Saturday, June 27, 2015

Keynesian Economics and Peak Oil

As I read articles on the web about our economic malaise beginning in 2008 and continuing until now (stock market moves notwithstanding) I am constantly confronted with scathing condemnations of "Keynesian economics" and how it has failed us. Usually these are conservative commentators who deride the Federal Reserve and call their continued activity in taking on debt through Quantitative Easing "extend and pretend".
If you've read my blog at all you know I subscribe to the theory that our economic malaise is a result of the end of cheap oil. I am currently reading "Energy and the Wealth of Nations" by Charles Hall and Kent Klitgaard which, among other things, helps put the issue of "Keynesian economics" within the backdrop of energy. I will summarize what I believe is their understanding.
Through several permutations of prevailing economic theory we have based our understanding of economics on the resources and constraints in existence at the time. Classical economics was much more concerned with limits, while Keynesian economics is very much unconcerned with limits of natural resources. Keynes could get away with such a theory because of the ascendancy of cheap fossil fuels. Essentially, it was assumed that cheap energy was here to stay, therefore growth is here to stay. Economic downturns were merely the result of market imbalance and could be corrected through government spending/debt in order to "goose" the economy back into line. The government could also act to restrict the economy if it overheated.
That is all well and good if the assumption of unlimited cheap energy remains valid. The stagflation of the 1970s presented a big puzzle to mainstream economists at the time because, within a Keynesian framework, inflation and stagflation never go together. However, when resource limits constrict the ability to grow in a debt-fueled system, stagflation is exactly what you get.
Now, a country can ignore the reality of limits to cheap energy and continue to apply Keynesian tactics anyway. This is what has been called "extend and pretend" by many commentators. It still works, but only halfway... it keeps the economy from totally imploding but only results in limited growth while fueling inflation which may or may not extend across all sectors at any point in time.
What such government action fails to take into account is that government spending during a time of economic trouble is also predicated upon the availability of cheap energy. In this case, government debt is the appropriate action because continued growth is sure to follow which makes the debt a very good return on investment. It is a cycle of debt and growth that exists at the private and public level and defines what is known as the typical "post-war" economy.
Keynesian economics is ENTIRELY APPROPRIATE against a backdrop of never-ending cheap energy. It is SUICIDE without it.
The occurrence of US peak oil in 1971 and the occurrence of conventional peak oil around 2005-2006 both generally coincided with an increase in the growth of debt both public and private that had to be taken on in order to keep the "ship afloat." A day of reckoning is coming where debt and credit will collapse in the face of persistent economic stagnation.
There are no easy answers. I think one very worthwhile project that must be undertaken is to combat economic inequality. Unfortunately, I think when the whole house of cards comes down, economic inequality will correct itself very violently. The powers that be could correct it now, take the hit to their fortunes, and help everybody get the resources necessary to help weather the shocks ahead. As it stands, the American people know who to blame for the desperation that is to come. First name "One," last name "Percent."
The "One Percent" also better be prepared to take the blame for inaction on global warming as well, which will start to become very obvious over the next 10 years. Through their religious right lackeys and their Fox News propagandists they've hemmed and hawed and doubted and stalled and tried to confuse the American public. But global warming tends not to occur in a linear fashion but in a stepwise fashion and we now in 2015 are at the beginning of another bump up.

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