What is the right size of government?

In response to a newsletter from a thinker I respect, I was moved to reply and it turned into a mini-essay that I felt had some valuable insights. 

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One of your comments struck me as almost accurate and I thought it worthy of a response.

o Also, note that government doesn’t produce anything but simply redistributes capital from producers of capital to consumers of capital.

o   And while government has an important role to play in a thriving economy, it is one of facilitating the production of wealth, not creating it.

o  Therefore, the larger the government, the greater a drag it is on the productive capacity of the economy.

One of the obvious differentiators between Objectivism (which is a full philosophical system) and the economics-focused Libertarianism we commonly see is the role of government in a proper society. 

Libertarians fall into a range of camps that include Anarchy, Anarcho-capitalism, Minarchy, and related ideas. According to Rand, these are all anti-concepts that attempt to fuse a negative into a positive, thus destroying people’s ability to properly conceive and consider the positive. Anarchy is the absence of a central government. Anarcho-capitalism is the worst because it names the positive and then destroys it. Minarchy generally means the smallest government necessary and might be the closest to a proper formulation, but unnecessarily clouds the issue by creating a new term for what is simply capitalism. 

The positive is capitalism, the political and economic system where all property is privately owned and government is created to protect the rights of every individual citizen to life, liberty, and property. So long as the individual does not violate the rights of others, the government has no role, no policy, and takes no action. 

In a free society, government is an unalloyed good, an absolute necessity. Such a government is generally very small, but it may expand sometimes if needed to protect the country from external threats. Such a government is not good because it is small – size is not the standard of value – but because of what is does: protect rights from internal and external threats.

The first bullet could be improved by stating that through economic policy and the resultant use of force against innocent citizens, the government seizes the capital of producers and gives it to those people and groups favored by government policymakers. Some of those receiving the favours are also producers.

Your second bullet is almost perfect but can be improved by reformulating it as “A free society requires Government to play an essential role in the economy by protecting the rights of producers and consumers, creating the optimal conditions for production and trade.”

The third bullet is the weakest because it implies a negative correlation between government size and economic productivity. This is contradicted by Objectivism. A better formulation would be that since government is essential, there is a Kuznets curve something like this:

 At the origin point, there is essentially no economic production due to the condition of anarchy. This was the state of humanity for most of its history, with almost no production other than that needed for subsistence, and even then, subsistence was miserable. This is the fixed-pie view of wealth where anything can be stolen or destroyed with relative impunity.

The introduction of a government that starts to protect rights enables a sharp increase in production such as seen in the transition from the Enlightenment re-discovery of the power of reason and the consequent introduction of rights through the Industrial Revolution. In the U.S. and other relatively capitalist countries this persisted into the late 19th century and economic growth was 6% or even higher for long periods. 

Once the government started to adopt and enforce policies that did not protect rights, but violate them, the rate of economic growth started to decline. Controls, regulation, tariffs, taxes and other types of non-objective law are all forms of rights violations. The decline side of the curve is much more gradual than the increase side because it still contains significant rights protection, and these are usually gradually eroded. Because all the infrastructure created during a period of rights protection is difficult to destroy, both physically and intellectually, it is possible for a fascist government to commandeer production yet not rapidly destroy it. I think a good case in point is Argentina, in the news these days due to the election of a relatively free-market figure, which was once among the wealthiest of nations but then suffered a slow decline as collectivism became entrenched. 

A proper formulation of the third bullet point would thus be: “Once a proper, rights-protecting government has been instituted, any further growth of government will of necessity be rights-violating and thus lead to lower economic production.”

All this started with just the idea that the third bullet point was weak, but I am very happy with the thoughts that emerged, particularly the shape of the graphic, the form of which I have not seen before. 

Due diligence on the notion of "responsible investing" is needed

Today I was moved to write a detailed response to an article I came across, titled From KYC to KYP: how one advisor weaves responsible investing into his practice. Here is my response.

I have examined the ESG, "responsible investing" and "sustainable" taglines for many years, doing my due diligence to decide if they have merits worth including in my practice. I have found them all to be so badly defined, to include so many biases, fallacies and outright falsehoods, and to be so fundamentally immoral that I want nothing to do with them.

The prime example is anything to do with carbon dioxide emissions, global warming, climate change, net zero and the linked ideas. In a world where 6 billion people would be incredibly jealous of the energy we have access to and the resulting life-enhancing technologies powered by this energy, and reducing poverty is the most important way to improve the lives of billions, the world can desperately use vastly more energy.

Fossil fuels currently provide over 80% of world energy and are the fastest-growing energy source as measured by the amount of energy created. Every single country that has emerged from poverty has done so using fossil fuel energy to enhance life and every country now trying to do so chooses fossil fuels as the primary energy source. Why? Because of the unique and currently irreplaceable qualities of fossil fuels, including availability, energy density, affordability, scalability, flexibility. Despite decades of taxpayer subsidies for wind and solar combined with policies impeding fossil fuels, the percentage of world energy from fossil fuels has been steady. Also, wherever wind and solar are adopted, to the degree they are added to the grid, the cost of electricity rises.

There are huge biases and great context-dropping when many people think about energy. While the advantages of fossil fuels are downplayed or completely ignored, the advantages of wind and solar are over-hyped. While the disadvantages of fossil fuels are over-hyped and demonized, the disadvantages of wind and solar are mostly overlooked. The most thoughtful examination of the flawed thinking process I have seen is provided by energy expert Alex Epstein, author of the 2022 book "Fossil Future" and of www.energytalkingpoints.com. Time and again Epstein provides evidence and ideas that no one has been able to refute, and opponents of his ideas are almost all afraid to debate him.

For a great look at how the UN social development goals can actually be met using just a fraction of the money wasted on climate change issues, I recommend the work of economist Bjorn Lomborg and his organization The Copenhagen Consensus. This includes his books "False Alarm" and "Best Things First."

For an excellent look at the science of what we actually know about our climate I highly recommend the book "Unsettled" by Steven Koonin, one of the world's leading scientists and former Obama appointee. Koonin aptly distills the science literature, showing where the gap between what we know and what is commonly believed has been created and persists.

In summary, my research shows that for those who actually care about improving human life, the ESG/RI/Sustainable movements as constituted are so far off-target as to be against human flourishing and I condemn them as immoral. I recommend that financial advisors and investment management companies do deep due diligence on this subject as I have, in which case they will find an overwhelming body of evidence that supports the rejection of the ESG/RI/Sustainable taglines. I want nothing to do with them and when clients very occasionally ask, I have clear and definitive evidence from every knowledge discipline to back everything I say on this subject.

The rot in the ESG investing ideology

Reading an article in Wealth Professional Canada I was moved to comment. 

ESG has been all the rage for several years but is based on deeply flawed and at their root anti-human principles. Consider just one issue that dominates ESG: carbon dioxide produced by fossil fuel use. Fossil fuels are used everywhere that people work to break out of energy poverty because of their unique combination of abundance, dense energy, flexibility, portability, scalability and affordability. They can be used in millions of location by billions of people and despite thirty years and trillions spend on wind and solar, they only provide 3% of world energy and fossil fuels provide 82%. The fastest growing energy in the world by gigawatts? Fossil fuels that have lifted every single developed country out of energy poverty and powered the industrial revolution.

What about side effects of carbon dioxide? CO2 is literally the gas of life, feeding the plant kingdom that in turn feeds the animal kingdom. As CO2 rises life flourishes and for the last several decades the world has been greening due to CO2 fertilization. Is the global temperature rising? Is appears to have risen slightly, by about one degree celsius since the industrial revolution, however we have only had good satellite data for forty four years and it is hard to separate the human effects from immensely powerful natural forces like solar cycles, Milankovitch cycles, cosmic ray cycles and impacts like volcanoes. Yes, cities have warmed due to the urban heat island effect but mainly they are warmer at night.

Did you know that deaths from extreme weather events have declined 98% in the last hundred years or so? Yes - FIFTY times lower. This is because with abundant energy enables humans to prepare for, recover from and be more resilient against the naturally dangerous climate. 

The anti-fossil fuel component of ESG is so deeply flawed, so immoral, so anti-reason and anti-human that if any good remains within ESG it is all poisoned by association and can't be trusted. I avoid all ESG in my practice and will never be a supporter no matter how irrational the world becomes nor how popular the ESG delusion becomes. Take a close look for yourself, read widely and think carefully and in full context while eliminating bias. If you dare to you will find in ESG the rotten ideology that I have found.

Should there be a tax credit for financial planning?

 FP Canada has launched an effort to get a Federal tax credit for financial planning. 

I disagree with this initiative of FP Canada for several reasons, even though I am a financial advisor and a big proponent of financial literacy and the value of my life's work - financial advice. Here is a short version of my first reactions to this idea.

1. It injects even more government interference into the economy.

2. Government, via regulations, has driven up the cost of advice and reduced its access. This distorted the economy. The solution to one distortion cannot be further distortion.

3, It introduces yet another aspect of private life that ends up being reported to our taxation authority.

4. This is like the children's sports activity and arts activity credits, which thankfully were axed.

5. All these reporting requirements add costs for providers, add non-productive work for taxpayers, add compliance costs to the taxman.

6. I think it is discriminatory, taking money from one class of taxpayers and favoring those who have had lobbyists work on their behalf. Essentially, political pressure is used to extract money from the group being punished to reward the favoured group, a regressive tax - one among many. This is a violation of individual rights, never mind being inequitable.

7. Most fundamentally, it is not a proper function of government to redistribute wealth according to anyone's preferences. Government is created to protect rights and not to violate them. Government representatives might choose to speak favorably about the value of financial advice but should never take my money to help others pay for the advice they seek.

8. Only plans covering advice “across multiple areas” would be eligible. This begs for jerry-rigged gaming of the credit: who is to judge when enough areas have been covered? What if multiple areas are not wanted or needed by the client? What if plans are "gamed" so as to qualify under whatever arbitrary rules are set?

9. Almost zero Canadians pay for the type of financial planning fee that would be rewarded by this credit. The overwhelming preference of Canadians, as clearly expressed in their market choices, is to pay for advice bundled with their investment and insurance products and management. The article itself says only 4% use the type of advice this credit would promote. If you want to promote this type of advisor compensation, go into the marketplace and make your case - don't use the coercive power of government to do it against the wishes of Canadians. In summary, there is so much wrong with this idea that it should be stopped in its tracks or rejected outright by politicians.