One economist's answer to data center anxiety

Adrian Ma (0:01)

NPR.

Ricky Mulvey (0:06)

This is The Indicator from Planet Money, I'm Ricky Mulvey.

Adrian Ma (0:09)

And I'm Adrian Ma. It can feel rare these days to find a hot button political issue that unites Americans across the ideological spectrum. But AI data centers might be it.

Ricky Mulvey (0:20)

AI data centers, they're big and noisy and they guzzle energy. And in some cities around the country, they're putting a strain on local power grids. No wonder, in a recent Pew survey, 50% of Americans said they think data centers will be mostly bad for home energy bills.

Adrian Ma (0:37)

Yeah, and at a time when millions of Americans are seeing rising costs for utilities and a whole lot more, this is just one more thing for them to worry about.

Ricky Mulvey (0:45)

But today on the show, our guest argues that this isn't a reason to panic. When we come back, economist Julia Cartwright brings us a few examples from history to argue why the current boom in data centers doesn't mean we're doomed to high electricity prices.

Adrian Ma (1:09)

In 1980, the federal government released a report with a very boring name, the Global 2000 Report to the President. But the contents of this report was anything but boring.

Julia Cartwright (1:19)

They said, hey, we do not have the capacity or resource abundance to meet the demands of particularly electricity in the future.

Ricky Mulvey (1:29)

Julia Cartwright is a senior research fellow at the American Institute for Economic Research, a think tank that advocates for free markets and limited government.

Julia Cartwright (1:37)

So the report says, we anticipate that the real price of energy is going to rise about 150%. Now, if you think about the consequences of that, if the price of energy goes up, this means the price of everything is going up, because energy is such a valuable input into any type of production.

Adrian Ma (1:56)

The report's authors saw oil prices rising, fossil fuels becoming scarce, and a rapidly growing population. In the end, they said consumers will pay the price for this growing scarcity.

Ricky Mulvey (2:07)

This conclusion seems so dire, Julia says that the media nicknamed this document, dun dun dun, the doomsday report. But by the turn of the century, Julia says, the doomsday predictions didn't pan out.

Julia Cartwright (2:20)

What actually happens is that the real price of electricity did not increase by 150 percent. It actually decreased more than 25 percent in that 25 years. This report, not only was it wrong in magnitude, it was wrong in the direction.

Adrian Ma (2:39)

So what happened?

Well, basically, the report assumed that the energy scarcity of the time would continue. It underestimated how human behavior and technology would adjust to high energy prices. Things like fuel-efficient cars or new ways of oil and gas drilling that would eventually lead the US to become the world's largest oil producer.

Julia Cartwright (2:58)

So this is, I think, a very exciting and a very important example to illustrate the power of American ingenuity.

Ricky Mulvey (3:09)

Julia wrote this in a recent op-ed for The Washington Post. This ingenuity, she thinks, is being undersold when it comes to the concerns about data centers and energy prices.

Adrian Ma (3:18)

Just to put a little bit of context here, I read one analysis that electricity usage from data centers will double or triple in the next few years, and half of Americans think data centers will result in higher home energy bills. And the rationale here, classic supply and demand, right? Data centers have huge power requirements, there's limited energy, and that is going to put pressure on prices to rise.

You say this fear rests on the same broken assumptions as the Doomsday Report. What do you mean by that?

Julia Cartwright (3:53)

What I mean by this is that higher prices indicate to entrepreneurs to go into a specific type of industry. If a price is rising, this signals to somebody with an entrepreneurial bone in their body saying, I can actually solve this problem. And this is what I mean by the price.

Adrian Ma (4:16)

Because there's money to be made here.

Julia Cartwright (4:17)

Exactly. So I'll just give you a little example. Whale oil used to provide oil for lamps all around the nation, right? How many whales are there in the world, right? There is a limited number of whales, right?

Right. And so what happens, right? That price is going up, that price is going up. Boom, kerosene comes in and makes basically whale oil obsolete.

Adrian Ma (4:43)

You're saying somebody was like, oh, whale oil is too expensive. What else can we burn?