Sunday, March 25, 2012

Home Solar Panels: A New Safety Net and More

I'd like to expand on my last post about home solar panels (which I think has important points I don't hear being made). There's something very different and important about home solar panels compared to the typical advancement that increases GDP.

Long ago I came to the realization that not all $10 trillions in GDP are the same. You could have two countries (or separate worlds): One has $10 trillion in GDP, but $7 trillion in yachts, mansions, super-luxury resorts and restaurants, etc., vast income inequality, and $0.5 trillion in high return investments like basic science, education, and smart infrastructure. The other has the same $10 trillion in GDP, but is far less unequal, and has ten times the high return investment, $5 trillion.

That second country (or planet, to preclude the issue of free riding on technological advance), even though it has the same $10 trillion in GDP, could have much higher total societal utils today, and at the same time, in 50 years will be far wealthier – ridiculously wealthier a century later. After all, $5,000 meals and 50,000 square foot homes don't do much to advance science and productivity. And even the most extreme libertarian economists haven't yet had the gall to claim that marginal utility doesn't diminish greatly with increased consumption. And don't even get me started on positional externalities.

Remember, economists love to talk about Pareto optimality, but when you draw your Edgeworth Box in micro, with your curvy line containing all of the Pareto Optimal allocations, some of them have vastly more total societal utils than others. And it really shows the right wing bias in economics that the focus is almost exclusively on Pareto efficiency as opposed to maximizing total societal utils efficiency.

So not all $10 trillions in GDP are the same, and not all $X increases in GDP are the same. Take home solar panels, suppose that in 20 years 100 million American homes will have solar panels (not to mention solar walls and windows) that generate an average of $5,000/year in power. That's $500 billion more in GDP (Let's assume the panels are already installed, and they last 50+ years with little maintenance; see my last post for details and cites). But as we've painfully seen, an increase in GDP of a half-trillion can go almost all to the rich, or super rich, and do very little to add to total societal utils.

But there's more than that; In finance were always talking about states of the world, state-dependent utility, and how investments that pay off in bad states are much more valuable than those that pay off in good ones, even if they have identical expected payoffs. So even an extra half-trillion that went to the middle class and poor would still be a lot less increasing of expected utils if it was: in good times you get a nice windfall on top, and in bad times you get little or nothing.

Instead, what would really increase expected utility for the middle class and poor is an expected half trillion that paid off just as well in bad times, when you really need it (or really really need it), as in good times. In other words, a safety net. And that's just what solar panels are, a new and important safety net for the middle class and poor. If you lose your job, and have to support a family on very meager unemployment, it really helps if you have solar panels (and maybe walls and windows too) that make it so you have no utilities bill, and with potential increases in efficiency over the next 20-30 years -- both in the panels and the things they power -- no fuel bill (the panels power your electric cars), and no property taxes and insurance (with those potentially paid for by selling solar power back to the grid).

If Obamacare survives for try-and-see to decimate the disinformation (and outright lies), this gives people the opportunity, with a paid off home (an important focus in good personal finance), to always have a home, health care, utilities, and fuel, even in the worst of times. So that they can get by on just unemployment (and maybe food stamps and other aid), without financial ruin for their families, and maybe foreclosure, or worse -- shamefully, homeless families aren't that rare today. This would be a fantastic safety net to have commonly available with how profoundly risky our country has become over the last generation (see Yale political scientist Jacob Hacker's 2007 book The Great Risk Shift for details).

So far I've talked about how home solar panels represent a potentially large increase in GDP that (1) is for the 99%, not just the 1%, or 0.1% (or 0.01%), and (2) is a safety net that's there when you need it most, in, as finance academics would say, bad states. Next I'd like to add, (3) solar panels are (more or less) a non-positional good.

Suppose $5,000 per year was added to the GDP for every household, but it was in car spending. So every five years families spent $25,000 extra on their cars. So you go from a Honda to an Acura. Well, I think the vast majority of readers will see (or admit) that you get a lot less utility out of an Acura if everyone has an Acura, and it's just a normal car now. And in fact, if everyone is getting Acuras, or otherwise spending $25,000 extra on their cars, and you aren't, then you're going to be the poor guy with the cheap-ass car. And unless you’re a freshwater economist with a strong libertarian agenda, you'll probably admit, at least to yourself, that this will cause you substantial disutility (at least to your love life -- but that's positional too).

So positional externalities are very real and very large (for the formal evidence see here). They're an important reason why countries much poorer than the US have as high, or higher, happiness in surveys and studies. When everyone buys a fancier car a lot of the utiltiy goes up in the smoke of positional externalities, as the car is no longer fancy. Same for clothes, homes, and so much else that we buy. But solar panels, and the electricity and fuel they generate, aren't very positional, especially once the novelty wares off. So the utiltiy you get from them doesn't go down by much when you go from being one of the only guys in the neighborhood with them, to everyone has them. Bottom line: $5,000 added to everyone in a non-positional good will add much more total societal utils than $5,000 added to everyone in positional goods. 

And I'll add a (4) here. Home solar panels create profound positive externalites in that they help insure against catastrophic global warming and starve funds from some of the worst authoritarian and terrorist sponsoring regimes in the world. And without petro-money, these regimes are in serious trouble, and face great pressure to change for the better, or starve and be overthrown. In fact, there's a strong correlation between reform (and backsliding) in these countries and the price of oil.

So home solar panels really are different and rare in how they add to GDP: (1) They’re for the 99%, not just the 1% (or a lot less), (2) They're an important new safety net, (3) They're non-positional, and (4) They have profound positive externalites.