In “American Power Act” Bobo says the road to energy innovation is sure to be messy, but the U.S. is going to have to develop energy sources that are plentiful and clean. Mr. Cohen, writing from Ramallah, West Bank, sends us “Fayyad’s Road to Palestine,” in which he says Salam Fayyad, the Palestinian prime minister, is the best hope for Palestine in a very long time. Prof. Krugman, in “The Euro Trap,” says when Greece, Portugal and Spain joined the euro zone, they put themselves in a policy straitjacket. Now they face a debt crisis. There is a lesson here. Here’s Bobo:
In 1860, Samuel Curtis, a Republican congressman of Iowa, sponsored a bill to create a transcontinental railroad. The debate over that public-private partnership was long and messy. Democrats said the proposal was unconstitutional. Others rightly argued that it meant huge giveaways to the rich.
But the railroad effort, backed by Abraham Lincoln, swept forward. “Nations are never stationary,” Representative James Campbell told the House. “They advance or recede. We cannot remain inactive … without the loss of trade, of commerce, and power.”
After the legislation was approved in 1862, there were continual setbacks. The Union Pacific Railroad languished. Scandals mounted. Yet despite it all, the final spike was hammered into place at Promontory Point, Utah, in 1869, linking the nation and heralding a new burst of prosperity.
When you read that history, you’re reminded that large efforts are generally plagued by stupidity, error and corruption. But by the sheer act of stumbling forward, it’s possible, sometimes, to achieve important things.
Energy innovation is the railroad legislation of today. This country is studded with venture capitalists, scientists, corporate executives and environmental activists atremble over the great opportunities they see ahead. The energy revolution is a material project that arouses moral fervor — exactly the sort of enterprise at which Americans excel.
As with all causes of this sort, the righteousness sometimes runs ahead of the reality. When you actually look at the details of global warming legislation, you run into myriad questions. Is cap-and-trade really the most appropriate policy tool to reduce carbon emissions? Do the benefits of the most ambitious global warming bills really outweigh the costs? I strongly recommend two essays by Jim Manzi — “Conservatives, Climate Change, and the Carbon Tax” from The New Atlantis and “Dunce Cap-and-Trade” from National Review — in which he presents data suggesting they do not.
Nonetheless, the vision is certainly right. To remain the world’s pre-eminent nation, the U.S. is going to have to develop energy sources that are plentiful, clean and don’t enrich the worst people on earth. That means in the short term, the U.S. has to unleash the tens of billions of dollars of potential energy investments now being pent up by uncertainty and regulatory hurdles. To make a difference in the long term, the U.S. is going to have to invest more and differently in energy research and development.
Technology companies spend 5 percent to 15 percent of revenue on research and development. Energy companies, on the other hand, spend only one-quarter of 1 percent. The federal government spends $30 billion on health research, but only $3 billion on clean energy research.
It’s clearly going to take legislative action to catalyze private investment and to increase federal research to where it should be — about $25 billion a year, according to Mark Muro of the Brookings Institution. It’s going to take some equivalent of the Pacific Railroad Acts to kick this into gear.
The best vehicle now is the American Power Act, drawn up by John Kerry, Joe Lieberman and Lindsey Graham. The bill, like all politically plausible bills these days, is larded with special-interest provisions and public giveaways to defuse opposition and win votes. But it does perform a few essential tasks. To boost innovation, it raises the price on carbon and devotes some of that money (though not nearly enough) to research and development.
In addition, it establishes a predictable price for carbon. Lew Hay, the chief executive of the power provider FPL Group, e-mailed me on Thursday to say that if he can get that certainty on the carbon price and if there can be a renewable energy standard to create a market for carbon-free energy, his company could boost investments right away:
“Regarding wind energy investment at our NextEra Energy Resources subsidiary, we think we might invest about $1.5 billion to $2 billion more per year. Regarding solar, we think NextEra Energy Resources might invest $500 million or more per year outside of Florida and that our Florida Power & Light subsidiary might invest about $1 billion a year inside Florida.” Last but not least, he wrote, a new law would be a “huge factor” in deciding whether to move forward with new nuclear units.
Similarly, David Crane, the C.E.O. of NRG Energy, wrote that with a new law, his company could double the number of clean energy projects, from 17 to 36; it could triple the megawatts of clean generating capacity it is planning to add; it could produce three times as much nuclear power and 40 times as much coal with carbon capture and sequestration.
You get the sense that this country is straining against the leash, eager for a new wave of energy development. There will be excess, stupidity and greed along the way. But it would be simply amazing if, through some set of narrow political gamesmanship, Washington continued to stand in the way of all this.
Here’s Mr. Cohen:
I spoke to the Palestinian prime minister, Salam Fayyad, for 90 minutes, and the word he uttered most often, by far, was “security.” As in, “The absence of security has been our undoing.”
When Palestinian leaders are talking about their self-inflicted undoing, as well as the undoing inflicted on them by Israel, things may be starting to move.
His aim, Fayyad told me, was an end to the “security pluralism” that produced a “state of chaos and militias.” It was this chaos, he said, that fueled the violent schism between Fatah in the West Bank and Hamas in Gaza, undermining past Palestinian attempts to build the rudiments of statehood.
Fayyad, 58, is a small, precise, U.S.-educated man with a very ordered mind. He builds long, intricate sentences with an academic bent and is given to words like “axiomatic” or “purview.” For almost a decade his home was the World Bank; he’s hardly a political firebrand. Armed struggle has never been his thing. But right now he is a man with a mission.
That mission is a two-year program, begun last August, to ready Palestine for statehood by the second half of 2011. It represents a break with past Palestinian failure in that it espouses nonviolence — “an ironclad commitment, not a seasonal thing,” he said — and is focused on prosaic stuff like building institutions (police, schools, a justice system, roads and an economy) rather than exalted proclamations.
The program has secured explicit backing from the “Quartet” of the United States, Russia, the European Union and the United Nations, the group that last month called for “a settlement, negotiated between the parties within 24 months, that ends the occupation which began in 1967 and results in the emergence of an independent, democratic and viable Palestinian state living side by side in peace and security with Israel.”
The world’s 24 months and Fayyad’s timetable do no exactly overlap, but they are close enough for the intent to be clear. Fayyad has strong backing from President Barack Obama.
Next year, before the U.S. presidential campaign kicks in, will be crunch time. Can Fayyad’s program, which is advancing, and political negotiations, which are not, be made to coincide?
I don’t know, but I’m sure Fayyad is the best hope for Palestine in a very long time. He’s building it rather than ballyhooing it.
The easy argument against him is that he’s isolated politically — opposed by Hamas in Gaza and regarded with suspicion by the Fatah old guard in the West Bank. The argument for him is that he’s getting things done, improving people’s lives, and Palestinians are tired of going nowhere.
“This is about our right to life as a free people with dignity on this land — meaning, so that I’m not misunderstood, the land occupied by Israel in 1967,” Fayyad told me. “Every day we do work consistent with that to create the sense of a state growing. Bad things happen every day but you’re bound to have a lucky bounce and we have to be ready for it.”
Outside his office in Ramallah, and elsewhere in the West Bank, the fruits of that work are apparent. Stores and restaurants are full, Palestinian Authority police are everywhere in their crisp uniforms, tension is low and the economy, fueled by massive injections of aid, grew 7 percent last year. Israel’s presence remains overwhelming — the checkpoints, the snaking wall-fence, the settler-only highways — but Fayyad’s state-building is pushing into whatever space is available.
Would Palestinians, if talks fail, unilaterally declare independence in 2011 — an idea Fayyad has on occasion seemed to intimate?
“This is not about declarations of statehood,” he said. “This is not about proclamations of a state. It is about getting ready for one. Ours is a healthy unilateralism. Contrast that, if you will, with Israeli settlement activity.”
He continued: “This is not about going it alone; this is about going together holding hands with everybody, including Israelis.”
Fayyad is tired of the paralyzing claims of the past. “Let us not allow ourselves the luxury of acting as victims forever,” he said. “This is a case of two opposed historical narratives. And if this is going to direct traffic in the future, we are not going too far. It’s time to get on with it and end this conflict. Let’s move on. Let’s really look forward.”
But what about Hamas, representing some 40 percent of Palestinians, those in Gaza, whose charter calls for Israel’s destruction and whose opposition to Fayyad is fierce? A “major problem,” an “Achilles’ heel,” the prime minister conceded, but insisted that statehood, as it took form, could prove a unifying theme.
“Is it possible,” he told me, “given past experience, that we may find ourselves in spring of next year without progress being made?
“It is possible. But I believe, instead of sitting on our hands and waiting to get a perfect alignment of the stars, if we get busy helping ourselves, in realizing our dream of having strong and effective institutions of state, we make this outcome less likely. That’s a good enough bet for me.”
Now here’s Prof. Krugman:
Not that long ago, European economists used to mock their American counterparts for having questioned the wisdom of Europe’s march to monetary union. “On the whole,” declared an article published just this past January, “the euro has, thus far, gone much better than many U.S. economists had predicted.”
Oops. The article summarized the euro-skeptics’ views as having been: “It can’t happen, it’s a bad idea, it won’t last.” Well, it did happen, but right now it does seem to have been a bad idea for exactly the reasons the skeptics cited. And as for whether it will last — suddenly, that’s looking like an open question.
To understand the euro-mess — and its lessons for the rest of us — you need to see past the headlines. Right now everyone is focused on public debt, which can make it seem as if this is a simple story of governments that couldn’t control their spending. But that’s only part of the story for Greece, much less for Portugal, and not at all the story for Spain.
The fact is that three years ago none of the countries now in or near crisis seemed to be in deep fiscal trouble. Even Greece’s 2007 budget deficit was no higher, as a share of G.D.P., than the deficits the United States ran in the mid-1980s (morning in America!), while Spain actually ran a surplus. And all of the countries were attracting large inflows of foreign capital, largely because markets believed that membership in the euro zone made Greek, Portuguese and Spanish bonds safe investments.
Then came the global financial crisis. Those inflows of capital dried up; revenues plunged and deficits soared; and membership in the euro, which had encouraged markets to love the crisis countries not wisely but too well, turned into a trap.
What’s the nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line.
But that’s a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates — e.g., Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won’t accept inflation, deflation it is.
The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall while the debt burden doesn’t.
Hence the crisis. Greece’s fiscal woes would be serious but probably manageable if the Greek economy’s prospects for the next few years looked even moderately favorable. But they don’t. Earlier this week, when it downgraded Greek debt, Standard & Poor’s suggested that the euro value of Greek G.D.P. may not return to its 2008 level until 2017, meaning that Greece has no hope of growing out of its troubles.
All this is exactly what the euro-skeptics feared. Giving up the ability to adjust exchange rates, they warned, would invite future crises. And it has.
So what will happen to the euro? Until recently, most analysts, myself included, considered a euro breakup basically impossible, since any government that even hinted that it was considering leaving the euro would be inviting a catastrophic run on its banks. But if the crisis countries are forced into default, they’ll probably face severe bank runs anyway, forcing them into emergency measures like temporary restrictions on bank withdrawals. This would open the door to euro exit.
So is the euro itself in danger? In a word, yes. If European leaders don’t start acting much more forcefully, providing Greece with enough help to avoid the worst, a chain reaction that starts with a Greek default and ends up wreaking much wider havoc looks all too possible.
Meanwhile, what are the lessons for the rest of us?
The deficit hawks are already trying to appropriate the European crisis, presenting it as an object lesson in the evils of government red ink. What the crisis really demonstrates, however, is the dangers of putting yourself in a policy straitjacket. When they joined the euro, the governments of Greece, Portugal and Spain denied themselves the ability to do some bad things, like printing too much money; but they also denied themselves the ability to respond flexibly to events.
And when crisis strikes, governments need to be able to act. That’s what the architects of the euro forgot — and the rest of us need to remember.
