Invisible Energy: Economic Recovery Depends on Recognizing the Root Causes of the Problem
President Obama today took assertive steps to improve the energy efficiency of cars and buildings, and linked this to the need for green jobs to stimulate the nation’s economy.
The connection between energy efficiency and economic recovery needs to be continually emphasized: for too long efficiency has been the invisible resource. Its key role in growing the economy has gone largely unnoticed, and so the lag in efficiency for the last eight years has not been connected with the current recession.
The deepening recession was not caused by reckless mortgage lending practices alone. For the last decade or so, commentary from economists such as Paul Krugman and journalists such as Tom Friedman, as well as the official notes from the Federal Reserve, noted several major drags on the economy that are all a consequence of excessive and wasteful energy use.
Of course, the direct cause of the recession was the combination of the bursting of the housing bubble and the massive market failure in mortgage lending. Poor energy efficiency was implicated in the this issue as well: for a typical house built in the last 5 years in suburban sprawl, the median price loan was about $200,000 (median house prices are now down to $175,000) but the average 30-year commitment to utility costs to run the home was $75,000 and the cost to drive to and from it was $300,000. (Both of these could be cut in half by green building practices and smart growth patterns of development.) It is not surprising that a lending system looked only at the $200,000 commitment and not the $375,000 went wrong.
Any economic stimulus that does not address these root problems may succeed for a few years but will fail in the long term. Spending government money as the President has proposed to stimulate spending may help in the short term, but the money will all be borrowed. Unless we pay attention to how it will be paid back, we will not have solved the problem.
That is why it is encouraging that the stimulus package is beginning to address the need to invest in energy efficiency, where there are high rates of return that will allow spending today to be repaid by savings in only three years. There is much more that needs to be done, and we are hoping that subsequent congressional actions on climate and on energy will take advantage of efficiency opportunities that would otherwise be lost.
Many policy makers act as if free markets always automatically produce the best results for everyone. I call this belief "economic fundamentalism" and describe it in Saving Energy Growing Jobs. Today this attitude seems to be reflected in the belief that if we can just solve the immediate problems of the economy--by creating jobs through short term government spending for economic stimulus--everything will take care of itself.
But this belief seems to be premised on the concept that the current recession "just happened," rather than looking at the evidence that it was caused by the specific factors I have discussed here. We saw this recession coming. Many writers noted that worldwide competition for limited supplies of oil was a growing economic problem; it was common knowledge that the growth in consumer spending of the last decade was supported by increasing debt and could not be sustained.
What we seem to have forgotten amidst the storm clouds of recession is that these problems still have not been addressed. Until they are, we would be overly optimistic to forecast an end to recession.
But today we took a first step in that direction with the President's actions to improve automobile efficiency and emissions intensity, and his recognition that this was an economic stimulus action. We hope for much more of that in the future.