Five years ago I started writing this blog site because I figured energy dependence on fossil fuels would destroy America.  Nothing I’ve seen since then has changed my attitude in this regard, although initially I didn’t figure in the problems associated with climate change, nor did I fully appreciate the national security implications identified by the Joint Chiefs of Staff in 2012.  The Joint Chiefs basically said relying on fossil fuels is the greatest threat to our national security, and they also said ‘climate change’ essentially changes everything.

And national politics, particularly those surrounding our first President of color, Barack Obama, overwhelmed my desire to explore the energy issues.

As it turns out, now that President Obama has been re-elected, the energy issues are resurfacing as important despite Republican obsessions over dismantling the social safety nets, including Social Security and Medicare that have been major distractions.

Most recently the President has proposed using $2 billion in gas and oil lease revenues to fund basic research and development to find ways to replace hydrocarbons as our primary transportation fuel.   In the larger scheme of things energy, according to a New York Times article, the President is striving to “to build as broad an energy portfolio as possible for the country, with expanded oil and gas development; favorable tax treatment for nonpolluting sources like wind, solar and geothermal energy; loan guarantees for new nuclear plants; increased emphasis on energy efficiency; and research into long-term alternatives to fossil fuels.”

OK fine.  I don’t think nuclear is going anywhere anytime soon, especially since the Japanese tsunami wiped out the Fukushima nuclear power plant in 2011.  And clean coal is a non starter too, although Texas has begun a $2.5 billion ‘test’ project for sequestering carbon dioxide gas from the use of coal for energy by burying it underground.    In both cases, the ideas are non-economic.  They are the most expensive ideas in the portfolio and they need the government to insure unintended consequences because the private markets simply won’t.

The simple fact is that the rest of the world, to the degree it can afford to right now, is moving away from fossil fuel dependence as  fast as it can.   From the Rocky Mountain Institute book “Reinventing Fire,” in 2010 four German states, totaling 10 million people, relied on windpower for 43-52% of their annual electricity needs.  Denmark gets on average 26% of its energy from windpower.  The Extramadura region of Spain gets 25% of its power from solar, while the entire country has 16% of its energy supplied  by windpower.  In the US, the Minnkota Power Cooperative supplied 38% of its retail sales from wind.  Texas, yes that Texas, generated 8% of its electricity from wind in 2010, making it sixth in the world among countries, after China, the entire rest of the US, Germany, Spain and India.

While a lot of public discussion has involved solar, wind, hydro, thermal–the clean sustainable energy sources–the reality is that innovations that create efficiencies will drive most of the movement away from using fossil fuels.   We’ll simply be using less energy to do more work by being efficient, not necessarily by building new power plants, whether they are sustainable and clean or not.  Carbon fiber plane and auto frames will drop airplane and ground transportation weights by as much as 35%, and would raise car MPG ratings well into the 80MPG or greater ranges just by weight reduction.  The newest airplanes are using 20% less fuel because they contain carbon fiber frames instead of steel or aluminum.  This trend is still in its infancy, but will no doubt reduce annual transportation costs by billions of dollars within the next 10 years.

A national direct current grid, capable of transporting energy much longer distances more efficiently, would produce a national marketplace where producers of sustainable and clean energy supplies, most of which are situated in rural areas, can competitively price their energy into urban markets where most energy is used.   And a movement towards energy ‘islands’ where neighborhoods or city districts contain smaller energy plants that can supply their customers even if the larger grid cannot for some reason, can raise energy security by several magnitudes.   These types of modernizations work no matter what the energy source, but they definitely do make sustainable energy cheaper upfront where the initial resistance lies, because once built sustainable energy plants are far less expensive than fossil fueled plants.

The real impediment to all this is political.  Fossil fuel incumbents are some of the most profitable and therefore politically powerful, corporations in the world.  So far they’ve been able to successfully mute the publicity surrounding alternative energy sources, to divert everyone’s attention away from the real, substantive progress that’s been already made in sustainable sources and in energy efficiencies.  Republicans will, no doubt, fight the President’s efforts to earmark $2 billion in gas and oil revenues (that’s over 10 years, so it’s very modest in the scheme of things) to support energy research and development.

But times are changing.  Inevitably the price of gas and diesel fuels, and oil for heating, will rise simply because the rest of the planet is growing and as a result demanding larger and larger shares of these energy sources.  These developing countries understand that the US model of fossil fuel dependent economic growth can no longer be duplicated, so they are aggressively building sustainable supplies.  Nevertheless, in the meantime they will use fossil fuels too, even if they think fossil is more of a transition fuel (which it will be shown to be) rather than the bedrock fuel of their economies.

It’s a global race, in other words, to see who will be the most efficient user of energy.   As the advertisement says, ‘the best way to save on gas is to buy gas less often.’   So it goes.  It’s not a matter of using less energy, because energy use is going to climb as the world demand for it climbs, it’s a matter of getting more work done per unit of energy.

During his second inaugural address President Obama talked about climate change and infrastructure work that needs doing.  He wasn’t specific here, but I think I might have some idea of what he’s thinking about.

A lot of carbon release we create that scientists believe is a major dynamic in warming the planet comes from our energy systems, our cars, our buildings, our manufacturing facilities and, of course, our actual energy production and transmission.

The first thing to understand is a lot of that carbon discharge comes from inefficiency in our systems:  We waste most of the energy we burn with fossil fuels.   Consider that only 5% of the energy contained in our gas tanks is used to move the vehicle forward.  The rest warms the road, the tires and the air we displace or is lost in the propulsion system during braking, idling and running accessories like air conditioning or lights.  Half of all that waste is created by vehicle weight.   That’s about to change because carbon fibers have been developed, and are ramping up for mass production, which will cut as much as half that weight.

European race cars are almost completely built from these fibers, for example, but that manufacturing is crude and expensive.  That began to change in 1992 when an engineer, David Taggert, was tasked to an ultra-secret project at Lockheed Martin’s legendary Skunk Works facility in Palmdale, California.  There, Taggert and his engineers developed an advanced airframe for the F-35 Joint Strike Force that was 95% composed of carbon fiber composites.  The new plane was one third lighter than the previous version, yet even though carbon fiber composites were at the time incredibly expensive the new plane was two-thirds cheaper to build.

The use of carbon fiber composites are beginning to move into the airplane manufacturing mainstream, with Boeing’s Dreamliner wings being entirely made of this material.  The Dreamliner flies on 20% less fuel than its competitors and fuel is the single largest cost of running airlines.   Now the automotive industry is about to start making mass produced automobiles using the carbon material.  Manufacturing plants have sprung up across the globe in anticipation of the new sources of demand.  Both BMW and Toyota are in the final stages of introducing passenger vehicles utilizing the weight saving carbon fibers.  They both could be rolled out late this year as 2014 models.  Both will offer incredible mileages (100 mpg to over 200 mpg) as well as strength and safety because these carbon fibers can be made stiff and strong with joints made more flexible, malleable and energy absorbing.    The first ones won’t be cheap, ranging for $35,000 to $55,000.  But as more are sold, and as more carbon fiber manufacturing comes on line, those prices will inevitably drop dramatically.

Solar, windfarm and geothermal advances are cascading prices, and wastage, downward.  Some large energy production facilities, such as the huge solar mirror field now being built in the Mojave Desert, are already cost competitive with fossil fuels even after taking into account the subsidies fossil fuels producers receive from the federal government.  Being built by Bechtel, at 377 Megawatts, it’s the largest solar power plant being built in the world.  It is expected to be completed in 2013.  Energy engineers and interested investors are pushing for the US to build a national ‘smart’ transmission infrastructure, sort of a direct current electron superhighway that can transport energy over longer distances without losing most of the power.  Such a national system could do for energy production and transmission what the interstate highway system, built in the 1950s and 1960s, did for long distance auto and truck transportation.   Such a system would spawn sustainable power systems across the country because direct current systems can get the power from these  mostly rural power sources to cities.

If you want to learn about all the various ways our new energy world is about to develop before our eyes, go buy “Reinventing Fire,” a book sponsored by the Rocky Mountain Institute which details all the improvements which will be showing up in ever larger numbers within the next few years.

The National Resource Defense Council (NRDC) has published an innovative report that points out that using existing energy more efficiently has the greatest impact at the least cost.  Efficiency is so powerful a force the NRDC claims that even coal fired power plants can be kept on line, in many cases.

From the report:

An innovative feature of the proposal is the inclusion of
energy efficiency. State-regulated energy efficiency programs
could earn credits for avoided power generation, and avoided
pollution. Generators could purchase and use those credits
towards their emissions compliance obligations, effectively
lowering their calculated average emissions rate. Energy
efficiency is one of the lowest cost energy resources and
emission reduction options. States could use this provision
to slash emissions without costly and lengthy power plant
retrofits or new construction, reducing the overall cost of
the regulations……

Improving energy efficiency also cuts costs to consumers
and businesses. Switching to more efficient light bulbs,
adding weather-stripping or insulation in buildings, or
installing more efficient appliances and equipment, for
example, can save a typical household more than $700
per year—about one-third of the $2,200 average annual
utility bill….

The results from the model show that the proposed approach
would begin to modernize and clean up America’s electricity
sector while modestly reducing the nation’s electricity bill.
This is because energy efficiency programs adopted in
response to the incentives created by the approach would
cause overall demand to decline by 4 percent, rather

than increase by 7 percent. Meanwhile, coal-fired generation
would drop 21 percent from 2012 to 2020 instead of
increasing by 5 percent without the proposed carbon
standard. Natural gas generation would rise by 14 percent,
while renewables rise by about 30 percent (assuming no new
state or federal policies to expedite an increase in market
share for renewables)…

Investments in energy efficiency and demand response
are the lowest cost compliance pathway—much cheaper
than building new power plants or installing pollution
control equipment—so including this flexibility significantly
reduces overall costs. Energy efficiency consistently delivers
over three dollars in savings for every dollar invested,
which is one of the many reasons utilities have scaled up
annual investment from $2.7 billion in 2007 to nearly $7
billion in 2011, with a corresponding increase in energy
savings. See Figure 3: U.S. Electric Efficiency Program
Investments, 2007-2011. Efficiency investments reduce the
need to build additional power plants and infrastructure,
reduce wholesale power prices, and deliver significant bill
savings to individuals and businesses. Because substantial
reductions in CO2 can be achieved through energy efficiency
without building many new power plants or installing lots
of expensive pollution control equipment, the total costs of
compliance would be low—netting out at $4 billion in 2020.

Beezer here.  The report shows that enforcing the EPA clean air act need not be expensive.  It also says the program can be done without retiring coal plants and building brand new natural gas fired plants.  Basically the NRDC program is driven by the most efficient, least cost, techniques.  And  that technique is where efficiences come to the fore–irrespective of what fossil fuel is used.  The program provides a channel to substantial carbon dioxide reductions that doesn’t require, at least not initially, expensive replacement of coal fired power plants to gas fired ones.  The channel also allows for increased use of advanced systems like wind, solar and geothermal.

From a Bloomberg article today:

The 15 mile-per-hour winds that buffeted northern Germany on July 24 caused the nation’s 21,600 windmills to generate so much power that utilities such as EON AG and RWE AG (RWE) had to pay consumers to take it off the grid.

Rather than an anomaly, the event marked the 31st hour this year when power companies lost money on their electricity in the intraday market because of a torrent of supply from wind and solar parks. The phenomenon was unheard of five years ago.

With Europe’s wind and solar farms set to triple by 2020, utilities investing in new coal and gas-fired power stations no longer face stable returns. As more renewables come on line, a gas plant owned by RWE or EON that may cost $1 billion to build will be stopped more often from running at full capacity. It may only pay for itself on days like Jan. 31, when clouds and still weather pushed an hour of power on the same-day market above 162 ($220) euros a megawatt-hour after dusk, in peak demand time.

“You’re looking at a future where on a sunny day in Germany, you’ll have negative prices,” Bloomberg New Energy Finance chief solar analyst Jenny Chase said about power rates in wholesale trading. “And a lot of the other markets are heading the same way.”

Europe’s biggest power markets give preference to renewable energy including forcing some utilities to use their fossil-fuel plants less. That cuts into profit, complicating investment decisions as the companies try to meet emission targets and replace older plants and networks that Citigroup Inc. estimates will cost them more than 900 billion euros by 2020.

Profit Margins

Northern Europe’s renewable-energy goals call for about 200 gigawatts of solar and wind capacity by 2020, or almost a third of the current installed base, compared with about 70 gigawatts today, according to the Finnish energy consultant Poyry. Even by 2014, gross profit from burning coal in Germany may skid by as much as 41 percent, according to Barclays Plc.

The gross margin at a coal power plant after deducting fuel and emission permit costs, the so-called clean dark spread, may “collapse” to as low at 3.50 euros a megawatt-hour, Barclays analysts including Peter Bisztyga said in a Sept. 1 report. The spread was at 6.15 euros today, Bloomberg data show.

Narrower margins mean it will take longer for companies to pay off building new gas- and coal-fired facilities. Those plants are needed. They can run around the clock, preventing blackouts when the sun sets or the wind dies as European power demand grows 5 percent through 2015 compared with 2010, according to Paris-based bank Societe Generale SA’s forecast.

‘Squeezed Out’

“The more intermittent technology like renewables, the more baseload generation will be squeezed out,” Volker Beckers, chief executive officer of RWE’s U.K. Npower unit, said in an interview at Bloomberg’s London bureau. Npower’s plants are largely coal- and gas-fired, or baseload, meaning they can run around the clock.

Electricite de France SA is spending 6 billion euros on its new 1,650-megawatt nuclear reactor at Flamanville in Normandy. Dong Energy A/S, Denmark’s biggest utility, inaugurated its first power station in the U.K. in February, an 824-megawatt combined-cycle gas turbine plant for 600 million pounds.

EON will miss its 2015 forecast by about 3 percent for earnings of 13.3 billion euros to 13.8 billion euros before interest, tax, depreciation and amortization if average power prices are 57.30 euros a megawatt-hour, below EON’s forecast of 60 to 62 euros, UniCredit analyst Lueder Schumacher said.

At 58.50 euros, RWE’s recurring net income will be 2.2 billion euros in 2013, compared with the German utility’s forecast of 2.5 billion, he estimated.

‘Depress’ Prices

“Too much wind can depress power prices, but then there are times when very little wind is blowing,” Poyry Director Phil Hare said in a telephone interview.

Based on weather patterns over the past 10 years, there’s a 72-hour period each year when a wind farm would produce less than 5 percent of its potential output, Hare said. “Some other plant has to be there, but the company has to make the return on its investment in just those 72 hours over 10 years.”

Germany’s renewable energy boom will make hedging the power output for utilities’ coal and natural-gas plants “more and more difficult,” according to an executive at Edison Trading SpA speaking at a conference in London.

The country’s renewable energy output may rise to 200 terawatt-hours in 2020 from 120 terawatt-hours last year, Andrea Siri, Edison’s head of continental power and origination, said yesterday, citing a regulatory forecast.

2 Million Homes

Solar plants in Germany generated as little as 23.8 megawatts at 7 a.m. Berlin time yesterday compared with 11,570 megawatts at 1:30 p.m., according to a European Energy Exchange AG’s website, tracking power capacity. A steady supply of 1,000 megawatts is enough for about 2 million homes in Germany.

Power prices on the Epex Spot SE exchange in Paris that handles German and French supply vary hour-by-hour depending on how available capacity is. At times they can become negative when renewable energy peaks and there’s a surplus of power.

At such times, generators or the grid operator pay consumers to take their electricity if they aren’t able to reduce output or hedge it. Grid operators in Germany, Europe’s biggest power market, are also required to take renewable output if it is available, just as in Spain and France.

The highest-ever hourly price in the combined German-French intraday market was 162.06 euros a megawatt-hour for delivery between 6 p.m. and 7 p.m. in Germany on Jan. 31, while the lowest was minus 55.11 euros for 2 p.m. to 3 p.m. on Feb. 6, data from the exchange showed.

Negative German Prices

The negative German prices on July 24 occurred on a day when winds averaged 15 mph in the northern state of Mecklenburg- Western Pomerania, home to many wind farms, Bloomberg weather data show.

Germany’s same-day electricity price was below zero for nine hours on that windy day on July 24, with negative prices for a total of 31 hours so far in 2011, according to Epex data. France had 9 negative hours this year.

The joint French-German intraday market started last year and has so far helped to “buffer the volatility of prices,” Epex company spokesman Wolfram Vogel said by e-mail on Sept. 16.

“The law in Germany is that renewables have priority, so utilities have the choice of turning plants down for a few hours or paying a negative price to someone in Germany or abroad,” EON spokesman Georg Oppermann said in a telephone interview. The company’s traders can protect EON against losses by watching weather patterns, he added.

‘Clearly a Negative’

“The huge amount of renewable capacity due to be added to the grid will depress not just spreads but also the outright power price,” UniCredit analyst Scott Phillips said. “This is clearly a negative predominantly for all thermal power plants, particularly coal.”

Britain plans to install more than 8,000 offshore wind turbines by 2020 to get 15 percent of electricity from renewable sources. Germany installed 7.4 gigawatts of solar photovoltaic capacity last year, the most of any nation, driving total capacity to 17,200 megawatts. Spain aims to get 20.8 percent of its total energy from marine energy, geothermal and offshore wind projects, as well as hydropower, by 2020.

German wind power capacity peaked at close to 12,000 megawatts on July 24, according to Meteogroup data, the last day of negative prices. Four days later, the most that the country’s wind parks generated was 315 megawatts.

Photovoltaic and solar-thermal plants may meet most of the world’s demand for electricity by 2060 — and half of all energy needs — with wind, hydropower and biomass plants supplying much of the remaining generation, the International Energy Agency said in August.

Capacity Payments

U.K. energy regulator Ofgem is considering paying generators to keep plants open as back-up suppliers, compensating them for down time. The so-called capacity payments, which also are being studied in Germany, are likely to favor gas over coal, as gas plants can be turned on and off faster, according to Phillips.

Subsidized power rates called feed-in tariffs, a proposed carbon floor price in Britain and other measures favoring renewable projects will lead to a shift in the “merit order” of plants across Europe, he said. Power from renewable projects will be the first to be used, followed by gas-fired power plants, which release less carbon-dioxide than coal stations.

“Margins are going to get worse over the next few years but as the value of the plant for backup starts getting interest, it becomes an issue of what they’re worth, not what they cost,” Hare said.

Beezer here.  It’s all complicated, but eventually the cost of fossil fuels will rise to a level where the real options become very clear indeed.

From a wide ranging interview of celebrated economist Daren Acemoglu, published at the Minneapolis Federal Reserve website, comes a discussion of what is called ‘directed technological change.’   Simply put, economists try to model the effects of technological changes, both at the micro and the macro level.

In one section of the interview Acemoglu talks about the conflicts between fossil fuel energy systems and technological innovation in so-called ‘clean’ energy.  Can a huge economy like that of the US navigate towards cleaner systems without damaging overall future growth? 

Directed Technical Change & Global Warming

Region: I definitely want to ask about your related work with James Robinson on economic and political transformation, but first let me jump to another of your seminal contributions in economics: directed technical change. In brief, the idea is that innovation is directed by two competing forces: the price effect that encourages innovation toward scarce factors and the market size effect that does the opposite, directs it toward abundant factors.

You and your co-authors recently applied this idea to the environment—global warming, in particular—and concluded that because of the externalities involved, sound policy should re-direct technical change toward clean technologies without delay, and also that optimal regulation with carbon taxes and research subsidies need not reduce long-term economic growth.

And you compare it to other economic analyses of climate change intervention, such as the Nicholas Stern report and William Nordhaus’ work. But could you give a quick primer on directed technical change and how you apply it to climate change?

Acemoglu: Sure. It’s useful for me to express it the following way, I think. The directed technical change idea really has two layers to it.

The first layer is sort of obvious to economists, but hadn’t really been developed and stated. It’s that just as we think all other factors go toward more profitable areas, investment in new technology and innovative activities also goes toward more profitable areas. I think in a micro sense, nobody would doubt this. We don’t talk of “technological change” in the abstract. We talk of technological change in the pharmaceutical sector, for example. We talk of technological change going after heart disease. We don’t just talk of broad technological change. And when we want to understand technological change for heart disease, we ask, What’s the market for heart drugs, beta-blockers, ACE inhibitors, statins or whatever?

So, that’s the most important part. Directed technical change was pushing this idea at the economywide level. Technology, either across sectors or across different types of factors—factor-augmenting or factor-substituting technologies—is also going to be determined by their profit incentives.

I first tried to develop these ideas in the context of inequality and skill-biased technological change. There the market size and the price effects, which you’ve mentioned, turn out to be quite important. If you want to understand how this works in a more detailed level, you need to understand how these market size and price effects work. They create countervailing forces, but one of them always dominates, and so on.

When we turn to the environment, I think the bigger picture insights seem to be more important. Market size and price effects come out in the context of the environment, and they’re in our paper, of course. But for purposes of our conversation here, I think I can do justice to the main ideas without getting into those details.

Essentially, the bulk of the literature in environmental economics has been about how we have to tax economic activity to slow it down so that we don’t damage the environment. If you think of a single-sector economy, with one sector that depends on coal, or on gas, that’s the only thing you can do: slow down that one sector. If you want to reduce carbon emissions, you just have to slow down that sector. Now, you don’t directly slow it down; you change its composition of factors, perhaps, but you can’t let that sector take off at a very rapid rate and still, at the same time, limit carbon emissions.

Our perspective was, well, the economy has several technologies; some of them are cleaner than others. How should we shift toward the cleaner ones? When you look at the climate science, there’s a lot of emphasis precisely on this and on questions such as, When is it that nuclear power will become economical? When will geothermal or wind or solar solve both their cost and their delivery problems?

Therefore, the perspective shouldn’t be, How can we slow down economic activity? Instead, it should be, How can we shift the composition of economic activity away from dirty technologies to cleaner technologies?

Now, that’s a very directed-technical-change-related question, but it already comes with a very important implication: The focus shouldn’t be on slowing down economic activity, but on changing its composition and changing the type of technological changes that the market generates.

Moreover, and importantly, we expect there to be a distinctive cumulative aspect to research. Different technologies often build on past successes in the same line of technology. So when you’re building a new car, you build on the past advances in car technology; you don’t as much build on advances in solar technology. In the same way as when you build new solar panels, you’re building on the previous solar panels, not on the diesel engine. What that means is that there’s going to be strong self-reinforcement in changing the direction of technological change. So when technological change shifts away from the dirty technologies that are so fossil-fuel-dependent to the cleaner technologies, it will also make it potentially cheaper to produce these innovations, these cleaner technologies, in the future.

That was the basic observation that I think was most important in the approach. And that’s the source of the more optimistic conclusions. Let me explain that in the following way. If you have a Nordhaus-type model—and I don’t want to caricaturize it, because Nordhaus in other work has considered richer models—but the seminal contribution that Nordhaus made in the early 1990s, for example, was sort of a neoclassical growth model used for the environment, and reducing carbons is reducing capital accumulation. In a model like that, parameters are going to determine how aggressive you should be in reducing carbon, but when you reduce carbon, you’re reducing GDP, you’re reducing growth.

The more optimistic aspect of our perspective came from the realization that if what you’re doing with environmental policy is “tax one sector, but subsidize another sector,” you might actually achieve in the long run quite successful growth, because the other sector is going to pick up the slack. If we have enough technological ingenuity—and that is an if, which I think we tried to make explicit in the paper—and can generate cleaner technologies that avoid the negative environmental consequences of coal and oil, then there is no reason for our economy not to grow at a healthy rate in the long run. So that was the optimistic part.

So in that sense, factoring in directed technical change made this conclusion much more optimistic relative to Nordhaus and, of course, more optimistic than Stern’s review, which was much more effective, and I believe rightly so, [in warning] of the potential dangers from climate change.

But on the other hand, it also made policy prescriptions much more proactive than Nordhaus and, in that sense, far more similar to Stern. And the logic of that relates very tightly to the directed technical change aspect. In the Nordhaus approach, it’s like a ramp-up thing: You don’t want to do too much because reducing emissions today is costly, while the future is discounted. If you can cut things in the future, why do it today? Now you can also add, “We don’t know where we’re going to go, so let’s go slowly,” a very gradualist approach.

But let’s think of the logic of directed technical change with cumulative research. The less we do on green technology today, the less knowledge is accumulated in the green sector, so the bigger is the gap between fossil-fuel-based technology and energy, and the cleaner energy, so the harder it will be in the future to close that gap. With more proactive, decisive action today, we already start closing the gap, and we’re making it easier to deal with the problem in the future.

Beezer here.  The main point is that somehow the government needs to keep subsidizing technological innovation in the clean energy areas.  Without this effort, and Acemoglu argues net GDP growth may be unchanged by the subsidy, it will become harder in the future to transition into cleaner energy systems because postponing initial innovation also postpones other innovations that always follow the initial discoveries.    It’s the old saw about when is the best time to plant a tree?  Now.   As almost always, hat tip to  Mark Thoma’s economist’s view for highlighting this interview.

Economies grow because capital is being invested in labor and technology to grow one or more industries.  But this doesn’t happen just because one wants it to happen.  There has to be one or more “triggers” creating the need for more capital and labor.

Triggers could be a strong rise in population growth or some strong form of ”game changing” innovation that literally creates new companies, industries and products.  Or, as is often the case, governments decide to support certain industries by directing subsidies or tax incentives their way to insure growth. 

China is an excellent example of growth created by government actions to support exports.   If Ford wants to build a factory in China, Ford would have to partner with a Chinese firm, would have to use local labor and some portion of local product supplies and would have to export half of what they make.  These and several other official government policies, including pegging their currency to a value just under the dollar which guarantees China a price advantage, have been successful in creating jobs, income and overal economic growth in China.

In the US, taxpayers pump billion of dollars into basic research in several industries which, in turn, results in innovations that are made available to private industry.  Two related industries, medical devices and pharmaceuticals, have received much of this money.  It is no accident, therefore, that these two industries have been shining stars in terms of growth and income.  In the 1950s under President Dwight Eisenhower, taxpayers subsidized building the interstate highway system, which in turn guaranteed an explosion in the automotive industry.  The all important internet was invented, tested and installed by the government and then handed over, literally without charge, to private markets.  The internet has been a tremendous job and income creator not only in the US, but worldwide.

But America, for a number of reasons, has forgotten how important government action can be for supporting real job and income growth.  In fact, a common theme in Washington DC today is that government can’t do anything but waste taxpayer dollars and destroy jobs and income.  This belief may be the single most important cause of America’s fall from economic grace.

The US should take a page or two from the Chinese.  Running huge trade deficits is like having a hole in a tire you’re trying to inflate.  Every pound of pressure you try to put in the tire, just goes out through the hole.  China’s policies insure that investments they make results in the export of native made product.   Having local labor and product requirements, plus export requirements of product made, do just that.

The US should have the same requirements.  That we don’t have sensible requirements insures that US corporate and private investment capital results in jobs and income growth outside the US.   We’ve been making more product and hiring more people–just not in the United States.  

At the same time, we have subsidies that are wasteful and inhibit native job and income growth, among other ills.  Take the annual $4 billion subsidy for corn.  It has made corn cheap and plentiful, but it has created a giant industry that is destroying agriculture and making our country, literally, physically ill.  Ill health and the destruction of farm jobs (not to mention all the related supporting industry jobs) has helped weaken the nation for the benefit of the few.

From the blogsite accidental hedonist:

01/24/06, by Kate Hopkins 33988 views • Categories: Food Politics, High Fructose Corn Syrup (HFCS)

Financial regulatory reform.  Considering what the country has suffered, and still suffers from, one would think this “trigger” would be obvious.  But amazingly it isn’t.  Setting strong limits on what the taxpayer will guarantee in the financial industry and setting strong groundrules on speculation and leverage would appear to be screamingly obvious.  But because of the same philosophy of lousy government and tax cuts, we still have strong opposition in Washington DC to even these basic requirements.  Reform here will avoid financial disruptions in the economy, an economic boon all by itself. 

From 1932 until the late 1980s (almost 60 years) the US was spared financial meltdowns when these common sense rules were in place.  But because of the same philosophy the rules were weakened beginning in the 1980s, and eventually eliminated entirely in 1999.  The result: Seven financial economic crisises, including the last one which may still outdo the one that created the Great Depression of the 1930s.

Health care reform.  Again what should be obvious to everyone (we can’t afford the system we now have) became merely a side item on the menu.  The real opponent to reform was (can you guess?) fear of government, and unwillingness to actually pay for (read lower, not more taxes) a new system.  The main issues of better healthcare, cost control, and universal access to health care services for more than 30 million uninsured, became irrelevant under the onslaught of this misogynist (one of hate) philosophy.

So there’s some triggers.  To Beezer they should be as obvious as the nose on one’s face.  But our belief in the myth that government, due to some mysterious illness (despite more than two centuries of evidence to the contrary), can’t even pull up its figurative pants by itself remains virulent in DC and within the Republican political party as well. 

Too bad.  We’re well on our way to becoming a declining nation with a declining economy and declining standards of living.  So much we could do, so little understanding and will to do it.