Jobs, Investment and Energy:
Meeting President Obama’s Challenge
Ronald Reagan International Trade Center
Washington, DC
March 23, 2010
JG:
Our second panel will focus on the problem of how to rebuild America and how to pay for that reconstruction; and we have four speakers, two of whom are associated with the New America Foundation. They are Sherle Schwenninger, the director of the Economic Growth Program at New America, and Michael Lind, the policy director of the Growth Program. One of them is, I could almost say, a compatriot of mine from the Republic of Texas, John Robert Berman, who is on the front lines of some of the most interesting and challenging environmental and energy issues that the country faces, because he works and studies one of the most endangered and difficult regions in the country. And then we have, I’m very happy to say, added to the program relatively late an old friend of mine, a distinguished colleague from my days on Capitol Hill, John Alic, who was a senior associate for many years at the Office of Technology Assessment--an institution of great value, I must say, which is unfortunately no longer in existence--and presently an independent consultant with recent work very much in the area of this panel.
So let me begin by asking Sherle, if you would. We’ll just go right down the table. Let’s say 10 minutes each.
Sherle Schwenninger:
Thank you, Jamie and Thea, for inviting me to participate in this important event, and thank you also to Bernard Schwartz and Jeanette Clonan for their continued leadership in helping make these possible.
I want to provide a bit of a bridge from our first panel to our discussion here in the second panel. And I want to start it off by stating for you the three assumptions that I’m making:
First, we’re going to need a new big source of economic growth in the coming decade that will replace the debt finance consumption that was supported by housing wealth of the past decade or two.
Second, this is going to have to be led initially by public sector investment. We have overcapacity in much of the private sector, and given the weak demand, global demand, and uncertain environment, it’s very unlikely to have a major private investment boon, and we’ll need to fill that hole, as Jamie and Marshall pointed out, with public borrowing and public investment initially.
Thirdly, ideally that investment needs to be aimed at rebuilding our productive capacity and our quality of life in the future; but we also should aim to have some eventual improvement in our net export position because that would, too, contribute to economic recovery. But like Marshall pointed out, there’s going to be constraints in the near term because of weak growth in many of our major economic partners, although there’s some encouraging growth in emerging markets. And therefore the most promising element of the trade balance that also represents a potential for rebuilding the economy lies in the energy space. Because if we can reduce over a period of a decade the import bill, that in effect would contribute to growth, but also strengthen the productive base of our economy, because it would also, for both national security and environmental reasons, allow us to find a new big source of energy in a way that also would make us competitive and compatible with our environment.
So against those three broad assumptions that I’m making, I want to look quickly at where the Obama administration seems to be taking us and contrast that with what I believe some of our panelists are going to propose as a way of an alternative institutional framework.
If you recall, President Obama has laid out a new framework for economic growth going forward, and it has a heavy emphasis on green economy and green jobs, as well as health care reform being another one of the pillars. Now the problem I have with what the Obama administration has done to date, and there are some very good elements in the program even if it is of a very small scale; but on the whole the approach borrows much too heavily from an economic environment that was more appropriate to the 1990s, and more appropriate to the private software, the information technology world, than it is to the world of energy development and the world of the need for a public sector-led economic recovery.
Essentially this approach has four elements: One, you subsidize demand by providing, allowing states, encouraging states, as well as some federal mandates for green energy, or providing things like feed-in tariffs, which therefore subsidizes demand for wind and renewable energies.
Second, you provide tax credits to potential private producers. In other words, this is a private sector-facilitated generally venture capital approach, which again may have worked in the world of information technology, where software code writers could work two or three in a garage; but it’s not nearly as appropriate for very capital-intensive energy world. And therefore this Silicon Valley approach, this venture capital approach, has generally come at the expense of larger-scale, public-supported, longer research-and- development efforts.
And the final part of the approach, which is somewhat [in advance?] because of the political problems, is to increase the price of carbon to facilitate the subsidization of demand and the tax cut to producers.
Now my problem with this is that it produces five, I think, less than optimal results. The first is that much of the demand leaks out and stimulates industries and production abroad, often subsidized production abroad. Much of the subsidies for wind and solar end up in Germany, and China, and Denmark, and other places.
Second, it encourages what I’d call the commercial premature fixed investment in technologies at the expense of more promising future technologies, because—and I’m very familiar with, being from a Nebraska corn-farming family, and I saw the thousands of ethanol plants, and the millions of dollars of fixed investment that went into that. I’m also seeing it in many places in the solar industry, where we’re putting millions of dollars of fixed investment to subsidize, and when the subsidies run out, the ethanol plants, or in this case many of the solar plants, will no longer be useful.
Third, we’ve done it at the expense, without thinking about the infrastructure that we will need. Many of the wind and solar projects that are being put into place now are running into infrastructure bottlenecks because they don’t have the appropriate smart transmission grids, or whatever. The major solar plant in the southwest--it was supposed to feed into California—is now blocked by the lack of infrastructure and political disputes.
Finally, it’s weak on job creation and it disproportionately generally hurts low- and moderate-income Americans because it puts the cost of higher energy onto the backs of lower- and middle-income, and I think Lisa Margonelli of the New America Foundation will speak more about that.
I want to contrast this sort of private sector-facilitated venture capital approach to what I think is needed in terms of the appropriateness of both the economic conditions of this decade, but also more appropriate to the capital-intensive and technology-intensive nature of making major breakthroughs in technology. And again, the commercialization of this will have an important role, but probably further down the road.
So the approach might be contrasted to call it generally a sort of neo-new deal, a reconstruction finance authority model of economic rebuilding in the energy sector, particularly where public investment crowds in private investment rather than subsidizing the demand for private firms. Initially you have major public investment that makes private investment, therefore, more attractive. Infrastructure goes hand-in-hand with the energy development, meaning you wait till you see that a major technology has some potential; then you commit to long-term building projects. These can be done in allowing for greater regional choice. Again, Lisa Margonelli has a very interesting proposal for the clean power authority in the old industrial Midwest, which I think is very appropriate to that region that is not particularly conducive to demand subsidies for solar or even wind. So it allows for the development of major regional public investment projects.
Third—fourth, I mean—that it therefore provides, I think, much greater multiplier effects in terms of job creation. More likely, therefore, to benefit low- and moderate-income individuals, both because of the heavy job creation, but also in not raising prematurely energy costs on local businesses and on the transportation needs of low- and moderate- incomes. It’s more likely to, in the end, create self-generating economic returns in terms of the operation of regional financial authorities.
And finally, fifth, if it’s matched with long-term research and development, it’s more likely to lead to sustainable breakthroughs in new energy sources, as opposed to starts and stops of premature commercialization of some, what I would call inferior solar and ethanol options in the short term.
Now I know this goes a bit of against the grain of some of the suggestions that Governor Rendell made. I’m not entirely opposed to some of those methods; but I think on the whole, given both the economic circumstances of needing major public infrastructure investment and job creation, we’re much better to consider some of the ideas I think you’ll hear from my colleagues on the panel. Thank you.
John Alic:
I’m going to try and end up with some fairly concrete suggestions for what we should do first and what we should leave for later--talk about priorities. That’s what the notion of strategy is intended to convey here.
The focus of my comments is really on climate change and technological innovation for climate change. The energy and climate problems are closely related, but they’re not really the same. Governor Rendell several times came back to the question of new technology and where it comes from, and that’s the focus of my remarks, which are based on a study that came out late last year, was conducted for the National Commission on Energy Policy by the Center for Science Policy and Outcomes, part of Arizona State University, and the Clean Air Task Force.
We started by looking at three technologies with the aid of expert panels, convened three workshops here in Washington, also had experts on policy, people with experience in running programs and in political positions at the Energy Department, at places like DARPA, and DoD, and so on, to try and understand what these technologies needed for more innovation.
Those are the three technologies. I should perhaps say just one word about the last one. It is quite possible to pull carbon dioxide, which of course is the major global warming gas, right out of the air. The questions are, how do you do it practically and at reasonable cost?
This is the report. You can find it on the Web. Travis—stick your hand up, Travis—from CSPO has about 10 copies with him if you’d like a hard copy. We don’t have enough, I’m afraid, for everybody; but see Travis and he’ll give you one if you want it.
Our findings are, first of all, that none of these technologies—and I think by reasonable extrapolation probably none of those that you hear about—really need breakthroughs, particularly the kind of breakthroughs that might come from scientific advance. That’s not to say that research isn’t very important. It’s critical; but it’s going to pay off later. What we need today is to do it. Many of these technologies, particularly the ones that have to do with controlling greenhouse gas emissions from electricity generation coal-burning power plants which provide 50 percent of our energy in this country—those are known technologies, they’ve been proven on a relatively small scale, but they have not been adapted and demonstrated at power-plant scale, and that’s been sitting on the agenda for quite a long time now. We haven’t really gotten started in any concerted way. We need to do that.
The third finding I like to highlight has to do with the importance of competition, not only within markets, but within government. We know from our experience with technological innovation for the military during the Cold War that competition is a very important, very powerful influence in stimulating innovation. It can also be wasteful, there can be duplication. That is part of the price you have to pay.
The next three slides deal with those points in a little more concrete detail:
Innovation does not come only from research; that’s really the point of this quotation. It comes from business opportunity. When entrepreneurs see that they have a chance to build a business, to make profits, they pick up and use new technologies. Some of the most significant innovations of the 20th century, including the microprocessor, are simply technology development without any new research. The microprocessor was an old idea, half-a-dozen years old. What Intel needed was a customer. When they got it, we had the microprocessor. And look what’s followed from that.
Now I don’t know what happened to that. There’s supposed to be a picture of a power plant there basically to demonstrate the size and complexity of these beasts. I’ll just skip over that. I’m sorry. I thought we went through these at the beginning of the day.
This is more important. What you would see if it wasn’t for Bill Gates, because I did these on a Mac, is a chart of improvements in fuel efficiency of gas turbine engines, mostly for jet fighters and bombers. That’s an important technology, because as many of you also know, electric utilities use gas turbines for peaking power and they do so because of the improvements in fuel efficiency that we have gained from military investment since Second World War. And the point, I think, that I would stress in the absence of the actual slide is that’s mostly incremental innovation. It was an invention, yes; but the ideas go back to the 19th century. The first gas turbines were built early in the 20th century, the first jet engines in the late ‘30s. They were very, very inefficient. We would not be generating electric power with gas turbines if they hadn’t gotten a lot, lot better, and that is engineering design and development done in private sector. There is some government R&D money, but what it really is, is procurement contracts from defense. It’s the promise that government is going to buy the innovative results in the form of new products. And of course those are high-wage jobs at Pratt & Whitney and GE building these engines and building the components, too.
There we go back to the text. You can always at least count on that. From the report, the CSPO report, “Innovation Policy for Climate Change,” three recommendations:
First, we need to view greenhouse gas reduction as a public good; that the attempts made through carbon pricing to rely on market mechanisms could work if you get the prices high enough. We’ve thought from the beginning, and continue to think, that it’s very, very difficult through cap and trade, or carbon tax probably even harder, to boost the prices to a level high enough to induce very much genuine innovation.
Second: You need agencies that can compete with DoE. If you ask what our institutional capabilities for technology development in the federal government are, of course there are many agencies that support innovation in one way or another; and if you want to know what an agency can do, ask what they in fact do do. DoE does two things: nuclear weapons and remediation and science, mostly big science. Climate change is not a science project; it’s an industrial development project, a technology development project, and in contrast to the Defense Department, the Energy Department does not traditionally have strong linkages with industry. They have excellent scientists and engineers, excellent laboratories, and they do research. That is not fundamentally what this problem needs.
We do need research, of course. We’re spending money on research. That’s good. We need more. Taking off from the jet engine example, the government in our view also needs to buy stuff, because that’s where the business opportunities that stimulate innovation come from, the promise that if you have a product or a service that somebody wants, you will make it better because that’s your opportunity. That worked with information technology and the Internet, it can work with energy and climate change; but the market signals aren’t there because energy prices aren’t high enough. In some sense that’s good; but from the standpoint in innovation, it’s bad. Government, as Governor Rendell also said this morning, owns a lot of cars and trucks, and the purchasing power of federal, state, and local governments, if harnessed to buy the products of American industry will be a very, very powerful force in stimulating innovation.
So this is the last slide. This is what the strategy I’m suggesting looks like. This is not in the CSPO “Clean Air Task Force Report.” This is my personal kind of cut at what we should do. We need to link our research and demonstration activities with procurement, with the realization that climate change, a global problem, is a public good, like defense, like health and safety, like provision of vaccines, like public health, like infrastructure, we need to buy things in ways that will stimulate innovation from private firms, and that’s a place in which the logical starting point in my view is back to the electric utilities sector, back to those coal-burning power plants, because that is a manageable problem in an operational sense. We have 135 million cars and trucks on the road in this country. We aren’t going to turn over that fleet anytime soon. We have only about 1500 coal-burning power plants. That’s over a third, about 35 percent, of carbon dioxide output. There are only 500 sites. We know technologically pretty much how to do this. We need to scale it up. We need to get started. And we need to figure out how to pay for it, because it is going to be expensive, and it will generate a lot of political opposition, I’m sure. But it is a manageable problem; it’s a logical starting point, in a sense the elephant in the room that has been ignored for a long, long time. We should begin there.
Thank you.
John Robert Behrman:
Thank you very much.
Energy and environmental policy is one thing. It’s a popular patriotic challenge that my party should distinguish itself by resolving if necessary without much support from the other party. We have a deadlock politically. Governor Rendell referred to it. Here’s the way that deadlock gets broken decisively: One party in one part of the country solves a cluster of economic and engineering problems. It’s spectacular. People love it. The other party starts trying to copy it in every other part of the country. That’s the way a decisive breakthrough is going to come. It probably won’t start here.
The West Gulf Authority, I’m going to discuss with you, would advance the macroeconomic agenda that others have discussed here with simple but very purposeful financial insurance that would provide credit for technology-based public and private enterprise. There are historical precedents and ordinary probabilities involved in my proposal. No scientific hypotheses or long-range forecasting are necessary to recognize the challenge. These challenges are civil and industrial engineering opportunities that can become a popular and moral purpose for the scope, and scale, and timing of macroeconomic policy that is otherwise pure abstraction.
There’s no need for the voters I represent in Houston, Texas, to worry about projected climate change. We already know that our part of the U.S. has always been tropical, that because of subsidence of land caused by tectonic and sedimentary geology, the West Gulf already has a risen sea level. The land sinks; the water gets higher. We also know that this has us playing a sort of roulette in Houston now. Every year the wheel spins clockwise, and the little white ball spins counterclockwise; only those little white balls are not little. They’re huge storms, each with the power of many, many nuclear weapons.
This is the area of responsibility for the West Gulf Authority proposal. The red and the blue are areas that have already sunk; therefore, the water has risen. And every single year this puts us in a very, very dangerous situation.
Look right now at this somewhat smaller map. This is the actual Ike hurricane. As wind goes, it was a Mickey Mouse hurricane; it was just one or two. As storm surge went, it was gigantic, and this entire area was significantly inundated. This is not that bad, frankly; but storms like this—every year—are going to be hitting somewhere—well, maybe every other year, every three years—will be hitting somewhere on the West Gulf. And ironically, under present policies we keep replacing the damaged property rather than making profound improvements and dealing from a planning and standards perspective with what we absolutely know will happen again and again and again.
My district is up here off the map, in the corner there. A category 5 hurricane hitting in the Galveston Bay area will basically kill the entire Houston economy. The damage in my area will not be bad up at the Texas Medical Center and Rice University; but the entire economy will collapse. Nothing much will work in this area.
To give you some idea of more direct problems: right here is the world’s largest refinery. Right across the ship channel from it is the second largest refinery in North America and a little bitty refinery, a little bitty petrochemical plant that makes virtually all of the compound that every computer chip and solar panel in the world is made out of.
Down here is an old refinery that BP owns that they don’t maintain very well. Way up here in the corner off the map is a beautiful new LEED-certified building where BP does energy trading and deals with energy as a purely abstract problem. Right down here is the world’s largest sewage pump, the most powerful sewage pump on the planet; and when that goes down, nothing at the BP building will work anymore.
So what I’m describing here is a very large, significant catastrophe, and I can’t predict it anymore than I can win a lot of money at roulette; but that’s all we’re dealing with. Roulette is a mathematical model I think most people understand.
These are not forecasts I’m showing you; these are mostly just Lidar measurements of actual evolutions and engineering models of one real and one simulated hurricane on Galveston Bay. Much of our population and most of the nation’s key petrochemical infrastructure are damaged or demolished in these scenarios. World financial markets, incidentally, already recognize and discount these vulnerabilities, depressing investment in new fuel technologies and hydrocarbon refining or reforming capacity in our area. You can still make money reselling an old refinery; but there’s hardly any new investment in either bigger or better refineries in our area. You see, markets don’t provide for relocation of populations or reconstruction of industrial and strategic infrastructure on anything like the scale we’re dealing with here.
So, we’re playing casino roulette. And the political negligence in the face of that kind of threat really makes it Russian roulette. The clear and present danger we face calls for popular patriotic leadership from the center left lest we get exploitation of catastrophe by the far right. They have a religious narrative, an end-of-days story, a racial subtext to deal with almost everything that happens. So either the center left embraces engineering and economics in a practical way, or we’ll get to have those arguments over and over and over and over.
My proposal is financially unexciting, but purposeful, as well as well as flexible over the course of many, many credit cycles, not just between asset bubbles. The scale of the problem I’m describing here, will gonna take many credit cycles to deal with. We’re dealing with an industrial complex that grew up after World War I and gets more complex by the day, as well as fairly large. The growth has stopped, but complexity continues. From an engineering standpoint, the Authority will tackle large but fairly mundane civil and environmental problems rapid job creation potential in the vulnerable areas as well as long term industrial engineering problems that would benefit the whole of the national economy permanently. The two problems I’m focusing on here, there’s the industrial vulnerability, there’s also the agricultural vulnerability – the area I described for you is basically the foundation of the food chain for the whole South Atlantic. So you have to prepare both nature and industry under the worst circumstances.
We have a precedent for this in 1900 when Galveston was wiped out, the entire nation rallied and built the infrastructure for everything you see there. They thought they were going to improve the cotton trade all over the western United States, but they ended up building the petroleum infrastructure for World War II. But they thought they were dealing with the cotton trade when they did that, but the whole country rallied to the cause of Galveston. I’m suggesting that one of the precedents is essentially a hundred years old. One of the things we can deal with comfortably in the Gulf Coast area as energy policy is national security policy, it’s always been national security policy, but it’s been cheap oil policy until very recently. But it’s not difficult at all to frame energy policy as national security policy in Texas. It’s always been that, and if anybody forgets it, we get a few coffins every month to remind us. So, we can deal with relocating and re-engineering that infrastructure, we can deal with problems of changing our fuel assumptions, upgrading our entire national fuel policy – we have national fuel policy but it’s cheap oil in Houston. So if we want another fuel policy nationally, we have no better place to start than Houston. Some institutions with the moral authority and technical proficiency of the large scale World War II and Cold War civilian and military projects need to be revived. This time that can be done with no secrecy and hence, with less old fashioned toxic waste of the nuclear, chemical, or financial sort. Finally, we know where I come from that some government financed or guaranteed lending programs have created asset bubbles and perversely redistributed income. We’ve also noticed that this financialization of everything, which I call civil engineering by bond lawyers has embedded building standards unsuited for tropical climates and proliferated perversely in these development patterns all along the Gulf Coast. And now this has degenerated into unsound policy rackets and claims processing bills that are incompatible with international conventions and markets for securities or finance. So the West Gulf Authority would re-engineer building standards, lending instruments, and insurance policies in order to provide a more reliable domestic and a much larger international market for building materials and energy conservation technologies suitable for tropical markets. Export markets are increasingly tropical markets, so we are interested in things like a passive house that makes sense in a hot wet climate not a passive house that works great in Jutland, or Santa Fe, or Aspen, Colorado. You don’t do that, what you do in a tropical climate is radically different. Again, driven by business opportunities, real economic development is something we can do. Nothing I’ve proposed is a political or economic novelty. Some of it, the Roosevelt part, modeled on the TVA and the Bonneville Power Authority is older than I am, but the industrial development part, what I call the Hamiltonian part, is as old as the Republic, assuming we still have one. Thank you.
Michael Lind:
Thank you very much. My name is Michael Lind. I’m the policy director of the Economic Growth Program at the New America Foundation.
Mark Twain once observed that everyone complains about the weather, but nobody does anything about it. And sometimes you have a feeling about this when you hear all analysis and no proposals. So I’m going to use my few minutes to talk about some concrete proposals, some concrete big ideas for addressing the crisis that our nation faces. These are proposals that we’re working on at our Economic Growth Program at the New America Foundation with the generous support of Bernard Schwartz and with the input from our friends at Economists for Peace & Security.
I’m going to talk about three particular crises facing us: states, jobs, and the need to rebuild our manufacturing. Now these ideas, all of the ideas I’m going to go over that we’re coming up with, or have already come up with as concrete proposals, have precedents either in the United States or in other countries. Can they be done in the next few months or even in the next few years, given the political climate in Washington? Probably not. But our goal as an institution is to shift the boundaries of permissible discourse and permissible thinking.
First of all, the states: As Linda Bilmes pointed out earlier, the states are facing hundreds of billions of dollars in shortfalls through no fault of their own, as a result of the collapse of the world economy. If they crater, this will drag down the national and possibly the global economy into a double-dip recession. Ordinarily, you do not want to issue debt for ordinary operating expenses. This is the greatest crisis since the Great Depression however, and we need to rethink some of these rules. Countries like Japan have issued deficit financing bonds in the past. States like California are doing this now. So one of the things I propose is that the federal government should consider purchasing deficit bonds from the states. It can either buy them directly or it can create an instrumentality that can charter a government-sponsored enterprise which would have so-called agency debt that would not be directly guaranteed by the federal government, but it would have the imputed backing of the federal government. That’s a short-term solution.
In the long term, in order to avert these sorts of crises at the state level in future economic downturns, even ordinary cyclical recessions, we need to nationalize Medicaid and we need to nationalize unemployment insurance. Both Medicaid and unemployment insurance were intended to be federal programs, like Social Security, by the Committee on Social Security back in 1935. It was because of segregationist states rights Southern Democrats that they’re divided between the federal government and the state government. Those politicians are long since dead, and one of the advantages of federalizing these two programs would be these would be automatic stabilizers, because the federal government has a much easier time borrowing money in crises than the individual states do. So you would immediately remove these programs from the budgets of the states.
Jobs. A lot of the proposals for infrastructure and new investment manufacturing would generate a great many jobs, because those two things, infrastructure and manufacturing, have among the highest multiplier effects of economic activities. However, there are great numbers of service sector workers. We live in an economy in which 80 percent of the work force is in the service sector, who are unemployed now, who realistically are not going to get jobs in infrastructure and also in manufacturing. We need to create demand for their labor. And one way to create demand for the labor of unskilled service sector workers has been explored by European countries, including Sweden and Finland, Belgium, and also the United Kingdom; and that is to issue elderly people service sector vouchers for services like housekeeping, like transportation, like grocery shopping. I’m not talking about the sort of long-term disability care through Medicaid; but this is much more mundane activities. This kind of program has had some success in European countries. Because the service sector vouchers can only be redeemed by certified employers, this tends to dry up the black market in labor, and it leads to more revenues coming in; so you’re cleaning up off-the-books work. That’s a proposal we will be issuing in the next few days.
Finally, manufacturing: For those of you here in the room, we have a couple of policy briefs that you can pick up on the outside of this chamber. For those of you watching, you can go to growth.newamerica.net for two proposals that we have issued for revitalizing the American manufacturing sector.
The first is manufacturing bonds. We call them Made-in-America bonds. The model for these are the successful Build America bonds for infrastructure that were included by Congress in the American Recovery and Reinvestment Act in 2009. In little more than a year, these municipal bonds—they’re bonds that are issued by states and local governments with favorable federal tax treatment; I won’t go into the details, it’s rather complex, but they are federally supported municipal bonds—states and cities and counties have issued nearly $80 billion of these bonds with federal backing for infrastructure. I don’t need to tell you that there’s no way that that amount of money could have come through direct appropriations to Congress. So this is an indirect way in which the federal government is very successfully subsidizing infrastructure, and we propose that that model be applied to bonds that states, cities, and counties use to encourage manufacturing in their jurisdictions, as part of economic development programs that are already ongoing.
Finally, a more ambitious proposal is what we call the manufacturing credit system. It’s often thought that the government can only support a particular industry or enterprise by raising taxes and then spending it on that objective. In fact, the United States in the 20th century had enormous success as a catalyst leveraging private capital and steering credit by putting a thumb on the scale towards private enterprises. Our manufacturing credit system is modeled on the farm credit system, a system of regional cooperative banks that was established in 1916, even before the New Deal. To this day it is flourishing. It’s responsible for about 40 percent of all farm debt in the United States-- farm mortgages. We propose establishing a series of regional cooperative manufacturing credit banks. They would be paired with an entity called the Federal Manufacturing Loan Marketing Association, or Manny Mac, in the tradition of Fanny Mae and Freddy Mac and Sally Mae.
Now raising those names, I have to address the bias that exists against government-sponsored enterprise, as I conclude. There have been two kinds of these public investment banks or government-sponsored enterprises. The ones that ran amok were the ones that were deregulated and privatized in the Reagan era, or even since the 1960s, on the theory that efficiency requires markets in competition. In fact, Fanny Mae and Freddy Mac have been very successful, as much more mundane institutions, once they became publicly traded corporations, like other private corporations, they tried to raise shareholder value by jacking up their shareholder prices, and that was the source of this long train of disasters leading the subprime mortgage crisis.
You’ve probably never heard of the Federal Home Loan Bank system. That’s the third housing GSC, and they haven’t been involved in any scandals. Neither has the Farm Credit System. Why is that? It’s because the Farm Credit System and the Home Loan Bank System are organized on cooperative lines—not cooperative in the sense of individuals; but cooperative in the sense that commercial banks, thrifts, and credit unions own these entities, and they’re divided up regionally. These regional banks are owned by local lending institutions. Because the local lending institutions are the owners, they are not going to engage in dodgy lending practices and then they can just palm this off and never suffer from the consequences. So while the publicly traded private version of government-sponsored enterprises has been a disaster, we think that if you look at the cooperative GSC’s, they can provide a model for indirect government financing of manufacturing. And possibly we should consider applying this model to other areas, including infrastructure and energy. Thank you.
JG:
We have about 15 minutes, and I would like to invite questions from the floor.
Q:
I just have a really quick one, but I’m mostly intrigued by your idea that cooperatives. The one problem with cooperatives that you mentioned with the Federal Owned Bank and even the farm credit is that they’re a little risk-adverse, and when you’re talking manufacturing, don’t you need to have some people who are willing to be innovative and encourage more innovation? Especially if we’re going to turn towards more green technologies and using manufacturing to retool, wouldn’t they have to be able to embrace some more risk than historically the ones you’ve mentioned do not.
ML:
That’s an excellent question. The premise is that innovation takes place in an ecosystem which would also include America’s venture capital sector, which is the richest and most developed in the world. It would be a mistake in my view to try to replace that with government entities.
One of the things that the sort of system we’re describing could do is it could backstop our venture capital system, which is very good at these high-risk, early-stage operations.
But there’s a product cycle in most industries, and this is something that with all the talk of Silicon Valley, and startups, and innovation, particular technologies go through a 50- to 60-year product cycle, from the invention to the development and deployment. Then you have maturity and often consolidation in a few producers. And then finally there’s a period when the cost drops so much that the products are practically commodities.
So we think it would be useful if you had institutions—they can be private; but these public institutions could also do this—which would have different policies for different stages of the life cycle of a particular technology, just like you need a different diet and different vitamins at different stages of your life.
JRB:
I’d like to add that manufacturing credit is not necessarily much more risk-rich than some other things, particularly when you’re dealing with scalable technologies that have worked in a very reasonable way. They need to be proliferated quickly, but actually they’ve already gone through the risky phase. You’re into a second phase, and this sort of institution could be very good for that.
Incidentally, some other things are not: The tech boom was followed by something called telecom boom, which was actually pretty bad. And if the telecom boom had been realized through a much more careful process that involved these co-ops that had an interest in minimizing and sharing risk, and not just passing it off to something else, I think we would have had a much better development than we’ve had.
SS:
I guess as a Nebraska farmer, I would take issue both with your assumption that farming is not innovative, one; and two, that it’s not risky, especially the latter point.
Q:
I said the bureau was a little risk-averse.
SS:
Yes, but the underlying enterprise, you were referring back to the underlying enterprise of either manufacturing or agriculture. I can assure that farming is plenty risky in terms of the number of farms that have survived in the last 20 years is quite few and far between.
Q:
Somewhat mundane, but wondering what you think is the impact of the fact that higher education, especially in the field of science and engineering in China, India, and most of Europe, is generally free, and extremely costly in this country; that is, that the young engineer in my family is carrying a considerable debt and hoping that as a civil engineer he will continue to have a job, which is a risky proposition in Southern Florida right now. But what is the long-term impact of the decision that we made that higher education is something that you have to earn and that you have to pay for as an individual?
SS:
Daniel Brook has written a very important book called The Trap, which looks at the heavily indebted generation of recent college graduates, and how it therefore distorts their choices of careers, in addition to the very powerful cultural facts. So indeed I think there is a problem, and the rewards of investment banking I’m sure has played—or what were the perceived rewards of investment banking in the ‘80s and ‘90s and the first decade, as opposed to the rewards of graduating with an engineering and science degree--has played a distorting factor in the market, considering that many students come out of college or graduate programs with $150-200,000 in debts.
ML:
If you look at undergraduate degrees, somewhat contrary to popular belief, science and engineering have the highest incomes for people with BA’s. The problem is if you go on to graduate professional school, and if you get a professional degree and work in the FIRE sector (Finance, Insurance, Real Estate) the gains are much greater than that. So I think that’s part of the problem, too.
JRB:
I would add that the technology-intensive enterprises I’m talking about, either re-engineering petroleum refineries and other kinds of refineries, or building passive houses for tropical environments—all of that takes an extremely well-educated work force, okay? Forget higher degrees, it takes people who have high school degrees, or community college degrees, who are very well trained. Weatherizing a house in the tropics is very, very hard. So I’m more interested in closing the gap between people who have fancy, expensive educations like myself, and people who do extremely important, critical work well, without getting killed.
JA:
To answer the question directly, I certainly would like to see free public education extending to grades 16-plus. But it’s a decision made a long time ago, and I don’t think we’re very likely to reverse it.
But I think there’s another point here that we all ought to think about: Young people in school today will still be working fifty years from now. The world is going to be a very, very different place, in part because of the technological innovation that we’ve been talking about. Are we really preparing them for that? I’ve taken a look recently at the software industry. More than half of the people currently employed in computer software learned not in school, but through experience on the job, through self-training. They got very little institutional support. They had to figure out how to do this for themselves. A lot of them got bad advice along the way. We need to gear our institutions for continuous learning, and make that not a slogan, but a reality.
Q:
In hearing the discussion about areas where we have to have investment strategies, one thing that I think is really overlooked in our society, both in government and on the kind of panel that we have today, is the real need for investing in the distressed places in our country. I don’t know how we go as a nation and ignore those areas of our country, largely minority areas, where there’s high rates of poverty, high rates of unemployment, need for training, where crime and drug problems are endemic, where we have a whole dysfunctional society in those areas throughout the country. It seems to me we need an investment strategy that deals with that problem as much as any of the other problems that we have. I’d just like to challenge the people to think about that issue as a major issue for investment, as opposed to or complementary with the other kind of concerns that we also have.
JG:
Any comment?
ML:
Well, in fact if you look at any federally-based economic development programs, they’ve been driven over the past half-century by concerns about particular distressed areas, like Appalachia, inner cities, and so on. I hesitate to make that a hard and fast rule. Where you have an existing urban and industrial infrastructure, and this area can be revitalized and become vigorous and dynamic, I think it does make sense.
There are cases where the location of activity has simply shifted from one region to another. For example, a lot of the stuff around the Great Lakes was located there because of local mineral deposits and things like that. And Edward Glazer at Harvard has made some enemies by arguing that, well, we do have labor mobility in the United States, and sometimes people should move if the only reason that town was there was a zinc mine or something in the 19th century.
And there’s another caution I think we have to bear in mind when we’re talking about distressed areas: There was something called the Kelo decision by the Supreme Court a few years back, a very badly decided decision in my opinion, which said a city council could use the power of eminent domain to force low-income people out of their own homes in order to make room for private developers—not for a dam, not for a highway, not for a bridge; but on a gamble that the private developer would generate more tax revenues. So if you’re interested in this, there’s a school of thought called development without displacement, where you try to help distressed areas without ethnically cleansing them, as it were, of the distressed people.
JRB:
The red areas on my map exactly fit your description. As well as being low-lying areas, they are very much areas that fit the distressed population definition. All I can say is that the people living in those areas would much rather participate in strategic reinvestment in development than any sort of pity.
JG:
Last question.
Q:
I’ve a question for John Alic. You mentioned you were advocating for carbon capture sequestration. There are many who are concerned by that because it seems to solve one problem and create another. So could you talk a little about the environmental effects of it?
JA:
I assume you’re worried about sequestrations. Underground storage of carbon dioxide is certainly a problem that needs to be studied and explored, and in fact we have a head start on that compared to getting the carbon dioxide out of the flue gasses of the power plants, I think precisely because many people in government are sensitive to that.
It’s possible that some sort of unexpected geological problem will crop up and make this genuinely hazardous. I think the probability of that is probably relatively low. So my answer is I think we’re actually pretty much on top of that part of it. It’s what you do with the coal companies, the utilities, powerful figures and their communities, all the jobs that are linked with these—that’s where I think the more potent opposition is likely to come from. They won’t want to see anybody putting big attachments on their plants to get the carbon dioxide out, even if that’s the sensible way to attack the problem.
JRB:
That problem is very much like the one that was mentioned of hydrofracking. We do use carbon dioxide for tertiary oil recovery all the way from Texas to Calgary, and I believe we’re learning enough about doing that—you have to do it to learn anything—to manage the geological hazards it does involve.
JG:
Last question.
Q: Rob Behrman
Well, so I learned a little earlier and agree with the idea that the deficits are not necessarily a problem. And we’ve heard a lot of ideas. Governor Rendell suggested natural gas, repurchasing green fleets. You mentioned general government purchasing. We’ve had a West Coast Reconstruction Authority, a Manny Mac. Which of these ideas that we’ve heard today—why can’t we do them all? Or which ones are mutually exclusive? What can we look at as kind of a menu of options from what we’ve heard today?
JG:
Final comment from anybody in the panel.
ML:
Well, all of the above would be my vote.
JRB:
I think the Reconstruction Authority overlaps most of what Michael has been talking about.
SS:
I think one of the underlying constraints goes back to that question of how you structure a financial authority or a national infrastructure bank that actually can channel, at least for the next three to four years. There’s an enormous amount, until we hit a corporate refinancing problem perhaps in 2014, there’s enormous amount of private savings that are going to be looking for constructive projects, and I think one of the big challenges is how you create a national financial authority, a national infrastructure bank, that can support and further capitalize these regional efforts. That makes all of them, all those sensible projects, possible.
JG:
Okay. On that note let me say that this panel has given us a lot of insight on what as a very practical matter we might do as we move forward to tackle the challenges that we face. So I want to thank you all, and I want to thank the audience, and invite the third panel to come to the table.
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