Inflation is at a 40-year high. More and more United States residents are struggling to make ends meet as the costs of basic goods, groceries, and gasoline skyrocket. On paper, the economy is doing great. Wages are up, the economy is growing at its fastest rate in almost 40 years, and the unemployment rate is currently under 4%, an incredible turnaround from bottoming out at nearly 15% at the height of the pandemic. According to the New York Times’ jobs report from this month, the unemployment rate for workers without a high school diploma is at an all-time low, reaching a record-setting 4.3 percent in February. So why does such a good economy feel so bad?
Recently a meme has been circulating which encapsulates how many U.S. residents are feeling about the “great” economy. In the meme, a man checking out at Walmart tells the cashier “The economy is going great! We created 5 million jobs this year.” The Walmart employee responds, “I have 3 of them and I still can’t pay my rent.” As a recent column from Grist puts it, “over the past several months, Americans have learned how bad a ‘good’ economy can feel.”
So now, the question is, how can the powers that be slow down economic inflation enough for workers to actually feel the benefits of a growing economy and income gains? Instead of the usual tactic of turning to the Federal Reserve to stabilize runaway inflation by raising interest rates and ceasing the purchase of long-term bonds, President Biden is suggesting a different strategy this time around: investing in clean energy. The unorthodox approach likely will not have immediate chilling effects on inflation, but economists say it could be a sound strategy for the long term.
According to a 2020 report by the Financial Times, “wind and solar are intrinsically deflationary, whereas fossil fuels are intrinsically inflationary.” The economics of renewables and fossil fuels are profoundly different. While fossil fuels require continued inversions of cash to keep exploring for new resources and drilling new wells, renewable resources operate on simple economies of scale. “You simply have to build the infrastructure in the right place to capture the energy that is already there and that is freely available once that has been built,” writes FT. And as technology improves and economies of scale kick in, “capital-investment costs fall dramatically over time while the short-run marginal cost of production is zero.”
There is also the fact that climate change, unless mitigated, is going to be very, very expensive. According to the NRDC (Natural Resources Defense Council), hurricane damage, real estate losses, energy costs, and water costs (just four of many potential impacts of global warming) “will come with a price tag of 1.8 percent of U.S. GDP, or almost $1.9 trillion annually (in today’s dollars) by 2100.” What’s more, insurance giant Swiss Re predicts that climate change may slash global economic output by $23 Trillion in 2050 if the global community does not pivot away from fossil fuels in a hurry.
Runaway inflation and skyrocketing oil prices may just be the incentive that some nations need to finally make that transition – but it hasn’t happened yet. In the short term, skyrocketing energy prices have been a boon to oil companies, who are reverting to a “drill, baby, drill!” business strategy. Even coal, which the world had largely committed to phasing out at last fall’s COP26, has seen a massive boost from the energy crunch and skyrocketing oil and gas prices. In the longer term, however, “higher and more volatile energy prices will be a catalyst for individual and global efforts to decarbonize the energy grids, which is critical for meeting climate change goals” CNBC reported last week.
While components for clean energy infrastructure such as cobalt and lithium are no exception to inflation, on a long enough timeline investing in clean energy is a no-brainer. Clean energy is not going to help millions of U.S. residents pay their rent next month, but it will prove to be essential for their economic future.
By Haley Zaremba for Oilprice.com
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