environment

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Get ready for a massive renewable energy boom


Renewables will be the fastest growing source of energy between now and 2040, according to new projections from the Energy Information Administration.

The EIA forecasts that from 2012 to 2040, solar, wind, and geothermal production will nearly double, rising 97 percent. The next closest projection is for natural gas, which is expected to grow 56 percent.

Of course, renewables make up a small proportion of global power generation. So even after all that growth, renewables are estimated to account for a measly 3.8 percent of total energy production in 2040, compared with 38 percent for natural gas.

But this is actually an extremely conservative estimate. Renewables — and especially solar — aren’t really like other energy sources. Non-renewables are energy-rich fuels, but there is only a finite supply in the ground. This means that prices are unpredictable and subject to large spikes that badly damage the economy, as occurred in the 1970s and the 2000s.

Read More At TheWeek.com

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Hurricanes and Broken Windows

It is relatively easy to debunk the Broken Window fallacy, the idea that hurricanes or more generally the destruction of capital may be a tragic economic stimulus. Indeed, much has already been written on the opportunity cost of the new spending that may be unleashed by a natural disaster — in the last few days by Robert Murphy and Jim Quinn (and many others) and historically by Henry Hazlitt and Fredric Bastiat. When a window is broken, and money is spent on a glazier, the labour, capital and resources is only moving the economy back to where it was, and it has an opportunity cost — whatever might have been purchased with the labour, capital and resources had the window not been broken.

A Krugmanite might respond to this with the idea that when an economy is in a depression state, where vast quantities of labour and capital are idle, then this opportunity cost is less relevant. But this is not so.

A natural disaster will undoubtedly result in new economic activity that would not have taken place otherwise. Undoubtedly, labour, capital and resources that may n0t have been employed otherwise will be employed because of an earthquake, or a flood or a fire. But believers in the Broken Window fallacy are looking at the economy through a distorted lens. What they define as “activity” (i.e. GDP) is only one side of the picture. Yes, a major hurricane like Sandy might require $100 billion or more spent to repair the damage. Yet to only look at spending is to only look at one side of the picture — the flow. An economy is both stock and flow. That $100 billion of spending is flow to replace damaged and destroyed capital stock (houses, factories, roads, etc).

To grasp the full picture we have to look at both sides of the equation. If a hurricane like Sandy causes $100 billion of damage requiring $100 billion of spending to fix, then after that spending we are in aggregate no better off than we were before the storm. Without the storm, resources would surely have been deployed differently. But without the preceding hurricane damage, all spending is a gain because the spending is not replacing capital stock that has been destroyed. Let us assume that Sandy had blown herself out without making landfall, and that without the need for a major reconstruction, only 10% ($10 billion) of the $100 billion necessary to repair the damage was deployed in the economy. In aggregate, we are $10 billion better off than with the $100 billion of spending in the wake of the storm, because that $100 billion was merely making up for losses via destruction.

I hope that we can put the Broken Window fallacy to bed at last and agree that the “stimulus” effect of natural disasters, is merely a transitory illusion based on flow, while ignoring that that flow is merely compensating for loss in stock. There are benefits to natural disasters — like learning not to build in areas prone to flooding or volcanism, or developing building materials and techniques or other innovations robust to earthquakes or flooding, or the concept of natural-disaster preparedness and survivalism — but these are informational and not an economic “stimulus”.

And certainly, unemployment is a tragedy. But there are far better ways to reduce unemployment — like slashing red tape and cutting taxes for small businesses and startups  — than the destruction of capital.

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Free Market Ecology

These gargantuan global conferences where the emissaries of governments meet in hallowed halls to thrash out a global planning agenda — dressed in the clothes of ecology, or sustainable development, or whatever the buzzword of the day — are a waste of time.

They are a waste of time for the taxpayer, who has to stump up to pay for such efforts. They are a waste of time for the protestors who swarm to such events holding placards and shouting slogans. They are a waste of time for the ecologists who — whether right or wrong — believe that the present shape of human civilisation is unsustainable. Possibly the only group that really benefits are the self-perpetuating bureaucratic classes, who often take home huge salaries they could never earn in the private sector.

And the Malthusian targets of the bureaucracy have a history of missing.

The Guardian notes:

Rio+20 was intended as a follow up on the 1992 Earth Summit, which put in place landmark conventions on climate change and biodiversity, as well as commitments on poverty eradication and social justice. Since then, however, global emissions have risen by 48%, 300m hectares of forest have been cleared and the population has increased by 1.6bn people. Despite a reduction in poverty, one in six people are malnourished.

If these bureaucratic classes knew the first thing about economics or markets, they would begin to question whether such conferences — and all the promises, intergovernmental commissions, and regulatory pledges they spawn — are necessary. The more I question, the more I come to believe that all that is needed to halt any man-made ecological crises are free markets and free speech.

The history of human civilisation has been one of triumph over the limits of nature. While we have had our ups and downs, recent projections of imminent ecological ruin — such as those in the 1970s produced by Ehrlich and Holdren and the Club of Rome, or earlier by Keynes, Malthus and Galton (etc) — have all failed to materialise. But the trend goes back much further, into the distant past. Throughout our history our species has done what has been necessary to survive. Humanity has lived on this planet for upwards of 500,000 years, and through that time, we have survived a myriad of climate changes — solar variation, atmospheric variation, cycles of glaciation, supervolcanoes, gamma ray bursts, and a host of other phenomena.

It will be no different this time. We are dependent on our environment for our life and for our future. That is widespread knowledge, and so as the capable and creative species that we are, we have already developed a wide array of technological solutions to potential future environmental problems. This is a natural impulse; humanity as individuals and as a species hungers for survival, for opportunities to pass on our genes.

As I wrote last month:

If we are emitting excessive quantities of CO2 we don’t have to resort to authoritarian centralist solutions. It’s far easier to develop and market technologies (that already exist today) like carbon scrubbing trees that can literally strip CO2 out of the air than it is to try and develop and enforce top-down controlling rules and regulations on individual carbon output. Or (even more simply), plant lots of trees and other such foliage (e.g. algae).

If the dangers of non-biodegradable plastic threaten our oceans, then develop and market processes (that already exist today) to clean up these plastics.

Worried about resource depletion? Asteroid mining can give us access to thousands of tonnes of metals, water, and even hydrocarbons (methane, etc). For more bountiful energy, synthetic oil technology exists today. And of course, more capturable solar energy hits the Earth in sunlight in a single day than we use in a year.

The only reason why these technologies are not widespread is that at present the older technologies are more economically viable. Is that market failure? Are markets failing to reflect our real needs and wants?

No; those who so quickly cry “market failure!” fail to grasp markets. Certainly, I think GDP is a bad measure of economic growth. But throwing out the concept of money altogether as a measure of society’s needs and wants is completely foolish. Markets are merely an aggregation of society’s preferences. Capital and labour is allocated as the market — in other words, as society — sees fit. As Hayek showed in the 1930s, the market gives society the ability to decide how a good or service should be distributed based on individuals willingness to give money for it. The market gives feedback to producers and consumers through the price mechanism about the allocation of resources and capital, which in turn allows on the basis of individual consensual decisions corrections that prevent shortages and surpluses. Under a planned system there is no such mechanism.

The fact that greener technologies have not yet been widely adopted by the market is merely a symptom of the fact that society itself is not yet ready to make a widespread transition. But the fact that research and development and investment continues to pour into green technologies shows that the market is developing toward such an end.

Solar consumption has gone parabolic:

And so it will continue; as society evolves and progresses, the free market — so long as there is a free market — will naturally reallocate resources and labour based on society’s preferences. Without a free market — and since 2008 when the banks were bailed out and markets became junkiefied intervention-loving zombies, it is highly dubious that there is such a thing as a free market in the West — planners will just end up guessing at how to allocate resources, labour and capital, and producing monstrous misallocations of capital.

The political nature of such reallocation is irrelevant; whether the centralists call themselves communists or socialists or environmentalists, their modus operandi is always the same: ignore society’s true economic preferences, and reallocate resources based on their own ideological imperatives (often for their own enrichment).

My view is that the greatest threat to the planet’s ecology is from the centralists who wish to remove or pervert the market mechanism in order to achieve ideological goals. It is not just true that removing the market mechanism retard society’s ability to evolve into new forms of production, resource-allocation, and capital-allocation based on society’s true preferences. The command economies of the 20th Century — particularly Maoist China and Soviet Russia — produced much greater pollution than the free markets. Under a free market, polluters who damage citizens or their property can be held to account in the market place, and through the court system.There is no such mechanism through the kind of command of economy that the centralists seem to wish to implement.

The answer is not central planning and government control. The answer is the free market. 

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Krugman’s Inflation Target

The Keynesian blogosphere is up in arms at Ben Bernanke’s response to Krugman’s view that he should pursue a higher inflation target as a debt erasure mechanism.

According to Chairman Bernanke:

We, the Federal Reserve, have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in that we’ve been able to take strong accommodative actions in the last four, five years to support the economy without leading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I think would be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.

Krugman responded:

This is not at all the tone of Bernanke’s Japan analysis; remember, Japan had nowhere near as high unemployment as we do, and his analysis back then was not simply focused on ending deflation.

Disappointing stuff.

The basic Keynesian logic is as follows:

The economy is performing far below its potential, due to an ongoing slump in aggregate demand caused by a contraction of confidence. Simply, there is plenty of money, but far too many people are risk averse and thus are not spending (and thus creating economic activity) but instead just holding onto their money. The Fed should ease some more, so as to create inflation that turns holding cash into a risk, and so encourage investment and consumption. What’s more, residual debt overhang is a burden on the economy, and additional inflation would decrease the relative value of  debts, giving some relief to debtors.

Matthew O’Brien presented this chart to make the case that output is far below its potential:


I am deeply sceptical that GDP is a sufficient measure of output, and I am even more sceptical that the algorithmic jiggerypokery involved in calculating what the Federal Reserve calls “Potential Nominal GDP” has anything whatever to do with the economy’s real potential output. But I will accept that — based on the heightened unemployment, as well as industrial output being roughly where it was ten years ago — that potential output is far below where it could be, and that the total debt overhang at above 300% of GDP is excessive.

The presupposition I really have a problem with, though, is the notion that this is a problem with hoarding:

Simply, the United States is a consumption-driven economy. And that isn’t so much of a fact as it is a problem. More and more money is going toward consumption, and less and less is going toward investment in companies, in ideas and in businesses. Exemplifying this, less and less money — even in spite of the Fed’s “pro-risk” policies (QE, QE2, ZIRP, etc) is going into domestic equities:

The fundamental problem at the heart of this is that the Fed is trying to encourage risk taking by making it difficult to allow small-scale market participants from amassing the capital necessary to take risk. That’s why we’re seeing domestic equity outflows. And so the only people with the apparatus to invest and create jobs are large institutions, banks and corporations, which they are patently not doing.

Would more easing convince them to do that? Probably not. If you’re a multinational corporation with access to foreign markets where input costs are significantly cheaper, why would you invest in the expensive, over-regulated American market other than to offload the products you’ve manufactured abroad?

As Zero Hedge noted:

In the period 2009-2011, America’s largest multinational companies: those who benefit the most from the public sector increasing its debt/GDP to the most since WWII, or just over 100% and rapidly rising, and thus those who should return the favor by hiring American workers, have instead hired three times as many foreigners as they have hired US workers.

So will (even deeper) negative real rates cause money to start flowing? Probably — but probably mostly abroad — so probably without the benefits of domestic investment and job creation.

Then there is the notion that inflation will effect debt erasure. This chart tends to suggest that at least for government debt it may not make much difference:

There’s no real correlation between government debt erasure and high inflation.

Paul Donovan of UBS explains:

The fundamental obstacle to governments eroding their debt through inflation is the duration of the government debt portfolio. If all outstanding debt had ten years before it matured, then governments could inflate their way out of the debt burden. Inflation would ravage bond holders, and governments (with no need to roll over existing debt for a decade) could create inflation with impunity, secure in the knowledge that existing bond holders could do nothing to punish them. In the real world, of course, governments roll over their debt on a very frequent basis.

Consumer debt may also not experience significant erasure.

From Naked Capitalism:

Inflation only reduces debt overhang in a significant way for households who are fortunate enough to see their nominal wages rise along with the general rise in prices. In today’s economy, workers are frequently not so fortunate.

The deeper reality though, is that even if my concerns are unfounded and Krugman is correct, and that a higher inflation target would achieve precisely what Krugman desires, I don’t think it would solve the broader problems in the economy.

As I wrote in November:

The problem is that most of the problems inherent in America and the West are non-monetary. For a start, America is dependent on oil, much of which is imported — oil necessary for agriculture, industry, transport, etc, and America is therefore highly vulnerable to oil shocks and oil price fluctuations. Second, America destroys huge chunks of its productive capital policing the world, and engaging in war and “liberal interventionism”. Third, America ships even more capital overseas, into the dollar hoards of Arab oil-mongers, and Chinese manufacturers who supply America with a heck of a lot. Fourth, as Krugman and DeLong would readily admit, American infrastructure, education, and basic research has been weakened by decades of under-investment (in my view, the capital lost to military adventurism, etc, has had a lot to do with this).

In light of these real world problems, at best all that monetary policy can do is kick the can, in the hope of giving society and governments more time to address the underlying challenges of the 21st Century. When a central bank pumps, metrics (e.g. GDP and unemployment) can recover, but with the huge underlying challenges like the ones we face, a transitory money-printing-driven spike will in no way be enough to address the structural and systemic problems, which most likely will soon rear their ugly heads again, triggering yet more monetary and financial woe.

On the other hand, it would be interesting to see Bernanke go the whole hog and adopt a fully-blown Krugmanite monetary policy, just to see Krugman’s ideas get blown out of the water by the cold, dark hand of falsification.

Of course, there was an opportunity to achieve debt erasure in 2008, when the world faced a default cascade and a credit collapse. Had economists and planners let the system liquidate, a huge portion of bad debt and bad companies and systems would have been erased, and — after a period of pain — we might well be well into a new phase of organic self-sustaining growth. But we live in a different world; where zombie systems, companies and their assets are preserved by government bailouts and interference, and very serious people like Paul Krugman earnestly push dubious solutions to problems that their very interventionist worldview created.

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More Evidence That Austerity During Depressions Works

Sorry, no. I am being sarcastic.

From Bloomberg:

The U.K. economy shrank in the first quarter as construction output slumped, pushing Britain into its first double-dip recession since the 1970s and raising pressure on officials to salvage the recovery.

Gross domestic product contracted 0.2 percent from the fourth quarter of 2011, when it shrank 0.3 percent, the Office for National Statistics said today in London.

Last month I described Britain’s problems: GDP levels have never recovered to pre-crisis levels, the unemployment rate continues to climb from post-crisis levels, government debt level continue to climb, inflation levels are elevated, and all of these metrics are somehow worse than the situation in America. 

And now Britain is back in recession.

The bottom line here is that trying to conduct an austerity program during the depths of a recession is dangerous. Less government spending and higher taxation translates into falling incomes for many, which often translates into falling tax revenues (as is the case here), which means that “deficit reduction” just produces larger deficits. Greece is the extreme example.

Nations in the Eurozone that have seen the most growth have conducted the least austerity:


So what would a successful conservative economic program look like today?

Well, until the nation is out of the slump and consistently growing, it should begin and end with slashing regulation and barriers to entry so that more unemployed people can become self-employed. It could include some form of program to encourage taxpayer-funded banks to lend to people who want to start businesses, for the same reason.

While not throwing around stimulus slush money (for that tends to end up in the pockets of well-connected corporations) it would maintain spending levels, and look to redirect some spending toward more productive endeavours for instance giving small businesses tax breaks for every job they create, or every factory they open.

The welfare cuts must wait until there is a strong and self-sustaining recovery, for when the economy is creating lots of jobs, for when there is a demand for labour. Slashing welfare when there are no jobs to go to is totally self-defeating.

The deficit reduction must wait until tax revenues are consistently rising due to a strong and self-sustaining recovery.

It frightens me that conservative voices have gotten this so hideously wrong. We had a decade of fiscally reckless government, where governments, consumers and businesses totally forgot the imperative to save in the fat times to spend in the lean, and joined the leverage mania and the derivatives casino. That was dangerous and foolish. And now policymakers have chosen to focus on deficits at precisely the wrong time. It is absolutely the worst of both worlds.

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The Disaster of Youth Unemployment

This is a demographic disaster.

From the Guardian:

Unemployment among Europe‘s young people has soared by 50% since the financial crisis of 2008. It is rising faster than overall jobless rates, and almost half of young people in work across the EU do not have permanent jobs, according to the European commission.

There are 5.5 million 15- to 24-year-olds without a job in the EU, a rate of 22.4%, up from 15% in early 2008. But the overall figures mask huge national and regional disparities. While half of young people in Spain and Greece are out of work, in Germany, Austria and the Netherlands it is only one in 10. In a further six EU countries, youth unemployment is around 30%. Of those in work, 44% are on temporary contracts.

The same phenomenon exists in the United States:

And why is this such a staggering  problem?

Firstly, the psychological impact: a whole lot of young people have never become integrated with the workforce. Many will become angry and disillusioned, and more likely to riot and rob than they are to seek productive employment. There is a significant amount of evidence for this:

Thornberry and Christensen (1984) find evidence that a cycle develops whereby involvement in crime reduces subsequent employment prospects which then raises the likelihood of participating in crime. Fougere (2006) find that increases in youth unemployment causes increases in burglaries, thefts and drug offences. Hansen and Machin (2002) find a statistically significant negative relationship between the number of offences reported by the police over a two year period for property and vehicle crime and the proportion of workers paid beneath the minimum before its introduction. Hence, there are more crime reductions in areas that initially, had more low-wage workers. Carmichael and Ward (2001) found in Great Britain that youth unemployment and adult unemployment are both significantly and positively related to burglary, theft, fraud and forgery and total crime rates.

Additionally unemployment is correlated with higher rates of suicide and mental illnesses like depression. And of course, the longer the unemployment, the rustier workers become, and the more skills they lose. Frighteningly, the numbers of long-term unemployed are rising:


Second, the economic impact: people sitting at home doing nothing don’t contribute productivity to society. In a society faced with falling or stagnant productivity, that is frustrating; there are lots of people sitting there who could be contributing to a real organic recovery, but they are not, because nobody is hiring, and (perhaps more importantly) barriers to entry and the welfare trap are crowding out the young, and preventing the unemployed from becoming self-employed. It also means higher welfare costs:


That leads to higher deficits, and greater government debt.

So it is not just a demographic disaster; it is also a fiscal one.