Your money is literally going up in some — up chimneys and tailpipes — for non-renewable oil and coal we could have energy from the sun and plants.
Simple Economics: LEAVE US ALONE
Driving across the bleakly beautiful emptiness of central Wyoming, sitting comfortably in an air-conditioned twenty-eighth-floor office in a new downtown Denver building, or leaning against a wall in a Winnemucca gambling casino talking with the manager, I kept thinking about the pervasive and frightening phenomenon that we all lump together under the catchall term “inflation.”
When I was done with my ride, I found that no one understands it, and no one likes it. I found, for example, a professor of economics at the University of Montana in Missoula. He used to teach a graduate course on inflation. He has cancelled it.
“This isn’t ’inflation’ the way It works in books,” he said. “The fact Is that nothing I’ve learned in more than twenty years as an economist applies to the present situation. If you find an explanation, you tell me. Any economist who says he can explain it is bending the facts to fit his theory. The simple truth is that after all these years, I Just don’t know. And I don’t believe that anyone else does.”
At Don and Dave’s Men’s Wear in Berkeley, California, where I boggled momentarily at the price of a new pair of Allen Edmonds shoes, both owners (who have been in business since the 1930s) were quick to complain about the inflationary effect of “government interference in small business.” Willingly conceding a massive increase in the base cost of goods, they were nonetheless certain that the real cause of inflation is the increase in the cost of doing business that is brought about by increasing government regulation.
Some labor publications stress a related conviction: if it weren’t for power being exercised, through government, by “environmentalists,” jobs would be far more plentiful. Concern about the last stand of giant redwoods, about the snail darter, about the lead content of gasoline, is raising the cost of everything and keeping hardworking Americans from getting decent jobs cutting down trees or building dams and highways.
When gasoline lines appeared in California early in 1979, Californians blamed either the Arabs or the oil companies for everything from the price of canned corn to the prevalence of bilharzia along the upper Nile. Witty writers in New York and Washington blamed greedy Californians. When the gas lines shifted eastward, Easterners decided that maybe it was the Arabs or the oil companies after all. Whatever else they believed, most Americans seemed to assume that “inflation” and the “energy crisis” should be tied together into the same cause-and-effect bundle.
Near Greeley, Colorado, farmer Norm Brown suggested that city folks are missing the point. “The one commodity in America that is not inflated in price is wheat. Somebody’s getting rich, and somebody’s getting screwed, and it’s the farmer who’s getting screwed. They sell my wheat in Europe for three or four times what I’m getting, and I don’t see a penny of that profit.”
A “new wave” of conservative economists, hardly able to conceal their glee because the long-entrenched theories of New Deal fiscal “experts” seem to be breaking down, is rallying behind conservative economist Milton Friedman: it is time to remove all controls from everything, and everything will turn out all right.
Rollin Bernard, president of Midland Federal Savings and Loan in Denver, agrees in part. “You cannot regulate an economy like the American economy without disjointment,” he says, coining a word. “Every time you turn down the number-four screw, the number-eight top blows.”
Relatively radical thinkers like Larry Ward, a Montana economist, and Jeff Lustig, a California political scientist, don’t get the media attention that goes to Friedman and his disciples of laissez-faire, but they are equally eloquent. The villain, to them, is “monopoly capital,” and the vehicle for its villainy is the mechanism of “administered prices.”
According to everybody’s economics text, prices are supposed to rise no higher than a certain point because competition keeps them down. When demand and purchasing power drop, prices are supposed to drop. In fact, the argument goes, the “competitors” simply agree to hold prices at a certain level — and to keep them up at that level regardless of textbook pressures. Oil companies are included as a part of this analysis.
A truly ingenious “explanation” comes from Citicorp, one of the world’s largest international-finance organizations. According to its Annual Report for 1978, which shows Citicorp’s earnings per share, after taxes, as having risen by 27 percent over 1977, America suffers from its present economic ailment — what we loosely call “inflation”—because we expect to suffer from inflation. It’s all a sort of psychosomatic illness of the pocketbook.
If the government puts more money into the system, then that is, by definition, “inflation.” People are supposed to have more to spend, demand should go up, business should have more to invest in expansion, more goods should be produced, and as a result prices (and taxes) should rise. But unemployment should go down, while wages should also rise, and money should be easier to borrow.
Theoretically, if the supply of money is reduced, then interest rates go up, it’s harder to borrow, supply and demand and taxes drop, unemployment rises and people start to hedge, prices go down. And so, it goes, up a little, down a little, with a firm governmental hand at the controls, keeping it all in orderly, delicate balance.
Not so, says Citicorp. In a down cycle, businesses do indeed cut back their production and lay off workers, but the businessmen know that the government is going to send the money supply back up again, and they don’t want to be caught short. So, anticipating tomorrow’s “reinflation,” they don’t lower their prices. We get high unemployment, high prices, and tight money all at the same time. There is no way out.
Citicorp’s conclusion: if the government would get out of the money-manipulating process, the problem would go away. Apparently, its analysts don’t believe that businessmen will ever be honest enough to lower their prices when their costs drop. After all, it isn’t government regulation that’s “forcing” all those businessmen to keep their prices up.
The ghetto family trying to rear four kids on a maid’s income while the husband looks hopelessly for a job is not much concerned with Norm Brown’s problems on his Colorado-prairie wheat farm. Norm Brown isn’t excited about the problems of the more affluent-seeming lawyers I talked to in that downtown Denver building. One of the lawyers did say, “Gee, if I’m having this trouble, it must be really rough for some truck driver,” but even he conceded that he doesn’t know how people with considerably less income are able to survive.
We do not, in voicing our frustrations and seeking out our villains, think of ourselves as all being up the same inflationary creek in the same fiscally leaky rowboat. Take, for example, Warren Smith and Don Jones (not the names of the two lawyers mentioned above). Warren was an attorney for a major corporation in the East and moved to Denver to become a partner in a prestigious law firm. Don only recently passed the bar in the Midwest and has come to the same law firm as a very junior associate.
“Back east” Warren bought a house — a fairly expensive house in a fairly expensive suburb. He had to borrow money sure, just as do all the rest of us who try buying a home; and, of course, his house appreciated in value, as has virtually all real estate during the past decade. But when he moved to Denver — selling one house and buying another — he very nearly didn’t make it despite his prestigious position and more than adequate salary.
For one thing, the interest rate on his new home purchase is probably more than 50 percent higher than the rate on his old one. For another, while he sold the first house at an inflated price, he also paid an even more inflated price for the second. And, finally, he isn’t working for a major corporation anymore; he has no “clout” with lenders (banks treat corporation executives very kindly if the corporation keeps a lot of cash on deposit).
Warren isn’t suffering from “inflation” as is Norm Brown on his farm, much less in the sense that the unemployed ghetto dweller suffers. But he is paying twice as much for shelter alone while trying to maintain a family on not much more money. He moved, not for economic advantage, but to return to a part of the world that he loves: a lot of people with just a little less income have no such choice available. The nation is full of families whose homes have doubled or tripled in value — and who can’t afford to sell.
For Warren’s younger colleague, Don Denver was an opportunity to advance in his profession: but when I talked to him, he and his wife had spent months trying to find a home and someone to finance it. He had no house to sell, little capital, no long-standing credit record, no “clout.” He’ll eventually find a place, but he’ll pay at least 11.5 percent on his mortgage for most of his life. And he’ll be one of the last among young people just starting out, to be able to buy a home at all in the Denver area.
In Casper, Wyoming, while I was touring, there was a statewide convention of a group called WIFE. It stands for Women Involved in Farm Economics, and its membership is made up mostly of younger farm wives who make the same complaints about the costs of trying to get started. Don Jones might have said about older professionals in Denver exactly what Sara Arnold of Hawk Springs, Wyo said about older farm families: that when times were better, they were able to take advantage of the situation and that now “they don’t feel as hard pressed as those of us just starting out.”
Like the male farmers I met near Greeley, WIFE members are big on gasohol production. Gasohol is the creation of fuel from grain. It works in the same way that whiskey is produced from grain and yields both fuel and a high-protein residue that is an excellent livestock feed. WIFE is also big on government backing of farm prices and on changes in beef import laws. Their “villain” is an absence of government regulation with regard to grain prices, beet imports, and increasing “monopoly capital” control.
They don’t know about Warren Smith and Don Jones in their air-conditioned offices or about the family in the ghetto; none of them knows about the Winnemucca casino manager who stares glumly at covered and idle tables or about the frustrated economist in Montana. Each has a different “villain,” and yet, to some extent, they’re all correct. Each is complaining about something that, if it were changed, would immediately and drastically affect all the others.
In April, Patrick Caddell’s Cambridge Survey Research, Inc., sent to President Carter a long memo concerning some polling he had just completed. The memo is said to have resulted in the “domestic summit” and Cabinet shakeup in July. Caddell found a “deep pessimism” among Americans and a “remarkable surge in public cynicism about the futility of elections and the inefficacy of government.” Caddell said he could find no explanation for this pessimism and cynicism “except the corrosive psychological ef-fect of persistently high inflation.”
Gail Kuntz is pessimistic. Working for the Montana Department of Natural Resources and Conservation, she recently undertook to find out what happens to coal that’s mined in her state. She traced a sizable quantity of coal to its final use in a power plant in Ohio — a power plant located quite near a more abundant, and cheaper, coal supply. A brief investigation found that the power company in Ohio and the coal-mining company in Montana belong to the same people. They bought the more expensive coal from farther away, but they bought it from themselves — and charged Ohio homeowners for the difference, including shipping, calling it “cost” and taking their profit on that “cost.”
Ron Specht of Ault, Colorado., is pessimistic, as are Norm Brown of Pierce and their fellow farmers in the area. They are part of the American Agriculture Movement, which tried to attract attention a while back with a “tractor march” on Washington. Despite the dramatics, wheat prices haven’t gone up (though bread prices have). In fact, since I spoke with Specht and Brown, the Department of Commerce has announced that this year’s winter-wheat surplus is the largest since World War II; grain elevators are full, and wheat is being “stored” by being dumped on open ground.
Nonetheless, the Farmers National Bank of Ault says that between January 1978 and January 1979 their farm-loan interest rate went from 9.5 percent to 13 percent. Van Why and Son, which sells Massey-Ferguson farm equipment in the same area, says that a combine muffler, a typical farm-machine replacement part, which cost $12.51 at the beginning of 1978, cost $16.19 a year later. Burroughs Texaco, in the same area, says that in the same period a tanker load of diesel fuel went up 10 percent and a tanker load of gasoline (before the 1979 “crisis”) went up 13 percent. Even a simple crescent wrench went, during that year, from $9.65 to $10.83 — an increase of more than 12 percent. As you read this, those figures are already a year old.
Californians as a whole are certainly pessimistic. Their historically familiar hunger for simple solutions led them, in 1978, to attack a villain called “government spending” with a sloppily built meat-ax called Proposition 13. The head broke off the ax, flew in the wrong direction, and sliced into the already lagging incomes of teachers, librarians, and underpaid state clerical workers, not to mention cops and firemen.
Proposition 13 lowered the taxes of ordinary homeowners, of course, but this year’s gasoline lines lent irony to the fact that, in attacking “government spending,” California voters gave the Standard Oil Company of California a free 1978-79 tax reduction of $1,800,000 in San Francisco alone. SOCAL Is one of the state’s largest landowners outside San Francisco; so the additional profit, overall, was probably In the tens of millions. None of it came back as cheaper prices at the gas pumps.
In fact, a lot of those gasoline lines were at Chevron stations, Standard of California’s “brand name.” Others were at Exxon, Texaco, and Mobil stations, where motorists fumed at “the Arabs” while reading such headlines as “SAUDIS RAISE OIL PRICES.” The “Saudis” in question produce their oil through a consortium called the Arabian-American Oil Company; the American members of the consortium are Exxon, Mobil, Texaco, and Standard of California.
While prices passed a dollar a gallon in those companies’ gas stations, the additional profit to Standard of California alone from one early-summer “Saudi” pricing decision was nearly $4 million a day. “For Exxon, Texaco, and Mobil,” says a San Francisco Examiner story, “the figures presumably would be nearly the same.”
“Inflation,” as the word is currently being used in newspaper headlines and private conversations all over America, is a misnomer.We are suffering from textbook inflation — a debasement of the value of money — so that people with savings or people who live on fixed incomes must watch their buying power diminish. In a textbook inflationary situation, however, incomes rise along with prices, employment is high, and money is easy to borrow. None of this is true as I write, and it isn’t merely because “recession” is overtaking “inflation.” What newspapers are calling “inflation” is simply what we used to call “the cost of living,” and our economic problem is simply that the cost of living is outrunning our ability to pay for it. “Inflation” is the dark side of the American Dream.
For the first six months of 1979, according to news headlines, the annual “inflation rate” was 13.2 percent. The Consumer Price Index — the Labor Department’s monthly calculation of the combined costs of many “necessities,” including food, shelter, and transportation — had increased at that annual rate.
The “annual rate” figure, while both accurate and scary, is confusing. What the Labor Department actually said was that the cost of living was 1 percent higher during June than it had been in May, 1 percent higher during May than it had been in April, and so on backward through the year. During the same period, according to the Commerce Department, the personal incomes of Americans went up, too — but only by one-half of 1 percent every month.
In other words, what you have to pay out went up every month, twice as fast as what you were able to take in did. That’s what most of us mean when we kick around the word inflation.
Of course, if you don’t have a job, if you can get only occasional work, if you’re a farmer who has to watch wheat prices drop while the cost of bread continues to rise, then the “personal income” figures don’t mean much. All you can do is start to wonder whether those stories are true about fixed-income pensioners eating dog food for dinner.
They are.
If a beginning could be assigned to our present troubles, it might be that moment at which Lyndon Johnson decided to lie to all of us about the cost of the war in Vietnam. The truth would have meant higher taxes to pay that cost; instead, the money was spent, but not provided for — presumably so that opposition to the war would not grow at an even faster rate. The result is that we’re paying for Vietnam now, through the hidden and belated “tax” imposed by the decline in the buying power of our dollars.
That problem might have begun to ease by now if that were the only effect that “government spending” has on our pocketbooks. As continuing critics, most of us concentrate on piddling research programs in HEW or on “swollen bureaucracies.” If there’s a pocketbook villain, however, it lives in a single, five-sided building just outside Washington: The Pentagon.
This is not — as some people seem immediately to assume — a political argument somehow connected with Jane Fonda. It is a simple matter of hard-nosed cost-benefit analysis, of the sort that should delight the most conservative Republican whose ribs were ever made of rock. In the proposed fiscal budget for 1980, the total amount of money requested for the Department of Defense (and for the military programs of the Department of Energy) is more than $138 billion. It’s an increase of $10 billion over the year before. For what?
Not for machine guns or barracks paint or soldiers’ salaries. The amount for all conventional uses — anything at all other than nuclear weapons — has actually gone down. But measured in “constant dollars” — meaning that we’re talking about the actual increase in comparison with your buying power and tax-paying ability — the budget for strategic nuclear weapons alone will increase by 19 percent.
As we all know, this is money to kill every Russian 32 times, because the Russians are able to kill every American 31 times. In fact, the American strategic position would not change at all if $10 billion were cut out of the military budget starting tomorrow morning. We spend the money on Strangelove hardware that nobody wants — that will kill no more people, and do it no more efficiently, than the hardware we already have. We don’t spend it on crucial needs, such as our own agriculture. Instead, we let our farmers “pay” subsidies to European middlemen.
The largest wheat-buying and exporting firms are controlled by Europeans. They buy wheat from American farmers at depressed prices. Then European governments put what amounts to an “import tax” on the wheat. German and French and Danish millers wind up paying an inflated price for the same wheat — and, by direct arrangement or through a more subtle collaboration, the import-export firms and the European governments split the difference, while the American government looks the other way and prays for a better day.
Some of that money comes back, of course, but not to the farmer, and not to you and me. The Citicorp Annual Report mentioned earlier says that during 1978 Citicorp took in from “foreign exchange income” a total of $104,662,000. The only explanation is that it came from “trading profit in numerous currencies” and from “the effect of translation gains and losses on assets and liabilities” in currencies other than the dollar. When you read those puzzling stories about the American dollar going up and down on international money markets, it’s well to remember that somebody’s making money on every one of those fluctuations, and it isn’t your local public library.
Possibly this is another demonstration of the workings of “monopoly capital.” (I hasten to note that to oppose “monopoly capital” and its workings is not necessarily to be anticapitalist.) But we have had trusts and cartels and oligopolies and international manipulators and uncaring profiteers before; the worst of them have conned us, exploited us, and robbed us. Never before, however, have we had an economic situation that the textbooks — even the most radical of textbooks — don’t account for.
Behind all the “villains” is another villain, as inexorable as it is impersonal.
The cost of energy is an inherent part of the cost of everything. Ron Specht’s combine muffler, for instance, went up in price 29 percent in a year; it takes energy to manufacture a combine muffler. It takes energy to bake bread, to process food, to produce electricity and to transmit it to jigsaw a jigsaw puzzle, to print or edit a magazine, even to write an article about energy. For some reason Americans want to believe that this all has to do with “dependence on foreign oil,” especially since distant Arabs are easier targets than their home-based collaborationists in the oil companies. But brave presidential speeches about shifting to coal or to shale oil or even to nuclear energy miss the point.
All of those energy sources, uranium included, are nonrenewable. Make alcohol from grain, and you’ll have another wheat crop next year; burn wood, and you can grow more trees; the sun keeps on shining, rivers keep flowing, the wind keeps blowing. But when we’ve used up the coal and oil and uranium, then, baby there ain’t no more. Though in theory we could go on as we are for another generation or two — even without nuclear energy and its frighteningly intractable problems of safety and disposal — the fact is that we can’t afford to do this, and there is no way in which we will ever be able to afford it. It’s come to that.
Courtenay Salter knows or seems to. She is the chief economist for the Commerce Department, and it was she who told us a while back that American productivity is going down. The decline, she said, was “centered in the automotive sector, underscoring the sensitivity of our economy to changes in petroleum prices and availability.”
Prices and availability. When the cost of bringing something to you goes up, the price you’re going to pay for that something has to go up, too. And the cost of extracting nonrenewable resources from the earth is not merely going up. It’s going to keep rising, as the mathematicians say, exponentially.
Let’s take a 1972 study by the National Petroleum Council (oil industry people, for the most part; so far, their predictions have turned out to be low). The study asked: “If the rate of profit were held steady, what would happen to the price of oil if we increased domestic production by 18 percent a year?” That’s a reasonable production increase, well within our technological capacity. In 1970 dollars, the study answered itself, the price (which was $3.18 a barrel in 1970) would go to $3.70 in 1975, to $5.16 in 1980, and to $7.21 in 1985.
Since the dollars are constant, we can take each five-year increase as a percentage of the 1970 price. From then until 1975, the projected increase is 16 percent; from 1975 until 1980 the further increase is not another 16 percent but another 46 percent of the original price; and the additional increase from 1980 to 1985, in terms of the 1970 price, is 64 percent. In other words, the increases themselves increase as time goes by.
This is not because oil executives are evil capitalists or because Arab sheikhs love Ferraris. It is simply because the more oil you take out of the ground, the more it costs to take out what is left. That’s what an “exponential” increase in cost means. In the NPC study the first five-year increase was 16 percent, but the increase over 15 years wasn’t 3 times 16, or 48 percent. Instead, it was 127 percent.
There is nothing whatever that anyone can do about it. It is a hope-drunken dream to imagine that some vast new oil field or coal deposit will be discovered; we have already searched the planet thrice over. “Conversion to nuclear energy” is equally futile; safety aside, a massive conversion would simply mean that we’d run out of uranium before we ran out of oil. (”Breeder reactors” are a brief postponement, not an answer; no Congress can repeal the Second Law of Thermodynamics.)
Except for the existence of a few hydroelectric dams, our manufacturing, agriculture, retailing, transportation, and private lives are dependent entirely on nonrenewable energy resources. Switching from one such resource to another is like jumping from a rapidly sinking boat into a rapidly freezing ocean.
If the cost of energy is going to keep rising, then the cost of everything is going to keep rising, too. There is not the slightest economic chance that incomes can keep pace; employment can’t keep pace either. Raise a businessman’s costs, and he looks first for ways to cut down on labor. His best solution, right now, is to get by with fewer employees and to use machines to increase the productivity of the people he keeps.
We think of “automation” in connection with factories. Wrong: what ever happened to elevator operators? Most large newspapers are moving increasingly toward automation in the editorial as well as in the printing departments. Around San Francisco the rapid-transit system has no human attendants in most stations most of the time; ticket selling and change making are done by machine. Tellers are also getting scarcer.
Even a professor of history is affected. Whereas once his university’s library was a collection of printed materials, it is now increasingly likely to be a collection of computer terminals linked to one big library, possibly thousands of miles away and available via phone line, at which academic journals are stored, not on shelves, but in “key-word” computer tapes.
If computerized libraries also mean that a lot of marginal journals, dependent on library sales, will have to stop publishing — so that exchanges of knowledge will dwindle and duplication of effort will multiply — then that’s how it goes. As things now stand, the implacably rising cost of energy is going to turn libraries, schools, and even police departments into amenities as obviously luxurious as a gas-guzzling 1951 Cadillac.
On being appointed secretary of the treasury in July, G. William Miller said that with the proper policies America can be “healed” in five to seven years, but that it will call for “the tightening of belts and the return to being in command of our own destiny.” He was quite right on all counts, but it’s doubtful that he meant what we might wish that he had meant.
Our only way out of the long-rage problem is to convert to the use of renewable resources, and it will take at least five years, probably longer, even to begin that conversion on the necessary scale. Most of us would rather believe in a conspiracy than recognize that our escape from pessimism, cynicism, and disaster can be powered only by grain alcohol and the sun.
Instead of spending $142 billion on new ways to use coal, we’re going to have to spend it on the government contracts that will make possible our rapid conversion to solar and grain-alcohol technology. Along the way, we shall simply have to get rid of disposable cans and bottles, petroleum-based plastics, and energy-hungry materials wherever possible. I don’t mean to say, “Charge a deposit for them” or “Recycle them.” I mean to say, “Get rid of them.”
No one who has power ever gives it up willingly; we may have to fight banks, Arabs, oil companies, foreign wheat brokers, misled labor leaders, officious bureaucratic regulators, and frightened politicians all the way from our union meetings to our presidential elections. That’s returning to “being in command of our own destiny,” though it probably isn’t at all what Secretary Miller meant. It will take time and sacrifice, but at least we’ll know what we’re working toward.
We’ll know, that is, if we face the truth, starting at the top. The truth and its honest recognition are the cures to all that pessimism and cynicism; I can tell Mr. Caddell that there are a lot of ordinary people out there who know an irrelevancy or an outright lie when they hear one. This administration should know that.
So: no more “oil import limitations” that match the highest import year in history. No more scapegoating the ecology-minded, who have been right all the time. And no more listening to businessmen and labor leaders alike who take advantage of our amusement over snail darters to push their immediate short-range projects for profit — such as putting lead back into gasoline or building still more gas-hungry highways.
No more nonsense about how solar technology is 30 years in the future. It’s here. No more allowing utilities to get away with the assumption that power has to be delivered to your house from a central source. A small plant, perhaps locally or cooperatively owned, that serves 50 homes, or 3 apartment buildings is perfectly operable.
Most of all, no more seeking out minor villains under the mistaken impression that each is the Attila who leads the economic Huns. For “inflation” there are palliatives, the slaying of neighborhood dragons, that can bring about a temporary easing of pressure; there is no solution to the problem but the long, uncomfortable table process of conversion to renewable energy resources. For our pessimism and cynicism, there is no cure but truth.
