[A-List] Hollow Men of Economics

[Bill Totten]

by Gregor MacDonald

theoildrum.com (July 30 2010)


Left unaddressed during the past three years in most of the debates
between economists has been the problem of energy. The reason is
simple: post-war economists don't do energy, except as an
ever-expanding resource that the credit system and technology makes
available. For the post-war economist, the supply curve of energy -
save for brief lags - is always coming back into rough equilibrium with
the economy.

Accordingly, the ongoing dispute between Keynesians and Austrians (or
Austerians if you like) is exceedingly boring in this regard. As late
as 2008, for example, economist Paul Krugman was at least an
"infrastructure and engineering" Keynesian. However, Paul quickly
converted to becoming just a "throw lots of money at the existing
system" Keynesian. The hollow nature of Krugman's debate with Niall
Ferguson meanwhile comes via their shared belief that the system will
self-organize, if you follow their respective prescriptions. They are
indeed the inheritors of Adam Smith.

However, neither allowing the economy to deflate further from here via
austerity, nor throwing more debt-marked stimulus will solve the
present day problem. For the United States, along with the rest of the
developed world, has reached a boundary in energy.

Only an economist could wonder in their leisure now, whether energy
played a significant role in our current crisis. Indeed the public
remarks of Ben Bernanke on the matter of energy, during the 2005 to
2010 period, were at least as clueless as his embarrassing commentary
on the historic bubble in housing and credit. As the nation's chief
economist, Bernanke saw no problem with credit, with derivatives, with
the fast inflation in housing prices, or with energy prices. And as an
American economist, he was not alone.

As state's see their budgets collapse and start a new round of layoffs,
we should consider the fact that house price inflation masked the lack
of wage growth in the United States. And now that house prices continue
their descent for a fifth year, American workers are more fully exposed
to the decade-long march higher in energy costs. They can experience
this individually through energy prices, or more generally through the
overall energy cost to the economy. Hence, the chart at
http://www.theoildrum.com/files/United-States-Energy-Expenditures-as-a-Percent-of-GDP-1999-2008.jpg.

Unlike many who were either shocked or angered at the ridiculous paper
released by Richmond Fed Economist Kartik Athreya, Economics is Hard, I
was delighted. For, the paper confirms that at the Federal Reserve,
just as in the post-war economics profession, competency has been
replaced with authority. Indeed, this was in fact Athreya's central
point: that only a PhD in economics conferred the proper access to
discuss economic issues. The most beautiful rebuttal came from Ambrose
Evans-Pritchard, who made a point dear to me and one that I have made
for years: economics is a social science, not a science. In other
words, economists are working down here, alongside the rest of us
humanists. History, literature, psychology, and anthropology to mention
a few disciplines are all equally competitive fields of knowledge to
understand the system of behavior known as an economy. Accordingly, it
behooves post-war economists to dislodge themselves of the view that
their discipline neatly explains energy and energy supply. Lose the
attitude. The problem of energy limits awaits you.

Chart: United States Energy Expenditure as a Percent of GDP, 1999 to
2008. Data used is the latest available. GDP series comes from the US
Department of Commerce, Bureau of Economic Analysis {1}. Energy
Expenditure data comes via EIA Washington's SEDS series {2}, for all
states and also the country as a whole. I put these two data series
together on my own, but, checked it against EIA Washington's own
calculation of Total Energy Expenditures vs GDP {3}. 2009 is not
omitted from the chart by choice, but rather, because expenditure data
is not easily available yet for that year. Background photo is of a
rooftop sculpture by Antony Gormley from his project Event Horizon {4},
which was displayed in both London and New York.

Links:

{1}
http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=1999&LastYear=2008&3Place=N&Update=Update&JavaBox=no#Mid

{2}
http://www.eia.gov/emeu/states/state.html?q_state_a=us&q_state=UNITED%20STATES

{3} http://www.eia.doe.gov/emeu/aer/txt/ptb0105.html

{4} http://eventhorizonnewyork.org/

_____


Gregor MacDonald is an oil analyst and energy sector investor, who, in
his words, "also focuses on the coming transition to alternatives".
This post was previously published on Gregor.us.

http://www.theoildrum.com/node/6705?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+theoildrum+%28The+Oil+Drum%29


http://www.billtotten.blogspot.com
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