In spite of all appearances to the contrary, Demand Side does not like being gloomy. We do sit in dark rooms listening to opera and picking the wings off flies, but it's all for fun. But this week confirmation hearings are scheduled for Baffled Ben Bernanke and it was too much for us. We ran screaming into the light of day.
With the help of our new BOTE model we are going to explore what we can do to get going again. On Friday we'll reprise the Home Owners Loan Corporation antidote to mortgage debt, what could be a big boost for growth and employment as a result of repairing household balance sheets.
Today, we're going to look at the possibilities from energy savings, new energy sources and climate change mitigation. This is likely familiar turf to most of our listeners, but it is real and right on from the Demand Side.
Let's get started with Bill Gross -- not THE Bill Gross of PIMCO bond fame, somebody better -- the founder of IdeaLab and a leading light in alternative energy development.
Why, you ask, do new businesses create most of the new jobs? A big reason is that there is a lot of investment in new businesses. Investment is the natural stimulus to the economy. Not the so-called investment of the housing bubble, please note. We allowed residential investment and the financial sector to dance their little two-step of economic collapse in the name of investment, but it was really only speculation. As we'll see on Friday, the multiplier is crippled by debt. And now we have plenty of it.
In the present case, with energy projects and climate change mitigation, the multiplier is fully engaged in energy projects. Why? One reason is it trades low job activities with high job activities. Fossil fuel production and distribution involves the fewest jobs per dollar of spending of any sector in the real economy. Replacing fossil fuels with savings -- energy retrofitting or mass transit, for example -- replaces resource extraction with technology and infrastructure. A second reason is creating alternative energy sources and the transmission infrastructure to support them also incentivizes major new investment -- the natural stimulus. And third, connected, all these activities generate a real and inevitable stream of benefits from which to pay the debt service for the investment. Sadly, investment in housing did not.
It is in the climate change arena that we see most clearly that if the Market is the invisible hand, it is connected to a blind eye. The Market cannot see ahead and price the saving of the planet's environment in a meaningful way. Instead it underprices the causes of global warming the fossil fuels and automobiles and energy plants that use fossil fuels and creates a perverse incentive favoring the currently entrenched oligarchs of Big Auto, Big Oil, Coal, and so on.
Let's go from the general to the specific
From David Leonhardt in the NY Times: A Stimulus That Could Save Money
White House officials are now looking at creating a new version of cash for clunkers — this time for home weatherization.We at Demand Side proposed to our local city-owned utility a program that would effectively capture the energy savings to pay for the installation of solar panels, weatherization and higher efficiency heating and cooling systems. The homeowner would agree to continue paying his utility bill on the basis of historical usage. The utility would install and maintain the improvements. When they were paid off, the homeowner would keep the energy savings and have a more valuable house in the bargain. It is essentially financing the improvements by energy savings.
[John] Doerr calls his proposal, which would give households money to pay for weatherization projects, “cash for caulkers.”... The housing bust has idled contractors and construction workers, who could be put to work insulating homes and caulking air leaks. Many households, meanwhile, would save substantial money — not to mention help the climate —
Rental properties, where the landlord has less incentive to help the tenant, could be mandated to participate. If the buildings were sold, the entirety of the project would follow the new owner on the same terms by way of a new kind of lien.
Another no-brainer is commercial building retrofitting. As Dr. Jonathan Frost pointed out now three years ago, many building energy improvements are no-brainers. They pay for themselves in a matter of less than ten years.
This means jobs at the same time it means less energy consumption.
Another hopeful sign out of the Obama administration, from the Wall Street Journal:
“The Obama administration’s push to solve the nation’s energy problems, a massive federal program that rivals the Manhattan Project, is spurring a once-in-a-generation shift in U.S. science.Energy Push Spurs Shift in U.S. Science
The government’s multibillion-dollar push into energy research is reinvigorating 17 giant U.S.-funded research facilities, from the Oak Ridge National Laboratory here to the Lawrence Berkeley National Laboratory in California. After many years of flat budgets, these labs are ramping up to develop new electricity sources, trying to build more-efficient cars and addressing climate change.
It is a mistake to think, however, that we need a big breakthrough to get started. We need a rational pricing mechanism -- which gas taxes could help. Demand Side is not on board with the Carbon trading scheme, though it could be a part.
There is plenty of low-hanging fruit in the retrofitting arena.
Investment in energy transmission infrastructure would be like investment in interstate highways. That is, without the investment in interstates, the automobile would never have become the iconic American product. No matter the bellyaching about taxes, it was the gas tax and the highway that created the automobile industry. The same can be done with alternative energy. Investment and production that would never be profitable will suddenly come on line to the benefit of us all, and our grandchildren.
And as always there is the National Surface Transportation Financing Commission, which we insist on calling (incorrectly) Blue Ribbon Commission on Transportation. This commission is now known as the National Surface Transportation Policy and Revenue Study Commission, perhaps in response to the backlash against all things revenue produced by earlier iterations. In fact, its latest final report is out yesterday. We have not reviewed it entirely, but see that its recommendations include the interesting formulation :
"Investment gaps as stated in constant cents per gallon of highway motor fuel."
Interestingly, transit, freight rail and passenger rail investment could be fully funded by a gas tax of 10 cents increasing to 17 cents per gallon through 2050. This is an annual investment of between $25 and $40 billion. It is highways that pull in the big money. Estimates are that fully funding highway investment would involve taxes rising from 71 cents per gallon in the near term to 85 cents in 2050. This would fully fund $200 billion per year plus in transportation infrastructure.
It is completely true that long-term investment commitments will lever private investment dollars targeted to the public goods.
So Demand Side wonders why we don't rebuild America by rebuilding America