Energy Based Inflation Solution

Originally published March 20, 2008 on Thank you to The wayback machine for allowing me to recover the content of this article!

The Washington Post released an article today stating that the price of coal has risen by more than 50% over the last five months. Earlier in the week, I gave a brief explanation of the economic theory I developed 5 years ago called Energy-based inflation.

The article published by the Washington Post creates an even greater awareness of the important of energy prices in the inflation rate of an economy. According to the US Department of Energy, we generate 49% of our energy from coal, which means that US businesses are not likely going to absorb the increase in energy costs. The costs are going to be passed along to the consumer. Guess which bill you are going to pay with your federal tax rebate? You might as well start writing the check to you local electric company.

One short-term solution would be for the Federal Reserve to choke the economy with a steep shortening of the money supply to force a deep recession. I’m sure this won’t happen, but it would actually produce the best result down the road. By choking the economy, it would force people and businesses to heavily reduce the consumption of energy. It would also result in considerable loss of jobs that would ripple into the economies of countries like China (the largest consumer of energy in the world). With American consumption down, Chinese energy demand would rapidly slow down. The problem with this solution is that it cost hundreds of thousands, if no millions, of jobs around the world. It would also create significant instability in the financial markets as investors would pull substantial investments out of China.

Another solution would be for the Federal Reserve to continue to lower rates to help spur consumer spending and business investment. The issue with this is the energy-based inflation will just be exacerbated by the expanding money supply. Inflation will then have two driving forces: (1) high demand for energy and low supply; (2) an expanding American money supply. Ultimately, this will lead to further devaluation of the dollar and relatively few Americans better in a couple years than we are right now. There is a long-term solution to energy-based inflation, however.

Many point to alternative energy sources as a way to combat rising energy prices. While this will help get us half way there, it won’t solve the problem quickly. To find the solution to the American energy crisis, we need to borrow a page from one of our Founding Father and the creator of what is considered today the Republican Party. Yes, you read that right, Republicans to the rescue. Alexander Hamilton was a strong believer in a Federal government that supported, protected, and aided budding industries.

The budding industry is not so much alternative energy but alternative energy consumption. Given the option, few Americans are going to care where our energy comes from. However, what if the energy was completely free? I’m betting that free energy would capture the attention of just about everyone. What our federal government should do if provide funding to the tune of $500 billion dollars to place solar energy panels or wind turbines that feed back into the local power grid on any property that requests it in the southern 1/3 of the United States. The installation and materials are completely free. The only trade off is that excess energy put onto the grid will not result in a rebate from your local energy supplier.

Here’s how it would breakdown… One of the major barriers for most homeowners when it comes to installing a solar system is the cost of the installation. The materials are expensive. However, the cost of the materials would drop considerably due to the economies of scale of such a large expansion of solar energy and wind energy equipment. Plus, the government would have strict rules on pricing of service since they are footing the bill for the entire project. The immediate impact is a considerable increase in employment for solar and wind power installers and manufacturers who make solar and wind power equipment. Then there is the ripple effect.

The ripple effect of creating so many jobs is tremendous, but that is not where the real economic benefit comes from. To be sure, there will be considerable increases in the purchase of local goods and services, but they are nominal compared to the major benefit of this plan.

Suddenly, millions of Americans in the southern 1/3 of the country will not longer have to pay for electricity. The electricity coming from their new solar and/or wind equipment will be more than enough to power their electrical needs. In fact, much of the installations will be able to generate more energy than a single house consumes, putting free energy back onto the local power grid. Now the ripple effect really starts to come into effect. Free from having to pay for energy, more than 2 million Americans are now saving on average $100/month. That’s $200 million dollars injected into the American economy every single month. Winter months will slow down a little bit, but that’s why we focused on the southern 1/3 of the country to begin with.

$200 million dollars/month sounds pretty good, but about the rest of the country that doesn’t receive these subsidized energy installations? Remember, the excess energy is put back onto the grid and the utility companies don’t have to pay for it. This means that the electric companies are now generating considerably more energy at the same costs they have today. This means that the price of electricity will drop and the demand for coal will drop. Drop the demand = drop the prices. And because this is a long-term solution that will last for decades, prices must drop. But we aren’t finished with benefits.

We’ve just eliminated $200 million dollars in electric bills per month and reduced the total cost of energy for the rest of the American population by another $200 million dollars per month, but we’re just on the tip of the iceberg. Now, imagine if every office building, industrial park, and shopping flat receives discounts on their energy producing equipment? Their bottom line increases, which means they can do one of two things: (1) increase wages or decrease the cost of their products/services.

If anyone is asking how we are going to pay for this, you need look no further than the latest tax rebates given to the tune of $200 billion dollars. For the most part, that money will be consumed, leading to absolutely no long-term benefit to the economy. Spend an extra $300 billion (a fraction of what we are spending on many other programs) to provide a permanent solution to our energy demand.

Then the only big question is what about the maintenance? We’ve just installed millions of dollars worth of solar and wind energy equipment. Entrepreneurs will come out of the woodworks for this one. Think about it for a moment. There are now millions of homes and businesses with this equipment on their property. If you have the entrepreneurial spirit, startup a business that performs the maintenance and upgrades to the systems. There are millions of them. The only other question might be why the government should subsidize this.

Government subsidizing of this plan is the only way it would make sense. When I charge a customer for my services, I don’t make up taxes to charge him/her. I simply charge the customer for the services. The government is the only entity that controls taxes. Ask any business owner and they will tell you that taxes are a consideration for doing business. If they don’t, ask them if they operate an S corporation or a C corp.

This plan is not much unlike what happened with the Internet. Businesses were given considerable tax breaks to get this budding industry rolling. Borrowing from one of our most brilliant Founding Fathers has proven to be extremely beneficial to our economy for more than 200 years. This brilliant idea of leveraging government to build, grow, and expand budding industries is as timeless as any American ideal.


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