-Ashraf Ghani is Chairman of the Institute for State Effectiveness and co-author with Clare Lockhart of "Fixing Failed States: a Framework for Rebuilding a Fractured World". His opinions are his own. -

The current financial crisis has called into question our trust in globalization as a spontaneously generated order. Such orders, while of human making, are not of human design. The market can be seen as a force capable of generating solutions to the most difficult of economic problems.

We should not forget, however, that the visible hand of the state is necessary to set the appropriate regulatory mechanisms that keep the market functioning according to a set of rules, and to put in place the risk management systems to deal with market failures. The return of the state to the center stage of economic management in the current global economy highlights the shift in values that will guide economic policy for the next decade, or possibly even the rest of the century. All business models operate with assumptions regarding the enabling regulatory environment. With the return of the state to active management of the financial sector in the short-term, and the emerging consensus on a more assertive role by the state in the regulation of the market over the longer-term, business models now require major revisions.

The crisis is global in nature, yet the response mechanisms have been predominantly national in character. The resumption of prosperity is going to require concerted global action, and the most powerful nations will have to agree to give up some of their powers in the national arena in return for collaborative powers within a more predictable global arena. Agreeing on such rules requires a shift in values to highlight the need for cooperative solutions and rule based behavior, rather than unilateral actions based on individual interests. While the state is "back in", the market that it needs to regulate is fundamentally different from the national markets after World War II.

The market operates with speed, while bureaucracies are bound by rules and procedures. We must now arrive at regulatory instruments that can satisfy public demand for accountability while having the speed to keep up with the market. Failure to establish alignment between the pace of the market and government will be extremely dangerous.

Since the time of U.S. President Ronald Reagan and British Prime Minister Margaret Thatcher in the 1980s, the market has been seen to provide both the instruments for assessing risks and the instruments of risk management. Trust in market ratings systems led to underestimation of the risks to which the banking sector was exposed and the massive failure of the market has now made the state, and thereby the public, assume management of risks.

The challenge both to the state and business is going to be in the determination of the balance of risks to be assumed between a revitalized market and an interventionist state. Decisions regarding these options will have immense consequences for they way business models are to be built, operated and endure. Assumption of a more assertive role by the state requires a massive shift in the values of public service as well as the skills, mental models and mechanisms of interaction between the government and the market.

In the short term, there is the challenge as to where the people necessary to perform the regulatory function by the state will come from- will they be drawn from very financial industry that was responsible for the crisis, or are there capabilities outside the system that can be harnessed for this task? In the West, several generations have been steeped in the assumption of a minimalist state, and a transition of this sort will not be easy.

We must also consider the issue of accountabilities both for legislatures and for the public. Historically, the power of the purse has been seen as mechanism to check the power of the executive branches of government and make them justify the claim to resources on the basis short-term allocations. Swift executive action is going to require agreement on mechanisms for flexible decision-making, while also satisfying this demand for accountability.

It is unclear as yet how legislatures and publics are to be convinced that the government and the market are going to use vast amounts of public resources through agreement on values frameworks that do not yet exist.

Business models are going to require entirely new ways of thinking, acting, collaborating and competing. Leadership that can both satisfy the shareholder in terms of the rate of return, and the public in terms of accountability, will have to be inherent parts of business models in an era when public money is essential to survival and revitalization of the market. Business leaders must now answer to two masters simultaneously- the public, whose massive resources are being used to rescue them- and shareholders- whose trust they must regain to ensure sustainability in the future.

 The public, both as shareholders and stakeholders, will play a vital role in the legitimacy and sustainability of business going forward. Designing a new framework for the governance of economic globalization is going to require new thinking if we are to harness the market to restore world prosperity and stability.

– James Saft is a Reuters columnist. The opinions expressed are his own –

There has been a lot of talk in Davos about improving business ethics, and mercy knows there is certainly room for that. The past few years, like the end of most booms, have included plenty of fraud, self-dealing, and general all-purpose unethical behaviour.

I think it’s fantastic that business should seek to raise ethical standards. It’s good business, and not before time. I do understand that a lot of what happened was a social phenomenon, and that a change in mores can only help.

But frankly, a new emphasis on ethics is a sideshow, and among some who propose it, a diversionary tactic.

While I agree that mankind is perfectible, as an investor, a citizen and hopefully some day a retiree, I am not willing to bet my future or the future of my children on it.

I want some guarantees.

I want some better safeguards.

And that means no schemes of ethical codes and self-regulation, but schemes of tighter regulation, greater oversight and dire consequences for those who breach them.

The problem is not (just) that people were greedy or self-interested. Greed and self-interest seem to occur pretty regularly, in my experience. It is true that they got a bit more reinforcement in the past decade then usual, and so might have grown,  but I really do think we are on a hiding to nothing if we try to solve the problems in the financial markets and economics and avoid future bubbles by more emphasis on ethics. The problem was that the rules under which everyone operated did not do enough to limit and channel greed and self-interest.

I want to make clear too that I’m not singling out bankers here, there was a lot of unseemly behaviour among consumers, house buyers and retail investors too.

But I do think that the financial sector needs to be very careful about how they pitch a new emphasis on ethics. If the intention is to try to minimize regulation, it won’t work and will only exacerbate the backlash they are already facing.

But why do I think I have the right to demand safeguards and guarantees? Well, I, like you, am a taxpayer and a voter and we are ultimately the bag holders for the misadventures of the financial sector. That sector enjoys a government guarantee which has been growing and growing.

Regulation means less leverage, less socialization of risk and privitisation of reward. And yes, I do understand that more regulation and less leverage imply lower growth, but also lower volatility in growth, which we can all agree is expensive.

And among the rewards that the private sector can earn there needs to be a better balance between how those rewards are parcelled out between employees and shareholders.  I don’t so much want a much bigger role of the state in deciding who makes what, but I’d like to see better a balance of power between shareholders and employees.

Take for example the trader at a AAA-rated bank (remember them?) who used that rating to borrow cheaply and buy a structured product with a higher yield. He banked his bonus and was still in the money when the trade went bad. He was taking advantage of two groups of people. First the shareholders, who should have gotten more of the benefit of the franchise they fund and second the taxpayers, who ultimately were insuring the whole rodeo.

I don’t expect the trader to suddenly become a saint; I do expect the system to take that into account.

——————————————————————————–

Also at Davos is Maria Ramos, CEO of Transnet, who raised some important questions about the discussion of ethics and business values:

I've been tweeting from the World Economic Forum, using the microblogging platform Twitter to discuss the mundane (describing crepuscular darkness of the Swiss Alps at 5 a.m.) or the interesting (live tweeting from presentations).

Is it journalism?

Is it dangerous?

Is it embarrassing that my tweets even beat the Reuters newswire?

Am I destroying Reuters standards by encouraging tweeting or blogging?

(These aren't rhetorical questions - I've been challenged by many people who would answer those questions as No, Yes, Yes, and Yes! I answer them as Yes, Potentially, No and No.)

The foundation of what we do as a company and as a news service are the Reuters Trust Principles.

While it is vital to read the five as a whole, I take the fifth ("That no effort shall be spared to expand, develop and adapt the news and other services and products of Thomson Reuters so as to maintain its leading position in the international news and information business") as an imperative for continual innovation and experimentation.

I have no idea what journalism will look like in five years except that it will be different than it is now. That's a great thing, I believe.

I have little patience for those who cling to sentimental (and frankly inaccurate) memories of the good old halcyon days of journalism that were somehow purer and better than a world where tweets and blogs compete with news wires and newspapers.

Bring it on, I say!

Journalism is one of the great self-declared professions and crafts.  I am a journalist because I said I was one more than two decades ago and have spent the years since working on my abilities. I am not one because I am somehow anointed with a certificate or an exam result.

Journalism is ideally designed for democratisation.

Working for Reuters gives me a tremendous platform and great access. It does not give me a license.

Microblogging and macroblogging and social networks are themselves great platforms.

If great storytellers use those platforms to display their knowledge, access, expertise and abilities, I think that is a marvellous advance.

If I don't beat the Reuters wire with a live tweet because I deliberately hold back, someone else will. If I don't beat the Reuters wire because I'm slow or inattentive, someone else will.

The reason my live tweeting was fast is that it was unintermediated, while the journalist covering the story went the traditional route and had a discussion with an editor about how best to position and play the story.

Both methods have important roles. In this case, the editor added value.

In a democratic world where publishing platforms are available to all, editors and institutions like Reuters MUST add great value if they are to survive the competitive fight with the unintermediated storytellers.

I love that.

I love the competitive pressure that brings.

I love the way it will force us continually to redefine our role vis-a-vis unaffiliated storytellers.

I love the way it is and will continue to force us to redefine our profession and our craft.

Are there potential pitfalls and dangers? Could a mistweet hurt our reputation? Of course. And over time we will have to work hard to decide what we have reporters tweet in their own names and what we have them do in the company name; we'll have to refine our rules about micro and macroblogging to allow the maximum of free expression while holding fast to our important values of being fair, accurate and free from bias.

But we will get there. And consumers of news will be the ultimate beneficiaries.

– James Saft is a Reuters columnist. The opinions expressed are his own –

It’s not exactly a wake, but participants at this year’s World Economic Forum have witnessed many of their most cherished beliefs being challenged, upended and sometimes ground in the mud.

Think of it as the “Davos Consensus,” a loose alignment of principles that held sway in this Swiss mountain resort and in large parts of the world over the past decade.

This consensus, which generally favoured the market over the state, “light-touch” regulation of financial services and the free flow of goods and capital across borders, is somewhere between on the defensive and in full, not always organised retreat.

What is a lot less clear is what might replace it.

It’s true that the global economic crisis and the debt bubble that preceded it did not deliver on much of the promises made by defenders of globalisation and market forces. Instead it was one of the biggest misallocation of resources in history; to housing and consumption that either wasn’t needed or really couldn’t be afforded.

Banks wiped out much of their capital base and their regulators failed spectacularly too, missing everything from the dangers of a build up in leverage to the Madoff Ponzi scheme.

Now the state is in the ascendant, both as an “investor” and regulator and as an economic force. Everywhere the talk is about stimulative government spending and although it’s intended to be a temporary measure while the economy recovers you do get the feeling that the shift in the balance between state and private enterprise might outlast the downturn.

And even though banks have not yet been widely nationalised, there is no doubt that the state is actually directing which parts of the economy get cash. The United States is buying mortgage related debt, Britain is bailing out its auto industry, and there is every chance that further investments in banks by governments will mean more control of how, where and to whom they lend.

It is too a huge contrast from last year, when the debate was about how much globalisation, in the form of sovereign wealth fund ownership of the western banking system, was tolerable. The sovereign funds aren’t buyers any more and the cash that is flowing into banking is mostly within individual states; governments ploughing funds into banks.

It’s really not too far-fetched to speculate that globalisation might have reached its high-water mark.

It is also absolutely certain that regulation of finance will be tighter.

“The ideology of the last decade was self-regulation which means no regulation,” NYU economist Nouriel Roubini told a panel discussion in Davos.

“If we don’t want a backlash against trade we have to have prudential regulation of the financial system.”

REGULATORY FREIGHT TRAIN

One tiny problem is that the stuff underlying the Davos consensus really was pretty good at doing lots of things, not least raising living standards in huge swathes of the developing world. States aren’t traditionally all that great at allocating resources either, and it is by definition impossible for them to explain when and how they will step back and let individuals pick up the ball.

Maybe most concerning is the threat of protectionism. Most governments who rescue their banks and spend money trying to stimulate their economies have a natural incentive to try and capture as much of the benefit as they can for their voters. If you are on the line for the losses of a big international bank, do you really want it to continue taking chances lending abroad? Wouldn’t it be more sensible to just go back to “basic” banking, lending to businesses you really know? That is a line we will hear more of and it is protectionism in another form.

There have also been moves in the United States to attach “Buy American” provisions to the $825 billion economic stimulus package. While it’s not exactly the Smoot-Hawley tariffs that made the Depression so much worse, it is a slippery slope. Even more regulation of financial services, needed or not, will tend to make states eager to bottle up their banks at home, the better to watch closely that they are not taking the wrong kinds of risks.

And while the move to allow judges to force loan amendments, so-called “cramdowns” on to investors makes very good economic sense, given the collapse in housing and the complexity of many mortgage securities, it raises questions about what other contracts won’t be honoured and will be repudiated by the state.

So what’s next? The consensus here is that the state will have to come in and clean up everybody’s messes but business executives don’t seem to have twigged yet that regulation is heading at them like a freight train.

Whatever the new rules are, the sooner governments can spell them out the sooner everyone else can get on with their newly diminished roles in the rebuilding.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.

Davos leaders have traditionally looked to the long term and have largely been keen on helping all nations of the world to benefit from economic development. But with politicians and businesses tied up with short term concerns about the economic crisis there’s a risk at least that efforts to spread development and to ward against the threat of climate change may go on hold, at least for a time. Reuters News asked delegates at the World Economic Forum’s annual meeting to share their thoughts on whether we should be concerned about development and sustainability slipping down the global agenda.

Where do I put my money?
What do I read?
Who do I listen to?
Who saw it coming?
Who made money from it?
Who will make money from it?
Who can I trust?

As Davos gets under way, my feeling from chatting with contacts and listening to conversations around me is that one thing the world economy is really suffering from right now is a crisis in trust.

Institutions failed us.
Governments failed us.

Our own intuition failed most of us (George Soros said today that he protected his capital and had a satisfactory return — that’s certainly better than I did!).

Our advisers failed us.
The media failed us too.

So before we buy again, or invest again, or behave normally again, people need an answer to the fundamental question — where can I invest my trust.

I think that’s the issue behind all of the discussions here.

And solving the related questions of “who is trustworthy now” and “what can we do to create trust in governments and institutions” seems a vital first step.

-  Lawrence Bloom is deputy chairman of Noble Cities and chairman of the World Economic Forum, Global Agenda Council on Urban Management. His views are his own –

The chaos generated by the meltdown of the global economic system provides environmentalists and human rights advocates with utopian opportunities to promote a new economic model, which will not only help sustain life on our planet, but actually increase its quality for many.
As world leaders search for creative solutions to restore global equilibrium, the opportunity for recognising the importance of both human and environmental capital has perhaps never been so possible or achievable.
Recognising all three types of capital: financial, environmental and human, will help us to build the equivalent of a balanced three-legged stool . Hopefully, this stool will be more stable than the current one-legged model of financial capital.
Last week the United Nations Environment Program recommended the business world use the global downturn to press ahead with green technologies that will save firms money and help save the planet. It also recommended using micro-finance loans to help developing countries provide sustainable solutions in such places as Bangladesh where small loans have allowed women entrepreneurs to install solar panels and bring electricity to 100,000 homes.
Society has been operating on the belief that if the engines of capitalism are powered to churn constantly, wealth will prevail and all of human society will benefit. But this system has served to create great income disparities by generating incredible wealth and incredible poverty, and has been the main driver in causing catastrophic environmental damage.
The unregulated, trickle-down financial policy is necessary to generate positive GDP figures, but traditionally these data do not include the cost of rainforest or biodiversity loss. Thanks to the United Nations Green Economy Initiative, and the work being undertaken by Pavan Sukhdev and his colleagues who are engaged in the Economics of Ecosystems and Biodiversity project, we can now put GDP-like values on these losses.
As a result, we are beginning to recognise that the credit crunch in the financial markets is a minnow in comparison to the credit crunch in our environment and biodiversity systems. It appears that we have been “borrowing” $2.5 trillion every year for the last 25 years without any significant compensating payback.
Over time, we may acquire the wisdom to realise that what traditional economics considers “externalities”, as if they were irrelevant, are closer to our survival needs than the creation of economic wealth. The 90 pence we pay for a litre of petrol is divided between government tax and profit for the oil company, but who picks up the tab for the damage that is done by burning the fuel in the atmosphere? We privatise profit and we socialise loss.
We need to start valuing people first, and then we will collectively begin to operate on the principle that the environment is not just another word for commodity market, but that it supports life. Valuing human capital means acknowledging that each person on this planet is entitled to fresh water, nutritious food, proper shelter, healthcare, education, justice and access to capital. This way we can release the creative potential of all of humanity. Only when we are clear on these values can we create a financial system that serves it.
The current financial credit drivers are akin to the booster rockets on a space craft. In the same way as the boosters blast the craft free of the Earth’s atmosphere and gravitational pull, so the current financial system has created wealth, education and freedom for 1.5 billion people. But for many - the remaining 4.5 billion - the cost has been very great and to our ecosystems it has been disastrous. The skill in a space shot is knowing when to blow the explosive bolts, releasing the boosters and continuing the mission with the second stage only. Our skill will be in jettisoning our current economic model and designing a new and more inclusive “second stage”.
What we should be talking about now at a strategic level is urgently restructuring our monetary system into a non-debt, or minimal-based debt structure using Sharia-type finance and complementary currencies with government spending money directly into circulation.
In whichever way we choose as a society to tackle the global financial crisis, we must create a system that protects and nurtures all of humanity and the environment before it is too late.
An inspirational quote attributed to a North American First Nations Chief Seattle states: “We are all connected like the blood that unites one family. Whatever befalls the Earth befalls the sons of the Earth. Man did not create the web of life, but he is part of it, whatever he does to the web, he does to himself.”
These words written more than one hundred years ago speak directly to us today. Will we have the intelligence to listen?

- Jonathan Lash is president of the World Resources Institute. The views expressed are his own -

Much of the world’s attention is fixed on the brutal effects of the global financial crisis.
But sooner or later - sooner we hope - the global economy will rebound. Markets will recover, and stocks will rise. Nature, on the other hand, does not do bailouts. The effects of today’s greenhouse gas emissions - like those of yesterday and tomorrow - will be permanent, at least in the timescales that we care about.

They are what will shape the lives and markets of tomorrow.

My view of sustainability is very simple: what can’t be sustained won’t be. It was impossible for real estate values to continue to rise much faster than economic growth. It had to end sometime . . . and it did. When the bubble burst, the consequences were severe.

The same lesson applies to the ecological sphere. We simply cannot continue changing the chemistry of the atmosphere, through rising greenhouse gas emissions, without inviting enormous consequences. We cannot continue to increase human use of fresh water at twice the rate of population growth. Not only are there are limits on available supplies, but in many places these are reduced by climate change and pollution. Nor can we continue to create coastal dead zones, in areas where hundreds of millions of people depend on fisheries, by releasing ever more nitrogen into the surface waters of the Earth.

Since these behaviours can’t be sustained, they won’t be. The key question is whether we choose a managed transition to sustainability, or wait until the bubble bursts. That choice will have a profound effect on tomorrow’s markets.

So what is the solution, the way forward?

Nations are making vast investments in stimulus packages as they seek to retool their economies and revive productivity. It doesn’t make sense to retool twice. We need to build for, and invest in, the economy of tomorrow.

Economic recovery around the world will be driven by thousands of firms in each country making decisions about what products to make, what technologies to use, and who to hire. It is essential that these decisions incorporate the risks and opportunities presented by a carbon-and-resource constrained world. It is critical that they create jobs in building the products that will help improve lives with reduced impact on the Earth’s resources.

The financial crisis has created an enormous opportunity for change. In the United States, the Reagan era, an era of unrestrained free markets, in which government was regarded, at best, as a necessary evil, seems to have ended. In its place, there’s a demand for government to be a source of solutions and a partner in implementation, particularly in dealing with the consequences of an economy that for the most part does not value the ecosystem services that underlie our well-being.

Right now is the best opportunity I have seen in 30 years as an environmentalist to align economic, social and environmental goals.
The United States Climate Action Partnership , of which WRI is a founding member, and whose 26 corporate members include General Electric , Duke Energy, DuPont and General Motors, last week renewed and strengthened its call for the U.S. Congress to adopt a mandatory national cap and trade system to reduce current U.S. greenhouse gas emissions by 80 percent by 2050. The linked economic and environmental crises could have divided USCAP’s members, but instead it renewed their determination to find reasoned solutions to the climate problem.

On Inauguration Day, President Barack Obama also called for a new era of responsibility. I can’t imagine a more important place for us to reflect this call than in taking responsibility for the effects of our actions on the global environment. We have the technology to mitigate those effects, and to create a new economy.

We need to seize the moment.

- Andy Stern is the president of the Service Employees International Union. His views are his own -

We are living through the third economic revolution. The first was the agricultural revolution, and it took nearly 3,000 years. The second was the industrial revolution, which took about 300 years. This revolution is going to take 30 years. As we move from an industrial economy based in factories to a knowledge and finance economy that lives on the Internet, no generation of people has ever witnessed so much change in a single lifetime.

And this revolution is televised, it’s Googlized, it’s digitized, it’s in your face, on your screen, 24/7. It is relentless and it’s unending and it’s far from over.

The problem is this revolution is not working for the vast majority of the world’s citizens.

Despite the exponential increases in productivity and profits that have resulted from the globalization of our markets and economies, nearly half the world’s population lives on less than $2.50 per day. The richest 20 percent of the world’s people earn 86 percent of the income, consume 80 percent of the resources, and create 83 percent of the waste.

This is an unsustainable model, and we are seeing the cracks in the system each day.

It is a humbling and mind-opening moment for those whose wholesale embrace of a privatizing, deregulating, free-market-worshiping ideology has put us on the fast track to global financial collapse. Financial manipulation, greed and deregulation have led to economic havoc.

The majority of consumers have little or no spending power, and the way forward gets murkier each day. It may sound a little old fashioned, but workers of the world need a raise. If workers don’t gain greater purchasing power, we’ll never get out of this recessionary spiral.

And that means a hard look at our business models and values before it’s too late.

This is not a time for more image polishing codes, charitable activity or more conferences; it’s time for changes in reality. It is time for straight talk; for new values, new business models, new thinking, and most importantly bold action.

Ten years ago, the International Labour Organization (ILO) issued its Declaration on Fundamental Principles of Rights at Work. The United Nations (UN) Global Compact followed two years later, which more than 4,700 businesses and stakeholders have signed onto voluntarily. Their commitment? Among other things:

· Upholding the freedom of association and the effective recognition of the right to collective bargaining (Principle 3),

· The elimination of all forms of forced and compulsory labor (Principle 4), and

· The elimination of discrimination in respect of employment and occupation (Principle 6).

And yet, little has changed for the workers they employ.

Despite laws that guarantee a day of rest, it is not uncommon for workers to go for months without a day off in the global security industry. Likewise, a recent survey of labor rights compliance in the supply chains of large apparel industry brands found workers subject to forced overtime on a routine basis in 94 percent of the factories surveyed. In an equal number of cases, the workers’ right to organize and bargain was not respected. In 2006 the International Trade Union Confederation (ITUC) found nearly 5,000 cases of workers in Asia who were fired for exercising their right to association. The list of infractions goes on and on.

The bottom line: voluntary codes are not enough. The impressive social dialogue and lofty rhetoric of recent years appears to have amounted to little more than an image airbrushing for corporations like Nike and other signatories of the UN Global Compact. And while an airbrush may sell more sweaters and products, it doesn’t lift a working family out of poverty.

For our global economy to thrive and grow again, corporations, governments, and non-state actors (like labor unions) must work together towards a system where competition is based on the quality and sustainability of goods and services provided—not by a race to lower costs at the expense of workers, the environment, and product quality. We created global trade, global finance, global corporations, but no global multi-lateral regulation, oversight or enforcement.

Too often, in the global economy, companies—not countries—are making the rules of the global economy.

To maintain a level playing field, standards and regulations must be set and enforceable by independent entities evenly across industries and up-and-down supply chains. The ILO and UN agreements are a good start, but with no external enforcement processes or grievance mechanisms, they remain toothless, and need to be updated or replaced with binding agreements that include an independent, third-party monitor vested with the power to direct a remedy.

This is not only possible; it’s been done. Union Network International (UNI) and two of the world’s largest employers in the property services industry forged such agreements in the past year. In June 2008, UNI and cleaning giant ISS signed a comprehensive compact guaranteeing the employer’s 440,000 employees the freedom to unite on the job if they so choose. They also established a jointly-managed fund aimed at monitoring and raising standards in specific markets. In December 2008, UNI forged a similar agreement with UK-based G4S, the largest private security group and the second largest private sector, multi-national employer in the world.

Improvements in employment conditions and wages negotiated by local unions after these agreements are already having a positive effect on the companies’ employees, their families, and the communities in which they live and work, as well as the property services sector overall. Such compacts, with the possibilities of comprehensive (rather than issue by issue) agreements between NGOs and corporations, offer hope in—as well as a model for—dealing with our current global economic crisis.

With the philosophy of unfettered-greed-as-king being deflated by reality, and with a new president at the helm in the United States who respects the market but does not worship it, the time is ripe for change.

We won’t reverse the worldwide financial meltdown in five short days in Davos. But what we can do—what I hope we do—is to acknowledge the failure of the free market to magically solve all of our problems, and set to work together addressing the challenges and embracing the opportunities this current economic moment holds.

- Robert Engle is the Michael Armellino Professor of Finance at New York University Stern School of Business and a Nobel Laureate. His views are his own. -

We have faced energy crises before. The last energy crisis was about running out of oil. This one is about the fear that we might not. The future health of our planet is jeopardized by the greenhouse gases emitted by our industrial society. But can we afford an expensive energy policy in this time of economic distress?

The simplest and best solution to reducing emissions is thought by most economists to be a comprehensive tax on the emission of greenhouse gases. Only in this way will individuals and businesses that avoid the tax be doing what is socially desirable. Only in this way will it become profitable to find substitute energy sources; no longer would it be necessary to subsidize alternatives. The price of oil will rise naturally when we begin to run out, but in this proposal, the price would rise before we reach the bitter end. It is only a matter of timing.

However, a tax is generally considered politically impossible and in this time of deepening recession, it is especially unpalatable. But what about the money - what happens to the money that is raised by this tax? This revenue could be divided evenly among all U.S. residents and sent out in a periodic cheque. This check could even be sent before the tax revenue was received. A substantial emission tax would generate a substantial check. This could be used for anything but might well be used to buy a more fuel efficient car, insulate a house, move closer to work or otherwise reduce the impact of the impending tax.

Because this tax would be returned to consumers, it would stimulate the economy. The sectors that might expect benefits would be automobiles, construction and real estate. These all can use good news. Because of the per capita redistribution, this would be particularly beneficial to low income groups who would pay less than an equal share of the taxes. Because the tax would reduce our consumption of oil, we would be sending fewer petrodollars abroad and instead returning it to Americans.

We already know that high oil prices induced dramatic changes in our economic behavior which had clear benefits for reduced emissions. Driving miles fell, sales of SUVs fell and the only growth areas of automobile sales were in small cars. Housing prices fell more in the distant suburbs than in the central cities, and public transportation rider ship increased. But these gains are now being reversed as the price of oil has dropped dramatically.

In order to achieve the long term climate benefits, it is necessary to insure that there is a permanent shift in the price of emissions rather than a temporary shift. Car buyers, home buyers, builders, public transportation planners and alternative energy producers will reverse their decisions and reduce their investment and research unless they are assured that oil prices will stay permanently high.

When the recession is over, it no longer makes sense to redistribute the tax revenue. Instead, the revenue could be invested in a sovereign fund, passively managed and dedicated to the major unfunded social costs of the upcoming decades – social security and Medicare. The fund should be managed by a semi-independent agency much like the Federal Reserve. This agency would monitor the progress on reduction of greenhouse gasses and recommend adjustments in the surcharge.

One policy will solve both global warming and long run fiscal deficit. Workers several decades from now will not have to be taxed so heavily to support social security and they will not have to be taxed so heavily to solve climate change. The long run risks offset. Essentially the tax on income and payroll is replaced by a tax on carbon. The tax is placed on a “bad” rather than a “good.” Today’s working generation will in part save for its own retirement out of this tax revenue.

What happens if we are wrong? Suppose the planet is able to fix itself. Suppose we find an inexpensive way to sequester carbon dioxide. Then would we have broken the economy for no good reason? The answer is that we would have stimulated the economy in the recession, saved the social security system, improved our balance of payments and increased the time until we exhaust the world’s petroleum. This is not a bad outcome.