Subscribe to BrookesNews’ Bulletin `

Why a cap and trade carbon taxes will savage living standards

Gerard Jackson

Monday 11 May 2009

President Obama's dangerous policy of wasting astronomical amounts of capital on so-called alternative energy projects will if fully implemented savage American living standards and crush industry by dissipating capital on a colossal scale while sending energy prices through the roof. Before frothing Obamatrons leap mindlessly to his defence allow me to point out that the Anointed One stated: "Under my plan of cap and trade, electricity rates would necessarily skyrocket". Obviously raising energy prices to lower living standards is part of his agenda.

The strange phenomenon of politicians promoting an energy policy that will impoverish their fellow citizens is not confined to the United States. The very same thing is happening in the UK and Australia. Kenneth Davidson of The Age sums up the argument for this destructive program by arguing that Co2 is a pollutant that needs to be severely curbed. (Time the sun set on carbon scheme, 4 May 2009). This is an outrageous lie. Co2 is in fact a nutrient. Moreover, if he were serious he would also call for the government to the amount of Co2 exhaled by the public. He then triumphantly refers to Ross Gelbspan by stating:

He points out that during the Second World War, the Roosevelt administration could spend 30 per cent of gross domestic product on defence, compared with 6 per cent now, without any adverse consequences for the US economy, even though the expenditure on battleships, war planes and tanks was pure consumption, unlike the eco-friendly infrastructure required now.

All that this proves is that Gelbspan is a complete economic illiterate. (Incidentally, he is a proven liar and a fraud who falsely presented himself as a Pulitzer Prize winning journalist). First and foremost, America's war-time policy was designed to greatly expand the production of military matériel and not destroy capital. This is a vital distinction that the great majority of economists have failed to grasp. To begin with, Roosevelt's military expansion crowded out an enormous amount of net private investment. When the war ended a 62 per cent drop in Federal spending between 1945 and 1947 allowed net private investment to zoom along with living standards, giving America the post-war boom that the likes of Kenneth Davidson said was impossible.

Obama's policy would have the reverse effect by literally destroying capital. Once again, every economy has a production structure consisting of highly complex stages of production consisting of heterogeneous capital goods that embody technological advances. Real wages for everyone and hence living standards are raised by adding more and more complex stages to the structure. The effect of Obama's energy policy would be to disrupt and shorten this structure. The reason for this is that his alternative energy schemes are grossly inefficient economically.

Let us begin with wind power. The maximum amount of energy that windmill a can extract is about 59.3 per cent and is called the Betz limit. This tells us that it is impossible for any windmill or wind turbine to turn more than 59.3 the per cent of the wind's energy into mechanical or electrical energy. In English so plain that even Rahm Emanuel should be able to understand it wind power is dilute. A fact that cannot be legislated away is that wind power is subject to the third power of the wind's velocity. This means that even small changes in wind velocity will generate huge disproportionate changes in output, even with the best designed windmills.

Any kid with a calculator can work this out from the following very rough rule-of-thumb formula P = r2v3. So if the radius of the blades is 3 metres and wind power is 30 mph, output will be 243 kilowatts. Should wind velocity drop to 15 mph output will plummet to 33.75 kilowatts which amounts to an 88 per cent drop in output. Therefore the greens' claim that one can run a modern economy on wind power is a malicious lie.

The same goes for solar panels. There is a fundamental physical law at work here. It states that the maximum amount of energy that the earth receives from the sun under optimum conditions is just under 1 kWh per square metre (11 square feet). So even if these panels were 100 per cent technically efficient they would still be grossly inefficient economically. (One should take note that greenies and their mouthpieces are always careful about never mentioning economic efficiency).

Optimum conditions mean that the sky must be clear and the sun must be perpendicular to the collecting area. These conditions are the exception and not the rule. A child with a hand calculator can easily work out from the above facts that the diluteness of solar energy means huge collecting areas. This natural limit is why even desert regions have failed to provide the necessary conditions to make solar operations profitable.

It's not as if there are no examples of this lunacy on which to draw. Back in 1991, LUZ, a solar-electricity generating company, went into bankruptcy. Green fanatics and the media enablers the same ones who drool over Obama preached that the company's technology had made solar power an economic alternative to nuclear energy. Even Fortune magazine fell for this garbage. LUZ had built its plant in the New Mexico desert to take advantage of the highly favourable conditions. And what is the brilliant Obama's solution? Massive subsidies.

As I have already said, the basic technical problem is the diluteness of solar energy, a fact that no amount of political posturing or media lying can change. What this means is that these alternative suffer enormously from diseconomies of scale. And diseconomies of scale mean rising costs per unit of output. So the more these plants expand the more their average costs of production rise. Therefore there exists an enormous cost gap between these phony sources of energy and centralised energy production, something that Obama confessed to knowing when he admitted that his policy would cause energy prices to rocket, a result he is clearly aiming for.

The existence of this cost gap would result in the closing down of power stations with the result that the whole capital structure would be thoroughly disrupted. Energy intensive firms would have to either go out of business or leave the country. Other firms would have to introduce more and more labour intensive techniques of production. In other words, for employment to be maintained real wages would have to be savagely cut.

In short, Obama's energy policy is really a policy of capital consumption. (Another term would be deindustrialisation). To ram the point home: the more capital intensive a country the higher its standard of living. The opposite holds true. As for those who argue that these alternative energy plants would represent genuine investments I can only point out that they have absolutely no understanding of capital theory. These so-called investments would be nothing but malinvestments, a tragic testimony to a gargantic dissipation of capital by a profoundly ignorant and ideologically motivated man. As Drs Arden and Marjorie Meinel, pioneers in solar energy, said of this kind of economic lunacy:

Should this siren philosophy be heard and believed we can perceive the onset of a New Dark age.

Gerard Jackson is Brookesnews' economics editor

Subscribe to BrookesNews Bulletin