A wind turbine at the Westmill Wind Farm & Solar Park at Watchfield, near Swindon, England, September 24, 2021. (Andrew Boyers/Reuters)
The week of September 20: ESG, energy, Carter vs. Biden and much, much more.
Significant portions of the last two weeks’ Capital Letters have been focused on the growing energy crunch in Europe — a crunch that has revolved primarily around natural gas, but which has also highlighted the unreliability of wind energy. This crunch, which is rapidly turning into a crisis, is not just about (far from it, in fact) irresponsible and ill-thought-out climate policies, but it is hard to overlook their baleful effect. There’s a lesson there for the U.S., should we choose to pay attention.
“Europe’s experience is the product of foolish energy policy,” says Gordon Tomb, senior fellow for Pennsylvania-based Commonwealth Foundation. “Germany, for example, moved away from fossil fuels and nuclear in favor of wind and solar and its electricity now costs twice that of France’s nuclear-generated power.
“Reliability and affordability of the electric system has to be paramount, even as we look at how we’re making this energy transition, which our members are fully engaged in,” Todd Snitchler of Electric Power Supply Association (EPSA) told InsideSources. “Europe is not identical to the United States but it’s constructive that consumers are sensitive to price increases, especially at a time when there is peak demand.”
Labor Day and the unofficial start of fall may be behind us, but the warm weather is not going anywhere for many parts of the United States.
“We’re not out of the woods when we look at high temps and that’s an area that gets the public’s attention,” says Snitchler. “So, when you have a situation where reliability could be jeopardized and consumers are paying higher prices than they would otherwise have to pay, it can lead to a situation that is not helpful in trying to address the broader concerns about emissions reductions, reliability, and affordability.”
President Joe Biden and progressive Democrats have committed to reducing the use of fossil fuels in order to cut carbon emissions. They see alternative sources like wind and solar as solutions, but critics argue that so-called green technologies are more expensive and less reliable, leaving consumers paying more for electricity that may not be there when needed.
Consumers can expect “expensive, unreliable energy sources” to follow the “replacement of economical, readily available coal-and-gas-fired generating plants with solar panels and wind turbines,” says Tomb. “The outcomes of these policies — job losses and damaged lives — is all too predictable.”
I had hoped that, after its recent — how to put this — mishaps, California’s government might have understood the importance of reliability.
After all (via Fox26, from August):
California officials say five temporary gas-fueled generators will be set up around existing power plants throughout the state to avoid blackouts and boost the state’s grid.
This is a move in the opposite direction from California’s big push toward “green” renewable energy.
“We cannot keep the lights on without additional natural gas and the state’s been forced to go out and find it in an emergency situation,” said Assemblymember Jim Patterson.
But then, from Thursday, September 23:
FRESNO, Calif. (FOX26) — A bill is now on Governor Gavin Newsom’s desk that could disproportionately impact families in the Central Valley and nearby foothill and mountain communities.
Assembly Bill 1346 would end the production of gas-powered small, off-road engines–used in lawn and garden equipment and generators—by January 1, 2024.
To ruin the reliability of a grid and then remove one of the workarounds available to help people deal with it would be quite something.
And do I think that the Biden administration will learn any lessons from the fiasco in Europe?
QTWAIN, as the young people say.
And how are things going in Europe?
Not well. The worsening situation I described last week has gotten worse. The epicenter of the crisis continues to be the U.K., where more than a decade of quite remarkable insouciance (which appears to continue) about maintaining secure energy supplies has combined with governing-class climate fundamentalism to make the country particularly vulnerable to the current spike in (natural) gas prices.
Here’s just one story (there are plenty to choose from), via, in this case, the Daily Telegraph:
One of the North Sea’s largest oil producers is urging ministers to relax legislation so it can pump lower-quality gas into the British grid to ease the supply crunch.
Sam Laidlaw, executive chairman of Neptune Energy, has written to Kwasi Kwarteng, the Business Secretary, to make the case for allowing gas of a lower calorific value into the UK network.
Mr Laidlaw’s bid to ease the shortage gripping Britain came as industry chiefs warned that surging power costs are making their businesses unviable. Steel makers said they could be forced to shut down production following a 50-fold rise in their bills . . .
It is, perhaps, unkind to note that in November, the U.K. will be hosting COP-26, the next big climate jamboree, a fact about which any British prime minister capable of feeling shame ought, under any circumstances, to be mortified — and these are not any circumstances. Unfortunately, the U.K.’s prime minister, Boris Johnson, who has embraced climate fundamentalism with an intensity all too typical of converts to a new faith, is as shameless as he is incompetent. He is now busy shambling around proclaiming the importance of this miserable event, which will do little or nothing to help the climate, but a great deal to trash the economy, and will further empower Xi, Putin, and OPEC.
Some wicked types appear to be hoping that this historic meeting/last chance to save humanity will be marred by a power cut. Well . . .
I was going to write yet more about this, but a rather pressing deadline to write an article for NR about the departure of Angela Merkel has intruded. This task is complicated by the fact that the last time I wrote about her for the magazine (in 2018), I compared her to the late Leonid Brezhnev, not least because she has presided over what will come to be seen as a long period of stagnation. What to say now, only three years later? That things have stagnated some more? World’s smallest violin and all that, but this won’t be easy to write . . .
But before moving on to the Capital Matters week, let’s see what’s happening in the world of ESG. As you may recall, ESG, measuring companies against various environmental, social, and governance benchmarks, is an aggressive variant of “socially responsible” investment. ESG has recently been attracting large inflows of money — and generating something of a bonanza for numerous consultants as well, of course, for those who sell funds labeled (or hastily relabeled) as ESG-compatible.
Aswath Damodaran is professor of finance at New York University Stern School of Business. He recently tweeted a must-read thread about ESG. He has had his doubts for a while, it seems:
Last year, I argued that ESG was the most overhyped, and oversold concept in business (https://bit.ly/3lnozXw), and heard from people who felt I was missing its good points. After a year of searching, I still cannot find them.
Reading Damodaran’s meticulous analysis of ESG from last year, this comes as no surprise. After all, not far into his article, we can read this:
In the interests of openness, I took issue with the Conference Board [the US Business Roundtable (BRT)] last year on stakeholder interests, and I start from a position of skepticism, when presented with “new” ways of business thinking. If the debate about ESG had been about facts, data and common sense, and ESG had won, I would gladly incorporate that thinking into my views on corporate finance, investing and valuation. But that has not been the case, at least so far, simply because ESG has been posited by its advocates as good, and any dissent from the party line on ESG (that it is good for companies, investors and society) is viewed as a sign of moral deficiency. At the risk of being labeled a troglodyte (I kind of like that label), I will argue that many fundamental questions about ESG have remained unanswered or have been answered sloppily, and that it is in its proponents’ best interests to stop overplaying the morality card, and to have an honest discussion about whether ESG is a net good for companies, investors and society.
Spoiler: It’s not, at least in my view (I’ve written about the BRT’s absurd rather sinister embrace of stakeholder capitalism myself on just a few occasions). Sinister? Yes. Stakeholder capitalism, which is increasingly intertwined with ESG, is an expression of corporatism, an ideology that can be relatively benign (such as in post-war West Germany), but which also, rather less benignly, provided some of the intellectual underpinning for fascism. I wouldn’t, of course, claim that the BRT is intent on installing fascism in this country, but it is not unreasonable to argue that stakeholder capitalism (the notion that a company should be run for a series of “stakeholders” rather than, primarily, its shareholders) will lead, at the very least, to the dilution of our democracy.
In his note from last year, Professor Damodaran doesn’t focus on that angle, but he highlights some of the various inconsistencies in the case being made for ESG. These include the lack of agreement over what the required standards should be:
what I find to be good or bad in a company will reflect my personal values and morality scales, and the choices I make will be different from your choices, and any notion that there will be consensus on these measures is a pipe dream.
Wise words, but they are unlikely to weigh heavily with the SEC, which seems set on introducing as much standardization as it can in this area, as this can be the pathway for an activist SEC — and that, unfortunately, is what we have now — to, whether directly or indirectly, transform corporations into engines of societal change.
Another problem confronting those advocates of ESG who are prepared to think its qualities through (as opposed to those who simply want to use it as ideological enforcement tool or — think of all the rent-seekers that ESG has attracted — money-making opportunity) is that it is very difficult to judge how much of a stock’s performance is due to a high ESG score and how much to other factors. Correlation and causation and all that. For example, one of the reasons for the outperformance of many ESG funds last year was the strong performance of tech companies, which generally score well on ESG metrics (particularly because they typically have a low environmental footprint), but their strong share prices owed little or nothing to those scores.
Damodaran looks at this question in a different way:
Do companies perform better because they are socially conscious (good) companies, or do companies that are doing well find it easier to do good? Put simply, if ESG metrics are based upon actions/measures that companies that are doing better, either operationally and/or in markets, can perform/deliver more easily than companies that are doing badly, researchers will find that ESG and performance move together, but it is not ESG that is causing good performance, but good performance which is allowing companies to be socially good.
He then goes into a deeper examination of the question of return, which like the rest of his paper, should be read in full.
Based upon the studies so far, the strongest evidence in support of ESG seems to be that “bad” companies face higher funding costs (from debt and equity), whereas the evidence on ESG paying off as higher profits and growth is elusive. There is some evidence supporting the proposition that being socially responsible (or at least not being socially irresponsible) can protect companies from damaging disasters, but selection bias is a problem.
Note that point about funding, however. As Damodaran points out, the combination of higher funding costs and lower price might well mean that investors in these “bad” companies should see higher returns.
Relying on basic logic, he also makes the argument that “the notion that adding an ESG constraint to investing increases expected returns is counter intuitive. After all, a constrained optimum can, at best, match an unconstrained one, and most of the time, the constraint will create a cost.”
In one of the few cases where honesty seems to have prevailed over platitudes, the TIAA-CREF Social Choice Equity Fund explicitly acknowledges this cost and uses it to explain its underperformance, stating that “The CREF Social Choice Account returned 13.88 percent for the year  compared with the 14.34 percent return of its composite benchmark … Because of its ESG criteria, the Account did not invest in a number of stocks and bonds . . . the net effect was that the Account underperformed its benchmark.”
It is true that investors in ESG stocks can benefit from a transition effect, something that Damodaran describes, rather more benignly than I would, as
an adjustment period, where being good increases value, but investors are slow to price in this reality. During the adjustment period the highly rated ESG stocks will outperform the low ESG stocks, as markets slowly incorporate ESG effects, but that is a one-time adjustment. Once prices reach equilibrium, highly rated ESG stocks will have greater values, but investors will have to be satisfied with lower expected returns. The presence of a transition period, where markets learn about ESG and price them in can also explain why there may be a payoff to more disclosure and transparency on social and environmental issues, by speeding the adjustment. It is perhaps this hope of transition period excess returns that that has driven some institutional investors to become more activist on ESG issues and can explain why some have been able to show excess returns from increasing (reducing) their holdings in good (bad) companies.
I’d put it another way: Investors can make money by following money. If “everyone” is investing in ESG stocks, then jumping on the bandwagon can be a good way to cash in. The skill lies in knowing when to jump off. See the dot-com bubble for details.
It has been argued that investing on ESG lines can reduce “risk,” a claim that Damodaran regards as being not entirely without merit:
The other scenario where incorporating ESG into investing may yield a payoff is when investors are concerned about limiting downside risk. To the extent that socially responsible companies are less likely to be caught up in controversy and to court disaster, the argument is that they will also have less downside risk than their counterparts who are less careful. There is some evidence of this in this paper that finds that companies that adopt better ESG practices are less likely to see large drops in value.
Note that this notion of “risk” should not be muddled up with climate risk, a notion which central banks are using to justify their increasing involvement in climate policy. It is a conceit, which as economist John Cochrane has repeatedly (and correctly) argued is nonsense. This will not come as much of a surprise. After all nonsense has all too often been a guiding principle for central banks on either side of the Atlantic for a couple of decades now.
Damodaran concluded as follows (my emphasis added):
Much of the ESG literature starts with an almost perfunctory dismissal of Milton Friedman’s thesis that companies should focus on delivering profits and value to their shareholders, rather than play the role of social policy makers. The more that I examine the arguments that advocates for ESG make for why companies should expand mission statements, and the evidence that they offer for the proposition, the more I am inclined to side with Friedman. After all, if ESG proponents are right, and being good makes companies more profitable and valuable, they are on the same page as Friedman. If, on the other hand, adopting ESG practices makes companies less valuable, the onus is on ESG’s proponents to show that societal benefits exceed that lost value.
The ESG bandwagon may be gathering speed and getting companies and investors on board, but when all is said and done, a lot of money will have been spent, a few people (consultants, ESG experts, ESG measurers) will have benefitted, but companies will not be any more socially responsible than they were before ESG entered the business lexicon. What is needed is an open, frank, and detailed dialogue concerning ESG-related corporate policies, with an acceptance that being good can add value at some companies and may destroy value at others, and that in the long term, investing in good companies can pay off during transition periods but will often translate into lower returns in the long term, rather than higher returns.
After reading the whole of Damodaran’s article (I have not had the space—and the Merkel thing is getting really pressing—to do it justice), please do turn to the tweet thread, which as you can tell from that first volley is rip-roaring stuff. And pay attention to the diagram Damodaran has made of the ESG ecosystem (as so often, following the money is not a bad way to understand what is going on), and to these words:
Why is ESG being sold so aggressively? Because accountants, measurement services, fund managers & consultants are on the ESG gravy train, with stockholders & taxpayers paying. Corporate CEOs are buying into ESG, because it makes them accountable to no one.
The last tweet in the thread reads as follows:
Bring your moral code into your own business & investment decisions, but investing other people’s money to advance what you view as “good” is hubris. Accept that being good is more likely to cost & inconvenience, than to help, you, and be okay with that. https://bit.ly/3nwSP4N
On September 14, Damodaran updated last year’s article with another major piece. Rather than repeat himself he refined and elaborated on some of the points he had made. Once again, the entire thing rewards a careful read, but I would highlight this passage:
Even if being “good” does not increase value or make investors better off, could it still help, by making the world a better place? After all, what harm can there be in asking and putting pressure on companies to behave well, even if costs them? In the short term, the answer may be no, but in the long term, I believe that this will cost us all (as society). The ESG movement has given each of us an easy way out of having to make choices, by outsourcing these choices to corporate CEOs and investment fund managers, asking them to be “good” for us, while not charging us more for their products and services (as consumers) and delivering above-average returns (as investors). Implicit in the ESG push is the presumption that unless companies that are explicitly committed to ESG, they cannot contribute to society, but that is not true. Consider Bill Gates and Warren Buffett, two men who built extraordinarily valuable companies, with goodness a factor in decision making only if it was good for business. Both men have not only made giving pledges, promising to give away most of their wealth to their favorite causes in their lifetimes, and living up to that promise, but they have also made their shareholders wealthy, and many of them give money back to society. As I see it, the difference between this “old” model of business and the proposed “new ESG” version is in who does the giving to society, with corporate CEOs and management taking over that responsibility from shareholders. I am willing to listen to arguments for why this new model is better, but I am certainly not willing to concede, without challenge, that a corporate CEO knows my value system better than I do, as a shareholder, and is better positioned to make judgments on how much to give back to society, and to whom, than I am.
All true, but don’t ignore the political angle to stakeholder capitalism and ESG. As I have discussed on numerous occasions, this poisonous combination is a way of using corporate money and power to advance a progressive political agenda without going through the normal democratic machinery. That’s not good.
But let’s not end on a bleak note. One of the most prominent advocates of ESG has been BlackRock’s CEO and chairman Larry Fink, who has been peddling the supposed superior morality of both stakeholder capitalism and ESG with as much aplomb as he peddles (checks notes) BlackRock’s ESG products.
It would therefore have taken a heart of stone not to laugh at this little item in the Financial Times:
Funds managed by BlackRock and HSBC added to their holdings of Evergrande bonds just months before a liquidity crisis at the Chinese property developer pushed it to the brink of default.
BlackRock in August bought up five different Evergrande dollar bonds through one of its high-yield funds, which had holdings in the developer then worth $18m, Morningstar data show. The size of the holding had already expanded sharply this year as the fund’s assets under management rose.
The world’s biggest asset manager had total exposure of close to $400m across its funds, according to data compiled by Bloomberg based on June, July and September filing dates.
Putting money to work in a country run in a way that, whatever the formal name of its ruling party, blends Mussolini and Ponzi is, I would I have thought a bit of a stretch for an investment manager that puts such an emphasis on ESG. And that’s before thinking about China’s genocide of the Uyghurs, the crushing of Hong Kong, pollution, and so on and so on and so on. But ESG is what it is, I suppose.
Evergrande? A story for another day.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 36th episode, David is joined by Heritage Foundation scholar, Dr. Jay Richards, whose work in establishing the moral foundation of economics has been extraordinary. They talk a little Hayek, a little history, a little Sowell, and a little soul.
And the Capital Matters week that was . . .
The pandemic and related closures hit the restaurant industry hard, with about 90,000 eateries closing permanently. When the pandemic finally subsides, America will need entrepreneurs to launch new restaurants and fill the void.
But restaurant entrepreneurs face government barriers. Before opening in New York City, for example, a “restaurant may need to obtain as many as 30 permits, registrations, licenses, and certificates and could face as many as 23 separate inspections.”
In many states, alcohol licensing can be the largest barrier. By my count, there are 18 states that, using per capita formulas, cap the number of licenses in cities and counties. The caps can make restaurant launches very costly or block them entirely, particularly when businesses want to serve liquor in addition to beer and wine . . .
The Biden Administration
In July, President Biden nominated Graham Steele for assistant secretary of the Treasury for financial institutions. Steele will be in front of the Senate Banking Committee tomorrow for his nomination hearing.
If confirmed, Steele would head the Treasury Department’s Office of Financial Institutions (OFI). The OFI coordinates policy on financial regulation and also oversees federal initiatives on financial education and cybersecurity.
Steele is no moderate Democrat when it comes to financial issues. From 2010 to 2015, he worked for Ohio senator Sherrod Brown, whose Rust-Belt-moderate image doesn’t align with his radical policy views. (Brown is the current chair of the Senate Banking Committee.) Steele’s nomination earned a glowing endorsement from Massachusetts senator Elizabeth Warren, whose idea of financial regulation often treats the rule of law as an afterthought when it conflicts with progressive policy goals . . .
In 2013, Democrats sought to raise taxes on married couples making more than $250,000 but settled in a split Congress for an increase on couples making more than $450,000, or $535,000 today.Today, Democrats are proposing to increase income-tax rates on couples making more than $450,000.
This history is part of the context of Representative Alexandria Ocasio-Cortez’s infamous “TAX THE RICH” dress. Over time, as the Democratic Party’s coalition has grown more affluent (and more concentrated in high-cost areas), the line between middle-class households who need to be protected from higher tax rates and rich people who should pay them keeps inching higher. The congresswoman herself denies that she means to include doctors in her category of rich people. Their median pay in 2020 was $208,000. “Physician” is the most common job held by people in the top 1 percent of income . . .
From the New York Times:
“The White House’s calculation of what the wealthiest pay in taxes is well below what other analyses have found. The difference comes from the White House officials’ decision to count the rising value of wealthy Americans’ stock portfolios — which is not taxed on an annual basis — as income. It finds that between 2010 and 2018, those top 400 households, when including the rising value of their wealth, earned a combined $1.8 trillion and paid an estimated $149 billion in federal individual income taxes.”
Which is to say: Rich people have more income if we take a lot of stuff that isn’t income and call it income . . .
As public-school battles over masks, vaccinations, and critical race theory continue, one thing is for certain this year: The demand for school choice will be stronger than ever. Yet misconceptions about school-choice programs draining funding from public schools still abound. As students head back to the classroom and state legislators get back to session this fall, it’s critical we understand where education dollars are really going.
The reality is that spending on school-choice programs pales in comparison to recent increases in employee- and retiree-benefit costs for education systems across the country. Today, state spending on school-choice programs such as vouchers, education savings accounts, and tax-credit scholarships accounts for less than 0.4 percent of total U.S. K–12 public-education expenditures.
To put this in perspective, if school choice were defunded in, say, Maryland, Utah, and Mississippi, the states’ savings could boost public-school funding by less than $10 per student in each state — and that’s before accounting for the costs of absorbing private-school students back into district schools. Even Florida, the nation’s school-choice bellwether, could save only an extra $405 per student if choice programs were cut — a small fraction of what it spends on public schools each year.
The rampant fearmongering about school-choice programs operating at the expense of public education is entirely baseless. If anything, these programs are underfunded, considering their track record of improving educational attainment, parent satisfaction, and test scores . . .
Many U.S. school buildings, especially those operated by the public sector, were closed last year. Academic progress, child development, and psychological health suffered from e-learning. Was there an offsetting health benefit for students, teachers, or their families? If so, of what magnitude?
Economics is essential for answering these questions. Human behavior affects disease transmission and responds to incentives and economic organization. Economists have long analyzed and prepared standardized measures of occupational risks, of which contracting COVID-19 at school is a novel instance. Occupational-risk analysis particularly emphasizes the time dimension of infection risks and thereby their relationship with other health risks experienced in more familiar occupational and consumer settings.
This approach readily shows that the fatality risk to self and living partners, which may include an elderly person, for one day taught in person by the average nonelderly K–12 teacher during the fall 2020 term was comparable to the risk of driving 18 miles alone in a car . . .
The world’s best bureaucrat.” Those are the words that New York magazine used to describe Federal Reserve chairman Jay Powell in October 2020. And they were right to say so. Under Powell’s chairmanship, GDP has grown by more than 10 percent, and the U.S. has seen a rapid recovery from the pandemic with actual GDP now equaling neutral GDP. Indeed, most sensible observers ought to agree that this record has earned him a reappointment as Fed chairman.
It should come as no surprise, then, that three members of the “Squad” — Representatives Alexandria Ocasio-Cortez, Rashida Tlaib, and Ayanna Pressley — have called on Joe Biden to find someone else to do the job.
Why? Because Powell hasn’t done enough to address climate change and racial inequality. To be sure, these are important issues, but effectively adding them to the Fed’s mandate would almost inevitably spur more partisan involvement in monetary policy, the consequence of which would be a severe blow to its independence . . .
There were few surprises in Gary Gensler’s first appearance before the Senate Committee on Banking, Housing, and Urban Affairs as Securities and Exchange Commission chairman last week. Anyone who has been following the SEC’s agenda over the past five months could have scripted his testimony, right down to the folksy metaphors. We heard, once again, that Gensler is a “Rom Com” guy, when he compared the dangers of artificial intelligence in trading apps to Netflix’s recommendation algorithm. We also heard numerous references to his father, who was a hard-working small-business owner. But the biggest takeaway from Gensler’s wide-ranging testimony was his commitment to the ambitious and aggressive agenda that he has set for the SEC.In opening remarks, Senator Pat Toomey (R., Pa.) highlighted a number of areas in which Gensler’s agenda pushes the agency beyond its authority, restricts investor freedom, and hampers innovation. But a frank line of questioning from Senator John Kennedy (R., La.) about corporate disclosures on environmental and social issues more succinctly captured the crux of the debate:
“Senator Kennedy: As to the people and the companies that you regulate as chairman of the SEC, do you consider yourself to be their daddy?
SEC Chairman Gensler: No. No. (laughs)
Senator Kennedy: Then why do you act like it?” . . .
In a bombshell announcement this week, Lithuania’s defense ministry announced that people should toss their Chinese cellphones: According to a report by the ministry’s cybersecurity division, devices sold by Xiaomi, a major Chinese smartphone company, are packaged with software that censors 449 phrases about sensitive political topics, including those pertaining to Tibet, Taiwan, and democracy.
There’s a broader story here about how this fits into Lithuania’s newly central role in resisting Chinese authoritarianism; the tiny Baltic country has thrown itself to the front lines of the resistance against the Chinese Communist Party’s assault on democracy. In just over a few weeks, Lithuania, like Australia and Taiwan, has transformed itself into a chief opponent of the Chinese Communist Party — and, incredibly, it’s done so from Eastern Europe.
But this news is important for an additional reason. Thanks to a recent court ruling, Americans can continue to invest in Xiaomi, despite its ties to the Chinese party-state as it exports its censorship regime around the world . . .
When funding infrastructure, federal elected officials do not start by asking, “What projects need to be done?” Instead, they ask, “How much money should we spend?”
Then, through a process that amounts to little more than a parlor game, they decide on a giant number — say, 550 billion. They put a dollar sign in front of it and divvy it up in legislative text. (You Are Here.) They pass it and have a great big signing ceremony where they pat each other on the back for all the great infrastructure they have “created.”
Now, state transportation officials — who are the most knowledgeable on what is actually needed and have heretofore been taking the back seat in this process — have to figure out which projects get funding. Again, the incentive is to throw every project at the wall and see what sticks. Forecasts are part of this process. So if you’re a consulting company putting together a forecast, and you want a project to get built, what do you say? You say that the project is essential because tons of people would use it in ten years. There are no downsides to that approach. The project is more likely to get built. If your forecast is right, you look smart. If your forecast is wrong, nobody will blame you because it was just a forecast, and predictions are hard . . .
Scott Lincicome’s newsletter for The Dispatch yesterday was about the shipping crisis currently taking place in America. He emphasizes two things that are important to remember about the problem.First, shipping is a global industry, but this crisis is largely an American problem. “According to the 2020 World Bank/HIS Markit ‘Container Port Performance Index,’ for example, not one U.S. port ranked in the top 50 global ports in terms of getting a ship in and out of a port,” Lincicome writes. “The highest ranked U.S. port (statistically) was Philadelphia at 83, with Virginia close behind at 85 and NY/NJ at 89. Oakland came in at 332, while LA/LB [Los Angeles/Long Beach] ranked a dismal 328 and 333, respectively.”
Why are our ports so far behind? Not because we don’t spend enough on infrastructure, as the Biden administration would have you believe. The federal government could spend a quadrillion dollars on ports, and it wouldn’t change the contracts with longshoreman unions that prevent ports from operating 24/7 (as they do in Asia) and send labor costs through the roof. (Lincicome finds that union dockworkers on the West Coast make an average of $171,000 a year plus free health care.) The unions also fight automation at American ports today, “just as they fought containerized shipping and computers decades before that,” Lincicome writes . . .
Jacques de Larosière and Steve Hanke:
After 13 months in limbo, Lebanon finally formed a government on September 10. It is led by Najib Mikati, a billionaire and veteran politician. As prime minister, Mikati faces the daunting task of bringing Lebanon’s economy back from the dead.
Lebanon’s death spiral began two years ago. After being pegged to the U.S. dollar at a rate of 1,507.5 for 22 years, the Lebanese pound’s peg broke, and a currency crisis erupted. As the pound plunged — eventually shedding 92 percent of its value against the dollar — inflation surged. In late July 2020, Lebanon became the first country in the Middle East ever to experience a bout of hyperinflation, with the monthly inflation rate hitting 53 per cent. Caught in the midst of the currency storm, banks became insolvent, and the economy collapsed. In a futile attempt to keep a lifeline of imports flowing, the central bank devised a concoction of multiple exchange rates. This massive import subsidy scheme drained over half of the central bank’s foreign-exchange reserves in two short years. What should Mikati do?
He could proceed conventionally by dusting off the government’s April 2020 recovery plan. Its centerpiece was a more flexible exchange-rate regime coupled with capital controls and foreign loans accompanied by conditionality. But when introduced during currency crises in countries that suffer from weak institutions and endemic anomie, such systems have a poor record. In Lebanon, failure would be guaranteed, mirroring Argentina’s recent experiences . . .
Veronique de Rugy:
In a new study published by the Club for Growth Foundation, Dan Mitchell and Robert O’Quinn assess the macro-economic effects of President’s Biden’s “Build Back Better” agenda to expand the welfare state.
Their study summarizes a lot of scholarly academic research on the negative relationship between the size of government and economic growth. They also look at studies published by establishment organizations such as the International Monetary Fund (IMF), World Bank, Organization for Economic Cooperation and Development (OECD), and the European Central Bank (ECB) to further document the negative effects of higher government spending on economic growth.
The authors apply a recent CBO study showing that ten-percentage-point increase in government spending as a percent of GDP would reduce real GDP growth rate by 1.1 percent per year. They then apply those findings to Biden’s proposal, which the Committee for a Responsible Federal Budget estimates — once budget gimmicks are eliminated — would cost $5.48 trillion instead of $3.5 trillion over ten years . . .
On Wednesday, Eric Levitz of New York Magazine took a bold stance in defense of President Biden’s massive American Families Plan (AFP): “$3.5 Trillion Is Not a Lot of Money.”
$3.5 trillion comes out to $27,247.74 for every household in the United States. When you add to that $3.5 trillion the $550 billion in new infrastructure spending Democrats have also proposed and the $1.9 trillion they already spent on COVID relief in January, the per-household cost rises to $46,321.17. The Congressional Research Service calculated in 2010 that the entire cost of the Second World War, in fiscal-year 2011 dollars, was $4.1 trillion. Democrats want to enact $5.95 trillion in new spending in just this year.
Now, I give Levitz credit for not just hiding behind the pretense that Democrats are doing something routine. “If passed in its current form,” he writes, “the reconciliation package would be the largest expansion of the American welfare state in half a century.” His fundamental argument, however, is a double-edged sword. Levitz complains that the $3.5 trillion number is artificially made to sound huge by the fact that congressional budget rules require an estimate of a proposal’s cost over ten years, so that an annual layout of $350 billion turns into $3.5 trillion. That is true: Democrats are not proposing a one-time, immediate $3.5 trillion layout in 2021. But it also underlines what Democrats are trying to do here: With a 50–50 Senate, a 220–212 House majority, and an unpopular president who was elected to just not be Donald Trump, they want to enact a permanent expansion of the federal budget that no future Congress will be asked to reauthorize . . .
Persistent inflation could be avoided, but between the passage of the $1.9 trillion American Recovery Plan and the pending $1.1 trillion “bipartisan infrastructure” bill and the Democrats’ planned $3.5 trillion spending bill, it is hard to be optimistic. The only question is whether Congress will oblige.
Carter, on the other hand, nominated Paul Volcker to chair the Federal Reserve. While there are disagreements as to why he did this, there is not too much dispute that he knew that Volcker would take a tough line on inflation, which he quickly proceeded to do. Biden remains oddly indifferent to the risk of inflation. Hopefully, Congressional Republicans and Democratic moderates such as Joe Manchin (D., W.Va.) and Kyrsten Sinema (D., Ariz.) will thwart Biden’s spending ambitions.
As if the scales were already not tilted in Carter’s favor relative to Biden’s (at least to date), the starkest differences between the two can be found in the area of economic regulation. On this transformative issue not only was Carter much better than Biden, but he may be one of the most notable deregulatory presidents in modern history. He’s almost certainly the most unexpected . . .
Capitalism at Work
We continue to fight COVID-19 and its variants, but the rapid development of vaccines last year put us on the offensive against the disease. Vaccines from Moderna of Massachusetts and BioNTech of Germany have led the way, with 360 million doses delivered in the United States to date. (BioNTech teamed with Pfizer for the manufacturing and distribution of its shot.)
The federal government expedited drug approvals and helped to fund the vaccine roll-out. But how were Moderna and BioNTech able to design and deliver highly effective vaccines so quickly — in months, rather than the years it usually takes for vaccines?
The answer is that the two companies had been working on the mRNA technologies behind the vaccines for a decade, and they were supported by more than $3 billion of private capital. Moderna’s and BioNTech’s vaccines are a triumph of the biotechnology industry and of the venture capitalists and wealthy angel investors who fund it . . .
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