The week of October 4: a higher debt ceiling, higher energy prices, spending, American banking with Chinese characteristics and much, much more.
So, where were we? I was just getting ready to write about the debt ceiling (and, I suppose “the coin”), but the day was saved, if only for a few weeks, by the agreement to raise the debt limit by enough to see the country through until early December. Assuming that everything goes through (a House vote lies ahead), investors can relax, at least for a little while.
That said, while both sides are blaming the other for the impasse that brought the U.S. closer to a cliff than it should have been (NR’s editorial on that topic can be found here), no one should be under the illusion that running into that ceiling would be anything other than a disaster, with unknowable longer-term consequences. Once the dominoes begin to fall . . .
Writing in the Wall Street Journal on Thursday, James Mackintosh had a fascinating piece on how the markets had been beginning to get uneasy about what might happen:
Treasury bills this month started to price in the danger that there would be a temporary problem. The yield on the T-bill due to mature on Oct. 26, shortly after the debt ceiling would most likely be breached, jumped from 0.05% at the start of the month to 0.15% by Tuesday. It collapsed back to 0.08% after Senate Minority Leader Mitch McConnell offered a two-month suspension of the debt ceiling. The government was paying more than highly rated companies for some short-term borrowing.
Officials talked up the disaster scenarios in an effort to bring around Senate Republicans, with Treasury Secretary Janet Yellen saying a default would “likely precipitate a historic financial crisis.”
Yellen has not distinguished herself since taking on her current job, but she was not necessarily wrong about that.
Back to the WSJ (my emphasis added):
Investors never thought any problems would last. Yields on bills maturing in December had fallen, rather than risen.
In other words, investors thought that if the government did default on its obligations, it would not be for very long, simply because the consequences would be so appalling. As Mackintosh explains:
U.S. assets are absolutely central to the global financial system, and no one believes that senators will put that at risk for more than a few days.
Worse, if the U.S. defaulted in full, and stayed in default, and the Federal Reserve didn’t do anything about it, it would trash the value of pretty much everything. Defaults would ripple across companies, banks, other governments and individuals, and the world economy would be crushed. It isn’t clear any assets would provide a shelter, short of well-stocked bunkers.
Not that there is anything wrong with well-stocked bunkers.
It was entirely reasonable for investors to think that such a default almost certainly wouldn’t happen. On top of that, there are several ways the government could avoid or mitigate a default, including scrapping the filibuster, claiming Congress is in breach of the constitution, minting a $1 trillion coin [hmmm . . .] or persuading the Fed to buy defaulted bills and bonds.
It is also reasonable to think that a minor default doesn’t much matter. The U.S. has failed to meet its obligations at least three times in its history, contrary to Ms. Yellen’s claim that it has always paid its bills on time.
These repeated failures to pay—after the war of 1812, in 1933 on gold owed to Panama and in 1979 due to what The Wall Street Journal reported at the time was an “embarrassing back office crunch”—didn’t interfere with the U.S.’s ability to borrow more, or even obviously push up the cost. This isn’t surprising when you look at the ability of even the dodgiest emerging-market governments to take on new loans shortly after defaulting. Investors focus on the future and tend to think each default is a one-off, even for serial defaulters such as Argentina or Greece.
The last point is true. (Argentina, incredibly, even raised a 100-year bond in 2017; things turned out much as might have been expected, and within a very short time.) What is also true is that any sign of crumbling in the foundation of the global financial system is a rather different category of event than an Argentina, doing what it does. The consequences of such a crumbling are inherently unknowable. It’s almost certainly the case that the U.S. would be given the benefit of the doubt while a (supposedly) short-term problem was being worked out (not least because of the lack of alternative investment options in sufficient size), but for how long?
Mackintosh concludes that a default is “too terrible for the Republicans to consider or the White House to allow.” That puts, in my view, too much of the blame on the GOP for this mess (again, take a look at the NR editorial on this), but it doesn’t change the truth of Mackintosh’s last sentence:
[The prospect of a default] is… so awful [and thus unthinkable] that investors haven’t prepared, massively magnifying the market impact should it ever, finally, come to pass.
One other point: The U.S. gains immense strategic advantage from the dollar’s role as the reserve currency (irritation within the EU about this “exorbitant privilege” helps explain why it took the disastrous decision to adopt the euro). Nothing should be done that risks chipping away at that advantage.
So with the debt ceiling off the agenda — at least until the arguments start up again in a few weeks — how are things going with that pesky energy crunch, a topic that has filled significant portions of the last four Capital Letters?
Pretty much as expected.
European industry is being pushed closer to breaking point as the region’s energy crisis worsens by the day.
Power and gas prices are hitting fresh records almost daily, and some energy-intensive companies have temporarily shut operations because they’re becoming too expensive to run. As winter approaches and Europeans start to turn on their heaters, the squeeze will intensify, pushing more executives into tough decisions about keeping plants open.
The Daily Telegraph (Thursday):
Having more renewables on the system can make it harder to manage, however, as they depend on the weather and also do not provide inertia [storage, essentially].
Last year the ESO [the UK’s National Grid’s electricity system operator], which balances supply and demand in Britain, issued six “margin notices” to the market, signalling that buffer supplies were tight and it needed new generation to come on.
Those six were the first issued since 2016, with supplies falling below what had been predicted by generators.
The ESO expects to issue a similar number this year – but warned that number could double if 2GW of ageing capacity closed early . . .
Volatility in U.S. natural gas futures jumped to a record on Tuesday on the back of an energy crunch in major world markets that has sent prices soaring globally.
Natural gas prices are at record levels in Europe and Asia, as major markets like China struggle to find enough fuel to meet demand that has bounced back from the coronavirus-induced downturn faster than anticipated.
In Europe, prices this year have rocketed more than 500%, on worries that current low levels of storage will be insufficient for the winter.
That has fed through to U.S. natural gas futures, which recently closed at 12-year-highs of $6.31 per million British thermal units (mmBtu).
The current surge in the price of natural gas (and not just natural gas) is only, as I have noted before, a partial consequence of Western climate policies. But those policies, made more dangerous still by the speed at which they are being implemented and, in another example of the recklessness that underpins them, by the reluctance to have recourse to nuclear power, mean that we are beginning to see more and more glimpses of what the energy future is going to look like if the climate warriors get their way.
A week or two back, The Economist, a magazine that generally (and I’d emphasize that word) uses a calm writing style to mask its deep climate fundamentalism has been fretting about the political implications of all this:
Environmentalism is driven by populists’ two big bogeymen, scientific experts and multilateral institutions.
Speaking of bogeymen, can The Economist really do no better than the old “populist” jeer? The claim that “environmentalism is driven by scientific experts and multilateral institutions” is also revealing. While that claim is true at one level, it ignores the role that a certain type of millenarian fervor plays in environmentalism, particularly when it comes to climate change. To believe that “scientific experts” are immune to it is to show little knowledge of history and even less of human nature.
Here, however, The Economist is on surer ground:
Green campaigners vie to befuddle the public with acronyms and jargon. Multilateral institutions override democratic legislatures in order to co-ordinate global action. In the public mind, greenery is coming to mean global confabs that produce yet more directives, and protesters who block city centres and motorways.
Greenery suffers from the classic problems of technocratic policymaking, namely offering distant rewards in return for immediate sacrifices and imposing uneven costs.
How credible that promise of “distant rewards” will be seen to be, particularly if geopolitics continue to be what they are and the direction of climate policy continues to be what it is, is an entirely different question.
Over-50s, the most reliable voters, won’t be around to see the world boil.
As I said, generally calm language . . .
Poorer people are likely to suffer more than richer ones from the green transition, not just because they have less disposable income but also because they are more likely to work in the dirty economy. The impression of injustice is reinforced by the fact that many of the most vocal green activists have a material interest in the green economy as bureaucrats, lobbyists and entrepreneurs.
A fuel-price rise in 2018 inspired France’s gilets jaunes; Germany’s Alternative für Deutschland and Finland’s Finns Party have lambasted green hysteria. In Britain, by contrast, anti-greenery is still nascent. Some on the Tory right have complained that their party is in the grip of the green lobby. A few MPs in the “red wall”—once-safe Labour seats in northern England that turned Tory over Brexit—have warned that green levies on driving could see those voters switch back again. The closure of some London streets to through-traffic has sparked protests.
But such rows are about to get a lot louder. Turbulence on the global energy market is drawing unflattering attention to British energy suppliers, which are struggling with the transition from coal- and gas-fired plants to renewables. The more the business secretary, Kwasi Kwarteng, says about there being “absolutely no question of the lights going out”, the more consumers will worry. And other environmental policies on the horizon will also hit them hard. From 2030 the sale of new petrol and diesel cars will be banned. The electric cars that will replace them are rapidly improving, but not yet as cheap or as convenient. For city-dwellers it is hard enough to find parking without having to look for a charging-point too, and long journeys require planning . . .
How to avert an anti-green backlash? Politicians need to avoid unforced errors.
When it comes to politicians and climate policy that’s like asking an alcoholic to turn down another gin.
On Wednesday over at Bloomberg Green (yes, really), there was also growing anxiety that the energy crunch’s preview of where climate policy might be taking us could prove a little, well, off-putting:
Allies of the oil and coal industry have seized on energy crises overseas and rising gasoline prices in the U.S. to counter President Joe Biden’s plans to combat climate change and force a rapid shift to renewable power.
What are these nefarious “allies” doing?
They’re warning that the dilemma now facing Europe — where energy shortages have crimped consumers and forced some manufacturers to shut plants — is a specter of what could happen inside the U.S. under proposals to swiftly curtail the use of fossil fuels.
“It’s an indication of what’s coming here,” said Senator Kevin Cramer, a North Dakota Republican who argues a proposed $1,500-per-ton fee on methane emissions and other climate proposals in the Democrats’ social-spending bill would boost U.S. energy prices. “Why we would want to duplicate that is beyond me.”
Why? Fanaticism or stupidity, that’s why — and the categories are not mutually exclusive.
Renewable energy supporters argue the European energy woes show the importance of accelerating the transition away from fossil fuels. Europe’s reliance on natural gas — including after the closing of nuclear plants in Germany — has exacerbated its supply crunch.
High energy prices “reinforce the need for a transition to new forms of energy, particularly sustainable energy, and at the same time they reinforce the need for energy diversification,” U.S. Secretary of State Antony Blinken said in an interview with Bloomberg Television on Wednesday.
Blinken is obviously taking lessons from Blackadder’s General Melchett, a First World War general:
If nothing else works, a total pig-headed unwillingness to look facts in the face will see us through.
But perhaps I am being too pessimistic. After all, a rescuer has come forward offering to help Europe out — albeit a rescuer who may end up demanding a price that cannot just be measured in cash.
With winter fast approaching and a stunning energy price surge pummeling Europe, Russian President Vladimir Putin chose an opportune moment to use his country’s leverage as an oil and gas superpower.
On a chaotic day that saw European benchmark gas surge 40% in a few minutes, Putin eased prices by offering to help stabilize the situation. Russia could potentially export record volumes of the vital fuel to the continent this year, he said.
Quick certification of the controversial Nord Stream 2 natural gas pipeline would be one way to achieve this, according to Deputy Prime Minister Alexander Novak.
It should not be forgotten that one of the consequences of structuring the energy transition in the way that the Paris model envisages will be to increase European and (as America prepares to walk away from energy independence) U.S. reliance on suppliers such as Putin. It should also be noted that the final sign-off for the Nord Stream 2 pipeline has yet to come (thus Novak’s comments), and that it may be complicated by the negotiations to form a new government in Germany (both the FDP and Greens are unenthused by the project) and at the EU level. For more on the latter, go here.
There’s this, too, also via Bloomberg:
Even if the pipe does start soon, it’s unclear whether Russia would have enough spare output capacity to increase exports to Europe fast, especially given surging demand at home. Opponents of Nord Stream 2 insist Gazprom already has sufficient delivery routes through other countries, and analysts have said that the lack of supply is more an issue of production capability.
As such, it’s likely that Nord Stream 2 would only help to alleviate, not eliminate, the region’s severe gas deficit. The impact on near-term prices would therefore be limited, with Europe dependent on a number of supply and demand factors to ease the crisis.
While we’re on the topic of the geopolitics of climate policy, here’s Matt Ridley in The Spectator. He quotes the Chinese foreign minister, Wang Yi: “Climate cooperation cannot be separated from the general environment of China-US relations.”
To take a step back, Ridley’s reference in his article to the COP is to “the Conferences of the Parties” — the series of climate summits arranged by the U.N. The latest conference, COP-26, will be held in Scotland, which goes some way to explaining why the British government is taking even more pains than usual to appear greener than green.
But back to Ridley on Wang and the machinations of the Chinese Communist Party.
Roughly translated, [Wang’s statement] reads: we will go along with your climate posturing if you stop talking about the possibility that Covid-19 -started in a Wuhan laboratory, about our lack of cooperation investigating that origin, or about what we are doing to Hong Kong or the Uighur people.
The Chinese Communist party is using the COP as a bargaining chip. To keep us keen, Xi announced last month that China would stop funding coal-fired power stations abroad. ‘I welcome President Xi’s commitment to stop building new coal projects abroad — a key topic of my discussions during my visit to China,’ enthused Alok Sharma, the president of COP26. ‘A great contribution,’ said John Kerry, the United States climate envoy.
In truth, Xi is throwing us a pretty flimsy bone. He did not say when he would stop funding overseas coal or whether projects in the pipeline would be affected, so the impact on the world’s coal consumption will be minimal. And the gigantic expansion of coal burning in China itself continues. It already has more than 1,000 gigawatts of coal power, and has another 105 gigawatts in the pipeline. (Britain’s entire electricity generational capacity is about 75 gigawatts.) . . .
China’s leaders have long ago decided that the climate issue is simply something they can use as leverage with the West. A few minor announcements about more spending on solar power or less money for coal in Africa are a small price to pay for the West’s relative silence on human rights in Hong Kong, the release of the Huawei finance director in Canada and some easing of tariffs and sanctions. It’s a double whammy win for China: it cannot believe its luck as it watches us closing down our reliable and affordable power sources to buy from them wind turbines, solar panels and ingredients for batteries for electric cars.
Currently, the Chinese strategy is to divide and rule: they are all charm with Brits and all snarl with Americans and Australians. The Aussies got slapped with trade sanctions just for asking for an inquiry into how the pandemic started. The Chinese Communist party newspaper the Global Times last month let it be known that it finds Britain more amenable than ‘erratic’ America: ‘Comparing with Kerry, Sharma showed a more readily cooperative attitude,’ it wrote, schoolmaster-style, and quoted the Foreign Minister as saying that Britain ‘won’t be as domineering as the US in talks with China over climate change cooperation, which will be used as a way to improve its deteriorating relations with China and secure the Chinese market after Brexit’.
In a forthcoming paper for the Global Warming Policy Foundation, Professor Jun Arima of Tokyo University, who was one of Japan’s chief climate negotiators, warns that: ‘The divided and acrimonious world that is being created by net zero policies will permit China to further enhance its global economic presence and influence while the developed, democratic world becomes economically, politically, and militarily weaker.’
Great, just great.
Oh yes, there’s this, too, via Reuters on Friday:
China has ordered its two top coal regions to boost output and will allow coal-fired power utilities to charge customers higher prices as the country battles its worst power crunch in years.
Back to Bloomberg Green:
Oil and gas industry advocates are urging the administration to unleash U.S. supplies, including by quickly selling new drilling rights in Western states locked up since Biden paused lease sales in January. They’re also citing the overseas energy supply crunch as they lobby lawmakers to dial back plans to repeal industry tax breaks, tax methane emissions from oil and gas wells and penalize electric utilities that don’t move quickly to adopt ultra-low-emitting power sources.
“Oil and gas industry advocates” may be biased, but they are correct.
This, however, is nonsense:
White House Press Secretary Jen Psaki said Monday the Biden administration would keep using every tool at its disposal “to ensure we can keep gas prices down for the American public.”
Some oil leaders say Europe’s energy woes illustrate the potential risks of moving too quickly to mandate renewable power, before taking essential steps to revamp U.S. electric grids, boost energy storage and build more solar arrays and wind farms.
The center-left Financial Times, a Pravda for Brussels and an evangelist for ESG (a peculiarly aggressive variant of “socially responsible” investing), spends a great deal of time talking about the climate “crisis,” so it was good to see this in an article in its pages from a few weeks back by Mervyn Somerset Webb (editor in chief of MoneyWeek):
Whether we like it or not our energy transition involves long term reliance on fossil fuels. That means that we should stop demonising them — evangelising about ESG, following the trend to divest from shares in oil companies and kiboshing new projects with regulation, high financing costs (many banks are pulling back from the sector) and the like. Instead we should focus on making their extraction cleaner and more efficient while we wait for the engineering challenges around a renewables-led future to be solved.
If we don’t do this — if we allow ourselves to be beguiled by the idea that solar is so advanced that we no longer need filthy fuels to have ice cream, we will find the future held back by needlessly expensive energy. . . . Some reckon that the global population will gladly slash their energy use and pay a “greenium” for the energy they do use. I’d say anyone who believes that has never been on the customer services desk at Ocado, or asked someone in India whether they would like the same average living standard as the average European or, for that matter, received their latest gas bill.
To repeat myself, quite.
Or, if you prefer, here’s Ben Marlow in The Daily Telegraph:
The correct response [to the energy crisis facing the U.K.] would be to take the foot off the pedal as Britain hurtles towards net zero and the decarbonising of the economy, at the same time as finding ways to smooth the transition. But this hapless Government looks set to do neither.
Instead, with charities warning that more than a million more households are about to be plunged into fuel poverty, energy suppliers falling like dominoes, and the UK increasingly at the mercy of the Kremlin, business secretary Kwasi Kwarteng has doubled down on a pledge to green the grid by 2035, calling it “a fundamental milestone”.
The word he was looking for was “millstone.”
Kwarteng told the Conservative party conference in Manchester that the current crunch “shows exactly why we need vigorously to pursue climate goals and to strengthen energy security, while, above all, protecting consumers and the planet”.
But with comments like that, you wonder whether he is actually on this planet. None of it makes any sense. Most experts agree that you cannot aggressively pursue a net zero plan without great costs to consumers. Without other energy sources to count on, accelerating the switch towards renewables will surely only exacerbate the current squeeze . . .
Either the Government has to tell the green lobby to “get fracked” and use more fossil fuels to flatten volatility during the shift, or be more honest and explain that we will have to live with permanent swings in supplies and therefore prices, and that means more people are likely to end up struggling to pay their bills.
At the moment, ministers are doing neither, terrified of upsetting Extinction Rebellion and the equally unhinged eco-warriors at Insulate Britain, but afraid of being frank with the public about the costs of greening the economy, and indeed the limitations of green technology . . .
As for energy security, this country’s record is risible. There is plenty that could be done to make the UK more self-sufficient but with the Cop26 summit in Glasgow around the corner, the Government has its fingers in its ears, determined to prove its green credentials on the international stage.
Writing in The Spectator, Matthew Lynn adds:
We hope the government has a plan somewhere, although as Mike Tyson famously observed, everybody has a plan until they get punched in the face. With industrial and office closures and schools shutting down, we should make it through to spring without switching off anyone’s gas boiler. But there is no question that it will be a political humiliation. The government will have been exposed as dangerously inept and whatever reputation for competence it has left may not recover.
Brits will want to read both articles in full. It will not be a comfortable experience. Making matters worse is that the policies that have led Britain into this mess have enjoyed cross-party support. That doesn’t excuse the Conservatives’ role in all this, but it helps explain The Economist’s fears about anti-green “populism.”
The fact there is much more of a debate here in the U.S. over “climate” and what to do about it is an indication of a democracy that might be in better shape than we sometimes imagine. As for the U.K., the best thing that can be said about the approach that it has taken is that it has provided a terrible lesson on how not to do things. In that respect, I suppose, if in no others, its prime minister, Boris Johnson, is serving a useful purpose. Whether the Biden administration will learn the lessons that should be learned from all this is a different question.
The EU, meanwhile, an institution that never has to worry too much about popular consent, ploughs on:
During the first official debate on the EU’s landmark climate proposals unveiled in July, environment ministers from France, Cyprus, Romania, Malta and Slovakia were among those casting doubts on proposals to create a new Emissions Trading System for heating and road transport. Hungary’s representative said the new ETS would cause “serious damage,” even with a 72 billion-euro ($83 billion) social climate fund cushioning the impact on the most vulnerable.
“The creation of new carbon market does give rise for a lot of concern,” Barbara Pompili, France’s ecological transition minister, said at the Environment Council debate in Luxembourg. “There is risk that energy prices will rise without any clear impact on carbon emissions.”
There, Pompili steps into dangerous territory. Is what the EU is doing to reduce carbon emissions sufficient to make any material difference to the climate and the effects that changes to the climate may have? And is it ever likely to?
Earlier Wednesday, EU climate chief Frans Timmermans reiterated that record carbon price increases, which some member states blame for contributing to the energy crisis, were responsible for no more than a fifth of the recent surge in electricity. . . . EU carbon futures for December were at 60 euros Wednesday, more than double the level last year.
This is not the first time that Timmermans has made a claim like this. As I mentioned a couple of weeks ago:
It would also have been interesting to see what adding back in the cost of subsidies (paid, in the end, by taxpayers) would have done to those supposedly “low” renewables prices. Timmermans could have elaborated on the way that broader climate policy in countries such as Germany (although there Merkel’s characteristically cowardly switch away from nuclear power has made a bad situation worse), has been pushing up energy costs for quite some time now. Oddly, he didn’t.
There’s also the question of whether European opposition to fracking (even if fracking was never going to lead to the bonanza seen in the U.S.) might have contributed something to the current gas crunch. Meanwhile the phasing out of coal-fired plants is shrinking access to an alternative source of supply when gas prices soar. Then, to return to the topic of nuclear energy: It may have been a bugbear of environmentalists since long before the climate panic (and not only in Germany), but once the power stations themselves are built, nuclear is a zero-emission energy source. Nuclear power could be of considerable assistance in maintaining economic growth during (and after) any energy transition. That economic growth is needed to create the wealth that, sensibly deployed, would provide us with the technologies and the resilience that a changing climate might require — but this sort of thinking remains largely taboo . . .
Meanwhile (via Reuters):
A British regulator rejected Royal Dutch Shell’s (RDSa.L) plans to develop the Jackdaw gasfield in the North Sea after considering its environmental statement, industry sources said on Wednesday.
“We’re disappointed by the decision and are considering the implications,” a Shell spokesperson said.
It was unclear on what grounds the Offshore Petroleum Regulator for Environment and Decommissioning (OPRED) refused to approve the environmental statement for the field’s development.
What was it that General Melchett said again?
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 . Capital Matters podcast, sponsored by . Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 38th episode David tackles the very essence of Capital Record in this solo-act version of the podcast that should not to be missed.
The Capital Matters week that was . . .
While universities exist to teach knowledge that stands the test of time, professors invariably face pressure to teach the new hot topic.
In economics, a field built on the premise that people rationally respond to incentives, there has been a push to incorporate more elements about psychology and human irrationality in our effort to understand why things work in the way that they do. The result has been to create a subfield called “behavioral economics.” Defenders of this field of study claim that such incorporation allows economists to better explain and predict behavior and improve policy.
This sounds promising enough, but students signing up for courses shouldn’t take the bait . . .
If you listen to the president, not only will $3.5 trillion cost nothing, but Republicans are obligated to raise the debt limit even though they don’t control Congress and don’t support new spending.
Two new graphics went up today on the president’s Twitter account. One shows the debt increase for President Trump at $7.8 trillion, while the debt increase under Biden is only $678 billion. The second shows that President Trump is responsible for 28 percent of the debt in American history, while Biden would be responsible for only 2 percent. “The reason we have to raise the debt limit is—in part—because of the reckless tax and spend policies of the last Administration,” the tweet says.
“In part” is doing a lot of work in that sentence . . .
Senator Bernie Sanders (I.,Vt.), America’s most prominent proponent of government-run health care, is once again leading the charge to move our country to a single-payer system.
As chairman of the Senate Budget Committee, Sanders is pushing a $3.5 trillion budget plan that includes expansions of Medicare, Medicaid, and Obamacare. Some moderate Democrats have balked at the cost. But Sanders predicted Sunday that Democrats would “come together” to pass the massive package via reconciliation later this year.
The health-care reforms in the budget would funnel millions more Americans into public health coverage and put our nation a stone’s throw from Senator Sanders’s longtime goal: a government takeover of the health-care system . . .
When conservatives criticize Democrats for spending too much taxpayer money, we’re typically greeted with an immediate response of whataboutism from the Democrats’ pundit class: If you guys are so fiscally responsible, why didn’t you say more when this or that Republican president cut taxes without cutting spending, or spent money on defense, or signed bloated budget bills? There are several problems with this line of argument.
First, of course, a lot of us have written things critical of various Republican actions or failures to act. Different people have different perspectives, but most of us who criticize too much domestic spending by Democrats have also bemoaned too much domestic spending by Republicans. The timing of those writings is often dictated by events: It is both easier and more urgent to write about proposals that are in danger of passing Congress than about spending-cut ideas that are going nowhere. The biggest battlefield for Republican spending priorities is in party primaries; some of us fought long, losing battles against the nominations of Mitt Romney and Donald Trump — and even George W. Bush — because they were soft on spending.
Second, it is true that conservative critics are often against the Democrats’ choices of what to spend money on. But that does not make complaints about the size of the bill somehow pretextual; it is not inconsistent with also thinking that Democrats are spending too much money . . .
Pieces of the Green New Deal may become law if the $3.5 trillion reconciliation package passes. But the green plan has one glaring problem: It can’t be accomplished without government involvement in almost every aspect of energy production and consumption. It would require subsidization from top to bottom — from demand to supply. The slew of practical barriers the plan would face raises the question: Is the Biden administration’s goal to transition to a clean-energy future that can actually meet the demands of modern society? Or is it to transfer wealth to select interest groups that will dutifully return the favor when it’s time for reelection?
Last month, President Biden nominated Saule Omarova as Comptroller of the Currency. As the Wall Street Journal has noted, “Omarova graduated from Moscow State University in 1989 on the Lenin Personal Academic Scholarship.” Sadly, unlike Gaidar, she doesn’t seems have paid too much attention to the implications of the collapse of the Soviet economy, a collapse she witnessed firsthand. Central planning had presented the Soviet economy with disaster after disaster (as a reminder, the Russian economy grew very rapidly in the late Czarist period, which is just one reason why “but industrialization” is not an adequate response to criticism of Soviet economic management). With the Soviet authorities no longer prepared to use the amount of force necessary to preserve their system from the consequences of sustained economic failure, it collapsed.
Lesson: Central planning doesn’t work.
This was a lesson that Omarova appears to have failed to learn.
Well, there’s one exception to that, and perhaps that was the lesson she learned. Central planning works very well for central planners . . .
Alexander Salter and Thomas Hogan:
The political contest over banking and financial regulation is heating up. What Columbia’s Charles Calomiris and Stanford’s Stephen Haber call the “game of bank bargains” is developing into a partisan tug-of-war. It matters little who wins, because the game itself is the problem.
Congressional representatives Mondaire Jones (D., N.Y.), Rashida Tlaib (D., Mich.), and Ayanna Pressley (D., Mass.) have introduced a bill, the Fossil Free Finance Act (FFFA), which would direct the Federal Reserve to limit bank lending for projects related to fossil fuels and greenhouse gases. The proposal would prohibit “new or expanded fossil fuel projects after 2022” and “the financing of all fossil fuel projects after 2030.” Whatever the bill’s merits, it significantly raises the stakes in the bank-regulation game . . .
Michael Brendan Dougherty:
It’s really not hard to envision that Frances Haugen, the “Facebook Whistleblower,” is going to get the Hollywood treatment soon. She has already provided the origin story. She saw a friend get radicalized by content online. This is meant to give the story a personal drama. Even a relatable one — everyone seems to have someone in his life who shares wild conspiracy theories he got from social-media platforms.But the only question is whether journalists between now and then will uncover whether she specifically sought out a job on Facebook’s misinformation because of her preexisting political commitments. According to a report on The Daily Wire (more on them in a minute), Haugen is a donor to Alexandria Ocasio-Cortez. She’s working with the press firm that was formerly run by current White House spokeswoman Jen Psaki.
As a law student in 2017, Federal Trade Commission chairwoman Lina Khan quickly gained notoriety for a “note” in the Yale Law Journal titled, “Amazon’s Antitrust Paradox.” Her focus was on protecting rivals from Amazon’s low — “predatory” — prices, suggesting that we either “forc[e] it to split up its retail and Marketplace operations” or hobble it with “public utility regulations and common carrier duties.” The article had only ancillary grumbles about Google and offered no suggestions that Facebook was a monopoly either. (Khan, however, has recently tried to make that case at the FTC without much success.)
Yet just four pages into that 2017 essay, Ms. Khan stumbled on something important. She astutely observed that, “Close to half of all online buyers go directly to Amazon ﬁrst to search for products.” Think about that for a minute: If half of all searches for consumer products start with Amazon, how can the Justice Department now claim, as it does, that “Google has accounted for almost 90 percent of all search queries in the United States”?
In other words, more than three years before the DOJ launched its October 2020 market-share allegation against Google, Lina Khan had already rebutted it . . .
It doesn’t matter if Leviathan is governmental or corporate: Too much centralized power is harmful to liberty. Google LLC and its parent company Alphabet have vast, unsettling power over our citizenry. Google may once have claimed its motto was “don’t be evil.” But as Madison noted, none of us are angels.
A further word about Madison’s canonical statement about the souls of men and governments: Conservatives and libertarians understandably focus on the dangers of overcentralized government power. But individual liberty was the focus of the Founders. Threats to liberty need to be addressed, whether they come from individuals or institutions. Whether the institution threatening liberty is a government or corporate entity doesn’t change that. It only changes the nature of the response.
Google is such a threat. More web traffic goes to Google platforms than the other top-50 platforms combined. Beyond that, more news is consumed on Google News than on any other platform. Most critically, Google dominates search, cornering 90 percent of the market. Network effects and algorithmic improvements suggest that Google Search’s dominance will only grow . . .
The Debt Ceiling
Imagine it’s the evening of October 17 . . .
The dark of night engulfs the District of Columbia, and Congress has yet to fix the debt limit. Officials gather in the belly of the Beltway beast, and all those present know what is to come: Tomorrow morning, as predicted, the U.S. Treasury will default on the government’s obligations. Time has run out. A desperate President Biden instructs the U.S. Treasury to deposit a secretly minted coin at the Federal Reserve Board. Although having implied to Congress weeks earlier that she would not do so, Secretary Yellen quietly resolves to do whatever it takes to save the dollar. She walks the 1 trillion-dollar-stamped platinum specie through the White House grounds, past the Ellipse, and down C street to Fed headquarters, where Chairman Powell is waiting outside in the cold autumn rain to greet his predecessor with grim resignation and a phalanx of the agency’s uniformed police. He slips the numismatic monstrosity into his coat like a bellhop collecting a two-bit gratuity.
Depending on your perspective, this made-for-television drama either excites or terrifies you. For those calling on President Biden to #MintTheCoin, this scene is a display of unconventional heroism. As they correctly observe, should the U.S. government default on its obligations, the consequences would be catastrophic. No longer considered the world’s wealth haven, the U.S. would witness dollar interest rates rise and exchange rates devalue. There would be a financial crisis, a deep recession, and an end to the dollar’s dominance . . .
Even though the debt limit showdown appears to have been temporarily postponed, Democrats remain committed to a strategy aimed at trying to pressure Republicans to join them in raising the ceiling. But the strategy is rooted in a core political miscalculation.
For months, Democrats have steadfastly refused to use the reconciliation process to raise the debt ceiling on a pure party-line basis. Senate majority leader Chuck Schumer has called the idea a “nonstarter.” House speaker Nancy Pelosi said she would rule out the idea of using the procedural maneuver to overcome any Republican filibuster. President Biden has said he cannot guarantee that the U.S. won’t default on its debt because “that’s up to Mitch McConnell.”
In reality, Democrats have the power to raise the debt limit whenever they want. The Senate parliamentarian has ruled that they can do so and would be able to in a separate measure that would not require tinkering with the separate $3.5 trillion social-welfare bill they are trying to pass. Even though Democrats have wanted to use reconciliation to push through a sweeping domestic agenda, to try to raise the minimum wage, and even to grant amnesty to millions of illegal immigrants, they have thus far been unwilling to use reconciliation to avoid a catastrophic debt-limit scenario . . .
The Reconciliation Bill
Democrats have insisted time and again that their reconciliation bill will not add to the debt. The Congressional Budget Office, however, has not scored the full reconciliation bill, so we just have to take the Democrats’ word for it.
Contrary to their promises, the Democrats’ own reconciliation instructions allow them to add up to $1.75 trillion to the debt. The reconciliation instructions are where Congress essentially says, “Here’s how much each committee is allowed to spend, and we’ll work out the details later.” They are currently in the process of working out the details and arriving at final legislation text. That final text will then need to be voted on, and that’s what goes to the president if it passes Congress.
Scoring the details of each committee’s proposal is a very time-consuming process, as CBO director Phillip Swagel explains in a letter to Mitch McConnell today. There are 13 House committees, each of which produces recommendations that need to be scored. “CBO has completed cost estimates for the recommendations of four of those committees,” Swagel writes. “We expect to finish estimates for the recommendations of another two committees this week.”
That would put them at almost halfway to a complete cost estimate by the end of this week. Recall that Democrats wanted to pass the reconciliation bill last week. With Obamacare, we had to pass the bill to find out what’s in it. With this reconciliation bill, apparently, we have to pass the bill to find out what it costs . . .
In whatever spending splurge the Democrats come up with, there will be hidden costs and excess burdens associated with the taxes to finance it. Just what are these costs and burdens?
There are burdens placed on taxpayers that go well beyond the visible tax payments they make. These include myriad compliance costs: record-keeping, studying tax laws, making calculations, filling out forms, grappling with enforcement actions, and so on.
These administrative and compliance costs are relatively easy to comprehend. A more difficult concept is the excess burden of additional taxes — the disincentives and distortions they impose on the economy. Without those taxes, the economy would generate more income and do it more efficiently . . .
Conagra is not the first massive food company to say it expects higher inflation. Last month, General Mills said it expects more inflation, too. It pointed to the same concerns everyone has: logistical problems and higher input prices.
The August inflation report was frustratingly inconclusive on whether inflation is here to stay or not. The most common benchmarks for inflation expectations, the five-year and ten-year breakeven inflation rates derived from Treasury bond markets, still show inflation expectations holding steady at about 2.5 percent. In fact, expectations are slightly lower now than they were in May. That’s a big hurdle for inflation hawks to overcome.
But these recent decisions by some of the country’s largest food companies present a problem for the transitory-inflation narrative. If more companies expect higher inflation and make pricing and wage decisions based on that, it can contribute to more inflation — the self-fulfilling prophecy of increased inflation expectations.
The decisions these companies make are based on market forces just as much as the decisions of Treasury bondholders. Both have skin in the game and money on the line . . .
Saule Omarova, President Biden’s nominee to lead the Office of the Comptroller of the Currency, is a champion of bringing a Chinese-style CBDC to America. In a 2020 Cornell Law School paper, Omarova wrote that adopting a full-fledged CBDC in the U.S. would enable the Fed to “fully replace — rather than compete with — private bank deposits” and to establish Fed control over “the very process of generation and allocation of financial resources, . . . directly crediting and debiting the accounts of all participants in economic activity.” That would amount to transferring Congress’s constitutional power of the purse to the unelected Federal Reserve Board.
Once the Fed has control of all Americans’ savings and checking accounts, she writes, it will be able to “function as a hybrid of a sovereign wealth fund and a private equity firm,” printing money to spend on infrastructure projects like high-speed rail. The Fed’s engorged balance sheet would empower it to short high-flying stocks, thereby signaling “to the market [the Fed’s] determination that current prices . . . are artificially inflated and accordingly best suppressed,” Omarova writes.
Not only does Omarova have allies in the Biden White House, but also at the Fed itself. Lael Brainard, the Left’s favorite to replace Jerome Powell as chair of the Federal Reserve Board, has led an initiative to explore the Fed’s ability to implement a CBDC. Brainard believes that CBDCs can “increase financial inclusion” by helping those without bank accounts deposit directly with the Fed. But the opposite is true, even if you believe that the Fed’s intentions are wholly benign.
If a CBDC-empowered Fed were to become the country’s sole depository institution, it would accumulate billions of terabytes of intimate information about every American’s financial transactions. That federal database would become a prime cybersecurity vulnerability for the United States, leaving Americans of modest means susceptible to hackers and scams.
If you were troubled by IRS leaks of private tax returns, wait until the Fed knows everything about your spending habits. And if you think cancel culture is bad now, wait until left-wing activists start agitating for the Fed to cancel conservatives’ bank accounts. You might have thought that single-payer health care was Democrats’ most ambitious policy idea. But single-payer banking, through a CBDC, would do far more to transform the character of the U.S. economy . . .
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