When economists fail to teach: Trevor Tombe and capital gains taxes

Economics is a beautiful discipline. Done right, it’s a science on par with physics. Unfortunately, too often, economists debase their discipline when they speak in the press. The public remains confused, and convinced that economists can get any result they want – a truly dismal science. Case in point is professor Trevor Tombe’s article in The Hub Why raising capital gains taxes makes sense—yes, really. Instead of helping the public understand the economic reasoning behind taxes on capital income, Tombe simply runs cover for the recent federal budget. Maybe everything in the budget is wonderful, including the new treatment of capital gains, but if economists want to explain the idea to the public, perhaps treating their discipline like a science instead of political punditry would be a good start.

Taxes, taxes, taxes!

What is efficiency?

Efficiency is a technical concept in economics and Tombe serves to confuse the public by using the word casually. Tombe says “An efficient tax system is one that is neutral and doesn’t bias such decisions.” Sure, but efficiency means far more. In economics efficiency hinges on the Pareto criterion: economic activity that makes everyone better off without making anyone worse off. For example, if you have more wheat than barley and your neighbour has more barley than wheat, and if you can find mutual agreeable terms, a trade would make you both better off while hurting no one. In economics, Pareto efficiency provides the foundation for understanding markets and policy intervention. In an idealized free market the entire economy becomes Pareto efficient through mutually improving trades, leaving the government or central planner with little if anything to do. In reality, markets are not perfect and just because an idealized society is Pareto efficient, for subjective reasons, we might not like the distribution of wealth, even if arrived at through voluntary means. Regardless of the government’s wisdom, it must generate revenue to fund programs. An optimal tax policy ensures that revenue collection minimizes additional distortions to decision making that further break the Pareto criterion. That’s what Tombe means by an efficient tax system, but keep in mind governments that redistribute wealth almost always sacrifice efficiency for equity. Maybe for political harmony it’s a good idea to give up some efficiency for equity, but economics as a science can’t offer too much about what is “fair” – that’s why we have philosophy (and a democracy).

Why tax capital gains differently?

Tombe provides a confused answer to this question. He starts with the argument that a dollar is a dollar, suggesting all sources of income should be taxed the same. He then compares the special capital gains treatment an investor receives when selling a second home to the need for partial capital gains inclusion on corporate profits because of existing corporate taxes. The implication is that second-home investors are still “not paying their fair share” but the corporations and shareholders at the new inclusion rate are. Tombe provides a graphic showing Canada’s “improved fairness” from the federal budget’s increase in the capital gains inclusion rate. Hurrah! The new capital gain inclusion rate is both more efficient and more equitable – the Holy Grail of economic policy!! Yeah, none of this is economics.

Remember: optimal tax policy requires that the government raises its revenue in a way that distorts decision making the least by keeping the Pareto criterion intact as much as possible. It is not clear – and it does not follow from anything in Tombe’s article – that equalizing tax rates across labour and capital accomplishes this goal. Optimal taxation economics shows that it actually does matter how a dollar is generated. There is an enormous body of research on this topic which Tombe completely ignores.

Optimal taxation theory has a core result, the ChamleyJudd theorem. This theorem states that over a long time horizon, the optimal tax rate on capital income goes to zero. More than that, the theorem shows that taxes on capital over the long run harm workers – capital taxes end up Pareto inefficient. The intuition is simple: when the capital stock shrinks, less is left for reinvestment which means lower productivity, less innovation, and therefore less consumption and leisure possibilities for workers (of course there are a lot of important details I’m skipping). The result is mathematically technical with lots of “ifs” that approximate the real world but none of which hold exactly. Chamley-Judd provides an important background result for thinking about optimal tax policies – optimal tax polices robustly separate capital income from other sources. Applying economics as a science in this instance is about identifying, through careful empirical and theoretical research, how the “ifs” of Chamley-Judd and the related literature are violated in a real economy at an actual point in time. One example of a violation is tax arbitrage created by shifting labour income to capital through various compensation schemes. Careful work can help determine the optimal tax rate on capital income in a real world situation. Where we land is complicated. Tombe offers no such insight and teaches us nothing about these difficult questions as they pertain to Canada. Instead he provides book-keeping accounting about “fairness”.

Economists, be scientists!

I don’t know what the optimal tax rate on capital income in Canada should be. Based on Tombe’s article, I don’t think he does either. Maybe capital gains inclusion rates should be increased because of the specifics around the failures of the assumptions behind Chamley-Judd, and those increases will lead us closer to an optimal tax policy. Or maybe taxes on capital income should be higher even though they will lead to inefficiencies and lower economic growth because the trade-off is politically savvy. Or maybe they should just be lower. I don’t know. Whatever the level, an evidence-based approach looks nothing like Tombe’s article.

For all economists out there: Please treat your discipline like a science. When given the opportunity teach the public, start from scientific principles like physicists do. Economics does not have to be the dismal science!

Stephen Gordon: Carbon tax open letter rebuttal challenge accepted

On X, Professor Stephen Gordon issued a challenge to rebut An Open Letter from Economists on Canadian Carbon Pricing. Professor Gordon, challenge accepted.

First, I want to make clear that we are talking about the real world – and that includes everything that goes into the climate change agenda, from carbon taxes to public choice. The carbon tax debate is about something much larger than an idealized commodity tax used to mitigate an externality as argued from a second year undergraduate econ textbook. The public and the political parties are well aware of the real debate taking place: Climate change mitigation is an invitation to an incredible centralization of government power of which a carbon tax is not a replacement for inefficient alternative policies, but the first of many potentially slippery steps toward dirigisme. How much centralization of power, with all the risks and threats to liberty and economic growth that that power entails, is worth it for mitigating the externality created by greenhouse gas emissions? In that sense An Open Letter from Economists on Canadian Carbon Pricing is naively partisan and the letter will be used by the political class for its partisan implications. They’ve already started.

Yes, the economists are right about the efficiency of a commodity tax with rebate, which is the essential content of their letter. Carbon burning activities are normal goods and higher prices will reduce demand. Wealth compensation will restore, and in many cases improve, the original utility level of most consumers at a lower level of carbon consumption, even if they can afford their previous consumption level. Distorting effects follow the standard triangle of the second order of smallness deadweight loss arguments (provided the absence of other pre-existing margins of distortion). As policies go, using prices to do the work of resource reallocation is far more efficient than top-down government decree. The basic idea is that the market price of carbon burning does not reflect the full cost to society and the commodity tax restores cost/benefit margins across consumption. Basic econ; got it. And it has nothing to do with the carbon tax debate in Canada.

Let’s deal with the size of the externality. The open letter is a little sneaky here and I think academics who are trying to educate the public on an important issue could do better. They state:

A conservative estimate is that the impacts of climate change will cost our economy at least $35 billion by 2030, and much more in future decades.

Fine, but starting from when? What the letter leaves out is that the $35 billion by 2030 is the estimated cumulative total cost from 2015. The $35 billion is not an annual figure; the letter should have made this point more clear. Canada’s GDP is about $2,000 billion per year. From 2015 to 2030, the total cumulative GDP is about $30,000 billion making the effect size of climate change about 0.1% of GDP per year. Economics always stresses the opportunity costs of alternatives. Why are we spending so much time and energy, let alone real money, on a problem with an effect size of 0.1% per year of GDP? How is that a “a real threat to Canadians’ economic well-being”? Even if the effect grows to 0.2% per year, it means that the economy would be about 15% smaller than it otherwise would have been in the year 2100. The real problem is that are in fact many pre-existing margins of distortion much more severe than climate change – inefficient taxes on capital and labour, rent control, marketing boards, red-tape in small business formation, over-regulation, protectionist tariffs, misaligned entitlements, and rent-seeking channels in nearly every walk of life from health care to hair styling. All of these issues shave off growth at least ten times greater than climate change and perhaps much more, and they are potentially much easier to deal with. Getting the basics wrong means we will squander perhaps as much as 1,000% of economic growth potential over this century – the difference between 5% and 2% GDP growth per year. Just imagine if the airplane was invented today. In our hyper-regulated world, how long would it have taken before a government would have allowed a business to carry passengers? Thankfully, the real world saw its first regularly scheduled airline service just 10 years after the Wright brothers at Kitty Hawk. If the signatories wish to be taken as non-partisan as they claim, perhaps instead of presenting the idealized arguments from an undergraduate lecture about the efficiency of a commodity tax with rebate that is super important to only one side of the political spectrum, they could pen a full-throated open letter that emphasizes those areas where Canada could make the greatest improvements to the growth rate of the economy. In the end, it’s economic growth that shatters poverty, pays for social programs, and eventually leads to a world with cleaner energy and a cleaner environment. A sclerotic and an anemic economy is the real threat to Canadians’ well-being; climate change mitigation chases couch change.

The Canadian public understands the carbon tax debate far better than the experts might imagine. The public is being asked to pay for a small, if not minuscule, externality in the present that will not move the needle on the issue globally. More importantly, the Canadian public sees climate change mitigation as an overwhelming call to centralize power. Politicians and activists supportive of the carbon tax also generally advocate for heavy government industry intrusion, with the carbon tax but one of a plethora of dirigiste policies. For similar reasons Milton Friedman opposed creating a negative income tax as just another welfare program on top of a behemoth system. The public will not believe any party that promises to implement a carbon tax in lieu of all other climate change mitigation programs and nor should it. The public also sees many, if not most, of those same advocates and politicians using climate change as an opportunity to address a long wish list of progressive causes. Whatever the merits of those causes, they have nothing to do with the simple argument of restoring marginal costs and benefits associated with an externality, and the public knows it. It’s true that climate change is a big collective action problem but mitigation creates a giant public choice problem with all its attendant real world capture issues. No government that depends on the climate change mitigation vote can withstand those power-centralizing pressures. Perhaps this is the reason so much political capital is spent on the climate change agenda. Opposition to the carbon tax is a political signal that says:

Given the smallness of climate change effect sizes on the economy, the trade-off from living with the externality is worth it, rather than accepting a slippery slope that centralizes power, magnifies regulatory capture, and portends a threat to liberal democracy itself.

Maybe the opposition is wrong and we have nothing to fear from the centralization of power, despite Eisenhower’s warning, but this is the real value-based debate Canadians are having through their elected representatives. The signatories might be right on the academics of curve pushing, but they are very wrong in understanding the nature of the political question being put to the Canadian public. And that’s why democracy with all its sham, political theatrics, and broken promises is far better at judging the real evidence than economists give credit. Let’s not forget Kennedy’s lament after the Bay of Pigs disaster:

“How could I have been so foolish to have trusted the experts?”

CBC embraces its antisemitism

I find it appalling how deep antisemitism – full on Jew-hatred – runs in Canada. The Left uses it as a mark of sophistication. Yesterday the CBC ran a story by Avneet Dhillon, “Why does Scotiabank have a $500M stake in an Israeli weapons maker?” in which the national broadcaster signals its deeply antisemitic colours while masquerading as a producer of investigative journalism.

CBC’s display of full-on antisemitism.

In this hit piece, the CBC implicitly suggests that the IDF intentionally, or at least recklessly, targets civilians, including children playing on a beach, made possible in part by Scotiabank mutual funds which hold positions in the military technology company, Elbit Systems. The CBC implies that ordinary Canadian investors, duped by war-profiteers at Scotiabank, feed a heartless military machine run by evil Jews. More than that, the CBC video takes a shot at financier David Feingold, menacingly labelled as “a prolific investor in Israeli funds and Israeli companies”, for managing investments at Scotiabank and directing capital to Elbit. We are not far from fomenting the usual conspiracies about how Jews control all the money, power, and influence around the world. This disgusting video goes on to explains how much the IDF depends on Elbit and by extension how much hoodwinked Canadians are funding “the siege of Gaza”.

Let’s get some facts straight. Israel and the IDF do not try to kill civilians. More than any other country involved in conflict, Israel works as hard as possible to avoid unnecessary bloodshed and collateral damage. The terrorist group Hamas (or as the CBC prefers, militants), on the other hand, does everything it can to ensure maximum suffering of the civilians in both Gaza and Israel. They feel no shame hiding weapons and command posts under hospitals or other civilian infrastructure. This conflict could end tomorrow if Hamas simply surrendered. Of course the IDF will make mistakes, just like every other country involved in conflict, including Canada. If Elbit Systems and other Israeli defence contractors could not find any investment capital, the IDF could not function. Without a functioning IDF, as 1948, 1967, and 1973 taught us, Israel would be destroyed.

The CBC frames this video as investigative journalism, informing the public about the unique evils of Israel and the nefarious financial schemes of international Jewry. But that narrative is a shameful lie – it’s boilerplate antisemitism. No other country, even those much more careless in conflict, is held to Israel’s standard. The famous physicist of Jewish ancestry, Steven Weinberg, an avowed atheist, in 2007 withdrew from a planned visit to Imperial College in London due to widespread anti-Israel and antisemitic boycotts taken by UK universities and other institutions. He had this to say:

I know that some will say that these boycotts are directed only against Israel, rather than generally against Jews. But given the history of the attacks on Israel and the oppressiveness and aggressiveness of other countries in the Middle East and elsewhere, boycotting Israel indicated a moral blindness for which it is hard to find any explanation other than antisemitism.”

It saddens me to see how deep antisemitism runs in Canada’s leftist “progressive” circles, how it seeps through our supposed national broadcaster. I am strong supporter of free speech. I want antisemites to say what they think – that way I know who you are. But do it on your own dime. The sooner we can defund the CBC the better.

I saw the face of antisemitism

As a kid growing up I never understood the Holocaust. I didn’t understand how anyone could hate a group of people so much that they would want to annihilate them. Attending a Catholic elementary school, I remember thinking “Hey, wait, wasn’t Jesus a Jew? So why do people hate Jews again…?” Nazi Germany’s evils seemed so complete to me that just the sight of the spine of the jacket cover of William Shirer’s The Rise and Fall of the Third Reich in our family library instantaneously filled me with disgust. (The book is a must read – it gives a ringside seat to the emergence of humanity’s most heinous ideology.) Throughout my life I thought, or preferred to think, that hard-kristallnacht-antisemitism was a thing of the past, harboured only in strange and powerless corners. But I did listen closely to my Jewish colleagues in physics and mathematics who warned, in quiet conversation, that hatred of Jews lurks under the surface in well-to-do, mostly “progressive” society. Without Israel, at least as the last point of refuge, Jews will always be in jeopardy.

In the wake of the Hamas terrorist attacks in Israel last month, here in Ottawa I have seen those warnings from my colleagues play out in full. I find it incredible that massive groups of people took to the streets in our capital city chanting antisemitic slogans – a scene repeated around the world. Instead of steadfast opposition to Hamas and everything it stands for, trendy progressives truck with terrorists who call for the literal extermination of Jews. In just three weeks, antisemitism has become a new way to show your “nuance” and signal your “sophistication”. It’s disgusting.

The leadership in Gaza has had nearly two decades to start building a Singapore of the Middle East. Instead, they spent and continue to spend resources on rockets, tunnels, and antisemitic indoctrination. Instead of setting the conditions for prosperity, tolerance, and peace – with a world and an Israel who wants them to succeed – Gaza leadership doubles down on hatred, propaganda, and war. Even if we accept that Hamas hoodwinked Palestinians in the 2006 election, where are all the mass uprisings to overthrow Hamas today? The truth is, Hamas has a deep core of support in Gaza, even if mostly passive. Of course the Israeli Defense Force wants to avoid Palestinian civilian casualties. But given Hamas tactics and their terrorist aims, Israel’s self defence will lead to unavoidable deaths in crossfire. The world needs to point the finger squarely at Hamas for Palestinian suffering.

Years ago, a New York Jewish community leader asked Thomas Sowell, “What can Jews themselves do in order to minimize the hostility they face?” Sowell responded, “Fail. Because as long as you succeed you are going to be hated.” Jews have so often risen from the bottom, in conditions of grinding poverty and rank discrimination, and yet passed so many other groups in achievement. In that regard, almost all people fail to grasp the staggering loss from the Holocaust. Sure, the inhumanity and industrial cruelness represents a singular blot on the human race, but more than that, the Nazis destroyed the Jewish intellectual and cultural conditions of central and eastern Europe that just produced Einstein, Szilard, Bohr, Ulam, Born, Meitner, Wigner, Pauli, von Neumann, Haber, Hausdorff, Tarski, Erdös, and Noether, and with it, one of the roots of our modern technological age. These men and women were my heroes in young adulthood. Fortunately for the Allies, Jewish refugees and American Jewish physicists played an outsized role on the Manhattan Project. To humanity’s benefit, the Jewish intellectual tradition survives – look at the lists of Nobel Laureates, Field Medallists, Oscars, and virtually any creative discipline on Earth since WWII. Never in history has such a small group of people contributed so much, despite the millennia of hostility.

To all those “progressives” on my street: The world needs Israel; Hamas we can do without.

The point of vanishing convenience

I don’t think climate change is a big deal. I don’t think it makes the top ten list of global problems, and I don’t think that we should do much to stop it. In fact, I think that we need to burn more fossil fuels than we do right now as it is the surest way to lift an energy-starved planet out of poverty. I know people say they disagree with me. Some even say we face a climate catastrophe that threatens us all with extinction. But when I look at how these climate change hand-wringers live, they act as though they are in complete agreement with me. Even more oddly, when you look at how I live, you’d swear I was the one who was the climate change hero trying to save the world. I guarantee that my carbon footprint is minuscule compared to just about everyone else in Canada. I don’t care how people live, and I certainly don’t care how others think I should live, but if you believe that the world faces a coming climate change induced extinction and you don’t even try to live like me, then you are worse than a hypocrite. Your convictions run only as deep as the point of your vanishing convenience.

The CBC recently ran a First Person piece by Heather Kitching. Heather says that the world faces a climate calamity, but finds it too difficult to cut carbon from her life given that she lives in Thunder Bay. Her main complaint is that EV car sharing isn’t available and that heating her home without natural gas is just too expensive. I am sure Heather thinks she cares about the world. She clearly wants to tell us about how much she cares and she wants us all to know how hard she’s working to do the right thing. A public confession of sorts, I suppose. But she hasn’t thought carefully about what she claims to believe. Consider this thought experiment:

Imagine it is WWII all over again. And imagine that you can save one Jew from the Holocaust. You have no ability to stop the Nazis or their evil machine, but you have the opportunity to save one human being. Now imagine that to save that person you have to move into a major Canadian city, rent a nice apartment (or buy a nice condo), give up car ownership, ride your bike all year long no matter the weather – hardly ever even taking public transit – and eat a mostly plant-based diet. If you live this way for the rest of your life, you will save one Jew from the Holocaust. Would you do it? If you claim that climate change is destroying the planet and there is nothing individuals can do about it, you’re wrong. You can live like me. At the very least you’ll be able to say, I couldn’t stop it, but I didn’t go along with it. And, you can say that in expectation my meagre contribution to the reduction of carbon in the atmosphere saved one statistical life somewhere on Earth over the next century. Maybe the great flood of 2087 in Bangladesh will be just a fraction of a millimetre lower because you spent a lifetime living a low carbon lifestyle. What’s more, is that as terrible and evil as the Nazis were, people like Heather claim climate change will be even worse – to their mind we face human extinction if we don’t do enough! Now, I don’t believe climate change is a threat at all so I don’t think that my lifestyle benefits anyone but me. But if you believe climate change is about to usher in an apocalypse and you go along with carbon burning because it’s convenient, that makes you a collaborator.

Me winter biking in Ottawa: A climate change hero or just a cheapskate?

What people like Heather from the CBC say is that they’ll help stop what they believe is the near certain death of humanity up to the point that it becomes too personally inconvenient. That’s her real confession. She could ride a bike all year long, even in the winter. I do so in Ottawa – and my bike isn’t even electric. She could section off living space in her home during the winter and heat her reduced living quarters with electric radiators. She doesn’t have to live in Thunder Bay if not contributing to climate change is that important to her. Now I don’t find Heather evil but I do find her dangerous. I believe she’s an honest soul who wants to be a good citizen. What makes people like her dangerous is that she doesn’t think. She falls prey to social desirability bias which leads to a world run by demagogues. Cost benefit analysis goes out the window in service of lofty ideals, opening the gates of hell for the demagogues to impose serious consequences including poverty and endless human suffering on the rest of us. (Peace, Land, and Bread anyone?) Heather shouldn’t feel bad about her carbon footprint. She should enjoy time with her girlfriend in her gas-powered car. Life is short enough as it is.

As for why I live in a box in the sky, with no car (I’ve never owned one), biking all year long, it’s not for climate change. It’s for time. By living this way I get time back for what’s important to me. I’m at work in 12 minutes, and on the tennis court with my wife in 15 minutes. And tennis is life to us. Everything I need is within a 25 minute bike ride and often within a 5 minute walk. And biking turns your legs into Sexy Flanders! My life isn’t for everyone. If you live on an acreage with a big pickup truck and ATVs, fill your boots – have fun! I’d love to have a beer with you. No one should have to live like me and certainly not for climate change.

Hallucinating with ChatGPT

Natural language generation has improved remarkably over the last decade and OpenAI’s ChatGPT showcases an unbelievable performance of state-of-the art systems. Like many curious people over the last month, I played with ChatGPT from time to time. It’s super impressive – it can create poems, write prose in nearly any style, and provide detailed answers to all sorts of questions. Oh, and it’s also an amazing bullshit artist and it will lie with abandon.

I decided to ask ChatGPT a specific question about particle physics that is a bit subtle but has a straightforward answer. ChatGPT’s response is stunning bullshit.

ChatGPT gets the first part right – the most common decay mode is to an electron, an electron antineutrino, and a muon neutrino. Now, the rest of the answer is completely wrong. First, the muon is kinematically forbidden from decaying into pions. The muon is simply not massive enough to do so. Second, even if the muon were massive enough to decay with three charged pions in the final state (like the tau lepton can), conservation of lepton number still requires neutrinos. Apparently ChatGPT has thrown lepton number overboard so that it can give me an answer!

The correct answer to my quetsion is: Theoretically yes, but hopelessly rare. No observation of muon decay without emitting neutrinos has ever been observed.

In the Standard Model (the theory of fundamental particle interactions) with massless neutrinos, muon decay must include neutrinos in the final state. The Standard Model with massless neutrinos conserves family lepton number and so neutrinos in the final state are required to conserve muon and electron number (a muon neutrino and an electron antineutrino). However, neutrino flavour oscillation observations tell us that neutrinos have very, very tiny masses. Extending the Standard Model to include neutrino masses allows for the muon to decay without neutrinos (for example to an electron and a photon) but at rates so extremely small that we have no hope of observing neutrinoless decays of the muon unless the Standard Model is further extended with exotic physics.

Ok, rather technical stuff. But where did ChatGPT come up with the idea of pions in the final state? Well, I asked it. And sure enough ChatGPT came up with references, including a paper in Nature from 1982 with claims of actually observing neutrinoless decays of the muon! Well, either I missed something during my PhD and postdocs (I have done a fair amount of work on supersymmetric extensions of the Standard Model with enhanced flavour violating decays of the muon) or ChatGPT is making stuff up. All of the references that ChaptGPT gave me are complete fabrications – they don’t exist!!

It turns out that natural language generation in systems like ChatGPT suffer from hallucinating unintended text. Its creative power, its ability to write poems etc., requires such an enormous amount of flexibility that ChatGPT seems to start making things up to complete an answer. I’m not an expert on natural language processing, but I know that researchers are aware of the phenomenon.

I happen to know something about particle physics so it’s not a big deal that ChatGPT fibbed to answer my question. In fairness, my question is a bit subtle (short answer is No with an if, long answer is Yes with a but). But imagine circumstances that are more important. How do you know if you can trust the answers? Asking it for reference doesn’t seem to help.

To me the lesson is that systems like ChatGPT are going to be ever more useful with the potential to make life much more convenient. But these systems are not a substitute for human cognition. For the teachers out there – don’t worry about ChatGPT writing your students’ essays, just check to see if the references exist!

Update (February 23, 2023)

I returned to ChatGPT last night, getting into a discussion with it about the top quark. ChatGPT continued to give insane answers about QCD, electroweak physics, and the nature of the Higgs sector. I thought I could get it on track if it would just realize that the muon’s mass is less than the pions. It produced this gem:

ChatGPT fails the Piaget test.

The Piaget test.

A chasing after the wind

As COP27 gets underway in Egypt, I am reminded of the remarks made by world leaders and politicians about what is allegedly at stake:

We are sleepwalking to climate catastrophe. In our globally connected world, no country and no corporation, can insulate itself from these levels of chaos.”  – Antonio Guterres, UN Secretary General

There’s one issue that will define the contours of this century more dramatically than any other, and that is the urgent threat of a changing climate.” – Barack Obama, former US President

My “Oh Shit” moment came early in my days as Environment Minister. We need to be absolutely clear-eyed about the accelerating climate crisis while using fear, anger & hope to activate us to do everything needed to ensure a safe climate.” – Catherine McKenna, former Environment Minister of Canada

These kinds of statements by world leaders, high level bureaucrats, activists, and former politicians abound in the media. The central message is that we must move heaven and earth within the current decade and beyond to avoid an absolute climate catastrophe. While these people might believe their rhetoric, the implications and logical conclusions of their statements are terrifying – they implicitly suggest a willingness, if not a desire, to torch liberal democracy while offering our youth nothing but a culture of nihilistic despair.

It is clear that climate change is not a massive world problem. The best economic estimates on climate change loss place the global GDP drag at about 0.15% per annum for the next 80 years if the world warms to the upper end of the IPCC forecast range. That is, if the world warms 5C by 2100, the world GDP will be about 10% to maybe 20% smaller than it otherwise would have been without climate change. As a comparison point, it means that climate change delays our well-being by about 10 to 20 years by the end of the century. It’s a bit like re-living the 20th century with a growth drag that puts the year 2000 at the level of the mid 1980s. Not great, but not quite the end of the world either. I explore the climate change story further in a previous post.

But let us suppose that you are unconvinced by the economic arguments and that you believe people like Catherine McKenna. Perhaps like her, you have had an “oh shit” moment too. In that case, you believe that climate change will make the world nearly unlivable if we don’t make significant changes to our economies right now. The problem now pivots: liberal democracies are slow and incremental with a focus on splintering political power, respecting individual autonomy, and building legitimacy through consensus. Parliaments, congresses, and executive branches face built-in constraints from divisions of power and the rule of law. Through centuries of experience and experimentation, our liberal democracies have given rise to the most successful and prosperous societies the world has ever known. But what if our democracies are too slow to satisfy climate change activists? Even worse, what if our democracies elect, at least from time to time, governments with a tepid view toward climate change mitigation? Seriously, between now an 2050 – the year we must, for some reason, hit net-zero emissions – what is the chance that Western countries will elect and re-elect governments that put climate change well down their priority lists? It’s certainly not zero. And if it is likely, what is the chance that liberal democracy over the coming decades can deliver on saving us from the climate catastrophe that activists tell us awaits?

Therein lies the rub. If activists can’t convince liberal democracies to move quickly on climate change by gluing themselves to famous works of art, setting fires at tennis matches, or making apocalyptic pronouncements at climate change conferences, the next logical move is an attack on liberal democracy itself. The unintended consequence of Catherine McKenna’s rhetoric, and people like her, is a deep disdain for democracy. If the electorate chooses wrong too often, changing the message from fear, anger, and hope to only fear and anger, what should we activate? In that eventuality, only benign authoritarianism can deliver us from the coming climate catastrophe. It’s not Donald Trump or “ultra-MAGA Republicans” I worry about, it’s the climate change catastrophe people who truly frighten me. The penny will eventually drop for them if they come to believe that our democracies can never bring the rapid change they think is necessary to save us from destruction. After all, what good is liberal democracy in a used up world?

In addition to sowing the seeds of authoritarianism, the climate change movement offers nothing but nihilistic despair to our youth. Again, let us suppose you believe the climate change message and that you know it is probable, if not likely, that we won’t do enough to combat climate change. The rational response to that belief is to hedge your life choices. What is the point in making long term investments in yourself with payoffs in a far off future that has a significant chance of never materializing? Why sacrifice the present and why bring another life into a world that has a large chance of being destroyed by inaction? Even if you think that our democracies will eventually choose well, you still must assign some non-zero probability that they won’t, and that non-zero probability should rationally inform your life choices today. It’s a bleak pessimistic worldview, and it’s wrong.

The climate change message terrifies me, not because of the climate change stories that will be told at COP27 over the next two weeks, but because it sets the stage for authoritarianism with all the confidence of religious zeal while simultaneously offering a philosophy of nihilistic despair to our youth. The desire to centralize power is as old as humanity itself; our liberal democracies help us resist that temptation. Let us hope that our democracy will endure the climate change activist tide.

Goodbye horses

The famous economist Thomas Sowell once wrote, “No race has a monopoly on high achievement and no race is incapable of producing high achieving individuals.” If we look across the arc of history, from the Chinese dynasties to the Indigenous peoples of North America, this truth is so plainly evident that it’s difficult to understand how eugenics programs ever gained traction. And yet today I read a CBC story, Ojibwe horses are endangered, that undermines the legacy of Indigenous ingenuity by building a narrative of mysticism while rejecting both science and history.

Prehistoric horses: Chauvet Cave paintings

The overwhelming consensus in the scientific community is that there were no horses in the Americas when Europeans made first contact. The vast majority of reputable sources on the evolution, domestication, and the history of the horse state that while horses existed in North America tens of thousand of years ago, they went extinct well before European contact and were only reintroduced after the arrival of Columbus. Genetic research shows that all horses in the Americas descend from Eurasian stock. Yet the CBC reports that the Ojibwe horse “lived around the Great Lakes long before European contact”.

Without question the Ojibwe horse, also called the Lac La Croix Indigenous Pony, is a national treasure fully deserving of protection. The breed nearly disappeared in 1977 and the Herculean preservation efforts since have given the breed a chance. The most remarkable fact is that the Ojibwe horse is a breed of pony matured by Indigenous people in Canada. Indigenous people used them in the bush along trap lines in Northwestern Ontario. As a breed, they are perfect for such conditions. Genetic testing shows that the Ojibwe horse originates from European introduction. Professor Gus Cothran, an expert on the genetics of horses says in Equine Monthly, “They are derived from horses that Europeans brought to North America. They did not originate in North America as a distinct strain of horse.” Research shows that the Ojibwe horse is a cross between the Spanish mustang and Canadian horses originally from France, but it was Indigenous people who created the breed.

Instead of doing research on the Ojibwe horse, the CBC simply states myths as facts. My guess is the CBC is trying to be sensitive to some Indigenous groups who insist horses in North America predate European arrival. (There are other groups in North America that insist on pre-contact horses, including some Mormons who wish to reconcile passages in their religious texts. I suspect that the CBC would be less generous entertaining Mormon narratives). By promoting mythical or religious beliefs to fact, the CBC not only undermines Indigenous ingenuity, but science itself. How does the CBC retain any credibility when confronting the anti-science crowd on climate change or vaccines when the CBC shows a willingness to behave exactly the same way with Indigenous issues? I find the CBC’s story on the Ojibwe horse disheartening – almost racist – because it robs us of the real story worth celebrating: Ingenious Indigenous people created a new breed of pony from European stock to fulfill their needs. It’s fine to discuss Indigenous beliefs, to create a greater understanding about rich Indigenous story telling, but it’s a form of neo-Lysenkoism to dismiss genetics to serve a political purpose.

Jared Diamond in his book Guns, Germs, and Steel, answers the question why the Europeans didn’t encounter a mirror copy of Europe in the Americas. The racist and terribly incorrect answer that has shaped so much of the awful history of this continent is based on racial superiority. But Diamond points out that the confluence of poor geography, and the general lack of domesticable plants and animals, such as the horse, meant that the flow of people from Europe to the Americas was always destined to go in that direction. The genetic potential of both peoples were the same, it was their unfair respective environments that set the course of history. The story of the Objibwe horse shows that if Indigenous people did have horses pre-contact, they would have created a plethora of breeds for every single need. And if that had happened, Columbus and Champlain would have faced Indigenous armies more powerful than the Huns – and perhaps during Indigenous first contact in Europe.

Thomas Sowell is right: No race has a monopoly on high achievement and no race is incapable of producing high achieving individuals.

A tale of signalling: post-secondary education and COVID-19 policies

A university education is not what it seems. The usual story, the one that makes us feel all warm and fuzzy, tells us that a university education – regardless of discipline – builds critical thinking skills, engenders a worldly view, and creates an informed citizen. We are empty vessels into which the fount of knowledge pours forth, filling us with enlightenment. Students graduate with skills that command a higher wage as they contribute more to society. But there is an alternative story that equally explains the facts. A university education is a signalling mechanism that does not pour knowledge into empty vessels, but instead sorts like jeweler’s loupe. Think about it. Most people can’t remember much of what they studied at university. In this story, a university education is a giant IQ test, coupled to a test of perseverance and conscientiousness. Students graduate with a signal that says they’re generally smarter than average and can put up with a lot of tediousness for years, and that’s exactly what an employer needs. Students who graduate had all the requisite attributes the day they entered university and the purpose of the degree program is to show the world they in fact have them. Who cares if you can’t remember the details of your liberal arts degree? Your employer certainly won’t. But your employer will care that they’re getting what they paid for – someone who can get a university degree. In truth, the human improvement and the signalling story are simultaneously true and the relative weight of each varies across degree programs. Bryan Caplan, an economist at George Mason University, has an excellent book on the subject, The Case Against Education: Why The Education System is a Waste of Time and Money.

CTV News London has an interesting story, A tale of two institutions: Western and Fanshawe deviate on return-to-school COVID-19 policies, that nicely illustrations the nature of signalling. Western University has opted to make COVID-19 boosters mandatory for all staff and students as well as to demand in-door masking at least until Thanksgiving. On the other hand, Fanshawe College will not implement masking or a vaccine policy this fall citing the Middlesex-London Health Unit. These two post-secondary institutions are in the same city (London, Ontario) with students of the same age. So why the difference? How is “the science” different at Western than at Fanshawe? Of course there’s no difference in the science, but the institutions fill subtly different roles in society. As a university, Western has a much larger signalling component in its diplomas than Fanshawe’s, an institution that operates more as a technical trade school. Students at each institution seek different products with different sensitivities to signalling, often coming from differing socio-economic circumstances.

Increasingly, adherence to high risk averse COVID-19 polices match political affiliation. Wearing a mask while riding a bike with no helmet – and I see this behaviour nearly every day in downtown Ottawa! – is a signal of political beliefs. We shouldn’t be surprised to see those institutions which trade in a signalling market, composed mostly of people from the urban upper middle class, will on average demand stricter COVID-19 policies two and a half years after the start of the pandemic.

Disclaimer: I attended Western for my undergraduate and I had an amazing time. It’s a great school and I learned amazing things from phenomenal minds. But I’m a bit weird. To me, going to class is a form of recreation, even a form of entertainment; it’s an end in itself.

Climate change mitigation: a solution in search of a problem

The new IPCC report is out this week and the Secretary of the United Nations has issued stern warnings and rebukes. The report’s co-chair James Skea of Imperial College London cautions that “If we continue acting as we are now, we’re not even going to limit warming to 2 degrees, never mind 1.5 degrees.” The authors of the new report argue that we need to halt all fossil fuel developments, and radically change our lifestyles including our diets to save the planet.

I accept the science. More precisely, I embrace the range of possibilities that the IPCC publishes based on the amount of global CO2 emissions and the likely effect on the atmosphere. But embracing atmospheric science is only a small part of the issue. What all the reports and commentary leave out are realistic cost-benefit analyses and the likely economic outcomes even in the upper range of warming forecasts. Of course the media does a poor job of highlighting the likely outcomes or placing them in proper context. Once we think about the outcomes it becomes clear that climate change is a solution in search of a problem.

Global GDP growth: the surest way to smash global poverty.

So, how can I believe the science but not the climate change mitigation story? First we need to be precise in our questions and goals. Clarity matters. Stripping away all the romance, the real question is:

If we want to spend tens of trillions of dollars today to make the world a better place in 2100, what is the most efficient way to proceed?

An answer to this question centers on three lines of reasoning:

1) Lifting worldwide GDP growth.
2) Avoiding a rare but potentially catastrophic possibility.
3) Protecting the planet’s biodiversity.

Implicit in the climate change narrative is the statement that climate change mitigation tops the list for addressing all three points. Let’s address each.

Lifting worldwide GDP

To begin we need a measure and a sense of scale. When comparing economic well-being, economists use GDP – the value created through production of goods and services. Of course GDP is an imperfect measure, but GDP and GDP growth correlate strongly with all the aspects of life that we consider important. We do not see a rush of immigration from countries or regions with high GDP to lower ones; it’s always the other way around. Since 1950, the planet’s GDP has grown by over a factor of 12. As a percentage of the population, fewer people live in abject poverty, lifespans are longer, health care is more readily available, infant and maternal mortality has plummeted. We are better connected, better educated, more fulfilled, more peaceful, and we are more productive than ever before. In short, the world has gotten an awful lot better for so much of the world’s population. Economic growth has been the key feature for shattering poverty. Nothing else comes close. Unfortunately we have a long way to go. There are many parts of the world where GDP growth has been tepid to say the least. On growth considerations, the germane question is:

If we want to spend tens of trillions of dollars today to increase the world’s GDP to the greatest extent possible by 2100, what is the most efficient way to proceed?

Not all countries have seen the same growth prospects and some countries switched paths over time. A great example of a path change occurred with China in the late 1970s. As China opened up and started to move to a more market based economic orientation, GDP per capita exploded. From 1990 to today, China’s GDP per capita has grown by more than 1,000%. When we think about poor countries and the lessons around economic growth, it’s hard to think about anything else! With China, we have a direct example from the last 30 years which shows what is possible by adopting at least some level of a market based economy. Going back to the end of WWII we have examples at least as impressive as modern day China such as South Korea, Japan, Singapore, and Hong Kong. If Africa took a similar trajectory to any of these examples, 1,000+% GDP per capita growth over the next 30 years is not only completely within the realm of possibility but could even be the most likely outcome. Think of a world in which another 2 billion people experience such economic growth.

Now let’s compare 1,000% GDP growth over 30 years to anything that climate change has in store. The best economic estimates suggest that at 6C of warming by the end of the century – the very upper end of the climate models – the world economy will be about 10% smaller than it otherwise would have been without climate change in 2100. Even if the estimate is wrong by a factor of 2, and the actual effect is 20%, the effect size of climate change is about 0.25% of GDP loss per annum! Climate change is peanuts compared to the variation in growth we see between countries which organize around markets and those which do not. So if we want to spend tens of trillions of dollars today with the goal of making the world a better place in 2100, would it not make more sense to use those resources to persuade as much of the world as possible to follow the success path of well known examples? It’s hard to believe that chasing 0.25% per annum growth level effects come out at the top of the list. Such small effects in our own GDP growth sit at the level of the inefficiencies in the Canadian tax code.

Avoiding Catastrophe

It’s pretty clear that if the path to a better world in 2100 is GDP growth, climate change is one of the last places to start – 0.25% per annum growth effects just don’t make the leap for us. But there are other concerns. Suppose that climate change triggers some presently poorly understood tipping point which catastrophically ruins the environment and makes the miracles of economic growth impossible. In that case, spending tens of trillions of dollars today on climate change mitigation might make a lot of sense. But now the question changes:

If we want to spend tens of trillions of dollars today to make the world safer by avoiding a potential yet poorly understood catastrophe by 2100, what is the most efficient way to proceed?

In other words, we seek to spend a lot of money today in a precautionary sense – buying insurance – so we can have a future with economic growth. To answer this question, we need to think about how climate change compares to other potential catastrophes. We are just coming out of a pandemic that in 2020 shrunk the world economy by an effect greater than 10 years worth of expected climate change damage. Now, imagine a pandemic much worse than Covid, or even much worse than the flu of 1919. A severe global pandemic could erase decades of economic growth almost overnight. But it’s not just pandemics. There are only seven principal cereal crops in the world of which just two, wheat and corn, make up over 60% of global production. Suppose that a serious blight or virus destroys much of the world’s grain output, something like the Irish potato famine but on a global scale. Global debt runs could ruin our economies and throw us into a worldwide great depression that lasts decades. And of course nuclear war always hangs over us like the Sword of Damocles, not to mention a comet or asteroid impact, a major volcanic eruption, the collapse of the Earth’s magnetic field…you get the point. There are many, many, low probable highly catastrophic possibilities to worry about all of which could in part be mitigated right now by tens of trillions of dollars worth of spending today. Where do we start? We can’t insure against all possibilities. To make the case that climate change is special, we have to show that somehow, of all the unlikely but horrible possibilities that exist, climate change makes the top of the list on a cost-benefit insurance basis. It’s hard to make that argument, but I have some limited sympathy for it. But to put catastrophic events in perspective, for at least the last decade governments have told banks and corporations to plan carefully around climate change exposure. Now imagine if a decade ago governments instead suggested that financial institutions and businesses put a potential pandemic at the top of their mitigation priorities. Perhaps Covid would have been handled much better. Stuff that really threatens us are events like Covid on steroids; real catastrophes come out of the blue, not something that gives a century of notice with gradual change.

Protecting biodiversity

Climate change mitigation seems like a weird place to start if we want greater economic growth or mitigation against rare but potentially catastrophic outcomes. But climate change might be special when it comes to biodiversity. Perhaps climate change will be so awful for the planet’s plants and animals that, while GDP will hum along, we will irreparably harm the biodiversity of the planet and eventually poison long term growth prospects. Again we need to think in terms of cost-benefit. The question now becomes:

If we want to spend tens of trillions of dollars today to ensure the biodiversity of the planet through 2100, what is the most efficient way to proceed?

The biggest problems around biodiversity are habitat loss and destruction by direct human intervention. The large mammals of Africa and Asia have nearly been hunted to extinction. Ocean life suffers from over-fishing. Direct human effects on the environment have so far proved far more destructive than the indirect effects caused by climate change. Even if we manage to get all of the Western world on electric cars by 2050, rhinoceroses and elephants will hover near extinction, if not already extinct by then, and another 30 years of over-fishing risks colossal implications for sea life regardless of a slightly cooler climate. I doubt our green infrastructure renewal will save even one giraffe or increase the length of single tuna fish. It’s not clear that climate change is the place to start if we want to protect the environment and biodiversity. Perhaps sectioning off large parts of the Earth as no-go zones for humans might lead to better outcomes. Returning to economic growth, it’s countries with high GDPs per capita that treat their environments the best. Thus a virtuous cycle of higher economic growth with increasingly cleaner environments may end up being the best way to protect the natural world. In that case, the pathway to rapid GDP growth could be the saviour of biodiversity.

Squaring the climate change agenda

Somehow the public has become captivated by an arbitrary, almost magical, threshold of 1.5C of warming with an implicit belief that the world will end at the 2C mark within a hundred years or less. Climate models make no such predictions. Worse, when experts do offer preliminary cost-benefit analyses, they often leave out the effects of human adaptation. Rising sea levels do not mean 187 million people will be displaced over the next century. Urbanization saw billions migrate to cities over the last 100 years. Patterns of human habitation will continue to change over the coming century. Humans live in extreme climates and elevations already, from the Sahara desert to nearly the north pole, from the Tibetan and Andes plateau to The Netherlands and the Mekong Delta. We have lived across this enormous variation for millennia. There is no model of climate change, even with 6C of warming by 2100, that has a level effect larger than the variation that already exists.

The more I think about it, the more I see climate change as a solution in search of a problem. Every time we rephrase the question to precisely address what we hope to achieve in the far off future, climate change does not seem to offer the leading solution. It’s hard to imagine how climate change tops the list for increasing economic growth, protecting us from a potential catastrophe, or sustaining biodiversity. Yes, climate change contributes in some way to all three of these lines, but it’s not leading order. It’s true that climate change is a classic example of an externality in which an unregulated market is unlikely to generate the optimal amount of global warming given the benefits from carbon intensive production that humanity receives. Spending something to mitigate climate change makes sense, but it’s not an all-hands-on-deck-or-it’s-the-end-of-the-world kind of problem and it certainly does not warrant anything close to the attention it receives. And if ultimately the political will is insufficient to address climate change in any substantive way, it’s not a big issue – we’ve learned to live with all kinds of externalities that are just too costly to address. We know how to adapt.

So if climate change represents a rather small or moderate externality, why does it attract so much attention? I am sure there are true believers who claim to “believe the science” and yet focus all their concern on highly improbable catastrophic climate change events as though those outcomes are the most likely to occur. But for others, I think climate change offers a seductive channel for capturing government power. Under the climate change lens, CO2 emissions are a form of pollution, creating an externality for government action to solve. But we have to remember that heavy direct government regulation of pollution is the backdoor to the government marshaling production. After all, pollution is a byproduct of production; you can’t touch one without touching the other. That’s why in industrial settings, economists argue for narrowly targeted pollution mitigation, often emphasizing indirect government involvement that relies on some form of market or price mechanism, tied to carefully delineated property rights and the rule of law. A government that shepherds a sea change of the entire economy through direct action and direct government participation – whether justified or not – ends up in the driver’s seat of the economy, deciding on what gets produced and who produces what. Regardless of intent, as President Eisenhower recognized over 60 years ago, that centralization of power is a danger to democracy and liberty. We face enormous institutional and political risks from the clarion call to centralize power to save the planet from what all reasonable estimates tell us is a rather small problem. But maybe that’s the point…