Creating Jobs, Strengthening the Economy and Increasing Energy Independance through a Manhattan Style Energy Efficiency Program

The number of households receiving federal aid for heating their homes increased dramatically in the past three years, increasing 43 percent, from 5.8 million homes in 2007 to 8.3 million homes in 2009. According to the New York Times, it is expected that the number will rise to over 10 million in 2010. This $5 billion federal program, known as LIHEAP (Low Income Heating Energy Assistance Program), pays one-half of each home's heating bills. This is a morally necessary expenditure, designed to ensure that people are able to afford keeping warm and healthy, especially given these economically challenging times.

A corresponding program, the federal Weatherization Assistance Program, was budgeted at $250 million for 2009, representing approximately 100,000 homes weatherized per year. Fortunately, in the 2009 American Recovery and Reinvestment Act, the line item for weatherization is $5 billion over an approximate two year period. This increased funding will result in upwards of 700,000 homes being weatherized per year over the next three years, nearly a seven-fold increase. Although this represents an extraordinary increase over the original 2009 budget, it is still too low. Accelerating investment in our country's energy efficiency represents an investment opportunity that will create a large number of jobs, increase disposable household income, while reducing our country's trade deficit, contributing to lower interest rates.

The United States should have a massive Manhattan style national initiative to significantly increase the investment in upgrading our energy using infrastructure, focusing on increasing the efficiency with which we use energy across all sectors of the economy. For example, approximately 115 million homes in the United States use fossil fuels directly or indirectly for heat, including natural gas, oil, propane and electricity. Currently, little is being done to improve the efficiency of the existing furnaces and heating systems in place. We have the resources and technologies available to significantly increase the penetration of geothermal heating systems, solar thermal heating systems, and combined heat and power systems in the residential sector, with extraordinary benefits to accrue to our economy, yet there appears to be little or no national appetite to pursue these technologies.

For example, if we replaced the natural gas furnaces in the country's existing 56 million homes that use natural gas for heat, using high efficiency combined heat and power systems, we would be able to reduce the country's greenhouse gas emissions by approximately 30 percent, while giving homeowners the ability to produce all of their own electricity as a by-product of heating their homes with a much more efficient CHP furnace. It is perhaps an oversight that our country appears to remain fixated on providing massive economic assistance to companies that are too big to fail, and not directing the investment capital where it will do the most benefit - improving the economic well being of our households and small businesses while creating jobs, increasing our energy independence and creating new exportable clean energy technologies through a massive Manhattan style energy efficiency technology development and investment program.

The Sustainable Economy - An Introduction

Our well being, our economy, and our future is inexorably tied to the earth and its natural cycles.  If we are not careful, we run the risk of thinking that our economy and well being is separate from the earth, and lose sight of what is critical to our well being.  Our economy is a measure of transactions that take place in the physical world, transactions focused on the exchange of monetary values and flows that course throughout our society.  These flows of value include a close integration with the natural world, an integration that we have yet to learn how to fully value and integrate with our economic thinking.  It is the integration of the natural world with our economic world that is at the core of the sustainable economy.  Without this integration, at some point, we will lose.

The impact of failure would be extraordinary.  The reach of our economy is huge, with tendrils coursing through the far reaches of billions of people’s lives.  The collapse of our economy would wreak untold havoc on those living on the economic fringes of societies around the globe.  Already, our impact on the environment is creating challenges with the water we drink, the air we breath, and the soil that we till.  The loss of resources upon which our livelihood depends will accelerate unless we adopt policies that take us to a sustainable economy.  We do not have the luxury of migrating to unspoiled lands, as perhaps nomadic tribes once did. 

The greatest danger that we face is the prospect of wars, driven by failing societies and geopolitical tensions brought on by the pain of resource depletion.  In recent years, the term oil wars has emerged, with the prospect being raised that the great epoch of oil wars have already begun.  It has also been suggested that the genocide in Darfur was caused in part by the grotesque reduction in agricultural yields, brought on, as it was by changes in the rain patterns.  These changes in rain patterns, as it has been noted, may have been caused by changes in ocean temperatures.

How value is created and destroyed underlies all survival.  The beauty of our economic system is that it mimics natural feed back loops, encouraging value creating behaviors.  There are three major disconnects with the system, however.  First, the economic system does not distinguish between sustainable value creation and unsustainable value creation.  Second, the economic system does not incorporate the impacts and interplay with the natural world.  Third, it does not necessarily do a good job of distinguishing between drawing upon stores of value, and drawing upon flows of value.   

There have been societies which observe and integrate natural cycles into their own form of economies, managing the careful balances necessary to sustain life and well being.  There have also been societies that have observed their own destructive policies wreaking havoc on their natural environments, and, for certain perhaps enlightened societies, have been able to change their behaviors and pull their own societies back from the brink of self destructive behavior.  Unfortunately, the preponderance of examples is of societies that never realized the self destructive nature of their policies and activities, and fell into oblivion.

Addressing Our Economic Malaise

Our economy has gone through a downdraft, with economic value disappearing due to overreaching economic imbalances, principally in housing, economic disquietude brought on by stratospheric energy prices, which have since subsided, and a radical downdraft in stock markets.  The value of housing has been reduced by about 6.1 trillion dollars since its peak, according to Zillow.  In 2008, according to the Washington Post, the stock market lost 6.9 trillion dollars in value.  

The radical increase in energy prices in the past two years, along with the bursting of the housing bubble and the stock market have caused consumers to pull back in their spending, and caused bankers to focus on their balance sheets, and pull back on lending.   The three industries hardest hit so far are housing related, financial and the automobile industry, beginning with the shift away from larger energy intensive vehicles.  

The current replacement rate for automobiles, based on recent low purchasing levels, implies that people are going to be holding on to their cars for 21 years on average.  Consumers have overshot on the downside, creating the potential for pent up demand to be released.  This represents one kind of force, which is the natural replacement level for products.  Another key force is the American spirit.  The American spirit has existing for several hundred years, giving individuals the opportunity to dream and to realize their dreams.  Not only does life go on, but people want to realize their dreams.  It is time for this yearning to be recognized, put to good use, and encouraged.  

As we move forward through this trying economic time, we must remember to focus on making changes that strengthen our economic well being, keep our eye on the prize, and tap into and encourage the American spirit to shine ever brightly.  Fundamentally, our economic well being is based on the value that we each create every day, both singly and in aggregate.  There are times when the value we create is real, there are times when the value we create is drawn from our natural resources, and finally, there are times when the value we create is based on surges in capital valuations and markets.  These distinctions are critical.  In the long term, an economy will not expand without creating true value at its core.  

Because of the significant size of the downdrafts in housing and the stock markets, it is going to take time for the economy to claw its way back, a process that will be enhanced and aided to a great degree by true value creation.  This is done by individual and collective productivity, innovation and investment in processes and advanced technologies.  It is also advanced by encouraging those kernels of value creation that add value to the economy, and not being dragged down by investing in dying industries and value sapping activities.  Finally, we cannot forget to lend energy and encouragement to our belief in creating abetter future, our collective capacity to succeed, and an unrelenting belief in the value of the American spirit.   

Sustainable Economics and Economic Revitalization

When the disruptive imbalances in an economy are overwhelming in scale, and appropriate resources are not applied to address the imbalances, societies will collapse.  Our current challenging economic circumstance was brought about by the confluence of several significant imbalances that emerged within our economic system.  The adjustment taking place in the economy is significant, and unless we understand he sources of these imbalances, we run the risk of being a republic in decline.  This post takes a look at the key imbalances which have caused our current economic malaise, and considers key actions required to readjust these imbalances.  

Our economy is represented by flows of dollars through millions of transactions every day.  When there are imbalances in our economy, that result in a reduction of the value or quantity of transactions, or when there are dollars that flow out of our system, this creates a dampening effect on our economy.  It is similar to a circulatory system, where the entire system is affected when the coursing of blood is somehow constricted, or when a wound begins dropping down the blood pressure.  If the constrictions or the blood loss is too great, the whole system fails.  Our challenge is to find the constrictions and the wounds, and apply salves as quickly and as precisely targeted as possible.

To establish a sustainable economy, we need to understand the causal factors which created the imbalances, and to carefully construct a system which monitors and mitigates their possible occurrence.  These imbalances are exacerbated by our generally unsustainable approach to resource intensive and extraction activities, as well as our own exuberant behaviors within our created economic realms.  

Energy - The key imbalance that led to our current economic woes.  In no time in the last thirty years have energy price increase such as we have seen not led to a recession, and now is no different.  Individuals, households and businesses saw their energy expenditures for electricity, heating, cooling and transportation increase, drawing their economic resources away from other expenditures.  It is this competition for expenditures that began to take economic flows away from alternative consumer expenditures.  People started doing everything they could, from reducing trips, buying more efficient vehicles and trading off other expenditures.  

This ratcheting up of energy expenditures on the part of households, and the resultant reduction in expenditures impacted not only consumer expenditures, but began to gnaw away at our overall economic vitality, which may have begun to erode the driving forces behind the housing boom.

Energy prices were driven up by increasing global demand for a non-renewable natural resource, which our economy had to suffer through.  We were not able to do anything to address the price growth.        

Housing Boom - The second key imbalance in our system was caused by a multi-year run up in housing prices that outstripped the underlying economic foundation for housing prices.  We saw a significant reduction in credit standards for housing mortgages that created marked upward pressure on the part of buyers, which, coupled with normal growth associated with economic expansion, created a huge overhang in housing prices, and the bubble eventually burst.  

When housing valuations turned around and began to drop, consumer sentiment switched along with a marked reduction in associated economic activity.  Houses were no longer the piggy banks that they have been, and the impact on sentiment may even be more significant, along with reductions in the purchasing of furniture, appliances, etc. associated with home purchasing.  

More recently, with the reduction in stock market valuations of certain banking and financial institutions, has caused those banks and financial institutions to tighten their credit standards while they strengthen their balances sheets by reducing the value of their loan making.  This has created an additional factor further dampening sales in the housing market. 

Financial Leverage - A third key imbalance in our economic system of late is the extraordinarily high levels of financial leverage on the balance sheets of our banking and financial institutions.  This imbalance created a much higher exposure to rick that was not recognized until too late.  Various financial instruments were created that have been very difficult to determine the level of risk carried by the holders of the instruments.  These included credit default swaps and collateralized mortgages and other investments.  

As the performance of these investment instruments began to erode, the various financial institutions began to revalue these investments as significantly lower values, requiring write downs.  The losses and write downs caused stock valuations to fall precipitously for certain institutions with too much risk.  These stock price drops and simultaneous downward adjustments in their balance sheets created a huge problem: these institutions needed to strengthen their balance sheets with capital, while their access to capital was drying up.  Without government intervention, these imbalances due to the writing down of toxic assets lead to insolvency and potential bankruptcy.  

In the absence of public intervention, private financial institutions are going to be rebuilding their balance sheets by among other measures, reducing their loans by increasing credit standards.  

These three imbalances are the core sources of our economic meltdown today, driving fewer house sales, fewer automobile purchases, reduced overall consumer purchases, and constraints on commercial lending, capital purchases, growth and hiring.  The development of solutions to this situation have to explicitly address the causal factors, targeting specific changes in behavior that are sought to pull our economy out.  The solutions will be addressed in the next blog.