NDN Blog

First Priority Is to Set Priorities

As President-elect Barack Obama turns to the enormous challenges facing the nation, his first priority will be to set his priorities. Already, there are more urgent problems than any president could tackle successfully in a single term, and even more will almost certainly emerge. Moreover, he now will have to lead in ways he did not have to as candidate, by taking real and contentious actions. His historic, landslide election will give him greater, initial political capital than any president since Ronald Reagan. Even so, capital gets spent, and a president’s power and influence are finite, so he will have to choose precisely where he intends to focus all that capital, power and influence.

The lead items on his domestic agenda must be the nation’s financial and economic crisis. That will require, first, steps to slow housing foreclosures. He has pledged to initiate a 90-day moratorium on foreclosures, but that would be only a first, modest step. He also could also create a new fund to lend tide-over funds to homeowners facing foreclosure after the 90 days are up, and while Fannie Mae and Freddie Mac work out a responsible plan for them to renegotiate the terms and interest rates on the mortgages of homeowners in distress. He also can help banks get credit flowing again with a temporary, reduced tax rate on an estimated $700 billion in profits now held abroad by the foreign subsidiaries of American companies.

That step also could provide a measure of stimulus for an economy currently entering what is likely to be a long, nasty recession, and addressing the recession also must be one of President Obama’s first priorities. Tax rebates won’t work, since most Americans would most likely save any new checks rather than spend them. So Washington will have to jumpstart the nation’s additional spending, with a new spending package of $200 billion to $250 billion. And President Obama should focus most of it on the long-term investments he called for during the campaign, including grants to digitize health care records and provide access to computer training for current workers, and new supports to modernize the electricity grid and accelerate the development and spread of alternative energy. On top of that – and grants to cash-strapped states so they can avoid large cuts in their Medicaid programs and their workforces – the new president should focus the infrastructure piece of his stimulus on creating a national infrastructure financing bank and initiating new commitments for low-polluting light rail systems in major metropolitan areas.

The president will also hear demands and pleas for a new regulatory framework for the financial sector. That task is clearly a necessary and urgent one, but getting it right will be a long, complex process. His best move would be to create a national, expert commission with a mandate to figure it out over the next six months and report back to the nation.

The president’s serious priority-setting can only really begin once he addresses those emergencies – and it won’t be easy. The stimulus measures can be the first steps toward meeting his pledge to help build a more energy-efficient and climate-friendly economy. And since he will have to choose, the rest of that agenda should probably take lower priority than health care reform. One reason is that while the recession will cut energy prices and energy use with no help from Washington, for at least a time, it will only worsen out health care problems. The recession will further increase the numbers of people without coverage, perhaps by millions, without making a dent in the steady, sharp increases in health care costs that will continue to cut into jobs and wages. And any further delay will only make it all worse. It’s time to carry out his plans to make coverage much more nearly universal, and tie those extensions to a hard-nosed program of cost controls that will require hospitals and clinics to adopt the best practices of the country’s most cost efficient medical centers.

This will leave President Obama with plenty to tackle in the second half of his term. That can be the time to take further steps to help make America more climate friendly and energy efficient. It also has to be the time to build on the cost-control lessons from health care reform and finally address the serious and treacherous business of reforming Medicare and other entitlement spending for tens of millions of Baby Boomers.

And if President Obama can make real progress in these priority areas over his first term, it will almost certainly earn him an even bigger national landslide for a second term. 

Who's In Charge?

Another crisis has emerged on top of the unraveled financial system, hyper-volatile stock markets, and accelerating economic downturn: There’s no one at the helm of the economy or the piecemeal bailout and the other schemes devised to make it right. President George W. Bush is nearly absent and his credibility is exhausted. The Treasury Secretary’s authority is only slightly less damaged, and he cannot commit the nation to new policies. And now the Congress has left the city to campaign. The two presidential candidates, including whichever one becomes the next president, cannot assert any authority even if either of them wanted to. There’s no Congress around to pass on what Obama and McCain might call for. Further, President Bush couldn’t respond to an Obama recommendation without undermining his party’s candidate, nor respond to a McCain proposal without reinforcing the Democrats’ case that the two are in joined at the brain.

So, the economic crisis has continued to worsen. The problems in housing, finance and now the overall economy aren’t on recess, nor will they hold their fire until the next president is inaugurated. In fact, more economic and political problems will emerge. For example, last week, three of the nine banks slated to get the first bags of cheap, federal bailout money reported very respectable third-quarter profits. Wells Fargo, State Street Bank, and J.P. Morgan-Chase together earned profits of $2.6 billion for the quarter, even as they agreed to accept $25 billion each in cheap, new capital from American taxpayers.

Of course they agreed: The money will cost them 5 percent or half of what Warren Buffet received for his $5 billion capital investment in Goldman Sachs last month, so now they can expand their businesses at a cut rate. The CEO of J.P. Morgan-Chase called his $25 billion injection a “growth opportunity.” By what methods of accounting do they need emergency government assistance? And where are the deciders in the administration? The Treasury spokesperson said, ‘We are not here to make money off these companies,’ a view which almost certainly would draw sharp attacks from most members of Congress if they were here, as well both campaigns and most Americans. In fact, if interest rates rise before the banks pay back the government’s gifted capital, these loans to healthy, profitable banks will actually cost taxpayers plenty, since every cent of their $75 billion will be borrowed, and the recipients are paying below-market rates.

Presumably, the Treasury has criteria for extending these bailout loans, but since there is no transparency and, with Congress gone, no one to call for it, we cannot know what or whose criteria they are. But what could those criteria be, if sound, profitable banks qualify for emergency capital infusions? With a sinking economy and millions of Americans facing unemployment and home foreclosures, is it the first priority of those in charge to finance new growth opportunities for profitable banks? Is that the government’s reward for their managing to avoid bankruptcy? In fact, it looks like one of the final acts of an administration that now has injected a big dose of Asian-style “crony capitalism” between the most senior officials of the White House and the Treasury, and Wall Street.

This is happening, in part, because in the midst of genuine economic crisis, the United States is nearly leaderless. British Prime Minister Gordon Brown and other European leaders last week called for a ‘Bretton Woods II’ summit to redesign the global financial architecture, and last weekend President Bush called for his own summit. The Brits and Bush both want everyone to meet within a few weeks to begin the figure out how the International Monetary Fund, World Bank and the Bank of International Settlements should operate in this new era and, presumably, to discuss new terms for overseeing capital flow among countries. Who would speak for the United States? It’s likely that Barack Obama will be president-elect by the time they meet, but he still won’t be president and therefore unable to exercise presidential authority. The man who will still be president, George W. Bush, will also be utterly without domestic support or credibility in economic matters, with no means of selling a new international package to the American people or Congress. These kinds of issues come up during any presidential transition; but they’re especially worrisome this time, because we find ourselves in the middle of a cascading economic crisis that will not wait until next January.

Senators Obama and McCain need to prepare now. Both candidates should convene a group of trusted economic advisors to review the current options for dealing with the deteriorating housing market, the instability in our financial system, and the real economy’s accelerating problems, without reference to the campaigns. This group should report its findings and recommendations to the president-elect on November 5, and he should present his recommendations to a lame-duck Congress that same week. Campaign operatives may assume we have until January, but the man who becomes president-elect must know that he will have to take action as soon as the votes are counted.

Stimulus for the Long Run

When Congress returns to Washington following the election, its first priority will be to pass another stimulus package for the sinking economy. It’s already clear that the package will involve about $200 billion in new stimulus or a boost equal to about 1.4 percent of GDP. The question is what form the package should take. The path of least political resistance is another round of tax rebates for American families, which they could spend to jumpstart demand and, ultimately, the business investments and jobs to meet that demand. The catch is, that path is very unlikely to work this time. Moreover, the new president-elect and Congress can put that $200 billion to uses that will stimulate long-term growth and income gains much more effectively.

Most people won’t spend small windfalls when they’re worried about losing their jobs or homes next month or finding themselves unable to pay their health care premiums or their kid’s tuition. Instead, they save such windfalls or use them to pay down debts. That’s just what happened this past spring with most of the tax rebate in the last stimulus. With unemployment rising, home values continuing to fall and the stock market down nearly 40 percent over the last year, most Americans are even more anxious today and feeling a lot poorer. In this environment, two-thirds of more of those rebate checks would simply be saved, providing virtually no stimulus.

But we still need that stimulus, if only as an insurance policy against future economic shocks that could deliver serious new blows to the faltering economy, such as a run on the dollar that would drive up interest rates or another wave of financial failures if the deterioration in the housing market gets worse. And since the recessions in countries that suffer financial meltdowns are usually longer and deeper than normal, we should prepare ourselves for another year or more of tight times.

There are better paths for the coming stimulus package than tax rebates. A piece of it should go to ease some of the recession’s immediate pressures and pain: extend unemployment benefits for the millions more Americans likely to lose their jobs in 2009, and give states and cities infusion of funds so they don’t have to make sharp cuts in the payrolls of teachers, police and other public workers, or in Medicaid services for sick, low-income people.

The President-elect-to-be and Congress, however, should direct the lion’s share of the $200 billion in a new direction: investments in the basic elements of growth for the next decade. In effect, we should use the stimulus to drive policy reforms that will affect the shape and strength of the next expansion, rather than simply its timing. A third or more of the new funding should go to infrastructure – and most of that not for traditional roads and bridges, but for the public requirements of the low-carbon, energy efficient economy we know we have to build. The package could provide, for example, the first support for modernizing the nation’s electricity grid. The federal government also could make itself a model of climate-friendly and energy-efficient ways of doing business, with large-scale, new investments to upgrade the heating, cooling and lighting systems of all federally-owned buildings for low-carbon energy efficiency and to shift the federal fleet to hybrid and other energy-efficient vehicles. The package also could include new tax preferences for businesses and households to upgrade their systems. Investments in public transportation could be another important focus for stimulus spending. Today, public transportation accounts for just one percent of U.S. passenger miles, compared to five percent in Canada, 10 percent in Europe and 30 percent in Japan. For the short term, the stimulus package could include subsidies for local transit systems to cut their fares by half or more. For the long term, the package can include down payments on a new national program to promote the construction or extension new light rail systems for metropolitan areas, which can also create jobs quickly.

Through this recession and into the next expansion, wage and productivity gains will increasingly be tied to a person’s capacity to operate in workplaces dense with information and telecommunications technologies. Knowing that, we also can direct some of the stimulus to a plan we developed and which Senator Obama has endorsed, to provide grants to community colleges to keep their computer labs open and staffed in the evenings and on weekends for any adult to walk in and receive free computer training. Since we know that every American student also needs to develop computer and Internet-based skills, the stimulus also can include the first funding for an innovative program to provide inexpensive laptops developed by the MIT Media Lab for every sixth-grade student. Finally, the stimulus package can fund the extension of broadband installation and service for users in every school, local library, and local and state human services offices.

These are all investments which we know we have to make, if we really intend to make the U.S. economy more efficient, innovative, and sustainable. We also know that Congress will pass some $200 billion in new stimulus within a month’s time. The new President-elect can use this coming occasion not only to create more jobs, but to do so in ways that will help drive the development of a real, 21st century workforce and genuine 21st century economic infrastructure. And taking this course could be an early and important opportunity for him to practice both his new politics and a new form of economic leadership.

Calming the Nation's Nerves: Nothing to Fear More than Fear Itself

Congress tried late last week to stall the financial crisis by pledging to spend $700 billion on devalued securities held by financial institutions, and by Monday morning, it was clear that the pledge wasn’t enough to reassure investors or restart lending.

Instead, a classic panic has set in here and around much of the world as public confidence in banks, other financial institutions and the markets themselves has nosedived; at the same time, banks and other financial institutions are wary of loaning money to potential borrowers. This panicked mindset threatens the economy more today than the continuing turmoil in the housing and financial markets. 

We must now recreate baseline confidence before we can repair the continuing damage to our financial and housing markets.  

Financial and broader economic panics thrive on a combination of huge and unexpected setbacks and a serious absence of information. They unfold when people face enormous uncertainty about matters vital to them, such as the value and security of their homes,  retirement accounts and college savings. Panics thrive when people see everyone else, including those with the power and position to manage such weighty matters, struggling with the same uncertainty. 

People feel threatened and powerless to do anything, not because they have no options, but because they have to evaluate or choose among those options, and they worry that more unexpected calamities could overtake whatever course they decide upon. That’s where tens of millions of Americans – and Europeans and Asians as well – have found themselves this week. They don’t understand why the value of their homes and investments has plummeted so suddenly, and they see that those ostensibly in charge of the economy in Washington and on Wall Street have little grip on this as well. The result is that spending and investment are shutting down, dragging the entire economy into what seems very likely to be the worst downturn since the 1930s. 

The remedy to this panic is information, which only the nation’s leaders can generate and demonstrate they understand. For example, the Federal Reserve and the FDIC should have legions of examiners working around the clock to re-audit the conditions of all major financial institutions, starting with commercial banks. The Treasury and Fed could then report to the public on each institution’s financial health and their confidence in its continuing financial health. The largest group would still be judged healthy; another group could be designated as worth watching, with measures to help it move to the first group; those in trouble would be identified with a plan of action to help them recover, if possible. Without this information, most people have been panicking that almost every institution and every investment might well be in serious trouble.  

This program won’t solve the capitalization crisis across financial institutions, much less the crisis gripping housing markets, which itself has driven so much of the current upheaval. But it would staunch the panic as investors, business owners and families come to feel that they finally know where the problems lie and what the government and nation’s business leaders will do to address them.

At the same time, our leaders can finally begin to address seriously the housing and capitalization crises in an economic environment in which businesses and people will be able respond reasonably and predictably.

Back to Basics: The Treasury Plan Won’t Work

Years of reckless mismanagement by the self-styled masters of the financial universe and senior economic policy officials now leave us with no alternatives but major action – but the Administration’s proposals are neither the only alternative nor anywhere close to the best one.

The Treasury says we need its plan to address a liquidity crisis, with banks unable to secure the funds to lend to sound businesses that need to invest or just need to meet their payrolls. There is evidence that overnight lending to banks by other banks or other financial institutions is way down. But there’s no evidence of sound companies unable to get funds to meet operating requirements. Moreover, the Federal Reserve has opened its "discount" window and is prepared to lend funds to any financial institution and at below-market rates. The Bush Administration seems to be trying to steamroll Congress and the public: we have to conclude that there is no liquidity emergency that could conceivably justify the steps they propose.

The Treasury also says Americans have to be prepared to bankroll their plan, because more financial institutions are on the verge of insolvency, which would trigger serious problems for the economy. The insolvency or capital problem is self-evident, since these institutions created it. They borrowed hundreds of billions of dollars to buy mortgage-backed securities and to sell the default-protecting derivatives of those securities, all of which were patently speculative: they bought and sold them precisely because they produced very large streams of monthly income, and since financial markets trade off risk and return, their initial high returns signaled that they were very risky.

Now that the securities have fallen sharply in value, these institutions owe much more on the debt they took on to buy them than the securities themselves are worth. That means capital losses that come out of their equity and leave many of them technically insolvent or close to it. So there is a real capital or equity problem across much of our financial system. The Treasury plan won’t solve it, however, not at least on terms that any sensible legislator, regulator or taxpayer should consider.

The Treasury plan originally contemplated providing that capital by paying financial institutions more than their securities are currently worth – since it’s the current market value of those securities that threatens these institutions with insolvency. So that means ordinary taxpayers would have to overpay for the assets of institutions owned and operated by the richest people in America. That’s the Bush economic doctrine, but it’s not mine – is it yours?

At a minimum, if taxpayers are to overpay rich people for their risky investments, they should get a big equity stake in all the institutions in return. That would make it a version of a debt-equity swap – but if that’s what it is, we alternatively could use regulation to require debt-equity swaps between the institutions and those they actually owe to debt to. That would be cleaner, less intrusive over the long run, and create no taxpayer exposure.

Alternatively, Congress could mandate that these institutions halt dividend payments and raise more capital, since we’re in this fix because they haven’t been subject to capital/equity requirements. Anything can find a buyer at the right price, and as a result of these institutions’ mismanagement, they’ll have to trade more of their equity for the capital -- as Goldman Sachs is doing now with Warren Buffet.

That still leaves the most serious business. Congress needs to take serious steps to address the underlying cause of the crisis by stabilizing the underlying assets: provide a new loan facility for homeowners facing foreclosure or new mechanisms to renegotiate the terms of the mortgages of people facing foreclosure. It also leaves one more thing: the stark and unhappy recognition that the Treasury, the Federal Reserve and the White House have produced an unworkable, inequitable and inefficient plan that Congress need not and should not accept.

What Should We Really Think about Fannie Mae and Freddie Mac

The price of what are called “credit default swaps” for U.S. Treasury debt is rising sharply. Credit default swaps are financial instruments by which one investor holding debt pays another investor to guarantee that if that debt defaults, he will make the first investor whole. 

This week, the Treasury assumed responsibility for $5.2 trillion in outstanding debts held by Fannie Mae and Freddie Mac. A modest but significant share of that is headed for default, and the Treasury will have to absorb the losses. And the result is a rising price for credit default swaps on the U.S. Government: It now costs $18,000 to insure $10 million of U.S. Treasury debt. The market sees a very small - but not negligible - prospect that the U.S. Government would actually default on its debt, which would be, well, the end of the American and global economies as we know them. That’s how bad it is.

Credit default swaps for subprime mortgage based securities, of course, have played a significant role in the current unraveling in the financial markets. But conservative/Republican disdain for normal regulation of those markets has played the larger, underlying role.  Such regulation isn’t intended to “manage” those markets, but to ensure that the rest of us are protected from serious repercussions when problematic choices by financial market players (for example, to double down on subprime mortgages or their derivatives) collide with adverse conditions that make those problematic choices very reckless.

That’s the essential meaning of the Fannie Mae and Freddie Mac regulatory bailouts. Setting aside the many years of astonishingly reckless and self-interested management at Fannie Mae and Freddie Mac, the mortgage market would freeze up if these two institutions suddenly couldn’t operate. Here’s a brief course in why that’s so: there’s always plenty of credit for new mortgages, because those creating the mortgages promptly sell them, in bundles, to investors, so that the credit can cycle back to finance more mortgages. 

Fannie Mae and Freddie Mac both create and buy trillions of dollars in these mortgage-backed securities, and there’s no financial institution that could step in if they were taken out of the picture. That’s why we need to keep them operating, even if it requires a bailout. By the way, the other major holders of these securities include U.S. banks – expect a line of them to go belly-up in the next six months – and foreign central banks. 

The potential unpleasant fallout for our relations with other countries if their holdings went bust is the other reason that the Bush Administration has taken the largest interventionist step in U.S. financial markets since the Great Depression. Once again, the Bush Administration is moved to act not by what’s happening to Americans, but by the implications for our relations with other countries

Last Night in St. Paul: Déjà Vu

Déjà vu. In 1992, while managing economic policy for Bill Clinton's campaign, I recall watching the Republican Convention in happy disbelief. For days, the gabfest had veered sharply and angrily to the right; and then, when George H.W. Bush accepted his renomination, it took him 26 minutes to get to the economy, the central issue of that campaign, which he talked about for perhaps five minutes. He didn't get it, and neither did John McCain last night. It took him even longer to get to the deep, economic concerns of a majority of Americans, and then devoted about three minutes to jobs, wages, the housing bust, globalization, trade, debt, and the rest. He doesn't get it either.

Another aging, career politician out of touch is hardly news. But another president who doesn't understand or much care about what's happening to most people in our economy would have serious long-term consequences for the real prospects of tens of millions of American families. And deteriorating conditions for most could well undermine public support for the measures that a responsible president will have to take over the next generation - including broad based IT training for all workers; universal access to post-secondary education; a major national commitment to 21st century infrastructure, including universal broadband and climate-friendly light rail system in most major metropolitan areas; a national commitment to aggressively support and promote R&D in climate friendly technologies and fuels, and support to broadly deploy the new technologies and alternative fuels; new cost-control provisions to slow rising health care costs as we provide universal access to health care insurance; and more.

Somehow, none of this made its way into John McCain's acceptance speech, which is only the most recent evidence that he doesn't have what we need in our next president.

The Reality Behind the Olympics Coverage

My advice while you're watching the coverage of China that will start this weekend is, prepare to be dazzled, and prepare to be skeptical. Beijing and Shanghai are probably the most modern cities in the world, especially in their city centers, and they appear to bespeak a country as prosperous and advanced as our own, or nearly so. That's not the case. The national average income in China today is less than $150 per-month, and more than half of Chinese live on less than half that. No more than 20 percent have any health care coverage, and in a system that many Chinese call "pay or die," those that don't have coverage have to fend for themselves. (That's the main reason Chinese families save 30 percent of their small incomes.) China's economic progress since 1990 is truly stunning, with GDP and incomes more than doubling each decade, and exports growing an astonishing 20 to 25 percent a year for a generation. A new model of development has driven this extraordinary progress, in which China invited the world's advanced corporations to transfer entire business operations to a country that promised to soon be one of the world's biggest markets and is already home to the world's largest, low-cost skilled workforce. The result, in less than a generation, is that China has gone from being an economic backwater to one of the world's leading production and assembly platforms. That also means that while the spectacular architecture on display in the Olympics is all made in China, most of what's modern in the Chinese economy is still either foreign-owned or clones of foreign operations. It will be another decade or more before native Chinese companies can compete with their Western counterparts.

There's also a big "if" hanging over China's future. Everywhere else in the world, great economic progress has spurred demands for more political rights by those making the progress. China's leadership has always responded harshly to such demands - Tiananmen is only the best-known instance in which the government harshly put down political protests, with large losses of life.(Human rights groups estimate that China executes 10,000 to 15,000 people each year, and a significant share have likely been convicted of political crimes.) China also acknowledges that every year, at least 70,000 protests of more than 100 people occur, and the real incidence is probably quite a bit higher than that. The quandary for China is the almost certain collision sometime in the next decade of large scale popular demands for more political rights, and very small circle of leaders determined to maintain their monopoly on political authority. Thus far, the leadership's strategy has avoided such a collision: Preserve central authority by delivering extraordinary economic growth and progress. But since China shifted to market-based policies in the 1980s-with wrenching dislocations for hundreds of millions of people- it has never experienced an economic downturn. China may be facing at least a moderate slowdown this year and next: With high oil prices and financial problems here and in Europe, manufacturing orders and export growth have both fallen sharply for the first time. A serious slowdown may not happen this year or next, but it will happen - and the world will watch to see if the Chinese leadership will permit at last initial moves towards greater liberty and democracy.

To learn more about China's development and economy, read Futurecast: How Superpowers, Populations, and Globalization Will Change the Way You Live and Work, by Robert Shapiro (St. Martins, 2008).

McCain's Real Record on Fiscal Discipline: Lots of "Straight Talk;" No Action to Back it Up

When there’s a dispute in sports, we go to the videotape; in politics, we go to the facts – and the facts show that for all of John McCain’s righteous wrath over federal spending, he has been an active supporter of its enormous increases in recent years.

It’s fine to talk about pork barrel spending, but let’s look at his actual votes on all Senate appropriations bills for domestic spending since he started running for president. 

New research shows that since 2006, the self-appointed guardian against wasteful spending from Arizona actually opposed less than six-tenths of one percent of the discretionary spending approved by the Senate. Counting only those appropriations during which Mr. McCain was actually present and voted for or against, he opposed eight-tenths of one percent and voted for 99.2 percent. And counting only the last two years, while Mr. McCain has been most actively campaigning for president, the self-proclaimed arbiter of fiscal restraint actually voted against not one dollar of the more than $2 trillion in appropriations approved by the Senate.

Senator McCain’s record seems to refute his own campaign promises to balance the budget and pay for the new tax cuts he wants to give business and high-income Americans – and for his new spending – by cutting existing programs.

Here are the particulars as verified by the Senate’s records. For FY 2006, Senator McCain opposed one appropriation bill, $17 billion for discretionary spending in agriculture, out of a total of $940 billion in discretionary spending approved for that fiscal year, or 0.56 percent. For FY 2007, the Senate approved nearly $1.1 trillion in discretionary appropriations, and Senator McCain voted for all of it. For the current fiscal year, 2008, the Senate has approved, again, a little under $1.1 trillion; and again, Senator McCain opposed none of it, at least not by actually voting against any of it.

The economic benefits of restraining spending are sometimes exaggerated in our political discourse, especially when economic conditions are weak. However, the value of actually behaving in ways that correspond to your own “straight talk” cannot be overstated. On this basis, Senator McCain’s record falls painfully short.

China and Climate Change

Ooops ... The Financial Times reports today that China and India once again have rejected a cap on CO2 emissions -- and without these countries and the other large developing nations that will follow their lead, the world cannot seriously address the threat of climate change. China and India's response should be no surprise: as fast growing developing economies, their appetite for the energy that produces most of the CO2 increases sharply every year. Moreover, their modernization programs are concentrated in the most energy-intensive industries around - basic manufacturing and energy-intensive agriculture - while most of their own domestic energy supplies lie in coal, the most climate-damaging fuel. One way to move forward is to give them an alternative to a CO2 cap. Carbon-based taxes should be more appealing, since China and other fast-growing developing countries need more revenues to support the basic public goods of modernization -- infrastructure programs and greater access to education and health care. But that won't be enough: we will have to make it worth their while economically to join us, Europe and Japan in a global campaign to address climate change. That will mean offering them better and cheaper alternatives to the hundreds of coal-burning electricity plants they plan to build every year into the indefinite future. Better alternatives for the climate are widely available, for example, in hydropower or natural gas-fueled generating system, and perhaps soon, in solar and wind as well.

In the end, however, the United States, along with Europe and Japan, probably also will have to make those alternatives cheaper by providing large technology transfers at cut rates. And the United States is the only country that can make any of this happen, at least regarding China. As the largest foreign direct investor in China, its largest export market, and the guarantor of the sea and air lanes across which all of China's trade and oil supplies travel, China's leaders recognize America as the indispensable economic and military power for China's own progress. All we need is a president and administration prepared to use that position to advance the global agenda on climate change.

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