Hot, Flat, and Crowded[1]
Part I: When the Market
and Mother Nature Hit the Wall
Chapter 1: Why
Citibank, Iceland’s Banks, and the Ice Banks of Antarctica All Melted Down at
the Same Time
Friedman: “This subprime frenzy, though, was
abetted by more than just a US government desire to promote homeownership and
construction (the efforts of Fannie Mae and Freddie Mac). It was also abetted
by a broader easing of credit and low interest rates – too low for too long –
under the Federal Reserve leadership of Alan Greenspan in the early 2000s. This
easing of credit by the Fed, in turn, was enabled by the massive amount of
dollars sloshing around the global economy from all the high-saving countries,
particularly the Asian Tigers, Middle East oil exporters, and China.”
Brian: I’m glad that we’re roughly on the
same page in terms of our understanding of the causes of the 2008 Great
Recession. Hopefully this will save us some tedious economic arguments down the
line.
Friedman: “We had allowed Wall Street
investors and executives to underprice risks and privatize their gains, but
then force taxpayers to bail them out when the losses threatened a systemic
breakdown.
Why were We the People left holding the bag? Because the
economy depended on it. Key financial services companies had become too big to
fail, and had we let them go down, we all would have gone down with them. You
and I would have gone to our ATMs to withdraw money from our banks and nothing
would have come out.”
Brian: Under a fractional reserve banking
system, you are correct. But there is another way. If 100% of the depositors’
money was actually held for them by the banks in reserve, as a kind of money
warehousing service, than the situation would have been completely different.
No matter how many reckless financial services firms went bankrupt, ordinary
depositors’ money would have been right there, unless of course they had
consciously decided to lend it for investment purposes to a bank or financial
company, in which case they would have known that they were taking on the risks
of an investor.
If fractional reserve
banking were declared to be an inherently fraudulent activity by the government
and made illegal, then a combination of 100% reserve banking for deposits and
genuine lending of savings to investment arms of the banks for investments
would prevail. Enthusiasts of inflation, such as most politicians and
mainstream economists, wouldn’t like this non-inflationary system, but it is
the only sure method of protecting innocent bank customers from the market
activities of financial service firms with whom they don’t want to have any
dealings or relations.
In addition, bailouts, no matter how ‘necessary’ they might
seem at the time, are bound to be harmful in the longer-run. I discuss this at
length here: http://thinkingabouthumansociety.blogspot.ca/2013/04/the-government-bailout-of-aig-why-i.html
Friedman: “Consider MIT’s Joint Program on the
Science and Policy of Global Change. In 2009 the program quietly updated its
Integrated Global System Model, which tracks and predicts climate change from
1861 to 2100. Its revised projection indicates that if we stick with business
as usual, in terms of carbon dioxide emissions, average surface temperatures on
earth by 2100 will hit levels far beyond anything humans have ever experienced.”
Brian: I don’t particularly want to get
into an in-depth discussion of climate change science here, but I also refuse
to accept the predictions of global warming alarmists as sure facts which
policy must accommodate itself to. Contrary to popular myth, the science on
anthropogenic climate change is in no way ‘settled’. It is still unclear how
much of our recent climate change can be attributed to human burning of fossil
fuels, and how much to natural factors such as the changing phases of the
Pacific Decadal Oscillation (PDO)(which was in its positive, or ‘warming’
phase, from about 1977 to 2007), or to a gradual natural warming climb out of
the Little Ice Age that ended in the early 1800s. Natural changes in ocean
currents, volcanic activity, and fluctuations in the sun’s radiation and ‘solar
wind’ output, are also potentially big natural factors of climate change. If
scientists overestimate the contribution of human carbon dioxide emissions to
our recent climate changes, then their predictive models will also overestimate
what the effects of carrying on with our carbon dioxide emissions will be on
the climate of the future. Given this scientific uncertainty, I think that it
is far too early to be leaping to policy decisions about regulating carbon
dioxide emissions.
For some interesting skeptical viewpoints on anthropogenic
climate change, I would recommend: 1. NASA climate researcher Roy Spencer’s The Great Global Warming Blunder, a very
readable and provocative discussion. 2. Arctic researcher Syun-Ichi Akasofu’s “Two
Natural Components of the Recent Climate Change”, a scientific article which is
packed with data and graphs, but which presents an important, straight-forward argument.
Chapter Two: Dumb As We
Wanna Be
Friedman: “It became political suicide for any
politician to advocate what every responsible person in the country knew we
needed – higher taxes, lower spending, and a reduction in entitlements.”
Brian: How about lower taxes, even lower
spending, and a greater reduction in entitlements? Is that an ‘unreasonable’ demand? Would that be ‘irresponsible’?
I wish you would explain further why the higher taxes part is absolutely
necessary.
Friedman: “And then came 9/11. What happened
after that day could have and should have been our wake-up call. The country
was ready to be enlisted for a great national rebuilding. We were ready to be a
new Greatest Generation. We were ready for a “Patriot Tax” on gasoline that could
have been our generation’s victory garden to help make us independent of the
very people who had attacked us.”
Brian: No need for ‘Patriot Taxes’, oil
sands and shale shelf energy sources in North America, provided that the
environmentalists got out of the way, could make North America substantially
energy-independent, if that is really a desired goal. Of course, why we should
shun importing oil from willing sellers in the Middle East, just because a few
rogue terrorists managed to kill a number of Americans, is beyond me. It smacks
of irrational stereotyping.
Friedman: “America’s initial response (to the
1973-74 Arab oil embargo) was significant. Urged on by Presidents Gerald Ford
and Jimmy Carter, the United States implemented higher fuel economy standards
for American cars and trucks. In 1975, Congress passed the Energy Poilcy and
Conservation Act, which established corporate average fuel economy (CAFÉ)
standards that required the gradual doubling of passenger vehicle efficiency
for new cars – to 27.5 miles per gallon – within ten years.
Not surprisingly, it all worked. Between 1975 and 1985,
American passenger vehicle mileage went from around 13.5 miles per gallon to
27.5, while light truck mileage increased from 11.6 miles per gallon to 19.5 –
all of which helped to create a global oil glut from the mid-1980s to the
mid-1990s”
Brian: Conspicuously absent from this
discussion are the effects of the price controls on oil and natural gas,
imposed by Nixon and maintained by Ford and Carter. As any economist will tell
you, price controls create artificial shortages and discourage new production
of the good in question, precisely what happened with oil and gas in the 1970s.
Reagan repealed the controls in 1981, and the ‘global oil glut’ soon followed.
Now, perhaps improved vehicle energy efficiency played a part too, but ignoring
the effects of the price controls and their repeal is misleading.
As for the vehicular fuel economy regulations, undoubtedly a
lot of the gains in fuel economy would have happened without the regulations,
and those that wouldn’t have would not have been worth it to implement. You don’t
need regulations to force car companies to produce more fuel efficient cars. No
car consumer likes paying more for gas per mile driven or likes going to the gas
station more frequently, so most would have been willing to pay more upfront
for more fuel efficient cars, and the producers would have obliged them of
their own accord. However, with gains in fuel efficiency generally come
increased costs of production for the cars, increased costs that will be
reflected in the price of the car to the final consumer. For many consumers,
paying the extra price upfront in order to reap savings in fuel costs later
will be worth it (up to a certain point), but not for everyone. People who aren’t
going to be driving their cars very often or who don’t have a lot of cash to
pay upfront for the car will probably prefer cheaper, but less fuel efficient,
cars, over their more expensive, but more fuel efficient, counterparts. One-size-fits-all
government regulations do not take these subjective factors into account. They
may also end up pushing fuel economy into a region of diminishing returns, from
most consumers’ perspective, with small gains in fuel economy coming at the
expense of large increases in costs of production.
Chapter 3: The Re-Generation
Friedman: “When you talk about environmental or
ecological sustainability, says Dernbach, the definition is pretty clear: “Something
is environmentally or ecologically sustainable when it protects, restores, or
regenerates the environment rather than degrades it.””
Brian: There is nothing ‘clear’ about this
definition. Who is to decide when the ‘environment’ is being ‘restored’ and
when it is being ‘degraded’? These are heavily subjective value judgements,
totally dependent on what you believe ‘the environment’ should be used for. Is digging
up and burning coal to produce electricity environmentally ‘degrading’? Most
environmentalists would say yes. But the ability to dig up and burn coal to
produce electricity enables millions of people to heat their homes and to run
their life-enhancing appliances at a cheaper financial cost. Is this not
improving their ‘environments’?
This idea that the state of raw nature is ‘The Environment’,
and that it is this environment which must be protected, is based on subjective
value judgments that heavily favor natural goods over human-produced goods. For
myself and many others, the ‘natural environment’ is not something that must
always be protected, but something that can be improved upon through human
efforts. I greatly prefer my ‘artificial’ modern home, heated by harnessed
energy, located in a vast, concrete-paved and building-strewn conglomeration of
human life known as a city, to a ‘natural’ cave located in an untouched forest.
The former constitutes a better environment for me to live in than the latter.
Part II: Where We Are
Chapter 4: Today’s
Date: 1 E.C.E. Today’s Weather: Hot, Flat, and Crowded
Friedman: “This book focuses on five key
problems that a hot, flat, and crowded world is dramatically intensifying. They
are: (1) the growing demand for ever scarcer energy supplies and natural
resources; (2) a massive transfer of wealth to oil-rich countries and their
petrodictators; (3) disruptive climate change; (4) energy poverty, which is
sharply dividing the world into electricity haves and electricity have-nots; (5)
and rapidly accelerating biodiversity loss, as plants and animals go extinct at
record rates.” (numbers added by Brian)
Brian: Ok, let’s go over these one by one:
1. Typically, on a free-market, when
there is growing demand for something, the higher prices which this demand
causes leads to an increased supply of it being produced, via the profit
motive. This has been happening in the energy and natural resource sectors, but
not as fast as one might hope. Why not? Well, I’ll tell you one thing that
definitely doesn’t help: legions of environmentalists harassing and clamouring
for restrictions on mineral mining companies, oil and gas companies, nuclear
power companies, coal mining and coal power plant companies, etc… If you are
worried about the scarcity of something, don’t clamour for heavy restrictions
on the production of that thing.
The mining and energy industries are very heavily regulated,
and sometimes even monopolized, by governments. For free-market advocates, the
fact that they consequently are not as productive as one might hope they would
be is not surprising. These productivity problems, as well as a lack of clearly
defined property rights in energy sources and natural resource sources, that
lead to artificially short-term production strategies, are the real problems
with the energy and natural resource industries. There is no fundamental
scarcity of ‘potentially useable’ energy and natural resources on earth:
massive amounts of energy constantly flow around the earth, unharnessed by
humans, and vast amounts of minerals are waiting in between the surface and the
centre of the earth. Increases in productivity are needed to get at them economically;
overkill environmentalist restrictions can only hamper this process.
2. Similar reasoning as above. If
environmentalists and governments allowed ‘non-petrodictator’ energy producers
to exploit more land and natural resources and to become more productive, than
less wealth would flow to the ‘petrodictators’.
3. There may or may not be unusually
disruptive climate change in the near future, and if there is, it may or may
not be caused primarily by humans, as discussed above. At any rate, the best
way to deal with climate change is to be as free and as wealthy as possible.
Freedom and disposable resources enable people to adjust to natural changes more
effectively than they could if they were poor and hampered. Freedom of movement/immigration
and of real estate markets allows people to dodge some of the negative effects
of climate change and to benefit more effectively from some of the positive
effects. Economic freedom in general allows producers to quickly adjust their
production to fit a climate-changed world better. The possession of abundant resources
allows people to directly defend themselves against nature’s vagaries, whether
through dam/dike building, through hurricane-proof and earthquake-proof home
building, or through being able to cheaply heat or cool their living spaces
with heaters and air conditioners. Advances in agricultural and greenhouse
technology, along with the resources to implement them, can allow producers of
agricultural products to adjust effectively to whatever climate change might
occur as well.
4. The best way to alleviate poverty is
to produce more. Thus, the reasoning for point #1 applies here as well.
5. ‘Record’ rates apply only to
recorded periods of time. Many of the entries in the ‘Guinness Book of World
Records’ might be erroneous, because perhaps somebody who should have had the
record, performed the feat without it being recorded, perhaps because the feat
was performed in a historical period where written records of things were
scarce. The same applies to these ‘record’ rates of species extinctions. It is
easy for something to be at a ‘record rate’ if the time period that has been
properly recorded is relatively short. Such is the case with the recording of
species extinction. Keeping meticulous records of the fortunes of all of the
species in the world is a very modern phenomenon. In fact, scientists are still
discovering new species at a
relatively rapid rate! Thus, it is hard to take these ‘record rates’ of
extinction entirely seriously, especially when we know that tons of species
have come and gone, sometimes fairly rapidly, over the natural history of the
earth (the dinosaurs, to note a conspicuous example).
Also, even if plant and animal species were going extinct
unusually rapidly, why is that necessarily a disastrous thing for humanity? If
the dairy cow or the domesticated dog were to go extinct, that would be a
serious blow to many humans. But precisely because this is the case, there is
very little risk that these species will go extinct. Humans tend to do very
well at preserving and making more abundant species of animals that obviously serve
human purposes. But if it is an obscure species of poisonous snake in the
Amazon rainforest that is going extinct, why should we care? Environmentalists
will no doubt talk about ‘balanced eco-systems’ and such, but only eco-systems that
serve human purposes more effectively than any other ‘eco-system’ that could
take their place are worth preserving. There is nothing sacred about a ‘species’
or an ‘eco-system’ as such: their utility to humanity is the only thing that
matters.
I believe that I can think of five more pressing world problems
than the ones that Friedman worries about. They are: 1. Persistent monetary
inflation of all of the world’s currencies and the destructive boom-bust cycles
that follow in inflation’s wake. 2. Governments all over the world taking a
greater and greater role in their country’s economies through taxation,
regulation, imposing licensing requirements, and nationalization. 3.
Destructive civil wars in impoverished authoritarian countries. 4. Private
property rights in land, natural resources, and environmental goods not being
fully and consistently recognized, resulting in inefficient use of these goods.
5. Widespread support for the environmentalist movement’s assault on material
civilization, in the name of relatively trivial benefits and the purported ‘truths’
of quite unproven and controversial scientific hypotheses.
Friedman: “Normally, high prices would prompt
more investment, more drilling, and more oil. It has been slow to happen this
time around, though, for several reasons, said Goldstein. First, there was a
broad shortage of equipment in the oil industry – from skilled petroleum
engineers to drilling rigs to tankers – to expand production. Second, countries
like Russia began retroactively changing the drilling rules in their fields,
squeezing out foreign producers in order to pump more oil themselves; what this
did was discourage more professional and experienced global oil companies from
operating there, and this in turn reduced production. Finally, America and
other Western nations continued to limit the amount of acreage they were ready
to offer for oil drilling for conservation reasons.”
Brian: Exactly the point I made earlier.
The equipment shortage was probably due to a general capital shortage, in part
caused by anti-saving and egalitarian government policies, exacerbated by the
highly regulated and restricted nature of the oil industry. The skilled labor
shortage was probably largely a result of government artificially subsidizing impractical
courses of education, rather than allowing financial and market considerations
to structure the education market more. The second factor is the Russian
government’s restrictionist and socialist policies. The third factor is the US
government’s policies, policies supported by environmentalists keen on
restricting energy production. The answer to all of these problems is a freer
market, all over the world.
Part III: How We Move
Forward
Chapter 13: The Stone Age
Didn’t End Because We Ran Out of Stones
Friedman: “The way to do that (create clean
energy solutions that will supplant ‘dirty’ energy sources) is by creating our
own price signal to trigger the market to launch those 10,000 innovations in
clean energy in 10,000 garages and 10,000 laboratories. The market will give us
what we want, but only if we give the market the signals it needs: a carbon
tax, a gasoline tax increase, a renewable energy mandate, or a cap-and-trade
system that indirectly taxes carbon emitters – or some combination of all
these.”
Brian: While I appreciate your lukewarm
endorsement of the efficiency of free-markets, what you are talking about is
not really a free-market at all. On a free-market, a government wouldn’t decide
that a certain category of market products are ‘bad’, and then tax and restrict
them accordingly. Allowing them the right to do so assumes that the government
knows what it is doing and that it has only the best interests of their
citizens at heart, both dubious assumptions.
How high should the government make the gasoline or carbon
tax? Well, it depends on what the magnitude of the negative effects of using
the product will be. But actually, no one knows this magnitude, so how could
the government? If the magnitude of the negative effect turns out to be
relatively small, or the supposed negative effect turns out to be non-existent,
then the tax would have prevented a perfectly good set of energy sources from
being used to raise the well-being of the world’s consumers. Given that we are
talking about energy, a resource that is very significant for every consumer
and producer, this possibility should not be brushed aside lightly.
In addition, how can we trust the government to be objective
when evaluating the magnitude of the alleged negative effects, and the
appropriate policy responses? Most politicians and bureaucrats love it when the
scope of their duties increases: it means more power and prestige for them and
their institutions. What better way of increasing this scope then by accepting
the assumption that the world’s energy production and consumption must be
tightly regulated in order to avoid global catastrophe? Governments and their
officials definitely have a skin in the game when it comes to climate and
energy science: accepting the disastrous anthropogenic climate change
hypothesis results in more power and authority going to the government, which
will thus bias government officials in favour of this hypothesis.
On a real free-market for energy and energy production, what
would probably happen is this: Coal, oil, and natural gas will continue being
used, but the large and increasing demand of the world’s population for energy
will push the price of energy up. This will result in more exploration and
production of coal, oil, and natural gas, but it will also result in financial
incentives for the serious exploration of new alternate energy technologies,
and financial incentives for the expansion of existing alternate energy
options, such as nuclear and geothermal energy. Energy consumers ultimately demand
useable energy: not a particular form of energy such as oil or coal. Increased
demand for energy will thus spur innovation and production in all forms of
energy, ‘dirty’ and ‘clean’ alike.
Friedman: “If you want to bring about a mass
movement toward more energy-efficient cars, windows, buildings, power
generation systems, lighting, and heating, the simplest way is to make sure that
the true cost of using any and all hydrocarbon-based fuels is reflected in
their price to consumers – the true climate costs, the true environmental
costs, and the true geopolitical costs.”
Brian: The only ‘true’ cost or price of
something is the market cost or price. This is because the market process,
through the mechanisms of supply and demand, can translate billions of
subjective valuations from the world’s consumers into a single money price or
money cost. The government, on the other hand, can do no such thing. At best,
the government can arbitrarily impose the value judgments of its politicians
and officials onto the unwilling consumers, forcing them to pay a higher price
for the goods or services that they want to consume.
Friedman: “Big industrial players like GE need
some price certainty if they are going to make big long-term bets on clean
power, and to those market dogmatists who say that the government should not be
in the business of fixing floor prices or other incentives to stimulate clean
power, (Jeffrey) Immelt (CEO of General Electric) says: Get real. “Don’t
worship false idols, The government has its hand in every industry. If we have
to have them, I’d prefer they were productive rather than destructive.”
Brian: As a market dogmatist myself, I
would ask: what makes government any less of a ‘false idol’ to worship than the
free-market? We don’t ‘have to have’ government meddling in every industry,
there were many periods of history within the last 200 years where governments
meddled far less with industry. In fact, this was the case in most periods of
American history. Why accept a political outcome as a given when we can try to
change it? And if you are so pessimistic about changing political outcomes,
what makes you think that you will be able to convince the government to
intervene ‘productively’ rather than ‘destructively’?
Friedman: “We need to stop fooling ourselves
that by rejecting a gasoline tax increase or a serious price on carbon we are
actually saving our citizens money. It is a complete illusion – the epitome of
short-sighted thinking. OPEC and the market are imposing their own taxes.
America, you are paying a tax today. It is a tax every time you heat your home,
power your small business, or drive your car. It is a burden on every
transaction you make as a human being. I want to cut your taxes. Read my lips:
I want to cut your taxes.”
Brian: The answer to ‘OPEC taxes’ is to
encourage energy production, all energy production (including coal, oil, and
natural gas), in non-OPEC countries. That will cause the price of energy to go
down. Government taking a cut of economic transactions has never saved any
consumer money; how could it? If you think that the tax is necessary to stop
the ‘negative externalities’ of pollution and anthropogenic climate change then
fine, stick to saying that. I disagree with you, but at least you’re being
honest about what you’re going for. But to claim that putting a tax on the most
effective energy sources that the world currently has is going to somehow save
consumers money in the time span which they care most about (generally the
short and medium terms) is just not true.
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