The week of May 30, 2022: Electric vehicles’ central planning problem, China, fiscal policy, energy, and much, much more.
Central planning is not exactly the best way of organizing an economy (#understatement). That’s true, whether we look at the colossal failures of communism or, for that matter, many less ambitious attempts to manage an economy by decree.
Central planning lite (or relatively lite) has been a feature of the energy “transition” now underway in much of the West for some time. As this transition proceeds, the difficulties flowing from its reliance on aggressive, unrealistic and arrogant directives from above are becoming all too apparent, from the woes associated with wind energy — a technology clearly not ready to fulfill the role assigned to it by the climate technocracy — to growing evidence that forcing people away from conventional autos into electric vehicles is going to lead to immense problems that appear not to have been anticipated. (This may a charitable explanation. Perhaps those in charge were well aware of the problems but were determined to press on regardless. Omelets, eggs, we know that script.)
If, however, we give climate policymakers the benefit of the doubt or, in other words, accept that they simply did not foresee the problems now coming into view, their failure to do so should not come as too much of a shock. Central planners cannot reasonably be expected to anticipate all the difficulties that may emerge as their grand projects move along. In a way (again, to be charitable) they cannot be blamed for that, but they can be blamed for embarking on such undertakings in the first place. For governments to try to force through such projects with no recognition of what is actually feasible is an invitation to disaster, and it’s an invitation that will be accepted. If governments believe that such projects are necessary, and if their voters agree, it is infinitely better to signal the general direction of change, provide for wide discretion on issues such as timing, and leave it at that.
Friedrich von Hayek, making, I think, his long overdue debut in the Capital Letter after some years as an intern at Capital Matters, put it this way The Fatal Conceit: The Errors of Socialism (1988):
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. To the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralizing decisions and that a division of authority will actually extend the possibility of overall order. Yet that decentralization actually leads to more information being taken into account.
It’s not a big leap from talk of a fatal conceit to looking at the increasing pressure on drivers to switch to electric vehicles (EVs) at a pace that appears to bear no relation to what can realistically be achieved, at least without massive disruption. Markets are immensely responsive and immensely adaptive, but that does not mean that they can respond to every bureaucratic whim.
To be clear, there is nothing wrong with the idea of EVs, which, in fact, preceded vehicles powered by the internal combustion engine. Nor is there anything necessarily wrong with governments giving a modest nudge (favorable tax treatment, say) to help boost demand for such cars. That’s up to them and, more specifically, the voters who elect them. They may be wrong, but that should be their mistake to make. This issue is too big to be resolved by a corporatist cabal of stakeholder capitalists, activist investors (playing political games with other people’s money), NGOs, and regulators.
If the EVs work well enough, the prices are good enough, their running costs are attractive enough, their environmental benefits are appealing enough, and the infrastructure (charging stations and the grid) is reliable enough, a healthy market will develop for them, and, as teething problems emerge, that market will probably sort them out.
Unfortunately, that natural process is not being given the time it needs. California is looking at a ban on the sale of new gas or diesel-powered cars by 2035. But, if that law is passed, the ratchet will start turning before then.
From Cal Matters (no relation):
If enacted, 35% of new cars, SUVs and small pickups sold in the state must be zero-emission starting with 2026 models, then increasing yearly, reaching 51% of all new car sales in 2028, 68% in 2030 and 100% in 2035. Of those, 20% can be plug-in hybrids.
Only about 2% of cars on California’s roads were zero emissions in 2020.
Quite how these interim targets will be achieved will be interesting to see.
Automakers — what else are they going to say — expressed their enthusiasm:
An alliance representing nearly all automakers said in a statement Wednesday that they are “committed to electrification and a net-zero carbon transportation future.” Many major manufacturers, including General Motors, have already announced goals to ramp up clean-car models on a similar timeframe.
But there’s a but . . .
But the automakers added that it’s critical for governments to ensure that “everything from (electric car) infrastructure, demand, critical minerals and supply chain are in place.” Even then, the companies said the state’s proposed rules “will be extremely challenging even in California and may not be achievable” in other states.
Oh.
There has to be “demand” for these products. Who’d have thunk it?
By “infrastructure,” the automakers are presumably referring (above all) to a good charging network.
One of the biggest roadblocks could be the lack of charging stations for electric cars. Nearly 1.2 million chargers will be needed for the 8 million zero-emission vehicles expected in California by 2030, according to a state report. Right now, there are only about 70,000 with another 123,000 on the way, falling far short.
Then there’s the small matter of city dwellers in apartment buildings (or even smaller units with only roadside parking) with no obvious access to at-home charging facilities.
Or have central planners decided that such folk have no real need for cars anyway? After all, they have topnotch (and secure) public transit and bargain-priced taxis.
Surely not!
Those auto manufacturers must be hoping that an electrical grid will be in place able to cope with the extra demand that all those EVs will put on it, and that the days when people have to worry about a faltering grid reliant on inherently unstable renewable energy and distinctly shaky backup will soon be over? Good luck with that!
So how about those “critical minerals?”
Um…
Let’s start with lithium, a key metal for EVs’ batteries.
Annie Lee, writing for Bloomberg:
Elon Musk wants to mine it, China is scouring Tibet for it, battery makers are crying out for it. Lithium, the wonder metal at the heart of the global shift to electric cars, is in a full-blown crisis. Demand has outstripped supply, pushing prices up almost 500% in a year and hindering the world’s most successful effort yet to halt global warming.
The shortage of lithium is so acute that in China, which makes about 80% of the world’s lithium-ion batteries, the government corralled suppliers and manufacturers to demand “a rational return” to lower prices. Analysts at Macquarie Group Ltd. warned of a “a perpetual deficit,” while Citigroup Inc. nearly doubled its price forecast for 2022, saying an “extreme” rally could be coming.
The consequences of failure to produce enough lithium are potentially devastating. Global investment in EVs has grown faster than any other new-energy sector over the past few years, outstripping even wind and solar power. Current lithium spot prices could add up to $1,000 to the cost of a new vehicle, Benchmark Mineral Intelligence said. Along with higher prices of other raw materials, that is reversing years of falling prices as EVs race to become cost-competitive with gasoline-powered cars. If battery makers can’t get enough lithium, it would curb the expansion of clean-energy vehicles, making it harder to meet global emissions targets.
Needless to say, the pandemic and the Russian war on Ukraine have made things worse for battery-makers, Lee reports, causing difficulties with “supplies of other ingredients they need, including nickel, graphite and cobalt.”
A surge in battery metal prices means it could take several years longer for electric vehicles to become as affordable as conventional cars, according to BloombergNEF.
Prices of lithium, cobalt and nickel have soared in the past year, eating into EV makers’ margins at a crucial point in the development of the burgeoning industry.
The Californian authorities do admit that EVs are a tad more expensive than their conventional equivalents, but that, they tell us, is going to change.
Cal Matters:
Electric cars now cost more to purchase, but price drops plus savings on gas and maintenance would add up, saving consumers an estimated $3,200 over ten years for a 2026 car and $7,500 for a 2035 car, the air board calculated.
All will be well.
Meanwhile, via Bloomberg:
For now, the base case for EV sales remains unchanged, but green inflation — a term for the sharp rise in energy transition-related prices — could put “negative downward pressure on EV penetration,” Yuzawa said.
According to data from Cox Automotive, the average transaction price for a new EV in the US climbed to more than $65,000 in April, up 16% from a year earlier. That outpaced gains in total new vehicle prices over the same period and placed EVs squarely in the same price bracket as luxury cars.
To be fair that price tag — an average — is swollen by the degree to which electric cars have been marketed as an upscale product (there are a number of cheaper alternatives), but still . . .
And I wonder how the time spent waiting to recharge the car once on a long journey will be costed?
I touched on some of these issues in an earlier post.
California will not be alone (New York, its regular partner in idiocy, is also shooting for 2035), and others too are along for the ride.
But there’s always one lemming that wants to be first off the cliff.
NBC:
Washington state plans to ban most non-electric vehicles by 2030, according to a newly signed bill by Gov. Jay Inslee.
The bill says that all vehicles of the model year 2030 or later that are sold, purchased, or registered in the state must be electric.
But maybe I shouldn’t be so negative. At least EVs will hasten in a happy era when the West is not dependent on our strategic rivals for crucial raw materials.
Or maybe not. Ambrose Evans-Pritchard, writing in The Daily Telegraph:
“The economies of the future will no longer rely on coal and oil, but on lithium for batteries; on silicon metal for chips; on rare earth permanent magnets for electric vehicles and wind turbines,” [Ursula von der Leyen, the European Commission’s president told the World Economic Forum in Davos.
“The green and digital transitions will massively increase our need for these materials. However, access is not a given. For many of them, we rely on a handful of producers in the world. We must avoid falling into the same trap as with oil and gas,” she said.
It may already be too late to prevent a chronic supply crunch through the 2020s. The International Energy Agency says China controls half the world’s capacity for lithium refining and produces three quarters of all lithium-ion batteries. “Today it’s about oil, tomorrow it will be about lithium supplies,” said Fatih Birol of the IEA.
China already has a strategic lock hold over rare earth metals used across the spectrum of advanced technology, not just for green energy and artificial intelligence, but also for military lasers, missiles, and satellites. Beijing is fast acquiring dominance over global supply of cobalt and graphite. Over 98pc of permanent magnets – typically requiring neodymium – come from China.
Prices of lithium carbonate have risen almost tenfold this year. Cobalt is up by 150pc, and nickel futures have almost doubled. The IEA calculates that the “cathode materials” in battery packs for electric cars have jumped from 5pc to 20pc of the total cost in less than a decade.
Nato secretary general Jens Stoltenberg issued equally stark warnings in Davos over the risks of sleep walking into an invidious dependence on China, arguing that the invasion of Ukraine had exposed the pitfalls of naïve free trade with antagonistic powers that do not pull their punches. There must be no equivalent of the Nord Stream 2 pipeline debacle in dealings with Beijing.
Too late, I think (more here), and much more in a piece that we ran this week by Joel Kotkin.
Here’s one extract (there will be another in the regular weekly roundup below):
The ever-quickening pace of mandates for electric cars, with little in the way of new electric capacity, seems likely to serve Chinese interests more than ours. Beijing maintains almost total domination of the solar-panel industry — its battery capacity is now roughly four times ours, a gap projected to expand by 2030. They also have effective control of the requisite rare-earth minerals and the technology for processing them.
Indeed, given China’s growing dominance in computer production (and its drive to control semiconductors as well), the future of American automobile production could very well consist of slapping a Chinese computer to a Chinese battery with some bent metal, arguably also sourced there, around it.
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 69th episode David is once again joined by Father Robert Sirico, co-founder of the Acton Institute and a leading public intellectual in the cause of a free and virtuous society. Fresh off the publication of Father Sirico’s brand new book, Economics and the Parables, he and David dive deep into the Biblical teachings of economics, the state of affairs on the right, and where integralism commits its fatal flaw.
The Capital Matters week that was . . .
China
Like many other current green policies, the shift to electric cars will also threaten the living standards of working- and middle-class households. As the prices of rare metals and computer chips surge, the prices of EVs have grown. Electric-truck maker Rivian recently raised the price of its pickups by $12,000 to nearly $80,000, not normally what working- or middle-class Americans can afford to pay for a pickup. The enormous demand for both rare earths, such as lithium, as well as such basic commodities as copper and aluminum — critical for EVs — has sparked a mounting inflationary wave in EV costs and could lead to more environmentally challenging mining projects . . .
Fiscal Policy
Jonathan Williams and Lee Schalk:
Inflation was up 8.3 percent in April over the preceding twelve months. From groceries to gasoline, Americans are feeling the squeeze. Meanwhile, some leaders in Washington are calling for higher taxes — despite raking in a record $2.1 trillion in tax revenue in the first half of the fiscal year.
This tax-and-spend habit in Washington is one of the culprits for the higher levels of inflation, and our national debt recently surpassed $30 trillion. Fortunately, many states are countering the big-government policies of D.C. with their own fiscally responsible reforms . . .
The Congressional Budget Office (CBO) last week released its much-anticipated mid-year baseline of expected federal spending, taxes, and debt over the next decade, along with the economic assumptions behind them. The nerdier end of official Washington has been pouring over the numbers ever since, and there are some conclusions to be drawn.
What screams out to the casual reader is how much of our fiscal woes come from spending, not taxes. According to the CBO baseline, federal spending is expected to grow from about 22 percent of economic output (once one-time Covid money is cycled out) to 25 percent of economic output a decade from now (assuming realistic projections of discretionary spending growth). In other words, federal government spending is eating up a bigger and bigger piece of our economic pie . . .
Energy
One of the markers of human progress has been the way that we have been able to break away from the constraints put upon us by the natural environment. For example, we have developed better and better methods of lighting — from candles and oil lamps onward. We have beaten, so to speak, the night. Equally, in more and more parts of the world we have managed to break away from the constraints imposed by weather or climate, another sign of progress.
And yet now, the climate warriors are telling us to put our faith in an electricity grid that may well find itself vulnerable to being crippled as a result of the inescapable reality that the wind doesn’t always blow, and the sun doesn’t always shine. In all probability, storage technologies will, in due course, be developed that get around those problems, and nuclear energy will — if the political will can be found to turn to it — be able to help out. But the latter will also take time.
It is true that there are many factors outside Biden’s control that are currently presenting challenges to the energy industry. But as I warned in my magazine piece from March, if Biden gets his way, the next energy crisis will be self-inflicted. Tying up drilling in litigation and regulation is a great example of what that looks like in practice.
Permits on federal land matter a lot for Wyoming because, as of 2018, the federal government owns 47 percent of the land in the sparsely populated state. High percentages of federal land ownership are common in Western states, with Nevada’s federal share at 80 percent, Utah at 63 percent, and Idaho at 62 percent. Some of that land is for national parks and military bases, but the vast majority of it is not. The Department of Defense has actually sold over half the land it held in 1990 and owns less than 2 percent of federal lands today, and the National Park Service owns only 13 percent.
Tech
Policy-makers in the EU are about to finalize new digital-platform rules, many of which mirror U.S. proposals currently stalled in Congress. Like past European tech regulation, the EU’s Digital Services Act (DSA) will bring harmful unintended consequences for consumers and businesses. American politicians should reject this approach and keep to the regulatory regime that’s helped make the U.S. a global tech leader . . .
Taxation
As the White House is running through all possible causes of inflation except the real ones (its policies and the Fed’s), the latest and certainly most novel economic cause involves the rich paying too little in taxes. The White House’s inflation response is becoming a bit like having an arsonist put out fires.
Just as the White House lacks an understanding of the causes of inflation, it does not understand that the rich, such as Jeff Bezos, are already paying their fair share. Our country’s roughly 700 billionaires and the 1 percent they are part of are helping others more than the rest of us are, even if they paid nothing in taxes . . .
The Economy
In Politico’s Playbook newsletter this morning: President Biden will spend June pivoting to a focus on economic issues, “to convince skeptical voters that, despite their current misgivings, the economy is actually doing quite well.”
Attempting to convince people that they’re doing better than they think they are is always a risky political strategy, but it seems particularly unlikely to work when gas prices keep setting new records every day. This morning, the national average price of a gallon of regular gasoline is $4.62, according to AAA. A year ago, it was $3.04.
But it isn’t just gas prices . . .
JP Morgan’s Jamie Dimon may be one of those who pushed ‘stakeholder capitalism’ to the forefront of the C-suite agenda (and he still is doing what he can to advance it), but he does have a way of occasionally letting his understanding of finance and economics override his more usual corporatist game . . .
Regulation
In a letter today to Securities and Exchange Commission chairman Gary Gensler, 16 Republican governors expressed their opposition to the SEC’s proposed climate-change disclosure rule. The proposed rule would require publicly traded companies to include on their SEC-mandated reports information about climate risks, greenhouse-gas emissions, and other climate-related metrics as defined by the SEC.
“As governors, we are deeply concerned your proposed rule veers far outside the SEC’s authority as a federal agency,” they wrote. “The proposed rule will harm businesses and investors in our states by increasing compliance costs and by larding disclosure statements with uncertain and immaterial information that the federal government — let alone the SEC — is not equipped to judge.”
Antitrust
We are in a new era for antitrust. There’s an attempt being made to throw the old rules out, and unfortunately, their replacements are being written by two bureaucratic government agencies at the forefront of “progressive” change in antitrust enforcement. Together, the Federal Trade Commission, under Lina Khan, and the Department of Justice Antitrust Division, under Jonathan Kanter, are updating their agencies’ merger guidelines to push a political agenda against mergers. Luckily, their attempts to discourage mergers in the marketplace are unlikely to go far. Hubris within the antitrust agencies will ultimately backfire when the courts reject their attempts to overhaul merger enforcement . . .
Protectionism
India has long believed in the goal of economic self-sufficiency. Its constitution describes India as a socialist country, and Prime Minister Jawaharlal Nehru, in office from independence in 1947 until his death in 1964, saw economic independence as connected with political independence. “He held that depending on imports for railways, airplanes and guns amounted to being slaves of foreign countries,” wrote economics professor Arvind Panagariya in the Times of India last year.
Nehru and, after him, his party, the Indian National Congress, ran the country for the first 30 years after independence. They made Soviet-style five-year plans and implemented the “License Raj” of government involvement in every aspect of commerce. They did so in pursuit of the goal of economic self-sufficiency . . .
Inflation
The latest in “Useless Bills We Give a Fun Title to Use as a Club against Our Political Opponents When They Vote against It” is the Consumer Fuel Price Gouging Prevention Act.
Yesterday, Bill Pascrell Jr., a New Jersey Democrat, tweeted his dismay at the May 19 vote total for the bill in the House. He supported the bill, and it passed, but Pascrell laid into Republican members of Congress, none of whom voted in favor of it . . .
Government and Marketing
The private and public sectors have different incentives when it comes to producing, distributing, and promoting a product. For-profit companies aim to generate the profits that create value for their owners. Public officials aim to stay in office and enhance the power they have while in office.
The public–private difference is especially stark when it comes to the advertising and marketing activities that could increase the fraction of the population that uses a good, whether it be health insurance, schooling, vaccines, or other goods with social benefits. In the private sector, the purpose of product advertising and marketing is to generate profit by making potential consumers aware of the product as well as increasing the intensity of their interest . . .
DEI (Diversity, Equity & Inclusion)
Progressive publications, such as a frequently quoted 2020 McKinsey article, and “Entrepreneurial Inequity,” just issued by the Alliance for Entrepreneurial Equity (AEE), parrot the same statistics, conclusions, and mandate for “equity” in venture capital. Their analyses are disconnected from the prerequisites for business success and offer false hope to underprivileged Americans.
The core of the progressive demand for “equity” is the categorization of individuals by race, gender identity, and sexual orientation, followed by the proportionate allocation of benefits . . .
Emerging Markets
Sri Lanka had been a South Asian success story, at least on economic development. The island country, located off the southern coast of India, had endured a 26-year civil war that concluded in 2009, but by 2019 it had been elevated from a lower-middle-income country to an upper-middle-income country by World Bank classifications. Its GDP per capita, adjusted for purchasing power, is about double that of India, about the same as the poorer countries of Eastern Europe such as Ukraine and Moldova, and only slightly behind Brazil. Its largest city of Colombo had become a tourist destination. It’s not a wealthy country by any stretch of the imagination, but it was doing well for its neighborhood, and its 22 million inhabitants saw a dramatic improvement in their quality of life in the past decade.
On Monday, authorities were telling airlines to make sure they had enough fuel for return trips because they probably wouldn’t be able to refuel in Sri Lanka. On Tuesday, they began the process of applying for international food aid . . .
Musk/Twitter
The reason Musk decided to buy Twitter, however, was not to make a profit, but to support free speech. Regardless of the number of “bots” on the platform, Twitter is at the converging point of media, political, business, and cultural interest — where opinion is shared and read. As Twitter is a major conduit for public discourse, ensuring that it is well run and uncompromised by bias is essential. Musk’s wealth and skill set uniquely equip him to take on this responsibility, and to do it well . . .
To sign up for The Capital Letter, please follow this link.