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The Vanishing Middle Class

8:00 am in Uncategorized by E.L. Beck

The Waters Begin to Churn

During my return to graduate school a few years ago, I had enrolled in a class on international political economy and a requirement, naturally, was to complete a paper. I elected to write on Japan’s “Lost Decade.” Before I dove into the topic’s research, I only held a sketchy picture of Japan’s long recession, one that started in the early ‘90s due to a collapse in that country’s commercial real estate market, and assumed that by 2004 – the year I wrote the paper (rewritten for a general audience as A Roadmap to Follow, now posted on Scribd) – the recession would be over. Nevertheless, I was intrigued by such a lengthy economic downturn.

As my research unfolded a clearer picture, I started to see that, far from moving on, Japan was entering its second consecutive “Lost Decade,” and that the country was truly suffering from some intransigent economic problems. Despite enormous amounts of fiscal stimulus from Japan’s national government, its economic woes had taken root and were not going away. As I drilled through the various arguments as to why this reality took hold – the commercial real estate bubble, Japan’s government propping up failed banks, and a stubborn deflationary cycle, to name a few – I started to understand that the true root causes could be traced back to the 1980s.

It was then that, in response to the United States levying steep tariffs to protect the domestic automotive industry during the Reagan administration, Japanese automakers responded by building manufacturing plants here in the U.S. There were no grand strategies at play here: Japan’s automakers were simply responding to a threat to their ongoing viability as companies. What no one – to the best of my knowledge – perceived at the time was that this offshoring of manufacturing would eventually open the flood gates for Japanese companies from across the industrial spectrum to send more and more jobs overseas.

This bleeding of middle-income jobs took an immediate toll on Japan; the commercial real estate collapse was merely the triggering device. That it happened so soon in Japan can be explained, I argued in the paper, by the fact that Japanese are net savers, a then-culturally ingrained tendency. As a result, Japanese consumers did not lift their country’s moribund economy by spending on credit; they simply did the rational thing and stopped spending. As time went on, this created a deflationary spiral downwards. It took five years after the real-estate collapse before deflation appeared on Japan’s radar and nine years before deflation took a particularly nasty – and entrenched – turn. There was simply no demand to be found anywhere in the country.

In the United States, manufacturers also started to offshore jobs during the ‘80s, but no long, severe recession turned up. The difference? When Japan’s middle incomes stagnated, Japanese tightened their belts and stopped spending. Americans, on the other hand, responded by going on a spending binge, increasing credit card debt to new highs, taking out equity loans on their abodes, and buying new homes. When home prices reached record heights due to demand, Americans signed on to ever more sophisticated mortgages that allowed little or no down payments, with low monthly payments for the first few years (balloon mortgages). Americans didn’t care: They assumed that before the reset took effect, the house would be sold and another one bought. In short, Americans made up for a lack in increased in wages with an increase in credit lines.

I wanted to make this parallel at the end of the paper, and show that the U.S. was following the same track. Data from the Federal Reserve and the Census Bureau were showing the rising indebtedness versus stagnant incomes but at the time, the American economy was doing fine, brushing itself off after a quick downturn in the wake of the technology bubble bursting in 2001. “Stick to Japan,” my professor suggested. “Anything else is just conjecture on your part.”

Sage advice for the time, but by 2007 my instincts proved correct. In March of that year, I caught a glimpse of a news story about a mortgage company – New Century Financial – that had specialized in subprime mortgages and was now in trouble. In the paper on Japan, I noted the ravaging effects of deflation on home prices, but did not necessarily foresee that the economic collapse in the United States would emanate from the housing market. Who could have guessed banks and financial institutions would hand out mortgages to borrowers in no position to repay? Perhaps when banks have to reach out to the subprime market to issue more credit, that’s an indication the prime credit markets are saturated, not a good thing.  Nevertheless, the number of defaults, primarily buyers who had purchased homes using subprime mortgages, was increasing at New Century and causing the company financial stress.

I knew it was only a matter of time.

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The Dirty Secrets of Clean Hydrogen

8:00 am in Uncategorized by E.L. Beck

We placed a man on the moon in less than a decade after the call to action. Why can’t we do the same for hydrogen?

On June 14, 2011, Bloomberg News reported that Energy Secretary Steven Chu “whose mandate includes getting more fuel-efficient cars on U.S. roads, is disregarding advisers in his own department and seeking to cut almost half the federal funding for hydrogen-powered autos.”

Chu explained that “hydrogen fuel-cell technology” developed by carmakers “isn’t yet practical,” according to the story. Yet, Mary Nichols, chairwoman of California’s Air Resource Board, contends that Chu’s “explanations don’t make sense to me. They are not based on the facts as we know them.” In light of the Obama Administration’s and automaker’s July, 2011 agreement to achieve 54.5 mpg fleet averages by 2025, de-incentivizing hydrogen research hamstrings such goals. These actions undercut progress on hydrogen. So why take them?

As we look into the future, hydrogen must have a presence. While hybrid vehicles play a stop-gap role during our switch from reliance on oil, they do not hold long-term potential thanks to their incremental fuel savings and limited use for anything beyond a family sedan. Biofuels also have a dead end, seen in their need to replace food-producing farmland with energy-producing farmland. With our ever-increasing population on earth, that is unsustainable.

Electric cars are nice with which to play in the short term, but as their numbers grows, so too the demand for the electric to recharge them grows and, at some point, the carbon emissions saved by the electric vehicle is overtaken by the carbon emissions produced by the power plant that generates the electricity to recharge the electric vehicle. Besides, some as-yet unknown breakthrough technology will be required to truly boost battery capacity exponentially beyond what we enjoy today, the capacity that will be required to turn an electric vehicle into anything beyond an urban commuter vehicle.

All of these technologies hold short-term potential, perhaps even mid-term, but long-term potential? It is doubtful. Reaching substantial independence from oil will require a substantial seismic shift in our energy resourcing. Simply look at one vehicle category that electric and hybrid technology cannot answer, and that biofuels cannot answer in light of its above-mentioned shortcoming: trucks. Trucks, from pickup trucks to commercial panel vans to local delivery trucks to semi-trucks, will need to maintain their current engines to remain viable. Only the internal-combustion engine, at the moment, produces the torque required for trucks to haul or tow (or for off-road equipment such as bulldozers to do their jobs).

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