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June 28, 2009

Obama's Energy Bill is a Recipe for Economic Destruction
by Gerard Jackson

Those whom the gods wish to destroy they first make mad is an ancient saying that Obama seems intent on confirming with his energy bill. It has been estimated that if implemented this bill will added $9 trillion to energy costs by 2050. And the bad news does not stop there. Critics point out that the these costs will be felt throughout the US economy, particularly in the production of goods and services. However, Americans will not have to wait until 2050 for a severe energy crisis to strike.

The brilliant Waxman and Markey are demanding that electric utilities use grossly inefficient solar and wind power sources to generate 20 per cent of their power. This is the kind of insanity that raised California energy prices to nearly twice the national average and in doing so contributed mightily to the state's current economic crisis. Let's take a look at some figures. Average growth in GDP since 1970 has been about 3 per cent p. a. This means that GDP doubles roughly every 24 years. (I'm applying the banker's "doubling time" trick of dividing 72 by the annual rate of increase).

At a cost of $9 trillion Obama's energy bill averages $0.237 trillion per year which would amount to $5.684 trillion in 2036. As GDP will have doubled to $28 trillion this means that Americans will be facing a totally unnecessary increase in energy prices of $5.684 trillion, which would be 20 per cent of GDP. Let that figure sink in. Even according to this bottom line figure Obama's energy taxes -- and this needs to be stressed, these additional costs are in fact taxes -- will soak up 20 per cent of GDP. Add this monstrosity to his massive deficits that see no end in sight, his colossal increase in borrowing that could triple the national debt by 2016, the nationalisation of health care and other proposed increases in government spending and you are looking at a prostrate economy.

Without a doubt this is very bad indeed. Unfortunately the situation is going to be far worse. By focusing on 'dollar costs' critics are missing the true costs of this impending disaster. His energy policy is a direct attack on America's capital structure (sometimes called the production structure), the effect of which will be to shrink it. When this happens living standards will fall.

Economic growth is another name for capital accumulation. Any country that consumes capital or allows the rate of capital accumulation to fall behind the growth in population will experience falling living standards. Capital is paid for out of savings and savings are forgone consumption, a process by which present goods are transformed into future goods. (It is important to distinguish between savings and cash balances).

Obama supporters tell me that this cannot be so because "solar and wind power plants are capital". So spending $1 billion dollars on these is just the same economically as the same amount of money a coal-fired power station. No it ain't. I have explained numerous time that these so-called alternative energy sources are grossly inefficient and suffer from massive diseconomies of scale, which means they are afflicted with rising average costs of production.

The more they expand the higher will be their average costs. No amount of wishful thinking can make it otherwise. Hence, even if they were 100 per cent efficient in a technical sense they would still be hopeless inefficient economically. Therefore the insurmountable problem of diseconomies of scale will always make them extremely inferior to centralised power plants and this is why they have to be subsidised.

Therefore spending on these plants results in capital consumption because it involves the absorption of capital that would otherwise have been used to raise living standards. Put another way: spending on these plants can only take place by sacrificing spending on projects that raise living standards. For example. Reliable power plants that actually have long run falling average costs, meaning that the more they produce the cheaper each unit of electricity will be. This is called increasing returns to scale. To invest in the opposite is utter economic idiocy.

As the costs of electricity rises more and more energy intensive lines of production will have to close down. To fully grasp the ramifications of this process we must develop some understanding of how incredibly complex the capital structure is, even with respect to a single product. As Hayek explained:

What is no less important is that, in the course of the lengthening of the process, the stream of operations leading up to a given product will as a rule be split up into many branches and sub-branches. And it may be that, long before the first move is made to produce the actual material from which the product is to be made, work is being taken in hand to provide some auxiliary material or tool which will be needed later to convert the raw material into the final product. At each stage of the process from the raw material to the finished product the main stream will be joined by tributaries which in some cases may already have run through a much longer course than the main stream itself. But all these activities, many of which may be carried on at the same time at different places, have to be regarded as part of the same process, and have to be taken into account when we talk about its length. The series of operations which are required in order to provide the fuel or lubricant, and the tools or machines which are needed for turning the raw material into the finished product, are just as much part of the process of production of the good as the operations performed on the raw material. (The Pure Theory of Capital, The University of Chicago Press, 1975, pp. 174-175)

By raising energy prices a large number of streams and tributaries will be eliminated while others will be redirected into less productive lines. The more energy prices rise the greater will be the damage. Instead of accumulating capital America would be accumulating malinvestments thanks to Obama's capital destroying legacy. Let us, for example, assume that the US is reduced to a pathetic one per cent annual growth in GDP. By 2050 GDP would have increased to $21 trillion dollars, $9 trillion of which is consumed by energy taxes. This would come to 43 per cent of GDP.

To top it off, Americans will be facing an avalanche of tax increases in 2010 to 2011, courtesy of a Democratic ruled Congress. Obama has made it clear that the aim of increased taxation is income equality (except for his super rich pals whose vast wealth will remained untaxed) which will increase the level of consumption*. This means less investment which in turn will hit living standards. As Keynes observed:

If fiscal policy is used as a deliberate instrument for the more equal distribution of incomes, its effect in increasing the propensity to consume is, of course, all the greater. (The General Theory of Employment Interest and Money, Macmillan-St. Martin's Press, 1973, p. 95).

No matter which way GOP-hating Obama cultists try to spin it Obama's energy policy alone is a recipe for economic disaster. Then again, I did not write this in an effort to change the minds of Obama's delusional supporters but to educate others about the grave dangers his policies pose for American living standards. If you doubt me, just take a gander at what the Democrats have done to California. Unlike the federal government California cannot print dollars to try and save itself, thank God.

Bernard Shaw surely had the arrogant and conceited likes of Obama in mind when he said:

He knows nothing and thinks he knows everything. That points clearly to a political career.

Footnote:

Obama cultists truly are pathetic. Their idea of a refutation is to mindlessly parrot talking points the Democrats issue. I'll do this by the numbers.

1. Bush is not responsible for the deficit. It was Obama who quadrupled it to $1.8 trillion dollars.

2 Bush is not responsible for Obama's gigantic spending binge. This was Obama's plan all along.

2. The Democrats have controlled Congress since 2007. From that time onward they could have stopped any increase in spending. Instead they accelerated it with Obama voting for every single spending increase that hit the floor. This is why under this lot spending jumped by $429 billion in two years.

3. Deregulation did not cause the financial crisis. Two things: First the crisis also swept through Europe, despite the fact that its financial sector is heavily regulated. Second, I warned back in 2004 that thanks to Greenspan's monetary policy the US could expect trouble in 2008. Moreover, the crisis would again first make itself when manufacturing started to contract. This is exactly what happened.

4. Bush tax cuts were not -- unfortunately -- "massive": they were very modest compared with the Kennedy and Reagan cuts. Moreover, I have yet to see an explanation of how in heavens name tax cuts in any form whatsoever could possibly trigger a financial crisis. And if tax cuts are the culprit then how do Obama groupies explain the crisis in Europe? I can only imagine that these poor souls are getting this nonsense from the mendacious Senator Steny Hoyer.

5. In the four years following 2003 the cuts tax receipts rocked by $785 billion.

6. The so-called cuts that favoured the rich resulted in the richest 1 percent, 5 percent and 10 percent of taxpayers paying even more in taxes.

7. This site vividly puts Obama's spending in perspective and in doing so demonstrates just how reckless it is.

8. The real cause of the crisis is the lousy economics that rationalises deficits and justifies more and more governments spending and taxation, greater control of the economy, loose monetary policies, manipulation of interest rates, etc.

Why Obama's green energy jobs policy will be an economic nightmare

More on Obama's economically insane energy plan

*Defending the Austrian explanation of why consumer demand does not drive the economy

Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes economics editor.

Copyright © 2005-2009 Gerard Jackson

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