Macro Roundup

Greg Obenshain and Eldar Safarov report on a Andrei Shleifer paper (attached) we previously highlighted that argues financial crisis are relatively predictable, "...The authors define periods when three-year debt growth has been in the top 20% of historical increases and three-year asset price growth has been in the top third of historical increases as the “Red Zone,” shown in the upper right-hand corner of the figure below... The probability of experiencing a financial crisis within one year of entering the Red Zone is over 13%, compared to a 4% probability in the entire dataset. Remarkably, the probability of entering a financial crisis within three years of entering the Business Red Zone is 45% and an astounding 69% in the rare instances when both the household and business Red Zones are breached. The authors note that crises do not immediately follow high debt and asset price growth, suggesting they take time to develop.... And most interestingly, we have just entered a Red Zone as of the end of 2020.This is driven by the rise of debt-to-GDP and the equity market rally. Even if debt-to-GDP is calculated using the pre-COVID GDP level, this result holds. So, if crises are by-products of credit and asset price growth cycles, as the authors’ evidence strongly suggests, then the US may have just entered the danger zone. This does not mean that we need to worry about the sky falling just yet. The authors show clearly that crises take time to develop, and only materialize 36% of the time after a Red Zone has been entered...."

Are Financial Crises Predictable?

The consensus wisdom among academics and practitioners alike is that crises are inherently unpredictable. But Harvard’s famed behavioral economics group has recently produced a new paper suggesting the consensus wisdom on predicting crises might be wrong—at least on a time horizon of three years or longer. Instead, they argue that rapid expansions of credit can drive asset price booms, which are followed by credit busts.

Building off earlier academic research, the authors combine data from 42 countries between 1950 and 2016 to study financial crises in the context of business and household credit growth as well as equity and home price growth. They define crises as declines in bank equities by greater than 30% or banking panics, which capture events such as the Great Recession (2007) and the Savings and Loan Crisis (1990), but not the bust of the dot-com bubble. In line with the theories of Hyman Minsky and Charles Kindleberger, the authors find that financial crises tend to follow periods that feature both elevated debt and asset price growth. The authors define periods when three-year debt growth has been in the top 20% of historical increases and three-year asset price growth has been in the top third of historical increases as the “Red Zone,” shown in the upper right-hand corner of the figure below.

The table below shows the probability of entering a financial crisis once the Red Zone has been breached, broken down by the type of Red Zone event: business, household or both.

As a leading indicator, the Red Zone would appear to be effective. 64% of crises were preceded by either the business or household Red Zone warning within the prior three years. When the authors expand their three-year debt growth to include the top 40% of historical increases and the three-year price growth to be in the top two-thirds of historical increases, the Yellow Zone precedes 82% of crises within the prior three years. But like most leading indicators, their presence does not necessarily result in the event. Red Zones and Yellow Zones were followed by crises only 36% and 20% of the time. To give a sense of what this data looks like, we show the Red and Yellow Zone indicators for the US housing sector along with the real housing price index.

Ideally, we’d show the same chart for US businesses debt and asset price growth. However, there were no business Red Zones in the United States in the authors’ dataset. But while the authors needed to study 42 countries across 60 years so that they could get statistically significant results, we are not similarly constrained. We can use their insights to see what happens if we use US data alone. Specifically, rather than global cut-off values for Red and Yellow Zones, we can use only the US data to define the Yellow and Red Zones. The results are shown below.

Credit and asset booms are what predict busts. In part, the authors argue, because investors tend to extrapolate these booms into the future, taking more risks than they should. Investors feel an inevitable desire to “reach for yield” in low-yielding environments, spurring credit growth that drives asset growth until the inevitable reckoning when some portion of the assets and some portion of the debt go bad.

Jordyn Holman, Leslie Patton, and Peyton Forte, "Corporate America Is Ponying Up for Workers Suddenly in Demand," Bloomberg, August 9, 2021,
https://www.bloomberg.com/news/articles/2021-08-09/corporate-america-is-ponying-up-for-workers-suddenly-in-demand

Corporate America Is Ponying Up for Workers Suddenly in Demand

For the first time in decades, the American worker is finally in command when it comes time to talk money.

There are tell-tale signs everywhere that this is so.

Like the way some employers -- such as Kroger Co., Chipotle Mexican Grill Inc. and Under Armour Inc. -- are frantically pushing up hourly wages to try to retain employees. Or the way others -- like Starbucks Corp. and Drury Hotels -- are dangling hiring bonuses to entry-level applicants. Or the way CVS Health Corp. is no longer requiring job seekers to have high-school diplomas. Or the way Dan Sacco, the owner of Your Pie restaurants in Iowa, is instructing his general managers to poach workers from rivals with offers of better hours and higher pay.

“Everything is fair game now,” Sacco says.

It is unclear how long all of this will last in the wild and disjointed economic recovery that’s followed last year’s pandemic collapse. But one thing is certain: Workers are scoring the fattest pay hikes since the early 1980s. Wages for the leisure and hospitality industry have surged at an annualized pace of 6.6% over the past two years. And data released Friday showed that payrolls rose nationally at the fastest pace in almost a year, a sign of how desperate employers are to fill jobs.

“If you’re not able to get staff to cover, it leaves you really crunched and that’s what we’re seeing at the moment,” said Neil Saunders, a managing director at market research firm GlobalData who covers retailers and grocers. “Wages have gone up and have been going up.”

Inflation is another complicating factor that’s limiting the benefits of pay raises. Consumer prices surged 5.4% in June from a year ago, the fastest pace since 2008. According to a Peterson Institute study, inflation-adjusted compensation for all civilian workers is now lower than it was in December 2019.

But if policy makers can tamp down on the price increases, workers should do well. Data from the Labor Department show median wage growth was 4.8% in July on a 24-month annualized basis, up from a 3.3% pace in January 2020. Service workers saw gains almost two percentage points higher than the average for all employees last month.

The subject came up at a recent meeting with Treasury Secretary Janet Yellen in Atlanta, where she gathered senior leaders from companies including Delta Air Lines Inc. and Coca-Cola Co. to talk about inflation and the economy. During private discussions, some executives bemoaned the fact they still can’t fill open positions even after wages were increased, according to a person familiar with the conversation. The consensus among employers was that higher pay is here to stay.

A Starbucks location in Manhattan is offering a $200 signing bonus to anyone who joins by the end of the month. Kroger said by the end of the year the average hourly rate at its grocery stores will be about $21, when comprehensive benefits are considered, up from $15.50 in March. And recruiting efforts have spread far and wide, with Church’s Chicken passing out coupon books that say “Always Hiring.”

At Amazon, warehouse workers and other hourly employees got raises this year as the retailer seeks to retain talent. Amazon is spending heavily on signing incentives, Chief Financial Officer Brian Olsavsky said during a call with analysts last month.

“It’s a very competitive labor market,” Olsavsky said.

Darius Adamczyk, the CEO of Honeywell International Inc., is doling out wage hikes of more than 10% for some factory workers. He’s trying to raise prices to offset steeper costs for labor, materials and services. Those higher wages will probably stick, since companies rarely reverse increased pay rates.

“If labor costs go up permanently, then we’re going to have to figure out how we sustain at least some level of that pricing power,” Adamczyk said in an interview.

In Iowa, Sacco says his Your Pie pizzerias have been able to hire a few more people after offering higher wages. He pays about $10.50 an hour, and workers often earn another $2 an hour in tips. His other recruiting pitch is a better schedule. He’s poached a few workers from nearby rivals that are open until 1 a.m., later than his restaurants’ 9:30 p.m. closing time.

There are some businesses who say the tide is turning in their favor. McDonald’s Corp. CEO Chris Kempczinski said after raising wages about 5% in its U.S. locations, applications have increased significantly, particularly as the federal stimulus has ended in parts of the country. Critics have argued that workers have stayed on the sidelines because of cash transfers and unemployment benefits.

Noodles & Co., a fast-casual restaurant chain, saw a 70% jump in applications in June compared with April.

“We’re starting to see the light at the end of the tunnel in terms of the whole staffing shortage,” CEO Dave Boennighausen said.

Labor Secretary Marty Walsh says the U.S. job market is healthy as people resume traveling and eating out at restaurants, though he acknowledged that delta variant poses a risk. Vaccinations and wage growth are encouraging people to return to the workforce, though salaries may have to go higher, he said in an interview Aug. 6 after the payrolls report.

“Wage growth is good. It’s good for the American worker,” Walsh told Bloomberg Television. “In some sectors, we’re definitely going to need to see higher wage growth for people to come back to work. But I think where we’re headed right now, all signs are incrementally going in a good, positive direction.”

Benjamin Zycher on lack of clarity in climate trends, "...For one thing,there is no observable upward trend in the number of "hot" days between 1895 and 2017; 11 of the 12 years with the highest number of such days occurred before 1960. Since 2005, NOAA has maintained the U.S. Climate Reference Network, comprising 114 meticulously maintained temperature stations spaced more or less uniformly across the lower 48 states, along with 21 stations in Alaska and two stations in Hawaii. They are placed to avoid heat-island effects and other such distortions as much as possible. The reported data show no increase in average temperatures over the available 2005-2020 period. In addition, a recent reconstruction of global temperatures over the past 1 million years — created using data from ice-sheet formations — shows that there is nothing unusual about the current warm period. Rising sea levels are another frequently cited example of impending climate crisis. And yet sea levels have been rising since at least the mid-19th century. This rise is tied closely with the end of the Little Ice Age that occurred not long before, which led to a rise in global temperatures, some melting of sea ice, and a thermal expansion of sea water. There is some evidence showing an acceleration in sea-level rise beginning in the early 1990s: Satellite measurements of sea levels began in 1992 and show a sea-level rise of about 3.2 millimeters per year between 1993 and 2010. Before 1992, when sea levels were measured with tidal gauges, the data showed an increase of about 1.7 millimeters per year on average from 1901 to 1990.... A study of changes in Arctic and Antarctic sea ice yields very different inferences. Since 1979, Arctic sea ice has declined relative to the 30-year average (again, the degree to which this is the result of anthropogenic factors is not known). Meanwhile, Antarctic sea ice has been growing relative to the 30-year average, and the global sea-ice total has remained roughly constant since 1979....During all periods from 10 years (2006-2015) to 65 (1951-2015) years in length, the observed temperature trend lies in the lower half of the collection of climate model simulations, and for several periods it lies very close (or even below) the 2.5th percentile of all the model runs. Over shorter periods, such as the last two decades, a plethora of mechanisms have been put forth to explain the observed/modeled divergence, but none do so completely and many of the explanations are inconsistent with each other...."

Benjamin Zycher, "The Case for Climate-Change Realism,"National Affairs, Summer 2021, https://www.nationalaffairs.com/publications/detail/the-case-for-climate-change-realism

The Case for Climate-Change Realism

There is a long and infamous history of world leaders marking humanity's "last chance" to avoid the ravages of man-made climate change.

In 1989, for instance, the director of the New York office of the U.N. Environment Program warned that rising sea levels would cause entire nations to disappear if the global-warming trend were not reversed by the year 2000. "Ecological refugees will become a major concern," he cautioned, "and what's worse is you may find that people can move to drier ground, but the soils and the natural resources may not support life. Africa doesn't have to worry about land, but would you want to live in the Sahara?"

In 2007, the chairman of the Intergovernmental Panel on Climate Change (IPCC) gave the world just a few years to act: "If there's no action before 2012, that's too late. What we do in the next two to three years will determine our future. This is the defining moment."

Two years later, Prince Charles warned that we had just 96 months to avert "irretrievable climate and ecosystem collapse, and all that goes with it." "Our consumerist society comes at an enormous cost to the Earth," professed the man with multiple palaces, fleets of automobiles, a large and permanent entourage, endless opportunities for world travel, and all the other trappings of royalty. "We must face up to the fact that the Earth cannot afford to support it."

More recently, President Joe Biden echoed the existentialist concerns of his environmentalist predecessors in his inaugural address: "A cry for survival comes from the planet itself. A cry that can't be any more desperate or any more clear." This past April, while unveiling new climate-change legislation, the president reiterated the absolute imperative to act quickly and decisively to curb greenhouse-gas emissions: "We really have no choice. We have to get this done."

Not only were many of these predictions unfounded, their tone and optics were also often ripe for ridicule. The problem, however, is that Republicans rarely go beyond dismissive mockery in responding to climate alarmists. When then-president Donald Trump insisted global warming was a "hoax" or a concept "created by and for the Chinese," he took this dismissive attitude too far. Though he later insisted that his comments were meant as jokes, it is clear that such rhetoric is hardly a serious response to an empirical, scientific claim about potentially worrying changes in Earth's climate.

More concerning than the lack of seriousness in these remarks is the way such rhetoric plays into the hands of climate alarmists. The truth is that the available climate science gives serious reason to doubt, and even dispute, the claims of climate catastrophists and their allies in Washington. But when the best that Republicans can muster in defense of a more nuanced, realistic approach to understanding and responding to climate change is to refer to it as a "hoax," they empower Democrats to publicly — and, quite frankly, credibly — accuse them of "denialism," thereby establishing themselves as the undisputed "party of science."

A better understanding of climate science is not merely worthwhile for improving policymaking, but for improving political strategy. If Republican leaders took the time to acquaint themselves with climate science, they would find that Democrats' apocalyptic forecasts and radical policy proposals are largely and increasingly untethered from reality. From a purely tactical perspective, Republicans interested in fighting the Green New Deal and other extremist climate policies would be wise to cease ignoring environmental science and instead become its staunchest public advocates.

Such a re-orientation would require significant changes in the way those on the right discuss climate change. But before they can even begin implementing those changes, conservatives will need to re-engage with climate science. After having been dismissive of climate alarmism for years, it's time for conservatives to recommit themselves to understanding the scientific basics and to arguing the compelling case for climate realism.

CAUSES OF CLIMATE CHANGE

The basic theory of man-made ("anthropogenic") climate change is straightforward and undisputed: Atmospheric concentrations of greenhouse gases, emitted in part through the burning of fossil fuels, absorb some heat that would otherwise escape from the Earth's atmosphere into space, raising temperatures in the troposphere (the lowest atmospheric layer) and at the Earth's surface. This warming effect is called "radiative forcing." As greenhouse-gas concentrations rise, this warming increases too, but with diminishing impacts. In other words, the effect of an increase in greenhouse gases grows smaller as more greenhouse gas accumulates in the atmosphere.

Radiative forcing also creates a series of highly complex feedback effects in terms of ocean evaporation, cloud formation, precipitation, and other phenomena over which there exists far less scientific consensus. Because of that substantial uncertainty, the net effects of both radiative forcing and its associated feedback effects on global temperatures are the subject of sharp debate.

Despite political rhetoric suggesting the contrary, there is little dispute in the scientific literature that the amount of warming caused by radiative forcing alone is small: A doubling of atmospheric greenhouse-gas concentrations in the absence of feedback effects would increase surface temperatures by about 1 degree Celsius after the climate system fully adjusts. But that slight warming creates feedback effects that would affect the initial forcing impact. Thus, the determinative question in scientists' attempts to predict the impact of anthropogenic climate change is how "sensitive" the Earth's climate system is to radiative forcing. A low sensitivity would mean warming caused by man will be very small or even undetectable, while a high sensitivity would mean warming caused by man could be catastrophic.

Anthropogenic warming is "real" in the sense that increasing atmospheric concentrations of greenhouse gases are having detectable effects. The difficult issues are whether those effects are large or small, whether the resulting changes are adverse or beneficial on net (only extremists deny that there are some benefits to warming), and the degree to which natural variations are also contributing to climate change.

This last question is especially crucial in determining the scale of anthropogenic warming. After all, climate phenomena are driven by much more than atmospheric concentrations of greenhouse gases. One example among many is the Pacific Decadal Oscillation, a shift in circulation patterns in the northern Pacific Ocean that occurs approximately every 30 years. It has a warm phase and a cool phase, affecting temperatures in the northern hemisphere. Another example is the Southern Oscillation, which involves cycles of temperature fluctuation — known commonly as "El Niño" during the warm phase and "La Niña" during the cool phase — in the eastern and central equatorial Pacific Ocean. A third is the Atlantic Multi-Decadal Oscillation, a natural variability in sea-surface temperatures in the North Atlantic Ocean with cycles estimated at 60 to 80 years. There is also a substantial body of evidence indicating that changes in solar activity affect climate patterns on Earth as well. These examples are far from exhaustive.

In short, the complexity of the climate system is not to be understated. Moreover, the concept of a global surface temperature — quite apart from whether there have been changes in it — is more problematic than is commonly recognized. This figure is not the result of a single, centralized measurement; instead, it is the average of large positive and negative data reported by widely dispersed measurement stations subject to often-uncorrected changes in surrounding conditions. Notwithstanding those data issues, it is useful to briefly review the available global surface (land and ocean) temperature record since the "Little Ice Age," which ended no later than 1850.

The Earth is warming: The data reported by the National Oceanic and Atmospheric Administration (NOAA) show that temperatures increased after 1850 until the early 1880s, and then fell — particularly after the eruption of Krakatoa in 1883 — until 1910. They then increased substantially (by about 0.7 degrees Celsius) through 1945. A mild cooling period followed through the mid-1970s, after which temperatures increased through the late 1990s and early 2000s. Temperatures were more-or-less constant through about 2015, and have increased since then. Beginning in 1979, the satellite measurements for the entire troposphere show warming of about 0.17 degrees Celsius per decade, and for the troposphere over the tropics, of about 0.13 degrees Celsius per decade. These measurements are consistent with those from weather satellites, the data from which extend back to the 1950s.

The 1910-1945 warming — which was very roughly the same magnitude as that observed from the mid-1970s through about 2000 — is of particular interest in that it cannot be explained by higher greenhouse-gas concentrations, which increased from 300 parts per million to 310 parts per million over that period. This reinforces the commonsense observation that temperatures result from some combination of natural and anthropogenic influences. But the former have received far less attention than one might assume. As climatologist Roy Spencer of the University of Alabama in Huntsville and NASA notes:

Very little research has ever been funded to search for natural mechanisms of warming....it has simply been assumed that global warming is manmade. This assumption is rather easy for scientists since we do not have enough accurate global data for a long enough period of time to see whether there are natural warming mechanisms at work. The United Nation's Intergovernmental Panel on Climate Change (IPCC) claims that the only way they can get their computerized climate models to produce the observed warming is with anthropogenic. But they're not going to find something if they don't search for it. More than one scientist has asked me, "What else COULD it be?" Well, the answer to that takes a little digging.

The central point here is not that we can say for certain that climate change is driven primarily by natural phenomena acting independent of anthropogenic factors. But it is important to recognize that the assumption of many politicians, environmental groups, and no small number of scientist-activists — that humans are the single most significant cause of climate change — is simply unsupported by the available science. Such an absence of evidence cautions humility; it should make Americans think twice before embracing radical solutions to a problem that we are only beginning to comprehend.

CLIMATE TRENDS

Beyond exhibiting extreme overconfidence in a cherry-picked analysis of climate-change causes, politicians and activists frequently ground their alarmism in frightening predictions about consequences that are likewise far from certain. This is not only true within the very new (and still quite unreliable) field of predictive climate science; it is true even in the context of ongoing climate phenomena. Indeed, politicians and journalists frequently characterize dramatic or unusual climate phenomena as the product of anthropogenic climate change, yet there is little evidence to support those claims.

For one thing, there is no observable upward trend in the number of "hot" days between 1895 and 2017; 11 of the 12 years with the highest number of such days occurred before 1960. Since 2005, NOAA has maintained the U.S. Climate Reference Network, comprising 114 meticulously maintained temperature stations spaced more or less uniformly across the lower 48 states, along with 21 stations in Alaska and two stations in Hawaii. They are placed to avoid heat-island effects and other such distortions as much as possible. The reported data show no increase in average temperatures over the available 2005-2020 period. In addition, a recent reconstruction of global temperatures over the past 1 million years — created using data from ice-sheet formations — shows that there is nothing unusual about the current warm period.

Rising sea levels are another frequently cited example of impending climate crisis. And yet sea levels have been rising since at least the mid-19th century. This rise is tied closely with the end of the Little Ice Age that occurred not long before, which led to a rise in global temperatures, some melting of sea ice, and a thermal expansion of sea water. There is some evidence showing an acceleration in sea-level rise beginning in the early 1990s: Satellite measurements of sea levels began in 1992 and show a sea-level rise of about 3.2 millimeters per year between 1993 and 2010. Before 1992, when sea levels were measured with tidal gauges, the data showed an increase of about 1.7 millimeters per year on average from 1901 to 1990.

But because the datasets are from two different sources — satellite measurements versus tidal gauges — they are not directly comparable, and therefore they cannot be interpreted as showing an acceleration in sea-level rises. Moreover, the period beginning in 1993 is short in terms of global climate phenomena. Since sea levels have risen at a constant rate, remained constant, or even fallen during similar relatively short periods, inferences drawn from them are problematic. It is of course possible there has been an acceleration in sea-level rise, but even still, it would not be clear whether such a development stemmed primarily from anthropogenic or natural causes; clearly, both processes are relevant.

A study of changes in Arctic and Antarctic sea ice yields very different inferences. Since 1979, Arctic sea ice has declined relative to the 30-year average (again, the degree to which this is the result of anthropogenic factors is not known). Meanwhile, Antarctic sea ice has been growing relative to the 30-year average, and the global sea-ice total has remained roughly constant since 1979.

Extreme weather occurrences are likewise used as evidence of an ongoing climate crisis, but again, a study of the available data undercuts that assessment. U.S. tornado activity shows either no increase or a downward trend since 1954. Data on tropical storms, hurricanes, and accumulated cyclone energy (a wind-speed index measuring the overall strength of a given hurricane season) reveal little change since satellite measurements of the phenomena began in the early 1970s. The number of wildfires in the United States shows no upward trend since 1985, and global acreage burned has declined over past decades. The Palmer Drought Severity Index shows no trend since 1895. And the IPCC's Fifth Assessment Report, published in 2014, displays substantial divergence between its discussion of the historical evidence on droughts and the projections on future droughts yielded by its climate models. Simply put, the available data do not support the ubiquitous assertions about the causal link between greenhouse-gas accumulation, temperature change, and extreme weather events and conditions.

Unable to demonstrate that observed climate trends are due to anthropogenic climate change — or even that these events are particularly unusual or concerning — climate catastrophists will often turn to dire predictions about prospective climate phenomena. The problem with such predictions is that they are almost always generated by climate models driven by highly complex sets of assumptions about which there is significant dispute. Worse, these models are notorious for failing to accurately predict already documented changes in climate. As climatologist Patrick Michaels of the Competitive Enterprise Institute notes:

During all periods from 10 years (2006-2015) to 65 (1951-2015) years in length, the observed temperature trend lies in the lower half of the collection of climate model simulations, and for several periods it lies very close (or even below) the 2.5th percentile of all the model runs. Over shorter periods, such as the last two decades, a plethora of mechanisms have been put forth to explain the observed/modeled divergence, but none do so completely and many of the explanations are inconsistent with each other.

Similarly, climatologist John Christy of the University of Alabama in Huntsville observes that almost all of the 102 climate models incorporated into the Coupled Model Intercomparison Project (CMIP) — a tracking effort conducted by the Lawrence Livermore National Laboratory — overstate past and current temperature trends by a factor of two to three, and at times even more. It seems axiomatic to say we should not rely on climate models that are unable to predict the past or the present to make predictions about the distant future.

The overall temperature trend is not the only parameter the models predict poorly. As an example, every CMIP climate model predicts that increases in atmospheric concentrations of greenhouse gas should create an enhanced heating effect in the mid-troposphere over the tropics — that is, at an altitude over the tropics of about 30,000-40,000 feet. The underlying climatology is simple: Most of the tropics is ocean, and as increases in greenhouse-gas concentrations warm the Earth slightly, there should be an increase in the evaporation of ocean water in this region. When the water vapor rises into the mid-troposphere, it condenses, releasing heat. And yet the satellites cannot find this heating effect — a reality suggesting that our understanding of climate and atmospheric phenomena is not as robust as many seem to assume.

The poor predictive record of mainstream climate models is exacerbated by the tendency of the IPCC and U.S. government agencies to assume highly unrealistic future increases in greenhouse-gas concentrations. The IPCC's 2014 Fifth Assessment Report, for example, uses four alternative "representative concentration pathways" to outline scenarios of increased greenhouse-gas concentrations yielding anthropogenic warming. These scenarios are known as RCP2.6, RCP4.5, RCP6, and RCP8.5. Since 1950, the average annual increase in greenhouse-gas concentrations has been about 1.6 parts per million. The average annual increase from 1985 to 2019 was about 1.9 parts per million, and from 2000 to 2019, it was about 2.2 parts per million. The largest increase that occurred was about 3.4 parts per million in 2016. But the assumed average annual increases in greenhouse-gas concentrations through 2100 under the four RCPs are 1.1, 3.0, 5.5, and an astounding 11.9 parts per million, respectively.

The studies generating the most alarmist predictions are the IPCC's Special Report on Global Warming of 1.5°C and the U.S. government's Fourth National Climate Assessment, both of which were published in 2018. Both assume RCP8.5 as the scenario most relevant for policy planning. The average annual greenhouse-gas increase under RCP8.5 is over five times the annual average for 2000-2019 and almost four times the single biggest increase on record. Climatologist Judith Curry, formerly of the Georgia Institute of Technology, describes such a scenario as "borderline impossible."

RCP6 is certainly more realistic. It predicts a temperature increase of 3 degrees Celsius by 2100 in the average of the CMIP models. But on average, those CMIP models overstate the documented temperature record by a factor of at least two. Ultimately, models with a poor record of successfully accounting for past data and highly unrealistic future greenhouse-gas concentrations should not be considered a reasonable basis for future policy formulation.

It is worth noting that the public discussion of the climate crisis consistently ignores the very real possibility that the small amount of warming that will likely occur might yield noteworthy benefits. The peer-reviewed literature reports that over the last 35 years, a substantial greening of a quarter to half the Earth has occurred, of which over two-thirds is due to carbon-dioxide fertilization. The peer-reviewed literature also reports that this fertilization effect has been accompanied by a sharp increase in plants' water-use efficiency. Moreover, a well-known multinational study of the mortality effects of heat and cold finds that the latter results in far more premature deaths. Though there will likely be some negative consequences of a warming planet, these early reports remind us that there will likely be positive effects as well.

Finally, we cannot ignore the potentially adverse effects of government policies designed to fight climate change. Before we rush toward hasty assessments of a climate disaster, we need to take full stock of these potential benefits and costs.

COSTS OF COMBATING CLIMATE CHANGE

The implicit assertion of various climate proposals is that they would, upon implementation, yield significant beneficial effects. Yet curiously, their proponents almost never specify the future effects in terms of temperatures and other important climate measurements. The reality is that even policies that would most aggressively reduce greenhouse-gas emissions would likely have only very small effects on climate.

To estimate the impact of such policies, we must use a climate model. This model would make predictions about temperatures that will occur at some distant future year — say, the year 2100 — both with and without the policies under consideration. For years, the U.S. government has used the climate model developed with funding from the Environmental Protection Agency. This model suits our purposes here as well as any.

The predicted effects of the various proposals put forth may surprise many readers. Even if we were to incorporate assumptions that exaggerate the impact of reduced greenhouse-gas emissions, full implementation of the "net-zero" emissions goals of the Biden administration would reduce global temperatures by 0.17 degrees Celsius by 2100. That effect would be barely detectable given normal variation in the global temperature record. The much-discussed Green New Deal — also a net-zero proposal — would have about the same effect. The Paris agreement, if implemented immediately and enforced strictly, would have a similar impact of about 0.17 degrees Celsius. A 50% emissions cut by China would yield an impact of 0.18 degrees Celsius. A net reduction to zero greenhouse-gas emissions by all 37 member states of the Organization for Economic Cooperation and Development would increase that figure to about 0.35 degrees Celsius. An immediate global emissions cut of 75% would yield an impact of 0.54 degrees Celsius.

Despite the lackluster effects of these climate proposals, they would be exceedingly costly. Sharp reductions in greenhouse-gas emissions can be accomplished only by substituting expensive energy for cheaper energy, notwithstanding ubiquitous assertions to the contrary by proponents of climate policies. My estimate of the cost of the electricity portion of the Green New Deal alone is $500 billion per year, or about $4,000 annually per U.S. household. Setting aside the reality that such policies are not even remotely viable politically, there is serious reason to doubt such extraordinary costs are worth whatever minor reductions in temperature they might achieve.

A similar analysis can be applied to the recommendations of the IPCC's Global Warming of 1.5°C report referenced above. Buried in its supporting documentation is a discussion of the taxes on greenhouse-gas emissions that would be needed to limit warming in this century to 1.5 degrees Celsius. In 2019 dollars, the midpoint of the range for the imagined 2030 tax level comes out to $3,213 per ton. That works out to a tax per gallon of gasoline of about $30.

The way to understand the true costs of proposed climate policies is to consider the reductions in greenhouse-gas emissions that would be needed to achieve the older, "safe" levels of emissions sought by climate activists. Under the average of the CMIP models, the temperature-reduction goal for RCP6 would be 1 degree Celsius (from 3 degrees Celsius down to a goal of 2 degrees Celsius), which would require greenhouse-gas emissions cuts almost 600% greater than those promised under the Paris accord. In the RCP8.5 scenario, the average temperature increase predicted is 4.9 degrees Celsius by 2100; a reduction of 2.9 degrees Celsius would require greenhouse-gas cuts over 1700% of those promised in the agreement.

WEIGHING THE INTERESTS OF FUTURE GENERATIONS

These figures are staggering, and utterly impossible to achieve. This forces us to recognize that any policy we implement will involve significant costs and trade-offs. Rather than determining the policy solutions for us, as some politicians pretend it can do, the available climate science demands that our leaders weigh these trade-offs in consideration of our manifold interests, commitments, and values.

One important metric to consider in navigating the fraught cost-benefit analysis of a particular course of action is the concept of a "discount rate." When applied to proposed policies, a discount rate is a weighting of the relative values of effects experienced soon (or during the current period) and those experienced further out in time. A low discount rate means that the future is not being discounted heavily relative to the present; a discount rate of zero would mean that any future period, regardless of how distant in time, has the same weight as the current one. A high discount rate means that the future is discounted more heavily relative to the present.

Any investment of scarce resources must compete, at least in principle, with alternative investments. Those alternatives, on average, can be expected to yield some economic rate of return to the economy in the aggregate, even if that expected return is difficult to measure or even to define. Accordingly, the costs and benefits of alternative investments must be compared so as to yield choices among those alternatives that produce the highest total economic return to society. Conceptually, the most straightforward way to evaluate a given investment or government policy is to apply that economic rate of return as the discount rate, and to see if the stream of costs and benefits has a "net present value" greater than zero. If so, the project is justified economically, and undertaking it will increase the aggregate value of all investments considered together.

Among the chief arguments proponents of aggressive climate policies promote is the contention that climate change is a dangerous phenomenon that will impose massive harms on future generations. Accordingly, the argument goes, a low or even zero discount rate applied to the analysis of climate policies is appropriate as a means by which the interests of future generations should be taken into account.

Yet this argument is incorrect. The central interest of future generations is a bequest from previous generations of the most valuable possible capital stock (the sum of all investments), of which environmental quality is but one important dimension among many. There are always unavoidable trade-offs among these dimensions. Maximizing that bequest for future generations requires the current generation to allocate resources efficiently. If environmental policies implemented by the current generation yield less wealth currently as well as a smaller total capital stock for future generations — defined broadly to include environmental values — then, from the viewpoint of those future generations, some additional emissions of pollutants and greenhouse gas would be preferable.

Analytically speaking, climate policy is a forced investment of scarce resources in a particular set of activities and a forced disinvestment in others — for example, in the exploration and development of fossil fuels. The use of an artificially low discount rate for the valuation of those investments distorts the allocation of capital among alternative investments in the current period as well as across current and future periods. The inexorable result is a smaller capital stock to be bequeathed to future generations. An artificially low discount rate for the evaluation of climate policies, therefore, is inconsistent with the interests of future generations, which will be concerned about far more than climate phenomena alone.

To think about this in more concrete terms, it helps to imagine an infant born in a cave some tens of thousands of years ago, in a world with environmental quality effectively untouched by mankind. At birth, that child would have had a life expectancy on the order of 10 years. Had it been able to choose, it would almost certainly have willingly given up some environmental quality in exchange for a longer life expectancy engendered by better housing, food, water, medical care, safety, and other advantages ad infinitum.

The general proposition is straightforward: People willingly give up some environmental quality in exchange for lives that are longer, wealthier, and healthier. Few would choose to live on a pristine desert island; most would prefer closer proximity to family, employment, entertainment, and all of the other myriad beneficial dimensions of living in a world with a less-than-pristine environment. Ultimately, then, the most responsible way for policymakers to move forward on climate policy is to weigh all of their obligations to future generations against one another, rather than focusing on one to the detriment of the rest.

Moreover, future generations will be much wealthier than the current one. The IPCC itself estimates that individual incomes by the end of the century will be at least 400% greater than is the case today, and that the damage from anthropogenic climate change unmitigated by policy initiatives will be only 2.6% of global GDP by 2100. This is virtually the same as the projections generated by the mainstream models estimating the economic effects of changing climate phenomena.

ESCAPING THE NARRATIVE

In 2006, former vice president Al Gore made it clear that "unless drastic measures to reduce greenhouse gases are taken within the next 10 years, the world will reach a point of no return." In 2011, the International Energy Agency argued that the opportunity to avoid dangerous climate change would be "lost forever" if serious actions to limit greenhouse-gas emissions were not implemented within the ensuing five years. Somehow, the fact that these deadlines have come and gone has not led to any discrediting or re-evaluation of the original claims or demands.

Luckily for us, the truth is that the ongoing crusade for major reductions in greenhouse-gas emissions — that is, large shifts away from inexpensive energy — is grounded in an alarmism entirely unsupported by the available scientific evidence. To achieve these perpetually apocalyptic conclusions, climate catastrophists have hid behind modeling results that are notoriously unreliable, climate proposals with impacts either small or ambiguous, and a growing unwillingness to engage in actual debate. Meanwhile, those deeply skeptical of the many assertions climate activists and their political allies make have been shunted aside, branded as "denialists," and banished from polite society.

There seems to be little incentive to challenge these alarmists or their false "science versus denial" dichotomy. But the political stakes are too high for those who can see through climate extremism to dismiss such hysterics and leave the substance of alarmists' claims unchallenged. So long as Democrats can get away with presenting theirs as the "party of science," they will continue to operate with a significant strategic advantage when it comes to public debates on climate policies that will have profound impacts on the country for generations to come. Instead of merely dismissing the faux science that lends support to climate alarmism as a "hoax," conservatives must do more to engage with and reclaim the growing body of scientific evidence that supports their climate-change realism.

Benjamin Zycher is a resident scholar at the American Enterprise Institute.