Can we have more butter, please?

For a long time, in blog-years, I have been worried that the Great Recession and the anemic recovery are not any temporary issues but that they could be reflective of serious transformations in the economic structure.  Nothing in the American economy, nor in the global economy, has given me reasons to think otherwise.  The only good news is that students do not come asking for career and employment advice--because, if they do, then I would end up sharing my gloomy assessment, which will not do them any good.

But then, thankfully, I am only a nobody harboring such worries.  It is not like such assessments are in the New York Times, in analyses authored by respected economists who are not of the "loony left."

Oh, wait, here is Tyler Cowen writing in the New York Times

the recession was a learning experience that we haven’t fully absorbed. From this perspective, the radical and sudden changes of the financial crisis were early indicators of deep fragility and dysfunctionality.

In case you are not aware of Cowen, he is is an economics professor at George Mason University.  Cowen and his folks at George Mason are far from the "loony left."  Check out the blog that Cowen and his buddies run in order to understand their approach to public choice policies.

Anyway, back to Cowen's NY Times piece.  The title of that says it all:

Don’t Be So Sure the Economy Will Return to Normal

Welcome to the "new" normal!

Slowly but surely, we may be responding to these difficult revelations by scaling back our ambitions for the economy — reinforcing negative trends that were already underway. In this troubling view, we have finally begun to discover some unpleasant truths. Borrowing a phrase from the University of Toronto economist Richard Florida, it’s possible that we are experiencing a “Great Reset.”

So, what do we do then?  How can we reset this Great Reset?

If a reset is underway, we might have to accept that public policy cannot reverse it easily. Once unsustainable economic structures begin to fail, it takes a significant improvement to make them viable again. Yet because of the difficulty of making major changes under our current political alignment, most new government policies today are no more than changes at the margin. Perhaps the most basic problem is that it is difficult to be sure when a reset is underway, and it is harder yet to raise public alarm about changes that seem to be gradual and slow.
Most of all, it is not always wise to fight a reset.

Ouch!

Perhaps the most crucial issue is whether economies will return to normal conditions of steady growth, or whether we are witnessing a fundamental transformation, unveiled in bits and pieces. Nominations for the nature of that transformation include a “robot economy,” a new political economy where elites have too much power or, perhaps, a new global economy where the United States no longer holds such a dominant position, to the detriment of American firms and workers.
No one knows whether or how much of a reset may be underway.

It is rare for economists to openly admit that "no one knows."  Which means only one thing: things are not looking good.  They are looking real bad.

BTW, here's one more worry, which is more like a corollary.  When the American economy falters, staggers, guess what the bipartisan approach is to revving up the economy?  Think.  Think some more.  Yep, war.

The Daily Show
Get More: Daily Show Full Episodes,The Daily Show on Facebook,Daily Show Video Archive

We have exhausted the "low hanging fruit" of energy. Or not?

Recently, Tyler Cowen wrote about how the US has pretty much gathered all the low hanging fruit of economic growth and development and that we are doomed from now on, unless we adopted something along the lines of a libertarian manifesto.  Reviewing Cowen's e-book, Timothy Noah wrote in Slate:

Cowen's core message is: Get used to economic stagnation, or what he calls "the new normal." It's a weird conservative echo of liberalism's era-of-limits gospel from the 1970s, articulated by the Club of Rome and other groups, the chief difference being that liberals used economic pessimism to sell wise environmental stewardship while Cowen is using it to sell complacency about the fate of the middle class.

The WSJ did not do him a favor, which they thought they were doing, when writing:

His arguments aren’t perfect, and “low-hanging fruit” doesn’t quite have the catchiness of “The World is Flat,” but in terms of framing the dialogue Tyler Cowen may very well turn out to be this decade’s Thomas Friedman. 

Tyler Cowen is infinitely smarter than a Thomas Friedman. What an insult to him!

Anyway, my point is that it was Cowen's "low hanging fruit" thesis that I was reminded of as I was reading in the Scientific American this essay, which in print is titled "The true cost of fossil fuels."  The core argument involves "energy return on investment (EROI)" which is a measure that is a ratio of how much energy is returned compared to the investment.  Given that we dig for fossil fuels, it is an inversion of "low hanging fruit" in the sense that the easier it is to extract the fuel, the higher the return on it.

You need a subscription to get to the detailed charts.  And I have no patience to provide here photos of those charts.  But, the inventor of this metric explains the logic in the interview with the magazine:

What happens when the EROI gets too low? What’s achievable at different EROIs? If you've got an EROI of 1.1:1, you can pump the oil out of the ground and look at it. If you've got 1.2:1, you can refine it and look at it. At 1.3:1, you can move it to where you want it and look at it. We looked at the minimum EROI you need to drive a truck, and you need at least 3:1 at the wellhead. Now, if you want to put anything in the truck, like grain, you need to have an EROI of 5:1. And that includes the depreciation for the truck. But if you want to include the depreciation for the truck driver and the oil worker and the farmer, then you've got to support the families. And then you need an EROI of 7:1. And if you want education, you need 8:1 or 9:1. And if you want health care, you need 10:1 or 11:1.

Tyler Cowen says that we have exhausted the low hanging fruit with respect to education and healthcare.  EROI now tells us that these two will become even more expensive. The only thing good about the EROI is that yet again is a confirmation that the gazillions that go into subsidizing ethanol are wasted.

Sounds tempting to conclude, therefore, this will be the new normal and that we better get used to it.  If one is born into the middle or lower classes, well, you might as well move to Montana, build yourself a log cabin, and live your life hunting bears and fly fishing.

Except, the same issue of the Scientific American has an interesting piece in its regular feature of highlighting an article or theme from past years.  And, what was featured this time?  Well, it is from one hundred years ago, from April 1913:

Yep, a hundred years ago, the worry was about energy sources once we exhausted the coal mines:

Long before we took stock of our fuel supply and found that we must husband what little we have left, scientific dreamers wondered whether natural forces could not in some way be utilized. Already we are making extensive use of water power, or 'white coal' as it is called. The tide has yielded us some power and so have the waves.

Note there what is missing: petroleum, natural gas, and nuclear power.  In 1913, humans hadn't even figured out the proton and the neutron. Neutrinos weren't probably even in the collective human imagination.

I do not mean to suggest that science and technology will lead us out of the stagnation and that we can all rest easy until those nerds in the labs figure things out for us.  But, come on, sky-is-falling?  Check with Thomas Malthus about how his sky-is-falling claim worked out!  I suppose we have been worrying about the future ever since the proto-human stood up on two legs and made the other two as "hands" and sat posing as Rodin's Thinker.  We have evolved to worry, which is good--the worrying has led us to innovate.  Worry away :)

Worry about India's economy. Worry a lot!

Less than a fortnight into the hundred days in India, the more I observed, the more I wondered whether India's economic "success" story was more hype than real.  That line of thinking morphed into to this column in which I wrote that "the economic health of India is not looking good."

Every day, evidence seemed to pile on to further reinforce the impression that India could run into some serious economic troubles really soon.  I was particularly concerned that the country was not paying enough attention to the long-term requirements of resources, energy, and infrastructure.  

Thus, it was pretty much all "doh!" for me when I read Tyler Cowen's NY Times column where he writes that "We ignore India’s troubling trends at our peril"

 the economy has decelerated from projected rates of more than 8 percent, and negative momentum may bring a further decline. The government reported year-over-year growth in the October-through-December quarter of only 6.1 percent.

What is disturbing is that much of the decline in the growth rate is distributed unevenly, with the greatest burden falling on the poor. If the slower rate continues or worsens, many millions of Indians, for another generation, will fail to rise above extreme penury and want. The problems of the euro zone are a pittance by comparison.

India's growth, or lack of, will affect the smaller neighboring economies, Cowen writes.

India's finance minister, Pranab Mukherjee, who is now canvassing to become the country's next president, offers an upbeat assessment, which I find hard to believe:

 India was growing at over 9 per cent before the global financial crisis of 2008 pulled down the growth rate to 6.7 per cent in 2008-09. India has projected a growth rate of 7.6 per cent in 2012-13, up from 6.9 per cent recorded in the previous fiscal. 

Even if India records that rate of growth, there is inflation to worry about.  Thus, a report like this one appears to be a lot more realistic than the ministerial pontifications.

Meanwhile, when I talked with my parents the other day, they said that electricity rates have gone up, and power cuts continue.  It is a continuation of the power shortage that forced my college-mate to shut down his mill in Coimbatore.  While the upward revision of the rates is a correct policy approach--one that had previously severely under-priced electricity--not much can be created without new sources of electricity, which is needed for rural and urban economic activities alike.

Not lookin' good :(

So, this is a Depression, not a Recession?

Economists and politicians alike are afraid to even utter the "R" word, so we wouldn't expect them to use the "D" word at all, even if in the back of their minds they are thinking that this is an awful economic depression.

It looks like that is not the case anymore.

Here is Paul Krugman:

Let’s not mince words: This looks an awful lot like the beginning of a second Great Depression.
So will we “act swiftly and boldly” enough to stop that from happening? We’ll soon find out.
We weren’t supposed to find ourselves in this situation. For many years most economists believed that preventing another Great Depression would be easy.

And, Tyler Cowen:
Eight reasons why we are in a depression

1. We have zombie banks.
2. There is considerable regulatory uncertainty in banking and finance.
3. There is a negative wealth effect from lower home and asset prices.
4. There is a big sectoral shift out of real estate, luxury goods, and debt-financed consumption.
5. Some of the automakers are finally meeting their end, or would meet their end without government aid.
6. Fear and uncertainty are high, in part because they should be high and in part because Bush and Paulson spooked everyone.
7. International factors are strongly negative.
8. There is a decline in aggregate demand, resulting from some mix of 1-7.

I got the link to Cowen from Megan McArdle, who writes:

My reasoning for thinking of this as a depression, rather than a recession: roughly, that we don't understand how to get in or out of it. The recession of the early 1980s was very deep, but we knew pretty much what caused it, and hence how it would end. Even the 1970s slump had an obvious proximate cause in the oil shocks. This kind of perfect financial storm is a rarer bird, and no one has plausibly claimed to have mapped the way out yet.

More on the United States of Gordon Gekkos

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

James Fallows wrote this in the Atlantic's January 2008 issue. Why is this relevant in the contemporary economic context? Fallows wrote there that

For China, it has helped the regime guide development in the way it would like—and keep the domestic economy’s growth rate from crossing the thin line that separates “unbelievably fast” from “uncontrollably inflationary.” For America, it has meant cheaper iPods, lower interest rates, reduced mortgage payments, a lighter tax burden.

Still unclear? More from Fallows:

The billions of dollars China pumps into the United States each week strangely seem to make it harder rather than easier for Americans to face their own structural problems. One day, something snaps. Suppose the CIC makes another bad bet—not another Blackstone but another WorldCom, with billions of dollars of Chinese people’s assets irretrievably wiped out. They will need someone to blame, and Americans, for their part, are already primed to blame China back.
So, the shock comes. Does it inevitably cause a cataclysm? No one can know until it’s too late.

Well, does this set up the context well for Daniel Gross' and Tyler Cowen's comments that I earlier blogged about?
Further, the Chinese money is not only one source. There are other foreign investors too. So, when Paulson worries about restoring confidence in the American financial sector, I bet he is equally concerned about making sure that foreigners will continue to pump money into our system. More so when the current account deficit is at 5.1% of the GDP! To quite an extent, our financial health is beginning to resemble that of a stereotypical Third World country!!!

Which is why I am all the more convinced that the subprime mortgage issue was only a symptom of the much bigger problems. Even the problems with all the regular mortgages are symptoms of these larger problems. So, it bugs the crap out of me when pundits who are even less qualified than me on this topic proclaim that we need to address the housing industry issues first. Hello?

Ok, back to working on the syllabi ....

China with money more powerful than USSR with guns

More commentaries, in addition to my earlier blog, on the Fannie/Freddie takeover zoom into the Chinese angle: that when the Chinese and others bought billions of debt, they did so because the feds were guarantors. So, when Fannie/Freddie tanked, well, here is Tyler Cowen (via Megan Mcardle)

In essence we already agreed to the bail out some time ago. Have you ever spent $17,000 on a car and asked the dealer what the warranty for the car "really meant"? Well, the Chinese spent $340 billion on agency debt and probably asked the same question at least once or twice. They live in a world of secret agreements with leaders, not transparent democratic arrangements. So when it comes to the U.S government decision, we're not just starting from scratch here. How many phone calls do you think Hank Paulson has received from the Chinese central bank since August 2007?
"Are you *sure* that paper is safe enough for us to keep on buying?"
We'll never know exactly what kind of verbal dance Paulson concocted in response, but just look at the resulting flow of purchases and the relatively slight mark-up over Treasuries over that period of time. The Chinese (among others) thought we were standing behind the securities, at least in any world-state short of federal government quasi-bankruptcy. (In fact Paulson is in a total bind once that phone call comes in. He doesn't have much incentive to just say "tough luck" and precipitate a crisis when otherwise no crisis is on the horizon.)
So should we try this: "Oh, is that what you thought? Guaranteed? Did we use that word? Sorry, try reading our signals better next time. We love you. Great job with those Olympics. And when it comes to those Treasury Bills, we really do still mean it. And don't forget to support us on Iran and North Korea."

And we pretend that we are the world's sole super-power who can do anything we want. It is bizarre that China has more influence on our policies than the USSR ever did.

Money is more powerful than guns! No wonder that Putin too is going the same route of flexing his petroleum riches.