Monday, May 26, 2008

Let’s Throw a Recession

by Larry Mongoss, guest blogger

Everybody, at least in America, is talking about the high price of energy and the tough economic times ahead. In a world where the variety of opinions on every topic is enormous, there seems to be no one from any political party, religion, activist group or even country that embraces the idea of a recession or depression. Or perhaps they are just holding back. That though, would be surprising, since people are willing to voice their opinions that even natural disasters, are good, justified, desirable or somehow appropriate. True, such people are usually a small minority, but still the silence on economic hard times seems pretty resounding.

Ahem… I would like to voice my opinion that a recession, in America and around the world, may actually be a good thing to have at this point in our history. I don’t say this simply to be contrary, though I do enjoy being contrary from time to time. I have reasons for making this statement and you, kind reader, should be asking yourself why I would take such an odd position. On the other hand, if you find this idea quite sensible, then perhaps you are already well ahead of me.

Many people entered the 21st century with a feeling of optimism. The depression of the 1930s, the oil crisis of the 1970s, the stagflation of the 1980s and the wars big and little to fill in the other decades were all things of the past. The 1990s had gone well (with the exception of those pesky little wars that would not go away) and there was no reason it could not continue. Sure there were people whining about the environment, talk about peak oil, an ongoing AIDS epidemic and other bad things happening, but hey, that is just part of life. For at least 50 years people had been saying we would never finish the 20th century intact – that nuclear war, natural calamity or the wrath of God would claim use before we got there. But finish we did, things were good, and on we could march.

We hit a little hiccup in 2001, with the bursting of the tech bubble, and mild economic slowdown some associate with the events of 9/11 (even though the slowdown started before that). But that was largely restricted to the United States and beyond a bunch of people who lost a bunch of money the only tangible lesson that came out of it was “diversify!” This is precisely the same advice that has been given for about 50 years but exclamation point was added back it (it must have disappeared somehow in the 90s).

Now, the situation is both the same and different. Sticking to economics, a great deal has changed in the sense that China, India and the oil exporting countries are much bigger players than before, especially relative to the US. But very little has changed in the sense that we are still doing stuff – mining copper, smelting steel, building bridges, driving cars and so on – pretty much the way we were a decade ago. That similarity is actually the crux of the matter.

Things work the way they do today because energy is cheap, while plants don't get paid. Take these two in turn:

Gasoline has just passed $4 per gallon in the US. This is a lot more expensive than it was a few years ago, but it is still cheap in the scheme of things. People in most developed countries have been paying over $5/gallon for gasoline for years (actually they mostly buy it in liters and pay for it with funny things like yen and euros but you get the idea). Some of these people, admittedly not nearly as many as in the US, even drive SUVs. If energy was real expensive (think $20 to $50/gallon for gasoline) we would do things very differently. Trains (or something similar), rather than cars and planes, would be the transportation of choice. Winters would be cold, summers would be hot, indoors and out. People would read more (actually there is no basis for such an assertion). So this covers energy.

Now, before we discovered fire, plants were winners, picking up lots of carbon from the atmosphere and depositing it on the ground. Even after fire, with a relatively small number of people on the planet the plants were still in the game. But we have added coal and petroleum to wood fuel, found lots of uses for them, and increased our number exponentially. Guess what, the plants are now losing. The trouble is plants, and other things in the environment, don’t participate in the economy. We don’t pay for oxygen, and byproducts of production like carbon dioxide can simply be dumped. With a few people hanging around camp fires that was no big deal, but with billions living modern lives it is. There is nothing in ordinary economics (capitalist or communist) that properly manages this. People are trying to deal with these issues, but the responses have pretty consistently been targeted at specifics (noise, sulfur, carbon dioxide, etc.) and not at fundamental changes to the way we do things.

OK, I get it. You’re lost. What the hell am I talking about and what does this have to do with recessions? Perhaps you think this was all just a trick so I could try to teach some economic theory. Well, maybe you’re right but it is actually connected.

As I think I mentioned, the world is obsessed with economic growth. Pesky things like a finite quantity of nonrenewable resources and an environment that can only take so much banging before it breaks are fine intellectual constructs, but they have nothing to do with the business at hand – economic growth. Or maybe they do. Somehow we need to move from the intellectual internalization of these things to behavioral change. For that to happen people need to be poked with a really big, really sharp stick, or be shown an unbelievably juicy carrot. News flash – no carrots on the horizon.

Perhaps having oil hit $135 a barrel is the sharp stick, and perhaps having this happen as a lead in to a global recession is what makes it big. For both people and organizations behavioral changes result from stress. Hard economic times definitely bring a lot of stress to the table. So maybe we will see some shifting.

The alternative, as far as I can tell, is a bigger and more painful adjustment in a few more years. In fact, this may still happen but the bigger will be smaller than the bigger would have been had the smaller not happened before the bigger – if you get my drift. We are driving 80 miles an hour at a brick wall – perhaps if we slow to 65 we will give the air bags a chance to do their job.


Kelly Spitzer said...

Thanks for this, Xujun. I agree with you. Recessions aren't all bad. The ways in which we measure growth (the GDP and GNP) are highly flawed and unsustainable. Six or seven years back, there was a movement out there called "Redefining Progress" that tried to take into account things like species loss, women raising children, etc. I wonder if it's still around...

Larry Mongoss said...

Hi Kelly,

Thanks for the good comment. Indeed many people have looked and continue to look for alternative ways to measure our economic and social well being. This is both sensible and necessary, but not enough people care to listen. Again it gets down to something that has to be conveyed to the majority emotionally, and not intellectually.