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…of the federal budget.  From today’s Washington Post (front page story) on the latest version of an economic stimulus plan (emphasis added):

Pitching a plan that is expected to include $300 billion in tax cuts, Obama pledged to consult Republican leaders, who until yesterday had been left out of negotiations between the president-elect’s advisers and congressional Democratic staff.

“The monopoly on good ideas does not belong to a single party. If it’s a good idea, we will consider it,” Obama told House and Senate leaders at an hour-long closed-door meeting, according to one attendee.

Obama, making his pitch two weeks before taking office, won generally favorable reviews from GOP leaders, particularly because of his decision to increase the tax-cut ratio to 40 percent of the overall package.

Senate Minority Leader Mitch McConnell (R-Ky.) and House Minority Leader John A. Boehner (R-Ohio) told reporters they were convinced that Obama was sincere in his invitation to let Republicans help craft the nearly $800 billion package to create jobs and lift the nation out of recession. But they also expressed concerns about the size of the package, as well as particular elements under discussion between Obama and Democratic lawmakers.

“I remain concerned about wasteful spending that might be attached to the tax relief. Simply put, we should not bury future generations under mountains of debt,” Boehner said.

Funny how it’s only the “wasteful spending” (the “other side’s” policy) that adds to the “mountains of debt”–and not the tax cuts to which the spending is now merely “attached to.”  (No news flash here: tax cuts actually aren’t “free.”)  And I think we ought to recognize that it’s not just “the monopoly on good ideas” that doesn’t belong to a single party; unfortunately, the market for bad ideas is similarly “bipartisan.”

One thing is becoming clear:  all these gracious and sincere negotiations are going to add up to a whole lot of debt–my point in yesterday’s post.  So let’s hope we spend the money wisely, so our kids will have the capacity to pay it back later on.  Whether it be through government spending or tax cuts, we really shouldn’t be fooled into thinking that “wasting” is ok just because we’ve decided large deficits are ok and maybe even desirable (for now).

Today I’ve been reading about how the economic stimulus plans are shaping up, trying to learn about all the new tax cuts that are suddenly back into the picture despite the skepticism expressed over the past few months about how effective another round of tax cuts would be in boosting consumption–given the already-mediocre marks many economists gave them the last time around, and the current state of American consumers, who are now less than enthusiastic about even being labeled ”consumers.”

The Wall Street Journal’s story says my friend Bill Gale was also surprised to see the $300 billion in tax cuts:

William Gale, a tax-policy analyst at the Brookings Institution think tank in Washington, said the scale of the whole package is larger than expected. He called the business offerings a true surprise, since most attention has been focused on the spending side of the equation, especially the hundreds of billions of dollars being discussed for infrastructure and aid to state and local governments.

“On the other hand, it was hard to figure out how they were going to spend all that money in intelligent ways, so it makes sense to do more on the tax side,” Mr. Gale said. His biggest question about the latest proposal concerns the credits for hiring new workers or refraining from layoffs. Much of that money would likely go to companies that would have hired more people anyway, he said, adding that it is impossible to know what firms would have done without such a credit…

Bill may be onto something.  There is a lot of deficit-spending that policymakers want to do, and while everyone seems to suspect that direct government spending may have more merit relative to tax cuts this time around, there’s still not quite enough faith that we could do that much intelligent spending that fast (even among those of us who have a good deal of faith in government more generally).  Even if there might be some “dumb” tax cuts being proposed (in terms of how effective they are as stimulus), maybe they’re not any ”dumber” than some of the spending that’s being proposed.

And then the same WSJ story goes on to offer this explanation of the new-found tax-cut components of the stimulus/recovery package:

Republicans are already criticizing parts of the stimulus package. Sen. McConnell, speaking Sunday on ABC’s “This Week,” questioned one of the biggest items, which would send as much as $200 billion to states largely to expand the federal share of Medicaid, the health program for the poor. He suggested structuring that aid as a loan, saying it would encourage states to “spend it more wisely.”

An array of business tax cuts could help overcome such GOP opposition, enabling the Democrats to present their plan as a balanced mix of tax cuts and spending. It also would likely encourage business interests to lobby hard for its enactment.

Mr. Obama’s team has spoken of wanting to attract significant Republican support, not simply picking up votes from a Republican moderate or two…

But the so-called “balanced” mix of tax cuts and spending, designed for political “compromise,” still tips the scales on the positive costs side.  It’s more of the same kind of thinking that has led to such fiscal irresponsibility in so-called “bipartisan” (instead really, inherently “partisan”) negotiations over the past eight years.  It’s the “you only get yours if I get mine” attitude–in contrast to the alternative “I’ll give up some of mine if you give up some of yours” one.  The “balanced” shares of the packages going to tax cuts versus spending may be similar in both cases, but the level of deficit-spending is very different.  

In the context of the massive stimulus package we seem to be publicly committing to (maybe $800 billion or more over two years), I worry that the policymakers are effectively saying to each other: ”you only get to have your dumb spending, if I get to have my (dumb) tax cuts.”  And the economists, who are the ones usually most likely to worry and speak up about the dumbness in policies, might in this case be inclined to project a “dumb is better than nothing” attitude.  Even with the large stimulus I do believe we need, I would still like to say that dumb is not better than nothing, because even today, dumb policies have a price.

I’m still hoping that political compromise and bipartisanship (or “post-partisanship”) will lead us to come up with more thoughtful, not less thoughtful, policies–i.e., the discovery of more “two rights” situations, rather than the lapsing into our old, “two wrongs” habits.

Well, tomorrow it’s back to usual around the Concord Coalition offices… starting with a morning meeting about pay-as-you-go (PAYGO) budget rules.  There was a lot in today’s (Sunday) Washington Post to warm up the ol’ fiscal responsibility engine inside me, starting with the front page story (by Shailagh Murray and Paul Kane) on the Obama fiscal policy agenda and the Blue Dogs’ worry about its cost and the slippery slope of labels like “stimulus” and “emergency”:

…the economic downturn will represent the first test of Obama’s relationship with congressional Democrats, potentially pitting him against the party’s formidable wing of fiscal conservatives.

Leaders from both chambers sat down to work out details in meetings at the Capitol beginning in mid-December. With House Speaker Nancy Pelosi (D-Calif.) staking an early position in favor of a $500 billion stimulus, Obama’s advisers spread the word that their plan would probably approach $850 billion.

Those numbers sent sticker shock through the Blue Dog caucus, which has crusaded for federal deficit reduction and which represents a large enough force to block just about anything, particularly if Republicans hang together in opposition.

After discussions with Emanuel and other top Obama advisers, Hill said, the caucus’s leaders decided to “set aside our strong feelings about deficit reduction” to support the plan, but with some conditions. The group wants to insert statutory language in federal law instituting pay-as-you-go rules, which require spending cuts or tax increases to offset new federal programs.

When Democrats took control of Congress after the 2006 elections, Pelosi instituted House rules that required a “pay-go” principle to be considered. But they were routinely flouted over the past two years as the Bush White House objected to tight fiscal constrictions. In meetings after the November election, Obama advisers raised the idea of making pay-go a federal law, suggesting that Blue Dog demands would probably be met. But the president-elect’s team has not specified how, and more importantly when, such a rule would take effect.

With no answers yet, Hill said he has been tasked by congressional leaders with crafting language defining emergency situations in which pay-go rules could be ignored. Despite the economic crisis, many Blue Dogs are seeking early imposition of pay-go rules, even if it creates problems for funding initiatives such as health-care reform that Obama has argued are key to the nation’s recovery…

…and continuing with Neil Howe and Richard Jackson’s column reminding me that although we face demographic challenges in this country, we don’t have it as bad as many other developed countries, and how in a lot of ways the rest of the world is counting on us to get our act together and save better–because we actually have the means to do so:

An important but limited exception to hyperaging is the United States. Yes, America is also graying, but to a lesser extent. We are the only developed nation with replacement-rate fertility (2.1 children per couple). By 2030, our median age, now 36, will rise to only 39. Our working-age population, according to both U.N. and census projections, will continue to grow throughout the 21st century because of our higher fertility rate and substantial immigration — which we assimilate better than most other developed countries. By 2015, for the first time ever, the majority of developed-world citizens will live in English-speaking countries.

America certainly faces some serious structural challenges, including an engorged health-care sector and a chronically low savings rate that may become handicaps as we age. But unlike Europe and Japan, we will still have the youth and fiscal resources to afford a major geopolitical role. The declinists have it wrong. The challenge facing America by the 2020s is not the inability of a weakening United States to lead the developed world. It is the inability of the other developed nations to be of much assistance — or indeed, the likelihood that many will be in dire need of assistance themselves.

A major reason the wealthy countries will need strong leadership are the demographic storms about to hit the developing world…

And then there was Michelle Singletary’s resonating resolution to stop calling herself a “consumer”:

…you never save when you spend.

Never.

When you buy things on sale you are still spending money…

And we are passing this legacy of consumerism on to our children. More children go shopping every week than read, go to church, participate in youth groups, play outdoors or spend time in household conversation…

Rather than keeping things the same, why don’t we again become producers?

“Households and the country need investment, not consumption,” [Boston College professor Juliet B.] Schor said. “We need to invest in energy conservation, degraded ecosystems, a sustainable food system, education, community building, human connection and skills for everyday living.”

Aren’t you weary of being a consumer with all the accompanying debt it requires to keep up this occupation? If so, make 2009 the year you stop defining yourself as a consumer.

And of course, Tom Toles’ cartoon above.  Yep, it’s back to work!

A front page story in today’s Washington Post focuses on the tougher grading scale that high schools in Fairfax County, VA (where my kids go to school) use:

Fairfax high school students are required to earn at least 94 percent to earn an A and at least 64 percent to pass a class. Most school systems in the country use a 10-point scale, meaning that 90 percent gets an A and 60 is a passing grade. Many already give students’ GPAs a bigger boost for more challenging courses.

It seems that the Fairfax County Public Schools superintendent, Jack Dale, wants to recommend that the school system keep its stricter standards, because a report released yesterday didn’t prove that the those tougher-to-get As hurt Fairfax County students’ chances of getting into colleges (emphasis added):

The 120-page report — the product of more than 1,800 hours of staff time, a $30,000 consultant’s fee and thousands of hours from parent volunteers — compared the GPA distribution in Fairfax to those of 35 schools using a 10-point scale and found that Fairfax students consistently had lower grades.

Parents argue that their students are earning some of the top SAT scores in the country and spending extra hours studying for college-level classes but are not getting the grade-point averages that reflect their abilities or efforts.

For those Fairfax students who scored between a 1200 and 1249 on the math and verbal sections of the SAT, only 5 percent had a GPA of 4.0 or higher, the report found. That compares with 27 percent of non-Fairfax students who scored above the straight-A mark.

“Right now, we are not even in the ballpark,” said Louise Epstein, a gifted-student advocate and one of the founding members of FAIRGRADE, the parent group that has worked to change the grading scale and give students more credit for advanced courses.

Surveys of more than 60 college admissions officers showed that GPA is only one element that admissions officers consider and that the rigor of the students’ classes and their SAT or ACT scores are also important. Admissions officers say that grades in the core classes, such as math and science, are given top consideration. But the report could not find clear evidence that students graded with 10-point scales had more success in admissions.

The study found stronger results that GPAs that reflect extra credit are a primary factor in determining who earns merit scholarships and who gains entrance into honors programs.

Now, I don’t know what kind of statistical analysis was done for the report, but just based on my fuzzy familiarity with the econometrics I once learned and practiced, and the last sentence quoted above, and the recognition that the threshold to cross into qualifying for a merit scholarship or college honors program is much higher than the threshold to get admitted, I would say this is prima facie evidence that Fairfax County’s tougher grading scale is penalizing high-achieving Fairfax County kids, at the margin.  In fact though, I think it suggests the tougher grading scale has to be mattering at the margin at the lower achievement levels and thresholds as well.  In the case of Fairfax County, I’m sure that the lower GPAs might not seem to hurt kids’ admissions so much (at first “statistical blush”), because the standardized test scores and high family incomes (and all the perhaps unmeasured benefits associated with those high incomes) tend to make up for it.  (This is what econometricians and statisticians call “simultaneity bias.”)

So while I’m glad that Superintendent Dale is considering some sort of proposal to (brute-force) adjust grades for the highest achievers (”Dale said he would propose that Fairfax students get a bump in their grade-point average when they complete honors and college-level classes to make them more competitive”), I’m not sure the report justifies his decision to keep the overall grading system the same.

I also don’t agree with this reasoning against moving to the 10-point scale:

Fairfax school officials have argued that lowering the bar could lead to grade inflation.

“Grade inflation,”as I have always understood it to mean, is subjectively lowering standards for each letter grade, like “grading on a curve”–and hence is an issue of relative, not absolute, measurement.  Grade inflation can occur under any absoulte grading scale.  If anything, the knowledge that Fairfax County’s grading scale is absolutely harder (compared with the other school districts in the state and around the country) should lead Fairfax County teachers to tend to subjectively adjust the way they assign letter grades in their individual classes to “make up for it.”  I have casual empirical evidence from the mouths of some of my children that this is informally practiced by some Fairfax County high school teachers.  In other words, grade inflation is more likely to occur when teachers feel the absolute grading system is somehow “unfair”–in other words, under the tougher, not weaker, grading standards.

And whether it’s admissions that are affected, or just qualifying for the honors programs or merit scholarships, let’s face it, it all matters at the margin, especially now with the economy as bad as it is and the cost of a college education as high as it is.  So Fairfax County Public Schools, I say lower your standards!  Our over-achieving kids are hard enough on themselves (like parent, like child) as it is!

OK, it’s the last Friday night of our family’s holiday break, and after all the “big thinking” about New Year’s Resolutions over the past couple days, I don’t feel like thinking or writing about anything too serious tonight.  So bring out the doggie photos!  This one above is a recent one of my beloved “Roscoe”–the older beagle we adopted from a rescue group (HART) over a year ago, when he was guesstimated to be (already) about 10 years old, having been found on a rural Virginia road infested with fleas (turned out he had Lyme Disease) and with a bullet wound to one leg.  (Now, who could resist such a dog?!)

I’m inspired to put up the beagle’s photo and not one of my two golden retrievers, because I think beagles are an underappreciated, “common man’s” breed, and yet I’ve seen the breed get some recent publicity in the reminiscing about presidential pooches and in particular, the buzz about what kind of dog will make it into the Obama White House.

Why, just look at who’s first to be interviewed for the Obama family dog job on the cover of the New Yorker (drawn by Barry Blitt):

When Obama first promised the puppy to his daughters, Sasha and Malia, Mary Lou Aguirre of the Fresno Bee recommended her own beagle, “Bagel”, as a “loaner dog” (very similar ideas were being floated at my house):

Dear President-elect Obama, first lady Michelle and first children Sasha and Malia:

Do I have a dog for you! Specifically, our dog Bagel, the beagle; she could be a loaner dog until your family makes a decision on getting a puppy for the White House. I’d even be willing to pay for an airline ticket to send Bagel to 1600 Pennsylvania Ave.

I’m not saying Bagel is presidential in any way. She lacks decorum in every sense of the word. She has been known to flop down on the sidewalk and show her soft underbelly to any stranger willing to rub her stomach. Frankly, it’s quite undignified.

On the plus side, she has the softest long ears. I believe it’s her best feature, and she looks very cute when she tilts her head as if she’s paying attention. In reality, Bagel is a terrible listener.

For example, Bagel turns a deaf ear when we shout at her to get her nose out of the cabinet where the kitchen trash can is kept. Her insatiable appetite, moments after being fed, is mind-blowing. And unless you have a dog biscuit in your pocket, she will not respond to commands, even if you’re the commander-in-chief.

On the other hand, Bagel’s virtues include being an excellent alarm clock. You will always know when it’s midnight and 4 a.m. Bagel, who lolls around the house throughout the day, comes alive in the wee hours. But given the large White House staff, I’m guessing there will be an official White House dog walker who can take Bagel around the Rose Garden.

I’m not the only person touting beagles. The Web site www.zazzle.com is selling “Beagles 4 Obama” T-shirts for $17.95. [oh my, they really do have them, here...] Surely, it’s an attempt to ensure that the breed is taken as a serious “first pet” option. It’s been too long since beagles were a part of America’s First Family. Lyndon B. Johnson had two beagles, named Him and Her, during his administration (1963-68).

It’s time for a comeback…

And here’s an old cover of Life magazine featuring LBJ’s beagles, which I found via several online stories, including at least one that mentioned the Newseum’s current “first pets” exhibit (running through March, so dog lovers should check it out):

But one of my favorite beagle images is the one that I found comparing former presidential candidate Mike Huckabee’s looks to that of a beagle, on the “Mutts” blog of John Woestendiek of the Baltimore Sun.  Our family had noted the striking resemblance a year ago when we first had Roscoe and were seeing a lot of Huckabee’s face on TV.  If you scroll through the top bar of the linked blog story, you will find some of the other candidates and the dog breeds they most resemble.  Fun!

Could it be true that the dumb but loveable and life-loving beagle is coming into vogue?…  It’s a year for change after all.

I’ve been thinking about my personal “New Year’s Resolution(s)” and recognize that most of us tend toward resolutions that have something to do with “living within our means” or at least scaling back on the ”excesses” in our lives–excessive eating and weight being the most popular, I suppose.  Thinking back to some of my resolutions in recent years, I realize that even before the economy soured, my resolutions have often fallen into the “don’t consume so much” category–even though I haven’t been on a diet since my freshman year in college (more because I have great genes rather than great natural self-motivation to get into “great jeans“).  In recent years I’ve resolved to: pay down my credit card balances; avoid impulse shopping by staying away from the mall or certain internet retail sites; buy my kids fewer but higher quality, lasting investment-like items; and instead of buying new stuff (for myself at least), make better use of (and entertain myself with) stuff I already have–cookbooks, exercise videos, clothes that hang in the closet with tags still on them.

All these resolutions basically boil down to trying to live in a more “sustainable” manner–to better recognize the limits to our resources (including our financial budgets or our physical metabolism!), and doing our best to “optimize” (find our greatest happiness) given those constraints.  “Optimizing” means directing our resources where we’ll get the most “bang” per buck or per hour or per unit of effort or energy.

So I’ve decided that this year my personal New Year’s Resolution is a lot more general and encompassing than those I’ve declared in the past.  And while it would be too personal for me to elaborate here about how this relates to specific things in my life, those specifics are certainly there. 

I resolve to do my best to avoid “wasting” my:

• money;
• time;
• “drive” (the energy where my head is); and
• “passion” (the energy where my heart is)…

and therefore to become a more “sustainable” person (as well as a better mom).  In summary:  don’t squander, do cherish.

That may sound a little too touchy-feely for the usual kind of material on EconomistMom, but if you step back a bit (and squint), you might see that the list could easily apply to public policy and what policymakers should resolve to do in their making of economic policy in 2009.  For policymaking will not be easy in 2009, as today’s editorial in the Washington Post points out:

…The central fact, of course, is the quake that has rolled through the economies of the United States and much of the world in recent months, the aftershocks that continue, and the dread feeling that the Big One is yet to come. We are discovering that the economic arrangements that have served us so well for years do not guarantee permanent prosperity, and, by the way, there are many people whom they have never served all that well, anyway.

Americans remain hopeful. A new presidential administration is on the way, full of ideas and vigor. World leaders have learned from past economic disasters the need for cooperation and coordination. But the politics of fear and narrow self-interest can undermine the best efforts to revive and maintain prosperity and to provide greater security for all when it comes to the essentials: housing, food, medical care.

Policy will matter, and in this regard it is good to know that the president-elect is not given to following the tired formulations of the left, the right and the various shills and operators who dominate so much of what passes for public discussion. He is pragmatic, open-minded and thoughtful. But, as he knows, he will also have to take on some powerful forces, those aligned with his party and those in opposition, and that will take courage. And in the end, of course, it will be not just policy that saves us but, as always, the energy, imagination and desire of the people — people who see opportunity where others do not and who have the freedom to pursue it…

I am hopeful for policymaking and our economy in 2009, because I think the new Administration is coming into their new job having made some of their own resolutions:  to better recognize the budget constraints, and to better prioritize what the government chooses to do–in other words, to provide better government that is not so “wasteful” in terms of our nation’s resources, mental energy (drive), and imagination (passion), to help us achieve a more sustainable nation.  The Post is right that pursuing such a grand goal, with resolve, takes a lot of courage from our leaders… just like any New Year’s Resolution that any of us set for ourselves takes a lot of courage to follow through on.

And another resolution of my own:  to help make this blog more sustainable, by encouraging you all to share your own thoughts here more often, by posing more questions back to you.  So, if you had to come up with a recommended New Year’s Resolution for the new Administration and the new Congress, what would it be?  (It could be much more specific than mine.)  And/or do your own personal resolutions tend to fall under the same “sustainability” (”don’t waste”) theme that mine do?

(photo of the new New Year’s Eve ball to drop in Times Square tonight!)

Dave Barry summarized well the chaos and weirdness of 2008 in his Year in Review last weekend:

How weird a year was it? Here’s how weird: 

–O.J. actually got convicted of something. 

–Gasoline hit $4 a gallon — and those were the good times. 

–On several occasions, “Saturday Night Live” was funny. 

–There were a few days there in October when you could not completely rule out the possibility that the next Treasury secretary would be Joe the Plumber. 

–Finally, and most weirdly, for the first time in history, the voters elected a president who — despite the skeptics who said such a thing would never happen in the United States– was neither a Bush nor a Clinton.

Of course, not all the events of 2008 were weird. Some were depressing. The only U.S. industries that had a good year were campaign consultants and foreclosure lawyers. Everybody else got financially whacked. So, we can be grateful that 2008 is almost over…

It’s been a great year of excitement and change for myself as well, and I’m very grateful for many good things that came to me in 2008 (this blog, and my connections with new and old friends through this blog, included).  But like Dave Barry and the rest of the country, I’m really ready to move onto 2009, and I look forward with a lot of optimism.  I’m hopeful that 2009 will be a happier year for most of us.

Happy New Year!

Today I spoke with a reporter about the “Christmas wish list” of “ready-to-go” state and local spending projects presented by the U.S. Conference of Mayors.  She pointed to some projects on the list that have received lots of criticism from policymakers, for their seemingly dubious qualifications as “good stimulus”–such as a particular project in an Ohio city to get prostitutes off the streets.  But the reporter was asking me if the criticism of these projects was warranted from an economic standpoint.  What makes the prostitutes’ program or the polar bear exhibit a bad idea, economically, compared with other projects that sound more reasonable (justified, substantial, serious, and moral?)–such as, for example, mass transit, highway, and ”green infrastructure” projects?

My quick response was that there’s not necessarily a strong correlation between what seems “worthy” from a moral or “smell test” (or “first blush“) perspective, and what is really “worthy” (i.e., worth it) from an economic perspective.  For example, in the case of the prostitutes project, I flippantly responded that the economic worthiness of the project depends on whether they might hire any laid off autoworkers to chase those prostitutes!  (Hmmm….)

But seriously (I went on), a key question for all of this state and local spending billed as “stimulus” is whether and how quickly these initiatives can create or save jobs.  Is there a good matchup between the weakness in the local job market and the new labor demand that would be associated with the spending project?  And better yet, in the process of creating these new jobs (quickly), is there also good on-the-job training that would be provided, so that even after some of these jobs might go away, workers would be left in a better position in terms of their longer-term employment prospects? 

For example, I have been wondering about what the Detroit area might come up with for their laid off autoworkers. Would it be possible to come up with “stimulus” spending that helps Detroit with both short-term jobs and longer-term “transformation” toward producing green (more sustainable) technologies?  As I look on the list of Detroit-area projects submitted by the mayors, I’m not sure I see very much of that longer-term vision, but I think in evaluating the worthiness of these projects we have to at least pay attention to the “bang per buck” measures–such as the (inverse of the) cost of the projects per job created (and the quality of the jobs and who would get those jobs)–and hope that the jobs claims in the report aren’t wildly exaggerated (although I worry why wouldn’t they be?).

The Economist’s “The World in 2009″ special issue is really great reading, and in this year’s issue they include a special section on the environment.  Deputy editor Emma Duncan leads off the section with “Wonderful, wonderful Copenhagen?”–suggesting that carbon policy is going to be a really “hot topic” (my pun intended) in the year ahead, especially here in America:

The most important year for climate change since 2001, when the Kyoto protocol (which set targets for cutting carbon-dioxide emissions) was agreed, will be 2009. The first period of the protocol runs out in 2012. The deal to replace it is supposed to be done at the United Nations’ Climate Change conference in Copenhagen, which starts on November 30th 2009 and is due to end on December 11th. No deal means that mankind gives up on trying to save the planet.

The accord needs to be a substantial one, not just a face-saving agreement to declare that the issue must be tackled. The rich world (especially America) needs to commit itself to legally enforceable carbon-emissions reductions for the second period of Kyoto, from 2012 to 2016 and beyond. The big emitters from the developing world, such as China, need to commit themselves to something substantive—not economy-wide emissions-reductions, but, for instance, carbon-intensity targets (cuts in carbon emissions per unit of GDP) or measures directed at the power sector in particular…

What happens in Washington is most important. Progress on climate change is much likelier under the new administration than the old, for the new one is committed to introducing mandatory federal carbon-emissions cuts through a cap-and-trade scheme of the sort that operates in Europe. What is not clear, though, are the answers to the crucial subsidiary questions. Where do the cuts come from? And how big will they be?

The amount of political capital the new president is prepared to spend on climate change will determine the answers to those questions. Plenty will be needed to overcome opposition from organised labour, which fears possible job losses resulting from the higher costs that carbon constraints are bound to impose, and from dirty industries, such as aluminium, cement, oil and carmaking, which fear the impact on profitability. The administration is likely to reach for “border adjustments” (tariffs on carbon-intensive goods from countries that America thinks are not doing enough to cut emissions) to help overcome objections from those quarters. It may disappoint greens by going for a system that includes a cap on the carbon price, and by setting the cap on emissions higher than environmentalists would like. And even with those compromises, getting legislation through Congress in time for Copenhagen will be exceedingly difficult.

And The Economist’s energy and environment correspondent, Edward McBride, continues to worry about the inevitable political opposition that carbon policy will face, in his article “Fighting for the planet” (subtitle “So much to argue about in green politics”):

The giddy price of oil subsumed most talk of the environment in 2008; in 2009 the price of carbon will be the most pressing question. In America, the new president has pledged to cut emissions by instituting a cap-and-trade scheme: expect a drawn-out battle in Congress…

As with free-trade deals, the proliferation of regional and local carbon-trading schemes is likely both to spur efforts to reach a global accord and to complicate them. In America, ten north-eastern states have grouped together to form the Regional Greenhouse Gas Initiative [link added], a cap-and-trade scheme among utilities that starts running on January 1st. Opponents of emissions-trading will hold up every glitch as an example of how misguided the whole concept is; proponents will insist it proves emissions-trading is viable, whatever its flaws.

Western states plan another, more ambitious programme, while Midwestern states are working on a third. To make matters even more complicated, several Canadian provinces plan to participate in the various American initiatives, in protest at the relative modesty of Canada’s own national scheme. Australia and New Zealand will try to link up their respective systems. And there will be a row, complete with legal battles, over the EU’s plan to levy a carbon tax on flights to or from Europe. As a negotiating stance, the regions and countries with more stringent policies will insist that national and global arrangements must not pander to the lowest common denominator. But they will also be quick to scale back their green ambitions if efforts to set up broader trading schemes founder.

All this uncertainty will not be good for the carbon markets. Prices will be volatile, providing more ammunition to those who dislike the idea of emissions-trading…

Which leads me to take notice of this point in Dan Rosenblum’s comment to yesterday’s post on gasoline prices:

…you correctly note in your post that a high price and certainty are necessary. A cap-and-trade program, unlike a carbon tax, would result in serious price volatility. The result? Energy users would not have the price signal they need to encourage investment in energy efficiency and less carbon intensive fuels. For a more detailed comparison of carbon taxes and cap-and-trade, see the Carbon Tax Center web site.

Economists (who naturally have a bad tendency to abstract from reality) tend to view a carbon tax policy as basically equivalent to a permits/cap-and-trade carbon policy where the tax rate happens to be set at the market-clearing price that would result at the quantity of permits provided, and where government receives the full market value of those rights to emit carbon (all of the revenue from the tax).  But of course, in practice that market-clearing price would be constantly moving around under a permits policy that would set the quantity, not the price.  A carbon tax policy, on the other hand, sets the price, but results in uncertainty about the quantity (the end result in terms of carbon dioxide emissions).  For a market-based strategy that will undoubtedly interact with the rest of the economy and its dynamics, however, as well as one dependent on continued political support (in these difficult, recessionary times), it strikes me that it’s probably more important to establish certainty about prices (economic impact) much more than certainty about quantities (environmental impact).

This cartoon by Richard Thompson, from Dave Barry’s excellent Year in Review, reminds me that the “gasoline price roulette” we’ve experienced this year has not been a good thing for Americans–even as we now enjoy sub $2/gallon prices (and as my family’s just made the road trip from Virginia to Ohio).

Why not?  Because just as we were starting to adapt to the $4/gallon prices we saw in the peak of summer–by driving less and more efficiently, shunning gas-guzzling SUVs, and getting on waiting lists for hybrids–the larger forces of a deeper, world-economy-wide recession started to bring gasoline prices quickly back down.  And what happened?  Check out the official data from the Energy Department’s Energy Information Administration.  Here’s the plot of retail gasoline prices over the past couple years:

Note the peak is July ‘08, and the far right trough is where we are now…

And here are the plots of U.S. gasoline production and gasoline demand, over the past year (the yellow and red segments; the blue line compares to same months last year):

The middle of the two graphs above show U.S. production (supply) and demand in July.  That yellow line shows that both did not rise during the peak summer travel period but instead remained flat.  (Contrast with the July-August period in 2007, the blue dotted line.)  And in September-October of this year, both dropped off dramatically, further widening the decline from the prior year.  But since this fall when gasoline prices started rapidly falling, gasoline demand has rebounded just as dramatically, wiping out nearly all of the early-fall decline, and U.S. gasoline production now fully matches its 2007 levels.

Which is why I think–and I’ve said this before–our country needs higher gasoline prices, assisted by government policies that would more appropriately “price” the external costs associated with the use of fossil fuels, such as through a carbon tax or cap-and-trade program.  It’s not just a higher price we need, but a higher and certain price.  And it’s not just us stupid, near-sighted American consumers who need to be forced into the better behavior of consuming gasoline more efficiently (conserving), but also the not-necessarily-stupid-but-profit-seeking, near-sighted Detroit automakers who need to be “incentivized” into the better behavior of producing more fuel-efficient technologies and vehicles.

I’m not talking about enacting and implementing a carbon tax now, in the midst of this awful recession.  But I strongly agree with Resources for the Future’s Richard Morgenstern, who recently argued (in “The Hill” newspaper) that the incoming Obama Administration must make an early and clear commitment to establishing a carbon-pricing policy that would take effect as soon as the economy begins to recover:

Obama clearly supports reductions in oil consumption and an attack on global warming. But a chorus of voices wants him to set aside any significant initiatives in these areas while he struggles to pull the country out of recession. Green elements of the stimulus package, they believe, will provide sufficient push for low- and no-carbon technologies, thus obviating the need for early decisions on a cap-and-trade or other carbon-pricing regime. But announcing at the outset an explicit plan for carbon pricing is essential — for two reasons.

First, setting a carbon-pricing target would strongly signal to both business and consumers that new technologies must be developed and adopted without delay. Without that price incentive, the advent of greener forms of energy will be postponed yet again.

Second, setting a price on carbon emissions will assure a revenue stream to support future climate-related programs — and, quite possibly, other initiatives as well. The stimulus package cannot go on forever, and carbon revenues can give the federal government the wherewithal to fund future initiatives.

Opponents of an early announcement on carbon pricing say it may worsen the recession. The reality is that any such scheme cannot be implemented immediately, given the need to develop legislation and subsequent regulations…the president could propose an explicit mechanism to postpone implementation in the event certain economic conditions are not met…

[I]t is the best way to reduce uncertainty about U.S. climate policy. Without such directives, investors will continue to act as if carbon emissions are free…

A cap-and-trade system will put a price on those emissions, creating an incentive to develop and adopt more carbon-efficient technologies — much like the recent run-up in gasoline prices shifted consumer purchases in favor of fuel-efficient vehicles. As the economy rebounds, the expectation that an already enacted carbon-pricing scheme will soon kick in will trigger green investments. Early action could be further encouraged by distributing allowances — bankable for future use in a carbon-pricing program — to firms that reduce emissions prior to program implementation.

The way I see it is that one consumer’s gasoline bill is another automaker’s return on his green investment.  Detroit isn’t going to “transform” just because the government goes “poof”–and isn’t likely to reform efficiently just because the government says “jump.”