Understanding Our Oil-Related Fiscal Cliff

The United States’ fiscal cliff is very much related to several changes we have been going through recently, and will likely continue to experience:

  1. High oil prices (more than triple their level ten years ago). High oil prices cause people to cut back on discretionary spending, leading to layoffs in discretionary industries and debt defaults. Governments get less revenue in taxes at the same time they need to increase spending for unemployment benefits, bailing out banks, and stimulus funds. Result: financial problems for governments of oil importing countries, including many Eurozone countries and the United States.
  2. More free trade with Asian countries starting about 2001, when China joined the World Trade Organization. This change sent many jobs to Asia, and also holds down wages in US industries that compete with companies using overseas labor.
  3. Lots of baby boomers becoming eligible for Medicare and Social Security, starting about 2011. This is a problem because taxes, in practice, need to cover the cost of  benefits on a cash flow basis, which is the way US handles its financial accounting. As a practical matter, this is the way the world economy works as well–the goods and services used today are created by today’s workers, with resources pulled out of the ground today. Carryovers in terms of goods are very limited–mostly a little grain.
  4. A health care industry that is able to charge fees that are increasingly out of line with the wages of common workers.

None of these issues looks likely to improve in the near future, suggesting that we are encountering a long-term problem that is only likely to get worse.

In this post, I provide charts showing that if the US funding problem is fixed through higher taxes on individuals (including proprietors), the needed fix would require additional taxes averaging approximately 15% of each person’s wages. If oil production remains relatively flat, as it has since 2005, additional tax increases even above this level will likely be needed later, as higher oil prices lead to more layoffs, and more need for government spending.

I also discuss three approaches other than higher taxes on individuals that might be used to try to fix the problem:

  1. Send programs back to the states
  2. Fix health care costs by emulating the Japanese using severe caps on medical charges
  3. Rethink taxes on imports

The first approach is being considered by others. I see drawbacks to it that others may have overlooked. The second two approaches are admittedly nonstandard, but need to be at least considered.

I am not very optimistic that a way can be found around the fiscal cliff. The problems are too much “baked into the cake”. But if we don’t understand what the magnitude of the problem is, and what is causing it, it is hard to make good decisions.

The Magnitude of the Problem

The “standard” way of looking at government income and expense is as a percentage of GDP. As a practical matter, though, about 80% of federal taxes relate to individuals, so it makes more sense to me to use a wage base for comparison, especially if there is concern that wages aren’t keeping up with GDP.

Also, while the issue at hand is federal taxes, from a taxpayer point of view the real issue is total taxes–Federal, State, and Local, including Social Security and miscellaneous taxes. If we compare total government expenditures to estimated taxpayer wages1, we see that in calendar years 2009 through 2011, expenditures exceeded 65% of wages (Figure 1). Total government receipts have averaged around 50% of wages, currently slightly less than this benchmark.

Figure 1. Government expenditure and expenses for all levels of US government combined (including federal, state, and local and Social Security), based on Table 3.1 of the Bureau of Economic Analysis. See Note 1 for definition of wage base used.

Based on Figure 1, we either need to raise taxes by a little more than 15% of wages, and keep raising taxes in the future to keep up with an escalating problem, or we need to cut back on government benefits, such as unemployment insurance, Social Security and Medicare.

Either of these actions can be expected to have a very adverse impact on the economy. If citizens need to pay much higher taxes, they will cut back on discretionary spending. Such a cutback is likely to lead to more layoffs in discretionary sectors, and more recession. If benefits are reduced, those directly affected will be very unhappy. There may even be civil disorder. In addition, those with reduced benefits are likely to cut back on their spending, leading to recession. They may also default on loans, leading to bank problems.

Of course, the Fiscal Cliff discussions are about fixing only a little bit of the problem now, and making plans to fix small amounts in the future. The real issue, if we understand the four problems listed at the beginning of this post, is that we are facing an escalating problem. This is especially the case if world oil supply remains relatively flat, as it has been since 2005.

Breakdown of the Deficit

Figure 1, shown above, showed a combination of Federal, State, and Local government income and outgo (including Social Security, Medicare, etc.) as compiled by the US Bureau of Economic Analysis. Figure 2, below, shows the corresponding figures for State and Local Governments.

Figure 2. State and Local Government Revenue and Expenditures based on Table 3.3 of the Bureau of Economic Analysis, expressed as a percentage of the same wage base as described in Note 1.

A person can see from Figure 2 that Income and Outgo are fairly well in balance for State and Local Governments, but there is a problem with both taxes and benefits rising over the long term. This contributes to the long-term unhappiness citizens feel about taxes in general, even if the problem is not federal taxes.

While it may seem surprising, the Federal deficit discussions relate to all government spending other than State and Local government.2 Thus, besides regular budgeted spending, the Fiscal Cliff discussions consider Social Security, Medicare, the Federal Government’s portion of Unemployment Insurance, and un-budgeted military expense. If the Federal Government should become obligated in the future to bail out government organizations, such as the Pension Benefit Guaranty Corporation or the Federal Deposit Insurance Corporation, these costs would presumably need to be considered as well in determining whether there is a balance of income and outgo.

Probably of the biggest areas of funding shortfall is Medicare (Figure 3, below).

Figure 3. Medicare Revenue and Expenditures by Fiscal Year, based on Tables 2.4 and 11.2 of the Historical Data of the White House Office of Management and Budget.

Medicare, besides providing health care for those ages 65 and over, also provides coverage for some disabled workers. The program has always needed supplemental funding, but the amount of the deficit has become greater in recent years, and is forecast to get even worse in the future. (On all of the charts, the forecasts I show are those provided in the White House Office of Management and Budget reports.)

Social Security is better funded, or was, until a decision was made to cut employee contributions by 2% of wages, for calendar years 2011 and 2012. This was done as an off-budget stimulus to the economy.

Figure 4. Social Security receipts and outlays, based on Tables 2.4 and 4.1 of the Historical Tables of the White House Office of Management and Budget.

The current plan seems to be to return to the original tax rate effective January 1, 2013. This return to the original tax rate does not seem to be reflected in the White House Office of Management and Budget (OMB) figures I am showing in Figure 4. Even if this change is made, it is my understanding that there is still some need to raise Social Security taxes.

Another grouping on budget reports which has some revenue associated with it is Income Security, shown as a functional category on OMB report 11.2. This grouping seems to include the federal portion of unemployment compensation. It probably also includes Food Stamps. It too shows a shortfall.

Figure 5. Federal Income Security receipts and outlays from Tables 2.4 and 11.2 of the Historical Data of the White House Office of Management and the Budget.

If it were somehow possible to erase the problems with these three programs (Medicare, Social Security, and Income Security), there would still be a federal revenue shortfall, but a manageable one. In several periods, there has been a surplus on this basis (Figure 6).

Figure 6. Comparison of Receipts and DIsbursements for Federal Programs excluding Medicare, Social Security, and Income Security, based on Historical Data of the White House Office of Management and Budget.

We can break down the remaining federal spending (as shown in Figure 6) into some major groupings.

Figure 7. Allocation of Federal Spending, other than that for Medicare, Social Security, and Income Security, based Historical Data of the White House Office of Management and Budget.

Health, at the bottom of Figure 7, would seem to include federal funding related to state Medicaid programs. The bulge for future years reflects the new federal healthcare program. Defense, shown in red, is very large in recent years, but is forecast to shrink in the budget forecasts of the OMB.

Net interest is reflects a netting out of interest paid and received. This is a different accounting treatment that a person sometimes sees, with Social Security being credited with some portion of interest payments. Here, all interest is in one location. Recent interest payments have been very low, thanks to the artificially low interest rates now in effect. Interest payments are forecast to more than double by 2016.

Figure 7 shows that the “All Other” category is quite small, compared to the $1 billion+ in deficit that we are facing on an ongoing basis, if funding stays as in the recent past. This would correspond roughly to federal government programs where the expenses are mostly salaries of government employees, rather than transfer payments to citizens. I calculated this amount by subtraction of the selected pieces from the total.

Federal Revenues and Outlays Compared to the Selected Wage Base

If we use the same wage base as with Figures 1 and 2, the ratios of income and disbursements to wages are as shown on Figure 8 below.

Figure 8. Federal Government Revenue and Expense (including Medicare, Social Security, etc.) as percentage of Wage Base described in Note 1.

The current high outgo doesn’t look as high relative to prior years, as it does in Figure 1, but looks can be deceiving. Figure 2 near the beginning of the post shows that state and local taxes have been increasing–from roughly 20% of wages in the late 1970s to 25% (or more) now. So total taxes “feel higher,” even if the federal part doesn’t rise by much. The federal government has paid for some of this rise in state programs, through federal funding of local programs. The temptation now will be to cut back on federal funding.

If there is a goal to keep total state and local taxes to less than 50% of the wage base, then it would make sense to get federal spending down to 30% of wages, or below 30%, if there is a cutback in federal funding of state programs. If federal payments look to be headed for 45% of wages, this would mean that federal spending for all programs combined would need to be cut back by one-third (=(45%-30%)/ 45%).  Alternatively, of course, taxes can be raised–but with the caveat that taxpayers get very unhappy about taxes over a certain level.

If we look at individual programs “stacked up” as a percentage of wages, this is what we see:

Figure 9. Federal spending as a percentage of wages, broken out by category, in stacked chart. Spending based on White House OMB data; wages as described in Note 1.

The biggest run-away program is Medicare. It will be difficult to fix it without making a lot of people unhappy. Defense can be cut back even more than it has been, but that leaves a lot of unemployed military people as well as unemployed people who work in defense industries.

Other Ways to Fixing Funding  Besides Higher Taxes

Send programs back to states. Perhaps the easiest way for the Federal Government to reduce spending is to turn programs over to the states, offering some sort of small “block grant” to fund them. Then, if the program is unsatisfactory, it is the problem of the state, not the federal government. Richer states will be able to provide better programs than poorer states. The federal government’s role will gradually be reduced.

The downside of this approach is that programs are likely to be greatly reduced in scope. The federal government will become less and less important in the whole scheme of things.

I have written about the tendency of countries with financial problems to break into smaller pieces, as with the possibility of Catalonia seceding from Spain. The problem with reducing the government’s role is that it tends to push a country more in this direction. The view may become, “If the individual states are doing everything, who needs the expensive federal government, with all of its debt?”

Fix Health Care Costs. US healthcare has been on its own track for a long time. It is far more expensive than the systems of other developed countries, and the quality of results is not very good, according to studies such as this one by Commonwealth Fund.

Figure 10. International Comparison of Healthcare Spending, from Explaining High Health Care Spending in the United States: An International Comparison of Supply, Utilization, Prices, and Quality, by David A. Squires, The Commonwealth Fund, May 2012.

The high cost of the Medicare program and the high anticipated cost of the new healthcare program for the uninsured are both related to this issue. David Squires, author of the study linked above, points out that Japan has a health care system that shares similar features to the US system: it is a fee for service system with unrestricted access to specialists and hospitals. Yet its cost is near the bottom of the chart, and Japanese have the longest life expectancy in the world. The major difference in the Japanese health care model is that the Japanese government aggressively regulates health care prices. The report indicates that if the US were to spend the same share of GDP on healthcare as Japan, the saving would amount to $1.25 trillion. This would be enough to pay for our annual spending deficit, if it could be channeled in that direction. (Of course, it can’t, but it would help.)

Perhaps a change closer to the Japanese system of regulation could be coupled with more emphasis on healthy eating and exercise. The major losers in such a change would be surgeons and other specialists earning very high salaries, investors in very high-priced devices, pharmaceutical companies who charge US customers more than elsewhere, and hospitals that need to scale back services to be more in line with what other developed countries provide.

Rethink Foreign Imports. Economists have told us globalization is the only solution. Yet, we cannot compete on a level footing with countries with very low labor costs, especially if their primary fuel is (cheap) coal. We find that we have more and more laid-off workers, at the same time their economies are growing rapidly. (I describe this more in  this post.)

It seems likely that over the long-term, globalization is going to shrink, as the cost of importing goods increases, and as financial problems of countries increasingly get in the way of signing longer-term contracts. (Who wants to sign a contract to make products for a country whose currency may radically drop in value before the goods are produced?)

A partial solution might be to penalize companies that outsource jobs to parts of the world with lower wages (but this would be hard to enforce, and likely run afoul of free trade agreements). It would theoretically be possible to re-impose tariffs on selected categories of imported goods and services, to try to encourage more local hiring, even if it means higher production costs. Again, this has free trade agreement issues.

A  related issue is the idea of businesses being able to incorporate offshore, and escape US taxation. I know my work as an insurance actuary involved a lot of work for “offshore captives“. Somehow, we should be rethinking whether allowing US companies to take the benefit of these offshore services, without tax, inside the United States, is in the United States’ best interests. Shouldn’t we be taxing goods and services produced elsewhere, to avoid US taxation?

Other Issues

There are many other issues that deserve a more complete treatment, including further discussion of the four causes of the increasing deficit at the beginning of this post. I have treated some parts of these issues in other posts, such as High Price Fuel Syndrome.

Notes:

[1] Wages used as a base consists of “Wages and Salary Disbursements” for both employees in government and in private industry, plus “Employer Contributions for Government Social Insurance” plus “Proprietors Income” relating to both “farm” and “non-farm”. All of these amounts are from Table 2.1, Personal Income and Its Disposition. For most people, this will be the nominal wages a person receives (before deductions of any kind), plus the amount paid by the employer on behalf of the employee for Social Security and Medicare contributions. I have not included “Transfer Payments” such as Social Security, Medicare, Medicaid, and Unemployment Insurance, since these are likely not to be heavily taxed. For projecting future years wages, I have assumed 3% annual growth (1% increase in labor force and 2% inflation). If there is recession or if the number of jobs fails to rise, this assumption may prove to be too high.

[2] There is a small overlap between federal and state programs. For example, the Federal Government gives State and Local Governments to spend on unemployment benefits, and on Medicaid, and on stimulus projects. The data sources I am using should remove these overlaps correctly.

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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157 Responses to Understanding Our Oil-Related Fiscal Cliff

  1. donsailorman says:

    I think the main fiscal problem the U.S. has is that we are greatly undertaxed. All the European countries are much more heavily taxed than the U.S. Some of those high-taxed countries such as Germany, Norway, the Netherlands, and Sweden have significantly higher standards of living than does the U.S., and their citizens live several years longer than do U.S. citizens.

    The idea that high taxes stifle prosperity is pure undiluted B.S. There is not a shred of evidence to support this position. Minnesota, where I live, is one of the most highly taxed of all the fifty states. It also has one of the very best-educated citizens of all the fifty states. Real disposable per capita income is much higher than in Minnesota than in North Dakota, where the oil is and which has highly productive wheat farms and cattle ranches and is a low tax/low services state. Because of the oil boom, N.D. has a lower unemployment rate than does Minnesota, but in all other respects standards of living are very significantly higher in Minnesota than in North Dakota. One of my friends, who works for Wal-Mart, was recently offered $110,000 per year to take over as trouble shooter for all North Dakota Wal-Mart stores, which is pretty good for a guy in his mid thirties who never finished college. He turned down the offer and applied for a Wal-Mart job in the Twin Cities at lower pay, but he hated the idea of being based in the oil boom town of Willitson, where the price of houses is more than double the price of a comparable house in the Twin Cities areas.

    • Thanks for your views. Do you have figures on what percentage of income in Europe goes to taxes (including all of the taxes people pay)?

      I think part of the difference here is that for most people, healthcare in the US is outside the tax system. Our healthcare costs are so high that the combined burden of healthcare and taxes may very well be higher than the corresponding amount in Europe–but that is a guess on my part. I haven’t seen the real figures.

      • Leo Smith says:

        In the UK just over 50% of the GDP circulates through the government.

        It hasn’t solved our problems either.

      • Schuyler says:

        Gail,

        If one looked at Federal spending per capita or adjusted for wages would it appear any less gloomy? I was just wondering what effects population growth might be having on debt, or if they are even significant from the broader perspective. 😛

        • Sorry, I haven’t had a chance to look at this. But in general wages per capita are not doing well. The government has hidden the impacts of the high price of oil behind a high federal spending deficit since 2008. Now, it is becoming clear that this model of spending more that the country takes in can’t be continued indefinitely. It we had a good supply of $20 oil, I expect quite a bit of our problem would go away.

      • donsailorman says:

        Well, I have seen the figures. U.S. tax payers pay for a lot of medical care through taxes, including Medicare and Medicaid and also through property taxes at the county level to finance the care for emergency rooms at county hospitals. By law (I think through all the states but am not sure on this) emergency rooms in public county hospitals must accept all who apply for medical help, regardless of ability to pay. Much of Medicaid is paid for by the federal government–some through taxes and some through deficit spending.

        Medical spending in the U.S. is a financial catastrophe. Canadians spend less than half as much on medical care than does the U.S., and that is also true of Britain and European countries. U.S. medical care is not especially good. We have high infant mortality rates and lower life expectancies than do Canadians, the U.K. and most if not all of the European countries.

        Obama care is going to be one more catastrophe. A few days I overheard the manager at the local Dairy Queen mention that all employees had to be cut back to 28 hours per week or less because of Obama care. What Obama care is going to do is to vastly increase the cost of health insurance, because under the law medical insurance companies must accept all applicants regardless of pre-existing conditions. Also the premiums for old people must be no more than triple the cost of premiums to younger and much healthier people. What companies are going to do (and they are already doing this) is to fire their fulltime employees and then hire them back as independent contractors at lower wages and no medical benefits. IBM, for example, has already done this with much of its labor force.

        • I worry about health requirements making it harder for people to get full time employment. It seems like all of these programs are dominated by unintended consequences.

      • Some examples of tax in Norway where I live:

        VAT is 25% on most goods except food which is 15%.
        A normal income has around 30% income tax, but rises all the way to 50% if you earn a lot.
        A normal petrol car will double in price from taxes alone once it arrives our docks, one exception is electrical cars which are almost tax free.
        We have road tax as well and very high tax on gasoline and diesel.

        Naturally the government also have very high income on the oil – which counts a lot for the general good situation here. But yes, socialism has made an impact in Norway as a country with regards to taxation. Although we like to bitch about taxes like everywhere, I think in general people feel its required to have a fair and well run country. Although lately the right wing parties (Høyre and Frp) have gone up a lot in popularity and some predict they will win the next elections if they cooperate. Still our right wing politics is far to the left of the democrats with regard to taxation I think.🙂

    • Julie Cosgrove says:

      You completely ignore that moral argument about how wasteful, inefficient and downright corrupt the Federal government and many State governments like mine in California are. How on earth can you morally ask people at any income level to pay more in taxes to a fiscally irresponsible government that delivers terrible results overall? That just makes no sense. Government is NOT a responsible steward of resources…which money represents.

      In addition, why is it that the people that rely on the majority of government services the most…the poor and middle class, pay the least amount? Why is that morally acceptable? Unless you can’t understand a federal balance sheet (which is full of lies and tricks so I would not fault you for it), it’s pretty clear that we have a SPENDING problem, not a revenue problem.

      Personally, and I know a lot of Conservatives, Liberals, Libertarians and Independents who feel that the idea that taxes are too low is a completely insane statement. How much is enough for this corrupt government? How much is enough for you? Why are you or any bureaucrats better determinants of how individual’s money should be used? That just seems like arrogant hubris to me.

      Finally, there are lots of studies that prove that higher taxes reduce investment. You just reject them because the violate you world view and love of Big Government and moral belief that people should be hosed by the government. PATHETIC. Just do a Google search for “study taxes affect investment” and you’ll find countless results. Why do you go around spreading falsehoods? Is it simply ignorance or a desire to mislead? We all hope it is the former.

      • donsailorman says:

        You are the one who is ignoring the facts. Germany, Norway, the Netherlands, and Sweden, all of them high tax countries, have higher rates of investment than does the U.S., which is a low-tax country. I think we should abolish the income tax because it is unfair, inefficient, and it invites corrpution of politicians and fraud by citizens and business people. We should, in my opinion, have a value-added tax only. Many, perhaps most, economists much prefer the value-added tax to the income tax.

        How to get politicians and leaders who will not be corrupted is the fundamental theme of Plato’s “Republic.” It is a thought experiment only and Plato did not think it could be implemented in the real world. For more Plato reading I suggest “The Laws” which is about how to have good government from a practical point of view. Aristotle, both in the “Ethics” and “The Politics” has many brilliant insights; He thought that ethics and politics were one ball of wax. In my opinion, political science has gone backward since the days of Plato and Aristotle.

        • Would you exempt businesses from income taxes as well? How about taxes on resources extracted?

          I take it that they would also pay VAT on goods they purchase in the course of doing business, so would pay some taxes too.

          • Schuyler says:

            Most will not likely agree to an economic balance sheet that includes externalities or long term deferred costs. I know very few people, even liberals, who are enthusiastic about paying actual long term costs, whether they approve of redistribution via taxes or not. We’re riding a wave of natural endowments. Probably for psychological – instinctive reasons, our economic policies will be determined by way of an ongoing series of crises rather than preemptive measures. Rational risk assessment and accordingly adjusted behaviors require rational participants. Perhaps there will be some tipping point that will allow for more far sighted economic policies? But will they be rational? Or just more ideologically based social experimentation? 😛

            • Politics is not a system that is given to rational thinking.

              I talked to one person in the government-related sector in the last couple of days who explained that he thought the way his organization behaved reflected employees acting in the way that they thought would best protect their own pensions.

            • donsailorman says:

              All economists that I know, and I know about 300 Ph.D. economists, favor an internalization of external costs. There is a big literature on this subject that goes back more than fifty years.

          • donsailorman says:

            The VAT is not a hard tax to understand; it is strictly a tax on consumption. Some object that it is regressive, but that can be easily fixed by exempting food and maybe rent from the VAT. The VAT operates very well in many European countries and seems to be the only way to finance a system of welfare captitalism in which a great deal of income is transferred from the rich and the middle class to the poor. Note that Sweden, the classic example of a welfare state, has completely abolished poverty. Some of the other Scandinavian countries have also done this.

          • donsailorman says:

            There are variations on the VAT. I think most countries tax only at the consumer level. In 2001 I bought a Brompton folding bicycle for 600 pounds, including VAT. When I left the UK 100 pounds of the VAT was refunded to me, working on the theory that I should not be taxed because I was only a tourist and would not be receiving any benefits of the VAT.

          • donsailorman says:

            Now that I think of it, I believe that that VAT is extracted at all stages of production. To make a loaf of bread, you need flour, so the miller pays some tax because he or she adds value. Then the baker has to pay some VAT because he adds value. Also the retailer adds value, so he or she also has to pay some VAT. But the consumer pays a lot through higher prices.

            • It seems to me that whenever businesses pay taxes, ultimately it is the consumer who pays, because without consumers, the businesses would have no reason for being.There might be some situations where the shareholder gets lower dividends because of taxes, but that would be the exception, rather than the rule.

            • donsailorman says:

              You are correct. The VAT is a pure consumption tax.

  2. robert wilson says:

    Is the true US debt $16+ trillion, or as Cox and Archer suggest, $100+ trillion?
    http://online.wsj.com/article/SB10001424127887323353204578127374039087636.html

    • The $16 trillion in the debt of the US government where there are explicit bonds outstanding.

      The government has a lot more promises than that. It stands behind the Federal Deposit Insurance Corporation for banks, and the Pension Benefit Guaranty Corporation for Pensions, among other things. It also stands behind the promises it has made for future Medicare payments and future Social Security payments, and future payments to government employees. These would add a whole lot more.

      The linked article doesn’t mention the default risk on banks and pension. I am sure we could find other default risks as well. For example, the FHA behind US mortgages. So the total is amazingly high.

  3. Dave Cooper says:

    Something I’ve kept reading about, for years: the US has kept getting away with the Fed’s money-printing because of the US dollar’s status as the world’s main “reserve currency” — but, http://theeconomiccollapseblog.com/archives/the-giant-currency-superstorm-that-is-coming-to-the-shores-of-america-when-the-dollar-dies

    • I heard this issue mentioned twice today–once in a private conversation with someone else attending the ASPO-Conference, and later by a speaker, who was concerned that the effective price of gold could skyrocket if/when this happens. This is more of an issue that most people think. If we cannot reach agreement on the fiscal cliff, it could possibly push the world more in this direction.

  4. Pingback: Understanding Our Oil-Related Fiscal Cliff « Usman Sattar blog

  5. I think our greatest problem, in the fully collective sense, is the rejection of reality about what oil has become . We have bet our lives (literally) on the continued availability of oil, it’s far more than just this looming ‘fiscal cliff’ or whatever.
    more taxes won’t work, because taxes can only be paid out of increasing prosperity, and we can only have increasing prosperity if we can go on increasing our energy input into the commercial infrastructure, so more ‘stuff’ can be made for everyone to buy and keep the money whirlpool circulating.
    But making stuff needs cheap energy

    Seems like there’s a hole in my bucket

    • GermanStacker says:

      From the main article: “Such a cutback is likely to lead to more layoffs in discretionary sectors, and more recession.” Reading this always makes me think of the usual middle class fun spending on holiday parks, fancy restaurants, big cars and even property. Doesn’t seem so bad. But when the downward spiral accelarates, MOST things might become disretionary, and some of them seem to be viewed as essential by many people today. Health care isn’t essential, we can die at 60 without a problem for society.
      I admit that I’m reading this blog also to get sustainable long term investment ideas. And if I believe your story, it would seem to be “go short everything” in the medium term. Well the hedge funds got them a bloody nose on that, and then they may forbid shorting like during 2008 in socialist france, or my bank goes bust. Silver is nice, but too risky for all-in, have to sell some at the next little upspike. Thinking to run a bycicle repair shop with some other guys if I can preserve the capital until people have to stop driving cars, like 2025. Well better continue good ole’ prepping, nothing wrong with that. Urban people (like over 10.000) will never live off small scale farming, not going to happen. Seasonality and lack of space will forbid. Rather government confiscates land and provides staples soviet style. For prepping, recently discovered black molasses, i.e. byproduct of making sugar from sugarcane. Enormous nutri value (calcium, magnesium, iron and others in a complex natural way), long shelf life, not too bulky and cheap. Drink with hot water, put into yoghurt, everything.

      • its because we dont die at 60 that society has a problem

        • I think that the fact that we don’t die at 60 is connected to some other things. We have defeated “Survival of the Fittest” through farming and healthcare (among other things). If we had not done this, women would have more babies, but many would die earlier. Total population would not expand, so we could remain in our niche of the world ecological system. We probably cut this off about the time we learned to control fire, over 1,000,000 years ago.

          Now, it is the fact that health care can cure ailments as they come along, so we don’t die off before 60 that leaves us with a big elderly dependent population. The fact that we are financially well enough off to take care of the elderly allows us the luxury of taking care of them in nursing homes and assisted living centers (even though these don’t necessarily help the quality of life of individuals). In the hunter gatherer era, those who couldn’t keep up with the group almost certainly got left behind to die, or chose to walk away from the group, to die. We have changed this.

          • I keep banging on that everything changed for humankind—we actually became ‘humankind’– once we could control fire, after that it was only a matter of exponential progression until we controlled everything else, because fire-energy gave us access to every other form of energy. we thought we controlled the world but we forgot about bacteria , who are the real dominant species on this planet. We declared war on them, so they regrouped and are now fighting back to take back control of the planet that has always belonged to them
            as energy availability slips away from us, we will be literally in a fight for survival
            this article makes interesting reading on that subject
            http://healthafteroil.wordpress.com/2012/11/10/guest-post-survive/

            • Thanks! Your point about bacteria is a very good one. Thanks for the link.

              I think insects and other crop predators are in some ways parallel. We are genetically modifying seeds and developing all kinds of pesticides and herbicides, but mutation goes on so quickly that we can’t win. This is especially the case if we have to cut back our efforts in this direction.

  6. Schalk says:

    Thank you for another very interesting post, Gail. I would like to run some thoughts by you to see what you think:

    As I see it, the fundamental cause of all the western problems is that we cannot come to grips with the fact that we will have to start consuming less due to peak conventional oil and our changing demographics. This is manifested in all sorts of ways – increasing budget deficits, growing shortfalls in welfare programs, jobs going oversees etc.

    In the end, Americans and Europeans will have to reduce their consumption/production ratio (aka swallow some austerity) and the best way to do this is by adjusting salaries. A Chinese worker probably earns half the PPP adjusted salary of an American worker for doing the same job (and still manages to save 40%). Until western salaries are reduced or Chinese salaries are increased to a more balanced level, these trends will continue.

    Both these changes will have the same effect: Less consumption in the west. One can try to mask this fundamental truth through things like import tariffs, inflationary monetary policy, more debt and other miscellaneous policy tinkering, but this is just kicking the can down the road.

    Really the only solution I can see is if western governments own up to reality and launch honest programs to educate people about the implications of peak conventional oil and shifting demographics. People must understand that these factors fundamentally enforce reduced consumption in the west and that the best way to do this is to actually start looking after personal health and finances and improving personal energy efficiency. In this way reduced consumption translates directly to increased life satisfaction and everyone’s a winner.

    Such a government program will be truly unprecedented, but can you really see any other way in which these fundamental imbalances can be corrected without something like a dollar collapse?

    • I think a dollar collapse is probably part of the readjustment.

      The issue I see is that our economy has built in connections that make shrinking back difficult. For example, we have forgotten how to do things in a simpler way, using less energy. All we can think of is inventing some more advanced way, with more spending, that we solve each problem. So we invent a more energy efficient washing machine, rather than wash our clothes on a washing board or by a stream. Also, an electrical company that loses half of its business is likely to face bankruptcy. Thus, shrinking back is likely to be severely disruptive to developed economies.

      Also, I still think that climate is more on the side of most people in China, India, and the rest of Asia, than it is the US, Europe, and Russia. Warm countries can get along with less external energy use, since they can get away with bicycles much of the year and flimsier houses. Admittedly there are some cold areas in Asia, but the big areas competing with the US tend to be fairly warm. The people can get along with lower salaries, and still have a reasonable lifestyle.

      I am not even sure a government program to educate people would work. There are too many unknowns and too many difficult transitions. It would be helpful if someone thought through some basic issues like what land transitions might need to happen, if more human labor is needed on farms. How does one go about buying up land and redistributing it, or is there a better way (for example, surfs on existing big farms?) It would be hard for any group of us to think through what all of the problems might be. We almost have to face them, and work through them as they happen.

      • donsailorman says:

        Aristotle was very concerned with constucting a good society–or polity as he called it. One of the things he insisted on was that extreme concentration of wealth lead to plutocracy, which both Plato and Aristotle agreed was one of the very worst forms of government. To deal with poverty, he suggested that the government of Athens should buy up plots of land that were sufficent to support a family, and that these plots should be given to the poor, those who were on the Athenian version of welfare. The problem with Aristotle’s solution to poverty is that the land around Athens (and most of Greece) is poor land, not suitible for agriculture.

        One of the best federal U.S. laws ever was the Homestead Act, which allowed 160 free acres to anyone who would build a house on it and cultivate it for five years. I am not sure, but I think the Homestead Act is still in effect, and you may still be able to get 160 of free farmland. Of course it is much harder to find vacant or publically owned land in the U.S. today than it was, say in 1910 close to the time of the great Oklahoma land rush. In any case, I think redistribution of land is prerequisite for a decent economic future for the U.S.

        • Schalk says:

          Yes, such a division of land might very well become necessary in the future, but it will have to be accompanied by a massive campaign to give people the necessary skills to actually use this land productively.

          I’m originally from South Africa and, after Apartheid ended, the government began its land distribution program, buying productive farms from white farmers and giving it to previously disadvantaged blacks. In short, this has been a disaster leading to large productive farms going to waste and ever-increasing racial tensions to fester. The result has been a long range of brutal farm-murders (which has been noticed by genocidewatch.org) and many young people such as myself emigrating.

          • I am not even convinced that individual plots make sense, given the massive amount of training that will be needed. There may also be limitations in the amount of hand tools available. It may make more sense to have someone in charge who does understand what needs to be done. This kind of arrangement seems especially sensible, if farms are already fairly large, and under single ownership. Also, under such an arrangement, animals owned by the group might be used to help provide fertility to different parts of the total area over time, for example.

            The ownership model may look like surfs working on farms. Or there may be some form of common ownership. It probably would be worthwhile analyzing what has worked in the past.

        • They tried redistribution of land in Zimbabwe, where land was seen as wealth. They were too stupid to realise that it’s the produce of the land that constitutes wealth
          Zimbabwe went from a food exporter to basket case economy in a very short time (as Schalke says)
          Most of us wouldnt know what to do with 160 sq ft let alone 160 acres, and would starve to death between harvests. Farming is probably the top skill, few of us have it now. Then there’s the problem of those able to produce food having to defend it against those with nothing

          • donsailorman says:

            One of my friends in Grand Rapids, Minnesota owns a fine 160 acre farm a few miles from town with a big woodlot and also lots of pasture. He plows roughly 100 acres with two big horses and a horse-drawn plow, heats with wood and can easily live off the grid for an entire winter. For his day job he is a full-time English instructor at a nearby community college. His farm is bountiful in the production potatoes, O.K. for corn, and quite good for rutabegas and similar tubers. He also has some acres in beans and serval acres of berry bushes plus some fruit trees.

            I never asked him how he learned to farm, and his father was not a farmer. He was one of the “back to the land” movement of the 1960s and 1970s.

            I agree with you that farming is very hard to learn unless you have grown up in a farming family, but it can be done. A number of my students grew up on and still lived on farms.
            From an astonishing early age they would learn such skills as how to milk a dairly cow in a sanitary way. Not one of my students who grew up on farms wanted to be a farmer or a rancher. Also, not one of my students who came from three generations of loggers wanted to be a logger. Very few young people–especially young women–want to live on a farm. The median age of farmers is quite high and getting higher. As the old farmers retire or die it is going to be harder and harder to replace these very hard-working and highly skilled people.

            • One thing that bothers me today is the fact that kids spend their time filling their minds with video games and television. Thought and reading books are low on their list. This is even true for a lot of adults.

              The kids of farmers were learning a lot. I know someone sent me links earlier showing the brain size of hunter-gatherers was larger than today. I expect they kept track of an awfully lot of information about where foods of a particular type could be found at what time of year, without a map or a written summary of what they figured out. Also, how to get away from predators of various types.

            • donsailorman says:

              Several of my very best students were the sons and daughters of farmers–mainly because they understood the necessity of working long hours and working very hard to achieve success. Typically they would get up at 4 or 4:30 a.m. to do the morning milking, then study for a couple of hours before coming to eight o’clock classes. After school they would do several hours of farm chores until dark, and then during the hours of darkness they would study hour after hour until they had mastered the material.

              In my opinion, one of the main reasons students do poorly in school is that they are just plain lazy. By way of contrast, all of my four children had jobs by the age of fifteen and a half and saved up considerable sums for their college expenses. All my children worked in college for twenty hours a week of work study plus another job on weekends. They graduated with very little debt. I always emphasized to them the importance of proper work and study habits and set a good example for them.

            • I expect parents who are successful in general tend to do more of the things you mention than those who are “barely making it”. If nothing else, a person is working who is working several part-tme jobs to try to make ends meet may lack the time and energy to properly supervise his children and see that they get good nutrition and enough sleep.

          • That is a good point. It is not the land itself that is wealth. It is really the produce that gives us wealth.

            I think that we can lose sight of the fact that the ability to yield produce involves quite a combination of other conditions. Nature has its own way, and that will yield actually the highest yield, but spread over a huge area (if I understood Tad Patzek correctly. I think he was talking about primary productivity, not the highest yield of edible food.) We can in our own humble way attempt to produce a different ecosystem that will produce more edible food on a given area. I would argue that it takes a lot more than knowledge. About all we can do without fossil based tools is dig with a stick, and perhaps in some places stick a seed in the ground. Water is a huge issue as is not degrading the soil. There is also a question of how much of the yield we as humans are able to keep, as opposed to giving it to other competitors (insects, animals, crop diseases). Without fossil fuels, our share becomes much less.

          • I agree that many people wouldn’t know what to do on a farm, so its really a bit pointless to give farmland to individual families. Its really better that a community of families try to cultivate a farm together, with the help of someone experienced. The land and its produce could be owned and shared among that community – any surplus used for trade naturally. Also some people are better skilled at repairing stuff than the actual farming, so its only natural that skill would be distributed as needed. But I think the important lesson to learn for the people in such a “world” is how important the common sharing and community is – that “owning” and “riches” does not work in this world. Whether it is really possible to form this kinds of communities without someone “claiming ownership” is another matter altogether. History teaches us that at one point the dictator shows up and takes ownership. It almost seems inevitable that some sort of hierarchy will form even under an energy limited world, and especially if education also falls apart.

            I always found it interesting that human beings are always able to imagine “a better world” or “a fair and just world” – but is completely utterly unable to implement it. Some people just have a built in gene that they should conquer and rule, even in a small silly way by having the biggest McMansion and 4WD monstertruck parked outside (who would think that the more debt you have, the more status you have).

            • Don Stewart says:

              Dear John
              In my immediate area we have perhaps a thousand young people who could make a living on 5 acres and prosper with 10 acres. They have worked on farms and many have attended the community college sustainable agriculture program. What is the barrier? It is, quite simply, the cost of getting started–mostly the land. My county doesn’t make it difficult for them to build a small dwelling–but some neighboring counties make it impossible (keeping out the riff-raff, I suppose).

              So here we sit with Bernanke printing bales of money and giving it either to politicians or to bankers and driving up the cost of farmland so that young people who are woefully underemployed can’t afford it. It doesn’t make sense to blame this sorry situation on the young people’s alleged ‘lack of knowledge or work ethic’. Bernanke could use the money he is printing to buy and distribute land in small parcels to young people who demonstrate the ability to sequester carbon in the soil and prevent soil erosion.

              What we are suffering from is a lack of political will and imagination. I hope it isn’t just suicidal tendencies in the governing class.

              Don Stewart

            • I think that the hierarchical behavior you describe is common because there are so many people on the earth now. I have mentioned Craig Dilworth and his book, “Too Smart for our Own Good.” He talks about most mammals (including humans) being K-selected species. In K-selected species, hierarchical behavior is a way of dealing with overpopulation by squeezing out those at the bottom. I expect that in remote areas, or in a hunter-gatherer society, there wouldn’t be too much trouble with sharing and working together. It is when we get to today’s modern crowded society that fighting over who is “top dog” gets to be a problem.

              You may be right about a hierarchy forming in an energy-limited world. With enough oil, there has been closer to “enough” in the recent past. Wars have killed off fewer people recently, for example. If we are back to an era of shortages, the natural tendency to fight over what is available will begin again. Hierarchies will form in this effort.

      • Schalk says:

        I just wish that we could do this without the potential large scale tragedies that might accompany something like a dollar collapse. That could really be very bad…

        Have you ever written a post explicitly discussing how economies like the US of the EU could best manage the way down? I’d be very interested in such an article by a well-informed writer such a yourself.

        The irony is just that it really is very easy for individuals to live much more sustainably within our modern industrialized societies. I currently have a carbon footprint of under 2 tons/year and doing this has enhanced my life tremendously. My diet is primarily plant-based, I cycle everywhere I need to go, I have completely broken the erroneous psychological link between consumption and happiness and I get most of my fun from creation/learning. The result is that I have not been sick for 4 years, am in perfect shape, am financially secure, have a range of valuable skills and a scientific output 500% that of the norm.

        Yes, it is true that our debt-based system of perpetual economic expansion will break down when people start shifting down in large numbers, but even this has to be manageable through honest, intelligent and pro-active action. I just cannot help thinking that there has to be a way in which we can make the transition to true sustainable prosperity without any major catastrophes along the way…

        • donsailorman says:

          I suggest that you read two books by Lester Thurow, “The Zero-Sum Society” and “The Zero-Sum Solution.” Each book is available, used, on amazon.com for one cent plus shipping and handling. If you want to self-learn economics there is no better way than to read all the books of Robert Heilbronor and Lester Thurow. For a few editions, Thurow co-authored “The Economic Problem” which is a book for the basic microeconomic and macroeconomic two semester class. Both the late Robert Heilbronner and Lester Thurow were and are socialists, and both were among the best writers of economic prose ever.

        • I am not sure that I have the answer to what can prevent potential large scale tragedies. The picture a lot of people have in their minds is that of oil prices gradually rising, and the customer being able to buy less gasoline or diesel because of the high oil price. While this may happen in some cases, I am afraid that the issue will be more complicated–for example, there won’t be oil available at any price for significant periods, in some places, or there will be major interruption in imports in general, or there will be some states will secede, because they don’t feel that they are getting adequate benefit for the taxes they are paying, and think that they are better off “going-it-alone”.

          My concern is that today, everything seems to have a long supply line leading up to it. Even replacing the bicycle tire on your bicycle is not something a local person can do with local materials easily. The concern I have is that supply lines will start breaking, and this will bring about a breakdown of systems that don’t appear to be related to where the initial shortage took place. For example, a car may be taken off-line for lack of a replacement water pump, or electricity my be interrupted because of interruption in coal transport to the power plant, or because workers lack transportation to get to work, or because the bank is closed, and it is not possible to pay workers so they will continue to work.

          When I was in India recently, I saw people getting along with much simpler systems. But even these would be subject to supply line breaks, because they too have adopted at least some modern methods.

          Most people today have lost touch with how things used to be done, when most goods and services did not depend on fossil fuels and long distance transport. For example, my father (who is no longer alive) was a medical doctor–originally a general practitioner. He was trained in the 1940s to evaluate patients by how they looked. He had a good idea of how high a person’s fever was just by looking at him and feeling of him. He knew the difference in size between a 5 pound baby, a 6 pound baby, and and 8 pound baby, just by looking at the size of the baby, because he had delivered so many of them. He set lots of bones with the simplest of X-ray equipment, and I expect could almost do without, in a real pinch. My father often used hypnosis so as to avoid needing anesthetic in situations where this seemed better (childbirth; some accident situations). My father had a hard time understanding why today’s doctors have to do a number of tests to figure out things that appeared obvious to him, based on the way he was trained. While today’s doctors could probably do some percentage (80%??) of what they do today, using much simpler approaches than they use now, I expect most of them would need retraining to think like an old-fashioned doctor.

        • I can’t see how downsizing is ‘manageable’
          management implies control, and any form of control demands some form of dictatorship.
          any form of dictatorship will only suit half the population–at best–the rest will rise up against it, violently.
          we are all tribal, the dictator will be accused of favouring his own clan—look at Egypt right now, or Syria
          that is the future we all face I fear

        • I sincerely envy your freedom, its really the kind of life you promote that more people need to see and learn from today. That you can be happy without all the stuff. I am seriously working on forming a lower carbon footprint life and figuring out how I can limit debt and remove some of the “artificial chains”, but I am constantly torn between bad options – and I really don’t want to completely change everything overnight also as it would be too worrying for my family and myself. I have started analyzing what kind of budget I could really live on, as you are completely right that its quite simple for individuals to live more sustainable once you get rid of the “consumerism habits”. I have come to enjoy that I can e.g. buy books for the kids at a used book store, many are practically mint and cost 1/5th of new price. I am a long time computer gamer so I enjoy that I can download more content instead of buying new and expensive packaging, although I have a hobby in preservation of old used 8bit computer games that is hard to shake off (that Commodore 64 will still work on the power of a treadmill🙂 ) – Basically there are so many parts of life where we can change habits. We hardly eat out at junk food places (perhaps a couple times a year as a happening for the kids) – We mostly buy ecological food and have increased our vegetable percentage considerably (our kids love simple pasta+veggie meals without any meat or sauce). We hardly ever buy soda drinks – if anything I buy some beer now and then, and i plan to learn how to brew some beer myself (John Greer informs in his blogs that this is a good thing to know). We plan on starting our own little composting unless we can get the local housing community to pitch in on some together for the whole area. One small step for mankind…🙂

          • Schalk says:

            That sounds great, John🙂 Indeed, stepping back from the consumerist rat-race can be highly rewarding (not to mention very good for the planet).

            This is actually the central topic of my blog (http://oneinabillionblog.com/). I have only been writing for about 6 months, so it is far from being the finished product, but I think the central concept of the approach advocated – constructing intelligent micro environments within which happy, healthy, wealthy and sustainable living happens automatically – is worth spreading. Feel free to come by and take a look.

            It’s great that your kids actually like veggies and even better that they like books. Sounds like you’re setting them up for a great life.

            Oh, and my computer game phase started a little after the 8-bit era, but I am proud to have finished every version of Commander Keen🙂

      • Offering individuals a plot of land to farm is not a workable solution.
        Individual small plots generally do not have access to water other than through well digging, and this is causing serious aquifer depleting, as I discussed in the recent Water article on the Diner.
        What IS a demonstrably workable solution however is independent and distributed Hydroponics systems. This is not Theoretical, Peter on the Doomstead Diner practices this form of food production and raises most of what he eats inside his own house in Ocean Falls, BC.  You can read about it and see the evidence in the photos from his indoor system by following the link provided here.  This food BTW is “soft” enough for the “small” human jaw to munch through uncooked.  LOL.
        Hydroponics conserves water and uses far less in terms of fertilizer, and it can be done inside Cities as well as Suburbs.  Combined with Aquaculture and Mealworm production, a balanced diet with animal protein, fats and carbohydrates all can be raised up in far smaller spaces than conventional techniques.
        As a society we can move to this form of food production, but if the society won’t move that way, the individual can.  It is not theoretical, just a matter of the Will to do so.
        RE
        Doomstead Diner

        • Lack of access to water is an important point for individual small plots. It seems to me that it could be an issue for hydroponics as well, unless the person has a good supply from roof rum-off. Fertilizer for hydroponics seems to be a current fossil fuel product, but not something we can produce long term. Even containers are a current fossil fuel product. I expect hydroponics may be a temporary solution for some people–and maybe that is what you are looking for, not something we can use 100 years from now.

        • Hydroponics uses far less water than conventional farming since it is in a closed loop system and doesn’t runoff. It uses far less fertilizer for the same reason. Fertilizer can be made from various forms of animal waste, in the next year we should be experimenting with duck guano and worm juice possibly. Did you go have a look at Peter’s setup? William is starting on his in the next month or so.

          Far as whether the systems will operate in 100 years, probably. Its mostly made from Sewer Pipe, and lots of pipe in NYC is well over 100 years old now. That stuff lasts a long time. There will be plenty of parts to scavenge from old cars and decaying McMansions also.

          In the far, far future, you could build similar systems using Bamboo for tubing, tightly woven and waxed baskets, wooden casks etc. Mainly though I see this as a means for the individual to get off the current Industrial Food apparatus, and if undertaken on a larger scale could help to spread out population reduction over a couple of generations, rather than all coming at once like the Deer on St. Matthews Island.

          RE

  7. michael dittmar says:

    Dear Gail,

    excellent as usual. Many thanks for the insights.
    Actually I have a related question to all of this.

    Inflation and hyperinflation seems to be the only way out.
    (like pest and cholera as a choice or
    thanks to peak oil and shortages the entire system starts to fail and oil extraction
    even if wanted will not grow as much as expected .. so we avoid the climate cliff
    by bringing things to a stillstand)

    but anyway, here is my question:
    When trying to find actual about what really happened back in Germany after WW I
    the hyperinflation .. very very little is easily available..
    perhaps you or anybody here has some good links for further reading
    I would be very grateful

    regards
    Michael

    • donsailorman says:

      I have closely studied more than 2000 pages on the German inflation of 1923. The best book for the noneconomist is titled “The German Inflation of 1923,” which should be available, used and cheap, from amazon.com. If you are sophisticated in economics or economic history or in statistics, I recommend that you search the journals of economic history. Some of the best articles were published in German and have never been translated into English.

      Using Google you should be able to find a lot. I am almost sure there is a Wikipedia article on the German inflation of 1923. Try using different word combinations when you search with Google or another search engine.

      • donsailorman says:

        The author of “The German Inflation of 1923 is Fritz Ringer, and used on amazon.com the price is $2.91 plus shipping. Another excellent book is “When Money Dies: The Nightmare of Deficit Spending, Devaluation, and Hyperinflation in Weimar Germany” by Adam Ferguson. You can order it from amazon.com for $8.86 used plus shipping.

    • GermanStacker says:

      My grandparents lived it here in Germany, they showed me the worthless 50.000.000.000 bills. The mistake by the government back then making runaway and eventually hyperinflation possible was to put the newly printed money directly into the economy. That’s why today they go via the bond markets, where they always can continue to manipulate the game among themselves.
      At the moment of course, they are forestalling natural deflation. When that flips and inflation kicks in because people wake up, central banks can start selling the bonds back into the market along with financial repression, like forcing institutions to buy, maybe fixing low interest rates by law (Spain already demanded so). Then they destroy the money they recieve, or keep it who knows. Screw pensioners and savers on both the way up and down. Advice is the same as in Weimar: stay safe and sane, exit all paper, rely on yourself, prepare, default on your obligations when everybody does, and don’t buy property or equities until after the dust settled and everything is dirt cheap.

      • donsailorman says:

        The Federal Reserve System is an engine of inflation; it was created in 1913. Prior to 1913 there was no long-term inflation inflation in the U.S. The silver dollar of 1913 had exactly the same value of the original U.S. silver dollars of the late 18th century when it was first defined to be equal to the famous Spanish silver dollar known also as a “piece of eight.” By the way, the Mexican peso for centuries had exactly the same silver content as the U.S. dollar and was worth exactly as much as a U.S. dollar up to the late 1930s.

        What a dollar will buy today is what roughly what four cents would buy in 1913.

        I wrote my M.B.A. thesis on “Common Stocks as an inflation health. Using very simple numbers (not even any algebra, just graphs and tables of numbers) I proved that, contrary to conventional wisdom, stocks were not a good hedge against inflation. My prof was very impressed, gave me an A+ and said that I should try to get it published and now I regret that I did not follow his advice. Both my son (who majored in economics) and I agree that inflation is the big threat, and now all his 401k money is in I bonds, which are indexed to inflation. I prefer the Vanguard mutual fund that invests soley in TIPs, Treasury Inflation Protected Securities.

        I do not think that precious metals are a good hedge against inflation at this time because they are vastly overpriced, especially gold. In 1972, when it was legalized to buy gold, I bought large quantities of gold coins to finance the college educations of all my children. I paid about 37 dollars per ounce and bought Austrian gold philharmonic coins, in part because they are one of the most beautiful coins ever made.

        • gold is ultimately a loser, if only for the simple reason that you can’t eat it
          on the other hand, gold can be compared to its value down the ages, but how many ounces of gold would buy a decent horse or a parcel of land of a certain size
          I think comparisons would show that it hasn’t changed much, though I admit to be no authority on the subject

      • Julie Cosgrove says:

        Completely agree except I did buy a plot of land because I am not sure what happens in the future. Given that it is near impossible to determine the value of property today since it’s been manipulated by government and Federal Reserve printing for decades if not a century now, I just wanted to make sure I had something for a homestead outside of the SF Bay Area because I am not sure if you’ve ever been here but…there are a lot of crazy and violent people who won’t take kindly to being poor or getting their government checks cutoff. I don’t want to be around for that madness. I got a good deal anyhow.

        I am stacking gold and silver every month. Large and small denominations. Thank God we have a way to escape the lies, corruption and outright theft of the current system so lauded by the elites of both parties (land, gold and silver and other hard assets). This country has become a disgusting place in so many ways and I see so much support for it of it coming from the faux intellectuals in academic, media and the crony capitalist CEOs.

        It all happened in Rome very similar to this but this time around we have resource limits to worry about which will make it even worse. Buy a gun or twenty.

    • I haven’t tried to study this issue. Perhaps readers have links.

  8. Dana Visalli says:

    Thanks Gail, all very interesting. I’m curious why cutting funding to the Department of Defense isn’t considered. I think there is widespread agreement that most of our wars are ‘discretionary,’ so if we were serious about economy we could choose not to have them. Also if we want to face reality, then our discretionary wars suggest that we have a Department of Offense, not defense. A last relevant point is that non-governmental assessments of military spending render a total of about $1 trillion dollars, rather than the $500-600 billion shown in Figure 2. I’ve often said I would be willing to pay taxes to our so-called federal government if there was an actual Department of Defense and it was funded at about $1 billion a year to defend our borders from the Canucks. It really comes down to how serious we are about moving towards ecological and psychological health. So far I would say–not very serious.

    • I didn’t happen to mention cutting funding to the Department of Defense, because (1) the forecasts already were showing cuts (2) I wasn’t trying to outline all options, just some that others might not think about.

      I tried to take my spending amounts from the summary that was most exhaustive. Thus, it is my understanding that what I show already includes subcontractor costs and costs that might not be budgeted, since it adds up to everything the government spends. If I am missing anything, it would end up in the “All other” category in Figure 7, which is not very large.

      • Defence spending is 60% of the US Federal Budget. Cut the military, stop the killing.

        • donsailorman says:

          Sorry, but your numbers are flat-out wrong. Check a reliable source for your numbers; Gail has posted many of these numbers over the past several months. She is an actuary and is very good at judging the validity and accuracy of numbers. Or you can go to Wikipedia. I get most of my numbers from “The Economic Report of the President,” which is an annual publication and also from “The Wall Street Journal,” which is published six days a week.

          Entitlement spending is most of government spending, and it is increasing rapidly both in real absolute terms and also as a percentage of real GDP. For a good introduction to GDP and related numbers, I recommend the textbook I wrote: ECONOMICS: MAKING GOOD CHOICES, or any macroeconomics book. I especially like the paperback version of the Heilbroner and Thurow text, THE ECONOMIC PROBLEM. The textbook by Paul Samuelson is also excellent, and as always, old editions of textbooks are very cheap to purchase–often for one cent plus shipping and handling from amazon.com

        • Defense spending is a lot less than 60% of total federal spending, including Medicare, Social Security, and all the rest. Eliminating defense spending would stop the killing, but leave quite a number of people (especially young people) unemployed.

          Look at my graphs. Even eliminating it doesn’t do the trick, but it would be a fairly big step.

  9. Don Stewart says:

    IMHO, the real issue with the Fiscal Cliff isn’t ‘reality’, it’s ‘delusional thinking and emotional childishness’.

    What most people seem to want and so the politicians and the corporations promise them is a free lunch. And, for a little while, increased leverage seems to deliver a free lunch. And for several decades now increasing supplies of energy have fueled a global economy that delivered more stuff and fooled most people into thinking that debts would never have to be repaid–or at least we would all be so rich that repaying them would be a trivial exercise. We are like drunks–last night was fun but now we have a hangover.

    Can we behave like clear thinking, emotionally mature adults? And if we did so, what would life look like? The absolutely best description I have seen is in Charles Hugh Smith’s book Why Things Are Falling Apart and What We Can Do About It. I particularly recommend that you begin by reading these sentences on page 194:

    ‘We have seen that neither the marketplace nor the Central State can sustainably supply ‘the good life’ to the majority of citizens, for a number of systemic reasons. Both the market and the State have gained power by replacing the non-market economy–what I call the community–with high-cost ‘solutions’ that require ever-increasing amounts of credit, income, and tax revenues. Now that incomes are declining and credit has ballooned to destabilizing levels, those ‘solutions’ are untenable’.

    And on page 195:

    ‘the secret of a long, prosperous life is well-established: a vibrant social life of friends, family, and voluntary associations, a purposeful life (positive reasons to get out of bed in the morning), a diet of whole grains, legumes, fresh fruits and vegetables (lightly processed foods low on the food chain), occasional meat and seafood and sufficient sleep….None of these requirements require a fortune in cash…’

    If we believed these things, we would not be printing enough money to drive the cost of a parking spot in Hong Kong into the hundreds of thousands of dollars range, and the price of Kansas farmland to 15,000 dollars per acre. We WOULD be looking at what the government needs to do in the way of demolishing those regulations and practices which prevent people of modest means from living a good life with little money.

    So what can we do? We have discussed to death the notion of making our own families more resilient. As for politics, I have no magic oil lamp which, when rubbed, will make our government get religion. I guess all we can do is oppose it and try to throw sand in the gears. In terms of community, I can tell you what I am going to attempt.

    Dr. Joel Fuhrman’s book The End of Diabetes will be published in late December. A number of other people have demonstrated reversal of type 2 diabetes. I think Dr. Fuhrman may take this fact into the mainstream with his book. The Amazon publicity states: ‘The End of Diabetes proves that diabetes, heart disease, and high blood pressure are not inevitable consequences of aging. They are reversible and preventable. This simple and effective plan offers great food, starts working right away, and puts you on a direct path to a longer, better, fuller, disease-free life.’ I know how to do this. My goal is to leverage what I know to as many people in my community as possible. I’ll work on the details.

    Don Stewart

    • I agree with pretty much all of what you write and you have quoted.

      I figured out many years ago that my heredity puts me at risk for Type 2 diabetes, so I have to stay away from eating patterns that would lead to it. So far it has worked.

    • I totally agree with you Don, but its really tricky to convince enough people around us about the realities of life (the search for the good life). Many are just blinded by the media and consumerism around us, its expected that to be part of this society you take up a huge loan to get a house for your family and then toil away at some place for the rest of you life to pay down the debt. Its really a terrible deal (selling your soul to the banks). Some are more motivated by others and are able to pay down debt way faster so they become “free” earlier in their life (who wouldn’t want to be debt free by their 40s).

      I have also lately pondered a lot about what me and my family really need in life and could probably live on a very small budget if we wanted too. I sometimes think about stuff like, moving the whole family into my parents house (which is after all too big for them), work where I am now still but save a lot of money for buying a house a bit outside town that has a big enough area for some small scale food growing. The plan would then to reduce the amount of paid work in order to spend more time at this new home and making that life work. But at the same time I am no farmer, and basically I have no idea how to plant anything so all that would be new skills to acquire. Also I have this feeling that not everyone has to be a farmer, although noone really needs a computer programmer either if things turn badly (after all consultants are the first to be booted in recessions). So perhaps some other skill which I like but is useful in a low energy future (perhaps a bartering one). But in all of this we still have to live among other people, and we have kids with their own expectations. We can try to teach them better ways but i cant hold them back from their friends and certainly not education. Even the notion of moving them to a new place is one I cant do, as I know how important growing up in one place was for me as a kid.

      I am looking around though, there are some communities and places like this website where I can at least get some feeling for how a future could be. Very few around me regards energy and running out of resources a real problem we have to worry about – that we will invent ourselves out of it. Sometimes I listen to them, and even people like Richard Alley are optimistic about finding an alternative that is sustainable. Naturally just listening to that man alone just makes you more happy, and I sometimes feel the hope that we will be forced to adapt our energy use and technology as we go along the curve down. Question is if we are able to at least stretch that way down as long as possible so we hardly feel the decline – or if there will be serious conflicts and resource wars breaking out all of the world. The latter scares me as it doesnt really matter if you are debt free and have your own crops growing if the society around you breaks apart. But I am not really a believe in mad max scenarios so I guess we should at least try to prepare a bit and learn new skills as we go along.

      At least my mind is set to that change is necessary and that I dont mind it either. Stuff like public transport which made me previously think “how stupid, who want to take the bus?” – now really makes sense and I would support any good new public transport system. Same so with a lot of socialistic ideas (although I have been partly drawn to that before) about community, sharing and “having enough”.

  10. C Breeze says:

    Regarding health care:

    Although the Japanese system looks good in some ways, it is not sustainable:
    http://www.washingtonpost.com/wp-dyn/content/article/2009/09/06/AR2009090601630.html?sid=ST2009102805439
    Any time some valued thing is given for free (or at very an artificially low cost), people begin to overuse and waste it. When an insurer pays the doctor rather than the patient, prices can be raised to heights that no patient would willingly pay. When free emergency care for the poor is mandated but free home care is not, everyone chooses emergency care, even though it is only “free” to them: it costs society a very large amount.

    Imagine if food, which is also essential to health, were treated like health care. The elderly and poor would get a card that would allow them to eat for free in any restaurant they please, but it would not pay for making their own meals at home. If you were REALLY hungry and had no food insurance, you could go to the finest restaurant in town and they would have to give you a free meal. Imagine what would happen to the waiting time for tables at the finer restaurants. How much you would have to pay for your meal to subsidize all those freebies for the hungry? What would happen if the government cracked down on costs by lowering wages for chefs and waiters? Would this improve our food system? Would restaurants become more affordable?

    At least for food, there would be a limit: people eventually get full. Unfortunately there is no clear limit to how much health care a person would use. In the Japanese system in the article link above, one mother took her child every week to the doctor during cold and flu season, just to make sure everything was fine. It is not uncommon for Medicare patients to have several weekly doctor visits. Some of these are quite wealthy people who demand the finest in care for free even though they could afford to pay for it.

    Society would be better served by a very basic universal health care system to ensure everyone has preventive care and standardized treatments for common diseases and for the most complex/expensive diseases, with everything beyond these basics being paid for directly by the people receiving the care.

    • I think that in the United States, Medicare has gotten to be very much like the system described in the newspaper article you linked, especially when the “supplemental plans” that most seniors buy are included. There are too many people who are bored or lonely, and look forward to an outing to the doctor’s office as a somewhat pleasant excursion for the morning or afternoon. With the coverage available, trips for issues that are a bit out of the ordinary often end up at the emergency room, since the cost is $0. (My husband and I have made a lot of trips to doctors offices and emergency rooms with elderly relatives.)

      One of the big issues in Japan is the demographic change. If the US were to get its elderly population up to 40%, its costs would truly be horrendous as well.

      I agree with obesity being an issue. That was my reason for my comment at the end about more emphasis on diet and exercise.

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