A Monetary Policy Primer, Part 5: The Supply of Money

In previous installments of this primer I’ve tried to convince you, first, that monetary policy is ultimately about keeping the available quantity of money from differing substantially, if only temporarily, from the quantity demanded and, second, that doing this boils down in practice to having a money stock that adjusts so as to maintain a steadily-growing level of overall spending on goods and services.

If we’re to pick the right arrangements for achieving this goal, we’d better have a good understanding of the determinants of an economy’s money stock, and of how that stock can be made to expand or contract just enough to keep total spending stable.  Although I eventually plan to talk about monetary arrangements that might make maintaining a steady flow of spending a lot easier than our present system does, for now I’m going to stick to discussing how the same goal might be achieved, at least in principle, in our present monetary system or, more precisely, in the system we had until the subprime crisis of 2008.  (A later post will discuss how things have changed since the crisis.)  This means talking about the Fed’s “instruments of monetary control,” which include devices for regulating the total quantity of bank reserves and circulating Federal Reserve notes, and also for regulating the quantity of bank deposits and other forms of privately-created money that will be supported by any given quantity of bank reserves.

You Ought to Have a Look: Ontario’s Energy Plan, Evidence-based Policy and a New Climate Sensitivity Estimate

You Ought to Have a Look is a feature from the Center for the Study of Science posted by Patrick J. Michaels and Paul C. (“Chip”) Knappenberger.  While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic.  Here we post a few of the best in recent days, along with our color commentary.

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First up in this week’s edition of You Ought to Have a Look is an op-ed by Ross McKitrick (one-time Cato Adjunct who is now Chair of Energy, Ecology & Prosperity at the Frontier Centre for Public Policy and Economic Professor at the University of Guelph) who shreds the energy policy being forwarded by Kathleen Wynne, the Liberal Party Premier of Ontario. Wynne’s proposed plan—aimed to combat climate change—includes, among other things, a requirement that all homes eventually be heated by electricity (i.e., no natural gas, etc.).

McKitrick describes up the plan,

Around the time that today’s high-school students are readying to buy their first home, it will be illegal for builders to install heating systems that use fossil fuels, in particular natural gas. Having already tripled the price of power, Queen’s Park will make it all but mandatory to rely on electricity for heating.

There will be new mandates and subsidies for biofuels, electric buses for schools, extensive new bike lanes to accommodate all those bicycles Ontario commuters will be riding all winter, mandatory electric recharging stations on all new buildings, and many other Soviet-style command-and-control directives.

distills what’s wrong with it,

[E]ven if the…plan were to stop global warming in its tracks, the policies would do more economic harm than the averted climate change.

and, in inimitable Ross fashion, throws in this zinger,

The scheme is called the Climate Change Action Plan, or CCAP, but it would be more appropriately called the Climate Change Coercion Plan: the CCCP.

The entire op-ed appearing in the Financial Post is a must read.

Next up is a post at the blog IPKat (a U.K.-based Intellectual Property news blog) by Nicola Searle that provides an interesting review of a new book by Paul Cairney titled The Politics of Evidence-Based Policy Making.

Evidenced-based policy making (EBPM) is the idea that, well, policy should be based on some sort of evidence. But as Searle (and Cairney) point out, this is a lot more complicated than it seems. Searle eloquently describes the situation as: “Policymaking isn’t a Mondrian, it’s a Monet.”

Rather than the (utopian) linear view that “evidence” clearly informs the best “policy,” the situation is much more complex and involves uncertainties, interpretations, personal beliefs, outside pressures, policy goals, etc.

Searle provides this analogy:

As Cairney puts it, “in the real world, the evidence is contested, the policy process contains a large number of influential actors, and scientific evidence is one of many sources of information.” I’d described policy making in general as akin to an extended family choosing which film to watch. Uncle Alex campaigns for Barbarella, cousin Vic, holding the remote, decides you’re all watching Hulk until your sister Pat throws a tantrum unless you watch Frozen. You might consult the Rotten Tomatoes rating, but you’re convinced that critic from the New York Post is on the payroll of a major studios and the popular rating seems to have been spammed by bots… In the end you watch a Jude Law rom-com. And that’s the simplified version.

For more insight, check out Searle’s full post, or perhaps even Cairney’s book. This is a topic that is quite relevant to the subject of climate change policy (as well as a litany of policy that is rooted in U.S. Environmental ProtectionAgency “evidence”).

And finally, we’d be remiss if we didn’t draw attention to a new study appearing in the AGU journal Earth and Space Science by University College Dublin’s J. Ray Bates that finds that the equilibrium climate sensitivity—that is, the earth’s total surface temperature rise that results from a doubling of the atmospheric effective concentration of carbon dioxide—is “~1°C.”

Bates’ work is an update and extension of the methods and findings of (Cato Center for the Study of Science’s Distinguished Senior Fellow) Richard Lindzen and Yong-Sang Choi and represents another estimate of the climate sensitivity that falls well below the average of the climate models (3.2°C) used in the most recent IPCC report.  The lower the climate sensitivity to greenhouse gas increases, the lower the overall impacts when measured over comparative time-scales.

We’ve added the new Bates results to our lower-than-model climate sensitivity compilation (Figure 1).

Figure 1. Equilibrium climate sensitivity (ECS) estimates from new research beginning in 2011 (colored), compared with the assessed range given in the Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report (AR5) and the collection of climate models used in the IPCC AR5. The “likely” (greater than a 66% likelihood of occurrence) range in the IPCC Assessment is indicated by the gray bar. The arrows indicate the 5 to 95 percent confidence bounds for each estimate along with the best estimate (median of each probability density function; or the mean of multiple estimates; colored vertical line). The right-hand side of the IPCC AR5 range is actually the 90% upper bound (the IPCC does not actually state the value for the upper 95% confidence bound of their estimate). Ring et al. (2012) present four estimates of the climate sensitivity and the red box encompasses those estimates. Likewise, Bates (2016) presents eight estimates and the green box encompasses them. Spencer and Braswell (2013) produce a single ECS value best-matched to ocean heat content observations and internal radiative forcing.

 

Figure 1. Equilibrium climate sensitivity (ECS) estimates from new research beginning in 2011 (colored), compared with the assessed range given in the Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report (AR5) and the collection of climate models used in the IPCC AR5. The “likely” (greater than a 66% likelihood of occurrence) range in the IPCC Assessment is indicated by the gray bar. The arrows indicate the 5 to 95 percent confidence bounds for each estimate along with the best estimate (median of each probability density function; or the mean of multiple estimates; colored vertical line). The right-hand side of the IPCC AR5 range is actually the 90% upper bound (the IPCC does not actually state the value for the upper 95% confidence bound of their estimate). Ring et al. (2012) present four estimates of the climate sensitivity and the red box encompasses those estimates. Likewise, Bates (2016) presents eight estimates and the green box encompasses them. Spencer and Braswell (2013) produce a single ECS value best-matched to ocean heat content observations and internal radiative forcing.

As the Bates results are just-released, we await to see how they stand up to scrutiny (and the test of time).

The journal Earth and Space Science is open access, so everyone can go and have a look for themselves (although, fair warning, the article is very technical).

Once Again, REAL ID Is a National ID

A small pro-national-ID group called “Keep Identities Safe” is dancing a little jig because New Hampshire Governor Maggie Hassan (R) has signed legislation to move her state closer to compliance with our national ID law, the REAL ID Act.

In a blog post—apparently their first ever (so that link will be broken if they blog again)—they try to declare the end of the REAL ID Rebellion. I often say it was founded when Rep. Neal Kurk (R-Weare) inveighed against the national ID law in a 2006 speech on the floor of the New Hampshire House of Representatives.

But the heart of the matter is the denial that REAL ID is a national ID law. The New Hampshire legislation says, “Any records received pursuant to this paragraph shall not be used, further transferred, or otherwise made available to any other person or entity for the purpose of creating or enhancing a federal identification database.”

How can New Hampshire offer a REAL ID option and not participate in a national identification database?

It’s a good question, so I’ll cite again directly to the terms of the REAL ID law, which requires states to:

(12) Provide electronic access to all other States to information contained in the motor vehicle database of the State.

(13) Maintain a State motor vehicle database that contains, at a minimum –

(A) all data fields printed on drivers’ licenses and identification cards issued by the State; and
(B) motor vehicle drivers’ histories, including motor vehicle violations, suspensions, and points on licenses.

The U.S. Department of Homeland Security has temporarily written that requirement out of the law in an effort to get states committed to REAL ID. When enough states are in the tank, the agency will move the compliance goalposts and require states to begin sharing their drivers’ data via the nationwide database system that the law specifically requires. The American Association of Motor Vehicle Administrators is currently touting on its website that Iowa has signed up to its “State-to-State Verification Service.”

The New Hampshire legislation also suffers from poor draftsmanship. New Hampshire’s motor vehicle bureaucrats can sign their state up to AAMVA’s information-sharing system simply by allowing themselves to believe that they are not doing so “for the purpose of creating or enhancing a federal identification database.” Governor Hassan has left New Hampshirites unprotected from seeing their data shared nationally.

Notably, the REAL ID law does not exempt “non-federal” licenses from the information-sharing requirement. New Hampshirites who choose that option will still have their information shared nationally.

Has the REAL ID Rebellion ended? Perhaps. DMV bureaucrats and their pro-national-ID allies at “Keep Identities Safe” have been working for years to wear down and evade state legislatures’ resistance to the national ID law. They have had some success in growing the power of the federal government in yet another direction.

Should this be a source of pride? A national ID is a poor security tool that wastes taxpayer dollars, upsets the constitutionally prescribed state-federal balance of power, and compromises law-abiding Americans’ privacy and liberties. The move toward national ID compliance in New Hampshire is probably not something to dance a jig about.

The Luckiest Crop in History

Recently, the New York Times ran an opinion piece by Gregg Easterbrook, which draws attention to the disconnect between the gloomy public on the one hand and the real state of America on the other hand. The prevailing mood in the United States is one of pessimism. For prominent politicians on both sides of the aisle, to use Easterbrook’s words, “the impending apocalypse has been issue number one.” Yet in almost every measurable way, this is the best time in history to be alive. The evidence goes on and on [links added]:   

Pollutiondiscriminationcrime and most diseases are in an extended decline; living standardslongevity and education levels continue to rise … A century ago, most Americans worked in agriculture: Today hardly any do, and we’re all better off, including farmers. That manual labor, farm or factory, has given way to 60 percent of Americans employed in white-collar circumstances … In 1990, 37 percent of humanity lived in what the World Bank defines as extreme poverty; today it’s 10 percent.  

Where did all this progress come from? Easterbrook rightly credits, “interconnected global economics.” Through an intricate symphony of competition and exchange, humanity has driven technology forward and achieved heights of prosperity that would be unimaginable to our ancestors.   

Unfortunately, Easterbrook also gives credit to top-down government planning where none is due. He cites the Affordable Care Act as an example of a successful reform, but rising life expectancy and improved health outcomes are long-term trends that both predate Obamacare and extend far beyond U.S. borders. It is far too soon to attribute any part of those trends to that highly problematic policy.   

Easterbrook even claims that, “In almost every case, reform has made America a better place, with fewer unintended consequences and lower transaction costs than expected. This is the strongest argument for the next round of reforms.” That is a sweeping overgeneralization, as it obviously hinges on the specific nature of reforms. Plenty of reforms throughout American history are now universally recognized as horrible mistakes – just look at alcohol prohibition.   

Despite some confusion about the drivers of progress, Easterbrook’s opinion piece is a refreshing reminder of the incredible progress humanity has made and well worth a read. It ends with this heartening quote that the data backs up:   

Recently Warren Buffett said that because of the “negative drumbeat” of politics, “many Americans now believe their children will not live as well as they themselves do. That view is dead wrong: The babies being born in America today are the luckiest crop in history.” 

Topics:

A Difficult Truth: Noninterventionism’s Less Tolerant Faction

Libertarians and other advocates of a noninterventionist foreign policy—or its close cousin, a policy of realism and restraint —have grappled with how to respond to the candidacy of Donald Trump.  Some of Trump’s policy positions are refreshing and sensible.  His hostility to wars for regime change and nation building are a gratifying contrast to the enthusiasm for such ventures that both neoconservative Republicans and humanitarian interventionist Democrats have exhibited in recent decades.  Trump’s insistence that America’s longstanding allies in both Europe and East Asia do far more for their own defense also has at least the potential to significantly reduce the republic’s excessive and obsolete security burdens. Finally, his desire to avoid confrontational relationships with major powers such as Russia and China  is a rare voice of prudence among America’s political elite, and it has understandable appeal to noninterventionists.

But there are other Trump positions that are deeply disturbing, if not outright offensive to the kind of noninterventionists (or “cosmopolitan realists”) who have filled the ranks of Cato’s foreign policy program.  Trump’s hostility to free trade is both disappointing and myopic.  But his stance on immigration is even worse.  His proposal to build a wall along the border with Mexico to keep out undocumented Hispanic migrants is not only impractical, it conveys a message of hostility to such populations. Trump’s stance on Muslim immigration, especially his call for a “temporary” ban, conveys such hostility with even greater clarity.

Lesson from Cyprus: Spending Restraint Is the Pro-Growth Way to Solve a Fiscal Crisis

Much of my work on fiscal policy is focused on educating audiences about the long-run benefits of small government and modest taxation.

But what about the short-run issue of how to deal with a fiscal crisis? I have periodically weighed in on this topic, citing research from places like the European Central Bank and International Monetary Fund to show that spending restraint is the right approach.

And I’ve also highlighted the success of the Baltic nations, all of which responded to the recent crisis with genuine spending cuts (and I very much enjoyed exposing Paul Krugman’s erroneous attack on Estonia).

Today, let’s look at Cyprus. That Mediterranean nation got in trouble because of an unsustainable long-run increase in the burden of government spending. Combined with the fallout caused by an insolvent banking system, Cyprus suffered a deep crisis earlier this decade.

Unlike many other European nations, however, Cyprus decided to deal with its over-spending problem by tightening belts in the public sector rather than the private sector.

This approach has been very successful according to a report from the Associated Press.

…emerging from a three-year, multi-billion euro rescue program, Cyprus boasts one of the highest economic growth rates among the 19 Eurozone countries — an annual rate of 2.7 percent in the first quarter. Finance Minister Harris Georgiades says Cyprus turned its economy around by aggressively slashing costs but also by avoiding piling on new taxes that would weigh ordinary folks down and put a serious damper on growth. “We didn’t raise taxes that would burden an already strained economy,” he told The Associated Press in an interview. “We found spending cuts that weren’t detrimental to economic activity.”

CRST Van Expedited: Back To the Dunking Booth for the EEOC

Of the Equal Employment Opportunity Commission’s record in court, I wrote last summer that 

…it’s not easy to think of an agency to whose views federal courts nowadays give less deference than the EEOC. As I’ve noted in a series of posts, judges appointed by Presidents of both political parties have lately made a habit of smacking down the commission’s positions, often in cases where it has tried to get away with a stretchy interpretation of existing law. See, for example, the Fourth Circuit’s rebuke of “pervasive errors and utterly unreliable analysis“ in EEOC expert testimony, Justice Stephen Breyer’s scathing majority opinion in Young v. U.P.S. on the shortcomings of the EEOC’s legal stance (in a case the plaintiff won), or these stinging defeats dealt out to the commission in three other cases. 

Occasionally, as in the Abercrombie & Fitch case, the commission manages to prevail anyway. But in last week’s Supreme Court decision in CRST Van Expedited, Inc. v. EEOC, it was back to the dunking booth for the much-disrespected commission. The ruling, written by Justice Anthony Kennedy, was unanimous. It laid out in detail a long tale of shoddy EEOC litigation waged against the Iowa-based trucking company CRST, in which the commission took a female driver’s complaint of sexual harassment during training and attempted to expand it into a giant “pattern and practice” lawsuit that might have been settled for millions. Rather than settling, the trucking company decided to fight. The ensuing litigation did not, to understate things, show the EEOC at its best.