Issues Now!

The United States Needs a Cohesive Industrial Policy

Steven Capozzola — Tue, 26 May 2009 17:02:54 -0700

Clyde Prestowitz is absolutely right that the United States needs a cohesive, forward-looking national industrial policy. And furthermore, he is correct in pointing out the “policies of China, Japan, Korea and others to undervalue their currencies.” Such mercantilistic trade practices are an excellent reminder that other major economic powers already maintain their own inwardly focused industrial policy.

Beyond GM: Our Bankrupt Industrial Policy

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This becomes particularly relevant when discussing the U.S. auto sector. In fact, more than 7.2 million U.S. jobs are dependent on a healthy U.S. auto parts supply chain.

What’s needed to strengthen the automotive supply chain and revitalize American manufacturing are policies that get America back to work.

Our organization, the Alliance for American Manufacturing (AAM) recently undertook an 11-state, 34-city bus tour that culminated in a teach-in on Capitol Hill. As we took our message across the country, we found strong support for a more reciprocal trade policy and for a restructured U.S. auto industry that doesn’t simply rely on the offshoring of more production in order to meet a shrinking bottom line. Simply put, tax dollars should not be used toward the outsourcing of more U.S. production.

We must revise our approach to trade policy, including strong enforcement of existing U.S. trade law. We also need to reform our healthcare system and invest in research and innovation in order to restore American manufacturing. Anything less is simply short-sighted.

An Industrial Renaissance Policy

Clyde Prestowitz — Tue, 26 May 2009 13:39:11 -0700

For years Larry Summers and I had a running argument over industrial policy.

As a mainstream economist in good standing, he, of course argued that governments can't pick winners and losers and that even if it could, special interests would inevitably capture the process and distort it. Under no circumstances, he emphasized, should America have an industrial policy.

My view was that as an industrial nation we would inevitably make decisions that involved picking winners and losers. Breaking up AT&T, standards setting by the FCC or FDA, R&D spending by N.I.H, etc. are all examples of such decisions. The only question was and is whether those decisions would be guided by some overall productivity optimizing criteria or by chance or, more likely, the very special interests Larry feared.

Beyond GM: Our Bankrupt Industrial Policy

Well, now that the U.S. government owns the banks, insurance, and auto companies with Larry as the chief winner and loser picker, that whole discussion has become moot.

But now that we are picking winners and losers, the question of how we are doing it has become very important. So far, the answer is "not very well."

While pouring big bucks into GM and Chrysler to keep them alive, the administration has largely ignored one of the biggest factors making them uncompetitive - the exchange rate. The strong dollar and the policies of China, Japan, Korea and others to undervalue their currencies tend to undercut the rescue effort. Industrial policy will only work if it is a complete policy, and a complete policy in this case must be one that deals with the exchange rate question.

More important, however, is the question not only of saving Detroit, but more broadly, of revitalizing the whole U.S. productive base. To avoid a repeat of the experience of the past two years, we must come out of this crisis with a vastly reduced trade deficit. But to do that, we must begin to produce more of what we consume, which is, after all, what Obama has been talking about when he discusses creating green and other kinds of jobs. But the problem is that right now, the greener we get, the more we import because we don't make most of the stuff we would need to install.

Take batteries for instance. Electric cars, lawn mowers, and other devices need batteries. With a few small exceptions, U.S. companies don't make batteries. They also don't make windmill blades and turbines. They also don't make solar cells or concentrators.

Even if GM and Chrysler survive in some reduced form, a lot of workers are going to lose their jobs as a lot of factories are shut down. A sensible industrial policy would be looking at ways to replace those auto factories with battery, windmill, and solar cell plants. The new Commerce Secretary ought to be talking to Korean battery makers, Danish windmill producers, and Japanese photovoltaic cell manufacturers about why they should be investing in the U.S. and why they should be doing joint ventures with American companies. He should have some financial investment incentives to use to entice these companies to U.S. shores.

At the same time he should be creating government-industry consortia to promote development of these technologies in the United States. Use the Sematech consortium that was set up in the late 1980s to meet Japanese competition in semiconductors as a model. He should also be working with State governors to see to it that new factories are located so as to replace old ones and to take advantage of concentrations of worker skills.

In short, America needs a real industrial renaissance policy, not just a save GM and Chrysler policy.

Political Realists Rejoice, Climate Science Realists Demand More

Joseph Romm — Fri, 22 May 2009 11:44:18 -0700

Every journey of a 1000 miles begins with a single step — including stopping human-caused global warming at “safe levels,” as close as possible to 2°C. Many people have asked me how I can reconcile my climate science realism, which demands far stronger action than the Waxman-Markey bill requires, and my climate politics realism, which has led me to strongly advocate passage of this flawed bill.

The short answer is that Waxman-Markey is the only game in town. If it fails, I see no chance whatsoever of stabilizing anywhere near 350 to 450 ppm since serious U.S. action would certainly be off the table for years, the effort to jumpstart the clean energy economy in this country would stall, the international negotiating process would fall apart, and any chance of a deal with China would be dead. Warming of 5°C or more by century’s end would be all but inevitable, with 850 to 1000+ ppm. If Waxman-Markey becomes law, then I see a genuine 10% to 20% chance of averting catastrophe — not high, but not zero.

The Politics of Energy: How Much Capping And Trading?

Today was the first genuine step that the U.S. House of Representatives has ever taken on climate. And since the Committee is stuffed with members representing traditional (i.e. polluting) energy industries, it shouldn’t be harder for the full House to pass this bill than it was for the committee. That said, the House GOP leadership is certainly much savvier than Joe Barton (see here) — and agricultural and other interest groups have yet to flex their muscle. Much work remains keep the bill as strong as possible even in the House.

For climate politics realists, it will be a staggering achievement if, in 12 months or so, an energy and climate bill that looks something like Waxman-Markey is signed into law by President Obama. After all, the United States hasn’t enacted a major economy-wide clean air bill since the Clean Air Act amendments of 1990. And that bill had a cap-and-trade system where 97% of the permits were given to polluters. And it focused on direct, short-term health threats to Americans.

The forces that are lined up against serious climate action today are incredible:

The Congressional GOP are almost unanimous in their opposition to any serious climate bill or any clean energy bill (see Hill conservatives reject all 3 climate strategies) — and they are committed to demagoguing the cost issue even to the point of embarrassing the outside-of-the-beltway GOP (Republicans (sic) for Environmental Protection “call out those Republicans who continue to spread the false claim that capping greenhouse gas pollution will — supposedly — cost American families $3,100 every year.”)

The polluting industries spend vast sums of money on lobbyists, on deceptive ads, and on right wing think tanks who spread disinformation. The status quo media under-reports and misreports the climate science and climate economics (see Must-read (again) study: How the press bungles its coverage of climate economics — “The media’s decision to play the stenographer role helped opponents of climate action stifle progress.”). The climate science activists can’t even agree on a message or whether they should even talk about climate science (see Mark Mellman must read on climate messaging: “A strong public consensus has emerged on the reality and severity of global warming, as well as on the need for federal action” — ecoAmerica “could hardly be more wrong”). From a political perspective, Democrats are being asked to face an onslaught of deceptive campaign ads claiming they have raised energy taxes in order to pass a bill whose climate benefits will not be apparent for a very long time — although the clean energy and jobs benefits will begin almost immediately (Nobelist Krugman: Climate action “now might actually help the economy recover from its current slump” by giving “businesses a reason to invest in new equipment and facilities”). And many of their constituents, primarily the conservatives and the conservative-leaning independents, don’t even think human caused global warming is a problem that needs aggressive government action, assuming they think it is a problem at all (see here).

From the perspective of political realism, it will be a great challenge just to stop this bill from being weakened as it winds itself through the House and especially the Senate.

From the perspective of climate science realists, the bill has two gaping flaws. And I don’t mean the allocations for big polluters. I know many of my readers disagree, but I just don’t think that the allocation undermines the goals of the bill at all, and in fact are a perfectly reasonable way of satisfying political needs while preventing windfalls for polluters and preserving prices.

The first flaw is the 2 billion offsets that polluters can potentially use instead of their own emissions reductions. I have previously explained why I am far less worried about domestic offsets (see here). In a regulated market with a cap, many of the domestic offsets will represent real reductions of US greenhouse gas emissions, and the total supply of cheap domestic offsets will be limited. I will blog tomorrow on why I do not believe the international offsets threaten the overall integrity of the bill. The bottom line is that the vast amounts of moderate-cost near-term domestic emissions reductions strategies — energy efficiency, conservation, replacing coal power with natural gas-fired power, wind power, biomass cofiring, concentrated solar thermal power, recycled energy, geothermal, and hydro power (see “An introduction to the core climate solutions“) – will be cheaper (in quantity) than most of the offsets will be in 2020.

Second, the 2020 target is too weak (see here). Given the lost 8 years of the Bush administration, it was inevitable that a bill which doesn’t even impose a cap until 2012 could not have the same 2020 target (compared to 1990 levels) than the Europeans are considering.

That means we’re going to build too much polluting crap in the next decade. That means we’ll have to go back and unbuild it at some point. More expensive, sure, than doing it right the first time, but no more difficult than deploying a dozen or so accelerated stabilization wedges globally in three to four decades needed to beat 450 ppm.

For me, a two-term President Obama (together with the next three Congresses) cannot solve the global warming problem, but can create the conditions that allow the next couple of presidents to do what is needed. Or he can be thwarted, making it all but impossible for future presidents.

The only hope for stabilizing at 350 to 450 ppm is a WWII-scale and WWII-style effort as I have said many times. And that implies a level of desperation we don’t have now (see “ What are the near-term climate Pearl Harbors?“). When we have that desperation, probably in the 2020s, we’ll want to already have:

* substantially dropped below the business-as-usual emissions path
* started every major business planning for much deeper reductions
* goosed the cleantech venture and financing community
* put in place the entire framework for U.S. climate regulations
* accelerated many tens of gigawatts of different types of low-carbon energy into the marketplace
* put billions into developing advanced low-carbon technology
* started building out the smart, green grid of the 21st century
* trained and created millions of clean energy jobs
* negotiated a working international climate regime
* brought China into the process

This bill is crucial to achieving all of those vital goals.

Kudos to Henry Waxman and Ed Markey — and a great many other progressive politicians and advocates — for making this historic moment happen.

Originally posted at Climate Progress

The Waxman-Markey Rorschach blot

David Roberts — Tue, 19 May 2009 02:25:13 -0700

The story of climate change, like the progressive story itself, is about the distance between what justice and prudence demand and what's possible within the current constraints of power politics. It just so happens what when it comes to climate, the distance is unusually large.

The scale of the global shift that will be necessary to rebuild the world's energy infrastructure, radically increase the intelligence of its resource use, and preserve and enhance its natural carbon sinks is beyond anything contemplated in human history. What's worse, not only does it need to be done, but it needs to be done quickly, and over the objections of some of history's most wealthy and powerful special interests. It is an almost perfect political problem.

This has given the issue a kind of Rorschach quality (the blot, not the masked vigilante). Against the scale of the task, virtually any effort today's dysfunctional politics can cook up appears pathetically, criminally inadequate. Then again, against the baseline of total denial and hostility that defined the Bush years, virtually any effort can seem worth celebrating. Anything is better than nothing, but nothing is enough.

Which brings us to the Waxman-Markey climate/energy bill, aka the American Clean Energy and Security Act, or ACES.

There's a great deal of anger and frustration among greenies this week. The original draft of ACES was a mixed bag: its "complementary policies" (the 75% of the bill devoted to energy stuff unrelated to cap-and-trade) were excellent, and its targets for climate pollution reduction were bolder than anticipated, but it allowed for far too many carbon offsets and left unsettled the key issue of how the pollution permits under cap-and-trade would be allocated. It original draft came out a couple weeks ago and since then the green world has struggled to come to terms with it.

After the draft proposal was released, the bill went into closed-door negotiations in the Energy & Commerce Committee, which is packed with legislators from carbon-intensive states. Republicans have, of course, decided on blanket opposition to any climate measures, so the negotiations were entirely between Dems from low-carbon (generally liberal, generally wealthy, service and white-collar) states and Dems from high-carbon (generally conservative, generally poor, coal and manufacturing) states. (The media has, for whatever reason, decided that the latter group deserves the appellation "moderates.")

Everyone knew the ambitious original draft would get trimmed back in committee, but what emerged as the consensus bill last week was ... mangled. In summary, everything that put real short-term pressure on industry was weakened. Whereas the IPCC and the UNFCCC recommend reaching 20% below 1990-level emissions by 2020, WM will reach just 4%. Whereas Obama, the CBO, Waxman, Markey, progressive groups, green groups, and anyone else who's taken a substantive look at the question favors a system in which all the pollution permits are auctioned off (to raise revenue that can cushion low-income ratepayers, invest in clean energy, and deny polluters windfall profits), the WM bill now gives away 85% of permits, most of which don't shift to auctions until after 2030. Coal utilities, "clean coal" projects, oil refineries, energy-intensive industries like steel -- they all get huge handouts.

Before the bill mandated that utilities ramp up renewable energy to 25% of their portfolio by 2025, and increase efficiency savings to 15% by 2020; now those two standards have been combined, to 20% total by 2025, 5% of which can be efficiency. Before the bill had tough performance standards on new coal plants; those have been weakened. Before the bill had a low-carbon fuel standard which would have blocked a rush to tar sands oil and other filthy new sources of fossil fuel; that's gone entirely. Before the bill had huge money for "clean coal"; now it has extra-huge money.

In short, the revised bill is triumph for coal patch Dems and big business and a punch in the gut for greens. It immediately came in for criticism from environmental groups, some of which have withdrawn their support entirely. There's real debate among greenies whether this bill would do anything to spur action in the short-term; whether it would address the pressing issue of existing coal plants; whether it would completely defang the EPA.

Then again.

Al Gore still supports the bill. Paul Krugman still supports it. Obama still supports it. What do they know (or think) that, say, Greenpeace doesn't?

It comes down to how you see the big picture and the larger forces of history -- that Rorschach blot. Those who have turned against the bill think there will be one chance to do this; they cite the Clean Air Act to show how crappy compromises get cemented in place in legislation and become very, very difficult to reopen. They're worried that if a weak bill is put in place, by the time the country seriously revisits it it could well be too late. It blows the one chance.

The bill's supporters think history is on their side. They see the most important goals as establishing a long-term declining cap on CO2 (the 2030 and 2050 targets remain strong in W-M), getting a carbon trading system up and running, and above all shifting off the status quo trajectory. They also point out that the U.S. desperately needs something to take to the international climate talks in Copenhagen in December. Only a show of good faith will get the rusty gears of multilateral negotiation turning again, and that process, too, cannot wait. As time passes, they say, climate change will hit harder, increasing political pressure to strengthen the system. States will accelerate their own programs; clean businesses will gain size and lobbying muscle; everyone will get much more serious about the problem and cognizant of the opportunities. This is the beginning of a journey that will only gain, not lose, momentum.

Who's right? It depends on what time of day you ask me.

All I know is, today the Obama administration is unveiling new fuel efficiency standards for vehicles. We should have had these in place long ago; they're still not as good as other developed countries'; the emissions they'll reduce will only be a tiny fraction of what's needed.

But it's a step. And if a small step is all you can take, I guess you take the small step.

Bailouts Still a Necessary Evil

Ryan Avent — Wed, 13 May 2009 08:12:57 -0700

Dean Baker is not an admirer of the stress tests or the administration’s financial market interventions, I think it’s safe to say. Rather than devote time to bashing both, however, he has cleverly opted to accept the administration’s stress test findings – a 100% pass rate – and argue that government support is clearly no longer needed. It’s a nifty (and satisfying) approach, but I don’t think it’s the best way to understand the current situation.

While many observers have focused on the pass/pass nature of the stress tests, that’s undoubtedly the least informative part of the published results. The real news is the scores – the estimated capital buffer the banks need to add to weather the crisis. These numbers should not be read as absolutes. Obviously, the figures are subject to change based on how successful banks are at raising private capital through equity offerings and sales of various subsidiary operations. They’re also dependent on macroeconomic conditions; as Dean notes, the adverse scenario doesn’t seem all that adverse in some respects, but by revealing the conditions against which it tested the banks, the Fed has made it possible for private investors (and, indeed, everyone) to use their own judgment in evaluating the results.

Should We Bail Out This Bailout?

What the government has given us, in other words, is a pretty good picture of where the banks stand, subject to movements in a few observable variables. This can’t be interpreted as a license to begin a wholesale pullback of the government’s interventions; the test results explicitly take into account government backstops and equity injections. Take those away and the results change. But the publication of the results does give us an opportunity to revisit the strategy behind the interventions.

I am in agreement with several of Dean’s proposed strategic adjustments. I think it’s time to bury the Public-Private Investment Partnerships (PPIP), for instance. The PPIP plan was conceived in a much different climate, when capital markets were closed to nearly all banks, and when an extremely dire macroeconomic outlook promised no end to bank losses. The situation now looks less grim. Banks are having success raising private capital, and the promise of a return to growth (albeit extremely weak) within a few quarters suggests that most banks may be able to earn their way out of the crisis.

In other words, the government needn’t put together a complicated scheme to cajole private money into the financial system, and it certainly need not aid all banks equally. Instead, most of the large banks should be weaned off direct government aid over the next year. In the meantime, the government should move forward on a strategy to deal with large, complex institutions that are unable to recapitalize themselves. Bank of America and Citigroup should be given six months to shrink themselves to manageable size and raise capital, during which time a regulatory reform bill that includes explicit nationalization authority should be moved through Congress. The credible threat of receivership will focus minds at the country’s sickest banks and will provide an exit strategy if targeted equity injections and forbearance prove insufficient to save them.

I also agree with Dean that it’s time to address AIG’s status once and for all. And while I think the government should not yet wind down its guarantees or special lending facilities, I do believe it should put in place specific procedures for doing so, so it is clearly understood that these are not to become permanent features of the financial landscape.

All of this takes as a given that intervention continues to be the right path, which is not a position shared by all progressives. I am sympathetic to this view. No one wants to save a banking system that failed so spectacularly, just as no one wants to save car companies that ran themselves into the ground or homeowners who took out irresponsible loans to buy far too much house. All of this insults our natural sense of what is fair and right.

But it’s important to understand that the government’s first priority has to be to minimize the cost of this financial and economic crisis to us all. There will be time to revisit the failures of regulatory policy later, when conditions have stabilized. I don’t think Americans will have lapsed into complacency so much by autumn that real reform will be difficult to pass.

Many progressives want to use the actual process of crisis resolution to reshape the financial system, but this is like trying to install a sprinkler system while one’s home is on fire. It’s now time to have patience. If in a year’s time the Congress and the administration are no closer to a substantial regulatory overhaul, then it will be time to break out the pitchforks.