Connor+&+Jarele


 * So far we plan to switch between to versions of HTF **

** Advantage 1: U.S. Energy Policy **

** First, current Federal Energy Strategies fail – they impose market distortions, and ineffective constraints on private industry **

__ The U __ nited __ S __ tates __ ' current energy policies take an ineffective, piecemeal approach to addressing the nation's transportation energy needs __ - **__ an approach that forestalls a comprehensive, coordinated policy from being implemented __**. [*147] A. Traditional Energy Policies Since the automobile replaced the train as Americans' primary mode of transportation early in the 20th century, United States foreign policy has focused on ensuring American industry and individual consumers have access to inexpensive petroleum. Enormous military and foreign policy expenditures have been maintained to this end. This is not to suggest that such government actions were unwise. n4 Rather, it shows that __ government foreign policy expenditures have distorted the market for oil. __ Foreign policy expenditures represent, effectively, a government subsidy of gasoline's true cost. Like any cost not realized by market actors, the low price of gasoline has led to overproduction and overconsumption of vehicles. These distortions have shaped the sprawling development of American society, which widespread car ownership made possible, and which requires Americans living in all but a handful of cities to rely on cars. Not only does the low price of gasoline keep car ownership high, it also decreases consumer demand for fuel-efficient vehicles. These trends have produced a country very dependent on artificially inexpensive foreign oil. Indeed, President George W. Bush went so far as to call this dependency an addiction. n5 But it is an addiction enabled by government policies; if American consumers are addicts, the United States government is their dealer. B. Alternative Energy Policies __ Recent government policies purportedly intended to wean Americans off oil do not correct existing market distortions, but rather **impose additional distortions** __. Moreover, the fact that these policies are not aimed at making Americans drive less, but only at lessening the environmental impact of this level of driving, n6 suggests that considerations other than efficiency motivate lawmakers. n7 Initiatives promoting the production of biofuels and the consumption of fuel-efficient vehicles provide evidence of this distorting effect. [*148] 1. Biofuel Production Subsidies Biofuels such as ethanol and biodiesel have widely been promoted as a panacea to America's dependence on foreign oil. n8 Touted as providing emissions benefits over fossil fuels, n9 increasing national security, and revitalizing rural communities economically, n10 biofuels have received substantial political support. However, there is a broad consensus that given the low price of gasoline, these alternative fuels will not be competitive in the absences of government sub-sidies. n11 Among the many subsidies available to producers of biofuels, most notable is the Volumetric Ethanol Excise Tax Credit, or "blender's credit," which credits oil companies with $ .51 for each gallon of ethanol mixed into gasoline sold. n12 Biodiesel blenders receive a similar tax credit of $ 1.00 per gallon of "agri-biodiesel," made from plants such as soybeans, and $ .50 per gallon of "wastegrease biodiesel," made from recycled vegetable oils and animal fats. n13 Until December 31, 2008, small producers of ethanol and biodiesel received a tax credit of $ .10 per gallon of biofuel produced, up to 15 million gallons. n14 In addition, the government rewards fueling station owners with a tax credit of 30% (up to $ 30,000) towards the cost of installing biofuel-capable refueling equipment. n15 The federal government also imposes significant tariffs on imported biofuels; imported ethanol is subject first to a tariff equaling 2.5% of its total value, and second to a $ .54 per gallon tariff. n16 [*149] 2. Biofuel Consumption Incentives The government also provides tax credits to consumers who purchase hybrid vehicles, vehicles that run on biofuels, or other fuel-efficient cars. n17 Since hybrids cost $ 2,000 to $ 7,000 more than cars that run on gasoline, such incentives are necessary to make alternative fuel vehicles competitive. Savings from these vehicles' increased fuel economy take many years to compensate for the vehicles' higher prices, even when gasoline prices are high. Indeed, "from a short-term payback perspective, without the tax credits, hybrids make no sense for the average driver[.]" n18 However, tax credits available to consumers "start to go away when a car maker sells its 60,000th alternative-fuel vehicle, a level Toyota reached in mid-2006 and Honda hit in the third quarter of 2007." n19 Some states provide consumers incentives to purchase alternative fuel vehicles as well. For example, in California, hybrid and alternative-fuel vehicles are per-mitted to drive in carpool lanes regardless of the number of passengers they carry. n20 These primarily tax-based policies aim to compensate for the low relative price of gasoline by subsidizing biofuel production and consumption, in order to encourage producers and consumers to utilize non-petroleum resources more than they otherwise would. In this way, lawmakers respond to incentives produced by the artificially low price of gasoline by artificially lowering the price of alternatives. However, so distorting fuel markets has created numerous problems, described below. III. Shortcomings of the Current Approach These problems stem from the economic inefficiency inherent in government policies. Increasing the supply of alternative fuel vehicles rather than addressing the demand for them only encourages dependence on government subsidies, and burdens the government with a role better left to the private sector. As a consequence, the United States' uncoordinated assortment of transportation energy [*150] policies poorly addresses the nation's economic, national security, and environmental concerns. n21 A. Economic Inefficiency __ Current energy policies both produce and perpetuate inefficient externalities n22 **that undermine their success** __. In the absence of externalities, price information encourages the optimal level of output: that where marginal cost equals marginal benefit. Market prices convey information in two ways; they tell producers what benefits consumers derive from goods and services, and they tell consumers what those goods' and services' production costs are. n23 However, __ the government's two-sided intervention in the transportation fuel market produces significant externalities unaccounted for in fuel prices __. **__ Government policies artificially reduce the cost of transportation fuels such as gasoline __**. __ This lower cost inflates consumer demand for these fuels, to the detriment of the United States' economy, national security, and environment __. B. Economic Harm 1. Volatile Gasoline Prices Economic externalities produced by the government's current energy policies are significant. While American transportation consumes a great deal of petroleum products, especially gasoline, the United States' domestic petroleum resources are limited. As a consequence, American consumers and industry are vulnerable to price shocks in the international oil markets. n24 OPEC controls 41% of the world's petroleum reserves, providing member countries significant control over oil production and prices. n25 And as is true of any commodity, oil prices are inherently volatile. n26 "The price of crude oil fluctuates based on a wide variety of international and political events, seasonal demand, and other factors, with the [*151] price of crude [oil] determined in the global market." n27 This renders the gasoline market "vulnerable to hurricanes, accidents, crude supply interruptions, terrorists, and dictators." n28 This volatility interacts with consumer behavior in an interesting way. Although consumer demand for gasoline is relatively price inelastic n29 in the short term, n30 fluctuations in gasoline prices do affect individuals' long-term outlook, influencing consumer demand for vehicles, for example. In response to sharp increases in world oil prices during the 1970s n31 and since 2006, consumers seek more fuel-efficient vehicles, and these preferences correspondingly recede as gas prices drop. n32 However, because vehicle design and production lag behind demand, such drastic short-term shifts in consumer demand cripple the automobile industry. Publicly-traded automakers operate on short timelines. Even if they could accurately predict future consumer demand, automakers report earnings to shareholders on a quarterly basis, face constant operating costs, and must make regular payments on outstanding debt. Automakers therefore must respond to consumer demand tied to volatile gasoline prices, which is easier said than done. All too often, automakers fail to anticipate future demand accurately, causing fuel-efficient vehicles to hit the market just in time for falling oil prices to destroy the demand for them. n33 Indeed, as gas prices plunged in November 2008, "the Toyota [*152] Sequoia and Honda Pilot SUVs posted big gains while sales of most other cars plunged." n34 2. Ineffective, Unfair CAFE Standards These dynamics reveal the futility __ of lawmaker reliance on __ Corporate Average Fuel Economy (" __ CAFE") standards __. CAFE standards __ mandate that automakers produce vehicles that meet certain fuel economy ratings __. n35 From 1990 to 2007, cars were required to achieve an average fuel economy of 27.5 miles per gallon. n36 **__ In an attempt to decrease the United States' dependency on foreign oil, the 2007 Energy Independence and Security Act ("EISA") removed the previous CAFE exemption for sport utility vehicles and cargo vans and raised the efficiency mandate for all new passenger vehicles to 35 miles per gallon by the year 2020 __**. n37 This standard is projected to decrease United States oil consumption by 2.3 million barrels daily. n38 **__ However, such "government "efficiency' edicts are never efficient." __** n39 __ The availability of efficient cars does not affect consumer purchasing decisions regarding efficiency - **only gas prices do that** __ . In the short term, people respond to higher fuel prices by purchasing more efficient vehicles, not by driving less. n40 Such behavior is emblematic of efficiency measures designed to decrease consumption. "The energy saved on a more efficient refrigerator trickles all too easily into a larger one, just as the calories saved with a Diet Coke generally trickle into a brownie." n41 **__ Ironically, CAFE standards may even work against government policies subsidizing biofuels because improvements in vehicle efficiency may forestall private research and investment in non-petroleum sources of transportation energy __** . n42 [*153] __ Moreover, CAFE standards __, intended to counterbalance incentives produced by other government policies, **__ represent a significant uncompensated government imposition on automakers __**. __ When gas prices are low, CAFE standards force carmakers to lose money producing small vehicles for which there is less demand, in order to be allowed to produce the large vehicles that earn a profit __. n43 **__ Regulators thus dump the true cost of government policies on the private sector __**, creating the illusion of good government "as they impoverish society as a whole." n44
 * Turgeon 2k10**
 * (Evan N. Turgeon, Legal Associate at the Cato Institute; J.D.University of Virginia School of Law 2009; B.A. Tufts University 2004, “Triple-Dividends: Toward Pigovian Gasoline Taxation,” Journal of Land, Resources, & Envir onmental Law 2010, pg lexis//um-ef)//**

** And, specifically new CAFE regulations are coming – ** //**Greene 6/28**// //**(Michael, “34.1 MPG CAFE Standards for 2016 Upheld by U.S. Court of Appeals” http://www.treehugger.com/cars/341-mpg-cafe-standards-2016-upheld-us-court-appeals.html**//**HH)** __ The 2012-2016 Corporate Average Fuel Economy standards __, better known under the acronym CAFE, __ mandate reaching 34.1 MPG by 2016 __ , a number that many big players felt was too high. This __ led to a challenge in the courts __, all the way to the U.S. Court of Appeal. The U.S. Supreme Court decision on health-care will no doubt totally overshadow this less media-friendly legal decision, but __ the U.S. Court of Appeal actually upheld the federal CAFE standards __ : The U.S. Court of Appeals in Washington dism __ issed challenges brought by states led by Texas and major industries including chemical, energy, utility, agriculture and mining companies as well as the National Association of Manufacturer __ s. The decision is a big win for the __ Obama __ administration, __ which plans to finalize the 2017-25 fuel-efficiency standards and greenhouse gas emissions limits by August __. __ The new rules will hike requirements to 54.5 mpg by 2025 __. This is great news, because while they are flawed, CAFE standards are what we have now to move things along. They don't say how automakers must increase efficiency, just by how much. The can then figure out what solution works best.

** CAFÉ standards bankrupt the auto industry and ship jobs overseas **

T__he legislative action by the Senate to dramatically increase__ corporate average fuel economy (__CAFE) standards is a perfect example of how a poor law is created when non-engineers__ (i.e. senators) __dictate__ __engineering advances ("__CAFE quicksand," Commentary, June 14). __The arbitrary deadlines and requirements assume that the automakers can maintain the same product mix of large and small cars, vans, SUVs, trucks and so on, at various price points, while simultaneously marching steadfast toward the requirement as if it can proceed precisely as legislated.__ __And if the automakers can't succeed, they will simply limit the product mix to meet the requirement and we can cede the industry to the overseas__ automakers. The bottom line is this__: If an automaker can produce a vehicle that has dramatically better gas mileage__ than comparable models__, that vehicle will dominate its market. Therefore, market forces can and will force mileage improvements automatically within a timetable determined by engineering and technical advances. If the senators truly wanted to reduce gas consumption for the good of the country and the world, they would follow the model set by other industrialized nations and raise the gas tax__. This can be a floating tax designed to minimize large price swings so automakers can plan appropriately and not be subjected to sudden market disruptions that scuttle product plans. As it is, __the Senate is content to lay the burden of reduced oil consumption on U.S. automakers, who are obviously struggling and could be bankrupted by these requirements__, instead of on the oil companies, which have been wallowing in tens of billions in profits over the last few years. For the sake of the Midwest, Michigan and our domestic auto industry, I urge the House to reject this bill. This area and our industry have suffered enough and __wz do not need another nail in our coffin in the form of a poorly conceived solution to our oil consumption.__ Auto industry is key to the economy- consumer goods and multiplier effect __The auto industry is one of the most important industries in the United States. I__ t historically __has contributed 3 – 3.5 percent to the overall Gross Domestic Product__ (GDP). __The industry directly employs over 1.7 million people engaged in designing, engineering, manufacturing, and supplying parts and components to assemble, sell and service new motor vehicle__ s. In addition, __the industry is a huge consumer of goods and services from many other sectors, including raw materials, construction, machinery, legal, computers and semi-conductors, financial, advertising, and healthcare.__ The auto industry spends $16 to $18 billion every year on research and product development – __99 percent of which is funded by the industry itself.__ Due to the industry’s consumption of products from many other manufacturing sectors, __it is a major driver of the 11.5% manufacturing contribution to GDP.____Without the auto sector, it is difficult to imagine manufacturing surviving in this country.__
 * Washington Times **, 6-26-** 2007 **, Just say no to CAFÉ, lexis, S.O.
 * Hill et al 10****-** Sustainable Transportation and Communities Group and Project Lead, Project Manager of the center for automotive research, Research Associate at the center for automotive research, (Kim, Debbie Menk, Adam Cooper, “Contribution of the Automotive Industry to the Economics of All Fifty States and the Unites States”, [].

** And, a weak economy causes conflict – all emprirical analysis goes our way **

Less intuitive is how __ periods of economic decline may increase the likelihood of external conflict __. Political science literature has contributed a moderate degree of attention to the impact of economic decline and the security and defence behaviour of interdependent states. Research in this vein has been considered at systemic, dyadic and national levels. Several notable contributions follow. First, on the systemic level, Pollins (2008) advances Modclski and Thompson's (1996) work on leadership cycle theory, finding that __ rhythms in the global economy are associated with the rise and fall of a pre-eminent power and the often bloody transition from one pre-eminent leader to the next __. As such, __ exogenous shocks such as economic crises could usher in a redistribution of relative power __ (see also Gilpin, 1981) __ that leads to uncertainty about power balances, increasing the risk of miscalculation __ (Fearon. 1995). Alternatively, even a relatively certain redistribution of power could lead to a permissive environment for conflict as a rising power may seek to challenge a declining power (Werner, 1999). Separately, Pollins (1996) also shows that global economic cycles combined with parallel leadership cycles impact the likelihood of conflict among major, medium and small powers, although he suggests that the causes and connections between global economic conditions and security conditions remain unknown. Second, on a dyadic level, Copeland's (1996. 2000) theory of trade expectations suggests that __ 'future expectation of trade' is a significant variable in understanding economic conditions and security behaviour of states ____. __ He argues that __ interdependent states are likely to gain pacific benefits from trade so long as they have an optimistic view of future trade relations. However, if the expectations of future trade decline, particularly for difficult ____ to replace items such as energy resources, the likelihood for conflict increases, __ as states will be inclined to use force to gain access to those resources. Crises could potentially be the trigger for decreased trade expectations either on its own or because it triggers protectionist moves by interdependent states.4 Third, others have considered the link between economic decline and external armed conflict at a national level. Blomberg and Hess (2002) find a strong correlation between internal conflict and external conflict, particularly during periods of economic downturn. They write: The linkages between internal and external conflict and prosperity are strong and mutually reinforcing. Economic conflict tends to spawn internal conflict, which in turn returns the favour. Moreover, __ the presence of a recession tends to amplify the extent to which international and external conflicts self-reinforce each other. __ (Blomberg & Hess, 2002. p. 89) Economic decline has also been linked with an increase in the likelihood of terrorism (Blomberg. Hess. & Weerapana. 2004). which has the capacity to spill across borders and lead to external tensions. Furthermore, crises generally reduce the popularity of a sitting government. __ 'Diversionary theory' suggests that, when facing unpopularity arising from economic decline, sitting governments have increased incentives to fabricate external military conflicts to create a 'rally around the flag' effect __. Wang (1990, DeRouen (1995). and Blomberg, Hess, and Thacker (2006) find supporting evidence showing that economic decline and use of force are at least indirectly correlated. Gelpi (1997), Miller (1999), and Kisangani and Pickering (2009) suggest that the tendency towards diversionary tactics are greater for democratic states than autocratic states, due to the fact that democratic leaders are generally more susceptible to being removed from office due to lack of domestic support. __ DeRouen __ (2000) __ has provided evidence showing that periods of weak economic performance in the U __ nited __ S __ tates, and thus weak Presidential popularity, __ are statistically linked to an increase in the use of force. __ In summary __, recent __ economic scholarship positively correlates economic integration with an increase in the frequency of economic crises, whereas __ political science scholarship links economic decline with external conflict at systemic, dyadic and national levels ____. __ ' This implied connection between integration, crises and armed conflict has not featured prominently in the economic-security debate and deserves more attention. This observation is not contradictory to other perspectives that link economic interdependence with a decrease in the likelihood of external conflict, such as those mentioned in the first paragraph of this chapter. Those studies tend to focus on dyadic interdependence instead of global interdependence and do not specifically consider the occurrence of and conditions created by economic crises. As such, the view presented here should be considered ancillary to those views.
 * Royal 10 – Jedediah Royal, Director of Cooperative Threat Reduction at the U.S. Department of Defense, (Economic Integration, Economic Signaling and the Problem of Economic Crises, Economics of War and Peace: Economic, Legal and Political Perspectives, ed. Goldsmith and Brauer, p. 213-215)**

** Advantage Two: Deficits – **

** First, the deficit is on an unsustainable path – now is the CRITICAL time to re-orient policies to stave-off a new debt tragedy **

At some point __ in the not-too-distant future, analysts say, investors may decide the lack of effective governance constitutes an increased risk of default __**__ and will no longer be willing to hold U.S. Treasuries at normal interest rates __**. __ S __ tandard __ and P __ oor __ 's downgrade of the U.S. debt rating in __ August __ 2011 indicated as much: "America's governance and policymaking [has become] less stable, __ less effective, and less predictable than what we previously believed." **__ If many investors begin fleeing to alternatives, it may become prohibitively expensive for Washington to attract new buyers of debt __**, __ resulting in __ even larger deficits, increased borrowing, or what is known as **__ a "debt spiral __** ."Global investors may continue to fund high U.S. deficits for several years, but __ the recent experiences of several advanced economies in Europe-- __ Greece, Iceland, Ireland, and Portugal-- **__ indicate the unpredictability and speed at which fiscal crises can come __**. __ Several factors have thus far helped insulate the United States from such a fate __ --a floating exchange rate, reserve currency status, lower borrowing costs, a higher capacity for growth, and no record of default. __ But there are also some striking similarities with the situation faced by some European states __, including a rising debt to GDP and a reliance on foreign capital to finance debt.A 2009 report by the non-partisan Congressional Research Service suggests that **__ a loss of confidence in the debt market could prompt foreign creditors to unload large portions of their holdings __** , __ thus i __ nducing others to do so, and __ causing a run on the dollar in international markets __**__ and a sudden spike in U.S. interest rates. __** A study of U.S. Treasury data indicates that Beijing is beginning to diversify away from the dollar (WSJ). The percentage of China's foreign exchange reserves held in dollars fell to a decade low of 54 percent for the year ending June 2011, down from 65 percent in 2010. According to the IMF, "Low borrowing costs in Japan and the United States have arguably created a false sense of security, but should be viewed instead as providing a window of opportunity for policies to address fiscal vulnerabilities."CFR Adjunct Senior Fellow Francis Warnock writes that __ the United States came close to the above scenario in late 2009, __ when the ten-year Treasury yield jumped fifty basis points from 3.25 to 3.75 percent in response to a record U.S. deficit, the end of the Federal Reserve's quantitative easing program, and an uptick in inflation prospects. However, he says, __ the onset of the eurozone phase of the global financial crisis staved off an investor backlash __. "U __ .S. policymakers need to understand that this is not a reset, not a new beginning; **it is a lucky break,"** __ writes Warnock. **__ How lawmakers use this grace period will influence the ability of the U __** nited **__ S __** tates **__ to borrow in the future and have "broad implications for the sustainability of an active U.S. foreign policy __** ," he says.
 * Council on Foreign Relations 3/2/12**
 * (“U.S. Deficits and the National Debt,” pg online @** [|**http://www.cfr.org/united-states/us-deficits-national-debt/p27400**] **//um-ef)//**

** And, the plan is a KEY TEST for future budget debates – increasing revenue ensures a sustainable fiscal path ** //**Washington Post 3/7**// //**(“A fiscal test for Congress,” pg lexis**//**um-ef)** __ Over the past year, many Republicans and Democrats in the Senate have indicated support **for dramatic deficit reduction** __. So far, this exercise has resulted in lots of __ talk **but no real action** __. In fact, despite a national debt of $15 trillion, __ the Senate continues to pass the same fiscally irresponsible legislation that created our massive deficit problem. __ Last March, I joined 64 of my Senate colleagues, Republicans and Democrats, in a letter to President Obama pledging our support for the kind of comprehensive plan to reduce the deficit set forth by the Simpson-Bowles commission. Six months later, after the Budget Control Act was passed, 45 Democratic and Republican senators joined again in calling for the Joint Select Committee on Deficit Reduction (commonly known as the "supercommittee") to "go big" and to cut the deficit by $4 trillion over the next 10 years. Unfortunately, neither of those calls for action produced real results. But members were on record in support of a combined strategy that overhauls the tax code, reforms Social Security and Medicare, and cuts discretionary spending. __ Now, the Senate is considering a two-year federal highway reauthorization bill that, __ as astounding as it sounds, **__ does not correct serious flaws in our infrastructure financing __**. Sadly, __ th**is bill simply kicks the can down the road, making it harder to implement the** __ kind of **__ deficit reduction plan __** for which so many in the Senate expressed support multiple times in this session. A version of the highway bill considered last month in the House was built on a similar flawed funding mechanism. __ Enacting a long-term highway bill and investing in our nation's infrastructure ____ are key elements for economic growth __. **__ Congress established the highway trust fund in 1956 to finance the interstate highway system through a federal fuel tax. __****__ But in recent years highway spending has outpaced gasoline tax revenue and balances in the trust fund. __**__ Since 2008 Congress has transferred $34.5 billion from the general fund to the highway trust fund, __ only delaying a necessary solution and __ adding to our deficit __ to cover the difference. __ The bill before the Senate spends more than we can afford __ by financing two years' worth of costs over as many as 10 years. __ In two years, the trust fund will still be insolvent, requiring us to fill the gap **with billions more** to support even current funding levels __. And as the years go by, __ that gap will continue to grow __, digging the hole even deeper. Republicans justifiably cried foul when President Obama's health-care law used 10 years' worth of revenue to cover six years' worth of costs. I know many Democrats had similar concerns. So how can we now be part of a more aggressive effort to use a similar gimmick to fund this highway bill? __ The Senate has an opportunity __ with the highway bill **__ to stop a costly pattern of denial and evasion __**. __ We must be honest __ with the American people and **__ find a way to align highway trust fund revenue __****__ with responsible spending so that they meet our country's infrastructure needs without adding to the deficit __** .Accordingly, I have offered two options for restoring sound financing to this bill. The first would lower spending in the bill to a level the highway trust fund can support annually. The second would require Congress to fully offset any additional expense over the two-year reauthorization period through reductions in other programs. These alternatives will require the kind of tough choices many Americans make every day. We can either spend less on highways or we can spend less on something else. For Congress to spend more than it is taking in is not rational and would demonstrate that neither party is ready to lead. __ The highway bill, __ which involves far less money each year than the Social Security and Medicare programs, **//__ is an important test __//****__ of our __** stated bipartisan **__ goal to put our country back on a sustainable fiscal path __**. __ The current bill takes us in the opposite direction __. __ Federal highway infrastructure funding shares wide support in Congress and throughout the country __, so members should set priorities and fund them with the resources that are available. __ **If we fail this small test, how will we ever pass a sweeping agreement to cut the deficit** __ and avoid what Erskine Bowles called "the most predictable economic crisis in history **__ "? __**

** And, Failure to Reign-In Deficits and Establish Fiscal Discipline Guts U.S.-China Relations they’ll be over-aggressive, gutting cooperation **

__ The lopsided nature of trade and financial flows between the U.S. and China has complicated this relationship, __ tightening the economic entanglements between the two economies and **__ making them more contentious __****. **__ The U.S. __ receives a large volume of low-cost imports from China and __ has also gotten help in financing a significant part of its budget and current account deficits __. China remains quite dependent on U.S. export markets and continues to look to U.S. Treasury bond markets to park a large portion of its rapidly rising stock of foreign exchange reserves. Over the past year, the U.S. has become less dependent on China’s financing of its deficits, particularly as the U.S. private saving rate has gone up and the current account deficit has fallen. Nevertheless, __ given the sheer scale of the U.S. deficit financing requirement __ —a budget deficit of about $1.6 trillion in 2010 and prospects of nearly $9 trillion of deficits over the next decade— **__ sentiments in bond and currency markets are fragile __**. __ A precipitous action by China to shift aggressively out of U.S. dollar- __ denominated instruments, __ or even an announcement of such an intention, could **act as a trigger** that nervous market sentiments coalesce around, leading to a sharp fall in bond prices and the value of the U.S. dollar __. However, such a move would not be without cost for China. Certainly, China would like to tear itself away from the U.S. Treasury market but faces the prospect of a capital loss on its large accumulated stock of holdings (on a mark-to-market, domestic currency basis) if U.S. Treasury bond prices were to fall as a result of a spike in interest rates or if the renminbi were to appreciate in value relative to the U.S. dollar. But the U.S. leaves itself vulnerable as China might well view these costs as worth bearing in order to preserve its national sovereignty or if trade and other economic disputes with the U.S. came to a head. Indeed, I will argue that the direct costs could in fact be rather modest from the Chinese perspective. **__ The prospect of __**__ economic and political **disputes ratcheting up has been elevated by an increasing imbalance in this relationship** __. For instance, in recent months, __ China has aggressively sought to shift the narrative about the financial crisis __ and its aftermath by arguing that global current account imbalances had little or nothing to do with the crisis. Moreover, even as the world economy is recovering, China has __ argued that it is loose U.S. monetary policy alone that may be fueling asset price bubbles around the world __. Whatever the merits of these arguments, __ the forcefulness with which Chinese leaders have put forward these narratives indicates their strong perception that the balance in __**__ the bilateral relationship has shifted decisively in their favor __**. This assertive tone is likely to continue as China’s economy becomes larger and its influence both in the Asian region and abroad becomes more pervasive. In fact **__, the bargaining strengths of the two countries are finely balanced. __** But the **__ changing __****__ perceptions set up a dangerous game of chicken that could spin out of control __** if unrealistic expectations and the desire to pander to domestic audiences trumps rational collective policymaking in one or both countries. In my testimony, I will lay out some key facets of this complicated bilateral relationship, present my prognosis for how this relationship is likely to evolve, and then discuss how to manage some of the potentially contentious aspects of this relationship. Trade and Financial Dependence between the Two Economies[1] Trade between the two economies has continued to increase in volume and the U.S. remains one of China’s major export markets. Chinese exports to the U.S. rose from $100 billion in 2000 to $296 billion in 2009, while imports rose from $16 billion to $70 billion. A central question is whether rising volumes of trade between the two economies have made them more important as mutual trading partners. Interestingly, exports to the U.S. accounted for a relatively stable share of about 21 percent of China’s overall exports from 1998 to 2006 (Figure 1). During 2007-2009, the share of China’s exports going to the U.S. fell to about 18 percent. The share of U.S. exports going to China has risen gradually over the years but is still under 5 percent. These numbers probably understate the true importance of China’s dependence on the U.S. export market. In terms of sheer volume, U.S. imports still account for a significant share of world final consumption demand. Moreover, a great deal of intra-Asian trade is the result of proliferation of cross-country supply chains facilitated by falling costs of transportation and logistics. IMF analysis suggests that about one-third of the value added component of exports from Asia is still accounted for by the U.S. Thus, a slowdown in U.S. demand could lead to slower growth in other economies that export large quantities to the U.S. and thereby have indirect knock-on effects on Chinese export growth to those economies as well. As a source of U.S. imports, China’s share has increased steadily, climbing to 15 percent of total U.S. imports by 2009. China’s dependence on U.S. imports, by contrast, has fallen over time, with imports from the U.S. accounting for about 7 percent of China’s imports since the mid-2000s. Many of the thorny issues in the bilateral relationship between these two countries can be traced to the evolution of the rising bilateral U.S. trade deficit with China. This deficit rose from about $84 billion in 2000 to nearly $227 billion in 2009 (about 1.6 percent of U.S. GDP). In 2009, the deficit with China amounted to nearly two-thirds of the overall U.S. trade deficit of $365 billion, compared to about one-third in 2008 (see Figure 2). The U.S. current account deficit, which had hit $800 billion in 2006, declined slightly in 2007-08. The crisis-induced recession in the U.S. has shrunk the deficit to $370 billion in 2009. China’s current account surplus fell to $284 billion in 2009 (Table 1). But, as discussed below, it is likely that, as the U.S. and global economic recoveries become entrenched, structural forces will again lead to an expansion of the U.S. current account deficit and China’s current account surplus. The IMF, for instance, forecasts that the U.S. current account deficit will rise to about $400 billion in 2011 while China’s current account surplus could top $500 billion. China’s nominal exchange relative to the dollar was flat for a decade until July 2005, when there was a step appreciation of 2 percent of the renminbi (see Figure 3). Over the next three years, the renminbi racked up a cumulative nominal appreciation of 18 percent against the dollar and a slightly lower appreciation in real effective terms. However, since July 2008, the renminbi has remained tightly pegged to the dollar, riding up with the U.S. dollar as it strengthened due to the safe-haven effect during the global financial crisis and down with the U.S. dollar since March 2009, when that effect began to wear off. This has reversed some of the appreciation of the trade-weighted measure of China’s real effective exchange rate, which is now up about 14 percent relative to its level in July 2005. Chinese currency policy, which involves heavy intervention in the foreign exchange market to prevent the renminbi’s appreciation against the U.S. dollar, has resulted in a rapid rise in foreign exchange reserves (see Figure 4). After a tiny net increase in the first quarter of 2009, reserve accumulation picked up in pace and remained strong for the remainder of the year. At the end of 2009, China’s total stock of foreign exchange reserves stood at $2.4 trillion. China’s international investment position has improved steadily to a net asset position of $1.5 trillion at the end of 2008 (Table 2). The value of China’s foreign assets now far exceeds the value of its external liabilities. Foreign exchange reserves account for about two-thirds of China’s gross foreign assets. It is not easy to estimate the “equilibrium” value of the renminbi—the level it would settle at if China’s capital account were open and there was no government intervention in the foreign exchange market. The fact that the People’s Bank of China has consistently intervened in just one direction and by massive amounts—as indicated by its accumulation of foreign exchange reserves—suggests that the renminbi would appreciate significantly, conditional on capital outflows being relatively restricted, if China’s central bank stopped intervening in the foreign exchange market. Private and Official Financial Flows Financial flows between the two economies have increased but, while private flows remain modest, official flows have become more lopsided over time. The major financial link between the two countries remains Chinese official purchases of dollar-denominated financial assets. Contrary to the popular notion of U.S. firms investing heavily in China, official foreign direct investment (FDI) flows from the U.S. to China peaked at $5.4 billion in 2002 and have remained at a modest level around $3 billion a year since 2005 (Figure 5). This low number could partially be due to American companies’ use of offshore financial centers to channel FDI flows to China. Nevertheless, all available data indicate that most FDI flows to China are from other Asian countries that are integrating their supply chains with China. FDI from China to the U.S. remains very modest. China does not make public the currency denomination or composition of its foreign exchange reserves. U.S. data from the government’s Treasury International Capital System (TIC) database are potentially misleading as they capture the location rather than identity of a purchaser of U.S. instruments. For instance, China’s purchases of Treasury bonds routed through a U.K. bank would be counted as a purchase by a U.K. resident or institution. Notwithstanding these caveats, the TIC data capture some interesting trends. Estimates based on TIC data suggest that Chinese holdings of U.S. Treasury securities amounted to about $755 billion at the end of 2009 (see Table 3, Panel B). About one-third of China’s holdings of foreign exchange reserves are in U.S. Treasury securities. The true proportion is likely to be higher for the reasons noted above.[2] It is intriguing that, even based on these data, the share of China’s reserve accumulation going into U.S. Treasuries in 2008 was much higher than during the period 2004-07. During 2009, there was initially some month-to-month whipsawing from net sales to net purchases of U.S. Treasuries. In the latter half of the year, there was a discernible shift away from short-term Treasury bills to longer-term Treasury notes (see Table 3A for monthly TIC data related to China). Apprehensions, based on TIC data for the last few months of 2009, that China may be dumping U.S. Treasuries might be an overstatement. Some analysts have argued that China might simply be shifting out of U.S. short-term Treasury bills, which currently have a very low yield, to longer-term Treasury notes that have a higher yield and that these purchases of Treasury notes are being channeled through intermediaries in the U.K. and elsewhere. This is plausible but not entirely convincing. Given the relatively flat U.S. yield curve and the high levels of U.S. deficits and debt, which the Chinese have expressed considerable concerns about, this hardly seems like a propitious time to lock into long-term U.S. government bonds for the sake of modestly higher returns. Prognosis for the Bilateral Economic Relationship Paradoxically, the crisis is likely to intensify the awkward embrace between the two economies. In the short run, China needs export growth in order to maintain job growth and preserve social stability. As China continues to run current account surpluses by exporting to the U.S. and other advanced country markets, it has little alternative to buying U.S. Treasuries with the reserves it accumulates while managing its exchange rate. The U.S. will continue to need willing buyers for the debt issued to finance its budget deficit, especially if the household saving rate starts drifting back towards pre-crisis levels. Hasn’t the Chinese economy’s dramatic growth performance during the crisis shown that it has become less dependent on export markets in the West, especially as GDP growth remained strong despite a decline in the trade surplus during 2009? Answering this question requires a retrospective look at the Chinese growth model. There are two distinct features of the Chinese growth process in the decade before the crisis, when GDP growth averaged about 10 percent per annum.[3] First, investment accounted for more than half of overall GDP growth, with net exports playing an important role as well since 2005 (see Figure 6). Private consumption, by contrast, has not been a key driver of growth. Second, even high GDP growth has not translated into much employment growth, with overall net employment growth averaging only about 1 percent over the last decade.[4] Thus, the Chinese government has had to cope with the twin challenges of rebalancing growth towards domestic consumption in order to make growth more welfare-enhancing for its citizens and of generating higher employment growth in order to maintain social stability. To counter the aftershocks of the crisis, the Chinese government embarked on a massive fiscal and monetary stimulus program in the latter half of 2008. In addition to a large expansion of government spending, it directed the state-owned banks to make credit freely available. The banks dutifully went on an unprecedented lending spree, amounting to nearly $1.5 trillion (or about one-third of China’s GDP) in 2009, a pace that has continued into January 2010. It’s a good bet that most of this lending went to large state enterprises, favored clients of the state banks. With cheap and plentiful money, along with subsidized inputs such as energy and land, conditions were ripe for a massive investment boom, which amounted to nearly 90 percent of GDP growth in 2009.[5] This investment boom is creating excess capacity in many industries such as steel, aluminum and glass that already had some spare capacity to begin with. Down the road, this could dampen employment and household income growth. Banks fear a resurgence of bad loans on their books if consumption demand doesn’t grow fast enough to soak up the output from the new factories. Moreover, the Chinese household saving rate has trended upward in recent years; the economic uncertainty associated with the crisis and the weak global economic recovery are likely to increase saving for precautionary purposes.[6] In short, the stimulus could end up actually worsening the balance of growth by tilting it even more towards growth led by investment rather than private consumption. The only solution then is to export the fruits of this investment. Thus, investment-led growth sets the stage for export-led growth, exactly the reverse of the balanced private consumption-led economy that Chinese leaders want. The reliance on exports, as noted earlier, is also because it is a key source of net job growth. As the U.S. recovery strengthens, imports are likely to rise, leading to a further deterioration of the U.S. overall trade deficit as well as its bilateral trade deficit with China. China’s overall current account balance is likely to continue to increase and, as the global economic recovery progresses, China will continue running large trade surpluses and accumulating foreign exchange reserves at a rapid rate. Thus, we could be in for a repeat of the global current account imbalances in 2006-07, typified by large U.S. current account deficits and Chinese current account surpluses. How Dependent is the U.S. on Financing from China? Based on data from TIC and other U.S. sources, it is possible to construct a profile of the owners of U.S. government debt held by the public, which stood at $7.8 trillion at the end of December 2009. China’s share of total outstanding U.S. government debt held by the public has risen steadily over the years, but fell slightly in the latter half of 2009 and now stands at 10 percent (or about one-quarter of all U.S. debt held by foreigners). This represents a one percentage point reduction relative to the share in August 2009, consistent with the fall of about $45 billion in China’s overt holdings of U.S. Treasuries from August to December 2009. Debt issued by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, which amounted to about $7.2 trillion as of September 2009, represents a liability of the U.S. government as well. China’s share of outstanding U.S. agency bonds was 6.4 percent in 2007 but fell below 6 percent in 2009. In short, even based on official data that probably understate the true picture, China has contributed to a significant proportion of U.S. government debt financing in recent years. If one were to take the TIC data literally, China has apparently cut its shares of holdings of net U.S. public and agency debt in the latter half of 2009. As noted earlier, this conclusion based on TIC data should be interpreted with considerable caution. While it is difficult to ascertain exactly what share of U.S. government debt is held by China, the TIC data do allow us to put some bounds on this calculation. Identified Chinese holdings of U.S. Treasuries and GSE debt amounted to about $1.16 trillion at the end of 2009 ($755 billion + $405 billion; see Table 4, last panel). Based on the widely-held assumption that about 70 percent of Chinese foreign exchange reserves are in dollar-denominated bonds and also assuming that the remainder that are not accounted for in TIC are all in Treasuries, this would imply an additional holding of about $520 billion in Treasuries.[7] This would amount to a total of $1.32 trillion, or 17 percent of outstanding U.S. net public debt (excluding GSE debt).[8] In other words, it is a significant but not overwhelming share. Is it a credible threat that China could dump a significant share of its holdings of U.S. Treasuries? Many analysts argue that any threat by China to shift a large portion of its reserves out of U.S. government paper is just bluster as such a move would impose huge costs on China itself. But these costs tend to get overstated in popular discussions of the matter. Let us examine each aspect of these costs. 1. If interest rates in the U.S. spiked as a consequence of Chinese actions, there would be a capital loss to China on the value of its Treasury bond holdings. This is correct on a mark-to-market basis, but it is likely that China has a hold-to-maturity approach on its bond portfolio, given that it has such a large stock of reserves and has no immediate liquidity needs. Hence, the actual capital loss may not be significant enough to feature in the political calculus. 2. A plunge in the value of the dollar against other major currencies would reduce the domestic currency (renminbi) value of China’s dollar-denominated holdings. This is indeed accurate. But only if the renminbi appreciated relative to the dollar. Otherwise, China would lose a modest amount on the value of its euro and yen holdings and this would be more than made up for by the benefits of higher trade competitiveness if the renminbi rode down with the dollar against other major currencies. 3. Currency appreciation would lead to a big loss on reserve holdings in local currency terms. If the renminbi appreciated substantially relative to the dollar, as economists believe it eventually must given the much higher productivity growth in China relative to the U.S., China would certainly take a capital loss. But this is likely to be at least partially offset by seigniorage revenue that China can get as it moves forward in tandem on exchange rate flexibility and capital account liberalization. By preparing the ground for the internationalization of the renminbi, China stands to gain some of the benefits that accrue to an international reserve currency, although this might happen only over a period of a decade or so. China is already taking measures to foster the adoption of the renminbi in trade and financial transactions in Asia. In short, any Chinese threat to move aggressively out of Treasuries is a reasonably credible threat as the short-term costs to the Chinese of such an action are not likely to be large. But can China make a big difference to U.S. interest rates given that its share of the financing of the U.S. budget deficit has fallen over time? The answer lies not in the absolute amounts of financing that China brings to the table, but in how its actions could serve as a trigger around which nervous market sentiments could coalesce. Given that there are no clear prospects of reining in exploding deficits and debt in the U.S., especially if one factors in rising health care and entitlement costs, changes in availability of deficit financing at the margin can have potentially large consequences. The real constraint to any Chinese desire to shift significantly out of investing in U.S. Treasuries may actually have more to do with the sheer size of the U.S. Treasury bond market relative to other available investments, including euro and yen government bonds. Through the China Investment Corporation--its sovereign wealth fund, which has a capital base of $200 billion--China has been seeking to diversity its investments into a broader range of asset classes. But this is a modest amount relative to the overall size of China’s foreign assets. The reality is that, so long as China continues to accumulate reserves at a pace of around $400 billion a year, there are few relatively safe investments other than U.S. government bond markets that are deep and liquid enough to absorb a significant portion of such massive inflows.[9] Getting the Balance Right The U.S. has been supportive of China getting its rightful place on the global economic stage. The __ Obama __ administration __ has actively supported a more prominent role for China __ at the IMF and other multilateral institutions such as the Financial Stability Board. The administration has also played a key role in supporting the ascendance of the G-20 rather than the G-7 as being the agenda-setting body on the global economic stage, __ effectively giving China a more prominent seat __ at the table __ in key policy discussions __. These are logical—indeed, necessary—stepsto make these institutions more inclusive and effective in dealing with the many global challenges that lie ahead. While greater Chinese influence in international economic affairs is inevitable, the U.S. has played an important role in speeding up this realignment. __ The question remains whether the U.S. is gaining sufficient leverage __ from its importance to the Chinese economy and its initiatives to give China a more prominent place on the world stage. Indeed __, the shifting narratives __ noted earlier seem to __ have put the U.S. __ administration __ on the defensive __ in its dealings __ with China __. Here are some steps the __ Obama __ administration __ needs to __ take to __ rebalance this relationship: __ * **__ Get real on deficit reduction __**__. __ The simple reality is that __ the U.S. has to summon the political will to decisively tackle its mammoth budget deficit and rising public debt, __ which have contributed to its current account deficits and dependence on funds flowing in from the rest of the world. Otherwise, the U.S. will become increasingly vulnerable to external influences. __ In the absence of a clear commitment and a credible plan __ to bring down the deficit **__ through __** a combination of revenue increases and **__ expenditure reductions, the U.S. will face a worsening balance of power in its relationship with China. __** * Be more assertive in this bilateral relationship. My view is that mollification of China on economic and political issues is no longer the right approach. The administration’s actions—including certain statements by Secretary Geithner and Secretary Clinton during their respective visits to Beijing—have fed into the perception that the U.S. is on the defensive in this bilateral relationship. On human rights issues, in particular, the U.S. cannot be seen to be backing down as a result of economic pressures. * Elicit the support of other emerging markets and developing countries in influencing Chinese currency and other economic policies. Rather than focusing on the effects of China’s currency on the U.S.-China bilateral trade balance, the implications of China’s currency policy for its own economic stability and those of other emerging markets should be highlighted. Greater currency flexibility could have considerable long-term benefits for China by allowing its monetary policy to become more independent, reducing its dependence on exports and rebalancing its economy towards domestic consumption. This would be good for China’s growth and would also make a useful contribution to the stability of the international financial system.[10] It would also ease the pressure on other emerging markets that are facing a dire loss of competitiveness relative to China if their currencies appreciate while China’s doesn’t, complicating their macroeconomic policy management. * Continue to foster high-level engagements among leaders of the two nations through the Strategic and Economic Dialogue and other avenues. Building up trust at these higher levels will be important to ensure that low-level disputes with minor direct ramifications don’t spin out of control as pandering to domestic constituencies could lock the two nations into a cycle of confrontation that escalates disputes to a more damaging level. __ Setting the China-U.S. relationship on an even keel is important __ not just for the principals but also __ for the broader world economy as the cooperative or conflicted nature of this relationship will set the tone for progress on __ a number of multilateral issues, including __ global macroeconomic stability, reform of the international monetary system and tackling climate change __. ** Multiple Scenarios for Extinction ** //**Wenzhong****, PRC Ministry of Foreign Affairs, 2-7-4 (Zhou, “Vigorously Pushing Forward the Constructive and Cooperative Relationship Between China and the United States,”** [|**http://china-japan21.org/eng/zxxx/t64286.htm**]**)**// China's development needs a peaceful international environment, particularly in its periphery. We will continue to play a constructive role in global and regional affairs and sincerely look forward to amicable coexistence and friendly cooperation with all other countries, the United States included. We will continue to push for good-neighborliness, friendship and partnership and dedicate ourselves to peace, stability and prosperity in the region. Thus China's development will also mean stronger prospect of peace in the Asia-Pacific region and the world at large. __China and the US should__, and can, __work together for peace, stability and prosperity__ in the region. Given the highly complementary nature of the two economies, China's reform, opening up and rising economic size have opened broad horizon for sustained China-US trade and economic cooperation. __By deepening our__ commercial __partnership__, which has already delivered tangible benefits to the two peoples, __we can__ do still more and also __make greater contribution to global economic stability__ and prosperity. __Terrorism, cross-boundary crime, proliferation__ of advanced weapons, __and spread of deadly diseases pose a common threat to mankind. China and the US have__ extensive shared stake and __common responsibility for meeting these challenges, maintaining world peace__ and security __and__ addressing __other__ major __issues__**__ bearing on human survival __** and development. __China is ready to keep up its coordination and cooperation in these areas with the US__ and the rest of the international community. During his visit to the US nearly 25 years ago, Deng Xiaoping said, "The interests of our two peoples and those of world peace require that we view our relations from the overall international situation and a long-term strategic perspective." Thirteen years ago when China-US relations were at their lowest ebb, Mr. Deng said, "In the final analysis, China-US relations have got to get better." We are optimistic about the tomorrow of China-US relations. We have every reason to believe that so long as the two countries view and handle the relationship with a strategic perspective, adhere to the guiding principles of the three joint communiqués and firmly grasp the common interests of the two countries, we will see even greater accomplishments in China-US relations.
 * Prasad 2/25**
 * (Eswar, Eswar Prasad holds the New Century Chair in International Economics. He is the Tolani Senior Professor of Trade Policy at Cornell University and a Research Associate at the National Bureau of Economic Research. He was previously head of the Financial Studies Division and the China Division at the IMF, “The U.S.-China Economic Relationship: Shifts and Twists in the Balance of Power,” pg online @ **[|**http://www.brookings.edu/testimony/2010/0225_us_china_debt_prasad.aspx**]** //um-ef)// **

//Advantage Three: Manufacturing//

//First, American steel and manufacturing have recovered from the recession, but increased competition means it still could collapse killing the economy//

// Gibson 5/28/12 // //(Thomas Gibson President And Ceo American Iron And Steel Institute, “American Iron And Steel Institute President And Ceo Mr. Thomas Gibson, Prepared Testimony Before The Senate Energy And Natural Resources Committee Hearing On The Clean Energy Standard Act Of 2012, As Released By The Committee,” pg lexis//um-ef) __Steel and other manufacturing industries **are the backbone of the U.S. economy**__. **__A strong manufacturing sector__** __creates significant benefits for society, including good-paying jobs__, **__investment in r__** esearch **__and d__** evelopment, __essential materials for our national defense, and highvalue exports__. **__A robust American steel industry is critical to leading the domestic economy into recovery__**. AISI is concerned about increased electricity costs and reliability issues that may result from additional regulation of the utility sector, including a national Clean Energy Standard (CES). The consumers of electricity will ultimately have the compliance costs and reliability risks passed on to them. AISI recently commissioned a report by __Professor Timothy J. Considine__ of the University of Wyoming on the industry`s impact on the U.S. economy. Professor Considine __found that the steel industry`s purchases of materials, energy, and supplies for the production of steel stimulate economic output and employment **in a range of sectors across the economy**__. __Steel`s economic contributions are multiplied many times over,__ with Professor Considine finding that **__every $1 increase in sales by our sector increases total output in the U.S. economy by $2.66.__** Additionally, he found that __every individual job in the steel industry supports seven additional jobs in other sectors of the economy. In__ aggregate, __the steel industry accounts for over $101 billion in economic activity and supports more than 1 million jobs across the country__. A copy of that study is attached to my testimony and I request that it be made part of the hearing record. __Like the rest of our economy, the steel industry is recovering from the depths of the recession **but far from fully recovered**__. As we near the midpoint of 2012, __there are positive signs that the economy continues on a slow but steady recovery,__ although subject to volatility - particularly related to the downturn in Europe`s economy and the slowdown of the Chinese economy. AISI`s latest estimate is for shipments of 97 million tons for 2012, which would be an increase of roughly 5 percent over the 92 million tons the industry shipped in 2011. Shipments of 97 million tons are only equivalent to our shipments in 1995, and represent only 90% of our five-year prerecession average shipments of 108 million tons.Domestic capacity utilization rose to 79 percent in the first quarter, a 6 percent improvement from the previous quarter. Total finished steel import market share year-to-date is at 23 percent, and __imports are increasing at a faster rate than our domestic steel market is recovering__. The most recent Department of Commerce Steel Import Monitoring and Analysis data for the month of April recorded another sharp rise in finished imports to the highest level since October of 2008. __We are very concerned about this trend and sensitive to policy changes__ that could make production here more expensive and less internationally competitive. Steel & Energy The production of steel is inherently energy intensive, and the industry consumes substantial amounts of electricity, natural gas, and coal and coke to make our products. In 2010 our domestic industry consumed 45.7 billion kWh of electricity. Energy is typically 20% or more of the cost of making steel and, as such, energy efficiency is key to our industry`s competitiveness. AISI members are doing everything they can to increase energy efficiency, and we are leading the way by effectively setting the bar for steel industry efficiency worldwide. AISI members have made substantial gains in reducing their energy usage, as well as their environmental footprint, over the last two decades. The domestic steel industry has voluntarily reduced its energy intensity by 27% since 1990, while reducing its greenhouse gas (GHG) emissions by 33% over the same time period. In fact, data presented by the U.S. Department of Energy at a recent meeting of Global Superior Energy Partnership`s Steel Task Group showed that the steel industry in the U.S. has the lowest energy intensity and second- lowest CO2 emissions intensity of any major steel producing country. While we approach the practical limits for efficiency using today`s processes and continue to pursue incremental gains, AISI members are not resting on their laurels. We recognized in 2003 that in order to make any further significant improvement in energy use, new breakthrough technologies would be needed. It was at that time the industry began investing, often in partnership with DOE, in the CO2 Breakthrough Program, a suite of research projects designed to develop new ironmaking technologies that emit little or no CO2 while conserving energy. We have developed two key technologies to achieve those goals since that time, and they are now ready for pilot scale testing. The research is being done at MIT and University of Utah and both projects are the subject of proposals currently under consideration for DOE cost-sharing. This successful partnership with DOE, along with the continued support of Congress, will accelerate the development and deployment of critical technologies such as these. Concerns with S. 2146 A national CES imposes its direct requirements on the utility sector, not on its customers, but it is the customers that will bear the costs associated with compliance. Our principal concern is that this will inevitably raise the costs of electricity to large industrial customers like steel, while potentially lessening the quality and reliability of electricity supply. The analysis of S. 2146 performed by the Energy Information Administration (EIA) highlights key concerns about a CES raising the price of electricity to customers, and to large industrial facilities in particular. EIA projects that by 2035, national electricity prices will be 18% higher than the reference case. For industrial customers, the report concludes that electricity will cost 25% more under a CES than it otherwise would. This economic impact will be exacerbated for the steel industry due to the regional differences in current fuel mix and the cost to switch to other fuels for the generation of electricity. EIA projects that S. 2146 will substantially reduce coal-fired generation. Compared with a reference case, coal generation would decline by 25 percent in 2025 and by over half -- 54 percent -- in 2035. Thus, within two decades, the electricity generation infrastructure of the United States would radically shift from the fuel mix that has been in place since the advent of significant nuclear power generation around 1970. Certain areas of the country are better suited for renewable production from wind and solar sources, while others have an abundance of coal sources. As noted above, creating a national CES will have a disproportionate impact on coal-fired utilities, and there is a high correlation between the service areas of those utilities and the location of steel production facilities. Industrial customers, especially steel producers, will be charged to offset the cost of replacing coal capacity with other sources, including the cost of new transmission infrastructure. The two leading states in terms of iron and steel production in the U.S. are Indiana and Ohio, while other important states for the industry are Alabama, Pennsylvania, Kentucky, and Michigan. All of these states are heavily dependent on coal for electricity production, and in turn, so is our industry. EIA projects in its Annual Energy Outlook 2012 Early Release that by 2035, 39% of electricity generation will be from coal. In its analysis of S. 2146, it projects this percentage to drop to 18.7% in 2035, a result that will disproportionately impact the steel industry.Legislative and regulatory policy measures that impact energy availability and reliability influence each company`s competitive situation in a unique way. And, as also noted above, **__the domestic steel industry is subject to substantial international competition.__** __In particular, this competition comes from nations such as China,__ where the industry is largely state owned, controlled, and subsidized. In two recent countervailing duty cases, the Department of Commerce determined that Chinese steel pipe producers were receiving below market rates for electricity, which constitutes a subsidy. __For the steel industry, operating in the U.S. under tight margins with substantial subsidized competition from overseas, policies that raise energy costs on domestic companies threaten our ability to remain competitive__.

And, surface transportation investment is __CRITICAL__ to U.S. Manufacturing – props up dependent industries

Hermann 2k11 // ASCE commends the Joint Economic Committee for holding a hearing today on how __surface transportation investment is a key factor for continued economic recovery and job creation__. The Society is pleased to present to the Committee our views on investing in the nation's infrastructure **__and the critical link to U.S manufacturing__**. __An agenda that fosters__ economic growth and __job creation through policies that strengthen U.S. manufacturing and infrastructure will allow the nation to remain competitive in the Twenty-First Century__. Infrastructure Receives a Grade of "D" ASCE's 2009 Report Card for America's Infrastructure graded the nation's infrastructure a "D" based on 15 categories (the same overall grade as ASCE's 2005 Report Card). The report also concluded that the nation needs to invest approximately $2.2 trillion from 2009 - 2014 to bring our nation's infrastructure to a state of good repair. This number, adjusted for a three percent rate of inflation, represents capital spending at all levels of government and includes current expenditures. Even with current and planned investments from federal, state, and local governments from 2009 - 2014, the "gap" between the overall need and actual spending will exceed $1 trillion by the end of the five-year period. In the Report Card, the nation's surface transportation system included roads receiving a grade of "D-," bridges receiving a grade of "C," and transit receiving a grade of "D". __With nearly one-third of **roads** in poor or mediocre condition, a quarter of the nation's **bridges** either structurally deficient or functionally obsolete, **and transit** use increasing to its highest levels in 50 years, the nation's surface transportation system is in a state of **critical decline**__. Additionally, to bring just these three surface transportation categories up to an acceptable condition would require a five-year investment of $1.2 trillion, according to ASCE estimates. If the nation continues to under- invest in infrastructure and ignores this backlog until systems fail, we will incur even greater costs. While Congress is in the process of developing a comprehensive multi-year surface transportation authorization bill, and __as__ President __Obama emphasizes the infrastructure investment needs for the nation, our roads, bridges, and transit systems **continue on in a state of decline**__. According to the Congressional Budget Office, the total of all federal spending for infrastructure has steadily declined over the past 30 years. The results of years of under investment can be seen in traffic and airport congestion, unsafe bridges and dams, deteriorating roads, and aging drinking water and wastewater infrastructure. Infrastructure Investment = Jobs __Money invested in essential public works can create jobs, provide for economic growth, and ensure public safety through a modern, **well-engineered national infrastructure**__. The nation's transportation infrastructure system has an annual output of $120 billion in construction work and contributes $244 billion in total economic activity to the nation's gross domestic product (GDP). In addition to the overarching economic benefits, the Federal Highway Administration estimates that __every $1 billion invested in the nation's highways supports 27,823 jobs, including 9,537 on-site construction jobs, 4,324 jobs in supplier industries, and 13,962 jobs throughout the rest of the economy__. Standard and Poor's has stated that __highway investment has been shown to stimulate the economy **more than any other fiscal policy**__, with each invested dollar in highway construction generating $1.80 toward the gross domestic product in the short term, while Cambridge Systematics estimates that every dollar taxpayers invest in public transportation generates $6 in economic returns. The transportation industry's experience with the American Recovery and Reinvestment Act of 2009 illustrated the strong job creation impact of dedicated transportation investment, with the $48 billion for transportation improvements in the legislation supporting tens of thousands of jobs in engineering, construction, and supporting industries. Infrastructure Investment = A Healthy Economy __The job-creation potential of infrastructure investment is only one contributing factor of the interaction between surface transportation and the nation's ability to compete in the global marketplace__. **__Equally important are the benefits to a region's long term growth and productivity__**. A significant challenge to this economic growth is __increased congestion,__ which **__contributes to the deterioration of the nation's infrastructure__**. __Therefore, the importance of freight movement and the impact of congestion on the nation's economy must be emphasized__. ASCE is concerned with the increasing __deterioration of America's infrastructure__, reduced investment for the preservation and enhancement of our quality of life, and the __threatened decline of U.S. competitiveness in the global marketplace__. In response, ASCE has not only issued multiple Report Cards on the condition of infrastructure, but has also sought to advance policy solutions that provide for a clean and safe quality of life, as well as fuel economic growth. While taken for granted by most Americans, our infrastructure is the foundation on which the national economy depends. As the economy grows, we cannot only think in terms of repairing what we have, but of creating a modernized transportation system that addresses long-term needs. The current system was originally built in the 1950's and 1960's at a time when the country had different transportation needs and a smaller population. With an expanding population and a larger economy, the nation needs a transportation system that can keep pace. Unfortunately, due to the rapid growth of the country, highway and freight capacity failed to keep up. In July 2011, ASCE released an economic study that measures the potential impacts to the economy in 2020 and 2040 if the nation maintains current levels of surface transportation investments. The report is the first in a series of four reports that will focus on the correlation between the nation's infrastructure and the economy. Subsequent reports will detail the economic correlation to the nation's drinking and waste water systems, energy grid, and ports and airports. The first study, Failure to Act: the Economic Impact of Current Investment Trends in Surface Transportation Infrastructure, found that if investments in surface transportation are not made in conjunction with significant policy reforms, families will have a lower standard of living, businesses will be paying more and producing less, and our nation will lose ground in a global economy. The nation's deteriorating surface transportation will cost the American economy more than 876,000 jobs, and suppress the growth of the country's GDP by $897 billion in 2020.The study results estimate that more than 100,900 manufacturing jobs will be lost by 2020. Ultimately, Americans will also get paid less. While the economy will lose jobs overall, those who are able to find work will find their paychecks cut because of the ripple effects that will occur through the economy. In contrast, __a study__ from the Alliance for American Manufacturing __shows that__ roughly **__18,000 new manufacturing jobs are created for every $1 billion in new infrastructure spending__**. **__ These manufacturing jobs would be created in fabricated metals, concrete and cement, glass-rubber- plastics, steel, and wood product industries __**. Furthermore, the Alliance for American Manufacturing study shows that __using American-made materials for these infrastructure projects yields a total of 77,000 additional jobs__, based on a projected investment of $148 billion a year (including $93 billion of public investment). International Competitiveness Failure to Act also shows that __failing infrastructure will drive the cost of doing business up by adding $430 billion to transportation costs in the next decade__. Firms will spend more to ship goods, and the raw materials they buy will cost more due to increased transportation costs. Productivity costs will also fall, with businesses underperforming by $240 billion over the next decade; this in turn will drive up the costs of goods. **__As a result, U.S. exports will fall by $28 billion, including 79 of 93 tradable commodities__**. __Ten sectors of the U.S. economy account for more than half of this unprecedented loss in export value - among them key manufacturing sectors like **machinery, medical devices, and communications equipmen**t__. On the contrary, most of America's major economic competitors in Europe and Asia have already invested in and are reaping the benefits of improved competitiveness from their infrastructure systems. To illustrate further the correlation between transportation and a strong national economy, __the U.S. Chamber of Commerce__ in late 2010 __released a transportation performance index that examines the overall contribution to economic growth from a well-performing transportation infrastructure__. The index displays a __decline in the nation's economic competitiveness due to a continued lack of investment **in surface transportation systems on all levels**__**.** However, the results also indicate that __a commitment to raising the performance of transportation infrastructure would provide long-term value for the U.S. economy__. At this juncture, even Treasury Secretary Tim Geithner is underscoring the importance of investing in our nation's infrastructure and the value of export promotion for the competitiveness of U.S. businesses. On a recent trip to a North Carolina manufacturing plant, Secretary Geithner drew parallels between investment in infrastructure, jobs creation, and growth of the domestic manufacturing sector. While efforts such as the American Recovery and Reinvestment Act of 2009 have provided some short term relief to a struggling engineering and construction sector, a sustained economic recovery, will remain difficult without a new multi-year surface transportation bill. Five Key Solutions As part of ASCE's 2009 Report Card for America's Infrastructure, ASCE identified five Key Solutions that illustrate an ambitious plan to maintain and improve the nation's infrastructure: Increase federal leadership in infrastructure; //
 * (Andrew Herrmann, P.E. SECB, F.ASCE President American Society of Civil Engineers, Impact Of Infrastructure Investment On The Manufacturing Sector, pg lexis//um-ef)//**

//And, Only// long-term //infrastructure investment generates demand for steel – short-term highway bill extensions don’t solve//

//**Steel Times International 12**// //** (a magazine for the steel industry, “American Iron and Steel Institute calls for further Government intervention”, 4/25/12, AD: 7/17/12, http://www.steeltimesint.com/contentimages/features/AISI-USAbriefing.pdf) **// // Transport infrastructure __AISI is also calling for__ the US __Congress to pass a new, robust, long term surface transportation bill__ as opposed to continually extending the old one three months or so at a time. “ __We must make rebuilding our crumbling transportation infrastructure system **a top national priority**__ ,” Surma says, adding that doing so is essential to doing business efficiently and for the US to maintain its dominant role in the global economy. Just before Congress went on recess in late March it passed its ninth 90-day extension of the surface transportation bill, which will guarantee funding for the nation’s bridges, highways and roads until June 30. The US House of Representatives in mid-April passed what would be a tenth 90-day extension, taking the bill to the end of September, although that bill is not expected to pass the Senate because of factors relating to the Keystone XL pipeline which is being opposed by some environmental groups. Gibson says __these extensions of the bill will not provide the boost that the US economy, and the steel industry, needs.__ “ __We need a longterm bill with level funding so that the states can plan the bigger construction projects that can produce the valuable jobs and generate the demand for steel, concrete and other materials. “Our preference would be the longest, most robustly funded bill that this Congress can produce__ ,” Surma says, which would be the House leadership’s five-year, $260bn surface transportation authorization bill, which, if passed, would include energy and natural resource provisions to open up on-shore and offshore bans for oil and gas drilling leases. Gibson lauded the Senate for doing its job and passing a two year, $109bn reauthorization bill in mid-March. Now, he says the House, which has not passed a bill yet, must act and pass a bill that could be conferenced with the Senate measure. The question, however, lies in how to pay for such a bill given all the concerns of the burgeoning US deficit. “ __Transportation is a core function of government and it costs something to fund__ ,” __Gibson__ says, however, he __observes that the traditional way to do that, the highway fund, which is funded by a tax on gasoline, is falling short__, partly because vehicles are becoming more fuel efficient and Americans are changing their driving behavior. He called on the government to be more creative in finding a funding solution, including possibly more public/ private partnerships. //

//It’s critical to prevent American Collapse//

//**Buyer, Member of the House of Representatives, 7-31-7**// //** (Steve, Before the International Trade Commission, Regarding the five-year sunset review on Certain Hot-Rolled Carbon Steel Flat Products from Argentina, China, India, Indonesia, Kazakhstan, Netherlands, Romania, South Africa, Taiwan, Thailand, and Ukraine (Inv. Nos. 701-TA-404-408 and 731-TA-898-908) **// //__ A robust steel industry is fundamental to the security and economic viability of this nation __ . If you were to contemplate the ten resources considered essential to the successful establishment of a nation, steel would be high on that list __ . A fruitful domestic steel industry maintains its viability by being adaptive, technologically savvy, and flexible so that it can maintain its competitive edge in the world market __ . That competitive edge lends itself to economic security and stability here at home. __ Both of those elements are vital ingredients to a nation's ability to develop and maintain an adequate defense __ . I believe we must remain vigilant to protect ourselves from a future without a steelmaking infrastructure sufficient to meet our national defense needs. In the years that have followed the tragic events of September 11, 2001, national defense has dominated public attention. __ When contemplating the tumultuous nature of this global war against terror in which we are immersed __, I think it is apparent that __ we cannot accept a situation in which we are reliant on the kindness of strangers to meet our security-related steel needs __. Depending on trusted friends and allies may not be wise, since they have requirements of their own for steel. __ Simply put, the defense of our nation depends on steel. Our aircraft carriers, cruisers, tanks, HUMMVEES, are all made of steel __. __ We ____ cannot become dependent on foreign sources for this material so vital to our national defense __. __ The U __ nited __ S __ tates __ is the only superpower in the world. We cannot project our force around the globe, __ which from time to time is necessary, __ without the ability to move people and equipment quickly. It is in our national interest to maintain a vigorous steel industry __. __ The economic stability of the steel industry here at home, and our ability to remain competitive abroad, directly impacts our national security __. The efficient low-cost producers that comprise the membership of our domestic steel market can compete effectively against any foreign producer in the global economy. __ To ensure their stature, the steel industry has invested billions of dollars in modernizing itself while simultaneously improving environmental compliance __. It has learned the hard way the benefit of cutting-edge technology. __ These producers are heavily concentrated in northwest Indiana and at the end of 2006 they employed over19,000 Americans in that region __. Companies like Nucor of Crawfordsville and Steel Dynamics of Pittsboro contribute substantially to the ensuring a healthy local economy and thereby contribute to a stable and healthy __ national economy __. __ The nation's annual production of over 100 million tons of steel, of which Indiana is the second-largest producer among the states, keeps this country at the top of the worldwide steel industry __. However, if the competitive nature of this market is unfairly influenced by steel dumping or by illegal subsidies given to foreign producers by their governments or other entities, the integrity of the domestic and global market is jeopardized. In those instances, the domestic market loses its ability to effectively compete with its global rivals. When that occurs, it negatively impacts the economic stability of our domestic steel industry which in turn threatens our national security. __ We need to ensure that companies like Nucor and Steel Dynamics have the opportunity to modernize and grow to adequately meet the demands of the global market __ without the fear of sustaining financial damage from unfair or illegal trade practices. To ensure that our nation's defense remains adequate and capable, we must continue to enable mechanisms that will influence other countries to play by the rules Simultaneously, we must be cognizant, and take appropriate action, to recognize those instances in which anti-dumping and countervailing duties are no longer required to safeguard our economic and security interests. In either instance, we cannot allow to go unchallenged the continuous violations of international and U.S. trade laws that lend to a skewed market and undercut the ability for fair competition to flourish in the global economy. **__ The preservation of the economic integrity of our domestic steel industry is fundamental to our ability to protect our very existence as a nation. __**//

//Hegemony solves nuclear war and extinction//

// Barnett 11 // //**(Thomas P.M. Barnett 11 Former Senior Strategic Researcher and Professor in the Warfare Analysis & Research Department, Center for Naval Warfare Studies, U.S. Naval War College American military geostrategist and Chief Analyst at Wikistrat., worked as the Assistant for Strategic Futures in the Office of Force Transformation in the Department of Defense, “The New Rules: Leadership Fatigue Puts U.S., and Globalization, at Crossroads,” March 7 [] )**// // It is worth first examining the larger picture: __We live in a time of arguably the greatest structural change in the global order yet endured, with this historical moment's most amazing feature being its relative and absolute lack of mass violence__. That is something to consider when Americans contemplate military intervention in Libya, because if we do take the step to prevent larger-scale killing by engaging in some killing of our own, we will not be adding to some fantastically imagined global death count stemming from the ongoing "megalomania" and "evil" of American "empire." We'll be engaging in the same sort of system-administering activity that has marked our stunningly successful stewardship of global order since World War II. Let me be more blunt: __As the guardian of globalization, the U.S. military has been the greatest force for peace the world has ever known. Had America been removed__ from the global dynamics that governed the 20th century, the mass murder never would have ended. Indeed, it's entirely conceivable __there would now be no identifiable human civilization left, once nuclear weapons entered__ the killing equation. But the world did not keep sliding down that path of perpetual war. Instead, __America stepped up and changed everything by ushering in our now-perpetual great-power peace. We introduced the international liberal trade order known as globalization and played loyal Leviathan over its spread. What resulted was the collapse of empires, an explosion of democracy, the persistent__ spread __of human rights, the liberation of women, the doubling of life expectancy, a roughly 10-fold increase in adjusted global GDP and a profound and persistent reduction in battle deaths from state-based conflicts__. That is what American "hubris" actually delivered. Please remember that the next time some TV pundit sells you the image of "unbridled" American military power as the cause of global disorder instead of its cure. With self-deprecation bordering on self-loathing, we now imagine a post-American world that is anything but. Just watch who scatters and who steps up as the Facebook revolutions erupt across the Arab world. While we might imagine ourselves the status quo power, we remain the world's most vigorously revisionist force. As for the sheer "evil" that is our military-industrial complex, again, let's examine what the world looked like before that establishment reared its ugly head. The last great period of global structural change was the first half of the 20th century, a period that saw a death toll of about 100 million across two world wars. That comes to an average of 2 million deaths a year in a world of approximately 2 billion souls. Today, with far more comprehensive worldwide reporting, researchers report an average of less than 100,000 battle deaths annually in a world fast approaching 7 billion people. Though admittedly crude, these __calculations suggest a 90 percent absolute drop and a 99 percent relative drop in deaths__ due to war. We are clearly headed for a world order characterized by multipolarity, something the American-birthed system was designed to both encourage and accommodate. But given how things turned out the last time we collectively faced such a fluid structure, we would do well to keep U.S. power, in all of its forms, deeply embedded in the geometry to come. //

//And, manufacturing capabilities key to technology necessary for U.S. deterrence//

// O’Hanlon et al 2k12 // //**(Mackenzie Eaglen, American Enterprise Institute Rebecca Grant, IRIS Research Robert P. Haffa, Haffa Defense Consulting Michael O'Hanlon, The Brookings Institution Peter W. Singer, The Brookings Institution Martin Sullivan, Commonwealth Consulting Barry Watts, Center for Strategic and Budgetary Assessments “The Arsenal of Democracy and How to Preserve It: Key Issues in Defense Industrial Policy January 2012,” pg online @ [|http://www.brookings.edu/~/media/research/files/papers/2012/1/26%20defense%20industrial%20base/0126_defense_industrial_base_ohanlon]**// **um-ef)** The current wave of defense cuts is also different than past defense budget reductions in their likely industrial impact, as **__the U.S. defense industrial base is in a much different place than it was in the past__**. __Defense industrial issues are too often viewed through the lens of jobs and pet projects to protect in congressional districts__. **__But the overall health of the firms that supply the technologies our armed forces utilize does have national security resonance__**. __Qualitative superiority in weaponry and other key military technology has become an essential element of American military power in__ the modern era— **__ not only for winning wars but for deterring them __**. **__That requires world-class__** scientific and **__manufacturing capabilities—__**__which in turn can also generate civilian and military export opportunities for the U__ nited __S__ tates __in a globalized marketplace__.

Defense Industrial Base Prevents Terrorism, China War, And Russia War Via Deterrence Watts 2k8 Since the 1950s, __the US defense industrial base has been a source of long-term strategic advantage for the United States__, just as it was during World War II. **__American defense companies provided the bombers and missiles on which nuclear deterrence rested and armed the US military with world-class weapons, including low-observable aircraft, wide-area surveillance and targeting sensors, and reliable guided munitions cheap enough to be employed in large numbers__**. They also contributed to the development of modern digital computers, successfully orbited the first reconnaissance satellites, put a man on the moon in less than a decade, and played a pivotal role in developing the worldwide web. Critics have long emphasized President Eisenhower’s warning in his farewell television address that the nation needed to “guard against the acquisition of undue influence, whether sought or unsought, by the military-industrial complex.” Usually forgotten or ignored has been an earlier, equally important, passage in Eisenhower’s January 1961 speech: __A vital element in keeping the peace is our military establishment.__**__Our arms must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction__**. Eisenhower’s warning about undue influence, rather than the need to maintain American military strength, tends to dominate contemporary discussions of the US defense industrial base. While the percentage of US gross domestic product going to national defense remains low compared to the 1950s and 1960s, there is a growing list of defense programs that have experienced problems with cost, schedule, and, in a few cases, weapon performance. In fairness, the federal government, including the Department of Defense and Congress, is at least as much to blame for many of these programmatic difficulties as US defense firms. Nevertheless, those critical of the defense industry tend to concentrate on these acquisition shortcomings. __The main focus of this report is on a larger question. How prepared is the US defense industrial base to meet the needs of the US military Services in coming decades?__ The Cold War challenge of Soviet power has largely ebbed, but new __challenges have emerged__. __There is the immediate threat of the violence stemming from__ SalafiTakfiri and Khomeinist __terrorist groups and their state sponsors,__ that have consumed so much American blood and treasure in Iraq; the longer-term challenge of authoritarian capitalist regimes epitomized by __the rise of China and a resurgent Russia; and, not least, the worsening problem of proliferation__, particularly of nuclear weapons. __In the face of these more complex and varied challenges, it would surely be premature to begin dismantling the US defense industry__. From a competitive perspective, therefore, __the vital question about the defense industrial base is whether it will be as much a source of long-term advantage in the decades ahead as it has been since the 1950s__. All levels of manufacturing and R&D are interconnected – a sustainable manufacturing base in the U.S. is critical to Advanced Manufacturing and R&D Lind 2k12 Manufacturing, R&D and the U.S. Innovation Ecosystem __Perhaps the greatest contribution of manufacturing to the U.S. economy as a whole involves the disproportionate role of **the manufacturing sector in R&D**__. __The expansion in the global market for high-value-added services has allowed the U.S. to play to its strengths by expanding its trade surplus in services__, many of them __linked to manufacturing, including R&D__ , engineering, software production and finance. Of these services, **__by far the most important is R&D.__** The United States has long led the world in R&D. In 1981, U.S. gross domestic expenditure on R&D was more than three times as large as that of any other country in the world. And the U.S. still leads: in 2009, the most recent year for which there is available data, the United States spent more than 400 billion dollars. European countries spent just under 300 billion dollars combined, while China spent about 150 billion dollars.14 In the United States, private sector manufacturing is the largest source of R&D. The private sector itself accounts for 71 percent of total R&D in the United States, and although U.S. manufacturing accounts for only 11.7 percent of GDP in 2012, the manufacturing sector accounts for 70 percent of all __R&D spending by the private sector in the U.S__ .15 __And R&D and innovation are inextricably connected:__ a National Science Foundation survey found that 22 percent of manufacturers had introduced product innovations and the same percentage introduced process innovations in the period 2006-2008, while only 8 percent of nonmanufacturers reported innovations of either kind.16 Even as the manufacturing industry in the United States underwent major changes and suffered severe job losses during the last decade, R&D spending continued to follow a general upward growth path. __A disproportionate share of workers involved in R&D are employed directly or indirectly by manufacturing companies__ ; for example, **__ the US manufacturing sector employs more than a third of U.S. engineers. __** 17 This means that **__ manufacturing provides much of the demand for the U.S. innovation ecosystem ,__** **__ supporting large numbers of scientists and engineers __**__who might not find employment if R&D were offshored along with production__. Why America Needs the Industrial Commons Manufacturing creates an industrial commons, which spurs growth in multiple sectors of the economy through linked industries. __An “industrial commons” is a base of shared physical facilities and intangible knowledge shared by a number of firms__. The term “commons” comes from communallyshared pastures or fields in premodern Britain. __The industrial commons in particular in the manufacturing sector includes not only large companies but also small and medium sized enterprises__ (SMEs), __which employ 41 percent of the American manufacturing workforce and account for 86 percent of all manufacturing establishments in the U.S. Suppliers of materials, component parts, tools, and more__ **__ are all interconnected __** ; most of the time, Harvard Business School professors Gary Pisano and Willy Shih point out, these linkages are geographic because of the ease of interaction and knowledge transfer between firms.18 Examples of industrial commons surrounding manufacturing are evident in the United States, including the I-85 corridor from Alabama to Virginia and upstate New York.19 __Modern economic scholarship emphasizes the importance of geographic agglomeration effects and co-location synergies__. 20 __Manufacturers and researchers alike have long noted the symbiotic relationship that occurs when manufacturing and R&D are located near each other__ : **__the manufacturer benefits from the innovation, and the researchers are better positioned to understand where innovation can be found and to test new ideas__**. While some forms of knowledge can be easily recorded and transferred, much “know-how” in industry is tacit knowledge. __This valuable tacit knowledge base can be damaged or destroyed by the erosion of geographic linkages, which in turn shrinks the pool of scientists and engineers in the national innovation ecosystem__. If an advanced manufacturing core is not retained, then the economy stands to lose not only the manufacturing industry itself but also the geographic synergies of the industrial commons, including R&D. Some have warned that this is already the case: __a growing share of R&D by U.S. multinational corporations is taking place outside of the United States.__ 21 In particular, a number of large U.S. manufacturers have opened up or expanded R&D facilities in China over the last few years.22 __Next Generation Manufacturing__**__A dynamic manufacturing sector in the U.S. is as important as ever__**. But thanks to advanced manufacturing technology and technology-enabled integration of manufacturing and services, the very nature of manufacturing is changing, often in radical ways. What will the next generation of manufacturing look like? In 1942, the economist Joseph Schumpeter declared that “the process of creative destruction is the essential fact about capitalism.” By creative destruction, Schumpeter did not mean the rise and fall of firms competing in a technologically-static marketplace. He referred to a “process of industrial mutation— if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating the new one.” He noted that “these revolutions are not strictly incessant; they occurred in discrete rushes that are separated from each other by spaces of comparative quiet. The process as a whole works incessantly, however, in the sense that there is always either revolution or absorption of the results of revolution.”23 As Schumpeter and others have observed, technological innovation tends to be clustered in bursts or waves, each dominated by one or a few transformative technologies that are sometimes called “general purpose technologies.” Among the most world-transforming general purpose technologies of recent centuries have been the steam engine, electricity, the internal combustion engine, and information technology.24 As epochal as these earlier technology-driven innovations in manufacturing processes and business models proved to be, they are rapidly being superseded by new technologydriven changes as part of the never-ending process of Schumpeterian industrial mutation. __The latest wave of innovation in industrial technology has been termed “__**__ advanced manufacturing __**__.”__ The National Science and Technology Council of the Executive Office of the President defines advanced manufacturing as “a family of activities that (a) depend on the use and coordination of information, automation, computation, software, sensing, and networking, and/or (b) make use of cutting edge materials and emerging capabilities enabled by the __physical and biological sciences, for example, nanotechnology, chemistry, and biology. It involves both new ways to manufacture existing products and the manufacture of new products emerging from new advanced technologies__ .”25 Already computer-aided design (CAD) and computer-aided manufacturing (CAM) programs, combined with computer numerical control (CNC), allow precision manufacturing from complex designs, eliminating many wasteful trials and steps in finishing. CNC is now ubiquitous in the manufacturing sector and much of the employment growth occurring in the sector requires CNC skills or training. Information technology has allowed for enterprise resource planning (ERP) and other forms of enterprise software to connect parts of the production process (both between and within a firm), track systems, and limit waste when dealing with limited resources. Other __areas in which advanced manufacturing will play a role__ in creating new products and sectors and changing current ones **__are: Supercomputing__**. **__America’s global leadership in technology depends in part on whether the U.S. can compete with Europe and Asia in the race to develop “exascale computing__** ,” a massive augmentation of computer calculating power that has the potential to revolutionize predictive sci ences from meteorology to economics. According to the Advanced Scientific Computing Advisory Committee (ASCAC), “ __If the U.S. chooses to be a follower rather than a leader in exascale computing, we must be willing to cede leadership” in industries including aerospace, automobiles, energy, health care, novel material development, and information technology__ .26 **__Robotics:__** __The long-delayed promise of robotics is coming closer to fulfillment.__ Google and other firms and research consortiums are testing robotic cars, and Nevada recently amended its laws to permit autonomous automobiles.27 Amazon is experimenting with the use of robots in its warehouses.28 __Nanotech__ nology __may permit manufacturing at extremely small scales including the molecular and atomic levels__ .29 Nanotechnology is also a key research component in the semiconductor indusmanutry, as government funding is sponsoring projects to create a “new switch” capable of supplanting current semiconductor technology.30 Photonics or optoelectronics, based on the conversion of information carried by electrons to photons and back, has potential applications in sectors as diverse as telecommunications, data storage, lighting and consumer electronics. __Biomanufacturing is the use of biological processes or living organisms to create inorganic structures, as well as food, drugs and fuel__. Researchers at MIT have genetically modified a virus that generates cobalt oxide nanowires for silicon chips.31 Innovative materials include artificial “metamaterials” with novel properties. Carbon nanotubes, for example, have a strength-to-weight ratio that no other material can match.32 Advanced manufacturing using these and other cuttingedge technologies is not only creating new products and new methods of production but is also transforming familiar products like automobiles. The rapid growth in electronic and software content in automobiles, in forms like GPS-based guidance systems, information and entertainment technology, anti-lock brakes and engine control systems, will continue. According to Ford, around 30 percent of the value of one of its automobiles is comprised by intellectual property, electronics and software. In the German automobile market, electronic content as a share of production costs is expected to rise from 20-30 percent in 2007 to 50 percent by 2020.33 And, advanced manufacturing technology will make war IMPOSSIBLE Paone 2k9 __The convergence of "exponentially advancing technologies" will form a "super-intelligence" **so formidable that it could avert war**__, __according to__ one of the world's leading futurists. __Dr. James Canton__, CEO and chairman of the Institute for Global Futures, a San Francisco-based think tank, is author of the book "The Extreme Future" and an adviser to leading companies, the military and other government agencies. __He is consistently listed among the world's leading speakers__ and has presented to diverse audiences around the globe. He will address the Air Force Command and Control Intelligence, Survelliance and Reconnaissance Symposium, which will be held Sept. 28 through 30 at the MGM Grand Hotel at Foxwoods in Ledyard, Conn., joining Air Force Chief of Staff Gen. Norton Schwartz and a bevy of other government and industry speakers. He offered a sneak preview of his symposium presentation and answered various questions about the future of technology and warfare in early August. " **__The superiority of convergent technologies will prevent war,"__** Doctor Canton said, claiming **__their power would present an overwhelming deterrent to potential adversaries__**. While saying that the U.S. will build these super systems faster and better than other nations, he acknowledged that a new arms race is already under way. "It will be a new MAD for the 21st century," he said, referring to the Cold War-era acronym for Mutually Assured Destruction, the idea that a nuclear first strike would trigger an equally deadly response. It's commonly held that this knowledge has essentially prevented any rational state from launching a nuclear attack. Likewise, Doctor Canton said he believes __rational nation states, considering this imminent technology explosion, will see the futility of nation-on-nation warfare in the near future__. Plus there's the "socio-economic linking of the global market system." "The fundamental macroeconomics on the planet favor peace, security, capitalism and prosperity," he said. Doctor Canton projects that nations, including those not currently allied, will work together in using these smart technologies to prevent non-state actors from engaging in disruptive and deadly acts. As a futurist, __Doctor Canton__ and his team study and predict many things, but their __main area of expertise__ -- and the one in which he's personally most interested -- __is advanced and emerging technology__. "I see that __as the key catalyst of strategic change on the planet__, and it will be for the next 100 years," he said. **__He focuses on six specific technology areas: "nano, bio, IT, neuro, quantum and robotics;"__**__those he expects to converge in so powerful a way__. Within the information technology arena, Doctor Canton said systems must create "meaningful data," which can be validated and acted upon. __"Knowledge engineering for the analyst and the warfighter is a critical competency that we need to get our arms around__ ," he said. "Having an avalanche of data is not going to be helpful." Having the right data is. "There's no way for the human operator to look at an infinite number of data streams and extract meaning," he said. "The question then is: How do we augment the human user with advanced artificial intelligence, better software presentation and better visual frameworks, to create a system that is situationally aware and can provide decision options for the human operator, faster than the human being can?" He said he believes the answers can often be found already in what he calls 'edge cultures.' "I would look outside of the military. What are they doing in video games? What are they doing in healthcare? What about the financial industry?" Doctor Canton said he believes that __more sophisticated artificial intelligence applications will transform business, warfare and life in general__. Many of these are already embedded in systems or products, he says, even if people don't know it. ** Thus the Plan: ** ** Text: The United States federal government should increase the federal excise tax rate and phase-in a price floor and variable tax on gasoline for surface transportation infrastructure in the United States. ** ** Contention Two: Solvency – ** ** The plan solves – establishing a price floor sends a signal for renewable energy development, while increasing revenue for transportation infrastructure ** __ Congress should enact legislation to restructure the federal gasoline tax to better internalize the external costs of gasoline consumption __**__ and to send __****__ a price signal to investors __****__ that would afford them the certainty that they require to take risks on clean energy technology __**. The following Parts outline a recipe for how the government should accomplish this task. A. Phase-In a Price Floor and Variable Tax on Gasoline __ **Congress should phase-in a price floor and variable tax on gasoline** __. The price floor mechanism begins __ with a target price __. The amount of the variable tax is the difference between the target price and the market price. __ Thus, if the market price of a gallon of gasoline falls below the target, then the variable tax makes up the difference. __ n256 __ The "variable fuel tax ... increases as the market price drops and decreases as [market] prices rise." __ n257 __ If the market price rises above the price floor, then the variable tax becomes zero __. __ The price floor and variable tax will function to stabilize the price at the pump __ : [*421] regardless of how much the market price fluctuates, the consumer will never pay less than the price floor for a gallon of gasoline. __ The target price is the key __ to the success of the price floor mechanism. If the target price is too low, then consumers will not change their consumption patterns and businesses will not feel confident enough to make investments in clean energy technology to the degree necessary to meaningfully contribute to the solution to climate change and oil dependence. If the target price is too high, then it could have a negative effect on economic productivity. There are two ways to limit the tax's economic fallout. First, the target price must not be set too high too early. This is easier said than done; but consider the state of the oil and gas market in mid-2008. The price of oil rose to $ 147 per barrel and gasoline peaked above $ 4 per gallon. Charles Krauthammer argues that "with $ 4 gas still fresh in our memories, the psychological impact of a tax that boosts the pump price to near $ 3 would be far less than at any point in decades." n258 The relentless march of oil prices through mid-2008 certainly affected economic productivity, but high oil prices are not among the primary causes of the financial crisis. n259 __ Dramatic spikes in the price of oil are inevitable in the long-term __ n260 __ and could arise in the short-term __. n261 __ The alternative to a gradual decline in consumption beginning in the short-term is an abrupt decline in consumption brought on by a supply shock and severe economic contraction in the medium-to-long-term __. n262 **__ The longer the delay, the worse the contraction will be __**. n263 It took $ 4 per gallon gasoline to change American consumption patterns in 2008, and it may take less of a price increase to maintain more manageable consumption patterns in the future. n264 Therefore, __ the ultimate price target should be between $ 3 and $ 4. __ n265 A $ 4 gallon of gasoline would still cost less than the $ 5 to $ 15 that it would cost if the price were to include all of gasoline's externalities. n266 Moreover, gasoline would still be cheaper in the United States at $ 4 per gallon than it would be in Canada or many EU nations, which tax gasoline at much higher rates. n267 __ The second way to limit the tax's economic fallout is to phase it in __. n268 Beginning with a modest price floor of $ 2 per gallon, for example, and gradually increasing the [*422] target over time would provide consumers and businesses with lead time to prepare for the increased fuel costs. If Congress offsets the gasoline tax increases by simultaneously phasing out payroll or income taxes, then it could set the gasoline price floor higher. As a failsafe, Congress could include a provision in the tax that would allow the IRS to adjust the target price based on its observed effects on gasoline consumption and economic activity. Finally, __ the statute should adjust the price floor to account for inflation __. n269 B. Phase-In Increases in the Current Gasoline Tax __ In addition to establishing a variable tax on gasoline, Congress should maintain and increase the current excise gasoline tax __. Retailers set the price of gasoline, but each phase of the value chain adds to the gasoline's cost. n270 Retailers incorporate these costs into the ultimate price. n271 __ If gasoline retailers and producers know that the new tax will force consumers to pay a minimum price, then they could simply raise their prices to capture the tax revenue that would otherwise go to the federal government __. In other words, in response to a price floor on gasoline, the market could price gasoline equal to or near the statutorily mandated target price. W **__ ith a price floor of $ 4 per gallon and a market price of, say, $ 3.50 per gallon, the federal government should collect $ 0.50 per gallon in tax revenue __**. Knowing that consumers will pay $ 4 per gallon, though, refiners, distributors, and retailers could simply raise their prices - thereby raising the market price - to, say, $ 3.75 per gallon. The market, then, would capture $ 0.25 per gallon that would otherwise have been federal tax revenue. Of course, __ competition always operates to drive down the market price, and this scenario also raises the specter of anticompetitive collusion and possible antitrust violations __. This situation, though, is not outside the realm of possibility. States could also raise their respective gasoline taxes to capture a larger portion of the would-be federal tax revenue. Again, imagine a price floor of $ 4 per gallon and a market price of $ 3.50 per gallon in State A. State A, knowing that the federal price floor will compel consumers to pay $ 4 per gallon, could simply raise its own state tax on gasoline by $ 0.50 to capture the tax revenue that would otherwise go to the federal government. This scenario is easy to envision and likely to occur. __ To ensure that it captures a greater share of the revenue from the variable tax than the current $ 0.184 per gallon excise tax, the federal government **should increase the federal excise tax rate** __. __ The level of the tax increase will depend on how much revenue the federal government determines that it wants to capture from the variable tax. __ If Congress phases out payroll or income taxes or issues rebates to low-income earners to offset the economic effects of the increase in the gasoline tax, then it will likely also need to increase its current excise tax on gasoline or make do with a smaller budget. Regardless of who captures the tax revenue, though, **__ the establishment of a price floor on gasoline would send an appropriate price signal to the energy market and achieve more efficient cost/price integration than does the present market for gasoline __**. [*423] C. Revenue Distribution and Tax Offsets __ The current gasoline tax is the __ Highway Trust Fund's __ (HTF) **primary source of revenue** __. n272 Many supporters of gasoline tax reform argue, however, that additional revenue from gasoline tax increases should be devoted to investment in renewable energy technology. n273 As appealing as this option is to clean energy advocates, it may not be possible or practical. **__ The HTF is presently underfunded and many portions of the federal highway system are in disrepair. __** n274 At the least, **__ Congress should not divert the current gasoline tax revenue away from funding the HTF without establishing an alternate source of revenue for the HTF. __** Additionally, the gasoline tax is regressive. n275 It would therefore be prudent to either redistribute the tax revenue to low-income earners in the form of tax rebates or to phase out certain payroll or income taxes, n276 in which case Congress would need to raise the gasoline tax to make up for the lost revenue. The desirability of such changes to the Internal Revenue Code is a contentious issue and beyond the scope of this Note. Ultimately, the tax revenue generated from an increase in the gasoline tax would not - and should not - be distributed to any single use, but should be allocated as the government deems appropriate. ** The plan kills damaging CAFÉ Standards and transitions away from government interventions into the market ** So why even think about it? Because __ the virtues of a gas tax remain what they have always been. A tax that suppresses U.S. gas consumption can have a major effect **on reducing world oil prices** __. And the benefits of low world oil prices are obvious: They put tremendous pressure on OPEC, as evidenced by its disarray during the current collapse; __ they deal serious economic damage to energy-exporting geopolitical adversaries such as Russia, Venezuela, and Iran __ ; __ and they reduce the enormous U.S. imbalance of oil trade __ which last year alone diverted a quarter of $1 trillion abroad. Furthermore, a reduction in U.S. demand alters the balance of power between producer and consumer, __ making us less dependent on oil exporters __. **__ It begins weaning us off foreign oil, __** and, if combined with nuclear power and renewed U.S. oil and gas drilling, puts us on the road to energy independence. __ High gas prices __, whether achieved by market forces or by government imposition, __ encourage fuel economy __. In the short term, they simply reduce the amount of driving. In the longer term, __ they lead to the increased (voluntary) shift to more fuel-efficient cars __. **__ They render __****__ redundant and unnecessary the absurd CAFE standards __****__ - __** -the ever-changing Corporate Average Fuel Economy __ regulations that mandate the fuel efficiency of various car and truck fleets __ -- **__ which introduce __****__ terrible distortions into the market __**. As the consumer market adjusts itself to more fuel-efficient autos, the green car culture of the future that environmentalists are attempting to impose by decree begins to shape itself unmandated. This shift has the collateral environmental effect of reducing pollution and CO2 emissions, an important benefit for those who believe in man-made global warming and a painless bonus for agnostics (like me) who nonetheless believe that the endless pumping of CO2 into the atmosphere cannot be a good thing. These benefits are blindingly obvious. They always have been. But the only time you can possibly think of imposing a tax to achieve them is when oil prices are very low. We had such an opportunity when prices collapsed in the mid-1980s and again in the late 1990s. Both opportunities were squandered. Nothing was done. Today we are experiencing a unique moment. Oil prices are in a historic free fall from a peak of $147 a barrel to $39 today. In July, U.S. gasoline was selling for $4.11 a gallon. It now sells for $1.65. With $4 gas still fresh in our memories, the psychological impact of a tax that boosts the pump price to near $3 would be far less than at any point in decades. Indeed, an immediate $1 tax would still leave the price more than one-third below its July peak. The rub, of course, is that this price drop is happening at a time of severe recession. Not only would the cash-strapped consumer rebel against a gas tax. The economic pitfalls would be enormous. At a time when overall consumer demand is shrinking, any tax would further drain the economy of disposable income, decreasing purchasing power just when consumer spending needs to be supported. What to do? Something radically new. A net-zero gas tax. Not a freestanding gas tax but a swap that couples the tax with an equal payroll tax reduction. A two-part solution that yields the government no net increase in revenue and, more importantly--that is why this proposal is different from others--immediately renders the average gasoline consumer financially whole. Here is how it works. The simultaneous enactment of two measures: A $1 increase in the federal gasoline tax--together with an immediate $14 a week reduction of the FICA tax. Indeed, that reduction in payroll tax should go into effect the preceding week, so that the upside of the swap (the cash from the payroll tax rebate) is in hand even before the downside (the tax) kicks in. The math is simple. The average American buys roughly 14 gallons of gasoline a week. The $1 gas tax takes $14 out of his pocket. The reduction in payroll tax puts it right back. The average driver comes out even, and the government makes nothing on the transaction. (There are, of course, more drivers than workers--203 million vs. 163 million. The 10 million unemployed would receive the extra $14 in their unemployment insurance checks. And the elderly who drive--there are 30 million licensed drivers over 65--would receive it with their Social Security payments.) Revenue neutrality is essential. No money is taken out of the economy. Washington doesn't get fatter. Nor does it get leaner. It is simply a transfer agent moving money from one activity (gasoline purchasing) to another (employment) with zero net revenue for the government. Revenue neutrality for the consumer is perhaps even more important. Unlike the stand-alone gas tax, it does not drain his wallet, which would produce not only insuperable popular resistance but also a new drag on purchasing power in the midst of a severe recession. Unlike other tax rebate plans, moreover, the consumer doesn't have to wait for a lump-sum reimbursement at tax time next April, after having seethed for a year about government robbing him every time he fills up. The reimbursement is immediate. Indeed, at its inception, the reimbursement precedes the tax expenditure. One nice detail is that the $14 rebate is mildly progressive. The lower wage earner gets a slightly greater percentage of his payroll tax reduced than does the higher earner. But that's a side effect. The main point is that the federal government is left with no net revenue--even temporarily. And the average worker is left with no net loss. (As the tax takes effect and demand is suppressed, average gas consumption will begin to fall below 14 gallons a week. There would need to be a review, say yearly, to adjust the payroll tax rebate to maintain revenue neutrality. For example, at 13 gallons purchased per week, the rebate would be reduced to $13.) Of course, as with any simple proposal, there are complications. Doesn't reimbursement-by-payroll-tax-cut just cancel out the incentive to drive less and shift to fuel-efficient cars? No. The $14 in cash can be spent on anything. You can blow it all on gas by driving your usual number of miles, or you can drive a bit less and actually have money in your pocket for something else. There's no particular reason why the individual consumer would want to plow it all back into a commodity that is now $1 more expensive. When something becomes more expensive, less of it is bought. The idea that the demand for gasoline is inelastic is a myth. A 2007 study done at the University of California, Davis, shows that during the oil shocks of the late 1970s, a 20 percent increase in oil prices produced a 6 percent drop in per capita gas consumption. During the first half of this decade, demand proved more resistant to change--until the dramatic increases of the last two years. Between November 2007 and October 2008, the United States experienced the largest continual decline in driving history (100 billion miles). Last August, shortly after pump prices peaked at $4.11 per gallon, the year-on-year decrease in driving reached 5.6 percent--the largest ever year-to-year decline recorded in a single month, reported the Department of Transportation. (Records go back to 1942.) At the same time, mass transit--buses, subways, and light rail--has seen record increases in ridership. Amtrak reported more riders and revenue in fiscal 2008 than ever in its 37-year history. Gasoline demand can be stubbornly inelastic, but only up to a point. In this last run-up, __ the point of free fall appeared to be around $4 __. If it turns out that at the current world price of $39 a barrel, __ a $1 tax does not discourage demand enough to keep the price down, we simply increase the tax __. __ The beauty of the gas tax is that we--and not OPEC--do the adjusting __. And that increase in price doesn't go into the pocket of various foreign thugs and unfriendlies, but back into the pocket of the American consumer. What about special cases? Of course there are variations in how much people drive. It depends on geography, occupation, and a host of other factors. These variations are unavoidable, and in part, welcome. The whole idea is to reward those who drive less and to disadvantage those who drive more. Indeed, inequities of this sort are always introduced when, for overarching national reasons, government creates incentives and disincentives for certain behaviors. A tax credit for college tuition essentially takes money out of the non-college going population to subsidize those who do go--and will likely be wealthier in the end than their non-college contributors. Not very fair. Nonetheless, we support such incentives because college education is a national good that we wish to encourage. Decreased oil consumption is a similarly desirable national good. There will certainly be special cases, such as truck drivers and others for whom longer distance driving is a necessity that might warrant some special program of relief. That would require some small bureaucracy, some filings for exemption or rebate, and perhaps even some very minor tweak of the gas tax (say, an extra penny or two beyond the dollar). But that's a detail. Most people can drive less. They already do. Why a $1 tax? Because we need a significant increase in the cost of gasoline to change our habits--or, more accurately, maintain the new driving habits and auto purchase patterns that have already occurred as a result of the recent oil shock. We know from the history of the 1980s and 1990s that these habits will be undone and unlearned if gasoline remains at today's amazingly low price. In the very short time that prices have been this low, we have already seen a slight rebound in SUV sales. They remain far below the level of last year--in part because no one is buying anything in this recession, and in part because we have not fully recovered from the psychological impact of $4 gasoline. We are not quite ready to believe that gas will remain this low. But if it does remain this low, as the night follows day, we will resume our gas-guzzling habits. It might therefore be objected that a $1 gasoline tax won't be enough. If $4 was the price point that precipitated a major decrease in driving and a collapse of SUV sales, an immediate imposition of a $1 gas tax would only bring the average price to $2.65. To which I have two answers. First, my preliminary assumption is that it takes $4 to break the habit of gas-guzzling profligacy. But once that is done, it might take something less, only in the range of $3, to maintain the new habit. It may turn out that these guesses are slightly off. The virtue of a gas tax is that these conjectures can be empirically tested and refined, and the precise amount of the tax adjusted to consumer response. Second, my personal preference would be a $1.25 tax today (at $1.65 gasoline) or even a $1.50 tax if gas prices begin to slide below $1.50--the target being near-$3 gasoline. (The payroll tax rebate would, of course, be adjusted accordingly: If the tax is $1.50, the rebate is $21 a week.) The $1 proposal is offered because it seems more politically palatable. My personal preference for a higher initial tax stems from my assumption that the more sharply and quickly the higher prices are imposed, the greater and more lasting the effect on consumption. But whatever one's assumptions and choice of initial tax, the net-zero tax swap remains flexible, adjustable, testable, and nonbureaucratic. __ Behavior is changed, driving is curtailed, fuel efficiency is increased, without any of the arbitrary, shifting, often mindless mandates **decreed by Congress**. **This is a major benefit of the gas tax that is generally overlooked** __. __ It is not just an alternative to regulation; because it is so much more efficient, __**__ it is a killer of regulation __****.**__ The most egregious of these regulations are the __ fleet fuel efficiency ( __ CAFE) standards forced on auto companies. __**__ Rather than creating market conditions that encourage people to voluntarily buy greener cars, the CAFE standards simply impose them __**. __ And once the regulations are written--with their arbitrary miles-per-gallon numbers and target dates--they are not easily changed __. If they are changed, moreover, they cause massive dislocation, and yet more inefficiency, in the auto industry. **__ CAFE standards have proven __****__ devastating to Detroit __**. __ When oil prices were relatively low, they forced U.S. auto companies to produce small cars that they could only sell at a loss __. They were essentially making unsellable cars to fulfill mandated quotas, like steel producers in socialist countries meeting five-year plan production targets with equal disregard for demand. __ Yet the great 2008 run-up in world oil prices showed what happens without any government coercion. As the price of gas approached $4 a gallon, there was a collapse of big-car sales that caused U.S. manufacturers to begin cutting SUV production and restructuring the composition of their fleets __. GM's CEO, for example, declared in June, "these prices are changing consumer behavior and changing it rapidly," and announced the closing of four SUV plants and the addition of a third shift in two plants making smaller cars. **__ Which is precisely why __****__ a gas tax would render these government-dictated regulations irrelevant and obsolete __**. If you want to shift to fuel-efficient cars, don't mandate, don't scold, don't appeal to the better angels of our nature. **__ Find the price point, reach it with a tax, and let the market do the rest __**. Yes, a high gas tax constitutes a very serious government intervention. But it has the virtue of simplicity. It is clean, adaptable, and easy to administer. Admittedly, it takes a massive external force to alter behavior and tastes. But given the national security and the economic need for more fuel efficiency, and given the leverage that environmental considerations will have on the incoming Democratic administration and Democratic Congress, that change in behavior and taste will occur one way or the other. Better a gas tax that activates free market mechanisms rather than regulation that causes cascading market distortions. __ The net-zero gas tax not only obviates the need for government regulation __. **__ It obviates the need for government spending as well. __**__ Expensive gas creates the market for the fuel-efficient car without ____ W**ashington having to pick winners and losers with massive government "investment" and arbitrary grants** __. __ No regulations, no mandates, no spending programs to prop up the production of green cars that consumer demand would not otherwise support __. And if we find this transition going too quickly or too slowly, we can alter it with the simple expedient of altering the gas tax, rather than undertaking the enormously complicated review and rewriting of fuel-efficiency regulations.
 * (Senior Fellow @ The Center for Strategic and Budgetary Assessments (Barry D, “The US Defense Industrial Base, Past, Present and Future,” CBA, __http://www.csbaonline.org/4Publications/PubLibrary/R.20081015._The_US_Defense_In/R.20081015._The_US_Defense_In.pdf__)**
 * (Michael Lind is policy director of New America’s Economic Growth Program and a co-founder of the New America Foundation. Joshua Freedman is a program associate in New America’s Economic Growth Program. “Value Added: America’s Manufacturing Future,” pg online @ http://growth.newamerica.net/sites/newamerica.net/files/policydocs/Lind,%20Michael%20and%20Freedman,%20Joshua%20-%20NAF%20-%20Value%20Added%20America%27s%20Manufacturing%20Future.pdf //um-ef)**
 * (Chuck, 66th Air Base Wing Public Affairs for the US Air Force, 8-10-09, “Technology convergence could prevent war, futurist says,” http://www.af.mil/news/story.asp?id=123162500)**
 * Abelkop 2k9**
 * (Adam, J.D., University of Iowa College of Law, 2010; B.A., Wake Forest University, PHd Student @ Univ of Indiana, “Why the Government Should Drink Your Milkshake: The Case for Restructuring the Federal Gas Tax,” The Journal of Corporation Law Winter, 2009, 35 Iowa J. Corp. L. 393 pg lexis//um-ef)**
 * Krauthammer 2k9**
 * (Charles, American Pulitzer Prize–winning syndicated columnist, political commentator, and physician, McGill University degree in political science and economics, Commonwealth Scholar in politics at Balliol College, Oxford, Doctor of Medicine from Harvard Medical School “The Net-Zero Gas Tax; A once-in-a-generation chance,” pg lexis//um-ef)**

** Congress just passed a MASSIVE transportation bill – it should have triggered your disads, but didn’t fix the Highway Trust Fund ** __ Congressional leaders __ announced opaquely last week that they’d “ __ moved forward __ ” __ on a deal on the __ highway section of the __ transportation bill __. That means transit, rail, and safety programs are still being negotiated __. And __ it means the financing of the bill hasn’t yet gotten the seal of approval from the House. Still, both houses of Congress have __ agreed to spend more on the transportation bill **than the Highway Trust Fund** __ itself __ **can bear** __. (The House gave its green light a couple weeks ago when it nixed the Broun motion to keep transportation spending to HTF receipt levels.) __ To overspend the HTF but still **plausibly deny** that they’re deficit-spending __, __ the Senate Finance Committee has done some pretty fancy footwork __ to offset the expenditures with other savings. Chair Max Baucus (D-MT) squeezed blood from the stone of the U.S. budget, and many of his colleagues have lauded him as a miracle worker. __ But Taxpayers for Common Sense __ – and lots of other people with common sense – **__ say the numbers don’t really add up __**. The information below comes from TCS’s report, released last week, on the Senate pay-fors. Stick with me here – this is all a little convoluted, but understanding the funding is a key part of the process __. While the Senate transportation bill may be a good stop-gap __ compared to the option of even shorter extensions, __ a look at the funding shows __ why __ it provides **no long-term answers** to the question of how to pay for transportation __. __ The sources of new **H** __ ighway **__ T __** rust __ **F** __ und __ revenue Baucus et al came up with are __ : __ A transfer from the general fund: $4.97 billion __. **__ This is the most obvious example of __****//__ deficit spending __//** – **__ just taking money from the Treasury to pay for transportation. __**__ That’s on top of $34.5 billion the Treasury has already coughed up in the last four years to bail out the H __ ighway __ T __ rust __ F __ und – something no one wanted to repeat. Dedication of imported car tariffs to the Highway Trust Fund: $4.52 billion. This revenue would no longer go to the general fund. A transfer from the Leaking Underground Storage Tank Trust Fund: $3.685 billion. TCS approves of this use of funds, since they come from the gas tax and are underspent at a three-to-one ratio. This transfer just eliminates most of the backlogged surplus. Dedication of the gas guzzler tax to the Highway Trust Fund: $0.697 billion. The government levies a fee on vehicles whose combined city and highway fuel economy is worse than 22.5 mpg (with exemptions, of course, for some of the worst offenders, like SUVs and minivans). It’s transportation-related, but the tax revenues have always gone into the general fund, so this functions as another transfer from the Treasury. Total new HTF revenues: 13.872 billion. So, since the Senate proposes to take from the general fund to plug the Highway Trust Fund, they have to pay back the Treasury somehow. That’s known on Capitol Hill as an “offset,” to avoid deficit spending. __ The principal new source of revenue to replenish the general fund is a pension stabilization provision __, expected to yield $9.394 billion. By reducing the amount companies have to contribute to employees’ pensions — which are tax-free — that money will become taxable income. Even skeptics seem to agree that $9.394 billion is probably a reasonable amount to expect from this change. But TCS notes that the Pension Benefit Guaranty Corporation (PBGC), which guarantees pension benefits when a company goes bankrupt, has a $23 billion deficit, which they say would be a better fit for this chunk of money. __ There are 10 __ more __ offsets __, most of them good for a negligible amount of money, __ but put them all together __ (with the pension change) __ and __ they total $17 billion. __ They include __ changes to arcane tax code provisions, increased enforcement of tax payment on Medicare providers and passport holders, and even **//__ a new tax __//****__ on “roll-your-own” cigarette machines __**. So that’s enough to pay the general fund back for what the Highway Trust Fund took. But __ TCS says some of these represent **bogus savings** __. For example, the government is planning to “save” $3.627 billion by further delaying a tax change that hasn’t even taken effect yet. __ The Senate bill would spend ten years’ worth of this “savings” in little more than a year __. But that’s not all! __ The bill also includes __**__ extraneous spending __**__ on things that don’t have anything to do with transportation __. Most of the non-transportation items have their own funding built in, but TCS wonders why they’re included in the bill at all. They include $ __ 3.627 billion for Gulf states’ coastal restoration, __ paid for out of fines from the BP oil spill; $1.4 billion for reauthorization of the land and water conservation fund, funded with oil drilling money; a change in the definition of a “small-issuer” bond, which is tax-exempt, and therefore forfeiting $0.761 billion in taxes; __ elimination of the cap on water and sewer bonds __ ; and relief from the alternative minimum tax for investors in private activity bonds (which are often used for infrastructure). The final item under “new spending” does, in fact, deal with transportation. In fact, it’s a key priority for transportation reformers: **__ bringing the transit tax benefit up __**__ to the level of the parking benefit for commuters __. Currently, the limit is $125 a month for transit and $240 for parking. Putting transit commuters on a level playing field with drivers is a significant transportation goal for this bill to achieve. TCS grumbles that the way to handle the imbalance is to lower the parking subsidy, which is fair enough. But if that’s not going to happen, the $0.139 billion it will cost to raise the transit benefit to achieve parity is well worth it. All together, whew, __ that’s a lot of complicated math just to avoid raising the gas tax __. ** Transportation infrastructure is financed in one of two ways – through the general fund, or through increased revenue – Stimulus Programs finance through the general fund while failing to repair the Highway Trust Fund ** **__ Transportation Investment __** and User Financing __ When Congress created the National System of Interstate and Defense Highways in 1956, it __ considered two options for financing the construction costs—borrow the money by issuing highway bonds or enact pay-as-you-go taxes on highway users. After much debate, the second option was chosen. Congress __ raised the federal gasoline tax __ from two cents per gallon to four cents per gallon __ and directed the revenues into the __ newly-created Highway Trust Fund ( __ HTF __ ). **__ Virtually all federal highway investment since then has been financed from the HTF __**. In 1982, Congress added the Mass Transit Account (MTA) to the HTF. The tax rate on gasoline was increased to 9 cents per gallon, with revenues from one cent of the five cent increase being directed into the MTA. Since then, most federal investment in mass transit has been financed from the Mass Transit Account, while highway improvements have been funded from the Highway Account (HA). Subsequently, __ the federal tax on gasoline has been increased only twice—in 1990 and 1993 __ —and currently stands are 18.3 cents per gallon. There is also a 24.3 cent-per-gallon tax on diesel fuel (and equivalent taxes on other motor fuels) as well as taxes on large trucks, which are also credited to the HTF. A similar user-fee-funded trust fund finances most federal investment in the nation’s airports and air transportation system. Through the years, user fee financed trust funds have proven a remarkably responsible way to finance federal investment in highways, public transportation and airports. In fact, during most years since its creation in 1956, the Highway Trust Fund generated balances that helped mask the size of the unified federal deficit, leading stakeholders to argue that Congress was violating the trust of highway users by failing to invest all user fee receipts in highway and transit improvements. Three factors have had a significant effect on the HTF balance in recent years: • When Congress enacted the Transportation Equity Act for the 21st Century (TEA-21) in 1998, it transferred $8 billion from the Highway Trust Fund balance to the General Fund at the start of FY 1999 and provided that interest on the HTF balance would henceforth be credited to the General Fund—the only trust fund so treated—costing the HTF almost $11 billion in foregone revenues. In addition, when Congress enacted motor fuel tax increases in 1990 and 1993, more than $22 billion of the revenues were deposited in the General Fund despite being taxes levied on highway users for the purpose of investing in highway and transit improvements. • Economic downturns in 2001 and 2008-09 had a depressing effect on highway travel and thus revenues into the HTF, as did unusually high gasoline and diesel fuel prices in 2008. In addition, highway construction costs skyrocketed between 2004 and 2009, due to world-wide increases in the cost of asphalt, cement and steel. Both effects put immense pressure on HTF revenues. • In 2005, Congress enacted the Safe, Accountable, Flexible, and Efficient Transportation Equity Act – A Legacy for Users (SAFETEA-LU) which increased federal investment in highway and transit improvements without increasing user fees. To accomplish that, Congress funded the federal highway and public transportation programs at a level where projected outlays through FY 2009 would not only use projected HTF revenues, but would also spend down much of the fund’s existing balance. 3 The HTF balance peaked at $31 billion in FY 2000 and has since been drawn down. Nonetheless, between 1956 and 2007—a span of more than 50 years—the federal highway and mass transit programs had no net impact on the federal budget. User revenues into the Highway Trust Fund financed all federal expenditures on highway and transit improvements, imposing no burden on the federal General Fund or the federal budget deficit. The Airport and Airways Trust Fund (AATF) has had a similar history. Created in 1971, the AATF has had positive balances most years since, punctuated only by a period in the mid-1990s when user fees on air travelers had temporarily expired. By FY 2000, the AATF had a balance of more than $7 billion. The need to improve airport security after September 11, 2001, resulted in a temporary decline in the AATF balance, but the balance is projected to bounce back to about $10 billion in FY 2010. The AATF thus has also been an example of how a user-fee financed program contributes to fiscal responsibility. American Recovery and Reinvestment Act and General Fund Transfers Since 2007, General Fund revenues have been used on several occasions to supplement HTF revenues to finance highway and public transportation improvements, which added to the unified federal deficit. This occurred for two reasons: Economic recovery. With the economy in its worst downturn since the Great Depression and unemployment approaching 10 percent, __ Congress included $48 billion for ready-to-go transportation improvements in the __ American Recovery and Reinvestment Act of 2009 ( __ ARRA). All of the transportation improvements **were financed from the federal General Fund** __, as was the rest of the $787 billion Recovery Act. __ Since the purpose of the legislation was to stimulate economic recovery __ and support jobs in the United States, __ it was entirely appropriate to finance the __ highway, transit and airport construction __ projects through general fund deficits __. **__ While this violated the time-honored users-pay approach to financing transportation improvements, the impetus for the spending was not to improve the transportation system, but to use such improvements to stimulate the economy __** and support jobs. Once this is accomplished, however **__, asking general taxpayers to pay for regular improvements to the nation’s transportation system would be a clear departure from the user fee financing principle that has served these programs and the federal budget well for decades __**. Rescue the Highway Trust Fund. __ Since FY 2007, user revenues into the Highway Trust Fund have been significantly less than expected __, due largely to the impact of the economic recession on highway travel (both personal and freight) as discussed above. The failure to generate new HTF revenues to support the SAFETEA-LU highway and public transportation investments made the trust fund extremely vulnerable to these economic shocks. With outlays exceeding revenues, the Highway Account of __ the HTF was in danger of running out of funds toward the end of FY 2008 __ —two years earlier than the authors of SAFETEA-LU had forecast. Projections showed the transit program would run out of money two years later. __ To prevent the U.S. government from defaulting on its highway and transit program obligations, Congress injected $8 billion __ into the Highway Account in FY 2008, followed by $7 billion in FY 2009 and $14.7 billion in FY 2010. In addition, $4.8 billion was injected into the Mass Transit Account in FY 2010. __ These transfers came from the General Fund __ and clearly affected the size of the federal budget deficits those years. __ All __ three __ transfers, however, represented previously foregone user fee revenues that should have gone into the Highway Trust Fund __, **__ which instead were credited to the General Fund __** —$8 billion transferred from the HTF to the GF in FY 1999, interest on the HTF balance that was credited to the GF, and federal aid to state and local governments to repair transportation infrastructure damaged by natural disasters (which for many years was paid from the HFT whereas all other federal disaster relief was paid from the GF). If Congress had not diverted these user revenues from the HTF into the GF, there would, arguably, have been no need for the General Fund transfers in FY 2008, FY 2009 and FY 2010. __ The injection of revenues into the HTF between FY 2008 and FY 2010 is, unfortunately, only a stopgap action __. The Congressional Budget Office projects that both the Highway Account and Mass Transit Account will exhaust their existing balances during 2012 or 2013. While this is a serious concern, **__ the far more important issue is that projected Highway Trust Fund revenues in the years ahead are far short of the nation’s __****__ transportation investment __****__ needs __**. The Gap Between Needs and Revenues The U.S. Department of Transportation (U.S. DOT) recently released its 2008 Report to Congress on the Status of the Nation’s Highways, Bridges, and Transit: Conditions and Performance. The report found that the United States is investing less each year than the minimum needed just to maintain current physical conditions and operational performance on the nation’s highways and transit systems. For highways, report data indicate that federal highway funding in the next surface transportation bill would have start at $69.5 billion, at minimum, in FY 2010 and grow to $76.3 billion by 2015 just to maintain physical conditions and operating performance on the nation’s highways and bridges. By contrast, Congress provided funding of only $41.1 billion for the federal highway program for FY 2010, almost $28.5 billion less than would be needed just to maintain current conditions. Beyond that, the outlook is for an even greater shortfall. Projected Highway Account revenues range from $32.6 billion in FY 2011 to $35.8 billion in FY 2015, according to the Congressional Budget Office. The annual funding gap during this period averages $39 billion. **__ The contrast between investment needs and revenues __** through FY 2017 is shown in Figure 1. Federal highway funding met needs in FY 2009 only because of the ARRA highway stimulus. __ For public transportation, the federal __ share of transit capital __ investment __ during the next surface transportation bill __ would need to be $8.6 billion __ in FY 2010, rising to $9.4 billion by FY 2015. Since only 70 percent of federal transit funds go into capital improvements, funding for the transit program in the next authorization bill would thus have to range from $12.3 billion in FY 2010 to $13.5 billion in FY 2015. By comparison, Congress enacted transit program funding of $10.34 billion in FY 2010, which is somewhat less than required to maintain current conditions. It should be noted that funds to construct new transit systems are not included in the Conditions and Performance Report data. The cost of new systems would add substantially to the transit investment needs identified in the report. Moreover, the federal share of transit needs for FY 2010-2015 exceeds projected MTA revenues, which means additional revenues will be required. Federal Commission Recommendations __ SAFETEA-LU ____ created two commissions **to examine the nation’s transportation investment needs** ____ and recommend revenue options __ —the National Surface Transportation Infrastructure Financing Commission and the National Surface Transportation Policy & Revenue Study Commission. Both have issued their final reports. Both commissions arrived at the same conclusion after exhaustively studying myriad revenue enhancing options. In the short-term, __ both commissions concluded t**he most efficient way to increase revenue to finance** __ needed **__ federal investment __**__ in highway and transit improvements __**__ is to raise the federal gas __** and diesel tax rates __ and then index these excises annually to inflation: __ • The Financing Commission recommends an immediate 10 cents per gallon excise rate increase on gasoline sales and a 15 cents per gallon excise rate increase for diesel fuel sales which would both thereafter be annually adjusted to inflation. This level is intended simply to recapture purchasing power lost since the 1993 rate increase. • The Policy & Revenue Study Commission recommends that the federal fuel tax be increased from 5 to 8 cents per gallon per year over the next 5 years, after which it should be indexed to inflation. __ This blue-ribbon group considered not only recapturing lost purchasing power, **but also generating more revenue to meet** __ the **__ program investments __** it believes are necessary to reform the program and meet future national goals for system preservation, capacity enhancements to facilitate freight movement, transportation-related emission reductions and security, among others. In the longer term, both commissions recommend transition to a vehicle-miles-travelled, or VMT-based, user fee system. The 10 cent gasoline/15 cent diesel excise enhancements would translate into approximately $20 billion per year in additional revenue for the Highway Trust Fund. With these adjustments, on average, individual households would pay approximately $9 per month more in federal gas taxes (individual households now pay on average $17 per month). By comparison, the average household pays about $300 per month to operate and maintain its cars (and about $800 per month to own and operate them). The overall level of revenue enhancement recommended by the National Surface Transportation Policy & Revenue Study Commission is in the range necessary to meet the national highway and transit needs previously discussed. It is also well worth noting that major national business and highway user organizations—including the U.S. Chamber of Commerce and the American Trucking Associations—are publicly supporting a federal motor fuels excise increase to finance an expanded transportation improvements.
 * Snyder 6/26**
 * (Tanya Snyder became Streetsblog's Capitol Hill editor in September 2010 after covering Congress for Pacifica and public radio. She lives car-free in a transit-oriented and bike-friendly neighborhood of Washington, DC., pg online @** [|**http://dc.streetsblog.org/2012/06/26/where-did-the-senate-get-the-extra-money-to-pay-for-its-bill/**] **//um-ef)**
 * ARTBA 2k10**
 * (American Road and Transportation Builders Association to the National Commission on Fiscal Responsibility and Reform “The Contribution of the Federal Transportation Investment Programs to Fiscal Responsibility and Deficit Reduction,” pg online @ [] //um-ef)**

Or

** Advantage 1: U.S. Energy Policy **

** First, current Federal Energy Strategies fail – they impose market distortions, and ineffective constraints on private industry **

__ The U __ nited __ S __ tates __ ' current energy policies take an ineffective, piecemeal approach to addressing the nation's transportation energy needs __ - **__ an approach that forestalls a comprehensive, coordinated policy from being implemented __**. [*147] A. Traditional Energy Policies Since the automobile replaced the train as Americans' primary mode of transportation early in the 20th century, United States foreign policy has focused on ensuring American industry and individual consumers have access to inexpensive petroleum. Enormous military and foreign policy expenditures have been maintained to this end. This is not to suggest that such government actions were unwise. n4 Rather, it shows that __ government foreign policy expenditures have distorted the market for oil. __ Foreign policy expenditures represent, effectively, a government subsidy of gasoline's true cost. Like any cost not realized by market actors, the low price of gasoline has led to overproduction and overconsumption of vehicles. These distortions have shaped the sprawling development of American society, which widespread car ownership made possible, and which requires Americans living in all but a handful of cities to rely on cars. Not only does the low price of gasoline keep car ownership high, it also decreases consumer demand for fuel-efficient vehicles. These trends have produced a country very dependent on artificially inexpensive foreign oil. Indeed, President George W. Bush went so far as to call this dependency an addiction. n5 But it is an addiction enabled by government policies; if American consumers are addicts, the United States government is their dealer. B. Alternative Energy Policies __ Recent government policies purportedly intended to wean Americans off oil do not correct existing market distortions, but rather **impose additional distortions** __. Moreover, the fact that these policies are not aimed at making Americans drive less, but only at lessening the environmental impact of this level of driving, n6 suggests that considerations other than efficiency motivate lawmakers. n7 Initiatives promoting the production of biofuels and the consumption of fuel-efficient vehicles provide evidence of this distorting effect. [*148] 1. Biofuel Production Subsidies Biofuels such as ethanol and biodiesel have widely been promoted as a panacea to America's dependence on foreign oil. n8 Touted as providing emissions benefits over fossil fuels, n9 increasing national security, and revitalizing rural communities economically, n10 biofuels have received substantial political support. However, there is a broad consensus that given the low price of gasoline, these alternative fuels will not be competitive in the absences of government sub-sidies. n11 Among the many subsidies available to producers of biofuels, most notable is the Volumetric Ethanol Excise Tax Credit, or "blender's credit," which credits oil companies with $ .51 for each gallon of ethanol mixed into gasoline sold. n12 Biodiesel blenders receive a similar tax credit of $ 1.00 per gallon of "agri-biodiesel," made from plants such as soybeans, and $ .50 per gallon of "wastegrease biodiesel," made from recycled vegetable oils and animal fats. n13 Until December 31, 2008, small producers of ethanol and biodiesel received a tax credit of $ .10 per gallon of biofuel produced, up to 15 million gallons. n14 In addition, the government rewards fueling station owners with a tax credit of 30% (up to $ 30,000) towards the cost of installing biofuel-capable refueling equipment. n15 The federal government also imposes significant tariffs on imported biofuels; imported ethanol is subject first to a tariff equaling 2.5% of its total value, and second to a $ .54 per gallon tariff. n16 [*149] 2. Biofuel Consumption Incentives The government also provides tax credits to consumers who purchase hybrid vehicles, vehicles that run on biofuels, or other fuel-efficient cars. n17 Since hybrids cost $ 2,000 to $ 7,000 more than cars that run on gasoline, such incentives are necessary to make alternative fuel vehicles competitive. Savings from these vehicles' increased fuel economy take many years to compensate for the vehicles' higher prices, even when gasoline prices are high. Indeed, "from a short-term payback perspective, without the tax credits, hybrids make no sense for the average driver[.]" n18 However, tax credits available to consumers "start to go away when a car maker sells its 60,000th alternative-fuel vehicle, a level Toyota reached in mid-2006 and Honda hit in the third quarter of 2007." n19 Some states provide consumers incentives to purchase alternative fuel vehicles as well. For example, in California, hybrid and alternative-fuel vehicles are per-mitted to drive in carpool lanes regardless of the number of passengers they carry. n20 These primarily tax-based policies aim to compensate for the low relative price of gasoline by subsidizing biofuel production and consumption, in order to encourage producers and consumers to utilize non-petroleum resources more than they otherwise would. In this way, lawmakers respond to incentives produced by the artificially low price of gasoline by artificially lowering the price of alternatives. However, so distorting fuel markets has created numerous problems, described below. III. Shortcomings of the Current Approach These problems stem from the economic inefficiency inherent in government policies. Increasing the supply of alternative fuel vehicles rather than addressing the demand for them only encourages dependence on government subsidies, and burdens the government with a role better left to the private sector. As a consequence, the United States' uncoordinated assortment of transportation energy [*150] policies poorly addresses the nation's economic, national security, and environmental concerns. n21 A. Economic Inefficiency __ Current energy policies both produce and perpetuate inefficient externalities n22 **that undermine their success** __. In the absence of externalities, price information encourages the optimal level of output: that where marginal cost equals marginal benefit. Market prices convey information in two ways; they tell producers what benefits consumers derive from goods and services, and they tell consumers what those goods' and services' production costs are. n23 However, __ the government's two-sided intervention in the transportation fuel market produces significant externalities unaccounted for in fuel prices __. **__ Government policies artificially reduce the cost of transportation fuels such as gasoline __**. __ This lower cost inflates consumer demand for these fuels, to the detriment of the United States' economy, national security, and environment __. B. Economic Harm 1. Volatile Gasoline Prices Economic externalities produced by the government's current energy policies are significant. While American transportation consumes a great deal of petroleum products, especially gasoline, the United States' domestic petroleum resources are limited. As a consequence, American consumers and industry are vulnerable to price shocks in the international oil markets. n24 OPEC controls 41% of the world's petroleum reserves, providing member countries significant control over oil production and prices. n25 And as is true of any commodity, oil prices are inherently volatile. n26 "The price of crude oil fluctuates based on a wide variety of international and political events, seasonal demand, and other factors, with the [*151] price of crude [oil] determined in the global market." n27 This renders the gasoline market "vulnerable to hurricanes, accidents, crude supply interruptions, terrorists, and dictators." n28 This volatility interacts with consumer behavior in an interesting way. Although consumer demand for gasoline is relatively price inelastic n29 in the short term, n30 fluctuations in gasoline prices do affect individuals' long-term outlook, influencing consumer demand for vehicles, for example. In response to sharp increases in world oil prices during the 1970s n31 and since 2006, consumers seek more fuel-efficient vehicles, and these preferences correspondingly recede as gas prices drop. n32 However, because vehicle design and production lag behind demand, such drastic short-term shifts in consumer demand cripple the automobile industry. Publicly-traded automakers operate on short timelines. Even if they could accurately predict future consumer demand, automakers report earnings to shareholders on a quarterly basis, face constant operating costs, and must make regular payments on outstanding debt. Automakers therefore must respond to consumer demand tied to volatile gasoline prices, which is easier said than done. All too often, automakers fail to anticipate future demand accurately, causing fuel-efficient vehicles to hit the market just in time for falling oil prices to destroy the demand for them. n33 Indeed, as gas prices plunged in November 2008, "the Toyota [*152] Sequoia and Honda Pilot SUVs posted big gains while sales of most other cars plunged." n34 2. Ineffective, Unfair CAFE Standards These dynamics reveal the futility __ of lawmaker reliance on __ Corporate Average Fuel Economy (" __ CAFE") standards __. CAFE standards __ mandate that automakers produce vehicles that meet certain fuel economy ratings __. n35 From 1990 to 2007, cars were required to achieve an average fuel economy of 27.5 miles per gallon. n36 **__ In an attempt to decrease the United States' dependency on foreign oil, the 2007 Energy Independence and Security Act ("EISA") removed the previous CAFE exemption for sport utility vehicles and cargo vans and raised the efficiency mandate for all new passenger vehicles to 35 miles per gallon by the year 2020 __**. n37 This standard is projected to decrease United States oil consumption by 2.3 million barrels daily. n38 **__ However, such "government "efficiency' edicts are never efficient." __** n39 __ The availability of efficient cars does not affect consumer purchasing decisions regarding efficiency - **only gas prices do that** __ . In the short term, people respond to higher fuel prices by purchasing more efficient vehicles, not by driving less. n40 Such behavior is emblematic of efficiency measures designed to decrease consumption. "The energy saved on a more efficient refrigerator trickles all too easily into a larger one, just as the calories saved with a Diet Coke generally trickle into a brownie." n41 **__ Ironically, CAFE standards may even work against government policies subsidizing biofuels because improvements in vehicle efficiency may forestall private research and investment in non-petroleum sources of transportation energy __** . n42 [*153] __ Moreover, CAFE standards __, intended to counterbalance incentives produced by other government policies, **__ represent a significant uncompensated government imposition on automakers __**. __ When gas prices are low, CAFE standards force carmakers to lose money producing small vehicles for which there is less demand, in order to be allowed to produce the large vehicles that earn a profit __. n43 **__ Regulators thus dump the true cost of government policies on the private sector __**, creating the illusion of good government "as they impoverish society as a whole." n44 ** And, these Energy strategies gut U.S. Foreign Policy strategy – they ensure ineffective diplomatic leverage and lack of U.S. legitimacy ** //**Turgeon 2k10**// //**(Evan N. Turgeon, Legal Associate at the Cato Institute; J.D.University of Virginia School of Law 2009; B.A. Tufts University 2004, “Triple-Dividends: Toward Pigovian Gasoline Taxation,” Journal of Land, Resources, & Envir onmental Law 2010, pg lexis**//**um-ef)** C. Foreign Policy Detriment In 1828, James Madison expressed his fear that insufficient governmental intervention in economic matters might betray American interests, writing, "[a] nation leaving its foreign trade, in all cases, to regulate itself, might soon find it regulated, by other nations, into a subserviency to a foreign interest ... ." n47 Just this has occurred in petroleum markets. "To the extent OPEC could maintain high and stable world oil prices, it replaced the [government supply] and import controls that had set the terms for energy markets in the United States for many [*154] years before the [1973 energy] crisis." n48 Since the crisis, OPEC-controlled petroleum markets have cost Americans dearly. n49 Ensuring a steady supply of foreign oil requires enormous foreign policy expenditures, which must be considered in evaluating the appropriateness of current energy policies. 1. Wealth Transfers to OPEC In 2007 alone, the United States imported over 4.9 billion barrels of oil. n50 At an average price of $ 66.29 per barrel, n51 this works out to over $ 325 billion sent overseas. Not only do these expenditures represent lost opportunities for the domestic economy, n52 but much of this money was sent to countries such as Russia, Iran, and Venezuela - countries whose strategic objectives conflict with those of the United States in many policy areas. Revenue from oil sales provides these countries the financial resources to expand their national powers, potentially to the detriment of the United States. n53 Especially problematic is the fact that OPEC member countries control 41% of the world petroleum reserves under national oil companies. n54 In the middle of the 20th century, the "Seven Sisters," a group of privately held oil companies, exerted a great deal of control over oil markets, and "responded to price signals to explore, invest, and promote technologies necessary to increase production." n55 The oligopoly of national oil companies that now control oil markets operate under vastly different incentives, limiting investment and restricting production to keep prices high and prolong the production horizon. n56 In so doing, OPEC reaps profits by undermining economic efficiency in world oil markets. n57 [*155] 2. Costly International Relations Moreover, __ the U __ nited __ S __ tates __ ' military, which maintains bases throughout the world, has as one of its strategic goals ensuring a supply of foreign oil for importation and domestic consumption __. Funding such strategic holdings requires enormous annual expenditures. Estimates of the United States' FY 2009 military budget range from $ 515.4 billion n58 to $ 713.1 billion, n59 based on which items are included. __ Although U __ nited __ S __ tates __ military policy does not consider ensuring an adequate oil supply its only strategic objective, it is safe to assume that **defense expenditures could be reduced substantially** if foreign oil were less vital to the nation's stability __. __ High oil demand imposes an additional foreign policy cost on the U __ nited __ S __ tates __ : **it raises the cost of international relations** __**.**__ The U __ nited __ S __ tates __ ' refusal to participate in international climate change initiatives **impairs the country's legitimacy in the global community** __. __ This may increase the political costliness of foreign government compliance with the strategic objectives of the U __ nited __ S __ tates, **__ requiring greater American concessions in exchange for international cooperation __**. The historical refusal of the United States to bind itself to multilateral energy use agreements __ also ensures that Americans will take little part in the deliberation over and drafting of such policies __. n60 **__ International law detrimental to the U __** nited **__ S __** tates **__ ' interests may result __**.
 * Turgeon 2k10**
 * (Evan N. Turgeon, Legal Associate at the Cato Institute; J.D.University of Virginia School of Law 2009; B.A. Tufts University 2004, “Triple-Dividends: Toward Pigovian Gasoline Taxation,” Journal of Land, Resources, & Envir onmental Law 2010, pg lexis//um-ef)//**

** But effective Multilateralism – led by the United States Solves – prevents multiple triggers for conflict and destruction **

__ The "Global Trends __ " report __ identifies several worrying aspects of the new international order—competition for resources __ like oil, food, commodities and water; __ climate change; __ continued __ terrorist threats; __ and __ demographic shifts __. But the most significant point it makes is that __ these changes are taking place at every level and at great speed in the global system. Nations with differing political and economic systems are flourishing. Subnational groups, __ with varied and contradictory agendas, __ are on the rise. Technology is increasing the pace of change __. Such __ ferment is usually a recipe for instability. Sudden shifts can trigger sudden actions __ —terrorist attacks, secessionist outbreaks, __ nuclear brinksmanship. The likelihood of instability might increase because of the economic crisis. __ Despite some booms and busts—as well as 9/11 and the wars in Afghanistan and Iraq—the world has been living through an economic golden age. Global growth has been stronger for the past five years than in any comparable period for almost five decades. Average per capita income has risen faster than in any such period in recorded history. But that era is over. The next five years are likely to be marked by slow growth, perhaps even stagnation and retreat, in certain important areas. What will be the political effects of this slowdown? Historically, __ economic turmoil has been accompanied by social unrest, nationalism and protectionism. We might avoid these dangers, but it is worth being acutely aware of them. __ At the broadest level, __ the objective of the U __ nited __ S __ tates __ should be to stabilize the __ current __ global order and to create mechanisms through which change—the rise of new powers, economic turmoil, the challenge of subnational grou __ p __ s __ like Al Qaeda— __ can be accommodated without overturning the international order __. Why? The world as it is organized today powerfully serves America's interests and ideals. The greater the openness of the global system, the better the prospects for trade, commerce, contact, pluralism and liberty. __ Any strategy __ that __ is likely to succeed __ in today's world __ will be one that has the __ active support and __ participation of many countries __. Consider the financial crisis, which several Western governments initially tried to handle on their own. They seemed to forget about globalization—and nothing is more globalized than capital. Belatedly recognizing this, leaders held the G20 meeting in Washington. This was a good first step (though just a first step). __ Without a coordinated approach, efforts to patch up the system will fail. The same applies not just to "soft" problems __ of the future— __ pandemics, climate change—but to __ current __ security challenges __ as well. The problem of multilateralism in Afghanistan—a place where everyone claims to be united in the struggle—is a sad test case for the future. Thirty-seven nations, operating with the blessing of the United Nations and attacking an organization that has brutally killed civilians in dozens of countries, are still unable to succeed. Why? There are many reasons, but it does not help that few countries involved—from our European allies to Pakistan—are genuinely willing to put aside their narrow parochial interests for a broader common one. Terrorism in South Asia generally requires effective multinational cooperation. Business as usual will produce terrorism that will become usual. National rivalries, some will say, are in the nature of international politics. But that's no longer good enough. __ Without better and more sustained cooperation, it is difficult to see how we will solve __ most of __ the major problems of the 21st century __. The real crisis we face is not one of capitalism or American decline, but of globalization itself. __ As the problems spill over borders, the demand for common action has gone up. But the institutions and mechanisms to make it happen are in decline __. The United Nations, NATO and the European Union are all functioning less effectively than they should be. __ I hold no brief for any specific institution __. The United Nations, especially the Security Council, is flawed and dysfunctional. __ But we need ____ some ____ institutions for global problem-solving, ____ some __ mechanisms to coordinate policy. Unless we can find ways to achieve this, we should expect more crises and less success at solving them. In a world characterized by change, __ more and more countries—especially great powers like Russia and China and India—will begin to chart their own course. That in turn will produce greater instability. __ America cannot forever protect every sea lane __, __ broker every deal and fight every terrorist group. Without some mechanisms to solve common problems, the world as we have come to know it, with an open economy and all the social and political benefits of this openness, will flounder and perhaps reverse. Now, these gloomy forecasts are not inevitable. Worst-case scenarios are developed so that they can be prevented. And there are many good signs in the world today. The most significant rising power—China—does not seem to seek to overturn the established order (as have many newly rising powers in the past) but rather to succeed within it. Considerable cooperation takes place every day at the ground level, among a large number of countries, on issues from nuclear nonproliferation to trade policy. Sometimes a crisis provides an opportunity. The Washington G20 meeting, for instance, was an interesting portent of a future "post-American" world. Every previous financial crisis had been handled by the IMF, the World Bank or the G7 (or G8). This time, the emerging nations were fully represented. At the same time, the meeting was held in Washington, and George W. Bush presided. The United States retains a unique role in the emerging world order. It remains the single global power. It has enormous convening, agenda-setting and leadership powers, although they must be properly managed and shared with all the world's major players, old and new, in order to be effective. President-elect __ Obama has powers of his own __, too. I will not exaggerate the importance of a single personality, but __ Obama has become a global symbol __ like none I can recall in my lifetime. Were he to go to Tehran, for example, he would probably draw a crowd of millions, far larger than any mullah could dream of. __ Were his administration to demonstrate __ in its day-to-day conduct __ a genuine understanding of other countries' perspectives __ and an empathy for the aspirations of people around the world __, it could change America's reputation __ in lasting ways. This is a rare moment in history. __ A more responsive America, better attuned to the rest of the world, could help create a new set of ideas and institutions—an architecture of peace for the 21st century that would bring stability, prosperity and dignity to the lives of billions of people. ____ Ten years from now, the world will have moved on; __ the __ rising powers will have become unwilling to accept an agenda conceived in Washington __ or London or Brussels. __ But at this time and for this man, there is a unique opportunity to use American power to reshape the world. This is his moment. He should seize it. __
 * Dr. Zakaria 2k8**
 * (Fareed, Ph.D. in Government from Harvard University, & editor of Foreign Affairs magazine & Newsweek Internationa & professor of IR and political philosophy at Harvard and Columbia University, “Wanted: A New Grand Strategy”, 12/8/08,** [|**http://www.newsweek.com/id/171249**] **)**

** And, specifically new CAFE regulations are coming – **

__ The 2012-2016 Corporate Average Fuel Economy standards __, better known under the acronym CAFE, __ mandate reaching 34.1 MPG by 2016 __ , a number that many big players felt was too high. This __ led to a challenge in the courts __, all the way to the U.S. Court of Appeal. The U.S. Supreme Court decision on health-care will no doubt totally overshadow this less media-friendly legal decision, but __ the U.S. Court of Appeal actually upheld the federal CAFE standards __ : The U.S. Court of Appeals in Washington dism __ issed challenges brought by states led by Texas and major industries including chemical, energy, utility, agriculture and mining companies as well as the National Association of Manufacturer __ s. The decision is a big win for the __ Obama __ administration, __ which plans to finalize the 2017-25 fuel-efficiency standards and greenhouse gas emissions limits by August __. __ The new rules will hike requirements to 54.5 mpg by 2025 __. This is great news, because while they are flawed, CAFE standards are what we have now to move things along. They don't say how automakers must increase efficiency, just by how much. The can then figure out what solution works best.
 * Greene 6/28**
 * (Michael, “34.1 MPG CAFE Standards for 2016 Upheld by U.S. Court of Appeals” http://www.treehugger.com/cars/341-mpg-cafe-standards-2016-upheld-us-court-appeals.html//HH)//**

** CAFÉ standards bankrupt the auto industry and ship jobs overseas **

//** Washington Times **, 6-26-** 2007 **, Just say no to CAFÉ, lexis, S.O.// //T__he legislative action by the Senate to dramatically increase__ corporate average fuel economy (__CAFE) standards is a perfect example of how a poor law is created when non-engineers__ (i.e. senators) __dictate__ __engineering advances ("__CAFE quicksand," Commentary, June 14). __The arbitrary deadlines and requirements assume that the automakers can maintain the same product mix of large and small cars, vans, SUVs, trucks and so on, at various price points, while simultaneously marching steadfast toward the requirement as if it can proceed precisely as legislated.__ __And if the automakers can't succeed, they will simply limit the product mix to meet the requirement and we can cede the industry to the overseas__ automakers. The bottom line is this__: If an automaker can produce a vehicle that has dramatically better gas mileage__ than comparable models__, that vehicle will dominate its market. Therefore, market forces can and will force mileage improvements automatically within a timetable determined by engineering and technical advances. If the senators truly wanted to reduce gas consumption for the good of the country and the world, they would follow the model set by other industrialized nations and raise the gas tax__. This can be a floating tax designed to minimize large price swings so automakers can plan appropriately and not be subjected to sudden market disruptions that scuttle product plans. As it is, __the Senate is content to lay the burden of reduced oil consumption on U.S. automakers, who are obviously struggling and could be bankrupted by these requirements__, instead of on the oil companies, which have been wallowing in tens of billions in profits over the last few years. For the sake of the Midwest, Michigan and our domestic auto industry, I urge the House to reject this bill. This area and our industry have suffered enough and __wz do not need another nail in our coffin in the form of a poorly conceived solution to our oil consumption.__// Auto industry is key to the economy- consumer goods and multiplier effect //**Hill et al 10****-** Sustainable Transportation and Communities Group and Project Lead, Project Manager of the center for automotive research, Research Associate at the center for automotive research, (Kim, Debbie Menk, Adam Cooper, “Contribution of the Automotive Industry to the Economics of All Fifty States and the Unites States”, []. // //__The auto industry is one of the most important industries in the United States. I__ t historically __has contributed 3 – 3.5 percent to the overall Gross Domestic Product__ (GDP). __The industry directly employs over 1.7 million people engaged in designing, engineering, manufacturing, and supplying parts and components to assemble, sell and service new motor vehicle__ s. In addition, __the industry is a huge consumer of goods and services from many other sectors, including raw materials, construction, machinery, legal, computers and semi-conductors, financial, advertising, and healthcare.__ The auto industry spends $16 to $18 billion every year on research and product development – __99 percent of which is funded by the industry itself.__ Due to the industry’s consumption of products from many other manufacturing sectors, __it is a major driver of the 11.5% manufacturing contribution to GDP.____Without the auto sector, it is difficult to imagine manufacturing surviving in this country.__//

** And, a weak economy causes conflict – all emprirical analysis goes our way ** //**Royal 10 – Jedediah Royal, Director of Cooperative Threat Reduction at the U.S. Department of Defense, (Economic Integration, Economic Signaling and the Problem of Economic Crises, Economics of War and Peace: Economic, Legal and Political Perspectives, ed. Goldsmith and Brauer, p. 213-215)**// Less intuitive is how __ periods of economic decline may increase the likelihood of external conflict __. Political science literature has contributed a moderate degree of attention to the impact of economic decline and the security and defence behaviour of interdependent states. Research in this vein has been considered at systemic, dyadic and national levels. Several notable contributions follow. First, on the systemic level, Pollins (2008) advances Modclski and Thompson's (1996) work on leadership cycle theory, finding that __ rhythms in the global economy are associated with the rise and fall of a pre-eminent power and the often bloody transition from one pre-eminent leader to the next __. As such, __ exogenous shocks such as economic crises could usher in a redistribution of relative power __ (see also Gilpin, 1981) __ that leads to uncertainty about power balances, increasing the risk of miscalculation __ (Fearon. 1995). Alternatively, even a relatively certain redistribution of power could lead to a permissive environment for conflict as a rising power may seek to challenge a declining power (Werner, 1999). Separately, Pollins (1996) also shows that global economic cycles combined with parallel leadership cycles impact the likelihood of conflict among major, medium and small powers, although he suggests that the causes and connections between global economic conditions and security conditions remain unknown. Second, on a dyadic level, Copeland's (1996. 2000) theory of trade expectations suggests that __ 'future expectation of trade' is a significant variable in understanding economic conditions and security behaviour of states ____. __ He argues that __ interdependent states are likely to gain pacific benefits from trade so long as they have an optimistic view of future trade relations. However, if the expectations of future trade decline, particularly for difficult ____ to replace items such as energy resources, the likelihood for conflict increases, __ as states will be inclined to use force to gain access to those resources. Crises could potentially be the trigger for decreased trade expectations either on its own or because it triggers protectionist moves by interdependent states.4 Third, others have considered the link between economic decline and external armed conflict at a national level. Blomberg and Hess (2002) find a strong correlation between internal conflict and external conflict, particularly during periods of economic downturn. They write: The linkages between internal and external conflict and prosperity are strong and mutually reinforcing. Economic conflict tends to spawn internal conflict, which in turn returns the favour. Moreover, __ the presence of a recession tends to amplify the extent to which international and external conflicts self-reinforce each other. __ (Blomberg & Hess, 2002. p. 89) Economic decline has also been linked with an increase in the likelihood of terrorism (Blomberg. Hess. & Weerapana. 2004). which has the capacity to spill across borders and lead to external tensions. Furthermore, crises generally reduce the popularity of a sitting government. __ 'Diversionary theory' suggests that, when facing unpopularity arising from economic decline, sitting governments have increased incentives to fabricate external military conflicts to create a 'rally around the flag' effect __. Wang (1990, DeRouen (1995). and Blomberg, Hess, and Thacker (2006) find supporting evidence showing that economic decline and use of force are at least indirectly correlated. Gelpi (1997), Miller (1999), and Kisangani and Pickering (2009) suggest that the tendency towards diversionary tactics are greater for democratic states than autocratic states, due to the fact that democratic leaders are generally more susceptible to being removed from office due to lack of domestic support. __ DeRouen __ (2000) __ has provided evidence showing that periods of weak economic performance in the U __ nited __ S __ tates, and thus weak Presidential popularity, __ are statistically linked to an increase in the use of force. __ In summary __, recent __ economic scholarship positively correlates economic integration with an increase in the frequency of economic crises, whereas __ political science scholarship links economic decline with external conflict at systemic, dyadic and national levels ____. __ ' This implied connection between integration, crises and armed conflict has not featured prominently in the economic-security debate and deserves more attention. This observation is not contradictory to other perspectives that link economic interdependence with a decrease in the likelihood of external conflict, such as those mentioned in the first paragraph of this chapter. Those studies tend to focus on dyadic interdependence instead of global interdependence and do not specifically consider the occurrence of and conditions created by economic crises. As such, the view presented here should be considered ancillary to those views.

** Advantage Two: Deficits – **

** First, the deficit is on an unsustainable path – now is the CRITICAL time to re-orient policies to stave-off a new debt tragedy **

//**Council on Foreign Relations 3/2/12**// //**(“U.S. Deficits and the National Debt,” pg online @** [|**http://www.cfr.org/united-states/us-deficits-national-debt/p27400**]// **um-ef)** At some point __ in the not-too-distant future, analysts say, investors may decide the lack of effective governance constitutes an increased risk of default __**__ and will no longer be willing to hold U.S. Treasuries at normal interest rates __**. __ S __ tandard __ and P __ oor __ 's downgrade of the U.S. debt rating in __ August __ 2011 indicated as much: "America's governance and policymaking [has become] less stable, __ less effective, and less predictable than what we previously believed." **__ If many investors begin fleeing to alternatives, it may become prohibitively expensive for Washington to attract new buyers of debt __**, __ resulting in __ even larger deficits, increased borrowing, or what is known as **__ a "debt spiral __** ."Global investors may continue to fund high U.S. deficits for several years, but __ the recent experiences of several advanced economies in Europe-- __ Greece, Iceland, Ireland, and Portugal-- **__ indicate the unpredictability and speed at which fiscal crises can come __**. __ Several factors have thus far helped insulate the United States from such a fate __ --a floating exchange rate, reserve currency status, lower borrowing costs, a higher capacity for growth, and no record of default. __ But there are also some striking similarities with the situation faced by some European states __, including a rising debt to GDP and a reliance on foreign capital to finance debt.A 2009 report by the non-partisan Congressional Research Service suggests that **__ a loss of confidence in the debt market could prompt foreign creditors to unload large portions of their holdings __** , __ thus i __ nducing others to do so, and __ causing a run on the dollar in international markets __**__ and a sudden spike in U.S. interest rates. __** A study of U.S. Treasury data indicates that Beijing is beginning to diversify away from the dollar (WSJ). The percentage of China's foreign exchange reserves held in dollars fell to a decade low of 54 percent for the year ending June 2011, down from 65 percent in 2010. According to the IMF, "Low borrowing costs in Japan and the United States have arguably created a false sense of security, but should be viewed instead as providing a window of opportunity for policies to address fiscal vulnerabilities."CFR Adjunct Senior Fellow Francis Warnock writes that __ the United States came close to the above scenario in late 2009, __ when the ten-year Treasury yield jumped fifty basis points from 3.25 to 3.75 percent in response to a record U.S. deficit, the end of the Federal Reserve's quantitative easing program, and an uptick in inflation prospects. However, he says, __ the onset of the eurozone phase of the global financial crisis staved off an investor backlash __. "U __ .S. policymakers need to understand that this is not a reset, not a new beginning; **it is a lucky break,"** __ writes Warnock. **__ How lawmakers use this grace period will influence the ability of the U __** nited **__ S __** tates **__ to borrow in the future and have "broad implications for the sustainability of an active U.S. foreign policy __** ," he says. ** And, the plan is a KEY TEST for future budget debates – increasing revenue ensures a sustainable fiscal path ** __ Over the past year, many Republicans and Democrats in the Senate have indicated support **for dramatic deficit reduction** __. So far, this exercise has resulted in lots of __ talk **but no real action** __. In fact, despite a national debt of $15 trillion, __ the Senate continues to pass the same fiscally irresponsible legislation that created our massive deficit problem. __ Last March, I joined 64 of my Senate colleagues, Republicans and Democrats, in a letter to President Obama pledging our support for the kind of comprehensive plan to reduce the deficit set forth by the Simpson-Bowles commission. Six months later, after the Budget Control Act was passed, 45 Democratic and Republican senators joined again in calling for the Joint Select Committee on Deficit Reduction (commonly known as the "supercommittee") to "go big" and to cut the deficit by $4 trillion over the next 10 years. Unfortunately, neither of those calls for action produced real results. But members were on record in support of a combined strategy that overhauls the tax code, reforms Social Security and Medicare, and cuts discretionary spending. __ Now, the Senate is considering a two-year federal highway reauthorization bill that, __ as astounding as it sounds, **__ does not correct serious flaws in our infrastructure financing __**. Sadly, __ th**is bill simply kicks the can down the road, making it harder to implement the** __ kind of **__ deficit reduction plan __** for which so many in the Senate expressed support multiple times in this session. A version of the highway bill considered last month in the House was built on a similar flawed funding mechanism. __ Enacting a long-term highway bill and investing in our nation's infrastructure ____ are key elements for economic growth __. **__ Congress established the highway trust fund in 1956 to finance the interstate highway system through a federal fuel tax. __****__ But in recent years highway spending has outpaced gasoline tax revenue and balances in the trust fund. __**__ Since 2008 Congress has transferred $34.5 billion from the general fund to the highway trust fund, __ only delaying a necessary solution and __ adding to our deficit __ to cover the difference. __ The bill before the Senate spends more than we can afford __ by financing two years' worth of costs over as many as 10 years. __ In two years, the trust fund will still be insolvent, requiring us to fill the gap **with billions more** to support even current funding levels __. And as the years go by, __ that gap will continue to grow __, digging the hole even deeper. Republicans justifiably cried foul when President Obama's health-care law used 10 years' worth of revenue to cover six years' worth of costs. I know many Democrats had similar concerns. So how can we now be part of a more aggressive effort to use a similar gimmick to fund this highway bill? __ The Senate has an opportunity __ with the highway bill **__ to stop a costly pattern of denial and evasion __**. __ We must be honest __ with the American people and **__ find a way to align highway trust fund revenue __****__ with responsible spending so that they meet our country's infrastructure needs without adding to the deficit __** .Accordingly, I have offered two options for restoring sound financing to this bill. The first would lower spending in the bill to a level the highway trust fund can support annually. The second would require Congress to fully offset any additional expense over the two-year reauthorization period through reductions in other programs. These alternatives will require the kind of tough choices many Americans make every day. We can either spend less on highways or we can spend less on something else. For Congress to spend more than it is taking in is not rational and would demonstrate that neither party is ready to lead. __ The highway bill, __ which involves far less money each year than the Social Security and Medicare programs,
 * Washington Post 3/7**
 * (“A fiscal test for Congress,” pg lexis**//**um-ef)**//
 * __ is an important test __**//**__ of our __** stated bipartisan **__ goal to put our country back on a sustainable fiscal path __** . __ The current bill takes us in the opposite direction __ . __ Federal highway infrastructure funding shares wide support in Congress and throughout the country __, so members should set priorities and fund them with the resources that are available. __ **If we fail this small test, how will we ever pass a sweeping agreement to cut the deficit** __ and avoid what Erskine Bowles called "the most predictable economic crisis in history **__ "? __**//

** And, Failure to Reign-In Deficits and Establish Fiscal Discipline Guts U.S.-China Relations they’ll be over-aggressive, gutting cooperation **

//**Prasad 2/25**// //** (Eswar, Eswar Prasad holds the New Century Chair in International Economics. He is the Tolani Senior Professor of Trade Policy at Cornell University and a Research Associate at the National Bureau of Economic Research. He was previously head of the Financial Studies Division and the China Division at the IMF, “The U.S.-China Economic Relationship: Shifts and Twists in the Balance of Power,” pg online @ **[|**http://www.brookings.edu/testimony/2010/0225_us_china_debt_prasad.aspx**]//**um-ef)** __ The lopsided nature of trade and financial flows between the U.S. and China has complicated this relationship, __ tightening the economic entanglements between the two economies and **__ making them more contentious __****. **__ The U.S. __ receives a large volume of low-cost imports from China and __ has also gotten help in financing a significant part of its budget and current account deficits __. China remains quite dependent on U.S. export markets and continues to look to U.S. Treasury bond markets to park a large portion of its rapidly rising stock of foreign exchange reserves. Over the past year, the U.S. has become less dependent on China’s financing of its deficits, particularly as the U.S. private saving rate has gone up and the current account deficit has fallen. Nevertheless, __ given the sheer scale of the U.S. deficit financing requirement __ —a budget deficit of about $1.6 trillion in 2010 and prospects of nearly $9 trillion of deficits over the next decade— **__ sentiments in bond and currency markets are fragile __**. __ A precipitous action by China to shift aggressively out of U.S. dollar- __ denominated instruments, __ or even an announcement of such an intention, could **act as a trigger** that nervous market sentiments coalesce around, leading to a sharp fall in bond prices and the value of the U.S. dollar __. However, such a move would not be without cost for China. Certainly, China would like to tear itself away from the U.S. Treasury market but faces the prospect of a capital loss on its large accumulated stock of holdings (on a mark-to-market, domestic currency basis) if U.S. Treasury bond prices were to fall as a result of a spike in interest rates or if the renminbi were to appreciate in value relative to the U.S. dollar. But the U.S. leaves itself vulnerable as China might well view these costs as worth bearing in order to preserve its national sovereignty or if trade and other economic disputes with the U.S. came to a head. Indeed, I will argue that the direct costs could in fact be rather modest from the Chinese perspective. **__ The prospect of __**__ economic and political **disputes ratcheting up has been elevated by an increasing imbalance in this relationship** __. For instance, in recent months, __ China has aggressively sought to shift the narrative about the financial crisis __ and its aftermath by arguing that global current account imbalances had little or nothing to do with the crisis. Moreover, even as the world economy is recovering, China has __ argued that it is loose U.S. monetary policy alone that may be fueling asset price bubbles around the world __. Whatever the merits of these arguments, __ the forcefulness with which Chinese leaders have put forward these narratives indicates their strong perception that the balance in __**__ the bilateral relationship has shifted decisively in their favor __**. This assertive tone is likely to continue as China’s economy becomes larger and its influence both in the Asian region and abroad becomes more pervasive. In fact **__, the bargaining strengths of the two countries are finely balanced. __** But the **__ changing __****__ perceptions set up a dangerous game of chicken that could spin out of control __** if unrealistic expectations and the desire to pander to domestic audiences trumps rational collective policymaking in one or both countries. In my testimony, I will lay out some key facets of this complicated bilateral relationship, present my prognosis for how this relationship is likely to evolve, and then discuss how to manage some of the potentially contentious aspects of this relationship. Trade and Financial Dependence between the Two Economies[1] Trade between the two economies has continued to increase in volume and the U.S. remains one of China’s major export markets. Chinese exports to the U.S. rose from $100 billion in 2000 to $296 billion in 2009, while imports rose from $16 billion to $70 billion. A central question is whether rising volumes of trade between the two economies have made them more important as mutual trading partners. Interestingly, exports to the U.S. accounted for a relatively stable share of about 21 percent of China’s overall exports from 1998 to 2006 (Figure 1). During 2007-2009, the share of China’s exports going to the U.S. fell to about 18 percent. The share of U.S. exports going to China has risen gradually over the years but is still under 5 percent. These numbers probably understate the true importance of China’s dependence on the U.S. export market. In terms of sheer volume, U.S. imports still account for a significant share of world final consumption demand. Moreover, a great deal of intra-Asian trade is the result of proliferation of cross-country supply chains facilitated by falling costs of transportation and logistics. IMF analysis suggests that about one-third of the value added component of exports from Asia is still accounted for by the U.S. Thus, a slowdown in U.S. demand could lead to slower growth in other economies that export large quantities to the U.S. and thereby have indirect knock-on effects on Chinese export growth to those economies as well. As a source of U.S. imports, China’s share has increased steadily, climbing to 15 percent of total U.S. imports by 2009. China’s dependence on U.S. imports, by contrast, has fallen over time, with imports from the U.S. accounting for about 7 percent of China’s imports since the mid-2000s. Many of the thorny issues in the bilateral relationship between these two countries can be traced to the evolution of the rising bilateral U.S. trade deficit with China. This deficit rose from about $84 billion in 2000 to nearly $227 billion in 2009 (about 1.6 percent of U.S. GDP). In 2009, the deficit with China amounted to nearly two-thirds of the overall U.S. trade deficit of $365 billion, compared to about one-third in 2008 (see Figure 2). The U.S. current account deficit, which had hit $800 billion in 2006, declined slightly in 2007-08. The crisis-induced recession in the U.S. has shrunk the deficit to $370 billion in 2009. China’s current account surplus fell to $284 billion in 2009 (Table 1). But, as discussed below, it is likely that, as the U.S. and global economic recoveries become entrenched, structural forces will again lead to an expansion of the U.S. current account deficit and China’s current account surplus. The IMF, for instance, forecasts that the U.S. current account deficit will rise to about $400 billion in 2011 while China’s current account surplus could top $500 billion. China’s nominal exchange relative to the dollar was flat for a decade until July 2005, when there was a step appreciation of 2 percent of the renminbi (see Figure 3). Over the next three years, the renminbi racked up a cumulative nominal appreciation of 18 percent against the dollar and a slightly lower appreciation in real effective terms. However, since July 2008, the renminbi has remained tightly pegged to the dollar, riding up with the U.S. dollar as it strengthened due to the safe-haven effect during the global financial crisis and down with the U.S. dollar since March 2009, when that effect began to wear off. This has reversed some of the appreciation of the trade-weighted measure of China’s real effective exchange rate, which is now up about 14 percent relative to its level in July 2005. Chinese currency policy, which involves heavy intervention in the foreign exchange market to prevent the renminbi’s appreciation against the U.S. dollar, has resulted in a rapid rise in foreign exchange reserves (see Figure 4). After a tiny net increase in the first quarter of 2009, reserve accumulation picked up in pace and remained strong for the remainder of the year. At the end of 2009, China’s total stock of foreign exchange reserves stood at $2.4 trillion. China’s international investment position has improved steadily to a net asset position of $1.5 trillion at the end of 2008 (Table 2). The value of China’s foreign assets now far exceeds the value of its external liabilities. Foreign exchange reserves account for about two-thirds of China’s gross foreign assets. It is not easy to estimate the “equilibrium” value of the renminbi—the level it would settle at if China’s capital account were open and there was no government intervention in the foreign exchange market. The fact that the People’s Bank of China has consistently intervened in just one direction and by massive amounts—as indicated by its accumulation of foreign exchange reserves—suggests that the renminbi would appreciate significantly, conditional on capital outflows being relatively restricted, if China’s central bank stopped intervening in the foreign exchange market. Private and Official Financial Flows Financial flows between the two economies have increased but, while private flows remain modest, official flows have become more lopsided over time. The major financial link between the two countries remains Chinese official purchases of dollar-denominated financial assets. Contrary to the popular notion of U.S. firms investing heavily in China, official foreign direct investment (FDI) flows from the U.S. to China peaked at $5.4 billion in 2002 and have remained at a modest level around $3 billion a year since 2005 (Figure 5). This low number could partially be due to American companies’ use of offshore financial centers to channel FDI flows to China. Nevertheless, all available data indicate that most FDI flows to China are from other Asian countries that are integrating their supply chains with China. FDI from China to the U.S. remains very modest. China does not make public the currency denomination or composition of its foreign exchange reserves. U.S. data from the government’s Treasury International Capital System (TIC) database are potentially misleading as they capture the location rather than identity of a purchaser of U.S. instruments. For instance, China’s purchases of Treasury bonds routed through a U.K. bank would be counted as a purchase by a U.K. resident or institution. Notwithstanding these caveats, the TIC data capture some interesting trends. Estimates based on TIC data suggest that Chinese holdings of U.S. Treasury securities amounted to about $755 billion at the end of 2009 (see Table 3, Panel B). About one-third of China’s holdings of foreign exchange reserves are in U.S. Treasury securities. The true proportion is likely to be higher for the reasons noted above.[2] It is intriguing that, even based on these data, the share of China’s reserve accumulation going into U.S. Treasuries in 2008 was much higher than during the period 2004-07. During 2009, there was initially some month-to-month whipsawing from net sales to net purchases of U.S. Treasuries. In the latter half of the year, there was a discernible shift away from short-term Treasury bills to longer-term Treasury notes (see Table 3A for monthly TIC data related to China). Apprehensions, based on TIC data for the last few months of 2009, that China may be dumping U.S. Treasuries might be an overstatement. Some analysts have argued that China might simply be shifting out of U.S. short-term Treasury bills, which currently have a very low yield, to longer-term Treasury notes that have a higher yield and that these purchases of Treasury notes are being channeled through intermediaries in the U.K. and elsewhere. This is plausible but not entirely convincing. Given the relatively flat U.S. yield curve and the high levels of U.S. deficits and debt, which the Chinese have expressed considerable concerns about, this hardly seems like a propitious time to lock into long-term U.S. government bonds for the sake of modestly higher returns. Prognosis for the Bilateral Economic Relationship Paradoxically, the crisis is likely to intensify the awkward embrace between the two economies. In the short run, China needs export growth in order to maintain job growth and preserve social stability. As China continues to run current account surpluses by exporting to the U.S. and other advanced country markets, it has little alternative to buying U.S. Treasuries with the reserves it accumulates while managing its exchange rate. The U.S. will continue to need willing buyers for the debt issued to finance its budget deficit, especially if the household saving rate starts drifting back towards pre-crisis levels. Hasn’t the Chinese economy’s dramatic growth performance during the crisis shown that it has become less dependent on export markets in the West, especially as GDP growth remained strong despite a decline in the trade surplus during 2009? Answering this question requires a retrospective look at the Chinese growth model. There are two distinct features of the Chinese growth process in the decade before the crisis, when GDP growth averaged about 10 percent per annum.[3] First, investment accounted for more than half of overall GDP growth, with net exports playing an important role as well since 2005 (see Figure 6). Private consumption, by contrast, has not been a key driver of growth. Second, even high GDP growth has not translated into much employment growth, with overall net employment growth averaging only about 1 percent over the last decade.[4] Thus, the Chinese government has had to cope with the twin challenges of rebalancing growth towards domestic consumption in order to make growth more welfare-enhancing for its citizens and of generating higher employment growth in order to maintain social stability. To counter the aftershocks of the crisis, the Chinese government embarked on a massive fiscal and monetary stimulus program in the latter half of 2008. In addition to a large expansion of government spending, it directed the state-owned banks to make credit freely available. The banks dutifully went on an unprecedented lending spree, amounting to nearly $1.5 trillion (or about one-third of China’s GDP) in 2009, a pace that has continued into January 2010. It’s a good bet that most of this lending went to large state enterprises, favored clients of the state banks. With cheap and plentiful money, along with subsidized inputs such as energy and land, conditions were ripe for a massive investment boom, which amounted to nearly 90 percent of GDP growth in 2009.[5] This investment boom is creating excess capacity in many industries such as steel, aluminum and glass that already had some spare capacity to begin with. Down the road, this could dampen employment and household income growth. Banks fear a resurgence of bad loans on their books if consumption demand doesn’t grow fast enough to soak up the output from the new factories. Moreover, the Chinese household saving rate has trended upward in recent years; the economic uncertainty associated with the crisis and the weak global economic recovery are likely to increase saving for precautionary purposes.[6] In short, the stimulus could end up actually worsening the balance of growth by tilting it even more towards growth led by investment rather than private consumption. The only solution then is to export the fruits of this investment. Thus, investment-led growth sets the stage for export-led growth, exactly the reverse of the balanced private consumption-led economy that Chinese leaders want. The reliance on exports, as noted earlier, is also because it is a key source of net job growth. As the U.S. recovery strengthens, imports are likely to rise, leading to a further deterioration of the U.S. overall trade deficit as well as its bilateral trade deficit with China. China’s overall current account balance is likely to continue to increase and, as the global economic recovery progresses, China will continue running large trade surpluses and accumulating foreign exchange reserves at a rapid rate. Thus, we could be in for a repeat of the global current account imbalances in 2006-07, typified by large U.S. current account deficits and Chinese current account surpluses. How Dependent is the U.S. on Financing from China? Based on data from TIC and other U.S. sources, it is possible to construct a profile of the owners of U.S. government debt held by the public, which stood at $7.8 trillion at the end of December 2009. China’s share of total outstanding U.S. government debt held by the public has risen steadily over the years, but fell slightly in the latter half of 2009 and now stands at 10 percent (or about one-quarter of all U.S. debt held by foreigners). This represents a one percentage point reduction relative to the share in August 2009, consistent with the fall of about $45 billion in China’s overt holdings of U.S. Treasuries from August to December 2009. Debt issued by government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, which amounted to about $7.2 trillion as of September 2009, represents a liability of the U.S. government as well. China’s share of outstanding U.S. agency bonds was 6.4 percent in 2007 but fell below 6 percent in 2009. In short, even based on official data that probably understate the true picture, China has contributed to a significant proportion of U.S. government debt financing in recent years. If one were to take the TIC data literally, China has apparently cut its shares of holdings of net U.S. public and agency debt in the latter half of 2009. As noted earlier, this conclusion based on TIC data should be interpreted with considerable caution. While it is difficult to ascertain exactly what share of U.S. government debt is held by China, the TIC data do allow us to put some bounds on this calculation. Identified Chinese holdings of U.S. Treasuries and GSE debt amounted to about $1.16 trillion at the end of 2009 ($755 billion + $405 billion; see Table 4, last panel). Based on the widely-held assumption that about 70 percent of Chinese foreign exchange reserves are in dollar-denominated bonds and also assuming that the remainder that are not accounted for in TIC are all in Treasuries, this would imply an additional holding of about $520 billion in Treasuries.[7] This would amount to a total of $1.32 trillion, or 17 percent of outstanding U.S. net public debt (excluding GSE debt).[8] In other words, it is a significant but not overwhelming share. Is it a credible threat that China could dump a significant share of its holdings of U.S. Treasuries? Many analysts argue that any threat by China to shift a large portion of its reserves out of U.S. government paper is just bluster as such a move would impose huge costs on China itself. But these costs tend to get overstated in popular discussions of the matter. Let us examine each aspect of these costs. 1. If interest rates in the U.S. spiked as a consequence of Chinese actions, there would be a capital loss to China on the value of its Treasury bond holdings. This is correct on a mark-to-market basis, but it is likely that China has a hold-to-maturity approach on its bond portfolio, given that it has such a large stock of reserves and has no immediate liquidity needs. Hence, the actual capital loss may not be significant enough to feature in the political calculus. 2. A plunge in the value of the dollar against other major currencies would reduce the domestic currency (renminbi) value of China’s dollar-denominated holdings. This is indeed accurate. But only if the renminbi appreciated relative to the dollar. Otherwise, China would lose a modest amount on the value of its euro and yen holdings and this would be more than made up for by the benefits of higher trade competitiveness if the renminbi rode down with the dollar against other major currencies. 3. Currency appreciation would lead to a big loss on reserve holdings in local currency terms. If the renminbi appreciated substantially relative to the dollar, as economists believe it eventually must given the much higher productivity growth in China relative to the U.S., China would certainly take a capital loss. But this is likely to be at least partially offset by seigniorage revenue that China can get as it moves forward in tandem on exchange rate flexibility and capital account liberalization. By preparing the ground for the internationalization of the renminbi, China stands to gain some of the benefits that accrue to an international reserve currency, although this might happen only over a period of a decade or so. China is already taking measures to foster the adoption of the renminbi in trade and financial transactions in Asia. In short, any Chinese threat to move aggressively out of Treasuries is a reasonably credible threat as the short-term costs to the Chinese of such an action are not likely to be large. But can China make a big difference to U.S. interest rates given that its share of the financing of the U.S. budget deficit has fallen over time? The answer lies not in the absolute amounts of financing that China brings to the table, but in how its actions could serve as a trigger around which nervous market sentiments could coalesce. Given that there are no clear prospects of reining in exploding deficits and debt in the U.S., especially if one factors in rising health care and entitlement costs, changes in availability of deficit financing at the margin can have potentially large consequences. The real constraint to any Chinese desire to shift significantly out of investing in U.S. Treasuries may actually have more to do with the sheer size of the U.S. Treasury bond market relative to other available investments, including euro and yen government bonds. Through the China Investment Corporation--its sovereign wealth fund, which has a capital base of $200 billion--China has been seeking to diversity its investments into a broader range of asset classes. But this is a modest amount relative to the overall size of China’s foreign assets. The reality is that, so long as China continues to accumulate reserves at a pace of around $400 billion a year, there are few relatively safe investments other than U.S. government bond markets that are deep and liquid enough to absorb a significant portion of such massive inflows.[9] Getting the Balance Right The U.S. has been supportive of China getting its rightful place on the global economic stage. The __ Obama __ administration __ has actively supported a more prominent role for China __ at the IMF and other multilateral institutions such as the Financial Stability Board. The administration has also played a key role in supporting the ascendance of the G-20 rather than the G-7 as being the agenda-setting body on the global economic stage, __ effectively giving China a more prominent seat __ at the table __ in key policy discussions __. These are logical—indeed, necessary—stepsto make these institutions more inclusive and effective in dealing with the many global challenges that lie ahead. While greater Chinese influence in international economic affairs is inevitable, the U.S. has played an important role in speeding up this realignment. __ The question remains whether the U.S. is gaining sufficient leverage __ from its importance to the Chinese economy and its initiatives to give China a more prominent place on the world stage. Indeed __, the shifting narratives __ noted earlier seem to __ have put the U.S. __ administration __ on the defensive __ in its dealings __ with China __. Here are some steps the __ Obama __ administration __ needs to __ take to __ rebalance this relationship: __ * **__ Get real on deficit reduction __**__. __ The simple reality is that __ the U.S. has to summon the political will to decisively tackle its mammoth budget deficit and rising public debt, __ which have contributed to its current account deficits and dependence on funds flowing in from the rest of the world. Otherwise, the U.S. will become increasingly vulnerable to external influences. __ In the absence of a clear commitment and a credible plan __ to bring down the deficit **__ through __** a combination of revenue increases and **__ expenditure reductions, the U.S. will face a worsening balance of power in its relationship with China. __** * Be more assertive in this bilateral relationship. My view is that mollification of China on economic and political issues is no longer the right approach. The administration’s actions—including certain statements by Secretary Geithner and Secretary Clinton during their respective visits to Beijing—have fed into the perception that the U.S. is on the defensive in this bilateral relationship. On human rights issues, in particular, the U.S. cannot be seen to be backing down as a result of economic pressures. * Elicit the support of other emerging markets and developing countries in influencing Chinese currency and other economic policies. Rather than focusing on the effects of China’s currency on the U.S.-China bilateral trade balance, the implications of China’s currency policy for its own economic stability and those of other emerging markets should be highlighted. Greater currency flexibility could have considerable long-term benefits for China by allowing its monetary policy to become more independent, reducing its dependence on exports and rebalancing its economy towards domestic consumption. This would be good for China’s growth and would also make a useful contribution to the stability of the international financial system.[10] It would also ease the pressure on other emerging markets that are facing a dire loss of competitiveness relative to China if their currencies appreciate while China’s doesn’t, complicating their macroeconomic policy management. * Continue to foster high-level engagements among leaders of the two nations through the Strategic and Economic Dialogue and other avenues. Building up trust at these higher levels will be important to ensure that low-level disputes with minor direct ramifications don’t spin out of control as pandering to domestic constituencies could lock the two nations into a cycle of confrontation that escalates disputes to a more damaging level. __ Setting the China-U.S. relationship on an even keel is important __ not just for the principals but also __ for the broader world economy as the cooperative or conflicted nature of this relationship will set the tone for progress on __ a number of multilateral issues, including __ global macroeconomic stability, reform of the international monetary system and tackling climate change __. ** Multiple Scenarios for Extinction ** China's development needs a peaceful international environment, particularly in its periphery. We will continue to play a constructive role in global and regional affairs and sincerely look forward to amicable coexistence and friendly cooperation with all other countries, the United States included. We will continue to push for good-neighborliness, friendship and partnership and dedicate ourselves to peace, stability and prosperity in the region. Thus China's development will also mean stronger prospect of peace in the Asia-Pacific region and the world at large. __China and the US should__, and can, __work together for peace, stability and prosperity__ in the region. Given the highly complementary nature of the two economies, China's reform, opening up and rising economic size have opened broad horizon for sustained China-US trade and economic cooperation. __By deepening our__ commercial __partnership__, which has already delivered tangible benefits to the two peoples, __we can__ do still more and also __make greater contribution to global economic stability__ and prosperity. __Terrorism, cross-boundary crime, proliferation__ of advanced weapons, __and spread of deadly diseases pose a common threat to mankind. China and the US have__ extensive shared stake and __common responsibility for meeting these challenges, maintaining world peace__ and security __and__ addressing __other__ major __issues__**__ bearing on human survival __** and development. __China is ready to keep up its coordination and cooperation in these areas with the US__ and the rest of the international community. During his visit to the US nearly 25 years ago, Deng Xiaoping said, "The interests of our two peoples and those of world peace require that we view our relations from the overall international situation and a long-term strategic perspective." Thirteen years ago when China-US relations were at their lowest ebb, Mr. Deng said, "In the final analysis, China-US relations have got to get better." We are optimistic about the tomorrow of China-US relations. We have every reason to believe that so long as the two countries view and handle the relationship with a strategic perspective, adhere to the guiding principles of the three joint communiqués and firmly grasp the common interests of the two countries, we will see even greater accomplishments in China-US relations.
 * Wenzhong****, PRC Ministry of Foreign Affairs, 2-7-4 (Zhou, “Vigorously Pushing Forward the Constructive and Cooperative Relationship Between China and the United States,”** [|**http://china-japan21.org/eng/zxxx/t64286.htm**]**)**

Advantage Three: Manufacturing

First, American steel and manufacturing have recovered from the recession, but increased competition means it still could collapse killing the economy

Gibson 5/28/12 (Thomas Gibson President And Ceo American Iron And Steel Institute, “American Iron And Steel Institute President And Ceo Mr. Thomas Gibson, Prepared Testimony Before The Senate Energy And Natural Resources Committee Hearing On The Clean Energy Standard Act Of 2012, As Released By The Committee,” pg lexis//um-ef)// //__Steel and other manufacturing industries **are the backbone of the U.S. economy**__. **__A strong manufacturing sector__** __creates significant benefits for society, including good-paying jobs__, **__investment in r__** esearch **__and d__** evelopment, __essential materials for our national defense, and highvalue exports__. **__A robust American steel industry is critical to leading the domestic economy into recovery__**. AISI is concerned about increased electricity costs and reliability issues that may result from additional regulation of the utility sector, including a national Clean Energy Standard (CES). The consumers of electricity will ultimately have the compliance costs and reliability risks passed on to them. AISI recently commissioned a report by __Professor Timothy J. Considine__ of the University of Wyoming on the industry`s impact on the U.S. economy. Professor Considine __found that the steel industry`s purchases of materials, energy, and supplies for the production of steel stimulate economic output and employment **in a range of sectors across the economy**__. __Steel`s economic contributions are multiplied many times over,__ with Professor Considine finding that **__every $1 increase in sales by our sector increases total output in the U.S. economy by $2.66.__** Additionally, he found that __every individual job in the steel industry supports seven additional jobs in other sectors of the economy. In__ aggregate, __the steel industry accounts for over $101 billion in economic activity and supports more than 1 million jobs across the country__. A copy of that study is attached to my testimony and I request that it be made part of the hearing record. __Like the rest of our economy, the steel industry is recovering from the depths of the recession **but far from fully recovered**__. As we near the midpoint of 2012, __there are positive signs that the economy continues on a slow but steady recovery,__ although subject to volatility - particularly related to the downturn in Europe`s economy and the slowdown of the Chinese economy. AISI`s latest estimate is for shipments of 97 million tons for 2012, which would be an increase of roughly 5 percent over the 92 million tons the industry shipped in 2011. Shipments of 97 million tons are only equivalent to our shipments in 1995, and represent only 90% of our five-year prerecession average shipments of 108 million tons.Domestic capacity utilization rose to 79 percent in the first quarter, a 6 percent improvement from the previous quarter. Total finished steel import market share year-to-date is at 23 percent, and __imports are increasing at a faster rate than our domestic steel market is recovering__. The most recent Department of Commerce Steel Import Monitoring and Analysis data for the month of April recorded another sharp rise in finished imports to the highest level since October of 2008. __We are very concerned about this trend and sensitive to policy changes__ that could make production here more expensive and less internationally competitive. Steel & Energy The production of steel is inherently energy intensive, and the industry consumes substantial amounts of electricity, natural gas, and coal and coke to make our products. In 2010 our domestic industry consumed 45.7 billion kWh of electricity. Energy is typically 20% or more of the cost of making steel and, as such, energy efficiency is key to our industry`s competitiveness. AISI members are doing everything they can to increase energy efficiency, and we are leading the way by effectively setting the bar for steel industry efficiency worldwide. AISI members have made substantial gains in reducing their energy usage, as well as their environmental footprint, over the last two decades. The domestic steel industry has voluntarily reduced its energy intensity by 27% since 1990, while reducing its greenhouse gas (GHG) emissions by 33% over the same time period. In fact, data presented by the U.S. Department of Energy at a recent meeting of Global Superior Energy Partnership`s Steel Task Group showed that the steel industry in the U.S. has the lowest energy intensity and second- lowest CO2 emissions intensity of any major steel producing country. While we approach the practical limits for efficiency using today`s processes and continue to pursue incremental gains, AISI members are not resting on their laurels. We recognized in 2003 that in order to make any further significant improvement in energy use, new breakthrough technologies would be needed. It was at that time the industry began investing, often in partnership with DOE, in the CO2 Breakthrough Program, a suite of research projects designed to develop new ironmaking technologies that emit little or no CO2 while conserving energy. We have developed two key technologies to achieve those goals since that time, and they are now ready for pilot scale testing. The research is being done at MIT and University of Utah and both projects are the subject of proposals currently under consideration for DOE cost-sharing. This successful partnership with DOE, along with the continued support of Congress, will accelerate the development and deployment of critical technologies such as these. Concerns with S. 2146 A national CES imposes its direct requirements on the utility sector, not on its customers, but it is the customers that will bear the costs associated with compliance. Our principal concern is that this will inevitably raise the costs of electricity to large industrial customers like steel, while potentially lessening the quality and reliability of electricity supply. The analysis of S. 2146 performed by the Energy Information Administration (EIA) highlights key concerns about a CES raising the price of electricity to customers, and to large industrial facilities in particular. EIA projects that by 2035, national electricity prices will be 18% higher than the reference case. For industrial customers, the report concludes that electricity will cost 25% more under a CES than it otherwise would. This economic impact will be exacerbated for the steel industry due to the regional differences in current fuel mix and the cost to switch to other fuels for the generation of electricity. EIA projects that S. 2146 will substantially reduce coal-fired generation. Compared with a reference case, coal generation would decline by 25 percent in 2025 and by over half -- 54 percent -- in 2035. Thus, within two decades, the electricity generation infrastructure of the United States would radically shift from the fuel mix that has been in place since the advent of significant nuclear power generation around 1970. Certain areas of the country are better suited for renewable production from wind and solar sources, while others have an abundance of coal sources. As noted above, creating a national CES will have a disproportionate impact on coal-fired utilities, and there is a high correlation between the service areas of those utilities and the location of steel production facilities. Industrial customers, especially steel producers, will be charged to offset the cost of replacing coal capacity with other sources, including the cost of new transmission infrastructure. The two leading states in terms of iron and steel production in the U.S. are Indiana and Ohio, while other important states for the industry are Alabama, Pennsylvania, Kentucky, and Michigan. All of these states are heavily dependent on coal for electricity production, and in turn, so is our industry. EIA projects in its Annual Energy Outlook 2012 Early Release that by 2035, 39% of electricity generation will be from coal. In its analysis of S. 2146, it projects this percentage to drop to 18.7% in 2035, a result that will disproportionately impact the steel industry.Legislative and regulatory policy measures that impact energy availability and reliability influence each company`s competitive situation in a unique way. And, as also noted above, **__the domestic steel industry is subject to substantial international competition.__** __In particular, this competition comes from nations such as China,__ where the industry is largely state owned, controlled, and subsidized. In two recent countervailing duty cases, the Department of Commerce determined that Chinese steel pipe producers were receiving below market rates for electricity, which constitutes a subsidy. __For the steel industry, operating in the U.S. under tight margins with substantial subsidized competition from overseas, policies that raise energy costs on domestic companies threaten our ability to remain competitive__. //

//And, surface transportation investment is __CRITICAL__ to U.S. Manufacturing – props up dependent industries//

// Hermann 2k11 // //**(Andrew Herrmann, P.E. SECB, F.ASCE President American Society of Civil Engineers, Impact Of Infrastructure Investment On The Manufacturing Sector, pg lexis**//**um-ef)** ASCE commends the Joint Economic Committee for holding a hearing today on how __surface transportation investment is a key factor for continued economic recovery and job creation__. The Society is pleased to present to the Committee our views on investing in the nation's infrastructure **__and the critical link to U.S manufacturing__**. __An agenda that fosters__ economic growth and __job creation through policies that strengthen U.S. manufacturing and infrastructure will allow the nation to remain competitive in the Twenty-First Century__. Infrastructure Receives a Grade of "D" ASCE's 2009 Report Card for America's Infrastructure graded the nation's infrastructure a "D" based on 15 categories (the same overall grade as ASCE's 2005 Report Card). The report also concluded that the nation needs to invest approximately $2.2 trillion from 2009 - 2014 to bring our nation's infrastructure to a state of good repair. This number, adjusted for a three percent rate of inflation, represents capital spending at all levels of government and includes current expenditures. Even with current and planned investments from federal, state, and local governments from 2009 - 2014, the "gap" between the overall need and actual spending will exceed $1 trillion by the end of the five-year period. In the Report Card, the nation's surface transportation system included roads receiving a grade of "D-," bridges receiving a grade of "C," and transit receiving a grade of "D". __With nearly one-third of **roads** in poor or mediocre condition, a quarter of the nation's **bridges** either structurally deficient or functionally obsolete, **and transit** use increasing to its highest levels in 50 years, the nation's surface transportation system is in a state of **critical decline**__. Additionally, to bring just these three surface transportation categories up to an acceptable condition would require a five-year investment of $1.2 trillion, according to ASCE estimates. If the nation continues to under- invest in infrastructure and ignores this backlog until systems fail, we will incur even greater costs. While Congress is in the process of developing a comprehensive multi-year surface transportation authorization bill, and __as__ President __Obama emphasizes the infrastructure investment needs for the nation, our roads, bridges, and transit systems **continue on in a state of decline**__. According to the Congressional Budget Office, the total of all federal spending for infrastructure has steadily declined over the past 30 years. The results of years of under investment can be seen in traffic and airport congestion, unsafe bridges and dams, deteriorating roads, and aging drinking water and wastewater infrastructure. Infrastructure Investment = Jobs __Money invested in essential public works can create jobs, provide for economic growth, and ensure public safety through a modern, **well-engineered national infrastructure**__. The nation's transportation infrastructure system has an annual output of $120 billion in construction work and contributes $244 billion in total economic activity to the nation's gross domestic product (GDP). In addition to the overarching economic benefits, the Federal Highway Administration estimates that __every $1 billion invested in the nation's highways supports 27,823 jobs, including 9,537 on-site construction jobs, 4,324 jobs in supplier industries, and 13,962 jobs throughout the rest of the economy__. Standard and Poor's has stated that __highway investment has been shown to stimulate the economy **more than any other fiscal policy**__, with each invested dollar in highway construction generating $1.80 toward the gross domestic product in the short term, while Cambridge Systematics estimates that every dollar taxpayers invest in public transportation generates $6 in economic returns. The transportation industry's experience with the American Recovery and Reinvestment Act of 2009 illustrated the strong job creation impact of dedicated transportation investment, with the $48 billion for transportation improvements in the legislation supporting tens of thousands of jobs in engineering, construction, and supporting industries. Infrastructure Investment = A Healthy Economy __The job-creation potential of infrastructure investment is only one contributing factor of the interaction between surface transportation and the nation's ability to compete in the global marketplace__. **__Equally important are the benefits to a region's long term growth and productivity__**. A significant challenge to this economic growth is __increased congestion,__ which **__contributes to the deterioration of the nation's infrastructure__**. __Therefore, the importance of freight movement and the impact of congestion on the nation's economy must be emphasized__. ASCE is concerned with the increasing __deterioration of America's infrastructure__, reduced investment for the preservation and enhancement of our quality of life, and the __threatened decline of U.S. competitiveness in the global marketplace__. In response, ASCE has not only issued multiple Report Cards on the condition of infrastructure, but has also sought to advance policy solutions that provide for a clean and safe quality of life, as well as fuel economic growth. While taken for granted by most Americans, our infrastructure is the foundation on which the national economy depends. As the economy grows, we cannot only think in terms of repairing what we have, but of creating a modernized transportation system that addresses long-term needs. The current system was originally built in the 1950's and 1960's at a time when the country had different transportation needs and a smaller population. With an expanding population and a larger economy, the nation needs a transportation system that can keep pace. Unfortunately, due to the rapid growth of the country, highway and freight capacity failed to keep up. In July 2011, ASCE released an economic study that measures the potential impacts to the economy in 2020 and 2040 if the nation maintains current levels of surface transportation investments. The report is the first in a series of four reports that will focus on the correlation between the nation's infrastructure and the economy. Subsequent reports will detail the economic correlation to the nation's drinking and waste water systems, energy grid, and ports and airports. The first study, Failure to Act: the Economic Impact of Current Investment Trends in Surface Transportation Infrastructure, found that if investments in surface transportation are not made in conjunction with significant policy reforms, families will have a lower standard of living, businesses will be paying more and producing less, and our nation will lose ground in a global economy. The nation's deteriorating surface transportation will cost the American economy more than 876,000 jobs, and suppress the growth of the country's GDP by $897 billion in 2020.The study results estimate that more than 100,900 manufacturing jobs will be lost by 2020. Ultimately, Americans will also get paid less. While the economy will lose jobs overall, those who are able to find work will find their paychecks cut because of the ripple effects that will occur through the economy. In contrast, __a study__ from the Alliance for American Manufacturing __shows that__ roughly **__18,000 new manufacturing jobs are created for every $1 billion in new infrastructure spending__**. **__ These manufacturing jobs would be created in fabricated metals, concrete and cement, glass-rubber- plastics, steel, and wood product industries __**. Furthermore, the Alliance for American Manufacturing study shows that __using American-made materials for these infrastructure projects yields a total of 77,000 additional jobs__, based on a projected investment of $148 billion a year (including $93 billion of public investment). International Competitiveness Failure to Act also shows that __failing infrastructure will drive the cost of doing business up by adding $430 billion to transportation costs in the next decade__. Firms will spend more to ship goods, and the raw materials they buy will cost more due to increased transportation costs. Productivity costs will also fall, with businesses underperforming by $240 billion over the next decade; this in turn will drive up the costs of goods. **__As a result, U.S. exports will fall by $28 billion, including 79 of 93 tradable commodities__**. __Ten sectors of the U.S. economy account for more than half of this unprecedented loss in export value - among them key manufacturing sectors like **machinery, medical devices, and communications equipmen**t__. On the contrary, most of America's major economic competitors in Europe and Asia have already invested in and are reaping the benefits of improved competitiveness from their infrastructure systems. To illustrate further the correlation between transportation and a strong national economy, __the U.S. Chamber of Commerce__ in late 2010 __released a transportation performance index that examines the overall contribution to economic growth from a well-performing transportation infrastructure__. The index displays a __decline in the nation's economic competitiveness due to a continued lack of investment **in surface transportation systems on all levels**__**.** However, the results also indicate that __a commitment to raising the performance of transportation infrastructure would provide long-term value for the U.S. economy__. At this juncture, even Treasury Secretary Tim Geithner is underscoring the importance of investing in our nation's infrastructure and the value of export promotion for the competitiveness of U.S. businesses. On a recent trip to a North Carolina manufacturing plant, Secretary Geithner drew parallels between investment in infrastructure, jobs creation, and growth of the domestic manufacturing sector. While efforts such as the American Recovery and Reinvestment Act of 2009 have provided some short term relief to a struggling engineering and construction sector, a sustained economic recovery, will remain difficult without a new multi-year surface transportation bill. Five Key Solutions As part of ASCE's 2009 Report Card for America's Infrastructure, ASCE identified five Key Solutions that illustrate an ambitious plan to maintain and improve the nation's infrastructure: Increase federal leadership in infrastructure;

And, Only //long-term// infrastructure investment generates demand for steel – short-term highway bill extensions don’t solve

Transport infrastructure __AISI is also calling for__ the US __Congress to pass a new, robust, long term surface transportation bill__ as opposed to continually extending the old one three months or so at a time. “ __We must make rebuilding our crumbling transportation infrastructure system **a top national priority**__ ,” Surma says, adding that doing so is essential to doing business efficiently and for the US to maintain its dominant role in the global economy. Just before Congress went on recess in late March it passed its ninth 90-day extension of the surface transportation bill, which will guarantee funding for the nation’s bridges, highways and roads until June 30. The US House of Representatives in mid-April passed what would be a tenth 90-day extension, taking the bill to the end of September, although that bill is not expected to pass the Senate because of factors relating to the Keystone XL pipeline which is being opposed by some environmental groups. Gibson says __these extensions of the bill will not provide the boost that the US economy, and the steel industry, needs.__ “ __We need a longterm bill with level funding so that the states can plan the bigger construction projects that can produce the valuable jobs and generate the demand for steel, concrete and other materials. “Our preference would be the longest, most robustly funded bill that this Congress can produce__ ,” Surma says, which would be the House leadership’s five-year, $260bn surface transportation authorization bill, which, if passed, would include energy and natural resource provisions to open up on-shore and offshore bans for oil and gas drilling leases. Gibson lauded the Senate for doing its job and passing a two year, $109bn reauthorization bill in mid-March. Now, he says the House, which has not passed a bill yet, must act and pass a bill that could be conferenced with the Senate measure. The question, however, lies in how to pay for such a bill given all the concerns of the burgeoning US deficit. “ __Transportation is a core function of government and it costs something to fund__ ,” __Gibson__ says, however, he __observes that the traditional way to do that, the highway fund, which is funded by a tax on gasoline, is falling short__, partly because vehicles are becoming more fuel efficient and Americans are changing their driving behavior. He called on the government to be more creative in finding a funding solution, including possibly more public/ private partnerships.
 * Steel Times International 12**
 * (a magazine for the steel industry, “American Iron and Steel Institute calls for further Government intervention”, 4/25/12, AD: 7/17/12, http://www.steeltimesint.com/contentimages/features/AISI-USAbriefing.pdf) **

And, manufacturing capabilities key to technology necessary for U.S. deterrence

O’Hanlon et al 2k12 // The current wave of defense cuts is also different than past defense budget reductions in their likely industrial impact, as **__the U.S. defense industrial base is in a much different place than it was in the past__**. __Defense industrial issues are too often viewed through the lens of jobs and pet projects to protect in congressional districts__. **__But the overall health of the firms that supply the technologies our armed forces utilize does have national security resonance__**. __Qualitative superiority in weaponry and other key military technology has become an essential element of American military power in__ the modern era— **__ not only for winning wars but for deterring them __**. **__That requires world-class__** scientific and **__manufacturing capabilities—__**__which in turn can also generate civilian and military export opportunities for the U__ nited __S__ tates __in a globalized marketplace__. //
 * (Mackenzie Eaglen, American Enterprise Institute Rebecca Grant, IRIS Research Robert P. Haffa, Haffa Defense Consulting Michael O'Hanlon, The Brookings Institution Peter W. Singer, The Brookings Institution Martin Sullivan, Commonwealth Consulting Barry Watts, Center for Strategic and Budgetary Assessments “The Arsenal of Democracy and How to Preserve It: Key Issues in Defense Industrial Policy January 2012,” pg online @ [|http://www.brookings.edu/~/media/research/files/papers/2012/1/26%20defense%20industrial%20base/0126_defense_industrial_base_ohanlon]** //**um-ef)**//

Defense Industrial Base Prevents Terrorism, China War, And Russia War Via Deterrence Watts 2k8 Since the 1950s, __the US defense industrial base has been a source of long-term strategic advantage for the United States__, just as it was during World War II. **__American defense companies provided the bombers and missiles on which nuclear deterrence rested and armed the US military with world-class weapons, including low-observable aircraft, wide-area surveillance and targeting sensors, and reliable guided munitions cheap enough to be employed in large numbers__**. They also contributed to the development of modern digital computers, successfully orbited the first reconnaissance satellites, put a man on the moon in less than a decade, and played a pivotal role in developing the worldwide web. Critics have long emphasized President Eisenhower’s warning in his farewell television address that the nation needed to “guard against the acquisition of undue influence, whether sought or unsought, by the military-industrial complex.” Usually forgotten or ignored has been an earlier, equally important, passage in Eisenhower’s January 1961 speech: __A vital element in keeping the peace is our military establishment.__**__Our arms must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction__**. Eisenhower’s warning about undue influence, rather than the need to maintain American military strength, tends to dominate contemporary discussions of the US defense industrial base. While the percentage of US gross domestic product going to national defense remains low compared to the 1950s and 1960s, there is a growing list of defense programs that have experienced problems with cost, schedule, and, in a few cases, weapon performance. In fairness, the federal government, including the Department of Defense and Congress, is at least as much to blame for many of these programmatic difficulties as US defense firms. Nevertheless, those critical of the defense industry tend to concentrate on these acquisition shortcomings. __The main focus of this report is on a larger question. How prepared is the US defense industrial base to meet the needs of the US military Services in coming decades?__ The Cold War challenge of Soviet power has largely ebbed, but new __challenges have emerged__. __There is the immediate threat of the violence stemming from__ SalafiTakfiri and Khomeinist __terrorist groups and their state sponsors,__ that have consumed so much American blood and treasure in Iraq; the longer-term challenge of authoritarian capitalist regimes epitomized by __the rise of China and a resurgent Russia; and, not least, the worsening problem of proliferation__, particularly of nuclear weapons. __In the face of these more complex and varied challenges, it would surely be premature to begin dismantling the US defense industry__. From a competitive perspective, therefore, __the vital question about the defense industrial base is whether it will be as much a source of long-term advantage in the decades ahead as it has been since the 1950s__. All levels of manufacturing and R&D are interconnected – a sustainable manufacturing base in the U.S. is critical to Advanced Manufacturing and R&D Lind 2k12 Manufacturing, R&D and the U.S. Innovation Ecosystem __Perhaps the greatest contribution of manufacturing to the U.S. economy as a whole involves the disproportionate role of **the manufacturing sector in R&D**__. __The expansion in the global market for high-value-added services has allowed the U.S. to play to its strengths by expanding its trade surplus in services__, many of them __linked to manufacturing, including R&D__ , engineering, software production and finance. Of these services, **__by far the most important is R&D.__** The United States has long led the world in R&D. In 1981, U.S. gross domestic expenditure on R&D was more than three times as large as that of any other country in the world. And the U.S. still leads: in 2009, the most recent year for which there is available data, the United States spent more than 400 billion dollars. European countries spent just under 300 billion dollars combined, while China spent about 150 billion dollars.14 In the United States, private sector manufacturing is the largest source of R&D. The private sector itself accounts for 71 percent of total R&D in the United States, and although U.S. manufacturing accounts for only 11.7 percent of GDP in 2012, the manufacturing sector accounts for 70 percent of all __R&D spending by the private sector in the U.S__ .15 __And R&D and innovation are inextricably connected:__ a National Science Foundation survey found that 22 percent of manufacturers had introduced product innovations and the same percentage introduced process innovations in the period 2006-2008, while only 8 percent of nonmanufacturers reported innovations of either kind.16 Even as the manufacturing industry in the United States underwent major changes and suffered severe job losses during the last decade, R&D spending continued to follow a general upward growth path. __A disproportionate share of workers involved in R&D are employed directly or indirectly by manufacturing companies__ ; for example, **__ the US manufacturing sector employs more than a third of U.S. engineers. __** 17 This means that **__ manufacturing provides much of the demand for the U.S. innovation ecosystem ,__** **__ supporting large numbers of scientists and engineers __**__who might not find employment if R&D were offshored along with production__. Why America Needs the Industrial Commons Manufacturing creates an industrial commons, which spurs growth in multiple sectors of the economy through linked industries. __An “industrial commons” is a base of shared physical facilities and intangible knowledge shared by a number of firms__. The term “commons” comes from communallyshared pastures or fields in premodern Britain. __The industrial commons in particular in the manufacturing sector includes not only large companies but also small and medium sized enterprises__ (SMEs), __which employ 41 percent of the American manufacturing workforce and account for 86 percent of all manufacturing establishments in the U.S. Suppliers of materials, component parts, tools, and more__ **__ are all interconnected __** ; most of the time, Harvard Business School professors Gary Pisano and Willy Shih point out, these linkages are geographic because of the ease of interaction and knowledge transfer between firms.18 Examples of industrial commons surrounding manufacturing are evident in the United States, including the I-85 corridor from Alabama to Virginia and upstate New York.19 __Modern economic scholarship emphasizes the importance of geographic agglomeration effects and co-location synergies__. 20 __Manufacturers and researchers alike have long noted the symbiotic relationship that occurs when manufacturing and R&D are located near each other__ : **__the manufacturer benefits from the innovation, and the researchers are better positioned to understand where innovation can be found and to test new ideas__**. While some forms of knowledge can be easily recorded and transferred, much “know-how” in industry is tacit knowledge. __This valuable tacit knowledge base can be damaged or destroyed by the erosion of geographic linkages, which in turn shrinks the pool of scientists and engineers in the national innovation ecosystem__. If an advanced manufacturing core is not retained, then the economy stands to lose not only the manufacturing industry itself but also the geographic synergies of the industrial commons, including R&D. Some have warned that this is already the case: __a growing share of R&D by U.S. multinational corporations is taking place outside of the United States.__ 21 In particular, a number of large U.S. manufacturers have opened up or expanded R&D facilities in China over the last few years.22 __Next Generation Manufacturing__**__A dynamic manufacturing sector in the U.S. is as important as ever__**. But thanks to advanced manufacturing technology and technology-enabled integration of manufacturing and services, the very nature of manufacturing is changing, often in radical ways. What will the next generation of manufacturing look like? In 1942, the economist Joseph Schumpeter declared that “the process of creative destruction is the essential fact about capitalism.” By creative destruction, Schumpeter did not mean the rise and fall of firms competing in a technologically-static marketplace. He referred to a “process of industrial mutation— if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating the new one.” He noted that “these revolutions are not strictly incessant; they occurred in discrete rushes that are separated from each other by spaces of comparative quiet. The process as a whole works incessantly, however, in the sense that there is always either revolution or absorption of the results of revolution.”23 As Schumpeter and others have observed, technological innovation tends to be clustered in bursts or waves, each dominated by one or a few transformative technologies that are sometimes called “general purpose technologies.” Among the most world-transforming general purpose technologies of recent centuries have been the steam engine, electricity, the internal combustion engine, and information technology.24 As epochal as these earlier technology-driven innovations in manufacturing processes and business models proved to be, they are rapidly being superseded by new technologydriven changes as part of the never-ending process of Schumpeterian industrial mutation. __The latest wave of innovation in industrial technology has been termed “__**__ advanced manufacturing __**__.”__ The National Science and Technology Council of the Executive Office of the President defines advanced manufacturing as “a family of activities that (a) depend on the use and coordination of information, automation, computation, software, sensing, and networking, and/or (b) make use of cutting edge materials and emerging capabilities enabled by the __physical and biological sciences, for example, nanotechnology, chemistry, and biology. It involves both new ways to manufacture existing products and the manufacture of new products emerging from new advanced technologies__ .”25 Already computer-aided design (CAD) and computer-aided manufacturing (CAM) programs, combined with computer numerical control (CNC), allow precision manufacturing from complex designs, eliminating many wasteful trials and steps in finishing. CNC is now ubiquitous in the manufacturing sector and much of the employment growth occurring in the sector requires CNC skills or training. Information technology has allowed for enterprise resource planning (ERP) and other forms of enterprise software to connect parts of the production process (both between and within a firm), track systems, and limit waste when dealing with limited resources. Other __areas in which advanced manufacturing will play a role__ in creating new products and sectors and changing current ones **__are: Supercomputing__**. **__America’s global leadership in technology depends in part on whether the U.S. can compete with Europe and Asia in the race to develop “exascale computing__** ,” a massive augmentation of computer calculating power that has the potential to revolutionize predictive sci ences from meteorology to economics. According to the Advanced Scientific Computing Advisory Committee (ASCAC), “ __If the U.S. chooses to be a follower rather than a leader in exascale computing, we must be willing to cede leadership” in industries including aerospace, automobiles, energy, health care, novel material development, and information technology__ .26 **__Robotics:__** __The long-delayed promise of robotics is coming closer to fulfillment.__ Google and other firms and research consortiums are testing robotic cars, and Nevada recently amended its laws to permit autonomous automobiles.27 Amazon is experimenting with the use of robots in its warehouses.28 __Nanotech__ nology __may permit manufacturing at extremely small scales including the molecular and atomic levels__ .29 Nanotechnology is also a key research component in the semiconductor indusmanutry, as government funding is sponsoring projects to create a “new switch” capable of supplanting current semiconductor technology.30 Photonics or optoelectronics, based on the conversion of information carried by electrons to photons and back, has potential applications in sectors as diverse as telecommunications, data storage, lighting and consumer electronics. __Biomanufacturing is the use of biological processes or living organisms to create inorganic structures, as well as food, drugs and fuel__. Researchers at MIT have genetically modified a virus that generates cobalt oxide nanowires for silicon chips.31 Innovative materials include artificial “metamaterials” with novel properties. Carbon nanotubes, for example, have a strength-to-weight ratio that no other material can match.32 Advanced manufacturing using these and other cuttingedge technologies is not only creating new products and new methods of production but is also transforming familiar products like automobiles. The rapid growth in electronic and software content in automobiles, in forms like GPS-based guidance systems, information and entertainment technology, anti-lock brakes and engine control systems, will continue. According to Ford, around 30 percent of the value of one of its automobiles is comprised by intellectual property, electronics and software. In the German automobile market, electronic content as a share of production costs is expected to rise from 20-30 percent in 2007 to 50 percent by 2020.33 And, advanced manufacturing technology will make war IMPOSSIBLE Paone 2k9 __The convergence of "exponentially advancing technologies" will form a "super-intelligence" **so formidable that it could avert war**__, __according to__ one of the world's leading futurists. __Dr. James Canton__, CEO and chairman of the Institute for Global Futures, a San Francisco-based think tank, is author of the book "The Extreme Future" and an adviser to leading companies, the military and other government agencies. __He is consistently listed among the world's leading speakers__ and has presented to diverse audiences around the globe. He will address the Air Force Command and Control Intelligence, Survelliance and Reconnaissance Symposium, which will be held Sept. 28 through 30 at the MGM Grand Hotel at Foxwoods in Ledyard, Conn., joining Air Force Chief of Staff Gen. Norton Schwartz and a bevy of other government and industry speakers. He offered a sneak preview of his symposium presentation and answered various questions about the future of technology and warfare in early August. " **__The superiority of convergent technologies will prevent war,"__** Doctor Canton said, claiming **__their power would present an overwhelming deterrent to potential adversaries__**. While saying that the U.S. will build these super systems faster and better than other nations, he acknowledged that a new arms race is already under way. "It will be a new MAD for the 21st century," he said, referring to the Cold War-era acronym for Mutually Assured Destruction, the idea that a nuclear first strike would trigger an equally deadly response. It's commonly held that this knowledge has essentially prevented any rational state from launching a nuclear attack. Likewise, Doctor Canton said he believes __rational nation states, considering this imminent technology explosion, will see the futility of nation-on-nation warfare in the near future__. Plus there's the "socio-economic linking of the global market system." "The fundamental macroeconomics on the planet favor peace, security, capitalism and prosperity," he said. Doctor Canton projects that nations, including those not currently allied, will work together in using these smart technologies to prevent non-state actors from engaging in disruptive and deadly acts. As a futurist, __Doctor Canton__ and his team study and predict many things, but their __main area of expertise__ -- and the one in which he's personally most interested -- __is advanced and emerging technology__. "I see that __as the key catalyst of strategic change on the planet__, and it will be for the next 100 years," he said. **__He focuses on six specific technology areas: "nano, bio, IT, neuro, quantum and robotics;"__**__those he expects to converge in so powerful a way__. Within the information technology arena, Doctor Canton said systems must create "meaningful data," which can be validated and acted upon. __"Knowledge engineering for the analyst and the warfighter is a critical competency that we need to get our arms around__ ," he said. "Having an avalanche of data is not going to be helpful." Having the right data is. "There's no way for the human operator to look at an infinite number of data streams and extract meaning," he said. "The question then is: How do we augment the human user with advanced artificial intelligence, better software presentation and better visual frameworks, to create a system that is situationally aware and can provide decision options for the human operator, faster than the human being can?" He said he believes the answers can often be found already in what he calls 'edge cultures.' "I would look outside of the military. What are they doing in video games? What are they doing in healthcare? What about the financial industry?" Doctor Canton said he believes that __more sophisticated artificial intelligence applications will transform business, warfare and life in general__. Many of these are already embedded in systems or products, he says, even if people don't know it. ** Thus the Plan: ** ** Text: The United States federal government should increase the federal excise tax rate and phase-in a price floor and variable tax on gasoline for surface transportation infrastructure in the United States. ** ** Contention Two: Solvency – ** ** The plan solves – establishing a price floor sends a signal for renewable energy development, while increasing revenue for transportation infrastructure ** __ Congress should enact legislation to restructure the federal gasoline tax to better internalize the external costs of gasoline consumption __**__ and to send __****__ a price signal to investors __****__ that would afford them the certainty that they require to take risks on clean energy technology __**. The following Parts outline a recipe for how the government should accomplish this task. A. Phase-In a Price Floor and Variable Tax on Gasoline __ **Congress should phase-in a price floor and variable tax on gasoline** __. The price floor mechanism begins __ with a target price __. The amount of the variable tax is the difference between the target price and the market price. __ Thus, if the market price of a gallon of gasoline falls below the target, then the variable tax makes up the difference. __ n256 __ The "variable fuel tax ... increases as the market price drops and decreases as [market] prices rise." __ n257 __ If the market price rises above the price floor, then the variable tax becomes zero __. __ The price floor and variable tax will function to stabilize the price at the pump __ : [*421] regardless of how much the market price fluctuates, the consumer will never pay less than the price floor for a gallon of gasoline. __ The target price is the key __ to the success of the price floor mechanism. If the target price is too low, then consumers will not change their consumption patterns and businesses will not feel confident enough to make investments in clean energy technology to the degree necessary to meaningfully contribute to the solution to climate change and oil dependence. If the target price is too high, then it could have a negative effect on economic productivity. There are two ways to limit the tax's economic fallout. First, the target price must not be set too high too early. This is easier said than done; but consider the state of the oil and gas market in mid-2008. The price of oil rose to $ 147 per barrel and gasoline peaked above $ 4 per gallon. Charles Krauthammer argues that "with $ 4 gas still fresh in our memories, the psychological impact of a tax that boosts the pump price to near $ 3 would be far less than at any point in decades." n258 The relentless march of oil prices through mid-2008 certainly affected economic productivity, but high oil prices are not among the primary causes of the financial crisis. n259 __ Dramatic spikes in the price of oil are inevitable in the long-term __ n260 __ and could arise in the short-term __. n261 __ The alternative to a gradual decline in consumption beginning in the short-term is an abrupt decline in consumption brought on by a supply shock and severe economic contraction in the medium-to-long-term __. n262 **__ The longer the delay, the worse the contraction will be __**. n263 It took $ 4 per gallon gasoline to change American consumption patterns in 2008, and it may take less of a price increase to maintain more manageable consumption patterns in the future. n264 Therefore, __ the ultimate price target should be between $ 3 and $ 4. __ n265 A $ 4 gallon of gasoline would still cost less than the $ 5 to $ 15 that it would cost if the price were to include all of gasoline's externalities. n266 Moreover, gasoline would still be cheaper in the United States at $ 4 per gallon than it would be in Canada or many EU nations, which tax gasoline at much higher rates. n267 __ The second way to limit the tax's economic fallout is to phase it in __. n268 Beginning with a modest price floor of $ 2 per gallon, for example, and gradually increasing the [*422] target over time would provide consumers and businesses with lead time to prepare for the increased fuel costs. If Congress offsets the gasoline tax increases by simultaneously phasing out payroll or income taxes, then it could set the gasoline price floor higher. As a failsafe, Congress could include a provision in the tax that would allow the IRS to adjust the target price based on its observed effects on gasoline consumption and economic activity. Finally, __ the statute should adjust the price floor to account for inflation __. n269 B. Phase-In Increases in the Current Gasoline Tax __ In addition to establishing a variable tax on gasoline, Congress should maintain and increase the current excise gasoline tax __. Retailers set the price of gasoline, but each phase of the value chain adds to the gasoline's cost. n270 Retailers incorporate these costs into the ultimate price. n271 __ If gasoline retailers and producers know that the new tax will force consumers to pay a minimum price, then they could simply raise their prices to capture the tax revenue that would otherwise go to the federal government __. In other words, in response to a price floor on gasoline, the market could price gasoline equal to or near the statutorily mandated target price. W **__ ith a price floor of $ 4 per gallon and a market price of, say, $ 3.50 per gallon, the federal government should collect $ 0.50 per gallon in tax revenue __**. Knowing that consumers will pay $ 4 per gallon, though, refiners, distributors, and retailers could simply raise their prices - thereby raising the market price - to, say, $ 3.75 per gallon. The market, then, would capture $ 0.25 per gallon that would otherwise have been federal tax revenue. Of course, __ competition always operates to drive down the market price, and this scenario also raises the specter of anticompetitive collusion and possible antitrust violations __. This situation, though, is not outside the realm of possibility. States could also raise their respective gasoline taxes to capture a larger portion of the would-be federal tax revenue. Again, imagine a price floor of $ 4 per gallon and a market price of $ 3.50 per gallon in State A. State A, knowing that the federal price floor will compel consumers to pay $ 4 per gallon, could simply raise its own state tax on gasoline by $ 0.50 to capture the tax revenue that would otherwise go to the federal government. This scenario is easy to envision and likely to occur. __ To ensure that it captures a greater share of the revenue from the variable tax than the current $ 0.184 per gallon excise tax, the federal government **should increase the federal excise tax rate** __. __ The level of the tax increase will depend on how much revenue the federal government determines that it wants to capture from the variable tax. __ If Congress phases out payroll or income taxes or issues rebates to low-income earners to offset the economic effects of the increase in the gasoline tax, then it will likely also need to increase its current excise tax on gasoline or make do with a smaller budget. Regardless of who captures the tax revenue, though, **__ the establishment of a price floor on gasoline would send an appropriate price signal to the energy market and achieve more efficient cost/price integration than does the present market for gasoline __**. [*423] C. Revenue Distribution and Tax Offsets __ The current gasoline tax is the __ Highway Trust Fund's __ (HTF) **primary source of revenue** __. n272 Many supporters of gasoline tax reform argue, however, that additional revenue from gasoline tax increases should be devoted to investment in renewable energy technology. n273 As appealing as this option is to clean energy advocates, it may not be possible or practical. **__ The HTF is presently underfunded and many portions of the federal highway system are in disrepair. __** n274 At the least, **__ Congress should not divert the current gasoline tax revenue away from funding the HTF without establishing an alternate source of revenue for the HTF. __** Additionally, the gasoline tax is regressive. n275 It would therefore be prudent to either redistribute the tax revenue to low-income earners in the form of tax rebates or to phase out certain payroll or income taxes, n276 in which case Congress would need to raise the gasoline tax to make up for the lost revenue. The desirability of such changes to the Internal Revenue Code is a contentious issue and beyond the scope of this Note. Ultimately, the tax revenue generated from an increase in the gasoline tax would not - and should not - be distributed to any single use, but should be allocated as the government deems appropriate. ** The plan kills damaging CAFÉ Standards and transitions away from government interventions into the market ** So why even think about it? Because __ the virtues of a gas tax remain what they have always been. A tax that suppresses U.S. gas consumption can have a major effect **on reducing world oil prices** __. And the benefits of low world oil prices are obvious: They put tremendous pressure on OPEC, as evidenced by its disarray during the current collapse; __ they deal serious economic damage to energy-exporting geopolitical adversaries such as Russia, Venezuela, and Iran __ ; __ and they reduce the enormous U.S. imbalance of oil trade __ which last year alone diverted a quarter of $1 trillion abroad. Furthermore, a reduction in U.S. demand alters the balance of power between producer and consumer, __ making us less dependent on oil exporters __. **__ It begins weaning us off foreign oil, __** and, if combined with nuclear power and renewed U.S. oil and gas drilling, puts us on the road to energy independence. __ High gas prices __, whether achieved by market forces or by government imposition, __ encourage fuel economy __. In the short term, they simply reduce the amount of driving. In the longer term, __ they lead to the increased (voluntary) shift to more fuel-efficient cars __. **__ They render __****__ redundant and unnecessary the absurd CAFE standards __****__ - __** -the ever-changing Corporate Average Fuel Economy __ regulations that mandate the fuel efficiency of various car and truck fleets __ -- **__ which introduce __****__ terrible distortions into the market __**. As the consumer market adjusts itself to more fuel-efficient autos, the green car culture of the future that environmentalists are attempting to impose by decree begins to shape itself unmandated. This shift has the collateral environmental effect of reducing pollution and CO2 emissions, an important benefit for those who believe in man-made global warming and a painless bonus for agnostics (like me) who nonetheless believe that the endless pumping of CO2 into the atmosphere cannot be a good thing. These benefits are blindingly obvious. They always have been. But the only time you can possibly think of imposing a tax to achieve them is when oil prices are very low. We had such an opportunity when prices collapsed in the mid-1980s and again in the late 1990s. Both opportunities were squandered. Nothing was done. Today we are experiencing a unique moment. Oil prices are in a historic free fall from a peak of $147 a barrel to $39 today. In July, U.S. gasoline was selling for $4.11 a gallon. It now sells for $1.65. With $4 gas still fresh in our memories, the psychological impact of a tax that boosts the pump price to near $3 would be far less than at any point in decades. Indeed, an immediate $1 tax would still leave the price more than one-third below its July peak. The rub, of course, is that this price drop is happening at a time of severe recession. Not only would the cash-strapped consumer rebel against a gas tax. The economic pitfalls would be enormous. At a time when overall consumer demand is shrinking, any tax would further drain the economy of disposable income, decreasing purchasing power just when consumer spending needs to be supported. What to do? Something radically new. A net-zero gas tax. Not a freestanding gas tax but a swap that couples the tax with an equal payroll tax reduction. A two-part solution that yields the government no net increase in revenue and, more importantly--that is why this proposal is different from others--immediately renders the average gasoline consumer financially whole. Here is how it works. The simultaneous enactment of two measures: A $1 increase in the federal gasoline tax--together with an immediate $14 a week reduction of the FICA tax. Indeed, that reduction in payroll tax should go into effect the preceding week, so that the upside of the swap (the cash from the payroll tax rebate) is in hand even before the downside (the tax) kicks in. The math is simple. The average American buys roughly 14 gallons of gasoline a week. The $1 gas tax takes $14 out of his pocket. The reduction in payroll tax puts it right back. The average driver comes out even, and the government makes nothing on the transaction. (There are, of course, more drivers than workers--203 million vs. 163 million. The 10 million unemployed would receive the extra $14 in their unemployment insurance checks. And the elderly who drive--there are 30 million licensed drivers over 65--would receive it with their Social Security payments.) Revenue neutrality is essential. No money is taken out of the economy. Washington doesn't get fatter. Nor does it get leaner. It is simply a transfer agent moving money from one activity (gasoline purchasing) to another (employment) with zero net revenue for the government. Revenue neutrality for the consumer is perhaps even more important. Unlike the stand-alone gas tax, it does not drain his wallet, which would produce not only insuperable popular resistance but also a new drag on purchasing power in the midst of a severe recession. Unlike other tax rebate plans, moreover, the consumer doesn't have to wait for a lump-sum reimbursement at tax time next April, after having seethed for a year about government robbing him every time he fills up. The reimbursement is immediate. Indeed, at its inception, the reimbursement precedes the tax expenditure. One nice detail is that the $14 rebate is mildly progressive. The lower wage earner gets a slightly greater percentage of his payroll tax reduced than does the higher earner. But that's a side effect. The main point is that the federal government is left with no net revenue--even temporarily. And the average worker is left with no net loss. (As the tax takes effect and demand is suppressed, average gas consumption will begin to fall below 14 gallons a week. There would need to be a review, say yearly, to adjust the payroll tax rebate to maintain revenue neutrality. For example, at 13 gallons purchased per week, the rebate would be reduced to $13.) Of course, as with any simple proposal, there are complications. Doesn't reimbursement-by-payroll-tax-cut just cancel out the incentive to drive less and shift to fuel-efficient cars? No. The $14 in cash can be spent on anything. You can blow it all on gas by driving your usual number of miles, or you can drive a bit less and actually have money in your pocket for something else. There's no particular reason why the individual consumer would want to plow it all back into a commodity that is now $1 more expensive. When something becomes more expensive, less of it is bought. The idea that the demand for gasoline is inelastic is a myth. A 2007 study done at the University of California, Davis, shows that during the oil shocks of the late 1970s, a 20 percent increase in oil prices produced a 6 percent drop in per capita gas consumption. During the first half of this decade, demand proved more resistant to change--until the dramatic increases of the last two years. Between November 2007 and October 2008, the United States experienced the largest continual decline in driving history (100 billion miles). Last August, shortly after pump prices peaked at $4.11 per gallon, the year-on-year decrease in driving reached 5.6 percent--the largest ever year-to-year decline recorded in a single month, reported the Department of Transportation. (Records go back to 1942.) At the same time, mass transit--buses, subways, and light rail--has seen record increases in ridership. Amtrak reported more riders and revenue in fiscal 2008 than ever in its 37-year history. Gasoline demand can be stubbornly inelastic, but only up to a point. In this last run-up, __ the point of free fall appeared to be around $4 __. If it turns out that at the current world price of $39 a barrel, __ a $1 tax does not discourage demand enough to keep the price down, we simply increase the tax __. __ The beauty of the gas tax is that we--and not OPEC--do the adjusting __. And that increase in price doesn't go into the pocket of various foreign thugs and unfriendlies, but back into the pocket of the American consumer. What about special cases? Of course there are variations in how much people drive. It depends on geography, occupation, and a host of other factors. These variations are unavoidable, and in part, welcome. The whole idea is to reward those who drive less and to disadvantage those who drive more. Indeed, inequities of this sort are always introduced when, for overarching national reasons, government creates incentives and disincentives for certain behaviors. A tax credit for college tuition essentially takes money out of the non-college going population to subsidize those who do go--and will likely be wealthier in the end than their non-college contributors. Not very fair. Nonetheless, we support such incentives because college education is a national good that we wish to encourage. Decreased oil consumption is a similarly desirable national good. There will certainly be special cases, such as truck drivers and others for whom longer distance driving is a necessity that might warrant some special program of relief. That would require some small bureaucracy, some filings for exemption or rebate, and perhaps even some very minor tweak of the gas tax (say, an extra penny or two beyond the dollar). But that's a detail. Most people can drive less. They already do. Why a $1 tax? Because we need a significant increase in the cost of gasoline to change our habits--or, more accurately, maintain the new driving habits and auto purchase patterns that have already occurred as a result of the recent oil shock. We know from the history of the 1980s and 1990s that these habits will be undone and unlearned if gasoline remains at today's amazingly low price. In the very short time that prices have been this low, we have already seen a slight rebound in SUV sales. They remain far below the level of last year--in part because no one is buying anything in this recession, and in part because we have not fully recovered from the psychological impact of $4 gasoline. We are not quite ready to believe that gas will remain this low. But if it does remain this low, as the night follows day, we will resume our gas-guzzling habits. It might therefore be objected that a $1 gasoline tax won't be enough. If $4 was the price point that precipitated a major decrease in driving and a collapse of SUV sales, an immediate imposition of a $1 gas tax would only bring the average price to $2.65. To which I have two answers. First, my preliminary assumption is that it takes $4 to break the habit of gas-guzzling profligacy. But once that is done, it might take something less, only in the range of $3, to maintain the new habit. It may turn out that these guesses are slightly off. The virtue of a gas tax is that these conjectures can be empirically tested and refined, and the precise amount of the tax adjusted to consumer response. Second, my personal preference would be a $1.25 tax today (at $1.65 gasoline) or even a $1.50 tax if gas prices begin to slide below $1.50--the target being near-$3 gasoline. (The payroll tax rebate would, of course, be adjusted accordingly: If the tax is $1.50, the rebate is $21 a week.) The $1 proposal is offered because it seems more politically palatable. My personal preference for a higher initial tax stems from my assumption that the more sharply and quickly the higher prices are imposed, the greater and more lasting the effect on consumption. But whatever one's assumptions and choice of initial tax, the net-zero tax swap remains flexible, adjustable, testable, and nonbureaucratic. __ Behavior is changed, driving is curtailed, fuel efficiency is increased, without any of the arbitrary, shifting, often mindless mandates **decreed by Congress**. **This is a major benefit of the gas tax that is generally overlooked** __. __ It is not just an alternative to regulation; because it is so much more efficient, __**__ it is a killer of regulation __****.**__ The most egregious of these regulations are the __ fleet fuel efficiency ( __ CAFE) standards forced on auto companies. __**__ Rather than creating market conditions that encourage people to voluntarily buy greener cars, the CAFE standards simply impose them __**. __ And once the regulations are written--with their arbitrary miles-per-gallon numbers and target dates--they are not easily changed __. If they are changed, moreover, they cause massive dislocation, and yet more inefficiency, in the auto industry. **__ CAFE standards have proven __****__ devastating to Detroit __**. __ When oil prices were relatively low, they forced U.S. auto companies to produce small cars that they could only sell at a loss __. They were essentially making unsellable cars to fulfill mandated quotas, like steel producers in socialist countries meeting five-year plan production targets with equal disregard for demand. __ Yet the great 2008 run-up in world oil prices showed what happens without any government coercion. As the price of gas approached $4 a gallon, there was a collapse of big-car sales that caused U.S. manufacturers to begin cutting SUV production and restructuring the composition of their fleets __. GM's CEO, for example, declared in June, "these prices are changing consumer behavior and changing it rapidly," and announced the closing of four SUV plants and the addition of a third shift in two plants making smaller cars. **__ Which is precisely why __****__ a gas tax would render these government-dictated regulations irrelevant and obsolete __**. If you want to shift to fuel-efficient cars, don't mandate, don't scold, don't appeal to the better angels of our nature. **__ Find the price point, reach it with a tax, and let the market do the rest __**. Yes, a high gas tax constitutes a very serious government intervention. But it has the virtue of simplicity. It is clean, adaptable, and easy to administer. Admittedly, it takes a massive external force to alter behavior and tastes. But given the national security and the economic need for more fuel efficiency, and given the leverage that environmental considerations will have on the incoming Democratic administration and Democratic Congress, that change in behavior and taste will occur one way or the other. Better a gas tax that activates free market mechanisms rather than regulation that causes cascading market distortions. __ The net-zero gas tax not only obviates the need for government regulation __. **__ It obviates the need for government spending as well. __**__ Expensive gas creates the market for the fuel-efficient car without ____ W**ashington having to pick winners and losers with massive government "investment" and arbitrary grants** __. __ No regulations, no mandates, no spending programs to prop up the production of green cars that consumer demand would not otherwise support __. And if we find this transition going too quickly or too slowly, we can alter it with the simple expedient of altering the gas tax, rather than undertaking the enormously complicated review and rewriting of fuel-efficiency regulations.
 * (Senior Fellow @ The Center for Strategic and Budgetary Assessments (Barry D, “The US Defense Industrial Base, Past, Present and Future,” CBA, __http://www.csbaonline.org/4Publications/PubLibrary/R.20081015._The_US_Defense_In/R.20081015._The_US_Defense_In.pdf__)**
 * (Michael Lind is policy director of New America’s Economic Growth Program and a co-founder of the New America Foundation. Joshua Freedman is a program associate in New America’s Economic Growth Program. “Value Added: America’s Manufacturing Future,” pg online @ http://growth.newamerica.net/sites/newamerica.net/files/policydocs/Lind,%20Michael%20and%20Freedman,%20Joshua%20-%20NAF%20-%20Value%20Added%20America%27s%20Manufacturing%20Future.pdf //um-ef)**
 * (Chuck, 66th Air Base Wing Public Affairs for the US Air Force, 8-10-09, “Technology convergence could prevent war, futurist says,” http://www.af.mil/news/story.asp?id=123162500)**
 * Abelkop 2k9**
 * (Adam, J.D., University of Iowa College of Law, 2010; B.A., Wake Forest University, PHd Student @ Univ of Indiana, “Why the Government Should Drink Your Milkshake: The Case for Restructuring the Federal Gas Tax,” The Journal of Corporation Law Winter, 2009, 35 Iowa J. Corp. L. 393 pg lexis//um-ef)**
 * Krauthammer 2k9**
 * (Charles, American Pulitzer Prize–winning syndicated columnist, political commentator, and physician, McGill University degree in political science and economics, Commonwealth Scholar in politics at Balliol College, Oxford, Doctor of Medicine from Harvard Medical School “The Net-Zero Gas Tax; A once-in-a-generation chance,” pg lexis//um-ef)**

** Congress just passed a MASSIVE transportation bill – it should have triggered your disads, but didn’t fix the Highway Trust Fund ** __ Congressional leaders __ announced opaquely last week that they’d “ __ moved forward __ ” __ on a deal on the __ highway section of the __ transportation bill __. That means transit, rail, and safety programs are still being negotiated __. And __ it means the financing of the bill hasn’t yet gotten the seal of approval from the House. Still, both houses of Congress have __ agreed to spend more on the transportation bill **than the Highway Trust Fund** __ itself __ **can bear** __. (The House gave its green light a couple weeks ago when it nixed the Broun motion to keep transportation spending to HTF receipt levels.) __ To overspend the HTF but still **plausibly deny** that they’re deficit-spending __, __ the Senate Finance Committee has done some pretty fancy footwork __ to offset the expenditures with other savings. Chair Max Baucus (D-MT) squeezed blood from the stone of the U.S. budget, and many of his colleagues have lauded him as a miracle worker. __ But Taxpayers for Common Sense __ – and lots of other people with common sense – **__ say the numbers don’t really add up __**. The information below comes from TCS’s report, released last week, on the Senate pay-fors. Stick with me here – this is all a little convoluted, but understanding the funding is a key part of the process __. While the Senate transportation bill may be a good stop-gap __ compared to the option of even shorter extensions, __ a look at the funding shows __ why __ it provides **no long-term answers** to the question of how to pay for transportation __. __ The sources of new **H** __ ighway **__ T __** rust __ **F** __ und __ revenue Baucus et al came up with are __ : __ A transfer from the general fund: $4.97 billion __. **__ This is the most obvious example of __****//__ deficit spending __//** – **__ just taking money from the Treasury to pay for transportation. __**__ That’s on top of $34.5 billion the Treasury has already coughed up in the last four years to bail out the H __ ighway __ T __ rust __ F __ und – something no one wanted to repeat. Dedication of imported car tariffs to the Highway Trust Fund: $4.52 billion. This revenue would no longer go to the general fund. A transfer from the Leaking Underground Storage Tank Trust Fund: $3.685 billion. TCS approves of this use of funds, since they come from the gas tax and are underspent at a three-to-one ratio. This transfer just eliminates most of the backlogged surplus. Dedication of the gas guzzler tax to the Highway Trust Fund: $0.697 billion. The government levies a fee on vehicles whose combined city and highway fuel economy is worse than 22.5 mpg (with exemptions, of course, for some of the worst offenders, like SUVs and minivans). It’s transportation-related, but the tax revenues have always gone into the general fund, so this functions as another transfer from the Treasury. Total new HTF revenues: 13.872 billion. So, since the Senate proposes to take from the general fund to plug the Highway Trust Fund, they have to pay back the Treasury somehow. That’s known on Capitol Hill as an “offset,” to avoid deficit spending. __ The principal new source of revenue to replenish the general fund is a pension stabilization provision __, expected to yield $9.394 billion. By reducing the amount companies have to contribute to employees’ pensions — which are tax-free — that money will become taxable income. Even skeptics seem to agree that $9.394 billion is probably a reasonable amount to expect from this change. But TCS notes that the Pension Benefit Guaranty Corporation (PBGC), which guarantees pension benefits when a company goes bankrupt, has a $23 billion deficit, which they say would be a better fit for this chunk of money. __ There are 10 __ more __ offsets __, most of them good for a negligible amount of money, __ but put them all together __ (with the pension change) __ and __ they total $17 billion. __ They include __ changes to arcane tax code provisions, increased enforcement of tax payment on Medicare providers and passport holders, and even **//__ a new tax __//****__ on “roll-your-own” cigarette machines __**. So that’s enough to pay the general fund back for what the Highway Trust Fund took. But __ TCS says some of these represent **bogus savings** __. For example, the government is planning to “save” $3.627 billion by further delaying a tax change that hasn’t even taken effect yet. __ The Senate bill would spend ten years’ worth of this “savings” in little more than a year __. But that’s not all! __ The bill also includes __**__ extraneous spending __**__ on things that don’t have anything to do with transportation __. Most of the non-transportation items have their own funding built in, but TCS wonders why they’re included in the bill at all. They include $ __ 3.627 billion for Gulf states’ coastal restoration, __ paid for out of fines from the BP oil spill; $1.4 billion for reauthorization of the land and water conservation fund, funded with oil drilling money; a change in the definition of a “small-issuer” bond, which is tax-exempt, and therefore forfeiting $0.761 billion in taxes; __ elimination of the cap on water and sewer bonds __ ; and relief from the alternative minimum tax for investors in private activity bonds (which are often used for infrastructure). The final item under “new spending” does, in fact, deal with transportation. In fact, it’s a key priority for transportation reformers: **__ bringing the transit tax benefit up __**__ to the level of the parking benefit for commuters __. Currently, the limit is $125 a month for transit and $240 for parking. Putting transit commuters on a level playing field with drivers is a significant transportation goal for this bill to achieve. TCS grumbles that the way to handle the imbalance is to lower the parking subsidy, which is fair enough. But if that’s not going to happen, the $0.139 billion it will cost to raise the transit benefit to achieve parity is well worth it. All together, whew, __ that’s a lot of complicated math just to avoid raising the gas tax __. ** Transportation infrastructure is financed in one of two ways – through the general fund, or through increased revenue – Stimulus Programs finance through the general fund while failing to repair the Highway Trust Fund ** **__ Transportation Investment __** and User Financing __ When Congress created the National System of Interstate and Defense Highways in 1956, it __ considered two options for financing the construction costs—borrow the money by issuing highway bonds or enact pay-as-you-go taxes on highway users. After much debate, the second option was chosen. Congress __ raised the federal gasoline tax __ from two cents per gallon to four cents per gallon __ and directed the revenues into the __ newly-created Highway Trust Fund ( __ HTF __ ). **__ Virtually all federal highway investment since then has been financed from the HTF __**. In 1982, Congress added the Mass Transit Account (MTA) to the HTF. The tax rate on gasoline was increased to 9 cents per gallon, with revenues from one cent of the five cent increase being directed into the MTA. Since then, most federal investment in mass transit has been financed from the Mass Transit Account, while highway improvements have been funded from the Highway Account (HA). Subsequently, __ the federal tax on gasoline has been increased only twice—in 1990 and 1993 __ —and currently stands are 18.3 cents per gallon. There is also a 24.3 cent-per-gallon tax on diesel fuel (and equivalent taxes on other motor fuels) as well as taxes on large trucks, which are also credited to the HTF. A similar user-fee-funded trust fund finances most federal investment in the nation’s airports and air transportation system. Through the years, user fee financed trust funds have proven a remarkably responsible way to finance federal investment in highways, public transportation and airports. In fact, during most years since its creation in 1956, the Highway Trust Fund generated balances that helped mask the size of the unified federal deficit, leading stakeholders to argue that Congress was violating the trust of highway users by failing to invest all user fee receipts in highway and transit improvements. Three factors have had a significant effect on the HTF balance in recent years: • When Congress enacted the Transportation Equity Act for the 21st Century (TEA-21) in 1998, it transferred $8 billion from the Highway Trust Fund balance to the General Fund at the start of FY 1999 and provided that interest on the HTF balance would henceforth be credited to the General Fund—the only trust fund so treated—costing the HTF almost $11 billion in foregone revenues. In addition, when Congress enacted motor fuel tax increases in 1990 and 1993, more than $22 billion of the revenues were deposited in the General Fund despite being taxes levied on highway users for the purpose of investing in highway and transit improvements. • Economic downturns in 2001 and 2008-09 had a depressing effect on highway travel and thus revenues into the HTF, as did unusually high gasoline and diesel fuel prices in 2008. In addition, highway construction costs skyrocketed between 2004 and 2009, due to world-wide increases in the cost of asphalt, cement and steel. Both effects put immense pressure on HTF revenues. • In 2005, Congress enacted the Safe, Accountable, Flexible, and Efficient Transportation Equity Act – A Legacy for Users (SAFETEA-LU) which increased federal investment in highway and transit improvements without increasing user fees. To accomplish that, Congress funded the federal highway and public transportation programs at a level where projected outlays through FY 2009 would not only use projected HTF revenues, but would also spend down much of the fund’s existing balance. 3 The HTF balance peaked at $31 billion in FY 2000 and has since been drawn down. Nonetheless, between 1956 and 2007—a span of more than 50 years—the federal highway and mass transit programs had no net impact on the federal budget. User revenues into the Highway Trust Fund financed all federal expenditures on highway and transit improvements, imposing no burden on the federal General Fund or the federal budget deficit. The Airport and Airways Trust Fund (AATF) has had a similar history. Created in 1971, the AATF has had positive balances most years since, punctuated only by a period in the mid-1990s when user fees on air travelers had temporarily expired. By FY 2000, the AATF had a balance of more than $7 billion. The need to improve airport security after September 11, 2001, resulted in a temporary decline in the AATF balance, but the balance is projected to bounce back to about $10 billion in FY 2010. The AATF thus has also been an example of how a user-fee financed program contributes to fiscal responsibility. American Recovery and Reinvestment Act and General Fund Transfers Since 2007, General Fund revenues have been used on several occasions to supplement HTF revenues to finance highway and public transportation improvements, which added to the unified federal deficit. This occurred for two reasons: Economic recovery. With the economy in its worst downturn since the Great Depression and unemployment approaching 10 percent, __ Congress included $48 billion for ready-to-go transportation improvements in the __ American Recovery and Reinvestment Act of 2009 ( __ ARRA). All of the transportation improvements **were financed from the federal General Fund** __, as was the rest of the $787 billion Recovery Act. __ Since the purpose of the legislation was to stimulate economic recovery __ and support jobs in the United States, __ it was entirely appropriate to finance the __ highway, transit and airport construction __ projects through general fund deficits __. **__ While this violated the time-honored users-pay approach to financing transportation improvements, the impetus for the spending was not to improve the transportation system, but to use such improvements to stimulate the economy __** and support jobs. Once this is accomplished, however **__, asking general taxpayers to pay for regular improvements to the nation’s transportation system would be a clear departure from the user fee financing principle that has served these programs and the federal budget well for decades __**. Rescue the Highway Trust Fund. __ Since FY 2007, user revenues into the Highway Trust Fund have been significantly less than expected __, due largely to the impact of the economic recession on highway travel (both personal and freight) as discussed above. The failure to generate new HTF revenues to support the SAFETEA-LU highway and public transportation investments made the trust fund extremely vulnerable to these economic shocks. With outlays exceeding revenues, the Highway Account of __ the HTF was in danger of running out of funds toward the end of FY 2008 __ —two years earlier than the authors of SAFETEA-LU had forecast. Projections showed the transit program would run out of money two years later. __ To prevent the U.S. government from defaulting on its highway and transit program obligations, Congress injected $8 billion __ into the Highway Account in FY 2008, followed by $7 billion in FY 2009 and $14.7 billion in FY 2010. In addition, $4.8 billion was injected into the Mass Transit Account in FY 2010. __ These transfers came from the General Fund __ and clearly affected the size of the federal budget deficits those years. __ All __ three __ transfers, however, represented previously foregone user fee revenues that should have gone into the Highway Trust Fund __, **__ which instead were credited to the General Fund __** —$8 billion transferred from the HTF to the GF in FY 1999, interest on the HTF balance that was credited to the GF, and federal aid to state and local governments to repair transportation infrastructure damaged by natural disasters (which for many years was paid from the HFT whereas all other federal disaster relief was paid from the GF). If Congress had not diverted these user revenues from the HTF into the GF, there would, arguably, have been no need for the General Fund transfers in FY 2008, FY 2009 and FY 2010. __ The injection of revenues into the HTF between FY 2008 and FY 2010 is, unfortunately, only a stopgap action __. The Congressional Budget Office projects that both the Highway Account and Mass Transit Account will exhaust their existing balances during 2012 or 2013. While this is a serious concern, **__ the far more important issue is that projected Highway Trust Fund revenues in the years ahead are far short of the nation’s __****__ transportation investment __****__ needs __**. The Gap Between Needs and Revenues The U.S. Department of Transportation (U.S. DOT) recently released its 2008 Report to Congress on the Status of the Nation’s Highways, Bridges, and Transit: Conditions and Performance. The report found that the United States is investing less each year than the minimum needed just to maintain current physical conditions and operational performance on the nation’s highways and transit systems. For highways, report data indicate that federal highway funding in the next surface transportation bill would have start at $69.5 billion, at minimum, in FY 2010 and grow to $76.3 billion by 2015 just to maintain physical conditions and operating performance on the nation’s highways and bridges. By contrast, Congress provided funding of only $41.1 billion for the federal highway program for FY 2010, almost $28.5 billion less than would be needed just to maintain current conditions. Beyond that, the outlook is for an even greater shortfall. Projected Highway Account revenues range from $32.6 billion in FY 2011 to $35.8 billion in FY 2015, according to the Congressional Budget Office. The annual funding gap during this period averages $39 billion. **__ The contrast between investment needs and revenues __** through FY 2017 is shown in Figure 1. Federal highway funding met needs in FY 2009 only because of the ARRA highway stimulus. __ For public transportation, the federal __ share of transit capital __ investment __ during the next surface transportation bill __ would need to be $8.6 billion __ in FY 2010, rising to $9.4 billion by FY 2015. Since only 70 percent of federal transit funds go into capital improvements, funding for the transit program in the next authorization bill would thus have to range from $12.3 billion in FY 2010 to $13.5 billion in FY 2015. By comparison, Congress enacted transit program funding of $10.34 billion in FY 2010, which is somewhat less than required to maintain current conditions. It should be noted that funds to construct new transit systems are not included in the Conditions and Performance Report data. The cost of new systems would add substantially to the transit investment needs identified in the report. Moreover, the federal share of transit needs for FY 2010-2015 exceeds projected MTA revenues, which means additional revenues will be required. Federal Commission Recommendations __ SAFETEA-LU ____ created two commissions **to examine the nation’s transportation investment needs** ____ and recommend revenue options __ —the National Surface Transportation Infrastructure Financing Commission and the National Surface Transportation Policy & Revenue Study Commission. Both have issued their final reports. Both commissions arrived at the same conclusion after exhaustively studying myriad revenue enhancing options. In the short-term, __ both commissions concluded t**he most efficient way to increase revenue to finance** __ needed **__ federal investment __**__ in highway and transit improvements __**__ is to raise the federal gas __** and diesel tax rates __ and then index these excises annually to inflation: __ • The Financing Commission recommends an immediate 10 cents per gallon excise rate increase on gasoline sales and a 15 cents per gallon excise rate increase for diesel fuel sales which would both thereafter be annually adjusted to inflation. This level is intended simply to recapture purchasing power lost since the 1993 rate increase. • The Policy & Revenue Study Commission recommends that the federal fuel tax be increased from 5 to 8 cents per gallon per year over the next 5 years, after which it should be indexed to inflation. __ This blue-ribbon group considered not only recapturing lost purchasing power, **but also generating more revenue to meet** __ the **__ program investments __** it believes are necessary to reform the program and meet future national goals for system preservation, capacity enhancements to facilitate freight movement, transportation-related emission reductions and security, among others. In the longer term, both commissions recommend transition to a vehicle-miles-travelled, or VMT-based, user fee system. The 10 cent gasoline/15 cent diesel excise enhancements would translate into approximately $20 billion per year in additional revenue for the Highway Trust Fund. With these adjustments, on average, individual households would pay approximately $9 per month more in federal gas taxes (individual households now pay on average $17 per month). By comparison, the average household pays about $300 per month to operate and maintain its cars (and about $800 per month to own and operate them). The overall level of revenue enhancement recommended by the National Surface Transportation Policy & Revenue Study Commission is in the range necessary to meet the national highway and transit needs previously discussed. It is also well worth noting that major national business and highway user organizations—including the U.S. Chamber of Commerce and the American Trucking Associations—are publicly supporting a federal motor fuels excise increase to finance an expanded transportation improvements.
 * Snyder 6/26**
 * (Tanya Snyder became Streetsblog's Capitol Hill editor in September 2010 after covering Congress for Pacifica and public radio. She lives car-free in a transit-oriented and bike-friendly neighborhood of Washington, DC., pg online @** [|**http://dc.streetsblog.org/2012/06/26/where-did-the-senate-get-the-extra-money-to-pay-for-its-bill/**] **//um-ef)**
 * ARTBA 2k10**
 * (American Road and Transportation Builders Association to the National Commission on Fiscal Responsibility and Reform “The Contribution of the Federal Transportation Investment Programs to Fiscal Responsibility and Deficit Reduction,” pg online @ [] //um-ef)**