The last two weeks’ news discussions about the economy are all focused on figuring out whether the economy is recovering (in which case we need to solve the problem of government deficits through austerity) or whether the economy is faltering (in which case we need more economic stimulus).
It is dangerous, however, to base critical economic decisions on forecasts of where the economy is going: Economic forecasts are almost always wrong. So last week’s discussion universally was focused on answering the wrong question, the one that is unanswerable – namely: “which way is the economy going?”
What are the right questions? First, we should ask, “What is wrong with the economy?” Here there is little disagreement. Seven or eight problems identified in my earlier blog are recurring themes among economists of the left, center, and right. The two themes I touched on above, high government deficits and weak consumer and business spending along with the (implicit) risk of inflation are universally agreed to be problems.
The second natural question to ask is “how do you solve all of these problems at once?” Here, all of the discussion appears to assume that you can’t solve all of the problems at once. That solving one of them makes the others worse.
But there is in fact an answer: one that has surprisingly been absent from the policy discussion. The answer is to spend more money on things that produce large net savings. The best way out of the recovery is to invest in things that pay back in two, three or four years. If the nation invests in such short paybacks, we can borrow responsibly because in five years we would have paid back all of the additional borrowing and more, and in the meantime we’ve got the stimulus of increased spending. If we can keep doing this for years or decades to come, all the better.
Where do we find such options? The National Academy of Sciences as well as other responsible organizations have identified some half trillion dollars of energy efficiency investments with average paybacks shorter than three years and I show in Invisible Energy how this half trillion is merely the tip of the iceberg.
We know, as a nation, how to encourage these investments through a combination of market-based incentives. All that is missing is the political will to carry them out with the urgency that they deserve.