Air conditioning: an economic miracle

Mario Draghi, the former Jerome Powell of the European Union, has been tasked with writing a detailed report on economic competitiveness (or lack thereof) in Europe.

His findings are striking.

Here are some facts and figures that stood out:

On various criteria, a large GDP gap has opened up between the EU and the US, driven mainly by a more pronounced slowdown in productivity growth in Europe. European households have paid the price for lost living standards. On a per capita basis, real disposable income has grown nearly twice as much in the US as in the EU since 2000.

Europe is stuck in a static industrial structure, with few new companies rising to disrupt existing industries or develop new growth engines. Actually, there is no EU company with a market capitalization of more than €100 billion that was founded from scratch in the last fifty yearswhile all six US companies with a valuation of more than €1 trillion were created during this period.

The EU is entering the first period in its recent history where growth will not be supported by population growth. By 2040, the labor force is expected to decline by nearly 2 million workers each year.

EU companies still face electricity prices 2-3 times higher than in the US. The prices paid for natural gas are 4-5 times higher.

Draghi offers some solutions for closing the competitiveness gap by reducing barriers to innovation, increasing investment in certain areas, and establishing an educational curriculum that facilitates technological breakthroughs.

Here’s a solution that Draghi didn’t offer – more air conditioning.

The world is getting hotter.

Europe is the fastest warming continent, with average temperatures rising to twice the global average.

Check out this chart from Torsten Slok:

I knew AC wasn’t a big deal in Europe, but I didn’t realize only 10% of homes have it.

You might laugh at this suggestion, but there is evidence to show that air conditioning is one of the most important inventions of the last 100 years.

Singapore’s founding father, Lew Kuan Yew, credited air conditioning as one of the main factors that transformed a small island nation with few natural resources into one of the most prosperous countries in the world:

Air conditioning was the most important invention for us, perhaps one of the signal inventions of history. It changed the nature of civilization by making development in the tropics possible.

Without air conditioning you can only work in the cool hours of the early morning or at dusk. The first thing I did when I became prime minister was to install air conditioners in the buildings where the civil service worked. This was the key to public efficiency.

When air conditioning first became widespread in the United States in the 1950s and 1960s, one study found that federal employees saw their productivity increase by 24 percent when they moved into an office with AC.

Steven Johnson wrote a whole chapter in his book, How we got here nowabout how the advent of cold – ice, refrigeration and AC – changed the course of history.

There’s a reason many of the world’s greatest cities—London, Paris, New York, Tokyo—were created in temperate climates. But now growth is taking place in warmer areas. Johnson explains:

The fastest growing megacities are predominantly in tropical climates: Chennai, Bangkok, Manila, Jakarta, Karachi, Lagos, Dubai, Rio de Janeiro.

The ability to control temperature and humidity in office buildings, shops and the homes of the wealthier allowed these urban centers to attract an economic base that catapulted them to mega city status.

What we are witnessing is possibly the largest mass migration in human history, and the first to be triggered by a home appliance.

Air conditioning changed voting patterns in the United States, allowing more people to migrate south. In the coming years, it will likely save lives as certain areas of the planet get hotter.

I can’t imagine life without AC and I’m not sure how people managed in the pre-AC era.

The AC unit in my office building invariably goes out for a few weeks every summer. It makes my desk horribly uncomfortable to work in.

If temperatures continue to rise, air conditioning will likely be one of the most important appliances of the 21st century as well.

Michael and I talked about air conditioning and more in this week’s Animal Spirits video:



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Further reading:
The effect of air conditioning

Now here’s what I’ve been reading lately:

Books: