What Economists Believe

Left-Leaning Economists Say Spend-Baby-Spend

I think Robert Reich is one of the smartest and most articulate economists out there. He was the Secretary of Labor under Bill Clinton's administration. As smart as he is, his advice to the president would be to increase the national debt to spur economic growth. He is in good company among the illuminati of economics. Paul Krugman has been calling for substantially more stimulus from the US government for quite a while now. Both of these brilliant men are hard-core Keynesians. John Maynard Keynes famously pointed out that government spending could be used as a policy instrument to spur economic growth. Republican president Richard Nixon adopted the notion that the US government would intervene in market conditions to keep the economy from tanking and ironically remarked, "We're all Keynesians now."

Today, on top of this, Ben Bernanke, head of the Fed, called for NO decline in government spending. That will keep the economy on track to recovery.

Well, if the government had the money to spend then that approach seemed to work. Even when the country had to go into temporary debt to pay the bill that was OK. That was then; this is now. The problem with Reich's and Krugman's calls for more stimulus now is that the only way the US can spend money on stimulus is to go much deeper in debt. And as I have pointed out on several occasions there is a real problem with any debt in these days. Paying off debt tomorrow (the plan) depends entirely on growth of the real economy (making stuff) and that depends on increased energy flows in the future to do that work. And this is where we run into the serious problem; energy flow is going to decline in the future. See: The Future of Capitalism, Profits, and Growth.

And what kind of economy are these left-leaning economists trying to stimulate back into growth? They want to create jobs so that consumers will have cash to go out and spend again. What will they spend on? It doesn't matter as long as they spend. The gross domestic product (GDP) is the benchmark measure of the health of the economy. As long as the GDP is growing month over month then all is well. And we have lived in a consumer-driven economy (> 70%!), which is the only kind of economy we could revive. So, what these economists want to have happen is the government take on more debt to give businesses monetary incentives to hire people so that those people will have incomes so they can go out and buy stuff and mostly services so that other people will have jobs and have income so they can buy stuff and... That is the formula for success.

Like all neoclassical economists these folks believe in the closed loop version of macroeconomics. Money begets money and as long as the money supply has a good velocity (indeed acceleration) without triggering inflation, then life is good. And that is all there is to the model.

They still haven't realized the vital role of energy in being the true currency of economic activity. They still don't realize that the decline of net energy that is underway even now is going to make it impossible to do MORE work in the future so as to pay back the debt we take on today. I don't really understand why they don't. They are smart enough. They have access to all the same data. But apparently they are true believers and only pay attention to the data and models they already believe in.

Once again I point out that cleverness (intelligence + creativity), which is the characteristic we so often admire and praise, is simply insufficient to understand the reality that rules the world. It is physical reality that we should be paying attention to. And we should drop ideological beliefs in favor of scientific knowledge about that reality (even if it is provisional it is better than simple beliefs). So what keeps brilliant men and women like these economists from grasping the bigger and more comprehensive picture of biophysical economics? It is lack of sapience, or at least adequate sapience to handle the complex problems they would hope to solve. And if they are our best, what does this say for the average?

I fully recognize that there are many people out there suffering. They have not had income for a long time in this economic situation. Believe me when I say that my heart goes out to them (have friends and family in this situation). I take no pleasure in the pains of others. I'm sure you don't either. But we have to face a very painful reality. Going into further debt today will only make matters far worse in the not-too-distant future if our plan is to revive a consumer-based economy. We're I in Obama's shoes I would be pushing not for a jobs bill but an education bill that (if we are to go further in debt) would be an investment in something that would actually help people. Namely I would fund all the unemployed going to permaculture school! That's right. The best thing that you can teach people now is how to raise their own food. For those who are underwater in their mortgages, I would push for a bank jubilee, forgiving all mortgage debt where people cannot pay. That would clearly hurt banks, so probably get me assassinated(!) but we have to understand that these debts will never be paid under any set of circumstances, so why not let the unemployed keep their homes and learn to take care of themselves. Why favor bankers over citizens?

Well political reality will, of course, prevent anything like a rational approach to minimizing pain. Ironically, the bankers will ultimately suffer even more even if they get a short-term break from our current political leaders. I guess we can take comfort in that. It is very simple. Debt cannot be repaid unless more work is accomplished in the future than is done when the debt is created. And that cannot happen because we have passed peak oil and peak net energy. And our brilliant economists just don't get it.

Comments

[GaryA]

More Gin-clear writings from George to hold up and compare with the murkey journalistic slurry offered by the mainstream media!
Not sure how he keeps up the work rate.... all power to his elbow or should that be digits? :-)

[Molly Radke]

Once again, you "hit the nail on its head!" How I LONG to hear SOMEONE in the political - OR economic - establishment say -recognize - the reality of which you speak. Alas I keep listening in vain. Like you say, those people have access to the same data that "we" have access to - indeed they probably have access to better, more accurate data, but they are nothing more that "true believers" in the ruling ideology. When I was teaching I used to point out to my students that one thing capitalism and communism had in common was the certainty of those in EACH system that they were onto the TRUTH - that their version of "facts" and "history" was the ONLY TRUE VERSION. Neither system could/would allow ANY tentativeness - any acknowledgment that there exists ALWAYS the possibility of new facts and new versions of "reality" - i.e. reality may have fundamental elementally unchanging components, but their aggregate composition is always evolving and changing. And thus the manner in which so-called sapient beings interact with "reality" must always evolve and change.

[Ann]

I think your idea about an education bill is probably on the right track, especially since the government now owns most of the student loans of Sallie Mae. There could be incentives and lower interest rates for someone studying farming over law and business administration. The banks could still package these loans and sell them to Wall St. This would really get people thinking about their chosen majors!

[George Mobus]

Molly,

Well said. I think Question Everything is an appropriate philosophy!

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Ann,

Thanks for the comment. Interesting idea on how to actualize this in the current environment.

George

[Brian]

I want to question your assertion that growth depends on increasing energy flows. Since the 70s, the amount of energy spent per constant dollar of GDP has gone down.

This is partly due to conservation efforts, and partly due to changes in economic activity -
The energy needed to get a dollar of software or computer GDP is a lot less than the energy needed for heavy manufacturing.

[Manoel]

George, I've translated your post to Galician because of its relevance: you can see it here: http://vesperadenada.org/2010/06/12/as-crenzas-dos-economistas/

Hope it's OK.

[Robin Datta]

I forget who it was who did experiments with cats: newborn kittens were allowed to see only vertical lines or horizontal lines for some duration. They permanently lost their ability to see lines in the other orientation. Those who have worked with surgeons would notice that the same procedure is done differently (in the details) by different surgeons or even the same condition is treated differently: much of the difference is based on differences in their training. Even in animals differences in learned behaviour are passed on through generations. In the earliest phases of the Second World War,there were Polish (horse) mounted cavalry formations charging German armored (tank) cavalry formations.

Economists are nod immune.

Rare indeed are the individuals who can break out of the mold that they have been cast into: retrospectively they stand out as giants.

[George Mobus]

Brian,

You are correct about the energy intensity history. But you should be careful in thinking about what it actually means. GDP is a notoriously bogus measure of wealth so its role in the numerator is inflationary which makes the intensity numbers sound good, but actually not very worthwhile. Also, it is true that we did realize a small uptick in the efficiencies of some aspects of our energy use in the late 70s and early 80s, after the oil shocks. But these have dissipated considerably in the 90s (how many SUVs got sold after our societal amnesia kicked in?)

The assertion about growth and energy flow comes directly from the sciences. No physical system can grow, in the sense of increasing size, unless it is able to obtain additional sources of energy over time. This is simple physics and the laws of biophysics apply equally well to economics as to, say, living systems. Please take a look at the Biophysical Economics category (left hand column) to see some background on this subject.

George

[George Mobus]

Hi Robin,

Hubel and Wiesel, ocular dominance columns in area V1.

Hubel, D.H.; Wiesel, T.N. (February 1, 1970). "The period of susceptibility to the physiological effects of unilateral eye closure in kittens". The Journal of Physiology 206 (2): 419–436

Neuroplasticity seems to slacken off with maturity. But the work of Elkhonon Goldberg (http://en.wikipedia.org/wiki/Elkhonon_Goldberg ) shows that it doesn't necessarily have to. At least, as you point out, there are examples of people who have managed to remain adaptable throughout life.

George

[Dan]

Hi George and Robin,

You are right that the pathways in the brain do get cemented with repetition, and although these can be broken, it does become harder than when connections are new and tenuous.

However, as Saul Bellow said: "A great deal of intelligence can be invested in ignorance when the need for illusion is deep."

I think people are invested in their world view, and most are afraid they'll lose status and/or comfort, and/or wealth, and/or positive self-image, etc., if they challenge it.

[Sam]

I want to respond to Ann's comment, because she brings up a policy proposal that is increasingly popular but I would argue has questionable merits.

Ann's goal is a worthy one, to have more farmers, engineers, and other professionals who can help society cope in a low-energy environment. And education is the primary means of achieving that goal.

But getting students to study certain "relevant" subjects at the university level will take more than money. We can offer students scholarships for plant science but not for philosophy, but then we must ask two questions. First, will there be more plant science students? And second, will those students become good plant scientists?

I am inclined to believe that both are true to some extent, but not to the extent that proponents wish was true.

Incentives work, and with the high cost of college, scholarships for science are likely to get students studying those disciplines. Had I been offered such a scholarship, I might have studied plants instead of my chosen major (Political Science with a concentration in Public Policy). But would I have been a good plant scientist? The scholarship does nothing to improve my education--to allow me to complete more research, take more courses, etc. Rather, it incentivizes me to follow a track where I am not playing to my strengths. I am likely to be much better at public policy, so does it make sense training me for something that I am not good at?

Yet at the same time, there may be plenty of students who had never considered a plant science track until such a scholarship was offered. They may enjoy learning it and excel at the subject. So the scholarship has the potential to bring new students into the field, but in many cases, incentives may lead students down the wrong path. I don't know which effect is stronger, I am inclined to believe the latter because anecdotally, students are looking for any way they know to reduce the exorbitant cost of college. But it is something that can and should be tested empirically.

Rather, I agree that we need massive increases in education funding to make college more accessible to all students, but more importantly, to change what we teach and how we teach at a K-12 level. Critical, creative, and systemic thinking must be emphasized. But we also need to do a better job of training teachers so they can more effectively present subjects that are perennially difficult for students to understand (eg. math), but also teach subjects that are not emphasized, such as geography and earth science, as well as agriculture.

I recently returned from a trip to Botswana, where agriculture is taught as an academic subject—students are expected to grow their own crops on school grounds and learn different planting techniques. This happens because the government expects that many students in Botswana will become farmers. Most administrators in the States understandably don’t have this as a goal for their students, yet this must change. And if we teach these subjects well and get students engaged in them at an early age, then my belief is that they will be better prepared to specialize in them at the university level, and they will also be more willing to do so, money or not.

I say this as a current undergraduate who has many friends studying both science/engineering and philosophy. Incentives only get you so far, mindsets have to change, and this is why I can’t agree with George more about needing to rethink how and what we teach starting at a young age.

[Anonymous]

Russia’s Central bank announced on Monday that starting from this month it is tying the Rouble exchange rate to the oil price:
http://rt.com/Business/2010-06-08/russia-cb-rouble-rate.html

[George Mobus]

Hi Dan.

I think people are invested in their world view, and most are afraid they'll lose status and/or comfort, and/or wealth, and/or positive self-image, etc., if they challenge it.

This is a cogent point that begs a question or two. Fear (of loss) is largely produced by the amygdala and limbic system. And it is largely subconscious. So do people actively deny or block counter evidence to their world view, or do they merely subconsciously allow the limbic responses to dominate? I suspect the latter is the case. They do not even know that this is what is happening. And the reason, I further suspect, is that the prefrontal cortex area responsible for down modulating the limbic responses so that the prefrontal (reasoning) system can kick in is too weak to do so. Yet another example of how the development of the prefrontal cortex is the key to wisdom.

George

[George Mobus]

Sam,

Your very thoughtful comment led me to think some more about Ann's comment and your reply, which raised practical considerations.

My thought is that we should probably not try to squeeze my suggestion into the current higher-ed or education funding paradigms. Specifically my suggestion is to teach people permaculture, not just agriculture. There is a significant difference. Also, this would more likely resemble a jobs retraining approach crossed with a WPA-like jobs corps as opposed to an education policy aimed at higher education (as it is practiced today).

Another way to think about it is that this isn't aimed at a temporary fix of a deficit that will one day go away, such as a lack of engineers, say. Rather we are looking at a permanent restructuring of society toward a capacity to produce our most essential forms of wealth, food, adequate shelter, etc. through a concerted program of education in how to do these things and, most importantly, why we need to do them. That latter issue comes close to the spirit of an academic pursuit as I envisioned it in A Dream of Education for the Future, and in The Core of a Sapient Society.

George

[George Mobus]

Anon,
Thanks for the tip. Any thoughts on consequences?

George

[Dan]

Hi George,

Re: cognitive development

Such specific analysis cannot be addressed on any meaningful level (population-wise) without an overhaul of many ingrained cultural and political/legal concepts.

No matter... change is coming.

Related to permaculture, you might be interested in this TED talk if you haven't already seen it:

Mushrooms

[comox]

Excellent article thanks. I'd be interested in a post by you some day exploring the question of whether key people in our governments actually do understand what is going on, and if so, what this might imply about their strategy.

[Anonymous]

I am not sure about the consequences. Maybe it is a step to an energy based currency? What do you think about gold? It also represents a huge amount of embodied energy.

[George Mobus]

Dan,

Thanks for the link.

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Comox,

I know that key people, including Obama himself, do know about peak oil and, from what I gather, believe it will impact the economy. They take their cues from the official government agency, the Energy Information Administration, that has not officially reported the future peaking of oil in the past, but is now revising its estimates of future production downward and seems to be implying that peak oil is a possibility. So while the leaders understand the concept of peak oil, they are not understanding that it may have already passed and that our current economic situation is a result of that.

I suspect that Obama is realizing that we are drawing down a finite resource and that logically we have to do something different. But he also probably believes that the peak is off in the future and so his policies now are meant to buy time. He believes that the market and ingenuity will solve the problem in the long run. Of course he is essentially what William Catton describes as a cargoist - someone who believes that things fall from heaven.

I believe Obama is more motivated to change our energy policies based on carbon emissions and global warming than on peak oil. Now he is also motivated by the kind of pollution we see in the Gulf of Mexico accident.

Just my interpretation of hearsay evidence!

George

[George Mobus]

Anon,

Unless you can eat it, wear it, or take shelter in it, or use it to produce food, clothing, and shelter (tools) it isn't an asset. Gold would work fine as a coinage to represent embodied energy, but other than the effort expended to mine and refine it, it doesn't contain intrinsic value as an asset. Paper works just as well and is a lot cheaper (energy-wise) to produce.

George