Crisis Note 2009-2: Understanding the US Economy - The Route of All Evil
In my 10-04-2008 Crisis Note, in the section 'What's the problem with housing?', I identify the size of houses in the US as being a bigger problem than the number of excess homes in the country.
Since then, I've been pondering why US homes are so large. We seem to live in more square feet per adult than people in any other country.
Don't get me wrong. I am not writing this to go on a green environmentalist crusade. Those of you that know me are aware that I am a car nut. My internet moniker since the mid 1980s has been 'gofast', I have too many cars, and the main reason I used to actually go into the office in my previous job was to get my daily fix on the local racetrack called the Merritt Parkway! That being said, I am a rabid anti-SUVist! And, yes, I still believe they will be the mobile homes of the near future. :-)
Let's understand what the highway system is, and its implications.
According to wikipedia, the Interstate Highway System is actually called the Dwight D. Eisenhower National System of Interstate and Defense Highways. It was lobbied for my major US automobile manufacturers, and championed by President Eisenhower after WWII as a necessary component of a national defense system, to allow for troop and supply movements in the event of a foreign invasion. It is the largest highway system in the world (46k+ miles) as well as the largest public works project in history. It connects most US cities, and facilitates the distribution of nearly all the goods and services in the US. Most people in the US use the highways to commute to work.
So far, so good, correct? What's wrong with this picture?
1) It allows people to live far from their places of work. Americans of working age (20-55) drive 15000 miles per year on average. That is 41 miles per day (365 days). If I assume weekends involve less driving (say 20 miles/day), and some holidays have no driving, I come up to 51 miles of commuting per day on average, or 25 miles each way. Towns are usually built to have access to the highways.
2) This, in turn, has facilitated people in the US 'living horizontally' unlike the rest of the world, where people 'live vertically'. By allowing people to keep living further and further away from their places of work, in suburbs, they can continue to live in single family homes. US single family homes are a) too big (see CN 10-4-08) and b) too inefficient from an energy perspective - they have too many surfaces that leak heat and cooling, unlike apartment buildings that are very efficient.
3) By fostering suburbia, goods cannot be efficiently delivered to the citizens. As a result, goods are delivered by trucks, as opposed to by train, for example. A typical tractor trailer in the US is 500hp to 800hp, and moves 1 container. A cargo train, on the other hand, is usually 6000hp, and can usually move 40 or more containers, appx 150hp per container! While the highway system will have reduced costs of tractor-trailer operation vs operating the same truck on rural roads and highways, it is still not the cost effective relative to trains. Trains are a very efficient way to move goods!
Obviously the main disadvantage of freight trains is their lack of flexibility, given the way America lives, and they have been crowded out of the market for deliveries.
4) Between commuting via automobile, and trucks being used for cargo, the highway system is thus responsible for the US' high CO2 emissions. 40+% of all US CO2 emissions are vehicular related. This is unlike the rest of the world, where vehicular emissions are typically less than 20% of all CO2 emissions.
Dead link: http://www.edf.org/documents/2209_CarEmissionsFactSheet.pdf
"Automobiles are America's biggest reason for oil dependence, and therefore represent the single biggest piece of our global warming problem".
Within the US, Texas is the biggest culprit, with a third of its emissions coming from transportation. Beef, surprisingly, also contributes to CO2 emissions and its not from methane.
Dead link: http://www.newsweek.com/id/116784/page/1
5) See #2 above. US single family homes also consume a lot of energy due to their high percentage of exterior surfaces relative to the usable living space. And due to their sizes, this also means that we also consume an excessive amount of electricity, relative to other industralized and populous nations.
Dead link: http://earthtrends.wri.org/searchable_db/index.php?action=select_countries&theme=6&variable_ID=574
7) Flooding anyone? Among others, the great state of NJ has had numerous floods over the past few years that I have been paying attention. FEMA calls it NJ's #1 Natural Hazards. I've heard numerous people blame it on development - expanded towns lead to move concrete covering the land, preventing and altering drainage for rain, and resulting in flooding in areas that had previously not flooded. Blame the NJ Turnpike!
Dead Link: http://www.livingstonnj.org/njfloodfacts4-08.pdf
8) Another side effect of having so many towns and villages, many of them being little more than exurbs, is that they have their own governments, with massive duplication of administrations. This is all incredibly inefficient. For example, each town typically has its own personnel administrating a police force, schools, fire depts, etc. This increases the cost to society as most of these jobs are effectively non essential, and makes the society less efficient. I'm not going to discuss the problems this can create with education, as each town comes up with its owns funding schemes for education, which has often resulted in a lack of standards.
9) Yet one more side effect: Al Gore
Al Gore's house:
10) The Democratic Party's twin goals - of reversing Global Warming, and Stimulating the Economy by via Keynesian spending on the highway sytem - are thus mutually exclusive.
There is no doubt in my mind that America's highway system has shaped America's economy, and as the result, the world's. The following link is worth reading - it discusses the benefits the highway system has bestowed on the US, so I won't repeat them here.
I don't agree with it completely - many of the benefits it mentions are now liabilities, in my mind. From an economic perspective, they claim that every $1 invested in the system has created $6 in output.
To me, one of the most important benefits of the highway system is that it has made American culture the envy of the world, as the mobility, freedom, and flexibility the highway system has allowed has permeated the mindset. Americans believe they can do anything, and have the right to do so, and are not afraid of trying!
However, I don't think one needs the highway system any longer to foster this independence. Its time to rethink the way American lives.
Implications of the highway system on the future of the American economy
There is no question that the US highway system allowed the US to develop faster than the rest of the world after World War II. Europe and Japan were in shambles and had to rebuild their cities and infrastructure before they could even think of regaining economic power. The US auto industry became the one of the most important economic forces during this period, and there are claims that it was responsible for the ascend of the middle class (debunked by the right as propaganda from the democratic party).
Be that as it may, most people will accept that this period of prosperity allowed the unions to gain power, and made the UAW force the auto companies to offer full pensions and health benefits after only 30 years of working. These legacy pension costs have now succeeded in making the US auto industry non-competitive, and it is essentially bankrupt.
Dead Link: http://www.awb.org/articles/magazine-julaug2005/chair_s_corner_pension_problems_plague_america_s_legacy_companies.htm
I will argue that this period of prosperity was largely as a result of a lack of competition from the rest of the world. It allowed the US to ignore its cost structure, as it could dictate pricing during the 50s and 60s. We are now paying the price for this complacency.
If you've read my previous Crisis Notes, you'll have figured out that I don't expect the US economy to recover any time soon. I expect US residents to save as much as they can, and I don't think the government consumption or exports will be able to replace domestic consumption in the GDP formula. As a result, US GDP will decline if not collapse. (I will discuss this in detail in a forthcoming Crisis Note.)
As I've discussed in my 10-24-2008 Crisis Note, I think we will eventually end up with a single global currency and the world will be a single market. Prior to this happening, the surplus countries will team up with the regional powers (mostly deficit countries) to help prevent the world from collapsing - eg in Europe, Germany will help the smaller countries remain solvent, in the Asia-Pacific region, Japan and China will play this role, etc. This is already starting to happen. At some point, the surplus countries will realize that they are simply giving away their savings and capital, and will demand a restructuring of currencies and purchasing power, similar to Bretton Woods after WWII.
Dead Link: http://www.history.com/content/money/u.s.-history-of-money/post-world-war-ii-developments
When this happens, I suspect we will end up with a single currency and central bank. It will be like restarting a game of monopoly, except with different countries starting off with different amounts of cash. The goal will be to eliminate distortions and leverage from cross border financing and currency mispricings, that have been fundamental in causing this crisis (see my ramblings on the Yen Carry trade).
Unless we have another World War before this happens, the main difference between the Post Financial Crisis world economy, and the one that existed after World War II, is that America will not be the only country with manufacturing capacity this time around. Many countries will be competing. Savings will lead to capital formation, and thus lead to money suppply growth and expansion of each countries' economy. The primary determinant of which country will lead the world in the GDP race will thus be determined by its savings rate.
I suspect America will be found wanting. The American's personal cost structure will be found to be too high relative to the rest of the worlds' - housing, transportation and energy will take up too much of our income relative to other countries. Within the industrialized nations, we will not be able to form capital as the same rate as others. We will thus fall behind. Our cost structure will get passed through in the final price of our goods, which will be found to be non competitively priced, and manufacturing will migrate to countries with a lower cost structure.
And this will all be because of the US highway system.
- Let me get this out of the way: hope and audacity are not part of the solution.
- Spending stimulus money on roads and bridges is not going to spare us this bleak future - it will only accelerate it.
- America needs to rethink the way it lives. Now!
1) Americans will need to move closer to their places of work.
- They will also need to live more efficiently - vertically, in apartment buildings and multifamily dwellings, and not in single family houses.
- The government should encourage this by converting failed commercial properties in cities (office buildings, many never occupied) into residential properties. This can be prodded along with tax incentives, etc.
- If politicians persist in demanding Keynesian stimulus spending, it should be directed towards creating new businesses in cities - through sponsoring research and providing financing- to employ the people that will be moving there.
- The East and West Coasts will become high density corridors for population and manufacturing. Access to ports will also mandate this. Economic concepts like competitive advantage will dictate the location of industries. New cities will probably grow, and many old ones will vanish (Detroit comes to mind).
2) Energy needs to become more efficient.
- Time to end the debate and go nuclear, like Japan and France. Create a nationalized energy company that can enforce eminent domain to build nuclear reactors, and get rid of the liability issue (which is low risk anyway). Wind. tidal, solar, etc are all great to think about, but they are not cost effective (yet). To win in the new world, we will need to manufacture, and that means lots of cheap energy.
- Lets quantify the safety issue:
Deaths from Mining, including Coal:
- In US: 42 in 2006; In China 2006: 4749 reported.
Deaths from Lung Cancer due to Mining Coal in the US: appx 400/year
Deaths from Nuclear: not clear, but its not much
- We need to invest in disposal techniques for spent nuclear rods. Drill to the center of the earth? Or send them to the Sun in a rocket?
- Smart Energy grid - yes, that might be needed in the near term, while we still have capacity constraints from coal energy. But once we have enough nuclear, it might not be necessary. The real question is the cost benefit one: what will it cost, and will the additional costs make us even more non-competitive.
- Dependence on oil, and global warming: I think this will fix itself. Cheap oil has allowed us to live inefficiently. Being non-competitive will force us to become more efficient, which will reduce the demand for oil. If America's usage of carbon based fuels is the cause of global warming, economics alone will make this reverse. My tirade about the highway system is based on efficiency, not on its tint (non-green).
3) Transportation is going to be a huge issue.
- Investment will be needed in mass transit in the cities where people end up living.
- Parts of the existing highway system will need to be converted to rail, to move components and products of manufacturing cost effectively.
- Give up on electric cars - they need Lithium for the batteries. Over half the world's Lithium is in Bolivia. If transportation is determined to be a security issue (which it should be), do we want to be dependent on another country? What about the demand part of the equation. Lithium is a relative rare element. As demand for Li- based batteries increases, what happens to the cost of batteries and the cars? Does this make us more efficient?
4) In the meantime, "Regionalization" will be practiced by local governments:
- One of the positive side effects of the current recession's reduction of town income and thus budgets is the move for local government "regionalisation". This will help save money for earners, thus leading to greater wealth and capital formation. This might actually help the housing crisis, if it leads to lower property taxes!
- The government should be providing scholarships and research grants to all so inclined.
- American college level and graduate education is still in great demand in the rest of the world. America's excess towns and villages can easily be converted into college towns. This will also provide a source of overseas capital entering the US economy, as well as a pool of trained graduates that can be converted to productive, tax paying US citizens. (Ahem.) If America want's a true multiplier effect, it should provide full scholarships to all overseas students. Believe me, I know this will work - my family paid for my education in the US, yet I have paid many, many more times that investment in US taxes, and consumption in the US.
- The US did this during the Space Program - I know they raided India's engineering and medical colleges in the 60s. (Why do you think there are so many Indian doctor's in the US?). Its time to do it again, while foreigners still believe the American dream exists.
A few people commented on this article. Those comments can be found at the original site of this blog, shaeshah.blogspot.com