New Theory: Great Woke Filter Conceals Life In the Cosmos

03 Friday Jun 2022

Posted by Nuetzel in Central Planning, Extraterrestrial Life, Space Travel

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Asymptotic Burnout, Baumol's Disease, Club of Rome, Equilibrating Process, Fermi Paradox, Grabby Aliens, Hard-Step Model, Homeostatic Awakening, Innovation, Interstellar Travel, Limits to Growth, Market Incentives, Michael L. Wong, Robin Hanson, Selection Bias, Singularity, Stuart Bartlett, Superlinearity, Thomas Malthus, Unbounded Growth, Unidentified Aerial Phenomena, William Baumol

A recent academic paper seeks to explain the Fermi Paradox by asserting that all civilizations must either collapse or reach a point of homeostasis. The paper cites tensions between population growth, resource scarcity, limits to technical innovation, and ultimately political resistance to growth. The Fermi Paradox (FP) is the observation that by now, we should have detected or heard from an alien civilization if the universe has so much potential for intelligent life. But if those civilizations fail to advance beyond a certain level, they don’t develop the technical prowess to explore outside their own stellar neighborhoods or even become detectable from great distances.

The new paper, by Michael L. Wong and Stuart Bartlett (WB), says these outcomes might be the result of “asymptotic burnout” — followed by either civilizational collapse or a “homeostatic awakening”. Never has “get woke, go broke” been so palpable! Certain sections of the WB paper read like an encyclopedia of leftist apocalyptic speculation, dressed up in mathematics and assumed to generalize to any civilization of intelligent beings in the universe. The incredible vastness of outer space suggests that it might never be possible for us to detect these kinds of homebound, low-tech civilizations, whether constrained by scarcities and moribund technologies or hamstrung by their own politics. Similarly, they might not be able to detect us.

Great Filters

There are other, similar explanations of FP. All of those fall under the heading of “Great Filters”, and I’m not sure WB have come up with anything new in that regard except for the “woke” spin. Great filters can be extinction events, such as intra-planetary hostilities culminating in the reckless use of weapons of mass destruction. Or unfortunate collisions with massive asteroids, which are a matter of time. Malthusian outcomes have been discussed in the context of great filters as well. In the past, I’ve discussed the limitations imposed by collectivist social structures on a civilization’s potential to achieve interstellar travel. I’m not the only one. The kind of “awakening” posited by WB would certainly demand the centralization of economic decision-making, though they envision conditions under which the “awakening” is a rational and enlightened decision.

Grabby Civilizations

A bit of a digression here: one of the most interesting explanations for FP that I’ve heard is from economist Robin Hanson and several co-authors. Hanson, by the way, wrote the original paper on great filters. His more recent insight is the likelihood of an earth-bound selection bias: there must be reasons why we haven’t seen alien activity in earth’s backward light cone, assuming they exist. The light cone defines an area of space-time we have observed, or could have observed had we been looking. To have been within our light cone, an event coordinate’s distance from us in space must have been less than or equal to the time it takes for its light to arrive here. For example, we can see what happened on the surface of the Sun fifteen minutes ago because at the Sun’s distance, it takes just ten minutes for its light to reach us. However, an event on the Sun that occurred five minutes ago is still outside our backward light cone. Likewise, if a star is 100,000 light years away, we cannot see events that occurred there within the past 99,999 years.

Hanson and his co-authors focus on the timescales and “hard steps”, or critical evolutionary transitions, necessary for intelligent life to develop in a solar system. They construct a probability model suggesting that the birth of human civilization was likely on the early end of the time distribution of civilizational beginnings in the universe. That means there probably aren’t many distant civilizations we could possibly have seen in our light cone. We’d be more likely to detect them if they are sufficiently advanced to be so-called “grabby” civilizations, but that kind of technological development takes a long time. “Grabby” civilizations (or their machines) are capable of expanding their reach across the stars at high speed, some significant fraction of the speed of light. They can be expected to visibly alter the volume of space they control by settling, mining, building large structures, etc…. An interesting (and perhaps counterintuitive) result is that the faster such a civilization expands, the less likely we’d have seen them in our backward light cone. And we haven’t, which argues for a higher speed of alien conquest, all else equal.

In another post, Hanson estimates that the time until we meet another grabby civilization centers on about 1 billion years if we expand. So grabby civilizations are quite rare if they exist. That doesn’t rule out the possibility that we might detect or encounter a much less technically advanced civilization. Nevertheless, Hanson strongly believes in the reality of Great Filters and believes that human civilization is likely to encounter certain filters that we cannot even anticipate.

The explanation for FP offered by Hanson, et al is nuanced, and it is my favorite, given my fascination with the possibility of extraterrestrial life. Even if the development of human civilization is not especially “early”, the number of interstellar civilizations, grabby or not, is probably still quite small at this juncture. And no doubt space travel is tough! These civilizations and their interstellar pioneers might not endure long enough to cover the distances necessary to reach us. Even more pertinent is that we’ve really only been “looking” in earnest for maybe ten decades at the most, and without complete coverage or much precision. Alien origins or spatial conquests within the last 100 years at distances exceeding 100 light years would not yet be visible to us. And again, it’s remotely possible that there is a grabby civilization whose expansion will intersect with us sometime in the near future, but it is still too distant to be within our backward light cone. If closing on us fast enough, it could have been within a single light year six months ago and we would not yet know it!

Do Civilizations Scale Like Cities?

Now let’s return to the kind of great filter put forward by WB. They first appeal to the observation that cities scale superlinearly. That is, in cross-sectional data, the relationship between city population and various measures of income or output (and other metrics) are linear in logs with a coefficient greater than 1. That means a city with twice the population of another would generate more than twice as much income.

There are reasons why we’d expect city size to be associated with greater productivity, such as an abundance of collaborative opportunities and economies of agglomeration. However, WB assert that it is impossible for a city to sustain a superlinear growth relationship over time, requiring “unbounded growth”, without periodic bursts of innovation. Otherwise, a city encounters a growth “singularity”. WB maintain that the inability of innovation to sustain unbounded growth manifests in a cascade of failure in such a city, or at least homeostasis.

WB go on from there to claim that a civilization, as it advances, will become so interconnected via technology that it can be treated analytically like a single super-city. This assumption, that whole worlds scale like cities, offers WB an analytical convenience. They assume that population growth outstrips the supply of finite resources with an inadequate pace of innovation. WB further propose that civilizations confronting these barriers might undergo “awakenings” under which zero growth is accepted as a goal.

Of course, the growth of a city will stagnate when its size overwhelms its ability to meet demands. A city might be under severe resource constraints. There are external phenomena that can cause a city to languish. All this depends upon the unique vulnerabilities of individual cities. Certainly a widespread dearth of innovation could do the trick. A planetary civilization might be subject to similar constraints or limiting events. Some planets might be resource poor or have especially hostile natural environments. Aliens unfortunate enough to be there will not and cannot become “grabby”. But WB’s hypothesis amounts to the assertion that no civilization can hope to achieve “grabbiness”.

Faults In the Clouds of Delusion

The WB argument is misguided on several levels. First, there is only limited evidence that the scaling of cities is time invariant — that the relationships hold up as cities grow over time —no singularity required! After all, the super-linear relationship referenced by WB is based almost entirely on cross-sectional data. Moreover, the scaling assertion is atheoretic. Rationales are offered based on human social connections and presumed, fixed technical relationships between city population and such things as energy use and infrastructure requirements. However, the discussion is completely devoid of the equilibrating processes found in market economies and the guidance of the price mechanism. Instead, growth simply rages on until the pace of innovation and limited resources can no longer support it.

WB appear to assume that a planet’s finite pool of resources places a hard limit on the advancement of civilization. This is more than a bit reminiscent of the Club of Rome and it’s “Limits to Growth”, or the popular understanding of Thomas Malthus’ writings. That understanding is based on a purely biological model of human needs. which was spectacularly wrong in its prediction of worldwide famine. But that was only a starting point for Malthus, who believed in the power of markets. And even in primitive markets, the very scarcity with which biological needs conflict is what incentivizes greater efficiencies and substitutes. When something gets especially scarce, the market signals to users that they must conserve, on one hand, and it also incentivizes those able to commandeer resources. The latter act to fill the need with greater supplies, close substitutes, or inventive alternatives. Again, these kinds of equilibrating tendencies don’t seem to be of any consequence to WB.

The focus on super-linearity and the relationship between population and economic and other metrics obscures another reality: global fertility rates have been declining for decades and are now below replacement levels in many parts of the world. In addition, we know that birth rates tend to decline as income rises, which directly undermines WB’s concern about super-linearity. The unsustainable population growth envisioned by WB is unlikely to occur, much less overwhelm the ability of resources and innovation to provide for growth in human well-being. WB also ignore the fact that in-migration to cities is a primary contributor to their population growth, whereas in-migration has not been observed at the global level… at least that we’re aware!

What is never in short supply is human ingenuity, if we allow it to work. It enables us to identify and extract new reserves of resources previously hidden to us, and every new efficiency increases the effective reserves of resources already available. Mankind is now on the cusp of an era in which mining of scarce materials from the moon, asteroids, and other planets will be possible.

WB are correct that there are obstacles to urban growth, but they seem only dimly aware of the underlying reasons. Cities must provide myriad services to their residents. Many of those services will experience meager productivity gains relative to goods production, and consequently increased costs of services over time. This is an old problem known among economists as Baumol’s disease, after William Baumol. While it is not limited to cities, it can be especially acute in urban areas. The cost escalation may be severe for services such as education, health care, law enforcement, and the judicial system, which are certainly critical to the economic viability of cities. However, there will be future innovations and even automation of some of these services that boost productivity. Still, they are bound to mostly rise in cost relative to sectors with high average growth in productivity, such as manufacturing. Baumol’s disease is unlikely to tank the world economy. It is simply a fact of economic evolution: relative prices change, and low productivity sectors will suffer cost escalation.

The kind of “awakening” WB anticipate would only occur if individuals are willing sacrifice their liberties en masse, or if elites coerce them to do so. Perhaps there are beings who never imagine the kinds of liberties humans expect, or at least wish for. If so, I’d wager their average intelligence is too low to accomplish space travel anyway. We’ve learned from theory and history that socialism imposes severe constraints on growth. That’s why I once proposed that civilizations capable of interstellar travel will have avoided those chains.

Conclusion

Wong and Bartlett attempt to explain the Fermi Paradox based on the “asymptotic burnout” of civilizations. That is, they believe it’s extremely unlikely that any civilization can ever advance to interstellar travel, or as Hanson would put it, to be “grabby”. WB rely on an analogy between the so-called super-linearity of city scales and the scales of planetary civilizations. They generalize super-linearity to the time domain. In other words, WB make the heroic assumptions that the economic aggregates of planetary civilizations scale over time as cities scale cross-sectionally.

WB then claim that civilizations will confront limits to advancement based on their inability to sustain their pace of innovation. This amounts to Malthusian pessimism writ large. Today, human civilization, while not without its problems, is nowhere near the limits of its growth, and we are nearly ready to reach out beyond the confines of our planet for access to new stocks of resources. There are vast stores of unexploited energy even here on earth, and there are a number of relatively new energy technologies that are either available now or still in development. And there will be much more. Like the Club of Rome, WB lack an adequate appreciation for the power of markets and incentives to solve economic problems, which includes spurring innovation.

Finally, WB make the wholly unsupported conjecture that some civilizations will undergo “awakenings”, choosing to adopt homeostasis rather than growth. WB might or might not realize it, but this implies an abandonment of market institutions in favor of centrally-planned stagnation, and not a little coercion. Perhaps we should view WB’s hypothesis as a cautionary tale: get woke, go broke! Certainly, a homeostatic civilization that relies upon the ignorance of central planners will never develop the capacity for interstellar travel. It simply cannot generate the wealth or expertise necessary to do so. In fact, they are more likely to suffer bouts of mass starvation than any sort of middling prosperity. We probably haven’t seen other civilizations yet, and maybe we’re “early” on the development time-scale for civilizations, but when and if aliens arrive, it won’t be thanks to socialist “awakenings”. WP are at least correct in that regard.

Dobbs, Roe, and the Freakout Over Federalism

25 Wednesday May 2022

Posted by Nuetzel in Abortion, Federalism, Uncategorized

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Abortion, Adoption, Akhil Amar, Artificial Womb, Bill of Rights, Birth Control, CDC, Classism, Court Leak, dependency, Disparate impact, Dobbs v. Jackson Women’s Health Organization, Due Process Clause, Emergency Contraception, Equal Protection Clause, Establishment Clause, Eugene Volokh, Eugenics, Federalism, Fetal Homicide Laws, Fetal Rights, Fetal Viability, First Amendment, Fourteenth Amendment, Great Society, Josh Blackman, Judicial Activism, Later-Term Abortion, Margaret Sanger, Morning After Pill, Personhood, Planned Parenthood v. Casey, Privacy Rights, Pro-Life, racism, Roe v. Wade, Ruth Bader Ginsburg, Samuel Alito, Supreme Court, War Drugs, World Health Organization

The leak of a Supreme Court draft opinion in Dobbs v. Jackson Women’s Health Organization has created uproars on several fronts. The opinion, written by Justice Samuel Alito, represented a 5-4 majority at the time of its writing, but it is a draft opinion, and the substance and the positions of other justices might change before a final decision is handed down by the Court by the end of June. The draft would essentially uphold a Mississippi law restricting abortions after the first 15 weeks of pregnancy. This would overturn the Roe v. Wade (1973) and Planned Parenthood v. Casey (1992) decisions. The former established that states could regulate abortion only beyond a certain stage of pregnancy (originally the first trimester), while the latter allowed states to regulate once a pregnancy reached the stage of fetal viability. While 24 weeks is often cited as the lower limit of viability, it is considered to be as early as 20 weeks by the World Health Organization, an estimate that could decline with future advances in prenatal and neonatal care (such as artificial wombs). In any case, viability would no longer be the standard if the draft opinion stands. Indeed, it would once again be up to states as to how they wish to regulate abortion.

Here is an update on where things stood on May 11th. Reportedly, the 5-4 majority still stood, and no other draft opinions existed in the case at that time. No news since.

Due Process and Privacy Rights

Was Roe v. Wade a good legal decision? Ruth Bader Ginsburg did not hold the opinion in high regard as a matter of the jurisprudence. Apparently, she felt that the Court should have simply struck down the restrictive Texas law in question without imposing a set of rules, which amounted to an aggressive infringement on the legislative function and the evolution of law, and case law, at the state level. Her words were:

“Doctrinal limbs too swiftly shaped, experience teaches, may prove unstable. The most prominent example in recent decades is Roe v. Wade.”

She also felt the Court should not have leaned on the Due Process Clause of Fourteenth Amendment, which prohibits the denial of “life, liberty or property, without due process of law”. And she believed that relying on due process and the privacy rights of a woman and her physician made Roe vulnerable to challenge. She was probably right.

Yale Law School professor Akhil Amar, who is pro-choice, also believes the Roe decision was misguided and calls its reliance on due process “textual gibberish”. The objection to substantive due process is based on the absence of any principle establishing which “rights” not found explicitly in the Bill of Rights are valid, and which are not.

Equal Protection

In fact, Amar defends Justice Alito’s draft opinion and believes, as Ginsberg did, that the Equal Protection Clause of the Fourteenth Amendment is a better defense of abortion rights. The contention is that unless a woman possesses the right to terminate a pregnancy, she is not on an equal footing with similarly situated men in terms of self-determination and life opportunities. Of course, none of this weighs the interests of the unborn child.

Establishment Clause

Josh Blackman has an interesting series of comments about whether the Establishment Clause of the First Amendment may be a valid defense of abortion rights. That seemingly preposterous claim relies on abortion as a right, in some cases, protected by the free exercise of religion. As Blackman sums up in his sixth point:

“… abortion rights groups should be careful what they wish for. If the Court recognizes a Free Exercise right to perform or receive an abortion, then conservatives can cook up even more aggressive religious liberty strategies. I’ll bring the bagels for the next meeting of the Temple of Automatic Weapons.”

Eugene Volokh makes several interesting points on attempts to use the Establishment Clause “to obtain exemptions from generally applicable laws”. A separate, misguided take at the Establishment Clause is that a law must be unconstitutional if it was based on religious beliefs. Volokh handily disposes of that contention here.

Judicially-Prescribed Rights vs. Constitutional Rights

Blackman has written that the Alito draft is a tour de force, addressing many constitutional principles and concerns expressed by other justices. In another post, Blackman explains a very basic rationale for a decision to overturn Roe. It is related to the objections expressed by Ginsberg and Amar, and to the many “lamentations” expressed in the Court’s abortion opinions over the years since Roe. Namely, that rule and establishment of new rights by court decision was not a mechanism intended by the framers of the Constitution, but self-government and federalist principles were:

“It is a mistake to argue that Dobbs extinguishes a right, without also acknowledging that the decision would restore another right. Overruling Roe would extinguish a judicially-created right to abortion, but it would restore a very different right: the right of the people to govern themselves.”

Personhood

Of course, none of these points are really germane to the crux of the pro-life argument to which I subscribe. However, both Roe and Casey acknowledge the state’s interest in protecting the fetus beyond some point in a pregnancy. The closer to term, the greater the interest. The implication is that a fetus gradually takes on degrees of “personhood” through the course of gestation, and that rights attach to that nascent individual at some point. Both Roe and Casey, by allowing states to regulate abortion beyond some point, offer recognition that the closer an abortion occurs to full term, the stronger the case that it may be prohibited.

The law in most European nations carries the same implication, and if anything leans more heavily in favor of fetal rights than Roe. Furthermore, there are 38 states with fetal homicide laws, which treat the fetus as a person in the case of a murder of a pregnant woman. In 29 of those states, the law applies at the earliest stages of pregnancy. This suggests that in most states, sentiments may weigh in favor of treating the fetus as a person imbued with constitutional rights.

In the end, this is not an exclusively religious argument, as the pro-abortion Left always suggests. For me, it’s purely an ethical one. At what point beyond conception are pro-abortion activists willing to concede that a human life is at stake? Apparently a heartbeat is not enough to convince them. Neither does the appearance of small fingers and toes. Nor the ability to feel pain. These are all things that happen before the child is “viable”. But even viability is not enough for some of the more radical abortion activists, who are proposing choice right up to the moment of birth. Incredibly, and despite the real limitations imposed on mid- or late-term abortions in many states (in line with Roe and Casey), some pro-choice advocates are now acting as if overturning these cases causes women to lose such an unfettered right!

Practical Matters

Anyone can obtain a variety of birth control alternatives without a prescription (and often for free). This includes emergency contraception, or the “morning after pill”. Granted, sometimes birth control measures fail, which places the prospective mother (and perhaps an involved or conscientious father) in a difficult position. Nevertheless, careful use of birth control would minimize the abortion problem and obviate much of the debate, but people are often too impulsive or careless about sex.

Late term abortions are a fairly small percentage of all abortions. The CDC reported that in 2018, 50,000 (~8%) abortions occurred after the first trimester (14+ weeks), and 6,200 (1%) took place at or beyond the point of theoretical viability (21+ weeks). This study found that of abortions at 20+ weeks, mothers tended to be younger (20 -24), discovered their pregnancies somewhat later, faced logistical and financial delays in arranging the abortion, or faced other challenging life circumstances. However, the researchers rebut a common rationale for late-term abortion when they say:

“… most women seeking later terminations are not doing so for reasons of fetal anomaly or life endangerment.”

Eugenics and Classism

Pregnancies among black women are terminated at a disproportionately high rate. That’s consistent with the original, eugenicistic and racist goals of Planned Parenthood founder Margaret Sanger. This is an outcome to top all disparate impacts. I have witnessed pro-abortion activists counter that these aborted lives would have been miserable, impoverished, and without opportunity — essentially not worth living — but these are value judgements of the most monstrous kind. I’ve also heard the pathetic argument that fiscal conservatives should be happy that abortions will reduce spending on aid programs. Of course, the plight of the would-be mother is also emphasized by pro-abortion advocates, but we should not be so eager to accept the tradeoff here: abortion gets the mother is off the hook, but a child’s life is at stake. No matter the odds of success, human beings are all endowed with potential and opportunity, and it’s not necessary to be economically secure to be happy or pursue dreams.

It’s easy to be pessimistic that public policy can ever mitigate the economic burden on impoverished women who bring unexpected or unwanted pregnancies to term, or to brighten the economic future of their children. After all, over the decades since the Great Society program was conceived, the welfare state has proven no better than a dependency treadmill. Family structure has been decimated by those programs and the destructive consequences of the failed (but ongoing) war on drugs. Likewise, public education is a disaster. However, there are also alternatives such as adoption, and there are many private individuals and organizations working to encourage prospective mothers and ease those burdens.

The Leak

The leak of the draft opinion in Dobbs is unfortunate as it compromises the ongoing integrity of the Court’s internal debates and proceedings. In addition to this institutional damage, the impropriety of staging protests outside the homes of justices and inside places of worship should be roundly condemned by people with respect for judicial integrity, privacy and free exercise. These protests are partly attempts to intimidate, and they have even been accompanied by threats of violence. The belligerent posture of these activists is unconscionable.

Long Live Federalism

Again, the Court’s final decision in Dobbs might not be the opinion in the leaked draft. However, if the Court does indeed overturn Roe, it would not outlaw abortion. Rather, it would allow voters in each state to have a voice in aligning the law with public sentiment. Some states will have more restrictive abortion laws than others, but even the Mississippi law at issue in Dobbs allows abortion up through week 15, almost two weeks longer than the original Roe limitation.

The country is still deeply divided on the issue of abortion. Fundamentally, a broader acceptance of the life-and-death reality of abortion would help bring more consensus on the issue. One theory I have is that many who oppose overturning Roe would simply rather not think about that reality. In their minds, Roe keeps abortion compartmentalized, safely walled off from conscience and sometimes even spiritual convictions. They rationalize Roe based on their inability to observe the person whose life is at stake, and they accept justifications that minimize the value of that life.

A single rule imposed by the Court has not and will not resolve these differences. Indeed, Roe and Casey were failed acts of judicial activism that should be reversed. While bad legislation is regrettable, it is always subject to review and challenge by the people. In a federalist system, a bad law is contained like a single experimental treatment in a large trial with multiple arms. However, in this case, unlike a trial with random selection of subjects, one treatment group may differ from others in important respects, and the objective is not to identify one single-best solution, but different solutions that work best for different groups. That is a closer approximation to real self-government than federal legislation and especially one-size-fits-all Court rule-making.

Rejecting Fossil Fuels at Our Great Peril

18 Wednesday May 2022

Posted by Nuetzel in Central Planning, Energy, Risk, Technology

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Bartley J. Madden, Biden Administration, Dan Ervin, Don Boudreaux, Electric Vehicles, Energy Mandates, Energy subsidies, EV Adoption, External Benefits, External Costs, Fossil fuels, Grid Stability, Intermittancy, Kevin Williamson, Markets, Power Outages, Price Controls, regressivity, Renewable energy, Russia Sanctions, SEC Carbon Mandate, Sustainability

The frantic rush to force transition to a zero-carbon future is unnecessary and destructive to both economic well-being and the global environment. I do not subscribe to the view that a zero-carbon goal is an eventual necessity, but even if we stipulate that it is, a rational transition would eschew the immediate abandonment of fossil fuels and adopt a gradual approach relying heavily on market signals rather than a mad dash via coercion.

I’ve written about exaggerated predictions of temperature trends and catastrophes on a number of occasions (and see here for a similar view from a surprising source). What might be less obvious is the waste inherent in forcing the abandonment of mature and economic technologies in favor of, as yet, under-developed and uneconomic technologies. These failures should be obvious when the grid fails, as it does increasingly. It is often better to leave the development and dispersion of new technologies to voluntary decision-making. In time, advances will make alternative, low- or zero-carbon energy sources cost effective and competitive to users. That will include efficient energy storage at scale, new nuclear technologies, geothermal techniques, and further improvements in the carbon efficiency of fossil fuels themselves. These should be chosen by private industry, not government planners.

Boneheads At the Helm

Production of fossil fuels has been severely hampered by the Biden Administration’s policies. The sanctions on Russian oil that only began to take hold in March have caused an additional surge in the price of oil. Primarily, however, we’ve witnessed an artificial market disruption instigated by Biden’s advisors on environmental policy. After all, neither Russian oil imports nor the more recent entreaties to rogue states as Iraq and Venezuela for oil would have been necessary if not for the Administration’s war on fossil fuels. Take a gander at this White House Executive Order issued in January 2021. It reads like a guidebook on how to kill an industry. In a column this weekend, Kevin Williamson quipped about “the Biden administration’s uncanny ability to get everything everywhere wrong all at once.” That was about policy responses to inflation, but it applies to energy in particular.

Scorning the Miracle

Fossil fuels are the source of cheap and reliable energy that have lifted humanity to an unprecedented level of prosperity. Fossil fuels have given a comfortable existence to billions of people, allowing them to rise out of poverty. This prosperity gives us the luxury of time to develop substitutes, not to mention much greater safety against the kind of weather extremes that have always been a fact of life. The world still gets 80% of its energy from fossil fuels. These fuels are truly a miracle, and we should not discard such valuable technologies prematurely. That forces huge long-term investments in inferior technologies that are likely to be superseded in the future by more economic refinements or even energy sources and methods now wholly unimagined. There are investors who will still wish to pursue those new technologies, perhaps with non pecuniary motives, and there are a few consumers who really want alternatives to fossil fuels.

Biden’s apparent hope that his aggressive climate agenda will be a great legacy of his presidency is at the root of his intransigence toward fossil fuels. His actions in this regard have had a profoundly negative psychological effect on the oil and gas industry. Steps such as cancellations of pipeline projects are immediately impactful in that regard, to say nothing of the supplies that would have ultimately flowed through those pipelines. These cancellations reinforce the message Biden’s been sending to the industry and its investors since his campaign: we mean to shut you down! Who wants to invest in new wells under those circumstances? Other actions have followed: no new federal oil and gas leases, methane restrictions, higher drilling fees on federal land, and a variety of climate change initiatives that bode ill for the industry, such as the SEC’s mandate on carbon disclosures and the Federal Reserve’s proposed role in policing climate impacts.

And now, Democrats are contemplating a move that would make gasoline even more scarce: price controls. As Don Boudreaux says in a recent letter to The Hill:

“Progressives incessantly threaten to tax and regulate carbon fuels into oblivion. These threats cannot but reduce investors’ willingness to fund each of the many steps – from exploration through refining to transporting gasoline to market – that are necessary to keep energy prices low. One reality reflected by today’s high prices at the pump is this hostility to carbon fuels generally and to petroleum especially. And gasoline price controls would only make matters worse by further reducing the attractiveness of investing in the petroleum industry: Why invest in bringing products to market if the prices at which you’re allowed to sell are dictated by grandstanding politicians?”

The kicker is that all these policies are futile in terms of their actual impact on global carbon concentrations, let alone their highly tenuous link to global temperatures. The policies are also severely regressive, inflicting disproportionate harm on the poor, who can least afford such an extravagant transition. Biden wants the country to sacrifice its standard of living in pursuit of these questionable goals, while major carbon-emitting nations like China and India essentially ignore the issue.

Half-Baked Substitution

Market intervention always has downsides to balance against the potential gains of “internalizing externalities”. In this case, the presumed negative externalities are imagined harms of catastrophic climate change from the use of fossil fuels; the presumed external benefits are the avoidance of carbon emissions and climate change via renewables and other “zero-carbon” technologies. With those harms and gains in question, it’s especially important to ask who loses. Taxpayers are certainly on that list. Users of energy produced with fossil fuels end up paying higher prices and are forced to conserve or submit to coerced conversion away from fossil fuels. Then there are the wider impediments to economic growth and, as noted above, the distributional consequences.

Users of immature or inferior energy alternatives might also end up as losers, and there are likely to be external costs associated with those technologies as well. It’s not widely appreciated that today’s so-called clean energy alternatives are plagued by their need to obtain certain minerals that are costly to extract in economic and environmental terms, not to mention highly carbon intensive. And when solar and wind facilities fail or reach the end of their useful lives, disposal creates another set of environmental hazards. In short, the loses imposed through forced internalization of highly uncertain externalities are all too real.

Unfortunately, the energy sources favored by the Administration fail to meet base-load power needs on windless and/or cloudy days. The intermittency of these key renewables means that other power sources, primarily fossil-fuel and nuclear capacity, must remain available to meet demand on an ongoing basis. That means the wind and solar cannot strictly replace fossil fuels and nuclear capacity unless we’re willing to tolerate severe outages. Growth in energy demand met by renewables must be matched by growth in backup capacity.

A call for “energy pragmatism” by Dan Ervin hinges on the use of coal to provide the “bridge to the energy future”, both because there remains a large amount of coal generating capacity and it can stabilize the grid given the intermittency of wind and solar. Ervin also bases his argument for coal on recent increases in the price of natural gas, though a reversal of the Biden EPA’s attacks on gas and coal, which Ervin acknowledges, would argue strongly in favor of natural gas as a pragmatic way forward.

Vehicle Mandates

The Administration has pushed mandates for electric vehicle (EV) production and sales, including subsidized charging stations. Of course, the power used by EVs is primarily generated by fossil fuels. Furthermore, rapid growth in EVs will put a tremendous additional strain on the electric grid, which renewables will not be able to relieve without additional backup capacity from fossil fuels and nuclear. This severely undermines the supposed environmental benefits of EVs.

Once again, mandates and subsidies are necessary because EV technology is not yet economic for most consumers. Those buyers don’t want to spend what’s necessary to purchase an EV, nor do they wish to suffer the inconveniences that re-charging often brings. This is a case in which policy is outrunning the ability of the underlying infrastructure required to support it. And while adoption of EVs is growing, it is still quite low (and see here).

Wising Up

Substitution into new inputs or technologies happens more rationally when prices accurately reflect true benefits and scarcities. The case for public subsidies and mandates in the push for a zero-carbon economy rests on model predictions of catastrophic global warming and a theoretical link between U.S. emissions and temperatures. Both links are weak and highly uncertain. What is certain is the efficiency of fossil fuels to power gains in human welfare.

This Bartley J. Madden quote sums up a philosophy of progress that is commendable for firms, and probably no less for public policymakers:

“Keep in mind that innovation is the key to sustainable progress that jointly delivers on financial performance and taking care of future generations through environmental improvements.”

Madden genuflects to the “sustainability” crowd, who otherwise don’t understand the importance of trusting markets to guide innovation. If we empower those who wish to crush private earnings from existing technologies, we concede the future to central planners, who are likely to choose poorly with respect to technology and timing. Let’s forego the coercive approach in favor of time, development, and voluntary adoption!

The Fed’s Balance Sheet: What’s the Big Deal?

08 Sunday May 2022

Posted by Nuetzel in Government Failure, Inflation, Monetary Policy

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Allocation of Capital, Bank Reserves, crowding out, Debt Monetization, Fed Balance Sheet, Federal Funds, Federal Reserve, Fiscal Inflation, Inflation tax, Interest Rate Targeting, MBS, Monetary policy, Mortgage Backed Securities, QE, Quantitative Easing, Scarcity, Tapering

The Federal Reserve just announced tighter monetary policy in an attempt to reduce inflationary pressures. First, it raised its target range for the federal funds rate (on overnight loans between banks) by 0.5%. The new range is 0.75% – 1%. Second, on June 1, the Fed will begin taking steps to reduce the size of its $9 trillion portfolio of securities. These holdings were acquired during periods of so-called quantitative easing (QE) beginning in 2008, including dramatic expansions in 2020-21. A shorthand reference for this portfolio is simply the Fed’s “balance sheet”. It includes government debt the Fed has purchased as well as privately-issued mortgage-backed securities (MBS).

What Is This Balance Sheet You Speak Of?

Talk of the Fed’s balance sheet seems to mystify lots of people. During the 2008 financial crisis, the Fed began to inject liquidity into the economy by purchasing large amounts of assets to be held on its balance sheet. This was QE. It’s scope was unprecedented and a departure from the Fed’s pre-crisis reliance on interest rate targeting. QE had the effect of increasing bank reserves, which raised the possibility of excessive money supply growth. That’s when the Fed began to pay interest to banks on reserves, so they might be content to simply hold some of the reserves over and above what they are required to hold, rather than using all of that excess to support new loans and deposits (and thus money growth). However, that interest won’t stop banks from lending excess reserves if better opportunities present themselves.

The Fed has talked about reducing, “normalizing”, or “tapering” its balance sheet for some time, but it only recently stopped adding to it. With inflation raging and monetary policy widely viewed as too “dovish”, analysts expected the Fed to stop reinvesting proceeds from maturing securities, which amounts to about $95 billion per month. That would shrink or “taper” the balance sheet at a rate of about $1.1 trillion per year. Last week the Fed decided to cap the “runoff” at $47.5 billion per month for the first three months, deferring the $95 billion pace until September. Monetary policy “hawks” were disappointed by this announcement.

Monetizing Government

So, one might ask, what’s the big deal? Why must the Fed taper its securities holdings? Well, first, the rate of inflation is far above the Fed’s target range, and it’s far above the “average Joe’s” comfort range. Inflation imposes significant costs on the economy and acts as a regressive form of taxation, harming the poor disproportionately. To the extent that the Fed’s huge balance sheet (and the corresponding bank reserves) are supporting incremental money growth and fueling inflation, the balance sheet must be reduced.

In that connection, the Fed’s investment in government debt represents monetized federal debt. That means the Fed is essentially printing money to meet the Treasury’s financing needs. Together with profligate spending by the federal government, nothing could do more to convince investors that government debt will never be repaid via future budget surpluses. This dereliction of the government’s “full faith and credit”, and the open-armed acceptance of the inflation tax as a financing mechanism (à la Modern Monetary Theory), is the key driver of fiscal inflation. Reducing the balance sheet would represent de-monetization, which might help to restore faith in the Fed’s ability to push back against fiscal recklessness.

Buyer of First Resort

Perhaps just as critically, the Fed’s heavy investment in government debt and MBS represents an ongoing distortion to the pricing of financial assets and the allocation of capital. Some call this interference in the “price discovery process”. That’s because the Fed has represented a market-altering presence, a willing and inelastic buyer of government debt and MBS. Given that presence, it’s difficult for buyers and sellers to discern the true values of alternative uses of capital, or to care.

QE was, among other things, a welcome institutional development for the U.S. Treasury and for those who fancy that fresh money printing is an ever-valid form of government payment for scarce resources. The Fed’s involvement also means that other potential buyers of Treasury debt need not worry about interest rate risk, making public debt relatively more attractive than private debt. This is a dimension of the “crowding out” phenomenon, whereby the allocation of capital and flows of real resources between public and private uses are distorted.

The Fed’s presence as a buyer of MBS depresses mortgage rates and makes mortgage lending less risky for lenders and investors. As a result, it encourages an over-investment in housing and escalating home prices. This too distorts the allocation of capital and real resources, at the margin, toward housing and away from uses with greater underlying value.

Conclusion

The magnitude of the Fed’s balance sheet is an ongoing testament to an increasingly dominant role of central authorities in the economy. In this case, the Fed has served as a conduit for the inflation tax. In addition, it has unwittingly facilitated crowding out of private capital investment. The Fed’s purchases of MBS have distorted the incentives (and demand) for residential investment. These are subtle effects that the average citizen might not notice, just as one might not notice the early symptoms of a debilitating disease. The long-term consequences of the Fed’s QE activities, including the inflation tax and distorted allocations of capital, are all too typical of failures of government intervention and attempts at central planning. But don’t expect anyone at the Fed to admit it.

Collectivism Is Not the “Natural” State

03 Tuesday May 2022

Posted by Nuetzel in Collectivism, Property Rights

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Aché, Capitalism, Collectivism, Covid-19, Friedrich Engels, Hunter-Gatherers, Manvir Singh, Noble Savage, Paraguay, Primitive Communism, Property Rights

There is a great myth that primitive man was some sort of “noble savage”, perfectly attuned to the natural environment and disposed to an egalitarian principle. All that, of course, is balderdash. A related myth is that primitive societies were essentially collectivist and that private property was largely an unrecognized institution. This is something I’ve heard too often from individuals wishing to characterize leftist ideals as natural and wholesome. So I welcomed a recent piece in Aeon called “Primitive Communism”, by Manvir Singh, which reviews evidence on a number of hunter-gatherer societies and cites several scholars on the subject of ownership and the distribution of goods among those peoples. A preponderance of the evidence suggests that private property and private rewards were (and are) quite common in primitive societies, and those practices predated agriculture.

The assertion that the advent of private property and trade was somehow unnatural for mankind, or even unjust, might owe its widespread acceptance to Friedrich Engels’ “The Origin of the Family, Private Property and the State”. Singh summarizes one of the book’s primary arguments thusly:

“Once upon a time, private property was unknown. Food went to those in need. Everyone was cared for. Then agriculture arose and, with it, ownership over land, labour and wild resources. The organic community splintered under the weight of competition.”

While there were a few primitive societies in which economic output was shared, it is not clear whether any central authority was relied upon for determining the distribution of output. Instead, in those cases, sharing seems to have been a matter of social convention. Singh posits that interdependence played a major role in motivating output sharing, but mechanisms for dealing with interdependence differed in societies with stronger property rights, including voluntary sharing, which was often but not always based on reciprocity. Volunteerism still has a strong role in modern, developed economies, but for better or worse, social insurance is increasingly viewed as a function of the state, with its monopoly on legal coercion.

And how “natural” is social insurance? Not very in a world of extreme scarcity. One of the more interesting passages in Singh’s article has to do with the brutality of subsistence-level societies. The weak were often abandoned or killed, which Singh discusses in the context of the collectivist Aché people of Paraguay. This “culling” applied variously to orphans, the disabled, the unsightly, and the aged. It’s unclear whether these decisions were collective or left up to individual families. Noble savages indeed!

It’s astonishing how often Engels’ faulty premise is accepted as historical fact. The argument, however, often serves as a subtext for collectivist rationales in the modern era. As Singh says:

“For anyone hoping to critique existing institutions, primitive communism conveniently casts modern society as a perversion of a more prosocial human nature.”

I’m not sure whether it’s possible to marshall evidence that primitive societies with strong property rights were more successful than their collectivist counterparts. That would be a good topic of further research, but it would be tough to control for the difficulties posed by varying natural conditions faced by these societies.

On the other hand, suppose we stipulate that property rights developed as a consequence of, or in tandem with, organized production, as Engels would have had it. We’d have to categorize that development as a kind of technological breakthrough in its own right. By aligning incentives with production, property rights were critical to the phenomenal growth in prosperity the world has enjoyed over the past several centuries. Nevertheless, the evidence on primitive societies suggests that the alignment came more “naturally”.

It’s about time to put the fiction of “primitive communism” to rest. Private property was sensible for the denizens of most primitive societies. Even the most collectivist of the those societies made certain concessions to that reality. These facts comport with a view of property ownership as a natural right.

Social Insurance, Trust Fund Runoff, and Federal Debt

28 Thursday Apr 2022

Posted by Nuetzel in Deficits, Social Security

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

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

The Trust Funds

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

Fund Accumulation

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

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

Draining the Funds

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

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

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

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

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

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

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

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

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

Discretionary vs. Mandatory Budgets

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

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

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

Conclusion

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

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

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

Critical Gender Theory and Trends in Gender Identity

21 Thursday Apr 2022

Posted by Nuetzel in Gender, Wokeness

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

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

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

LGBTQ+ Numbers

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

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

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

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

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

Causal Quandary

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

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

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

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

Socialization

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

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

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

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

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

Medical Experts

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

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

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

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

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

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

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

Educational Experts

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

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

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

Other Causal Forces

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

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

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

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

Conclusion

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

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

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

Markets Deal With Scarcity, Left Screams “Price Gouging”

11 Monday Apr 2022

Posted by Nuetzel in Antitrust, Environmental Fascism, Oil Prices

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

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

Break It Then Blame It

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

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

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

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

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

Antitrust Nonsense

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

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

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

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

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

Coerced Scarcity

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

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

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

Conclusion

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

The SEC’s Absurd Climate Overreach

04 Monday Apr 2022

Posted by Nuetzel in Central Planning, Global Warming

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

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

The SEC Mandate

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

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

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

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

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

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

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

Identifying the Risk Causers

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

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

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

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

Much Ado About Nothing

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

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

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

Back To The SEC’s Mandated Role

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

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

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

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

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

ESG Scoring: Political Tool Disguised as Investment Guide

30 Wednesday Mar 2022

Posted by Nuetzel in Capital Markets, Corporatism, Environmental Fascism, Social Justice

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Access to Capital, Antitrust, Blackrock, Climate Action 100+, Corporatism, Diversity, Equity, ESG Fees, ESG Scores, Great Reset, Green Energy, Inclusion, John Cochrane, Mark Brnovich, Principal-Agent Problem, Renewable energy, Renewables, rent seeking, Shareholder Value, Social Justice, Stakeholder Capitalism, Sustainability, Too big to fail, Ukraine Invasion, Vladimir Putin, Woke Investors, Zero-Carbon

ESG scores are used to rate companies on “Environmental, Social, and Governance” criteria. The truth, however, is that ESGs are wholly subjective measures of company performance. There are many different ESG scores available, with no uniform standards for methodology, specific inputs, or weighting schemes. If you think quarterly earnings reports are manipulated, ESGs are an even more pliable tool for misleading investors. It is a market fad, and fund managers are using it as an excuse to charge higher fees to investors. But like any trending phenomenon, for a time, the focus on ESGs might feed-back positively to returns on favored companies. That won’t be sustainable, however, without legislative and regulatory cover, plus a little manipulative help from the ESG engineers and “Great Reset” propagandists.

It’s 100% Political, 0% Economic

ESGs are founded on prioritizing objectives that have little to do with shareholder value or any well-understood yardsticks of financial or operating performance. The demands on company resources for scoring highly on ESG are often nakedly political. This includes adoption of environmental goals such as fraudulent “zero carbon” impacts, the nebulous “sustainability” objective promoted by “green” activists, diversity, inclusion and equity initiatives, and support for activist groups such as Black Lives Matter and Antifa.

Concepts like “stakeholder value” are critical to the rationale for ESGs. “Stakeholders” can include employees, suppliers, and customers, as well as potential employees. suppliers, and customers. In other words, they can be just about anyone in the broader community, or more likely activists for “social change” whose interests have but the thinnest connection to the business’s productive activities. In essence, so-called stakeholder capitalism amounts to a ceding of control over corporate resources, and ultimately confiscation of wealth from equity owners.

Corporations have long engaged in various kinds of defensive actions, amounting to a modern-day trade in indulgences. No one will be upset about your gas-powered fleet if you buy enough carbon offsets, which just might neutralize the impact of the fleet on your ESG! On a more sinister level, ESG’s provide opportunities for cover against information that might be damaging to firms, such as the use of slave labor overseas. Flatter the right people, give to their causes, “partner” with them on pet initiatives, and your sins will be ignored and your ESG will climb! And ESGs are used in attempts to pacify leftist investors who see the corporation as a vessel for their own social objectives, quite apart from any mission it might have had as a productive enterprise.

Your ESG will shine if you do business that’s politically-favored, like renewable energy, despite its inefficiencies and significant environmental blemishes. But ESGs are not merely used to reward those anointed as virtuous by the Left. They are more forcefully used to punish firms in industries that are out of favor, or firms refusing to participate in buying off authoritarian crusaders. For example, you might be so berserk as to think fossil fuels and climate change represent imminent threats of catastrophe. Naturally, you’ll want to punish oil and gas producers. In fact, if you are in charge of ESG modeling, you might want to penalize almost any extraction industry, with certain exceptions: the massive extraction and disposal costs of renewables will pass without notice.

All these machinations occur despite the huge uncertainty surrounding flimsy, model-based predictions of warming and global catastrophe. Never mind that fossil fuels are still relied upon to provide for most of our energy needs and will be for some time to come, including base-load power generation when intermittency prevents renewables from meeting demand. The stability of the power grid depends upon the availability of carbon-based energy, which in fact is marvelously efficient. Yet the ESG crowd (not to mention the Biden Administration) seeks to drive up its cost, including the cost of capital, and these added costs fall most heavily on the poor.

ESG-guided efforts by activists to deny capital to certain segments of the energy sector may constitute antitrust violations. Some big players in the financial industry, who together manage trillions of dollars in investment funds, belong to an advocacy organization called Climate Action 100+. They coordinate on a mission to completely transform the energy industry via “green” investments and divestments of presumptively “dirty” concerns. These players and their clients have huge investments in green energy, and it is in their interest to provide cheap capital to those firms while denying capital to fossil fuel industries. As Arizona Attorney General Mark Brnovich writes at the link above, this is restraint of trade “hiding in plain sight”.

Manipulation

ESGs could be the mother of all principal-agent problems. Corporate CEOs, hired by ownership as stewards and managers of productive assets, are promoting these metrics and activities, which may not align with the interests of ownership. ESG’s are not standardized, and most users will have little insight into exactly how these “stakeholder” sausages are stuffed. In fact, much of the information used for ESGs is extremely ad hoc, not universally disclosed, and is often qualitative. The applicability of these scores to the universe of stocks, and their reliability in guiding investment decisions, is extremely questionable no matter what the investor’s objectives. And of course the models can be manipulated to produce scores that suit the preferences of money managers who have a stake in certain firms or industry segments, and who inflate their fees in exchange for ESG investment advice. And firms can certainly engage in deceptions that boost ESGs, as already discussed.

Like many cultural or consumer trends, investment trends can feed off themselves for a time. If there are enough “woke” investors, ESGs might well feed an unvirtuous cycle of stock purchases in which returns become positively correlated with wokeness. Such a divorce from business fundamentals will eventually take its toll on returns, especially when economic or other conditions present challenges, but that’s not the answer you’ll get from many stock pickers and investment pundits.

At the same time, there are ways in which the preoccupation with ESGs dovetails with the rents often sought in the political arena. Subsidies, for example, will be awarded to firms producing renewables. Politically favored firms are also likely to receive better regulatory treatment.

There are other ways in which firms engaging in wasteful activities can survive profitably, at least for a time. Monopoly power is one, and companies often develop a symbiosis with regulators that hampers smaller competitors. This is traditional rent-seeking corporatism in action, along with the “too-big-to-fail” regime. Sometimes sheer growth in demand for new technologies or networking potential helps to conceal waste. Hot opportunities can leave growing companies awash in cash, some of which will be burned in wasteful endeavors. ESG scoring offers them additional cover.

Cracks In the Edifice

John Cochrane notes a fundamental, long-term contradiction for those who invest based on ESGs: an influx of capital will tend to drive down returns in those firms and industries, while the returns on firms having low ESGs will be driven upward. Yet advocates claim you can invest for virtue and superior returns. That can’t outlast real market forces, especially as ESG efforts dilute any mission a firm might have as a productive enterprise.

Vladimir Putin’s brutal invasion of Ukraine has revealed other cracks in the ESG edifice. We now have parties arguing that defense stocks should be awarded ESG points! Also, that oil production by specific nations should be scored highly. There is also an awakening to the viability of nuclear power as an energy source. Then we have the problem of delivering on Biden’s promise to Europe of more liquified natural gas exports. That will be difficult given the way Biden has bludgeoned the industry, as well as the ESG conspiracy to deny it access to capital. Just watch the ESG hacks backpedal. Now, even the evangelists at Blackrock are wavering. To see the thread of supposed ESG consistency unravel would be enough to make you laugh if the entire conspiracy weren’t so grotesque.

Closing

The pretensions underlying “green” initiatives undertaken by large corporations are good mainly for virtue signaling, to collect public subsidies, and to earn better ESG scores. They are usually wasteful in a pure economic sense. The same is true of social justice and diversity initiatives, which can be perversely racist in their effects and undermine the rule of law.

Ultimately, we must recognize that the best contribution any producer can make to society is to create value for shareholders and customers by doing what it does well. The business world, however, has gone far astray in the direction of rank corporatism, and keep this in mind: any company supporting a sprawling HR department, pervasive diversity efforts, “sustainability” initiatives, and preoccupations with “stakeholder” outreach is distracted from its raison d’etre, its purpose as a business enterprise to produce something of value. It is probably captive to outside interests who have essentially commandeered management’s attention and shareholders’ resources.

When it comes to investing, I prefer absolute neutrality with respect to out-of-mission social goals. Sure, do no harm, but the focus should remain squarely on goals inherent in the creation of value for customers and shareholders.