Category: Economics

Feds Impose Tariffs on Imports of Paper-Thin Steel Needed to Make EV Engines

(p. A3) Large U.S. steelmakers are ramping up production of a hard-to-make, paper-thin steel to capture a fast-growing market for a material critical to powering electric vehicles.

. . .

Such electrical steel, which accounts for about 1% of all the steel produced annually in the world, already is in short supply for electric vehicles, executives said. Companies expect demand to accelerate faster than production as EV volumes expand in the coming years.

“It’s in limited supply and with very long lead times. Sometimes 50 or 52 weeks,” said Hale Foote, owner of Scandic Springs Inc., a San Leandro, Calif., company that uses high-grade electrical steel to make parts for scientific measurement devices.

. . .

More than 80% of the electrical steel produced comes from China, Japan and South Korea, all countries that are subject to U.S. tariffs or quotas on steel imports, industry analysts said.

. . .

(p. B2) “It takes intense focus. You have to have absolute consistency or you scrap the material,” said David Stickler, who led the investment group that built Big River Steel in Osceola, Ark., and then sold the mill to U.S. Steel in 2021. Mr. Stickler said he envisioned electrical steel being a core product at Big River when he started planning the mill nearly a decade ago.

. . .

Steel-industry executives said that creating more domestic capacity to make electrical steel for vehicles will likely take years, as steel companies acquire equipment and become proficient at the exacting production process.

“You can’t just buy the equipment and start making electrical steel. Those who’ve made the investment will have an advantage for the next five to 10 years,” Mr. Stickler said.

For the full story, see:

Tita, Bob. “Paper-Thin Steel Used to Power EVs Is in Short Supply.” The Wall Street Journal (Tuesday, March 28, 2023): B1-B2.

(Note: ellipses added. The online version is longer, but the passages quoted above appear in both versions.)

(Note: the online version of the story has the date March 27, 2023, and has the title “The Paper-Thin Steel Needed to Power Electric Cars Is in Short Supply.”)

So-Called “Inflation Reduction Act” Mandates Pharma Firms Dishonestly Say They Voluntarily Negotiated Prices

(p. A15) The pharmaceutical company Merck claims in a lawsuit filed this week that the “Drug Price Negotiation Program for Medicare,” part of last summer’s Inflation Reduction Act, is an unconstitutional taking of company’s property and a violation of the company’s freedom of speech. If successful, this lawsuit will prevent the unconstitutional practice of forcing drug companies to sell drugs to the U.S. government at a government-determined price.

To make the provision of the 2022 law constitutional, Congress could have imposed price controls, or it could have bargained with pharmaceutical companies using the massive marketing power of Medicare, which accounts for some half of all American drug spending. Instead, Congress tried to prevent pharmaceutical companies from walking away from any potential deal. Under the act, secret negotiations force pharmaceutical companies to agree to government-determined prices amounting to massive discounts off market-based prices, under the threat of crippling taxes and penalties.

Americans tend to support pharmaceutical “price negotiations,” but oppose “price controls.” Knowing this, Congress set up a ruse.

. . .

. . ., the law essentially requires a company to communicate that it agreed to the set price—compelled speech that is prohibited by the First Amendment. Time and again, the Supreme Court has declared forced speech beyond the power of the government. The government’s only seeming interest is to pretend that a system of unilateral price controls and mandated sales is actually a system of voluntary negotiations.

For the full commentary, see:

Daniel E. Troy. “An Unconstitutional Offer Drug Companies Can’t Refuse.” The Wall Street Journal (Friday, June 9, 2023): A15.

(Note: ellipses added.)

(Note: the online version of the commentary has the date June 8, 2023, and has the same title as the print version.)

An Hawaiian Wants Land She Can Own and Control, Even if Not in Hawaii

(p. 1) When Pauline Kauinani Souza was a child in Hawaii, she spent early mornings watering her grandfather’s watermelons and papaya trees.

Her family lived frugally, eating homemade bread and heating water over a fire for bathing. But the no-frills life came with the ultimate perk: living near the beach and drifting off to sleep at night to the sound of waves gently crashing on the shore.

Now, at 80, Ms. Souza lives in Las Vegas, a desert city of neon reinvention far from the ocean and her ancestral home. It is not paradise, but it is full of Native Hawaiians like her who have flocked there in recent years for the endless entertainment, reasonable cost of living and something few people can find in Hawaii: a house they can afford.

“I own it outright,” she said proudly of her two-bedroom, ranch-style home in Las Vegas. “In Hawaii, there aren’t many people who can say that.”

Increasingly, Las Vegas is drawing Hawaiians who came to visit and decided to stay, convinced that an affordable faux version of the islands is better than an endless struggle to make ends meet in the real thing.

Between 2011 and 2021, the population of Native Hawaiians and (p. 19) other Pacific Islanders in Clark County, Nev., which includes Las Vegas, grew by about 40 percent, for a total of nearly 22,000 people. That was the greatest number of newcomers in that demographic in any county outside Hawaii, according to population estimates from the U.S. Census Bureau. In that same period, the total population of Clark County grew by about 17 percent.

For many, the draw is real estate: Houses in the Las Vegas area have a median listing price of about $460,000, compared with about $800,000 in Honolulu, according to Federal Reserve Economic Data.

Americans migrating for cheaper housing is not unusual, as seen most dramatically in the decades-long shift from the Northeast to the Sunbelt. But this migration from the impossibly lush natural landscape of the islands to the brash desert of Las Vegas is a particularly vivid glimpse of how the search for housing remakes the country in sometimes surprising ways.

. . .

In 2022, Hawaii had the highest cost of living out of all 50 states and the District of Columbia, according to data from the Council for Community and Economic Research. The state imports the vast majority of its food, making everyday groceries especially expensive. And strict regulations on building have contributed to housing shortages and prices out of reach for many.

For the full story, see:

Eliza Fawcett and Hana Asano. “Priced Out of Paradise’ But Hawaiians Thrive in Desert.” The New York Times, First Section (Sunday, May 21, 2023): 1 & 19.

(Note: ellipsis added.)

(Note: the online version of the story has the date May 20, 2023, and has the title “There’s No Ocean in Sight. But Many Hawaiians Make Las Vegas Their Home.” The online version says that the print version has the title “Desert Provides A New Paradise For Hawaiians” but my national print version has the title “They’re ‘Priced Out of Paradise’ But Hawaiians Thrive in Desert.”)

As Millennials Age They Shift to Republicans

(p. B4) Fifteen years ago, a new generation of young voters propelled Barack Obama to a decisive victory that augured a new era of Democratic dominance.

Fifteen years later, those once young voters aren’t so young — and aren’t quite so Democratic.

. . .

This shift toward the right among the young voters who propelled Mr. Obama to victory 15 years ago is part of a larger pattern: Over the last decade, almost every cohort of voters under 50 has shifted toward the right, based on an analysis of thousands of survey interviews archived at the Roper Center.

It’s not necessarily a stunning finding. Political folklore has long held that voters become more conservative as they get older. But it is nonetheless at odds with a wave of recent reports or studies suggesting otherwise. The Financial Times, for instance, wrote that “millennials are shattering the oldest rule in politics” by not moving to the right as they age.

For the full commentary, see:

Nate Cohn. “Millennials Aren’t an Exception. They Have Moved to the Right.” The New York Times, First Section (Sunday, June 4, 2023): A16.

(Note: ellipsis added.)

(Note: the online version of the commentary was updated June 2, 2023, and has the title “Millennials Are Not an Exception. They’ve Moved to the Right.”)

“They Just Invest in How to Navigate This Bureaucracy”

(p. A1) Capella Space, a San Francisco-based start-up, is building a fleet of small, inexpensive satellites that can track enemy troops as they move at night, or under cloud cover that traditional optical satellites cannot see through.

Fortem Technologies, a small aerospace company in Utah, wants to supply the Pentagon with a new type of unmanned aircraft that can disable enemy drones.

HawkEye 360, a Virginia-based firm, has used private equity funds to launch its own satellites that use radio waves emitted by communications equipment and other electronic devices to detect the presence of enemy troop concentrations.

Each of these systems is getting real-world testing in the war in Ukraine, earning praise from top government officials there and validating investors who have been pouring money into the field.

But they are facing a stiff challenge on another field of battle: the Pentagon’s slow-moving, risk-averse military procurement bureaucracy.

When it comes to drones, satellites, artificial intelligence and other fields, start-up companies frequently offer the Pentagon cheaper, faster and more flexible options than the weapons systems produced by the handful of giant contractors the Pentagon normally relies on.

But while the military has provided small grants and short-term contracts to many start-ups, those agreements often expire too quickly and are not large enough for young companies to meet their payrolls — or grow as rapidly as their venture capital investors expect. Several have been forced to lay people off, delaying progress on new technologies and war-fighting tools.

. . .

(p. A8) From the early months of the war, SpaceX’s Starlink, the Elon Musk-founded satellite internet service, had played a critical role for frontline Ukrainian troops. But small drones and a denser collection of satellites are also helping to provide the capacity for pervasive surveillance, allowing Ukraine to identify and track threats and targets constantly.

A new generation of cheaper and more precise attack drones carrying bombs can loiter in the air autonomously until they find their targets. Artificial intelligence-backed computer systems can fuse this collected data and other feeds to make targeting decisions, faster than any human.

The Ukrainians have also innovated a great deal themselves, impressing Pentagon officials as they have converted commercial drones, for example, into mini bombers.

Taken together, said Thomas X. Hammes, who studies war-fighting history at the Pentagon-backed National Defense University, the developments represent a “genuine military revolution,” and one that is happening much more quickly than the shift from infantry that traveled by foot in World War I to the motorized and mechanized armies of World War II.

. . .

(p. A9) Perhaps the most revolutionary use of American technology in Ukraine has been the application of software that uses artificial intelligence, made by Palantir, to help with targeting efforts. The company’s chief executive, Alex Karp, traveled to Ukraine last year to meet with President Volodymyr Zelensky.

“If you go into battle with old school technology,” Mr. Karp said this year at an event to discuss artificial intelligence tools in warfare, “and you have an adversary that knows how to install and implement digitalized targeting in A.I., you obviously are at a massive disadvantage.”

Some experts say that artificial intelligence, which has been used in Ukraine to help sift through the massive loads of data being accumulated from surveillance, will ultimately prove as disruptive to the nature of war-fighting as nuclear weapons.

. . .

For Primer, the small artificial-intelligence firm based in downtown San Francisco, it was a breakthrough moment.

Not long after the war in Ukraine started, its engineers, working with Western allies, tapped into a tidal wave of intercepted Russian radio communications. It used advanced software to clean up the crackly sound, automatically translated the conversations, and most importantly, isolated moments when Russian soldiers in Ukraine were discussing weapons systems, locations and other tactically important information.

This same work would have taken hundreds of intelligence analysts to identify the few relevant clues in the mass of radio traffic. Now it was happening in a matter of minutes.

The findings were quickly matched up with other so-called open source intelligence streams, like geolocation data pulled from social media accounts, giving updates on the location of troops or equipment, that could be matched with surveillance video from drones or images from satellites.

“It’s getting situational awareness,” said Sean Gourley, the founder of Primer.

Yet at the same time, the Pentagon was still deciding when to move ahead with major purchases of its technology. The company was burning through its cash reserves too quickly, so Mr. Gourley laid off engineers and other staff members.

“These engineers are great at creating solutions to solve these problems, which is what matters,” Mr. Gourley said. “But there is the uncertainty: When is this contract going to close? It’s very, very hard to justify that spend.”

Mr. Gourley said he decided instead to invest more money in a government relations push, hiring a former top aide to the Senate Armed Services Committee to help the company promote its business in Washington.

“The big defense companies, they don’t really kind of invest in the tech,” he said. “They just invest in how to navigate this bureaucracy. That kind of sucks, but that’s how you’ve got to play this game.”

In interviews, nearly a dozen top executives of technology-oriented companies shared stories of stalled efforts or frustration.

For the full story, see:

Eric Lipton. “Pentagon Is Slow At Signing Deals With Innovators.” The New York Times (Monday, May 22, 2023): A1 & A8-A9.

(Note: ellipses, and bracketed date, added.)

(Note: the online version of the story has the date May 21, 2023, and has the title “Start-Ups Bring Silicon Valley Ethos to a Lumbering Military-Industrial Complex.”)

In 2021 Summers and Blanchard Worried That Biden’s Covid Stimulus Would Fuel Inflation

(p. A2) When Congress passed President Biden’s $1.9 trillion American Rescue Plan in early 2021, which included checks to households, enhanced jobless benefits and aid to state and local governments, inflation was around 2% and unemployment, though coming down, still above 6%.

At the time many forecasters thought the stimulus could push demand above the economy’s potential to supply goods and services and unemployment below its long-run natural rate of around 4%. Yet few thought this would meaningfully raise inflation. In previous decades unemployment had remained similarly low without raising price pressures.

A few disagreed, notably former Treasury Secretary Lawrence Summers and Blanchard. Both warned the stimulus was so large it would push the economy dangerously into overheating territory.

For the full commentary, see:

Greg Ip. “CAPITAL ACCOUNT; Why Did Inflation Take Off? Two Top Economists Answer.” The Wall Street Journal (Wednesday, May 24, 2023): A2.

(Note: the online version of the commentary has the date May 23, 2023, and has the title “CAPITAL ACCOUNT; Why Inflation Erupted: Two Top Economists Have the Answer.”)

A 2021 article that documented Summers’s and Blanchard’s worry that Biden’s huge stimulus might fuel inflation is:

Ip, Greg. “Inflation Risk: Little Now, but Some See Danger Ahead.” The Wall Street Journal (Tues., March 2, 2021).

Lockdowns in China Move Atlas to Shrug

(p. A1) By the usual measures, Loretta Liu had it made. She graduated in 2018 from one of China’s top universities, rented an apartment in the glamorous city of Shenzhen, and had been hired as a visual designer at a series of high-flying companies, even as youth unemployment in China was reaching record highs.

Then, last year, she quit. She now works as a groomer at a chain pet store, for one-fifth of her previous salary. She spends hours on her feet, wearing a uniform in place of her once carefully selected outfits.

And she is delighted.

“I was tired of living like that. I didn’t feel like I was getting anything from the work,” Ms. Liu said of her previous job, where she said she had little creative freedom, often worked overtime, and felt her mental and physical health deteriorating. “So I thought, there’s no need anymore.”

Ms. Liu is part of a phenomenon attracting growing attention in China: young people trading high-pressure, prestigious white-collar jobs for manual labor. The scale of the trend is hard to measure, but widely shared social media posts have documented a tech worker becoming a grocery store cashier; an accountant peddling street sausages; a content manager delivering takeout. On Xiaohongshu, an Instagram-like app, the hashtag “My first experience with physical labor” has more than 28 million views.

. . .

Around the world, the coronavirus pandemic spurred people to reassess the value of their work — see the “Great Resignation” in the United States. But in China, the forces fueling the disillusionment of young people are particularly intense. Long working hours and domineering managers are common. The economy is slowing, dimming the prospect of upward mobility for a generation that has known only explosive growth.

And then there were China’s three years of “zero Covid” restrictions, which forced many to endure prolonged lockdowns, layoffs and the realization of how little control their hard work gave them over their futures.

“Emotionally, everyone probably can’t bear it anymore, because during the pandemic we saw many unfair and strange things, like being locked up,” Ms. Liu said.

. . .

When Yolanda Jiang, 24, resigned last summer from her architectural design job in Shenzhen, after being asked to work 30 days straight, she hoped to find another office job. It was only after three months of unsuccessful searching, her savings dwindling, that she took a job as a security guard in a university residential complex.

At first, she was embarrassed to tell her family or friends, but she grew to appreciate the role. Her 12-hour shifts, though long, were leisurely. She got off work on time. The job came with free dormitory housing. Her salary of about $870 a month was even about 20 percent higher than her take-home pay before — a symptom of how the glut of college graduates has started to flatten wages for that group.

But Ms. Jiang said her ultimate goal is still to return to an office, where she hoped to find more intellectual challenges. She had been taking advantage of the slow pace at her security job to study English, which she hoped would help her land her next role, perhaps at a foreign trade company.

“I’m not actually lying flat,” Ms. Jiang said. “I’m treating this as a time to rest, transition, learn, charge my batteries and think about the direction of my life.”

For the full story, see:

Vivian Wang and Zixu Wang. “In China, Young Workers Ditch Prestige Jobs for Manual Gigs.” The New York Times (Tuesday, April 11, 2023): A1 & A11.

(Note: bracketed year added.]

(Note: the online version of the story has the same date as the print version, and has the title “In China, Young People Ditch Prestige Jobs for Manual Labor.”)

The title of this blog entry alludes to Ayn Rand’s novel:

Rand, Ayn. Atlas Shrugged. New York: Random House, 1957.

Opponents of Geoengineering View Global Warming as Nature’s Just Punishment of Us for Our Indulging in Technology and Capitalism

(p. A13) Make no mistake—Mr. Myhrvold is concerned about climate change.  . . .

He laments that policy makers largely scorn geoengineering—human interventions in the Earth’s natural systems to thwart or neutralize climate change.

. . .

Geoengineering is about “deliberately trying to reduce climate change.” Excess CO2 traps a little less than 1% of heat from the sun, “so if we could make the sun 1% dimmer, we could shut off climate change.” When Mount Pinatubo, a volcano in the Philippines, erupted in 1991, it lowered world-wide temperatures by 1 degree Celsius for about 18 months. Human-emitted particulate pollution has historically offset about 20% of human-emitted CO2. “Ironically,” he says, “the Clean Air Act made our air better but hurt climate change.”

The simplest solar-radiation management scheme, Mr. Myhrvold says, “is to emit particles in the stratosphere to mimic Mount Pinatubo. We invented a particularly elegant way to do this with balloons and a pipe to the sky.” By “we,” he means Intellectual Ventures, the company Mr. Myhrvold founded in 2000 after leaving Microsoft, where he spent 13 years and rose to the position of chief technology officer. Intellectual Ventures “creates, incubates and commercializes” new inventions.

“Marine cloud brightening” is another solar-related intervention. “The idea is to increase the number and size of low clouds that form over the oceans so that more incoming sunlight bounces back into space instead of heating the ocean.” Scientists have proposed a variety of ways to do this. One, which Mr. Myhrvold’s company has explored, is to outfit ships with equipment to spray seawater into the air as they traverse the ocean. “The salt particles can serve as nuclei for water vapor to condense into droplets, thus forming clouds.”

. . .

“Opponents worry that once you have geoengineering, people won’t make sacrifices to cut emissions. They want a sword of Damocles hanging over humanity as a means to force us to follow their ideology.”

Mr. Myhrvold uses an analogy he describes as “horrible in some ways.” When the AIDS epidemic hit, some people saw it as punishment from God. “Their attitude was, ‘This is what you get if you indulge in the practices we don’t approve of.’ ” In climate change, he says, this moralistic attitude takes the following form: “I don’t like aspects of our society, I don’t like technology, I don’t like capitalism, and this is nature’s retribution. And so we have to change the way we live.” Such beliefs “have become a very powerful disincentive, particularly for academic researchers.”

. . .

“You could imagine a world in which cardiology doesn’t exist because the medical profession said, ‘You fat bastards. You did it to yourselves. We’re not going to help you.’ ”

For the full interview, see:

Tunku Varadarajan, interview. “THE WEEKEND INTERVIEW; Emission Cuts Will Fail. What to Do Then?” The Wall Street Journal (Saturday, Feb. 18, 2023): A13.

(Note: ellipses added.)

(Note: the online version of the interview has the date February 17, 2023, and has the title “THE WEEKEND INTERVIEW; Emission Cuts Will Fail to Stop Climate Change. What to Do Then?”)

Local Chinese Governments Fund Bullet Trains and Green Spaces When People Want Higher Wages and Basic Bus Service

(p. B4) China is full of wasteful infrastructure that the government likes to brag about but that doesn’t serve the most urgent needs of the public.

The Chinese government likes to say the country has the longest and fastest high-speed railways in the world. But except for a couple of lines that connect the megacities of Beijing, Shanghai, Guangzhou and Shenzhen, most lines operate below capacity and at a great loss. About 80 percent of China’s high-speed railways constructed in the past decade were built in distant and poor regions, China State Railway Group said last year.

Zhao Jian, a professor at Beijing Jiaotong University, warned in an article that high-speed railways could become the “gray rhino” that crushed the Chinese economy because many local governments had taken on a lot of debt to build them. But most of those railways move people, not freight. So they would make sense only in densely populated areas where people were willing to pay more for speed.

Local leaders are interested in infrastructure projects because their economic payoff, while minimal, is immediate — people get construction jobs, and companies get building contracts. Such a short-term approach dominates in China’s political system, in which cadres are deployed to run toward the goal set by their leader regardless of the financial or human cost.

The Shangqiu government brags that there is about 150 square feet of green space for each of the 2.3 million residents in the city’s central municipal area. One of Shangqiu’s biggest infrastructure projects this year is a wetlands park. After building many roads to nowhere, local governments have been spending big on urban beautification projects in recent years.

It’s nice to have green space for everyone. But like most inland Chinese cities, Shangqiu isn’t wealthy. Its college graduates are complaining on social media that it’s difficult to find a job that pays more than $300 a month. Its basic pension provides its seniors with $17.80 a month, after a $1.50 raise this year.

Many Chinese people who are at least 60 years old live on pensions like this. According to official data, in 2021, $54 billion in basic pensions was distributed to more than 162 million people, or about $28 a person each month on average. The residents would probably prefer that the government spent on unemployment protection, bus service and welfare instead of high-speed railways and green space.

Shangqiu is far from an exception.

A resident in Pucheng, in the northwestern province of Shaanxi, complained on the local government’s online messaging board in February [2023] that there was no bus service between downtown and the railway station.

“This is the most basic public service,” the resident, who signed with the name Li Hongbo, wrote. “I felt that people’s livelihood has deteriorated. I hope the leaders can pay some attention to it.”

For the full commentary, see:

Li Yuan. “THE NEW NEW WORLD; China’s Cities Splurge and Debt Piles Up.” The New York Times (Wednesday, March 29, 2023): B1 & B4.

(Note: bracketed year added.)

(Note: the online version of the commentary has the date March 28, 2023, and has the title “THE NEW NEW WORLD; China’s Cities Are Buried in Debt, but They Keep Shoveling It On.”)

The Growing Pain of the Working-Class

Many of the working poor are indeed suffering. The solution is mainly to reduce government regulations, to allow a robustly redundant labor market and more opportunities for free-agent entrepreneurship. (See Openness to Creative Destruction.)

(p. 6) Ever since Bobbie Wert was 8 years old, her stomach has ached. “My tummy hurts,” was her refrain as a girl, and the discomfort was accompanied by vomiting and diarrhea that kept her out of school — sometimes for half the days in the school year.

Doctors poked and scanned but couldn’t figure out anything wrong. Over the years, they cut her open and removed bits and pieces yet couldn’t drive away the pain. So doctors prescribed opioids in increasing doses — even fentanyl patches — that left her addicted. At age 43, she now is off opioids but still suffers every single day, enduring chronic pain like an estimated 50 million other Americans.

Wert is part of a vast and mysterious panorama of pain that is increasing, sometimes with no obvious physical cause. And while chronic pain is a global problem, it is particularly puzzling in America. In other wealthy countries, it’s the elderly who report the most chronic pain, which makes some sense. But in the United States it’s the middle-aged — especially the jobless and people like Wert, who did not graduate from high school — who suffer the most. It is a plague on the less educated.

All this raises the question: Is this physical suffering a canary in the coal mine warning us of larger dysfunction in our society?

Here’s what we do know: Tens of millions of Americans are suffering pain. But chronic pain is not just a result of car accidents and workplace injuries but is also linked to troubled childhoods, loneliness, job insecurity and a hundred other pressures on working families.

. . .

“People’s lives are coming apart, and this leads to huge increases in physical pain,” said Angus Deaton, a Nobel Prize winner in economics who with Anne Case popularized the term “deaths of despair.” He, Case and Arthur Stone warn in a recent article that “the mystery of American pain reveals a warning for the future.”

Americans die from deaths of despair — drugs, alcohol and suicide — at a rate of more than a quarter-million a year, and the number of walking wounded is far greater.

For the full commentary, see:

Nicholas Kristof. “Why So Many Americans Are Feeling More Pain.” The New York Times, SundayOpinion Section (Sunday, May 7, 2023): 6-7.

(Note: ellipsis added. In the original last paragraph, the words “want” and “all” are in italics.)

(Note: the online version of the commentary has the date May 3, 2023, and has the title “Why Americans Feel More Pain.”)

The book by Deaton and Case alluded to above is:

Case, Anne, and Angus Deaton. Deaths of Despair and the Future of Capitalism. Princeton, N.J.: Princeton University Press, 2013.

Critique of Fed Claim That a Year of Above Average Temps Increases Odds of a Recession

(p. A17) . . . recently I published a critique of a study from the Federal Reserve Board claiming that a year of above-normal temperatures in countries around the world makes economic contraction more likely.

. . .

There are two main reasons why the Fed study appeared at first to show a statistically significant effect of temperatures on economic growth. First, each country in the sample had equal weight in the analysis. China had the same weight as St. Vincent though China’s population is 13,000 times as large. Equal weighting means that some small countries with unusual histories of economic growth greatly influenced the results.

The paper’s results disappeared when countries like Rwanda and Equatorial Guinea—which had economic catastrophes and bonanzas unrelated to climate change—were omitted. Omitting similar countries representing less than 1% of world gross domestic product was enough to eliminate the paper’s result. The complicated statistical techniques used in the Fed study magnified the influence of these unusual countries.

There’s a second reason why the Fed study appears to find that temperature affects growth: Many poor countries have warm climates. A warm climate doesn’t preclude economic growth, as is demonstrated by Florida, Arizona, Taiwan, Singapore and several Persian Gulf states. But the average poor country is warmer than the average rich country. Debate continues as to whether this correlation is random or causal, but the hypothesis of the Fed paper is that year-to-year increases in temperature reduce annual economic growth. The paper claims that its method controls for long-term differences in climate, but using simulated data I found that the Fed paper’s method can be fooled into finding an effect that doesn’t exist.

For the full commentary, see:

David Barker. “The Fed’s Climate Studies Are Full of Hot Air.” The Wall Street Journal (Monday, April 10, 2023): A17.

(Note: ellipses added.)

(Note: the online version of the commentary has the date April 9, 2023, and has the same title as the print version.)

Barker’s critique mentioned above is:

Barker, David. “Temperature and Economic Growth: Comment on Kiley.” Econ Journal Watch 20, no. 1 (March 2023): 69–84.