Janet Yellen Should Focus On Fiscal Policy, Not Environmental Activism

COMMENTARY Environment

Janet Yellen Should Focus On Fiscal Policy, Not Environmental Activism

Dec 24th, 2020 10 min read
COMMENTARY BY

Former Director, Center for Data Analysis

Norbert Michel studied and wrote about financial markets and monetary policy, including the reform of Fannie Mae and Freddie Mac.
Environmental activists are hopeful that Janet Yellen, Joe Biden’s pick for Treasury Secretary, will lead a major shift in public policy toward actively addressing climate change. Alex Wong / Staff / Getty Images

Key Takeaways

Climate activists are right to recognize what Yellen could accomplish through the FSOC because she can do plenty.

Regardless of what one thinks of climate change, this fact should be lamented, not celebrated.

The American founders created a system of government with checks and balances partly to protect us from ourselves.

Environmental activists are hopeful that Janet Yellen, Joe Biden’s pick for Treasury Secretary, will lead a major shift in public policy toward actively addressing climate change. Yellen publicly supports carbon taxes, and some activists are calling for her to use the Financial Stability Oversight Council (FSOC) in the “campaign against global warming.”

Some might recognize the FSOC as the council of regulators that designates certain large banks for special regulations because they are systemically important financial institutions (SIFIs). But the council’s authority goes well beyond hitting large banks with higher capital requirements.

Climate activists are right to recognize what Yellen could accomplish through the FSOC because she can do plenty. Regardless of what one thinks of climate change, this fact should be lamented, not celebrated.

Jamie Henn, director of Fossil Free Media, understands that “Yellen will have the power to help move trillions of dollars out of fossil fuels and trillions more into renewables. She could do more for the Green New Deal than nearly any other cabinet position.”

Henn is probably not too far off. The problem, though, is that the very same authority that opens the door to these kinds of policies can also accomplish the opposite goals when a different party is in power.

What, exactly, is the FSOC?

Created by the 2010 Dodd-Frank Act, it is a council of all the major federal financial regulators. The Treasury Secretary serves as the council’s chair. Section 112 of Dodd-Frank defines the FSOC’s basic purposes, such as identifying risks to U.S. financial stability that come from “outside” the financial marketplace, and responding to “emerging threats” to financial stability.

However, the Dodd–Frank Act does not spell out how the council may respond to emerging threats to financial stability. In fact, it doesn’t even define emerging threats or, for that matter, financial stability. This sort of ill-defined government authority is dangerous in its own right.

Separately, section 120 of Dodd-Frank authorizes the council to recommend more stringent regulations for an “activity”— if the council determines that the “conduct, scope, nature, size, scale, concentration, or interconnectedness” of the activity could “increase the risk of significant liquidity, credit, or other problems spreading” through other companies or markets. [Emphasis added.]

Strictly speaking, the FSOC itself does not have the authority to impose regulations, but the council’s recommendations go to other financial regulators, all of which are represented on the council. Virtually all of these agencies are, of course, run by appointees of the administration in power.

Thus a Biden administration would have the authority to restrict/redirect practically any climate-related economic activity based on nothing more than a belief that it might cause “problems” in the future.

Congress should never have given such authority to unelected officials running regulatory agencies and, arguably, should not have such power to begin with.

Many climate activists will probably scoff at this objection, but the FSOC could just as easily make life miserable for the companies that they like. For instance, the FSOC could slap solar energy companies (or their investors) with stringent regulations and fees. In the last year, two major solar companies filed bankruptcy. These cases provide concrete examples of renewable energy companies posing a risk to “financial stability,” thus justifying (under Dodd-Frank) virtually any new regulation that the council comes up with.

The existence of the FSOC is wholly incompatible with a system of limited government and dynamic private markets.

The fact that it still exists is a failure of Republican leadership in the Senate and the Trump administration. In 2017, the U.S. House passed a bill that would have stripped the FSOC of these nebulous authorities and turned it into what it was originally supposed to be: a vehicle for regulators to share information.

At the time, Republicans held just 52 seats in the Senate, so passing a bill via regular order to undo parts of Dodd-Frank was not going to happen. However, Congress could have passed the bill – or, at the very least, parts of the bill – via reconciliation, requiring only a simple majority. Instead, the Senate chose to focus only on tax reform, and ultimately left every single title of the Dodd-Frank Act in place.

A cynic would say that this decision had nothing to do with tax reform, and everything to do with the fact that large financial firms on Wall Street wanted nothing to do with amending the Dodd-Frank Act.

Regardless, their actions stuck Americans with a group of regulators that have the ill-defined authority to require private capital be directed in whatever manner they come up with. Regardless of what one thinks about climate change, the fact that any U.S. Treasury secretary has the ability to accomplish this sort of task should concern all Americans.

There is plenty to debate about climate change, and reasoned deliberation of important issues is certainly a good thing.

For instance, while scientists have shown that some glaciers are melting, they have also estimated that adding a “Mount Everest-sized amount of [melted] ice every two years” to the world’s oceans results in a sea level rise of 0.02 inches per year. Similarly, they estimate that “the Antarctic contribution to global sea level rise” is at “about one-fifth of a millimeter per year (or in English units, 0.71 inches per century).”

These figures do not suggest imminent catastrophe.

Other research shows that “From a quarter to half of Earth’s vegetated lands has shown significant greening over the last 35 years largely due to rising levels of atmospheric carbon dioxide.” [Emphasis added.] This research, conducted by “an international team of 32 authors from 24 institutions in eight countries,” is consistent with other recent findings, such as those reported by my colleague Kevin Dayaratnathat suggest the planet’s luke-warming has been beneficial.

All of these facts, along with the revelation that U.S. greenhouse gas emissions have been falling for the last decade without harsh government action, should be weighed against the harm from giving unelected officials the authority to do the bidding of someone who wants to “transition away” from an entire industry and achieve zero emissions by command. (Dayaratna’s research shows that, according to the government’s own models, such policies would impose massive costs with negligible climate benefits.)

The American founders created a system of government with checks and balances partly to protect us from ourselves. They understood that humans sometimes think that they have the knowledge to shape the entire world according to their own beliefs, and that legally empowering them to try usually ends badly. They knew that, even with the best of intentions, such authority tends to corrupt those in power and harm everyone else.

The evidence suggests that this time will not turn out very different.

This piece originally appeared in Forbes https://www.forbes.com/sites/norbertmichel/2020/12/23/janet-yellen-should-focus-on-fiscal-policy-not-environmental-activism/?sh=6144239c2852