By Paul Homewood
This is a claim we are going to see more of in coming months, as governments ramp up fiscal support to deal with the coronavirus crisis:
The claim however is based on a fundamental misunderstanding of economics.
Let me explain:
If we take the UK as an example, the current position is that the government is providing about £350bn of special funding to mitigate the economic effects of coronavirus, for instance in providing sick pay and loans to keep companies afloat.
But here’s the thing – all of this money printing, whether fiscal or monetary, cannot increase economic output. All it does is lubricate the system.
Let’s use a simple example.
Assume we have a population of 60 million and enough grain to make 60 million loaves. Everybody gets a loaf a day. Now suppose something happens, a drought for instance, and we only have enough for 30 million loaves. No matter how much money the government printed, it would not change the fact that everybody only had half a loaf each. In other words, it cannot increase economic output.
How though does this relate to the green agenda, which wants governments to print money in order to fund renewable energy projects and the like?
Again, spending hundreds of billions on, say, solar and wind farms, does not increase economic output, because they are only providing what we already have, that is electricity.
What they will do though is consume a lot of resources, whether labour, capital, material or energy. This in turn diverts these resources from other uses, leading to a decline in economic output in other sectors. After all, green deal proponents even boast that their plans will create hundreds of thousands of new jobs.
And it is that diversion of resources which is the real cost we will have to pay.
The same applies to all of the other demands of the green deal, such as electrification of transport, hydrogen heating, carbon storage and heat pumps. They are all only replacing something we have already which works perfectly well, but will all demand vast outlay of resources.
Worse still, the green alternatives are not as efficient as the ones we have at the moment. For instance, there is absolutely no sense in taking natural gas, and converting it into hydrogen in order to burn it in the same way we do with the gas itself, particularly given that the conversion process itself consumes a lot of energy.
Economic growth comes from increasing productivity. New technologies, materials, production methods and so on gradually replace older ones because they are better in one way or other. If low carbon solutions really are better, they too will come to the forefront.
But until then, they should remain on the drawing board.
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March 20, 2020 at 01:57PM