If you came of age in the 20 years leading up to the millennium, it’s likely you will treat energy as a non-limiting input to the US economy. As a journalist, policy maker, or economist, you are far more likely to produce political explanations when faced with economic dilemmas. The Great Recession has offered the perfect occasion to witness the phenomenon, a financial crisis which specifically kicked off amidst 150 dollar oil in 2008. Instead of advising the President that the country faced debt-deflation, with a nasty overlay of high commodity costs, the White House economic team has drawn from the post-war playbook which holds that if you stimulate the economy generally then the system will magically reorganize itself. Well, that hasn’t happened and it’s not going to happen.
The barrier to understanding the US economy’s structural problem was hatched in the previous two decades of declining energy costs. Those were good times. Unfortunately, this inculcated the view that our problems were most often discretionary, of our own making. Well, guess what. The US economy did not choose to stop growing in 2007. Thus, the recommendation that we simply “choose” to starting growing again rings rather hollow. But that is the nature of obsolete expertise, which will flog the same prescriptions ad infinitum, well past failure.
For over two years now, this blog has recommended a more targeted version of Keynesianism. In contrast to Whatever Keynesianism—which advises we throw as much money as possible at the whole system, a quickly depleting process that makes the status quo only more sclerotic—I have strongly advocated for policies which would attack energy input costs. Indeed, as illustrated in the chart above, if you agree the decline of energy expenditures from above 10% of GDP to just below 6% of GDP boosted the US economy, you must agree the quick trip back to 10% must have hurt. Worse, the stubborn levels post 2008 during high unemployment are nothing but painful.
Original chart, pre-annotated at Gregor.us, can be seen here: US Annual Energy Expenditures, as of July 2011.
Source: EIA Short Term Energy Outlook.
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