Tariffs, Content Quotas, and What Passes for Patriotism

10 Friday Mar 2023

Posted by in Free Trade, Protectionism

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If there’s one simple lesson in economics that’s hard to get across it’s the destructive nature of protectionism. The economics aren’t hard to explain, but for many, the lessons of protectionist failure just don’t want to sink in. Putting aside matters of national security, the harms of protectionism to the domestic economy are greater than any gains that might inure to protected firms and workers. Shielding home industries and workers from foreign competition is generally not smart nor an act of patriotism, but that sentiment seems fairly common nonetheless.

The Pathology of Protectionism

Jingoistic slogans like “Buy American” are a pitch for voluntary loyalty to American brands. I’m all for voluntary action. Still, that propaganda relies on shaming those who find certain foreign products to have superior attributes or to be more economical. This feeds a psychology of economic insularity and encourages those who favors trade barriers, which is one of the earliest species of failed central planning.

The cognitive resistance to a liberal trade regime might have to do with the concentrated benefits of protectionist measures relative to the more diffuse (but high) costs it imposes on society. Some of the costs of protectionism manifest only with time, which makes the connection to policy less obvious to observers. Or again, obstructing trade and taxing “others” in the hope of helping ourselves may simply inflame nationalist passions.

Both Democrats and Republicans rally around policy measures that tilt the playing field in favor of domestic producers, often severely. And again, this near unanimity exists despite innumerable bouts with the laws of economics. I mean, how many times do you have to be beaten over the head to realize that this is a mistake? Unfortunately, politicians just don’t live in the long-term, they leap to defend powerful interests, and they seldom pay the long-term consequences of their mistakes.

Joe Biden’s “Buy American”

The Biden Administration has pushed a “Made In America” agenda since the President took office, It’s partly a sop to unions for their election support. Much of it had to do with tightening waivers granted under made-in-America laws (dating back to 1933) governing foreign content in goods procured by the federal government. The most recent change by Biden is an increase in the requirement for domestic content to 60% immediately and gradually to 75% from there. Also, “price preferences” will be granted to domestic producers of goods to strengthen supply chains identified as “critical”, including active pharmaceutical ingredients, certain minerals including rare earths and carbon fibers, semiconductors and their advanced packaging, and large capacity batteries such as those used in EVs.

There’s a strong case to be made for developing domestic supplies of certain goods based on national security considerations. That can play a legitimate role where defense goods or even some kinds of civilian infrastructure are involved, but Biden’s order applies much more broadly, including protections for industries that are already heavily subsidized by taxpayers. For example, the CHIPS Act of 2022 included $76 billion of subsidies and tax credits to the semiconductor industry.

George Will describes the cost of protectionism and Biden’s “Buy American”:

“‘Buy American,’ like protectionism generally, can protect some blue-collar jobs — but at a steep price: A Peterson Institute for International Economics study concludes that it costs taxpayers $250,000 annually for each job saved in a protected industry. And lots of white-collar jobs are created for lawyers seeking waivers from the rules. And for accountants tabulating U.S. content in this and that, when, say, an auto component might cross international borders (U.S., Canadian, Mexican) five times before it is ready for installation in a vehicle.”

Biden’s new rules will increase the cost of federal procurement. They will squeeze out contracts with foreign suppliers whose wares are sometimes the most price-competitive or best-suited to a project. This is not a prescription for spending restraint, and it comes at a time when the federal budget is under severe strain. Here’s George Will again:

“This will mean more borrowing, not fewer projects. Federal spending is not constrained by a mere shortage of revenue. So, Biden was promising to increase the deficit. And this policy, which elicited red-and-blue bonhomie in the State of the Union audience, also will give other nations an excuse to retaliate (often doing what they want to do anyway) by penalizing U.S. exporters of manufactured goods. ….. Washington lobbyists for both will prosper.”

Domestic manufacturers who find their contracting status “protected” from foreign competition will face less incentive to perform efficiently. They can relax, rather than improve or even maintain productivity levels, and they’ll feel less pressure to price competitively. Those domestic firms providing goods designated by the government as “critical” will be advantaged by the “price preferences” granted in the rules, leading to a less competitive landscape and higher prices. Thus, Biden’s “Buy American” order is likely to mean higher prices and more federal spending. This is destructive and counter to our national interests.

Donald Trump’s Tariffs

In a recent set of proposals trialed for his presidential election campaign, Donald Trump called for “Universal Baseline Tariffs” on imported goods. In a testament to how far Trump has stumbled down the path of economic ignorance, his campaign mentions “patriotic protectionism” and “mercantilism for the 21st century”. Good God! Trump might be worse than Biden!

This isn’t just about China, though there are some specific sanctions against China in the proposal. After all, these new tariffs would be “universal”. Nevertheless, the Trump campaign took great pains to cloak the tariffs in anti-China rhetoric. Now, I’m very unfavorably disposed to the CCP and to businesses who serve or rely on China and (by implication) the CCP. Certainly, in the case of China, national security may dictate the imposition of certain forms of protectionism, slippery slope though it might be. Nevertheless, that is not what universal tariffs are about.

One destructive consequence of imposing tariffs or import quotas is that foreign governments are usually quick to retaliate with tariffs and quotas of their own. Thus, export markets are shut off to American producers in an escalating trade conflict. That creates serious recession risks or might reinforce other recessionary forces. Lost production for foreign markets and job losses in the affected export industries are the most obvious examples of protectionist harm.

Then consider what happens in protected industries in the U.S. and the negative repercussions in other sectors. The prices charged for protected goods by domestic producers rise for two reasons: more output is demanded of them, and protected firms have less incentive to restrain pricing. Just what the protectionists wanted! In turn, with their new-found, government-granted market power, protected firms will compete more aggressively for workers and other inputs. That puts non-protected firms in a bind, as they’ll be forced to pay higher wages to compete with protected firms for labor. Other inputs may be more costly as well, particularly if they are imported. These distortions lead to reduced output and jobs in non-protected industries. It also means American consumers pay higher prices for both protected and unprotected goods.

Consumers not only lose on price. They also suffer a loss of consumer sovereignty to a government wishing to manipulate their choices. When choices are curtailed, consumers typically lose on other product attributes they value. It also curtails capital inflows to the U.S. from abroad, which can have further negative repercussions for U.S. productivity growth.

When imports constitute a large share of a particular market, it implies that foreign nations have a comparative advantage in producing the good in question. In other words, they sacrifice less to produce the good than we would sacrifice to produce it in the U.S. But if country X has a comparative advantage in producing good X, it means it must have a comparative disadvantage in producing certain other goods, let’s say good Y. (That is, positive tradeoffs in one direction necessarily imply negative tradeoffs in the other.) It makes more economic sense for other countries (country Y, or perhaps the U.S.) to produce good Y, rather than country X, since country Y sacrifices less to do so. And that is why countries engage in trade with each other, or allow their free citizens to do so. It is mutually beneficial. It makes economic sense!

To outlaw or penalize opportunities for mutually beneficial trade will only bring harm to both erstwhile trading partners, though it might well benefit specific interests, including some third parties. Those third parties include opportunistic politicians wishing to leverage nationalist sentiments, their cronies in protected industries, and the bureaucrats, attorneys, and bean counters who manage compliance.

When Is Trade Problematic?

Protectionists often accuse other nations of subsidizing their export industries, giving them unfair advantages or dumping their exports below cost on the U.S. market. There are cases in which this happens, but all such self-interested claims should be approached with a degree of skepticism. There are established channels for filing complaints (and see here) with government agencies and trade organizations, and specific instances often prompt penalties or formal retaliatory actions.

There are frequently claims that foreign producers and even prominent American businesses are beneficiaries of foreign slave labor. A prominent example is the enslavement of Uyghur Muslims in China, who reportedly have been used in the manufacture of goods sold by a number of big-name American companies. This should not be tolerated by these American firms, their customers, or by the U.S. government. Unfortunately, there is a notable lack of responsiveness among many of these parties.

Much less compelling are assertions of slave labor based on low foreign wage rates without actual evidence of compulsion. This is a case of severely misplaced righteousness. Foreign wage rates may be very low by American standards, but they typically provide for a standard of living in the workers’ home country that is better than average. There is no sin in providing jobs to foreign workers at a local wage premium or even a discount, depending on the job. In fact, a foreign wage that is low relative to American wages is often the basis for their comparative advantage in producing certain goods. Under these innocent circumstances, there is no rational argument for producing those goods at much higher cost in the U.S.

Very troublesome are the national security risks that are sometimes attendant to foreign trade. When dealing with a clear adversary nation, there is no easy “free trade” answer. It is not always clear or agreed, however, when international relations have become truly adversarial, and whether trade can be usefully leveraged in diplomacy.

Conclusion

As I noted earlier, protectionism has appeal from a nationalist perspective, but it is seldom a legitimate form of patriotism. It’s not patriotic to limit the choices and sovereignty of the individual, nor to favor certain firms or workers by shielding them from competition while penalizing firms requiring inputs from abroad. We want our domestic industries to be healthy and competitive. Shielding them from competition is the wrong approach.

So much of the “problem” we have with trade is the infatuation with goals tied to jobs and production. Those things are good, but protectionists focus primarily on first-order effects without considering the damaging second-order consequences. And of course, jobs and production are not the ultimate goals of economic activity. In the end, we engage in economic activity in order to consume. We are a rich nation, and we can afford to consume what we like from abroad. It satisfies wants, it brings market discipline, and it leads to foreign investment in the American economy.

Biden and Trump share the misplaced objectives of mercantilism. They are both salesmen in the end, though with strikingly different personas. Salesmen want to sell, and I’m almost tempted to say that their compulsion causes them see trade as a one-way street. Biden is selling his newest “Buy American” rules not only as patriotic, but as a national security imperative. The former is false and the latter is largely false. In fact, obstructions to trade make us weaker. They will also contribute to our fiscal imbalances, and that contributes to monetary and price instability.

Like “Buy American”, Trump’s tariffs are misguided. Apparently, Trump and other protectionists wish to tax the purchases of foreign goods by American consumers and businesses. In fact, they fail to recognize tariffs as the taxes on Americans that they are! And tariffs represent a pointed invitation to foreign trading partners to impose tariffs of their own on American goods. You really can’t maximize anything by foreclosing opportunities for gain, but that’s what protectionism does. It’s astonishing that such a distorted perspective sells so well.

Carbon Credits and Green Bonds Are Largely Fake

06 Monday Mar 2023

Posted by in Climate, Environment

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It doesn’t take much due diligence to reveal that certain green “commitments” are flimsy gestures at best. I discussed the poor economics of recycling mandates in a post a few days ago. Here I discuss two other prominent examples of fake virtue: so-called carbon offsets and green bonds. These are devices often utilized by private actors to assuage activists, gain favor with public policymakers., or simply to claim and promote themselves as “zero-footprint”. No doubt many well-intentioned people believe in the goodness of these instruments, blissfully ignorant of the underlying fakery. Of course, this is dwarfed by the broad flimsiness (and cost implications) of claims about climate catastrophe, which is what motivates carbon credits and most green bonds in the first place. The includes “commitments” made by various nations under the Paris Climate Accords, but that is a subject for another day.

Climate Credits

I mentioned Blake Lovewall’s interesting commentary on carbon credits recently. Purchasing these credits is a way of “greenwashing” activities that emit carbon dioxide. Also known as carbon offsets, this is a $2 billion market with growth fueled by a desire by businesses to appeal to environmental activists and “green” investors, and to boost their ESG scores. I’ll quote here from my own piece, which had as it’s main thrust the waste inherent in wind and solar projects (Lovewall quotes are in blue type):

“The resulting carbon emissions are, in reality, unlikely to be offset by any quantity of carbon credits these firms might purchase, which allow them to claim a ‘zero footprint’. Blake Lovewall describes the sham in play here:

‘The biggest and most common Carbon offset schemes are simply forests. Most of the offerings in Carbon marketplaces are forests, particularly in East Asian, African and South American nations. …

The only value being packaged and sold on these marketplaces is not cutting down the trees. Therefore, by not cutting down a forest, the company is maintaining a ‘Carbon sink’ …. One is paying the landowner for doing nothing. This logic has an acronym, and it is slapped all over these heralded offset projects: REDD. That is a UN scheme called “Reduce Emissions from Deforestation and Forest Degradation”. I would re-name it to, “Sell off indigenous forests to global investors”.’

Lovewall goes on to explain that these carbon offset investments do not ensure that forests remain pristine by any stretch of the imagination. For one thing, the requirements for managing these ‘preserves’ are often subject to manipulation by investors working with government; as such, the credits are often vehicles for graft. In Indonesia, for example, carbon credited forests have been converted to palm oil plantations without any loss of value to the credits! Lovewall also cites a story about carbon offset investments in Brazil, where the credits provided capital for a massive dam in the middle of the rainforest. This had severe environmental and social consequences for indigenous peoples. It’s also worth noting that planting trees, wherever that might occur under carbon credits, takes many years to become a real carbon sink.”

Lovewall makes a strong case that carbon credits are a huge fraud. This was reinforced by a recent investigation conducted by the Guardian, Die Zeit and SourceMaterial, a “non-profit investigative journalism organization”, according to the Guardian. The investigation was based on independent research studies as well as interviews with various parties. They found that at least 90% of “rainforest credits” do not represent carbon reductions. Two studies found no abatement whatsoever in deforestation under the credits. Furthermore, the deforestation threats (absent credits) had been overstated by some 400%. The investigation also noted serious human rights violations associated with the offset projects. Rainforest credits are only one kind of carbon offset, but similar problems plague other types of credits as well, such as those earned by shuttering fossil fuel plants in developing countries desperately short on power generation.

That so much of the carbon credit market is fraudulent should infuriate climate change radicals. The findings also are a disgrace to participants in these markets, revealing that much of the “net zero” propaganda trumpeted by corporate PR organizations is a charade. Regrettably, it is motivated by an unnecessary panic over carbon dioxide emissions and their presumed role in global warming. Spending on environmental initiatives should be a warning flag for investors. The resources firms dedicate to those credits deserve careful scrutiny. The fascination with ESG scores is another sign that corporate managers have lost sight of their fundamental mission: to maximize shareholder value by serving their customers well.

Green Bonds

Another suspicious form of “commitment” is embodied in the issuance of so-called “green bonds” to raise funds for environmental initiatives. This form of investing is so ostensibly “virtuous” that these bonds are demanded even with specific commitments that are quite “soft”. This just released study finds that green bonds offer little assurance of any positive environmental impact:

“… we find a concerning lack of enforceability of green promises. Moreover, these promises have been getting weaker over time. Green bonds often make vague commitments, exclude failures to live up to those commitments from default events, and disclaim an obligation to perform in other parts of the document. These shortcomings are known to market participants. Yet, demand for these instruments has been growing. We ask why green bond promises are so weak, while the same investors demand strong promises from the same issuers in other settings.”

Green bonds are “virtue ornaments” typically purchased by institutional investors with some sort of environmental or ESG objective. Apparently, earning returns is an afterthought. Unfortunately, these funds managers are usually investing on behalf of other people. While some of those clients might wholly support the environmental objectives, many others have no clue.

Fortunately, there are alternatives, and I’m tempted to say caveat emptor applies here. However, it really is a remarkable breach of fiduciary duty to manage funds based on objectives other than maximizing expected returns, or to in any way sacrifice returns in favor of “green” objectives. That is happening before our very eyes. Even clients who wish to invest funds for green objectives are being shaken down here. According to the research cited above, the green bond “commitments” are hardly worth the paper they’re written on.

Institutional investors go right along, scrambling to add green bonds to their portfolios. This helps drive down the effective cost of funds to the green bond issuers. Thus, highly speculative climate or environmental initiatives can be funded on the cheap. They do, however, produce lucrative opportunities for the climate crisis industry.

One More Time

People save to build wealth, typically for their retirement years. If that’s your objective, you probably shouldn’t invest in firms expending their resources on carbon credits. At best, the credits are a buy-off to activists. who are just as ignorant of the whole sham.

One might plausibly ask whether I should love carbon credits because they allow, at least, certain forms of beneficial economic activity to avoid challenge by crazies. Perhaps that’s true taking the world as it is, but my hope is that exposing various layers of climate hysteria and craziness is one way to change the world. The whole carbon credit enterprise enables extraction of still greater rents by climate change opportunists, to say nothing of human rights abuses taking place under the guise of these credits.

Like carbon offsets, green bonds promote fictitious virtue, They are another way in which green profiteers extract rents from well-meaning savers and investors, some of whom are unaware that ESG objectives are undermining their returns. Even if investors prefer to sacrifice returns in the pursuit of green goals, the initiatives thus funded often have no environmental merit, particularly when it comes to reducing carbon emissions. Despite the efforts of these bonds issuers to convince us of their green bona fides, their “commitments” to green results are usually flimsy.

HT: Green Fraud blog for the image above.

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The Wasteful Nature of Recycling Mandates

02 Thursday Mar 2023

Posted by in Markets, Recyclng

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Materials recycling has been practiced for thousands of years, but typically only when it has made economic sense to do so. Thomas J. Bruno mentions several cases in which recycled inputs have been heavily relied upon, not because of mandates, but because of demand for reuse or as inputs to various kinds of production. For example, the “rag trade” provided an important input to “new” clothing till about 1900, and the trade still exists today. Here’s Bruno on some other prominent examples:

“Steel is highly recycled already, with structural steel being 93% recycled. Currently, 97% of discarded automotive steel is used in new cars and other products. The market position for aluminum is also good; 75% of all aluminum ever produced is still in use today.”

Bruno’s key point is that recycling anything is a process that uses resources. It involves fixed costs of plant and variable costs for other inputs like water, energy, various chemicals, and labor. Thus, recycling makes economic sense and is efficient only when the private demand for recycled end-products justifies the costs of processing the used materials. Otherwise, on balance recycling is a waste of scarce resources.

Yet recycling enthusiasts and too many policymakers proceed under the misapprehension that recycling anything always makes sense! This is blind recycling! They approach the question with a certain religious fervor, rather than sharp pencils and the minds to wield them effectively. The resource costs are borne by local taxpayers, and they are not insignificant. These include the cost of additional facilities, running multiple trucks, and further sorting. If industrial buyers of these materials fail in their assessment of demand for goods with recycled content, then they bear the cost of any additional transport, processing, and disposal. Recycling shouldn’t salve the guilt that anyone associates with producing waste when, as is so often the case, nobody wants that shit! It ends up in the landfill and the effort to reuse ends up as waste as well. But still, the green public veneer of recycling programs remains in place.

Plastics recycling has proven to be perhaps the greatest disappointment to recycling enthusiasts. According to Bruno:

“Mechanical recycling involves grinding and remelting the plastic into a stream suitable for molding, but only a few types (out of thousands) of plastics can be so reprocessed. … Chemically recycling waste plastics has been an unmitigated disaster, resulting in product streams with far worse properties than virgin feedstocks.”

Those difficulties might be surmounted with improved technology or novel uses for plastic waste. Read this for an interesting discussion of using plastic in roads in place of bitumen for binding asphalt, or as modular panels in forming road base, but there is a long way to go before these are viable and economic alternatives.

Regulating products to require recycled content is just as harmful an intrusion as mandates on consumers and businesses to recycle used materials having little or no value. Predictably, it leads to degradations in quality and/or higher processing costs, with the ultimate burden shared by producers and users of end products. If it made economic sense, producers would already use more recycled inputs, but that is often out of the question. Mandates only bring more harm.

Despite constant handwringing in the media and among environmentalists, landfill capacity in the U.S. is adequate. Landfill space is priced based on scarcity, like any other resource. More landfill space will be brought on-line when market prices signal its profitability, despite the power of NIMBY-ism even in desolate lands. That usually can be overcome by compensatory arrangements. Landfills are far better managed and sealed today than in the past. Meanwhile, solid waste compression and techniques that speed the process of decomposition are stretching the capacity of existing landfills.

Once again, this is all a matter of economics. The value of avoiding the use of landfills via recycling is often just not there. Uneconomic recycling is simply a waste of scarce resources.

Broken Windows: Destroying Wealth To Create Green Jobs

25 Saturday Feb 2023

Posted by in Industrial Policy, Renewable Energy

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Investments in “green energy” create jobs, just like any other form of investment in physical assets. We’re told, however, that the transition to renewable energy sources will create a veritable jobs bonanza! Apparently, this is believed to be a great selling point for everyone to get behind. Sure, promoting job creation is always popular with politicians, and it is very popular with private actors seeking to win public funding of one kind or another.

The heavy emphasis on jobs creation brings to mind an old Milton Friedman story about a visit to China during which dignitaries brought him to a construction site, no doubt thinking he’d be impressed with their progressive investments in infrastructure. At the site, Friedman noticed workers digging a large trench or arroyo with shovels. When he asked why bulldozers or backhoes weren’t used, he was told that the jobs were too valuable. His response was something like, “Then have them use spoons!” The lesson, of course, is that merely creating jobs is not a prescription for building wealth and prosperity. But there is more at stake here than the low productivity of construction workers who lack the best tools.

There are some bad rationales for heavy investment in renewable energy sources, and I’ve addressed those at length previously. The appeal to job creation, however, is awful on simple economic grounds. It emphasizes a thing that is easily counted while ignoring massive costs that are generally untallied.

In the U.S. we have a huge base of productive capital that meets our energy needs, the bulk of which is built to utilize fossil fuels. That plant constitutes wealth to society, and not just to those with an ownership interest. Dispatchable power is available to the public at a rate below that at which they value the power. That ability to deliver consumer surplus on demand is a major aspect qualifying power capacity as societal wealth. The push for renewables, if wholly successful, would make the existing base of generating capacity redundant. There is no doubt that the ultimate goal of renewable energy advocates is to destroy existing capacity reliant on fossil fuels. They simply have not come to grips with the reality that it meets energy needs far more efficiently than intermittent renewables like wind and solar power. In spirit, the effort bears a strong similarity to destroying bulldozers to replace them with shovels, or spoons!

Recently, Michael Munger discussed the mistaken notion that renewable investments are justified based on job creation. He noted that with a coincident dismantling of the existing base of power generation, it amounts to exactly what Frederic Bastiat called the broken window fallacy, which insists that breaking windows is a great way to keep glaziers fully employed. There are many examples and variations on this idea, including so-called “planned obsolescence”.

Bastiat poked fun at an elite French government official who had marveled at the economic gains reaped in England with the rebuilding of London following the “Great Fire” of 1666. Bastiat engaged in some satire by suggesting that France could greatly benefit from burning Paris to the ground. But his point was serious: we often hear that reconstruction provides a silver lining for workers following hurricanes or other disasters. Fair enough: rebuild we must. The Keynesians among us would say it works out well for workers who are otherwise unemployed. Disasters destroy wealth, however, and often lives, not to mention opportunities for incremental wealth creation that are lost forever. The reconstruction jobs are not “good news”!

Unfortunately, people get carried away with broken windows arguments, using them to justify their own pet projects. The addition of new competing products and technologies is unquestionably healthy, but not when one side enlists the state as a partner in destroying viable incumbents and existing public or private wealth. For that matter, the state and its allies seem intent on destroying invested physical capital even before it’s services can come on line… if it’s viewed as the “wrong” kind of capital.

The costs of a transition to renewables is massive. The “big ask” for green energy involves not just taxpayer support for the build and usage, with all the inefficiencies endemic to taxation and market interventions. So-called green energy also entails huge environmental costs, and it calls for the wholesale destruction of an embedded industry. That means decommissioning invested assets having many years of useful life. And that goes for physical plant all the way from the wellhead to final use, including the destruction of stoves, cars, and other machines too numerous to mention. Those machines, by the way, still account for roughly 80% of our power use.

I leave you with part of Munger’s closing:

“Once you are duped into believing destruction is productive, almost everything that a rational public policy would label as a cost becomes, by some judo move of seraphic intuition, a benefit. … The problem is that jobs are not wealth. Wealth is access to the goods, products, and services that make our lives better. It is true that ‘studies show’ that wiping out all our productive wealth based on fossil fuels … would create jobs. Those ‘studies’ are among the best arguments against doing anything of the sort.”

The Oceans and Global Temperatures

18 Saturday Feb 2023

Posted by in Climate science, Ocean Temperatures

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Despite evidence to the contrary, there’s one thing climate change alarmists seem to consider a clincher. Well… their stylized account has the seas absorbing heat from our warming atmosphere as human activity forces carbon emissions into the air. That notion seems to be reinforced, at least in the popular imagination, by the fact that the sea is a “carbon sink”, but that is a matter of carbon sequestration and not a mechanism of ocean warming. While ocean temperatures have warmed slightly over the past few decades, it is almost entirely coincidental, rather than a result of slightly warmer air temperatures.

Heat and the Hydrosphere

There is no doubt that the oceans store heat very efficiently, but that heat comes primarily from solar radiation and geothermal sources underseas. In fact, water stores heat far more efficiently than the atmosphere. According to Paul Homewood, a given cross section of sea water to a depth of just 2.6 meters is capable of holding as much heat as a column of air of the same width extending from the ocean surface to the outermost layers of the atmosphere! (See here for an earlier reference.) However, that does not imply that the oceans are very effective at drawing heat from warmer air or particularly carbon back-radiation. Both the air and water draw heat from solar radiation, and how much in any given location depends on the Sun’s angle in the sky.

A solid guide is that air temperatures are heavily influenced by water temperatures, but not as much vice versa. When temperatures in the upper layers of the ocean rise from natural forces, including reduced upward circulation from greater depths, evaporation causes this heat to radiate into the atmosphere along with evaporation of water vapor. Homewood notes that El Niño patterns make the influence of the Pacific Ocean waters on climate pretty obvious. The impact of the Gulf Stream on European climates is also instructive.

The Indian Ocean accounted for about half of the sea warming that occurred within the globe’s top 700 meters of waters over the years 2000 – 2019, though the Indian Ocean represents only about 20% of the world’s sea surface. The authors of that research found that the warming was not caused by trends in surface forcing of any kind, including warmer air temperatures. They said the ocean warming:

“… has been driven by significant changes in oceanic fluxes and not by surface forcing. … the ocean has been driving a rapid increase in Indian Ocean heat content.”

This was consistent with an earlier study of global sea temperatures covering the period 1984 – 2006 that found:

“… diminished ocean cooling due to vertical ocean processes … A conclusion is that natural variability, rather than long-term climate change, dominates the SST [sea surface temperature] and heat flux changes over this 23-yr period.”

It’s a Water World

Heat released by the oceans tends to dominate variations in global temperatures. A 2018 study found that evaporative heat transfer to the atmosphere from the oceans was closely associated with variations in air temperatures:

“When the atmosphere gets extra warm it receives more heat from the ocean, when it is extra cool it receives less heat from the ocean, making it clear that the ocean is the driving force behind these variations. …

The changes in solar radiation received at the Earth’s surface are clearly a trigger for these variations in global mean temperature, but the mechanisms by which these changes occur are a bit more complex and depend on the time-scale of the changes.”

Measurement

Willis Eschenbach reviewed a prominent study of ocean temperature changes and noted that the authors’ estimate of total warming of the oceans was quite small:

“… over the last sixty years, the ocean has warmed a little over a tenth of one measly degree … now you can understand why they put it in zettajoules—it’s far more alarming that way.”

Eschenbach goes on to discuss the massive uncertainty underlying measurements of ocean temperatures, particularly below a depth of 2,000 meters, but even well above that depth given the extremely wide spacing of so-called ARGO floats. However, the relative stability of the point estimates over 60 years is noteworthy, not to mention the “cold water” doused on alarmist claims about ocean overheating.

Sun Engine

Ocean warmth begins with energy from the Sun and from the deep interior of the Earth. The force of solar energy is greatest in the tropics, where sunlight is perpendicular to the surface of the Earth and is least dispersed by the thickness of the atmosphere. The sun’s radiative force is smallest in the polar regions, where the angle of its light is acute. As Anthony Watts says:

“All elements of Earth’s weather, storm fronts, hurricanes, the jet stream, and even ocean currents, are driven to redistribute energy from the tropics to the poles.”

Both land and sea absorb heat from the Sun and from volcanic activity, though the heat is moderated by the sea. That moderation is especially impactful in the Southern Hemisphere, which has far less land area, greater exposure of sea surface to the Sun, and about half of the average ocean temperature variation experienced in the North.

Ultimately, the importance of natural sunlight on air and sea temperatures can’t be overemphasized. Henrik Svensmark and some co-authors have estimated that a cosmic ray flux of 15% from a coronal mass ejection leads to a reduction in cloud cover within roughly 9 – 12 days. The ultimate increase in the Earth’s “energy budget” over about a week’s time is about the same size as a doubling of CO2, which certainly puts things in perspective. However, the oceans, and hence cloud cover, moderate the impact of the Sun, with or without the presence of additional greenhouse gases forced by human activity.

Vapors

The importance of evaporation from bodies of water also deserves great emphasis. No one doubts the massive influence of greenhouse gases (GHGs) on the climate. Water vapor accounts for about 90% of GHGs, and it originates predominantly from oceans. Meanwhile, carbon dioxide accounts for less than 4% of GHGs, and it appears that only a small part is from anthropogenic sources (and see here and below).

The impact of changing levels of water vapor dominates GHG levels. They are also a critical input to cloud formation, a phenomenon that climate models are generally ill-equipped to explain. Clouds reflect solar radiation back into space, reducing the Sun’s net contribution to the Earth’s energy budget. On the other hand, clouds can trap heat in the lower layers of the atmosphere. The globe has an average of 60 – 70% cloud cover, and most of that is over the oceans. Increased cloud cover generally leads to declines in temperature.

A 2015 study identified a process through which the sea surface has an unexpectedly large impact on climate. This was from the formation of isoprene, a film on the ocean surface, which leads to more cloud formation. In addition to biological sources, isoprene was found to originate, surprisingly, from the effect of sunlight.

The Big Sink

Man-made emissions of CO2 constitute only about 5% of naturally discharged CO2, which is roughly matched by natural removal. CO2 is absorbed, dissolved, or transformed in a variety of ways on both land and sea, but the oceans collectively represent the world’s largest carbon sink. They hold about 50 times more CO2 than the atmosphere. Carbon is stored in sea water at great depths, and it enhances undersea vegetation just as it does on land. It is sequestered in a variety of sea organisms as calcium carbonate and is locked in sediments as well. A longstanding question is whether there is some limit on the capacity of the oceans and other sinks to store carbon, but apparently the uptake over time has remained roughly constant at just under 50% of all natural and man-made CO2 emissions (also see here). So far, we don’t appear to be approaching any sort of “saturation point”.

One claim about the rising carbon stored undersea is that it will drive down the oceans’ pH levels. In other words, it will lead to “ocean acidification” and harm a variety of marine life. Rud István has ridiculed that term (quite rightly) because slightly less alkaline sea water does not make it “acidic”. More substantively, he notes the huge natural variations in ocean pH levels across different marine environments, the exaggeration inherent in some estimates of pH changes that do not account for physical buffering, and the fact that the impact on many organisms is inconsistent with the presumed harms of reduced pH. In fact, errors in some of the research pointing to those harms has been acknowledged. In addition, the much feared “coral crisis” seems to have been a myth.

Conclusion

The upper layers of the oceans have warmed somewhat over the past 60 years, but the warming had natural causes. Heat transfer from the atmosphere to the hydrosphere is relatively minor compared to the absorption of heat by oceans via solar forcings. It is also minor compared to the transfer of temperature from oceans to surface air. As Jim Steele has explained it:

“Greenhouse longwave energy penetrates only a few microns into the ocean surface and even less into most soils, but the sun’s shortwave energy passes much more deeply into the ocean.”

It’s reasonable to concede that warmer air temperatures via man-made GHGs might be a minor reinforcement to natural sources of ocean warming, or it might slightly moderate ocean cooling. However, measuring that contribution would be difficult against the massive background of natural forcings on ocean temperatures.

Oceans are dominant in terms of heat storage from natural forcings and in terms of carbon sequestration. In fact, the oceans have thoroughly outperformed alarmist projections as a carbon sink. Dire prognostications of the effect of carbon dioxide on marine life have been drastically over-emphasized as well.

Economic Growth and the Real Accretion of Resources**

18 Saturday Feb 2023

Posted by in Growth, Scarcity

≈ Leave a comment

A copy of a post from last week appears below. This was necessary because two of the sites to which I cross-post required a revised link. I don’t know why, but they did.

A few weeks ago I argued that raising living standards and eliminating poverty are human imperatives, and therefore growth is an imperative. Growth is a natural process for a free and creative people, and the alternative to growth is not zero growth. The coercion necessary to “achieve” a static economic environment would invariably lead to decline. It would be impossible to maintain average living standards while attempting a coerced leveling of those standards.

People have a notion, however, that it’s impossible to sustain growth due to the planet’s finite base of resources. If that is the case, we have available a mechanism to warn us as the time of hard limits approaches, which I’ll discuss below. So far, that signal hasn’t been activated. Moreover, the claim that growth is unsustainable can be challenged on several levels, which I’ll also address.

Effective Resources

First, a word about what I mean by the “accretion of resources”. The phrase refers to growth in the total effectiveness or productive potential of known resources given the rate of discovery and improvements in extraction and production technologies. Of course, if these discoveries and efficiencies are exceeded by current use, then there is no accretion, but depletion.

So let’s say we have a particular known stock of a resource we can readily draw on, so many pounds of resource X. In addition, we might know of the existence of another equally large quantity that can’t be readily drawn upon. Those are additional known (or proved) but undeveloped reserves. They might be difficult to exploit except at high cost, but we know they exist. We’d want to get on with the business of developing those reserves for extraction if they were needed any time soon, and we might want to begin prospecting for new reserves as well. As we’ve learned over the years. discoveries of previously unknown reserves of resources can be quite large. Prospectors are willing to bet that more resources exist, and they’ll undertake the risks of exploration if the potential rewards are adequate.

All of those concepts are straightforward. However, suppose we discover ways in which resource X can be used more efficiently, making things stronger or run longer or harder with less X. If we double the efficiency with which X is used, we have doubled the effective known reserves of X and, at least theoretically, unknown reserves as well. We’d have witnessed a doubling in the years that resource X can last. This is a form of resource accretion. Improvements in extraction or purification methods are also examples. Technological leaps like this, not to mention untold small increments in the efficiency of practices, have made economic growth possible in the past and will continue to do so in the future. Our effective resources seem to keep expanding. Accretion has occurred even with respect to resources like land as the world urbanized and the efficiency of farming advanced many-fold.

Growth In Real Time

Perceptions of growth are sometimes shaped by graphic depictions that some parties find alarming, so it might be helpful to take a quick look at some growth curves. First is an oldie-but-goodie chart showing GDP per capita taken from “Statistics on World Population, GDP, and Per Capital GDP, 1- 2008 AD” by Angus Maddison of the IMF:

This shows the explosion in the value of production that occurred during and after the industrial revolution, in contrast to very slow progress before that. The point I want to make here is how dramatic growth can look on a broad but visually compressed time scale. OMG! Look what we’ve done! How can we go on like this??? Often, the crux of the limits to growth argument is that such growth seems impossible assuming that we face fixed resource limits.

In fact, we experience growth in a very “local” way with respect to the passage of time. The two charts below illustrate a difference in perspectives using a hypothetically constant annual growth rate of 2.5%. The first chart shows 200 periods of growth, while the second expands only the last 20 periods of that time frame.

There is a great difference in the way the two vertical axes are scaled, which is important, but the second chart conveys that a respectable growth rate doesn’t really feel extreme when you’re in the middle of it, or, that is, in real time. It can look very extreme at the end of a long interval, depending on how severely the time axis is compressed. That’s not to discount the reality of much larger levels of activity (the vertical axes) and demands for resources as time goes on. However, those levels, and growth from those levels, is not at all alarming if our ability to achieve them has kept pace. So how can we know when we’re approaching a point at which resource limits will make it impossible to achieve those levels of activity? Market prices are the key signals, and they are the key to resource accretion.

Market Signals Light the Way

The market price is the best gauge of the scarcity of a resource. When resources become especially scarce, higher prices tell us so. That leads to conservation, which obviously extends the availability of those resources. Prices also function as an incentive for sellers to exploit new or harder-to-reach stores of a resource. That kind of resource accretion is one of the lessens the oil market has taught us again and again: oil exploration and known reserves tend to expand as the price rises, such that the prospect of oil depletion moves out to ever more distant horizons. There are certain minerals, elements, or isotopes (tritium?) that seem to be quite rare on Earth, but our ability to find them or extract them often improves with time. Space mining, which would vastly reduce the scarcity of resources like platinum, iron, nickel, cobalt, and many others, may become a reality in the near future. Interestingly, much of that activity could be in private hands. Space mining would lead to resource accretion on a whole new scale, and if we aspire to be a “grabby” civilization, it is a logical next step. So let’s go grab an asteroid!

When a price spikes due to greater scarcity, opportunities for substitution, exploration, and new efficiencies arise because the higher price justifies the cost of exploiting them. In addition to more difficult or costly extraction, a higher price encourages the use of close and even novel substitutes that may involve new technologies. In turn, that substitution reduces the relative scarcity of the original resource in question. And finally, back to conservation, users respond to price increases by finding their own innovative efficiencies in how a resource is utilized. The price response to scarcity is a channel through which much technological progress is encouraged.

While our earth-bound resources or even our star-system’s resources are finite, their effective quantity is highly flexible. Their potential at any time depends on our stage of discovery and the state of technology. Human ingenuity is a marvel at stretching the effective quantity of resources, and the greatest gains always occur when market forces are unleashed.

Thus, we see that prices, markets, and capitalism itself enable rational and sustainable responses to scarcity. Yet too often we hear claims that capitalism must be destroyed in order to save humanity. In fact, capitalism itself is the one system of social organization capable of achieving resource accretion, sustained growth, and lifting mankind from poverty. In fact, growth might well be an insurmountable problem without the dynamic energies of capitalism. Government planners are incapable of gathering and processing the vast information that markets process each and every day. Planners must substitute their own weak judgements, which prove flawed again and again.

Scarcity of the Commons

The environmental Left is quick to marshal a different kind of limits-to-growth argument. This one has to do with the scarcity of non-priced common resources and their overuse in production. For example, if a certain activity degrades the environment and those costs are not internalized by producers, they will tend to produce “too much”, leading to some degree of deterioration in human living conditions or the natural quality of the environment. In that case, we might not notice the limits to growth bearing down on us before corrective action is taken. Or so goes the theory that accumulating externalities lead to catastrophe. This is another front along which the limits to growth are asserted, particularly by climate alarmists and the environmental Left. Most prominently today, they contend that increases in atmospheric carbon concentration will lead to an unlivable warming of Earth’s climate.

Sense and Nonsense

The most glaring shortcoming of climate change advocacy is that the trends it decries are exaggerated. I’ve discussed the absurdly brief climate record cited by alarmists in several past posts (many of which appear here). We can start with the contention that carbon emissions are “poison”. In fact, carbon is life nourishing, as we’ve witnessed with the “greening” of the planet at current carbon concentrations of 4 parts per 10,000 of atmospheric gas. Furthermore, a longer historical temperature record using paleoclimate data shows that we are well within the range of past variation, even with the huge distortions to the record caused by urban heat islands and questionable downward adjustments to records of five to 15 decades ago.

The alarmist perspective is also inflamed by simplistic models of carbon forcing that ignore the impact of solar radiation, volcanic activity, and the behavior of aerosols in the atmosphere. Those models have consistently over-predicted temperature trends for decades. Equally troubling is that these models promote the fiction that mankind can control global temperatures by a little fiddling with a “carbon dial”, as if such fiddling could be accomplished without a massive centralization of political and economic power. The panicked narratives related to sea level increases and alleged increases in violent weather are equally flawed.

Growth Can Cure It

Another compelling response to climate arguments against growth is that technological advances have already enabled us to produce power without carbon emissions. Unfortunately, as a matter of public policy (regulation and bad choices by government industrial planners), we have increasingly failed to avail ourselves of these opportunities, instead choosing extremely wasteful methods of generating power. These are the windmill and solar “renewables”, which are resource-intensive, intermittent, low utilization, non-dispatchable, lacking storage for excess generation, intensive in land use (reversing prior accretions), and environmentally disastrous in fabrication, operation, and at disposal. Nuclear power is a far superior technology, especially with the advent of small, modular reactors and potential breakthroughs in fusion energy. These might help to rescue us from the spectacle of bone-headed industrial planning and greedy, renewable-energy rent seekers, but regulators have done seemingly all they can to prevent nuclear facilities from being built.

Just as human ingenuity is capable of expanding the exploitable stock of tradable, priced resources, it is also capable of inventing non-carbon power technologies that are more efficient and less environmentally destructive than ground-based solar and wind. Collection of non-intermittent solar energy in space arrays with wireless transmission to Earth is another promising alternative, as is geothermal energy. And carbon capture technologies show promise for neutralizing emissions or perhaps even reversing carbon concentrations one day, if that is deemed necessary. Much of this development work is in private hands, but barring drastic reductions in scale, the bulk of these efforts are (or will be) dependent on government funding.

It’s worth acknowledging here that resource accretion has a safety component in an expected value sense. Sometimes those risks can be internalized if risk reduction is of value to buyers. But the costs of “reasonable” risk mitigation cannot always be internalized without government action. For example, deflecting asteroid threats to the planet might be done best by private actors, but paying for that activity is a worthy application of public finance. The ability to deflect incoming asteroids is a noteworthy example of resource accretion via risk reduction.

Somehow, governments must be convinced to begin dedicating a larger share of the vast sums they spend on misguided climate interventions (including renewable technologies) to more sensible innovations. We might then benefit from accelerated breakthroughs that would settle not only our energy future, but a great deal of political strife as well. Like the market response to changes in scarcity, creative entrepreneurs will always step forward to compete for government funding. But if you pay them for crap, you’ll get a lot of crap!

Growth Once More

One day we might learn we are reaching the top of an s-curve. We aren’t there yet, if our ongoing accretion of resources is any guide, and there are new frontiers of space and technology to explore. The primary obstacles we face are not natural, but political and regulatory.

One area neglected above is the accretion of human capital. Certainly education is another way to expand our boundaries. However, population growth (and therefore labor force growth) tends to slow as living standards rise, and many argue that demographics have already become a drag on growth. A shrinking and aging population places a tremendous burden on young workers, making other sources of growth and productivity all the more critical. But new physical capital, resource development (including education), and new technologies can all continue to drive productivity and growth.

Growth depends on resource accretion, and there are many ways in which our effective stock of resources can be expanded. That includes enhancements in quantities, efficiencies, and safety. Private investment should be the primary avenue through which these are accomplished, which in turn requires flows of saving. Those flows are much more difficult to conjure without growth, so we have a chicken and egg cross-dependency. But chickens will lay eggs, just as saving and all kinds of investment will take place given the right incentives. Those would promote expansion in our effective stock of resources, improved adaptation to change, and enhanced well being. In the end, the rationale is simple: ending poverty requires growth.

Addendum: I just noticed that Don Boudreaux posted (and beautifully elaborated upon) this great Julian Simon quote:

“The quantity of a natural resource that might be available to us – and even more important the quantity of the services that can eventually be rendered to us by that natural resource – can never be known even in principle, just as the number of points in a one-inch line can never be counted even in principle.”

Economic Growth and the Real Accretion of Resources

10 Friday Feb 2023

Posted by in Growth, Scarcity

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A few weeks ago I argued that raising living standards and eliminating poverty are human imperatives, and therefore growth is an imperative. Growth is a natural process for a free and creative people, and the alternative to growth is not zero growth. The coercion necessary to “achieve” a static economic environment would invariably lead to decline. It would be impossible to maintain average living standards while attempting a coerced leveling of those standards.

People have a notion, however, that it’s impossible to sustain growth due to the planet’s finite base of resources. If that is the case, we have available a mechanism to warn us as the time of hard limits approaches, which I’ll discuss below. So far, that signal hasn’t been activated. Moreover, the claim that growth is unsustainable can be challenged on several levels, which I’ll also address.

Effective Resources

First, a word about what I mean by the “accretion of resources”. The phrase refers to growth in the total effectiveness or productive potential of known resources given the rate of discovery and improvements in extraction and production technologies. Of course, if these discoveries and efficiencies are exceeded by current use, then there is no accretion, but depletion.

So let’s say we have a particular known stock of a resource we can readily draw on, so many pounds of resource X. In addition, we might know of the existence of another equally large quantity that can’t be readily drawn upon. Those are additional known (or proved) but undeveloped reserves. They might be difficult to exploit except at high cost, but we know they exist. We’d want to get on with the business of developing those reserves for extraction if they were needed any time soon, and we might want to begin prospecting for new reserves as well. As we’ve learned over the years. discoveries of previously unknown reserves of resources can be quite large. Prospectors are willing to bet that more resources exist, and they’ll undertake the risks of exploration if the potential rewards are adequate.

All of those concepts are straightforward. However, suppose we discover ways in which resource X can be used more efficiently, making things stronger or run longer or harder with less X. If we double the efficiency with which X is used, we have doubled the effective known reserves of X and, at least theoretically, unknown reserves as well. We’d have witnessed a doubling in the years that resource X can last. This is a form of resource accretion. Improvements in extraction or purification methods are also examples. Technological leaps like this, not to mention untold small increments in the efficiency of practices, have made economic growth possible in the past and will continue to do so in the future. Our effective resources seem to keep expanding. Accretion has occurred even with respect to resources like land as the world urbanized and the efficiency of farming advanced many-fold.

Growth In Real Time

Perceptions of growth are sometimes shaped by graphic depictions that some parties find alarming, so it might be helpful to take a quick look at some growth curves. First is an oldie-but-goodie chart showing GDP per capita taken from “Statistics on World Population, GDP, and Per Capital GDP, 1- 2008 AD” by Angus Maddison of the IMF:

This shows the explosion in the value of production that occurred during and after the industrial revolution, in contrast to very slow progress before that. The point I want to make here is how dramatic growth can look on a broad but visually compressed time scale. OMG! Look what we’ve done! How can we go on like this??? Often, the crux of the limits to growth argument is that such growth seems impossible assuming that we face fixed resource limits.

In fact, we experience growth in a very “local” way with respect to the passage of time. The two charts below illustrate a difference in perspectives using a hypothetically constant annual growth rate of 2.5%. The first chart shows 200 periods of growth, while the second expands only the last 20 periods of that time frame.

There is a great difference in the way the two vertical axes are scaled, which is important, but the second chart conveys that a respectable growth rate doesn’t really feel extreme when you’re in the middle of it, or, that is, in real time. It can look very extreme at the end of a long interval, depending on how severely the time axis is compressed. That’s not to discount the reality of much larger levels of activity (the vertical axes) and demands for resources as time goes on. However, those levels, and growth from those levels, is not at all alarming if our ability to achieve them has kept pace. So how can we know when we’re approaching a point at which resource limits will make it impossible to achieve those levels of activity? Market prices are the key signals, and they are the key to resource accretion.

Market Signals Light the Way

The market price is the best gauge of the scarcity of a resource. When resources become especially scarce, higher prices tell us so. That leads to conservation, which obviously extends the availability of those resources. Prices also function as an incentive for sellers to exploit new or harder-to-reach stores of a resource. That kind of resource accretion is one of the lessens the oil market has taught us again and again: oil exploration and known reserves tend to expand as the price rises, such that the prospect of oil depletion moves out to ever more distant horizons. There are certain minerals, elements, or isotopes (tritium?) that seem to be quite rare on Earth, but our ability to find them or extract them often improves with time. Space mining, which would vastly reduce the scarcity of resources like platinum, iron, nickel, cobalt, and many others, may become a reality in the near future. Interestingly, much of that activity could be in private hands. Space mining would lead to resource accretion on a whole new scale, and if we aspire to be a “grabby” civilization, it is a logical next step. So let’s go grab an asteroid!

When a price spikes due to greater scarcity, opportunities for substitution, exploration, and new efficiencies arise because the higher price justifies the cost of exploiting them. In addition to more difficult or costly extraction, a higher price encourages the use of close and even novel substitutes that may involve new technologies. In turn, that substitution reduces the relative scarcity of the original resource in question. And finally, back to conservation, users respond to price increases by finding their own innovative efficiencies in how a resource is utilized. The price response to scarcity is a channel through which much technological progress is encouraged.

While our earth-bound resources or even our star-system’s resources are finite, their effective quantity is highly flexible. Their potential at any time depends on our stage of discovery and the state of technology. Human ingenuity is a marvel at stretching the effective quantity of resources, and the greatest gains always occur when market forces are unleashed.

Thus, we see that prices, markets, and capitalism itself enable rational and sustainable responses to scarcity. Yet too often we hear claims that capitalism must be destroyed in order to save humanity. In fact, capitalism itself is the one system of social organization capable of achieving resource accretion, sustained growth, and lifting mankind from poverty. In fact, growth might well be an insurmountable problem without the dynamic energies of capitalism. Government planners are incapable of gathering and processing the vast information that markets process each and every day. Planners must substitute their own weak judgements, which prove flawed again and again.

Scarcity of the Commons

The environmental Left is quick to marshal a different kind of limits-to-growth argument. This one has to do with the scarcity of non-priced common resources and their overuse in production. For example, if a certain activity degrades the environment and those costs are not internalized by producers, they will tend to produce “too much”, leading to some degree of deterioration in human living conditions or the natural quality of the environment. In that case, we might not notice the limits to growth bearing down on us before corrective action is taken. Or so goes the theory that accumulating externalities lead to catastrophe. This is another front along which the limits to growth are asserted, particularly by climate alarmists and the environmental Left. Most prominently today, they contend that increases in atmospheric carbon concentration will lead to an unlivable warming of Earth’s climate.

Sense and Nonsense

The most glaring shortcoming of climate change advocacy is that the trends it decries are exaggerated. I’ve discussed the absurdly brief climate record cited by alarmists in several past posts (many of which appear here). We can start with the contention that carbon emissions are “poison”. In fact, carbon is life nourishing, as we’ve witnessed with the “greening” of the planet at current carbon concentrations of 4 parts per 10,000 of atmospheric gas. Furthermore, a longer historical temperature record using paleoclimate data shows that we are well within the range of past variation, even with the huge distortions to the record caused by urban heat islands and questionable downward adjustments to records of five to 15 decades ago.

The alarmist perspective is also inflamed by simplistic models of carbon forcing that ignore the impact of solar radiation, volcanic activity, and the behavior of aerosols in the atmosphere. Those models have consistently over-predicted temperature trends for decades. Equally troubling is that these models promote the fiction that mankind can control global temperatures by a little fiddling with a “carbon dial”, as if such fiddling could be accomplished without a massive centralization of political and economic power. The panicked narratives related to sea level increases and alleged increases in violent weather are equally flawed.

Growth Can Cure It

Another compelling response to climate arguments against growth is that technological advances have already enabled us to produce power without carbon emissions. Unfortunately, as a matter of public policy (regulation and bad choices by government industrial planners), we have increasingly failed to avail ourselves of these opportunities, instead choosing extremely wasteful methods of generating power. These are the windmill and solar “renewables”, which are resource-intensive, intermittent, low utilization, non-dispatchable, lacking storage for excess generation, intensive in land use (reversing prior accretions), and environmentally disastrous in fabrication, operation, and at disposal. Nuclear power is a far superior technology, especially with the advent of small, modular reactors and potential breakthroughs in fusion energy. These might help to rescue us from the spectacle of bone-headed industrial planning and greedy, renewable-energy rent seekers, but regulators have done seemingly all they can to prevent nuclear facilities from being built.

Just as human ingenuity is capable of expanding the exploitable stock of tradable, priced resources, it is also capable of inventing non-carbon power technologies that are more efficient and less environmentally destructive than ground-based solar and wind. Collection of non-intermittent solar energy in space arrays with wireless transmission to Earth is another promising alternative, as is geothermal energy. And carbon capture technologies show promise for neutralizing emissions or perhaps even reversing carbon concentrations one day, if that is deemed necessary. Much of this development work is in private hands, but barring drastic reductions in scale, the bulk of these efforts are (or will be) dependent on government funding.

It’s worth acknowledging here that resource accretion has a safety component in an expected value sense. Sometimes those risks can be internalized if risk reduction is of value to buyers. But the costs of “reasonable” risk mitigation cannot always be internalized without government action. For example, deflecting asteroid threats to the planet might be done best by private actors, but paying for that activity is a worthy application of public finance. The ability to deflect incoming asteroids is a noteworthy example of resource accretion via risk reduction.

Somehow, governments must be convinced to begin dedicating a larger share of the vast sums they spend on misguided climate interventions (including renewable technologies) to more sensible innovations. We might then benefit from accelerated breakthroughs that would settle not only our energy future, but a great deal of political strife as well. Like the market response to changes in scarcity, creative entrepreneurs will always step forward to compete for government funding. But if you pay them for crap, you’ll get a lot of crap!

Growth Once More

One day we might learn we are reaching the top of an s-curve. We aren’t there yet, if our ongoing accretion of resources is any guide, and there are new frontiers of space and technology to explore. The primary obstacles we face are not natural, but political and regulatory.

One area neglected above is the accretion of human capital. Certainly education is another way to expand our boundaries. However, population growth (and therefore labor force growth) tends to slow as living standards rise, and many argue that demographics have already become a drag on growth. A shrinking and aging population places a tremendous burden on young workers, making other sources of growth and productivity all the more critical. But new physical capital, resource development (including education), and new technologies can all continue to drive productivity and growth.

Growth depends on resource accretion, and there are many ways in which our effective stock of resources can be expanded. That includes enhancements in quantities, efficiencies, and safety. Private investment should be the primary avenue through which these are accomplished, which in turn requires flows of saving. Those flows are much more difficult to conjure without growth, so we have a chicken and egg cross-dependency. But chickens will lay eggs, just as saving and all kinds of investment will take place given the right incentives. Those would promote expansion in our effective stock of resources, improved adaptation to change, and enhanced well being. In the end, the rationale is simple: ending poverty requires growth.

Addendum: I just noticed that Don Boudreaux posted (and beautifully elaborated upon) this great Julian Simon quote:

“The quantity of a natural resource that might be available to us – and even more important the quantity of the services that can eventually be rendered to us by that natural resource – can never be known even in principle, just as the number of points in a one-inch line can never be counted even in principle.”

Oh To Squeeze Fiscal Discipline From a Debt Limit Turnip

01 Wednesday Feb 2023

Posted by in Fiscal policy, Monetary Policy

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It’s as if people view the debt limit controversy as a political nuisance rather than the stopgap enforcement mechanism for fiscal sanity that it’s intended to be. That’s a lesson in how far we’ve gone toward an unhealthy acceptance of permanent federal deficits. Oh, most people seem to realize the the government’s spending is prodigious and beyond our capacity to collect taxes, but many don’t grasp the recklessness of the ongoing blowout. Federal deficits are expected to average $1.6 trillion per year over the next decade, versus less than $0.9 trillion and $1.25 trillion over the two previous decades, respectively. That $1.25 trillion includes the massive (and excessive) transfers that took place during the pandemic, which is why we’ve bumped up against the debt limit earlier than had been expected. The trend isn’t abating, despite the fact that the pandemic is behind us. And keep in mind that the Congressional Budget Office has been too optimistic for the past 20 years or so. Take a look at federal debt relative to GDP:

Unpleasant Arithmetic

With federal debt growing faster than GDP, the burden of servicing the debt mounts. This creates a strain in the coordination of fiscal and monetary policy, as described by David Andolfatto, who last year reviewed the implications of “Some Unpleasant Monetarist Arithmetic” for current policy. His title was taken from a seminal paper written by Thomas Sargent and Neil Wallace in 1981. Andolfatto says that:

“… attempting to monetize a smaller fraction of outstanding Treasury securities has the effect of increasing the rate of inflation. A tighter monetary policy ends up increasing the interest expense of debt issuance. And if the fiscal authority is unwilling to curtail the rate of debt issuance, the added interest expense must be monetized—at least if outright default is to be avoided.

Andolfatto wrote that last spring, before the Federal Reserve began its ongoing campaign to tighten monetary policy by raising short-term interest rates. But he went on to say:

“Deficit and debt levels are elevated relative to their historical norms, and the current administration seems poised to embark on an ambitious public spending program. … In the event that inflation rises and then remains intolerably above target, the Federal Reserve is expected to raise its policy rate. … if the fiscal authority is determined to pursue its deficit policy into the indefinite future, raising the policy rate may only keep a lid on inflation temporarily and possibly only at the expense of a recession. In the longer run, an aggressive interest rate policy may contribute to inflationary pressure—at least until the fiscal regime changes.”

So it is with a spendthrift government: escalating debt and interest expense must ultimately be dealt with via higher taxes or inflation, despite the best intentions of a monetary authority.

Fiscal Wrasslin’

Some people think the debt limit debate is all a big fake. Maybe … there are spendthrifts on both sides of the aisle. Still, the current debt limit impasse could serve a useful purpose if fiscal conservatives succeed in efforts to restrain spending. There is, however, an exaggerated uproar over the possibility of default, meaning a failure to make scheduled payments on Treasury securities. The capital markets aren’t especially worried because an outright default is very unlikely. Establishment Republicans may well resort to their usual cowardice and accept compromise without holding out for better controls on spending. Already, in a politically defensive gesture, House Speaker Kevin McCarthy has said the GOP wishes to strengthen certain entitlement programs. Let’s hope he really means restoring solvency to the Social Security and Medicare Trust Funds via fundamental reforms. And if the GOP rules out cuts to any program, let’s hope they don’t rule out cuts in the growth of these programs, or privatization. For their part, of course, Democrats would like to eliminate the debt ceiling entirely.

One of the demands made by Republicans is a transformation of the federal tax system. They would like to eliminate the income tax and substitute a tax on consumption. Economists have long favored the latter because it would eliminate incentives that penalize saving, which undermine economic growth. Unfortunately, this is almost dead in the water as a political matter, but the GOP further sabotaged their own proposal in their zeal to abolish the IRS. Their consumption tax would be implemented as a national sales tax applied at the point of sale, complete with a new Treasury agency to administer the tax. They’d have done better to propose a value added tax (VAT) or a tax on a simple base of income less saving (and other allowances).

Gimmicks and Measures

We’ve seen proposals for various accounting tricks to allow the government to avoid a technical default and buy time for an agreement to be reached on the debt limit. Treasury Secretary Janet Yellen already has implemented “extraordinary measures” to stay under the debt limit until June, she estimates. The Treasury is drawing down cash, skipping additional investments in government retirement accounts (which can be made up later without any postponement of benefits), plus a few other creative accounting maneuvers.

Payment prioritization, whereby the Treasury makes payments on debt and critical programs such as Social Security and Medicare, but defers a variety of other payments, has also been considered. Those deferrals could include amounts owed to contractors or even government salaries. However, a deferral of payments owed to anyone represents a de facto default. Thus, payment prioritization is not a popular idea, but if push comes to shove, it might be viewed as the lesser of two evils. Missing payments on government bonds could precipitate a financial crisis, but no one believes it will come to that.

Two other ideas for avoiding a breach of the debt ceiling are rather audacious. One involves raising new cash via the sale of premium bonds by the Treasury, as described here by Josh Barro (and here by Matt Levine). The other idea is to mint a large denomination ($1 trillion) platinum, “commemorative” coin, which the Treasury would deposit at the Federal Reserve, enabling it to conduct business as usual until the debt limit impasse is resolved. I’ll briefly describe each of these ideas in more detail below.

Premium Bonds

Premium bonds would offer a solution to the debt limit controversy because the debt ceiling is defined in terms of the par value of Treasury debt outstanding, as opposed to the amount actually raised from selling bonds at auction. For example, a note that promises to pay $100 in one year has a par value of $100. If it also promises to pay $100 in interest, it will sell at a steep premium. Thus, the Treasury collects, say, $185 at auction, and it could use the proceeds to pay off $100 of maturing debt and fund $85 of federal spending. That would almost certainly require a “market test” by the Treasury on a limited scale, and the very idea might reveal any distaste the market might have for obviating the debt limit in this fashion. But distaste is probably too mild a word.

An extreme example of this idea is for the Treasury to sell perpetuities, which have a zero par value but pay interest forever, or at least until redeemed beyond some minimum (but lengthy) term. John Cochrane has made this suggestion, though mainly just “for fun”. The British government sold perpetuities called consols for many years. Such bonds would completely circumvent the debt limit, at least without legislation to redefine the limit, which really is long overdue.

The $1 Trillion Coin

Minting a trillion dollar coin is another thing entirely. Barro has a separate discussion of this option, as does Cochrane. The idea was originally proposed and rejected during an earlier debt-limit controversy in 2011. Keep in mind, in what follows, that the Fed does not follow Generally Accepted Accounting Principles (GAAP).

Skeptics might be tempted to conclude that the “coin trick” is a ploy to engineer a huge increase the money supply to fund government expansion, but that’s not really the gist of this proposal. Instead, the Treasury would deposit the coin in its account at the Fed. The Fed would hold the coin and give the Treasury access to a like amount of cash. To raise that cash, the Fed would sell to the public $1 trillion out of its massive holdings of government securities. The Treasury would use that cash to meet its obligations without exceeding the debt ceiling. As Barro says, the Fed would essentially substitute sales of government bonds from its portfolio for bonds the Treasury is prohibited from selling under the debt limit. The effect on the supply of money is basically zero, and it is non-inflationary unless the approach has an unsettling impact on markets and inflation expectations (which of course is a distinct possibility).

When the debt ceiling is finally increased by Congress, the process is reversed. The Treasury can borrow again and redeem its coin from the Fed for $1 trillion, then “melt it down”, as Barro says. The Fed would repurchase from the public the government securities it had sold, adding them back to its portfolio (if that is consistent with its objectives at that time). Everything is a wash with respect to the “coin trick”, as long as the Treasury ultimately gets a higher debt limit.

Lust For the Coin

In fairness to skeptics, it’s easy to understand why the “coin trick” described above might be confused with another coin minting idea that arose from the collectivist vanguard during the pandemic. Representative Rashida Tlaib (D-MI) proposed minting coins to fund monthly relief payments of $1,000 – $2,000 for every American via electronic benefit cards. She was assisted in crafting this proposal by Rohan Grey, a prominent advocate of Modern Monetary Theory (MMT), the misguided idea that government can simply print money to pay for the resources it demands without inflationary consequences.

Tlaib’s plan would have required the Federal Reserve to accept the minted coins as deposits into the Treasury’s checking account. But then, rather than neutralizing the impact on the money supply by selling government bonds, the coin itself would be treated as base money. Cash balances would simply be made available in the Treasury’s checking account with the Fed. That’s money printing, pure and simple, but it’s not at all the mechanism under discussion with respect to short-term circumvention of the debt limit.

Fed Independence

The “coin trick” as a debt limit work-around is probably an impossibility, as Barro and others point out. First, the Fed would have to accept the coin as a deposit, and it is under no legal obligation to do so. Second, it obligates the Fed to closely coordinate monetary policy with the Treasury, effectively undermining its independence and its ability to pursue its legal mandates of high employment and low inflation. Depending on how badly markets react, it might even present the Fed with conflicting objectives.

Believe me, you might not like the Fed, but we certainly don’t want a Fed that is subservient to the Treasury… maintaining financial and economic stability in the presence of an irresponsible fiscal authority is bad enough without seating that authority at the table. As Barro says of the “coin trick”:

“These actions would politicize the Fed and undermine its independence. In order to stabilize expectations about inflation, the Fed would have to communicate very clearly about its intentions to coordinate its fiscal actions with Treasury — that is, it would have to tell the world that it’s going to act as Treasury’s surrogate in selling bonds when Treasury can’t. …

These actions would interfere with the Fed’s normal monetary operations. … the Fed is currently already reducing its holdings of bonds as part of its strategy to fight inflation. If economic conditions change (fairly likely, in the event of a near-default situation) that might change the Fed’s desired balance sheet strategy.”

On With The Show

Discussions about the debt limit continue between the White House and both parties in Congress. Kevin McCarthy met with President Biden today (2/1), but apparently nothing significant came it. Fiscal conservatives wonder whether McCarthy and other members of the GOP lack seriousness when it comes to fiscal restraint. But spending growth must slow to achieve deficit reduction, non-inflationary growth, and financial stability.

Meanwhile, even conservative media pundits seem to focus only on the negative politics of deficit reduction, ceding the advantage to Democrats and other fiscal expansionists. For those pundits, the economic reality pales in significance. That is a mistake. Market participants are increasingly skeptical that the federal government will ever pay down its debts out of future surpluses. This will undermine the real value of government debt, other nominal assets, incomes and buying power. That’s the inflation tax in action.

Unbridled growth of the government’s claims on resources at the expense of the private sector destroys the economy’s productive potential, to say nothing of growth. The same goes for government’s insatiable urge to regulate private activities and to direct patterns of private resource use. Unfortunately, so many policy areas are in need of reform that imposition of top-down controls on spending seems attractive as a stopgap. Concessions on the debt limit should only be granted in exchange for meaningful change: limits on spending growth, regulatory reforms, and tax simplification (perhaps replacing the income tax with a consumption tax) should all be priorities.

In the meantime, let’s avoid trillion dollar coins. As a debt limit work-around, premium bonds are more practical without requiring any compromise to the Fed’s independence. Other accounting gimmicks will be used to avoid missing payments, of course, but the fact that premium bonds and platinum coins are under discussion highlights the need to redefine the debt limit. When the eventual time of default draws near, fiscal conservatives must be prepared to stand up to their opponents’ convenient accusations of “brinksmanship”. The allegation is insincere and merely a cover for government expansionism.

Conformity and Suppression: How Science Is Not “Done”

26 Thursday Jan 2023

Posted by in Political Bias, Science

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I’m not terribly surprised to learn that scientific advancement has slowed over my lifetime. A recent study published in the journal Nature documented a secular decline in the frequency of “disruptive” or “breakthrough” scientific research across a range of fields. Research has become increasingly dominated by “incremental” findings, according to the authors. The graphic below tells a pretty dramatic story:

The index values used in the chart range “from 1 for the most disruptive to -1 for the least disruptive.” The methodology used to assign these values, which summarize academic papers as well as patents, produces a few oddities. Why, for example, does the tech revolution of the last 40 years create barely a blip in the technology index in the chart above? And why have tech research and social science research always been more “disruptive” than other fields of study?

Putting those questions aside, the Nature paper finds trends that are basically consistent across all fields. Apparently, systematic forces have led to declines in these measures of breakthrough scientific findings. The authors try to provide a few explanations as to the forces at play: fewer researchers, incrementalism, and a growing role of large-team research that induces conformity. But if research has become more incremental, that’s more accurately described as a manifestation of the disease, rather than a cause.

Conformity

Steven F. Hayward skewers the authors a little, and perhaps unfairly, stating a concern held by many skeptics of current scientific practices. Hayward says the paper:

“… avoids the most significant and obvious explanation with the myopia of Inspector Clouseau, which is the deadly confluence of ideology and the increasingly narrow conformism of academic specialties.”

Conformism in science is nothing new, and it has often interfered with the advancement of knowledge. The earliest cases of suppression of controversial science were motivated by religious doctrine, but challenges to almost any scientific “consensus” seem to be looked upon as heresy. Several early cases of suppression are discussed here. Matt Ridley has described the case of Mary Worley Montagu, who visited Ottoman Turkey in the early 1700s and witnessed the application of puss from smallpox blisters to small scratches on the skin of healthy subjects. The mild illness this induced led to immunity, but the British medical establishment ridiculed her. A similar fate was suffered by a Boston physician in 1721. Ridley says:

“Conformity is the enemy of scientific progress, which depends on disagreement and challenge. Science is the belief in the ignorance of experts, as [the physicist Richard] Feynman put it.”

When was the Scientific Boom?

I couldn’t agree more with Hayward and Ridley on the damaging effects of conformity. But what gave rise to our recent slide into scientific conformity, and when did it begin? The Nature study on disruptive science used data on papers and patents starting in 1945. The peak year for disruptive science within the data set was … 1945, but the index values were relatively high over the first two decades of the data set. Maybe those decades were very special for science, with a variety of applications and high-profile accomplishments that have gone unmatched since. As Scott Sumner says in an otherwise unrelated post, in many ways we’ve failed to live up to our own expectations:

“In retrospect, the 1950s seem like a pivotal decade. The Boeing 707, nuclear power plants, satellites orbiting Earth, glass walled skyscrapers, etc., all seemed radically different from the world of the 1890s. In contrast, airliners of the 2020s look roughly like the 707, we seem even less able to build nuclear power plants than in the 1960s, we seem to have a harder time getting back to the moon than going the first time, and we still build boring glass walled skyscrapers.”

It’s difficult to put the initial levels of the “disruptiveness” indices into historical context. We don’t know whether science was even more disruptive prior to 1945, or how the indices used by the authors of the Nature article would have captured it. And it’s impossible to say whether there is some “normal” level of disruptive research. Is a “normal” index value equal to zero, which we now approach as an asymptote?

Some incredible scientific breakthroughs occurred decades before 1945, to take Einstein’s theory of relativity as an obvious example. Perhaps the index value for physical sciences would have been much higher at that time, were it measured. Whether the immediate post-World War II era represented an all-time high in scientific disruption is anyone’s guess. Presumably, the world is always coming from a more primitive base of knowledge. Discoveries, however, usually lead to new and deeper questions. The authors of the Nature article acknowledge and attempt to test for the “burden” of a growing knowledge base on the productivity of subsequent research and find no effect. Nevertheless, it’s possible that the declining pattern after 1945 represents a natural decay following major “paradigm shifts” in the early twentieth century.

The Psychosis Now Known As “Wokeness”

The Nature study used papers and patents only through 2010. Therefore, the decline in disruptive science predates the revolution in “wokeness” we’ve seen over the past decade. But “wokeness” amounts to a radicalization of various doctrines that have been knocking around for years. The rise of social justice activism, critical theory, and anthropomorphic global warming theology all began long before the turn of the century and had far reaching effects that extended to the sciences. The recency of “wokeness” certainly doesn’t invalidate Hayward and Ridley when they note that ideology has a negative impact on research productivity. It’s likely, however, that some fields of study are relatively immune to the effects of politicization, such as the physical sciences. Surely other fields are more vulnerable, like the social sciences.

Citations: Not What They Used To Be?

There are other possible causes of the decline in disruptive science as measured by the Nature study, though the authors believe they’ve tested and found these explanations lacking. It’s possible that an increase in collaborative work led to a change in citation practices. For example, this study found that while self-citation has remained stable, citation of those within an author’s “collaboration network” has declined over time. Another paper identified a trend toward citing review articles in Ecology Journals rather than the research upon which those reviews were based, resulting in incorrect attribution of ideas and findings. That would directly reduce the measured “disruptiveness” of a given paper, but it’s not clear whether that trend extends to other fields.

Believe it or not, “citation politics” is a thing! It reflects the extent to which a researcher should suck-up to prominent authors in a field of study, or to anyone else who might be deemed potentially helpful or harmful. In a development that speaks volumes about trends in research productivity, authors are now urged to append a “Citation Diversity Statement” to their papers. Here’s an academic piece addressing the subject of “gendered citation practices” in contemporary physics. The 11 authors of this paper would do well to spend more time thinking about problems in physics than in obsessing about whether their world is “unfair”.

Science and the State

None of those other explanations are to disavow my strong feeling that science has been politicized and that it is harming our progress toward a better world. In fact, it usually leads us astray. Perhaps the most egregious example of politicized conformism today is climate science, though the health sciences went headlong toward a distinctly unhealthy conformism during the pandemic (and see this for a dark laugh).

Politicized science leads to both conformism and suppression. Here are several channels through which politicization might create these perverse tendencies and reduce research productivity or disruptiveness:

  • Political or agenda-driven research is driven by subjective criteria, rather than objective inquiry and even-handed empiricism
  • Research funding via private or public grants is often contingent upon whether the research can be expected to support the objectives of the funding NGOs, agencies, or regulators. The gravy train is reserved for those who support the “correct” scientific narrative
  • Promotion or tenure decisions may be sensitive to the political implications of research
  • Government agencies have been known to block access to databases funded by taxpayers when a scientist wishes to investigate the “wrong questions”
  • Journals and referees have political biases that may influence the acceptance of research submissions, which in turn influences the research itself
  • The favorability of coverage by a politicized media influences researchers, who are sensitive to the damage the media can do to one’s reputation
  • The influence of government agencies on media treatment of scientific discussion has proven to be a potent force
  • The chance that one’s research might have a public policy impact is heavily influenced by politics
  • The talent sought and/or attracted to various fields may be diminished by the primacy of political considerations. Indoctrinated young activists generally aren’t the material from which objective scientists are made

Conclusion

In fairness, there is a great deal of wonderful science being conducted these days, despite the claims appearing in the Nature piece and the politicized corruption undermining good science in certain fields. Tremendous breakthroughs are taking place in areas of medical research such as cancer immunotherapy and diabetes treatment. Fusion energy is inching closer to a reality. Space research is moving forward at a tremendous pace in both the public and private spheres, despite NASA’s clumsiness.

I’m sure there are several causes for the 70-year decline in scientific “disruptiveness” measured in the article in Nature. Part of that decline might have been a natural consequence of coming off an early twentieth-century burst of scientific breakthroughs. There might be other clues related to changes in citation practices. However, politicization has become a huge burden on scientific progress over the past decade. The most awful consequences of this trend include a huge misallocation of resources from industrial planning predicated on politicized science, and a meaningful loss of lives owing to the blind acceptance of draconian health policies during the Covid pandemic. When guided by the state or politics, what passes for science is often no better than scientism. There are, however, even in climate science and public health disciplines, many great scientists who continue to test and challenge the orthodoxy. We need more of them!

I leave you with a few words from President Dwight Eisenhower’s Farewell Address in 1961, in which he foresaw issues related to the federal funding of scientific research:

“Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades.

In this revolution, research has become central; it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal government.

Today, the solitary inventor, tinkering in his shop, has been over shadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.

The prospect of domination of the nation’s scholars by Federal employment, project allocations, and the power of money is ever present and is gravely to be regarded.

Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific-technological elite.”

Grow Or Collapse: Stasis Is Not a Long-Term Option

18 Wednesday Jan 2023

Posted by in Climate, Environment, Growth

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Growth is a human imperative and a good thing in every sense. We’ve long heard from naysayers, however, that growth will exhaust our finite resources, ending in starvation and the collapse of human civilization. They say, furthermore, that the end is nigh! It’s an old refrain. Thomas Malthus lent it credibility over 200 years ago (perhaps unintentionally), and we can pick on poor Paul Ehrlich’s “Population Bomb” thesis as a more modern starting point for this kind of hysteria. Lewis M. Andrews puts Ehrlich’s predictions in context:

“A year after the book’s publication, Ehrlich went on to say that this ‘utter breakdown’ in Earth’s capacity to support its bulging population was just fifteen years away. … For those of us still alive today, it is clear that nothing even approaching what Ehrlich predicted ever happened. Indeed, in the fifty-four years since his dire prophesy, those suffering from starvation have gone from one in four people on the planet to just one in ten, even as the world’s population has doubled.”

False Limits

The “limits” argument comes from the environmental Left, but it creates for them an uncomfortable tradeoff between limiting growth and the redistribution of a fixed (they hope) or shrinking (more likely) pie. That’s treacherous ground on which to build popular support. It’s also foolish to stake a long-term political agenda on baldly exaggerated claims (and see here) about the climate and resource constraints. Ultimately, people will recognize those ominous forecasts as manipulative propaganda.

Last year, an academic paper argued that growing civilizations must eventually reach a point of “asymptotic burnout” due to resource constraints, and must undergo a “homeostatic awakening”: no growth. The authors rely on a “superlinear scaling” argument based on cross-sectional data on cities, and they offer their “burnout” hypothesis as an explanation for the Fermi Paradox: the puzzling quiet we observe in the universe while we otherwise expect it to be teeming with life… civilizations reach their “awakenings” before finding ways to communicate with, or even detect, their distant neighbors. I addressed this point and it’s weaknesses last year, but here I mention it only to demonstrate that the “limits to growth” argument lives on in new incarnations.

Growth-limiting arguments are tenuous on at least three fundamental grounds: 1) failure to consider the ability of markets to respond to scarcity; 2) underestimating the potential of human ingenuity not only to adapt to challenges, but to invent new solutions, exploit new resources, and use existing resources more efficiently; and 3) homeostasis is impossible because zero growth cannot be achieved without destructive coercion, suspension of cooperative market mechanisms, and losses from non-market (i.e., political and non-political) competition for the fixed levels of societal wealth and production.

The zero-growth world is one that lacks opportunities and rewards for honest creation of value, whether through invention or simple, hard work. That value is determined through the interaction of buyers and sellers in markets, the most effective form of voluntary cooperation and social organization ever devised by mankind. Those preferring to take spoils through the political sphere, or who otherwise compete on the basis of force, either have little value to offer or simply lack the mindset to create value to exchange with others at arms length.

Zero-Growth Mentality

As Robert Colvile writes in a post called “The Morality of Growth”:

“A society without growth is not just politically far more fragile. It is hugely damaging to people’s lives – and in particular to the young, who will never get to benefit from the kind of compounding, increasing prosperity their parents enjoyed.”

Expanding on this theme is commenter Slocum at the Marginal Revolution site, where Colvile’s essay was linked:

“Humans behave poorly when they perceive that the pie is fixed or shrinking, and one of the main drivers for behaving poorly is feelings of envy coming to the forefront. The way we encourage people not to feel envy (and to act badly) is not to try to change human nature, or ‘nudge’ them, but rather to maintain a state of steady improvement so that they (naturally) don’t feel envious, jealous, tribal, xenophobic etc. Don’t create zero-sum economies and you won’t bring out the zero-sum thinking and all the ills that go with it.”

And again, this dynamic leads not to zero growth (if that’s desired), but to decay. Given the political instability to which negative growth can lead, collapse is a realistic possibility.

I liked Colville’s essay, but it probably should have been titled “The Immorality of Non-Growth”. It covers several contemporary obstacles to growth, including the rise of “stakeholder capitalism”, the growth of government at the expense of the private sector, strangling regulation, tax disincentives, NIMBYism, and the ease with which politicians engage in populist demagoguery in establishing policy. All those points have merit. But if his ultimate purpose was to shed light on the virtues of growth, it seems almost as if he lost his focus in examining only the flip side of the coin. I came away feeling like he didn’t expend much effort on the moral virtues of growth as he intended, though I found this nugget well said:

“It is striking that the fastest-growing societies also tend to be by far the most optimistic about their futures – because they can visibly see their lives getting better.”

Compound Growth

A far better discourse on growth’s virtues is offered by Veronique de Rugy in “The Greatness of Growth”. It should be obvious that growth is a potent tonic, but its range as a curative receives strangely little emphasis in popular discussion. First, de Rugy provides a simple illustration of the power of long-term growth, compound growth, in raising average living standards:

This is just a mechanical exercise, but it conveys the power of growth. At 2% real growth, real GDP per capital would double in 35 years and quadruple in 70 years. At 4% growth, real GDP would double in 18 years… less than a generation! It would quadruple in 35 years. If you’re just now starting a career, imagine nearing retirement at a standard of living four times as lavish as today’s senior employees (who make a lot more than you do now). We’ll talk a little more about how such growth rates might be achieved, but first, a little more on what growth can achieve.

The Rewards of Growth

Want to relieve poverty? There is no better and more permanent solution than economic growth. Here are some illustrations of this phenomenon:

Want to rein-in the federal budget deficit? Growth reduces the burden of the existing debt and shrinks fiscal deficits, though it might interfere with what little discipline spendthrift politicians currently face. We’ll have to find other fixes for that problem, but at least growth can insulate us from their profligacy.

And who can argue with the following?

“All the stuff an advocate anywhere on the political spectrum claims to value—good health, clean environment, safety, families and quality of life—depends on higher growth. …

There are other well-documented material consequences of modern economic growth, such as lower homicide rates, better health outcomes (babies born in the U.S. today are expected to live into their upper 70s, not their upper 30s as in 1860), increased leisure, more and better clothing and shelter, less food insecurity and so on.”

De Rugy argues convincingly that growth might well entail a greater boost in living standards for lower ranges of the socioeconomic spectrum than for the well-to-do. That would benefit not just those impoverished due to a lack of skills, but also those early in their careers as well as seniors attempting to earn extra income. For those with a legitimate need of a permanent safety net, growth allows society to be much more generous.

What de Rugy doesn’t mention is how growth can facilitate greater saving. In a truly virtuous cycle, saving is transformed into productivity-enhancing additions to the stock of capital. And not just physical capital, but human capital through investment in education as well. In addition, growth makes possible additional research and development, facilitating the kind of technical innovation that can sustain growth.

Getting Out of the Way of Growth

Later in de Rugy’s piece, she evaluates various ways to stimulate growth, including deregulation, wage and price flexibility, eliminating subsidies, less emphasis on redistribution, and simplifying the tax code. All these features of public policy are stultifying and involve dead-weight losses to society. That’s not to deny the benefits of adequate state capacity for providing true public goods and a legal and judicial system to protect individual rights. The issue of state capacity is a major impediment to growth in the less developed world, whereas countries in the developed world tend to have an excess of state “capacity”, which often runs amok!

In the U.S., our regulatory state imposes huge compliance costs on the private sector and effectively prohibits or destroys incentives for a great deal of productive (and harmless) activity. Interference with market pricing stunts growth by diverting resources from their most valued uses. Instead, it directs them toward uses that are favored by political elites and cronies. Subsidies do the same by distorting tradeoffs at a direct cost to taxpayers. Our system of income taxes is rife with behavioral distortions and compliance costs, bleeding otherwise productive gains into the coffers of accountants, tax attorneys, and bureaucrats. Finally, redistribution often entails the creation of disincentives, fostering a waste of human potential and a pathology of dependence.

Growth and Morality

Given the unequivocally positive consequences of growth to humanity, could the moral case for growth be any clearer? De Rugy quotes Benjamin Friedman’s “The Moral Consequences of Economic Growth”:

“Growth is valuable not only for our material improvement but for how it affects our social attitudes and our political institutions—in other words, our society’s moral character, in the term favored by the Enlightenment thinkers from whom so many of our views on openness, tolerance and democracy have sprung.”

De Rugy also paraphrases Tyler Cowen’s position on growth from his book “Stubborn Attachments”:

“… economic growth, properly understood, should be an essential element of any ethical system that purports to care about universal human well-being. In other words, the benefits are so varied and important that nearly everyone should have a pro-growth program at or near the top of their agenda.”

Conclusion

Agitation for “degrowth” is often made in good faith by truly frightened people. Better education would help them, but our educational establishment has been corrupted by the same ignorant narrative. When it comes to rulers, the fearful are no less tyrannical than power-hungry authoritarians. In fact, fear can be instrumental in enabling that kind of transformation in the personalities of activists. A basic failing is their inability to recognize the many ways in which growth improves well-being, including the societal wealth to enable adaptation to changing conditions and the investment necessary to enhance our range of technological solutions for mitigating existential risks. Not least, however, is the failure of the zero-growth movement to understand the cruelty their position condones in exchange for their highly speculative assurances that we’ll all be better off if we just do as they say. A terrible downside will be unavoidable if and when growth is outlawed.