July 31, 2008
The world can (and must) innovate its way out of this slowdown
Response to "The world cannot grow its way out of this slowdown" by Kenneth Rogoff (Financial Times, 30 July 2008) in the Financial Time's Economists' Forum.
I agree with Ken Rogoff’s analysis (and Martin Wolf’s interpretation) of the global imbalances leading to the current crisis. One point I do not agree with is that high commodity prices are “prima facie evidence that the global economy is still growing too fast” and that “it will probably take a couple of years of sub-trend growth to rebalance commodity supply and demand at trend price levels (perhaps $75 per barrel in the case of oil, down from the current $124).”
High oil prices are not a sign that we have grown too fast, they are a sign that demand for oil has gone up. Yes, the two are closely related, but there’s a crucial degree of freedom in play: energy intensity.
High oil prices in the 1970s prompted a decrease in oil per unit of output, a trend that has continued to a lesser extent since then. It is no secret that climate change, one of the other major crises facing the world at the moment, will require us to make large strides in that direction. (McKinsey introduced the useful concept of “carbon productivity” and shows why it needs to – and, crucially, how it can – rise tenfold by 2050.)
Energy prices – and oil in particular – have risen so dramatically for a deep underlying reason, albeit one that’s possible to express in simple terms: demand has gone up, while the resources themselves are becoming ever scarcer.
The best answer to high oil prices is using less oil, not scaling back the use of capital and labour to bring oil prices down to “trend.”
Posted by Gernot Wagner on Thursday, July 31, 2008. 
