American Homicide Rates: Which America?

12 Thursday Oct 2017

Posted by Nuetzel in Discrimination, Gun Control, Immigration

Tags

Affirmative Action, Assimilation, Bretigne Shaffer, Diversity, Economic Mobility, Heterogeneity, Illegal Immigration, On the Banks, Rent Controls, Ryan McMaken, School Choice, Segregation, Sponsorship, Violent Victimization, War on Drugs

A heterogenious society and the successful assimilation of minorities are two very different things, as much as we might wish otherwise. Two populations within a region will come into contact, but conditions promoting real assimilation are complex. (I’m avoiding use of the term “diversity” because it has come to imply the successful assimilation of distinct groups.) While cultural differences can enrich the lives of both populations, sharp economic gaps between minority and majority populations (and even some cultural differences) will tend to slow the process of assimilation. This is often associated with social dysfunction, such as high crime and homicide rates, especially among the minority group. This is a fairly common phenomenon in countries with racial and ethnic minority or immigrant populations, as Ryan McMaken writes in a recent piece on international differences in heterogeneity and homicide rates.

Heterogeneity In the West

Countries in the Western Hemisphere tend to have relatively high immigrant and minority populations, as McMaken describes:

“… when considering the Americas, … nation-states are in most cases frontier states with populations heavily affected by immigration, a history of conflict with indigenous populations, and institutionalized chattel slavery that lasted until the 19th century. The factors are significant through the region, and the United States cannot be held apart in this regard from the Caribbean, Brazil, Colombia, and other states impacted by all these factors.

Importantly, these factors also make the Americas significantly different from Western Europe and other areas — Japan and Korea, for example — where the present situation is marked by much higher levels of cultural uniformity and quite different recent histories and current demographic trends.“

Homicides

McMaken questions popular theories of cross-country differences in homicide rates based on the degree of gun control and gun ownership rates. Homicides and violent victimization have been declining in the U.S. for many years even as gun ownership has soared. Furthermore, international comparisons are traditionally plagued by arbitrary country classifications and exclusions, as well as inconsistent definitions of homocide and gun ownership. However, McMaken points to other explanations for violent crime found to be fairly robust in the academic literature: poverty and population heterogeneity:

“… these factors contribute to lower levels of social cohesion, and thus higher levels of criminality and other socially-undesirable behaviors.“

McMaken cites research involving ethnic minority populations of Slavs in Germany, Italians in Argentina and the U.S., and Arabs in Europe, all of whom had crime rates far exceeding those in their countries of origin. The connection between heterogeneity and crime might have nothing to do with particular ethnic groups, though it seems all too easy for observers within individual countries to blame specific “others” for crime. It is a symptom of alienation from the majority as well as economic desperation and vulnerability to opportunities and threats arising from the underground economy. Illegal activities might truly provide the best alternatives available to low-skilled, minority job seekers. Needless to say, underground economic activity, such as the drug trade, involves high risk and often violence among users and between competing factions. This is an important source of the high crime and victimization that typifies many minority communities.

Despite declines since the 1970s, the U.S. still has a higher homicide rate than many other industrialized countries. Beyond the weakness cited above, such comparisons fail to control for other confounding effects, including the degree of heterogeneity across countries.

Policies

Heterogeneity poses a problem in the context of involuntary and often voluntary segregation of sub-cultures. If you don’t believe the “voluntary” part, take a close look at the different clusters of individuals in the cafeteria at almost any “diverse” university or corporate office. Judge for yourself. Differences in language, fertility, demographics, religion and cultural traditions may be noteworthy, but where crime is associated with effectively segregated minorities, there is usually a gap in economic status and mobility relative to society at large.

What policies can mitigate these conditions and their impact on crime? It would be nice to approach this question strictly from the perspective that heterogeneity is a given, but the degree of heterogeneity is, to some extent, an endogenous outcome. Restrictive immigration policies might leap to mind as a way of restraining heterogeneity, and there is little doubt that illegal immigrants are less likely to assimilate (many contend that their crime rate is low). Policies allowing less restricted flows of legal immigrants tend to be salutary if they are based on domestic economic need, economic potential, or compassion for those seeking asylum or a haven from political oppression. A legal immigrant receiving a welcome on new shores is more likely to assimilate successfully than an illegal immigrant, all else equal. Citizenship and language education are avenues through which assimilation might be encouraged. And there could be ways to improve sponsorships and even temporary visa programs so as to encourage assimilation.

What can be done to encourage more effective assimilation of all minorities? And what can be done to reduce the crime associated with unassimilated populations? One major corrective is a strong economy. Policies that encourage economic growth will lead to greater participation in markets and society, with consequent interaction and mixing of sub-cultures. Growth policies include low and non-distortionary taxes and light regulation.

The war on drugs also accounts for a major share of homicides, and that war interacts with non-assimilation in perverse ways. It is crippling to disadvantaged communities precisely because it creates risky “opportunities” in the underground economy. It also produces high levels of incarceration and dangerous forms of “cut” contraband. As I’ll discuss in my next post, ending the war on drugs would reduce violent crime and lead to safer drugs in relatively short order.

A short list of other policies that would foster assimilation and economic mobility would include: improved education: school choice and apprenticeship programs; better labor market outcomes: reduce the minimum wage or create sub-minimum wage categories to enhance opportunities to gain experience and skills; better housing: eliminate rent controls.

Assimilation is always more effective when it occurs “organically”. Affirmative action and forced diversity initiatives often fail to achieve effective assimilation. Beyond the obvious infringement on liberty, these policies may sow resentment among those who suffer reverse discrimination, and among those who witness it, to the probable detriment of efforts to eliminate bias. Even worse, these policies often put their intended beneficiaries into vulnerable, un-winnable situations: jobs or programs for which their skills are not adequate. There are undoubtedly excellent candidates among those placed in positions under quotas, but there is a likelihood that many will be unsuccessful in their roles.

Conclusion

The anti-gun left is eager to attribute differences in homicide rates to the impact of gun control policies, but a close examination of the facts reveals better explanations. A prominent factor contributing to differences in homicide rates is the degree of heterogeneity across countries. Those with more homogeneous populations tend to have lower homicide rates and vice versa. But the problem is not merely heterogeneity, but the difficulty of economic and cultural assimilation of minority populations. These factors appear to lead to greater crime within many minority populations. The U.S. is not unique in its experience with high minority crime rates, but it is a relatively heterogenous nation. This is an important factor in explaining why the homicide rate tends to be higher in the U.S. than in other industrialized countries. To close, I’ll offer something cogent from Bretigne Shaffer’s On the Banks blog, in which she offers this quote from an individual named Michael Owen (the soccer player?):

“... we don’t really have a single America with a moderately high rate of gun deaths. Instead, we have two Americas, one of which has very high rates of gun ownership but very low murder rates, very comparable to the rest of the First World democracies such as those in western & northern Europe, Australia, New Zealand, Canada, Japan, South Korea. The other America has much lower rates of gun ownership but much, much higher murder rates, akin to violent third world countries.“

Sins of American Health Insurance

22 Wednesday Feb 2017

Posted by Nuetzel in Health Care

≈ 1 Comment

Tags

COBRA, competition, Cross Subsidies, Employer Coverage, Future Insurability Coverage, health care costs, High-Risk Pools, Individual Coverage, Insurability, John Cochrane, Medicaid, Obamacare, Portability, Tax Deductibility, Wage controls

Health insurance in the U.S. suffers from many dysfunctions, but a couple of basic steps in its institutional evolution lie at the root of its worst shortcomings. I say this after coming across another great post by John Cochrane the other day, this time with some of his thoughts on fashioning an Obamacare replacement. He lays out a few basic principles, one of which is that “health insurance is not a payment plan for small expenses“, or shouldn’t be.

The best parts of Cochrane’s post, I think, relate to two longstanding features of the health insurance market in the U.S.:

“The original sin of American health insurance is the tax deduction for employer-provided group plans — but not, to this day, for employer contributions to portable individual insurance. ‘Insurance’ then became a payment plan, to maximize the tax deduction, and then horrendously inefficient as people were no longer spending their own money.

Worse, nobody who hopes to get a job with benefits then buys long-term individual insurance. This provision alone pretty much created the preexisting conditions problem.”

The last two sentences are insightful commentary on the inadequacy of coverage for pre-existing conditions, though “creating the pre-existing conditions problem” should probably read “foreclosed any easy solution to the pre-existing conditions problem“. During World War II, the government authorized the tax deduction for employer-provided health plans as a concession to labor interests frustrated by war-time wage controls. Cochrane should be forgiven for making this sound like a deal with the devil. Today, employer-provided coverage is almost always limited to one’s job tenure (plus 18 months under COBRA, since 1985). In the 1940s, the benefits might have been generous, but portability was probably the last thing on their minds, especially in light of the long job tenures of the day and the fact that many employers, at that time, offered coverage to vested retirees. The dominance of employer-provided coverage after WW-II pretty much ruled out lifetime insurability in a world with relatively high job mobility.

The tax deduction also helped to institutionalize the faulty notion that “good” health insurance should cover a panoply of services involving small, recurring expenses that are properly considered normal health upkeep. Instead, insurance should cover large, unexpected expenses for services necessary to treat injuries or severe illness. In addition, the coverage and the premium should, at the buyer’s option, include a guarantee of future insurability at standard rates. This option should not be mandated, but a refusal to opt-in must come at the risk of potentially large future health care obligations.

Cochrane also says:

“Cross-subsidies are a second original sin. Our government doesn’t like taxing and spending on budget where we can see it. So it forces others to pay: It forces employers to provide health insurance. It forces hospitals to provide free care. It low-balls Medicare and Medicaid reimbursement.

The big problem: These patches and cross-subsidies cannot stand competition. Yet without supply competition, costs increase, the number of people needing subsidized care rises, and around we go.”

Competition and choice must exist in health care delivery and in the health insurance market to keep costs under control. But if person A is an identifiable health risk and person B is not, and if healthy B is forced to pay the same premium for health coverage as sickly A, then A is cross-subsidized by B. Competition will encourage B to bail out of the risk pool. If B is prohibited from doing so, costs will soar because the cross-subsidies create incentives for A to over-utilize services, even making allowance for A’s greater need. Thus, forcing A and B into the same risk pool ultimately exacerbates the plight of both A and B by raising costs. That’s where we find ourselves today.

Enabling competition and dismantling cross-subsidies can only occur if all consumers are able to purchase not just health insurance, but long-term health insurability. To avoid a painful transition, publicly-funded high-risk pools might be necessary for the existing type As of the world, who are already burdened by poor health and might not be able to afford the premium necessary for insurance. Going forward, those who refuse a future-insurability option must understand that if they fail to opt-in prior to developing a serious health condition, they will have to rely on Medicaid, private charity, or a risk-rated policy, if they can afford it.

Will Republicans abolish the ill-founded tax deduction? Almost certainly not. They are likely to extend it to the individual side of the market, despite the fact that this will have an additional inflating impact on health care costs. At least it will reduce the current advantage of employer-paid coverage, potentially broadening the market faced by individuals. Also, Republicans might take steps to restore choice, promote competition, and eliminate cross-subsidies. As Cochrane notes, there are also ideas in play to improve portability. Questions remain about many of the details, however, including Medicaid reforms. On the whole, I’m hopeful that we’ll see most of Obamacare’s short-sighted provisions and rules rolled back and replaced by legislation to encourage the development of the market for insurance coverage and for future insurability.

The Ruinous Authoritarian Impulse: Rules For Housing and Diversity

20 Friday Oct 2017

Posted by Nuetzel in Affirmative Action, Housing Policy, Identity Politics

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Admissions Quotas, Affirmative Action, Hiring Quotas, Historic Preservation, Housing Inequality, Land-Use Regulation, Mismatch Hypothesis, Randall O'Toole, Rent Control, School Choice, Stigmatization, Wendell Cox

I’m following up on an earlier post with a few thoughts on two topics: the “unexpected” harms of affirmative action and the left’s unwitting promotion of inequality via restrictive housing policies in many American cities. I mentioned both policies last week without much elaboration in “American Homicide Rates: Which America?” Both are efforts by government to apply centralized decision-making to complex social issues. Both reflect misdiagnoses of the problems they seek to address. Both are coercive and dismissive of the power of free individuals to help themselves and the power of markets to solve social problems. And both kinds of policies are failures.

Whether government is prescribing the rental value of a property, regulating forms of new construction, or imposing land-use regulations, zoning, historic preservation, and environmental rules, the result is higher housing costs and often lower-quality housing for the low end of the income distribution. The effects of some of these policies are discussed by Randall O’Toole in “Bringing Soviet Planning To New York City“. Wendell Cox notes that progressive cities are home to the worst inequality of housing opportunities for blacks and hispanics. The Cox piece is a bit dry, but it is instructive. These are results that reinforce the alienation described in the “Which America?” post linked above.

Allowing government to prescribe the appropriate matching of individuals to roles based on racial or identity group status is divisive and counter-productive. This is so-called affirmative action. Decisions based not on merit, but on skin color or membership in favored identity groups are discriminatory by their very nature. Members of non-favored groups, including non-favored minorities such as asians, are penalized, despite their lack of any connection to the injustices of the past. Human capital is a scarce resource, which is why merit has value. So group preferences in hiring involve tradeoffs, subverting goals such as productivity, profit and expense control. This inflicts a cost on society as a whole.

In college admissions, affirmative action often compromises learning. This article on affirmative action at universities emphasizes the “mismatch hypothesis”, which asserts that individuals with lesser academic credentials who are placed as a consequence of preference programs often “suffer academically as a result”. The damage includes higher dropout rates among minorities and generally less learning than if these individuals had studied with peers having more similar credentials. A further implication is that these individuals probably experience less career success. In fact, an under-qualified employee’s job performance might permanently damage his or her career prospects. There may be other consequences of group preferences such as stigmatization and alienation of individuals within the academic community or workplace.

Whether the topic is better housing, improved educational and economic prospects, trade, drugs, technology, or any other human endeavor, the best solutions do not involve decisions imposed by government coercion. Instead, allowing individuals to interact freely, gaining valuable employment experience and access to the bounty of markets, fosters organic gains in opportunities. Individual liberties and equality before the law are the real keys to broader success. The visible, iron hand of the state tends to diminish the supply of affordable housing. Forced quotas in hiring and academic admissions often harm their intended beneficiaries and poison the social environment. When placement decisions are in the hands of public institutions like state universities, it is in the best interests of both schools and students to make those decisions based on academic credentials. Opportunities for higher education will improve only with advances at lower levels of education, which requires parental choice rather than a collection of unresponsive mini-monopolies. In addition, higher education should lose it’s cachet as an elixir for economic prospects. Many individuals, regardless of group identity, would optimize their careers through vocational skills and entering the workforce to gain experience at an earlier age than the typical university graduate.

Truthy’s In The Eye of The Beholder

20 Monday Oct 2014

Posted by Nuetzel in Uncategorized

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Ajit Pai, Civil Liberty, Free Speech, Government Spying, NSF, Snooping, Social Media, Steven Colbert, Truthy, Twitter

Over the top: The federal government, through the NSF, is funding the development of a tool to “mitigate the diffusion of false and misleading ideas, detect hate speech and subversive propaganda, and assist in the preservation of open debate.” Oh really? Should anyone find this reassuring? FCC Commissioner Ajit Pai condemns this initiative in the Washington Post. The project’s name is “Truthy,” a term credited to Steven Colbert, who otherwise seems to have nothing to do with it. Pai sums up the project nicely:

“Hmm. A government-funded initiative is going to ‘assist in the preservation of open debate’ by monitoring social media for ‘subversive propaganda’ and combating what it considers to be ‘the diffusion of false and misleading ideas’? The concept seems to have come straight out of a George Orwell novel.

The NSF has already poured nearly $1 million into Truthy. To what end? Why is the federal government spending so much money on the study of your Twitter habits?

Some possible hints as to Truthy’s real motives emerge in a 2012 paper by the project’s leaders, in which they wrote ominously of a ‘highly-active, densely-interconnected constituency of right-leaning users using [Twitter] to further their political views.’”

Does anyone of good faith on the Left actually think this is a good idea? And make no mistake: technology of this sort can be reversed. If anyone on the Left thinks it’s a good idea, are they willing to live with the consequences if things don’t go their way, say, if their avowed enemies take power? Have some more Pai:

“To those who wish to shape the nation’s political dialogue, social media is dangerous. No longer can a cadre of elite gatekeepers pick and choose the ideas to which Americans will be exposed. But today’s democratization of political speech is a good thing. It brings into the arena countless Americans whose voices previously might have received inadequate or slanted exposure.

The federal government has no business spending your hard-earned money on a project to monitor political speech on Twitter. How should it instead have reacted when funding for Truthy was proposed? The proper response wouldn’t have required anywhere near 140 characters. It could have been, and should have been, #absolutelynot.“

No Radar, No Rudder: Fiscal & Monetary Destabilization

31 Wednesday May 2023

Posted by Nuetzel in Fiscal policy, Monetary Policy

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budget deficits, Credible Committments, crowding out, David Beckworth, David Henderson, Discretionary Spending, economic stimulus, Federal Reserve, Great Depression, Housing Bubble, Inflation Reduction Act, Long and Variable Lags, Lucas Critique, Mortgage Crisis, Pandemic Relief, Rational Expectations, Robert Lucas, Shovel-Ready Projects, Spending Multipliers, Stabilization policy, Tyler Cowen

Policy activists have long maintained that manipulating government policy can stabilize the economy. In other words, big spending initiatives, tax cuts, and money growth can lift the economy out of recessions, or budget cuts and monetary contraction can prevent overheating and inflation. However, this activist mirage burned away under the light of experience. It’s not that fiscal and monetary policy are powerless. It’s a matter of practical limitations that often cause these tools to be either impotent or destabilizing to the economy, rather than smoothing fluctuations in the business cycle.

The macroeconomics classes seem like yesterday: Keynesian professors lauded the promise of wise government stabilization efforts: policymakers could, at least in principle, counter economic shocks, particularly on the demand side. That optimistic narrative didn’t end after my grad school days. I endured many client meetings sponsored by macro forecasters touting the fine-tuning of fiscal and monetary policy actions. Some of those economists were working with (and collecting revenue from) government policymakers, who are always eager to validate their pretensions as planners (and saviors). However, seldom if ever do forecasters conduct ex post reviews of their model-spun policy scenarios. In fairness, that might be hard to do because all sorts of things change from initial conditions, but it definitely would not be in their interests to emphasize the record.

In this post I attempt to explain why you should be skeptical of government stabilization efforts. It’s sort of a lengthy post, so I’ve listed section headings below in case readers wish to scroll to points of most interest. Pick and choose, if necessary, though some context might get lost in the process.

Expectations Change the World
Fiscal Extravagance
Multipliers In the Real World
Delays
Crowding Out
Other Peoples’ Money
Tax Policy
Monetary Policy
Boom and Bust
Inflation Targeting
Via Rate Targeting
Policy Coordination
Who Calls the Tune?
Stable Policy, Stable Economy

Expectations Change the World

There were always some realists in the economics community. In May we saw the passing of one such individual: Robert Lucas was a giant intellect within the economics community, and one from whom I had the pleasure of taking a class as a graduate student. He was awarded the Nobel Prize in Economic Science in 1995 for his applications of rational expectations theory and completely transforming macro research. As Tyler Cowen notes, Keynesians were often hostile to Lucas’ ideas. I remember a smug classmate, in class, telling the esteemed Lucas that an important assumption was “fatuous”. Lucas fired back, “You bastard!”, but proceeded to explain the underlying logic. Cowen uses the word “charming” to describe the way Lucas disarmed his critics, but he could react strongly to rude ignorance.

Lucas gained professional fame in the 1970s for identifying a significant vulnerability of activist macro policy. David Henderson explains the famous “Lucas Critique” in the Wall Street Journal:

“… because these models were from periods when people had one set of expectations, the models would be useless for later periods when expectations had changed. While this might sound disheartening for policy makers, there was a silver lining. It meant, as Lucas’s colleague Thomas Sargent pointed out, that if a government could credibly commit to cutting inflation, it could do so without a large increase in unemployment. Why? Because people would quickly adjust their expectations to match the promised lower inflation rate. To be sure, the key is government credibility, often in short supply.”

Non-credibility is a major pitfall of activist macro stabilization policies that renders them unreliable and frequently counterproductive. And there are a number of elements that go toward establishing non-credibility. We’ll distinguish here between fiscal and monetary policy, focusing on the fiscal side in the next several sections.

Fiscal Extravagance

We’ve seen federal spending and budget deficits balloon in recent years. Chronic and growing budget deficits make it difficult to deliver meaningful stimulus, both practically and politically.

The next chart is from the most recent Congressional Budget Office (CBO) report. It shows the growing contribution of interest payments to deficit spending. Ever-larger deficits mean ever-larger amounts of debt on which interest is owed, putting an ever-greater squeeze on government finances going forward. This is particularly onerous when interest rates rise, as they have over the past few years. Both new debt is issued and existing debt is rolled over at higher cost.

Relief payments made a large contribution to the deficits during the pandemic, but more recent legislation (like the deceitfully-named Inflation Reduction Act) piled-on billions of new subsidies for private investments of questionable value, not to mention outright handouts. These expenditures had nothing to do with economic stabilization and no prayer of reducing inflation. Pissing away money and resources only hastens the debt and interest-cost squeeze that is ultimately unsustainable without massive inflation.

Hardly anyone with future political ambitions wants to address the growing entitlements deficit … but it will catch up with them. Social Security and Medicare are projected to exhaust their respective trust funds in the early- to mid-2030s, which will lead to mandatory benefit cuts in the absence of reform.

If it still isn’t obvious, the real problem driving the budget imbalance is spending, not revenue, as the next CBO chart demonstrates. The “emergency” pandemic measures helped precipitate our current stabilization dilemma. David Beckworth tweets that the relief measures “spurred a rapid recovery”, though I’d hasten to add that a wave of private and public rejection of extreme precautions in some regions helped as well. And after all, the pandemic downturn was exaggerated by misdirected policies including closures and lockdowns that constrained both the demand and supply sides. Beckworth acknowledges the relief measures “propelled inflation”, but the pandemic also seemed to leave us on a permanently higher spending path. Again, see the first chart below.

The second chart below shows that non-discretionary spending (largely entitlements) and interest outlays are how we got on that path. The only avenue for countercyclical spending is discretionary expenditures, which constitute an ever-smaller share of the overall budget.

We’ve had chronic deficits for years, but we’ve shifted to a much larger and continuing imbalance. With more deficits come higher interest costs, especially when interest rates follow a typical upward cyclical pattern. This creates a potentially explosive situation that is best avoided via fiscal restraint.

Putting other doubts about fiscal efficacy aside, it’s all but impossible to stimulate real economic activity when you’ve already tapped yourself out and overshot in the midst of a post-pandemic economic expansion.

Multipliers In the Real World

So-called spending multipliers are deeply beloved by Keynesians and pork-barrel spenders. These multipliers tell us that every dollar of extra spending ultimately raises income by some multiple of that dollar. This assumes that a portion of every dollar spent by government is re-spent by the recipient, and a portion of that is re-spent again by another recipient. But spending multipliers are never what they’re cracked up to be for a variety of reasons. (I covered these in “Multipliers Are For Politicians”, and also see this post.) There are leakages out of the re-spending process (income taxes, saving, imports), which trim the ultimate impact of new spending on income. When supply constraints bind on economic activity, fiscal stimulus will be of limited power in real terms.

If stimulus is truly expected to be counter-cyclical and transitory, as is generally claimed, then much of each dollar of extra government spending will be saved rather than spent. This is the lesson of the permanent income hypothesis. It means greater leakages from the re-spending stream and a lower multiplier. We saw this with the bulge in personal savings in the aftermath of pandemic relief payments.

Another side of this coin, however, is that cutting checks might be the government’s single-most efficient activity in execution, but it can create massive incentive problems. Some recipients are happy to forego labor market participation as long as the government keeps sending them checks, but at least they spend some of the income.

Delays

Another unappreciated and destabilizing downside of fiscal stimulus is that it often comes too late, just when the economy doesn’t need stimulus. That’s because a variety of delays are inherent in many spending initiatives: legislative, regulatory, legal challenges, planning and design, distribution to various spending authorities, and final disbursement. As I noted here:

“Even government infrastructure projects, heralded as great enhancers of American productivity, are often subject to lengthy delays and cost overruns due to regulatory and environmental rules. Is there any such thing as a federal ‘shovel-ready’ infrastructure project?”

Crowding Out

The supply of savings is limited, but when government borrows to fund deficits, it directly competes with private industry for those savings. Thus, funds that might otherwise pay for new plant, equipment, and even R&D are diverted to uses that should qualify as government consumption rather than long-term investment. Government competition for funds “crowds-out” private activity and impedes growth in the economy’s productive capacity. Thus, the effort to stimulate economic activity is self-defeating in some respects.

Other Peoples’ Money

Government doesn’t respond to price signals the way self-interested private actors do. This indifference leads to mis-allocated resources and waste. It extends to the creation of opportunities for graft and corruption, typically involving diversion of resources into uses that are of questionable productivity (corn ethanol, solar and wind subsidies).

Consider one other type of policy action perceived as counter-cyclical: federal bailouts of failing financial institutions or other troubled businesses. These rescues prop up unproductive enterprises rather than allowing waste to be flushed from the system, which should be viewed as a beneficial aspect of recession. The upshot is that too many efforts at economic stabilization are misdirected, wasteful, ill-timed, and pro-cyclical in impact.

Tax Policy

Like stabilization efforts on the spending side, tax changes may be badly timed. Tax legislation is often complex and can take time for consumers and businesses to adjust. In terms of traditional multiplier analysis, the initial impact of a tax change on spending is smaller than for expenditures, so tax multipliers are smaller. And to the extent that a tax change is perceived as temporary, it is made less effective. Thus, while changes in tax policy can have powerful real effects, they suffer from some of the same practical shortcomings for stabilization as changes in spending.

However, stimulative tax cuts, if well crafted, can boost disposable incomes and improve investment and work incentives. As temporary measures, that might mean an acceleration of certain kinds of activity. Tax increases reduce disposable incomes and may blunt incentives, or prompt delays in planned activities. Thus, tax policy may bear on the demand side as well as the timing of shifts in the economy’s productive potential or supply side.

Monetary Policy

Monetary policy is subject to problems of its own. Again, I refer to practical issues that are seemingly impossible for policy activists to overcome. Monetary policy is conducted by the nation’s central bank, the Federal Reserve (aka, the Fed). It is theoretically independent of the federal government, but the Fed operates under a dual mandate established by Congress to maintain price stability and full employment. Therein lies a basic problem: trying to achieve two goals that are often in conflict with a single policy tool.

Make no mistake: variations in money supply growth can have powerful effects. Nevertheless, they are difficult to calibrate due to “long and variable lags” as well as changes in money “velocity” (or turnover) often prompted by interest rate movements. Excessively loose money can lead to economic excesses and an overshooting of capacity constraints, malinvestment, and inflation. Swinging to a tight policy stance in order to correct excesses often leads to “hard landings”, or recession.

Boom and Bust

The Fed fumbled its way into engineering the Great Depression via excessively tight monetary policy. “Stop and go” policies in the 1970s led to recurring economic instability. Loose policy contributed to the housing bubble in the 2000s, and subsequent maladjustments led to a mortgage crisis (also see here). Don’t look now, but the inflationary consequences of the Fed’s profligacy during the pandemic prompted it to raise short-term interest rates in the spring of 2022. It then acted with unprecedented speed in raising rates over the past year. While raising rates is not always synonymous with tightening monetary conditions, money growth has slowed sharply. These changes might well lead to recession. Thus, the Fed seems given to a pathology of policy shifts that lead to unintentional booms and busts.

Inflation Targeting

The Fed claims to follow a so-called flexible inflation targeting policy. In reality, it has reacted asymmetrically to departures from its inflation targets. It took way too long for the Fed to react to the post-pandemic surge in inflation, dithering for months over whether the surge was “transitory”. It wasn’t, but the Fed was reluctant to raise its target rates in response to supply disruptions. At the same time, the Fed’s own policy actions contributed massively to demand-side price pressures. Also neglected is the reality that higher inflation expectations propel inflation on the demand side, even when it originates on the supply side.

Via Rate Targeting

At a more nuts and bolts level, today the Fed’s operating approach is to control money growth by setting target levels for several key short-term interest rates (eschewing a more direct approach to the problem). This relies on price controls (short-term interest rates being the price of liquidity) rather than allowing market participants to determine the rates at which available liquidity is allocated. Thus, in the short run, the Fed puts itself into the position of supplying whatever liquidity is demanded at the rates it targets. The Fed makes periodic adjustments to these rate targets in an effort to loosen or tighten money, but it can be misdirected in a world of high debt ratios in which rates themselves drive the growth of government borrowing. For example, if higher rates are intended to reduce money growth and inflation, but also force greater debt issuance by the Treasury, the approach might backfire.

Policy Coordination

While nominally independent, the Fed knows that a particular monetary policy stance is more likely to achieve its objectives if fiscal policy is not working at cross purposes. For example, tight monetary policy is more likely to succeed in slowing inflation if the federal government avoids adding to budget deficits. Bond investors know that explosive increases in federal debt are unlikely to be repaid out of future surpluses, so some other mechanism must come into play to achieve real long-term balance in the valuation of debt with debt payments. Only inflation can bring the real value of outstanding Treasury debt into line. Continuing to pile on new debt simply makes the Fed’s mandate for price stability harder to achieve.

Who Calls the Tune?

The Fed has often succumbed to pressure to monetize federal deficits in order to keep interest rates from rising. This obviously undermines perceptions of Fed independence. A willingness to purchase large amounts of Treasury bills and bonds from the public while fiscal deficits run rampant gives every appearance that the Fed simply serves as the Treasury’s printing press, monetizing government deficits. A central bank that is a slave to the spending proclivities of politicians cannot make credible inflation commitments, and cannot effectively conduct counter-cyclical policy.

Stable Policy, Stable Economy

Activist policies for economic stabilization are often perversely destabilizing for a variety of reasons. Good timing requires good forecasts, but economic forecasting is notoriously difficult. The magnitude and timing of fiscal initiatives are usually wrong, and this is compounded by wasteful planning, allocative dysfunction, and a general absence of restraint among political leaders as well as the federal bureaucracy..

Predicting the effects of monetary policy is equally difficult and, more often than not, leads to episodes of over- and under-adjustment. In addition, the wrong targets, the wrong operating approach, and occasional displays of subservience to fiscal pressure undermine successful stabilization. All of these issues lead to doubts about the credibility of policy commitments. Stated intentions are looked upon with doubt, increasing uncertainty and setting in motion behaviors that lead to undesirable economic consequences.

The best policies are those that can be relied upon by private actors, both as a matter of fulfilling expectations and avoiding destabilization. Federal budget policy should promote stability, but that’s not achievable institutions unable to constrain growth in spending and deficits. Budget balance would promote stability and should be the norm over business cycles, or perhaps over periods as long as typical 10-year budget horizons. Stimulus and restraint on the fiscal side should be limited to the effects of so-called automatic stabilizers, such as tax rates and unemployment compensation. On the monetary side, the Fed would do more to stabilize the economy by adopting formal rules, whether a constant rate of money growth or symmetric targeting of nominal GDP.

Debt Ceiling Stopgaps and a Weak Legal Challenge

07 Sunday May 2023

Posted by Nuetzel in Federal Budget, Public debt

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Bank Liquidity, Biden Administration, Bing, Capital Gains Income, Chuck Schumer, Civil War, Debt Ceiling, Debt Limit Suspension, Default, Discharge Petition, Extraordinary Measures, Federal Deficits, Fourteenth Amendment, Google, Janet Yellen, Kevin McCarthy, Minting Coin, Modern Monetary Theary, Par Value, Perpetuities, Premium Bonds, Spending Restraint, statism

Long-awaited developments in the federal debt limit standoff shook loose in late April when Republicans passed a debt limit bill in the House of Representatives. Were it signed into law, the bill would extend the debt ceiling by about $1.5 trillion while incorporating elements of spending restraint. That approach is highly unpopular with democrats, but the zero-hour looms: Treasury Secretary Janet Yellen says the Treasury will run out of funds to pay all of the government’s obligations in early June. Soon we’ll have a better fix on President Biden’s response to the republicans, as he’s invited congressional leaders to the White House this Tuesday, May 8th to discuss the issue.

Biden wants a “clean” debt limit bill without changes impacting the budget path or existing appropriations. Senate Majority Leader Chuck Schumer would like to see a “clean” suspension of the debt limit. Republicans would like to use a debt limit extension to impose some spending restraint. They’ve focused only on the discretionary side of the budget, however, while much-needed reforms of mandatory programs like Social Security and Medicare were left aside. In fairness, both political parties have made massive contributions over the years to the burgeoning public debt, so not many are free of blame. But any time is a good time to try to enforce some fiscal discipline.

The Extraordinary Has Its Limits

Three months ago I wrote that the Treasury’s “extraordinary measures” to avoid breaching the debt limit would probably allow adequate time to break the impasse. In other words, accounting maneuvers allowed spending to continue without the sale of new debt. That bought some time, but perhaps not as much as hoped … tax filing season has revealed that revenue is coming in short of expectations, probably because weak asset markets have not generated anticipated levels of taxable capital gains income. In any case, very little progress was made over the past three months on settling the debt limit issue until the House passed the plan pushed by McCarthy. So we await the results of the pow-wow at the White House this week.

A Legislative Trick?

There’s been talk that House democrats will try to push through a “clean” debt limit bill of one sort or another by using a so-called discharge petition. They conveniently snuck this measure into an unrelated piece of legislation back in January. The upshot is that a bill meeting certain conditions must go to the floor for a vote if the discharge petition on the issue has at least 218 signatures. That means at least five republicans must join the democrats to force a vote and then join them again to pass a clean debt limit bill. That’s a long shot for democrats. Given the odds, will Biden deign to negotiate with House Speaker Kevin McCarthy? Even if he does, Biden will probably stall a while longer to extend the game of chicken. His hope would be for a few House republicans to lose their resolve for budget discipline in the face of looming default.

An Aside On Some Falsehoods

There’s a good measure of jingoistic BS surrounding the public debt. For example, you’ve probably heard from prominent voices in the debate that the U.S. has never defaulted on its debt and dad-gummit, it won’t start now! But the federal government has defaulted on its debt four times in the past! In three of those cases, the government reneged on commitments to convert bills or certificates into precious metals. The first default occurred during the Civil War, however, when the Union was unable to pay its war costs and subsequently went on a money printing binge. Unfortunately, we’re now engaged in a civil war of public versus private claims on resources, but the government can’t pay its bills without piling on debt. The statist forces now in control of the executive branch continue to insist that every American should demand more federal borrowing.

Here’s more BS in the form of linguistics that seemingly pervade all budget discussions these days: the House bill includes modest spending restraints, but mostly these are reductions in the growth of spending. Yet these are routinely described by democrats and the media as spending cuts. We could use another bill in the House demanding clear language that abides by the commonly accepted meaning of words. Fat chance!

The Trillion Dollar Coin

In my earlier debt limit post, I discussed two unconventional solutions to the Treasury’s financing dilemma. Both are conceived as short-term workarounds.

One is the minting of a $1 trillion platinum coin by the Treasury, which would deposit the coin at the Federal Reserve. The Fed would then sell back to the public (banks) existing Treasury bonds out of its massive holdings (> $8 trillion). The Treasury could then use the proceeds to pay the government’s bills. Thus, the Fed would do what the Treasury is prohibited from doing under the debt ceiling: selling debt.

When the debt ceiling is ultimately lifted, the “coin” process would be reversed (and the coin melted) without any impact on the money supply. As described, this is wholly different from earlier proposals to mint coins that would feed growth in the stock of money. Those were the brainchildren of so-called Modern Monetary Theorists and a few left-wing members of Congress.

There hasn’t been much discussion of “the coin” in recent months. In any case, the Fed would not be obligated to cooperate with the Treasury on this kind of workaround. The Fed has urged fiscal discipline, and it could simply refuse to take the coin if it felt that debt limit negotiations should be settled between Congress and the President.

Premium Bonds

The other workaround I discussed earlier is the sale by the Treasury of premium bonds or even perpetuities. This involves a little definitional trickery, as the debt limit is expressed in terms of the par value of debt. An example of premium bonds is given at the link above. High interest, low par bonds could be issued by the Treasury with the proceeds used to pay off older discounted bonds and pay the government’s bills. Perpetuities are an extreme case of premium bonds because they have zero par value and would not count against the debt limit at all. They simply pay interest forever with no return of principle. Paradoxically, perpetuities might also be less controversial because they would not involve payments to retire older debt.

Constitutional Challenge

The Biden Administration has pondered another way out of the jam, one that is perhaps more radical than either premium bonds or minting a big coin: challenge the debt ceiling on constitutional grounds. The idea is based on a clause in the Fourteenth Amendment stating that the: “validity of the public debt of the United States… shall not be questioned.” That’s an extremely vague provision. Presumably, as an amendment to the Constitution, this “rule” applies to the federal government itself, not to anyone dumping Treasury debt because its value is at risk. Any fair interpretation would dictate that the government should do nothing to undermine the value of outstanding public debt.

Let’s put aside the significant degree to which the real value of the public debt has been eroded historically by inflationary fiscal and monetary policy. That leaves us with the following questions:

Does a legislated debt limit (in and of itself) undermine the value of the public debt? Why would restraining the growth of debt or setting a limit on its quantity do such a thing?

Would a refusal to legislate an increase in the debt limit undermine or “question” the debt’s value? No, because belt-tightening is always a valid alternative to default. The Fourteenth Amendment is not a rationale for fiscal over-extension.
If we frame this as a question of default vs. fiscal restraint, only the former undermines the value of the debt.

From here, it looks like the blame for bringing the value of the public debt into question is squarely on the spendthrifts. Profligacy undermines the value of one’s commitments, so one can hardly blame those wishing to use the debt ceiling to promote fiscal responsibility. Any challenge to the debt ceiling based on the Fourteenth Amendment is likely to be guffawed out of court.

The Market’s Likely Rebuke

The market will probably react harshly if the debt ceiling impasse continues. That would bring higher yields on outstanding Treasury debt and a sharp worsening of the liquidity crisis for banks holding devalued Treasury debt. Naturally, Biden will attempt to blame the GOP for any bad outcome. His Treasury could attempt to buy more time by announcing the minting of a large coin or the sale of premium bonds, including perpetuities. Ultimately, neither of those moves would do much to stem the damage. The real problem is fiscal incontinence.

Some Critical Issues In the Gun Rights Debate

01 Monday May 2023

Posted by Nuetzel in Gun Rights, Second Amendment

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Antifa, ArmaLite Rifle, Assault Rifles, Auto Sears, Auto Switch, Black Market, Black on Black Violence, BLM, Brownshirts, Bump Stock, Defensive Gun Use, Defund the Police, Due Process, Enumerated Right, Feral Hogs, Fully Automatic, Gun Ownership, Gun-Free Zones, KKK, Machine Guns, Magazine Capacity, Mass Shootings, Mental Health, Politico, Rand Corporation, Red Flag Laws, Rep. Dan Crenshaw, Self-Defense, Semi-Automatic, Sporting Rifles, Tyranny, War on Drugs, Well-Regulated Militia

It’s long past time for me to revisit a few key issues surrounding gun rights, as well as a few sacred cows accepted uncritically by the press and nurtured by interventionists. Tragic gun violence and mass shootings have given rise to strong public reaction, but one undeniable result is that gun purchases have surged, bringing household gun ownership rates up sharply to levels of the 1980s and 1990s. This owes in part to the growing reality that police in many communities are under-resourced, unable to respond effectively to crimes and disorder in the wake of defunding and activist sentiment opposing police use of force. Under these circumstances, many private citizens believe they must be ready to defend themselves. And after all, even under better circumstances, counting on the ability of police to arrive and act promptly at a time of extreme need is a crap shoot.

As a preview, here’s a list of the sections/topics addressed below. You can skip what might not interest you, though earlier sections might provide more context.

What’s An “Assault Weapon”?
Deadlier Gun Modifications
Homicide Data
Crime and Gun Violence
Lone Wolf Psychopaths
Private Intervention and Reporting
Red Flag Laws
Defensive Gun Uses
Invitations To Kill
Second Amendment Protections

Modern Sporting Rifles

Not many politicians or people can define exactly what they mean by “assault weapons”, even those strongly opposed to … whatever they are. Scary looking things. Contrary to the implication promoted by the anti-gun lobby, what they call “assault rifles” today are not machine guns. Those have been heavily regulated since 1934, must be registered, and are now illegal for civilians to own if produced after May 19, 1986. In other words, what are frequently called “assault rifles” are not fully automatic weapons that fire a continuous stream of bullets. Rather, they are semiautomatic, which means they load the next bullet automatically but do not fire multiple bullets with a single pull of the trigger. You have to pull the trigger each time you fire a bullet. There are many semiautomatic handguns as well. Here’s a little history on semi-automatics:

“Semi-automatic, magazine-fed rifles were introduced to the civilian market here in the US in 1905. The US military adopted them about three decades later for use in World War II. … The civilian version of the modern sporting rifle, the AR-15, was introduced in 1956 so it has been with us for over six decades.”

So… it’s also misleading to call semiautomatics “military rifles” because they were originally produced for the civilian market. By the way, “AR” stands for ArmaLite Rifle, NOT “assault rifle”.

It’s more accurate to use the term “modern sporting rifle” for a semiautomatic today, rather than “assault rifle”. The vast bulk of the 15 million semiautomatic rifles held by the public were purchased for sport shooting, and people actually think they’re a lot of fun to shoot. Of course, they are also kept as a defensive weapons. By defensive, I include their use as a weapon against predators or invasive species on farms and ranches. If you don’t think that kind of weapon is especially useful for that purpose, remember that the task often involves firing with accuracy over a significant range. A modern sporting rifle is far superior to alternatives under those circumstances, especially when multiple shots at a moving target are likely to be necessary.

Obviously, a semiautomatic rifle is advantageous if there are multiple intruders. I was reminded of this by a recent article about feral hogs and the destruction they’re causing in the south, and especially in Texas. They breed fast and are so numerous that they are wreaking unprecedented damage to farms, ranches, and even suburban lawns and gardens. A handgun, shotgun, or a bolt action rifle won’t be nearly as effective against these beasts because they travel in groups of two to 30+.

Deadly Modifications

An accessory called an “auto sears” or “auto switch” can transform a semiautomatic pistol or rifle into a fully automatic weapon, but it’s a felony to possess an unregistered auto sears. Bump stocks allow semiautomatic rifles to fire more rapidly, sort of like machine guns, but they sacrifice accuracy. Bump stocks were outlawed a few years ago under an ATF rule, but their legality is still pending in court. These modifications do have legitimate uses, but I won’t argue the soundness of these bans other than to note their consistency with prior restrictions on machine guns. However, illegal bump stocks and auto sears circulate and they are easy to produce, so it’s not clear that these laws can ever produce their hoped-for result.

There are restrictions on magazine capacity in 13 states. The biggest problem with these restrictions is that they limit the effectiveness of defensive gun use. People miss their targets in high-pressure situations… a lot. Furthermore, dangerous confrontations often involve more than one attacker to defend against. Changing a magazine in the middle of all that presents a challenge that should be unnecessary. It’s no coincidence that 15+ bullet magazines are standard issue with some of the most popular guns on the market.

Homicide Data

It’s difficult to get refined data on the use of sporting rifles in gun homicides because reported categories of weapons are too broad. Nevertheless, we know semiautomatic rifles are not commonly used in violent crimes. There were 20,138 firearm deaths in the U.S. in 2022 excluding suicides, which is obviously tragic. In 2020, handguns were used in 59% of all gun homicides, while rifles (including semiautomatics) were used in just 3%. It’s possible these percentages undercount, as there is a sizable category labeled as “Type Not Stated”.

Mass shootings, defined by the FBI as four or more people killed, accounted for 3.2% of firearm deaths, for a total of 648 including deaths of shooters themselves. Rifles were used in about 30% of the mass shootings. That’s roughly consistent with the range of estimates shown in this 2021 report from the RAND Corporation.

It’s important to note that internationally, the U.S. has not been the outlier in mass public shootings that many believe it to be. In any case, you’ll hope in vain if you think a ban on sporting rifles will put a stop to mass shootings. In addition to interfering with the rights of millions of law-abiding gun owners, the decade-long ban on so-called assault weapons ending in 2004 had no impact on mass public shootings or any other type of crime (also see this post). Of course, there are plenty of other available means of committing mass murder, and there are plenty of illegal guns on the street, so this shouldn’t be a surprise.

One more important fact to bear in mind: despite efforts to convince us otherwise, gun violence is not the leading cause of death among children. By that I mean real children, not 18 – 19 year-old gang members. Kids age 12 and under die in car crashes at double the rate of gun deaths, for example.

Crime and Gun Violence

Gun violence has many causes, and criminal activity is foremost. According to this analysis, arguments or gang-related incidents accounted for 57% of 303 mass shooting deaths over a six-month period in 2021, while also accounting for more than 75% of the injuries. Much of this mayhem is black-on-black violence, and it’s odd that few seem willing to admit it. Law-abiding inner-city households and minorities just might have the most to gain from gun ownership.

A poorly conceived and politically motivated article in Politico claimed that gun violence was heavily concentrated in southern “red states”. The author’s heavy-handed attempt to focus on state-level statistics blurred more relevant distinctions. For example, he failed to emphasize the heavy concentration of gun violence in urban areas (which are heavily “blue”) and crime-ridden neighborhoods populated by those at the lowest rungs of the socioeconomic ladder.

The predominance of criminal and gang-related shootings suggests that major solutions to gun violence can be found within the criminal justice system: stiff bail, aggressive prosecution, and long sentences for criminal actions, whether gang-related or otherwise. Lately, we’ve been veering in the other direction.

On the other hand, gangs would be far less active and deadly if black market opportunities were minimized. Those tend to be created by government when it interferes with otherwise voluntary transactions. Most conspicuous in this regard is the prosecution of the drug war. This creates risk-fueled profits for dealing and trafficking that are highly enticing to hard-luck gang members. Unfortunately, competitive pressure on the black market often takes violent forms. Legalization or even decriminalization of a wider assortment of drugs would undercut black market profitability, however. This approach would be far more effective if governments avoid imposing high taxes on newly-legalized drugs, because taxes simply recreate black-market opportunities.

Psychopathic Homicide

It’s no secret that severe mental illness can lead to acts of violence, including mass shootings. One analysis found that so-called “lone wolf” attacks accounted for 15% of mass shooting deaths and less than 5% of injuries during the first half of 2021.

We can probably all agree that anyone in the grips of a severe psychosis should not be in possession of guns. The obvious problem is that we can’t easily identify such persons without severe infringements on constitutional rights. Furthermore, we won’t always accurately identify true threats and we’ll mistakenly finger some harmless individuals. So how do we decide who’s really and legally crazy? Can we agree on some threshold of craziness and who meets it? Respect for civil liberties demands restraint in limiting individual rights without just cause. The revocation of a person’s Second Amendment rights should require a high degree of certainty that the individual is a threat.

Not all disturbed individuals seek or ever receive care, and not all disturbed individuals are dangerous, so attempting to identifying them through their utilization of mental health care is imperfect at best. Indeed, most mass shooters are thought to have had an undiagnosed disorder. Should a therapist be required to report to authorities a patient whom they’ve diagnosed as psychotic or dangerous? Would that be sufficient cause to confiscate a patient’s guns? That is not as straightforward for therapists as it might seem:

“Mandatory reporting of persons believed to be at imminent risk for committing violence or attempting suicide can pose an ethical dilemma for physicians, who might find themselves struggling to balance various conflicting interests. Legal statutes dictate general scenarios that require mandatory reporting to supersede confidentiality requirements, but physicians must use clinical judgment to determine whether and when a particular case meets the requirement. In situations in which it is not clear whether reporting is legally required, the situation should be analyzed for its benefit to the patient and to public safety. Access to firearms can complicate these situations, as firearms are a well-established risk factor for violence and suicide yet also a sensitive topic about which physicians and patients might have strong personal beliefs.”

If physicians or therapists approach these questions with the greatest deference to public safety, we’re liable to see a lot fewer people seeking therapy. I would not rule out, however, that such deference might be the best for society.

Private Intervention and Reporting

Less formal mechanisms to promote public safety require vigilance by private individuals, families, and other groups. A large number of perpetrators of mass killings were known to be deeply troubled well beforehand by family and/or acquaintances. Signs of maladjustment in loved ones are easily dismissed or forgiven, but families must take great responsibility for the potential actions of their own. Seeking therapeutic help is one thing, but when a family member shows more obvious signs of psychosis, then it might be time for contact with authorities and possibly institutionalization.

There have also been many cases in which mass killers have previewed their violent thoughts on-line. Anyone connected with such an individual on social media or witnessing deranged behavior should not hesitate to contact police to intervene. Of course, things aren’t always clear cut, but it’s important to be attentive and take responsible action when an individual’s behavior appears to take an ominous turn. This too can be abused, and authorities must be fair-minded about reviewing reports of threats to be sure they aren’t motivated by petty differences, whether personal, business, or political. This is at the heart of the right to due process of law under the Fifth and Fourteenth Amendments of the Constitution.

Red Flag Laws

Among the proposals for reducing gun violence are additional measures for controlling ownership and access to guns. Red flag laws are intended to restrict more formally and comprehensively the ability of persons at risk of harming themselves or others from owning or acquiring guns. At present, 19 states and DC have some form of red flag law(s), while one state (OK) has enacted an anti-red flag law.

Broadly, restrictions on gun possession, whether technically part of a red flag law or otherwise, can be invoked on account of age (< 21), a federal or state criminal record, a documented alcohol or drug addiction, a formally diagnosed mental illness, or a pattern of threatening or suicidal behavior. The latter may include threats arising from domestic disputes. All of these possibilities are potentially troublesome from the perspective of civil liberty, but under red flag laws, usually a court order is required to enforce the restriction. The key point is that the individual in question must have due process rights before restrictions are imposed or guns are confiscated. Otherwise, as Rep. Dan Crenshaw (TX) objects:

“What you’re essentially trying to do with the red flag law is enforce the law before the law has been broken. And it’s a really difficult thing to do, it’s difficult to assess whether somebody is a threat. Now if they are such a threat that they’re threatening somebody with a weapon already, well, then they’ve already broken the law. So why do you need this other law?”

The answer to Crenshaw’s question is that mere threats are difficult to prosecute. Likewise, it should be difficult to revoke anyone’s Second Amendment rights. Red flag laws should ensure that anyone whose gun rights are under review will receive due process. A huge difficulty is that such reviews must be speedy. If a real danger is convincingly shown to exist, then guns are confiscated and/or the individual is placed on a red flag list, at least temporarily.

Defensive Gun Use

One of the most under-reported phenomena in the gun debate is that of defensive gun uses (DGUs), which are hard to count because they often go unreported. One component of DGUs is so-called justifiable homicide by police and private citizens, which (when reported) typically contribute 700 – 800 deaths to total homicides each year. However, a DGU does not imply that a shot is fired or that a gun is pointed in the direction of a criminal threat. At a minimum, it means a threat was deterred by the presence of an armed defender.

The 2021 Georgetown National Firearms Survey reported an estimated 1.67 million DGUs per year. Of these, 25% occur inside the gun owner’s home and another 54% on their property. There is no question that DGUs save lives, and probably many thousands of lives every year. There is also no doubt that the prospect of an armed defender inside a home or business deters criminals.

Killing Zones

As one might gather from the evidence on DGUs, one of the most misguided efforts to promote safety within environments like schools and churches is their designation as “gun-free zones”. This is an invitation to anyone crazy enough to perpetrate deadly violence against large numbers of innocents, as we learned once more in the recent Nashville school shooting. Someone on staff should be trained and always armed with a gun, whether that be a resource officer, another employee, or a volunteer. Preferably several designated individuals would be armed in buildings such as large schools, or perhaps one or two trusted and designated volunteers at gatherings in houses of worship.

Second Amendment Protections

Second Amendment rights are critical to effective self-defense, which is usually a matter of protecting one’s life and property from thieves, home invaders, and predatory or destructive beasts. Anti-gun radicals find even this rationale objectionable, demonstrating no regard for gun rights whatsoever. Another claim is that the right to bear arms was given specific purpose only by the need to maintain “a well-regulated militia”, and it is further asserted that this need is out-dated.

Despite those objections, a right’s stated purpose in the text of the Constitution does not by itself define any limit on its applicability. The fact that the Second Amendment recognizes and enumerates gun rights gives emphasis to the founders’ awareness that gun-grabbers might push any advantage were that right to be left unenumerated. Furthermore, a civilian militia, whether formal or informal, might well be needed to defend against any tyrannical force as might arise in the event of a breakdown of the constitutional order.

I’m willing to stipulate that there is no immediate threat today of physical coercion by government intended to subjugate classes of individuals, or of any federal military aggression against the sovereignty of any state. That may owe in part to private gun ownership, however, which deters against open acts of tyranny. It also tends to foster a preference for more nuanced applications of government power. There’s no need for privately-owned tanks, fighter aircraft, and missiles to offer meaningful deterrence. Direct, bloody confrontations are a bad look and no way to gain broad support for other forms of coercion by government.

A better alternative for regimes or political movements who wish to radically change the social order is to offer subtle and plausibly deniable encouragement of destructive or coercive acts by proxy forces (e.g., Brownshirts, Antifa, BLM, KKK). While possession of guns by these proxies can make them more dangerous, a general public under arms is not as vulnerable as an unarmed population. Private gun owners can defend themselves more effectively and represent a significant and healthy impediment to extensions of political power of this nature.

Fix TikTok? Or Nix It? The Authoritarian RESTRICT Act

08 Saturday Apr 2023

Posted by Nuetzel in anti-Semitism, Big Government, Liberty, Technology

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AI, Artificial Intelligence, Attention Span, ByteDance, CATO Institute, Caveat Emptor, ChatGPT, Community Standards, Data Privacy, Elon Musk, First Amendment, Free Speech, Hate Speech, L. Frank Baum, Munger Test, National Security, Open Source, PATRIOT Act, People’s Republic of China, Philip Hamburger, Protectionism, RESTRICT Act, Scott Lincicome, Separation of Powers, The Land of Oz, TikTok, Twitter

There’s justifiable controversy surrounding TikTok, the social media app. I find much to dislike about TikTok but also much to dislike about the solutions some have proposed, such as a complete ban on the app in the United States. Such proposals would grant the federal executive branch powers that most of us wouldn’t grant to our worst enemy (i.e., they fail the “Munger test”).

Congressional Activity

The proposed RESTRICT Act (Restricting the Emergence of Security Threats that Risk Information and Communications Technology) is a bipartisan effort to eliminate the perceived threats to national security posed by technologies like TikTok. That would include a ban on the app. Proponents of a ban go further than national security concerns, arguing that TikTok represents a threat to the health and productivity of users. However, an outright ban on the app would be a drastic abridgment of free speech rights, and it would limit Americans’ access to a popular platform for creativity and entertainment. In addition, the proposed legislation would authorize intrusions into the privacy of Americans and extend new executive authority into the private sphere, such as tampering with trade and commerce in ways that could facilitate protectionist actions. In fact, so intrusive is the RESTRICT Act that it’s been called a “Patriot Act for the digital age.” From Scott Lincicome and several coauthors at CATO:

“… the proposal—at least as currently written—raises troubling and far‐reaching concerns for the First Amendment, international commerce, technology, privacy, and separation of powers.”

Bad Company

TikTok is owned by a Chinese company, ByteDance, and there is understandable concern about the app’s data collection practices and the potential for the Chinese government to access user data for nefarious purposes. The Trump administration cited these concerns when it attempted to ban TikTok in 2020, and while the ban was ultimately blocked by a federal judge, the Biden administration has also expressed concerns about the app’s data security.

TikTok has also been accused of promoting harmful content, including hate speech, misinformation, and sexually explicit material. Critics argue that the app’s algorithm rewards provocative and controversial content, which can lead to the spread of harmful messages and the normalization of inappropriate behavior. Of course, those are largely value judgements, including labels like “provocative”, “inappropriate”, and many interpretations of content as “hate speech”. With narrow exceptions, such content is protected under the First Amendment.

Unlike L. Frank Baum’s Tik-Tok machine in the land of Oz, the TikTok app might not always qualify as a “faithful servant”. There are some well-founded health and performance concerns related to TikTok, however. Some experts have expressed reservations about the effects of the app on attention span. The short-form videos typical of TikTok, and endless scrolling, suggest that the app is designed to be addictive, though I’m not aware of studies that purport to prove its “addictive nature. Of course, it can easily become a time sink for users, but so can almost all social media platforms. Nevertheless, some experts contend that heavy use of TikTok may lead to a decrease in attention span and an increase in distraction, which can have negative implications for productivity, learning, and mental health.

Bad Government

The RESTRICT Act, or a ban on TikTok, would drastically violate free speech rights and limit Americans’ access to a popular platform for creativity and self-expression. TikTok has become a cultural phenomenon, with millions of users creating and sharing content on the app every day. This is particularly true of more youthful individuals, who are less likely to be persuaded by their elders’ claims that the content available on TikTok is “inappropriate”. And they’re right! At the very least, “appropriateness” depends on an individual’s age, and it is generally not an area over which government should have censorship authority, “community standards” arguments notwithstanding. Furthermore, allowing access for children is a responsibility best left in the hands of parents, not government.

Likewise, businesses should be free to operate without undue interference from government. The RESTRICT Act would violate these principles, as it would limit individual choice and potentially harm innovation within the U.S. tech industry.

A less compelling argument against banning TikTok is that it could harm U.S.-China relations and have broader economic consequences. China has already warned that a TikTok ban could prompt retaliation, and such a move could escalate tensions between the two countries. That’s all true to one degree or another, but China has already demonstrated a willingness and intention to harm U.S.-China relations. As for economic repercussions, do business with China at your own risk. According to this piece, U.S. investment in the PRC’s tech industry has fallen by almost 80% since 2018, so the private sector is already taking strong steps to reduce that risk.

Like it or not, however, many software companies are subject to at least partial Chinese jurisdiction. The means the RESTRICT Act would do far more than simply banning TikTok in the U.S. First, it would subject on-line activity to much greater scrutiny. Second, it would threaten users of a variety of information or communications products and services with severe penalties for speech deemed to be “unsafe”. According to Columbia Law Professor Philip Hamburger:

“Under the proposed statute, the commerce secretary could therefore take ‘any mitigation measure to address any risk’ arising from the use of the relevant communications products or services, if the secretary determines there is an ‘undue or unacceptable risk to the national security of the United States or the safety of United States persons.’

We live in an era in which dissenting speech is said to be violence. In recent years, the Federal Bureau of Investigation has classified concerned parents and conservative Catholics as violent extremists. So when the TikTok bill authorizes the commerce secretary to mitigate communications risks to ‘national security’ or ‘safety,’ that means she can demand censorship.”

A Lighter Touch

The RESTRICT Act is unreasonably broad and intrusive and an outright ban of TikTok is unnecessarily extreme. There are less draconian alternatives, though all may involve some degree of intrusion. For example, TikTok could be compelled to allow users to opt out of certain types of data collection, and to allow independent audits of its data handling practices. TikTok could also be required to store user data within the U.S. or in other countries that have strong data privacy laws. While this option would represent stronger regulation of TikTok, it could also be construed as strengthening the property rights of users.

To address concerns about TikTok’s ownership by a Chinese company, its U.S. operations could be required to partner with a U.S. company. Perhaps this could satisfied by allowing a U.S. company to acquire a stake in TikTok, or by having TikTok spin off its U.S. operations into a separate company that is majority-owned by a U.S. entity.

Finally, perhaps political or regulatory pressure could persuade TikTok to switch to using open-source software, as Elon Musk has done with Twitter. Then, independent developers would have the ability to audit code and identify security vulnerabilities or suspicious data handling practices. From there, it’s a matter of caveat emptor.

Restrain the Restrictive Impulse

The TikTok debate raises important questions about the role of government in regulating technology and free speech. Rather than impulsively harsh legislation like the RESTRICT Act or an outright ban on TikTok, an enlightened approach would encourage transparency and competition in the tech industry. That, in turn, could help address concerns about data security and promote innovation. Additionally, individuals should take personal responsibility for their use of technology by being mindful of the content they consume and what they reveal about themselves on social media. That includes parental responsibility and supervision of the use of social media by children. Ultimately, the TikTok debate highlights tensions between national security, technological innovation, and individual liberty. and it’s important to find a balance that protects all three.

Note: The first draft of this post was written by ChatGPT, based on an initial prompt and sequential follow-ups. It was intended as an experiment in preparation for a future post on artificial intelligence (AI). While several vestiges of the first draft remain, what appears above bears little resemblance to what ChatGPT produced. There were many deletions, rewrites, and supplements in arriving at the final draft.

My first impression of the ChatGPT output was favorable. It delineated a few of the major issues surrounding a TikTok ban, but later I was struck by its repetition of bland generalities and its lack of information on more recent developments like the RESTRICT Act. The latter shortfall was probably due to my use of ChatGPT 3.5 rather than 4.0. On the whole, the exercise was fascinating, but I will limit my use of AI tools like ChatGPT to investigation of background on certain questions.

Tariffs, Content Quotas, and What Passes for Patriotism

10 Friday Mar 2023

Posted by Nuetzel in Free Trade, Protectionism

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budget deficits, Buy American, CCP, CHIPS Act, Comparative advantage, Consumer Sovereignty, Content Restrictions, Critical Supply Chains, Domestic Content, Donald Trump, Dumping, Export Markets, Federal Procurement, Foreign Trade, Free trade, George Will, Import Waivers, Joe Biden, Made-In-America Laws, Mercantilism, National Security, Nationalism, Patriotism, Price Competition, Price Preference, Protectionism, Tariffs, Trade Retaliation, Universal Baseline Tariffs, Uyghur Muslims

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 Nuetzel in Climate, Environment

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Blake Lovewall, Carbon Credits, Carbon Offsets, Caveat Emptor, Climate Change Opportunism, Deforestation, Die Zeit, Environmental Committments, ESG Scores, Fiduciary Duty, Green Bonds, Green Investing, greenfraud.blogspot.com, Greenwashing, Net Zero, Paris Climate Accords, Recycling Mandates, REDD, SourceMaterial, The Guardian

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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