TT's Lost in Tokyo — by TokyoTom

[Update:  Links fixed]

Bloomberg reported on March 6 that Former Fed Chairman Paul Volker, in proposals to the Obama administration regarding financial regulatory reform that were included in a January report he wrote with the “Group of 30”, commented that:

the financial industry’s problems stem from larger issues. “I don’t think this is just a technical problem, it’s a societal problem,” he said. He cited bankers on Wall Street receiving multimillion-dollar bonuses for engineering failed mergers.

“There’s something wrong with the system,” Volcker said. “What are the incentives, what’s going on here?”

 But it seems that Volker can`t quite put his finger on the core of the moral hazard problem.  Do any of my readers have any ideas?

The March 6 Financial Times has a great piece by Willem Vuiter, professor at the LSE and former chief economist of the EBRD, that completely rips the Fed`s bailout of AIG`s credit default swap counterparties, as emblembatic of the epidemic of moral hazard that has rotted out our financial system. 

Vuiter doesn`t focus on the dynamics that led to the problem (limited liaibility by shareholders, which has led to a vacuum in risk management, as no one had enough “skin in the game”), but correctly notes that the Fed`s actions incentivize further irresponsiblity – and that the Fed and Congress themselves don`t have enough skin in the game, as they are playing with taxpayer money, not their own.

The article is worth reading in whole; here are excerpts of the parts that resonated most with me (emphasis mine):

The reports on the evidence given by the Vice Chairman of the Federal Reserve Board, Don Kohn, to the Senate Banking Committee about the Fed’s role in the government’s rescue of AIG, have left me speechless and weak with rage.  AIG wrote CDS, that is, it sold credit default swaps that provided the buyer of the CDS (including some of the world’s largest banks) with insurance against default on bonds and other credit instruments they held.  Of course the insurance was only as good as the creditworthiness of the party writing the CDS.  When it was uncovered during the late summer of 2008, that AIG had nurtured a little rogue, unregulated investment banking unit in its bosom, and that the level of the credit risk it had insured was well beyond its means, the AIG counterparties, that is, the buyers of the CDS, were caught with their pants down.

Instead of saying, “how sad, too bad” to these counterparties, the Fed decided (in the words of the Wall Street Journal), to unwind “.. some AIG contracts that were weighing down the insurance giant by paying off the trading partners at the full value they expected to realize in the long term, even though short-term values had tumbled.”

An LSE colleague has shown me an earlier report in the Wall Street Journal (in December 2008), citing a confidential document and people familiar with the matter, which estimated that about $19 billion of the payouts went to two dozen counterparties between the government bailout of AIG in mid-September and early November 2008. According to this Wall Street Journal report, nearly three-quarters was reported to have gone to a group of banks, including Société Générale SA ($4.8 billion), Goldman Sachs Group ($2.9 billion), Deutsche Bank AG ($2.9 billion), Credit Agricole SA’s Calyon investment-banking unit ($1.8 billion), and Merrill Lynch & Co. ($1.3 billion).  With the US government (Fed, FDIC and Treasury) now at risk for about $160 bn in AIG, a mere $19 bn may seem like small beer.  But it is outrageous.  It is unfair, deeply distortionary and unnecessary for the maintenance of financial stability.

Don Kohn ackowledged that the aid contributed to “moral hazard” – incentives for future reckless lending by AIG’s counterparties – it “will reduce their incentive to be careful in the future.” But, here as in all instances were the weak-kneed guardians of the common wealth (or what’s left of it) cave in to the special pleadings of the captains of finance, this bail-out of the undeserving was painted as the unavoidable price of maintaining, defending or restoring financial stability. What would have happened if the Fed had decided to leave the AIG counterparties with their near-worthless CDS protection?

“I’m worried about the knock- on effects in the financial markets. Would other people be willing to do business with other U.S. financial institutions…if they thought, in a crisis like this, they might have to take some losses?”

Let’s step back a minute and ponder this.  US banks and shadow-banks (like AIG’s Financial Products Division) took on excessive leverage and excessive risk.   There was not only too much careless lending by US banks, there was too much careless lending to US banks.  When this crisis is over and when, in the fullness of time, the real economy has recovered, we want to see less lending by and to US banks than we saw in the years 2004 – 2006.  How do we get those who provided US banks and other financial institutions with too much funding at too low a cost to behave with greater prodence and caution in the future? Presumably by making sure that they pay the price for there (sp) reckless financial decisions.  The counterparties of AIG who had been unwise enough to buy insurance against default on debt instruments they held, by acquiring CDS written by AIG should have been told to eat it. …

Unless the counterparties pay the full price for their hubris and recklessness, they will be back for more.  It is therefore tragic that central banks and governments everywhere are going out of their way to protect and shelter the unsecured creditors of the banks (holders of junior and senior debt among them), by raiding the tax payer or the credit and reputation of the central bank.  Significant mandatory debt-to-equity conversions and large write-downs of (haircuts on) the claims of other unsecured creditors should be an integral part of any financial assistance package. …

While the demise of Lehman and the destruction of most of its unsecured creditors was an unnecessary surprise, it was still the best option available to the authorities, given the absence of an SRR [Special Resolution Regime].  Markets and market participants are educated only by painful example.

The cardiac arrest followed the realisation, well after Lehman went kaput, that (1) most of the internationally recognisable US banks were insolvent or would be but for past, present and anticipated future government financial support; that (2) many other non-bank financial institutions (AIG) and shadow-financial institutions (GE) were either insolvent or at death’s doorstep; and that (3) the government was not on top of the issues and the Congress was deeply divided and irresponsible.

The logic of collective action teaches us that a small group of interested parties, each with much at stake, will run rings around large numbers of interested parties each one of which has much less at stake individually, even though their aggregate stake may well be larger.  The organised lobbying bulldozer of Wall Street sweeps the floor with the US tax payer anytime.  The modalities of the bailout by the Fed of the AIG counterparties is a textbook example of the logic of collective action at work.  It is scandalous: unfair, inefficient, expensive and unnecessary.

Well said!

[Somehow
most of my excerpts of Tillerson`s speech weren`t included in my first try; there`re here
this time.]

It may still seem novel to some, but Exxon
Mobil Corporation began throwing its weight behind carbon pricing
policies more
than two years ago, 
Subsequently, Rex
Tillerson, Exxon`s Chairman and CEO, has
given a
number of speeches on
Exxon`s actions (and cost savings) in reducing its own GHG emissions, its
investments in energy technologies that further improve energy efficiency and
GHG efficiency, and Exxon`s views on climate risks and preferred policy
options.  Why is this worth mentioning?  Simply, Exxon is an
excellent, well-run company that knows the energy business and climate risks
well (its scientists have been sitting on the IPCC panels fromtheir inception),
so it has some credibility (in this vein, Rob Bradley`s MasterResource
“free-market” energy blog has a post up todaｙ,
similarly remarking on Exxon`s credibility as well-run, principled and
“the consumer’s friend and the taxpayer’s friend;” Rob just
conveniently fails to mention Exxon`s pro carbon-tax stance).

Tillerson made another such speech on February 17, on the occasion
of a visit to the Stanford
University-centered Global
Climate and Energy Project (GCEP), the world`s largest privately-funded
effort to conduct basic research on energy technologies that will further
reduce GHG emissions.  Exxon has has committed $100 million to
GCEP over ten years and has been the lead funder of GCEP since its
establishment in December 2002.  The punchline of Tillerson’s remarks?

“It
is rare that a business lends its support to new taxes. But in this
case, given the risk-management challenges we face and the alternatives
under consideration, it is my judgment that a carbon tax is the best
course of public policy action. And it is a judgment I hope others in
the business community and beyond will come to share.”

Tillerson`s
full speech here is worth a look; I excerpt a few portions below – climate
policy comments are largely at the end (emphasis added):

GCEP’s research program, like ExxonMobil’s, is shaped to fit the contours of what has been termed the “grand challenge” before us. It is, in fact, a dual challenge — supplying the energy essential to global economic growth, while at the same time reducing greenhouse gas emissions and managing the risks of climate change. …

However, the world economy will recover. History shows that human ingenuity and productivity cannot long be suppressed. And when the world economy recovers, so will world energy demand.

Growing populations in developing countries who are seeking higher standards of living will drive this increased energy demand, which is expected to be 35 percent higher in the year 2030 than it was in the year 2005, despite the current and temporary economic conditions.

Meeting this growing long-term societal demand requires that we develop all economic and environmentally sound sources of energy. This includes hydrocarbon energy sources like oil and natural gas, which are abundant, available, versatile and affordable.

Huge investments over many decades have enabled oil and natural gas to meet close to 60 percent of the world’s enormous energy needs today, and projections are that oil and natural gas will account for a majority of the world energy demand through at least the year 2030. They are simply indispensable and irreplaceable at scale.

This global energy demand challenge is matched by a global environmental challenge — curbing greenhouse-gas emissions and addressing the risks of climate change. Thanks to greater energy efficiency and growing use of cleaner energy such as natural gas for power generation, greenhouse-gas emissions levels are expected to decline in some developed economies. …

The challenge for developing economies is more daunting, where energy demand is increasing as growing populations strive for higher standards of living. For example, by the year 2030, China’s carbon-dioxide emissions will be comparable to those of the United States and Europe combined — even recognizing that China’s energy use and emissions will be much lower on a per-capita basis — rising from 4 metric tons per capita in 2005 to 5.8 metric tons per capita in 2030.

Nonetheless, the net effect of these countervailing trends will be a sizeable increase in greenhouse-gas emissions worldwide. Even with dramatic gains in efficiency, rising demand for energy will continue to push related carbon-dioxide emissions higher through the year 2030 — an increase of 28 percent from the year 2005. …

To develop these integrated solutions, we will need to find the best ways to unlock new technology. Energy innovation — led by private enterprise, furthered by independent research, spread by free markets, and supported by sensible and stable public policy — will be essential to enabling us to achieve each of these aims. It is the key to a more prosperous, more secure, and more sustainable energy and environmental future.

It is important to remember, however, that gains in efficiency and technology occur over time.

The most dramatic changes will not happen overnight, due to the sheer complexity of the technologies we develop and the enormous scale of the global energy market. Technological transformation takes time.

The history of energy over the last century helps put such transformation into perspective. For example, it is estimated that at the beginning of the 20th century, coal and wood provided more than 95 percent of the world’s energy needs. From that point, it took more than half a century for petroleum — a cleaner and more versatile alternative — to surpass coal as the world’s largest energy source. It took nearly 50 years more to develop the technologies and build the global infrastructure so that natural gas, an even cleaner-burning source, could play a sizable role in the world’s energy mix.

This reality about timeframes is another reason why we need energy policies that allow for long-term planning and consistent, disciplined investments that lead to technological advances.

National and state governments can play a helpful role in this vital enterprise.

By creating a stable, long-term policy framework for investment in academic and commercial research efforts, government can be a partner in the short-, medium-, and long-term technological transformations we need.

One of the areas where government can provide needed stability is by implementing simple, transparent, and predictable policies to mitigate greenhouse-gas emissions. Throughout the world, policymakers are considering a variety of legislative and regulatory options. In our view, assessing these policy options requires an understanding of their likely effectiveness, scale and cost, as well as their implications for economic growth and quality of life.

Consistent with that view, we believe that a carbon tax would be a more effective policy option to reduce greenhouse-gas emissions than alternatives such as cap-and-trade. Pricing carbon through a direct and transparent tax could incentivize the search for lower-emissions energy solutions while also providing the stability and predictability industrial companies need to make long-term, capital-intensive investments in equipment and research.

To ensure revenues raised from this tax are indeed directed to investment, and to assist those on lower incomes who spend a higher proportion of their income on energy, a carbon tax should be offset by tax reductions in other areas to become revenue neutral for government.

It is rare that a business lends its support to new taxes. But in this case, given the risk-management challenges we face and the alternatives under consideration, it is my judgment that a carbon tax is the best course of public policy action. And it is a judgment I hope others in the business community and beyond will come to share.

Sadly, so-called “free-marketers” are often so busy smacking down bad arguments from greens that they fail to note, much less acknowledge, that they’re fairly frequently making bad arguments themselves or ignoring gaping inconsistencies in their own positions.  Of course it IS awfully easy to get caught up in partisan conflict, which provides a nice rush of self-righteousness, but it probably also helps if you’re being paid to post by fossil fuel interests, like the folks over at the supposedly “free-market” MasterResource energy blog, of Rob Bradley‘s Institute for Energy Research.  In any case, it’s disappointing, not solely because it comes from “free-marketers”, but because it offers no hope of engaging productively with those with whom they disagree.  In other words, more of Culture Wars “R” Us.

I’ve already commented quite a number of times here about Rob Bradley and his co-bloggers at MasterResource, but I continue to be astonished by the inability of the bloggers (and some commenters) to notice when they are being inconsistent or are taking anti-market/anti-lbertarian positions.  A recent post by Rob Bradley on the limitations of wind power, with follow-on comments by others, is a case in point.  In his post, Rob trots out some very old literature to make some perfectly fine – if rather obvious and well-known – points about the limitations of wind power; I observed that of course one can make similar observations about the short-comings of other energy sources, such as the social costs of coal. 

While Rob fails to respond, a visitor and one of his guest bloggers, Tom Stanton, senior energy fellow at the Pacific Research Institute (which bills itself as a “champion [of] freedom,
opportunity, and personal responsibility for all individuals by
advancing free-market policy solutions”) ride to his rescue, with strawmen and astonishingly non-libertarian (indeed, utilitarian) commentary.  Why can’t the right do better than this?

For the interested, I excerpt the relevant comments below (emphasis added):

1
TokyoTom { 03.04.09 at 12:09 pm }

Rob, thanks for this; you are right of course about the drawbacks to wind.

Now can I interest you in some very, very old tracts on how dirty
coal is, both in mining and combustion, or newer ones about deaths,
health costs, damages to property that are still ongoing and
uncompensated?
BTW, while you are obviously an advocate for coal, are you also an
advocate that coal producers and consumers bear their own costs? Or is
shifting those costs to others a right that they have homesteaded?

Andrew { 03.04.09 at 6:45 pm }

Tom,
the question isn’t “is coal bad?” its “is it better than (essentially)
nothing?” It is. Coal, I submit, has save far more lives than it has
cost, and has improved quality of life more than damaged it.

TokyoTom { 03.05.09 at 3:58 am }

Andrew,
the question is NOT whether “coal is it better than (essentially)
nothing?”, just as it is not whether wind or any other energy source is
perfect or preferable.

The question is whether those who engage in economic activities are
bearing the costs or risks of those activities, or whether those
activities appear relatively preferable to the people involved because
they are able to shift damages, costs, risks and/or responsibilities
for consequences to others.

True libertarians insist that individuals (and firms) bear full
responsibility for harms caused to others; some in fact insist that
those who are harmed without their consent have the right to use courts
to enjoin the damaging activity. Maybe this all seems a little quaint
to you?

My point is simply that Rob is ignoring, rather obviously and perhaps deliberately, the human costs of the use of coal.

Tom Tanton { 03.05.09 at 9:15 am }

The
“human cost of coal” has been extensively studied as have most other
energy (nay, all economic) technologies. That study are most often
referred to as “externalities”–Guess what? The economic ‘costs’ of coal
are mostly, if not completely, offset by the economic benefits. The
negative externalities are NOT enough to offset the higher cost
premiums of technologies like wind that never quite mature (most likely
because of the heavy per unit subsidy they’ve become dependent on after
35+ years.)
Now let’s see about human costs–in countries with coal (or nuclear or
any meaningful) baseload power isn’t the average life span about twice
that of folks living in countries with no or primitive energy? Aren’t
THOSE folks also less educated, and less free? Do they even have 15
minutes a day of “leisure time”?Aren’t those folks also burdened with
spending every daylight hour finding a piece of wood (or dung) to cook
their measly daily bread and using unsanitary water to boot?
I don’t believe Rob is ignoring the costs of coal. I believe Sir you’re
ignoring the economic and human benefits of coal and modern energy.

TokyoTom { 03.05.09 at 12:08 pm } [links added]

Tom,
it seems that you understand little, if anything, about free markets or
libertarian principles. Murray Rothbard`s paper on air pollution makes
it clear that it was utilitarian arguments like yours – “the damage my
pollution does to you is fine because people want to but my products” –
that industry used in the 1800s to subvert the common law and run
roughshod over property rights, leading to the “pollution is free”
philosophy and ruinous competition where the non-polluter went
bankrupt. The upshot was the horrible pollution in the 50s, 60s and 70s
that led to tremendous citizens` movements to use government to bring
pollution under control – with laws signed by Republican presidents.

No externalities? Where were you? What motivated the Clean Air Act, Clean Water Act, SuperFund?

As for coal vs. wind, please spare me the strawman. I`m not at all
suggesting that wind OUGHT to be subsidized. I`m just asking for a
little intellectual honesty that will recognize that coal use IS
subsidized, by being allowed to shift real and significant costs to
others, and that we`d all be better off if those socialized costs were
internalized.

Perhaps someday it will occur to those who (correctly) want to bash
greens for their stupid proposals that they might be more successful if
they were a little more consistent themselves and started exploring
common ground. Where`s the post praising the federal court decision
forcing TVA to do a better job at cleaning flue gases than required by
the CAA in order to limit harm caused in NC, for example? Where`s the
post calling for the privatization of the bumbling, polluting TVA,
which keeps generating costs for taxpayers and ratepayers?

But that`s not what this blog is all about, is it? You guys are more
into making enemies and fighting over government than in truly shifting
risks and regulation back to markets and the courts.

As for countries abroad, this is of course unrelated to a discussion
local/regional costs and energy alternatives in the US. But since you
bring it up, don`t forget that the real reason why these other nations
aren`t developed yet is that they`re still kleptocracies that don`t
sufficiently protect private property rights and returns on
investments.  Why are you cheering on poor governance, instead of
suggesting that they could become wealthier sooner by accelerating
their move up the Kuznets curve (which is an artifact not only of
preferences, but of insufficient information and laws that protect the
elites over private property of the masses)?

Tom Woods, in his recent “Another “Free Market” Intellectual Has Second Thoughts” post at the Mises Economics Blog, notes with great disappointment that Richard Posner is about to publish a book that will apparently abandon the free market and call for greater government intervention.

While I share Mr. Wood’s disappointment that Posner and others are not more vigorously defending free markets, I suggested in comments on Mr. Wood’s post that perhaps free market intellectuals are not yet really pulling their own weight in examining and describing the flaws in the market system that contributed to the current financial crisis, or in explaining the types of reforms that would actually be appropriate.  In particular, it seems to me that the role played by the state grant of limited liability to corporate shareholders in facilitating flawed and irresponsible risk-taking by executives and traders, as well as in perversely fuelling a vicious cycle of rent-seeking and further counterproductive regulation, should be much more seriously examined. 

In short, I believe that, as argued by James Glassman and William Nolan in a recent Wall Street Journal op-ed, unless and until owners and executives have “more skin in the game”, we will continue to ride a tiger of selfish risk-shifting, moral hazard, and ever more disruptive government regulation.

I copy below my comments on Tom Wood’s post:

Tom, it’s hard to judge an unpublished book, but I suspect you’re
right to do so. Has Posner given any more solid clues as to where he’s
headed?

However, as it’s clear that things went wrong, I can’t help but
wonder when can we expect to hear more from you and others on what
government factors (besides the Fed, Freddie and Fannie) “fatally
deformed” the financial markets, and laying out a “new, genuinely
free-market paradigm for the economy”. Isn’t there a good book or two
in there from Austrians?

It seems to me that that James Glassman and William Nolan have a key
insight into the type of reforms needed in a WSJ piece that refers to
von Hayek. They argue that “an irresponsible attitude toward risk led
to terrible mistakes in judgment” and conclude that “bankers need more
skin in the game”. How to move in that direction?  Glassman and Nolan
point to the success of the Brown Brothers Harriman partnership, which
lacks the limited liability feature of modern corporations, and specifically recommend that governments recognize (by less burdensome laws and regulations) that entities like partnerships where owners face unlimited personal liability are more responible risk managers.

As I have argued in a series of posts, starting with my review of
Huebert and Block‘s criticisms of Long, the state grant of limited
liability to shareholders (in particular the grant vis-a-vis those
injured by corporate acts and involuntary creditors, which is a pure
grant from the state and cannot be contracted for) has led to a number
of perverse results, which can be fairly clearly seen in the financial
crisis:

TT

Marlo Lewis of CEI has a rather schizophrenic post up at Rob Bradley‘s MasterResource blog – one of my favorite “free market” fossil-fuel industry-funded sites (unlike the NRO’s “Planet Gore”, MasterResource actually allows comments!) – regarding the proposal by leading “alarmist” climate scientist Dr. James Hansen (of NASA and Columbia U.’s Earth Institute) that the federal government adopt a “tax and dividend” climate policy instead of a “cap and trade” approach.

Lewis notes that Hansen recently testified in front of the U.S. House Ways and Means Committee about Hansen’s “tax and dividend” proposal, but while Lewis calls Hansen’s per capita rebated carbon tax proposal “clever”, Lewis puzzlingly fails to compare Hansen’s proposal with the cap and trade alternative that the Obama administration supports and that Congress (and industry) appears to favor.  Instead we get some poorly grounded speculation about the effects of a carbon tax and complaints about the political viability of a transparent carbon tax – all of which points not only ignore the more opaque, rent-seeking prone and heavy-handed cap and trade alternative, but by implication suggests that those who prefer an opaque and back-room deal prone cap and trade approach have made the correct political calculation.

Nor does Lewis make any mention of all of the support that carbon taxes have received, not only from economists, but from a wide range of others, including Exxon`s Rex Tillerson and various neocons, conservatives and libertarians (George Will, Congressman Bob Inglis, Jon Adler, Barbara Thoring, etc.), at least in comparison to cap and trade.

As a result, one is forced to wonder just whati it is that Lewis is trying to achieve – is he trying to sabotage a government-lite carbon policy, so that government-heavy policy is more likely to prevail?  If so, why?  Or does he really think that opposing EVERY carbon pricing policy is the most effective way to delay and/or influence ultimate policy outcomes?  I for one am confused.

My more extensive (and less high-level) comments to Marlo Lewis on his comment thread are copied below:

Marlo,
first, I’m afraid I don’t follow you on the science. We can’t stop our
still growing GHG releases on a dime, much less the short- to
medium-term feedbacks from water, methane and albedo changes, and
long-term will persist for centuries, and the water cycles, the oceans’
pH and world’s biota are changing noticeably and fairly rapidly, even
without significant further increases during the past decade – yet what
is it, precisely, about our ability to change our influence on the
system or to control responses that gives you comfort? Why do you seem
to think it is “conservative” for our nation and others to do nothing
in light of our remarkable and uncontrolled global climate experiment?

BTW, surely you are aware that Hansen has earlier offered extensive
information that paleoclimate records indicate that long-range climate
rsponse to a CO2 doubling is on the scale of 3 degrees C. Did you miss
that? Or were you more eager to say that Hansen’s reference to more
recent studies about facts some how implies that Hansen is “dissing”
models? What’s the point anyway, other than point-scoring – if facts
appear to indicate that long-term sensitivity is relatively high,
should we be ignoring that and placing our faith in models instead?
Should facts not further inform models, or policy-makers?

Second, while you note Hansen’s attack on cap & trade and his
“tax and dividend” proposal “quite clever”, you fail to offer any
opinion on the realative merits of these quite different proposals.
Instead, you offer some sniping criticisms of tax and dividend, as if
you are hoping that the consequence will be that the Obama
administration, Dems and rent-seekers generally will turn away from
climate policy altogether. But isn’t that nothing but wishful thinking,
and shouldn’t libertarians and others who prefer to avoid the
monstrosity of cap & trade be trying to encourage the efforts of
those whose proposals would be much less economically damaging? Isn’t
Hansen’s proposal far preferable over cap & trade, and the kind of
industrial planning that Jon Adler says is inevitable from the EPA
under EPA vs. Massachusetts without legislative action?

Exxon and a host of others (as noted at the blog posts linked at my
name) have come clearly down in favor of carbon taxes over cap &
trade; perhaps you may at some point care to favor us with your own
comparative views.

It seems to me that Hansen’s proposal is clearly preferable; it
could be easily implemented and monitored, would not involve large new
bureaucracies, would be much more transparent and less susceptible to
rent-seeking, would provide market signals on GHGs while having no
fiscal impact, would be grounded in the principle that the atmosphere
is owned by citizens and not government (or by corporations that are
given or purchase rights to emit GHGs), and, by being refunded per
capita to citizens would be generally progressive.

Third, as for your criticisms of Hansen’s proposal:

– carbon taxes will hit coal use more heavily than petroluem or
natural gas, so focussing first on “pain at the pump” smacks of
pandering, especially as revenue recycling may eliminate the pain
completely;

– older, dirtier coal plants are already uneconomic and generate
tremendous costs to health and property that are not costed to
producers or consumers; taxing carbon is a great way to end some of the
nonsense incentivized by the CAA. Your speculation about power supply
and electricity prices is nothing more than speculation, but oil and
gas-fired plants could be brought on line relatively quickly;

– as for the “green stimulus” effect, it is ironic that you fail to
see that the fact that “There is no guarantee people will use their
dividends to buy hybrid cars, energy-efficient appliances, or green
energy” is in fact an argument IN FAVOR of rebated carbon taxes as
opposed to cap and trade, as the first allows much greater economic
freedom and is thus more conducive to wealth creation. Further, not
only is dividending the tax proceeds a great way to make sure that the
government doesn’t have an even larger pot to dole out mandates,
subsidies and other goodies to favored industries, but the right could
trade its acceptance for such a tax for elimination of existing
subsidies to ethanol and solar.

– your point about labor productivity is fair, but it ignores the
social cost of carbon. Has forcing polluting industries for the ’60s on
benefitted society and improved productivity as a whole the whole? Or
is it simply more important to allow certain classes of producers and
consumers to profit while continuing to shift costs to others?

– as for “massive” transfers, this is all “would” and “could”
without any backing, and it completely ignores all of the massive
wealth transfers involved in the way we presently regulate power
generation and energy (and have refused to regulate GHGs). I’m happy to
have more information, but let’s not forget that the whole purpose is
to have a closer alignment between profits/benefits and social costs.

Anti-enviro Steven Milloy,adjunct scholar at CEI, author and co-founder of a gadfly free-enterprise fund, has a post up on his Green Hell Blog about some interesting recent remarks by Robert F. Kennedy, Jr.   Apparently RFK Jr., at the “Capitol Climate Action” rally held on March 2, said that 

“Massey Energy CEO Don Blankenship “should be in jail… for all of eternity,”  and that coal companies Massey Energy, Peabody Energy and Arch Coal are “criminal enterprises.”

It seems clear from the context that RFK Jr. is referring to these firm’s destructive “mountaintop removal” mining practices and the legal and political strong-arming (all the way up to bribing W.Va. supreme court justices) in which the leaders of these politically powerful firm engage, which I have commented on several times.

I’m a bit disappointed that Milloy does not favor his readers with an explanation for why RFK Jr. is wrong, and Milloy closes with these puzzling remarks:

“But if Kennedy wants to oppose coal while honoring his father, perhaps
he ought to adopt RFK’s pro-nuclear stance. According to a March 21,
1967 New York Times article, RFK proposed that the New York
State Power Authority be permitted to develop nuclear power pants and
that private investment in nuclear power be encouraged.”

Milloy’s apparently favorable reference to nuclear power and his faiure to address the real social costs of coal stirred me to make a few comments, which I copy below:

Steve, just a few quick questions:

– are you seriously pushing nuclear power, or just cynically
flogging Kennedy for a technology that energy experts like Cato’s Jerry
Taylor have concluded just aren’t economical without life-support from
government?

http://mises.org/Community/blogs/tokyotom/archive/2009/02/24/cato-s-jerry-taylor-quot-nuclear-power-is-solar-power-for-conservatives-quot-and-nuclear-needs-quot-a-policy-of-tough-love-quot.aspx.

– do you disagree that coal is dirty, and imposes serious impacts on
health and property rights, both when mined and burned? The American
Lung Assn said in 2004 that power plant pollution causes 24,000
premature deaths each year (at least 50% more than annual homicides),
as well as over 550,000 asthma attacks and 38,000 heart attacks
annually.

– States like North Carolina are still suing – and winning – in
federal court to force power producers (like the big, government-owned,
polluting dinosaur TVA bureacracy) to be cleaner:
http://edition.cnn.com/2009/US/01/14/tva.ruling/index.html

Do you love the TVA, and hate North Carolina?

Inquiring minds want your help in figuring out whom to hate, and why.

In a series of posts at the self-declared “free market” blog of the fossil-fuel energy industry funded Institute for Energy Research, energy expert  Rob Bradley (former Ken Lay speechwriter and Enron policy wonk) explores his dark forebodings that the “Malthusian wing” of the Obama administration and the environmentalist Left are actually enjoying and welcoming the present economic predicament.  Says Bradley, putting words in the mouth of his Malthusian stalking strawman:

“The economic recession/depression is good, not bad. It lowers our carbon footprint in countless ways. It saves resources. It throttles back industrial society to sustainable levels that were exceeded long ago. Let the downturn continue to get us out of the growth mentality. Let rising expectations fall! Less is more!”

[From: The Malthusian Wing of the Party in Power: When Will They Speak Up?; see also Beware of the New “Limits to Growth” (and looking for ReaganVision to CarterVision).]  Bradley will apparently be transported by paroxyms of self-satisfied delight/misery if a lefty, particularly one inside the Administration, ventures to say something like this.

Bradley may very well prove to be right that someone on the left may assert that an end to the “growth is good” mentality may be a silver lining in our recession.  But in his focus on prognosticating what plots the “Malthusians” may be hatching, Bradley simply refuses to actually engage the “Malthusians” on either their premises or their proposed solutions – namely, that there are real and serious problems that our societies must address and that more government is needed.  Indeed, Bradley doesn’t even venture to explain why he considers the Malthusians to be wrong, apparently assuming that this is self-evident. 

But as I have noted any number of times, there is indeed a wide range of very real and serious issues to be discussed, both as to problems AND to proposed “solutions”, such as I have noted in these two posts:

Too Many or Too Few People? Does the market provide an answer?

Food shortages: Ron Bailey takes up the cry, are Malthus and “Green fascism” on the march?

As a result, Bradley does not appear to be interested in the slightest in engaging productively with the Obama administration or the Left, and so in effect uses the term “Malthusian” as a type of shibboleth (or even an article of faith?) among supposedly “right-minded” people, and as an ad hom against the left.  In this, Bradley echoes others such as George Will who, in a recent editorial about climate change, warned of “dark green doomsayers”.

While I do not agree with the Left that more government is always the right solution, those on the right cannot win these arguments simply by name-calling or by trotting out – as George Will did in his editorial – the 1980 bet that Paul Ehrlich and others lost to Julian Simon over the future prices of minerals and commodities.   But the Ehrich-Simon bet was well-known; why not use it?   Because those who do so have ignored the reason why the Simon triumphed and Ehrlich lost, which was that because people own mineral resources, markets functioned to both to change demand and to provide incentives for future supply (and Ehrlich was no economist).  But none of this logic holds true for unowned or “public”, open-access resources – like the acidifying oceans, tropical forests and the global atmosphere and the climate it modulates – for which there simply are no effective property rights or functioning markets.  Instead, we continue to see see destructive exploitation (and kleptocracy in the countries where powerful elites elevate their interests over those of citizens). 

So, in the context of the issues that the “Malthusians” are now raising – in this case, the atmosphere – the Simon-Ehrlich bet stands for a propositions whose conditions clearly at present are not fulfilled, and which will not be fulfilled without hard work.  Until that hard work of establishing property rights or other effective governance institutionsis completed, people with legitimate preferences as to such resources and who are concerned about the effects of modern market demands on them have little ways of expressing those preferences other than through pressure on policy makers and attempts at moral suasion.

As an aside, let me note that nowhere does Bradley acknowledge that the Obama administration and Left inherited our economic shambles from freedom- and market-loving Greenspan/Bush/Bernanke/Paulson and the Right.  In this, Bradley resembles NRO commentator Henry Payne, who recently was so quick to lay all of the woes of the US automakers at the foot of the Obama administration and Washington Dems.  It’s sad that what may otherwise be legitimate commentary is so skewed by such transparent partisan bias and inconsistency.  Such reflexive partisanship also ignores not merely the responsibility of the Right, but also ignores what appear to be fairly significantly weaknesses in the structure of Western capitalism, which have been commented on by Michael Lewis, Joe Nocera and James Glassman and William Nolan at the WSJ; viz., weaknesses stemming from the weak governance and moral hazard (and strong rent-seeking) that is encouraged by the state grant of limited liaibility to corporate shareholders.

In other words, there are lots of real issues to discuss, from difficult resource issues that require collective action to address to public choice problems inherent in the use of government.

Those who profess a love of reason should turn to it, and not hobble themselves by a reliance on facile assumption and shallow ad homs.  Unless, of course, the aim is not to resolve underlying issues of appropriate institutions, but either to “win” the argument by wresting control of policy (and of related rents) from perceived competitors or, if winning is not likely, to at least satisfy emotional needs by railing at foes while surrendering the field (and the selection of policies) to them.

Let me close with a note of one small irony:  while Bradley is expecting that the Left will embrace the recession as a way to deliberately slow growth, Bradley’s own associate at IER, Austrian economist Bob Murphy has just put up on his personal blog a “wonderful clip” by comedian Loius C.K., who comments:

“Those were simpler times, I think; I just feel that we may be going back to that, by the way.  In a way, good; because when I read things like, “the foundations of capitalism are shattering,” I’m like, maybe we need that; maybe we need some time where we are walking around with a donkey with pots clanging on the sides.  … Yeah, because everything is amazing right now, and nobody’s happy.”

Seems like even Malthusian-haters will only be happy if we’re all more miserable!

The February 25 Wall Street Journal carries an insightful piece of commentary by James K. Glassman (president of the World Growth Institute and a former undersecretary of state) and William T. Nolan (president of Devonshire Holdings and former associate at Brown Brothers Harriman & Co. in the early 1970s) .

The Glassman and Nolan piece, entitled “Bankers Need More Skin in the Game; Partnerships may be a more trustworthy business model than corporations,” echoes in the context of Wall Street financial institutions the theme of inappropriate managerial risk-taking that I have previously blogged on a number of times regarding the consequences of  the “limited liability” corporate form.  Glassman and Nolan point to the sterling performance of Brown Brothers Harriman & Co., the oldest and largest partnership bank in the U.S., founded in 1818.

The Glassman and Nolan editorial is worth reading in whole, for purposes of discussion I excerpt portions here (bolding is mine):

“Of all the causes of the financial meltdown of the past few years, the easiest to understand is that an irresponsible attitude toward risk led to terrible mistakes in judgment. But where did this casual approach to risk originate?

“A major culprit, we believe, is a change in the way Wall Street financial institutions are organized. During the late 1970s and ’80s, much of the responsibility for risk was transferred away from the people who made the financial decisions. As a result, leverage rose from 20-1 to 40-1 or higher, creating shaky towers of debt, which, as we know, eventually collapsed. …

“The trick is to find a way to encourage sensible risk-taking, while dampening the impulse to take chances that can throw an economy into recession and force taxpayers to bail out a banking system.

“Can government accomplish this feat through rule-making and regulatory oversight? It is unlikely. As the Nobel Prize-winning economist Friedrich von Hayek correctly emphasized, no one — not even a politician or a bureaucrat — can gain the broad and deep knowledge necessary to make wise enough rules. Moreover, in a $14 trillion economy, you can’t hire enough overseers to pore over everyone’s books.

“There is, however, a better solution: expose players in the financial game to greater personal loss if their risk-taking fails. When you worry that a mistake will cause you to lose your second home, your stocks and bonds and your club memberships, then you’re less likely to take the kinds of risks that expose the rest of society to your failures.

“A simple mechanism exists to achieve this purpose: the private partnership. Partners face liability that extends to their personal assets. They aren’t protected by the corporate shield that limits losses to what the corporation itself owns (as well as the value of the stocks and bonds the corporation has issued). Unfortunately, the partnership is a legal form of business organization that was largely abandoned by banks over the past quarter-century. Our advice is to bring it back. …

“Even John Gutfreund — the man who kicked off the dramatic change in investment-banking culture and structure when he took Salomon Brothers, a longtime partnership, public in 1981 — confirms our thesis. Michael Lewis wrote in the December issue of Condé Nast Portfolio that Mr. Gutfreund now believes “that the main effect of turning a partnership into a corporation was to transfer financial risk to the shareholders. ‘When things go wrong, it’s their problem,'” said Mr. Gutfreund.

“But when the personal wealth of executives is put at risk, as it is in a partnership, their behavior changes. Risk aversion increases. Few partnerships would leverage themselves to the hilt to load up on risky subprime loans.

“How do we know this? Luckily, for this financial experiment, there is a control case: Brown Brothers Harriman & Co. ….

“Some would say that BBH is sui generis. Would its structure work more broadly for financial institutions? It already is. As large brokers merged into huge corporations with greater concentration in real-estate finance, corporate finance migrated to private equity firms and hedge funds, which are generally structured as partnerships. While many of these new engines of finance have suffered in the recent meltdown, they generally didn’t engage in such extreme risk-taking and thus haven’t become wards of the state.

“We know from Alfred Chandler, the great business historian, that “strategy determines structure.” Similarly, structure determines behavior — in this case, a healthier attitude toward risk. It is unlikely that a partnership will grow to the size of a Bank of America or Citigroup, but, while size can boost efficiency, it also poses systemic risk. As partnerships — and corporations with partnership attributes — replace behemoths, the current crisis will spawn structures for future success.  …

We do not believe that government should require banks to be partnerships. Rather, investors — and governments — should recognize the extra safety inherent in doing business with partnerships.“

I have previously argued that one of the key state interventions that has fuelled the rent-seeking and risk socialization that we see today is the grants of blanket limited liability to shareholders, along with the grant of legal personhood (with unlimited purposes and life and Constitutional rights) to corporations:

Limited liability has enabled corporate managers to act without close shareholder oversight and management; this I believe has played a key role in the vast misalignment of incentives that Michael Lewis and David Einhorn describe at the NYT, and in the risk mismanagement that Joe Nocera of the NYT describes at length in the NYT Magazine.  Those taking large bonuses (whether in the financial industry or large corporations) were essentially playing with OPM – Other People’s Money – and capturing the upside of short-term gains while leaving shareholders and taxpayers holding the bag for loses.

I hope that you and others here will look more deeply at the role of the state in the problem of misaligned incentives that continue to corrupt American capitalism.

It is not clear what Glassman and Nolan intend with their reference to “corporations with partnership attributes”, but I would note that corporations that make use of an unlimited liability structure (as American Express once did) share the main “partnership attribute” – that the owners of the firm may be, if the assets of the firm are insufficient, personally liable to creditors for all debts of the firm (other than those whose creditors agree in advance to limit recourse), particularly for torts to involuntary third parties.  The availability of the unlimited liability corporate form in various jurisdiction should be further investigated.

I agree with Glassman and Nolan that governments should recognize the better risk management that partnerships are likely to conduct, but not merely in the financial sector but in other industrial, commercial and professional fields as well.   Such recognition could take the form of eased regulations, for example.  I favor aggressive pursuit of this “carrot” approach to encouraging better risk management and less shifting of risks to shareholders, government and citizens generally.  However, this fails to consider what should be done about existing public companies and other limited liability corporations.  I would urge more aggressive veil-piercing, both judicially and by statute.

In any case, it is gratifying to see this topic getting some of the attention that it deserves.

There’s an interesting article in the Feb. 22 Times Union on the ineffectiveness of the New York oil spill fund:

Oil polluters pass on spill costs to public

The New York Environmental Protection and Spill Compensation Fund pays to clean up oil spills if polluters won’t handle it themselves. While the state is supposed to get that money back, it is owed millions by companies that won’t settle up. In more than 1,100 cases — some dating back to the early 1980s — the state has recouped just 17 cents on every dollar it spent.

As I’ve noted previously on several occasions, the limited liability that states grant to owners of corporations means that owners of polluting firms can walk away, leaving citizens and states holding the bag for risks and clean-up costs; this is true not only for the New York emergency oil spill clean-up fund, but for ordinary pollution damages where individuals are seeking compensation.  This problem is manifest in, and has been compounded in, New York, where the gas tax-funded clean-up fund system is clearly not working; not only has the fund been bailed out by general taxes, but the gas tax being used to fund it has been increased eight-fold since 1978, and the fund argues that it lacks sufficient enforcement tools.  At least part of the problem may be that the fund administrators find it easier simply to clean up and increase taxes than to try to pursue polluters.

As New York ponders reforms, the New York legislature ought to consider explicitly “piercing the corporate veil” by providing that the owners and executives of polluting firms – including shareholders of public companies – have direct personal liability for clean-up costs.

That may do wonders in incentivizing them to make sure that the firm that they own and/or manage (or an insurer on its/their behalf) promptly reimburses the fund for clean-up costs.  One suspects it might even cut down on the number of oil spills!