Wage and Wealth Disparity
Today, there is great wage and wealth disparity, just as there was in the late 1920s. The richest Americans are amassing unprecedented levels of wealth, while the middle class and working poor struggle to make ends meet. This divide mirrors the stark inequality seen in the Roaring Twenties, when the wealthy elite controlled a disproportionate share of the nation’s resources.
Like the 1920s, low energy consumption growth has become a concerning trend. Recent data shows energy use expanding at a sluggish pace, evoking memories of the pre-Depression era. This shift has major implications for economic activity and the ability to fuel growth.
A significant difference today is the extraordinarily high level of US government debt. Adding more debt now is fraught with peril, as servicing existing obligations becomes increasingly challenging. Where could the economy go from here? Analyzing historical patterns can provide valuable insights.
Debt, Interest Rates, and Economic Cycles
There is a close relationship between government debt levels and interest rates. Figure 1 shows that the highest interest rates in 1981 correspond to the lowest ratio of US government debt to GDP. Prior to 1981, changes in interest rates were largely driven by market forces or the Federal Reserve’s attempts to slow an overheating economy.
After 1981, the Fed’s focus shifted towards stimulating growth by keeping rates low. However, the central bank’s influence over longer-term interest rates, such as those underlying mortgages, appears limited. As the economy rebounded from the Covid-19 crisis, 10-year Treasury yields started climbing rapidly, indicating market forces at play.
This inability to substantially influence longer-term rates is concerning given the high US government debt load. Being forced to pay 4% or more on long-term debt that rolls over could create major cash flow issues, potentially requiring even more borrowing just to service existing obligations.
The Great Depression and World War II
In the 1930s, the US and much of the world were mired in the Great Depression, with interest rates near 0%. Various New Deal programs under President Roosevelt were launched from 1933 to 1945, including the creation of Social Security. Figure 4 shows these programs temporarily boosted GDP, but did not fully solve the underlying issues caused by defaulting debt and failing banks.
Entering World War II proved to be a huge economic boon, with many more women joining the workforce to produce munitions and take over jobs left vacant by drafted men. After the war, private sector growth needed to be ramped up to provide jobs for returning soldiers and others left unemployed. An abundant supply of fossil fuels helped fuel this post-war economic expansion, as debt-based demand was used to pull the economy along.
Energy Consumption and Economic Growth
Economic growth requires producing physical goods and services, which in turn depends on adequate energy supplies of the right types and quantities. Figure 6 shows the average annual growth rate of world energy supply has been stepping down over the years, as the easiest and cheapest fossil fuels are extracted first.
Comparing Figures 5 and 6, we can see that US GDP growth approximately matched world energy supply growth in the 1950s-1970s. But from 1981-2007, average US GDP growth of 3.2% soared above world energy consumption growth of just 2.1%. This was enabled in part by offshoring a significant share of US industrial production to lower-cost regions.
Recent low growth in energy supplies has created an economic problem that added debt has only partially been able to hide. In the latest period (2008-2023), both US GDP growth (1.8%) and world energy consumption growth (1.5%) were very low.
The 1920s and Today: Parallels in Low Energy Growth
Both the 1920s and the latest period (2008-2023) are characterized by very low energy growth. Population was growing by 1.1% per year in both eras. Net energy consumption per capita growth was slightly negative (-0.1%) in the 1920s and only a small positive percentage (0.4%) in 2008-2023. Per capita consumption had been growing much more quickly between 1950 and 1980.
Hidden beneath the surface is the fundamental problem that there is not enough energy to go around. This problem doesn’t manifest in high prices, but in unusually large wage disparities. The very rich gain excessive influence, while special interests and their drive for profits become increasingly important, sometimes at the expense of citizen well-being.
The Coming Challenges
At some point, the world economy will face a situation in which the amount of fossil fuels we can extract starts falling. While we have some add-ons to the fossil fuel system (such as renewables), they are all dependent on the fossil fuel system and would stop producing not long after the fossil fuel system stops. Growth in energy supply determines the growth in physical goods and services that can be produced.
In periods of rapid growth, even high-interest borrowing from the future makes sense. But in periods of low growth, only very low-interest loans are feasible. When the economy is shrinking, most investments cannot repay loans requiring interest. Repaying debt with interest becomes much more difficult.
The US has been throwing every tool in the box at stimulating the economy since 1981, but is now running out of options. Adding more debt isn’t likely to work well or for long. Government-funded investments in green energy and electric transportation are not yet paying back sufficiently.
Potential Scenarios for the Future
Some intermediate steps on the road ahead could include:
a) Stock market collapses, as excessive speculation fueled by low interest rates unwinds.
b) Drops in the prices of homes, farms, and other assets as debt-fueled bubbles deflate.
c) Debt defaults and failures of banks, insurance companies, pension plans, and even governments.
d) Declining commodity prices and food production, leading to less need for oil consumption and thus falling oil prices.
e) Governments trying to issue more debt-based money to raise prices, leading to hyperinflation.
f) Persecution of the wealthier people blamed for society’s problems.
g) War, as a way to obtain resources elsewhere and put laid-off workers back to work.
Regions that can provide complete supply chains based on their own resources may be somewhat insulated, as long as those resources are adequate. But no Advanced Country today appears to fit that description. The central and southern parts of the US, where Trump’s support is strongest, may be closest to this ideal.
The path forward is uncertain, but it seems clear that the debt-fueled economic growth model that has prevailed since 1981 is reaching its limits. Adapting to a lower-energy future will be a major challenge, and some parts of the country may fare better than others. Roofers in El Cajon and across the country will need to stay nimble and responsive to evolving economic conditions.
