Too many things wrong (Sargent and Field edition)



And not enough time to blog about all of them. Two that seem to be really important and worth noticing in recent debates around the blogosphere among the chattering classes are the idea  (subscription required) that State Defaults after the Jacksonian economic crisis were good to establish US credibility, and the notion that Total Factor Productivity (TFP) was essential for the US recovering from the Great Depression.

Very briefly I’ll discuss why these two propositions are just wrong. Sargent argues that by guaranteeing State debts the Hamiltonian system created moral hazard, and that the States defaults of the 1840s, which resulted from this arrangement, were instrumental in creating a credible fiscal commitment to sound finance. In his words: “in refusing to bail out the states in the early 1840s … the federal government reset its reputation vis-à-vis the states, telling them in effect not to expect it to underwrite their profligacy.” The lesson for Europe is let the periphery default, and, by the way, that would lead them to fiscal consolidation by even more austerity (yep he never heard of multipliers). At any rate, this account of the United States experience is pure fiction.

First of all the collapse had nothing to do with profligacy, and all to do with prices of cotton falling, and States defaulting on foreign debt, not domestic debt. In Europe the countries do print the money in which their debt is denominated, the problem is that the ECB is not willing to do it. The crisis is self-made, and if the ECB monetized a bit of debt there would be no danger of inflation, since the economies are really (really) far from full employment.

Further, the US national government at that point had no public debt (Jackson paid it down and caused a financial crash; he also required payments of public lands in specie, that is the crisis was worsened by austerity and sound money), and no national bank or monetary authority. Hence, it could not bail the States out. Only after the Civil War, with greenbacks, a more centralized management of debt and money were created in the US. So there is no possibility that the reputation of something that did not exist until the 1860s was built in the 1840s.

Sargent's anal fixation with austerity in order to pay debts, even those in domestic currency, and his lack of understanding of basic events in the history of the United States are appalling. And this guy got a Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (yep, it’s not a real Nobel!).

Field is an interesting case. The mistake in his book is not of his making, in all fairness, but the result of the profession's lack of understanding of basic economic principles. His point, well explained by Mark Thoma, is that part of the recovery in the 1930s was caused by rapid growth in productivity (TFP). Nothing against the argument, which might be (and probably is) true, to some extent. Note also that productivity is not only pro-cyclical but also structural and demand-led, which means that some of the increase in productivity was actually caused by the recovery. But the problem is that TFP is not a measure of productivity.

Note that TFP is based on the notion that there is a production function in which output (Y) is a function of labor (N) and capital (K), and forget for a second the problems of using the notion of a quantity of capital. In addition, we know that income (Y) is equal to the payments to labor (N) and capital (K). So we have a theoretical construct and an identity:

Y=f(N, K) and Y=wN+rK

Obviously if you derive Y with respect to time, you must obtain from either equation that the growth of Y over time is a function of growth in labor and capital, and either some additional part, which depends on the technology f(…) in the theoretical construct, and the weighted average of the growth of wages (w) and profits (r) in the identity. And yes the second is an identity and by definition (constructed in the national accounts) true. So TFP is a residual that says something about income distribution. Let’s please use labor productivity, when discussing productivity. For more on that see, for example, Felipe and McCombie (2001; subscription required).

The role of the State in US Development

As part of Peter Ho's talk yesterday, two graduate students presented some of their research. One of the topics, was the role of the State, the Fiscal-Military State in particular, in the early process of industrialization and development in the US, which was, as noted by Peter, very much in line with his arguments for managed trade. Here is a link to a paper I wrote on the rise of what Schumpeter termed the Tax State. On the Fiscal-Military State read this. The classic book by John Brewer, The Sinews of Power, was essential in the development of some of these ideas, in the sense that it shows the fundamental role of the State for industrialization and the creation of a global empire. The argument put forward, in the talk yesterday, was that the US development can only be understood from a Fiscal-Military Developmental State perspective.

Devastating Labor Market Backslide

According to Heidi Shierholz, from the Economic Policy Institute (EPI) regarding the last Employment Situation report by the Bureau of Labor Statistics:

"Virtually every single measure was devastatingly weak: only 18,000 payroll jobs were added, average hours declined, nominal wages fell, unemployment was up in almost all age groups, more than 250,000 workers dropped out of the labor force altogether, and the public sector continued to bleed jobs. Furthermore, a downward revision to last month’s data means that this is the second month in a row with job growth at 25,000 or less. This is a remarkable, across-the-board backslide. The President and Congressional leaders need to stop talking about deficit reduction and start talking about job creation."

Meaning, they need to talk about more fiscal stimulus. The whole thing here.

The end of the New Deal as we know it?

So it seems that Obama is willing to play ball with Republicans on the debt-ceiling issue.  Meaning cut Medicare and Social Security in exchange of an increase in the debt limit, increasing planned cuts for the next ten years from somewhere around two to closer to four trillion dollars.  This was reported by the Washington Post, and seems to be in accordance with, not just Obama’s politics, but of the mainstream democrats since Carter and including Clinton, who notoriously ended welfare as we knew it.

It’s incredible that Obama would cave without putting a fight (he says that the WaPo story is overhyped apparently, but suggests that Social Security should be a means tested program!).  This basically implies that the long fight that started with Reagan’s presidency to dismantle the basic achievements of the New Deal will finally succeed under a democratic presidency.  But, on the other hand, it is part of the democratic move to the right, at least on economic issues, since Carter.

The graph shows the rate of growth of median income since 1948.  The average rate of growth until 1979, before the Volcker shock, was 2.4 per cent.  Since the Reagan administration it has been 0.5 per cent.  That is the miracle of trickle down economics.  And it is because the economic performance is so poor that fiscal problems have taken place.  It is ironic that conservatives managed to sell the failure of their policies as the reason why those very same policies should be pursued.

Western Response to Japan

The Real Crime Against Humanity 

Final-Four picks in the midst of the greatest disaster 
in human history. Nero fiddled as Rome burned, Obama
picks NCAA teams as the Pacific and his own West Coast 
faces decades of coming unprecedented catastrophe. 
(Wiki Commons)

Tony Cartalucci, Contributing Writer
Activist Post

The Anglo-American multi-trillion dollar global military machine has been defended ad nauseum as essential to protecting free humanity and its progress into a promising future. In reality, it is a criminal facilitator obsessed with pilfering the world's resources, consolidating power in the hands of feckless feeble minded, short-sighted degenerate financiers, and fostering an unprecedented level of interdependence and vulnerability in every nation brought within their sphere of influence.

One must wonder what sort of world we might be living in today if the trillions of dollars and hundreds of thousands of lives squandered in the last 10 years of war profiteering in the Middle East, were instead used to push real education, technological research and development, and real tangible technological progress. Not only would we have sources of power that could replace dangerous and antiquated power plants like the 40 year old Fukushima reactors, but we as Americans might have a naval fleet actually capable of protecting the "free world" from real threats like the one unfolding off the east coast of Japan's Fukushima prefecture.

Instead, the US fleet is stretched globally involved in a myriad of meddling geopolitical gambits, many of which were intentionally engineered and initiated by corporate-serving policy wonks in Washington and London. Even as Japan drowns, burns, melts-down, evacuates, and workers engage in suicide missions to mitigate the unprecedented disaster unfolding, Washington and London leadership obsessively pursue their pet projects worldwide.


The globalist International Institute for Strategic Studies (IISS) has been obsessing over Libya, and how to allocate military and civilian resources to aid the perpetuation of the US-backed Middle East conflagration, wringing their hands over the fact that their assets are already so thinly stretched between Iraq, Afghanistan, Iran, and Pakistan. Considering the US State Department's global network of recruiting, training, funding, equipping, and supporting contrived revolutions worldwide on behalf of globalist corporate interests, it shouldn't surprise us how incompetent and ill-prepared it is to deal with its real duties - maintaining formal relations with foreign nations.

IISS policy wonks exhibit the entirety of their feckless unwarranted 
authority and gives a glimpse into an unprecedented misappropriation of
the "international system's" priorities. If you have resources, influence, and
authority, and aren't using them to solve real problems, you belong behind
bars for criminal negligence.

In this case, Japan, mired in a catastrophe that very well endangers the US itself is in dire need of any and all assistance, an effort the Secretary of State Hillary Clinton should direct her entire, undivided attention to. Instead, Secretary Hillary Clinton is wasting time in Paris consorting with foreign backed Libyan rebels trying to overthrow the government of a sovereign nation.

The amount of extra-legal, unwarranted, un-Constitutional aid the US is rendering to pro-globalist projects around the world is almost as astronomical as America's debt incurred through the criminal activity of the Federal Reserves' economic-alchemists. A nation with the potential, population, and resources of America, led by what amounts to murderous-bullies, degenerate gamblers, and myopically obsessed megalomaniacs is a crime in and of itself.

 

The globocrats' negligence over the decades, the squandering of the American people's resources, human and otherwise, and the incessant meddling geopolitical social engineering has intentionally produced a world dependent on their "international system" and has doomed us to needlessly suffer disasters like the one in Japan. These are disasters that responsible, honorable men and women leading our nations could have prevented and most certainly could have ensured entire navies and armies would be on hand to deal with if all else failed.

The "international system" is a cancer of incompetence, self-destructive greed, that is leaving all of humanity naked and vulnerable to the real challenges of the future. It is a cancer that desperately needs to be excised with the utmost expediency. The twisting feeling we have in our guts when we wake up each morning, realizing the horrors unfolding in Japan and spreading in the winds off their coast is what a real humanitarian disaster looks and feels like, these are the challenges we as humanity face - not contrived rebellions in Libya, not climatology statistics cooked up by Belfer Center's corporate sponsored shaman, and not fake wars funding 10 years of war profiteering.

These are real challenges that require real leadership, leadership we do not have, but desperately need. Each day these impostors remain in power the effects of their crimes become irreparably more profound. These are men that invent crimes and the criminals allegedly carrying them out to detract from the reality that they are the biggest criminals on earth - their crimes the most grievous against humanity. Their fumbling over Japan, while prioritizing their murderous pilfering and meddling across the Middle East, Central Asia and Northern Africa are unforgivable affirmations we must take to heart and act on now, today. The winds of change are literally coming and we are all about to pay the price for the globalists' "misleadership."

The answer is simple. Boycott and replace these corporations with local solutions, stop listening to their lies, stop voting for them entirely in their contrived version of "democracy" and write in names of men and women who truly deserve to be behind the levers of power no matter how unlikely their chance is to win. Become self-sufficient in food, water, power, security, media, and entertainment - pursue the education you were denied within the globalists' sabotaged school systems. Our lives literally depend on moving on, and doing so without these parasites feeding off of us, posing as the source of civilization when all they do is feed off of civilization.

For more information on alternative economics, getting self-sufficient and moving on without the parasitic, incompetent, globalist oligarchs:

The Lost Key to Real Revolution
Boycott the Globalists
Alternative Economics
Self-Sufficiency 

Tony Cartalucci's articles have appeared on many alternative media websites, including his own at Land Destroyer.    

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The Hypocrisy Clause

Guest post by Timothy A. Wise of TripleCrisis

Trade officials in the Obama Administration have made it abundantly clear that they will move forward in the WTO's Doha Round of negotiations only if the larger developing countries agree to open their economies more to U.S. exports. As Kevin Gallagher pointed out on the Triple Crisis Blog ("Obama's New Trade Agenda"), the administration's trade policies, and its announced goal of doubling U.S. exports, backtrack from those of the Bush Administration, renege on the basic principles of the Doha Development Round, and undermine precisely the kind of multilateralism President Obama claims to stand for.

Such intransigence does not bode well for the WTO, nor does it give much hope that the Obama Administration will use the current TransPacific Partnership negotiations to forge what it promises will be a "21st century trade agreement."

Clearly, a creative new approach is needed to break the trade deadlocks. I offer a modest proposal here: Instead of negotiating reductions in tariffs and farm subsidies, it's time to negotiate reductions in hypocrisy. I call it the Hypocrisy Clause, which mandates phased reductions in "trade-distorting hypocrisy," with the greatest reductions coming from the most developed hypocrites.

Why focus on hypocrisy? Ask the unemployed workers who voted for Obama based on his campaign commitment to reform NAFTA and future trade agreements.

Ask any developing country negotiator. Ask the Brazilians, who have been waiting six years for the U.S. government to respect the WTO ruling that U.S. cotton subsidies violate WTO rules. The U.S. has flaunted the WTO finding, appealing twice (and losing), and now Obama's trade officials have the gall say they'll step up enforcement of existing trade rules. They even cut a side deal with Brazil to stave off Brazil's approved retaliatory trade measures, further delaying compliance with WTO rules. Meanwhile, Mexico waits for its NAFTA partner to comply with the NAFTA ruling on Mexican trucks entering the U.S.

But if you want to know why we should negotiate hypocrisy reductions, ask the so-called "Cotton 4" countries in Africa. Their cotton farmers have suffered more than Brazil's from the U.S failure to respect the WTO ruling. Now they listen as U.S. negotiators insist that no movement on cotton can occur until the larger Doha agreement is signed, in direct contradiction of the 2005 Hong Kong commitments to treat cotton "ambitiously, expeditiously and specifically" ahead of the broader Doha agreement.

Who cares what the rules are or what the negotiators agree to if the rich countries then just do what they want?

Under my Hypocrisy Clause, that stops. The United States, as a developed country that has benefited greatly over many years from its past hypocrisy, would have to eliminate such actions immediately. So would the European Union, whose own hypocrisy may not compare with current U.S. levels (much to the EU's delight) but still offers large trade-distorting benefits. The EU could start by scaling back its export subsidies for dairy products, which it raised last year to dump surplus milk despite its loudly proclaimed commitment to end all export subsidies under Doha.

Under the proposed Hypocrisy Clause, rich countries will have to reduce or eliminate "trade-distorting hypocrisy." Hypocritical acts and negotiating positions deemed non-trade-distorting will still be permitted. (Otherwise there would be no politicians to negotiate.)

But what about middle-income hypocrisy? Isn't Brazil one of the world's largest agro-export powers with a well-cultivated reputation for defending the interests of other countries' small-scale farmers? Isn't Brazil also guilty of hypocrisy? Absolutely. In fact, as part of its side agreement on cotton with the United States, Brazil got a multi-million dollar fund for investment in its cotton sector. Talk about hypocrisy: Africa's Cotton 4 will now have to compete in global markets not only with subsidized U.S. cotton but with Brazilian cotton subsidized by the United States!

Middle-income countries such as Brazil, which have only recently begun to benefit economically from their hypocrisy in international negotiations, will have to reduce such trade-distorting actions, but they will be given more time. This reflects the Doha principle of "special and differentiated treatment" for developing countries, with reduction schedules that demand "less than full reciprocity" from developing country hypocrites.

And the Least Developed Countries? Their governments will be allowed to be as hypocritical as they want, since their countries have yet to benefit economically from such positions.

Does my Hypocrisy Clause proposal stand any chance of success, given the rampant hypocrisy in global trade negotiations? It has at least as good a chance as the current efforts to negotiate fair tariff and subsidy reductions when the world's largest trading partner won't respect the Doha mandate, doesn't comply with existing WTO rulings, and demands further liberalization in developing countries' financial sectors after its own deregulated financial sector nearly provoked a global depression.

If rich countries are going to keep using trade negotiations to "kick away the ladder" of development, outlawing the very trade measures they themselves relied on to grow, then we're better off abandoning the pretense of negotiating about industrial tariffs, agricultural subsidies, and service-sector liberalization.

Instead, let's cut the hypocrisy.

[PHOTO CREDIT: Harvesting cotton in Brazil, by Farming Matters (CC).]

The End of the Free Market or The End of State Capitalism?

Ian Bremmer will be on The Daily Show with Jon Stewart tomorrow. Below is my review of his new book:

Political risk guru Ian Bremmer examines the growing momentum of "state capitalism" in his new book The End of the Free Market: Who Wins the War between States and Corporations? Bremmer argues that state capitalism differs from free-market capitalism in that politics rather than profit is the main driver of decision-making. For this reason, it threatens to curtail free markets and the global economy. It is the latest chapter in the "rise of the rest," or the expansion of non-Western states in the international system.

Capitalism takes many forms but all of them can be distinguished by their "use of wealth to create more wealth, a broad enough definition to capture both free-market and state capitalism," Bremmer notes. In the free-market form of capitalism, the job of the state is to "enable" wealth generation by enforcing contracts and limiting the influence of moral bads such as greed—the latter can lead to market failures, which have occurred periodically since the Dutch tulip craze of 1637. Free-market governments attempt to ensure that the economic game is played fairly.

In contrast to free-market capitalism, the economy in state-capitalist regimes is dominated by the state agenda. "Forced to choose between the protection of the rights of the individual, economic productivity, and the principle of consumer choice, on the one hand, and the achievement of political goals, on the other, state capitalists will choose the latter every time," Bremmer explains. Continuing the sports game analogy, state capitalists control the referees as well as the main players.

Bremmer admits that state capitalism isn't new. He traces the first reference to an 1896 speech by Wilhelm Liebknecht, a founder of the Social Democratic Party of Germany. But due to recent questions regarding the merits of free markets after the 2008–2009 financial crisis, the need for job growth and economic stability in less-than-democratic regimes, and the growth of the economies and influence of state-capitalist countries, this form of capitalism is catching on worldwide.

While there is "no single model of state capitalism," its leading practitioners, China and Russia, "share a well-developed sense of risk aversion," having recently abandoned communism as their guiding philosophies. Other notable users of this model include energy-rich states, such as Angola, Iran, Kuwait, Malaysia, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela. Another cluster of countries in this group, some of which have benefited from rising commodity prices, include emerging markets that have only tentatively committed to free-market principles, such as Brazil, Egypt, India, Indonesia, Mexico, South Africa, and Turkey.

Another way to identify a state-capitalist country is by looking at the use of four specific policy tools. One policy tool favored by state capitalists is the national oil (and gas) corporation (NOC), such as Gazprom of Russia, China National Petroleum Corporation, and the National Iranian Oil Company. NOCs like these own 75 percent of the world's crude-oil reserves. A second tool is the state-owned enterprise, such as China's First Automobile Works.

A third tool is privately-owned companies—so-called national champions—that are supported by the state to develop a "commanding position" in an economy. The Brazilian mining concern Vale, according to Bremmer, is a prominent example of a company that was coerced by its government to advance the state objective of stimulating the economy.

A final tool is the sovereign wealth fund (SWF), the largest of which includes the UAE's Abu Dhabi Investment Authority valued at $300–650 billion and Saudi Arabia's Monetary Agency valued at $430–500 billion. Many types of governments have SWFs but they "tend to be as transparent—or as secretive—as their governments," Bremmer writes, noting that Norway's Government Pension Fund is exceedingly open and accountable. Norway is an example of a country that has some state-capitalist trappings but is not in the state-capitalist camp. Similarly, the U.S. bailout of financial institutions was designed to "save the free market, not bury it," Bremmer notes. "It's not the tools that count; it's how they're used. But countries that have all four of these institutions tend to be state capitalist," he writes.

How do these tools threaten the free market? While Bremmer is careful not to predict a new Cold War, he does worry about fissures in the international system and state-capitalist support for undemocratic regimes such as Guinea. As the head of Eurasia Group, a political risk company, it is Bremmer's job to ask what if. He poses at least ten hypothetical scenarios in the book, including given the mutually assured economic destruction (or interdependence) between the United States and China, what happens if China closes the door?

While the phrase "The End of the Free Market" may capture public anxiety in America today, Bremmer should have called his book "The End of State Capitalism"—he bets that free markets will win the "war" with statists. First, state capitalism just doesn't have the same appeal as an ideology that communism had, it is "more a set of governing principles than a coherent political ideology." Second, state capitalism is actually a sign of domestic political vulnerability. It is a response to the risks countries face as they open up, which Bremmer detailed in his earlier book The J Curve. Meanwhile, free markets hold several advantages over their statist cousins: Most importantly, these systems better facilitate innovation and long-term growth.

Bremmer lays out several recommendations to ensure that free markets do indeed prevail. Most of these recommendations are just good common sense for America: keep markets open, invest in hard power, pick the right fights, and welcome world-class foreign workers. Bremmer is saying subtly that for America to continue to lead it should be strong, smart, and principled. In other words, it should stay true to its values.

"Rise of the Rest III" (2010)

Earlier this month, we held at the Carnegie Council the third iteration of our ongoing series on the "rise of the rest" or the emergence of non-Western powers in international affairs. Our March 9, 2010 panel titled "Rise of the Rest III" was a follow up to a similarly themed event we held at Carnegie Council in 2008 and one that I participated in at the Nixon Center in Washington DC in 2007. Here is a summary from the original 2007 panel called "The World Without the West." Here is my summary and my speech from 2007.

Nicholas Gvosdev kicked off the panel this month by reviewing some of the points made at the last two panels.



A point I made in 2007 was that the BRICs (Brazil, Russia, India, and China) countries are not similar, nor are they a coherent alliance. But why the BRICs has been working as a group is that these countries are coordinating their actions and using theirs relationships as force multipliers, Gvosdev said. It allows the members to credibly speak for half the planet. Gvosdev pointed to embryonic groupings that can go around the United States if U.S. leadership is unsatisfactory.



The southern democracies, like Brazil and India, act as "independents" in international affairs. They will work with the United States when they see it in their interest and will work with other southern democracies, for example through the IBSA (India, Brazil, South Africa) Dialogue Forum when they don't. IBSA is coordinating on trade issues but is also making forays into military joint activities as well, Gvosdev said.



Craig Charney started by making the point that there is an international consensus among peoples that they want some sort of elected and accountable political leadership. "Democracy" broadly means "free expression" worldwide, and people want to choose their own leaders, according to Charney's extensive polling. It is "minimalist" support for democracy and not very deep. It is not a demand for "free and fair elections," but the desire to choose own's leader is a "very powerful trend at present," Charney said.



Charney also identified "connectedness," along with collective responsibility and national power, as another powerful trend and reality in international affairs today. "We are seeing the emergence of imagined communities," which is reinforcing national sentiment through electronic media, Charney said. He noted that 70 percent of humanity now lives in a family with a telephone, creating billions of communications possibilities and accelerating collective consciousness, collective action, and social movements.

As for China, Charney made a fascinating point that seems to resonate with my own research in Asia: Worldwide people admire China for its economic growth, but the admiration for the United States goes much deeper to include America's legal system, its movies, its popular culture, its educational system, its openness, etc. Recently, I have tried to make a somewhat playful point to some of my friends that until China creates modern equivalents to rock 'n' roll and Hollywood, I will be unconcerned about Chinese influence. Give me a Chinese Michael Jackson and "Avatar," I will be worried about a decline in U.S. influence.



Parag Khanna identified a widespread crisis of global governance--in power, norms, and institutions. The emerging powers or "the rest" do not yet have the appropriate voice in global goverance commensurate with their political and economic weight. In power relations, for example, there is no credible proposal on the table to expand the UN Security Council or reform the board of the IMF. For norms, the rules, for example over democracy or intellectual property or humanitarian intervention, are in question. As for institutions, the proposals have been unimaginative. "Meta global governance" has been uninspired, Khanna said.



"What is global governance?" Khanna asked. It is the sum of: multilateral bodies (like the UN), regional mechanisms (like the African Union), inter-regional functional activities (like bilateral climate change cooperation), and the huge array of public-private partnerships (like the activities of the Gates Foundation), Khanna answered. Global governance therefore has no center, Khanna said. So to capture the totality of globalization, "you have to think of global governance as radically decentralized," he said.



Stephen Young asserted that the epistemology of modern civilization is fundamentally nihilistic, and therefore there are no norms or values, only power. But power fragments unless you have a dominant power. So the world is guided by Hobbesian dynamics--"kill or be killed, eat or be eaten," Young said. You therefore need to find norms and values common to many traditions. He rejected the idea that America actually ever had hegemony in the international system but underscored the importance of the "rise of the rest" in a world that is fundamentally about power.

Nevertheless, the central and continuing importance of "the West" in international affairs actually makes "the rise of the rest" the "second rise of the West," Young said. He also asked whether what we might see if a "convergence of societies," as I have argued elsewhere, for example in relation to Google's exit from China. Young concluded that greed has been a perennial problem in the global economy and we have not much evolved since the Dutch tulip bubble of the 1600s. Young's group, the Caux Round Table, sees the need to promote corporate responsibility, use core (universal) values in corporate governance, and to find the right pricing in the economy even if it takes state intervention.



I asked the panel what I asked Harry Harding in 2008: In this new world of emerging powers is cooperation possible? (Harding's response is above.) This time, each panelist had slightly differing views. Young said cooperation is possible but it will be case specific and we therefore need to engage by acknowledging the identities of potential partners. Gvosdev said cooperation will require a real give-and-take, especially between the United States and China. We have to honestly ask ourselves, what kind of world do we want, said Gvosdev. The United States asks for more burden sharing from China but when China becomes more assertive Americans get suspicious. Like Young and many in the Obama administration, Charney said cooperation will depend on establishing a dialogue on shared interests. Khanna finished by saying we will see a world that is "to each his own. You will see more and more of what Charles Kupchan of Georgetown calls the autonomy rule—engaging with other countries in such a way that one can't push too far beyond the extent to which one is really respecting their own autonomy and self-directed evolution. I think we'll see more of that."

To view the transcript and the video in its entirety of the event, click here. A special thanks to our corporate sponsors Booz, HP, and Merck for making this event possible. We look forward to the next iteration of this ongoing series. Like any successful Hollywood movie, another sequel is expected--"Rise of the Rest IV," perhaps next time in 3D.

U.S.-China Clean Energy Announcements

Today the U.S. Department of Energy released the following announcement, which details several U.S.-China energy initiatives very much consistent with the recommendations of our recent Carnegie Council working group. The announcement is below.

Beijing, China - Today, President Barack Obama and President Hu Jintao announced a far-reaching package of measures to strengthen cooperation between the United States and China on clean energy.

1. U.S.-China Clean Energy Research Center. The two Presidents announced the establishment of the U.S.-China Clean Energy Research Center. The Center will facilitate joint research and development of clean energy technologies by teams of scientists and engineers from the United States and China, as well as serve as a clearinghouse to help researchers in each country. The Center will be supported by public and private funding of at least $150 million over five years, split evenly between the two countries. Initial research priorities will be building energy efficiency, clean coal including carbon capture and storage, and clean vehicles. The Protocol formally establishing the Center was signed in Beijing by U.S. Energy Secretary Steven Chu, Chinese Minister of Science and Technology Wan Gang, and Chinese National Energy Agency Acting Administrator Zhang Guobao.

2. U.S.-China Electric Vehicles Initiative. The two Presidents announced the launch of the U.S.-China Electric Vehicles Initiative. Building on the first-ever US-China Electric Vehicle Forum in September 2009, the initiative will include joint standards development, demonstration projects in more than a dozen cities, technical roadmapping and public education projects. The two leaders emphasized their countries’ strong shared interest in accelerating the deployment of electric vehicles in order to reduce oil dependence, cut greenhouse gas emissions and promote economic growth.

3. U.S.-China Energy Efficiency Action Plan. The two Presidents announced the launch of a new U.S.-China Energy Efficiency Action Plan. Under the new plan, the two countries will work together to improve the energy efficiency of buildings, industrial facilities, and consumer appliances. U.S. and Chinese officials will work together and with the private sector to develop energy efficient building codes and rating systems, benchmark industrial energy efficiency, train building inspectors and energy efficiency auditors for industrial facilities, harmonize test procedures and performance metrics for energy efficient consumer products, exchange best practices in energy efficient labeling systems, and convene a new U.S.-China Energy Efficiency Forum to be held annually, rotating between the two countries.

4. U.S.-China Renewable Energy Partnership. The two Presidents announced the launch of a new U.S.-China Renewable Energy Partnership. Under the Partnership, the two countries will develop roadmaps for wide-spread renewable energy deployment in both countries. The Partnership will also provide technical and analytical resources to states and regions in both countries to support renewable energy deployment and will facilitate state-to-state and region-to-region partnerships to share experience and best practices. A new Advanced Grid Working Group will bring together U.S. and Chinese policymakers, regulators, industry leaders, and civil society to develop strategies for grid modernization in both countries. A new U.S.-China Renewable Energy Forum will be held annually, rotating between the two countries.

5. 21st Century Coal. The two Presidents pledged to promote cooperation on cleaner uses of coal, including large-scale carbon capture and storage (CCS) demonstration projects. Through the new U.S.-China Clean Energy Research Center, the two countries are launching a program of technical cooperation to bring teams of U.S. and Chinese scientists and engineers together in developing clean coal and CCS technologies. The two governments are also actively engaging industry, academia, and civil society in advancing clean coal and CCS solutions. The Presidents welcomed: (i) a grant from the U.S. Trade and Development Agency to the China Power Engineering and Consulting Group Corporation to support a feasibility study for an integrated gasification combined cycle (IGCC) power plant in China using American technology, (ii) an agreement by Missouri-based Peabody Energy to participate in GreenGen, a project of several major Chinese energy companies to develop a near-zero emissions coal-fired power plant, (iii) an agreement between GE and Shenhua Corporation to collaborate on the development and deployment of IGCC and other clean coal technologies; and (iv) an agreement between AES and Songzao Coal and Electric Company to use methane captured from a coal mine in Chongqing, China, to generate electricity and reduce greenhouse gas emissions.

6. Shale Gas Initiative. The two Presidents announced the launch of a new U.S.-China Shale Gas Resource Initiative. Under the Initiative, the U.S. and China will use experience gained in the United States to assess China’s shale gas potential, promote environmentally-sustainable development of shale gas resources, conduct joint technical studies to accelerate development of shale gas resources in China, and promote shale gas investment in China through the U.S.-China Oil and Gas Industry Forum, study tours, and workshops.
U.S.-China Fact Sheet on Shale Gas Initiative

7. U.S.-China Energy Cooperation Program. The two Presidents announced the establishment of the U.S.-China Energy Cooperation Program. The program will leverage private sector resources for project development work in China across a broad array of clean energy projects, to the benefit of both nations. More than 22 companies are founding members of the program. The ECP will include collaborative projects on renewable energy, smart grid, clean transportation, green building, clean coal, combined heat and power, and energy efficiency.

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U.S.-China Climate Change Leadership: Five Ideas for a Common Agenda

NEW YORK, Sept. 29 /PRNewswire-USNewswire/ -- As the United States and China prepare for a bilateral summit on climate change in November, a pair of think tanks--one from each country--said today they have identified five concrete, business-oriented steps their nations could take together to combat climate change while meeting energy needs.

China and the United States--the world's two largest carbon emitters--should identify a handful of "world critical" technologies that address energy production and climate change, according to the China Reform Forum, the Chinese think tank, and the Carnegie Council, a New York-based institution. The two countries should then jointly develop the technologies under a bilateral regime that promotes private investment, project development, and shared intellectual property rights.

Carnegie Council and China Reform Forum said they had developed the proposed measures by convening an expert working group in New York on August 28.

The group identified specific areas in which the two countries could cooperate. Participants at the meeting noted such cooperation will require developing deeper trust. They said, however, finding ways to cooperate will help to build that trust--a reinforcing process. The deeper the level of trust, the more ambitious and successful joint projects will be. Successful cooperation can depoliticize the issue of climate change, allowing U.S. politicians to sell the issue to their constituents and expand the prospects for future bilateral cooperation, participants said.

The two think tanks urged the United States and China to:

- Identify five to ten top "critical" technologies that would abate climate change while increasing needed energy supplies in the near to medium term;

- Establish a bilateral protocol to spur joint development of these technologies by encouraging investment, development, and protection of intellectual property rights;

- Embark on joint research, perhaps creating laboratories, to develop "leapfrog technologies" beyond the carbon footprint--such as hydrogen fuel-cell vehicles or green buildings--with an eye toward harnessing entirely new infrastructures.

- Implement a joint pilot project in each country--such as carbon capture at a coal-fired electricity plant or smart electrical grid--at the local, state, or regional level.

- Support one another in creating and launching public education campaigns aimed at changing public opinion on climate change, strengthening the sense of individual responsibility, moving beyond a zero-sum notion of climate change obligations, and issuing a set of best practices.

The New York meeting, hosted by Booz & Company, a global management consulting firm, took place shortly after it was announced that President Barack Obama and President Hu Jintao of China would hold a summit meeting in Beijing in November ahead of the multilateral climate change talks in Copenhagen this December.

The China Reform Forum sent the delegation to New York City and included a People's Liberation Army major general and leading climate change and economics researchers. Conference participants hailed from two United Nations agencies, North American think tanks, universities, and corporations, including IBM and Booz & Company.

The Carnegie Council and the China Reform Forum said they plan to reconvene within one year in Beijing with two goals in mind: to further develop a common ethical understanding between the United States and China on climate change and other issues, and to report back on the feedback from their networks on the five suggested areas of cooperation.

The meetings are the first steps in what both sides hope will be a strong, long-term, institutional relationship dedicated to the pursuit of common ethical approaches to problem solving.

To show international leadership on climate change the United States and China must overcome domestic mindsets suspicious of real burden-sharing. It was suggested that both countries should find ways to change public attitudes by, for example, recognizing, celebrating, and incentivizing green entrepreneurs.

For an interview with Joel Rosenthal, President of Carnegie Council, or other participants, please contact Carnegie Council Communications Director Madeleine Lynn at 1-212-838-4120 ext.222.

The Carnegie Council for Ethics in International Affairs (www.cceia.org), established in 1914 by Andrew Carnegie, is an independent, nonpartisan, nonprofit organization dedicated to increasing understanding of the relationship between ethics and international affairs.

SOURCE Carnegie Council for Ethics in International Affairs

Reflections on US-China Climate Change Working Group

Last month, the Carnegie Council, Booz & Company, and China Reform Forum held a US-China working group in New York City on the ethics and innovations surrounding the global climate change debate ahead of the US-China summit in November and the Copenhagen climate change talks in December. The big success was in that the group was able to list a set of concrete research, technology, and policy objectives (forthcoming in a later publication).



As Nikhil Chandavarkar of UNDESA noted, the group was able to view the US-China relationship as a positive sum game and less binary than is sometimes portrayed in the press or in domestic constituencies. The group also noted how similar the United States and China are in their attachment to values. Nikhil recommended more US-China talks on the civil society level in order to build confidence between the countries.



Similarly China energy expert Chris Brown noted that the group was able to lay out a set of proposals for future cooperation--and in specifics (an unusual feat). Chris said it was one of the most "forward-looking, constructive" panels he has been on. As for the atmosphere for the US-China summit in November, Chris was encouraged by the agreement on both sides of the enormity of the climate change problem. The problem will be getting past domestic obstacles.



Carnegie Council Trustee Jonathan Gage (of Booz & Company) compared the working group to the delegation we led to Beijing last year. He sensed a growing level of trust and willingness to talk about future initiatives.



One of the big themes of the discussion was the moral obligation of businesses to society in the context of climate change. Jeff Hittner of IBM made the case that publics will hold companies to account for their impact. "Sustainabilty and profit... go hand in hand," he said. "Ethical consumers" are making decisions based on a broader set of factors, he continued. Because of the growing interconnectedness of technology, Jeff said, people can make better, more efficient decisions with a greater awareness of the impact of those decisions.

Stay tuned for our forthcoming conference statement.

Reverse China Hedge

For the past five years or so, the common wisdom in Washington was that the best way to deal with China's uncertain future was for U.S. policymakers to employ a "hedging strategy" toward Beijing. The logic was elegant: Warriors at the Pentagon should dissuade China from acting aggressively while diplomats in Foggy Bottom should persuade China to act responsibly and peacefully.

This hedging approach was clearly articulated in 2006 in President Bush's National Security Strategy, saying it would "encourage China to make the right strategic decisions for its people while we hedge against other possibilities." Earlier that year, the Pentagon's Quadrennial Defense Review Report similarly spelled out that while it would focus on "encouraging China to play a constructive, peaceful role in the Asia-Pacific region” it would also aim to create "prudent hedges against the possibility that cooperative approaches by themselves may fail to preclude future conflict."

While the United States has been trying to create more policy coherence and be more consultative in its posture toward the world, China has been displaying some elements of a hedging strategy against what some might see as an uncertain future for U.S. power. Several factors might explain China's more multifaceted approach toward the United States, including domestic demand for an external scapegoat for economic woes, uncertainty about how the financial crisis will play out, and an overall more intertwined relationship between China and the world.

When Chinese asked me five years ago whether China was a friend or a challenge to the United States, I would say both. I called this seemingly dissonant approach toward China the result of a complex democratic process of policy making. Similarly, as China's middle class grows and its social stability becomes more worrisome, its own posture is becoming less monolithic.

This is one of the main findings from a trip to China I took last week with China scholar Josh Eisenman. The trip, which was a follow up to a delegation we led last September to Beijing, took us to four Chinese cities (Beijing, Qingdao, Nanjing, and Shanghai) and one farming village in Shandong. In my view, our conversations revealed more ambivalence about China's approach to the United States. As some have said, China may "seize" perceived U.S. weakness to reconfigure its position in the global pecking order. There was no question that China benefited from good relations with the United States and everyone preferred a healthy U.S. economy. But the doubt over U.S. economic health relative to Chinese economic growth has opened the door to a deeper debate.

On one hand, China benefits from the U.S. security, markets, and financial arrangements. On the other, however, China is naturally, almost mechanically, reconsidering its place as it grows.

This theme emerged during a long conversation we had with a senior Chinese scholar. It went something like this:

"Does China feel that the United States is a threat?"

"No."

"So why does China feel the need to expand its power projection and build its military?"

"It is in response to U.S. military power."

In other words, China may not feel that the United States is a threat per se, but the very fact that the United States is powerful is driving China to grow its power and act more like a "great nation." It is like international relations balance of power theory is a natural law.

My message to our Chinese hosts was simple: If China would like to act more assertively in the South China Sea, for example, it needs to provide global public goods as well. As it stands, China's opaque and increasingly powerful military is starting to scare its neighbors. The international system is predicated on safe sea-lanes that are guaranteed by the U.S. navy; the safe sea-lanes facilitate open trade and foster global peace and prosperity. If China wishes to challenge this arrangement, it will have to offer something.

Another area in which this theme has turned up is in the U.S-China economic relationship. Just before we left for our trip to China, Prime Minister Wen Jiabao said he was worried about his dollar assets. "We have lent a huge amount of money to the US. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried," he said. His statement masked China's dilemma: It needs the United States to stimulate its economy with loser fiscal and monetary policies, which could drive down the value of the dollar, hurting China's dollar assets. Complicating the relationship, a weaker dollar could also lead to a lower volume of Chinese exports to the United States at least in the long run.

Fortunately, this week at the G20 meeting in London, Presidents Hu Jintao and Barack Obama found common ground on shared interests of stabilizing the global economy, cooperating in addressing climate change, and creating a high-level strategic and economic U.S.-China dialogue, which could help build trust between these two powerful nations. Out of a common sense of fairness, there seems to be agreement that the governance of the IMF must be restructured as well. The China hedge may be reversing but so far longer-term, strategic interests have prevailed.

Photo of Tiananmen Square taken by the author during the trip.

Climate Change Fairness Questions Loom

Countries that buy Chinese exports (hint, hint, America and Japan) should be held responsible for the carbon emissions it took to manufacture those goods in climate change negotiations, according to a Chinese government statement this week. And the debate over what is fair in climate change talks heats up. Shinsuke Sugiyama of Japan's Ministry of Foreign Affairs said 2009 will be a "make or break" year in achieving progress on a new global deal. Some scientists have even said we have passed that point.

Last month, when I traveled to Tokyo, I met with one of Toyota's senior executives in charge of climate change issues. He seemed comfortable speaking to the ethical concerns many in Japan have over climate change negotiations, suggesting that the very moral underpinnings of climate change negotiations are in debate.

He questioned the fairness of the Clean Development Mechanism (CDM). In the Kyoto Protocol, Japan has a target of reducing emissions by 6%, and Japan's industries have a "Voluntary Action Plan on the Environment." But Nippon Steel, a highly efficient company in steel production, still has to buy CDMs from less developed countries. Meanwhile, Mittal is the world's largest steel company but doesn't have to buy CDMs even though they bought European steel companies with weaker standards than Nippon Steel. This just goes to show that developing countries, under this scheme, can sell both steel and credits, he said.

Emission trading is a flexible mechanism to get to a target, so we can avoid free riders. In Japan, there are no free riders thanks to business association Keidanren, he said. He argued that Japan is different; it is a country that has other mechanisms to avoid free riding, using pressure through organizations, especially Keidanren. "It's more of a culture than a requirement," he said.

Japan, which sees itself as a nation of seafaring traders, generally questions the ethics of trading the right to emit CO2. This point has come up in multiple interviews, including with METI and Japan's New Energy Development Organization (NEDO). The Toyota official called CO2 a "fragile commodity. We don't like it. It's subprime. CO2 has no value, so any agreements are artificial, so we're doubtful."

A better alternative is proper regulations and harmonization of standards, he said. Toyota takes the "top runner approach" based on vehicle weight. For example, in 1998, JAMA started top runner and set a target, and top runner was the biggest program impact.

Can Japan's approach be used in China? Maybe not, the Toyota official said. The Chinese have no Keidanren and no democracy. Japan started regulations 1500 years ago, but China is always about "great men," not regulations. Also, Japan has a culture of avoiding waste (mottainai).

Many in Japan have questioned the fairness of expectations on Japan to reduce emissions when its industry has already become so efficient. It's not fair to Japan because Japan has already achieved efficiency, he said. Japan's Kyoto Protocol commitment—a 6 percent reduction in greenhouse gas emissions below the 1990 level by 2012—has been described by Japanese officials as akin to trying to wring water out of a dry towel.

The Toyota official asked: How can less developed countries be supported in conjunction with developed countries' targets? We have clean development mechanisms but some negotiators say rich countries should pay for everything, but that's not fair. Less developed countries always ask for money from developed countries, but developed countries can't afford it. We should substantially decrease emissions on our own and contribute to less developed countries. Most Japanese don't know these mechanism, so the government needs to explain it: how much of the target is their own effort or by their taxes? National costs borne by individual countries are hidden.

Finally, there is an intellectual property rights question about climate change mitigation technology. He said China may claim that these technologies are analogous to AIDS vaccines (they should be shared on behalf of the global public good) but watering down the property rights of this privately-developed technology could reduce incentives to innovate.

Photo: "stuffed japanese shop in Nagasaki chinese quarter" by colodio

U.S. Navy's Global Public Goods and "Elegant Decline"

I participated on a panel about US-China relations on Press TV in New York City last week. One of the major themes was the recent "spat" between US and Chinese ships in the South China Sea, near Hainan island where China is reportedly building its first aircraft carrier. From a very insightful Time magazine article, "But despite the soothing words of the two top diplomats, it's a safe bet that more such incidents can be expected in the future. The Pentagon was quick to note that the mariners aboard the U.S.N.S. Impeccable (pictured here from the U.S. Navy website) were civilians working for the Military Sealift Command, while the Chinese side stressed that the confrontation involved local fishing boats. The reality is that the incident occurred because both sides are preparing for war — "shaping the battlefield," in military jargon — for a conflict that both hope will never happen." Indeed more of this sort of thing will happen.

Beyond the classic international relations 101 analysis that what we are seeing is tension between an established power, the United States, and a rising power, China, there are other issues at play. One is that there is disagreement over the interpretation of the UN Convention on the Law of the Sea; but that China and the United States are arguing about the law's interpretation--rather than whether the law should exist at all--is a good sign. It is further evidence that China wants to operate within the basic parameters of the international system.

But another is that as China increasingly relies on international trade for its prosperity, it will want a greater role in protecting its merchant fleet. Which gets me to the main point I made on Press TV: China may wish to have a greater say in the management of trade routes, but that will imply that it must also be willing to provide the global public good of safe sea lanes (as Robert Kaplan calls a "global commons" that benefits all nations). Unless China can provide public goods like these, its aggressiveness will be perceived as only that: aggressive.

Kaplan has written about this issue in a variety of places, including the recent issue of Foreign Affairs in his article "Rivalry in the Indian Ocean." From a Dec. 2008, Washington Post essay titled "A Gentler Hegemony: U.S. Hegemony May Be in Decline, but Only to a Degree," Kaplan writes here is "where we are now, post-Iraq: calmer, more pragmatic and with a military -- especially a Navy -- that, while in relative decline, is still far superior to any other on Earth. Near the end of the Cold War, the U.S. Navy had almost 600 ships; it is down to 280. But in aggregate tonnage that is still more than the next 17 navies combined. Our military secures the global commons to the benefit of all nations. Without the U.S. Navy, the seas would be unsafe for merchant shipping, which, in an era of globalization, accounts for 90 percent of world trade. We may not be able to control events on land in the Middle East, but our Navy and Air Force control all entry and exit points to the region. The multinational anti-piracy patrols that have taken shape in the Strait of Malacca and the Gulf of Aden have done so under the aegis of the U.S. Navy. Sure the economic crisis will affect shipbuilding, meaning the decline in the number of our ships will continue, and there will come a point where quantity affects quality. But this will be an exceedingly gradual transition, which we will assuage by leveraging naval allies such as India and Japan"--what Kaplan calls U.S. "elegant decline" in his Foreign Affairs article.