In my last post I talked in general terms about things a government might do to ease our transition to a significantly lower level of energy use, if it wasn't shackled by political realities. Things like encouraging and facilitating conservation, decentralization and rehumanization. But that was all a bit too vague to be very satisfying and I promised to make some more specific recommendations in my next post. I believe the three most important areas to consider are money, energy and food, and I'll be talking about them in this post and the following two.
I should say once more that this is a fantasy, and I don't think it has much chance at all of actually happening. More likely we'll continue on as we are and end up making the transition to a lower energy economy the hard way.
Money may seem an odd thing to consider first, but a great many of our interactions with the world are mediated by money. When we need or want something, we generally buy it rather than growing it or making it for ourselves. When we work, we usually make things that we neither need nor want and get paid in money rather than directly using the fruits of our labour. When we save, rather than stocking away real goods, we save money. And when we want to know the value of something, we check its price in dollars ( or whatever our favourite currency may be).
Because of this we are quite dependent on money, and the financial system that manages it. When that system isn’t working, we stand to suffer even if there isn’t a real shortage of what we need and we are still quite capable of doing productive work. And there’s certainly lots wrong with the financial system that could be fixed.
But there is more to the problem that just that.
When it comes right down to it, money is nothing more than a token for claims on future productivity. And since productivity is primarily based on energy, what money actually represents is surplus energy--the energy that is left over to fuel growth after we've supplied all the necessities of life.
In the last century, when fossil fuels were cheap and available in copious quantities, there was an abundant supply of surplus energy and economic growth was essentially unstoppable. Our financial system adapted to the demand for a constantly growing supply of money by creating money out of thin air, as debt. For providing this service, banks insisted on being paid back with interest. This worked fine as long as the economy was growing and the cycle of borrowing and paying back with interest could go on.
But the supply of surplus energy is now dwindling and the rate of economic growth is declining along with it. Our current debt based financial system is not set up to cope with this situation, and is having difficulty providing all the services we have come to rely on. You can print more money, but you can't print energy and no amount of adjusting the money supply or fine tuning of financial regulations can fix the energy problem.
Along with this comes another problem. Beyond just supplying various money related services to the rest of the economy, the financial sector has developed a whole set of activities based on trading money (or derivatives of money), on using money to make more money. And many of us have come to rely on such activities for our livelihoods, including people like me whose income comes from a pension fund. As long as the economy was growing reliably, this was very popular because it allowed one to make a living without any great expenditure of effort. Sadly, in a contracting economy, it doesn't work.
But what is it that a government should be trying to do? Ensure good times in the short run for the richest few percent of its citizens and the corporations they own? I think not. And since this is a political fantasy, I can say outright that for me the ideal society must provide its members with a useful role to play and in the process earn their livelihood, and assure them of protection and support in times of need. And this must be accomplished within the limits imposed by the carrying capacity of our finite planet.
Even if we weren't facing real problems like resource depletion and climate change, our current societies are not set up to do this.
The standard solution is to try to get the economy growing again, assuming that growth will solve all the other problems. Most governments are trapped in the mindset that this is the only solution, which is a pity, since many of our problems are actually caused by growth.
I would say that it is vital to resist the temptation to borrow money to "jump start" the economy. The automotive analogy is a good one, because cars need energy to run and so does the economy. The problem we face is not that the battery is dead, but that the fuel tank is nearly empty and the engine is starting to sputter. Trying to stimulate the "business as usual" economy is an effort doomed to fail and leave governments even further in debt.
What to do instead?
Well, first it would be vital to acknowledge the situation--that the limits to growth are real and a big part of our problem is caused by a decreasing energy surplus. Then it would be good to quit lying with statistics and make public a realistic appraisal of the current economic situation.
And then, we should have a look at all the things that have been done by governments attempting to keep "business as usual" going over that last few decades. There is a long list of excesses that need to be rolled back.
Reductions in taxation on corporations and the rich surely need to be reversed. It's become pretty clear that reducing taxes doesn't stimulate the economy or create jobs and a revenue starved government can't accomplish much but go deeper in debt, until it finally has to default on that debt. Tax reform should place the burden on those who can most afford to pay, discourage unsustainable activities and support the sort of government programs that will actually help us deal with the current situation and become more sustainable.
Governments have relaxed many regulations which businesses claimed were making it hard for them to operate profitably. But we know it was a declining surplus energy, not overregulation that caused the problem, and we also know that relaxing those regulations has made things worse in many ways.
I'm supposed to be focusing on money here, so I guess this isn't really the place to discuss environmental protection regulations (though they do need attention). I'll leave that for another day.
But financial regulations do bear directly on the subject of money, and many governments have drastically loosened regulations governing the FIRE industries (financial, insurance and real estate). This allowed those industries to pursue ever riskier endeavours in an attempt to offer high rates of return in a contracting economy (a fool's errand). What is really needed are stricter regulations to stop financeers from taking ridiculous risks at our expense. We should take the approach that financial institutions that are "too big to fail" are actually too big to exist.
Many governments have off loaded the job of managing the money supply on semi-independent central banks, organizations with strong ties to the financial industry. To me it seems like this is putting the fox in charge of the hen house. Governments should take over the central banks and directly manage the money supply, to make sure that more than just the big financial players benefit.
I should make it clear that I don't believe precious metals are of much use as a basis for money. The artificially high values we place on precious metals are far beyond what would be indicated by their practical uses--they are little different from the values we place on paper, "fiat" currencies, and are of little more use as a store of value. Currencies based on gold (or whichever metal you prefer) don't offer a real solution to managing a contracting economy.
Corporations in general (not just in the FIRE industries) have gained such a high level of rights and political influence that people are almost second class citizens. This is at the very heart of the "political realities" that I discussed in my last post. First we need to change the regulations governing how election campaigns are funded, to reduce corporate influence. Then we need to cut back on corporate rights and increase their responsibilities.
Big business has been a major proponent of the "free market", mainly because a free market, unregulated by government, is much easier to manipulate. Those with the most financial power can control the operation of a free market to their own advantage. And even if it was free of such manipulation, the market is not an effective mechanism for regulating an economy. The individuals dealing in the market are not reliably rational nor are they guaranteed to always seek their own best interest (or even know what that might be). Markets have a long history of blowing bubbles and crashing, and need to be regulated to minimize such behaviour.
While granting corporations more rights, many governments have actively engaged in union busting, assisting companies in reducing wages and making working conditions worse. This is done in the name of increasing profits and stimulating growth, but workers are also consumers and when they have less disposable income demand goes down, making things harder for businesses, not easier.
Globalization and free trade agreements are more of the same. Moving manufacturing to countries where labour is less expensive and safety and environmental regulations are less strict has a short term beneficial effect on the bottom line of the companies who do it. But it basically guts the economies of the countries loosing those jobs, and eventually reduces the demand for the goods those companies sell. This is a "race to the bottom" that a wise government would do well to avoid.
Many governments have signed free trade agreements that, in addition to greasing the tracks for the "race to the bottom", bind them to support "business as usual" and restrict them from many activities that would actually help mitigate the effects of economic contraction, such as encouraging localization and protecting local economies from competition with the global economy. Those agreements need to be cancelled. A low energy economy is not going to be based on international trading, so promoting free trade is not something we need to worry about
I could go on like this for a while longer and I am sure my readers could pitch in with more ideas. Much of what has been done in an attempt to keep "business as usual" going has in fact made the economic contraction worse and harder for people to cope with. It would be a big help if governments would quit doing that. But none of this would stop the economy from contracting to a level of activity that matches the available supply of surplus energy.
We need a plan for a steady state economy that can function at the much lower level of energy that is available from renewable sources. This new system will have to be much simpler and less centralized than what we have at present, because we won't have the resources to do anything more complex. And it will have to work without relying on growth.
Exactly what such an economy would look like demands a post or perhaps series of posts in itself. And since this will involve decentralization, and policies set on a community-by-community basis, there is ample room for many different solutions. But I'd like to use the space I have left in this post to discuss how governments might help us get there from here without leaving a large part of the population stranded without savings or livelihood. And that plan is going to have to work at a time when government revenue, even with a more rational approach to taxation, is going to be shrinking along with the rest of the economy.
I've usually talked about all this in terms of energy, but it can be seen just as well from a financial viewpoint. Our current economy is growth based and globalized, and much of it is financialized as well. That is, based on trade in financial instruments rather than the manufacture of and trade in real goods. The economic contraction is irresistibly pushing us towards an economy that will be de-centralized, low energy and largely based on the production of necessities for the local population.
I expect that this transition will occur very unevenly. Of course, in the developing nations there are still areas that have never been industrialized and which will hardly notice this as a change at all. On the other hand there will be areas in the developed world that will prove very resistant to change and will instead optimize their systems to carry on with less and less surplus energy. Unfortunately that sort fine tuning makes for a very brittle system -- the very opposite of resilient -- which is highly susceptible to breakdown when conditions change. And we'll certainly be faced with lots of changing conditions in the decades to come: droughts, heavy weather and rising sea levels related to climate change, wars over resources, stock market bubbles and crashes to name only a few.
But even if, through good luck or good planning, we avoid that sort of thing, the economy will still be contracting and that will bring its own sort of slow, grinding change. This will hit first and hardest in rural and low-income urban areas. It is important to remember that a corporation’s overriding goal is to make a profit and pass that on to its shareholders. If part of its business is no longer profitable, it must be shutdown, regardless of whether the services and jobs it was providing are seen by ordinary people as vital.
If you are a wealthy shareholder in corporations that are still operating successfully, you can likely afford to live in a community that has not yet been touched by any of this and you probably wonder what all the fuss is about. But if you are an employee of the business being shut down or you rely on its products, you will have no doubt as to what the fuss is about. A couple of examples that are currently happening will make it easier to see what I mean and where this is leading us.
The first of these is the phenomenon of food deserts, which Wikipedia defines as "areas of relative exclusion where people experience physical and economic barriers to accessing healthy foods". Food deserts usually exist in rural areas and low-income urban communities, where it is difficult for retailers of fresh and healthy produce to make a profit, and so they have been replaced by fast food outlets and convenience stores. People in these areas are left with no affordable source of healthy food, since travelling to distant supermarkets would be too expensive in both time and money. Also note that the jobs offered at fast food outlets and convenience stores may well be poorer in pay and working conditions than those in the food markets they replace.
This sort of situation arises quietly and with relatively little uproar beyond some minor protests about the closing of a supermarket here and there. I've seen it happen in small rural towns in the area where I live and it is quite common in many large cities. There is little doubt the trend will continue, and one can hardly fault the corporations involved, they are only doing what they are set up to do. Should governments intervene and regulate corporations, forcing them to continue operating in unprofitable situations? The only practical way to do so would be through subsidies and tax breaks--more of the same losing strategy that we've been following for a while now.
The real solution lies in localizing the food supply, and much of this can happen on its own. But it would be even easier if governments would set up programs encouraging farmers and urban gardeners to grow food for local consumption, and encouraging people to set up farmers markets, food co-ops and so forth to connect the producers with their potential customers.
Along with this I expect to see a move away from the formal economy towards an informal economy that is less dependent on the financial system and less mediated by conventional money. Governments could help with this by encouraging the development of local money and local credit systems which would continue to function as the formal financial system gradually crumbles and fails.
The second example is the response of oil companies to the recent drop in oil prices. It is important to understand that this was caused by accumulated demand destruction during several years of high prices, not by a sudden glut of oil. Production of conventional oil peaked around 2005, and what growth in production we've seen since then has been from higher priced sources, like deep offshore wells, tar sands and fracking, which aren't profitable at the current lower prices. The big oil companies have responded by cutting back on investments in exploration and development, areas where they don't see much possibility of a profit. Even the "promising" non-conventional sources of oil are suffering cut backs.
I wouldn't hazard a guess as to how long oil prices will stay low--the interplay of declining supply and demand destruction as the economy contracts due to reduced surplus energy is much too complex to predict. But I will comment that it is starting to look like the limiting factor on the supply of fossil fuels is not how much is in the ground, but how much can be gotten out profitably. It doesn't matter a bit how much we need the energy, if it can't be produced profitably, it won't be produced at all. Governments could take over and run the energy business, as they already do in many countries, but if the business isn't profitable, that just means the governments will go further and further in debt.
In the meantime, we need to learn to get by with much less energy. That's the subject of my next post, but I have just a bit more to say yet about the economic transition that is the subject of this post.
Governments need to facilitate the transition to the low energy economy.
As the current economy contracts, more and more people will fall out of it and need help in making their move to the local, low-energy economy. Finding jobs in the new economy may not be as much of a problem as you'd think, because a lot of rehumanization will be going on in the new economy--that is machines will be replaced by people, especially in areas like agriculture. The trick will be helping people find a place where they are needed and getting them trained to do the new jobs.
But many will be saddled with debts that they have no hope of ever paying off. I strongly suspect that the best thing would be to forgive those debts. There is normally a great reluctance to forgive debt, on the basis that this creates a "moral hazard", encouraging people to borrow with no intention of repaying. But that is clearly not the situation here, and indeed a lot of this debt problem lies with the banks, who continued lending on the groundless assumption that economic growth would continue forever.
Of course, the flip side of forgiving loans is that creditors suffer. Indeed all those who take their livelihood from the financial system will suffer as it contracts, even pensioners like myself. And this will be more traumatic because of the high expectations we have held. But, presumably if the political fantasy we are considering is actually attainable, it will also be possible to sway public opinion to the idea that getting by on "just enough" is a laudable goal. A major part of that would be getting those who have been the most conspicuous consumers to set an example, particularly those in positions of power.
As an aid to those who are reading this whole series of "Political Fantasy" posts, here is a complete set of links.
- The Great Contraction
- Technology Isn't the Answer, Depending on What Question You're Asking
- A Political Fantasy, Part 1
- A Political Fantasy, Part 2: Money and the Financial System
- A Political Fantasy, Part 3: Energy, EROEI, and Non-Renewable Sources
- A Political Fantasy, Part 4: Renewable Energy Sources
- A Political Fantasy, Part 5: using energy wisely when we don't have much
- A Political Fantasy, Part 6: Agriculture, an Overview
- A Political Fantasy, Part 7: Agriculture, Details
- A Political Fantasy, Part 8: Agriculture, What Lies Ahead