Another View of the US Economy: Observations on Exergy, GDP & Median Incomes

The standard view of the American economy is one of exponential growth: even if interrupted by a recession once a decade and a Depression once every two generations (the 1890’s, the 1930’s, the 2010’s?), the engines of industry would always come back roaring again. Output per American could always be expected to increase as it has from 1790 until the present day. There has never been a decade, even during America’s two Depressions, when US GDP was lower at the end than at the beginning.

However, another point of view on the US economy can be developed by drawing on observations of factors such as median income, energy consumption and inequality. Broadly speaking, this picture is one relative stagnation from 1890-1940, and again from 1973-today, punctuated by the truly remarkable “miracle economy” of the post-war boom. Furthermore, the US is now about to transition to a new phase: economic stagnation and anarchic stasis, to be followed by oligarchic Caesarism. This first post will be, for now, just a series of observations that I believe to be inextricably linked, but lack the theoretical foundations to put on a sound footing. Feel free to skip it, as it might be hard to follow and I’m mostly writing it to get greater understanding for myself. More polished version(s) to follow.

1. Median incomes (the ones that matter to ordinary Americans) tell a radically different story from the GDP figures. As shown below, they remained at a virtual plateau from 1914 to 1940. During the WW2 mobilization, spare capacity filled up, as factories began to produce the tanks, ships, planes, jeeps and misc. that played a crucial role in the Allied victory. After the war, what might have been a new plateau from the 1940-50 base accelerated, literally driven by the automative revolution; it is during this time that the US became a suburban, oil-based civilization.

ave-us-income-saez

However, the oil shocks of the 1970’s threw a jackhammer into that arrangement. Since then, the only discernible rise took place in the 1990’s: a period that saw the opening up of the Chinese “reserve army of labor” and the Soviet resource base to global markets. These began creating powerful deflationary effects in the US. But things went into reverse altogether during the past “lost decade“.

The median household income in 2008 was $50,303. The median household income in 1999, expressed in 2008 dollars, was $52,748.

You’ve got to figure 2009 will see another decline in income, in which case Americans will end the decade significantly less well off than when they started it. We’re not just treading water. We’re going backwards. …

Still, the 2000s have been especially barren. Median income rose only in three years—2005, 2006 and 2007, and even at the cyclical peak in 2007 it was below the levels of 1999 and 2000.

2. More on the energy developments during the period. During 1950-70, the US enjoyed very rapid growth both in absolute energy consumption and the energy efficiency of its techno-industrial base. Therefore, the quantity of “useful work” available for exploitation by American labor and capital increased very rapidly.

But this growth moderated since the 1970’s. Given the continuing reduction in the EROEI of oil, the peaking of the net energy flowing into the US economy from coal in 1998, and the turn to costly shale gas to maintain natural gas production volumes observed within the last decade, this trend must have only strengthened in the 2000’s. Graphs are taken from Economic Growth and Cheap Oil (Robert Ayres).

us-exergy-services-supply

The growth in the”technical efficiency” with which exergy is converted to “useful work” by the American economy has been flattening since the 1980’s (probably due to diminishing returns to investments into more efficiency: see Tainter, etc). Though Obama’s drive to increase energy efficiency is laudable, it will be hard to achieve big results given that most of the low-hanging fruit have already been picked.

technical-efficiency-us-exergy-services

If further improvements in technical efficiency are low, then the US will be going into a permanent hyper depression in the years ahead according to Ayres’ calculations. As of today, the observed results match the Low forecast.

ayres-us-gdp-forecasts

There’s little reason for hope. The potential for squeezing more “useful work” – the single biggest factor in GDP growth – out of the current US energy base are very limited. Coal, oil and natural gas are roads to nowhere. While nuclear and renewables are far more sustainable in the long-term (for maintaining an industrial base), they need 1) several decades to be build up and 2) given the same investments in K and L generate less useful work than today’s hydrocarbons because of their low EROEI’s.

3. Another interesting thing is that the period of stagnant US median incomes is linked with rising inequality. (This explains the continued moderate growth in consumption and GDP – its just that since 1973 a very large portion of it has been accruing to the guys at the top of the pecking order).

Now in stagnant systems – e.g. overpopulated agrarian societies – this is explained (Turchin) by the fact that land, food and credit prices have a tendency to go up, benefiting the elites (landowners, financiers, etc) relative to the rest of the population. While similar processes apply to industrial societies (see Marx), its effects can be combated by the powerful redistribution mechanisms available to the modern state (that were lacking in the agrarian states of yore). Hence, despite the fact that since the 1980’s Western Europe has been on much the same vastly lower growth trajectory, inequality in states such as France and Germany has remained low.

On the other hand, the US – having progressively deregulated the financial sector and knocked down marginal tax rates – has experienced a massive increase in inequality that may now be approaching the levels of the Gilded Age.

marginal-tax-rates

4. Fertility rates are linked to economic conditions. One of the many explanations for the post-war baby boom in the US is that soldiers were returning home, social conservatism, etc. But none of them are very convincing as comprehensive explanations.

us-fertility-rate

Instead, one may interpret the above graph as follows:

  • 1900-1940: stagnant median incomes; TFR approaches replacement level rates as the US ceases being an agrarian society.
  • 1940-1970: the baby boom as US middle class living standards expand rapidly. Populations tend to expand rapidly when their resource base expands. Interesting why TFR expansion started dropping in early 1960’s, though: perhaps looking at cohort TFR’s (which adjust for average age of childbearing) would yield a better fit with the economic stats?
  • 1970-2010: roughly replacement level TFR’s, stable median incomes.
  • 2010+: if median incomes begin to fall in the future, due to energy constraints and/or fiscal collapse, we might well see the TFR drop to something like 1.5.
  • A comparison: Russia completed its post-agrarian fertility transition by the mid-1960’s; after that, the TFR remained stable at around 1.9-2.1 until 1990 (as we know this was a time of zastoi / stagnation, esp. in the later part of this period). But in the 1990’s Russia’s TFR fell off a cliff, along with real living standards (not only did average incomes fall, soaring inequality made most people’s income fall even faster). The nadir was reached in 1999 (TFR=1.16) and has since risen up to 2009 (TFR=1.56).
  • Of course, non-material factors also play a big role: e.g., why is German TFR so much lower than France’s? etc…

5. Preliminary speculations. The reason I’m very skeptical on the Keynesian / Krugman vs. Austrian / Tea Party “debate” is that both positions, though ostensibly opposite, are based on the same presumption: that further economic growth is still possible, if only their policy prescriptions were to be followed. (In a recent Oil Drum posting Gregor MacDonald laid out my thoughts very well in Hollow Men of Economics.

So, Krugman draws many simplistic graphs showing how growth was bigger during the (Keynesian) 1950’s-1960’s than during the (monetarist) 1980’s-2000’s, ergo, the government should throw more and more money at the economy, the deficits and debts be damned. Then there his ridiculous “invisible” bond vigilantes argument: if the US can sell debt so cheaply, why should we worry about exploding budget deficits? Only a few things wrong with this theory…

  1. It’s a complete strawman! By the time the bond vigilantes take off their invisibility cloak, the costs of servicing debt – much of it now in short-term bonds which have to be frequently rolled over – will begin to spike, leading to an irreversible death spiral.
  2. Makes the questionable assumption that the US will grow at 2-3% in the future, whereas 1) the necessity of deleveraging, 2) the exergy situation and 3) the fragile geopolitical situation makes this highly unlikely.

Of course, the Austrians / WSJ are no less insane. If only the rich could get more tax breaks, if only banksters and oil corporations could be coddled even more than they are already, everything would be fine and dandy and we’ll be growing our way into a Randian paradise of abundance.

Both sides UTTERLY fail to consider the vital factor of useful work to economic growth. Useful work is a function of exergy & technical efficiency. Exergy is likely to peak and go into decline within the decade, given the trends in the energy base; technical efficiency appears to have a trend of flattening out. If investors were to suspect there are no prospects for future growth, the credit system – the economic equivalent of fertilizer in agriculture – as it exists today would collapse (why give out loans if there’s little prospects they will be repaid?), and the consequent drop off in investment will lead to depreciation overtaking and the capital stock beginning to contract. Finally, while the labor force will continue to expand, its quality will not because American IQ has been flat since around the 1980’s because of the cessation of the Flynn effect. (The *only* positive, productivity enhancing trend at work is the continued informatization of the economy, which may gain a boost with the appearance of ubiquitous, specialized and highly effective AI’s by the 2020’s.)

This is not an attractive view to take, because it basically means that whatever the government does or doesn’t do, GDP decline is inevitable. But the alternatives aren’t rosy either:

  • If Krugman “wins” the debate: the economy sputters along for a few years, never getting onto a sustainable growth trajectory. Awning budget deficits and ballooning of the public debt (which is now at 140% of GDP if you also count local/municipal debt and Freddie Mac/Freddie Mae liabilities). The result: an Argentina 2000/Latvia 2009-style collapse, probably sometime around 2012-15 (might be triggered by a “geopolitical shock”). End-result: some kind of American Caesarism.
  • If Austrians “win” the debate: the decline is grinding and gradual, rather than sudden and catastrophic.

Instead, it would perhaps be a better idea to craft policies in such a way as to minimize the harm done for (as I suggested in my abortive “Collapse Party” project) and at the same time make the foundations of the American state stronger.

  • Reintroduce the high marginal tax rates of the 1950’s-60’s to reduce inequality and shift the burden to those able to shoulder it. Might prevent the soaring inequality / corruption / resentment that leads to crony Caesarist outcomes. Problem: ACHTUNG SOCIALISM!
  • Allow the financial system to contract / collapse as needed. Today, it is a rotting dead weight on the US – both economically (there’s no need for such a huge financial sector in the first place) and morally (they are a class apart from normal Americans). Problem: institutional capture means same banksters wield immense influence over both parties of power.
  • Reduce military expenditures. There’s a lot that can be cut. First, the metastasized “war on terror” apparatus. Second, the expeditionary/naval component can be cut. There’s no long-term hope of containing China, but the Western US itself is secure. The Pacific Fleet can be reduced. Get out of Afghanistan. On the other hand, maintaining dominance in the Atlantic (core US interest) and the Middle East (oil) is useful. Third, saved money can be used to 1) continue research into next-generation military technologies, 2) reducing deficit. It’s not really a choice, actually. Military contraction is inevitable in the next decade: the only question is whether it will be uncontrolled (as during 1990’s Russia, when c.70% of Soviet military assets depreciated into junk) or controlled (with the result that core strengths will be preserved). Problem: suggesting reductions in military spending is unpatriotic & goes against the powerful defense & MIC lobby.
  • Obamacare is imperfect, but one of the administration’s best achievements. Leave as is.
  • Use savings from cutting off subsidies to the MIC & financial mafias – and the bigger tax intakes – to launch a coordinated restructuring of the US energy base. To accelerate the transition to sustainability, start planning and building lots of new nuclear power plants, and renewables. Start phasing out coal. First, makes a positive contribution to helping the world avoid catastrophic climate change. Second, this transition is in any case inevitable once the EROEI of hydrocarbons dips to lower levels – but by then, switching will harder because there’ll be many other challenges on the plate (e.g. mitigating the increasing effects of global warming; coping with the dearth of capital). So make a head start now. Problem: requires the kind of forward thinking that institutions are chronically incapable of.
  • How do solve all these problems? Obama needs to take a gamble, revolutionize his leadership, launch an all out political assault against the enemies of progress. Problem: not going to happen.

And that’s the story of it.

If I had to bet on it, I’d say US GDP per capita will be 5-25% lower in 2020 than it is now – even though we’re in recession. (Unlike with the 1930’s Depression, there’s no abundant, very high-EROEI energy subsidy on the horizon waiting to propel the US to another level). Inequality will be no lower than today, because of the power of today’s stakeholders in the system, hence – coupled with lower output and the waning of the credit system – median incomes will be a lot lower; hence, many more people in outright destitution. The center of gravity (economy, population) shifting back to the north and east (above all the Great Lakes region) from the south and west. The Presidency will have transitioned to some kind of Caesarism, served by a clique of politically-connected oligarchs. Any imperialist adventures now confined to the Western hemisphere. The citizenry too atomized, apathetic and preoccupied with quotidian concerns to do much about it.

I appreciate your thoughts and criticisms of this post, but do note that it is not meant to be final or “serious”; more like a strange mix of relatively obscure economic concepts, lazy extrapolations and personal impressions. As I said at the beginning, I hope to refine and connect these ideas into a more rigorous and logical framework in the future.

Comments

  1. “On the other hand, the US – having progressively deregulated the financial sector and knocked down marginal tax rates – has experienced a massive increase in inequality that may now be approaching the levels of the Gilded Age.” I keep hearing this but in states like California and New Jersey the effective tax rate when property taxes are thrown in approaches Swedish levels. Not that governments in these states are nearly as efficient or honest as the Swedes.

    “Finally, while the labor force will continue to expand, its quality will not because American IQ has been flat since around the 1980′s because of the cessation of the Flynn effect. (The *only* positive, productivity enhancing trend at work is the continued informatization of the economy, which may gain a boost with the appearance of ubiquitous, specialized and highly effective AI’s by the 2020′s.)”

    Careful Anatoly, you’re getting into The Bell Curve territory here. Although the main prediction of that book at the end, that the technnocratic class would become self-serving, self-perpetuating and create credentialist barriers to upward mobility in the U.S., was ignored in favor of the hot button discussion of relatively insignificant differences in average IQ among races.

    Yet The Bell Curve proved prescient, as upward mobility has stagnated and some of the same people that advocate for more open borders are just fine and dandy with that in practice since it gives them a cheaper, more docile workforce. It’s amazing how well corporatists can play the race card to silence criticism of them importing a cheaper labor force. Or on the Mancession front, how they chart women’s progress in catching up with male wages with Hanna Rosin’s Atlantic Monthly propaganda which serves to hide the fact that it was always the male workers who were far more likely to strike than female from the dawn of the Industrial Age. The classic Oliver Twist image of a British factory in the 19th century after all is of boys and women doing the worst grunt work with men seeking to join guilds or become tradesmen or soldiers to avoid the sweatshop floor.

  2. In other words, race and gender are cards played by corporatists to divide and conquer the U.S. middle and working classes. It is the height of absurdity that the federal government is suing the State of Arizona for actually trying to enforce federal laws. But when you are running a corporatist system and the fix is in to always let in illegals by hook or crook because you want the labor and someone else wants their eventual votes that’s what happens. Either change the laws to favor Mexican nationals as the de facto system currently does over immigrants from everywhere else, or tighten up the border.

  3. “To accelerate the transition to sustainability, start planning and building lots of new nuclear power plants, and renewables.” This has been in my opinion the biggest failure of the Obama Administration. Where are the actual permits for the new nuclear plants? Why hasn’t the process been accelerated? Where are the high speed rail trains? The Sapsan in Russia between Moscow and St. Pete and then Nizhny Novgorod was built in two and a half years. Why the hell does everything in the U.S. have to drown in red tape, high consultants/lobbying fees, and bureaucracy? Even if Keynesian stimulus could work and put more people back to work on ‘shovel ready’ projects all they really did was slap TIGR signs on existing highways. There was no real new infrastructure built.

  4. An excellent post exploring a lot of issues. I completely agree with many of your solutions, the bankruptcy of this economic debate (“autistic”), though I don’t want to reach the same conclusions.

  5. Careful with your predictions here. US bonds are fixed-coupon, so low interest payments are locked in for the whole maturity period. So, whatever the terms the Treasury gets now, are going to stay with the USA government. Any future earthquakes are going to hurt secondary market, but are mostly irrelevant to the debt servicing bill of the USA. You have to add another assumption to your set: that if (and when) interest rates on US debt balloon, the investors are going to shift their demand into the short side of Treasuries, AND that the USA needs to roll over a lot of debt at that point. Which is, of course, the point of Krugman – if the growth rate is increased today (relative to the baseline), there won’t be such high deficits in the future (again against the baseline), and it won’t be necessary to roll over as much debt.

    Well, the whole story of the current extremely low interest rates (determined by the secondary markets) on 10-year bond is the lack of high-quality assets (and yes, that’s exactly why securitization with AAA tranches took off; but that’s a slightly different story) worldwide. With austerity proponents winning in Europe, and no other MBS bubble in sight, I fail to see where exactly all the pension funds are going to get their 10 and 30 year bonds they need for maturity matching of their assets and liabilities.

    • That is all true, but note that the average maturity of US bonds is already at 4 years. During the next five years, it will have to roll over $4.7tn and cover cumulative deficits of $5.7tn+. So coupled with the ballooning size of the debt, if interest rates were to rise – as they will if investors lose appetite – the US could find itself in a sticky situation far faster than is generally acknowledged. That is, BTW, why Bernanke is playing the helicopter game.

      The reason I disagree with Krugman is that none of what he proposes is likely to do much to grow the economy. The stimulus spending appears to have been very ineffective – as to be expected in an economy as developed as the US (and if Ayres is correct, as constrained by fundamental energetic limits). However, all this new debt *will* have to be rolled over come 2012-15.

      High-quality assets – I’d say China, Russia & resources, though obviously the electronic herd hasn’t yet arrived to that conclusion.

      • Anatoly,

        don’t know why you consider stimulus ineffective so far. It’s been too small, yes, but not ineffective (at least looking at GDP; the jury is still out on what the heck is going on with the jobs, IMHO). Fiscal stimulus is very useful in case Zero Lower Bound is binding, and it’s going to be binding for quite some time yet.

        Exactly because the crowd will continue to consider US Treasuries but not resource or China stocks safe assets, it’s not going to panic. There’s nowhere to panic into for them, this paradigm shift isn’t going to happen any time soon.

  6. Good job, Anatoly, excellent and informative post. Thank you.

  7. “…as factories began to produce the tanks, ships, planes, jeeps and misc. that played a crucial role in the Allied victory.”

    Outside of the Pacific, was it really crucial? I’d say supportive instead.

    As your first graph shows, the post-WWII boom petered out in the US sometime after 1970. You mention energy as a cause. But this was also the time when manufacturing started leaving the US for the Far East. Why did that happen? I suspect that it was partly because the US government didn’t support US manufacturing the way Asian governments supported Asian manufacturing. The bleeding could have been stopped with tariffs, but the US government never seriously tried to do that. Why? I’m guessing that this had to do with the fact that the US elite is anything but monolithic. The financial and media elites on the one hand and the manufacturing/mineral extraction elites on the other hand have always hated each other. Throughout the 20th century and to this day these have really been two competing ethno-cultural groups. I’m thinking that the US government’s failure to stick up for US manufacturing reflected the desire of the US financial and media elites to bump off the US manufacturing elite. Spite can be a big motivating factor in politics. Compared to all of that, the Japanese elites acted like a unified team. Same thing for the people running China since Deng Xiao Ping.

    “Therefore, the quantity of “useful work” available for exploitation by American labor and capital increased very rapidly.

    But this growth moderated since the 1970′s. Given the continuing reduction in the EROEI of oil…”

    But this reduction happened for the whole world. Far Eastern economies didn’t stagnate after 1970 in the way being discussed here, but the US economy did. I guess one could say in response that because of its car culture America is more sensitive to oil prices than Asia is, though I doubt this is enough to explain the differences in performance.

    “Another interesting thing is that the period of stagnant US median incomes is linked with rising inequality.”

    Everyone’s golden standard for low inequality seems to be Scandinavia before immigration hit it a few decades ago. Well, I seem to remember once seeing a table that showed that the standard deviation of IQ goes down as you go north in Europe. No wonder the Swedes are so fond of egalitarianism – they all actually ARE kind of equal to each other. In contrast, countries where the IQ distribution is extremely wide, like India or Brazil, tend to have terrible inequality. In the last few decades immigration has moved the US in the direction of countries like India and Brazil. All other things being equal, a wider distribution of IQ will work towards increasing inequality. Of course a million other factors affect inequality as well. One of them is the health of the political system. At the very high end a lot of personal income comes from gaming that system. I’m specifically thinking of recent bank bailouts, etc. One could make an argument that the US political system is more gameable now than it was in the past. In the Gilded Age, before anti-trust laws, the system was probably also highly gameable.

    “Interesting why TFR expansion started dropping in early 1960′s, though…”

    I’d blame the decline in social conservatism.

    “…why is German TFR so much lower than France’s?”

    Partly because there are more Muslims in France?

    “…the deficits and debts be damned.”

    I think they’ve already damned us.

    “Both sides UTTERLY fail to consider the vital factor of useful work to economic growth.”

    I also think that both sides have failed to consider something very important, but for me that’s not energy, but the variable, tribalist, Darwinian nature of humanity.

    “…the credit system – the economic equivalent of fertilizer in agriculture…”

    I know what you mean, but I would have still phrased it differently. Fertilizer adds net value to agriculture. Credit can’t add value to the entire economic system – the only things that ever do that are work, technological improvements, the discovery of new resources, etc. From the perspective of the entire economy all finance, including credit, is redistributive of value that’s already been created somewhere else, not additive to it.

    A few years ago it occurred to me that during the entirely of my Soviet youth I had never heard anybody discussing loans of any sort even once. I then asked my parents if there was a legal way to get a loan in the old USSR. They said that if there was, they were not aware of it. A huge economy functioning without credit – who would have thought?

    “…American IQ has been flat since around the 1980′s because of the cessation of the Flynn effect.”

    Richard Lynn once described the dynamics of IQ in the 20th century as using more and more fertilizer on progressively worse seeds. The Flynn Effect has been disproportionately observed among the working classes. This is probably because in the 20th century the bottom of society has been able to eat better than ever before. The elites have been eating well since time immemorial, so the Flynn Effect hasn’t affected them much. Through the entirety of the 20th century the elites have been outbred by the lower classes, so the average seed quality must be decreasing. Once all the benefits of good nutrition are exhausted, one would expect a decline to set in.

    “End-result: some kind of American Caesarism.”

    The French Revolution started in 1789, Napoleon came to power in 1799: 10 years. The German Empire collapsed in the midst of a historic defeat in 1918, Hitler came to power in 1933: 14.5 years. The Russian Revolution occurred in 1917, Stalin’s power became undisputed sometime around 1929: 12 years. The Soviet Union started approaching its end in the late 1980s, Putin came to power in 2000: 12 years, give or take one or two.

    No, I’m not comparing Putin to Hitler, and this is nothing more than baseless speculation, but isn’t it eerie how the time period between a total collapse of authority and its reestablishment, often in a harsher form (except for Putin), has taken a little more than a decade on several different occasions?

    “Allow the financial system to contract / collapse as needed. ”

    I agree 100% with that whole paragraph, including the part about institutional capture.

    “Reduce military expenditures.”

    Again, I agree 100%.

    “Problem: requires the kind of forward thinking that institutions are chronically incapable of.”

    Ah, but single energetic men (Caesars) are capable of doing LOTS of things that bureaucracies, democracies and “democracies” can’t do.

    • Outside of the Pacific, was it really crucial? I’d say supportive instead.

      Not 100% crucial, perhaps, but without the US there to support the small things that Soviet central planners had neglected – telephone cable, aviation fuel, meat cans, jeeps – the Soviet advance in 1943-45 would have been far more costly than it was, and the Germans may have even managed to stabilize the front and sought a peace that preserved the Nazi regime.

      Re-industrial stagnation. Little protectionism may have played a role, but attributing this to the “US government didn’t support US manufacturing the way Asian governments supported Asian manufacturing” is too far. For a start, Asian economies were catching up to the US so them experiencing faster growth was to be expected as per standard macroeconomic theory.

      But this reduction happened for the whole world. Far Eastern economies didn’t stagnate after 1970 in the way being discussed here, but the US economy did…

      The Asian economies were growing rapidly on account of increases in K and productivity from a lower base, whereas the potential for these had been more exhausted in the US. I think that basically, once a commodity like oil becomes constrained – and absent artificial interventions – it will flow naturally to wherever it would produce the highest returns as a factor in production.

      Re-IQ & inequality. Very much agreed, didn’t put it into the post due to size constraints & it having already been covered in the IQ & Industrialism post. Take Italy. In the PISA tests (which closely correlate to IQ), Southern Italians score like Turks; Northern Italians score like Germans. Not a bad explanation for their huge north-south divide and resulting 36 Gini index, despite Italy’s social welfare system.

      Partly because there are more Muslims in France?

      But generally believed not to play a major role (I covered it in a demography myths post some time back).

      I know what you mean, but I would have still phrased it differently. Fertilizer adds net value to agriculture. Credit can’t add value to the entire economic system – the only things that ever do that are work, technological improvements, the discovery of new resources, etc. From the perspective of the entire economy all finance, including credit, is redistributive of value that’s already been created somewhere else, not additive to it.

      Good analogy. I would add that usually, a free (but well-regulated) credit system allows the channeling of resources to the sectors of higher value / utility in a highly effective manner. If this system collapses, these channels become clogged up and ineffective – forcing a return to a cash or even barter economy (e.g., 1990’s Russia!) – and those with resources turn to hoarding / asset-stripping them.

      A good article on this concept: Where Is Oil Production Headed?: An Adverse Scenario.

      A huge economy functioning without credit – who would have thought?

      Actually, there was a kind of credit system, amongst enterprises – but most were implicitly meant to be kicked down into the future indefinitely. IIRC, one of Gorbachev’s reforms – which had something to the effect of making these “loans” cashable – was one of the causes of the Soviet economic unraveling.
      But really it’s a long time since I’ve read up on this so don’t quote me on it.

      Once all the benefits of good nutrition are exhausted, one would expect a decline to set in.

      I doubt these dysgenic effects operate on such short timescales. I think a bigger contributing factor was the decline of the “industrial” work ethic amongst the middle classes.

      No, I’m not comparing Putin to Hitler, and this is nothing more than baseless speculation, but isn’t it eerie how the time period between a total collapse of authority and its reestablishment, often in a harsher form (except for Putin), has taken a little more than a decade on several different occasions?

      Something I noticed too – even the basest anarchy doesn’t seem to last more than 10 years before society reconstitutes itself, albeit on a somewhat less complex basis.

      That’s what Caesars are for! 😉

  8. Victor said:

    “I keep hearing this but in states like California and New Jersey the effective tax rate when property taxes are thrown in approaches Swedish levels. Not that governments in these states are nearly as efficient or honest as the Swedes.”

    I think Anatoly was talking about taxes on high earners, but I can’t resist mentioning that here in New York I pay more than 40% of my very middle class salary in taxes. And when I try to spend the remaining <60%, I pay about 8.3% of it in sales tax. Federal, state, local, Social Security tax, Medicare tax, who knows what else – it all adds up. And they borrow trillions on top of that! I'm not a libertarian, but it's easy to understand where libertarian anger is coming from.

    "…the hot button discussion of relatively insignificant differences in average IQ among races. "

    I don't think they're insignificant.

    "Why the hell does everything in the U.S. have to drown in red tape, high consultants/lobbying fees, and bureaucracy?"

    Environmental impact statements, "not in my back yard" sentiments from everyone and his dog, general litigiousness, decentralization of authority.

    Sergey said:

    "US bonds are fixed-coupon, so low interest payments are locked in for the whole maturity period."

    What are the chances that interest rates will be low when these bonds finally mature and have to be rolled over?

    "Which is, of course, the point of Krugman – if the growth rate is increased today (relative to the baseline), there won’t be such high deficits in the future (again against the baseline), and it won’t be necessary to roll over as much debt."

    If the government can't pay down any of the existing debt anytime soon (and it can't), then yes, it will be necessary to continually roll over a much larger amount of debt than there was at any time before 2008. And at some point between now and infinity interest rates WILL rise.

    • “What are the chances that interest rates will be low when these bonds finally mature and have to be rolled over?”

      Well, interest rates are notoriously hard to predict, especially well into the future. Martingale might work the best. Therefore, they will be low 🙂

      More seriously, the question is what happens in between. If the growth is helped even a little bit, there will be much less deficit to finance. That’s the point, and what the current CBO projections show.

      “If the government can’t pay down any of the existing debt anytime soon (and it can’t), then yes, it will be necessary to continually roll over a much larger amount of debt than there was at any time before 2008. And at some point between now and infinity interest rates WILL rise.”

      NO. If you can keep the ratio of debt to GD constant, for example, there’s no reason why the market would, all of a sudden, lose their nerves and request higher interest rate.

      More to the point, you a) don’t acknowledge that post-WWII debt/GD has been much higher, and that the USA has grown safely out of it, and b) you suggest that pre-2008 level in the USA was at the upper limit of sustainable debt. I don’t think there’s any evidence for b). Look at Japan which has been living with debt/GDP approaching 200% for ages, has a population that’s decreasing since 2005, and, in general view, is unable to grow.

      And BTW, do you support permanent extension of the Bush tax cuts?

      • “And BTW, do you support permanent extension of the Bush tax cuts?”

        No, that would just get us in a deeper hole. I think that the US was healthier after WWII than it is now in a thousand ways. And even modern Japan is fundamentally healthier – it still maintains a trade surplus (people still want to buy its products) and it has a high-quality workforce, so the probability of it growing out of its hole seems somewhat higher. Not necessarily much higher though.

      • That’s assuming the debt-to-GDP ratio can be held constant. If on the other hand US GDP is destined to grow slowly or stagnate, that ratio will spiral out of control very quickly.

        The post-war US: different story. 50% of world manufacturing, total dominance of world markets outside the socialist bloc. No obligations to be cashed in by soon-to-be-retired baby boomers. Etc etc.

        For the record, I think Japan is in a deep hole too – albeit for somewhat different reasons. While its debt is not as big an issue (thanks to Japan’s hugely positive net international investment position and captive internal debt markets), its strategy of keeping afloat through exports will become unsustainable in an increasingly protectionist world.

        • Increasingly protectionist world = world where China, Japan, and Germany lose at the same time? Wow, it’s big, at not going to happen. If we managed not to dig into “beggar thou neighbor” policies in 2008, nothing fast enough that couldn’t be adjusted to is going to happen on this front.

          I’m afraid we are not going to see a scenario that would allow a test of Krugman hypothesis, because austerity maniacs are going to win. The interest rates will stay low, growth will be slow, and unemployment very painful.

  9. The basic US/NATO strategy is to control the worlds resources and human capital while owning most of the intellectual property and data. The Chinese economy, military, political establishment is fully supported by American consumers except for strategic products such as microprocessors and glue chipsets (Intel, IBM), software (Microsoft, IBM), telematics (General Motors OnStar) which will go the other way and eventually everywhere. The US has probably already cut-up the Russian land mass and decided who gets what piece. Putin, Medvedev, and the rest of the Russian leadership are starting to look flaky both at home and abroad; might not last 24 more months so I wouldn’t proclaim the US dead just yet. The US can always reunify the armed forces and streamline the military budget. The health care plan gives corporate America a huge boost both in the IT (infrasructure and royalties) and biotech sectors (patent protection and captive markets). The health care individual mandate gives political cover to the activation of the Selective Service System which is how the US will deal with the massive jobs problem. They simply lose their civil and reproductive rights and the middle class (university grads) will cheer loudly. This is why Mexicans stay in the US with illegal status, they don’t want to get drafted and they all know it’s coming.

  10. Alexei Cemirtan says:

    Interesting article, questionable, but interesting.

    My biggest problem, though, is with your proposed solutions. Politics is the art of the POSSIBLE and judging by your other articles you are certainly cynical enough to recognise that. So what was the point of listing things that will never happen? You could have just written “we are all screwed” and left it at that.
    It would have been far more interesting to read about what could be done within the framework of the current American political system, rather than some kind of a dreamland where all politicians are clever, responsible and can see into the future.
    The reason I am being so critical is that the “solutions” in your article strongly resemble the advice constantly given to Russia by Western “experts”, which may seem reasonable from a very narrow viewpoint, but turns out to be completely useless in the real world.