Responding to Negative Coverage of Negative Rates in the Financial Times

In this post, let me present a solution before more fully presenting a problem for negative interest rate policy that shows up in news articles such as the three Financial Times articles shown above.

The Solution

It is time for the next step in negative interest rate policy. Even without any change in paper currency policy, it is possible to go to quite deep negative rates if banks are compensated financially for the difficulty of having negative rates on small checking and saving accounts.

Central banks are quite attentive to the strains on bank profits that can result from commercial banks’ understandable reluctance to make rates negative in modest-sized checking and saving accounts. There are two main ways that they help banks financially to make up for that. The most common is to have some amount of reserves kept with the central bank that can earn a positive or zero rate even though reserves held with the central bank beyond that are subject to a negative rate. The other way central banks help commercial banks financially is by lending to them at below-market interest rates (under certain conditions).

I see the next step in negative interest rate policy as more explicitly tying the financial help central banks give to commercial banks under negative rate policy to the provision by those commercial banks of nonnegative rates to households’ small checking and savings accounts.

Here is how it might work. In “How to Handle Worries about the Effect of Negative Interest Rates on Bank Profits with Two-Tiered Interest-on-Reserves Policies” I write:

A “two-tiered system” in which a certain amount of deposits at the central bank get a zero interest rates and amounts above that get a lower interest rate seems hard to some of the ECB’s central bankers because that might hit banks harder in some countries than others. To me, the basic solution if a two-tiered system is desired is fairly straightforward: the two-tiered system should be designed to be equivalent to a subsidy to the deposit rates for household accounts below a certain size–say enough to provide a zero interest rate on an average balance over a month of 1000 euros worth of bank deposits per adult, for that adult’s main bank. (Those with more than one bank would have to designate one bank for this effective subsidy.) 

The value of tying the amount of deposits with the European Central Bank that a private bank can get zero interest rates on to the amount of household balances from accounts with 1000 euros or less is that this makes it natural for the private banks to pass on the negative interest rates to commercial and to the excess over 1000 euros in large accounts (which is helpful for transmission of the effects of the negative interest rates) while small household account are shielded from the negative interest rates (which is helpful politically). And it is easy enough to understand the rule and its intent that banks will be able to explain why they need to transmit negative interest rates to those with large accounts. (Of course, the cutoff could be set at some other level than 1000 euros, if desired.) And this policy is fully consistent with keeping bank profits unharmed by negative interest rates as long as they do pass on negative interest rates to large accounts and commercial accounts as they are supposed to.  

Experience in Switzerland, Denmark and Sweden suggests that the more sophisticated bank customers who have large accounts or have commercial accounts adjust quickly to negative interest rates after a few weeks of bitter complaining. The objective of a two-tiered system is to have negative interest rates prevail generally in the markets, but shield from negative interest rates those who are the least able to understand negative interest rates and perhaps to accomplish a bit of redistribution as well–though clearly not redistribution toward the poorest of the poor, who may not have bank accounts at all. 

I expand on this in “Ben Bernanke: Negative Interest Rates are Better than a Higher Inflation Target”:

I have advocated arranging part of the multi-tier interest on reserves formula to kill two birds with one stone: not only support bank profits but also subsidize zero interest rates in small household accounts at the same time–the provision of which is an important part of the drag on bank profits as it is now. I think being able to tell the public that no one with a modest household account would face negative rates in their checking or saving account would help nip in the bud some of the political cost to central banks.

To avoid misunderstanding, it is worth spelling out a little more this idea of using a tiered interest on reserves formula to subsidize provision of zero interest in small household checking and savings accounts. To make it manageable, I would make the reporting by banks entirely voluntary. The banks need to get their customers to sign a form (maybe online) designating that bank as their primary bank and giving an ID number (like a social security number) to avoid double-dipping. In addition to shielding most people from negative rates in their checking and savings accounts, this policy also has the advantage of setting down a marker so that it is easier for banks to explain, say, that amounts above $1500 average monthly balance in an individual checking+saving accounts or a $3000 average monthly balance in joint couple checking+saving accounts would be subject to negative interest rates. That is, the policy is designed to avoid pass-through of negative rates to small household accounts but encourage pass-through to large household accounts, in a way that reduces the strain on bank profits.

Ruchir Agarwal and I expand on this even further in our IMF Working Paper “Enabling Deep Negative Rates to Fight Recessions: A Guide” in the subsection “Using the Interest on Reserves Formula to Subsidize Zero Rates for Small Households.” Here is the text of that subsection, in full:

The bank profitability problem arises in large measure from the difficulty banks face in passing on negative rates to their small retail depositors, which squeezes net interest margins. Experience with negative interest rates in Switzerland, Sweden, Denmark, and the eurozone indicates that as rates are cut below zero, negative interest rates are not immediately passed through to the small-scale bank accounts held by the typical household.

Banks are likely to make a distinction in their strategy towards legacy customers and hot-money customers. Legacy customers with de facto loyalty to a given bank are a long-run source of profits; if their accounts are not too large, shielding them from modest negative interest rates may not cost that much and may be worth a lot in not alienating them. Hot-money customers have little loyalty; the fact that they take advantage of a bank’s above-market zero deposit rate today doesn’t mean they will be there generating profits next year. So, there is relatively little lost from making new customers who are more likely to be hot-money customers face negative deposit rates. In addition, customers who have very large accounts are expensive to give a zero deposit rate in a negative rate environment. Moreover, those who are most expensive to give an above-market rate to tend to be more sophisticated and so less likely to quit a bank out of sheer emotional pique over negative rates. The upshot is that in an environment of negative interest rates, banks may shield most retail depositors (but not large, sophisticated depositors) from negative rates. Shielding retail depositors from negative rates may hurt banks’ profitability.

The bank profitability problem can be readily handled by transferring funds to banks when necessary, using existing central banking tools. For example, several central banks have already been doing this using a tiered interest-on-reserves formula. Danmarks Nationalbank has a negative interest rate on its certificates of deposit (CDs) but allows banks to place amounts up to a certain limit in their current account at a zero interest rate. The current account limit is set low enough to ensure transmission from the CDs to the money-market rates. The Swiss National Bank (SNB) allows a similar exemption from negative interest rates on any amount of deposits a bank holds below an exemption threshold. The SNB sets the exemption threshold at twenty times the minimum reserve requirements in reporting period 2014, minus the net increase in cash holdings since then. The Bank of Japan (BoJ) uses a three-tier system: reserves up to a certain balance earn 0.1 percent (basic balance), the next tier earns 0 percent (macro-add on), while the rest is subject to negative interest rates (policy-rate balance).

As mentioned above, another tool that has been used to transfer funds to banks is the European Central Bank’s negative lending rate through its targeted longer-term refinancing operations (TLTROs). Under TLTRO II, banks are able to borrow at the deposit facility rate (-0.4 percent) up to a limit, as long as they meet certain benchmarks for lending targets.

Building on these precedents, we recommend that central banks pursuing any approach to negative interest rate policy—including the clean approach—use the interest-on-reserves formula to subsidize banks in providing zero rates to small household deposit accounts. For example, a two-tiered system could be designed to be equivalent to a subsidy to the deposit rates for household accounts below a certain size–say enough to provide a zero interest rate on an average balance over a month of, say, 5000 euros for a couple or 2500 euros for an individual, for an adult’s main bank. Such a system could be based on fully voluntary reporting by banks after individuals voluntarily sign up to get the subsidy. (Those with more than one bank would have to designate one bank for this effective subsidy.) Rogoff (2016) has advocated similar mechanisms to shield small depositors from negative rates.

We see four virtues to tying the amount of deposits with the central bank that a private bank can get zero interest rates on to the amount of household balances up to a given per-adult limit:

  1. It takes care of the bank profitability problem, or the bulk of the bank profitability problem.

  2. The limit defining what amounts of money are over the limit provides a marker for banks in explaining to customers that large accounts will have the over-the-limit amount subject to negative interest rates. This should make pass-through to large accounts a bit easier for the banks.

  3. Being able to get zero interest rates on small-scale deposit accounts should reduce the incentive for households to do small-scale paper currency storage.

  4. Avoiding negative interest rates on small deposit accounts avoids a potential political problem for the central bank. Because this would also be a customer relations problem for the commercial banks, the central bank should be able to rely on the commercial banks to avoid negative deposit rates as long as those banks can do so without hurting the bottom line. The subsidy through the interest-on-reserves formula ensures that banks can provide zero rates for small deposit accounts without hurting their bottom line.

If (i) the central bank is successful at avoiding massive paper currency storage, with its attendant disintermediation (a key objective in most of the policies discussed in this paper) and (ii) the central bank subsidizes the provision of zero rates to small deposit accounts, banks should only have a profitability problem if they fail to pass on negative rates to those with large deposit accounts. Fortunately, experience in Switzerland, Denmark, and Sweden suggests that the more sophisticated bank customers who have large accounts or have commercial accounts adjust quickly to negative interest rates after a few weeks of bitter complaining. The objective of a two-tier system is to have negative interest rates prevail generally in the markets, but shield from negative interest rates those who are the least able to understand negative interest rates—and perhaps to accomplish a bit of redistribution as well

(though clearly not redistribution toward the poorest of the poor, who may not have bank accounts at all).

[The following is the footnote at the end of the subsection:] Note that worrying about redistribution per se is typically not a mandated central bank objective in the context of monetary policy. Monetary policy actions do have redistributive effects. For example, there has been criticism of the regressive redistributive effects of quantitative easing (QE). By contrast, the policies proposed here do not present such concerns—and in fact have the opposite impact by redistributing towards lower-income households (although not redistribution towards the poorest of the poor, who may not have bank accounts at all.)

The Problem

This post is mainly about the bank profits problem, but I should mention the other two problems raised by negative interest rate policy, the paper currency problem and the political problem.

Martin Arnold’s September 4, 2019 article “ECB set to consider damage done by negative rates” has this to say about the paper currency problem:

Even if it launches these mitigation measures, some analysts believe the ECB is rapidly approaching the point at which the economics shift in favour of hoarding cash.

Klaus Wiener, chief economist at the German Insurance Association, said one insurer had recently been quoted a price for storing its cash of 0.2 per cent of its value, including insurance — half the cost of the ECB’s deposit rate.

There is some evidence that hoarding has already started. The amount of physical cash held in vaults and safes has swelled 57 per cent to €81.5bn since negative rates were introduced five years ago, ECB data shows — though that remains tiny compared to the over €6tn in eurozone bank deposits.

I doubt this quote of a 1/5 % all-in per year storage cost for paper currency is accurate, or we would likely see much more paper currency storage in the euro zone than we do see. If the ECB did see a more serious rise in paper currency storage, it could inhibit it with a version of the policy the Swiss National Bank and the Bank of Japan use: arranging the interest on reserves formula to penalize commercial banks that make net withdrawals of paper currency at the central bank’s cash window.

Leaving aside the political opposition of banks, which can be muted by anything that solves the bank profits problem, Richard Milne and Martin Arnold’s February 19, 2020 article “Why Sweden ditched its negative rate experiment” has this to say about the political problem:

One of the reasons the Riksbank gave for its decision to end negative rates was that the public struggled to understand the policy and thought it “strange”. 

Lack of understanding can certainly contribute to the political flak a central bank will get from negative interest rate policy. (To help people understand, I have a children’s story about negative interest rate policy.)

“Why Sweden ditched its negative rate experiment” also recounts Isabel Schnabel’s efforts to deal with the political problem:

Isabel Schnabel, a German economist who recently joined the ECB board, says that criticism of its monetary easing policies in her country “is all too often combined with claims and accusations that have no basis in fact”. While the average German saver is €500 out of pocket because of negative rates, Ms Schnabel says an average borrower is €2,000 better off and the overall gains outweigh the losses, with Berlin saving billions of euros on interest payments. 

On the bank profits problem, Clair Jones lays out the perspective of banks in her April 3, 2019 article “Draghi’s ECB tackles negatives of contentious interest rate policy”:

ECB president Mario Draghi pushed the world’s leading central banks into uncharted territory in 2014 when the eurozone deposit rate — what commercial banks pay to hold money at the ECB — went negative. Further cuts have pushed the rate to minus 0.4 per cent since 2016, part of a policy to spur banks to lend money rather than sit on it. Banks were dismayed at what has been in effect a tax on their activities, which ECB insiders say amounts to €7.5bn a year.

Similarly, in “ECB set to consider damage done by negative rates” Martin Arnold writes:

Critics say that negative rates weaken the eurozone’s already struggling banking system, discouraging lending and motivating insurers, banks and savers to hoard physical cash. Volker Hofmann at the Association of German Banks said eurozone lenders pay €7.5bn a year in negative rates on the excess deposits they hold at the ECB, adding: “It is a remarkable burden for banks who find it more or less impossible to convey this cost to retail savers.”

And in “Why Sweden ditched its negative rate experiment” Richard Milne and Martin Arnold write:

Eurozone banks say they have paid €25bn in negative rates to the ECB since it cut rates below zero in June 2014, eating into their already weak profits. 

…

The Association of German Banks said in a recent report that negative rates had cost eurozone lenders a total of €25bn since they were introduced. “This burden is depressing the profitability of the banks and will ultimately even constrain their lending capacity,” it warned. 

The same article mentions Markus Brunnermeier and Yann Koby’s paper with its brilliant title for marketing purposes: “The Reversal Interest Rate.” Richard and Martin write:

Much of the debate about negative rates hinges on the idea of a “reversal rate” below which lending activity by banks is subdued and starts to fall. 

Research published last year by Princeton University economists Markus Brunnermeier and Yann Koby found that many of the benefits of negative rates are front-loaded — such as gains in asset prices on bank balance sheets — while the corrosive side-effects last longer. 

The idea of a “reversal rate” beyond which interest rate cuts are contractionary is simply a theoretical restatement of the bank profits problem. (See “Markus Brunnermeier and Yann Koby's ‘Reversal Interest Rate’.”) If a central bank did nothing to address the bank profits problem, then at some point further interest rate cuts would weaken banks enough to be counterproductive. Fortunately, real-world central banks are quite attentive to the bank profits problem.

Tiered Interest on Reserves and Below-Market-Rate Lending as Remedies to the Bank Profits Problem. So far, the two main central bank policies to deal with the bank profits problem are tiered interest-on-reserves formulas and lending to commercial banks at below-market rates. Let’s look at both of them.

Claire Jones writes this in “Draghi’s ECB tackles negatives of contentious interest rate policy”:

One consideration is a three-tiered system, with part of each bank’s deposits at the ECB paying zero interest, and another portion attracting a positive rate.

…
A change to a tiered system on deposit rates would help him to win the argument for changing forward guidance from council members such as Mr Villeroy de Galhau, who are concerned that keeping expansionary monetary policy in place for so long will harm the region’s banks, already under pressure from sluggish growth.

…

Frederik Ducrozet, of Pictet Wealth Management, said Mr Draghi and other ECB doves, with the tacit support of Mr Villeroy de Galhau, appeared to be laying the ground for a change. “This does look like a mini coup,” he said. “[They are] forcing a discussion …Come September, if for some reason the ECB needs to extend forward guidance, a tiered reserves system is likely to emerge as an option to mitigate the cost of negative rates.”

In “ECB set to consider damage done by negative rates” Martin Arnold writes:

Christine Lagarde, who is set to succeed Mr Draghi at the helm of the ECB, last week said that “while I do not believe that the ECB has hit the effective lower bound on policy rates, it is clear that low rates have implications for the banking sector and financial stability more generally”.

The ECB should “closely monitor whether adverse side effects may emerge in the future, the longer low interest rates are in place”, she added.

…

One option is a tiering system in which a portion of banks’ excess deposits are exempt from negative rates. Other countries with negative deposit rates, including Switzerland, Denmark and Japan, have similar systems. And the ECB has another option: subsidised lending.

There is a geographical difference between the effects that these two mitigating measures have across Europe. Tiering is likely to provide more relief to German, French and Dutch banks, which hold more excess deposits; cheap loans help southern European banks, which have higher funding costs.

Why There Is a Bank Profits Problem. Since banks live on spreads (differences between interest rates), they wouldn’t be a bank profits problem if all interest rates went do in tandem, with spreads unaffected. And indeed, declines in interest rates—including declines in the negative region—tend to result in net capital gains because banks have long-term assets and short-term liabilities. So what is the problem? It is that rates on bank deposits such as checking and savings accounts may not go down smoothly. Evidence suggests that the bank profits problem is more severe for banks that rely heavily on retail deposits as a source of funds. Here, from “ECB set to consider damage done by negative rates”:

Research published last month by economists from the US Treasury department, the University of Bath, the University of Sharjah and Bangor University found “robust” evidence that bank lending growth was weaker in countries with negative rates.

The impact was greatest on banks funded mainly by retail deposits, they said. It has become more common for European banks to charge fees for current accounts, but they only mitigate a fraction of the extra cost of negative rates.

It is important to realize that the stickiness of retail deposit rates at zero is worse for small accounts. Richard Milne and Martin Arnold write in “Why Sweden ditched its negative rate experiment”:

Negative rates turn the principles of finance on their head by forcing commercial banks to pay to store money at the central bank rather than earn interest on it. At the same time, some countries and companies have been paid to borrow. Most recently, some individuals across Europe have begun paying to deposit large sums of money in banks, while mortgage borrowers in Denmark have received money from their house loans rather than having to pay interest. 

There is a way to make this stickiness of retail deposit rates worse. From the same article:

Olaf Scholz, Germany’s finance minister, said recently that he would examine whether it was possible to protect savers by banning banks from passing on the cost of what he called the ECB’s “penalty rates”.

By contrast, if banks are given an incentive to maintain nonnegative deposit rates for small savers in a way that supports bank profits, as I discuss in the first half of this post, Olaf Scholz can get a big chunk of what he wants without worsening the bank profits problem.

How the Paper Currency Problem Contributes to the Bank Profits Problem. Note that an important part of banks’ reluctance to lower retail deposit rates comes from their fear that small depositors would simply use paper currency instead of putting their money in the bank. Lowering the rate of return on paper currency is a good way to combat this. But trying to make sure that banks continue to provide nonnegative rates to small checking and saving accounts can also combat this. Paper currency is convenient in small amounts, but becomes less convenient for large sums of money. And the government has miscellaneous ways to discourage massive paper currency storage by the very wealthy or by large organizations. So getting those with small amounts of money to keep much of their money in the bank is an important win in the effort to avoid excessive paperization of the economy.

Note that I have written extensively on how in practice to lower the rate of return on paper currency. See “How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide” for an organized bibliography.

Answering Two Other Attacks on Negative Interest Rate Policy.

Beyond the genuine problems raised by paper currency policy—the bank profits problem, the paper currency problem and the political problem—there are problems blamed on a central bank’s use of negative interest rates that are either (a) arguments against any interest rate cut, even in the positive region, or (b) pointing to problems arising from the decline in the long-run natural interest rate, which is beyond central banks’ control.

One of the most important arguments against interest rate cuts in general, even when they are needed to fight a recession, is that they might cause asset bubbles. For example, Richard Milne and Martin Arnold write in “Why Sweden ditched its negative rate experiment”:

Another risk from negative rates is that they inflate asset price bubbles, while also keeping alive zombie companies that without cheap money would collapse. In Sweden, the big concern has been the housing market, with Mr Ingves repeatedly issuing warnings about record levels of household debt. 

A series of measures to make mortgages harder to access have eased Swedish fears.

I have written several responses to this concern about asset bubbles:

One key problem caused by the decline in the long-run natural interest rate is the greater difficulty people have in saving for retirement—often pointed out by pension funds that have the responsibility of helping people save for retirement. This is a genuine problem, one I am very concerned about for my personal retirement saving. But it is a problem beyond the power of a central bank to affect—other than by avoiding the downward drag on long-term rates from long-lasting negative output gaps. Here is some of what I have written on this issue:

Conclusion

As a central bank goes to deeper negative rates, at some point it will have to address the paper currency problem—at least by penalizing commercial banks for withdrawing extra paper currency at the cash window as the Swiss National Bank and the Bank of Japan do, and ideally be taking paper currency temporarily off par, as I have long advocated as a key measure in the monetary policy toolkit. But as I say in “What is the Effective Lower Bound on Interest Rates Made Of?” it is currently worries about the bank profits problem—not the paper currency problem directly—that is most inhibiting central banks at negative rates from using deeper negative rates.

Using the interest-on-reserves formula to give banks incentives to provide nonnegative rates for small checking and saving accounts and keep banks from suffering for doing so is a way to take care of by far the biggest piece of the bank profits problem and help a great deal with the political problem at the same time. If there are headlines about negative deposit rates for regular people it is an unforced error for a central bank. They should get out ahead of any such headline by volunteering that they have a policy to encourage banks to avoid negative rates for small accounts.

The Federalist Papers #7 A: Divided, the States Would Fall into Territorial Disputes Likely to Lead to War Between the States—Alexander Hamilton

Image Source: “Alternate History Weekly Update”Link to the full text of the Federalist Papers #7

Image Source: “Alternate History Weekly Update”

Link to the full text of the Federalist Papers #7

In the first half of the Federalist Papers #7, Alexander Hamilton makes one of the most persuasive arguments for a particular counterfactual history that I have seen. He argues that if the Union dissolved into separate groups of states, territorial disputes over western territories would be severe, and could easily lead to war. One reason this is so persuasive is that 73 years later, disputes over which states would be slave territories and which would be free territories did in fact lead to civil war. If disputes over whether territory was “slave” or “free” led to civil war, it is not hard to believe that disputes over full ownership of western territory by initially eastern states could have led to war. And those dispute probably would have come to a head much earlier than the actual American Civil War in 1860.

See if you aren’t persuaded by Alexander Hamilton’s argument. Here is the full text of the first half of the Federalist Papers #7:

|| Federalist No. 7 || 

The Same Subject Continued: Concerning Dangers from Dissensions Between the States
For the Independent Journal.

Author: Alexander Hamilton

To the People of the State of New York:

IT IS sometimes asked, with an air of seeming triumph, what inducements could the States have, if disunited, to make war upon each other? It would be a full answer to this question to say--precisely the same inducements which have, at different times, deluged in blood all the nations in the world. But, unfortunately for us, the question admits of a more particular answer. There are causes of differences within our immediate contemplation, of the tendency of which, even under the restraints of a federal constitution, we have had sufficient experience to enable us to form a judgment of what might be expected if those restraints were removed.

Territorial disputes have at all times been found one of the most fertile sources of hostility among nations. Perhaps the greatest proportion of wars that have desolated the earth have sprung from this origin. This cause would exist among us in full force. We have a vast tract of unsettled territory within the boundaries of the United States. There still are discordant and undecided claims between several of them, and the dissolution of the Union would lay a foundation for similar claims between them all. It is well known that they have heretofore had serious and animated discussion concerning the rights to the lands which were ungranted at the time of the Revolution, and which usually went under the name of crown lands. The States within the limits of whose colonial governments they were comprised have claimed them as their property, the others have contended that the rights of the crown in this article devolved upon the Union; especially as to all that part of the Western territory which, either by actual possession, or through the submission of the Indian proprietors, was subjected to the jurisdiction of the king of Great Britain, till it was relinquished in the treaty of peace. This, it has been said, was at all events an acquisition to the Confederacy by compact with a foreign power. It has been the prudent policy of Congress to appease this controversy, by prevailing upon the States to make cessions to the United States for the benefit of the whole. This has been so far accomplished as, under a continuation of the Union, to afford a decided prospect of an amicable termination of the dispute. A dismemberment of the Confederacy, however, would revive this dispute, and would create others on the same subject. At present, a large part of the vacant Western territory is, by cession at least, if not by any anterior right, the common property of the Union. If that were at an end, the States which made the cession, on a principle of federal compromise, would be apt when the motive of the grant had ceased, to reclaim the lands as a reversion. The other States would no doubt insist on a proportion, by right of representation. Their argument would be, that a grant, once made, could not be revoked; and that the justice of participating in territory acquired or secured by the joint efforts of the Confederacy, remained undiminished. If, contrary to probability, it should be admitted by all the States, that each had a right to a share of this common stock, there would still be a difficulty to be surmounted, as to a proper rule of apportionment. Different principles would be set up by different States for this purpose; and as they would affect the opposite interests of the parties, they might not easily be susceptible of a pacific adjustment.

In the wide field of Western territory, therefore, we perceive an ample theatre for hostile pretensions, without any umpire or common judge to interpose between the contending parties. To reason from the past to the future, we shall have good ground to apprehend, that the sword would sometimes be appealed to as the arbiter of their differences. The circumstances of the dispute between Connecticut and Pennsylvania, respecting the land at Wyoming, admonish us not to be sanguine in expecting an easy accommodation of such differences. The articles of confederation obliged the parties to submit the matter to the decision of a federal court. The submission was made, and the court decided in favor of Pennsylvania. But Connecticut gave strong indications of dissatisfaction with that determination; nor did she appear to be entirely resigned to it, till, by negotiation and management, something like an equivalent was found for the loss she supposed herself to have sustained. Nothing here said is intended to convey the slightest censure on the conduct of that State. She no doubt sincerely believed herself to have been injured by the decision; and States, like individuals, acquiesce with great reluctance in determinations to their disadvantage.

Those who had an opportunity of seeing the inside of the transactions which attended the progress of the controversy between this State and the district of Vermont, can vouch the opposition we experienced, as well from States not interested as from those which were interested in the claim; and can attest the danger to which the peace of the Confederacy might have been exposed, had this State attempted to assert its rights by force. Two motives preponderated in that opposition: one, a jealousy entertained of our future power; and the other, the interest of certain individuals of influence in the neighboring States, who had obtained grants of lands under the actual government of that district. Even the States which brought forward claims, in contradiction to ours, seemed more solicitous to dismember this State, than to establish their own pretensions. These were New Hampshire, Massachusetts, and Connecticut. New Jersey and Rhode Island, upon all occasions, discovered a warm zeal for the independence of Vermont; and Maryland, till alarmed by the appearance of a connection between Canada and that State, entered deeply into the same views. These being small States, saw with an unfriendly eye the perspective of our growing greatness. In a review of these transactions we may trace some of the causes which would be likely to embroil the States with each other, if it should be their unpropitious destiny to become disunited.

How to Fight Global Warming

I have run into a surprising number of people who think global warming has a good chance of causing an apocalypse that will destroy the world as we know it within the next few decades. I think that unlikely. We should be very concerned about the small chance that Earth could become like Venus, but in the long history of the Earth it has been very warm before, and it is not that likely that things will go completely off the rails this time.

Some of the biggest harms of global warming and the rise in atmospheric carbon dioxide riving global warming are likely to be:

  1. effects on the ocean, including acidification

  2. a combination of rising oceans and local climate changes that drives mass migrations that lack of sympathy for desperately poor “economic migrants” is likely to turn into humanitarian catastrophes

  3. extinctions of many species

(Let me know what I forgot.)

Economists tend to favor a “carbon tax” on carbon dioxide emissions as a highly efficient and effective way to slow global warming. This kind of tax can also be applied to methane leaked into the atmosphere. Atmospheric methane is a powerful greenhouse gas, but also much, much shorter-lived than atmospheric carbon dioxide.

In their working paper “Making Carbon Taxation a Generational Win Win,” Larry Kotlikoff, Felix Kubler, Andrey Polbin, Jeffrey Sachs, and Simon Scheidegger argue that because many of the benefits of slowing global warming accrue to future generations, it is appropriate to rack up additional national debt—that future generations would have to deal with—if those funds are used to slow global warming.

Here is my favorite version of compensating the current generations for their efforts to reduce carbon dioxide emissions. I think once enacted, it could solidify political support for fighting global warming. Give all adult citizens an equal amount of transferable “carbon tax equities,” with additional equities created to give to children who reach age 18. These carbon tax equities would distribute the proceeds of carbon taxes in proportion to carbon tax equity holding. They would become worthless if carbon taxes were ever reduced to zero. So those who had bought up a lot of carbon tax equities would lobby strenuously against carbon taxes being reduced to zero, and could rightly claim it was unfair to do so when they had purchased the carbon tax equities under the expectation that there would be carbon taxes. Being given assets of substantial value, backed by carbon taxes for many years to come also makes it easier for people to finance an education or the purchase of a home.

Creating assets that help solidify a political settlement has important precedents. Alexander Hamilton argued (successfully) for the assumption of state debts by the new federal government because it would give bondholders a stake in the success of the new federal government. The Meiji government gave samurais “samurai bonds” to compensate them for their samurai stipend being cut off and allowed those samurai bonds to be used to capitalize banks. (There is a working paper on this: “Swords into Bank Shares: Finance, Conflict, and Political Reform in Meiji Japan,” by Saumitra Jha, Kris Michener and Masanori Takashima.)

What if we can’t get carbon taxes enacted in enough countries? In the Q&A after presenting “Making Carbon Taxation a Generational Win Win” at the 2019 North American Summer Meetings of the Econometric Society, Larry Kotlikoff said something fascinating: stopping the burning of coal alone can get one most of the way toward the benefits of an ideal carbon tax. Why is coal so bad? When combined with oxygen in the air by burning, every atom of carbon has the potential to make a molecule of carbon dioxide, and coal is almost entirely carbon atoms. By contrast, natural gas is mostly methane, CH4, which has four atoms of hydrogen for every atom of carbon. Oil is also a hydrocarbon, though it has a higher carbon to hydrogen ratio. The hydrogen atoms generate a lot of energy when combined with oxygen to form H2O: water. So there is a lot of energy from natural gas that isn’t coming from the carbon in it. In any case, burning coal is very, very bad—worse than burning natural gas, oil or other hydrocarbons. An international agreement to quit building coal power plants and to begin to phase out the existing coal plants would be a huge step forward for slowing global warming—a much, much bigger step than any international agreement so far to try to deal with global warming.

The horror of coal has an important implication for environmental activists: demonizing coal would do more than almost anything else they could do to save the planet. In my view, demonizing coal is quite possible if environmental activists focus on this goal. Inevitably if one tries to get across a dozen messages, each of those messages loses some punch. They can get lost among all the other messages. But if the horror of coal became the main message, I think people would remember. Demonizing coal seems quite doable because coal looks dirty. That is, coal is not only bad, it looks bad.

(I am not a big hashtag user on Twitter, myself but there are many tweets that bear the hashtag #killcoal. Here are some of my tweets with the words “Kill coal.”)

For those who are worried about apocalypse during their lifetime, let me give one more word of reassurance. climate engineering such as aerosols to block some fraction of sunlight may have bad side effects, but in a pinch they are quite doable. (See the Wikipedia article “Climate engineering.”) The cost is relatively modest. Moreover, unlike restraining carbon dioxide emission, for which it is crucial to get most nations on board, since a few big nations can emit a lot of carbon dioxide, climate engineering can be done unilaterally by one nation without any need of getting other nations on board. Bad things will happen in the world in the future, and many of those bad things in the future may result from global warming, but I think nuclear holocaust is a much more likely route to true “end-of-the-world”ish apocalypse than global warming.

Update, April 4, 2020: One of my students had some important questions about this post. Let me put my answers down on paper here.

First, what is an example of what I talk about in this passage?

... because many of the benefits of slowing global warming accrue to future generations, it is appropriate to rack up additional national debt—that future generations would have to deal with—if those funds are used to slow global warming.

The simplest case would be if some type of government purchases—say research spending—is important for slowing global warming. 

But what if a carbon tax is the main tool for stopping global warming? Then giving the current generation carbon tax rebates that are bigger than the current revenue from the carbon tax would be an example of racking up government debt to make it all a good deal for the current generation as well as for future generations. My proposal of carbon tax equities is in this spirit. 

Let me explain the carbon tax equities. "Equity" simply means something that works like a stock. Stock gives you ownership of a slice of a company's profits. Carbon tax equities are pieces of paper that give you a slice of carbon tax revenue. Just like stock, if you want, you can sell your rights to your future slice of carbon tax revenue. My idea is that the current generation gets the carbon tax equities. The value of these carbon tax equities is greater than the value of all the carbon taxes the current generation will pay, since the carbon tax equities include the value of carbon taxes future generations will pay. So the current generation is getting more back than it pays. This is arguably fair to future generations because they get a non-destroyed planet—it is in the interest of future generations to compensate/bribe the current generation to slow global warming. 

Fasting Before Feasting

Suppose you are concerned about your weight and have a time of feasting coming up: a holiday, friends or family coming to town, or as I do, a retreat that will have a lot of good food. Suppose also that you have had a good experience with fasting in general, heeding all of the cautions about fasting that I repeat at the beginning of my post “Increasing Returns to Duration in Fasting.” (By “fasting,” I mean not eating food, but continuing to drink water.) Is it better to fast before feasting or fast after feasting? The answer is “Fasting before feasting is better,” and follows from an interesting logic.

In “Increasing Returns to Duration in Fasting” I write:

I theorize that when you end your fast and resume eating, you will have an enhanced appetite in order to replenish your glycogen stores. By contrast, I think of the amount of body fat having a weaker effect on appetite.

Everything I say from here on is predicated on that theory. If the body’s desire to replenish glycogen stores enhances appetite after a sustained period of fasting, then it will feel natural to eat somewhat more than usual after a period of fasting. Thus:

  • If you fast right before a time when you were planning to feast anyway, that isn’t extra at all.

  • But if you fast after feasting, then you will have an additional period when you are like to eat extra after your fast. That would be over and above the feast before your fast.

So, if your appetite is enhanced by the body’s desire to replenish glycogen stores after a fast, you will probably end up at a lower weight if you time that extra appetite to coincide with the feasting that you were going to do anyway instead of having that extra appetite come later, when it is likely to lead to an additional time of heavy eating.

Another totally equivalent way of looking at things that will make more sense if you read “Increasing Returns to Duration in Fasting” is that if you time a fast so it comes before a time of feasting you were going to do anyway, you escape the “fixed cost” of a period of fasting coming from the extra appetite to rebuild glycogen stores after your fast is over. In saying this, I am using the calories in/calories out identity, but treating calories in as something highly endogenous that depends on your appetite. And I am assuming that you are eating low on the insulin index so that calories out don’t change much while you are fasting. (See “Forget Calorie Counting; It's the Insulin Index, Stupid.”)

Note that eating low on the insulin index leaving calories out at a normal level is closely related to eating low on the insulin index making fasting easy: if your body were trying to reduce calories out it would likely make you feel sluggish at best and truly crummy at worst, which is no fun. But if your body is expending just as many calories as normal, you have a good chance of feeling fine during fasting, at least once you have adapted to the new way of eating when you do eat. (See “David Ludwig: It Takes Time to Adapt to a Lowcarb, Highfat Diet.”)

For annotated links to other posts on diet and health, see:

A Thumbnail History of Mormonism from When It Became a Going Concern to Utah Statehood

Other than the initial founding years of Mormonism, Alex Beam’s February 21 2020 Wall Street Journal book review of Benjamin Park’s Kingdom of Nauvoo does a great job of boiling down 19th-century Mormon history down. All to many people don’t know this fascinating story. Let me arrange key quotation from Alex into chronological order to give you the sketch:

  1. Joseph Smith fled [Kirtland, Ohio] in the dead of night after his “anti-bank bank,” called the Kirtland Safety Society, collapsed, impoverishing both Mormon and gentile investors.

  2. Nauvoo, where the Mormons sought shelter after fleeing Ohio and Missouri, was yet another place where the church came to grief. 

  3. The Mormons’ sojourn in Nauvoo, Ill., along the banks of the Mississippi River, is one of the grand, underappreciated sagas in American history. In just six years, the Latter-day Saints, as they called themselves—guided by their charismatic, bumptious leader, Joseph Smith—built a thriving metropolis in a mosquito-infested swamp that grew to be bigger than Chicago.

  4. Not only did Smith confect a vibrant city from a swamp; he conjured up many of Mormonism’s best known, and most notorious, doctrines in just a few years. In Nauvoo, he introduced “vicarious baptisms” of the dead, a rite that Mormons practice to this day, even on deceased gentiles, their term for non-Mormons. He also devised the “endowment” ritual to initiate members—featuring a re-enactment of the Adam and Eve story from the Book of Genesis—and it is still performed in Mormon temples.

    It was in Nauvoo that Smith introduced and practiced the most controversial teaching of all: polygamy. By 1846, just three years after his secret “revelation” calling for plural marriage, about 200 men and 700 women had multiple spouses.

  5. Mr. Park exploits new material on Smith’s so-called Council of Fifty, a secret, all-male committee whose remit was to support his wackadoodle presidential campaign of 1844. Oh, yes, and “to rule the world,” as Mr. Park summarizes its grand ambition. The church kept the council’s minutes under lock and key for 172 years, until 2016. Why? Probably, in part, because they were seditious. The Council of Fifty was to be a theocratic “shadow government,” Mr. Park says, with a “new form of divine governance.” The council appointed a committee to draft a new constitution for the putative “Aristarchy,” a government by “the wisest & best,” in Smith’s phrase.

    Another reason for concealing the council’s minutes for so long might have been its sheer ridiculousness, painful to a faith that wants its history to be taken seriously. The idea that Smith “plotted to take over American politics” and set himself up as “king of God’s empire,” as Mr. Park puts it, testifies to Smith’s manic digressions during the Nauvoo period. More than once, Mr. Park uses the adjective “reckless” to describe Smith’s actions.

  6. Aggrieved by the Mormons’ political machinations and shocked by reports of widespread polygamy, the anti-Mormon “old settlers” of western Illinois murdered Smith in 1844 and drove his followers out of Illinois two years later.

  7. When the mortally wounded Smith—injured by gunshots, pursued by a mob—plummeted from his second-story cell window at the Carthage, Ill., jail, … Smith “raised his arms in the Masonic sign of distress.” His last words were “O Lord my God . . . ”—the beginning of the Masonic call for help. (“O Lord my God is there no help for the widow’s son?”)

  8. After Smith’s death, his successor, Brigham Young, led 15,000 Latter-day Saints westward to a manifest destiny in the Great Salt Lake Basin. As Mr. Park explains it, the embittered Mormons abandoned the American experiment and fled to the then-quite-wild West, “outside America’s control.”

  9. … the Mormon hegira to Utah was a secession that worked, decades before the bloody, failed attempt by the Confederate States of America. 

  10.  Mr. Park adeptly describes Smith’s cautious acceptance of female authority on the frontier and Brigham Young’s reactionary rejection of it. “I don’t want the advice or counsel of any woman—they would lead us down to hell,” Young proclaimed less than a year after Smith’s death. The Mormon Church has treated African-Americans even more equivocally, and Mr. Park is sharp and unsparing in his account of the church’s initial acceptance, and later humiliation, of its very few black members during the Nauvoo era and its aftermath. He credits Smith with an “inclusive racial vision,” undone by Young’s “policy of white supremacy.”

  11. Fifty years later, after operating a de facto Mormon republic in and around the Utah Territory, church members rejoined the United States in 1896 as the state of Utah, and the rest is history. 

  12. The Church of Jesus Christ of Latter-day Saints now claims more than 16 million members world-wide and is a potent economic and political force in the country that once anathematized them.

Let me add a few notes of my own to this sketch of the history of Mormonism from when it had become a going concern to Utah statehood:

  • Kirtland, Ohio became an early Mecca for Mormonism because Sidney Rigdon had brought almost all of his preexisting Cambellite Restorationist congregation in Ohio into Mormonism. Also, things had gotten hot for Joseph Smith in upstate New York where he founded Mormonism.

  • Illinois initially welcomed the Mormons when Missouri expelled Mormons under an “Extermination Order.” Nauvoo received a charter from the Illinois state government giving Nauvoo a large degree of autonomy.

  • Because of the predominance of Mormons in Nauvoo, Joseph Smith was the ruler of Nauvoo while he lived.

  • Joseph Smith was put in the jail where he was murdered by a mob because he ordered the destruction of a printing press for the Nauvoo Expositor, which in its first issue had revealed polygamy among the Mormons and was planning in its second issue to reveal that Joseph Smith had had himself crowned king of the world. Thus, Joseph Smith was going on trial for violating freedom of the press as Mayor of Nauvoo.

  • It has been very difficult for the Mormon Church to fully renounce Brigham Young’s racial views. But in recent years, the Mormon Church has come a long way toward doing so. See:

 Don't miss these posts on Mormonism:

Also see the links in "Hal Boyd: The Ignorance of Mocking Mormonism."

Don’t miss these Unitarian-Universalist sermons by Miles:

By self-identification, I left Mormonism for Unitarian Universalism in 2000, at the age of 40. I have had the good fortune to be a lay preacher in Unitarian Universalism. I have posted many of my Unitarian-Universalist sermons on this blog.

Why Housing is So Expensive

Figure 7 from “Productivity and Potential Output Before, During, and After the Great Recession” by John Fernald, ultimately published in the 2014 NBER Macroeconomics Annual

Figure 7 from “Productivity and Potential Output Before, During, and After the Great Recession” by John Fernald, ultimately published in the 2014 NBER Macroeconomics Annual

There are two big reasons why housing is so expensive. The first is the obstacles put in the way of building new housing in many of the most desirable cities to live in. My detailed knowledge of these obstacles comes mostly from two Facebook groups: Market Urbanism and Market Urbanism Report. I highly recommend those Facebook groups. The political battle over regulatory obstacles to housing construction has heated up lately. For a long time there have been many “NIMBYs”: people who say “Not In My Back Yard.” But now there are also “YIMBYs” as a political force: people who say “Yes, In My Back Yard.”

The YIMBYs have had some successes lately. For example, California state law now says that local governments must allow garages that are not being used for vehicles to be converted into living space. Oregon state law now bans single-family-housing-only zoning. Minneapolis also now bans single-family-housing-only zoning. And Salim Furth has an article on a variety of pro-housing policies being pursued in different states.

The argument for state and federal involvement in policies affecting the quantity of housing that is built is a strong one because local governments are unlikely to fully factor in the benefits to people not now living in a city (and therefore not voting in that city) of being able to afford to move to that city. State governments are more likely to factor in that benefit for people moving from elsewhere in the state, while the federal government is more likely to factor in that benefit for people moving in from other states. (Note that the federal government does not need to mandate anything: it can simply dangle federal money in front of states that have a pro-residential-construction policy.)

One nice policy that targets total amount of housing without dictating specifics to local governments a policy in which the state establishes a goal for housing construction for each locality. If the local government meets the goal, it retains full control over the detailed zoning and other regulations. But if the local government doesn’t meet the goal, then a state agency can approve construction without any veto from the city. Most local governments would work strenuously toward achieving the goal in order to retain local control.

Having local governments get out of the way of residential construction reduces the regulatory cost of building housing and reduces the land cost of housing when taller buildings are allowed. But it still costs something to build the structure itself. Sadly, as John Fernald’s graph at the top of this post shows, there has been no real improvement in productivity in construction in the last 50 years. (“TFP” stands for “Total Factor Productivity.”) This accords with casual observation: the way houses are built now doesn’t seem that much different than when I was 10 years old in 1970. When one thinks about the dramatic transformation of many other industries in the last 50 years, the lack of transformation in construction is truly remarkable.

In particular, I marvel at how much greater the increase in productivity has been in manufactured goods made in factories than in construction. Is construction inherently so different from manufacturing? The mystery of low productivity growth in construction is one that more economists should try to answer.

I have a hypothesis for where policy went wrong, getting in the way of productivity improvements in construction. We could probably have had dramatic improvements in productivity in construction if we had moved more and more toward building pieces of houses in factories and then hooking those pieces together onsite. (Think Legos.) This would have required nationally standardized construction codes that could vary by soil type, earthquake or flood risk, average precipitation, etc., but would otherwise be the same all across the US. It is not to late to begin such a transformation.

I have heard the argument that housing is different because people want a customized house, but one could make the same argument about cars, and it is false. We manage to make high-end cars in factories that are customized enough for people to be happy with them. Moreover, the lower people’s income, the more willing they are to accept standardization if it means a less expensive house. The tragedy is that there aren’t standardized houses produced in pieces in factories by big companies that are a step above or three steps above a double-wide trailer house.

Bringing down the high cost of housing is something that is within our power. But it will take big changes from current policy.

Other posts on housing:

Links drawn from “Market Urbanism” and “Market Urbanism Report” and other authors:

Sugar Is Not Very Satiating

One of the things I have emphasized in my diet and health posts is that eating sugar makes you hungry. See for example:

The same kind of spike up in insulin can make people hungry after eating sugar can make people hungry after consuming nonsugar sweeteners—some more so than others. See

The paper “Effects of stevia, aspartame, and sucrose on food intake, satiety, and postprandial glucose and insulin levels” by Stephen Anton, Corby Martin, Hongmei Han, Sandra Coulon, William Cefalu, Paula Geiselman and Donald Williamson shows that sugar has enough stronger insulin spike (or something else that has the same effect on satiation) to cancel out the satiating effect of sugar’s extra calories when compared to aspartame and stevia. As a result, people ended up eating more calories over the day by the amount of extra calories that were in the sugar as compared to the stevia or aspartame.

The insulin spikes themselves can be seen in the authors’ Figure 3:

insulin after sweetener.png

As you can see, whether with sugar, stevia or aspartame the “preload” snack caused a substantial increase in insulin. But the increase in insulin is worst with sugar, least with stevia and in between with aspartame.

Simply because stevia and aspartame are not as bad as sugar in causing an insulin spike doesn’t mean they are OK. Aspartame has MSG-like side-effects that make it a good thing to avoid. (See “The Case Against Monosodium Glutamate—Why MSG is Dangerous (as are Other Sources of Free Glutamate) and How the Dangers Have Been Covered Up.”) The debate about whether Stevia is OK or not rages in the comment section of “Which Nonsugar Sweeteners are OK? An Insulin-Index Perspective.”

To the extent the problem with Stevia is its effect in making you hungrier, you can judge for yourself by experimenting with how hungry you feel after, say a soft drink sweetened only with stevia and containing few calories. This is actually not so different in spirit from one of the measures Stephen Anton, Corby Martin, Hongmei Han, Sandra Coulon, William Cefalu, Paula Geiselman and Donald Williamson use. They write:

Computerized VAS were used to assess subjective ratings of hunger, satiety, fullness, as well as hedonic ratings of food (i.e., appearance, aroma, flavor, texture and palatability). When completing the VAS, participants rate the intensity of these subjective states on a 100-unit line from “not at all” to “extremely.” Studies support the reliability and validity of VAS for measuring subjective states related to food intake (Geiselman et al, 1998; Flint, Raben, Blundell, & Astrup, 2000).

The bottom line of “Which Nonsugar Sweeteners are OK? An Insulin-Index Perspective” is that oligosacchides (such as chicory root) or erythritol seem to be the safest nonsugar sweeteners. “Swerve” seems to have erythritol and oligosaccharides as its main sweeteners, though other things could be hiding under the label “natural flavors.” I have also been able to find on Amazon sweeteners that are mainly erythritol and others that are mainly oligosaccharides if you prefer to lean in one of those directions. Of course, as I emphasize in “Which Nonsugar Sweeteners are OK? An Insulin-Index Perspective,” anything sweet is likely to make you think about and anticipate food, which has some tendency to raise insulin and make you feel hungry.

For annotated links to other posts on diet and health, see: