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July 31, 2015 3:40PM

You Ought to Have a Look: Hillary and Jeb Offer Climate Opinion

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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This week, the royal families of Clinton and Bush offered up their 2016 campaign insights on climate change.  People have been very interested in what they would say because, as Secretary of State, Clinton gave hints that she was even more aggressive on the issue than her boss, and Bush is the son of GHW Bush, who got us into this mess in the first place by going to Rio in 1992 and signing off on the Climate Treaty adopted there.*

Hillary Clinton unveiled her “climate plan” first.  As feared, it’s a step-up over Obama’s, with an impossibly large target for electricity production from renewable energy. While her fans were exuberant, noticeably absent from her plan were her thoughts on Keystone XL pipeline and a carbon tax.

Manhattan Institute scholar Oren Cass (whose take on the carbon tax we’ve featured previously) was, overall, less than impressed. Calling Hilary’s climate plan a “fake plan” in that it really would have no impact on the climate. Cass identifies what Hilary’s “real” plan is—pushing for a $100+ billion annual  international “Green Climate Fund”  (largely populated with U.S. dollars) to be available to developing countries to fight/prepare for climate change. 



Here’s Cass’s take:

Hillary Clinton has a real climate change plan and a fake climate change plan. She released the fake plan earlier this week to predictably rapturous media applause for its “far-reaching” and “comprehensive” agenda.

…The plan is most obviously fake because it is not really a climate plan at all. Clinton offers no estimated reductions in carbon dioxide emissions or future temperatures, probably because her plan cannot achieve any meaningful ones. Her ultimate goal to generate 33 percent of U.S. electricity from renewable sources by 2027 would reduce global emissions by less than 2 percent annually, even if every new kilowatt-hour of renewable power managed to replace coal-fired power. That is only a [tiny-eds] fraction of the increase expected from China during the same period.

Instead of claiming any climate success, Clinton’s campaign material emphasizes health benefits from reducing air pollutants (not carbon dioxide). It promotes job creation (though job losses would be at least as large). And it promises to “make the United States the world’s clean energy superpower,” whatever that means.

The plan is most importantly fake because it obscures an actual climate plan that Clinton has no interest in discussing with voters. The real plan, simply put, is to pay for other countries to reduce their emissions through an unprecedented transfer of wealth from the developed world to the developing world. This plan emerged from the international climate negotiations in Copenhagen in 2009, at which then-Secretary Clinton pledged the United States would help create a Green Climate Fund of at least $100 billion in annual aid – a commitment comparable in scale to all existing development aid from OECD countries.

 Be sure to check out the whole thing, in which Cass concludes:

The silly gap in Clinton’s climate plan is the continuing no-comment on the Keystone XL pipeline. The surprising one is the absence of a price on carbon. But the dangerous one is the omission of what she actually wants to do.

Clearly, Hillary is more interested in influencing public opinion than the actual climate.

Jeb Bush then offered up his thoughts about climate change. In an interview with Bloomberg BNA, Bush said, among other things that “the climate is changing” and that “human activity has contributed to it” but that “we should not say the end is near.”  

Sounds like a solid take!

Bush went on to with his opinions on various aspects of energy regulations currently aimed at climate change. Keystone XL pipeline? “Yes.” Renewable fuel standard? “2022 is the law and is probably the good break point.” EPA’s Clean Power Plan? “[I]rresponsible and ineffective.”

You ought to have a look at the complete set of questions and answers. A refreshing and logical response to the various aspects of the issue.

For example, here’s his full answer to Bloomberg BNA’s question “Is climate change occurring? If so, does human activity significantly contribute to it?”:

The climate is changing; I don’t think anybody can argue it’s not. Human activity has contributed to it. I think we have a responsibility to adapt to what the possibilities are without destroying our economy, without hollowing out our industrial core.

I think it’s appropriate to recognize this and invest in the proper research to find solutions over the long haul but not be alarmists about it. We should not say the end is near, not deindustrialize the country, not create barriers for higher growth, not just totally obliterate family budgets, which some on the left advocate by saying we should raise the price of energy so high that renewables then become viable.

U.S. emissions of greenhouse gasses are down to the same levels emitted in the mid-1990s, even though we have 50 million more people. A big reason for this success is the energy revolution which was created by American ingenuity—not federal regulations.

This is an encouraging stance from a Republican presidential candidate. And one that we think should come to dominate the issue—from both sides. It serves no one to deny that humans are causing climate change, nor to cry that we’re all going to die. Actions should be appropriate to the magnitude of the issue—in other words, lukewarm.

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*Many people advised him not to go. But he did, anyway, probably thinking he would get yelled at if he didn’t, and lose votes in the upcoming Presidential election. How well did that work out for him?

July 31, 2015 2:10PM

Reserve Requirements Basel Style: The Liquidity Coverage Ratio

Over the last couple of decades, reserve requirements all but vanished as a means of bank regulation and monetary control. But now a new variation on reserve requirements is being introduced through the capital controls of the Basel Accords.

Canada, the UK, Sweden, Australia, New Zealand, and Hong Kong have all abolished traditional reserve requirements. In many other countries, reserve requirements have become a dead letter. In the U.S., for instance, the Fed under Alan Greenspan reduced all reserve requirements to zero except for transactions deposits (checking accounts), while permitting banks to evade reserve requirements on transactions balances by using sophisticated computer software to regularly “sweep” those balances into money market deposit accounts, which have no reserve requirement. In 2011 Congress went a step further by allowing the Fed to eliminate all reserve requirements if it so desired. The Eurozone, for its part, began with a reserve requirement of only 2 percent, which was reduced to 1 percent in January 1999.

There were good reasons for this deregulatory trend. Economists consider reserve requirements an implicit tax on banks, requiring them to hold non-interest earning assets, while central banks considered changes in such requirements too blunt an instrument for monetary control. The Fed discovered the latter shortcoming when, in the midst of the Great Depression, having just gained control over the reserve requirements of national banks, it doubled them, contributing to recession of 1937.

Ostensibly designed to keep banks more liquid, reserve requirements can prevent them from drawing on their liquidity when it is most needed. As Armen A. Alchian and William R. Allen point out in University Economics (1964): “To rely upon a reserve requirement for the meeting of cash-withdrawal demands of banks’ customers is analogous to trying to protect a community from fire by requiring that a large water tank be kept full at all times: the water is useless in case of emergency if it cannot be drawn from the tank.”

As reserve requirements became less fashionable, advocates of more stringent bank regulation resorted instead to risk-based capital requirements, as implemented through the international Basel Accords. More recently the increasingly widespread practice of paying interest on bank reserves has also given central banks an alternative and less burdensome means for inducing banks to hold more reserves.

But in Basel III, agreed upon in 2010-2011, there appeared a new kind of liquidity requirement that mimics reserve requirements in many respects. Known as the “Liquidity Coverage Ratio” or LCR, it requires banks to hold “high quality liquid assets” (HQLA) sufficient to cover potential net cash outflows over 30 days. In September 2014 the Fed, the Comptroller, and the FDIC finalized the rule implementing the Liquidity Coverage Ratio. The rule, which took effect at the beginning at 2015, must be fully complied with by January 2017.

Far from involving a simple ratio, as earlier reserve requirements did, the Liquidity Coverage Ratio is extremely complicated, filling 103 pages in the Federal Register. The rule does not apply to small community banks but instead to banks with more than $250 billion of assets, with a modified rule applying to the holding companies of both banks and savings institutions. The Fed also plans to impose a similar rule on non-bank financial institutions. But because a variant of the rule applies to bank holding companies on a “consolidated basis,” the Liquidity Coverage Ratio already affects most major investment banks, which are owned by bank holding companies.

Unlike traditional reserve requirements, the Liquidity Coverage Ratio does not call for any minimum quantity of cash reserves. Instead, it calls for a minimum quantity of various high quality liquid assets. Weighting bank assets according to their maturity, marketability, and riskiness, the LCR even counts as high quality some forms of corporate debt at half of face value. The LCR also differs in being applied, not just to bank deposits, but to nearly all bank liabilities, including large CDs, derivatives, and off-balance sheet loan commitments, according to their maturity.

In short, the Liquidity Coverage Ratio is designed to reduce maturity mismatches for large financial institutions in order to protect against the kind of panics in the repo and asset-backed commercial paper markets that occurred during the financial crisis of 2007-2008. In any case, the rule will still require banks to hold more reserves or short-term Treasury securities than they otherwise might prefer. Since the rule was under discussion by 2010, it could be another reason—along with interest on reserves and capital requirements—why U.S. banks have continued to hold more than 100-percent reserves behind M1 deposits.

Every time there is a financial crisis, the proposal to force banks to hold higher reserve ratios, if not 100-percent reserves, resurfaces. During the Great Depression, this proposal went under the name of the Chicago Plan and even received support from Milton Friedman in his early writings. The proposal was called “narrow banking” during the savings and loan crisis. Since the recent crisis, it has been advocated in one form or another by such economists as Laurence Kotlikoff of the Boston University, John Cochrane of the University of Chicago, and Martin Wolf of the Financial Times. All of these proposals hinge on the government paying interest on bank reserves.

The new Liquidity Coverage Ratio in one sense is less restrictive than these proposals but in another is more so. It is less restrictive in that it allows deposits to be covered by liquid securities other than cash equivalents, and in that sense is a bit reminiscent of the discredited real-bills doctrine that insisted the banks should make only short-term, self-liquidating loans.

But the Liquidity Coverage Ratio is more restrictive than conventional reserve requirements in so far as it applies to a much broader range of bank liabilities. Unlike such requirements, it is striving to prevent banks from engaging in significant maturity transformation, which involves bundling and converting long-term securities into short-term securities. That makes it closest in spirit to Cochrane’s reform proposal, which combines a 100-percent reserve requirement for deposits with a 100-percent capital requirement for all other bank liabilities. Cochrane’s proposal really would eliminate all maturity mismatches; indeed, it would make all banks resemble combinations of safe-deposit businesses on the one hand and mutual funds or, for that matter, Islamic banks, on the other.

Will the Liquidity Coverage Ratio ultimately work? Although the question requires further thought and study, I doubt it. Several monetary economists, considering the rule’s implementation in Europe (here and here), are more optimistic than I am, and a few even think that it will not be restrictive enough. But they may be overlooking the long-term downsides.

As with so many past banking regulations, this one could ultimately end up being non-binding. Banks may find loopholes in the rule, or may innovate around it, and the rule’s very complexity and supposed flexibility is likely to make doing these things easier. On the other hand, when the next financial crisis hits, by hobbling a bank’s discretionary control over its balance sheet, the rule may well exacerbate the crisis. To the extent that the rule is binding, it changes the fundamental nature of banking in a way that may curtail efficient financial intermediation. Whatever happens, it definitely increases the government’s central planning of the allocation of savings. In the final analysis, it is another futile attempt to use prudential regulation to overcome the excessive risk taking resulting from the moral hazard created by deposit insurance and too-big-to-fail.

[Cross-posted from Alt-M.org]

July 31, 2015 10:23AM

Boston Beats Beijing in Olympics Contest

News comes this morning that Beijing has been awarded the 2022 Winter Olympics, beating out Almaty, Kazakhstan. Which touches on a point I made in this morning's Boston Herald: 

Columnist Anne Applebaum predicted a year ago that future Olympics would likely be held only in “authoritarian countries where the voters’ views will not be taken into account” — such as the two bidders for the 2022 Winter Olympics, Beijing and Almaty, Kazakhstan.

Fortunately, Boston is not such a place. The voters’ views can be ignored and dismissed for only so long.

Indeed, Boston should be celebrating more than Beijing this week. A small band of opponents of Boston's bid for the 2024 Summer Olympics beat the city's elite -- business leaders, construction companies, university presidents, the mayor and other establishment figures -- because they knew what Olympic Games really mean for host cities and nations:

E.M. Swift, who covered the Olympics for Sports Illustrated for more than 30 years, wrote on the Cognoscenti blog a few years ago that Olympic budgets “always soar.”

“Montreal is the poster child for cost overruns, running a whopping 796 percent over budget in 1976, accumulating a deficit that took 30 years to repay. In 1996 the Atlanta Games came in 147 percent over budget. Sydney was 90 percent over its projected budget in 2000. And the 
Athens Games cost $12.8 billion, 60 percent over what the government projected.”

Bent Flyvbjerg of Oxford University, the world’s leading expert on megaprojects, and his co-author Allison Stewart found that Olympic Games differ from other such large projects in two ways: They always exceed their budgets, and the cost overruns are significantly larger than other megaprojects. Adjusted for inflation, the average cost overrun for an Olympics is 179 percent.

Bostonians, of course, had memories of the Big Dig, a huge and hugely disruptive highway and tunnel project that over the course of 15 years produced a cost overrun of 190 percent.

Read the whole thing.

July 30, 2015 3:23PM

Of Rotten Eggs and Guilty Minds

By Ilya Shapiro and Randal John Meyer

It isn't every day that a person can go to his or her job, work, not participate in any criminal activity, and still get a prison sentence. At least, that used to be the case: the overcriminalization of regulatory violations has unfortunately led to the circumstance that corporate managers now face criminal—not just civil—liability for their business operations’ administrative offenses.

Take Austin and Peter DeCoster, who own and run an Iowa egg-producing company called Quality Egg. The DeCosters plead guilty to violating certain provisions of the Food, Drug, and Cosmetic Act because some of the eggs that left their facilities contained salmonella enteritidis, a bacterium harmful to humans. They were sentenced to 90 days in jail and fined $100,000 for the actions of subordinates, who apparently failed, also unknowingly, in their quality-control duties.

In other words, the “crime” that the DeCosters were convicted of didn’t require them to have put eggs with salmonella into interstate commerce, or even to have known (or reasonably been able to foresee) that Quality Egg was putting such eggs into interstate commerce. It didn’t even require the quality-control operator(s) most directly involved in putting the contaminated eggs into interstate commerce to have known that they were contaminated.

Nearly a century of jurisprudence has held that imprisoning corporate officers for the actions of subordinates is constitutionally suspect, given that there’s neither mens rea (a guilty mind) nor even a guilty act—the traditional benchmarks of criminality since the days of Blackstone. Yet there are about 300,000 regulations that can trigger criminal sanctions. These rules are too often ambiguous or arcane, and many lack any requirement of direct participation or knowledge, imposing strict liability on supervisors for the actions (or inactions) of their subordinates.

In United States v. Quality Egg, the district court ruled that courts have previously held that “short jail sentence[s]” for strict-liability crimes are the sort of “relatively small” penalties that don’t violate constitutional due process.  Such a sentence has only been imposed once in the history of American jurisprudence, however, and for a much shorter time on defendants with much more direct management of the underlying bad acts. Additionally, prison is not the sort of “relatively small” penalty—like a fine or probation—that the Supreme Court has allowed for offenses that lack a guilty mind requirement.

Joining the National Association of Manufacturers, Cato points out in an amicus brief supporting the DeCosters’ appeal that this case presents an opportunity for the U.S. Court of Appeals for the Eighth Circuit to join its sister court, the Eleventh Circuit, in holding that prison sentences constitute a due-process violation when applied to corporate officers being charged under a strict-liability regulatory regime.

July 30, 2015 1:54PM

Mission Creep in Syria

This week, the United States and Turkey agreed on a deal to expand cooperation in the fight against ISIS, in part through the creation of an ‘ISIS-free zone’ in Northern Syria. The scope of the agreement is unclear, not least because Turkish officials are hailing it as a ‘safe zone’ and a possible area for refugees, while U.S. officials deny most of these claims. U.S. officials are also explicit that the agreement will not include a no-fly zone, long a demand of U.S. allies in the region.

But what’s not in doubt is that the United States and Turkey plan to use airstrikes to clear ISIS fighters from a 68-mile zone near the Turkish border. The zone would then be run by moderate Syrian rebels, although exactly who this would include remains undefined.

Over at the Guardian today, I have a piece talking about the many problems with this plan, in particular the fact that it substantially increases the likelihood of escalation and mission creep in Syria:

“The ambiguity around the ‘Isis-free zone’ creates a clear risk of escalation. It’s unclear, for example, whether groups engaged in fighting the regime directly will be allowed to enter the zone and train there, or only those US-trained and equipped rebels focused on Isis. US officials have been keen to note that Assad’s forces have thus far yielded to American airstrikes elsewhere in Syria – choosing not to use their air defense system and avoiding areas the US is targeting - but that is no guarantee that they would refrain from attacking opposition groups sheltering inside a safe zone.”

The plan is just another step in the current U.S. approach to Syria, which has been haphazard and ill-thought out. The United States is engaged in fighting ISIS while most fighters on the ground want to fight the Assad regime, a key reason for the abysmal recruitment record of the U.S. military’s new train-and-equip programs in Syria. Increased U.S. involvement in Syria risks our involvement in another costly, open-ended civil war.

Renewed diplomatic efforts to find a settlement are the only way to effectively address the Syrian crisis. A negotiated settlement which sees Assad removed from power - while allowing some of his followers to participate in a unified Syrian government - would allow fighters inside the country to focus on fighting ISIS, while ensuring that Syria’s minorities are not entirely disenfranchised.

A successful diplomatic settlement will be difficult to achieve. Negotiations would by necessity involve other unpleasant states, including Assad’s Iranian and Russian patrons. But there have been recent indications that Moscow may be more willing to talk, and the ties forged during the U.S.-Iranian nuclear talks could prove valuable. The United Nations is once again trying to restart talks, an initiative the United States should support wholeheartedly. Nonetheless, diplomacy is infinitely better than the slippery slope to military intervention offered by this week’s agreement with Turkey.

You can find the whole article at the Guardian here. For more thoughts on how a U.S. diplomatic strategy for Syria might work, check out this podcast.

July 30, 2015 12:13PM

Taking Another Look at the Cecil the Lion Story

There is something fishy about Cecil the lion story. Don’t get me wrong, I find trophy hunting nauseating. Still, why on earth would Walter Palmer pay $50,000 to kill a lion? Per capita GDP in Zimbabwe is $936 per year (2014 dollars). If Palmer wanted to do something illegal, he could have killed a lion for fraction of the price. (I assume that any lion would do. Palmer happened to get “unlucky” and kill the most famous lion in Zimbabwe.)

Goodness knows that magnificent wild animals get slaughtered throughout Zimbabwe – for food, skin and horns – on a daily basis and for free. The culprits include hungry locals, corrupt parks officials, members of the military and government officials. It is very likely that Palmer believed (or wanted to believe) that he was buying a legal kill and outsourced the details (permits, etc.) to the locals. That does not make Palmer innocent. He should have known better than go on a safari to a failed state – with no property rights and the rule of law. That said, the story should be understood in the proper context: it is not individual hunters, but poverty and corrupt government that are destroying Zimbabwe’s wildlife.

For more on this, see my article in the Financial Times here.

July 30, 2015 10:24AM

India’s Faltering Economic Revolution: Lost Opportunity, Lost Future

Last year Narendra Modi won an unusually strong majority in India’s parliamentary election. Modi subsequently visited the U.S. and was warmly welcomed by both the Obama administration and Indian-Americans.

Although ethnic Indians circled the globe as entrepreneurs and traders, the Delhi government turned dirigiste economics into a state religion. Mind-numbing bureaucracies, rules, and inefficiencies were legion.

Eventually modest reform came, but even half-hearted half-steps generated overwhelming political opposition. Last May the Hindu nationalist Bharatiya Janata Party, led by Modi, handed the venerable Congress Party its greatest defeat ever. He seemed poised to transform his nation economically.

As the anniversary of that visit approaches, the Modi dream is fading. He simply may not believe in a liberal free market.

Moreover, few reforms of significance have been implemented. The failures overshadow the Modi government’s successes and highlight its lost opportunities. Critics cite continuing outsize budget deficits and state direction of bank lending.

Former privatization minister Arun Shourie observed last December: “when all is said and done, more is said than done.” Unfortunately, Modi has missed the “honeymoon” period during which his political capital was at its greatest. Time is slipping away.

Indeed, Indian politics quickly began shifting back to business as usual. Modi has been forced to fend off charges of corruption and other misbehavior.

None of this is unusual by Indian standards, but voters are getting fed up. Disappointed Delhi voters gave a landslide victory to a new anti-corruption party in February.

Religious violence also is on the rise, largely instigated by Hindu extremists. While serving as Gujarat state’s chief minister, Modi was implicated in the 2002 riots which killed more than 1200 people, mostly Muslims. Since his election sectarian attacks are up, on Christians as well as Muslims.

Modi has not encouraged the rising violence, but his government has catered to Hindu nationalist sentiments. Only after an assault on a Christian school—the vast majority of whose students and teachers are Hindus—did he promise that his government would give “equal respect to all religions.”

Sectarian violence obviously harms innocent Indians. It also provides foreign investors another reason to go elsewhere.

Despite his disappointing economic record so far, Modi still has an opportunity to liberalize India’s economy. In upcoming years his party will take control of the appointive upper house, which has impeded some of his initiatives.

Argued Sadanand Dhume of the American Enterprise Institute, “in Gujarat, too, he started slowly, but ended up presiding over a long boom.” However, it is not enough for his government to tinker with nonessential reforms.

On Dhume’s to-do list are tax reform, privatization, subsidy cuts, and electricity restructuring, India also should limit government spending, liberalize its labor rules, simplify the visa process, modernize bankruptcy procedures, streamline legal processes, and strengthen private property rights.

As I point out on Forbes online: “India desperately needs strong growth for years, even decades, to move to the first rank of nations, as China has done. India has extraordinary potential. But for decades the Indian government has squandered its future.”

Despite the high hopes generated after the BJP’s dramatic victory, nothing has really changed. While growth has picked up in India, that improvement is not sustainable absent far more fundamental and comprehensive reform.

Without sustainable growth, India will not follow China’s example to build a competitive manufacturing sector, generate broad-based income growth, and create a new great power capable of influencing global affairs. Such reforms will not be easy, but making tough decisions presumably is why the Indian people elevated Modi.

Some people predict the 21st Century will be the Chinese century. It is more likely to be the Asian Century, at least if Narendra Modi takes advantage of his unique opportunity. Leading India into a better, more prosperous future obviously would benefit India and the Indian people. It also would benefit the rest of the world.