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Wednesday, October 27, 2021
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Andrew Stuttaford

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Energy, Climate Policy, and Inflation

A woman walks her dog along Energy Street past a disused gas holder in Manchester, England, September 23, 2021. (Phil Noble/Reuters) The week of October 11: a grim cocktail (an energy crunch, inflation, and a supply-chain mess) and much, much more. 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. The Independent: 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. The Financial Times: 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.” The Financial Times: 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. The Daily Telegraph: 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 Douglas Carr: 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 Noah Gould:  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 Brian Blase:  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 Steve Hanke and Matt Sekerke: 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 Jimmy Quinn: 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 . . . Rachel Chiu: 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 Richard Morrison: 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 Tom Cotton: 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 Dominic Pino:  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 Noah Williams: 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 Jim Geraghty: 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 . . . Dominic Pino 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 . . . Rich Lowry: 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 . . . Dominic Pino: 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 Dominic Pino: 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 . . . David Harsanyi: 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 Philip Klein: 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 Michael Brendan Dougherty: 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? . . . To sign up for the Capital Letter, follow this link.

A Fundamental Millstone: Climate Policy and the Energy Crunch

Power lines near Ulm, Germany, in 2006. (Alexandra Beier/Reuters) 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. Mackintosh: 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. Bloomberg (Wednesday): 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 . . . Reuters (Wednesday): 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. The Economist: Over-50s, the most reliable voters, won’t be around to see the world boil. As I said, generally calm language . . . The Economist: 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. Seized! What are these nefarious “allies” doing? Bloomberg Green: 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. Bloomberg Green: 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. Bloomberg (Wednesday): 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. Oh. 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. #inline-newsletter-nloptin-616224ea4bf45 .inline-newsletter-subscribe__cta label { font-size: 1.2rem; line-height: 1.5rem; color: #000000; } #inline-newsletter-nloptin-616224ea4bf45 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-616224ea4bf45 { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-616224ea4bf45 .inline-newsletter-subscribe__email-submit { border-color: #e92131; background-color: #e92131; color: #ffffff; } #inline-newsletter-nloptin-616224ea4c0c4 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #000000; } #inline-newsletter-nloptin-616224ea4c0c4 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-616224ea4c0c4 { background-color: #ffffff; border-width: 1px; } #inline-newsletter-nloptin-616224ea4c0c4 .inline-newsletter-subscribe__email-submit { border-color: #eba605; background-color: #eba605; color: #ffffff; } #inline-newsletter-nloptin-616224ea4c13b .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #dd9933; } #inline-newsletter-nloptin-616224ea4c13b .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.5rem; color: #2d2d2d; } #inline-newsletter-nloptin-616224ea4c13b { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-616224ea4c13b .inline-newsletter-subscribe__email-submit { border-color: #dd9933; background-color: #dd9933; color: #ffffff; } #inline-newsletter-nloptin-616224ea4c1ac .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #0f733c; } #inline-newsletter-nloptin-616224ea4c1ac .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-616224ea4c1ac { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-616224ea4c1ac .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } 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.” Keep? Meanwhile: 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. Quite. 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.” Marlow: 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? QTWAIN. Bloomberg: 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 RecordWe 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 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 . . . EconomicsBrian Albrecht: 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 . . . SpendingDominic Pino: 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 . . . Sally Pipes: 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 . . . Dan Mclaughlin: 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 . . . Environmental PolicyKat Dwyer: 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? RegulationAndrew Stuttaford: 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 . . . Big TechMichael 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. Alan Reynolds: 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 . . . Charles Miller: 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 CeilingChristopher Russo: 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 . . . Philip Klein: 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 BillDominic Pino: 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 . . . TaxationSteve Hanke: 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 . . . InflationDominic Pino: 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 . . . BankingAvik Roy: 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 . . . To sign up for the Capital Letter, follow this link. Something to Consider If you valued reading this article, please consider joining our fight by donating to our Fall Webathon. Your contribution makes it possible for us to continue our mission of speaking truth and defending conservative principles. 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The Energy Crunch Spreads, but Climate Campaigners Press On

A worker puts a cap to a pipe at the construction site of the Nord Stream 2 gas pipeline near Kingisepp, Leningrad Region, Russia, June 5, 2019. (Anton Vaganov/Reuters) The week of September 27: oil, gas, coal, climate, taxation, spending, a nod to the Reichenbach Falls, the contradictions within the Biden administration, and much, much more. After three weeks in which significant portions of the Capital Letter have been focused on the growing energy crunch in Europe, I was thinking that it was time, as people used to say, to move on. This crunch has (up to now, although that is changing) revolved primarily around natural gas, but it has also highlighted the unreliability of wind energy, and ought (even if, so far, there are few signs of it) to be leading to a major rethink about how we should handle the energy “transition” that is now under way. (Spoiler: not in the manner in which it is currently being handled.) These are big topics, but surely, I thought, it was time for a break. Then I saw this story from Bloomberg on Thursday: It’s not just extra natural gas that Europe’s struggling energy markets are finding tough to get from Russia. Power producers in the continent are being forced to ask Russia for more coal to ease an energy crunch with winter approaching and record-high gas prices denting profitability, according to officials at two Russian coal companies. But they may be left stranded as any increase in exports from the country won’t be substantial, they said. Russia! Coal! As I have mentioned in those earlier Capital Letters, the run-up in natural-gas prices is only partly attributable to the climate policies being pursued in certain (mainly European) countries, but — to use a possibly unfortunate choice of words — dig a little deeper, and it is easy to see how those policies have contributed more to the spike in prices than a glance at barely rotating wind turbines in the North Sea would suggest. Back to Bloomberg for one example: Having largely turned away from coal for years in an attempt to green its electricity generation, Europe is now in a conundrum. The region’s gas storage sites are only partially full, liquefied natural gas suppliers are favoring Asia, and intermittent renewables aren’t able to fully meet demand. With the winter heating season approaching, the dependence on Russia to keep the lights on is growing. “If all the European utilities switch to coal, it will result in a huge spike in coal demand that Russia alone cannot provide for on such a short notice,” said Natasha Tyrina, a principal research analyst at Wood Mackenzie Ltd. in Houston. “That would need supply from other countries as well, from the U.S. for example, but the situation there is similar to everywhere else.” One of the long-standing criticisms of Europe’s climate-driven approach to energy supply is that it has increased its reliance on Russian gas. Reading the next story (via Bloomberg) and thinking about the strategic implications is not a recipe for peace of mind. Europe’s energy crunch deepened after China ordered its state-owned companies to secure supplies for this winter. Pipeline auctions also signaled restricted flows from Russia. Gas and power prices surged to records as the fight for supplies is set to intensify. China’s Vice Premier Han Zheng, who supervises the energy sector, told state-owned energy companies to get hold of supplies at all costs, according to people familiar with the matter. The news came just as no extra pipeline capacity was booked to deliver gas to Germany’s Mallnow compressor station via a key link to Russia . . . Traders were already on edge this morning, with Russian gas flows to Germany’s Mallnow falling again. Supplies via the major transit route are about a third less than at the beginning of the week. To make matters worse, no capacity was booked at an auction to deliver gas to Mallnow for the first day of the month. Traders had been watching day-ahead auctions for Mallnow after only 35% of capacity for October was booked at a monthly auction . . . Of course, worries about western Europe’s dependence on Russian gas are old news. That its climate policies might, if only in the short term, have led to an increase in its demand for Russian coal is, however, a twist of the pickaxe that I had not expected. However, Russia is not, as Ms. Tyrina points out, going to be able to be much help. Bloomberg (my emphasis added): European utilities are in desperate need to get their hands on more coal, a strategist at one European utility said, asking not to be identified. But Russia, the world’s third-biggest exporter of the fuel, is mainly targeting sales to the largest buyers in Asia. “Russia has been cutting coal exports to Europe for years as the European Union was closing thermal coal power stations,” said Kirill Chuyko, head of research at BCS Global Markets. It’ll be hard to re-route to Europe “as there are existing contracts with Asian clients. On top of it, transportation capacity is anyway limited.” Also complicating matters is Europe’s stringent environmental standards for burning coal, making it much more difficult and time-consuming for Russia to prepare supplies that meet the quality requirements, the officials at the country’s coal companies said.   Switching out of coal-fired power may be the right thing to do (I think it is), but to do so without thinking through how its reliability is going to be replaced is, given the intermittency that comes with so much of renewable energy, extraordinarily irresponsible. It doesn’t help that many climate warriors are also opposed to nuclear (something that should be part of the long-term solution), and have also rejected (natural) gas, which, if nothing else, would make the best “bridge” fuel source that there probably is. Interestingly, Joe Manchin gets the point. Via Rachel Frazin in The Hill: Sen. Joe Manchin (D-W.Va.) on Thursday said natural gas must be included in a clean energy program his fellow Democrats are pushing. “It has to be,” the key swing vote senator told reporters. “I am all for all of the above. I am all for clean energy, but I am also for producing the amount of energy that we need to make sure that we have reliability.” . . . Manchin is not just a key Senate swing vote. He’s also the chairman of the Senate’s Energy and Natural Resources Committee that’s expected to craft the upper chamber’s version of the program. However, Frazin points out that: The remark is sure to anger climate advocates, who have opposed the use of natural gas in a key program known as the Clean Electricity Performance Program (CEPP). A version of the CEPP drafted by the House would pay power providers to shift towards clean energy sources and penalize companies that don’t move quickly enough. The House’s version would exclude natural gas that doesn’t use technology to capture its emissions . . . The growing demonization of natural gas, whether by politicians or their unelected surrogates in ESG-land, has meant that western companies are already proving increasingly unwilling to make the capital investment to expand production. It’s also worth noting that when Centrica, the parent company of British Gas, began the final stages of running down Rough, the U.K.’s largest, but ageing (it had already been partially closed) storage facility for natural gas in 2017, it had no interest in replacing it, something for which Centrica can hardly be blamed. With plans for draconian greenhouse-gas reductions already announced in the U.K., Centrica would have had little confidence about the capital return such a project would generate. In a FT report that year, it was noted that [Rough’s] closure will add to wider concerns over UK energy security as domestic North Sea gas reserves decline and the country phases out old coal and nuclear power stations in favour of cleaner but less reliable renewable resources. However, officials at the Department for Business, Energy and Industrial Strategy said they were neither surprised nor worried by the loss of Rough, arguing that the market had coped well without it over the past year . . . Analysts and traders have largely accepted this sanguine view. They point out the world is facing a gas glut as large new volumes of LNG enter the market from the US and Australia, which should keep prices relatively low and supplies accessible. However, sceptics note that LNG cannot be accessed as quickly as gas stored at Rough and predict the UK will be forced to pay higher prices to compete for imports during times of tight supplies. The skeptics were right. Back in 2017, the fracking lobby in the U.K. was arguing that diminished energy security was a reason to move ahead with — wait for it — fracking, an argument that, however strong, had to contend with the reality that fracking in, say, the wide, empty spaces of the American west is one thing, but fracking on a crowded island is quite another: NIMBY and all that. This problem was made worse by the fact that in the U.S. mineral rights run, as they should, with the property in question. In the U.K., however, the ownership of oil and gas — as well as gold and silver — beneath someone’s property is held by the Crown Estate (in practice, the state, not Prince Harry’s less self-important relatives) reducing the incentive to develop it. There’s a lesson (barely) concealed in this story about the relationship between private-property rights and economic development. Throw in exaggerated concerns over minor “earthquakes” (a word that, in the context of fracking, is infinitely more powerful than the seismic events it purports to describe), more general climate hysteria, and a debate over how real the U.K’s reserves are, and there is, sadly, little prospect that fracking will come to Britain’s rescue. On the other hand, there is still quite a bit of offshore gas that could be used to help out. According to Oil and Gas U.K. (OGUK — a trade group, admittedly) there is enough of it under the North Sea to support the proposed energy transition over the next 30 years. They note, unnecessarily but pointedly, that extracting this will take investment. As things currently stand, there is probably insufficient political — or, given the influence of ESG, capital markets’ — support to tempt companies into spending the money that this would take. As mentioned above, many climate warriors have turned against natural gas, even though burning natural gas emits about half as much CO2 as burning coal does. This is partly because of the demonstrative if pointless ascetism often associated with climate panic, and partly because of fears that the relative advantage brought by those lower CO2 emissions can be offset by methane leakage. The latter is a valid enough topic of concern (methane is another greenhouse gas), even if the appropriate degree of concern remains disputed, and even if this problem, under certain circumstances, is amenable to technical fixes, something indeed that appears to be implicit in Frazin’s brief description of the proposed CEPP legislation. Nevertheless, CEPP or no CEPP, the Biden administration itself has not taken a particularly friendly attitude to natural gas, and nor have various city and state governments. It is to be hoped that the current energy crunch will change some minds, but I’m not optimistic — cults flourish on the quest for perfection — and the price will be paid in consumer dollars, reliability of energy supply, and in this country’s geopolitical position. Walking away from natural gas, available in abundance thanks to fracking, a technology that, together with the increased oil production it has also enabled, has effectively delivered American energy independence, is something that OPEC (and others) will be delighted to see disappear. The Wall Street Journal: OPEC and Russia might compensate for reduced U.S. supply. But there could still be an enormous oil shortage if U.S. and European giants scale back global production under pressure from green investors. That’s the takeaway from OPEC’s annual report on Tuesday, which projects $11.8 trillion in new oil investment will be needed through 2045 to meet demand growth and compensate for production declines at existing fields. OPEC estimates that global oil demand will increase 8% over the next two decades from pre-pandemic levels as low-income countries industrialize. Even as the West pushes renewables and electric cars, oil and gas are forecast to make up roughly the same share of global energy in 2045 as they do today. Nigerians and Guatemalans won’t be driving Teslas. OPEC predicts the Middle East will make up 57% of crude exports by 2045, up from 48% in 2019. Liberals will dismiss the OPEC report as self-serving, but today’s energy shortages and price spikes are a blaring reminder that the world needs more, not less, oil and natural gas. Bloomberg: OPEC Secretary-General Mohammad Barkindo said Europe’s gas crunch underscored that more investment in fossil fuels is needed. Governments must realize the switch to cleaner forms of energy can only happen slowly, he said. “Emotions have overtaken industry facts,” he said on a panel with energy ministers from Qatar and the UAE. “How do we change this narrative, because we’re losing it? Civil society and climate activists have taken over the space. Activist shareholders have held the industry nearly to ransom.” While Barkindo is right that the transition to cleaner forms of energy should take place at a more measured pace, and he is right that climate activists have indeed invaded this space, he is wrong to suggest that “civil society” has had much to do with what is going on. What passes for civil society in this case is a facsimile largely made up of the activists and numerous ESG or stakeholder capitalist rent-seekers interested in money, power, or both. Voters, for the most part, have been left in the dark, if only metaphorically. For now. Meanwhile, rising energy bills are going to make “transitory” inflation even less transitory than it was ever destined to be. The Financial Times: Soaring energy prices will push up broader inflation across Europe this year, hurting consumers and threatening the region’s post-pandemic economic recovery, economists are warning. Benchmark European gas prices have already tripled this year, even before peak winter demand kicks in. Norway’s Equinor, one of Europe’s biggest gas suppliers, said last week that high energy prices could last well into 2022 and warned of possible price spikes. “Brace for a surge in eurozone gas inflation,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics. Rising energy prices will drive “an acceleration in the eurozone’s headline inflation,” added Daniel Kral, economist at Oxford Economics. If the coal story (which I also discussed in the week before last’s Capital Letter in a different context) was not sufficient reminder that the prices of different energy sources are connected, here’s this from Rystad Energy on Tuesday: The recent rally in LNG [liquid natural gas] prices in Europe and Asia has dramatically widened the economic incentive to switch from natural gas to oil in power generation. Steep carbon regulations and operational constraints limit Europe’s ability to burn oil in power plants, but Asia has more flexibility. If the gap between LNG and oil prices remains wide, Asia is set to boost oil demand by 400,000 barrels per day on average over the next two quarters, a Rystad Energy report shows. This will support already high oil prices. And Asia has more flexibility when it comes to coal, too. Bloomberg: U.S. and European officials pushing for tougher climate action are worried the energy crunch that’s snarling the global economy could also undermine crucial United Nations talks next month. Government officials speaking on condition of anonymity said they were concerned that the squeeze in energy markets, surging prices, and the resurgence of coal will cast a shadow over efforts to curb emissions when 197 countries meet at the climate change summit, known as COP26, in Glasgow, Scotland. The risk is that the price spike makes emerging economies — for example India — more reluctant to ditch coal because that would threaten energy security, three government officials said. Whereas countries like the U.K. have tried to use gas as a so-called “bridging fuel” as they shift to lower-carbon options, the surge in prices makes that option less palatable — at least for now. The crisis has also thrown into sharp relief the volatility that can accompany renewable energies. It really is not hard to make the case (even if using assumptions contained in the IPCC’s models) that the climate warriors’ attack on natural gas (which is, at the very least, premature) may well turn out to be self-defeating. Wait, there’s more (from the Financial Times on Tuesday): Coal, carbon and European gas prices have all hit record highs as crude oil pushed above $80 a barrel in the clearest signs yet that the world is heading into an energy crunch likely to weigh on economic growth. Brent, the international benchmark, rose as much as 0.9 per cent to $80.22 a barrel early on Tuesday, hitting a three-year high for the second consecutive day before settling 0.6 per cent lower at $79.09. Although, as mentioned before, climate policies are only one contributing factor to the spike in natural-gas (and other energy) prices, it is not unfair to think of all this as an early taste of greenflation. With greenflation in mind, take a look at this article by Jeremy Warner in the Daily Telegraph. Warner echoes what OPEC’s Barkindo has to say about transition periods (please also note Warner’s comments on ESG), and then explores what it could mean for inflation: Over the past several years, there has been a roughly 20 per cent cut in annual global energy investment. This was driven initially by the collapse in the oil price that followed Saudi Arabia’s reckless attempt to grab market share by flooding the world with supply. After that came the pandemic, and its accompanying plunge in economic activity. All incentive to invest disappeared. But more recently, another factor has entered the equation. The drive to go green has made almost any investment in hydrocarbons persona non grata. With their determination to instill politically correct “environment, social, and governance” (ESG) ways of thinking into corporate activity, there is now an almost pathological aversion among global investors to allocating any capital to hydrocarbons. Both BP and Shell have slashed investment in oil and gas to the bare minimum needed to keep existing production ticking over. The rush to go green is all very well, but it fails to take account of one rather important factor; the global economy is still almost wholly dependent on hydrocarbons for its energy needs. . . . From a global perspective, renewables have so far made only marginal inroads, and the proportion provided by nuclear has actually declined. Rapid growth in China is of course the main story here, but even in advanced economies, weaning activity off hydrocarbons is proving painfully slow and costly. Practice doesn’t match the panglossian rhetoric, especially in holier than thou Europe . . . To interrupt Warner for a moment, it’s worth remembering that renewables are somewhat less green than portrayed, not least because of the problem of intermittency: The wind doesn’t always blow, and the sun doesn’t always shine, meaning that back-up generation systems (which unless nuclear energy is involved, will generate greenhouse-gas emissions) will be required until energy-storage capabilities are far better than is now the case. Writing in Real Clear Energy, Rupert Darwall’s arguments are focused on the U.K., but the wider implications, including for the U.S., are obvious: As Britain is learning the hard way, you can’t regulate the weather. Investing in more wind capacity doesn’t make the wind blow harder when there isn’t any wind; and if there little or no wind, wind power output will be as close to zero as makes no difference. And then there’s the fallacy that policies that suppress domestic production of natural gas by delaying license approvals and banning fracking cut demand for natural gas. Although electricity demand [in the U.K.] was 3% lower in the first quarter of this year, demand for natural gas jumped 8.1%, mainly because lower wind speeds increased demand for gas in electricity generation. The only thing that self-embargoing new domestic production has achieved is to hand more market power to [Russia’s] Gazprom, the biggest gas supplier to western Europe. Back to the Daily Telegraph’s Warner (my emphasis added): There is little reason to believe things are going to change quickly, even with the sort of incentives many governments are now offering – the costs of which are all too predictably piled onto citizens. To understand why, it is worth reading about the history of energy transitions as documented by Vaclav Smil, a faintly eccentric Canadian scientist made famous by Bill Gates, who lists Smil as one of his favourite thinkers. “I wait for new Smil books,” Gates says, “the way some people wait for the next Star Wars movie.” Past energy transitions have taken a very long time, much longer than the 30 year horizon implicit in reaching net zero by mid-century – and that’s despite the fact that historically they have all been market driven and provided huge gains in efficiency over what went before.  Today’s is unique, in that it is government led, and for now offers no advantage in efficiency. To the contrary, it implies a big downward shift in what Smil calls “power density”, in that the infrastructure requires a lot more resource and a lot more space. You wouldn’t be doing it at all but for fears over climate change. In any case, in Smil’s view the world could take many decades to wean itself off fossil fuels. Gates himself is not as downbeat, but as Smil told Science magazine, “he’s a techno-optimist, I’m a European pessimist.” The obvious danger here is that of a mismatch between the world’s continued dependence on hydrocarbons, and the now quite dramatic levels of divestment from them, on the one hand, and the slow pace of renewables in taking their place on the other. Reduced supply when demand remains high means only one thing – higher prices. So no; high energy prices are not going to be temporary. As in the 1970s, they may end up as one of the primary drivers of a wider inflationary shock. Meanwhile (via The Financial Times): A [U.K.] Treasury review of where the costs of net zero [greenhouse gas emissions] will fall, also long delayed, is expected to be published before the November COP26 climate conference the UK is hosting in Glasgow. It says something that the U.K. has gone so far down the route to net zero without revealing how much all this will, you know, cost. It will be interesting to see how credible these “long delayed” numbers will be. The FT reports that Hannah Dillon of the Zero Carbon Campaign is concerned that “there’s a really big job to do to sell to the public the benefits that will come from the transition.” There’s a reason for that. And before Americans feel too smug about this being a mess that Europeans have — to the extent that this price spike has, directly or indirectly, been caused by climate policies — inflicted upon themselves, we should bear in mind that the current administration seems intent on sending the U.S. down the same course. But, for now, there’s this to think about (via the Financial Times on Tuesday): “We’re looking at not just the UK and Europe but a potential global energy crisis coming into the winter,” said Robert Rennie, global head of market strategy at Westpac. US natural gas prices surged by 10 per cent to more than $6 per million British thermal units, their highest price in seven years, before retreating on the back of forecasts for warmer-than-expected weather and less demand in the next few weeks. The October-delivered gas contract, which expired on Tuesday, settled 2.4 per cent higher at $5.841/mBtu. Analysts said that the soaring price, with the front-month contract up almost 200 per cent in a year, was the result of less drilling by US shale producers, supply disruption following hurricanes in the Gulf of Mexico and fast-rising demand, which left stored natural gas stocks well below the five-year average . . . Soaring energy prices in the US have already sparked some White House concern, with President Joe Biden calling earlier this month for an investigation into why average petrol prices — up almost 50 per cent in the past year to about $3.19 a gallon — are so high. An investigation? C’mon, man! Oh yes, the debt ceiling. We’ll have more on that in due course, but here is an extract from an article in the FT: Exactly when the US will hit its debt ceiling is unclear — tax receipts are due soon — but the Treasury has offered October 18 as an estimate. If it is not raised or suspended, only a lack of precedent spares us from knowing in detail the severity of the fallout. “Catastrophic economic consequences” is Treasury secretary Janet Yellen’s elliptical phrase. Yellen may have blown much of her credibility in recent months, but I don’t think she’s wrong about that. For some reason, when my mind turns to the current impasse over the debt ceiling, I cannot help thinking of Arthur Conan Doyle’s The Final Problem (it wasn’t, but that’s another story). Dr. Watson and Sherlock Holmes gaze down at the Reichenbach falls: It is, indeed, a fearful place. The torrent, swollen by the melting snow, plunges into a tremendous abyss, from which the spray rolls up like the smoke from a burning house. The shaft into which the river hurls itself is an immense chasm, lined by glistening coal-black rock, and narrowing into a creaming, boiling pit of incalculable depth, which brims over and shoots the stream onward over its jagged lip. The long sweep of green water roaring forever down, and the thick flickering curtain of spray hissing forever upward, turn a man giddy with their constant whirl and clamor. We stood near the edge peering down at the gleam of the breaking water far below us against the black rocks, and listening to the half-human shout which came booming up with the spray out of the abyss. Watson has to leave his friend to tend to a sick woman, but: As I turned away I saw Holmes, with his back against a rock and his arms folded, gazing down at the rush of the waters. It was the last that I was ever destined to see of him in this world. When I was near the bottom of the descent I looked back. It was impossible, from that position, to see the fall, but I could see the curving path which winds over the shoulder of the hill and leads to it. Along this a man was, I remember, walking very rapidly . . . 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 37th episode, David is joined by Jordan Ballor, director of research at the Center for Religion, Culture, and Democracy. They discuss why institutions are held in such low regard, whether or not big business is capable of acting with virtue, and what steps are most needed in this day and age of apparent disdain for all we hold dear. Listen up — Jordan and David are more optimistic than you might think! And for some video content . . . National Review Institute, in partnership with the Trammell & Margaret Crow Foundation, hosted a debate on stakeholder capitalism on Wednesday, September 22nd at the Debate Chamber at Old Parkland in Dallas, Texas. Kevin Hassett, senior adviser to National Review Capital Matters, and Mark Zandy, chief economist for Moody’s Analytics, engaged in a spirited debate about the merits and drawbacks of ESG investing. Cullum Clark, director of the Bush Institute-SMU Economic Growth Initiative, served as moderator. Harlan Crow’s Debate Chamber on the Old Parkland campus was designed to “be a place where there are conversations, there’s sharing of ideas, and there are thought leaders.” True to Buckley’s legacy, NRI’s debate series at Old Parkland provides a forum for civilized debate and discussion — lessons that important legacy still teaches us today. You can watch it here. The Capital Matters week that was . . . Taxation Daniel Pilla: The Treasury Department recently released its “General Explanations of the Administration’s FY 2022 Revenue Proposals.” This is the so-called Treasury “Green Book.” Dated May 2021, the Green Book explains exactly how various elements of the Biden administration’s tax plan will operate. In addition to the tax increases that have been discussed at length, the administration would set up a comprehensive financial spying operation that would impact every American. The proposal is to establish a “comprehensive financial account information reporting regime.” The purpose is to track activities in all financial accounts and report them to the federal government. The law would require an annual report to the government showing “gross inflows and outflows with a breakdown for physical cash, transactions with a foreign account, and transfers to and from another account with the same owner.” To say that this is a system of “comprehensive” spying is not hyperbole . . . Daniel Pilla: On September 7, 2021, the Treasury Department released a story titled “The Case for a Robust Attack on the Tax Gap.” The piece, written by deputy assistant secretary Natasha Sarin, is the third installment in a series designed to win support for a massive increase in IRS enforcement capabilities. The Treasury Department presses the case for increasing the IRS’s budget by $80 billion over the next ten years, claiming that the “investment” — read: “government spending” — will generate “an estimated $320 billion in additional tax collections” over that period. Parenthetically, even if this were true, the additional revenue would not be sufficient to cover the federal government’s operating deficit for just one year. The article also pushes the case for the administration’s proposal to engage in massive spying on citizens through our nation’s banks and financial institutions. I discussed this proposed at length in National Review earlier this week. The department suggests that the blizzard of new information reporting required under President Biden’s plan will not “impos[e] any burden on taxpayers whatsoever.” Nothing could be further from the truth. It is undisputed that banks and other financial institutions will pass on to their customers the high cost of complying with the plan’s mandated annual reporting . . . Andrew Stuttaford: There are plenty of other objections to taxing unrealized capital gains and, writing back in 2019, David Bahnsen responded to an earlier, broader (“millionaires and billionaires” were to be targeted) Wyden proposal with a thorough demolition job here. I’d add this to what David had to say. A tax on an increase on unrealized (and, of course, possibly ephemeral) gains is only on the most stretched of interpretations a tax on income. In reality it is a tax on wealth, and one thing that wealth taxes do is redefine the relationship between the individual and the state. To be sure, it is “only” a tax on a portion of a wicked billionaire’s wealth, but (to repeat myself) the ratchet has to begin somewhere. As I tweeted here: “A wealth tax is a sophisticated, lighter touch derivative of feudalism, but the core of it is the same: The state (“the king”) has, theoretically, a call on everything you own.” That’s not where we should want to be headed. Brad Polumbo: As Congress debates the Democrats’ multitrillion-dollar spending proposals and attendant tax hikes, President Biden is falling back on his old campaign talking points. “Our Build Back Better Agenda will cut taxes for the middle class, lower costs for working families, create more jobs, and sustain economic growth for years to come,” the president tweeted Sunday. “And the most important part? No one making under $400,000 will pay a penny more in taxes.” (Emphasis mine). He is renewing a familiar promise, having campaigned extensively on the fact that working and middle-class Americans would not see any tax increases under the Biden administration. Yet, if it’s signed into law, the slate of tax increases recently unveiled by House Democrats would shatter the president’s pledge in at least two major ways . . . Spending David Harsanyi: On Friday, Phil Klein did an excellent job debunking Joe Biden’s contention that a $3.5 trillion welfare-state expansion bill will “cost nothing.” Over the weekend, this nonsensical characterization of the widest-ranging and most expensive spending bill in American history metastasized among the liberal punditocracy. Liberal pundits contend that the $3.5 trillion welfare-state expansion “costs perhaps zero” because it is “paid for.” Even if we concede that the reconciliation bill contains the kind of tax hikes that can offset short-term outlays, the expenditure does not change. Simply because you can afford a car (or in this case, your parents can afford to buy you one) doesn’t mean the car doesn’t cost anything. Helpful liberals tried to frame the difference in “gross” and “net” costs. But every penny of the bill is money taken from someone, either today or tomorrow — usually from a more useful part of the economy. (Or, likely, it will be lots more debt spending. That isn’t “zero,” either, even if our political parties act like it.) Of course, the bill also creates new baseline spending in perpetuity . . . Poverty (or Not): David Harsanyi:  In a now-deleted tweet, progressive representative Pramila Jayapal made the wild claim that the “U.S. has nearly ONE-THIRD of the world’s billionaires. Meanwhile, our poverty rate is the 4th highest in the world. Tax the rich.” Big if true! But the fact that any elected official could, even for a fleeting moment, believe that the United States had anywhere near the highest poverty rate in the world tells us a lot about the progressive mindset and policy goals. Democrats tend to perfunctorily portray the United States as a poverty-stricken plutocracy where “[t]rillionaires and billionaires are doing very, very well,” as Joe Biden argued the other day when peddling his massive state expansion, but “the middle class keeps getting hurt.” This idea is driven by a zero-sum obsession with “inequality,” and not the reality of a nation where the largest economic movement over the past decade has been from the middle class to the upper middle class . . . The Biden Administration Joel Kotkin: The president (rightly, to my mind), has appointed some tough trust-busters including FTC chairperson Lina Khan, antitrust attorney Jonathan Kanter and White House aide Timothy Wu. Restoring competition to the tech marketplace should appeal to all but the most doctrinaire libertarians and of course the oligarchs themselves. But these efforts may be undermined and weakened at the highest levels of an administration largely staffed with former Obama officials, including Chief of Staff Ron Klain, Domestic Policy Council Director Susan Rice, and National Economic Council Director Brian Deese, all of whose personal coffers now brim with money at least partly derived from the Valley or Wall Street. Vice President Harris is particularly close to the oligarchy, especially Facebook, while National-Security Adviser Jake Sullivan has close ties to Microsoft. Biden’s corporate-progressive alliance forces him to expand welfare for hoi polloi but also seeks to maintain and even expand oligarchal privileges. His infrastructure bill subsidizes the oligarchs’ investments — from electric cars to broadband and artificial intelligence — turning him, as one observer put it, into “Silicon Valley’s biggest venture capitalist.” Biden has also worked to free up the supply of H1B visas granted to the foreign “indentured servants” who now account for upwards of three-quarters of Silicon Valley’s tech workforce. The contradictions, as Marxists would agree, are pretty profound. Oligarchs want cheaper, unorganized labor, while progressives increasingly seek to unionize workers. Public sentiment does not rest with the oligarchs, whom many in both parties see as an overweening threat to competition and privacy. So, here’s the rub. Democrats depend on tech money (just ask Gavin Newsom), but the ascendant wing of the party seeks to throttle Silicon Valley. AOC suggests that a country that “allows billionaires to exist” is immoral, calling for the confiscation of most tech fortunes. AOC and her co-belligerents have a lot of reach: She, Bernie Sanders, Elizabeth Warren, and others have Twitter followings that many establishment Democrats can only dream of . . . Welfare and Other Transfers Joseph Sullivan: The $3.5 trillion in reconciliation legislation now under consideration by the White House and Congress would transform the economic relationship between American citizens and the government. This much is conventional wisdom. Even the New York Times calls it a “vast expansion of the social safety net.” Though not wrong, they miss the forest for the trees. The reliance of American individuals on government transfers has already trended upward, and at times even suddenly jumped, over the past two decades. The legislation, then, would not amount to a revolution so much as a codification of one that is already well underway . . . The Debt Ceiling Kevin Hassett: In a gift to humanity, way back in 1917, the Second Liberty Bond Act established an aggregate debt limit. Since then, Congress, much to its chagrin, has had to lift the debt limit whenever it is about to be breached. There is perhaps no more painful vote for a politician of either party than the debt-limit vote. Spending increases can be celebrated as humane attempts to support social justice without raising a murmur from the electorate. But during these votes, everyone sweats profusely awaiting the final tally. That’s why it is common for the party out of power to slow-roll the debt-limit increase. It is a way to make the party in power own, perhaps unfairly, all the cumulative fiscal irresponsibility that has piled up since the last increase. It is the only time that those responsible for runaway spending are made to feel at least a little bit bad about it. So far, it has always worked out in the end . . . The USPS Ross Marchand: As the United States Postal Service (USPS) stagnates financially, ideas for expanding the agency’s business model are a dime a dozen. Some lawmakers and commentators, for instance, have suggested getting the USPS into the banking business — despite the agency’s lackluster foray into other financial services. And now, some are raising the seductively simple proposal to have mail carriers check on the elderly for a fee in addition to performing some basic health checks. This idea would not only lead to further labor disputes with mail carriers and slow down mail-delivery times but also jeopardize private and nonprofit approaches to senior care. The homebound elderly certainly deserve our help and compassion, but America’s mail carrier is not up to the task . . . Law and Regulation George Leef: In this Law & Liberty essay, Professor John McGinnis of Northwestern Law School, argues that the eviction moratoria are unconstitutional. Under the Constitution, the states are forbidden to enact laws that “impair the obligation of contracts.” McGinnis rightly says that if a moratorium allowing renters to avoid paying amounts they have contractually agreed to pay doesn’t violate that clause, it’s hard to think what would. The problem here goes back to the New Deal, when the Supreme Court in 1934 upheld a Minnesota law that similarly interfered with rental housing contracts in Homeowners Association v. Blasidell. That was one of those terrible decisions that tore apart the Constitution because a majority on the Court thought that government had to have new power because of the Depression. It was a bad decision then and it sets a bad precedent . . . The Budget Dominic Pino: Whenever the Left encounters resistance on a massive spending measure, it’s a matter of routine to make wild gestures at the Pentagon’s budget, which is large, and ask why some other large amount of money can’t also be spent. The Pentagon’s budget request for this fiscal year was $715 billion, and the House gave it $778 billion. That’s a lot of money. Progressives are correct on that point (and if they’re upset about the House giving the Pentagon more than it asked for, they should take it up with the Democrats who control the chamber). If you multiply it by ten, that’s $7.78 trillion over the budget window we use when talking about fiscal policy. The reconciliation bill would cost $3.5 trillion over the budget window, and 3.5 trillion < 7.78 trillion, so the U.S. spends way more on defense than on helping with “human infrastructure,” the story goes. There are a few problems with that story . . . China Jimmy Quinn: Republican lawmakers are opening a new front in the fight against Chinese military companies hoovering up American data. In a letter to top Biden-administration officials, Senator Tom Cotton and Representative Mike Gallagher called for BGI Group, a major Chinese genomics conglomerate, to be added to the U.S. government’s export blacklist and its Chinese military company investment ban list. Their comments about the company’s practice of collecting data from U.S. citizens echo a number of previous warnings issued by national-security officials . . . Medicare Chris Pope: In 2020, the federal government for the first time spent more on Medicare than on national defense. Absent legislative reform, Medicare funding as a share of GDP is projected to increase by another 50 percent over the next 20 years. Medicare’s trustees recently surprised nobody by projecting that the program’s trust fund will run out of money within five years. Most observers have rolled their eyes at the news, accepting that Medicare’s costs are out of control and no one is willing to address the looming insolvency. In recent decades, Congress has repeatedly acted to rein in Medicare costs. But this has typically been motivated by broader fiscal considerations and the desire to use resources for other purposes. The trust-fund device by itself achieves little other than legitimizing regressive tax increases that otherwise would not be possible . . . Cryptocurrency Steve Hanke and Matt Sekerke: All parties appear to want regulation for crypto — but an apparent impasse remains because of the mistaken belief that crypto exists in a legal white space. In truth, cryptocurrency is already subject to the existing laws and regulations of finance; it would be an affront to the rule of law for regulators to behave otherwise. It is time for all involved to give up the pretense that crypto transactions require substantively new rules . . .

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