Do We Develop or Recover?

Romney says drill more; Obama says push oil, gas and alternative energies.

The differences between Economists Paul Krugman and Jeffrey Sachs come down to whether the above matters. Krugman stresses the need to increase demand, and advocates deficit spending--any deficit spending--in order to "grow" the economy. Sachs points out that what you spend the money on makes a difference.

Krugman would agree that spending on Defense, for example, is not going to increase the nation's long-term wealth the way spending on new technologies like alternative energy and infrastructure modernization would. Smart grids and high-speed trains would improve the economy, not just add to it.

One of the greatest barriers to recovery, however, is the huge amount of debt tied up in real estate that has lost value (28.6% of all mortgages owed by homeowners are underwater). Student loan debt is $914 billion, though credit card debt has fallen from over $800 billion last year to $626 billion now. The overhanging private debt deflates increases in demand created by the Fed, or government stimulus funds--regardless of public debt.

Sachs posits that in order for people to have more money, the economy can't just recover to what it was before, but must develop into something different, because the world economy has changed. People need new skills, businesses need new technologies and both need better infrastructure, from those smart grids and universal broadband, to better roads, rails and vehicles.

One of the unexpected growth spots in this otherwise slack economy is an old-fashioned oil and gas boom, unleashed by the environmentally damaging newish technology of fracking. Some of US growth is from cheap natural gas and (not cheap) domestic oil, not from burgeoning wind and solar power. (Oil isn't cheap, because prices are set in the world market, regardless of where it's pumped). Low natural gas prices make solar and wind less attractive.

It's an energy revival led by dinosaurs. The booms are not only environmentally destructive, they will delay necessary development needed for the US to lead as an advanced economy--unless the money they generate is taxed away to create incentives for alternative energies, smart grids and skills.

If we simply revel in the sudden abundance of fossil fuels, while Germany, China and Japan pursue alternative energies, we insure that global warming intensifies. We'll also fall behind technologically and in creating a sustainable future. We'll be like the Spanish Empire, which drowned in the gold and silver it extracted from the Americas, unable to make anything, able only to buy things--until the gold and silver so inflated the world's currencies that Spain became the poor man of Europe.

This also parallels the extractive conquest model of the Roman Empire. It ripped off the "known" world until it could expand no further. Impoverished by contraction, it finally "fell," when it could no longer swagger even down the Italian peninsula.