“Remember how ten years ago, at the turn of the Millennium, the media were full of retrospectives of the last ten years, or hundred years, and of starry-eyed predictions for the next ten? The authors of the predecessors to blogs were excited about the future, and speculating about what we could call the next decade. If the previous decade was the nineties would be next one be the “aughties”?
If you fast forwarded to today, a viewer/reader would have to be amazed at the lack of interest—and the lack of confidence, as we move to the next decade. It is evident that the right name for this decade would have to be the Decade of Zero. Because the main story of the last ten years, at least for America, is the story of failures, of missed opportunities, or at best of laying the foundations for future progress, as opposed to achieving it.”
...when I happened to look at Paul Krugman’s column, where he says the essentially the same thing.
Dr. Krugman explains the economic failures of the decade: the failure to see growth in family income, in jobs, in housing values, or in the stock market, or in America’s importance in the world economy. Commenters on this column also point out failures in other measures of American success and welfare.
The environment is also beset with failures to take action. Global concentrations of greenhouse gases are more than 5% higher than they were in 2000. America has made almost zero progress as a nation in curtailing greenhouse gas emissions (although some individual states and regions have done a lot). We are ten years closer to potential tipping points in the global climate system, and still operating without a global plan to solve the problem. Climate change can still be mostly averted, but it is that much harder now than it would have been if we started in 2000 (much less 1992).
For both the economy and the environment, we (meaning the public policy decisionmakers in the federal government and in businesses organizations) closed our eyes to obvious problems, hoping that if we could convince everyone to have confidence, the problems would go away. Or at least not be noticed. This is a key problem that we need to overcome to avoid another Decade of Zero: we need to face facts and recover the recognition that problems demand solutions.
The first solution we need to address is to pass a climate protection bill. Anyone who worries that solving climate change will compromise the economy should take note: during the decade where we dithered and procrastinated on taking action on the environment, the economy stagnated and developed systematic problems that still are not under control.
But this is actually a reason for hope, not for gloom. We can solve both problems with the same policies. There is a tool for job creation and economic recovery that is dramatically underutilized in the economy: Energy Efficiency. The National Academy of Sciences recently released a study showing the potential to invest almost a half trillion dollars in energy efficiency in buildings alone over the next decade, an investment that will pay itself back in less than three years and then go on saving over $150 billion a year for the foreseeable future.
My own analysis will be presented next month in the new book Invisible Energy, to be published by Bay Tree Publishing. It highlights something buried in the details of the NAS study: that the assumptions understate the true potential for stimulating the economy by reducing emissions of greenhouse pollution through efficiency. We actually have the opportunity to invest trillions of dollars in climate solutions that also address some of the core causes of the Great Recession of this decade, causes that are still only minimally discussed in the national economic dialogue.
Tackling the climate change problem will provide an impetus to solving American’s underlying economic problems, and Invisible Energy will show how.
Krugman’s op-ed notes that it is hard to find anyone, of either party, willing to address the fundamental causes of the problem. The same is true for energy efficiency. But we have the choice. There are ways to exploit this immense resource for economic recovery and climate stabilization in a way that enhances markets and helps make America more competitive. We need to make them a priority for the decade of the teens.
]]>We here in the United States have been slow to recognize this connection, perhaps because of a national political dialogue on climate change that focused on the costs of cutting emissions while ignoring the much larger economic benefits. This has been less of a problem in Europe, where attempts to meet the goals of the Kyoto protocol have spawned deep interest in energy policies to promote efficiency.
The progress that Europe is making can be heard in an interview between the Alliance to Save Energy's President Kateri Callahan with European Energy Commissioner Andris Piebalgs.
The Commissioner discusses some of the more ambitious goals that the European Union has established and how the EU and its member states are working to meet them.
The Alliance to Save Energy (ASE) is a strong partner with NRDC in the effort to bring policy attention to energy efficiency globally as well as in the United States. ASE will be holding a conference and trade show - the Energy Efficiency Global Forum and Exposition - in Paris from Monday, April 27 through Wednesday, April 29. Commissioner Piebalgs will be speaking, one of 100 leading voices representing 26 countries and six continents expected to be at the conference.
I hope that NRDC's members and supporters who are able to be in Paris at this time, or are willing to make the sacrifice of travelling there, will attend.
For more information on EE Global 2009, to register for or serve as a sponsor of the event, please visit http://eeglobalforum.org; or contact Mindy Berman at (310) 915-5947 or mberman@ase.org.
]]>This week's Group of 20 meeting in London will arise from the death of one system of ideas even as another struggles to be born.
He discusses the concepts of government oversight of markets in terms of socialism and capitalism (as in "one system of ideas/another") and suggests that the common wisdom is that unregulated markets are capitalistic and regulation is related to socialism or at least European style social democracy.
Many policy makers act as if free markets are the result of an absence of government regulation and assume that such markets always automatically produce the best results for everyone. I call this belief "economic fundamentalism" (and describe it in Saving Energy Growing Jobs) because its believers treat it as revealed truth that need not be subject to empirical verification.
The global recession and its direct cause -- the financial sector meltdown -- offer dramatic empirical evidence that unregulated (or even weakly regulated) markets can fail.
What has not been recognized is how regulation is always necessary to make markets work in the first place. Government regulation is not a move from capitalism to some form of socialism, instead, regulation is a necessary condition for capitalism and free markets to work.
Incongruous as this may seem, I actually saw how unregulated markets can fail during a recent vacation trip to Morocco.
As I wandered through the narrow medieval streets of Fes, I saw shop after shop displaying "18th Century Berber tribal silver jewelry" or "50-year-old rugs made without chemical dyes."
An economic fundamentalist would say that such shops, where prices were set by bargaining, should produce the best deals. But in fact, they will usually produce a bad deal for tourists, who don't know exactly what they are bargaining for, while the store owners do.
How do you know if an article is antique hand made silver? Of what kind of dyes were used in a rug? You only know if there are standard-regulations-on how products are labeled and represented. This is usually a function of government. I describe this problem in more detail in Chapter 4 of Saving Energy Growing Jobs on pages 126-34.
The problem of needing government regulation of markets -- the establishment of standards for what a product really is, whether it is an oriental rug or a variable-rate home mortgage -- is a key to the solution of climate problems.
For example, when you buy a new television, you have no idea what its carbon footprint will be, even though apparently identical televisions differ in the their carbon footprint by as much as 2 to 1. (They have the same 2:1 difference in their effect on your electric bill: the difference could cost you $150 a year.)
But television manufacturers can't advertise the difference today because U.S. law (wisely) requires that such representations be made using government-produced standards. But the standards for energy measurement were designed for black and white televisions of the 1970s! California has petitioned the Department of Energy to substitute a new international standard written just last year, but as of today is still waiting for a response.
A favorable response could empower consumers to cut residential carbon emissions by over 1 percent while saving money. It is one of a long, long list of actions where government intervention into dysfunctional markets for energy efficiency technologies could help get us out of the recession while reducing pollution and creating jobs.
These issues will be discussed in detail in my forthcoming book from Bay Tree Publishing called Invisible Energy.
]]>This failure is important to understand because one would have thought that financial markets are among the least prone to failure. There have been active markets in loans for hundreds -- even thousands -- of years. The issues are well understood. Even for exotic mortgages, it was pretty clear what the terms were -- what the borrower must repay, what the lender can expect, and what the risks to both were.
The fact that both borrowers and lenders acted irrationally -- or at best irresponsibly -- is incontrovertible evidence that markets can fail.
In the case of mortgages, there are many reasons for failure. One is ignoring the costs of energy and location, as I discussed in a previous blog.
Another cause of the mortgage default problem is the creation of a market failure that went unrecognized by the lending industry and by the financial companies that financed mortgages. It is the trend since the 1990s of separating the business of originating of loans from the business of investing in income-generating financial assets. While lenders used to make their money from the interest payments on the loan, now most lenders make their money on points and fees, and sell the actual mortgages to financial corporations that create mortgage/securities from them. With different parties responsible for different parts of the transaction, there is no one who can act to work out potential problems of non-payment with the borrower.
In the area of energy efficiency in buildings, one of the major failures of the market is called diffuse decisionmaking. An energy efficiency measure with a 100% return on investment accomplished through upgrading the cooling system in an office building may not be undertaken because no one has both the authority and the responsibility for the cost and authorization of the investment.
Today this problem characterizes the mortgage mess as well: because no one has both the authority and the responsibility for negotiating a solution better than foreclosure.
Market failures are at the heart of the discussions about energy efficiency and its potential to protect the climate at a profit. Those skeptical of the ability of efficiency to deliver the solution argue that markets cannot fail: that if you think that there are trillions of dollars of profit from efficiency that could be reaped with the right policies, you are mistaken. Markets could not allow such an unexploited opportunity to exist.
But the mortgage crisis provides irrefutable evidence that markets can fail on a large scale.
Further discussion of the mortgage crisis and its causes will appear in my new book, tentatively titled, Invisible Energy: How Efficiency Can Stabilize Global Climate and Fix the Economy, forthcoming from Bay Tree Publishing. More detail on failures of the market can be found in my current book Saving Energy, Growing Jobs.
Economic fundamentalists might counter that the problem is due to government interference in the market through the creation of Fannie Mae and Freddy Mac. But if this were true, the problem would have focused on these corporations: they would have been the first to fall, and federalizing them would have solved the problem. But other institutions were hit even worse, and as we are seeing, solving the problems of these two did not stop the panic.
The problems are consequences of known failures of the market. The government could have corrected these failures in advance and avoided most of the crisis. And unless it tries to correct them now, it will not succeed in stopping the bleeding without immense cost to the taxpayer.
]]>Some analysts today are saying that we may be seeing the bottom of the default crisis in the foreseeable future.
The reasoning is apparently like this: "borrowers got in trouble by purchasing $400,000 homes that they couldn't afford. But now the prices are down to $250,000, so everything will be all right."
This sort of thinking ignores the key contributor to the crisis - energy and transportation costs. A $400,000 house in suburban sprawl does not commit its owner to only $400,000 of costs over 30 years. It commits the household to almost $800,000: $400,000 to buy the house, over $300,000 to drive to it, and over $75,000 to pay the utility bills. If the price of the house comes down to $250,000, the total commitment is still $650,000. It hasn't changed much!
And since without changes in underwriting standards, the house at the lower price will be considered "affordable" to households with even lower incomes than before (all the lender thinks about is that the purchase price has come down more than 35%), Fannie Mae and Freddie Mac would just be setting up the sequel to the default crisis of 2008.
Now that Fannie Mae and Freddy Mac are responsible to the taxpayer, let's make sure that their lending policies are financially responsible. And also environmentally responsible.
New underwriting standards should be based on the total of monthly obligations resulting from transportation costs, utility bills, and house payments all taken together, rather than considering house payments to the exclusion of these other two large obligations.
Not only will this help with economic growth and financial responsibility, it will also help with fairness in lending. In the cases where we have been able to get data, the most location efficient neighborhoods have much more diversity and also lower rates of home ownership. New standards will help improve environmental justice in home ownership opportunity.
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What should we do with this new responsibility?
The first thing we should do is to not repeat the mistakes that got us into trouble the first time.
As several commentators have pointed out, Fannie and Freddie were not deeply involved in the sub-prime crisis: they maintained higher underwriting quality standards than many other lenders. But they essentially went broke just the same. Staying the course with underwriting standards just invites a repeat of the current crisis the next time the economy is under pressure and consumers who borrow for loans get stretched.
But indiscriminately tightening underwriting standards will harm an already weakened housing and real estate industry. In my previous blog, "Real Economic Stimulus with Energy Efficiency," I noted that mortgage defaults are very highly correlated to neighborhoods that are sprawling and have low transit service, and consequently require their residents to spend a lot of money on driving.
There is an easy way to solve this problem. The new underwriting standards should be based on the total of monthly obligations resulting from transportation costs, utility bills, and house payments all taken together, rather than considering house payments to the exclusion of these other two large obligations.
For a typical new home, which is priced at about $225,000 (median price), the cost of driving to and from the home over the course of a 30-year mortgage exceeds $300,000 for homes located in sprawl and the energy costs exceed $75,000 even if the home meets national model energy codes.
Location efficiency and energy efficiency could increase real affordability substantially: houses that qualify for the federal tax credit use about a third less energy than average while costing only a few thousand dollars more (if that); and houses in location efficient neighborhoods can cut driving expenses by more than three quarters.
New underwriting standards that are more stringent in general but recognize the increased affordability of energy efficient and location efficient housing could do more to promote growth in housing and encourage growth that is financially as well as environmentally sustainable.
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"Many of the arguments against environmental protection actually are concerned more about the issue of potentially dangerous top-down government economic planning-the sort that was used in the Soviet Union-than they are about the environment itself.
...much of the opposition to environmental policies disproportionately emphasizes the issue of government control versus individual choice as the primary reason to oppose environmental protection. A surprisingly large percentage of the anti-environmental writings on the Internet address the authors' opposition to a state-controlled economy and their apparent belief that environmentalism is a stalking horse for big government.
Fear of government control by business is a key recurring theme when examining the politics of anti-environmentalism...this fear is often expressed in broad terms that relate to property rights
Evidently many people believe, or accept the policies of people who believe, that environmentalism is less important in its own right than it is as a "battleground on which competing visions now engage."
The view above would seem to explain much of the business community's knee-jerk advocacy against environmental protection. American business has been concerned about socialism for well over 150 years. In fact, much of businesses activism against organized labor in the nineteenth century was based on the fear that labor union organizations were the precursor of Communist revolutions that would expropriate property from business.
The fears of Communism are not completely ill founded: many countries, beginning with the Soviet Union, underwent socialist revolutions and did in fact expropriate property."
But this week, so did a self-describedly conservative Administration. Two of the largest publically-traded corporations in America, Fannie Mae and Freddie Mac, were place into conservatorship by the government. This amounts to expropriating private property, since the shareholders of these companies have been essential wiped out. This action is no different than what the early Soviet government did, or that other self-describedly socialist governments have done or threatened to do.
Surprisingly little negative reaction has appeared from the folks who are so worried about government takeovers in the context of climate change.
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So we probably won’t do anything to prevent the next price spike: Congress recessed for August when prices were much higher than today without acting on consensus legislation that would have provided moderate-term tax incentives for energy efficiency in homes, appliances, and offices — incentives that would start us on the road to saving 4 times as much energy in the form of gas alone as the oil industry thinks could be found in the Alaska National Wildlife Refuge. These incentives, packaged with tax credits for renewable energy, had strong bipartisan support and were also backed by a broad coalition of business as well as environmental interests.
It seems that we can’t fix the leaky roof when it’s raining, but we don’t want to bother when it’s sunny.
We are especially lax on fixing it when the fix is invisible — when it is based on energy efficiency measures that literally cannot be seen.
Maybe we can take the right steps on energy by realizing that fixing our energy problems will also fix most of what’s wrong with the economy this summer.
And energy efficiency — the invisible but largest energy resource — is at the heart of the economic solution.
I will be blogging about this in the coming weeks. Some of the material in these blogs will appear in my new book, tentatively titled, Invisible Energy: How Efficiency Can Stabilize Global Climate and Fix the Economy, forthcoming from Bay Tree Publishing, which also brought out Saving Energy, Growing Jobs.
The fundamental problems facing the American economy are not broadly based concerns that can be addressed easily through conventional government interventions. Many economic slowdowns were due to broad problems such as weakening consumer demand or increasing general inflation. These could be dealt with by adjustments in fiscal and monetary policy. But most of the problems facing the American economy today relate to the weaknesses of specific sectors of the economy. These weaknesses are not random or accidental, but rather are the result, to a greater or lesser degree, of the failure to address the sorts of energy policies that I have described.
Conventional economic stimulus won’t work to address these problems, because it will worsen some of the problems at the same time that it helps solve some others. Because of faulty energy polices, the economic situation is like driving your car with the brakes on. Pressing harder on the gas pedal won’t solve the problem, it will just overheat the brakes.
This is an apt metaphor, because the brakes are the high cost of energy, much of which results in a flow of dollars away from the United States, and the failures of markets that thwart competition and innovation. I will show in Chapter 2 how energy is at the heart of several of the most important economic problems of the late decade of the 2000s.
But in brief, these problems are:
1. The risk of inflation
2. The large trade deficit
3. The mortgage crisis
4. The low savings rate
5. Productivity increases that are too low
6. Government deficits
7. Weak consumer spending
8. Too few jobs
All of these problems are created or exacerbated by inefficient uses of energy, and by the policy choices that enable inefficiency. So all of them can be ameliorated by reformed policy choices.
Perhaps you are wondering what the mortgage default crisis has to do with energy. Here’s the connection:
The mortgage credit crisis is not only due to subprime lending: even the giant government-sponsored enterprises Fannie Mae and Freddy Mac are seeing their portfolio values decimated by defaults. But these defaults are not random: they have a very clear pattern that has mysteriously been overlooked by the financial services sector. Mortgage defaults occur in places where the need to drive is very high — strolling suburbs with little or no transit service. Urban areas with compact, walkable neighborhoods and good transit services have been largely immune from the credit crisis. What date we have suggests that the lower the auto transportation cost associated with living in a certain neighborhood, the lower the probability of default. A rational energy policy would consider transportation expenses in underwriting loans, and could have avoided a substantial if not dominant portion of the risk that is now afflicting the economy. Concerning the low savings rate, for the past 35 years, since the energy crisis of 1973, median incomes of Americans have hardly changed, yet the trend of ever-increasing need to drive cars has continued unabated. At the same time, cities and suburbs were growing in ways that reduced compactness, walkability and transit access, apparently leading to this increased need to drive to maintain the same quality of life. Driving is expensive — it was 18% of household expenditures even when gas was $1.50/gallon. This compares to only 21% for housing itself (considering only paying for the house, not the utilities or furniture, etc.). So if expenses go up, it’s not surprising that savings would go down.
This problem could have been avoided — and a repeat of it could be avoided without crushing new housing construction — if the lending industry started to consider transportation and energy costs along with the mortgage payments in deciding if a borrower can afford the house. This is not hard to do: there have already been small scale testing of Energy Efficient Mortgages and Location Efficient™ mortgages. The Location Efficient™ mortgage test was a complete success — not a single borrower has defaulted.
]]>In response to his Senate testimony about energy efficiency, he notes in the blog that Senator George Voinovich “said that this was ‘poppycock.’” Romm goes on to say that “conservatives simply have a blind spot when it comes to energy efficiency…”
Is this true? Are conservatives simply irrational in dismissing the merits of energy efficiency? Or do they think we are missing something? I invite comments on this blog from conservative skeptics of energy efficiency: how can we reach a common understanding of what the opportunity is? For my part, I will start discussing some of the ways energy efficiency can help get America out of its economic travails in forthcoming blogs.
In my book, Saving Energy, Growing Jobs, I lamented the lack of dialogue between environmentalists and self-labeled “pro-business” advocates. I argued that environmental protection should be seen as an economic development opportunity because environmental protection policies promote the innovation and competition that enhances growth.
What would it take to promote a real dialogue between pro-business interests and environmentalists? Besides inviting discussion on this blog, I am also working with a colleague, Bill Roller, of the Berkeley Group Education Foundation, to develop a one-day workshop to try to make some progress on the issue of how to encourage constructive dialogue for mutually beneficial results. This workshop will be held in San Francisco on the 19th of September.
]]>His article asserts that environmentalists support "radical economic and social regulation." The careful reader must note that he cites no evidence for this assertion. Actual legislation to control climate -- such as AB 32 that passed in California with bipartisan support, and the Lieberman Warner bill in the Senate -- are examples of the types of solutions environmentalists actually support: emissions caps with multiple market-based mechanisms for meeting the caps at the greatest benefit (or in a more pessimistic scenario, at the least cost).
The wolf-in-sheep’s-clothing is a common theme in anti-environmental writing, as I observed in my book Saving Energy, Growing Jobs:
Perhaps the most widespread myth about environmentalists is that environmental activists are truly, at heart, Communists, and that the struggle of the business community against environmental activism is actually a struggle to protect private property from Communism.
To equate environmentalists with Communists is seldom done in so many words by the anti-environmentalist authors, but is quite evident indirectly from their writing, and surprisingly widespread. Chapter 1 notes how a number of advocacy articles on climate change asserted that even environmentalists recognized that global climate change wasn’t all that important! Instead, the articles argued, environmentalists recognized that doing something about global warming would require more government control—perhaps to the point of total government control over private industry, as in a Communist country. They asserted that the hidden agenda of environmentalists was not environmental protection, but rather government control of business.
The above speculation is echoed in the Wall Street Journal’s citation of business concerns about global climate change: "Many skeptics contend that liberal environmental agendas are behind alarming global-warming headlines, although often skeptics bring agendas of their own." It is difficult to imagine what so-called liberal environmental agendas might mean if not state-run central economic planning.
In at least one case the linkage is made explicitly and publicly. Nationally syndicated columnist George Will wrote in a 2005 op-ed column that "For some people, environmentalism is collectivism in drag. Such people use environmental causes and rhetoric not to change the political climate for the purpose of environmental improvement. Rather, for them, changing the society's politics is the end, and environmental policies are mere means to that end."
Such a theme recurs constantly on the websites of conservative think-tank organizations, such as the Competitive Enterprise Institute, that are widely cross-referenced on other business and political organization sites. The Institute’s president, Fred L. Smith Jr., wrote a paper (available on the Institute’s website) in 2004 entitled "Eco-Socialism: Threat to Liberty Around the World." In it, he states, "the ecology has become the battleground on which competing visions [of the economy] now engage." And the text states clearly that the two competing visions are his Institute’s vision of free markets and the opponents’ vision of "centralized collectivist solutions."
This article above is not an isolated case of this story being circulated. The Institute is well linked on the Internet to other conservative sites, and articles and reports of a similar tenor are widespread. Evidently many people believe, or accept the policies of people who believe, that environmentalism is less important in its own right than it is as a "battleground on which competing visions now engage."
The view above would seem to explain much of the business community’s knee-jerk advocacy against environmental protection. American business has been concerned about socialism for well over 150 years. In fact, much of businesses activism against organized labor in the nineteenth century was based on the fear that labor union organizations were the precursor of Communist revolutions that would expropriate property from business.
The fears of Communism are not completely ill founded: many countries, beginning with the Soviet Union, underwent socialist revolutions and did in fact expropriate property. If a real connection between environmental advocacy and Communism did exist, this would be something serious for business to worry about.
Actually, the facts are almost completely opposite: where socialists have expropriated private industry, they have also operated it in a way that is much more irresponsible environmentally than is the case in market-based economies. Centrally planned economies have the world’s worst record on environmental protection, pollution, destruction of natural environments, and the most hostility for citizen-based environmental advocacy.
The concerns about government control are equally mistaken. My experience in the Soviet Union, and more recently in China, shows that the level of state control over actual production processes in these economies is lower that it is in market economies like America and Europe, often to the extent that even when the country seriously wants to change business practices to protect the environment, as is now the case in China, the level of control necessary to do this well simply doesn’t exist.
In other words, a free-market economy subject to the rule of law is a much more fertile field to implement environmental policies than a Communist country. Based on the facts, environmentalists should be at least as anti-socialist as businesses.
It seems that George Will, Krauthammer, and other conservative pundits must have missed the memo. Colleagues Kate Wing and Andrew Wetzler ably demonstrate the pragmatism of today's environmental advocates in responses to Krauthammer's column and a recent Will column, respectively.
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