There have been some major events in the world energy market lately. For the first update let’s start with Spain.
Spain and Renewables:
Spain under-took a massive effort to embrace renewable energy technologies. Per Bloomberg:
The country generated 23 percent of its electricity from renewable sources in 2010… wind power in April covered 25 percent of electricity demand, a record that saved 270 million euros in fossil fuel imports. At one point on April 19, wind covered 61 percent of power demand.
How did Spain become a pioneer in wind and solar? Simple. Massive tax breaks for these sorts of installations.
In the 2000s, Spain copied the German clean-power aid model, as did nations from Portugal to Israel and Japan, increasing subsidies to a pinnacle in 2007. That’s when a law granted 444 euros ($556) a megawatt-hour for home rooftop solar panels feeding the power grid, compared with an average 39 euros paid to competing coal- or gas-fired power plants. By 2009, the consumer bill for clean-energy aid had risen to 6 billion euros a year, ahead of the 5.6 billion euros in Germany, whose economy is almost four times bigger, according to the Council of European Energy Regulators… Solar energy was the biggest drag on the system, accounting for almost half of the annual 6 billion euros of liabilities and producing just above 2 percent of the power
Let’s do the math there again. Through state subsidies, the government was paying 444/39 = more than 11x the rate for solar panels. This understates the disparity because that 39 Euro per MWH on the other sides includes a much longer term investment horizon, while rooftop solar panels would have a correspondingly lower life span. To be fair, much of their renewable subsidies went to wind power, which while un-economic was less disastrously so than rooftop solar (with this level of subsidies). In addition to overpaying, the government was doing this on a massive scale, as noted above since the government largess was larger than Germany in absolute terms while their economy is much, much smaller.
The scale of over-building in these technologies was incredible. Per the article:
With peak electricity demand at less than half of capacity, the country doesn’t need more power plants, he said. Spain has a capacity of 99 gigawatts, and peak demand of 44 gigawatts.
This level of surplus power, (123%, or (99-44)/44)) is unprecedented. By contrast, in the United States in 2010, our surplus (summer) capacity is 19.2%, per the EIA document summarized here.
Recently Spain has undergone an austerity crisis and the government stopped subsidizing new energy installations. What happened? The industry immediately evaporated.
Saddled with a budget deficit more than twice the European Union limit and a ballooning gap between income and costs in its power system, Spain halted subsidies for new renewable-energy projects in January. The surprise move by Prime Minister Mariano Rajoy one month after taking office helped pierce investor confidence in stable aid for clean energy across Europe. “They destroyed the Spanish market overnight with the moratorium,” European Wind Energy Association Chief Executive Officer Christian Kjaer said in an interview. “The wider implication of this is that if Spanish politicians can do that, probably most European politicians can do that.”
In addition to halting the bleeding of government finances caused by the end to these massive subsidies for new installations, the “green jobs” immediately melted away.
The 75,466 renewable energy jobs that existed in Spain at the industry’s peak in 2008 shrank to 54,925 in 2010, according to the Renewable Energy Producers Association’s most recent data.
Likely this job loss will further accelerate since in 2010 there still were some subsidies available; now the subsidies have been completely eliminated, thus de-facto decimating the industry in Spain.
It is important to note that this Spanish “investment” in renewable technologies often can’t be leveraged by industrial producers because wind power is intermittent (and expensive) and much of the solar was implemented for individual households. By contrast, the US shale gas boom, tied with expansion of gas-fired plants making up a larger percentage of the total capacity base (and in particular the “base load” capacity base), has made America more competitive for industrial producers and led to economic growth (or a slowdown in relative decline) in energy-intensive industries. This document (by an industry source, but likely directionally correct) states the following:
The lower natural gas prices achieved with shale gas production will result in an average reduction of 10% in electricity costs nationwide over the forecast period. By 2017, lower prices will result in an initial impact of 2.9% higher industrial production. By 2035, industrial production will be 4.7% higher.
On a larger scale, Spanish “investment” in renewable energy didn’t make the country more competitive from a manufacturing perspective nor did it reduce the cost of energy to the average homeowner. It created a class of economic parasites that evaporated as soon as the subsidies went away. The Spanish companies that thrived off the boom are now moving overseas to attempt to compete with local entities in other countries where subsidies still exist that could make renewables viable.
The Construction Bust
Alongside their “investment” in renewables at a massive scale, Spain also was part of a tremendous property boom. This property boom collapsed a couple of years ago and new construction was an over-sized part of the total economy. Per these official statistics (from the height of the boom):
The relative contribution made by the construction sector to the value added of the non-financial business economies of Cyprus (19.4 %), Poland (18.1 %) and Spain (17.6 %) was notably higher than for other Member States… In value-added terms, the least specialised Member States for construction were Germany (reflecting a rebound following the post reunification boom years), Slovakia and Hungary, the construction sector contributing between 4.7 % and 5.5 % of the value added of their respective non-financial business economies in 2007.
Note the contrast again between Spain and Germany; Spain’s construction industry was 3 to 4 times larger as a percentage of the economy than Germany, and their subsidies for renewable energy were 4x larger on a per-capita basis when adjusted for the size of the economy as noted above. The Germans basically invested to make their economy more competitive, and the Spanish didn’t (property and renewables don’t help). It isn’t that the Spanish didn’t do anything, it is that what they did made little sense.
As the construction industry collapsed, unemployment soared.
Unemployment is more than 24 percent, the highest in the Euro zone, and for people under 25 it’s at a staggering 50 percent. Economists say the base figure could rise to 30 percent.
Countries where young people are unemployed at a 50% rate are a tinderbox ready to ignite, as deposed rulers in the Middle East can attest (perhaps to be replaced by new dictators, but still…) People often assume that revolutions “can’t happen here” in a Westernized country but we are about to enter a dangerous phase if this level of youth unemployment goes on indefinitely.
It is important to realize the giant, lost opportunity that this mis-investment in renewable energy meant for Spain. Alongside the construction boom, Spain is now in a horrible box of low competitiveness and massive structural unemployment. And the young will suffer the most, unless they emigrate to other countries that chose to invest more wisely than in ephemeral “green jobs” and construction instead of industrial competitiveness.
Cross posted at LITGM
Spain
Renewables MarketCollapsesFIFY
Yes unfortunately you are right on the overall collapse.
I just wanted to show that it wasn’t that they did nothing, it was that they did all the wrong things.
Useless construction, useless subsidies, and also universities teaching useless subjects.
All our dogmas on “investment” taken to the extreme.
With predictable results.
The green revolution is a powerful example of choosing ideology over reality.
Reality always wins.
Britain has recently announced that wind power is a waste of money. It was a cover story on the Economist recently. More here.
@VeryRetired – reality eventually wins I’d almost compare economic basic truths with nature. One can’t go against either for long.
Can we bury Keynes now? All of this “investment” in Spain certainly increased aggregate demand and GDP, just as Keynes’ theory called for.
All of that spending now means nothing. Productive investment requires entrepreneurs with the keen ability to identify useful projects.
Government spending wastes resources on a massive scale. Governments run on favors, not profits.
I have got to finish reading the Forgotten man – Amity Shlaes was just making the point that as Roosevelt was dumping money into public programs other countries were starting to recover faster than we – and it was the public spending – that prolonged our depression.
But then isn’t Keynes favored by big-government – primarily left – politicians? Look at Obama – unapologetic for adding $5 trillion to the debt – convinced that what he has done is right.
I cannot see Keynes every being buried – perhaps dormant for a generation (not that that has happened yet) – and brought back to life by those who think it just wasn’t applied correctly. Big govnt proponents – and a belief in market and primarily Laissez-faire economics – is mutually exclusive .
“Let’s do the math there again. Through state subsidies, the government was paying …”
That appears to be 100% false.
“In the 2000s, Spain copied the German clean-power aid model…”
“By 2009, the consumer bill for clean-energy aid had risen to…”
The “German” model is to force the multi-billion profit corporations who have near-monopoly on supplying electricity to buy whatever renewable energy is fed into the net at a fixed price.
So no government money is involved at all, it’s rather that the corporations are forced to buy from certain privileged energy sources at a high price.
In the end the consumer foots most of the bill (corporate profits may be a bit lower, too), but the consumers are also voters, so it’s legitimate.
“This level of surplus power, (123%, or (99-44)/44)) is unprecedented.”
Actually, the nuclear power-loving French are still net importing electricity from Central Europe, so they don’t seem to get enough from Spain. It appears that the installed power surplus is simply a natural consequence of certain renewable power technologies not providing constant power. The measure has lost its relevance in regard to most renewable energies. To use it is pointless at best.
“The lower natural gas prices achieved with shale gas production will result in an average reduction of 10% in electricity costs nationwide over the forecast period.”
Lots of energy cost projections are frivolous, and I’d look into who paid for this study before taking it seriously. There’s no reason why consumers and industry should benefit from a cheap energy source as long as alternative energy sources are expensive. The energy supplier with the cheap source will demand the normal price level, party over huge rent profits and claim to shareholders that the board of directors is composed of geniuses who deserve € 10-20 million annual compensation so they don’t switch employers.
@Garland:
You have no idea of what Keynes proposed apparently. Keynesianism is strictly against pushing the economy with extra investments in times of prosperity, while it’s in favour of doing the same when the rate of capacity utilisation is substantially below 100%.
Poor Keynes. He has been trashed by politicians who took half his idea and forgot the rest. He wanted governments to run surpluses in good times. That would never happen. They only spent more.
SO…
Agreed that capacity measures get distorted due to the fact that renewable technologies are unreliable on peak, when they are needed most. This means that even though you pay a high price per unit of power, the “real” cost is even higher because it is unreliable. By all reputable sources Spain paid a very high cost per unit of power through solar. Even the Spanish utilities realized that it was unsustainable.
I am stunningly aware of the difficulty of energy cost projections since I spent many many years in the industry. There are many sources that cite the increasing competitiveness of US industry due to the shale boom and reduction in natural gas costs. It also helps consumers in the pocketbook since natural gas sets the marginal price for peak planning in most purposes.
I am not an expert in the German system of utilities I will need to research it more in the future. Every country has their own regulatory system and comparisons are not always “apples to apples” but it is clear that Spain, a country of relatively limited resources (compared to Germany, for certain) lavished a high degree of subsidies on their renewables market, and now that those subsidies have come to an end, the industry is dying almost immediately. That is a fact that can be attested to by the companies involved in the process and easily documented.
I stand by the statement that Spain certainly has too much surplus power, given also how their economy is in the doldrums. This is also a plain fact.
Well, Spain has some of near-desert areas (Estremadura, for example) and solar power IS a reasonable hope for their future. They’re a more reliable and more close energy supplier than Morocco or Algeria, for example.
Their industry has a bit of everything, but there’s little hope that it will develop much manufacturing value added and many manufacturing jobs anytime soon. It’s not like they dominated the biotechnology bandwagon or similar.
Judging by their overall situation, solar power is probably their way to go, but that doesn’t mean that they couldn’t overshoot, of course. Spain is among the few continental European countries prone to develop serious bubbles, even in basically sound sectors (such as construction). See the flax scandal of 1999.
To SO,
You willfully ignore the actuality of Keynesian theory as applied by governments.
If governments are not following Keynes, then where is the outcry from Keynesian economists, denouncing the actions of government. They should be screaming constantly that Keynes has been misunderstood and misapplied, to protect the reputation of supposedly “true” Keynesian policy.
Keynesian theory is laughable. Supposedly, the government should restrict economic growth in good times by accumulating a surpluss with higher taxes. Then, the government should moderate recessions by spending the surplus to increase economic growth in bad times.
(1) Who would be crazy enough to restrain economic growth? What is bad about fast growth? This is politically impossible and immoral.
(2) Governments never hold a surplus. They itch to spend it all and more, in good times and bad.
(3) Lacking a surplus, where is the outcry from Keynesian economists that the government should not raise spending? These economists should be complaining. Instead, they excuse the lack of stimulated growth by calling for three or more times as much government spending.
Keynesians explain that we must borrow money (or even just print it) to support greater government spending. Then, we can cover the deficit from the economic boom to follow. But, the boom does not materialize. Each time, we seem to have done something wrong. We are told that it is not the fault of Keynes’ theory, but of our imperfect world.
Keynesians even recommend the healing powers of wars and tsunamis to get an economy going again! These people and policies would be funny if they weren’t the central tragedy of our times.
Stimulus Does Not Cure a Recession
The Hayekian understanding of the business cycle is that the dips are places where mal-investments are written off and new investment opportunities are discovered. Spain clearly has an enormous amount of mal-investment in “renewable” electricity production, as well as housing.
The only upside will be that wealthy Germans may someday buy the houses as retirement homes, and young Spaniards will move to Germany to take the jobs the Germans have retired from.
SO: without links to credible statistical sources I am inclined to dismiss your comments as mere rants.
@Schwartz:
I don’t even see where my points could be bolstered by statistics. They’re solid in a qualitative sense already.
@Garland:
You wrote
“All of this “investment” in Spain certainly increased aggregate demand and GDP, just as Keynes’ theory called for.”
and that’s 100% wrong.
Keynes’ theory would have called for government intervention during the crisis, not for cutting government intervention in times of crisis as the Spanish did. Besides, the Spanish renewable energy intervention was apparently not even expansionary and thus not related to Keynesianism in any way.
I didn’t even write about my opinion on what governments do with Keynesianism in practice, at least not on this thread. It’s thus disingenious to accuse me of ignoring that part of the story.
“…then where is the outcry from Keynesian economists, denouncing the actions of government.”
So you did miss Krugman’s complaints about the GWB record deficits entirely?
Krugman is overly focused on the short term, but definitively a stern Keynesian.
“Who would be crazy enough to restrain economic growth? What is bad about fast growth? This is politically impossible and immoral.”
Politically impossible – maybe. Immoral or crazy? Hardly.
In the long term, it’s much better to have growth more close to potential GDP growth line than to have a large business cycle ambitus around this path.
You seem to believe that fast growth could be sustained, but it couldn’t. The rate of technological progress is limited to about 1.5-2.5% per annum in a highly developed economy. Faster growth can only be maintained as long as the economy is not at full utilisation, undercapitalised, not exploiting its natural resources fully or experiencing high (working age) population growth (Solow-Swan model). Population growth doesn’t even help but hurt in regard to GDP per capita.
So the reason for slowing fast growth at times is that this also reduces the other side of the coin; fast downturns a.k.a. recessions.
Hint: There are several continental European countries with much, much less dramatic economic cycle upturns and downturns than the U.S. – and they’re better off right now, with half the unemployment rate, a fine trade balance and a positive savings rate. They looked less bright in their last upturn than the U.S. did during the late 90’s – that’s their dark side of the coin.
Mere Rants. And long ones at that.
To SO,
You wrote “The rate of technological progress is limited to about 1.5-2.5% per annum in a highly developed economy.”
Say you are the Grand Economic Controller. At any given time, how would you know whether the correct rate of growth is 1.5%, 2.5%, or 3.5%?
How do you know what the capacity utilization is for an economy? Isn’t it different in each instance, company by company?
Is GDP what you measure for growth? Does this include military expansion?
When China was claiming 5% growth, were Keynesian economists in despair that China would crash soon, or were they applauding the enlightened central control of the Chinese economy?
Specifically, what do you do to limit the rate of growth? If you target specific activities, what do you do to them?
It seems to me that limiting growth means either unemploying people, or specifically denying business opportunities to people. That is, you would specifically limit production.
Would you really do that? How would you prove to people that this limitation now is going to prevent a recession later? Or, would you just force them to do what you want?
Where and when has the Keynesian program worked? How do you know? How do you demostrate cause and eff in a world of many factors?
There’s no right or wrong rate of technological progress. Technological progress just happens, and it changes slowly. The variation is about 0.1-0.3 per cent points per decade. That’s why the potential GDP growth is quite steady, too (no matter ow much influence politicians claim to have over the economic output). What’s not steady is the economic cycle around this growth path.
Capacity utilisation of the economy is known thanks to statistics bureaus. We usually know this info timely, and quite accurately. We can look at unemployment and share of working persons in the working age group as well as what utilisation rate is being reported from the industries (such as for example 85%).
China is undercapitalised and experienced high growth rates for almost entirely the same reason as Germany did after its industry and cities were bombed out. Huge savings rate, much construction work, many new or enlarged factories. Their growth rate isn’t so much a topic for Keynesian economics theory (which is more about the cycles) as for the classic Solow-Swan model.
A limiting activity on the grate of growth is usually the absence of pro-growth efforts. The central banks tightens money supply to avoid inflation, the government can cut subsidies and postpone some of its own infrastructure investments.
“How do you demostrate cause and eff in a world of many factors?”
Econometrics. Huge datasets, advanced mathematical analysis methods, huge effort and thoroughness. That’s where economic science gets its rather intricate variables from.
Econometrics depend on huge datasets, and this is not easy with topics on the rare crisis events. So what Keynesians do instead is second-best; they find supporting evidence for their assumptions, which is easier. Correct assumptions lead logically to correctness of the model, for the assumptions and the model have logical connections.
Keynesians can claim to have made better predictions about the course of this crisis and that their assumptions were largely proven correct. This applies largely to what happens when interest rates are at the lower zero bound.
@Schwartz:
Now if you dismiss what I write as rants, what do you expect me to think about the quality of your replies?
To SO,
I can’t argue with “Huge datasets, advanced mathematical analysis methods, huge effort and thoroughness. That’s where economic science gets its rather intricate variables from.”
This is a gigantic appeal to unnamed authority. Macro-economists are supposedly getting it right, but seem to have no effect on the government, except to encourage it to spend more whenever there is some difficulty.
I remain puzzled as to why the government can’t predict the unemployment rate, the effects of it’s stimulus programs, or the growth rate of GDP. Is it merely ignoring the huge datasets, etc.?
Keynesians always claim that government spending ended or mitigated the preceeding crisis. The government spent, and the crisis ended. QED.
Henry Morgenthau Jr. was FDR’s Treasury Secretary in 1939: “We have tried spending money. We are spending more than we have ever spent before and it does not work. I say, after eight years of this administration, we have just as much unemployment as when we started, and an enormous debt to boot!”
“gigantic appeal to unnamed authority”? I was writing about a standard method! It’s not my fault when someone else doesn’t know such an important economic science method as econometrics.
http://en.wikipedia.org/wiki/Econometrics
“Keynesians always claim that government spending ended or mitigated the preceeding crisis. The government spent, and the crisis ended. QED.”
Actually, they point out that the economy recovered right until the point when FDR moved away from Keynesian methods in 1937.
Look at it yourself:
http://en.wikipedia.org/wiki/File:US_Unemployment_1910-1960.gif
http://bonddad.blogspot.de/2011/05/great-depression-part-2.html
(both from quick googling)
The situation from 1937 on rather supports than weakens the Keynesian position, as does even more so the development prior to 1934.
Listen, I’m actually no Keynesian. I was all in favour of accelerating expenses which would happen anyway and of supporting short-time labour so companies keep their personnel intact and ready to rebound. My idea for accelerated public investment would have run out of steam in my country long ago and wasn’t much-needed anyway. In the U.S. otherwise with its now de facto negative capital investment rate (public + private) in combination with about 1 % p.a. population growth it should be obvious that the government should launch huge infrastructure investment projects, especially given the ridiculously low long-term interest rates on U.S. bonds which are lower than just about every average rate of return for public infrastructure investments you could ever find in studies.
It’s should be just as obvious that the federal budget should help the states to maintain the widely agreed-on public services (police, education et cetera) at the normal/preferred level even during the public revenue slump of the ongoing economic crisis. 48 of them cannot have deficits by law, so the burden should fall on the fed level.
Both doesn’t require the tiniest bit of Keynesian theory for justification. Even the most basic economic analysis would yield that these actions should be self-evident.
The U.S. isn’t even doing the most self-evident actions because it dived deep into ideology, irrationality and mutual aversion.
To SO,
If econometrics is so good, then why can’t the government predict the unemployment rate, the effects of it’s stimulus programs, or the growth rate of GDP. Is it merely ignoring the huge datasets and the proven power of Econometrics?
You point to posts with raw statistics and pronounce that they support your explanation. I confess, those statistics need a better analysis than I can apply, or (in my opinion) than you have given.
You write: “Even the most basic economic analysis would yield that these actions should be self-evident.”
Well, you are smart, and the rest of us are stupid.
You claim to not be Keynesian, but the Keynesian solution is the one that you want: “huge infrastructure investment projects”. What are you relying on as the practical example where that has worked?
Spending did not end the Great Depression
Reduced spending and lowered tax rates did it.
Econometrics finds averages, medians and distributions. The actual short-term unemployment rate is coined by a deviation from the average.
Remember, econometrics was my answer to “How do you demostrate cause and eff in a world of many factors?”, I did not claim it’s the economic science’s I-win button for every problem.
Your ideological article of faith about the end of the Great Depression does not help.
For one, there was no substantial reduction of tax rates back then, the recovery was rather strong until FDR slashed the budget in ’37 and the U.S. has had poor economic performance during the last 30 years of reduced tax rates.
Economic science knows very little about how low tax rates are supposed to lead to more economic growth becuase there’s actually little connection between the two. The article of faith doesn’t withstand an analysis simply because people save / invest for an expected profit of 50 bucks almost just as much as they do for an expected profit of 100 bucks. Some may become irrational due to taxation and prefer no profit over a reduced profit – these people simply consume (saving would still equal someone else’s investment because there’s no positive net capital export) and the money sooner or later ends up in someone’s hands who is ready to save in favour of the 50 bucks profit.
Ironically, the only illusion about how lower taxation would lead to more economic output (save for some extreme cases of near-total taxation) is about investment: I already explained why it’s an illusion (reduced profit is still better than no profit), but it’s most remarkable how the tax rate reduction fashion of the last 30 years did apparently not keep the U.S. economy from dropping into unsustainably low savings rates and often negative net capital investment (it’s even worse if you keep population growth in mind). Growth was weak in per capita terms, too.
Fact is that the Republican economic ideology has failed on the macro scale for 30 years now. It’s been a mightily expensive experiment. The only ones who prospered are those few who refused to trickle down the advantages they received under this economic regime.
“huge infrastructure projects” – really, macroeconomic science is about how an economy needs public and private capital investment for a large output potential.
Back in 2010 the U.S. had a negative net capital investment; its capital stock depreciated more than the nation had private+public capital investment. Meanwhile, the population grew by about one per cent. It takes absolutely no Keynesianism to be in favour of more investment (and a suitable savings rate!) than that. Keynesianism is only the icing on the cake here.
My creativity does not suffice to imagine how one could not accept the need for much more infrastructure investments.
To SO,
You present a bundle of opinion without citations. How can I take you seriously?
You continue to avoid my question:
If econometrics is so good, then why can’t the government predict the unemployment rate, the effects of it’s stimulus programs, or the growth rate of GDP. Is it merely ignoring the huge datasets and the proven power of Econometrics?