2013: Beginning of Long-Term Recession?

We have been hearing a lot about escaping the fiscal cliff, but our problem isn’t solved. The fixes to date have been partial and temporary. There are many painful decisions ahead. Based on what I can see, the most likely outcome is that the US economy will enter a severe recession by the end of 2013.

My expectation is that credit markets are likely see increased defaults, as workers find their wages squeezed by higher Social Security taxes, and as government programs are cut back. Credit is likely to decrease in availability and become higher-priced. It is quite possible that credit problems will adversely affect the international trade system. Stock markets will tend to perform poorly. The Federal Reserve will try to intervene in credit markets, but if the US government is one of the defaulters (at least temporarily), it may not be able to completely fix the situation.

Less credit will tend to hold down prices of goods and services. Fewer people will be working, though, so even at reduced prices, many people will find discretionary items such as larger homes, new cars, and restaurant meals to be unaffordable. Thus, once the recession is in force, car sales are likely to drop, and prices of resale homes will again decline.

Oil prices may temporarily drop. This price decrease, together with a drop in credit availability, is likely to lead to a reduction in drilling in high-priced locations, such as US oil shale (tight oil) plays.

Other energy sources are also likely to be affected. Demand for electricity is likely to drop. Renewable energy investment is likely to decline because of less electricity demand and less credit availability. By 2014 and 2015, less government funding may also play a role.

This recession is likely be very long term. In fact, based on my view of the reasons for the recession, it may never be possible to exit from it completely.

I base the foregoing views on several observations:

1. High oil prices are a major cause of the United States Federal Government’s current financial problems. The financial difficulties occur because high oil prices tend to lead to unemployment, and high unemployment tends to lead to higher government expenditures and lower government revenue. This is especially true for oil importers.

Figure 1. US Government Income and Outlay, based on historical tables from the White House Office of Management and Budget (Table 1.1). *2012 is estimated. http://www.whitehouse.gov/omb/budget/Historicals

Figure 1. US Government Income and Outlay, based on historical tables from the White House Office of Management and Budget (Table 1.1). *2012 is estimated by OMB. http://www.whitehouse.gov/omb/budget/Historicals

2. The United States and world’s oil problems have not been solved. While there are new sources of oil, they tend to be sources of expensive oil, so they don’t solve the problem of high-priced oil. Furthermore, if our real economic problem is high-priced oil, and we have no way of permanently reducing oil prices, high oil prices can be expected to cause a long-term drag on economic growth.

3. A cutback in discretionary spending  is likely. US workers are already struggling with wages that are not rising as fast as GDP (Figure 2). Starting in January, 2013, US workers have the additional problem of rising Social Security taxes, and later this year, a likely cutback in government expenditures. The combination is likely to lead to a cutback in discretionary spending.

Figure 2. Wage Base (defined as sum of "Wage and Salary Disbursements" plus "Employer Contributions for Social Insurance" plus "Proprietors' Income" from Table 2.1. Personal Income and its Distribution)  as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.

Figure 2. Wage Base (sum of “Wage and Salary Disbursements” plus “Employer Contributions for Social Insurance” plus “Proprietors’ Income” from Table 2.1. Personal Income and its Distribution) as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.

4. The size of our current financial problems, both in terms of US government income/outgo imbalance and debt level, is extremely large.  If high oil prices present a permanent drag on the economy, we cannot expect economic growth to resume in a way that would fix these problems.

5. The financial symptoms that the US and many other oil importers are experiencing bear striking similarities to the problems that many civilizations experienced prior to collapse, based on my reading of Peter Turchin and Sergey Nefedov’s book Secular Cycles. According to this analysis of eight collapses over the last 2000 years, the collapses did not take place overnight. Instead, economies moved from an Expansion Phase, to a Stagflation Phase, to a Crisis Phase, to a Depression/Intercycle Phase. Timing varies, but typically totals around 300 years for the four phases combined.

It appears to me that the corresponding secular cycle for the US began in roughly 1800, with the ramp up of coal use. Later other modern fuels, including oil, were added. Since the 1970s, the US has mostly been experiencing the Stagflation Phase. The Crisis Phase appears to be not far away.

The Turkin analysis started with a model. This model was verified based on the experiences of  eight agricultural civilizations (beginning dates between 350 BCE and 1620 CE). While the situation is different today, there may be lessons that can be learned.

Below the fold, I discuss these observations further.

Issue 1. High oil prices tend to lead to government financial problems.

Food prices tend to rise at the same time as oil prices, partly because oil is used in the production of food (for example, plowing, irrigation, herbicides and insecticides, harvesting, transport to market). Also, because oil is in short supply, corn is now being grown for use as ethanol to be used as a gasoline-extender. Growing additional corn puts pressure on food prices, because it drives up the price of land and encourages farmers to put more land into corn production, and less into other crops.

The reason governments are affected by high oil and food prices is as follows. When oil and food prices rise, buyers cut back in discretionary spending, so as to have enough for “basics,” including food and commuting expenses. Workers are laid off in discretionary industries, such as vacation travel and restaurants. These laid off-workers pay less taxes, and sometimes default on loans. Governments are quickly drawn into these problems, for two reasons:

  1. Their tax revenue is lower, because of layoffs in discretionary sectors.
  2.  Their expenditures are higher, because of the need to pay more unemployment benefits, provide economic stimulus, and bail out banks.

Oil importers are especially affected, because they are also paying out funds to oil exporters. The countries with well-publicized financial problems (including several European countries, the United States, and Japan) tend to be major oil importers.

Oil exporters are not adversely affected to the same extent, because they have  additional revenue from higher prices on oil they are exporting. They may still be somewhat affected because of rising food prices, and the fact that higher oil revenues do not necessarily go to those buying food. A recent study shows that food shortages helped trigger the Arab Spring protests.

Part of the reason that the impact of high oil prices is as severe as it is, is because there are many follow-on effects. For example, if oil prices rise, the price of shipping goods of all types rises. If businesses are able to pass through these higher costs, discretionary income of buyers for other goods falls. If not, businesses find that their higher costs lead to lower profits. To bring profit margins back up to an acceptable level, businesses may lay off workers.

As another example, prices of homes are likely to be adversely affected by high oil prices, because a family with inadequate discretionary income will forgo moving to a larger home, and may even default on a mortgage.

It should be noted that the impact of high oil prices doesn’t completely go away unless oil prices go down and stay down. Businesses can partly mitigate the impact of high oil prices by laying off workers in discretionary segments. Some businesses will fail completely, however. Replacement may be by an overseas company, with a lower cost structure that uses less oil. See my post on energy leveraging.

Workers generally must permanently adjust their budgets to higher food and oil prices. This is often difficult to do. The lack of jobs is a particular problem–something that workers cannot fix by themselves. Government programs can mitigate the job shortfall, by paying benefits to unemployed workers and by reducing interest rates, so that businesses can more easily make investments that will lead to more employment. These programs are costly, though, and are a major  cause of the current mismatch between government income and expense.

Issue 2. World oil problems have not been solved.

There have been a number of reports this years, such as one by the International Energy Agency, seeming to suggest that the world oil problem has been solved. These analyses are incomplete. They do not recognize that our real problem is a financial problem. Our economy (everything from interstate highways to electric transmission to Social Security programs) was put in place using cheap ($10 or $20 barrel) oil. Shifting to today’s high cost of oil (up near $100 barrel) causes severe economic dislocations. There is no more cheap oil to be found, however, because oil companies extracted the cheapest to extract oil first and now the “easy oil” is gone.

The impression one gets from reading the papers is that US oil production is having a huge impact on world oil production. If a person looks at the numbers, world oil production is close to flat. Rising US production makes up for falling European production, but doesn’t do a whole lot more.

Figure 3. World crude oil production, based on EIA data. *2012 estimated based on partial year data.

Figure 3. World crude oil production, based on EIA data. *2012 estimated based on partial year data.

The rise in United States oil production is indeed somewhat helpful, but we are still many years away from being “energy independent” and even farther from becoming “oil independent.” The real issue is high oil prices, and these are not being fixed.

Figure 4. US crude oil prices  (based on average prices paid by US refiners for all grades of oil based on EIA data) converted to 2012$ using CPI-Urban data from the US Bureau of Labor Statistics.

Figure 4. US crude oil prices (based on average prices paid by US refiners for all grades of oil based on EIA data) converted to 2012$ using CPI-Urban data from the US Bureau of Labor Statistics.

Our financial problems are here and now, in 2013. Promises of hoped-for higher oil production in several years at a still very high price don’t fix today’s financial problems. In fact, they will likely continue to contribute to financial problems in the future.

Issue 3. Declining wages and increased taxes can be expected to lead to a decline in discretionary spending.  

As indicated at the beginning of the post, wages (including earnings of  businesses owners considered as “proprietors,” but not including “transfer payments” such as Social Security and unemployment insurance) have not been growing as fast as GDP since 2000. Below is a repeat of Figure 2 shown at top of post.

Figure 2. Wage Base (defined as sum of "Wage and Salary Disbursements" plus "Employer Contributions for Social Insurance" plus "Proprietors' Income" from Table 2.1. Personal Income and its Distribution)  as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.

Figure 2. Wage Base (sum of “Wage and Salary Disbursements” plus “Employer Contributions for Social Insurance” plus “Proprietors’ Income” from Table 2.1. Personal Income and its Distribution) as Percentage of GDP, based on US Bureau of Economic Analysis data. *2012 amounts estimated based on part-year data.

There seem to be several reasons behind this decline. One reason, already mentioned, is high oil prices leading to US layoffs, because of decreased discretionary expenditures.

Another reason for the decline is increased automation. Electricity can often be substituted for human labor, reducing costs, but also reducing jobs. Economists seem to term this change higher labor productivity. They also seem to believe that new jobs will appear from somewhere, but in practice, this is not happening. Instead, lack of jobs is part of what is leading to recessionary influences.

Another reason for the decline is increased competition from countries with lower labor costs and lower fuel costs. China joined the World Trade Organization in December 2001, and its manufacturing (and thus use of fuels) increased dramatically shortly thereafter.

Figure 5. China's energy consumption by source, based on BP's Statistical Review of World Energy data.

Figure 5. China’s energy consumption by source, based on BP’s Statistical Review of World Energy data.

Another reason is demographic. Baby boomers are reaching retirement age. This has already begun affecting the number of individuals who retire each year. In the future, the number of retirees can be expected to increase further.

In total, we see a very large drop in the percentage of US citizens with jobs, starting about 2000 (Figure 6). This is very close to the time that China ramped up its growth (Figure 5).

Figure 6. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census.  2012 is partial year estimate.

Figure 6. US Number Employed / Population, where US Number Employed is Total Non_Farm Workers from Current Employment Statistics of the Bureau of Labor Statistics and Population is US Resident Population from the US Census. 2012 is partial year estimate.

In calendar years 2011 and 2012, workers’ contributions for Social Security funding were temporarily reduced by 2% of wages, as a way of stimulating the economy. As of January 1, 2013, this temporary reduction was removed. For a couple with combined wages of $100,000, take-home pay is thus being decreased by $2,000 per year. With less disposable income, workers can be expected to cut back somewhere–buying a larger home, buying a new car, or going out to eat.

So far, only a small amount of other tax increases have been put in place, and only a few cuts have been made. More tax increases or benefit cuts will be needed later this year to bring revenue and expense into better alignment. Any such change will tend to have a recessionary impact, because citizens’ discretionary incomes will be affected.

Issue 4. The spending gap and the amount of debt look too big to be fixable without excellent economic growth.

As noted above, wages have not been keeping up with GDP. The majority of federal taxes are based on wages, so in my comparisons,  I use wages, rather than GDP, as a base.

If we use the wage base from Figure 2, the amount of government outgo vs income (all levels, not just federal) is as follows:

Figure 7. US Government Spending (all levels) as percentage of Wage Base, as defined in Figure 2, above.

Figure 7. US Government Spending (all levels) as percentage of Wage Base, as defined in Figure 2, above, based on US Bureau of Economic Analysis data.

Based on Figure 7, the issue in recent years has been primarily rising expenditures. These higher expenditures would seem to be partly because of high-priced oil, but also because of other influences noted above that are leading to declining employment. The amount of the gap is close to 15% of wages–something that is very hard to fix. Even the current increase in Social Security taxes (“only” 2% of wages) will exert downward pressure on discretionary spending.

A related issue is that compared to wages (using the same wage base as in Figure 2), debt of all kinds is extremely high.

Figure 8. US Debt as a Percentage of the Wage Base, where the Wage Base is as defined in Figure 2, and Federal Debt is from Treasury Direct, and other types of debt are from the Federal Reserve Z.1 report.

Figure 8. US Debt as a Percentage of the Wage Base, where the Wage Base is as defined in Figure 2, and Federal Debt is from Treasury Direct, and other types of debt are from the Federal Reserve Z.1 report.

Government debt is in now more than household debt of all kinds, including mortgage, credit card, auto, and student loans. It is close to two times the wage base used in this analysis.

One issue with paying down debt is that during the pay-down period, the government (or individual) reducing the debt “feels poorer,” because funds available for spending on goods and services needed today is lower. This happens because some current tax revenue, or some current wages, must be used to pay down debt, and thus is not available for today’s spending. This is a turn-around from the increasing debt situation experienced many times in the past. For example, part of the reason times seemed good in the 2002-2006 period was because people were able to refinance their homes and use the funds to buy a new car or add on a family room. If we are forced to pay down debt, we have the reverse effect.

Issue 5. Similarity to “Secular Cycles” of Peter Turchin and Sergey Nefedov.

Throughout the ages, many economies that have experienced long-term expansion. Eventually, they reached limits of some sort and collapsed. The book Secular Cycles by Peter Turchin and Sergey Nefedov takes an analytical approach to looking such past cycles.  They developed a fairly complex model of what they would expect over time, in terms of trends in wages, prices, population, income inequality, and other variables. They then examine historical records (relating to eight civilizations in four countries, with “start dates” between 350 BCE and 1620 CE) to see whether this predicted pattern was born out in practice. In general, the authors found good agreement with the predicted model.

Typically, civilizations analyzed were reaching upper limits in population growth because of limits on food availability, but sometimes limits on water or fuel also were important.  The model predicted four phases (expansion, stagflation, crisis, and depression/ intercycle). The typical length of the entire cycle was 300 years. The length of the various segments was fairly variable. The stagflation stage often lasted 50 or 60 years. The crisis stage tended to be shorter, more often in the 20 to 50 year range. There often was overlap between phases, with a civilization seeming to cycle back and forth between, say, expansion and stagflation.

In the model, there are various feedback loops. For example, as the number of workers rises relative to the amount of land, the price of land and food tends to rise. Jobs outside of agriculture do not rise proportionately, so wages of common workers tend to fall in inflation adjusted terms. With lower wages for common workers, nutrition declines. Eventually, the population becomes weakened, and population declines. There are also other players–the elite and the state itself.

Some characteristics of the four phases are as follows:

  1. Expansion phase (growth) – Increasing population, relatively low taxes, political stability, low grain prices, and high real (inflation-adjusted) wages.
  2. Stagflation phase (compression) – Slowing population growth, much heavier taxes needed to support a growing elite class, low but increasing political instability, rising grain prices, declining real wages for most workers, increasing indebtedness, and increasing urbanization.
  3. Crisis phase (state breakdown) – Population declining from the peak (typically by disease or by deaths from warfare), high income inequality, political instability increasing to a peak, high but very variable grain prices, high urbanization, tax system in a state of crisis, peasant uprisings.
  4. Depression/intercycle – Low population, attempts to restore state,  declining economic inequality, grain prices decreasing but variable.

It seems to me that the United States and much of the world are going through a cycle much as described by Turchin. The Growth Phase of our current cycle seems to have begun around 1800, with the rise of coal use. Stagflation in the United States seems to have started with the drop in US oil production in 1970. All of the government budget and debt problems now seem to suggest that we are reaching the Crisis Phase.

Obviously, there are differences from the civilizations modeled, because we now live in a much more integrated world. Furthermore, earlier societies did not depend on oil and other modern fuels the way we do today. We do not know how the current situation will play out, but the comparison is concerning.

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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158 Responses to 2013: Beginning of Long-Term Recession?

  1. Thanks for this excellent and level headed analysis Gail, I really appreciate your work. Really interesting comments as well. Have been reading the Oil Drum for the past few years but only recently found your blog. As a permaculture design teacher and community out reach worker I really value none-hysterical or partisan perspectives on the massive challenges, changes and new opportunities facing us all. Clear, thoughful and insightful, I will be refering to this in my teaching and referencing it for my students. A very happy New Year to you and yours.
    Steven Jones, Wales, UK

  2. Attica Blue says:

    Interesting analysis, but it seems to me that a key piece is missing. I don’t see anything about how what wealth and income there is, and which is being created, is being distributed and how that distribution itself contributes to the crisis you describe. For example, in the US (I suspect the situation is little different elsewhere) most of the income growth in the wake of the 2008 crash has for a variety of structural reasons gone to a tiny sliver of the wealthy population. If the middle and working classes don’t have that income–as a result of variables you mention such as automation, taxes and declining government (social) spending–then they can’t very well spend it. But if income gains were more equitably distributed wouldn’t people then be much more able to survive the impact of these variables coming into play and thus keep the economy running more smoothly?

    • Yes, more equitable distribution of resources would be slightly helpful, at least in the short run, from the point of view of the people at the bottom of the wealth distribution.

      But in fact, there is a shortfall in availability of food and petroleum products, which is part of the reason their price is high in the first place. Distributing wages more toward the bottom of the group is a way of using food and petroleum products that are available faster. To understand this, think of the person who earns $200 million dollars a year, compared to the one who earns $100 million dollars a year. Cutting the income of the one who earns $200 million a year in half likely won’t change his spending much. Certainly it won’t change his spending on food and commuting costs. He may do a small amount more vacation travel, but mostly he will “invest” his income, or spend it on high-priced services, that don’t require much energy. If the money is distributed to poor people, they will be much more likely to buy food and petroleum with them, pushing demand up, and raising prices further. With the higher income, some may be more likely to have children as well, increasing the future number of people to be fed, and making the resource scarcity problem worse, not better.

      One of the rather unpleasant things I discovered a while ago was that hierarchical behavior (which is what leads to the income inequalities) is an instinctual behavior of all K-selected species, when there is “crowding”–too many people for the resource base. With other K-selected species in the animal kingdom, the hierarchical behavior reduces population by not letting those at the bottom of the pyramid share in the scarce resources. Needless to say, this is not a situation humans find appealing. Read my post, Human Population Overshoot- What Went Wrong?

  3. BillT says:

    I would be more inclined to call it a permanent depression, temporarily papered over by the Fed.

  4. barath says:

    Gail — fascinating post. I wonder how you’d compare your projection with that from the Bonddad Blog, which is a very sober and go-to source for (somewhat conventional, though still energy-aware) economic analysis. Their forecast is that we’ll see mild contraction at the beginning of this year, and then recovery in the second half, and I’ve never seen them get it wrong (either on the downside or the upside).

    • I think the kicker is their last sentence. “But the resurgeance of the housing market, and the continuing accomodation in interest rates and moentary policy, look like they will come to the rescue again later in the year, provided Washington can avoid burdening the consumer with further austerity measures taking effect this year.”

      They are assuming that congress can avoid burdening the consumer with further austerity measures. I am looking at the situation and seeing nothing but a huge batch of austerity measures coming “down the pike.” They are assuming that things will naturally get better. I am assuming that the huge deficit I talked about in Our Oil-Related Fiscal Cliff will pose a large enough burden that it can’t be avoided any more.

      I suppose I could be wrong by a year or two. Maybe the government will somehow be able to kick the can down the road a while longer. By the way, I got the 2008 forecast right. Peak Oil and the Financial Markets: A Forecast for 2008.

  5. Saket Kale says:

    The post is quite detailed, after reading it seems only two things can solve this issue.

    One is a dynamic and immediate fall in population, which is not possible at the best impractical.

    Second, finding of a cheaper energy seems to be the other required thing, however that too seems far fetched since we have not been able to find anything as such till now with so many years of research.

    As for the comparisons that you have made, can we really compare problems faced in 1800’s with what we are facing now? Seems to not match somewhere somehow.

    On the brighter side, I am sure someone will surely find a way to get out of this!!

    • Jb says:

      @Saket Kale

      Finding another cheap (and probably needs to be liquid) fuel source of comparable EROEI would not solve any of our problems. It would in fact make our problems worse. As Jan noted above, the more we consume, the more waste we produce. The more efficient our technology becomes, the more quickly we put people out of work and deplete natural resources beyond their ability to recover.

      Which leaves us with your second option.

    • Jan Steinman says:

      “… it seems only two things can solve this issue.”

      Regarding this issue, I invite you to banish “solve” from your vocabulary.

      As John Michael Greer points out, this is not a “problem” with “solutions.” Rather, it is a “predicament” with “coping strategies.”

      The western world, notably America, is used to looking at everything as a problem with a solution. This generally leads to greater difficulties if, as the case seems now, there are no solutions. It causes you to waste time and energy looking for solutions, rather than looking for the best ways to simply muddle through with less.

      And yet, there are coping strategies to explore! Life will get shorter for almost everyone — but that might mean chopping off ten years of hospitalization hooked up to tubes. We will do more physical labour — but that might mean fewer heart attacks, gout, and other diseases of sedentary life.

      I think the #1 coping strategy is to start providing more of your own food, as best as you can. Start with an apartment balcony while looking for a community garden or a land share.

      During economic disruption, those who can’t afford to eat will suffer the most, while those who can provide for themselves may well have the best “quality of life,” despite not having much money.

      • jbstiesJb says:

        “I think the #1 coping strategy is to start providing more of your own food, as best as you can.”

        I agree, Jan.

        During the Depression, my great grandfather was forced to send his two daughters to live on his friend’s farms because he couldn’t afford to feed them. He sold apples and brooms on the street corners of Richmond, VA and did other odd jobs (sounds like Greece and Spain, doesn’t it?). They also took in a foster child but it wasn’t enough.

        There is no way of knowing if the public safety nets currently in place will survive or what you’ll have to do to comply with rule changes, or what amount of supplemental food they will provide. There is also no way of knowing what farms, transport trucking companies, packing plants, etc. will survive a loss of functioning credit markets.

        • public safety nets are financed from ‘public excess’.
          If there is no excess, then I think everything might revert to relying on charity.
          If we unwind that, we might be back to the original and only source of succour, which was the church door.
          Churches always demanded 10% as a tithe, most of which went on building more churches, but a little was left over to feed and medicate the destitute

    • You have a lot of faith with respect to the solution. Politicians and companies are not going to tell us how badly things are really going.

      In some sense, finding a low price energy solution is equivalent to finding a new high EROEI energy solution, when a full cycle of costs are included. Unfortunately, the highest EROEI fuel we have today is coal.

      We don’t have any cheap renewable competitors. The one that comes closest is wind, but its costs aren’t cheap when viewed on a total system basis, including the cost of new electric grid upgrades. It is also not liquid, an important point. I think the EROEI for wind as calculated (about 18) is misleadingly high. I don’t think the calculation is really on an “apples to apples” basis with fossil fuel EROEI calculations, because of wind’s intermittency, high upfront costs, lack of real long-term operating experience in the calculation (what operators hope for, not what actually takes place), different balance between direct energy, labor and financing costs associated with wind, and all of the grid upgrades that wind necessitates if added in large quantities, which are not included in today’s calculation.

      • Jan Steinman says:

        “We don’t have any cheap renewable competitors.”

        You forgot about little green men from Alpha Centauri, who will come and give us the secret of zero-point energy.

        That’s no more implausible than all the other “deus ex machina” solutions being floated, including nuclear.

    • Fred Magyar says:

      @Saket Kale,
      “On the brighter side, I am sure someone will surely find a way to get out of this!!”

      I’ve never been quite able to understand how people come to hold this particular point of view. I can only conclude that anyone holding it must be what is colloquially known as a ‘Cockeyed Optimist’

      I sure wish I could share your optimism!
      Cheers!
      Fred

      • Jan Steinman says:

        Nice performance! My Mom used to sing that incessantly.

        There is a lot to be said for optimism, as long as it doesn’t depend on particular outcomes. A true optimist looks for and implements the best coping strategy, instead of just being morose and maudlin. The optimists may be the only survivors. That would be by the “Liebnitz” definition: that this world is the best of all possible worlds. That’s a healthy attitude.

        But I wouldn’t call someone who is “sure someone will surely find a way to get out of this” an optimist. That’s just yielding control of your future to some unknown “someone.” Not my cup of tea.

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  7. Roger Arnold says:

    Excellent work, Gail. This is probably the most cogent analysis of the current economic situation that I’ve seen. That’s important, given the desperate need for deeper popular understanding of the mess we’re in. Unless more people are able to understand what’s happening, there’s little or no chance of fixing anything.

    Toward that end, I’d make one point. You speak of high oil prices as a key driver for the recession. That’s true, except that it’s not the absolute price that’s the problem. Rather, it’s the rapid *increase* in price, and the corresponding decrease in productivity in what is a major economic sector. The issue is accommodation. We’ve accommodated to cheap energy, and unwinding that accommodation is very difficult.

    There have been prosperous societies in which the cost of energy, in relation to GDP, was vastly higher than what we currently pay. For a long time, the declining cost of energy created a surplus in disposable income and available capital. That drove economic expansion as well as productivity gains in other fields. A “virtuous cycle”. Higher productivity, by definition, means less labor required to produce the same goods and services. The labor pool that was “freed up” (or “displaced”, depending on one’s point of view) had to find other occupations. For the most part, that meant producing new goods and services that were not previously known, or not previously affordable. In the early stages of growth, that was easily done and led to better lives for most people. As productivity continued to rise, however, there has been an increasing shift into non-productive services, artificial demand stimulated by an expanding ad industry, fashion-driven consumption, planned obsolescence, etc.

    Today, the bulk of GDP goes for services that are either non-productive or marginally productive, and that arguably detract from overall quality of life. It’s never black and white, but the fraction of GDP that is paid to sectors that we once did without or that functioned perfectly well at much lower levels is huge. At least 90% of spending in the military, financial, advertising, and prison sectors is overhead we could do quite well without. A good fraction of what we spend on health care and the legal system is unnecessary overhead. Conservatives rail about government spending on welfare and social service programs like unemployment, but the cost of government entitlement programs is still much less that the hidden costs we pay for things we don’t need but that have worked their way into the system. Ridiculous levels of executive compensation, for one example.

    All that is hidden and of little consequence while productivity is rising and the economy growing. We can afford it, and don’t notice the drag. It’s just the cost of maintaining full employment. Everybody has to do something, even if it’s robbing homes, dealing drugs, or chasing drug dealers. But once productivity in a major sector — like energy — takes a dive, the ripple effects are devastating. The machine grinds to a halt. It’s not that it couldn’t function at the higher cost level for that sector, but to do so, some of the fat grown into the system when productivity was rising has to be eliminated. That’s at best a painful process, and when so much of the serious fat is connected with the rich an powerful, it can be nearly impossible.

    • Roger, those are all good points.

      As Charlie Hall frequently points out, the society you can have with low EROEI energy is fairly different from the one you can have with high EROEI energy. High cost and low EROEI are in some ways equivalent. I think price is in some sense a better measure. It is certainly more readily available, and includes all inputs, especially if price is somewhat in line with cost of production. In some sense, if cost rises for reasons other than cost of production (need for more programs to keep population from rioting), that is just as important.

      We experienced a run-up in oil costs between about 2004 and 2008. The big oil importers have never readjusted to the higher costs. Instead, we have papered them over with deficit spending. Thus, at this point in time, we still have a big piece of the higher cost/ lower EROEI story not being moved into the real economy. Furthermore, everything we can see shows that costs of oil production are going to continue to increase, if we try to ramp up production to keep up with the growing demand of the Chinese, Indians, and others.

      I agree that a lot of the services we have today could “go away”, with little loss to the economy. Unfortunately, these services are what allowed the US and Europe’s GDP to grow without increasing its fossil fuel use very much. I think the common estimate is that we got three times leverage, in terms of adding three times as much GDP as fossil fuel use, with adding new services. Unfortunately, taking away these services is likely to have the reverse leverage–taking away three times as much GDP as it provides reduction in fossil fuel use.

      We are going to end up with an awfully lot of displaced workers. These workers have been trained to work in a fossil fuel world, and are totally unprepared for a new world with much less fossil fuels. Farmland is owned by farmers who are used to using the latest in technology. In general, they have little knowledge of alternative methods. I have no I idea of how such a transition might take place.

      • Jan Steinman says:

        “Farmland is owned by farmers who are used to using the latest in technology. In general, they have little knowledge of alternative methods. I have no I idea of how such a transition might take place.”

        Permaculture is a good start.

        The farm we bought as a co-op had high-pressure spray irrigation, requiring 100 gallons per minute at 125 pounds per square inch.

        We switched to dripline, which puts the water where you need it.

        But even that is not sustainable, as the plastic tubing degrades in the sun and needs to be replaced every 3-5 years or so.

        So we’re in the process of changing to gravity-fed ponds and swales, with garden beds beside the swales, to get subterranean irrigation. It’s not as efficient a use of water as dripline, but perhaps your readers recall my expounding on the evils of chasing efficiency. It’s probably closer to the “maximum power point” on the efficiency curve than plastic dripline is.

        I hope we can finish the system and see how it works and fine-tune it. But we won’t be here in another year if we can’t get some financial partners. We’re caught with one leg in the financial-industrial age, and one leg in a return-to-stone-age future!

  8. Dear Gail, Teabaggers and Doomers out there who see the world as half empty, look again. This is not going to be rerun of Reagan supply side economics. America made that statement very clear on November 6.

    The year was 1981. Over the previous 10 years the United States had finished its longest and most wasteful war in it’s history. The price of gasoline had just finished quadrupling. Our new president was removing the solar panels on his new home and illegally selling weapons to the oil rich Middle East. The new CAFÉ standards set a few years earlier where starting to hit the market place. Prudhoe Bay was just coming online. A big 27’ color console TV cost a grand with only three channels to watch. Your phones only worked at home and connected by a short wire. The national speed limit was 55 mph. IBM was a major supplier of typewriters and America was entering the age of tax cuts, debt and military expansion. Yes folks, Reagan kicked the can 30 years into the future.

    By 2001 we were all feeling pretty good and hoping or being sold another round of supply side economics could make us all millionaires. There was plenty of cheap oil in Iraq and SUV’s made us feel like suburban warriors. All we had to do was go shopping and let the deregulated banks do all the hard work. We were all masters of our universe and the future Teabagger warriors were telling us Reagan proved deficits didn’t matter.

    It’s now pretty clear in 2013 the clock has been reset. We are going to get another chance to do it again starting out with a lot more wealth, debt, people and technology than in the past. The future is yours to take personal, national and world responsibly. The pity party here at The Finite World needs to move forward with positive ideas and help make them reality. The words can’t, failure and collapse shouldn’t be in your vocabulary because it wasn’t in your ancestors who gave you your current riches. There is no guarantee of growth. You have to make it happen. And those who talk but fail to plan for the future, you plan to fail. You wouldn’t raise your children with this much negativity I read here. Why do you let it run your lives now?

    Your lives are only half full. Go live the rest of it.

    • Tony Weddle says:

      You’re welcome to suggest remedies or coping strategies, ChiefEngineer. Just saying that all this talk of collapse is too negative doesn’t really help. Thinking positively doesn’t change reality. You’re right, though, that there is no guarantee of growth. In fact, on a finite planet (note the name of this blog), the opposite is true: growth is guaranteed to end. The only real questions are when will the end of growth be obvious and how will societies predicated on growth cope with that ending of growth?

      Being positive is not a coping strategy so please let us know what we should be doing.

      • Roger Arnold says:

        Well said. The prevailing social story is still that growth is / should be the norm, and that it can continue indefinitely. People may accept the abstract notion that there must be limits, but the limits are vague, and seem to keep being pushed back. So the notion of limits doesn’t resonate.

        A writer friend of mine, Don Kingsbury, used to illustrate the absurdity of unending exponential growth by detailing the consequences of what most people would consider a very moderate 1% growth rate in human population. It only takes 3,300 years of that — a blink of the eye in geological time — before the mass of human bodies exceeds the mass of the earth. Space colonies, you suggest? It’s less than another thousand years before the mass of human bodies exceeds the mass of the sun. Interstellar travel? It’s only a couple of thousand years later that mass of human bodies exceeds the mass of the galaxy. All in an instant of geological time shorter than the 15,000 years since the last glaciation ended.

        Once people get their heads wrapped around the notion that growth *must* stop somewhere, they can perhaps begin to consider the question of where we would like it to stop. One of the problems that the sustainable living movement has is that we frame the issue in terms of limits to growth. That implies that the limits are fixed, and that we simply grow until we hit them and then either find a way around them or stop. But as long as we’re not pressed by those limits, it’s not a problem.

        The reality is that it’s not hard limits that confront us, it’s tradeoffs and costs that we incur when we cross various lines. There are choices and lifestyles that are already lost to us, because the world has become far too crowded to allow them. If we fancy the life of a hunter-gatherer, sorry, forget about it. The land is fenced and all belongs to somebody else. Captivated by the romantic life of the solitary mountain man, working his trap lines and bringing a load of furs to the trading post in spring? Sorry, not possible. One can still find momentary solitude, but it won’t be in places like Yosemite or scenic mountain parks. They’re crawling with tourists.

        It’s time, IMO, to start talking less about limits to growth, and putting more focus on the negative consequences of growth.

        • I hadn’t really thought about it that way. Thanks!

        • When talking to people about limits I often refer to the youtube video of Al Bartlett who has been trying tell us this for quite a while now, that humans dont understand what exponential growth really means. His examples are simple to understand and gives the viewer an understanding of “the doubling time” – which obviously economists never bother to figure out the consequences of. Anyway, thought I’d link the video here:

          What is a bit frightening is that with exponential growth you never have any real feeling of when its “full”. It can look like there is plenty of resources or space or whatever you are growing in – and then in a blink of an eye its packed and the limits have been reached. It is clear to me that we are approaching this with most of the planets resources including our own population growth.

        • I always try to point this out to the ‘bug out’ brigade
          exactly where are these buggers-out supposed to bug out to?
          We have them in UK…which is even more ludicrous

    • Sure the simplest way to cope any crisis in life is simply to ignore it, just like any problem building in the horizon. And when its here you have to deal with it. I guess in some way that’s what Joe Average do when he works and lead a stressful life until he crashes into a wall of depression and then try to solve it with medication. I am not so sure that this is a good survival tactic though, and neither will you live a full life “on the edge of sanity”. So first I would have to ask you what you fill the rest of your life with?

      No doubt the majority of us fill it with pointless and wasteful things never understanding that we are feeding a “doomsday machine” – or at least one that will make the planet a terrible place to be for our children. But our children don’t matter now does it? I am myself and I live my own life, I want the best out of it! Who wants children anyway? Hmm… I cant help but think that this is an exceptionally egoistic thought about anything – never looking ahead a bit to check the landscape so you don’t lead your kids over a cliff. Its also a terrible evolutionary trait if we believe our brilliant minds have overcome force of nature in a finite world.

      Happy thinking doesn’t make our wasteful habits and reliance on fossil fuel any less of a problem. However if you are able to take this optimism into action of change away from the harmful ways of our society then please do so. I believe a major reason why so many of us here talk around this matter is that we care, and want people to understand that in the end its our responsibility to govern the resources wisely in this finite world.

      I don’t think anyone here “plans to fail”, but rather want to know something about what information is needed to build some sort of resilience against serious changes to our civilization. If you look around you, as the complexity grows we seem to invest less and less into resilience in case those systems should break down. This is not a very good survival strategy for the average people as only the rich people on the top of the pyramid has enough buffer to handle a crisis.

      But positive attitudes to adaption and resilience to change is needed for sure. Although I am not sure if the world needs 6 billion farmers once the advantages of our fossil fuel runs out. That is cause for some concern which is voiced ever so often here. To many people crowded for too little resources tend to result in chaos. Its really just a question of time when our safe western civilization will experience much of the same as we see in other poor countries. It all depends a bit on how well a government is able to hold up any sort of system of sharing resources or if they only answer to the few rich people who got them into power.

    • Michael E Andersen says:

      Dear ChiefEngineer … are you aware of the develloping problem in Japan ? … almost two years ago three nuclear reactors and their fuel pool contents were destroyed and have been releasing unimaginable amounts of radiation into our ecosphere … it can not be stopped … the condition is at a tipping point … when the radiation levels at the Fukushima NPP get too high to allow the ongoing efforts of limited cooling of the nuclear fuel at the facility , they will lose control of all the fuel at the facility and it will lead to the potential loss of more NPP not far from this current problem … if you need incite to this information you can begin your study at EneNews.com … best wishes regarding your ability to stay optomistic my friend … $$ProfitOfDoom$$ (my handle at EneNews.com LOL !)

      • markbahner says:

        “almost two years ago three nuclear reactors and their fuel pool contents were destroyed and have been releasing unimaginable amounts of radiation into our ecosphere …”

        It’s fairly easy to imagine the amount of radiation released by Fukushima.

        Per wonderful Wikipedia: “According to a June 2012 Standford(sic!) University study, the radiation released could cause 130 deaths from cancer (the lower bound for the estimater (sic!) being 15 and the upper bound 1100) and 180 cancer cases (the lower bound being 24 and the upper bound 1800), mostly in Japan.”

        In other words, the total number of deaths worldwide from Fukushima are expected to be less than or approximately equal to the number of deaths that occur from automobile accidents in the U.S. every single week.

        • Michael E Andersen says:

          Greetings markbahner … I strongly suggest that you research your sources more closely … all radiation exposure info that has been released for public consumption from Stanford has been related to external contact (exposure) … you might imagine that the danger of unstable radioactive isotopes occurs when they are ingested into an organism … the conditions are real and are evident if one will only dare to investigate what is going on right now … please take the time to gather info regarding the current situation with Nuclear … my response to your post is directed to others as I believe you may already know better … if you actually believed what you have posted here then you should respond by saying you will eat these isotopes that are being released right now and have been released in vast quantity … a good starting point for greater understanding is at Enenews.com … peace to you and your loved ones.

    • Good luck!

      One thought as I read through your post is that Reagan in 1981 had a lot of things going for him, that had nothing to do with changes in tax policies he put in place. The reason the economy did as well as it did in subsequent years mostly had to do with cheap oil and other fuel. This had been engineered by a lot of investment in the previous decade in new nuclear and coal electricity production and taking oil generation of electricity off line. Also, Americans were able to take advantage of cheap (and fuel efficient) cars that the Japanese had already engineered. There were no doubt some synergies from more world co-operation. Rising debt during his presidency no doubt played a big role as well.

  9. Don Stewart says:

    Suppose, for the sake of argument, that Gail and others are right that we face a long recession. Suppose we face a steadily declining standard of living for decades ahead. What is the primary problem we face? Lack of food? Lack of the internal maturity to deal with the facts of our existence? Social disorder? Debt? Crumbled expectations?

    I don’t know the answer to that question. However, I think that one key to living in the that sort of world may be to create in our own minds what the world was like before we really knew fossil fuels. And a very good selection of fictional stories about a world which was mostly made by hand has just been published. The book is A Place in Time by Wendell Berry. It was written when Berry was 78–a half decade older than I am. It covers the time period from the Civil War up to the post-WWII conversion of an agricultural society to an industrial society (including the agriculture).

    ‘resting upon the order of time and nature…a child could be happy in it…I had come along just in time to glimpse the old order when it was still somewhat intact. I had played or idled in blacksmith shops while the smiths shod horses or mules, and build from raw iron and wood many of the simple farming tools still in use. I had gone along with the crews of neighbors as they followed the binder in the grainfields, gathering the bound sheaves into shocks, stopping to catch the young rabbits that ran from the still-standing wheat or barley. I had watched as they fed load after load of sheaves into the threshing machine and sacked and hauled away the grain. And I had been on hand when the sweated crews washed on the back porch and sat down to harvest meals equal to Christmas dinners, even in wartime with no sugar in the iced tea.’

    ‘not to a proper harvest meal, but to hamburgers that I knew they associated with town life, with hamburger joints.’

    ‘The farm had been his life, his passion and his trial. The economy of the farm, depending as it did on markets and the money economy, had been during most of his life far less stable and secure than the household economy that depended almost entirely on the place itself.’

    ‘Small amusements lasted him a long time.’

    ‘It is perhaps impossible for someone living unhappily with a flush toilet to imagine someone living happily without one.’

    The collection of stories is as richly varied as life itself. Here you will not find idyllic stories of neighbors or families living in perfect harmony or lives untroubled by any adversities. What you will find are abundant examples of the raw materials from which a good life can be constructed. You won’t find ‘ the new Soviet Man’ or Ayn Rand’s selfish individualists or people who find some particular religion to be the answer to all problems. You will find people doing the best they can with the hand they are dealt (including their own foibles) and sometimes succeeding and sometimes failing. You will find young men cut down by war and old men who have lived a lot longer than they were useful.

    Berry’s world view is that it was a good world up until industrial agriculture destroyed everything, and that the industrial agriculture era will be fleeting. While what comes after won’t look exactly like what came before, perhaps it may be worthwhile to take a look back and see just how people were happy before people routinely farmed with tractors and combines and how couples managed (or didn’t) before birth control and the vagaries of love in a very small society and how a privy by the garden made perfect sense. One of my favorite stories is told from the perspective of a young preacher and his bride who both grew up in a small town and take a church in a very rural neighborhood. Thus, you get a view from people who grew up thinking that food came from grocery stores who learn that their food depends on the gifts from the farmers in the church who, in turn, know that food is a gift from nature.

    Berry touches on many of our modern concerns. He puts this speech into one character’s mouth: ‘You can’t plow your way out of debt.’

    In short, if you are trying to figure out the inner landscape of what may be coming, I cannot recommend this book of fiction highly enough.

    Don Stewart

    • Thanks for your suggestion. It is easy to forget how much things have changed in a very short time.

      People didn’t need to find time to exercise, because their work provided plenty of exercise. Most people had a guaranteed “job” as a farmer or homemaker, because of the need for these roles to provide the basic necessities. Grandparents could be helpful in a multi-generational household.

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