The Week of January 16, 2023: Electric vehicles, the debt ceiling, regulation, the Fed, ESG, and much, much more.
The Week of January 16, 2023: Electric vehicles, the debt ceiling, regulation, the Fed, ESG, and much, much more.
Before turning to electric vehicles and their future, please note that there will be a Capital Matters Conference in New York City on January 26, 2023, on Innovation, Growth — And Their Newer Enemies.
It will be held at the Union League Club in NYC
Sponsorship information and tickets are available here https://bit.ly/3VH8i0x
Speakers: Larry Kudlow, Kevin Hassett, Linda McMahon, Amity Shlaes, David L. Bahnsen, Jason Trennert, Peter J. Travers, Andrew Puzder and, well, me.
Y es, it’s electric vehicle (EV) time — again. In last week’s Capital Letter, I discussed how much of the “good” news about EVs was anything but. In an earlier Capital Letter from last June, my focus (a theme I repeated in the later letter and again in the latest magazine issue of National Review) was on the way that the evolution of the “market” for EVs, like so much of the effort to deal with the possible effects of climate change, is being steered by central planners. This has not been a good thing:
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.)
The switch to EVs, I argued, is being pushed at a pace that appears “to bear no relation to what can realistically be achieved, at least without massive disruption.” Indeed, though “markets are immensely responsive and immensely adaptive, but that does not mean that they can respond to every bureaucratic whim.”
My piece in the latest National Review is basically an examination of where things now stand with EVs. It is not the happiest of accounts. To be sure, 2022 saw a strong increase in EV sales, but the difficulties posed by the pace of the proposed electrification of the auto sector have not gone away. And more and more consequences of the disruption (to put it lightly) that EVs are causing keep becoming clear.
For starters, the switch to EVs has offered Chinese auto manufacturers to make up ground on their Western counterparts: an opportunity that they have not been slow to take. Compared with conventional internal combustion engine (ICE) autos, EVs — which can be described as a computer and a battery housed in a four-wheeled box — are easy to manufacture. For that reason among others, the shift to EVs has already devalued the inbuilt advantage enjoyed by Western manufacturers because of their long-term experience with ICE vehicles, and it has further to fall still.
Chinese EV manufacturers, for their part, have built up a domestic market: EVs represented over 20 percent of new auto sales there in October 2022, and hybrids perhaps another 9 percent. The figures for that month were by no means outliers. Chinese EVs also account for well over half the global market in EVs. Now, Chinese auto manufacturers are using that experience as a launchpad into Western markets that have previously eluded them. In 2022, sales of Chinese EVs accounted for about 5 percent of the Western European new-car market. And China’s rise is unlikely to cease there. A recent report (January 17) in Bloomberg noted that BYD, China’s leading EV manufacturer was turning its attention to the U.K.
And:
Shenzhen-based BYD has been expanding in Europe, having already set up shop in countries including Norway, Denmark, Sweden, the Netherlands and Belgium. The group — which also has been making a big push into other markets around Asia, including Thailand and Australia — may even pass up Tesla Inc. in global EV sales this year by expanding its model lineup and manufacturing capacity, according to BloombergNEF.
When including its plug-in hybrid electric vehicles, BYD already outsold Tesla in 2022, and its sales of fully electric vehicles soared to around 911,000 last year, from 321,000 in 2021.
According to Fitch, China’s carmakers will take a 12–15 percent market share in Western Europe by 2025. To date, a key selling point for Chinese EVs has been a cheaper sticker price, an advantage reinforced by the fact that European EV manufacturers have targeted a more upmarket segment, in part perhaps because (at a guess) they have not yet mastered the ability to make cheaper models at the margins they need. But the prospect that China will also be aiming at the higher-end market should worry the German auto sector in particular. As a reminder, the German auto sector is the backbone of the Germany’s vital industrial sector, much of which is dependent on exports. The largest market for German auto-sector exports is China. How long will that last?
Writing for Forbes, Neil Winton adds this:
[A]s more Europeans are priced out of their ICE cars because EU CO2 legislation makes even bottom-of-the-range new cars unaffordable until they are finally disappeared, consumers will be looking for cheap and cheerful independent transport. Anything to avoid the bus, train, tube or crowds of people.
As European automakers’ economics are unable to compete with volume Chinese competition now, just wait until they produce their ace card, the €10,000 after tax ($10,550) utility runabout – 100 miles range, 65 mph top speed, 2 plus 2 children capacity. For these cars to become ubiquitous, manufacturers have to understand the electric car revolution means a drastic change in transportation. Electric cars are happiest in an urban or rural mode and fail miserably over high-speed long-distance driving.
This car already exists in China – the Hongguang MINI.
So far, the European industry seems happy to concede a big share of the volume (and the so far non-existent cheap little runabout sector) market to China, or maybe India, on the grounds no profits can be made. Surely the EU will help Europeans address these markets? If not, all that will be left will be premium sedans and SUVs, and that would mean huge job losses and only about one fifth of current European output.
Oh yes:
Tesla, BMW and Renault’s Dacia subsidiary import electric cars to Europe, made in China. VW will start soon.
Winton mentions that the EU charges a 10 percent tariff on Chinese car imports, while China imposes duties between 15–25 percent on autos headed east. He wonders how long that regime will continue. Meanwhile, the U.S. imposes tariffs of 25 percent.
In short, by forcing this switch to EVs, the West (and Europe in particular) is not only throwing away its longstanding lead in auto manufacturing but handing a great chunk of that market to a geopolitical rival. Even by the dismal standards of central planning this is remarkably stupid.
Should European governments increase tariffs on Chinese imports while persisting with the switch to EVs (something that might be risky given China’s position in the supply chain), however, they risk pricing many of their citizens out of autos entirely. But that’s something that quite a few environmentalists (not only climate fundamentalists) as well as urban planners would like to see (particularly in Europe, where there are denser public transport networks). But how will that play with voters? If, of course, that still matters.
The challenge that China represents in the EV sector is multi-pronged. Chinese companies have established a dominant (55–60 percent) position in the manufacture of EVs’ all-important batteries (which represent between 30–40 percent of an EV’s value), and further down the value chain too. This includes high market shares (perhaps somewhere between 55–70 percent, depending on the material) in the supplying and processing of the metals needed to make the batteries. Western countries may be rushing to build battery manufacturing plants of their own, but they still need to find the metals to feed them. As I noted in the article for National Review, that’s likely to mean a major scramble for resources. These may be in short supply, with implications both for the availability of EVs — and for what they may cost.
Further complicating matters, these resources will need to be found in friendly or friendly-ish countries. The Ukraine crisis (and the chaos that surrounded Covid-19) has (I hope) re-taught the West a lesson it should never have forgotten: Supply lines matter, and supply lines in which enemies or even frenemies play a key role are a problem. That means some of those new resources for Western EVs will have to come from within our borders. This will require an expansion of existing mines and the opening of new ones at a recently unprecedented speed. In other words, if environmentalists want to make EVs work, they may well have to accept something that they tend to be reluctant to even recognize — tradeoffs. In this case, they will have to decide between opening new mines to facilitate the development of EVs or giving yet more assistance to the Chinese companies active in the EV sector, enterprises that are not particularly famous for how much they care about the environment or, indeed, human rights.
In one small sign of the resource “wars” to come, there’s this from Canada (via the Financial Times). All three companies concerned are active in lithium mining. Lithium is a key metal used in the production of EV batteries. The International Energy Agency (IEA) has forecast lithium shortages from 2025.
The Toronto Stock Exchange has called on Canada’s government to do more to replace lost capital after Ottawa ordered three Chinese companies to divest their stakes in Canadian producers of critical minerals.
Dean McPherson, head of business development for mining at TSX’s operator TMX Group, said the intervention by Justin Trudeau’s government risked harming the free flow of capital on which mining companies rely to explore and develop resources.
“Keeping out the capital flow from China only on the basis of a critical minerals strategy is concerning,” he told the Financial Times. “We think it’s important for them to come up with ways to replace that capital — you can’t say ‘you can’t have that capital but we’re not going to do any programme to put funds into those companies’.”
In November, Ottawa ratcheted up tensions with Beijing by demanding three Chinese companies sell their stakes in junior miners Ultra Lithium, Lithium Chile and Power Metals Corp, following a review that concluded the investments posed a national security threat.
Prime Minister Justin Trudeau said at an event on Dec. 5 that he wants to make sure Canada is “in control” of its critical minerals so that the country’s allies can rely on the nation at a time when the demand for these minerals have increased primarily due to the rise in sale of electric vehicles globally, as the world looks to shift away from fossil fuels.
For once, Justin Trudeau’s government is right. If critical minerals are indeed critical (and, given the electrification of the auto sector, lithium certainly is), then these mining companies should not be relying on Chinese capital for reasons too obvious to explain.
But this is just one skirmish in what is likely to be a long struggle over access to EV-related minerals, a problem that climate policymakers might have considered more carefully before opting to go down the electric route.
Some other recent EV stories . . .
The Daily Telegraph (January 18):
According to data from motoring body the RAC, the price of charging up an electric car at a public point has surged almost 60pc in the last eight months.
Rapid charging points, often used by motorists who do not want to wait around for a battery top up, are as much as £10 more expensive than filling up a car with petrol.
The Daily Telegraph (January 19):
Driving home for Christmas is rarely a pleasant experience but electric car owners had a worse time than most. Some drivers report queues lasting hours, while videos on social media show lines of stationary Teslas waiting in the rain. At peak times, the charging network starts to creak alarmingly . . .
Even if you count older, accident-prone chargers, the Government has its hands full with installation targets. By 2030, Britain is meant to have 300,000 charge points. This is almost ten times the current number, and would mean creating more than 3,000 chargers a month for seven years. Just 923 were installed last month.
Central planning is hard.
But it should have been easy enough to see that heaping additional pressure on electric grids already under pressure from decarbonization was . . . unwise.
The [German] Federal Network Agency is planning to ration the power supply to heat pumps and EV charging stations in order to protect the distribution grids from collapse. Charging times of three hours to charge electric cars will be allowed so that they can cover a distance of 50 kilometers.
Electric cars, heat pumps and private solar systems are booming. This is pushing the power grids in cities and communities to their limits.
An expert quoted by the “FAZ” warns that the local power grids are in danger of becoming the bottleneck for the energy transition. According to estimates, expanding it would cost a three-digit billion amount.
Teething troubles, obviously. Nothing to worry about. All is 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 the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 102nd episode, David is joined by supply-side legend Dr. Art Laffer to really look at the empirical truth of what higher taxes and lower taxes mean in an economy. They go all around the horn on the moral, economic, and political considerations of these questions, and leave you with conclusions you won’t be able to resist.
No Free Lunch
David has also launched a new six-part digital video series, No Free Lunch, here on National Review Online. In it, we bring the debate over free markets back to “first things” — emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy . . .
The series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Dr. Hunter Baker, Ryan Anderson, Pastor Doug Wilson and Senator Ted Cruz.
Yes, the six-part series now has seven parts.
Enjoy.
The Capital Matters week that was . . .
Adam Smith
In allowing each to pursue his interest his own way, within the bounds of justice, we inspirit our fellow humans and unleash dynamism. As we work, trade, and create, we are drawn into a beautifully cooperative enterprise — metaphorically speaking — with millions of our fellow human beings across time, space, and national borders through the division of labor.
Thus benevolence, we see, plays multiple roles in Adam Smith. Humans are by no means devoid of benevolence. But the heavy lifting comes from our natural sense of accountability, through the judgments of our peers and then through conscience, to a being who is universally benevolent. The political economy of The Wealth of Nations for Smith is properly conceived as an extension of the ethics of The Theory of Moral Sentiments in that it attempts to illustrate the political and social sensibilities that leverage our limited knowledge and affections in service of the good.
The Debt Ceiling
The red wave that wasn’t has consequences for policy-making in Washington. One result of the GOP’s new, narrow House majority is that outlandish and marginal policy proposals from the fringes of both parties will get more attention than they otherwise would. The coming battle over raising the debt ceiling will serve as a case in point . . .
The debt-ceiling charade is upon us again. The U.S. will hit its debt ceiling on Thursday. Treasury secretary Janet Yellen warns us that without increasing it by June, the U.S. will not have sufficient funds to pay its bills.
Meanwhile, House speaker Kevin McCarthy and his Republican colleagues float the idea of debt prioritization, instructing the Treasury to first prioritize debt-service payments, then Social Security, Medicare, and veterans’ benefits, and finally military funding. These budgetary gimmicks were also floated during the debt-ceiling standoff in 2011 and 2013 but were never enacted. It is safe to say that neither party wants a government shutdown such as that in 2013, 2018, and 2019. What can be done?
I apologize in advance for what will be a rant about the debt ceiling. But such a rant is necessary. For weeks now, there have been lots of newspapers articles and lots of people quoted about the mess that debt-ceiling legislation has become. Here is New York Times reporter Jim Tankersley writing about a potential breach of the debt limit..
Activists advancing the ludicrous notion that the solution to the debt-limit crisis is to have the U.S. Treasury mint a trillion-dollar coin are becoming completely unhinged. Or maybe they were never hinged?
Jeff Stein, the Washington Post economics reporter, asked two of the leading theorists advancing the idea to respond to certain reservations from those close to the White House. Among the reservations was the fact that the Supreme Court could strike down the idea. Stein then posted the text exchange. One of the activists, an assistant law professor at Willamette University, Rohan Grey, had a novel solution: “ignore SCOTUS.” Oh, and demand that the Federal Reserve accept the coin by sending troops.
Regulation
The Consumer Product Safety Commission (CPSC) made headlines last week for entertaining the idea of a ban on gas-powered stoves, before quickly backtracking amid a fierce public outcry. Though that was a particularly notable instance of the CPSC’s attempted administrative overreach, it was not the only one . . .
When Joe Biden appointed Gary Gensler as chairman of the Securities and Exchange Commission, progressives celebrated. They had one of their own at the head of Wall Street’s regulator. As promised, Gensler has moved fast in pushing more government regulation, even when the regulation would overstep the SEC’s authority. But now that unified Democratic government is a thing of the past, Gensler will face more scrutiny. In November, Representative Tom Emmer (R., Minn.) said Gensler will be spending so much time before Congress that he “might as well bring a cot.”
Trade
This Wall Street Journal article is a must-read for those who have been calling for a return to industrial policy, subsidies, protectionism, and overall retrenchment on the grounds that it would be better than the current system for the country and its workers. I would add to the list of those who should read this piece all the supporters of the Inflation Reduction Act and the Chip Act.
It’s not as if they weren’t warned that protectionism and cronyism at home would result in protectionism and cronyism abroad . . .
Energy
In August 2022, President Biden signed the so-called Inflation Reduction Act, a $370 billion spending package that will do little to reduce inflation, but it will do a lot to subsidize solar-power production. Unfortunately, these subsidies will lead to market distortions that will increase the cost of electricity for Mississippi families and businesses.
The biggest problem with subsidies is that they incentivize rational actors to do irrational things . . .
Tax
The GOP may control the House, but it’s likely that will be no help to millions of Americans enduring economic hardship this year. Struggling even to elect a speaker, House Republicans have already shown that their slim majority is fractured, not to mention the fact that Democrats control the Senate. In other words, the chances of Republicans passing any substantive legislation this session are small. If help is going to come for the American economy, it won’t be from the House.
Indeed, the Senate, despite its Democratic majority, may offer Americans more hope for economic relief . . .
ESG
Twenty-one state attorneys general released a letter to proxy advisory firms today taking issue with their use of ESG criteria in advice to state investment vehicles. The letter was written by Utah attorney general Sean Reyes. It provides evidence of possible violations of fiduciary duty and says, “We seek written assurance that you will cease such violations and commit to following the law.”
Eric Hoffer (1902–1983), an often-quoted American philosopher and Presidential Medal of Freedom recipient, famously observed that “up to now, America has not been a good milieu for the rise of a mass movement. What starts out here as a mass movement ends up as a racket, a cult, or a corporation.” Unfortunately for America’s retirees, ESG investing has made this transition in record time, and if Hoffer had lived long enough to see its emergence, he would have died laughing.
Until June 2022, Terrence Keeley worked for BlackRock as managing director, global head, and senior adviser of the Official Institutions Group (OIG). There he oversaw BlackRock’s relationships with “central banks, sovereign wealth funds, finance ministries, and supra-nationals around the world.” In addition, he led the firm’s “education.” There may not be a single person on earth better qualified to assess the results of the experiment of environmental, social, and governance (ESG) investment. In his book, Sustainable, Keeley does just that . . .
Currency Boards
It’s time for Sri Lanka to mothball its central bank and replace it with a currency board. A currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange. It is required to hold anchor-currency reserves equal to 100 percent of its monetary liabilities.
A currency board, unlike the Central Bank of Sri Lanka, has no discretionary monetary powers and cannot issue credit. It therefore imposes a hard budget constraint on the fiscal authorities. Its sole function is to exchange the domestic currency it issues for an anchor currency at a fixed rate . . .
Climate
It’s almost as if there was a playbook, but with different groups working on variants of a theme, where the theme is always “shut up.”
The model, of course, was tobacco. Banning ads specifically directed at children or making false claims (explicitly or implicitly) about the healthy properties of cigarettes — well, that’s reasonable enough. Other moves, such as the state stepping in to stop tobacco companies from sponsoring sporting events, or Britain’s grim cigarette packaging rules, another legacy of the appalling Tory party, not so much.
And so Bloomberg reports that Australian climate activists are “pushing to end advertisements and sponsorships they say allow fossil fuel companies to burnish their reputations while profiting from products that heat up the planet.”
The more the state ‘plans,’” wrote Hayek, “the more difficult planning becomes for the individual.” This may resonate with the driver of an electric vehicle (EV) who has pulled up at a charging station in the middle of nowhere, only to find it broken.
The Fed
Over the past 15 years, the Federal Reserve has made two major policy errors. In 2008, it adopted an excessively contractionary monetary policy, worsening the Great Recession. In 2021 and 2022, it adopted an excessively expansionary monetary policy, adding to the recent inflation. Adopting three key policy reforms would greatly reduce the risk of repeating these mistakes . . .
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Please note that there will not be a Capital Letter next week as I will be attending our Capital Matters conference (details above), as should you.