Capital Institute welcomes this guest post from our first Fellow, David Nicola. David will bring a year of Capital Institute experience to the Fuqua School of Business at Duke University where he will be studying for his MBA, while keeping his ties to us.
Last week the above headline flashed across my blackberry. I was excited at first glance, thinking “finally, an article from a mainstream economist that will bring clarity to the debate about endless economic growth on a finite planet.” I was even more excited that this article appeared in the Wall Street Journal–-a bastion of the current economic paradigm, which operates under the assumption that continual, limitless growth is the only goal 21st century human beings should embrace.
The article by John Taylor, a professor of economics at Stanford and the author of “Getting Off Track: How Government Actions and Interventions Caused, Prolonged and Worsened the Financial Crisis,” is a refreshingly non-partisan editorial from one of the most partisan media empires in the world. The author contends that bi-partisan, non-interventionist policies of the US government in the 1980s and 1990s were behind the much larger economic growth of that time period versus the feeble “recovery” since the 2008 crash. He also maintains that the bi-partisan “interventionist” policies of both the Bush and Obama administrations have hampered the current recovery. He concludes that if we unwind “interventionist” policies of the Bush and Obama eras that our economy will grow faster. This argument sounds plausible and most would agree that counterproductive intervention is one of the many problems our country faces. The US needs smart government, not big government. Taylor’s article, however, misses an important point when comparing, as the author deems it, the “period of unprecedented economic stability and growth in the ’80s and ’90s” to today. The omission of this crucial point is where my enthusiasm turned to disappointment. When comparing these two periods, Taylor’s editorial fails to recognize the importance of our planet’s physical limitations and how those boundaries affect our economic endeavors.
The economy relies on non-renewable resources to generate economic growth. These resources are inherently limited and in a market economy the price of these resources has increased significantly as supplies become constrained. Perhaps the difference in growth between the 1980s and 1990s versus today resulted from our failure to recognize and accept these ecological limits. The elimination of government bureaucracy, while a necessary step, does nothing to address the rapid depletion of non-renewable resources that fuel our current economic endeavors.
Oil illustrates this point most effectively, but we can also look to other resources and see a similar effect (graph). For the “two year” periods Taylor compares (1983-1984 versus 2009-2010), the differences in inflation-adjusted oil prices are negligible (graph). When looking at this data, some may conclude that my aforementioned argument does not hold water: How can oil prices help explain the difference in growth if they are similar on an inflation-adjusted scale?
Let’s look more deeply into the data. Oil was an inflation-adjusted average of $42.42 from 1980 to 1999 (table) and $34.31 from 1983 to 1999, the exact time frame that Mr. Taylor deems the “period of unprecedented economic stability and growth in the ’80s and ’90s.” From 2008 to 2010 the inflation-adjusted average was $74.88 and we know that the average price of oil will only increase when 2011 data is factored in. That amounts to a 76.5 to 118.2 percent inflation-adjusted increase in the price of a single barrel of oil. Do we really think ignoring this price action, which results directly from resource constraint, has no effect when comparing these two time periods?
Conventional economists and political leaders continually turn a blind eye to resource constraint, which has already proven, and will continue to prove, troublesome in the future. The US and the rest of the world will not be able to return to an era of “unprecedented economic stability and growth” if our current economic system, which is based on intense consumption of oil and other limited resources, continues. For the record, I do not believe it will be possible for the US to ever return to another “period of unprecedented economic stability and growth” as in the 1980s and 1990s. (You can read why visit the Capital Institute website.)
Adding to the current pain is the Chindia effect. In the 1980s and 1990s the economies of China and India were a blip on the radar screen (China GDP chart, India GDP Chart). Now the US is competing against these giants for non-renewable resources, thereby increasing demand pressure as China and India pursue the same misguided, oil-dependent economic growth. The numbers speak for themselves: global oil demand is up 40 percent from 1980-2009 (graph). We must begin the transfer to a carbon-free economy. The US should lead the charge in this endeavor.
Let’s also examine Taylor’s argument from another perspective. Perhaps the bi-partisan, non-interventionist tendencies of the 1980s and 1990s caused our current dilemma. The American consumer, government, and leading economist squandered an era of cheap oil by failing to reduce our addiction to this limited resource. The weak “recovery” since 2008 is an unintended consequence of failing to deal with this addiction. We traded growth in the 2008 to 2010 period, and beyond, for growth in the 1980s and 1990s. Our society refuses to see the long-term implications of these choices as politicians live from election to election and Wall Street lives from quarter to quarter.
John Taylor clearly made a strong attempt at a non-partisan economic argument for helping the US navigate our current economic condition. However, we must strive for a different outcome — understanding and preserving earth’s limited resources is a place to start. Instead of asking: “How can we prop up the economy in the short term?” we should ask: “How can we reduce our impact on the world while preserving resources for the future, and promoting smart and balanced economic activity?” This shift in thinking must begin with the renowned economists of the world. Realizing that our economic endeavors are grounded in the physical and biological principles of the earth will allow for a transition to a “new growth consensus.”
Taylor’s recommendations that we should eliminate government waste and rid this country of counterproductive government “intervention” are spot on. The US, however, must go much further than this initial step. Our leaders and foremost academics should take a fresh look at reducing our reliance on limited resources and must embrace smart government action that guides our economy onto a trajectory that is in balance with the boundaries of a finite planet.–David J Nicola is a Capital Institute Fellow and a student at Duke University’s Fuqua School of Business