The Capital Letter

The Capital Letter: Week of January 4

(Carlo Allegri/Reuters)
Rational (for now) exuberance, irrational vaccine policies, and other dangers.

There was an apocryphal story that used to float around the markets that the morning after the Bolshevik coup, prices rose on the St. Petersburg exchange. Sadly, but fortunately for Mr. Market’s frequently battered reputation, it’s not true. (The exchange had been closed for quite a while.)

Quite what label to apply to Wednesday’s disgraceful “events” (an insurrection, an attempted putsch, a cosplay coup, a riot) will be discussed for a long time after the courts have passed sentence on a good number of the perpetrators. What the full political and thus, by extrapolation, economic consequences might be are also as yet (and probably for some while) unknowable, but, at a guess, they will be to push the political pendulum quite a bit to the left, something that, at some time, the markets will have to consider.

However, looking, say, at the S&P on Wednesday afternoon, investors remained calm (there was a slight sell-off), although the occupation of the Capitol was by no means over by the time U.S. markets closed. The S&P had recovered all its losses within an hour of the opening the next day, and at the time of writing (2 p.m., Friday) was up on the week.

The market’s focus had returned to the reality that the Republicans’ double defeat in Georgia was going to mean effective Democratic control of the Senate, and to investors that meant another round of stimulus.  Daniel Tenreiro discussed this in yesterday’s Capital Note, which is (like all issues of the Capital Note, well worth reading—to sign up, go here). Please take a look, in particular, at what Daniel has to say about the “imperial circle,” something for which a strong dollar has historically been crucial. At the moment the dollar is . . . not strong.

I was also struck by this:

The “neutral” rate of interest — the price of money set by supply and demand — has been on a downward march for decades. While the neutral rate isn’t directly observable, economists peg it at less than 1 percent.

Whether that is (or, more importantly, continues to be) the case is going to matter (#understatement). I have a feeling that unpleasant surprises are coming, but then I almost always think that.

In the meantime, the exuberance, to use a charged word, that we are seeing now can be justified (for now).

Jeff Sommer, writing in the New York Times explains:

  • Interest rates are extraordinarily low. Although the yield on 10-year Treasury notes has risen lately, the Federal Reserve and other central banks have said they are determined to keep short-term rates low, and when rates are low, stocks and other risky assets are comparatively attractive.

  • The pandemic is the main cause of global economic troubles and it will eventually end. With vaccinations underway, Wall Street hopes that economic growth in most regions and sectors will surge later this year, along with rising corporate profits.

  • The chances of at least some further economic stimulus have increased. By sweeping the two contested Senate seats in Georgia, Democrats have gained a tenuous hold on both houses of Congress as well as the presidency. President-elect Biden will very likely be able to deliver more aid to people in need and to local governments, which is expected to increase economic growth.

  • Truly sweeping legislative changes will be difficult, if not impossible, given the Democratic Party’s razor-thin margin in the Senate and reduced majority in the House. While some increased spending is likely, this shaky grip on power implies that big tax increases on wealthy investors and rich corporations may not happen soon.

  • The election may have delivered something close to a Goldilocks alignment for the stock market. Mr. Biden’s cabinet picks so far suggest that he will govern as a centrist, and the market historically has fared well under Democratic presidents who do not have sweeping control of Congress. The possibility that the Biden administration will usher in a more efficient and inclusive government, with more spending and only moderate changes otherwise, is seen as a sweet outcome for stocks.

Much of that is true, although I suspect that the next stimulus will “increase” economic growth only by slowing the decline that would otherwise accompany the intensification of the pandemic. This seems set to continue, helped on its way by the arrival of a more infectious variant of the coronavirus, which cannot be helped, and the generally unimpressive roll-out of the vaccination programs across the nation, which can.

Writing in The New Atlantis, Brendan Foht and Ari Schulman:

Meanwhile, in the U.S. vaccination rollout, overly complex eligibility and prioritization structures, potential punishments for hospitals that violate prioritization guidelines in order not to waste doses, inter-governmental squabbling, other red tape, and simple lack of willpower have left millions of doses languishing in freezers across the land instead of injected into arms. What under the old strain would have been a frustrating delay and missed opportunity, under the new strain could constitute a looming disaster.

Read the whole thing for a useful discussion of the new strain.

And while we’re on the subject of the coronavirus, can we get on with following the U.K.’s lead by approving the AstraZeneca vaccine?

For a quick tabloid-style comparison of the Pfizer, Moderna, and AstraZeneca vaccines, go here.

Meanwhile, much hangs on that word “centrist,” which may mean one thing to a writer for the New York Times, and another to investors. Obviously, tax is going to be one area of focus. But even if a 50–50 Senate will mean a block on the incoming president’s more draconian plans in that area, it will not be able to rein in the boost to the power of the regulatory state that is now only weeks away, something not normally associated with economic growth.

That last point would always be worth remembering, but that is even more the case when that regulatory state is, we are told, going to be keenly focused on climate change. Whatever one may think about climate change (FWIW, I’m a lukewarmer), it is very hard to think that the measures designed to control it, measures that in many senses represent an investment in inefficiency, are compatible with boosting economic growth.

Perhaps it’s unfair to mention it, but this story from the U.K. (via the Financial Times) is worth pondering:

At three mothballed fabrication yards in Scotland, promises by Boris Johnson that the UK would become the “Saudi Arabia” of wind power rang hollow as their owner BiFab, a producer of giant foundations for offshore turbines, collapsed last month.

The move into administration by the 20-year-old Fife company, which at its peak employed up to 2,000 workers at the three yards, came just a fortnight after the UK prime minister had placed offshore wind at the centre of his “green industrial revolution”. Mr Johnson’s 10-point plan promised 60,000 jobs and turbines in British waters that would “power every home” by 2030.

BiFab’s struggles in recent years, which saw it lose out on lucrative contracts on UK projects to competitors in the United Arab Emirates and China, meant its collapse came as little surprise.

But the demise of the company, which had its roots in the North Sea oil industry, was still a painful reminder of the empty promises made by successive governments that offshore wind would herald a bright new industrial dawn for Britain.

The UK’s waters are home to more offshore wind farms than anywhere else in the world but this concentration has not translated into the jobs and manufacturing boom envisaged in the years since the first one came on stream 20 years ago.

Who’d have thunk it?

There’s also the little matter of the ongoing, and thoroughly misguided, antitrust attack on Big Tech launched by the Trump administration, which will almost certainly be intensified by a Biden administration — a reminder that “bipartisan” agreement in the political class is all too often a sign of mistakes in the making. And if Big Tech is to be hobbled, it’s unlikely to be helpful to markets that, if we’re looking at individual stocks, have been driven, to no small extent, by Big Tech.

Capital Matters began the week on a cheerier note (low bar) with John Fund supplying a series of relatively upbeat numbers on the economy. Zachary Evans ushered gloom back into the room with a piece on the possibility that Maryland might have the melancholy distinction of introducing a first-in-the-nation digital advertising tax:

State Senate president Bill Ferguson, a Democrat who represents parts of Baltimore, has championed the tax as a way to help fund an overhaul of Maryland’s public-education system. Ferguson’s legislation would tax tech companies making over $100 million in global annual revenue and over $1 million in annual gross revenue derived from digital advertising in Maryland, setting tax rates between 2.5 and 10 percent . . .

However, a coalition of Maryland businesses and pro-business groups, including the state Chamber of Commerce, are vociferously objecting to the tax, contending that the financial burden will hit small businesses in the midst of ongoing closures.

Digital ad taxes have been enacted in various European countries, including the U.K. and France, as a way to generate additional revenue to fund expansive welfare states. A number of U.S. states, including New York and Washington, are now considering following Europe’s lead in the wake of the coronavirus pandemic and the resulting blow to state coffers. If enacted, Maryland’s proposed tax would be the first such example in the U.S.

Big Tech companies including Amazon, Google, and Apple have responded to the European digital ad taxes by passing off costs to consumers and advertisers. Google, for example, increased advertising prices by 2 percent in the U.K. after the country implemented a tax on digital ads. Amazon increased service fees for independent booksellers by 2 percent in response to the U.K.’s “digital service tax,” while Apple regularly adjusts prices for apps in countries that implement such taxes.

Companies would respond similarly in Maryland if the state approves a digital ad tax, according to Margaret Mire, the state-affairs manager at Americans for Tax Reform . . .

Joseph Sullivan, our chart guy, looked at Biden’s proposed tax plans (one reason, incidentally, why investors will be watching what a 50–50 Senate actually means):

If the U.S. adopted Biden’s proposed federal tax rate, its overall corporate-tax rate would not be “in line” with the rest of the G7. Assuming U.S. state and local corporate taxes stayed the same, Biden’s proposal would result in nearly the highest overall corporate-tax rate in the G7, according to data from the OECD. The U.S. would be tied with France. In fact, as the chart above shows, factoring in state and local taxes, the U.S. corporate-tax rate is much closer to the G7 overall corporate-tax average today than it would be if the proposal Joe Biden campaigned on were adopted . . .

Alexander Salter argued in favor of “offering emergency visas to Hong Kong freedom fighters and Uyghur Muslims”:

When the West opened up to China, the hope was that political liberalization would follow economic liberalization. That has not happened. Instead, the free nations of the world, led by the U.S., face a Chinese Communist Party hell-bent on maintaining its authoritarian political system by any means necessary. Joe Biden must recognize China for what it is: a transgressor of both international law and human rights. Beijing cannot be an international partner in good standing under its current leadership.

Unfortunately, many Western elites are complicit in China’s brutality, particularly the leaders of multinational corporations. New evidence suggests “Uyghurs are working in factories that are in the supply chains of at least 82 well-known global brands in the technology, clothing and automotive sectors, including Apple, BMW, Gap, Huawei, Nike, Samsung, Sony and Volkswagen.” Since many of these companies embrace calls for social-justice stakeholder capitalism, their duplicity in overlooking actual injustice — slave labor — is hypocritical and unconscionable. We cannot rely on woke capital to stand up to the CCP. The task falls on the Biden administration, unlikely as that may seem.

While combating China requires a holistic strategy, the granting of emergency visas is relatively simple and highly effective . . .

Veronique de Rugy was (rightly) unimpressed by the shortcomings in the vaccination program, and unsurprised by them too:

Who is surprised that the federal government fell far short of its promise to vaccinate 20 million people by the end of 2020? I am not, really. There are many factors, including the reluctance of health-care workers to get vaccinated when their turns are up (I think that those who don’t want the vaccine now should be free not to take it but go to the back of the line and be accountable for their decision, but that’s a topic for another day).

That said, even without this, we shouldn’t have been surprised by the slow rollout. It isn’t the first time that top-down institutions have failed to roll out whatever products they were designed to get out. Remember the rollout of Obamacare’s website?

And yet, forgetting the lessons of the past, we hear many people blaming this on the lack of central planning from the Trump administration . . .

Citing numerous other critics of this roll-out (and Veronique), I, no less unsurprised, echoed this theme:

There are times (clearly) when governments can help with this process — and they have. But there are also times when governments would do better to get out of the way, a reality that, as in so many other instances, does not appear to be sinking in. The failure to accept that there are things which governments do not need to be controlling is something that we have seen repeatedly during this pandemic, and it’s a failure that has made things even worse than they were always going to be.

The quicker vaccines are distributed, the more rapidly (obviously) this nightmare comes to an end, as both deaths and new cases ought to decline at an exponential rate. That’s too big a prize to sacrifice on the altar of micromanagement, even if it leaves some bureaucrats and politicians feeling that they no longer have the degree of control that is their comfort zone.

And Kevin Williamson, citing a piece by Virginia Postrel that Veronique had discussed in her post, weighed in on this too:

The progressives who believe that a rational central plan can be imposed on society — that the nation can be organized as though it were one big factory — have long recoiled from the complexity, waste, redundancy, etc., that they see in market-driven business operations. But, very often, what seems like waste or inefficiency is the shortest route to a different end: A grocery store assumes that a certain amount of produce will go to waste, but the buyers don’t reduce their orders — the little bit extra is used as a hedge against unpredictable swings in demand, a way to avoid the real costs of running out of something and thereby irritating customers. You don’t buy your cars from Honda or GM, and you don’t buy your milk from a dairy producer. Those extra steps and layers are not inefficiency — they are efficiency that Bernie Sanders doesn’t understand.

We have some relatively well-governed states and some terribly misgoverned ones, but none of them is going to get Americans the COVID-19 vaccines as efficiently as Walmart can bring you a pair of socks from the other side of the planet. That’s because Walmart isn’t Walmart — it is a vast, complex ecosystem of production and distribution involving thousands of firms and millions of workers in dozens of countries.

There are very few simple solutions to complex problems. There are a lot of complex solutions to complex problems.

Those busy dreaming up a Green New Deal might like to bear that point in mind. They won’t, however.

Benjamin Zycher called for an end to the sort of discrimination by financial institutions that “socially responsible” investors have been pressing for (and which banks are increasingly going along with):

The opposition to “discrimination” by political activists has not prevented them from applauding constrained access to capital by such politically unpopular businesses as producers of fossil fuels and firearms or operators of for-profit colleges and private prisons. The list of disfavored economic sectors will only grow over time as government engages in ever-more economic favoritism. This problem has become sufficiently acute for some industries that the Office of the Comptroller of the Currency has proposed a “Fair Access to Bank Services, Capital and Credit” rule that would compel national banks and federal savings associations to make lending decisions based only upon creditworthiness and related criteria, rather than such politicized standards as “reputation risk.”

In reality, the proposed rule is targeted at the vast bureaucracy that regulates the everyday operations of banks. Many of these regulators are quite willing to impose their political preferences upon the institutions they oversee; they are all too happy to pretend that they are the legislature, which, having failed to enact the measures preferred by the regulators, must be circumvented.

Regulators monitor lending institutions constantly across many dimensions, sifting through their complex operations to find violations of rules small and large, whether accidental or not. Are lenders free in such an environment to make lending decisions driven solely by considerations of creditworthiness? The question answers itself.

If you want to read a contrary view (also from the right), we published an article on this topic by John Berlau a few weeks ago that you can find here.

At the risk of sounding altogether too pompous, it’s worth nothing that at Capital Matters we recognize that there is plenty of room for disagreement on economic matters on the right. We’d like this space to be a place where such disagreements can be aired, if not necessarily resolved.

David Bahnsen questioned the way that some in the securities industry, who have broken the law, can face prolonged bans from the industry even after they have served their sentence or paid their fine:

There also is a violation of a fundamental tenet of law and order involved in the very concept of bans that extend beyond the original penalty (and the longer the ban, the greater the violation), because it tramples on the principle of redemption. Wrongdoing should be punished, but wrongdoers should also be given the chance to earn and experience restoration and redemption. This is a distinctly Christian notion, but also one rooted in the traditions and norms that undergird our social contract. The possibility of rehabilitation is meant to be built into the justice system. Redemption is a worthy, even if all too frequently forgotten, aspiration. There is also a practical matter at play here (and Americans once had a reputation as a practical people): Rehabilitation is made infinitely more difficult when former offenders are denied, by operation of law or regulation, their best chance of earning something akin to a good livelihood.

This article is about white-collar criminals who have worked in the financial sector, but I should stress that the point I am making here is not reserved for them. Up and down the food chain of criminality, people who have paid their debt to society are denied the opportunity to get themselves back on their feet again, by being blocked, as a matter of law or regulation, from countless jobs and professions. While employers should not be coerced into lending a helping hand, the state should not be in the business of holding former criminals down. Of course, some crimes warrant “lifetime punishments” — terrorism, murder, and the like. But a lifetime ban from labor, vocation, calling, from one’s area of professional expertise, skill, and passion, turns the Judeo-Christian ethic and traditional American jurisprudence on its head . . .

Tobias Hoonhout looked at a case of “incomplete” reporting on Amazon:

As [economist Michael] Mandel explains in a blog post he wrote in response to the Bloomberg article, while the QCEW suggests one conclusion, other data from the Bureau of Labor Statistics shows that, adjusted for inflation, hourly wages for non-managerial warehouse workers have risen by 11.5 percent since 2013, when e-commerce really took off — eclipsing wage growth in industries such as health care, manufacturing, and retail by multiple points.

Prior to Amazon’s founding, the warehouse sector was tiny, often too small to be measured and reported by the Bureau of Labor Statistics. So while the arrival of an Amazon fulfillment center may temporarily depress wages for the small number of existing local warehouse workers, the e-commerce boom has created many more warehouse jobs than previously existed — and many different kinds of warehouse jobs, due to the complexity of an Amazon fulfillment center.

The fulfillment centers “bear the same relationship to ordinary warehouses as jet planes bear to bicycles. Whereas an ordinary retail warehouse is a stopping place for bulk shipments on the way to stores, a fulfillment center dynamically responds to orders from individual customers, integrating many different vendors,” Mandel wrote in a 2017 report.

Mandel says he explained this important piece of context to Bloomberg before the article was written, only for the writers to ignore it in their final draft.

“The reporter for the Bloomberg story actually contacted me, and we talked for a long time about this, and I gave him a fair bit of data,” Mandel revealed. “They didn’t [include it], which I was sort of surprised at.”

The Bloomberg story, Tobias notes, was cited in a December tweet by Alexandria Ocasio-Cortez, who is still trying to justify her role in sabotaging Amazon’s plans for a major headquarters in New York City.

2 plus 2 must equal 5.

I should also mention that Daniel Tenreiro has an article in this latest edition of NR (available to NR and NRPLUS subscribers!) on “How I Learned to Stop Worrying and Love Big Tech.”

It’s a must read, but here’s an extract:

The phrase “robber baron” entered the American vernacular in 1859. Originally a reference to medieval German nobles who ran extortion rackets on the Rhine, the phrase was revived by New York Times reporter Henry J. Raymond to describe railroad magnate Cornelius Vanderbilt. Though “robber baron” now connotes the unscrupulous avoidance of competition in business, Raymond initially used it to describe excessive competition — “competition for competition’s sake; competition which crowds out legitimate enterprises.” Commodore Vanderbilt, the parvenu son of a ferry operator, had turned the genteel, “legitimate” shipping business into a street brawl. The sheer scale of his wealth — an unprecedented $100 million at the time of his death, roughly $2.5 billion in today’s dollars — offended the Times’ polite sensibilities.

The same revulsion at big business undergirds a recent report by the House subcommittee on antitrust, which likens Facebook, Google, Apple, and Amazon to “the kinds of monopolies we last saw in the era of oil barons and railroad tycoons.” Discomfited by the wealth amassed by tech CEOs, the subcommittee calls for a total overhaul of antitrust law to rein in the country’s leading businesses. Among its recommendations: break up tech firms, prohibit all their mergers and acquisitions, and bar them from promoting their products over those of competitors. Politicians as far afield as Senator Elizabeth Warren and Senator Josh Hawley have endorsed these proposals.

The problem for these would-be trustbusters is that antitrust law as it currently exists does not suffice to achieve their ends. Since the publication of Robert Bork’s The Antitrust Paradox in 1978, the courts have punished monopolistic behavior only insofar as it harms consumers. By every relevant metric, the tech industry benefits consumers.

So Big Tech’s opponents call for a return to a previous era, when antitrust law aimed at a hodgepodge of incoherent, often contradictory goals. Before adopting the consumer-welfare standard, courts at times punished businesses for raising prices, at other times for cutting them. With no clear definition of monopoly, judges could deem anything and everything deleterious to competition — and they did. In 1962, the Supreme Court blocked the merger of Brown Shoe Company, a shoemaker accounting for 5 percent of the national market, with a retailer that sold 2 percent of the nation’s shoes. The merged firm would have held 7 percent of the market for a single retail category, with numerous competitors nipping at its heels. The resulting efficiencies would have lowered prices for consumers and freed up capital for investment, but the overweening nature of antitrust jurisprudence allowed the Court to halt the growth of businesses arbitrarily . . .

Finally, we produced the Capital Note (our “daily” — well, Monday–Thursday, anyway). Topics covered included: the disappearance of a Chinese billionaire, SOE defaults, the mounting risks to China’s financial system, the Big Board and China, vaccine distribution, Elon Musk, California, and a very expensive tweet, 0 percent mortgages (for 20 years), fractional trading, how a weak dollar could unravel U.S. economic policy, Facebook bans Trump, the case against Big Tech antitrust, and Reagan’s Imperial Circle.

To sign up for the Capital Letter, follow this link.