Monday, November 16, 2009

Economic Pessimism and a Half-Assed Stimulus

People who talked to me a year ago might recall my having said that I thought the 2009 economy would be a lot worse than the predictions, and that unemployment would be over 10% this year. In fact, I was so gloomy last year that I made (and kept) a resolution to shut up about it, partly on the grounds that no one really likes a pessimist even if he's right.

What about now? Well, there is Nouriel Roubini. He made a name for himself by being bearish during the real estate bubble. Now, the typical pattern for economic soothsayers is to ride their calls over the top, failing to recognize when conditions have changed. So, it comes as no surprise to me that he's still bearish. He thinks the unemployment rate will peak at 11% and stay there for a couple of years.

Link to Roubini's view

I recognize the danger of riding a good call over the top, but I'm with Roubini. The reason is that Obama's stimulus was a half-measure. It should have been twice as big as it was, and should have consisted entirely of spending and none of the business tax cuts demanded by Republicans, who then turned around and voted against the package anyway. Obama allowed himself to get rolled, and now he'll have the worst of all worlds: a stimulus with his name on it, but one that's too small to matter.

Beyond that, the current stimulus does nothing for the long run. There is no investment in it. Let me give a small example of what could have been done.

Some tens of millions of U.S. homes are heated with oil. This drives up our trade deficit, impoverishes the homeowners, and spews carbon into the atmosphere, exacerbating global warming. And it's unnecessary, because there is long-established technology to replace conventional furnaces.

I start by noting that if you dig six feet into the ground, it's almost always 55 degrees down there. If you dig a 75-foot trench, lay pipe, and run anti-freeze through it, you can draw the heat from the ground and replace the oil burner with a heat exchanger. It has the added appeal of being an air conditoner in the summer time. The only energy you use is to run the pump, which is 70% less than if you burn oil (or natural gas, for that matter). These systems are called "geothermal heat pumps," and they've been used for a long time to heat homes in Scandinavia and Eastern Canada. An American company located in Ft. Wayne, Indiana, Water Furnace International, is a major manufacturer of the systems.

Water Furnace International's website

It costs about $6,000 to replace an oil burner with a gas burner. It costs about $16,000 to replace an oil burner with a "Water Furnace," the extra cost being mainly of digging the 75-foot trench and laying the pipe. But you save 70% on your energy bill, which makes for roughly a six-year payback on one of these systems.

Here's the sort of thing the government should have gotten involved in: Cut a deal with Water Furnace and others to make these things in huge volume at lower prices -- in that regard, take a page from Wal-Mart -- and then totally subsidize them, in return for sharing the energy cost savings. There'd have been an up-front investment of $50 billion or $100 billion to do it, but it would be recouped over time by sharing the savings on energy bills. Side benefits: Lower oil imports. Long-term reductions in energy use. Reduced carbon output. Give lots of jobs to unskilled unemployed to dig those trenches. Stimulate an American industry.

Is anyone even thinking about stuff like this? It sure doesn't seem like it. Instead, we have a half-assed stimulus package that is doing little but (maybe) keeping the really big wolf from the door in the short term, and nothing over time. Chalk it up to the timidity and lack of imagination of a Democratic Party that's thoroughly scared of its own shadow and bereft of the spirit of innovation

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