Macro Roundup

FRBSL researchers examined components of the CPI since 2000 and found wide differences by sector: the overall basket increased 1.8X from January 2000 to December 2022, while education prices grew to 2.6X and communication prices fell to 0.8X.

“…The figure below shows the U.S. consumer price index (CPI) for various expenditure types, as computed by the Bureau of Labor Statistics. For each series, the units are chosen to equal $1 in January 2000 so that their evolution over time can be compared. The “All” line (solid red) increased from $1 in January 2000 to about $1.80 in December 2022. This means that a person needed about $1.80 in December 2022 to purchase the same basket as he or she could have purchased with $1 in January 2000. One extreme case is that of education-related expenditures (solid gray line): Their prices have multiplied by 2.6 since January 2000. Another extreme case is communication-related expenditures (solid blue line): Their prices have decreased from $1 to about $0.80….”

Guillaume Vandenbroucke, “How Inflation and Relative Price Increases Differ,” Federal Reserve Bank of St. Louis, February 13, 2023, https://www.stlouisfed.org/on-the-economy/2023/feb/how-inflation-relative-price-increases-differ

How Inflation and Relative Price Increases Differ

Economists distinguish between the general price level and the relative price level. To understand the difference, consider a basket consisting of one apple and one orange, each costing $1. The basket’s price is $2, and an orange is just as expensive as an apple.

Relative Price Differences

Imagine a scenario in which the apple’s price decreases to 50 cents while the orange’s price increases to $1.50. The basket’s price is still $2, but an orange now costs three times as much as an apple. There is no inflation since the general price level, reflected by the basket’s price, is constant.

Yet relative prices are quite different, and consumers are likely to change their purchasing behavior in response to the increased relative price of oranges. They may purchase fewer oranges and more apples than before.

Introducing Inflation

Now, consider a second scenario in which the prices of apples and oranges each increase from $1 to $2. Then the basket’s cost increases to $4, up from $2. Yet, an orange is still just as expensive as an apple. There is inflation, but relative prices have not changed.

Again, consumers are likely to change their behavior, but for a different reason than in the first scenario. Since everything is more expensive, they might purchase less of everything, unless their income also increases in the same proportion as all prices.

Examining CPI since 2000

The figure below shows the U.S. consumer price index (CPI) for various expenditure types, as computed by the Bureau of Labor Statistics. For each series, the units are chosen to equal $1 in January 2000 so that their evolution over time can be compared.

The CPI represents how the dollars needed to purchase a particular basket of consumption change over time. The “All” line (solid red) represents a basket of all goods and services typically purchased by a consumer in the U.S.

The other lines represent components of that basket. For example, the “Medical” line (broken green) represents medical care services and commodities while the “Recreation” line (dotted blue) represents cable and satellite television, radio services, pet-related commodities and services, admission to movies and related services. Thus, the “All” line represents the general price level, and the other lines represent relative prices.

The “All” line (solid red) increased from $1 in January 2000 to about $1.80 in December 2022. This means that a person needed about $1.80 in December 2022 to purchase the same basket as he or she could have purchased with $1 in January 2000. This is inflation. The recent increase in inflation can be seen in the steepening of the curve since mid-2020.

The fact that other lines increased either faster or slower than the “All” line is an indication that some prices are increasing faster than others. In other words, relative prices are changing along with the rising general price level.

One extreme case is that of education-related expenditures (solid gray line): Their prices have multiplied by 2.6 since January 2000. Another extreme case is communication-related expenditures (solid blue line): Their prices have decreased from $1 to about $0.80. Between these two extremes, other prices have increased at similar rates, such as food and housing.

Examining CPI since 2020

The second figure reproduces the same calculation as in the first figure, but with January 2020 as the starting date. The key difference between the two figures is that, even though the price of education- and medical-related expenditures have increased faster than other prices in the long run (as seen in the first figure), transportation- and food-related expenditures (dashed green line and dotted orange line, respectively) are the fastest-growing prices since January 2020.

The two figures are reminders that, in trying to understand the effects of inflation (either in the short run or the long run), one must keep in mind that price increases are not even across different categories of expenditures.

In addition, inflation masks changes in relative prices, which may affect people’s spending decisions regardless of the changing general price level.

Jon Haidt cites the percentage of undergraduates diagnosed with a mental illness and argues that an epidemic of anxiety and depression started impacting young Americans in 2012, “…There was no sign of a problem before 2010, and the epidemic is well underway by 2015. You can also see that the rate of depression is much higher in girls, as is the absolute increase (since 2010 an additional 18% of girls suffered from depression in 2021, compared to an additional 6% of boys), however, the relative increase is similar in both sexes: around 150%. The rate had more than doubled before the covid epidemic. The 2020 data were collected in early 2020, just before covid restrictions, and the 2021 data were collected a year later before vaccines were widely available. You can see that covid accelerated the rise in depression in that last year, but it was already rising really fast….”

Jon Haidt, “The Teen Mental Illness Epidemic Began Around 2012,” After Babel, February 8, 2023, https://jonathanhaidt.substack.com/p/the-teen-mental-illness-epidemic

The Teen Mental Illness Epidemic Began Around 2012

From the first time I wrote about Gen Z in 2015 (with Greg Lukianoff, in our Coddling essay) through my most recent discussion in a December interview with Tunku Varadarajan in the Wall Street Journal, the main criticism I have heard is that I’m just another old man (I’m 59) shaking his fist and complaining about “kids these days,” when in fact “the kids are alright.” If that’s true, then the first half of the Babel project—on what social media did to childhood and to teen mental health—is fatally flawed. Is the criticism valid?

1. The Case Against Me

Two responses to that WSJ essay do us the favor of collecting quotations from previous generations complaining about the behavior of youth. First, see this Twitter thread from Paul Fairie, titled A Brief History of Kids Today Are Spoiled

Fairie includes this 1925 gem:

Remove the girl or boy of today from radio, the telephone, furnace heat, the automobile, the libraries, movies, and other forms of amusement and comfort––give them merely a jackknife and nature’s unchanging wonders for amusement, and how would they fare? … Ennui would claim them for its own and … they would fare ill until returned to their accustomed habitat of convenience and plenty.

Second, see this essay by Mike Males in LA Progressive, titled Enough Youth-Bashing, which includes this:

From Greek poet Hesiod to modern youth bashers led by psychology professors Jonathan Haidt and Jean Twenge and former first lady Michelle Obama, no one says anything new. Hesiod cornered the market with his “no hope for the future of our people” rant against the “reckless… frivolous youth of today” (700 BC).

And this:

Eon after eon, it’s the same float going by. Socrates thought books made the young mentally weak. Panics over coffee, witches, jazz, dime novels, comics, TV, backwards-masked lyrics, Ozzy, Eminem, Tupac, Grand Theft Auto, Harry Potter’s Hermione, Miley, cellphones, Facebook, sexting, social media… the endless ephebiphobic idiocies should be retitled, “I’m Superior!” and given their own dismal library shelf.

These critics make two valid points: First, you can find these criticisms in all recent generations and in some going back thousands of years.

1 Second, the criticisms are often part of a larger moral panic that arises in response to any new consumer product––and especially any new technology––that “kids these days” are using. Social media clearly fits this pattern. (Robby Soave explained the dynamics of tech panics well in his 2021 book Tech Panic.)

The critics also gain support from empirical studies by psychologists John Protzko and Jonathan Schooler, whose 2019 essay in Science Advances was titled Kids these days: Why the youth of today seem lacking. Protzko and Schooler summarize their many studies showing that older people suffer from a variety of cognitive biases, such as that we each have biased and self-serving memories of what we were like at that age, and so we older people always find current younger people inferior and declining.

In sum, it’s reasonable to start with skepticism of my claim (with Jean Twenge) that there is an epidemic of mental illness that began around 2012, and that is related in large part to the transition to phone-based childhoods, with a special emphasis on social media. It makes sense to embrace as a null hypothesis the skeptics’ view that there is nothing to see here, just another moral panic, and the kids are fine. I am in full agreement that the burden of proof falls on me.

But if you take that as your null hypothesis, then you should be open to evidence that the null hypothesis is false and this time is different. Anecdotes about kids who began cutting themselves the week after going on Instagram won’t do. You’ll want to see peer-reviewed studies and high-quality surveys showing 1) that there is in fact an epidemic of mental illness and 2) that phones and social media are substantial contributing causes. I am currently writing a book that makes both of these arguments: Kids In Space: Why Teen Mental Health is Collapsing.

In the rest of this Substack post, I offer a preview of the evidence that a mental illness epidemic emerged around 2012. I won’t directly address the issue of causality here. I’ll do that in many future posts, and in the book. (You can find a short version of the argument in my 2022 Senate testimony.) This post simply responds to the “kids these days” critics. I make the case that this time really is different. The kids have not been alright since the early 2010s.

2. The Collaborative Review Doc

I have been collaborating with Jean Twenge (author of iGen, and the forthcoming Generations) and Zach Rausch (my research assistant) on a pair of collaborative reviews that are open-source Google documents where we collect all the evidence we can find, on both sides of each question, and we invite critics to add comments and studies. In this post, I present our document titled: Adolescent mood disorders since 2010: A collaborative review. In future posts on this Substack, I’ll present many more collaborative review docs and explain why open-source Google docs are an essential adjunct to social science research, especially regarding social trends that are changing too fast for the slow gears of academic life to keep up with––phenomena like social media and its effects on teen mental health and on liberal democracy.

Here is the first half of the Table of Contents, to give you a sense of the layout. Please look around the doc itself. If you are a researcher or mental health expert, ask for commenting rights to add your own studies and criticisms. I am a devotee of John Stuart Mill who wrote that “he who knows only his own side of the case, knows little of that.” Help me get this right.

First, let’s look at what Gen Z says about its own mental health, compared to previous generations. After that, we’ll look at hard evidence about behavior, to address the criticism that the only thing that has changed is Gen Z’s willingness to report their mental health problems.

3. Increases in Self-Reported Depression and Anxiety

Section 1 of the Collaborative Review summarizes self-report surveys that have been conducted at regular time intervals since 2010 or earlier. Do members of Gen Z say that their mental health is declining? Yes, in every study we can find. We cannot find any studies on the other side. I will focus today’s post on data from the United States. I’ll have a future post on what’s happening internationally, showing that the same patterns are happening in largely the same way at roughly the same time in Canada, the UK, Australia, and New Zealand, and I’ll share with you what Zach and I are learning about other countries beyond the Anglosphere.

Here are two of the graphs you’ll find in section 1 of the Collaborative Review document:

As you can see in Figure 2, and in most of the Figures in the review doc, there was no sign of a problem before 2010, and the epidemic is well underway by 2015. You can also see that the rate of depression is much higher in girls, as is the absolute increase (since 2010 an additional 18% of girls suffered from depression in 2021, compared to an additional 6% of boys), however, the relative increase is similar in both sexes: around 150%. The rate had more than doubled before the covid epidemic. The 2020 data were collected in early 2020, just before covid restrictions, and the 2021 data were collected a year later before vaccines were widely available. You can see that covid accelerated the rise in depression in that last year, but it was already rising really fast.

Figure 3 comes from a very different source: the mental health clinics on hundreds of college campuses. You can see once again that there’s not much to see before 2010, but the epidemic is in full gear by 2015. You can also see that while rates of all disorders have increased, the increases are largest, in both relative and absolute terms, for mood disorders, a class of mental illness that is made up primarily of depression and anxiety disorders (which includes anorexia). In 2019, just before covid, one in four American college students suffered from an anxiety disorder, compared to just one in ten back in 2010. The rate may be higher today.

Section 1 of the collaborative review shows that according to the kids themselves, the kids are not alright. What happens when we ignore what they say and look at what they do?

4. Increases in Self-Harm

In 2019, when Twenge and I launched the document, there were still some skeptics who argued that the large increases you see in Figures 1 and 2 reflect only a change in Gen Z’s willingness to disclose their struggles, which is a good thing. Here is psychiatrist Richard Friedman, in the New York Times in 2018:

“Despite news reports to the contrary, there is little evidence of an epidemic of anxiety disorders in teenagers… There are a few surveys reporting increased anxiety in adolescents, but these are based on self-reported measures — from kids or their parents — which tend to overestimate the rates of disorders because they detect mild symptoms, not clinically significant syndromes.”

This argument is heard less often nowadays, but it was made by one critic recently in response to my WSJ interview. Here is Vicki Phillips, in Forbes, in an essay titled Gen Z: Hopeless Or Hopeful?

[Haidt] fails to note the remarkable truth. Gen Z is in fact embracing a new, more open and honest relationship with their mental health, one that destigmatizes the issue so that it can be addressed. This is leading to more people reporting their mental health challenges and seeking support, and contributing to the rising numbers of reported cases. More effective diagnoses and increased connection to care are both good by any measure. As an educator, I feel an obligation to support Haidt on his personal learning journey. And as someone who has actually worked with Gen-Zers, I can tell you, the kids these days are more than alright.

But if Phillips and Friedman were correct that “the kids are alright” and the appearance of an epidemic is an illusion based on Gen Z’s “more honest relationship with their mental health,” then we would not see any change in objective measures of mental health, such as hospitalizations for self-harm, or deaths by suicide. But in fact, we do see such changes, and the timing and magnitude of them generally match the changes in self-reported mental health problems. Sections 2 and 3 of the Collaborative Review doc report these findings.

Figure 4 shows the number per 100,000 older teens who are admitted each year to hospitals because they harmed themselves, mostly by cutting themselves with sharp objects. Once again there is no sign of a problem before 2010, and the epidemic is raging by 2015.

Figure 5 is the same as Figure 4 except that it shows what happened to younger teens, ages 10-14. Younger teens were very rarely hospitalized for self-harm before 2010, but by 2020 the rate for girls had nearly tripled, rising to exceed the rate at which older teen girls were hospitalized back in 2009. This is a clue as to what caused the epidemic. What could have changed right around 2012 that hit tween and young teen girls hardest? (I’ll answer that in a later post.)

5. Increases in Suicide

Section 3 of the Collaborative Review doc presents the most tragic data of all: a large increase in the number of completed suicides.

For suicide, the rates are always higher for boys and men. Girls and women make more suicide attempts, but they are more likely to use reversible means. Boys and men are more likely to use firearms and tall buildings, which are not reversible. Suicide takes a much larger toll on boys and men. But it is noteworthy that the relative increase since 2010 is larger for girls and women.

When we look at the change in suicide rates for tweens and younger teens, in Figure 7, we find three features that echo what we saw in the graphs for self-harm: 1) the percent increase is larger for girls than for boys, 2) the percent increase for young girls is much larger than the increase for older girls, and 3) even more than in Figure 4, there is a sharp increase for girls between 2012 and 2013. In fact, there was a 67% increase in suicides in that single year. This sudden and enormous spike, in a single year, once again forces us to ask: what changed in the lives of 10-14 year old girls in 2012?

6. Conclusion

I began this essay by taking the burden of proof upon myself. Given the long history of tech panics, you should come to this question and this blog with skepticism. Your default assumption should be the null hypothesis so often asserted by my critics: this is just one more unjustified freakout by older people about “kids these days.”

But as I have shown in this post, the evidence that this time is different is very strong. In 2010 there was little sign of any problem, in any of the long-running nationally representative datasets (with the possible exception of suicide for young teen boys). By 2015––when Greg Lukianoff and I wrote our essay The Coddling of the American Mind––teen mental health was a 5 alarm fire, according to all the datasets that Jean Twenge and I can find. The kids are not alright.

Please join me on the After Babel Substack to figure out why. In future posts I’ll cover topics including these:

What is happening to teen mental health in other countries? Is this just an American thing?

What is the evidence that the epidemic is caused in large part by social media?

What is the evidence that the loss of free play and risky play contributed to the epidemic?

What is happening to boys? They’re not on social media as much, so why is their mental health deteriorating too? I started this Substack to help me write two books, as explained in the About post. In many posts, such as this one, I’ll make a strong assertion in the title of the post in the hope of drawing criticism. Did the epidemic really start in 2012, or was it earlier? Was it gradual, not a sharp bend in 2012? I want to hear all of the counterarguments and find all of the contrary evidence now, rather than waiting until after the book is published. So please be (constructively) critical in your comments. It is so hard to find time to write the books that I won’t be able to respond to comments one by one, but I will read them all and I’ll pull out the best criticisms and respond to them in new text at the bottom of this post.

It is beyond the scope of this short post to go into variations by race, SES, ideology, and other factors, but I have done so in Appendices A through G of the collaborative review doc. TLDR: there are some variations, such as that the increases in depression and anxiety were larger among sexual minorities, and among girls who self-identified as liberal. But the general trends are similar across all groups.

The suicide rate for boys was higher in the 1980s than it is now. I believe those earlier levels, which used to rise and fall with the violent crime rate, were caused in part by the high and rising prevalence of lead in children’s bloodstreams from the 1950s until leaded gas was banned in the late 1970s and early 1980s. Rates of suicide and violence then plummeted 15 years later, and sociologists have not yet converged upon an explanation. You can see graphs of these changes, and find arguments on both sides, in my debate with Chris Ferguson, in section 3.2.1 of the Collaborative Review doc.

Robinson Meyer argues that Biden’s decarbonization based industrial policy faces three significant headwinds: spending money efficiently, coordinating across multiple government agencies, and making policy adjustments over time. “The U.S. financial system persistently struggles to fund projects that take a long time to turn a profit and that can expect to have only modest returns. Unfortunately, the biggest and most important physical infrastructure — factories, transmission lines — often fall under that category. Second, the government may lack the ability to coordinate its own actions. Late last year, the Biden administration declined to help reopen a “green” aluminum factory in Ferndale, Wash., that was exactly the kind of low-carbon industry it wants to champion. Never mind the right hand not knowing what the left hand is doing: The right hand couldn’t get the left hand to plug the cord in. Finally, the government may not understand enough about the companies it’s trying to help. In Taiwan and South Korea, industrial-policy agencies… constantly gather information from the private sector and use it to adjust goals and policies over time. The I.R.A.’s main incentives are tax credits, which are hard to repeal once they’re in place and hard to fix if they’re not working. They are an unusually mindless way to incentivize companies to change their behavior.”

Robinson Meyer, “A Huge, Uncharted Experiment on the U.S. Economy Is About to Begin,” New York Times, February 12, 2023, https://www.nytimes.com/2023/02/12/opinion/economy-ira-infrastructure-clean-energy.html

A Huge, Uncharted Experiment on the U.S. Economy Is About to Begin

If you want to understand the immense windfall the Biden administration is about to bestow on green industries, take a look at hydrogen. Engineers still aren’t exactly sure what role the gas will play in a climate-friendly economy, but they’re pretty sure that (contra the ridicule in “Glass Onion”) it will be useful for something. We might burn it to generate heat in factories, for instance, or use it to make high-tech chemicals.

And thanks to three laws Congress passed over the past two years — the bipartisan infrastructure law, the CHIPS and Science Act and the climate-focused Inflation Reduction Act — the industry will be very well taken care of. Over the next decade, the government is going to invest $8 billion on hydrogen “hubs” across the country, special zones where companies, universities and local governments can build the machinery and expertise that the new industry needs. Other hydrogen projects will qualify for a $10 billion pot of money in the I.R.A. or $1.5 billion in the infrastructure bill. Still others could draw from a new $6.3 billion program that will help industrial firms develop financially risky demonstration projects.

So that’s up to $25.8 billion before you get to the bazooka: an uncapped tax credit for hydrogen that could pay out perhaps $100 billion or more over the next decades.

Few Americans realize it yet, but the trifecta of the Biden-era laws amounts to one of the biggest experiments in how the American government oversees the economy in a generation. If this experiment is successful, it will change how politicians think about managing the market for years to come. If it fails or misfires, then it will greatly limit the number of tools to fight climate change or a recession. The story of the 21st-century American economy is being shaped now.

I say “experiment,” but, really, there are two. The first concerns the economy. Mr. Biden’s team believes that it can move the United States toward a more robust, high-capacity and even re-industrialized economy. Can it? And can it use policy moreover to make sure that innovative ideas don’t get lost in the research lab or patent office, but instead make their way to the factory floor and corporate showroom, generating jobs and economic value along the way?

The second experiment: Can the same economy — which has, virtually since the abolition of slavery, derived a good deal of its industrial energy from extracting hydrocarbons from the ground and setting them on fire — find a new primary energy source? Even today, America generates 79 percent of its energy from fossil fuels. The administration is, in a sense, trying to conduct a high-stakes heart transplant on the economy while the patient remains alive on the table.

Don’t get me wrong: Some kind of climate boom is now all but assured. The investment bank Credit Suisse predicted last year that the I.R.A. would put more than $800 billion into the economy by the end of the decade, galvanizing more than $1.7 trillion in climate-friendly public and private spending overall. The law will transform the United States into the “world’s leading energy provider,” the bank said. The American renewable industry alone could attract 78 percent more investment per year by 2031, according to the energy-research firm Wood Mackenzie.

But I worry that the federal government has started its experiments too haphazardly. The I.R.A. did not emerge from careful study and bipartisan consensus building, but from intraparty haggling and a harried legislative process. Even the bipartisan CHIPS Act was more of a crisis measure than a strategic intervention. These shortcomings are forgivable; in the I.R.A.’s case, it’s not like Republicans were ever going to help pass a climate bill. But these constraints have deprived the government of the strong institutions, internal expertise and administrative capacity that have made similar experiments successful in other countries.

For practical purposes, that means, first, that the government won’t be able to spend all this money in the right place. The U.S. financial system persistently struggles to fund projects that take a long time to turn a profit and that can expect to have only modest returns. Unfortunately, the biggest and most important physical infrastructure — factories, transmission lines — often fall under that category. In other countries, industrial policy has entailed creating an agile, entrepreneurial agency that can get money to the right companies in the right ways — as a loan, as equity, as a purchase guarantee.

Congress took some steps in that direction last year. The I.R.A. beefed up the Loan Programs Office, the Department of Energy’s in-house bank, and it established a new green lending office within the Environmental Protection Agency. But Congress has put these institutions on a short leash with a limited mandate. This means that the government can’t support as many risky investments as it should.

Second, the government may lack the ability to coordinate its own actions. Late last year, the Biden administration declined to help reopen a “green” aluminum factory in Ferndale, Wash., that was exactly the kind of low-carbon industry it wants to champion. The local union, electric vehicle makers and the state’s Democratic leadership all wanted to revive the factory. The project even has national-security relevance, since the United States currently imports aluminum from Russia. But Mr. Biden chose not to intercede with the local electricity provider, the Bonneville Power Administration, to supply the plant with enough cheap power to operate even though it is a federal agency ostensibly under the president’s control. Never mind the right hand not knowing what the left hand is doing: The right hand couldn’t get the left hand to plug the cord in.

Finally, the government may not understand enough about the companies it’s trying to help. In Taiwan and South Korea, industrial-policy agencies don’t only hand out money; they constantly gather information from the private sector and use it to adjust goals and policies over time. The I.R.A. contains very few mechanisms for this kind of in-flight course adjustment. Its main incentives are tax credits, which are hard to repeal once they’re in place and hard to fix if they’re not working. They are an unusually mindless way to incentivize companies to change their behavior.

And this points to a related concern: that we have underestimated just how hard decarbonization will be. One of the most cherished and widely held ideas in climate activism is that we could have solved climate change by now if only we’d had the “political will.”

This idea, once true enough, may soon outlive its utility. Mr. Biden and his successors will discover that decarbonization is an inherently difficult and complex societal challenge that cannot be solved with money alone. Some important activities will be legitimately hard to do without emitting carbon pollution; there will be some trade-offs that flummox even the most committed progressives.

Which is to say: Even if the U.S. had an agency that could finance or approve any industrial project in the exact right way at the precise right time, it would still be legitimately unclear which projects it should support. Will a new lithium mine create jobs and build political support for decarbonization, or will its local pollution effects provoke backlash? If a new hydrogen hub opens in your hometown, will you love the growth or hate the higher housing costs?

The Biden experiments bear the mark of a particular set of lawmakers and White House staff members who needed to meet a particular set of goals. They sought to stimulate the pandemic-depleted economy, reduce carbon pollution in a durable way, respond to what they saw as the Chinese manufacturing juggernaut and — perhaps above all — revitalize the American working class to prevent the next Trumpian crisis. They stumbled on a germ of an idea, a climate-friendly “industrial strategy,” and after 18 months of excruciating legislative wrangling, they have somehow made it the law of the land.

But the lawmakers who wrote that policy are not charged with carrying it out, and many of the officials who championed it most — like Brian Deese, the director of the National Economic Council — are now leaving the White House. Will the next crew understand what they’ve inherited? In order for Mr. Biden’s two experiments to have a chance of success, the officials must not go on autopilot or disarm the parts of the I.R.A. meant to build domestic political support. And they cannot assume that everything about the coming climate boom will work out in the end. More than just the country’s fate depends on it.

The Economist’ argues that “The crunch caused by the war in Ukraine may, in fact, have fast-tracked the green transition by an astonishing five to ten years” via increased subsidies, “The crunch caused by the war in Ukraine may, in fact, have fast-tracked the green transition by an astonishing five to ten years. Last year global capital expenditure on wind and solar assets grew from $357bn to $490bn, surpassing investment in new and existing oil and gas wells for the first time. America’s Inflation Reduction Act earmarks $369bn of subsidies for green tech; the European Commission has unveiled a “Net-Zero Industry Act”, which will provide at least €250bn ($270bn) to clean-tech companies. China’s 14th five-year plan for energy, released in June, for the first time sets a goal for the share of renewables in power generation (of 33% by 2025). All told, the IEA expects global renewable-energy capacity to rise by 2,400gw between 2022 and 2027, an amount equivalent to China’s entire installed power capacity today. That is almost 30% higher than the agency’s forecast in 2021, released before the war. Renewables are set to account for 90% of the increase in global generation capacity over the period. Carbon-dioxide emissions look set to fall considerably faster than expected just 12 months ago. S&PGlobal, a data firm, thinks emissions from energy combustion will peak in 2027, at a level the world would still be producing in 2028 had the war not happened.”

Economist Staff, “War and subsidies have turbocharged the green transition,” The Economist, February 13, 2023, https://www.economist.com/finance-and-economics/2023/02/13/war-and-subsidies-have-turbocharged-the-green-transition

War and subsidies have turbocharged the green transition

To many activists, Lutzerath, an abandoned hamlet in Germany, encapsulates the nightmare of the global energy crisis. For months campaigners blocked the site’s demolition, after Robert Habeck, the country’s energy minister, allowed a utility firm to mine for lignite—the dirtiest form of coal—under its graffitied houses. As a giant excavator swallowed its way closer, hundreds of police, unfazed by the pyrotechnics propelled at them, dragged protesters from their stations. Now the village is empty; its last buildings gone.

In their panic to keep the lights on, policymakers across Europe and Asia are reopening coal mines, keeping polluting power plants alive and signing deals to import liquefied natural gas (lng). State-owned oil giants, such as the uae’s adnoc and Saudi Aramco, are setting aside hundreds of billions of dollars to boost output, even as private energy firms mint enormous profits. Many governments are encouraging consumption of these dirty fuels by subsidising energy use, to help citizens get through the winter.

Yet the reality is that the return of brown fuels is a subplot in a much grander story. By making coal, gas and oil scarcer and dearer—prices remain well above long-run averages, despite recent falls—Russia’s invasion of Ukraine has given renewable power, which is mostly generated domestically, a significant strategic and economic edge. Indeed, even as Mr Habeck endorsed coal-mining last year, the Green politician set out plans to expand solar and wind energy, including in Lutzerath’s gusty Rhineland. All over the world officials are raising renewables targets and setting aside huge sums to bankroll a build-out.

This complexity makes it difficult to discern whether the tumult in energy markets has aided or impeded the energy transition. To assess the overall picture, The Economist has looked at a range of factors, including fossil-fuel consumption, energy efficiency and renewables deployment. Our findings suggest that the crunch caused by the war in Ukraine may, in fact, have fast-tracked the green transition by an astonishing five to ten years.

Smoke signals

As the Battle of Lutzerath suggests, the main reason for alarm is that the world is burning more coal these days. Before the war, it seemed as if appetite for the fuel, having peaked in 2013, was in secular decline. Last year, however, consumption grew by 1.2%, surpassing 8bn tonnes for the first time in history. Sky-high gas prices have pushed utility firms in Europe and parts of Asia, notably Japan and South Korea, to use much more of the stuff. Politicians have prolonged the life of coal-fired plants, reopened closed ones and lifted production caps. This has led to a scramble for supply, one which has been exacerbated by Europe’s ban on Russian imports. In China and India production jumped by 8% and 11% respectively in 2022, pushing world output to a record high.

The International Energy Agency (iea), an official forecaster, predicts coal demand will remain high until 2025 (though it cautions that soothsaying is particularly hard in current market conditions). Europe will receive less gas from Russia, and global lng supply is likely to stay tight, meaning coal will remain the bloc’s fall-back option. India’s appetite will probably grow, adding to demand. But the rise will be tempered by an increase in the use of renewables—and beyond 2025 coal’s fortunes look dim. New lng projects in America, Qatar and elsewhere will kick in, providing relief to gas markets. At the same time, a wind and solar boom will shrink appetite for fossil fuels, not least in China. The iea expects the country to build renewable generation capacity capable of supplying 1,000 terawatt-hour by 2025, equivalent to the total power generation of Japan today.

Meanwhile, the world’s existing production capacity of both oil and gas is already close to being fully used. Russia cannot easily redirect gas exports; its oil rigs, lacking people and parts, may soon produce less than they do now. Although energy-hungry countries have been busy signing long-term deals to import lng, which will force them to import the fossil fuel for several more decades, volumes remain modest. Hydrocarbon firms are enjoying juicy profits, but investment in new projects is falling. Such spending remains well below levels of a decade ago, and a dollar of investment seems to go less far nowadays: capital expenditure per barrel of output, a measure of exploration and production costs, has risen by 30% since 2017. Sustained demand amid slowly rising, perhaps even falling, supply should keep prices of both high.

Lofty prices mean that consumers and firms have sought to reduce their reliance on fossil fuels. Last year the world economy became 2% less energy-intensive—measured by the amount of energy it uses to produce one unit of gdp—its fastest rate of improvement in a decade. Efforts to consume less are most apparent in Europe, which in recent months has been assisted by unusually mild temperatures. Together warm weather and greater energy efficiency mean the continent has used 6-8% less electricity this winter than in the previous one. All over the world, capital is being mobilised on a vast scale to make the economy more frugal. Last year governments, households and firms together spent $560bn on energy efficiency. This money mainly went on two technologies: electric vehicles and heat pumps. Sales of the former almost doubled in both 2021 and 2022.

But efficiency can only make so much difference. People are also looking to alternative sources of energy, especially in Europe. From December 2021 to October 2022 contract prices for the continent’s wind and solar photovoltaic projects were on average 77% below wholesale power prices. At €257 per megawatt-hour (mwh), the average price in Germany in December, a typical solar plant takes less than three years to become profitable, against 11 years at €50 per mwh, the average spot price between 2000 and 2022. Globally, installations of rooftop solar panels, which households and firms use to trim bills, rose by half last year. A record 128GW of onshore-wind projects also broke ground, marking a 35% increase from the year before.

Such indicators only cover a fraction of the activity that has taken place since the war, because selecting a site, obtaining permits and designing large wind or solar farms can take many years. A more representative—and even more encouraging—metric is the amount of money flowing to new projects. Last year global capital expenditure on wind and solar assets grew from $357bn to $490bn, surpassing investment in new and existing oil and gas wells for the first time. Rystad Energy, a consultancy, reckons investment will continue to rise over the next two years.

At the same time, the fuel squeeze has turbocharged clean-energy policy in the world’s biggest economies. America’s Inflation Reduction Act (ira) earmarks $369bn of subsidies for green tech; the European Commission has unveiled a “Net-Zero Industry Act”, which will provide at least €250bn ($270bn) to clean-tech companies, while also bringing forward the target for doubling the eu’s installed solar capacity to 2025, from 2030. National ambitions have been supersized, too. In July Germany raised its target for the renewable share in power generation by 2030 to 80%, from 65%. China’s 14th five-year plan for energy, released in June, for the first time sets a goal for the share of renewables in power generation (of 33% by 2025). The country’s provincial governments are also increasingly offering green incentives.

Much of the money will be spent inefficiently. The ira comes with a raft of “Made In America” stipulations. In response, the European Commission is planning to loosen state-aid rules. This industrial policy will compound an already existing problem: that of cost inflation. Russia’s war in Ukraine lifted the price of metals such as aluminium, copper and steel, all of which are crucial for cables, turbines and panels. Although some commodity prices are now falling, costs are being pushed up by higher interest rates—a particular issue for developers of solar and wind farms, which require more capital upfront than regular power plants. High freight and power costs, as well as staffing shortages, add to the bill. Namit Sharma of McKinsey, a consultancy, reckons that by 2030 the eu will have to quadruple the number of people developing, building and running the green plants required to meet its targets.

All this means that developers at the top of the green supply chain are not making much money. Several offshore-wind giants have recently announced that they will carry out huge write-downs on projects. In theory, developers could pass higher costs on to consumers by bidding for potential projects at higher prices. But in practice miserly new national rules and auction designs make doing so difficult. This winter Europe adopted a windfall tax on renewable-energy generators, and a cap on wholesale power prices, in effect placing a ceiling on returns. Germany’s new offshore-wind-tender system makes bidders compete over how much they are willing to pay to run projects, a system known as “negative bidding”. Never-ending permitting wrangles dilute returns even further.

Earth, wind and fire

In an alternative, less protectionist universe America’s and Europe’s vast spending packages would have an even bigger impact. But even in this fallen world, they are still pretty momentous—sufficient, forecasters consulted by The Economist estimate, to accelerate the energy transition by five to ten years. The investment surge and tighter targets should create an enormous amount of renewable-generation capacity. All told, the iea expects global renewable-energy capacity to rise by 2,400gw between 2022 and 2027, an amount equivalent to China’s entire installed power capacity today. That is almost 30% higher than the agency’s forecast in 2021, released before the war. Renewables are set to account for 90% of the increase in global generation capacity over the period.

As green power is turbocharged and fossil-fuel use sags, carbon-dioxide emissions look set to fall considerably faster than expected just 12 months ago. s&p Global, a data firm, thinks emissions from energy combustion will peak in 2027, at a level the world would still be producing in 2028 had the war not happened. Rystad estimates that those from electricity and heating generation alone could hit a ceiling as soon as this year. This is because the recent mad rush to secure fossil fuels is unlikely to last long or be big enough to counteract the green boom. For an illustration of this, return to Germany. The fate of Lutzerath was sealed by a compromise. The deal will see two coal plants that were to be shut in 2022 run until March 2024. In return, however, two bigger plants will be retired in 2030—eight years sooner than had been planned.