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The Great train wreck

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On a shelf in the office of Britain’s Cabinet Secretary is a folder labelled “infrastructure projects.”  It contains summaries of all of the projects for which public funding can be provided in the event of a recession.  At one end of the spectrum are various road and rail improvements – a by-pass here, some additional stations there.  At the other end are multi-billion pound megaliths like nuclear power stations, high speed rail lines, new airport runways and even entirely new towns.  What they all have in common is a blind faith in the economics of the Tennessee Valley Authority and the wider New Deal of the early 1930s.

The approach is as close to pure Keynesian demand management as you will find in the real world.  States invest in new infrastructure – such as the hydroelectric dams of the 1930s – in order to replace the employment lost in the private sector.  Previously unemployed workers then have additional cash to spend.  Their collective new spending increases demand for goods and services, creating an environment in which the private sector is persuaded to invest once more.

Critics of the New Deal point out that its effects were far more modest than modern day enthusiasts claim.  Total state investment was relatively small, and mass unemployment persisted until 1942 – when the demands of war finally took up the slack in the labour market. 

Against this, proponents of the New Deal point out that when it comes to fighting wars, there is always an unlimited supply of cash to go around.  It follows that if we were to treat economic depressions like military conflicts we could surely print and spend our way to prosperity.

From an energy-based perspective, both sides of this argument are wrong, because economies are primarily energy rather than money systems.  The economic woes of the 1930s were the result of an interconnected world economy responding to the shock of the rising energy cost of coal.  Britain’s coal extraction had peaked in 1913, while other states were struggling to extract low energy cost reserves.  Note that this is not the same as “running out of” coal – our modern oil-powered world has proved capable of extracting far more coal than the British had managed to prior to 1913; but much of that extraction was only possible due to the high surplus energy provided by oil.

By the 1920s, the USA had already begun the transition from a coal-based to an oil-based economy.  Europe and Japan, in contrast, had little access to oil and were becoming increasingly dependent upon imports to remain competitive.  The demands of war exacerbated the situation.  Indeed, lack of access to oil is the primary reason why both Germany and Japan embarked upon a world war; and is also why both countries were defeated.  The USA, in contrast, was to provide six out of every seven barrels of oil consumed by the allies in World War Two.  It also produced and modernised the oil-powered vehicles – ships, planes, tanks, trucks, etc. – with which the war was fought in eye-watering quantities.  As historian H.P. Wilmott notes, all of the allied divisions that landed in Normandy after 6 June 1944 were motorised; but 89 percent of the German divisions that met them were dependent upon horses.

The once and done post-war boom, kick-started with Marshall Aid, was in large part the result of European and Asian economies following the USA in converting their economies from coal to oil.  And with a seemingly endless exponential growth in oil extraction in the USA, few saw any reason for concern with the creation of economies that relied on s finite resource like oil.

When that exponential growth in oil extraction came to an end during the 1970s, the result was the series of ever deeper crises that have afflicted the western economies ever since.  Where Marshall Aid spending had triggered a boom in the early 1950s, similar state spending in the 1970s resulted only in stagflation, as millions were forced out of work even as prices rose out of control.  Nevertheless, modern opponents of the neoliberal consensus that emerged out of the crises of the 1970s, continue to hark back to the New Deal and the post war boom as the solution to modern crises.

So too do politicians, of course.  These craven creatures who will all too readily sacrifice our long-term future in the pursuit of a brief upward tick in their approval ratings, will gladly spend other people’s money in an attempt to overcome an economic downturn that is likely to see them ejected from office.  And so, in the aftermath of a pandemic whose economic consequences have been greatly worsened by their actions, the political class looks set to throw trillions of dollars, euros and pounds at off-the-shelf infrastructure projects in an attempt to mop up the mass unemployment they have created.

This is not entirely without merit.  Insofar as – for the moment – governments can continue to rack up huge debts at near zero percent interest rates, borrowing – or even creating new currency – to invest in future infrastructure has some sense… provided that we are clear about the future trajectory we are on.

Here though, is our problem, because there are three versions of the future at play.  The first, and most likely to be believed because it involves working on autopilot, is the “V-shaped recovery” in which we attempt to restore the economic conditions of December 2019 and try to pretend that 2020 didn’t happen.  Unfortunately however, 2020 was real.  Tens of thousands of businesses closed and millions of people lost their jobs.  The knock-on impact on supply chains means that the global economy only has capacity to restore about four fifths (at best) of the economy of December 2019.  Too many ships, trucks and planes have been scrapped and too many mines and oil wells have been abandoned for a return to “normal” or even to some kind of “new normal.”

For the same reasons of course, Herr Schwab and his buddies at the World Economic Forum are merely experiencing something akin to a dystopian acid trip, when they conjure up visions of a “Great Reset” based around a nuclear fusion and hydrogen-powered digital economy in which we “own nothing and are happy.”  We may well end up owning nothing – for very different reasons – but we are unlikely to be happy about it.

This brings us to the third, most likely and least popular vision of the future – the one where energy and resources continue to deplete – as they already had been in the years prior to the pandemic – resulting in far more of the energy that remains to us having to be used to maintain essentials like food, clean drinking water and a decent healthcare system.  As a consequence, much of the debt-based consumer economy that was built in the last four decades is going to go away because we lack the energy to power it.  That is bad news for exporting countries like China, whose wealth depends on selling cheap consumer goods to the wider world.  But it is also bad news for western importing states like the UK, whose consumption was underwritten by a mountain of unrepayable debt.  One day – maybe tomorrow; maybe five years from now – sterling will lose its value as the final, diehard investors realise the debt is never going to be repaid.  After that, the nominal wealth which allows Britons to convince themselves that theirs is still the fifth richest nation on Earth, will have to readjust to the fact that we are a backward country that – with a handful of exceptions – cannot make things, cannot grow things and that lacks most of the skills needed even to maintain the things we already have.

We could – in the time that remains – invest in rectifying at least some of this mess.  A brown new deal approach, for example, would harvest and protect the remaining fossil fuels so that they are used for building and maintaining essentials – more fuel for farming; no fuel for frivolous air travel, for example.  Developing genuine recycling centres to restore and rebuild goods which are currently either burned, buried or shipped abroad to be burned or buried, might allow us to extend the life of some of the material goods inherited from the days when there was enough energy to go around.  Removing much of the funding from a bloated university Ponzi scheme and transferring it to craft skills and agriculture-based technical education might at least equip some of the next generation for the energy-deprived future that awaits them.  Doing away with pre-pandemic vanity projects like HS2 and the Heathrow third runway in favour of electrifying a larger part of the diesel-powered rail network or extending fibre optic broadband, to further cut the need to drive, may also cushion the blow that is coming.

It won’t happen of course.  The closer we get to the edge of the Seneca Cliff, the faster the political class will reach for projects that are designed to drive us over the edge.  The various bits of the green new deal which are adopted will rapidly run into resource shortages.  This will result in the first serious supply-side shock since the 1970s.  The result will be far greater stagflation than was experienced in that benighted decade.  And this time around there will be no North Sea, Alaskan or Gulf of Mexico oil deposits to bail us out. 

Arguably, we have been squandering the last of our ability to soften the blow that is coming, ever since Ronald Reagan symbolically removed the solar panels from the White House roof.  In the years following the 2008 crash, we might have questioned the received economic orthodoxy and taken more time to understand why neither productivity improvements nor real – i.e. non-financial – economic growth had put in an appearance.  Eight years later we might have benefitted by examining why so many millions of our fellow citizens were moved to vote for such apparently economically damaging options as Brexit and Donald Trump.  Even now, we might stop to ask why our economies and our public health systems have failed to live up to the task of managing what, in the grand scheme of things, is a relatively mild pandemic virus… it is hardly the Black Death.

But we didn’t.  We simply assumed that the past is our best guide to the future.  In the same way, we will allow ourselves to believe that throwing more good money after bad on extra runways, high speed rail links and behemoth nuclear power plants will pave the way to the utopian New Jerusalem; even as our civilisation goes the way of every previous one.

If we had any sense, we would shred that “infrastructure projects” folder on the shelf in the Cabinet Secretary’s office; but we won’t… and we – and our children – will soon live to regret it.

As you made it to the end…

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