Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: carbon taxes and democracy, Big Tech and Biden, lending as a (Chinese) strategic weapon, the “socially responsible” ecosystem and its parasites, corporatism and Western self-harm. To sign up for the Capital Note, follow this link.
News and Views
Climate Change and Democracy
One of the characteristics of climate warriors is the way in which they attempt to bypass the democratic process when it comes to their attempt to work for changes that would have a truly, probably irreversible, transformative effect on society — changes that, in a democracy, might be expected to be decided upon by, well, the electorate. Instead, what we are seeing are changes forced through by an unsavory cabal of unelected regulators (often extending their mandates beyond any reasonable interpretation of what they should be), unelected activists, unelected corporate managements, and unelected investment-management groups with billions of dollars of other people’s money to play with. And then there are judges, discovering law where there is none.
Climate alarmists continue to have a big problem: democracy. Every time voters are presented with something close to the actual costs of achieving draconian CO2 emissions targets, they say no.
The latest reality check came Sunday in Switzerland, where 51.6% of the voters rejected a government scheme to meet the anti-carbon goals of the Paris Agreement on climate change. That’s the agreement that President Biden recently rejoined, albeit without the approval of American voters or Congress.
At least the Swiss were honest enough to tell voters that they would have to pay for their climate indulgences with the likes of a surcharge on car fuel costs and a tax on airline tickets. Perhaps most Swiss thought this cost was exorbitant, or useless, since the country contributes only 0.1% to global CO2 emissions. The Swiss could go net-zero on CO2 and it wouldn’t matter a whit to the climate.
This explains why America’s climate left assiduously avoids putting carbon taxes on the ballot. Mr. Biden won’t even endorse indexing the federal gas tax for inflation. Instead the Administration is planning to use regulatory and judicial coercion. Voters understand they will pay for the climate obsessions of elites.
And was this result a reminder of the value that referendums (referenda?) can add to a properly functioning democracy?
D.C. vs. Big Tech
It’s a sign of the suspicion with which Big Tech is now regarded in Washington, D.C., that the appointment of Lina Khan as the chairwoman of the Federal Trade Commission attracted considerable bipartisan support.
President Biden named Lina Khan, a prominent critic of Big Tech, as the chairwoman of the Federal Trade Commission, the White House said on Tuesday, a signal that the agency is likely to crack down further on the industry’s giants.
Earlier in the day, the Senate voted across party lines, 69 to 28, to confirm Ms. Khan as a commissioner. The president may name any commissioner to lead the agency, which investigates antitrust violations, deceptive trade practices and data privacy lapses in Silicon Valley and throughout corporate America.
Khan is one of the most renowned American scholars to criticise large US technology companies, such as Amazon, Facebook and Google, for abusing their market power, and has demanded government action to restrain them.
Khan’s 2017 paper “Amazon’s Antitrust Paradox” took aim at the corporation’s growing power, particularly its role as both logistics provider and competitor to the millions of smaller businesses that use Amazon to sell goods.
It concluded that prevailing thinking on antitrust — that lower prices are net good for consumers — was outdated and did not take into account conflicting forces in the modern economy . . .
Damn those lower prices! A curse, I tell you, a curse.
There is no suggestion that tech companies face immediate break-ups. FTC commissioners can investigate and sue companies over antitrust issues but they cannot create policies. Antitrust regulation takes place in courts, where cases are slow-moving and appeals are frequent. The US has not broken a company apart in decades. Its plan to split up Microsoft in the 1990s was overturned.
For all the talk, there is no outline for new regulation. A contingent of Republicans, such as Utah’s Mike Lee, criticise tech companies yet believe extra regulation could hurt innovation and the US economy . . .
That “contingent” is right.
Lina Khan’s confirmation as FTC commissioner is the result of growing bipartisan support for a populist approach to antitrust.
As antitrust populism is inevitably going to become the governmental policy stance on antitrust, American consumers and innovation may soon be collateral damage. Consumers may no longer be able to benefit from large companies’ economies of scale. Innovation may slow down as less efficient and less innovative companies will be able to seek legal protection against aggressive, yet beneficial competition.
In a time of increased global competition, antitrust populism will cause lasting self-inflicted damage that benefits foreign, less meritorious rivals.
Around the Web
Lending as a strategic weapon:
A stroke of concrete that gleams against the stony outcrops of the Dinaric Alps. Hung on one of the vast grey pillars is the country’s distinctive crimson banner, a golden two-headed eagle at its centre. The project may bear a symbol of the young post-communist state but those living in the village beneath know who’s really behind the motorway. The Socialist Republic of Yugoslavia has faded but the communists are back.
Montenegro is struggling to repay a £860 million Chinese loan for the highway’s construction, built to connect the port of Bar with neighbouring Serbia. Much of the project remains incomplete. Now the country’s debt has inflated to 103 per cent of GDP, with Beijing owning nearly a fifth of its total loan book.
It was hoped that the motorway would prove a vital regional trade link. Montenegrin roads are notorious for their dilapidated condition and frequent fatalities. But Western financial institutions were unwilling to support the project, unconvinced of its fiscal viability. Instead, the Chinese Exim Bank provided a loan, while the state-owned China Road and Bridge Corp was brought in as a contractor . . .
There are two ways China can now proceed. The first is so-called ‘debt-trap diplomacy’ where China directly acquires critical infrastructure in a country that is unable to service its debt. That is how in 2017 China got a 99-year lease on a strategic Indian Ocean port in Sri Lanka. The same could happen to Bar port in Montenegro. China already owns Piraeus Port in Greece — Europe’s seventh largest harbour.
The second strategy is to offer Montenegro debt restructuring but in exchange China will seek political loyalty from Montenegro. That loyalty would mean more work for Chinese state-owned companies and voting at international institutions in China’s favour. Montenegro is, after all, a Nato member state. In both cases, China wins, Europe loses . . .
More (via the FT) on the (big) business of “socially responsible” investing:
PwC will increase its global headcount by more than a third over the next five years as part of a $12bn investment in recruitment, training, technology and deals designed to capture a booming market for environmental, social and governance advice.
The plan, announced on Tuesday, marks a significant acceleration from the audit and consulting group’s $7.4bn investment since 2016, over which time its annual revenues grew by 20 per cent to $43bn.
The expansion will add 100,000 people to a workforce that has grown by more than a quarter, to 284,000 people, in the past five years . . .
Create an ecosystem and the parasites will come.
Shareholder value, corporatism, and Western self-harm:
In his epochal book “Capitalism, Socialism and Democracy,” Joseph Schumpeter described publicly traded corporations as capitalism’s vulnerable fortresses. This is truer now than when Schumpeter was writing in the 1940s, with huge, politically controlled state and municipal pension funds. The Big Three index funds of Vanguard, BlackRock, and State Street now hold 43% of the fund industry’s U.S. equity assets, which own individual stocks and vote their proxies not out of choice or conviction but because they’re in the index. Across the Atlantic, the EU is formalizing state direction of private investment with the 2020 EU taxonomy for sustainable activities regulation designed to help meet the bloc’s decarbonization objectives.
For these reasons – and despite the collateral shareholder-value destruction – the carbon blockade of publicly traded corporations is likely to succeed in its proximate aim. But decarbonizing them is not the same as decarbonizing the economy. The reason is obvious: Partial blockades don’t work. If Exxon or Chevron or Shell don’t supply gasoline, other firms less beholden to American and European institutional investors or to the Dutch courts will. Private companies and state-owned oil companies of OPEC and Russia will gain what Western oil majors are forced to cede.
The point is emphasized by Jason Bordoff, a senior climate expert on President Obama’s National Security Council, in a comprehensive critique for “Foreign Affairs.” Emissions go down only if oil use declines, Bordoff notes. “Unless both supply and demand change in tandem, merely curbing the oil majors’ output will either shift production to less accountable producers or have potentially severe consequences on economic and national security interests.” Bordoff also casts doubt on the effectiveness of a Western-led financial blockade of the oil and gas sector. “To the extent capital from Western banks dries up, Chinese banks have also demonstrated they can fill the gap.” . . .
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