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By David Goldstein on May 26, 2010 with no responses

Invisible Energy: The Key to Recovery from Recession

Last Friday Paul Krugman warned about the possibility of another decade of zero. Krugman warned about the risks of being over-zealous in fighting inflation, and suggested—indirectly—that additional stimulus might be needed.

He ended by saying that we could hope that past stimulus will jump-start the economy, but concluded “hope is not a plan.”

So what IS a plan?

The plan would have to begin by correcting the underlying economic imbalances that led to the recession. While we have made some progress on the direct triggers of the recession, by tightening up credit, especially on home mortgages, and by trying to regulate lending more thoughtfully, we still have not addressed the underlying causes.

For mortgage lending, we have made almost no progress on incorporating energy and transportation costs into underwriting. When lenders evaluate or not whether borrowers can reliably make payments on a median mortgage of about $150,000 (or 80% of a median house price of about $180,000) they continue to ignore the 30-year commitment to pay some $300,000 in transportation expenses for a house located in suburban sprawl, and another $75,000 in utility costs.

While these cost obligations are not contractual commitments, they are in practice real issues that affect  whether or not  the borrower can make their payments. Think about it. If you are in financial distress in Chicago in the winter, and you can’t pay both your mortgage and your heating bill, which will you pay first? If you live in sprawl and need your car to drive to work, or look for a job, which bill will you pay first, your auto loan and gas or your mortgage?

The common-sense answers to these two questions are consistent with the results of statistical studies of mortgage defaults. And the solution is simple: lenders could start basing lending on the sum of energy, transportation, and mortgage costs next week if they wanted to.

Wouldn’t this cut off credit for new homes? In fact, it would do the reverse. My colleagues in real estate development say that almost no new construction is happening in sprawl areas right now. The combination of defaults and their consequent depression in property values in these areas has already choked off new construction. But new projects are still proceeding in location efficient areas—at least to some extent. Reforming lending rules could accelerate this trend and start a recovery in new home construction.

Here’s another scary way to look at these long-term commitments that were made worse over the last generation. There are some 110 million homes that pay these utility bills. So our nation is obligated over 30 years to some 8.5 trillion dollars in consumer energy costs. And if half of our homes are located in sprawl (and the real fraction is probably even higher than half) we must add another 25 trillion [math enthusiasts will note that I assumed that the other half of homes are committed to “only” $150k in transportation.]

This is 33 trillion in hidden obligations over 30 years, a problem made worse by observing that the figure will more than double if we extend our time horizon to 60 years. For comparison, this is on the same order of magnitude as future obligations for Social Security and Medicare, without the offsetting revenue sources that these programs have.

These national-level obligations are particularly troublesome in the context of an economy with a near-zero savings rate and that imports far more than we export. Where are we going to get the money to pay them?

A plan for economic recovery must address all of these problems. It can do so by relying on vastly expanded energy efficiency policies as a cornerstone. Efficiency can cut the obligation of utility bills by half at a much lower cost than continuing on the path we are on. If we borrow money for home efficiency investments, we can pay it back within 5 or 10 years, and then use the money saved for other purposes after that, allowing a recovery to be sustainable and creating local jobs in the meantime.

There are well-developed and widely supported plans to do this, but they have been languishing in Congress for over a year. A similar plan for commercial buildings is in the Waxman Markey climate bill that passed the House about a year ago. While Congress waits, the unemployment rate continues to rise and America’s debt continues to increase, and oil prices have started to head back up.

Energy efficiency is one of the strongest tools we have at our disposal to recover from the recession. It can address all of the major problems that led to the Great Recession and that continue to hold back recovery: from the fear of inflation that Krugman warns about to the trade deficit, high unemployment, and govenment deficits.Yet the policies that could work are not seen by policymakers to be of sufficient importance to implement with the needed urgency, and the economy continues to drift.

These issues are discussed in depth in my book Invisible Energy, which is now available at many on-line and traditional book stores.