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Sunday, December 2, 2012

Gail Tverberg as the anti Scott Sumner

     Which makes it doubly ironic where I discovered her-from a link on Sumner's Money Illusion page. He didn't link her directly, but from a link he did provide-oilprice.com I discovered her "Our Finite World."

      It seems to me that as different as these two analysts are what they have in common is they have at bottom a very simple, cursory explanation of what our problems are. Like her explanation of the Great Recession is just as simple as Sumner's-yet it's implications couldn't be more different.

      Obviously, if you've read Sumner at all you know that in his mind it's all about NGDP. If the Fed just needs to target it and make sure it follows the long term trend and we'll be fine. If the Fed had done so, the 2008 crisis never would have happened.

       In this sense there is little about the "real economy" we even need to scruple about. For him, the real economy itself seems to be the epiphenomenon and not the other way around. The housing bubble-assuming there was one at all; and, whether or not there was one seems to change; on some days there actually wasn't one as there is no such thing as housing bubbles; on other days it did happen but who really cares? There was no negative impacts from this as NGDP continued to be fine after the housing bubble popped and there was no trouble till the Fed failed to maintain NGDP in 2008-is no big whoop. Just target NGDP and the rest follows.

      Ms. Tverberg's explanation is not much more difficult to explain though as mentioned above it's implications couldn't be more different. One of the tough things about economics is the question correlation and causation. We can discover any number of fascinating correlations, however, establishing that there really is a rigorous causation between them is a horse of quite a different color.

      So Sumner has a correlation-NGDP and a healthy economy. It's not hard to see the correlations. In the 70s NGDP was way over trend and so we had the Great Inflation. In 2008, it was way beneath trend and so we had the Great Recession. Whether or not genuine causation can be shown is another question.

      Ms. Tverberg has her own correlation. It's this: between economic growth and energy usage. She points to data that seems to show a strong correlation. A growing economy needs to have affordable oil. Oil is the key to everything in her theory. It's not so much that we're doomed to run out of oil, as that we're doomed to run out of affordable oil.

      She suggests that the rise in U.S. oil prices  is enough to explain the Great Recession:

       "I make arguments similar to these in Oil Supply Limits and the Continuing Financial Crisis. James Hamilton (2009) has shown that the rise in oil prices alone were sufficient to bring on recession in the 2007-2008 recession."

        http://ourfiniteworld.com/2012/09/26/high-priced-fuel-syndrome/

         In the above link, she suggests that it's the rise in oil prices in not just the U.S. but also the Eurozone and Japan that explains the relative decline in growth and employment in the respective countries.

          In other words another way to understand the U.S. over the last 40 years is that rising oil prices were a very big part of the struggles of the 70s. In the 80s and 90s oil prices were very low which coincided with a healthy U.S. economy.

          However, with the huge spike since 2001 we're again in the same predicament and she sees this as being more or less insoluble. Yes, it's optimistic stuff...

           She suggests that the admission of China to the WTO in 2001 had a much bigger impact than commonly appreciated. At the same time China's use of coal exploded. For her, only oil and coal are truly primary energy sources-the other kinds are basically derivatives of the major two. China and the rest of the developing world-for her more or less the rest of the world outside of the U.S., the Eurozone, and Japan-are gaining as they have a heavy use of coal.

            She's very pessimistic about renewable energy and not so optimistic even on natural gas. The trouble in her view is that oil is the key. We need cheap oil to make the level of economic growth and technological progress we've come to expect. There's no way to have this without it. The various proposed substitutes aren't substitutes at all in her view:

             "Substitutes for oil, including renewable fuels, are ways of increasing consumption of coal and natural gas over what they would be in the absence of renewable fuels, because they act as add-ons to world oil supply, rather than as true substitutes for oil. Even in cases where they are theoretically more efficient, they still tend to raise carbon emissions in absolute terms, by raising the production of coal and natural gas needed to produce them."

               http://ourfiniteworld.com/2012/11/20/climate-change-the-standard-fixes-dont-work/

               Her suggestion is that while we like to think that we've figured out how to be very efficient in our allocation of scarce resources over the last 150 years, this might just be about a finite time period where we had lots of cheap oil. Her "solutions" are not nearly as comforting as Sumner's NGDP targeting:

                "It would be convenient if we could slow CO2 emissions by working to produce energy with less CO2. This option does not seem to be working well though, so I would argue that we need to work in a different direction: toward reducing humans’ need for external energy. In order to do this, I would suggest two major steps:

                ("1) Reduce the world’s population, through one-child policies and universal access to family planning services. This step is necessary because rising population adds to demand. If we are to reduce demand, lower population needs to play a role."
       
                 " (2) Change our emphasis to producing essential goods locally, rather than outsourcing them to parts of the world that are likely use coal to produce them. I would suggest starting with food, water, and clothing, and the supply chains necessary to produce these items."

                "Changing our emphasis to producing essential goods locally will have a multiple benefits. It will (a) add local jobs, and (b) lead to less worldwide growth in coal usage, (c) save on transport fuel, and (d) add protection against the adverse impact of declining world oil supply, if this should happen in the not too distant future. It should also help reduce CO2 emissions. The costs of goods will likely be higher using this approach, leading to less “stuff” per person, but this, too, is part of reaching reduced CO2 emissions."

                  "It is hard to see that the steps outlined above would be acceptable to world leaders or to the majority of world population. Thus, I am afraid we will end up falling back on Nature’s plan, discussed above."

                    In the comments section she also claims that prior to the use of fossil fuels there was no unemployment. Just in case anyone mistakes her for an optimist here she is in an interview with OilPrice.com

                     "I see the future as fairly bleak. The big issue is the way high oil prices affect the economy, leading to recession, joblessness, and huge government deficits. The issue is really a lack of cheap oil."

                    "This is an issue that can’t be expected to go away, even with new (high priced) oil supply in the US, or with the possibility of more natural gas supply. We are right now experiencing adverse financial impacts from high oil prices, but these impacts are being disguised by artificially low interest rates and huge amounts of deficit spending."

                      "I find it hard to see much of a ray of hope for avoiding some kind of discontinuity, because the problem seems to be already at hand. For example, I see Europe’s current financial problems and the US’s fiscal cliff as being a direct result of lower energy affordability, especially oil, in recent years."

                         http://oilprice.com/Interviews/Forget-Renewables-We-Need-Cheap-Oil-An-Interview-with-Gail-Tverberg.html

                         Anyway, it's interesting stuff. The best you can say is that the Cassandras aren't always right. The most pessmistic scenarios in the 70s about oil didn't come true. I see her concerns and they seem very plausible, but it's possible that we'll discover a way out yet again. Though it's obviously short term, in the U.S. we've seen gas prices actually flat since their peak in July, 2008 while the stock market has risen every year.


         

     

      

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