Pain or death? The view from the balloon
There are credible scientists making serious plans to offset global warming by spraying sulfuric acid into the upper atmosphere. The idea is that the sulfur combines with water vapor to form a fine particulate that will remain airborne and deflect some of the sun's rays, thus offsetting the heating effect. People advocating for this believe they can fine tune the climate like a thermostat.
Of course, this is absurd, and many of you intuitively grasp that. The climate is a complex, adaptive system involving far more than simply solar rays. It's the height of arrogance -- or foolishness -- to believe we can fine tune such a complex system. Even if we managed to for a while, the compounding impacts over time are totally unpredictable. I'm guessing that most people reading this article would believe it better to stop impacting the climate today -- to dramatically reduce our CO2 emissions -- than to try and mitigate the effects after the fact.
Sadly, many of us are domain dependent with our skepticism. We cringe at the notion that the climate can be manipulated to our ends but we show no skepticism at all when it comes to fine tuning other complex systems. I made this case in regards to the economy a year ago in the podcast Climates and Markets. The skeptic on climate manipulation embraces economic manipulation (and visa versa, just to make this uncomfortable for everyone). Oh, but Chuck....we know so much more about the economy. Yeah, you know who you sound like?
In late July, the McAlvany Commentary released an interview with author and economist Richard Duncan. I've listened to it five times, along with a lot of other stuff that Duncan has said in other places. I've finally found a Keynesian economist that I can relate to. That is, I've found one that seems to be honest and forthright. He scares the hell out of me, but at least he's not pretending he's found some secret formula that only the like-minded are enlightened enough to understand.
Let me elaborate. The first half of the interview is a brilliant analysis of China and the relationship between China's economy and the rest of the world. It would be a disservice to break it down too far -- you should really listen to it -- but I will try with this: China saves while America consumes and this works for everyone so long as credit continues to expand.
His insight in that first half on the inflation/deflation debate was also fascinating. He contends -- and I see his point and agree -- that globalization has been deflationary on wages (driven down the cost of labor worldwide) and, while there has been asset inflation (a bubble in stocks and housing), the lower wages have offset inflationary pressures we would normally expect to see from money printing. So print away; there are still billions of people willing to work at really low wages and we've got a long ways to go until there is a labor shortage and the incomes of the poorest become competitive. (Note that I'm not suggesting this is tasteful, just honest from the viewpoint of a demand-side economist.)
In the second half of the interview, he builds on these insights and gives, what I'm calling, an honest assessment of where we're at right now economically. I'd like to start with this quote (and you can listen along here):
...in terms of the broader economy, and the broader economic implications, the world has really never experienced the sort of conditions that we now are facing, where we have such high debt levels globally, and where we, at the same time, have a global economy with enormous excess capacity, not only across all the industries, but even more importantly, in the labor market. In India, you could easily find 300 million people who would work for $5 a day, so we have massive excess capacity in labor, which means there are no inflationary pressures.
Everyone is trying to understand what we have to do to prevent our economy from collapsing, and hopefully, to be able to return to growth. But it’s important for everyone to understand that there is no real past experience for us to draw on. This isn’t 1776 and the age of Adam Smith, nor is it the early 1900s when Ludwig von Mises was writing about the consequences of credit expansion. This is a new period, and we’re going to have to come up with our own solution to this crisis of ours if we’re going to avoid disaster, and look at things, not using textbooks that are 50 years, 100 years, 250 years old, which don’t apply to our age. We’re living in a different period, and we have different tools available to us that we’re going to have to use if we’re going to avoid disaster.
This is the part that I find so fascinating, the reason I've listened to this over and over and over again. Typically what we hear from demand-side economists advocating for intervention is some trope about the Great Depression and World War II (Bernanke was an expert on the Depression, so we were told) and the terrible lessons from inaction. The Krugmans of this world -- along with Duncan here -- argue that the mistake that caused the Depression was inaction and that the Fed's willingness to act aggressively in 2008 saved us from a repeat calamity. It's the prime data point. Textbook Keynes. In fact, from the interview:
[The Great] depression only ended when World War II started, and at that point, government spending in the U.S. increased by 900% during the war. That ended the depression.
We’re in a similar situation now, except in 2008 probably the bubble was even larger than in 1930. This time, when it popped, rather than doing nothing, they acted very aggressively. They haven’t solved the problem, but we’ve had eight more years of prosperity that we wouldn’t have had.
What I find fascinating is the admission that this policy has led us into uncharted waters, that today is not simply a wash/rinse/repeat of the 1930's. That we're someplace where the textbooks don't apply and the old models are not applicable. We're figuring it out as we go. Contrast this admission with the certainty of the next statement -- which follows shortly after the previous one in the interview -- and see if you feel any of my misgivings.
And now we find ourselves in the situation where, remarkably, what the last eight years has shown us, has proven, is that it is possible for the U.S. government to borrow and spend trillions of dollars that it doesn’t have, and to finance it with paper money creation without creating inflation. So, the sensible thing to do, of course, would be for the government to borrow more, and to invest it, and rebuild our rotting infrastructure.
And there we are. Remarkably, we've proven what works. So now on to our national political consensus, the only thing we really agree on as Americans in a reflexive kind of way: let's rebuild our rotting infrastructure. Let's throw trillions of dollars at the highways, trains, ports and utilities of this country and -- I'm going to say this intentionally -- make America great again. It's the obvious thing to do, right?
I'm going to get into Duncan's vision of stimulus spending in a follow up post, but for the rest of this piece I want to dwell on why this all matters. Why it's important that, in this complex, adaptive system we call an economy, we're able to acknowledge that we're far into uncharted waters and we're making it up as we go along. David McAlvany pushes Duncan on whether or not more debt and more spending is really a solution or whether it is simply buying us more time. In other words, isn't he just advocating kicking the can down the road to avoid the consequences of our prior bad economic decisions? Duncan's answer is (listen along here):
...the crucial question is, how much pain would there be? Would it be a couple of years of acute pain followed by a return to the garden of Eden of laissez-faire? Or would it be death? If it’s death after 50 years and a 64-trillion dollar expansion of credit, or something resembling a ten-year depression followed by World War III with nuclear weapons, that would be pretty much end of our civilization. So, that’s the question that we have to decide. Can we take the pain? Can we endure 25% unemployment?
Those are some pretty high stakes. Duncan makes it clear later on what he thinks the stakes are.
So, many bright and well-meaning people advocate balancing the budget, reducing the debt level, banning the Fed, but that’s just like someone who has gone up in a hot air balloon, far up in the sky, suddenly looking down and becoming frightened and advocating cutting off all the hot air. Well, our balloon has been inflated by massive amounts of credit for more than half a century. If you cut off the credit now, our hot air balloon is going to crash to the ground and we’re all going to die. So, we need to keep the credit flowing.
So, in other words, if you want to look at this black or white, we can cut off the credit and collapse into a great depression and have our civilization collapse, or we can have the government do a lot of deficit spending financed by the Fed, and grow our way out of this into an age of unprecedented prosperity.
Read that entire quote again. We're in an economic hot air balloon way up in the sky -- that's where our past policies have taken us. Our choices are to cut off the hot air and plummet to earth (civilization collapse) or go even higher and try to reach a level of "unprecedented prosperity".
I'm sorry, but that's insanity. Those might seem to be our only two choices now, but there should be nobody looking back with pride that "50 years and a 64-trillion dollar expansion of credit" gave the Baby Boom generation a great ride. And there should be nobody looking ahead into the vast unknown with confidence when the collapse of civilization is one potential outcome of our experiment -- and not an unlikely one, according to Duncan.
I did an entire series this year on the work of Czech economist Tomas Sedlacek. His primary insight is that our post World War II economy -- coinciding with America's Suburban Experiment and the building of all that infrastructure we now so desperately want to repair -- is one in which we traded stability for growth. In Duncan's terms, we wanted to ride the balloon higher and higher, despite the risk involved. Sedlacek suggests we now need to trade growth for stability, slowing our economy and reducing our debts in order to decrease our risk of collapse. Duncan contends that is impossible, that we'll collapse if we slow at all and our only choice is to ride the balloon aggressively higher. Duncan might be right on collapse, but is that the kind of world you want to live in? And is taking the balloon higher really the only other alternative?
If you spend time freaking out over the climate and the runaway impacts that releasing a couple hundred million years of stored energy in just a couple of centuries may have on that complex system, you should also be freaking out over the (bipartisan) disaster that is our fragile global economic system, a system of arguably greater complexity and volatility. We urgently need to get moving on building strong towns.
Read the follow up article, "A Rising Balloon Lifts All Fools."
Top photo by @Thales via Flickr.
Charles Marohn (known as “Chuck” to friends and colleagues) is the founder and president of Strong Towns and the bestselling author of “Escaping the Housing Trap: The Strong Towns Response to the Housing Crisis.” With decades of experience as a land use planner and civil engineer, Marohn is on a mission to help cities and towns become stronger and more prosperous. He spreads the Strong Towns message through in-person presentations, the Strong Towns Podcast, and his books and articles. In recognition of his efforts and impact, Planetizen named him one of the 15 Most Influential Urbanists of all time in 2017 and 2023.