The National Post is Canada’s second largest national paper.
Philip Cross is the former chief economic analyst at Statistics Canada.
Jeff Rubin forgets that knowledge, not cheap oil, brings growth
Jeff Rubin is the kind of guy I want to like. He made a remark in 2005 about sheiks and mullahs controlling oil supplies that provoked his handlers at CIBC, where he was chief economist for 20 years, to send him on a course to heighten his sensitivity and political correctness. If my former employers at Statistics Canada had been nearly as skittish, I could have spent much of my 36 years there taking courses. Anyway, the course apparently had its desired effect on Rubin, as his new book on The End of Growth is as politically correct as it gets when it comes to decrying our addiction to autos and suburbs, our indifference to climate change, and ultimately our grubby materialism.
This book is an extension of his previous work, in which he predicted high oil prices were here to stay, and would fundamentally alter how and where we live and work. In this book, he extends this thesis to claim that permanently high oil prices will permanently cripple economic growth. The book notes that this may not be all bad, since the end of growth would reduce greenhouse gas emissions, although I think for most people that would not take the sting out of being unemployed. We are told the end of growth may even be good, since some studies supposedly have found happiness and incomes are not closely linked. Whenever I hear that argument, I recall the saying, “People who don’t think money can buy happiness don’t know where to shop.”
For an economist, Rubin displays a distressing lack of knowledge of how economics works, something surprisingly common in the profession. He repeatedly says the way to discourage energy consumption is to raise its price, which would be true if price was the only relevant variable. But look at the data on gasoline consumption by Canadians. Even as the price of filling up the tank rose over the last decade to record levels, Canadians kept buying more gasoline. Why? Because they could afford it, partly because the plunging cost of heating homes with natural gas capped the total energy bill to households and mostly because incomes rose.
This income effect, as economists call it, also explains why global oil consumption has risen steadily over the last decade. China, India and other rapidly developing countries can afford higher oil prices, which they regard as a small price to pay for their rapid economic growth. Indeed, it is this very acceleration in oil consumption that has sustained higher oil prices. While supply has risen, notably with the expansion of Canada’s oil sands, it has struggled to keep up with demand. Energy consumption fell only in countries like the U.S. at the worst of their recessions, because the impact of shrinking jobs and incomes reinforced, rather than offset, the impact of higher prices.
For the rest of this column, please go to the National Post website: http://opinion.financialpost.com/2012/05/10/the-end-of-thought/