Kevin Drum

Is Waxman-Markey Worth It?

| Wed Jul. 1, 2009 2:03 PM EDT

I've got a bit of a ramble teed up on climate change and the Waxman-Markey bill, which unfortunately means that my conclusion is going to be buried at the end of a long post.  So if that's all you want to read, feel free to skip down to the last two paragraphs.  The rest is just throat clearing.

Still here?  Then here's the ramble.  Over the past couple of weeks there's been a lot of blogospheric chatter surrounding a cost-benefit analysis of Waxman-Markey done by Jim Manzi.  I'm not going to link to the dozens of posts going back and forth about it, but suffice it to say that Manzi concludes that W-M isn't a good deal.  Over the next century, it's going to cost us more in lost economic growth than it will benefit us in reduced global warming.

I didn't get involved in this conversation for a simple reason: I've been on both the producing and receiving end of too many cost benefit analyses to trust them.  If you're being relatively honest and if you're dealing with fairly concrete, short-term issues, they're useful tools, but even then it's still the case that you can manufacture strikingly divergent conclusions by manipulating your assumptions and inputs by surprisingly small amounts.  Cost-benefits usually look like they're grounded in hardheaded thinking simply because they're numerically based, but quite often they're nothing of the kind.

And that's in the best case.  Climate change is far worse.  Not only are we decidedly not talking about concrete, short-term issues, but there's a huge asymmetry in what we can say about the cost side and the benefit side of fighting global warming.

On the one hand, you have the actual science of climate change.  And although climate models are enormously complex and subject to considerable uncertainty, they're fundamentally based on physics, chemistry, and thermodynamics.  We know how much CO2 we're pumping into the atmosphere and we can project with pretty good confidence how much that's going to increase over the next century if we do nothing to stop it.  We know how the greenhouse effect works, we have pretty good historical records of how CO2 concentration correlates with global temperatures, and we have a pretty good sense of the feedback loops involved in things like melting icecaps and saturation of the ocean sinks.  Basically, our level of uncertainty is within tolerable bounds here.  And what we know is that if we do nothing, global temps are absolutely certain to rise 2°C over the next century, fairly likely to rise by 4-5°C, and at least somewhat likely to rise by 6-7°C.  The lower number would be bad but, just possibly, manageable.  You could at least make an arguable case, as Manzi does, that the cost of preventing an additional 2°C is higher than it's worth.  The two bigger numbers, however, would be catastrophic.  Unfortunately, the science increasingly suggests that these higher numbers are considerably more likely than we thought even a few years ago, and any serious cost-benefit analysis needs to address that.  Using only the lower number avoids tackling the real problem we're up against.

So that's the climate analysis in a nutshell.  On the opposite hand you have the economic analysis.  And that's simply hopeless.  An economic analysis that goes even ten or twenty years into the future is as much guesswork as anything else.  One that goes a hundred years into the future is just voodoo.  It looks like economics, but you might as well be throwing darts.  Compounded over a century, even minuscule changes in assumptions and operating parameters produce enormous changes in your conclusions, and the result is that you end up deep in the weeds arguing over tiny differences in those assumptions instead of simply admitting that they're flatly impossible to forecast.  That's good for slowing down the debate, but not much else.

(For a couple of more detailed versions of this argument, see Dave Roberts here and Patrick Appel here.)

So where we stand is fairly simple: we have a pretty good idea of what climate change is going to do to the planet, and we have a pretty good idea that there's at least a reasonable chance that the results are going to be catastrophic (and much more catastrophic for some than for others).  However, we don't have a good idea of the economic impacts of addressing climate change, and we never will.  The problem is simply too nonlinear and too long-term to be analyzable, especially when the differences between high-end and low-end projections are on the order of two or three percent.  When it comes to climate change, cost-benefit on anything other than a very broad scale is a mug's game.

Still, let's grant several things.  First, Waxman-Markey is a kludge of a bill.  It's possible that its cost-benefit is negative, and it's almost certain that, by itself, its cost benefit is quite small even if it is positive.  Second, W-M's carbon caps by themselves will probably have only a tiny effect on rising temperatures.  Third, global warming is a hopeless problem if we don't get the rest of the world to address it too.  If China and India and the rest of the developing world don't play along, nothing the U.S. and Europe do by themselves will be enough to halt it.

That's all true.  So why support Waxman-Markey?  There are all sorts of reasons.  For one thing, it's a good start.  Also: it may be hard to persuade other countries to join us, but it will be impossible if we aren't willing to do something ourselves.  And although the cap-and-trade piece of the bill starts out weak, at least it puts in place the administrative framework we'll need down the road if and when we work up the will to address climate change more seriously.

But here's what I think is the overriding reason to support W-M despite its flaws: even if it's weak, and even if the rest of the world doesn't join in immediately, it starts to align incentives in the United States in favor of inventing and deploying green technologies.  (Ditto for the ETS cap-and-trade system in Europe.)  And that's critically important: it's in the advanced economies of the world that new green technologies will be invented.  And it's in the advanced economies of the world that existing green technologies will be proven to work on a wide scale.  Once that happens — once the technologies are proven and economies of scale start to bring down their costs — the rest of the world will start to adopt them too.  W-M, in its final form, may not be a strong bill, but by raising the price of carbon even a little bit, it makes the development and deployment of green tech far more likely in the United States, and therefore, far more likely on a global basis too.

And that's critically important.  Conservation and efficiency and cutting back are all necessary parts of addressing climate change, but human nature being what it is, that's never going to be enough.  We're going to have to invent entire new technologies as well.  W-M makes that more likely, and that's why it needs to be passed.  Warts and all.

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What's Next for South Carolina?

| Wed Jul. 1, 2009 12:19 PM EDT

As Mark Sanford's increasingly bizarre effort to turn the South Carolina governor's office into an extension of the Oprah Winfrey show barrels toward its seemingly inevitable conclusion, the Washington Post introduces us to André Bauer, the lieutenant governor who will take over if Sanford resigns:

Bauer, 40, has made a career of running against South Carolina's establishment — and winning. Elected to the state legislature at age 26, he became known as an ambitious politician, rising quickly and winning the state's No. 2 position in 2002.

Yet as lieutenant governor, he has become known as much for his personal behavior as for his political record. In 2003, he was charged with driving 60 mph and running two red lights in downtown Columbia. When pulled over, Bauer was so aggressive that a police officer pulled a gun on him.

In 2006, Bauer was stopped by a state trooper who clocked him driving 101 mph on an interstate highway. He used his state-issued radio to tell the officer he was "S.C. 2" — the code for lieutenant governor — and was not ticketed. Then, weeks later, Bauer was injured when the single-engine airplane he was piloting crashed and burned.

....Over the years, Bauer's romantic life has stirred rumors, the latest bubbling up in recent days. In an interview Monday with the State, a Columbia newspaper, Bauer voluntarily brought up the subject of his sexual orientation. "Is André Bauer gay? That is now the story," the lieutenant governor was quoted as saying, adding his answer: "One word, two letters. 'No.' Let's go ahead and dispel that now."

I live in California, so I can hardly throw stones at another state's dysfunctional politics.  But I can still throw pebbles.  The Palmetto State really knows how to pick 'em, doesn't it?

Time Zone Blues

| Wed Jul. 1, 2009 11:59 AM EDT

There are pros and cons to living in the Pacific time zone.  Today, it's all downside.  Apparently Sarah Palin's PAC put out a truly bizarre video on YouTube, but by the time I woke up and got around to watching it, it had already been taken down.  Boo! I want my Sarah!

Descriptions are here, here, and here.  If anyone knows where I can see a bootlegged copy or something, let me know.

UPDATE: Apparently it wasn't SarahPAC that created this video after all.  Just some weird Palin supporter.  More here.

The Politics of Healthcare

| Wed Jul. 1, 2009 11:44 AM EDT

Jonathan Cohn takes a look at the many compromises Barack Obama is making in order to get a healthcare reform bill passed:

Put aside, for a moment, the policy merits of these moves. The politics are lousy. Obama would be in danger of producing legislation that seems to offer little up-front benefit, particularly for the electorally vital middle class. And if some of these people end up paying even modestly higher taxes to help finance reform they're not likely to be happy about it. It's hard to imagine such legislation provoking a backlash that could produce total repeal. It's not so hard to imagine such legislation creating bad political feelings, the kind that linger around until the next Election Day and pave the way for legislative retrenchment later on.

The key to healthcare reform is that it be popular with the public.  The Medicare prescription bill, for example, was generally popular because it provided a clear and concrete benefit.  Broader healthcare reform, however, is going to have a harder time.  If there's no public option, for example, and most people simply keep the employer-based healthcare they already have, then what's the selling point?  Most people will just see higher taxes funding better coverage for the poor, and you don't have to be the world's biggest cynic to understand that this isn't going to be overwhelmingly popular.  Helping the poor is all well and good, but like it or not, most of us want to know what's in it for ourselves if our taxes are going up.  That's just life.

Right now, we're running the risk that the answer is "not much."  Healthcare reform needs a little more obvious sizzle if it's going to survive the coming tsunami of conservative agitprop, and the bills wending their way through Congress don't have much of that left.  Jon is right: it's lousy politics.

Fighting over Sarah

| Wed Jul. 1, 2009 10:58 AM EDT

Sarah Palin is the gift that keeps on giving and giving and giving.  Todd Purdum's profile in this month's Vanity Fair was a fairly ordinary takedown with only a little in the way of new revelations, but even so it's managed to spark a breathtaking amount of vitriol among Republican operatives.  Jonathan Martin reports on what happened after Bill Kristol accused McCain aide Steve Schmidt of speculating during the campaign that Palin's strange behavior was due to post-partum depression:

Asked about the accusation, Schmidt fired back in an e-mail: “I'm sure John McCain would be president today if only Bill Kristol had been in charge of the campaign.”

“After all, his management of [former Vice President] Dan Quayle’s public image as his chief of staff is still something that takes your breath away,” Schmidt continued. “His attack on me is categorically false.”

Asked directly in a telephone interview if he brought up the prospect of Palin suffering from post-partum depression, Schmidt said: “His allegation that I was defaming Palin by alleging post-partum depression at the campaign headquarters is categorically untrue. In fact, I think it rises to the level of a slander because it’s about the worst thing you can say about somebody who does what I do for a living.”

But Kristol’s charge was seconded by Randy Scheunemann, a longtime foreign policy adviser to McCain who is also close to the Standard editor and was thought to be a Palin ally within the campaign. “Steve Schmidt has a congenital aversion to the truth,” Scheunemann said.

....Responding to Schmidt’s counterattack, Kristol directly fingered Schmidt: “It’s simply a fact that when the going got tough, Steve Schmidt trashed Sarah Palin, both within the campaign and (on background) to journalists. This was after Steve took credit for the Palin pick when, at first, he thought it made him look good. John McCain deserved better.”

At this, Schmidt unloaded in a lengthy telephone interview, suggesting that Kristol was carrying out a personal vendetta based out of anger over the attempt to fire Scheunemann in the final days of the campaign.

There's only one proper response to this: Palin/Sanford 2012!  Drill baby drill!

Chart of the Day

| Tue Jun. 30, 2009 7:16 PM EDT

Today's economic green shoot is the latest Case-Shiller report, which shows that although house prices are still declining, they're declining at a slower rate than before.  Hooray!

But Henry Blodget is right about this:

We're still talking about an astonishing rate of collapse....So the folks who use this slight moderation in the rate of decline to spin tales of a "bottom" or, worse, a "recovery" are smoking something.  Prices have at least another 10%-15% to fall, and they'll likely be falling for at least another year or two.

To show this graphically, I've helpfully extended the S&P chart Blodget includes in his post.  It's this simple: as long as the line is below zero, house prices are dropping.  And if price declines slow down at about the same rate they accelerated, it means we won't get back to zero until sometime in 2011.  Put even more simply: the price decline between 2007-2009 — which started slowly and then picked up steam — will probably be mirrored by the price decline between 2009-2011 — which started with a head of steam and will end up dropping ever more slowly until it finally flattens out.  And that price drop was about 25%.

So if anything, Blodget might be too optimistic.  We might still have 25% to go.

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Leverage

| Tue Jun. 30, 2009 6:16 PM EDT

In last week's column, Martin Wolf warned that bushels of new regulations won't save us from another banking crisis.  The problem, he said, is that in a highly leveraged business it makes perfect sense for shareholders (and therefore management) to take enormous risks, and nibbling around the regulatory edges won't change that.  But what will?  He didn't really say, prompting me to comment, "Perhaps this column was a season finale cliffhanger and we have to wait until next week for the mind blowing conclusion?"

I guess it really was, after all, because this week we get Wolf's answer:

If institutions are too big and interconnected to fail, and no neat structural solution can be identified, alternatives must be found: much higher capital requirements and greater attention to liquidity are the obvious ones. At present, big financial institutions operate with next to no capital: in the US, the median leverage ratio of commercial banks was 35 to 1 in 2007; in Europe, it was 45 to 1 (see chart). As I noted last week, this makes it rational for shareholders to “go for broke”, with the results we have seen. Allowing institutions to be operated in the interests of shareholders, who supply just 3 per cent of their loanable funds, is insane. Trying to align the interests of management with those of shareholders is then even crazier. With their current capital structure, big financial institutions are a licence to gamble taxpayers’ money.

So how much capital makes sense for systemically significant institutions? “Much more than today” is the answer. Moreover, the required capital must also not be risk-weighted on the basis of banks’ models, which are not to be trusted. Shareholders’ funds should make up a minimum of 10 per cent of capital. In the US, it used to be far higher.

....Within a far better capitalised financial system, it would also be relatively easy to operate a “macroprudential” regime, with the required capital rising during booms and falling during busts. Again, the bigger the stake of shareholders, the less one would worry if the rewards of managers were aligned with them.

Well, that turned out to be distinctly non-mind blowing, didn't it?  Regulate leverage wherever, whenever, and in whatever form it appears.  But though Wolf's answer may have been a bit anticlimactic, at least it has the virtue of being right.

The big remaining question, though, is: how?  How do you mandate higher capital requirements in a way that's likely to be robust?  As Wolf says earlier in the column, "'Never again' might be too much to ask. But 'not for a generation' is essential."  So how do we build a system of stronger capital requirements likely to persist around the globe for at least a generation?  I haven't yet heard a really persuasive answer to this, and unfortunately, at this point it's not clear that anyone is even trying very hard to figure it out.  There are just too many people who want to believe that the crisis is over and we can go back to business as usual with just a bit of minor deck chair rearranging.  Ten years from now we'll pay the price for this.

Senator Al Franken (D–Minn.)

| Tue Jun. 30, 2009 5:36 PM EDT

Norm Coleman has finally conceded the 2008 Minnesota Senate race.  Al Franken will be sworn in soon (probably next week) and Democrats will finally have a majority of 60 in the Senate.

Which will, of course, make approximately no difference at all.  The corruption of the filibuster into a routine requirement for 60 votes in the Senate (an arguably unconstitutional evolution, IMHO) combined with the continuing presence of half a dozen non-liberals in the Democratic caucus combined with an almost iron self-discipline within the Republican caucus — well, all that combined means that liberals now have the illusion of control of Congress but not the reality.  In a way, it's almost the worst of all possible worlds.  Dem vs. Dem is now practically the only narrative that anyone will pay attention to, and since unanimous agreement is the only way for that narrative to play out well, this means it's almost always going to play out badly.

Still, that's a glass-half-empty point of view.  So let's be more positive: one more vote is one more vote.  And unless events are massively unfavorable, the ground still looks favorable to pick up two or three more seats in 2010.  And Franken will probably be a pretty good senator, someone who knows how to talk in plain language and get himself on the talk shows.  As long as he keeps his sense of humor and shows it to us once in a while, I'm looking forward to seeing more of him.

Quote of the Day

| Tue Jun. 30, 2009 3:14 PM EDT

From Malcolm Gladwell, responding to yet another book length treatise from one of the information-wants-to-be-free (Free, I tell you, Free!) diehards:

So how does YouTube bring in revenue? Well, it tries to sell advertisements alongside its videos. The problem is that the videos attracted by psychological Free—pirated material, cat videos, and other forms of user-generated content—are not the sort of thing that advertisers want to be associated with. In order to sell advertising, YouTube has had to buy the rights to professionally produced content, such as television shows and movies. Credit Suisse put the cost of those licenses in 2009 at roughly two hundred and sixty million dollars. For [Chris] Anderson, YouTube illustrates the principle that Free removes the necessity of aesthetic judgment. (As he puts it, YouTube proves that “crap is in the eye of the beholder.”) But, in order to make money, YouTube has been obliged to pay for programs that aren’t crap. To recap: YouTube is a great example of Free, except that Free technology ends up not being Free because of the way consumers respond to Free, fatally compromising YouTube’s ability to make money around Free, and forcing it to retreat from the “abundance thinking” that lies at the heart of Free. Credit Suisse estimates that YouTube will lose close to half a billion dollars this year. If it were a bank, it would be eligible for TARP funds.

That might not make much sense to you.  Read the whole thing and it will.

The Power of Coal

| Tue Jun. 30, 2009 1:59 PM EDT

Ezra Klein notes that coal state Democrats voted against the Waxman-Markey climate bill at a higher rate than non-coal state Dems, but not that much higher.  About one-in-four of the coal state Democrats voted no, compared to only a little over one-in-10 of everyone else:

Even so, that means only one-in-four of the coal state Democrats voted no. I'd like to see those results drilled down to coal-dependent districts, but still, that's quite a bit less parochial defection than one might imagine.

....Another way of putting this is that the evidence suggests that this vote was less about parochial interests than partisanship and ideology. Plenty of Democrats from coal states made the judgment that they could defend this legislation to their constituents.

I think I'd look at this a little differently.  Sure, partisan politics was the main divide, but that's the main divide on everything.  What's more interesting is that a quarter of the coal state Dems voted against the bill even though it had already been massively watered down to reflect coal state interests. In its current state, Waxman-Markey has very little effect on coal state interests for at least the next decade, and possibly for more like 20 years.  But even so, lots of coal state Dems voted against it despite the fact that passage is a major goal of the party leadership, it's a major goal of the president, and it's the right thing to do.  I'd call that pretty damn parochial.