The Economic Growth Engine

The Economic Growth Engine

How Energy and Work Drive Material Prosperity

Robert U. Ayres and Benjamin Warr

The historic link between output (GDP) growth and employment has weakened. Since there is no quantitively verifiable economic theory to explain past growth, this unique book explores the fundamental relationship between thermodynamics (physical work) and economics.

Introduction

Robert U. Ayres and Benjamin Warr

Subjects: economics and finance, energy economics, environment, ecological economics

Extract

In the year 2000 at the end of the Clinton Administration the US federal budget had a surplus of 1 percent of GDP. By 2007 the surplus had become a deficit of over 6 percent of GDP, a figure more usually associated with Latin America. Part of the swing from surplus to deficit was due to the military spending to finance the war in Iraq. Another part was due to the huge new ‘homeland security’ program. A third part was due to the continued outsourcing of manufactured products (and exodus of manufacturing jobs) from East Asia. The Bush Administration’s tax cuts for the wealthy was another major cause. The overvalued US dollar, propped up by its role as the major reserve currency of the world, has played a role. The budgetary deficit has been compensated in part – but only a small part – by the anti-recession policy of the Federal Reserve Bank, resulting in extraordinarily low domestic interest rates for several years (2001–04). That policy permitted (indeed encouraged) excessive consumer spending, which, in turn, generated steady growth in the US GDP (and kept tax returns from collapsing) until the end of 2007. But the low interest rates, together with lax, or lack of, regulation, permitted some clever financial operators to create a real estate boom that soon became a ‘bubble’. This was driven by huge numbers of sub-prime ‘teaser’ mortgages, which were sold by predatory lenders to unqualified people who should not have been buying houses...