Feature

A Hummer in Every Driveway

Americans use more energy per capita than any other country, and have nothing to show for it.

The problems that ail the U.S. economy and American society are one and the same: Both consume too much and refuse to make badly needed changes. This is true above all in the realm of energy. The United States doesn't need exotic biofuels or balloon-borne wind turbines. Its real problems are wasteful private energy use and the near-total absence of effective, down-to-earth, long-term policies.

Energy use is merely a means to many rewarding ends: economic security, education, health. The United States consumes nearly twice as much energy per capita as the richest countries of the European Union, which raises the question: What has it gotten in return? Are Americans twice as rich as the French? Are they twice as educated as the Germans? Do they live twice as long as the Swedes? Are they twice as happy as the Danes or twice as safe as the Dutch? The obvious answer for all of the above is no; indeed, many of America's quality-of-life indicators -- including infant mortality, longevity, and educational achievement -- do not even rank among the world's top 10!

It's not as though Americans don't know better. U.S. industries from steel-making to plastics synthesis are among the world's most energy-efficient; American agriculture is highly productive, as are America's railroads. But for decades, Americans themselves have been living beyond their means, wasting energy in their houses and cars and amassing energy-intensive throwaway products on credit. The size of the average American house has more than doubled since the 1950s, and they are more often than not poorly insulated, inefficiently heated in the winter, and cooled to near-arctic temperatures in the summer.

Automobiles are even worse. Incredibly, the overall efficiency of America's cars, vans, and SUVs didn't budge between 1986 and 2006, and subsequent improvements have been risible compared with the doubling of efficiency that the country's automotive fleet managed between 1975 and 1985. If that trend had continued -- which was well within the realm of technical possibility -- the average American would be driving a 50 miles-per-gallon vehicle now rather than today's 30 mpg clunker. And that's nothing next to what could have been saved had the United States finally joined the 20th century and built rapid trains on par with France's trains à grande vitesse to serve high-population-density regions such as the corridor between Boston and Washington. (Amtrak's Acela? Please.)

The parallels with America's great public-health epidemic of obesity are inescapable. Even after throwing away some 40 percent of its abundant food supply, the United States still has the industrialized world's most overweight population. America similarly produces more energy per capita than any other major rich economy -- so much so that if the United States were to consume that energy at a rate comparable to Germany or France, it would be a massive energy exporter. Instead, America imports more than 25 percent of its energy, paying more than $2 trillion for the privilege over the past decade -- and still ends up with little to show for it. The United States now faces the choice of curbing its energy appetite with deliberation, commitment, and foresight, or waiting for the unraveling economy to put it on a painful crash diet.

Javier Jaen

Feature

The Perils of Loose Living

For decades, Americans have looked to monetary policy as an engine of economic growth -- and suffered the dire consequences.

Documentaries like Inside Job and books like Michael Lewis's The Big Short have spun a narrative of America's economic crisis that stars Wall Street bankers and credit-rating agencies as the ultimate villains. But despite popular belief, subprime mortgages with exotic features had little to do with the housing bubble and the current debt overload weighing down U.S. households. They accounted for a mere 5 percent of mortgages at the time. The story line is just wrong.

The real culprit was the Federal Reserve. With its ultraloose monetary policy in the early 2000s, the Fed single-handedly created the refinancing boom and ushered in the housing bubble. The record-low interest rates not only fed the boom that had to go bust, but also favored that sector of the U.S. economy that is predominantly financed with debt, i.e., the financial sector, at the expense of sectors that are more reliant on risk capital, such as manufacturing. That might explain why, by the mid-2000s, bank profits accounted for 30 percent of all profits reported by S&P 500 companies. In other words, Americans stopped making stuff and relied on paper earnings instead.

Yet the only prescription being applied to the depressed U.S. economy today is basically what it was a decade ago: cutting interest rates in an attempt to inflate prices for assets like houses and stocks and boost consumption. Because the federal funds rate is already close to zero, the Fed has been buying up bonds with a longer maturity to drive down long-term interest rates. Although the latest bond-buying program -- nicknamed QE2 -- ended in June, its effect on interest rates will continue as long as the Fed holds onto the bonds. A third round of what economists call "quantitative easing" is imminent. But if consumption, the very hallmark of American culture, did not save the day in the 2000s, why would it do so today? It was China, not the United States, that prospered from Americans' spending binge as hundreds of millions of Chinese were lifted out of poverty.

In this year's State of the Union address, President Barack Obama invoked the idea of a "Sputnik moment" for this generation, implying that the United States was besieged by China as it had been half a century before by the Soviet Union. According to Obama, the country needed historic new levels of research and development akin to the massive investment that fueled the space race with the Soviets in the 1960s. But instead of backing up his vision with money, as President John F. Kennedy had, Obama announced a spending freeze, boasting that it would bring discretionary spending down to levels not seen since President Dwight Eisenhower. It's hard to miss the irony here.

And lower interest rates won't do the trick, as they won't bring down the cost of risk capital. For much of the 1980s and 1990s, any decrease in interest rates was mirrored by a similar drop in the cost of risk capital, spurring innovation. Since 2000, however, the cost of risk capital has gone up in spite of dramatically falling interest rates. The expected yield on risk capital is now more than three times the yield on 10-year Treasurys. The mechanism behind this is quite simple. U.S. consumption spurs economic growth and savings in China. But China's savings are mainly invested in risk-free assets, perhaps because the Chinese are culturally risk-averse, but also because the financial markets in China are still underdeveloped and not fully liberalized.

Whatever the reason, it's now clear that monetary policy is not an effective way to promote innovation. China and Germany both have a tradition of promoting new investment and innovation through state subsidies. The German government's subsidies for research, development, and innovation are four times as high as Britain's, and the Chinese government is luring investors with free land and other subsidies up to 40 percent of capital cost.

It should not come as a surprise that the economies of China and Germany have been thriving. Economic growth in China this year has been close to 10 percent, and it might have been even higher were it not for the People's Bank of China's successful attempts to cool down the economy. And even though economic growth in Germany somewhat disappointed in this year's second quarter, the unemployment rate hit a historic low. No jobless recovery there.

Thirty years ago, Chinese leaders realized that for China to become relevant, it had to look more like the United States. Now it's time for Americans to realize that to stay relevant, the United States will have to look more like China.