Paradigm-challenged economists: Summers, housing and the grid

Another analogy for today's economy is that of a bus. Energy inputs are the fuel. Monetary issues are the brake. If the bus is about to run out of fuel, the driver can either press the brake and make the bus stop in a controlled manner at a convenient place or he can keep pressing the gas pedal until fuel runs out and the bus stops by itself a little further. But it will always stop. And the key point is: the further down the road it stops, the worse for the passengers.

Why? Because in the real world, it means more oversized, energy-inefficient McMansions will be built in suburban and exurban locations, requiring huge energy inputs for cooling and heating and very long commutes for every need of their occupants. It also means more fuel-inefficient cars and SUVs will be made and sold. It means in a word digging society into an even deeper hole.

But these are just the MARGINAL adverse effects of a monetary policy geared to propping up demand, and by no means the greatest danger posed by such a policy. As you may know, Richard Duncan's Olduvai theory postulates societal collapse by way of the collapse of the electrical grid. The assumption is completele plausible: it doesn't take a major in engineering to see that a grid collapse would bring about the collapse in societal order. With that in mind, let's quote from the Nov 25 Professor Lawrence Summers' piece in the Financial Times, to ascertain the extent of the current disconnection between economic thinking and the dynamics of key physical realities:

"Single family home construction may be down over the next year by as much as half from previous peak levels."

OK, if that's so bad, we can infer that Professor Summers would like to see home construction remaining near its previous peak levels. But has he ascertained whether the capacity of the electrical grid can accomodate the incremental demand from those new homes? Has he checked the prospects for the US natural gas supplies? Has he checked the timing for decommision of old nuclear powerplants, and for the construction of new ones (if there will be any)? Has he checked where those homes are being constructed, particularly whether a significant share is in naturally unlivable places like Las Vegas where heavy use of air conditioning is a requirement for survival?

Obviously the answer to all those questions is no, and I do not blame him. He is just a member of a generation (actually several generations) of economists that never had to pay any attention to physical constraints for setting their policies because they were not an issue, economists that have spent all their lives on the way up to Hubbert's Peak and that seem unable to realize that we are right there now and that the way ahead is down, not up.

But this shows once more that these paradigm-challenged economists have become unsafe drivers. Because as we can see, fostering home construction does not just place the marginal adverse effects I mentioned in my previous post. It has the potential of loading the electrical grid beyond its capacity. And the grid is either up or down. And if it's down for a long time, societal order falls down too.

Sure that collapse can be prevented by draconian measures. In such an emergency, you can take whole cities like Las Vegas off the grid and let them bake to save the rest of the country. Or you can send the police and National Guard home by home to seek and destroy air conditioners. Or you can set exponential pricing for electricity to force people to skimp on it. All options that make a recession not look so bad after all.

So, just as in a previous post (http://peaktimeviews.blogspot.com/2007/12/are-economists-paradigm-challenged.html ) I proposed that there should be "safety overrides" for setting Fed Funds rates taking into account the levels and trends of inventories of crude oil and petroleum products, here I propose that there should be similar overrides when setting policies that affect home construction taking into account the status and trends of electrical generacion capacity.

And again, a prompt recession is not the long-term solution for the problem. It just provides a window of opportunity for addressing it in a decisive yet orderly way.


Let's finish by dealing with a few other quotes from Professor Summers' article:

"it is hard to believe declines of anything like this magnitude will not lead to a dramatic slowing in the consumer spending that has driven the economy in recent years."

Which would greatly reduce the current unsustainable US trade and current account deficits and help the dollar retain its role as the international trade and reserve currency. Doesn't look too bad, either. At least for the US.

"Then there are the potentially adverse effects on confidence of a sharply falling dollar,"

At this point Professor Summers' thinking gets not only disconnected from physical realities but contradictory too. If he wants to prevent the dollar from falling, bringing down US demand for foreign goods is the only way to do it. On the other hand, US exports would not be affected by a financial crisis.

"rising energy costs, geopolitical uncertainties especially in the Middle East,"

If Professor Summers fears that energy costs will remain high or be even higher, or that energy supplies from the Middle East could become compromised, does it make sense to encourage further suburban and exurban home construction and thus increase energy demand (and the dependence on cheap imported fuel for the long commutes required for every need in life)?

"or lower global growth as economic slowdown and a falling dollar cause the US no longer to fulfil its traditional role of importer of last resort."

No, Professor, after Hubbert's Peak the world is in a new environment where lower global growth will not be the consequence of insufficient demand but of a physical constraint from Nature, namely the peaking and the subsequent relentless decline in the production rate of fossil fuels.

In this new environment, the world no longer needs an importer of last resort, because there is no longer a producer of last resort (or swing producer, as they used to call Saudi Arabia) of the critical energy inputs required for production.

And again, it's not Professor Summers' fault. He is just influenced by the predominant Solow model of growth, which tragically overlooks the role of those energy inputs in economic output. Which is the topic I touched on in a previous post.