The week of August 29: The coming EV mess, self-driving cars, jobs, healthcare, and much, much more.
The week of August 29: The coming EV mess, self-driving cars, jobs, healthcare, and much, much more.
C alifornia, 1962:
♪ Well I saved my pennies and I saved my dimes (giddy up, giddy up 409)
For I knew there would be a time (giddy up, giddy up 409)
When I would buy a brand new 409 (409, 409) ♪
California, 2022:
California . . . is banning the sale of new gasoline-powered vehicles starting in 2035, marking a historic step in the state’s battle against climate change . . .
The decision is expected to have sweeping impacts beyond California and will likely pave the way for other states to follow suit. At least 15 states, including New Jersey, New York and Pennsylvania, have adopted California’s vehicle standards on previous clean-car rules.
The EU, rarely able to resist a bad idea, is also banning the sale of new internal-combustion-engine (ICE) vehicles by 2035. Boris Johnson’s grimly green Great Britain is going for 2030. That extending these deadlines out a decade or so would have no material effect on the climate but would do much to smooth a hugely complex transition has made no difference. Nor did the likelihood that prolonging the competition between old and new technologies would improve electric vehicles — and their affordability — more rapidly than would otherwise be the case. A market in which different technologies compete contains more incentives to innovate than one where the competition is only within the same technological space.
What mattered more, I suspect, to climate policy-makers was reinforcing the sense of urgency that has done so much to help them push forward with programs that would otherwise be rejected out of hand. And it’s not enough to beef up the rhetoric. The legislation and (more often) regulation must deliver the same apocalyptic message. A more leisurely timetable would not fit the doomsday narrative. So far, this trick has worked, but the results of this type of rulemaking are beginning to hurt (they are part of the explanation for Europe’s energy shambles). Worse is to come, with political consequences at which we can only guess.
The size of the Californian market, especially when combined with that of states that follow its lead, would always have been likely to mean that EVs become, de facto if not de jure, America’s new standard, even in states where people remained free to choose a new ICE car. But, relying on their reading, not of the consumer, but of a corporatist establishment of which they are themselves a part, America’s Big Three have already anticipated what lies ahead. Chrysler plans to be all-electric by 2028, and GM is headed in the same direction, but has settled on 2035. Only Ford appears to be hedging its bets, splitting its operation into EV and ICE units. It’s pouring money into the former but appears set on doing more with its legacy business (bleak term) than simply running it down. Tobacco companies have shown how that can work.
The Big Three understood that they would need to act quickly to establish a strong position in a transformed U.S. market where years of ICE experience might count for relatively little, a worrying prospect with Chinese EVs already making some inroads in Europe. With the benefit of the world’s largest domestic market (looking at it in volume terms and excluding hybrids, some 2.9 million EVs were sold there in 2021, compared with around 500,000 in the U.S.), Chinese firms could well emerge as a formidable global competitor in a business dominated by EVs.
Like its counterparts elsewhere, California’s regulatory ratchet tightens in stages. By 2026, 35 percent of new vehicles sold in the state must be powered by batteries or hydrogen fuel cells (not many of the latter type of vehicle are currently available, but no matter). The required percentage rises to 68 percent by 2030, and 100 percent by 2035. Arbitrary targets and compulsion are telltale signs of central planners at work. And so is disaster.
There is carrot as well as stick. California provides various financial incentives to encourage the purchase of EVs. There are the incentives (a tax credit of up to $7,500) to buy EVs contained in the implausibly named Inflation Reduction Act (IRA). These are subject to certain conditions. The car mustn’t cost more than $55,000 (there are separate limits for used cars) and the buyer must not earn more than $150,000. The caps are intended to encourage the production of lower-priced EVs, a hint, perhaps, of the administration’s unease over how this new market is currently evolving. California’s decision to take the prohibitionist route may be a matter of reflexive big-government bullying, climate hysteria, or both, but, read a different way, forcing new-car buyers into EVs is not a vote of confidence in their intrinsic appeal.
The IRA imposes other conditions to secure eligibility for the tax credit.
NPR:
If you want to qualify for the full $7,500 today, the car has to be assembled in North America. And this one requirement alone has already disqualified dozens of EVs from the tax credit. Automakers like Hyundai or Toyota are out, but certain Ford models, certain Rivian models, the Nissan Leaf – they’re among cars that still qualify for now. Other provisions take effect in January, and they will disqualify even more cars from the tax credit . . . Finally, those all-important EV batteries – not only must some of the components be in North America. A lot of what’s in those batteries have to come from the U.S. or a trading partner.
Excellent reasons as there are to be suspicious of anything smacking of mercantilism, there’s a decent argument for a touch of it in this case. If U.S. taxpayer money is used to back EVs (to be clear, it oughtn’t to be), then it should be directed toward encouraging the production of EVs and their components in the U.S. The adoption of EVs, which are relatively easy to manufacture, will likely mean significant job losses among skilled blue-collar workers in countries with well-established auto industries, such as the U.S. or Germany, another blow to a dangerously embattled section of the workforce. Trying to offset some of the layoffs to come is worthwhile. Whether it will make much of a difference is another matter.
Then there’s China. Europe’s current energy debacle is a reminder that becoming economically dependent on a country that is at best a frenemy is unwise. China has built up a dominant position in the supply chain for lithium-ion batteries that power most EVs. Investment in battery production in the U.S. is speeding up, and that will help, although the related issue of how to guarantee the supply of the materials that go into the batteries remains unresolved. The central planners steering America’s decarbonization are already throwing away the energy independence regained by fracking — a triumph attributable to free markets, lest we forget. To allow them to set the stage for a second disaster — an auto sector both reliant on China and potentially vulnerable to Chinese competition — is madness, but that is the course on which we have embarked.
Those who argue that China would never turn on a good customer have learned nothing from Russia’s behavior over the last year. Nor have they understood that China’s economic model has evolved into a version of the harnessed capitalism characteristic of fascist or quasi-fascist states. If Beijing decides, for geopolitical reasons, that companies in China should stop supplying American customers, then that is what will happen. Under the circumstances, deepening our dependency on China is — well, I’ll repeat the word — madness, but that’s just what the speed of the planned switch to EVs will entail.
Not only that, but a more relaxed timetable would have bought more time to install the charging infrastructure essential to achieve a transition that is not only orderly but also avoids constraining the longer journeys which are both inevitable in a continental-sized country and — this matters — a part of America’s sense of itself. As things now stand, that will be tricky.
[T]he Bipartisan Infrastructure Law (BIL) provides $7.5 billion to develop the country’s EV-charging infrastructure. The goal is to install 500,000 public chargers—publicly accessible charging stations compatible with all vehicles and technologies—nationwide by 2030. However, even the addition of half a million public chargers could be far from enough. In a scenario in which half of all vehicles sold are zero-emission vehicles (ZEVs) by 2030—in line with federal targets—we estimate that America would require 1.2 million public EV chargers and 28 million private EV chargers by that year. All told, the country would need almost 20 times more chargers than it has now.
According to McKinsey, installing those public chargers will cost over $35 billion, and how those public charging stations will be operated presents additional challenges all of their own (I wrote a bit about that here).
A longer transition would also have offered more hope that we would have an electric grid able to cope with the demands that EVs will put upon it, a task made more difficult still by the mess decarbonization is making of our electricity supply, not least in California.
Heading into one of the busiest holiday travel weekends in the United States, and just a week after approving a bold plan to ban the sale of new gasoline cars, California asked electric vehicle owners this week to limit when they plugged in to charge.
Meanwhile, speeding towards 2035 (or 2030 for the unlucky Brits) is increasing the price pressure on the raw materials EVs require, making them less rather than more affordable.
CNBC:
Ford Motor is hiking the starting prices of its electric Mustang Mach-E crossover by more than $8,000 for some models, as it reopens order banks for the 2023 model year.
The company on Thursday said the markups – ranging between $3,000 and $8,475, depending on the model and battery – are due to “significant material cost increases, continued strain on key supply chains, and rapidly evolving market conditions.”
The Mach-E is the latest electric vehicle to experience a price increase, as raw material costs for batteries for electric vehicles more than doubled during the coronavirus pandemic.
The starting prices for the 2023 Mustang Mach-E will now range from about $47,000 to $70,000, up from roughly $44,000 to $62,000 for the 2022 model year. Prices exclude taxes and shipping/delivery costs.
Ford earlier this month also raised the starting prices of its electric F-150 Lightning pickup by between $6,000 and $8,500, depending on the model. The automaker cited similar reasons for those increases, specifically related to raw materials such as lithium, cobalt and nickel that are used in batteries for the vehicles.
Others automakers including General Motors, Rivian, Lucid and Tesla also significantly raised prices on their newest electric vehicles . . .
Ford’s chief executive, Jim Farley, told analysts in a conference call last month [July] that at best, only 50 percent of the raw materials needed to meet the auto industry’s announced E.V. targets were actually available.
Whatever the timetable, more EVs mean more mining. But where? In an age of geopolitical uncertainty and growing resource nationalism, as much as possible should be carried out here in the U.S. Given the likely effect of decarbonization on employment, the jobs will come in handy, too. However, will American environmentalists (and, not unrelatedly, regulators) accept more mining at home, rather than in some conveniently faraway country? The omens are not good, and it is not only American environmentalists who will be objecting. It’s almost as if there are strains of environmentalism in which the need for trade-offs or, even, economic growth, is rejected. Say it ain’t so!
Total global mining capital expenditures, which include smaller firms and state-owned enterprises, averaged about $100 billion annually over the past decade. Analysts at Bank of America say mining companies need to spend $160 billion yearly to accelerate the energy transition away from fossil fuels enough to limit the impact of global warming . . .
Environmental concerns are stalling many projects that are supported by governments. Serbia earlier this year revoked Rio Tinto’s licenses tied to a roughly $2 billion lithium investment after protests about possible environmental damage. Materials startups in the U.S. from North Carolina to Minnesota are struggling to receive the necessary permits and backing to move projects forward.
Put another way: This is going to take much more time than the current timetable allows. Central planning is like that.
There is some consolation in that the legislation in California (and elsewhere) permits — how kind — the sale of second-hand ICE vehicles. This conjures up an image of a future in which, somewhat like today’s Cuba, ancient ICE autos still travel the roads for years to come.
But if you really think that regulators will allow that for long, I have a replacement EV battery to sell you.
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 82nd episode David is joined by Stephen Miran, lead portfolio manager of Amberwave Partners and a recent Treasury economist in the Trump administration. Together, the two wrestle through questions of monetary-policy efficacy, the right criteria for governmental “support” to an economy, and the future of global macro in an era where leveraged beta (i.e., “the easy money”) is harder to come by. It is a discussion that covers a lot of ground and will leave you wanting more.
The Capital Matters week that was . . .
Automotive Innovation
As happens around 100 times each day in America, a car’s human driver had caused a fatal collision. Due to distraction, inebriation, incapacitation, malice, or just plain incompetence, human drivers caused collisions resulting in the deaths of more than 40,000 people in the United States last year, the highest number of roadway fatalities recorded in more than a decade according to National Highway Traffic Safety Administration (NHTSA) statistics. With 2021’s troubling uptick, the cumulative number of Americans killed by motor vehicles has climbed to well over 4 million since we first put cars on our roads over a century ago. In 94 percent of roadway collisions, the NHTSA says, drivers are to blame.
Self-driving cars offer hope that this seemingly endless series of tragedies might come to an end (or something close to it) . . .
My car can mitigate a crash’s damage to me through crumple zones and braking. Adaptive cruise and lane-keep ensure that a commute through Iowa is less draining. Blind-spot monitoring and backup alerts keep us from harming others behind or beside us. And each of these technologies revolves around the driver, not vice versa.
Driving is independence, and the idea of mandated deference to a machine mind is repugnant. I’ll decide how I wish to take a corner, how quickly to accelerate, and my route to the cottage up north — slowing down to take in the creeks and sights at leisure. If I wanted to travel passively, I’d take a bus or a train.
For more on this debate, please go here, here, here and here.
Student-Loan Forgiveness
As John mentioned late last week, an analysis from the University of Pennsylvania’s Wharton school concluded that Biden’s student-loan bailout will cost taxpayers between $600 billion and more than $1 trillion, much more than the $300 billion figure that had been thrown around before the decision.
You will notice that on social media, the usual response to the criticism of the student-loan bailout is to accuse critics of being selfish, heartless, cruel, bitter, angry, and so on. (Or they hallucinate that you own a bar and took Paycheck Protection Program loans.)
You notice no one who knows anything about the student-loan program is arguing, “Oh, this decision won’t cost taxpayers that much.”
Healthcare
Something that apparently surprised government bureaucrats and left-wing commentators but is, in fact, completely predictable is happening: The growth in new monkeypox cases is leveling off and may be starting to decline, and the government had little to do with it. In New York City — the epicenter of the U.S. outbreak — the seven-day average of new cases actually peaked at the end of July and has been declining since. Similarly, new cases in California — the other most common site of U.S. illness — appear to have peaked in early August and subsequently declined.
Contrary to what some observers think, there is nothing perplexing about these developments. Economists have long known that people voluntarily change their behavior to avoid the risks and costs of infectious diseases. These changes in individual behaviors usually precede any government action and have a greater impact . . .
Trade
[E]ven if we grant Lighthizer’s premise, it’s far from clear that tariffs would be a solution. The tariffs we do have (in the 4,000-plus-page Harmonized Tariff Schedule — some “market fundamentalism” that is) harm American families by driving up the costs of goods. Poorer families are especially hard-hit by MFN tariffs, which are principally levied on necessities such as clothing, shoes, and household goods. The MFN tariffs aren’t effective at increasing domestic employment, either.
Scherer notes, “The last time tariffs were mentioned at the Republican National Convention with Lighthizer-level enthusiasm was at the 1932 convention that nominated President Hoover.” Absent from his article are two key names: Reed Smoot and Willis Hawley. Those Republican members of Congress sponsored one of the largest tariff increases in U.S. history, which was then signed into law by President Hoover in 1930.
While economic historians dispute the extent to which the Smoot–Hawley tariffs worsened the Great Depression, you won’t find anyone who thinks they eased it . . .
Taxation
The “Inflation Reduction Act,” newly signed into law by President Joe Biden, keeps the tax preference for carried interest yet creates a 1 percent buyback tax, thanks to a last-minute political deal by Senator Kyrsten Sinema. As buybacks are already taxed through capital gains taxes, it’s likely that firms will now move away from issuing buybacks, which are a quick and efficient way for large firms to return capital to shareholders who tend to reinvest such cash in smaller companies . . .
Markets
I suspect that Powell may also have been concerned that the market’s recovery might have been a sign that his anti-inflationary message was not resonating in the way that it should, a problem as the management of expectations is an important inflationary tool. Read the sections in Paul Volcker’s autobiography dealing with his early months in office and you can see that he had somewhat similar worries after seeing the market response to his initial anti-inflationary efforts (although in that case markets — deeper into an inflationary era — were underwhelmed rather than complacent: The dollar fell “and the price of gold hit a new record”). This played no small part in Volcker’s pivot to the far tougher approach he unveiled on October 6, 1979.
The market paid attention, and eight days later the author of a piece in the New York Times was referring to “the great crash of 1979.” . . .
The Economy
Surveys should always (IMO) be taken with a pinch or two of salt, but some have suggested that falling gas prices might help explain consumers’ greater cheer. That’s plausible enough, and the political implications of that might be worth noting. The Conference Board’s Lynn Franco is not, however, ready to pop the champagne:
“August’s improvement in confidence may help support spending, but inflation and additional rate hikes still pose risks to economic growth in the short term.” (My emphasis added.)
Feeling gloomy again? Check out job openings . . .
Gross domestic product and gross domestic income should be exactly identical. GDP looks at output from the consumption side, and GDI looks at output from the income side, but in economic theory, that’s the same thing. It’s an accounting identity in macroeconomics (Y = I). Just intuitively, it makes some sense: Everything you buy is income to someone else, so whether we add up all the money people spend or we add up all the money people make, we should get the same number.
In the real world, of course, this doesn’t work, and GDP and GDI are never actually identical. But, similar to the employment data, the gap is much larger than normal right now . . .
While a recession is typically accompanied by shrinking activity across most sectors of the economy, weakness, to date, has been pretty concentrated: in imports in the first quarter and inventories in the second. While the economy may not yet be in a significant downturn, it has all but come to a standstill — private, final domestic demand growth was 0.2 percent in Q2 after stripping out volatile imports and inventories — and inflation is making every household feel much poorer.
With growth at a standstill and households getting crushed by inflation, hearing the Biden administration bend over backward to argue that “we’re not precisely in a recession” is akin to being punched in the gut and then told, “Well, that’s not technically your gut; that’s a few inches up.” . . .
For more Stephen Miran, please go to this week’s Capital Record.
Supply Chains
Three of the smaller unions involved in the ongoing freight-rail labor dispute have made a tentative agreement with carriers to avoid a strike. But two of the largest unions are still hesitant to accept independent recommendations.
Since January 2020, carriers and unions have been negotiating a new labor agreement. The agreement will last five years, starting at the beginning of 2020 and running through the end of 2024 . . .
ESG
Climate-related risks are, given typical investment horizons, of almost no relevance whatsoever so far as asset managers are concerned, other than those risks that flow not from changes in the climate, but from increasingly aggressive climate-related lawfare and changes in climate policy. But with a dangerously powerful combination of greed, hysteria, and lust for power now doing so much to shape that policy (I’ll hold off on commenting on the lawfare: This is a family-oriented site), the last thing that investors should be financing is a group that, if its opposition in this instance to relatively sensible climate policy-making is any guide, will only make matters worse. They should turn instead to lobbyists and lawyers, scavengers of some use in either heading off ill-judged policies or, if necessary, offering some assistance in working through their consequences . . .
Inflation Reduction Act
What’s in a name? If the recently signed Inflation Reduction Act is any indication, a lot of hot air.
It’s no secret that the act fumbles on inflation. A recent UPenn-Wharton assessment reveals it will “very slightly increase inflation until 2024 and decrease inflation thereafter” at a rate “statistically indistinguishable from zero.” The final version, according to their model, will “slightly reduce GDP in the first decade while slightly increasing GDP by 2050.”
All in all, it’s a 30-year wash.
In fact, the act so spectacularly fails to reduce inflation that its staunchest supporters have pivoted to extolling its other policy objectives instead — notably, environmental justice and energy security. But there’s a problem there, too: The act’s climate measures fall even further afield of their mark . . .
Cryptocurrency
Steve Hanke and Caleb Hoffman:
Since Bitcoin is a highly speculative asset, it should have no place in a sovereign state’s portfolio. Prior to Bukele’s first Bitcoin trade on September 6, 2021, Hanke warned in an August 2021 National Review article that any investment by El Salvador in Bitcoin might result in trading losses and would certainly result in a credit downgrade. Since his first speculative foray into the Bitcoin market in September, Bukele has appropriated over $100 million in Treasury funds to purchase 2,381 Bitcoins. Those Bitcoins are now worth about $48 million. Bukele’s crypto speculation has forced El Salvador to accept a higher risk profile.
As night follows day, this higher risk profile has invited credit downgrades. In the last six months, Moody’s, S&P, and Fitch have all downgraded El Salvador’s sovereign-debt rating, pushing it into speculative territory — junk, and rightfully so. Not surprisingly, since the Bitcoin law was implemented in September 2021, the price of the Salvadoran dollar-denominated sovereign bond due in 2025 has plunged by 48 percent. Today, Bloomberg Economics lists El Salvador as the most likely country in Latin America to default on its debt.
The verdict is in on Bukele’s Bitcoin experiment. It was based on false promises from beginning to end. A total failure.
Regulation
On Monday, a federal judge formally lifted the injunction preventing A.B. 5, a California law passed in 2019, from applying to truckers. The law seeks to classify more workers as employees instead of independent contractors. That affects owner-operator truck drivers, who are small-business owners who contract with shippers rather than being employees of trucking companies. Owner-operators are especially common among the drayage truckers who work in and around California’s major seaports near Los Angeles and Oakland.
California Democrats decided they knew better than the truckers and sought to force more of them into being employees. Being an employee comes with more protections under labor law than being an independent contractor, but it can also come with less freedom to decide when to work and which deliveries to make . . .
Energy
Some good news to follow up the Morning Jolt of August 24: The California state legislature agreed to go along with governor Gavin Newsom’s plan to keep the Diablo Canyon nuclear plant operating until 2030. (Yes, that Gavin Newsom.)
Not too long ago, some of the more “green” Democrats in the state legislature hoped to block the proposal, and to move ahead with shutting off nearly one-tenth of the state’s electricity-generating capacity, making up for the lost energy with new light bulbs and tax credits for solar panels. This led to a surprisingly nasty fight among California Democrats; Newsom spokesman Anthony York said that the legislators’ proposal “feels like fantasy and fairy dust and reflects a lack of vision and a lack of understanding about the scope of the climate problem.”
So much of the danger arising out of the reckless decisions by so many European countries to depend so heavily on Russia for essential supplies of hydrocarbons was amplified by the fact that it’s impossible to surge solar and wind energy production in meaningful time frames. Consequently, Putin still holds one unused card to weaponize energy, a kind of economic ‘nuclear’ option: Russia could yet choose to sanction, or embargo, the West by radically reducing overall energy shipments to the world, rather than merely throttling back Europe’s supplies while selling more elsewhere. Such an embargo would really send prices soaring. It wouldn’t be the first time a major energy producer sought to inflict economic punishment . . .
Infrastructure
Unfortunately, instead of trying to understand the facts associated with [Mississippi’s water crisis], including how we got here and the state’s history of trying to provide both expertise and financial support, some in the national media apparatus have seized upon this dynamic. Sensationalistic headlines at CNN, MSNBC, and USA Today all overtly assume that the current crisis is driven by racial animus. This approach might fire up echo chambers, but it does not solve problems, and ultimately is not in the interest of the people most hurt by this crisis.
To the credit of state leadership and city officials, they seem to understand this and be undeterred from finding a workable solution. Citizens should be equally focused on solutions instead of finger-pointing and deflection. One idea percolating is to create a regional utility district that is larger than Jackson. There is precedent for this in Mississippi, with the six coastal counties forming regional districts following Hurricane Katrina. While details matter and buy-in would be necessary, the proposed solution recognizes that the impact of safe water in Jackson extends beyond Jackson.
Whether Republican or Democrat, white or black, Jackson residents deserve better. Mississippi needs a strong capital city. Thoughtful use of ARPA funds and a state-city partnership can go a long way to fixing the problem. It can also serve as an opportunity to build trust and bridges . . .
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