Review: Tools to Assess Candidates’ positions

• Any foreign policy must confront an anarchic world

• Candidates (and everyone) will devise foreign policy positions based on:– 1. How dangerous they (we) think the world is and

whether that danger can be averted– Very dangerous—only power matters

» Trust no one and go it alone--unilateralism » Trust no one and dominate others

– Danger can be averted— intentions matter and can be influenced

» Trust that international cooperation can mute problems and solve global problems

» Or isolation mind own business and others will not be afraid

Tools to assess candidates’ positions

• 2. How broad America’s interests are or should be– Broad interests in a world where only power reduces danger

• go-it alone unilateralism • or dominance of international organizations

– Broad interests in a world where diplomacy can reduce danger• international cooperation• Foreign aid

– Narrow interests in a dangerous world:• Independence• Defense

– Narrow interests in a world where danger can be muted: • Isolation: If the U.S. focuses inward, others will be reassured that

the U.S. will not attack or hurt

3. Foreign Policy Traditions

• Myth of American Exceptionalism: the United States is a nation "providentially set apart in the New World and wanting nothing more than to tend to its own affairs,"

– only grudgingly responding to calls for global leadership "in order to preserve the possibility of freedom."

• first by pushing west until it reached the sea, • then through a brief period of direct colonialism, • and more recently through a ruthless if indirect imperial policy of control.

• In reality, the United States has sought expansion, open door policy with China• It worked spectacularly. Creation of global institutions to manage global economy• The United States became a great power replete with material abundance. But….. • Right around the time of the Vietnam War, this began to unravel.

– Trade imbalances, federal deficits,– mushrooming entitlements,– plummeting savings rates,– energy dependence

• led us to become a debtor nation, counting on others to foot the bill—US became a participant in global institutions, not a leader..

1920s global interdependence

1930s Depression

1945-73 U.S. LeadershipInternational Financial

InstitutionsInternational Trade Organizations

Global interdependence

1970’s Recession

1980’s1990’s

GlobalizationAbsence of Leadership and Regulation….Govt = “private good, public bad”

British leadership

Protectionism

Protectionism

4. Market Forces

Global Danger Only reduced through power Reduced through diplomacy

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America as Crusader

Strategic Trade—capture markets

Dominance of International Institutions

America as Crusader

Leadership in International Institutions

Free Trade Agreements with global protections, regulations

America as Promised Land

Strategic Trade

Regulated Trade

Protectionism

Self sufficiency

America as Promised Land

Protectionism

Self sufficiency

Turning to the Current economic crisis….

• 1. Housing values remain stable for 100 years to 1995• 1995-2005 Housing prices double +• 2. Wage stagnation and income inequality +• 3. Deregulation of financial markets

• 4. Easy money easy mortgages as bets on in housing prices + Run of

CDOs and derivatives + borrowing to buy them (betting on in value) + rating fraud + easy insurance (AIG) highly leveraged banks

Housing supply overwhelms demand housing prices fall + mortgage defaults

CDOs lose value + Bank stock prices fall credit drys up Begin the bailout (hopefully) more credit (hopefully) save businesses and jobs (hopefully) economic growth

Fannie Mae and Freddy MacWhy did Fannie and Freddie dive into the subprime mortgage market? And were their practices just one facet -- or the most important cause -- of the crisis? The questions are related and the answers

debatable.

• The reckless lending policies of Fannie Mae and Freddie Mac, necessitated a $200 billion government rescue Sept. 2008 • Powerful Democratic (and some Republican) advocates of affordable housing, have been the GSEs' most potent and ardent champions in

recent years. • in summer 2005. The Senate Banking Committee adopted a bill to impose tighter regulation on Fannie and Freddie, with all Republicans

voting for it. But the Democrats voted against it in committee and killed it on the floor.• Also in 2005, Fannie and Freddie began buying vast amounts of subprime and "alt-A" mortgages with, in many cases, virtually no down

payments, that had been taken out by people with low credit scores and low incomes relative to their monthly payments. • GSEs dramatically lowered their traditional underwriting standards.• Between 2005 and 2007, Fannie and Freddie "sold out the taxpayers" by financing almost $1 trillion in such highly risky mortgages, • Fannie and Freddie played a major role in causing the current crisis, because their quasi-governmental status allowed them to privatize

profit while socializing risk. They bought mortgages from banks, which could then use the cash to make more loans -- and they were enabled them to lend at high rates to reap enormous profits for their private stockholders and executives and to borrow at low rates based on the government's implicit promise to rescue them from any failure, as it has now done.

• private Wall Street investment banks and others financed even more of the $3 trillion in substandard mortgages than Fannie and Freddie did

• although the Clinton administration pushed the GSEs to finance more affordable housing by purchasing subprime mortgages, it was not until 2005 that the GSEs began financing risky loans in huge amounts.

• Freddie and then Fannie had been ravaged in 2003 and 2004 by accounting scandals The company was under siege. Competitors were snatching lucrative parts of its business. Lenders were threatening to sell directly to Wall Street unless Fannie bought a bigger chunk of their riskiest loans.

• "So Mr. Mudd steered Fannie into more-treacherous corners of the mortgage market, • Fannie's stamp of approval made shunned borrowers and complex loans more acceptable to other lenders• The banks had little incentive to avoid risky loans as long as they could sell them to the GSEs and others long before any defaults.• Fannie and Freddie joined the junk-mortgage (bad ratings) binge to avoid losing business to private companies such as Bear Stearns,

Lehman Brothers, and Goldman Sachs. • August 2004 decision by the big bond-rating agencies, Moody's and Standard & Poor's, to loosen their guidelines for rating mortgage-

backed securities.• But why would investment banks take foolish risks with their own money, as well as that of investors, just because Fannie and Freddie

were doing so? • the companies wrongly assumed that these must be sound investments because Fannie and Freddie,

McCain: market solutions

• tax cuts aimed at helping investors weather the financial crisis. – temporary reductions on capital gains tax, – on taxes paid by senior citizens when they

withdraw money from retirement accounts, – on taxes paid on unemployment benefits.

Obama: market and regulatory solutions

• tax breaks for businesses that create new jobs, • a freeze on foreclosures by banks that participate in the

government's rescue program • a public-works fund to rebuild the nation's infrastructure

while keeping people employed. • He embraced McCain's proposal to suspend the rule that

would require retirees to start liquidating their 401(k) holdings at the bottom of the stock-market crash.

• He proposed that Americans should be able to withdraw some of those retirement savings without penalty during the economic crisis.

Global Cooperation

British Leadership (again?)

• At a special European summit meeting, the major economies of continental Europe declared themselves ready to follow Britain’s lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts.

• And Mr. Paulson reversed course, and now plans to buy equity stakes rather than bad mortgage securities

1990’s GlobalizationNo Leader!!!! No regulation!!!!

2008

Global Leadership? Britain? G8?International Organizations?

Wage stagnation

HousingBubble

Easy Money Future?

On participation in the global economy: What do Americans

Want?• In a recent Pew Centre poll, 48% of Americans

said trade agreements are a bad thing, and just 35% thought they were good—the worst margin in at least a decade.

• Free trade is also deeply unpopular with Democrats in Congress, whose numbers are expected to grow after the election.

• That means either president will face an uphill battle getting new agreements through.

McCain Obama

• Free trade must be free of restrictions and regulations

• opposition to farm and ethanol subsidies

• extract concessions from trading partners

• free trade can advance only when American workers are protected

• Supports trade subsidies

• extract concessions from trading partners

Session 4: Energy Policy

Energy: What are the issues

U.S. 5% of population uses 25% of world’s energy (not a foreign policy issue)

Soooooo….what are the foreign policy issues?• Central voter concern of the 2008 Election

– in 2006, energy was the most important issue for independent voters.

– In 2008, recent polling shows energy to the be the single most important issue for the entire electorate.“

• Why is Energy a foreign policy issue?– Rising prices of oil – Energy Independence – Climate change …….emissions

1. Price of Oil: The central issue

• Gas in the U.S. is still cheaper than it was in the nineteen-seventies, after adjusting for inflation,

• And that it still costs a lot less in the U.S, than it does abroad. – In the United Kingdom, for example, a gallon of

gasoline costs more than five dollars.• Many Americans believe that they are entitled to

cheap fuel, regardless of how much they consume.

• The price at the pump is up more than a quarter on its level a year ago. 

The Electorate wants low prices and no taxes on gas

Both candidates say they will lower prices

• .McCain suggested suspending America’s tax on fuel to make life easier for drivers and increase domestic supply of oil.

• Obama wants to raise taxes on oil producers, and give some of the proceeds to help those hardest hit by the rise in energy prices.

2. Energy Independence

• Both Candidates want energy independence and “clean” energy

Both candidates have incoherent policies

• long-term plans aimed at energy independence and reducing emissions,

• undermined by short-term promises to drivers to reduce price of oil.

• Why?

2. Lower Prices mean more consumption and Energy Dependence

• In 2003, the United States consumed some twenty million barrels of oil a day,

• slightly more than half was imported from abroad, much of it from the Persian Gulf.

• By 2020, domestic oil producers will be meeting less than a third of United States needs,

• Gulf countries will be supplying up to two-thirds of the world's oil.

• "This imbalance, if allowed to continue, will inevitably undermine our economy, our standard of living, and our national security,"

Can the United States move beyond dependence on foreign energy?

• For much of the twentieth century, the United States was the world's largest oil producer,

• Today we are only the third-largest producer,– behind Saudi Arabia and Russia.

• In terms of proven reserves, the U.S. has slipped to tenth place in the international rankings, – as reservoirs in Texas, Louisiana, and Oklahoma

have started to dry up.

US dependence on foreign oil

Dependence is now necessary:

• If the United States were forced to rely on its own oil resources alone, it would run out of oil in four years and three months.

• What Can be done?

Is Energy Independence the answer?

Independence will not be easy to achieve….

• Making America less reliant on foreign oil involves – Confronting powerful commercial interests,– solving difficult technological problems, and– convincing the American public that cheap

fuel is not a birthright.

How to reduce Dependence?

• Increase Domestic oil supply – ANWR – offshore drilling

• Coal and Natural Gas

• Alternative Energies

• Conservation

Arctic National Wildlife Refuge

The Arctic National Wildlife Refuge

• Surveys carried out by the U.S. Geological Survey suggest that it may contain about ten billion barrels of recoverable oil.

• In 2025 ANWR could be generating about a million barrels of oil a day.

• By 2025 Americans will be consuming almost thirty million barrels a day.

• So…ANWR could satisfy perhaps three or four per cent of that total

• meaning that most of the oil we use would still have to be imported.

• So…..Not a solution

McCain and Obama on off shore drilling

• McCain wants to lift the long-standing ban on offshore drilling (although, unlike Sarah Palin, he would keep the Arctic National Wildlife Refuge off-limits).

• Obama opposes this idea

• He will probably give in to it…he might drop his objections in order to push a bipartisan legislative package on energy

Dry Oil Wells

What about Natural Gas?

Natural Gas

• already meets about half of America's energy needs, mostly in the form of fuel for power stations.

• But….America possesses just three per cent of the world's known reserves;

• Iran, Russia, and Qatar together possess more than fifty per cent.

• There can be no guarantee that a future government in Tehran, Moscow, or Doha won't seek to exercise its market power in the same way that opec did in the nineteen-seventies.

Gazprom's Yuzhno-Russkoye gas field in the Yamal-Nenets District of Russia

Coal

Coal in the U.S.

• It is still abundant in the United States. We are “The Saudi Arabia of Coal”

• But burning coal is a main source of global warming

Alternative Energies: energy independence within a generation.

geothermal heat pumps use the relatively constant temperature— six feet below the earth’s surface--to draw warm air into a building in winter and remove warm air in summer.They can save building owners 25 percent to 65 percent on energy costs while reducing carbon dioxide emissions.

On the right track?

• Renewable energy now meets 7 percent of the nation’s energy needs

• public subsidies have promoted a leap for several alternative energy sources in recent years.

• federal legislation aims to replace a major share of the oil now imported into the United States with domestically produced biofuels in the next 15 years.

Conservation

But Not this kind…….

Conservation and alternatives to oil

• Asking consumers to conserve won’t get votes so…….

• Tighten fuel efficiency standards (Obama)

• Tax credits for hybrids

• Hydrogen powered cars

Consumers Do their Part: Electric Cars and Hybrids

The Tesla

Energy: McCain’s position• McCain, is less zealous in his environmentalism and more forgiving

of big business

– Not a very good Track Record

• Rejects raising auto fuel efficiency standards•  In both 1994 and 1999, McCain voted against more money for

renewable energy, including solar. • In 2005 he voted against legislation that would have required utilities

to get 10 percent of their power from renewable sources. • In 2007 he missed every vote on renewable energy. • He is against subsidies for wind and solar energy, although he is in

favor of subsidies for nuclear power.• Advocated temporary gas tax suspension to lower gas prices

McCain on biofuels

• refused to endorse subsidies for ethanol

• opposes tariff on imported ethanol

• Renewables: Tax credits to encourage – cleaner cars– encourage spending on research– promote renewable power. 

Nuclear Energy and Electric Cars

•  Renewables Wants 45 new nuclear plants by 2030,

• Renewables: favours subsidies for nuclear power.

• Renewables and conservation He has also proposed a $300m prize for anyone who comes up with a battery that is small, cheap and powerful enough to propel electric cars into the mainstream.

Obama’s Energy Policies

• Obama envisages stiffer regulation for business and a bigger role for government.

• Conservation: Promotes higher efficiency standards• Renewable energy: double federal research money for

renewable energy, – Aim for 25 percent of our electricity from clean sources by 2025

– windfall tax on oil-company profits to discourage drilling

• Obama supported renewables in the Senate, making it back for a key vote (that McCain failed to vote on) during the primary campaign.

Obama on energy independence

• Renewables: upgrade of the electricity grid, the better to bring renewable energy from windy plains and sunny deserts to cities. – he does not back building any additional nuclear

power stations.

• Conservation: steer more funds towards public transport.

• Conservation: He has set a date—2014—for phasing out incandescent light bulbs

Obama on biofuels

• four overlapping sets of regulations to promote ethanol: – a renewable-fuel standard, – a low-carbon-fuel standard, – incentives for producing cellulosic ethanol

(from trees and grasses, rather than from corn or sugar)

– incentives for locally owned ethanol distilleries.

Global Danger Only reduced through power Reduced through diplomacy

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McCain: Energy Independence

Drill Baby Drill

Renewable energy

More nuclear plants

Obama: Energy Independence

Renewable energy

Conservation

No more nuclear plants

Are their proposals for energy independence realistic?

• New energy sources are unreliable

• Impacted by the economic crisis

• What about Transport?

Reliability is an issue

• Power generated from waves, windmills, and solar panels is weak, intermittent, and expensive-at least twice the cost of electricity produced from coal or gas.

• When it is cold or dark, solar panels don't produce energy;

• when it is calm, wind turbines don't turn.

Hurt by the Economic Crisis• Shares of alternative energy companies have fallen even more

sharply than the rest of the stock market.• if the prices for oil and gas keep falling, the incentive for utilities and

consumers to buy expensive renewable energy will shrink. • That is what happened in the 1980s when a decade of advances for

alternative energy collapsed amid falling prices for conventional fuels.

• It is now happening again…….• Now Tesla Motors, is forced to delay production of its all-electric

Model S sedan, close two offices and lay off workers.  • Now…“Natural gas at $6 makes wind look like a questionable idea

and solar power unfathomably expensive,” • Government funding for renewables is now going to have to

compete with levels of government funding in other areas

Transportation

Transport Overlooked?

• Switching to renewable energy wouldn't reduce oil imports because most power stations don't run on oil, which is largely used for road and air transport.

• Developing a transport fuel that can compete with oil is an enormous challenge.

• 28 per cent of all energy is used for transport

Is energy independence a Myth?

What are the Alternatives?

• Global Interdependence– Diversify sources of oil– Ensure reliable OPEC supply

• Raise the Price of Oil

3. Diversify sources of energy globally

• new discoveries in Russia, Central Asia, and West Africa will eventually allow the United States to diversify its sources of petroleum.

• The most recent giant field that was discovered was in Kazakhstan…. That field probably has more oil in place than the total remaining known reserves of the United States.

• The exploitable resources in the former Soviet Union are probably on the same order of magnitude as those in Saudi Arabia and Iraq."

But Too much uncertainty….

• Nobody knows for sure how much crude is buried in around the world

• or how much it will cost to extract those reserves and transport them to world markets.

• Taking the planet as a whole, the rate at which oil is being discovered has slowed down since the nineteen-sixties,

• and some geologists believe that global production is about to start falling.

We still need OPEC, but how do we insure reliable supply?

Need is exacerbated by growing global demand

• Global demand for oil is increasing

• During the past ten years, global demand for oil has risen by almost a fifth,

• with the greatest increases coming from India and China

• More demand and uncertain supply means higher prices at the pump

4. Control the supply: The Carter Doctrine

• January 23, 1980, President Jimmy Carter in his State of the Union address:

• "Let our position be absolutely clear: An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force."

U.S. efforts to secure supply of Middle East oil

• Prior to the Carter Doctrine, the United States had exercised its influence in the Middle East through friendly governments in Saudi Arabia and Iran:

• In 1979, Iran broke from the United States and the Pentagon embarked on a lengthy military buildup in the Gulf,

• In 1983, President Reagan established a U.S. Central Command, charged with defending U.S. interests in East Africa, the Middle East, and Central Asia.

• After the Gulf War of 1991, the U.S. stationed its forces in Saudi Arabia, the Muslim holy land, and built up its presence in Qatar and Turkey.

• Iraq fell victim to Washington's willingness to project its power militarily,

• the invasion of Iraq is only the latest in a series of military engagements in the Gulf proceeding from the Carter Doctrine– the very first military objective of Operation Iraqi Freedom was to

secure control over the oil fields and refineries of southern Iraq."

Control the supply: Iraq?

Iraq

• In 1999, Cheney pointed out that by 2010 the world would probably need another fifty million barrels of oil a day.

• "So where is the oil going to come from?" Cheney asked.• the Middle East, with two-thirds of the world's oil and the

lowest cost, “is still where the prize ultimately lies."•  As Vice-President, Cheney was put in charge of the

National Energy Policy and warned that Saddam would be able to seize control of the world's economic lifeline if he acquired weapons of mass destruction:

Policy of Military Intervention doesn’t usually work as planned

Market Instability and high gas prices

• It has destabilized the rest of the Middle East, especially Saudi Arabia,

• and this has severely rattled the oil market. • Futures traders fear that interruption in supply

could lead to a crisis in the market.• This has led them to bid up the current price, • an increase that is sometimes referred to in the

markets as a security premium.

• And what the candidates aren’t discussing…..

Global Danger Only reduced through power Reduced through diplomacy

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Control sources of energy supply•friendly governments and puppet regimes•Military intervention

Diversify sources of supply

Global governance of energy?

McCain: Energy Independence

Drill Baby Drill

Alternative energy sources

Obama: Energy Independence

Alternative Energy sources

Conservation

5. Raise the Price of Oil: not discussed

• Between 1976 and 1985, when gasoline prices were high, drivers switched to smaller, less wasteful cars,

• and oil consumption fell by ten per cent.

• Once oil prices slipped back, Americans returned to their beloved gas-guzzlers.– Between 1985 and 2000, the demand for oil

rose by almost twenty-five per cent.

Advantages of higher gas prices

• Higher energy prices encourage gasoline conservation,

• they help the renewable-energy sector, which can't compete at today's prices

But did higher energy prices cause the economic crisis?

• When the price of fuel goes up, it acts like a tax on the economy, reducing consumers' purchasing power and raising firms' costs.

• After the oil-price shocks of both 1973 and 1979, the economy went into a recession.

• After 2001, As oil prices rose, the rate of economic expansion fell.

• Alan Greenspan blamed economic slowdown on rising oil prices.

New Energy Issues

• Resource Scarcity: How will the United States Cope

• Environment: Is independence even possible?

• The intertwining of Environment and Resource scarcity: New sources of international conflict?

The End