State of the Union
Monday 28 April 2025
The United States has not increased its total energy consumption in nearly 25 years. Of course, energy consumption per capita has fallen during this time, as the nation’s population grew by 21%, from 280 to 340 million. But total energy consumption, measured in quadrillion btu (quads), has averaged around 95 per year with most years coming within a percentage point or two of that figure. Last year for example? 94.2 quads. How about 10 years ago, in 2014? 95.4 quads. So, the US is a very good energy saver, applying efficiency gains across sectors over time, and reaping the rewards: growing GDP without growing energy inputs.
One observation worth making here is that much of this progress occurs through the normal course of technological advancement, and the regulatory state that pushes industry to embed efficiency gains into products. Computers, toasters, lights, cars, power tools, buildings, transportation. Policy and technology working together, to bring down the overall volume of energy required to produce GDP? Shocking! And here we thought the regulatory state was in the way of profits! Question: If over the course of 25 years your population increases 21%, and your GDP nearly triples, while your energy inputs stay flat, would you not agree your return on energy invested is stellar?
The US trade position is excellent and requires no fixing. In the current discourse, China is cast as a predatory nation that overproduces and exists only to dump goods on the rest of the world, and the US is the poor and unlucky buyer of last resort, forced to hoover up everyone else’s goods. What a bunch of nonsense. The US is not only the world’s second largest manufacturer (second to China), but exports goods and services that are valued at a very robust 12% of its GDP. If China is a toxic state-supported overproducer that exports goods valued at 20% of its own GDP, how is that radically different from the US position? Why isn’t the US accused of dumping cheap oil and gas, for example, on the rest of the world?
The bulk of misunderstanding around the US trade position is little more than nostalgia, and the very wrong view that the jobs we shipped overseas the past half century can somehow “come back.” Well, one of the reasons those jobs can’t come back is that they no longer exist! The jobs that exited the US and other western nations have been transformed in foreign countries by robotics, automation, software, and other efficiency gains. The US no longer makes shoes or clothing at scale but guess what—making shoes and clothing are also challenging to make in low labor cost domains too. These are not high value, high margin goods which is why those countries that produce them have also invested in more efficient, modern manufacturing methods. When China makes heat pumps, solar panels, mobile phones, wind turbines, and cars—do people imagine these are all being produced in 1930’s style sweatshops? These are all being manufactured with the latest production technology.
The US can no more return to being a manufacturing-forward economy, than it can return to being an agrarian-forward economy. Economic development has an arc. It goes in one direction. The US and the West are traveling through this same arc, having gone through agrarian, and then industrial revolutions. Today, while the West still retains agriculture and manufacturing, the primary jobs are found in design, engineering and technology innovation, software, and services—and a great deal of those services are defined by intelligence, knowledge, and analysis. Just what you’d expect from wealthy populations that have made higher education the norm.
Newsflash: China is fated to travel the same arc, so we don’t need Treasury Secretary Bessent to give a speech exhorting China to achieve better balance in its economy. China is already on track to do just that. China passed the Lewis Turning Point in 2010—the moment when all available surplus labor working in agriculture moves out of rural areas and goes to work in manufacturing in the cities. You can find a related theme in the Kuznets Curve, another way to think about economic development. Nations become wealthy during the industrial phase, which leads them to turn to education, skill upgrading, further modernization, and better attention to preserving the environment. China can no more prevent itself from going forward in this regard, than the US can induce itself to go backward.
The US runs an economy that produces $28 trillion of GDP. We get paid to invent things, improve things, design things which are both manufactured here (often with parts imported) and abroad. And we get paid alot for those services, far more than one gets paid for making clothes, shoes, or heat pumps. The US trade deficit last year was around $900 billion. So, if you think a trade deficit at less than 3% of total GDP is a problem, you need to read some books. And if you think a simple trade deficit with a poor country like Madagascar is a problem, from whom we import nickel and vanilla, you need to have your head examined.
California has now surpassed Japan to become the world’s fourth largest economy. If we examine the components of California’s $4.1 trillion GDP, we find that the Golden State is the quintessential modern economy that’s almost solely focused on services, finance, technology, design, and knowledge work. This is also why California’s emissions from energy consumption haven’t grown in 20 years. The workers of California are paid extremely well as they serve global markets largely through digital mediums, and they use the remuneration from those jobs to buy goods which are largely manufactured elsewhere. If you let the arc of economic development run freely, this is where you land: humans aspire to do intellectual work, and to be paid handsomely for it. They do not aspire to work in factories—and to be paid poorly for it. People still pick avocados in California, and the state’s agricultural sector is still important, still serves a need. But agriculture and manufacturing are not profit centers for the state. Software sales, the next Star Wars installment, technology design, money management, and consulting are the high value, high profit activities that have taken California to its current position. More to the point, this is also how California surpassed Japan in GDP, because Japan still retains a massive industrial base. While this retention of a vast industrial base works for Japan, it is not the route to fast growth. California grew by a blistering 6% last year, faster than the US itself, or China, or Germany. Japan grew by just 0.6% last year.
Energy transition meanwhile is a whole lot easier if many of the industries in your domain involve making digital copies of the same software package, rather than making physical copies of lawnmowers, weed-wackers, and hedge trimmers. Just to say: Cold Eye Earth itself is a small digital business, also based on the West Coast, and which is able to deliver as many copies at zero marginal cost to subscribers. Your correspondent then takes those earnings and buys things manufactured outside the country: cycling gloves, cycling tires and tubes, cycling clothes, for example. The economy of Portland, Oregon would not be improved by making a doomed attempt to manufacture bike kit here in the city. Just not enough profit, and therefore not enough eventual purchasing power from those profits. Far better to be a digital business (of which there are many here) and use those higher profit margins to live in a land of natural beauty, great food, and a clean environment.
Some important California energy facts:
• Per capita energy use is nearly at rock bottom, among all US States. Only Rhode Island and New York consume less energy per person.
• Gasoline consumption has finally entered decline, having never recovered from the 2020 pandemic.
• Total energy consumption is now lower than it was 35 years ago, in 1990. California energy consumption peaked in 2007, and as of 2022 was down 13% from that high.
• Combined wind and solar now provide a truly extraordinary 38.8% of electricity sales.
These energy facts are compatible with a post-industrial economy. But they are not compatible with a manufacturing-forward economy, like Japan. California is of course a sub-national economy within the US, but more importantly it’s at the tip of the spear of OECD economies, the leading-edge economy of the West. These energy related achievements are possible only because steel, lumber, consumer goods, cars, construction equipment, trucks, buses, trains, and other machinery and engineered products are created elsewhere, and do not show up on California’s energy ledger. So from a trade and human development view, we are lucky to have created California. But let’s also not delude ourselves into thinking the Golden State represents a reduced call upon natural resources, or, that through its ever increasing purchasing power it doesn’t constantly help drive demand for global goods.
The price level for everything is higher in the West, because of its wealth. You can understand the impulse to bring prices down, but historically the only path to keeping prices under control has been trade, innovation, and the advances of efficiency offered by technology. Sure, nobody is pleased that a simple ranch house in Silicon Valley goes for $2 million, but there aren’t that many places on earth that offer such a large volume of high-salaried jobs.
One avenue that feels less explored here in the West is the offering of pared down consumer products that function well, but are stripped of their luxury. You may have seen recently, for example, the prototype of a simple and affordable EV pickup truck from a Jeff Bezos funded startup called SLATE. The kids over at the Verge composed the perfect title for their coverage: The $20,000 American-made electric pickup with no paint, no stereo, and no touchscreen. With a range of 150 miles, this pickup would be perfect for urban settings. Remember, the majority of car trips in the US are somewhere in the 5-15 mile range.
The first 100 days of the Trump administration sum to damage and destruction across a wide swath of the American economy. In particular, the country’s future has been hurt, possibly quite badly. It is now routine for Canadians to regard the US as a former friend. The cancellations of myriad government programs—developed over a half century to stabilize the world through foreign aid—have hurt out international standing. And we’ve even seen the long shadow of doubt actually come to rest on the nation’s financial assets. While the US Dollar and US sovereign bonds would have to suffer far more sustained pressure before losing their status, it is notable how much of their status is not just a function of plumbing and mechanics, but human perception. And outside perception of the US is not good right now. Understandably.
This brings us to the question of whether the US economy is going to enter recession; and in addition, whether that recession will be accompanied by lower, deflation-driven prices, or higher, tariff-driven prices. We know that on a factual level, tariff-boosting prices are on the way, along with some shortages too. But on a dynamic level, we have to consider the interplay between higher prices, and job losses—which are surely coming now in trucking, and other discretionary consumer sectors. (For example, among the reports now flowing about empty container ships, tariff snarls, and looming shortages, we are also getting data showing tourism to the US is way down, and that’s showing up especially in places like Las Vegas). So, we have to be careful about assuming that tariff-driven higher prices are sustainable, if at the same time the US economy starts suffering job losses.
As a reminder, the US has experienced three bouts of deflation the past 25 years, but only one bout of inflation—and that came as a result of an exogenous shock, the pandemic. The deflationary episodes however emanated from the economy itself. This pattern aligns well with overall observations made by economists that despite inflation in some sectors, globalization has for decades now been a force for deflation, rather than inflation. It’s also important to point out that the three bouts of deflation the US has experienced (in the periods starting with the years 1999, 2008, and 2020) all began with a severe stock market decline. That makes a ton of sense! When the market declines, purchasing power, wealth, and consumer psychology decline. And here in 2025, we have also experienced a severe market decline. Some of that decline has been recovered, at the index level, but individual stocks have lost much more. This is exactly how previous recessions began. And further declines in the market during recession only serves to deepen the deflationary forces.
The problem right now is that all the tariffs need to go away immediately. And, doing so only gets us back to conditions that obtained coming into the year. Meanwhile, the cost cutting efforts of DOGE will likely wind up costing the US economy money, because this attack on state capacity is going to ripple through many economically supportive programs from every conceivable federal agency. One example: DOGE has dismantled various programs that make it less likely, not more likely, that the US builds more nuclear power.
So, it may be of some help that in the view of Cold Eye Earth, any inflationary price shocks will be temporary, and the economy will blow right past them into recession. Once that happens the administration, if it hasn’t already, will likely abandon its doomed tariff plans and will then get busy doing what administration do: fighting the recession with interest rate cuts, and stimulus.
—Gregor Macdonald