2011 May 29 Sunday
Tyler Cowen: The Great Stagnation

Businessweek has a very flattering article on Tyler Cowen and how his book The Great Stagnation has prompted a shift in the debate about poor economic growth. Having read the book I strongly recommend reading it.

The Great Stagnation runs through three centuries' worth of what Cowen calls the "low-hanging fruit" of economic growth: free land, technological breakthroughs, and smart kids waiting to be educated. For developed economies, he argues, none of these remains to be plucked.

Even more important than land, in my view, is energy. As Peter Tertzakian pointed out in his book A Thousand Barrels a Second, previous energy transitions of the last couple of centuries were to energy sources that were cheaper and/or more convenient. The transition to petroleum combined both cost and convenience advantages. For example, the transition from coal to oil for heating eliminated the need to load coal into the furnace and to clean out ash. Oil enabled a huge growth in productivity of farm equipment, construction equipment, and in the transportation of humans and goods. The orders of magnitude increases in energy usage made possible our high living standards far more than did widespread college education. Many of the technological innovations were basically to use petroleum in more ways (e.g. to power jet engines). Our problem: Supplies of our most convenient fuel are looking pretty limited. What passes for good news on oil supplies (e.g. hydraulic fracturing of tight oil shale) costs more and projected flow rates aren't high enough to enable a return to the years of substantial annual increases in oil production.

"We thought we were richer than we were."

Yet America, Europe, and Japan have built political and social institutions on the assumption of endless growth. Cowen summarizes the financial crisis in eight words: "We thought we were richer than we were."

It's not that he disagrees with any of the better-known explanations for the crisis—easy credit, flawed ratings—it's that he sees a more fundamental problem, one that can't be fixed with regulation, bailouts, or tax cuts. Cowen thinks that now that America has used up the frontier, educated all of the farm kids, and built a couple of cars for every family, we might be done growing for awhile.

A slowing or halting of growth is highly problematic because so much has been set up based on the assumption of continued economic growth at a rate close the post-WWII average. Debt instruments have been issued and entitlements promised based on assumptions about long term growth that are not realistic. Pension funds project their funding needs based on rates of return from their stock market investments that are too optimistic. Even worse, we could be looking at something even more painful than stagnation: a receding tide of prosperity.

One can see signs of declining returns on investment in many areas. For example, doubling Pentagon modernization budgets delivered far less than was expected.

For almost a decade, the Defense Department saw its budgets boom but didn’t make the kind of technological strides that seemed possible.

“Since 9/11, a near doubling of the Pentagon’s modernization accounts — more than $700 billion over 10 years in new spending on procurement, research and development — has resulted in relatively modest gains in actual military capability,” Defense Secretary Robert M. Gates said in an address last week.

The article goes on to discuss what is wrong with US Army procurement methods. But I see something deeper at work to cause 10 years of US DOD spending at double the previous rate to yield only modest gains. The low hanging fruit are gone. The US military do not know how to get large gains from smaller scale projects. Therefore they try to do much larger scale engineering projects. Then many of those fail.

Computers are widely seen as huge enablers of progress and I agree they've delivered some big benefits. But what impresses me about the huge amounts of data getting sucked into computers and processed is that it has not (at least so far) enabled such better ways to manipulate matter in ways that can keep energy and other forms of commodities cheap. Investor Jeremy Grantham thinks we've going thru a transition into a much more resource-limited economic era. The industrialization of Asia combined with declining concentrations of minerals extracted from ores and other resource extraction limitations have caused a big turn in the direction of commodity prices starting in 2002 off of the long term trend of the last 100 years (see figure 2 there and my commentary here).

Some economists looked at the economic benefits of personal computers and assigned a small value of them. Compare those benefits to our far larger gains from coal- and oil-driven industrialization. I see computers as reducing (but far from eliminating) the pain of rising commodities costs by, for example, making engines run more efficiently and by reducing the need for physical travel. But computers so far haven't had an impact as great as the combination of oil drilling and mass-produced cars.

Okay, am I all doom and gloom? Nope. In spite of depleted fisheries, Peak Oi, declining ore concentrations, pollution, the potential for massive glacier melts and droughts, aquifer depletion, top soil loss, massive species extinction, human overpopulation (1970s environmentalists were right), and other problems too numerous to list I still hear Eric Idle singing. Potential very big benefits can be seen on the horizon from biotechnology. Very notably, we'll get new organs grown to replace old failing organs. But when will we get replacement organs, stem cell therapies, gene therapies, and great cures for cancer? So far all that's progressing much more slowly than the incredibly dramatic orders of magnitude declines in DNA sequencing costs.

cost2_sml.jpg

Sequencing costs are going down at rates much faster than Moore's Law for computers. That can happen with really small stuff such as strands of DNA. But cells are much bigger and more complex things and organs are far more complex still. What I want to know: when will the advances in manipulating the small scale come fully to bear on stem cells, gene therapies and other key areas of biotechnology?

By Randall Parker    2011 May 29 10:17 PM   Entry Permalink | Comments (38)
2009 June 20 Saturday
China Energy And Transportation Demand Up

More cars produced than in America for the first time.

For the first quarter of the year, 2.7 million cars were sold in China -- besting U.S. sales of 2.2 million for the first time to become the world's largest car market.

If the Chinese do not shift to electric cars powered by nuclear, wind, and solar power we are going to face a big problem with fossil fuels depletion and pollution.

Oil demand is rising briskly.

China consumed 33.23 million metric tons of oil in May, up a strong 6% from the same month in 2008, a Platts analysis of official data showed June 18.

Note: The Chinese are stockpiling too. It is not clear whether this figure includes demand for stockpiling. Is retail demand up?

Take a look at the larger trends behind these latest two reports. In 2007 China surpassed the US in CO2 emissions. In 2008 China accounted for 43% of world coal consumption.

China, which has been trumpeting its new wind and solar goals in recent days, led the way with a near 7% increase in the amount of coal it burned during 2008 despite average prices rising 73% to $150 (£129) per tonne. This accounts for 43% of global coal use.

Out of the major commodities the United States still only leads China in oil consumption. The same is true for most (all?) minerals.

Among the basic commodities—grain and meat in the food sector, oil and coal in the energy sector, and steel in the industrial sector—China now consumes more than the United States of each of these except for oil. It consumes nearly twice as much meat (67 million tons compared with 39 million tons) and more than twice as much steel (258 million to 104 million tons).

These numbers are about total consumption. “But what if China reaches the U.S. consumption level per person?” asks Brown. “If China’s economy continues to expand at 8 percent a year, its income per person will reach the current U.S. level in 2031.

“If at that point China’s per capita resource consumption were the same as in the United States today, then its projected 1.45 billion people would consume the equivalent of two thirds of the current world grain harvest. China’s paper consumption would be double the world’s current production. There go the world’s forests.”

The Earth's crust is made up of 8.1% aluminum and 5% iron. So we will have plenty of them even if China industrializes to the US per capita level. But for applications that use large amounts of rarer inputs we are going to have to shift toward other ways to accomplish what those limited resources do for us.

By Randall Parker    2009 June 20 06:09 PM   Entry Permalink | Comments (3)
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