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Why peak oil signals the world’s end, or at least the one we know – Zawya

Why peak oil signals the world’s end, or at least the one we know – Zawya.

By Joel Guglietta

While global financial markets are still levitating somewhere between the stratosphere and the Kingdom of Asgard, by 60°24′31″ North and 172°43′12″ West, in the middle of nowhere, an isolated island of 137.857 sq-mi holds the key of three major economic developments and risks:

  1. November 2013, Lawrence Summers raised the question whether the “secular stagnation” and the impossibility for the US and other major economies to grow without the help of recurring bubbles was not doomed to become the “new normal”.
  2. March 2014, the Conference Board released a study (figure 1) showing the falling trend in global total factor productivity, i.e. in the share of output not explained by the “accumulation of factors” (more on this economic jargon below).
  3. March 2014 again, the NASA published a research paper answering to “widespread concerns that current trends in resource-used are unsustainable, but possibilities of overshoot/collapse remain controversial”. This study tells us that, based on a well-known prey-predator model to which they add “wealth and economic inequality”, a total collapse is “very difficult to avoid” (figure 2).

w
Source: The Conference Board, January 2014

3
Source: NASA, 2014

1. – The tragic fate of the fat caribou, or why we have to fear the reindeer of St Matthew more than the wolves of Wall-Street

During World War II, the US Coast Guard decided to install long range aids to navigation in St Matthew Island, a remote rock in the Bering Sea in Alaska, and to stock emergency food source there. In August the same year, they released 29 reindeer (known as caribou in North America) on the island as a backup food source for the 19 men stationed there. As World War II drew to an end, the Coast Guard left the island and, by the same token, the population of reindeer growing unchecked as their only predators, the 19 men on duty there, were sent back home. It followed a dramatic boom & burst of population dynamics (figure 1). From 1944 to 1966 the number of these herbivores, which did not have to worry anymore about any predator and ate all the available lichen, increased from 29 to 6,000. In 1957, their body weight was found to exceed that of reindeer in domestic herds by 24.5 percent among females and 46.6 percent among males. Then, the following winter, as they faced a limited food supply to sustain their number and their massive body weight, they underwent a crash die-off, the population falling from 6,000 to 42 (figure 3).

There is a lot of food for thought in this story. First, as the NASA study suggests, when one species (for example the top 1 oercent living in the Galapogos, another rock ,as I put it in a paper issued last year “Why Kings of Galapagos are long equity under (mild) Mugabenomics?”) thrive to the abject detriment of another one (the lichen, or the “bottom” 99%), bad things eventually happen.

2
Source: The Conference Board, TED, January 2014

1
Source: Manicore

Second, and more generally, the point of this story boils down to the mundane fact that resources are everything, and when they vanish, the transition from a given state to another one, namely from unchecked growth and exuberance to complete obliteration, is dramatic most often than not. This holds all the more true for the key resource, i.e. oil, which brings us to the second chapter of our tale.

2. – The peak-oil: a conspiracy theory or a mandatory mathematical truism?

Most of the discussions on oil hover around the question of “reserves”. I am going here to state the obvious but the key argument to keep in mind is that these reserves are meant for one and only purpose: oil production. ….woooh!, that’s new, next please! Okay, but bear with me. Till someone proves me I am wrong, I assume that the volume of Earth is finite, so that oil reserves are finite.Now, for a given stock of non-renewable resource, all production functions obey to the same law: they start from zero, grow to a maximum and decline to zero in a “bell-shape” way (figure 4). Now, the area under this curve is called the integral of the production function and it is strictly equal to the oil reserves. Because oil reserves are finite, the integral is necessarily convergent and because they are non-renewable the production function (the derivative function of the oil reserve) cannot have another form than a bell shape. You can stretch it, you can squeeze it, but the general form is this one and not any other. This is mathematical certainty like 2+2=4. The peak-oil is a mandatory mathematical truism, not a “conspiracy theory”.

Obviously, the key question is: the “peak-oil”, is it for now?

Well, running the risk of stating one obvious thing after another, I assume that we all agree that a compulsory task to perform before extracting oil from the ground is to find it. This has profound implications as this makes us certain that a peak is mandatory given the resource potential of the oil field. It also tells us that the higher the proven reserves and the bigger they are with respect to production, the closer the peak of oil production (remember: the integral is the area under the production curve). If I take the example of the United-States, as evidenced by King Hubbert, there is a 35-year lag between discovery and production (figure 5). If evidence proves Hubert peak was a bit bad on timing, possible production curves, based on the world ultimate reserves. i.e. total extractable petroleum, suggest that the peak is now.

4
Source: Laherrere, 2003

f
Source: Manicore

This is old story and, as the world still goes around, one could dismiss all this analysis. However, what is new is that business conditions are becoming more challenging for the oil majors as figure 7 suggests. Indeed since 2009, the capital expenditures of ExxonMobil, Royal Dutch Shell and Chevron have increased by 39-89 percent while their production has stalled. This is the balance-sheet-based proof that the peak-oil is happening now.

d
Source: Wall Street Journal

Now, the last point on the peak-oil, and this is key to understand the third and last chapter of our tale. We have to keep in mind that when we hear that we still have for 20 or 30 years of oil ahead of us it does not mean that we live the “good life” for the next 2 to 3 decades with constant consumption and then, the year after, we fall straight to zero consumption in a crash die-off as our reindeer herd experienced. Actually, consumption will be following the bell-shaped production function, it will be a slow death, and in the meanwhile, as the oil majors experience, the massive rise of capital expenditure will be weighting on the marginal energy return of energy. Indeed, according to Kopits, total upstream industry spendind since 2005 has been USD 4 trillion (about USD 2.5 trillion spent on legacy crude oil production), and legacy oil production has declined by 1 mmb/d since 2005. By comparison, between 1998 and 2005 the industry spent USD 1.5 trillion on upstream development and added 8.6 mmb/d to total crude production. This declining energy return in energy production, which is nothing but the by-product of declining/exhausting oil reserves and the very fact we are experiencing the peak-oil, drives the whole economy down.

Indeed, though we live in the age of the “information technology” it is worthwhile to remember that the information society is an energy ogre (not mentioning the globalisation mantra which gives a central role to the transport industry which consumes two-third of total oil). For example, according toASU engineer Eric Williams 227 to 270 kilograms (or 500 to 594 pounds) of carbon dioxide are emitted in manufacturing a laptop computer. Mark Mills , the CEO of the Digital Power Group, teaches us that a medium-size refrigerator will use about 322 kW-h a year whereas the average iPhone uses about 361 kW-h a year once the wireless connections, data usage and battery charging are tallied up.

3. – There is something deeply wrong about macro-economic theory

So how all this relates to the “secular stagnation” scenario and all the fall in total factor productivity. Well, this is where things get a little bit technical and where our tale comes (finally!) to an end.

Most economists are big fan of more or less complex equations designed to explain everything in a highly stylised fashion. In this quest, in order to explain the origin of economic growth, they use the so-called Cobb-Douglas production function which states that GDP (Y) is a function of technology (A), capital (K) and labour (L). More precisely, the Holy Grail equation takes this form: Y = A * Ka * Lb, with “a” and “b” the elasticity of production to capital and labour. Total factor productivity is for instance derived from this equation.

Now, as the purpose of this equation is to explain the origin of economic growth, let’s put ourselves in the shoes of the Neanderthals. While we are planning to go in the wild to bring back some proteins to the tribe, we look around us. We do find sturdy arms, sturdy legs and few well-functioning brains. In a word, we find “labour”. Do we find “capital”? A broad and outstanding No! However, as the time goes by, our species is evolving. We will find primal energy in the form of fire, and then, at a very latter stage fossil energy and we will understand how to use it. “Capital” will appear at a much latter stage based on accumulated labour (whatever it is “inspiration”, aka knowledge, or “transpiration”, aka sweat and hard work) and the use of energy around us.

The point is very simple: the central equation explaining economic growth is plain wrong and we need to transform it in order to make capital an inner feedback loop to the system as it is mentioned in the Report to the Club of Rome (2003) or suggested by Jean-Marc Jancovici . How to do this?

Well in order to make things simple, let’s assume that returns to scale are constant (if I multiply resources by 2, output will be increased by 2, which fares as a reasonable assumption) so that we get b = 1-a, and therefore Y = A * Ka * L1-a. Now, let’s make the capital K dependent on energy (E) and labor (L) (or accumulated labor, (integral of L), so that K = c * E * L (with “c” a constant and simply labour which does not change the qualitative properties of the model). Our equation becomes: Y = A * ba * Ea * L.

Add to this new equation a reasonable assumption about the dynamics of labour (I assume a logistic function for the dynamics of the population with a sharp increase followed by an asymptotic rise) and the knowledge we have gained over the shape of the oil production function and thus of the dynamics of how available reserves evolve, we can build a toy-model and easily simulate the path of the economy (figure 8) on an oil(energy)-dependent computer. This toy-model clearly shows how sensitive an economy can be to the downward shift in oil-production during and after the peak-oil.

Do not get me wrong here. I do not believe that the Stone Age ended because we were short of stones. My point comes down to say that we are smack in the middle of an energetic transition, that this transition has a much more profound current negative effect that many can believe and that the world as we know is coming to an end, evolving towards “something else”. The hope here is that, flawed economic models, lack of political will to manage this energetic transition or ideological foolishness from the Talibans of the “all-green” regarding the nuclear energy as “evil”, will not drive us toward the tragic fate of the reindeer herd of St Matthew Island and other unfortunate raging bulls (figure 9). Indeed, the NASA research suggests that high wealth inequality is sufficient to create a total collapse. Add inequality regarding access to energy, water and food (agriculture is oil-dependent too) on the top of that, and we have a Mad-Max-Moment ahead of us. In this state of urgency, do we attend a rise in global capex in renewable energy that could make us more optimistic? Well, unfortunately not. Global investment in renewable energy fell 11 percent in 2013 to USD 254 billion according to Bloomberg New energy Finance. This is the second decline in renewable investments since 2001. So, yes the crash die-off of our fat caribous is unfortunately still a scenario.

v
Source: Joel Guglietta

Joel Guglietta is Managing Director of OCTIS Asset Management in Singapore

Author Steen Jakobsen, Chief Economist & CIO, Saxo Bank
Saxo Bank provides an execution-only service. The material on this website does not contain (and should not be construed as containing) investment advice or an investment recommendation, or a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Saxo Bank accepts no responsibility for any use that may be made of these comments and for any consequences that result.

Why peak oil signals the world's end, or at least the one we know – Zawya

Why peak oil signals the world’s end, or at least the one we know – Zawya.

By Joel Guglietta

While global financial markets are still levitating somewhere between the stratosphere and the Kingdom of Asgard, by 60°24′31″ North and 172°43′12″ West, in the middle of nowhere, an isolated island of 137.857 sq-mi holds the key of three major economic developments and risks:

  1. November 2013, Lawrence Summers raised the question whether the “secular stagnation” and the impossibility for the US and other major economies to grow without the help of recurring bubbles was not doomed to become the “new normal”.
  2. March 2014, the Conference Board released a study (figure 1) showing the falling trend in global total factor productivity, i.e. in the share of output not explained by the “accumulation of factors” (more on this economic jargon below).
  3. March 2014 again, the NASA published a research paper answering to “widespread concerns that current trends in resource-used are unsustainable, but possibilities of overshoot/collapse remain controversial”. This study tells us that, based on a well-known prey-predator model to which they add “wealth and economic inequality”, a total collapse is “very difficult to avoid” (figure 2).

w
Source: The Conference Board, January 2014

3
Source: NASA, 2014

1. – The tragic fate of the fat caribou, or why we have to fear the reindeer of St Matthew more than the wolves of Wall-Street

During World War II, the US Coast Guard decided to install long range aids to navigation in St Matthew Island, a remote rock in the Bering Sea in Alaska, and to stock emergency food source there. In August the same year, they released 29 reindeer (known as caribou in North America) on the island as a backup food source for the 19 men stationed there. As World War II drew to an end, the Coast Guard left the island and, by the same token, the population of reindeer growing unchecked as their only predators, the 19 men on duty there, were sent back home. It followed a dramatic boom & burst of population dynamics (figure 1). From 1944 to 1966 the number of these herbivores, which did not have to worry anymore about any predator and ate all the available lichen, increased from 29 to 6,000. In 1957, their body weight was found to exceed that of reindeer in domestic herds by 24.5 percent among females and 46.6 percent among males. Then, the following winter, as they faced a limited food supply to sustain their number and their massive body weight, they underwent a crash die-off, the population falling from 6,000 to 42 (figure 3).

There is a lot of food for thought in this story. First, as the NASA study suggests, when one species (for example the top 1 oercent living in the Galapogos, another rock ,as I put it in a paper issued last year “Why Kings of Galapagos are long equity under (mild) Mugabenomics?”) thrive to the abject detriment of another one (the lichen, or the “bottom” 99%), bad things eventually happen.

2
Source: The Conference Board, TED, January 2014

1
Source: Manicore

Second, and more generally, the point of this story boils down to the mundane fact that resources are everything, and when they vanish, the transition from a given state to another one, namely from unchecked growth and exuberance to complete obliteration, is dramatic most often than not. This holds all the more true for the key resource, i.e. oil, which brings us to the second chapter of our tale.

2. – The peak-oil: a conspiracy theory or a mandatory mathematical truism?

Most of the discussions on oil hover around the question of “reserves”. I am going here to state the obvious but the key argument to keep in mind is that these reserves are meant for one and only purpose: oil production. ….woooh!, that’s new, next please! Okay, but bear with me. Till someone proves me I am wrong, I assume that the volume of Earth is finite, so that oil reserves are finite.Now, for a given stock of non-renewable resource, all production functions obey to the same law: they start from zero, grow to a maximum and decline to zero in a “bell-shape” way (figure 4). Now, the area under this curve is called the integral of the production function and it is strictly equal to the oil reserves. Because oil reserves are finite, the integral is necessarily convergent and because they are non-renewable the production function (the derivative function of the oil reserve) cannot have another form than a bell shape. You can stretch it, you can squeeze it, but the general form is this one and not any other. This is mathematical certainty like 2+2=4. The peak-oil is a mandatory mathematical truism, not a “conspiracy theory”.

Obviously, the key question is: the “peak-oil”, is it for now?

Well, running the risk of stating one obvious thing after another, I assume that we all agree that a compulsory task to perform before extracting oil from the ground is to find it. This has profound implications as this makes us certain that a peak is mandatory given the resource potential of the oil field. It also tells us that the higher the proven reserves and the bigger they are with respect to production, the closer the peak of oil production (remember: the integral is the area under the production curve). If I take the example of the United-States, as evidenced by King Hubbert, there is a 35-year lag between discovery and production (figure 5). If evidence proves Hubert peak was a bit bad on timing, possible production curves, based on the world ultimate reserves. i.e. total extractable petroleum, suggest that the peak is now.

4
Source: Laherrere, 2003

f
Source: Manicore

This is old story and, as the world still goes around, one could dismiss all this analysis. However, what is new is that business conditions are becoming more challenging for the oil majors as figure 7 suggests. Indeed since 2009, the capital expenditures of ExxonMobil, Royal Dutch Shell and Chevron have increased by 39-89 percent while their production has stalled. This is the balance-sheet-based proof that the peak-oil is happening now.

d
Source: Wall Street Journal

Now, the last point on the peak-oil, and this is key to understand the third and last chapter of our tale. We have to keep in mind that when we hear that we still have for 20 or 30 years of oil ahead of us it does not mean that we live the “good life” for the next 2 to 3 decades with constant consumption and then, the year after, we fall straight to zero consumption in a crash die-off as our reindeer herd experienced. Actually, consumption will be following the bell-shaped production function, it will be a slow death, and in the meanwhile, as the oil majors experience, the massive rise of capital expenditure will be weighting on the marginal energy return of energy. Indeed, according to Kopits, total upstream industry spendind since 2005 has been USD 4 trillion (about USD 2.5 trillion spent on legacy crude oil production), and legacy oil production has declined by 1 mmb/d since 2005. By comparison, between 1998 and 2005 the industry spent USD 1.5 trillion on upstream development and added 8.6 mmb/d to total crude production. This declining energy return in energy production, which is nothing but the by-product of declining/exhausting oil reserves and the very fact we are experiencing the peak-oil, drives the whole economy down.

Indeed, though we live in the age of the “information technology” it is worthwhile to remember that the information society is an energy ogre (not mentioning the globalisation mantra which gives a central role to the transport industry which consumes two-third of total oil). For example, according toASU engineer Eric Williams 227 to 270 kilograms (or 500 to 594 pounds) of carbon dioxide are emitted in manufacturing a laptop computer. Mark Mills , the CEO of the Digital Power Group, teaches us that a medium-size refrigerator will use about 322 kW-h a year whereas the average iPhone uses about 361 kW-h a year once the wireless connections, data usage and battery charging are tallied up.

3. – There is something deeply wrong about macro-economic theory

So how all this relates to the “secular stagnation” scenario and all the fall in total factor productivity. Well, this is where things get a little bit technical and where our tale comes (finally!) to an end.

Most economists are big fan of more or less complex equations designed to explain everything in a highly stylised fashion. In this quest, in order to explain the origin of economic growth, they use the so-called Cobb-Douglas production function which states that GDP (Y) is a function of technology (A), capital (K) and labour (L). More precisely, the Holy Grail equation takes this form: Y = A * Ka * Lb, with “a” and “b” the elasticity of production to capital and labour. Total factor productivity is for instance derived from this equation.

Now, as the purpose of this equation is to explain the origin of economic growth, let’s put ourselves in the shoes of the Neanderthals. While we are planning to go in the wild to bring back some proteins to the tribe, we look around us. We do find sturdy arms, sturdy legs and few well-functioning brains. In a word, we find “labour”. Do we find “capital”? A broad and outstanding No! However, as the time goes by, our species is evolving. We will find primal energy in the form of fire, and then, at a very latter stage fossil energy and we will understand how to use it. “Capital” will appear at a much latter stage based on accumulated labour (whatever it is “inspiration”, aka knowledge, or “transpiration”, aka sweat and hard work) and the use of energy around us.

The point is very simple: the central equation explaining economic growth is plain wrong and we need to transform it in order to make capital an inner feedback loop to the system as it is mentioned in the Report to the Club of Rome (2003) or suggested by Jean-Marc Jancovici . How to do this?

Well in order to make things simple, let’s assume that returns to scale are constant (if I multiply resources by 2, output will be increased by 2, which fares as a reasonable assumption) so that we get b = 1-a, and therefore Y = A * Ka * L1-a. Now, let’s make the capital K dependent on energy (E) and labor (L) (or accumulated labor, (integral of L), so that K = c * E * L (with “c” a constant and simply labour which does not change the qualitative properties of the model). Our equation becomes: Y = A * ba * Ea * L.

Add to this new equation a reasonable assumption about the dynamics of labour (I assume a logistic function for the dynamics of the population with a sharp increase followed by an asymptotic rise) and the knowledge we have gained over the shape of the oil production function and thus of the dynamics of how available reserves evolve, we can build a toy-model and easily simulate the path of the economy (figure 8) on an oil(energy)-dependent computer. This toy-model clearly shows how sensitive an economy can be to the downward shift in oil-production during and after the peak-oil.

Do not get me wrong here. I do not believe that the Stone Age ended because we were short of stones. My point comes down to say that we are smack in the middle of an energetic transition, that this transition has a much more profound current negative effect that many can believe and that the world as we know is coming to an end, evolving towards “something else”. The hope here is that, flawed economic models, lack of political will to manage this energetic transition or ideological foolishness from the Talibans of the “all-green” regarding the nuclear energy as “evil”, will not drive us toward the tragic fate of the reindeer herd of St Matthew Island and other unfortunate raging bulls (figure 9). Indeed, the NASA research suggests that high wealth inequality is sufficient to create a total collapse. Add inequality regarding access to energy, water and food (agriculture is oil-dependent too) on the top of that, and we have a Mad-Max-Moment ahead of us. In this state of urgency, do we attend a rise in global capex in renewable energy that could make us more optimistic? Well, unfortunately not. Global investment in renewable energy fell 11 percent in 2013 to USD 254 billion according to Bloomberg New energy Finance. This is the second decline in renewable investments since 2001. So, yes the crash die-off of our fat caribous is unfortunately still a scenario.

v
Source: Joel Guglietta

Joel Guglietta is Managing Director of OCTIS Asset Management in Singapore

Author Steen Jakobsen, Chief Economist & CIO, Saxo Bank
Saxo Bank provides an execution-only service. The material on this website does not contain (and should not be construed as containing) investment advice or an investment recommendation, or a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Saxo Bank accepts no responsibility for any use that may be made of these comments and for any consequences that result.

“The Biggest Redistribution Of Wealth From The Middle Class And Poor To The Rich Ever” Explained… | Zero Hedge

“The Biggest Redistribution Of Wealth From The Middle Class And Poor To The Rich Ever” Explained… | Zero Hedge.

While the growth of inequality in America has been heavily discussed here, it was Stan Druckenmiller’s outbursts (and warnings that “from beginning to end – once markets adjust from these subsidized prices – that the wealth effect of QE will have been negative not positive”) that brought it more broadly into the average American’s mind. QE, taxes, income disparity, and entitlements are four major means by which wealth is transferred from the poor and the middle class to the richThe following simple chart explains it all…

Via Shane Obata-Marusic ( @sobata416)

A – “the rich hold assets, the poor have debt” is how Citi’s Matt King described the distribution of wealth in the US.

B – QE has resulted in a loss of purchasing power for the US dollar. Faced with this problem, consumers in the middle class are taking on more non-housing debt in order to maintain the same standard of living. In addition, the US government – which continues to run a deficit year after year – continues to accumulate debt. Due to these facts, total debt outstanding – aka credit market instruments for all sectors – is at all time highs. More debt means more interest payments and lower savings rates. These trends do not bode well for the middle class consumer.

C – On the other hand, QE has been great for the rich. QE has inflated the prices of assets such as property, bonds, stocks, and non-home real estate:

Home prices in Detroit are going up despite the fact that the city is bankrupt. The “housing occupancy” table is meant to show what appears to be a higher than average amount of speculative demand i.e. lower than average owner occupancy rates.

The rich have most of the assets which is why the average family income of the top 0.01% increased by 76.2% from 2002 to 2012. In contrast, the average family income of the bottom 90% decreased by 10.7% over that same period.

D – Taxes as a percentage of real disposable income have more than doubled since 1980. This trend has not been kind to the bottom 90%.

Conversely, favourable tax rates on dividends and capital gains have allowed the rich to become wealthier over time.

E – Median household income has been in a downtrend since the late 90s.

In opposition, corporate profits are at all-time highs.

F – The entitlement problem is only going to get worse as more baby boomers leave the work force. Future generations will have to pay for the debt that the old and rich continue to take on.

Growing benefits and sympathetic tax rates on investments enabled the old to increase consumption by 164% from 1960-1991 .

G – In conclusion, QE, taxes, income disparity, and entitlements are contributing to “the biggest redistribution of wealth from the middle class and the poor to the rich ever” If things continue the way they are going, then millennials and future generations will pay the price:

Despite the fact that inequality in the US is nothing new:

Today, it might be worse than it ever has been:

Unless the distribution of wealth in America begins to change for the better, assets will continue to benefit the rich and debt will continue to burden the middle class and the poor.

For an economy that’s largely based on consumption, excess debt only serves to reduce expenditures and to slow economic growth over time.

Quality of life for the median American household is only going to get better if the issues associated monetary policy, entitlements, taxes, and income are addressed and dealt with.

For now, the best thing that you can do is to discuss these issues with your friends, family and colleagues and try to come up with solutions.

Mainstream Economists Finally Admit that Runaway Inequality Is Hurting the Economy Washington’s Blog

Mainstream Economists Finally Admit that Runaway Inequality Is Hurting the Economy Washington’s Blog.

But Bad Government Policies Are Making Inequality Worse By the Day

AP reported Tuesday:

The growing gap between the richest Americans and everyone else isn’t bad just for individuals.

It’s hurting the U.S. economy.

***

“What you want is a broader spending base,” says Scott Brown, chief economist at Raymond James, a financial advisory firm. “You want more people spending money.”

***

“The broader the improvement, the more likely it will be sustained,” said Michael Niemira, chief economist at the International Council of Shopping Centers.

***

Economists appear to be increasingly concerned about the effects of inequality on growth. Brown, the Raymond James economist, says that marks a shift from a few years ago, when many analysts were divided over whether pay inequality was worsening.

Now, he says, “there’s not much denial of that … and you’re starting to see some research saying, yes, it does slow the economy.”

As one example, Paul Krugman used to doubt that inequality harmed the economy.  As the Washington Post’s Ezra Klein wrote in 2010:

Krugman says that he used to dismiss talk that inequality contributed to crises, but then we reached Great Depression-era levels of inequality in 2007 and promptly had a crisis, so now he takes it a bit more seriously.

Krugman writes this week in the New York Times:

The discussion has shifted enough to produce a backlash from pundits arguing that inequality isn’t that big a deal.

They’re wrong.

The best argument for putting inequality on the back burner is the depressed state of the economy. Isn’t it more important to restore economic growth than to worry about how the gains from growth are distributed?

Well, no. First of all, even if you look only at the direct impact of rising inequality on middle-class Americans, it is indeed a very big deal. Beyond that, inequality probably played an important role in creating our economic mess, and has played a crucial role in our failure to clean it up.

Start with the numbers. On average, Americans remain a lot poorer today than they were before the economic crisis. For the bottom 90 percent of families, this impoverishment reflects both a shrinking economic pie and a declining share of that pie. Which mattered more? The answer, amazingly, is that they’re more or less comparable — that is, inequality is rising so fast that over the past six years it has been as big a drag on ordinary American incomes as poor economic performance, even though those years include the worst economic slump since the 1930s.

And if you take a longer perspective, rising inequality becomes by far the most important single factor behind lagging middle-class incomes.

Beyond that, when you try to understand both the Great Recession and the not-so-great recovery that followed, the economic and above all political impacts of inequality loom large.

***

Inequality is linked to both the economic crisis and the weakness of the recovery that followed.

Indeed – as we noted in September – a who’s-who of prominent economists in government and academia have now said that runaway inequality harms economic growth, including:

  • Former U.S. Secretary of Labor and UC Berkeley professor Robert Reich
  • Global economy and development division director at Brookings and former economy minister for Turkey, Kemal Dervi
  • Societe Generale investment strategist and former economist for the Bank of England, Albert Edwards
  • Deputy Division Chief of the Modeling Unit in the Research Department of the IMF, Michael Kumhof
  • Former executive director of the Joint Economic Committee of Congress, senior policy analyst in the White House Office of Policy Development, and deputy assistant secretary for economic policy at the Treasury Department,  Bruce Bartlett

Even the father of free market economics – Adam Smith – didn’t believe that inequality should be a taboo subject.

Numerous investors and entrepreneurs agree that runaway inequality hurts the economy, including:

Indeed, extreme inequality helped cause the Great Depression, the current financial crisis … and the fall of the Roman Empire .  And inequality in America today is twice as bad as in ancient Rome, worse than it was in Tsarist RussiaGilded Age America, modern Egypt, Tunisia or Yemen, many banana republicsin Latin America, and worse than experienced by slaves in 1774 colonial America. (More stunning facts.)

Bad government policy – which favors the fatcats at the expense of the average American – is largely responsible for our runaway inequality.

And yet the powers-that-be in Washington and Wall Street are accelerating the redistribution of wealthfrom the lower, middle and more modest members of the upper classes to the super-elite.

 

Income Inequality: Canada Does Surprisingly Little To Reduce Wage Gap

Income Inequality: Canada Does Surprisingly Little To Reduce Wage Gap.

income inequality canada

Canada is among the developed countries that do the least to reduce income inequality, according to an analysis from Mother Jones’ Kevin Drum.

Drum looked at the degree of income inequality before taxes and government transfers, and compared those numbers to the degree of income inequality after taxes and transfers, for various developed countries.

Not surprisingly, he found the U.S. was worst when it came to ironing out inequality. Taxes and government transfers reduce inequality by about 26 per cent in the U.S.

But Canada fared little better, coming in third, tied with Australia and behind Israel, out of 22 countries surveyed. Canadian governments reduce inequality by about 31 per cent, Drum found.

Drum’s data is based on income inequality research carried out by Janet Gornick, a professor of political science at the City University of New York, whose work appeared in this recent New Yorker article.

Some interesting tidbits from Gornick’s research: U.S. incomes before taxes and transfers are surprisingly equal — pre-tax inequality is roughly the same in the U.S. as in Sweden or Norway.

But the U.S.’s tax system, which provides all sorts of loopholes for the wealthy, does far less than Sweden’s (or anyone else’s) tax code to reduce inequality. Thus the U.S. ends up with the highest after-tax income inequality, despite being naturally no more unequal than other countries.

In Canada, our pre-tax incomes are slightly more equal than the U.S. or Sweden. On that measure, Canada ranks 13th of 22 countries — right in the middle of the pack.

But when taxes and transfers are taken into account, Canada shoots up on the inequality rankings, and becomes the fourth most unequal of 22 countries, behind the U.S., Israel and the U.K. (See chart below.)

That means Canadian policies do far less than the policies of most other countries to reduce inequality.

Canada’s tax reforms of recent years have largely favoured corporations. The federal corporate tax rate has been nearly cut in half since 2000 — from 28 per cent at the turn of the century to 15 per cent in 2012. Personal income tax brackets have fallen only slightly during that time.

Opposition politicians have been criticizing the government for hiking EI premiums to $4,277 this year from $3,412 in 2008. Some call it a hidden tax hike that primarily affects low- and middle-income earners. (EI premiums are capped, with everyone earning more than $47,000 paying the same amount.)

2007 study from the left-leaning Canadian Centre for Policy Alternatives found that, after years of tax cuts, Canada’s one per cent wealthiest families pay a lower effective tax rate than the country’s poorest 10 per cent of families.

Here is Gornick’s chart of measuring inequality, before and after taxes and transfers.

The numbers are each country’s Gini coefficient — the standard measure of income inequality. A Gini coefficient of 0 means everyone in the country earns the same amount of money. A Gini coefficient of 1 means one person earns all the money, and no one else earns anything. Obviously, all countries are somewhere between 0 and 1.

gornick chart

 

DailyCensored.com – America’s Economic Dark Side

DailyCensored.com – Breaking Censored News, World, Independent, Liberal NewsAmerica’s Economic Dark Side – DailyCensored.com – Breaking Censored News, World, Independent, Liberal News. (source)

Former Clinton administration Labor Secretary Robert Reich explained, saying:

“Of all developed nations, the United States has the most unequal distribution of income, and we’re surging towards every greater inequality.”

America’s 400 richest elites have more wealth than half the population. Jacob Kornbluth’s new documentary film “Inequality for All” examines disturbing truths.

US inequality is at historic highs. Since 1970, America’s economy doubled. The top 1% benefitted hugely. They earn more than 20% of national income. It’s triple their 1970 percentage.

The gap between rich and all others keeps widening. Inequality hurts everyone, says Reich. Since economic recovery began in 2009, America’s top 1% got 95% of the gains.

Adjusted for inflation, median household income keeps declining. Where will most people “get the money they need to keep the economy going,” asked Reich?

“We’re the richest economy in the history of the world. For the majority of Americans not to get the benefits of this extraordinarily prosperous economy, you know, there’s something fundamentally wrong.”

America has less upward mobility than any other developed country. If you’re poor, you’ll stay that way.

If you’re lower middle class, “the cards are going to be stacked against you. You will probably never get anywhere,” says Reich.

“Who is actually looking out for the American worker? The answer is nobody.”

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The nation is headed toward becoming a “100 percent plutocracy.” Inequality this extreme fuels public anger. It hurts economic growth. Force-fed austerity assures worse ahead.

Reich teaches a popular Wealth and Poverty course at UC Berkeley. His book “Beyond Outrage” explains what’s wrong with America’s economy.

It doesn’t work. It benefits the privileged few. It harms most others. Doing so undermines America. Expect worse ahead unless people react, he says.

He’s never been more concerned about things than now. He cites “the corrupting effects of big money in politics,” regressive hard right policies, and unprecedented “wealth and power at the very top.”

Things are “perilously close” to falling apart altogether. People are right to be outraged. It’s a “prerequisite for social change.” It’s vital to “move beyond outrage and take action.”

The stakes are too high to be ignored. Nothing good happens in Washington unless people mobilize, organize and demand it.

“Nothing worth changing in America will actually change unless you and others like you are committed to achieving that change,” he stresses.

So-called US economic recovery is fake. Main Street poverty, unemployment, underemployment, hunger and homelessness are at Depression era levels.

Half of all US households are impoverished or bordering it. Recovery benefitted only America’s most well off. Most others endure deepening deprivation.

According to economist Emmanuel Saez:

“For the first time in nearly 100 years, the percentage of income taken by the top 10 percent of Americans topped 50 percent.”

From 2009 to 2012, “(t)op 1% incomes grew by 31.4% while bottom 99% incomes grew by only 0.4%.” Adjusted for inflation, they declined considerably.

From 2007 – 2009, average real family income declined 17.4%. It’s more than any period since the Great Depression. Wealthy Americans recovered and then some. Conditions for most others went from bad to worse.

According to Saez:

“We need to decide as a society whether this increase in income inequality is efficient and acceptable and, if not, what mix of institutional and tax reforms should be developed to counter it.”

Russell Sage Foundation president Sheldon Danziger said:

“The continued high rate of poverty is no surprise, given ongoing high unemployment, stagnant wages and government spending cuts.”

“Poverty is higher today than it was in 2000, and household incomes are lower. The ‘lost decade’ is likely to turn into ‘two lost decades.’ ”

According to Marx:

“Accumulation of wealth at one pole is at the same time accumulation of misery, agony of toil, slavery, ignorance, brutality, and mental degradation at the opposite pole.”

America’s wealth distribution is extreme. It keeps shifting disproportionately upward. Most people are more than ever on their own.

Financial elites run America. Whatever they want they get. Popular needs go begging. Things go from bad to worse.

In 1962, Michael Harrington’s “The Other America: Poverty in the United States” exposed the nation’s dark side, saying:

“In morality and in justice, every citizen should be committed to abolishing the other America, for it is intolerable that the richest nation in human history should allow such needless suffering.”

“But more than that, if we solve the problem of the other America we will have learned how to solve the problems of all of America.”

Jack Kennedy addressed the issue. In his January 8, 1964 State of the Union address, Lyndon Johnson declared war on poverty.

He barely scratched it. Inequality was severe. Today, it’s unprecedented and growing. It bears repeating. Census data show around half of US households impoverished or bordering it.

Government data most often over-estimate good news and understate what’s bad. Unprecedented numbers of US households are impoverished under protracted Main Street Depression conditions.

Bipartisan harshness assures greater pain and suffering. Over 20% of US households haven’t enough money for food and other essentials.

On November 1, Supplemental Nutrition Assistance Program (SNAP) benefit cuts are coming. One-person households will get $11 per month less.

For 2 people, it’s $20. For three it’s $29. For four it’s $36. Expect more cuts ahead. Food costs are rising. Family incomes are falling. More help is needed. Congress and Obama intend less.

America’s most needy will be harmed most. So will tens of millions of children. They may end up without enough to eat.

America’s great divide is greater than ever. In 2009, around half of US households had no assets. Today it’s more than half.

Most Americans don’t earn enough to live on. Things go from bad to worse. Hardwired inequality is deepening. Casino capitalism takes precedence.

America’s criminal class alone benefits. Ordinary people are swindled. Venal politicians serve wealth, power and privilege. Democrats and Republicans are in lockstep. Few benefit at the expense of most others.

On July 28, AP headlined “Exclusive: Signs of Declining Economic Security,” saying:

“Four out of 5 US adults struggle with joblessness, near poverty or reliance on welfare for at least parts of their lives.”

It’s a disturbing “sign of deteriorating economic security and an elusive American dream.”

“Survey data exclusive to The Associated Press points to an increasingly globalized US economy, the widening gap between rich and poor, and loss of good-paying manufacturing jobs as reasons for the trend.”

Hardship for white Americans is rising. AP-GfK poll numbers show “63 percent of whites called the economy ‘poor.’ ”

Fifty-two-year-old Irene Salyers perhaps spoke for others, saying:

“I think it’s going to get worse. If you do try to go apply for a job, they’re not hiring people, and they’re not paying that much to even go to work.”

Economic insecurity is much worse than government data show. It affects over three-fourths of white Americans.

It’s defined as experiencing unemployment some time during working years or needing government aid to survive.

According to Professor William Julius Wilson:

“It’s time that America comes to understand that many of the nation’s biggest disparities, from education and life expectancy to poverty, are increasingly due to economic class position.”

Government data fall short of explaining things. Conditions are much worse than official reports. Most Americans struggle to get by. Impoverishment or close to it affect them.

It’s harder than ever for millions of disadvantaged households to survive. Their numbers keep growing exponentially. Vital social protections are eroding. It’s happening when they’re most needed.

“By race, nonwhites still have a higher risk of being economically insecure, at 90 percent.”

“But compared with the official poverty rate, some of the biggest jumps under the newer measure are among whites, with more than 76 percent enduring periods of joblessness, life on welfare or near-poverty.”

“By 2030, based on the current trend of widening income inequality, close to 85 percent of all working-age adults in the US will experience bouts of economic insecurity.”

According to Professor Mark Rank:

“Poverty is no longer an issue of ‘them.’ It’s an issue of ‘us.’ Only when poverty is thought of as a mainstream event, rather than a fringe experience that just affects blacks and Hispanics, can we really begin to build broader support for programs that lift people in need.”

Data Professors Tom Hirschl and John Iceland compiled provide more context. They show:

• for the first time in nearly three decades, impoverished single-mother households surpassed or equaled black ones; they exceeded numbers of Hispanic single mother families; and

• numbers of children living in high-poverty neighborhoods increased.

According to a University of Chicago General Social Survey, whites are more pessimistic about their futures than since the depths of the early 1980s.

“Just 45 percent say their family will have a good chance of improving their economic position based on the way things are in America,” said AP.

Polls show over 80% of Americans mostly don’t trust government. Congress’ approval rating is 11%.

It’s barely above its all-time February and August 2012 10% low. Given the margin of error, they’re’s virtually no difference between then and now.

Americans are suffering. Things go from bad to worse. Republicans and Democrats are in lockstep. They’re cutting social protections when they’re most needed.

Expect greater harshness ahead. Most people are fed up. Poll numbers show it. Conditions are far too deplorable to ignore. It remains to be seen what’s next.

A previous article said people power alone can save us. They’re’s no other way.

Stephen Lendman lives in Chicago. He can be reached at lendmanstephen@sbcglobal.net.

His new book is titled “Banker Occupation: Waging Financial War on Humanity.”

http://www.claritypress.com/LendmanII.html

Visit his blog site at sjlendman.blogspot.com.

Listen to cutting-edge discussions with distinguished guests on the Progressive Radio News Hour on the Progressive Radio Network.

It airs Fridays at 10AM US Central time and Saturdays and Sundays at noon. All programs are archived for easy listening.

http://www.progressiveradionetwork.com/the-progressive-news-hour

 

The Stunning Truth About Inequality In America | Washington’s Blog

The Stunning Truth About Inequality In America | Washington’s Blog.

 

oftwominds-Charles Hugh Smith: Rising Inequality and Poverty: Can They Be Fixed?

oftwominds-Charles Hugh Smith: Rising Inequality and Poverty: Can They Be Fixed?.

 

We are all losing out to the 1% | new economics foundation

We are all losing out to the 1% | new economics foundation.

 

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