A status report about the US economy (we party so hard we cannot hear the alarms ringing)

Summary:  We have the best economic recovery that a trillion dollars per year of Federal borrowing can produce, with enthusastic cheering from Wall Street.  Some people look at the data and believe the great boom has begun.  Some look at the data and see a patient on life-support, slowly fading away.  We’re off the map of conventional economic theory, so read this and judge for yourself.


  1. Some trends deserving special notice
  2. Some of the best leading indicators
  3. US employment
  4. Looking at long-term trends, away from Wall Street’s obsession with the last tick of the data
  5. What’s maintaining enthusiasm about our economy?
  6. Conclusions
  7. For more information about the US economy

(1)  Some trends deserving special notice

  • Rising treasury yields (eg, ten year is up almost 1/2 point since January).  Watch this closely!  The Fed must keep a lid on long rates.
  • Brent spot oil prices recent low was December 19 at $102; it’s now $125 (up 23%) —  a serious drag on global economy.

(2)  Some of the best leading indicators

(a)  A forecast about the US economy by a firm with one of the best records

(b)  Much of the world is slowing

… per the Markit purchasing manager indexes (PMI).  Here is a summary of the March PMI’s, followed by excerpts:

  • Flash Eurozone Manufacturing PMI at 47.7 (49.0 in February), 3-month low.  “Eurozone slides back into recession as output falls at stronger rate in March”
  • Flash Germany Manufacturing PMI at 48.1 (50.2 in February), 4-month low.
  • Flash France Manufacturing PMI drops to 47.6 (50.0 in February), 4-month low.  “French private sector output slides back into contraction in March”
  • Flash China Manufacturing PMI at 48.1 (49.6 in February). 4-month low. “New order book weakness contributes to renewed decline in manufacturing output”


Incoming new business fell for the eighth successive month, deteriorating at the fastest rate since December. Renewed declines in France and Germany were accompanied by a sharper rate of contraction elsewhere (on average). The rate of decline of new orders also exceeded that for output, causing backlogs of work to fall for the ninth successive month. This is likely to put further downward pressure on output levels in April.

New orders fell at the fastest rate for three months in both manufacturing and services. Goods producers reported the steeper rate of decline, as falling domestic demand was exacerbated by a ninth consecutive monthly drop in new export orders.


March data pointed to a slight reduction in new business received by private sector companies in Germany. This renewed contraction in client demand means that total new work has now fallen in seven of the past eight months. The overall reduction was driven by a solid drop in manufacturing new orders, whereas service providers noted a modest expansion in March. Manufacturers also reported a sharp and accelerated decline in new export business, suggesting that softer global trade flows had been a key factor behind the latest fall in new work.


Manufacturers noted a drop in new orders for the ninth consecutive month, and at the sharpest rate since last November. Domestic demand appeared to be the main area of weakness, as new export orders increased slightly for the second month running. In the service sector, growth of new business eased to near-stagnation.


Weakening domestic demand continued to weigh on growth, as indicated by a slowdown in new orders which came in at a four-month low. External demand remained in contraction territory, but the decline was at a slower pace, implying that there are no improvements in the demand outlook. More worryingly, employment recorded a new low since March 2009, suggesting slowing manufacturing production was hindering enterprises’ hiring desire. The soft-patch in manufacturing was in line with the recent downside surprise in industrial production growth.

(3)  US employment

Some people believe this is a strong dimension of the US recovery.  The data suggests otherwise.  It’s a weak recovery, at best.

(a)  Long-term trends

(b)  Short-term trends

Seasonal adjustments are necessary to interpret short-term trends.  But the 2008-2009 crash and bounce introduced distortions into the SA formula, which use recent history to adjust the current numbers.  Also, the US had almost no winter this year (see the NOAA data here).  These formulas assume a winter downturn, and adjust up accordingly.  Accordingly they boosted the numbers for a winter downturn that did not occur.  Here’s one example, from Table B-1 of the February employment report.  Going from negative to positive is a common adjustment, but might not be appropriate now given the light winter.

Unadjusted nonfarm employment:

  • December: 132,965 thousand
  • February:   131,164 thousand
  • Loss:  1,800 thousand jobs

Seasonally adjusted nonfarm employment:

  • December: 132,186 thousand
  • February:   136,697 thousand
  • Gain:  511 thousand jobs

(c)  Trends

The unemployment rate can improve in two ways:  people get jobs, or they stop looking — then they are then no longer unemployed by the headline U-3 unemployment metric (broader measures of unemployment, the U-4 to U-6 metrics on table A-16 of the employment report, are 8.9 to 14.9%). Economists use more useful metrics, chiefly the labor force participation ratio and employment-population ratio.  See the “recovery” in the long-term graph (from Brad Delong, Prof Economics, Berkeley):

How does this “recovery” compare to previous downturns?  The following comes from “Prospects for the US labor market“, published 26 March 2012 by the New York Fed:

The employment-to-population ratio displays a classic V-shape recession and recovery pattern in the 1970s and 1980s. In the recession and recovery of the early 1990s, however, the employment-to-population ratio instead displays a U shape, only returning to its pre-recession level three years after the peak in the unemployment rate. In the recession and recovery of the early 2000s, neither the participation rate nor the employment-to-population ratio returns to its previous level, so we see an incomplete U-shape pattern. In the most recent cycle, the employment-to-population ratio traces out an L shape, but the unemployment rate falls because the participation rate declines substantially … in other words, a larger share of the population is out of the labor force rather than participating and being unemployed.

(4) Looking at long-term trends, away from Wall Street’s obsession with the last tick of the data

See these two thought-provoking graphs from Roubini Global Economics report of 23 March 2012 (gated), using data from the FRED system of the Federal Reserve Bank of St. Louis.

(a)  Real Income Growth Less Transfers Remains Stagnant

(b)  Growth of Durable Goods Orders Continues to Slow

(5)  What’s maintaining enthusiasm about our economy?

(a)  More free money!

Perhaps the expectations of additional monetary stimulus from central banks in the US, EU, and China.  None of these look certain, or even likely in the next 2 or 3 quarters, unless the economy slips into recession.

  • China is attempting to cool an overheated economy.  Many experts consider stimulus unlikely before the leadership change in October.
  • The ECB has just completed a massive (and controversial) monetary injection (two rounds of LTRO, expanding their balance sheet with weak assets). See ECB Balance Sheet Hits Record $3.9 Trillion on History-Making Bank Loans at Bloomberg.
  • Another round of Fed stimulus (QE3) probably would have little economic effect, servicing only as a politically divisive stimulus to markets before the election.

(b)  About the effect of QE1 and QE2

Monetary stimulus works largely by stimulating credit growth.  That has not happened in this cycle.  Excluding Federal education loans, there has been steady contraction in Household credit (per the Fed’s G.19 report) since 2008.  Business borrowing has expanded slightly during the past few quarters, following a large contraction during the 2007-2011 period.

(c)  About those education loans

Many experts fear these are the new subprime.   As in this excerpt from “Grading Student Loans“, New York Fed, 5 March 2012 (red emphasis added):

The outstanding student loan balance now stands at about $870 billion, surpassing the total credit card balance ($693 billion) and the total auto loan balance ($730 billion). With college enrollments increasing and the costs of attendance rising, this balance is expected to continue its upward trend. Further, unlike other types of household debt such as credit cards and auto loans, the student loan market is incredibly complex.

… we find that as many as 47% of student loan borrowers appear to be in deferral or forbearance periods, and thus did not have to make payments as of third-quarter 2011. Specifically, 17.6% of borrowers had exactly the same balance in the third quarter as in the second quarter of this year, and 29.1% increased their overall student loan balance by taking on new originations or accruing interest to the balance.

We then recalculate the proportion of borrowers with a past due balance excluding this group of borrowers. We find that 27% of the borrowers have past due balances, while the adjusted proportion of outstanding student loan balances that is delinquent is 21% – much higher than the unadjusted rates of 14.4% and 10%, respectively (see charts below).

High default rates should surprise nobody given the high unemployment rate since 2008 among those 20-34 years old.  For more information see:

(6)  Conclusions

Massive fiscal and monetary stimulus has maintained slow growth since 2009.  But like many powerful medicines, it’s poison if used at high doses too long.  Not just unsustainable, but actively harmful.  The medicine makes us feel good — which we mistakenly believe means we have regained our health. And so we ignore the two steps necessary for a real recovery.  We may not have long to implement them — a few years, a few quarters, a few months?

  • Use the opportunity to borrow at low rates and build at low cost to rebuild our rotting infrastructure.  Prepare American to compete in the 21st century.  Other nations do so while we play.
  • Use the time bought by this medicine to make painful reforms (especially to the banking system).  That’s how wise nations use recessions, as they make change politically possible for a brief time.

“You never want a serious crisis to go to waste. … Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before.”
— Rahm Emanuel, Obama’s chief of staff, speaking at a conference of top corporate chief executives in November 2008.  (Source)

(7)  For more information about the US economy

  1. Why the middle class is dying, 9 March 2011
  2. Update on the inflation hysteria, the invisible monster about to devour us!, 15 April 2011
  3. About the January jobs report – mildly good news, but bought at great cost, 4 February 2012
  4. We have an economic recovery. It costs $1.1 trillion per year – and might still fail, 23 March 2012

37 thoughts on “A status report about the US economy (we party so hard we cannot hear the alarms ringing)”

  1. A sad article, FM. But it is an accurate statement of the current state of the US economy (and, by extension, the health of the US culture).

    People need to know this. Dreams are fun and pretty but they are a poor basis for planning for the future.

    1. Mine is a minority opinion. But so have all my analysis and forecasts during this cycle.

      • In early 2008 I said we were in a recession. Hordes o commentators, from the The Instapundit’s website, told me I was wrong (Bush could do no wrong).
      • In late 2008 I said that the global economy was crashing and only desparate action could prevent another depression. Commenters said I was over-reacting.
      • In 2009 I said that our reaction to the crash stopped the decline, but would not produce a solid recovery (tax cuts would not put people back to work or rebuild our rotting infrastructure). Commenters said I was wrong. A “v” recovery was here; tax cuts are magic.
      • In 2010 I said that the danger was a slowing economy, and mocked those warning of inflation and hyperinflation. Commenters said I was wrong, that inflation was certain.
      • In 2011 I said that our massive fiscal and monetary stimulus created very slow growth, but fixed nothing and could not be sustained. Commenters warning about rising interest rates, a falling dollar, and inflation.

      Perhaps if I used another type font I would communicate more clearly?

    2. The problem, as you almost certainly know, is not the clarity of your communication. The problem is that you are telling the people running the party that they have to take a break from their partying or it will come to an uncomfortable end. They don’t want to hear that and for the moment they don’t have to. But someday they will have no choice and they will shout “WHY DIDN’T ANYBODY WARN US THAT THIS WOULD HAPPEN?” And they will ignore all of the I told-you-so’s.

      You are not alone in being ignored, for example the ECRI is being mocked for their recession forecast. Which is ridiculous when you compare the level of analysis by the ECRI vs. the level of analysis of their mockers. The ECRI may not have timed their prediction very well but their model seems solid and the facts they feed into the model are indisputable. By comparison, the mockers only offer platitudes, gut feelings, and trailing indicators such as unemployment.

    3. From the ECRI link.

      “Most data, both public and private, are seasonally adjusted. But the nature of the Great Recession seems to have had an unexpected impact on the statistical seasonal adjustment algorithms that are hard-wired to detect when the seasonal patterns evolve and change over the years. This is normally a good thing, but when the economy fell off a cliff in Q4/2008 and Q1/2009, it was partly interpreted by these procedures as a lasting change in seasonal patterns. So, according to these programs, data from Q4 and Q1 would be expected thereafter to be relatively weak, and therefore automatically adjusted upwards. Our due diligence on this subject indicates a widespread problem, resulting in many recent economic headlines being skewed to the upside.”

      This is interesting. I wonder if it’s construction. Jobs like construction and painting are affected by bad weather, and with real estate no longer continually rising in price investment is in housing is now more risky and difficult to get funding for.

      “we find that as many as 47% of student loan borrowers appear to be in deferral or forbearance periods,”

      And these young educated people might have been the ones who would be buying these homes and having children and starting a recovery in the housing market except, oops, too many are debt slaves to college loans. This should be a warning to any young person. Keep your college expenses as low as possible — with Jr. College transfer and with living at home, a degree could be much cheaper. I think $20K of debt would be manageable, but $100K+ could be a lifetime indenture.

      1. Note that those posts discussed a recession than had already began, but that Republicans refused to acknowledge or even prepare for (they were too busy licking Bush Jr’s boots).

        Unfortunately predicting a US recession lies outside the current state of the economic science. Available data is some combination of unreliable or lagging (ie, we know where the economy was 6 months ago but not now). Theory is immature.

        Making it more difficult:
        (1) The US is part of a global economy, about which we have far less data than for the US (the emerging nations are half the world, and we have relatively little current data).
        (2) Current conditions are “off the map”, unlike the post-WWII world we knew so well.
        (3) The economic world consists of social and technological factors that evolve (a problem chemists don’t have).

  2. “We may not have long to implement them — a few years, a few quarters, a few months?”


    Matters not
    We (they) won’t.
    Debt/Solvency are difficult masters.

    (Could we get new Fonts for replies, please?)


  3. On rebuilding’rotting infrastructure’
    1.How are you paying for it- borrowing , taxing , or printing money ?
    2. Who/what is it going to benefit ?
    a. Future growth? But why assume there will be future growth , when other nations can produce things as good ( now having lots of unemployed educated , which explodes the previous theory that the answer was more educated citizens ) , and possibly cheaper ( perhaps having resources of oil , solar /wind power , raw materials , citizens desperate to work for any pittance )
    b.people getting construction jobs , and having spending money in their pockets : but things are now built with ( chinese?) machines and small numbers of ( cheap immigrant? )labourers
    3.Do we really need roads and railroads and airports in an internet future?

    1. Ignoring points 1 and 2, since someone with more economic knowledge can probably argue against them better.

      3. Until someone figures out how to send food and fuel over the internet, you still need transport infrastructure. In order to use the internet you’re going to need a functioning communications and electrical network, which largely relies upon transport infrastructure to build and maintain it. Making it easier to transport goods also helps to prevent localised monopolies on essential goods and further enables trade.

    2. This is basically what Japan did. That while the USA is dominated by corrupt banks, Japan is dominated to a greater extent by corrupt construction companies. I think the results are arguably better, though still very much mixed. At least you can ride the bullet trains all around the country, and there are bridges and highways and community centers everywhere. The unemployment situation is a bit better in Japan than it is here, I think the construction has done a better job of spreading out the stimulus to the general public than what the Fed has done here.

      The consensus, though, seems to be that the infrastructure spending hasn’t really revived the economy, and the situation remains grim. That everything is still limping along at the zombie level.


      1. “the infrastructure spending hasn’t really revived the economy”

        You must be kidding. What infrastructure spending? Only a tiny fraction of the stimulus spending went to fund new infrastructure spending? Most was funding existing services, infrastructure maintenance (eg, filling potholes), and tax cuts.

      2. “seems to be that the infrastructure spending hasn’t really revived the economy”

        Also, that’s absurd.

        (1) You must be reading GOP myth-makers. A very large body of research shows that infrastucture spending has one of the highest multipliers of any fiscal stimulus.

        (2) Fiscal stimulus stabilizes the economy. Despire politicans wild claims, it’s not a magic pill that heals the sick. Only deleveraging, structural reforms, and time can restore an economy to health.

    3. 1. “How are you paying for it – borrowing, taxing, or printing money?”

      I said “low interest rates”; which means borrowing (how most infrastructure is built). These low rates AND low costs provide a once in a lifetime opportunity.

      2. “Who/what is it going to benefit?”

      History shows that good infrastructure is a necessity for growth, which benefits everyone.

      a. “But why assume there will be future growth, when other nations can produce things as good”

      You are unclear how trade works. I suggest reading Ricardo about comparative advantage.

      3. “do we really need roads and railroads and airports in an internet future?”

      Do you eat, buy electronic devices, consume energy, wear clothese? Do you travel for business or pleasure?

    4. “You must be kidding. What infrastructure spending? Only a tiny fraction of the stimulus spending went to fund new infrastructure spending? Most was funding existing services, infrastructure maintenance (eg, filling potholes), and tax cuts.”

      I’m referring to Japan. Japan has been spending vast amounts of money on infrastructure projects going all the way back to the 90’s. It has never ended.

      1. Different circumstances. Infrastructure spending is not magic. No matter how spent it supports the economy. But only rationally spent funds provide an economic return for the nation on the investment.

        The proposal in the US is to update vital but rotting infrastructure. Japan could have done so, but politically powerful interest groups hijacked the funding. Instead they build bridges to nowhere, modern train stations for farm villages, etc. Pousing concrete everywhere.

        This is all explained at length on the FM website. For an intro see:

    5. “The proposal in the US is to update vital but rotting infrastructure. Japan could have done so, but politically powerful interest groups hijacked the funding. Instead they build bridges to nowhere, modern train stations for farm villages, etc. Pousing concrete everywhere.”

      Well, it’s not all pointless construction. Really, I’m not sure where you’re seeing rotting infrastructure is in Japan. it seems like there’s quite a bit of old but functional 70’s-80’s vintage stuff that’s still being used. But generally, people in Japan, even the children, are just less destructive, so a lot of these old buildings and stations remain in better shape for a longer amount of time.

      It seems that here in the SF Bay area everything takes forever to get built. That we had the earthquake in 1989 and now the SF Bay bridge is still being worked on. That’s over 23 years. They spent a lot of money and time re-building a short section of interstate 880 that was destroyed in the quake. In Japan, I think it’s kind of the opposite extreme, and that the construction companies pay off the politicians, and then they just start bulldozing right off. I’m sure Obama would have thrilled to see more money go into infrastructure, but the issue is that the USA just isn’t setup to build stuff quickly. For better or worse, including environmental and other local concerns, we have a lot of obstacles.

      1. My comment was poorly phrased. I meant to say that Japan could have used the borrowed funds to build useful infrastructure, instead of wasting the money. Such as upgrading their sewage treatment facilities to level 3 — and modernizing their atomic power plants.

  4. Fabius, do you ever feel like Cassandra? Also, I vote comic sans, if only for the levels of rage that font seems to induce.

    1. Yes. But in that sense I stand in the company of men far better than I. Such as economist Paul Krugman, former Comtroller General David Walker, attorney Glenn Greenwald — and the large number of other Americans warning of the dark path we’ve taken.

  5. Restoring American. Competitiveness” by Gary P. Pisano and Willy C. Shih, Harvard Business Review, July-August 2009 — Opening:

    As the United States strives to recover from the current economic crisis, it’s going to discover an unpleasant fact: The competitiveness problem of the 1980s and early 1990s didn’t really go away. It was just hidden during the bubble years behind a mirage of prosperity, and all the while the country’s industrial base continued to erode.

    Now, the U.S. will finally have to take the problem seriously. Rebuilding its wealth-generating machine—that is, restoring the ability of enterprises to develop and manufacture high-technology products in America—is the only way the country can hope to pay down its enormous deficits and maintain, let alone raise, its citizens’ standard of living. Reversing the decline in competitiveness will require two drastic changes:

    • The government must alter the way it supports both basic and applied scientific research to promote the kind of broad collaboration of business, academia, and government needed to tackle society’s big problems.

    • Corporate management must overhaul its practices and governance structures so they no longer exaggerate the payoffs and discount the dangers of outsourcing production and cutting investments in R&D.

    Have you seen this article here? I’ve read this before, that American competitiveness has been damaged by outsourcing of manufacturing, but this pdf here makes the case well. What’s happened is that the expertise to manufacture the products of the future has left for Asia.

    I think they make a convincing argument, to me at least, that the failure of American solar energy has been a result of the outsourcing of other related manufacturing to Asia. They have a nice case study of the Amazon Kindle and why it cannot be made in the USA.

    1. It’s not total malarky, just mostly malarky.

      Companies act to maximize profits. They outsource when in their best interests, and no HBR article will convince them or me that they’re wrong.

      Companies react to macroeconomic factors, the kind often invisible to writes of HBR articles. An overvalued currency, such as the British and American Imperial elites love, increases imports and discourages imports. It’s math.

      Current US trade policy in effect promotes outsourcing, under the mistaken belief that nothing has changed since 1817 (when Richardo wrote about comparative advantage in trade). For details see Globalization and free trade – wonders of a past era, now enemies of America.

      The authors’ nicely shill for more corporate handouts from the public to fund their R&D. Bogus. For details see Research and Development in the Federal Budget, Matt Hourihan, 22 March 2012 — published by the AAAS R&D Budget and Policy Program. What would be nice is the Federal government applying research dollars to something more useful than defense.

  6. Based on my experience and research over the years on the economic development of nations in general and the situation in Congo in particular, I understand that the DRC has significant infrastructure and economic problems that are exacerbated by localized forms of corruption, which exists in many countries.
    Financial Advisor

  7. Regarding American competitiveness damaged by outsourcing of manufacturing …

    1. I think we believe that success for the few at the expense of throwing American workers out on the street isn’t really success. But I don’t think this concept goes very far with our business leaders. That alone is a huge issue.

    2. Labor in Asia/India/Latin-America is still much cheaper. Even beyond the differences that come from currencies.

    3. The easy answer is that we should try to stay ahead of the rest of the world and always be the source of the hottest new technology. That’s awesome, and sometimes possible, for example with Apple and Google (PS- who says we’re poor? http://www.huffingtonpost.com/2012/03/16/apple-market-cap-worth-more-than_n_1348762.html#s785286&title=The_Entire_US ). But for a country of 300 million I think we’re going to need more than just the tech sector to live off of.

    We should look into how other countries in our position try to maintain their good position and divide it up amongst themselves. Germany and Japan, for instance. Or France, or Spain, or South Korea.

    1. When new industries form, companies take into account the exchange rate and these kinds of issues when they decide where to place manufacturing, but that once an industry is developed in a country with all the labor skills and physical plants, that the tendency is that it’s just going to remain there. I think this is also an issue with patents. That if you’re you’re there in the factory watching LCD displays being made, there’s going to be ways to improve the process that you invent because you’re at the site. You have an advantage over someone sitting in a cubical on the other side of the planet. This is an advantage that accumulates in the country where the manufacturing occurs. Even after the massive rise in the value of the Yen there were still obstacles to improving exports to Japan from the USA.

      Obama has attempted a kind of industrial policy with the idea of encouraging solar energy and other projects like this. This has failed, I think, because ‘green’ is a of a political definition and to make a solar panel, you need basic processes that have developed in China which they use in a wide variety of products, not just green ones. Now we’re going to have tariffs on Chinese solar panels — but, you know, good luck with this. I think it’s just going to slow down adoption of solar in the USA for the benefit of a few companies.

    1. Troll: an internet term for a person who, through willful action, attempts to disrupt a community or garner attention and controversy through provocative messages.

      Your comments are now moderated. Those that contribute something to the discussion will get posted.

  8. A few robots could be distantly programmed to cut/bend/drill/glue/weld/solder/assemble to make different sorts of ‘ stuff ‘ locally , using local recycled materials ( eg electronic stuff ) . Like we used to buy a pattern and some cloth , rather than a dress .

    1. >> A few robots could be distantly programmed to cut/bend/drill/glue//weld/solder/assemble …

      or a few human beings.

  9. Perhaps I’m wrong (please correct me if I am), but it seems to me that many of the trends so vividly illustrated by these charts trace back to fundamental structural changes in the world economy produced by irreversible changes in technology and global resources.

    For example, the first and second set of charts (nonfarm payroll and labor market indicators over recent cycles) paints an alarming picture of an economy steadily employing a smaller percentage of its population over time. This seems inevitable given the rise of automation, robotics, the advance of artificial intelligence programming, and so on. For example, a simple proxy for the first set of charts would be the income per employee produced by America’s most successful companies from 1948-2010. When we compare General Motors with Google, we see the modern company (Google) producing fantastically more money per employee than GM did in the postwar period. This is not a result of bad management practices: it’s the inevitable result of an increasingly automated economy.

    The next chart, real income growth remains stagnant, is exactly what we would expect from an electronically mediated highly-automated globalized economy in which global wage arbitrage relentlessly drives down the wages in developed countries while pushing up the wages in third world countries. Once again, global wage arbitrage doesn’t appear to be a trend that we can magically erase by changing our management practices or altering government regulation of industry. It’s a fundamental structural process operating internationally, largely beyond the control of individual government and individual economies, or so it seems to me.

    The next chart, showing the decline in durable goods sales, also seems exactly what we would expect in the aftermath of a gigantic housing bubble imploding — combined with Peak Oil. Unless I’m mistaken two of the biggest sources of consumer durable goods sales are houses (which pumps up sales of refrigerators, washing machines, furniture, consumer electronics, and so on) and the automotive sector.

    It seems to me that we must face the prospect of a permanently declining automotive sector as the price of oil relentlessly ratchets up. The estimates I’ve seen place Peak Oil sometime during the 2030s, which, if correct, gives us only a few years of continued growth before we enter a period of permanent contraction and wrenching economic change. Certainly regions like Southern California cannot be expected to survive Peak Oil in their current form. These kinds of endless freeway-and-suburb urban grids were built during the period of cheap oil, and when you see reports from the recent Southern California Association of Governments summit (not quite a fringe group of cranks, methinks) like The Age of Oil — Beginning of the End?, it suggests to me at least that large regions of the United States face wrenching economic and social transitions for which they do not seem to be preparing.

    The future of the housing sector also seems in doubt insofar as suburbs appear increasingly unsustainable in world of Peak Oil. Once again, it’s not the lunatic fringe voicing these concerns about the way America’s metropolitan freewway-based infrastructure is designed: the latest issue of Scientific American features an excerpt from a book discussing the tremendous impact Peak Oil is likely to have on many of our suburban metropolitan areas.

    Much of the discussion on this thread, therefore, involving various types of infrastructure investment seems at best misplaced, and at worst severely counterproductive. Building more freeways, repairing sewer and water mains leading to increasingly unsustainable metropolitan urban areas or suburbs, and erecting enormous civic centers to which people must drive with increasingly unaffordable gasoline seems a very strange response to these huge structural changes in the global economy.

    To put it bluntly, we appear to be moving away from the Age of the Automobile and toward a robotic and database-driven economy that employs a much smaller percentage of the population than was the case in past economic recoveries. Martin Ford and Marshall Brain have written a great deal about this, and many of their predictions are now coming true. Self-driving cars are today a reality: robots are increasingly able to perform simple tasks like restocking supermarket shelves. What will this do to the remaining middle class jobs in America, and throughout the developed world?

    It seems to me that capitalism as we know it will have to change significantly as the middle class permanently shrinks and the number of permanently unemployed people in the population relentlessly rises. We have to move to a general reduction in the hours worked by all workers, or perhaps something like FDR’s guaranteed minimum income proposal from the 1944 period. In any case, it seems clear to me that Peak Oil + automation + robotics + AI + databases augur enormous tectonic changes in the global economy — probably leading eventually to something like a zero-growth totally recycled economy, something we have no experience with, and which economics as it presently exists does not appear to be able to envision.

    1. Agree the the changes are deep and structural, but I don’t think we are screwed in any fundamental way. It’s more like the situation of the Luddites. They were tempted to smash up the textile machines so they could keep feeding themselves by continuing the old way of making fabric. The problem was with how the technological changes left a lot of people out in the cold. There’s no fundamental reason for this.

      I want to pick at some of the tech details first though.

      Robots: I find it more helpful to think of robots as tools rather than “replacement people”. You could build a lumberjack robot, or give a man a chainsaw. Same effect, but it gets rid of a lot of the bad feelings.

      Peak oil: Not the same as peak energy, nor peak transportation. If gasoline got 2, 3, 4, even 5 times as expensive, we could just carpool. Not that I would be sorry to see the suburbs go. But there’s plenty of technology we can deploy much more of in the U.S. — natural gas, hybrid cars, strong lightweight materials to reduce the weight of all the stuff we’re transporting, 1990’s age electronics for much more efficient power conversion and power transfer, trains, buses, motorbikes, nuclear, solar. Plus new tech yet to be developed. Who knows what they can reach underground with the drilling technology of 20 years from now. Maybe we’ll have massive geothermal power generation. And if society can get by for 50-60 years there ought to be nuclear fusion. Think of the bad habits that will bring about. I think the age of the automobile is more in danger from peak road maintenance than peak oil.

      Returning to employment and social consequences — Why don’t we just reduce the workweek? Yeah, it’s redistribution of wealth, so what? What’s so bad about having less work to go around? We’re all a bunch of masochists, wanting more stuff to do for the same slice of the pie.

      Or we can just use all the time we gain to build enormous corporate hierarchies (or government bureaucracies) and spend 5 hours a day on email, or some other not-really-productive activity, call it work, and feel like we earned our pay.

    2. I think I missed the most important paragraph in your post though- about the infrastructure investment for the sake of helping the econ crisis, and how it’s unwise to just recreate more of what we have now. I agree very much with that.

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