That Word “Liberal” … I Don’t Think That Means What You Think It Means

03 Wednesday Jan 2024

Posted by Nuetzel in Conservatism, Liberalism, Socialism

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Adam Smith, Capitalism, Classical Liberal, Conservatism, Consumer Sovereignty, Corporatism, Free Markets, Freedom of Speech, Friedrich Hayek, Liberalism, Libertarianism, MAGA, monopoly, Monopsony, Nate Silver, Natural Rights, Non-Aggression Principle, Perfect Competition, Progressivism, Property Rights, Public goods, Religious Freedom, Right to Life, Scott Sumner, social engineering, Socialism, State Capacity, State Religion, statism, The Wealth of Nations

Leftism has taken on new dimensions amid its preoccupation with identity politics, victimhood, and “wokeness”. Traditional socialists are still among us, of course, but “wokeists” and “identitarians” have been on the progressive vanguard of late, rooting for the deranged human butchers of Hamas and the dismantling of liberal institutions. This didn’t happen overnight, of course, and traditional socialists are mostly fine with it.

An older story is the rebranding of leftism that took place in the U.S. during the first half of the 20th century, when the word “liberal” was co-opted by leftists. Before that, a liberal orientation was understood to be antithetical to the collectivist mindset long associated with the Left. Note also that liberalism retains its original meaning even today in much of Europe. Often we hear the term “classical liberal” to denote the “original” meaning of liberalism, but the modifier should be wholly unnecessary.

Liberalism Is Not “In-Betweenism”

In this vein, Nate Silver presents a basic taxonomy of political orientation in a recent Substack post. It includes the diagram above, which distinguishes between socialism, conservatism, and liberalism. Silver draws on a classic essay written by Friedrich Hayek in 1945, “Why I am Not a Conservative”, in which Hayek discussed the meaning of the word “liberal” (and see here). Liberalism’s true emphasis is a tolerance for individual rights and freedoms, subject to varying articulations of the “nonaggression principle”. That is, “do as you like, but do no harm to others”.

We often see a linear representation distinguishing between so-called progressives on the left and conservatives on the right. Of course, a major hallmark of leftist thinking is extreme interventionism. Leftists or progressives are always keen to detect the slightest whiff of an externality or the slightest departure from the perfectly competitive market ideal. They seem eager to find a role for government in virtually every area of life. While it’s not a limiting case, we can substitute socialism or statism for progressivism on the far left, as Silver does, whereby the state takes primacy in economic and social affairs.

Conservatism, on the other hand, is a deep resistance to change, whether institutional, social, and sometimes economic. Conservatives too often demonstrate a willingness to use the coercive power of the state to prevent change. Hayek noted the willingness of both socialists and conservatives to invoke state power for their own ends.

Similarly, religious conservatives often demand state support beyond that afforded by the freedom to worship in the faith of one’s choice. They might strongly reject certain freedoms held to be fundamental by liberals. Meanwhile, socialists often view mere religious freedom as a threat to the power of the state, or at least they act like it (e.g. see here for an example).

Like conservatives, dedicated statists would doubtless resist change if it meant a loss of their own power. That is, they’d wish to preserve socialist institutions. On this point, witness the vitriol from the Left over what it perceives as threats to the public school monopoly. Witness also the fierce resistance among public employees to reducing the scale of the administrative state, and how advocates of entitlements fiercely resist decreases in the growth rate of those expenditures.

Silver, like Hayek, objects to the traditional, linear framework in which liberals are thought to occupy a range along a line between socialism and conservatism. He objects to that because real liberals value individual liberty as a natural human right, a viewpoint typically abhored by both socialists and conservatives. There is nothing “in between” about it! And of course, conservatives and progressives are equally guilty in their mistaken use of the word “liberal”.

Mapping Political Preferences

Liberty, statism, and conservatism are not exactly orthogonal political dimensions. Larger government almost always means less economic liberty. At a minimum, state dominance implies a social burden associated with public monopoly and monopsony power, as well as tax and welfare-state incentive problems. These features compromise or corrupt the exercise of basic rights. On the other hand, capitalism and its concomitant reliance on consumer sovereignty, individual initiative, free exchange and secure property rights is most in harmony with true liberalism.

For conservatives, resistance to change in support of a traditionally free market economy might offer something of a contradiction. In one sense, it corresponds to upholding market institutions. However, free markets allow new competitors and new technologies to undermine incumbents, who conservatives sometimes wish to defend through regulatory or protectionist measures. And conservatives are almost always too happy to join in the chorus of “price gouging” in response to the healthy operation of the free market in bringing forth supplies.

All that is to say that preferences involving liberty, statism, and traditionalism are not independent of one another. They cannot simply be mapped onto a three-dimensional space. At least the triangular representation gets liberalism out of the middle, but it’s difficult to visualize other ideological positions there. For example, “state religionism” could lie anywhere along the horizontal line at the top or even below it if certain basic liberties are preserved. Facism combines elements of socialism and a deformed version of capitalism that is properly called corporatism, but where would it fall within the triangle?

Big Government Liberalism?

Silver says he leans heavily toward a “big government” version of liberalism, but big government is hard to square with broad liberties. Granted, any well-functioning society must possess a certain level of “state capacity” to defend against private or public violations of individual rights, adjudicate disputes, and provide true public goods. It’s not clear whether Silver’s preferences lie within the bounds of those ambitions. Still, he deserves credit for his recognition that liberalism is wholly different from the progressive, socialist vision. It is the opposite.

The “New” Triangle

Silver attempts to gives the triangular framework a more contemporary spin by replacing conservatism with “MAGA Conservatism” and socialism with “Social Justice Leftism” (SJL), or “wokeism”. Here, I’m treating MAGA as a “brand”. Nothing below is intended to imply that America should not be a great nation.

The MAGA variant of conservatism emphasizes nationalism, though traditional conservatives have never been short on love of nation. For that matter, as a liberal American, it’s easier to forgive nationalist sentiments than it is the “Death to America” refrain we now hear from some SJLs.

The MAGA brand is also centered around a single individual, Donald Trump, whose rhetoric strikes many as nativistic. And Trump is a populist whose policy proposals are often nakedly political and counterproductive.

SJL shares with socialism an emphasis on various forms of redistribution and social engineering, but with a new focus on victimhood based on classes of identity. Of SJL, Silver says:

“Proponents of SJL usually dislike variations on the term ‘woke’, but the problem is that they dislike almost every other term as well. And we need some term for this ideology, because it encompasses quite a few distinctive features that differentiate it both from liberalism and from traditional, socialist-inflected leftism. In particular, SJL is much less concerned with the material condition of the working class, or with class in general. Instead, it is concerned with identity — especially identity categories involving race, gender and sexuality, but sometimes also many others as part of a sort of intersectional kaleidoscope.”

The gulf between liberals and SJLs couldn’t be wider on issues like free speech and “equity”, and equality of opportunity. MAGAns, on the other hand, have some views on individual rights and responsibility that are largely consistent with liberals, but reflexive populism often leads them to advocate policies protecting rents, corporate welfare, and protectionism.

Divided Liberalism

Liberalism emphasizes limited government, individual autonomy, and free exchange. However, there are issues upon which true liberals are of divided opinion. For example, one such area of controversy is the conflict between a woman’s right to choose and the fetal right to life. Many true liberals disagree over whether the rights of a fetus outweigh its mother’s right to choose, but most would concede that the balance shifts to the fetus at some point well short of birth (putting aside potential dangers to the mother’s life). Open borders is another area that can divide true liberals. On one side, the right to unrestricted mobility is thought to supersede any public interest in enforcing borders and limiting the flow of immigrants. On the other side, questions of national sovereignty, national security, as well as social and state capacity to absorb immigrants take primacy.

Don’t Call Lefties “Liberal”… They’re Not!

True liberalism (including most strains of libertarianism) recognizes various roles that a well-functioning state should play, but it also recognizes the primacy of the individual and individual rights as a social underpinning. As Hayek noted, true liberals are not resistant to change per se, unlike conservatives. But modern progressives demand changes of the worst kind: that the state should intervene to pursue their favored objectives, laying claim to an ever-greater share of private resources. This requires government coercion on a massive scale, the antithesis of liberalism. It’s time to recognize that “progressives” aren’t liberals in any sense of the word. For that matter, they don’t even stand for progress.

I’ll close with a quote from Adam Smith that I cribbed from Scott Sumner. Unfortunately, Sumner does not give the full reference, but I’ll take his word that Smith wrote this 20 years before the publication of The Wealth of Nations:

“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”

So When Can We Expect That Hard Landing, Hmmm?

13 Wednesday Dec 2023

Posted by Nuetzel in Economic Outlook, Monetary Policy

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Consumer Sentiment, Core PCE, Federal Funds Rate Target, Federal Open Market Committee, Hard Landing, Inflation, Jamie Diamond, Labor Market, Leading Indicators, Long and Variable Lags, Milton Friedman, Money Growth, Neutral Real Rate, Quantitative Tightening, Real Interest Rates, Real Wages, Recession, Scott Sumner, Soft Landing, Tight Money

The joke’s on me, but my “out” on the question above is “long and variable lags” in the impact of monetary policy, a description that goes back to the work of Milton Friedman. If you call me out on my earlier forebodings of a hard landing or recession, I’ll plead that I repeatedly quoted Friedman on this point as a caveat! That is, the economic impact of a monetary tightening will be lagged by anywhere from 9 to 24 months. So maybe we’re just not there yet.

Of course, maybe I’m wrong and we won’t have to get “there”: the rate of inflation has indeed tapered over the past year. A soft landing now seems like a more realistic possibility. Still, there’s a ways to go, and as Scott Sumner says, when it comes to squeezing inflation out of the system, “It’s the final percentage point that’s the toughest.” One might say the Federal Reserve is hedging its bets, avoiding further increases in its target federal funds rate absent evidence of resurging price pressures.

Strong Growth or Mirage?

Economic growth is still strong. Real GDP in the third quarter grew at an astonishing 5.2% annual rate. A bulge in inventories accounted for about a quarter of the gain, which might lead to some retrenchment in production plans. Government spending also accounted for roughly a quarter, which corresponds to a literal liability as much as a dubious gain in real output. Unfortunately, fiscal policy is working at cross purposes to the current thrust of monetary policy. Profligate spending and burgeoning budget deficits might artificially prop up the economy for a time, but it adds to risks going forward, not to mention uncertainty surrounding the strength and timing in the effects of tight money.

Consumers accounted for almost half of the third quarter growth despite a slim 0.1% increase in real personal disposable income. That reinforces the argument that consumers are depleting their pandemic savings and becoming more deeply indebted heading into the holidays.

The economy continues to produce jobs at a respectable pace. The November employment report was slightly better than expected, but it was buttressed by the return of striking workers, and retail and manufacturing jobs declined. Still, the unemployment rate fell slightly, so the labor market has remained stronger than expected by most economists.

Consumer sentiment had been in the dumps until the University of Michigan report for December, which erased four months of declines. The expectations index is one component of the leading economic indicators, which has been at levels strongly suggesting a recession ahead for well over a year now. See the chart below:

But expectations improved sharply in November, and that included a decline in inflation expectations.

Another component of the LEI is the slope of the yield curve (measured by the difference between the 10-year Treasury bond yield and the federal funds rate). This spread has been a reliable predictor of recessions historically. The 10-year bond yield has declined by over 90 basis points since mid-October, a sign that bond investors think the inflation threat is subsiding. However, that drop steepened the negative slope of the yield curve, meaning that the recession signal has strengthened.

Disinflation, But Still Inflation

Inflation measures have been slowing, and the Fed’s “target” inflation rate of 2% appears within reach. In the Fed’s view, the most important inflation gauge is the personal consumption expenditures deflator excluding food and energy prices (the “core” PCE). The next chart shows the extent to which it has tapered over the past two quarters. While it’s encouraging that inflation has edged closer to the Fed’s target, it does not mean the inflation fight is over. Still, the decision taken at the December meeting of the Fed’s Open Market Committee (FOMC) to leave its interest rate target unchanged is probably wise.

Real wages declined during most of the past three years with the surge in price inflation (see next chart). Some small gains occurred over the past few months, but the earlier declines reinforce the view that consumers need to tighten their belts to maintain savings or avoid excessive debt.

Has Policy Really Been “Tight“?

The prospect of a hard landing presupposes that policy is “tight” and has been tight for some months, but there is disagreement over whether that is, in fact, the case. Scott Sumner, at the link above in the second paragraph, is skeptical that policy is “tight” even now. That’s despite the fact that the Fed hiked its federal funds rate target 11 times between March 2022 and July 2023 (by a total of 5.25%). The Fed waited too long to get started on its upward rate moves, which helps explain the continuing strength of the economy right now.

The real fed funds rate turned positive (arguably) as early as last winter as the rate rose and as expected inflation began to decline. There is also solid evidence that real interest rates on the short-end of the maturity spectrum are higher than “neutral” real rates and have been for well over a year (see chart below). If the Fed leaves its rate target unchanged over the next few months, assuming expected inflation continues to taper, the real rate will rise passively and the Fed’s policy stance will have tightened further.

Another view is that the Fed’s policy became “tight” when the monetary aggregates began to decrease (April 2022 for M2). A few months later the Fed began so-called “quantitative tightening” (QT—selling securities to reduce its balance sheet). Thus far, QT has reversed only a portion of the vast liquidity provided by the Fed during the pandemic. However, markets do grow accustomed to generous ongoing flows of liquidity. Cutting them off creates financial tensions that have real economic effects. No doubt the Fed’s commitment to QT established some credibility that a real policy shift was underway. So it’s probably fair to say that policy became “tight” as this realization took hold, which might place the date demarcating “tight” policy around 15 – 18 months ago.

Back to the Lags

Again, changes in monetary policy have a discernible impact only with a lag. The broad range of timing discussed among monetary experts (again, going back to Milton Friedman) is 9 – 24 months. We’re right in there now, which adds to the conviction among many forecasters that the onset of recession is likely during the first half of 2024. That’s my position, and while the tapering of inflation we’ve witnessed thus far is quite encouraging, it might take sustained monetary restraint before we’re at or below the Fed’s 2% target. That also increases the risk that we’ll ultimately suffer through a hard landing. In fact, there are prominent voices like hedge fund boss Bill Ackman who predict the Fed must begin to cut the funds rate soon to avoid a hard landing. Jamie Diamond, CEO of JP Morgan, says the U.S. is headed for a hard landing in 2024.

Looking Forward

If new data over the next few months is consistent with a “soft landing” (and it would take much more than a few months to be conclusive), or especially if the data more strongly indicate an incipient recession, the Fed certainly won’t raise its target rate again. The Fed is likely to begin to cut the funds rate sometime next year, and sooner if a recession seems imminent. Otherwise, my guess is the Fed waits at least until well into the second quarter. The average of FOMC member forecasts at the December meeting works out to three quarter-point rate cuts by year-end 2024. When the Fed does cut its target rate, I hope it won’t at the same time abandon QT, the continuing sales of securities from its currently outsized portfolio. Reducing the Fed’s holdings of securities will restrain money growth and give the central bank more flexibility over future policy actions. QT will also put pressure on Congress and the President to reduce budget deficits.

Riding the DEI Weimar Curve: What’s Next on the Pogrom?

24 Friday Nov 2023

Posted by Nuetzel in anti-Semitism, DEI, fascism, Liberty

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Adolf Hitler, anti-Semitism, Banality of Evil, Bari Weiss, C.S. Lewis, Class Struggle, Critical Theory, David Foster, DEI, Diversity, Equity, Federalist Society, Gaza, Great Depression, Hamas, Inclusion, Inner Ring, Institutionalized Racism, Jamie Kirchick, Marxism, Naziism, Oppressors, Philip Carl Salzman, Protected Groups, Reverse Discrimination, Ricochet, Social Justice, Tablet, Weimar Republic, Zero-Sum Game

Germany’s inter-war descent into genocidal barbarism is perhaps the most horrifying episode of modern times. Seemingly normal, “nice people” in Germany were persuaded to go along with the murderous pogroms of the anti-Semitic National Socialists, giving truth to the “banality of evil”, as the famous expression goes. Of course, there were plenty of true believers, and multitudes bowed to the Nazis under fierce coercion, but many others went along just to “fit in”.

What could life have felt like in Weimar Germany in the late 1920s and early 1930s as the fascists accumulated power? Were normal people afraid? Well before Adolf Hitler’s rise to power he was known for his hatred of Jews, but German political leaders who enabled his ascent did not take his extreme prejudice as seriously as they should have, or they thought they could at least keep him and his followers in check. Surely there were people who foresaw the approaching cataclysm for what it would be.

Current expressions of anti-Semitism might give us a sense of what life was like during the decline and fall of the Weimar Republic. Just ask Jewish students at NYU and Cornell if they’ve sensed a whiff of it in the wake of Hamas’ slaughter of civilians in southern Israel on October 7th. The harassment these students have endured was motivated in part by claims that Israeli retaliation is morally inferior to the barbarities committed by Hamas, which is preposterous.

Of course, unlike late Weimar Germany, when Jews were blamed for economic (and other) problems, the Jew hatred we’re witnessing in the U.S. today has little to do with the immediate state of the economy. Conditions now are nothing like what prevailed in Germany as the Great Depression took hold, despite current inflationary stresses on real household incomes.

And yet some hold Jews in contempt for their relative economic success, a fact that is bound up with the frequency with which Jews are placed at the center of economic conspiracy theories. One would think Jews to be the ultimate “white oppressors”. But it seems that much of the current wave of anti-Semitism comes from fairly elite quarters, ensconced within major institutions where its sympathizers are insulated from day-to-day economic pressures.

And that brings us to a frightening aspect of the current malaise: how heavily institutionalized the hatred for certain groups or “classes” has already become. This owes to the blame directed toward whites, men, Jews, and Asians presumed to have been endowed with an inside track on success at the expense of others. Success of any kind, in the narrative of “critical” social justice, is “oppressive”, as if success is a zero-sum game.

Here is Philip Carl Salzman on this point:

“The ‘social justice’ political analysis is founded on the Marxist conviction that society is divided into two classes: oppressors and victims. The corresponding ‘social justice’ ethic is that victims must be raised up and celebrated and that oppressors must be suppressed and eliminated.”

This thinking has been integrated into the policies, practices and rhetoric taught in schools at all levels, corporations and nonprofits, social and traditional media, and government (including intelligence agencies and the military). This level of integration gives diversity, equity, and inclusivity (DEI) policies coercive force on behalf of so-called “protected groups”, in the parlance of anti-discrimination law. When those practices are enforced by government in various ways, the private gains extracted from “unprotected” groups amount to fascism.

Bari Weiss wrote an article in Tablet last week entitled “End DEI” in which she describes her bemused reaction as a student in the early 2000s to nascent DEI rhetoric. (Also see her recent speech to the Federalist Society here.) It’s more obvious today, but even then she recognized the hate inherent in DEI doctrine. She crystallizes the dangers she saw in DEI ideology:

“What I saw was a worldview that replaced basic ideas of good and evil with a new rubric: the powerless (good) and the powerful (bad). It replaced lots of things. Colorblindness with race-obsession. Ideas with identity. Debate with denunciation. Persuasion with public shaming. The rule of law with the fury of the mob.

“People were to be given authority in this new order not in recognition of their gifts, hard work, accomplishments, or contributions to society, but in inverse proportion to the disadvantages their group had suffered, as defined by radical ideologues. According to them, as Jamie Kirchick concisely put it in these pages: ‘Muslim > gay, Black > female, and everybody > the Jews.’”

Weiss says Jewish leaders told her, at that time, not to be hysterical, that these perverse ideas would ultimately pass like any fad. That sounds so eerily familiar. Instead, we’ve witnessed a widespread ideological takeover.

“If underrepresentation is the inevitable outcome of systemic bias, then overrepresentation—and Jews are 2% of the American population—suggests not talent or hard work, but unearned privilege. This conspiratorial conclusion is not that far removed from the hateful portrait of a small group of Jews divvying up the ill-gotten spoils of an exploited world.

“It isn’t only Jews who suffer from the suggestion that merit and excellence are dirty words. It is strivers of every race, ethnicity, and class. That is why Asian American success, for example, is suspicious. The percentages are off. The scores are too high. From whom did you steal all that success?”

The whole DEI enterprise is corrupt and unethical. It denies the meritorious in favor of those having certain superficial characteristics like the “right” skin color. That is evil and economically demented besides. It also breeds hatred that often flows both ways between classes of people, creating an incendiary environment. That we’re talking about systemic, legalized discrimination against any group is disturbing enough, but when small minorities are “othered” in this way, the potential for violent action against them is magnified. But this is just where the DEI mindset leads its proponents and beneficiaries.

Our slide into this monstrous “social justice” regime mirrors the insanity and anger that was fomented against certain “out groups” when the Nazi’s accumulated power in the latter years of the Weimar Republic. Too many today have succumbed to this zero-sum psychology, young and old alike. Fortunately, they are beginning to face some fierce resistance, but those who extol the supposed righteousness of the class struggle via DEI won’t easily give up. Our institutions are infested with their kind.

As long as influential people preach the virtues of DEI and social justice, the danger of a headlong plunge into genocidal madness is possible. And the sad truth is that normal human beings are subject to social manipulation of the most evil kind. David Foster at Ricochet: quotes an address given by C.S. Lewis in which he emphasizes this point. His words are haunting:

“Of all the passions, the passion for the Inner Ring is most skillful in making a man who is not yet a very bad man do very bad things.”

Elsewhere in Lewis’ address, he says:

“And the prophecy I make is this. To nine out of ten of you the choice which could lead to scoundrelism will come, when it does come, in no very dramatic colours. Obviously bad men, obviously threatening or bribing, will almost certainly not appear. Over a drink, or a cup of coffee, disguised as triviality and sandwiched between two jokes, from the lips of a man, or woman, whom you have recently been getting to know rather better and whom you hope to know better still—just at the moment when you are most anxious not to appear crude, or naïf or a prig—the hint will come. It will be the hint of something which the public, the ignorant, romantic public, would never understand: something which even the outsiders in your own profession are apt to make a fuss about: but something, says your new friend, which ‘we’ — and at the word ‘we’ you try not to blush for mere pleasure—something ‘we’ always do.

“And you will be drawn in, if you are drawn in, not by desire for gain or ease, but simply because at that moment, when the cup was so near your lips, you cannot bear to be thrust back again into the cold outer world. It would be so terrible to see the other man’s face—that genial, confidential, delightfully sophisticated face—turn suddenly cold and contemptuous, to know that you had been tried for the Inner Ring and rejected. And then, if you are drawn in, next week it will be something a little further from the rules, and next year something further still, but all in the jolliest, friendliest spirit. It may end in a crash, a scandal, and penal servitude; it may end in millions, a peerage and giving the prizes at your old school. But you will be a scoundrel.”

White Racialism, Identity Politics, and Crippling DEI

09 Thursday Nov 2023

Posted by Nuetzel in DEI, Identity Politics

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Anti-discrimination law, Christopher Rufo, Colorblind Society, Comparative advantage, DEI, Diversity, Equity, George Floyd, Hobbesian, Identity Politics, Inclusion, Jim Crow Laws, Protected Classes, Racial Preferences, Racialism, racism, rent seeking, Segregation, Slavery, Social Constructs, Structural Racism, Tribalism, Tyler Cowen, Victimhood, Victor Davis Hanson, White Racialism, Zero-Sum Thinking

I’ve taken an extended hiatus from blogging while moving to a different part of the country. I haven’t posted here in over 10 weeks, but a new post appears below. I’m still tying-up loose ends from the move, but I’ll be trying to get back to posting more regularly … trying!

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Absurd ideas about race and identity politics come from extreme elements on both the Left and the Right. Some leftists insist that race has no natural basis — that it’s simply a “social construct”. On the Right, a “racialist” contingent is promoting the “celebration of whiteness” and embracing racial preferences for whites. Treated as alternative pathways, I’d take “social construct”. It’s nonsense, of course, but the beautiful irony is that it provides a basis for stripping away from our institutions the entire diversity, equity, and inclusion (DEI) straightjacket. It’s almost as if those promoting race as a social construct wish to build a “colorblind” society. On the other hand, I suppose some think they can have their DEI cake along with a side of free choice to identify as anything they want: black, white, or furry.

Who Are the Racists?

People of good faith don’t harbor or act on racist tendencies. The mere recognition of racial/ethnic/cultural differences is not evidence of racism and does not preclude the treatment of all with fairness and due respect. It’s possible to respect, value, or fall in love with someone outside one’s own racial, ethnic, or cultural group of origin, even while holding a general affinity for one’s own group, as nearly everyone does.

But a few real racists are sprinkled across all races, ethnicities, cultures, and the full political spectrum. The “popular” racist stereotype as white male has been kept alive by the lingering echos of slavery in America, which ended nearly 16 decades ago, and the long hangover that included Jim Crow laws and segregation. Today, however, “white society” or “whiteness” is hardly the sole domain of prejudice.

Is Racialism Different?

Now, a few whites are promoting the celebration of “white identity” as a counterbalance to identity politics among non-whites. Ostensibly, this “white racialism” might be similar to celebrations of identity often practiced by minorities, which are also forms of racialism. Should white racialism be viewed as less savory than racialism practiced by racial minorities?

For most Caucasians, “being white” does not have much salience relative to other affiliations defining identity. That’s why white racialism seems odd to me. Sure, when forced to check a box, whites will check “Caucasian”, but “white identity” seems overly broad. There are too many distinct cultures and subcultures that dominate self-identity, such as national ancestry, religion, and cultural membership.

The same could be said for many other racial categories, but minority status and historical events (e.g., American slavery) help explain why broad categories often form cohesive identity groups. And, as Christopher Rufo notes in his great discussion of the racialist viewpoint, broad categories tend to be the most closely associated with racialism:

“Yes, left-wing racialism is indeed now deeply embedded in America’s institutions, and the demographic balance of the country has shifted in recent decades. And yes, the basic racial classification system in the United States broadly delineates continental origin—Europe, Africa, Latin America, Asia—in a way that is not arbitrary or meaningless. Terms such as ‘white,’ ‘black,’ ‘Latino,’ and ‘Asian,’ while often obscuring important variations within such groupings, have become the lingua franca and are useful shorthand descriptors for many purposes.”

There are individuals from all groups or “classes”, including whites, who react critically to aggressive expressions of identity by members of other classes. Perhaps that’s excusable, depending on the degree of zealotry on either part. The line between pride in race/ancestry/culture and fractious racialism might be hard to discern in some cases, but the chief distinction is rooted in explicit, demeaning and/or envious comparisons to “out-groups”. This might be damaging enough, but from there it can be a very short step into outright racism.

A preoccupation with the historic disadvantages of one’s race can be disempowering to an individual and destructive in a social sense. I believe the white racialist phenomenon belongs in that category. The presumed “disadvantages” of whiteness are very contemporary, however, rooted in policies dating back only to the widespread adoption of racial preferences for non-white “protected classes” and DEI.

Preferences For All

Imagine the racialist policies now practiced widely in government, industry, and academia — particularly racial preferences on behalf of protected classes — but now applied on behalf of heretofore unprotected classes as well. For example, what if some proportion of jobs, admissions, or other coveted placements were set aside for whites? If whites represent 50% of the population, then 50% of hires or admissions would be reserved for whites.

Some might assume that this treatment is already implied by existing racial preferences, but that’s not the case. In the wake of George Floyd’s death, just 6% of new hires among S&P companies were white, according to Bloomberg News.

Nevertheless, such a white racialist turnabout would be a colossal mistake. Adding strict limits to the application of existing preferences might be a good thing, but white racial preferences would buttress the entire system of racial preferences as an institution and add more rigidity to the operation of labor markets. From an economic viewpoint, it would be just as pernicious as racial preferences generally.

Racial preferences of any kind freeze labor markets and impair the allocation of human resources to their most-valued uses. In fact, placing one individual into a position on any basis other than their qualifications implies that two individuals must be placed into positions in which they lack comparative advantage relative to each other. Little by little, that means lost output and upward price pressure. It is a mechanism that short circuits gains from trade, shriveling the benefits that the most and least talented confer on society at large. Extending preferences to whites would only serve to further institutionalize this damaging practice.

Adherence to numerical preferences is to pretend that people can be treated less as individuals and more like interchangeable parts… except with respect to their value as “class members”. Racial preferences are presumed to be a remedy for so-called structural racism, as opposed to racism by individuals. But they involve classification and favor the so-called “oppressed” at the expense of designated “oppressors”. The latter, almost without exception, had no role oppressive regimes of the past. Favoritism of this kind necessarily means reverse discrimination and fails to match individuals to roles in an optimal fashion.

Whether publicly or privately imposed, racial preferences often undermine those they are purported to help by placing individuals into positions for which they may not be competitive. This can sabotage an individual’s long-term success. It goes without saying that preferences build resentment among the “unprotected”, which goes to the impetus for “white racialism”. Indeed, preferences are not always popular with protected classes either. That’s because they interfere with merit-based decision-making and are perceived to stigmatize those presumed to benefit.

The Fixed Pie Is a Lie

Racialism reflects zero-sum thinking, a hallmark of DEI initiatives. Tyler Cowen quoted the abstract of a recent NBER working paper that found:

“… a more zero-sum mindset is strongly associated with more support for government redistribution, race- and gender-based affirmative action, and more restrictive immigration policies.”

Zero-sum thinking is fundamental to rent-seeking behavior, which is motivated by either malevolent greed or perceptions of victimhood. Victimhood and rent seeking is at the heart of calls for DEI, to say nothing of more radical proposals like reparation payments. White racialism attempts to get in on the action by positing that whites are oppressed under the current institutional dominance of DEI. But the misguided presumption that every identity group should have their own preferences or quotas broadens the emphasis on redressing perceived harms and redistributing rewards — zero-sum activities.

These zero-sum efforts waste energy and resources, harming our ability to produce things that enhance well being. Ultimately, they are actually negative-sum activities, and they also breed hatred.

Race is obviously determined by genetics, but I’d be happy to pretend it’s a mere social construct if that would help get us to a “colorblind” society.

Conclusion

There’s a huge irony in the racialism exercised by both traditional and “white racialist” DEI advocates: it neglects the most fundamental and just application of diversity: equality of opportunity. This principle incorporates the concept of diversity without sacrificing economic efficiency. We’ve largely abandoned it in favor of equality of outcomes via racial preferences, even at a time when society has become enlightened with respect to racial differences. In doing so, we’ve unintentionally chosen another form of explicit racial victimization.

To close, here’s a good summary of the dangers of racialism and identity politics offered by Victor Davis Hanson:

“Anytime one ethnic, racial, or religious group refuses to surrender its prime identity in exchange for a shared sense of self, other tribes for their own survival will do the same.

All then rebrand their superficial appearance as essential not incidental to whom they are.

And like nuclear proliferation that sees other nations go nuclear once a neighboring power gains the bomb, so too the tribalism of one group inevitably leads only to more tribalism of others. The result is endless Hobbesian strife.”

And that’s how white racialism fits right in with the pernicious politics of identity. When you can, vote for the elimination, or at least reform, of DEI policies and practices, not for a reinforcement of identity politics.

Musings and Misgivings of a Likely Trump Voter

24 Thursday Aug 2023

Posted by Nuetzel in Politics

≈ 2 Comments

Tags

Comparative advantage, corporate taxes, Corporatism, Donald Trump, eminent domain, Energy Production, Entitlement Reform, Illegal Immigration, Industrial Policy, Inflation tax, Legal Immigration, Medicare, Modern Monetary Theory, Nationalism, Populism, Protectionism, Social Security, Spending Growth, statism, The Wall

Choosing between the lesser of evils is a bummer, but that’s often the reality for voters. That goes almost without saying… our choices are politicians! I’ll certainly be in that quandary if Donald Trump is the Republican nominee for president in 2024, which looks increasingly likely. I held my nose and voted for him — twice — primarily because the Big Government solutions promoted consistently by Democrats are so awful.

At this point I’m not fully on board with any GOP candidate. That could change, but not yet. Now, if you’re a Trump supporter and you think the rambling opinions below are too critical of your guy, cut me some slack. I’m not a “Never Trumper”. I’m a “Never Statist”. And while I’ve never had much faith that Trump is with me on that count, he will almost surely be the lesser of evils.

The Abused Politician

Trump has been subjected to despicable treatment by political opponents since well before his inauguration in 2016, and his abusers in and out of government never let up. Many of the charges and accusations against him have been pure fiction and at this point represent obvious election interference. So I’m somewhat sympathetic to him despite some of his positions and often disagreeable manner. Still, I credit him for being a fighter, and as an aside, I’ll add that I actually enjoy some of his rants. He has the style of a nasty stand-up comic, which gives me some occasional laughs.

I agree with Trump on certain policy matters. On others, including some fundamental points, I find it hard to trust him as a leader, and I said that long before he was elected in 2016. He claims not to be a politician, but he is a politician through and through. He’s also a populist. And while populism can serve as a valuable check on certain excesses of government, it often cuts the wrong way, favoring what I like to call “do-somethingism”. That usually means public intervention. Populism is a perfectly natural home for a “pick-and-choose” statist like Trump, however. Moreover, I’m not happy that he refused to debate his opponents, and that too was a purely political decision.

Malign Neglect

If you need proof of Trump’s base instincts as a politician, look no further than his refusal to engage on the subject of entitlement reform. It’s no secret that both Social Security (SS) and Medicare are technically insolvent. This is probably the most important fiscal issue the country will face in the foreseeable future.

Without reform, SS benefits will be cut 23% in 2034. That would bring certain outrage among seniors and anyone approaching retirement. Sure, it’s a decade down the road, but addressing it sooner would be far less painful. Does Trump favor a huge cut in benefits? Probably not. Does he think benefits can simply continue without additional funding or reform of some kind? Does he prefer a greater inflation tax, rather than reform? Does he secretly favor “just print the money” like the modern monetary theorists of the Left? There are much better alternatives, but where is his leadership on this issue?

His unwillingness to discuss entitlements, and indeed, his denigration of anyone who so much as mentions the need for serious reforms, is a disgrace. He knows the train wreck is coming, but his focus is squarely on short-term politics. Why are so many on the Right willing to fall for this? Maybe they too understand it’s an elephant in the room, but an elephant that must not be named. After all, it’s not as if the Democrats have done a thing to address the issue.

False Fealty to Workers

Trump is a protectionist, given to the mercantilist fallacy that only exports are good and imports are bad. We import heavily because we are a high-income nation. The other side of that coin is that the world craves our assets, including the U.S. dollar (which is in absolutely no danger of losing its dominance as the primary currency of international transactions).

Here’s a little truth from “Trade Flows 101”: U.S. imports of goods and services correspond to purchases of U.S. assets by the rest of the world. In other words, U.S. trade deficits present opportunities for foreign investors to supply us with capital. That helps foster greater U.S. productive capacity, greater worker productivity, and higher wages.

On the other hand, government intervention to discourage imports via quotas or tariffs increases domestic prices and erodes real wages in the U.S. Furthermore, to favor certain industries (exporters) over others (importers) is a grotesque application of corporatist industrial policy. Why does the Right tolerate Trump’s advocacy for this sort of government central planning? Part of the answer is national security, which I accept to a limited extent, but not when “critical industries” are extended favors by government that are redundant to already powerful market forces.

Protectionism owes some of its popularity to the appeal of nationalism, as distinct from patriotism. However, it promotes sclerosis among domestic producers by shielding them from competition, causing direct harm to U.S. consumers. There is nothing patriotic about protectionism.

Real Stuff

A fallacy closely related to protectionism, and one to which Trump subscribes, is that the U.S. must produce more “things” — more commodities and manufactured goods. That’s not the market’s judgement, but one that appeals to the instincts of interventionists. In any case, services are often more highly valued than physical goods. If your comparative advantage is in producing a highly-valued service, don’t beat yourself up over neglecting to produce hard goods at which you’re comparatively lousy. Specialization and trade are under-appreciated as true social and economic miracles.

That said, we certainly have an advantage in the production of fossil fuels and should continue to produce them without interference. I’m with Trump on that. One day, reliable sources of “clean” energy will be economic, but we’re not there yet.

Corporate State

Well before his presidential run, Trump had a history of leveraging government to achieve his private ends. Eminent domain actions were useful to his development projects and expanding his own property rights at the expense of others. Naturally, he claimed his projects were in the public interest. Ah, the mindset of a rent seeker: government exists to actively facilitate the acquisitive interests of private business, or at least the “winners”. That thinking is thoroughly contrary to the libertarian view of the state’s role in establishing a neutral social environment under the rule-of-law.

In other ways, as President, Trump sought to bring major corporations under his political sway. Trump’s protectionist leanings as president were a prime example of corporatism in action. And read this account of a public meeting (and watch it at the link) at which one CEO after another, under Trump’s furrowed gaze, took turns describing something great they were doing for the country and committing to do more. It was one big, weird suck-up session intended to make the puffed-up Trump look like a great leader. As the author at the link says:

“These are corporate executives doing the President’s bidding for fear or favour.”

I supported Trump’s tax cuts, though they were certainly designed to reduce taxes on corporate income. Was this corporatist largess? That might have been part of his motivation. However, as I’ve argued before, corporate income is largely double-taxed. Moreover, shareholders do not bear the full burden of corporate taxes. Workers bear a significant portion of the burden, so Trump’s corporate tax cuts encouraged growth in real wages, whether he understood it or not.

It’s Still So Big

Tax cuts paired with reduced spending would have been a welcome approach. Unfortunately, Trump was a fairly big spender during his term in office, even if you exclude Covid emergency spending. Growth in the government’s dominance over resources did not slow on his watch. Fiscally disciplined he’s not!

It’s true that his administration made efforts to curtail regulation, but in retrospect, those steps at best arrested the growth of regulation, rather than achieving reductions. The hope of seeing any real deconstruction of the administrative state under Trump was fleeting.

Migration

Immigration is a complicated issue when it comes to assessing Trump’s candidacy. I’m strongly in favor of greater legal immigration because it would improve our demographics and labor supply while shrinking our entitlements deficits. Legal migrants are often technically proficient and many come with sponsorships. On the whole, legal migrants tend to be ready and willing to work,

This position is often condemned by Trump’s most ardent cheerleaders, however. I’ve generally supported Trump’s position on illegal immigration as a matter of national security, to eliminate human trafficking, and to reduce burdens on public aid and support systems. Unfortunately, during Trump’s presidency, he did more to reduce legal immigration than illegal immigration. I have no qualms about “the Wall” except for its expense and the likelihood that cheaper and superior technologies could be deployed for border security. Trump might prefer the Wall’s symbolic value.

Rightly or wrongly, Trump’s messaging on immigration strikes many as nativist, providing an easy excuse for the Left to accuse him of racism. That certainly won’t help his election prospects.

Conclusion

Trump will almost surely be the GOP nominee, unless Democrats succeed in putting him behind bars by then. If the choice is Trump vs. almost any Democrat I can imagine, I’ll have to vote for him. For all his faults and wild card qualities, I still consider him a safer alternative than the devils we know on the Left. But I’d feel much better about him if he’d take a responsible position on Social Security and Medicare reform, abandon protectionism except in cases of critical national security needs (and without overkill), commit to spending reductions, and adopt a more productive approach to legal immigration.

Climate Change Did Not Cause the Maui Fires

15 Tuesday Aug 2023

Posted by Nuetzel in Climate, Wildfires

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Arson, Cliff Mass, Firebreaks, Hawaii Fire Risk, Hurricane Dora, Invasive Grasses, James Steele, Josh Green, Lahaina, Maui, Mick Fleetwood, Steve Parrish, Trade Winds, West Maui Wildfires

Several years ago my wife and I dined on the roof of Mick Fleetwood’s restaurant in beautiful Lahaina on Maui. Sadly, that restaurant was destroyed by this week’s wildfire, along with the famous banyan tree and most of the town. The death toll keeps climbing in what was an unimaginably tragic event.

Climate alarmists, including Hawaii Governor Josh Green and one of my favorite personalities, Steve Parrish, jumped to the immediate and wrong-headed conclusion that this fire was caused by climate change. They believe that sounds so sensible, but nothing could be further from the truth. As I noted in a post last week, this year has seen relatively little burning around the globe. It just so happens that the western side of Maui is particularly prone to grass fires, and this one happened to be huge.

Here’s a good explanation from James Steele of the circumstances which culminated in the fire that destroyed Lahaina. He first acknowledges that wildfires are quite common in Hawaii, but very few are caused by lightning strikes:

“According to Hawaii Wildfire Management Organization, 98% of all Hawaiian fires are started by people, of which 75% are due to carelessness. .. As retirees flock to Hawaii seeking the health benefits of a warmer climate, the population has tripled since 1980, which only increases the probability of a careless fire being started.”

Arson is part of the story, but I don’t know of any reports of arson that might be implicated in this conflagration. Fires from electrical lines have also been mentioned as possible triggers.

The western part of Maui tends to be much drier than more eastern parts of the island. Here’s Steele again:

“Lahaina is situated on the leeward side of Maui’s mountains. These highlands wring out the moisture carried by the trade winds, with only 15” of rain falling in Lahaina compared to 300” on the mountains to the east.”

Expanding acreage of invasive grasses has led to excessive fire risk. This has occurred with declining production of agricultural products like pineapples and sugar cane. These “small diameter” grasses dry-out very quickly and become dangerous fuel for wind-blown fires. Even worse, a very wet spring led to more growth in the grasses than normally occurs. Once dry weather set in, a tinder box was created in western Maui.

Cliff Mass makes some of the same points, and he offers some detail on strong trade winds that developed last week between a powerful high-pressure system to the north of Maui and Hurricane Dora to the south. And no, climate change is not increasing the frequency or severity of hurricanes. Maui’s position between other islands, and the mountains east of Lahaina, create a funneling effect for the winds. Mass speculates that these high winds blew down power lines, igniting the fires.

The risk of catastrophic fires in West Maui has been known for years. The link summarizes statements made by a director of a non-profit involved in planning and preparing earlier reports on fire risk:

“… significant progress in implementing the community-based work since [her] organizations inception in 2002. But the necessary ‘enormous infrastructure’ investments have not come.

‘I don’t know if I understood the urgency of those bigger investments.’ ….”

The recommended investments included 70 miles of fire breaks and 90 miles of fuel breaks. Essentially, these breaks would be bare land intended to reduce fire spread and intensity. Apparently that work was never initiated, nor was work begun on other types of infrastructure needed to minimize risk.

The tragic fire in West Maui resulted from a confluence of declining agriculture, invasive and fire-prone grasses, an especially wet spring followed by a dry summer, a few days of unusually strong trade winds, and geography that funnels and focuses the intensity of those winds. The “spark” or “sparks” might well have been from downed power lines, or possibly some other kind of accident, carelessness, or even arson. It was not caused by global warming, as much as the climate change activists might like to convince you. The assertion that fires are becoming more frequent and severe has absolutely no basis in fact.

Tis the Season of Peak Climate Propaganda

09 Wednesday Aug 2023

Posted by Nuetzel in Climate

≈ 1 Comment

Tags

Björn Lomberg, Climate Change, Cooling the Past, Dust Bowl, El Nino, EPA, global warming, Heat Wave Index, Heat Waves, Hunga Tonga, Lancet, NASA, PBS News Hour, Satellite Temperatures, Thermometer Sitings, Urban Heat Island Effect, Water Temperatures, Water Vapor, Wildfires

It happens every summer! It’s been hot, and the news media and professional grifters in the anti-carbon climate-change establishment want us to panic about it. Granted, the weather really was quite hot for several weeks in July across parts of the U.S., Europe, and elsewhere, but it’s cooled off considerably since then, especially in my neck of the woods.

July is typically the warmest month of the year, and July 2023 was the warmest July for the troposphere on the satellite record. (The troposphere is the lowest 13 km of the atmosphere, but that’s an average — it’s thicker toward equatorial latitudes, thinner toward the poles.) However, attribution of this summer’s heat waves to carbon-induced climate change is misplaced. What follows are a few considerations in evaluating this claim, and the lengths to which climate activists go to distort weather data and reporting.

The Biggest Greenhouse Gas

One speculative explanation for the recent heat wave has gained some traction: the eruption of the Hunga Tonga-Hunga Ha’apai volcano in the South Pacific on Jan. 15, 2022 (and see here). This underwater eruption spewed massive quantities of water vapor into the stratosphere, which encircled the globe in fairly short order. Water vapor acts as a greenhouse gas, and it is by far the most important greenhouse gas. This plume of vapor may have affected the climate with a delay, and it is not expected to dissipate for at least a couple of years. However, there are theories that the eruption might have led to some offsetting effects due to the reflective properties of water and ice in the stratosphere. See here for an interesting debate on the estimated effects of this “shock” to the atmosphere.

NASA has estimated that the Hunga Tonga eruption resulted in a 10% increase in atmospheric water vapor, while the European Space Agency puts the increase at 13%. Now, in addition to this added water vapor, we have the early effects of an El Niño event in the Pacific, which may elevate temperatures over the next couple of years.

However, the temperatures in July simply don’t justify the claim that we’re experiencing “unprecedented” warmth. The satellite records go back only to 1979, which is an especially narrow window on climatological scales. The longer record of temperatures shows earlier periods of higher temperatures, For example, U.S. surface temperature records indicate that the 1930s had periods warmer than this July. Moreover, while estimates of paleo-climate data are a matter of great dispute, there is no question that the globe has experienced warmer temperatures in the past, with an ice-free Arctic.

So, was July 3 really the hottest day in history? No way, and the worst part of this warm spell wasn’t even the warmth. Rather, it was the attempts to make weather a political matter, as if public policymakers possess some kind of control knob over weather phenomena, or as if we should bestow upon them dictatorial powers to act on their fantasy.

Longer Trends

There’s plenty of other evidence running contrary to the “hotter-than-any-time in-history” foolishness. Take a look at trends in hot and cool weather from individual U.S. weather stations over a somewhat longer time span than the satellite record. The red symbols shown on the map below mark stations reporting increases in the number of unusually hot days (heat in the 95th percentile) between 1948 – 2020, with larger symbols corresponding to greater increases in extremely hot days. The blue symbols mark stations reporting increases in the number of unusually cool days (in the 5th percentile) over the same period. The data in this chart is published by the EPA, and it is definitely not alarming.

The next chart shows the so-called Heat Wave Index produced by the EPA. Recent spikes in the index are muted relative to the Dust Bowl days of the 1930s.

Journalism or Exaggeration?

Reports of hot weather in Europe have been distorted as well, often placing more emphasis on forecasts of high temperatures than on the temperatures themselves. It’s almost as if authorities, with the aid of the news media and naive weather reporters, are determined to raise an exaggerated sense of alarm among the citizenry. Almost?

Cold 10x Deadlier Than Heat

The next chart vividly illustrates an attempt to propagandize climate misinformation. Take a look at the left side of this illustration, which appeared in the medical journal Lancet. Note the difference in the horizontal scale for heat deaths vs. cold deaths. The chart on the right side uses equivalent scales for heat vs. cold deaths. This should qualify the journal for some kind of award for mendacity, or perhaps sheer stupidity. It’s the cold that really kills, not the heat! I’m moving south!

Finding Hot Water

And here’s a take-down of some incredible water temperature propaganda. A PBS News Hour reporter has pushed claims that South Florida water temperatures reached 101 degrees this summer. The emphasis on a single reading was taken from a buoy not subject to the cooling effects of deep water circulation, and it is located where fresh water often overlays salt water, which traps heat. Data from other buoys not far away showed much lower temperatures.

Spreads Like Wildfire

Another fallacious claim we hear too often is that global warming is literally causing the world to go up in flames. The facts run contrary to these scare stories. Björn Lomborg notes the following:

“For more than two decades, satellites have recorded fires across the planet’s surface. The data are unequivocal: Since the early 2000s, when 3% of the world’s land caught fire, the area burned annually has trended downward.

“In 2022, the last year for which there are complete data, the world hit a new record-low of 2.2% burned area. Yet you’ll struggle to find that reported anywhere.”

The heavy focus by the media on this year’s wild fires in North America offers a perfect example of the media’s tendency to “cherry pick for clicks”. Africa and Europe have had little burning this year, and in North America, arson has played a conspicuous role (and see here) in the wildfires.

Distorted Measurements

Personally, I have trouble accepting claims that temperatures are any warmer now than they were in my youth, at least where I grew up. My subjective and local assessment aside, there are strong reasons to doubt the reliability and significance of trends in official temperature records. The urban heat-island effect has distorted temperatures by ever greater magnitudes, as growing metropolitan areas absorb heat readily compared to rural green space.

Furthermore, poor siting of weather stations and temperature gauges has become all too common. This includes equipment located at airports and other areas in close proximity to asphalt or concrete. This contributes to an upward bias in more recent temperature data. It’s also worth noting in this context that satellite temperature readings must be calibrated periodically to surface temperatures. If the latter are corrupted in any way, the satellite readings may be corrupted as well.

“Adjusting” the Past

Official historical records also include a variety of “adjustments” to temperature data that raise concerns. Ostensibly, these adjustments are justified by an interest in maintaining a consistent historical record. Changes in equipment or it’s exact location can create discontinuities, for example. Unfortunately, the adjustments appear to have had a systematic tendency to “cool the past” relative to more recent data. This reinforcement of the warming trend over the past few decades is suspicious, to say the least. It does very little to build confidence in the agencies responsible for these records.

Conclusion

The hot temperatures in July brought the usual deluge of propaganda, including distortions in the reporting of weather phenomena. And we hear increasing calls to force transition to EVs (which are powered mostly by fossil-fuel electric plants), subsidize intermittent renewable power sources, and to end the use of air conditioning and gas stoves. Yet these coercive measures would do nothing to prevent summer heat or climate change generally. Water vapor represents 95% of greenhouse gases, and the huge vapor shock from the Hunga Tonga eruption might well make us prone to warmer temperatures for at least some months to come, mixed with signals from the Pacific El Niño pattern. But these are not evidence of a man-made crisis, despite perverse cheers from those rooting for more draconian state intrusions and an end to growth, or indeed, a reversal in gains to human well being.

Real Short-Term Rates Have Been Positive For Months

21 Friday Jul 2023

Posted by Nuetzel in Inflation, Monetary Policy

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Bidenomics, Cleveland Fed, Inflation Expectations, Joe Biden, Kevin Erdman, Monetary Aggregates, Neutral Fed Funds Rate, Real Interest Rates, Restrictive Policy, TIPS

Note: I’m moving for the first time in many years. We have a lot to do quickly because we’ll close on our new home in early September. It’s in a place with palm trees, but no basements! The clean-up and winnowing of our accumulated papers, possessions, and … junk — not to mention attending to all the details of the move — is taking up all of my time. Anyway, I started the post below a week ago and had to put it aside. Not sure how frequently I’ll be posting till we’re fully settled in the fall, but we’ll see how it goes.

____________________________________________

The inflation news was great last week, with both the Consumer Price Index (CPI) and the Producer Price Index (PPI) reported below expectations. Month-over-month, the increase in the overall CPI was just 0.2%. Year-over-year, CPI inflation was 3%, down from 9% a year ago. Of course, contrary to Joe Biden’s ridiculous claims, this inflation news came despite, and not because of, the pernicious effects of “Bidenomics”. But that aside, just like that, we heard proclamations that the Federal Reserve had finally succeeded in bringing real short-term interest rates into positive territory. Finally, some said, Fed policy had moved into more restrictive territory. But in fact, real rates moved above zero months ago.

The popular rate narrative is based on the fact that the effective Fed Funds rate is now 5.08% while “headline” CPI inflation fell to 2.97%. That would give us a real Fed Funds rate of 3.11%… if that sort of calculation made sense. Here’s an appropriate reaction from Kevin Erdman:

“The short term rate minus trailing 12 month inflation is not a thing. It’s an irrelevant number. Nothing about June 2022 inflation has anything to do with the real fed funds rate in July 2023.”

His statement generalizes to interest rates at any maturity less a corresponding measure of trailing inflation. They are all irrelevant. A proper real rate of interest must incorporate a measure of inflation expectations. Survey data is often used for this purpose, but a better measure can be taken from market expectations by comparing a nominal Treasury rate with a rate on an inflation-indexed Treasury (TIPS) of the same maturity. This is a fairly convenient approach.

Below, we can see that the real one-year Treasury rate has been positive since last November.

And here is the real one-month Treasury rate:

Again, these charts suggest that real short-term rates have been positive much longer than some believe. Whether that represents a “restrictive policy stance” by the Federal Reserve is another matter. We know the Fed has tightened policy, but that began after the notably loose policy conducted throughout the pandemic. Have we truly crossed the threshold into “tightness”?

Here’s the effective (nominal) federal funds rate over the past year.

This rate is under fairly direct control by the Fed, and it is the primary focus of most Fed watchers. It’s an overnight lending rate on loans of reserves between banks, so to adjust it precisely for expected inflation requires an annualized, overnight inflation rate. That’s pretty tricky!

Finding a published measure of expected inflation over durations of less than a year forward is difficult. One can derive one or use a longer-term rate of expected inflation as a proxy, with the proviso that near-term expectations might be more extreme than the proxy, especially if inflation is expected to change from its current pace. Here are one-year inflation expectations over the past year from a Cleveland Fed model that utilizes TIPS returns and other data.

So inflation expectations have declined substantially. If we compare them with short-term interest rates or the effective fed funds rate over the past year, it’s likely the real fed funds rate climbed above zero before the end of the first quarter of 2023. It might even have exceeded the so called “neutral” real Fed funds rate (R*), which was estimated by the Fed to be 1.14% in the first quarter of 2023. A real Fed funds rate above that level would have been deemed restrictive in the first quarter.

My own view is that changes in the Fed funds rate are not at the heart of the transmission mechanism from monetary policy to the real economy. The monetary aggregates are more reliable guides. The broad money stock M2 has been edging lower for well over a year now. That certainly qualifies as a restrictive move, but there is still a lot of excess liquidity out there, left over from the pandemic deluge engineered by the Fed.

The good reports last week might not mark the end of the inflation problem. There are still price pressures from both the demand and supply-sides. Furthermore, to put things in context, the month-to-month increases in May and June of last year were large, which helped to hold down the 12-month increases this May and June. But the CPI was flat during the second half of last year. That means month-to-month inflation over the next six months may well translate into an escalation of year-over-year inflation. That might or might not be turn out to be meaningful, but it would provide a pretext for additional Fed tightening.

The main point of this post is that real interest rates cannot be calculated on the basis of reported inflation over prior months. Doing so at this juncture understates the degree of monetary tightening in terms of short-term rates. Real interest rates can only be determined by nominal rates relative to expectations of future inflation. This gives a more accurate picture of actual credit market conditions and the Fed’s rate policy stance.

Government Failure as a Root Cause of Market Failure

10 Monday Jul 2023

Posted by Nuetzel in Government Failure, Market Failure

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Capital Formation, central planning, Chevron Doctrine, Competitive Equilibrium, Corruption, crowding out, Declaration of Independence, Don Boudreaux, External Benefits, External Costs, Government Failure, Inflation, John Cochrane, Labor Supply, Market Failure, Michael Munger, monopoly power, Pareto Superiority, Peter Boettke, Price Controls, Protectionism, Redistribution, Regulatory Capture, rent seeking, Risk-Free Asset, Side Payments, Social Security, State Capacity, Tax Distortions, Thomas Jefferson, Treasury Debt, William R. Keech

We’re told again and again that government must take action to correct “market failures”. Economists are largely responsible for this widespread view. Our standard textbook treatments of external costs and benefits are constructed to demonstrate departures from the ideal of perfectly competitive market equilibria. This posits an absurdly unrealistic standard and diminishes the power and dramatic success of real-world markets in processing highly dispersed information, allocating resources based on voluntary behavior, and raising human living standards. It also takes for granted the underlying institutional foundations that lead to well-functioning markets and presumes that government possesses the knowledge and ability to rectify various departures from an ideal. Finally, “corrective” interventions are usually exposited in economics classes as if they are costless!

Failed Disgnoses

This brings into focus the worst presumption of all: that government solutions to social and economic problems never fail to achieve their intended aims. Of course that’s nonsense. If defined on an equivalent basis, government failure is vastly more endemic and destructive than market failure.

Related to this point, Don Boudreaux quotes from Peter Boettke’s Living Economics:

“According to ancient legend, a Roman emperor was asked to judge a singing contest between two participants. After hearing the first contestant, the emperor gave the prize to the second on the assumption that the second could be no worse than the first. Of course, this assumption could have been wrong; the second singer might have been worse. The theory of market failure committed the same mistake as the emperor. Demonstrating that the market economy failed to live up to the ideals of general competitive equilibrium was one thing, but to gleefully assert that public action could costlessly correct the failure was quite another matter. Unfortunately, much analytical work proceeded in such a manner. Many scholars burst the bubble of this romantic vision of the political sector during the 1960s. But it was [James] Buchanan and Gordon Tullock who deserve the credit for shifting scholarly focus.”

John Cochrane sums up the whole case succinctly in the “punchline” of a recent post:

“The case for free markets never was their perfection. The case for free markets always was centuries of experience with the failures of the only alternative, state control. Free markets are, as the saying goes, the worst system; except for all the others.”

Tracing Failures

We can view the relation between market failure and government failure in two ways. First, we can try to identify market failures and root causes. For example, external costs like pollution cause harm to innocent third parties. This failure might be solely attributable to transactions between private parties, but there are cases in which government engages as one of those parties, such as defense contracting. In other cases government effectively subsidizes toxic waste, like the eventual disposal of solar panels. Another kind of market failure occurs when firms wield monopoly power, but that is often abetted by costly regulations that deliver fatal blows to small competitors.

The second way to analyze the nexus between government and market failures is to first examine the taxonomy of government failure and identify the various damages inflicted upon the operation of private markets. That’s the course I’ll follow below, though by no means is the discussion here exhaustive.

Failures In and Out of Scope

An extensive treatment of government failure was offered eight years ago by William R. Keech and Michael Munger. To start, they point out what everyone knows: governments occasionally perpetrate monstrous acts like genocide and the instigation of war. That helps illustrate a basic dichotomy in government failures:

“… government may fail to do things it should do, or government may do things it should not do.’

Both parts of that statement have numerous dimensions. Failures at what government should do run the gamut from poor service at the DMV, to failure to enforce rights, to corrupt bureaucrats and politicians skimming off the public purse in the execution of their duties. These failures of government are all too common.

What government should and should not do, however, is usually a matter of political opinion. Thomas Jefferson’s axioms appear in a single sentence at the beginning of the Declaration of Independence; they are a tremendous guide to the first principles of a benevolent state. However, those axioms don’t go far in determining the range of specific legal protections and services that should and shouldn’t be provided by government.

Pareto Superiority

Keech and Munger engage in an analytical exercise in which the “should and shouldn’t” question is determined under the standard of Pareto superiority. A state of the world is Pareto superior if at least one person prefers it to the current state (and no one else is averse to it). Coincidentally, voluntary trades in private markets always exploit Pareto superior opportunities, absent legitimate external costs and benefits.

The set of Pareto superior states available to government can be expanded by allowing for side payments or compensation to those who would have preferred the current state. Still, those side payments are limited by the magnitude of the gains flowing to those who prefer the alternative (and if those gains can be redistributed monetarily).

Keech and Munger define government failure as the unexploited existence of Pareto superior states. Of course, by this definition, only a benevolent, omniscient, and omnipotent dictator could hope to avoid government failure. But this is no more unrealistic than the assumptions underlying perfectly competitive market equilibrium from which departure are deemed “market failures” that government should correct. Thus, Keech and Munger say:

“The concept of government failure has been trapped in the cocoon of the theory of perfect markets. … Government failure in the contemporary context means failing to resolve a classic market failure.”

But markets must operate within a setting defined by culture and institutions. The establishment of a social order under which individuals have enforceable rights must come prior to well-functioning markets, and that requires a certain level of state capacity. Keech and Munger are correct that market failure is often a manifestation of government failure in setting and/or enforcing these “rules of the game”.

“The real question is … how the rules of the game should be structured in terms of incentives, property rights, and constraints.”

The Regulatory State and Market Failures

Government can do too little in defining and enforcing rights, and that’s undoubtedly a cause of failure in markets in even the most advanced economies. At the same time there is an undeniable tendency for mission creep: governments often try to do too much. Overregulation in the U.S. and other developed nations creates a variety of market failures. This includes the waste inherent in compliance costs that far exceed benefits; welfare losses from price controls, licensing, and quotas; diversion of otherwise productive resources into rent seeking activity, anti-competitive effects from “regulatory capture”; Chevron-like distortions endemic to the administrative judicial process; unnecessary interference in almost any aspect of private business; and outright corruption and bribe-taking.

Central Planning and Market Failures

Another category of government attempting to “do too much” is the misallocation of resources that inevitably accompanies efforts to pick “winners and losers”. The massive subsidies flowing to investors in various technologies are often misdirected. Many of these expenditures end up as losses for taxpayers, and this is not the only form in which failed industrial planning takes place. A related evil occurs when steps are taken to penalize and destroy industries in political disfavor with thin economic justification.

Other clear examples of government “planning” failure are protectionist laws. These are a net drain on our wealth as a society, denying consumers of free choice and saddling the country with the necessity to produce restricted products at high cost relative to erstwhile trading partners.

There are, of course, failures lurking within many other large government spending programs in areas such as national defense, transportation, education, and agriculture. Many of these programs can be characterized as centrally planning. Not only are some of these expenditures ineffectual, but massive procurement spending seems to invite waste and graft. After all, it’s somebody else’s money.

Redistribution and Market Failures

One might regard redistribution programs as vehicles for the kinds of side payments described by Keech and Munger. Some might even say these are the side payments necessary to overcome resistance from those unable to thrive in a market economy. That reverses the historical sequence of events, however, since the dominant economic role of markets preceded the advent of massive redistribution schemes. Unfortunately, redistribution programs have been plagued by poor design, such as the actuarial nightmare inherent in Social Security and the destructive work incentives embedded in other parts of the social safety net. These are rightly viewed as government failures, and their distortionary effects spill variously into capital markets, labor markets and ultimately product markets.

Taxation and Market Failures

All these public initiatives under which government failures precipitate assorted market failures must be paid for by taxpayers. Therefore, we must also consider the additional effects of taxation on markets and market failures. The income tax system is rife with economic distortions. Not only does it inflict huge compliance costs, but it alters incentives in ways that inhibit capital formation and labor supply. That hampers the ability of input markets to efficiently meet the needs of producers, inhibiting the economy’s productive capacity. In turn, these effects spill into output market failures, with consequent losses in .social welfare. Distortionary taxes are a form of government failure that leads to broad market failures.

Deficits and Market Failure

More often than not, of course, tax revenue is inadequate to fund the entire government budget. Deficit spending and borrowing can make sense when public outlays truly produce long-term benefits. In fact, the mere existence of “risk-free” assets (Treasury debt) across the maturity spectrum might enhance social welfare if it enables improvements in portfolio diversification that outweigh the cost of the government’s interest obligations. (Treasury securities do bear interest-rate risk and, if unindexed, they bear inflation risk.)

Nevertheless, borrowing can reflect and magnify deleterious government efforts to “do too much”, ultimately leading to market failures. Government borrowing may “crowd out” private capital formation, harming economy-wide productivity. It might also inhibit the ability of households to borrow at affordable rates. Interest costs of the public debt may become explosive as they rise relative to GDP, limiting the ability of the public sector to perform tasks that it should *actually* do, with negative implications for market performance.

Inflation and Market Failure

Deficit spending promotes inflation as well. This is more readily enabled when government debt is monetized, but absent fiscal discipline, the escalation of goods prices is the only remaining force capable of controlling the real value of the debt. This is essentially the inflation tax.

Inflation is a destructive force. It distorts the meaning of prices, causes the market to misallocate resources due to uncertainty, and inflicts costs on those with fixed incomes or whose incomes cannot keep up with inflation. Sadly, the latter are usually in lower socioeconomic strata. These are symptoms of market failure prompted by government failure to control spending and maintain a stable medium of exchange.

Conclusion

Markets may fail, but when they do it’s very often rooted in one form of government failure or another. Sometimes it’s an inadequacy in the establishment or enforcement of property rights. It could be a case of overzealous regulation. Or government may encroach on, impede, or distort decisions regarding the provision of goods or services best left to the market. More broadly, redistribution and taxation, including the inflation tax, distort labor and capital markets. The variety of distortions created when government fails at what it should do, or does what it shouldn’t do, is truly daunting. Yet it’s difficult to find leaders willing to face up to all this. Statism has a powerful allure, and too many elites are in thrall to the technocratic scientism of government solutions to social problems and central planning in the allocation of resources.

Biden OMB Suggests Minimal Discounts of Future Benefits

28 Wednesday Jun 2023

Posted by Nuetzel in Big Government, Risk, Tradeoffs

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Administrative State, Certainty Equivalent, Consumer Price Index, Discount Rate, John Cochrane, Joshua Rauh, MIT, Modernizing Regulatory Review, Office of Management and Budget, Present Value, Real Interest Rate, Regulatory Impact Analysis, Risk-Free Rate, TIPS, Tradeoffs, Treasury Bonds, Unintended Consequences

Tweaks to the projected costs and benefits of prospective regulations or programs can be a great way to encourage domination of resources and society by the state. Of course, public policy ideas will never receive serious consideration unless their “expected” benefits exceed costs. It’s therefore critical that the validity of cost and benefit estimates — to say nothing of their objectivity — are always subject to careful review. By no means does that ensure that the projections are reasonable, however.

Traditionally less scrutinized is the rate at which the future costs and benefits of a program or regulation are discounted into present value terms. The discount rate can have a tremendous impact on the comparison of costs and benefits when their timing differs significantly, which is usually the case.

Intertemporal Tradeoffs

People generally aren’t willing to forsake present pleasure without at least a decent prospect of future gain. Thus, we observe that the deferral of $1 of consumption today generally brings a reward of more than $1 of future consumption. That’s made possible by the existence of productive opportunities for the use of resources. These opportunities, and the freedom to exploit them, allow a favorable tradeoff at which we transform resources across time for the benefit of both our older selves and our progeny. The interaction of savers and investors in such opportunities results in an equilibrium interest rate balancing the supply and demand for saving.

We can restate the tradeoff to demonstrate the logic of discounting. That is, the promise of $1 in the future induces the voluntary deferral of less than $1 of consumption today. To arrive at the amount of the deferral, the promised $1 in the future is discounted at the consumer’s rate of time preference. The promised $1 must cover the initial deferral of consumption plus the consumer’s perceived opportunity cost of lost consumption in the present, or else the “trade” won’t happen.

Discounting practices are broadly embedded in the economy. They provide a rational basis of evaluating inter-temporal tradeoffs. The calculation of net present values (NPVs) and internal rates of return (the discount rate at which NPV = 0) are standard practices for capital budgeting decisions in the private sector. Public-sector cost-benefit analysis often makes use of discounting methodology as well, which is unequivocally good as long as the process is not rigged.

Government Discounting

The Office of Management and Budget (OMB) provides guidance to federal agencies on matters like cost-benefit analysis. As part of a recent proposal that was prompted by executive orders on “Modernizing Regulatory Review” from the Biden Administration, the OMB has recommended revisions to a 2003 Circular entitled “Regulatory Analysis”. A major aspect of the proposal is a downward adjustment to recommended discount rates, largely dressed up as an update for “changes in market conditions”.

Since 2003, the OMB’s guidance on discount rates called for use of a historical average rate on 10-year government bonds. Before averaging, the rate was converted to a “real rate” in each period by subtracting the rate of increase in the Consumer Price Index (CPI). The baseline discount rate of 3% was taken from the average of that real rate over the 30 years ending in 2002. There has been an alternative discount rate of 7% under the existing guidance intended as a nod to the private costs of capital, but it’s not clear how seriously agencies took this higher value.

The new proposal seeks to update the calculation of recommended discount rates by using more recent data on Treasury rates and inflation. One aspect of the proposal is to utilize the rate on 10-year inflation-indexed Treasury bonds (TIPS) for the years in which it is available (2003-2022). The first ten years of the “new” 30-year average would use the previous methodology. However, the proposal gives examples of how other methods would change the resulting discount rate and requests comments on the most appropriate method of updating the calculation of the 30-year average.

The new baseline discount rate proposed by OMB is 1.7%, and it is lower still for very distant flows of benefits. This is intended as a real, after-tax discount rate on Treasury bonds. It represents an average (and ex post) risk-free rate on bonds held to maturity over the historical period in question, calculated as described by OMB. However, like the earlier guidance, it is not prospective in any sense. And of course it is quite low!

Our Poor Little Rich Ancestors

The projected benefits of regulations or other public initiatives can be highly dubious in the first place. Unintended consequences are the rule rather than the exception. Furthermore, even modest economic growth over several generations will leave our ancestors with far more income and wealth than we have at our disposal today. That means their ability to adapt to changes will be far superior, and they will have access to technologies making our current efforts seem quaint.

Now here’s the thing: discounting the presumed benefits of government intervention at a low rate would drastically inflate their present value. John Cochrane uses an extreme case to illustrate the point. Suppose a climate policy is projected to avoid costs equivalent to 5% of GDP 100 years from now. Those avoided costs would represent a gigantic sum! By then, at just 2% growth, real GDP will be over seven times larger than this year’s output. Cochrane calculates that 5% of real GDP in 2123 is equivalent to 37% of 2023 real GDP. And the presumed cost saving goes on forever.

We can calculate the present value of the climate policy’s benefits to determine whether it’s greater than the proposed cost of the policy. Let’s choose a fairly low discount rate like … oh, say zero. In that case, the present value is infinite, and it is infinite at any discount rate below 2% (such as 1.7%). That’s because the benefits grow at 2% (like real GDP) and go on forever! That’s faster than the diminishing effect of discounting on present value. In mathematical terms, the series does not converge. Of course, this is not discounting. It is non-discounting. Cochrane’s point, however, is that if you take these calculations seriously, you’d be crazy not to implement the policy at any finite cost! You shouldn’t mind the new taxes at all! Or the inflation tax induced by more deficit spending! Or higher regulatory costs passed along to you as a consumer! So just stop your bitching!

Formal Comments to OMB

If Cochrane’s example isn’t enough to convince you of the boneheadedness of the OMB proposal, there are several theoretical reasons to balk. Cochrane provides links to a couple of formal comments submitted to OMB. Joshua Rauh of the Stanford Business School details a few fundamental objections. His first point is that a regulatory impact analysis (RIA), or the evaluation of any other initiative, “should be based on market conditions that prevail at the time of the RIA”. In other words, the choice of a discount rate should not rely on an average over a lengthy historical period. Second, it is unrealistic to assume that the benefits and costs of proposed regulations are risk-free. In fact, unlike Treasury securities, these future streams are quite risky, and they are not tradable, and they are not liquid.

Rauh also notes that the OMB’s proposed decline in discount rates to be applied to benefits or cash flows in more distant periods has no reliable empirical basis. He believes that results based on a constant discount rate should at least be reported. Moreover, agencies should be required to offer justification for their choice of a discount rate relative to the risks inherent in the streams of costs and benefits on any new project or rule.

Rauh is skeptical of recommendations that agencies should add a theoretical risk premium to a risk-free rate, however, despite the analytical superiority of that approach. Instead, he endorses the simplicity of the OMB’s previous guidance for discount rates of 3% and 7%. But he also proposes that RIAs should always include “the complete undiscounted streams of both benefits and costs…”. If there are distributions of possible cost and benefit streams, then multiple streams should be included.

Furthermore, Rauh says that agencies should not recast streams of benefits in the form of certainty equivalents, which interpose various forms of objective functions in order to calculate a “fair guarantee”, rather than a range of actual outcomes. Instead, Rauh insists that straightforward expected values should be used, This is for the sake of transparency and to enable independent assessment of RIAs.

Another comment on the OMB proposal comes from a group of economists at MIT. They have fewer qualms than Rauh regarding the use of risk-adjusted discount rates by government agencies. In addition, they note that risk in the private sector can often be ameliorated by diversification, whereas risks inherent in public policy must be absorbed by changes in taxes, government spending, or unintended costs inflicted on the private sector. Taxpayers, those having stakes in other programs, and the general public bear these risks. Using Treasury rates for discounting presumes that bad outcomes have no cost to society!

Conclusion

Discounting the costs and benefits of proposed regulations and other government programs should be performed with discount rates that reflect risks. Treasury rates are wholly inappropriate as they are essentially risk-free over time horizons often much shorter than the streams of benefits and costs to be discounted. The OMB proposal might be a case of simple thoughtlessness, but I doubt it. To my mind, it aligns a little too neatly with the often expansive agenda of the administrative state. It would add to what is already a strong bias in favor of regulatory action and government absorption of resources. Champions of government intervention are prone to exaggerate the flow of benefits from their pet projects, and low discount rates exaggerate the political advantages they seek. That bias comes at the expense of the private sector and economic growth, where inter-temporal tradeoffs and risks are exploited only at more rational discounts and then tested by markets.