Tom Lowe
On January 21, 2000 I published our analysis of the economy based upon an analysis by Wynne Godley of the Jerome Levy Economics Institute and papers by C. J Campbell on the imminent decline of world oil output in the next few years.
On March 19,2000, I predicted a recession within six months based upon the current economic indicators.
The recession is now arriving.
Surfing the Levi Institute a few days ago, I came across another article by Godley, Drowning in Debt, originally published in the London Review of Books, July 6, 2000. http://www.lrb.co.uk.
Godley again points out that the long economic expansion beginning in 1991 has been characterized by an unusually high growth rate in private expenditure, averaging 4.6 percent per annum, whereas the growth in output has averaged only 3.7 percent per annum. How can this happen? "How was a quart extracted from a pint pot?" Godley answers that the pint pot was supplemented by imports of goods and services, which rose at an average rate of 10.4 percent per annum.
Since a deterioration in the balance of payments and a big improvement in the budget surplus tend to drive down private disposable income, how, he asks, was the private sector able to increase its spending so fast? Godley answers that net savings have been falling as Americans spend more than they earn. The excess spending was financed by borrowing.
For the expansion to be sustained Americans will have to continue to borrow more, or the other two factors, either the balance of payments or the government surplus or both must be reduced. Godley cites the experience of Japan, the United Kingdom, Sweden and Finland and notes that recent periods in which private debt was accumulating were accompanied by an economic boom, but each was followed by a severe recession as the credit expansion unraveled.
Godley did not mention oil. I personally think it will be a major factor in the next few years and will affect the balance of payments far more profoundly than memory chips, Nike shoes or PlayStations. We can forego many of the imports that are contributing to the balance of payments deficit, but energy from oil is not one of them. We are addicted to oil and without major changes in our civilization, which is founded upon the assumption of cheap energy, we simply will have no choice.
What are Godley's recommendations? He states that a "relaxation of fiscal policy" on the part of the federal government as well as a fall in the value of the dollar would both help to avoid the scenario of a severe recession with a large fall in the stock market and he expresses the hope that "contingency planning along these lines is at hand, even though it runs slap contrary to conventional thinking at the moment."
That it indeed does run slap contrary to conventional thinking was amply illustrated by Mr. Greenspan's speech the other day. None of the factors above were given much weight. In fact, Greenspan's advocacy of a tax cut as preferable to an increase in government outlay clearly reflects his identification with the moneyed kleptocracy represented by both the Republican and Democratic parties.
Unfortunately, there was no mention in either Godley's article or Greenspan's speech about the possibility, if not probability, of economic disruptions brought about by global warming. The property and casualty insurers have already had a taste of global climate instability, as their losses in the '90s have been enormous, directly as a result of unusual weather. Economists, as a class, generally find global environmental concerns awkward to address, but they have a moral duty to study the effect of these global changes on the lives of the world's peoples and advise us accordingly. Few of them have fulfilled this duty.
Between now and the year 2010, we will finally be forced to put aside our pathological denial of the energy and environmental crises. When the supply and demand curves for oil intersect, the days of cheap energy will abruptly come to an end. We cannot continue to use 20 billion barrels of oil every year and discover only 6 billion barrels without depleting our reserves. Because our climatic system is what scientists call a "chaotic system," we cannot predict precisely how global warming will affect our lives on this earth. It may convert large portions of the U.S. into desert, or it might do the opposite, i.e. rain forest. It could produce tropical storms of such severity and size that mass evacuations will be necessary from low lying areas. We could lose the great midwestern breadbasket to Canada.
The recession into which we are now moving will be like a tea party in comparison.