Sooner or later, I will have to write something more detailed about the supply-chain mess, but for now, please note what NR’s Dominic Pino has been writing on the subject (see below). I’ll just note one early concern about the pandemic’s prolonged lockdowns. The worry, which I shared, was that those in charge overestimated the ease with which economies could be switched off, and then back on. That was never likely to be an easy task, and — this shouldn’t have been hard to work out — the longer the period of disruption, the more difficult it becomes to put everything back together again. An economy operates through an immensely complicated web of connections. Tear a hole in that web, and then leave it there for a while, and it becomes exceedingly difficult to fix. Knowing that helps understand what we are seeing now.
But back to the energy crisis, the topic that has filled significant portions of the last four five Capital Letters, and is not going away anytime soon.
Let’s start with Britain. Under the Conservative party, it has combined climate fundamentalism with a remarkable insouciance about energy security. The results should serve as a warning to the rest of the world. Climate fundamentalism was embraced by almost all Britain’s entire governing class. But the reckless implementation of the country’s overall energy policy is the responsibility of the Tories, who were in office throughout the relevant period. If the lights go out or the factories are forced into short-time working or worse (there have been instances where they already have been), the Conservatives deserve the brunt of the blame.
Liam Halligan, writing in the Daily Telegraph:
As the nights draw in and temperatures drop, a shocking lack of gas storage and creaking nuclear capacity means the UK really faces the prospect at least of outages. Spiralling energy prices are causing much apprehension not just on the domestic household front, but among businesses too – not least as there is no energy price cap for companies . . .
Amid all the obvious downsides of this energy price spike, one upside is that our politicians – ahead of next month’s COP26 summit in Glasgow – will surely have to start being more honest about the cost of meeting their ambitious decarbonisation targets.
On the contrary, they will merely take their evasions to the next level.
Just to put that “shocking” lack of storage into proportion, Ben Wright, also writing in The Daily Telegraph, explained how a vast gas-storage facility was closed down, not least thanks to the Tories’ refusal to provide enough financial backing to keep it open, an act of astonishing irresponsibility:
Germany, Italy, the Netherlands and France all have gas storage capacity equivalent to between 25pc and 37pc of their annual consumption. The UK’s storage capacity is equivalent to just 2pc of what we burn each year.
These countries realise that a growing reliance on renewable energy has, paradoxically, resulted in a growing dependence on gas to provide power when the wind’s not blowing and the sun’s not shining.
Back to Halligan (my emphasis added):
It was [then Conservative prime minister] Theresa May who made a unilateral and legally binding commitment the UK could reach net zero carbon emissions by 2050 – without any real idea of how that would be achieved or paid for.A Treasury review of the costs of this immense undertaking has been delayed for months.
Yet this huge commitment clearly involves an almighty social and economic shift – with the burden of change most likely to be shouldered overwhelmingly by ordinary people. By 2030, new petrol and diesel vehicles will be banned – but electric cars typically cost 50pc more than their petrol equivalents.
Gas boilers are to be ripped out and replaced by electric heat pumps – the bill for each of those will be £10,000 or perhaps £15,000, and then they cost more to run.
Renewable energy, meanwhile, is hugely subsidised, which has long caused fuel bills to rise. Yes, it’s to the UK’s credit around two-fifths of our energy now comes from a combination of wind, solar, biomass and hydro. Yet energy regulator Ofgem says 23pc of what households pay for electricity now goes on “environmental and social costs” – suggesting the COP26 agenda [COP-26 is the forthcoming climate jamboree scheduled for November in Glasgow]is adding to higher bills, making this energy crunch even worse.
As Halligan points out, add soaring energy costs to the supply-chain debacle, the rising cost of certain materials (something that owes a lot to higher energy costs) and a weakening pound, and U.K’s inflation outlook is beginning to look very bleak indeed.
And here’s another glimpse of Boris Johnson’s Britain.
Rail freight operators are having to mothball their electric locomotives and switch back to diesel trains, which are slower and cause more pollution, because of the unfolding energy crisis.
The logistics firms say a surge in wholesale energy prices and an increase in the track access charges they pay has made the low-carbon trains uneconomical to operate.
Writing in The Spectator, Seb Kennedy explains why the natural-gas price has been spiraling up still further, and not just in the U.K.
[A couple of weeks ago], Xi Jinping’s government raised the stakes by ordering its state-owned energy companies to secure winter supplies ‘at all costs’, in effect declaring a global bidding war for increasingly scarce seaborne cargoes of liquefied natural gas (LNG) and thermal coal . . .
China has been in crisis for several weeks now, leading to power-rationing for industrial consumers and blackouts in some residential areas . . .
Initially, the Chinese government responded by ordering factory closures (or four-day weeks) and calling for homes and offices to limit use of heating and cooling systems. Emergency coal mines [oh!] have been opened to feed the many thousands of furnaces across northern China that keep residential tower blocks warm, factories running and power grids energised throughout the darkest, coldest months of the year.
A Chinese state mandate to outbid other gas and coal importers will have especially wide-reaching repercussions in the UK and Europe, which rely on secure and affordable imports of gas and coal to keep their economies running too. China’s three state energy giants — PetroChina, Sinopec and CNOOC — can pay more than publicly traded western energy suppliers that are constrained by market economics and, in the case of the UK, the ‘energy price cap’, which prevents costs being passed on to end consumers. If there is to be an energy war, China starts with a huge advantage . . .
Unfortunately for governments, ballooning wholesale gas and power prices show no sign of deflating. Gas futures in the UK and EU are trading at record levels…Imports of globally traded LNG into north-west Europe are much lower than usual. Why? Because the ships sail towards the highest bidder and Asia always pays more. China, Japan, South Korea and Taiwan have far less gas storage capacity than Europe, so their state-backed energy suppliers fork out to avoid running out. A painful reality is that north-west Europe is the market of last resort for LNG. Those huge oceangoing vessels carrying enormous payloads of gas chilled to liquidform will always follow the money . . .
As wholesale gas prices surged in Europe, utilities began switching back to cheap, dirty coal for power generation [oh!]. This meant utilities have had to buy more EU carbon allowances, which drove up the price of carbon, pushing electricity prices even higher . . .
It is no secret that the decision by Europeans to move away from fossil fuels has been something of a strategic gift to Moscow, and Vladimir Chizhov, Russia’s ambassador to the EU, was unable to resist making a few pointed observations to the Financial Times:
While rejecting assertions from European lawmakers that Russia had played a role in Europe’s gas crunch, Chizhov said Europe’s choice to treat Moscow as a geopolitical “adversary” had not helped.
“The crux of the matter is only a matter of phraseology,” he said. “Change adversary to partner and things get resolved easier . . . when the EU finds enough political will to do this, they will know where to find us.”
Mr. Chizhov, I think, was having rather too much fun at this point.
The Financial Times:
Chizhov said he believed the commission [the EU’s bureaucratic arm], whose flagship renewable energy reform initiative aims for the bloc to achieve net zero emissions by 2050, was “underestimating the future role of gas” as a European energy source.
“Until mankind finds a way to store energy in a sizeable manner, all those propellers and solar panels will not become a decisive factor,” he said.
“All those propellors.”
Chizhov may have been having way too much fun, but he was not wrong. Perhaps the Europeans should have thought twice about handing the Russians quite such an advantage, an advantage that will increase unless Europeans can credibly commit to gas production (gas may be a “bridge” fuel, but the bridge will have to be a long one if investment in production is to pay off), gas storage (it’s encouraging that a large new facility may be on the brink of approval in Northern Ireland) and nuclear energy. Renewables will, for the reasons that Chizhov gives, simply not do the trick until the storage issues have been resolved. Decarbonizing energy was never going to be easy, but by rushing into it prematurely, the Europeans have made it an even more difficult task than it would otherwise have been.
Here and there, however, there are signs that some common sense may be beginning to break through.
President Emmanuel Macron has said France will invest €1bn in nuclear power by the end of this decade as Europe’s energy crisis spurs renewed interest in the contentious source of power.
“The number one objective is to have innovative small-scale nuclear reactors in France by 2030 along with better waste management,” he said while announcing a “France 2030” investment plan on Tuesday.
France is a bastion of nuclear power in Europe, with more than 70 per cent of its electricity derived from nuclear plants. However, after the disastrous 2011 explosion at a plant in Fukushima, Japan, and big cost overruns at a new plant in Flamanville, north-west France, national pride around France’s nuclear capability eroded.
Early in his presidency Macron announced the intention to shut 14 reactors and cut nuclear’s contribution to France’s energy mix from 75 to 50 per cent by 2035.
But the mood has now changed. Macron said on Tuesday he would begin investing in new nuclear projects “very quickly” . . .
Approval of nuclear plants is also a way for Macron to show his pro-nuclear credentials when a number of his most likely challengers in next year’s presidential election are pushing for more investment.
“Nuclear is coming [back] to the fulcrum of the energy debate in France and much faster than I ever thought it would,” said Denis Florin, a partner at Lavoisier Conseil, an energy-focused management consultancy.
Advocates say nuclear power’s availability and predictability has proved its worth at a time of soaring gas prices — while renewable energy remains volatile and difficult to store. Those advantages, which have protected French industrial companies and consumers from the most severe price hikes seen in other parts of Europe, have begun to outweigh lingering safety concerns.
And note this:
France also wants nuclear energy to be labelled as “green” in the evolving EU green finance taxonomy that determines which economic activities can benefit from a “sustainable finance” label. France and eastern European capitals want to show investors that nuclear energy is part of the EU’s journey towards carbon neutrality, while Germany and others have resisted, pointing principally to the environmental impact of nuclear waste.
Within the EU, more countries will probably soon be aligning themselves with France, which is currently supported by Finland, Croatia, Romania, Poland, Hungary, Slovenia, Slovakia, Bulgaria and the Czech Republic, starting probably with the Estonians, a practical bunch of people, despite the fact that they are generally reluctant to diverge from Germany’s line.
And yes, the words “green finance taxonomy” are a small reminder of how climate policy and central planning are inextricably linked.
Meanwhile, these new polling data could also be, so to speak, straws in the wind:
While a recent opinion poll by Odoxa found that the French public is still on the whole more favourable to wind power than nuclear, at 63 per cent compared with 51 per cent, French citizens’ support for nuclear has increased 17 percentage points over the past two years, while positive perceptions of wind power have decreased by the same amount.
According to the same survey, nuclear power is judged to be less expensive than wind and less damaging to the landscape, as well as being a field in which France is “more advanced than its neighbours”.
Sixty-seven percent of respondents also were of the view that nuclear is more efficient than wind. As the events of the last few months have shown, that is being very, very generous to wind.
Macron’s proposed new “mini-reactors” — which would be less complex to produce and run than conventional reactors — would also help to maintain France’s industrial competitiveness given that prototypes are already being developed in China, Russia, the US and Japan.
Several analysts believe Macron will go deeper into nuclear technology through the construction of at least six conventional European pressurised reactors (EPRs), to be built by 2044 — a project the government has considered for years. Documents obtained by the French press in 2019 suggested those would cost France’s heavily indebted EDF roughly €47bn . . .
For those who have spent years advocating greater investment in renewable energy sources, and who thought they had the president’s ear, the mounting momentum towards nuclear has come as a disappointment.
“Every euro invested in nuclear is a euro not invested in other energies,” said Matthieu Orphelin, an MP who used to represent Macron’s party but has now switched to France’s Greens. “A permanent, headlong rush into nuclear power will not save us.”
And Europe’s headlong, heedless rush into renewables will?
Meanwhile, the price dislocation (I’ll stick with a euphemism) caused by European climate policy is unlikely to be, to borrow a popular (if unconvincing) adjective, particularly “transitory.”
Europe’s attempts to be a global leader on climate change have arguably fed into the wider changes in the market. They have pushed the fast-growing economies of Asia to move away from coal, only to find that countries such as China and India are now rivals for the same supplies of LNG that Europe has come to rely on from countries such as the US and Qatar.
The gas industry used to operate almost entirely on point-to-point pipelines that kept regional competition to a minimum. The rapid growth of the LNG industry means seaborne cargoes have now created something more akin to a global market similar to oil.
“Every year China connects up to 15m homes in its coastal cities to the gas grid — that’s like adding a Netherlands and a Belgium worth of demand every year,” says Henning Gloystein at Eurasia Group, a consultancy. “So when it gets cold in China the gas price goes up in the UK and Germany.”
The FT also quotes Tom Marzec-Manser of ICIS, a consultancy, as saying that wholesale prices will not fall back to the pre-COVID years, at least until the summer of 2023.
Transitory.
And increases in the cost of energy have a way of being reflected elsewhere.
Canned drinks, smartphones and cars could cost more after the energy crisis sent the price of aluminium soaring to a 13-year high.
Industry figures have warned that costs faced by aluminium producers are rising so rapidly that they have little choice but to pass them on to companies further down the supply chain.
It means a host of goods – including everything from cans to tools, electronic gadgets and vehicles – become more expensive to make.
Making aluminium is particularly energy-intensive, leading some in the industry to dub it “solid electricity”.
And keep an eye on zinc.
S&P:
Belgium-based Nyrstar, one of the world’s largest producers of zinc, is to further cut production by up to 50% at its three European smelters from Oct. 13 due to the surge in energy prices, the company said.
The fiasco in Europe, and particularly in the U.K., is a masterclass in how not to tackle a climate-driven energy transition. Whether the Biden administration will pay any attention to the implications of this has yet to be seen. Early indications are not encouraging, which should alarm energy consumers in this country. That said, I suspect that politics may soon start to intrude if voters start to focus on what the administration’s plans could mean for the cost and the reliability of their energy supply.
When it comes to the overall cost that the U.S. may be facing, Bjorn Lomborg went through some interesting numbers in the Wall Street Journal the other day:
The annual cost of the promises to which President Obama signed on under the Paris climate agreement would have hit roughly $50 billion in 2030, or about $140 per person. Many studies show Americans are willing to pay a couple of hundred dollars a year to remedy climate change, but this data is highly skewed by a small minority willing to spend thousands of dollars. A recent Washington Post survey found that a majority of Americans would vote against a $24 annual climate tax on their electricity bills. Even if they’d hand over $140, it’d buy them little. If Mr. Obama’s agreement were sustained through 2100, it would reduce global temperatures by a minuscule 0.06 degree Fahrenheit.
President Biden is pushing much stronger climate policies with much higher price tags. Before his election, he promised to spend $2 trillion over four years on climate policies—equivalent to $1,500 per person per year. And Mr. Biden’s current promise—100% carbon emission reduction by 2050—will be even more phenomenally expensive.
A new study in Nature finds that a 95% reduction in American carbon emissions by 2050 will annually cost 11.9% of U.S. gross domestic product. To put that in perspective: Total expenditure on Social Security, Medicare and Medicaid came to 11.6% of GDP in 2019. The annual cost of trying to hit Mr. Biden’s target will rise to $4.4 trillion by 2050. That’s more than everything the federal government is projected to take in this year in tax revenue. It breaks down to $11,300 per person per year, or almost 500 times more than what a majority of Americans is willing to pay.
Although the U.S. is the world’s second-largest emitter of greenhouse gasses right now, America’s reaching net zero would matter little for the global temperature. If the whole country went carbon-neutral tomorrow, the standard United Nations climate model shows the difference by the end of the century would be a barely noticeable reduction in temperature of 0.3 degree Fahrenheit. This is because the U.S. will make up an ever-smaller share of emissions as the populations of China, India and Africa grow and get richer.
As Indian Power Minister Raj Kumar Singh blurted out during a recent climate confab, net zero is a “pie in the sky,” and “you can’t stop” developing countries from using more and more fossil fuels. A realistic climate solution would instead focus on innovation to bring down the price of cleaner energy to one both American and Indian voters are willing to pay.
And to return to geopolitics, the New York Times reports:
President Biden has effectively accepted the idea that the United States will rely more on foreign oil, at least for the next few years. His administration has been calling on OPEC and its allies to boost production to help bring down rising oil and gasoline prices, even as it seeks to limit the growth of oil and gas production on federal lands and waters.
What could go wrong?
In the meantime, it has, however, been clear for some time that the U.S. will not be spared more expensive energy prices (check out where gasoline prices and natural-gas prices now are and what’s going on in the oil market), although the economic toll will be less than elsewhere. Not helping, however, is this little twist (via the Financial Times):
The number of rigs drilling for new oil and gas wells, a key indicator of industry health, has grown steadily to 533, nearly double what it was this time last year, according to oilfield services company Baker Hughes.
But as the industry has tried to expand again it is running into the kinds of supply chain and labour problems bedevilling consumer brands such as McDonald’s, Ford and Walmart, raising costs and lifting the oil price at which a producer can break even.
Rystad’s Abramov [Artem Abramov, head of shale research at Rystad Energy] said the price to profitably drill a typical well in Texas’s Permian Basin, the nation’s largest producing region, could rise from about $50 a barrel to $55 a barrel next year.
A Federal Reserve Bank of Dallas survey of more than 100 oil and gas producers and oilfield services groups last month found that companies were struggling to find workers and coping with delayed and more expensive deliveries of equipment and materials.
Input costs reported by oilfield services firms were at a record high, the Dallas Fed said, while an index of supplier delivery times almost doubled between the second quarter and the third.
Meanwhile, it is instructive to read (via Bloomberg) that “U.S. power plants are on track to burn 23% more coal this year, the first increase since 2013.” Coal will supply about 24 percent of U.S. electricity this year, a statistic that will annoy Bloomberg’s proprietor. A disclosure at the bottom of the story reads:
Michael Bloomberg, the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News, has committed $500 million to launch Beyond Carbon, a campaign aimed at closing the remaining coal-powered plants in the U.S. by 2030.
Fine, but the broader lesson from Europe is that shutting down reliable capacity without providing for reliable substitution (and, beyond a certain point, renewables do not offer that reliability) is not the way to go. To close coal plants at the same time as discouraging new development of cleaner fossil-fuel reserves is, if analogies with the European experience hold, an invitation to disaster.
But some, perhaps most, climate fundamentalists see spiking prices as evidence that the energy transition has proceeded too slowly rather than too quickly. And many more mainstream climate policy-makers appear to see no reason for a change of course.
Thus Reuters reports:
High energy prices should not be used as an excuse to slow the transition to clean energy sources to fight climate change, Swedish Finance Minister Magdalena Andersson, who heads the International Monetary Fund’s steering committee, said on Thursday.
There’s just the faintest echo there of the mid-20th-century idea that a little hunger was no reason to slow the transition to collectivization.
Writing in The Spectator, Rupert Darwall has the same thought, but more so:
In economic terms, aggressive decarbonization is the closest democracies will come to the forced collectivization of the communist bloc. It requires the deployment of coercive state power on a scale and intrusiveness exceeded only by emergency COVID lockdowns and mandates, but lasting for decades.
On that happy note, I’ll be traveling in the latter part of the coming week, so there will be no Capital Letter to bring gloom to that weekend. However, the energy crunch will still be with us when the next edition is written. And so will the supply-chain problems. And so will inflation. Good times.
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 39th episode, David is joined on Capital Record by Bob Doll, longtime chief equity strategist at prestigious Wall Street firms such as Merrill Lynch, BlackRock, and Nuveen, and is now the chief investment officer at Crossmark Global Investments. Bob spent 40 years on Wall Street as a man of faith, virtue, and values, and experienced all the success and adversity that can go along with such a long-term journey. He has a lot of wisdom and experience to impart to us, and he does so today on the Capital Record.
The Capital Matters week that was . . .
Housing
The Fed has conducted monetary policy with single-minded focus on recent employment data, especially for disadvantaged minorities. The great obstacle for disadvantaged employees is the “last hired, first fired” syndrome. While the Great Financial Crisis recovery was all too slow thanks to misguided big-government policies, it was steady and continued for more than ten years, which enabled the “last-hired, first fired” to get and keep jobs. (That, in turn, led to record pre-pandemic employment among this group.) The Fed has plenty of latitude to maintain stimulative monetary policy while disinflating bubble values and their attendant stability risks. Monetary policy has caused this bubble, and only monetary policy will cure it. The Fed’s September “taper” announcement may be an indication that they recognize that fact. We must hope it’s not too late. As distinguished late historian Herbert Stein is famous for saying, “if something cannot go on forever, it will stop.” History informs us that current home pricing cannot go on forever.
Trade
Free trade has become a politically homeless idea, supported by neither party with any great eagerness. Trump opposed the idea of free trade and now Biden shows signs of following in his footsteps. But Biden–Trump protectionism is a dead end. The U.S. should recommit to the idea of global free trade within fortified rules of the game. Focusing on our strengths will increase prosperity and U.S. competitiveness abroad. Tariffs and other trade restrictions are much easier to impose than to eliminate, and they eventually must be eliminated if the American economy is to flourish. Any attempts to loosen trade restrictions are admirable, but the difficulty of those attempts should caution against implementing them in the first place.
Health Care
While trying to sell the ACA to the American public more than a decade ago, its proponents decried insurance-company practices and cast insurers as the villains. In stark contrast to the rhetoric, insurers have flourished under the ACA from massive new federal subsidies — both for the exchanges and through Medicaid expansion — and increased regulations allowing them to collect more premiums. The health-care components in the reconciliation bill represent the sequel and, if enacted, will be another gift from congressional Democrats to health-insurance companies. In this legislation that is full of bad programs and policies, the $600 billion of increased subsidies to health insurers are among the worst and should be among the first to go when choosing what to cut.
Cryptocurrency
We do not wish to claim that crypto is devoid of innovation, but to cut some of the more breathless claims about it down to size. Many sophisticated entities are experimenting with crypto and its associated technologies, and surely that experimentation will turn up interesting use cases. But no aspect of cryptocurrency technology is such a fundamental advance in the provision of money or payment services that it deserves to be regulated differently than the money-creation and payment activities of banks. If anything, crypto’s incredible capacity for reinventing wheels should enhance our appreciation for the economic, legal, and social technologies of fiat money, banking, capital markets, and prudent regulation.
Tech
Twitter has suspended several accounts operated by a Canadian publisher critical of the Chinese Communist Party’s foreign-influence operations around the world.
Dean Baxendale, the president of Optimum Publishing International, told National Review that the company last Wednesday suspended six accounts affiliated with his business — Optimum’s main account and those promoting five of its books. Despite his repeated inquires, Twitter has not yet provided an explanation for the suspensions, Baxendale said.
The suspensions follow a worrying pattern set by Twitter, which took similar temporary action against a prominent expert on China’s foreign-influence operations earlier this year. At the time of this writing, a spokesperson had not responded to National Review’s request for comment . . .
Antitrust law is supposed to protect competition, not individual competitors.
It’s no secret that Big Tech is attracting antitrust scrutiny around the world. Regulators are ready to break up and restructure prominent companies such as Google, Amazon, and Facebook over what they deem to be monopolistic behavior. But their approach appears to reveal a warped understanding of antitrust itself, focusing on size and competitors rather than on consumers. As a result, current tech-related antitrust actions intend to use regulation as a device to redistribute power and profit . . .
ESG
When it comes to the world of environmental, social, and governance (ESG) investing, we’ve become used to Panglossian headlines about how every new development only strengthens the case for groups such as Michael Bloomberg’s Sustainability Accounting Standards Board and Klaus Schwab’s World Economic Forum. Institutional messaging is suffused with assumptions that corporate regulation will inevitably march leftward. But recent developments in energy markets and outlook — driven by the very policies pushed by ESG advocates — may signal a coming crack-up among the responsible-investing crowd.
There’s no shinier jewel in the woke corporate crown than the fight against climate change, and the success of ESG frameworks around the world are likely to be judged by how much they move the needle on related policy. The Securities and Exchange Commission, for example, is expected propose rules on climate-change disclosure for public companies soon. That will almost certainly be only the first salvo, however, in a planned fusillade of rules meant to erect a “comprehensive ESG framework” covering everything from racial justice and fair trade to “inclusive” health-care benefits and sex-based quotas for board membership. Climate, being the alleged existential emergency, will serve as the dependable packhorse that will draw the rest of the corporatist wagon behind it . . .
China
China’s most loyal and lucrative partner is not a foreign government or national leader. It’s a group of multi-national businesses, Hollywood elites, ivory-tower intellectuals, weak-kneed diplomats, and entrenched bureaucrats located here in the United States. This group has championed economic integration and appeasement for decades, relentlessly demanding that America forgive every act of aggression committed by the Chinese Communist Party (CCP), no matter the cost to the American people. Some in this group are drunk on Chinese money, and some are blinded by a naïve hope that China will moderate. But all live in fear of CCP reprisal.
Now, this “China Lobby” has a new leader: Joe Biden’s secretary of Commerce, Gina Raimondo.
Secretary Raimondo recently stated that she thinks “robust commercial engagement will help to mitigate any potential tensions [with China].” This is simply wrong, and has been for over a quarter century . . .
Southwest Airlines
Southwest’s problems the past few days were not caused by imposition of a vaccine mandate. They seem to be the consequence of a long series of business decisions in response to the pandemic recovery that didn’t work out as well as planned, with bad weather mixed in for good measure.
Shutting a complex system down is much easier than starting it back up. We’ve seen this dynamic across the economy as the patterns of specialization and trade that were so routine before the pandemic have been upended and reconstructed. The Southwest debacle is only the latest example of this recurring phenomenon as businesses and consumers do what they can to get back to normal . . .
Unemployment
The increased fiscal transfers go far beyond enhanced unemployment benefits. Since April 2020 there have been three rounds of large stimulus or relief checks mailed to households, and starting this spring families with children have been receiving monthly government checks. Comparing the totals over the 17 months since April 2020 with the preceding 17 months, government transfer payments have increased by 47 percent and have accounted for over 30 percent of real personal income during this span. Thus, even though the enhanced unemployment benefits have ended, other policies are still making joblessness more attractive than it has been in the past.
Overall, the Biden administration’s shift in policy direction toward more expansive and universal benefits, without work requirements or other contingencies, has lessened the incentive to work. Many employers and market participants are still hopeful that the fall will bring a stronger labor-market recovery. But we now face the distinct possibility that policy changes will have turned the temporary upheavals of the coronavirus recession into persistent reductions in employment . . .
Supply-Chain Problems
The worsening supply chain issues plaguing the country do not have one single cause.
To get caught up, I urge you to read my colleague Dominic Pino, here, here and here to start. Two key points: “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… The pandemic merely immanentized a crisis that was long brewing. The problems we are now enduring won’t be solved by a pandemic-emergency stopgap measure. They require real changes to the way the industry works that will be difficult to design and implement and will encounter heavy resistance from interest groups that benefit from the status quo.” (Biden announced today that the Port of Los Angeles will indeed start operating 24/7.)
Pent-up consumer demand is increasing rapidly, and suppliers are struggling to keep up. Chinese ports are closing because of COVID-19, and they’re also dealing with rolling power outages, and they’re dealing with typhoons on top of that. Vietnamese ports and factories are dealing with COVID-19-driven shutdowns and slowdowns as well. (It would also help if cargo ship captains stopped trying to parallel park in the middle of the Suez Canal.)
There’s a lot that the Biden administration cannot control. There is no button in the White House that can make a lot more unionized heavy crane operators appear, or make Chinese ports open, or make shipping containers appear where they’re needed.
But the administration is far from blameless . . .
President Biden announced yesterday that the Port of Los Angeles, the busiest port in America, would begin to operate 24/7 to help alleviate the supply-chain constraints that are causing delays and increasing prices around the country.
Let’s hope this isn’t a temporary measure. Operating 24/7 is not extraordinary by global standards. The U.S. was the outlier for not running on nights and weekends. The port should continue to operate 24/7 simply as a matter of global competitiveness, regardless of the present logjam.
Biden’s action was a good use of the presidential bully pulpit, and it was refreshing to see the president do something other than promise to blow taxpayer money for a change. A zillion federal dollars won’t fix many of our port’s problems, which have more to do with unions and inefficient labor practices. Twisting the longshoreman union’s arm into agreeing to 24/7 hours is a step in the right direction, and it doesn’t add a line item to the federal budget.
It is only a step, though . . .
If there is one universally recognized principle in American political life, it’s that the president of the United States should want Christmas to come off without a hitch.
Surely, this is one of the reasons Anthony Fauci rapidly backed off his comment in an interview the other day that it’s too early to say whether people should gather for the holiday. No sooner had Fauci relented than the national focus shifted to an ongoing crisis of the global supply chain that is clearly going to crimp the Christmas shopping season, forcing the Biden administration to scurry to try to alleviate a long-running, highly complex mess . . .
With all the focus on America’s shipping delays, it’s easy to forget that the world’s biggest shipping backup is in southern China, not southern California.
That’s according to the Financial Times this morning, which reports that “a typhoon closed the ports [in Hong Kong and Shenzhen] for two days this week — but although weather often disrupts shipping, this just added to the problems from previous jams since the pandemic began. In August, a single Covid case paralysed a terminal for a fortnight in the major Chinese port of Ningbo, outside Shanghai.”
The waiting times for ships at U.S. ports are longer (seven to twelve days at Los Angeles/Long Beach and six to seven days at Savannah, compared to one to three days at Shanghai and Shenzhen), but there are more ships waiting at the Chinese ports, according to the FT. A lot more — 97 are currently waiting in Shenzhen, and 73 are waiting in Shanghai, compared to 53 and 20 at Los Angeles/Long Beach and Savannah, respectively . . .
Inflation
Another month, another higher-than-normal top-line inflation number. The Bureau of Labor Statistics reported today that the consumer-price index was up 0.4 percent in September over August, and the index is 5.4 percent higher than it was in September of last year. The monthly increase is 0.1 percentage points higher than the increase from July to August, and the annualized rate has been 5.4 percent for three of the past four months now. The plateau in the annualized rate is encouraging, but the plateau is at roughly twice the desirable rate of inflation.
The Biden administration says there’s nothing to worry about, and that could be cause for concern. As Jim pointed out today, they have a record of “arguing that the problem is not really a problem” on everything from the economy to Afghanistan to the border. The American people seem to be catching on to the administration’s general incompetence, and their word is not deserving of our trust . . .
The administration is, as we speak, campaigning to cram through a welfare-state bill that could dump another $5.5 trillion into the economy. What justification is there for unprecedented spending when inflation is accelerating? Democrats have already passed an additional $4 trillion in expenditures in the first six months of the Biden administration, and the economy is still underachieving.
When asked whether he believed that passing another colossal spending bill would exacerbate the problem, the same president who contends that his $5.5 trillion welfare-state expansion bill costs “zero” argues that more spending would “reduce inflation, reduce inflation, reduce inflation.”
Biden has waved away inflation concerns on numerous occasions, once arguing that “no serious economist” was suggesting that “unchecked inflation” was on the way. This was four months ago. We are now in our sixth month of historic spikes. I’m not sure if Biden considers Larry Summers, former treasury secretary for Bill Clinton and Barack Obama’s National Economic Council director, a serious economist, but Summers seems to believe runaway inflation and bottleneck supply-chain problems pose a serious risk to the economy . . .
Spending
At the heart of the liberal disregard for fiscal restraint is the idea that because Republicans passed the Trump tax cuts in 2017, passing a raft of new social-welfare programs now is perfectly responsible. While it is undeniable that Trump-era Republicans were profligate, it’s worth noting that at the time of passage, the CBO estimated that the Trump tax cuts would increase deficits by $1.5 trillion over a decade. In March, Democrats passed a $1.9 trillion package billed as “COVID relief” and didn’t bother finding a way to pay for it. So even before setting out on their current spending push, Democrats already passed legislation that exceeded the Trump tax cuts.
This week, CBO further undermined the attempt by Democrats to blame tax cuts for our fiscal woes by revealing that in the 2021 fiscal year that just ended in September, federal tax collections soared. Specifically, this past year, the government collected $4.047 trillion in tax revenue, with corporate tax collections jumping 75 percent as the economy reopened. What’s amazing about that number is that in June 2017, the CBO projected that the government would collect $4.011 trillion in revenue in 2021. In other words, in the most recent fiscal year, the government raised $36 billion more than was expected before the Trump tax cuts were passed . . .
Tax
For years Ireland defended its low corporate-tax rate, 12.5 percent, as a matter of national sovereignty and part of an overall economic strategy that lifted the country out of poverty and into becoming one of the richer nations in Europe. The idea was to facilitate foreign investment in Ireland’s English-speaking workforce. American companies that wanted access to the European Union’s market did just that. Just a few years ago, government ministers there would call Irish taxation policy it a “red line” issue. Both parties currently running the government in Ireland ran on protecting Ireland’s tax sovereignty.
And then, a week ago, Ireland gave it up to join an OECD minimum-corporate-tax pledge of 15 percent. Irish media presented this as an inevitable evolution of the country’s position. They had to — there was hardly any debate about it in public at all. In September, the taoiseach, Micheál Martin, explained that a tax hike couldn’t be ruled out. Which was instantly translated by the island’s media as an assumption that a tax hike was inevitable. And because inevitable, probably good, yeah? . . .
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