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Expectations of Indefinite Growth

I often find myself speaking with people who believe that technological progress and growth are simple facts of life.  The sun rises in the east, birds fly south for the winter, new iPhones are announced in July.  Most people are not technical, so this is not such an unreasonable belief.  The pace of technological growth has been picking up for several generations now.  Nobody has ever known anything different.

I believe that forward progress is anything but certain.  Most economic growth is underpinned by ever-increasing volumes of energy, while our debt-based economic system is predicated on steady, reliable, exponential growth.  Between population growth and resource exhaustion, we are now facing a steady squeeze in the energy supply.  This will necessarily put the brakes on growth as more capital is diverted to energy procurement and away from consumption of goods and services.

I was recently sent an article by Dr. Tom Murphy, a physicist at UCSD, who has a great blog about energy and growth.  He makes some great points about the ultimate physical limits facing our economic system.

Galactic Scale Energy
Timelines to Physical limits for modest levels of growth.

Can Economic Growth Last
(Sequel to Galactic Scale Energy)  He talks about the infeasibility of maintaining growth without increasing energy inputs

What if Malthus was right?

Jeremy Grantham is a British investor and Co-founder and Chief Investment Strategist of Grantham Mayo Van Otterloo (GMO), a Boston-based asset management firm. GMO is one of the largest managers of such funds in the world, having more than US $107 billion in assets under management as of December 2010. Grantham is regarded as a highly knowledgeable investor in various stock, bond, and commodity markets, and is particularly noted for his prediction of various bubbles.

His past couple of quarterly newsletters have focused on resource limitations and I believe that they are spot-on.  The emphasis added to specific bullet points is my own.

(The april link to the GMO site was broken, so I uploaded my copy of the pdf as a google document)

April 2011 - Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever

July 2011 - Resource Limitations 2: Separating the Dangerous from the Merely Serious

Summary from the April 2011 newsletter:

The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value.  We all need to adjust our behavior to this new environment. It would help if we did it quickly.

Summary

• Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and flowing in population.
• From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientific progress.
• Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.
• The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our finite resources of hydrocarbons and metals, fertilizer, available land, and water.
• Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.
• The problems of compounding growth in the face of finite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).
• The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.
• But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
• Statistically, most commodities are now so far away from their former downward trend that it makes it very probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important economic event since the Industrial Revolution.
• Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will surely get less bad.
• Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.
• From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
• We all need to develop serious resource plans, particularly energy policies. There is little time to waste.

Summary from the July 2011 newsletter:

• We humans have the brains and the means to reach real planetary sustainability. The problem is with us and our focus on short-term growth and profits, which is likely to cause suffering on a vast scale. With foresight and thoughtful planning, this suffering is completely avoidable.
• Although we will have energy problems with peak oil, this is probably an area where human ingenuity will indeed eventually triumph and in 50 years we will have muddled through well enough, despite price problems along the way.
• Shortages of metals and fresh water will each cause severe problems, but in the end we will adjust our behavior enough to be merely irritated rather than threatened, although in the case of metals, the pressure from shortages and higher prices will slowly increase forever.
• Running out completely of potassium (potash) and phosphorus (phosphates) and eroding our soils are the real long-term problems we face. Their total or nearly total depletion would make it impossible to feed the 10 billion people expected 50 years from now.
• Potassium and phosphorus are necessary for all life; they cannot be manufactured and cannot be substituted for. We depend on finite mined resources that are very unevenly scattered around the world.
• Globally, soil is eroding at a rate that is several times that of the natural replacement rate. It is probable, although not certain, that the U.S. is still losing ground. The world as a whole certainly is.
• The one piece of unequivocal good news can be found in the growth of no-till farming. In no-till, the residue of the previous crop is left on the ground and new seeds are planted without plowing. This technique reduces erosion by around 80%, reduces fertilizer run-off, preserves moisture, improves the soil (and, quite possibly, the quality of the food), and reduces the emissions of heat trapping gasses.
• The growth of no-till has been very rapid in South America, rapid in the U.S. (which is now at 35%), and moderate in many other developed countries. But it is used on only about 5% of farms globally.
• Overall, the best farms will have no erosion problems but, on average, soil will continue to be lost across the globe. Together with increased weather extremes and higher input prices (perhaps much higher), there will be increasing problems in feeding the world’s growing population.
• In particular, a significant number of poor countries found mostly in Africa and Asia will almost certainly suffer from increasing malnutrition and starvation. The possibility of foreign assistance on the scale required seems remote.
• The many stresses on agriculture will be exacerbated at least slightly by increasing temperatures, and severely by increased weather instability, especially more frequent and severe droughts and floods.
• These types of slow-burning problems that creep up on us over decades and are surrounded by a lack of scientific precision hit both our capitalist system and our human nature where it hurts.
• Capitalism, despite its magnificent virtues in the short term – above all, its ability to adjust to changing conditions – has several weaknesses that affect this issue.
• It cannot deal with the tragedy of the commons, e.g., overfishing, collective soil erosion, and air contamination.
• The finiteness of natural resources is simply ignored, and pricing is based entirely on short-term supply and demand.
• More generally, because of the use of very high discount rates, modern capitalism attributes no material cost to damage that occurs far into the future. Our grandchildren and the problems they will face because of a warming planet with increasing weather instability and, particularly, with resource shortages, have, to the standard capitalist approach, no material present value. 4

4 An expanded discussion on the failings of capitalism will be in next quarter’s letter. In addition, a discussion on the current market, including any investment implications from this piece, will be posted in two weeks.

Airlines cut markets in face of high fuel prices

Assuming that fuel prices continue to steadily climb into the indefinite future, what will the airline industry look like in 50 years?  I don't think that we're going to see an electric airplane in the near future.  I could see it steadily ratcheting down to the point where it is an intercontinental transportation option for the rich, with rail shouldering the domestic needs of the masses.

Lady gets charged with a Misdemeanor for her front yard vegetable garden

This prioritization of aesthetics over practical utility really bothers me. All that land goes to waste just so that people can enjoy an uninterrupted green view. She should be applauded for supplementing the local food supply and reducing the amount that has to be trucked in from elsewhere.

Across Europe, Irking Drivers Is Urban Policy

(From the intro of the NY Times article)
"While American cities are synchronizing green lights to improve traffic flow and offering apps to help drivers find parking, many European cities are doing the opposite: creating environments openly hostile to cars. The methods vary, but the mission is clear — to make car use expensive and just plain miserable enough to tilt drivers toward more environmentally friendly modes of transportation..."

Michigan CEO: Soul-Crushing Sprawl Killing Business

This one's from Rustwire.  I'm copying the full post verbatim, here.  However, the original is linked through the title.

This is the full text of a letter from a business owner on why he might need to leave Michigan. This guy NAILED it, what we have been trying to express on this blog about sprawl and economic vitality. This is what the leadership in Cleveland doesn’t seem to get. Thank you, Andrew Basile!

From: Andrew Basile, Jr
Sent: Friday, July 30, 2010 12:16 PM
Subject: Why our growing firm may have to leave Michigan.

All,

I hope you find this essay of interest/value. It’s probably something you’ve heard a million times but I thought I ought to at least try to vocalize it rather than silently surrender.

We have a patent law firm in Troy. In 2006, our firm’s legacy domestic automotive business collapsed. We rebuilt our practice with out-of-state clients in a range of industries, including clients like Google, Nissan and Abbott Labs, located in the US, Japan, Europe and China.

Today, we have 40 highly-paid employees and much of our work now comes from out of state. This makes us a service exporter. We are very proud of the contribution our firm makes to the local economy. We also created a not-for-profit incubator using excess space in our office. The incubator is home to 4 start-ups, all of which are generating revenue and two of which have started employing people. This is something we do without charge as a charity to help the state.

We’d like to stay in Michigan, but we have a problem. It’s not taxes or regulations. There’s lots of talk about these issues but they have no impact on our business. We spend more on copiers and toner than we do on state taxes.

Our problem is access to talent. We have high-paying positions open for patent attorneys in the software and semiconductor space. Even though it is one of the best hiring environments for IP firms in 40 years, we cannot fill these positions. Most qualified candidates live out of state and simply will not move here, even though they are willing to relocate to other cities. Our recruiters are very blunt. They say it is almost impossible to recruit to Michigan without paying big premiums above competitive salaries on the coasts.

It’s nearly a certainty that we will have to relocate (or at a minimum expand) our business out of Michigan if we want to grow. People – particularly affluent and educated people – just don’t want to live here. For example, below are charts of migration patterns based on IRS data Black is inbound, red is outbound. Even though the CA economy is in very bad shape, there is still a mass migration to San Francisco vs. mass outbound migration from Oakland County (most notably to cities like SF, LA, Dallas, Atlanta, NY, DC, Boston, and Philly) San Fran only seems to be losing people to Portland, a place with even more open space and higher quality urban environments.

The situation for Michigan is even worse than it seems because those lines are net migration. You can click on the links and see the composite of outbound and inbound. I went through many links, and in most cases, the average income of the outbound from Oakland County is high (e.g. $60K, and the average income of the inbound is low (e.g. $30K).

Recession or no, isn’t it screamingly obvious that people with choices in life – i.e. people with money and education – choose not to live here? We are becoming a place where people without resources are grudgingly forced to live. A place without youth, prospects, respect, money or influence.

There’s a simple reason why many people don’t want to live here: it’s an unpleasant place because most of it is visually unattractive and because it is lacking in quality living options other than tract suburbia. Some might call this poor “quality of life.” A better term might be poor “quality of place.” In Metro Detroit, we have built a very bad physical place. We don’t have charming, vibrant cities and we don’t have open space. What we do have are several thousand of miles of streets that look like this:

Having moved here from California five years ago, I will testify that Metro Detroit is a very hard place to live. Ask any former Detroiter in California, and you will hear a consistent recital of the flaws that make Metro Detroit so unattractive. Things are spread too far apart. You have to drive everywhere. There’s no mass transit. There are no viable cities. Lots of it is really ugly, especially the mile after mile of sterile and often dingy suburban strip shopping and utility wires that line our dilapidated roads (note above). There’s no nearby open space for most people (living in Birmingham, it’s 45 minutes in traffic to places like Proud Lake or Kensington). It’s impossible to get around by bike without taking your life in your hands. Most people lead sedentary lifestyles. There’s a grating “car culture” that is really off-putting to many people from outside of Michigan. I heard these same complaints when I left 25 years ago. In a quarter century, things have only gotten considerably worse.

Ironically, California is supposed to be a sprawling place. In my experience they are pikers compared to us. Did you know that Metro Detroit is one half the density of Los Angeles County?

The fundamental problem it seems to me is that our region as gone berserk on suburbia to the expense of having any type of nearby open space or viable urban communities, which are the two primary spatial assets that attract and retain the best human capital. For example, I noted sadly the other day that the entire Oakland Country government complex was built in a field 5 miles outside of downtown Pontiac. I find that decision shocking. What a wasted opportunity for maintaining a viable downtown Pontiac, not to mention the open space now consumed by the existing complex. What possibly could have been going through their minds? Happily, most of the men who made those foolish decisions 30 or 40 years ago are no longer in policy-making roles. A younger generation needs to recognize the immense folly that they perpetrated and begin the costly, decades long task of cleaning up the wreckage.

These are problems, sure, but they could be easily overcome, especially in Oakland County which is widely recognized as one of the best-run large counties in the country. But despite our talents and resources, the region’s problem of place may be intractable for one simple, sorry reason: our political and business leadership does not view poor quality of place as a problem and certainly lacks motivation to address the issue. Indeed, Brooks Patterson — an otherwise extraordinary leader — claims to love sprawl and says Oakland Country can’t get enough of it. These leaders presume that the region has “great” quality of life (apparently defined as big yards, cull de sacs and a nearby Home Depot). In their minds, we just need to reopen a few more factories and all will be well. The cherished corollary to this is that Michigan and Metro Detroit have an “image” problem and that if only people knew great things were they would consider living or investing here. The attitude of many in our region is that our problems are confined to Detroit city while the suburbs are thought to be lovely.

We don’t have a perception problem, we have a reality problem. Most young, highly talented knowledge workers from places like Seattle or San Francisco or Chicago find the even the upper end suburbs of Metro Detroit to be unappealing. I think long term residents including many leaders are simply so used to the dreary physical environment of Southeast Michigan that it has come to seem normal, comfortable and maybe even attractive. Which is fine so long as we have no aspiration to attract talent and capital from outside our region.

My fears were confirmed when I began trying to gather local economic development literature to use as a recruiting tool. The deficits which so dog our region are sometimes heralded by this literature as assets. For example, some boosters trumpet our “unrivaled” freeway system as if freeways and sprawl they engender are “quality of life” assets. In San Francisco, the place sucking up all the talent and money, they have removed — literally torn out of the ground — two freeways because people prefer not to have them. I noted one “Quality of Life” page of a Detroit area economic development website featured a prominent picture of an enclosed regional shopping mall! Yuck. It’s theater of the absurd.

The people who put together that website must live in a different cultural universe from the high income/high education people streaming out of Michigan for New York, Chicago, and California. Not only is there no plan to address these issues, I fear that the public and their elected leaders in Michigan don’t even recognize the problem or want change. We have at least one bright spot in the nascent urban corridor between Pontiac, and Ferndale, which is slowly building a critical mass of walkable urban assets. At the same time, there’s no coordinated effort to develop this. Indeed, MDOT officials lie awake at night thinking of ways to thwart the efforts of local communities along Woodward to become more walkable. Another symptom the region’s peculiar and self-destructive adoration of the automobile. Even though the Big Three are a tiny shadow of their former selves, Michigan is still locked in the iron grip of their toxic cultural legacy.

I’d like to hang on another five years. I feel like we’re making a difference. But by the same token, I don’t see any forward progress or even an meaningful attempt at forward progress. It’s almost like the people running things are profoundly disconnected from the reality that many if not most talented knowledge workers find our region’s paradigm of extreme suburbanization to be highly unattractive. It seems to me that we are halfway through a 100 year death spiral in which the forces in support of the status quo become relatively stronger as people with vision and ambition just give up and leave. As we descend this death spiral, we must in my mind be approaching the point of no return, where the constituency for reform dwindles below a critical threshold and the region’s path of self destruction becomes unalterable.

Thank you for considering my views. I welcome any opportunity to be of help to any efforts you may have to fix this.

Andrew Basile, Jr.
—
Andrew R. Basile, Jr.
Young Basile Hanlon & MacFarlane, P.C.
228 Hamilton Avenue, Suite 300
Palo Alto, California 94301

Offices also in Troy and Ann Arbor Michigan