Austerity, A New Weaselword

The financial press has become inundated with the word “austerity.” Since Greece’s left-wing Syriza proclaimed an “anti-austerity revolution,” strong adjectives, like “incredibly savage,” precede that overused word.

What was once a good word has become a weaselword. That, according to the Oxford Dictionary, is “a word that destroys the force of a statement, as a weasel ruins an egg by sucking out its contents.” How could that be?

Well, in the hands of an unscrupulous or uninformed writer, the inversion of a perfectly good word into a weaselword is an easy task. All one has to do is leave the meaning of a word undefined or vague, rendering the word’s meaning so obscure as to make it non-operational. With that, a meaningless weaselword is created.

In its current usage, the word austerity is so obscure as to evoke Fritz Machlup’s paraphrase of Goethe’s line from Faust: To conceal ignorance, Mephistopheles counsels a student to misuse words. Such is the story and fate of austerity.

Does Fed Leverage and Asset Maturity Matter?

Debate over whether to subject the Federal Reserve to a policy audit has occasionally focused on the size and composition of the Fed’s balance sheet. While I don’t see this issue as central to the merits of an audit, it has given rise to a considerable amount of smug posturing. Let’s step beyond the posturing and give these questions some of the attention they deserve.

First the facts. The Fed’s balance sheet has ballooned over the last few years to about $4.5 trillion. And yes, the Fed discloses such. No argument there. The Fed, like most central banks, has traditionally conducted its open-market operations in the “short end” of the market. The various rounds of quantitative easing have changed that. For instance the vast majority of its holdings of Fannie & Freddie mortgage-backed securities ($1.7 trillion) have an average maturity of well over 10 years. Similarly the Fed’s stock of treasuries have long maturities, about a fourth of those holdings in excess of 10 years.

Now the leverage question. We all get that the Fed cannot go “bankrupt” like Lehman. But that’s because “bankrupt” is a legal condition and one from which the Fed has been exempted. Just like Fannie and Freddie cannot go “bankrupt” (they are considered legally outside the bankruptcy code). The eminent economist historian Barry Eichengreen tells us the Fed’s leverage doesn’t matter as “the central bank can simply ask the government to replenish its capital, much like when a government covers the losses of its national post office.” Some of us would say that’s a problem not a solution, just like it is with the Post Office.

Others would suggest the Fed’s leverage doesn’t matter because “the Fed creates money”. Again that misses the point. Any losses could be covered by printing money, but isn’t that inflationary?  And that, of course, is just another form of taxation. So it seems Senator Paul’s primary point, that the Fed’s balance sheet exposes the taxpayer to some risk has actually been supported, not discredited, by these supposed rebuttals.

Let’s get to another issue, the maturity of the Fed’s assets. There’s a good reason central banks generally stay in the short end of the market. It avoids taking on any interest rate risk.  When rates go up, bond values fall. Yes the Fed can avoid recognizing those losses by simply not selling those assets. But that creates problems of its own. If we do see inflation, normally the Fed would sell assets to drain liquidity from the market. But would the Fed be willing to sell assets at a loss? At the very least there would be some reluctance. And yes they could cover those losses by printing money, but that’s hardly helpful if the Fed finds itself in a situation of rising prices.

The point here is that the Fed’s balance sheet does raise tough questions about its exit strategy.  Perhaps the economy will remain soft for years and the Fed can exit gracefully.  Perhaps not.  I raised this possibility before Congress a year ago.  I don’t know anyone with a crystal ball on these issues.  But one thing is certain, this is a debate we should be having.  Its the “nothing to see here, move along” crowd that poses the true risk to our economy.

Why Is the International Environmental Movement Silent about the Nicaragua Canal?

Nicaragua’s plan to build an Interoceanic Canal that would rival the Panama Canal could be a major environmental disaster if it goes forward. That’s the assessment of Axel Meyer and Jorge Huete-Pérez, two scientists familiar with the project, in a recent article in Nature. Disturbingly, the authors point out,

No economic or environmental feasibility studies have yet been revealed to the public. Nicaragua has not solicited its own environmental impact assessment and will rely instead on a study commissioned by the HKND [The Hong Kong-based company that has the concession to build the canal]. The company has no obligation to reveal the results to the Nicaraguan public.

In recent weeks we have seen similar opinions aired in the Washington Post, Wired, The Economist, and other media. In their article, Meyer and Huete-Pérez explain how the $50-billion project (more than four times Nicaragua’s GDP), would require “The excavation of hundreds of kilometres from coast to coast, traversing Lake Nicaragua, the largest drinking-water reservoir in the region, [and] will destroy around 400,000 hectares of rainforests and wetlands.” So far, the Nicaraguan government has remained mum about the environmental impact of the project. Daniel Ortega, the country’s president, only said last year that “some trees have to be removed.”  

Interestingly, despite this potential massive threat to one of the most pristine environmental reservoirs in the Americas, none of the leading international environmental organizations, such as Greenpeace, Friends of the Earth or the Sierra Club, has issued a single statement about the Nicaragua Canal.

We know for a fact that this is not out of lack of interest in Central America. After all, some of these organizations were pretty vocal in their opposition to CAFTA. Why isn’t the Nicaragua Canal proposal commanding the attention of these international environmental groups?

You Ought to Have a Look: Antarctic Ice, Summer Thunderstorms, and Cold Winters

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.

In this week’s You Ought to Have a Look, we’re going to catch up on some new climate science that hasn’t gotten the deserved attention—for reasons soon to be obvious.

First up is a new study comparing climate model projections with observed changes in the sea ice extent around Antarctica.

While everyone seems to talk about the decline in the sea ice in the Northern Hemisphere, considerably less discussion focuses on the increase in sea ice in the Southern Hemisphere. If it is mentioned at all, it is usually quickly followed by something like “but this doesn’t disprove global warming, it is consistent with it.”

But, even the folks delivering these lines probably realize that the latter bit is a stretch.

In fact, the IPCC and others have been trying downplay this inconvenient truth ever since folks first started to note the increase. And the excuses are getting more involved.

A new study pretty much exposes the emperor.

Good News from Hungary

In a recent article for the Weekly Standard, I noted that freedom in Hungary was under attack. In the past several years, the Prime Minister Viktor Orban has tightened its control over media, harassed civil society organizations, politicized the judiciary, nationalized $14 billion worth of assets from private pension funds, and populated the board of Hungary’s central bank by appointees of the ruling party, Fidesz. Mr Orban – who was once seen as a pro-market, liberal reformer – has also become Vladimir Putin’s most reliable partner in the EU, having hosted him for a working visit just last week.

But not all Hungarians are applauding as the country descends deeper into what could be called ‘goulash authoritarianism’. In fact, the parliamentary by-election in the county of Veszprem on Sunday has brought a very encouraging piece of news. A Fidesz candidate was defeated by an independent candidate, Zoltan Kesz, endorsed by a coalition of left-of-center parties.

“The left-right divide has been turned on its head in Hungary; the relevant distinction here is between the pro-Western and pro-Eastern political parties,” says Mr Kesz, referring to Mr Orban’s geopolitical allegiances. It should also be said that Mr Kesz is no ordinary politician. An activist and English teacher, he is the founder of Hungary’s premier libertarian think-tank, the Free Market Foundation. Interestingly, given the toxic political and ideological environment in Hungary, the organization has become known as the leading voice against racism in the country, and much of its efforts have been aimed to counter the rise of political forces such as the xenophobic Jobbik party, which is currently the third largest political force in the country.

Mr Kesz’ election is significant because it brings an end to the narrow supermajority, which Fidesz enjoyed in the Hungarian parliament since the election last year. In 2013, the parliament passed a number of controversial constitutional amendments, and many feared that the unchecked dominance of Fidesz could herald the demise of Hungarian democracy. While Mr Kesz’ electoral victory assuages those fears somewhat, he will be fighting an uphill battle to get his country back on track.

We Should Only Trust the Government as Far as We Can Throw It

Vietnam vet Robert Rosebrock is 72 years old, but he’s still got enough fight in him to stand up for what he believes in. The Veteran’s Administration of Greater Los Angeles (VAGLA) and the U.S. Court of Appeals for the Ninth Circuit would prefer his fight to be in vain.

Rosebrock’s fight here is a protest against VAGLA’s use of a parcel of land deeded to the U.S. government for the care of homeless veterans for purposes other than that purpose.  For example, VAGLA leased parts of the land to a private school, an entertainment company, and a soccer club, and occasionally used it for hosting events. Every Sunday for 66 weeks, Rosebrock hung at least one and as many as 30 U.S. flags from a border fence on the VA property that he believed was being misused.

After seeing a celebrity gala event on the property one Sunday afternoon, Rosebrock started hanging flags with the stars down, signifying dire distress to life and property—the distress faced by LA’s homeless veterans. At this point, VAGLA started enforcing its policy against “displaying of placards or posting of materials on bulletin boards or elsewhere on [VA] property.” When Rosebrock continued, believing his First Amendment rights would protect him, he was issued six criminal citations. He then stopped hanging his flag upside down but was later allowed to hang it right-side-up—a clear if unusual example of viewpoint-based speech discrimination that violates the First Amendment.

“Slipshod Work, Faulty Analysis, And Statistical Sleight Of Hand” At the EEOC

We’ve reported earlier in this space on how the Obama administration’s Equal Employment Opportunity Commission (EEOC) keeps getting slapped down by federal judges over what we called its “long-shot lawsuits and activist legal positions.” Now the Fourth Circuit has weighed in on a high-profile employment screening case from Maryland – and it too has given the EEOC a good thwacking, in this case over “pervasive errors and utterly unreliable analysis” in the expert testimony it marshaled to show the employer’s liability. Those are the words of a three-judge panel consisting of Judge Roger Gregory, originally appointed to the court by Bill Clinton before being re-appointed by his successor George W. Bush, joined by Obama appointee Albert Diaz and GWB appointee G. Steven Agee. 

The case arose from the EEOC’s much-publicized initiative of going after employers that use criminal background checks in hiring, which the agency insists often have improper disparate impact on minority applicants and have not been validated as necessary for business reasons. It sued the Freeman Cos., a provider of convention and exposition services, over its screening methods, but Freeman won after district court judge Roger Titus shredded the EEOC’s proffered expert evidence as “laughable,” “unreliable,” and “mind-boggling.” The EEOC appealed to the Fourth Circuit. 

If it was expecting vindication there, it was very wrong. Agreeing with Judge Titus, Judge Gregory cited the “pervasive errors and utterly unreliable analysis” of the commission’s expert report, by psychologist Kevin Murphy. “The sheer number of mistakes and omissions in Murphy’s analysis renders it ‘outside the range where experts might reasonably differ,’” which meant it could not have been an abuse of discretion for Judge Titus to exclude it. 

Strong language, yet Judge Agee chose to write a separate concurrence “to address my concern with the EEOC’s disappointing litigation conduct.” Noting a pattern in multiple cases, Agee faulted the commission’s lawyers for circling the wagons on behalf of its statistical methods despite repeated judicial hints that it needed to strengthen its quality control. “Despite Murphy’s record of slipshod work, faulty analysis, and statistical sleight of hand, the EEOC continues on appeal to defend his testimony.” If the agency doesn’t watch out, exasperated judges might start imposing more sanctions against it. 

Incidentally, as a counterpoint to the EEOC’s bullheadedness, the U.S. Commission on Civil Rights a year back did a briefing program on employee screening and criminal background checks that tries to include an actual balance of views. You can read and download it here.