President Obama Begins to Take on Climate Change

President Obama Begins to Take on Climate Change

January 27, 2009

Within one week of taking office, President Obama has dispelled any doubts on whether he’s serious about tackling climate change. His stimulus plan will direct more tax and spending subsidies to climate-friendly technologies and fuels over the next 18 months than the Bush administration did over the last eight years, and the federal government will offer itself as a model by bringing federal facilities up to the “Gold Leeds” energy-efficiency standard. Moreover, his EPA will let states that as yet are politically more climate-sensitive than Washington, including California and a dozen others, set more stringent CO2 emissions standards than the federal versions. And other climate-friendly laws and regulations are on their way, including higher federal fuel-efficiency standards for automobiles and trucks.

Sound as these steps generally are, they leave undone the hard work that climate scientists agree must be done — namely, put in place a policy to embed the cost of carbon in the price of everything our businesses and households use, especially that electrical power which mostly still depends on the most carbon-intensive fuel we have, coal. And there’s a good reason why President Obama isn’t starting with this step, even though it’s the most important one: Making people pay more for carbon-intensive energy and the products and services produced with it means that, well, people have to pay more — and people don’t like that, especially in very hard economic times.
And, the inconvenient truth is, those are only the beginning of the costs to contain climate change, since retrofitting our factories, offices, homes and our power systems for less carbon-intensive and energy-intensive technologies and materials will cost everyone, well, a lot more than the stimulus package. To his credit, President Obama corrected one of his rivals for the nomination who tried to claim that we could beat climate change at little cost. And there is some other good news here: The costs to redo our lives around more climate-friendly fuels and technologies can be spread over two generations — and paying those costs will save much of planet for our grandchildren.

The current, hard economic times hopefully will focus more of the climate change debate on how to contain those costs, both the direct costs to people and businesses and the indirect ones through the larger effects of these policies on the economy. And if we don’t figure that out, any systemic reform that doesn’t contain those costs may not survive long enough to make a difference. Here is where a real divide opens between the two main options for embedding the price of carbon, a cap-and-trade system and carbon-based taxes. On the direct costs, a tax-based system has the advantage: You can tax energy based on its carbon content, and then turn around and return the revenues to everybody through payroll tax cuts or simple disbursement to every household. Cap-and-trade could do something of the same thing by auctioning off its permits to generate greenhouse gases and then using those proceeds for tax cuts. But so far, every cap-and-trade plan either gives away its permits (businesses wouldn’t have it any other way) or uses the auction revenues to pay for other climate-friendly initiatives. In either case, cap-and-trade leaves everyone’s incomes lower, a pretty nasty outcome for most of us.

Another inconvenient truth here is that carbon-based taxes also have the advantage on indirect costs. The great asset of cap and trade is that it applies an actual cap to CO2 emissions. But whenever demand for the energy that produces those emissions is greater than had been expected when the cap was set — for example, because the summer is hotter than expected, the winter is colder, or the economy grows faster than anticipated — demand will hit the cap, and prices will spike for both the permits and the energy that underlies them. Adding a new layer of national price volatility in energy prices, on top of what we already have to bear from international forces, would be another nasty outcome.

Carbon-based taxes have their own problems. They don’t involve a set, annual cap on greenhouse gases, so keeping us on a safe emissions path would probably entail adjusting the level of the tax on a pretty regular basis. And the prospect of enacting a large, new tax and then choosing which offsetting taxes to cut could itself easily turn into a nasty piece of political business. It’s no wonder that President Obama isn’t eager to referee this fight. Of course, the public’s faith that of all of our national leaders, he alone is best equipped to drive and guide our responses to daunting challenges is also the main reason he’s the president today.



A Serious Thought or Two on the Inauguration, from Halfway Around the World

January 21, 2009

I’d rather be spending this week in Washington celebrating with friends and my country the politically and spiritually invigorating elevation of Barack Obama to our presidency. These feelings lie very close to the heart of patriotism, and they are an exquisite pleasure to feel again without reserve.

Instead, I find myself in one of the coldest places on earth, Mongolia’s capital city of Ulan Bator, giving advice on the process of economic and social modernization. On the way, I stopped off in Beijing, where the extravagant new bones of that ancient city, from the Olympic Village to the new Ritz Carlton on Financial Street (no joke), have the signature taint of the very-recent time when money was no object, prosperity seemed unending, and architectural glitz was the national emblem of conspicuous consumption. Here in Mongolia, a country perched atop huge mineral deposits, people are adjusting with difficulty to the end of ballooning commodity prices and an accompanying overconfidence that led to tax and regulatory changes for extracting as much as imaginable from the foreign mining companies developing the resources. Now that those prices have sunk, those changes could force the companies to pull up stakes from Mongolia and head for Africa’s mineral deposits. So the global crisis leaves Mongolia wrestling with how to give up its most recent hopes for itself and settle for a slower route to modernization that will cost a lot more.

On this wondrous day of the inauguration of a serious, intelligent and deep-valued person — all things relatively new for us and for the world looking to us again — the question is how rude our own awakening will be. Like the Mongolians with their mineral deposits, President Obama has enormous resources. And much as the Mongolians could squander their assets by holding fast to a narrow minded view that doesn’t take account of new conditions, we could squander our own historic moment of extraordinary unity of purpose and faith in our new leader’s capacities.

To avoid this trap, we all have to recognize not only the real nature of our deep and dangerous economic and geopolitical problems, but also the pitfalls in our own system that could divert our new leadership from the tasks history will ultimately remember them for.

President Obama’s signature governing act in his first year will almost certainly be the paths he charts for the $350 billion bailout fund and the trillion dollar stimulus. The pitfall for both is politics-as-usual, while the path to meaningful, productive change will rest on transparency, accountability, and innovation. The change we need here is an end to giving the most well-connected financial institutions and interest groups whatever they ask for. The changes we need for both the bailout and the stimulus are openness about who gets what and under what conditions; accountability that requires those who receive bounties from the taxpayers to actually use them for those taxpayers benefits, by extending more credit and advancing a 21st century economy and society; and innovations that can address the underlying forces driving our problems, especially the rising foreclosure rates for the financial crisis and the stagnation of incomes that laid part of the foundation for the current Great Recession.

The other pitfall for our new president and the rest of us to begin to think about is the hangover that will hit us from the extraordinary steps we’re being forced to take now. Several years of deficits topping $1 trillion, on top of what looks to be a doubling of our monetary base over just six to eight months, could ultimately produce the greatest underground, domestic inflationary pressures in more than a half-century. Moreover, they are likely to come to the surface a few years from now, just as our boomers’ demands on government spending begin to add up exponentially. This could create an acute financing crisis for American government, on top of rising inflation, and the second economic crisis of the Obama presidency. Recalling John Kennedy, what we can do for our country is to be prepared to support serious entitlement reforms that will mean less for all of us and even, yes, new taxes on top of it.

But today, wherever we are, let’s celebrate our own good judgment and good fortune in Barack Obama.



How to Find a “Free” $420 Billion to Stimulate the Economy

January 14, 2009

President-elect Obama says he’ll consider any good idea to address our accelerating economic decline and help stabilize the financial system. In fact, there’s a huge, untapped resource to do both sitting on the balance sheets of America’s multinational companies: Their foreign subsidiaries are holding about $1 trillion in past earnings, because our tax laws defer the U.S. corporate tax until the parent companies bring those earnings back to the United States. If we can get them to do just that, it could finance new jobs and new capital investment, and provide additional liquidity to our strapped financial system. It’s the closest thing to “found money” that Congress and the new administration will ever find in the current crisis.

And we can make it happen by temporarily cutting the tax rate on earnings brought back here. In fact, we did it once before: In 2004, Congress cut in the corporate tax on such “repatriated” earnings for one year from 35 percent to 5.25 percent. Along with a colleague, Aparna Mathur, I’ve looked at new IRS data to see how well the temporary tax cut worked. It increased inflows of foreign-source earnings by some $312 billion, including $252 billion by U.S. manufacturing companies. The 2004 law also told companies how they could use the new funds they brought back; and surveys found that that they used $73 billion of those earnings to create or retain jobs, $75 billion for new capital spending, and $39 billion to pay down domestic debt. Without the tax break, companies keep their foreign source earnings abroad indefinitely, or at least until they can be used to offset domestic losses for tax purposes. That’s made the 2004 law a free lunch: It produced $34 billion in new federal revenues, including $16 billion in direct corporate tax revenues and $18 billion in personal tax revenues on income the additional jobs and higher wages supported by new funds.

We also have run the numbers to estimate what would happen if the Obama administration tried this again. We found that it would bring back $420 billion in foreign-source income now held abroad, $340 billion of that coming into U.S. manufacturing companies. If Congress once again limits how the money can be used, it could mean $97 billion for employment, enough to create or save 2.6 million jobs over two years. It could mean $101 billion for new capital spending, enough to increase the capital stock of U.S. manufacturers by 2 percent and produce long-term wage gains of 1.3 percent. It also could produce or free up $52 billion for companies to reduce their domestic debt, the equivalent of 21 percent of the bank equity infusions provided by the Treasury TARP program in 2008. Finally, the free lunch: The repatriated funds would produce nearly $45 billion in new federal revenues, split between the corporate taxes on the funds themselves and personal taxes on the additional wage income coming from the job retention or creation and the wage increases linked to the new capital spending.

We will publish a full report on this idea within a few days.

The economy is so depressed now, that this policy may not work out precisely the way it did in 2004-2005. This terrible recession shouldn’t affect how much foreign earnings come back under this policy, but it could mean that less of those funds will be used for new capital spending or jobs, at least for another year, and more will go to paying down domestic debt. Even so, the stimulus effects would be substantial, and it would actually reduce the deficit a little — and that should make it a genuine priority for the new administration.



Politics and the Economic Crisis

January 9, 2009

Barack Obama’s historic election as a new, national agent of change will face a daunting test as the economic crisis continues to accelerate, and the political pressures arising from what must now be called “The Great Recession” begin to reshape the response.

The latest evidence is today’s unemployment data: One million jobs lost in two months; the sharpest eight-month rise in the jobless rate since 1945, when tens of millions of soldiers and sailors were demobilized; and losses across every sector and every region. Jobs are in freefall along with the markets, investment, consumer spending, and household wealth. And economists are now genuinely frightened by the course the Great Recession is taking, because there’s been nothing like it in anyone’s experience.

That’s why long-time advocates of fiscal probity now call for stimulus topping $1 trillion, and why every spending and tax idea floating around Congress for the last decade is back on the table again. The political pressures and real concerns are so overwhelming that there’s talk of large tax cuts, despite the consensus among economists that when people and businesses are as economically downcast as they are today, tax relief has little stimulus power. That’s not only politics at work; it also reflects a sense of grave foreboding among many of those same economists.

We do need unprecedented stimulus — but all of the stimulus in the world won’t change the course of this crisis until we also address its underlying forces. The wealth of American households and the portfolios of American financial institutions will continue to tank until the housing market stabilizes — or at least until foreclosure rates return to normal. And the most aggressive, easy policy in our history won’t be enough, and financial institutions won’t begin normal lending again, until they’re more confident that the hundreds of billions of dollars in mortgage-backed securities and other derivatives they still own aren’t headed for the drain as well.

The new administration can take on these challenges directly, as candidate Obama pledged to do with extraordinary foresight. For example, we can impose a 90-day moratorium on foreclosures and use the time to renegotiate the terms of tens of thousands of distressed mortgages held by Fannie Mae and Freddie Mac. One idea promoted by many economists is to convert those mortgages to 30-year fixed at 5.25 percent, which happens to be long-term mean rate for Fannie and Freddie mortgages. It won’t stop foreclosures, but it should bring down foreclosure rates to near-normal levels, which would do more to stabilize the financial system than the bailouts in the Bush administration’s own Wall Street version of tsunami stimulus. And some tough love from the new Treasury Secretary could help restart the lending process: Having done what we can to stabilize the value of their portfolios, we should consider requiring institutions receiving federal aid to use a real share of that assistance to restart their lending.

We need large-scale stimulus, but it will only work if we first address the underlying problems. Otherwise, 18 months from now, we could be $1 trillion poorer and little to show for it.