Obama owes Bush an apology

My new column for the FT looks at Obama's national security policies.

Critics in his own party and Republican opponents are attacking Barack Obama's emerging stance on national security with equal ferocity. Many Democrats are furious that the president has broken his promise to abandon the Bush administration's war-powers approach to fighting terrorism. Dick Cheney, the former vice-president, and other conservatives attack him for doing the opposite - for keeping his promise and emasculating the US anti-terror effort.

The left's complaints make far more sense than Mr Cheney's. Mr Obama is adjusting the Bush administration's policies here and there and seeks to put them on a sounder legal footing. This recalibration is significant and wise, but it is by no means the entirely new approach that he led everybody to expect.

Mr Obama is in the right, in my view, but he owes his supporters an apology for misleading them. He also owes George W. Bush an apology for saying that the last administration's thinking was an affront to US values, whereas his own policies would be entirely consonant with them. In office he has found that the issue is more complicated. If he was surprised, he should not have been.

Paying for health care reform

My new column for the FT doubts that savings from greater efficiency will go very far to pay for the administration's health care ambitions, and looks at less palatable options for raising the cash.

Last week, after meeting groups representing hospitals and insurance companies, Barack Obama announced a breakthrough on reforming US health care. It was "a historic day", he said. The providers had made "an unprecedented commitment" to curb the system's costs, running at 16 per cent of gross domestic product. They had agreed, he said, to reduce growth in healthcare spending by 1.5 percentage points a year, enough to save $2,000bn (€1,480bn, £1,320bn) over the next decade.

Exactly how was something of a mystery. Was this an aspiration, a target or a forecast? Within hours all parties began clarifying the declaration to the point of meaninglessness. The producer groups, facing agitated members demanding an explanation, denied they promised anything. White House officials repeated the president's assertion, then withdrew it saying he had misspoken, then affirmed it again.

Political slapstick is routine on this issue. What matters is whether the administration, the health care industry and the US electorate are moving any closer to facing the hard choices that Mr Obama is always telling the country he is willing to confront. So far the answer is no.

Onward to the next economic crisis

This new column for National Journal looks at credit after the stress tests, and public borrowing as cap-and-trade revenues evaporate. It sees trouble ahead. [The link expires in two weeks.]

The good news is that the world economy may be turning the corner. The bad news is that a lot is still wrong with American banks, and U.S. government borrowing seems to be sliding even further out of control. The first development points to a slow recovery at home, the second to a whole new crisis not far down the road.

The civil-rights battle of our time

My latest column for the Financial Times looks at America's education deficit, and what it costs the country.

The most ambitious US presidency in living memory hardly needs to extend its list of tasks, you might think. Yet the country's long-term economic prospects turn on something that is all too easy to neglect, just as it has been neglected in the past. The US is failing calamitously in primary and secondary education. The average quality of its workforce is falling, and its schools are adding to the problem rather than mitigating it.

Much of what ails the country - including growing economic inequality - can be traced to this source. Politicians recognise the fact, and prate about it endlessly. Barack Obama puts improving the schools alongside health reform and alternative energy whenever he lays out his long-term goals.

The trouble is, fixing the schools is not something that a crisis ever forces you to do. The consequences of a third-rate education system creep up on you and, experience shows, can be tolerated indefinitely. Many vested interests prefer it that way. Talk about the issue and move on is the line of least political resistance.

You can read the rest of the article here.

Replacing Souter

An excellent column on this by Stuart Taylor [the link expires in a week].

What Obama needs, in short, is an intellectually stellar, not-too-old, Hispanic woman lawyer with empathy for the powerless; views on social issues that are predictably liberal but not so activist as to inflame the Right; views on presidential war powers that are predictably deferential but not so much so as to inflame the Left; broad real-world experience; and, of course, rapport with Obama.

No such human being exists, I suspect. I also suspect that the president may come to see the opportunity to choose a new justice as a lot less fun than a law professor might imagine.

The evolution of progress

I'm just back from a symposium which discussed the draft of a new book by my friend and former colleague Matt Ridley, author of "The Red Queen", "The Origins of Virtue", "Genome"--each of them a masterpiece of popular science writing.  The new book applies Matt's interest in evolutionary science to economics. It takes a long view, and a very optimistic one. It is a kind of antidote to Jared Diamond's pessimism. It is still at an early stage, and I have some questions about the thesis, but the first draft is brilliant and I don't doubt the final version will be essential reading.

I came away from the meeting with a long reading list and several thoughts. First, all symposiums--but especially those discussing grounds for optimism about the human project--should be held in Napa Valley. Conditions in the area lend themselves to cheerfulness, at times almost excessively so. (It is not for nothing that I got married there. Not this week, you understand. That was a previous visit.)

Second, the interface between genetics and economics is well worth exploring. I reached the same conclusion a few years ago after reading Paul Seabright's "The Company of Strangers", a really wonderful book that has not had the readership it deserves. (Here is a review I wrote for The Economist.) Perhaps the literature is about to blossom now, however. A lot of research seems to be under way.

One of the participants in the symposium was Anna Dreber, who has been researching among other things the links between testosterone and risk-taking in financial markets, and the connection between a certain genetic trait, DRD4, and economic behaviour. DRD4 appears to be linked to migration--a highly entrepreneurial activity--and again to financial risk-taking. One wonders whether bank regulators, in the aftermath of some future financial meltdown, will want banks to monitor the incidence of DRD4 among their employees, and perhaps set higher capital requirements for institutions with too high a reading. (Explicit genetic discrimination in hiring will be illegal, of course, so the issue will have to be dealt with after the fact. Alternatively, they could just hire more women.)

Robin Hanson of GMU and Overcoming Bias was also at the meeting. He gave an excellent presentation on the misunderstood pre-history of economic growth. He offers some further reflections on the topic, deeper than mine, on his blog.

Republicans all at sea

This new column for the FT gauges the depths to which the Republicans could sink:

One thinks of the British Labour party's reaction to Margaret Thatcher's victory in 1979. Labour lost because it had not been socialist enough, was the party's diagnosis: it needed to be truer to itself. Having forgotten how you win elections - namely, by occupying the middle ground - the party then lost its desire to win them. Better to be true to your principles and out of power than to compromise. True to its principles, it was out of power for nearly 20 years, and the Thatcher revolution transformed the country.

The Republicans' emulation of this proven model of political failure takes on an even more farcical aspect when you consider the conservative ideas to which party purists say they want to return. Labour under Michael Foot at least had an alternative programme of policy and a leader - almost any is better than none - to enunciate it. Republicans have neither. Their platform, if you can call it that, is a compendium of slogans and prejudices, bound together by disgust at the Obama administration. With the economy in its present state, this is no time to be saying "government is the problem" - especially if you have nothing further to add and the economy's troubles are universally understood to be the legacy of a Republican president.

The party needs to frame practical, coherent, and above all centrist alternatives to what Mr Obama and his congressional allies are doing. Instead, it wants to shore up its base, chant its slogans and purge its moderates. You have to laugh. Yet this gleeful suicidal tendency is sad as well as funny. There is plenty of scope for calm, centrist criticism of Mr Obama's bold progressive agenda. The country needs exactly this.

The rest of the article is here.

How to do cap and trade

The prospects for carbon cap and trade this year are not good: the Senate has too many doubters, Democratic and Republican alike. Still, the measure in the House is interesting. In this new column for National Journal, I argue that with a nip here and a tuck there, it could be made to act like a carbon tax in all but name. A carbon tax has a lot of advantages. And not having to call it that would be even better.

Many economists would prefer a carbon tax to cap-and-trade. One reason is that it makes this kind of fiscal gaming a bit more difficult and -- saying the same thing in another way -- a bit easier for the general public to spot.

A more fundamental difference is that a carbon tax sets a price on greenhouse-gas emissions and, in effect, lets quantities fall where they may. Cap-and-trade does the opposite: It sets a quantitative ceiling, and then the price of a permit -- in effect, the tax rate on carbon, by another name -- moves up and down according to the severity of the limit and economic circumstances. If the ceiling presses down very hard at a time of rapid economic growth, the permit price will be high; set the ceiling high enough in relation to economic activity, and the permit price would fall to zero, because nobody would have to reduce their emissions to comply.

The notion of keeping the tax constant and letting quantities vary also fits with the idea that additional carbon emissions have a known environmental cost. In principle, if you set the tax rate equal to that cost, the market can be left to decide what the correct ceiling on emissions should be. Most environmental scientists, however, would prefer to set a ceiling for the sake of extra certainty in achieving cuts of a particular size. The case for this is stronger if the damage caused by carbon emissions has so-called threshold effects -- that is, if the damage rises discontinuously once a certain line is crossed, which is a distinct possibility. You set a ceiling to ensure that the threshold is not crossed.

The trouble is, using that approach, the implicit carbon tax may then fluctuate so much that it disrupts the economy and makes energy planning for the future more difficult. Moreover, the logic of threshold effects is a little dubious when you are setting limits for the U.S. economy in isolation. Global carbon emissions, not national carbon emissions, drive global warming. The United States can set a quantitative ceiling for its own emissions, but even if it complies with that target, emissions elsewhere will decide whether a critical global threshold is crossed.

The draft bill actually envisages a compromise between the two approaches. It would create a "strategic reserve" of extra permits that could be allocated to prevent "unexpected allowance-price fluctuations." If this reserve were of sufficient size, and if it were used to hold the prices of permits steady at a specific amount -- say, $20 per ton of carbon -- then the result would be akin to an outright carbon tax set at that rate. If the architects of cap-and-trade have something along these lines in mind, the case for cap-and-trade over an explicit carbon tax collapses, and vice versa: The two become one.

If cap-and-trade were administered this way, the only remaining differences would be whether you use the word "tax," and how much cover you give to Congress in creating and disbursing pork.

You can read the whole column here [link expires in ten days].