Social Insurance, Trust Fund Runoff, and Federal Debt

28 Thursday Apr 2022

Posted by pnoetx in Deficits, Social Security

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Anti-Deficiency Act, Charles Blahous, Deficits, DI, Disability Income, Discretionary Budget, entitlements, Federal Reserve, Fiscal Inflation, Fiscal Tiger, Hospitalization Insurance, Joe Biden, Mandatory Spending, Medicaid, Medicare Part A, Medicare Part B, Medicare Part D, Medicare Reform, Medicare Trust Fund, Monetization, OASI, Old Age and Survivorship Income, Pay-As-You-Go, payroll taxes, SMI, Social Security Reform, Social Security Trust Fund, Student Loan Forgiveness, Supplementary Medical Insurance

The Social Security and Medicare trust funds are starting to shrink, but as they shrink something else expands in tandem, roughly dollar-for-dollar: government debt. There is a widespread misconceptions about these entitlement programs and their trust funds. Many seem to think the trust funds are like “pots of gold” that will allow the government to meet its mandatory obligations to beneficiaries. But, in fact, the government will have to borrow the exact amounts of any “assets” that are “cashed out” of the trust funds, barring other reforms or legislative solutions. So how does that work? And why did I put the words “assets” and “cashed out” in quote marks?

The Trust Funds

First, I should note that there are two Social Security trust funds: one for old age and survivorship income (OASI) and one for disability income (DI). Occasionally, for summary purposes, the accounts for these funds are combined in presentations. There are also two Medicare trust funds: one for hospitalization insurance (HI – Part A) and one for Supplementary Medical Insurance (SMI – Parts B and D). The first three of these trust funds are represented in the chart at the top of this post, which is from the Summary of the 2021 Annual Reports by the Boards of Trustees. It plots a measure of financial adequacy: the ratio of trust fund assets at the start of each year to the annual cost. The funds are all projected to be depleted, HI and OASI much sooner than DI.

Fund Accumulation

The first step in understanding the trust funds requires a clearing up of another misconception: the payroll taxes that workers “contribute” to these systems are not invested specifically for each of those workers. These programs are strictly “pay-as-you-go”, meaning that the payroll taxes (and premiums in the case of Medicare) paid this year by you and/or your employer are generally distributed directly to current beneficiaries.

Back when demographics of the American population were more favorable for these programs, with a larger number of workers relative to retirees, payroll taxes (and premiums) exceeded benefits. The excess was essentially loaned by these programs to the U.S. Treasury to cover other forms of spending. So the trust funds accumulated U.S. Treasury IOUs for many years, and the Treasury pays interest to the trust funds on that debt. On the upside, that meant the Treasury had to borrow less from the public to cover its deficits during those years. So the government spent the excess payroll tax proceeds and wrote IOUs to the trust funds.

Draining the Funds

The demographic profile of the population is no longer favorable to these entitlement programs. The number of retirees has increased so that benefit levels have grown more quickly than program revenue. Benefits now exceed the payroll taxes and premiums collected, so the trust funds must be drawn down. Current estimates are that the Social Security Trust Fund will be depleted in 2034, while the Medicare Trust Fund will last only to 2026. These dates are reflected in the chart above. It is the mechanics of these draw-downs that get to the heart of the first “pot of gold” misconception cited above.

To pay for the excess of benefits over revenue collected, the trust funds must cash-in the IOUs issued to them by the Treasury. And where does the Treasury get the cash? It will almost certainly be borrowed from the public, but the government could hike other forms of taxes or reduce other forms of spending. So, while the earlier accumulation of trust fund assets meant less federal borrowing, the divestment of those assets generally means more federal borrowing and growth in federal debt held by the public.

Given these facts, can you spot the misconception in this quote from Fiscal Tiger? It’s easy to miss:

“In the cases of Social Security, Medicare, and Medicaid, payroll taxes provide some revenue. Social Security also has trust funds that cover some of the program costs. However, when the government is short on funds for these programs after getting the revenue from taxes and trust funds, it must borrow money, which contributes to the deficit.”

This kind of statement is all too common. The fact is the government has to borrow in order to pay off the IOUs as the trust funds are drawn down, roughly dollar-for-dollar.

A second mistake in the quote above is that federal borrowing to pay excess benefits after the trust funds are fully depleted is not really assured. At that time, the Anti-deficiency Act prohibits further payments of benefits in excess of payroll taxes (and premiums), and there is no authority allowing the trust funds to borrow from the general fund of the Treasury. Either benefits must be reduced, payroll taxes increased, premiums hiked (for Medicare), or more radical reforms will be necessary, any of which would require congressional action. In the case of Social Security (combining OASI and DI), the projected growth of “excess benefits” is such that the future, cumulative shortfall represents 25% of projected benefits!

Again, the mandatory entitlement spending programs are technically insolvent. Charles Blahous discusses the implications of closing the funding gap, both in terms of payroll tax increases or benefit cuts, either of which will be extremely unpopular:

“How likely is it that lawmakers would immediately cut benefits by 25% for everyone, rich and poor, retiring next year and beyond? More likely, lawmakers would phase in reforms gradually, necessitating much larger eventual benefit changes for those affected—perhaps 30% or 40%. And if we want to spare lower-income individuals from reductions, they’d need to be still greater for everyone else.”

It should be noted that Medicaid is also a budget drain, though the cost is shared with state governments.

Discretionary vs. Mandatory Budgets

When it comes to federal budget controversies, discretionary budget proposals receive most of the focus. The federal deficit reached unprecedented levels in 2020 and 2021 as pandemic support measures led to huge increases in spending. Even this year (2022), the projected deficit exceeds the 2019 level by over $160 billion. Joe Biden would like to spend much more, of course, though the loss of proceeds from his student loan forgiveness giveaway does not even appear in the Administration’s budget proposal. Biden proposes to pay for the spending with a corporate tax hike and a minimum tax on very high earners, including an unprecedented tax on unrealized capital gains. Those measures would be disappointing in terms of revenue collection, and they are probably worse for the economy and society than bigger deficits. None of that is likely to pass Congress, but we’ll still be running huge deficits indefinitely..

In a further complication, at this point no one really believes that the federal government will ever pay off the mounting public debt. More likely is that the Federal Reserve will make further waves of monetization, buying government bonds in exchange for monetary assets. (Of course, money is also government debt.) The conviction that ever increasing debt levels are permanent is what leads to fiscal inflation, which taxes the public by devaluing the public debt, including (or especially) monetary assets. The insolvency of the trust funds is contributing to this process and its impact is growing..

Again, the budget discussions we typically hear involve discretionary components of the federal budget. Mandatory outlays like Social Security, Medicare, and Medicaid are nearly three times larger. Here is a good primer on the mandatory spending components of the federal budget (which includes interest costs). Blahous notes elsewhere that the funding shortfall in these programs will ultimately dwarf discretionary sources of budgetary imbalance. The deficit will come to be dominated by the borrowing required to fund mandatory programs, along with the burgeoning cost of interest payments on the public debt, which could reach nearly 50% of federal revenues by 2050.

Conclusion

It would be less painful to address these funding shortfalls in mandatory programs immediately than to continue to ignore them. That would enable a more gradual approach to changes in benefits, payroll taxes, and premiums. Politicians would rather not discuss it, however. Any discussion of reforms will be controversial, but it’s only going to get worse over time.

Political incentives being what they are, current workers (future claimants) are likely to bear the brunt of any benefit cuts, rather than retirees already enrolled. Payroll tax hikes are perhaps a harder sell because they are more immediate than trimming benefits for future retirees. Other reforms like self-directed Social Security contributions would create better tradeoffs by allowing investment of contributions at competitive (but more risky) returns. Medicare has premiums as an extra lever, but there are other possible reforms.

Again, the time to act is now, but don’t expect it to happen until the crisis is upon us. By then, our opportunities will have become more hemmed in, and something bad is more likely to be promulgated in the rush to save the day.

Critical Gender Theory and Trends in Gender Identity

21 Thursday Apr 2022

Posted by pnoetx in Gender, Wokeness

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Babylon aber, Bisexuality, Bryan Caplan, C. Bradley Thompson, Celibacy, Cisgender, Closeting, Critical Gender Theory, Critical Race Theory, Critical Theory, Disney, Emilie Kao, Feminism, Gallup, GayBCs, Gender Dysphoria, Gender Identity, Gender Support Plans, Gender Unicorn, Gender-Affirming Therapy, Generation Z, Grooming, Heritability, Larpers, Laurence S. Mayer, LGBTQ, Libs of TikTok, Marxism, Millenials, Misgender, My Princess Boy, Paul R. McHugh, Paul W. Hruz, Precocious Puberty, Puberty Blockers, Recruitment, Religiosity, Sexual Liberation, Sexual Preference, Social Justice, Socialization, Transgenderism, Transition, Transition Closet, Victimhood

The growing influence of critical gender theory (CGT) in schools is unacceptable to many parents, especially at early grade levels. In fact, it’s been coming from certain areas of pediatric medicine for some time. Like critical race theory, CGT is another branch of critical theory, which was developed by a set of European social thinkers in the 1930s. CT is fundamentally a Marxist construct, and it lies at the heart of nearly all appeals to “social justice”. C. Bradley Thompson offers this concise perspective on critical theory:

“The principal aim of Critical Theory was and is, first, to deconstruct the forms of domination and hierarchy (i.e., the power relations) found in traditional or bourgeois societies, and, second, to reconstruct society toward what it calls ‘real’ or ‘true’ democracy, which is a neologism for socialism. Critical theory seeks to liberate any and all ‘victim’ groups based on their inferior and subjugated social status in capitalist societies (e.g., non-whites, women, and LGBTQ+ persons, etc.).”

LGBTQ+ Numbers

It’s fair to ask whether exposure to CGT in schools has any influence on the sexual orientation and preferences of students as they mature. That can be true only to the extent that these preferences reflect socialization, rather than other environmental factors or heredity. Apparently, most LGBTQ+ individuals are disposed to claim that their sexual preference is genetic. However, the claim that sexual preference is heritable to the exclusion of social influences is dubious. And there are other non-genetic, environmental influences that play a strong role as well.

Bryan Caplan discusses some fascinating generational differences in sexual orientation / identification revealed by a recent Gallup survey. Here, I reproduce the table shown in Caplan’s post. The sum of these categories (not shown) is taken as the LGBTQ+ share of each generation.

Taken at face value, those are extremely large increases over five generations… or even over two generations from millennials to GenZs, the gay proportion being the only category in which millennials and GenZs are reasonably close in 2022.

Another important wrinkle is that the share of older generations identifying as LGBTQ+ has been stable since the last survey conducted by Gallup in 2017, as shown by the Gallup chart below:

Millennials have increased by more than a third, and the LGBTQ+ share among Gen Zs has roughly doubled to 20.8%. Gen Zs surveyed in 2017 ranged from roughly 18 – 20 years of age, but that range was roughly 18 – 24 years of age in the latest survey. Therefore, the 2022 survey might capture a greater share of GenZs having “matured” into acceptance of specific sexual identities. Nevertheless, the levels and changes in these two generations are striking.

Causal Quandary

Caplan wonders how these increases would be possible if sexual orientation was predominantly heritable, especially given that these groups are unlikely to produce offspring at the same rate as the general population. The shrinking genotype / expanding phenotype paradox leads him to conclude that heightened LGBTQ+ socialization is generally responsible for the dramatic increases.

A number of Caplan’s commenters questioned his conclusions for one or several of these categories. At the risk of missing some of the nuance in the comments, I’ll attempt to summarize a few common threads: First, as Caplan himself notes, closeting is much less common than in the past. Therefore, increases in the reported shares of these categories might be illusory. Less closeting has brought little change in the responses of the older generations, however, and perhaps that’s because they tend to associate primarily within their own age cohorts.

Second, there could be environmental influences that have led to a smaller share of cis-gender males and females, as well as more “mis-genders” at birth. For example, anything that changes the flow of testosterone to a fetus in the womb might change a child’s sexual orientation, but whether some force has induced systematic changes in those flows over time, and across the population, is another matter.

Finally, the bulk of those claiming status as LGBTQ+ among millennials and Gen Zs are bisexual. For those who are otherwise heterosexual, identification as bisexual might be fairly “costless”. That suggests a possibility that the bisexual share may be influenced by status-seeking among GenZs, especially females. One joke goes “How can you tell if a girl is bi-sexual? … Don’t worry, she’ll tell you!” Thus, some commenters viewed the large increase in reported bisexuality as inflated by status seeking among what amounts to a kind of “larper” set. There might be so much emphasis on being open-minded about sexual experimentation among younger cohorts that minor incidents from childhood or adolescence are subsequently exaggerated into claims of bisexuality.

Socialization

Obviously the reduction in closeting leads to greater social exposure of non-traditional sexual preferences, including exposure to the nation’s youth. That’s a powerful social change, and it creates an atmosphere increasingly conducive to further socialization of these preferences, if not recruitment. Like many trends, this one feeds on itself: this 2021 study found a positive association between men “coming out” as gay and state legalization of same-sex marriage, the presence of gay communities, and positive attitudes toward gays. Moreover, there are definite signs of social contagion, as demonstrated by this clique of teenagers who, one and all, suddenly decided they were trans!

What forces led to the cascade in LGBTQ+ identification among more recent age cohorts? As a group, the full LGBTQ+ coalition has greater visibility, political power in asserting “victimhood”, and potential for socializing the general population to alternative lifestyles. However, there might not be any single trigger spanning LGBTQ+ identities that can explain the trend’s genesis. Perhaps the trends were set in motion by the sexual liberation of the 1960s and 70s which, as a libertarian, is not otherwise something I find objectionable.

The rise of radical feminism might have provided a basis for some females to reject males as a source of sexual gratification (and companionship), or as an exclusive source thereof, at any rate. There’s a likelihood that this contributed to the rise in lesbianism as well as female bisexuality. Feminism also served as a pretext for identity politics, which relies on claims of victimhood and is therefore fertile ground for critical theorists.

Critical theory first gained significant ground in the U.S. at universities along dimensions of race, but gender and sexual preference weren’t far behind. This “social justice” perspective filtered its way into departments of education, where academic standards are exceptionally forgiving. This, in turn, led to more fertile ground for critical theory in elementary and high school education.

CGT promotes the idea that gender is a social construct. If an individual feels that he or she is not well-suited to their biological sex, then CGT holds that they should identify as members of the opposite sex and pursue any medical paths to transition as might be available. This view has increasingly been applied to younger individuals.

Medical Experts

Paul W. Hruz, Laurence S. Mayer, and Paul R. McHugh (HMM) discuss the 1980s development of certain pharmaceuticals prescribed today to many children suffering from gender dysphoria. One might suspect that these drugs helped to set some of these trends in motion, together with so-called “gender-affirming” therapies that are now widely practiced. The latter involve therapists who accept and support the gender identity with which a patient feels most comfortable. Needless to say, this approach is likely to encourage a gender dysphoric youth to continue their exploration of a change in gender.

Synthetic hormonal “puberty blockers” became available in the early 1990s as a treatment for early puberty (so-called “precocious puberty”). At about the same time, the treatment was tested to stop production of sex hormones in adult males identifying as females. In the 1990s, the treatment was first used to suppress puberty in children with gender dysphoria, but the effects are supposedly reversible. Advancing to a full “transition” protocol involves the subsequent use of cross-sex hormones and ultimately surgical reassignment. Today, puberty suppression techniques are widely used on children with gender dysphoria because it is viewed as a safe choice that might “buy time” while other forms of maturation proceed. Here are HMM on this point:

“The use of puberty suppression and cross-sex hormones for minors is a radical step that presumes a great deal of knowledge and competence on the part of the children assenting to these procedures, on the part of the parents or guardians being asked to give legal consent to them, and on the part of the scientists and physicians who are developing and administering them. We frequently hear from neuroscientists that the adolescent brain is too immature to make reliably rational decisions, but we are supposed to expect emotionally troubled adolescents to make decisions about their gender identities and about serious medical treatments at the age of 12 or younger. And we are supposed to expect parents and physicIans to evaluate the risks and benefits of puberty suppression, despite the state of ignorance in the scientific community about the nature of gender identity.”

HMM also discuss the strong influence that activists have had on the medical establishment. This is summarized nicely by Emilie Kao:

“… the largest LGBT lobbying organization, the Human Rights Campaign and World Professional Association for Transgender Health (WPATH) influenced medical organizations like the Endocrine Society and the American Academy of Pediatrics to embrace gender affirmation over the last two decades. Jason Pierceson, author of Sexual Minorities and Politics, explains that ‘political activism and consciousness raising has also changed the way in which the medical community views transgender persons.’ He describes how this activism led the American Psychiatric Association to “abandon the mental illness paradigm of transgenderism” by changing the description in the Diagnostic and Statistical Manual of Mental Disorders (DSM-5) to treat only the stress associated with gender dysphoria as a mental disorder. No breakthroughs in science or medicine led to the change, which was accomplished just by political activism.”

HMM do not claim that puberty blockers and gender-affirming therapy are at the root of increasing transgenderism. However, they express strong reservations about widespread use of puberty blockers among gender dysphoric adolescents.

We know that gender dysphoric youths have high rates of anxiety, depression, and even suicide. Unfortunately, transition doesn’t seem to alleviate those problems as a general rule. Furthermore, it’s important to remember that unhappy adolescents are nothing new. It can be an unhappy time for many kids who are full of self-doubt. Most of them get over it, however, and many with dysphoria get over it as well. One has to ask: does helping dysphoric children along the path to transition so early have any real gains in the aggregate?

Educational Experts

What role have the schools played in the gender confusion? The answer is just as horrifying as the role of the therapists and medical doctors encouraging and overseeing the early encouragement of transitions discussed above.

“As early as 2007, for instance, California’s education code stated that gender pertains not to anything biological but to ‘a person’s gender-related appearance and behavior.’[3] Gender is, in other words, a choice and has no relation to biology. This means that children have a smorgasbord of gender identities to choose from.”

So this is not new and could well have played a role in the Gallup survey results, especially for GenZs. Read at the last link about such things as “Gender Support Plans” in the schools, teacher training in dealing with gender issues, a “children’s garden” where five-year olds can learn the difference between biological sex and “gender”, a kindergarten book called My Princess Boy, the GayBCs for ages 4 – 8, the provision of a “transition closet” in which kids change their clothing once they arrive at school, school nurses who provide puberty blockers to kids they evaluate as dysphoric, pronoun lessons, of course, and many other examples. Also see this article for further information about CGT in schools, including the “Gender Unicorn” first introduced in 2016 and now used nationwide, starting as early as pre-K and kindergarten. And for a running catalog of the outrageous lessons taking place in our schools, check out Libs of Tik Tok.

Other Causal Forces

There are other vaguely plausible explanations for the trend toward more common identification as LGBTQ+ among millennials and GenZs. The internet and especially social media come to mind. Small and large social contagions are frequent on these platforms. Pre-social media, members of certain sub-cultures, and dare I say outcasts, had more difficulty finding, communicating and sharing information with one another. Today there is much less friction in that regard. Social media is also a hotbed of misery for many individuals, afflicted all too often with feelings of inadequacy or a feeling that they are outcasts. Among unhappy youths, the suggestion to try something different, to join a new “tribe”, may be very tempting. The internet serves as a guide.

A phenomenon that might be related to trends in gender identity is an increase in celibacy and decline of “partner sex”, especially among younger individuals and men. While so-called partner sex includes gay sex, the trend in sexual identity is not about any decline in sexual activity per se, but about representations of sexual identity. The uptrend in celibacy is consistent with the hypothesis that some cisgenders, frustrated by a lack of sexual partners (as distinct from the small, mostly male and angry “incel” community), might seek out a broader array of prospects. However, I know of no actual evidence to suggest such a connection.

The entertainment world is certainly no newcomer to controversies surrounding sexual identity. Gayness has long been celebrated in the theatre community, to a fault. I love theatre, but the near ubiquity of the theme in recent years has grown tiresome. There have always been gay stars of the screen, television, and musical entertainment, though it was often closeted in the past. Gay and gender identity themes have become much more common in film, but it was only recently that Disney began to emphasize gender issues explicitly with the children’s audience in mind. Some adults and even adolescents must grapple with gender dysphoria as they always have, with varying degrees of success and failure. However, to subject an audience of young children to themes that are beyond their ability to comprehend, and for whom the early exposure is completely unnecessary, is not acceptable.

Finally, the decline of religiosity might play a role in the trend toward LGBT+ identities. For one thing, church-goers have one more place to meet potential mates. More importantly, traditional religion has nearly always frowned on homosexuality, at least officially, and the LGBT+ coalition is largely areligious. Therefore, it seems likely that the negative trend in religiosity might be related to the positive trend in the LGBTQ+ population.

Conclusion

There is no question that identification as any of various forms of LGBTQ+ has increased dramatically among millennials and GenZs, with the largest increase in the bisexual category. Bryan Caplan hypothesizes that the trend is one of socialization, if not recruitment. It seems likely that this is the case, though much of the LGBTQ+ community’s internal, personal recruitment is probably of the passive variety. In addition, it seems likely that some of the gap relative to older generations is due to a reduction in closeting as well as “costless” status-seeking among individuals who wish to be perceived as enlightened or woke.

It’s also evident that the portion of the medical establishment concerned with issues of gender identity, as well as schools and certain entertainment institutions, have adopted the extreme views espoused by critical gender theory. They are actively encouraging children to learn about and explore various gender identities. This may encourage gender dysphoria, and when children show signs of dysphoria they are encouraged to move to the next stage, which involves affirmative therapy and puberty blockers, A bit later, teenagers might move on to other hormonal treatments and later-still, sex-change surgery. Our major medical, educational, and entertainment institutions appear to be real sources of non-passive recruitment, and indeed, the grooming of children for lives as LGBTQ+ adults.

Credit for the image at the top of this post goes to the Babylon Bee.

Markets Deal With Scarcity, Left Screams “Price Gouging”

11 Monday Apr 2022

Posted by pnoetx in Antitrust, Environmental Fascism, Oil Prices

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Antitrust, Barack Obama, central planning, ESG Scores, FDR, Fossil fuels, Gas Prices, Green New Deal, Intermittancy, Joe Biden, Keystone Pipeline, Lawrence Summers, Oil Prices, Oil Profits, OPEC, Power Grid, Price Gouging, Profit Margins, Profiteering, Renewable energy, Strategic Petroleum Reserve, Ukraine Invasion, Vladimir Putin, West Texas Intermediate

Democrats claim profiteering by oil companies is responsible for the sustained rise in oil prices since Joe Biden’s inauguration (really, his election). That’s among the more laughable attempts at gaslighting in recent memory, right up there with blaming market concentration for the sustained increase in inflation since Biden’s inauguration. At a hearing this week, congressional Democrats, frightened by the prospect of a beat-down just ahead in the mid-term elections, couldn’t resist making “price-gouging” accusations against oil producers. These pols stumble over their own contradictory talking points, insisting on more oil production only when they aren’t hastily sabotaging oil and gas output. Their dishonestly is galling, but so is the foolishness of voters who blindly accept the economic illiteracy issuing from that side of the aisle.

Break It Then Blame It

Those who level “price gouging” charges at oil companies are often the same people seeking to eliminate fossil fuel consumption by making those energy choices unaffordable. The latter is a bad look this close to mid-term elections, so they follow the playbook I described recently in “Break the Market, Blame It, Then Break It Some More“. And this post is instructive: “House Dem: Big Oil is profiteering by, er … doing what we demanded”.

Not only have the Democrats’ policies caused oil prices to soar; for many years they’ve been undermining the stability of the power grid via forced conversion into intermittent renewable energy sources like wind and solar, all while preventing the expansion of safe and carbon-free nuclear power generation. It’s ironic that these would-be industrial planners seem so eager to botch the job, though failure is all too typical of central planning. Just ask the Germans about their own hapless efforts at energy planning.

As economist Lawrence Summers, former Treasury Secretary under Barack Obama, said recently:

“Look, the net effect of the things the administration talks about in terms of micro policies to reduce inflation, this gouging talk is frivolous, nonserious, and utterly ineffectual. A gas price holiday would, ultimately, push up prices by raising demand. … The student loan relief … is injecting resources into the economy at a hundred billion dollar a year annual rate when the economy needs to be cooled off, not heated up. … The administration could be much more constructive than it has been with respect to energy supply.”

The market functions to allocate scarce resources. When conditions of scarcity become more acute, the market mechanism responds by pricing available supplies to both curtail use and incentivize delivery of additional quantities. That involves the processing of vast amounts of information, and it is a balancing at which the market performs extremely well relative to bumbling politicians and central planners, whose actions are too often at the root of acute scarcities.

Antitrust Nonsense

Of course, the Democrats have seized upon the inescapable fact that soaring oil prices cause profits to soar for anyone producing oil or holding stocks of oil. But oil company profits are notoriously volatile. Margins were negative for most of 2020, when demand weakened in the initial stages of the pandemic. And now, some companies are bracing for massive write-downs on abandoned drilling projects in Russia. The oil and gas business is certainly not known for high profit margins. Short-term profits, while they last, must be used to meet the physical or financial needs of the business.

The threats of antitrust action by the Biden Administration are an extension of the price-gouging narrative, even if the threat reflects an injudicious grasp of what it takes to prove collusion. It takes a fertile imagination to think western oil companies could successfully collude on pricing in a market dominated by the following players:

Fat chance. In any case, it’s a global market, and it’s impossible for western oil producers to dictate pricing. Even the OPEC cartel has been unable to dictate prices, not to mention keeping it’s members from violating production quotas. But if a successful conspiracy among oil companies to raise prices was possible, one would guess they’d have done it a lot sooner!

Nor is it possible for the oil majors to dictate prices at the pump, because retail prices are set independently. While the cost of crude oil is only about 54% of the cost of refined gas at retail, fluctuations in prices at the pump correlate strongly with crude oil prices. Here is a ten-year chart of daily price data, where the blue line is the price of West Texas Intermediate crude oil and the orange line is the average price of regular gas in the U.S.:

Here are the same two series for 2022 year-to-date:

Coerced Scarcity

Again, oil prices have been under upward pressure for over a year until a break in early March, following the steep run-up in the immediate wake of the Ukraine invasion. First there was Biden’s stultifying rhetoric, before and after the 2020 election, assisted by radical members of Congress. Then there were executive orders halting drilling on federal lands, killing the Keystone pipeline, efforts to shut down several other existing pipelines, and the imposition of regulatory penalties on drillers. In addition, unrest in certain parts of the Middle East curtailed production, compounded this year by the boycott on Russian oil (which, as a foreign policy matter, was far too late in coming).

However, existing facilities have been capable of squeezing out more oil and gas. Lo and behold, supply curves slope upward, even in the short-run! Despite all of Biden’s efforts to cripple domestic oil production, higher crude prices have brought forth some additional supplies. Biden’s raid on the Strategic Petroleum Reserve has also boosted supply for now, but its magnitude won’t help much, and it must be replaced for use during real U.S. national emergencies, which the war in Ukraine is not, as awful as it is.

That said, investing in new drilling capacity is not wise given the political climate created by Biden and the Democrats: they have been quite clear that they mean to crush the fossil fuel industry. For some time, the oil companies have been busy investing cash flows in “green” initiatives in an effort to bolster their ESG scores, a dubious exercise to say the least. Arguably, in this policy environment, the most responsible thing to do is to return some of the capital over which these firms are stewards to its rightful owners, many of whom are middle-class savers who hold oil stocks in their 401(k) funds. That approach is manifest in the recent stock buybacks and dividend payments oil companies have announced and defended before Congress.

Conclusion

A forced shutdown of fossil fuel energy was much ballyhooed by the Left as a part of Joe Biden’s agenda. Biden himself bought into the “Green New Deal”, imagining it might win him a vaunted place alongside FDR’s legacy in American history. The effort was unwise, but Biden is trying to hang onto the narrative and maintain his punitive measures against American oil companies. All the while, he begs OPEC producers to step up production, bending a knee to despots in countries such as Iran and Venezuela. Why, it’s as if their fossil fuels are somehow cleaner than those extracted in the U.S! The feeble Biden and congressional Democrats are proving just how mendacious they are. They can rightfully blame Vladimir Putin for the recent escalation in oil prices, but they bear much responsibility themselves for the burden of high gas prices, energy bills, and the unnecessary, ongoing scarcity victimizing the American public.

The SEC’s Absurd Climate Overreach

04 Monday Apr 2022

Posted by pnoetx in Central Planning, Global Warming

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capital costs, Carbon Emissions, Carbon Forcing Models, carbon Sensitivity, central planning, Corporatism, Disclosure Requirements, ESG Risk, ESG Scores, Green Energy, Greenhouse Gas, Hester Peirce, John Cochrane, Litigation Risk, Paris Agreement, Regulatory Risk, Renewable energy, Scope 1, Scope 2, Scope 3, SEC Climate Mandate, Securities and Exchange Commission

The Securities and Exchange Commission recently issued a proposed rule for reporting on climate change risk, and it is fairly outrageous. It asks that corporations report on their own direct greenhouse gas emissions (GHG – Scope 1), the emissions caused by their purchases of energy inputs (Scope 2), and the emissions caused by their “downstream” customers and “upstream” suppliers (Scope 3). This is another front in the Biden Administration’s efforts to bankrupt producers of fossil fuels and to force the private sector to radically alter its mix of energy inputs. The SEC’s proposed “disclosures” are sheer lunacy on several levels.

The SEC Mandate

If implemented, the rule would allow the SEC to stray well outside the bounds of its regulatory authority. The SEC’s role is not to regulate emissions or the environment. Rather, as its web site makes clear, the agency is charged with:

“… protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation.”

Given this mission, the SEC requires management to disclose material financial risks. Are a firm’s GHG emissions really material risks? The first problem here is quite practical: John Cochrane notes the outrageous costs that would be associated with compliance:

“‘Disclosure’ usually means revealing something you know. A perfectly honest answer to ‘disclose what you know about your carbon emissions’ is, ‘we have no idea what our carbon emissions are.’ Back that up with every document the company has ever produced, and you have perfectly ‘disclosed.’ There is no asymmetric information, fraud, etc.

The SEC has already required the production of new information, and as Hester Peirce makes perfectly clear, the climate rules again make a huge dinner out of that appetizer: essentially telling companies to hire a huge number of climate consultants to generate new information, and also how to run businesses.”

In a separate post, Cochrane quotes SEC Commissioner Hester Peirce’s response to the proposed rule. She emphasizes that companies are already required to disclose all material risks. Perhaps they have properly declined to disclose climate risks because those risks are not material.

“Current SEC disclosure mandates are intended to provide investors with an accurate picture of the company’s present and prospective performance through managers’ own eyes. How are they thinking about the company? What opportunities and risks do the board and managers see? What are the material determinants of the company’s financial value?”

Identifying the Risk Causers

Regardless of the actual risks to a firm caused by climate change, the SEC’s proposed GHG disclosures put a more subtle issue into play. Peirce describes what amounts to a fundamental shift in the SEC’s philosophy regarding the motivation and purpose of disclosure:

The proposal, by contrast, tells corporate managers how regulators, doing the bidding of an array of non-investor stakeholders, expect them to run their companies. It identifies a set of risks and opportunities—some perhaps real, others clearly theoretical—that managers should be considering and even suggests specific ways to mitigate those risks. It forces investors to view companies through the eyes of a vocal set of stakeholders, for whom a company’s climate reputation is of equal or greater importance than a company’s financial performance.”

In other words, a major risk faced by these firms has nothing to do with climate change itself, but with perceptions of “climate-related” risks by other parties. That transforms the question of climate risk into something that is, in fact, regulatory and political. Is this the true nature of the SEC’s concern, all dressed up in the scientism typically relied upon by climate change activists?

The reaction of government bureaucrats to the risks they perceive is a palpable threat to investor well-being. For example, GHG emissions might lead to future regulatory sanctions from various government agencies, including fines, taxes, various sanctions, and mitigation mandates. In addition, with the growth of investment management based on what are essentially shambolic and ad hoc ESG scores, GHG or carbon emissions might lead to constraints on a firm’s access to capital. Just ask the oil and gas industry! That penalty is imposed by activist investors and fund managers who wish to force an unwise and premature end to the use of fossil fuels. There is also a threat that GHG disclosures themselves, based (as they will be) on flimsy estimates, could create litigation risk for many companies.

Much Ado About Nothing

While there are major regulatory and political risks to investors, let’s ask, for the sake of argument: how would one degree celcius of warming by the end of this century affect corporate results? Generally not at all. (The bounds described in the Paris Agreement are 1.5 to 2 degrees, but these are based on unrealistic scenarios — see links below.) It would happen gradually in any case, with ample opportunity to adapt to the operating environment. To think otherwise requires great leaps of imagination. For example, climate alarmists probably fancy that violent weather or wildfires will wipe out facilities, yet there is no reliable evidence that the mild warming experienced to-date has been associated with more violent weather or an increased incidence of wildfires (and see here). There are a great many “sacred cows” worshiped by climate-change neurotics, and the SEC undoubtedly harbors many of those shibboleths.

What probabilities can be attached to each incremental degree of warming that might occur over several decades. The evidence we’ve seen comes from so-called carbon-forcing models parameterized for unrealistically high carbon sensitivities and subjected to unrealistic carbon-concentration scenarios. Estimates of these probabilities are not reliable.

Furthermore, climate change risks, even if they could be measured reliably in the aggregate, cannot reasonably be allocated to individual firms. The magnitude of the firm’s own contribution to that risk is equivalent to the marginal reduction in risk if the firm implemented a realistic zero-carbon operating rule. For virtually any firm, we’re talking about something infinitesimal. It involves tremendous guesswork given that various parties around the globe take a flexible approach to emissions, and will continue to do so. The very suggestion of such an exercise is an act of hubris.

Back To The SEC’s Mandated Role

Let’s return to the practical problems associated with these kinds of disclosure requirements. Cochrane also points out that the onerous nature of the SEC proposal, and the regulatory and political threats it embodies, will hasten the transition away from public ownership in many industries.

“The fixed costs alone are huge. The trend to going private and abandoning public markets, at least in the U.S. will continue. The trend to large oligopolized politically compliant static businesses in the U.S. will continue.

I would bet these rules wind up in court, and that these are important issues. They should be.”

Unfortunately, private companies will still have to to deal with certain investors who would shackle their use of energy inputs and demand forms of diligence (… not to say “due”) of their own.

The SEC’s proposed climate risk disclosures are stunningly authoritarian, and they are designed to coalesce with other demands by the regulatory state to kill carbon-based energy and promote renewables. These alternative energy sources are, as yet, unable to offer an economical and stable supply of power. The fraudulent nature of the alleged risks make this all the more appalling. The SEC has effectively undertaken an effort to engage in corporatist industrial policy benefitting a certain class of “green” energy investors, exposing the proposal as yet another step on the road to fascism. Let’s hope Cochrane is right: already, 16 state attorneys general are preparing a legal challenge. May the courts ultimately see through the SEC’s sham!

Sacred Cow Chips

Monthly Archives: April 2022

Markets Deal With Scarcity, Left Screams “Price Gouging”

The SEC’s Absurd Climate Overreach