In time of war, there is a tendency for both political parties to rally around the president, as we saw (all too well) in Iraq after September 11. In time of financial panic, there is often a similar inclination. The two presidential candidates, for example, are being careful in their statements. I don’t blame them. The issues are too complex to be taken on inside the context of a political campaign. Both candidates realize that the danger of a verbal misstep that the other side can try to blame for worsening the crisis is far greater than the likelihood that either one will come up with a brilliant solution that will gain widespread support or will solve the problem, let alone both.

 These matters are not solely of interest to historians or economists.   The presidential campaign of Senator John McCain appears set to drive its wagon down the same road in which Reagan and Bush have already worn deep ruts.   The candidate is apparently selling the same snake oil:  he says he believes that tax cuts increase revenues.   His principle policy director disavows the Laffer Principle, just as the economists who advised Presidents Reagan and Bush did.   But the views of the economic advisers are not what determines what these presidents do. 

“The Queen in Alice in Wonderland  said that, with practice, she was able to believe as many as six impossible things before breakfast.   Most of us are more limited in our capacity for credulity.  If John McCain believes both the Laffer Proposition (tax cuts raise revenues) and Starve the Beast (higher revenues lead to higher spending, anathema to conservatives), then as a good conservative, his duty is clear.  He ought to run on a truly novel platform of higher tax rates!   Why?   Higher tax rates would reduce revenues (this is what Laffer says would happen) and thereby reduce spending (this is what Starve the Beast says would happen).   
    

Seriously folks.   If McCain continues to propose extending the Bush tax cuts, he should at least be forced to choose between the Lafferite defense and the “Starve the Beast” defense. Only then can the rest of us know which of the two mutually inconsistent propositions to refute. 

I discussed my paper September 12, in a panel where Larry Summers and Gene Sperling also gave their thoughts on Supply Side Economics, at a joint meeting of the Center for American Progress  and the Economic Policy Institute.     

[Any readers wishing to comment on this blog post: I suggest you go to the RGE version.] 

(Incidentally, the July Snowmass presentations regarding Integrated Assessment models of the effects of such emission-reduction policy plans, which I plugged in my preceding blog post, are now accessible to the public.)

But issues of competitiveness and how to address it have risen to the top in the climate change policy debate among politicians.      The Lieberman-Warner bill - would have required the president to determine what countries have taken comparable action to limit GHG emissions;  for imports of covered goods from covered countries, the importer would then have had to buy international reserve allowances – equivalent to a tariff.  (The same with some of the bill’s competitors such as the Bingaman-Specter “Low Carbon Economy Act” of 2007.) 

In theory, there is a possible legitimate role for border adjustments in facilitating a multilateral regime such as the Kyoto Protocol.  One might think of penalties on carbon-intensive imports:

1.      as sanctions to apply pressure on non-participants,

2.      as a calibrated “countervailing duty” to equalize a distortion that will otherwise see carbon-intensive activities migrate to less-regulated countries (a phenomenon known as leakage)   or

3.      as political reassurance to domestic firms worried about their international competitiveness.

If designed properly, they need not necessarily be inconsistent with the WTO (World Trade Organization).    There are precedents, most importantly (and most ironically) the famous/infamous shrimp/turtle case.

But U.S. politicians are unlikely to do it properly.   They may be unaware that the US is more likely to end up as the target of such tariffs than as the enactor – to end up as the defendant, rather than as the prosecutor.   The European Union is way ahead of us in cutting back GHG emissions under the Kyoto protocol, and its EC Directive earlier this year had similar language calling for penalties aimed at shirking competitors.   That’s us.  The difference between their provisions for dealing with shirkers and ours is that their system is already in operation, while for the time being, we are the shirkers.  So US politicians had better look before they leap on this one.

The Brookings Institution had a conference in June that was well-focused on this set of policy issues, organized by Lael Brainard.  Interested readers can link to the papers at Climate Change, Trade and Competitiveness: Is a Collision Inevitable ?    Mine was titled  “Addressing the Leakage/Competitiveness Issue In Climate Change Policy Proposals,” in the panel on Proposals to Deal with Leakages.   

 The issues are reminiscent of larger fears on the part of anti-globalizers — that the WTO and free trade are obstacles to environmental regulation more generally — fears that I think are largely misplaced.   With well-designed multilateral policies, we can work to protect the global environment while simultaneously preserving the economic advantages of free trade.

I am also working on a broader project to address the design of climate change policy architecture as part of the HPICA initiative at Harvard directed by Joe Aldy and Rob Stavins.

[Any readers wishing to comment on this blog post: I suggest you go to the RGE version.] 

Ten years ago this summer, President Clinton’s Council of Economic Advisers, of which I was a Member, responded to requests from the Congress, which was then under Republican control, to explain in analytical terms what would be the economic effects of the Kyoto Protocol on climate change that had just been negotiated among the members of the UN Framework Convention on Climate Change.  Our response was a document called the Administration Economic Analysis.   It relied on some of the leading Integrated Assessment Models, and showed that the costs of Kyoto could be relatively low provided international trading of emission permits were freely allowed, and provided developing countries participated in the system.    Not zero costs, as wishful thinking by some techno-optimists would have it.  Not prohibitive costs, as some skeptics would have it.   But moderate costs — relatively low if measures could be implemented sensibly.

Integrated Assessment Models are designed to assess both the economic costs and the environmental benefits of action to reduce emissions of greenhouse gases.   For 15 years, the Energy Modeling Forum (EMF), under the leadership of John Weyant at Stanford University, has periodically brought together the modelers to compare results and exchange ideas.   It was gratifying when we discovered that the economic model we had used to estimate costs was near the middle of the pack of ten leading academic models according to the EMF, in terms of the estimated impact on energy costs  for example, contrary to suspicions that we must have low-balled the estimates.

Exactly ten years ago, in August 1998, I attended the Energy Modeling Forum’s annual workshop in Snowmass, Colorado, Climate Change Impacts and Integrated Assessment.   My assignment then was to explain the Administration Economic Analysis to this group.  Unlike most American economists, I believe that something along the lines of the Clinton-Gore version of Kyoto offers the most promising path to address the problem of Global Climate Change.

Senator Obama is on a vist to the Middle East and Europe.   Senator McCain went to visit Colombia earlier in July.   These trips suggest a seriousness of purpose that American presidential candidates often lack.    They offer us hope that the candidates want to learn how to do the job well.   Furthermore, they offer a hyper-attentive world grounds for hope that the next president will have a higher level of interest in other countries than did his predecessor.

So far as I know, it is unprecedented for the two party candidates to do foreign policy trips before the election.    I can think of three reasons why we are seeing this now.    First, because the primary elections started early this year, there is a hiatus between the end of the primaries and the party conventions.   Thus the candidates can spare the time to go abroad.   Second, foreign policy has risen much higher on the agenda of concerns of typical American voters, since September 11, 2001, and since the invasion of Iraq.   (And of course Obama wants to put to rest McCain’s past jibes about not having visited Afghanistan and Iraq.)   Third, Barack Obama and John McCain are not the usual inward-looking, domestically-oriented parochial governors that we all too often get as presidential candidates.    Both are US Senators, and both in their youths had very formative adventures in foreign countries (both in Southeast Asia, as it happens).    Thus both, if nothing else, have the cosmopolitan outlook that a world leader needs.

Traditionally new presidential candidates do not think much about foreign policy during their campaigns.  This is especially true of governors who have only domestic experience.   But, regardless of the candidates, in most election years the American public cares little for international affairs, and is far more concerned about domestic issues.

Once new presidents take office they ften have to go through a period of “breaking in” in the area of foreign policy.   International events often take them by surprise and disrupt all their fine platforms and plans.  This period can be very costly to the country.   Think of John Kennedy’s first-year failures in his initial summit meeting with Premier Khrushchev and in the Bay of Pigs invasion.   Think of George W. Bush’s first-year failures in ignoring warnings that Al Qaeda would strike in the US or that an invasion of Iraq would be fraught with danger.    A little international exposure before they took office would have served them well.  So perhaps the excessive length of this election cycle has a silver lining after all !

[Any readers who may wish to post comments: Please go to RGE website, if you have access.]