Degrowth Versus Sustainability

I was on the “Steve Keen and Friends Livestream” very recently, and one of the topics that came up is “Degrowth.” I had earlier made some comment about degrowth on Twitter and noted that I found it hard to find a good explanation of what “degrowth” really meant. A few helpful people sent me the article “What does degrowth mean? A few points of clarification” by Jason Hickel.

Labour Market Tightness

The interesting part of the inflation debate is the question of labour market tightness. If we are looking at the CPI, what we see is that many components hit high rates of inflation. This means that we need similar gains in 2022 to keep the CPI from dropping back towards 2% or whatever. The more interesting issue is whether strong wage gains will continue, as that increased purchasing power would give a lift to demand and increase purchasing power across all sectors.

The latest U.S. labour market data dump was consistent with continued improvement in the labour market, with the broad employment-to-population ratio rising to 59.2% (figure above). That is well above the lows, and returned to the values seen in middle of the last cycle.

My not very useful observation is that hourly earnings is perkier than would be justified by historical rules of thumb based on macro data. Potential explanations appear to be as follows.

• One explanation I have seen is that wage growth may be more sensitive to the rate of job creation, rather than levels, as is conventionally assumed. (I saw the analysis on the EmployAmerica website, but I cannot remember which blog/report contained it.) Since a good portion of job gains are firms getting back to work after shutdowns, employment growth rates will presumably burn out relatively soon.

• Policies that paid people not to work obviously help tilt bargaining power towards workers. I am unsure as to how much of this effect remains.

• Have workers dropped out of the workforce due to health concerns? This is the story being pushed by the hawks. It is unclear to me how sustainable such a strategy is for workers.

• On a related point, day care employment has not fully recovered, and so workers are effectively locked out of the job market.

• The changing consumption patterns of consumers has invalidated certain modes of operation for firms. So firms could theoretically have the same number of employees, yet need a different mix of workers. This would cause “skills bottlenecks,” even in the absence of net employment growth.

• Certain firms and industries feasted on unsustainable labour practices — being able to call in workers effectively on demand, for example. Even a slight amount of labour market tightening would squeeze out such practices. Meanwhile, there are industries reliant upon pushing capital expenditures to “contractors”: trucking and ride sharing. Sooner or later, the supply of suckers who don’t understand depreciation would dry up.

Projecting high wage growth on a multi-year horizon appears to be reliant on the premise that firms and workers cannot adapt to the realities of a world with COVID-19.

Peak Oil

One of the other issues with the inflation outlook is the question of oil prices. At the moment, wholesale energy prices have undergone a correction, which will blow a hole in the rate-of-change of the energy component of the CPI. On a longer horizon, we might need to be cautious.

As seen in the chart above, “liquid” production has peaked in the United States (right about when one of the more reliable contrary indicators on Twitter was laughing about Peak Oil). This was somewhat predictable: fracking generates output quickly, but the depletion rate is also rapid. The industry was unable to keep up the frenetic pace of drilling since it was not economic.

Admittedly, high oil prices could generate another burst of fracking activity. However, the reality is that the fracking needs to move towards more marginal sites, and depletion gets worse as conventional oil production continues its secular decline.

There are of course other sources of hydrocarbons. However, the United States was the epicentre of fracking triumphalism, and the most that oil production bulls can hope for is that the same script plays out elsewhere (horrifying anyone worried about climate change).

Email subscription: Go to https://bondeconomics.substack.com/ 

(c) Brian Romanchuk 2021

Electricity Options

The recent power failures in Texas led me to think about a topic I had not thought much about since my electrical engineering undergraduate days -- electricity transmission and generation. In this article, I discuss big picture options for electricity, both from a technology and electricity markets/regulation point of view.

Computers, Productivity And Long-Term Growth

I ran into an attempted slam on Paul Krugman's 1998 argument that "the internet" would not be a big deal economically. Sadly for the anonymous account who dredged the argument up, Krugman was closer to the truth than the people he was arguing with at the time. This was part of a debate when I started in finance, and related to long-term growth. The linkage to fixed income is via the dreaded r>g fiscal sustainability debate -- what is the long-term real growth rate? 

At the time, I was largely unimpressed with economists' grasp of the technological issues. My academic background was in control systems engineering, which was the discipline tied to harnessing the power of electronics to better operate mechanical and chemical systems. My view is that there is a certain amount of economic folklore around the subject, and the correct answer is that long-term real growth projections are almost entirely garbage in-garbage out exercises. 

U.S. Oil Production In Process Of ... Peaking

My base case view matches what is priced into the markets: the crude oil market is glutted and demand is falling off a cliff. Storage constraints are in sight, and I am not seeing an immediate catalyst for a demand rebound. The nearly inevitable outcome is that drilling drops dead, and capacity is shuttered. At some point, one will be able to take the chart of U.S. crude liquid products (conventional oil plus the products of fracking), stick a red line through the maximum value, and all other values on the chart will below that maximum. In common parlance, this behaviour is known as a "peak." As a long-suffering card-carrying Peak Oil believer, I will be flooding the internet with "I told ya so!" missives.

Some Comments On Economic Climate Change Models

Other than a few comments on the Green New Deal (on the basis of economics), I have shied away from discussing the issues around climate change. However, I ended up in the cross-fire of a discussion between Steve Keen and others on Twitter, as a result of tweeting a link to this article: "The Cost of Climate Change: Steve Keen Dismantles William Nordhaus." As an immediate disclaimer, I am not familiar with the literature, but one basic premise of Keen's seems correct: the time discounting methodology used by Nordhaus makes little sense. Since it follows an optimal control paradigm, it unsurprisingly attracts defenders among neoclassical economists. However, as someone with a control engineering background, it does not really work. It only makes sense if the costs of climate change are essentially trivial, which is an obviously disputed point.

Comments On The Green New Deal And MMT

There is considerable interest in the Green New Deal (GND) proposal by U.S. Representative Alexandria Ocasio-Cortez, and its relationship with Modern Monetary Theory (MMT). Although my preference is to focus on my business cycle book, since I am one of the many MMT bloggers, I should at least comment on the Green New Deal. The natural question arises: what does the Green New Deal mean, and is it feasible? Based on my very limited understanding of the American legislative process, I would guess that it is way to early to say anything definitive. That said, that has not really stopped anyone else from making wild claims about the proposal...

Productivity And The Cycle

I am resuming work on pondering the business cycle, and just wanted to give some initial comments about the notion of productivity. This article just describes some basic concepts taken from a generic post-Keynesian perspective (plus some of my own views, which may or may not be eccentric). As work progresses on my book, I should address the neo-classical approach, as well as empirical results.

Science And Economics

I had largely managed to avoid writing about the latest angst in the economics blogosphere regarding mathematics, science, and economics. I am not a fan of mainstream economics, but at the same time, I question some of the broad brush attacks on economics. The quest to pretend that economics can be a science like physics is doomed, and does not take into account the nature of what is being studied.

Rise Of Robot Lettuce

A story about a robot-run lettuce farm that can produce 10 million heads a year has been making the rounds (h/t Mike Norman Economics). Although interesting, you cannot extrapolate this to imply that all farming jobs are at risk. The article is interesting in how the techno-enthusiasm covers up the interesting economics. (This article could be viewed as a post-script for my review of the book Rise of the Robots.)

Yes, The Earth Is Not "Running Out Of" Oil And Gas

I had to shake my head at the following Telegraph headline: "The Earth is not running out of oil and gas, BP says." The article itself has highlights from BP's new Technology Outlook, which the Telegraph summarises as "... existing technology [is] capable of unlocking so much that global reserves would almost double by 2050 despite booming consumption." Although there may be some grounds for optimism embedded in the report, the complete lack of understanding what "peak oil" types are worried about is troubling. (The argument is that we would never "run out of" oil, rather extraction flows collapse once they no longer make economic sense.)

Pondering Post-Peak Oil Theory

Although I would consider myself to be in broad agreement with "Peak Oil" theory, I am less sure about some of the recent approaches to it. The Oil Drum was the go-to site for peak oil analysis, and I am unaware of any comparable replacement. My diagnosis is that Peak Oil theory developed a public relations problem after the 2009 Financial Crisis - many believed that oil prices would keep going on up to $300/barrel (or whatever), and there was a shock when oil prices collapsed. My feeling is that many in the Peak Oil camp over-reacted to that event.

Book Review: Smaller Faster Denser Lighter Cheaper

The book Smaller Faster Lighter Denser Cheaper: How Innovation Keeps Proving The Catastrophists Wrong by Robert Bryce is a celebration of technical progress, in particular progress fueled by capitalism. As someone in the Peak Oil camp, I was curious to take a look at some of the more optimistic views of the future. Although I do not disagree with Bryce's assessment of the past, the weaknesses within his analysis did not really cause me to reassess my gloomier long-term outlook.

Peak Oil And The Cycle

One of the things that are often misunderstood about "Peak Oil" is that it is not a prediction that oil prices will rise up in a straight line. Recent events have definitely thrown cold water on that interpretation. I will make a brief explanation why "Peak Oil" is not proven incorrect by the latest price swoon, and some comments on the economic effect of cheaper oil. I do not know whether the positive or negative effects are greater for the United States, but I think the reaction of the Canadian dollar provides a good read on the situation in Canada.

Energy Limits To Growth: Krugman Vs. Buchanan

In "Slow Steaming and the Supposed Limits to Growth", Paul Krugman slams the article "Economists are Blind to the Limits to Growth", by Mark Buchanan, a physicist who writes commentary for Bloomberg. Krugman complains that Buchanan is following a view that is common in the hard sciences - that physicists know more about economics than economists. Although I am no fan of mainstream economics, I think this complaint is largely valid - most business cycle economists can get away without obsessing about the "limits to growth" imposed by physics. That said, based on the analysis laid out in Sustained Growth On A Finite Planet, I show why I disagree with both sides of the dispute.

Drill, Baby, Drill!

One of the developments in the North American real economy which is of extreme importance for forecasting is the surge in oil and gas drilling activity. Although the number of people directly employed in drilling is minuscule, there are multiplier effects along the supply chain. What is ominous about this activity is the track record of fixed investment in North America since at least the early 1980s - every large surge in fixed investment turned out to be a bubble that precipitated a recession when it deflated.

Book Review: The End Of Growth

Jeff Rubin's book The End Of Growth is a good introduction to the impact of Peak Oil on the economy and markets. It was published in 2012, and the Kindle version has been updated since then (note that I did not read the updated version). Although the book is not perfect, I think it has some advantages over other analyses of Peak Oil. Although Peak Oil has been proclaimed to be dead, I explain the advantages of starting to analyse it now - you want to understand the concept before it rises again from the grave.

Sustained Growth On A Finite Planet

In recent years, it has been increasingly popular to make statements along the line that exponential* economic growth cannot forever in a finite planet. (One of the more popular examples of this argument was the essay Exponential Economist Meets Finite Physicist, by Tom Murphy, an Associate Professor of Physics at the University of California, San Diego.) I follow what I would describe as a minimal Peak Oil viewpoint, but I believe that this framing of the issue in terms of a finite planet is largely incorrect in terms of analysing the economy. My reading of the situation is that under a non-catastrophic Peak Oil scenario, economic growth in the developed world will continue much as it has been doing for a fairly long horizon (30 to 50 years?). Much longer horizons (100 years, for example) is when very serious problems would show up in the economic data.