Rethinking the Economy » Global Economy

Why Stimulus Still Works: 85% Of Consumer Spending Still Stays Here

RethinkEcon — Thu, 19 Jan 2012 07:34:50 +0000

Ron Paul and other conservatives have been arguing that Keynesian-style stimulating the economy is a waste of money – so much of what we buy is made overseas that we don’t get much bang for the buck. Is that true? Paul Krugman says no:

Barry Ritholtz sends us to a San Francisco Fed paper from last summer that makes a point on which many people seem confused: despite globalization and all that, the bulk of a consumer dollar spent in America falls on American-produced goods and services…

Why? For one thing, most consumer spending is on services, few of which are really tradable. For another, even if the thing you buy in WalMart says “Made in China”, the price includes a lot of US value-added in the form of transportation and retailing costs…. we’re still a country where about 85 cents of your consumer dollar is spent at home, one way or another.

Good to know!

Oh Where, Oh Where Has the European Left Gone?

RethinkEcon — Wed, 28 Dec 2011 07:23:27 +0000

Here in the States, we lefties often pine for the wonderful social democracies Europe has. So one of the most striking things about the Euro Crisis has been the absence of a powerful left response. There have been riots in the streets, marches, protests, mass civil disobedience, and strikes.. But that’s what we are reduced to doing most of the time. This is Europe, baby! Where are the left parties? The German unions who have seats on corporate boards via “codetermination?” The folks who don’t have to go to the street because they’ve already got their butts in positions of power? Where’s the Euro-Solidarity?

In Why Europe Needs a New Deal, Nation writer Andy Robinson gives us some hints.

The issue of sovereignty has also divided the left in the task of challenging the depression economics now in vogue.…
“We can have a European New Deal with existing institutions,” said [Portugal Prof. Stuart. Bracket Holland at the Dublin TASC conference. “We would borrow to invest in everything from transport to urban regeneration.” Meanwhile, “China would jump at the chance to buy euro bonds as an alternative to the US Treasury market,” he said.…

The exasperating thing about the crisis is that, when viewed as a single unit, the European economy meets the conditions for a progressive expansionary drive to create employment with good wages. Selective industrial policy could be used to compensate for the competitiveness gap between periphery and core, the real cause of the crisis. Greek socialist MP Papachristos thinks mechanisms could be introduced, along lines recommended by US economist Thomas Palley, to fine-tune monetary policy to correct eurozone imbalances.

Some variant of a “European New Deal,” as Holland and Greek economist Yanis Varoufakis call it, is supported by the majority of left parties. But it raises hugely difficult issues of sovereignty and democratic control. For the moment, institutions like the European Investment Bank, which Holland believes can be hijacked by the left and turned into vehicles for economic change, are barely accountable. The European Parliament continues to be a sad parody of real democracy.

This is further exacerbated by a related issue:

the crisis of sovereignty, as key decision-making is shifted from the national arena to Brussels, Berlin, Paris and Frankfurt. The extraordinary events in Greece are the most extreme example.… The threat that Troika crisis management poses for democracy and national sovereignty is only beginning to emerge. Opinion polls show that two-thirds of Greeks oppose the Brussels agreement. Yet when Papandreou announced a referendum, the response from Brussels and Berlin was furious intolerance for democratic rights.… German Chancellor Merkel and French President Sarkozy—now known scornfully in Southern Europe as Merkozy—warned that Greece would be expelled from the euro if the people rejected the austerity plan. Aware that after such an aggressive ultimatum very few Greeks would dare to vote no, the Greek left rejected the referendum and blamed Papandreou for blackmailing the people.

“The stance by Merkel and Sarkozy was a blatant violation of European law and of our constitutional right to self-determination,” said George Katrougalos, a leftist law professor at Demokritos University in Athens. “I was amazed that the left did not support the referendum; we can’t support direct democracy only when we know we’ll win.” The split on the referendum was just one example of the difficulty of organizing anything more than mass protest when decision-making power is shifting to unaccountable technocrats.

The other major issue: the European left is divided.

The issue of sovereignty has also divided the left in the task of challenging the depression economics now in vogue. There are two responses to beggar-thy-neighbor internal devaluation. One is a fast track to some kind of Keynesian United States of Europe… The other left plan is to default on the debt and simply leave the monetary union. “This is a neoliberal project, and we have to break with it,” said Galway University economist Terry McDonough at the Croke Park TASC conference. In any case, he added, breakup is already happening, with massive withdrawals from Irish and Greek banks.

And yet, I’m still stuck at, but this is Europe, baby! This isn’t being shoved down people’s throats by the IMF. “Unaccountable technocrats” may be the conductor’s face, but France and Germany are basically driving the train. Where the $@!!&* are their Lefts? Forget Solidarity with Nicaragua, where the hell is their Solidarity with the rest of Europe?

In part the story sounds like the problem was that a big chunk of the European Left went along with a glittery technocratic vision when the EU was created and didn’t win – and didn’t keep fighting hard for – a Democratic EU. But in turn this probably has as much to do with nationalism is anything else – as does the rather tepid response from the French and German left, whose fellow countryfolk are not in the mood to “bailout” other countries without extracting a pound of flesh.

We still have a lot to learn from Europe. But there is also something very fundamentally wrong with our European brothers and sisters if this is the best they can do.

Engineers to Pols: Stop Pretending We Can’t Solve the Climate Crisis Because We Don’t Have the Tech

RethinkEcon — Tue, 27 Sep 2011 07:13:20 +0000

This just in: engineers are pissed off enough that they are calling politicians on their shit around the climate crisis (hat tip to Jess Zimmerman):

The technology needed to cut the world’s greenhouse gas emissions by 85% by 2050 already exists, according to a joint statement by eleven of the world’s largest engineering organisations.

The statement was presented on Friday 23 September to the South African Deputy High Commissioner ahead of December’s COP17 climate change talks in Durban.

The statement says that generating electricity from wind, waves and the sun, growing biofuels sustainably, zero emissions transport, low carbon buildings and energy efficiency technologies have all been demonstrated. However they are not being developed for wide-scale use fast enough and there is a desperate need for financial and legislative support from governments around the world if they are to fulfil their potential.

Dr Colin Brown, Director of Engineering at the Institution of Mechanical Engineers – one of the eleven organisations supporting the statement – said:

“While the world’s politicians have been locked in talks with no output, engineers across the globe have been busy developing technologies that can bring down emissions and help create a more stable future for the planet.

“We are now overdue for government commitment, with ambitious, concrete emissions targets that give the right signals to industry, so they can be rolled out on a global scale.”

The statement calls for:

•A global commitment at Durban to a peak in greenhouse gas emissions by 2020, followed by substantial reductions by 2050;
•Governments to ensure that green policies do not unfairly and unintentionally act to the detriment of one particular industry or country;
•Intensive effort to train and retrain workforces to ensure we have the right skills for the new industries that will spring up around green technologies;
•A heavier emphasis to be placed on boosting energy efficiency, which is the best available measure to bring down emissions in the short and medium term.

The eleven organisations include the Danish Society of Engineers (IDA), India’s Institution of Engineers (IEI), Germany’s Association of Engineers (VDI), Australia’s Association of Professional Engineers, Scientists and Managers (APESMA) and the UK’s Institution of Mechanical Engineers (IMechE). Collectively they represent over 1.2 million engineers spanning four continents.

18 Days!!!

RethinkEcon — Mon, 21 Feb 2011 14:36:55 +0000

On Sunday, Kamal Abbas, general coordinator of the independent Egyptian Centre for Trade Unions and Workers Services (CTUWS) and all-around bad ass, sent Michael Moore a video clip supporting his union brothers and sisters protesting at the Wisconsin State Capitol. As I was reading the transcript, one thing blew me away:

No one believed that our revolution could succeed against the strongest dictatorship in the region. But in 18 days the revolution achieved the victory of the people.

18 days??? The Egyptian revolution was such a blur — I spent most of the time holding my breath & praying that the incredibly heroic demonstrators wouldn’t be massacred — that it never registered just how phenomenally fast it happened.

In part that was because of factors beyond anyone’s control. But it was also because of the incredible unity & smart tactics displayed by all the groups and individuals involved, who brilliantly exploited an opening — and undoubtedly because of years of previous struggle by folks like Abbas. It was a truly remarkable display of what people can do when they stand & fight together for a just cause.

If you’re wondering who the folks are in the background:

The poster in the background shows photographs of some of the recent young victims of the Mubarak government. The writing says they are among the martyrs of the 25 January Revolution.

UAW Ready to Rock ‘n Roll!

RethinkEcon — Tue, 04 Jan 2011 07:51:28 +0000

Very cool news courtesy of the Wall Street Journal :

The United Auto Workers union said it is prepared to spend hundreds of millions of dollars in a bid to organize employees, including a new push for hourly factory workers at foreign-owned car plants in the U.S.

The effort is part of a major shift in focus by the UAW, which had spent most of the past 75 years extracting better wages and benefits from the three Detroit auto makers.

A few new changes in their strategy:

The new strategy under [UAW President] King, a lawyer by training who was elected to the union’s top job last summer, is built on a set of 11 principles to be presented to the targeted companies.

The principles, which were made available to the Journal, including pledges to refrain from coercion, intimidation and threats to workers from either side. Another provision calls for both union and management to avoid promising better wages or benefits based on a worker’s vote for or against the UAW.

UAW officials said the principles are designed to give the union better protections to organize. They also aim to assure the company that if the agreement is followed and workers reject the union, the UAW will walk away without protest. Mr. King said the Detroit makers already abide by the principles.

They’re also going to go global – and are ready to spend big:

The UAW, he said, would hold demonstrations at the corporate headquarters of these companies outside the U.S. as well as at their U.S. plants. In addition, it would picket their dealerships in the U.S. and abroad, and sports events globally that are sponsored by the car companies.

Mr. King said he will tap the union’s strike fund of more than $800 million for the push, calling it the best way to protect his current membership. “We have, in many ways, pretty deep pockets in terms of what we’re willing to spend,” said Mr. King, adding that the union already approved spending $60 million on organizing at its convention in June. “We have really unlimited resources to devote to this. It’s unlike anything that’s been seen in the UAW in many, many years.”

What a fabulous way to start the new year!

European Unions: Slow on the Draw?

RethinkEcon — Wed, 17 Nov 2010 07:26:23 +0000

The American Prospect has an interesting series of articles on how CWA, the Steelworkers, SIEU, and other US unions have been reaching out to European unions for help in organizing. You may not realize it, but if there’s a school bus that gets your kid to school, or there’s a security guard in your office building or your bank, or if there is a cafeteria in your office building or on your college kid’s campus, odds are they are part of a European-owned company.

In this age of globalization, large foreign multinationals are acquiring subsidiaries in the United States. Going native, they are embracing anti-union tactics they avoid at home, where unions often have legal recognition, respect, and political influence.

In turn, US unions are learning how to work back up the food chain.
(Disclosure: I’ve worked for some of the unions and campaigns mentioned in these articles)

Take the case of 58-year-old Marcia Snell, who spent a “decade working for food concessions operated by the French multinational Sodexo at Ohio State University sports arenas.”

on her part-time hours and low pay ($9 an hour or less until recently, after she began organizing and got a raise and a full work week), Snell had to raise her five children with the help of Medicaid, food stamps, and public assistance. When her Medicaid coverage ended, she could not afford Sodexo’s insurance or her heart medicine and then needed bypass surgery.

French Sodexo union leaders Jean-Michel Dupire and Gerard Bodard say that after visiting Columbus last spring, they were shocked by differences between the lives of Americans like Snell and French Sodexo workers — and the difference between Sodexo’s self-image and reality. In France, anyone can easily join a union, and everyone in the food services is under union contracts. Most French Sodexo workers earn the minimum wage (about $12 an hour), but they have comprehensive public health insurance, a much more generous public pension, full work weeks, and six weeks paid vacation. (Snell will get her first few vacation days next year.)

“I think we’ll help each other,” Bodard says, “because we’re working for a global company, and the only way for us to go is to build global power. In France, we’ve put pressure on Sodexo and given publicity [to U.S. conditions] so everyone in the sector knows about it.”

Reflecting the growing worry that multinational companies will bring U.S. labor standards to Europe, Bodard adds, “What I’m going for is equal treatment, but it’s also important to bring everyone to the top, not the bottom.”

“The French workers stood by us and want to help us get a union,” Snell says. “They actually cried when we told them our stories. … By workers from other states and countries going together, it shows we really want a union.”

Although there have been exciting first steps, the road to Solidarity Forever has been rocky. Partly it’s because it’s hard work. But there are hints in these articles that European unions are also to blame.

Let’s start with the example of International Framework Agreements (IFAs), over 50 international agreements primarily signed by European-based corporations that were won in the last decade.

Most of these agreements require the employer to pledge to honor the eight key worker-rights provisions of the International Labor Organization, among which is the right to organize unions.

Yet, particularly when it comes to guaranteeing the right to organize — the key goal for all U.S.-based unions — many framework agreements are no more than “hollow shells,” in the words of one American unionist who works with unions across the world. The problem, says Ron Oswald, who heads the IUF (the federation of unions in the food and hospitality sector), is that “the IFAs are not enforceable. Most lack basic processes for conciliation, mediation, and arbitration, and the IUF, and the other GUFs [global union federations], don’t have the capacity or resources to make the agreements work.”

Why don’t the powerful European unions who helped create IAFs stomp on corporations when they ignore these agreements?

First, because European workers are still struggling to overcome the challenges faced by their conflicting interests. For example, back in the mid-90s the European Union passed rules that said large companies with employees in more than one European country have to create a European Works Council, similar to the German Works councils, “in which management met with elected representatives of their workers.” Only about a third of the companies that fit the criteria have done so. And these councils haven’t been particularly effective, according to general secretary of the European Trade Union Confederation John Monks

“Most are just getting-to-know-you opportunities for union representatives from different countries,” Monks says. They “are not an effective means of upward harmonization of wages across borders. There’s no bargaining on pay transnationally, even with a common currency [the euro]. We tried it within some councils in an area of the North Rhine [in Germany], the Netherlands, Northeast France, and Belgium, but it didn’t work. The Belgians wanted to index wages to inflation; the Germans [who come from an exporting nation] tried to hold wages down. The borders blocked our capacity to reach a common position.”

It’s not that they can’t get anything done.

Monks does note, however, that the councils were able to bargain successfully for non-wage-related benefits — in particular, job-training entitlements and parental leave.

But when it comes to hard-core differences around wages, national interests trump solidarity.

The other problem is best summed up in an anecdote from SIEU’s campaign to organize Securitas, a Swedish owned security firm. When Ken Parkison, a guard who was fired for trying to organize his workplace in Denver, he ended up joining “a delegation of Swedish unionists in Cincinnati helping American co-workers present petitions for recognition of a union.”

The Swedes were “appalled” at how Securitas treated Parkison — -and them. As the American-Swedish delegation stood outside the Cincinnati office, the manager opened the door, and Bergman Israelsson — also an employee representative on the corporation’s board of directors — stepped forward and identified herself. The manager “ignored me and slammed the door in my face,” she says. “I’m used to talking with management at all levels with respect. I’m not angry. I feel sad. You don’t treat people that way.”

in my ears in the US labor movement, I don’t think I’ve ever met a labor leader who, after the treatment the Swedes got, would say “I’m not angry, I feel sad.” And she works for a security company! If a corporate dick head acted like that to a US nurse who was part of a powerful union, the nurse would skin him alive.

In short, after many decades of living in an amazing welfare state that they helped create, European unions have lost some of their fighting spirit. Sure, when somebody tries to increase work hours or cut their benefits they know how to rock ‘n roll. But when it comes to going on the offense, they’ve got a long way to go.

How long? Ironically, one of the US’s newest successful exports is Kicking Ass 101.

Change to Win has an office in Utrecht, in the Netherlands, that is working with European unions to help develop their own organizing programs and help them target the vulnerabilities of the companies they seek to unionize. Much like American unions 50 years ago, European unions haven’t felt the need to organize in recent decades, and in a number of European nations, where bargaining takes place nationally by sector, increasing union representation doesn’t have a direct link to collective-bargaining clout. But, says David Chu, who heads Change to Win’s European office, the spread of low-wage work in Western Europe and the rightward turn of many European governments have weakened Europe’s social fabric and workers’ power. “Some European unions,” he says, have responded to these changes “by returning to a style of unionism that is more active and militant, and want to enhance their ability to campaign and rebuild their memberships.” Like the AFL-CIO’s Organizing Institute, the Change to Win center trains organizers and strategists for the kind of arduous battles that American unions know only too well. Germany’s IG Metall, the world’s most powerful union, has established an organizing department that, with Change to Win’s help, has targeted wind-turbine manufacturers and auto dealers.

If a powerhouse like IG Metall — made up of big, burly metal workers who could probably pop your head off with two fingers — need our help learning how to organize, that tells you everything you need to know.

So the next time someone from Europe complains about the US, let them know that it’s partly their fault. If they don’t aggressively use the power they have to fight for workers across the globe who desperately need help — which certainly includes us — they have no one but themselves to blame for the seeds they sowed.

Intel’s Andy Grove: Putting Jobs Back Inside

RethinkEcon — Mon, 02 Aug 2010 07:01:06 +0000

A few weeks ago, BusinessWeek ran a piece by Intel founder Andy Grove about how to create more jobs in the US. I held off reading it; I wasn’t interested in another diatribe about how we need to cut taxes on big business, create more “labor flexibility” by destroying unions, and general give Corporate America everything they want.

But it turns out that Grove is not your average CEO.

the great Silicon Valley innovation machine hasn’t been creating many jobs of late—unless you’re counting Asia, where American tech companies have been adding jobs like mad for years.

The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs…

Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

The underlying problem: the rules are stacked in favor of off shoring manufacturing jobs.

Each company, ruggedly individualistic, does its best to expand efficiently and improve its own profitability. However, our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs—we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate…

We got to our current state as a consequence of many of us taking actions focused on our own companies’ next milestones. An example: Five years ago a friend joined a large VC firm as a partner. His responsibility was to make sure that all the startups they funded had a “China strategy,” meaning a plan to move what jobs they could to China.

How do we get out of this mess? Not by big corporate tax cuts but by rebuilding “our industrial commons.”

We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability—and stability—we may have taken for granted.

Grove’s strategy doesn’t address how we could at the same time ensure our brothers and sisters in China also get good jobs . But it’s still a pretty amazing statement from the head of one of the most successful US manufacturing companies in the last 25 years.

We Live on a Different Planet Than Europe, or What “Conservative” Looks Like in Germany

RethinkEcon — Mon, 07 Jun 2010 06:25:50 +0000

I heard an interview with Steve Hill, author of Europe’s Promise, in which he said Germany’s new chancellor Merkel, is in favor of the German policy that pushes companies to reduce the number of hours employees work rather than laying them off. A little Googling and voila, a NYT description of Merkel’s first policy speech back in November:

Mrs. Merkel, who heads a new coalition of conservatives and the business-friendly Free Democrats, said the global financial crisis would result in a fundamental reshuffling as competition increased for market share, raw materials and human capital….

“Without growth, no investment; without growth, no jobs; without growth, no money for education; without growth, no support for the weak,” Mrs. Merkel said….

Unemployment, now at 8.3 percent, “will rise further,” she said, and added that the government’s subsidy plan known as Kurzarbeit would be extended.

The Kurzarbeit program encourages companies to reduce the amount of hours their employees work rather than laying them off. Under the plan, companies only pay for the hours their employees work and the government compensates those whose hours are cut with an allowance covering some of the lost wages.

“Without Kurzarbeit, more jobs would have been lost,” Mrs. Merkel said.

The program has already saved 400,000 jobs, according to IAB Research Institute, which is affiliated with the Federal Labor Agency. At least 1.4 million employees are working shorter hours, according to the labor agency…

Wow.

Values Vs Market-Based: The Ugly Mess Behind Cap and Trade

RethinkEcon — Tue, 04 May 2010 06:53:25 +0000

[Part 3 of Values-based vs. Market-based Approaches to the Economy]

As we saw yesterday, the strongest argument for a market-based framework is that it allows for decentralized, flexible, creative solutions vs. what Krugman calls “a ‘command and control’ fix that issues specific instructions in the form of regulations.”

That’s the theory. But step into the nitty-gritty details of creating a market-based solution, and a very different picture emerges. A market-based framework does allow for lots of flexibility and creativity. But the creative energy it unleashes can just as easily be spent making money while undermining the goals the market was supposed to accomplish. This isn’t a showstopper. But to put this destructive creativity in check, you’ve got to create lots and lots of “specific instructions in the form of regulations.”

It’s hard to get a visceral sense of just how much regulation a “market-based” approach requires to actually work. So in this post we’ll take a look under the hood of Krugman’s favorite solution, cap and trade, at five ways it can go south if it isn’t kept in check by lots of regulations.

1) Speculation Pew has a great brief on what it takes to set up an emissions market so speculators won’t blow it up. And baby, it ain’t pretty.

For starters, you have to close “the Enron Loophole, the London Loophole, and the Swaps Loophole.” What are they? Trust me, unless the idea of reading sections like “Options for Improving Oversight of OTC [over-the-Counter] and Exchange-based Transactions” makes you feel tingly, you don’t want to know. And this loophole list is just the beginning, based on past speculative tricks. The creative boys and girls at Goldman Sachs are sure to come up with new loopholes.

Mind you, that’s not a reason to avoid using a market-based solution. The point of Pew’s brief is to explain what we need to do to make emissions markets work. And as Krugman pointed out last year,

Any time you have a market, there’s some opportunity for speculation… So, should fear of speculation lead us to ban trading in wheat? Nobody would say that… Now substitute “emission permits” for wheat. It’s exactly the same story.

My point isn’t that a market-based solution can’t work because of speculation. It’s that it will require lots and lots and lots of rules and regulations to keep speculators from blowing it up.

2) Emissions Offsets. The European Union has been running an emissions market, the Emissions Trading Scheme (EU ETS), for half a decade, and they’ve learned some very valuable, painful lessons. One of them is that if you don’t limit the ability of folks to buy offsets, some people will go at them with all the reserve of a crack addict. And we’re not talking some shady Eastern European country, we’re talking about the Netherlands. According to professors Tamra Gilbertson and Oscar Reyes, the Netherlands’s 2008-2012 emissions trading National Action Plan (NAP)

stated its intention to purchase 20 million tonnes of offset credits every year towards its reduction target. This would be equivalent to outsourcing all of its emissions reductions commitments during that period.

At least these supersized offsets help reduce emissions somewhere else, right? Maybe — if you create a bunch of those icky “specific instructions in the form of regulations” plus monitoring & enforcement to ensure the folks who develop and sell these offsets don’t get too creative…

3) Giving Away the Store. When the EU created their emissions market, there was a lot of political pressure to hand out more permits to corporations where the market could hurt their “competitiveness.” The end result: more emissions permits were given away than the current amount of pollution.

Take ArcelorMittal, one of the world’s largest steel makers. According to Gilbertson and Reyes,

The EU’s own data on emissions showed that ArcelorMittal’s verified emissions increased by 6.7 per cent in 2006 and by 15.5 per cent in 2007, with a downward trend of -8.4 per cent in 2008 due to the economic crisis. Yet whether its emissions increased or decreased, the fact that it was awarded massively more permits than it would have needed even to begin reducing emissions remained a constant: a 36.9 per cent overallocation in 2005, 26.9 per cent in 2006, 25 per cent in 2007 and 31.7 per cent in 2008.

Actually, it’s worse than that. Not only is the emissions market not providing pressure to go green, because so many permits were granted, folks in steel are making a profit off them without lifting a finger. From the industry rag Metal Bulletin in April 2009:

European steel producers are selling allocated carbon permits that have become surplus to requirement due to production cuts, carbon analysts told MB. “Steelmakers are using the EU Emissions Trading Scheme (EUTS) as a cash cow,” one analyst said. “The steel sector has received more permits than it should have.” Nevertheless the steelmaker’s actions are perfectly legitimate as the EU carbon market is a free one, carbon traders said.

Overall, according to the October 2007 UK Parliament’s Environmental Audit Committee’s assessment of the first phase of the EU’s emissions market

most observers believe that too many allowances to emit carbon have been allocated in phase 1, meaning there is overall little or no incentive for firms to cut back on their emissions, and thus that the entirety of this phase is likely to be ineffective in driving down emissions.

4) Banking. Both the EU’s Emissions Trading Scheme and most US proposals allow companies to “bank” some or all of the emissions permits they don’t use. There are a number of reasons why you might want to allow banking. But if you make a mistake at the start — say by giving corporations way too many emissions permits — leading companies bank unused permits is a gift that keeps on giving. A more nuanced approach could give you the benefits of banking without this huge downside. But guess what that nuance means? Lots more “specific instructions”…

5) Fun with Numbers. Another downer from professors Gilbertson and Reyes:

An inquiry by the UK Parliament’s Environmental Audit Committee found that ‘it is widely accepted that UK power generators are likely to make substantial windfall profits from the EU ETS amounting to £500 million a year or more’. The German environment minister cited figures from his own ministry which showed that the four biggest power producers in his country – Eon, RWE, Vattenfall and EnBW – would reap profits of between €6 billion and €8 billion from the first phase of the scheme.

How did the power companies pull this off? Since the politicians didn’t want to hurt corporations who had tough overseas competitors, they put more of the burden on the energy folks, assuming that they could just pass the cost onto the consumer. So the power companies fired up some of that fabulous market creativity:

The costs that are indirectly passed on to consumers through an increase in wholesale energy prices do not reflect what carbon credits actually cost, but rather what the companies assume they could cost. This leaves considerable scope for overestimates: first, by assuming a larger than necessary need to buy permits or credits; second, by assuming that there will be a high carbon price; and third, by assuming the costs of replacing EUAs, irrespective of their actual use of offset credits which have consistently commanded lower prices. Yet if these assumptions turn out to be over-generous, the surplus is more often pocketed as profit than returned to the consumer….

They then seek to maximise the value of these permits – so while the cost passed on to consumers approximates to the cost of reducing emissions in accordance with a cap, what the company actually does is whatever it considers to be cheapest – which may be to buy EU ETS permits from other installations in the scheme, or buy offset credits instead.

The EU could stop all of this — with lots more of those icky “specific instructions in the form of regulations” — but so far they’ve only done a half-assed job. A snark from Gilbertson and Reyes sums it up:

It makes more sense, then, to view the EU ETS as two parallel schemes: one that encourages the power sector to buy extra allowances – which, as we have seen, passes the notional cost on to consumers to generate large profits for the energy companies – and another that awards a large surplus of free permits to heavy industry, requiring no emissions reductions but allowing them to sell permits back to the power sector to generate large profits.

Conclusion
Again, we’re talking Europe — a place where you can have a conversation about the health-care system without it degenerating into accusations of Death Panels and Socialism. You can imagine how these issues will play out in the good old USA.

This isn’t to say that cap and trade is a bad idea or that it couldn’t work. I’m not a green policy geek, and I don’t understand the details well enough to say one way or the other. But what I do know is that anybody who thinks using a market based solution is somehow going to be simpler or require fewer detailed rules and regulations is kidding themselves.

Up next: principles of a value-based framework.

“American Jobs” And Our Values

RethinkEcon — Mon, 15 Feb 2010 07:39:04 +0000

When two feet of snow slowed DC life to a crawl last week, I started catching up on old New Yorker’s. In an interesting December article on China’s “crash program for clean energy,” one paragraph caught my eye:

[a] message is gaining currency in Congress; it frames American leadership as manifesting not so much the courage to seize the initiative as the determination to prevent others from doing so. Senator Charles Schumer, one of several lawmakers who have begun to cast China’s role in environmental technology as a threat to American jobs, has warned the Obama Administration not to provide stimulus funds to a wind farm in Texas, because many of the turbines would be made in China. (“We should not be giving China a head start in this race at our own country’s expense,” Schumer said in a statement.) Senators John Kerry and Lindsey Graham, in an Op-Ed in the Times, vowed not to “surrender our marketplace to countries that do not accept environmental standards,” and suggested a “border tax” on clean-energy technology.

Obviously we want to create more good jobs, especially good green jobs, for folks in the US. But if you’re a progressive, jingoistic nationalism is a nonstarter. So how do we deal with this tension?

If the economy is like a game where players get to set some of the rules, then when choosing these rules we should go back to our core values. As a Christian, I’d put it this way:

Thou shalt love thy neighbour as thyself. There is none other commandment greater than this. (Mark 12:28-31)

Or as Rabbi Hillel said:

If I am not for myself, who will be for me? If I am not for others, what am I?

What does this mean in practice?

For Americans, it means that we have to create good jobs in the US in such a way that our brothers and sisters in China can also end up with good jobs
For policy wonks and op-ed writers who aren’t worried about having their lives destroyed by outsourcing, just saying “free trade will create good jobs for everybody” or saying the environment comes first — in short, treating working-class families like widgets instead of their brothers and sisters — doesn’t cut it

So where does this leave us? Creating rules that are based on the principles that all countries:

have a right to encourage good jobs for their folks
have a moral interest and a self interest in encouraging trade that creates good jobs at home through exports and good jobs abroad

If we set aside the Econ 101 fairytale that “free trade” — a.k.a. a form of trade that hasn’t ever existed and that no politicians will ever vote into reality — will magically solve the problem, then we need to use trial and error to figure out how to make this work.

For starters, we need to stop talking about companies and start talking about jobs. Take what the article called the “Apple model”:

So far, many of the most promising energy technologies—from thin-film solar cells to complex systems that store carbon in depleted oil wells—are luxury goods, but the combination of Chinese manufacturing and American innovation is powerful; Kevin Czinger, a former Goldman Sachs executive, called it “the Apple model.” “Own the brand, the design, and the intellectual property,” he said, and then go to whoever can manufacture the technology reliably and cheaply.

That’s a good deal for Apple’s executives, shareholders, and a handful of skilled professionals, and — hopefully — it creates decent jobs in China. But it’s an example of why US median wages for working families have stayed flat.

Conversely, if a foreign company creates good jobs here, they’re still good jobs (obviously it’s a problem if most US companies are wiped out by competition, but we are a long, long way from there).

Some concrete proposals:

First, we should do everything we can to encourage the rise of strong unions working together around the globe. Without strong unions, a broad-based white US middle class wouldn’t have developed after World War II. Even though the profit pie was growing after World War II, corporations didn’t just hand over a decent-sized slice of the bounty workers had helped produce — workers had to fight for it. The same is true today for global trade.

And if we want to make sure that US and Chinese workers end up better off, there’s nothing like fighting together for justice for all to get folks to truly see each other as neighbors, as brothers and sisters, to understand what it’s like to struggle to get by in Tianjin and Detroit, to give both a chance to have a real voice in the solution.

Second, any government should be able to say that a certain percentage of the work done for their contracts should create jobs in their country. Not too high a percentage — then there’s no pressure for local/national companies to become more competitive. But enough to make sure that folks in their country benefit, both from the wages and from the skills & knowledge that come with new markets like clean energy.

Finally, countries should try to figure out a reciprocal way to discourage the Apple model. It won’t be straightforward to do. If, say, we just added a small tax on US companies that followed the Apple model, their global competitors would get a significant advantage. And whatever disincentives we put in place need to be moderate enough so they don’t kill off any incentives to create better jobs in China. So long as our Chinese neighbors make one seventh the income that we do, we have a moral obligation to help them.

Ditto for Kerry’s and Graham’s idea of a border tax on “countries that do not accept environmental standards.” It’s not good for anybody to when countries compete for jobs based on lowering environment standard. But any proposed solution has to take into account the needs of our Chinese brothers and sisters.

This answer isn’t as neat and simple as “unleash free trade, and everyone will have more milk & cookies.” But it’s also not based on a fairytale about how the economy actually works. So long as our attempts to tweak the economy’s rules are based in our core values, and so long as we are humble/smart enough to not pretend we can figure out the answer without real-world experience I think we will find the right balance and the mutual prosperity and care that comes with it.

NOTE: In discussing this issues, I didn’t talk about any of the other values we have — that anybody who’s willing and able to work hard should be able to make it, that we are stewards of the earth — that also address them. They’re important, but it was too much to try to address in one post.