Economic growth is the increase in our measured ability to alter our environment to suit our needs and tastes. We do this using tools, but it is energy that does the work. Without energy even the most sophisticated tools are useless — witness the 2003 blackout in Ontario and the northeastern United States. And, of course, humans cannot live without food energy.

Some observers blame lower growth on a slowdown in the rate of innovation, or believe our new tools are not as productive as those we invented in the past. But while these are interesting questions, I want to focus instead on two other interconnected issues: high energy prices and income inequality.

While the idea may shock some — Western Canadians in particular, whose prosperity rises with the price of oil — economic growth is best served by cheap and abundant energy. The fact is that our current problems of slow economic growth in Western Europe and North America have been precipitated by spiking and expensive fossil energy prices, particularly for oil, which so dominates the transportation sector. This happened first in the 1970s and early 1980s and then again in the last decade, when spiking oil and natural gas prices helped to prick the subprime mortgage bubble.

purchase img1
Photo: iStock

Accordingly, technological change in the energy sector itself — specifically hydraulic fracturing of shale formations and the bonanza of natural gas and oil that it has unlocked —

is hugely positive for North American economic growth. Cheaper energy emanating from shale formations would do far more to restore real growth than would a relentless and ultimately very dangerous competitive expansion of the money supply in some nations. The substitution of natural gas for oil in the transportation market is particularly beneficial. If real economic growth is our objective, then we should focus on how to bring down the real cost of energy even more.

Income inequality is a related problem. It, too, can be tracked historically to spiking energy prices, and also the rise of a low-cost energy regime (based on coal) in Asia. Paradoxically, income inequality is deadly for economic growth, because while it increases savings — the rich save more — the vast productivity of market capitalism must be met with a vast consumption. Someone has to buy the potential output, otherwise the new tools and technologies will not be forthcoming. Too much income inequality means that money just sits in idle cash balances. That fundamental truth shouldn’t surprise us: it was the enduring lesson of the Great Depression.

In the face of no increase and even a decline in the real wages of most people, consumption can only grow at the cost of taking on ever more debt. Increasing income inequality and the related growth of private and public debt consign us to a highly vulnerable trek through a low-growth swamp. Then — to reiterate the first point above — future spikes in energy prices will sink us in that swamp. 

Our politicians have made far too many ”end-of-life” promises for pensions and health care that will only be kept if we have continued economic growth. It is to deliver on these promises that we will need to bring down the cost of energy. And while we could also invent machines that conserve energy, the energy the new machines displace had best not be the energy supplied by humans. Yet that is what has been happening in the past decade or so: labour-displacing technological change has aggravated the immediate problem of income inequality and fed the vicious cycle described above.

So, as unlikely as they may seem to some, the two policies to which we need to harness our ambitions for growth are simply these: lower energy costs and a more equitable distribution of spending power.