Republicans are hammering Obama because the unemployment rate is about to go over 10% (Gingrich says the stress tests “have already failed” because they were based on a lower number), and many Democrats in Congress are getting anxious about a tough reelection if the numbers don’t get better soon (and therefore are less willing to stick their necks out for the president).

But my money is on much better numbers turning out for August, maybe even coming back under 9%.  Here’s why:

  • Summer Jobs that typically are filled by high school students this year are going to be picked up by displaced workers, even though overqualified.  Teenagers unable to find jobs will have less money for games, clothes and to save for the Fall, but nevertheless they will not be claiming unemployment benefits.
  • Stimulus package: Construction projects will finally start coming online.  Not the big rail and infrastructure projects to be sure, but definitely the smaller ones, such low-income housing weatherization and city roads.  Also tax incentives for energy efficient windows and solar energy have kicked in, and these retail type contracts are ramping up as banks start lending again and contractors start marketing them aggressively.  Then there is the undocumented worker factor: A sizable portion of construction work used to be done by illegal immigrants (20% ??), especially with small 5-10 person contractors.  Many of these workers have gone back to their homelands, so for every 9 legal construction workers that were laid off, about 10 will now be hired back for a comparable project.
  • College grads: More than usual they will go into volunteer work (unpaid or sponsored by the expanded Americorps), delay graduation, pursue graduate degrees, travel for a wile if they have the resources, or stay with their parents (without collect unemployment).
  • Chinese stimulus: We’ll start feeling the effect of Chinese projects on our durable orders numbers.

Stimulating a new economy

January 19, 2009

Feldstein and Stiglitz both warn ‘what after the stimulus money is gone?’.  We have been propped up by two bubbles the last decade.  What will prop us up after we’ve used our borrowed money in two years?

Friedman puts it nicely: “If we spend $1 trillion on a stimulus and just get better highways and bridges — and not a new Google, Apple, Intel or Microsoft — your kids will thank you for making it so much easier for them to commute to the unemployment office or mediocre jobs.”

Fortunately I do see the foundation for a new economy in two specific elements of the emerging package:

A third element of the package is a wildcard: Healthcare reform.  Universal healthcare is a moral imperative, but the real value of reform is in increasing efficiency.  The current system is so expensive it is a real drag on the economy.  We must reduce costs and optimize delivery using technology, standardization, regulation and reorganization to a point where cost per insured is cut in half, otherwise we will still be at a disadvantage.  Most of this change will depend on Obama and Dashle’s reform skills, and not on how much we spend via stimulus package.

A fourth one is necessary for a world-wide recovery: Chinese people must start spending and enjoying the fruits of their labor.  The China-lends-us-money-so-we-can-buy-their-products dynamic is over.  This is obviously beyond our control, but well within the command of the central party committee.  Credit cards anyone?

Dirt cheap energy

January 19, 2009

A massive investment in solar and wind energy will reduce harmful emissions as well as our dependence in foreign oil.

More importantly however, it will usher in a new era of increasingly cheap energy, in two phases:

Stage One – First five years

Wind and light from the sun are free, therefore the raw materials for solar and wind energy have zero cost.  The only variable costs of these facilities are insurance, maintenance, minimal payroll and maybe land lease.

However the initial capital investment, and servicing the debt that goes with it, is higher than traditional plants.  So if the cost of a kw/h from wind or solar is higher than one from coal or gas it is due to the higher initial capital investment.

When the government spends 32 billion in solar/wind production and transmission infrastructure these capital costs will be nationalized as part of the stimulus package, and there will also be no direct interest expense to be paid by each project.  Perhaps the government will retain part of the profits, or have some other mechanism of recapturing some of the taxpayers’ investment.  But even so the wholesale price is likely to be much lower than coal’s.

Stage Two – Beyond 2014

The explosive investment in solar and wind technologies will radically increase their efficiencies.

Between 1980 and 2000 wind cost per kw fell from $2,600 to $790, mostly via increase in blade size and more efficient design.

Photovoltaic cell efficiency is still less than 20%.  They are also expensive due to their exotic materials and complex build processes.  This means there’s another 80% worth of energy to obtain from the same area via optimizations, as well as lower capital costs from streamlined construction.  In other words, there is a lot of room for improvement.

Thanks to a recent wave of venture capital investment, government programs, and academic interest, there are hundreds of new startups, labs and individuals doing promising research in this area where only a handful were just three years ago.  These actors will only speed up their research as the market for their products explodes overnight.  Each one is attacking the problem in a different way, and as is common with high-risk ventures, most will fail, some will succeed, and one will find a technology that is truly radical.

It is that one company that finds a new material or process which doubles the PV or turbine efficiency that will change the game entirely.  I have little doubt there will be one or two such disruptive players.

Let’s do the math: If we manage to increase efficiency of PV cells to 50%, and lower production costs to one third, that would reduce the cost of solar energy (non-subsidized) to one eighth what it is today!

The house’s proposed 850 billion stimulus package includes 30 billion for highway construction.  Instead of laying more pavement that will need to be maintained, why not make our current roads a lot safer?

Solar-powered road markers increase safety during night and low-visibility driving.  They charge during the day and illuminate all night.

Imagine being able to see stalled cars and other roadside obstructions, and the contour of the road, up to half a mile before your headlights can show you.

The lower accident rate would bring about efficiencies to our economy such as:

  • Lower driver insurance premiums (imagine an extra $100 in your pocket every month)
  • Lower ambulance and other first-responder costs to localities.
  • Lower medical expenses and insurance premiums.
  • Fewer days spent away from work while recuperating.
  • Lower costs for repairing or replacing crashed vehicles.