December 28, 2011
Getting the U.S. economy growing
We can sit and wring our hands, or we can get to work.
Nobel laureate and Columbia University economics professor Joseph Stiglitz sees a long-term problem in the current U.S. economics malaise:
It has now been almost five years since the bursting of the housing bubble, and four years since the onset of the recession. There are 6.6 million fewer jobs in the United States than there were four years ago. Some 23 million Americans who would like to work full-time cannot get a job. Almost half of those who are unemployed have been unemployed long-term. Wages are falling-- the real income of a typical American household is now below the level it was in 1997....
Even when we fully repair the banking system, we'll still be in deep trouble-- because we were already in deep trouble....[I]n the years leading up to the recession, according to research done by my Columbia University colleague Bruce Greenwald, the bottom 80 percent of the American population had been spending around 110 percent of its income. What made this level of indebtedness possible was the housing bubble....
The trauma we're experiencing right now resembles the trauma we experienced 80 years ago, during the Great Depression, and it has been brought on by an analogous set of circumstances. Then, as now, we faced a breakdown of the banking system. But then, as now, the breakdown of the banking system was in part a consequence of deeper problems....
Today we are moving from manufacturing to a service economy. The decline in manufacturing jobs has been dramatic-- from about a third of the workforce 60 years ago to less than a tenth of it today. The pace has quickened markedly during the past decade. There are two reasons for the decline. One is greater productivity-- the same dynamic that revolutionized agriculture [in the Great Depression] and forced a majority of American farmers to look for work elsewhere. The other is globalization, which has sent millions of jobs overseas, to low-wage countries or those that have been investing more in infrastructure or technology.
Stiglitz' Columbia colleague Jeffrey Sachs had a similar assessment:
The collapse of housing is actually a symptom rather than the fundamental source of US economic weakness.
The structural problem is that America has lost its international competitiveness in basic industries including textiles, apparel, and several other areas of manufacturing. The production jobs are now in China, India, and elsewhere, where wages are much lower while productivity is more or less comparable to the US (and where production often involves US companies, using US technologies, producing overseas and re-exporting to the US market). Only US college grads can resist the international competitive pressures; high-school grads have found the labor market fall out from beneath their feet.
I agree with Stiglitz and Sachs that America's long-term problems played an important role in putting us we are today. However, I take a different view from either of them on what we should try to do about it. My suggestion is that America should try to return to what some scholars maintain was the original source of America's success, which came from using North America's abundant natural resources as a basis for a competitive advantage in manufacturing.
I recently highlighted one way that process made an important contribution in 2011. In 2008, the U.S. imported 1.8 million more barrels every day of refined petroleum products than we exported. Increased production of North American crude oil together with declining U.S. consumption have given Midwest refiners a huge competitive advantage internationally since then. As a consequence, the U.S. moved from being a net importer of refined products to exporting 0.4 more million barrels a day than we imported in the second half of this year.
Monday's Wall Street Journal has some other examples:
The boom in low-cost natural gas obtained from shale is driving investment in plants that use gas for fuel or as a raw material, setting off a race by states to attract such factories and the jobs they create.
Shale-gas production is spurring construction of plants that make chemicals, plastics, fertilizer, steel and other products. A report issued earlier this month by PricewaterhouseCoopers LLC estimated that such investments could create a million U.S. manufacturing jobs over the next 15 years.
West Virginia is vying with Pennsylvania and Ohio to attract an ethylene plant that Royal Dutch Shell PLC said it plans to build in the Appalachian region to take advantage of the plentiful new gas supplies....
"This shale gas development is a game-changer of huge proportions," said Dan DiMicco, chief executive officer of Nucor Corp., a steelmaker based in Charlotte, N.C. Nucor is building a $750 million plant to make iron from natural gas and iron-ore pellets near the Mississippi River in St. James Parish, La. Mr. DiMicco said the investment wouldn't have been possible without the lower costs that have come with shale gas.
And here's a third example from Inland California's Daily Bulletin:
Molycorp announced it received permission from the U.S. Bureau of Land Management to conduct exploratory drilling operations near its Mountain Pass [rare-earth-element] mine....
Before December 2010, the Mountain Pass mine had been shut down for eight years due to environmental reasons.
In the months since, Molycorp has not only reached profitability, but it has also acquired processing facilities in Arizona and Estonia, while also building expanded milling and ore separation facilities at its Mountain Pass mining site.
Molycorp also announced a joint venture with two Japanese companies, Mitsubishi and Daido Steel, in which the three companies would work together to produce high-tech magnets.
These "rare earth elements" are vital in all kinds of high-technology manufacturing, and are another area where the U.S. used to play a leading role. We could do the same again.
I recommend that, rather than wring our hands in despair, America should respond to our long-term challenges by making note of the natural advantages we already enjoy and figuring out how to make the best use of them.
Posted by James Hamilton at December 28, 2011 06:42 AMdigg this | reddit
Following is a link to, and an excerpt from, an essay that I originally wrote more than four years ago, in early 2007:
The ELP Plan: Economize; localize & produce
“In this article I will further expound on my reasoning behind the ELP plan, otherwise known as “Cut thy spending and get thee to the non-discretionary side of the economy.”
I have been advising anyone who would listen to voluntarily cut back on their consumption, based on the premise that we were probably headed, in a post-Peak Oil environment, for a prolonged period of deflation in the auto/housing/finance sectors and inflation in food and energy prices . . .
In my opinion, the unfortunate new reality is that we are going to see a growing labor surplus–against the backdrop of deflation in the auto/housing/finance sectors and inflation in food and energy prices. By reducing your expenses now, while you can do it voluntarily, you will at least be better prepared for whatever the future may bring . . .
I recommend that you try to reduce the distance between work and home to as close to zero as possible, and furthermore, that you live in smaller, much more energy efficient housing, preferably close to mass transit lines . . .
Jim Kunstler has suggested that we should not celebrate being largely a nation of consumers. I agree with Jim. We need to once again become a nation of producers. I recommend that you try to become, or work for, a provider of essential goods and services. Key recommended sectors are obviously energy–conventional, non-conventional and alternative energy production and energy conservation–as well as food production, especially local organic farming close to towns and cities . . . “
Posted by: Jeffrey J. Brown at December 28, 2011 08:03 AM
Another great post, Jim. Hopefully, our country hasn't lost that "Yankee ingenuity" that made us great. It was our creativity, the resources we had available, and willingness to take chances that got us where we are. We just need to get back on track and reignite that spirit.
Posted by: Brian at December 28, 2011 08:15 AM
Amen to that.
I was wondering whether you'd comment on Stiglitz. I agree with him that the changes in the real economy are important, and that excessive emphasis on monetary phenomena tend to miss underlying realities in the physical economy.
I disagree, however, about major changes in the US economy. In the last decade, the driver of the global economy has been changes in China--that is on the scale of changes in the US that preceded the Great Depression. This time around, we are the tail, not the dog.
Also, Stiglitz completely overlooks the role of oil. The early 1930s were not primarily an oil shock to the best of my knowledge. Both 2008 and 2011 have oil shock characteristics.
I am also a bit wary about excessively discounting US manufacturing and similar blue collar jobs. China's comparative advantage in manufactures will ebb over time--I think visibly by 2015. But as you say, we need to focus on industries in which we have a comparative advantage, and those are the ones linked to natural resources for the time being.
Posted by: Steven Kopits at December 28, 2011 08:26 AM
I agree, JDH, this is a great post. The world economies are being crippled by the green/environmental movement. Cheaper, plentiful energy and raw resources and a well trained and diligent work force has and will determine economic success.
We are seeing too many hurdles to reaching or slowing our progress to these goals compared to other economies.
Posted by: CoRev at December 28, 2011 09:24 AM
Manufacture more based on our resources (natural and human) is a fine plan.
But as non-labor factor productivity continues to improve (e.g. automation) and labor factor productivity improves (e.g. effective use of advanced software) the rise in material wealth may not produce many jobs for high-school-only people.
Posted by: Bryan Willman at December 28, 2011 09:28 AM
Joe ignores the fact that a country can have an absolute advantage in everything if it sets its currency low enough. Treasury again refused to brand China as a currency manipulator, continuing its long-standing obvious and monumental lie. It is not just the natural operation of comparative advantage at work in the de-industrialization of the U.S. economy.
Jim, when you say "America should respond to our long-term challenges by making note of the natural advantages we already enjoy and figuring out how to make the best use of them." are you advocating anything more than allowing markets to work? The notion of a resurgence based on cheap fossil fuels is heartening to those who are concerned over our de-industrialization, but less so for those who see it as increasing the threat to our global environment. I'd rather see a trend to less material consumption.
Posted by: don at December 28, 2011 09:33 AM
Payden & Rygel is running ads on CNBC, basically discussing the bullish outlook for the global economy. They note that about 25% of the total output of goods & services ever created was created in the past 10 years (presumably through the end of 2011), which led me to wonder what percentage of total cumulative global crude oil production (crude + condensate) was consumed in the past 10 years.
I believe that cumulative global production through 2005 was about 1,000 Gb (billion barrels), and the EIA shows cumulative crude oil production for 2006 to 2011 inclusive at about 161 Gb, and cumulative crude oil production for 2002 to 2011 inclusive at 264 Gb, so (264/1161) X 100 = 23%.
So, the production, in the past 10 years, of 25% of all goods and services ever produced, corresponded to about 23% of all crude oil ever consumed. I wonder what happens to the global production of goods and services if, as I suspect, the supply of global net oil exports* available to importers other than China & India declines at 5%/year to 8%/year from 2010 to 2020 (versus the 2.8%/year decline that we saw from 2005 to 2010)?
*Calculated in terms of total petroleum liquids
Posted by: Jeffrey J. Brown at December 28, 2011 10:03 AM
Don's comment: "The notion of a resurgence based on cheap fossil fuels is heartening to those who are concerned over our de-industrialization, but less so for those who see it as increasing the threat to our global environment. I'd rather see a trend to less material consumption." shows the economic dichotomy caused by the environmental policies.
in order to positively impact perceived environmental issues, real economic and social welfare issues are created or exacerbated. There seems to be little attempt to meet a middle ground when environmental extremes are the goal.
Posted by: CoRev at December 28, 2011 10:16 AM
Incidentally, the flip side of the observed 2.8%/year decline in Available Net Exports (ANE)* of oil from 2005 to 2010 is that Chindia's combined net oil imports increased at 7.5%/year from 2005 to 2010.
In my humble opinion, the relentless math behind the ongoing GNE and ANE declines make most other discussions analogous to passengers on the Titanic** discussing dinner plans in New York, after ship hit the iceberg.
*Global Net Exports (GNE) less Chindia's net imports
**Note that in the first 15 minutes after the Titanic hit the iceberg, only a handful of people knew that the ship would sink, but that did not mean that the ship was not sinking. In the last 15 minutes before the ship sank, it was obvious to everyone that the ship was sinking, but by then it was far too late to get to a lifeboat.
Posted by: Jeffrey J. Brown at December 28, 2011 10:23 AM
OK first, you say you have a different view than those other guys, but don't go beyond that. Is your view to do what they say and also exploit commodities to boost factory activity? Or is it that they are wrong and that we need to bet our economic future on exploiting commodities to boost factory activity?
Either way, I'm curious to know - what do we know about the potential of any of these to generate income on a broad basis? We are, after all, still quite rich. What we don't have is economic security for those in the middle and at the low end. How many jobs are their in the exploitation of shale gas, heavy metals and the like? Surely, there is profit to be had, and perhaps increased security for the nation as a whole. If, however, this ends up being another endeavor that generates income and security for those who already have plenty of both, what's the point?
You have done considerable work on hydrocarbons in the economy and, what-da-ya-know?, you think resource exploitation is the key to our future happiness. Need more.
There is also the problem that CoRev is always wrong, and not just in a simple "not right" way. When CoRev says greenies are ruining the economy, you really need to look into whether greenies have been undervalued and have a tremendous further contribution to make. Not only does the available evidence suggest that environmental preservation has done no net economic harm, but all the evidence I am aware of says that our efforts at environmental protection are a net positive for the economy and well short of equilibrating marginal costs with marginal benefits. So your prescription is to exploit commodities associated with some of the greatest environmental harm. Without showing that it would result in good distributional results. Without showing why the US political culture would respond to the environmental costs of shale gas or heavy metals in a better (or faster) way than it has responded to other environmental costs along the way.
I realize this is just one blog post, but it doesn't seem particularly well thought through. We can get Stiglitz and Sachs elsewhere. We get you here. Please, tacking a couple of resource articles onto a couple of Sachs and Stiglitz articles to say you have a better idea, give us the better idea in detail - costs, benefits, and all.
Posted by: kharris at December 28, 2011 10:28 AM
I had not realized, until it was made explicit by this post, the structural shift in the labor market of the 1930's. I knew of the increase in farm productivity, and of course, I knew of the unemployment; but I hadn't put the two together.
Thanks for that.
Posted by: mutant_dog at December 28, 2011 10:33 AM
Eh, the US economy has been growing........just not like we have in the past since the 90's boom ended.
We get fits and starts of growth(sorta like the little surge now), but nothing consistant outside the RE boom/bust and that wasn't overly impressive.
I don't see a way to get it going any faster right now.
Posted by: The Rage at December 28, 2011 11:26 AM
With all due respect to Sachs, the housing collapse is due to a bubble collapse.
Posted by: wally at December 28, 2011 11:58 AM
Well, I like the post and the attitude. Let's go do it.
I am in the process of drawing up a nat gas forecast for the US. It looks to me that we could utilize 1-2 mboe/day of natural gas as CNG and 1 mboe/day of propane for transportation fuel on 9 mbpd of current gasoline consumption. We do have options.
Posted by: Steven Kopits at December 28, 2011 01:02 PM
At the same time, I think we might start taking a closer look at coal and steel forecasts at the 2015 range. China's per capita coal consumption is closing on 80% that of the US. That's pretty high, even allowing that China sources 80% of its power from coal, versus the US at 50%. The go-go days for coal in China are numbered.
Don't know about steel, which is used in infrastructure, construction and transportation. Don't know how it splits out, but if I were NuCor, I'd want to take a real close look.
Posted by: Steven Kopits at December 28, 2011 01:14 PM
kharris I would like to see some data that demonstrates increases to GDP, CapEx, or general investment from environmental conversation. Please note I am not being sarcastic and suggesting it does not exist. My thinking is that if a person has resources that can be invested or not invested it seems reasonable that making the decision to invest is the rational economic decision provided there is a decent chance of ROI. This of course assumes no environmental or societal damage.
So we have to evaluate the opportunity cost of not investing versus potential return of investing. It would seem investment would produce more jobs and economic value than preservation no?
Posted by: Martin at December 28, 2011 01:37 PM
Jeffrey J. Brown if memory serves that peek oil has been predicted at least (3) times. That math was based on increased consumption and largely flat or declining proven reserves. The problem with the predictions is they never materialized because supply always increased. This is of course true as the prices for crude rose with consumption.
When I look at the data for increased proven reserves from the US, Canada, and Brazil it seems that in addition to price increases there will be enough crude to meet global demand.
Posted by: Martin at December 28, 2011 01:44 PM
Seems to me, the unification of world economies going on has -inevitably- brought unification of costs and prices with disadvantage to high cost producers.
We can either lower production costs to compete or find salable products unmatchable elsewhere as the post recommends.
The process is not static; it continues in an increasingly interconnected world; whatever we do for advantage will not last. It's a Red Queens' race!
Posted by: Jack Curtis at December 28, 2011 08:04 PM
Let us debunk few pernicious ideas on the foundation of this crisis.
It looks like 1930, No it does not, it is worse,in 1930 the USA are net exporters of capital,net exporters of oil,the banking industry can be mended,winding up affordable.
In 1930 around 1800 cars manufacturers can be numbered,consolidation is made in the industry, in the railways as well.In 1930, the industrial world is a nascent industrial base where major innovations provide for a sustained domestic production,automobiles,television,fridge,radio.The consumers credits and loans are a general burden,but the economics of general balances are still a benchmark for assessment.When Professor J. Taylor writes,"it took thirty years for L Schwarz and Friedman to complete the exhaustive analysis of the great depression causes and consequences",it will take two lost decades to forget them,and one last decade only to add to the ploy.The similar features are only apparent in the total credit to GDP 270% in 1930 against 320% in 2008.In 1930 not only the USA but many countries of Europe had incomes,large gold reserves if one think they hold value.
Most of the Western nations had a current account surplus and were generating exports.
The banking and financial industry are the main culprits.
No,they are not, they are joint and several with the governments and all ancillaries public functions.This state of economic affairs is the "'Rosemary's Baby" of the public functions,of the government bodies, of the supra national economics bodies.Banks,financial industries were put at the forefront of a plan.One does not build 415 trillion usd exchange traded derivatives (http://www.bis.org/publ/qtrpdf/r_qa1112_anx23a.pdf) without being unoticed,without a purpose,without consequences.The economic equilibrium built on such premises and financial tools cannot be unwound without further damages.The balances in prices favourable to some countries may at any time be challenged to the contrary. The shift of the economies have been made from labour to capital,less labour.More capital available through the banking system,the average leverage of the banking system was around 1/40.Adam Smith did not deliver neither Keynes or Keynesian theories.Cynics the financial industry and participants helped themselves and took their morsels and that is why legislators had imposed surveillance and attached functions.
Sanitise the financial industry,derivatives are handful tools if used to hedge what one has.The same arbitrage in prices and interest rates used to be made directly on the underlying assets without larger damages but the self inflicted decay of a particular asset.It was affordable for a nation,it is no longer affordable for the all nations.
Let the unsound financial corporations fail and monitor the administration of the failures.
Review the credibility of maths underpinning the theories and markets.Note that progresses have been made in the human candor and yet they bare the same consequences.
In the years 400/440 of the Roman Empire, a battle against the Huns was lost,the Huns had silk flags bringing them the wings of the victory,silk had never been seen before.
Later nations had the right faith,later the right paintings and pictures.Now the right maths,the right algorithms, the right computers.
Decrease the structural costs of production,that includes a decrease of the costs and burden of the governments and public expenditures.
Establish a price volume matrix of imported goods and fill the vacuum where it can be filled (fiscal and or production)
Robotic, is unequally developed among the industrialised nations,it involves research development and upgrades of production functions and labour.
Energy, progresses seem possible in the solar electricity, as an illustration of the ongoing researches (Focus: Nanotube Bundles Show Promise for Solar Cells)
Posted by: ppcm at December 29, 2011 12:00 AM
I must be missing or misunderstanding something, but wouldn't reliance on natural resources to get us out of the current predicament be a symptom of the malice and not its cure. Not long ago abundant natural resources were spoken of as a curse, a drag on economic growth. If it happened that a country had too much of extractables in its soil, it also likely suffered from the Dutch disease, a closed economy, a corrupt bloated bureaucracy and a ghastly income stratification between an uneducated impoverished populace and a small fabulously wealthy rent-seeking elite.
Posted by: nilys at December 29, 2011 01:42 AM
As you hint the growth model of the USA has been for centuries based on finding more red-skins and the resources they were squatting upon (land, bisons, Black Hills, Texas oilfields, ...) and repossessing those resources (instant equity!) and extracting rents from them. Or resources underused by dark-skins (their labor) and repossessing them too, but that was a minor effect.
The big structural problem with the USA is that it has run out of redskins when they reached the Californias, and the resources that the red-skins were squatting upon have also been largely mined out, or are insufficient to provide rent for everybody.
But the new Black Hills in today's USA are the savings and pension accounts of the working classes, and the working classes are the new red-skins, and the Real Americans of the USA have been doing very well repossessing and mining those savings and pension accounts. The USA have also found that the brown-skins are the new dark-skins, in a gentler way, and the middle passage accordingly now is just a trip across the Arizona desert, rather than the Atlantic, but again these are a sideshow.
Indeed in the past 30 years a wave of unprecedented prosperity has lifted the fortunes of the population of the USA, as the mining of the savings and pension accounts of the newly reclassified red-skins have provided them with great riches.
Too bad for the new red-skins, but the fortunes of the old or new red-skins don't matter.
Once upon a time some parts of the USA were also prosperous thanks to adding value with the so called Yankee system of production, but that requires thinking hard and working diligently, and the USA masters of the universe have been disdainful of value added enterprise for a long time, reckoning that mining value is a much better way to make money fast with a minimum of effort.
Posted by: Blissex at December 29, 2011 03:02 AM
The suggested solution, using natural resources, seems a temporary issue. The fact is we must care more about preserving these natural resources.
Posted by: Pierre-Yves Le Maout at December 29, 2011 03:27 AM
Any way, I personally believe America will soon stand up and continue to prosper. We, non-Americans, still support American Dream, its entrepreneurial spirit. This country will overcome any obstacles and, as far as it concerns economy and business, will continue to be an example for others.
Posted by: Nazima at December 29, 2011 03:29 AM
Martin, even though there may be lots of oil, we're constrained by how fast we can extract it. We can't produce the equipment or train people fast enough to grow production much in the short term. In addition, as a developed economy, there is not much room for productivity growth in the US, so the oil produced is much more valuable in the developing world. Even if global recoverable reserves grow greatly, Jeff's advice is good.
Posted by: aaron at December 29, 2011 04:48 AM
Global total liquids production, inclusive of low net energy biofuels, increased at 0.5%/year from 2005 to 2010 (EIA).
Global crude oil production (EIA) and total petroleum liquids production (BP) was essentially flat from 2005 to 2010. Here is a "What If" chart that lines up North Sea crude oil production in 1996 with global crude oil production in 2005 (different vertical scales):
Global Net Exports (GNE)* fell at 1.3%/year from 2005 to 2010.
Available Net Exports (ANE)** fell at 2.8%/year from 2005 to 2010.
US crude oil production, prior to the hurricanes, was 5.4 mbpd. In 2011, it will probably average between 5.6 and 5.7 mbpd.
Canada showed an increase in net exports of 0.25 mbpd from 2005 to 2010. Over the same time frame, GNE fell by about 3.0 mbpd and ANE fell by about 5.0 mbpd.
Brazil is a net importer of petroleum liquids, with a recent pattern of increasing net imports of petroleum liquids.
If we look at the combined net export output from Canada, Mexico, Venezuela, Brazil, Argentina and Colombia, their combined net oil exports fell from 5.1 mbpd in 2005 to 4.0 mbpd in 2010.
*GNE = Production less consumption, top 33 net oil exporters, total petroleum liquids, BP + Minor EIA data
**ANE = GNE less Chindia's combined net oil imports
Posted by: Jeffrey J. Brown at December 29, 2011 05:11 AM
Thinking of economic activity at the level of the firm misses a great deal. A coal mine or power plant may face a lower return due to environmental control, but environmental control firms grow in response to environmental regulation. I know it isn't all that satisfying for me to tell you to look up the studies yourself, but I'm trying to earn a living right now, so that's all I can do. However, the mercury emission regulations just put in place offer a fair example of the sort of trade-offs involved. Estimates I've seen put the cost/benefit ratio at about 1/9. Though power industry lobbyists claimed there would be rolling blackouts in response to the new rules, outside analysts have concluded that no such thing will happen. Rather, the plants that will close "because of new regulation" were nearly all likely to close without the regulation, and new plants will be built in their place. Building the new plants may not be a huge lift to the profits of private firms, but will be a lift to GDP.
Note also that "peek oil" was first predicted for the US rather than the world as a whole, and occurred just about exactly when the originator of the idea said it would. He had the advantage of USGS county-by-county data. Data of similar quality is simply not available for the world as a whole, so forecasts of similar accuracy are for the world as a whole are also unavailable. There is a certain hubris in making peek oil claims for the whole world without good data on which to base the forecast, but there is also a certain hubris in dismissing the logic of the peek oil argument just because ill-founded forecasts proved untrue. The logic that allowed the very accurate peek oil forecast for the US applies to the world as a whole.
Posted by: kharris at December 29, 2011 06:19 AM
In order to get the US economy growing again people should focus on supply side factors, namely increasing in productivity through technological progress - that's the key to long term output growth!
Posted by: Anonymous at December 29, 2011 06:29 AM
JDH This is a strange recommendation given the fact that you yourself have admitted that we do not seem to know how to traverse an optimal path for an exhaustible resource.
It's also unfortunate to see that you've fallen for the Stiglitz "structural" analysis. Sorry, but there is nothing about today's global macroeconomic problem that cannot be solved with good old fashioned fiscal stimulus. This is an aggregate demand problem we're facing, not a some kind of structural thing. Next we'll be hearing some Austrian mumbo-jumbo about the length of production cycles and concertina effects.
Finally, you haven't told us how your recommendation helps us choose between competing explorations of natural resources. For example, the greatest natural resource advantage this country possesses is fresh water. The Great Lakes account for roughly one-fifth of the world's fresh water. Many of the things you propose threaten that resource. Mineral exploration poisons watersheds with arsenic. Exploitation of coal dumps mercury into the air and water. Oil refineries hurt Gulf fishing and recreation industries, which are also natural resources. So I think you owe us a follow-up post that lays out just how we should make trade-offs between the exploitation of competing resources. And when you get around to writing that post I think you'll find that where America really shines is in the brainpower to research and think through those kinds of problems. The US still has the best university system in the world, and by a long shot. America's motto should be "intellectual missionary work among savages" and a good place to begin is at home. In other words, as a member in good standing with the academy, you should not be encouraging the kind of irresponsible nonsense we just saw coming from CoRev.
Posted by: 2slugbaits at December 29, 2011 06:49 AM
aaron it still sounds like peak-oil and all the peak-oil guys have been wrong up until now. Respectfully I also don't buy the argument about proven reserves increasing but production staying flat due to inability to get it out. We have ultra deep drilling rigs being built and fracking technology solely because crude is around $100 pb. High prices and tight demand bring producers which usually means increases in supply. Yes it takes 5 years to get new oil out of the ground but that means supply increases will be slow but there will be increases.
Posted by: Martin at December 29, 2011 07:13 AM
If the economy ever does get moving, there is going to be a humongous labor SHORTAGE. It seems that everyone is on drugs, and nobody can pass a pre-employment drug test.
Maybe the real way to compete with China is how the Brits did it back in the 19th Century: get 'em all hooked on Opium.
Posted by: Buzzcut at December 29, 2011 07:25 AM
Perhaps proven reserves aren't really increasing, or they are increasing at a very slow rate?
In any case, following are charts showing Texas & North Sea crude oil production around their respective peaks (horizontal axes), versus annual oil prices (vertical axes):
You will not that in both cases production fell, despite sharply rising oil prices.
Texas & the North Sea were primarily developed by private companies, using the best available technology, with virtually no restrictions on drilling, and they collectively accounted for about 9% of total cumulative global crude oil production through 2005. Yet they show clearly defined production peaks, and the post-peak declines in both cases corresponded to sharply rising oil prices.
The following link has a graph showing the 1999 North Sea peak lined up with the 1972 Texas peak:
Your argument is that the sum of the output of discrete regions that show clearly defined production peaks will not show a production peak, despite the fact that global crude oil production has been flat for six years, versus generally rising oil prices?
We have, as noted up the thread, seen a measurable, but very small, increase in total liquids (inclusive of low net energy biofuels). But the GNE & ANE numbers show an ongoing decline (in total petroleum liquids).
The only real difference between the Texas/North Sea peaks and the current global plateau is that we have an a slowly rising contribution from unconventional production globally, which was not a factor in the Texas & North Sea peaks. However, slowly rising unconventional production has only served to keep crude oil production on a plateau since 2005, with no material increase in crude production, despite the massive expenditures by the global oil industry in the past six years.
Posted by: Jeffrey J. Brown at December 29, 2011 07:43 AM
I share your sentiment that America needs to stop wringing its hands, and get to work. However, our salvation will not be found in increased exploitation of natural resources, it will be found in offering unique or superior products at competitive prices.
The superior products will result from low cost access to quality education and deconstruction of a patent system that operates more as a barrier to entry than as an encouragement to innovation... Competitive pricing will only result from deflation. Here, its only the oligopoly that insists on inflation to solve the ills of our economy. They control the bulk of production and distribution, and can raise prices to limit erosion of their holdings. Lower classes are trapped by frozen or declining wages when they can find work, ravaged by increasing price levels.
Ultimately, its the banking system (the FED), that controls our fate. It has allowed avalanche conditions to develop with a mountain of credit, and a currency that has eroded 88.5% (on a CPI basis) in the last 50 years. The credit overhang has to be reduced... Its best done through default rather than the slow torture of inflation.
Posted by: Anonymous at December 29, 2011 08:27 AM
2slugs and KHarris, I'm trying to determine just what is controversial enough in this statement: "...shows the economic dichotomy caused by the environmental policies.
in order to positively impact perceived environmental issues, real economic and social welfare issues are created or exacerbated. There seems to be little attempt to meet a middle ground when environmental extremes are the goal."
Seems that denial of the impact on the gulf economy from the over reaction of the BP spill is in place. The real, "finger in the eye" denial for most environmental liberals is the DDT banning issue. Millions of human souls lost to bad science. Or we can look at the ozone issue and its now better understood science, and how that has had economic impacts.
The anecdotal evidence is overwhelming. Denial of it from one political sector is also overwhelming.
Posted by: CoRev at December 29, 2011 08:30 AM
JDH-Can you be more explicit about your proposals? The boom in commodity extraction in the US is about demand for those commodities and real increases in prices for those commodities for the last 10 years or so. That commodity extraction is happening without any significant change in the environmental regulations governing those industries over the last 10 years.
I'm not seeing how growth in commodities extraction and processing will aid our employment problems unless the growth in those industries is enormous. Table A-13 at BLS seems to indicate that these industries are maybe 20 million or so, although most of that is probably in construction rather than extraction, given the current unemployment rates. http://www.bls.gov/news.release/empsit.t13.htm
How many jobs do you think we can add in commodities extraction by removing regulations? And what are the tradeoffs in other industries and in human health/environmental damage?
Posted by: uber_snotling at December 29, 2011 08:37 AM
don, kharris, uber_snotling, and others: Let me repeat my vision for clarification: use North America's abundant natural resources as a basis for a competitive advantage in manufacturing. Yes, for the main part, the market should be able to figure out how to do these things on its own, and indeed the three examples I cite here are all things that are already happening without any governmental policy. I do nevertheless believe that agreeing on the big picture of where we're trying to go would be very helpful for policy making on any of a number of individual concrete decisions. As for specific policy changes to consider, I had 5 specific suggestions here and 4 here.
Posted by: JDH at December 29, 2011 09:03 AM
Given all the discussions above regarding the natural availability of natural resources and using the 1930s as a model for an economic renaissance, there seems to exist a self-serving myopia that overlooks several fundamental points: the BRICS' consumption, investment and labour markets are here to stay while they were but peripheral issues in the last century, natural resources are depletable and thus not sustainable, and numerous other countries (ie: Germany, among others) seem to have adapted just fine by (i) investing for productivity through both education and technology, (ii) not having a natural resource base, and (iii) prudent economic management. Could we please stop fumbling around looking for a simplistic formula and simply get back to the basics of an economy that has been abused by the simplicity for too long and thus will need serious long-term rehab rather than short-term jingos?
Posted by: SageWithAge at December 29, 2011 10:57 AM
JDH When dealing with the big picture, it's important to remember that in the long run we want to maximize NET product, not GROSS product. This is especially important when thinking about how best to exploit exhaustible natural resources. One major problem is that conventional NIPA procedures do not properly account for the depletion of natural resources. If you want to get things right, you have to net out from GDP Hotelling rents from extraction costs and add back in the value of new discoveries priced at the marginal cost of discovery. Of course, that's not how current NIPA evaluate things. Here I am closely following Hartwick's and Weitzman's approaches for exhaustible natural resources.
As to America's competitive advantage, I think it's pretty clear that we are absolutely unequaled at warfare. I just finished reading Unger's new biography of Machiavelli so I'm numb to cynicism, but if you want to take a hardnosed look at the world I think it will be pretty clear that America's chief contribution to global prosperity is to be the meanest, baddest cop around. Something like a 21st century Roman or Athenian Empire. Except that we're too uncomfortable about extracting tribute for our troubles. But like it or not, it's what we do best. Ask the Iranians if they really want to block the Straits of Hormuz.
CoRev Your mosquito abatement example is hopelessly confused, not to mention naive. If you ever bother to take a course in systems of nonlinear differential equations with interaction terms, perhaps they will trot out that old textbook favorite the Volterra Principle:
Aside from Volterra's fish population example, the old mosquito/DDT problem is also commonly used in textbooks to illustrate the point. Contrary to naive intuition, over the long run use of DDT does not reduce the mosquito population.
Posted by: 2slugbaits at December 29, 2011 11:40 AM
2slugs, you have done your normal "look over here... how could you be so wrong" mathematical approach to arguing a real world situation.
Real world: malaria has been nearly completed eradicated in the US for nearly a generation due mainly to DDT. The approach does not require eradication of the mosquito, but "house spraying" to prevent them from taking residence with humans. 2slug world: but, but, the formula clearly shows that there is a relationship between prey and predator???!!!?!
As I said, the finger in the eye example is the DDT example.
There is more to add re: the persistent environmental attacks on exploration and production of raw resources and world availability and pricing.
Posted by: CoRev at December 29, 2011 12:20 PM
As to America's competitive advantage, I think it's pretty clear that we are absolutely unequaled at warfare.
Finally something I agree with Slugs about. The only institution in this country that has not failed is the Marine Corps. They certainly know how to fix problems that have been festering for decades (Sadaam Hussein, for example).
Granted, perhaps it is easier to solve problems when you can just blow things up and kill people.
Posted by: Buzzcut at December 29, 2011 12:52 PM
CoRev Your history of malaria control leaves something to be desired. Malaria was largely eradicated in the US long before DDT was ever used (1947). Malaria started to disappear in the 1920s and (especially) during the 1930s with the draining of swamps and the TVA. The housespraying you're talking about was supposed to halt the reintroduction of malaria, not its eradication. So your history is just bad. And for a more recent example, Vietnam tried to eradicate malaria with DDT and it completely failed. Vietnam then switched to other approaches with a lot greater success. Look, DDT tends to have an asymmetric effect on predators. The mosquitoes evolve tolerance to DDT much faster than the birds and bats that eat them. As a result DDT will cause an initial drop in the mosquito population, but then over a longer run the mosquito population will grow at a greater rate than the predator population. That's what the Volterra Principle predicts and it has been verified in all kinds of real world cases including fish and mosquitoes. Like I said, the mosquito example is by now a standard chestnut in most math textbooks.
DDT is only useful today in relatively rare circumstances in which there is a pressing short term crisis.
Buzzcut Well, the jarheads have great attitude and they make the most with what they've got, but the Army has by far the greater capacity and the more sophisticated logistics models. Whenever I'm at meetings with my Marine Corps ORSA counterparts I sometimes have this avuncular impulse to want to pat them on the head because they try so darn hard....bless their souls.
Posted by: 2slugbaits at December 29, 2011 02:37 PM
Absolutely we should return to doing what made the country great. We became the world's super power via free market capitalism. Part of the current problem is that excessive printing has distorted prices, which prevents the free market from allocating capital to its most efficient use. If prices do not contain accurate supply/demand information, business produces the wrong mix of products. We wind up with millions of empty McMansions instead of factories turning out products that the world wants to buy.
Many people don't trust the free market to produce prosperity, but it has historically worked better than central planning. When the bank tries to centrally plan the economy via printing, the result is leveraged Minsky bubbles that misallocate capital. IOW, stop the printing press so that prices once again contain accurate supply/demand data, and the free market will gradually move back to efficient capital allocation.
Posted by: Ekim at December 29, 2011 02:47 PM
We are side tracking this thread so I will not continue. 2slugs, stop shooting from the hip and do a little research.
Posted by: CoRev at December 29, 2011 06:12 PM
Here is the real reason for our current malaise:
Free trade can be mutually beneficial. There are gains through comparative advantage (CA) and gains from industries with increasing returns to scale (IRS). Technically, both home and foreign benefit by restructuring to produce at different and mutually advantageous points on their respective production possibilty frontiers (ppfs). So far so good.
Trade may allow a third type of restructuring: industrial relocation. Industrial relocation will occur where the capital stock within an industry is internationally mobile but some factor of production is not. If also the factor can be obtained in greater relative abundance and at lower cost in foreign then there is an incentive for firms within the industry to relocate to foreign and so lower their costs. Typically (though not always) the immobile factor is labour.
Industrial relocation is not benign. Just as there is an increase in the capital stock of foreign so there is a decrease in the capital stock of home. The ppf at home shrinks and the ppf of foreign expands. Whether or not trade is beneficial then depends on whether or not gains from comparative advantage and increasing returns to scale outweigh losses from relocation.
My own interest is in developing computer models of trade. These show that industrial relocation can overwhelm benefits from CA and IRS on reasonable assumptions. The principle reason for this is that the main driver for capital reallocation from home to foreign is the cost differential of the immobile factor. In the case of labour, it is unlikely that the US or any other developed country will match wages in the developing world any time soon.
The issue is critical. Recent years have seen a rapid increase in FDI (foreign direct investment) associated with firms relocating. I now firmly believe that the wage stagnation experienced by developed countries is a direct consequence of this type of restructuring. It also means that it will be difficult for developed economies to grow out of the current recession as their ability to export is continually undermined by IR.
As to why so many academic economists do not seem to either address or even properly understand the issue of capital mobility and the circumstances in which it becomes problematic I have no real answer. Certainly Ricardo understood it and should not be maligned in this regard. To explain capital: The capital stock in an industry includes plant, equipment, patents, formulas, trade names, techniques of production and a host of other factors that contribute to its productive capacity and, indeed, the productive possibility of the whole economy. If an industry dies competitively, then almost by definition the capital loss is small as its intrinsic value is reduced and its parts are progressively sold. Resources released, such as labour, are then reallocated more productively. In contrast, if a highly competitive industry simply relocates elsewhere then little is sold, additional capital is consumed in relocation expenses and what resources are released do not have a more productive use. The labour force of a high tech company will most likely end up mowing lawns or waiting tables. Moreover, attempts to foster innovation and enterprise, however well intentioned, must ultimately fail as these new firms will also relocate once they have established themselves.
Posted by: Floxo at December 30, 2011 09:32 AM
Floxo, An alternative explanation, and/or contributing factor:
A Review of Annual Brent Crude Oil Prices
Here is a link to EIA data showing annual Brent prices, which is a good indicator of global crude oil prices:
Here are the annual Brent crude oil prices from 2005 on, along with the rates of change relative to 2005:
2006: $65, +17%/year
2007: $72, +13%/year
2008: $97, +19%/year
2009: $62, + 3%/year
2010: $80, + 8%/year
2011: $111*, +12%/year
The 2011 annual Brent price is about twice the 2005 annual price, and it is the highest annual crude oil price ever, up 26% over the annual 2010 price, and up 14% from the annual 2008 price.
Note that we have had two price doublings since 2002, from $25 in 2002 to $55 in 2005, and then from $55 in 2005 to $111 in 2011.
In response to the first price doubling, we did of course see a substantial increase across the board in total liquids production (inclusive of biofuels), total petroleum liquids, crude + condensate, and in Global Net Exports (GNE) and in Available Net Exports (ANE).
In response to the second price doubling, we have seen a very slow rate of increase in total liquids production (up 0.5%/year from 2005 to 2010), virtually flat total petroleum liquids and and virtually flat C+C production (through 2010), and a 1.3%/year and 2.8%/year respective decline rate in GNE & ANE (through 2010). I estimate that the ANE decline rate will accelerate to between 5%/year and 8%/year from 2010 to 2020.
I estimate that the current CANE* depletion rate could be on the order of about 8%/year. This would be the rate that we are consuming the cumulative post-2005 supply of global net exports available to importers other than China & India.
*Cumulative Available Net Exports (post-2005)
Posted by: Jeffrey J. Brown at December 30, 2011 10:50 AM
"Sorry, but there is nothing about today's global macroeconomic problem that cannot be solved with good old fashioned fiscal stimulus. This is an aggregate demand problem we're facing, not a some kind of structural thing. Next we'll be hearing some Austrian mumbo-jumbo about the length of production cycles and concertina effects."
Well said. But, if fiscal stimulus is needed, isn't it best to do that by investing in the kinds of things JDH is suggesting here? In an ordinary recession where only short term stimulus is needed, maybe this would natter less, but if Richard Koo is correct and we will need stimulus for a decade, wouldn't it be wise to make sure structural issues are addressed at the same time by investing that stimulus in ways which can boost our competitiveness?
I would agree though that getting macroeconomic policy wrong here is still the biggest threat to economic growth. Neither "peak oil" nor environmental regulation is going to cause macro level unemployment.
Environmental regulation is not limiting economic growth, because environmental regulation is increasing quality of life. If this doesn't show in GDP, that is merely a measurement error.
At the same time, economic activity is not meaningfully being constrained by natural resource limits, either. There are lots of reserves that can be tapped as prices rise, and lots of alternatives for any one energy source.
Looking at something like "total liquids production" for example can be misleading, when that total includes some products where usage is declining in part due to environmental reasons. The truth is production of gas and diesel has continued to increase. But residual fuel oil has declined sharply, as it can't compete with natural gas in power generation or building heating (where it is a minor fuel, but major pollution source). And liquefied petroleum gas has also lost some ground where natural gas can be used instead. Production will respond to demand, and lower demand for some of these products is actually good news.
Posted by: acerimusdux at December 30, 2011 11:27 AM
It would be interesting to extend Wright's work by refining his natural resource estimates categories to energy inputs and all other. He textually and explicitly recognizes the importance of the energy input with the comments on coal, but not in the data he presents. I think you are making an important statement here, but as we think about necessary collective actions, we need to focus on the high payback ones. Energy inputs may be the most important of all to industrial success. A very interesting question.
Posted by: Steve Bannister at December 31, 2011 07:28 AM
Precious metal mining Points to make a firm decision when selecting any eco friendly gold mining technique Gold Mining Systems
Posted by: Ronny Matern at December 31, 2011 12:05 PM
If you wish to understand this competitive issue then look at first Dr. Michael Porter and then Dr. Clayton Christensen's theories.
It is pretty obvious that a disruptive innovation wave has hit Western economies. Western environmental standards, labor standards and high input cost from energy prices (due to taxation) have made the West unable to compete. Western production also overshot the needs of the customer, who values a cheap product that will last two years over a highly engineered product that will last 10+ years! In the past two decades, Chinese manufacturing has gone from "not good enough" to adequate for the majority of customers and customers have switched like mad.
It is not unlike how cheap digital cameras and less printing has killed Kodak's film-based process. Only it is cheap labor, cheaper input and infrastructure cost and cheaper quality that has defeated local western production.
Posted by: Jeremy at January 14, 2012 05:24 PM