My daughter alerted me to this interview of Rhiana Gunn-Wright, “one of the architects of the Green New Deal.” It’s annoying–I swear I would have gone completely mental had she said “right?” one more time–but educational. Not because you will learn anything about the way the world works, but you will learn the way the minds of the Green New Dealers work.
The interview is hosted by ex-Obamaite Jason Bordoff, now of Columbia University’s Center on Global Energy Policy. Given Bordoff’s current gig, he was obviously interested in the GND’s implications for energy. After all, the supposed raison d’etre of the GND is that our current energy system, dependent on fossil fuels as it is, is causing us to hurtle towards catastrophic warming.
But whenever Bordoff asked a question about energy, or climate policy, Gunn-Wright couldn’t even feign interest. Her responses were in the vein of “whatever”, and then she launched into impassioned monologues about what really interested her–a laundry list of progressive dreams from health care to child care to labor policy.
What’s clear from Gunn-Wright’s performance is that “climate change” is merely a Trojan Horse for a hard-core leftist agenda. The plan is to use climate alarmism to stampede voters into electing hard-left politicians who, once ensconced in power, will implement what good (I use that term ironically) socialists have been drooling to implement for decades–since before the original New Deal.
Meaning that if you think the GND as presented by the likes of AOC and Sen. Ed Malarky–excuse me, Markey–would be ruinously expensive–you ain’t seen nothing yet!
Speaking of AOC, thinking of her reminded me of Mark Twain: “First, suppose you are an idiot; now suppose you are a member of Congress. But I repeat myself.” I think even Twain would be gobsmacked by the stupidity of Ocasio-Cortez. It’s beyond disturbing that such a moron promoting such a malign program is taken seriously, and has indeed bamboozled virtually every Democratic presidential candidate into endorsing her program.
But maybe that’s the good news. I think that it is highly likely that as enthusiastically as the coastal elites have embraced GND, it will prove toxic at the ballot box. Trump’s full-throated attacks on socialism certainly indicate that he believes so. And he has an innate sense for these things, as the very fact that he is president demonstrates.
One last thing. If you think I was scathing about the GND, I had nothing on Richard Epstein. He about jumps out of your computer in this podcast from a few weeks back. Worth a listen–especially as an antidote to the leftist bromides of Rhiana Gunn-Wright. Right?
In the folk tale about B’rer Rabbit and the Tar Baby, the trapped trickster bunny is at the mercy of B’rer Fox. The Fox debates ways to dispose of the Rabbit–hanging, drowning, burning–and the Rabbit pleads to do any of those things–just don’t throw him into the briar patch. Falling for the reverse psychology, B’rer Fox hurls B’rer Rabbit into the supposedly dreaded briars, after which B’rer Rabbit says: “Born and bred in the briar patch. Born and bred!”
Might I offer a more cynical explanation? Getting thrown into the output limitation briar patch is exactly what B’rer Glasenberg wants. A firm exercises market power by limiting output to raise price: global warming gives Glencore an elite-blessed excuse to limit output, i.e., exercise market power. It will be especially beneficial for Glencore if other coal producers are stampeded into cutting output too.
Indeed, you know how this will play out. The activists will now descend on the other producers, holding up Glencore as a shining progressive example. Some, perhaps most, and maybe even all, will capitulate, further increasing prices.
And Glencore/B’rer Glasenberg will laugh all the way to the bank.
As an aside, this is an interesting illustration of the theory of the second best. In a world without any distortions, an exercise of market power is a bad thing–it reduces welfare. But in a world with other distortions, an exercise of market power can enhance efficiency.
If due to an externality, coal output in a competitive industry is too large, the exercise of market power mitigates the effect of the externality.
I was considering not commenting on the Green New Deal, given the largely negative–and often incredulous and scathing–response that its release evoked. Including from mainstream Democratic politicians, notably Nancy Pelosi. But most of the cast of thousands currently seeking the Democratic presidential nomination have embraced it to some degree or another, and the criticism has spurred a counterattack from many media precincts. The plan will therefore not be consigned immediately to oblivion, so I will weigh in.
In a nutshell (emphasis on the “nut”), the proposal aims at making the US “carbon neutral” in a mere decade by eliminating the internal combustion engine, retrofitting every existingbuilding in the US, largely eliminating air travel and replacing it with high speed rail, and reducing, er, flatulence from cows by sharply reducing our consumption of meat. No biggie, right?
I find it somewhat ironic that hard on the heels of the announcement of the basics of the GND, the hard left governor of California, Gavin Newsome, said it was necessary to “get real” and recognize that the state’s high speed rail project was a disaster, and to eliminate most of the route.
But “getting real” is not on the GND agenda.
If implemented, the GND would effectively destroy a vast amount of the existing US capital stock, or require its replacement with less productive capital. This will make Americans poorer, in terms of consumption of goods and services.
The proponents of the GND commit the fundamental economic fallacy of arguing that this destruction of productive resources will bolster the economy because of all the jobs that will be created to build a fossil-fuel free power system, electric autos, massive rail systems, etc. The reality (sorry, but I can’t help dealing in reality) is that jobs are a cost, as is the decline in consumption required to make massive investments in new capital to replace existing capital.
The point of producing–including through the use of labor which entails the cost of foregone leisure–is to consume. The GND will unambiguously reduce consumption of goods and services, and make us poorer. GND is crypto-Keynesianism at its worst.
Then there is the detail of paying for this. Here advocates of GND invoke MMT–Magical Monetary Theory. Sorry, MMT actually stands for “Modern Monetary Theory” but my description is far more accurate. MMT is free lunch economics writ large, mistakes accounting identities for economic substance, and commits errors that would be embarrassing for someone in their first session of Econ 101 at one of your more backward community colleges.
The Magical Monetary Theorists argue that an endeavor as massive as the GND can be paid for by printing money.
Q: Can we afford a # GreenNewDeal? A: Yes. The federal government can afford to buy whatever is for sale in its own currency.
What follows (as is usually the case with MMT arguments) is a verbal discussion of a game of financial Three Card Monte.
Read that again: ” The federal government can afford to buy whatever is for sale in its own currency.” But at what price, dear? At what price? Venezuela has been operating on this principle, and is on pace to achieve record inflation of more than a million percent per year.
All of which obscures the economic essence. Investment today requires people to reduce consumption of goods and services. They only do so in anticipation of consuming more in the future–the “more” is the interest/return on capital from the investment. In private capital markets, the interest rate/return on capital adjusts so that the additional consumption people demand to fund investment is just paid for by the additional production flowing from the assets invested in.
In GND, as noted above, the massive investment will not result in a greater flow of goods and services in the future that will make people willingly reduce their consumption today. Indeed, future consumption in goods and services will decline. The private rate of return will be negative.
And indeed, GND implicitly acknowledges this. Its entire rationale is to reduce carbon emissions, under the theory that these are a “bad.” That is, the payoff from the massive investment (the sacrifice of private consumption) is a lower level of bad carbon emissions.
But to the extent that the reduction of this particular bad is a good, it is a public good. Everyone benefits from a decline in this putative pollutant, regardless of their contribution in paying for the reduction. Meaning that it cannot be financed voluntarily via private capital market transactions, but must be compelled, and paid for through massive taxation.
Printing money only changes the form and/or the timing of the taxation. Inflation is a tax. Moreover, if you borrow/print to pay for investment today, the investment cost not covered by the inflation tax must be paid for by higher taxes in the future. Like the old oil filter commercial: you can pay me now, or you can pay me later. But you must pay.
This is not hard. But reality is not magical.
Furthermore, given that it will be the most massive government program in history, it will entail all of the rent seeking and waste inherent in such programs.
I should also note that it will entail massive redistribution, most notably from rural, exurban, and suburban areas to urban ones as it will dramatically raise the costs of transportation and mobility which are borne disproportionately by those living outside cities. If a few Euro cents/liter fuel tax in France sparked massive protest in non-metropolitan France, just think of what would be in store in the far more sprawling US in response to taxes orders of magnitude larger than those imposed by Manny Macron.
These costs could be justified if the cost of carbon is sufficiently high, in which case the social rate of return could be substantially higher than the private rate of return, and the cost of capital. But even if one believes the most alarmist estimates of the cost of carbon, the adoption of GND by the US would have a modest–and arguably trivial–impact on emissions and temperatures, given the level and growth of emissions elsewhere, especially in China and India. Thus, the social rate of return is almost certainly far below the cost of capital.
The advocates of GND argue that the US needs a grandiose mission. The analogies that they draw are to NASA’s moon landings, or–get this–World War II and the defeat of the Nazis.
But neither Apollo nor even WWII envisioned the radical transformation of society–which is an explicit goal of GND. Apollo was a focused, and by comparison with GND, a relatively moderate expenditure financed in the ordinary course of government business and intended primarily as a campaign in the Cold War, undertaken at a time when the Johnson administration waged another Cold War campaign–Vietnam–with the specific objective of minimizing disruption to US society and the economy. World War II definitely altered every aspect of American life, but these disruptions were also viewed as temporary sacrifices necessary to win the war, to be reversed at its conclusion. Which happened in the event: the US demobilized rapidly, and most wartime expedients (e.g., rationing, the massive employment of women in manufacturing) were scrapped precipitously at its conclusion. As happened in WWI as well: Harding’s 1920 campaign slogan was “return to normalcy” after the extraordinary measures adopted during the war. But GND proposes to be the new normalcy, deliberately destroying the old normalcy.
The original New Deal as implemented was also not intended to be as transformative as its latter day green version (though the more Bolshi elements of the Roosevelt administration did harbor such ambitions).
What are the politics here? This is being pushed by the urban progressive left, epitomized by Alexandria Ocasio-Cortez, D-Brooklyn. (Sorry, Tatyana!) The ubiquitous AOC is the face and voice of the movement, though frankly I doubt it would get the same attention if her face looked like, say, Debbie Wasserman-Schultz, and I wonder whether her Munchkin voice will eventually grate on even her fellow travelers, not to mention the rest of us.
But the main political effect here is to cause deep fissures in the Democratic party. Mainstream elements are in a state of near panic, which they are attempting to conceal, with little success.
And this will redound to the benefit of Donald Trump. Opposition insanity is the greatest gift an incumbent can receive. And methinks this is a gift that will keep on giving, through November 2020.
Coal represents a dwindling fraction of New York’s generation. The EIA reports 0 electricity from coal in October, 2018. As of 2014, the last full year for which I could find data on the EIA website, coal accounted for 4.6 million MWh, out of a total of 137 MWh of generation.
The efficiency impact of this depends on (a) the estimated social cost of carbon, (b) the kind of generation that will replace the shuttered coal plants, and (c) the non-energy costs that this replacement generation creates.
If you believe that the cost of carbon is $40/ton, if coal is replaced by zero emissions generation, the move is efficiency enhancing. A coal plant with a heat rate of a little more than 10 implies a carbon cost per MWh of $40. This is well above the price increase of around $7.
If coal is replaced by natural gas, with a carbon cost of about $20/MWh, the call is closer, but still comfortably in favor of eliminating coal.
Lower social costs of carbon of course affect the math. The other thing to keep in mind, though, is that the price is for energy only. Changing the generation mix also affects the need for ancillary services to maintain grid stability. In particular, substituting diffuse and intermittent renewables for coal increases the non-energy costs of supplying electricity. These costs can be appreciable, though again it’s difficult to see them being so large as to overcome the approximate $160 million in carbon cost savings from eliminating coal, based on a $40/MWh CO2 cost, ~4 MWh of coal fired generation, and replacement of coal by zero carbon emissions generation sources.
What’s truly startling about the numbers, though, is the redistributive impact. Price is driven by marginal cost, and the price impact suggests that the cost of the marginal megawatt hour from coal replacement generation is about $7/MWh above that of the eliminated coal units. Note: that $7/MWh price increase benefits every single MWh generated by inframarginal units (e.g., combined cycle NG). Coal represents (as noted before) ~3 pct of NY generation, but the remaining 97 percent will see a big increase in margins.
This is a crude calculation, but roughly speaking the regulation will result in a transfer of about $1 billion/year from consumers to owners of generation (~140 million MWh x $7/MWh). The vast bulk of this $1 billion will be a quasi rent for inframarginal generating assets. (About $28 million–4 mm MWh/year x $7/MWh–will cover the cost of the more expensive generation that replaces coal plants.)
As is often the case with regulation, the wealth transfers swamp the efficiency effects (which total at most $130 million=~4 MM MWh x $33/MWh in social cost savings). (Since coal generation has probably dropped from the 4 million in 2014, and the price impact reflects the elimination of the remaining coal generation, the total efficiency effects now are probably substantially smaller than $130 million.)
Thus, although this regulation is sold as one benefitting the environment, I strongly suspect that the political coalition that has given it birth is strongly supported by incumbent generation operators selling into the New York market. That is, it smacks of the typical special interest regulation that benefits a small concentrated group at the expense of a large diffuse one (i.e., the consumers in New York), all dressed up in pretty green (environmental green camouflaging Benjamins green, as it were).
Yes, in this instance perhaps–depending on one’s assumptions about the cost of carbon and the incremental uplift costs created by the regulation–this bargain has produced an efficient outcome. But the redistributive nature of this regulation, and those like it, creates a great risk that such regulations will be introduced even when they are inefficient.
Those harmed include ordinary New Yorkers lighting their homes, and commercial and especially manufacturing firms (and their employees) who pay higher power costs. (Employees will pay in lost employment and lower wages, due to a decline in derived demand for labor driven by higher costs of other inputs.) In France, a seemingly small imposition on a similar group sparked widespread social unrest. It hasn’t happened in the US yet (or in places like Germany, where consumers and employers are paying steeply higher electricity costs due to anti-carbon regulations), but US states should be aware that such policies could trigger resistance here as well–especially if and when the hoi polloi realize that the biggest winner from these policies is not the environment, but companies that are pretty unpopular to begin with.
Driving electric cars and scrapping your natural gas-fired boiler won’t make a dent in global carbon emissions, and may even increase pollution levels.
Higher electrification may lead to oil demand peaking by 2030, but any reduction in emissions from the likes of electric vehicles will be offset by the increased use of power plants to charge them, according to the International Energy Agency’s annual World Energy Outlook, which plots different scenarios of future energy use.
Substitution electrical motors for internal combustion engines involves a substitution of one fossil fuel for another? Who knew? WHY WASN’T I TOLD????
Further, especially when it comes to countries outside the EU, Canada, and the US, this will result in a substitution towards coal, electrification will involve a substitution of higher-CO2 intensive fuel (coal) for lower CO2-intensive fuel.
But, but, but . . . renewables! Right?
Of course, Bloomberg feels obliged to quote a green fantasist:
“Electrification is a necessary part of deep decarbonization because it is relatively easy to decarbonize the power sector,” said Lauri Myllyvirta, a senior analyst at Greenpeace’s air pollution unit. “But electrification only helps if the power sector moves rapidly towards zero emissions.”
Zero emissions power sector. “Relatively easy to decarbonize.” Apparently, Greenpeace does not require drug tests. Or perhaps, they do, but if you test negative you’re fired.
What is the cost of zero emissions power sector? (Anything is “easy” if cost is no object.) Even far smaller renewable penetration (Denmark, Germany, California) results in substantially higher electricity costs. Costs which fall extremely regressively, especially if implemented no a global basis, but upper middle class types who populate Greenpeace and Green Parties etc. couldn’t be bothered thinking about that.
Furthermore, there is no proof that renewables scale, and indeed, basic considerations and basic economics strongly suggest they will not and cannot. Renewables are diffuse and intermittent, and as a result maintaining reliability is costly, and this cost increases at an increasing rate the larger the share of renewables in the generation mix.
But, but, but . . . . batteries!
Batteries have been the subject of intense research for decades, and costs are falling, but again there are serious doubts that they can scale sufficiently to make zero emissions power even remotely attainable. Indeed, batteries perhaps can handle diurnal variations in renewable power production, but handling the massive seasonal fluctuations in power demand is another matter altogether.
Further, from a lifecycle perspective, it is by no means clear that electric vehicles reduce CO2 emissions. What’s more, the monomaniacal focus on CO2 ignores the other environmental and economic consequences of renewables generation, including profligate use of land, blended birds, the pollution created by extraction of minerals used in batteries and motors, and the pollution caused by the disposal thereof.
These issues always bring to mind James Scott’s Seeing Like a State, which shows that “high modernist” projects envisioned by alleged elites invariably result in catastrophe because they inevitably impose simplistic, low-dimension measures on complex, high-dimension systems. Unintended consequences usually strike with a vengeance, and even the intended consequences fail to materialize.
The massive re-engineering of society required to de-carbonize is in many ways the zenith of high modernism, and is destined to produce a nadir of consequences, even compared to some of the other disasters that Scott examines.
The IEA’s caution should be heeded. But it will not be. Those Who Know Better will plunge ahead, until it becomes clear that they in fact know very little about what they imagine to design. Alas, they will not bear the costs of their conceit. The Lesser Thans will, and the lesser you are, the greater the costs will be.
This Bloomberg piece from last month claims that the International Maritime Organization’s looming 2020 caps on sulfur emissions from ships “could lift crude prices by $4 a barrel when the measures come into effect in 2020.”
The IMO regulation will have different impacts on different crudes. It will no doubt cause the spread between sweet and sour crudes to widen. This happened in 2008, when European regulation mandating low sulfur diesel kicked in: this regulation contributed to the spike in benchmark Brent and WTI prices, and wide spreads in crude prices. During this time, (if memory serves) 10 VLCCs full of Iranian crude were swinging at anchor while WTI and Brent prices were screaming higher and sweet crude inventories were plunging precisely due to the fact that the regulation increased the demand for sweet crude and depressed demand for heavier, more sour varieties.
The IMO regulation will definitely reduce the demand for crude oil overall. The demand for crude is derived from the demand for fuels, notably transportation fuels. The regulation increases the cost of some transportation fuels, which decreases the (derived) demand for crude. This change will not be distributed evenly, with demand for light, sweet crudes actually increasing, but demand for sour crudes falling, with the fall being bigger, the more sour the crude.
The regulation will hit ship operators hard, and they will pass on the higher cost to shippers. In the short run, carriers will eat some of the cost–perhaps the bulk of it. But the long run supply elasticity of shipping is large (arguably close to perfectly elastic), meaning after fleet size adjusts shippers will bear the brunt.
The burden will fall heaviest on commodities, for which shipping cost is large relative to value. Therefore, farmers and miners will receive lower prices, and consumers will pay higher prices for commodity-intensive goods. Further, this regulatory tax will be highly regressive, falling on relatively low income individuals, who pay a higher share of their income on such goods.
This seems to be a case of almost all pain, little gain. The ostensible purpose of the regulation is to reduce pollution from sulfur emissions. Yes, ships will produce less such emissions, but due to the joint product nature of refined petroleum, overall sulfur emissions will fall far less.
Many ships currently use “bottom of the barrel” fuel oil that tend to be higher in sulfur. Many will achieve compliance by shifting to middle distillates. But the bottom of the barrel won’t go away. Over the medium to longer term, refineries will make investments that allow them to squeeze more middle distillates out of a barrel of crude, or to remove some sulfur, but inevitably refineries will produce some low-quality, high sulfur products: the sulfur has to go somewhere. This is inherent in the joint nature of fuel production.
And yes, there will be some adjustments on the crude supply side, with the differential between sweet and sour crude favoring production of the former over the latter. But sour crudes will be produced, and new discoveries of sour crude will be developed.
Meaning that although consumption of high sulfur fuels by ships will go down, since (a) in equilibrium consumption equals production, and (b) due to the joint nature of production the output of high sulfur fuels will go down less than its consumption by ships does, someone will consume most of the fuel oil that ships no longer used. And since someone is consuming it, they will emit the sulfur.
The ultimate result will be a regulation that basically shifts who produces the sulfur emissions, with a far smaller impact on the total amount of emissions.
This represents a tragic–and classic–example of a regulation imposed on a segment of a larger market. The pernicious effects of such a narrow regulation are particularly acute in oil, due to the joint nature of production.
Given the efficiency and distributive effects of the IMO, it is almost certainly not a second best policy. Indeed, it is more likely to be a second worst policy. Or maybe a first worst policy: doing nothing at all is arguably better.
One particularly disturbing aspect about this debate is its polarity–it’s framed as forestry management vs. climate change. And here, both Zinke and his critics are culpable.
It doesn’t have to be that way. Policy on forest management can be analyzed quite independently of climate change. Indeed, to the extent there is a dependence, logically one should be more supportive of measures to mitigate fire risk if you believe that other factors–including warming–have raised that risk. That is, the warmists, and those who believe there is a connection between warming and fire risk, should be the biggest supporters of reducing the factors that increase the frequency and intensity of fires–and reducing fuel load would be at the top of the list. These are measures that can be taken in the here and now, and which do not involve wrenching costs.
But that requires pragmatism, and that is something that is conspicuous by its absence on the environmentalist left. Indeed, they largely view mitigation and other pragmatic, gradualist responses to climate change as a serious moral failing requiring a response befitting the Inquisition, culminating in an auto de fe. That is, the response is religious in nature, and not logical or pragmatic. Mitigation is about trade-offs, and evaluating costs and benefits. These are not the terms of religious debate.
Indeed, I surmise that one of the reasons for raging against mitigation–and likely the most important reason, especially among the more strident–is that mitigation undermines the case for the totalitarian measures that many on the environmental left ardently support. And if you think totalitarian is too harsh a word, I think you are quite wrong. Fighting climate change is the justification by many on the left for a complete reordering of economic and social systems, achieved by coercion and force if necessary.
If mitigation reduces the harm, the case for such totalitarian measures is undermined. And since for many on the left the primary value is not the environment per se, but a complete reordering of economic and social systems, this represents a mortal threat to their political agenda.
That is, environmentalism and climate change are largely instrumental–Trojan Horses, as it were. This is why mitigation strategies are met with such intense hostility. What’s the point in mitigation, if it deprives you of an opportunity to reorder society?
As a matter of rhetoric, people like Ryan Zinke (and Trump, for that matter) would be better to separate issues relating to mitigation of risk from the climate change issue, or to the extent that they bring up climate change at all, emphasize that mitigation is even more valuable to the extent that climate change does increase the risk of things like wildfires. Do not let the Trojan Horse into the debate. Emphasize that such measures can be a pragmatic response to a risk. I think that would resonate much more with ordinary people, as much as it infuriates ideologues.
You can guarantee that you would have heard about it 24/7 had it been even remotely plausible to pin this catastrophe on anthropogenic global warming. Algore, every A through Z list celebrity (looking for an opportunity to distract from Harvey Weinstein’s shrubbery), every politician from Australia to Zimbabwe would have been on about it incessantly, at high volume, and in the highest dudgeon.
But the die-off was due to–wait for it–excessive sea ice which greatly increased the distance that the adults had to go to get food. So because they died for the wrong reason–and indeed, died for a highly inconvenient reason (or would that be truth?)–the story made barely a ripple. Move along, nothing to see.
SWP doesn’t work for the Trump Treasury Department, and is in fact neuralgic to the idea of working for any government agency. Yet the Treasury’s recent report on financial regulatory reform is very congenial to my thinking, on derivatives related issues anyways. (I haven’t delved into the other portions.)
A few of the greatest hits.
Position limits. The Report expresses skepticism about the existence of “excessive speculation.” Therefore, it recommends limiting the role of position limits to reducing manipulation during the delivery period. Along those lines, it recommends spot month on limits, because that is “where the risk of manipulation is greatest.” It also says that limits should be designed so as to not burden unduly hedgers. I made both of these points in my 2011 comment letter on position limits, and in the paper submitted in conjunction with ISDA’s comment letter in 2014. They are also reflected in the report on the deliberations of the Energy and Environmental Markets Advisory Committee that I penned (to accurately represent the consensus of the Committee) in 2016–much to Lizzie Warren’s chagrin.
The one problematic recommendation is that spot month position limits be based on “holistic” definitions of deliverable supply–e.g., the world gold market. This could have extremely mischievous effects in manipulation litigation: such expansive and economically illogical notions of deliverable supplies in CFTC decisions like Cox & Frey make it difficult to prosecute corners and squeezes.
CFTC-SEC Merger. I have ridiculed this idea for literally decades–starting when I was yet but a babe in arms 😉 It is a hardy perennial in DC, which I have called a solution in search of a problem. (I think I used the same language in regards to position limits–this is apparently a common thing in DC.) The Treasury thinks little of the idea either, and recommends against it.
SEFs. I called the SEF mandate “the worst of Frankendodd” immediately upon the passage of the law in July, 2010. The Treasury Report identifies many of the flaws I did, and recommends a much less restrictive requirement than GiGi imposed in the CFTC SEF rules. I also called out the Made Available For Trade rule the dumbest part of the worst of Frankendodd, and Treasury recommends eliminating these flaws as well. Finally, four years ago I blogged about the insanity of the dueling footnotes, and Treasury recommends “clarifying or eliminating” footnote 88, which threatened to greatly expand the scope of the SEF mandate.
CCPs. Although it does not address the main concern I have about the clearing mandate, Treasury does note that many issues regarding systemic risks relating to CCPs remain unresolved. I’ve been on about this since before DFA was passed, warning that the supposed solution to systemic risk originating in derivatives markets created its own risks.
Uncleared swap margin. I’ve written that uncleared swap margin rules were too rigid and posed risks. I have specifically written about the 10-day margining period rule as being too crude and poorly calibrated to risk: Treasury agrees. Similarly, it argues for easing affiliate margin rules, reducing the rigidity of the timing of margin payments (which will ease liquidity burdens), and overbroad application of the rule to include entities that do not impose systemic risks.
De minimis threshold for swap dealers. I’m on the record for saying using a notional amount to determine the de minimis threshold to determine who must register as a swap dealer made no sense, given the wide variation in riskiness of different swaps of the same notional value. I also am on the record that the $8 billion threshold sweeps in firms that do not pose systemic risks, and that a reduced threshold of $3 billion would be even more ridiculously over inclusive. Treasury largely agrees.
The impact of capital rules on clearing. One concern I’ve raised is that various capital rules, in particular those that include initial margin amounts in determining liquidity ratios for banks, and hence their capital requirements, make no economic sense, and and unnecessarily drive up the costs banks/FCMs incur to clear for clients. This is contrary to the purpose of clearing mandates, and moreover, has contributed to increased concentration among FCMs, which is in itself a systemic risk. Treasury recommends “the deduction of initial margin for centrally cleared derivatives from the SLR denominator.” Hear, hear.
I could go into more detail, but these are the biggies. All of these recommendations are very sensible, and with the one exception noted above, in the Title VII-related section I see no non-sensical recommendations. This is actually a very thoughtful piece of work that if followed, will undo some of the most gratuitously burdensome parts of Frankendodd, and the Gensler CFTC’s embodiment (or attempts to embody) those parts in rules.
But, of course, on the Lizzie Warren left and in the chin pulling mainstream media, the report is viewed as a call to gut essential regulations. Gutting stupid is actually a good idea, and that’s what this report proposes. Alas, Lizzie et al are incapable of even conceiving that regulations could possibly be stupid.
Hamstrung by inane Russia investigations and a recalcitrant (and largely gutless and incompetent) Republican House and Senate, the Trump administration has accomplished basically zero on the legislative front. It’s only real achievement so far is to start–and just to start–the rationalization and in some cases termination (with extreme prejudice) of Obama-era regulation. If implemented, the recommendations in the Treasury Report (at least insofar as Title VII of DFA is concerned), would represent a real achievement. (As would rollbacks or elimination of the Clean Power Plan, Net Neutrality, and other 2009-2016 inanity.)
But of course this will require painstaking efforts by regulatory agencies, and will have to be accomplished in the face of an unrelentingly hostile media and the lawfare efforts of the regulatory class. But at least the administration has laid out a cogent plan of action, and is getting people in place who are dedicated to put that plan into action (e.g., Chris Giancarlo at CFTC). So let’s get on with it.
The last several days in Houston have been warm and sunny. Most stores are open (with the surprising exception of a local Starbucks), traffic is getting back to normal–unfortunately (I-610 in particular is a nightmare). There are still flood waters in some locations, but most of the water has drained. I drove on US-59 (I-69, which nobody calls it) yesterday. Here’s how it looked a few days ago.
Some of the bayous are pretty much back to normal. Here is Brays (or Braes) Bayou, at Calhoun Rd. near UH, as of Friday–less than 48 hours after the rain stopped.
That doesn’t look much different than on a normal day. (This bayou has been subject to a lot of Corps of Engineers work post-Allison. The place I first lived in for a bit had been flooded up to the 1st floor ceilings during Allison. That area did not flood this time around. Whether that can be attributed to work on the bayou I can’t say.)
I only had to contend with many small lizards who took refuge on my 2d floor patio. When I sat out there after the storm, I felt like I was at a casting call for a Geico commercial.
Thank you to all who contacted me via various channels to inquire about how I was faring. I am deeply grateful, and am glad to say that unlike so many others, I was mainly inconvenienced, rather than suffering bodily or material harm. I am deeply sorry for those less fortunate than I: there but for the grace of God . . .
As some commenters have noted, and has been widely recognized, Houston and Texas have acquitted themselves very well. The contrast with the New Orleans during and post-Katrina is remarkable on every dimension. Rather than social disintegration, there has been solidarity and a spirit of mutual aid. My tennis coach’s father works with Red Cross, and says that they have more volunteers than they can handle. The lines in grocery stores that I visited once they reopened were amazing placid, with people patiently chatting while waiting their turn. Would that Christmas shopping scenes be as civil.
But of course, numerous people of ill will outside of Houston and Texas have taken this opportunity to take swipes at the city, state, and their people. Examples include a disgusting “cartoon” in Politico (a Tweet of which the gutless bastards deleted when called out on it), an even more disgusting cartoon in Charlie Hebdo, and more Tweets than I could count claiming that Harvey was divine justice for Houston’s petrol-chem industry–presumably these were Tweeted from artisanal wood and hemp smart phones by people who don’t drive, eschew all plastics, and produce all their own food using only llama dung as fertilizer. (The Unabomber was an evil bastard, but at least he lived what he believed.) These criticisms make as much sense as fundamentalists blaming earthquakes in the Bay Area as God’s retribution on sodomites (which is an illustration of how political opposites are often doppelgängers).
To which most Texans reply: we really don’t give a shit what you think. Or as one meme put it: Hold our beer–we got this.
And of course there are those who are using this to advance their political obsessions. I’ve already mentioned those who assert, obnoxiously and ad nauseum, that Harvey was the inevitable and predictable result of climate change. Among the most prominent, and certainly most execrable of these, was one-time economist Jeffrey Sachs:
Gov. Abbott, we would like to bid you a political adieu. Perhaps you can devote your time to rebuilding Houston and taking night classes in climate science. Senators Ted Cruz and John Cornyn, you will soon be asking us for money to help Texas.
My answer will be yes, if you stop spewing lies about climate dangers, agree to put US and Texas policy under the guidance of climate science, back measures to lower carbon emissions and stay in the Paris Climate Agreement. Then, of course, let’s help your constituents to rebuild.
And to ExxonMobil, Chevron, Koch Industries, ConocoPhillips, Halliburton, and other oil giants doing your business in Texas: You put up the first $25 billion in Houston disaster relief. Call it compensation for your emissions. Tell the truth about growing climate threats. Then, as citizens seeking the common good, we will match your stake.
This is the rankest opportunism, and his entire piece is written with a reckless disregard for the evidence about the link between CO2 and hurricanes generally (which is equivocal at best), and about the link between anthropogenic effects on climate and Hurricane Harvey in particular.
As I noted in my earlier post, Harvey was not an exceptionally powerful storm by historical standards, and indeed storms of its intensity were actually more common during the period prior to large increases in CO2 emissions. Harvey’s devastating effects were a result of the chance interaction of weather patterns that led Harvey to meander and linger over Houston.
At present another hurricane–Irene–is forming in the Atlantic. To illustrate the role of weather, there are two scenarios for its track. If the dominant weather pattern over the North Atlantic is a strong high pressure region, it will likely hit the US, most likely Florida. A weaker high pressure area, will result in Irene turning north and petering out in the Atlantic.
The other hobby horse being ridden with abandon is that Houston’s pro-development policies increased the damage: I’ve read that Houston’s lack of zoning bears some of the blame. Two of the most strident advocates of this view include The Economist and Bloomberg Business Week.
Well, on one level, this is Captain Obvious DUH territory: no development, no damage. More seriously, it is difficult to see how any policy change would have had an appreciable impact. The Houston Has No One to Blame But Itself litany wreaks of the correlation-causation fallacy, and post hoc ergo propter hoc arguments.
Where to begin? I guess with the fact that this was truly an exceptional storm, with record rainfall. Given Houston’s topology and geography, there would have been massive flooding even had the place been inhabited by Karankawa and the Akokisa indians living in grass huts sleeping on chickees, as it was once upon a time.
Houston is flat as a table. It is cut by numerous bayous and streams: its nickname is “The Bayou City.” Many of these streams are quite winding, which means that when they take on a lot of runoff, the water goes up and over the banks rather than rushing out to Galveston Bay, because it has nowhere else to go.
Yes, the pavement and building increases runoff. But several factors need to be kept in mind. First, Houston’s soil is sandy and its water table is very high, meaning that even absent parking lots and streets and buildings the capacity of the soil to absorb is limited. Second, contrary to the prejudices of people who write about Houston in blissful ignorance of the facts, Houston has the largest amount of green space of any city in the United States. Only about 10 percent of the area in Houston is rated as impermeable, and 90 percent is ranks less than 2 on a 5 point scale of permeability (with a lower score indicating greater permeability). Third, many of the outer lying areas that flooded were inundated by the Brazos River and connecting streams, which is another meandering stream, and which was not swollen by runoff from suburban developments, but which just couldn’t handle all the rain and the runoff from undeveloped areas.
And can anyone honestly say that any of Harris County would be that much less developed under any alternative development policies? Zoning for instance, might have affected the distribution of business and maybe some residential areas, but the total amount of the county that would be built on would almost certainly be virtually the same.
Yes, if Houston had adopted the policies of Detroit, and suffered the same economic shocks, there would be a lot more green space and Harvey would have done a lot less damage. No serious person considers that a good trade-off.
Indeed, there have been floods as extreme and even more extreme, back when Houston was far less developed than today. A good example is 1935, when Buffalo Bayou crested at 54 feet. It crested at a mere 40 feet in 2017. But downtown Houston has flooded ever since there was a downtown Houston, because downtown Houston lies hard up a flood-prone bayou. And it was put there because that bayou was the city’s economic link to the world, and which eventually made it one of the great ports in the United States.
In sum, given the prevalence of floods before the boom of the recent decades, it is difficult indeed to attribute this week’s floods to that boom. Instead, the floods are a constant, as is Houston’s geography and topology. Combine those with biblical rains, heavy even by Houston standards, and we have what we have.
Some–The Economist for example–blame permitting of houses in 100 year flood plains. The impact of this (the magazine estimates 8600 houses so located) on the total volume of flooding is certainly trivial, meaning that there are no external effects to speak of. Those who built in these locations assumed the risk, based on the same information The Economist used to make its calculations.
Yes, to the extent that such development is encouraged by subsidized flood insurance, or the prospects of post-flood government assistance, too many of such houses are built, and the private losses are socialized to US taxpayers at large. I completely agree with the principle of making people bear the full cost of insuring the risk, or the full cost of losses if they choose to build but underinsure. But again, the contribution of this to the magnitude of the flooding is probably too small to even measure: the magnitude of the flooding was due to record rain and Houston’s topography. Further, it also likely represents a small fraction of the estimated $160 billion in damage from the storm.
Jeffrey Sachs writes: “Houston has been growing rapidly without attention to flood risk.” It has been growing rapidly, but to say that this growth has occurred without attention to flood risk is a damnable lie–a libel, actually. Especially post-Allison (in 2001) there has been an effort to reduce the city’s vulnerability to flooding. Of course, as with any government endeavor, one can criticize the execution, and the priorities: as commenter and friend Tom Kirkendall notes, money squandered on sports stadiums and light rail (the lightest aspect of which is ridership) could have been better spent on infrastructure, including drainage improvements. But there has been considerable attention. There has been work on the bayous. (For example, there has been ongoing work on Brays Bayou near Calhoun for some time–and the crews were back at work on Friday.) Moreover, as any Houstonian with a car can tell you (and that is the vast majority of Houstonians, as many outsiders often snarikly remark), every road repaving project is a long running saga because in addition repaving, the city is installing huge storm sewer lines. Shepherd has been a nightmare for years because of such a project.
The strategy has been to try to direct runoff to the major highways, which is one reason for some of the most striking images of the flooding. Better to flood freeways than neighborhoods.
So Jeffrey Sachs, in his lofty and deliberate ignorance, can fuck right off.
The rainfall in Harvey was approximately double that of Allison, and covered a much wider area. For example, one reason that some of the major disasters Harvey caused did not occur with Allison is that the former storm overwhelmed the Addicks and Barker Reservoirs, whereas that did not happen with the latter because the heavy rain area did not extend that far.
I do not know for certain, but it is my impression that the Harvey flooding in the area that Allison also hit hard is comparable to what happened in 2001, despite the fact that Harvey’s rainfall was about double Allison’s. A comparison of 2017 and 2001 will tell a lot about how well post-Allison infrastructure changes mitigated the damage this time around.
No doubt HCFCD will put out a post-Harvey report, and will be challenged to come up with a appropriate title. I look forward to reading it, paying particular attention to what it has to say about the effect of post-Allison mitigation efforts.
But the basic point is that this is not primarily, or even secondarily a policy issue, regardless the attempts of opportunists to make it so. This was a historic storm–an epic storm–produced by a chance interaction of weather events. It dumped huge rains on one of the largest cities in the US–in amounts that would have no doubt overwhelmed every major city in the US. Moreover, it hit a city which nature made preternaturally vulnerable to flooding.
In sum, Harvey is a natural disaster. The economic cost is indeed due to economic development, but that is primarily an effect, rather than a cause, as Jeffrey Sachs, the Economist, Bloomberg BusinessWeek and myriad others with an axe to grind would make it.
Musical postscript. I survived Harvey’s danger, and didn’t even have to climb a flagpole.
