There Are Costs To Climate Virtue

Inflation is always and ever a monetary phenomenon. Every bout of inflation, wherever and whenever it has occurred, is the result of money creation in excess of the real economy’s ability to respond. That is the case this time. The fault for the nation’s current inflation woes lies with the Federal Reserve (Fed). It was altogether too willing to accommodate reckless spending by the federal government. But if past monetary mismanagement is now, as always, the basic cause of inflation, there can be other contributors. One that deserves special attention is the fallout from ill-conceived green initiatives.

The monetary root of American’s current inflation is clear. The Fed seemed fully on board as Washington orchestrated a surge in spending, increasing outlays at an rate unsustainable rate of almost 20% a year between 2019 and 2022. Budget deficits ballooned, approaching 15% of the nation’s gross domestic product (GDP) and averaging some 11% in 2020, 2021, and 2022. The Fed supported it all, accelerating the flow of new money into the economy from the 5.4% a year averaged in the prior five years to a 20% yearly rate between February 2020 and February 2022.

Because the real economic output could not possibly keep up with the sudden demands made by government spending and more generally by the Fed’s new money creation, inflationary pressure became inevitable. That is the base line of today’s situation. But because green initiatives held back the economy’s ability to respond, inflationary pressures became that much more severe. This particular aspect of the inflation problem arose less because the United States and other developed countries pursued green initiatives and more because the actions taken exhibited little foresight and or even a recognition of practicalities.

The biggest green mistake was an unrealistic expectation of how fast alternative energy sources could substitute for fossil fuels in meeting the economy’s general energy needs. In the United States, for instance, President Biden on taking office in January 2021 immediately cancelled the Keystone pipeline to carry Canadian oil into this country. His administration further restricted exploration for fossil fuels or drilling where it had the authority to do so. Strong anti-fossil fuel rhetoric further discouraged private investment in these resources. Similar talk and policies had been in place for even longer in Europe. These actions had profound effects. Investments in fossil fuel development and transmission fell worldwide. By the end 2021 the amount of money so dedicated was already 25% below 2019 levels.

At the same time, green sources failed to make up for this loss of fossil-fuel based energy. Indeed, spending on green energy sources hardly rose at all. This difference is at least as significant as the loss of Russian oil due to the war in Ukraine. It is then little wonder that world economies faced energy shortages and would have even in the absence of that war. The shortage made it that much more difficult for economies to respond to the demands imposed by increased government spending and the flood of money provided by the Fed. The effect is clear in how energy inflation has led the general price acceleration of this time. To be sure, month-to-month measures have varied, but the underlying problem shows in how the energy component of the U.S. consumer price index (CPI) rose 18% a year on average from December 2020 to last December, far faster than the 6.1% annual gain in the overall index.

A shortsighted emphasis placed on electric vehicles (EVs) and batteries compounded the green inflation effect. While governments and advocates pressed this emphasis, economies failed make commensurate developments in mining the metals crucial to the construction of these products – cobalt, copper, nickel, graphite, and manganese. With these supplies constrained the emphasis on EVs and batteries forced a huge jump in their prices, adding significantly to the rise first in producer prices and then consumer prices. The impact is clear in how the weight of these metals in the overall cost of a lithium-ion battery has risen from some 50% in 2017 to almost 70% in 2022.

No one could rightly blame inflation on the green agenda. As already indicated, inflation is fundamentally a monetary phenomenon. Nor could anyone easily claim that the green agenda is inherently inflationary. Rather, an additional inflation pressure has developed from poorly thought-out policies and attempts to move faster than is practical. These, more than the green agenda itself, have made the recent inflation more severe than it otherwise would have been. Political rhetoric should follow thought and perhaps action, too. In this case, it led or rather substituted for both action and thought.