A few weeks ago, writing about the latest death spasms in the European banking system, I said: "The overnight market can dry up — well, overnight if a bank's solvency comes into question.... It might not happen in a week, but it's sure starting to look like it might happen in a month or two."

Well, we're now halfway through "a month or two." So how are things going? Paul Krugman surveys recent events and asks:

Did the euro just enter its death throes? OK, I know that sounds over the top, and I hope it is. But recent developments are really, really bad.

Yes indeed. Greece looks increasingly hopeless, and the rest of Europe appears increasingly in little mood to help. Just the opposite, maybe. So what to do? Barry Eichengreen says eurobonds and fiscal union are a great idea, but they'll take months or years to put in place. And Europe doesn't have months or years: "The most recent Greek rescue, put in place barely six weeks ago, is on the brink of collapse. The crisis of confidence has infected the eurozone’s big countries. The euro’s survival and, indeed, that of the European Union hang in the balance." Three things need to happen right away:

The first urgent task is for Europe to bulletproof its banks. Doubts about their stability are at the center of the storm. It is no coincidence that bank stocks were hit hardest in the recent financial crash.

....The second urgent task is to create breathing space for Greece. The Greek people are making an almost superhuman effort to stabilize their finances and restructure their economy. But the government continues to miss its fiscal targets, more because of the global slowdown than through any fault of its own.

....The third urgent task is to restart economic growth. Financial stability, throughout Europe, depends on it. Without growth, tax revenues will remain stagnant, and the capacity to service debts will continue to erode. Social stability, similarly, depends on it. Without growth, austerity will become intolerable.

I keep thinking that, when Greek default, cascading bank failures, or dissolution of the eurozone — or all three — appear truly imminent, European leaders will finally buckle down and do what needs to be done. But the last couple of weeks haven't done much for my confidence on this score. If anything, Europe seems to be drifting ever further toward lifeboat ethics. The bad kind, that is. The every-man-for-himself kind. And we finally seem to be genuinely close to a point of no return. Once the financial markets decide to attack — either a country or a banking system — they can't be bought off with half measures. It's either a full-scale, damn-the-torpedoes rescue or else it's catastrophe. And right now a full-scale rescue isn't looking very likely. Instead, "austerity" is the order of the day, which is sort of like thinking that maybe the steerage decks are really the best place to ride out the sinking of the Titanic.

But hey, that's just Europe, right? It's not going to affect us, is it? Why, just a few days ago, Ben Bernanke said that our financial exposure to European problems was "manageable." So there's nothing to worry about. But then again, this is the same guy who said in 2007 that "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained." So maybe it's time to stock up on canned goods after all.

Is there a silver lining? No, there isn't. But if you insist on one, here it is: since this time the epicenter of the problems is Europe, it's possible that President Obama can convince the troglodytes in the Republican Party that any contagion that hits Wall Street is sort of like a foreign invasion. That seems like the only thing likely to get their blood flowing, so maybe we'll actually be able to respond. You never know.

The Great Southern California blackout was apparently caused by an electrical grid that collapsed after a single series capacitor was taken offline in Yuma, Arizona, causing a cascading series of failures:

The failure of a single piece of equipment in Yuma, Ariz., ignited a massive blackout that left more than 4 million people without power, baffling utility officials and highlighting the vulnerability of the U.S. electrical grid.

Authorities in Arizona said Friday that safeguards built into the system should have prevented the breakdown at a Yuma substation from cascading across southern Arizona and into California and northern Mexico. They didn't, and the resulting instability led to the sudden shutdown of the San Onofre nuclear power plant, cutting off power to a large swath of Southern California.

...."We're struggling," said Daniel Froetscher, vice president of energy delivery for APS, the largest electricity provider in Arizona. "We have to take a hard look at the system design and figure out exactly what happened....We don't know the underlying causes."

The proximate cause remains unknown, but I'm going to take a guess and say that the ultimate cause is an aging electrical grid that's increasingly unable to handle big loads and small failures. This problem is hardly unique to the United States (Europe has suffered half a dozen blackouts as big as Thursday's in the past decade), but that's no reason to be complacent about it. If only we could pony up lots of cheap money to do something about this. But from where? It would have to be, oh, I don't know, some kind of nationwide infrastructure bank or something, sponsored by some entity that can issue long-term bonds practically for free.

Just a pipe dream, I guess. Nothing like that exists. Luckily I have plenty of spare battery-operated lanterns around.

Gas-fired power plants produce about half as much CO2 as coal-fired plants. So that makes natural gas good for the environment. Shutting down coal-fired generators and replacing them with gas-fired plants would cut down on CO2 emissions and reduce global warming.

But wait. Precision matters here. When natural gas is burned, it produces half as much CO2 as coal. But what if some of the raw natural gas leaks into the atmosphere when it's extracted from the ground? Natural gas is methane — which is a much more potent greenhouse gas than CO2 — so in addition to the CO2 that gas creates when it's burned, we need to add in the effect of leakage. Depending on how much leaks out, the net contribution of gas to global warming could actually be higher than coal.

So how much does leak out? Joe Romm rounds up the estimates here, which range from about 2% to upwards of 7%. (See updates below.) That's a pretty wide range, and it turns out, a pretty important one. A new study from the National Center for Atmospheric Research (NCAR), which accounts for both leakage of raw methane as well as the CO2 it generates when it's burned, concludes that replacing coal plants with gas-fired plants probably won't have much effect on climate change. The chart on the right displays the grim news. In the best case, if leakage is 2.5%, global warming would be reduced 0.08°C by the end of the century. That's less then a tenth of a degree. If leakage is 5%, warming is reduced by only 0.03°C. Anything above that and the net effect is actually negative. But even the best case is barely even noticeable compared to current estimates of warming by 2100, which range from 3°C to 6°C.  

Bottom line: natural gas is certainly cleaner than coal when it comes to particulates, mercury, and other sources of air pollution. But on the global warming front, its impact is slight at best. Until and unless carbon capture technology becomes genuinely feasible, the reality is that if we want to get serious about climate change, we need to eventually wean ourselves off fossil fuels almost completely.

UPDATE: An atmospheric chemist at an environmental NGO emails to make a couple of opposing points. First, methane leakage is most likely at the low end of the range I quoted. The high-end 7% estimate is based on a paper so bad he calls it "deceitful." What's more, methane leakage is something that can be addressed pretty effectively if the EPA gets its act together.

Second, one of the reasons that the NCAR study shows a small effect of switching away from coal is because the benefit of the reduced CO2 is offset by reduced emissions of SO2, which currently slows global warming because it acts as a coolant. However, sulfate particulate matter is deadly to breathe, and it's going away regardless of whether or not we switch away from coal. It's already on its way out in the U.S. and Europe, and starting to go away in China too. So SO2 reductions shouldn't be counted as a cost of switching from coal to gas. If you do the modeling without that, the switch from coal to gas has a bigger effect.

His conclusion: "It's a complicated story. The gas industry has made a total mess of Pennsylvania (behaving like a marauding horde) and clean-burning gas won't save our backsides. But gas might be an important part of the way forward, and more to the point, bad science is bad science."

I can't referee this immediately, but it seemed important to at least make a note of this dissenting opinion. If I learn more, I'll let you know.

UPDATE 2: CFR's Michael Levi agrees that the NCAR study is "badly flawed." I think I accept that at this point. The benefits of converting from coal to gas may be lower than industry cheerleaders would have us believe, but it's probably more worthwhile than the NCAR study suggests.

Catblogging was a close call this week. But last night my sister told me that not only had I better get on the ball and take some pictures, but it had been a tough week and they'd better be good pictures. Well, I don't know about that. But for better or worse, this morning we have cats exercising their brain muscles. On the left, Inkblot is finishing up today's Sudoku and Kenken puzzles in the LA Times. He seems to have made pretty good progress. On the right, Domino is working on the crossword puzzle, but she doesn't seem to be doing as well. I guess she got distracted by the cartoons.

Hey, whatever happened to Glenn Beck? Didn't he hold a rally in Israel recently? How come I didn't hear anything about that? The answer comes from Glenn Beck himself: "I don't believe Fox was there," he said on his radio show.

Imagine that! No Fox, no coverage. Paul Waldman draws a broader conclusion:

What this illustrates is the continuing power of TV, not so much as a medium of persuasion but as a medium of status conferral....That's because even if they aren't actually watching it, being on television signals to those people that you're a member of the most elite club, and you can't be ignored. That's true despite the fact that cable audiences are tiny — Beck himself always reached many more people on the radio than he did on television, even when his TV show was at its apex. But now, no matter how many fans he retains, he isn't on TV so he might as well not exist.

If a tree falls in the forest and no one hears it, does it make a sound? Good question. Now try this one: If a ranting lunatic doesn't have a show on Fox, does anyone know he exists? Apparently not. For some reason, we have bestowed this power to define who matters and who doesn't on Roger Ailes and Fox News. Why?

The Fed has been pumping billions of dollars of reserves into the banking system over the past few years. This hasn't created any inflationary pressure yet, but monetary hawks worry that it will if the Fed waits too long to unwind its balance sheet. "You cannot afford to get behind the curve on reining in this extraordinary amount of liquidity because that will create an enormous inflation down the road," said Alan Greenspan a couple of years ago.

Karl Smith agrees that this is an issue that needs to be taken seriously. At the same time, it's also an issue that Ben Bernanke has the tools to address. "The Fed has complete power to slow the expansion of lending and hence the emergence of hyper-inflation," says Karl, "and it doesn’t have to remove its reserve injections to make it happen."

Click the link for the full explanation. It's a little long, but very friendly. Basically, the Fed's authority to pay interest on reserves is the hero of the story. But the bottom line is simple: hyperinflation just isn't something to worry about, no matter how many gold bugs tell you otherwise.

Derek Thompson has an interesting piece in the Atlantic about our "productivity crisis." At the end of the piece, he highlights charts showing four areas where costs have risen much faster than inflation over the past few decades, which suggests that productivity growth has been low in these areas. I don't really disagree, but I feel like all of them deserve a little bit of pushback. Here they are:

  • Housing. True, the average house price has gone up. But so has the average house size. On that basis, the cost of a new house has gone down from $90 per square foot to $73 per square foot since 1970. That's not so bad.
  • Energy. Yes, it's up, but look at Thompson's chart for home energy costs. It doubles between 1973 and 1981, during the era of the OPEC oil embargoes. But since then it's been flat despite the fact that oil prices have continued to go up. This is largely due to more efficient use of energy in response to the energy crisis of the 70s: we get more GDP per BTU of energy today than we did 30 years ago, and household appliances are far more energy efficient. Again, not bad.
  • Education. The price of higher education has doubled over the past three decades. But that's driven not so much by higher actual costs, as by the fact that universities have simply learned that they can charge more. Obviously higher education is no productivity nirvana, but I think looking at raw costs is misleading.
  • Healthcare. Healthcare costs are skyrocketing, but this isn't so much because, say, a chest X-ray costs more in real terms today than it did in 1960. It's because a chest X-ray isn't good enough anymore. We want MRIs. We want PET scans. We want tiny cameras sent into our blood vessels. Sure, healthcare costs a lot more than it used to, but it's mainly because we demand a lot more treatments than we used to.

I don't want to protest too much here. Higher education is no more productive now than it was in the Middle Ages, probably, and a huge number of all those extra medical treatments we demand are useless or even counterproductive. At the same time, I'm not sure it's helpful to describe education and healthcare as industries that have low productivity growth. This suggests that they're laggards who simply refuse to respond to consumer demand for more efficiency. But the truth, I think, is that we as consumers have demanded that universities retain much the same teaching model as they've always had, and we've been willing to back up that demand with ever more dollars. We don't want our kids going to electronic classes and, apparently, we don't want our state governments to subsidize public universities the way they used to either. On the healthcare front, there's been tons of new technology, but we, as consumers, don't want that technology used to provide the same old service at a lower price. We want it used to provide additional services. We've spoken loud and clear on that score.

Anyway, read the whole thing. It's a worthwhile take on some of the problems we face, even if I think there are some caveats to keep in mind. After all, sluggish productivity is sluggish productivity no matter what the ultimate cause. Maybe it's our own fault, but it's still something to face up to.

So what about the nitty gritty of Obama's American Jobs Act? Is it any good? At a policy level, it rings in at about $450 billion, much bigger than most people were expecting. Here's how it breaks down:

  • $250 billion in tax breaks. Most of this is a payroll tax cut, but the plan also includes 100% expensing of business investment, tax credits for hiring unemployed workers, and a few other things.
  • $100 billion in infrastructure spending. About half of this is for new projects, and the other half goes to an infrastructure bank, a program to fix up vacant and foreclosed homes and businesses, and a program to fix schools.
  • $100 billion in other stuff, including extension of unemployment benefits, direct state assistance to hire cops and firefighters, a mortgage refinancing program, and a few other smaller items.

The White House fact sheet is here. So would it work? Macroeconomic Advisors, a private forecasting firm, estimates that it would boost GDP by 1.3% in 2012 and raise employment by 1.3 million. This is roughly equivalent to the CBO's low-end estimates of the original stimulus package in 2010, and the CBO has estimated that 1.3 million new workers translates to a decrease in unemployment of 0.7%.

Moody's is a little more optimistic: "The plan would add 2 percentage points to GDP growth next year, add 1.9 million jobs, and cut the unemployment rate by a percentage point.”

So that's probably the rough consensus. The plan is bigger than expected, the president's appeal was stronger than expected, the details of the plan have been generally well received, and if passed, it will raise GDP by 1-2 points and reduce unemployment by about one point or so.

So why did it take me so long to write a post about the actual policy impact of the AJA? Partly because I was waiting for the private forecasters to weigh in on its effect. But to put my cards fully on the table, there's also this: much more than usual — which is already a high bar — chattering about the policy impact of Obama's plan simply feels like a charade. I can't remember the last time that the actual merits of a policy proposal mattered so little. The details of Obama's plan will simply have no impact at all on whether it's passed. Among Republicans, reaction to Obama's proposal will be 100% guided by political considerations.

I don't think anyone really disputes this. And maybe I'll buck up and get all wonkish about this stuff after I recover this weekend. I usually do. But the truth remains that the policy impact of Obama's plan is purely a sideshow. Arguments on that level are all sound and fury, signifying nothing. Republicans just flatly don't care.

For what it's worth, here's an email I got last night from a friend who watches a lot of Fox News:

Don't know whether it means anything at all, but I was pretty shocked by the relatively mild reaction on my ferociously anti-Obama Fox Business shows and Greta Van Susteren's show on FNC. Aside from Greta, all the rest of them, Fox hosts, GOP pols, business owners and financial types were quite lacking in their usual shrieking hostility.

Since they usually screen these people's opinions really precisely before booking them, I have to conclude that some sort of word has gone out through Fox channels to go easy for some reason. Fox Business host David Asman tried to rile up the business and financial types, and failed, but it was pretty half-hearted and he didn't pursue it.

I'm not saying these people raved about the speech, but there was a marked lack of the routinely super-hostile reaction to anything Obama says or does. Even Michele Bachmann was not her normal fire-breathing self on Greta.

As I say, I don't know if it means anything, but it was quite striking to me. Something's afoot here that's a little different than what we've become so used to, it does seem.

I don't know if it means anything either. But the GOP leadership also reacted mildly, and I do think that this is basically the smart play for Republicans. Obama's goal is to persuade voters that he's the last reasonable man in Washington and that Republicans are a bunch of slavering ideologues. How do you defang that? Easy as 1-2-3. First, make sure your reaction to his plan is muted and sober. Second, agree to consider his entire plan and give it a fair hearing. Third, pass one or two pieces of it. This wouldn't have enough impact on the economy to really affect the election, but it would simultaneously make Republicans look sober and judicious (we passed a couple of items!) and also fiscally responsible (we tossed out all the goodies for special interest groups!).

We'll see. Keeping everyone reined in won't be easy. But this would unquestionably be the smartest possible way for Republicans to handle Obama's proposal.

Fortress America

Sunday is the 10th anniversary of 9/11. But while the attack on the World Trade Center is probably what provokes the sharpest memories in most people, that's not what stayed with me after the initial shock wore off. In the years since, my strongest reaction has always been less to the event itself than to how we decided to respond to it. I'm unnerved by the way we've become so security obsessed, so suspicious, so wary. Ordinary office buildings require IDs before they'll let you in. Taking pictures is a suspicious activity. Airplanes return to the gate because someone in seat 34A got scared of a guy in a turban a couple of rows in front of them. Small children are swabbed down for bomb residue.

There's a passage in Bob Schieffer's memoir of his reporting career, This Just In, that's stayed with me for a long time. Here it is:

These days, friends are never really sure I'm serious when I tell them that the Pentagon, like most of official Washington, was still open to the public in the 1970s.…No one was required to show identification to enter the building, nor were security passes required.…During the time that Jim Schlesinger was secretary of defense, I would sometimes drop by on a Saturday morning, and if his door was open, I would stick my head in and ask if anything was going on.

When I first read that, I remember being astonished. I'm enough younger than Schieffer that the idea of simply strolling into the Pentagon struck me as unthinkable. And yet, that was only a few decades ago. Shortly after the era Schieffer describes, by the time I was old enough to notice these things, I simply accepted the tighter security of the '80s and beyond without question. Now compare Schieffer's recollection with this passage from Wednesday's New York Times feature, "Fortress D.C.":

Some things are obvious: the Capitol Hill police armed with assault rifles, standing on the Capitol steps; concrete barricades blocking the once-grand entrances to other federal buildings; the surface-to-air missile battery protecting the White House; the National Archives security guards, almost as old as the Declaration of Independence enshrined inside, slowly waving a magnetic wand over all who enter. But most of the post-9/11 security measures have simply been embedded in the landscape and culture of the nation's capital.

From the reflecting pool at the foot of the Capitol to the reflecting pool in front of the Lincoln Memorial, government cameras take pictures of citizens, who smile for Big Brother and snap their own pictures of the government cameras. In the $561 million underground Capitol visitors center, completed in 2008, people clutching gallery passes from a senator's or representative's office are funneled through magnetometers, to witness a secure Congress in its sealed chambers.

These things, of course, I don't accept naturally because they've changed in my lifetime. But how about someone 30 years younger than me? To them, the assault rifles, the cameras, the magnetometers, the ban on bringing water bottles onto airplanes—all of the post-9/11 security paraphernalia—probably strike them as entirely natural. Not having this stuff around would seem as weird to them as not asking for ID at the Pentagon struck me.

This is, for me, the most enduring legacy of 9/11. I imagine the wars will all be over eventually, Al Qaeda will be conclusively dismembered, and even the drones might be put back in their hangars. But the protective apparatus we've put in place, both the less visible surveillance state and the highly visible security state, will be with us forever. And they'll get worse and worse: If the past decade is any judge, Americans seem willing to put up with an almost unlimited amount of this stuff as long as it's done in the name of protecting us from terrorism. The only thing that's provoked any serious reaction at all has been backscatter scanners in airports—and not because they represent any kind of real government overreach, but because people have a knee-jerk revulsion to the idea of having "nude" pictures of themselves taken.

That gets us upset. But hundreds of billions of dollars spent to relentlessly harden the routines of our daily lives? Our apparent attitude toward that, to paraphrase our former president, is "bring it on."