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Chinese-U.S. Exchange Rates and Knowledge Capital Flows: Why We Feel Poorer

Posted on by The Progressive Policy Institute

The short summary:   The Chinese policy of buying dollars can be best understood as an indirect purchase of U.S. knowledge capital–technology and business know-how.  That, in a nutshell, is why we feel poorer today. Unless the Obama Administration understands the link between the undervalued yuan and the global  flows of knowledge capital,  negotiations with China are doomed to fail.

Viewed in the usual economic light, Chinese exchange rate policy in recent years looks like a gift to the U.S..   By buying up dollars to keep the yuan low, China–still a poor country– is effectively lending money to the U.S.–still a rich country–to buy Chinese products.  According to the official statistics, the U.S. has run a cumulative $1.4 trillion trade deficit with China since 2005. But over the same period, Chinese ownership of  dollar-denominated financial assets in the U.S. has risen by $1.3 trillion.

To put it another way, the conventional statistics seem to be saying that  the U.S. is getting $350+ billion a year in cheap clothing, electronics products, and toys at no real cost today.  What’s not to like?

But if this explanation was really correct–if  that purchase of dollars  was a gift from China–the U.S. would  be feeling happy and prosperous right now.  We have received all of these cheap goods and services, without having to give up very many of our own resources.

But of course, the U.S. doesn’t feel rich and happy right now–we feel poorer, while the Chinese are feeling more prosperous. How can we explain this?

The  reason why the Chinese purchase of dollars seems like a gift is  because we have a 20th century statistical system trying to track a 21st century  global economy. We can do a decent job tracking the flows of goods and services and a passable job tracking financial flows.  But there is no statistical agency tracking global knowledge capital flows–and that’s where the real story is. Take a look at this diagram.

The first three boxes represent the conventional view: The U.S. gets cheap goods and services, and then pays for them by selling financial  assets.

But that leaves out the  the transfer of knowledge capital  from the U.S. to China. In effect, the Chinese purchase of dollars is a mammoth subsidy for the transfer of technology and business-know into China.

Consider this. When China keeps the yuan low, that’s an inducement for U.S.-based companies to set up factories and research facilities in China, both for sale in China and for imports back to the U.S. .  And that, in turn, requires a transfer of  technology and business know-how from the U.S. to China.

My favorite example is furniture makers.  Over the years, U.S. furniture makers had accumulated this vast storehouse of knowledge–for example, how to make  coatings on dining room tables that are less likely to chip or discolor from heat or liquids. That’s one of the differences between a low-quality and a high-quality table.

As the manufacturing of furniture was offshored to China, the knowledge capital had to be transferred as well.   And that, in turn, helped turn the Chinese furniture industry into a global exporting powerhouse.

Now, let’s stop and make  three points here. First, we need to compliment China. It is not easy to absorb knowledge capital from the outside and make good use of it.  Frankly, all sorts of other countries could have tried the same exchange rate trick, and it wouldn’t have worked for them.

Second, the transfer of knowledge capital to China doesn’t mean that the same knowledge capital  disappears in the U.S. However, our knowledge capital  does become less valuable because there is more global competition–and that’s why we feel poorer. (see my earlier post on the writedown of knowledge capital)

Third, what’s needed from Washington is a sophisticated  response that both focuses on rebuilding our own knowledge capital, while at the same time slowing down the exchange-rate knowledge capital pump. More to come on this.

crossposted at Mandel on Innovation and Growth

False Start

Posted on by The Progressive Policy Institute

House Republicans start work today on their first big initiative – repealing President Obama’s health care reform. That the new GOP majority has made its top priority a purely symbolic and, let’s face it, vengeful act speaks volumes. Don’t expect the 112th Congress to be a model of legislative decorum and bipartisan comity.

Sobered like everyone else by the Tucson tragedy, Republicans have promised a “thoughtful” debate. But the sophomoric title of their bill – “Repealing the Job-Killing Health Care Law Act” – gives the game away. Even Speaker John Boehner, supposedly the adult among the new class of conservative enfants terribles, can’t refrain from calling the Accountable Care Act “job crushing” and “job destroying” on his website.

In fact, while the new health care law has some flaws, wholesale destruction of jobs is probably not one of them. Although no one can credibly predict the net employment effects of this highly complex reform, it seems likely that adding 30 million new paying customers to health insurance markets would increase demand for medical services.

In any case, House leaders know they can’t undo the President’s health reform in toto, but nonetheless feel they have to give their militant cadres a chance to get animosity to Obamacare out of their system. Once the House passes the repeal bill, probably tomorrow, it will die in the Democratic Senate. Then Republicans will get down to the more serious business of trying to pick apart the Accountable Care Act piecemeal.

In GOP eyes, the ripest targets include the requirement that everyone buy health insurance, a new long-term care insurance program, and taxes on insurance companies. While few Democrats want to undo the party’s historic achievement in finally getting most Americans covered, some will likely join GOP efforts to kill or amend these provisions.

That’s especially true of the individual mandate. It is opposed by a majority of voters, and 20 states are challenging its constitutionality in the courts. Yet, as Republicans well know, it’s also the linchpin of reform. At the heart of Obamacare is a deal in which insurance companies agree to stop cherry picking healthy customers and denying affordable coverage to people with “preexisting conditions” in exchange for adding most of the uninsured to their customer base. The deal unravels without the mandate, because then only the sickest people would take advantage of the new law, driving up premiums for everyone. Democrats tempted to oppose the mandate should keep that in mind.

As House Republicans lash the mandate as an infringement on freedom that should stink in the nostrils of all liberty-loving Americans, a little history is in order. One reason we have an individual mandate is that Republicans have opposed alternative ways to extend coverage for all Americans. They successfully blocked President Clinton’s employer mandate in 1994. And of course, they vehemently object to a national health care system that insures everyone (and taxes them to pay for it) whether they want it or not.

In reality, no truly voluntary health scheme can get around the adverse selection problem. The individual mandate is an imperfect solution, but the right question is, compared to what? The “alternatives” advanced by the GOP last during the great debate over Obamacare did not even pretend to cover most of the uninsured.

As Jill Lawrence reports in Politics Daily, health policy analysts are thinking creatively about different ways to induce people to seek health insurance. But the last thing House Republicans want to do is to improve Obamacare. Their goal is evisceration.

That’s too bad, because the nation could use a serious debate about refinements in the $1 trillion Accountable Care Act. The new long-term health care benefit incorporated in the bill (the Class Act) does need a second look from budget-conscious lawmakers. It’s especially important that the Act’s rather weak cost containment provisions be strengthened. And there will be plenty of adjustments to be made as this enormous bill is implemented between now and 2014, when its main provisions fully kick in.

In short, a party serious about governing would seize the opportunity to make fundamental improvements in the 2010 health reform law. In embracing a rollback strategy instead, House Republicans have gotten off on the wrong foot.

Repeal ObamaCare Week Begins

Posted on by The Progressive Policy Institute

It’s officially Repeal ObamaCare Week in the U.S. House, and the air will be filled with the noise of a renewed battle over the alleged benefits and demerits of that landmark legislation. Once the repeal bill has formally passed the House and formally died in the Senate, Republicans will move on to their real agenda of disabling health reform indirectly.

It’s not clear at this point which provisions will be targeted most aggressively: the individual mandate that makes coverage of the less healthy uninsured possible; the Medicaid mandates on the states (many of which are itching to cut Medicaid); the long-term care insurance program; the funds made available to set up health insurance exchanges—these are all possibilities. And while House Republicans are instructing their committee to begin drafting “replacement” legislation for the 2010 Act, there’s no real indication they are serious about their own “ideas” for health reform, other than as a way to deny association with the health care status quo.

As the health reform repeal saga plays itself out, pressure is steadily mounting to find some way to avoid defeat of a debt limit increase, which will probably be necessary by March. And while the growing number of Republicans (including three proto-presidential candidates) demanding a defeat of this measure all say they are holding it hostage to a major deficit-reduction package, there’s no consensus on how much in the way of spending cuts will serve as an adequate ransom.

On the 2012 front, Democratic prospects for hanging onto the Senate took a hit as Sen. Kent Conrad of North Dakota announced he would not run for another term that year. ND Democrats lost their other senator, Byron Dorgan, to retirement last year, while veteran at-large House member Earl Pomeroy was defeated.

Meanwhile, a Republican senator thought to be vulnerable to a 2012 conservative primary challenge, Richard Lugar of Indiana, took his political life in his hands by calling for a return to the federal assault gun ban of the Clinton years, which expired in 2004. Another step like that will probably feed rumors that Lugar’s privately decided to retire, though he’s shown no sign of it publicly.

In other 2012 news, New Jersey Gov. Chris Christie announced he was not interested in running for president this cycle. Christie had become a very hot property of late among Republicans looking for an alternative to what is shaping up as a dangerously weak field, though the logistics of a first-term governor running for president were probably prohibitive. An effort to draft Rep. Mike Pence of Indiana (currently mulling over a 2012 gubernatorial candidacy) to run for president was publicly launched, with influential RedState blogger Erick Erickson cheerleading from the sidelines. And Sarah Palin’s interview with Fox’s Sean Hannity last night might well be interpreted as her effort to rally conservative base support as assessments of her potential presidential strength go south. Speaking of Palin, Nate Silver took issue with the common meme (most recently articulated by Ross Douthat) that her notoriety is a pure media construction, noting that polls show her to be the most galvanizing figure in American politics.

The Democratic candidate for president in 2012, Barack Obama, got some good news as his job approval rating moved over 50 percent for the first time in months in two major polls, from CNN and ABC-Washington Post. And as you have probably heard, the White House staff got a familiar addition this last week, as former DLC president and Clinton staffer (and most recently, staff director for the Bowles-Simpson deficit reduction commission) Bruce Reed became vice-president Joe Biden’s chief of staff, joining his close friend and Clinton-era colleague Gene Sperling (the new chairman of the National Economic Council) as major new administration hires.

Hu’s on First

Posted on by The Progressive Policy Institute

China’s President Hu is winging his way to DC as I type, set to dine with President Obama this evening.  The summit will be an interesting mix of symbolism and substance — most summits share elements of both, of course, because the two sides are usually equally interested in the wonkery and pageantry.  This time, not so — the substance and symbolism are bifurcated. China values the image of a proper reception on the world’s stage, while the U.S. is more interested in taking a hard line, discussing military ties, North Korea, human rights, currency revaluation and the like.

PPI has churned out a fair bit of China-related material in the last several months, and if you’re trying to read up on everything China-related during the summit, here’s a good guide to set you on the right path:

1.  In December, PPI hosted a forum on US-China relations, featuring Sen. Chris Coons (D-DE), Asst SecDef for Asia Chip Gregson, plus James Fallows, Joseph S. Nye Jr., and Mike Chase (see below).  We were trying to get at the question of balance in dealing with China’s rise — emphasizing cooperation where we can, being aggressive when we must, while properly understanding the limits of China’s power. As Nye put it during the panel:

There is a rise in Chinese power, but it’s a mistake to over-estimate it. The size of China’s economy and our economy may be equal in size by 2030, but they will not be equal in composition, and per capita income will only be 1/3 of our per capita income.

You can watch the CSPAN coverage here.

2.  Naval War College professor and PPI author Michael Chase has written three memos on the Chinese military, which you can read here (on China’s military budget), here (on its anti access and area denial strategy), and here (on its growing naval capacities).  Here’s his basic conclusion:

In short, the U.S. will need to strengthen its ties to key countries in East Asia and develop strategic and tactical military concepts and capabilities that would allow it to counter China’s growing military power. Meanwhile, U.S. policy makers must seek collaboration with the Chinese military in an effort to highlight the benefits of being a global stakeholder to Beijing.

3.  Finally, yours truly has penned a series of China-related posts in the last few months, on issues like North Korea, Chinese soft power (or lack thereof), and open-seas sovereignty issues.

Even though there seem to be a thousand pressing issues, here’s an overarching one that could could have grave implications in years to come:

Sino-American tensions in military relations are nothing new, but Secretary Gates’ trip continues to expose a fascinating—and potentially dangerous—rift inside the Chinese bureaucracy: the lack of communication between Beijing’s military and civilian leaders.

This week, China unveiled the J-20, its first and only stealth fighter.  China’s bizarre choice of this week—during Gates’ visit—to flex its newfound military muscles by test-flying the J-20 for the first time. When Gates signaled to President Hu that the test flight was unnecessarily provocative, Hu replied that it had “absolutely nothing to do” with Gates’ visit. Pointedly, Gates acknowledged his concern about the Chinese military acting independently of the political leadership, a problem that could in a worst-case scenario lead to unauthorized military action against, for example, Taiwan.

Getting China’s leaders to communicate with one another is well-outside the Obama administration’s powers, of course, but continuing to press Beijing’s political leadership on the issue is a good start.

Obama Endorses Innovation as Regulatory Principle

Posted on by The Progressive Policy Institute

Today President Obama took a big step towards improving the federal regulatory process. In particular, he came out with an executive order that addresses two of my big concerns: The cumulative effect of regulations, and bringing innovation as a key goal in the regulatory process.

Sec. 3.  Integration and Innovation.  Some sectors and industries face a significant number of regulatory requirements, some of which may be redundant, inconsistent, or overlapping.  Greater coordination across agencies could reduce these requirements, thus reducing costs and simplifying and harmonizing rules.  In developing regulatory actions and identifying appropriate approaches, each agency shall attempt to promote such coordination, simplification, and harmonization.  Each agency shall also seek to identify, as appropriate, means to achieve regulatory goals that are designed to promote innovation.

This is very important.  Up to this point, innovation has just not been part of the regulatory assessment process at all. Similarly, the cumulative impact of regulation has not been taken into account at all. I applaud the Obama Administration for this change.

However, the Obama initiative doesn’t go far enough to set out the principle of countercyclical regulatory policy–that is, stressing the importance of encouraging  growing and innovating industries during this period of economic weakness, and only regulating if necessary.

In addition, at the Progressive Policy Institute, we’ve been working on a proposal for  a Regulatory Improvement Commission. The RIC,  modeled on the BRAC commission, will provide a transparent and systematic process for identifying regulations that can be improved or pruned, while  maintaining important social values. Stay tuned.

This piece is cross-posted at Mandel on Innovation and Growth

What’s Next For Climate Change Policy?

Posted on by The Progressive Policy Institute

The new Congress is now in session, with a large GOP majority in the House and a much diminished Democratic majority in the Senate; the prospects for serious climate change legislation in the U.S. are dimmer than ever. The Republican Party has largely turned its back on science and its own conservative ideas (remember, McCain was a champion of cap and trade back in 2008), and because of the profound climate denialism of the Tea Party movement even once reasonable Republicans are now turning their backs on the overwhelming scientific evidence, and the many ways comprehensive climate policy is good for the overall economic and security interests of the nation. (To be fair, there are a few Democrats in fossil-fuel dependent states that are also opposing new climate measures, such as Senators Rockefeller and Manchin of West Virginia.)

But not all is bleak; there are still a number of reasons to be mildly optimistic that significant progress can still be made in the run-up to the 2012 elections.

  1. The EPA is set to roll out new regulations on greenhouse gas emissions from power plants, which have the potential to reduce greenhouse gas emissions from the power sector by a few percentage points over the next few years. The rules will make coal generation less economically viable, and likely spur new development in less greenhouse gas-intensive sources, such as natural gas, in addition to renewable sources. I highly recommend the work by David Roberts at Grist for details on the EPA’s actions and their consequences. On January 13th the EPA revoked the permit for a massive mountain-top removal coal plant (which had been approved by the Bush Administration in 2007), signaling that the agency is prepared to put an end to the industry’s controversial practice.
  2. The Obama Administration has given the okay for a host of huge new solar plants on federal lands and gone a long way to streamlining the process by which such plants can be built. By reducing bureaucratic hurdles and red tape for large solar installations, we are likely to witness a large increase in mega-solar plants. Aside from the higher cost of solar (relative to fossil fuel), the biggest hurdle to widespread adoption has been the huge time lags and transaction costs in the permitting process; the Administration’s moves go a long way towards decreasing these barriers. The economies of scale of these plants will likely lead to significant cost reductions, making solar much more competitive in the near future. It’s important to note that these solar plants mostly rely on solar thermal technology―an 18th century technology using mirrors to heat water and produce steam, which powers a turbine―that is fast-becoming the low-cost solar alternative.
  3. The announcement by Google that it will invest $5 billion in a massive electricity transmission line in the Atlantic will help spur the development of massive wind farms off the Eastern seaboard. These hold tremendous potential and could one day provide most or all of the power for many of the East Coast’s major cities.
  4. The G-20 is moving forward with its plan to eliminate or severely reduce fossil fuel subsidies in the “medium” term. This is extremely difficult to accomplish politically, given both the entrenched interests who will lose billions and the effect on consumer prices, but even a slow and steady removal of these subsidies will help to tilt the energy mix towards less greenhouse gas-intensive forms of energy and decrease overall emissions.
  5. California is finally moving forward with its climate legislation AB32, as the final challenges to the law have been defeated. While the legislation doesn’t go into effect until 2012, it is the most progressive and far-reaching climate change policy in the world and the results are likely to be extremely consequential for the nation, and ultimately any future international climate change regime. California is the world’s 8th biggest economy so if comprehensive climate change legislation can work here it will prove a global model; according to UC-Berkeley Professor Peter Berck AB32 is likely to lead to a net increase in jobs in California because of the major energy efficiency improvements that the legislation will force into action. We will soon see if these optimistic predictions are borne out by the reality on the ground.
  6. In 2010 private investment in green energy soared to a record high, and with the global economic recovery gaining momentum oil prices are likely to keep rising, providing additional economic incentives for alternatives. To date, much of this green investment has been outside the U.S. because of the failure to pass comprehensive national policy, but there is still time for the U.S. to catch up if we can get serious.
  7. Significant progress was made in the recent COP16 meetings in Cancun, with the major developing country emitters agreeing to verification of their emissions reductions in the future. Steps were also made to begin the implementation of the major forest carbon program, REDD, which has the potential to provide a cheap path to effective carbon emissions, while also preserving much of the world’s remaining forests.

As I detail in my new book, What Environmentalists Need To Know About Economics, the theory, facts, and ingredients for good policy, are on the side of those who want to take an aggressive and forward-looking approach to global climate change (and other critical environmental issues); hopefully, the intellectually honest and serious Republicans and conservatives will pressure the GOP to return to its pro-environmental roots and become constructive players in the national conversation. More on this soon.

Testing the New Mood in Washington

Posted on by The Progressive Policy Institute

Everyone in Washington is signaling that political life will return to semi-normal after the hiatus created by the shootings in Tucson, though gestures (genuine or not) of enhanced civility and collegiality remain the order of the day, for a while at least.  This “new mood” will be put to the immediate test next week when House Republicans hold a formal vote on the (seriously, this is the official title) “Repealing the Job Killing Health Care Act.”

The outcome is foreordained by the earlier party-line vote on the rule for this bill, and no one expects it to get anywhere in the Senate.  Thus it’s all agitprop, and House GOPers will strain to keep some control over the lurid rhetoric about health reform threatening the fundamentals of American liberty that so many congressional candidates embraced during the 2010 campaign cycle.

Meanwhile, the clock is ticking on the broad fiscal issues that will in particular challenge congressional Republicans, who have made so much noise about restoring fiscal discipline, but who have mostly distinguished themselves by putting tax cuts off the table while thumbing their noses at the Congressional Budget Office’s once-sacrosanct role of acting as a bipartisan scorekeeper on the cost and benefits of proposed legislation.

One key issue, of course, is whether Republicans will signal an intention of doing something about entitlement spending or will instead let the full brunt of deficit reduction fall on non-defense discretionary spending (questionable in part because of the immediate negative economic impact that would have by reducing public sector employment and further dampening consumer demand).  An interesting and sure-to-be-debated perspective was offered today in a New York Times op-ed by National Review’s Ramesh Ponnuru, who bluntly reminded Republicans of the long history of failed GOP efforts to go after Social Security and Medicare absent Democratic “cover:”

Reforming these programs is vital to our nation’s long-term fiscal health — which is why Republicans should resist this advice and leave the issue alone. Reform is impossible this year or next unless President Obama takes the lead on it. What’s more, Republicans have no mandate for reform, and a failed attempt will only set back the cause.

Unsurprisingly, there’s also an effort underway from the left side of the ideological spectrum, under the loose umbrella of a group called “Strengthening Social Security,” to raise pressure on the president to avoid embracing the kind of entitlement benefits cuts suggested by the Bowles-Simpson deficit reduction commission when he makes his State of the Union Address.  If Republicans do predictably make their interest in entitlement spending contingent on presidential “cover,” as they did during the Clinton administration, then the internal White House decision on the administration’s own fiscal strategy could have a big impact on what actually happens to non-defense discretionary spending this year.

On the more purely political front, the Republican National Committee is voting today on its chairmanship, with prospects for another term for embattled incumbent Michael Steele looking grim.  With three major opponents in the field, none of whom seems to command a majority of the RNC, a multi-ballot election is very likely, with Wisconsin Republican chairman Reince Priebus, once a Steele ally, considered the front-runner.  Steele’s supporters appear to be making a last-minute attempt to spread fears that Priebus is too close to potential presidential candidate Haley Barbour and his nephew, Mississippi RNC member Henry Barbour.

Speaking of presidential wannabees, Georgia-based conservative radio talk host Herman Cain became the first Republican to officially file exploratory committee papers for the 2012 race to oppose Barack Obama.  Cain, an African-American former business executive, made an unsuccessful run for the Senate in 2004 (losing to fellow-Republican Johnny Isakson), but has become a Tea Party favorite on the airwaves.  He recently won a 2012 straw poll conducted on the website of the influential RedState blog, though it should be noted that RedState is Georgia-based as well.

More generally, as David Weigel of Slate has noted, the 2012 presidential cycle is getting underway very slowly; 14 candidates had at least set up exploratory committees by this time four years ago (in 2004, five Democrats had done so by this point on the calendar).  In the absence of a real front-runner, the reluctance of supposed “dark horse” candidates like John Thune, Haley Barbour, Mike Pence, Mitch Daniels, and Chris Christie to get into the race has increased the stock of better-known retreads like Mike Huckabee, Newt Gingrich, and Mitt Romney.  And while Sarah Palin’s political status has taken a serious hit just before, during, and after the Tucson tragedy, she is another potential beneficiary of a sluggish-to-develop field.  If Palin decides against running, keep an eye on her close friend Rep. Michele Bachmann of Minnesota, who is making noises about a candidacy and planning to spend some time in her native state of Iowa, where she will be squired around by right-wing icon Steve King.

The Washington Post Gets its Signals Wrong on High-Speed Rail

Posted on by The Progressive Policy Institute

One might expect, with a disastrous oil spill just behind us and gas prices predicted to soar to $5 a gallon by 2012, that the Washington Post would address the Obama administration’s alternative to oil-based transportation with nuanced understanding.

Sad to say the paper has instead served up an editorial full of misinformation about the administration’s high-speed rail project in California. The proposed 200-mph train system between southern California and the Bay Area has been in the crosshairs of House Republicans led by Jerry Lewis (R-Cal.), who has introduced a bill to force the return of $2 billion in federal stimulus funds awarded to the project.

The Post has placed its prestige behind Lewis (without saying so) by calling for a halt to the project until its costs, route alignment, potential ridership, and other details are studied to some unspecified level that meets the paper’s approval.

To justify such a draconian proposal, much at odds with the prevailing bipartisan support for rail in the state, the Post characterizes the project as a flakey California “experiment” – a suggestion that’s pretty far removed from reality.

The railway is based on technology that’s been in operation for 46 years in Japan (where it has carried three billion riders without a single fatality) and has spread throughout Europe and southeast Asia. China is committed to opening a dozen HSR lines equal in size and complexity to the California project.

The editorial says that “a series of skeptical blue-ribbon documents” have called into question the financial viability of the system. “Most damning” of these documents is a report by the California High-Speed Rail Peer Review Group calling official estimates of potential ridership so unreliable that they “offer little basis for proceeding.”

Those words would be damning if they weren’t yanked out of context. They come from a discussion of the methodology of the ridership study and the assertion by one consultant that, due to large “error bounds,” the projections might or might not be accurate. Either outcome was equally possible.

The Review Group called on the California High Speed Rail Authority to reexamine and refine the methodology, if needed. That’s it. There was no implication that the estimates were cooked to favor the project, as the Post implies. In fact, the Review Group went out of its way to say that no forecasting model can predict 100 percent accuracy.

The editorial continues by describing the first segment of the route, going from Bakersfield north to the small village of Borden, as the “train to nowhere.” This is plain nonsense. As explained at public hearings and on an internet posting by project CEO Roelof van Ark, the railway is not designed to terminate at Borden anymore than the Interstate Highway system planned to end in Missouri, where the first miles were laid.

Stopping temporarily at Borden was decided because the environmental review was nearly complete and the line could connect to existing rail track, allowing the new line to have “independent utility” (as required by the California legislature) before construction resumed north to Sacramento and northwest to San Francisco.

The editorial is similarly disingenuous when it says that the system “has attracted zero private capital” and has been “unable to guarantee any source – governmental or private – for almost half of the cost of completion.”

Rail consortiums in France, Germany, Japan, and Korea, as well as the U.S., have expressed interest in the project. China has told outgoing Gov. Arnold Schwarzenegger that it might underwrite California’s construction costs. But the project hasn’t yet reached the stage when companies have been invited to make bids.

If the Post read the Review Group report carefully, it would better understand why private capital has been reluctant to openly commit to the project. “The demonstration of firm public sector financial commitments will be an absolute necessity prior to approaching sources of private capital,” it stressed. In other words, investors won’t sink money into a project that’s under the threat of rescission by the likes of Rep. Lewis.

There’s more to suggest a willful ignorance of the facts pertaining to high-speed rail by the newspaper. For example, its statement that “in much of the country passenger rail can’t compete with car travel by interstate highways.” That’s only true because Amtrak trains run at 50 mph averages. As Robert Cruickshank points out, trains that zip passengers between LA and San Francisco in under three hours – or less than half the time it takes to drive between the cities on a good day – are going to change the way people travel.

The base projection of 65 million annual riders when the system is completed in 2030 may prove too low considering that California is expected to add 8-10 million more residents over the next 20 years. The Peer Review report says that the railway could “achieve high profits” once it’s finished.

That’s a bonny prospect for Californians, even if it doesn’t fit the prejudices of the Post, which ends its editorial with the revealing comment that it’s probably only in its own backyard, the Northeast Corridor, where federal rail investment “makes sense at all.”

The Emerging Crisis in Lebanon

Posted on by The Progressive Policy Institute

While the nation’s attention focuses on Tucson, a crisis emerges in Lebanon. Hezbollah, a member of the Lebanese governing coalition since a deal brokered in 2008 by President Michel Suleiman— has pulled out of the government coalition.  The move is in anticipation of the results of the UN-backed inquiry into the death of former Prime Minister Rafik Hariri, which is expected to find Hezbollah members implicated in his murder. This is the first time a Lebanese coalition government has collapsed under pressure from resignations, a dangerous first in a country that was wracked by a brutal civil war in the 1980s. The ethnic-religious balance of power is precarious in Beirut, with Hezbollah representing the Shi’ite Muslims from the South.

All of this shows the problem with the Bush administration’s reckless democracy promotion in 2005 and 2006. The administration was quick to hold up the rallies in the wake of Hariri’s murder as the best example of the new post-Iraq Middle East, a future filled with democratic pluralism and rule of law. Lebanon “can serve as a great example (to other countries) of what is possible in the Middle East,” President Bush said.

But there was no follow-up, no larger strategy beyond supporting the UN tribunal.

The administration never had a plan for how to make Hezbollah disappear, save for giving Israel time to crush it in the 2006 war. The reality is that Hezbollah has a strong base in parts of the country, making the terrorist group-cum-political party impossible to excise without upending the country’s fragile balance.

Which is why promoting democracy from afar is so difficult. Local actors can always undermine the master plans of outside powers, and people living in any given country often have as much to fear from instability as they do from illiberalism. The Lebanese people seem to want justice. But not at the cost of further bloodshed.

The Obama administration is continuing on this risky path. Secretary Clinton accused Hezbollah of trying to wreck the UN probe by resigning from the government. She is surely correct, but the Iranian-sponsored group is not going to simply back down. And so there is a stand-off of sorts, with the U.S. and its allies on one side, Hezbollah and Iran on the other, and the majority of Lebanese people in the middle.

The worst outcome of all for the U.S. would be more violence. The best bet is to continue with the Syrian-Saudi attempts at mediation, which hopefully can find some solution that allows both sides to save face while preserving stability.

New Congress and Military Spending: This is Going to Be Fun

Posted on by The Progressive Policy Institute

Last week, Secretary of Defense Robert Gates announced plans to pare back another $78 billion in Pentagon spending, a sum on top of the $100 billion in efficiencies he’s promised to find.  And while one fight’s a-brewing over what to do with those savings (Gates tried to get out in front of the coming austerity package by investing his savings back into DoD, while Obama’s deficit commission wants to use that money to pay down the national debt), a much bigger one is taking shape in the Republican party.

In response to Gates’ proposed savings, the GOP leadership — including new House Armed Services Chairman Buck McKeon (R-CA) — was typical: plow more money into the Pentagon, even when the Pentagon doesn’t want it.

“We are fighting two wars, you have China, you have Iran: Is this the time to be making these types of cuts?” says McKeon.

But the Tea Party — which backed a large percentage of the 85 new Republicans in Congress – has other ideas. Tea Party leader Judson Phillips has posted a letter (restricted access) on the Tea Party Nation website demanding “serious and meaningful cuts in the budget.”  It’s little wonder why so many leading conservatives are trying to paint on the blank canvass of Tea Party intellectualism and co-opt the movement before its heart-felt but un-Washington ways engulf the Republican party.

Most Democrats and progressives understand the need for fiscal restraint at the Pentagon.  After all, solving the deficit requires increasing revenues, fixing entitlements, and counting on a contribution from the government’s largest agency, the Pentagon.  The public knows this too – a new poll suggests that over half of Americans support reduced military spending.

In other words, we could be approaching the tipping point on fiscal responsibility and military spending.  Mainstream Republicans, who want to shovel money towards the Pentagon that even it doesn’t want, are beginning to swim upstream more and more.

Congress vs. The EPA, Round II

Posted on by The Progressive Policy Institute

Everything old is new again. Around this time last year, the Environmental Protection Agency (EPA) was in the process of issuing major rules that would lead to regulation of greenhouse gases under the Clean Air Act (CAA). Many in Congress opposed these moves, and sought to delay or halt them. I wrote about these attempts in this space (here, here, here, and here) and, as I predicted, they failed—none reached the President’s desk.

But failure has not stopped EPA opponents from trying again. Since last year, some things have changed. The EPA has moved forward with regulation, implementing GHG-related permitting requirements for new and modified emitters, and announcing in December that it plans GHG emissions standards for existing power plants and refineries. But none of these moves are surprising—the EPA is not pushing any harder now than it was last year.

But of course the 2011 Congress is different from the 2010 version, particularly since Republicans now control the House. Will this Congress be able to derail the EPA?

Maybe. It depends, not just on politics, but on what avenue of attack Congress chooses. This choice will probably be made first in the House, where new Energy and Commerce Committee Chair Fred Upton (R-Mich.) will set the agenda. Four broad options are on the table. Last year, each of the first two options were pursued. All four are likely this year. Let’s briefly look at each in turn.

1) New legislation: Congress could simply pass a law modifying EPA authority. Proposals range from a short delay in EPA GHG authority to removing GHGs from the CAA entirely, effectively overturning the Supreme Court’s Massachusetts v. EPA decision.

While Republican control of the House does smooth the path of new legislation somewhat, the Senate and above all the President remain significant barriers. While modest legislation, such as a delaying bill, is likely to attract some Democratic support, it will need 60 votes to pass the Senate. Even then, President Obama is certain to veto any legislation restricting EPA authority. It seems very unlikely that any such bill could attract a veto-proof majority.

2) Congressional Review Act: Congress has the authority to cancel any regulatory action with specific legislation. This authority is only available for 60 days after the regulation is formally issued, however.

 

CRA resolutions do not require 60 votes to pass the Senate. This is relatively little help, for two reasons. First and most obviously, the President will likely veto any resolution. Furthermore, almost all of the significant GHG rulemakings made by the EPA were issued well over 60 days ago, and cannot be rescinded by CRA resolution anyway.

3) Appropriations: Congress may choose not to fund EPA programs, even if they remain legally permissible (or even required).

 

Congress has not yet passed a budget for 2011, so this Congress will need to pass two over the next year. This gives ample opportunity for restricting EPA funding. The appropriations process is ultimately subject to the same procedural requirements as other legislation, so any budget will have to pass the Senate and be signed by the President. Defunding the EPA makes either far less likely — but unlike EPA-specific legislation, the politics are hard to predict. The budget process always involves compromises. How hard are EPA’s opponents and supporters willing to fight? If Congress does pass a budget that defunds agency GHG regulation, would the President veto it – risking a government shutdown?

4) Oversight: Even if none of the above is possible, Congress’s (or often individual committee’s) subpoena power can be used to investigate and, in practice, slow EPA action.

 

While oversight measures cannot alter EPA’s legal authority, they can make regulatory life very difficult. Since individual committees can conduct hearings and investigations, there is relatively little to stop motivated members of Congress from targeting the EPA with these tools. They are unlikely to stop any regulatory program, but they will be a drain on agency resources and energy.

In short, I don’t think headline-grabbing moves to alter EPA legal authority over GHGs are much more likely of success this year than last. That’s unlikely to change until and unless there is a change in the White House. These kinds of bills are more politics than policy; I doubt their supporters really think they will pass. Instead they allow members to make statement votes, and force EPA supporters to make votes that may be used against them later.

But the appropriations process and Congress’ oversight powers are both real, though different, threats to EPA regulation. Budget negotiations this year are likely to be acrimonious, and the EPA is a small pawn in a bigger game. If EPA opponents make defunding the agency a priority, they may be able to achieve it by doing so in an otherwise-palatable budget that the President determines he cannot afford to reject. In this sense, the relative political unimportance of the EPA works to its advantage — will Republicans in the House choose defunding the agency as their line in the sand, over other measures with much larger fiscal impact? This seems unlikely, but certainly not impossible.

Committee oversight presents a different challenge to the EPA. Some level of Congressional interference is certain, but its extent probably depends greatly on the agency’s ambition. If the EPA fears Congressional subpoena, it is less likely to regulate strongly or creatively. Instead, it may slow-walk some measures, and scrap others. Unfortunately, this may have the perverse effect of making regulation less efficient, rather than simply leading to less regulation. If agency resources are stretched (because of Congressional demands, underfunding, or both), it is less able to do careful analysis. If the agency makes avoiding controversy a paramount goal, it is less likely to try innovative approaches (such as tradable GHG performance standards) aimed at more efficient regulation. An EPA that does the minimum required by law might be more costly to the economy, not less.

This piece is cross-posted at Weathervane

Obama’s Approval Numbers Creep Up: How Can He Build on This?

Posted on by The Progressive Policy Institute

About a month ago, in the wake of a the great tax-cut compromise, I wrote a post entitled “Why Obama’s Approval Numbers Are About to Creep Up.” At the time, I reasoned that the tax cut deal was popular, Obama was playing to his strength as a broker of compromise, and a little public disagreement with the hard left might help him among political independents and moderates.

At the time, his approval rating was hovering around 47 percent. A month later, the latest AP-GfK Poll has it at 53 percent, the highest it’s been since March 2010, right before the healthcare debate kicked into high gear. More importantly for Democrats, 53 percent of Americans now rate them favorably, compared to 45 percent who view them unfavorably, almost an exact reverse of where voters were on Election Day.

But Republicans are also doing better. Last fall, only 29 percent approved of Republicans in Congress, but now that number is up to 36 percent. And Congress’s overall approval ratings, which fell to the teens at the end of last year, are back up to 26 percent.

So, in the wake of a lame-duck Congress in which some serious stuff was accomplished, it seems that Americans feel a little better about their leaders generally. It’s also possible that without the vitriolic attacks ad of campaign season invading everybody’s space, there’s a little bit of an inevitable bounce.

But the main takeaway point is that this is good news for Obama and the Democrats. As a new Gallup Poll highlights, across the political spectrum, every group except “very conservative” (even just plain old conservative) thinks that it is more important to compromise than to stick to beliefs. On this question, by the way, moderates look almost identical to both the “liberal” and “very liberal” group.

Hopefully, the Arizona tragedy will have at least some staying power as a wake-up call to the dangers of political extremism, and continue shine a favorable light on Obama’s talents as adult-in-the-room.

However, the challenge for Obama remains to do more than just get all the kids to play nice with each other. He also still needs to lay out a galvanizing positive vision to get voters excited, as he did in his campaign. These are anxious times, and anxious times are fertile ground for the politics of blame and anger, especially absent any optimism for the future.

Obama and the Democrats are gaining back a little political momentum, and the spirit of problem-solving is enjoying a mini-renaissance. Great. But let’s capitalize on this. It needs to be a starting point for working toward solutions to the generational problems that our nation faces, like solving our looming deficit crisis or restructuring the economy for the 21st century. You’ll be hearing more from us on this subject soon.

White Voters vs. Obamacare

Posted on by The Progressive Policy Institute

House Republicans want to repeal health care reform in the worst way, even if it means doing what they slammed President Obama for doing last year: taking their eye off Americans’ economic travails.

They’ve convinced themselves that health reform is a drag on recovery, even though its main provisions won’t kick in for several years. They also claim a popular mandate to undo reform, even though polls show the public evenly divided on the issue.

There is one significant voter block, however, that strongly backs repeal: white voters, and especially white blue collar voters. Health care, unfortunately, is an issue that illuminates a deep racial/ethnic fissure in American politics.

As Ron Brownstein reports in a fascinating National Journal analysis of new exit poll data, 56 percent of white voters back repeal, while an overwhelming majority of minority voters favor either expanding or maintaining Obama’s reforms.

It’s already been widely reported that white voters backed Republican candidates in last year’s midterm 60-37 percent. That’s the lowest percentage Democrats have garnered from white voters since modern polling began. Brownstein’s analysis sheds new light on those voters’ attitudes toward Obama’s policies and government’s role in general. For Democrats and progressives, it’s not a pretty picture:

  • Three fourths of minority voters, but only 35 percent of whites, approve of Obama’s performance.
  • Whites are strongly skeptical of expansive government: 63 percent say government is doing too many things best left to people and businesses. An almost identical percentage of minorities say government should do more to solve problems.
  • Whites give priority to reducing government deficits; minorities to more public spending to create jobs.
  • Nearly half of whites who voted in the midterm identified themselves as conservatives.
  • Blue collar (non-college graduates) whites form the hard core of skepticism toward Obama and his party. They backed GOP candidates by 2-1.
  • Democrats were only competitive among whites in 2010 in two demographics—college-educated women and under 30-voters.

It’s always a mistake to over interpret the results of a single election, but it’s been a very long time—the post-Watergate election in 1974—since Democrats won an outright majority of the white vote. The defection of blue collar Democrats, the mainstay of the grand old New Deal coalition, also is old news.

Margins matter, of course, and Obama will have to narrow the racial-ethnic chasm to win reelection in 2012, even as he re-energizes his base of minority and young voters, and college women. But electoral calculations aside, the appearance of what Brownstein calls a new “color line” in U.S. politics isn’t good for the nation’s political soul. Progressives need to engage white voters more directly on questions about the size and role of government. We should be serious about making government more accountable, about enabling citizens and communities to do more for themselves, and about reining in runaway federal deficits and debts. But we should also stand firmly for public activism to rebuild America’s productive capacities, particularly our run-down infrastructure, curb out-of-control medical costs and make the promise of equal opportunity real for all citizens.

Obamacare, in fact, is a good place to start that conversation. Progressives ought to be open to refinements and improvements (especially strengthening its cost containment provisions), while remaining resolute in defending the core achievement of extending, at long last, basic health protection to all Americans. After all, blue collar white voters are not natural allies of health insurance companies. They have as much interest as anyone else in having access to affordable care, not losing coverage if they get injured or sick or change jobs, keeping their kids covered through age 26, and in encouraging medical providers to charge based on the quality, rather than quantity of care they deliver.

Progressives should also take the opportunity to remind white voters that Obamacare is no alien import from Canada or Europe, but a national version of Romneycare – the comprehensive coverage approach pioneered in Massachusetts with the full support of that notorious socialist, then-Gov. Mitt Romney.

It’s time, in short, to bring the health care debate down from the level of ideological abstraction – the only level on which conservatives can win – to the concrete realities facing U.S. families struggling with soaring health costs and spotty coverage.

This Week in the New Congress

Posted on by The Progressive Policy Institute

Political and legislative activity in Washington was largely suspended in the immediate wake of the shootings in Tucson. As anyone who’s been sampling the news media since the weekend is aware, there’s been a discussion about whether there ought to be a debate over possible connections between the tragedy in Tucson and the type of overheated anti-government and even insurrectionary political rhetoric we’ve heard of late from conservatives, some of it aimed at Rep. Gabrielle Giffords herself. The “let’s don’t debate” side appears to be winning. Indeed, conservative outrage at the alleged “politicalization” of the shootings has rivaled outrage over the shootings themselves.

Not surprisingly, scattered calls for a fresh look at the ready availability of the kind of weapons and ammunition deployed in Tucson haven’t gotten much traction. Rep. Carolyn McCarthy (D-NY) has reintroduced her bill to ban certain high capacity ammunition magazines, which is a way to reduce the lethal effect of firearms without banning the weapons themselves. But it’s not likely to see the light of day in the Republican-controlled House. A more likely avenue of response to the shootings is via interest in care (voluntary or involuntary) for the violence-prone mentally ill. Still, the very eve of perhaps the most intensive effort ever to reduce discretionary social spending isn’t the best possible time to call for a boost in mental health services.

With or without any formal sanction, beefed-up security for Members of Congress and other elected officials is almost certain to emerge, along with significantly greater caution about public events and casual contact between elected officials and constituents. (Typically, conservative blogger Ben Domenech suggested arming congressional staff). Again, the timing isn’t great, given existing levels of public unhappiness with government and politicians, much of it motivated by the sense that officeholders have “lost touch” with the citizenry.

The hiatus on activity in Washington has not extended to state and local governments (other than in Arizona), where a difficult new year is unfolding under the shadow of one of the worst fiscal crises since the Great Depression. A new analysis from the Center on Budget and Policy Priorities shows that in December alone, state and local governments laid off 20,000 employees. Overall, state and local payrolls have dropped by 397,000 since August 2008, with just over half the reductions attributable to local school districts, even though national public school enrollment levels have risen by 741,000 since the beginning of the recession. with revenues still bottoming out and stimulus funds scheduled to run out soon, state and local employment is likely to drop even further in 2011. This even without taking into account many new Republican officeholders determination to public employees for cutbacks while cutting taxes for corporations and high-income individuals.

Just last week there was a development within the conservative movement that may pour cold water on Republican “tax reform” efforts at the state level, which were aimed at paying for income tax cuts with increases in sales taxes. Conservative policy commissar Grover Norquist of Americans for Tax Reform condemned a Republican-sponsored proposal in Georgia to boost net revenues through a broadening of the sales tax base accompanied by income tax cuts. Any “reform” plan, said Norquist, would violate the no-tax-increase pledge his group has secured from a vast number of GOP pols unless it reduces the overall tax burden, not just the portion borne by corporations or the wealthy. This ukase has obvious implications for similar talk of a more-revenues-through-base-broadening-and-lower-rates deal in Washington. And aside from the impact on tax progressivity, an abandonment by conservatives of schemes to raise more revenues via more regressive taxes will increase the pressure on public spending, as Norquist made plain by calling for major reductions in the “size and scope of government.”

Mr. Gates Goes To Beijing

Posted on by The Progressive Policy Institute

Defense Secretary Robert Gates is in China, meeting with President Hu today in a diplomatic effort to warm military-to-military relations between the two countries. Gates’ trip is in advance of the Obama-Hu summit in Washington next week.  Military relations had frosted over this summer following $6.4 billion in U.S. arms sales to Taiwan.

Gates’ meeting with Hu followed on the heels of an encounter with Chinese defense chief Liang Guanglie, where the two agreed to begin regular strategic security talks in an effort to reduce tensions. The Pentagon believes that a structured long-term dialogue will build trust and focus on longer term issues as the United States—regardless of administration—will likely arm Taiwan for decades to come.

Top of the to-do list on military cooperation will no doubt be North Korea, and it’s hardly coincidence that Gates used this visit to highlight advances in Pyongyang’s military technology that could threaten the West Coast within five years.  Further, as Michael Chase points out in a series of PPI memos on the Chinese military, getting Chinese buy-in on North Korea may rely in part on building trust first in areas like humanitarian assistance, disaster relief, and anti-piracy missions, to name a few.

Sino-American tensions in military relations are nothing new, but Secretary Gates’ trip continues to expose a fascinating—and potentially dangerous—rift inside the Chinese bureaucracy: the lack of communication between Beijing’s military and civilian leaders.

This week, China unveiled the J-20, its first and only stealth fighter.  China’s bizarre choice of this week—during Gates’ visit—to flex its newfound military muscles by test-flying the J-20 for the first time. When Gates signaled to President Hu that the test flight was unnecessarily provocative, Hu replied that it had “absolutely nothing to do” with Gates’ visit. Pointedly, Gates acknowledged his concern about the Chinese military acting independently of the political leadership, a problem that could in a worst-case scenario lead to unauthorized military action against, for example, Taiwan.

Getting China’s leaders to communicate with one another is well-outside the Obama administration’s powers, of course, but continuing to press Beijing’s political leadership on the issue is a good start.

Tucson: The Real Questions

Posted on by The Progressive Policy Institute

Flag half mast at Captiol BuilidingWe at the Progressive Policy Institute are heartsick over the senseless attack Saturday on Rep. Gabrielle Giffords, which also claimed the lives of six people, including a nine-year-old girl. Not only is Gabby our friend, she is an exemplar of the pragmatic progressivism that puts country before party. We pray for her recovery, and grieve for those who will never recover from this rampage.

As if this tragedy were not bad enough, some pundits have disgraced themselves by using it to score political points and vindicate their own particular stance. Thus, we’re instructed that the attack was the inevitable result of a climate of hostility created by the Tea Party, or Sarah Palin, or anti-immigration groups in Arizona. There’s no evidence this is true, but political gladiators apparently can’t help themselves.

We’ve refrained from commenting until now in hopes of learning more about the motives of the alleged shooter, Jared Lee Loughner. It seems he suffers from severe mental illness and was animated by his own inner demons, rather than “vitriol” in the atmosphere.

The political finger-pointing that has followed the shooting has been revolting. It’s not too early to start grappling with some of the pertinent questions this tragedy actually raises. We’d highlight three:

First, why is it so easy for mentally disturbed individuals to acquire handguns in America? The gun shop that sold Loughner the semiautomatic Glock 19 apparently ran a background check. Why did it not turn up the fact that the suspect had recently been booted out of a community college for his erratic and disruptive behavior? Surely more rigorous checks are in order and don’t impair the basic right to gun ownership.

And what public purpose is served by allowing citizens to buy high-capacity magazines more suitable for war than self-protection? These were covered under the ban on assault weapons passed on President Clinton’s watch, which has since lapsed. Let’s hope the Tucson massacre gives fresh impetus to reinstating it.

Second, how is it that we lack the legal tools to protect society against mentally unhinged people before they turn violent? Most people with serious mental illnesses aren’t dangerous, but some are. Obviously, it’s hard to assess such risks in advance. Yet when people exhibit patterns of bizarre and sociopathic behavior—as did the alleged suspect in Tucson, and as did Seung-Hui Cho, who massacred 32 people at Virginia Tech in 2007—they shouldn’t simply be left to their own devices. Determining how to preempt the potential for violence entails careful thought and a delicate calibration of individual rights and public safety. But society can’t simply look the other way as individuals descend into madness.

Third, will this attack result in erecting new barriers between elected representatives and the people? As we have seen since 9/11, elected officials have a tendency to overreact to acts of violence, erecting elaborate and costly security shields against low-probability threats. Will Members of Congress now demand bodyguards and be enveloped in security cocoons like the president? If the Tucson attack leads to a greater separation between politicians and those who elect them, it will have dealt a serious blow to our democracy.