Subsidizing wind and solar because China and Germany are doing it

Subsidizing wind and solar because China and Germany are doing it

Here is President Obama speaking in Ohio Thursday:

We also need to keep investing in clean energy like wind power and solar power.

…  And as long as I’m President, we are going to keep on making those investments.  I am not going to cede the wind and solar and advanced battery industries to countries like China and Germany that are making those investments.  I want those technologies developed and manufactured here in Ohio, here in the Midwest, here in America.  (Applause.)  By American workers.  That’s the future we want.

The President has picked three industries and is arguing for an industrial policy to subsidize them in part because other countries are subsidizing them.

Let’s extend this logic.  Suppose China or Germany starts subsidizing the biotech industry.  Should the U.S. government subsidize American biotech firms so that “those technologies [are] developed and manufactured … here in America, by American workers?”

What if China subsidizes web development firms, Germany subsidizes auto manufacturers, France subsidizes biotech firms, Japan subsidizes advanced battery firms, Brazil subsidizes ethanol firms, and South Korea subsidizes chip manufacturers?  Should the U.S. subsidize all of those domestic industries so that we don’t cede any of them?

What if the Canadian or Mexican government were to subsidize high-tech oil production firms, or Brazil to subsidize advanced tobacco production?  Is the President’s policy to keep here in American through subsidies all industries that other governments are subsidizing, or only the “good” industries that he thinks should be kept in America?

More generally, should the U.S. government (a) subsidize particular industries and if so (b) determine those subsidies based on what other countries are doing?

If we are to subsidize particular industries over others, how do we square that with the argument, made by the President and others, that we need to remove such subsidies from the tax code?

If the rule for structuring subsidies is to make sure we don’t cede certain industries to other countries, how is that different from giving the governments of those countries control over the shape and structure of the U.S. economy?

If the President wants to subsidize wind and solar power because he wants to accelerate the development of carbon-free alternatives to coal and natural gas, he should make that argument.  If President Obama is instead going to subsidize industries either because he likes them or because other Nations’ governments are subsidizing them, then we must acknowledge that he is engaged in industrial policy, aka state-managed capitalism, with an open question about whether the managing state is based in DC, Berlin, or Beijing.

(photo credit: Maryellen McFadden)

Nearly doubling renewable energy generation

Nearly doubling renewable energy generation

Today the Administration released their Blueprint for a Secure Energy Future: One-Year Progress Report.

Almost every time President Obama talks about energy he mentions wind and solar power. He used to talk about nuclear power as well. Doing so was politically courageous for a Democrat because nuclear power splits the environmental left. The President rarely mentions nuclear power these days, I presume because of the Fukushima earthquake + nuclear incident a year ago.

The White House blog post accompanying the Blueprint includes the following highlight:

Doubling Renewable Energy Generation: Thanks in part to the Obama Administration’s investment in clean energy – the largest in American history – the United States has nearly doubled renewable energy generation from wind, solar, and geothermal sources since 2008.

“Nearly doubled” in less than four years sounds pretty good but reminds me of this Dilbert cartoon.  In it Dilbert raises his hand and asks the marketing manager:

Are you asking a room full of engineers to be excited about a big percentage increase over a trivial base?

Let’s look at my favorite energy graph, produced by Lawrence Livermore National Laboratory, a part of the Department of Energy.  It translates all energy usage into a common unit (BTUs) for comparison.  You’ll probably want to click on the graph to see a larger (and readable) version.  In particular look at the size of the solar (yellow), wind (purple), and geothermal (brown) connecting lines, especially in comparison to the lines for nuclear (red), coal (black), and natural gas (light blue).

llnl-energy-use

Wind, solar, and geothermal sources are trivially small sources of U.S. energy.  Doubling their usage is significant within those industries but when compared to the overall pattern of energy usage in the U.S., the increases are tiny.

Here are three basic facts to know about energy sources for electricity production in the U.S.:

  1. We have lots of really cheap coal.
  2. Thanks to new fracking technologies we now have lots of cheap natural gas, too.
  3. Nuclear comes in third and represents about 20% of our source of electricity production.

Don’t forget two points from yesterday’s post which you can see easily from the above graph:

  • In America there is little overlap between fuel used for transportation and electricity used to light, heat, and power our homes and businesses.
  • If you could make solar power price competitive with electricity produced from coal or natural gas you would do almost nothing to lower the price at the gas pump because there are so few electric-powered and hybrid vehicles on the road.

Let’s compare BTU totals in sources of U.S. energy excluding transportation.

energy-use-by-source-ex-transpo

From this graph you can see how small wind and solar power are relative to other energy sources in the U.S.  Even large percentage increases in the use of solar and wind power will have trivial impacts on the patterns of American energy usage.  Doubling, tripling, or quadrupling our usage of these technologies will not fundamentally change the three above basic facts about electricity production in the U.S.  Until there is a technology breakthrough, the U.S. is a land of electricity production from coal, natural gas, and nuclear, with hydro and biomass trailing and with wind, geothermal, and solar too small to matter much at all.

The value of increased solar and wind production is not the marginal short-term reductions of coal and natural gas we use in America.  These increments are too small to matter. The benefit is instead whatever we learn about producing and using these technologies that might, at some point in the future, result in innovations that so significantly reduce the cost of these technologies that it becomes less expensive to produce power from these renewable sources than it does with our abundant supplies of coal and natural gas.  If the technology ever crosses (or even approaches) those breakeven thresholds, then these energy sources will rapidly and significantly alter the shape of the U.S. energy picture.

Until then the President has a rhetorical point that sounds good but matters little to how we use and produce energy in the U.S.

(photo credit: Nedra)

The 10 most important American economic policy issues of 2010

Here is my view of the 10 most important American economic policy issues of 2010.

1.  The weak U.S. macroeconomy

In 2010 a weak macroeconomy once again swamped in importance all other economic policy issues.  Forecasters had predicted a tough year — the 9.7% average unemployment rate for the first 11 months of the year is not far above the Administration’s 9.3% forecast for the year.

In 2011 the most important metric will once again be the unemployment rate.  Economically as well as politically the focus will once again be almost entirely on job creation.  We need the economy to be generating hundreds of thousands of net new jobs each month.  That is unlikely but not impossible.

Most forecasters project a stronger U.S. economic growth path in 2011 than 2010, but few are projecting that growth will be robust enough to bring the unemployment rate down rapidly.  While this week’s unemployment claims took a turn for the better, that’s a volatile data set, and the labor picture over the past few months has been weak.  If the forecasts hold up, things will be bad but improving throughout 2011.  You decide whether the politics and press will focus on the bad or the improving part.

Please remember not to lean too heavily on economic projections.  My rule of thumb is that the best macroeconomic forecasts get unreliable six months out and are not much more than guesses beyond a year.

2.  The failure of fiscal stimulus

This trend began in 2009 and solidified in 2010.  The fiscal stimulus debate camps and arguments are well established, and because the debate relies on comparison to a counterfactual it may never be provably resolved, allowing economists to argue ad nauseam.

Whatever your view on the policy question, as a political matter the stimulus failed miserably.  There are a few easily identifiable errors.

  • The President repeatedly took too optimistic of a tone relative to what his experts projected on something that was largely beyond his control.
  • Team Obama gambled and lost by creating an unverifiable “jobs saved or lost” metric.  Sometimes the unverifiability worked for them, but ultimately it broke against them because a job saved by policy is neither provable nor visible.
  • The policy path the President chose in early 2009 (more accurately, the path to which he acquiesced when Congress chose it) set up countless “waste, fraud, and inefficiency” stories throughout 2010.
  • After February 2009, every time the President signed another bill “to create jobs,” he reinforced the message that his first stimulus law was failing or at best insufficient.

3.  The stimulus vs. austerity debate

The U.S. is now left of Germany and the U.K. on fiscal policy in rhetoric if not result.  That is both weird and disturbing.

4.  (Temporary?) enactment of the health care laws

The President and his allies had a huge policy victory here.  I think these laws are an unmitigated disaster, the largest economic policy mistake in a long time.  The President and his allies created a massive new entitlement, spent budget offsets needed to address our long-term spending problem and therefore made future middle class tax increases a near certainty, and turned health insurance into a regulated utility.

The ongoing pushback from Republicans, even after enactment, was a wonderful surprise from a party that had for too long been afraid to debate health policy.  Democrats had to delay implementation of the most expensive provisions for a few years, allowing Republicans time to mount a repeal campaign that continues to build steam.  My first big blog mistake of the year was prematurely declaring the legislation dead after Scott Brown’s surprise victory in Massachusetts.  My second (unpublished) mistake was assuming that the President’s signature was the endgame.  It appears the 2012 Presidential election will be in part a referendum on these laws.

5.  Enactment of financial services reform (Dodd-Frank)

This is another big policy win from the Administration’s perspective.  I have mixed feelings on the law.  Some parts (like creating resolution authority for regulators to shut down too-big-to-fail firms) are essential, others (like the Consumer Financial Protection Bureau) are harmful, and still others (like the long-term resolution of Fannie Mae and Freddie Mac) are unresolved.

Many policymakers appear to have convinced themselves that new policies and structures are (or, in a few years when the regs are complete, will be) in place to prevent large institutions from failing.  I worry that we still don’t have a good solution for the next Black Swan event when (not if) one or more of those huge institutions do fail in spite of the new, better informed, and more powerful regulators.

6.  Carbon pricing implosion

In less than four years carbon pricing has gone from front burner to burnt toast.  The Climategate data fudging scandal undermined a previously strong positive public perception of climate scientists and their advocacy.  In Copenhagen the global negotiations imploded after confronting the problem of the China-India hole in the U.S./green strategy.  A Democratic House and Senate could not agree to carbon pricing legislation, demonstrating that regional economic perspectives are at least as important as policy philosophy.  The President walked a tightrope between demonstrating to greens that he was with them and allowing himself an exit strategy when legislation inevitably failed.  West Virginia Governor (and now Senator) Joe Manchin erased any doubt by literally shooting the Waxman-Markey bill in a campaign ad.

We now appear headed down the worst possible policy path.  Congress will not enact legislation but the Environmental Protection Agency will start regulating greenhouse gas emissions and allowing/encouraging States to do so.  This is the most economically burdensome way to regulate carbon emissions.  It will be large enough to impose significant constraints on domestic power production and heavy manufacturing now, and maybe on other sectors later.  Yet any reductions in U.S. emissions will be small relative to uncapped increases from China and India.  EPA’s rules and Congressional efforts to block them will create policy uncertainty, deterring needed investment in the expansion of U.S. power production and slowing long-term economic growth.  EPA’s regulatory authority always served two purposes to those who want to price carbon:  as a threat to try to force legislative action, and as a costly fallback if legislation failed.  The fallback option never made sense.  It should but probably won’t be abandoned.

7.  The Democratic Congress’ budget failures

From the perspective of Congressional Democrats, the health care and financial services victories counterbalance their two fiscal policy failures in 2010.  Tax rates on income and capital will not increase during President Obama’s first/only term.  They failed to enact full-year appropriations bills to fund the government, resorting instead to short-term continuing resolutions.  The new Congress will have to complete the leftover appropriations work in early 2011.  Many of the President’s spending goals will be unmet as he wrestles with a Republican House majority with very different priorities.  I am pleased with both outcomes, which exceeded my initial expectations.

Both results can be traced directly to decisions by Speaker Pelosi, Senate Majority Leader Reid, and their respective Budget, Tax, and Appropriations Chairmen.  They failed because they didn’t even try to govern.  They never tried to pass a budget resolution, they delayed action on taxes until the last possible minute when Republicans were strongest, and they never tried to pass appropriations bills in the Senate.  They missed an opportunity to create a reconciliation bill that would have allowed them (and the President) to win the tax extension debate.  In each case these were unforced errors by Democratic Congressional leaders that significantly affected the fiscal policy outcomes of 2010.

8.  Rise of the Tea Party

I have not much to add here other than to recognize that the small government impetus began with the early 2009 Santelli rant and exploded into summer 2009 Town Hall opposition to Obamacare.  I now think of it not as a political party, but instead as a strong and deep anti-TARP-autos-bailout-stimulus-Obamacare-cap-and-trade-government-spending-earmarks-deficits sentiment.  In simpler terms it’s a powerful populist pushback against the expansion of government.  Over the next two years Republicans can succeed to the extent they respect this sentiment and push for smaller government and a bigger private sector.

9.  Increasing awareness of medium-term fiscal problems

The bad news is America’s long-term fiscal problems are now medium-term fiscal problems.  The good news is that Americans are increasingly aware of those problems, and pressure is building on elected officials to solve them.  While nothing transformative on this front happened in 2010, several trends are important to note.

  • The shift from long-term to medium-term is a result of two factors: (1) inaction on entitlement spending over time by both parties; (2) enormous short-term deficits that are wiping out a projected temporary deficit trough before the Baby Boom spending wave hits.  Those enormous short-term deficits result from (1) the weak economy; (2) actions taken to recover from the weak economy; and (3) a generic expansion of government spending unrelated to economic stimulus.
  • In February the President’s budget launched this round of fiscal debate by intentionally leaving a large deficit hole to be plugged by recommendations from a new Presidential fiscal commission.  The President’s goals for that commission were too focused on the short run, and it’s unclear whether he intended the commission to solve the problem, provide him with cover for a proposal in early 2011, or just to buy him time through a mid-term election year.  Nevertheless, the commission reported in December with a bipartisan package of spending reforms and tax increases, teeing the issue up nicely for 2011.
  • Enormous 2009 and 2010 deficits and massive spending increases in those years raised the prominence of both the size of government and fiscal imbalance as important policy issues.
  • Fiscal crises in Europe and looming fiscal crises in various U.S. States focus attention on the U.S. federal fiscal problem.

It’s always safe to bet against a big painful fiscal policy change, but if it’s ever going to happen, 2011 seems like as good a year as any.  The 1997 budget deal was done by President Clinton, Speaker Gingrich, and Majority Leader Lott, a D-R-R alignment.  This time we have a D-R-D alignment.

10.  Round 2 of the Obama economic team

Three of the four key Obama economic advisor slots will be manned by different personnel in 2011 than a year earlier.

Out (voluntarily):  Larry Summers (NEC), Peter Orszag (Budget), and Christina Romer (CEA)

In:  Jack Lew (Budget), Austan Goolsbee (CEA), ??? (NEC)

  • The departure of WH COS Rahm Emanuel and upcoming departure of Senior Advisor David Axelrod will also have a big effect on economic (as well as other) policy.  My sources say they were heavily involved in almost all major economic decisions, sometimes operating as a separate decision-making layer between the economic team and the President.
  • Treasury Secretary Geithner and NEC Deputy Jason Furman are now the institutional memory of the Obama economic team.
  • Both Lew and Goolsbee are insiders who were promoted.
  • The President should have filled (or at least announced) Summers’ successor at NEC weeks ago.  The fall is policy development time in the White House, and the President hurt himself by not having in place a successor to his top White House economic advisor.

Have a Happy New Year.

(photo credit: Takras)

 

Reactions to the President’s post-election press conference

Reactions to the President’s post-election press conference

Here are my initial reactions to important economic policy elements of the President’s press conference.

The President argued the electoral losses were the result of a continued weak economy and his inability to convince voters that he had made things better quickly enough. He repeatedly ducked the question of whether his policies contributed to the Democrats’ devastating losses. Two conclusions are consistent with ducking this question: (1) he thinks his policies did not hurt Democrats on Election Day; or (2) he knows they hurt Democrats but doesn’t want to admit it because doing so would further risk the policy gains he has achieved. I find it very hard to imagine (1), but I misjudged him last January and as a result I incorrectly concluded he would stop pushing for health care reform, so I lack confidence in my ability to discern between the two.


He did not acknowledge learning anything from the election or that he was in any way surprised by the result. In contrast he surprised me with the word “confirmed”:

And yesterday’s vote confirmed what I’ve heard from folks all across America: People are frustrated — they’re deeply frustrated — with the pace of our economic recovery and the opportunities that they hope for their children and their grandchildren.

Given this answer, I’d like to ask him “Were you surprised by Tuesday’s results?”


The initial press reaction was that the President “took responsibility for the losses.” The precise words in his prepared statement were, however, artfully phrase:

Over the last two years, we’ve made progress. But, clearly, too many Americans haven’t felt that progress yet, and they told us that yesterday. And as President, I take responsibility for that.

The President took responsibility only for “too many Americans [not feeling] progress yet.” That’s a minor concession, along the lines of “We didn’t communicate our policies well.” He conceded nothing about the effectiveness (or lack thereof) of his economic policies, nor about the unpopularity of stimulus, health care, or cap-and-trade.


In a prepared statement as important as this one, no language is accidental. These sentences foreshadow his upcoming economic priorities and themes for next year’s budget and State of the Union address:

But what I think the American people are expecting, and what we owe them, is to focus on those issues that affect their jobs, their security, and their future: reducing our deficit, promoting a clean energy economy, making sure that our children are the best educated in the world, making sure that we’re making the investments in technology that will allow us to keep our competitive edge in the global economy.

and

In this century, the most important competition we face is between America and our economic competitors around the world. To win that competition, and to continue our economic leadership, we’re going to need to be strong and we’re going to need to be united.

He also tends to connect economic competitiveness with domestic infrastructure, R&D, and education spending. This linkage is not accidental.


He tried to erect a firewall around the health care laws:

And with so much at stake, what the American people don’t want from us, especially here in Washington, is to spend the next two years refighting the political battles of the last two.

Yet for several months he has been refighting (is that a word?) the tax rate battle of ten years earlier, and his entire economic message has been a backward-looking complaint and a relitigation of the policies and conditions he “inherited.”


He floated a few areas of potential bipartisan agreement:

  • the looming tax increases;
  • energy:
    • expanding domestic natural gas supply;
    • energy efficiency;
    • “how we build electric cars”;
    • expanding nuclear power;
  • education;
  • limiting appropriations earmarks;
  • fixing one tax provision in the health care laws that hurts small businesses;
  • infrastructure spending; and
  • immediate (and temporary) expensing of business investment.

He acknowledged that legislation pricing carbon is dead for the foreseeable future. In doing so he acknowledged a well-established conventional wisdom, but it’s still significant when the President says it. His “this year” language should kill silly speculation about a lame duck Congress trying to enact cap-and-trade in 2010, and his “… or the year after” language takes cap-and-trade off the table through the remainder of this Presidential term.

I think there are a lot of Republicans that ran against the energy bill that passed in the House last year. And so it’s doubtful that you could get the votes to pass that through the House this year or next year or the year after.

He also signaled a willingness to trade legislative action on “clean energy” with dialing back (or prohibiting?) EPA from regulating greenhouse gases:

So I think it’s too early to say whether or not we can make some progress on that front. I think we can. Cap and trade was just one way of skinning the cat; it was not the only way. It was a means, not an end.” And I’m going to be looking for other means to address this problem.

And I think EPA wants help from the legislature on this. I don’t think that the desire is to somehow be protective of their powers here. I think what they want to do is make sure that the issue is being dealt with.


Finally, on the question of looming tax increases he signaled that “This is something that has to be done during the lame duck session,” and he made no negative statements about extending all the rates. When asked directly “So you’re willing to negotiate?” he replied “Absolutely.” In upcoming days I’ll write about potential paths to a tax deal.

(photo credit: The White House)

Oil spill crisis as opportunity

Oil spill crisis as opportunity

Here is Rahm Emanuel’s famous quote, from November 19, 2008. You don’t need to watch more than the first minute.

The President’s Oval Office address last night suggests an implementation of this principle, as he tries to reconfigure the climate change / cap-and-trade debate into a new War on Fossil Fuels. It appears the President will attempt to use the oil spill crisis as an opportunity to enact cap-and-trade legislation which otherwise has almost no chance of becoming law.

In launching this war he is foregoing an opportunity for targeted legislation addressing only the risks of deepwater drilling. This alternative legislative path could give America and her President a quick, easy, bipartisan policy victory which I believe could rally and unify the nation when we sorely need it.

The War on Fossil Fuels

Let’s look at the words used by the President last night. We begin with his heavy use of military imagery:

… the battle we’re waging against an oil spill that is assaulting our shores and our citizens …

We will fight this spill …

I’d like to lay out for you what our battle plan is …

I’ve authorized the deployment of over 17,000 National Guard members along the coast. These servicemen and women …

I urge the governors in the affected states to activate these troops …

The same thing was said about our ability to produce enough planes and tanks in World War II.

We can see that fossil fuels are the enemy:

For decades, we’ve talked and talked about the need to end America’s century-long addiction to fossil fuels.

The transition away from fossil fuels is going to take some time …

… as long they seriously tackle our addiction to fossil fuels …

The use of “war” with “addiction to fossil fuels” suggests a closer communications parallel may be the “war on drugs.”

We can also see that climate change, cap-and-trade, global warming, and greenhouse gases are not the communications priority. The President referred once to “a strong and comprehensive energy and climate bill” passed by the House earlier this year. He did not say any of the other phrases, most notably not “cap-and-trade.” That language appears to be nearly dead. Then again, he did refer to “pricing carbon” one week ago.

Most importantly, the President defined the policy goal as “the need to end America’s century-long addiction to fossil fuels.” He reiterates this by saying,

So I’m happy to look at other ideas and approaches from either party – as long they seriously tackle our addiction to fossil fuels.

Q: How does the President reply if the minority party offers, ‘We will work with you in good faith on an answer to deepwater drilling safety, but will continue to disagree with you on broader questions of fossil fuels and specifically on cap-and-trade.” Does he take the partial win and solve the deepwater drilling problems? Or does he refuse and hold out for the rest of his energy/climate agenda?

One climate issue, two separable energy issues

If you are focused on carbon emissions, then oil, coal, and natural gas naturally group together as “fossil fuels” and are the combined source of the problem. If you are focused on energy, then oil is one issue (transportation), and coal and natural gas are another (electric power).

We use almost no oil to produce power in the U.S., and electricity powers only a tiny fraction of our transportation, despite recent increases in hybrid and natural gas vehicles. Yes, they’re growing at a rapid rate. But the overlap between oil as one type of energy source vs. coal and natural gas as another is vanishingly small. My favorite energy graph makes this clear. Look at the thin green lines that go from petroleum to supply residential and commercial power, and at the even thinner orange and turquoise lines that show how much our transportation is fueled by electric power and natural gas.

(Source: The University of California, Lawrence Livermore National Laboratory, and the Department of Energy)

Someday when battery technologies improve, the fuel and power worlds will blend in the U.S., and there will be strong and direct economic relationships between the production of electric power and the use of oil. Until that day, from an energy perspective, “fossil fuels” conflates oil with coal and natural gas in a way that is at best confusing and at worst misleading. Substituting biofuels for oil or making vehicles more fuel efficient has almost no effect on the amount of coal or natural gas we use. “Produc[ing] wind turbines,” “installing energy-efficient windows, and small businesses making solar panels” are quantitatively irrelevant to our use and production of oil. All the windmills and solar panels you could imagine will not reduce our dependence on oil as a transportation fuel.

The President’s gamble

The President risks overreaching by trying to use a crisis in one subset of domestic oil drilling to enact a policy agenda that applies to all types of oil drilling and imports, and to coal, and to natural gas. Were he to focus just on solving the deepwater drilling problem, he’d have a slam dunk. Instead he’s trying not to let this crisis go to waste, and to use it as an opportunity to enact indirectly related policies that are much more hotly disputed.

Two scenarios

Scenario 1 – Imagine that the President proposes new legislation targeted at the problem of engineering safety in deepwater drilling. Imagine his legislation contains five provisions:

  1. Require that all deepwater wells have a relief well in place before production begins.
  2. Mandate requirements for double piping and a list of other industry engineering best practices. The prior best practice for engineering safety becomes the legally mandated minimum.
  3. Mandate that each deepwater drilling operation be insured for at least $20 B of environmental damage before production can begin. Insurers will therefore require further engineering stringency to protect themselves.
  4. Raise the legal liability cap for any drilling platform to $50 B, just to be safe.
  5. All new wells must meet all of the above requirements, and all existing wells must cease production until they meet them. (The details here might need some work.)

With these requirements, some amount of deepwater drilling would cease because it wouldn’t be economical with the added costs. I’m confident that policymakers across the board would say, “Fine. If the added protection is not worth that extra cost, then don’t drill there. I want a belt, and suspenders, and Velcro too.”

I believe the legislation in scenario 1 would pass the House and Senate within a week or two, with overwhelming and possibly unanimous bipartisan majorities. The President could quickly unify the country and celebrate a wise bipartisan solution to preventing the recurrence of a painful problem. That would still leave the existing crisis, but the long-term policy issues would be solved.

Scenario 2 – The President pushes for enactment of cap-and-trade legislation which raises the cost of gasoline and diesel fuel, and of power produced from coal and natural gas. He insists that Congress include all the policies from scenario 1 in this bill.

Scenario 2 is a huge gamble. If the President succeeds, it will probably look like the health care fight. It will be a long, vigorous, largely partisan debate, overlaid with regional economic and energy interests. Legislation will become law only after squeaking out a 60th vote to overcome a filibuster.

The President knows he cannot enact cap-and-trade before November without a game changer. He assumes his legislative margin will be (much) smaller next year. He is rolling the dice to see if he can turn this crisis into a legislative opportunity, in what may be his last chance to enact a national carbon price.

My view

Sometimes it’s good to vigorously debate important policy issues. Sometimes America needs to make a huge directional change and only a strong President can lead us in a new direction. These directional shifts are painful for the country as we argue and fight, but if you agree with the new direction, that squabbling is worth it.

I think America is as deeply divided on climate change issues as it is on health care. I’d like us to change direction on energy, but I’m OK doing so gradually as technology allows us to do so without imposing enormous costs on our economy. This explains why I often support policies focused on energy technology research and development.

I think solving our deepwater drilling engineering safety problems is now a top national policy priority. I think our other top domestic policy priority needs to be near-term economic growth. I rank climate change lower on my list of policy problems.

The President could have a quick, clean, bipartisan win on legislation that would eliminate the risk of another spill like this one.

Instead he is rolling the dice again, gambling that he can leverage the problems with drilling for oil in deep water to get legislation that also raises costs for power production. He is also choosing a path that he knows will provoke partisan conflict. Maybe he sees an electoral benefit to having the fight.

I assume the President believes what he says, and he thinks that fossil fuels and the combined problems of environmental damage from deepwater drilling, the national security externalities and economic costs of our oil dependence, the pollution and climate change externalities from carbon emissions from all sources, all must be solved at once and immediately. He wants to change America’s direction sharply and suddenly, even if doing so is painful economically.

I respectfully disagree with sharply and suddenly, because the benefits are uncertain and the costs are significant. Also, the specific cap-and-trade bills being debated are a horrible mess of political bargaining and implementation nightmares.

The President’s War on Fossil Fuels will reinvigorate an intense policy debate on the future of energy and environmental policy in America. He may be successful in bending the Congress to his will, as he did with health care. He may fail.

I prefer another path that is simpler, faster, more unifying, and more targeted at the problem that is in the forefront of our consciousness this summer.

I think it would be good for America to unite and say, “We worked together to prevent that problem in the Gulf from happening again.” It is easy to do so, and I wish the President would choose that path instead.

(photo source: White House)

Cliff Notes: The President's Carnegie Mellon economic speech

Cliff Notes: The President's Carnegie Mellon economic speech

Last Wednesday the President spoke about the economy at Carnegie Mellon University. Administration officials billed this as a major economic address, the follow-up to his speech last April at Georgetown. I think the most accurate and fairest way to understand the views of an elected official begins with what he or she says. The problem is that this speech is more than 5,000 words, so almost no one will read the whole thing.

In summarizing it I still ended up at around 1,300 words. Think of it as getting 75% savings.

I will respond to the speech soon. For now, this is my attempt at a non-judgmental summary. Where you don’t see quotation marks I am paraphrasing him, fairly I hope.

The speech naturally breaks into three parts:

  • Part I: The Choice
  • Part II: The Foundation
  • Part III: The Laundry List

There are some obvious topical subdivisions which I have labeled.


Part I: The Choice

The oil spill is my top priority.

The macroeconomy

I inherited an extremely weak economy, “one of the worst economic storms in our history.”

I took bold and unpopular actions, and they worked. “These steps have succeeded in breaking the freefall.”

“We’re again moving in the right direction.”

“This economy is getting stronger by the day.”

[But] “It’s not going to be a real recovery until people can feel it in their own lives.”

“In the immediate future, this means doing whatever is necessary to keep the recovery going and to spur job growth.”

Why we need a new foundation

The last ten years were terrible economically for American families. “Some people have called the last 10 years ‘the lost decade.'”

There has been “a sense that the American Dream might slowly be slipping away.”

China and India and Europe are “building high-speed railroads and expanding broadband access.” They’re making serious investments in technology and clean energy because they want to win the competition for these jobs.

We can’t afford to return to the pre-crisis status quo. We can’t go back to an economy that was too dependent on bubbles and debt and financial speculation.”

“We have to build a new and stronger foundation for growth and prosperity … and that’s exactly what we’ve been doing for the last 16 months.

It’s a foundation based on investments in our people and their future; investments in the skills and education we need to compete; investments in a 21st century infrastructure for America, from high-speed railroads to high-speed Internet; investments in research and technology, like clean energy, that can lead to new jobs and new exports and new industries.

This new foundation is also based on reforms that will make our economy stronger and our businesses more competitive — reforms that will make health care cheaper, our financial system more secure, and our government less burdened with debt.”

International & Trade

“We have to keep working with the nations of the G20 to pursue more balanced growth.”

“We need to coordinate financial reform … so that we avoid a global race to the bottom.”

“We need to open new markets and meet the goal of my National Export Initiative: to double our exports over the next five years.”

“We need to ensure that our competitors play fair and our agreements are enforced.”

Republicans are partisan and for no government

Republicans keep saying no to everything we’re doing.

“And some of this, of course, is just politics.”

“But to be fair, a good deal of the other party’s opposition to our agenda has also been rooted in their sincere and fundamental belief about the role of government. It’s a belief that government has little or no role to play in helping this nation meet our collective challenges. It’s an agenda that basically offers two answers to every problem we face: more tax breaks for the wealthy and fewer rules for corporations.”

“The last administration called this recycled idea ‘The Ownership Society.’ But what it essentially means is that everyone is on their own. No matter how hard you work, if your paycheck isn’t enough to pay for college or health care or childcare, well, you’re on your own. If misfortune causes you to lose your job or your home, you’re on your own. And if you’re a Wall Street bank or an insurance company or an oil company, you pretty much get to play by your own rules, regardless of the consequences for everybody else.”

My philosophy of government is a middle ground, rejecting too much government

“Government cannot and should not replace businesses as the true engine of growth and job creation.”

“Too much government can deprive us of choice and burden us with debt.”

“But I also understand that throughout our nation’s history, we have balanced the threat of overreaching government against the dangers of an unfettered market.”

“[O]ne-third of the Recovery Act we designed was made up of tax cuts…”

“[D]espite calls for a single-payer, government-run health care plan, we passed reform that maintains our system of private health insurance.”

The choice

Republicans/Conservatives/Big Business have argued against many good things done by government: Social Security, Medicare, deposit insurance, seat belts, clean air and water.

“And all of these claims proved false. All of these reforms led to greater security and greater prosperity for our people and our economy. And what was true then is true today.”

“For much of the last 10 years we’ve tried it their way.”

“And now we have a choice as a nation. We can return to the failed economic policies of the past, or we can keep building a stronger future. We can go backward, or we can keep moving forward.”


Part II: The New Foundation

“The first step … has been to address the costs and risks that have made our economy less competitive — [1] outdated regulations, [2] crushing health care costs, and [3] a growing debt.”

Financial reform is good and “sweeping”

It “will help prevent another AIG”

“It will end taxpayer-funded bank bailouts.”

“It contains the strongest consumer protections in history.”

Health care reform

We did health care reform because “we can’t compete in a global economy if our citizens are forced to spend more and more of their income on medical bills; if our businesses are forced to choose between health care and hiring; if state and federal budgets are weighed down with skyrocketing health care costs.”

“The costs of health care are not going to come down overnight just because legislation passed, and in an ever-changing industry like health care, we’re going to continuously need to apply more cost-cutting measures as the years go by.”

Health care reform did good things.

“The other party has staked their claim this November on repealing these health insurance reforms instead of making them work. They want to go back. We need to move forward.”

Deficits and debt

Thanks to the Bush tax cuts and prescription drug benefit, I inherited a $1 trillion one-year deficit and projected deficits of $8 trillion over the next decade.

I inherited a severe recession “and the effects of the recession put a $3 trillion hole in our budget before I even walked through the door.” Additionally, the steps that we had to take to save the economy from depression temporarily added more to the deficit … about $1 trillion. Of course, if we had spiraled into a depression, our deficits and debt levels would be much worse.

“Now, the economy is still fragile, so we can’t put on the brakes too quickly. We have to do what it takes to ensure a strong recovery.”

We need to extend unemployment insurance.

We need to give more money to state and local governments so they don’t have to fire teachers.

“There are four key components to putting our budget on a sustainable path. Maintaining economic growth is number one. Health care reform is number two. The third component is the belt-tightening steps I’ve already outlined to reduce our deficit by $1 trillion. … The fourth component is [the Fiscal Commission.]“


Part III: The Laundry List

Education reform

  • Race to the Top
  • Replace guaranteed student loans with direct loans
  • “Revitalize our community colleges”

Infrastructure

  • High-speed rail
  • High-speed broadband
  • Clean energy subsidies

Energy

  • “I supported a careful plan of offshore oil production as one part of our overall energy strategy. … But … only if it’s safe, and only if it’s used as a short-term solution while we transition to a clean energy economy.”
  • “It means tapping into our natural gas reserves, and moving ahead with our play to expand our nation’s fleet of nuclear power plants.”
  • We need to “put a price on carbon pollution.”
  • We will get “a comprehensive energy and climate bill” done.

Research and innovation

  • Make the research and experimentation tax credit permanent.

“The role of government has never been to plan every detail or dictate every outcome. At its best, government has simply knocked away barriers to opportunity and laid the foundation for a better future. Our people — with all their drive and ingenuity — always end up building the rest. And if we can do that again — if we can continue building that foundation and making those hard decisions on behalf of the next generation — I have no doubt that we will leave our children the America that we all hope for.”

(photo credit: Obama Visits Carnegie Mellon IX. by Patrick Gage)

What can President Obama learn from President Bush’s bipartisan successes?

What can President Obama learn from President Bush’s bipartisan successes?

Conventional wisdom says the tenure of President George W. Bush was dominated by partisanship. There were deep partisan splits over the war in Iraq, enhanced interrogation, wiretapping, the 2003 tax cuts, and Social Security reform.

This conventional wisdom ignores significant bipartisan legislative accomplishments led by President Bush. I will focus on domestic policy accomplishments.

Each of the following major laws was enacted on a bipartisan vote:

President Bush also reached across party lines to reform immigration law. His bipartisan outreach on this issue was successful, but the legislation failed due to opposition from both wings. In that effort President Bush’s team negotiated with a broad group in the Senate, led by Senator Kennedy on the left and Senator Kyl on the right. President Bush’s attempts deeply split his own party, yet he persisted until it became apparent there was not a 60 vote coalition to succeed.

I imagine some readers are skeptical of the above list so, once again, I’m going to show you some pictures. I’m going to show you a lot of pictures. I want to hammer home the Bush-bipartisan success point. I will then try to draw some lessons for Team Obama.


Let’s begin with the 2001 tax cuts to orient ourselves to the graph format.

  • Dark shading means they voted aye. Light shading means they voted no. So in the top bar in this first graph, 12 Democrats and 46 Republicans voted aye, while 31 Democrats and 2 Republicans voted no.
  • Blue shows Democrats and independents caucusing with Democrats (like Senators Lieberman and Sanders).
  • Red shows Republicans.
  • I left out those who didn’t vote, which explains why many Senate votes don’t total 100, and many House votes don’t total 435.
  • In each case I tallied the vote on final passage.
  • As always, you can click on any graph to see a larger version.

On final passage of the Bush tax cuts of 2001:

  • in the Senate 46 Republicans and 12 Democrats voted aye, while 2 Republicans and 31 Democrats voted no; and
  • in the House 211 Republicans and 28 Democrats voted aye, while 10 Republicans and 154 Democrats voted no.

It should be fairly easy to see that the 2001 tax cuts were enacted by a center-right coalition. Almost all Republicans supported the final product, and about 1 in 4 (Senate) or 1 in 6 (House) Democrats voted aye.

This bill was bipartisan largely because the Bush White House, Senate Majority Leader Lott and Senator Grassley worked closely with Democratic Senators Breaux and Baucus to craft a bill and keep moderate Democratic Senators onboard. We used the reconciliation process, and therefore had 58 votes when we needed only 51 for final passage in the Senate.

You can see that the 2001 tax cuts would not have had even a simple majority in the Senate if Republicans had acted alone. The Senate was split 50-50 at the time.


Now let’s turn to education.

This was a broad bipartisan coalition. President Bush reached out to Senator Kennedy and instructed his team to negotiate directly with Kennedy. You can see the result. This is about as bipartisan as it gets for major legislation.

The Senate was a 51-49 Democratic majority when this bill became law.


Next up, trade.

Trade Promotion Authority, formerly known as fast track, gives the President authority to negotiate trade deals with other countries and have them subject to only an up-or-down vote by Congress, rather than being amended to death. It is essential for Congress to give the President this authority if you’re to have free trade agreements.

Again you can see the center-right coalition that dominates much of American economic policymaking. This has even a little more Democratic support than the 2001 tax cuts, and slightly more opposition from protectionist Republicans. As with the 2001 tax cut, you can see that there are more economic centrist Democrats in the Senate than in the House.

This bill could not have passed either the House or the Senate with only Republican votes. A bipartisan coalition was necessary for legislative success.

This is with a 51-49 Democratic majority in the Senate.


Medicare and Health Savings Accounts are next.

Now we’re back to a Republican majority in the Senate.

Once again, President Bush, his team, and Senator Grassley worked closely with centrist Democratic Senators Baucus and Breaux to negotiate a deal. The final details were hammered out in a fierce negotiation between Baucus/Breaux and Rep. Bill Thomas (R-CA), with extensive White House support.

President Bush held a few meetings at the White House with Baucus, Breaux, and the key Republicans to strengthen the coalition and keep the ball moving forward. This bill created the Medicare drug benefit (which split Republicans) and Health Savings Accounts (which Republicans and conservatives especially like). Democratic leaders opposed this bill, but we managed to hold Democratic moderates anyway.

Once again, the winning majority coalition in both the House and Senate was bipartisan, and the bill could not have become law without Democratic support. A key vote before Senate final passage was a cloture vote, in which some of the 9 Republicans who ultimately voted no supported cloture.


Now we turn to the first major energy law during the Bush tenure.

Senators Bingaman and Baucus were key to this legislative success, which you can see was more bipartisan than some of the prior successes. The legislative process was filled with amendments and negotiations across the partisan aisle and fierce regional conflicts.

Senate Democrats split roughly equally and 75 House Democrats supported final passage. This law focused on electricity (rather than fuel), which sometimes has more of a regional policy focus than a partisan split. This bill originated with VP Cheney’s Energy Task Force, which was labeled by the Left as a dark and evil conspiracy. And yet the final legislation had significant bipartisan support.


Pension reform gets less attention than the others but is important.

I highlight this law because it is easy for pension issues to break down along party lines, with Republicans favoring management interests, Democrats favoring labor interests, and the taxpayer getting shafted. Republican committee chairmen and the Bush Administration reached across party lines to elevate the interests of protecting the pension system, future retirees, and taxpayers, battling against tremendous lobbying pressure from business and labor interest groups to relax the pension rules and allow pension plans to be underfunded.

The law was far from a complete victory for good pension policy, but it was a definite improvement over what preceded. And again, you can see the tremendous breadth of bipartisan support.


Still in President Bush’s tenure, we now shift to Democratic majorities in the House and Senate. The 2007 energy law focused on fuel.

In the 2007 State of the Union Address, President Bush proposed to increase fuel economy standards (CAFE), and to increase the mandated amount of renewable fuels (ethanol) that had to be blended with gasoline. This “energy security” proposal infuriated conservatives – the Wall Street Journal editorial page trashed us for it all year. The President recognized that, with new Democratic majorities in the House and Senate, he would have to build a different legislative coalition than had worked for him when his own party was in the majority.

The final bill was negotiated via an exchange of letters between the Bush White House and Speaker Pelosi. You can see unanimous Democratic support and Republicans deeply split, especially in the House. As with his unsuccessful immigration reform efforts, President Bush was willing to negotiate a compromise with leaders and even wingers from the other party.


Next is the early 2008 stimulus law.

Before announcing his stimulus proposal, President Bush called Speaker Pelosi and Senate Majority Leader Reid to brief them on it. They urged him to propose a broad outline rather than detailed specifics. President Bush agreed to do so.

President Bush hosted a meeting with the bipartisan / bicameral leaders to discuss the stimulus, similar in composition to the upcoming Blair House meeting. That Cabinet Room meeting was unproductive.

The President then assigned his Treasury Secretary, Hank Paulson, to negotiate directly with Speaker Pelosi and Minority Leader Boehner. The three of them negotiated a compromise that followed the President’s outline, and that the President, Speaker, and Minority Leader supported. Almost all Democrats supported the bill, as did most Republicans, but with a significant contingent voting no.


Housing reform legislation was stuck for a long time until Fannie Mae and Freddie Mac started to collapse. Then it suddenly broke free.

Again you can see the results of negotiations between a Republican President and a Democratic-majority House and Senate. The bill had unanimous Democratic support and a fairly serious split on the Republican side.


Finally we have the TARP.

The first version of TARP was negotiated by Secretary Paulson with Democratic and Republican leaders and committee chairmen in an intense and conflict-ridden negotiation. The legislation failed spectacularly on the floor of the House the first time. The President’s team then negotiated by phone with House and Senate leaders of both parties, leading to a few modifications to the original package. The Senate formed a broad center-out coalition to pass the bill easily, which then succeeded the second time around in the House.

You can see broad bipartisan support, as well as significant opposition from both parties. As with the 2007 energy law and the 2008 stimulus, the 2008 TARP was enacted with Democratic majorities in the House and Senate, with leaders from the opposite party working out compromises with a Republican President.


Now we turn to the three big domestic policy issues of President Obama’s tenure so far. We begin with the February 2009 stimulus.

Other than three Senate Republicans, the bill was passed and became law on party line votes. There were no negotiations with Congressional Republicans.


Cap-and-trade is next, but only in the House.

Eight House Republicans voted for the bill, providing Speaker Pelosi with her winning margin. A significant block of Democrats voted no.


We end with the health care bills that are the subject of this Thursday’s meeting.

Once again you can see straight partisanship.


Observations and common threads

Senate Republicans peaked at 56 votes during Bush’s tenure.

President Bush used reconciliation twice three times: once in 2001 for the bipartisan tax cuts, once in 2003 for the partisan tax cuts (not shown), and once in 2005 to cut spending.

In all other cases he had to deal with potential filibusters, occasionally from both sides of the aisle.

In Republican majority Congresses, the winning margin was often provided by Democrats, especially in the Senate.

There are at least four different versions of a bipartisan vote:

  • Unifying your own party (or nearly so) and picking off a moderate block from the minority: tax cuts, TPA, Medicare/HSAs. You do this by trying to split the other side’s moderates from their party leaders.
  • Picking up the majority of the other party, at the cost of a losing a significant block from your own side: 2005 energy, TARP. You do this by negotiating with the other party’s leaders.
  • Working with the majority of the other party and getting all of their side while your own side splits deeply: 2007 energy, 2008 stimulus, housing. You do this by negotiating with the other party’s leaders when they’re in the majority.
  • Near consensus: No Child Left Behind, Pension Protection Act (in the Senate). You do this by negotiating with everyone. Miracles occasionally happen.

Why did Bush succeed at enacting bipartisan legislation?

I assume that some on the Left will say the Republican minority is now far more unified, partisan, and obstinate than the Democratic minority ever was. I think this is silly. Whatever you think of Republicans, they’re not that unified. I’m reminded of the organized crime boss in the movie Sneakers: “Don’t kid yourself. It’s not that organized.”

I believe there are six keys to President Bush’s bipartisan legislative successes:

  1. He sometimes reached out to Congressional Democrats and negotiated directly with them, even at the expense of upsetting his Congressional Republican allies.
  2. He knew how to count votes, and when not to rely on a razor-thin partisan margin for victory.
  3. He knew how to nurture existing bipartisan discussions and alliances in Congress and turn them to his own advantage.
  4. He was willing to preemptively split his own party when necessary to get a deal.
  5. He knew when and how to split the other party, negotiating with Democrats who were potential supporters of a compromise and isolating those who would oppose a deal no matter what.
  6. He and his allies generally stuck with a traditional legislative process, which builds credibility and makes members feel they are getting their fair shot, even if they lose a vote.

President Obama needs to learn each of these lessons if he wants to succeed as President Bush did.

  • President Obama explains that his proposals include {modified versions of) Republican ideas. That’s not how you bring the other party on board. You can end up at the same place by bringing members of the other party into the room and negotiating with them. Then they (in this case, Republicans) have ownership of the compromises and are more likely to support the final product. The way you get someone to agree is by bringing him into the room and negotiating with him (or her). Make the other guy feel like he got a win.
  • For a year he tried to enact legislation by relying on a universe of 60 votes from which he needed 60. That’s nearly impossible to do on any important issue, especially when you simultaneously provoke the other 40 to stand firm by shutting them out.
  • On health care he undercut Senate Finance Committee Chairman Baucus, whose bipartisan “Gang of Six” had the best chance to negotiate the core of a bipartisan compromise. Recently Leader Reid blew up a Baucus-Grassley deal on the jobs bill, further poisoning the water for any potential future bipartisan efforts. No Senate Republican can now have confidence that any Democratic committee chairman has the authority to negotiate a binding deal. Why should Republican Sen. Lindsey Graham enter into bipartisan cap-and-trade negotiations after he saw what Reid did to Baucus-Grassley?
  • President Bush alienated a significant share of his own party when he announced his 2007 energy proposal, his 2008 stimulus proposal, immigration reform, and the TARP. On cap-and-trade and especially health care, President Obama has instead tried to hold onto his left wing as long as he possibly could, making the inevitable break even more painful and losing the ability to demonstrate to Republicans that he is willing to make hard choices in his own party to bring Republicans onboard.
  • Bipartisan doesn’t always mean negotiating with the leaders of the party. You have to know when to negotiate with the opposition leaders, when to negotiate with a winger from the other party (e.g., Bush-Kennedy on education, or Bush-Kennedy-Kyl on immigration), and when to try to pick off a few moderates from the other party to squeak out your margin of victory. Other than Speaker Pelosi picking off eight House Republicans for cap-and-trade, Team Obama and Congressional Democrats have failed with each of these tactics. But have they actually tried?
  • The traditional legislative process creates legitimacy within the halls of Congress. Committee markups, bipartisan negotiations, open amendment processes, and traditional open conferences are processes that create predictability, order, and a sense of fair play. It is much easier to cultivate members of the minority party when they perceive you are playing by the rules. Team Obama and their allies repeatedly try to bypass the rules, creating new substantive products behind closed doors and relying upon nontraditional legislative processes. This undermines both public confidence and the minority’s willingness to play ball. If Senator Reid were to allow floor amendments to be offered to major legislation, even amendments he might lose, he might not face quite so many filibusters and failed cloture votes.

If President Obama wants bipartisan legislative success, he could learn a few things from his predecessor.

(photo credit: Official White House photo by Eric Draper)

Six good Obama economic policies

Six good Obama economic policies

I have been fairly aggressive in my recent criticism of the Administration. I figure it’s time I say something positive about good things they are trying to do.

Here are six of President Obama’s economic policies that I support. Several come with caveats.

  1. Make [some of] the Bush tax cuts permanent: The President proposes to make permanent the individual income tax rate cuts enacted in 2001 and 2003 for the 10%, 15%, 25%, 28%, and part of the 33% brackets. This is good.
    • Caveat: He proposes to allow the other part of the 33% bracket to increase to 36%, and for the 35% bracket to increase to 39.6%. I oppose this.
  2. Index the Alternative Minimum Tax: The AMT is screwed up. For the past ten years Congress has annually “patched” the Alternative Minimum Tax so that it doesn’t affect millions of new taxpayers. The President proposes to permanently indexing the current AMT parameters for inflation. This is good.
  3. Slow out-of-control health care cost growth: The President argues that cost growth is the core problem to be solved by health care reform. Out-of-control health care cost growth (1) leaves those with health insurance with less money available for other things; (2) prevents millions of people from being able to afford health insurance; and (3) contributes to the unsustainable growth of Medicare and Medicaid spending. The Beltway health care reform debate usually focuses on only the uninsured, ignoring the other symptoms and, more importantly, the underlying cause. Kudos to the President.
    • Caveat: Despite his Administration’s claims, the President did not propose policies that would have significantly slowed this cost growth. He identified a problem and then did not propose an effective solution.
    • Caveat: Congress ignored the President’s problem definition and again just tried to expand taxpayer-financed coverage for the uninsured.
    • Caveat: The pending legislation would dramatically increase long-term health care spending through the expansion of third-party payment for health insurance.
  4. Slow the growth of Medicare spending: The President has proposed modest policy changes to slow the growth of Medicare spending. Medicare spending is unsustainable and its growth must be slowed to prevent fiscal collapse.
    • Caveat: We need to slow Medicare spending growth even more than the President has proposed.
    • Caveat: He proposed to spend those savings on a new health care entitlement, undoing all the fiscal policy good of slowing spending health care growth. <forehead slap>
    • Caveat: I would slow the growth of different parts of Medicare. The President is primarily squeezing Medicare Advantage plans. I would make beneficiaries pay higher cost-sharing and have more means-testing, and I would squeeze fee-for-service Medicare providers (hospitals, physicians and nurses, nursing homes, home health providers, medical equipment providers, the whole ball of wax).
  5. Approve Free Trade Agreements with South Korea, Panama, and Colombia: In this year’s State of the Union the President said “We will strengthen our trade relations – with key partners like South Korea and Panama and Colombia.” These are the three nations with whom the U.S. has Free Trade Agreements pending Congressional approval. I assume with this language the President means he will submit to Congress these three FTAs and push Congress to enact them this year. This is good and long overdue.
    • Caveat: If he means something else by “strengthen our trade relations” then he’s playing a game.
    • Caveat: I’d like to say the same thing about the global free trade negotiations based in Doha, but his language was so vague I cannot draw a positive conclusion.
    • Caveat: He did almost nothing to advance free trade and free capital flows in his first year.
  6. Expand nuclear power: The President now supports the expansion of nuclear power: “And we’re going to have to build a new generation of safe, clean nuclear power plants in America.” His recent budget proposed significantly expanding financial support for the construction of new nuclear power plants.
    • Caveat: He opposes using Yucca Mountain in Nevada as a repository for nuclear waste but offers no alternative solution.
    • Caveat: Some suggest his support is contingent on enactment of a cap-and-trade bill. I see no evidence of this.

The packaging caveats in (1) and (4) are important. If Congress packages policy changes to slow Medicare spending growth with policies to increase health spending, then the result is worse than doing nothing. Similarly, if the legislative result of making some of the Bush tax cuts permanent is to cause other tax rates to go up, that’s bad.

(photo credit: Official White House photo by Pete Souza)

Carbon cap = Public option

Carbon cap = Public option

Let’s compare the public option of health care reform with a carbon cap in the clean energy/climate change/cap-and-trade debate.

Public option Carbon cap
Policy / goals
Top priority for the Left yes yes
Important to policy goals of the President yes? yes
Policy can work without it, although less effectively from the Left’s perspective yes yes
Initially pushed by outside left President
House
Passed the House yes yes
Moderate/nervous House Ds hated voting for it yes yes
Speaker and House liberals insist on it yes
(for a while)
yes
Senate
Has majority support in the Senate maybe maybe
Has 60 votes in the Senate no no
Can pass the Senate no no
Republicans
Republicans oppose the policy all almost all
Republican base hates it yes yes
Republicans see political gain if Democrats continue to push it yes yes
President Obama
Supports it when asked yes yes
Pushes for it when speaking publicly no no
Will insist on it in legislation no no

Fleshing out the comparison

I believe there is an extremely high likelihood a carbon cap, like the public option, will not become law any time in the near future. Today I would give 100:1 odds against it becoming law in 2010, and 50:1 odds against it becoming law during this Presidential term. Cap advocates have some limited leverage through EPA’s regulatory authority, which I will explain below.

The key to this conclusion is the President’s posture toward both policies. The President rarely mentioned the public option in his speeches and almost never initiated a discussion about it. Yet when asked, he always said something like “It’s good policy, I support it, it should be in a bill. I am focused on the policy goal of _____, and it’s a good way to reach that goal.” He never (slipping once) said it must be in a bill to merit his signature. This posture allowed him to insulate himself somewhat from left-side attacks, while allowing himself the flexibility to sign a bill that excluded the public option if one made it to his desk.

The President appears to take the same posture on a carbon cap. When asked, he says he supports it and that it’s good policy. Yet he rarely mentions it in speeches, never aggressively, and he always focuses instead on policy goals: clean energy through technology development and so-called green jobs. He occasionally says that pricing carbon is a good way to achieve these goals and that he supports it. In doing so he sounds exactly like he did when he spoke about the public option. The President rarely talks about “climate change,” “greenhouse gases,” or “cap-and-trade.” He much more frequently talks about “clean energy technology” and “green jobs.”

There are some differences, but they don’t affect my conclusion:

  • I agree with a friend who guesses that the President believes more in a carbon cap than he does in the public option, which arose as a relatively late legislative addition resulting from outside pressure. If this is true, then the President’s goal is to price carbon, but he is making a language/messaging choice that he should instead talk about clean energy and green jobs. I think the President is also making a tactical calculation that he cannot get a carbon cap through the Senate. As a result, the political investment he appears willing to make in a carbon cap appears comparably small to that which he made in the public option.
  • A handful of Congressional Republicans support pricing carbon and even a carbon cap. I don’t think this will have a big effect on the legislative dynamics of the two issues.

The President sets up a potential deal without a carbon cap

A few weeks ago in his State of the Union Address, the President signaled support for nuclear power, clean coal, and expanded access to oil and gas drilling. I read this high-profile signal as an offer of compromise, throwing the door open to a bipartisan energy/climate bill which I will guess might include:

  • a flexible Renewable Portfolio Standard for electricity, (possibly) mandating that each State generate a fraction of its power from renewable/clean/low greenhouse gas sources;
  • more financial support for nuclear power (the President mentioned expanded loan guarantees; dealing with nuclear waste is key but lags behind);
  • more financial support for clean coal;
  • something unspecified on oil and gas drilling (onshore? offshore? both?);
  • even more subsidies for technology R&D.

Such a bill could, I think, garner broad bipartisan support in the Senate because it would not include a carbon cap. I think Team Obama is trying to set up such a deal without getting blamed for being the one to stick the knife into the carbon cap.

Now the President has not said that he would support the above package without a carbon cap, and if asked I’ll guess he would say a bill should include all of the above and a carbon cap. This is what he did with health care and the public option until he approached the endgame. The more important question is what the President would do if it becomes clear that this package can pass the Senate without a carbon cap, and cannot pass with one. In the current environment, I think he would grab the compromise, declare victory, and tell unbelieving carbon pricing advocates that he’ll try again in the future.

Hurdles to a clean energy law without a carbon cap

The biggest hurdle to a signing ceremony is whether the most aggressive advocates for a carbon cap (who tend to concentrate on the left side of the Democratic party) would block such a bill. They could do so in at least three ways:

  1. Liberals could continue to pressure Senate Majority Leader Reid into not bringing up the bill in a procedural manner that allows such a vote. Leader Reid has so far deferred to Senator Boxer’s Environment and Public Works Committee on this issue. As long as he maintains this jurisdictional view, a non-cap compromise deal is highly unlikely. To allow for the possibility of such a deal, Reid would need to either introduce his own bill, or shift jurisdiction to Senator Bingaman’s Energy Committee. Each move would require Reid to make an explicit decision to split his conference.
  2. Even if Leader Reid were to bring such a compromise bill to the Senate floor, liberals might be able to kill the above compromise in the Senate because it’s not good enough from their perspective.
  3. Speaker Pelosi and House Democrats could refuse to accept a bill that excludes a carbon cap in a conference with a hypothetical Senate-passed bill like the one above.

Like the public option debate, this one centers on the question “Is half a loaf better than nothing?” I think the President has decided that it is. I’m not sure how the fiercest advocates of climate change legislation might feel. Their strategic challenge is that if a bill like the one described above becomes law, the chance of future enactment of a carbon cap drops from near-zero to zero. The subsidies are the dessert that accompanies the political pain of voting for a carbon cap. Once that dessert has been eaten, there is little to encourage members to vote for a later bill capping carbon.

At the same time, those advocates have to know that their chances of enacting a carbon cap this year are near zero, and there is little to suggest that those chances will improve over the next few years. So how much of a sacrifice is it to give up something now that has only a very small chance of becoming law if you wait?

I think the President can, if he pushes hard enough, get his left to yield and send him a clean energy bill excluding a carbon cap before Election Day 2010. I don’t know, however, whether he will push hard enough. I think he made a strategic mistake on health care by allowing the process to drag on (and I’m glad that he did). By not stepping up and knifing the public option early, he shifted the blame for killing it to the Senate, but at the cost of tremendous delay and ultimately of the health care bill’s failure. The same tactical calculation may present itself on a carbon cap. Would declaring a carbon cap dead increase the prospects for a clean energy law in 2010, and if so is the President willing to take the heat for being the one to say this?

A wildcard is the Environmental Protection Agency’s ability to regulate greenhouse gas emissions under current law, thanks to a 2007 Supreme Court decision Massachusetts v. Environmental Protection Agency, and a subsequent endangerment finding by the EPA. Advocates and opponents of capping carbon agree that EPA’s regulatory authority is clunky, bureaucratic, and more economically damaging than a carbon cap might be. But carbon cap advocates want EPA to move forward to pressure cap opponents into a legislative trade: we’ll stop EPA if you give us a law capping carbon.

This is the awakening climate change issue for 2010: will EPA be allowed to use their authority? Will the threat to use this authority resuscitate a carbon cap, or will it backfire and cause Congress to stop EPA from acting? The fiercest carbon cap advocates are willing to allow EPA to do some economic damage if it generates pressure for a future legislative solution. Yet there is growing center-right support, including from some Congressional Democrats, that this threat is too damaging and that EPA’s wings should be clipped. It’s easy to imagine this issue being injected into a legislative debate, and a stalemate blocking a signed law. It’s also easy to imagine a Tea Party-like tidal wave focusing on a rogue EPA as their next target, and sweeping nervous in-cycle Democrats along with them.

Conclusions

  1. Carbon cap = public option.
  2. The President is willing to sign a clean energy bill this year that excludes a carbon cap.
  3. He almost certainly won’t admit that until late in the legislative debate.
  4. In the State of the Union he created the framework for such a deal.
  5. That means such a legislative deal could happen, not that it will happen.
  6. If the President signs a clean energy bill that excludes a carbon cap, the prospects for a legislated carbon cap drop from near zero to zero.
  7. The public option dynamics could replicate themselves for the carbon cap. I would expect teeth gnashing on the left as the President hedges and ultimately dumps it overboard.
  8. While the carbon capping left wants to use EPA’s regulatory authority as legislative leverage, it’s possible this will backfire. A bipartisan center-right-Tea Party coalition to clip EPA’s wings could soon pick up steam.
  9. The effects on a clean energy bill of such a fight over EPA’s regulatory authority are unpredictable.
(photo credit: Bruno D Rodrigues)

Global climate change negotiations in color

Global climate change negotiations in color

The President spoke this morning to the UN Climate Change Summit in New York City. He’s in a tough spot. In December he will send his representatives to the global climate change negotiations in Copenhagen, and the American delegation is likely to disappoint those who advocate for a global agreement pricing carbon. I don’t think the President can deliver the U.S. Senate to set a national carbon price through a carbon cap or carbon tax. Copenhagen is going to be uncomfortable for U.S. negotiators whose body language suggests they are sympathetic to the views of European Greens. I am going to start with a refresher on Negotiations 101, and then make you dizzy with some fairly complex multicolored graphs to present a model of the interests and tensions in global climate change negotiations. Imagine a buyer and seller negotiating over a used car. Each has a range of prices that make the deal worthwhile.     Each party tries to keep their range secret from the other so they don’t give too much away. The buyer begins with an opening bid of $10K, the seller begins with $25K, and then they begin to approach each other’s prices. The buyer has a (secret) reservation price of $18K : that’s the most he is willing to pay for the car. The seller has a (secret) reservation price of $16K : the least he is willing to accept. Since the two reservation prices overlap there is a zone of possible agreement (ZOPA). In theory, a deal is possible. Whether they can reach agreement, and where in the ZOPA they finalize, depends on the skill of the negotiators. It is in their joint interest to agree to a deal somewhere in the ZOPA, if they can find their way to it. It’s hard because neither knows the other’s reservation price. If, however, the reservation prices do not overlap, then there is no zone of possible agreement, no matter how hard the negotiators try:

If $18K and $20K are their true reservation prices, then no deal is possible, no matter how skilled or well-intentioned are these negotiators. I think that on nationwide carbon pricing, there is no zone of possible agreement between the U.S. Senate and China. I don’t think a deal is possible, no matter what the President wants. And I think the President is not the principal U.S. party in this negotiation – he’s ultimately an agent. The disjointed U.S. Senate is the principal who must be sold on a global agreement. A positive carbon price reduces carbon emissions and imposes a cost on an economy. GDP is lower, incomes are lower. In addition, if the U.S. imposes a carbon price of $X and China imposes a price of zero, then the manufacture of carbon-intensive goods will naturally migrate from the U.S. to China. These economic costs are the primary reason why the cap-and-trade bill has been such a difficult debate in the U.S. Members of Congress have different views on how to measure and compare the economic costs and environmental benefits. The stated view of the Chinese and Indian governments is that the U.S. and Europe should set a positive carbon price, and China and India should set no carbon price. To go even further, it appears they believe that rich countries with historically high carbon emissions (like the U.S. and Western Europe) should also pay China and India to reduce their carbon emissions. I am going to use China in the following example. The same logic applies to all large developing nations, including Brazil, China, India, Indonesia, Korea, Mexico, Russia, and South Africa. These eight nations accounted for about 38% of global CO2 emissions in 2006. On the following graph the x-axis represents a possible U.S. nationwide carbon price, and the y-axis represents a possible Chinese nationwide carbon price. Whether they’re implemented through carbon taxes, nationwide caps, or a combination of sector-based policies is unimportant for this exercise. I will hand-wave past all that to simplify a national policy into a single number, the (probably implicit) price set per ton of carbon or CO2 emitted.

We are now at the blue dot: there is no nationwide carbon-price in either the U.S. or China. (I am ignoring lots of important sectoral policies like CAFE to oversimplify.) If the U.S. imposes a nationwide carbon price, as in the House-passed bill, then the blue dot moves right. There will be costs to the U.S. economy, and U.S. emissions growth will slow. The farther right we go, the more significant are both the economic costs to the U.S., and the reductions in U.S. (and therefore global) carbon emissions. The Chinese situation is a little more complex. The Chinese are signaling they will not accept a positive carbon price that would slow their economic growth. They are instead suggesting they should be subsidized to reduce their emissions – which you can think of as a negative carbon price (oversimplifying). The red shaded area represents what the Chinese government has said they would agree to, with darker red representing “better” from what I think is the Chinese government’s perspective. They would prefer to receive bigger subsidies and for the U.S. to pay a higher carbon price, so the red gets darker as you move down and right.

The Greens (in the U.S. and around the world) want more global emissions reductions. The farther right you move, the more the U.S. reduces its emissions. The farther up or down you move, the more China reduces its emissions – a positive carbon price in China will force them to reduce their emissions, or bigger subsidy payments from the rest of the world can encourage them to do so. The farther you move from the graph’s origin, the more total emissions are reduced and the happier a Green will be.

If you look closely you’ll see I have shaded the green so that it gets darker as you move down. In doing so I’m trying to show the alliance between climate change interests and more traditional Leftist agendas. A pure environmental policy position would value equally the top right and bottom right corners of the graph. But other left-leaning western political interests also believe that global income should be redistributed away from the U.S. and toward developing nations, including to large developing nations like China and India. The fiercest western Green advocates generally argue the U.S. should do a lot more (move right) and developing countries (including big ones like China and India) should not have to reduce their emissions, or even receive subsidies (move down). I can’t tell how much of this is a fellow-traveler policy view about the redistribution of income from rich nations to relatively poorer ones, and how much is a tactical decision by western Greens that the U.S. is more easily pressured than China. Here is my view on the marginal vote is in the U.S. Senate, shaded in blue below.

I think the American people, and enough of their Senators to matter, would reject areas below the x-axis. If disguised properly as broad-based multilateral aid, the Administration and its allies may be able to squeeze a few billion dollars out of American taxpayers for climate change subsidies to the developing world. At the same time, I think it is impossible that the marginal Senate vote would agree to use taxpayer funds to directly subsidize China to reduce its carbon emissions. Similarly, the Senate might in theory agree to move right and agree to a nationwide carbon price, but only if:

  1. it’s not too big of a price (thus, not too far right) because of the economic costs imposed on the U.S.; and
  2. it does not create too big of a competitive disadvantage for American firms relative to their Chinese and Indian counterparts.

This second point is captured in the dotted line, which represents equal carbon prices in the U.S. and China. It’s easy to imagine a Member saying “I’ll vote for a reasonable (read: small) carbon price in the U.S., so long as it doesn’t disadvantage U.S. firms relative to Chinese and Indian competitors.” I’ve allowed a little room to the right of the dotted line to show that Congress might be willing to slightly “disadvantage U.S. firms, insisting on “parity” rather than “equality.” The orange dot represents the House-passed bill. It would set a positive carbon price for the U.S., but more than I think the marginal U.S. Senate vote is willing to support. OK, now put on your 3D glasses. Let’s overlay the Chinese government position (stated), the traditional Green view, and the marginal U.S. Senate vote. Is there any area where all three overlap, any Zone of Possible Agreement among all three parties?

Nope, no Zone of Possible Agreement. In particular, the only places where the marginal U.S. Senate vote and the Chinese government positions (blue and red) overlap is the origin point (where we are now) and a very small segment of the x-axis, representing a tiny U.S. carbon price. Even that looks unlikely, and the Greens (who have significant advocates on the left of the Senate Democratic caucus) find it unacceptable. The Greens (especially in Western Europe) and China can agree on an area far to the right and at or below the x-axis, in which the U.S. imposes a significant domestic carbon price and the Chinese and Indians impose no price or even get subsidized. The Senate (and American voters, I think) will never go there. We saw this in the late 90’s when the Senate unanimously rejected the Kyoto agreement. Interestingly, there’s an area where the Greens and the U.S. could team up, along the dotted line that slopes upward and to the right. The Greens would have to moderate their expectations, shrinking the white semicircle a bit until it overlaps the blue.Such an alliance would then try to pressure large developing nations to “do their part.” President Obama used language like this today at the UN Conference:

But those rapidly growing developing nations that will produce nearly all the growth in global carbon emissions in the decades ahead must do their part, as well. Some of these nations have already made great strides with the development and deployment of clean energy. Still, they need to commit to strong measures at home and agree to stand behind those commitments just as the developed nations must stand behind their own. We cannot meet this challenge unless all the largest emitters of greenhouse gas pollution act together. There’s no other way.

A final warning: the above analysis cuts to the core issue of setting a national carbon price to illustrate the fundamental negotiating interests and tensions. Yes, there are areas for productive incremental cooperation. My favorite of these is the push for all nations to repeal tariff and non-tariff barriers to clean energy and carbon-reducing technologies, most effectively advocated by my former colleague Dan Price. Whatever incremental agreements are made, the above tension will remain, and it shows why I think a negotiated global carbon price is highly unlikely and the President is in a tough spot.

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