The week of June 6, 2021: Greenflation, fossilflation, climateflation, greenstagflation, old-fashioned inflation, and much, much more.
The appointment of Christine Lagarde as president of the European Central Bank was never going to bode very well for the way that the ECB is run. Lagarde is a politician, not a banker, and, as to her attitudes to rules, well, many of those who followed the euro zone crisis (a time when Lagarde was France’s finance minister) will remember her comments after those in charge approved the first Greek bailout.
“We violated all the rules because we wanted to close ranks and really rescue the euro zone,” Lagarde was quoted as saying.
“The Treaty of Lisbon was very straight-forward. No bailout.”
Oh well.
Since taking on her job at the ECB she has been one of those responsible for involving the central bank into climate policy. Questioned about whether that particular piece of mission creep was appropriate at a time when the euro zone was in the grips of the pandemic, she was scathing:
Asked whether the pandemic could dilute the importance of green issues, the ECB president said that “those who would be tempted by that option would live to regret it”. She added: “I have children, I have grandchildren. I just don’t want to face those beautiful eyes, asking me and others: ‘What have you done?’”
The best that can be said about that argument is that it makes more sense than her claims that the ECB’s involvement in this area can be justified on the basis that climate change represents a systemic financial risk, a claim that has (repeatedly) been demolished by John Cochrane and others. But then we know what she thinks about rules.
Meanwhile, euro zone inflation has been running well above its medium-term target. Under the circumstances, any suggestion that climate policies could contribute to inflation (“greenflation”) is . . . unhelpful.
In January, I noted my surprise that Isabel Schnabel, a senior member of the ECB hierarchy (she is the member of the ECB’s Executive Board responsible for market operations) had been talking frankly about greenflation (even if she did not use the term). Although, she maintained, the run-up in energy prices in Europe didn’t owe a great deal to climate policies (with, I argued, notable exceptions such as the U.K. and, arguably, Germany), Schnabel warned that, sooner or later, they would have an impact (and not in a good way):
While in the past energy prices often fell as quickly as they rose, the need to step up the fight against climate change may imply that fossil fuel prices will now not only have to stay elevated, but even have to keep rising if we are to meet the goals of the Paris climate agreement. . . .
The combination of insufficient production capacity of renewable energies in the short run, subdued investments in fossil fuels and rising carbon prices means that we risk facing a possibly protracted transition period during which the energy bill will be rising. (emphasis added)
As I wrote, “risk” struck me as understatement, as did “possibly.”
Those words “insufficient production capacity” may conceal a deeper problem: Renewables (specifically wind and solar) are not ready for prime time. Thanks primarily to difficulties arising out of intermittency, no one can be sure when they will be able to fill the gap created by the withdrawal from fossil fuels. And the unwillingness to invest in the backup power sources that renewables are likely to need for the foreseeable future will only add unreliability (another cost).
That said, there was growing, if belated, recognition (now accelerated by the war in Ukraine) that that unwillingness would need to be scaled back. Nuclear power is coming back into vogue in some countries, and the EU Commission, at least, is rightly prepared to designate both it and natural gas as green fuels, if only, in the latter case, on a “bridging” basis.
But, even assuming the commission’s proposal is approved, new nuclear power stations will take years to build (after, probably years of controversy and litigation). Meanwhile, even now, as the fighting continues in Ukraine, the Biden administration appears to be divided between climate fundamentalists and those who recognize that we will, in some form or another, and for some timespan or another, need to stick with oil and gas, divisions hardly designed to encourage investment in new production. The same can be said of talk of “price gouging,” not to speak of proposed windfall taxes.
Then there is the way that, despite a partial retreat by BlackRock, the “cartel” formed by regulators, C-suite stakeholder capitalists and ESG-influenced investors seem set on continuing to obstruct investment in energy sources they deem sinful despite the fact that they are essential to ensure a (relatively) smooth transition away from GHG-emitting fuels. The alternative will be a chaotic leap into (quite literally) the dark, a leap that will both be hugely and unnecessarily expensive, while doing little for the climate.
In my piece, I also quoted from an article by Bloomberg’s Javier Blas.
Here’s an extract from an extract:
There’s more to come beyond energy commodities. As the world moves to electrify everything — from heating to driving — the commodities needed to power the green transition are in greater demand and, therefore, getting more expensive. Take lithium, a crucial element of electric car batteries: It has surged to a record. The same is true of copper, which is needed in every piece of electrical cable.
This is a reality that many of those proposing the “electrification of everything” continue to overlook, as is obvious from their efforts to force through the adoption of electric vehicles, a policy that may represent (so far) a pinnacle of obliviousness, even by the standards of climate policy-makers.
Meanwhile, via Reuters (June 9, emphasis added):
U.S. renewable energy developers have delayed or scrapped several big battery projects meant to store electrical power on the grid in recent months, scuttling plans to replace fossil fuels with wind and solar energy.
At least a dozen storage projects meant to support growing renewable energy supplies have been postponed, canceled or renegotiated as labor and transport bottlenecks, soaring minerals prices, and competition from the electric vehicle industry crimp supply.
Back to Blas:
Greenflation will have fiscal and monetary consequences, Schnabel argues. Governments will need to support the families left behind as energy prices soar. She didn’t say much about businesses, but it’s clear that if Europe lets rising gas and electricity prices go unchecked, the region would lose its energy-intensive industries — from aluminum smelters to fertilizer producers.
Britain’s food supply is now “vulnerable” after spiralling energy bills prompted the permanent closure of one of only two major fertiliser plants, farmers have warned. . . .
CF Fertilisers will shut down its Ince manufacturing plant near Chester, which provides crucial supplies of nitrogen fertiliser and carbon dioxide. The company said it could no longer afford to keep the plant open amid spiralling gas prices and high environmental taxes. Production has been suspended since September.
Well, it’s not as if there is a food crisis or anything.
Note too, the contribution made by “high environmental taxes.”
On the topic of those taxes, pause to marvel at the fact that Boris Johnson, whose climate fundamentalism has reached a point that suggests a need for either psychiatric help or a less destructive religious outlet, is now greener than Germany, the Heimat of environmentalism. Johnson, the Daily Telegraph (June 8) reported, has so far ignored calls to suspend green taxes, including from “scores” of Tory MPs who presumably can see what, electorally lies ahead.
The Daily Telegraph:
Last autumn Germany slashed its own environmental levy, called the renewable electricity surcharge, by more than 40 per cent as gas prices soared.
The other ideas – cutting VAT on energy bills and implementing a more permanent reduction in fuel duty – have been called for by scores of Conservative MPs.
Downing Street and the Treasury is resisting demands to adopt any of the three measures and is holding off tax change considerations until the November Budget.
Maybe Johnson’s humiliatingly narrow win in a recent vote of confidence called by Conservative MPs will mean that he sees reason at that time.
Meanwhile, Lagarde tweets (June 1):
We are now observing “fossilflation”, not “greenflation”! While decarbonisation in the energy sector can cause rising prices in the medium term, it can lower inflation in the long term. That’s why green innovation is key.
When Schnabel spoke in January, she never referred to “greenflation.” Adding a catchy name to unspeakable truths would not have been appropriate. By the time she gave a speech in mid-March, the ECB’s climate policymakers had (I suspect) been busy devising neologisms designed to distance inflation (bad) from green (good). And so Schnabel argued that three distinct inflations were associated, one way or another, with climate change. The first is inflation linked, she maintained, to the cost of climate change itself:
As the number of natural disasters and severe weather events is rising, so is their impact on economic activity and prices. For example, exceptional droughts in large parts of the world have contributed to the recent sharp rise in food prices that is imposing a heavy burden on people who are struggling to make ends meet.
The second is “fossilflation,” which was, she argued, responsible for much of the recent rise in inflation: “Fossilflation reflects the legacy cost of the dependency on fossil energy sources, which has not been reduced forcefully enough over the past decades.”
Quite how that dependency could have been reduced by enough to be effective given widespread aversion to nuclear power, the rapid growth in China and other emerging markets, and, to return to an earlier theme, the fact that renewables were simply not ready was left unclear. To her credit, Schnabel did accept (as she had done in January) that the growing hostility in the West to investment in new production would affect fossilflation in the next few years:
[M]any institutional investors in financial markets have started to materially reduce their exposures to fossil fuel energy producers, leading to increased funding costs and contributing to the sluggish response of crude oil production in large parts of the world.
Finally, Schnabel turned to greenflation as she (now?) understood the term (my emphasis added):
Many companies are adapting their production processes in an effort to reduce carbon emissions. But most green technologies require significant amounts of metals and minerals, such as copper, lithium and cobalt, especially during the transition period.
Electric vehicles, for example, use over six times more minerals than their conventional counterparts. An offshore wind plant requires over seven times the amount of copper compared with a gas-fired plant.
No matter which path to decarbonisation we will ultimately follow, green technologies are set to account for the lion’s share of the growth in demand for most metals and minerals in the foreseeable future.
Yet, as demand rises, supply is constrained in the short and medium term. It typically takes five to ten years to develop new mines.
This imbalance between rising demand and constrained supply is why the prices of many critical commodities have increased measurably in recent months. The price of lithium, for example, has increased by more than 1000% since January 2020 [as a reminder, this speech was given in March]. Export restrictions on Russian commodities may add to pressure on prices over the near term.
These developments illustrate an important paradox in the fight against climate change: the faster and more urgent the shift to a greener economy becomes, the more expensive it may get in the short run.
[A]s more and more industries switch to low-emission technologies, greenflation can be expected to exert upward pressure on prices of a broad range of products during the transition period.
Conclusion? Readers can debate climateflation among themselves, but the idea that there is necessarily a clean distinction between fossilflation and greenflation is not one that will stand up over time. If, because of agitation against fossil fuels — whether from that “cartel” or from governments — companies cut back production, fossil-fuel prices will be higher than they would otherwise have been. It is hard to see that as anything other than another transition cost, or, in other words, as a part of greenflation.
Given that the pace of the transition is currently planned to pick up rapidly, greenflation will be contributing to rising prices for quite some time. There will be nothing transitory about the transition costs, which ought to be calculated in a way that also measures the way they will hold back economic growth.
Greenstagflation? It’s more than possible.
The better course? Boost spending on adaptation and improving resilience, (such as strengthening the sea defenses of low-lying cities), which will often pay for itself. As far as alternative sources of energy are concerned, focus on nuclear. For renewables, emphasize research (particularly on energy storage), rather than spending billions on equipment not yet ready for prime time. Otherwise, don’t let the perfect be the enemy of the good: Continue to switch into less GHG-intensive natural gas, while developing better systems to limit methane leakage. And reject climate masochism, whether banning gas appliances in new homes or the sale of new internal combustion cars.
Above all, work with the free market, not central planning. Whether the central planners now in charge of climate policy will be prepared to accept that, well . . .
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 70th episode, David is joined by Lyman Stone, renowned expert in demographics from the American Enterprise Institute and other significant think tanks and organizations. Lyman and David dive deep this week into mortality, migration, and fertility, and look to better understand the implications for economic growth and human flourishing that various trends in these components represent.
The Capital Matters week that was . . .
Intellectual Property
At the behest of the Biden administration, the World Trade Organization is about to vote on a “waiver” that would remove American intellectual-property rights that protect Covid vaccines. Trampling over these rights and the U.S. Constitution will only harm future pandemic preparedness and undermine American competitiveness . . .
Regulation
The U.S. economy is headed towards stagflation, a miserable economic condition in which economic growth stagnates while inflation soars. In the first quarter of this year, real GDP declined by 1.4 percent even while overall consumer prices rose by 8.3 percent in the twelve-month period ending in March. For American families who were struggling before the latest economic setbacks, the 5.5 percent increase in average hourly earnings over the previous twelve months was hardly enough to cope with the 10 percent increase in the cost of groceries over the same period, $4.624 per gallon average gasoline prices ($5.559 on the West Coast) as of May 30, and average rents that have soared over 15 percent from a year earlier to $1,962 as of April.
Against this bleak backdrop, my new research shows that regulatory reform offers the nation the shot in the arm it needs without contributing to the current economic woes . . .
In a spate of executive actions on Monday, President Biden invoked his authority under the Defense Production Act (DPA) to declare that a variety of green-energy-related materials were “essential to national defense,” and that as a result, the government would be stepping in to increase their production.
Biden’s actions are an abuse of presidential power, and they have the potential to cause serious harm to the American economy in the long run . . .
Inflation/Stagflation
By December, the Democratic Congressional Campaign Committee offered a tweet praising President Joe Biden for lowering gas prices, sharing a graph that had no start date showing gas prices going down by two cents from November 22 to November 29, from $3.40 to $3.38. It was a laughable attempt to hype a miniscule and short-lived decline, one that most consumers probably never noticed.
A word that never came up in Buttigieg’s conversation with Stephanopolous: “Refinery.”
Bonds from developing countries are being sold off in what one emerging-markets fund manager called “the worst start I can remember across the asset class and I’ve been doing EMs for more than 25 years,” the Financial Times reports.
What with the aftereffects of the pandemic, the war in Ukraine, rising inflation, and lower global economic growth, things are looking down for emerging markets . . .
People who haven’t noticed the return of inflation are, like baby formula, growing scarce in America. According to a recent poll, 70 percent of Americans now regard inflation as “a very big problem” facing the country. Economists, for their part, are interrogating the data. The newest numbers are now prompting them to ask: Has inflation peaked?
If wages aren’t keeping up with prices for most people, they’re going to think it’s a bad economy. They’re going to think it even if the economy and the number of jobs is expanding. That’s my read on the last 30 years or so of data about public opinion and the economy, and it makes intuitive sense. Even when unemployment is high, most people have jobs. When inflation is high, a much larger percentage of voters feels it directly at the grocery store and gas pump.
It’s a point that Paul Krugman does not seem to have fully absorbed.
The entire recent surge in gas prices will certainly show up on the May inflation report, though. As Jim notes, the national average price of gasoline, according to weekly Energy Information Administration data, went from $4.18 at the start of May to $4.62 at the end of May, an increase of almost 11 percent. That’s not the same data source the BLS uses to calculate gasoline inflation, but it gives a rough idea of what to expect.
Unlike April, when the gasoline-price index actually helped temper the headline inflation number, gasoline will be a significant driver of inflation for May . . .
[P]rogressive intellectuals have spent the past decade learning the lessons of 1929 and 2008 and forgetting the lessons of 1979–82. Both the Great Depression and the 2008 credit crisis reflected, and were exacerbated by, sudden reductions in liquidity. In each case, there were economic arguments over whether the greater culprit was too lax monetary policy creating a bubble, or too fast a contraction when it popped. In either event, a lot of progressives came away with the view that the government in 2009–10 should have spent more profligately to stimulate the economy. They developed “modern monetary theory,” which is more or less a prescription for cutting loose on public spending without worrying that inflation could ever recur or debt could ever catch up with us. No downsides! No trade-offs! Just print more money, and the party will never end. We find ourselves in the world that the MMT solons said could never return, even though many of us were old enough to remember it the last time. How do you solve a problem when your doctrine says that the problem is inconceivable and the solution unthinkable?
Inflation
As Phil points out, there’s no aisle in the grocery store where shoppers can escape inflation.
Early on, inflation in meat outpaced other categories, leading the Biden administration to speak of the “greed of meat conglomerates.” If only they were less greedy, the prices would go down, Biden wanted you to believe.
Okay, but look at Phil’s chart. What’s the explanation for eggs, milk, coffee, oranges, flour, rice, cereal, peanut butter, lettuce, and bread? Are all those industries controlled by greedy conglomerates, too, who just happened to start raising their prices at the exact same time after the Fed expanded the money supply and government spending went through the roof?
At the last FOMC meeting, the Fed increased rates by 50 basis points instead of 25. The headlines read “largest interest-rate increase since 2000” and the economy was supposed to be spooked. The Fed was getting serious about fighting inflation, we were told.
I wrote at the time that 50 basis points wasn’t enough. Today’s inflation report provide evidence to support that the Fed’s credibility is eroding. When the headlines read “historic interest-rate increase” and inflation only becomes more entrenched a month later, it should be a flashing red light to central bankers.
The FOMC’s next meeting is in a few days. Markets are already pricing in a 50 basis-point increase. The Fed needs to go higher than that. It should go with 75 basis points at least . . .
Stable inflation is not here yet, but when it does arrive, we will likely be looking at inflation in the 7 percent range as far as the eye can see. The thing that non-economists might easily miss is that inflation’s negative consequences on consumer welfare build steadily over time. Two years of 10 percent inflation, something that seems like almost a sure thing going forward, has the same effect on prices as ten years of 2 percent inflation. But the difference is that in year three, whatever inflation comes then and thereafter will be growing from a general price level that will be 21 percent higher than it was two years ago. Even lower inflation will move prices relative to the start of the cycle more than would have happened if inflation has stayed stable at 2 percent.
To put it a different way, somebody on a fixed income of $20,000 a year has seen the value of their income decline by about $2,000 over the past year, and will likely see another similar decline next year. Even if inflation stabilizes after that, they’ll still be trying to get by on 20 percent less money for the rest of their life, and they are sure to get angrier and angrier about it.
Electric Vehicles
I wrote a bit last week about what the developing electric-vehicle sector might mean for job creation. We have, after all, been told that decarbonization of the economy is going to generate lots of new jobs. I’m not convinced, particularly, as I noted last week, when it comes to net job creation. To be sure, the transition away from greenhouse gases ought to create quite a large number of new jobs for regulators, lawyers, and all the rest, and maybe even some well-paid blue-collar jobs too, but it will also cost jobs. The classic example of that, of course, will be in the oil and gas business, but, as discussed last week, electric vehicles are going to represent a significant challenge to existing auto companies (and the companies that supply them) and a significant opportunity for manufacturers in China, not least because of how (relatively) easy it is to manufacture EVs . . .
Antitrust
As time runs out for major antitrust legislation on Capitol Hill, the Federal Trade Commission emerges as the last, best hope for neo-Brandeisians looking for aggressive progressive moves against Big Tech. The recent confirmation of a third Democrat commissioner and the fact that the FTC chair herself helped craft the bills stalled in Congress mean that they’ll probably get their wish . . .
The Economy
Major economic trauma can have a ‘scarring’ effect on corporate (and not just corporate) behavior (I wrote about this here and here). There’s a good argument to be made, for example, that the financial crisis led to a long-term reevaluation of risk, a phenomenon that goes some way to explaining the relatively depressed rates of investment activity that followed the financial crisis, and we may see an echo of that as companies begin (at some level) to price in pandemic risk, a risk not many of them had previously considered with any seriousness. The same will almost certainly hold true of supply-chain risk. Over time that will lead to reshoring/nearshoring, but it’s easy to see how the view of what a prudent level of inventories is going to change over a wide range of industries, at least for now. However, as Target has just reminded us, higher inventories are not without their risks either . . .
More signs of trouble ahead.
Do you remember chip shortages?
Tax
The president’s budget assumes that Build Back Better becomes law, which makes the economist in a hole assuming a ladder seem reasonable by comparison. And nothing like the president’s budget will pass, either. The point here is to signal what Biden wants to happen, not what actually will happen.
And what Biden wants is borderline confiscatory taxation of corporations and wealthy individuals . . .
Energy
President Biden could be facing a legal challenge over his executive actions on green energy earlier this week. But not over the flagrant abuse of the Defense Production Act that I wrote about yesterday.
No, instead the government could be facing a lawsuit over a separate action Biden took to waive tariffs on solar-energy imports from Southeast Asia . . .
Though President Biden’s initial leasing “pause” was ruled out of step with the Mineral Leasing Act and Outer Continental Shelf Lands Act in 2021, the administration has refined its anti-leasing strategy, putting it on the right side of the law while maintaining the same effect, according to legal analysts. In May, the administration announced it would cancel scheduled lease sales off the Alaskan coast and in the Gulf of Mexico because of “conflicting court rulings” on environmental impact studies.
Deploying a tactic known as “sue-and-settle,” the Biden Interior Department has now found another means to its end. On June 1, Interior reached an agreement with an anti-energy pressure group to conduct additional, costly environmental analyses for 28 leasing decisions that Interior finalized between 2016 and 2020. While the May announcement canceled future sales, the June settlement will upend existing leases. The parcels now set for re-evaluation total more than 4 million acres and span the states of Colorado, Montana, New Mexico, Utah, and Wyoming.
Economics
It’s very difficult to get published in a major econ journal. It seems that many economists have calculated that the path of least resistance is to write about DEI. (It’s not purely calculated; many of them sincerely believe this stuff.) And based on what the major journals actually publish, that seems like a good bet.
It also has a chilling effect on the research that is conducted. Say you’re a young economics professor starting out, and you’re really interested in researching inflation. The signal is clear: To increase your odds of being published, you need to at least find a social-justice angle, even if you don’t really want to. At worst, you might abandon your interest in inflation altogether, putting it off until you’re more established and can afford to displease the journal editors, and pursue social-justice research instead. That deprives the world of valuable inflation research and adds to the flood of predictable social-justice papers that please leftist academics . . .
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