California - And by Extension the U.S. - Headed for Permanently Smaller Economy

Jul. 7.09 | About: The United (USO)

The June issue of Monthly, The Scholarship of Collapse, addresses several views of economic and systemic collapse from the works of Jared Diamond to Joseph Tainter, and then goes on to apply these views to the United States–and to its biggest state, California. Frankly, it’s not much fun to suggest that another leg down in housing is on the way. Or, that California is unlikely to see its GDP exceed its previous peak for quite some time. But without the two industries that characterized post-war growth in the US, housing and automobiles (and the financial industry that squatted on top of these) it’s hard to see how California–and the US by extension–does not become a permanently smaller economy.

Ouch. Permanently smaller economy!? Are you kidding me? The United States? Yeah, I know. The growth paradigm since WW2 is so firmly entrenched in the record (and in the psyche) that mere mention of US economic stasis seems outlandish. To suggest, as I am, that this condition will carry on for years sounds impossible. However, that is my call. I now foresee zero, net physical infrastructure or housing growth in California for at least another 5 years. If housing units go up somewhere in California, they’ll be bulldozed someplace else. If new roads or highways are erected, they’ll be discontinued or dismantled somewhere else. Without California, there will be no sustainable US GDP growth.

Peak autos is another favored theme of mine. Via the crushing blow of high energy prices, the price mechanism has tried for a second time in 30 years to send the signal that an economy run on cheap gasoline doesn’t, actually, work. Given the loathsome state of America’s presently collapsed economy, I would venture the country needs gasoline at 50 cents–right now–to return to its busy post-war arbitration of cheap transport and energy inputs, in service of earnings and output. That’s not going to happen. The reason: the United States no longer controls the price of oil via the mechanism of its own demand.

An interesting exercise when looking at previously collapsed economies and societies is to ask when a certain, initial terminus was reached, before the overshoot phase began. This could be the point, for example, when the Anasazi have denuded their local forests of wood, and have to start traveling farther afield for supply. The population will hardly be declining at this stage. In addition, the economy will be merrily carrying onward to a higher level of complexity. I call this the hidden terminus. The crossover point where resources were harder to attain, but, the techniques of the economy kept advancing (to some extent masking the underlying countertrend in resources). It now seems likely the United States reached this point in the year 2000. That’s when the ability to grow the economy, without a large acceleration in debt, appears to have crossed a threshold. From my June newsletter:

In my opinion the United States economy passed its hidden terminus with the bursting of the technology bubble in 2000. All of the power and thrust in the economy since 2000 was provided by nothing more than an expansion of credit via two, typical vehicles: War and Domestic government spending (Guns and Butter), and, artificially low interest rates provided by the central bank. This concept can be extremely difficult to accept among people working in highly innovative, highly productive areas like technology, venture capital, engineering, and other globalized product and service industries. What’s important to understand, however, is that the economy we made in the United States needs to serve 300 million people. If a good portion of that population is living off the housing and automobile economy, unsustainable at high levels, it matters little to the problem of a fundamentally unsound economy that Google, SunPower, and Honeywell are indeed doing wonderful things in technology, solar energy, and engineering. Moreover, it seems quite likely now that the expansion of credit post 2000 was in many ways a collective attempt to replace the trailing loss of our manufacturing economy. Yes, the US remains a hotbed of the best innovation but the acceleration of the financial and financial product economy was very likely an overshoot, past the hidden terminus in the structure of our system. To use a phrase that was once somewhat unfairly said about California by Gertrude Stein, we have discovered that there was no there, there in the US economy.

The United States, just like California, now sits astride massive, gargantuan post-war infrastructure that was built with cheap energy and leveraged with cheap energy, for over 50 years. Many parts of the US right now are actually experiencing something closer to a depression, and yet oil is above 60 dollars a barrel. That's a price that was considered ridiculous just 5 years ago, when even 40 dollars a barrel was viewed as unsustainable.

The United States has been in an inflationary recession since the start of the decade, which now threatens to become an inflationary depression. To make matters worse, the federal government is in the midst of one of the largest policy mistakes in US history as it has chosen to make enormous new investments in car companies, cars, biofuels, roads, and highways to the exclusion of public transport.

This is a classic, textbook example of the sunk cost effect in decision making and is a hallmark of the collapsed societies of antiquity. The choices the US makes from this point forward will likely have more of an effect on how the decline is mitigated. As I wrote in my newsletter, we do not view the post-war decline of Britain as a human tragedy, and there’s no reason to see the US decline as either shocking, or unexpected. However, it is indeed regrettable that we did not face up appropriately to the changes that unfolded, at the start of this millennium.