Without major capital investments, this generation of Americans will short change the next
From 1980 to 2007, total U.S. electricity consumption increased by a factor of 1.8, but total generation capacity increased by only 1.7 times. In other words, demand out-grew supply. For a while, that was fine — we had more toys than we needed, and real power prices declined for two decades as we made better use of the toys we had.
By the year 2000, though, that gig was up, and we suddenly found ourselves having to run our most expensive plants harder, having fully tapped-out our low-cost supply. Electricity prices, not surprisingly, rose — and continue to do so, 10 years later. Grid managers refer to this trend as an “eroding reserve margin,” and its impacts were foreseen and avoidable.
Yet we did nothing. Worse, we still don’t seem to have any fundamental understanding of the cause. To the extent we are even aware that electricity prices are increasing, it’s because we’ve heard politicians and media pundits assign blame — blame that usually has absolutely nothing to do with the underlying cause. Saudi Arabian oil, California deregulation, and Wall St. fat cats get a lot more attention than infrastructure underinvestment.
This problem goes well beyond the power sector. Throughout the economy, our wants are growing faster than our capacity to meet them. From global warming to national security to Medicare cost inflation we face predictable, avoidable crises that require only that we make near-term, large-scale investments. We’ve blamed the oil companies, climate scientists, botched intelligence, and greedy insurance/pharmaceutical executives for those problems, but who is stepping up to take responsibility for getting them solved?
This is not a new idea; at least since the Japanese boom in the 1980s we’ve heard the steady drumbeat that the U.S. “doesn’t take a long view.” Given the choice, we’ll give $1,000 to the TV salesman before we give it to the rainy day fund. The counter-argument has been that consumer spending drives our economy in ways that are under-appreciated: it’s not that we save too little, but that the Asians save too much. Take U.S. consumerism away and a whole lot of recently-emerged economies don’t.
Up to a point, that’s true — but beyond that point, its nonsense. We just witnessed the collapse of a massive, debt-fueled spending bubble that our depleted savings accounts were not prepared to handle. Meanwhile, we are hurtling towards a fossil-fueled temperature bubble that our depleted atmosphere is not prepared to handle. There are those who say that human innovation will protect us from environmental disaster, because it always has before. And there were those who said that widespread, global housing price collapses were impossible. Is there any sign we’re learning from past hubris?
I recently found myself in Mexico City, having dinner with a Welsh banker who had spent much of his career privatizing businesses in eastern Europe and Latin America. It was as good a place as any to think about America’s role in the world, so I asked whether he thought U.S. policies and lenders had generally helped or hindered the countries in which he worked. He observed that “America is an amazing, unique place. That means that what worked in America probably doesn’t work anywhere else, and that always surprises you.” That led to a discussion of the various happy accidents that have made us so unique. What’s striking is the degree to which they also explain our current dilemma.
- Domestic resources. From rich topsoil to massive freshwater reserves, from herds of wild game to fossil fuel reserves, we had resources that — through our formative years — vastly exceeded our needs.
- The simultaneous development and preservation of the frontier. John Muir and John D. Rockefeller are two sides of the same American coin. We take for granted both the great solitude of the frontier and the great riches available to those who exploit it. The optimism innate to American Dream is sustained by that contradiction.
- A well-timed depression. The generation that led us through World War II and into the boom years of the 1950s never outgrew the frugality of their youth.
- A well-timed war. World War II and the subsequent demographic bubble established our economic pre-eminence and gave us the fiscal ability to pay for New Deal entitlement programs.
- The Marshall Plan. America’s ability to grow without war (at least of the hot variety), the emergence of the dollar as the global currency, and the moral dimension to our global leadership all derive in part from the foundations laid by George Marshall.
In each instance, the engine for future growth was created by the existence or creation of capital well in excess of present needs — a reserve margin. Like any capital investment, it required short-term sacrifice for long-term gain. Throughout the first two-thirds of the 20th century, we made big, long-time-horizon investments every decade or so: the New Deal, the Marshall Plan, the numerous advances of the civil rights era and the Clean Air Act. But since the 1970s, what have we done?
My generation (I was born in 1971) has taken those blessings for granted, and has no direct experience with the sacrifice required at the time of their creation. Like a kid on a trust fund, we’ve got access to an amazing stream of dividends, but don’t know how to invest.
More problematically, to even suggest that we ought to make short-term sacrifices (AKA, “investments”) triggers what Senator Byrd has aptly characterized as “barkings from the nether regions of GlennBeckistan.” If the private sector isn’t willing to invest, the public sector shouldn’t either, and if you believe otherwise you must be a big government liberal pinko.
Poppycock. Teddy Roosevelt was a populist and a conservationist, but I’m willing to bet he didn’t think very highly of Leon Trotsky, no matter how “socialist” his policies may sound to a modern ear.
The obvious consequence is a decline in the public discourse. The less obvious and ultimately much more troubling consequence is the steady erosion of the reserve margin we’re leaving for our kids. We need to make massive investments in capital to secure our future. We need new power plants, but need clean ones that replenish the capital of our atmosphere. We need to stabilize the Afghanistan/Pakistan region if we are not to spend the next 50 years in fear of Arab friends. We need to figure out how to build a social safety net that works for a very different demographic base and growth trajectory than the one we had in 1930.
In short, we need to act as if the next generation had a vote. When discount rates suggest otherwise, it proves only that ethics cannot — and should not — be algebraically eliminated from a larger moral calculus.
This is not a call to abandon those unique American advantages that made us great, but rather to return to them. We need the benefits that accrue uniquely from competitive markets, but cannot afford to lose sight of the occasional need for near-term financial sacrifice out of moral obligation.
Churchill — as good a scholar of the American character as anyone this side of de Tocqueville — understood this better than most. Without question, he understood and was able to communicate the need for self-sacrifice in times of crisis. But at the same time, he never lost sight of the power — and consequences — of competitive markets. Recall his observation that “the inherent vice of capitalism is its unequal sharing of blessings; the inherent virtue of socialism is its equal sharing of miseries.” Truly competitive markets remain the greatest engine we have for growth in human welfare, and they are fueled by their ability to provide unequal blessings. But not all markets are competitive, and not all moral obligations have dollar-denominated surrogates. Capitalism is necessary, but not sufficient.
The paradigm we need is something a bit more. We need to preserve, protect, and advance a political and business climate that provides all of us — including those not yet born — with equal opportunities to participate in a system that unequally allocates its blessings. That requires a change in the way we think about politics, business, and even morals. When the left argues for equal distribution and the right argues for unequal access, our reserve margin erodes. When business leaders absolve themselves of moral responsibility, it erodes further. When the moral stature of civic leaders is compromised if they are “tainted” by any past evidence of profit-seeking behavior, it erodes further still. All of these actions — ubiquitous as they are — focus attention on a false conflict and detract our attention from the critical issues at hand.
Today, we remember the “greatest generation” not for the returns they earned on their investments, but for the dividends they left behind. We need to hold ourselves to the same standard.
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