Energy Independence

Yesterday, Representatives Waxman and Markey, Chairmen of the House Energy and Commerce Committe and Energy and Environment Subcommittee, respectively, introduced draft energy legislation.  The ambitious bill lays out a sweeping agenda for energy reform that shows the intensity of commitment in this Congress to energy reform and dramatically increases the chance for passage of important energy legislation this year.  Today, the White House endorsed the legislation, further increasing the chances of action.

Key proposals include a cap and trade system to reduce emissions 83% by 2050, modernization of the grid, a renewable portfolio standard and support for new energy technologies including the politically important one of clean coal.  Coming on the heels of the major investments in clean energy included in the $787 billion ARRA legislation passed earlier this year, America is on the verge of the largest transition in energy priorities in our history--away from carbon based energy--toward new cleaner forms of energy.

Speaker Pelosi has already signaled her intent to move the legislation forward in the House where it will likely pass.  As usual, the key battleground will be the Senate where cap and trade legislation appears to be about four to five votes short of the 60 needed for cloture.  If cap and trade falls short, the Senate could move forward on the energy portions of a bill.  However, this would weaken the US negotiating position in Copenhagen next year.  Bringing a few more Senators on board is thus the key to comprehensive action.

The four titles of the bill map the major countours of the energy discussion, support for clean energy and clean technology including electric cars and a modernized grid, energy efficiency, a cap and trade system to limit heat-trapping pollutants and a transition title to minimize the disruptive impact of change this large on industry and consumers.

In addition to the Waxman-Markey bill, a variety of bills on the smart grid, grid modernization, renewable fuels, energy writ large and the reduction of carbon emissions through cap and trade or a carbon tax are also in play.  Some, such as Senator Harry Reid's transmission bill and Senator Bingaman's energy legislation have the imprimateur of highly influential legislators. 

While the Waxman Markey draft legislation is not designed to be the final say and leaves some details unspecified, we at NDN look forward to working with these leaders, the Administration and others to advance the legislation's critical energy goals.

The time has never been more ripe for moving America and the world decisively away from the carbon-laden fuels of the 19th and 20th Centuries toward a new, low carbon, renewable energy future.  That, in turn, should help drive the next great wave of economic growth one would expect from a major leap forward in the single most import imput--after people--in the economy, energy.

The gutting of the US auto industry is a negative development for the economy, the consequences of which have not, I believe, been fully thought through.  And the contrast between the treatment of banks and the auto industry gets to the crux of what underlies at a very deep level our current economic malaise and long term prospects for recovery.

Further on this subject, the cover article in the current Harper's by Thomas Geoghegan, a Chicago lawyer, explores how both the financial and manufacturing crisis stem from a single cause, the elimination of contract rights and usury caps protecting people in recent years that have seen credit card rates jump from a few percent to 30% or more. Usury or excessively high interest rates, Geoghan points out, is something that societies have regulated since Biblical days for good reason.  Sky high interest rates simultaneously impoverish those at the bottom while monopolizing capital at the top in the pursuit of huge but inevitably unsustainable profits.  Echoing Kevin Phillips argument that  declining societies turn to finance as the only way to support--if temporarily--excessive consumption, Geoghan describes how the prospect of absurdly high returns siphoned capital from productive sectors leaving us doubly impoverished.  He writes:

Some people still think our financial collapse was the result of a technical glitch--a failure, say, to regulate derivatives... In fact, some New Deal-type regulation was actually intoduced in recent years...think of the Sarbanes-Oxley Act.  The problem was not that we "deregulated the new Deal" but that we deregulated a much older, even ancient set of laws.

The first of these were contract rights.  "As one company after another "reorganized" in Chapter 11 to shed contract rights, working people learned that it was not rational to count on those rights and guarantees, or even to think in these future-oriented ways.  No wonder people in our country began to live for the moment and take out loans and start running up debts.

And then we dismantled the most ancient of human laws, the law against usury, which had existed in some form in every civilization from the time of the Babylonian Empire to the end of Jimmy Carter's term, and which had been so taken for granted that no one ever even mentioned it to us in law school.  That's when we found out what happens when an advanced industial economy tries to function with no cap at all on interest rates.

Here's what happens: the financial sector bloats up.  With no law capping interest, the evil is not only that banks prey on the poor (they have always done so) but that capital gushes out of manufacturing and into banking.  When banks get 25 to 30 percent on credit cards, and 500 or more percent on payday loans, capital flees from honest pursuits like auto manufacturing.  ...  What is history, really, but a turf war between manufacturing, labor and the banks?  In the United Sates, we shrank manufacturing.  We got rid of labor.  Now it's just the banks. 

Geoghegan's unusually provocative article is worth a read.  More broadly it raises an important question.  Will the United States undertake real reform to strengthen contract rights, limit usury, downsize our financial sector and upsize our productive base.  This is an outstanding opportunity for meaningful reform to address the middle class impoverishment that, as NDN has long noted, lies at the root of our current crisis and whose reversal is also critical to our democracy.

Yesterday, the Obama Administration's task force on the auto industry concluded that America's auto industry must downsize.  Drastically.  Cutting 50,000 jobs at GM--the company's proposal--is inadequate, the Administration concluded in its review of the GM plan.  Nor can GM continue to sponsor so many brands which the task force dubbed distracting to management.  Instead, the Administration believes GM should pare back to perhaps Chevy and Cadillac.  As for Chrysler, the Administration ordered it to sell, ie. hand itself over to Fiat or file for bankruptcy.

At issue is the $6 billion or so the industry needs to keep going. 

Does anyone else notice the irony that this pronouncement came on the heels of a plan to provide 1 to 2 trillion dollars to banks to take bad loans off their books with no concessions, no plan for a turnaround, no paring of brands, no industry review or task force, in fact, nothing at all required?

I support bailing out the banks.  And I support doing it without micromanaging the business beyond changing management at the top--and securing warrants to reduce the cost to taxpayers--as I don't think government is well suited to managing businesses.

But I don't think anyone in the government including the task force after reading the industry's plans and conducting one or two trips to Detroit know more about cars than the car industry itself.  Nor does anyone in the government know more about cars than about the banking industry which the government regulates and has been bailing out--and therefore learning about--for over a year at the cost of trillions. 

One other thing about the government's dual standard for financial services and autos bothers me, namely wrapping condemnation of the auto business in environmental rhetoric. While the car industry took a hit from high gas prices last summer--an external shock it could not control--and has shown a consistent tin ear to fuel economy, its problems today have little connection to the environmental profile of cars.  From a strict profit and loss perspective, investing in hybrids and electric cars--though critical to a future that may no longer exist in the United States--is not good for present cash flow.

The primary problem facing all the automakers today, not just GM and Chrysler but Toyota, Honda and the rest is that sales have fallen off a cliff becasue of lack of financing.  Few people can pay all cash for a car.  And currently only those with sterling credit can get a car loan.  The auto industry, from Honda whose sales are down over a third to Chrysler, is a casualty of the financial crisis created by our banks.  But it and the hundreds of thousands of Americans who work in the auto supply chain will now have to pay a far higher price.

The Big Three have one problem the Japanese carmakers don't, their legacy healthcare and retirement costs from when times were good and unions were strong.  These have been exacerbated, however, by the stock market collapse--again a financial problem not of their making. 

If America is serious about reaping the economic benefits of a clean technology revolution that encompasses transportation--as I believe we must be and the President has indicated he believes we must be as well, we can't do it with a gutted auto sector.  By gutting the auto sector, we are only making ourselves more dependent on financial services as the chief engine of our economy--a strategy that has proven ill advised.

To rebuild our economy we need more engineering and less financial engineering.  And to do that we will need a healthy auto sector.  In a previous post I outlined some of the reasons that finance is advantaged in the policy process relative to manufacturing.  Until we address the anti-blue collar, anti manufacturing barriers in our policy process, we will not succeed in placing our economy back on a sustainable path to long term growth.

Note: Morley Winograd and Mike Hais, NDN Fellows, are co-authors of the critically acclaimed Millennial Makeover: MySpace, YouTube, & the Future of American Politics. Winograd and Hais also have a long history with Detroit and Michigan. Winograd lived there for 50 years and was Chairman of the Michigan Democratic Party from 1973 to 1979. Winograd later served in Washington, DC, as Senior Policy Advisor to Vice President Gore, during which time he witnessed the events described in the essay below. Prior to joining Frank N. Magid Associates in 1983, Hais was a political pollster for Democrats in Michigan and an Assistant Professor of Political Science at the University of Detroit.

With President Barack Obama's expected annoucement later this morning, the current debate over whether to save our domestic auto industry has revealed some starkly different views about the future of manufacturing in America among economists, elected officials and corporate executives. There are many disagreements about solutions to the Big Three’s current financial difficulties, but the more fundamental debate is whether the industry  should bend to the will of the government’s and taxpayers' priorities or serve only the needs of the companies’ customers and their shareholders. 

Detroit had an opportunity -- nearly 10 years ago to the date -- to change. To understand the globalizing world around it, to understand that consumers' priorities and values -- especially those of the rising Millennial Generation -- were changing drastically. While some may think it's a leap to compare an overhaul of Detroit with an overhaul of the discredited Republican Party, the similarities are there:  

But when the government becomes a major stockholder in private enterprises, the brand becomes political. And as General Motors learned to its regret, when a company’s brand is as damaged as badly as the Republican Party’s is now, the chances of it prevailing in any debate about the automotive industry’s future is greatly diminished. Very aware of the public tsunami of anger over AIG bonuses, Wall Street excesses and public perception of corruption and lack of accountability, President Obama is not in a forgiving mood. He has made clear the domestic automobile industry has to be seen as a contributor in ending America’s dependence on foreign oil and improving our environment to secure his support. Almost exactly ten years since the debate at the Detroit airport, as a price for its financial support, the federal government will in fact be telling at least General Motors which vehicles to produce for its customers.  Given that arrangement, both parties to this newest partnership need to find “win-win” solutions for the industry’s future that match the optimism and civic spirit of the Millennial generation who will have to pay for the results of their decisions.

The last time the industry seriously engaged in such a debate was during the Clinton Administration and the companies’ failure to effectively respond to Vice President Al Gore’s offer to partner with them in producing more environmentally sensitive products gives substance to President Obama’s charge last week that their current difficulties were caused by executive “mismanagement” in the past.

Attempts to nudge Detroit into producing more fuel-efficient vehicles have been going on since the 1973-4 Arab Oil embargo, which led Congress to establish Corporate Average Fuel Efficiency (CAFÉ) standards for cars and light trucks. The original fuel efficiency target was for cars to meet an average of 27.5 miles per gallon (mpg) by 1985. On Earth Day, 1992, candidate Bill Clinton proposed to raise that standard even further to 45 mpg if he were elected President.

When Al Gore was asked to join the ticket, auto industry executives, terrified at the prospect that the man who had called for the abolition of the internal combustion engine might become Vice President, implored the leadership of the United Automobile Workers (UAW) to meet with the candidates and bring them to their senses. The lobbying effort worked.  Clinton agreed to delay the adoption of higher CAFÉ standards until it could be proven that such goals were attainable. 

This formulation opened the door for what came to be known as the Partnership for a New Generation of Vehicles or PNGV.  Reluctantly supported by the Big Three, PNGV provided approximately a quarter of a billion dollars in government research funds to demonstrate the feasibility of producing a midsize sedan that could get 80 mpg. Often called “the moon shot of the 90s,” each car company was to make a prototype of such a vehicle by the politically convenient year of 2000 and begin mass production by 2004.  

After a few years of technological research, the partnership settled on the combination of a hybrid gasoline and electric powered propulsion system as the most promising approach. But by 1997, the car companies began to resist expending their resources to develop even a prototype for such a vehicle. Vice President Gore, who had been in charge of the  PNGV program since its inception, decided to meet with the Big Three CEOs to make sure they did not forget their  past commitments. The answer from Detroit was emphatic: profits were coming from SUVs and heavy-duty trucks, not cars. Gore countered that argument by offering to trade the administration’s support for tougher regulations on the permissible amount of sulfur content in the diesel fuels that would power some of the new hybrid SUVs, if the car companies would join in expanding the scope of the PNGV plan to include SUVs, the very product they said the marketplace was asking for. Gore suggested each company produce a concept SUV by 2002 and three production prototypes by 2006, capable of getting 80 mpg. He also suggested they advance the mass production goal for cars to 2002 by deploying a 60 mpg five passenger sedan in 2002 rather than waiting for an 80 mpg version in 2004. 

Ford’s Peter Pestillo and his UAW ally, Steve Yokich, quickly replied, “no way.” Pestillo maintained, “We need much more time than that to make them cost competitive.”  Not all of the auto executives were blind to the challenge. General Motors’ Vice-Chairman, Harry Pearce had been the driving force behind GM’s ill-fated EV1 electric car experiment. And William Clay “Bill” Ford, Jr., great grandson of the company’s founder and Chairman of its Board of Directors envisioned building  a 21st century version of the Model T that would be environmentally friendly as well as inexpensive. Gore asked the companies to respond to his suggestions by September 1998, the fifth anniversary of PNGV.  

But it wasn’t until May of 1999, that the auto company CEOs joined the Vice President to settle the issue of SUVs and PNGV.  Gore began the meeting, held in a back room at the Detroit airport, by suggesting that developing these products could enhance the industry’s image as well as each company’s individual brands.  Ford's Pestillo asked for still more time to consider the idea: “While we love the progress we are making in PNGV as it’s currently constituted, it’s not yet clear to us that the technologies we have been working on apply to the design of an SUV.”  But Pearce used the platform (basic body design) issue raised by Ford to make Gore’s point. He sketched a future auto industry where the line between cars and trucks would not be as clear, describing what we know today as “crossovers”.  It might therefore be wrong, he suggested, for PNGV to be limited to just one platform. 

Gore took the opening and suggested the companies think about what such an announcement might mean to the industry’s image and their individual brands. “It’s not just the substance of the issue you need to consider. You also need to think about the symbolism of the decision. Putting SUVs into the PNGV project would change the public’s perception of where you are going in the future.”  When Pestillo attempted to return to his original arguments, he was overridden on the spot.  GM said, “If you will include lean burn technology (for diesel SUV’s) into the project that might work.” Gore responded, “Let’s work on this as a package.”

Recognizing the breakthrough they had just achieved, the participants began to think about what the future might look like if they formed a true partnership -- not too dissimilar from what is being contemplated now under the terms of the automotive industry loan. Gore said he would put his personal reputation behind such an agreement, which the press would think of as a “Nixon goes to China” event, garnering the auto industry a great deal of positive press. 

But when it came time for the true test of their commitment to this new partnership, the autos blinked. The Vice President suggested they sign off on a press release, conveniently drawn up before the meeting started, announcing the inclusion of SUVs in an expanded PNGV project. The CEOs argued for a less definitive announcement stating that they would address the issue of highly fuel efficient SUVs within the context of the PNGV partnership, but not commit to any specific goals for their production. This less-than-definitive agreement barely made it to page B4 of the Wall Street Journal the next day and was generally ignored by the public the participants were hoping to impress.

Unfortunately for America, General Motors then decided to go in almost the opposite direction. Rick Wagoner, who became General Motors' CEO in June 2000, chose to pursue an SUV-centered strategy that won big profits for a brief period. Since then, however, GM stock has plunged 95%, from $60 per share to just under $4 today. General Motors, which has lost $70 billion since 2005, has seen its market share cut in half.  Seven years after the fateful auto summit with Al Gore, when asked what decision he most regretted, Wagoner told Motor Trend magazine, “ending the EV1 electric car program and not putting the right resources into PNGV. It didn’t affect profitability but it did affect image.” [emphasis added].

His lack of commitment to the type of automobile industry that PNGV envisioned ultimately led to his downfall with the Obama Administration now demanding his resignation as part their plan to save GM.

The importance of a company’s public image or brand value has never been greater than in this new civic era, where the lines between democratic decision-making and private sector planning are becoming increasingly blurred. The organizing cry of Boomer feminists was “the personal is political.”

The paragraph from above bears repeating: 

But when the government becomes a major stockholder in private enterprises, the brand becomes political. And as General Motors learned to its regret, when a company’s brand is as damaged as badly as the Republican Party’s is now, the chances of it prevailing in any debate about the automotive industry’s future is greatly diminished. Very aware of the public tsunami of anger over AIG bonuses, Wall Street excesses and public perception of corruption and lack of accountability, President Obama is not in a forgiving mood. He has made clear the domestic automobile industry has to be seen as a contributor in ending America’s dependence on foreign oil and improving our environment to secure his support. Almost exactly ten years since the debate at the Detroit airport, as a price for its financial support, the federal government will in fact be telling at least General Motors which vehicles to produce for its customers.  Given that arrangement, both parties to this newest partnership need to find “win-win” solutions for the industry’s future that match the optimism and civic spirit of the Millennial generation who will have to pay for the results of their decisions.

President Obama's Weekly YouTube address today focuses on the budget outline he released earlier this week. In breaking down the various elements of his budget, Obama explains how the specifics correspond to commitment to change he made on the campaign trail.

The most memorable line comes after he discusses the changes from the Washington status quo that his budget represents:

I know these steps won’t sit well with the special interests and lobbyists who are invested in the old way of doing business, and I know they’re gearing up for a fight as we speak.  My message to them is this:

So am I.

Take a look at the whole address:

This very much feels like the President is governing with the large mandate he won on election day, and rightly so. It's amazing to think how much there is to do, after so much of this - energy, infrastructure, healthcare - has gone undone for the last 8 years or longer.

President Barack Obama's superb address Tuesday night had an underlying, unifying logic which some may have missed, but which hopefully those reading this will recognize.  

First, on the financial and economic crisis, he embraced the three basic steps we have urged since last September: on top of a stimulus aimed at long-term investments and helping the states – that’s now done – there will be new requirements that banks getting help from taxpayers use that assistance to expand their lending, and new steps to keep people in their homes and bring down foreclosure rates. It’s just economic common sense – but that’s precisely what most of official Washington casually casts aside in favor of scoring short-term, political points. (Take a look at Gov. Bobby Jindal’s empty and sneering response to the President’s speech. His repeated citing of Katrina as a model for government action, by itself, should be a career-ending act).

The President also laid out a domestic agenda for the rest of his first term, and it looks like the most sweeping since FDR and LBJ. I suppose that personal blogs, by definition, are no place for humility, so here it is straight. The three cornerstone Obama initiatives -- slow down our fast-rising health care costs, expand energy conservation and our use of alternative fuels, and give everybody new chances to upgrade their working skills -- are the exact prescription laid out more than a year ago in my book, Futurecast: How Superpowers, Populations and Globalization Will Change the Way You Live and Work. It’s also been a regular theme of this blog and a series of papers issued by NDN.  

Here, too, it’s just economic common sense, for a world being transformed by globalization.  The underlying logic of the President’s program springs from the fierce new challenges Americans face under globalization to their jobs and incomes. Globalization has made competition much stronger, and that competition leaves American businesses and their workers in a bind. Their costs have been rising very fast, especially for health care and energy, but intense global competition makes it harder for companies to raise their prices to cover these rising costs. The result is that the wages of most American stopped rising since about 2002, even as they became more productive. And most can’t find higher wages by getting new jobs, because before the current crisis began, the same forces had made this period the weakest for job creation since World War II.

The President understands that coming out of the current crisis isn’t enough, if we just return to another period of growth without wage gains or healthy job creation. He also understands another theme of Futurecast and NDN's work, namely that about half of Americans also need new skills if they aspire to jobs with a real future. That’s the basis for the third plank of the domestic agenda he laid out last night -- genuine, new access for young people to go to college or receive other, post-secondary training, and new opportunities for everyone else to upgrade their skills. 

President Obama’s first speech to Congress already ranks as the most serious and thoughtful presidential address on the economy in decades. Perhaps it took an historic crisis to break through the political cant and mental laziness that has gripped our economic agenda for so long. But the President is using this moment to put forward not only meaningful answers for the crisis, but serious, long-term remedies for much deeper economic problems which other politicians routinely ignore. That’s presidential leadership of the sort we haven’t seen since, well, FDR.

New York City--The indication over the weekend from Carol Browner that the EPA plans to move forward on regulating greenhouse gases, though not unexpected, provides indication that we are likely to see real action on climate change this year.  The possibility of EPA regulation of CO2 emissions makes a cap and trade system look like the more appealing alternative.  Thus, despite the conventional wisdom that you cannot impose taxes or new costs on business during a recession, it is increasingly looking like we will see action on climate change in time for the US to have a meaningful position and thus play a leadership role in Copenhagen.

Obviously as far as the climate is concerned, this is good news.  However, as far as the declining economy is concerned it may not be bad news either for several reasons.  First, stability and clarity with respect to the pricing and potential regulation of carbon is an improvement over uncertainty since it lets companies plan ahead.  Companies that make carbon reduction technologies, alternative energy companies, and companies exploring clean coal, will have clear rules if action moves forward.  And even utilities and heavy industry will benefit from clarity as opposed to uncertainty.  Done right, the higher cost of some energy that will result from pricing carbon will be largely recaptured by the government through auctions in a cap and trade system or taxes in a carbon tax regime.  In the current atmosphere of huge deficits and economic uncertainty, the resolution of regulatory uncertainty combined with a potential revenue source may offset the economic effects of higher energy prices.

Moreover, at this critical point in economic history, there is another reason that meaningful action and leadership by the United States is welcome.  At this critical juncture, global cooperation is paramount to managing the economic crisis. The global economy has survived and even thrived cleaning up the environment.  It has not survived the breakdown of global cooperation on key issues.  When the history of the current crisis is written, the breakdown of global cooperation earlier in the decade--due to the go-it-alone philosophy of the Bush Administration--will be assigned a part.  On the other hand, successful cooperation leading up to Copenhagen and beyond, by restoring global trust, can be part of the solution.

And of course there is the inconvenient issue of the climate.  The indication that the Administration and Congress are moving forward on climate change is thus good news.

"Dear America, please remember how you got to be the wealthiest country in history. It wasn't through protectionism, or state-owned banks or fearing free trade. No, the formula was very simple: build this really flexible, really open economy, tolerate creative destruction so dead capital is quickly redeployed to better ideas and companies, pour into it the most diverse, smart and energetic immigrants from every corner of the world and then stir and repeat, stir and repeat, stir and repeat, stir and repeat."

A New York Times op-ed today by Tom Friedman - quoted above - brings up some interesting points.  Enjoy. 

New York City -- A little over six months ago, I proposed to the economic team within the Obama campaign and, subsequently, to the world at large, a green stimulus bill that would stimulate the economy in the short term, but also work for the long term to include tax credits and money for renewable energy, weatherization, mass transit, retrofitting buildings and building workforce housing. All of these proposals and more passed an important milestone yesterday on their way into becoming law with the House passage of what has become an $820 billion bill solidly weighted toward green investments. We are very happy to see the President and Congress working to create the foundation for a low-carbon future, independence from foreign oil and the next great wave of economic growth. The action now moves to the Senate where we expect these proposals will be incorporated into similar legislation.

At the same time, however, the nature of the stimulus bill process, in particular, the need to move the money out quickly through previously authorized law, means that this bill represents, as the President has said, only a downpayment on needed investments. It does not, nor could it, given the short time frame, create all the new investments that will be needed to bring the American economy fully into the 21st century.  More work is needed to reform our funding process, for example, and update regulation to make the long-term investments in clean infrastructure needed to update our infrastructure for a more productive 21st century.

Nonetheless, the action by the House represents an important milestone.  We are hopeful the Senate will move rapidly in due course to pass similar legislation that meets the President's goal of signing the American Recovery and Reinvestment Act into law in the next few weeks.