Archives: 12/2016

You Ought to Have a Look: Climate Fretting and Why It’s Unjustified

You Ought to Have a Look is a regular feature from the Center for the Study of Science. 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.

While “climate fretting” has become a pastime for some—even more so now with President-elect Trump’s plans to disassemble much of President Obama’s “I’ve Got a Pen and I’ve Got a Phone”-based Climate Action Plan—climate reality tells a much different story.

For example, a new analysis by Manhattan Institute’s (and YOTHAL favorite) Oren Cass looks into the comparative costs of climate changevs. climate action. His report, “Climate Costs in Context” is concise and to-the-point, and finds that while climate change will impart an economic cost, it is manageable and small in comparison to the price of actively trying to mitigate it. Here’s Oren’s abstract:

There is a consensus among climate scientists that human activity is contributing to climate change. However, claims that rising temperatures pose an existential threat to the human race or modern civilization are not well supported by climate science or economics; to the contrary, they are every bit as far from the mainstream as claims that climate change is not occurring or that it will be beneficial. Analyses consistently show that the costs of climate change are real but manageable. For instance, the prosperity that the world might achieve in 2100 without climate change may instead be delayed until 2102. [emphasis added]

In other words, the economic impacts of climate change aren’t something worth fretting over.

Venezuela: On the Simple Arithmetic of Inflation

As the Venezuelan bolivar collapses, the hype about Venezuela’s alleged hyperinflation becomes more intense. Most of the commentary is literally fantastic, suggesting that the authors are unfamiliar with the subject of hyperinflation and the arithmetic of inflation.

For example, DolarToday.com – which publishes reliable black-market exchange rate data, as well as the Johns Hopkins-Cato Institute annual inflation estimates – claims that the bolivar has depreciated by over 100 percent this month. This is wrong because DolarToday’s arithmetic is wrong. DolarToday’s mistake represents a common error. It fails to transform the bolivar-U.S. dollar exchange rate into dollars and cents. At the start of the month, the VEF/USD black market rate was 1,501.17, and as of November 29th, it was 3,744.52. The correct arithmetic to calculate the deprecation of the bolivar between those two dates is ((1/3,744.52) - (1/1,501.17)) / (1/1,501.17) = 59.9 percent  depreciation. 

The accompanying charts illustrate the correct arithmetic and the linkage between black market exchange rates and annual inflation rates. For Venezuela’s inflation to hit the International Monetary Fund’s (IMF) 720 percent inflation forecast for 2016, the bolivar would need to depreciate by 44 percent from today’s rate of 3,744 to 6,735 VEF/USD. Furthermore, for Venezuela to hit hyperinflation, which is an annual inflation rate of 12,875 percent, the bolivar would need to collapse by 97 percent from today’s rate to 106,565 VEF/USD. 

The Quality of China’s Yuan Deteriorates – In One Chart

During the past year, the Chinese yuan (CNY) has shed a bit more than 7 percent of its value against the greenback. That’s only one aspect of the CNY’s weakness. Another concerns the quality of the CNY.

As Jerry Jordan pointed out recently at the Cato Institute’s 34th Annual Monetary Conference, a central bank is a balance sheet. Among other things, the People’s Bank of China’s balance sheet contains information that indicates the quality of the CNY.

While the monetary liabilities (read: monetary base) of the bank have remained rather constant since late 2014, their composition has changed. The assets, which are the counterparts to the monetary liabilities, have changed dramatically. The net foreign assets have fallen and been replaced by net domestic assets. In consequence, the quality of the CNY has deteriorated. In this light, the recent tightening of China’s capital controls on outbound foreign investment is nothing more than an attempt to preserve foreign exchange and reverse the deterioration in the CNY’s quality.  

Trump’s $10 Trillion Infrastructure Plan

President-elect Donald Trump has promised large increases in infrastructure investment. He has not proposed a detailed plan yet, but $1 trillion in new investment is being discussed as a target.

Actually, Trump has already made a specific proposal that would increase investment by far more than $1 trillion: his tax cut plan. His proposed corporate tax rate cut from 35 percent to 15 percent would increase the net returns to a vast range of infrastructure, including pipelines, broadband, refineries, power stations, factories, cell towers, and other hard assets. With higher net returns, there would be more capital investment across many industries.

How much more? The Tax Foundation estimated that the overall Trump tax cut would expand the U.S. capital stock by 20 percent above what it would otherwise be within 10 years. TF economists tell me that private capital stock is about 189 percent of gross domestic product under the baseline, which would be about $35 trillion this year and more than $50 trillion in 2026. If the Trump tax cut was enacted and the capital stock grew as TF projects, the capital stock would be $10 trillion or more higher than otherwise by 2026.

The Carrier Approach Will Fail to Attract or Retain Investment and Production in the United States

Media and social media have been percolating – mostly with invective – over President-elect Trump’s “deal” to keep Carrier and its 1,000 jobs from moving to Mexico.  I am among the many critics of this ad hoc, interventionist approach to retaining or attracting companies to perform value-added, job-creating activities in the United States.
 
But there is a broader lesson in all of this, which seems to be getting overlooked: The United States (and the 50 states, individually) is competing with the rest of the world to attract and retain investment in value-added activities – factories, research centers, laboratories, etc. And, in that competition, public policies are on trial.
 
The revolutions in communications and transportation have made global capital mobile. The proliferation of transnational supply chains and cross-border investment means that businesses – entrepreneurs and other value-creators – have options like never before. Investment and production location decisions are determined by a variety of factors, including: the size of the market, access to transportation networks, wages and skills of the workforce, whether there is healthy respect for the rule of law, stability of the political and economic climates, perceptions of corruption, the magnitude and impact of regulations and taxes, trade policies, immigration policies, energy policies, and whether the general policy environment is conducive to running a successful business.
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Will Mattis Be a Voice of Caution at the Pentagon?

“We are going to appoint ‘Mad Dog’ Mattis as our secretary of defense,” President-elect Donald Trump told a crowd in Cincinnati last night. He added, “They say he’s the closest thing to Gen. George Patton that we have.”

To be successful, James Mattis will also have to be this generation’s George Marshall, and perhaps its Dwight Eisenhower and George Washington, too.

Upcoming Cato Discussion on China’s Role in Dealing with North Korea

The United Nations Security Council has approved another round of sanctions against North Korea in response to its latest nuclear test. No one really believes that the new penalties, focused on Pyongyang’s coal and other exports, will have any effect. In fact, it is doubtful that China, which purchases most of the North’s goods, will fully enforce the new resolution.

Still, with most policymakers giving up any hope that the so-called Democratic People’s Republic of Korea will voluntarily negotiate away its nuclear program, Beijing remains the best option for constraining the DPRK’s nuclear ambitions. The People’s Republic of China so far has refused to play its assigned role, but Washington continues to press the PRC to act.

Getting Beijing to take strong action against North Korea is a long-shot, as I explain in an upcoming Policy Analysis, but worth serious effort by Washington. What that would involve is the subject of a forum at Cato at noon on December 8. Susan Glaser of the Center for Strategic and International Studies and Scott Snyder of the Council of Foreign Relations will join me in a panel discussed moderated by Cato Vice President Christopher Preble to discuss the challenges and possibilities of engaging China over the issue.

One thing is clear. Washington and its East Asian allies need to persuade rather than demand that the PRC act. How best to convince Beijing, and what mix of carrots and sticks would be most effective in doing so, will be among the issues discussed on the 8th. I hope you can join us: the details, including where to RSVP, are included here.