An optimistic diary (for once)

First, on the economy. The one thing I would like to point out is that we lived, in the past couple decades, at a time when several unique factors combined to create a kind of “perfect storm” which brought us the biggest bubble in history.

• the first factor has been the end of the Soviet Union, and the discredit it brought to economic theories competing with “free markets.” Coming at a time when our keynesian-drive economies were going through various strains (stagflation, etc – arguably brought about by our first collision of the industrial age with serious resource constraints), it provided fertile ground for ideological proponents of privatisation, deregulation, tax cuts, unfettered free-trade and pro-corporatist policies. The left has been struggling to fight back against the “socialism = fail, markets = freedom” meme reinforced by the powerful symbolism of the Berlin Wall falling; markets – in an extremist, ideology-driven version pushed by corpocratists and oligarchs – took over, in particuar financial markets, which have extended their reach into every aspect of our lives and have become the only judge of any and all public activity;
• the second factor has been the rather brutal entry on the global market of the Chinese and Indian workforces. When you increase the supply of a good, in this case labor, its price tends to go down, and this is what has happened, in the form of outsourcing, unemployment and/or stagnant wages in the West. It was made easy by free trade and capital flow liberalisation in the newly emerging markets, and faster thanks to the progress in telecommunications and travel. This trend is partly linked to the first one above, but it is largely a matter of chance that China’s opening to the world happened right at the time when its working age population was growing;
• the third factor is that our economies benefitted from a “last gasp” in the availability of resources – it is hard to underestimate the boost that was provided by (i) the North Sea and Alaska/Gulf of Mexico (domestic oil, accessible at no political cost, which helped make it look like the oil scares of the 70s were just a one-off) and (ii) the incredible growth in Chinese coal production in the past 10 years (ALL of the world GDP growth in that period can be explained by higher primary energy availability, which has come exclusively from higher Chinese coal output); the past 30 years were therefore a period when both labor and energy were plentiful, and thus (relatively scarcer) capital could dictate its terms;

This period is coming to an end.

Resource constraints are reasserting themselves. The extremist push by the largely parasitic oligarchic class to capture an ever increasing chunk of wealth is being stopped by the fact that parasites are only successful when they don’t kill their host, and right now the middle classes whose productivity they have successfully harnessed for their sole benefit are barren. China’s drive to do all our pollution for us is choking the country. Their coal is likely to run out soon, at current rates of production, and production growth. And, more importantly, they are undergoing a major demographic transition, as a result of the one-child policy of the past decades. Their working age population will soon decline – the all-important 20-39 demographic is already declining.

Right now, it doesn’t look like things will soon turn out badly for the oligarchs. After all, they managed to  increase their grip on our politicians during the great financial crisis, imposing a bailout of themselves over actually saving the economy. The political classes, mass media and more generally the Serious People all think that things are going well and that their ideology has been, once again, successfully pushed onto a hapless populace.

And we haven’t fully paid the price of the excesses of the past decade. The mountain of debt which was used to hide the wholesale looting of the middle classes is still hanging over us; the prosperity of the future which has been captured already by the wealthy through financial shenanigans will not be available to us now, barring a massive debt repudiation which applies to other instruments than our pensions ; the resource constraint, which temporarily subsided as the economy crashed is still waiting for us around the corner.

So, why the optimism?

• as noted, the consequences of the Chinese demographic transition are hard to overstate. Labor constraints are going to become a global reality once again, as no other third world country will be able to replace the Chinese on anything near the scale required. With increasing wages in China many things change: the lure of offshorisation fades, Chinese domestic demand (suppressed so far) will increase, and the Chinese themselves are going to ask for better environmental and work standards. This will translate into more demand for Western workers, and thus an end to labor cost erosion – and to living standards stagnation;
• the resource constraint is going to become a permanent feature, forcing us (and the Chinese) to change the structure of our economies. Pain, but also a lot of economic activity, will come from our necessary adaptation to lower energy availability. A lot of work will be required on infrastructure and green technologies, both of which are (i) jobs intensive and (ii) structurally hard to offshore.  And they require investment in the real economy, which is exactly what the oligarchs have been skimming off on. And it’s not like they will have a choice: you cannot cheat the laws of nature like you can cheat the “laws” of economics; and the so-far compliant/distracted/fearmongered populace will balk at doing without electricity or blaming brownouts on brown people…; it’s already happening: more wind farms have been built than traditional power plants in recent years in the West, while oil and electricity consumption are dropping quite spectacularly;
• and the good news is that we actually have the technologies available to do the transition. We know how to do building weatherisation; we know how to scale up renewable energy; we know how to do public transport and smart grids: what’s been missing is the political framework to make it happen.

Right now, it may look like if anything, the political framework is still moving in the wrong direction and, worse, if there is any popular backlash, it seems more likely to come in the form of a reactionary populism (ie scapegoating, fearmongering fascism) than the required progressive soak-the-rich kind. But while you can debase a currency and lie to people, you can’t cheat with nature. You can’t print megawatthours or joules or molecules of helium or rare earth metals. You can’t drink poisoned water or non existent water.

At some point, the very survival of any form of public authority will be at stake, and politicians will suddenly remember that States have incredible powers, do not actually need to be subversient to short term private oligarchic interests, and will start yielding that power towards strategic objectives.

And when the goal is full scale mobilisation towards survival, resources will go where they need to go, not to death-inducing capture by parasites.

Of course, this begs the question of what will trigger this survival mechanism. Do we need to get to the brink, and see thing worsen yet again (possibly a lot more) before we get there? I guess this is where my optimism comes in: I think the natural constraints are going to come for a while in the form of steadily increasing constraints (via prices, for instance) rather than outright shortages, and this will trigger enough action to move us on a different path, even if this is not immediately obvious.

Oil at $70 per barrel in the midst of a massive recession and demand reduction is an unmistakable sign. Or, in other words, the one hundred billion euros in the stimulus and TARP that went to renewable energy and bailing out GM will matter more, ultimately, than the trillions handed out to banks and bondholders, as one created or saved vital industrial infrastructure while the other just moved some electrons around, with no large scale long term consequences in the real world.

And if it takes yet more trillion-scale hand outs of fiat money to the parasites to authorise yet more real investment, this is the sneaky route that our adaptation to reality will take.

Or who knows, maybe we’ll get a real leader one of these days, able to steer us away from the wall before we actually hit it and get hurt. Now believing in that would be wildly optimistic!