Invisible Energy: Recovering from the Recession

I wrote yesterday to explain how energy efficiency is tied to our recovery from the economic recession and to applaud President Obama’s assertive steps to improve the efficiency of cars and buildings. Today, I’ll expand on my theory that the nation’s failures in energy efficiency contributed significantly to each of our economic problems and argue that unless we change our practices it will be hard to recover fully from the recession.

Energy efficiency and economic well-being have never been tied together closely in the public’s mind. But economists and public policy experts have made the connection and it is my belief that each of the following economic woes worsened in recent months and years because of our refusal to stay current with energy technology:

  1. The risk of inflation.
  2. The large trade deficit.
  3. The low savings rate.
  4. Productivity increases that are too low.
  5. Government deficits.
  6. Weak consumer spending.
  7. Too few jobs.

The connection with inflation is most direct. Energy costs were the main driver of inflation over the past 5 years, a fact that was well recognized by the Federal Reserve in raising interest rates. In fact, energy was the main culprit behind all of the last runups in inflation, in 1973, 1979, 1992, as well as the last one.

Energy efficiency can cut energy costs by reducing the demand for energy while leaving supply unaffected. The recent drastic reduction in oil prices shows how responsive energy prices are to drops in demand. But unfortunately the 2008 drop in demand was due to economic weakness, not efficiency.

Energy costs were 38 percent of the trade deficit in 2007. Efficiency could cut the amount of imports as well as reducing the cost of imports.

Energy efficiency investments typically pay all their cost back in 3 years, even though they last much longer. If we need to spend more to get out of the recession, we need to spend it on things that pay back; otherwise we just trade solving the problem of spending for exacerbating the problem of government deficits (#5 above).

The low savings rate may be in part of consequence of the rising costs of driving and energy. These costs are also related to the most direct cause of the recession. But consideration of energy and transportation costs in future home lending can help prevent a recurrence of the mortgage mess without preventing all but the rich from owning a home.

The current recession is not just a repeat of the Great Depression or the Japanese “lost decade” that followed the collapse of their real estate bubble. It is also a result of longer-term problems, many of which are fundamentally about energy efficiency.

Fighting the recession will require using all the tools at our disposal, not just avoiding the short term errors of the past.

In sum, efficiency policy is one of the very few government actions that can solve or at least mitigate all of these 7 problems. These issues will be discussed in detail in my forthcoming book from Bay Tree Publishing ( called Invisible Energy.