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  • February 19, 2019
  • The economics of a Green New Deal

    A Green New Deal has a lot of moving parts that have to work together. The solution looks more like solving a Rubik’s Cube than playing whack-a-mole. Are we up for this?

    I follow economic cycles. I don’t know how it started but I’ve always been fascinated by the ebbs and flows in economies. Big economies, small ones – it doesn’t matter. There’s the relatively short business cycle of course, that is often the subject of news coverage whenever the news reports on employment, interest rates, oil supply, and aggregate demand and supply but the business cycle is just one example and there are many.

    We’re mostly familiar with relatively short-term cycles. For instance, when oil prices are relatively high, they spur drilling which brings additional supply to market which brings prices down often to the point that further drilling is discouraged. But as supply tightens again prices rise and another drilling cycle kicks in. These cycles can play out over the course of a year or two.

    My primary interest in economic cycles has a much longer time horizon – 50 to 60 years, in particular. These long waves are called K-waves after the economist who first brought them to our attention about 100 years ago, Nicolai Kondratiev. He was an interesting person. An academic economist who studied capitalism and tried to explain it to Russian Communists. He was an advisor to Lenin but when Stalin came to power, Kondratiev was shunted aside because his views didn’t fit with Stalin’s orthodoxy. Eventually, Stalin had Kondratiev killed by firing squad.

    Kondratiev’s ideas came to America and were popularized by the American economist, Joseph Schumpeter who, among other things, is remembered for his concept of creative destruction. Schumpeter believed that each new innovation created value but at the same time it destroyed some of the value that the previous economic trend had brought. So, for example, the automobile brought tremendous value to the economy but at the cost of diminishing the horse and rail economies over time.

    You can see this throughout history as once promising jobs and industries become commoditized. While companies might do well in a commoditizing environment, often jobs get exported and people are left to find new ways to make money. Frequently, that means in a new industry.

    K-waves are interesting because they typically last longer than an average working lifetime. Figure the average working life in an industrialized society is about 40 years. That means you could work your entire lifetime within one K-wave. Some times would be better than others and they have less to do with who is in political office than what stage of the cycle you find yourself in. Innovations are continuously commoditized in the name of lower costs which results in jobs moving to lower wage areas and economic hardships are often what’s left behind.

    In the 20thcentury textile and shoe manufacturing left New England for lower cost labor states in the South. But a generation later those same jobs left the US for places like Japan, China and then on to Bangladesh and Vietnam.

    Not just any innovation can serve as the economic driver of a K-wave. We tend to over-use the term disruptive innovation to make the point. A disruptive innovation creates industries and jobs in such quantity that it becomes the driver of the economy for a little while at least. Disruptive innovations have the capacity to initiate K-waves.

    The silicon chip initiated the K-wave that’s finishing right now. Patented in 1959 the chip eventually led to the development of a computer on a chip which launched the modern IT era and all that goes with it like software, the Internet, mobile computing, and more.

    Disruptive innovations take on the order of 25 to 30 years to diffuse throughout the economy and during that time they create huge numbers of jobs. Then, in the following period commoditization takes place and Schumpeter’s creative destruction takes hold. Consider the IT industry again.

    Fifty years ago, computers sat in airconditioned rooms and consumed huge amounts of energy. They were attended to by small armies, or at least platoons, of highly skilled workers managing and maintaining them. But the story of the last 20 or so years is one of commoditization. We carry the equivalent of a big computer room in our pockets today and we maintain it all by ourselves. Not only that but we have access literally to all of the world’s knowledge on those tiny devices and the cost of these devices is too small for most people to remember. Those tiny devices have commoditized much of IT even as they’ve created wealth and made us all more productive.

    Here’s the point of all this. We’re at the end of the K-wave that dealt with information and telecommunications. Those industries won’t die but they’re no longer sufficient to drive the economy thanks to commoditization and inevitable price erosion.

    But right on time, there’s a new K-wave forming and just waiting to come to the forefront. What’s coming will help us get out of the ecological and climate bind we’re in.

    The new K-wave, which I call The Age of Sustainability includes renewable energy including solar, wind, geothermal and space based solar collection. But it also includes ways to capture carbon from the environment and store it safely for millions of years. Finally, the new K-wave also includes using some of that renewable energy to supplement what I call ecosystem services, perhaps a new term for you.

    We’re teetering on the brink of not having enough fresh water to support Earth’s groaning population and using our smarts to generate more is becoming a top priority. Look around. California isn’t the only place confronting dry and drought-like conditions. Iraq, Iran, Yemen, Syria and many other countries don’t have enough water for agriculture and their people are leaving those countries and disrupting their neighbors. Just ask Jordan about Syrian refugees. Did you know that Cape Town ran out of water for a while last year?

    Also, burning fossil fuels is poisoning the planet but, at the same time, fossil fuels are running out. The BP 2014 annual report stated that the Earth had, at the time, about a 54-year supply of oil left (about 1.687 trillion barrels) and we haven’t discovered any new oil since 2003.

    You might say what about fracking but that’s a technique for extracting hard to reach deposits and it isn’t an exploration method. Put it this way. We’ve been pumping oil out of the ground since 1859 at ever increasing volumes each year. Earth isn’t made of oil and sooner or later logic tells us this huge but limited resource has to run out.

    The new K-wave

    We’re at an inflection point. Going back to K-waves, the Age of Sustainability is just starting, and it will create jobs not only in renewable energy but also in ecosystem services, transportation, infrastructure, agriculture, and more. This new age has the potential of being the greatest job creating and money-making opportunity in history.

    The Green New Deal will be part of it and it is an interesting proposition. There’s no doubt that the infrastructure parts will be job creators and investment opportunities. So will be creating a renewable energy sector that replaces fossil fuels with electricity. But there’s also a need to remove about 1 trillion tons of CO2from the environment. That can be done with photosynthesis and we’ll need to invest in that; I discuss this in a book that I am not advertising here.

    What hasn’t come up yet, and what is causing a lot of resistance, is how to wind down the fossil fuel industries. Promoting coal use as we’re doing is a retrograde step, so is removing emissions restrictions and getting out of the Paris Climate Accords. But the fossil fuel industry is very powerful and it has trillions of dollars invested in things like mines, oil fields, pipelines, tankers, refineries and more. It won’t go quietly and that’s okay.

    We’ll still need fossil fuels for making advanced materials like rubber for cars, but we’ll need to burn far less. So because we’ll still need the fossil fuel industry, we need to put our heads together and come up with a plan that reduces the industry’s impact while keeping parts of it running strong. It’s the only way we can have a smooth transition. Unfortunately, we aren’t discussing that plan though it’s the 800 pound gorilla in the room and the thing all else depends on.

    So when you hear about or participate in discussions about a green future, keep an eye on how it impacts things like energy production, natural resources and carbon affiliated industries. The Green New Deal will look much more like solving a Rubik’s Cube than playing whack-a-mole. It will be hard but not impossible.

     

     

     

     

    Published: 5 months ago


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