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How high oil prices hurt wages and limit economic growth

Wages don’t rise at the same time as oil prices rise, Tverberg writes. The result is a mismatch between what citizens can afford, and the cost to manufacture and transport products.

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Per Capita Real GDP

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Gail Tverberg, an actuary with a background in math, analyzes energy and financial matters from a perspective that the world has limited resources. For more of Gail's posts, click here.

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In recent years, the economy as a whole has tended to fare better than wage earners. This happens partly because deficit spending is being used to provide income to the many unemployed people, and partly because businesses are able to “bounce back” from an earnings point of view better than wage-earners, because they can cut back the size of their operations to keep profits high. Sometimes they can even substitute low overseas labor costs, or automation.

If we compare per capita real (that is, inflation-adjusted) GDP with oil prices (both in 2012$), this is what we see:

There is some stalling in the rise of real GDP per capita, with high oil prices, but it is not nearly as pronounced as the stalling of wage growth. Nevertheless, Economist James Hamilton found that 10 out of the last 11 US recessions were associated with oil price spikes.

On a per capita basis, real GDP per capita in 2012 is between the 2005 and the 2006 level. This is far better than the situation with non-government wages. In Figure 4, we saw that in 2012, non-government wages were only between the 1998 to 1999 level. Ouch!

Hitting “Limits to Growth?” 

I wonder if the situation we are reaching now isn’t “Limits to Growth,” as described by the book by that name by Meadows et al. written in 1972.  The way we seem to be reaching Limits to Growth is through high oil prices, and the impacts these high oil prices have both on wages and on competitiveness with other countries. I explained some of these issues earlier in this post. There are also impacts on governments:

  • Low wages in total mean less tax revenue for governments;
  • Fewer employed means more government outlays for unemployment benefits;
  • Low wages lead to more problems with debt defaults, and more need for bank bailouts;
  • Governments can’t raise taxes fast enough or reduce benefits quickly enough, so they find themselves with rapidly rising deficits. If governments do raise taxes, workers are even worse off. If they reduce expenditures (less unemployment payments or allowing banks to fail), citizens are also unhappy.

Over the last several thousand years, many civilizations have grown up, reached limits of one sort or another, and eventually collapsed. Based on the work of  Peter Turchin and Sergey Nefedov in the book  Secular Cycles, there were financial issues not too different from the ones we are seeing now involved in these collapses. I showed in my post 2013: Beginning of Long-Term Recession? that there seem to be significant parallels to our current situation. These collapses often took 20 years or more, but the situation is still concerning.

While the situation we are looking at is unpleasant, if we understand the source of our problems, we can at least look at our situation a bit more rationally. We may not be able to find solutions, but we can at least eliminate some approaches as being unrealistic. We may be able to find partial solutions, such as making survival possible for a subset of humanity, if not everyone. If we don’t understand our predicament, there is no way we can rationally address it.

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