Tag Archives: economic growth

houses and cars

This article from Atlantic Monthly saying Millennials are not interested in houses and cars has been talked about a lot. The car companies think they just haven’t hit on the right propaganda yet:

Don’t blame Ford. The company is trying to solve a puzzle that’s bewildering every automaker in America: How do you sell cars to Millennials (a k a Generation Y)? The fact is, today’s young people simply don’t drive like their predecessors did. In 2010, adults between the ages of 21 and 34 bought just 27 percent of all new vehicles sold in America, down from the peak of 38 percent in 1985. Miles driven are down, too. Even the proportion of teenagers with a license fell, by 28 percent, between 1998 and 2008.

In a bid to reverse these trends, General Motors has enlisted the youth-brand consultants at MTV Scratch—a corporate cousin of the TV network responsible for Jersey Shore—to give its vehicles some 20-something edge. “I don’t believe that young buyers don’t care about owning a car,” says John McFarland, GM’s 31-year-old manager of global strategic marketing. “We just think nobody truly understands them yet.” Subaru, meanwhile, is betting that it can appeal to the quirky eco-­conscious individualism that supposedly characterizes this generation. “We’re trying to get the emotional connection correct,” says Doug O’Reilly, a publicist for Subaru. Ford, for its part, continues to push heavily into social media, hoping to more closely match its marketing efforts to the channels that Millennials use and trust the most.

I think Millennials have encountered a tough economy. If economic conditions improve and they have more money, they will find ways to spend it. But not necessarily on cars. I think cars are just fundamentally different from all the other things we can buy with our money. No other good just completely saturates the physical environment, and drives the entire way our physical world is set up, the way cars do. Cars have physically saturated our world to the point that there is no room to squeeze any more of them in. Getting around our car-oriented world is just not convenient any more, and people are smart enough to realize that no matter how much advertising is thrown at them. Advertising messages that cars represent “freedom” are just not going to resonate with most people any more. And as far as status and sex appeal, I don’t believe for a second that our species has fundamentally changed – those things still matter to our species of large hairless ape but they are moving on to new forms.

Cars kill, pollute, waste our space and waste our time – good riddance.

driverless vehicles and displacement of drivers

Here is a continuation of the Economist‘s musings about automation:

The possibility of a world in which a rather large share of the population works as drivers, simply because human labour has gotten too cheap to automate out of the job, should focus minds on the nature of the policy challenge economies are beginning to face. Is work—and the link between work and the earning of an income sufficient to live on—so important to society that we should want millions of people to function as meatware: doing jobs sensors and computers could and would do if only there were not an excess supply of humans needing to work in order to afford food and shelter?

That’s not a rhetorical question. It’s a genuine puzzle that societies will find themselves confronting in coming decades. It will be obvious to many people that the answer is no and just as obvious to many others that the answer is yes. I cannot begin to say which side will win the argument.

The idea is that as automated vehicle technology becomes more effective and inexpensive, it will start to put more drivers out of work. But having more drivers available will reduce wages for drivers, possibly below what the automated technology costs and reducing the incentive for further development of the technology. It’s logical, but this sort of thing must have happened throughout history, and technology tends to win even if it takes a while. Take agricultural technology like diesel-powered tractors – when they got cheaper and more effective, they put enormous numbers of agricultural workers out of work. For the most part, those people didn’t accept lower wages and continue as agricultural workers, they migrated and tried to find better jobs in manufacturing, jobs that were also unfortunately drying up due to globalization and automation. The result, in the U.S. at least, was formation of a (seemingly, so far) permanent new underclass. So not only are these issues about technology vs. jobs, they are about how (whether) the wealth created by the new technology is going to be shared throughout society. In theory, we could retrain people and better educate their children, while also working less and sharing income more broadly. But that doesn’t sound like the American way, does it?

spending vs. investment

Maybe somebody can explain all this to me (from Project Syndicate):

With all of the rules pointing toward recession, how can Europe boost recovery?

A two-year €400 billion ($510 billion) public-investment program, financed with European Investment Bank bonds, would be the best way to overcome Europe’s current impasse. Borrowing by the EIB has no implications in terms of European fiscal rules. It is recorded neither as new debt nor as a deficit for any of the member states, which means that new government spending could be funded without affecting national fiscal performance.

Thus, some of the investment spending currently planned at the national level could be financed via European borrowing to relieve national budgets. Such an indirect way of dealing with strict rules would also be easier than starting long and wearying negotiations on changes to the fiscal framework…

In addition, the ECB could purchase EIB bonds on secondary markets, which would help to keep funding costs low – or even reduce them. More important, purchases of EIB bonds would enable the ECB to undertake quantitative easing without triggering the degree of controversy implied by intervening in 18 separate sovereign-bond markets, where concerns that ECB purchases would affect the relative pricing of sovereigns are very real.

Already, €200 billion of EIB bonds are available. Adding €400 billion would increase the pool substantially. Together with asset-backed securities, covered bonds, and corporate bonds, €1 trillion of assets – the threshold widely thought to make quantitative easing by the ECB credible – would be available for purchase.

What I think it means is that if we don’t have the money to do the things we want to do, we can just make some more up. But of course, we can’t just make up an infinite amount of money, because we can’t just do an infinite amount of things here on our finite planet. So if we make up too much money, people might start to realize that money is just made up.

Here on this finite planet, we have a certain amount of resources at our disposal that allow us to do things – natural resources like energy, water, and fertile soils; machines, structures, and infrastructure we have built; and the physical efforts, knowledge, and skills of people. Also, less tangible things that we have tended to take for granted in the past – the ability of oceans and other ecosystems to grow food, absorb wastes, and cycle carbon, nutrients and gases that we can’t live without, for example. If we are finding that we don’t have the resources to do all the things we want to do, then we are poorer than we would like to be. We can make up some more money, but ultimately the financial system is just something we have come up with to allocate the resources and efforts we do have available, and ultimately to impose limits on ourselves just short of the actual physical limits, which actually do exist.

Where am I going with this? If we want to get richer, we have to protect the resources we can’t do without, like the health of ecosystems and the atmosphere. We have to impose limits on ourselves voluntarily today before the real physical limits are imposed on us. Then if we want to be richer tomorrow, we need to spend the resources we do have on the right kinds of investments in the right kinds of structures and machines; we need to spend our efforts in smart ways and increase our knowledge and skills in the right areas.

The kind of short term economic and financial press coverage I quoted at the beginning of this post doesn’t make the connections between money and the real world, and doesn’t make a distinction between financial spending in general and smart investment in the future. Jeffrey Sachs has written a nice post that makes some of these points, and argues that there has been a recent drop in true investment right when the world needs it most urgently:

Neither neo-Keynesians nor supply-siders focus on the true remedies for this persistent drop in investment spending. Our societies urgently need more investment, particularly to convert heavily polluting, energy-intensive, and high-carbon production into sustainable economies based on the efficient use of natural resources and a shift to low-carbon energy sources. Such investments require complementary steps by the public and private sectors.

The necessary investments include large-scale deployment of solar and wind power; broader adoption of electric transport, both public (buses and trains) and private (cars); energy-efficient buildings; and power grids to carry renewable energy across large distances (say, from the North Sea and North Africa to continental Europe, and from California’s Mojave Desert to US population centers)…

These considerations are reasonably clear to anyone concerned with the urgent need to harmonize economic growth and environmental sustainability. Our generation’s most pressing challenge is to convert the world’s dirty and carbon-based energy systems and infrastructure into clean, smart, and efficient systems for the twenty-first century. Investing in a sustainable economy would dramatically boost our wellbeing and use our “excess” savings for just the right purposes.

Krugman vs. limits to growth

Paul Krugman has weighed in with an anecdotal example of how companies can find ways to conserve energy:

After 2008, when oil prices rose sharply, shipping companies — which send massive container ships on regular “pendulum routes”, taking stuff (say) from Rotterdam to China and back again — responded by reducing the speed of their ships. It turns out that steaming more slowly reduces fuel consumption more than proportionately to the reduction in speed

Interesting, but Mark Buchanan makes the point that total energy use keeps increasing even as efficiency per unit of GDP decreases (the Krugman article was actually a response to this one):

Growth inevitably entails doing more stuff of one kind or another, whether it’s manufacturing things or transporting people or feeding electricity to Facebook server farms or providing legal services. All this activity requires energy. We are getting more efficient in using it: The available data suggest that the U.S. uses about half as much per dollar of economic output as it did 30 years ago. Still, the total amount of energy we consume increases every year.

Data from more than 200 nations from 1980 to 2003 fit a consistent pattern: On average, energy use increases about 70 percent every time economic output doubles. This is consistent with other things we know from biology. Bigger organisms as a rule use energy more efficiently than small ones do, yet they use more energy overall. The same goes for cities. Efficiencies of scale are never powerful enough to make bigger things use less energy.

I have yet to see an economist present a coherent argument as to how humans will somehow break free from such physical constraints. Standard economics doesn’t even discuss how energy is tied into growth, which it sees as the outcome of interactions between capital and labor.

Brian Czech further attacks the Krugman article:

Let’s not let Krugman delude us. “Growing real GDP” isn’t about an efficiency gain here and there. It means increasing production and consumption of goods and services in the aggregate. It entails a growing human population and/or per capita consumption. It means growing the whole, integrated economy: agriculture, extraction, manufacturing, services, and infrastructure. From the tailpipe of all this activity comes pollution.

Krugman seems to have fallen for the pixie dust of “dematerializing” and “green growth” in the “Information Economy.” He may want to revisit Chapter 4 of The Wealth of Nations, where Adam Smith pointed out that agricultural surplus is what frees the hands for the division of labor. In Smith’s day that included the likes of candle-making and pin manufacturing. Today it includes everything from auto-making to information processing, but the fundamentals haven’t changed. No agricultural surplus, no economic growth. And agriculture is hardly a low-energy sector.

Now, I think it’s possible to have a vision of truly clean energy, which could one day allow us to grow energy use without increasing our environmental footprint. But to get there, we have to turn the corner where the reduction in impact per unit increase in energy use is greater than the overall increase in energy use. And we are nowhere near turning that corner yet.

urbanization and economic growth

From PLOS, Urbanization is correlated with economic growth, but it is not necessarily the cause of it.

The authors of the study argue that GDP growth may create conditions that organically drive migration from rural to urban areas, but the assumption that urbanization will necessarily drive strong economic growth may be false. Pointing to the numerous examples of accelerated urbanization without strong economic growth (again, the green graph above), they caution that “urbanization is not an automatic panacea” for economic difficulties. Citing other work, the authors suggest that instead of trying to move people into cities, governments and development agencies should focus on creating a mobile workforce, ensuring broad access to goods and markets, implementing government policies that support commerce, and investing in infrastructure. These efforts could make a bigger difference for short- and medium-term economic growth than arbitrary urbanization targets.

While economic growth is an incredibly complex process and much work remains, this study serves as a good reminder not to confuse causation and correlation: just because two variables are closely related doesn’t necessarily mean that one directly causes the other.

slowdown in entrepreneurialism

I thought that high unemployment and downward pressure on wages was leading to more startup companies and entrepreneurs. Not so, according to Janet Yellen from the Federal Reserve:

With a good deal of justification, the United States has always viewed itself as an entrepreneurial country. Although most new businesses fail, founding a new company is still a key way for people to move up the income distribution, Yellen said. “However, it appears that it has become harder to start and build businesses,” she added. “The pace of new business creation has gradually declined over the past couple of decades.” This decline could serve to depress the growth of productivity, wages, and employment, Yellen went on, and it “may well threaten what I believe likely has been a significant source of economic opportunity for many families below the very top in income and wealth.”

world economic slowdown

Here’s a laundry list of world economic problems from CBS News:

The focused has been on Germany over the past week, the weakly beating heart of the still-troubled eurozone, where industrial production, factory orders and export activity all posted the worst results since early 2009 amid chatter that the country is on the verge of falling back into a technical recession.

Separately, France is having budget woes. And the eurozone debt crisis threatens a comeback as credit rating agencies issue new warnings and the market starts to realize that the European Central Bank can no longer bluff its way out of trouble. It now must step up with a bona fide sovereign bond-buying stimulus program (which could be illegal according to its charter and is unpopular idea with the Germans) after playing at one for more than two years.

Japan is also at risk of falling back into technical recession (GDP growth already contracted last quarter) as a recent sales tax hike and the negative impact of a very weak yen (higher food, fuel and import costs) pinches consumers.

Japan has been held together by the idea that the Bank of Japan would issue more cheap money stimulus and further slam the yen if the economy faltered. But economists are realizing that a weak yen is hurting more than it’s helping at this point. And given Japan’s massive 227% national debt-to-GDP ratio (vs. around 100% for the U.S.) time is running out.

And in China, the People’s Bank of China is watching as electricity production contracts outright for the first time since early 2009, an anecdotal sign that China’s economy has hit a wall.

The second reason is that the U.S. Federal Reserve is watching as its efforts to merely return monetary policy to a more neutral footing — by bringing to an end the QE3 bond-buying program and looking ahead to the first interest rate hike since 2006 — has resulted in a volatile corporate bond market and a massive rally in the U.S. dollar.

This has crushed commodity prices, tightened credit to foreign economies (many of which have grown dependent on borrowing at low rates in cheap dollars) and threatens to slow U.S. GDP growth by pinching American exports.

It goes on after that…

No mention of root causes here. I keep repeating myself all the time redundantly but some potential root causes, which are not mutually exclusive are (1) the world is still feeling effects of the 2007-8 financial crisis, in a classic depression and loss of demand and confidence scenario, (2) rich people and corporations are driving government policy in their favor to the point that inequality has gotten so bad it has broken our economic system, with the middle class and working class not having enough incentive (i.e. income) to be productive, (3) technology and automation are putting strong downward pressure on middle class and working class wages, (4) climate change and natural capital depletion are starting to be felt in energy and food prices, putting a head wind on economic growth, with “green” technological progress not enough to lessen or reverse environmental impacts, or (5) innovation and technological progress in general have slowed down and are not driving economic growth like they have over the past century or so.

a rambling post on oil prices, France, and U.S. health care

I said recently that I didn’t think oil prices would continue to decline much below $100 a barrel. Well, today (October 10 as I write) West Texas Intermediate is at $85.82 and Brent Crude at $90.21. An article I linked to recently said that fracking is cost-effective right now when oil stays above about $60.

In other economic news, U.S. health care cost growth is significantly down and it seems like that trend might continue. And France’s economy might be in trouble.

What do all these trends mean taken together? I have no idea, but I can speculate as well as anyone. Europe has been stagnant and is staying that way. Growth and energy demand are slowing in Asia too, exactly when U.S. oil and gas production are booming. Maybe solar panels are starting to take a bite out of the natural gas market? Probably not yet, but that will happen.

The U.S. health care system is an extraordinarily complex and inefficient market that nobody truly understands. There are some signs it may finally be getting a little more efficient. I think this may be one reason the U.S. looks like a bright spot in the overall lackluster world economy right now.

 

GDP and child mortality

In this 2007 TED talk, Hans Rosling compares GDP and child mortality rates between countries over long periods of time. He makes some interesting comparisons – today’s “developing” or “emerging” countries have GDP similar to the U.S. about a hundred years ago (all adjusted for inflation and purchasing power, I assume), but they are much more advanced in terms of health and living standards than the U.S. was then. By animating over time, you can see how the catching up process occurred particularly after World War II. These plots are interesting because they show child mortality and GDP in two dimensions, but then use colors and bubbles to add various third variables like education level or carbon emissions.

I have to critique a little bit, I can’t help it. He mentions that GDP growth statistically explains 80% of the gains in child mortality. I accept the statistics, but I don’t think GDP growth is logically the cause of these gains. I suspect there are a couple key technologies, vaccination and water disinfection, that can probably explain a lot of the trend, and the discovery of these technologies happened to occur at a certain time in history. 100 years ago, when the U.S. was passing a threshold to join the club of truly wealth countries, we were in the early stages of discovering and implementing these trends. Today, when countries in Asia and South America are joining the club, these technologies are well established. So it’s not just about wealth, it’s about where we are at a particular moment of history. Logically, there can be periods where the world makes large gains in quality of life without equally large increases in financial wealth, and also the opposite.