Creating a Low-Carbon Economy

Over the weekend, Senators John Kerry and Lindsey Graham penned a joint op-ed in the New York Times that has made those of us who care about action on climate change pretty happy. The prospects of Republican support extending beyond the Snow-Collins duo to John McCain's best friend in the Senate this early in the process is exciting, to say the least. And the compromise that Graham wants isn't too far-fetched.

There is, however, one piece of the op-ed that has made many who understand that combating climate change is a multilateral challenge nervous:

Fourth, we cannot sacrifice another job to competitors overseas. China and India are among the many countries investing heavily in clean-energy technologies that will produce millions of jobs. There is no reason we should surrender our marketplace to countries that do not accept environmental standards. For this reason, we should consider a border tax on items produced in countries that avoid these standards. This is consistent with our obligations under the World Trade Organization and creates strong incentives for other countries to adopt tough environmental protections.

I agree that we can't sacrifice jobs to overseas competitors. Competitiveness is one of the best reasons to pass climate legislation that spurs innovation and deployment of a whole generation of low-carbon technologies domestically. That said, climate change is a pressing global challenge that inherently requires unprecedented levels of global cooperation, but the proposed punitive trade policies are expressly unilateral mechanisms. This is a policy mismatch that will not help us solve this challenge. 

If we want the developing world – from which the vast majority of emissions growth is expected in the coming decades – to be on board with creating a solution to climate change and to buy our climate-friendly goods, slapping a tariff on them right away is not the way to make friends and influence people. And it's not as if the United States has been leading on climate issues – Imagine the American response if Europeans had imposed these tariffs. I don't want to begin to imagine the retaliation that other nations may decide upon; what do we do if China and India – who already have high barriers to climate friendly technologies – decide that they're not quite high enough, especially for American goods?

Additionally, it's crucial to note that climate legislation already allots (as opposed to auctions) permits to energy intensive industries. Tariffs amount to a double correction. Here's leading international economist Jagdish Bhagwati at a recent NDN-New Policy Institute event speaking about the tariffs and the WTO compliance of a cap and trade regime:

Some important people are wary of or opposed to these tariffs: The head Intergovernmental Panel on Climate Change, Rajendra Pachauri, thinks they're a bad idea:

"This is a dangerous thing, and I think people in Congress must understand this," said Pachauri, who spoke with the AP after he addressed the National Press Club. "Please don't use this weapon. I'm afraid that those that have been pushing these provisions probably don’t realize that all of this can cause a major negative reaction," Pachauri added. "The United States has always stood for a free market system. … Legislation to move away from that principle is clearly counterproductive."

As does President Obama: 

At a time when the economy worldwide is still deep in recession and we've seen a significant drop in global trade, I think we have to be very careful about sending any protectionist signals out there. There were a number of provisions that were already in place, prior to this last provision you talked about, to provide transitional assistance to heavy manufacturers. A lot of the offsets were outdated to those industries. I think we're going to have to do a careful analysis to determine whether the prospects of tariffs are necessary, given all the other stuff that was done and had been negotiated on behalf of energy-intensive industries.

So certainly it is a legitimate concern on the part of American businesses that they are not disadvantaged vis-a-vis their global competitors. Now, keep in mind, European industries are looking at an even more ambitious approach than we are. And they obviously have confidence that they can compete internationally under a regime that controls carbons. I think the Chinese are starting to move in the direction of recognizing that the future requires them to take a clean energy approach. In fact, in some ways they're already ahead of us -- on fuel efficiency standards, for example, they've moved beyond where we've moved on this.

There are going to be a series of negotiations around this and I am very mindful of wanting to make sure that there's a level playing field internationally. I think there may be other ways of doing it than with a tariff approach.

I'm excited that the chances for getting climate change legislation through the Senate have grown, I just don't want to see them destroy the chances for multilateral climate action. Both are important for American competitiveness, jobs, and the creation of a low-carbon economy.

Yesterday, NDN hosted three experts in the automobile industry to discuss the future of clean transportation. NDN Green Project Director Michael Moynihan moderated this wide-ranging and well attended discussion, the video of which can be found below.

Kim Hill, the Associate Director of Research at the Center for Automotive Research and the Director of the Sustainable Transportation and Communities Group, spoke about a recent study he conducted on the economic impact ATT’s shift to a more efficient vehicle fleet. The short version: the conversion to CNG and hybrid vehicles saved fuel and money and created jobs. The detailed study can be found here.

Mike Granoff, the Head of Oil Independence Policies for Better Place, the first service provider for electric cars, building infrastructure, software and the user interfaces to make electric cars available for mass adoption, spoke about the Better Place vision and business model and updated us on Better Place's progress. During the session, he mentioned the video of the battery swap station at work, which can be found here on the Better Place website. 

Finally, Dr. Kathryn Clay, the Director of Research for the Alliance of Automobile Manufacturers spoke about the industry's efforts to innovate to cut greenhouse gas emissions and the regulatory environment around those efforts. More on the Auto Alliance can be found here.

Here's the video of the full session:

One of the most important pieces for the future of transportation, energy, and climate is how we power automobiles. An interesting piece from the Wall Street Journal's "Environmental Capital" blog discusses a new study on the future of global oil supplies:

Here's an intriguing thought: Global oil supplies are indeed set to peak within a few years, and no, that is not bullish for oil. Quite the contrary—it will spell the end of the "oil age."

That's the take from Deutsche Bank's new report, "The Peak Oil Market." In a nutshell: The oil industry chronically under invests in finding new supplies, exemplified both by Big Oil’s recent love of share buybacks and under-investment by big oil-producing nations. That spells a looming supply crunch.

That will send oil to $175 a barrel by 2016—and will simultaneously put the final nail in oil's coffin and send prices plummeting back to $70 by 2030. That’s because there's an even more important "peak" moment on the horizon: A global peak in oil demand. That has already begun in the world’s biggest oil-consuming nation, Deutsche Bank notes:

US demand is the key. It is the last market-priced, oil inefficient, major oil consumer. We believe Obama’s environmental agenda, the bankruptcy of the US auto industry, the war in Iraq, and global oil supply challenges have dovetailed to spell the end of the oil era.

The big driver? The coming-of-age of electric and hybrid vehicles, which promise massive fuel-economy gains for short-hop commuting but which so far have not been economic.

Peak Oil, which used to be dismissed by many as kind of wacky theory (even though the idea was originally formulated by an oil company geologist), seems to have arrived firmly in the mainstream with the likes of Deutsche Bank onboard. Some argue that the arrival of peak oil will generate a massive shock to civilization, but, true or not, it will certainly be a game-changer that necessitates and speeds the deployment of new technologies. So if the Peak Oil believers are right, it's incumbent on us to start investing in these technologies today: Oil prices spikes have generally been economically problematic – or worse – some have triggered recessions.

For more on the "coming-of-age of electric and hybrid vehicles" and the general future of clean transportation and automaking, join us at NDN at noon today for Insights into the future of Clean Transportation, which will showcase speakers from the Center for Automobile Research, the Auto Alliance, and Better Place. If you can't make it, watch the event live online. 

With Friday's revelation from the Director of the White House Office of Energy and Climate Policy Carol Browner that President Obama's signature finding its way onto a climate bill was "not going to happen" prior to Copenhagen, it's time to go to Plan B to get the most out of the international conference. Although the US may not be leading on what many consider the most important piece of limiting climate harming emissions, there are still other areas in which we can show leadership.

One place to start is by building on something the G-20 did: a global agreement on the phase-out of fossil fuel subsidies. Taking the agreement from that smaller group and getting buy-in from additional nations (most of whom were obviously not at the G-20), would be helpful. Additional teeth should be put into such an agreement, such as an actual timeline – the current one is a somewhat laughable “medium term.” America can lead by acknowledging that our subsidies to fossil fuel industries easily outpace those given to clean technology and commit to changing that.

For many developing countries, fuel subsidies are something of a prisoner’s dilemma and policy trap. Governments artificially lower prices via subsidy thereby increasing demand – when, if nation’s acted in concert to eliminate these subsidies – markets would see to diminished demand and a lower world price. (Of course subsidies for low-income and vulnerable populations would remain appropriate.) Copenhagen is the perfect place to agree to such an outcome. 

There are other important ideas, some of which we'll be writing about and advocating in the coming months before Copenhagen. Domestically, a Renewable Electricity Standard and strong clean technology incentives are an achievable necessity. A robust agenda for reforming our electricity markets and slow-moving utilities is also a conversation we can begin.

Internationally, a Global Environmental Organization that adequately represents rising powers and developing nations and that builds and guards the structure and rules for the complicated climate regime, as Ed Gresser advocated in the latest Democracy Journal, is another good idea. And, as you'll be hearing about more in the near future, an agreement to remove the significant barriers to the global deployment of clean technology and environmental services is crucial. 

President Obama will be in a difficult position – he is in the right place on the issue, but the Senate is bogged down with healthcare, and getting to 60 on climate is not a forgone conclusion anyway. His team will therefore have to prepare a robust agenda of demonstrable accomplishments that showcases American leadership and gets the most out of this important conference.

For more on preparing for Copenhagen, check out the Washington Post, where NDN Globalization Initiative Chair Dr. Robert Shapiro continues his advocacy for a carbon tax. 

Experience shows that an important key to growing a vibrant renewable energy sector is a strong domestic market. Germany’s feed-in tariffs have helped it become a world leader in solar energy production. China has long been focusing on building their domestic renewable energy industries, and just announced they are upping their efforts to build domestic renewable demand. 

From the AP's coverage of the U.N. Summit on Climate Change:

Chinese President Hu Jintao said his nation will continue to take "determined" action. He laid out new plans for extending China's energy-saving programs and targets for reducing "by a notable margin" the "intensity" of its carbon pollution — carbon dioxide emission increases as related to economic growth.

He said China would greatly boost its forest cover, "climate-friendly technologies" and use 15 percent of its energy from renewable sources by 2020.

That 15 percent renewable energy by 2020 sounds like a Renewable Electricity Standard. It also sounds similar to the one in the ACES bill that passed the House in June, which mandates 20 percent renewables by 2020, but that generally allows for 5 percent of that to come from energy efficiency (which it undoubtedly will, as efficiency is way cheaper than renewables). In fact, the ACES standard can be weakened even further, all the way down to 12 percent renewables in some cases.

So now China's ahead of the United States, and, even if we pass ACES as is, will have a comparable or slightly stronger RES in an economy whose energy use (and therefore said sector) will grow much faster over the next decade than America's will. We'll have the price signal that cap and trade offers, but it’s not nearly as strong as it could be. (China is unwilling to agree to cap emissions and certainly won't ahead of the U.S.) 

Much of the opposition to domestic climate change regimes comes of the idea that American action on climate without China going along hurts the U.S. economy and does nothing to slow climate change. Now, basically the opposite could play out. With China stepping up on an RES and limited movement from the U.S. Congress toward passing a strong climate bill, some Americans seem willing to let China take a leadership role on perhaps the most pressing global governance challenge of the young century and develop an export-capable renewable energy sector that passes ours, thereby surrendering a high potential economic sector to world's most important rising power.

New York City - With President Obama's speech today before the UN meeting on climate change, convened by UN Secretary General Ban Ki-Moon, the release of excerpts from an IEA report on the climate Sunday and climate on the agenda at the G-20 meeting in Pittsburgh, this week has shaped up as a remarkable one in climate discussions.  On Sunday, the IEA released sections from its forth coming Energy Outlook  that are remarkably optimistic about the climate.  Today, President Obama gave a forceful--if thematic--speech to the UN--notable more than anything else for the reversal of US policy on the climate that his presidency brings relative to his predecessor.  And later in the week, the G-20 will take up the issue anew after failing to make major progress in London.  All of this is happening with Copenhagen now just around the corner.  At this point, it is worth taking stock of where the world is on what Sir David King has dubbed the hot topic.

First, the IEA report in its suprisingly positive findings shows above all, that action on climate change is within our reach.  The IEA found that the EU effort on climate has succeded more than previously thought.  It also praises China for its efforts and the US for improving fuel economy  Most notable, however, is the huge decline in emissions that has evidently accompanied the current recession.  The sharp dropoff in emissions shows that the word can cut emissions dramatically over a period of months and still survive.  In effect, it sets a boundary.  Obviousy, we don't want to see unemployment at 10% in the US in order to lower emissions.  But it shows that a lower emissions world is attainable. In fact, we are living it right now. 

The President's speech, though criticized by some environmentalists for lacking specifics, in my mind hit the right notes and reverses one of the troubling elements of much of the discussion before.  While noting that the developed world needs to do more, the President also called the developing world to account.  This strikes a slightly different note than many dicussions up to now that have reprised the poverty debate with the developing world asking for aid and the developed world expressing guilt over previous sins.  Climate change discussions--though they touch on issues of development--are not about equity between North and South but rather the survival of the planet.  Progress on saving the climate cannot be about apologizing for the last century of industrialization.  That was a necessary phase of economic development that although it raised living standards first in the developed world, in effect, paved the way for industrialization everywhere.  Nor was industrialization in the west a free ride for the workers who toiled in factories or even those who enjoyed its fruit as the high mortality of the indsutrial wage and bloody 20th Century attest.  The developing world although slower to industrialize in many ways inherits the technology, transportation network and markets created by the developed world's industrialization.  And developing countries have an even greater stake in addressing climate change because they stand to suffer disproportionately from rising sea levels, disruption of food supplies, extreme weather and other potential consequences of a hotter planet.  The President was right to call on the developing countries to be as serious as the developed ones about facing this issue.

The discussions underway at the UN and those that will be part of the G20 process, however, are not moving at the pace that anyone would like.  Although President Obama took pains to mention the passage of climate change legislation in the House, he could not point to a unifed American position as our basis for international negotiation.  The simple fact is that there is a very real possibility that a comprehensive global agreement on global greenhouse gas emissions will not be ready by Copenhagen.

If that is the case, however, as the IEA repot makes clear, that does not mean all is lost.  Rather, the US like China and, indeed, all countries needs to move forward on the many other fronts available to address the problem of greenhouse gas emissions.  Since the recent interruption of growth was, we all hope, temporary, as I have written before the answer ultimately must be technology.  In order to incent the private sector to accelerate the rollout of low carbon technologies, government needs to put the right policies in place.  That means improving fuel economy, building more efficient buildings and creating a new, smarter, more open electricity network to spur a renewable revolution. 

Regardless of what happens this week in New York and Pittsburgh, or what happens in Copenhagen the problem of climate change will not be solved in a day a month or a year, but only through the consistent application of private industry and government in all their actions to introducing that technology.  That is the real imperative underlying this week's focus on climate change.  And it must be the real goal of a wide range of policy efforts going forward whether the world secures a comprehensive agreement or not.

Last night's speech by President Obama in support of health care legislation, fiery yet thoughtful, and designed, as E.J. Dionne remarks today, to seize the autumn after a summer dominated by his opponents, increases the chances of passage of a health care bill this year.  By engaging directly and forcefully with Congress and the American people, last night the President injected himself into a debate including all of its details that until now he has largely tried to steer clear of.  The strongest parts of the speech were those where steeped in detail he argued for the overall package on the basis of its component parts.  The speech was significant not only for the prospects of health care legislation this year, but also for the President's entire agenda, including the next large legislative item on tap: energy and climate change legislation.

As with health care legislation, the President's strategy on energy and climate has been to set broad goals and encourage Congress to tackle the details.  As a former Senator himself, it is not surprising that he would have confidence in the ability of Congress to write law.  In the case of climate, the House did pass a bill this year and though the cap and trade component was weakened in drafting, the bill contains a meaningful Renewable Electricity Standard and other provisions critical to stimulating the growth of renewable electricity. 

While that strategy worked in the House, the Senate chose to postpone action this summer until after healthcare.  One rationale for postponement was to use the momentum created by health care to move energy as well.  Now, however, it appears less likely that health care will grease the skids for energy legislation.  Instead, the mobilization of Republicans against health care may carry over to energy.  Nonetheless, the health care debate suggests some important lessons for moving energy legislation.

The first lesson is that moving a bill--particularly one with a climate change component--is likely to require direct presidential engagement.  Currently the Administration does not have positions on many of the specifics of the energy bill.  It should develop positions and thorough arguments to back them up.  Absent direct engagement, it will be to easy for opponents of the legislation to suggest postponement.  While health care is the topic now at the top of the agenda, the Administration should begin laying the groundwork now for engagement when energy comes up later in the fall.

Second, the Administration has to decide whether to pursue a partisan or non partisan strategy.  Either way, it is critical that the Administration win over moderate Democrats.  Without them, it cannot pursue a partisan strategy.  And without them even a non partisan strategy becomes that much more difficult.  This too will require direct presidential engagement to determine which Senators require which changes to the law to feel comfortable supporting the overall package.  The key argument to be made to moderate Democrats is the economic one: that the US needs to take leadership in developing new energy technologies lest leadership of this vital sector pass to other countries.  The second most important argument is energy security.  What could be more absurd, after all, than fighting two wars in the Middle East and sparring with Iran over politics, while continuing to import large quantities of oil from that region.  The time to begin reaching out to the Democratic moderates is now.

Many commentators have correclty observed that the current Administration, at times seems to have learned too well the lessons of the early Clinton years of not trying to be overly prescriptive with respect to legislation.  However, the opposite is also true: the Administration cannot stay out of the fray.

To pass energy legislation as with health care, the Administration will need to engage and, yes, sweat the details.

In this weekend's Sunday New York Times Greg Mankiw, the Harvard professor of economics, criticizes the cap and trade bill working its way through Congress for giving out instead of auctioning off many allowances.  Mankiw who in the past has supported a tax on carbon as a simpler alternative to a cap and trade system, correctly points out, quoting President Obama, that a cap and trade system that auctions allowances can resemble a carbon tax.  If the auction revenues are used to offset other taxes, as with a carbon tax, any negative effect of the regime on the economy can be minimized. 

He goes on, however, to make an oddly flawed argument that should not go uncorrected. 

Criticizing the House bill that gives away allowances to utilities in lieu of auctioning them off, he says this will harm the economy by requiring consumers to pay more without recapturing revenues that could be used to offset taxes. The current bill by encouraging "lower real take home wages, reduced work incentives and depressed economic activity", he argues, will harm the economy.

Not true.

To the degree allowances are handed out at the beginning, consumers as well as utilities are given a pass and do not have to pay more for energy.  Some inefficient producers who need to buy credits on the exchange may raise prices to consumers or earn less profits.  However, other efficient producers will receive income from selling credits, letting them lower prices or increase profits. The overall impact on the economy of a cap depends on the level of the cap.  If sufficiently low, everyone will have to invest in new technology to cut emissions.  If sufficiently high, no one will. 

The real difference between auctioning off and handing out allowances is the first sends a stronger, immediate price signal, while the latter sends a weaker one likely to kick in later. 

Auctioning the allowances, like a tax, is a transfer away from industry and consumers to the government.  At best, the government can return the money by, for example, cutting a different tax.  If it keeps the money, the auctions act like a fiscal drag.  In contrast, granting allowances postpones the economic impact.  (For the record, there are reasons one might want to put off pain: first the current economic slump and second, the fact that low carbon alterantives to current fuels are growing steadily cheaper, meaning the cost of cutting emissions may be lower in the future.)

I have argued that with a new president in office and Cophenhagen coming up next year, this is the year to pass climate change legislation.  The bill can be strengthened later.  Others may disagree.  However, while auctioning credits may make for a stronger signal than granting them, it will not reduce the impact on the economy. 

This week the Center for Automotive Research in Detroit is holding its annual conference on the future of cars.  Entitled “Today's Turmoil: a Foundation for Success”, the four day conference allows the global industry to hear the insights of people like Akio Toyoda, the new president of Toyota who is shaking up the company started by his grandfather and discuss subjects such as manufacturing and how to make sustainable cars.  A new face this year: Ed Bloom of the US Auto Task Force in the role of the industry's new partner, government.

With global sales down almost 50% from their peak, it has, indeed, been a brutal year for the industry, especially so for the Big Three, now really One and a Half.   From this new low base, however, the industry is certain to rebound.  The question is whether it will rebound in America or whether the center of gravity of auto manufacturing will continue to shift away.  After the decades-old decline of the Big Three's market share, all the management studies and manufacturing initiatiaves, capped by GM and Chysler’s bankruptcy filings, some would argue the US industry is past recovery.  I disagree. 

I believe US carmakers can be part of the global rebound.  I also believe they must be if the US is to benefit from the clean economic revolution.  However, recovery of the industry won't come easy.   The US car industry needs to reinvent itself with help from policymakers and by listening to people outside the industry, especially the customer..  The good news it that auto manufacturing tends toward decentralization.  The weight of cars, variations in standards by country and a healthy measure of politics combines to encourage localized production.  There is no risk yet of a laptop-style shift of the entire industry to Asia.  The challenges are best described as severe but surmountable.  Here are six things the US auto industry needs to do to re-emerge in strong shape from the Great Recession of which government has a role in three:

First the industry needs to rediscover innovation.  In its glory days, passionate engineers invented new tires, transmissions, solutions to the problem of knock, the octane system of gasoline, ball bearings and other breakthrough technologies of the day, the equivalent of Twitter or Facebook or in the auto industry, new battery technologies, electric drive trains, carbon fiber materials, computerization, and energy economy technologies today.  One idea would be for US car companies to put venture capitalists from Silicon Valley or prominent scientists on their boards and move their R&D operations to Silicon Valley.   VC-backed Tesla, for example, is making major strides from its Palo Alto base. Palo Alto-based Better Place is similarly working with Renault and Nissan to pioneer new charging technology for an all electric car.  Cars are a technology product and it is time to remember this.  They are also a lifestyle product.  The Big Three should draw more design inspiration from places like New York and Los Angeles.  In its early days, GM had its headquarters in New York and it would behoove the industry to reconnect with centers of excellence across the country.

Second, the US car industry needs to recapture its ability to anticipate changes in consumer taste.  In My Years at General Motors, Alfred Sloan discussed how hard this always was, yet how essential: “Even though it takes years to develop a new product, it is our job to be ready with it when there is an effective demand”.  He was describing a problem that bedeviled the industry even in1957: a sudden desire by Americans for small cars—something in which the rest of the world even then excelled due to smaller streets, high priced gas and shorter distances—that caused imports to leap.  In that crisis, the Big Three responded with cars like the Corvair a year later to recapture the lower end of the market and bring imports from 10% back down to a negligible level.  The Big Three were far less successful after the oil shocks of the 1970s when imports began building market share.  They face an even sterner challenge in the wake of last year’s oil shock.  Message: be ready with small cars when they are needed.  And in the wake of climate change which is not going away: improve fuel efficiency.

Third, the US industry must try to reinvigorate its supplier base which has suffered even more than the OEMs in recent years.  A focused effort by industry to source locally and government support to high tech companies making batteries and other parts can help fuel the substrate necessary to a sound industry going forward.  Alan Mullaly at Ford is already shifting Ford toward greater outsourcing of parts.  To insure long term sustainability, it is important to rebuild the North American infrastructure.  As discussed below, this should be an element of negotiation with companies entering the US market.

Fourth, much has been made of the so-called cost disadvantage of the Big Three’s legacy costs which supposedly added $2,000 to the value of each car.  In fact, the appropriate way to deal with liabilities was always on the balance sheet as a capital item not as an operating one.  The GM and Chrysler bankruptcies put an end to much of this liability.  However, properly accounted for and written down, these legacy costs should be a footnote on the balance sheet, not a drag on operating profit..

Fifth, much has similarly been made of the supposedly high wages paid by US carmakers relative to foreign companies that have set up shop in the South.  While the gap is overstated, labor costs are lower in the South due to lower costs and the absence of unionization.  Here the US needs to act carefully but act on labor rules that have created an unfair playing field.  Due to our state system of regulation, the US has both right to work states and others where unionization is common.  Taking advantage of US federalism, foreign manufacturers even if their own countries are 100% union have set up shop in the South. A notable exception to this stratifaction is the unionized Toyota NUMMI facility in Fremont, California, where GM was a partner however, there is talk of Toyota closing that plant in the wake of GM’s pullout.

The answer to this is not heavy handed change in our federalist system.   However, as Bob Reich has argued, the US, as a whole, loses when states and even towns bid against one another for new factories.  He proposed a body or at least baseline standards to negotiate on behalf of American manufacturing sites.  It would not be unreasonable to require new factories to offer employees a chance to organize at some point after the plant is built, require some level of local sourcing of parts and at least try to negotiate for research and development investments.  Until other countries relax their standards for foreign investment, we should not give away the store.

Sixth, and here government is the critical player, the industry needs a reasonable exchange rate.  For about a quarter century, since the end of the 1982 recession, a high dollar has benefited our financial sector at the expense of manufacturing.  Something similar happened in England’s transition from manufacturing to finance capitalism in the late 19th Century when it shifted from a trade surplus to deficit (driving a quest for colonies.).  The dangers of over reliance on finance are clear.  Recently, Laura Tyson floated the idea of retooling our economy more toward investment and manufacturing in lieu of finance, in part, by lowering the value of the dollar.  Dollar policy is not something that is widely discussed or even understood yet it has an immense effect on the structure of our economy.  Perhaps like war it is too important to be left to the generals and should be the subject of an open and intellectually rigorous academic and industry discussion.

In short, cars will continue to be built in the United States.  The question is whether we will be leaders or followers, designing the breakthrough cars of the future, or building cars introduced somewhere else a few years earlier.

To this point, of the top 5 cars purchased under the Cash for Clunkers program, four bear Japanese nameplates.   (The rankings are Toyota Corolla, Ford Focus, Honda Civic, Toyota Camry and Toyota Prius.)  Of these, all but the Prius are largely made in the United States and Toyota will begin making the Prius in Mississippi next year.  While Japanese, German and Korean investment in factories in the United States is a win win, creating jobs, economic activity and tax revenues, it does not amount to leadership. 

In conclusion, the US auto industry faces huge challenges.  But the bottom of a cycle creates opportunity and the decks are now clear for a rebound.  It was not long ago that the US industries—after suffering through the 1980s--mounted a partial comeback, improving quality and inventing breakthrough products of the day such as the minivan and SUV—formats soon copied by others.  US industry and policymakers should begin taking action now to lead recovery when it inevitably comes.

With the Senate considering refilling (sorry) the funds for "Cash for Clunkers," here's a video of clean-tech entreprenuer Jack Hidary speaking about such a program last year at an NDN Green Project event on "Energy and the American Way of Life." Jack calls the proposal "Jack's Jalopy Law," but it's the same idea.