Coyote Blog

Conservatives rightly criticised the Obama Administration for rewriting rules so frequently and seemingly arbitrarily that businesses were reluctant to make long term investments.  As the WSJ editorialized in 2016:

Pfizer CEO Ian Read defends the company’s planned merger in an op-ed nearby, and his larger point about capricious political power helps explain the economic malaise of the last seven years. “If the rules can be changed arbitrarily and applied retroactively, how can any U.S. company engage in the long-term investment planning necessary to compete,” Mr. Read writes. “The new ‘rules’ show that there are no set rules. Political dogma is the only rule.”

He’s right, as every CEO we know will admit privately. This politicization has spread across most of the economy during the Obama years, as regulators rewrite longstanding interpretations of longstanding laws in order to achieve the policy goals they can’t or won’t negotiate with Congress. Telecoms, consumer finance, for-profit education, carbon energy, auto lending, auto-fuel economy, truck emissions, home mortgages, health care and so much more.

Capital investment in this recovery has been disappointingly low, and one major reason is political intrusion into every corner of business decision-making. To adapt Mr. Read, the only rule is that the rules are whatever the Obama Administration wants them to be. The results have been slow growth, small wage gains, and a growing sense that there is no legal restraint on the political class.

I am willing to believe this is true. On my own smaller scale, our company has disinvested in California because we simply cannot keep up with the changing rules there.

But all this forces me to ask, why doesn't this same Conservative criticism apply to Trump's trade policy?  The rules are changing literally by the day -- Consumers of goods from Mexico are going to be hit by new tariffs, Mexican goods are not going to be hit by new tariffs, China is hit by new tariffs, a China deal is near, a China deal is not near, Company A got a special tariff exemption, Company B did not get a special exemption, etc. How can any company with a global supply chain, which is most any US manufacturer nowadays, plan for new products or investments in this environment when they have no ability to make long-term plans for their supply chain?

A large part of the mythology of the American Civil War is the stories of brothers who fought on opposite sides of the way.   They are a favorite part of many Civil War novels (including that series which I can't remember the name of that had a Patrick Swayze mini-series).

I am sure similar stories are part of many civil war traditions in many countries, but one of the more amazing comes from China in the 20th century.  And it involved sisters, not brothers.

Soong Ching-Ling was one of three sisters born in the Shanghai area in the late 19th century and sent by their father to America for school.  She would marry her father's friend Sun Yat-Sen (one of several wives -- Sun was only Westernized so far).  When Sun died, the left-right coalition he held together among the Chinese revolutionary forces disintegrated, with Soong Ching-Ling ending on the communist side.  She eventually rose to be vice-president of the PRC.

Her sister Soong Mei-Ling would marry Sun Yat-Sen's protege Chiang Kai-Shek, who was to lead China in the 30's and early 40's and eventually dual unsuccessfully with the communists after the war for control of China.  He would then rule the Chinese nationalist forces in Taiwan for most of the rest of his life.

Postscript:  I see there is a Hong Kong movie with a pretty nice cast on the sisters, might have to watch it.

A while back I took at Teaching Company course on Victorian Great Britain.  The professor said something about the Victorians that really stuck with me -- he said that the British never understood the soft power they had in the world.   The world wanted to dress British and emulate British manners.  They read British authors.  They desperately wanted to send their children to British schools.  Even the native revolutionaries in their colonies sometimes revolted in very British ways.  Sure the leaders of the Indian National Congress harbored enormous resentments against the arrogance of British power, but all their leaders were British-schooled and cast many of their arguments in terms from the British enlightenment.

I was thinking about this a while back when I was in France and attended a show of local French artists.  As with much modern art, much of it incorporated bits of pop culture.  And about 98% of that was American and to a lesser extent British pop culture.  Sure, some of it was used ironically, but American culture is consumed everywhere in the world.  I must have seen 5 or 6 artists using Captain America imagery alone in their art in a not-at-all hostile or ironic way..  America in the 20th and 21st century is in the same position as the British in the 19th century, and we are probably just as unaware of that soft power and pissing it away just as surely with our slamming around the world like a bull in a china shop.

And speaking of China, it is simply insane in my mind to turn them into our enemies.  Whatever the top Chinese officials are after, much of the population wants to be like Americans.  They want to come to our schools and wear our fashions and watch our movies and TV.  We have had several exchange students from China live with us and they treat getting to spend time living in America like having hit the lottery.  We have watched one woman who goes by "Cat" in the US all the way from high school to college in America to getting a good banking job.  She first showed up at our house looking exactly like Ching "Honey" Huan from Doonesbury -- the hair, glasses, clothes, everything.  She now looks, dresses, and talks like any young American.  For a while her Instagram was dominated by pictures of her and her friends at Big 10 football games.

I have been consumed of late with other things in my life, and really have not had the chance to address the increasingly insane extent of the Trump Administration's economic nationalism. But go to Don Boudreax's and Mark Perry's blogs and scroll through them -- they do a much more eloquent job of defending free trade than I can.

I encourage you to click through to an animated visualization of the largest cities in the world, by year.

A few surprises, but the biggest one to me was how long Naples hung around on the list.

The fall and rise of the Chinese cities is also interesting.  People seem to get freaked out by China's growing prosperity, a fear for which I have zero sympathy -- people exiting poverty in China is an unalloyed good.  But here is a thought for context.  I can't absolutely prove that it is correct but I am pretty sure it is true.  The history of the world is that, with the exception of the 200 years from about 1800-2000, China has for 4000 years been the largest economy in the world.  Chinese prosperity today is not some aberration, it is a return to normal.

Update:  OK, I think I got it to embed:

New project:

A “Bar Chart Race” animation showing the changing ranks of the 10 biggest cities in the world since 1500.

Fascinating to watch giant cities vanish after falling in conquests, and amazing that three UK cities were in the top 8 in the late 1800s. pic.twitter.com/KglMZbYobr

— John Burn-Murdoch (@jburnmurdoch) March 18, 2019

Megan McArdle has a great WaPo article and tweet storm on high-speed rail in the US.  In it she focuses on issues of distance and infrastructure barriers we have.

One thing she left out is that the US rail system is optimized for freight, vs. European and Japanese systems that are optimized for passengers (it is hard to do both well with the same network).  The US situation is actually better, much better, for energy conservation.  I wrote in detail about this before:

First, consider the last time you were on a passenger train.  Add up the weight of all the folks in your car.  Do you think they weighed more or less than the car itself?  Unless you were packed into a subway train with Japanese sumo wrestlers, the answer is that the weight of the car dwarfs that of the passengers it is carrying.    The average Amtrak passenger car apparently weighs about 65 tons (my guess is a high speed rail car weighs more).  The capacity of a coach is 70-80 passengers, which at an average adult weight of 140 pounds yields a maximum passenger weight per car of 5.6 tons.  This means that just 8% of the fuel in a passenger train is being used to move people -- the rest goes into moving the train itself.

Now consider a freight train.  The typical car weight 25-30 tons empty and can carry between 70 and 120 tons of cargo.  This means that 70-80% of the fuel in a freight train is being used to move the cargo.

This is another case of short-sighted analysis that looks only at the seen rather than the unseen.  Coastal elites take trips to Europe and see the beautiful high-speed trains and in turn never spend a moment thinking about freight trains.  So they fixate on beautiful sexy passenger trains rather than thinking about the system holistically.  I titled a Forbes article I wrote on the effect as "Shifting Capital from the Productive to the Sexy."

PS-  I am a train buff and have a whole room of my house filled with a model railroad, so I don't knee-jerk hate on rail.  I have ridden European high-speed rail many times so I am familiar with the product.  The London-Paris segment is great, and I have ridden the French TGV from Paris to Marseilles and the Italian line from Milan to Florence.  What's not to love as a tourist -- we don't pay for them and they provide good service between the city centers of tourist destinations.   But if you look at those trains they really have a ton of expensive infrastructure carrying not very many people over relatively (for the US) short distances.

I write this because after I criticized infrastructure triumphalism in Joel Epstein's article at Huffpo, he wrote me a one line retort: "You should get out of the country more often."  LOL, if you had to enshrine a hall of fame of sneering coastal elite dismissive comments of critics, this would have to be on the list.  I tried to follow up with him and ask him if he would have the US adopt China's infrastructure construction practices if the cost was adopting China's environmental and accountability standards, but I did not get a response.

Today after the market closed was Tesla's analyst conference call to review  fourth quarter earnings.  TL:DR It was as weird as ever, maybe weirder.  Even before the call, Elon Musk said that the numbers released today would be un-audited, and the call ended by saying -- in a sort of "oh by the way" over the shoulder parting shot -- that their CFO was leaving and being replaced by a 36-year-old with only Tesla experience and no prior CFO role (not unlike the random young dude that the Arizona Cardinals just hired as their coach, but that is another story).  Neither Musk statement was a big confidence boost given the myriad questions swirling around the legitimacy of Tesla's reported financials.  But the REALLY weird stuff was in between.

The LA Times, which really has had some of the best Tesla coverage, has the best summary I have found so far of the call.  Before I get into some things we learned that helped support my article I wrote the other day, I want to share some of the priceless other highlights of the call.  All from the LAT article:

Tesla faces questions about whether enough new Model 3 sedans can be sold to generate substantial profits.

“The demand for the Model 3 is insanely high. The inhibitor is that people don’t have the money to buy one,” Tesla Chief Executive Elon Musk told analysts on the call.

The reduction in world poverty.

The global population living in extreme poverty has fallen below 750 million for the first time since the World Bank began collecting global statistics in 1990, a decline of more than 1 billion people in the past 25 years.

In a report released Wednesday, the World Bank said the extreme poverty rate had dropped to 10% as of 2015, the latest comprehensive data, and they estimate that the decline has continued over the past three years....

The report highlights the extent to which global poverty has shifted geographically. In 1990, nearly 1 billion of those living in extreme poverty were in East Asia, but decades of rapid economic development in China and other East Asian economies has brought that figure down to 47 million, a decline to a 2% poverty rate from 62%.

South Asia, with most of its population in India, Pakistan and Bangladesh, has seen the number living in extreme poverty fall to 216 million from more than 500 million, to 12% from 47%.

Sub-Saharan Africa has made less progress. Its poverty rate has fallen to 41% from 54% since 1990, but population growth has been so rapid that the number of people in extreme poverty has climbed above 400 million, from 278 million in 1990.

While I am not deeply worried about man-made climate change, I am appalled at all the absolutely stupid, counter-productive things the government has implemented in the name of climate change, all of which have costly distorting effects on the economy while doing extremely little to affect man-made greenhouse gas production.  For example:

• Corn ethanol mandates and subsidies, which study after study have shown to have zero net effect on CO2 emissions, and which likely still exist only because the first Presidential primary is in Iowa.  Even Koch Industries, who is one of the largest beneficiaries of this corporate welfare, has called for their abolition
• Electric car subsidies, 90% of which go to the wealthy to help subsidize their virtue signalling, and which require more fossil fuels to power than an unsubsidized Prius or even than a SUV.
• Wind subsidies, which are promoting the stupidist form for power ever, whose unpredictabilty means fossil fuel plants still have to be kept running on hot backup and whose blades are the single largest threat to endangered bird species.
• Bad government technology bets like the massive public subsidies of failed Solyndra

Even when government programs do likely have an impact of CO2, they are seldom managed intelligently.  For example, the government subsidizes solar panel installations, presumably to reduce their cost to consumers, but then imposes duties on imported panels to raise their price (indicating that the program has become more of a crony subsidy for US solar panel makers, which is typical of these types of government interventions).  Obama's coal power plan, also known as his war on coal, will certainly reduce some CO2 from electricity generation but at a very high cost to consumers and industries.  Steps like this are taken without any idea of whether this is the lowest cost approach to reducing CO2 production -- likely it is not given the arbitrary aspects of the program.

These policy mess is also an opportunity -- it affords us the ability to substantially reduce CO2 production at almost no cost.

The Plan

Point 1: Impose a Federal carbon tax on fuel.

I am open to a range of actual tax amounts, as long as point #2 below is also part of the plan.  Something that prices CO2 between $25 and $45 a ton seems to match the mainstream estimates of the social costs of CO2.  I think methane's greenhouse effects are exaggerated, but one could make an adjustment to the natural gas tax numbers to take into account methane leakage in the production chain.   I am even open to making the tax=0 on biofuels given these fuels are recycling carbon from the atmosphere.

So what is the best way to reduce CO2 -- by substituting gas for coal?   By more conservation?  By solar, or wind?  With biofuels?  With a carbon tax, we don't have to figure it out or have politicians picking winners.  This is why a Pigovian tax on carbon in fuels is going to be the most efficient possible way to reduce CO2 production.   Different approaches will be tested in the marketplace.  Cap and trade could theoretically do the same thing, but while this worked well in some niche markets (like SO2 emissions), it has not worked at all in European markets for CO2.   There has just been too many opportunities for cronyism, too much weird accounting for things like offsets that is hard to do well, and too much temptation to pick winners and losers.

When I first crafted early drafts of this plan several years ago, I had assumed that Progressives championed a carbon tax for the reasons I listed above, ie that it is the most efficient means to allow markets to reduce emissions.  However, the referendum a couple of years ago in Washington State demonstrated that many Progressives may not understand this at all.  You can read a lot more about this debate here.  I fail the ideological Turing test on this one, because I don't know if the Progressives who were strongly for CO2 reduction but opposed the Washington State carbon tax did so because they did not understand economics or because they cared less about global warming than funding other Progressive causes.

Point 2:  Offset 100% of carbon tax proceeds against the payroll tax

Yes, there are likely many politicians, given their incentives, that would love a big new pool of money they could use to send largess, from more health care spending to more aircraft carriers, to their favored constituent groups.  But we simply are not going to get Conservatives (and libertarians) on board for a net tax increase, particularly one to address an issue folks on the Right may not agree is an issue at all.  So our plan will use carbon tax revenues to reduce other Federal taxes.

I think the best choice would be to reduce the payroll tax.  Why?  Because, the carbon tax will necessarily be regressive (as are most consumption taxes) and the most regressive other major Federal tax we have are payroll taxes.  Offsetting income taxes would likely be a non-starter on the Left, as no matter how one structures the tax reduction the rich would get most of it since they pay most of the income taxes.

There is another benefit of reducing the payroll tax -- it would mean that we are replacing a consumption tax on labor with a consumption tax on fuel. It is always dangerous to make gut-feel assessments of complex systems like the economy, but my sense is that this swap might even have net benefits for the economy -- so much so that we might want to do it even if there was no such thing as greenhouse gas warming.  In theory, labor and fuel are economically equivalent in that they are both production raw materials. But in practice, they are treated entirely differently by the public.   Few people care about the full productive employment of our underground fuel reserves, but nearly everybody cares about the full productive employment of our labor force.   After all, for most people, the primary single metric of economic health is the unemployment rate.  So replacing a disincentive to hire with a disincentive to use fuel could well be popular.

Point 3:  Eliminate all the stupid stuff

Oddly enough, this might be the hardest part politically because every subsidy, no matter how idiotic, has a hard core of beneficiaries who will defend it to the death -- this the the concentrated benefits, dispersed cost phenomena that makes it hard to change many government programs.  But never-the-less I propose that we eliminate all the current Federal subsidies, mandates, and prohibitions that have been justified by climate change. Ethanol rules and mandates, solar subsidies, wind subsidies, EV subsidies, targeted technology investments, coal plant bans, pipeline bans, drilling bans -- it all should go.  The carbon tax does the work.

States can continue to do whatever they want -- we don't need the Feds to step on states any more than they do already, and I continue to like the 50 state laboratory concept.  If California wants to continue to subsidize wind generators, let them do it.  That is between the state and its taxpayers (and for those who think the California legislature is crazy or that the Texas legislature is in thrall to oil companies, that is what U-Haul is for).

Point 4:  Revamp our nuclear regulatory regime

As much as alternative energy enthusiasts would like to deny it, the world needs reliable, 24-hour baseload power -- and wind and solar are not going to do it (without a change in storage technology of at least 2 orders of magnitude in cost).  The only carbon-free baseload power technology that is currently viable is nuclear.

I will observe that nuclear power suffers under some of the same problems as commercial space flight -- the government helped force the technology faster than it might have grown organically on its own, which paradoxically has slowed its long-term development.  Early nuclear power probably was not ready for prime time, and the hangover from problems and perceptions of this era have made it hard to proceed even when better technologies now exist.   We are at least 2 generations of technology past what is in most US nuclear plants.  Small air-cooled thorium reactors and other technologies exist that could provide reliable safe power for over 100 years.  I am not an expert on nuclear regulation, but it strikes me that a regime similar to aircraft safety, where a few designs are approved and used over and over makes sense.  France, which has the strongest nuclear base in the world, followed this strategy.  Using thorium could also have the advantage of making the technology more exportable, since its utility in weapons production would be limited.

Point 5: Help clean up Chinese, and Asian, coal production

One of the hard parts about fighting CO2 emissions, vs. all the other emissions we have tackled in the past (NOx, SOx, soot/particulates, unburned hydrocarbons, etc), is that we simply don't know how to combust fossil fuels without creating CO2 -- CO2 is inherent to the base chemical reaction of the combustion.  But we do know how to burn coal without tons of particulates and smog and acid rain -- and we know how to do it economically enough to support a growing, prosperous modern economy.

In my mind it is utterly pointless to ask China to limit their CO2 growth.  China has seen the miracle over the last 30 years of having almost a billion people exit poverty.  This is an event unprecedented in human history, and they have achieved it in part by burning every molecule of fossil fuels they can get their hands on, and they are unlikely to accept limitations on fossil fuel consumption that will derail this economic progress.  But I think it is reasonable to help China stop making their air unbreathable, a goal that is entirely compatible with continued economic growth.  In 20 years, when we have figured out and started to build some modern nuclear designs, I am sure the Chinese will be happy to copy these and start working on their CO2 output, but for now their Maslov hierarchy of needs should point more towards breathable air.

As a bonus, this would pay one immediate climate change benefit that likely would dwarf the near-term effect of CO2 reduction.  Right now, much of this soot from Asian coal plants lands on the ice in the Arctic and Greenland.  This black carbon changes the albedo of the ice, causing it to reflect less sunlight and absorb more heat.  The net effect is more melting ice and higher Arctic temperatures.  A lot of folks, including myself, think that the recent melting of Arctic sea ice and rising Arctic temperatures is more attributable to Asian black carbon pollution than to CO2 and greenhouse gas warming (particularly since similar warming and sea ice melting is not seen in the Antarctic, where there is not a problem with soot pollution).

Final Thoughts

At its core, this is a very low cost, even negative cost, climate insurance policy.  I am convinced this policy, taken as a whole, would still make sense even if CO2 turns out to be as harmless as nitrogen.  The carbon tax combined with a market economy does the work of identifying the most efficient ways to reduce CO2 production.   The economy benefits from the removal of a myriad of distortions and crony give-aways, while also potentially benefiting from the replacement of a consumption tax on labor with a consumption tax on fuel.  The near-term effect on CO2 is small (since the US is only a small part of the global emissions picture), but actually larger than the near-term effect of all the haphazard current programs, and almost certainly cheaper to obtain.  As an added benefit, if you can help China with its soot problem, we could see immediate improvements in probably the most visible front of man-made climate change:  in the Arctic.

Postscript

Perhaps the hardest thing to overcome in reaching a compromise here is the tribalism of modern politics.  I believe this is  a perfectly sensible plan that even those folks who believe man-made global warming is  a total myth ( a group to which I do not belong) could sign up for.  The barrier, though, is tribal.  I consider myself to be pretty free of team politics but my first reaction when thinking about this kind of plan was, "What? We can't let those guys win.  They are totally full of sh*t.  In the past they have even threatened to throw me in jail for my opinions."  Since I first published this plan I have had very prominent skeptics contact me to criticize me for "giving in to the warmists."

I sometimes wonder if the media and the punditocracy have any ability any more to reality-check statistics.  Two examples:

One

Trump supporters were running around in circles patting themselves on the back with this story:

African American business owners are on the rise. According to the Minority 2018 Small Business Trends survey, the number of black-owned small businesses in the U.S. increased by a staggering 400% in a year-over-year time period from 2017 to 2018.

I call bullsh*t on this.  There is no WAY that the number of black-owned businesses increase by a factor of 5** in just one year.  There are millions of black-owned small businesses in this country and there is no way this quintupled** in a year.   It does not pass any kind of smell test.   It is clearly some sort of measurement error, either a small sample size for a survey or a change in data source and definitions from one year to another.  I could go investigate the study and try to figure out the cause but I do not even need to bother because economic and demographic data simply do not change at this pace in one year.

Two

The other example I have is this absurd figure:

A recent survey conducted by OVW and the Bureau of Justice Statistics found that an average of one in four undergraduate females experience sexual assault by the time they finish college.

Here is the deal with this stat:  no one actually really believes it.  Why do I say this with confidence?  Because parents still send their daughters to college -- in fact they fight and scrap and invest huge amounts of time and money to send their daughter to college.  If they really believed their little darling had a 1 in 4 chance of being sexually assaulted, they would never do so.

Here is a point of comparison:  The Japanese brutal occupation of Nanjing, China is commonly known as the "Rape of Nanjing."  It is called this in part because so many local women were raped.  The numbers are fought over by historians, but the best estimate is that 20,000 of the approximately 100,000 women who were in Nanjing at the time were raped by Japanese soldiers, or about one in five.  This means that if the one in four number is correct, then colleges are more dangerous for women than being in Nanjing during the Japanese occupation.  Now, I would venture to guess that if I tried to stuff you daughter into a time machine and send her back to Nanjing on December 13, 1937 you would probably fight me to the death to prevent it.  But parents don't act anything like this vis a vis going to college, ergo no one believes this figure.  So why does everyone keep using it like it is accurate?

** I had put quadrupled but my son just called and reminded me that a 400% increase means quintupled.  Thanks, Nic.  Though I will say there is a good chance the source incorrectly used 400% to mean quadrupled, so I can't rule that out either.

From an article about how China's decision to restrict imports of recyclable materials is throwing the recycling industry for a loop:

The trash crunch is compounded by the fact that many cities across the country are already pursuing ambitious recycling goals. Washington D.C., for example, wants to see 80% of household waste recycled, up from 23%.

D.C. already pays $75 a ton for recycling vs. $46 for waste burned to generate electricity.

"There was a time a few years ago when it was cheaper to recycle. It's just not the case anymore," said Christopher Shorter, director of public works for the city of Washington.

"It will be more and more expensive for us to recycle," he said.

Which raises the obvious question:  If it is more expensive, why do you do it?  The one word answer would be "sustainability" -- but does that really make sense?

Sustainability is about using resources in a way that can be reasonably maintained into the future.  This is pretty much impossible to really model, but that is not necessary for a decision at the margin such as recycling in Washington DC.  When people say "sustainable" at the margin, they generally mean that fewer scarce resources are used, whether those resources be petroleum or landfill space.

Gosh, if only we had some sort of simple metric that summarized the value of the time and resources that go into a service like recycling or garbage disposal.  Wait, we do!  This metric is called "price".  Now, we could have a nice long conversation about pricing theory and whether or not prices always mirror costs.  But in a free competitive market, most prices will be a good proxy for the relative scarcity (or projected scarcity) of resources.  Now, I am going to assume the numbers for DC are correct and are worked out intelligently (ie the cost of recycling should be net of the value of materials recovered, and the cost of burning the trash should be net of the value of the electricity generated).   Given this, recycling at $75 a ton HAS to be less "sustainable" than burning trash at $46 since it either consumes more resources or it consumes resources with a higher relative scarcity or both.

Postscript:  I have had students object to this by saying, well, those costs include a lot of labor and that doesn't count, sustainability is just about materials.  If this is really how sustainability is defined, then it is an insane definition.  NOTHING is more scarce or valuable than human time.  We have no idea, really, how much recoverable iron or oil there is in the world (and in fact history shows we systematically always tend to underestimate the amount).  But we do know for an absolute fact that there are 182.4 billion human hours lived in a given day. Period.  Labor is if anything more important than material in any sustainability question (after all, would you be willing to die a year earlier in exchange for there being more iron in the world?  I thought not.)

In fact, it is probably the changing scarcity and value of labor in China that is driving the issues in this article in the first place.  China can't afford the labor any more to re-sort badly sorted American recyclables, likely because the economic boom in China has created much more useful and valuable things for Chinese workers to do than separate cardboard boxes from foam peanuts.  Another way to think of the market wage rate is as the opportunity cost for labor, ie if you use an hour of labor for to do X, what is the value of production you are giving up somewhere else by their no longer having access to this hour of labor.

There was a funny sideshow to the recent Supreme Court Janus v. AFSCME decision.  That decision essentially made it impossible for local or state governments to require that all employees pay support to certain public employee unions, even if they are not a member of that union and/or don't support that union's activities and, particularly, that union's political speech.  Progressives, many of whom feel increasingly confident to admit that they are socialists, rushed to point out that this was a death knell for these unions because of the free rider problem.  If workers who benefitted from the union's collective bargaining activities were not forced to pay, then what incentive exists for any one employee to pay the union if they still will enjoy the benefits without paying.  Soon, everyone will become a free rider and the union will die.  America's most famous socialist Bernie Sanders demonstrates that he understands the free rider problem completely in this

Sanders’ bill, called the Workplace Democracy Act, would remove several of the major barriers to organized labor’s growth.

It would ban “right to work” laws, which allow employees to opt out of paying union dues even though the union must still bargain on their behalf, leading to what unions call “free-riding.”

Via Don Boudreaux:

Greg Ip writes that “The U.S. runs a trade deficit because it consumes more than it produces while its trading partners, collectively, do the opposite” (“How the Tax Cut President Trump Loves Will Deepen Trade Deficits He Hates,” April 19).

Here is how I like to explain why this is wrong.  The trade deficit exists in large part because foreigners are more likely to consume the American-made goods and services they buy right here in the US, rather than take them back to their home country, while US consumers tend to bring foreign goods back to America to consume them.  Let me unpack this.

First, over any reasonable length of time, payments between countries are going to balance.  If this were not true, there would be some mattress in China that has trillions of dollar bills stuffed in it, and no reasonable person nowadays just lets money sit around lying fallow.  There are some payments between countries for each others' goods.   And there are some payments for each others' services.   And there are some payments for various investments.  All these ultimately balance, which makes fixating on just one part of this circular flow, the payments for physical goods, sort of insane.  If we have a trade "deficit" in physical goods, then we must have a trade surplus in services (which we do) and in investments (which we do) to balance things out.

But what do we mean by an investment surplus?  It means that, for example, folks from China are spending more money in the US for things like real estate and buildings and equipment -- either directly or through purchases of American equity and debt securities -- than US citizens are buying in China.  But note that another name for investment is just stuff that foreigners buy in this country that stays in this country and they don't take back home.  If a Chinese citizen buys a house in Los Angeles (something that apparently happens quite a bit), that is just as much "consumption" as when I buy a TV made in China.  But unlike my TV purchase (which counts as an import), because of the arbitrary way trade statistics are calculated, selling a Chinese citizen a house in LA does not count as an export because they keep and use the house here.  Let's say one Chinese person sells 10,000 TV's to Americans, and then uses the proceeds to build a multi-million dollar house in Hawaii.  This would show up as a huge trade deficit, but there is no asymmetry of consumption or production -- Chinese and American citizens involved in this example are producing and consuming the same amounts.  The same is true when the Chinese build a manufacturing plant here.  Or when then invest capital in a company like Tesla and it builds a manufacturing plant here.

Our bizarre fixation on the trade deficit number would imply that, if trade deficits are inherently bad, then we would be better off if the Chinese person who bought the house in LA dismantled it and then shipped the material back to China.  Then it would show up as an export.  Same with the factory -- if we fixated on reducing the trade deficit then we should prefer that the Chinese buy the equipment for their factory here but have it all shipped home and built in China rather than built here.   Is this really what you want?

I am willing to concede one exception -- when Chinese use trade proceeds to buy US government debt securities.   This is where my lack of formal economics training may lead me astray, but I would say that the US government is the one major American institution that is able to consume more than it produces.  Specifically, by running enormous deficits it is able to -- year in and year out -- allow people to consume more than they produce.  Trade proceeds from foreigners that buy this debt in some sense help subsidize this.

However, I don't think one can blame trade for this situation.  Government deficits are enabled by feckless politicians who pander to the electorate in order to be re-elected, a dynamic that has little to do with trade.  I suppose one could argue that by increasing the demand for government securities, foreigners are reducing the cost of debt and thus perhaps enabling more spending, though I am not sure politicians are at all price sensitive to interest rates when they run up debt -- as a minimum their demand curve is really, really steep.   There is a relation between government borrowing and trade but the relationship is reversed -- Increased borrowing will tend, all things being equal, to increase the value of the dollar which will in turn make imports cheaper and exports more expensive, perhaps increasing the trade deficit.

Don Boudreaux and and Mark Perry have been doing a great job making the case against Trump's trade sanctions.  But it is always a danger only to learn about opposing views from those who disagree with you, so in the spirit of Bryan Caplan's "Ideological Touring Test" I wanted to address directly some of the arguments in support of Trump's sanctions.

I followed several links to this article by Spencer Morrison.  After reading the whole thing, I fear I have made the intellectual error of choosing a poor representative of the opposing side's argument, but I am committed now, so here goes.

Consider that China steals more than half a trillion dollars in American intellectual property every single year. This is one of the reasons America’s trade deficit with China is so massive. For example, in 2010 Chinese companies stole high-speed rail designs from American firms, thereby depriving them of hundreds of billions in potential revenues. Such theft occurs in nearly every industry, whether it’s software programs or branded consumer goods. And the worst part? We let it happen.

I find the author's figure absurd, and likely untrustworthy given his example.  Following his high-speed rail design "theft" link one quickly finds that 1) Americans were not involved at all, which is not surprising since we really don't have high-speed rail manufacturing industry or expertise in this country; 2) the technology seems to have been acquired or copied legally; and 3) the real competitive issue for non-Chinese companies seems to be that the Chinese have extended and improved the technology.

This one paragraph essentially summarized the theme of the article, that technology is the key to increased well-being and that the US is poorer when they cannot monopolize the best technology.  The first is true, the second is dead wrong and flies in the face of 200 years of history.

I won't spend time on the mass of the article where describes the economy in very production-based terms which I don't totally agree with, but his basic point is one I can partially accept -- that real economic growth over time comes from  productivity growth.  I agree that technology is part of the productivity equation, but unlike the author I also see other drivers such as trade (which he calls "noise").  Trade is a critical factor in productivity improvement as specialization and comparative advantage greatly increase productivity.

But where I think he really goes off the rails is to say that because technology is wealth-creating, we need to monopolize that technology in the US.

The core issue remains: we continue to  offshore our advanced industries at an alarming pace, which will only increase the likelihood that the “next big thing” will be invented abroad. If we do not reverse this trend, we will soon be on the outside looking in.

It would be entertaining to discuss the origins of the American textile industry in the late 18th and early 19th century with the author, which were largely based on spinning jenny and powerloom designs that were literally stolen from manufacturers in the UK (countries don't own technologies, only individuals and their companies do).  The UK at the time had strict technology export restrictions of which I am sure the author would have been approving.

So did the UK suddenly become poorer as America built a lively cloth industry?  No, in fact the UK boomed along with the US.  It turns out that spreading new technology and productivity techniques around more widely made everyone richer.  This only makes sense.  Would the West really be wealthier if they had kept all technology from spreading, and thus were surrounded by countries dominated by subsistence farming and medieval crafts?  A skeptic might argue that the UK did eventually become poorer relative to the US and upstart Germany, but Andrew Carnegie could have told you why at the beginning of the 20th century.  He went back and toured manufacturers in his old home and was horrified at how little they reinvested in new technology.

Which brings me back to Chinese high speed rail, the example he started with.  Clearly the Chinese have a growing high-speed rail manufacturing industry, and they DIDN'T invent the technologies originally in China.  This is what trade is all about.  Rather than keep technologies locked up in a secret underground bunker in the Rockies, as the author seems to prefer, it spreads technologies around the world.  Production then shifts around the world based on a variety of factors such as comparative advantage in ways that are hard to predict, but seldom has a strong relationship to the country in which the technology was first invented.  One place production does NOT shift, though, is towards countries whose government has artificially raised critical raw material prices through border taxes on its consumers called tariffs.

Which reminds me, if the problem is China "stealing" things like high-speed rail technology, then why in the hell are we imposing steel and aluminum tariffs?  What the heck does this have to do with technology transfer?  In fact, if the US really had a high-speed rail industry we were worried about, or if one were exclusively concerned with the auto industry, the author is essentially telling them "we are sorry you had your technology stolen so to help you out we going to substantially raise the prices of your two largest purchases (steel and aluminum) so that you can be even less competitive internationally."  Ahh, I can feel the economic growth from that already.

If the author wants better intellectual property protections for US companies and individuals, I am generally supportive of efforts to achieve this (as long as we don't over-specify intellectual property and end up again with endless patent troll suits).  For all its flaws, though, joining the TPP seems to be a better path to this end (it actually addresses, you know, intellectual property protections rather than just raise steel prices for consumers).

To conclude, I love this quote from his article because, despite being anti-trade, he in fact is echoing the pro-trade observation by Steven Landsburg.

Yet our trade policy does exactly the opposite. After the North American Free Trade Agreement took effect in 1994, U.S. corn exports surged, as did our imports of automobiles. The problem is that automobile manufacturing is much more likely to benefit from disruptive technology than is growing corn—under NAFTA, the preponderance of long-run benefits went to Mexico, not the United States. The same is true with America’s trade relationship with China: America’s advanced goods trade deficit with China now tops $120 billion. Meanwhile, our biggest export is soybeans.

Free trade is, quite literally, turning America into China’s mercantile resource colony: we buy their value-added, manufactured products, and we sell them raw materials.

This is freaking awesome!  We grow and sell soybeans and get back advanced technology products.  Brilliant!  No wonder we are the richest nation on Earth.

Postscript:  So to save the time clicking through to Steven Landsburg, here is a part of what he said (via Carpe Diem):

There are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa. Everybody knows about the first technology; let me tell you about the second. First you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.

International trade is nothing but a form of technology. The fact that there is a place called Japan, with people and factories, is quite irrelevant to Americans’ well-being. To analyze trade policies, we might as well assume that Japan is a giant machine with mysterious inner workings that convert wheat into cars. Any policy designed to favor the first American technology over the second is a policy designed to favor American auto producers in Detroit over American auto producers in Iowa. A tax or a ban on “imported” automobiles is a tax or a ban on Iowa-grown automobiles. If you protect Detroit carmakers from competition, then you must damage Iowa farmers, because Iowa farmers are the competition.

The task of producing a given fleet of cars can be allocated between Detroit and Iowa in a variety of ways. A competitive price system selects that allocation that minimizes the total production cost. It would be unnecessarily expensive to manufacture all cars in Detroit, unnecessarily expensive to grow all cars in Iowa, and unnecessarily expensive to use the two production processes in anything other than the natural ratio that emerges as a result of competition.

That means that protection for Detroit does more than just transfer income from farmers to autoworkers. It also raises the total cost of providing Americans with a given number of automobiles. The efficiency loss comes with no offsetting gain; it impoverishes the nation as a whole.

This is, plus or minus, a reprint of an article on trade policy written 12 years ago at our Chinese sister publication, Panda Blog.

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States. The Chinese government does so through a number of avenues, including:

• Limiting yuan convertibility, and keeping the yuan's value artificially low
• Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers. A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese. So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  We Chinese send our resources, our capital, and the output of our most productive workers overseas to be enjoyed by American consumers, and what do we get in return?  A trillion dollars or so of foreign exchange surpluses that our government invests for 2% returns in US government bonds.  Yes, that's right -- not only are we subsidizing American consumers, but we are subsidizing their taxpayers by financing their government's debt at low interest rates.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties. It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports. Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods. Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses. And surpluses they did create. Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world. And what did this get them? Decades of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses. These achieved nothing lasting for Japan and they will achieve nothing for China. In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much. They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth. They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese. They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending. They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China! This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by the CIA-controlled American media. After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa. And, with well over a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse. American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse. Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

Who would have thought we would be replaying the 11th and 12th century investiture controversies a thousand years later in China:

Pope Francis has decided to accept the legitimacy of seven Catholic bishops appointed by the Chinese government, a concession that the Holy See hopes will lead Beijing to recognize the pope’s authority as head of the Catholic Church in China, according to a person familiar with the plan.

For years, the Vatican didn’t recognize their ordinations, which were done in defiance of the pope and considered illicit, part of a long-running standoff between the Catholic Church and China’s officially atheist Communist Party.

The pope will lift the excommunications of the seven bishops and recognize them as the leaders of their dioceses, according to the person familiar with the situation.

Most folks even slightly acquainted with the climate debate have seen Dr. Mann's hockey stick.  It is a historical temperature reconstruction using proxies such as the width of tree rings.

There were a zillion problems with this analysis, which I and many covered years ago and, frankly, I am past my tolerance in reiterating once again.  Just to name three:

• The inflection of the hockey stick occurs right where two completely different data sets - proxies and actual thermometer readings -- have been grafted together, leading one to wonder if the inflection is a real natural phenomenon or instead related to differences in how the data was gathered
• The blue line, of the proxy data, ends in 1950.  The reason for that is that the proxy data actually shows temperatures falling since 1950.  This does not mean that temperatures actually fell - we are sure they have risen -- it means that the proxies are not very good proxies.  If they are not following temperatures well in the last 50 years, why do we think they mirrored temperatures well in the 1000 years before that?
• As Steve McIntyre showed, while Mann used many proxies, his statistical method basically over-weighted a single data set from bristlecone pines in California and used techniques that were shown later to generate hockey sticks even from random noise.

Anyway, you can search Google and spend most of the day reading critiques and defenses of Mann.

But I think a lot of laymen missed the point of the analysis.  Folks want to say that the hockey stick proves we have a big current spike in temperatures -- ie they focus on the blade of the hockey stick.  But we already knew from surface temperature records that world temperatures have risen perhaps 0.8C over the last century.  And besides, as mentioned above, Mann's proxy data does not even confirm or support the current working.

No, the "insight" of the hockey stick analysis was the handle -- the fact that until 1900, Mann was essentially claiming that temperatures had been 1) dead flat with limited variation and 2) consistently well below current temperatures.  Prior to Mann's analysis, most scientists had a picture of past climate that had a warm period from 1000-1300 that was perhaps as warm as it is today followed by a cold period  (called the medieval warm period and the little ice age).  Most of this was based on historical analysis.  Go to your local university and find a medieval historian.  Going forward, universities will probably not teach any European history any more, but you probably can find a few old folks still hanging on via tenure.  I took an audio course from Philip Daileader of William and Mary and he started his course on the high middle ages (1000-1300) by saying the most important fact of that period was the demographic expansion allowed in part by a warm and favorable climate.  The warm climate allowed more food production as new areas, particularly in the north, could be brought into production.  In turn, after 1300, Europe was met with a cooler and wetter climate that created a horrible famine in the 1320's, which in turn likely weakened the population and made the black death a few decades later all the worse.  Later on, we have records of canals and rivers freezing across Europe that almost never freeze today.  This colder period lasted until the early 19th century (I use 1812 as a break as I think of the freezing Russian winter of that year that sent Napoleon home without most of his army).  Temperatures and sea levels began rising after that, long before man was burning fossil fuels in earnest.

This historical picture, shared by pretty much everyone until 20 years ago, was overturned by Mann.  Look at his chart - no warm period in the middle ages, and no substantially colder period just afterwards.  How did he refute the historical evidence, which is robust?  He waved this evidence off as limited to Western Europe.  Which was sort of funny, because most of his proxy data came from an even smaller area, the mountains east of Bishop, CA**.

So all this is a leadup to a new study out of China looking at temperature proxies for China.  And it turns out China, which is on the other side of the world from the west (I know that because when Bugs Bunny digs straight down he always comes out in China), has pretty much the same temperature history everyone before Michael Mann thought we had in Europe.

**postscript:  If you have a sports car, and want to drive a curving mountain road that does not have a lot of big cliffs and has pretty much zero other cars to get in the way, you might try Highway 168 from near Bishop up towards the ancient bristlecone pine forest.

Princeton, like many top Universities, requires a face to face interview of every candidate.  They do this mostly through their alumni network.  I volunteered for this effort for well over a decade, and it was fun to meet and talk to a lot of bright kids.

However, it was becoming clear to me that Asians, with the same qualifications, had a much worse chance of getting in than other similar kids of other ethnicities.   I started getting Asian kids asking me about this and I had some canned answer from the University to give them, but that answer looked like BS to me.  I felt like I was being asked to lie if I told Asian kids they did not face discrimination in the process.

So I quit.  Princeton is a private institution (though it accepts a lot of public money) so I suppose it can pick candidates any way it wants, but that does not mean I have to act as an agent for them if I disagree with what they are doing.

The WSJ has a follow-up today on a couple of cases being made by Asians against Princeton and Harvard admissions:

In 2006 Jian Li filed a complaint with the Education Department’s Office of Civil Rights after he was denied admission to Princeton University. Mr. Li, who emigrated from China at age 4, had a perfect score on the SAT and graduated in the top 1% of his high school class. He alleged that Princeton violated civil-rights laws banning discrimination on the basis of race, color and national origin. The complaint was initially rejected, but Mr. Li appealed and the government reopened the investigation in 2008. Seven years later, in 2015, the Obama administration, which strongly supported the use of racial preferences in college admissions and obviously took its sweet time reviewing Mr. Li’s case, issued a report exonerating Princeton.

Last year Mr. Blum’s organization filed a public records Freedom of Information Act request with the Education Department to gain access to the same documents that the federal government used to clear Princeton of any wrongdoing. Mr. Blum’s organization represents a group of Asian plaintiffs who are suing Harvard University over its admissions policies. The judge in that case has ordered Harvard to turn over six years of admissions records, and Mr. Blum suspects that the data will show that Harvard is unlawfully capping Asian enrollment.

America’s Asian population has exploded in recent decades, and Asian attendance at highly selective schools with colorblind admissions, such the California Institute of Technology and the University of California, Berkeley, reflects this demographic trend. At Harvard, however, the percentage of Asian undergrads has remained remarkably consistent for an institution that claims race is not a determining factor in who is admitted. Mr. Blum suspects that Princeton engages in similar shenanigans, but the school has been pressuring the Education Department to deny him the information that he requested more than a year ago.

Concerned that the government was finally going to fulfill the FOIA request, Princeton sued the Education Department on March 17 to block the release of the admissions documents. The suit argues that the material being sought is exempt from FOIA, a claim that the government has rejected. The school also maintains that releasing the data would compromise student privacy, and it likened its admissions process to “trade secrets” that, if exposed, would put Princeton at a competitive disadvantage in attracting students.

Don’t believe it. Admissions officers switch schools all the time, presumably taking knowledge of admissions procedures with them, and the criteria used by elite institutions to evaluate applicants is not the equivalent of an iPhone patent. Nor is student privacy an issue since names, addresses and other personal information can be redacted. Mr. Blum’s organization simply wants the number of Asians who have applied to Princeton, their SAT scores and grade-point averages, and other information that the school used to analyze applicants academically.

What really concerns Princeton is a potential discrimination lawsuit. What ought to concern the rest of us is the apparent determination of elite colleges to punish Asians students for their academic success. Asians have long been the forgotten victims of liberal affirmative-action schemes, subject to unwritten “just for Asian” admissions standards that recall the treatment of Jews in the first half of the 20th century. Princeton wants them to shut up about it. Let’s hope they don’t.

I will say that the act of turning down a perfect SAT is not limited just to Asians, so I don't take that as necessarily proof of discrimination.   Harvard and Princeton (and I suppose other Ivies but I really only know something about these two) seem to take a perverse pleasure in turning down perfect SATs.  I don't have the facts, but I wouldn't be surprised if the admit rate for kids with SAT's one notch short of perfect is better than those with perfect SATs.

My evidence of discrimination is based on years of actually meeting the kids, seeing their scores and resumes, and talking to them about their activities and passions -- and comparing who gets in and who does not.  And, of course, one merely has to look at the percentage of kids with Asian heritage at Princeton and compare it to universities like Berkeley that have color-blind admissions systems.

Ten years ago, we published an editorial from our Chinese sister publication Panda Blog.  Though some of the details of their government's financial actions have changed since then, the gist of it is still correct -- the Chinese government still engages in actions that they call "export promotion" and President Trump calls "currency manipulation".  So I think this editorial from the perspective of the Chinese consumer is still relevant:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

• Limiting yuan convertibility, and keeping the yuan's value artificially low
• Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
• Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

President Trump is a strong economic nationalist.  He believes that this country should source everything domestically - its products and its labor - and any labor or resources that are coming from other countries should either be stopped by a wall or heavily taxed.

Economists and I will spend a lot of time over the next four years trying to explain to our economically-ignorant administration why global trade and the global division of labor increase domestic incomes and production rather than decreasing them.  But I do not want to lose sight of another important benefit of open trade in the global economy - peace.

We often miss the fact because our news is dominated by stories of violence and terror, but we live in times of unprecedented peace around the world.  It is no coincidence that this is occurring at the same time that global trade is at a historic peak.  People and governments can obtain just about anything they want, inexpensively, through voluntary trade.  This has seldom been the case through history -- and when people could not get what they wanted through free trade, they tried to take it by force.

Think about the corollary of Trump's economic nationalism, particularly if everyone followed this same approach.  If one skews all the rules and taxes and prohibitions so everything must be sourced domestically, then if a country does not have some particular resource or skill domestically, it is out of luck.  No domestic rare earth metals?  Sorry.

But governments and powerful people seldom calmly accept that something they critically need is not available.  They will be tempted to go and take it.  The worst, most violent empire building of the last 100-150 years has occurred when countries have pursued economic nationalism.  Think of the colonialism of the late 19th century.  Today we happily trade with South Africa and other countries for valuable resources, but in that time of economic nationalism, if a country wanted access to these resources, it felt it had to control the land and the people.  Hitler in the 1930's wanted to make Germany self-sufficient in agricultural goods and certain other resources, and the only way to do that was to go and grab other people's land and resources.

The best example of all of this phenomenon is, I think, Japan in the 1930's.  Japan felt that it was resource poor and under Trump's theory of economic nationalism, it felt it had to control oil and other resources it did not have domestically.  So it plotted to go take it.  When the US instituted a trade embargo in these very goods to punish Japan's aggressiveness in China, it just accelerated Japan's thinking in this area, convincing it for good it had to control these resources, and it was soon invading the oil-rich islands of what is now Indonesia.  This example is all the more telling because Japan actually found true prosperity after the war when it traded peacefully for these resources.  Unfortunately, it adopted economic nationalism, via MITI, of another form and helped manage themselves into a 20-year recession, but that is another trade-related story for another day.

Postscript:  I have more to say on this when I get my thoughts better organized.  Right now I am hurrying to a plane, for Regina, Canada, where I am speaking on global warming tomorrow.  There is a related issue of what happens when strong protectionism on our part pushes China over into the crash they have been putting off for years -- suddenly a crash largely of their making becomes the fault of the US, with implications for a formation of a new cold war, but that again is another topic for another day.

Yesterday, I suggested we needed a new, real consumer advocacy organization to replace the economically ignorant Nader-led PIRG organizations.  The reason is that it is time that consumers banded together and resisted Trump's protectionism, since such protection generally protects a few politically favored unions and corporations while raising prices and reducing choice for all consumers.

A couple of hours after I posted that, the absolutely indispensable Mark Perry brings us a great post on academic research about how protectionist actions nearly always cost consumers more than they help producers.

The empirical evidence above helps us to understand a very important economic lesson about international trade, call it “protectionist math” — and that mathematical reality is that the costs of protectionism imposed on American consumers in the form of higher prices and a reduction in trade will always be greater than the benefits generated for the protected industries and the workers in those industries. And here’s another part of that “protectionist math” that helps us answer the question: Sure, we can save US jobs with protectionist trade policies, but how much does it cost consumers for every job saved with protectionist trade policy, and is that cost worth it? Economic analysis and the empirical evidence presented above suggest that it’s very, very expensive to save US jobs with protectionism — more than half-a-million dollars on average per year per job in 2016 dollars (see chart above). If Trump enacts protectionist policies that save $50,000 per year US factory jobs but at a cost to consumer of $500,000 annually for each job saved, that’s a surefire formula to “Make America Expensive and Poor Again,” not “great again.”

I won't reprint his chart, but he has detailed results form a number of academic studies in different industries that back this statement up.

My point about needing a new consumer advocacy group was a little tongue in cheek, but here is Perry quoting from a study at the Federal Reserve Bank of St Louis a number of years ago (back during the last wave of protectionism, which was based on Japan rather than China bashing).

The primary reason for these costly protectionist policies relies on a public choice argument. The desire to influence trade policy arises from the fact that trade policy changes benefit some groups, while harming others. Consumers are harmed by protectionist legislation; however, ignorance, small individual costs, and the high costs of organizing consumers prevent the consumers from being an effective force. On the other hand, workers and other resource owners in an industry are more likely to be effective politically because of their relative ease of organizing and their individually large and easy-to-identify benefits. Politicians interested in re-election will most likely respond to the demands for protectionist legislation of such an interest group.

This WSJ article's hook is a huge cache of raw aluminum photographed in the Mexican desert.  American aluminum manufacturers claim that this is Chinese aluminum being illegally transshipped through Mexico to get a lower tariff rate.

The U.S. Commerce Department says it is investigating the Mexican aluminum’s origin as part of a slew of trade complaints by the U.S. metals industry against China, many of which include allegations of transshipping.

China’s booming industrial production has reordered global markets, few more dramatically than aluminum. Fueled by access to inexpensive electricity and tax breaks, Chinese aluminum output doubled between 2010 and 2015. With local demand slowing,more of it was sent to the U.S., which was importing 40% of its aluminum by 2015—up from only 14% in 2010.

By the end of 2016, only five aluminum smelters will be operating in the U.S., down from 23 in 2000.

Alcoa Inc., the largest American aluminum maker, is splitting in two, isolating its profitable parts-making units from its troubled raw-aluminum operations. Alcoa Chief Executive Klaus Kleinfeld last year said illegitimate Chinese exports were “the major driver” of lower aluminum prices.

I suppose to an incumbent who has convinced himself that he has a God-given right to his historic market share, new sources of competition are always "illegitimate."  But through the whole article I kept asking myself, why are we forcing these folks in China to jump through so many hoops just to bring us lower-cost aluminum?  Given how fundamental aluminum is to almost every manufactured product today, we should be welcoming them as heroes, not forcing them to play silly games in the Mexican desert just to deliver their product at the price they want to sell it for.

It turns out that all this government effort to "protect" us from lower cost aluminum is to support an American aluminum industry that is tiny, maybe 2% of world production.

The industry would argue that the lower prices of Chinese imports are "illegitimate" in part because the sales price in the US is subsidized by Chinese taxpayers.  To which I answer, "so what?"  Or actually, to which I answer, "yay!"  If another country's taxpayers want to pay higher taxes so that they can provide valuable raw materials to US industry at lower prices, why in the heck would we want to stop them?

I am simply exhausted with the notion that seems to have taken over both political parties that trade with China is somehow the source of US economic woes.

Remember that voluntary trade can't happen unless both parties are benefiting from each trade.  Remember the masses of academic evidence that the (largely hard to see) benefits of trade in terms of lower costs and more choice tend to be greater than the (easier to see) job losses in a few trade-affected industries.  But even if none of that is compelling to you, consider that our trade deficit with China is just 2% of GDP.  It's almost a rounding error.

If politicians want to know why lower-skilled laborers struggle to find employment, they need to look past imports from China and Mexican immigration and look at their own policies that are making it more and more expensive for businesses to hire people in this country.   I have written about this many times before, but some of the most prominent include:

• minimum wage laws, rising to $15 an hour in many parts of the country, and increasingly draconian overtime rules, both of which substantially raise the cost of hiring someone.
• minimum benefit laws, including expensive health care requirements in Obamacare and a myriad of other state-level requirements such as mandatory paid sick leave or family leave
• payroll taxes that act as sales taxes on labor  -- we understand that cigarette taxes are supposed to reduce cigarette purchases but don't understand that payroll taxes reduce purchases of labor?
• employment regulations, such as chair laws and break laws in California, that make employing people more expensive and risky
• employer liability laws, that make employers financially responsible for any knuckleheaded thing their employees do, even when these actions violate company policy (e.g. making racist or sexist statements)**
• laws that make hiring far more risk, including those that limit the ability to do due diligence on potential employees (e.g. ban the box) and those that limit the ability of employers to fire poor performing employees.

And this is just employment law -- we could go on all day with regulations that make life difficult for lower income workers, such as the numerous laws that restrict the housing stock and drive up housing prices and rents for these same folks who are struggling to find a job.

Let's say you live in California.  Who has killed more jobs in your state -- China or the California legislature?  The answer is no contest.   The California legislature wins the job destruction race in a landslide.   While California's high-tech community enjoys a symbiotic relationship with China that has created immense wealth, the California legislature works overtime to make sure low-skilled workers in the state don't benefit.

**Postscript:  Of all the factors here, I won't say that this is the largest but I think it is the most underrated and least discussed.  But think about it.  If you are going to be personally financially libel for ignorant, insensitive, or uncouth remarks made by your employees, even when you have explicitly banned such behavior in company rules and don't personally tolerate it, how likely are you going to be to hire a high school dropout without a good work history to interact with customers?

Apparently new Communist Party archives are becoming available to scholars in China, and the true story of the Great Leap Forward appears to be even worse than we imagined.

A catastrophe of gargantuan proportions ensued. Extrapolating from published population statistics, historians have speculated that tens of millions of people died of starvation. But the true dimensions of what happened are only now coming to light thanks to the meticulous reports the party itself compiled during the famine. My study, Mao’s Great Famine: The History of China’s Most Devastating Catastrophe (2010), relies on hundreds of hitherto unseen party archives, including: secret reports from the Public Security Bureau; detailed minutes of top party meetings; unexpunged versions of leadership speeches; surveys of working conditions in the countryside; investigations into cases of mass murder; confessions of leaders responsible for the deaths of millions of people; inquiries compiled by special teams sent in to discover the extent of the catastrophe in the last stages of the Great Leap Forward; general reports on peasant resistance during the collectivisation campaign; secret police opinion surveys; letters of complaint written by ordinary people; and much more.

What comes out of this massive and detailed dossier is a tale of horror in which Mao emerges as one of the greatest mass murderers in history, responsible for the deaths of at least 45 million people between 1958 and 1962. It is not merely the extent of the catastrophe that dwarfs earlier estimates, but also the manner in which many people died: between two and three million victims were tortured to death or summarily killed, often for the slightest infraction. When a boy stole a handful of grain in a Hunan village, local boss Xiong Dechang forced his father to bury him alive. The father died of grief a few days later. The case of Wang Ziyou was reported to the central leadership: one of his ears was chopped off, his legs were tied with iron wire, a ten kilogram stone was dropped on his back and then he was branded with a sizzling tool – punishment for digging up a potato.

There is more like this in the article.  When I read this, I can't help thinking about Hannah Arendt and her classic "Origins of Totalitarianism."  During the 60's and 70's, this fabulous work was targeted for marginalization by the academic Left because many in academia were admirers of Stalin and the Soviet Union and deeply resented the parallels Arendt raised between European fascism and Soviet communism.   Arendt's partial rehabilitation came after 1989, when Eastern European scholars and historians coming out from under communism looked around for a framework to describe their experiences under communism, and found Hannah Arendt to be most compelling.  This new wave of scholarship on communist China likely will vindicate Arendt as well.

American university campuses, in their current orgy of admiration for socialism, will have to work extra hard to whitewash this, but I am sure they are up to the task.

Update:  Venezuela goes full Great Leap Forward.

A few random notes on computer games for those who share that interest:

1. For those Diablo fans who loved Diablo II but were disappointed that Diablo III was not exactly the sequel they'd hoped for, I have a suggestion:  Path of Exile from Grinding Gear Games.  It is set up as an mmrpg (so you have to be online to play) but it plays just fine single player and all the map areas are dedicated instances such that you aren't fighting other players for kills and loot drops.  The skill tree is famously enormous.  A certain group of you will buy the game 2 minutes after clicking on the next link (I did).   Here is the whole tree, it is absurd (the highlighted areas are the selections for one of my characters).  The customization ability is simply staggering.   Choosing a class like fighter or mage (they have different names in this game, but essentially these base classes) just changes your starting point on this map.  But this is not the end of the customization.  There is also an elaborate skill gem system where your attack and defense skills are based on your gem choices, both the main gems and support gems one adds to it.  Seriously, the actual combat is not much more elaborate than the debuff then hack and slash and loot drop of other Diablo style games, but this game has more ability to fine tune and experiment with character design than any I have ever played.
2. My absolute favorite, by far, board game has finally come out as a PC game -- Twilight Struggle.  It is on Steam and I can't yet fully recommend it because I have not played through all the way online.  I am told the AI needs to be tougher but it should be fine for noobs.  There is also online person to person play.  I love the gameplay and it has also been a platform for my son and I to have a lot of discussions about recent history.  If you are a total noob, here are a few lessons for the Soviet player (which I have the most experience playing)
   • The Soviets have to rush.  The game has three periods, and you have big advantages in period 1 and disadvantages in period 3.  You HAVE to build up a lead early or you are toast later on.  I have seen a 15 point lead evaporate in the last third of the game.  The best outcome is to win the game outright by the smear rule (20 point lead) by turn 7.
   • Your first move is to coup Iran.  Asia is yours in the early game if you succeed.  The only alternative is to first turn coup in Italy, but that is a riskier strategy and can only be justified if your first turn hand is really tuned to that approach.
   • Coup every turn ASAP.  Coups are your most powerful weapon (other than events) and couping first thing every turn denies that ability to the US
   • The space race is for dumping your worst cards, not an end in and of itself (always exceptions, of course).  Twilight Struggle's best dynamic is how you end up with your opponents cards in your hand that you end up having to play for them-- the space race is one way to dump the worst of these cards (e.g. grain sales to the Soviets).  Since the cards you can play become more restricted as you advance in the space race track, there are even some advantages to failing your rolls early on.
   • If you play the China card, it needs to be for a BIG goal - like improving your scoring of Asia right before you play the Asia scoring card.  In many cases, it is better to not play the China card at all than to have it pass to the Allies.
   • Cards that allow you to play influence on any country should be used to get access to places where you have no adjoining influence -- don't use it to add to existing influence or enter countries to which you already are adjacent.   This is the only way in initially to places like South America and much of Africa..  Decolonization is your friend.
   • Learn to love this site.  Not only does it give you a LOT of strategy, but it also answers complex card interaction questions for every card.

This is Chapter 9 (the final chapter) of an ongoing series.  Other parts of the series are here:

1. Introduction
2. Greenhouse Gas Theory
3. Feedbacks
4.  A)  Actual Temperature Data;  B) Problems with the Surface Temperature Record
5. Attribution of Past Warming:  A) Arguments for it being Man-Made; B) Natural Attribution
6. Climate Models vs. Actual Temperatures
7. Are We Already Seeing Climate Change
8. The Lukewarmer Middle Ground
9. A Low-Cost Insurance Policy  (this article)

While I have shown over the previous chapters that there is good reason to be skeptical of a future man-made climate catastrophe (at least from CO2), I am appalled at all the absolutely stupid, counter-productive things the government has implemented in the name of climate change, all of which have costly distorting effects on the economy while doing extremely little to affect man-made greenhouse gas production.  For example:

• Corn ethanol mandates and subsidies, which study after study have shown to have zero net effect on CO2 emissions, and which likely still exist only because the first Presidential primary is in Iowa.  Even Koch Industries, who is one of the largest beneficiaries of this corporate welfare, has called for their abolition
• Electric car subsidies, 90% of which go to the wealthy to help subsidize their virtue signalling, and which require morefossil fuels to power than an unsubsidized Prius or even than a SUV.
• Wind subsidies, which are promoting the stupidist form for power ever, whose unpredictabilty means fossil fuel plants still have to be kept running on hot backup and whose blades are the single largest threat to endangered bird species.
• Bad government technology bets like the massive public subsidies of failed Solyndra

Even when government programs do likely have an impact of CO2, they are seldom managed intelligently.  For example, the government subsidizes solar panel installations, presumably to reduce their cost to consumers, but then imposes duties on imported panels to raise their price (indicating that the program has become more of a crony subsidy for US solar panel makers, which is typical of the life-cycle of these types of government interventions).  Obama's coal power plan, also known as his war on coal, will certainly reduce some CO2 from electricity generation but at a very high cost to consumers and industries.  Steps like this are taken without any idea of whether this is the lowest cost approach to reducing CO2 production -- likely it is not given the arbitrary aspects of the program.

For years I have opposed steps like a Federal carbon tax or cap and trade system because I believe (and still believe) them to be unnecessary given the modest amount of man-made warming I expect over the next century.  I would expect to see about one degree C of man-made warming between now and 2100, and believe most of the cries that "we are already seeing catastrophic climate changes" are in fact panics driven by normal natural variation (most supposed trends, say in hurricanes or tornadoes or heat waves, can't actually be found when one looks at the official data).

But I am exhausted with all the stupid, costly, crony legislation that passes in the name of climate change action.   I am convinced there is a better approach that will have more impact on man-made CO2 and simultaneously will benefit the economy vs. our current starting point.  So here goes:

The Plan

Point 1:  Impose a Federal carbon tax on fuel.

I am open to a range of actual tax amounts, as long as point 2 below is also part of the plan.  Something that prices CO2 between $25 and $45 a ton seems to match the mainstream estimates out there of the social costs of CO2.  I think methane is a rounding error, but one could make an adjustment to the natural gas tax numbers to take into account methane leakage in the production chain.   I am even open to make the tax=0 on biofuels given these fuels are recycling carbon from the atmosphere.

A Pigovian tax on carbon in fuels is going to be the most efficient possible way to reduce CO2 production.   What is the best way to reduce CO2 -- by substituting gas for coal?   by more conservation?  by solar, or wind?  with biofuels?  With a carbon tax, we don't have to figure it out.  Different approaches will be tested in the marketplace.  Cap and trade could theoretically do the same thing, but while this worked well in some niche markets (like SO2 emissions), it has not worked at all in European markets for CO2.   There has just been too many opportunities for cronyism, too much weird accounting for things like offsets that is hard to do well, and too much temptation to pick winners and losers.

Point 2:  Offset 100% of carbon tax proceeds against the payroll tax

Yes, there are likely many politicians, given their incentives, that would love a big new pool of money they could use to send largess, from more health care spending to more aircraft carriers, to their favored constituent groups.  But we simply are not going to get Conservatives (and libertarians) on board for a net tax increase, particularly one to address an issue they may not agree is an issue at all.   So our plan will use carbon tax revenues to reduce other Federal taxes.

I think the best choice would be to reduce the payroll tax.  Why?  First, the carbon tax will necessarily be regressive (as are most consumption taxes) and the most regressive other major Federal tax we have are payroll taxes.  Offsetting income taxes would likely be a non-starter on the Left, as no matter how one structures the tax reduction the rich would get most of it since they pay most of the income taxes.

There is another benefit of reducing the payroll tax -- it would mean that we are replacing a consumption tax on labor with a consumption tax on fuel.  It is always dangerous to make gut-feel assessments of complex systems like the economy, but my sense is that this swap might even have net benefits for the economy -- ie we might want to do it even if there was no such thing as greenhouse gas warming.   In theory, labor and fuel are economically equivalent in that they are both production raw materials.  But in practice, they are treated entirely differently by the public.   Few people care about the full productive employment of our underground fuel reserves, but nearly everybody cares about the full productive employment of our labor force.   After all, for most people, the primary single metric of economic health is the unemployment rate.  So replacing a disincentive to hire with a disincentive to use fuel could well be popular.

Point 3:  Eliminate all the stupid stuff

Oddly enough, this might be the hardest part politically because every subsidy, no matter how idiotic, has a hard core of beneficiaries who will defend it to the death -- this the the concentrated benefits, dispersed cost phenomena that makes it hard to change many government programs.  But never-the-less I propose that we eliminate all the current Federal subsidies, mandates, and prohibitions that have been justified by climate change.  Ethanol rules and mandates, solar subsidies, wind subsidies, EV subsidies, targeted technology investments, coal plant bans, pipeline bans, drilling bans -- it all should go.  The carbon tax does the work.

States can continue to do whatever they want -- we don't need the Feds to step on states any more than they do already, and I continue to like the 50 state laboratory concept.  If California wants to continue to subsidize wind generators, let them do it.  That is between the state and its taxpayers (and for those who think the California legislature is crazy, that is what U-Haul is for).

Point 4:  Revamp our nuclear regulatory regime

As much as alternative energy enthusiasts would like to deny it, the world needs reliable, 24-hour baseload power -- and wind and solar are not going to do it (without a change in storage technology of at least 2 orders of magnitude in cost).  The only carbon-free baseload power technology that is currently viable is nuclear.

I will observe that nuclear power suffers under some of the same problems as commercial space flight -- the government helped force the technology faster than it might have grown organically on its own, which paradoxically has slowed its long-term development.  Early nuclear power probably was not ready for prime time, and the hangover from problems and perceptions of this era have made it hard to proceed even when better technologies have existed.   But we are at least 2 generations of technology past what is in most US nuclear plants.  Small air-cooled thorium reactors and other technologies exist that could provide reliable safe power for over 100 years.  I am not an expert on nuclear regulation, but it strikes me that a regime similar to aircraft safety, where a few designs are approved and used over and over makes sense.  France, which has the strongest nuclear base in the world, followed this strategy.  Using thorium could also have the advantage of making the technology more exportable, since its utility in weapons production would be limited.

Point 5: Help clean up Chinese, and Asian, coal production

One of the hard parts about fighting CO2 emissions, vs. all the other emissions we have tackled in the past (NOx, SOx, soot/particulates, unburned hydrocarbons, etc), is that we simply don't know how to combust fossil fuels without creating CO2 -- CO2 is inherent to the base chemical reaction of the combustion.  But we do know how to burn coal without tons of particulates and smog and acid rain -- and we know how to do it economically enough to support a growing, prosperous modern economy.

In my mind it is utterly pointless to ask China to limit their CO2 growth.  China has seen the miracle over the last 30 years of having almost a billion people exit poverty.  This is an event unprecedented in human history, and they have achieved it in part by burning every molecule of fossil fuels they can get their hands on, and they are unlikely to accept limitations on fossil fuel consumption that will derail this economic progress.  But I think it is reasonable to help China stop making their air unbreathable, a goal that is entirely compatible with continued economic growth.  In 20 years, when we have figured out and started to build some modern nuclear designs, I am sure the Chinese will be happy to copy these and start working on their CO2 output, but for now their Maslov hierarchy of needs should point more towards breathable air.

As a bonus, this would pay one immediate climate change benefit that likely would dwarf the near-term effect of CO2 reduction.  Right now, much of this soot from Asian coal plants lands on the ice in the Arctic and Greenland.  This black carbon changes the albedo of the ice, causing it to reflect less sunlight and absorb more heat.  The net effect is more melting ice and higher Arctic temperatures.  A lot of folks, including myself, think that the recent melting of Arctic sea ice and rising Arctic temperatures is more attributable to Asian black carbon pollution than to CO2 and greenhouse gas warming (particularly since similar warming and sea ice melting is not seen in the Antarctic, where there is not a problem with soot pollution).

Final Thoughts

At its core, this is a very low cost, even negative cost, climate insurance policy.  The carbon tax combined with a market economy does the work of identifying the most efficient ways to reduce CO2 production.   The economy benefits from the removal of a myriad of distortions and crony give-aways, while also potentially benefiting from the replacement of a consumption tax on labor with a consumption tax on fuel.  The near-term effect on CO2 is small (since the US is only a small part of the global emissions picture), but actually larger than the near-term effect of all the haphazard current programs, and almost certainly cheaper to obtain.  As an added benefit, if you can help China with its soot problem, we could see immediate improvements in probably the most visible front of man-made climate change:  in the Arctic.

For those who have hung with me this entire series, many thanks for your interest.  If you have questions, concerns, or outraged refutations, you are welcome to email me at the link above.