The revenge of the analog economy

The last few decades have seen the emergence of two rival economies: an older analog one built on the actual production of goods, and another that profits from financial transactions, images and customer surveillance. The contest between the two has been rather one-sided, with the “laptop economy” the big winner, particularly during the pandemic.

But while lockdowns made this one-sidedness clear, recent developments have been an unwelcome reminder that the pain suffered in the analog economy still matters. Whether through inflation, energy shortages or supply chain issues, we are getting an uncomfortable lesson in the enduring relevance of the material world.

Sadly, the needs of the analog economy aren’t taken seriously enough in Washington. It’s always been the case that differing economic interests pursue very different political and regulatory paths. This is particularly true on climate and energy issues. Although digital sectors have become more dependent on energy — emitting in 2018 close to 4 percent of the world’s greenhouse gases — the generally smaller, less capitalized analog companies such as those that produce chemicals, metals, cement and pulp and paper represent the world’s four leading consumers of energy.

Simply put, digital elites look at climate and energy not as a challenge but an opportunity to assert their preeminence. When green zealots look to confront the “climate catastrophe” and target traditional analog industries, including those in fossil fuels, for extinction, their efforts are generously funded by oligarchs like Jeff Bezos and Bill Gates and foundations spending the fortunes left by the likes of William Hewlett and David Packard.

Wall Street is more than happy to play along. Draconian climate measures allow the opportunity to feed merrily on highly subsidized “green” energy investments. Analog industries have not been so lucky; wherever the digital elites have their way, such as in California, traditional industries are stagnating or even declining.

Yet the still critical importance of the analog sectors has been reasserted through the pandemic, its accompanying supply-chain crisis, and now the Russian invasion of Ukraine. Putin has shown the digitally-dominated world that oil, gas, metals and food still really matter: it’s not much good to order toilet paper from Amazon if there’s none to be had anywhere. Information is useful, but not as useful as affordable gas and low-priced food.

Digital dreams — with promises of endless technical improvement and greater individual empowerment — simply cannot overcome analog realities. Nowhere is the disconnect between digital dreams and analog realities greater than in energy. Tech and Wall Street grandees have cheered on the trillions spent on green energy over the past twenty years, but the percentage of global power generated by fossil fuels has barely declined (87 to 84 percent between 2010 and 2019). The bulk of greenhouse gas reductions have come not from wind or solar but from substituting natural gas for coal. By 2050, according to recent estimates by the federal Energy Information Agency, fossil fuels will still account for 75 percent of all energy consumed globally.

The laptop industries suggest we need to get to “net zero” soon, but for most societies the costs could prove prohibitive, equivalent to about 7.5 percent of GDP from 2021 to 2050. “The increase,” notes McKinsey, “is approximately equivalent, in 2020, to half of global corporate profits, one-quarter of total tax revenue, 15 percent of gross fixed capital formation, and 7 percent of household spending.”

A pandemic and the Ukraine invasion have showed how fragile the economics actually are: today green energy projects and ESG funds are languishing even with massive subsidies and relentless public-relations campaigns, while oil companies enjoy bumper profits amid shortfalls.

Wealthy greens fantasize about a quick transition to renewable energy, but when Vladimir Putin shuts off the tap, even rich countries like Germany must prepare to shiver — the country’s largest landlord has announced a restriction on heating homes at night this winter. Brussels’s zealotry to eliminate the use of fossil fuels in Europe only created a disastrous dependence on Russia, and now the continent faces widespread energy rationing and power shortages.

Some insist that current energy shortages will spark greater commitment to “green” energy, but they seem more likely to spark a stunning return to analog realpolitik. Awakening from their green fantasies of economies powered by wind and solar, the EU recently relabeled nuclear and natural gas “green fuels.” Remarkably, as the threat of energy blackout mounted, the Germans even joined the Dutch and Austrians in burning more coal.

These contradictions between virtue-signaling and reality are particularly evident in the developing world. There, too, digital entertainment and financial wheeling and dealing have appeal, but far less than meeting basic needs. For these countries, practical concerns, such as access to Putin’s wheat, nitrates, oil and gas, overwhelm desire to address his perfidy. Fossil-fuel energy may be deplored by the digital elite, but these energy sources are coveted in places where over 3.5 billion people lack reliable access to electricity.

The anti-fossil-fuel policies pushed by the oligarchs and the World Bank are not widely popular in the developing world. India, neutral in the Ukrainian war, has no intention to reduce its emissions, warns Prime Minister Narendra Modi, till the 2070s. India also is loath to abandon coal while China, with emissions greater than the entire OECD, is building half the world’s new coal-based power plants.

In China, India and other developing countries the priority continues to be curbing poverty. The leaders of these nations only need to look at Sri Lanka, once a middle-income country, which embraced the energy policy and exclusions of chemical fertilizers pushed by nonprofits and woke investment bankers. The result has been not a green Utopia, but massive inflation that caused famine conditions and led to the seizure of the presidential palace by protesters who bathed in the oligarch’s swimming pool.

The political toll may be less dramatic in the West, but analog weakness, and the consequent high inflation, helped end the government of Boris Johnson in the UK, and led to the resignation of Mario Draghi in Italy and the fall of Estonia’s government. It also contributed to Emmanuel Macron losing his absolute majority in the French parliament.

Across Europe, analog peasants are rebelling against green elites. The first rebellion against government-mandated higher energy prices surfaced during the gilets jaunes protests in 2019 and swept through France. This year it’s Dutch farmers who are leading demonstrations against oligarchs who want them to reduce chemical fertilizers on their farmsteads. Recently they have been joined by their Spanish, Polish and Italian counterparts. Efforts to impose similar green policies may soon be pushed by government officials in the United States and Canada, reducing the output of two of the world’s dominant food producers.

President Biden, who owed his election in part to massive Wall Street and tech contributions, has been slow to abandon the green policies he had adopted since he took office. But even the dullest of wits will realize that climate is not voters’ primary concern. Gallup notes that environment ranks as a priority issue for only two percent of Americans, well below such things as inflation, the economy, government corruption or gas prices. Overall, barely a third of Americans, by one recent survey, support the Biden energy policies; the fact that electricity shortages are expected in much of the country won’t be much help in November either.

His policies are particularly reviled in the vast American countryside. The metropolitan economies inhabited by the financial and tech elites seek to hamstring greenhouse-gas-spewing industries concentrated in the hinterland while overrunning them with vast solar farms and windmills. There is widespread opposition to progressive attempts to cover 5.6 million acres — a space larger than Rhode Island and Massachusetts combined — with solar panels and wind turbines that would never get approved in or around their cherished urban centers.

Recently, facing the prospect of an inflation-driven midterm disaster, President Biden finally has begun to backpedal in ways that aid the analog economy. He now backs allowing drilling in the Gulf of Mexico and Alaska, has announced support for nuclear power and the greenlighting of a new LNG plant in Louisiana primarily to serve Europe.

Such a return to analog concerns is critical if the United States and the West are to have any hope of competing with China, India and the developing world. The current green agenda allows China to dominate production of wind turbines, solar panels and batteries, and soon electric vehicles. The digital-economy fixation on financial transactions, building better games and more effective customer surveillance, provides no answer to Beijing’s strategic analog dominance.

There is, in the United States at least, a belated but growing consensus to revive the analog economy. The recently passed $280 billion CHIPS Act, as well as recently passed legislation like the BuyAmerican.gov Act and the Make PPE in America Act, as well as recent legislation banning the importation of Chinese products made with forced labor in Xinjiang, demonstrate a new resolve, even if tenaciously attacked by free-market fundamentalists.

This lurch toward reason will still face a green-oriented regulatory apparatus that could slow construction of new plants and impose rules that make it increasingly difficult to ship products efficiently. Then there’s the lack of skilled labor. President Biden can prattle on about factory workers “learning to code” but builders, industrial, defense and energy companies face severe skills shortages. Due largely to an aging workforce, as many as 600,000 new manufacturing jobs this decade will go unfilled. The shortage of welders alone could grow to 400,000 by 2024.

Some states, like Ohio, Kentucky and Tennessee, have begun putting greater emphasis on training workers for the realities of the marketplace. These offer far better prospects to non-college graduates than taking a job at Target or in an Amazon warehouse. In general, manufacturing jobs pay over 20 percent more than service or retail jobs, something particularly critical for people without elite degrees.

University education also needs to change. Right now, schools are producing far too few electrical and mechanical engineers capable of applying themselves to making things that actually make life better. Indeed, over the past fifty years US computer science enrollment has soared while electrical engineering programs, which teach people to build chips among other things, have fallen dramatically.

This places the analog economy at great disadvantage. Only 5 percent of American college students major in engineering, compared with 33 percent in China; as of 2016, China graduated 4.7 million STEM students versus 568,000 in the United States, as well as six times as many students with engineering and computer science bachelor’s degrees. “In the US, you could have a meeting of tooling engineers and I’m not sure we could fill the room. In China, you could fill multiple football fields,” Apple CEO Tim Cook has observed, revealing one rationale for keeping virtually all the company’s production in the Middle Kingdom.

With China, allied with its vile Russian sidekick, dominating the analog functions, the West faces permanent decrepitude, even if enlivened by life in cyberspace. Only by urgently merging digital talents with the needs of the analog economy to create more advanced products can the West hope to overcome the most pressing geopolitical challenge seen for many decades.

This article was originally published in The Spectator’s September 2022 World edition.