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Overproduction, Inequality and Ecosystems

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Believe it or not, recessions in the developed world are rarely caused by shortages. By definition then, it follows that relative overproduction is the key culprit. Perhaps ironically, this problem is not limited to capitalist economies.

Industrial economies of many forms have tended to overproduce — whether they be capitalist, communist, socialist, social democratic or capitalist communist.

It seems counterintuitive — getting too much of a good thing. However, that is exactly the problem modern economies often face. For proof, we can draw on numerous cases from recent history.

A particularly interesting example comes from Alan Greenspan, former Chair of the Federal Reserve System. In the wake of the 2008 housing crisis, he proffered that a possible remedy for the situation would be to burn the existing housing inventory to decrease excess supply. Although Greenspan readily admitted that such a solution was politically untenable, even the possibility suggests that we might want to reevaluate the economic theories under which the world operates.

Let’s continue with the problems inherent in Greenspan’s “solution” from a more global standpoint, not least of which is the burden it puts on ecosystems in multiple ways (and traditionally ignored by economists). To build new houses, we may be contributing to deforestation, which, in turn, reduces naturally occurring carbon-capture mechanisms. Deforestation also decreases watershed capacity, which provides benefits such as flood control, water filtration and increased biodiversity. If we were to take Greenspan’s analogy to its logical extreme, burning the houses would re-release carbon into the atmosphere as well.

So much for neoclassical economics, which is the theoretical basis for Greenspan’s solution and most global central bank policies.

What’s happening is constant mismatches of supply and demand, which have only grown more pronounced as the developed world has become increasingly industrialized. Too much supply encounters too little demand, and the markets react negatively.

What should we be doing with the surplus? Presumably building houses in developing countries or here at home where they are needed. The reason that doesn’t happen is due to a persistent disconnect between supply and demand — driven by extreme inequality.

From a global perspective, inequality causes investments to be less than optimal. Bill Gates, for example, has legitimately questioned why more resources are expended on curing male pattern baldness than diseases such as malaria. We might also ask why large quantities of food are destroyed each year in the developed world because the poor cannot afford to buy it.

Despite these obvious discrepancies, central banks in the advanced nations still try to address recessions by further stimulating demand indiscriminately. These measures have taken several forms over time.

In the 1920s, prospective lack of demand for their increased manufacturing output worried companies so much, they poured money into advertising as a way to increase consumption. More recently, in the aftermath of 9/11, President George W. Bush encouraged consumers to buy more SUVs. After the Great Recession, Federal Reserve Board Chairman Ben Bernanke and Chair Janet Yellen kept interest rates at historically low levels (where they remain today) to encourage purchases. Oil prices plummeted in 2015 due to oversupply relative to demand, and may yet do so again next year.

The propensity for industrialized economies to overproduce is partly a function of ever more efficient automation. It also stems from the ability of firms to utilize “free” ecosystem services and natural capital that are underpriced relative to the long-term value. Current price mechanisms for ecosystem services simply do not reflect full replacement costs.

The best prospect for global growth and productivity — as well as greater global equality — now appears to lie with key infrastructure projects in developing economies. This focus is consistent with the UN’s Millennium Project goals and would go a long way toward tempering the developed world’s export of environmental degradation to countries that have little to offer world markets beyond agriculture, fisheries and forest products. Because more impoverished and less well-educated societal groups tend to be less sensitive to the environmental impact of economic activities, by providing the basic standards of living, societies could ease the pressure on ecosystem services where it is most critical.

In a world with so much genuine need, it hard to believe that economies plunge into recession because of too much stuff. And yet, due to widespread inequality, that is precisely what is happening now.

 

About the author: Thomas Tunstall, Ph.D., is the Senior Research Director at the University of Texas at San Antonio’s Institute for Economic Development, and was a principal investigator for numerous economic and community development studies. He has published peer-reviewed articles on shale oil and gas, and has written op-ed articles on the topic for the Wall Street Journal. Dr. Tunstall holds a doctorate degree in political economy, a master’s in business administration from the University of Texas at Dallas and a bachelor of business administration from the University of Texas at Austin.

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