The week of August 22, 2022: Not letting the energy crunch go to waste, regulation, student-debt forgiveness, price controls, and much, much more.
The week of August 22, 2022: Not letting the energy crunch go to waste, regulation, student-debt forgiveness, price controls, and much, much more.
I was probably going to write something today (Friday) about the student-loan forgiveness program — yes, it’s inflationary, yes, it’s going to boost college fees and, no, it won’t be the last — but there we are, I’ve written most of it just now. There’s also quite a bit to say about California’s electric-vehicle mandate, and what it reveals about the hubris of central planners.
But then I read these lines in an article by Camilla Cavendish in the Financial Times this (Friday) morning:
People may prove more amenable to sacrifice than politicians imagine. On a business trip to Tokyo after the Fukushima meltdown, I found executives complying with government instructions to limit air conditioning and jettison jackets. It was high summer, and we were all sweating, but it didn’t matter.
It may be just me, but I am not convinced that the behavior of corporate executives in a country known (admittedly not always fairly) for conformity is that much of a precedent, especially given those very specific circumstances. Fukushima was an immediate, all-too-visible crisis, and an obvious reason for people to do what they could to help. I doubt that it is much of a guide (the idea that Cavendish was floating) to how people will react to the current energy crisis or to the (disputed) effects of a changing climate.
The even more disputed policy solutions to deal with those effects that emerged from the Paris Climate Agreement and the COP sessions that followed represent no kind of consensus beyond sections of the West’s ruling class, as the Chinese, Russians, Indians, and others have regularly made clear. The non-Western countries have different priorities, some relating to their stage of economic development, and some that are rather more malign: The climate may change, but human nature does not. China, Russia, India, Saudi Arabia, and many others will look to wring political, strategic, and economic advantage out of the West’s embrace of a form of climate fundamentalism that, especially when it comes to the current policy response, owes more to millenarianism (a regular enough scourge throughout history) and a craving for control (another common scourge) than to a calm assessment of scientific probabilities and how to react to them.
Cavendish writes:
As the world braces for an energy shock even bigger than that of 1974, it is striking that Vladimir Putin’s war in Ukraine has foisted upon us something more like a global carbon tax than anything achieved by UN climate summits.
If we’re looking at the causes of the current energy crunch, Vladimir Putin is only a part of the equation, albeit a very important part of it. But the reason he has been able to apply his blackmail so effectively is because the West, and, in particular, the U.K. and (parts of) the EU have been engaged in a reckless, expensive, and ill-considered “race to net zero” that left its energy-supply arrangements hopelessly vulnerable in the event of the sort of shock that Putin has now delivered.
Energy prices were rising sharply for quite some time before the invasion (particularly in Europe), and for reasons largely unrelated to Russia (although Russia seems to have been messing around with natural-gas supplies as early as last summer). What’s more, last autumn’s spike in Europe owed a great deal, for a while, to the unreliability of wind energy — an unreliability that is one of wind’s hallmarks.
The rise in electricity prices in Germany was made even more painful by the fact that they had already climbed sharply in the wake of Angela Merkel’s Energiewende (a “turning” in energy policy driven by climate fundamentalism and nuclear dread), one of the latest in history’s long, long list of central-planning disasters. It was made even less forgivable by the fact that it was pushed by someone who had grown up in East Germany and should therefore have known better. That Germany’s experiment was only made possible by “cheap” Russian gas, a gamble with dangers that were apparent no later than 2008 (Georgia), or, if you want to be generous about it, 2014 (Ukraine Part I), only adds to the indictment of the large swath of the political class that went along with it. Why anyone should take prescriptions for future energy policy from that group escapes me.
Cavendish’s underlying argument (to oversimplify: that the current crisis ought to incentivize decarbonization in various ways) rests on the inevitability of higher energy costs as decarbonization continues on its way, a view that is widely shared, and will certainly be the case if we continue down our current path. While Cavendish makes clear that those most hurt by the higher cost of energy should be protected (something, incidentally, that is difficult to do with much completeness because of the way that higher energy costs percolate through the entire economy, hurting the vulnerable the most), it’s hard not to think that she — and this is a view that can be heard from Brussels to Berlin to Turtle Bay — regards our current woes as a teachable moment of sorts. Never let a crisis go to waste, as the old saying goes.
Cavendish:
When I studied environmental economics two decades ago, climate scientists were already pushing to make polluters pay the true cost of greenhouse gas emissions. Carbon pricing, they thought, would give incentives to reduce energy use, most efficiently. More than 30 jurisdictions around the world now have some form of carbon pricing or emissions trading scheme. But last year most of them priced carbon dioxide at $40 a tonne, or less — which is too cheap. The International Energy Agency says that the average carbon price needs to hit $200-250 a tonne for the world to achieve net zero emissions by 2050.
How do today’s astronomical prices change the equation? Adair Turner, chair of the Energy Transitions Commission, reckons the gas hike is the equivalent of a “massive” carbon tax, of around $600-$950 a tonne. If prices persist at anything like this level, he says, technologies like green hydrogen will be adopted much sooner than expected. The payback times for installing renewables and home insulation will also shorten dramatically.
I wonder how you factor in the cost of economic growth forgone by putting in place a legal, regulatory or (thinking of ESG) corporatist regime that will ensure that, for years to come, energy will be expensive.
If we are to face the challenges that climate change may pose (real, in my view — I’m no “denier,” to use that grotesque term — but almost certainly exaggerated), the key will be technological innovation and adaptation, and the world will need economic growth — a lot of it — to pay for both. To be sure, there should be incentives to encourage spending on alternative energy systems, but they should be more carrot than stick. Climate policy should be measured, pragmatic, and stripped of the religious resonance that now sounds so loudly, with its prophecies of doom, calls for asceticism, and attachment to absolutism.
So far as the last of those unlovely qualities are concerned, there is, for example, nothing “sinful” about regarding natural gas as a “bridge fuel” (as, to their credit, the EU Commission and, now, the EU’s parliament have recognized). And, if the price of maintaining economic growth is that the use of other fossil fuels, preferably on a cleaner and cleaner basis (yes, there’s a role for regulation), continues for longer than millenarians might like, so be it. That we should make much greater use of nuclear energy seems to me to be self-evident, but given prevalent regulatory regimes and inevitable legal battles, that’s hardly an overnight solution. Nor are renewables, at least until an economic, effective, and scalable form of energy storage is available (solving that problem is where much more of the money being poured into renewables should be going). We can spend all the billions we want on installing new turbines and new solar panels, but the sun won’t always shine, and the wind won’t always blow.
But, in the immediate future, the most interesting question will be how the energy crunch this winter plays out politically. We can already see suggestions, from the rise of the Gilets Jaunes in France to the recent protests by Dutch farmers, that applauding the idea to (allegedly) save the planet is one thing, but making the sacrifices necessary to (allegedly) achieve it are quite another. That said, it is likely that the political debate this winter will revolve, particularly in Europe, around the price voters are prepared to pay to save Ukraine. The contribution of climate policies to the current mess will be overlooked.
Even so, the political reaction will say something about, to borrow Cavendish’s words, “people’s amenability to sacrifice.” In that respect, it will be more interesting to watch the development of public opinion in Europe’s west than in its east. In the eastern countries, the fear that, if Ukraine falls, they could be next is, for historical and geographical reasons — let alone Putin’s own words — all too real. If they must make sacrifices — perhaps Hungary should be put to one side here — they will. In western Europe, however, far fewer see Russia as an immediate, let alone existential, threat. The reaction there might be a better guide to the sacrifices that people are truly prepared to make in the name of climate change. We’ll see. Meanwhile, the claim, widely made these days by officialdom, that the current crunch only proves the need to accelerate away from fossil fuels even faster, is likely to convince only those who want to be convinced.
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 the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 81st episode, David is joined by Dr. Calvin Beisner of the Cornwall Alliance for a substantive talk on environment and economic ethics. As honest a conversation as you will hear about stewardship of the earth, with a true economic awareness of trade-offs, a deep regard for science and ecological reality, and a theological foundation undergirding it all . . .
The Capital Matters week that was . . .
Regulation
Harry Crane and Koleman Strumpf:
Since 2014, the Commodity Futures Trading Commission (CFTC), a U.S. federal regulatory agency, has allowed Victoria University of Wellington, New Zealand, to operate a prediction market called PredictIt. Prediction markets provide forecasts of winners of future elections, working a bit like the more familiar stock market except participants buy shares of candidates rather than companies.
But earlier this month, the CFTC withdrew its no-action letter that had allowed PredictIt to operate, and it said all positions must be liquidated by February. This decision is a major blow to open and fact-based discourse on matters of public interest . . .
Add air conditioning to the long list of items experiencing inflation under the Biden administration. Whether it is fixing your home’s existing system or buying a brand new one, costs are moving higher due to environmental regulations. The same is true for the electricity needed to run our AC. Unless Washington reverses course, staying cool will only get more expensive in future summers . . .
Supply Chains
Workers at the Port of Felixstowe, the busiest container port in the U.K., began a strike yesterday that will last a total of eight days. They’re striking over pay, and they’re joining workers from other parts of the transportation sector in the U.K. who have already gone on strike this year.
It’s the first strike at Felixstowe in 31 years, and the union is fully aware of the larger economic consequences . . .
Tech
Naturally, American lawmakers are trying to sew up potential vulnerabilities to prevent further attacks. One such vulnerability, on which several elected officials have focused, is TikTok: the popular, video-based, social-media company. This comes after a recent report alleged TikTok’s parent company, ByteDance, shares U.S. user data with the Chinese government. One lawmaker who has sounded the alarm is Senator Marsha Blackburn (R., Tenn.), saying, “[TikTok] is both a national security threat and a surveillance threat to millions of Americans.”
This is ironic, as Blackburn is one of the lead sponsors of the Open App Markets Act (OAMA), which would make it more difficult for major American tech companies to isolate TikTok, should it become seen as representing such a threat . . .
Electric Vehicles
Whatever the short-term movements in metals prices (there have been signs of weakness, reflecting recession concerns), there are indications here and there of future squeezes to come.
“Indonesia may impose a tax on nickel exports this year, President Joko Widodo said, as the biggest producer of the electric-vehicle battery metal looks to refine more at home . . .
Student-Debt Forgiveness
The Penn Wharton Budget Model released its cost estimate for a few different iterations of student-debt forgiveness today. It estimates that over the ten-year budget window:
- Forgiving $10,000 for each borrower with income below $125,000 would add $330 billion to the deficit.
- Forgiving $10,000 for each borrower with no income cap would add $344 billion to the deficit.
- Forgiving $50,000 for each borrower with income below $125,000 would add $933 billion to the deficit.
- Forgiving $50,000 for each borrower with no income cap would add $979 billion to the deficit.
Even the cheapest of those options would wipe out the purported deficit reduction from the Democrats’ reconciliation bill, the so-called Inflation Reduction Act. The Congressional Budget Office estimated that law would reduce the deficit by $305 billion over the next ten years . . .
The Biden administration is using a flatly absurd legal argument to justify forgiving student debt, something even Democrats thought was only a power of Congress not that long ago.
Even the Department of Education thought it was only a power of Congress not that long ago. On January 12, 2021, the department’s office of general counsel published a legal opinion that cited Congress’s power of the purse under the Constitution and said, “The Secretary does not have statutory authority to provide blanket or mass cancellation, compromise, discharge, or forgiveness of student loan principal balances, and/or materially modify the repayment amounts or terms thereof, whether due to the COVID-19 pandemic or for any other reason.”
Price Controls
The new budget-reconciliation bill, just signed into law by President Biden, directs the executive branch to “negotiate” the prices of drugs purchased by Medicare. Those provisions of the new law will likely reduce patient access to prescription drugs both in the Medicare and commercial segments, which is contrary to what Democrats have claimed at least since President Clinton was in office . . .
Energy
The price being paid by the EU for the reckless pace of its “transition” from fossil fuels and, of course, the reliance of many of its members on Russian natural gas (the U.K. is guilty of the former, not the latter) continues to rise.
“Bloomberg, August 22 (my emphasis added):
European gas and power prices surged as panic over Russian supplies gripped markets and politicians warned citizens to brace for a tough winter ahead . . .
Housing
Another couple of data points to add to the picture of growing weakness in the housing market.
“U.S. existing home sales fell in July for the sixth straight month, the longest streak of declines in more than eight years, as higher mortgage rates and a shortage of homes for sale are cooling this once red-hot market . . .
Antitrust
In late July, the Federal Trade Commission filed a lawsuit to stop Meta from acquiring VR fitness-app developer Within. The commission’s arguments play fast and loose with market definitions to conjure threats to competition where none exist. The suit illustrates how, under Lina Khan, the FTC has departed from established antitrust law in favor of policy that is based on hostility toward large firms. This approach will ultimately make consumers worse off . . .
ESG
Environmental, Social, and Governance (ESG) investment practices distract investors and corporate management from maximizing long-term profitability, which is often achieved through innovation, cost control, and customer focus. By diverting attention away from priorities that align with increased productivity and toward a shifting array of inconsistently defined social-impact criteria, the ESG orientation is a long-term threat to continued economic growth . . .
Bidenomics
I’ve lived in America now for 23 years, and in that time I don’t recall so many economists who are usually sympathetic to a sitting president’s ideology being so critical of that president’s policies like some prominent left-leaning economists are now being of President Biden’s policies. I may be wrong, of course.
Either way, it is striking to me how many left-of-center economists such as Jason Furman, Lawrence Summers, Marc Goldwein, and others have been going to town, in highly critical tones, on some of Biden’s policy positions or talking points. I am thinking in particular of their disapproval of the American Rescue plan‘s size because of its impact on inflation, the debunking of greedflation as the cause of inflation, their opposition to price controls as a mean of controlling inflation, and now the announcement of student-debt forgiveness . . .
Tax
A lot of attention has been focused on the massive amount of money — $80 billion over the next ten years — the act will be sending to the IRS, much of it intended to pay for the hiring of 87,000 people. To be fair, some of these hires will fill vacancies and replace future retirees. Nevertheless, it’s highly probable that many of the effects of this strengthened IRS will be felt painfully in conservative-governed states . . .
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