“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.
]]>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.
]]>Particularly astonishing was the recent vote to establish a tax credit for buyers of new homes.
While a tax credit could superficially be seen to help stimulate more housing production and sales, more careful analysis shows that this is just adding to the nation's problems rather than solving them.
The most direct cause of the recession is that prospective homeowners borrowed money that they couldn't repay, perhaps ensnared by lending policies that offered the ability to buy a house to people who otherwise couldn't afford it.
But this is exactly what a tax credit does. Especially since the main costs of owning and operating a house-the cost of driving to and from it and of paying the utilities-still are not considered when originating loans. (As I previously noted, for a typical house lost in suburban sprawl, the median loan is below $175,000 but the average 30-year commitment to utility costs to run the home is $75,000 and the cost to drive to and from is $300,000.)
So the tax credit will perhaps help solve one problem-reducing the inventory of unsold homes-while actually worsening a bigger one: the toxic debt of mortgages that may default.
If we want to stimulate new housing, we should condition it on good energy efficiency and location efficiency. Senator Snowe recognized this in her amendment to the Economic Recovery bill that would offer a $5000 tax credit for building a new home but condition it on achieving a 50 percent reduction in utility bills. The reduction is measured by a home energy rating performed after the house is constructed.
Working with a broad group of nonprofits and business organizations, NRDC has developed a set of programs aimed directly at addressing all of the root causes of the recession through improving energy efficiency in a way that creates lots of jobs quickly but also develops a sustainable program of stimulating spending and provides a way to pay back all the costs through energy savings.
Unlike the tax credit for purchasing a new home, which may alleviate one cause of the recession but only at the expense of exacerbating another, energy efficiency policy helps relieve ALL the causes of the recession.
These issues will be discussed in detail in my forthcoming book from Bay Tree Publishing called Invisible Energy.
]]>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:
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 (http://baytreepublish.com/) called Invisible Energy.
]]>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.
]]>The most direct cause of the economic breakdown is mortgage defaults. This problem is linked to energy policy in two ways. First, the mortgages that seem to have the most problems are those located in neighborhoods that require lots of auto use. Cars account for about 18 percent of all consumer expenditures-almost as much as mortgage loan payments-and these costs can increase if gas or insurance prices rise.
Second, much of the default problem is a consequence of adjustable rate mortgages whose low initial interest rates rose during the last several years. They rose so fast in large part as a result of increases in short term interest rates. Interest rates increased in response to inflationary pressures, which in turn were largely caused by energy prices. We can see how the last several months' decline in energy prices due to recession-related drops in demand have virtually solved the inflation problem. Energy efficiency could have done the same thing.
One of the problems of America's current problem that influential economists like Paul Krugman and others fail to consider is that our country's savings rate has been hovering near zero for several years. It is one thing to call for consumers and/or the government to spend money to stimulate the economy when there's money to spend. It is another thing entirely to spend money that isn't there.
How can we increase demand without drowning in debt? The best answer is to spend the money on investments that pay us back in 2 or 3 or 5 years. Energy efficiency investments in buildings and industry can do this. The opportunity is immense: there are over a hundred billion dollars of high-return investments in homes and commercial buildings and factories that can be leveraged by national or state energy policy. NRDC is sponsoring initiatives for retrofits of homes and commercial buildings that could be adopted and begun early in 2009.
Another answer is to spend SOME money now to avoid the need to spend MUCH MORE later. A good example of that is the California High Speed Rail initiative, which was just approved by voters in November. By authorizing $10 billion in bonds, the state can leverage $30 billion in private and federal funding to construct a project that the High Speed Rail Authority's Business Plan projects will save $100 billion in government spending on freeways and airports while also providing 450,000 permanent jobs.
I will address these issues in more depth on my blog and in my upcoming book "Invisible Energy." They are discussed in a broader way in "Saving Energy Growing Jobs".
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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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"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.
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