The World Bank Must Rethink Its Strategy if it is to be Relevant on Climate Change

 

Summary of the Basic Argument:

In 1990, there were about 300,000 mobile cellular subscriptions in the lower and middle income countries of the world that can borrow from the World Bank.  By 2020, that number had risen to close to 7 billion.  This did not happen through the traditional telecom companies.  Rather, a new ecosystem of firms developed, showed that investments in providing cellular services were viable, and then extended coverage so it became essentially universal.  Finance was not the critical constraint.  With viable investments, finance followed.

The world is now facing the consequences of greenhouse gases accumulating in the atmosphere – mostly through the burning of fossil fuels – leading to a changing climate with consequences that are already bad but will become far worse.  The World Bank has been invited to do more to fund the investments that will be needed to address this.  But if the Bank continues with its traditional approach – more of the same but simply doing more of it – it will not play a meaningful role.  The investments required are simply far too high.  McKinsey has estimated that to get to net zero by 2050, over $160 trillion in investments in physical assets alone will be required in the countries that can borrow from the World Bank and IDA.  On top of this, investments will be needed to address the consequences of a warming planet.  Even under the most optimistic of forecasts, World Bank Group funding could not cover even one-half of one percent of what will be necessary.

There have been proposals that the Bank “stretch” its balance sheet in some way to enable it to lend more than it is now.  It is, indeed, arguable that the IBRD has been excessively cautious in its lending.  A simple stress test shows that at its current capitalization, about half of the loan portfolio would need to go into default for five full years (with no resolution during that period) before the Bank would need to make a call on its callable capital.  That is unlikely in the extreme.  But even if the Bank increased its lending to the very top of what is allowed under the Articles of Agreement, then with the existing capital, the IBRD could lend only an additional $11.8 billion per year – 36% more than the $33.1 billion in new commitments in FY2022.  This would still be far from what will be needed to address climate change.

The World Bank and Ajay Banga, the expected new president, need to rethink how this should be approached if the Bank is to play a meaningful role.  A top-down strategy, focused on identifying individual investments deemed a “priority”, and then seeking adequate funding (from subsidized sources to the extent required), will not suffice.  While the individual investment might well be beneficial, it will be a static one-off gain.  What one needs, rather, is a dynamic process, similar in nature to what allowed the provision of cellular services to take off.

A more opportunistic, bottom-up, approach would provide World Bank Group support to those investments that can be viable in their local circumstances.  The key point to recognize is the diversity of conditions that exist.  Solar or wind generated power might not be able to compete everywhere on cost with fossil-fuel burning sources (with the implicit subsidy being provided to such polluters by not requiring them to pay for the cost of the damage they cause).  But it is wrong to assume they cannot be competitive anywhere.  Connections to the power grid are not always available, they are often not reliable even where they are technically available, and in many cases the power from the grid can nevertheless cost more than what it would from renewable sources.

The key is to recognize this diversity in conditions, and then exploit the opportunities that exist.  And the opportunities are becoming increasingly common as technological changes are dramatically reducing costs of green alternatives not only in power, but in agricultural practices, transportation, and other sectors.  The key issue for low and middle income countries is to obtain access to those alternatives.  And with viable investments, funding will not be the critical constraint, just as it was not for cellular mobile services.  Furthermore, such funding will not add to the public debt burden – a worrisome concern in a number of countries.  When the investments are viable, what they provide and sell (such as power) will cover the cost of the financing.

The World Bank Group, both by showing the way through funding of pioneering investments that exploit such opportunities (both public and – via the IFC – private) and even more so through policy advice on best practices, can have a valuable role to play in this.  But little will be accomplished from a futile attempt simply to fund a bunch of projects, up to whatever the finite availability of subsidized funds might allow.  Rather, the Bank will only be effective if the support it provides (on policy as well as finance) leads to a dynamic where viable investments – not reliant on subsidies – will bring our greenhouse gas emissions down to zero.

 

A.  Introduction

Ajay Banga, the US nominee to be the next head of the World Bank Group, will have clear marching orders when he starts in his new job:  The World Bank must do more to address climate change.  In a major address in early October 2022, US Treasury Secretary Janet Yellen had called on the Bank to be more aggressive, to be more innovative, and to be more effective in addressing the challenges of climate change.  She asked that the Bank prepare a “roadmap” by December on how it would approach this.  And she said the US would support steps that would once have been considered radical, including measures that would “stretch” the balance sheet of the Bank and other multilaterals to permit greater lending than would have been considered before.  Other key shareholders, including Germany, echoed these remarks.

The relatively short (17 page) roadmap was duly prepared and distributed to the World Bank Board in mid-December, and was publicly released in January following the Board discussion.  Many, however, considered it disappointing.  While it did propose that the World Bank do more on climate change, it did not suggest a need for a fundamental shift in the Bank’s strategy in how it should provide such support.  It was basically just more of the same – but do more of it, up to whatever level donor nations would be willing to support financially.

There are problems, however, with the approach as laid out in the roadmap.  To start, whatever financial support the World Bank could provide – even with a major expansion in its lending capacity – would be tiny in comparison to the scale of the problem.  While it can be argued that every little bit helps, the share of what needs to be done that such financing could support under the approaches being considered would be so small as to be basically irrelevant.  Figures on this will be provided below.

But there are other issues than simply the scale.  The centerpiece of what would be new for the financing provided by the World Bank (more formally the International Bank for Reconstruction and Development, or IBRD) would be that grant funds would be provided by some set of donor nations to allow the World Bank to lend at a lower interest rate than otherwise.  The logic of such a subsidy is that the benefits from measures to reduce greenhouse gas emissions accrue to everyone on the planet, not only those in a particular country.

World Bank loans have not been subsidized in this way before.  Since its founding more than 75 years ago, World Bank funds have been lent to countries at a rate reflecting what it costs the Bank to borrow in the markets (which is relatively low, given its AAA rating and other backing), plus a margin to cover its administrative costs and to provide for a modest level of earnings (currently a margin of about 0.8% points on average when taking into account all fees and charges).  This rate has generally been less than the rate at which countries themselves can borrow in the markets, and thus it has been advantageous for the countries to borrow instead from the World Bank.  The proposal now would be to charge an interest rate that is even less, by blending in donor funds to “buy down” the rates.

[For those unfamiliar with the structure of the World Bank Group:  Note this is for the IBRD.  There is also the affiliated International Development Agency – or IDA – that provides funds raised from donor nations as grants or highly concessional loans to the poorest member countries with a per capita income below some cut-off.  The discussion in this post will be primarily on the IBRD, as that is where the changes in the approach to lending would be made.]

It is not clear how much might be provided in such donor funds, and thus not clear how large of an impact this could have on the loan rates.  But even if they were large enough to reduce the interest rates by half, say, one should recognize that interest rates have been rising.  The rates on World Bank loans in the coming years, even if subsidized by donors, will likely still be more than where they were until recently.  This raises the question of whether country borrowers will be willing to take on such loans for these purposes at such subsidized rates going forward, if those rates – even after subsidies – are higher than what they were in the recent past.  They were not all that interested before.

But an approach based on subsidies would not be sustainable for any length of time.  While it is certainly true that fossil fuels (and other emitters of greenhouse gases) are subsidized implicitly by not having to pay for the cost of the damage they cause, the notion that it will be possible to out-subsidize such polluters by providing even greater subsidies to renewables is fanciful.  The scale of the issue is just too vast.  It is also not clear how long this would be pursued:  forever?

There is a need to rethink this.  Part of the problem may stem from the use of the term “global public goods”.  This term is not normally applied in economics to a polluter who cuts back on how much they pollute.  Pollution is more properly termed an externality, where costs are being imposed on others.  And what is being produced here – whether power or cement or steel or burping cows – are all private goods that will be sold in the market, ultimately to consumers.  The issue is how to have such private goods produced in ways that are financially viable while not pouring greenhouse gases into the air.

This is not impossible.  The generation of power from renewable sources, for example, is already competitive without subsidies in certain circumstances.  Its cost has come down tremendously over the past decade.  The key is to recognize that there is a tremendous diversity in conditions in the countries, and that in particular situations in particular locales, power from renewable sources can be the least-cost source of supply.  Power from the grid may not be available at all in certain locales, may be undependable even where it is technically available, and may in any case cost more than power from renewable sources even when it is available.  This is of course not the case everywhere right now, with current technologies.  But neither is it the case nowhere.

To exploit this will require a change in mindset for the World Bank.  It needs to shift from a top-down approach – where “priority” investments are identified in some fashion with a focus then on finding adequate funding (including subsidized funding, to the extent deemed necessary), to a more bottom-up opportunistic approach.  The focus should be on identifying investments that should be financially viable and then determine why they are not proceeding.  Sometimes financial support might be appropriate (and done together with private sources of finance), but often the real need is to address what is blocking such investments.  There might, for example, be policies (or simply the traditional practices of an integrated power monopoly) that bar renewable sources of power from integrating with the grid.  The World Bank can play an important role in introducing best practices on how this can be addressed.  And in some cases there might be a need for investment to strengthen the capacity of the transmission grid to accommodate decentralized sources of power from renewable sources.  The World Bank might be able to play a helpful role here as well.

But the aim should be for the World Bank to shift from a mindset that it can fund a series of static, one-off, investments that might well be individually beneficial, to support for changes that can lead to a more dynamic response.  The chart at the top of this post illustrates what was possible when mobile cellular providers (mostly private) were allowed to compete and provide telecommunication services, in contrast to the response of entities (mostly public and mostly monopolies) providing fixed-line services.  The technology was of course new and the analogy is far from perfect, but it is doubtful that if the traditional fixed-line providers had simply been provided with greater subsidized resources they would then have come anywhere close to what the new cellular providers were able to do in just a few years.  Cell phone service subscriptions in these countries (the lower and middle income nations of the world that are eligible to borrow from the IBRD or IDA) rose from just 300,000 in 1990, and still very little in the mid-1990s, to close to 7 billion by 2020.

If there is to be any hope that climate change is to be effectively addressed, with net greenhouse gas emissions brought down to anywhere close to zero by 2050, we will need a response closer to what the mobile cellular providers were able to provide than what would have been expected from the traditional fixed line phone monopolies.  The challenge will be how to structure the response to allow for dynamics that are more like that which was seen with mobile cellular services.  This will only be possible if well-managed firms, operating in often challenging country environments, are able to provide these private goods (whether power, or cement, or beef, or whatever) with clean technologies profitably.  If they are, financing will follow, as it did for the mobile cellular providers.  If they are not, the most that can reasonably be expected from trying to push subsidized financing onto them might be some limited static gain, but not the dynamics needed.

This post will start with a discussion of why a focus on engineering an expansion in World Bank lending for climate change, but with traditional approaches followed, is unlikely to achieve anything close to what is needed to address the challenge the world faces with climate change.  There is a need to rethink this.

As noted above, confusion might stem in part from the way the term “Global Public Goods” is being used.  That will be discussed next.  While this is in the end semantics, discussion of the issue has largely ignored that private, profit-seeking, firms produce the goods (or at least can produce the goods) that are at issue here. The penultimate section of this post will discuss what the prospects for this are – or at least could be – and what might be done to facilitate this.  The aim is for a response closer to the dynamics of what mobile cellular providers were able to achieve.

A concluding section will discuss briefly the related but different issue of World Bank financing being provided to countries to allow them to better adapt or respond to what the consequences of climate change have been for them – and will be for them.  This fits in better with traditional World Bank approaches.  There is also the separate question of whether “compensation” in some form should be paid by the countries whose past emissions have led to our climate change crisis (primarily, but not exclusively, the richer countries), to the generally lower-income countries that are now also suffering the consequences.  This may well be justified.  But that does not necessarily mean that such funds should be used to subsidize World Bank loans.  They are two separate issues.

An annex will then follow with an analysis of a related issue.  Calls have been made, including, significantly, in the October address of US Treasury Secretary Janet Yellen, for the World Bank to make better use of its callable capital to allow it to increase its lending.  Using figures from the IBRD’s audited financial statements, the annex will examine how much lending could be increased even if it were raised all the way to what the IBRD’s statutory loan limit (as set in the Articles of Agreement) allows.  We will find that it is not really all that much.  It will then look at what the impact might then be on the financial risks the IBRD faces and hence its credit rating.  We will see that the impact should not be seen as all that much either.  That is, it is probably worthwhile for the Bank to lend more against its current capital structure – the financial risks of doing so are modest.  But even the maximum extra lending possible given its callable capital will not be all that much when compared to the challenges following from climate change.  This is not going to solve the issue.

A second annex will then look at the interest rates that have been charged on World Bank loans in recent years, and why they are now rising quickly even though World Bank loans are long-term.  Many do not realize that while World Bank loans have maturities that can go out as far as 35 years, almost all are now at variable interest rates.  And those interest rates have risen sharply.  Even if highly subsidized, IBRD interest rates on new loans would likely still be well above where they were just a few years ago.

B.  A Traditional Approach, Whether Subsidized or Not, Will Not Suffice  

The investments that will be needed to address climate change will be huge.  There is of course a great deal of uncertainty on how much that might be, and estimates vary (although similar in that all are very high).  But for illustrative purposes one can use recent estimates from the McKinsey Global Institute in a major study released in January 2022.  McKinsey looked at what it would take to reach net zero carbon (greenhouse gas) emissions by 2050, over the thirty-year period of 2021 to 2050, in 69 countries accounting for 95% of global GDP, and focused on seven sectors accounting for 85% of greenhouse gas emissions:  power, industry (in particular cement, steel, and chemicals), transportation, buildings, agriculture, forestry and other land use, and waste management.  That is, the estimates are for the cost of the investments in physical assets only (and only in seven sectors) in order to reduce greenhouse gas emissions along a forecast path to net zero by 2050 in countries accounting for 95% of world GDP.  They do not include the also high costs of adapting to and repairing the damage from the consequences of climate change – consequences that are already well underway.

While partial, McKinsey estimated that the cost across the globe to reduce greenhouse gas emissions along this path will be $275 trillion over the 30 years.  One can calculate from the regional and major country figures presented in Exhibit 24 of the main text that $160 trillion of this would be in countries that can borrow from the World Bank Group.

In its FY2022, in contrast, the World Bank (counting both IBRD and IDA), made new loan commitments of just $13.2 billion for projects that included climate mitigation measures as at least one component of the project (with an additional $12.8 billion for projects that had climate adaptation measures as at least one component).  While this was a record amount for such lending from the IBRD and IDA, it is not much compared to what will be needed.  Assuming it could continue at this pace for 30 years (where one needs to remember that IDA funds come from donor nations), the total for mitigation investments (including IDA) would be less than $400 billion.  This would be 0.25% of the $160 trillion needed.  Allowing for growth in these lending commitments at some reasonable rate (say 4% a year in real terms), it is hard to see the total ever exceeding 0.5% of what will be needed for investments to cut greenhouse gas emissions alone, and thus not counting what will also be needed to address the damages caused by climate change.  Furthermore, the IBRD share of this would only be about half of that, with the other half (for IDA) dependent on how much donors will be willing to contribute.

In addition, World Bank projects normally cover a range of related activities.  The investments in any given World Bank funded project that are specifically for climate mitigation measures will only be one component, and thus will only account for some share (possibly small) of the total project loan amount.  But such a project will be included as one where “climate mitigation” was an element, and the full loan amounts (i.e. including for activities other than directly for climate mitigation) will be counted in the $13.2 billion total.  The funding for investments in climate mitigation alone will be less.

There are other issues as well.  One is that while calls are being made for the World Bank to step up its lending for climate mitigation (as well as adaptation), many of those calling for the stepped-up lending have also noted that many of the countries are already facing high public debt loads.  But the IBRD as well as IDA lend only to the public sector (or at least only with a government guarantee of the loans), so there is an inherent contradiction in adding to the public debt of a country borrower that may already be facing possible debt issues.

This might in part be resolved by reducing the costs of those loans through subsidies.  But those subsidies must be provided by donors, and the amounts that donors are willing and able to provide are limited.  It should be noted that IDA credits have always been highly subsidized (and funded by donors) – at first as very long-term loans (up to 50 years now) at highly concessional interest rates (and called a service charge), and in more recent years some as outright grants as well.  But there is no indication that donors are willing to provide funds of anywhere close to the scale that would be required to address climate change in those countries that are eligible for IDA credits.

What is different in the more recent proposals is that funds might be provided to subsidize certain IBRD loans as well, to bring down the interest rate charges on such loans to below what it costs the IBRD to make such loans.  As noted in the introduction above, the IBRD has in its over 75-year history lent funds to country borrowers at rates that suffice to cover the cost to the IBRD to borrow in the markets (a rate that is relatively low due to its AAA rating as well as other backing) plus a margin (currently about 0.8%, when all fees and other charges are taken into account) to cover its administrative costs and some retained earnings.  Subsidizing that IBRD rate to some level below what it costs the IBRD to make such loans would be a departure from the approach it has followed for three-quarters of a century.

How much lower the IBRD interest rates could be on loans for climate mitigation measures (and other global public goods) would depend on how much donor countries would be willing to provide.  What that might be is not at all clear at this point.  But interest rates have been rising, and even subsidized rates would likely be a good deal higher than what the borrowing rates were from the IBRD not all that long ago.  (See Annex II below for the numbers on this.)  Taken by itself, it is not at all clear that countries borrowing from the IBRD would be all that interested in borrowing for the designated climate change purposes even at a subsidized interest rate.  They were not all that interested in borrowing for such purposes in prior years, when the interest rates would have been even lower without any such subsidy.  There is more that needs to be addressed here.  Simply subsidizing interest rates will not resolve them.

There is also the not very good record of demand by borrowers from an IFC managed facility that used IDA funds to subsidize the financing of IFC-supported private projects in IDA member countries.  The IFC (International Finance Corporation) is also part of the World Bank Group (along with the IBRD and IDA), and is the arm that provides loan and/or equity finance to private projects in member countries.  While the borrower would be different (private investors in the IFC projects, vs. country governments in the IBRD projects), the lesson from this “IDA Private Sector Window” is that subsidized financing terms do not make all that much of a difference in the decision on whether to proceed with a project or not.  The facility was launched in 2017, but in the now more than five years since it began, it has (as of March 17, 2023), only committed $3.34 billion in funds in total (with disbursements only a share of this).  It claims to have led to total investments of $19.82 billion, but it is difficult to say how much of this would have been invested anyway even without the IDA subsidy.  And in the five years of 2017 through 2021, foreign direct investment in low and middle income countries totaled $3 trillion (based on what is reported in the World Bank Databank), so the share would have been tiny even if all of the $19.82 billion is counted.

One should not, therefore, expect that a traditional World Bank approach – whether with subsidized interest rates or not – will suffice to meet the enormous challenge of what needs to be done to mitigate climate change and put the world on a sustainable path.  The magnitude of what the World Bank could support through its traditional approach – even with measures to expand that capacity – is simply far too small given the challenge.  It is also not at all clear that the subsidies that might be provided would make all that much of a difference either.

The World Bank and its member governments need to re-examine its strategy if it is to play a meaningful role on climate change.

C.  A Different Approach

Resolving this will certainly not be easy.  Polluters gain an advantage by being able to shift part of their costs on to others – by not paying compensation for the damage they cause.  There is also no ceiling on the costs they are thus able to shift to others:  The more they produce, the greater the costs they impose on others, and the greater the implicit subsidy they enjoy by not having to pay for those costs.

In contrast, a strategy of subsidizing those who do not pollute is limited.  Those subsidies need to come out of some government budget, and there is only so much that can be provided.  There will thus be a ceiling on what can be done through a reliance on such subsidies, and as discussed above on the magnitudes involved, that ceiling is far less than what would be needed.  Furthermore, reliance on such subsidies is certainly not sustainable.  They cannot continue forever.

There is a need to rethink this.  To start, it is useful to clarify the terms being used.  While the issue is being portrayed as one of “global public goods”, the meaning of that is different from what economists normally refer to as “public goods”.  To an economist, a “public good” is defined as some product that (in the rather ugly terms economists like to use) is both “non-rivalrous” and “non-excludable”.  Non-rivalrous means that if one person uses it, others can as well.  And non-excludable means that if I have access to it, others will as well and cannot be excluded.  Thus a commonly cited example of a public good is spending on the military to defend a nation.  I enjoy the benefits of that protection but others do as well (non-rivalrous), and if the military defends me it will similarly benefit all others in the nation (non-excludable).  A piece of cake, in contrast, is not a public good.  If I eat it, then others cannot, and if I have it I can exclude others from it.

The concept of global public goods as used in this discussion on climate change is referring to something a bit different.  It is not referring to the goods themselves being produced, but rather to whether those goods are being produced in a way that does not lead to pollution costs being imposed on others.  While there will be benefits for all to enjoy (a planet that is not wreaking as much damage as it would if heated up more), this shifts attention away from what is being produced (e.g. electric power, cement, cows) to how it is being produced.  But how it is being produced is causing what economists would usually refer to as an externality, not a public good.  And what is needed is for the goods to be produced in a way that does not impose this externality (the pollution costs) on others.

In the end this is just semantics.  But it diverts attention from the fact that regular goods are being produced (electric power, etc.) for sale ultimately to consumers, and there is a need to shift that production to methods that do not lead to such pollution.  The only financially viable and sustainable way to achieve this is for such production to be profitable.  And when one can achieve this (without subsidies), one can then follow the type of dynamics that led to the explosion in the provision of mobile cellular services (such as shown in the chart at the top of this post), rather than the limited static shifts that would follow if one were to rely on case-by-case subsidies.

Such viable investments are now often possible:  not everywhere, but neither nowhere.  Clean technologies are being developed – primarily in the richer countries – and the issue for those countries that can borrow from the World Bank Group is whether they will make use of them.

To take a specific example, the cost of generating power by solar panels has fallen by 90% in the US since 2009, to only $30 to $40 per megawatt-hour (MWHr) – equivalent to 3 to 4 cents per kilowatt-hour (KWHr) – for utility scale systems.  The cost of on-shore wind generated power is similar.  These are the costs before any subsidies.  (Note that these costs are measured in terms of what is called the “levelized cost of energy”, or LCOE, which is the full cost – both operating costs and capital costs – over the system’s entire lifetime expressed per megawatt-hour generated, and properly discounted over time.)

In contrast, the cost in the US for a new coal-fired plant is on the order of $80 per MWHr.  Indeed, the cost of newly built solar and wind sources of power can even be below just the marginal cost of continuing to operate an existing coal-burning plant, given the cost of coal and of the other operating and maintenance costs of such plants.  This is in particular true for older coal-burning plants, where their older and less efficient technologies are more costly to operate.

Depending on the situation (i.e. the adequacy of the connections to the grid as well as how large a share of the power being supplied is from intermittent sources) one might also need the ability to store power from the solar and wind systems.  The cost of storage will vary tremendously based on the locale, but can be low.  For example, in countries where hydro systems are a major source of power generation, one can often use solar-powered generation systems during the day while the hydro-powered systems are used at night or other times when the sun is not shining.  And hydro systems currently dominate in low-income countries, accounting for 71% of power generation in Central Africa, 66% in East Africa, and 63% in the low-income countries of the world as a whole.  In such cases where hydro accounts for a high share of the power generated, they can provide the flexibility needed to manage intermittent sources – assuming, of course, there is a willingness to do so.

But even with other methods to store power from intermittent sources such as solar or wind, the cost of power from renewable sources will often be below the cost of generating it from burning fossil fuels.  It really depends on the particular circumstances of the location.  The power markets themselves are also often highly fragmented, with high costs in some locales and lower costs in others (although the prices charged might not reflect this).  And indeed, in many places power from the grid may not be available at all (or not available reliably), thus leading those who need such power to purchase expensive diesel-powered backup generators.

The key point is there is great heterogeneity in the conditions that determine the cost of obtaining power in any given country, and even more so across countries.  Solar and wind generated power are not always cheaper everywhere today.  But they are cheaper in many situations today, and are also rapidly falling further in cost so this advantage will spread in the years to come.  The issue, rather, is that even where they have an advantage in cost, they are not being adopted as rapidly as they should.

The reason for this stems first from policy.  Power from renewable sources is not always welcomed – and thus not allowed – as a contribution to the grid.  Mobile cellular providers often faced similar such obstacles in their early years, as telecommunications was in many places a public monopoly and the existing operators did not want to allow such competition.  Those rules had to be changed to allow mobile cellular services to compete.  There is a similar need if renewable sources of energy, such as from solar and wind, are going to be allowed to grow.

The World Bank can and should play an important role in this.  It will not come from funding an isolated power generation project, but rather from working with countries to share best practices so that power from renewable resources will be allowed to provide power where they have an advantage in doing so.  World Bank funded investments might also play a high-leverage role in certain cases.  For example, there will typically be a need to upgrade the capacity of the transmission grid if it is to accommodate power generated from decentralized and intermittent renewable sources.  World Bank financial support to such investments might well be appropriate, and when in place would then make possible far greater investments (making use of other funding sources) in new generation from renewables.

One should also recognize that while there will be global benefits when power generation is switched from burning fossil fuels – with their greenhouse gas emissions – to sources such as solar or wind, there will also often be substantial local benefits.  One does not exclude the other.  Coal, for example, is an especially dirty fuel, not only from more greenhouse gases being emitted than from any other source of power generation (per KWHr generated), but also from sulfur and nitric oxides going into the air (leading to acid rain and other issues), mercury and other heavy metals going into bodies of water (and hence the fish caught there), and most obviously, the particulate matter going out the smokestacks.  Especially toxic is PM2.5 (particulate matter smaller than 2.5 microns in size), which can make the necessary act of breathing hazardous to one’s health.  The burning of coal is a major source of this (along with other practices – such as the burning of residues on agricultural lands – that also produce greenhouse gases in addition to the particulate matter in the air), and has led to pollution crises in a number of countries.  This has become an especially severe problem in recent years in major cities of the subcontinent (Bangladesh, India, and Pakistan), with levels averaging 10 times or more than what is considered safe in the WHO guidelines.  Many cities in China have had similar issues.

Countries therefore also have a local interest in reducing their burning of coal and other fossil fuels.  There are certainly global benefits from switching away from these sources of greenhouse gases, but one should not forget there will be local benefits as well.

But the steps necessary to allow and elicit a dynamic response in the investments required to address climate change have not always been the focus of what the World Bank has funded.  A recent example of the Bank’s traditional approach would be the large, $439.5 million, IBRD loan (for a $497 million project) approved in early November 2022 to support the final decommissioning of the Komati coal-burning power plant in South Africa, and replacing it with power from solar and wind sources.  The Komati power plant was an old and large plant, originally commissioned in 1961, that at one time had a capacity of 1,000 MW from nine coal-burning generating units.  Only one coal-burning unit (with a current capacity of just 121 MW) was still in operation, and will now be closed.  In replacement, and making use of the infrastructure already there to connect to the transmission grid, they will now install 150 MW of solar capacity, 70 MW of wind capacity, and 150 MW of battery storage.

The project, in isolation, may well be a good one.  But it will be a one-off gain that will still leave us far from where we need to be to address climate change.  And by itself it will absorb a substantial share of what the World Bank can lend for such projects.  In the World Bank’s fiscal year 2022 (that ended on June 30, 2022), the total lending of the IBRD and IDA together for climate mitigation was $13.2 billion, as noted above.  The IBRD (the source of the Komati loan) accounted for probably about half of that (I have not seen figures with an IBRD and IDA breakdown of funding for climate mitigation).  While the Komati project will be in the Bank’s fiscal year 2023, that single operation for a single power plant will likely account for a high share of what the IBRD will have lent for climate mitigation purposes in this fiscal year.

But there are broader issues in South Africa that limit the generation of power from renewable sources.  The Komati plant is operated by Eskom, the vertically-integrated power monopoly in South Africa (covering transmission and distribution in addition to generation), which is 100% owned by the Government of South Africa.  While I do not know all of the specifics of the Komati project, there is no mention in the World Bank released summary of it that anything broader is being done to address the more fundamental problems of Eskom itself – problems that not only have blocked competing sources of power from renewable sources developing but have also led to a major crisis in the country with highly disruptive rolling blackouts even while incurring major fiscal costs.  While reform of Eskom has been long discussed, powerful vested interests have blocked progress.  But until this becomes possible, one will not see the dynamics required to transform energy generation in South Africa to renewable sources, and isolated projects such as Komati will accomplish little.

A policy environment that allows competing suppliers of power from renewable sources is one side of what is needed if there is to be a dynamic response closer to that which was seen with mobile cellular services.  The World Bank, as noted, can and should have an important role in supporting this.  The other side will be an ecosystem of firms that can provide such services and operate profitably in the sometimes difficult business environments of these countries.  But there is a “chicken and egg” issue here as there will be no such firms in countries where they are not allowed to provide such services.

That does not mean that such an ecosystem of firms cannot develop rapidly.  One saw this, again, in the development of mobile cellular services.  And while what will be required to reduce greenhouse gas emissions will often be new in many of the countries, one is starting with a number of firms – both public and private – operating in not too dissimilar sectors.  There will also be an important role for foreign firms, both for the expertise they can provide and their access to resources – both technological and financial.

Within the World Bank Group, the International Finance Corporation (IFC) works with private firms to develop their capacity to implement successful investment projects in their respective markets.  The IFC may make loans for such projects but may also fund a direct equity stake in the firm itself, with the objective of seeing the firms and their projects succeed.  When they do succeed, the IFC loans will be repaid in full and the IFC equity interest will increase in value.

The IFC thus can play a valuable role in supporting the development of the system of firms that will be necessary if climate change is to be successfully addressed.  And such support can have repercussions well beyond the individual firm itself.  As an example from the US, the Obama administration in 2009 provided a $465 million loan to Tesla, at a critical time for the company.  Tesla came out of this successfully, repaid that loan in full five years early, and arguably has done more to develop the market for electric cars than any other company in the world.  While the Tesla case is obviously exceptional in the extreme, one does not need many examples of far more limited but still viable firms to have a major impact.  And, while coincidental, one might note that the $465 million loan provided to Tesla by the Obama administration is similar to the $497 million cost of the Komati project.  But the impact has been orders of magnitude greater than what can expect from Komati.

Finally, this approach of focusing on what is needed to be successful in the provision of power from renewable sources and in the application of other clean technologies – possibly in niche markets to start – also shifts the focus away from an obsession with finding funding.  Rather, when the investments themselves are viable and profitable, with firms that can function effectively in the often difficult operating environments of many countries, funding will be found.

An example of this is again provided in the rapid expansion of mobile cellular services.  Funding of course had to be found, but the firms could do this and funding itself did not block what was a tremendous expansion.  The service was viable (initially in niche markets, which then grew as the technology further developed and costs declined), and with this viability the firms were able to secure the funding they needed.  Similarly, funding per se is unlikely to be the critical constraint in an approach that focuses on projects that are viable – at first in specific locales where conditions allow the products to be produced profitably as well as cleanly, and later more broadly.

Note also that this addresses the concern that public debt levels are already high in a number of the countries the World Bank lends to.  Pushing further public debt on them could lead to problems, even though it is recognized that greenhouse gas emissions need to be reduced.  The strategy suggested here of focusing attention on projects that are or could be made to be (in the right policy environment) profitable resolves this as the investments themselves will generate the revenues needed to pay back the debts incurred (from the sale of the power generated, for example).

The example used in this discussion to illustrate the issues was that of power generated from renewable sources – solar or wind.  And the power sector will be central if greenhouse gas emissions are to be reduced to a net of zero by 2050, both because of the greenhouse gases being emitted today in the power sector from burning fossil fuels, and because clean power will also be needed to support the transition in a number of other sectors.  But there are similar opportunities in other sectors that will be critical in reducing greenhouse gas emissions to reach the net zero target of 2050.  The World Bank Group would have an important role in these as well, if it so chooses.  The key point is that, as for power, the diverse range of conditions within and across countries leads to opportunities where greenhouse gas emissions could be reduced without, in the particular circumstances of the location, requiring subsidies to be viable.

For example, in crop agriculture, practices such as minimum tilling, the planting of cover crops, and the introduction of organic matter can lead to substantial sequestration of carbon in the soils while increasing yields.  In forestry, a focus on suitable areas where fast-growing trees can be planted and farmed on a sustainable basis will both help protect existing, old-growth, forests (as one substitutes for the timber that would otherwise be taken from the old-growth forests), and would also, as they grow, absorb CO2 directly.  And livestock are a major source of greenhouse gas emissions, in particular of methane, but basic things such as better management of the manure produced (which can be valuable when done right) to more commercial activities such as the use of certain feed additives, can cut their methane emissions sharply.  The World Bank can provide support both directly for such activities as well as advise on best practices that will encourage (and in some cases simply permit) them.  And the IFC can provide support to the commercial firms that would be involved.

Or in another, and difficult, sector:  Cement production is a major source of CO2 emissions, in part due to the chemistry of the process involved in making cement.  Cement is also a sector where the IFC has historically been quite active.  But there are things that can be done to reduce CO2 emissions from the production of cement, by, for example, improving energy efficiency, converting any of the wet-process plants still in operation to more efficient dry process plants, substitution of different materials for clinker, and similar approaches.  The IFC can provide support to this through its investments in the sector.

D.  Final Points

The basic recommendation being made is that while the World Bank Group has a major role to play if greenhouse gas emissions are to be reduced to anywhere close to a net of zero by 2050, that role does not derive primarily from the funding that it would – or could – provide.  The funding needs are so large that whatever the World Bank might be able to provide would be tiny compared to the scale of the problem.  And this would be true even if, with funding support from its shareholders, it would be able through some means to double or even triple what it could otherwise provide.  It would still be small.

The strategy needs to be rethought.  Rather than approach this in a top-down fashion – where some decision is made at the top on what investments to support, and then a determination is made on what level of subsidies would be required to get those investments done – the recommendation is to follow a more bottom-up opportunistic strategy.  The key point to recognize is the diversity of conditions within as well as across countries, and that under certain circumstances in certain locations, investments can be made that will both reduce greenhouse gas emissions and be financially viable and sustainable on their own.  For example, in places where power is expensive or unreliable, it may well make sense (and be profitable) for households, or firms, or entire communities to install systems of solar power generation (with suitable storage).

The focus of the World Bank Group should be to seek out and understand better why such opportunities exist but are not being funded now.  It might then provide support directly, either by the World Bank proper (IBRD or IDA), or if private firms are involved then by the IFC.  More commonly, it would work with member country governments to remove the roadblocks hindering such investments and then to facilitate and widen such opportunities.  Sometimes it might be as straightforward as simply making it legal for decentralized sources of renewable power generation to feed into the grid.  In others, it might require investments to strengthen the power transmission grid so that it can accommodate and make good use of renewable sources of generation.  

In such a framework, the generation of power from renewable sources can be financially viable (that is, able to repay the investment required) and hence sustainable.  Access to subsidies would not be a pre-condition.  One could then have a dynamic process more similar to that which led to led to the tremendous expansion of mobile cellular services in these countries over a space of just a few years.  And it is such a dynamic process that is needed, rather than the more static process of case-by-case projects being funded when sufficient subsidized finance is found.

This discussion has been about those investments that, when implemented, reduce greenhouse gas emissions either directly or, more commonly, by substituting for more polluting existing producers.  In addition to such investments for climate mitigation, there are also investments for climate adaptation.  The latter are investments to address the consequences of climate change, such as less reliable rainfall (leading sometimes to droughts and sometimes to floods), or more intense storms, or greater average heat making certain crops no longer viable where they have traditionally been grown, or encroachment on to lands (and resulting salinization) from rising sea levels, and so on.

Major investments will be required to address such issues.  But they are issues where the traditional approach taken by the World Bank in supporting country efforts can be appropriate.

A related topic that has been raised by some is whether the countries whose greenhouse gas emissions over the last several centuries led to the now excessive levels heating up the planet (with most, although not all, of these countries also now relatively rich) should pay compensation in some form to those countries (mostly relatively poor) who are suffering the consequences of this change in the climate.  While some people would tie such payments to grants that would be provided to the latter group of countries to reduce their greenhouse gas emissions, there is no logical reason – if they are indeed to be considered as compensation – why they should be connected in that way.

Rather, if such payments are to be made as compensation for the damage that has been done to the (often poor) countries that are suffering from the consequences of climate change but were not responsible for it, then that compensation should instead be in accordance with the damage that has been (and will be) done.  Some countries have been damaged more than others, and some are more vulnerable to future damage than others.  There has been and will be a great deal of variation in these impacts across countries.  Indeed, it is possible (although probably rare) that the impact on certain countries or regions within countries could even be positive through, for example, better rainfall patterns for them.  And more specifically, damages should not really be assessed at the broad level of a country, but rather at groups living within the country.  Some may be suffering greatly as a result of climate change, and others not so much.

Hence if compensation is to be provided and linked to specific programs or investments, it would make greater logical sense to tie these to climate adaptation investments rather than to climate mitigation.  One can understand the interest donor nations have in climate mitigation, but if this is compensation for the damage done then logically one should tie such funding to activities that will provide relief to those who have been or will be affected adversely by climate change.

Furthermore, for the reasons discussed above, directing subsidies to investments to reduce greenhouse gas emissions is unlikely to get one very far.  There may be some limited, static, gains, but given the scale of the problem, such subsidies at any level that can reasonably be expected will be far from what would suffice to address the challenge of climate change.

To conclude, what will be needed will be to address the fundamental underlying issues that need to be resolved to make investments in clean technologies and methods viable.  Fortunately, there is much that can already be done, given the current technologies plus the diversity of conditions within and across countries.  The technologies are also improving rapidly, given the expenditures that are being made primarily in the richer countries to develop them.  For the countries that can borrow from the World Bank, the basic question will be how open they will be to adopting these technologies and methods – both those available now and as they are further developed in the coming years.

 

Annex I:  The Financial Implications of Making “Full Use” of the IBRD’s Callable Capital

The G20 assembled an expert panel (chaired by Ms. Frannie Léautier) to assess and make recommendations on the capital adequacy frameworks of the multilateral development banks, with a view to boosting their capacity to lend.  Their final report was released publicly in July 2022, and can be found at the website of the Italian Ministry of Economy and Finance.  (For some reason, it does not appear to be available at the G20 website.)

The release of the G20 Panel report led to a good deal of discussion on the merits of various approaches whereby, even with their current levels of capital, the multilateral development banks (MDBs) would be able to lend significantly more than they are now.  If financially prudent, this would be attractive to the shareholder countries that fund the capital of the MDBs given the huge need – for climate change as well as much more.

Much of the discussion has focused on the possibility of “leveraging callable capital”, although that term per se does not appear in the G20 Panel report and different authors appear to mean different things by it.  In this annex I will look at one specific possibility, which would be to increase annual lending (in the specific case of the IBRD) by an amount that would, over time, raise the stock of loans outstanding all the way to the “Statutory Lending Ceiling” (or SLL, and which grammatically would make more sense as the Statutory Loan Ceiling, as it is the stock of loans that is limited and not some figure on lending.  However, the World Bank’s audited financial statements refer to it as the Statutory Lending Ceiling.)

The SLL is set in the IBRD’s Articles of Agreement as a ceiling on the stock of outstanding loans that the IBRD is permitted to make to its member countries.  It is defined (as stated in the Management Discussion and Analysis accompanying the June 30, 2022, audited financial statements) to be equal to “the sum of unimpaired subscribed capital, reserves and surplus”.  Subscribed capital includes both paid-in capital and callable capital, and unimpaired means the amount that is immediately available and usable in the accounts of the IBRD.  The SLL was $339.0 billion as of June 30, 2022 (where all figures in this annex on stocks will be as of June 30, 2022 – the end of the IBRD’s fiscal year 2022 – and taken from the audited financial statements of that date).

IBRD loans outstanding to member countries as of that date totaled $229.25 billion in terms of what is labeled the ‘total exposure” on loans.  In terms of loans as measured for the SLL it is a bit higher at $235.7 billion, with the difference (it appears, although this is not fully spelled out) largely due to counting the full value of guarantees and not just their present value, plus possibly also due to how loan provisions are treated.

Based on the $235.7 billion measure of loans outstanding, then if the IBRD lent fully up to the SLL limit of $339.0 billion, its loan portfolio could grow by $103.3  billion.  Assuming that in equilibrium the additional lending would have the same average maturity as the existing IBRD portfolio (which was 8.75 years on the loans outstanding as of June 30, 2022), that would allow the IBRD to lend an additional $11.8 billion per year.  The IBRD lent $33.1 billion in its fiscal year 2022, so this would be an increase of 36%.  Lending an additional $11.8 billion per year over 30 years would total $354 billion.  This is not much when compared to the $160 trillion the McKinsey study concluded would be needed for investments in climate mitigation alone by 2050 in the countries that can borrow from the World Bank.

Would it be prudent to lend up to the SLL?  This is of course examined from many different angles as the IBRD manages its financial risks, but a core measure is the ratio of the IBRD’s usable equity to the loans outstanding.  The IBRD’s usable equity is the sum of its usable paid-in capital (the paid-in capital that is immediately usable by the IBRD – which in practice has been most of it) plus reserves that have been accumulated from retained earnings since the IBRD began operations more than 75 years ago, plus some small translation and other adjustments to reflect primarily conversions into dollars from other currencies. 

As of June 30, 2022, the figures were (in millions of US dollars):

Paid-in Capital: $20,499
  of which Usable Paid-in Capital: $19,352
General Reserve: $32,053
Special Reserve:               $293
Translation and other adjustments:  -$1,217
  = Usable Equity $50,481

This usable equity as a share of the Bank’s loan portfolio (using the $229.25 billion measure of total loan exposure) comes to 22.0% ( = $50,481 / $229,250).  The IBRD has followed a policy to keep this ratio at 20.0% or higher.  Note also – for those who have not thought through what the figures imply – that the IBRD’s loan portfolio at $229.25 billion is of course already far above its usable equity.  That is, this equity ratio is 22%, not 100%.  Thus protection from the callable capital guarantees is already being used to a certain extent.  In the extremely unlikely event that the entire portfolio went into permanent default with nothing paid back, there would be a need to call on the callable capital to ensure IBRD borrowings in the bond markets could be paid back.  Thus the backing of the callable capital guarantees is already in effect being leveraged.  The question is not whether this should be done, but rather the degree to which it should be done.

If the loan portfolio were allowed to grow all the way to the SLL, that ratio of usable equity to the thus higher loan portfolio would likely fall.  To properly assess by how much one would need a full spreadsheet model of how the IBRD’s balance sheet would evolve over time as the pace of new lending is increased, the new loans are disbursed (which typically takes years for the IBRD), and as the portfolio then grows.  Over time, as the portfolio slowly grows the IBRD would also have increased earnings from it (a portion of which would be retained), and hence the figure for usable equity in the numerator of the ratio would also grow.

But taking as an extreme case one where the loan portfolio somehow grew instantly to the full SLL (of $339.0 billion as of June 30), with the usable equity unchanged at $50,481 million, the ratio would only fall to $50,481 / $339,000 = 14.9%.  That is not all that far from the 20.0% ratio of current IBRD risk management policy.  And as noted, since the portfolio would grow only slowly over time, during which usable equity would also grow, the ultimate ratio would likely be well higher than the close to 15% ratio resulting from an instantaneous change in the size of the portfolio.

Such equity ratios may be a helpful guide as a quick and easy indicator of possible risk, but do not themselves measure whether a financial institution may soon face solvency issues.  Stress tests of the balance sheet can provide a clearer indication of the extent to which the financial institution can tolerate non-payment on its loans.

For example, a question that could be asked is what share of the portfolio would need to go into default – with neither principal nor interest paid for some period of time (which I will take to be five years for these scenarios) – for the IBRD to use up its entire usable equity and thus force a call on its callable capital in order to keep being able to pay IBRD bondholders the amounts coming due.  If that share of the portfolio is high, the likelihood of so many borrowing countries going into default simultaneously (and unresolved in some way for five full years) is low.

Only a simple estimate is possible as I do not have a complete spreadsheet model of the IBRD balance sheet and how it might evolve over time as some portion of its portfolio goes into default.  But for the purposes here it should give a sense of the magnitudes involved.

The figures needed for the calculation are (as of June 30, 2022, in $ millions):

Usable Equity:   $50,481
Loan exposure: $229,344
Principal due in next 5 years:   $70,251
Share due in next 5 years: 30.6% = $70,251/$229,344
SLL: $339,000

From this, together with an assumption on interest rates, one can calculate what share of the portfolio would need to go into default, with neither principal nor interest paid for a period of at least 5 years, for the IBRD to be forced to use up all of its usable equity by the end of the fifth year and hence require a call on its callable capital.

That share will depend on the interest rate over the five-year period.  There are two issues.  First, interest rates are going up (as is discussed in Annex II below), and we do not know at this point what those interest rates will be over the next five years.  Thus I will provide below the consequences for a range of plausible average rates, where we will likely end up somewhere within this range.  And second, there is the interest that will be due both for the loans made to the country borrowers in default and hence not received, and also for the borrowings in the bond markets that the World Bank has made and which will need to be paid.  The rates the IBRD charges the country borrowers are on average about 0.8% points above the rates that the IBRD pays in the markets, as was described in the text, when all margins and other fees and commissions on loans are included.

Which of these two rates should one use for these calculations?  While one might argue that the rates charged the IBRD borrowers (and not being paid by those in default) would be the relevant loss, those rates are on average about 0.8% higher than what those funds cost the IBRD.  That 0.8% margin covers both the IBRD’s administrative costs (which would remain) and also net earnings of the IBRD which are retained (or used for optional other purposes, such as transfers to IDA).  The retained earnings would be accumulated in the IBRD’s usable equity, but in the simple calculations being done here (since I do not have a full spreadsheet model to include the feedback effects), that usable equity figure is being adjusted solely by whatever is not being paid on the principal and interest on the loans assumed to be in default.  That is, the calculations do not include the effects of whatever would be added to usable equity during the five years from the net earnings on loans that are not in default.

If the IBRD’s administrative costs are being covered (or more than covered) by earnings on the share of the portfolio not in default, then using the interest rate on the IBRD’s borrowings rather than on its loans would be more consistent with the assumptions being made on usable equity.  And the IBRD’s administrative costs would be covered in the scenarios considered here.  On average over the five years from FY2018 through FY2022, the IBRD’s administrative costs accounted for a bit less than half (46%) of gross earnings, and hence what the World Bank calls its “Allocable Income” accounted for 54%.  Thus if the share of the portfolio in default is 54% or less, the share of the portfolio that is not in default would suffice to cover administrative expenses.  For this reason, the interest rate used in the calculations below is that on the cost of IBRD borrowing.

The resulting shares of the portfolio that would need to be in default for five years for the usable equity to be depleted (under the stated assumptions) at various interest rates would then be:

A)  With loans as in the balance sheet of June 30, 2022 (i.e. at $229,344):

Interest Rate on Loans   3.0%   4.0%   5.0%
Interest Rate on Borrowings   2.2%   3.2%   4.2%
Share of Loans in Default  52.9% 47.2% 42.6%

B)  With loans at the SLL limit of $339,000:

Interest Rate on Loans   3.0%   4.0%   5.0%
Interest Rate on Borrowings   2.2%   3.2%   4.2%
Share of Loans in Default  35.8% 31.9% 28.8%

Note:  In the loans at the SLL ceiling scenario, it is assumed that the share of the portfolio due in the next five years is the same share (30.6%) of the SLL portfolio as it was in the actual loan portfolio as of June 30, 2022.  It is also assumed to be the same share for the loans in default as for the overall portfolio.  Also, the interest due is not compounded over time, but rather is simply the sum (over five years) of the interest that would be due each year on the share of the portfolio that is in default.  

To arrive at the percentage shares of the portfolio that would need to be default for a five-year period to deplete what was available in usable equity (of $50,481 million to start) requires a bit of high school algebra.  But one can easily confirm the resulting figures shown here are correct.  For example, with the IBRD current balance sheet, and with interest rates assumed to average over the five years at 3.0% on the IBRD’s loans to the country borrowers (and 2.2% as the cost to the IBRD of the funds lent), the share of the overall IBRD portfolio that would need to be in default for a full five years, with no resolution of the problem within that time, would be 52.9% of the portfolio – or a bit more than half.  To confirm this, if one takes 52.9% of the $70,251 million that will be coming due in the next five years (where it is assumed that the maturity profile is the same for the borrowers in default as for the overall portfolio), and adds to this 52.9% of the interest that would be paid on the borrowed funds for the Bank’s total loans (i.e. 52.9% of 2.2% a year for five years on the portfolio of $229,344 million), the sum will come to $50,481 million.

The results are rough as simplifying assumptions had to be made.  But the basic conclusion one can draw is that with the portfolio where it was on June 30, 2022, roughly half of the portfolio would need to go into default and remain there with no resolution for at least five years before the IBRD’s usable equity would have been depleted.  Only at that point would there need to be a call on callable capital.  The likelihood of half of the IBRD’s portfolio going into default for five years with no resolution within that time frame is certainly minimal.

In the scenario where the IBRD loan portfolio somehow instantly jumped to the SLL limit (with usable equity unchanged at $50,481 million), the share of this larger portfolio that would need to go into default in order to deplete the usable equity within five years would, of course, be less.  But even here, and in this extreme case of leaving the usable equity at where it was on June 30, 2022, that share of the larger SLL portfolio would still be high – at roughly a third.  The World Bank has never in its history seen defaults in its portfolio at anywhere close to this.  Currently, only one country is in default to the IBRD – Zimbabwe, with outstanding loans of $428 million, or 0.2% of the IBRD loan portfolio.  And even in this case, the IBRD received a partial payment of $3 million from Zimbabwe in FY2022.

Bringing loans all the way up to the SLL ceiling is just one scenario, and some would see it as an extreme case of how much extra lending the World Bank could provide.  Based on the results found here, I would not see the risks to the IBRD’s financial standing to be all that much different than what they are now – they would still be minuscule.

But while the financial risks would still be low, the amount of extra lending the IBRD could provide and bring the portfolio all the way to the SLL ceiling would also not be all that much greater – just an extra $11.8 billion a year when the portfolio is in equilibrium, or 36% more than the $33.1 billion the IBRD lent in its FY2022.  Thus while the increased risks of a larger portfolio with the same capital as now would not appear to be excessive, the gains in terms of a greater volume of lending from the IBRD would not be all that much either.  It may well be worthwhile, but it would certainly still be very far from what is needed to address climate change.   

Some would have the IBRD increase its lending by more than this, and possibly by much more.  If this were to be done in the traditional fashion of a capital increase funded by the shareholders, then the risks could be kept similar to where they are now – i.e. extremely low.  But the discussion that has been underway has been on ways to “stretch the balance sheet”, by boosting MDB lending without the need for an accompanying capital increase.  Many have interpreted the G20 Expert Panel report as supporting this.

However, the position on this in the G20 Panel report is not so clear.  They do not make an explicit recommendation on how much additional lending should be provided.  But they do make the recommendation that the risk management framework of the MDBs should move away from the hard limit of the SLL ceiling (reflected in the Articles of Agreement of the IBRD and similar documents for the other MDBs), to a more flexible assessment more in line with the risk management framework of the Basel III accords.  The G20 Panel sees this as a more modern system for assessing risks, and that in the case of the MDBs those risk assessments should take into account both the traditionally provided (although not legally mandated) preferred creditor status accorded the MDBs (so debt service has traditionally been paid to the IBRD and other MDBs even when the country is in default to other creditors), plus also the value of the callable capital on the balance sheets of most of the MDBs (the IFC does not have this).  That callable capital is in effect a guarantee.  If there were to be a period of extreme financial stress that led to a need to call on that callable capital, the G20 Panel recognizes that the callable capital obligations might not be paid in full.  Thus they recognized that a valuation at 100% of the face value of these guarantees would not be appropriate.  But the callable capital nonetheless has some value – greater than zero – and the G20 Panel recommended that this value should be taken better into account when lending levels are decided.

The elimination of the hard SLL limit would require, at least in the case of the IBRD, a change to its Articles of Agreement.  This would be a major event.  And while I am not a lawyer, I assume there would then also be a need to make changes in the legal documents that accompany the bonds the IBRD has issued and are outstanding.

IBRD lending in excess of the current SLL limit but with the same IBRD capitalization as now could affect its financial risks, depending on how far higher the lending would be raised.  Depending on this extent, the AAA rating that the IBRD has had for most of its history could be affected.  But it all depends on how far one would go.  From the calculations here, I would not conclude that increasing lending to bring the portfolio all the way up to the SLL as currently defined would increase the risks by all that much.  But if one goes well beyond this, the situation would be different and would need to be assessed based on the specifics assumed.

 

Annex II:  Prospects for Interest Rates on World Bank Loans

IBRD loans to borrowing member countries are long-term – up to 35 years for the maximum maturity (albeit with a limit of 20 years on the average maturity based on how repayments are structured).  But while the maturities are long, many people may not realize that the interest rates on these loans are mostly now determined in terms of variable rates, tied to certain overnight benchmark rates.  While there is an option to take out such loans at fixed rates rather than floating rates (where the IBRD will use derivative instruments to go from floating to fixed), it appears few borrowers have chosen to make use of that option.

With interest rates rising, borrowing countries are now paying substantially more in interest on their IBRD loans than they were just a year ago.  This annex will look at the recent path of the most relevant benchmark interest rate and the consequent path of what is being paid on IBRD loans.  But first a brief description will be provided of the IBRD’s primary loan product, which it calls the IBRD Flexible Loan (or IFL).  The IBRD also has various guarantee products and some other special loan instruments, but they are relatively minor in magnitude.  One should also not confuse loans made by the IBRD with loans (as well as grants) from IDA.  IDA has its own, separate, balance sheet.

The structure of the IBRD Flexible Loan allows for a wide range of possible alternatives on terms such as whether fixed or floating, the currency of denomination, the repayment schedule, and similarly.  The IBRD Treasury will arrange for what is chosen by the borrower, using derivative instruments available in the financial markets, but with the basic principle that the borrower will pay the cost of whatever is chosen.  Thus the IFL can be made in any of four basic currencies (the US dollar, the euro, Japanese yen, or British pounds), with a cost linked to the cost of IBRD borrowing in any of those currencies.  In practice, however, 80% of the outstanding loans as of June 30, 2022, were in US dollars, 18% were in euros, and only 2% in other currencies.  For the discussion here, I will primarily focus on the structures in US dollars.

But beyond those four core currency options, the IBRD is willing to structure the loan in any of a wide range of other currencies, including in certain currencies of the borrowing members (such as Mexican pesos).  To do this it would enter into derivative contracts in those currencies to effectively convert the repayment obligations from one of the four core currencies (almost always the US dollar) into whatever currency is chosen, and pass along whatever the cost is of doing this (along with a small service charge for the IBRD) to the borrower of the loan.  And it will do this going out to whatever maturities can be cost-effectively so converted (with the agreement of the borrower).

The basic principle applies to other such alternatives.  Thus the borrower might, for example, prefer a fixed rate loan rather than a floating rate.  The IBRD Treasury will arrange for this using derivative instruments (out to whatever period is reasonably possible in the markets, as the borrower agrees), but it will pass along the full cost of this (as well as a small service charge) to the borrower.

Starting with a standard loan structure, loan pricing is a spread over what it costs the IBRD to borrow in the core currency chosen.  The benchmark used for the US dollar is the SOFR rate (Secured Overnight Financing Rate, which is the cost of overnight borrowing by a bank collateralized by US Treasury securities in the repurchase agreement market – it was developed to replace LIBOR), with similar overnight rates used for Japanese yen and the British pound.  The 6-month EURIBOR rate is used for borrowings in euros.  Interest due dates on IBRD loans are every six months, and on those dates the interest rates will be reset based on (for US dollars) the compounded SOFR rate over the preceding six months (and similarly for the Japanese yen and the British pound), while the benchmark for the euro is the 6-month EURIBOR. 

The spread then charged by the IBRD will be the sum of a fixed 0.50%, plus a variable spread (reset every three months) reflecting whatever it costs the IBRD to borrow in the respective currencies relative to the SOFR and other benchmarks, plus a fee on the longer maturity loans that varies by four country groups based primarily on its per capita income.  That extra spread for the maturity starts at 0.10% for a country in the lowest income group on loans with an original average maturity of 8 to 10 years, and grows to up to an extra 1.15% for a country in the highest income group on loans with an original average maturity of 18 to 20 years (with 20 years the maximum).

Note that the IBRD charges the borrowers a variable spread (updated every three months) reflecting whatever it cost the IBRD to borrow in the markets relative to the benchmark during the three-month period.  Up until April 1, 2021, the Bank also offered a fixed spread loan as an alternative.  This option was “suspended”, however, as of that date, and it is not clear if it will be reinstated at some point.  But it is important to be clear that this is a variable (or a fixed) spread for the IBRD over a variable rate benchmark interest rate.

Adding up all of the fees and the spreads – starting with the 0.5% on all loans, the extra spread (of up to 1.15%) on loans with a longer average maturity (of up to 20 years), as well as a front-end fee on all loans and a commitment fee on undisbursed balances (and a few other smaller charges, such as the fees when the IBRD enters into derivative contracts for one of the alternatives offered) – the average implicit spread on the loans in the IBRD portfolio works out to about 0.83% when interest rates have been steady.  Since the variable interest rates are determined every six months based on the compounded benchmark rates in arrears, that margin will be somewhat higher when interest rates are falling over time, and somewhat lower when interest rates are rising.

The standard IBRD loan product is therefore one with a variable spread (tied to what it costs the IBRD to fund itself) over a variable rate benchmark (SOFR for the US dollar), and are mostly (82%) in US dollars.  While borrowers can arrange for fixed rate loans, it appears in the financial accounts that this is now exceedingly rare.  According to figures in Table D-1 of the June 30, 2022, audited financial statements of the IBRD, only $3 million of the $162,859 million in IBRD loans that are in the variable spread category are fixed rate loans.  And since only variable spread loans have been made available since April 1, 2021, this means that essentially all of recent lending has been at a variable rate.  More of the older loans still on the books were fixed rate loans, but overall, as of June 30, 2022, 86% of the loans are variable rate and only 14% are fixed rate.

This means that most IBRD borrowers are highly exposed to rising interest rates.  The SOFR rate is the most important, and is now rising fast:

Not surprisingly, the SOFR rate tracks the Federal Funds Rate extremely closely.  The Federal Funds Rate is the principal interest rate that the Fed targets, and is the rate the Fed has been raising in steps since March 2022.  Prior to that, the rate had been at essentially zero since March 2020 – the month when the Fed cut it sharply at the onset of the Covid crisis.

The quarterly financial statements of the IBRD do not report the average interest rate on loans in the IBRD portfolio.  While the audited annual financial statements do provide figures for weighted average interest rates for the portfolio, those appear to be just for a point in time (i.e. June 30).

One can, however, calculate from figures in the quarterly financial statements what the implicit average interest rates on IBRD loans were for each of the quarters.  These implicit average interest rates will be the interest paid on loans in the quarter (from the income statement in the financial accounts) divided by average loans outstanding during the quarter (shown in the assets portion of the balance sheet, and where the average during the quarter is estimated based on the outstanding at the end of the preceding quarter and that at the end of the current quarter – which is a more than adequate estimate of the average as the overall loan portfolio changes only slowly from one quarter to the next).  The quarterly rate is then annualized.  The result is the line in green in this chart:

This IBRD average interest rate on loans can be compared to the average SOFR rate in the quarter.  The SOFR (based on a simple daily average over the period) is the line in red in the chart.  The SOFR rate shot up starting from mid-March 2022 as the Fed started to raise interest rates, and the average IBRD loan rate has similarly shot up.  The margin between them has been predictable.  During the long period when the SOFR rate was essentially zero, the spread between the IBRD average interest rate on loans and the average SOFR rate of the period varied in the narrow range of 0.82% to 0.84%.  Prior to that the spread was higher reflecting the fact the IBRD interest rates are calculated based on the SOFR rate in six-month arrears and the Fed had cut interest rates sharply in March 2020.  And the spread is now a bit lower (0.70% in the most recent quarter) as interest rates are rising.

As I write this we do not yet have the figures for the January to March quarter of 2023.  But the chart does have the SOFR rate through to March 3, and one sees that it has continued to rise.  Given the spread, the average IBRD loan rate will certainly be above 5% in this quarter.  How far further it will rise cannot be said with any certainty, as it will depend on how far further the Fed will raise interest rates, and the Fed itself does not know how much this will be.  It will depend, as the Fed has repeatedly said, on how the data on the economic situation evolves.  However, most expect the Fed to raise interest rates at least somewhat further.  How long these higher interest rates will then last can also not be predicted with any certainty.

But what was certainly predictable during the period of close to zero interest rates from 2020 to early 2022 was that the close to zero interest rates would not last forever.  Longer-term rates were higher, but still at historic lows.  Households in the US and elsewhere thus rushed to refinance their home mortgages to lock in the record low rates.  But for some reason, IBRD loans being taken out were still almost entirely at a variable rate – tied to short-term benchmark rates.  While fixed rate loans taken out in 2020 or 2021 would have carried higher interest rates to start, their relatively low rates compared to what should have been expected later would then have been locked in.  A reasonable estimate of what they would have been for IBRD loans would be what the rates were on 10-year US Treasury bonds (the standard indicator taken for long term rates) plus a spread (for the IBRD) of 0.8%.  That rate (including the 0.8% spread) would have averaged 2.2% in CY2021 and just 1.6% in the second half of CY2020.

Those interest rates on such fixed rate loans, had they been locked in, would be one-half or less of what is now being paid on the IBRD’s largely variable rate loans.  And that ratio is likely to fall further in at least the near term as short-term interest rates are still going higher.

Proposals have been made that IBRD loans to address climate change issues should perhaps be subsidized to bring their interest rates to below what the IBRD charges to cover its costs.  While it is not clear who would be funding those subsidies nor how much would be provided, a more fundamental point is whether countries would find such subsidized funds sufficient incentive in themselves to invest in climate change issues.  That is not at all clear.  If those subsidized funds were sufficient to buy down the interest cost of the loans by half, say, their cost would still be greater than what it would have cost the countries to borrow for such purposes (or any other IBRD supported purpose) just a short time ago.  If there was not much of an appeal then, it is not clear why subsidizing the now higher interest rates on such loans would lead to this now.

Roland Fryer – His Life Story, His Work on Education and on Police Use of Force, and Harvard

Marie Curie, Nobel laureate:  “Nothing in life is to be feared, it is only to be understood.  Now is the time to understand more, so that we may fear less.”

Roland Fryer grew up in difficult circumstances; rose to the top of his profession; did fundamental work on education that was not, however, always welcomed by the education establishment; found (contrary to all expectations, including his own) that there was not an anti-Black racial difference in police shootings in the data but rather, if anything, the opposite; and was soon thereafter suspended without pay for two years from his tenured position as a full professor at Harvard, with the research lab that served as the vehicle for his work permanently closed.

[Note:  Sources and references used, with links, are all gathered at the end of this post.]

A.  Roland Fryer

Roland Fryer is Black.  He was born in 1977 in Daytona Beach, Florida, but moved to Lewisville, Texas (about 20 miles northwest of Dallas) when he was very young.  Fryer’s mother left him (perhaps more left his father) when he was still an infant, and they did not meet again until he was in his 20s.  His father had been a math teacher but then became a copier salesman, was extremely abusive when he was drunk (which was often), and beat him often (especially when he was drunk).  And when Fryer was 15, his father was convicted of a rape and sent to prison for eight years.

Fryer spent his summers with his grandmother in Daytona Beach, Florida, where much of his extended family still lived.  And he remained close to his grandmother for many years (she passed away just a few years ago).  She was a school teacher (of sixth graders), and clearly a major influence.  But his family in Florida had difficulties.  In an interview, he noted (when asked for a count) that 8 of his 10 closest family members either died young or spent time in jail.  This was also true for many of his friends.  When staying with his grandmother in Florida, he would also frequently visit an aunt, who ran a profitable crack-cocaine operation from her home.  One day he went to visit his aunt, but arrived later than normal.  When he did he saw the home surrounded by police.  Nearly everyone there was arrested, as he likely would have been had he arrived a bit earlier.

Fryer was certainly not separate from this.  He made money by selling marijuana as well as selling items he systematically shoplifted from stores.  Given the nature of his clientele, as well as the all-cash transactions involved, he carried a gun (a .357 Magnum).

He did not do well in his studies at school.  But he was active in athletics, and must have been quite good as he was awarded a basketball scholarship to play at the University of Texas at Arlington – an NCAA Division 1 school.  It was not one of the top basketball programs in the country (it only had 11 winning seasons out of 48 as of 2004, a few years after he was there), but with that scholarship he got into a decent college.  And as he later related in an interview, while he had to take the SAT in order to qualify for the basketball scholarship, he was only interested in getting a minimum score of at least the 700 required to participate in NCAA athletics.  He got that (I am not sure by what margin – he said he did not do well in part as he was still drunk from the night before).  But keep in mind that a score of 700 (out of a possible 1600, and where one cannot get less than 400) should not be all that difficult.  Based on the more recent scores for 2020 (which are easier to find than earlier scores, but should be similar enough), a score of 700 will place you at the 3rd percentile.  Note this is percentile – that is, the 3% mark, not 30%.

He attended UT-Arlington but in the end never played on the basketball team there.  His basketball skills might not have been at that needed for the college-level game.  But he enrolled in an economics class and loved it.  He was also very good at it, despite what must not have been very good preparation in high school.  But the professor teaching the class supported him, provided tutoring as needed, and with the support of a dean he was switched from his athletic scholarship to an academic one.  He excelled in his studies, and graduated Magna cum Laude in just 2 1/2 years – not the normal four.

From UT-Arlington he enrolled in the economics Ph.D. program at Penn State – a solid school with a number of good faculty members, although not an economics program one would rank as among the top 20, say, in the US.  He received his Ph.D. in 2002, but already from 2001 had obtained a post-doc position in the Department of Economics at the University of Chicago – one of the very top schools in the country for economics.  Jim Heckman (a Nobel laureate) was a sponsor and a major influence, and at Chicago Fryer co-authored papers with Steven Levitt (of Freakonomics fame, although that came later).

He began to author or co-author a series of influential papers (some of which will be discussed below), moved to Harvard in 2003, and began to accumulate a series of honors and awards.  At Harvard he entered as a Junior Fellow in the prestigious Harvard Society of Fellows (2003-06), became an Assistant Professor of Economics in 2006, and received tenure as a full Professor of Economics in 2007 at the age of 30 – the youngest African-American ever to receive tenure at Harvard and one of the youngest ever of any race.

As further evidence of Fryer’s work at the top levels as an economist, and the public recognition of it:

a)  As I write this, Fryer is listed as the author or co-author of 51 papers distributed by the National Bureau of Economic Research (NBER);

b)  In the most recent c.v. I have been able to find – which was as of February 2018 – Fryer listed 69 papers either published or as working papers in progress;

c)  He has had papers published in many of the top economics journals, including the AER, QJE, JPE, REStat, and JPubEcon, as well as numerous other peer-reviewed journals;

d)  He received a MacArthur Fellowship in 2011 (more commonly known as the MacArthur “Genius Awards”);

e)  He is a fellow of the American Academy of Arts and Sciences;

f)  He received the John Bates Clark Medal in 2015, which is awarded annually (prior to 2009 biennially) by the American Economic Association “to that American economist under the age of forty who is judged to have made the most significant contribution to economic thought and knowledge” (from the AEA website on the award).  Many of the recipients of this award later went on to win a Nobel Prize in Economics.  The first recipient, in 1947, was Paul Samuelson.

There have been numerous other awards as well, in addition to very substantial financial support that Fryer has received to enable his research from a number of foundations as well as through government grants.  A vehicle Fryer set up in 2008 for this work was the Harvard Education Innovation Lab (or EdLabs), which employed Harvard students (undergraduate and graduate), post-docs, and others (many, if not most, recent students).  At one point at least (and based on a photo in a video), there were close to 20 people working at EdLabs.  It was a major operation, with office space just off-campus.

Roland Fryer is certainly a solid economist.

B.  Work on Education

A focus of Fryer’s work, from the start, has been on education.  I will summarize some of that work here, as it is of interest in itself in addition to giving a sense of how Fryer approaches issues.

Among his earliest papers were several co-authored with Steven Levitt of Chicago on the Black-White test score gap – its magnitude, how it changes as kids age, and underlying causes.  They found that there was no gap at the very youngest ages (9 months – although I have no idea how one assesses intelligence or abilities at such an age), but that a substantial gap had opened up by the time the children had reached kindergarten age.  They found that just a few measures of social background (socio-economic status, birth weight, poverty status) could account for this fully.  That is, Blacks from a given social background scored the same as Whites from a similar social background at kindergarten age.  After that, however, the Black-White gap continued to widen, and it no longer could be fully accounted for by social background.  Something was happening as the kids entered into their school years, with what was happening in the schools themselves a possible cause.

At around this time, Fryer also looked at the issue of “Acting White” – work that he later became well known for.  While many politicians and others asserted it to be a fact and that it was holding back exceptional Black students, there was very little if any evidence.  Some cited surveys of students on whether they felt their popularity suffered if they got good grades, and the kids generally said no.  If true, then there was no such issue as “Acting White”.  But such self-reporting is not a reliable guide.

Fryer had the insight that one could instead use a very large survey (of 90,000 students in 175 schools) undertaken in 1994, that asked the students who their best friends were.  They could list up to five males and five females.  The insight was not simply to rely on who a student said his or her best friends were, but rather count only those who also named you as one of the best friends.  If it was not reciprocal, it did not count.

Once pointed out, it is a pretty obvious insight.  But no one had pointed it out before.

Fryer found that the popularity index values he constructed were pretty similar across races at the low grade point average (GPA) of a D.  It then grew steadily for Whites (i.e. the students scored higher on the popularity index as their GPAs went up), with no drop-off among those with the highest GPAs.  But while it also at first went up for Blacks (although not as steeply as for Whites), it then dropped off following a GPA of 3.5 (i.e. halfway between an A and a B average).  “Acting white” did seem to matter.  Black students with exceptional GPAs were less popular among their peers than those with a lower GPA.

Going a bit further, Fryer found that such a relationship did not exist for Blacks in private schools.  Nor did he find it in schools that were almost entirely Black (80% or more).  But, disconcertingly for those of us who believe in integration (as I do, and as I believe Fryer does), he found the penalty on popularity of the high-achieving Black students was much larger in the more integrated schools.  That is a problem for society.  And Fryer did not try to bury the result.  While disconcerting, it came out of the data.

At some time around 2006, Fryer became involved with New York City schools.  Joel Klein (appointed by then Mayor Michael Bloomberg) was the school chancellor and trying many things.  Some of the first work Fryer did was to examine whether one could have an impact via financial incentives.  He was a frequent visitor to a school in the Bronx, and on his own at some point bought pizzas for a class to celebrate the achievement of some goal.  This was repeated a few times, but he then wanted to look more systematically at whether rewards of some sort could make a difference.

His work built up by steps from there, as reformers in other school districts sought to have various proposals tested.  With financial support from foundations, Fryer developed a series of experiments in several school districts across the country to see whether financial incentives would have an impact on student achievement.  In the end, randomized control trials were organized in five cities (New York, Chicago, Dallas, Houston, and Washington, DC), at a total cost of just $9.4 million, and with 36,000 students (18,000 receiving the financial awards and 18,000 in the control groups) in 250 schools.  The schools chosen were inner-city schools of predominantly Black and Hispanic students, with high concentrations of students whose low family income qualified them for free lunches.  Three of the school systems were headed at the time by nationally-prominent school reformers (Joel Klein in New York, Michelle Rhee in Washington, DC, and Arne Duncan – later Obama’s Secretary of Education – in Chicago).

The work was controversial, and the education establishment did not like it.  Some argued that paying financial incentives to students would “destroy their love of learning”.  But there was no evidence of this in the results.  It was also noted that it would not be much different from the practice among many middle-class parents of rewarding their kids financially if they got good grades, or did their homework on time, or read certain books, and so on.

Fryer’s findings are well worth reading (see sources cited at the end of this note), but a brief summary of the main result is that financial incentives to students on the side of inputs (do your homework, read books, attend school as you should and behave well when there) had positive effects, although sometimes with marginal statistical significance.  The positive effects in just one year relative to the control groups (based on regressions controlling for various factors) were equivalent to accelerating student progress by the equivalent of one to two months of school.  While that in itself would not close Black-White education gaps, the rate of return given the low cost was enormous.  They paid 2nd graders in Dallas just $2 for each book they read, and 5th graders in Houston just $2 for each math homework assignment completed.  But such small financial rewards led to gains of one to two months of schooling (as a statistical best estimate) relative to the control groups.

Note also that the effects found in months of schooling gained are averaged over all who were in the group offered the financial incentives -whether they took up the offers fully, took them up only partially, or did not take them up at all.  They are therefore estimating the compounding of two effects:  whether the students will undertake the activity in response to the incentive, and if they do, whether this activity will then lead to a gain in an educational outcome.  One wants to measure the two together as even if some activity might lead to fabulous gains in terms of student outcomes, it will not matter if no one takes it up in response to the incentive.

In contrast to the benefits seen on the input side, financial rewards on the output side (i.e. tied to grades received on their report cards, or scores on tests) did not have a positive effect.  Indeed, while not at all close to statistical significance, the estimated coefficients were slightly negative in most of the cases.

Fryer also examined a New York City program that provided financial incentives to teachers.  He found that they did not matter.  This might, however, have been a consequence of how the specific program was designed (working with the agreement of the teacher’s union).  The bonuses were paid in some amount per teacher, but then as a total sum to the schools meeting certain criteria on student gains.  The schools would then decide how to divide that pot of money internally.  Individual teachers did not receive a financial incentive based on the gains of their specific students.

Financial incentives to students could be considered the demand side of education.  There is also the supply side – the schools themselves and how they teach.  As just noted, financial incentives to teachers (at least in the program examined) did not appear to matter.  But Fryer also took a close look at what was being done at several chartered schools run as part of the Harlem Children’s Zone project.  Those schools have been highly successful.  Fryer looked at this systematically by comparing the outcomes of students who won the lottery to get into the over-subscribed schools and the otherwise similar students who lost in that lottery.

The schools were amazing.  Fryer found that students starting in middle school (6th grade), while far behind White peers, were able in three years (i.e. by 8th grade) when attending the Harlem Children’s Zone schools to fully close the gap in math test scores and close about half of the gap in reading scores.  And children enrolled in their elementary schools were able to fully close the gap in both scores by their 3rd grade.  Those who had applied to try to enter the Harlem Children’s Zone schools but had not won the lottery performed similarly to others in the city system.  That is, they did not do well.  And six years later, those who won the lottery to get into these schools compared to those who had not were more likely to have entered college, less likely (if female) to have been pregnant, and less likely to have been incarcerated.

The question then was whether the model of the schools being run by the Harlem Children’s Zone could be replicated elsewhere.  Fryer contacted a large number of school districts around the country, but none were interested in working with Fryer on trying to copy the model until the school district for Houston expressed a willingness.  The State of Texas was preparing to take over control of a number of Houston’s schools that were deemed to be failing, so as a last alternative Houston was willing to allow the group Fryer had organized to take over management of the failing schools instead.  They were a mix of twenty elementary, middle, and high schools.

Major changes were made:  The school day (for middle and high schools) was lengthened by an hour plus summer vacation was shortened by two weeks – this increased the number of instructional hours by about 20%; they replaced 19 of 20 principals and close to half of the teachers; added tutoring for students who were lagging (in just the 4th, 6th, and 9th grades due to funding limitations); used frequent tests to assess progress during the school year and to decide if certain lessons should be repeated; and inculcated a culture of high expectations.  Fryer calculated the extra financial cost per student of all these measures was about $1,800, or an extra 15%.

The results were largely similar to those found at the Harlem Children’s Zone for math, but less for reading.  Gains in math for students in the elementary schools were highly significant statistically and such that the racial gap was eliminated in three years.  The results on reading were also positive but less and not always statistically significant.  The gains in math for the students in the middle and high schools were almost as large, but there were almost no changes in the reading scores compared to the controls.

And an anecdote:  Fryer related in an interview that one time when teaching his undergraduate class at Harvard, one of the students came up to him after the class.  The student told him that he had gone to one of the high schools in Houston that Fryer had worked with, and wanted to say thanks.  Fryer had not been aware of this until that moment.  It was a failing school, that the State of Texas was getting ready to take over due to its poor record, and now a graduate from that school had been admitted to Harvard.

Despite these highly positive gains, school districts around the US have largely ignored this demonstration of effective schooling.  One suspects that the fact 19 of 20 school principals were replaced, as well as close to half the teachers, may be a factor.

Fryer’s work on education is revealing.  It shows Fryer is hands-on, wishes to work out practical approaches, follows the data, and is both careful and able to use rigorous statistical approaches to examine results of real-world significance.  He has followed the same approach in looking at the issue of police use of force.

C.  Racial Differences in Police Use of Force

With the increased attention being given to police shootings in the 2010s following a number of prominent cases, Fryer initiated a study to determine the degree to which there were differences across races in police shootings in the US that might reflect racial biases.  It was assumed there were – the question was by how much.

The problem is that there was very little data.  It was well known that databases kept by the FBI were far from adequate as reporting shootings to the FBI is voluntary and many police departments choose not to.  More fundamentally, reports that are just tallies of numbers do not tell much as they do not provide data on the circumstances of the shootings.

Some police departments do keep such records, but often they are just on paper and not in a machine readable form.  After contacting police departments around the country, Fryer was able to obtain data on incidents where officer weapons were discharged from 10 large police departments (the cities of Austin, Dallas, and Houston; Los Angeles county; and 6 large Florida counties), each for some subset of the years between 2000 and 2015.  They got 1,316 cases and could code for 65 different variables, but the data included only incidents when an officer’s weapon was discharged.  Hence that data could not be used to address whether there were similar incidents when an officer’s weapon might have been fired but was not.

For this, Fryer was able to obtain detailed data from the City of Houston.  They were provided access to the written files – which could vary between 2 pages and 100 pages for each incident.  From the files for incidents of serious crimes where lethal force might have been justified (defined as attempted murder of a police officer, aggravated assault of a police officer, and resisting, evading, or interfering in an arrest), they combined the incidents where an officer in fact fired a weapon with a random sample of other cases where they did not.  They ended up with 1,532 cases, and had their researchers read the files and code for 300 variables.  To help ensure accuracy, they had each file read by two researchers, acting independently, and then checked whether both coded the same for the given variables given their reading of the files.

Fryer’s key, and surprising, finding was:

“we find, after controlling for suspect demographics, officer demographics, encounter characteristics, suspect weapon and year fixed effects, that blacks are 27.4 percent less likely to be shot at by police relative to non-black, non-Hispanics” (emphasis in original).

Similarly, with the data from the 10 large police departments (including Houston, but also the nine others they were able to collect data from), Fryer was able to examine the impact of race on whether the officer or the suspect fired their weapon first.  Taking all factors into account, he found in his regression analysis that an officer firing first in the encounter was 46% less likely when the suspect was Black.  And 44% less likely if the suspect was Hispanic.

There were important limitations, of course.  For starters, the data was only for Houston (for the first analysis) and only for Houston and nine other major cities/counties (for the second analysis).  The results might well be different elsewhere.  They also had to rely on case records as recorded by the officers involved.  That could add a particular slant.  More fundamentally, the results are conditional on instances where there was some form of interaction with the police (within a specified type of serious cases examined).

For these reasons, further work on police use of force to confirm (or refute) Fryer’s findings is certainly warranted.  But for reasons that will become clear in the next section below, many academics who would otherwise research this further will likely, for understandable reasons, choose to stay away.

While there are these limitations, this is the only statistically rigorous study I am aware of that has examined such police use of force.  Furthermore, in a separate short paper, Fryer looked at how the data sets he constructed on officer involved shootings compared to those others have assembled.  That data is unfortunately limited, but Fryer identified four sets:  1)  Data assembled by The Washington Post on officer involved fatal shootings and the victims; 2)  Similar data on fatal shootings assembled by The Guardian; 3)  Data assembled by VICE News from 47 of the 50 largest police departments in the US, that includes both fatal and non-fatal shootings; and 4)  Data assembled by Cody Ross, then at University of California – Davis, as the sole academic analysis he could find. 

Fryer compared the measures of bias that each of these four data sets presented to what that measure would be for his own data from the 10 large police departments (the 10 cities and counties).  The results across the resulting five data sets were mostly similar.  For example, the Washington Post reported the percentage of Black civilians among the unarmed men killed by police.  This was 40% in the Post data, and varied between 34% and 53% in the others.  In the Fryer data it was 44%.  All of these are, of course, far higher than the Black share of the population (which is 12%).  And similarly for the measures used by each of the others.

Fryer’s data therefore does not appear to be out of line with what others have found.  But what is different is that he was able, with his much richer set of observations on other factors, to take into account in his statistical analysis the impact of these other factors and hence could isolate the role of race.  And when he did, he found no evidence of racial differences.  Indeed, in the data he was able to assemble the racial differences went the other way from what was expected.  As Fryer later described it (in a New York Times article on the research), it was “the most surprising result of my career”.

Fryer’s results were certainly controversial.  As he recounted later, many friends advised him to bury his findings and not publish them.  But he insisted he would, and his paper appeared in the Journal of Political Economy in June 2019 – one of the top economics journals in the US.

D.  Consequences

The first draft of his paper on the police use of force appeared in July 2016; a revised draft is dated January 2018; and it was published in June 2019.  During this time, in mid-2017, Fryer decided that his personal assistant at Harvard EdLabs would be let go as she was just not able to perform the job adequately.  A severance package was negotiated and agreed upon.  But an administrator at Harvard decided it should be reduced by $25,000 (I have never seen from what to what).  Had that administrator not insisted on this, the matter would have ended there.

The staff member was upset with this $25,000 reduction.  A short time later, she had lawyers file a case against Roland Fryer (as well as Harvard) claiming there had been sexual harassment at EdLabs.  In response, the Harvard office responsible for examining such claims launched an investigation.

The filing prepared by the lawyers for the assistant listed 38 complaints.  The Harvard office investigating the charges dismissed 6 immediately, leaving 32.  Of those 32, they then concluded following their investigation that a further 26 should be dismissed.  Several included what they were able to show were fabrications by the assistant – that is, they could demonstrate the assistant had lied.  That left 6 complaints.  They concluded that these could be valid, even though in some they took the assertion of the assistant over the denial of Fryer (despite knowing that the assistant had fabricated a number of the other complaints).

From what has come out (these are all based on leaks, as the documents have not been officially released) the findings were that some of the banter in the office was considered inappropriate due to sexual innuendo.  One example was Fryer complaining at some point about some Harvard administrator, and saying that the administrator was acting as if they “had not had sex since Blacks were slaves”.  The other instances were similar.

In no case was there an assertion that Fryer had made an improper advance on any individual.  Rather, there was banter in the office that some later said they considered to be inappropriate.  Only one complaint was filed (by the personal assistant let go), but during their investigation the Harvard investigators were able to find three other women (including one who had been let go in 2008, the year EdLabs opened) who were willing to say that some of what Roland had said when they worked there they now considered to be inappropriate.  The number of staff who had worked at EdLabs by that point were in the dozens – overwhelmingly strong supporters of Fryer and glad that they had worked with him, and mostly women.

That there had been such banter was not denied.  Indeed, it was open and not a secret, although apparently not common.  And while it should not be belittled if such talk was seen by anyone in the office as inappropriate, there had been no such complaints made in the ten years since EdLabs had opened until the personal assistant filed her complaint after being fired (and a Harvard administrator decided that the negotiated settlement package should be reduced by $25,000).  During those ten years, no one had ever told Fryer something along the lines of “it is inappropriate to say that and it makes me uncomfortable”.  Had someone said that, including by any of the four who later told the Harvard investigators that they now considered some of the remarks to be inappropriate, the Harvard investigators would presumably have highlighted it.  The investigators certainly would have asked all the EdLabs staff they interviewed whether they had ever said themselves to Fryer, or ever heard someone else say to Fryer, that they considered some remark in the banter to be inappropriate.  And had someone told the investigators that, the investigators would certainly have emphasized in their conclusions that Fryer continued with such banter even after some member of the EdLabs staff had told him that it made them uncomfortable.  But there was evidently no such finding.

The conclusion of the Harvard office investigating the issue was that Fryer should be required to take sensitivity training.  And that was it.  Nothing else.

But that was then deemed insufficient by the then Dean of the Faculty.  And in her position as dean she would be the one making the final decision on the penalty, if any.  She decided to establish a special committee to advise.  That committee was then made up of members she personally chose, and she included herself on it.

Following that review, the dean then decided not only that Fryer would be suspended without pay for two years – with no contact allowed with students or others at Harvard (so students being supervised would need to switch to someone else) – but also that EdLabs would be closed, and closed permanently.  All EdLabs staff would be dismissed and all its research programs ended.

She also recommended to the then president of Harvard – Lawrence Bacow – that Fryer’s tenure as a university professor be revoked.  Bacow, however, declined to make such a recommendation to the Harvard Corporation (the trustees of Harvard), who would have had the final say.  No professor at Harvard has had their tenure revoked in more than a century.

Needless to say, many of those involved with EdLabs and Fryer’s research were shocked.  It was not only that Fryer was being punished severely (where even the Harvard office charged with investigating such issues only recommended sensitivity training to address the complaint), but all of EdLabs was in effect being punished as well.  By her edict, the valuable and important work of the lab – with most of it still centered on the education of minority groups – was being stopped.

This was, however, extremely convenient for those who approached racial issues in a different way, with different conclusions reached.  That included the Dean of the Faculty herself, whose own research focused on racial issues (with an appointment in the Department of Government and jointly in the Department of African and African-American Studies).  If Fryer’s findings were correct, then aspects of her own work would be undermined.

She was born in New York to Haitian immigrants, but had a comfortable upbringing.  It could not be more different from Fryer’s.  Her father was an engineer, and the family spent several years of her childhood in Saudi Arabia when her father was posted there.  She attended Phillips Exeter Academy – perhaps the most elite prep school in the US – and then received her BA from Stanford and Ph.D. from Harvard.  She taught first at Stanford and then returned to Harvard as a full professor.  She was later appointed Dean of Social Science in 2015, and Dean of the Faculty of Arts and Sciences in 2018.

That Dean of the Faculty was Claudine Gay.  And on December 15, 2022, Harvard announced that Claudine Gay had been selected to be the next president of Harvard, with her appointment to start on July 1, 2023.

E.  Conclusion

Glenn Loury, a Professor of Economics at Brown University and a co-author of several papers with Fryer early in Fryer’s career, summed it up well:

To do the kind of work Roland does, you have to be more than brilliant. You have to be fearless. And I cannot help but suspect that now Roland is paying the price for pursuing the truth wherever it leads.  Several years ago, he was accused of sexual harassment by a disgruntled ex-assistant.  In my opinion and that of many others, those accusations are baseless.  But Harvard has used them as a pretext to shut down Roland’s lab, to curtail his teaching, and to marginalize him within the institution.

I’ll not mince words.  Those at Harvard responsible for this state of affairs should be utterly ashamed of themselves.  They have unnecessarily, heedlessly tarnished the career of an historically great economist.  Again, I can’t help but suspect that they have effectively buried vital research not because it was poorly done but because they found the results to be politically inconvenient. “Veritas” indeed.

Postscript

As of July 2021, Roland Fryer was allowed by Harvard to return to teaching – at both the graduate and undergraduate levels.  However, he would not be allowed to supervise students or participate in an advisory role for a further two years.

 

Sources and References

Links are provided to readily accessible sources, when possible.  Articles published in The New York Times are unfortunately only available behind a paywall.  For academic articles, the link will generally be to the version of the paper that appeared on the NBER site, as these are openly available online while subscriber access is generally required for the final version that appeared in the journals.  The articles as published are normally identical to the final NBER versions, or at least are very close.

a)  Biography and Life Story:

The first article below is a profile of Roland Fryer that appeared in The New York Times Magazine in March 2005, written by Stephen Dubner.  Dubner had heard of Fryer from Steven Levitt, with whom he co-authored Freakonomics (that appeared also in 2005).  This profile by Dubner did much to make Fryer a known figure outside of the economics profession.  Much of the article is on Fryer’s upbringing.

Stephen Dubner, “Towards a Unified Theory of Black America”, The New York Times Magazine, March 20, 2005.

Other sources on Fryer’s life and work:

Announcement of the award in 2015 to Roland Fryer of the AEA’s John Bates Clark Medal (with substantial material on Fryer’s research).

Roland G. Fryer biography on JRank.

b)  Curriculum Vitae and Publications:

This cv dated February 2018 is the most recent I have been able to find.  The academic papers on the list of Fryer’s NBER papers (51 as I write this) can be accessed in full from this page in most and possibly all cases (at least for the papers I have tried to look up thus far):

Roland Gerhard Fryer, Jr. “Curriculum Vitae”, February 2018.

National Bureau of Economic Research (NBER), Roland G. Fryer page.

c)  Work on the Black-White Test Score Gap, Co-Authored with Steven Levitt:

The first article is for a more general audience, and the following two the academic papers.

“Falling Behind” (with S. Levitt). Education Next 4 (August 2004): 64-71.

“Understanding the Black-White Test Score Gap in the First Two Years of School” (with S. Levitt). The Review of Economics and Statistics 86, no. 2 (May 2004): 447-464.

“The Black-White Test Score Gap Through Third Grade” (with S. Levitt). American Law and Economic Review 8, no. 2 (July 2006): 249-281.

d)  Work on “Acting White”:

The first article is for a more general audience, and the second the academic article.

“Acting White”. Education Next, Winter 2006.

“An Empirical Analysis of ‘Acting White’” (with P. Torelli).  Journal of Public Economics, 94, no. 5 (2010): 380-396.

e) Work on Financial Incentives for Students and for Teachers:

The first article is again for a more general audience, and the others for academics. 

“The Power and Pitfalls of Education Incentives” (with B. Allan), Discussion Paper 2011-07, The Hamilton Project, September 2011.

“Financial Incentives and Student Achievement: Evidence from Randomized Trials,” Quarterly Journal of Economics, 126, no. 4 (2011): 1755-1798.

“Teacher Incentives and Student Achievement: Evidence from New York City Public Schools,” Journal of Labor Economics, 31, no.2 (2013): 373-427.

f)  Work on the Chartered Schools Managed by the Harlem Children’s Zone:

“Learning from the Successes and Failures of Charter Schools,” Policy Brief 2012-06, The Hamilton Project, September 2012.

“Are High Quality Schools Enough to Increase Achievement Among the Poor?” Evidence from the Harlem Children’s Zone” (with W. Dobbie). American Economic Journal: Applied Economics 3, no. 3 (2011): 158-187.

“The Medium-Term Impacts of High-Achieving Charter Schools,” (with W. Dobbie),  Journal of Political Economy, vol 123, No. 5, October 2015.

g)  Results from New Management of a Group of Low-Performing Public Schools in Houston:

“Injecting Charter School Best Practices into Traditional Public Schools: Evidence from Field Experiments,” Quarterly Journal of Economics, August 2014, vol. 129, issue 3: 1355-1407.

h)  Work on Police Use of Force:

Link to the final NBER version of the paper:

“An Empirical Analysis of Racial Differences in Police Use of Force”, NBER Working Paper #22399, revised draft, January 2018.

Link to a pdf file of the paper as it appeared in the Journal of Political Economy:

“An Empirical Analysis of Racial Differences in Police Use of Force”, Journal of Political Economy, June 2019, vol 127, no. 3: 1210-1261.

The paper comparing statistics on racial differences in police shootings in the Fryer data to what they would be when defined as in four published sources:

“Reconciling Results on Racial Differences in Police Shootings”, AEA Papers and Proceedings, May 2018, vol. 108: 228-233.

i)  The Harvard Investigation:

  1)  The New York Times article reporting on the conclusions of the Harvard investigation of Roland Fryer:

Jim Tankersley and Ben Casselman, “Star Economist at Harvard Faces Sexual Harassment Complaints”, The New York Times, December 14, 2018.

  2)  Roland Fryer, letter to the New York Times in response:

Roland Fryer, “At a Harvard Lab, the Accused Responds”, The New York Times, December 20, 2018.

  3)  Article of Stuart Taylor, Jr., on the Harvard investigation and the bias in the New York Times report on it:

Stuart Taylor Jr., “Harvard, the NY Times and the #MeToo Takedown of a Black Academic Star”, Real Clear Investigations, January 29, 2019.

  4)  New York Times article reporting on Harvard’s decision to suspend Fryer and permanently close EdLabs:

Ben Casselman and Jim Tankersley, “Harvard Suspends Roland Fryer, Star Economist, After Sexual Harassment Claims”, The New York Times, July 10, 2019.

  5)  Glenn Loury’s assessment of the saga:

Glenn Loury, “The Truth about Roland Fryer”, March 13, 2022.

A Way Forward on Gun Safety: A Doable Reform That Could Make a Difference

This post was updated on October 4, with the addition of the Executive Summary and some minor editing of the text.  Several further changes were made on October 25 to clarify certain points, in response to comments received.  The substance has not been changed.  

Executive Summary

Deaths due to guns are far too high in the US – see the chart above.  And following the all-too-frequent mass shootings in the country, including the one at Uvalde, Texas, earlier this year, calls are made for something to be done.  Yet little is ever achieved.  While new gun safety legislation was passed following Uvalde, it was modest at best.  No one expects any measure that might put a significant dent in the number who die each year from firearms could ever be passed by the US Congress.  But a different approach is possible.

Two measures that have been proposed in the past, but which have not been put together, could have a far greater impact.  As importantly, the measures could be implemented through actions that a president has authority to take, coupled with actions that could be implemented in the states most willing to address gun safety.  As a track record is created and confidence is gained, it could then spread to further states.

The first pillar is to make available reliable personalized firearms (also often called “smart guns”), that will fire only when the owner is pulling the trigger and not when anyone else is.  The technology exists, but like any technology can be further improved.  One approach is fingerprint identification – a technology that has now been placed on hundreds of millions of smartphones worldwide, as well as on laptops, keyboards, and other devices.

Personalized weapons will not fire for others.  No longer could a child, when finding a parent’s loaded gun, end up tragically shooting themselves or a playmate.  Nor could a personalized firearm be used by a teen or preteen who, tragically, might be suicidal.  Nor would a personalized gun that had been stolen or obtained in some other way be of any use to teens in a gang – they would not fire (and one has to be 21 to buy a handgun).

Personalized firearms would also be safer for police and others.  Approximately 10% of police killed in the line of duty are killed with their own service weapon (or that of a colleague) – a weapon that was seized in a struggle with the officer as they tried to subdue a subject.  Similarly, private individuals confronting a criminal have often ended up being shot with their own gun.  (And while certainly not something I would recommend, there are those who believe teachers in schools should keep loaded and easily accessible guns in their classrooms.  A personalized firearm would not fire if a disgruntled student grabbed it.)

But perhaps the greatest value of personalized firearms that are linked to, and will fire only for, an individual owner is that they would change the dynamics of how guns end up in the hands of criminals. Stolen guns would be of no value to them – they could not be fired.  The same would be true for guns obtained through a straw purchaser (a colleague or a girlfriend), or from another gang member, or purchased on the black market.  Most criminals are armed with such illegally obtained weapons.  Personalized firearms would be of no use to them.

Making personalized firearms available would be complemented with an incentive to switch to them.  This is the second pillar, which would require gun owners to hold liability insurance that would pay compensation for any unjust harm caused by their gun.  This proposal comes from Jason Abaluck and Ian Ayres (professors at Yale).  The basic idea is similar to the requirement that all car owners hold insurance to cover the liability resulting from damages that car might cause – something required in all 50 states.

The payments would be at a standard amount (based on the nature of the injury) set by an insurance regulator.  This is similar to what is done for workers’ compensation insurance, and would allow the parties to avoid going to court to determine in each case the compensation to be paid.  Court processes are slow and expensive.

Private insurers would then have a strong incentive to determine (in competition with other insurers) what the insurance premium rates would need to be in order to cover the risks.  They would need to assess the risks and charge accordingly.  As for car insurance, those risks will likely be assessed based on factors such as the age of the owner, their gender, any criminal or other such record, the nature of the firearm being insured, and more.  Rates for hunting rifles, for example, would be relatively low, while those for handguns higher.  Importantly, the risks and hence the rates on personalized firearms would be well below what they would be for similar traditional weapons in similar hands.

Compensation payments in cases of suicides would need to be handled differently.  Just like for life insurance (which is not paid on suicides), paying the estates of those who commit suicide with their firearm could encourage such a tragic event.  Rather, the compensation payments from the insurer in such cases would be paid into a general fund.  That fund would be used for compensation payments to those harmed by a firearm, but where it was not possible to trace the origin of the firearm used.

The third pillar is that it can be implemented in a step-by-step process that does not require new federal legislation.  To start, the Biden administration would work with existing as well as potential new manufacturers of personalized firearms to further develop the technology, organize tests and demonstrations of reliability and effectiveness, and then based on the results of such tests, declare which models met the standards and would be eligible for federal procurement.  This is all within the standard authority of the executive branch.

Those models would then be made available as an option to federal officers who carry firearms.  They would not be required, but with over 130,000 federal officers carrying firearms, there will certainly be many who would prefer them.  Similarly, such models would be made available to the over 750,000 sworn state and local officers who carry firearms, in those jurisdictions that approve and for those officers who would prefer the safety of such arms.

Experience would then build confidence in the suitability of personalized firearms.  As that confidence grows, and as production costs come down with mass production, demand for such personalized firearms would also grow among private individuals.  Many gun owners – should they feel they have a continued need to keep guns in their homes – would prefer such arms.

In parallel, states keen on addressing gun violence would introduce liability insurance requirements.  Insurance in the US is organized at the state level.  Certain states could take the lead to establish the model and show what works, but the more states that participate the better.  The lower premium rates on the lower-risk personalized firearms would be a strong incentive to switch to such arms.

Ideally this should apply in all 50 states.  Realistically, one must recognize that a number of states will be reluctant or even opposed.  But as a track record is established, attitudes will hopefully change.  It may well take decades, as those attitudes are driven by fear and fears can be strongly held.  But the aim is a virtuous circle, where progress in reducing gun violence leads to the measures spreading more widely, which in turn leads to a further reduction in gun violence.

It certainly will not be perfect.  There will be those who seek to evade the law, and deaths due to guns will certainly not end overnight.  But with the US as such an extreme outlier, it would not take much to do better.

 

A.  Introduction

The tragedy of shootings in the US has not stopped.  In May, an 18-year old in Uvalde, Texas, slaughtered 19 school children – aged 9, 10, and 11 – plus two of their teachers.  Following such tragedies – as also after the killing of 14 teens and three adults at Stoneman Douglas High School in 2018, and the killing of 20 children aged 6 and 7 as well as six adults at Sandy Hook Elementary in 2012 – there are calls for something to be done.  But opponents of measures to place limits on the easy availability of weapons in the US have always succeeded in blocking any serious measure that would put a real dent in gun deaths in the US.

While it is commendable that Congress did pass a new gun safety law following Uvalde, it was modest at best.  While accurately described as the most important gun safety measure passed since 1994 (when a partial and temporary – now expired – ban on sales of new semi-automatic assault rifles was approved), the compromises required in order to secure enough Republican votes to allow passage given the Senate filibuster rules limits what it will do.  There will be enhancements to background checks to include juvenile records; individuals will be allowed to petition courts to limit gun ownership of previous intimate partners who have been guilty of domestic violence (closing what has been called the “boyfriend loophole”, as earlier law applied only to spouses); plus it authorizes increased federal funding to the states to implement mental health and crisis intervention programs and to enhance school safety investments.

While such measures are positive and should be applauded, it is telling that even such a modest bill can be accurately described as the most significant gun safety measure in close to three decades.  But sadly, there is no reason to believe that such measures, while positive, will have much of an effect on the overall number of those killed each year in the US from firearms.  Over 47,000 died in the US in 2021 due to gun violence.  And while mass shootings are particularly horrific, the number who die each year in mass shootings will normally be in the dozens.  Most deaths come from the “routine” use of guns to shoot someone, and rarely make national news.

Far more certainly could and should be done.  This blog post will describe one such reform – a major one – that actually could have a substantial impact.  It also could have a greater than zero chance of being implemented.  It would be a market-based approach based on the principle of individual responsibility (which might appeal to those conservatives who believe in individual responsibility as well as market-based measures), plus the focus would be on providing individuals a new choice – and not an obligation – on the kind of guns they may choose to own.

Nor would it require new legislation to be passed by Congress.  The initial impetus would be actions that a president has the authority to take.  This would then be complemented with measures that can be approved at the level of individual states.  States that are most willing to enact measures to reduce gun violence could take the lead.  While it would be more effective with a regional grouping of states, and more effective still at a national level, one could start in individual states and then see it spread as experience is gained and as a track record is established.

There would be two elements in the measures themselves.  The first would be a broad introduction of personalized weapon technology (often also called “smart guns”) – where the only one who can fire the gun is the owner.  The second would be a financial incentive to switch to such guns.  The latter would be achieved by the requirement that those owning a weapon must buy liability insurance for that weapon, where private insurance companies would set their rates for such coverage to reflect their assessment of the risk of that weapon causing harm.  One should expect the rates to be low on a personalized gun but relatively high for regular handguns.

Neither of these proposals is new.  But I have not seen the two put together before.  And together they should be expected to be far more effective than either individually, as they reinforce each other in an important way.

This blog post will present how such a program would work and could be implemented.  The post will first discuss how personalized firearms would not only stop many of the deaths (such as of children) that arise with current weapons, but would also very importantly change the dynamics of how criminals and criminal gangs arm themselves.  There would be no value to them of a personalized gun that had been stolen, or obtained through a straw purchaser, as they would not be able to fire it.  This will be followed by a discussion of how liability insurance on firearms would work.  And the section following that will then look at how one might get there from where we are now.

All major reforms to reduce gun violence in the US have failed.  While there is good reason to remain skeptical, the US is such an extreme outlier compared to other nations that it should not take all that much to get to a better place than where the country is now.  As the chart at the top of this post shows, homicides from the use of firearms in the US (adjusted for population) are close to an order of magnitude higher than in any other developed, democratic, country.  The closest is Canada, with a homicide rate due to firearms of 0.49 per 100,000 (based on the annual average from 2016 to 2019), versus 4.2 for the US in this period.  That is, the homicide rate was close to nine times higher in the US than in Canada.  It was more than twenty times higher than in the European Union, and well more than 100 times higher than in the United Kingdom.  [The figures were calculated from data collected by the Institute for Health Metrics and Evaluation (IHME), where the most recent comparable data across countries is for 2019 (and 2020 would have been a special case anyway due to Covid).  I took the annual average over 2016 to 2019 to avoid the possibility of an exceptional figure for some country in any given year.]

The incredibly high rate of gun homicides in the US could well be seen as depressing.  Why should the US stand out in this way?  But one can also see it as an indicator of what is possible.  Other countries from around the world show that deaths from guns at the rates seen in the US are far from inevitable.  It really should not take much to reduce US rates to well below where they are now.

B.  The Impact of Personalized Gun Technology

The aim is simple:  Make available guns that will fire reliably and with no special action by the owner, but not by anyone else.  That is, a positive identification would enable the gun to be fired by the owner, but not when someone else is handling the gun.  The technology exists, with alternative ways to enable this.  See, for example, here, here, and here, or this now somewhat dated 2013 report prepared by the US Department of Justice.

There are two broad approaches in the technology as it currently stands:  one relies on biometric information for the individual owner (with recognition of that individual’s fingerprints, palm prints, hand grip pattern, blood vein patterns in the hand, voice, and/or face), while the other uses token-based systems (where an RFID reader in the weapon is linked to an RFID tag or token embedded in an item carried by the owner, such as on a ring, watch, bracelet, wristband, and/or badge).  Token-based systems are the easiest to implement, but would not provide all of the advantages of a true personalized firearm.  While it would stop the accidental firing of a gun by a child that came upon such a weapon at home, for example, it would not stop such weapons from being sold to criminals in the black market (as the RFID token could be provided along with the weapon).  Still, it would be a step forward in reducing the risks of harm from firearms, and better than doing nothing at all.

While initially personalized guns will be basically hand-assembled and expensive, their ultimate cost should not be all that much more than for a regular gun once mass production starts.  ID systems no longer cost much.  Fingerprint ID sensors have been built into hundreds of millions of smartphones, as well as into devices such as laptops and keyboards.  And as for the cost, an Apple keyboard with Apple’s Touch ID button built-in costs only $50 more than a similar Apple keyboard without Touch ID (and this is at Apple’s premium prices).  While this technology, like any technology, can and should be further developed, technology is not the constraint on making such weapons now.

There are clear and important benefits.  Starting with the more obvious and then proceeding to those that would change the dynamics of how guns spread to criminals:

a)  Children:  It would save the lives of many children – from toddlers to teenagers.  All too often, young children come upon a loaded gun of their parents in their home, play with it, and then accidentally shoot themselves or a playmate.  As they get older, such guns may be used by a depressed teen or pre-teen to commit suicide.  And teenagers are all too often the victim of a firearm assault, usually by a handgun illegally obtained by another teenager.

In 2020, deaths due to firearms were the number one cause of death of those aged 1 to 19 – exceeding the number killed in traffic accidents.  And the mortality rate due to firearms in the US of children aged 1 to 19 – at 5.6 per 100,000 in 2020 – was close to 20 times the average in comparable countries of just 0.3:

This analysis comes from the Kaiser Family Foundation (KFF), using CDC and IHME data.  It is tragic that the US should stand out in this way.  While these figures include deaths when it was an adult handling the gun and pulling the trigger, such cases are only a small share of the total.

Rather, those deaths will largely be deaths due to other children holding the guns.  But by federal law, the minimum age to buy a handgun is 21.  Children cannot buy them.  While 18 and 19-year olds can buy shotguns and rifles in many (but not all) states – even though they cannot buy a beer in many of those same states – deaths due to homicides or suicides are largely from handguns.  According to FBI data, 94% of homicides by firearms (when the type of firearm was reported) were by handguns.  And almost all suicides are by handguns.  Thus almost all deaths of children due to firearms were likely by firearms obtained from someone else.  If children were not able to fire a gun they came across in their parent’s nightstand or obtained from someone else – due to personalized gun technology that would keep them from firing – most of those lives would have been saved.

b)  Police:  Two studies, of the partially overlapping periods of 1996-2010 and 2003-2013, each found that approximately 10% of the police officers who were killed while in the line of duty were killed by their own service weapon (or that of a colleague also at the scene).  This would typically involve a struggle with the suspect as the police are trying to subdue him (or her, but almost always a him), where the suspect was able to take control of the officer’s weapon and then use it on the officer.

This would not be possible if the police officers were using personalized weapons that only they could fire.

c)  Private individuals:  While there do not appear to be good statistics readily available on the number of private individuals who die from their own firearm when confronting a robber, burglar, or some other criminal (at least from what I have been able to find – only anecdotal stories such as this one), the share could well be higher than is the case when police officers confront criminals.  Police officers are trained to handle such situations; private individuals are not.

d)  Guns with Teachers in Schools:  While certainly not something that I would endorse, there are those (such as the NRA and former President Trump) who believe the way to make schools safe would be to provide teachers with loaded and easily accessible guns in their classrooms.  But one can easily imagine the tragedy that could follow when a disgruntled child or teenager could grab such a gun as easily as the teacher could.  And with millions of classrooms in the US, such tragedies would likely not be rare.

The situation would be different if it were a personalized weapon that could not be fired other than by the teacher.  While still not something I would recommend – teachers are not trained police officers – at least such guns would be of no use to a disgruntled student.

e)  Ending the trade in stolen guns:   The benefits listed above go to specific groups – certainly important groups (children, police officers, individuals confronting criminals, and teachers) – but still relatively narrow.  But with biometrically-based personalized guns the norm, there would also be a fundamental change in how guns spread in the nation, and in particular in how they get into the hands of criminals.

Specifically, since biometrically-linked personalized guns can only be fired by the owner, they will be of no use to anyone else.  Thus there will no longer be any reason to steal them, whether from an individual or from a gun shop.  This has become particularly important with the recent (June 2022) Supreme Court decision overturning a 109-year old New York State law that limited the carrying of concealed weapons outside of the home.  Guns carried outside of the home are easier to steal – with most of those thefts from unlocked parked cars.

We know what will likely now follow, as one can see what followed after a number of state legislatures chose to revoke such laws that had been on the books in their states.  A recent careful study (issued by the NBER, and summarized here and here) found that such changes led to a 35% increase in gun thefts, a 32% increase in armed robberies, and a 29% increase in overall firearm violent crimes (all controlling for other factors).

With personalized weapons, there would be no value in stealing a gun.  It would not work for the thief.

f)  Straw purchases:  With only biometrically-based personalized guns available, there would be no value in someone using a straw purchaser (such as a colleague or girlfriend) to purchase a gun when they were barred from doing so (for example due to a criminal record).  Such a gun would be of no use to them.  Such straw purchases would of course only totally cease when all guns for sale were such personalized guns.  Until then, gun manufacturers and gun shops would be serving two markets:  One for those who desire a gun only for their personal use, and one for guns that are of value to criminals who wish to illicitly pass along a gun they purchased to someone ineligible to buy one.

Such straw purchases serve not only criminals in the US.  The drug cartels in Mexico largely arm themselves by such straw purchases in the US, particularly in states with lax laws on gun purchases.  The Government of Mexico estimates that more than a half million guns are smuggled each year from the US into Mexico arming these gangs (with those guns largely obtained through straw purchases, they note).  They estimate that 70 to 90% of the guns recovered at crime scenes in Mexico had been smuggled from the US.

g)  Guns in gangs:  With biometrically-based personalized guns, there would be no point in passing around guns within a criminal gang to other members:  they would not be able to fire them.  But as long as guns that anyone can fire are available, criminal gangs will be able to obtain guns they can provide to other members for some criminal activity.  As in the case of straw purchasers, gun manufacturers and gun shops would know that they are serving two markets:  One where the guns are for personal use and one where they are of value to criminals.

h)  Black market:  Similarly, a black market in guns – for sale to individuals who would not be permitted to buy them from gun shops for some reason – could only exist for non-personalized weapons.  A personalized gun linked biometrically to an individual would be of no use.

Those who believe that weapons should be kept away from criminals should strongly support a move to personalized guns.  The NRA itself has noted:  “Most people sent to prison for gun crimes acquire guns from theft, the black market, or acquaintances.”  It went on to say: “Half of illegally trafficked firearms originate with straw purchasers who buy guns for criminals.”

Personalized guns would end this.

C.  Liability Insurance on Guns

The complementary reform to making personalized guns available would be to require that all gun owners carry liability insurance to compensate those harmed by the use of that gun – whether criminal or accidental.  The proposal was set out by Jason Abaluck and Ian Ayres, both professors at Yale, in a column written for the Washington Post and published in June 2022.  As they note, all car owners are required to carry liability insurance on their cars, to compensate those who may be harmed when that car is driven.  Those harmed by the use of a gun should be similarly compensated.

The basic elements of the approach are:

a)  The insurance would be market-based.  Private insurers would provide the policies, and would charge insurance premium rates that in their estimation reflect the risk that that gun might be used in a way that causes unjustifiable harm.  The harm might be accidental or criminal, but a victim has suffered either way.

b)  The amount of the compensation will depend on the extent of the harm, but would be paid at given amounts pre-set by a regulator (where in the US, insurance regulators are state-level entities).  This would be similar to how claims under workers’ compensation insurance are handled, where each state sets out a formula for the compensation based on the nature of the injury and other relevant factors.  There would then be no need to resort to the courts to determine damages in each case, thus avoiding the high costs and often long delays of the courts.

c)  The premium rates would then be set by the private insurer, in competition with other private insurers, at rates that best reflect that insurer’s judgment that their costs would be covered.  There would be a strong incentive for the insurer to research what factors are associated with the harms caused by the possession of guns.  One might speculate that these would include factors such as the age of the owner, gender, whether they had a criminal record or not, and more.  But one factor that some fear might be included would not be:  There could be no differentiation based on race (whether one thought – when other conditions are already taken into account – that this might be an independent factor or not), as that would violate anti-discrimination laws.

d)  The premium rates would also, and importantly, depend on the nature of the gun.  Hunting rifles are seldom used in crimes, and the insurance rates on such weapons would be low.  The rates on personalized guns – which only the owner can fire and hence are not ones that might be fired accidentally by a child or of any value to a criminal gang if stolen (as discussed above) – would be particularly low.

e)  While the actual premium rates would depend on what the insurers find by their due diligence, plus also depend on the standard rates of compensation that would be set in a particular state, to illustrate one might assume an average rate for such liability insurance on a gun might be $100 a year.  But on a hunting rifle it might be $50 a year on average, and on a hunting rifle of an older owner (say over the age of 30) it might be just $30 a year.  The liability insurance on handguns would cost more, as would insurance for those who are young.  This is all similar to what one finds with car insurance, where the rates depend on the age of the driver, gender, prior driving record, and the particular make and model of the car.

And it is important to note that insurance rates on personalized guns would be well below what they would otherwise be for the type of gun and for given factors such as the age of the owner – probably at least half or less.

f)  Liability payments in the case of suicides would need to be treated differently.  Suicide through the use of a readily available firearm is, sadly, common in the US.  Suicide by firearm accounted for over 60% of all firearm deaths over the last decade according to CDC data (in the decade to 2020 – the most recent year in the CDC data).  While it fell to “just” 54% in 2020, that was only because homicides due to firearms jumped by 35% in 2020.  (And it is noteworthy that despite all the stresses of Covid in 2020, the number of suicides by firearms in 2020 was basically the same as in 2019, and below what it was in 2018.)

If, in a suicide, the compensation payments were paid to the family of the deceased, there could be a perverse incentive motivating at least some of the suicides.  This is similar to the issue with life insurance, which is therefore not paid in cases of suicide.  To handle this, Abaluck and Ayres propose that payments from the insurer would still be made.  This would motivate the insurer to charge higher premia in cases where suicide risk may be high (which would in turn lead to fewer guns in the hands of those with such risk).  But the compensation paid would then go into a general fund to compensate victims of gun violence in cases where the guns used could not be traced.

Sadly, with suicides accounting for well over half of all the deaths due to firearms, this fund to compensate those where the firearm could not be traced would be “well funded”.  And this would address the criticism that some might have that the guns used in at least some of the criminal homicides might not be found.  It would still be possible to compensate those victims.

g)  All firearms would need to be registered, but this is already required (at least for certain types of firearms) in some states in the US.  While there are currently only six such states that require some such form of registration, those six states include California and New York and together account for one-quarter of the US population.  And it is worth noting that five of those six states (including California and New York) are in the top seven states in the US with the lowest death rates per capita from firearms in the US (CDC data for 2020).  The average death rate from firearms in those six states is less than half the rate in the rest of the nation.  While there are of course many factors involved in determining mortality from firearms, this does suggest – contrary to what the NRA would say – that such registration requirements do not make things more dangerous.

The registration process could also be used as the process by which a personalized firearm is “locked-in” to a specific owner.  That is, any newly purchased firearm would need to be brought in to some designated location (possibly some specific police station, as set by the local jurisdiction), that would have the special equipment needed to unlock the firearm and then lock it in to the fingerprints or other biometric measure of the specific owner.  Until it is unlocked in this way, the weapon could not be fired by anyone.  And after it is locked in to the new owner, it could not be fired by anyone else.

h)  Firearms sold in the US are already required by federal law to have a unique serial number engraved, stamped, cast, or otherwise embedded into them, to certain specifications (e.g. their depth) so as not to be easily removable.  Those serial numbers link a specific gun to a registered owner.  One would of course expect criminals would seek to evade this by trying to obliterate the serial number.  However, that is not easy.  Scratch marks are obvious, and even when a serial number is scratched out, there is special equipment that can often still recover the serial number, as the process of imprinting that number will lead to identifiable deformities in the underlying metal.

Police would in any case be legally able to seize any gun with a serial number that had been scratched out or otherwise hidden, or when not in the possession of the registered owner with a valid liability insurance cover – when the police find such a gun on someone who had been stopped for some reason.  Police are often blocked from seizing such weapons now and from making arrests connected to them.  Responsible owners would have no reason to worry, as there would be an ID on the gun and they would have proof of their liability insurance.  This is just as is typically required now when a car driver is stopped by the police for some reason (where the first request typically made by the police officer is to please provide proof of registration and insurance).

Criminals without this would indeed have reason to be concerned, just as a criminal driving a stolen car who is stopped by the police has reason to be concerned.  Others should not be.

i)  A more recent technology that is now available is for guns to place a unique, identifiable, mark on the cartridge casings that are ejected as a gun is fired.  Called microstamping, California passed a law in 2007 that all new models of semiautomatic pistols for sale in the state would need to incorporate microstamping once certain patents had expired so that the technologies would become publicly available without constraint.  Those patents expired in 2013, and hence the requirement came into effect from that date.  However, under pressure from the gun lobby, gun manufacturers then avoided the requirement by not introducing new models of such guns – as the law only applied to new models.  California then passed, with effect from July 1, 2022, a revised law easing the requirement and with other modifications, but it is too early at this point to see whether it will be skirted as well.

Microstamps on cartridges would prove to be of great help in tracing the guns used in a crime, and hence in solving those crimes, as spent cartridges will normally litter the scene.  Pro-gun groups have, however but not surprisingly, criticized the California law as unworkable, and brought lawsuits against it.  They argued that criminals would seek to evade the law by grinding down the mechanisms imprinting the microstamps.  However, the California Supreme Court ruled against them.  (Furthermore, while criminals do indeed seek to evade the law, that would seem to be tautological.  That is what criminals do.)

There is no doubt that the technology for microstamping, already good, could be made better.  That is true of any new technology.  But while there should be further such work, the technology as it exists would already be of tremendous benefit in solving many of the unfortunately numerous cases where guns are fired in a crime in the US.  And while such microstamping would lead to more criminal cases involving guns being solved, it is not absolutely necessary for a liability insurance system to work.  Rather, it would make such a system work better.

It does, however, pose a separate issue.  One would want to encourage all responsible gun owners to arm themselves – in those cases where they feel they have a continued need to arm themselves – with weapons that incorporate such microstamping technology.  Many of those weapons are subsequently stolen or otherwise end up arming a criminal, and if they are not personalized weapons, may be used in a crime.  Then, precisely because it would be possible to identify the weapon that had been fired to harm somebody even if the shooter got away with his gun, the insurer who had provided liability insurance on that weapon would need to pay the resulting claim.  Because of this, insurers would have an incentive to charge higher insurance premium rates on weapons with the microstamping technology.  This would not apply to personalized guns – as such guns could not be fired by anyone other than the owner – but would apply to traditional weapons.

To address this, one could have a requirement from the state’s insurance regulator (or by legislation) that the insurance rates on weapons with the microstamping technology would be charged at some lower rate – perhaps half – than the rate for a similar weapon but without that technology.  To make up for the other half, transfers could be made from the fund discussed above to compensate victims where it was impossible to trace the gun that was responsible for the harm.  That fund would be funded by the compensation that would have otherwise been paid in cases of suicides, and with suicides in recent years generally accounting for over 60% of deaths due to firearms, that fund would have ample balances.

j)  Requiring liability insurance coverage would not only be a strong incentive to choose a personalized gun if one is going to buy a gun, but would also be a strong incentive to turn in at least some of the extra guns that a person may have.  According to a survey by the Pew Research Center, 66% of those who own a gun say they own more than one gun, and 29% say they own five or more guns.  Gun owners, when faced with paying liability insurance premiums each year for each of their guns, would now have an incentive to turn in their excess guns (possibly all of their guns) in one of the increasingly common police buy-back programs, rather than simply let them accumulate in their home.

As they grow older, gun owners will also often realize that guns around the home – especially several guns around the home – do not make their families safer.  But it is easy now to do nothing and allow such guns simply to lie around in a cabinet.  Having to pay an insurance premium each year would be a reminder, as well as an incentive, to do something about it.  And taking such guns out of circulation would end the risk that they may end up in someone else’s hands and be misused.

k)  Insurers providing liability insurance on firearms would require the loss or theft of a firearm they insured to be reported immediately to the police.  There is no nationwide practice on this now, other than by federally licensed gun dealers (where there is a federal law requiring this).  While 13 states plus Washington, DC, do require such reporting by gun owners, and two more require such reporting in certain circumstances, the 35 other states have no such requirements.  While this reporting would not be as important for personalized guns (as discussed above), stolen guns that can be fired by anyone feed criminal activity.

Mandatory liability insurance would be an additional incentive to be careful where one stores a gun.  Guns kept in unlocked cars are a major source of such thefts.  Someone with a history of guns being lost due to such negligence would pay higher liability insurance rates.  This would lead gun owners to be more careful.

l)  Insurance requirements are a state-level matter in the US.  Thus states can decide individually whether to require liability insurance on firearms kept by residents of their states, just as each state decides what to require on liability insurance on cars.  Note there is no Second Amendment issue here – even though gun advocates will undoubtedly claim that there is.  While the modern interpretation of the Second Amendment by the current Supreme Court is that there is an individual right to keep a firearm at home (and with the recent decision overturning the 109-year old New York State law, also a right to carry concealed weapons outside of the home), there is no right to getting such firearms for free.  You must pay for them.  Similarly, a state can require you to pay for liability insurance that will compensate those harmed by an illegal or accidental discharge of that firearm.

It would of course be far better for all states to require such liability insurance rather than just some.  But an individual state could adopt it, and ideally work with other nearby states so that such insurance would be required on a regional basis.  Those living in reluctant states that do not at first have this would then see how well the process has worked in the states that had adopted it.  Assuming it proves effective, voters in those states – “armed” with such evidence – can then work to require their own legislatures to adopt similar measures.

This now gets into the process by which these dual reform measures (personalized firearms and liability insurance on firearms) could be implemented – the topic of the next section below.  We have seen that the reforms are workable.  There is nothing impossible here.  The issue, rather, is one of willingness.

D.  A Step-by-Step Program

How to get there from where we are now?  It will not be easy, and one should recognize that it may take decades due to the emotions involved.  Attitudes will need to change, and as these attitudes are driven by fear, they can be strongly held.  Current gun owners will need to see that personalized weapons are reliable and effective, as well as safer for them and their loved ones.

Proceeding step-by-step would allow confidence to build over time, fears to diminish, and should ultimately lead to a far better place than where we are now.  A program can start with measures that the Biden Administration, acting within the authority a president has, can act on.  States willing to take measures that would curb gun violence can also act.  Experience can then create comfort, and demonstrated progress can lead to confidence that this path forward leads to lower gun violence.  The aim is a virtuous circle, where progress in reducing gun violence engenders greater confidence and hence willingness to implement such measures more broadly, which in turn leads to lower gun violence.

Specifically:

a)  To start, the Biden administration should work with both current manufacturers of personalized firearms, as well as with potential new manufacturers, to further develop the technologies involved.  While technologies exist, they can always be refined and improved – making them more reliable, easier to use, and lower cost.  This can be done with the authority federal agencies (such as the FBI, the ATF, and others) have to develop equipment they might use.  A focus would be on reliability – that the personalized gun will always fire when the finger of the owner is on the trigger and not when that of someone else is.  One would also want a technology that could not be disabled or disconnected – where any attempt to do so would lead to a weapon that could not be fired at all.  And there are critics who assert that a personalized gun could be “hacked” remotely.  I do not see how this would be possible, at least for a fingerprint ID or similar biometric system, as it would be totally self-contained to the gun and not connected to the internet or some other external system.  But to address such possible concerns, one would also want to show the technology developed cannot be hacked in some way.  Critics could be invited to test the systems themselves.

b)  As such technologies are developed, the Biden administration can then organize regular evaluations of the technologies to test (and demonstrate) how well they work, and to determine also where further development work might be focused.  Based on such testing, they can then announce which specific personalized firearms would be eligible for federal procurement.

c)  With such personalized weapons developed, tested, validated, and declared eligible, they would then use standard federal procurement procedures to make available such firearms to federal law enforcement officials who wish to arm themselves with such weapons.  This would be voluntary, but with over 130,000 federal non-military officers authorized to carry firearms, there would certainly be many who would prefer the safety of such personalized firearms.  Armed federal officials include not just those in well-known agencies such as the FBI and the Secret Service, but also those in, for example, the border patrol and federal prison guards.  Many would prefer a weapon that could not be used against them in case they get into a struggle with someone they are trying to arrest or control.

d)  There are also about 750,000 sworn state and local law enforcement officers in the US, spread over about 18,000 government agencies.  Sworn law enforcement officials carry firearms.  There are an additional more than 300,000 non-sworn officers in such agencies, some of whom carry firearms for their job.  Many of these officers would choose to use personalized firearms if given that option.  They should be given that option.

e)  While the number of law enforcement officers who choose personalized firearms over traditional ones might at first be relatively small, that number can be expected to grow over time as the personalized firearms prove their reliability and safety.  And one should expect jumps in those choosing such weapons following publicized cases of law enforcement officers being shot with their own weapons.

f)  Based on the experience gained by law enforcement officials who have voluntarily chosen to carry personalized firearms, as well as with the continued development and refinement of the technologies involved, one could move over time to wider use of such weapons in these agencies.  As confidence is gained in their reliability and advantages, personalized weapons could become the standard weapons issued in at least certain federal agencies.  Federal financial assistance to state and local law enforcement agencies could similarly be geared to encouraging the use of such weapons.  Such federal financial assistance is significant, and could, for example, fund a higher share of the costs when the procurement is of personalized weapons than when it is for traditional firearms without such protections.  Again, the pace of the shift would depend on a demonstration of reliability and as confidence is gained.

g)  With the development of what would be a substantial market for such personalized firearms for law enforcement officials at the federal, state, and local levels, and the confidence that such use would engender, the much larger private market could develop.  With demonstrated effectiveness, as well as falling costs as mass production becomes possible, one would see interest in such personalized weapons among private individuals who believe they need a firearm for their personal protection.

h)  In parallel, states that are most interested in reducing gun violence could take the lead in adopting measures to encourage the use of personalized weapons.  This would start with mandatory registration and reporting requirements, which some states already require (with this associated with lower per capita deaths from guns than in other states – although this is likely due to many factors).

i)  Such states would also start to require that individuals take personal responsibility for any unjustified harm that might be caused by their weapons, by carrying liability insurance on whatever guns they own.  The states would set standard compensation amounts for those injured by the use of a gun that causes harm – whether accidental or criminal.  Private insurance companies would set the premium rates for such insurance, in competition with other private insurers.  As discussed in Section C above, such insurance rates can be expected to be far lower for personalized firearms than for similar firearms that can be fired by anyone.  This would provide a further incentive for individuals to choose such firearms over traditional ones.

j)  And also as discussed above, this would be complemented with generous buy-back programs designed to get as many traditional guns out of circulation as possible.  These programs already exist in many jurisdictions.  They would become particularly valuable as personalized firearms replace traditional firearms, and as individuals take on the costs (through the liability insurance they would be required to obtain) that they now impose on others from the harm caused by such weapons.

k)  There may also be transitional issues to be addressed.  If only a few states require liability insurance, a high share of the victims of gun violence in those states may well be from guns obtained by criminals in other states.  When the guns used could not be traced, those harmed by those guns (or in the case of homicides, their estates) would be compensated from the general fund discussed earlier (funded by payments that would otherwise have been paid in the cases of suicides).  When the guns can be traced (as they have serial numbers on them) and came from a state that does not require liability insurance, the question would arise whether there might be some other process – possibly via private lawsuits – to hold those responsible accountable for the harm caused by those weapons.

But one should not over-complicate this.  First, such transitional issues might not, in practice, be all that important quantitatively.  The magnitudes will depend on several factors.  And it will matter less as more states sign on to such a program.  The sooner they do, the better.  But if, to start, only a few states participate with then a high share of the harm resulting from guns obtained from other states, it is possible that the compensation paid to the victims might have to be limited.  But even limited compensation is better than no compensation at all, which is what we have now.

E.  Conclusion

Serious reform measures that would reduce gun violence in the US have repeatedly failed in recent decades.  As a result, even the most ambitious programs now being proposed are so modest that few believe that, even if approved, they would have a significant impact on the overall numbers.  They are still worthwhile – as any death averted is still of value.  But no one believes that a serious reform program would ever be passed by the US Senate, where just 40 senators can block any action.

What has been suggested here is an alternative approach.  One would proceed step-by-step, starting with actions the president can take on his own authority.  Individual states can then also proceed with measures they have the authority to pass and implement.  At least certain states, including several of the larger ones such as California, New York, and Illinois, would likely be willing.  Over time, as experience is gained and the benefits become clear, other states should be expected to join.  And at some point, even the most reluctant states would have to recognize that their lack of action is only serving to arm criminals.

The Biden administration should presumably have no issue with proceeding as presented above.  The Biden campaign platform on gun safety issues said specifically:

Put America on the path to ensuring that 100% of firearms sold in America are smart guns.  Today, we have the technology to allow only authorized users to fire a gun. For example, existing smart gun technology requires a fingerprint match before use. Biden believes we should work to eventually require that 100% of firearms sold in the U.S. are smart guns.

Given this commitment, the Biden administration should have no issue with ordering work to be done to further develop, test, and validate personalized firearms, and then to make such weapons available to federal law enforcement officials who carry a gun as part of their job.  I am not aware, however, of any actions along these lines that are underway.  A “Fact Sheet” released by the White House on July 11, 2022, listed 21 executive actions that President Biden has taken to reduce gun violence, but smart guns were not mentioned.

One can be certain that the NRA would still oppose this.  The knee-jerk reaction of the NRA in recent decades has been to oppose any and all gun reform proposals.  But at least formally, the NRA is not opposed to the development of smart guns nor to making them available for gun owners to acquire.  They say they are just opposed to making them mandatory.  Their position (as recorded on their website) is:

The NRA doesn’t oppose the development of “smart” guns, nor the ability of Americans to voluntarily acquire them.  However, NRA opposes any law prohibiting Americans from acquiring or possessing firearms that don’t possess “smart” gun technology.

The proposal as presented above is fully in line with this.  Smart guns would be developed and made available, but not made mandatory.   The NRA should in principle not be opposed.

But the NRA’s history on the issue is not encouraging.  In 2000, Smith & Wesson (the oldest and largest gun maker in the US) announced that, working with the Clinton White House, it would introduce a smart gun to the US market.  The NRA was outraged, and with its gun owner allies organized a boycott of Smith & Wesson firearms that drove the company close to bankruptcy.  The firm was sold to a new owner (for just $15 million) with the new owner reversing the plans.  The boycott ended, and Smith & Wesson once again became one of the largest manufacturers of guns in the US.  Not surprisingly, the firms planning now to bring smart guns to the US market are all start-ups.  They are not among the major gun manufacturers, who would be vulnerable once again to an NRA-led boycott.

What is key is that the NRA recognize that we are all on the same side here.  We all agree that we do not want “bad guys with guns” to commit crimes.  And should an individual wish to purchase a firearm, they will remain eligible to do so under this proposal.  An increasing share should, over time, see the advantages of personalized firearms over those without such safety mechanisms.  But it will be many years before the nation gets to the point where 100% of the new firearms being sold will incorporate such safety mechanisms.

It will not be perfect, certainly, but there is a need to start.  Any lives saved are worthwhile.  And the Biden administration can take those critical first steps.