Tesla & The New Economics Of The Coming Renewable Energy Boom

I don’t need to tell anyone of the importance of Tesla’s expansion into home battery technology. A home battery lets you store solar energy to use when the sun isn’t shining, which is a really, really major thing in terms of power distribution. As I’ve been pointing out for years, this is the crucial missing link between photovoltaic cells being a rapidly, rapidly cheapening technology with a lot of rollout potential, and photovoltaic cells being the major source for the world’s power. As I predicted in The Week in 2013:

The promising trends in technology and cost suggest much more than renewable energy becoming the fastest growing energy source in the next 30 years. They suggest that renewables will grow to be the number one energy source in the United States and the world in the next 30 or 40 years.

I’d say that that was actually an overly conservative projection. I now foresee solar to be number one in the next twenty, if not the next ten years.

It’s nice to live in the knowledge that renewable energy will overcome problems posed by diminishing oil reserves and (at least) mitigate anthropogenic climate change. It’s nice to know that as solar efficiencies continue to increase and solar manufacturing costs continue to fall that the long term trend for energy costs is down.

And you can do a heck of a lot of cool things with cheap, decentralized energy, like heating and lighting your home, manufacturing goods and technology and food and tools, and powering computers and artificial intelligence.

This, in my view, is the furnace to power the next fifty or a hundred years of soaring mid-20th century style economic growth. This is the beginning of an energy-driven economic supercycle — which takes us from the era of handheld computing to the era of building asteroid mining space stations and extraterrestrial colonies and maybe even interstellar spacecraft. It’s the main reason why I switched from bearish to bullish in 2013.

But what I really want to know is how to make money out of this trend. If photovoltaic cells and batteries are the new crude oil, coal, gasoline and natural gas (etc), does that mean Musk’s firms (Tesla, SolarCity, SpaceX, etc) are going to be the next Exxon-Mobil or Shell or Gazprom?

Maybe. But I’d tend to see renewable energy and emerging tech index funds as a slightly smarter bet. The trouble is that we’re at a very early stage in the supercycle.

An imperfect analogy: Xerox made an operating system akin to Windows years before Microsoft and Apple did, but Microsoft and Apple were the ones who reaped the bigger rewards. There are a whole load of factors that could dramatically affect which renewable energy systems are the ones that dominate the market: interface, battery-photovoltaic cell integration, price per unit of energy, price per unit of storage, durability and probably some others. And also a slew of more superficial factors such as marketing. If this is going to be as big as I think it is there will be a lot of competition from outside the renewables sector not least from firms like Google, and Apple and Facebook and Samsung as well as from older energy giants like BP, Shell and Exxon-Mobil.

For now, of course, Musk does seem to be establishing himself as the market leader and trendsetter in much the way Steve Jobs once did. But that could all change. It’s even not just a matter of competing firms. Just as the internet decentralized information distribution, and solar is on the cusp of decentralizing energy production, the whole manufacturing and (I’d argue) product design paradigm is edging closer to being transformed by another set of emergent technologies: 3-D printers and home manufacturing. Maybe as home manufacturing begins to become more prominent, open-source collaborative product and component design will beat out the current proprietary model.

The main takeaway here seems to be that this is an incredibly exciting time to be alive. We’re all set to get a lot richer from this, whether or not we bought Tesla at an early stage, just as people in the early 20th century didn’t have to buy Standard Oil shares to do well from that other energy revolution.

I Don’t Understand the Apple Watch

In 2006, I was telling anyone who would listen — which, given that I was a nerdy 19-year old, wasn’t many people — to buy Apple stock. Back then Apple seemed to be on the verge of something amazing. I had had an iPod since 2003, and had just bought a Macbook Pro, and was blown away by OS X. The operating system and interface had a crispness and an attention to detail that made Windows PCs seem like a muddled mess.

Turns out I was right about Apple. The past decade has seen Apple blow up bigger than I dreamed they might. The iPhone and iPad have been stunning successes that have allowed Apple to redefine what personal computing is. And now Apple is the biggest company in the world.

And the Apple Watch — their first new product line since the iPad — seems like a step in the wrong direction. Admittedly, I haven’t used an Apple Watch yet. But why bring out a watch when other elements of your product line have made watches obsolete?

I’m happy to have my wrists free. A smartphone already does what a watch used to do — tell the time — plus so, so, so much more. I don’t want another screen, especially not a tiny and hard-to-click one strapped to my wrist that actually requires tethering to a smartphone to work. Interface design has been the key difference between Apple and Apple’s competitors in the past 10 years and to hear complaints about the interface seems pretty damning.

Yes, I can see some point to a biometric data-collection band, especially for athletes and fitness junkies and for hospital patients. Yes, I understand that sooner or later a new model of the Apple Watch will not require a tethered iPhone to work.

But at this point this is a niche product, functionally akin to the Apple Newton in the early ’90s. It does some cool stuff. But it’s not going to change the world.

The trouble is that I think Apple is barking up the wrong tree. This is like a successful band’s dodgy fourth album where they rehash earlier ideas in pursuit of that indefinable thing that made them great in the first place. The trouble is that that thing — the bleeding edge — has moved on. Trying to recapture it by rehashing old ideas in a slightly different form might sell some records. And Apple will sell some watches. But it’s not going to change the world.

The bleeding edge technologies that will change the world immeasurably in the next 20 years are self-driving cars, artificial intelligence, 3-D printers, ultra-efficient solar cells that can produce energy more cheaply than fossil fuels, and battery and energy distribution technology to allow the ultra-efficient solar cells to power things when the sun isn’t out. Apple are actually working on some of these things.

The Watch is — at best —an unworthy distraction. Of course, like most ageing rockstars, Apple has the time and money for unworthy distractions. And that’s why younger, leaner competitors may be the ones to bring the truly revolutionary products to market.

On Trade Unions & Inequality

This chart is pretty wow:


Florence Jaumotte and Carolina Osorio Buitron of the International Monetary Fund have some ideas about how the correlation may have been caused:

The main channels through which labor market institutions affect income inequality are the following:

Wage dispersion: Unionization and minimum wages are usually thought to reduce inequality by helping equalize the distribution of wages, and economic research confirms this.

Unemployment: Some economists argue that while stronger unions and a higher minimum wage reduce wage inequality, they may also increase unemployment by maintaining wages above “market-clearing” levels, leading to higher gross income inequality. But the empirical support for this hypothesis is not very strong, at least within the range of institutional arrangements observed in advanced economies (see Betcherman, 2012; Baker and others, 2004; Freeman, 2000; Howell and others, 2007; OECD, 2006). For instance, in an Organisation for Economic Co-operation and Development review of 17 studies, only 3 found a robust association between union density (or bargaining coverage) and higher overall unemployment.

Redistribution: Strong unions can induce policymakers to engage in more redistribution by mobilizing workers to vote for parties that promise to redistribute income or by leading all political parties to do so. Historically, unions have played an important role in the introduction of fundamental social and labor rights. Conversely, the weakening of unions can lead to less redistribution and higher net income inequality (that is, inequality of income after taxes and transfers).

I have spent a lot of time thinking about what has caused the major upswing in inequality since the 1980s.

Back in 2011 and 2012 my analysis tended to emphasize financialization and specifically the massive growth in credit creation that took place since the 1980s. I think this was a rather naive view to take.

I don’t think I was wrong to look at financialization. Obviously, unchecked credit creation is a plausible pathway for the rich to make themselves and their friends richer. I just think it was naive to not see financialization — like deunionization, like globalization, and like trends in housing wealth — as part of a broader pie.

My hypothesis is that what changed is that politicians decided that greed was good and that “industrial policy” was a dirty phrase. The political structures that emerged in the wake of the Great Depression and World War 2 which together greatly limited inequality — welfare states, nationalized industries, unionized workforces, constrictive financial regulations like Glass Steagall — were severely rolled back. This created an opening for the rich to get much richer very fast, which they did.

If I’m right, it would take a major political shift in the other direction to start reducing inequality.

How To Euthanize Rentiers (Wonkish)

In my last post, I established that the “rentier’s share” of interest — resulting from as Keynes put it the “power of the capitalist to exploit the scarcity-value of capital” — can be calculated as the real-interest rate on lending to the monetary sovereign, typically known as the real risk free interest rate. That is because it is the rate that is left over after deducting for credit risk and inflation risk.

However, I have been convinced that my conclusion — that euthanizing rentiers should be an objective of monetary policy — is either wrong or impractical.

It would at very least require a dramatic shift in monetary policy orthodoxy. My initial thought was thus: the real risk-free interest rate (r) can be expressed as the nominal risk free interest rate minus the rate of inflation (r=n-i). To eliminate the rentier’s share, simply substitute 0 for r so that 0=n-i and n=i. In other words, have the central bank target a rate of inflation that offsets the expected future nominal risk free interest rate, resulting in a future real risk free interest rate as close to zero as possible.

There are some major problems with this. Presently, most major central banks target inflation. But they target a fixed rate of inflation of around 2 percent. The Fed explains its rationale:

Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling — a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.

Now, it is possible to argue that inflation targets should vary with macroeconomic conditions. For example, if you’re having a problem with deflation and getting stuck in a liquidity trap, a higher inflation target might be appropriate, as Jared Bernstein and Larry Ball argue. And on the other side of the coin, if you’re having a problem with excessive inflation — as occurred in the 1970s — it is arguable a lower inflation target than 2 percent may be appropriate.

But shifting to a variable rate targeting regime would be a very major policy shift, likely to be heavily resisted simply because the evidence shows that a fixed rate target results in more predictability, and therefore enhances “the public’s ability to make accurate longer-term economic and financial decisions”.

A second sticking point is the argument that such a regime would be trying to target a real-variable (the real risk free interest rate), which central banks have at best a very limited ability to do.

A third sticking point is Goodhart’s Law: “when a measure becomes a target, it ceases to be a good measure.” By making the future spread between the nominal risk free interest rate and inflation a target, the spread would lose any meaning as a measure.

A fourth sticking point is the possibility that such a severe regime change might create a regime susceptible to severe accelerative macroeconomic problems like inflationary and deflationary spirals.

And in this age of soaring inequality, the euthanasia of the rentier is simply too important an issue to hinge on being able to formulate a new workable policy regime and convince the central banking establishment to adopt it. Even if variable-rate inflation targeting or some alternative was actually viable, I don’t have the time, or the energy, or the inclination, or the expertise to try to do what Scott Sumner has spent over half a decade trying to do — change the way central banks work.

Plus, there is a much better option: make the euthanasia of the rentier a matter for fiscal policy and specifically taxation and redistribution. So here’s a different proposal: a new capital gains tax at a variable rate equal to the real risk-free interest rate, with the proceeds going toward business grants for poor people to start new businesses.

The Subtle Tyranny of Interest Rates

Interest rates are the price of credit. They are the price of access to capital.

Now, it is obvious that pricing credit is not tyrannical in and of itself. Interest compensates a lender for default risk and the risk of inflation eroding the purchasing power of the money that they lend.

The tyranny I am getting at is subtle. It is the tyranny that Keynes pointed to when he proposed a euthanasia of the rentier. Keynes proposed that low interest rates would:

mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.

Keynes pointed to an important feature of interest rates: the fact that capital has a cost is not just the result of default risk and the risk of inflation. It is also a result of the scarcity of capital.

Now, that is inevitable in a world where financial capital consists of metal that you dig up out of the ground.

But in our brave new state-backed fiat monetary system, why should capital be so scarce that those who have it can profit from its scarcity?

Obviously, central banks should not print money to the extent that it becomes worthless. But capital availability is absolutely critical to the advancement of society: the investment of capital is how societies become productive. It is how technology improves, and it is the key to wealth accumulation.

What Keynes didn’t specify was what exactly in the interest rate paid was the part that represented the “scarcity value” of capital.

Obviously, it doesn’t include the part that compensates for inflation, which is why we need to look at inflation-adjusted interest rates. And it isn’t the part that compensates for default risk. This is easily calculable too: it is the excess paid over lending to the monetary sovereign.

In the U.S. and Britain, that would be the American and British governments. In the eurozone — for complicated political reasons — there is no monetary sovereign exactly, but we might measure it by looking at it in terms of the spread against German government borrowing, because Germany seems to be the nation calling the lion’s share of the shots.

Here’s the real interest rate on U.S. 10-year government borrowing (I chose the 10-year because it is a benchmark, although I would have preferred to use a harmonized rate from across the yield curve.):


So what are we really seeing? The general trend is that real interest rates on U.S. government borrowing are overwhelmingly positive, with a few periodical exceptions where real rates on borrowing went a bit negative. This bias toward positive real interest rates on lending to the monetary sovereign, I would argue, is the rentier’s profit resulting from the scarcity of financial capital.

Year over year, that is going to compound heavily. It is these rentiers, I would argue, who should be euthanized. Not because they should be resented for doing well out of the system.  No. They should be euthanized because of the opportunity cost of devoting resources to enriching rentiers, resources that could be deployed productively elsewhere.

And how to euthanize the rentiers? Because we have identified what the rentier’s share is, the answer is very simple: making a real interest rate of zero on lending to the monetary sovereign an objective of monetary policy.

Update: After much debate, I have decided that euthanizing rentiers is not a matter for monetary policy, but a matter for fiscal policy. I have written another post discussing this.

What The UK’s Low Productivity Is Really Telling Us

This, I would argue, is one of the scariest charts in the world today. The green line is output per hour worked, and the dotted green line is the pre-crisis trend:


It’s what the Bank of England calls the “UK productivity puzzle.” As the BBC’s Linda Yueh notes: “output per hour is around 16 percentage points lower than it should be if productivity had grown at its pre-crisis pace.”

I don’t think it should be called a “productivity puzzle”. That would imply that we don’t really understand the phenomenon. That the phenomenon is a puzzle. But it’s really a simple phenomenon. The phenomenon is that people are producing less output per hour than they were before the financial crisis. Work is getting done. But the quality of the work is not improving.

The Bank of England points to “reduced investment in both physical and intangible capital, such as innovation, and impaired resource allocation from low to high productive uses” as a cause. In other words, the work is crap because firms aren’t deploying the resources to do good work. And this is a trend that predates the election of the Coalition government in 2010. As the Bank of England notes, the UK has lagged in investment as a percentage of GDP behind its fellow G8 economies since even the 1990s.

But things got really bad under the Coalition. And that shouldn’t really be news. There was a recession resulting from the financial crisis. The recession — as recessions tend to do — resulted in a severe drop in business investment. In the wake of the recession, what did the newly elected government decide to do? It decided to enact sweeping austerity programs — to slash investment even more.

So the story is that the government decided to compound the after-effects of the financial crisis with an austerity program. That means depriving the economy of even more resources needed for productivity, growth and prosperity. And — in truly, truly shocking news — UK investment as a percentage of GDP is currently lagging at a pathetic 15 percent of GDP behind Belgium, Gambia, Jordan, Equatorial Guinea and Costa Rica, and barely ahead of Greece!

The austerian view, of course, is that the austerity was necessary because otherwise the bond vigilantes would have sold UK public debt, and we would have turned into Greece, or something.

The so-called “productivity puzzle” and the related low-investment puzzle categorically proves this claim wrong. If the austerity was imbuing the market with confidence necessary for growth, we would expect to see productivity and investment rising.

That has not been the case. What has occurred is a zombie recovery caused by zombified economic policies. Yes, there has been substantial job growth, and GDP is now above its pre-crisis peak — albeit in the slowest recovery since the South Sea bubble 300 years ago. But the weakness in productivity continues to illustrate the rottenness.

You can’t starve yourself to strength. You can’t beat yourself to growth.

On the Race to Mars and the Economics of Colonizing Space

It is at least a little exciting to see that NASA wants to put a human on an asteroid by 2025 and on Mars by 2030.

Why not very exciting? Because NASA — unlike with the Moon — is not on track to be the first one there. Yes, governments — the largest of which are capable of borrowing, spending and taxing trillions — still have the most economic power of any agency at their disposal. Yet if their plans for space exploration are anything to go by, they no longer have anything like the most ambition.

Elon Musk, by contrast, plans to be on Mars by 2020, and establish a colony he wants to grow to a million humans by 2100. Mars One plans to establish a colony by 2024. Overambitious? Nobody really knows. Sending flesh-and-bone humans to Mars is a pioneering act, not just on par with but considerably more ambitious than the pioneering explorations of Magellan and Columbus. Scurvy, foreign diseases, unpredictable weather at sea and geomagnetic anomalies are one thing. But nobody knows how the human body will respond to multi-year space travel trips across the vast void of space that separates Earth and Mars, nor to life in a metal box on the Martian surface.

Of course, if the private colonists fail — as many are expecting them to do — it is nice to know that the U.S. government will try and get the job done instead. After all, as Stephen Hawking has argued, space colonization is absolutely central to humanity’s future. In our current state as a one-planet species, one stray asteroid, one nearby gamma ray burst, one large scale industrial accident, one explosive supervolcano, or one stray genetic mutation — not to mention climate change, and all the cataclysmic risks we don’t know about — could send us to the edge of extinction. As a two-planet or ten-planet or two-solar system species those risks progressively diminish further.

Simply, we face a choice as a species. Turn inward and remain an earthbound species and face inevitable extinction in the next few thousand years, or possibly even the next few hundred years. Or turn upward, colonize other worlds and human beings — like us, and descended from us — have a chance of still being around one million or even one billion years from now.

Of course, the ultimate viability of all this really comes down to economics. If Musk, Bezos, Branson and the other stargazing private space interests can make space technology profitable, they can fund their way (and our way) to the stars. If not, then humanity’s hopes of colonizing space are tied up with the inward-looking, climate change-denying, and stupefied reality of scientifically and economically illiterate politicians who care more about their 19th century ideologies, election campaigns, and parliamentary champagne than the state of humanity 10 or 1,000 generations from now.

In theory, the resources floating up in space may be the economic fuel necessary to take us to the stars. As I noted last year: “An asteroid less than a mile in diameter could hold more than $20 trillion in industrial and precious metals” at 1997 prices. And that’s in addition to the massive potential of tapping into the sun’s rays as a self-perpetuating energy source. And while abundance may bring down the price of such commodities (including energy) early asteroid miners may reap massive enough rewards to turn themselves into the next Google, Apple, or Facebook, capable of pumping billions or trillions of dollars into research into further technologies.

As I argued last year, those who believe that the global economy may be entering an era of so-called “secular stagnation” clearly have either not thought very much about the potential economic growth possible from growing into space, or they think it a very unlikely possibility. Do you know how much one interstellar spacecraft or large-scale space station could add to GDP? Not just in its construction, but in the huge amount of research and development needed to develop and deploy such a thing? This is a whole new economy.

And while robots may mean that this spending does not create many jobs, and while off-planet tax havens are likely to become a thing, at the very least the technologies will trickle down to the wider public. Already, the widespread availability of the internet is creating a widely accessible and levelled playing field in the dissemination of information, news and ideas. Distributed solar energy and 3-D printers have the potential to create similar effects in energy markets, and in manufacturing and lift billions out of poverty.

But none of this is guaranteed. Even with the recent upsurge in interest in private space industry from titans of industry like Musk and Bezos, uncleared technical hurdles may stymie the development of large scale space industry for decades to come. NASA may still beat the privateers to Mars. But NASA is no longer the tip of the spear. Hopefully, NASA’s exploits will begin to look like afterthoughts.