Limbo, the Maytag Repairman, and Macro Markets

How low can you go? Sometimes when spending seems weak and prices are falling there seems to be no end to that cycle. It’s like we are staring down into a bottomless pit. It seems like there is no end to the fall in prices. But prices never fall without limit and the real world is a little more like the limbo than a bottomless hole in the ground. 

You remember the limbo, right? It is a calypso thing. Two people hold the ends of a long stick and some fool with especially rubbery legs goes under the bar as people sing limbo limbo limbo like me while they drink tall island drinks with colorful parasols. As the bar goes lower some of the contestants no longer can go under the bar and the game ends when there is only one contestant who can go under the bar. For his efforts he is usually awarded discount coupons for orthopedic surgery. Or the game ends when your mom comes home and confiscates the rum you stole from her liquor cabinet.

The point of this post is to raise the question of the relative efficacy of market solutions to government intervention.  After five years we might want to question knee-jerk Keynesianism. To do this we have to take a little venture down supply and demand lane. We will now all hold hands and sing gumbaya.

For those who do not want a refresher in supply and demand you may cheerfully proceed down to the place marked “The Fun Starts Here.”

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Economists torture their students with supply and demand to discuss everything from wart growth to interplanetary travel. We can slap a S&D diagram on a white board or cocktail napkin quicker than you can say diminishing marginal returns. My friend Jimmy can wield a small hammer at limestone and produce a beautiful wall or walkway. My hammer is my set of colored markers that I can use to explain price and quantity changes of anything anywhere at any time.

The invention of the stirrup revolutionized warfare and led to a rapid increase in the price of saddles and horses.  Centuries later technological advances in computer chips led to astronomical declines in the price per unit of power for computers. The stirrup increased the usefulness and therefore the demand for horses and saddles and this caused their prices to rise. Computer chip technology made it possible to increase the supply of power at lower costs which led to declines in the price of computer power.

Supply and demand analysis has found its way into common discussion. Most of us are comfortable with the idea that bad weather which ruins crop yields will reduce supply and causes the price of tomatoes to rise. Of course when worry reduces investor appetite for risk we talk about how the decline in the demand for stocks causes stock prices to fall. You don’t have to be an economist to be familiar with the use of supply and demand concepts and how they come together to help one discuss past, present, or future expected price change. I am not trying to say that supply and demand is as well-known as a Charlie Sheen rant, but we have adopted this economic analysis tool to our everyday lives.

Supply and demand analysis is a pretty remarkable thing that comes up with predictions by making assumptions. For example, one assumption says that prices will change in response to the condition of a market. If the main change in a market is an increase in demand, for example, then in the absence of price change or before a price change can take place – this creates an imbalance in the market. In this example, we would observe demand greater than supply. This imbalance or shortage creates the incentives for both demanders and suppliers to agree to a higher price.  In the opposite case which finds supply much larger than demand, this surplus leads market participants to agree to a lower price.  When the price changes in response to these market imbalances, we say that the price change “clears the market.” Clearing of the market means that the price change brings supply and demand back towards equality. A conclusion of the usual market model is that prices play an important role of restoring balance to markets.

Adam Smith’s “invisible hand” concept explained that if markets were allowed to work then we would not need policy or policymakers or baboons to solve market imbalances. If there is too little or too much demand for a given supply you don’t need a committee of experts to solve the problem. What you need is a market wherein there is strong competition, good information, no impediments preventing actors from expressing market wishes, and no obstacles to prices changing as the market dictates.

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The Fun Starts Here

Those last paragraphs sound like a textbook and even I am getting sleepy. But a big point is that whether it is stirrups, tomatoes or whatever – we tend to adopt supply and demand analysis and use it to explain and predict real world outcomes.

This is why I am so perplexed about our application of these tools to macroeconomic situations.  While it might seem a bit far-fetched to some of you, macroeconomists apply supply and demand to a nation’s economy. Macroeconomists since J.M. Keynes have adopted the idea of national demand for goods and services and policy is often directed to stabilizing undesirable changes in aggregate demand. Accordingly, some macroeconomists believe that part of the solution to our latest recession is downward price adjustments. Since much of what caused the recession was a decrease in the demand for houses and financial assets, an application of supply and demand would argue that falling prices of houses and financial assets should part of the solution to market balance or equilibrium. At the macro level it is interesting that our policymakers were not content to just let Adam Smith’s invisible hand solve the problem. Rather than believe there was some reasonable end to a game of Macro-Limbo, they worried that prices were headed into a dark pit filled with rattle snakes and Rush Limbaugh. To prevent prices of financial, housing, and other assets from declining to the earth’s core, the Fed and the Treasury bought stocks, bonds, and companies like geeks at the introduction of the latest gadget at the Apple Store. To prevent housing prices from falling toward the South Pole the government not only bought houses but put in a whole new team to regulate foreclosures and to oversee an orderly disposition of houses.

Distrusting prices to equilibrate these markets, policymakers essentially stopped the markets from working and it appears in the end that they have drastically slowed the movement towards a new balance. Why did policymakers behave this way?  Why did they not allow market capitalism to function? One can only guess the reasons. One is that while they trusted markets to work for most things on most days, they lost their trust when it came to bigger events. Imagine if doctors decided not to use modern medicine every time they had to treat a really serious ailment! Second, what fun is it being in charge of a country if you don’t do anything but stand around watching prices fall and don’t get any credit when the problem disappears? Let’s call that the Maytag Repairman explanation. Third, perhaps they worried that prices would not move in the right direction. But of course, housing, bond, and stock prices did move in predictable fashion. Fourth, perhaps they worried that prices would fall too much and create too much havoc as they fell. It seems to me that this explains a lot of the mistrust of markets. When policymakers faced the public with sad worried eyes they proclaimed that it was necessary for government programs to forestall a horrible process.

Some policy makers are bragging about recent stock prices but notice that with all the merriment, the stock indexes are now only regaining a peak reached during the recession and still have a long way to go before reaching highs attained before the crisis. It has been half a decade of no real stock price growth. But with housing prices still falling, one has to wonder if the real truth of the intervention is that it simply stretched out the eventual adjustment. Prices were going to fall to clear the market but the government made sure the price change took years and years and years.

Geithner and Bernanke would say that I am a nut job. Letting the economy free fall would surely have caused a larger crash. But while most of my friends will agree that I am surely a nut job, I will not agree to what we can’t know. How far would prices have fallen and what would have been the side effects?  I suspect that without government’s mucking up expectations, prices of houses would have overshot in a downward direction and would have made housing the bargain of the century. After all – a house has real worth. It is composed of brick and mortar and sweat. That has value. If we overbuilt houses for numerous years the glut would lead to prices at the low end of that fundamental value. But clearly demand plays a role – and with housing prices cheap enough relative to the cost of producing new houses – the demand could come back. But we never let the prices reach those levels and we will never know how the invisible hand might have worked.

Let’s suppose housing or stock prices fell to these low values I proclaim above, wouldn’t that have killed off a lot of mortgages and created a national recession? Probably. But what I am raising here is that we chose to pull the band aid off slowly. Are we sure that the accumulated pain of the last five years of heavily regulated markets is not greater than the quicker and perhaps more intense spike of pain associated with a quick pull of the bandage? The unemployment rate has been high for quite a while and threatens to remain there for some time. Might these unemployed have been better off if that rate had risen even higher in 2008 or 2009 but was back to 6% today? What I do know is that it is now March of 2012 and we still hear our leaders proclaim that they saved the day and that without further stimulus the economy will go back into recession. I am not so sure that a market solution could have been much worse. The recession started in the beginning of 2007 and ended in the middle of 2009. Five years after the recession started and after trillions of dollars of very active policy, US policymakers admit that the economy is still too weak to be trusted. I think it is the policymakers that can no longer be trusted.

Stimulus Doesn't Add up

Joseph Stiglitz is a Nobel Prize winner for economics (2001) and a very influential economist. We should expect more from him in the way of good analysis. But like his other Keynesian compatriots (e.g. Paul Krugman, Martin Wolf) he writes cogently but is so driven by ideological goals that his analysis falls short of anything that one might actually call macroeconomics. In his recent article in the Financial Times (The American labor market remains a shambles, page 9, Tuesday, March 13, 2012), Stiglitz continues baying at the moon about macroeconomic stimulus. I have written numerous times in this blog about the risks of continued stimulus several years after the end of the US recession. I won’t repeat all that here but suffice it to say it behooves me to explain and defend my obnoxious allegation that such great economists fail to come even close to connecting the dots.

In this article, Stiglitz admits there has been a recovery in the US and comments that we have had several recent occasions of green shoots. Clearly this amounts to a recognition that all is not as fragile in 2012 as things were in 2008. But then Stiglitz brings up the risk factors – explaining adroitly how this recovery and expansion phase pales in terms of past ones in the US.  Stiglitz raises the correct issue – there is a concern that we have adequate policies to deal with an economy that simply won’t create jobs or output as fast as it used to. In the body of his article – and this is the frustrating part – he mentions some very real risks yet his own policy recommendation seems to avoid treating  these monsters in favor of mumbling a worn out Keynesian mantra – drill baby drill. No – just trying to see if you were still awake. The Stiglitz-Keynesian mantra is for continued big deficits, bigger debt, and a central bank that accommodates all that with more and more money.

Here are some of the trends and risks he singles out in his article:

• ·         Extrapolating current employment trends it could take 13 years to reach full employment in the USA
• ·         It will take sustained output growth of more than 4% to pull the unemployment rate down.
• ·         Even after deleveraging we should not expect the consumer to go back to previous rates of spending.
• ·         Over-building in housing leaves that sector unable to pull demand up sufficiently.
• ·         States and local governments have financial problems that prevent them from leading an upsurge in spending
• ·         Redistribution of income towards higher income individuals (who spend a smaller portion of their incomes) retards consumer spending. Wages not keeping up with inflation have exacerbated the redistribution of income.
• ·         The Great Recession reflects a transition from manufacturing to services.
• ·         Risks faced by the American economy include the European downturn, complacency in the US which prevents adequate government support, and that we are content with an unemployment rate above 7%.

From this he concludes…”the economy will almost certainly need more stimulus if it to return to full employment any time soon”.

It is telling that nowhere in this list of trends or risks is a worry about the negative impacts derived from sovereign risk associated with rising government deficits and debt. Equally noteworthy is how he fails to provide any connection between this very worthy list of trends/risks and his policy prescription for more stimulus.

It makes me think of the patient who sees his doctor about a knee problem and explains that she has been recently running 15 miles a day to prepare for the next Ironman race. The doctor says, young lady, I recommend that you take 6 aspirins with a spoonful of JD each day. While it is true that this medicine might have some impact on the pain it totally ignores the question of what is actually causing the knee problem – too much running. If this doctor has an improper relationship with Bayer or the Jack Daniels Company, then we might understand why he would give such bad advice. Of course, if the doctor is running for office then maybe he concluded that the patient would feel happier until the next election without giving her the tough advice to forget the Ironman.

Stiglitz’s advice is no different.  Like drugs the stimulus could have a short-term remedial effect. And like the drugs the bad advice could lead to long-term negative consequences.  An economist might say the risk of the stimulus is tolerable if it leads to some improvement. But surely this reasoning misses the point. If one does not attack the real causes of the knee problem or of the labor market’s under-performance, then we are certainly destined to stimulus addiction. Make no mistake that Stiglitz is advocating more stimulus. Those are his words.  I do not favor a strong and fast movement toward austerity in the USA. But many times in this blog I have explained why continuing the same level of stimulus or expanding it is the wrong thing to be doing now. 

Whether it is changes in age distribution, shift to a services sector, productivity, globalization, leverage, housing excess capacity or whatever – we get nowhere today if we do not address those issues head on.  Addressing these issues has nothing to do with more stimulus. Addressing those issues is what it will take to create the growth that will improve employment opportunities in the US.  And addressing those issues is why things are not likely to improve quickly. What is so devastating about Stiglits’s weak analysis is that it raises expectations about something that cannot and will not happen. These trends and risks that he mentions have been building for decades and the solutions will take time to work. Yes, we want the patient to have a good outlook and be positive about the future. But false confidence is wrong and will be counter-productive.

Stiglitz has every right to his opinion. But it is frustrating when a senior and prize-winning economist’s analysis is so superficial. The Financial Times has sophisticated readers and deserve to read a more thoughtful analysis of cause and effect. As in the doctor example wherein his poor prescription arose from an unethical relationship with drug companies or a populist approach to medicine, one wonders what promotes this lack of good economic analysis on the part of such an important economist. 

Interest Rates and Marty McFly

Interest rates are not drawing the main headlines but they contribute to the current risk environment and like oil prices, could have us all ooing and ahhing in a flash. For one thing a rise in interest rates could quash an economic expansion by making loans for housing, durables, and equipment more expensive. Even more worrisome is that a significant rise in rates could also make government spending rise making it that much more difficult to solve our deficit and debt problems. So a big question is when rates will begin to rise and by how much.

To answer these questions requires either Marty McFly and his time machine (1985 movie Back to the Future) or a healthy jigger of JD. Since the former is remote and the latter is filled with its own risks, we are left with a sober reflection on the things that tend to produce interest changes. This requires that we talk supply and demand but before we get to all that excitement let’s make sure that we all are on page 1 – that is, what do we mean by the interest rate?

At this point the reader who would not enjoy a delightful but long-winded primer on interest rates might want to skip down to the place marked XXX. After the XXX is where things get really juicy.

The interest rate according to Wikipedia is “the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. Are you asleep yet? What immediately comes to mind at this point is the swimsuit edition of Sports Illustrated. But never mind that – what is relevant is that you can imagine a lot of different items that might fit that description. For example you could borrow $50 today from Uncle Bob and only give him $45 back tomorrow. In that case the interest paid would be -$5 and you would have received a -10% (negative) interest rate. This is unusual and not in Uncle’s Bob’s favor as a lender and more than likely was the result of making the transaction when Uncle Bob was on his third martini. More likely you might borrow money from a bank (for a car or a house) and we would normally call that a car loan or a mortgage. In either case you would complete a 700 page loan  application form and sign in blood that you would not only pay back the principal but also something called interest. When I bought my VW Bug in 1966 I borrowed $1666 and promised to pay each month until I had paid about $1800 in full. The interest rate on that loan was about 3%.

Loans from Uncle Bob and loans from a bank are just the tip of the iceberg when we consider interest rates. A more common form of credit comes from what we call bonds. A bond is a security which is a contract between the borrower and the lender. Instead of a passbook you get a piece of paper or a contract. Most bonds have the interest rate printed on this contract – this is called the coupon rate. So let’s suppose you buy a bond issued by Groupon Company. That means you are lending money to this company. On the bond it might say $5, $100, 2022. That information means that each year you hold the bond security you will be lucky enough to receive $5. Since the principal value of the bond is $100, your coupon yield or rate is 5%. When the bond matures in 2022 – they will pay you the principal of $100.

The coupon yield is important but when experts talk about interest rates rising and falling, they are usually referring to yields or returns available in the bond market. These market rates can be quite different from what was printed on the bonds. The bond market is where we trade the bonds that were issued and are still outstanding. Let’s suppose you bought the above Groupon bond and have it sitting happily in your safe deposit box along with your family’s jewels. And then it occurs to you that Groupon is struggling to succeed and you decide that Groupon might not be around in 2022 – and maybe not even in 2012. You call Max your friendly bond dealer and ask her to sell your bond. But on the day she sells it, Groupon might be selling for only $50. If old Lar decides to buy that bond at $50 -- the bond that says $5, $100, 2022 – then old Lar is admittedly taking a little risk but he is getting a 10% market return. Why? Is it his good looks and charm? Is it his James Brown-like dancing ability? No – it is because a bond old Lar bought for $50 gives him $5 per year. That’s a 10% return.

Much of what we read about in the press with respect to interest rates focuses on bond prices and market returns. Anything which causes the market price of bonds to rise one day – leads to lower market returns (or we say lower interest rates)  – since buyers are paying more for a given coupon. On days when bond prices are falling, then purchasers are receiving a higher interest rate since they are getting higher rate of return for a given coupon.

One more bit of background. The credit market is huge and diversified. There are government bonds and private bonds. There are bonds that mature in 30 days while others mature in 30 years. There are many categories of bonds and then there are many kinds of bank loans. Yet with all this diversity we utter a strange euphemism in public places like – how’s your stupid kid and what’s going on with the interest rate today? 

We talk about THE interest rate as if it was one of your kids. Since it is true that rates on all of these kinds of credit instruments often move somewhat together, we simplify by talking about the interest rate. Of course we all know that this is just a summarization and if you are only interested in a 6 year car loan in Bloomington Indiana, then you better get beyond discussions of THE interest rate.

Okay I have written so much that I need a potty break so please give me a minute.

I feel much better now, thanks for asking.

This is the place marked XXX. Now the plot thickens.

All the above is necessary to support the idea that if you want to talk about interest rates, then you need to talk about supply and demand. Remember, supply and demand is the economist’s tool for understanding price changes. If the demand for tickets at the Indiana University-Purdue University basketball game increases, then we would expect a rise in the price of the tickets. Similarly if the demand for bonds is generally rising faster than the supply then that should lead to a rise in bond prices and THEREFORE a reduction in market interest rates.

A general summary of this point is as follows –

• ·         If bond demand is rising relative to bond supply then interest rates fall.
• ·         If bond demand is falling relative to bond supply, then interest rates will rise.
• ·         So all we need to do is focus on the demand and supply of bonds if we want to predict the future course of interest rates.

Who supplies bonds? That activity is done primarily by lenders and by speculators who see the present time as a good time to sell bonds (these speculators are predicting a future decline in interest rates). The lenders are mostly private companies who borrow to purchase equipment and structures or by governments that have budget deficits. As the US and world economy begins to recover and grow, private borrowing and therefore the supply of private bonds should increase. As the US and other governments encounter high and rising budget deficits, they will have to sell a large and rising about of bonds. Of course, anyone with an outstanding bond – whether you call them a speculator or not – with expectations that selling a bond in the future might be more difficult or less rewarding – may want to sell their bonds in today’s financial environment.

Who buys bonds? Bonds are purchased by savers – by people who see bonds as one way to invest their money. They have decided to not spend some portion of their income and if they demand bonds they have also decided not to use the filthy lucre for other saving options like saving accounts, equities, life insurance policies, gold, or Cuckoo Clocks. The economic instinct is to buy a bond today if the return looks good (bond prices are low) or if you think bond prices will rise in the future. Of course much depends on the risk they estimate for the bonds. If savers believe that bonds are now safer than they were a year ago, then they are more likely to be buying bonds today. But much also depends on the riskiness or confidence these savers have for stocks and other investments. If during the financial crisis people put their money into commodities and very short-term safe bonds, then today a more optimistic public might be ready to move out of bonds and move their money into higher yielding equities. This would diminish the demand for bonds.

As things stand right now a simple look at the bond market could envision a very strong increase in the supply of bonds (shift the supply curve to the right) and a less marked but measurable decrease in the demand for bonds ( a shift leftward in the demand for bonds). The result is a reduction in bond prices and a rise in the interest rate. The stronger is the growth of the US economy in the near-term, the more likely is this increase.

But there is a lot more to the story. And this is where we get into money and monetary policy. We all know that the Fed, the ECB, and other central banks have pumped a lot of liquidity into markets. This means that bankers have a lot of money around and have received it at a very low cost. Thus, there is much money around so that when firms and governments sell more bonds or otherwise demand more credit, the banks and financial institutions will be able to meet this need without much increase in interest rates. But that is only half the story. If the economy does begin to improve and if central banks are worried that they may have overdone this money thing – then it will be time for them to be withdrawing all this cheap money from the system. This is interesting but not funny. This is interesting because we don’t know how markets will react. 

There is a bunch of money out there but the market might worry that the central banks will be too eager to remove the potent liquid from the boiling pot. Central banks often remove money by selling the bonds they acquired in the last few years. If investors think the central banks are too eager – then this will produce an expectation of too little bond demand relative to supply and will lead to higher interest rates. That could derail the growth of the economy.

The other interesting part is that we might get higher interest rates if the market thinks the central banks are pulling too little liquidity out of the economy. Some folks will see the economy recovering and worry that there is just too much cheap money out there – this would stoke demand for goods and services too much and inflation would increase. A rise in the public’s expectation for future inflation will mean that the buying power of interest earned in the future at current interest rates will be less than hoped. Therefore there will be pressure on current interest rates to rise to ensure a better buying power in the future.

Very interesting – interest rates could rise whether the central banks increase or decrease liquidity in the system. That sounds like a forecast of rising interest rates to me. A resumption of economic growth means that bond supply will outstrip bond demand. The subsequent rise in interest rates will not be affected by central bank policy. Whether the Fed increases or decreases the supply of money it is bound to underscore the rising rate. Of course much depends on the apparent strength of the US and world economy. Right now there are signs of relative strength in some parts of the world (USA, Latin emerging markets, Asia) and not in others (EU, central European emerging markets). Much depends on how all this plays out. If Europe enters a significant recession in coming months, money will flow from the EU to the USA and that will help to keep US bond demand high and prevent interest rates from rising. But if US economic strength spills over to the EU and other parts of the world, then the interest rate increase scenario is hard to deny. 

Priorities, Playboy, and Price of Gas

Now it is gas prices. Now we are all concerned with gas prices. Mom said, Larry, I told you not to shoot that BB gun. Now look and see what you did to the neighbor’s plate glass window. Yes it is true. I did NOT shoot my eye out but I did manage at the age of about 10 to shoot several holes in my neighbor’s very large and expensive window. Luckily the only one that got hurt was me as I dealt with no allowance through puberty.

This post is not about heeding warnings. It is too simple to tell a story whose theme is “I told you so.” The real story is priorities – and especially priorities during a time of crisis. When a hurricane is bearing down on your town you don’t decide this is a good time to mow the yard – even if it needs it.  It might be a better use of your time to be putting up your window shutters. When your girlfriend starts avoiding your phone calls is not the best time to fix the chain on your bicycle. You might want to test your deodorant instead. When your boss scolds you every day about your job performance is not the time to start taking afternoon naps at your desk. Instead put down the Playboy Magazine and start focusing on your customers. Mowing the yard, fixing your bicycle and naps may be very important things to do. In ordinary times you should do these things religiously. But when all hell is breaking lose around you it seems rational to decide exactly how you should be focusing your time and energy—focus on the essential!

You might call this a process of taking one step backwards so you can take two steps forward. That is, it goes without saying that emergency times sometimes require that you lose steam or willingly stop progress in some areas so that you can focus your efforts on the problem at hand. If there is one thing I see in Washington it is an inability to prioritize and in doing so we make no progress. Fear of taking a step backward is causing us to recede and fail.

This lack of prioritization is not just a problem with energy prices. But let’s take energy first. The press is filled with stories that keep coming to the same point. We have known for some time that energy prices can spike and that they often behave this way when political problems become extreme. We have known for some time that oil and gasoline prices are on a razor’s edge between demand and supply.  Whether you call it the Arab Spring or you focus on the nuclear ambitions of Iran, we know that the world is quite vulnerable to international tensions. That Iran burped and oil and petro prices galloped is no surprise to anyone. It was a known and high risk.

As a demand and supply addict, I cannot help but frame this problem logically in a market framework.  Fundamental demand for oil is strong and growing. Sometimes speculative demand adds much to the fundamental amount usually demanded. Supply never seems to catch up to this demand in a way that might return oil prices in a permanent way to more tolerable levels. An economist would look at this market situation and conclude that a solution with lower oil prices would either require a reduction in demand or an increase in supply. In the recent past, neither of these outcomes has occurred. Thus we are not only stuck with high oil prices but we are continuously exposed to the risk of much higher oil prices.

 

The President was on TV the other day making fun of his political adversaries as he gleefully and disdainfully uttered the words Drill Drill Drill. The policy of his political opponents, according to the President, is to drill for more oil. I will readily admit and agree with the president that there is no quick solution to the rising prices of oil and gasoline. But there are policies that could be enacted today that might make some difference in supply of oil and gas forthcoming in the near-term future. And it seems to me that a recognition that a real solution is coming would go a long way to reducing speculative demand and might have a nice remedial impact on gasoline prices today.

So why doesn’t the President forcefully move in that direction? Why doesn’t he push for drill drill drill? The answer relates to priorities in a crisis situation. We need a policy to bring about a lot of supply in a relatively short period of time. To me, that is goal #1. But I think that goal is being held hostage by other priorities. These other priorities are not bad. These other priorities are things that are important and during normal times should be given strong shrift. But let’s deal with first things first. If oil and gasoline prices stay at their heightened levels, there is no doubt they will threaten the US and global economic expansion. There is no doubt that progress with employment goals will be pushed even further into the future. This will further underscore growing consumer negativity and unleash a decline in confidence in the US and many other countries. The question to ask, then, is why we would not pull out all the stops to get oil and gasoline flowing in a sustainable way? The answer is other priorities. We want green energy. We do not want to pollute our ground water or our lakes and oceans. We also want to be a world leader in developing the renewable sources of future energy. Is the probability of worsening the world by taking one step backward on these laudable goals worth the sure thing that the economy will worsen substantially? Am I shouting?

Maybe some of you think I am being disingenuous. Old Lar is pretending to be for clean water and clean air and new technologies but he is really one of those people who want to create a dirty and unsafe planet so that rich people who run oil companies will get richer and richer. If you want to think that, I cannot stop you. But I will cling to the idea that there are ways to take our step backward and to move forward. We can rely on fossil-based fuels to help solve the very alarming energy situation we face today AND we can also make slower but defined real progress towards our long-term renewable and clean resources. 

These things go hand in hand and it might be helpful to think of what happens if we do not go in this direction. First, by not moving more quickly with fossil fuels we ensure the certainty of a deep loss of employment and growth today. We accept this negative reality so that we do not increase the small probability of a calamity from a major pipeline or deep-water drilling .  Second, given our current national financial position and the worsening of it by higher energy prices, we also will probably have to give up some of the subsidies and tax advantages for those who would bring us the cleaner renewable energy. As slow growth provides even stronger challenges for government budgeting no program will be spared.

Inasmuch, the prudent thing needs to be done now. We need to work on a plan that would put the world awash in energy supply. Whatever form of energy that is, it is worth the try. If it means slowing down other forms of energy supply for a time – that makes sense. Focus on what is most important and most possible – and then address it. Otherwise we are going to find ourselves with insufficient energy – of all kinds. And of course we will have lost our opportunity to finally do something fundamental about energy prices.

You might argue that a temporary movement way from longer-term social and energy goals is really an excuse to permanently avoid attention to environmental harm. And for some people, that might be their goal. But for most of us who want our cake and eat it too there must be some compromises in the process of policy that makes it very clear that whatever steps taken backward will be temporary. I realize this is a lot to expect from our leadership, but it does make an easy compromise for both sides. Environmentalists do not want to see another economic crisis. The latter would harm the progress of their goals. Those who want growth through less environmental regulation get their day in the sun too but would have to agree to a resumption of regulations in the future. Both sides have plenty to gain. But if the past behavior of these so-called leaders is a guide to the future, they would rather raise the pitch on their usual arguments than use a little common sense.  It will be interesting if not frustrating to see how this plays out in the next weeks.

One final point. It seems to me that the President and his party are already loudly on record with respect to prioritizing and taking steps backward when it comes to the area of policy known as stimulus policy. They recognize that too much government debt and too much money can harm an economy in the long-run. Yet they are ready to risk the future of our country so that they can focus on employment. Why then is energy policy not part of their plan? Why can’t they also put at risk very long-term green goals to improve the health of the economy today? I will leave the answer to that question to my dear friends who read this blog. Your constructive comments are always welcome!