The Plugin Hybrid

As a technology nerd, I am excited about the prospect of plug-in hybrid electric vehicles (PHEV). General Motors recently sponsored a Society of Automotive Engineers task force to develop a standardized power connector for recharging electric vehicles.  Several major auto makers have agreed to adopt the technology.

Beyond standardization within the industry, environmentalists and techno-nerds alike have reason to be excited about a bright future for cleaner transportation.  First, one can expect that PHEV's won't single-handedly overload the power grid: the Energy Information Administration's 2009 annual energy outlook predicts "Plug-in electric hybrid vehicles are not expected to reverse the trend of slowing growth in electricity demand, which increases by only 0.1 percent for every 1 million PHEV-40 vehicles in operation." Second, batteries from PHEVs will minimally impact the environment.

However, one long-term issue could diminish the environmental benefits of PHEVs. These vehicles shift most emissions from gasoline to electric power plants.  The US needs to make its electricity sources look more like this, instead of this.  Coal provides the U.S. with half of its power, and no, clean coal is not a viable solution. Strip mining and the disposal of coal ash wreak havoc upon the environment.  Society must not trade its problems, but one can hope that the mass adoption of PHEVs encourages a cleaner power generation.

Bhagwati on Obama on trade

*This post on trade represents my personal opinions.

Sometimes, it feels like Mr. Obama’s honeymoon period is ending before he even takes office. In an op-ed published earlier this week, Jagdish Bhagwati absolutely savages Barack Obama on trade issues. I am a huge fan of Dr. Bhagwati. He is one of the greatest trade economists and one of the most unrepentant defenders of free, multilateral trade. His work has shaped my own views on trade more than any other single thinker.

Dr. Bhagwati chides Mr. Obama for his “eloquent silence on trade issues” and his tepid support of the Doha Round. He also criticizes the auto industry bailout (no disagreement here), which he believes will be WTO-incompatible, and dismisses Obama’s trade team as a pack of under-qualified, semi-protectionists.

His most interesting argument is against America’s bilateral/regional trade strategy. In Dr. Bhagwati’s eyes, powerful union lobbies and other political forces have produced a trade agenda in which the US negotiates standard-laden agreements with small, poor and comparatively weak countries. The standards, in areas such as environment and labor issues, effectively undermine the smaller partner’s areas of comparative advantage. He characterizes this “free but fair trade” and “an exercise in insidious protectionism that few recognise as such.” Ouch.

As an aside, I wonder how Dr. Bhagwati reconciles this novel argument with the fact that every single one of these bilateral agreements was negotiated by a Republican administration and narrowly passed in Congress by Republican legislators, over the vigorous opposition of Democrats and organized labor?

In any case, the economic logic of Dr. Bhagwati’s arguments cannot be ignored. The US, and the world, would best be served by the successful conclusion of the Doha Round. In terms of regional agreements, negotiating bilateral deals with small trade partners is an exercise in economic futility: any positive gain is a drop in the vast ocean that is the US GDP.

Trade, however, is as much a political issue as it is an economic one. This is unfortunate, but it isn’t very useful to assess trade issues without considering the political ramifications. Dr. Bhagwati acknowledges this: “history shows that the freeing of trade is nearly impossible to achieve in times of macroeconomic crisis.” In assessing where Mr. Obama will fall on trade, we need to examine the political/economic climate he inherits: an American public that is increasingly sceptical of the benefits of trade, an outdated suite of government programs to assist displaced workers, and one of the most vicious recessions in the postwar era. Paradoxically, if Mr. Obama pushes too hard on trade without recognizing these other challenges, he may risk further damaging the 70-year political consensus in the US that freer trade is a good thing. I was thinking out loud about this very issue earlier this week.

As is such, Dr. Bhagwati’s argument is strongest when he calls for more vocal leadership on the issue of trade. I do think that President Obama will need to work hard to resell trade to the American people, so I am bothered by his “eloquent silence.” I wish we had seen a stronger push for Doha last month from the Obama camp. Still, given the current political realities that affect trade, we need to give Mr. Obama more time before sounding the warning on his trade agenda.

Give the Big Three a bailout!

Ford, General Motors, and Chrysler need a bailout. But they're asking the wrong guys for money. Instead of driving their hybrids to Washington DC, they ought to fly into Riyadh and Dubai.

First off, no one makes fun of you for flying on your private jet. Saudi Prince Al Waleed Bin Talal just placed a personal order for a private Airbus A380! If you don't show up on a private jet, you're nobody. Secondly, Saudi Arabia and the UAE have money to spare: at least one trillion dollars in their sovereign wealth funds. The Big Three need about $34 billion to stay afloat, (which they have promised to pay back!), and it is important that they don't shut down. There is a dangerous domino effect if just one of the Big Three falls: they use many of the same suppliers, so if one goes down it might drag the others with it and lose some 2.5 million jobs in the process. This is probably an overestimate, and with so much of their production outsourced abroad, the pain would be spread around quite a bit. Still, it wouldn't be good.

The oil exporting countries have a vested interest in keeping SUV producing companies running. All car companies are hurting these days, but the Big Three are not sitting on enough cash to get through these tough times. Part of this is due to their brand-killing habit of making lots of bad cars, but they are working hard to fix that. The UAW has made some serious concessions, the Big Three are investing tons in R&D, and many of their cars are on par with Japanese and German imports these days (Disclaimer: I drive a Honda Civic, which was made in Ohio, interestingly enough).

Hell, all of OPEC should chip in and give a bailout to the Big Three. And if OPEC fails to bailout the Big Three, maybe Beijing would be interested? If they did I would take back all the mean things I said here. For selfish reasons, I am rooting for a bailout because someday I want to buy that new Camaro.

Bailout blues: Big Three edition

As someone who argued strongly in favor of a bailout for the financial sector earlier this fall, I am absolutely flabbergasted that a bailout for America’s car makers is under serious consideration. In short, this is a terrible idea, and there are no legitimate parallels to bailing out (recapitalizing?) the financial sector. The financial sector is essentially like the economy’s plumbing: if the pipes aren’t working, nothing works. By contrast, the auto industry is a bit like an old, poorly-functioning toilet: if it doesn’t work, it’s best to just get rid of it rather than paying exorbitant sums to refurbish it.

Spurious analogy? Perhaps. But this is truly bad policy. You can go to any number of sources for an explanation why: I particularly liked Megan McArdle’s posts and Dave’s at IPE-J. In short, Congress is proposing to devote a good chunk of finite resources* to struggling, out-dated firms with high fixed costs, no track record of innovation, no proven capability of making a product people actually want to buy, and no systemic connection to the greater economy. The halcyon days of “As GM goes, so goes America” are long gone, if they ever even existed. In fact, the only halfway decent argument that I can find to justify such a handout is to avoid a possible crisis of confidence: if the auto industry were to fail, would it cause consumer confidence (and spending) to collapse? It’s a novel interpretation, but one that I don’t find entirely convincing.

Nonetheless, it is looking increasingly likely that a bailout for the auto industry will happen possibly as early as this coming week during the lame duck session of Congress. I am particularly interested in what this says about our President-elect, who has come out forcefully on the side of intervention. Frankly, I can’t help but feel slightly nervous about the implications. This isn’t change. This is old-school, interventionist Democratic policy, which didn’t work very well on the first go-round. In my view, this bailout is in no small part about the demands of the United Auto Workers, who campaigned strongly for Mr. Obama’s election. I sympathize with their desire to preserve a high standard of living for union members, but unfortunately that way of life no longer seems sustainable. (Please read this post in its entirety before you feed me to the lions over that last statement.)

My point is this: in order to deliver on the massive change that Mr. Obama has promised in policy areas such as education and health care, he will need to do battle with powerful entrenched interest groups. It will be a long fight, but this is a poor showing in the first round.

* I don’t care if we've been spending like money grows on trees: it all has to come from somewhere, and if we borrow it, then sooner or later we have to pay the bill. I for one don’t want tax rates in the 40 – 50% range when I’m in my 40s because of terrible fiscal policy now.