Archive for the ‘Cost-Benefit Analysis’ Category

Since it’s basically a way of protecting property rights, environmental protection is a legitimate function of government.

That’s the easy part. It gets a lot harder when calculating costs and benefits.

Everyone surely agrees that a chemical company shouldn’t be able to dump toxic waste in a town’s reservoir because the costs would out-weigh the benefits. And presumably everyone also would concur that banning private automobiles would be crazy because this would be another example of costs being greater than benefits.

But there’s a lot of stuff in between those extreme examples where agreement is elusive.

And I’ll admit my bias. I don’t trust the modern environmental movement, particularly the climate alarmists. There are just too many cases where green advocates act like their real goal is statism.

Moreover, the hypocrisy of some environmental dilettantes is downright staggering.

And they also seem to be waging a regulatory war on modern life.

I’m giving all this background to create context for an article I want to discuss.

John Tierney, a columnist for the New York Times. has a piece that debunks recycling. He starts by looking back 20 years.

As you sort everything into the right bins, you probably assume that recycling is helping your community and protecting the environment. But is it? Are you in fact wasting your time? In 1996, …I presented plenty of evidence that recycling was costly and ineffectual, but its defenders said that…the modern recycling movement had really just begun just a few years earlier, they predicted it would flourish as the industry matured and the public learned how to recycle properly.

So what’s happened over the years? Has recycling become more feasible and rational?

Not exactly. From a cost-benefit perspective, it’s a scam. It simply doesn’t make sense.

…when it comes to the bottom line, both economically and environmentally, not much has changed at all. Despite decades of exhortations and mandates, it’s still typically more expensive for municipalities to recycle household waste than to send it to a landfill. …the national rate of recycling has stagnated in recent years. …The future for recycling looks even worse. As cities move beyond recycling paper and metals, and into glass, food scraps and assorted plastics, the costs rise sharply while the environmental benefits decline and sometimes vanish. …“Trying to turn garbage into gold costs a lot more than expected…”

Tierney specifically addresses the issue of greenhouse gasses.

…well-informed and educated people have no idea of the relative costs and benefits. …Here’s some perspective: To offset the greenhouse impact of one passenger’s round-trip flight between New York and London, you’d have to recycle roughly 40,000 plastic bottles, assuming you fly coach. …if you wash plastic in water that was heated by coal-derived electricity, then the net effect of your recycling could be more carbon in the atmosphere.

A traditional argument for mandated recycling is that landfill space is vanishing.

But that’s always been bunk.

One of the original goals of the recycling movement was to avert a supposed crisis because there was no room left in the nation’s landfills. But that media-inspired fear was never realistic in a country with so much open space. In reporting the 1996 article I found that all the trash generated by Americans for the next 1,000 years would fit on one-tenth of 1 percent of the land available for grazing. And that tiny amount of land wouldn’t be lost forever, because landfills are typically covered with grass and converted to parkland… Though most cities shun landfills, they have been welcomed in rural communities that reap large economic benefits (and have plenty of greenery to buffer residents from the sights and smells).

Moreover, incinerators are another practical option.

Modern incinerators, while politically unpopular in the United States, release so few pollutants that they’ve been widely accepted in the eco-conscious countries of Northern Europe and Japan for generating clean energy.

The bottom line is that recycling is an expensive feel-good gesture by guilt-ridden rich people.

In New York City, the net cost of recycling a ton of trash is now $300 more than it would cost to bury the trash instead. That adds up to millions of extra dollars per year — about half the budget of the parks department — that New Yorkers are spending for the privilege of recycling. That money could buy far more valuable benefits, including more significant reductions in greenhouse emissions. …why do so many public officials keep vowing to do more of it? Special-interest politics is one reason — pressure from green groups — but it’s also because recycling intuitively appeals to many voters: It makes people feel virtuous, especially affluent people who feel guilty about their enormous environmental footprint.

I don’t have a strong opinion on whether rich people should feel guilty about their resource consumption.

But I definitely get agitated when they try to atone for their guilt by foisting costly and ineffective policies on other people.

P.S. That’s why I consider myself to be pro-environment while also being a skeptic of environmentalists. Simply stated, too many of these people are nuts.

P.P.S. Some environmental policies lead to disgusting examples of government thuggery (some of which, fortunately, are not successful).

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I proposed an “IQ Test for Criminals and Liberals” back in 2012 which asked readers to imagine that they were thieves.

And I then asked them, as they were planning their crimes, how they would react if they knew that a particular homeowner was armed. Would they:

a. break into the house because you once heard a politician or journalist assert that gun ownership doesn’t deter crime?

b. decide after a bit of reflection about potential costs and benefits that it might be more prudent to find another house to rob?

My goal was to help well-meaning leftists understand that criminals respond to incentives. And even the really stupid ones will seek to maximize how much they can steal while minimizing the risk of bad outcomes.

And if you’re a criminal, one potential bad outcome is getting shot by an armed homeowner.

The same cost-benefit analysis applies to mass shooters. Regardless of whether these shooters are motivated by feelings of inadequacy or Islamofascist ideology, their goal is to kill as many people as possible before being stopped.

So it makes sense, from their warped perspective, to seek out “gun-free zones.”

And when these nutjobs start shooting in places where there’s very little likelihood that they’ll encounter immediate armed resistance, that means a higher body count.

Which is what happened at Fort Hood. And in Santa Barbara. And in Newtown, Connecticut. And at the Aurora movie theater. And at Virginia Tech.

And now in Chattanooga.

Here’s a photo from the recent shooting spree by Muhammad Youssef Abdulazeez. Notice the sign, right by all the bullet holes, stating that “Firearms Are Prohibited In This Facility.”

Needless to say, this sign didn’t stop the attack. It may have even encouraged the attack.

In any event, the rule did affect one group of people, as Sean Davis explained for The Federalist.

The gun-free zone sign didn’t prevent the shooter from firing a gun at completely innocent individuals within the zone. It did, however, prevent them from defending themselves.

And here’s the really depressing part of this tragedy. The military personnel targeted by the terrorist weren’t unarmed because Chattanooga had bad policy.

They were unarmed because of federal government policy. Writing for Fox News, John Lott explains this bizarre policy.

Army regulations are very clear stating that personnel cannot have firearms during their official duties.  Last year the Obama administration instituted interim rules that clearly prohibit privately owned weapons from all federally leased office and land, including recruiters’ offices. …With the exceptions of military police, military personnel are banned from having weapons on base, in federally leased buildings, or while they are carrying out official duties. For would-be terrorists among us there is an abundance of possible targets. …Allowing military personnel to at least defend themselves reduces the number of easy targets that terrorists/killers can attack.

Amen. Let members of the military have the ability to defend themselves.

And expand concealed-carry laws so that citizens also have greater ability to thwart crime and mass shootings.

P.S. I shared above a great cartoon from Chuck Asay. You can click here to see another. And these two posters make the same point quite effectively.

P.P.S. While folks on the left are one of the targets of my IQ test, not all liberals are misguided on the gun issue. As you can read here and here, there are a couple of them who put reason ahead of ideology.

P.P.P.S. It’s also encouraging to note that some lawmakers realize it’s a good idea to have more protection for schoolchildren.

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It’s time to correct a sin of omission.

In five-plus years of blogging, I haven’t given nearly enough attention to the wisdom of the late (and great) Milton Friedman.

Yes, I did say he was at the top of my list of great economists in a 2010 interview, and I’ve cited what he said about the correct goal of fiscal policy being smaller government rather than fiscal balance.

Moreover, I’ve quoted him many times (here, here, here, here, here, and here) to help explain why higher taxes simply lead to more government spending rather than deficit reduction.

But I’ve never once shared an interview of Friedman, which is a big oversight because of his incredible ability to advocate for economic liberty.

So let’s rectify this mistake. A reader emailed me this video, which purports to show Professor Friedman jousting with a young Michael Moore (yes, supposedly that Michael Moore, though I don’t know if it’s actually him).

But the identity of the questioner isn’t what’s important. Listen to Friedman explain the merits of cost-benefit analysis and consumer choice.

Amen. I love what he said about letting people make their own decisions about how much risk they wish to accept given relative prices.

If you want more Friedmanesque wisdom, I’ve also quoted him on issues ranging from immigration to “temporary” government programs, and from Swedish poverty to tax competition.

He also explained that there are four different ways of spending money, only one of which yields real efficiency (Jay Leno channeled some of Friedman’s wisdom when commenting on Obama shopping for Michelle)

And I’ve even noted that he helped guide the development of Economic Freedom of the World.

P.S. I do have one small disagreement with Milton Friedman. He supported the notion of a negative income tax/guaranteed annual income. His goal was noble, to replace the plethora of counterproductive welfare programs run from Washington, but I think a better approach is to get the federal government totally out of the business of income redistribution.

P.P.S. As I already stated, I don’t know if that was the (in)famous Michael Moore jousting with Friedman, but I can say that the Michael Moore of today is a big hypocrite when it comes to inequality.

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I believe that protecting the environment is both a good thing and a legitimate function of government.

But I’m rational. So while I want limits on pollution, such policies should be determined by cost-benefit analysis.

Banning automobiles doubtlessly would reduce pollution, for instance, but the economic cost would be catastrophic.

On the other hand, it’s good to limit carcinogens from being dumped in the air and water. So long as there’s some unbiased science showing net benefits.

But while I’m pro-environment, I’m anti-environmentalist. Simply stated, too many of these people are nuts.

Then there’s the super-nutty category.

But since I’m an economist, what really worries me is that these people are statists. There’s an old joke that environmentalists are “watermelons” since they’re green on the outside and red on the inside.

But maybe it’s not really a joke. At least not in all cases. Check out this video from Reason, filmed at the so-called climate march in New York City.

Just in case you think the folks at Reason deliberately sought out a few crazy people in an otherwise rational crowd, let’s now look at the views of Naomi Klein, who is ostensibly a big thinker for the left on environmental issues.

Slate published an interview with her and you can judge for yourself whether her views are sensible. Here’s some of what Slate said about her.

According to social activist and perennial agitator Naomi Klein, the really inconvenient truth about climate change is that it’s not about carbon—it’s about capitalism. …she’s turned her argument into a hefty book… This Changes Everything: Capitalism vs. the Climate is focused on exposing how the relentless pursuit of growth has locked us in to a system that’s incompatible with a stable climate. …

And here’s some of what Ms. Klein said.

The post-carbon economy we can build will have to be better designed. …not only does climate action mean a healthy community—it’s also the best chance at tacking inequality. …The divestment movement is a start at challenging the excesses of capitalism. It’s working to delegitimize fossil fuels, and showing that they’re just as unethical as profits from the tobacco industry. …profits are not legitimate in an era of climate change.

Profits are not legitimate?!? Geesh, sounds like a certain President who also disdains profit.

By the way, I’d bet Naomi Klein has a far bigger “carbon footprint” than the average person.

And I can say with great certainty that other leftists are huge hypocrites on the issue. Check out the vapid actor who did some moral preening at the climate-change march.

Kudos to Ms. Fields. She has a way of exposing phonies on camera.

Though I think it’s safe to say that Mr. DiCaprio doesn’t win the prize for being the biggest environmental hypocrite.

Shifting back to policy issues, even “mainstream” environmental initiatives are often very misguided. Here are a few examples.

The bottom line is that we presumably have some environmental challenges. For instance, it’s quite possible that there is some global warming caused by mankind.

I just don’t trust environmentalists to make policy. When they’re in charge, we get really dumb policies. Or grotesque examples of government thuggery. Or sleazy corruption and cronyism.

But at least we have some decent environmental humor here, here, here, and here.

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Well, another loser killed a bunch of people, this time in Santa Barbara, California.

Which gives gun control zealots an opportunity to seize upon the tragedy to recycle their calls to restrict private firearms ownership and otherwise erode the Second Amendment.

But I’m not too worried that they’ll succeed. The evidence is simply too strong that gun ownership reduces crime. The research shows that criminals are less aggressive when they fear potential victims may be armed.

Moreover, they don’t even have practical proposals. Here’s some of what Jacob Sullum wrote for Reason.

None of the items on the anti-gun lobby’s wish list makes sense as a response to the crimes of Elliot Rodger, the 22-year-old college student who murdered Martinez’s son and five other people on Friday night. …the Isla Vista massacre, which took place in a state with firearm laws that are among the strictest in the nation, exposes the false promise of policies that aim to prevent violence by limiting access to weapons. …The only specific policy Gross mentioned was “expanded background checks.” But California already has those: All gun sales in that state, including private transfers, must be handled by licensed dealers, and every buyer has to be cleared by the California Department of Justice…

Sullum continues.

Rodger passed those background checks because he did not have a disqualifying criminal or psychiatric record. …Yes, Rodger was depressed, socially isolated, and desperately lonely. But how many people who fit that description become mass murderers? The difficulty of predicting which of the world’s troubled oddballs will turn violent is the reason “expanded background checks” cannot stop this sort of crime.

Good point. Heck, if getting rejected by the opposite sex was a predicate for mass murder, I would have been a potential killer in high school.

So what might have worked? Perhaps, in a leftist fantasy world, outright confiscation of 300 million guns. Though that would lead to massive civil disobedience.

Not to mention they would have to impose controls on knives and cars.

One can imagine policies that might have stopped Rodger, but they are neither practical nor constitutional. If the government not only banned guns but somehow managed to confiscate the 300 million or so Americans already own, that would have put a damper on Rodger’s plans, although he used knives to kill half of the victims who died and used his car to injure others.

And here are some excerpts from analysis by the invaluable John Lott. He starts by observing that the already-existing gun control rules in California were utterly ineffective.

As usual, the media news stories got fundamental facts wrong here. Of particular interest, half the people killed here were stabbed to death. Also, you won’t hear this in the news, the magazines that the killer used were also apparently limited to holding no more than 10 rounds (note that the Sheriff said that all the magazines were legal under California law). Obviously neither point fits the gun control check list.

More important, the anti-gun policies in California may have made it easier for the killer.

Santa Barbara County, where the attack occurred, is essentially a gun-free zone. As of February 2014, there were only 53 individuals with a concealed handgun permit in Santa Barbara County. With an adult population of 337,000, that is a rate of just 0.016 percent. The few people allowed to carry are undoubtedly politically well connected individuals who were unlikely to have been in the part of town where this attack occurred. As we have seen over and over again, these multiple victim killers deliberately select locations where victims are unlikely to be able to defend themselves.

Indeed, in another article, Lott notes that the nutjob carefully planned his attack to minimize the chances of being stopped by a law-abiding person with a gun.

Rodger spent over a year and a half meticulously planning his attack. His 141-page “manifesto” makes it clear that he feared someone with a gun could stop him before he was able to kill a lot of people. …Deterrence matters. As my research with Bill Landes at the University of Chicago found, letting people defend themselves doesn’t just prevent these attacks from occurring, it also limits the harm should the attack occur.  At some point, the fact that virtually all these mass shootings take place where victims are defenseless is going to have to matter.

To be sure, there’s no way to fully prevent crazed and evil people from doing bad things. But public policy can tip the scales in one direction or the other.

That’s why we should focus on policies that discourage bad guys by changing their cost-benefit calculations, such as making it easier for victims to defend themselves.

Not that I expect our statist friends to grasp this economic insight. It seems gun control is a faith-based policy, as captured by this amusing image.

Gun Control Stupid

The same message can be found in this Chuck Asay cartoon and these satirical images.

P.S. I shouldn’t stereotype all leftists as being naive on firearms and gun control. As you can read here and here, there are some who put reason ahead of ideology.

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Time for another great moment in red tape.

I wrote a couple of weeks ago that banks treat customers poorly in part because of bad laws and regulations from Washington.

Money laundering laws were adopted beginning about 30 years ago based on the theory that we could lower crime rates by making it more difficult for crooks to utilize the financial system. There’s nothing wrong with that approach, at least in theory. But these laws have become very expensive and intrusive, yet they’ve had no measurable impact on crime rates. …politicians and bureaucrats have decided to double down on failure and they’re making anti-money laundering laws more onerous, imposing ever-higher costs in hopes of having some sort of positive impact. This is bad for banks, bad for the poor, and bad for the economy.

You may think that only cranky libertarians are unhappy about this system.

But that’s not the case. Three professors with expertise in criminology, justice, sociology, and public policy wrote a detailed assessment of policies on anti-money laundering (AML) and combating the financing of terrorism (CFT).

Given the establishment pedigree of the authors, the finding of the report are rather shocking. The report’s introduction hints that the whole apparatus should be called into question.

To date there is no substantial effort by any international organization, including the IMF, to assess either the costs or benefits of an AML/CFT regime.  The FATF system has proceeded as if  it produces only public and private goods, not public or private “bads” or adverse by-products  against which the “goods” have to be weighed.   The Fund staff itself has raised questions about whether its substantial investment in the 3rd round has yielded adequate returns. It is not known what value that investment produced for the FATF or the Fund’s core objectives.  There needs to be more open acknowledgement of actual and potential financial costs of AML/CFT controls, their potential misuse by authoritarian rulers, and possible adverse effects on populations that rely on remittances and the informal economy, as well as potential negative impacts on NGOs and parts of civil society.

And when you dig into the details of the report, you find some surprisingly blunt language.

Basically, there’s no evidence that these policies work, and lots of evidence that they impose real harm.

Benefits of the FATF AML/CFT system have not been demonstrated. Although there may be benefits known to international organizations, governments, regulators, and intelligence agencies, no systematic efforts have been made by the FATF network of IOs or countries or institutions to demonstrate benefits. …Standards and Methodology proceed as if the implementation of an effective AML/CFT regime delivers only public and private goods and imposes no public or private “bads.” This study has learned of no significant effort by any of the standard-setting or assessor bodies to undertake a cost-benefit analysis… Little consideration has been given, they say, to the costs of implementing an AML/CFT regime, and little evidence has been adduced to demonstrate that the costs produce commensurate benefits in their own or indeed in any other jurisdiction. …Costs are substantial whether construed broadly or narrowly. …Moreover, an AML/CFT regime generates substantial costs on the financial sector in terms of money-laundering compliance staff and software procurement. Entire industries have grown around consulting and advising businesses and governments on AML/CFT compliance… Particularly strong views were expressed by bankers about excessive costs of misplaced demands upon the financial industry for surveillance of customers.

The report notes that poor people are among the biggest victims.

AML laws and regulations may adversely affect access of marginal groups whom FATF documents describe as subject to “financial exclusion” from the formal financial system. The more onerous the burdens placed on individuals, companies, and NPOs in countries where there is a substantial informal and cash economy, the more likely they are to opt out of the formal economy for reasons of cost. …Money laundering and counter-terrorism measures can reduce the volume of overseas remittances to the most vulnerable populations in the poorest countries. …Administrative and financial costs imposed on voluntary associations, most of which are very small and poorly funded, can threaten the survival of small associations

By the way, the World Bank also has acknowledged that these counterproductive laws are very bad for poor people, oftentimes disenfranchising them from the banking system

Last but not least, kudos to the authors for making the very relevant point that the destruction of financial privacy is a boon for authoritarian governments.

Numbers of experienced assessors have observed that a fully functioning AML/CFT regime in some countries has provided tools for authoritarian rulers to repress their political opponents by denying them banking or other facilities, increasing surveillance over their accounts, and prosecuting or penally taxing them for  non-disclosure, in addition to opening up more opportunities for illegal extortion for private gain. This weapon can be applied against persons/organizations already in the formal financial system.

It’s worth pointing out that this also explains why it’s so dangerous to have governments collecting and sharing tax information.

But let’s stick to the issue of money laundering. Now let’s look at two case studies to get a sense of how these laws impose real-world harm.

We’ll begin with an article in The Economist, which looks at how Western Union’s ability to provide financial services has been hampered by heavy-handed (yet ineffective) laws and regulation.

It seems like this is a company providing a very valuable service, particularly to the less fortunate.

Western Union’s services are essential for people who do not have bank accounts or are working far from home. …Western Union helps to bolster trade and disperse the world’s wealth.

But the statists don’t care.

Someone, somewhere, may want to transfer money for a nefarious purpose. And rather than the government do its job and investigate actual crimes, politicians and bureaucrats have decided that it’s easier to make Western Union spy on all customers.

…these laudable activities conflict with another pressing goal: impeding money laundering. Rules to that end require financial institutions to know who their customers are and how they obtained their money. These requirements transform the virtues of Western Union’s model—the openness and breadth of its network and its willingness to process vast numbers of small transactions—into liabilities.

And the heavy boot of government came down on the company, forcing Western Union to incur heavy expenses that make the system far more expensive for consumers.

Western Union struck a far-reaching compliance agreement with Arizona’s attorney-general in 2010. It agreed to adopt 73 changes to its systems and procedures, to install an external monitor to keep tabs on its conduct and to fund the creation of a new enforcement entity, the Southwest Border Anti-Money Laundering Alliance. Many of the recommendations were highly detailed. Western Union has, for example, set up a system to monitor transactions that takes into account factors such as the seasonality of marijuana harvests and illegal immigration. It is conducting background checks on agents and their families. Such efforts have turned out to be difficult and expensive. …Western Union’s shares have been jolted several times. Earlier this month Western Union said it would be subject to independent monitoring for an extra four years. It faces big fines and criminal prosecutions if it fails to meet the stipulations in the compliance agreement.

Let’s look at another real-world consequence of the AML/CFT regime.

You’ve heard of “driving while black,” which describes the suspicion and hostility that blacks sometimes experience, particularly when driving in ritzy neighborhoods.

Well, DWB has a cousin. It’s BWR, otherwise know as “banking while Russian.” And the stereotype has unpleasant consequences for innocent people.

Here are some passages from a story in the New York Times.

We had sold our apartment in Moscow, jumped through an assortment of Russian tax hoops and transferred the proceeds to the United States, where we now lived. It made me nervous to have all that money sitting in one virtual clump in the bank — but not nearly as nervous as having the card connected to it not work. The experience was also humiliating. In one moment, I had gone from being a Citigold client to a deadbeat immigrant who couldn’t pay for her son’s diapers. I called Citibank as soon as I got home. …”Who closed it?” I was working hard not to sound belligerent. “And where is my money?” …It was Citibank. “I see that because your transactions indicated there may be an attempt to avoid complying with currency regulations, Citibank has closed your account,” the woman informed me. …“Why wasn’t I notified?” “The cashier’s check will serve as your notice.” Citibank had fired me as a client.

Why would a bank not want customers?

Because the government makes some clients too costly and too risky, even though there’s no suggestion of wrongdoing.

Other than ethnicity.

I wasn’t entirely surprised. This had happened to other Russian-Americans I know, including one of my closest friends and my father. My friend had opened her account at a local bank in the United States when she got her first job, at age 13. Her accounts were summarily closed in 2008, while she was working in Russia. The bank, which had been bought by Sovereign in the meantime, would not state a reason for firing a client of 27 years. My father, who immigrated to the United States in 1981, had his accounts closed by BankBoston in 2000, when he was a partner in a Moscow-based business. His lawyers pressed the bank on the issue and were eventually told that because Russians had been known to launder money, the bank applied “heightened scrutiny” to accounts that had a Russia connection. It had closed “many” accounts because of what it considered suspicious activity. Like other kinds of ethnic profiling, these policies of weeding out Russian-Americans who have money are hardly efficient.

But the main thing to understand is that the entire system is inefficient.

Laws were adopted with the promise they would reduce crime. But just like you don’t stop crime by having cops hang out at Dunkin’s Donuts, you also don’t stop crime by creating haystacks of financial data and then expecting to make it easier to find needles.

For more information, here’s my video on the government’s failed money laundering policies.

P.S. This map shows you the countries considered most at risk of dirty money, which should make you wonder why anyone is foolish enough to think that higher costs on American banks will make a difference.

P.P.S. You probably didn’t realize there was such a thing as money laundering humor, but you’ll enjoy this joke featuring President Obama.

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