Thursday, May 20, 2010

Local Carbon Taxes Are an Innovative Band-Aid

I must say, I'm pretty proud of the county where I grew up: Montgomery County, Maryland. It just passed the first county-level carbon tax in America. It also increased the energy consumption levy on homeowners and businesses by 85 percent. This comes as only mildly surprising for an area that has long been a fairly progressive suburb of Washington, D.C.

Combined these two new sources of revenue should generate $15 million and $112 million respectively. The sad news is that the money is needed to bridge a budget deficit, and the taxes will sunset in two years. The carbon tax applies to all sources generating more than 1 million tons of CO2 in a given year, charging them $5 per ton. Ironically, only one facility makes the cut: the Dickerson Generating Plant, a coal power station. Some of the money is set to be reinvested in an energy efficiency program for local homeowners.

The tragedy here is that local legislation has become necessary in the fight against climate change precisely because of the failure to pass national and international laws. This failure produces the sort of regulatory patchwork many large businesses say they hope to avoid in their operations across multiple districts. Of course, many of those same large corporations have also lobbied against any action whatsoever.

So while I applaud the first-movers in Maryland, let's hope they also hop the Metro to Washington to put some pressure on Congress to pass a clean energy bill this year so that the Obama administration can negotiate in better faith this winter in Mexico. Meanwhile, China is set to impose a carbon tax on its industries starting in 2012.

[PHOTO CREDIT: Power lines in Dickerson, Md. by Andrew Bossi (CC).]

Wednesday, May 12, 2010

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.