Archives: 04/2018

The Department of Labor Determines that ESG Efforts are not in the Fiduciary Best Interests of Investors

For the last few years a number of financial managers have been spending increasing resources to prod the companies they invest in to adopt more environmentally conscious and socially aware policies in their businesses. Many publicly-held corporations have had to deal with multiple shareholder resolutions annually intended to force them to adopt more socially or environmentally aware perspectives. Other investment fund managers have begun voting their proxies in favor of such shareholder resolutions, while taking other actions to encourage what they deem to be more socially salutary behavior.

However, there is an inherent conflict in such resolutions coming from investors: after all, the inevitable result of a corporation bowing to a proxy vote and prioritizing such activities is that it would reduce its profits–a bad thing for those who hold stock in the company.

Not so fast, say the activists driving this movement: while they may be pushing companies to pursue environmentally and socially responsible activities for their own political goals, they aver that such actions actually make good business sense as well, and that these will ultimately increase the profits of these companies. One oft-used rationale for resolutions pertinent to climate change is that these actions improve the long run sustainability of the company, which rational shareholders will value and thus will be reflected in the stock price.

While the firm-as-pure-profit-maximizer may be a perspective that fails to capture the complexity that is today’s multinational corporation, the notion that investor activists are somehow doing shareholders a favor and helping corporations correct a blind spot in their vision is absurd, and earlier this week the Department of Labor finally declared that to be the case.

The DOL declared that financial managers can no longer justify pushing environmentally or socially beneficial investments on the grounds that they are inherently beneficial for shareholders. Specifically, it wrote that:

“fiduciaries may not sacrifice returns or assume greater risks to promote collateral environmental, social, or corporate governance (ESG) policy goals when making investment decisions.”

The Labor Department’s actions effectively make it more difficult for activists to pursue social policy via proxy battles, which is precisely how it should be. Such efforts represent nothing less than an attempt to effectively tax the retirement wealth of savers to advance a political agenda.

Leland Yeager, R.I.P.

The world has lost one of its greatest monetary economists ever: Leland Yeager (b. 1924) has passed away, and boy will I miss him.

Leland’s writings on monetary economics taught me a big chunk of all that I know about the subject. Among other things, they gave me a better understanding of just what “money” means; of what banks do and why it matters; of how changes in the price level clear the market for money balances (and why those changes can take time, giving rise to bouts of “monetary disequilibrium”); and of how various international monetary arrangements can either aggravate or limit the extent of such disequilibrium.

Beyond matters of strict economics, Leland taught me — by example mainly — the importance of clear writing, and of steering clear of such enervating impediments to good scholarship as excessive preoccupation with one’s “methodology” or exclusive devotion to any one school of economic thought.

But mostly I will miss Leland simply because, besides being a kindred spirit, he was one of my all-time favorite human beings. Although it has now been many years since I last spent time with him, we corresponded regularly until recently, and I remember our past encounters with great affection. Leland was simply a blast to be with, and all the more so if the occasion involved plenty of good food and wine, for which he had a fine appreciation (and, in the case of wine, an apparently unlimited tolerance).

Kim Jong-un’s New Line and U.S. Negotiating Strategy

If President Trump wants to have a successful summit with Kim Jong-un then it’s important to understand the domestic political incentives that will shape Kim’s approach to negotiations. On April 20th, Kim gave a major speech at a plenum meeting of the Workers’ Party of Korea. Most U.S. media outlets focused on the announcement that the North would dismantle its nuclear testing facility and stop ballistic missile tests, but the speech also revealed important information about Kim’s political incentives that received less attention.

During a plenum meeting in March 2013, Kim announced the byungjin line,” which stated that the North would develop its economy and nuclear arsenal simultaneously. North Korea’s nuclear weapons program has made significant progress in the five years since the byungjin line was first announced. Kim acknowledged this progress in his April 20th speech when he declared that the byungjin line was successfully concluded. He also announced a “new strategic line” that focuses on economic and scientific development.

The end of the byungjin line and announcement of a new overarching strategy for North Korea shortly before the Trump-Kim summit has major implications for the Trump administration’s negotiating strategy.

The April 20th speech indicates that Kim’s primary objective in negotiations will be getting sanctions relief, because lifting sanctions is essential for achieving the economic development objective of the new strategic line. The new line may partially explain why the North has not demanded U.S. troop reductions in the lead-up to the summit. Pyongyang would rather not have a U.S. military presence on the Korean peninsula, but the troop presence does not greatly affect North Korea’s economic development so their removal is not necessary to achieve the new strategic line.

The Trump administration could use sanctions relief in a couple different ways depending on its overall negotiating strategy. For example, the United States could offer small concessions on sanctions relief in exchange for incremental progress on denuclearization in a tit-for-tat process. Such an approach would incentivize Kim to stay at the negotiating table over a longer period of time, but it would probably not produce any big, short-term wins for the Trump administration. Another approach entails standing firm on sanctions and not loosening them until the North takes major steps toward denuclearization. This would give the United States more leverage than the tit-for-tat approach, but Kim may be less willing to do what the United States demands without some other kind of concessions.

Coordination with U.S. allies and China will take center stage if sanctions relief is a more important issue to Kim than security guarantees. There are two main types of sanctions against North Korea. The United States, Japan, and South Korea have implemented several rounds of unilateral sanctions, while the UN Security Council has its own set of sanctions. The Trump administration was able to get China’s support for strong UN sanctions in 2017 as part of its maximum pressure strategy.

If the Trump administration wants to withhold sanctions relief to pressure Kim to take big steps towards denuclearization then it will have to coordinate with other sanctioning parties. Japan will likely stay in lockstep with the United States, but keeping South Korea and China on board could be more challenging. Seoul and Washington appear to be on the same page right now, but maintaining close coordination may prove difficult if the Moon Jae-in administration faces pressure to make some concessions on its unilateral sanctions during the inter-Korean summit. Maintaining China’s support for UN sanctions could also prove difficult because of the recent downturn in the US-China economic relationship.

Kim’s April 20th speech warrants very close consideration by the Trump administration. The end of the byungjin line marks the start of a new period for North Korea. Kim’s nuclear weapons are still important to him, but the speech indicates shifting domestic political incentives that will play an important role in negotiations with the United States. As the Trump administration crafts their negotiating strategy for the Trump-Kim summit they should keep Kim’s domestic incentives in mind and do their best to use these incentives to their advantage.

Pretextual Stops and the General Warrant: Stopping the March of the Whren Doctrine

The specific language of the Fourth Amendment was largely a product of the colonists’ experience with the noxious institution of the general warrant. Historically, general warrants—and specifically, writs of assistance—gave law enforcement broad discretion to search wherever and whatever they deemed necessary, without the need to establish specific probable cause before a judicial officer. Such broad discretion enabled abusive, selective enforcement, and the colonists’ contempt for those arbitrary practices was a major cause for the Revolutionary War itself.
But 227 years after ratification of the Fourth Amendment, we are tragically approaching a stealth resurrection of the general warrant, in the form of pretextual stops. In Whren v. United States, 517 U.S. 806 (1996), the Supreme Court held that the actual intent of law enforcement officers in making a stop—even unlawful intent, like racial discrimination—is irrelevant to the legality of a traffic stop under the Fourth Amendment, so long as there is probable cause to believe that some traffic violation occurred. The practical effect of this decision has been to give police officers nearly unfettered discretion to stop any person they choose at any time. After all, no one can actually operate a motor vehicle for an extended period of time without running afoul of some traffic law. Especially when combined with other areas of Fourth Amendment law that create expansive exceptions to the warrant requirement, Whren itself has already been described as the “twentieth-century version of the general warrant.”
But if that were not bad enough, the Seventh Circuit, in an en banc decision, recently extended the Whren doctrine even to parking violations—and effectively, to any and all fine-only offenses, no matter how trivial. Especially in light of the rampant state of overcriminalization in our country today, that move represents an endorsement of the general warrant in all but name. We have so many criminal laws today that we cannot even count them all, and states routinely regulate a huge swath of generally harmless conduct that regular citizens engage in every day. If violation of any regulation whatsoever is sufficient to justify a police stop (regardless of whether that regulation was actually the motive behind the stop), then police can, in effect, stop anyone they want to. The Cato Institute has therefore filed an amicus brief urging the Supreme Court to grant cert in this case, reverse the Seventh Circuit, and reconsider the Whren doctrine entirely.

Nicaragua and the Irony behind its Orthodox Economic Policies

Nicaragua is in flames as the 11-year-old kleptocracy of Daniel Ortega is rocked by massive protests that threaten its continuity. The unrest began after the government announced some adjustments to its bankrupted social security system. Ironically, for a self-proclaimed socialist who constantly rails against U.S. imperialism, Ortega was implementing the recommendations of the International Monetary Fund (IMF).

Ortega’s second spell in power has been quite the puzzle. He was a fervent supporter of the late Hugo Chávez and continues to be one of Venezuela’s most vocal allies in Latin America. Huge billboards that portray Nicaragua as “Christian, Socialist, and Solidary” greet visitors to Managua. Yet the economic policies of the Ortega regime are among the most orthodox in Latin America: inflation is relatively low (5.7% in 2017), the projected fiscal deficit for 2018 is just 1.1% of GDP, and economic growth has averaged 4.2% per year in the last decade. Nicaragua boasts free trade agreements with the United States and the European Union. In January, Standard & Poor’s highlighted Nicaragua’s “track record of steady GDP growth and pragmatic economic policies, its low fiscal deficits, and moderate government debt burden.” Moreover, in 2016 the IMF closed its office in Managua because of “Nicaragua’s success in maintaining macroeconomic stability and growth.” Not bad for a left-wing populist.

Since coming back to power in 2007, Ortega kept his revolutionary rhetoric but dropped his socialist economic policies of yore. He reached an understanding with the business sector: Ortega would guarantee macroeconomic stability and a good environment for private investment in exchange for allowing him to dismantle Nicaragua’s democratic institutions and impose a corrupt dynastic dictatorship. The business community acquiesced.

That is the irony about what triggered the protests: Faced with the imminent insolvency of the social security system, Ortega had several options. The easiest for a populist would have been to make up the shortfall by printing money. That would have fueled inflation, but Ortega could have blamed it on external factors—just as Nicolás Maduro does in Venezuela. Instead, Ortega decided to follow the IMF recommendations of increasing payroll taxes and cutting pension benefits. That is certainly less irresponsible than debasing the currency.

In fairness, the adjustments to the social security system were the straw that broke the camel’s back. Nicaraguans reacted to years of widespread corruption and nepotism. The heavy-handed way in which the regime handled the first bouts of unrest—by suspending independent TV channels and violently cracking down on demonstrators—just fueled the protests. Nicaragua’s turmoil is no longer about the controversial adjustments to social security—which Ortega called off anyway. It is about the massive corruption of the Ortega regime and the legitimate aspiration of many Nicaraguans to live in a democratic country with more or less decent institutions.

It is quite ironic that Ortega was elected as a left-wing populist but rules as an economic centrist who closely follows the advice of international financial institutions. The protests in Nicaragua show that macroeconomic stability without democracy, transparency and political freedoms is neither desirable nor sustainable.

Some More Insensitivity about Global Warming

Hot off the press, in yesterday’s Journal of Climate, Nic Lewis and Judith Curry have re-calculated the equilibrium climate sensitivity (ECS) based upon the historical uptake of heat into the ocean and human emissions of greenhouse gases and aerosols. ECS is the net warming one expects for doubled atmospheric carbon dioxide. Their ECS ranges from 1.50 to 1.56 degrees Celsius.

Nic has kindly made the manuscript available here, so you don’t have to shell out $35 to the American Meteorological Society for a one-day view.

The paper is a follow-on to their 2015 publication that had a median ECS of 1.65⁰C. It was criticized for not using the latest-greatest “infilled” temperature history (in which less-than-global coverage becomes global using the same data) in order to derive the sensitivity. According to Lewis, writing yesterday on Curry’s blog, the new paper “addresses a range of concerns that have been raised about climate sensitivity estimates” like those in their 2015 paper.

The average ECS from the UN’s Intergovernmental Panel on Climate Change (IPCC) is 3.4⁰C, roughly twice the Lewis and Curry values. It somehow doesn’t seem surprising that the observed rate of warming is now running at about half of the rate in the UN’s models, does it?

Lewis and Curry’s paper appeared seven days after Andrew Dessler and colleagues showed that the mid-atmospheric temperature in the tropics is the best indicator of the earth’s energy balance. This means that any differences between observed and forecast midatmospheric temperatures there can be used to adjust the ECS.

Late last year, University of Alabama’s John Christy and Richard McNider showed that the observed rate of warming in the tropical mid-atmosphere is around 0.13⁰C/decade since 1979, while the model average forecast is 0.30⁰C/decade. This adjusts down the IPCC’s average ECS to the range of 1.5⁰C (actually 1.46⁰).

That’s three estimates of ECS all in the same range, and all approximately half of the UN’s average. 

It seems the long-range temperature forecast most consistent with these findings would be about half of what the IPCC is forecasting. That would put total human warming to 2100 right around the top goal of the Paris Accord, or 2.0⁰C.

Stay tuned on this one, because that might be in the net benefit zone.

Still No Crisis At the Border

This month, Attorney General Jeff Sessions announced that the Department of Justice would institute a “zero-tolerance policy” along the Southwest border, stating that he wants to criminally prosecute 100 percent of all illegal entries. Sessions claimed that “a crisis has erupted at our Southwest Border that necessitates an escalated effort to prosecute those who choose to illegally cross our border.” Yet the “crisis” amounts to a flow of illegal immigration 96 percent lower than the level in the 1980s and lower than just two years ago.

Because we cannot know how many border crossers actually evade capture, the best measure of illegal entries is the number of crossers that Border Patrol apprehends. Of course, more agents results in more apprehensions for the entire Border Patrol, which is why it is important to control for the effect of enforcement, focusing on the number each agent arrests. More attempted crossings generally translate into more apprehensions for the average agent. Figure 1 presents the average number of monthly apprehensions along the Southwest border per Border Patrol agent. The average apprehensions per agent in a month in Fiscal Year 2018 was less than 2—which is 95.5 percent lower than the rate in the peak year of 1986.

Figure 1: Average Monthly Southwest Apprehensions Per Border Patrol Agent, FY 1980 to FY 2018


Source: Agents—Border Patrol & TRAC; Apprehensions—Border Patrol (1980-2017 & 2018)

The 1.9 average monthly apprehension rate for each agent so far for 2018 is exactly the average rate for the last decade. How does the Department of Justice find a crisis in these figures? It states, “the Department of Homeland Security reported a 203 percent increase in illegal border crossings from March 2017 to March 2018.”

To show why comparing one month in 2018 to the same month in 2017 is misleading, Figure 2 compares the first six months of each fiscal year since 2010. I bolded FY 2018 in black just so that it is visible among the thicket of near parallel lines. It is obvious that FY 2017 (orange), not 2018, is the abnormal year. Every other year followed the same pattern: lower apprehensions in the fall and winter, higher apprehensions in the spring and summer. 2017 broke this pattern. People came in higher numbers in the fall and winter of FY 2017—i.e. October 2016 to February 2017—while fewer came in the spring of 2017. Now the pattern has simply returned to normal.

Figure 2: Average Southwest Apprehensions Per Border Patrol Agent by Month, FY 2010 to FY 2018

Source: Border Patrol (agents); Apprehensions—Border Patrol (2010-2017 & 2018)

This fits with the hypothesis that I proposed last August: that Trump’s campaign rhetoric had a major effect on border crossings. People moved up their travel plans to hedge against the possibility that President Trump would institute major reforms to border security. In other words, Trump caused an increase in illegal immigration starting before the election and a decrease after his inauguration, but no net change in total arrivals. I predicted that the prior trend would return once migrants and asylum seekers realized that the hype was overblown. This is exactly what has happened.

Sessions should not use the anomalous months of 2017 to argue that the border crossings in 2018 are at “crisis” levels. There is simply no evidence to support this view.