Mr. Keynes Goes to Washington, a Look at How Keynesian Economics Is Impacting Energy Policy

If one had to pin the label of the most influential economist affecting current global economic policies, the almost obvious answer would be John Maynard Keynes. While Lord Keynes died over sixty years ago, the advent of the current global economic turmoil has resulted in a resurgence in Keynesian thought.

For background, John Maynard Keynes was a British economist whose ideas have been a central influence on modern macroeconomic theory. Keynes promoted an interventionist government policy. He felt that governments should use fiscal and monetary measures to mitigate the adverse effects of business cycles, economic recessions, and depressions.

In the 1930s, Keynes lead a revolution in economic thinking, overturning the older ideas of neoclassical economics that held that the "invisible hand" of free markets would automatically provide full employment as long as workers were flexible in their wage demands. Keynes argued that governments should fight the Great Depression in the 1930s with heavy spending. Keynes felt that with consumer and business spending so weak, governments had to boost demand directly.

Following the outbreak of World War II Keynes's ideas concerning economic policy were adopted by leading Western economies. By the 1960s, Keynesian economics was fully mainstream, and almost all capitalist governments followed its policy recommendations.

Keynes's influence waned in the 1970s, partly as a result of problems that began to afflict western economies, and partly due to critiques from Milton Friedman and other economists who were pessimistic about the ability of governments to regulate the business cycle with fiscal policy. With the rise of Britain's Margaret Thatcher and Ronald Reagan in the United States, the goal became to shrink government. However, Keynesian economics has now provided the theoretical foundation for the plans of President Obama and other global leaders to utilize government stimulus to address the current economic crisis.

Keynes & U.S. Energy Policy

The American Recovery and Reinvestment Act of 2009 that passed earlier this year is a $787.2 billion economic stimulus package that is intended to provide additional jobs and to help shorten the recession. According to the Congressional Budget Office, the stimulus package is expected to increase gross domestic product growth between 1.4 percent and 3.8 percent and to create up to 2.3 million new jobs by the fourth quarter of 2009.

Spending on energy programs is a significant part of the American Recovery and Reinvestment Act with energy-related spending in the stimulus bill exceeds $70 billion of the $787 billion allocated. Much of the spending will filter through the Department of Energy (DOE). The $70 billion includes $11 billion for smart grid investments, $3.2 billion for energy conservation block grants, $5 billion for the weatherization of over one million homes, and $2 billion in grants for manufacturers of advanced battery systems and vehicle batteries.

The funding also provides tax credits for improvements to energy-efficient existing homes through 2010. This tax credit is capped at $50 for any advanced main air circulating fan, $150 for any qualified natural gas, propane, oil furnace, or hot water boiler, and $300 for any item of energy-efficient building property.

The bill also authorizes $1.6 billion in clean renewable energy bonds to finance facilities that generate electricity from wind, biomass, geothermal, small irrigation, hydropower, landfill gas, marine renewable, and trash combustion facilities.

Additionally, the bill provides a three-year extension of the production tax credit for renewable energy. The tax credit is currently set at 2.1 cents per kilowatt-hour, and is claimed over a 10-year period based on the amount of electricity produced and sold.

Other provisions authorize $2.4 billion in bonds to finance state, municipal and tribal government programs, $3.4 billion for carbon capture and sequestration demonstration projects ("clean coal" projects). An additional $6 billion is being made available for loan guarantees for innovative technology programs.

What Would Keynes Do?

I cannot help but wonder how Lord Keynes would feel about the American Recovery and Reinvestment Act of 2009. I'm not sure he would be completely enthralled with our politicians' interpretation of his texts and theories. I think one of his chief critique's would be that economic stimulus needs to occur sooner rather than later. President Obama said that his goal is to have 75 percent of the stimulus take effect before the end of 2010. I feel that Keynes would suggest a more aggressive time frame for the stimulus spending.

According to Dr. Mario J. Rizzo, professor of economics and the Director of the Program on the Foundations of the Market Economy at New York University, Keynes also did not think that public works expenditure were very effective in countering existing or impending recessions. "He believed that it was difficult to get the timing right," said Rizzo. "In the first place, he preferred that such investments be made without deficits. But if they were to be made as 'loan expenditure'-that is, through a deficit in the portion of the government's budget allocated to long-term expenditures like infrastructure-the expenditure should be covered by a surplus in the portion of the budget allocated to ordinary expenses like transfer payments, or through a special fund accumulated in prosperous times for just such purposes. If a deficit were incurred, the investments should be 'self-liquidating,' that is they should repay their costs over the long run. Thus his strong, but not rigid, preference was against deficit-financed public works."

It is ironic that Lord Keynes most well-known quote was that "In the long run we are all dead." Over sixty years after his death, Keynes texts and theories are once again at the forefront of economic policy.

In closing, with the U.S. energy sector beginning one of the most dramatic investment periods of the industry's history, the research team at UtiliPoint International will be expanding our role to focus on economic research and allocation of resources with the initial emphasis placed on The American Recovery and Reinvestment Act of 2009. Due to the significant allocation of dollars for energy related initiatives, UtiliPoint believes providing economic research capability toward this investment activity is important for client, executive, and media briefings, and we very much look forward to providing these services.