Thursday, August 23, 2012

Economix blog forgets energy prices plus gas roller coaster update

Over at the N.Y. Times, David Leonhardt asked his readers "Why has median household income endured its worst 12-year stretch since the Great Depression?" He then listed 14 possible reasons and asked his readers to rate them as very important, modestly important, or marginally or not important. Follow over the jump for his choices and my reaction.

  1. Automation and computers: Although U.S. manufacturing output remains the highest in the world, manufacturing employment has fallen more than a third since 1980; meanwhile, computer networks have allowed highly skilled workers to become more productive and earn more.
  2. Global competition: Hundreds of millions of people have joined the global market in recent decades, and work can more easily cross borders than in the past.
  3. Demographics: The share of the U.S. population that is of working age is falling, leaving fewer potential workers and fewer potential entrepreneurs, and the rate of female labor participation is no longer rising.
  4. Deregulation: Many parts of the economy, including finance, have been partially deregulated, giving companies more flexibility in how they operate (including how they donate to political campaigns).
  5. The slowdown in educational attainment: The United States has the most educated 60-year-olds in the world but not the most educated 30-year-olds, 20-year-olds or 10-year-olds.
  6. Family structure: Single-parent families have become much more common, shrinking average household size and also creating broader issues.
  7. Fiscal policy: Effective federal tax rates have fallen much more for top-earning households than for everyone else, potentially affecting both pre- and post-tax income, while the share of entitlements that flow to the poor has shrunk.
  8. Rising health costs: After a slowdown in the late 1990s, health costs began growing rapidly again, leaving less money for employers to spend on raises.
  9. Immigration: Large numbers of relatively uneducated, unskilled workers have moved to the United States, often competing with lower-income native-born workers, while immigration of high-skills workers remains less common.
  10. An innovation plateau: The economy has struggled recently to produce breakthrough technologies that employ large numbers of people, perhaps partly because of a slowdown in government and private spending on research and other long-term investment.
  11. The falling minimum wage: The federal minimum wage, $7.25 an hour, is more than 30 percent lower than it was in 1968, after taking inflation into account.
  12. Changing cultural norms: Corporate executives in past decades often voluntarily accepted less than the maximum pay they could have won from their board, and many executives viewed themselves as having a deep responsibility to the cities where their companies were based.
  13. The tax code and regulation: Government is more complex -- and, in some respects, larger -- than it was in the past, forcing businesses to spend more time worrying about policy than in the past.
  14. The decline of unions: A smaller share of workers are in unions, directly hurting their bargaining power and indirectly affecting pay for many workers not in unions.
I immediately noticed the elephant in the room that Leonhardt didn't list--energy prices and availability. Without energy inputs, the economy will not grow faster than the rise in population, and likely, as we've seen already this past five years, will shrink. I wasn't the only one. Commenter sas asked about the omission before I ever read the piece.
how about peak oil? it seems telling to me that you completely ignored the rising price of energy -- especially liquid fuels (the natural gas fracking plays notwithstanding, which will eventually be shown to be just a huge ponzi scheme that depends on increasing land values rather than the value of the rapidly depleted fracked gas -- which will likely last 20 years, nowhere the loudly proclaimed 100 years).
I followed up to sas in support.
Thank you for posting this so I wouldn't have to. The higher prices for energy, especially oil, as demand outstrips supply would be enough to suck money out of other spending and prevent the consumer economy from expanding. Without considering the effects of the oil price choke collar on the economy, this poll is incomplete.

Mr. Leonhardt should talk to James Hamilton at the University of California, San Diego about the effects of high energy prices on the U.S. economy. He's the academic expert on the topic. Then he should come back and post another poll with energy supply and energy prices as the 15th option.
I wasn't the only one to respond to sas. Annette B chimed in with even more detail.
Root Cause:
Domestic oil production peaked in 1970 which was why OPEC had such an effect on us merely 3 years later with the oil embargo of 1973-74 and the lines at gasoline stations. We were stuck with depending on imports for the first time, from an unfriendly place with regional wars. Not recognizing the energy problem for what it was, thinking it was just a blip, Americans elected "Morning in America" Reagan just a few years later. Gas guzzlers, and old-time power plants, instead of being replaced by newer technologies, ruled for another 25 years. It was a terrible wasted opportunity not to have recognized that oil was declining and to have cast aside efforts at conservation that could have bought us more time to figure out the next step.

Coincidentally, the Baby Boom generation's adult working lives have mainly been spent in this time period from the early 1970s forward, between peak domestic oil and peak world oil, with higher energy costs, which eat into profits and wages and push jobs overseas to places that still rely primarily upon human labor, places with an abundance of cheap human energy, instead of increasingly expensive fossil fuel energy.

The sooner we switch to renewables and solar, the better off we will be. We still need to value human work enough to find jobs for human beings. The world is already a different place than in 1970, and when we run out of concentrated solar energy (coal,oil, and gas) from the Carboniferous period, there will be further changes.
As a geologist, I have to quibble that while the coal may be mostly from the Carboniferous, the oil and natural gas are from much younger rocks, mostly Cretaceous and Tertiary. Just the same, Annette B was absolutely right about the rest.

Speaking of high energy prices, since the previous update on the gas price rollercoaster, prices have been going down like a parachute. The week after I posted that entry, the price at the corner station dropped down to $3.95. Last week, it inched down to $3.89. This week, it fell briefly to $3.85. Today, it went back up to $3.99. However, the three stations a few blocks away are still at $3.85. The corner station won't remain that high for long, especially if customers do what I did, refuel at the cheaper stations.


  1. Classic study which, of course, out of necessity, seems to ignore the impact of banker/broker/billionaire larceny. One can rest assured that the NY Times will always protect the money. At the very best, THE VERY BEST, it didn't help the situation. At the very worst, it was, arguably, one of the prime movers contributing to the 'downturn' and as a small aside, the largest ripoff transfer of wealth in human history. That it will proceed to grow worse is certain: Very few, VERY, VERY few of the criminals who savaged the lives and wealth of too many innocent Americans have been brought to justice and are still out there plying their positively outrageous scams, lies, contempt and general havoc and destructive predations upon those of us who have thus far managed to retain some wealth. That no one is serving time or threatened with consequences has only emboldened these money monstrosities to operate more savagely and ruthlessly.

    1. What you wrote about is undoubtedly a factor, especially during the past 12 years, but it was addressed indirectly and euphemistically by four of the points: Deregulation, Fiscal policy, Changing cultural norms, and The tax code and regulation. Deregulation and tax and fiscal policies made it more profitable to pay higher salaries to those at the top while leaving the workers behind, and changes in cultural norms made it more acceptable to take the higher salaries, to say nothing about looting the companies, their stockholders, their employees, and their customers.