The Carbon Tax Scam

Anyone who questions the validity of Bruce Yandle’s Bootlegger and Baptist theory of Public Choice needs to look no further than the Climate Leadership Council and its carbon dividend proposal which is now be flacked by Americans for Carbon Dividends—AFCD—which is co-chaired by former Senators John Breaux and Trent Lott.

The carbon dividend proposal, designed by James Baker and George Shultz, would impose a carbon tax—they call it a fee– on all fossil fuels and then rebate the revenue on an equally to all Americans on a monthly basis. The program would be administered by the Social Security System. The implementation of the carbon tax would lead to the phasing out of regulations that are intended to reduce carbon dioxide emissions.

This proposal is supported by major corporations and distinguished Americans such as Ben Bernanke, Martin Feldstein, and of course, James Baker and George Shultz. On the surface the proposal appears quite reasonable. It is not. To quote, erroneously, Yogi Berra, “In theory, theory and practice are the same. In practice, they are not.”

The flaws in the proposal are many. To begin with the carbon tax is based on an assessment of the damages caused by using fossil fuels—the Social Cost of Carbon. Damages are derived from complex Integrated Assessment Models –IAM. MIT’s Robert Pindyck said “IAM-based analyses of climate policy create a perception of knowledge and precision that is illusory, and can fool policy-makers into thinking that the forecasts the models generate have some kind of scientific legitimacy.” He also said that “calling these models close to useless is being generous. “The reason for such harsh criticism is that many of the parameters and functional forms contained in models are arbitrary. The damage function tied to the relationship between temperature increases and GDP is based on climate sensitivity which we know very little about. The IPCC sensitivity estimated range varies by a factor of three.

So, why do economists and corporations support something derived by piling assumptions on top of assumptions? Economists rightly believe that a market based solution to climate change is preferable to command and control regulations, even if damages are uncertain and the size of a carbon tax is as well. CO2 emissions are seen as a bad, so taxing them is good and the tax will stimulate innovation. In the case of corporations, they realize that Congress will not enact a clean and simple tax and legislation to eliminate CO2 regulations. Politics will shape the size of the tax and its implementing legislation. Corporations want to “be at the table” as legislation is drafted and also get the PR benefits of supporting action to solve the climate change problem. Having two former senior senators leading the advocacy campaign will provide the “seat at the table”.

The carbon dividends scheme is a perfect example of the Bootlegger and Baptist theory. The whole thing is a scam!

Sea Level Rise: A Little Perspective

According to the recently released Climate Change Research Program report–CSSR—“ global average sea level has risen by about 7–8 inches since 1900. … Human-caused climate change has made a substantial contribution to this rise since 1900, contributing to a rate of rise that is greater than during any preceding century in at least 2,800 years. ….Global average sea levels are expected to continue to rise—by at least several inches in the next 15 years and by 1–4 feet by 2100. A rise of as much as 8 feet by 2100 cannot be ruled out. “

This assessment is consistent with the conclusion of the most recent IPCC report: “Over the period 1901 to 2010, global mean sea level rose by 0.19 [0.17 to 0.21] m. (7+inches) The rate of sea level rise since the mid-19th century has been larger than the mean rate during the previous two millennia.”

These conclusions are both definitive and scary. They bring to mind pictures that have been published of the Washington Monument and New York City being seriously flooded. But such certitude goes well beyond what we know.

Raising a cautionary warning often results in being labeled a skeptic who is a tool of the fossil fuel industry. While that is a diversionary tactic, that reality makes it important to support caution with sources who are not viewed as skeptics and who are above reproach.

One such source is Professor Carl Wunsch, recognized as one of the world’s leading oceanographers. He is on the MIT and Harvard faculties In a briefing to EPA, he made a number of points that undermine expressions of certitude. “Sea level has been rising for about 16,000 years. In the last interglacial (period) it appears to have been a few meters higher than today.” According to Wunsch, sea level measurements have to be divided into two periods—before and after 1992 when satellite altimeters became the measurement technique of choice. Before 1992, attempts to determine average sea level changes relied on tide gauges and changes in temperature and salinity. But these attempts have been controversial because of the distribution of measurements, calibration of the devices, and interpretation of density changes.

While altimetry is the most accurate way to measure sea level changes, it is not without its own challenges. These include atmospheric factors, orbits, tides, and rotation wobble among others. Correcting these requires a high degree of accuracy to avoid interpretive errors.

Given the array of measurement challenges mentioned by Wunsch, he cautioned, “Global mean sea level is almost surely rising. Historical data are not adequate to compute accurate global averages. No mathematical trick compensates for missing data. Present multidecadal estimates of global averages have an element of fantasy about them.”

Last year, NOAA published a paper on sea level rise–NOAA—that contained a range for sea level rise in 2100 that went from a low of less than .5 meters to 2.5 meters. The importance of the NOAA estimate is that it demonstrates how complicated understanding of the ocean is and the uncertainties involved in predicting future sea levels. A major uncertainty is ice sheet melts. Perhaps the best example of that uncertainty is the variability that the IPCC puts around ice sheet melt in Antarctica. The error bars show that the ice sheet could grow as well as lose mass. In addition to melt, climate conditions like El Nino can cause a rise in levels at shorelines for months at a time and subsidence can also cause a higher sea level where it occurs

There are two lessons to be drawn that apply to more than sea level rise. First, projections about the distant future should be made with a great deal of humility. Second, when someone make a specific projection with great certitude, you can be certain that they are trying to persuade; not educate.

The Big Payoff?

Is it merely coincidental that subsequent to the confirmation of Brett Kavanaugh President Trump is trying to reward Senator Grassley, Judiciary Committee Chair, for his steadfast support in shepherding the nomination through the Senate Process? Of course, Iowa also is an important state in the mid-terms and President Trump had to do something to undo the damage to commodity prices caused by his tariffs. Corn prices, which have been falling for the last five years, have plunged in response to the trade war caused by the Trump tariffs.
President Trump’s response has been to direct EPA to move ahead with a rule making so that ethanol in gasoline can be increased from 10% to 15% . How this is to be achieved is a mystery as even the Obama EPA concluded that it did not have the authority to lift the 10% cap. That is a good thing because gasoline with 15% would void auto warranties, further damage two cycle engines, and force service stations to incur large costs to install additional tanks.

If it is true, that (sometimes) no good deed goes unpunished, then it is equally true that no bad policy goes unrewarded. The ethanol mandate is a relic of a backroom deal in 1990 to gain farm state support for the 1990 revision to the Clean Air Act. To hide the deal, democrats led by Henry Waxman wrote a formula for reformulated gasoline into law. Politicians pretending to be chemical engineers is all anyone needs to know beyond the fact that prior to passing the Clean Air Act Amendments, the oil and auto industries informed Congress that they could meet proposed tailpipe emission standards without being told how to make gasoline.

Mandating ethanol by way of an oxygenate requirement was not enough for the greedy, so in 2007 President George W. Bush signed legislation that mandated the use of increasing volumes of ethanol. That was predicated on the assumptions that gasoline consumption would continually increase and that corn based ethanol would be replaced with cellulosic ethanol made from switchgrass and wood chips. Within a year, gasoline consumption plateaued and the cellulosic industry never got off the ground. Since 2008, gasoline consumption has only increased 4% while ethanol production has increased 71%. That helps to explain why the President wants to force E-15 into the market place.

After Congress increased the mandate for ethanol blending, EPA created a compliance mechanism—Renewable Identification Numbers (RIN)—to track ethanol blending. RINs can be traded or sold which created another market for traders to get richer. Refiners that do not have a ready source of ethanol have been victims of the RIN market, some incurring costs that exceed their revenue.
Advocates claim that critics aren’t looking at the whole picture. They claim that ethanol cleans the air, reduces oil imports, and results in less CO2 emissions. Their claims are just so much hot air. Back in 1990, there was a fear of our dependence on imported oil which reached a high of 60% of our consumption. Today, without any new Congressional magic, imports are less than 20% .
Since ethanol has a much lower energy density than crude oil, using ethanol in gasoline results in a mileage penalty, so more gasoline ends up being consumed.. The problems with ethanol are far broader than a loss of mileage, not reducing imports nor improving air quality or reducing CO2 emissions.
Incentives to increase corn production have increased the conflict between production for food and production for fuel. 40 percent of the nation’s corn crop is used to produce ethanol, removing it from use as animal feed and food products. As a result, consumers pay more for food products, including milk, cheese, beef, poultry, pork, and cereal. What’s more, the ethanol quota diverts valuable cropland away from other agricultural uses. The damage done to motors and the cost that would be incurred by service stations have no useful benefits and hence, are pure waste.
But ethanol is a more powerful lobby than it was decades ago. In response to the government’s mandates to force more ethanol into gasoline ethanol plant builds have increased. It takes a lot of resources to keep them operating. So, corn farmers and ethanol plant owners are willing to spend a lot of money to maintain mandates that enrich them while picking the pockets of consumers, These are Bootleggers at their worst.

A Geopolitical Rubik’s Cube

The brutal murder of Jamal Khashoggi has laid bare once again the problem we face in dealing with the complex Middle East problem where everything seems to be connected to everything else, few if any leaders who share our values, and there are only “least bad” options. In choosing our relationships with these nations, we are equally constrained. it is much like having to choose among Mafia dons. Faced with such a choice, the Godfather, Don Corleone, doesn’t look all that bad.

In responding to the Khashoggi assassination, we are faced with finding a set of actions that doesn’t make the problem worse, while also not compromising our basic values. The answer cannot be an empty set.

As more evidence is leaked and reported, there is less doubt that Mohammed bin Salman (MBS)ordered the assassination. In spite of a charm offensive to paint him as a visionary who will transform Saudi Arabia and by extension reshape the Middle East, he is a tyrannical autocrat who, like our President, has little self-restraint and seems incapable of seeing beyond the here and now. Consequences — both long-term and short — do not enter into his calculus.

So how should we respond? We clearly do not want our response to have the effect of a tilt that strengthens Iran’s hand or gives Russia even more influence in the region. Nor should we risk further destabilizing Saudi Arabia and the economic impact of its vast oil reserves. Similarly, Saudi Arabia can’t afford to dismiss our concerns. President Trump is concerned about losing our military sales and weakening our support of Saudi Arabia’s opposition to the ruling regime in Iran. The Saudis cannot easily walk away from their ties to our weapons systems. Their military capabilities are built and dependent upon US weapons systems and technology.

The current situation is analogous to two scorpions in a bottle who have to find a way to avoid stinging each other.

The range of options might be greater if there was a united allied response. But our allies have been unusually silent, perhaps reflecting a reaction to their treatment by President Trump and their desire to maintain their current relationships with Middle East countries. Whether or not allies individually or collectively act to sanction Saudi Arabia, the US cannot afford to blink. Our slow response to Putin-directed assassinations in foreign countries may have contributed to MBS believing that there would not be a strong response to the Khashoggi assassination.

The assassination clearly has to be treated as crossing a red line. Congress needs to act if the President won’t. And hard as it will be, we need to find a way to get our allies to join us because it will be in their own self-interest to do so.

Whether MBS remains the de facto ruler in Saudi Arabia is probably being debated and contemplated within the House of Saud and by the many enemies he has already made. Independent of the outcome, the long-term strategic outlook for the Middle East remains ominous; hence it requires a robust strategy built on the reasons why the US and our allies have to remain engaged.

Remaining engaged doesn’t mean ignoring actions that violate civil society norms. We have seen the consequences of indifference in Syria.

In addition to whatever actions are taken by the President and Congress and hopefully in conjunction with our allies, consideration should be given to actions that will lessen the choke hold of Middle East oil. One option would be to impose a targeted liquid fuel tax. That would give a boost to the global decarbonization that is already underway. Although the world is not going to walk away from oil-based fuels anytime soon, we can do more to further reduce our dependence on oil imports from unstable regions–and so can our allies.

A liquid fuel tax, sized to reflect a risk premium, could reduce import demand and further reduce CO2 emissions by stimulating new technology. The proceeds could be used to provide much-needed funds for our highway system. We also need to work with our allies to make sure that the IEA plans for addressing an oil shortfall are up to date and can be quickly implemented.

The IPCC Unhinged

The most recent IPCC Summary for Policy Makers with its dire predictions for the next decade and beyond suggest that there is a stronger basis for its predictions of catastrophic consequences and actions to avoid them. The only thing that seems to be new is the fact that major signatories to the Paris Accords are either ignoring their obligations or are finding them unrealistic.

The IPCC implies that the global climate situation has gotten worse but It hasn’t. Roy Spencer regularly publishes global satellite temperature measurements. This is the latest.

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As Spencer points out, “The linear temperature trend of the global average lower tropospheric temperature anomalies from January 1979 through September 2018 remains at +0.13 C/decade.” In spite of continuing increases in atmospheric CO2 concentrations, there has been no matching increase in global temperatures.

These data are consistent with the lower estimates of climate sensitivity—the amount of warming from a doubling of CO2. The IPCC in its most recent Scientific Assessment Report estimated that climate sensitivity was between 1.5 degrees C and 4.5 degrees C. A 2018 study by climate scientists Judith Curry and Nic Lewis, published in the August edition of Journal of Climate, estimates climate sensitivity to be 1.2 degrees C. In addition, work by Dick Lindzen—Constraining Possibilities Versus Signal Detection, NAS Press–showed that the relationship between Co2 and warming is logarithmic and given the likely sensitivity, it would take over a century for increased CO2 to increase temperatures by another 1 degree C.

The IPCC proposed actions are so severe—electrifying all on-road transportation, pulling CO2 from the atmosphere, and employing carbon capture technology which is unproven—that it is hard to take them seriously. EU nations, the drivers of the Paris Accords, are not being aggressive and Germany has concluded that its 2020 target is unachievable. Angela Merkel has now become doubtful about the more aggressive targets since European nations are struggling to meet existing ones.

According to a New York Times Magazine article–NYT Mag—the actions to achieve the Paris accords are fantasy. And, the IPCC predictions follow on 30 years of failed predictions. A little over 10 years ago, Al Gore and Jim Hansen predicted that we only had 10 to take IPCC like actions. As Pat Michaels wrote this past June, “… it’s time to acknowledge that the rapid warming he ( Hansen) predicted isn’t happening. … policy makers should adopt the more modest forecasts that are consistent with observed temperatures. That would be a lukewarm policy, consistent with a lukewarming planet.

All of this leads to a conclusion that the IPCC report is an attempt to regain relevance and continue the lifestyle its members have become accustomed to.

Follow The Dutch

Although we enjoyed a long stretch where no major hurricane made land fall, the last few years have been different and the storms have caused a great deal of damage, including serious flooding. By contrast, It has been over 60 years since the Netherlands had any serious flooding from either hurricanes or major North Sea storms, even though the Netherlands is mostly below sea level.

The difference is that the Dutch accept the reality of storms and the flooding that they can cause and have developed an aggressive program of mitigation and adaptation. By contrast, we tend to rebuild and tinker at the margins with actions like modifying building codes, erecting barriers, managing flood plains, and the National Flood Insurance Program. Whatever the merits of these and other actions, they have not been sufficient to effectively mitigate flood and hurricane damage.

The damage from floods and hurricanes runs into the tens of billions of dollars each year. According to the National Climatic Data Center floods and hurricanes between 2010 and 2015 cost the nation $34 billion. And in the last three years the costs have run into the hundreds of billions of dollars.

The National flood insurance reimburses owners who then rebuild in the same places, ensuring future damages unless risk mitigation steps have been taken as part of the rebuilding. Looking back over the past decade, it seems clear that the Federal and state governments are in a vicious cycle working at the margins, incurring losses, and providing insurance reimbursements so that rebuilding can take place.

If the definition of insanity is doing the same things over and over and expecting a different result, then our approach to addressing hurricane and flood risks is insane. It is time to reassess our approach to dealing with hurricanes and floods and the extent to which adopting the Dutch approach, which would be expensive, would reduce future damages. The Dutch create artificial sand dunes in coastal areas, some of which are large enough to house parking garages underneath. They have constructed dikes, dams, and floodgates to protect against water surges, along with a system of drainage ditches, canals, and pumping stations. There should be a serious study of what Dutch techniques will work in which areas and then a federal-state plan to implement them.

Beyond that, the National Flood Insurance Program should be abolished. States are more than capable of designing flood insurance programs to deal with their specific risks. And, there should be no flood insurance subsidies that shelter some from bearing the full costs of risks where they build. If owners of coastal property had to take the full cost of insurance into account in making their construction decisions, there would likely be fewer houses built so close to shorelines.

There also should be another careful review of FEMA and its mission. FEMA like most bureaucracies seeks larger budgets, more people and more power. Responding to disasters will generate more of those than focusing more on prevention and mitigation. There should be a robust research program on ways to mitigate flood and hurricane damage and related engineering data that states could use to develop state specific programs. Currently, FEMA’s strategic plan has risk management and mitigation as a high priority but it is not clear what FEMA does beyond information sharing that involves forward looking engineering research and drawing on the Netherlands experience to develop best practices for states to implement. There is nothing in the FEMA budget that does that.

 

The Internal Combustion Engine is Alive and Well

Recent analyses forecast that oil use, primarily gasoline, will peak anywhere from the early 2020s to as late as 2040. The basis for this forecast are government actions to compel a reduction in mobile source CO2 emissions and a transition to EVs. While these forecasts may prove accurate, there are reasons to apply a reasonable dose of pessimism that EVs will lead to a reduction in gasoline powered vehicles..

Climate change alarmism is predicated on the belief that the consumption of fossil fuels and the resulting increase in CO2 emissions is causing serious climate change that will only worsen. This belief is based primarily on the results of complex computer models that have been shown time and again to overstate actual warming, and hence the effect of atmospheric CO2 levels. Since 1998, actual global temperatures have not increased in lock step with increases in CO2 levels and even the IPCC has lowered its estimate of climate sensitivity. While none of this has so far had an effect on government policies outside of the US, at some point reality will make denial and the cost of it unacceptable.

So, absent more compelling evidence on anthropogenic climate change or a significant break though in EV technology the pressures to transition from the internal combustion engine (ICE) should subside and the ICE will continue to have a bright future.

Advances in vehicle and fuel technologies will lead to further reductions in tail pipe emissions, including CO2, and to further increases in fuel efficiency and economy. Those advances include direct injection, cylinder deactivation, variable valve timing, more turbo charged engines, greater use of sensors and computers to manage engines and better aerodynamics. It is estimated by some that ICE efficiency could reach 50%.

There are about 7.5 billion people in the world with 1.1 billion in developed countries. World wide there are about 1.2 billion on road light duty vehicles—gasoline powered. Almost one-half of those are in the US and Europe. As the emerging and developing economies grow, so will the demand for mobility. That will lead to a higher penetration rate of ICE powered vehicles. If the ownership rate reaches one half the US/Europe rate in the next two decades, about 1.5 billion vehicles would be added to the global fleet.

Economic development around the globe and advances in technology explain why EIA and HIS Markit project that ICEs will still be the consumers choice in 2040.

It’s Déjà Vu All Over Again

Several analyses have recently been released concluding that the end of the oil era is at hand. A Norwegian analysis puts peak demand five years from now while BP puts the start of a decline between 2035 and 2040.

The predicted end of the oil age is based on a belief that renewables will “dominate an increasingly electrified and efficient energy system.” There seems to be a growing belief that wind and solar are increasingly cost-competitive with oil, natural gas and coal. Beliefs need to be more than wishful thinking. The manufacturing costs of solar panels and wind turbines may be declining and generous government subsidies stimulate demand but they are not enough to bring about the long anticipated energy transition. It is total systems cost that matters along with the penetration of new technology.

Perhaps by 2040 there may be break throughs in battery and storage technologies but progress has not been that great over the past two decades and government does not have a good track record in forcing technologies into the market. Although a great deal of money is being ploughed into the development of energy storage technologies, they are in the early stage of R&D and utilities will not adopt them until their reliability is proven and they are cost competitive.

Since both wind and solar are intermittent, utilities need either proven storage capabilities or reliable back up power which is most likely to be either coal or natural gas. The EU has been the most aggressive in attempting to move to renewables and away from fossil fuels, especially Germany. But recently six European nations called for continuing the use of coal fired plants beyond 2030 and Germany, which has electricity rates three times the US average has backed away from its goal of reducing CO2 levels 40% below 1990 levels by 2020. A more likely transition, absent mandates and subsidies, is not to wind and solar but natural gas which is in great abundance.

Since oil is primarily used to make transportation fuels a decline in demand would require a dramatic shift to hybrids and EVs. There are a number of reasons to be skeptical about that happening in the next decade or so. First, governments are likely to reduce or eliminate generous subsidies for alternatives as they confront growing deficits. And, without those subsidies, demand will shrink. Second, as developing nations achieve higher standards of living, there will be an increase in mobility, which will come from gasoline or diesel powered vehicles. Third, battery packs remain expensive and suffer range limitations, especially in cold and very hot climates. Fourth, trucks, airplanes and ships will continue to rely on liquid fuels. Fifth, continued advances in technology for internal combustion engines will increase their efficiency and cost-effectiveness. And finally, over the next several decades the weight of scientific evidence ought to make it even more clear that CO2 is not the primary driver of warming and climate change.

For over a century, there have been regular predictions that the oil age would end in 20 years or less. But oil continues to dominate transportation because of its abundance, energy density, and cost-effectiveness. Someday, one of these predictions about the end of the oil age will prove true but the odds do not favor that day bring in the foreseeable future.

The Gotcha Regulation

Rep Chris Collins, who also happens to be a director of Innate Immunotherapeutics, has been charged with insider trading by Federal prosecutors. From the description in the media and the process of connecting the dots from a call to his son who told others, the case that he breached his fiduciary duty appears to be strong.

However, the case against insider trading is not as clear cut as it is generally made out to be. The law as contained in the Insider Trading Act of 1988 defines penalties for insider trading for someone who is guilty of breaking SEC rules when using material, non-public information to trade securities, or when passing on information to another person who acts upon the information. But there is no is no statutory definition of insider trading and not all insider trading is illegal. As a result, the SEC can distort its definition any way it wants and there are numerous examples of it doing so in the past. Writers have documented many allegations of insider trading that were based on weak evidence.

There is a fine line between what is legitimate insider information and what isn’t. In today’s high-tech world professional traders exploit all relevant sources of information. In making judgments about whether information is legitimate or not, a major consideration is the source. Is it second or third hand, is it information that anyone can obtain by a little research and drawing inferences, or is it from a banker, lawyer, or corporate officer who has a fiduciary duty to protect certain information?

Trading is illegal when the SEC asserts that it concludes that information used in making a buy or sell decision was obtained from a breach of fiduciary duty, or a duty arising from a relationship of trust or confidence. The contention is that those possessing insider information that is not public should not be able to benefit or help others to benefit when other shareholders cannot similarly benefit. On the surface, that seems fair and reasonable but there is a school of thought that holds an opposing view, a view based on an understanding of how markets work and the value of knowledge. When an “insider” uses non-public information to buy or sell stocks, that act sends a signal to the market that can produce information that other share owners can use in making their buy and sell decision. The case for insider trading is based on improving market efficiency.

In the 1960s, Henry Manne, one of the founders of the school of law and economics and a former dean of the Scalia School of Law at George Mason, wrote a book challenging the assertion that insider trading imposed harm on shareowners and the market. His basic thesis was that more information makes the stock market more efficient and accurate no matter how that information is acquired. Manne’s points were that the practice of insider trading did no significant harm to long-term investors while it contributed to more efficient stock market pricing. Over the past 50 years, insider trading has been strongly defended in scholarly journals. Nobel Laureate Milton Friedman argued that insider trading is a good thing, allowing market prices to more quickly reflect important information.

Since insider trading as defined by the SEC includes both legal and illegal trading, many have made the argument that the present law simply cannot be effectively enforced because it impossible to define the activity in a way that would not also bar legitimate research and trading. Hence, the SEC has a blunt instrument that it can use to construct a case asserting violations on the basis of presumptions of knowledge because producing definitive and convincing evidence is not easy. Manne made the argument that insider trading is what bootlegging was to the probation era. Meaning that authorities can’t stop it: “The imagination of wealth seekers in using valuable information in the stock market will always outpace the ability of regulators to cope.”

It is doubtful that Congress will ever rein in the SEC or make insider trading legal because it is too easy to demagogue against doing so. But Congress can act to constrain regulatory abuse and raise the bar on what constitutes evidence. The need for a better and more objective standard was demonstrated in the insider trading case against Martha Stewart. In spite of her trying to back date records concerning her selling, there was no proof that she was aware that the advice she got from her broker was non-public or that she knew of a failed drug trial that caused the stock of ImClone to crash. More recently, the SEC accused professional golfer, Phil Michelson, of insider trading because he acted on a tip from a gambler to whom he owed money. There was no evidence that he knew that tip was insider information. Other cases of insider trading have also rested on assumed SEC prescience and connecting dots from a preconceived conclusion.

The system shouldn’t work that way. If Congress will not act for political reasons that leniency is selling out to the wealthy and Wall Street, at least it should set a clear standard that innocence should be assumed and guilt proven by a preponderance of factual evidence.

A New Road To Serfdom

Senator Elizabeth Warren’s Accountable Capitalism Act reflects her total ignorance of capitalism, how a market economy works, and the power of incentives. For someone who was on the faculty at Harvard before becoming a senator, she obviously never interacted with any of the world class economists who are on its faculty—Larry Summers, Martin Feldstein, Richard Cooper, Greg Mankiw, and Dale Jorgenson for example. They might have informed her that her ideas have been discredited by history.

If she wasn’t a senator, her proposal would be widely ridiculed. Since she is, her wooden headed notions of how to improve corporate performance have to be taken seriously, in case democrats capture Congress and the White House in 2020. In the late 1970s, one of her predecessors, Teddy Kennedy, introduced a bill to break up oil companies that came within four votes of passing the Senate. Her mindset reflects the growing enthrallment with an illusion of democratic socialism that is being embraced by the far-left wing of the democrat party and a large number of millennials. Democratic socialism is a dream; not a real economic and political system. Where socialism has been adopted, political freedom has been reduced and income inequality increased.

In the case of Senator Warren and to paraphrase Mark Twain, we should not worry about all that she doesn’t know but we should be seriously troubled by all the things she knows that just aren’t true. She believes that the search for profit is ruining capitalism and that instead of just being accountable to shareholders who put their capital at risk by investing in corporations, she wants them accountable also to all the people. Her way of achieving this is to require all corporations with revenue—not profits—of more than $1 billion to be federally chartered with bureaucrats in the Commerce Department overseeing and regulating them. Where would she find the equivalent of angels instead of bureaucrats to make sure that boards of directors and executives take into account the interests of workers and local communities in the decisions they make. How would those interests be determined?

She would also require that 40% of boards be filled with workers whose incentives would be anything but long term and strategic.

All of these changes are supposed to come at no cost. According to Matthew Yglesias in a Vox article, “Warren’s bill would fundamentally restructure corporate governance and redistribute trillions of dollars from rich executives and shareholders to the middle class – without costing a dime.” In evaluating this assertion and the Senator’s bill, Don Boudreaux, a professor of economics at George Mason University, made what should be an obvious point, “Whenever the government commands you to do that which you otherwise would not do, it imposes on you a cost, … And this cost neither disappears nor is rendered less real simply because the specific manner in which it is imposed results in it not appearing as a debit entry on the accounting artifact that we call the U.S. government’s budget.” He also observed that Yglesias has taken a different perspective in commenting that zoning regulations and a NIMBY philosophy stall housing development. “When too many people have regulatory veto power over market decisions, stagnation is the outcome, and it ends up hurting any number of people.” He obviously is not troubled by cognitive dissonance.

Senator Warren wants to solve a problem that generally doesn’t exist. In doing that unintended consequences would dominate. Her economist colleagues at Harvard could have informed her that when companies reinvest profits, they are benefitting workers because investments that increase productivity, lead to wage growth and acreate new jobs. And, buy backs don’t just enrich the ultra-wealthy, they enrich workers who have shares in the company and who have retirement funds, and IRAs. Buy backs are also an efficient way to shift money from firms who have an excess to those that don’t since buy back profits are generally reinvested.

In a competitive environment, companies reward workers appropriately to reduce the risk losing them and have compensation packages to attract workers to fill new jobs.

While making and increasing profits is a corporation’s first priority, it is not their only one as has been demonstrated by a simple look at what leading companies do in terms of R&D, community involvement, providing for worker education and other benefits, and their support for social issues. Once corporate decisions become more centralized in Washington, political and economic freedom will be victims because the concentration of power always leads to the erosion of political freedom. As Milton Friedman observed in Capitalism and Freedom,” When the government confiscates wealth to achieve her desired redistribution, the incentive to create more wealth will be reduced. Friedman also made the point that the forced distribution of income, government has been doing more harm … “the justification of government intervention in terms of alleged defects of the private enterprise system … are themselves the creation of government, big and small.”

Senator Warren and her other true believers in utopian illusions would lead us down Friedrich Hayek’s Road to Serfdom. Almost 80 years ago he warned, ”the most important change which extensive government control produces is a psychological change, an alteration in the character of the people. This is necessarily a slow affair, a process whch extends… over …generations.”