Quick links to a few items I found of interest:
- The Congressional Budget Office has prepared informative slides summarizing the U.S. fiscal situation (via Business Insider)
- Betsey Stevenson and Justin Wolfers referee the Reinhart-Rogoff debate (via Free Exchange)
- Herndon, Ash, and Pollin appear to have been using faulty data for New Zealand
- Bill McBride reviews the U.S. decline in vehicle miles driven
- China’s oil imports are down relative to this point last year (via Steven Kopits)
It seems to me that Saudi oil officials have basically admitted that Saudi net oil exports peaked in 2005.
WSJ: Rift Emerges Over Saudi Oil Policy
(For article, do Google Search for title)
Excerpt:
End Excerpt.
My comments:
Of course, Brazil is a net importer of petroleum liquids, and even though Iraq has been showing a slow increase in net exports, an extrapolation of the 2008 to 2011 rate of decline in their ECI ratio (ratio of total petroleum liquids production to liquids consumption) suggests that Iraq could approach zero net exports by around 2031.
Regarding US production to the rescue, let’s assume that US Crude + Condensate (C+C) production averages 7.5 mbpd in 2013. Let’s further assume an overall decline rate from existing oil wellbores of 10%/year, which I suspect is conservative, given that an increasing share of US C+C production is coming from high decline rate tight/shale plays. So, whatever the decline rate is from existing wellbores, it is almost certainly increasing year over year.
In any case, at a 10%/year decline rate, in order to maintain 7.5 mbpd of production, the industry has to add 0.75 mbpd of new production every year. So, from 2013 to 2023, in order to maintain 7.5 mbpd, the industry would have to replace the equivalent of total current US C+C production. In other words, in 10 years the industry would have to replace the equivalent of current production from every US oil field–from Thunder Horse in the Gulf of Mexico, to the Eagle Ford Play, to the Bakken, to the North Slope of Alaska.
The US fiscal situation is a must-see presentation.
US oil consumption was up 0.5% in Q1, GDP was up 2.5%, so oil efficiency was up 2.0% in Q1. This is below Jim’s 2.5% number, below the 3.8% in the preceding quarters. I take this as actually a bullish sign in the short term, ie, that the economy is not under such pressure from oil prices. Recent Brent softness, in principle, should give the economy a bit of a tailwind in the next couple of months. I would expect to see a bit of life in VMT in May/June.
My take on VMT, from my April 22 comment:
CR reports that vehicle miles traveled (VMT) fell by 1.4% in Feb. 2013 compared to Feb 2012.
http://www.calculatedriskblog.com/2013/04/dot-vehicle-miles-driven-decreased-14.html
Feb 2012 was a leap year, and so had one more day than Feb. this year, which would seem to negate the headline conclusion. If we look at rolling 12 month VMT, the year ending Feb. 2013 was virtually unchanged from the year ending Feb. 2012. VMT is not improving, but not getting worse, either.
Implied efficiency gains, however, are miserable. Gasoline consumption fell by 0.7% in Q1 ’13 compared to a year earlier. According to the EIA STEO, VMT rose by 0.3% to March (Q1). (Where do they get their data, if DOT just released Feb. data?)
Thus, if we allow changes in VMT and gasoline consumption as proxies for efficiency improvements in the use of oil, then transportation efficiency is improving at a lowly 1% per annum. Given that we anticipate oil consumption to fall on average by 1.5%, and given that we’ve now had six years of high oil prices which should have prompted material improvements in vehicle mpg, this is not a cheerful statistic.
If we allow oil consumption (and not just gasoline) versus VMT as a measure of efficiency, the situation is even worse. US oil consumption actually increased 0.5% in Q1 ’13 compared to a year earlier. If we allow VMT increased by 0.3%, then transportation efficiency actually deteriorated 0.2% in the last year, a result even grimmer than the gasoline-based statistic above.
Much has been written about driving habits (http://marginalrevolution.com/marginalrevolution/2013/04/why-are-younger-americans-driving-less.html), but the plain vanilla explanation remains the most plausible: high oil prices continue to force Americans from their cars, adversely affecting economic activity and hiring on the margin.
Saudi Arabia is just now inaugurating its Manifa oil project, a 900,000 bpd monster consisting of 27 artificial islands and 41 km of causeway, with the intent, according to ArabNews, that “Saudi Aramco’s maximum sustained capacity will be maintained at the level preceding Manifa production.” In other words, Saudi Arabia is forced to move offshore just to maintain its production capacity. When the US moved offshore, the country was near peak production.
I think the official name of the VMT graph should be “The Real, Real Economy”.
Regarding China:
I am personally a little cautious about reading too much into oil imports, as these can change for inventory management purposes, and therefore do not necessarily tell us anything directly about the Chinese economy.
However, the slow growth of apparent Chinese oil demand–1.8% in the above-mentioned Platts report–well, that’s quite unusual.
We would expect GDP to be around that number, certainly not more than 3% more. So this suggests China’s GDP is running in the 2-5% range, well below reported figures.
This would explain the weakness in Brent, which is falling back to the OECD carrying capacity level.
I hunted around the internet, and found this guy, a Forbes commentator named Gordon Chang. He’s a China expert, and his views correspond to my sense of things.
http://www.youtube.com/watch?v=rAVoSOqr9g8
I have not seen a model of this, but if you took the decline in miles driven for those over 55 and then use the estimates to predict gasoline demand over the next 10 years I suspect the results would be very surprising. Add to this some assumptions in changes in overall vehicle efficiency and I think you would conclude that US oil consumption has peaked.
It is amazing to me that no one has tried to do this, and Bill is about the only analyst who has pointed the overall trend.
But then the violent crime rate is significantly lower than it was 30 years ago and the number of abortions and teen pregnancies are at decades lows and people still talk about the breakdown in moral values in this country, so maybe the number who actually try to look at data seriously is not very big.
Capex Compression in Oil Exploration and Production
An interview I gave last week. I recommend it to anyone interested in cutting edge topics in macro oil.
http://aspousa.org/2013/05/interview-with-steven-kopits/
So, is the conclusion that interpretation of 800 years of data is sensitive to intricacies of New Zealand sheep economics in 1951?
“Herndon, Ash, and Pollin appear to have been using faulty data for New Zealand”
Well, if so it’s because that’s the data that Reinhart and Rogoff were using (i.e. the databases of Angus Maddison), right?
http://www.reinhartandrogoff.com/data/browse-by-topic/topics/16/
And HAP claim the data in the Excel file they made publicly available (unlike R&R) came from from Reinhart and Rogoff. Examination of that data reveals an apparent (albeit minor) transcription error for New Zealand’s RGDP in 1946 (which affects the growth rate for 1946 and 1947) but that’s another matter.
Matthew C. Klein notes the following:
“Historians of New Zealand know that there was a boom in 1951 as a result of the U.S. Army’s demand for wool to make uniforms during the Korean War. According to Statistics New Zealand, the real economy expanded by about 16 percent in just that one year. Output contracted in the following years as the demand for wool subsided.”
Now, if you think back to Thomas Herndon, Peter Ash, and Robert Pollin’s (HAP) original analysis, they pointed out that the unusual weighting meant that the only year that New Zealand was above 90% of GDP in terms of public debt was 1951. And according to Reinhart and Rogoff’s dataset real GDP (RGDP) declined by 7.6% in 1951. But according to Statistics New Zealand (SNZ) the correct figure is *positive* 15.6%:
http://www.stats.govt.nz/browse_for_stats/economic_indicators/NationalAccounts/long-term-data-series/national-income.aspx
Now go back to HAP and look at Table 2:
http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf
Now do the arithmetic. Add together the average growth figures for the seven countries during the time that they had public debt over 90% of GDP but this time replace (-7.6%) with (+15.6%) for New Zealand and what do you find? Instead of an average RGDP growth rate of (-0.1%) for countries with debt over 90% of GDP you find that they had an average RGDP growth rate of (+3.3%).
Now compare that to the results from Reinhart and Rogoff’s paper which are listed in Table 3 of HAP (RR 2010b Appendix Table 1). For countries with public debt less than 30% of GDP the average RGDP growth was 4.1% and for countries with public debt between 30% and 60% of GDP, and between 60% and 90% of GDP, the average RGDP growth was 2.8%. Thus the average RGDP growth rate of countries with public debt over 90% is *higher* than than every category except the lowest category.
So, thanks JDH for that very informative link.
Flad –
US oil consumption per capita peaked in the second oil shock in 1979.
US oil consumption on a national level peaked with the global oil supply in 2005.
These are the folks losing mobility primarily: “In 1983, 69 percent of 17-year-olds had licenses, compared with 46 percent in 2010; for 18-year-olds, the percentage declined from 80 percent in 1983 to 61 percent in 2010.”
From The Detroit News: http://www.detroitnews.com/article/20130425/AUTO03/304250348#ixzz2S4orKoBP
How’s employment and income look for those demographics?
I don’t think the Stevenson and Wolfers article was refereeing, so much as a defense of Reinhart and Rogoff. This was my response.
Re: New Zeeland
If RR and HAP are sensitive to one data point the whole exercise is useless.
Again, beyond ‘scholars’ writing a paper riddled with freshman mistakes, Reinhart and Rogoff fluffers ignore one cold hard fact. In public discourse they knew how their paper was being spun, they knew how causality was being portrayed, and did they step up? Definitively “no”. They in fact reinforced those very views with their own public statements.
CII posting your response all over doesn’t make it any less ridiculous. Please stop your spam campaign.
Best single day of economic news since the end of the GR today. And it’s not 10 am yet.
I would second Steven Kopits’ recommendation to review the above linked interview. Following is an excerpt:
An Interview with Steven Kopits
http://aspousa.org/2013/05/interview-with-steven-kopits/
By Steve Andrews – The following is taken from an interview with Steven Kopits, managing director of the New York office of Douglas-Westwood, an international energy analysis firm. The views expressed are atttributable to Mr. Kopits and do not necessarily represent those of Douglas Westwood.
Steve Kopits,
China is the canary in the mine. Because it lives off of assembly and export, a Chinese slowdown is a reflection of a slowdown in world production.
Oh, totally agree with you on the slides. Lots of truth that is missing from the financial talking heads.
I’m just an amateur supply side analyst, and where Steven Kopits really excels is his demand side analysis. As Steven has noted, the problem that we are seeing is a narrowing gap between marginal consumers’ price ceiling and oil companies’ marginal price floor.
I think that the real question is what happens to demand in the oil exporting and developing countries, since the developed net oil importing countries, so far, have been in the position of taking what is left over, after the oil exporting and developing countries’ demand is satisfied.
My guess was that the 2002 to 2011 oil exporting and “Chindia” developing countries consumption patterns more or less continue for at least another 10 years or so, out to 2021, but who knows.
In any case, here is what has happened through 2011:
http://i1095.photobucket.com/albums/i475/westexas/Slide2-6_zps4d059c52.jpg
Because of increasing consumption in the oil exporting and developing countries, we see the divergence between global liquids production numbers and net export numbers. Following is a graph showing normalized global production and net export numbers, with the 2005 production/net export rate set equal to 100%:
http://i1095.photobucket.com/albums/i475/westexas/Slide1-29_zps42ffc9bc.jpg
Note that even if we continue to see a slowdown in China’s rate of increase in consumption, an offsetting factor is that their domestic oil production has basically stagnated in recent years.
US net oil imports increased at 11%/year from 1949 to 1970, when US crude oil production peaked. From 1970 to 1977, US net oil imports increased at 14%/year.
Charles II Let us examine in some depth your contention that “spending, intelligently done, can benefit growth.” (1) On its face this statement is correct. If governments had spent intelligently, the data across all countries would be different. And RR would not have found much debt-growth correlation at all in the historical record except in the lowest bucket. (2) Carried to its logical extreme, why have a private sector if government spends intelligently? Well, the overwhelming evidence from Adam Smith on is that the private sector and free market are better at the allocative process. (3) This shifts the locus of the argument to what should the government do? There will be some line that divides proper activity of government from that of the private sector. This line is not distinct but broad, fuzzy, and gray, as naturally enough individual voter values and preferences go into its construction. (4) The need for good financial governance should not be in question. There must be some optimal level of debt-to-GDP, though to my knowledge not much work on this has been done. Surely, the point has not surfaced in this RR controversy. (5) The long historic record for the US is that growth was fine until the successive budget imbalances of the modern era. Using Angus Maddison numbers, real growth averaged 3.7% from 1820 to 1940, a doubling of the standard of living each generation. Using RR’s long data set, the sovereign debt ratio averaged 14% over this 120-year span. We can conclude then in a preliminary way that optimal debt is somewhere in the 0 to 30% bucket. (7) Suppose for the sake of the argument it is in the neighborhood of 14%. Other than for the small increments of deficit spending to maintain this ratio, the budget must be balanced across the cycle. If so, then as far as debt goes the economy would perpetually remain in its standard-of-living maximizing range. (6) Not once since 1940 has debt been in this optimal range. The debt ratio is currently 104% or thereabouts. Deducting 14% gives 90%. So the following magnitude must be so: 90% of our current $17 trillion debt is congealed mistakes.
(7) Given the premise of the optimal debt ratio being around 14%, the cumulative mistakes inherent the other 90% are in two overlapping categories. One is that Congress and the executive branch did not have the fiscal rectitude to run the surpluses necessary after wars, financial panics, and recessions to get the debt back down. And two, all the excess deficit spending did not have an economic payoff. Emphasis on excess. That excess spending was a malinvestment of society’s resources, frittered away on consumption with little or no productive investment to pay future GDP dividends. It was money down the rathole, on wars that should not have been fought, projects like Solyndra, and government grown larger than it should have. (8) This brings us full circle to your spending intelligently done. Many functions of government enable and enhance GDP in the sense of providing the proper container in which optimal growth can take place. The results of government having been properly done would show up today in a level of GDP growth comparable to that of pre-modern times (allowing for core differences in the serendipity of technological discovery), and in the permissible small deficit increments that keep the debt ratio from falling below its (low) optimum. (9) Any debt above this optimum is prima facie evidence that resources were lost permanently. The deficit excesses simply could not have gone into investments that would have had true profitable payoffs. For if they had, GDP would have grown faster – indeed fast enough – to close the deficits over time and turn the budget to surplus long enough to get debt back to optimum. (10) If a realistic cost-benefit analysis were to show that an up-front trillion dollar deficit-financed expenditure on R&D and infrastructure in nuclear fusion would pay off in a discounted to present value flow, and if that grand project would otherwise not be undertaken by the private sector with a penny less being spent by government, the answer as to what should be done is obvious. (11) Sadly, to the tune of around $15 trillion dollars – the entire national output for a year – a large class of budget decisions since WWI has been anything but intelligent. Myopic short-termism and political corruption, punctuated by rare budget balancing like that in the Eisenhower administration, trumped the goose that lays the golden eggs of sound long-term financial prudence and sensible investment of resources.
As you say, understanding the point about spending being intelligently done is crucial. It really is the heart of the matter. I merely lay out the over-arching contours of the framework this implies, indeed the only framework in which it can be done. Right spending is one of the contours; sound fiscal prudence is the other. Both necessitate appropriate balance between short-run and long. The real world reason why the bias is to the short-term is the psychological propensity in humans to underestimate future needs and future costs.
Bill McBride’s discussion of VMT in February misses the boat. His mistake is in not accounting for the difference in the number of days in February between last year (a leap year) and this year. If you calculate daily VMT for February, you will find that VMT is actually up from 2012 by 2% year-over-year. This is clear from the DOT’s own web pages where they report daily VMT (Figure 2) here. VMT was also up in January (from Jan 2012) by 0.5%. Year-to-date, daily VMT is averaging higher than any year since 2009.
To my earlier point, from Sivak (UMTRI):
The average fuel-economy (window-sticker) value of new vehicles sold in the U.S. in April was 24.5 mpg. This value is down 0.1 mpg from the record high reached in March, likely reflecting the recent decrease in the price of gasoline. Despite this small drop, the fuel economy is up 4.4 mpg since October 2007 (the first month of our monitoring). For a description of the calculations and the recent mpg values, please visit http://www.umich.edu/~umtriswt/EDI_sales-weighted-mpg.html.
Re: Aki at May 1, 2013 09:07 PM
Much as RR can pass off their paper as being “spun”, it appears that they were in fact quite complicit in delivering the spin . The charitable explanation is that they were all over the place in advocating a “cliff point” and in being for and against austerity.
Steve Kopits and Professor Hamilton,
What do you make of this There are 7.4 billion barrels of recoverable oil in the western part of the state and extending into Montana, according to the latest estimate by the U.S. Geological Survey.
That’s more than twice the oil the USGS estimated could be recovered five years ago. What’s more, the USGS has nearly tripled its estimate of the natural gas available in the area.
wms, weather is also a huge factor.
Ricardo,
Total global liquids consumption is about 33 Gb (billion barrels) per year. So, the revised estimate of recoverable liquids from Bakken and related zones, which will be produced decades, would meet global demand for less than three months.
In terms of US production, the EUR for the current production on the North Slope of Alaska is about 21 Gb. The following chart shows US crude oil production, with North Slope production shown in red:
http://1.bp.blogspot.com/-yKRTW_v1eI4/TuuXUv5_AOI/AAAAAAAAGjI/6UL3bKZnJNA/s1600/2oil-alaska-chart.jpg
US annual Crude + Condensate (C+C) production showed a (so far) absolute peak in 1970, at 9.6 mbpd. Production fell to 8.1 mbpd in 1976, and then rebounded to 9.0 mbpd in 1985 (due to North Slope production) and then US C+C production started falling again.
In other words, the 21 Gb of reserves from the North Slope resulted in an “Undulating Decline” in US C+C production. I suspect that we are seeing a continuing “Undulating Decline” in US C+C production as the tight/shale plays come on line, but as noted up the thread the steady increase in underlying decline rates from existing wells presents quite a challenge.
At a 10%/year decline rate from existing wells, which is my opinion is probably conservative, in order to maintain current US C+C production, the US would have to replace the equivalent of the production from every US oil field over the next 10 years.
In regard to oil price floors versus oil price ceilings, I’m reminded of an aviation term, the “Coffin Corner.”
http://en.wikipedia.org/wiki/Coffin_corner_%28aviation%29
The Department of Transportation has average miles driven by age:
16-19 7,624
20-34 15,098
35-54 15,291
55-64 11,972
65+ 7,646
If I find the time I will model this myself, but these numbers suggest an older population is one that will drive substantially less.
http://www.fhwa.dot.gov/ohim/onh00/bar8.htm
MWS – Year over year from the numbers that McBride links to show a pretty significant decline from 2011 to 2012. I am not sure I would read too much from the first two months – thought they are higher.
The new USGS estimate increases the recoverable total, but doesn’t imply any sort of improvement in the quality of the individual wells. Given the rapid depletion rate of Bakken wells, you have to complete new wells at a high rate in order to sustain a given level of output. IIRC, the North Dakota Dept of Mineral Resources estimates based on current well profiles is 2,200 completions per year to sustain 850,000 barrels/day production. A variety of geologists have published similar numbers. If there are more places to drill, you can maintain that output for longer (assuming you can afford to continue drilling). But unless you increase the completion rate substantially, the annual production rate doesn’t change.
JBH, before giving a detailed answer, I think the larger picture is that we agree on some of the larger points. However, I believe that the existence of debt is a result of a failure of democracy, leading to corruption, unnecessary wars, and other factors that are far more important to debt than ::sigh:: Solyndra.
JBH argues, ” the overwhelming evidence from Adam Smith on is that the private sector and free market are better at the allocative process.”
Really? Private markets are better at ensuring that an injured worker gets treatment as opposed to getting thrown onto the ash heap? Millions of people with asbestosis would wish to disagree with you.
No, the private sector is at least as good at allocating resources if all economic factors are included in the calculation. The minute there are externalities, the private sector is the worst possible allocator. And so the best overall system has the private sector deliver most goods and services, and the government oversee the process to make sure that it is not just efficient but fair. Our Constitution specifies a postal service not because that’s efficient but because low-cost dissemination of information is vital for a democracy.
JBH says, “there must be some optimal level of debt-to-GDP, though to my knowledge not much work on this has been done. ”
Why should this be so? Doesn’t it depend on the country, that country’s needs at the moment, and the general financial circumstances? R&R have asked where is the coastline? without specifying the longitude. Perhaps there’s some average value, but with a standard deviation so large as to make it meaningless.
JBH says, “The long historic record for the US is that growth was fine until the successive budget imbalances of the modern era.”
During the 19th century, the US changed from a small country of limited resources based on the eastern coast to a continent-spanning behemoth reliant on exporting natural resources that it had obtained by conquest. Since then, it has been forced to rely on investing more and more in human capital, and it has done a worse and worse job of it. Combining early US history with recent history amounts to making fruit punch.
JBH says, “We can conclude then in a preliminary way that optimal debt is somewhere in the 0 to 30% bucket.”
And yet Japan is doing pretty well with a massive and increasing debt.
Also, I keep pointing to the importance of private debt, which directly impacts business and consumer decisions, whereas government debt does not. I notice that no one defending R&R wants to discuss that.
JBH says, “Not once since 1940 has debt been in this optimal range. The debt ratio is currently 104% or thereabouts.”
And yet debt was at similar levels in 1945, and what followed was a tremendous boom.
JBH says, “excess spending was a malinvestment of society’s resources, frittered away on consumption with little or no productive investment to pay future GDP dividends. It was money down the rathole, on wars that should not have been fought, projects like Solyndra, and government grown larger than it should have.”
The story of Solyndra is that of many investment projects that are undertaken in the private sector. I do not understand the fascination with this company, which had interesting technology in a sector with enormous promise–indeed, many sophisticated private investors put up money because they believed it would succeed. The government just provided loans. Would you do away with the SBIR program just because some companies succeed and some don’t? Anyone who knows the technology sector knows this would be foolish.
JBH says, “Any debt above this optimum is prima facie evidence that resources were lost permanently. ”
Not true. One choice would be to eliminate our debt by, for example, ending education, stopping public health, closing prisons, and so on,. We could perhaps make money by selling our citizens as slaves. Our economy would become much smaller, our country would be a tyranny, but the deficit would fall more.
Alternatively, if we avoided unnecessary wars starting with Vietnam, there wouldn’t be any debt. It always matters how we do things.
JBH says, “If a realistic cost-benefit analysis were to show that an up-front trillion dollar deficit-financed expenditure on R&D and infrastructure in nuclear fusion would pay off in a discounted to present value flow, and if that grand project would otherwise not be undertaken by the private sector with a penny less being spent by government, the answer as to what should be done is obvious.”
We agree. I’ve done the spreadsheets. I believe in cost-benefit analysis. I know that much government spending is based on such analysis.
Jeffery wrote:
…the revised estimate of recoverable liquids from Bakken and related zones, which will be produced decades, would meet global demand for less than three months.
You are right but it is a little misleading. The fact that the producing field has more than twice the oil and natural gas reserves once thought means that the amount of new reserves added to existing reserves is significant. If one restaurant had to serve every meal eaten in a day it would be inpossible, but we do not have to rely on only one restaurant.
The same can be said of the Saudi’s expanding off-shore. This is not a negative but a positive. I hae made the point over and over that if there were incentives for more exploration there would be massive oil finds. Every day we see oil reserves actually growing with new sources and techniques.
How many would have ever thought 20 years ago that the northeast would once again become a major producer?
Ricardo,
Something to keep in mind is that the higher the production rate, the higher the depletion rate, i.e., the faster that we are consuming our remaining fossil fuel resource base. Also, the higher the production rate, the greater the volume of oil that we have to replace every year, due to declines from existing wellbores. And the recent increase in US crude oil production was a result of thousands of wellbores with the highest overall decline rates in US history. This is why Peaks Happen–sooner or later the production from new wells can no longer offset the declines from older wells.
And something that is generally overlooked in all of the Cornucopian hysteria regarding US oil production is that–so far at least–we are seeing an “Undulating Decline in post-1970 US crude + condensate production. Here is an excerpt from my post of the thread:
However, the real challenge that net oil importing OECD countries are facing is the post-2005 decline in Global Net Exports of oil (GNE), with the developing countries, led by China, so far at least consuming an increasing share of a declining post-2005 volume of GNE. An excerpt from my recent paper on net oil exports:
http://aspousa.org/2013/02/commentary-the-export-capacity-index/
Charles: Nicely said about the bigger picture and our agreement on some of its points. Economics is the topic of this blog. Yet anyone who thinks and reads widely will realize that at times other areas of discourse must be brought into the analysis. My hope is that America survive with the values that made it strong, and that the standard of living of all Americans rise at the fastest possible sustainable rate. Alas, both traditional American values and the economic objective have been damaged this past century. Civilizations decline and fall because of this. Judging whether a war is necessary or unnecessary to that civilization or nation’s survival is not a simple matter. All the more so for those who have to make the decision in real time. Moreover, human prejudice and other fallibilities on the part of historians lead the cautious person to view the historic record with an eye both on what’s said and on what may be germane but lies still buried. Further, each person’s value structure leads them to conclude somewhat differently about historic events in general. This is further confounded by two things. Not having sufficient command of the facts, and the facts one thinks are facts in fact not being facts.
I said that free markets are the best allocative device we know of for growing society’s wealth. And left it at that, relying on the level of economic sophistication of the readers of this blog to fill in the blanks on things like externalities, distributional effects, and markets today being far from free. Of course give and take sometimes wanders off, only to then serendipitously reflect back on the main topic.
You say government oversees the economic process to make sure it is fair and efficient. I say two things to that. Government does not know what fair is. Individuals are the only element of society that know fair, instinctively each as early as childhood know it. But when you sum over all the i’s to get government, elemental fairness gets grossly distorted. The more corrupt the government, the greater the distortion. And secondly, it is flat wrong that government is efficient. In some things like foreign diplomacy it excels. But in an overall sense government is far less efficient than the private sector, and thoughtful people in the private sector know it. Nor is there any monopoly by political party or ideology on this. Render unto Caesar what is Caesar’s, and unto God what is God’s is a wise epigram. Western Civilization including America has gone away from this wisdom. Of course those who don’t hold our values – some of which values are by no means unfriendly to evolving over time – would disagree. I cast no aspersions here on you personally.
I broached the notion of optimal size of debt-to-GDP to induce thought about the concept. I don’t know of any work that frames debt this way, like Pareto did with optimality. Of course to an extent the optimum depends on the historic moment. A single case like the American Revolution is enough to prove that. It may even be that the United Kingdom’s debt from the late-1700s to mid-1800s was optimal given their overriding objective of preserving the empire. I am not arguing the point, though I do not think it was optimal in hindsight. That empire had a mechanism that drove it to expand so as to survive, with a fatal flaw that were it to grant its distant parts the liberty it cherished itself, it would have accordioned back to very small size and power. RR were the first to sketch the contours of sovereign debt, however blurry those contours are for now. It is a land that orthodox economics did not map. Too much household debt is a proximate cause of this crisis washing over Western Civilization. From the public debt contours, from the rapidly expanding literature, and from the conceptually similar contours businesses and households face, I judge that when sustainable economic growth is plotted against the debt ratio, growth reaches a maximum in RR’s 0 to 30% bucket. And that’ll be the point of optimum debt. If debt goes beyond that, there will also be some optimal dynamic path to bring it back down. The shape of this path back is what the main controversy is all about. Though some diehards say the debt does not matter.
The price of gold is a sensitive indicator of this. The run-up of gold since 2001 said US sovereign debt had gone way past optimal.
The true laws of economics are timeless: the necessity for a surplus, the efficacy of the roundaboutness by which capital (physical and human) is created to complement labor, the concept of comparative advantage (though not static like in the texts, but in a dynamic sense), the allocative property of the price system, the necessity of having a sound currency, and fiscal prudence. Every civilization before us has wrecked on the shoals of the latter and gone down. This, recognizing that fiscal prudence is inextricably intertwined with the surplus, with capital formation, with a sound currency, and with the ability of the price system to signal properly. These laws apply to nations nascent and declining. If they are timeless and laws, how could they not? Okun’s law is of a lesser order than they. My statement that growth was fine until the fiscal mistakes of our era rests on this foundation. The secular trend is not a law. It is an historic artifact dependent on the technology of the era, the prospects for trade, population growth and demographics, cultural work ethic, and so on. The secular trend of any era is modulated by governments adhering to or violating these timeless laws. The transitory phenomena have degrees of freedom that timeless laws do not. Hence that one path out of the infinitely many possible that the historic record marks will, in general, exhibit natural secular ups and downs along the way. The distinguishing mark of the current era is that growth is diminishing. Sufficient surplus is not being put aside, fiscal prudence eroded after Eisenhower, the currency was debased by Chairman Burns, it was further untethered from soundness by Nixon, the signaling of the price system became distorted, policy makers did not tend to dynamic comparative advantage as they should have after the advent of China, and pseudo growth in the sense of not being sustainable arose on the back of the great credit bubble, which resulted in a crisis of such depth that sovereign debt has exploded. This explication of the record is hardly fruit punch. Once you look deeper you see the thing that changed this last century was not just surface conditions but more so violation of timeless economic laws.
Japan is not doing well. Already two lost decades, and now fiscal catastrophe just over the horizon.
It is not so that those defending RR ignore private debt. RR observed and reported on a pattern in the data, and that pattern has attained gravitas. Ongoing work will analyze private debt and sort out its effect. I believe you are correct in it having such. Causality ran from private debt to financial crisis to the skyrocketing of public debt. As well, the sovereign debt was already on an upward track. But go back a step. What turned households from healthy savers to overburdened debtors over the course of a few short decades? This needs be pondered at its deeper roots. All the tampering with timeless law since JFK, and even before, had consequences on society’s time preference.
Indeed, public debt in 1945 was at a level similar to that of today. And indeed there was a boom. Partly this was so because the US was the only industrial giant left standing. However, much was due to the condition of the very thing you ask be considered in the previous paragraph – private debt. You put the ball in play in one, why not leave it in play in the next? By 1945, private debt was rock bottom and a vast pool of household saving was available to be drawn on. As well, the ethic of laying aside surplus year after year was quite alive. For policy purposes today, the thing to know is both public and private debt are beyond optimal. I say this while empirical studies are still sparse. Hayek and others, though, warned long ago, Minsky along the way, and recently Steve Keen. The latter are on record, each from a different vantage point, in predicting the crisis. In no uncertain terms and for the right reasons!
Solyndra will go down as a classic illustration of government’s inability to pick winners. Which, under the guiding hand of marketplace profit and loss, is the private sector’s role not government’s. Of course there are gray areas like the Apollo Project, the Interstate Highway System, and government initiated defense needs. But otherwise, the preponderance of knowledge says this is what entrepreneurs are for.
Kurt Cobb: Patient contrarians: The natural gas market isn’t what it seems
http://www.resilience.org/stories/2013-05-05/patient-contrarians-the-natural-gas-market-isn-t-what-it-seems
Excerpt: