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Economists not connecting the dots on new energy economy

In the continuing discussion of what will facilitate an economic economy in the United States, people are generally not connecting the dots that point to what kind of economic growth is even possible in the future. The very large dot that most politicians and economists are not connecting is the role of energy, and more specifically the services that technologies provide when consuming energy resources. Sometimes green energy or the production of energy resources is mentioned as a sound bite, but little to no substantial insight exists.

Economic growth models (i.e. production functions) are commonly written assuming that growth results from investments in three areas: labour (hours worked), capital (intellectual knowledge and physical infrastructure), and energy (consumption or services from consuming energy). Research from the last several years, with particularly keen contributions by Robert Ayres of INSEAD, shows that for developed economies to grow in modern times, investments in labor are relatively insignificant. However, investments in capital and energy enable almost all economic growth with each category contributing roughly the same impact. Therefore, with the current economic discussions focusing on how to decrease the unemployment rate, we shouldn’t expect robust economic growth if employment increases soon, and vice versa. This is exactly what is behind the “jobless recovery” that economist and politicians spoke of earlier this decade and that we are discovering may be happening again. The recovery is jobless in the United States and other developed economies, but not in developing economies where labour is cheaper. See the video from Meet the Press at www.msnbc.msn.com/id/34386643/ns/meet_the_press/

So how do we envision what will happen with a transition to a “green economy”? Some of the US stimulus money is meant to facilitate this transition. During Meet the Press this Sunday, Jennifer Granholm, the governor of Michigan (home of the US auto industry) held up an article from the Detroit Free Press (www.freep.com/article/20091213/SPECIAL04/312130004/1318/Auto-supplier-turns-trouble-to-triumph-by-venturing-into-turbines from minute 7:30) indicating that at least one automotive supply company has changed focus to adjust to a changing economy. Instead of waiting for a rebirth of the auto industry, the company changed to manufacturing parts for wind turbines using the same basic set of tools and skills from the existing workforce.

The question we can ask ourselves is: “Does making wind turbines instead of automobiles facilitate more jobs and/or more economic growth?” I certainly do not know that answer, but it seems the path to understanding should focus upon what service is being provided. The auto industry provides transportation and facilitates trade of goods via shipping. The wind turbines provide electricity as a service to homes, businesses, and factories. If electric vehicles become prominent, then electricity will begin to provide transportation services as well.

Businesses and governments are striving to create new ways to provide the same services, and it is not clear if these are fundamentally transformational or if they simply represent a diminishing return of investment of time, labour, money, and energy. Increasing efficiency in energy usage induced from the Arab oil embargoes of the 1970s showed that there was much to gain from using less energy to provide and expand the same services. Certainly there is less room for improvement now, but many claim that there is still so much room for efficiency improvements that economic growth can reoccur easily. However, to me it is not clear if investments in using more information in a smart utility grid will be sufficiently offset by increased energy efficiency. Putting insulation in your home is simple and straightforward and easily measureable. Installing a smart meter that communicates with your mobile phone so you can communicate with household and commercial appliances, heaters, and air-conditioners is significantly more investment in complexity. Measuring if that investment produces returns that outweigh that complexity will be more difficult to determine, but that is now on the agenda of many companies after the recent awards of US stimulus money for smart grid projects throughout the US.

Posted by Carey King on December 13, 2009 6:03 PM | Permalink