Krugman to the Rescue
First off, in fairness, we have to recognize that Paul Krugman is a liberal. His blog is called the Conscience of a Liberal, so I take him at his word.
I can understand his ideological stance with respect to wanting to relieve the American people who have lost their jobs and their homes. I can understand his railing at Tim Geithner (Treasury Secretary) and Ben Bernanke (Fed chairman) about the stupidity they are showing in not providing a stimulus to the economy that will relieve the pain and suffering (rather than a stimulus to the bankers and Wall Street to help their managers earn even bigger bonuses). Krugman has heart, I'll give him that. But here is what being stuck in a liberal ideology gets you: This Is Not a Recovery, 26 Aug. 2010. The remedy, for Krugman and every other neoclassical economist is growth.
I'm afraid I have to say, for one of the smartest economists in the world he sure is dumb!
He gets that the so-called economic recovery is a sham. He gets that what the government is doing is appallingly weak compared to what it should be doing under historically relevant conditions to truly stimulate the economy to produce jobs and get people back to work. What he doesn't understand is that these are not historically relevant times. This isn't the same situation as existed in 1932. What he s proposing is exactly the wrong thing to do if you care about the long-term. He wants to return to a growth economy based on consumer spending*. The pain he wants to relieve includes that which the American public is suffering not being able to go to Wallmart and shop to their hearts' content.
What, oh what, will it take to get people like Krugman to see reality? This question is especially cogent since reality is slapping us all in the face. You would think that Nobel Prize winners would be able to know when they are being slapped in the face and wake up to see that reality. “Thanks, I needed that.”
George, Get With the Program Man
No doubt if we did get back to a growth economy, in the range of 5+% annual, that this would help create more jobs and drive the unemployment numbers down. That has been the historical case. But exactly what is going to be growing? In other words, what in the economy would be able to grow to make the GDP grow by 5% a year? Would it be primary manufacturing? Not likely. Labor in China is still a lot cheaper than it is here, for the moment. Extractive industries? Maybe coal, but most of our mining operations are worked out. Retail maybe? If we could get cash into everyone's hands they would go buy more stuff and that would boost the retail industry. But wait a bit, many people today are going to pay down their debt from past shopping extravaganzas, many will divert the cash to savings. Services then? We have to ask what kind of services? Flipping burgers, that's a service. But the fast food business is just another form of retailing. How about beauty parlors, maybe we could treble the number of chairs and hair dressers. That is a needed service.
Wait, there is a service area that could easily expand and create some really high paying jobs — the financial services area! It is simple. The government lets the banks and Wall Streeters create many more creative financial instruments and sell them to ‘investors’. They will literally create more money, more value, and more transactions. That will look good in GDP numbers. If we were to completely kill all financial sector rules and regulations the GDP would soar and a significant number of financial service workers would then get rich. Here is the best of all. They need to buy hamburgers, get hairdos, and buy lots of expensive stuff. Thus retail and the rest of the service sector will expand once again. And when it does somebody has to raise or import the beef, shampoos, and fancy cars. Boy, this is sounding better all the time.
All we need to do, and I bet anything Tim Geithner already knew this, is we let the financial movers and shakers go to town and everything will be hunkydory once again. The recovery will be complete. We will be growing once again. Surely this last little hiccup in the economy due to financial (including mortgages) bubbles won't happen again. The free market will prevail.
Economic Growth Solves All Problems
Actually it does seem to do so as long as you look past real human happiness and measure problems solved in materialist terms (like GDP). It has been the case in the past and why would we think there is any reason why it wouldn't work that way now? Well one comes to mind: We've reached the limits of energy and material resources and you can't grow beyond those limits. I has turned out that the physical limits of our world really do define a fixed size pie that has to be sliced into thiner and thiner pieces if everyone is to get some (oh yeah, some don't so that others can get bigger pieces).
Our whole understanding of what the economy is, how it works, and what it takes to give a majority of folk a shot at living reasonably comfortable lives is bound up in a system that is always growing. We simply cannot conceive of any other way to organize things. People need jobs to earn incomes. Those incomes have to be sufficient to pay for necessities of life and some discretionary goods and services so as to have some enjoyment in life. Jobs come from firms constantly needing labor and management to produce goods and services on a continuous basis. The latter is supported by customers in sufficient numbers to put a continuous demand on the firms. Where do customers come from? Well, we need to have more people needing the goods and services; the customer base has to expand (births plus immigration). We can also build shoddy stuff that falls apart after awhile so that the customers need to continue to replace them. Or design new models that make the old models so obsolete that customers are embarrassed to be caught with the old models (Apple comes to mind).
Ah, but when the customer base is growing that means there are also more people needing more jobs. So we have to grow firms so as to meet the demand and create jobs. Why does this look like a vicious cycle to me?
Its a positive feedback loop that perpetuates the need for more jobs, stuff, and people (consumers and workers). And all positive feedback loops, if they predominate in any system, will lead to an eventual blowup. Unless, of course, the expanding system runs into resource constraints which is exactly what is happening today.
At our present rate of consumption (world wide) we are reaching the ends of economically extractable energy and material resources. We are even depleting our potable water supplies! How do you deplete a completely recyclable resource? We managed it. These limits are going to be felt most painfully in the depletion of fossil fuel energy sources. At least if we had more energy we could find ways to solve material resource depletion. We could find ways to recycle and substitute for quite a while longer. But the truth is that once fossil fuels start be take more energy to extract than they provide for other economic work we will have hit the wall.
Actually it is already underway. You can point your finger at the financial meltdown, the housing meltdown, the jobs meltdown or any number of proximal causes for the global economic recession (everywhere except China, for the moment). But there really is a single underlying cause of all the problems that we have great difficulty recognizing because we've always had the luxury of taking it for granted. Net energy is now in decline. And it takes net energy to run the economy, even if it weren't growing.
A growing economy requires a growing flow of net energy into the system. That means we have to find and extract much more fossil fuel each year than the year before. And we have to extract so much more that we can pay back the increasing energy costs of doing that extraction. We haven't been doing this. The peak of oil extraction marks the start of decline in total energy extraction. But more importantly, the peak of net energy came many years ago, before the peak of fossil fuel. This is because the energy costs of extraction have been increasing (exponentially, actually) leading to declining net profit to apply to other economic work.
We are no longer in a growth economy because we are no longer in a growing net energy environment. We aren't even in a steady state net energy flow so the potential to construct a steady state economy is no longer an option. Put rather rudely, we are now in a contracting economy, and will be for as long as we care to consider. There will be no new jobs created because there will be decreasing energy available to do the work. The so-called “knowledge-based” economy is an illusion. It is true that we need and use knowledge to run the economy, but the only real base of any economy is the food we produce to keep ourselves alive, followed by the construction of goods that support our living in temperate and cooler climates. And all of those base activities require a lot of energy. Knowledge isn't worth a dime if you can't eat it, or live in it.
The longer Krugman and Geithner and Obama and every one is committed to the notion that the only way out of our situation is to recover the consumption/growth economy the worse we are going to find ourselves when it finally becomes so obvious what is happening that even these geniuses finally get it. Then it will be too late to try to adapt and reconstruct an economic model based on biophysical realities instead of one based on so-called American dreams. You can't dream yourself satiated, unless you're in delirium from starvation!
* One alternative to the consumer-based economy is the export economy. We would presumably make our money by providing some kind of needed goods or services to the rest of the world. We would need some kind of competitive advantage. Some economists think that our knowledge-workers will provide knowledge services to other places in the world. A little reflection on this idea will soon turn up any number of reasons why it is stupid, not the least of which is that other countries are rapidly developing their own knowledge workers. Besides, the geniuses are still thinking that growth in sales (of exported somethings) is a necessary part of the scheme.