Squeezed Dry

There is a long history of plentiful and inexpensive energy aiding technological development and the substitution of capital for labor. The age of oil has been a period of rapid and rapidly rising production of goods, services and wealth. The ability to harness technology-driven productivity and grow output has transformed the world in wave after wave. The vast quantities of wealth produced and the enormous increases in human population, food output, longevity, literacy and health all attest to this. Abundant and price competitive energy was substituted for human physical labor in industry after industry, nation after nation. More was produced. The division of this ever greater wealth was and is influenced by endless technological change- energy consuming. When we see energy prices move as far and much as they have recently, it is necessary to ponder what this means for roles of technology, capital and labor.

The very success and extent of labor replacing technological progress has created the demand increase partially driving oil, coal and natural gas prices today. There are implications for the relations between capital and labor, wages and profits. Abundant, reliable and cost competitive new technologies must be run on abundant, reliable and cost competitive energy inputs. Rising energy costs call into question hyper mechanized long distance production and transportation arrangements. This is no minor matter as more and more of what we produce and consume is shipped over vast distances in production and for consumption. More and more of what we produce and consume emerges from far flung global assembly lines erected when energy was very cheap and assumed to always be very cheap. Most commentators don't focus on substitution between capital and labor in the face of energy price increases. The longer prices stay high, and the higher they go, the more important this area is to explore.

Skill biased technical change and globalization have influenced the split between wages and profits. Rising productivity has created the possibility of rising wages and profits. Sometimes this possibility becomes reality, sometimes it does not. Lately, in the US and abroad, the gains to productivity have gone more toward profits than wages. This makes clear that abundant, reliable and affordable energy has allowed greater wealth to be produced and a greater share of that greater wealth has been captured by profits. Rising energy prices could pressure this in two ways.

Energy prices are, directly or indirectly, costs in most goods and services production. Sustained and significant energy cost increases eventually become higher food and living costs. We are already at least nine months into a significant acceleration in expected energy and food price increases. If wages don't rise, an increasing portion of incomes will be redistributed to food, energy and costs related to food and energy. This will act like a wage reduction to the extent that it is difficult for consumers to find suitable and stable priced substitutes for food and energy. Systematic wage increase demands can not be held off indefinitely. Rising unemployment may reduce demands but, costs of living apply persistent and acute pressure. This can be seen in the faces and demands of squeezed multitudes in the US and beyond.

Meanwhile, firms' costs are pressured up by rising prices and increasingly strained basic operational planning and design born of assumptions about cheap, reliable energy and labor. Past imbalances between profit and wage gains from productivity are likely to increase demands for wage hikes. Very little of the productivity growth in the US since 1975 translated into wage increases. Much has become profits. We "solved" this problem by loaning more and more of the greater profits back to the American middle classes over past decades. This reached an insane crescendo in the great housing bubble. It is over now. Thus, households enter the present recession with rising prices, no savings and large debts. Further massive substitution of technology for labor will be more difficult as consumers struggle under high food and energy costs as firm costs rise. Households may default on debts or begin to embrace understandings and actions outside the norms of the recent past. In short, there is not much blood left to squeeze out of middle class rocks. Our recent difficulties in squeezing more light, sweet, cheap oil out of the rocks has a parallel in our households. Production processes with significant energy and labor cost components should be expected to be hit hardest and first. Here we might take airlines as a canary in the coal mine. We might also look hard at a Chinese economic model that relies on abundant, inexpensive labor and energy with a voracious appetite for distance shipped raw materials and final products.

The long term massive substitution of technology-driven innovation, fueled with cheap wages and energy, may be at increasing risk. Rising energy costs are hard to substitute around. Labor is an obvious substitute in relatively few cases. That may change on the margin. High and rising energy prices may begin to pressure the divisions between wages and profits through direct business costs and wage demands. Rising costs, slumping house prices, flat wages and heavy debt have left our households in truly dire condition.

The last three decades in America have been defined by rapid technological change, profit biased growth and generally cheap and abundant energy. Clearly, the world will not change overnight and energy prices have not attained -- nor will they likely in the near future attain levels -- sufficient to decimate major structural pillars of modern economies. It may be getting toward a point where we entertain discussion of the implications of energy prices for inflation, wage rates and profits on a macroeconomic level?

Comments

[outnow]

The unregulated speculation in food and energy will bring down the house. There is a move in Europe to do away with the free traders. Until and unless the Americans find the political courage to stop the madness, the American System is finished. The City of London, Dublin and Wall Street contain the parasites of the world. "Financial services" are otherwise know as monopoly and usury. It is criminal to lend to those who have no credit or verifiable income, bundle these loans, remove the risk from the balance sheet, rate these bundles as being triple A, and then dump the bad paper throughout the financial system.

If the term "liars loan" does not bother you and monopolies and cartels don't, then maybe inflation without a corresponding rise in real wages will. Most Americans believe that God decided that they should be poor and others increasingly wealthy. When the invisible hand of the free market is given free rein, then the pockets of the middle class are picked by the wealthy multinational corporations which own the government.

The days of cheap oil are over.

[Henry]

"When the invisible hand of the free market is given free rein,"

I agree with your point, however, there is one small academic point about the free market and that is this: the market has such a large number of players in the push and shove of supply and demand and no "single" one is big enough to make an action that reflects on the radar screen. So... what we are observing is a "market" that is more fixed like a Las Vegas casino than this ideal academic notion of a "free market". And... speculation is one thing, manipulation is another. The investment banks of this country are like the mob. Goldman analysts predict $250 oil and oil goes up. (think Goldman profits out of this) And here we put Mahtha in jail!!

[joebhed]

Thanks, both of you.

Wolff's commentary identifies much about the little to no hope for the wage earning American workers, with no control over their future well-being.

How bad will it get?
What unprecedented and unforeseen future awaits us as we evolve politically and economically from the greatest financial and economic crisis that any of us has ever seen? That would be most of us on the planet.

Do we ponder the likely outcomes of this unprecedented social reality in traditional economic and financial measures, or do we set up new measures that are equal to the exact situation in which we find ourselves?

Some have advocated the repudiation of debts.
I advocate for the repudiation of debt-money.

When people come to understand how the money system works in this country, they will revolt, peacefully. The Federal Reserve System was created by a pen. Today is the day to begin to un-create the FED, and to create its successor.

In the ealy '30s , FDR requested an alternative to the present FED fractional reserve system of private money creation.

The best economic minds of the Chicago school at that time recommended a government-issue, debt-free money system.

Milton Friedman was another great economist who believed in the need to end the private money-creating cartel that has a franchise on the American economy. The models, and the thinking, are out there.

Yes, it's time for THAT revolution.
Take back your money.
With a pen.

[Cathexis]

One of the best posts I have read. Anywhere.

I disagree, January, that this is a "cavalier analysis." To the contrary, I believe Mr Wolff exactly grasps oncoming situations of critical importance! Our current American "Business" model (treat Labor as costs, cut costs or find cheaper offshore alternatives) is predicated on energy (petrofuels) that are cheap enough so the delta in Labor savings is significantly greater than the costs incurred from extra shipping.

Take the premise of cheap transportation from the equation and the whoel house of cards comes tumbling down. A greta change is a'comin'!

Unfortunately, I have been in American Business long enough not to even consider that Business will change its adversarial view of Labor. I believe they'll find some other way to continually shift greater amounts of the burdens/risks of business onto employees and customers.

[joebaggadonuts]

If oil stays high for a few years, there will be very quick change. I think however that Iraqi oil will be flowing at 500K barrels/day above current levels by September/October, and other sources will be brought on stream. Don't forget the Administration can release the SPR any time they feel like it. They want to keep us hooked on oil. Take our money, make us poor, but keep us addicted.

And, the technology of remote conferencing, if we build out better infrastructure, can replace much although not all business meeting travel. Better knowledge of resources allows for more local substitution against products shipped from great distances. Build out of alternative energy infrastructure can replace non-transport related uses of energy if allowed time to mature. The key to keeping us hooked on oil is to put off the day or reckoning as long as possible. Our leadership is working very hard to do that. We should make them and their enablers pay for this crime against the future generations. The market can't do that by itself.

[elpollo]

January, I think Jim Kunstler has long seen this slow train coming and made the accurate inferences.

[January]

I thought economists were in the business of predicting the future, not just reviewing what we already know. Limiting your prediction to "no structural change" because of energy costs alone is about as weasel a hedge as I have heard since Bush told us we were in a "slowdown."

We will not avoid the catastrophic results of the GOP trickle-down economics of the last 30 years. By "we" I mean my working class neighbors. We need to hear from economists what those results are likely to be. We need to know that so that if and when we abandon the fascism of world empire we will not be confused between a change for the better and the unavoidable disasters of catastrophic economic mismanagement.

Our American plate of problems is too full for cavalier analyses such as offered in this article. We need more than positive thinking. Since those who already have everything do not want change, we can expect they will fight it ruthlessly, even after there may be a dramatic change of administrations. It only takes a handful of greedheads to filibuster, especially when they have packed the Supreme Court with like-minded cretans. I do not like exaggerated drama either, but any social disorder and our house of cards will collapse. The American people's capacity to tolerate injustice has a limit. Can't you see it? It's right before our noses!

[ftblgrl]

"The American people's capacity to tolerate injustice has a limit."

I think this is incorrect. However, our intolerance to hunger pangs and our inability to deal with extreme cold may necessitate a national "Get Off Your (fat, lazy) Ass Day"

[joebaggadonuts]

GOYAD. Cool acronym.