Monday, January 11, 2010

Energy Crisis Economics

Energy Crisis Economics

I haven't read a lot of Economics, but it seems from what I have read that economists are ill-prepared for the economic ramifications of an energy crisis. And this means that governments aren't getting good advice on the subject.

In a recent SMH article, Ross Gittins gave a summary of economics. This said that the things that determine GDP are skilled workers and infrastructure. Obviously we just have to keep training people and building more infrastructure and growth can go on forever. Not enough oil: you just need more oil producing infrastructure. He described a point of view which would never see an energy crisis coming and not recognize it when it hit.

I would go to the opposite extreme: not only include energy as a crucial input, but leave out infrastructure. You do need infrastructure, but it doesn't take that long to build it up, as we saw with huge growth among countries with educated populations in the years after WWII. What fueled that growth was the switch to oil-based energy, with cheap secure oil.

How do you run a steadily declining economy. Some believe it is impossible, but it is actually possible as long as the inflation rate is kept above the decline rate.

If your switching to a new energy source then you'll need different infrastructure. While you build that you have stop business as usual and put productive effort into infrastructure. This means soaking up purchasing power (with "Energy Crisis Bonds", similar to "War Bonds").

You have to lose the notion that people will demand that their investments break even in real terms. People will accept that this is impossible in a declining economy. What they want to do is maintain their relative wealth. Achieve that and you can run a decline just as well as growth.

More on some of this in future posts.