The Crash Course: The Unsustainable Future of Our Economy, Energy, and Environment (20 page)

All government revenue either comes from taxpayers or from borrowing, so when the time comes to pay off those “special” bonds, those funds must
either
come from taxpayers
or
from additional borrowing. The funds won’t come “from the government”; they’ll come from taxes or additional indebtedness. Therefore the “special” bonds have no value beyond how much future taxpayers will have to pay due to their presence. They’re not an asset of the government; they’re a liability of its people. There is a big difference between the representation of the Social Security holdings as a “trust fund” versus a multitrillion-dollar future liability of taxpayers. It’s as vast as the difference between night and day.

Depending on whose numbers you use, the federal shortfall in (mainly) entitlement funding is anywhere from $53 trillion (U.S. Treasury, 2009) to $99 trillion (Federal Reserve, 2009) to $202 trillion (Kottlikoff, 2010). Even the lowest estimate is nearly four times the total GDP of the nation. There are no painless ways to close even that gap.

Summing It Up

Putting it all together, we find that a personal failure to save is coincident with a failure to save at the state and local levels, which is mirrored by a corporate failure to save. And all are dwarfed by a colossal failure to save at the federal government level. Adding to this predicament is a profound failure to invest in and maintain existing infrastructure. All of these deficits will exert demands upon our national wealth in the relatively near future, and this leads me to conclude that the next 20 years are going to be completely unlike the last 20 years.

Here are the deficits:

How did we get here? How did this happen?
As a former consultant to Fortune 500 companies, I observed that if the leadership of a company was financially reckless or had a moral disregard for its workers, this same behavior could be found reflected throughout all the remaining layers of the company. The U.S. government became fiscally reckless beginning in the mid-1980s, failed to live within its means, borrowed more and more, and not only failed to properly fund the entitlement programs, but raided the funds and then excluded themselves from having to properly report this fact:

From the U.S. Code:

EXCLUSION OF SOCIAL SECURITY FROM ALL BUDGETS Pub. L. 101-508, title XIII, Sec. 13301(a), Nov. 5, 1990, 104 Stat. 1388-623, provided that: Notwithstanding any other provision of law, the receipts and disbursements of the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund shall not be counted as new budget authority, outlays, receipts, or deficit or surplus for purposes of—(1) the budget of the United States Government as submitted by the President, (2) the congressional budget, or (3) the Balanced Budget and Emergency Deficit Control Act of 1985.

Coincident with this loss of fiscal prudence, corporations, municipalities, states, and individuals all took similar approaches toward saving and financial responsibility. Between 1985 and 2010, the United States experienced a profound cultural shift with respect to financial prudence that began at the top, filtered throughout the remaining layers of society, and now permeates our entire economic landscape.

This is our legacy—the economic and physical world that we are choosing to leave to those who follow us. Most of these bills will come due, in a big way, in the twenty-teens. Given the massive amounts of debt, low savings, demographic headwinds, and other economic challenges, we are entering the next 20 years with our economic shoes firmly laced together.

¹
An important realization about NPV calculations is that by definition, all future cash flows have already been taken into account. This means that all expected streams of revenue have been offset against future expenses. Therefore, if a pension has a $1 trillion shortfall, we would need to place $1 trillion in the funds
today
toward future needs, and if we don’t do this next year, the shortfall will almost certainly grow. The only way it could be smaller is if benefits are reduced or the fund’s assets outperformed the assumed rate of growth that fed the original NPV calculation. That is, reality would have to be different than the initial assumptions. This happens all the time, but for a variety of reasons, initial assumptions have almost invariably turned out to have been overly optimistic, not pessimistic.

PART IV

Energy

CHAPTER 15

Energy and the Economy

Now that we have seen how our economy is based on perpetual exponential growth and reviewed the ever-accumulating series of debts and deficits with which we’ve saddled ourselves, we are ready to get to the heart of the matter: linking energy to the economy. This chapter is essential to appreciating why enormous economic changes are coming our way.

One of the many ways that classical economists go astray is by assuming that the economy exists in a vacuum, a complete little private universe that can be understood on its own, without considering “externalities” in the form of the resources that cycle in and the waste that must cycle out. The problem with this view is that the economy is absolutely not a complete little universe all its own. Quite the opposite; it’s like an organism, as dependent on its surroundings as a baby in a womb. Where economists assume that needed resources will magically arise because the marketplace demands them, a more holistic model would begin with the observation that the economy only exists because resources are available. The natural world isn’t a subset of the economy, it is the other way around—the economy is a subset of the natural world.

Recall from Chapter 9 (
What Is Wealth?
) that primary wealth leads to secondary wealth, which leads to tertiary wealth. Without primary wealth, nothing else exists. The only world in which conventional economics makes any sense is in a world without limits, one where no resource constraints exist. In the physical sciences, the difference between the two views would be described as the difference between an open system and a closed system.

A closed system is any defined set of space, matter, energy, or information that we care to draw a box around and study. The universe itself is a system, and within that largest of all systems, one can define any numbers of smaller systems. For example, our planet is a system, as is your body, your house, or a bathtub full of water. A closed system is a system having no interaction or communication with any other system—no energy, matter, or information flowing into or out of it. The universe itself is a closed system. There is no “outside” the universe, no other system beyond its boundaries that it can interact with.

The second type of system is an open system, with energy and matter flowing into and out of it. Such a system can use the energy and matter flowing through it to temporarily fight entropy and create order, structure, and patterns for a time. Our planet, for example, is an open system; it sits in the middle of a river of energy streaming out from the sun. This flow of energy enables the creation of large, complex molecules which in turn have enabled life, thus creating a biosphere that is teeming with order and complexity.

Closed systems always have a predictable end state. Although they might do unpredictable things along the way, they always, eventually, head toward maximum entropy equilibrium. Open systems are much more complicated. Sometimes they can be in a stable, equilibriumlike state, or they can exhibit very complex and unpredictable behavior patterns that are far from equilibrium—patterns such as exponential growth, radical collapse, or oscillations. As long as an open system has free energy, it may be impossible to predict its ultimate end state or whether it will ever reach an end state.
¹

The most important concept here is that order and complexity arise in any open system (such as our economy) if and only if energy is consumed. Let me restate this critical point: Order and complexity arise as a consequence of taking concentrated energy and reducing it to a less concentrated form, extracting useful work and generating heat along the way.

Our economy has been exponentially growing in complexity by leaps and bounds, as Beinhocker captures in this observation:

Retailers have a measure, known as stock keeping units (SKUs) that is used to count the number of types of products sold by their stores. For example, five types of blue jeans would be five SKUs. If one inventories all the types of products and services in the Yanomamö [stone age tribe] economy, that is, the different models of stone axes, the number and types of food, and so on, one would find that the total number of SKUs in the Yanomamö economy can probably be measured in the several hundreds, and at the most thousands. The number of SKUs in the New Yorker’s economy is not precisely known, but using a variety of data sources, I very roughly estimate that it is on the order of 10 to the 10th (in other words, tens of billions).

To summarize, 2.5 million years of economic history in brief: for a very, very, very long time not much happened; then all of a sudden, all hell broke loose. It took 99.4 percent of economic history to reach the wealth levels of the Yanomamö, 0.59 percent to double that level by 1750, and then just 0.01 percent for global wealth to leap to the levels of the modern world.
²

The amount of economic complexity required to build, track, ship, and utilize tens of billions of items is enormous. We can only describe our economy as a complex system that, like any other, owes its complexity to the continuous throughput of energy.

The purpose of this section of the book is to explore the connection between the economy and energy, and then ask what will happen to our economy when (not if, but
when
) ever-increasing energy (oil) flows through the economy, then suddenly stalls, then goes in reverse. Because open systems can only increase their complexity and maintain their order through the use of energy, the simple prediction is that our economy’s growth in complexity will also stall at first and then go into reverse. The hard part is predicting what will happen and when, because one consistent feature of complex systems is that they are inherently unpredictable.

Even Sand Is Too Complicated

Even something as seemingly simple as predicting the behavior of a growing sand pile currently eludes our predictive abilities. Imagine dropping grain after grain of sand into a pile. It grows and grows, but at some point it will slump on one side or perhaps entirely collapse. Knowing when and how much seems as though it should be a straightforward task, but it’s not.

In
Ubiquity: Why Catastrophes Happen
by Mark Buchanan,
³
a tale is recounted of three physicists, Per Bak, Chao Tang, and Kurt Weisenfeld, who set about trying to discover if they could predict when, where, and to what degree sand piles would avalanche. Using a computer model to speed things along, they ran an enormous number of simulations and discovered that nothing could be predicted at all. Not the size of the avalanche, which could range from a single grain tumbling down the face to the complete collapse of the whole pile, not the timing between events, and not whether the next grain would trigger either a cataclysm or nothing at all.

They discovered some important properties of systems that are poised on the knife edge of instability, but left the ability to predict the timing and size of catastrophic events to future scientists. For us, the important lesson learned from the sand pile experiments is that when it comes to the timing and the size of changes, complex systems are inherently unpredictable.

But this doesn’t mean they’re
completely
unpredictable. Knowing something of the “system of sand,” we can put some boundaries around what might and might not happen, and can therefore “predict” the future in the largest sense, even though its timing and precise details might elude us. We know that a growing sand pile will eventually collapse; we know that it cannot grow to be ten times taller than it is wide; we know that the higher and more complex the pile becomes, the more likely an avalanche becomes; we know that a sand pile is a complex system and will therefore behave in unpredictable ways. While we cannot predict exactly what will happen and when, we can understand the boundaries of the system and therefore know what is both possible and probable.

We know this from our everyday lives. We don’t know when, where, or how large the next earthquake in California will be, but we know that one will eventually happen. Because an earthquake in California is both possible and probable, local building codes seek to mitigate the risks by utilizing specific architectural designs and structural reinforcements. When we sit at the beach on any given day, we cannot possibly predict the form of every crashing wave and the shape of every turbulent eddy in the water’s retreat, but we can easily “predict” a range for the size of the waves that will wash in over the next hour. “Between 1 and 4 feet, but most likely 2,” we might guess based on the waves we’ve seen, and then we might let our children play in the surf, confident that an 18 foot wave won’t suddenly arrive and ruin the day.

Although events within complex systems are unpredictable in their timing and details, we can still (1) understand that they’ll happen, (2) know that when stresses are building the events become more likely (and larger), and (3) recognize the rough boundaries of the system.

The Master Resource

When oil first began to be used for industrial purposes at the turn of the last century, world population stood at 1.1 billion and sailing ships still plied the waters alongside coal steamers. Since then, world population has expanded more than 4 times, the world’s economy by more than 40 times, and energy use by more than 10 times.
⁴

We’re all familiar with the massive benefits bestowed by this explosive liberation of human potential in the forms of technological and intellectual advances. In order to appreciate the delicacy of the continuation of this abundance, we need to understand the actual role of energy in forming our society. If we recall back to Chapter 6 (
An Inconvenient Lie
), I made the point that both growth and prosperity are dependent on surplus. In the case of economic growth and prosperity, nothing is more important than surplus energy.

Imagine two separate societies: One has barely enough food energy to survive, and the other is blessed with a vast surplus of food energy. Assuming that they possessed the same cultural proclivities toward inventiveness, we would find the society with the subsistence food supply to be very rudimentary and not terribly complex when compared to the better-bestowed society. It would be clear that the surplus energy in the food supply had been “funding” economic growth for the more well-endowed society.

So we might say that among all energy sources, food is the one that most commands our attention when it’s in short supply. By way of example, we could compare the state of complexity of societies before and after the agricultural revolution some 10,000 years ago. Before the agricultural revolution, humans lived in small nomadic tribes that subsisted by hunting and gathering. There were few job roles, and only small, hand-held artifacts from this period have been found and studied today. After the revolution, complex societies with multiple producing and nonproducing job specializations arose, building enduring works of architecture, art, music, law, and all the other trappings of societal complexity that are familiar to us today. These bold works and levels of complexity only became possible once there was a surplus of food to “fund” specialized roles and activities.

Before agriculture, human society was limited in its complexity by the amount of food that could be gathered and crudely stored, which represented a very limited energy budget. After this agricultural revolution, enormous leaps in complexity were powered by the ability of farmers to create an excess of food calories that effectively freed up other people for other pursuits. But what unleashed the “third epoch”—the exponential explosion in complexity—that began some 150 ago and continues today? It was energy, of course, but it wasn’t food energy. It was ancient sunlight.
⁵

Instead of waiting for the rather diffuse and comparatively parsimonious energy from the sun to fall upon the earth and slowly grow their planted crops, humans discovered hundreds of millions of years of ancient sunlight condensed into the unbelievably dense and usable forms of coal and oil.
⁶
Nature will occasionally build up a massive store of potential energy and then wait for something to unleash it in a furious burst. Thunderheads build up enormous electrical potential energy and then discharge it all at once with a bolt of lightning. A steep slope will accumulate an enormous weight of snow before its potential energy is suddenly unleashed to the valley below. Ancient sunlight was stored as immense concentrations of potential energy, waiting in store for some spark to release it. That spark was us humans, and we’ve consequently liberated close to half of all those tens and hundreds of millions of years of stored energy in a span of a little over 150 years—faster than lightning, in geological terms.