Innovation is the Life Blood of Our Economy

The good news is that the uncertainty about a recession has been dispelled. We are officially in a recession which started in December 2007.The bad news is that it is likely to be the severest recession since the great depression of the 1930’s by the time it is over. Hopefully this will be sometime in the second half of 2009.

 Unlike the depression era the Federal Government has not been complacent about the meltdown of the economy and the financial sector. It has been very proactive. Hundreds of billions of dollars of tax payers money has been allocated to bail out the icons of our banking and insurance industries that are too big to fail but the strategy has yet to payoff .The credit markets are yet to unfreeze. At this time it is difficult to figure out what the money is being used for by the banks.

 In addition Congress is in the process of approving a $15 billion loan package for the three struggling U.S. auto giants-Ford, GM, and Chrysler in order to stave off their imminent bankruptcy. The prime rationale for the federal assistance is that they are too big to fail .Bankruptcy will result in severe job losses in the economy at time when we are in a deep recession and that is unacceptable to policy makers.

Well known economist Joseph Schumpeter some time ago said that recessions are like “a good cold shower for the economic system”. My hope is that even large old companies such as Ford, GM, and Chrysler can wake up with the cold shower hitting them with the realities of the 21^st century and become efficient and smart and build advanced fuel efficient cars that can compete with automobile leaders such as Toyota, Honda, and BMW. 

In times of economic downturns businesses lay off workers and cut costs wherever possible even in innovation projects that could pay handsome dividends in terms new products down the road. In other words innovation is often seen as a frill and can be dispensed with in tough economic times. That can ultimately spell disaster for a business in a highly competitive global economy.

This phenomenon is also nationally true. Bailouts, however, are temporary solutions only. They will not sustain productivity and prosperity into the future.

 In order to revitalize our economy we need to fall back on America’s strength—the idea and innovation economy. America has been a leader in innovation for quite some time.

The list of American successes is long and impressive and ranges from the light bulb to the transistor, the personal computer, the Internet, the genome. Four out of the eight winners of the Economist magazine’s recent annual innovation award (October 2008) are Americans. They include Jimmy Wales for the Wikipedia, the free on-line encyclopedia; Steve Chen and Chad Hurley, for You Tube, an easy way to share video via the Internet; Arthur Rosenfeld for the promotion of energy efficiency; and Bill and Melinda Gates for developing a businesslike approach to philanthropy. Their foundation provides an enabling platform for other non-profits for improving lives around the world. (Economist, December 6, 2008).

I would like to suggest that clean tech be one of our top national economic priorities. Silicon Valley as well as other US prime innovation regions are active in developing and investing in various forms of clean tech ranging from solar thermal, solar photovoltaic, biomass, tidal power, and energy efficiency.

 Clean energy is currently one the fastest growing sectors of our economy and it has the capacity of growing hundreds of thousands of jobs in the next several years. In addition it would contribute to our critical economic and national security needs of energy independence as well as reducing air pollution and mitigating the threat of climate change.

As job creation is one of the urgent priorities one of the obvious areas for government to invest in immediately would be to retrofit all of our existing public buildings .The payoff in addition to creating thousands of jobs is electricity conservation and reduction of pollution. Existing buildings use about 70% of our electricity and contribute to nearly 40% of our air pollution .The proposed Obama public works plan supports this initiative.

Enormous innovation opportunities also exist in health care, education, and infrastructure development with emphasis on transportation. Let us emulate the Silicon Valley ecology of innovation around the country so that we can become world leaders in creating new technologies that enhance our commerce as well as our quality of life.

We need to move beyond gas guzzling SUV’s, McMansions, and risk oblivious financial gymnastics in order to sustain our economy.

December 14, 2008

 

 

Economics of Hope –2009

This is the season of joy and hope.

A look at my investment portfolio certainly does not fill me with joy at this time. My joy also does not come from the things I own, it comes from spending time with family and friends and sharing the holidays with them.

My hope is an end to the gut wrenching recession we are experiencing and moving on to an America that is once again a highly competitive and productive economy.

Before I discuss what lies ahead for the economy in 2009 and beyond I will recount a bit of recent economic history as a lot has happened in the last year.

The U.S. recession started in December 2007 and much of the world is also mired in a recession including the 14 European Union countries. Even the robust economies of China and India are experiencing significant slowdown. By the end of 2008 the US will have lost 2 million jobs with unemployment level at around 7%.

We may have staved off further worsening of the downturn in the last six months by pumping more than trillion dollars of taxpayer’s money into the economy in 2008 via the Federal Reserve System and the U.S. Treasury. In addition further reinforcements for the floundering economy have come from the Fed with a recent cut in the Fed Funds rate to near zero (~ 0.275%).This is almost free money for the bankers that borrow from the Fed.

Typically in past recessions easy money policy of the Fed alone would have been sufficient to start the economic recovery. This time it has not done so because of the double whammy of the housing bust and the meltdown of the financial markets. Credit is still very tight despite the infusion of billions of dollars by the government into the banking system. Confidence has been undermined and many banks are still shy about lending money to clients.

The December 2008 Anderson UCLA forecast suggests that the national recession will continue well into 2009 with total job losses of another 2 million and unemployment rising up to 8.5% by the end of 2009 and early 2010.The recovery will begin by the end of 2009 .Most experts agree with this viewpoint.

What kind on a national economic recovery are we going to have?  Things are not going to go back to the booming housing bubble years of 2005 and 2006 when sky rocketing home prices encouraged consumers to use their houses as ATM machines to finance their reckless spending. With the housing bust consumer confidence plummeted and it continues to fall today.

Consumers account for nearly 70% of our economy and they will not participate in the next revival. This is a serious problem. They will be too busy taking care of their household debt accrued over several years of weak income and in addition they will work on building up their depleted savings again.

In last several years US exports have been a major factor in the nation’s economic growth because of an anemic dollar as well as robust economic growth abroad. The global recession will restrict this avenue of growth for the US with declining foreign demand for our exports at least next two years.

So where will the economic recovery come from? It will have to be from the massive fiscal stimulus being proposed by President elect Obama’s team. The plan involves hundreds of billions of dollars in spending on improving and adding to the nation’s infrastructure in areas such as highways, mass transit, weatherization of government buildings for energy efficiency, installation of information technology in medical facilities among others.

Nobel Prize winning economist Paul Krugman of Princeton University recently suggested that the U.S. economy will have to depend on massive infusion of public money into infrastructure for many years to come before the economy will pick up enough steam and sustain respectable economic growth. His concern is that once the economy picks up momentum there will be enormous political pressure on the new administration to cut spending and raise taxes prematurely to reduce the deficit before the economy gets on a sound footing. (Paul Krugman, New York Times, and December 22, 2008).I agree. That will be a big mistake.FDR did that in 1937 and the economy went into a recession.

There is little doubt in my mind that a New Economy is about to unfold where government becomes a major player in investing in much needed public capital goods just as the nation did in the aftermath of WW II when we built the Interstate Highway system. That made a huge difference in our economic well being and made the nation more competitive. It is about time we started rebuilding America’s competitive base by investing in our future and not just living in the past.

Passive Houses can Rejuvinate the Building Industry and the Economy

The cheapest, cleanest, and most abundant energy resource is energy efficiency. It is a very simple concept—using less energy to get the same amount of heat for our homes, same amount of light for our offices, and same amount of power for our cars. It is really about getting the same or more with less.

There are two general categories of energy efficiency measures:

·         First, using more efficient machines and designs such as the compact fluorescent bulb that usually resemble high end onion rings;

·         Second, improving the efficiency of existing machines and structures, such as insulating our homes.

As buildings use nearly two thirds of our power they ought to be the prime target for implementing energy efficiency measures. In recent weeks more attention is being paid to the Passive House rather than on the crumbling housing market. (Elizabeth Rosenthal, New York Times, December 27.2008) The Passive House involves a design and construction standard that reduces the heating requirements to such an extent that conventional heating systems are no longer required in the building. The term passive comes from the fact that the home maintains a steady temperature and does not depend on fossil fuel generated heating.

There are no drafts, no cold floors, no waiting for the heat to come on in the Passive House. In fact there are no furnaces in such a house. They are well insulated and air tight and are heated by the free heat generated from appliances such as refrigerators, ovens, lighting, and computers operating in the house. Of course body heat and external solar heating of the house are also captured in such a system. It is important to note that these structures do have windows that can be opened and most of them face south than north. The Passive House is an excellent idea—why not uses the heat that one can obtain free?

What about ventilation in such an airtight capsule? Previous attempts at building solar heated homes failed because of stagnant air and resulting mold. No problem. The new design has a smart mechanical ventilation system that brings in fresh air while eliminating the same amount of stale air from the house. What is really impressive is that the stale air carrying the free heat transfers the heat to the incoming fresh air prior to its leaving the building. Such a system enhances the air quality of the house greatly. An added feature of the design is that the house has zero emissions. (Pat Murphy, www.energybulletin.net)

The concept of the Passive House originated from the city of Darmstadt near Frankfurt in Germany.( Passivhaus Institut )The first Passive House was built  by Wolfgang Feist, a physicist from Darmstadt in 1991.Such homes are becoming increasingly popular in Germany and Scandinavia. Today they require 85% less energy than a house built to existing German building standards. (Hans De Keulneur, Intelligent Energy for Europe SAVE program) What is impressive is that the additional construction cost in Germany is only 5 to 7% more than the standard house costs.

The Passive House industry is growing fast in Germany. Schools in Frankfurt are built with the latest Passive House technology. The European Parliament is now proposing that all new buildings meet these standards by 2011.Now even the U.S army in Germany is considering building their barracks with this technology. Currently there are nearly 15,000 Passive Houses in existence around the world. Vast majority of them are in Germany.

The movement is slowly gaining momentum in the U. S. Recently the Passive House Institute US held its third annual conference in Duluth, Minnesota. By contrast, the European Institute recently held its 12^th conference in Germany. So far we are mostly talking about the concept rather than embracing it as they have done in Germany.

 Nabih Tahan, a California architect, who worked in Austria for more than a decade, recently retrofitted his older home in Berkeley to Passive House standards. It is now a demonstration Green Home in the Bay Area. (www.nabihtahanarchitect.com).  Hopefully the Passive House movement will  gain a foothold in the Bay Area and spill over to the other regions of the U.S.

Undoubtedly the Passive House concept extending to all buildings could play a crucial role in cutting our national energy consumption. This would not only enhance our building practices but lead our nation to energy independence as well providing us with a major strategy for meeting the challenges of climate change and environmental pollution. Energy efficient buildings are a big deal.