The Capital Letter

Inflation: Farewell to Transitory

(AndreyPopov/Getty Images)
The week of November 8: inflation, climate, antitrust, and much more.

I  began this week expecting that the next Capital Letter was going to be about the second week of the climate talks in Scotland, but apart from the observation that a (somewhat nebulous) joint climate declaration between the U.S. and China only underlines the extent to which the administration’s climate agenda is weakening this country’s strategic position, any other comments I may have will have to wait for another time. For now, please read Kent Lassman’s commentary in the weekly roundup below.

No, this week the scene — like, in all probability, our savings — was stolen by inflation, no longer just a ghost at the feast but a very real presence. It’s here, and claims that it is only “transitory” will no longer wash.

Bloomberg’s John Authers:

You will probably know the headline numbers by now. The important point is that the subtler figures compiled by various departments of the Federal Reserve were considerably more concerning. Six months ago, inflation was a story of extreme blips in prices of goods directly affected by the pandemic. Now, those effects are waning, but broader gauges are surging.

To start, the Cleveland Fed publishes a “trimmed mean” (excluding the biggest outlier components in both directions) and a median level of inflation. The trimmed mean, which is particularly popular with economists, has jumped to its highest in three decades. The median, hitherto encouragingly contained, is at its highest since the crisis month of October 2008.

Alternatively, the Atlanta Fed produces numbers on flexible and “sticky” inflation. Prices of some products and services adjust swiftly, while others take months. What central bankers want to avoid is a rise in sticky inflation, as this by definition will be difficult to reverse. On an annualized percentage basis, last month saw the sharpest rise in sticky prices since January 1991.

Check out the whole piece for other measures of inflation, including an indicator of core (sort of) inflation that the Bureau of Labor Statistics mysteriously started publishing earlier this year (it excluded food, shelter, energy, and used cars and trucks), and which Authers mischievously labels “CPI excluding everything you’d like to exclude” — even that rose at an annualized 4 percent in October, the highest rate since 1991.

This is an old trick. As Stephen Roach recalled back in October:

The inflationary build-up of the early 1970s was also presaged by a focus on transitory events: the Opec oil embargo and El Niño-related weather disturbances.

Then, as now, central bankers preached the transitory inflation gospel. In the 1970s, US federal reserve chair Arthur Burns asked his research staff to purge transitory factors from popular price indices. Burns, convinced that the Fed should only respond to underlying inflation, kept taking more out of the core until there wasn’t much left. Only then, did he concede there was an inflation problem.

I was part of the staff involved in that regrettable exercise to create the first measure of core inflation, on the team that developed new metrics and wrote brilliant reports that no one ever read.

The subheading in Authers’s article reads that “the pandemic no longer explains it.” That’s not entirely true. The pandemic still explains it, partly (as do the measures, wise or other than wise, taken to deal with it), but the assumption that inflation could be safely contained in one pandemic-related “transitory” box rested on an inadequate understanding of how this phenomenon works. Once inflation seeps into the system, it can metastasize almost anywhere, and bringing an end to it can be distinctly painful.

The metastasis now under way is being helped by the fact that we have far less reason than in the Volcker era (and the years that followed) to believe that the Fed is going to do the right thing. Thus the rate rise implemented in 2015 by the Yellen-era Fed (those were the days of a very different Yellen) can, to no small extent, be attributed to an approach to inflation that had endured since Paul Volcker was at the helm. But that was then.

Here’s Larry Summers, writing in the FT in April:

There is a serenity that, yes, inflation may rise for a time but it will return and expectations will not become unanchored. Of course, when it’s explained that the Fed has an entirely new paradigm, that this is an entirely new paradigm of fiscal and social policy, it’s a bit hard to understand why expectations should remain anchored.

So, we’re seeing an episode that I think differs both quantitatively and qualitatively from anything since Paul Volcker’s days at the Fed, and it stands to reason that would lead to significant changes in expectations.

Summers is old-fashioned enough to believe (as am I) that inflationary expectations matter. (For a contrary view go here.) They can influence the course that inflation, a condition with a tendency to feed on itself, will take. Widespread belief that the Fed is prepared to do what it takes to stop inflation from taking off will greatly increase that the chance that it does not. However, what Summers refers to as a “new paradigm,” specifically the Fed’s adoption of an essentially backward-looking average inflation targeting regime, does not inspire that confidence.

Mohamed El-Erian in the FT in June:

With the Fed having switched its approach on monetary policy to being dependent on outcomes in economic data rather than the traditional forecast-based approach, it is likely to be very late in adjusting strategy should its transitory inflation call not materialise.

A late slamming of the brakes, rather than an earlier easing off the accelerator, would significantly increase the risk of an unnecessary economic recession.

Martin Wolf, writing in the same newspaper the previous month:

While I understand why the Fed changed its monetary framework, I am unpersuaded it was a good idea. It means driving while looking into the rear-view mirror. It would surely be better to learn from past experience how the economy works than to try to compensate directly for historic failures. In particular, the new framework creates uncertainty over how the Fed intends to make up for the past shortfalls . . .

Most important, politics have changed. One would have to be at least 60 years old to have experienced high inflation and subsequent disinflation as an adult. The government and substantial swaths of the private sector have huge debt liabilities and borrowing plans. Joe Biden’s administration is determined to ensure that this recovery does not repeat the disappointment of the previous one. The stock market is more than generously priced by historical standards, with bubble phenomena everywhere. The doctrines of “modern monetary theory” are highly influential, as well. All this together has strengthened lobbies for cheap money and big fiscal deficits, and weakened ones for prudence.

Given all this, doubts about the Fed are reasonable. We know that it is politically easier to loosen than tighten monetary policy. Right now, the latter is going to be particularly unpopular. Yet if a central bank does not take away the punch bowl before the party gets going, it has to take it away from people who have become addicted to it. That is painful: it takes a Paul Volcker.

It does, but it is worth remembering that Volcker’s cure involved the federal-funds rate peaking (three times) at 20 percent, something that was extraordinarily painful at the time — and that was a time when U.S. government debt was far lower than it is today.

John Cochrane, writing in September:

Monetary policy lives in the shadow of debt. US federal debt held by the public was about 25% of GDP in 1980, when US Federal Reserve Board Chair Paul Volcker started raising rates to tame inflation. Now, it is 100% of GDP and rising quickly, with no end in sight. When the Fed raises interest rates one percentage point, it raises the interest costs on debt by one percentage point, and, at 100% debt-to-GDP, 1% of GDP is around $227 billion. A 7.5% interest rate therefore creates interest costs of 7.5% of GDP, or $1.7 trillion.

Where will those trillions of dollars come from? Congress could drastically cut spending or find ways to increase tax revenues. Alternatively, the US Treasury could try to borrow additional trillions. But for that option to work, bond buyers must be convinced that a future Congress will cut spending or raise tax revenues by the same trillions of dollars, plus interest. Even if investors seem confident at the moment, we cannot assume that they will remain so indefinitely, especially if additional borrowing serves only to pay higher interest on existing debt. Even for the United States, there is a point at which bond investors see the end coming, and demand even higher interest rates as a risk premium, thereby raising debt costs even more, in a spiral that leads to a debt crisis or to a sharp and uncontrollable surge of inflation . . .

In sum, for higher interest rates to reduce inflation, higher interest rates must be accompanied by credible and persistent fiscal tightening, now or later. If the fiscal tightening does not come, the monetary policy will eventually fail to contain inflation . . .

Successful inflation and currency stabilization almost always includes monetary and fiscal reform, and usually microeconomic reform. The role of fiscal and microeconomic reform is to generate sustainably higher tax revenues by boosting economic growth and broadening the tax base, rather than with sharply higher and growth-reducing marginal tax rates. Many attempts at monetary stabilization have fallen apart because the fiscal or microeconomic reforms failed. Latin-American economic history is full of such episodes.

Even the US experience in the 1980s conforms to this pattern. The high interest rates of the early 1980s raised interest costs on the US national debt, contributing to most of the then-large annual “Reagan deficits.” Even after inflation declined, interest rates remained high, arguably because markets were worried that inflation would come surging back.

So, why did the US inflation-stabilization effort succeed in the1980s, after failing twice before in the 1970s, and countless times in other countries? In addition to the Fed remaining steadfast and the Reagan administration supporting it through two bruising recessions, the US undertook a series of important tax and microeconomic reforms, most notably the 1982 and 1986 tax reforms, which sharply lowered marginal rates, and market-oriented regulatory reforms starting with the Carter-era deregulation of trucking, air transport, and finance.

It is possible for even unpromising governments to change direction in the face of crisis (see France in 1983), but prospects that the current higher tax, more stringent regulatory model currently being pursued in Washington will, despite the tussles in Congress, be abandoned anytime soon seem . . . remote.

Cochrane describes what followed the reforms of the early 1980s:

The US experienced a two-decade economic boom. A larger GDP boosted tax revenues, enabling debt repayment despite high real-interest rates. By the late 1990s, strange as it sounds now, economists were actually worrying about how financial markets would work once all US Treasury debt had been paid off. The boom was arguably a result of these monetary, fiscal, and microeconomic reforms, though we do not need to argue the cause and effect of this history. Even if the economic boom that produced fiscal surpluses was coincidental with tax and regulatory reform, the fact remains that the US government successfully paid off its debt, including debt incurred from the high interest costs of the early 1980s. Had it not done so, inflation would have returned.

But then Cochrane asks a rather tricky question:

Would that kind of successful stabilization happen now, with the US national debt four times larger and still rising, and with interest costs for a given level of interest rates four times larger than the contentious Reagan deficits? Would Congress really abandon its ambitious spending plans, or raise tax revenues by trillions, all to pay a windfall of interest payments to largely wealthy and foreign bondholders?

Arguably, it would not. If interest costs on the debt were to spiral upward, Congress would likely demand a reversal of the high interest-rate policy. The last time the US debt-to-GDP ratio was 100%, at the end of World War II, the Fed was explicitly instructed to hold down interest costs on US debt, until inflation erupted in the 1950s.

It’s hard not to wonder whether something like that, although tacitly rather than on the basis of explicit instructions, is playing a part in what is happening now. After all, the Fed is keeping borrowing costs at an extremely low level for longer than seems strictly necessary. Could it be that, if such levels lead to the inflating away of a meaningful portion of U.S. government debt, such a result might be perceived as more of a feature and less of a bug to some at the Fed than any remaining believers in sound money might care to contemplate?

Back to Cochrane:

The unraveling can be slow or fast. It takes time for higher interest rates to raise interest costs, as debt is rolled over. The government can borrow as long as people believe that the fiscal reckoning will come in the future. But when people lose that faith, things can unravel quickly and unpredictably.

Years ago, I attended a talk given by a former chairman of Goldman Sachs in which he said that when that loss of confidence came, it would do so very, very quickly. I don’t think he was wrong.

Cochrane:

Fiscal policy constraints are only the beginning of the Fed’s difficulties. Will the Fed act promptly, before inflation gets out of control? Or will it continue to treat every increase of inflation as “transitory,” to be blamed on whichever price is going up most that month, as it did in the early 1970s?

It is never easy for the Fed to cause a recession, and to stick with its policy through the pain. Nor is it easy for an administration to support the central bank through that kind of long fight. But tolerating a lasting rise in unemployment – concentrated as usual among the disadvantaged – seems especially difficult in today’s political climate, with the Fed loudly pursuing solutions to inequality and inequity in its interpretation of its mandate to pursue “maximum employment.”

Moreover, the ensuing recession would likely be more severe. Inflation can be stabilized with little recession if people really believe the policy will be seen through. But if they think it is a fleeting attempt that may be reversed, the associated downturn will be worse.

Perhaps it is also worth noting that the Fed appears to be in the process of embracing a climate-change mandate (based on dubious claims that it is doing so because of climate risk) — another sign of how increased politicization has led the central bank some way away from its original mandate. That, in turn, is likely to reduce the extent to which its commitment to fight inflation will be believed — with, as Cochrane suggests, expensive consequences:

And:

One might think this debate can be postponed until we see if inflation really is transitory or not. But the issue matters now. Fighting inflation is much easier if inflation expectations do not rise. Our central banks insist that inflation expectations are “anchored.” But by what mechanism? Well, by the faith that those same central banks would, if necessary, reapply the harsh Volcker medicine of the 1980s to contain inflation. How long will that faith last? When does the anchor become a sail?

A military or foreign-policy analogy is helpful. Fighting inflation is like deterring an enemy. If you just say you have “the tools,” that’s not very scary. If you tell the enemy what the tools are, show that they all are in shiny working order, and demonstrate that you have the will to use them no matter the pain inflicted on yourself, deterrence is much more likely.

Yet the Fed has been remarkably silent on just what the “tools” are, and just how ready it is to deploy those tools, no matter how painful doing so may be. There has been no parading of materiel. The Fed continues to follow the opposite strategy: a determined effort to stimulate the economy and to raise inflation and inflation expectations, by promising no-matter-what stimulus. The Fed is still trying to deter deflation, and says it will let inflation run above target for a while in an attempt to reduce unemployment, as it did in the 1970s. It has also precommitted not to raise interest rates for a fixed period of time, rather than for as long as required economic conditions remain, which has the same counterproductive result as announcing military withdrawals on specific dates. Like much of the US government, the Fed is consumed with race, inequality, and climate change, and thus is distracted from deterring its traditional enemies.

“The same counterproductive result as announcing military withdrawals on specific dates.”

Ouch.

Meanwhile, Marketwatch (Wednesday):

In the aftermath of Wednesday’s consumer-price index reading, showing a 6.2% headline year-over-year rate for October, investors flocked to hedges like gold and digital currencies, while one major investment firm was raising the prospect of a 7% CPI reading in the next several months, and the Federal Reserve’s well-worn “transitory” narrative about inflation was being called into question.

Mounting alarm was evident in Wednesday’s substantial selloff of Treasuries, the asset class hit hardest by inflation, which sent the 10-year  and 30-year yields to their biggest one-day advances in months. A gauge of inflation expectations for the next five years, known as the 5-year breakeven rate, also hit a record high. Meanwhile, investors like Jay Hatfield of Infrastructure Capital Advisors, along with Stifel Chief Economist Lindsey Piegza, are warning the Fed has “lost control” of inflation.

“The Fed has absolutely lost control of inflation and inflation expectations, or at least it appears that way,” Piegza said via phone Thursday. “Policy makers arguably should have moved a lot sooner to pull back on easy policy earlier this year, when inflation was showing signs of persisting beyond what most economists would be comfortable with, even temporarily.”

“But they continued to stick with their assessment that this is transitory,” she said. “The fear is not that they won’t be able to rein in price pressures eventually, but that now they may have to move at a faster pace than they would have otherwise needed to. By waiting so long, they’ve created an even more difficult challenge for themselves.”

Blame for the current inflationary surge cannot be blamed solely on either the Biden administration or the Fed. As mentioned above, there’s that pandemic (and — again as mentioned above — the response to it) to consider. The idea that large swaths of the global economy could be switched off and then on without major disruption was clearly absurd. Equally, the increase in prices is in some ways a measure, however paradoxical, of the success of 2020’s fiscal and (thinking, in particular, of the early months of the pandemic) monetary response to the coronavirus.

At the same time, it’s hard not to think that both the administration and the Fed have behaved with remarkable recklessness this year. Lulled, perhaps, by the absence of inflation after the QE initiated in the aftermath of the financial crisis, the Fed seems to have overlooked the distinction between money that went into the financial system (and, to no small extent, stayed there) and cash that was directly paid to individuals and businesses — money that was, particularly in the former case, available to be spent once things reopened. Adding fuel to that fire in the U.S. was the over-generous stimulus bill passed in March, which boosted demand to a point not easily accommodated by a shaky supply chain, with an impact on prices that was all too predictable.

Looking ahead meanwhile, my best guess is that the Fed will remain behind the curve. For its part, the administration will stick with a policy agenda that will not only assure higher energy prices for the foreseeable future (courtesy of its stance on climate change) but, whether through tax, regulation, or its broader hostility to enterprise, will also discourage the capital investment that ought to be part of the cure for our current woes.

This won’t end happily.

The Capital Record

We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.

In the 43rd episode, David is joined by George Gilder again — this time in an interview for National Review Institute to discuss his positively profound insights on “information theory” and “life after capitalism.” Not to be missed!

Miami Forum

NR Institute is holding a forum on capitalism in Miami on November 22, with Miami mayor Francis Suarez and Vivek Ramaswamy, author, entrepreneur, and much, much more.

Details here.

Palm Beach: Book Event

NR Institute is holding an event on December 7 to mark the publication of a new book, There’s No Free Lunch: 250 Economic Truths, by NRI trustee David Bahnsen.

In the book, Bahnsen pulls from the masters — the great economic voices of the past and the present — to remind readers of the basic economic truths that must serve as our foundation in understanding the challenges of today. In 250 vital points, he combines pearls of wisdom from economic legends with his own careful commentary to provide readers the perspective, information, and reaffirmation they need in order to see economics for what it is. It will empower you and equip you with the truth — 250 truths — that are crucially needed to keep the lights on in civilization and advance the cause of human flourishing.

The event will be held at the Colony Hotel in Palm Beach on Tuesday, December 7 — registration will begin at 5.30 p.m.; the event at 6 p.m.; and a reception and book-signing at 7 p.m. Complimentary books will be provided to all attendees.

RSVP here.

The Capital Matters week that was . . .

Taxation and Spending

Kevin Hassett:

In advertising his Build Back Better plan to the public, President Biden has asserted that the proposal costs zero. The argument is that the agenda would not increase government debt; rather, it would be paid for by increased taxation on “big corporations” and “those at the top.” While that line has received deserved criticism in recent weeks, howling about economic illiteracy, however satisfying, is a poor place to end the conversation. Indeed, the massive expansion of government that has occurred since the pandemic began will have very large long-run costs, which must be weighed carefully and seriously. In a rational policy debate, a careful review of our fiscal situation should be a prerequisite for any consideration of new spending . . .

Inflation

Andrew Stuttaford:

Inflation can begin as something “transitory,” but the way that it can feed on itself — expectations and all that — can help turn the transitory into something rather more long-lasting (for a contrary view go here) . . .

Philip Klein:

The staggering 6.2 percent rise in inflation in October not only represented the highest level in nearly 31 years, but there are increasing signs that the problem is getting broader. And it’s going to be really difficult for Joe Biden to spin his way out of the crisis, no matter how much help he gets from the media.

Though inflation has been rising for months, in many of the previous reports, the spikes were driven primarily by rising prices for used cars. This time, the Bureau of Labor Statistics notes that, “the increase was broad-based, with increases in the indexes for energy, shelter, food, used cars and trucks, and new vehicles among the larger contributors.” . . .

David Harsanyi:

[A] third of recent inflation increases has been propelled by energy prices, which spiked 6.7 percent. Biden defenders such as Paul Krugman, who have no compunction blaming Republican governors for seasonal variances in the spread of viruses, contend that Biden has no control over gas prices. Well, the first thing Biden did was freeze new oil and gas leases and shut down future pipelines. Biden now begs OPEC to increase production and help lower worldwide gas prices, but his domestic political goals and action run contrary to this position. Virtually every “green” plan in existence will intentionally, through mandates or bans or taxes or contrived “markets,” make fossil fuels more expensive or reduce use. Expensive gas is their goal. So how can Democrats credibly maintain they have a plan to stop rising prices? . . .

Andrew Stuttaford:

Underpinning the claim that inflation is not “unchecked” are two assumptions. The first is straightforward enough. The facts are as Biden presents them, and inflation is indeed not “unchecked,” nor will it be. We’ll see. The second is subtler. It is the assumption that our current bout of inflation can be checked, an assumption that is not so soundly based as the White House might want us to think, an assumption that owes its origins to Fed chairman Paul Volcker’s success at the beginning of the 1980s, when he presided over a switch to a regime that (essentially — more details here) targeted bank reserves, a regime that saw the Fed Funds rate peak (three times) at 20 percent. Just imagine if the U.S. had to pay even half of that on the debt that it has outstanding now . . .

Jim Geraghty:

The first ten months of the Biden administration have brought more than their fair share of unnerving revelations, reports, and rumors, but this line in a Washington Post story from Wednesday is a giant flashing neon sign that this White House is every bit as out of touch as you fear: “Senior White House officials were greatly disappointed by Wednesday’s report and surprised at how serious the inflationary problems are throughout the economy, according to people familiar with the matter. The report also fueled mounting concerns about supply chain bottlenecks.”

Surprised? We’ve been seeing building and worsening signs of increasing inflation since at least early summer, if not earlier. It’s bad enough if the president runs around insisting no serious economist believes there is unchecked inflation; it’s worse if the president and his staff actually believe what they’re saying . . .

Ramesh Ponnuru:

Imagine an inflation caused by an unexpected doubling of the amount of currency in circulation. In a best-case scenario, your take-home pay doubles, the price of milk doubles, airfares double, etc. The outstanding balance on your mortgage, though, stays the same. It’s fixed in nominal terms. You repay it in dollars worth half as much as they used to be. That’s a gain to you and a loss to the bank.

Then imagine an inflation caused by a natural disaster that makes all goods and services twice as difficult to produce. Airfares double, the price of milk doubles—but there’s no reason your take-home pay should double. Your mortgage payments are worth half as much as they used to be worth, so the bank still loses; but the money isn’t twice as easy to make, as in the previous scenario, so you, as the borrower, aren’t coming out ahead.

Our inflation appears to be mainly caused by supply-chain disruptions of various kinds. And that means it’s nearly pure loss.

Andrew Stuttaford:

We’ll have to see what the Fed comes up with, but, for now, it’s hard to see many signs that the administration has learned very much from its earlier blunders. Summers doesn’t appear to be worried that the next two big spending bills will prove inflationary (I’m not so sure: The money will start to flow long before any productivity gains they may generate, and the associated tax increases are likely to discourage investment, and thus production, but time will tell.) He should, however, be concerned about what the war on fossil fuels is going to mean for the cost of energy . . .

Daniel Tenreiro:

The risk for policy-makers is a doom loop whereby inflation today begets more inflation tomorrow. Higher prices for gas and groceries may push workers to demand higher wages, which in turn leads to higher production prices. A meaningful slowdown in inflation would require a rapid increase in either productive capacity or labor-force participation. It’s possible that price levels will subside as vaccines and the end of pandemic-era transfers push workers to enter the labor force. But it appears more likely at this point that higher prices will stall rather than fuel the recovery. Elevated inflation expectations incentivize workers to hold out for higher-paying jobs, make it difficult for producers and suppliers to lock in contracts at agreed-upon prices, and raise the specter of an economic slowdown induced by an interest-rate hike.

The Fed is in a bind: A rate hike would kneecap the economic recovery, but persistently high inflation would, too. Meanwhile, the White House looks committed to passing Biden’s Build Back Better plan, which would send yet more cash to households while likely reducing the supply of labor. A few more months of high inflation may ring the death knell for the White House’s agenda.

Economics

Alexander Salter:

Is America having a socialist moment? Democrats are more likely than ever to embrace the label. Republicans strongly condemn it. Both sides agree that socialism is a live issue.

They’re wrong. If we assume that socialism is only about the efficient management of the economy — no small assumption, to be sure — it is as dead as a doornail. Two economists, Ludwig von Mises and F. A. Hayek, put that theory to rest by demonstrating that it’s impossible for socialism to out-produce capitalism.

Let’s be clear: Socialism is not actually on the agenda in the U.S. As it’s traditionally defined . . .

David Bahnsen:

Today, we are somehow engaged in a great debate over basic matters of freedom and agency in our market economy. Individual responsibility’s stock is trading at a lower and lower level. Class warfare is at a high, and many on the right are joining those on the left in disdain for economic achievement. A materialistic view of poverty alleviation rules throughout the culture, one that neither alleviates poverty nor solves for the woes of what truly ails mankind.

I am unwilling to view the subject of taxation or the size of government as merely “econometric.” Measurements of Gross Domestic Product (GDP) may serve a data purpose in some analysis, but they are not the aim of economic study. We care about economic growth because we care for the human person, and the human person can flourish when he is free to grow and prosper. What optimizes this aim is my desire, and what impedes this aim is my enemy. If and where increased government spending impedes future economic growth, it needs to be understood and analyzed for that purpose — not as a mere data analysis . . .

Climate

Note that Kent and his Competitive Enterprise Institute colleagues were filing brief cables on COP26, the international climate conference being held in Glasgow, Scotland. 

Kent Lassman:

Frédéric Bastiat made famous the notion of the seen and the unseen. A broken window may be good for the glazier, but it is bad for the shopkeeper and a net social loss. America’s greatest living economics teacher, Thomas Sowell, wrote a book about the distinction between a person’s intentions and the actual outcomes of the policies that he promotes. Last month the Nobel Prize for Physics was awarded to Suki Manabe “for the physical modeling of the earth’s climate, quantifying variability, and reliably predicting global warming.” Manabe’s work is among dozens of models aggregated by the U.S. Department of Energy that are incorporated into the scientific assessments of climate change produced by the U.N.’s Intergovernmental Panel on Climate Change. These are the reports that inform the COP meetings. Unfortunately, it has been shown in peer-reviewed literature that the direct descendants of Manabe’s models perform the worst when compared with actual observations over the earth’s tropics, a critical data point. Again, things are not always as they seem . . .

Kevin Williamson:

The climate movement has never been able to deal directly with the fact — or even to admit that it is a fact — that its agenda enjoys widespread popular support almost nowhere, being rejected by all but a vanishingly small handful of electorates when costs are included. That is true of the United States, it is true of India, it is true of much of Europe, and it is true of most of the rest of the world.

And in non-democratic countries, the mechanics of accountability may work differently but the results must be in many cases the same: Beijing isn’t going to hold a plebiscite on the question, but it is unlikely that the Chinese Communist Party bosses are going to impose any real economic pain on the Chinese people in order to keep a promise made to the conventioneers in Paris and Glasgow . . .

Kent Lassman:

At 2009’s COP15, Secretary of State Clinton proposed a $100-billion-a-year Green Climate Fund that would begin in 2020. It was approved at 2011’s COP17. We are now two years into the spending plan. When it became clear that wealthy nations were not going to make the targets, they began green-labeling direct foreign aid as contributions to the Green Climate Fund. But that was never going to be an approach that would generate enough to enable poorer countries to move to a low carbon footprint. As a result, the parties at COP21 in Paris agreed to create a new, more ambitious target in 2025. If you want to understand the COP meetings, and the United Nations generally, follow the money. The rest of the show is largely window dressing . . .

Kent Lassman:

Two documents were released this week, which provided a bit of color to the talks. The first was a report from Climate Action Tracker (CAT). Its paper predicts warming of 2.7 degrees Celsius this century, after considering the difference between countries’ goals and their NDCs — the Nationally Determined Contributions, which are the centerpiece of the Paris agreement. While the CAT models assume that all warming is due to human activity (something which is hard to reconcile with the record of global industrialization in the past 150 years), it is a respected source and was on everyone’s lips in Glasgow. In addition, the draft of a statement for release at the end of the COP26 meeting began to circulate. The activist community was not impressed; indeed, Prime Minister Johnson faces an uphill battle in convincing them to support his net-zero agenda. There are key issues that remain unresolved including whether to force the NDCs toward a 1.5 degree target immediately or to stick with the Paris agreement’s schedule for updating each country’s pledge, how to measure and monitor emissions, and the all-important question of financing. Poorer countries want more and wealthier countries want to talk about something else . . .

Kent Lassman:

Milton Friedman taught us that there is no such thing as a free lunch. Every policy decision has trade-offs. Larger cars require more fuel, but all things being equal are not as safe as smaller, lighter cars. Different fuels — including wind, hydro, solar, nuclear, natural gas, and coal — present power plants and the electric grid with a variety of trade-offs. Raising the cost of energy today creates dramatic risks for the poor and near-poor in areas that are as diverse as they are essential — such as home heating, food production, and transportation. However, low-cost energy sources can create pollution that burdens future generations.

We must be skeptical of any argument that seeks to push us toward a course of action that is based primarily on the benefits of the new policy and the costs of the current policy. It is crucial to look at both sides of the ledger.

USPS

Ross Marchand:

It’s almost that time of year again, and the United States Postal Service (USPS) is marking the occasion by releasing new “A Visit from Saint Nick” forever stamps. There are also stamps celebrating Hanukkah, Kwanzaa, and Diwali. Some folks aren’t happy with the religious figures and phrases that appear on the USPS’s stamps, citing the Establishment Clause (which prohibits the governmental establishment of religion) as their reason for concern. The agency could alleviate those issues by allowing consumers to make their own customized religious stamps in lieu of official, USPS-ordained designs. Unfortunately, America’s mail carrier first barred religious content on customized stamps and then ended its Customized Postage program altogether when faced with free-speech and religious-liberty suits.

That was a mistake . . .

Interest Rates

Andrew Stuttaford:

Whatever the causes of this depressed investment demand, Summers (Bloomberg reports) believes that it will constrain the ability of policy-makers to use increased interest rates as a way of stabilizing the economy (an increase in the price of a good for which demand is weak isn’t going to be very helpful). Summers believes, according to the report, that that task will fall to government, a worrying prospect at a time when the administration’s plans — from higher taxation to increasingly onerous regulation — seem purpose-built to discourage investment. The thought that, by default, this could be used to boost the case for increased investment by the state is not a reason for celebration.

Adding to the gloom, Summers (rightly) worries about the way that ultra-low interest rates do give a fillip to one type of investment: malinvestment . . .

Supply Chains

Dominic Pino:

Truck chassis are used to haul cargo containers. They are the trailers that shipping containers rest on so that trucks can pull them. The United States needs a lot of them. A chassis is needed to carry a container even for very short drayage trips within or near a port complex. Each chassis can carry two TEU (20-foot equivalent unit) of freight, and the largest container ships today can drop off as much as 8,000 TEU of freight at one port call. Given that lopsided relationship, there are over 700,000 chassis registered in the U.S. That’s higher than the populations of Wyoming and Vermont.

And even then, 700,000 isn’t enough. With the historic influx of goods in the wake of the pandemic, America is experiencing a chassis shortage . . .

Antitrust

Daniel Sokol:

[The] populist impulse in antitrust is anything but new. History is replete with examples of antitrust authorities pursuing an “anti-big” agenda. Now, take the United States and Europe, both of which have recently introduced legislative proposals that seek to regulate the behavior of these digital platforms — or even break these companies apart. The new regulations seek to impose broad prohibitions on self-preferencing while permitting competitors to have greater access to the data that is controlled and used by digital platforms. History, again, however, counsels that such measures may very likely have the unintended consequence of harming consumers through higher prices, lower quality, reduced product offerings, and a chilling effect on innovation.

Nevertheless, both the current and former competition commissioners in Canada have taken a growing interest in the state of competition law in the country. For instance, some pundits have suggested that the competition-policy framework should be overhauled completely in order to promote much more aggressive enforcement against Big Tech companies.

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