Saturday, March 19, 2016

the economic growth system has reached its limits in very strange ways...,

ourfiniteworld |  We don’t just extract fossil fuels. Instead, whether we intend to or not, we get a lot of other things as well: rising debt, rising pollution, and a more complex economy.

The system acts as if whenever one pump dispenses the energy products we want, another pump disperses other products we don’t want. Let’s look at three of the big unwanted “co-products.”

1. Rising debt is an issue because fossil fuels give us things that would never have been possible, in the absence of fossil fuels. For example, thanks to fossil fuels, farmers can have such things as metal plows instead of wooden ones and barbed wire to separate their property from the property of others. Fossil fuels provide many more advanced capabilities as well, including tractors, fertilizer, pesticides, GPS systems to guide tractors, trucks to take food to market, modern roads, and refrigeration.

The benefits of fossil fuels are immense, but can only be experienced once fossil fuels are in use. Because of this, we have adapted our debt system to be a much greater part of the economy than it ever needed to be, prior to the use of fossil fuels. As the cost of fossil fuel extraction rises, ever more debt is required to place these fossil fuels in use. The Bank for International Settlements tells us that worldwide, between 2006 and 2014, the amount of oil and gas company bonds outstanding increased by an average of 15% per year, while syndicated bank loans to oil and gas companies increased by an average of 13% per year. Taken together, about $3 trillion of these types of loans to the oil and gas companies were outstanding at the end of 2014.

As the cost of fossil fuels rises, the cost of everything made using fossil fuels tends to rise as well. Cars, trucks, and homes become more expensive to build, especially if they are intended to be energy efficient. The cost of capital goods purchased by businesses rises as well, since these too are made with fossil fuels. Needless to say, the amount of debt to purchase all of these goods rises as well. Part of the reason for the increased debt is simply because it becomes more difficult for businesses and individuals to purchase needed goods out of cash flow.

As long as fossil fuel prices are rising (not just the cost of extraction), this rising debt doesn’t look like a huge problem. The rising fossil fuel prices push the general inflation rate higher. But once prices stop rising, and in fact start falling, the amount of debt outstanding suddenly seems much more onerous.
2. Rising pollution from fossil fuels is another issue as we use an increasing amount of fossil fuels. If only a tiny amount of fossil fuels is used, pollution tends not to be much of an issue. Air can remain safe for breathing and water can remain safe for drinking. Increasing CO2 pollution is not a significant issue.

Once we start using increasing amounts, pollution becomes a greater issue. Partly this is the case because natural sinks reach their saturation point. Another is the changing nature of technology as we move to more advanced techniques. Techniques such as deep sea drilling, hydraulic fracturing, and arctic drilling have pollution risks that less advanced techniques did not have.

3. A more complex economy is a less obvious co-product of the increasing use of fossil fuels. In a very simple economy, there is little need for big government and big business. If there are businesses, they can be run by a small number of individuals, with little investment in capital goods. A king, together with a handful of appointees, can operate the government if it does not provide much in the way of services such as paved roads, armies, and schools. International trade is not a huge necessity because workers can provide nearly all necessary goods and services with local materials.
The use of increasing amounts of fossil fuels changes the situation materially. Fossil fuels are what allow us to have metals in quantity–without fossil fuels, we need to cut down forests, use the trees to make charcoal, and use the charcoal to make small quantities of metals.

Once fossil fuels are available in quantity, they allow the economy to make modern capital goods, such as machines, oil drilling equipment, hydraulic dump trucks, farming equipment, and airplanes. Businesses need to be much larger to produce and own such equipment. International trade becomes much more important, because a much broader array of materials is needed to make and operate these devices. Education becomes ever more important, as devices become increasingly complex.

Governments become larger, to deal with the additional services they now need to provide.
Increasing complexity has a downside. If an increasing share of the output of the economy is funneled into management pay, expenditures for capital goods, and other expenditures associated with an increasingly complex economy (including higher taxes, and more dividend and interest payments), less of the output of the economy is available for “ordinary” laborers–including those without advanced training or supervisory responsibilities.

As a result, pay for these workers is likely to fall relative to the rising cost of living. Some would-be workers may drop out of the labor force, because the benefits of working are too low compared to other costs, such as childcare and transportation costs. Ultimately, the low wages of these workers can be expected to start causing problems for the economic system as a whole, because these workers can no longer afford the output of the system. These workers reduce their purchases of houses and cars, both of which are produced using fossil fuels and other commodities.

Ultimately, the prices of commodities fall below their cost of production. This happens because there are so many of these ordinary laborers, and the lack of good wages for these workers tends to slow the “demand” side of the economic growth loop. This is the problem that we are now experiencing. Figure 4 below shows how the system would work, if increasing complexity were not interfering with economic growth.