary to pay much higher interest rates because other countries raise their interest rates, and interest payments balloon. Or perhaps defaults by other countries will make it clear that the United States is in not a whole lot better shape than many of the others. If enough counties are unable to pay their debt, international trade might be cut back greatly, because countries will not trust one another to pay for goods shipped, unless potential buyers actually have other goods they are able to trade in return. Each country will attempt to go it alone, producing goods primarily based on its own resources. There may be a formal restructuring of debt, perhaps stretching out payment terms. As in (1), a huge number of programs will need to be cut back, like Social Security, unemployment insurance, and Medicaid, because of low taxes to support these programs.
3. Things fall apart. If collapse starts, the government could find itself with huge obligations in many areas, such as FDIC bank guarantees, pension guarantees, and Fannie Mae and Freddie Mac loan guarantees. At the same time, the tax base could erode further, due to more layoffs, falling property values, and falling stock market values. I can imagine a scenario similar to the dissolution of the Soviet Union situation taking place. The Federal Government might just disappear, and the individual states would be left on their own, either to go it alone, or band together with other states, and form new governments.
Responding to Our Predicament
I recently wrote a post called, What President Obama should have said regarding energy policy, in which I rough out a plan for the United States to get off fossil fuels. I also explain why I believe that what are now called “renewables” should be referred to “fossil fuel extenders” because they temporarily add a bit to supply, but do nothing to solve our long term problem. To the extent that fossil fuel extenders are high priced and require a lot of investment, I consider them to be part of the problem, not part of the solution.
I would like to see both Democrats and Republicans sit down, and figure out what the problem really is, instead of being so adamant that their own views are correct. Both sides seem to be to be significantly wrong in their views.
The Democrats should be aware that their views on attempting to help the climate are likely to make collapse sooner and more severe, and the models upon which they are basing their climate decisions assume unrealistically high fossil fuel use (see Appendix below). If collapse does occur, it likely will lead to a drop off in all fossil fuel use as well as a drop in world population. As a result, there will be less pressure on ecosystems of all kinds.
The Republicans seem to be overoptimistic as to what can be done with additional drilling, and with a partial switch to natural gas. I do not object to trying this approach, but believe optimism as to what it can reasonably accomplish should be tempered. Costs and energy used in oil and gas extraction are rising rapidly, and we too, are reaching the point where it will cease to be economic to drill, because the energy used in the process will be excessive compared to the energy of the oil and gas extracted.
Hopefully, we can find ways to mitigate the predicament we are in. I tried to lay out a rough transition plan for the US in my Obama post, mentioned above. Working on an international financial system would that is not debt based could be very helpful, if it allows more international trade to continue. The employment problem can be “fixed” if we can get workers transferred over non-fossil fuel approaches requiring more manual labor, if the economics can be worked out. I am not sure there is any “good solution,” but if all sides could sit down and understand where we are, it seems as though we would have a better chance at figuring out mitigations.
Appendix – Climate Change Estimates Using Lower Estimates of Fossil Fuels
Luis de Sousa and Euan Mearns put together an estimate of expected carbon dioxide equivalent emissions, using the estimates of fossil fuel use shown in Figure 14, as shown in this Oil Drum post. In this estimate, fossil fuel use peaks in 2018.
Luis de Sousa and Euan Mearns used the fossil fuel estimates in Figure 14 together with the MAGICC program used by IPCC modelers to estimate future CO2 equivalent emissions shown in Figure 15. If the actual situation is collapse, rather than the “Peak oil” type decline curve shown in Figure 14, the drop off in CO2 equivalent concentrations would seem to be greater and come more quickly.
Of course, climate change already seems to be a problem, and there are other reasons (such as ocean acidification) for eliminating excess CO2, so actions may still be needed. But decisions should be made in the context of understanding the full situation, including the downside if collapse is exacerbated and there is inadequate fuel for mitigation.
Social security reform whether through legislation tax law changes or privatization has been a major political issue that draws strong opinions from different demographic segments.Social Security faces the real threat of becoming insolvent because of factors such as longer life expectancies a large baby boomer population currently entering retirement age and inflation..Related Links …Youve probably contributed to this fund but will you reap the benefits?
Figure 8 says the federal government takes in 4 trillion per year. I understand where about 1.5 trillion (income tax) comes from. Where does the rest come from?
The $4.0 billion is broadly defined government, not federal government. I got my amounts from Table 3.1, from here.
There are separate tables 3.2 through 3.9 which give some breakdowns of this. Table 3.3 lists state and local taxes as $2.1 trillion. This includes sales taxes as well as real estate, gasoline, and other types of taxes. Contributions for Government Social Insurance are listed as $1.0 trillion in Table 3.1. I presume this would include social security and medicare. Taxes on corporate income (from 3.1) are $0.4 trillion.
I would have to look at these tables a little closer to figure out all the details, but you get the idea.
Thank you, now I understand.
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Gail, I agree we are facing a bracing wind of declining energy, related job declines, etc, but it seems like at least part of the employment/revenue imbalance is related to tax sheltering and jobs being transferred off shore by America’s largest money generators, the corporations. We middle class are paying our taxes and seeing our services cut while we are seeing our revenues sucked up by energy company subsidies, tax shelters, credits, etc. Doesn’t it seems like we need to put this on the table as well?
Kathryn, I agree but doubt anything will be done voluntarily in the near term to rebalance the system. In the meantime, the government + subsidized corporations will continue to bleed the host (us, the middle class) dry. My guess is they will continue to do so until the system collapses: subsidies can’t keep up with declining demand from paying customers. We’ll know this is happening when rolling blackouts become a way of life. Barring a US disaster similar to Japan, this could be years away as the lack of cheap, high quality liquid fuels slowly pushes the bulk of the middle class into poverty. Perhaps localized power stations will develop in wealthy enclaves while the suburbs evolve into something else. The spread of radiation from Japan to milk / water here in the US is worrisome.
The more we raise taxes on oil and gas companies, the faster production drops. Our infrastructure is built for oil and gas, so this is a problem.
With respect to renewables, the more we support them, the more our energy costs rise, and as far as I can see, we don’t add much to net energy. They also don’t really help our long-term energy picture. We also make ourselves less competitive with other countries, like India and China.
So my take is pretty much the opposite of the standard one. We should probably leave things alone tax-wise, or cut subsidies on so-called renewables. If they can stand on their own financially, fine, but otherwise, they don’t make sense.
If everything collapses quickly, all of this discussion may not make much difference. All of this is only a tiny piece of the total.
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The US needs to do three things
1) increase the eligibility age for social security and medicare to 75
2) close all foreign military bases and end all foreign wars and cut the DOD down to 200 billion per year
3) build out a new energy infrastructure
The first two just take political will. The third requires energy input and lots of it. But we can at least start with the existing energy surplus that we do have. You say you do not see a surplus. We will need to do things like rationing so we can divert enough energy to the build out. This will require sacrifices like car pooling (two people in a car rather than one, two generation of a family in one house rather than two houses, etc).
Of course no politician can get the money needed to be elected if they put forward these ideas. So as available export oil goes down we will ration but fail to build a new energy system and as export oil falls so will the standard of living in the US. Time to move to a location that is warm in the winter and can grow food (has water and soil).
4) Tax corporations & high wealth individuals
5) Expand electric rail both intercity & intra-city (metro & light rail)
Let’s do this through a flat tax at least for individuals which would eliminate a nice chunk of the IRS, and a huge chunk of the accounting/lawyering done for individual submitting their taxes. I’m done with regressive/progressive tax strategy discussions because while it sounds great in theory when they are done with all the special exceptions from people coming to work for the treasury paying no capital gains taxes to depletion tax breaks on my personal stake in shale gas drilling and the waste of all this administration – it doesn’t matter. Because the spiritual costs takes it over the top, it INVITES corruption, it INVITES people to say/lobby that what they do is MORE IMPORTANT than what other people do.
I’m sorry if my mother works a second job cleaning goldman’s bathrooms at night to put me through college and pays taxes, I do not see her as less important than the goldman executive paying zero taxes because he goes to work for the treasury department.
Pick your favorite pairing.
Without dabbling too very much in philosophy, let’s examine just what happens with a DoD budget reduction from its current 665ish billion (including supplementals) to 200 billion.
That is 465 billion dollars, and for all expenditures of this type 80% are personnel costs at the end of the pipeline, be it uniformed people, civilian DoD employees, or contractor employees. Defense folks are from the hard sciences (as opposed to soft sciences, not a statement of difficulty), even those without degrees (production technicians, aircraft mechanics, etc) and they are paid well.
This high pay helps some in reducing the numbers you would toss onto the sidewalk but it’s still $465 billion / say, $80,000 (incl benefits) = about 5.8 million people.
If we then toss back in unemployment costs for them, plus welfare and food stamps and utilities subsidy and housing subsidy, plus the loss of the White House and Congress to the Democrats as this particular surge in the unemployment rate would be north of 20% for one would suspect decades — it’s not clear that you really want to do this, is it?
Let’s also wonder about the geopolitical questions of military response spectrum for a DoD reduced to 1/3 its present size. It has always been very well understood, because of the personnel costs laid out above, that nuclear forces are cheap. Warheads do not require people. This inevitably translates into a response profile that eliminates options.
China sees its chance and makes the move to enslave Taiwan. What is the US response with $200Billion and no overseas bases from which to deploy force logistics? Answer: there are no options other than nuclear, and the always delightful strongly worded protest letter to the UN Security Council. Backstab Taiwan, or interdict the invading forces at their debarkation ports on the China coast with nuclear weapons.
Russia (GAZPROM) decides it has had enough of Ukrainian pipeline levies, and also had enough of Germany charging so much for its exports. They make their move. What is your profile of response options with Ramstein closed down and unavailable for force logistics? Answer: Nuclear weapons employment along the armored front, along with the always popular strongly worded letter to the UN Security Council (where Russia has a veto).
Of course, before these events unfold, the President will have been briefed that his only contingency for such things is always nuclear. His rhetoric in foreign policy speeches will need to emphasize it, in hopes that deterrence will be effective for all future moments of tension. And so you’ll have a President threatening nuclear war in every policy speech he ever gives on any foreign policy matter that ever arises. Will that win votes?
From a left wing perspective, not right wing, I really don’t think you want to do this.
The world will have to take care of itself. We are broke and can not afford to pay for their defense. Yes China and Russia and Israel may gain territory.
Correct. And given that Taiwan is not too valuable, and the Senkaku Islands are, China will be gaining Japanese territory. No real reason for them to stop there, either. Hawaii is attractive.
Stiglitz video over at Jesse’s:
In the second video, he says that “the best way to reduce the deficit (as I said) is to put America back to work.”
So if a lack of cheap, high quality oil prevents job creation, then the deficit must be inflated away, defaulted on, or simply ignored until it’s irrelevent.
Does Stiglitz say how he would put Americans back to work?
Right now, our workers are competing with China and India’s workers who are paid a whole lot less, in large part because they use a lot less oil and gas, and need less wages to support their lifestyle.
Also, goods and services over produced there are produced with electricity, made from cheap coal (with limited pollution reduction capabilities). So our goods and services have a double handicap, the wage handicap and the electricity handicap, but both are tied to energy. As oil prices rise, and as we add more expensive ways of making electricity, our competitiveness goes down further and further.
I read this comparison who is better prepared for peak oil?
1) the American who drives his used F150 pickup 20 miles to go work as a greeter at Wall-Mart
2) the Indian programmer who works for IBM in Bangalore and commutes 10 miles in a new turbo charged diesel van with 7 other programmers.
It is called competitive advantage it is what we do not have.
Thanks for the great post. Under scenario #3, could US states that produce oil seize control of their mineral rights, pull the drilling permits and renegotiate the contracts with corporations? Corruption at the local level would take over quickly if no one is answering the phone in DC.
I have no idea how things would work out with states operating on their own. It really would depend on how well interstate trade would hold up if there isn’t a common monetary system (a possibility)–also how international trade for replacement parts would hold up.
If local people can figure out a way to do extraction quick and cheap, I expect it would get done, without worrying about details like safety.
Want to see the problem? It’s not rocket science.
365 days/yr X 12,000,000 barrels of oil/liquids imported X $120/barrel (Brent closed at 126, and some imports from Canada are not priced at Brent, so 120 rather than 126) =
incrementally . . . 365 days X 12 million = 4.38 billion barrels / year
X $120/barrel = $526 billion leaving the country each year — in return for stuff we immediately set fire to.
It is patently astonishing to me that Russia and KSA don’t ally themselves and set the oil price to a number that will destroy the ability of competitors to fund their military.
Reagan & Thatcher (UK Prime Minister at the time) did exactly this to Russia (the Soviet Union aka the Evil Empire) in the 1980’s. They opened the taps in Texas & the North Sea & basically destroyed Russias income from the only foreign exchange it could get its hands on, oil. Goodbye FSU.
I bet they haven’t forgotten that.
There is considerable talk behind the public scenes of KSA and Russia. KSA is appalled that Obama threw Mubarak off the cliff, after having been a staunch US ally for 40 years. They are watching yet further incompetence by the present US government in Libya.
They do not want to be next. A Russia alliance could secure their future. In fact, it might improve it, elevating them to more than the mere subtle global dominance they now enjoy.
Just for the record. KSA participated in the drowning of Russia in oil as well, there were a lot of complicated actions towards strategic ends during the Reagan administration.
To counter some of this the current administration would need to construct some strategic goals, and then become proactive. There is a limit to post-modern philosophy in international affairs as applied to political diversity, “whatever they want” won’t work.
I think a Russian/KSA alliance would be very very scary for any administration, even this clueless one. A scarier one would be the addition of India and China to that alliance. As Mahan wrote long ago, sea denial is easier than sea control. The wild cards are the relationships with Iran and Pakistan, if Pakistan went farther into “failed state” then China would have its opportunity for reproachment with India. Only a revolution could alter the Iranian/Russian connection. China simply can’t force project without India.
For the KSA there are GIGANTIC risks here, my personal opinion is that they’ve been working with China as their hedge for years. Their “short of war” strategic move is selling oil for something other than dollars.
KSA & Libya.
The Saudi’s gave approval for NATO / USA intervention in Libya. They hate Gaddafi anyhow.
The “condition” was that the US would not intervene in the Saudi invasion, oh sorry, invited assistance, in Bahrain.
And as for a Saudi / Russia alliance remember that both these countries rely on selling their FF to the west for their income & standard of living. If they were to cosy further up to China in a China / Russia / KSA alliance then things will get real ugly real quick. I think China sees the KSA as a US oil patch & will not push that issue.
Heavens no. KSA delivers far more oil to China than to the US. China is the excellent customer of note for the Saudis, not the USA. The USA is the provider of top quality weapons that consistently outperform competition.
But if you can defund the US, then those weapons go away. A Russia/KSA alliance can raise global prices to the point where the US can’t have an economy. The Russians could hire away all the smart Lockheed folks and put them to work at MiG by simply paying them 3 or 4 times what Fort Worth can offer, while simultaneously ensuring their safety (while the Dallas area has food riots).
Russia / KSA as a new cartel has world domination written all over it. China’s growth could be managed in exactly the same way — via price choking.
If it’s played right, geology can decide the victor. It will not be the US, if the US gov’t allows it to play out.
In Amarillo late and post WWII there were many blue collar and manual labor jobs. During the summer vacations I and my high school friends flitted from job to job. I caddied, chauffeured girl scouts at age 15, built part of route 66, built Graham-hoeme plows, dug water traps (West Texas dirt is hard), worked in grain elevators emptying boxcars to feed Europe, became a garbage collector, drove a taxi, and trained as x-ray and lab technician helpers. A warm body could generally be hired within 10 minutes. I doubt that it was ever easier,
Even in the 60s and early 70s, when I was in high school, college, grad school, and on my first and second jobs, it was easy to get jobs. I got a job in high school without much difficulty, and others did too. My college room mate had three part time jobs (actually through the college), and encouraged me to work at least a little too, so I did. I got my first actuarial job by walking into a company (CNA Insurance in Chicago) without an appointment and with no actuarial exams (but I did have an MS in math), and taking an aptitude text. They said there was an opening, and sent me upstairs for an interview, the same day. I started work the next Monday.
It is precisely because we have a “complex” civilization (a Tainter type over complexified one?) that we need to strip back the layers of diffusive gobbledygook and see better what is going on beneath the stacked piles of obfuscation.
Consider the so-called “budget” battle between Dems & Republicans. More so, consider the Planned Parenthood thing.
There was a time when the activities of a physician performing pregnancy terminations in a sanitized medical office (as opposed to in a coat hanger factory) was considered a “job” and therefore that person “deserved” to get paid for it.
The Republicans (well at least the tea sipping end of that party) want to reclassify that activity as “not a job” and hence not deserving of a share in the outputs of our society.
Great post (as usual).
However, I am disturbed by how deeply you are bought into the use of the economist’s babble-talk.
If we “step back” to basics, we might see that “economics” is a determination of who gets what, and how much, out of the current and promised future productions of a society. “Economics” is also the creation of incentive to get most (but not all) of the members of the society to pull their “fair” share of the weight in making the current and promised future productions of our society society come true.
A “job” is a label attached to real or supposed activities of an individual to justify that individual’s getting of whatever share they get (a.k.a. “deserve” due to having the “job”) out of the current and/or promised future productions of our society.
As an example, consider the “job” that some recent members of a city council in Bell, California had and the “jobs” that the financial “auditors” for that city had and how much each got “compensated” for performing their fair share of such alleged pullings of their weights. Link to recent story about both is here.
So what’s my point?
You talk up above about there not being enough “jobs”.
IMHO that usage of language is a little bit on the loosey-goosey side of rational discussion. We can give everybody a “job” simply by labeling what they do as a “job”. Example: You are hereby appointing official street corner bum for the City of Bell, CA. Your “job” is to sit on a street corner and look destitute. The City will send you a monthly check for doing so. Thank you.
On the other hand, when you talk about current and future-promised productions of oil (that being merely an example of the many other things our society promises itself it will produce) you stand on much firmer ground. So maybe we can try to divorce ourselves form economist babble talk and focus instead on the questions of what current and promised future productions our society needs in order to keep going (and which it should avoid in order to keep going; e.g. production of crystal meth) and how do we get to that there state of affairs?
The real issue as I see it is that we have a complex system that we need to keep working–or else things fall apart. So somehow, we have to keep BAU going, even if it isn’t the ideal system, and uses too much oil and other fossil fuels.
I poke around and try to find what databases I can that help describe our situation. To some extent, I am limited by what data people have chosen to collect in the past.
My knowledge of what data is available is less than perfect. If people are aware of data I should be looking at, let me know. Government data is usually free and comes out frequently. It also can be slanted so as to make the data look as good as possible (“liquids” vs “oil” production; jobs vs “full time jobs”)
Surely you don’t mean this, or are you implying that this is the reason that the PTB keep pushing for BAU ie “things fall apart” otherwise.
BAU is the problem. BAU is continued economic growth, resource consumption, consumerism, increased energy use (either DBD or bring on safe clean green nuclear energy), expansion of cities & suburbs, environmental decay, factory food farming, just on time global delivery systems & exploiting cheap labour wherever it may be. BAU is allowing the corporations to flourish while your individual freedom is sacrificed because you have become a wage slave. Let’s do anything & everything to keep this madness of the growth paradigm going. That’s what the corporations & their political puppets want. More & more and more control over your life. Surely the modern business model of horror commutes to meaningless jobs in air conditioned cubicles to pay for monstrous mortgages & mall rat consumerism is meaningless. This is BAU.
What we need is to bring jobs back to local needs, local food, low impact local sustainable energy systems, reconnect with the environment. BAU is killing the biosphere & killing people & killing lifestyles.
I hope I have misunderstood you.
We have BAU and collapse. Collapse isn’t nice at all, and we aren’t at all prepared for it. So given a choice, I would take BAU. Of course, I don’t think we really have a choice–the system hands us what it will.
Small point perhaps
You say: “If we look at historical numbers (Figure 2), there seems to be a close tie between the number of US jobs and the amount of oil consumed in the US. One connection is that jobs often use oil in some way–operating machinery, or transporting goods. Anther connection is that people with good paying jobs can afford to buy goods and services (like vacations) that use oil, so the demand for oil stays high, even with high oil prices.”
I seem to remember Elizabeth Warren saying a while back that more women entering the US work force since the 70s means 2 cars, 2 journeys, (and to and fro to child care?), and presumably that equals more gasoline? When did US use of gasoline (per capita in a growing population; 20M since 2000?) peak/flatten?
Warren’s account of what the extra family money gained by women working was spent on was also interesting, and somewhat counter intuitive.
Perhaps more importantly, Stiglitz tells us that 1 percent of Americans take 24% of total income (a huge increase in recent decades). That must distort the basis of US tax and spend calculations and dependencies on resources? Similarly, has there been a reduction in proportion of taxes paid by corporations?
VMT shows a big drop off between 2007 and 2008, and a recent small increase in VMT. There is enough seasonality in the numbers that a person almost has to do some averaging to see the trends. I am not convinced counting vehicles is the best way to tell what is happening. Looking at gasoline and diesel sales might give very similar information.
According to BEA data, taxes on corporate income were substantially larger percentage of total government receipts in the 1940 to 1980 period than they have been in the period since 1980. The drop off in corporate taxes came quite a long time ago. I think part of this is all of the foreign corporations, that allow businesses to keep revenue off shore. In my post about what Obama should have said, I suggest taxing any goods or services made outside the US, at a gradually increasing percentage.
The shift toward a few high paying jobs and lots of low paying jobs seems to be partly because there is more competition from Chinese and Indian offshore workers on the low-paid jobs, and less on high paying jobs that aren’t transferrable. Or perhaps it is just too many workers in total relative to jobs, leading to jobs that pay too low. The government has not felt a need to protect workers for many years–the belief was that everything would work out OK, even if jobs went overseas.
Thanks for reply.
I guess though that the 1% of Americans who take 24% of income don’t have ordinary well-paid jobs in the sense you and I might recognize. That tiny stratum also controls 40% of the wealth! From Stiglitz in Vanity Fair:
“Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. “
With regard to transport in the US economy, here is a link I picked up yesterday from The Oil Drum.
The commenter looks at the updated Lawrence Livermore Laboratory’s quantified diagram of US energy use, and makes the points that petroleum for transport is the big one, and that it is mostly structural not discretionary (distribution of people/houses/jobs). These trends look difficult to row back from or deal with if the price of fuel rises while the large majority sees shrinking aggregate buying power. They must continue to spend on fuel?
not to mention the twenty trillion dollars worth of transaction guarantees that Joseph Stiglitz says we will be lucky to see 20% returned to tax payers.
p.s. Unemployed two years. Master degree in physics Columbia University and 20 years experience in the semiconductor industry. You are correct there is a shortage of jobs. Or more deeply a storage of resource to be utilized by people working so less need for labor. And a massive over supply of highly educated labor thanks to many excellent universities ariund the world including China, Russia, India, Indonesia, Egypt, Belarus, etc.
And everybody thinks that their child needs an advanced degree (whether in psychology or something else), so that they can compete in the world.
This situation has been scarey and is getting worse, one reason is that they have so much debt when they are “done”. Four years ago parents thought I was mad when I told them that the $40,000 borrowed for a private liberal arts degree was going to have a ROI of zero. Now they live at home and do part-time work at donut shops.
Generalized health care education is going to be like getting a real estate license was 7 years ago. Great until you drive off the cliff. Healthcare is so intertwined with government policies and subsidies, when they unravel and are no longer funded at current levels, you can bet we will shed health
care workers just like teachers are currently being shed.
So where do I point my budding psychologist son? I have
to point him at making-ends-meet skills. What are they generally and locally? Seems like food and energy might be general opportunities for maybe an AA degree, technician certificating, and work experience. For your region there might be something beyond that which will always be needed. My last practical thought would be knowledge how to repair things, as well as build things out of locally generated materials.
It is hard to give good job advice, because so many jobs are disappearing. My daughter is now a “personal trainer” with an MFA in creative writing. For now, there are people willing and able to pay for training sessions (and the job can’t easily be exported overseas).
Ed. You bring up a really interesting (& in your case, sad) observation here. The relationship of economies & education.
In growing economies (growing energy consumption, growing resource use, growing industrial output & growing standard of living) society can afford to educate its people to very high levels. It almost demands it to have a ready supply of a highly trained labour force for its complex systems.
But what happens when that economy hits its limits to growth? It doesn’t need all that highly educated personnel & in actual fact can’t afford them.
So now, all around the world we have very high levels of highly educated people with no jobs. A recipe for huge social discord & unrest.
In the US there is a major shift in the job market from well paid full time skilled work to poorly paid part time unskilled or low skill labour.
So it seems that one of the parameters of a declining economy will also be a large increase in tertiary educated people either unemployed or working in a lower skilled occupation. Gail, it would be real interesting to know if there are any statistics on this.
And as for my nickels worth on “What’s Behind the United States Budget Problems?” Well it’s the same thing that’s behind the Political Problems, & the
Social Problems in the US. It’s also the same thing that’s behind the Budget Problems of the UK, Ireland, Greece, Portugal, Mexico, Egypt, Japan and on & on — We have hit the limits to growth. We are on the down curve so aptly portrayed by Donella Meadows et al all those years ago.
And you know, the really sad thing is that not one government acknowledges this. Nowhere is there rational acceptance & planning for a future of lower energy, lower resources & lower standards of living.
I am becoming more of the opinion that governments are now a huge part of the problem & not the solution. We need to separate our lives away from government intrusion as much as possible & become as self sufficient as possible In actual fact, the budget problems are irrelevant. No matter what the outcome is, the decline of lifestyle in the US & elsewhere will continue. And more & more guys like Ed with beautiful education will be mowing lawns, manning checkout operators or unemployed.
You make good comments regarding the relationship between economies and education, and being on the down curve.
I am not aware of any statistics on young people and jobs, but if others have run across things, let me know. I am sure someone has done surveys.
I have run into a fair amount of what it going on, through my daughter, who is 27, and her friends. Many of them have low paying jobs, even though they have advanced degrees. One was working three part-time jobs for a while. Another lives at home with her parents, even after being out of school for several years, because her job pays so poorly. It is hard for these young folks to even think about getting married and having families, because they and their prospective spouses can’t get decent-paying full-time jobs.
Thanks too, for the links. I noticed in the first one that China joined the World Trade Organization in 2001. I don’t know if it is coincidence or not, but jobs/population has been going down hill since. The articles also pointed out that the recent news about job gains were really net losses of full time jobs – just more part time jobs. I suppose if you take a full time job with benefits, and convert it to two part time jobs without benefits, it would count as a gain in our goofy way of counting jobs.
On the question of the 20 somethings. My oldest son age 27 has a B.A. after college all he could find for work was yard work, stacking firewood, etc. He then spent a year teaching English at Southwest University in China where he was well paid and had a nice apartment of his own. He is now teaching English at the Siberia Federal University in Russia. He does not know what he will do next.
When he was doing yard work I asked him what he would do when Obama care required him to buy health insurance (with he had no money for) his reply was he would be out of the country.
My middle son age 25, works a 30 hour min wage job making picture frames at a mall. He can not afford dental care nor eye care nor new clothes we have paid for these. He does cover rent and minimal food.
My youngest is in 10th grade he just took a class “college and careers” about all he told me was health care is the way to go.
At least part of the reason health care is the “way to go” is because health care workers (especially doctors) are very well compensated, and especially when a person thinks about how badly a lot of part-time minimum wage workers are compensated.
There is a new OECD report out talking about the high cost and poor results of the US system. This is a WSJ blog about it, saying that US costs are 141% higher than average, and life expectancies are shorter.
Stories such as yours & Ed’s about young people not being able to get well paying jobs & living at home into their late 20’s & early 30’s are becoming more & more common. It is a definite result of the tougher economic conditions in todays’ world. And I for one feel horrible about it.
Most generations want to pass on a better style of life to the following generations, but this is not happening overall. The last time there were declining intergenerational standards of living were in the late 18th & early 19th centuries in the horror sweat shops & mines & child labour of the Industrial Revolution in Europe. Many people escaped this by migrating to the New World, a land of wide open spaces & limitless (at that time) resources.
I think many of us “older” ones reflect on our young careers & compare them with todays’ conditions. In my early twenties (24) in 1971 I had a very junior managerial position & was earning $78 a week ($4,056 pa). Sounds ridiculous doesn’t it but my lifestyle was great. I shared a nice apartment with my girlfriend & had a good car. Gas cost me about 2 bucks to fill it. So $2 to fill a big V8 out of my weekly wage of $78 is 2.5%. Today it costs about $70 to fill a large car with that same amount of gas. If 50% of Americans are earning $505 pw then that $70 to fill up is now 13.8% of your salary. In other words gas has increased in real dollar & inflation adjusted terms over 500% since 1970. Goodbye to cheap motoring.
I bought my first house in 1979. I had progressed up the ladder a bit by now & was earning $18,500 pa ($356 pw). Now my first house was a tiny 2 bdr bungalow & it cost $21,500, about 10% more than I was earning. Today even with the collapsing housing market you still need to find between $250,000 & $350,000 to buy something anywhere near civilization, & probably a lot more than that. How can anyone afford housing 10 times their earned salary? Oh, & as for my old bungalow, after some serious renovation & additions after I sold it many years ago, it would be worth over $750,000 by now. Insane.
For years I had these figures swimming around inside my head & whenever I would discuss them with friends I would just say that “the figures don’t add up” & I never really understood why. But now that I understand declining net energy & the down curve of complexity, the situations of declining income & job availability coupled with increasing costs of goods is all too apparent.
I am convinced that Peak Civilization occurred in that era I have just discussed around the late 60’s & early 70’s. Since then, IMO, nearly every parameter on lifestyle, cost of living, liveability of modern cities & suburbs, crime, filth, pollution, congestion have all deteriorated.
Sadly, the next generation is paying for it. Their options are going to be seriously limited & for this we should be deeply saddened.
1) Social Security is owed 2.5 trillion dollars by the federal government.
2) The federal government is not able to sell all its debt paper now. QE2 is the private bank called The Federal Reserve Bank “buying” federal debt by pretending it has money and letting the government pay it interest on money it never had just “made” maybe through fractional reserve banking maybe just complete fiction. Completely monetized. This will continue there will be a QE3 (Federal Reserve Bank pretends and gets more interest payments from us). It is time to nationalize the FED. See Kucinich’s N.E.E.D. legislation.
3) I believe war spending is off budget and not included in some of your graphs. (?)
4) Let’s cut military spending by 1.5 trillion per year. Remember DOE is mostly military, social security money is used to pay military benefits, etc…
My graphs of spending and taxes are of whatever the Bureau of Economic Analysis reports. My impression is that the amounts would be pretty complete (include off budget as well as on budget amounts). At any rate, the payments seem high to me, in comparison to, say, people’s salaries.
The Economist magazine ran an article recently called Taming Leviathan that showed a table in which they listed government spending as a percentage of GDP, for the US and several other countries. The US is shown 42.2%, which is lower than the average of 47.7% for the countries in the table they show. The catch is that the US doesn’t include healthcare, and most other countries do, so it is really not low. I cannot reproduce the Economist’s figures, though, with the BEA figures as I understand them. It is possible there is something I am leaving out. I don’t work with these figures on a regular basis, so haven’t figured out all the tricks a person needs to know to make certain everything is included. It may be another source is needed for some numbers.
I avidly read this article like I do all of yours. My only thought is that when our use of oil declines won’t we try to substitute it with coal or coal to liquids thereby creating more CO2 emissions? Thanks for all that you do.
I am afraid what happens is that the financial system gets taken out very early on. Then it becomes very difficult to finance anything (coal, natural gas, wind, hydro, electrical generation, etc). It may even be difficult to pay salaries.
If my third option for how the downfall occurs, we could even have different states, each with their own financial systems, of sorts. It would make for a real mess.
So even if people want to substitute coal or coal to liquids, the practicalities will make it impossible.
Gail, comments like this make me think you take the financial system too literally. At the end of the day it’s just a series of rules saying how to allocate resources and can be changed as necessary.
I can totally see (and fear) a situation where the energy crisis becomes a matter of “national security” and huge coal to liquid plants are made that are controlled by the government with the output rationed. Little for us and a lot for military and the rich of course. WWII showed how much can occur when people are willing to suspend their economic preferences for the “greater good” and the mechanization we’ve had since will make that even more extreme.
Same thing with shale oil and other disastrous ideas that have a huge negative net impact but will make it look like we’re doing something. As long as you can have a net EROEI then you can do quite a bit if people are forced to accept low standards of living.
I think the most likely result is an orgy of environmental destruction that has severe climate and pollution consequences, lowering our carrying capacity even far below what it’d be without use of fossil fuels.
At the end of the day I think it comes down to a political choice. How much are people willing to put up with and how many wars will they be willing to fight?
That said I think your analysis is great for arguing about the dynamics of the status quo and how it will most likely fail. I just think that past the point of recognition of that failure it will be impossible to predict what will happen.
The issue you are forgetting is that as financial problems multiply, the federal government is becoming less and less able to act on any real problem, because action requires money, and money just isn’t there.
What we know about collapse is that it tends to drop civilizations down to lower levels of complexity. WIth the United States, it seems to me that the federal government may become too weak to do much of anything, or disappear altogether. So I am doubtful that anyone will get its act together enough to make CTL plants.
But perhaps I am being too optimistic. There are a lot of things we can’t know for certain.
But Gail, money isn’t real. It’s just an abstraction.
The only real things are resources, labor and knowledge.
Resources are the most real because they are bound by the laws of physics (you need energy to convert them) and the vagaries of uneven distribution. But even resources have a fairly wide range of possibilities based on how fast you’re willing to extract them and how much loss in efficiency and environmental destruction you’re willing to take.
Labor is defined by a social contract. It is a mix of voluntary and coerced “agreement” to do what the society has determined is worthwhile.
Knowledge is of course a modifier on both and opens up the possibilities of what can be done.
Money is just a unit of abstract measure. Governments don’t need it, they create it. Did you know that the deficits that the government are running are literally close to the total amount of US “money” that exists? Monetary and trade policy aren’t based on universal laws as much as economists would like to pretend they are, they are merely social organizing principles.
The government “can’t” just print $100 trillion because it would destroy the trade partners willingness to give us resources that we need. But what if we coerced it out of them or came up with domestic replacements? They also “wouldn’t” do it because it would ruin the social contract by changing the rules in the middle of the game, so people would revolt. But if people realize that the rules have already changed due to lack of energy and they are convinced that their only options are to buy in or starve (or be the victim of force) then you could still get labor out of them.
Look at the Russian Revolution or Germany in the 30s. In both cases they had basically zero “money” but a zealous populace that agreed to change their economic preferences both because of positive ideological vision and threats. In a few short years they produced an enormous amount of output.
Or for more staid examples, look at China and Japan. In those cases the populations put off nearly all domestic consumption in order to build up export behemoths because they believed it would secure a better life at an indeterminate point.
Of course all of these models failed for various reasons because they were trying to ignore the “laws” of economics, i.e. long term psychology that is inherent in mankind as well as running into problems of resource overuse. But the comment was originally isolated to massive projects that could be done quickly, although at enormous expense. We have the resources to do that and it requires almost no labor. The only question will be about political will.
Your analyses in the context of the current economic system are amazing, in fact I think they are about the best. And they are definitely right that economic strife causes political strife and paralyzation because it is inherently a sign that the agreed upon rules aren’t compatible with reality; leading to massive internal fighting about what the new rules should be. It is definitely a possibility that this fight will destroy the ability of the Federal Government to coordinate any mass action before it realizes what is occurring, but it is also true that economic strife has led to extremely strong centralized governments that have answered the political infighting with a single answer: dictatorship. Whether you are talking about Napoleon, Caesar, Hitler, Stalin, Mao, so on and so forth, each time the organizing rules were determined by fiat and the cultures achieved massive and immediate strides in growth. They all eventually fell apart due to the contradictory rules of their own ideologies and/or the inefficiencies of central fiat, but not before they made indelible marks on history.
Sorry for the long comment, but this really is the weak point that I see in so many post-peak oil economic discussions.
Thank you for telling it the way it really is.
I kind of think, on climate change, we may have passed enough natural tipping points with what’s already emitted, that natural sinks such as permafrost are *already* on their way to becoming atmospheric carbon *sources* so I’m very pessimistic that limited future fossil fuel use either due to a collapse scenario or voluntary reduction alone will mitigate climate effects, and we may have a more extreme dieoff than otherwise necessary due to these factors. But, I hope to be proven wrong.
It is possible we are past tipping points. I have a hard time seeing voluntary changes doing much, in any event. If we use less coal or oil, China will just use more.
Temperature charts seem to show a rise for the last 100 years, so some of the change was before we were using nearly as much fossil fuels as today.
It is amusing that they are going down to the wire on funding for Planned Parenthood, ignoring the cost of obstetric and pediatric care.