Washington’s Green Energy Pyramids

Yesterday we suggested that one of the four avenues out of America’s gigantic demographic and fiscal trap is more productivity. Yet the overwhelming function of Washington at present is to eviscerate productivity, and we do mean that very word.

Just in the last several days, the financial press has highlighted two of these mindless projects of national impoverishment. They are embodied in a proposed regulatory dragnet to force 67% of new auto sales into EVs by 2032 and a Washington-funded green energy plan to induce America’s great oil companies to build the equivalent of energy pyramids, likely resulting in corporate hari kari not too far down the road.

But even before we dissect these mindless developments, it is important to understand how far gone the productivity trend is already. During the last decade, average productivity growth has fallen to just two-fifths of its average during the heyday of post-war prosperity.

Average Labor Productivity Gain Per Annum:

• 1947-1979: +2.50%;

• 1979-2010: +2.03%;

• 2010-2022: 1.07%.

There is no mystery as to why this dismal trend has materialized. To wit, real net investment has stagnated, and an increasing share of what is actually invested is being channeled to low-productivity and even 100% wasteful projects under orders, subsidies and mandates from Washington.

As shown in the graph below, the “real net fixed investment” metric eliminates the distortion caused by inflation in a long-term time series, and also adjusts for the fact that massive amounts of the capital stock are consumed each year in the form of depreciation and amortization charges for capital used up in the process of production. So the “net” part of it is what’s left from current gross capital spending after replacing D&A—the new capital, therefore, that can go into productivity and growth.

To be sure, real net fixed investment is volatile owing to the fact that gross CapEx tends to plunge temporarily during recessions, while charges for D&A are only modestly impacted. However, over long time periods the underlying trend is unmistakable.

Per Annum Growth of Real Net Investment:

• 1953-2006: +6.8%;

• 2006-2021: +0.5%

That’s right. Since 2006 the trend growth rate of real net fixed investment has plunged by 92%. Capital should never be wasted, of course, but under present conditions it’s an outright sacrilege. There just ain’t none to waste.