Why the housing crash ruined the financial system but the dot-com collapse did not

From Bubble to Depression? By Steven Gjerstad and Vernon L. Smith
Why the housing crash ruined the financial system but the dot-com collapse did not.
WSJ, Apr 06, 2009

Bubbles have been frequent in economic history, and they occur in the laboratories of experimental economics under conditions which -- when first studied in the 1980s -- were considered so transparent that bubbles would not be observed.

We economists were wrong: Even when traders in an asset market know the value of the asset, bubbles form dependably. Bubbles can arise when some agents buy not on fundamental value, but on price trend or momentum. If momentum traders have more liquidity, they can sustain a bubble longer.

But what sparks bubbles? Why does one large asset bubble -- like our dot-com bubble -- do no damage to the financial system while another one leads to its collapse? Key characteristics of housing markets -- momentum trading, liquidity, price-tier movements, and high-margin purchases -- combine to provide a fairly complete, simple description of the housing bubble collapse, and how it engulfed the financial system and then the wider economy.

In just the past 40 years there were two other housing bubbles, with peaks in 1979 and 1989, but the largest one in U.S. history started in 1997, probably sparked by rising household income that began in 1992 combined with the elimination in 1997 of taxes on residential capital gains up to $500,000. Rising values in an asset market draw investor attention; the early stages of the housing bubble had this usual, self-reinforcing feature.

The 2001 recession might have ended the bubble, but the Federal Reserve decided to pursue an unusually expansionary monetary policy in order to counteract the downturn. When the Fed increased liquidity, money naturally flowed to the fastest expanding sector. Both the Clinton and Bush administrations aggressively pursued the goal of expanding homeownership, so credit standards eroded. Lenders and the investment banks that securitized mortgages used rising home prices to justify loans to buyers with limited assets and income. Rating agencies accepted the hypothesis of ever rising home values, gave large portions of each security issue an investment-grade rating, and investors gobbled them up.

But housing expenditures in the U.S. and most of the developed world have historically taken about 30% of household income. If housing prices more than double in a seven-year period without a commensurate increase in income, eventually something has to give. When subprime lending, the interest-only adjustable-rate mortgage (ARM), and the negative-equity option ARM were no longer able to sustain the flow of new buyers, the inevitable crash could no longer be delayed.

The price decline started in 2006. Then policies designed to promote the American dream instead produced a nightmare. Trillions of dollars of mortgages, written to buyers with slender equity, started a wave of delinquencies and defaults. Borrowers' losses were limited to their small down payments; hence, the lion's share of the losses was transmitted into the financial system and it collapsed.

During the 1976-79 and 1986-89 housing price bubbles, the effective federal-funds interest rate was rising while housing prices rose: The Federal Reserve, "leaning against the wind," helped mitigate the bubbles. In January 2001, however, after four years with average inflation-adjusted house price increases of 7.2% per year (about 6% above trend for the past 80 years), the Fed started to decrease the fed-funds rate. By December 2001, the rate had been reduced to its lowest level since 1962. In 2002 the average fed-funds rate was lower than in any year since the 1958 recession. In 2003 and 2004 the average fed-funds rates were lower than in any year since 1955 when the rate series began.

Monetary policy, mortgage finance, relaxed lending standards, and tax-free capital gains provided astonishing economic stimulus: Mortgage loan originations increased an average of 56% per year for three years -- from $1.05 trillion in 2000 to $3.95 trillion in 2003!

By the time the Federal Reserve began to slowly raise the fed-funds rate in May 2004, the Case-Shiller 20-city composite index had increased 15.4% during the previous 12 months. Yet the housing portion of the CPI for those same 12 months rose only 2.4%.

How could this happen? In 1983, the Bureau of Labor Statistics began to use rental equivalence for homeowner-occupied units instead of direct home-ownership costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to 20.2, so the change had little effect on measured inflation: The CPI underestimated inflation by about 0.1 percentage point per year during this period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to 32.3.

With home price increases out of the CPI and the price-to-rent ratio rapidly increasing, an important component of inflation remained outside the index. In 2004 alone, the price-rent ratio increased 12.3%. Inflation for that year was underestimated by 2.9 percentage points (since "owners' equivalent rent" is about 23% of the CPI). If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%.

With nominal interest rates around 6% and inflation around 6%, the real interest rate was near zero, so household borrowing took off. As measured by the Case-Shiller 10 city index, the accumulated inflation in home-ownership costs between January 1999 and June 2006 was 151%, but the CPI measured a mere 23% increase. As the Federal Reserve monitored inflation in the early part of this decade, home-price increases were no longer visible in the CPI, so the lax monetary policy continued. Even after the Fed began to slowly raise the fed-funds rate in May 2004, the average rate remained low and the bubble continued to inflate for two more years.

The unraveling of the bubble is in many ways the most fascinating part of the story, and the most painful reality we are now experiencing. The median price of existing homes had fallen from $230,000 in July to $217,300 in November 2006. By the beginning of 2007, in 17 of the 20 cities in the Case-Shiller index, prices were falling. Serious price declines had not yet begun, but the warning signs were there for alert observers.

Kate Kelly, writing in this newspaper (Dec. 14, 2007), tells the story of how Goldman Sachs avoided the fate of many of the other investment banks that packaged mortgages into securities. Goldman loaded up on the Markit ABX index of credit default swaps between early December 2006 and late February 2007, as their price dropped from 97.70 on Dec. 4 to under 64 by Feb. 27. But the market was not yet in free-fall: The insurance on AAA-rated parts of the mortgage-backed securities (MBS) remained inexpensive. By mid-summer 2007, concern spread to the AAA-rated tranches of MBS.

At the end of February 2007, the cost of $10 million of insurance on the AAA-rated portion of a mortgage-backed security was still only $68,000 plus a $9,000 annual premium. Housing-market conditions deteriorated further in the first half of 2007. Case-Shiller tiered price sequences in Los Angeles, San Francisco, San Diego and Miami all show serious declines by the summer of 2007. Prices in the low-price tier in San Francisco were down almost 13% from their peak by July 2007; in San Diego they were off 10% by July 2007. Startling developments began to unfold that month. Between July 9 and Aug. 3, 2007, the cost of insuring AAA MBS tranches went from $50,000 upfront plus a $9,000 annual premium for $10 million of insurance to over $900,000 upfront (plus the annual premium).

Once the cost of insuring new mortgage-backed securities skyrocketed, mortgage financing from MBS rapidly declined. Subprime originations plummeted from $160 billion in the third quarter of 2006 to $28 billion in the third quarter of 2007. Mortgage-backed security issuance fell comparably, from $483 billion in all of 2006 to only $30.7 billion in the third quarter of 2007. Other measures of new loan originations were falling at the same time. The liquidity that generated the housing market bubble was evaporating.

Trouble quickly spread from the cost of insuring mortgage-backed securities to problems with credit markets generally, as the spread between short-term U.S. Treasury debt and the LIBOR rate increased to 2.40% from 0.44% between Aug. 8 and Aug. 20, 2007. Since U.S. Treasury debt is generally considered secure, but a bank's loans to another bank carry some risk of default, the spread between these rates serves as an indicator of perceived risk in financial markets.

In one city after another, prices of homes in the low-price tier appreciated the most and then fell the most; prices in the high-priced tier appreciated least and fell the least. The price index graphs for Los Angeles, San Francisco, San Diego and Miami show that in all of these cities, prices in the low-price tier have fallen between 50% and 57%. Moreover, housing prices have continually declined in every market in the Case-Shiller index. According to First American CoreLogic, 10.5 million households had negative or near negative equity in December 2008. When housing prices turned down, many borrowers with low income and few assets other than their slender home equity faced foreclosure. The remaining losses had to be absorbed by the financial system. Consequently, the financial system has suffered a blow unlike anything since the Great Depression, and the source is the weak financial position of the people holding declining assets.

Earlier, during the downturn in the equities market between December 1999 and September 2002, approximately $10 trillion of equity was erased. But a measure of financial system performance, the Keefe, Bruyette, & Woods BKX index of financial firms, fell less than 6% during that period. In the current downturn, the value of residential real estate has fallen by approximately $3 trillion, but the BKX index has now fallen 75% from its peak of January 2007. The financial sector has been devastated in this crisis, whereas it was almost completely unaffected by the downturn in the equities market early in this decade.

How can one crash that wipes out $10 trillion in assets cause no damage to the financial system and another that causes $3 trillion in losses devastate the financial system?

In the equities-market downturn early in this decade, declining assets were held by institutional and individual investors that either owned the assets outright, or held only a small fraction on margin, so losses were absorbed by their owners. In the current crisis, declining housing assets were often, in effect, purchased between 90% and 100% on margin. In some of the cities hit hardest, borrowers who purchased in the low-price tier at the peak of the bubble have seen their home value decline 50% or more. Over the past 18 months as housing prices have fallen, millions of homes became worth less than the loans on them, huge losses have been transmitted to lending institutions, investment banks, investors in mortgage-backed securities, sellers of credit default swaps, and the insurer of last resort, the U.S. Treasury.

In an important paper in 1983, Ben Bernanke argued that during the Depression, severe damage to the financial system impeded its ability to perform its economic role of lending to households for durable goods consumption and to firms for production and trade. We are seeing this process playing out now as loan funds for automobile purchases have withered. Auto sales fell 41% between February 2008 and February 2009. Retail and labor markets too are now part of the collateral damage from the housing debacle. Housing peaked in early 2006. Losses from the mortgage market began to infect the financial system in 2006; asset prices in that sector began to decline at the end of 2006. Meanwhile, equities and the broader economy were performing well, but as the financial sector deteriorated, its problems blindsided the rest of the economy.

The events of the past 10 years have an eerie similarity to the period leading up to the Great Depression. Total mortgage debt outstanding increased from $9.35 billion in 1920 to $29.44 billion in 1929. In 1920, residential mortgage debt was 10.2% of household wealth; by 1929, it was 27.2% of household wealth.

The Great Depression has been attributed to excessive speculation on Wall Street, especially between the spring of 1927 and the fall of 1929. Had the difficulties of the banking system been caused by losses on brokers' loans for margin purchases in 1929, the results should have been felt in the banks immediately after the stock market crash. But the banking system did not show serious strains until the fall of 1930.

Bank earnings reached a record $729 million in 1929. Yet bank exposures to real estate were substantial; as the decline in real estate prices accelerated, foreclosures wiped out banks by the thousands. Had the mounting difficulties of the banks and the final collapse of the banking system in the "Bank Holiday" in March 1933 been caused by contraction of the money supply, as Milton Friedman and Anna Schwartz argued, then the massive injections of liquidity over the past 18 months should have averted the collapse of the financial market during this current crisis.

The causes of the Great Depression need more study, but the claims that losses on stock-market speculation and a monetary contraction caused the decline of the banking system both seem inadequate. It appears that both the Great Depression and the current crisis had their origins in excessive consumer debt -- especially mortgage debt -- that was transmitted into the financial sector during a sharp downturn.

What we've offered in our discussion of this crisis is the back story to Mr. Bernanke's analysis of the Depression. Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge.

Mr. Gjerstad is a visiting research associate at Chapman University. Mr. Smith is a professor of economics at Chapman University and the 2002 Nobel Laureate in Economics.

Short '06 Lebanon War Stokes Pentagon Debate - Leaders Divided on Whether to Focus On Conventional or Irregular Combat

Short '06 Lebanon War Stokes Pentagon Debate. ByGreg Jaffe
Leaders Divided on Whether to Focus On Conventional or Irregular Combat
Washington Post, Monday, April 6, 2009; Page A01

A war that ended three years ago and involved not a single U.S. soldier has become the subject of an increasingly heated debate inside the Pentagon, one that could alter how the U.S. military fights in the future.

When Israel and Hezbollah battled for more than a month in Lebanon in the summer of 2006, the result was widely seen as a disaster for the Israeli military. Soon after the fighting ended, some military officers began to warn that the short, bloody and relatively conventional battle foreshadowed how future enemies of the United States might fight.

Since then, the Defense Department has dispatched as many as a dozen teams to interview Israeli officers who fought against Hezbollah. The Army and Marine Corps have sponsored a series of multimillion-dollar war games to test how U.S. forces might fare against a similar foe. "I've organized five major games in the last two years, and all of them have focused on Hezbollah," said Frank Hoffman, a research fellow at the Marine Corps Warfighting Laboratory in Quantico.

A big reason that the 34-day war is drawing such fevered attention is that it highlights a rift among military leaders: Some want to change the U.S. military so that it is better prepared for wars like the ones it is fighting in Iraq and Afghanistan, while others worry that such a shift would leave the United States vulnerable to a more conventional foe.

"The Lebanon war has become a bellwether," said Stephen Biddle, a senior fellow at the Council on Foreign Relations who has advised Gen. David H. Petraeus, head of the U.S. Central Command. "If you are opposed to transforming the military to fight low-intensity wars, it is your bloody sheet. It's discussed in almost coded communication to indicate which side of the argument you are on."

U.S. military experts were stunned by the destruction that Hezbollah forces, using sophisticated antitank guided missiles, were able to wreak on Israeli armor columns. Unlike the guerrilla forces in Iraq and Afghanistan, who employed mostly hit-and-run tactics, the Hezbollah fighters held their ground against Israeli forces in battles that stretched as long as 12 hours. They were able to eavesdrop on Israeli communications and even struck an Israeli ship with a cruise missile.

"From 2000 to 2006 Hezbollah embraced a new doctrine, transforming itself from a predominantly guerrilla force into a quasi-conventional fighting force," a study by the Army's Combat Studies Institute concluded last year. Another Pentagon report warned that Hezbollah forces were "extremely well trained, especially in the uses of antitank weapons and rockets" and added: "They well understood the vulnerabilities of Israeli armor."

Many top Army officials refer to the short battle almost as a morality play that illustrates the price of focusing too much on counterinsurgency wars at the expense of conventional combat. These officers note that, before the Lebanon war, Israeli forces had been heavily involved in occupation duty in the Palestinian territories.

"The real takeaway is that you have to find the time to train for major combat operations, even if you are fighting counterinsurgency wars," said one senior military analyst who studied the Lebanon war for the Center for Army Lessons Learned at Fort Leavenworth, Kan. Currently, the deployments to Iraq and Afghanistan have prevented Army units from conducting such training.

Army generals have also latched on to the Lebanon war to build support for multibillion-dollar weapons programs that are largely irrelevant to low-intensity wars such as those fought in Iraq and Afghanistan. A 30-page internal Army briefing, prepared for the Joint Chiefs of Staff and senior Pentagon civilians, recently sought to highlight how the $159 billion Future Combat Systems, a network of ground vehicles and sensors, could have been used to dispatch Hezbollah's forces quickly and with few American casualties.

"Hezbollah relies on low visibility and prepared defenses," one slide in the briefing reads. "FCS counters with sensors and robotics to maneuver out of contact."

Defense Secretary Robert M. Gates is expected to stake out a firm position in this debate as soon as today, when he announces the 2010 defense budget. That document is expected to cut or sharply curtail weapons systems designed for conventional wars, and to bolster intelligence and surveillance programs designed to help track down shadowy insurgents.

"This budget moves the needle closer to irregular warfare and counterinsurgency," Pentagon spokesman Geoff Morrell said. "It is not an abandonment of the need to prepare for conventional conflicts. But even moving that needle is a revolutionary thing in this building."

The changes reflect the growing prominence of the military's counterinsurgency camp -- the most prominent member of which is Petraeus -- in the Pentagon. President Obama, whose strategy in Afghanistan is focused on protecting the local population and denying the Islamist radicals a safe haven, has largely backed this group.

The question facing defense leaders is whether they can afford to build a force that can prevail in a counterinsurgency fight, where the focus is on protecting the civilian population and building indigenous army and police forces, as well as a more conventional battle.

Gen. George W. Casey Jr., the Army's top officer in the Pentagon, has said it is essential that the military be able to do both simultaneously. New Army doctrine, meanwhile, calls for a "full spectrum" service that is as good at rebuilding countries as it is at destroying opposing armies.

But other experts remain skeptical. "The idea that you can do it all is just wrong," said Biddle of the Council on Foreign Relations. Soldiers, who are home for as little as 12 months between deployments, do not have enough time to prepare adequately for both types of wars, he said.

Biddle and other counterinsurgency advocates argue that the military should focus on winning the wars in Iraq and Afghanistan and only then worry about what the next war will look like.

Some in this camp say that the threat posed by Hezbollah is being inflated by officers who are determined to return the Army to a more familiar past, built around preparing for conventional warfare.

Another question is whether the U.S. military is taking the proper lessons from the Israel-Hezbollah war. Its studies have focused almost exclusively on the battle in southern Lebanon and ignored Hezbollah's ongoing role in Lebanese society as a political party and humanitarian aid group. After the battle, Hezbollah forces moved in quickly with aid and reconstruction assistance.

"Even if the Israelis had done better operationally, I don't think they would have been victorious in the long run," said Andrew Exum, a former Army officer who has studied the battle from southern Lebanon. "For the Israelis, the war lasted for 34 days. We tend to forget that for Hezbollah, it is infinite."

WaPo: Mr. Holder muddies the waters on D.C. representation

A Constitutional Question
Mr. Holder muddies the waters on D.C. representation.
Sunday, April 5, 2009; A18

THERE HAS been much debate in the halls of Congress and on the streets of this town about legislation to give the District a vote in the House of Representatives. Now comes news that there are differences of opinion even within the Obama administration.

President Obama sponsored similar legislation when he was a member of the Senate and has said he supports the current measure. Attorney General Eric H. Holder Jr., a longtime District resident, is a staunch supporter of D.C. voting rights. But as The Post's Carrie A. Johnson reported last week, the Justice Department's Office of Legal Counsel (OLC) has concluded that the bill cannot stand up to constitutional scrutiny. The department has declined to make the opinion public, but most who challenge the legislation say that the Constitution endows only states with such representation and that a constitutional amendment is necessary to give the same right to the District. Scholars on the other side, including conservative legal luminaries Kenneth W. Starr and Viet D. Dinh, argue that the Constitution grants Congress exclusive powers over the District -- including the power to bestow upon it a House vote.

The bill has passed the Senate, and advocates hope that the House will follow this spring. It would then fall to the president to decide whether to sign the measure. The president should take into consideration the views of his OLC -- an elite section of the Justice Department that is responsible for, among other things, reviewing pending legislation for constitutionality. But the president is well within his rights to take into consideration other views, both inside and outside the administration, when deciding whether to sign a piece of legislation. A president should not sign a bill he considers unconstitutional, but as the support of Mr. Starr and Mr. Dinh demonstrates, there are solid arguments on both sides of this question. We strongly support passage of the legislation and would urge Mr. Obama to sign it and allow the matter to be fully and expeditiously decided by the courts.

Mr. Holder's handling of the voting rights matter gives us pause, however. When presented with the OLC's negative view of the bill, Mr. Holder took the highly unusual step of seeking the views of his solicitor general's office, which is tasked with a very different mission than that of the OLC. The solicitor general is obligated to defend any congressional act unless there is no plausible defense; this contrasts sharply with the OLC's mission of providing the attorney general with its views on the best, most legitimate legal interpretations and conclusions. Not surprisingly, the solicitor general's office informed Mr. Holder that it could mount a reasonable defense.

The attorney general is the ultimate decision maker at the Justice Department and as such is entitled to overrule opinions from the OLC. But such rejections should be based on well-thought-out differences of legal opinion and not on political preferences. Unfortunately, Mr. Holder's highly unusual solicitation of the solicitor general's office raises questions about what drove his actions. To dispel any concerns, Mr. Holder should order the release of all memos from the two offices on this subject and make his own views public as well.

WaPo: The House and Senate pile on the chicanery to mask the growing debt

Budget Gimmicks (Cont'd). WaPo Editorial
The House and Senate pile on the chicanery to mask the growing debt.
Sunday, April 5, 2009; A18

THE HOUSE and Senate passed their budget plans for the upcoming fiscal year last week, though details will still have to be worked out in conference. Not surprisingly, given the Democrats' monopoly and President Obama's popularity, his major policies were accepted; both resolutions call for expanding health care, increasing education funding and implementing a new cap-and-trade regime to limit greenhouse gas emissions. They would also make the bulk of the Bush tax cuts permanent, except for those that hit families making more than $250,000 a year. Also similar: hand-wringing about the growth in national debt, even as all three budgets pump up that debt by trillions over the next decade -- and beyond.

There are differences among the three budgets. The Senate did not include reconciliation instructions, the process that makes legislation filibuster-proof. The House did, hoping to facilitate passage of health-care reform, even in the face of warnings by senators from both parties, including Robert C. Byrd (D-W.Va.), one of the original authors of the procedure, that such an effort to marginalize the minority would make health-care reform more difficult. The Senate also indicated its preference for a larger estate tax exemption and lower rate than are in the Obama budget or the House version, as well as rejecting a reasonable plan supported by Mr. Obama to ask high-income seniors to pay more for Medicare prescription drugs.

Demonstrating that it has no real appetite for meaningful energy policy at this time, the Senate passed an amendment that would prohibit climate-change legislation that would affect prices -- which, of course, is part of the purpose of such a policy to help encourage less energy dependence. Message to Mr. Obama: Cap-and-trade is not looking good. Another amendment that fell by the wayside was a proposal to set up an entitlements commission -- an idea that looks increasingly necessary as policymakers continue to punt on the topic.

The president's original framework, even relying on some budgetary sleights of hand, added $9 trillion to the debt over 10 years. Rather than change policy to brighten the fiscal picture, the House and Senate chose to add more gimmicks and dishonesty. They jettisoned the $250 billion placeholder the administration responsibly included to provide the banking system with more capital, and they skimped (in the House version) and outright ignored (in the Senate's) the White House plan to better prepare for budget emergencies and natural disasters. They also assume that the president's Making Work Pay tax credit will expire after 2010 (House) or 2012 (Senate). One of the lessons not to be learned from the Bush era is the trick of putting magically disappearing tax cuts into the budget. In a similarly disingenuous act, the House and Senate assumed that, down the road, they would allow the alternative minimum tax to take a large bite out of middle-class taxpayers. The technical term for that is: fat chance. Finally, while the president gamely submitted a 10-year budget, Congress reverted to the well-worn trick of a five-year budget to mask the longer-term costs of its decisions.

Rarely has there been a moment in history where responsible budgeting has been more critical for laying out a rational plan for the government to navigate tricky economic, financial, and fiscal challenges while simultaneously reassuring global credit markets that the United States is a safe place to invest. Yet all of these budgets fall short.

Federal President's Weekly Address

President Obama Hails Unprecedented G-20 Action to Address Global Economic Downturn

THE WHITE HOUSE
Office of the Press Secretary
_________________________________________________________________
EMBARGOED UNTIL 6:00 AM ET Saturday, April 4, 2009

WEEKLY ADDRESS: President Obama Hails Unprecedented G-20 Action to Address Global Economic Downturn

WASHINGTON – In his weekly address, President Barack Obama praised the agreement of the G-20 nations to act together as a turning point in this global economic slump. With the American economy inextricably linked to the global economy, global coordination is needed to restore lending, spur job growth, reform financial regulation and ultimately fix our economy. The President also discussed his meetings with Chinese President Hu, Russian President Medvedev, and America’s NATO allies.

The audio and video will be available at 6:00am Saturday, April 4, 2009 at www.whitehouse.gov.

Prepared Remarks of President Barack Obama Weekly Address
Saturday, April 4, 2009

In this new century, we live in a world that has grown smaller and more interconnected than at any time in history. Threats to our nation’s security and economy can no longer be kept at bay by oceans or by borders drawn on maps. The terrorists who struck our country on 9/11 plotted in Hamburg, trained in Kandahar and Karachi, and threaten countries across the globe. Cars in Boston and Beijing are melting ice caps in the Arctic that disrupt weather patterns everywhere. The theft of nuclear material from the former Soviet Union could lead to the extermination of any city on earth. And reckless speculation by bankers in New York and London has fueled a global recession that is inflicting pain on workers and families around the world and across America.

The challenges of our time threaten the peace and prosperity of every single nation, and no one nation can meet them alone. That is why it is sometimes necessary for a President to travel abroad in order to protect and strengthen our nation here at home. That is what I have done this week.

I began my trip by attending a summit of the G20 – the countries that represent the world’s largest economies – because we know that the success of America’s economy is inextricably linked to that of the global economy. If people in other countries cannot spend, that means they cannot buy the goods we produce here in America, which means more lost jobs and more families hurting. Just yesterday, we learned that we lost hundreds of thousands more jobs last month, adding to the millions we’ve lost since this recession began. And if we continue to let banks and other financial institutions around the world act recklessly and irresponsibly, that affects institutions here at home as credit dries up, and people can’t get loans to buy a home or car, to run a small business or pay for college.

Ultimately, the only way out of a recession that is global in scope is with a response that is global in coordination. That is why I’m pleased that after two days of careful negotiation, the G20 nations have agreed on a series of unprecedented steps that I believe will be a turning point in our pursuit of a global economic recovery. All of us are now moving aggressively to get our banks lending again. All of us are working to spur growth and create jobs. And all of us have agreed on the most sweeping reform of our financial regulatory framework in a generation – reform that will help end the risky speculation and market abuses that have cost so many people so much.

I also met this past week with the leaders of China and Russia, working to forge constructive relationships to address issues of common concern, while being frank with each other about where we disagree. President Hu and I agreed that the link between China’s economy and ours is of great mutual benefit, and we established a new Strategic and Economic Dialogue between the U.S. and China. President Medvedev and I discussed our shared commitment to a world without nuclear weapons, and we signed a declaration putting America and Russia on the path to a new treaty to further reduce our nuclear arsenals. Tomorrow, I will lay out additional steps we must take to secure the world’s loose nuclear materials and stop the spread of these deadly weapons.

Finally, I met yesterday with our NATO allies and asked them for additional civilian support and assistance for our efforts in Afghanistan. That is where al Qaeda trains, plots, and threatens to launch their next attack. And that attack could occur in any nation, which means that every nation has a stake in ensuring that our mission in Afghanistan succeeds.
As we have worked this week to find common ground and strengthen our alliances, we have not solved all of our problems. And we have not agreed on every point or every issue in every meeting. But we have made real and unprecedented progress – and will continue to do so in the weeks and months ahead.

Because in the end, we recognize that no corner of the globe can wall itself off from the threats of the twenty-first century, or from the needs and concerns of fellow nations. The only way forward is through shared and persistent efforts to combat fear and want wherever they exist. That is the challenge of our time. And if we move forward with courage and resolve, I am confident that we will meet this challenge.

Thank you.

An Electrifying Irony (false promises and hopes in the transportation market)

An Electrifying Irony (false promises and hopes in the transportation market). By Kenneth P. Green
Master Resource, April 3, 2009

To those who have a memory that transcends more than a few weeks, recent events in the auto sector must induce a great feeling of irony.

Back in August of 2008, then-candidate Obama called for 1 million plug-in hybrid vehicles to be on the road by 2015.

To that end, then-candidate Obama called for:

• $4 billion in tax credits to American automakers to retool plants for the production of plug-in hybrid cars capable of 150 miles to the gallon;
• A $7,000 tax credit for consumers who bought early model plug-in vehicles

Then-candidate Obama also vowed that half of all cars purchased by the federal government would be plug-in hybrids or all-electric by 2012.


As both candidate and president, Obama has repeatedly raised plug-in hybrids as a vital technology for greening Detroit.

Fast forward to a recent item in the Wall Street Journal that reports: ”In a five-page analysis of GM’s viability, the [Obama car] team critiqued GM’s marquee next-generation project, the electric-powered Chevy Volt, as ‘too expensive to be commercially successful in the short-term.’” Thomas Edison told Henry Ford as much in 1896.

Ah, the irony is palpable. And it’s not as if we hadn’t told them so. We did. In Stop the Green Carjacking, an article I wrote for The American last year, I observed:

The National Renewable Energy Laboratory (NREL) estimates that plug-in hybrid vehicles cost $3,000 to $7,000 more than regular hybrids, even though the performance differences between the two models are slight, and the really fuel-efficient hybrids cost $12,000 to $18,000 more than the conventional brand.

And for the Volt, I observed:

Consider the Chevy Volt. When it was first announced, the price estimate from General Motors (GM) was $30,000. That soon jumped to $35,000. Now GM’s president says that the actual price could be closer to $40,000, and that GM will still lose money on the sale.

I wonder if Mr. Obama will give taxpayers back that $4 billion in tax credits he was giving the automakers for his plug-in hybrid dreams?

North Korea in International Limelight over its Space Development Programme

North Korea in International Limelight over its Space Development Programme. By Rajaram Panda and Pranamita Baruah
Institute for Defence Studies and Analyses, April 2, 2009

North East Asia’s fragile peace is being threatened by North Korea’s planned launch between 4 and 8 April over Japanese territory of a communication satellite. The US and its allies suspect the planned satellite launch to be a long-range ballistic missile test. The prevailing uneasy peace is accentuated by the fact that both a ballistic missile and a satellite launcher operate on very similar technology. According to Dennis Blair, Director of US National Intelligence, the technology for a space launch “is indistinguishable from an intercontinental ballistic missile.” If the “three stage space-launch vehicle works,” it could technically reach the US mainland. Consequently, the reactions from the US and its allies have been strong.

There has remained a lurking suspicion that North Korea and Iran have joined together to build missiles. That Iran has made rapid strides in missile technology is an established fact. But whether the collaboration between the two countries includes warheads or other nuclear work remains shrouded in mystery. But given the behaviour of the two countries over the years, it is difficult to disbelieve that both Iran and North Korea are not cooperating in such activity.

North Korea already possesses the Taepo Dong-2 with ICBM potential (striking range of 5500 kilometres or greater). It may be recalled that Pyongyang’s August 1998 test firing of a Taepo Dong-2 into the Sea of Japan had panicked American friends and allies in East Asia. It is a different matter that the test failed 40 seconds into its launch. However, it propelled North Korean engineers to make substantial modifications in the missile’s design. The advanced version of Taepo Dong-2 is supposed to have a minimum striking range of 6,700 kilometres (4100 miles), capable of striking the US west coast.

Despite its precarious economic problems, Pyongyang has never felt shy of demonstrating its defence capabilities by upgrading its missile development systems continuously. It has built a ballistic missile arsenal capable of hitting not only Japan and South Korea but also the west coast of the US. In total, North Korea deploys around 750 ballistic missiles, including between 600-800 SCUDs, 150-200 No Dongs, 10-20 Taepo Dong-1, and a few Taepo Dong-2s.

Pyongyang has not halted its nuclear programme despite the denuclearisation deal that it struck at the Six Party talks in February 2007. It is suspected that Pyongyang is aiming to produce nuclear payloads for its ballistic missiles. It is also feared that Pyongyang’s missile development programme is projected towards developing a nuclear warhead sophisticated enough for delivery aboard a space-bound rocket. In the event of Pyongyang achieving that capability, it would be in a position to detonate a nuclear warhead in space. The electromagnetic pulse (EMP) emanating from such a detonation would have frightening repercussions, especially for unhardened satellites. A space launch would advance Pyongyang’s missile programme, enabling it to produce more accurate and powerful ballistic missiles capable of terrorizing not only Seoul and Tokyo but also Los Angeles and San Francisco.

With a view to deterring and intercepting missiles from the North, South Korea has announced its own plans to complete a missile defence system by 2012. Japan too has affirmed its commitment to acquire a multi-layered system after the US withdrew from the Anti-Ballistic Missile Treaty (ABM) in 2002 and North Korea left the NPT regime in 2003. If North Korea does not retract from its ballistic missiles test programme, the US, Japan and South Korea are likely like to keep their missile defence options open.

There already exist the necessary mechanisms through international legal instruments to deter North Korea from upgrading its missile development capability. United Nations Security Council resolution 1718 (2006) prohibits Pyongyang from conducting any ballistic missile activity. North Korea is a signatory to the 1967 Outer Space Treaty, which prohibits the deployment of nuclear weapons or other weapons of mass destruction in orbit, in the moon or elsewhere in space. However, it has asserted its right to engage in a peaceful space programme. The state-run Korean Central New Agency said “preparations for launching experimental communications satellite Kwangmyongsong-2 by means of delivery rocket Unha-2 are now making brisk headway” at a launch site in Hwadae Country in the northeast. The statement called the upcoming launch “a giant stride forward” for the country’s space programme.

North Korea finds fault with the US and Japan, claiming that these two countries have already launched their own satellites and therefore have no moral right to prevent it from doing the same. It further warns Washington and Tokyo that if they deny Pyongyang the right to use space for peaceful purposes, it would not only be discriminatory but also not in keeping with ‘spirit of mutual respect and equality’ of the 2005 disarmament pact. Pyongyang further warns that any sanctions that the UN, US and its allies might impose on it would “deprive the Six-Party talks of any ground to exist or their meaning.” Meanwhile, North Korea has asserted that it would regard any attempt to shoot down its rocket as an unprovoked Act of War and retaliate with prompt strikes on the US mainland, Japan and South Korea.

The international community is aghast at Pyongyang’s obduracy. Japan has decided to call for an emergency meeting of the UNSC if the launch takes place. In the event of the North’s missile firing, Japan will urge the UNSC to take immediate action regardless of how other UN members would react, as it would be directly exposed to an immediate missile threat. Japan has warned that it will shoot down a missile or any debris if it threatens to hit Japanese territory.

Japan debated between two possible options in response to a missile launch by North Korea: to ask the cabinet to take an instant decision after a missile launch or to give military approval in advance to shoot it down, and finally decided to exercise the second option by issuing an advanced order to the Self Defence Forces on March 27 to use the Patriot missile defence system to destroy any missile or debris that shows signs of falling toward Japan. Japan, however, does not want to strike a North Korean rocket unless it appears to pose a direct threat, in the event of a mishap that could send an errant missile or debris flying toward the country.

Japanese Prime Minister Taro Aso has already obtained the support of British Prime Minister Gordon Brown. Both Japan and Britain have agreed to take the issue to the UNSC to discuss possible punitive action if Pyongyang goes ahead with the launch. As a pre-emptive measure, Japan has deployed three Aegis destroyers, two of which are fitted with anti-missile missiles, around Japan and Patriot guided-missile units at select locations in Japan. The US Seventh Fleet has been deployed around Japan. US cruisers and destroyers based at Yokosuka also reportedly have the capability to launch guided missiles against ballistic missiles. Five Aegis destroyers of the US Navy modified for ballistic missile defence have already left Yokosuka and other Japanese ports on March 30. They are expected to detect and track the North Korean rocket passing over northeastern Japan if the launch goes according to plan.

South Korea is worried over the heightened tensions on the Peninsula and President Lee Dang-hee has appealed for restraint. Seoul has also alleged that Pyongyang’s long-range rocket launch clearly violates UNSC resolution 1718. It has described Pyongyang’s planned rocket launch as a ‘serious challenge and provocation’ to regional security. North Korea, however, has ramped up its anti-Lee rhetoric, warning that the Koreas are headed for a military clash.

Russia too has joined the chorus of nations expressing concern over the upcoming launch. Russian Deputy Foreign Minister Alexei Borodavkin said that the launch would lead to increased tensions in the region and urged Pyongyang to refrain from it. As regards China, a traditional ally and a major donor for impoverished North Korea and UNSC permanent member, it has not publicly urged Pyongyang to halt the launch. However, both China and Russia have notified the Obama administration that North Korea has a legitimate right to launch a satellite. The perceived tacit support from China and Russia might embolden North Korea not to rethink its planned space satellite launch.

It appears that the uneasy peace in the North East Asian region stemming from Pyongyang’s intransigence is likely to continue for some more time to come. If North Korea is to be trusted about its intentions for the communication satellite launch programme, it would serve the interests of the country. If, however, Pyongyang has other covert intentions, it will have to face the reactions from its neighbours and the US.

Dr. Rajaram Panda is Senior Fellow, and Pranamita Baruah is Research Assistant, at the Institute for Defence Studies and Analyses, New Delhi.

Obama administration to avoid Congressional limits on executive pay

Administration Seeks an Out On Bailout Rules for Firms. By Amit R. Paley and David Cho
Officials Worry Constraints Set by Congress Deter Participation
Washington Post, Saturday, April 4, 2009; A01

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.

Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.

Although some experts are questioning the legality of this strategy, the officials said it gives them latitude to determine whether firms should be subject to the congressional restrictions, which would require recipients to turn over ownership stakes to the government, as well as curb executive pay.

The administration has decided that the conditions should not apply in at least three of the five initiatives funded by the rescue package.

This strategy has so far attracted little scrutiny on Capitol Hill, and even some senior congressional aides dealing with the financial crisis said they were unaware of the administration's efforts. Just two weeks ago, Congress erupted in outrage over bonuses being paid at American International Group, with some lawmakers faulting the administration for failing to do more to safeguard taxpayers' interests.

Rep. Edolphus Towns (D-N.Y.), chairman of the House Oversight and Government Reform Committee, said the congressional conditions should apply to any firm benefiting from bailout funds. He said he planned to review the administration's decisions and might seek to undo them. "We have to make certain that if they are using government money in any sort of way, there should be restrictions," he said.

A Treasury spokesman defended the approach. "These programs are designed to both comply with the law and ensure taxpayers' funds are used most effectively to bring about economic recovery," spokesman Andrew Williams said.

In one program, designed to restart small-business lending, President Obama's officials are planning to set up a middleman called a special-purpose vehicle -- a term made notorious during the Enron scandal -- or another type of entity to evade the congressional mandates, sources familiar with the matter said.

In another program, which seeks to restart consumer lending, a special entity was created largely for the separate purpose of getting around legal limits on the Federal Reserve, which is helping fund this initiative. The Fed does not ordinarily provide support for the markets that finance credit cards, auto loans and student loans but could channel the funds through a middleman.

At first, when the initiative was being developed last year, the Bush administration decided to apply executive-pay limits to firms participating in this program. But Obama officials reversed that decision days before it was unveiled on March 3 and lifted the curbs, according to sources who spoke on condition of anonymity because the discussions were private.

Obama's team is also planning to exempt financial firms that participate in a program designed to find private investors to buy the distressed assets on the books of banks. But Treasury officials are still examining the legal basis for doing so. Congress has exempted the Treasury from applying the restrictions in a fourth program, which aids lenders who modify mortgages for struggling homeowners.

Congress drafted the restrictions amid its highly contentious consideration of the $700 billion rescue legislation last fall. At the time, lawmakers were aiming to reform the lavish pay practices on Wall Street. Congress also wanted the government to gain the right to buy stock in companies so that taxpayers would benefit if the firms recovered.

The requirements were honored in an initial program injecting public money directly into banks. That effort was developed by the Bush administration and continued by Obama's team. The initiative is on track to account for the bulk of the money spent from the rescue package. All the major banks already submit to executive-compensation provisions and have surrendered ownership stakes as part of this program.

Yet as the Treasury has readied other programs, it has increasingly turned to creating the special entities. Legal experts said the Treasury's plan to bypass the restrictions may be unlawful.

"They are basically trying to launder the money to avoid complying with the plain language of the law," said David Zaring, a former Justice Department attorney who defended the government from lawsuits involving related legal issues. "They are trying to create a loophole to ignore Congress, and I think the courts will think that it's ridiculous."

The federal watchdog agency overseeing the bailout is looking into the matter, trying to determine whether the Treasury's actions are legal.

Of the two major restrictions imposed by Congress in the bailout legislation, the limit on executive pay has been the most politically explosive issue.

Obama himself has called for these limits. "We've got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street," he said earlier this year.

But officials at the Treasury and the Fed said they worry harsh pay limits will undermine critical bailout programs by discouraging financial firms from participating. Although many of these companies could survive without government help, they might lack money to ramp up lending, which officials consider critical to turning the economy around.

In private meetings with officials in both the Bush and Obama administrations, firms' leaders have pushed back against pay limits.

A major test of whether the Treasury would apply the congressional restrictions was a $1 trillion program developed last fall to revive consumer lending. The initiative, known as the Term Asset-Backed Securities Loan Facility, or TALF, will be seeded with up to $100 billion from the financial rescue package, with the rest coming from the Fed.

The program set up a special entity providing low-cost loans to hedge funds and other private investors so they can buy securities that finance consumer debt from banks and other lenders. This would free these companies to make more loans.

When the Bush administration announced the program in November, officials directed the Fed to apply the pay limits to the lenders because they stood to benefit the most from the program. "There was a public hunger for executive-compensation restrictions, and we knew we couldn't be tone-deaf to the politics there," a former Bush administration official said.

In February, Obama administration officials at the White House and the Treasury began reviewing that decision. Treasury officials consulted with Department of Justice attorneys, who said they could legally avoid the pay restrictions, according to a government official. The requirements were removed just before the initiative was launched.

The concerns persisted as the administration crafted other initiatives. Some private investors said, for instance, that they would not help the government buy toxic assets from banks if the congressional restrictions were applied to them. And every major provider of small-business loans has said that it will not participate in the government's program if it has to surrender ownership stakes to the government or submit to executive-pay limits.

Belgium & Spain offer NATO trainers for Afghanistan

Barack Obama fails to win Nato troops he wants for Afghanistan. By Michael Evans and David Charter in Strasbourg
The Times, April 4, 2009

Barack Obama made an impassioned plea to America’s allies to send more troops to Afghanistan, warning that failure to do so would leave Europe vulnerable to more terrorist atrocities.

But though he continued to dazzle Europeans on his debut international tour, the Continent’s leaders turned their backs on the US President.

Gordon Brown was the only one to offer substantial help. He offered to send several hundred extra British soldiers to provide security during the August election, but even that fell short of the thousands of combat troops that the US was hoping to prise from the Prime Minister.

Just two other allies made firm offers of troops. Belgium offered to send 35 military trainers and Spain offered 12. Mr Obama’s host, Nicolas Sarkozy, refused his request.

The derisory response threatened to tarnish Mr Obama’s European tour, which yesterday included a spellbinding performance in Strasbourg in which he offered the world a vision of a future free of nuclear weapons.

Mr Obama – who has pledged 21,000 more troops to combat the growing insurgency and is under pressure from generals to supply up to 10,000 more – used the eve of Nato’s 60th anniversary summit to declare bluntly that it was time for allies to do their share. “Europe should not simply expect the United States to shoulder that burden alone,” he said. “This is a joint problem it requires a joint effort.”

He said that failing to support the US surge would leave Europe open to a fresh terrorist offensive. “It is probably more likely that al-Qaeda would be able to launch a serious terrorist attack on Europe than on the United States because of proximity,” he said.

The presidential charm offensive failed to move fellow Nato countries. President Sarkozy told Mr Obama that France would not be sending reinforcements to bolster its existing force northeast of Kabul.

Germany, Italy, Poland, Canada and Denmark said that they were considering their positions. After a meeting with Angela Merkel, the German Chancellor, Mr Obama tried to apply further moral pressure. “I am sure that Germany, as one of the most important leaders in Europe, will be stepping up to the plate and helping us to get the job done.”

Jaap de Hoop Scheffer, the Nato Secretary-General, warned that new laws proposed by President Karzai in Afghanistan sanctioning child marriage and marital rape had made it harder to raise more soldiers.

“We are there to defend universal values and when I see, at the moment, a law threatening to come into effect which fundamentally violates women’s rights and human rights, that worries me,” he said.

“I have a problem to explain to a critical public audience in Europe, be it the UK or elsewhere, why I’m sending the guys to the Hindu Kush.”

The temporary British deployment falls short of the 2,000 soldiers that the Army had planned to deploy long-term to Afghanistan and appeared to catch defence chiefs by surprise.

Mr Brown announced the commitment as he flew into Strasbourg for the two-day summit, but hopes that it would spur other allies to follow suit were soon dashed. British officials said that the extra troops, expected to number between 500 and 700 – increasing Britain’s military strength there to about 9,000 – would be dispatched to southern Afghanistan for a four-month period leading up to and beyond the election, due to take place on August 20.

The plan is to withdraw them once the election is over. Mr Brown said that the extra troops were only supposed to provide a “temporary uplift”.

Military contingency plans remain on the table to send up to 2,000 more troops long-term, taking the total to 10,000, but that will depend on the political will to approve the deployment.
Although the Prime Minister discussed Afghanistan with President Obama when they held bilateral talks before the G20 summit in London, it is understood that no formal offer of extra troops was made.

Costs of Carbon Capture in a Carbon-constrained World

Could Carbon Capture Keep the Lights on in a Carbon-constrained World? By Marlo Lewis
Master Resource, April 2, 2009

A few weeks ago, the Congressional Research Service (CRS) published a report on carbon capture and storage (CCS) technologies for coal-fired power plants.

According to CRS, commercialization and widespread deployment of CCS will require “demand pull” regulation, such as Clean Air Act New Source Performance Standards, combined with cap-and-trade or carbon taxes; and it will require support for “technology push” RD&D (research, development, and demonstration) via government grants, tax preferences, and loan guarantees.

CCS will not be deployed on an industrial scale without “demand pull” regulation, because burning coal with CCS will always be more expensive than burning coal without it. Yet “technology push” RD&D to reduce CCS-related cost penalties is also critical. Although CRS does not explicitly say so, it implies that if CCS costs do not decline dramatically, carbon caps or taxes would make coal generation uneconomic. Absent relatively inexpensive CCS, carbon penalties could easily decimate the single largest source of electric power in the United States and, indeed, the world.

CRS cites MIT’s estimates of the increase in electric generating costs (on a levelized basis) due to CO2 capture at the post-combustion, pre-combustion, and combustion phases of a plant’s operation:

• Post-combustion capture using monoethanolamine (MEA) as a CO2 absorber increases generation costs 60%-70% for new construction and 220%–250% for retrofitted existing plants.
• Pre-combustion capture using integrated gasification combined cycle (IGCC) increases generation costs 22%–25% for new construction.
• Combustion capture in oxygen-fueled boilers increases generation costs 46% for new construction and 170%–206% for retrofitted existing plants.

CCS increases generating costs not only because the technology is advanced, but also because CCS plants divert a portion of the thermal energy that would otherwise produce electricity into capturing CO2 and compressing it into a liquid suitable for transport and storage. MIT estimates, for example, that post-combustion capture with MEA reduces generation efficiency by 25%–28% for new construction and 36%–42% for retrofitted existing plants.

What boggles the mind is the scale on which CCS would have to be deployed to preserve coal-generation in a carbon-constrained world.

According to CRS, the world meets 25% of its primary energy demand with coal, a number projected to increase steadily over the next 25 years. In 2005, coal was responsible for about 46% of the world’s electric power generation, including 50% of the electricity generated in the United States, 81% of the electricity generated in India, and 89% of the electricity generated in China.

The United States has more than 300 GW of coal-fired capacity; China has about 600 GW—and China added 90 GW in 2006 alone!

Coal-fired generation is expected to increase 2.3% annually through 2030, with resulting CO2 emissions estimated to increase from 7.9 billion metric tons per year to 13.9 billion metric tons per year.

CRS comments: “Developing a means to control coal-derived greenhouse gas emissions is imperative if serious reductions in worldwide emissions are to occur in the foreseeable future.” Yup, there’s no way to reduce worldwide emissions without controlling coal-derived emissions. In addition, and more importantly, if CCS costs do not drop sharply, pricing carbon could simply kill coal, condemning millions to freeze in the dark—a politically unsustainable outcome.

Is affordable, industrial-scale CCS just around the corner? Apparently not. “Developing technology to accomplish this task in an environmentally, economically, and operationally acceptable manner has been an ongoing interest of the federal government and energy companies for a decade,” says CRS. ”But,” CRS continues, “no commercial device to capture and store these emissions is currently available for large-scale coal-fired power plants.”

Battery technology is still not good enough to jumpstart an electric car revolution

Obama's Clean Car Chimera. By Ronald Bailey
Battery technology is still not good enough to jumpstart an electric car revolution
Reason, March 31, 2009

"I am absolutely committed to working with Congress and the auto companies to meet one goal: the United States of America will lead the world in building the next generation of clean cars," declared President Barack Obama this week when he announced his administration's plan to nationalize the American automobile industry. What does he mean by "clean cars"? During the presidential campaign, candidate Obama promised to enact $7,500 tax credit for new plug-in electric hybrid (PHEV) cars, vowing to "put 1 million Plug-In Hybrid cars—cars that can get up to 150 miles per gallon—on the road by 2015, cars that we will work to make sure are built here in America." In February, the promised $7,500 PHEV tax breaks were included in President Obama's $787 billion stimulus package.

Americans are already familiar with gas electric hybrid vehicles like Toyota's Prius, which uses nickel metal hydride (NiMH) batteries to power an electric motor that assists its gasoline motor and increases its gas mileage. The batteries are recharged by both the gasoline engine and by capturing energy used during braking (regenerative braking). For example, the EPA rates the Prius at 60 miles per gallon (mpg) in the city and 51 mpg on the highway. Introduced in 1997, over 1 million have been sold worldwide, 600,000 of them in the U.S. Despite their improved gas mileage, however, current generation hybrid automobiles, including the Prius, are still essentially gasoline powered vehicles.

That's where plug-in hybrid electric vehicles come in. PHEVs flip the current hybrid formula—instead of gas-powered cars assisted by electric motors and batteries, PHEVs will be electric-powered cars assisted by gasoline motors. Ideally, PHEVs would mostly run on electricity from batteries using their gasoline motors as range-extenders to charge the batteries after they've run out of juice. In a world of PHEVs, gasoline stations would go the way of livery stables since cars would get most of their energy by plugging them in at home at night or at parking garages and meters during work hours.

If most Americans switched to driving PHEVs, imports of foreign oil would fall. So would emissions of the greenhouse gases thought to be warming the planet. But by how much? A 2007 study by the Department of Energy's Pacific Northwest Laboratory sketched out a scenario in which 84 percent of cars, light trucks, and SUVs (about 200 million vehicles) were PHEVs traveling an average of 33 miles per day on electric power. In that scenario the country would reduce its consumption of oil by 6.5 million barrels per day—which is equivalent to 52 percent of current U.S. petroleum imports. Greenhouse gas emissions would be cut by as much as 27 percent.

Will our freeways soon be clogged with high-tech cars propelled mostly by electricity? The floundering automaker, General Motors, has promised to bring its Chevy Volt PHEV to market by 2010. Not to be left out, Ford and Chrysler have also announced plans to sell PHEVs in the next couple of years. Big automakers around the world are also promising that consumers will be able to drive their plug-in hybrids and electric vehicles in the next 2 to 3 years. Among them are Nissan-Renault, Daimler-Benz, BMW, Mitsubishi, Toyota, and the Chinese manufacturer, BYD. In addition, numerous startups—including Tesla Motors, Think, Fisker, Aptera, Zenn, and Phoenix Motors—are hoping to do an end-run around the stodgy majors.

However, without a plentiful supply of reliable long-range batteries, all such promises of a glorious electrically driven future are just so much hot air. Conventional NiMH batteries are OK for the quick charge and discharge of today's gas-electric hybrids, but they can't hold enough charge to take a car very far on its own. For more distance, carmakers are looking to the same battery technology that animates our laptops and cell phones: lithium-ion batteries, which hold a much greater charge and weigh much less than NiMH or conventional lead-acid batteries.

Surveying the world, it is clear that foreign manufacturers are currently in the lead when it comes to making lithium-ion batteries. In January, GM announced that it would use lithium-ion batteries produced by the North American subsidiary of the Korean chemical giant, LG Chem, in its Chevy Volt. LG Chem beat out A123 Systems, a lithium-ion battery maker headquartered in Watertown, Massachusetts. In February, Ford announced that the batteries for its PHEV and electric vehicles would be supplied by a joint venture between Wisconsin-based Johnson Controls and the French battery producer Saft Groupe SA. The actual batteries will not be manufactured in the U.S., but in Saft's factory in Nersac, France.

To play catch up, the Obama administration's $787 billion stimulus package authorized the Department of Energy to spend $2 billion on grants for advanced battery research. In addition, would-be American battery manufacturers can partake of the $25 billion Advanced Technology Vehicles Manufacturing (ATVM) loan program launched last September when the panic over the economic meltdown first took off.

Worldwide, this manufacturing optimistically adds up to—at most—enough to produce 1 to 2 million PHEVs per year by 2015. In 2007, automakers globally produced 70 million vehicles powered by standard internal combustion engines. The global fleet currently numbers 810 million vehicles, of which 240 million travel on American roads. Clearly, cars powered mostly by electricity will constitute a tiny proportion of the world's vehicles for some time to come.

What about further down the road? If Europe imposes stringent carbon controls on automobile emissions to address global warming, Wolfgang Bernhardt, a partner at Roland Berger Strategy Consultants in Stuttgart, Germany, told Automotive News in November, "I can see up to 3 percent of all cars being pure electrics by 2020, with a further 19 percent being plug-in hybrids." Alan L. Madian, director of consulting firm LECG, told The Washington Post that even with "heroic" assumptions that by 2030 new electric cars would only make up 50 percent of new vehicles being sold and only 8 percent of cars on the road.

The 2007 Department of Energy PHEV study found that when compared to 27.5 miles per gallon internal combustion vehicles, the break-even premium for a PHEV at $2.50 per gallon is $3,500 when electricity costs are $0.12 per kilowatt hour. At $3.50 per gallon, the premium rises to more than $6,500. Since batteries are expected to boost the average cost of each vehicle by as much $10,000, gasoline will have to cost more than $5.00 per gallon before PHEVs make economic sense to most drivers. Of course, generous federal subsidies can help overcome this financial disincentive. The government could also double or triple gasoline prices by imposing a substantial tax.

In 2006, an activist "documentary" about GM's ill-fated foray a decade ago into battery-powered cars, the EV1, asked, "Who killed the electric car?" The filmmaker offered an elaborate conspiracy theory involving oil companies, but the truth is that clunky inefficient batteries did the electric car in. And unless there is a spectacular breakthrough in electricity storage technology, clunky expensive batteries will likely kill the electric car this time, too.

Ronald Bailey is Reason magazine's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.

Families well below the president's 'no-tax' threshold will get a six-figure bill

Obama's $163,000 Tax Bomb. By Michael J Boskin
Families well below the president's 'no-tax' threshold will get a six-figure bill.
WSJ, Apr 03, 2009

The House and Senate are preparing to pass President Barack Obama's radical budget blueprint, with only minor modifications, by using (abusing would be more accurate) the budget "reconciliation" process. This process circumvents the Senate's normal rules requiring 60 votes to prevent a filibuster. Reconciliation was created by Congress in the mid-1970s to enforce deficit reduction, the opposite of what the president and his party are aiming for.

The immense increase in nondefense spending and taxes, and the tripling of the national debt in Mr. Obama's budget, have been the subject of considerable scrutiny since it was announced. Mr. Obama and his economic officials respond, not without justification, that he inherited an enormous economic and financial crisis and a large deficit. All presidents present the best possible case for their budgets, but a mind-numbing array of numbers offers innumerable opportunities to conjure up misleading comparisons.

Mr. Obama's characterizations of his budget unfortunately fall into this pattern. He claims to reduce the deficit by half, to shave $2 trillion off the debt (the cumulative deficit over his 10-year budget horizon), and not to raise taxes on anyone making less than $250,000 a year. While in a Clintonian sense correct (depends on what the definition of "is" is), it is far more accurate to describe Mr. Obama's budget as almost tripling the deficit. It adds $6.5 trillion to the national debt, and leaves future U.S. taxpayers (many of whom will make far less than $250,000) with the tab. And all this before dealing with the looming Medicare and Social Security cost explosion.

[table]

Some have laid the total estimated deficits and debt projections (as more realistically tallied by the Congressional Budget Office) on Mr. Obama's doorstep. But on this score the president is correct. He cannot rightly be blamed for what he inherited. A more accurate comparison calculates what he has already added and proposes to add by his policies, compared to a "do-nothing" baseline (see nearby chart).

The CBO baseline cumulative deficit for the Obama 2010-2019 budget is $9.3 trillion. How much additional deficit and debt does Mr. Obama add relative to a do-nothing budget with none of his programs? Mr. Obama's "debt difference" is $4.829 trillion -- i.e., his tax and spending proposals add $4.829 trillion to the CBO do-nothing baseline deficit. The Obama budget also adds $177 billion to the fiscal year 2009 budget. To this must be added the $195 billion of 2009 legislated add-ons (e.g., the stimulus bill) since Mr. Obama's election that were already incorporated in the CBO baseline and the corresponding $1.267 trillion in add-ons for 2010-2019. This brings Mr. Obama's total additional debt to $6.5 trillion, not his claimed $2 trillion reduction. That was mostly a phantom cut from an imagined 10-year continuation of peak Iraq war spending.

The claim to reduce the deficit by half compares this year's immense (mostly inherited) deficit to the projected fiscal year 2013 deficit, the last of his current term. While it is technically correct that the deficit would be less than half this year's engorged level, a do-nothing budget would reduce it by 84%. Compared to do-nothing, Mr. Obama's deficit is more than two and a half times larger in fiscal year 2013. Just his addition to the budget deficit, $459 billion, is bigger than any deficit in the nation's history. And the 2013 deficit is supposed to be after several years of economic recovery, funds are being returned from the financial bailouts, and we are out of Iraq.

Finally, what of the claim not to raise taxes on anyone earning less than $250,000 a year? Even ignoring his large energy taxes, Mr. Obama must reconcile his arithmetic. Every dollar of debt he runs up means that future taxes must be $1 higher in present-value terms. Mr. Obama is going to leave a discounted present-value legacy of $6.5 trillion of additional future taxes, unless he dramatically cuts spending. (With interest the future tax hikes would be much larger later on.) Call it a stealth tax increase or ticking tax time-bomb.

What does $6.5 trillion of additional debt imply for the typical family? If spread evenly over all those paying income taxes (which under Mr. Obama's plan would shrink to a little over 50% of the population), every income-tax paying family would get a tax bill for $163,000. (In 10 years, interest would bring the total to well over a quarter million dollars, if paid all at once. If paid annually over the succeeding 10 years, the tax hike every year would average almost $34,000.) That's in addition to his explicit tax hikes. While the future tax time-bomb is pushed beyond Mr. Obama's budget horizon, and future presidents and Congresses will decide how it will be paid, it is likely to be paid by future income tax hikes as these are general fund deficits.

We can get a rough idea of who is likely to pay them by distributing this $6.5 trillion of future taxes according to the most recent distribution of income-tax burdens. We know the top 1% or 5% of income-taxpayers pay vastly disproportionate shares of taxes, and much larger shares than their shares of income. But it also turns out that Mr. Obama's massive additional debt implies a tax hike, if paid today, of well over $100,000 for people with incomes of $150,000, far below Mr. Obama's tax-hike cut-off of $250,000. (With interest, the tax hike would rise to more than $162,000 in 10 years, and over $20,000 a year if paid annually the following 10 years). In other words, a middle-aged two-career couple in New York or California could get a future tax bill as big as their mortgage.

While Mr. Obama's higher tax rates are economically harmful, some of his tax policies deserve wide support, e.g., permanently indexing the alternative minimum tax. Ditto some of the spending increases, including the extension of unemployment benefits, given the severe recession.

Neither a large deficit in a recession nor a small increase from the current modest level in the debt to GDP ratio is worrisome. And at a 50% debt-to-GDP ratio, with nominal GDP growing 4% (the CBO out-year forecast), deficits of 2% of GDP would not be increasing the debt burden relative to income.

But what is not just worrisome but dangerous are the growing trillion dollar deficits in the latter years of the Obama budget. These deficits are so large for a prosperous nation in peacetime -- three times safe levels -- that they would cause the debt burden to soar toward banana republic levels. That's a recipe for a permanent drag on growth and serious pressure on the Federal Reserve to inflate, not the new era of rising prosperity that Mr. Obama and his advisers foresee.

Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.

Conservative: Obama's Attack Machine

Obama's Attack Machine. By Kimberley A Strassel
WSJ, Apr 03, 2009

The thing about fear is that you can see it. For an insight as to what the left today fears most, witness its attempted political assassination of Eric Cantor.

The 45-year-old Virginia congressman came to Washington in 2001, and by last year had been unanimously elected Republican Whip, under Minority Leader John Boehner. In recent months, Mr. Cantor has helped unify the GOP against much of President Barack Obama's agenda, in particular his blowout $787 billion stimulus, and yesterday, his blowout $3.6 trillion budget.

He's also one of the GOP's up-and-coming talents. Along with Wisconsin's Paul Ryan, or California's Kevin McCarthy, he represents a new guard, one that's sworn off earmarks and brought the conversation back to fiscal responsibility and economic opportunity. They've focused on party outreach, and are popular with younger voters and independents. They are big fund-raisers, part of a drive to recruit and elect more reformers. And they are on the rise.

All of which threatens the left. Democrats know their current dominance in Washington is in no small part due to public disillusionment with the GOP. They are also aware that their current tax-and-spend governance is creating plenty of opportunities for that opposition to remake itself. Thus the furious campaign -- waged by every blog, pundit, union, 527, and even the White House -- to kneecap Republicans who might help lead a makeover. Mr. Cantor is the top target.

This kicked off after the GOP's unanimous vote against the stimulus, which Democrats saw as an opening to brand Mr. Cantor as the public face of partisan opposition to the "bipartisan" president. The Virginian has in fact publicly reached out to the White House, and has been deeply involved in producing alternatives to administration policies. But never let the facts get in the way of a good smear.

Within days of the vote, the Democratic Congressional Campaign Committee was up with radio ads targeting 28 Republicans who'd voted no. Mr. Cantor was the only member of the House GOP leadership to get hit. The American Federation of State, County and Municipal Employees (AFSCME), the big union, and Americans United for Change, the pro-Obama group, launched their own ads against 18 members, again singling out Mr. Cantor. The groups also ran a national TV spot sporting a picture of the whip with text that read "just saying no" -- which earned Mr. Cantor a new liberal nickname: Dr. No.

Mr. Obama joined in at his Fiscal Responsibility Summit. As the TV cameras rolled, he deliberately turned to the whip to say: "I'm going to keep on talking to Eric Cantor. Some day, sooner or later, he's going to say 'Boy, Obama had a good idea.'"

The Rush Limbaugh flap inspired a new AFSCME and American United for Change ad, accompanied by a statement that when Rush says jump, "Eric Cantor and other Republicans say 'how high.'" At nearly the precise moment Obama Chief of Staff Rahm Emanuel made Sunday news by claiming Mr. Limbaugh was rooting for Obama "failure," George Stephanopoulos (who, take note, has daily calls with Mr. Emanuel) demanded on his own show that Mr. Cantor tell him if this was indeed the GOP strategy. David Plouffe, the president's campaign wizard, followed up with an anti-Limbaugh screed for the Washington Post, zeroing in on that "new Republican quarterback Eric Cantor, who says "the GOP's strategy will be to 'Just Say No.'"

And then there's the echo chamber. MSNBC's Keith Olbermann is so obsessed with Mr. Cantor, he can barely find time to be indignant about anything else. Talking Points Memo, Huffington Post, Think Progress and other leading liberal blogs are today all-anti-Cantor-all-the-time.

But the real ugly was unleashed a few weeks ago, when the goon squad set on Mr. Cantor's wife. An outfit called Working Families Win began running robocalls in five districts noting that Diana Cantor was a "top executive" at a bank that had received bailout funds -- the clear implication being that Mr. Cantor's vote for said bailout hinged on this fact. "In the middle of the AIG scandal, our congressman [fill in the blank] voted to make Virginia Republican, Eric Cantor, the conservative leader in Congress," it droned (incoherently and incorrectly), before demanding voters oppose the "Cantor Family Bank bailout."

At least when Chuck Schumer ran ads targeting Republicans for voting for a "bailout" that his own party brought to the floor -- and passed -- he kept his attacks on the members. And the last anyone looked, the AIG intervention was being overseen by the Obama administration, not the House minority whip. This may set a new political low, not the least because Mrs. Cantor in fact works at a subsidiary of the bank in question. Not to mention that Mr. Cantor led the initial GOP revolt against the "bailout."

The Virginian has a new, high-profile job, and that means taking some knocks. Mr. Cantor is also where he is for a reason, and has so far weathered the onslaught. But the coordinated takedown attempt is yet more proof that the Obama-led Democrats aren't nearly as interested in changing the "tone" as they are in holding on to power.

The President Is 'Keeping Score' - Chicago politics has moved into the White House

The President Is 'Keeping Score'. By Karl Rove
Chicago politics has moved into the White House.
WSJ, Apr 03, 2009

"Don't think we're not keeping score, brother." That's what President Barack Obama said to Rep. Peter DeFazio in a closed-door meeting of the House Democratic Caucus last week, according to the Associated Press.

A few weeks ago, Mr. DeFazio voted against the administration's stimulus bill. The comment from Mr. Obama was a presidential rebuke and part of a new, hard-nosed push by the White House to pressure Congress to adopt the president's budget. He has mobilized outside groups and enlisted forces still in place from the Obama campaign.

Senior presidential adviser Valerie Jarrett and her chief of staff, Michael Strautmanis, are in regular contact with MoveOn.Org, Americans United for Change and other liberal interest groups. Deputy Chief of Staff Jim Messina has collaborated with Americans United for Change on strategy and even ad copy. Ms. Jarrett invited leaders of the liberal interest groups to a White House social event with the president and first lady to kick off the lobbying campaign.

Its targets were initially Republicans, as team Obama ran ads depicting the GOP as the "party of no." But now the fire is being trained on Democrats worried about runaway spending.

Americans United is going after Democrats who are skeptical of Mr. Obama's plans to double the national debt in five years and nearly triple it in 10. The White House is taking aim at lawmakers in 12 states, including Democratic Sens. Kent Conrad, Ben Nelson, Mary Landrieu, Blanche Lincoln and Mark Pryor. MoveOn.Org is running ads aimed at 10 moderate Senate and House Democrats. And robocalls are urging voters in key districts to pressure their congressman to get in line.

Team Obama is also ginning up the Democratic National Committee. A special group at the DNC has been created called "Organizing for America." It is headed by Mr. Obama's campaign manager, David Plouffe, and is lobbying for the administration's spending proposals.

Organizing for America's first effort has not been terribly effective. It emailed 13 million Obama election workers, recruited 1,200 neighborhood canvassers, and, after a couple of weeks and more email pleas to the Obama list, produced 642,000 signatures. Having less than 5% of your own activists sign a petition is unimpressive and perhaps evidence that adding $9.3 trillion to the deficit alarms even some of Mr. Obama's most fervent supporters.

Every White House is faced with finding ways to nudge Congress without antagonizing it. But this overt campaign could infuriate members who won't appreciate being targeted by a president of their own party. They could react by becoming recalcitrant. Should that happen, team Obama will have to recalculate its efforts, especially as the public sours on big spending plans.

In March, a Gallup Poll found that positive impressions of the Obama budget dropped five points. Only 39% now harbor supportive views of it. A CNN/Opinion Research Poll in mid-March found that support for the stimulus bill Mr. Obama signed into law shifted 11-points against the bill in five weeks, with 66% of Americans opposed to a second stimulus bill.

Support continues to decline for the proposition that a big boost in government spending will lead America to prosperity. A NBC News/Wall Street Journal Poll early last month found that 61% of Americans were concerned that "the federal government will spend too much money" (up 12 points from December), and only 29% were concerned "it will spend too little money to try to boost the economy."

This growing skepticism will not be assuaged by White House Budget Director Peter Orszag's bewildering response when asked by a reporter last week about increasing federal debt. He said, "I don't know what spiraling debt you're referring to."

Members of Congress should also worry about how Mr. Obama is "keeping score." He is steeped in the ways of Chicago politics and has not forgotten his training in the methods once used by Saul Alinsky, the radical Chicago community organizer.

Alinsky's 1971 book, "Rules for Radicals," is a favorite of the Obamas. Michele Obama quoted it at the Democratic Convention. One Alinsky tactic is to "Pick the target, freeze it, personalize it, and polarize it." That's what the White House did in targeting Rush Limbaugh, Rick Santelli and Jim Cramer. (The president's press secretary, Robert Gibbs, went so far as to lash all three from the White House press podium.) It may also explain Mr. Obama's comments to Mr. DeFazio.

After all, Alinsky's first rule of "power tactics" is "power is not only what you have but what the enemy thinks you have." Team Obama wants to remind its adversaries it has plenty of power, and it does. The question is whether the White House will wield it responsibly. The jury is still out, but certain clues are beginning to emerge. "Don't think we're not keeping score, brother," even if said with a wink and a smile, isn't quite the "new politics" we were told to expect.

Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush.

Children's toys, the Consumer Product Safety Improvement Act and the lawmakers' intentions

Toys R Congress. WSJ Editorial
Ruining the kids motorcycle business
WSJ, Apr 03, 2009

Last year's Consumer Product Safety Improvement Act was supposed to make children safer by reducing the risk of lead poisoning in toys. Instead, the new law has become a case study in how hastily written regulation can club the economy and reduce consumer safety.

This bill was passed by wide margins in Congress and signed into law by President Bush in the aftermath of the controversy over lead paint in imported toys from China. The new law, which took effect in February, establishes strict limits on lead levels in products for children. Never mind that in 2008 only one American child was injured from lead poisoning from toys.

What few on Capitol Hill anticipated was how the new law would devastate the domestic toy industry. According to the American Toy Association, the new rules will cost retailers and toy makers an estimated $2 billion for compliance and removing children's products from the shelves even though they pose no real health threat. Even old children's books are being cleared from stores and libraries.

The multibillion-dollar children's motorcycle and all-terrain vehicle industry has been clobbered. Kids motorcross racing has boomed in recent years in rural and Western states. And the regulators at the Consumer Product Safety Commission (CPSC) have decided that virtually all of these youth vehicles violate the new standards because of lead in the brakes, tire valves and gears. They've ordered motorcycle dealers to stop selling them, putting hundreds of dealers and the entire motorcross industry in a depression. With one stroke of the regulatory pen, an estimated $100 million of inventory can't be sold, and the industry loss may reach $1 billion.

While safety concerns need to be paramount, there is virtually zero threat of lead poisoning from riding a motorcycle. One study by Dr. Barbara Beck of Harvard finds that a youth's intake of lead from riding a motorcycle is less than the amount from drinking water. Even the CPSC admits in a letter to Congress that the lead-intake risk from youth motorcycles is "remote at best."

The introduction in recent years of smaller cycles for kids under 12 has increased safety by replacing heavier cycles more prone to accident and more severe injury. According to a study by the Motorcycle Industry Council, "90% of the youth fatalities and injuries on motorcycles occur when kids ride adult vehicles." Those are what kids will ride if the CPSC ban stays in effect. Ken Luttrell, a Democratic state house member from Oklahoma, says, "With these new regulations, Washington has only succeeded in making biking much more dangerous for kids."

The inane regulations are leading to a backlash against Congress and the CPSC. A resolution calling for a year delay in implementing the new law so the industry has time to adjust passed the Oklahoma legislature 101-0 last week. Missouri and Nevada legislatures have passed similar resolutions. California's burgeoning cycle community is so enraged that some motorcycle dealers are openly defying the sales ban. On Wednesday a coalition of toy users and manufacturers held a rally in Washington to "stop the toy ban."

But so far the folks in Washington aren't interested in what families or employers think. Henry Waxman, a scourge of private business and ally of Speaker Nancy Pelosi, refuses even to hold hearings. Meanwhile, the Obama Administration has called for a major increase in the CPSC budget. Don't you feel safer already?

Federal President Guarantees Cars - Federal President's Ultimate Agenda

Obama's Ultimate Agenda. By Charles Krauthammer
WaPo, Friday, April 3, 2009; A19

Five minutes of explanation to James Madison, and he'll have a pretty good idea what a motorcar is (basically a steamboat on wheels; the internal combustion engine might take a few minutes more). Then try to explain to Madison how the Constitution he fathered allows the president to unilaterally guarantee the repair or replacement of every component of millions of such contraptions sold in the several states, and you will leave him slack-jawed.

In fact, we are now so deep into government intervention that constitutional objections are summarily swept aside. The last Treasury secretary brought the nine largest banks into his office and informed them that henceforth he was their partner. His successor is seeking the power to seize any financial institution at his own discretion.

Despite these astonishments, I remain more amused than alarmed. First, the notion of presidential car warranties strikes me as simply too bizarre, too comical, to mark the beginning of Yankee Peronism.

Second, there is every political incentive to make these interventions in the banks and autos temporary and circumscribed. For President Obama, autos and banks are sideshows. Enormous sideshows, to be sure, but had the financial meltdown and the looming auto bankruptcies not been handed to him, he would hardly have gone seeking to be the nation's credit and car czar.

Obama has far different ambitions. His goal is to rewrite the American social compact, to recast the relationship between government and citizen. He wants government to narrow the nation's income and anxiety gaps. Soak the rich for reasons of revenue and justice. Nationalize health care and federalize education to grant all citizens of all classes the freedom from anxiety about health care and college that the rich enjoy. And fund this vast new social safety net through the cash cow of a disguised carbon tax.

Obama is a leveler. He has come to narrow the divide between rich and poor. For him the ultimate social value is fairness. Imposing it upon the American social order is his mission.

Fairness through leveling is the essence of Obamaism. (Asked by Charlie Gibson during a campaign debate about his support for raising capital gains taxes -- even if they caused a net revenue loss to the government -- Obama stuck to the tax hike "for purposes of fairness.") The elements are highly progressive taxation, federalized health care and higher education, and revenue-producing energy controls. But first he must deal with the sideshows. They could sink the economy and poison his public support before he gets to enact his real agenda.

The big sideshows, of course, are the credit crisis, which Obama has contracted out to Treasury Secretary Tim Geithner, and the collapse of the U.S. automakers, which Obama seems to have taken on for himself.

That was a tactical mistake. Better to have let the car companies go directly to Chapter 11 and have a judge mete out the bitter medicine to the workers and bondholders.

By sacking GM's CEO, packing the new board, and giving direction as to which brands to drop and what kind of cars to make, Obama takes ownership of General Motors. He may soon come to regret it. He has now gotten himself so entangled in the car business that he is personally guaranteeing your muffler. (Upon reflection, a job best left to the congenitally unmuffled Joe Biden.)

Some find in this descent into large-scale industrial policy a whiff of 1930s-style fascist corporatism. I have my doubts. These interventions are rather targeted. They involve global financial institutions that even the Bush administration decided had to be nationalized and auto companies that themselves came begging to the government for money.

Bizarre and constitutionally suspect as these interventions may be, the transformation of the American system will come from elsewhere. The credit crisis will pass and the auto overcapacity will sort itself out one way or the other. The reordering of the American system will come not from these temporary interventions, into which Obama has reluctantly waded. It will come from Obama's real agenda: his holy trinity of health care, education and energy. Out of these will come a radical extension of the welfare state; social and economic leveling in the name of fairness; and a massive increase in the size, scope and reach of government.

If Obama has his way, the change that is coming is a new America: "fair," leveled and social democratic. Obama didn't get elected to warranty your muffler. He's here to warranty your life.

WaPo Editorial on G-20 summit

'We Did Okay'. WaPo Edtorial
The G-20 summit produces a few useful economic steps -- but misses a big opportunity.
WaPo, Friday, April 3, 2009; A18

THE MEETING in London of leaders of 20 top world economies produced a number of pledges of useful action to cope with the global recession. Increased economic coordination, a reaffirmed commitment to open trade and assistance to developing nations -- these are all hugely important, if leaders follow through. And the conversations among the 20 countries are useful in and of themselves -- the type of coordination that must accompany a tightly linked global economy. But the summit would have benefited from a greater focus on the U.S. priority of fixing the crisis we are in before moving on to protecting against the next one.

Entering the summit, there was a tension between the U.S. desire to focus on economic repair and France and Germany's interest in using the summit as a launching pad for a more coordinated financial regulatory regime. Perhaps President Obama could have pushed harder; on the other hand, he was handicapped by worldwide belief in U.S. culpability for the crisis and residual resentments of perceived U.S. high-handedness under the previous administration. Mr. Obama wanted to represent U.S. interests without appearing to bully other participants. Some of his counterparts, in turn, were happy to turn his dilemma to their advantage. One can only imagine the reaction if Mr. Obama had emulated French President Nicolas Sarkozy and threatened to walk out if he did not get his way.

So it was not a surprise when the summit birthed a communique chock-full of plans to increase and strengthen regulatory institutions but devoid of any commitment to further fiscal stimulus. It is a lost opportunity, nonetheless, that the leaders were gauzier in the area that matters most -- actions to restore economic growth -- than on almost any other topic that was covered. Standing between the world and an economic recovery are a broken financial system and inadequate global demand. Extended discussion of how best to jump-start lending and clean up banks' balance sheets would have been beneficial as nations struggle to find the right model for cleaning up toxic assets. And even if no specific stimulus actions would be taken right away, a commitment to spend more if the global economy continued to deteriorate would have been progress. On the other hand, devising a system to ward off the next crisis and cracking down on tax havens fall into the category of crucial but less urgent.

Still, some important and positive policies came out of the meeting. The commitment to a free and open system of trade is particularly critical in the face of protectionist sentiments emerging around the world. The substantial increase in resources for the International Monetary Fund and for poorer nations will help countries in need and provide capital to help keep trade flowing at a time when it is expected to contract. Both policies reflect not only important measures to help the world economy but continued economic integration, instead of an isolationist step backward.

When asked how he thought he did, Mr. Obama said, "I think we did okay." That sounds about right.

Fantasizing about capped 350 ppm CO2

Conference of the Century! (Fantasizing about capped 350 ppm CO2). By Marlo Lewis
Master Resource, March 30, 2009

Well, how else should we describe a conference addressing “The Greatest Challenge in History”? That’s what the 350 Climate Conference, to be held May 2 at Columbia University, calls global warming, which it also asserts is ”likely the greatest threat humanity has ever faced.”
The number “350″ refers to the “safe upper limit” of carbon dioxide (CO2) concentrations in the atmosphere–350 parts per million (ppm)–according to NASA scientist and Columbia University professor James Hansen, who will keynote the conference. Atmospheric CO2 levels today are roughly 385 ppm.

The online conference flyer explains:

While the exact limit–whether it be 550, 450, 350, or even lower–is subject to debate, the need for proactive strategies to climate change is clear. Vital issues directly relating to climate change, such as alternative energy and carbon sequestration, are likely to drive domestic and international policies for the decades and centuries to come. This conference will discuss the scientific, political, social and economic challenges and opportunities associated [with] reducing emissions and lowering atmospheric carbon levels.

Notice what’s missing from the program. There are “challenges and opportunities” associated wtih reducing emissions and lowering CO2 levels, but, apparently, no risks, no perils, no threats to humanity. That’s dishonest, daffy, or both.

For several years, the UN, the European Union, and numerous environmental groups have said that the world must reduce CO2 emissions 50% below 1990 levels by 2050 in order to “stabilize” atmospheric CO2 concentrations at 450 ppm by 2100.

Newsweek science reporter Sharon Begley (no skeptic she) interviewed Cal Tech chemist Nathan Lewis (no skeptic either) on what it would take just to keep atmospheric CO2 levels from reaching 450 ppm:

Lewis’s numbers show the enormous challenge we face. The world used 14 trillion watts (14 terawatts) of power in 2006. Assuming minimal population growth (to 9 billion people), slow economic growth (1.6 percent a year, practically recession level) and—this is key—unprecedented energy efficiency (improvements of 500 percent relative to current U.S. levels, worldwide), it will use 28 terawatts in 2050. (In a business-as-usual scenario, we would need 45 terawatts.) Simple physics shows that in order to keep CO2 to 450 ppm, 26.5 of those terawatts must be zero-carbon. That’s a lot of solar, wind, hydro, biofuels and nuclear, especially since renewables kicked in a measly 0.2 terawatts in 2006 and nuclear provided 0.9 terawatts. Are you a fan of nuclear? To get 10 terawatts, less than half of what we’ll need in 2050, Lewis calculates, we’d have to build 10,000 reactors, or one every other day starting now. Do you like wind? If you use every single breeze that blows on land, you’ll get 10 or 15 terawatts. Since it’s impossible to capture all the wind, a more realistic number is 3 terawatts, or 1 million state-of-the art turbines, and even that requires storing the energy—something we don’t know how to do—for when the wind doesn’t blow. Solar? To get 10 terawatts by 2050, Lewis calculates, we’d need to cover 1 million roofs with panels every day from now until then. “It would take an army,” he says. Obama promised green jobs, but still.*

The point? In Begley’s words, “We can’t get there from here: Political will and a price on CO2 won’t be enough” to stabilize emissions at 450 ppm. The UN/EU emission reduction target is unattainable absent “Nobel caliber breakthroughs.” Meeting the target will require “revolutionary changes in the technology of energy production, distribution, storage, and conversion,” as one group of energy experts wrote back in 2002.

Now, if those breakthroughs do not occur, then the only way to bring the world into compliance with the UN/EU goal envisioned for Kyoto II would be to deny large segments of humanity the blessings of affordable energy. As I observed in an earlier post, there is nothing quite like economic collapse to cut emissions.

Now recall that the emission stabilization goal of the 350 Climate Conference is 100 ppm lower than the EU/UN goal. In a paper on his Web page, Lewis says that achieving 350 ppm by mid-century would require world CO2 emissions to drop to zero by that date.

There is no known way to get there except draconian cutbacks in economic output, population, or both. Poverty is of course a perenniel source of conflict within and among nations as well as the leading cause of preventable disease and premature death. Moreover, climate policies punitive enough to induce negative economic and population growth are likely to meet with resistance and promote conflict rather than peace.

Will any of the invited speakers at the 350 Conference address these risks in a serious ways? Not unless he (or she) is brave enough to be the skunk at the garden party and endure abuse from those who denounce dissent as villainy and treason.

* See also my colleague Iain Murray’s blog on Begley’s column.