Sunday, June 18, 2017

Taking a short break - no post this week or next

An exceptionally heavy workload and travel schedule have conspired to prevent me from writing this week and next. I expect to post again on Sunday, July 2.

Sunday, June 11, 2017

Can we create a durable future?

It is hard to imagine anyone today building something as durable as the Roman Colosseum. Most of the damage we see to the 2,000 year-old stadium comes from two earthquakes and the persistent looting of its marble, stone and brass infrastructure by humans using them for other building projects. Were it not for these unfortunate depredations, the Colosseum might be largely intact today.

We pen fantasies about the durability of our culture in science fiction novels, television programs and movies set hundreds and even thousands of years from now. By then we humans will supposedly be moving with magical ease at speeds greater than light, zipping through the known universe aided by voice-command convenience (or maybe even thought-comand convenience).

But our age seems to be populated by buildings and cultural artifacts that are designed for impermanence. It's not that we are technically incapable of making things that are durable when we want to, especially when it feeds our desire to turn science fiction into fact. NASA's Mars Rovers launched in 2003 were designed for a mission of 90 Martian solar days. The Spirit rover operated until 2010. The Opportunity rover is still operating.

We have even more impressive longevity from the Voyager 1 and Voyager 2 space probes sent in 1977 to study the outer planets, that is, Jupiter, Saturn, Uranus and Neptune. Both spacecraft were designed for 5-year lifetimes and both are still working after almost 40 years. Voyager 1 has reached interstellar space where it continues to send back data. Voyager 2 will join it in two or three years. NASA expects to continue to receive data for another decade or so from both.

On Earth we would consider such durability to be over-engineering, too costly for our purposes. We build computers to be obsolete in less than 2 years. We build shopping malls, office parks and other commercial and industrial buildings with the idea that they will be abandoned or torn down in perhaps two or three decades. I am reminded of a New Yorker cartoon in which a developer looking at a model of his newly commissioned building remarks: "Great design, but when it comes time, a bitch to implode."

Nothing lasts forever. And, a society that has no dynamism, that does not change with changing circumstances, cannot survive. But it is we who are creating the change that we have to adapt to. It is we humans who are causing climate change. It is we humans who are causing rapid depletion of soil, water and energy resources. It is we humans who are increasing our environmental footprint in sheer numbers and in consumption per person.

We've initiated a feedback loop that has no end--except catastrophe. What would more durable arrangements look like? If we turn to those arrangements that have withstood the test of time, we have a starting point:

1. Small units of governance. The city of Rome has been continuously inhabited for more than 2,500 years. The Roman Empire, for all its durability, came and went even as the city lived on.

2. Small-scale agriculture and craft. Agriculturally based villages with craft industry have thousands of years behind them. This way of living is being crushed by modern industrial farming and its need for ever increasing scale. But the local food movement and the desire of many to know where their food comes from have breathed new life into small-scale farming.

3. Trade in luxury goods. Some exotic and valuable items have long been traded across large distances because a particular climate is suitable for certain produce, for example, tea or coffee--or the know-how and infrastructure is well-developed, silk from China, for example. What this point implies is that necessities are better produced closer to home to ensure a continuous and adequate supply.

4. Locations favorable to agriculture and navigation. It should be no surprise that many of the world's most important and long-lived cities are ports. Water has been historically a primary mode of transport. It is also, of course, essential to prosperous agriculture, either from adequate rains or from flowing rivers that can be diverted for irrigation.

All of these will seem obvious to anyone who has thought about the topic, sometimes through the lens of what is called "relocalization." In its simplest form this merely means returning the production of daily necessities closer to where we live. That seems straightforward enough; but the complex webs of trade and logistics we now have that bring us those necessities will be difficult to abandon. For those wanting to build more durable arrangements, this implies building them alongside the global system we have now. (It does NOT, however, mean abandoning the knowledge we have gained in the industrial age, but rather using it more wisely to attain our goals.)

Building a relocalized system may seem unduly duplicative and wasteful. And, it will be until it isn't, that is, until the global system stops serving our needs. In many ways that system already has stopped serving us if you count as one of our needs the desire to build a durable human culture that can thrive far into the future.

The fantasy of a spacefaring society has us fixated on an ever evolving technological future that asks us to abandon one set of gadgets for another almost continuously--all premised on the availability of unlimited resources and a climate crisis that somehow won't turn out to be a crisis. Few people are even contemplating the need to build a durable society because few imagine ever needing one.

We humans like the novelty afforded to us by our rapidly changing society. The world of information and communications technology has brought that novelty to us in addictive oversupply through ever more powerful cellphones and other electronic devices. What strikes me about this supposed novelty is its overwhelming sameness. It seems like novelty largely because new participants appear. But it is actually monotony itself because the stories we are told are as relentlessly interchangeable as they are shallow.

The durable society is not a dull society. It is rather a deeper society. We get to spend more time with the very landscape of our lives--the people, the buildings, the everyday objects, and the activities--than the frantic pace of the electronic message now allows us. The slow food movement is one expression of this desire for deeper engagement.

That deeper engagement is really the foundation of a durable future. It should come as no surprise then that it is difficult to build a durable future in a world that people don't have time to understand...with others they don't really know.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, June 04, 2017

Baumol's cost disease, productivity and the future of growth

William Baumol, one of the most famous economists you've never heard of, died recently. Baumol's fame came out of the observation that there are sectors of the economy in which productivity is rising swiftly, for example, manufacturing, and sectors where it is rising slowly or not at all, for example, string quartet performances.

The conclusion he drew from observing the behavior of wages in these sectors was that wages had to rise in the low-productivity growth sectors even as they do in high-productivity growth sectors. This is because people will over time simply leave the low-productivity growth sectors for the better wages of the other sectors. This theory became known as Baumol's cost disease.

In practice, society still values string quartet performances enough to pay their practitioners sufficiently to keep them playing. Baumol extended his theory to any economic sector in which personal service is essential to that sector. Examples include education, health care, child care, and legal services. As it turns out, nobody (yet) wants a robot lawyer or nanny.

Baumol's theory explains why costs are rising so fast for educational institutions, health care organizations, municipal governments, and performing arts groups. Their productivity increases are limited, but their relative costs for labor continue to rise because of their low-productivity growth compared to other parts of the economy. In more productive sectors, rising wages can be offset by rising productivity which allows costs per hour of labor to remain level or, in some cases, decline.

Baumol realized that even in the mid-1960s when he first formulated his ideas (see here and here), technology was already enabling performing artists to reach larger and larger audiences through television, radio and record players. That certainly increased their productivity by allowing many more people to enjoy a particular performance. But these technologies and their more recent variants do not increase the number of performances that an artist can do.

The broader implication of Baumol is that as societies expand their service sectors, it is inevitable that overall productivity growth will decline. And that can mean that overall economic growth will tend to decline as well. We have certainly seen progressively slower growth in mature world economies over time, particularly since the 2008-2009 recession.

All attempts to reduce overall costs across entire low-productivity sectors (as opposed to small facets of them) have essentially come to naught--unless the sector is simply disappearing. (For example, does anyone remember the typesetting business which was wiped out by the advent of software capable of handling that task on a graphic designer's desktop computer?)

Some attempts have been made to reduce the cost of education. Back in the mid-1990s the University of Michigan proclaimed that it would become a million-person institution with its distance learning program. It took 20 years before the university created what it calls Massive Open Online Courses. They are free (though you can pay a fee to get a nice certificate of completion). Paying customers, however, still want actual live teachers in front of them just as they still crave live performers of music and plays. And, they want the recognized credentials that are included with attendance at the live instruction venue.

Municipalities provide a wide range of services including public safety, fire protection, building code enforcement, and public health. All of these services require people whose productivity is difficult to enhance on par with what is happening in manufacturing, particular high-technology manufacturing.

We have now accepted that maintaining an opera company or a symphony orchestra will cost more than ticket receipts can raise. What Baumol suggests is that we will have to be prepared to pay ever higher prices for those services we want from low-productivity growth sectors such as health care and education so long as productivity continues to grow relatively faster in other sectors.

With exceptionally low overall productivity growth in the United States and the world, it is likely that Baumol's cost disease is catching up with us--even if it isn't the only cause of that low growth.

The fantasy that we can make all services continuously more efficient simply can't get past the human factor in many cases. And, where that factor is being eliminated or reduced--for example, automated bank tellers, self-serve restaurants, and online learning--we are finding increasing bifurcation of the marketplace. The human touch is being reserved more and more for those who can afford it: private banking, high-end sit down restaurants, and ever more expensive college educations (that come with actual personal connections to instructors and with bona fide credentials).

Is our future one in which only the rich are inoculated against Baumol's cost disease? The alternative is increased public subsidies for those services which we deem socially important in order to make them widely available.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, May 28, 2017

Anti-progress: The case of airline travel

We are so used to rapid progress in so many fields, especially in the communications devices and computers that we can hold in our hands and that keep getting cheaper. In addition, the media is filled with thrilling advances in biotechnology, robotics and artificial intelligence. It's hard to imagine that there might areas of our lives in which progress has not only ceased but been reversed.

One area with which many readers are certainly familiar is air travel. I was struck by Robert Gordon's account of this phenomenon in his marvelous tome, The Rise and Fall of American Growth. Here is what Gordon discovers:

  1. Speed and comfort in the passenger airline industry have not improved since the 1960s.
  2. In fact, comfort has declined as airlines have squeezed more seats into the same amount of space. To get the same amount of space which the typical airline passenger enjoyed in 1977, that passenger must pay on average an extra $59. Gordon prices the discomfort of staying in the cheap seats at $15, since most people don't pay the extra fee.
  3. Passengers must now pay for meals previously included in their air fares which he estimates at $8 per meal.
  4. Passengers must now pay for checked bags previously included in their air fares which Gordon estimates at $25 per bag.
  5. He estimates that the cost of the meal, the discomfort and the checked bags amount to a 24 percent unmeasured price increase from 2008 to 2014 for a now inferior service.
  6. Gordon estimates that 200 million additional hours of passenger time are wasted each year in post-2001 airline security checks that he believes are an overreaction to one major failure, namely, the security of airline cockpit doors.
  7. He acknowledges that for those opting out of the extras, sitting hungry in a cramped seat is somewhat offset by the proliferation of entertainment options now available during flights.
  8. Despite what we've been led to believe, there has been almost no decline in the inflation-adjusted passenger price per mile since airline deregulation was initiated in 1978. The great decline in price occurred before then due to the increasing size and efficiency of airliners. What people saw after 1978 was a wider variation in fares depending when you booked.

Since airlines are one of the most energy-intensive industries in the world, the question arises whether the reversing of progress in airline travel is related to energy prices. For fuel alone the percent of operating costs varied between 2004 and 2015 from a low of 17 percent in 2004 to a high of almost 37 percent in 2015.

Airlines struggled with high fuel prices from 2011 through 2014 when oil hovered around $100 per barrel consistently. Now that prices have dropped, the airlines are certainly enjoying higher profits. (See link above.) But their drive to raise prices and cram more passengers in each plane seems to have coincided with pressure from fuel costs.

Thus, high energy costs appear to have the ability to degrade or reverse progress in a key area of the economy. And, any reprieve from those high costs may be short if an analysis done by HSBC Global Research, the research arm of the huge multinational bank of the same name, is correct.

The point is that the notion that everything in our lives is getting better and better, faster and faster isn't borne out in reality. Gordon's book provides abundant examples. But the example of air travel seems particularly appropriate to ponder on this travel-filled holiday weekend.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, May 21, 2017

Stock hedges, home insurance, and our misunderstanding of risk

"If you own stocks without a hedge, it's not rational." So says the world's most famous student of risk Nassim Nicholas Taleb in a recent interview with Bloomberg as many of the world's stock markets hover near all-time highs. "It's like buying a house without insurance," he explained. "We have tail risks today that we didn't have before, and every day it gets worse."

"Tail risks" refer to the possibility of unusual, rare, catastrophic events, often of a nature that cannot be anticipated or even imagined. Such events are frequently dubbed black swans, a term made famous by Taleb's book called The Black Swan.

So, what is the perceived difference between houses and stocks and what does that tell us about how we judge risks elsewhere in our lives and societies? First, houses. Houses are very expensive consumer items or investments or both, depending who is buying them and why. Taleb's point is that the value of a house will not track the market if the house burns down.

Every homeowner understands this and buys insurance. In fact, the bank requires insurance if the home has a mortgage. And, that's because, of course, homes don't rebuild themselves if they are destroyed.

The companies underlying stock listings, however, are not obliterated by a market crash. Of course, some companies may disappear if the crash is followed by an economic downturn; but the thousands of companies that make up the exchanges do not all evaporate.

Stocks have historically recovered after losses, even extreme losses. So, the hedging Taleb is suggesting is really about timing. Can an investor afford to wait for the rebound before having to cash in? If Taleb's concerns are borne out in the next few years, many near retirement or already retired may be answering this question.

(The history of stock markets reveals a mixed picture. Some rebounds to previous highs have occurred within months or years. Some have taken decades. The Japanese stock market has yet to revisit the peak of 1989 and currently stands at about half the level of that peak.)

With housing and stocks we have two different kinds of risk, both of which can be hedged so as to prevent a severe loss of net worth. Why do most people only hedge one, namely the home?

Now, most investors diversify their investments. They own some stocks, some bonds, some real estate and perhaps some other investment such as a business they control or an annuity. While diversification, if done properly, can reduce risk, it is not true hedge.

Hedges are designed to go up in value in inverse relation to the decline in value of the instruments they are hedging. Owning gold as a hedge against a stock market crash may or may not work. Gold is not a true hedge in this instance and in the last market crash, it plummeted along with stocks. Stock options that necessarily rise in value as stocks sink are a true hedge.

Of course, homeowners insurance does not insure us against a decline in real estate prices. It turns out that one can actually now hedge that risk with the appropriate financial instruments. But few people do that for their family homes. In fact, people rarely envision having to sell their homes for less than they bought them.

It is this one-way bias that links people's perceptions of both homes and stocks. It is almost inconceivable that any of us might be forced to accept catastrophic losses if only we can hang on long enough. What this view presupposes is that the future will look like the recent past (that is, the last century or so). It will be one of growth, growth, growth. Growth in population. Growth in economic output. Growth in financial wealth. Growth in the energy supplies needed to make all the other growth happen.

It would indeed be a black swan if growth failed to appear or was so stunted that few people obtained any benefits from it. (Has the second scenario already arrived?) But the twin crises of energy depletion and climate change make such a future ever more likely. These crises aren't hidden and they aren't cyclical. They are advancing in such a way that the risks of both are not staying neatly tucked under the "tails" of the bell-shaped distribution curve of possible outcomes. Our current actions make them inevitable.

Things could change. Human societies could revolutionize the way they live so as to avert disastrous climate change or fossil fuel depletion (that is, depletion without adequate alternative energy). But, it seems that such a revolution would be more akin to a black swan than any rendezvous with energy or climate Armageddon.

We've convinced ourselves as a world society that such outcomes are so unlikely that we are making what amount to token efforts to avert them. Renewable energy is being deployed rapidly, but not rapidly enough to replace the current fossil fuel infrastructure soon enough to prevent a climate catastrophe (and perhaps an energy insufficiency).

There is no insurance policy that will protect us against catastrophic climate change. We cannot get our habitable climate back on any time scale that matters to humans once it's gone. The insurance policy is us, that is, changes in our behavior and our technology done quickly enough to matter. There is no other hedge that will help us.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, May 14, 2017

The trouble with infrastructure

The trouble with infrastructure is that it breaks down and needs to be repaired, it wears out and needs to be replaced, and it gets destroyed and needs to be rebuilt. All that requires energy, resources, labor and money.

Conceptually, here's the problem we face. The bigger we make any part of our infrastructure--roads, pipelines, electricity grids, water and sewer systems--the more expensive it becomes just to keep it in operating order. The same is true for our industrial plant, transportation system, commercial buildings and private homes. Things fall apart over time; entropy makes sure of that. To keep things from degrading to the point where they cannot function requires resources, labor and money--all of which cannot be spent on new infrastructure or productive investment, that is, all of which must go to maintain what we have rather than grow the economy.

The ancient Romans came face to face with this reality. Expansion of the empire had been paid for with booty seized from conquered populations. But once the expansion stopped, so did the booty. The Romans increasingly had to tax themselves in order to pay for large armies to protect the now very long border and for the necessary improvements in roads and other infrastructure to maintain their administrative and military presence throughout the empire.

It didn't last. Eventually, the Romans had to pull back. They had to shrink the empire.

Today, we don't think so much in terms of territory as Gross Domestic Product (GDP) when evaluating our material progress as nations. It turns out that one of the ways to keep the GDP growing is to skimp on maintenance.

In the United States, water systems have been a good place to skimp. After all, much of that infrastructure is underground or at sites remote from the cities it serves. Few will notice. Here's what the experts are saying about the silent degradation of America's water infrastructure:

Estimates of current investments in water infrastructure indicate that the backlog of deferred investments is increasing and renewal cycles are close to 200 years across the range of utility sizes. Resistance to rate increases combined with lack of appreciation of the buildup of renewal needs reinforces the need for effective business cases for pipe renewal. Based on these and other evaluations, it appears that a substantial gap exists between current expenditures on water main renewal and the investment levels needed to sustain system integrity. (emphasis added)

The American Society of Civil Engineers (ASCE) has given near failing grades to the American infrastructure. In a report the ASCE describes the problems with the drinking water infrastructure this way:

Drinking water is delivered via one million miles of pipes across the country. Many of those pipes were laid in the early to mid-20th century with a lifespan of 75 to 100 years....While water consumption is down, there are still an estimated 240,000 water main breaks per year in the United States, wasting over two trillion gallons of treated drinking water.

But drinking water is just one example. A friend alerted me to recent train derailments at New York City's Pennsylvania Station. The derailments caused enough damage to curtail train service for days. The problem is a 100-year-old infrastructure not built for the increasing demands put upon it. The governors of New York and New Jersey want Amtrak replaced as the station's operator.

It's no wonder that the perennially underfunded Amtrak is having trouble keeping up with needed maintenance. But putting someone else in charge doesn't solve the problem of skimping on maintenance unless there is extra money. So, will the governors provide it?

Then there is America's oil and gas pipeline infrastructure. Most of those pipelines are more than 50 years old. We seem willing to pay for rapid expansion of this system as is evidenced by 125,000 miles of new pipeline built since 2010 to accommodate the oil and gas drilling boom in the country.

But maintaining that infrastructure is just a drag on profits--until the consequences become so big that the clean-up and repair costs dwarf the phantom returns which deferred maintenance makes possible.

To be fair pipeline operators don't want leaks or breakdowns. But neither do they want to spend more than they have to to maintain their systems. Who decides how much that should be is a problem regulators and companies are going to be hashing out as pipeline accidents continue to make the news.

All of this brings us back to the conceptual framework I presented at the onset of this piece. Here I turn to the much maligned and much misunderstood project called Limits to Growth. Limits to Growth, of course, refers to modeling of the trajectory of worldwide economic growth in the early 1970s and updated twice since then as detailed in three separate books.

The most frequent outcome of that modeling is the collapse of industrial society starting somewhere in the middle of this century. A common misunderstanding of that model is that collapse is the result of "running out" of resources. But a close reading of Limits to Growth produces a more nuanced and troubling answer.

It is the lack of capital needed to grow which produces the limits referred to in Limits to Growth. We will end up spending so much just to maintain our continually bloating infrastructure (in the broadest meaning of that word), to extract the needed natural resources to do that, and to fight the effects of pollution (through, for example, water and sewage treatment) and now climate change (through, for example, the building and maintenance of seawalls), that we won't have anything left over for investment. When that happens, growth stops. Eventually, the economy shrinks as poorly maintained infrastructure become less productive. This is a collapse, but perhaps not a rapid one.

Infrastructure investment is lauded as the gift that keeps on giving. And, long-lived public and private infrastructure can and does increase economic productivity. But infrastructure can also become the leech that keeps on sucking when it becomes overly large and when we choose temporary economic pain relief and stimulants over the true medicine of forging a new trajectory for our infrastructure which requires deference to the limits we face.

Kurt Cobb is an author, speaker, and columnist focusing on energy and the environment. He has been a regular contributor to the Energy Voices section of The Christian Science Monitor and is author of the peak-oil-themed novel Prelude. In addition, he has written columns for the Paris-based science news site Scitizen, and his work has been featured on Energy Bulletin (now Resilience.org), The Oil Drum, OilPrice.com, Econ Matters, Peak Oil Review, 321energy, Common Dreams, Le Monde Diplomatique and many other sites. He maintains a blog called Resource Insights and can be contacted at kurtcobb2001@yahoo.com.

Sunday, May 07, 2017

Taking a short break - no post this week

An exceptionally heavy consulting and writing workload has forced me to take a short break from posting. I expect to post again on Sunday, May 14.