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Andrew Stuttaford

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Carbon Taxes and Democracy

A tall chimney above an industrial quarter in a town in Switzerland ( Lucia Gajdosikova/Getty Images) Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: carbon taxes and democracy, Big Tech and Biden, lending as a (Chinese) strategic weapon, the “socially responsible” ecosystem and its parasites, corporatism and Western self-harm. To sign up for the Capital Note, follow this link. News and Views Climate Change and DemocracyOne of the characteristics of climate warriors is the way in which they attempt to bypass the democratic process when it comes to their attempt to work for changes that would have a truly, probably irreversible, transformative effect on society — changes that, in a democracy, might be expected to be decided upon by, well, the electorate. Instead, what we are seeing are changes forced through by an unsavory cabal of unelected regulators (often extending their mandates beyond any reasonable interpretation of what they should be), unelected activists, unelected corporate managements, and unelected investment-management groups with billions of dollars of other people’s money to play with. And then there are judges, discovering law where there is none. In a recent referendum, Swiss voters, a constituency by no means hostile to environmentalist rhetoric, gave a demonstration that helps explain climate warriors’ aversion to democracy. The Wall Street Journal: Climate alarmists continue to have a big problem: democracy. Every time voters are presented with something close to the actual costs of achieving draconian CO2 emissions targets, they say no. The latest reality check came Sunday in Switzerland, where 51.6% of the voters rejected a government scheme to meet the anti-carbon goals of the Paris Agreement on climate change. That’s the agreement that President Biden recently rejoined, albeit without the approval of American voters or Congress. At least the Swiss were honest enough to tell voters that they would have to pay for their climate indulgences with the likes of a surcharge on car fuel costs and a tax on airline tickets. Perhaps most Swiss thought this cost was exorbitant, or useless, since the country contributes only 0.1% to global CO2 emissions. The Swiss could go net-zero on CO2 and it wouldn’t matter a whit to the climate. This explains why America’s climate left assiduously avoids putting carbon taxes on the ballot. Mr. Biden won’t even endorse indexing the federal gas tax for inflation. Instead the Administration is planning to use regulatory and judicial coercion. Voters understand they will pay for the climate obsessions of elites. And was this result a reminder of the value that referendums (referenda?) can add to a properly functioning democracy? Well, yes. D.C. vs. Big TechIt’s a sign of the suspicion with which Big Tech is now regarded in Washington, D.C., that the appointment of Lina Khan as the chairwoman of the Federal Trade Commission attracted considerable bipartisan support. The New York Times: President Biden named Lina Khan, a prominent critic of Big Tech, as the chairwoman of the Federal Trade Commission, the White House said on Tuesday, a signal that the agency is likely to crack down further on the industry’s giants. Earlier in the day, the Senate voted across party lines, 69 to 28, to confirm Ms. Khan as a commissioner. The president may name any commissioner to lead the agency, which investigates antitrust violations, deceptive trade practices and data privacy lapses in Silicon Valley and throughout corporate America. The Financial Times: Khan is one of the most renowned American scholars to criticise large US technology companies, such as Amazon, Facebook and Google, for abusing their market power, and has demanded government action to restrain them. Khan’s 2017 paper “Amazon’s Antitrust Paradox” took aim at the corporation’s growing power, particularly its role as both logistics provider and competitor to the millions of smaller businesses that use Amazon to sell goods. It concluded that prevailing thinking on antitrust — that lower prices are net good for consumers — was outdated and did not take into account conflicting forces in the modern economy . . . Damn those lower prices! A curse, I tell you, a curse. #inline-newsletter-nloptin-60ca00d3972d0 .inline-newsletter-subscribe__cta label { font-size: 1.2rem; line-height: 1.5rem; color: #000000; } #inline-newsletter-nloptin-60ca00d3972d0 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60ca00d3972d0 { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60ca00d3972d0 .inline-newsletter-subscribe__email-submit { border-color: #e92131; background-color: #e92131; color: #ffffff; } #inline-newsletter-nloptin-60ca00d3976c2 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #000000; } #inline-newsletter-nloptin-60ca00d3976c2 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60ca00d3976c2 { background-color: #ffffff; border-width: 1px; } #inline-newsletter-nloptin-60ca00d3976c2 .inline-newsletter-subscribe__email-submit { border-color: #eba605; background-color: #eba605; color: #ffffff; } #inline-newsletter-nloptin-60ca00d3978ef .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #dd9933; } #inline-newsletter-nloptin-60ca00d3978ef .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.5rem; color: #2d2d2d; } #inline-newsletter-nloptin-60ca00d3978ef { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60ca00d3978ef .inline-newsletter-subscribe__email-submit { border-color: #dd9933; background-color: #dd9933; color: #ffffff; } #inline-newsletter-nloptin-60ca00d397a09 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #0f733c; } #inline-newsletter-nloptin-60ca00d397a09 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60ca00d397a09 { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60ca00d397a09 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } #inline-newsletter-nloptin-60ca00d397ae5 .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #0f733c; } #inline-newsletter-nloptin-60ca00d397ae5 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60ca00d397ae5 { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60ca00d397ae5 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } More from the FT: There is no suggestion that tech companies face immediate break-ups. FTC commissioners can investigate and sue companies over antitrust issues but they cannot create policies. Antitrust regulation takes place in courts, where cases are slow-moving and appeals are frequent. The US has not broken a company apart in decades. Its plan to split up Microsoft in the 1990s was overturned. For all the talk, there is no outline for new regulation. A contingent of Republicans, such as Utah’s Mike Lee, criticise tech companies yet believe extra regulation could hurt innovation and the US economy . . . That “contingent” is right. ITIF: Lina Khan’s confirmation as FTC commissioner is the result of growing bipartisan support for a populist approach to antitrust. As antitrust populism is inevitably going to become the governmental policy stance on antitrust, American consumers and innovation may soon be collateral damage. Consumers may no longer be able to benefit from large companies’ economies of scale. Innovation may slow down as less efficient and less innovative companies will be able to seek legal protection against aggressive, yet beneficial competition. In a time of increased global competition, antitrust populism will cause lasting self-inflicted damage that benefits foreign, less meritorious rivals. Well, yes. Around the WebLending as a strategic weapon: The Spectator: A stroke of concrete that gleams against the stony outcrops of the Dinaric Alps. Hung on one of the vast grey pillars is the country’s distinctive crimson banner, a golden two-headed eagle at its centre. The project may bear a symbol of the young post-communist state but those living in the village beneath know who’s really behind the motorway. The Socialist Republic of Yugoslavia has faded but the communists are back. Montenegro is struggling to repay a £860 million Chinese loan for the highway’s construction, built to connect the port of Bar with neighbouring Serbia. Much of the project remains incomplete. Now the country’s debt has inflated to 103 per cent of GDP, with Beijing owning nearly a fifth of its total loan book. It was hoped that the motorway would prove a vital regional trade link. Montenegrin roads are notorious for their dilapidated condition and frequent fatalities. But Western financial institutions were unwilling to support the project, unconvinced of its fiscal viability. Instead, the Chinese Exim Bank provided a loan, while the state-owned China Road and Bridge Corp was brought in as a contractor . . . There are two ways China can now proceed. The first is so-called ‘debt-trap diplomacy’ where China directly acquires critical infrastructure in a country that is unable to service its debt. That is how in 2017 China got a 99-year lease on a strategic Indian Ocean port in Sri Lanka. The same could happen to Bar port in Montenegro. China already owns Piraeus Port in Greece — Europe’s seventh largest harbour. The second strategy is to offer Montenegro debt restructuring but in exchange China will seek political loyalty from Montenegro. That loyalty would mean more work for Chinese state-owned companies and voting at international institutions in China’s favour. Montenegro is, after all, a Nato member state. In both cases, China wins, Europe loses . . . More (via the FT) on the (big) business of “socially responsible” investing: PwC will increase its global headcount by more than a third over the next five years as part of a $12bn investment in recruitment, training, technology and deals designed to capture a booming market for environmental, social and governance advice. The plan, announced on Tuesday, marks a significant acceleration from the audit and consulting group’s $7.4bn investment since 2016, over which time its annual revenues grew by 20 per cent to $43bn. The expansion will add 100,000 people to a workforce that has grown by more than a quarter, to 284,000 people, in the past five years . . . Create an ecosystem and the parasites will come. Random WalkShareholder value, corporatism, and Western self-harm: Rupert Darwall in Real Clear Energy: In his epochal book “Capitalism, Socialism and Democracy,” Joseph Schumpeter described publicly traded corporations as capitalism’s vulnerable fortresses. This is truer now than when Schumpeter was writing in the 1940s, with huge, politically controlled state and municipal pension funds. The Big Three index funds of Vanguard, BlackRock, and State Street now hold 43% of the fund industry’s U.S. equity assets, which own individual stocks and vote their proxies not out of choice or conviction but because they’re in the index. Across the Atlantic, the EU is formalizing state direction of private investment with the 2020 EU taxonomy for sustainable activities regulation designed to help meet the bloc’s decarbonization objectives. For these reasons – and despite the collateral shareholder-value destruction – the carbon blockade of publicly traded corporations is likely to succeed in its proximate aim. But decarbonizing them is not the same as decarbonizing the economy. The reason is obvious: Partial blockades don’t work. If Exxon or Chevron or Shell don’t supply gasoline, other firms less beholden to American and European institutional investors or to the Dutch courts will. Private companies and state-owned oil companies of OPEC and Russia will gain what Western oil majors are forced to cede. The point is emphasized by Jason Bordoff, a senior climate expert on President Obama’s National Security Council, in a comprehensive critique for “Foreign Affairs.” Emissions go down only if oil use declines, Bordoff notes. “Unless both supply and demand change in tandem, merely curbing the oil majors’ output will either shift production to less accountable producers or have potentially severe consequences on economic and national security interests.” Bordoff also casts doubt on the effectiveness of a Western-led financial blockade of the oil and gas sector. “To the extent capital from Western banks dries up, Chinese banks have also demonstrated they can fill the gap.” . . . — A.S. To sign up for the Capital Note, follow this link.

Ends and Means: Publicizing Leaked Tax Returns, and Why

Founder, Chairman, CEO and President of Amazon Jeff Bezos unveils his space company called Blue Moon during an event in Washington, U.S., May 9, 2019. (Clodagh Kilcoyne/Reuters) ProPublica, billionaires, and you. Editor’s note: The following is an edited version of the Capital Letter published on June 12, 2021. However much some on the left might like to deny it, there is a legitimate distinction between capital appreciation and income. And however much some of them might understand it, ignoring the validity of that distinction is too good a propaganda opportunity to be passed up. And so when ProPublica, “an independent, nonprofit newsroom that produces investigative journalism with moral force” “obtained” and then, in an article by Jesse Eisinger, Jeff Ernsthausen, and Paul Kiel, publicized some of the details of “a vast cache of IRS information showing how billionaires like Jeff Bezos, Elon Musk and Warren Buffett pay little in income tax compared to their massive wealth — sometimes, even nothing,” much of the secondhand reporting of their story, not to speak of the ProPublica article itself, followed an all too predictable script. First, some background. Eisinger, Ernsthausen, and Kiel explain that the data, which consisted of “the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years” was handed over to ProPublica “in raw form, with no conditions or conclusions.” The information offers “an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.” Presumably it does (or could do) the same with respect to all the “thousands” who had their data pilfered. ProPublica’s reporters then “spent months processing and analyzing the material to transform it into a usable database.” And: We then verified the information by comparing elements of it with dozens of already public tax details (in court documents, politicians’ financial disclosures and news stories) as well as by vetting it with individuals whose tax information is contained in the trove. Every person whose tax information is described in this story was asked to comment. Those who responded, including Buffett, Bloomberg and Icahn, all said they had paid the taxes they owed. . . . Musk responded to an initial query with a lone punctuation mark: “?” After we sent detailed questions to him, he did not reply. Musk wins again. Eisinger, Ernsthausen, and Kiel: One of the billionaires mentioned in this article objected arguing that publishing personal tax information is a violation of privacy [but] we have concluded that the public interest in knowing this information at this pivotal moment outweighs that legitimate concern. Ah, yes, ends and means. In a joint statement, Stephen Engelberg and Richard Tofel, ProPublica’s editor-in-chief and president, wrote: Many will ask about the ethics of publishing such private data. We are doing so — quite selectively and carefully — because we believe it serves the public interest in fundamental ways, allowing readers to see patterns that were until now hidden. “Patterns” — i.e., the different tax treatment of capital and income — that were not “hidden,” but were rather well-known to anyone with a fairly basic awareness of the way in which the tax system works. Indeed, patterns — paired with “hidden,” a suitably sinister-sounding word — that are the result of decisions taken by democratically elected legislators, and which are generally in line with tax principles that (command economies apart) have applied for a long time and across much of the world, however much ProPublica may object to them. Engelberg and Tofel concede that there is also a legal question here, and we want you to know we have taken it seriously. A federal law ostensibly makes it a criminal offense to disclose tax return information. But we do not believe that law would be constitutional if applied to bar or sanction publication of a story in the public interest when the news organization did not itself remove the information from the control of the IRS or solicit anyone else to do so — as we did not. I reckon they are right about that. What’s more, I would not describe that as a “loophole,” even if that is a pejorative that the authors of the ProPublica report use several times in their article, albeit not with reference to their own conduct. (For example: “In the coming months, ProPublica will use the IRS data we have obtained to explore in detail how the ultrawealthy avoid taxes, exploit loopholes . . .”). The law is the law. And those who enforce the law are unlikely to look so favorably on those who leaked the information. CNBC: Attorney General Merrick Garland told lawmakers that investigating the source of a massive leak of taxpayer information behind an article by ProPublica will be one of his top priorities. Good. Let’s see how that goes. Meanwhile Edward Luce in the Financial Times was one of those who wondered about the source of the leak: The unanswered question about ProPublica’s leak is where it came from. The news site does not know its origin but has corroborated the data against other sources. A reasonable suspicion is that it was hacked by an entity that does not wish US democracy well. No single IRS officer would have access to all this information. ProPublica also observes (correctly) that “outside of the U.S., Sweden, Norway and Finland make public every citizen’s tax returns.” This owes a great deal both to the very Nordic concept of, to use the Swedish-language word, Jantelagen — an anti-individualistic approach to life difficult to reconcile with core American values — even if “in Wisconsin,” Engelberg and Tofel relate, “anyone can file a public records request to find out how much state residents pay in state taxes.” #inline-newsletter-nloptin-60c92780bbd1d .inline-newsletter-subscribe__cta label { font-size: 1.2rem; line-height: 1.5rem; color: #000000; } #inline-newsletter-nloptin-60c92780bbd1d .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60c92780bbd1d { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60c92780bbd1d .inline-newsletter-subscribe__email-submit { border-color: #e92131; background-color: #e92131; color: #ffffff; } #inline-newsletter-nloptin-60c92780bc2ac .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #000000; } #inline-newsletter-nloptin-60c92780bc2ac .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60c92780bc2ac { background-color: #ffffff; border-width: 1px; } #inline-newsletter-nloptin-60c92780bc2ac .inline-newsletter-subscribe__email-submit { border-color: #eba605; background-color: #eba605; color: #ffffff; } #inline-newsletter-nloptin-60c92780bc47f .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #dd9933; } #inline-newsletter-nloptin-60c92780bc47f .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.5rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c92780bc47f { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60c92780bc47f .inline-newsletter-subscribe__email-submit { border-color: #dd9933; background-color: #dd9933; color: #ffffff; } #inline-newsletter-nloptin-60c92780bc645 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #0f733c; } #inline-newsletter-nloptin-60c92780bc645 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c92780bc645 { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60c92780bc645 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } #inline-newsletter-nloptin-60c92780bc789 .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #0f733c; } #inline-newsletter-nloptin-60c92780bc789 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c92780bc789 { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60c92780bc789 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } Ironically, those who leaked the tax information and those who published it risk undermining the administration’s current proposal that the IRS be handed even more power than it already has to peer into individuals’ lives. If the IRS cannot be relied upon to safeguard the secrets with which it is now entrusted, why give it more? Turning to the substance of the ProPublica report, we read that the IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year. Well, that’s because, for all the digits that it takes to depict them, those “gains” are ultimately meaningless until they are realized. Given how many digits can be involved, I wouldn’t want to push the claim of meaninglessness too far, but those who were worth millions on paper during the dot-com boom — and then next to nothing thereafter — might have a few thoughts on the evanescence of unrealized gains. In the event there had been a tax on the unrealized gains that they had “accumulated” during the bubble would they have been given refunds after they had been wiped out, say, the year after? And there’s something else. We are frequently told by those on the left and their fellow travelers that short-term investment horizons are a discreditable feature of “casino capitalism.” Yet taxing unrealized gains penalizes those investors and business-builders who are in for the long haul. Eisinger, Ernsthausen, and Kiel: America’s billionaires avail themselves of tax-avoidance strategies beyond the reach of ordinary people. Their wealth derives from the skyrocketing value of their assets, like stock and property. Those gains are not defined by U.S. laws as taxable income unless and until the billionaires sell. To capture the financial reality of the richest Americans, ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period. We’re going to call this their true tax rate. That number can be strikingly low — which is why the authors make such use of it — but dubbing it a “true” tax rate does not make it so. By all means, make the case for a wealth tax, however misguided, but do not pretend that (possibly temporary) growth in unrealized asset values is, in any real respect, “income.” To be sure, it is true that billionaires can, as the authors highlight, borrow against their assets. But so, too, could anyone who takes out a home equity loan, albeit on an immensely smaller scale. Asserting that such a loan — which, like all loans, must be repaid — is, in some regards, “income,” and then turning that assertion into an argument, in some circumstances, to justify taxing the asset on which it is secured does not rest on the soundest of logical foundations. There is much more in the ProPublica piece to consider — do read the whole thing — but little of it is any more persuasive. I spotted, incidentally, a sideswipe at the Trump tax overhaul: In 2018, [Bloomberg] reported income of $1.9 billion. When it came to his taxes, Bloomberg managed to slash his bill by using deductions made possible by tax cuts passed during the Trump administration, charitable donations of $968.3 million and credits for having paid foreign taxes. What those Trump-derived deductions might have been I don’t know, but charitable donations have long been tax-deductible (and not without reason), as have foreign tax credits, which are essentially a way of avoiding double taxation on the same income. A spokesman for Mike Bloomberg replied that: Mike Bloomberg pays the maximum tax rate on all federal, state, local and international taxable income as prescribed by law. Taken together, what Mike gives to charity and pays in taxes amounts to approximately 75% of his annual income (over 95% of which is ordinary income). In other words, he currently only keeps about 25 cents of every dollar he makes. His effective tax rate on any income not given to charity is approximately 45%. If he stopped donating to charity, he would keep about 55 cents of every dollar he makes. Mike has given $11 billion in his lifetime to charity, for which the U.S. allows a deduction to encourage giving. The tax benefit that he gets from the charitable deduction is a fraction of what he gives to charity and he views any of this tax benefit as more money to put towards charitable causes. He scrupulously obeys the letter and spirit of the law. Mike also pays taxes in more than 30 countries, 35 states and a myriad of cities where his company does business, including New York which has among the highest income tax rates in the country. And as the majority owner of a global business, he pays significant overseas taxes which are not double taxed by the U.S. under federal tax law and international tax agreements. The company repatriates all profits back to America every year . . . The increase in Bloomberg’s net worth (relying on their distinctly debatable methodology, Eisinger, Ernsthausen, and Kiel calculate that “between 2014 and 2018, Bloomberg had a true tax rate of 1.30%”) does not merit a mention in his spokesman’s statement. And nor should it have done. Let’s briefly return to the tax cuts passed during the Trump administration. Later on in the article, these are described as having “disproportionately benefited the wealthy,” something that is hardly a shock given that the wealthy pay a disproportionate share of the nation’s taxes.  And maybe keep in mind too, that, as Demian Brady wrote for Capital Matters back in February, recent data published from the Internal Revenue Service find that the share of income taxes paid by the top 1 percent of filers increased under the first year of the TCJA, while the share of taxes paid by the bottom 50 percent of filers decreased . . .  Unsurprisingly, Eisinger, Ernsthausen, and Kiel also turn their attention to the estate tax, grumbling about trusts and philanthropic foundations. What really caught my attention, though, was this: The notion of dying as a tax benefit seems paradoxical. Normally when someone sells an asset, even a minute before they die, they owe 20% capital gains tax. But at death, that changes. Any capital gains till that moment are not taxed. This allows the ultrarich and their heirs to avoid paying billions in taxes. The “step-up in basis” is widely recognized by experts across the political spectrum as a flaw in the code. Some on the left, or even the center, may object to this step-up, but to say that this provision, which is not confined to the U.S., is widely recognized by experts across the political spectrum as a flaw is nonsense, and it is not a provision that benefits just the very rich. As alluded to above, how the step-up works is to reset the capital gains “basis” in an asset that someone inherits to the market price at the time of the testator’s death. If your uncle leaves you an asset that he bought for $50,000, but which was worth $200,000 when he died, your basis for capital-gains-tax purposes will be $200,000, not $50,000. As Daniel Pilla wrote in Capital Matters in April: This is what we refer to as “stepped-up basis.” And the rule absolutely does not apply only to “rich people.” The operation of Code §1014 is not controlled by one’s annual income, the value of the inherited asset, or the total value of one’s estate. It applies across the board. Every American taxpayer enjoys the benefit of stepped-up basis on inherited property. If Code §1014 were repealed in its entirety, all inherited property would be taxed on sale at the capital-gains rate. In general, the gain would be calculated on the difference between the sale price and the price at which the deceased person paid for it (plus any capital improvements that add to the cost basis). The Biden administration is taking aim at the step-up “loophole” (its word), having proposed in late April ending the practice of “stepping-up” the basis for gains in excess of $1 million ($2.5 million per couple when combined with existing real estate exemptions) and making sure the gains are taxed if the property is not donated to charity. If precedent is anything to go by, that $1 million will be eroded by inflation over the years, and (if the administration gets its way) when capital-gains tax does kick in it may do so at a new, higher rate. Despite Eisinger, Ernsthausen, and Kiel’s careful disclaimer that what “it would take for a fundamental overhaul of the U.S. tax system is not clear,” they would, I’d guess, prefer to see the introduction of some type of wealth tax. As the authors acknowledge, this is a form of taxation that has been tried and, by some, abandoned elsewhere — even if they understate the extent of that abandonment. It would, in all likelihood, catch unrealized capital gains within its net. The authors have the honesty to note that where wealth taxes exist, they are on “a small scale.” (So far as I am concerned, any wealth tax should, for reasons both practical and philosophical, be rejected.) Perhaps it’s worth noting that the now-scrapped Swedish wealth tax on, say, a Jeff Bezos (one of ProPublica’s targets), would have peaked out at about 3 percent in the late 1980s, assuming that he was unable of take advantage of various available reductions. I suspect that quite a few of those in the U.S. arguing for the taxation of unrealized capital gains, a grotesque notion on many levels, might not be satisfied with 3 percent, at least when it comes to the super-rich. Eisinger, Ernsthausen, and Kiel conclude as follows: Buffett put it in 2011: “There’s been class warfare going on for the last 20 years, and my class has won.” That’s rhetoric (admittedly taken from Warren Buffett) designed to conjure up images of greedy plutocrats and hardworking blue-collar folk. But in reality this article is just another salvo in a long-standing battle within the elite. The thinking behind it, if it led to the policies its authors almost certainly favor, would eventually lead to severe damage to the economy and to the aspirations of millions. But that, it seems, is beside the point.

A Low Road to Higher Taxes

Amazon CEO Jeff Bezos at a news conference in Seattle, Wash., June 18, 2014 (Jason Redmond/Reuters) The week of June 7: blurring income and capital to raise the tax take, inflation, oat milk and much, much more. However much some on the left might like to deny it, there is a legitimate distinction between capital appreciation and income, and however much some of them might understand it, failing to account properly for that distinction presents too good a propaganda opportunity to be passed up. And so when ProPublica, “an independent, nonprofit newsroom that produces investigative journalism with moral force” “obtained” and then, in an article by Jesse Eisinger, Jeff Ernsthausen, and Paul Kiel, publicized some of the details of “a vast cache of IRS information showing how billionaires like Jeff Bezos, Elon Musk and Warren Buffett pay little in income tax compared to their massive wealth — sometimes, even nothing,” much of the secondhand reporting of their story, not to speak of the ProPublica article itself, followed an all too predictable narrative. But first some background. The data, Eisinger, Ernsthausen, and Kiel explained, which consisted of “the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years” was handed over to ProPublica “in raw form, with no conditions or conclusions.” The information provides “an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.” Presumably it does (or could do) the same with respect to all the “thousands” who had their data pilfered. ProPublica’s reporters then “spent months processing and analyzing the material to transform it into a usable database.” And: We then verified the information by comparing elements of it with dozens of already public tax details (in court documents, politicians’ financial disclosures and news stories) as well as by vetting it with individuals whose tax information is contained in the trove. Every person whose tax information is described in this story was asked to comment. Those who responded, including Buffett, Bloomberg and Icahn, all said they had paid the taxes they owed. . . . Musk responded to an initial query with a lone punctuation mark: “?” After we sent detailed questions to him, he did not reply. Musk wins again, I reckon. Eisinger, Ernsthausen, and Kiel: One of the billionaires mentioned in this article objected arguing that publishing personal tax information is a violation of privacy [but] we have concluded that the public interest in knowing this information at this pivotal moment outweighs that legitimate concern. Ah yes, ends and means. In a statement ProPublica’s editor in chief and president jointly commented: Many will ask about the ethics of publishing such private data. We are doing so — quite selectively and carefully — because we believe it serves the public interest in fundamental ways, allowing readers to see patterns that were until now hidden. “Patterns” (the different treatment of capital and income) that were not “hidden” to anyone with a basic awareness of the way in which the tax system works, patterns that are the result of decisions taken by democratically elected legislators, and which generally reflect basic tax principles that have applied for a long time and, with exceptions here and there, across much of the world (once in power, communists preferred outright confiscation). Eisinger, Ernsthausen, and Kiel may object to those principles and, despite a disclaimer that what “it would take for a fundamental overhaul of the U.S. tax system is not clear,” would probably prefer to see the introduction of some form of wealth tax (a form of taxation that, as they concede, has been tried and, for the most part abandoned, elsewhere, even if they understate the extent of that abandonment), which would, almost by definition, capture unrealized capital gains within its net. The authors have the honesty to mention that where such wealth taxes exist, they are on “a small scale” (I should add, that so far as I am concerned, any wealth tax should, both for practical reasons and as a matter of principle, be rejected). Perhaps it’s worth noting that the now-scrapped Swedish wealth tax on, say, a Jeff Bezos (one of ProPublica’s targets) would have peaked out at about 3 percent in the late 1980s, assuming that he was unable of take advantage of various available reductions. I suspect that quite a few of those in the U.S. who want to see the taxation of unrealized capital gains, a grotesque idea on many levels, might not be satisfied with 3 percent, at least when it comes to the super-rich. ProPublica’s editor in chief and president concede that: There is also a legal question here, and we want you to know we have taken it seriously. A federal law ostensibly makes it a criminal offense to disclose tax return information. But we do not believe that law would be constitutional if applied to bar or sanction publication of a story in the public interest when the news organization did not itself remove the information from the control of the IRS or solicit anyone else to do so — as we did not. I suspect they are right about that. What’s more, I would not describe that as a “loophole,” even if that is a word that the authors of the ProPublica report use several times (for example, “in the coming months, ProPublica will use the IRS data we have obtained to explore in detail how the ultrawealthy avoid taxes, exploit loopholes . . .”) in their own work. The law is the law. The law is unlikely to look so favorably on those who leaked the information. CNBC: Attorney General Merrick Garland told lawmakers that investigating the source of a massive leak of taxpayer information behind an article by ProPublica will be one of his top priorities. Good. Let’s see how that goes. Writing on Marginal Revolution, Tyler Cowen asks: The information was stolen illegally, yet on Twitter so many intellectuals were crowing about the disclosure.  (Did some of those same people condemn the theft from Biden Jr.’s laptop?  How many of them, in other contexts, will defend strong rights of privacy?  I guess that right is for everyone except rich people who create a lot of jobs and output.) ProPublica acted unethically, and in fact nothing fundamentally new or interesting or surprising was learned from their act as accessory. The real story is how the numbers were obtained, and here I fear the worst.  A single rogue agent can’t just pull up the files of rich people on demand, as I understand the system (if so, Trump’s return would have leaked a long time ago).  So this was probably a coordinated effort of some sort, is it crazy to suspect the Russians having some role in it?  Who else has the will and ability?  (China has the ability, but the “coddled rich people” meme is not one they are looking to push.)  What other breach of national security has occurred in the process of unearthing this information?  How was it done?  Are conspiracy theories becoming more true these days? It is stunning to me how little consideration these issues are being given and how poorly so much of our MSM has performed. Stunning? Not really. Meanwhile, you can read some of the New York Times coverage here. And here’s Edward Luce in the Financial Times: The unanswered question about ProPublica’s leak is where it came from. The news site does not know its origin but has corroborated the data against other sources. A reasonable suspicion is that it was hacked by an entity that does not wish US democracy well. No single IRS officer would have access to all this information. ProPublica also observes (correctly) that “outside of the U.S., Sweden, Norway and Finland make public every citizen’s tax returns.” This owes a great deal both to the very Nordic concept of, to use the Swedish term, Jantelagen, an anti-individualistic approach to life difficult to reconcile with core American values, reflected also in the “right to roam” across private land contained within the Swedish Allemansrätten. America is not Sweden. What those who leaked the tax information and those who published it have done, however ironically, risks undermining the administration’s current proposal that the IRS be given even more power to peer into individuals’ private information. If the IRS cannot be trusted to safeguard the secrets with which it is already entrusted, why give it more? Turning to the substance of the ProPublica report, we read that: The IRS records show that the wealthiest can — perfectly legally — pay income taxes that are only a tiny fraction of the hundreds of millions, if not billions, their fortunes grow each year. Well yes, that’s because those “gains” are largely meaningless until they are realized. Ask those who were worth (on paper) millions during the dot-com boom, and then next to nothing thereafter. In the event a tax on unrealized gains had been in force and levied at that time would they have been given refunds on the unrealized gains “accumulated” during the bubble, but wiped out the year after? And there’s something else. We are frequently told by those on the left and their fellow travelers that short-term investment horizons are a discreditable feature of “casino capitalism.” Yet the prospect of being taxed on unrealized gains penalizes those investors and business-builders who are in for the long haul, qualities, we are told, that ought to be encouraged. Eisinger, Ernsthausen, and Kiel: America’s billionaires avail themselves of tax-avoidance strategies beyond the reach of ordinary people. Their wealth derives from the skyrocketing value of their assets, like stock and property. Those gains are not defined by U.S. laws as taxable income unless and until the billionaires sell. To capture the financial reality of the richest Americans, ProPublica undertook an analysis that has never been done before. We compared how much in taxes the 25 richest Americans paid each year to how much Forbes estimated their wealth grew in that same time period. We’re going to call this their true tax rate. They can call it “true.” But that does not make it so. Make the case for a wealth tax, however misguided, by all means, but do not pretend that (possibly temporary) growth in unrealized asset values is, in any real sense, “income.” To be sure, it is true that billionaires can, as the authors highlight, borrow against the value of their assets, but then, so, on a vastly smaller scale, can anyone who takes out a home equity loan. The argument that a loan (whether big or small) which, like all loans, must be repaid is, in some respects, a form of income and thus can be used as the justification for imposing a tax on the asset on which it is secured does not rest on the soundest of logical foundations. There’s much more in the ProPublica piece to consider — read the whole thing — but little of it is any more persuasive. I noted, incidentally, a sideswipe at the Trump tax overhaul: In 2018, [Bloomberg] reported income of $1.9 billion. When it came to his taxes, Bloomberg managed to slash his bill by using deductions made possible by tax cuts passed during the Trump administration, charitable donations of $968.3 million and credits for having paid foreign taxes. What those Trump-derived deductions might have been I don’t know, but charitable donations have long been regarded as a legitimate tax deduction (and not without reason) and so have foreign tax credits, which are essentially a way of avoiding double taxation on the same income. #inline-newsletter-nloptin-60c4b9ec463bd .inline-newsletter-subscribe__cta label { font-size: 1.2rem; line-height: 1.5rem; color: #000000; } #inline-newsletter-nloptin-60c4b9ec463bd .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60c4b9ec463bd { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60c4b9ec463bd .inline-newsletter-subscribe__email-submit { border-color: #e92131; background-color: #e92131; color: #ffffff; } #inline-newsletter-nloptin-60c4b9ec4674c .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #000000; } #inline-newsletter-nloptin-60c4b9ec4674c .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60c4b9ec4674c { background-color: #ffffff; border-width: 1px; } #inline-newsletter-nloptin-60c4b9ec4674c .inline-newsletter-subscribe__email-submit { border-color: #eba605; background-color: #eba605; color: #ffffff; } #inline-newsletter-nloptin-60c4b9ec468a3 .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #dd9933; } #inline-newsletter-nloptin-60c4b9ec468a3 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.5rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c4b9ec468a3 { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60c4b9ec468a3 .inline-newsletter-subscribe__email-submit { border-color: #dd9933; background-color: #dd9933; color: #ffffff; } #inline-newsletter-nloptin-60c4b9ec46aa8 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #0f733c; } #inline-newsletter-nloptin-60c4b9ec46aa8 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c4b9ec46aa8 { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60c4b9ec46aa8 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } #inline-newsletter-nloptin-60c4b9ec46bda .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #0f733c; } #inline-newsletter-nloptin-60c4b9ec46bda .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c4b9ec46bda { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60c4b9ec46bda .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } A spokesman for Mike Bloomberg commented (to their credit, Eisinger, Ernsthausen, and Kiel refer to it and provide a link to the full text), that: Mike Bloomberg pays the maximum tax rate on all federal, state, local and international taxable income as prescribed by law. Taken together, what Mike gives to charity and pays in taxes amounts to approximately 75% of his annual income (over 95% of which is ordinary income). In other words, he currently only keeps about 25 cents of every dollar he makes. His effective tax rate on any income not given to charity is approximately 45%. If he stopped donating to charity, he would keep about 55 cents of every dollar he makes. Mike has given $11 billion in his lifetime to charity, for which the U.S. allows a deduction to encourage giving. The tax benefit that he gets from the charitable deduction is a fraction of what he gives to charity and he views any of this tax benefit as more money to put towards charitable causes. He scrupulously obeys the letter and spirit of the law. Mike also pays taxes in more than 30 countries, 35 states and a myriad of cities where his company does business, including New York which has among the highest income tax rates in the country. And as the majority owner of a global business, he pays significant overseas taxes which are not double taxed by the U.S. under federal tax law and international tax agreements. The company repatriates all profits back to America every year . . . The appreciation in the value of Bloomberg’s unrealized assets (relying, doubtless, on their highly debatable methodology, Eisinger, Ernsthausen, and Kiel calculate that “between 2014 and 2018, Bloomberg had a true tax rate of 1.30%”) does not rate a mention in his spokesman’s statement. And nor, whether as a matter of law, or even hypothetically, should it have done. I also noted with interest the claim that “Bloomberg managed to slash his bill by using deductions made possible by tax cuts passed during the Trump administration.” Even if we accept that as true, perhaps it is worth noting, as Demian Brady wrote for Capital Matters back in February that: Recent data published from the Internal Revenue Service find that the share of income taxes paid by the top 1 percent of filers increased under the first year of the TCJA, while the share of taxes paid by the bottom 50 percent of filers decreased. These findings come straight from an IRS report that breaks down the tax share of income earners for tax-year 2018 — the first year of taxes filed under the new provisions. Among its changes, the TCJA lowered tax rates, nearly doubled the standard deduction, and expanded the child tax credit. The IRS data show that the top 1 percent of filers, those with adjusted gross income of $540,009 or higher, paid 40.1 percent of all income taxes. This amount is nearly twice as much as their income share. Despite the rate reductions under the TCJA, the tax share of the top 1 percent increased compared to 2017. In fact, the National Taxpayers Union Foundation has compiled historical IRS data tracking the distribution of the federal income tax burden back to 1980, and 2018 was the highest share recorded over that period . . . Unsurprisingly, Eisinger, Ernsthausen, and Kiel also turn their attention to the estate tax, grumbling about trusts and charitable giving, but what really caught my attention was this: The notion of dying as a tax benefit seems paradoxical. Normally when someone sells an asset, even a minute before they die, they owe 20% capital gains tax. But at death, that changes. Any capital gains till that moment are not taxed. This allows the ultrarich and their heirs to avoid paying billions in taxes. The “step-up in basis” is widely recognized by experts across the political spectrum as a flaw in the code. “Widely recognized by experts across the political spectrum as a flaw in the code.” Some on the left may object to this step-up, but to say that this provision, which is by no means confined to the U.S., is recognized by experts across the political spectrum is a flaw is nonsense. To take just one instance, here’s Daniel Pilla, writing in Capital Matters in April: The president vows to eliminate the so-called “stepped-up basis” rule for inherited property. The president refers to this as a “loophole” that allows the rich to game the system. It is no loophole. In fact, it is a specific rule of law under Internal Revenue Code §1014. This law was not a part of the TCJA. It has been on the books since 1954 but is only now under attack by Democrats looking for ways to take more of your money. Suppose your parents own a home worth $200,000. They purchased the home decades ago for, say, $50,000. . . . If you inherit the home after their death, your basis is equal to the fair market value of the property as of the date of death — in this example, $200,000. See: Code §1014(a)(1). Now if you sell the property for $200,000, there is no capital-gains tax because there’s no gain (sale price minus basis equals gain). This is what we refer to as “stepped-up basis.” And the rule absolutely does not apply only to “rich people.” The operation of Code §1014 is not controlled by one’s annual income, the value of the inherited asset, or the total value of one’s estate. It applies across the board. Every American taxpayer enjoys the benefit of stepped-up basis on inherited property. If Code §1014 were repealed in its entirety, all inherited property would be taxed on sale at the capital-gains rate. In general, the gain would be calculated on the difference between the sale price and the price at which the deceased person paid for it (plus any capital improvements that add to the cost basis). To go back to your parents’ home, if they paid $50,000 for it, and you sold it for $200,000 after their death, that $150,000 would be subject to tax. And that example might not be as extreme as it seems. It’s not unlikely that your parents would have held on to their last home for many years. One consolation, however, is that the White House appears to be contemplating exempting the first $1 million in unrealized gains from these new rules, a limit which, if left unchanged, will likely be eroded by inflation over the years, if not outright reduced or eliminated. Moreover, you can expect the tax bill to be calculated at a much higher rate than those currently in effect . . . Eisinger, Ernsthausen, and Kiel conclude as follows: Buffett put it in 2011: “There’s been class warfare going on for the last 20 years, and my class has won.” That’s imagery designed to conjure up images of greedy plutocrats and hardworking blue-collar folk. In reality, however, this article is just another salvo in the attempt by one section of the elite to wrestle power (and what flows from it from) another. That the result would result in severe damage to the economy and to the aspirations of millions is, it seems, beside the point. The Capital Record We released the latest of a 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 21st episode David was joined by Dr. Lacy Hunt, one of the foremost economic minds alive today, to unpack the debate over monetary inflation and the impact of government debt on economic growth. Lacy delivers some hard truths about where we are, how we got here. And the Capital Matters week that was . . . Back to the 1970s (and not just when it comes to inflation) Jon Hartley recalled Free to Choose: In May, Bob Chitester, producer of Milton Friedman’s famous Free to Choose PBS TV series and Free to Choose Media, died at the age of 83. Last year marked 40 years since the original airing of the series, which was first released in January 1980, toward the end of the Carter administration, in response to liberal economist John Kenneth Galbraith’s The Age of Uncertainty BBC series released in 1977. Free to Choose, in its original run on PBS, played an important part in making Friedman a household-name economist, and it has since attracted millions of views online. The series, which defended the virtues and welfare-enhancing abilities of free-market capitalism that helped set the stage for Reaganism, was launched during an era of rising inflation and big government. Indeed, the supply-shock era of the 1970s was a setting that all too eerily bears resemblance to today’s COVID-19 economic environment amid President Biden’s spending binge, the current “transitory” uptick in prices, and gas lines following the Colonial pipeline cyberattack. (The latter, in fairness, pales when compared with the OPEC embargoes of the 1970s and is hardly the fault of the president.) For this reason alone, everyone should consider watching (or rewatching) Free to Choose . . . Energy Policy/Climate Change Travis Nix: With gas prices soaring across the country, politicians should be working to fortify American energy independence and ensure that oil companies are treated fairly compared with other industries. Senator Bernie Sanders and Congresswoman Ilhan Omar must have missed the memo. They’ve introduced a bill to make drilling for oil more expensive. The “End Polluter Welfare Act,” as they’ve dubbed it, would eliminate a critical tax provision that eases expenses for American oil and gas companies drilling domestically. This bill would eliminate American jobs, reduce wages, and make America more dependent on energy sources in the war-torn Middle East, in addition to raising gas prices . . . Dominic Pino: “In this house, we believe,” among other things, “science is real,” reads the sign in front of your most insufferable neighbor’s house. The idea is to signal sophistication and allegiance to the Party of Science. Your most insufferable neighbor wants everyone driving past his house to know that he isn’t one of those slack-jawed Neanderthals he reads about in the New York Times from far-out places like central Pennsylvania or South Jersey. No, he’s pro-science, and he voted for Biden and wrote a stemwinder of a Facebook post back in March praising the president when he announced, “Science is back.” Your most insufferable neighbor was also happy when Biden canceled the Keystone XL pipeline project back in January. At long last, TC Energy, the Calgary-based energy company constructing Keystone XL, threw in the towel yesterday and announced it was abandoning the project. Rather than wait out another American presidential administration and hope the next one would allow it, TC Energy is cutting its losses and moving on . . . it seems segments of the Left have fooled themselves into thinking politicians make decisions based on science. They pretty much never do, and for good reason. Take the question of Keystone XL. Scientists say that climate change poses a threat to the planet. Scientists have done countless studies demonstrating that in various ways, whether they look at sea levels, temperatures, greenhouse gases, etc. Scientists have found that the Alberta tar-sands oil that Keystone XL would have transported is especially bad for the environment. Scientists also work for energy companies. ExxonMobil, ConocoPhillips, Royal Dutch Shell, BP, Chevron, et al. are some of the largest employers of scientists in the world (and they pay them fantastically). To find oil reserves (which is a lot harder than you might think), they need earth scientists. Pipeline engineering, too, is a highly technical scientific field. Scientists developed technology to detect minor pipeline leaks from outer space, which is actually much faster than detecting them from Earth. The technology uses satellites that analyze the vegetation near pipelines and detect changes in vegetation growth that would indicate hydrocarbon leakage. If your political position is “pro-science,” what do you do? There are brilliant scientists doing outstanding work on climate issues, and there are brilliant scientists doing outstanding work for petroleum and pipeline companies. That’s why Biden’s executive order didn’t use “pro-science” reasoning and instead made it about diplomacy. Science is of very limited use in making this decision because it doesn’t care about politics. Water freezes at 32 degrees and boils at 212 degrees no matter who’s president . . . Me on oat milk and other matters: It is hard to deny that certain forms of environmentalism, often (but certainly not exclusively) when climate change is involved, take on strong religious characteristics, frequently of a distinctly millenarian nature. However hard it may be to deny that eminently self-evident fact, plenty do, which made it refreshing to read this in an article in the Financial Times by Judith Evans: “As the oat milk brand Oatly spread across the world last year, its chief executive, Toni Petersson, said his product — which boasts lower greenhouse gas emissions than conventional dairy — was not just another drink. “For people today, sustainability is more of an ideology. It’s a structured belief system, almost like a religion . . . but it’s relied on what the science says,” Petersson said. “And I think we as a company have a licence to take a place in that ideology.” The science . . . Tax Robert VerBruggen: A new ProPublica story begins (emphasis mine): “In 2007, Jeff Bezos, then a multibillionaire and now the world’s richest man, did not pay a penny in federal income taxes. He achieved the feat again in 2011. In 2018, Tesla founder Elon Musk, the second-richest person in the world, also paid no federal income taxes. Michael Bloomberg managed to do the same in recent years. Billionaire investor Carl Icahn did it twice. George Soros paid no federal income tax three years in a row. ProPublica has obtained a vast trove of Internal Revenue Service data on the tax returns of thousands of the nation’s wealthiest people, covering more than 15 years. The data provides an unprecedented look inside the financial lives of America’s titans, including Warren Buffett, Bill Gates, Rupert Murdoch and Mark Zuckerberg. It shows not just their income and taxes, but also their investments, stock trades, gambling winnings and even the results of audits.” What?!?!? That’s bad. Tax data are supposed to be private — and zealously guarded — and yet “thousands” of people’s information got out . . . Veronique de Rugy on Biden’s proposed global minimum corporate tax: It started with the Biden administration arguing that other countries should join the U.S. in adopting a global minimum tax. This is how the White House pitched the proposal: A minimum tax on U.S. corporations alone is insufficient. . . . President Biden is also proposing to encourage other countries to adopt strong minimum taxes on corporations, just like the United States, so that foreign corporations aren’t advantaged and foreign countries can’t try to get a competitive edge by serving as tax havens. This is a perfect definition of a tax cartel with the explicit intent of suppressing tax competition from countries with lower (and I would argue better) tax systems. And the G-7 nations have now reached an agreement on a 15 percent global minimum tax. But to these government officials, the real value of this agreement is that it will make it easier to bully, or at the very least, to exert strong political influence over some 135 countries to get them to join their seven-country tax cartel. Banking & Finance John Berlau: As America shows its resilience and recovers from a devastating pandemic, many American families and entrepreneurs need credit to rebuild their lives and livelihoods. One would think the last thing the nation’s lawmakers would want to do is impose legal uncertainty to hamper the flow of credit to those who need it most. Yet this is just what Congress seems poised to do. The Senate voted last month to overturn the “true lender” rule, which clarified that smaller banks could partner with outside firms to offer credit using the same legal framework under which big banks have long issued credit cards. To ensure that credit flows to deserving American families and small businesses, the House must reject similar attempts to kill the rule through a Congressional Review Act (CRA) resolution and must leave the Trump administration rule in place . . . Dominic Pino: The Wall Street Journal reports that bank are telling their corporate customers to stop making deposits. Yes, you’re reading that correctly: Banks don’t want more deposits. The basic idea of banking is to take in money from deposits and lend it out at interest to borrowers. But with interest rates near zero, banks hardly make any money doing that, so taking in more money from deposits doesn’t do much for them . . . The Internet and Regulation Alden Abbott and Andrew Mercado: A founding father of the Internet, Vint Cerf, attributes its astonishing economic success in no small part to “permissionless innovation,” the freedom of Internet developers to try new business models and offer new services without obtaining prior government approval. The clear signal government sends by not overregulating the market is a reason the Internet today is a staple in our lives. Any calls for Internet regulation should be met with a healthy dose of skepticism, and before acting, the government should ensure that proposed Internet regulation is going to provide more consumer benefit than harm. In a recent essay, Facebook vice president for global affairs and former U.K. deputy prime minister Nick Clegg claims that U.S. Internet “regulation is overdue” and proposes bipartisan congressional action in four areas. Two of his broad proposals deal with clarifying rules for the removal of illegal content by Internet platforms and enacting federal privacy legislation. These proposals may have some merit but need to be fleshed out. His other two legislative proposals, however, should be rejected. First, his endorsement of a new federal “digital regulator” with broad powers would stifle innovation and allow established companies to keep potential rivals out of the market. Second, his call for Congress to regulate speech designed to “mislead people and undermine public trust” and speech involving the use of social media in elections is particularly pernicious. Having the government police speech on the Internet is a recipe for widespread suppression of competing viewpoints and violates the First Amendment’s guarantee of freedom of speech . . . Woke Capital A different take from Sean-Michael Pigeon: Sometimes it seems like everywhere you turn, a company is taking another political stance or harping on a new buzzword. Hollywood, Big Tech corporations, and even car companies feature slogans that feel brazenly partisan. Many on the right have reacted to this new phenomenon by asserting that Americans don’t want an openly political marketplace. However, as more people find purpose and belonging in their work, conservatives should feel encouraged that “do-gooding” can be a profitable and desirable business model . . . Inflation Kevin Williamson: The disruption of production has contributed to higher housing prices (lumber prices hit an all-time high last month, with mills unable to keep up with demand) and an enormous run-up in the prices of some goods, notably vehicles and luxury items, as well as shortages in other goods (such as firearms ammunition) that can be difficult to lay hands on at any price. When that gets sorted out, it should — should — take the pressure off some prices, including in such important sectors as houses and cars. But that may not be enough to lower the current momentum toward higher prices. As economists sometimes put it, the question before policy-makers is whether the inflation we are seeing is sticky, meaning that higher prices are likely to stay with us for a long time rather than being a short-lived blip. Sticky inflation is a problem because it can stick around even when economic growth slows or stagnates, a condition that persisted in the 1970s and gave us the term “stagflation.” Nobody much enjoyed stagflation. Some people did enjoy the countermeasures that were deployed against stagflation — sky-high interest rates. There are still among us people of a certain age who fondly remember getting 14 percent on their Treasuries back in the 1980s. It was a good deal if you were rich and neither working nor looking for a mortgage. And that’s the long-term reason to worry about inflation. When the Fed drives up interest rates to slow down inflation, it generally raises borrowing costs throughout the credit markets — including, ultimately, the cost of financing our national debt. Debt service will cost the U.S. government about $380 billion this year, accounting for 8 percent of all federal spending. For perspective, that is about what is spent on undergraduate instruction at all of the nation’s public colleges and universities combined. It’s a big chunk of change — and it’s big with interest rates that are very, very low by historical standards. If the cost of financing the debt goes up, it could easily blow a Pentagon-sized hole in the federal budget. Money that gets spent on debt service is money that isn’t available for other things, whether that’s the ordinary heavy expenditure for Social Security and Medicare or emergency measures in the face of some unknown future crisis. The more you owe, the fewer options you have . . . We also held a webinar on inflation featuring Kevin Hassett. You can see it here. Philip Klein: For the last decade or so, as the nation’s debt grew and the Federal Reserve kept pumping money into the financial system, there were periodic warnings about the risk of inflation. Yet these fears were never actually realized. As a result, in the face of growing signs of inflation, many people — including the ones who happen to run our nation’s fiscal and monetary policy — aren’t taking the current threat all that seriously. This is worrisome, because in reality, a growing body of evidence — major economic indicators and announcements from small and large businesses — suggests that inflation is quite real. Consumer prices leapt 5 percent in May year-over-year after gaining 4.2 percent in April, with some sectors experiencing gains not seen in decades. The growth of the money supply has been off the charts. A survey by NFIB, the largest advocacy group for small businesses, found that 48 percent of businesses reported raising prices, compared with just 5 percent who reported lowering prices — the widest gap since 1981. In addition, Factset found that in the first quarter, more S&P 500 companies brought up inflation in their earnings calls than any other quarter since the data firm began keeping track in 2010 . . . Our chart guy, Joseph Sullivan, on food price inflation and political instability: As no country is immune to COVID-19’s disruptions in the food-supply chain,” I wrote in Capital Matters on June 2, 2020, “food inflation is now again on the prowl.” Now, a year later, its prowl has turned into a pounce. According to data released by the United Nations on June 3, 2021, global food inflation has jumped to a height unseen in roughly a decade. Last year, food inflation was a worry for many government officials. Now, it’s materialized into a real foe that many are grappling with. And this foe, these latest numbers indicate, has grown to the point that it poses a real threat to the stability of governments . . . Conservatives against Big Business  Robert H. Bork Jr: Rachel Bovard has a well-written piece in The American Conservative that argues for those of us on the right to rediscover our true tradition of using antitrust law to stand up to powerful concentrations of market power. By the time you finish reading her piece, it will seem as if aggressive antitrust action is as Republican as splitting rails and running an underground railroad. But conservatives should reject her approach. Throughout her piece, Bovard focuses solely on a handful of Big Tech companies for their content decisions that anger conservatives. On this narrow concern, she endorses a purported return to a conservative stand against bigness that would, if enacted, mean the end of capitalism as we know it in America. If that sounds a bit hyperbolic, consider the two leading antitrust bills in the Senate today . . . Space Ingrid Chung on Jeff Bezos’ planned trip to space: Bezos’s trip to space would, if successful, prove to be a remarkable demonstration of the vitality of free enterprise and the successes achievable through the privatization of space exploration. NASA’s decision to outsource space-exploration projects has contributed to the expansion of the private space industry. The possibility of lucrative government contracts has incentivized corporations to invest resources and efforts, with considerable success, in the development of space technology to remain competitive. Such development is also prompted by the desire to spearhead the new and potentially enormously profitable industry of space travel. Among the leading space companies, Bezos’s Blue Origin is not the only one taking long strides forward. Elon Musk’s Space X had announced plans to launch the first all-civilian mission to space in February. Virgin Galactic’s founder Richard Branson is allegedly attempting to reach space before Bezos does by securing himself a seat on a test flight scheduled to take off over the Fourth of July weekend. Another space race appears to be on the horizon — only this time, it is among corporations instead of nations. Consider this another reason to endorse the privatization of space exploration — a space race among nations could put polities at odds; a space race among corporations encourages innovation and progress . . . Finally, we produced the Capital Note, our “daily” (well, Tuesday–Friday, anyway). Topics covered included: France fines Google, an hour-long web outage, bearish Bitcoin, a primer on digital-ad exchanges, Biden’s proposed tax cartel, Apes and Clover, Japan’s debt difference, corporate virtue signaling (exceptions may apply), textual investment, the G-7’s agreement on digital taxes, May’s inflation numbers, the EU’s fine on Amazon, Glenn Hubbard’s suggestion for international tax authorities, inflation, corporatism, risk and space flight, billionaires and value creation.

Hayek’s Tiger

The Chief Economist of the Bank of England, Andy Haldane, listens from the audience at an event at the Bank of England in the City of London, Britain, April 27, 2018. (Toby Melville/Reuters) Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: inflation, corporatism, risk and space flight, billionaires and value creation. To sign up for the Capital Note, follow this link. News and Views InflationWell, you didn’t think that topic wouldn’t rate a mention . . . From the U.K.’s New Statesman, an article by the Bank of England’s chief economist, Andy Haldane. Much of this, unsurprisingly, is focused on the U.K., although much will also strike a note with American readers, not least this comparison between the policy responses to the financial crisis and the arrival of COVID-19 (my emphasis added): During the Covid crisis, central banks have ­followed the same playbook as after the global financial crisis: a large and rapid crisis was met with a large and rapid monetary policy response. But after the global financial crisis, the economy recovered slowly so monetary policy was normalised slowly. This time is very different. The economy is rebounding rapidly. Yet the guidance issued by central banks implies a path for ­policy normalisation every bit as sedate as after the global financial crisis. Having ­followed the global financial crisis playbook on the way in – rightly – there is a risk central banks also follow it on the way out. This would be a bad mistake. If realised, this risk would show up in monetary policy acting too late. Friedrich Hayek once referred to inflation as the tiger whose tail central banks hold, usually with trepidation and ideally from a safe distance. If central bankers wait to see the whites of this tiger’s eyes before acting, they risk having to run like the wind to avoid being eaten. Waiting too long risks interest rate rises that are larger and faster than anyone would expect or want. It runs the risk of the brakes needing to be slammed on to an overheating economic engine. No one wins in that situation. Not central banks, whose mandates will have been breached and which would need to ­perform an economic handbrake turn for which they would not be thanked. Not businesses, for whom a higher cost of borrowing and a slowing economy would, with debts high, be an unwelcome surprise. Not households facing the twin threat of a rising cost of living and a rising cost of borrowing. And not governments, whose debt servicing costs would rise, potentially casting doubt on their capacity to run big debts and ­deficits. Ouch. The policy lesson is a clear one, and an old one. The inflation tiger is never dead. While nothing is assured, acting early as inflation risks grow is the best way of heading off future threat. This is monetary policy 101. As experience in the 1970s and 1980s taught us, an ounce of inflation prevention is worth a pound of cure. As I watch what the Fed is up (or not up) to, it’s hard not to think that the lessons of the 1970s have been forgotten, and those of 2008–10 have, in a way, been “over learned.” Not every crisis is the same, but memories of the most recent debacle are those that tend to weigh heaviest with policy-makers. This reminds me, in a way, of a conversation that I had with a leading Nordic banker at some point in the early 2000s. The Nordic banking sector had gone through a major trauma at the beginning of the 1990s (I was working for the New York subsidiary of one of the leading Swedish banks at the time, an experience not without its excitements). A decade or so later, the banker was worried that too many of his senior executives had been scarred by the disasters of the earlier 1990s. They were now lending too little rather than too much. For a truly gloomy experience, take a look at Philip Klein’s piece on inflation on Capital Matters: For the last decade or so, as the nation’s debt grew and the Federal Reserve kept pumping money into the financial system, there were periodic warnings about the risk of inflation. Yet these fears were never actually realized. As a result, in the face of growing signs of inflation, many people — including the ones who happen to run our nation’s fiscal and monetary policy — aren’t taking the current threat all that seriously. This is worrisome, because in reality, a growing body of evidence — major economic indicators and announcements from small and large businesses — suggests that inflation is quite real . . . It seems as if the tiger is on the loose. A Corporatist ConclaveWhen world leaders gather, the topic of climate change is, these days, frequently high on the agenda (only a churl would point out that the U.K.’s climate activist-in-chief, Boris Johnson, chose to take a plane to travel the 250 miles or so from London to the G-7 summit) and so it is this time at the G-7 meeting in Cornwall. And, as so often when climate change is being discussed, little effort is made to conceal how intertwined this topic has become with the construction of a corporatist state. The Daily Telegraph: The [unelected] Prince of Wales will host a reception for world leaders and [unelected] CEOs of some of the world’s largest companies at the G7 summit in Cornwall, accompanied by his son, the [unelected] Duke of Cambridge. Prince Charles was personally asked [why?] by the Prime Minister, Boris Johnson, to host the meeting focused on climate change, the Telegraph understands. On Thursday afternoon, he held a reception with nine business leaders at St James’s Palace ahead of the summit. The group were joined by John Kerry, the US special envoy for climate, as they pinpointed critical areas of discussion before meeting world leaders in Cornwall on Friday. They will push for new commitments from governments and “coordinated action” on climate change, believing that a signal of intent will be followed by financial investment . . . Governments should stick to representing the people that elected them, CEOs should stick to improving shareholder return, and members of the British royal family should remember that they are “living flags,” with opinions of no more value than those of any piece of cloth. #inline-newsletter-nloptin-60c34fb468f88 .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #0f733c; } #inline-newsletter-nloptin-60c34fb468f88 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c34fb468f88 { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60c34fb468f88 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } #inline-newsletter-nloptin-60c34fb469381 .inline-newsletter-subscribe__cta label { font-size: 1.2rem; line-height: 1.5rem; color: #000000; } #inline-newsletter-nloptin-60c34fb469381 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60c34fb469381 { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60c34fb469381 .inline-newsletter-subscribe__email-submit { border-color: #e92131; background-color: #e92131; color: #ffffff; } #inline-newsletter-nloptin-60c34fb4694ab .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #000000; } #inline-newsletter-nloptin-60c34fb4694ab .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60c34fb4694ab { background-color: #ffffff; border-width: 1px; } #inline-newsletter-nloptin-60c34fb4694ab .inline-newsletter-subscribe__email-submit { border-color: #eba605; background-color: #eba605; color: #ffffff; } #inline-newsletter-nloptin-60c34fb469596 .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #dd9933; } #inline-newsletter-nloptin-60c34fb469596 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.5rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c34fb469596 { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60c34fb469596 .inline-newsletter-subscribe__email-submit { border-color: #dd9933; background-color: #dd9933; color: #ffffff; } #inline-newsletter-nloptin-60c34fb469686 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #0f733c; } #inline-newsletter-nloptin-60c34fb469686 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c34fb469686 { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60c34fb469686 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } Meanwhile, check out what Gillian Tett has to say about the “Cornwall consensus” in the Financial Times: There is a subtle, but nonetheless profound, reset under way of the relationship between business and government. In the Washington consensus companies were regarded as independent actors competing with one another, without state involvement. Now all the talk is of “partnership” between government and business. Free enterprise is still lauded, but “partnership” is the framework for facing the big societal challenges of the day. Democracy, however, is not. If anyone is to focus on “big societal challenges,” it ought to be elected governments. CEOs should do only what they are paid to do — generate shareholder return. If they want to be involved in tackling these “challenges” then they should enter the political fray the old-fashioned way, via the ballot box, rather than by hijacking the power that goes with the capital entrusted to them by their shareholders to pursue ideological objectives unconnected with their companies’ business. These CEOs would justify the approach that they are taking, at least in part, as an example of “stakeholder capitalism” at work. As I discussed last July: The wider vision underlying stakeholder capitalism is one in which different interest groups such as employers, employees, and consumers collaborate in pursuit of mutually (if sometimes mysteriously) agreed objectives under the supervision of the state. It would never be quite post-democratic, not quite, in any likely American form, but what it would be is a variety of corporatism. Corporatism takes many, many forms. It can range from the relatively (relatively) benign — it runs through European Christian Democracy, and it can be detected in early-20th-century American Progressivism — to the infinitely more heavy-handed. It has been an important element in the theory, if not the practice, of some variants of fascism, most notably in Mussolini’s Italy, but not only there. Corporatism takes as its starting point the idea that society is best run through its leading interest groups, either alongside the ballot box, or, under fascism, in place of it . . . Needless to say, the World Economic Forum (“Davos”) — an institution too grand to be bound by much respect for democracy — has weighed in through one of the groups it “hosts”: The Alliance of CEO Climate Leaders steps up and calls on G7 and other world leaders to accelerate a just transition. Note not only the presumption contained in the naming of this “alliance” (“CEO Climate Leaders”) but also that word “just,” a word defined by whom, exactly? Around the WebSpace travel and risk The Wall Street Journal: When Jeff Bezos climbs into the New Shepard capsule for its first passenger trip to space next month, his safety will be almost entirely in the hands of the spaceflight company he founded two decades ago. Mr. Bezos plans to join the small band of tourists who have flown in space as the emerging industry prepares to launch hundreds of people aloft. For now, they aren’t protected by the meticulous federal safety regulations that govern commercial air travel. Passengers planning a ride on the New Shepard must sign a form waiving their right to sue Mr. Bezos’s Blue Origin LLC in the event of an accident. Richard Branson’s Virgin Galactic Holdings Inc. which plans to send paying passengers on its space plane as early as next year, requires a similar step. Congress agreed in 2004 to let the space-tourism industry self-regulate to speed its preparations for passenger flights. Years of delays, including an accident that killed a Virgin Galactic test pilot in 2014, have pushed back the start of flights for fare-paying passengers. The policy has been extended several times and now runs until October 2023. The Federal Aviation Administration’s jurisdiction is limited to protecting public safety and the environment during launches and re-entries, a spokesman for the agency said. “Congress has not allowed the FAA to extend its authority to the safety of crew or space flight participants,” the spokesman said. Regulators, lawmakers and industry executives are debating whether to introduce tougher rules, such as requiring passengers to be trained for the rigors of reaching the edge of space. The companies already offer some training for their short flights, which include periods of high G-forces and the possible disorientation that can come with weightlessness . . . Would I take a trip in this capsule? With enough Dramamine, yes. Random WalkBillionaires and creating value With billionaires’ taxes coming under scrutiny following the ProPublica leak, it’s perhaps worth remembering this from James Pethokoukis from April: Amazon founder Jeff Bezos is worth nearly $200 billion. And at the moment that makes him the richest person on Earth. So he’s clearly created a lot of value for himself since he wrote his first letter to Amazon shareholders back in 1997. In his latest letter — also his last since he’s stepping down as CEO — Bezos gives a more comprehensive view of who’s benefited from the growth of a company now with a market capitalization of nearly $2 trillion. One group, of course, are shareholders not named Jeff Bezos, who own 7/8th of the shares and include pension funds, universities, and 401(k)s. But there’s more to the story here than what Bezos calls “shareowners.” A lot more. Bezos looks at it this way, using the example of last year’s corporate performance: Firstly, Amazon created $21 billion in value for shareholders in 2020, or the company’s net income. If Bezos owned the whole kit and caboodle, that’s how much he would have earned last year. Secondly, there’s the $91 billion (payroll plus benefits and payroll taxes) of compensation for Amazon workers. Thirdly, third-party sellers earned somewhere between $25 billion (Bezos’ “conservative” choice) and $39 billion in profits. Fourthly, Bezos assigns $126 billion (75 hours saved a year shopping online x $10 an hour – the cost of a Prime membership) to Amazon’s “consumer customers,” including the 200 million Prime members. Fifthly and finally, Bezos pegs “AWS customer” value creation at $38 billion, based purely on cost savings and excluding the benefit from faster software development. This back-of-the-envelope calculation (and there’s greater detail in the letter) works to total value created of $301 billion, with just 7 percent of that going to shareholders. And since Bezos owns less than 10 percent of the shares, the value going to Amazon founder last year works out to about $2 billion, or less than 1 percent of total value created. The estimate reminds me of the great paper from Nobel laureate economist William Nordhaus, “Schumpeterian Profits in the American Economy: Theory and Measurement.” Nordhaus tries to calculate who gains from the value generated by innovation. His findings: “We conclude that only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers” And by “most,” he means almost all of the benefit with innovators “able to capture about 2.2 percent of the total social surplus from innovation.” Makes a rough sort of sense when you think about it. Consider what Jeff Bezos is worth — a lot — versus the value generated by his nearly trillion-dollar company — a whole lot more — and benefits all of us accrue. Not sure the “billionaires are policy mistakes” folks really get this. — A.S. To sign up for the Capital Note, follow this link.

Building the Biden Tax Cartel

President Joe Biden speaks during a visit to the Greenwood Cultural Center in Tulsa, Okla., June 1, 2021. (Carlos Barria/Reuters) Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Biden’s proposed tax cartel, Apes and Clover, Japan’s debt difference, corporate virtue signaling (exceptions may apply), and textual investment. Also: an invitation to a webinar on inflation featuring Kevin Hassett and Rich Lowry. To sign up for the Capital Note, follow this link. Capital Matters Webinar, Thursday, June 10, 2 p.m. (EDT) Inflation — Should We Be Concerned?National Review Institute and National Review Capital Matters presents a conversation with Kevin Hassett who served as former senior adviser and chairman of the Council of Economic Advisers in the Trump administration and Rich Lowry on inflation. Inflation has been so low for so long that most Americans understandably see persistent inflation as ancient history, and that any blip up today will quickly be reversed. But, is persistent inflation around the corner? Inflation and commodity prices are up sharply. The latest Michigan survey shows people expect 3.7 percent inflation next year. Shortages of everything from lumber to semiconductors have raised input prices for businesses, while the percentage of small businesses reporting that they cannot find qualified workers is at a record high. The ingredients are in the pot, and the fire is on. But will the pot boil? RSVP Here: https://us02web.zoom.us/webinar/register/WN_wwxm-DtbTCmPy6cx7BzT4Q The Global Minimum Tax and the Less Than Magnificent G-7Over the weekend, the G-7 group of rich countries agreed to back President Biden’s plans for a global minimum corporate tax. As Janet Yellen put it (my emphasis added): The G-7 Finance Ministers have made a significant, unprecedented commitment today that provides tremendous momentum toward achieving a robust global minimum tax at a rate of at least 15 percent. The French finance minister (unsurprisingly) was in the “at least” camp: This is a starting point . . . in the coming months we will fight to ensure that this minimum corporate tax rate is as high as possible. Some months back, there had been some talk that the administration wanted 21 percent. Keep that “at least” in mind. But even at 15 percent, there should be no doubts about the reason for all this, which is to create an international tax cartel designed to stop smaller countries from increasing their competitiveness (and attracting foreign investment) with corporate-tax rates that greedier governments consider to be too low. Biden and his team have attempted to justify this on the grounds that there has been a “race to the bottom” with corporate-tax rates — a race to the bottom marked, in reality, by the fact that very few appear to be taking part. As the Tax Foundation has shown, corporate-tax rates fell sharply after the 1980s, but over the last decade or so, they have (roughly speaking) plateaued. The White House’s real objective is to reduce the danger that its proposed increase in the domestic corporate-tax rate will pose to U.S. competitiveness and the appeal of this country as an investment destination. These numbers (again from the Tax Foundation) show why the administration might be concerned: An increase in the federal corporate tax rate to 28 percent would raise the U.S. federal-state combined tax rate to 32.34 percent, higher than every country in the OECD, the G7, and all our major trade partners and competitors including China. This would harm U.S. economic competitiveness and diminish our role in the world. When the U.S. last had the highest corporate tax rate in the OECD, prior to tax reform in 2017 with the Tax Cuts and Jobs Act (TCJA), the U.S. experienced several years of economic malaise, including chronically low levels of investment, productivity, and wage growth, as well as major distortions and avoidance schemes in the corporate sector. This included corporate inversions to lower-tax countries, migration out of the corporate sector and into the noncorporate sector, and a decline in business dynamism. This is why the U.S. lowered the corporate tax rate, to compete with other countries around the world that lowered theirs long ago. Whether we use corporate tax collections as a portion of GDP, average effective tax rates, or marginal tax rates, each measure shows that the U.S. effective corporate tax burden is close to or above the average compared to its OECD peers. Raising corporate income taxes would put the U.S. at a competitive disadvantage, whether one looks at statutory tax rates or effective corporate tax rates. As Yellen’s “at least” would suggest, this is only the first (completed) step, albeit an important one, in a far more detailed set of negotiations with a far wider range of countries. There is also the little matter of legislative approval in those countries that sign up, which may not be entirely straightforward. After all, national control over taxation is a fundamental aspect of sovereignty, and, by extension, basic democratic principle. It’s true that any treaty is almost certain to include an exit mechanism for a signatory that changes its mind, but that mechanism will be likely to be time-consuming and onerous, and unlikely to provide any protection against retaliation by those countries that remain committed to the treaty. Under such circumstances, it would have been better either not to have signed the treaty in the first place, or, even better still, to have blocked it. As always with tax proposals, the devil will lie in the details. As this useful summary from the Wall Street Journal would suggest, the details (so far) are not particularly detailed. An extract: [One long-standing principle in international taxation has been that] corporate profits should be taxed where value is generated, which traditionally was where businesses had a physical presence. The rule was easier to follow when profit flowed from factory floors instead of patents and other highly mobile intellectual property. Now the G-7, which comprises of Canada, France, Germany, Italy, Japan, the U.K. and the U.S., is proposing that some profit from some of the biggest companies should be reallocated to countries where their products and services are consumed. Those countries can then tax the reallocated portion of the profit. Under the proposal, nations where the companies’ products are consumed would have the right to tax 20% of profits above a margin of 10% . . . Only the largest and most profitable companies would be affected under the proposal, at most around 100. The 100 biggest companies by market capitalization have recently included such giants as Apple Inc., Saudi Arabian Oil Co., and Berkshire Hathaway Inc., data from S&P Global Intelligence show. However, measures other than market cap could be used to identify the biggest companies, and lobbyists say they expect some sectors to be excluded from the list . . . And so (via the Financial Times): Rishi Sunak, UK chancellor [finance minister], is pushing for a carve-out for the City of London in the G7’s push for a new global tax system to cover the world’s “largest and most profitable multinational enterprises”. Sunak said the weekend’s “historic agreement” by G7 finance ministers would force “the largest multinational tech giants to pay their fair share of tax in the UK”. But one official close to the talks said the UK was among the countries pushing “for an exemption on financial services”, reflecting Sunak’s fears that global banks with head offices in London could be affected. HSBC, the UK’s biggest bank by revenues, generates more than half its income from China, while Standard Chartered, another UK-headquartered lender, conducts little business in Britain, with most of its focus on Asia and Africa. Sunak raised the issue at the G7 talks in London, according to those briefed on the meeting, and his allies confirmed he would continue to make the case when the talks move to the G20 next month. “Our position is we want financial services companies to be exempt and EU countries are in the same position,” said one British official. But President Joe Biden wants to broaden the scope of the tax so it does not just hit US tech giants . . . That Britain’s Conservative government, elected to deliver a Brexit that was going to allow the U.K. to “take back control” of its destiny, has so far gone along with plans to fix any sort of global minimum tax is not without its ironies. #inline-newsletter-nloptin-60c0cc2ad934e .inline-newsletter-subscribe__cta label { font-size: 1.2rem; line-height: 1.5rem; color: #000000; } #inline-newsletter-nloptin-60c0cc2ad934e .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60c0cc2ad934e { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60c0cc2ad934e .inline-newsletter-subscribe__email-submit { border-color: #e92131; background-color: #e92131; color: #ffffff; } #inline-newsletter-nloptin-60c0cc2ad96bc .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #000000; } #inline-newsletter-nloptin-60c0cc2ad96bc .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60c0cc2ad96bc { background-color: #ffffff; border-width: 1px; } #inline-newsletter-nloptin-60c0cc2ad96bc .inline-newsletter-subscribe__email-submit { border-color: #eba605; background-color: #eba605; color: #ffffff; } #inline-newsletter-nloptin-60c0cc2ad9882 .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #dd9933; } #inline-newsletter-nloptin-60c0cc2ad9882 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.5rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c0cc2ad9882 { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60c0cc2ad9882 .inline-newsletter-subscribe__email-submit { border-color: #dd9933; background-color: #dd9933; color: #ffffff; } #inline-newsletter-nloptin-60c0cc2ad9a8a .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #0f733c; } #inline-newsletter-nloptin-60c0cc2ad9a8a .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c0cc2ad9a8a { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60c0cc2ad9a8a .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } #inline-newsletter-nloptin-60c0cc2ad9be2 .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #0f733c; } #inline-newsletter-nloptin-60c0cc2ad9be2 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60c0cc2ad9be2 { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60c0cc2ad9be2 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } Back to the WSJ: The G-7 deal likely would mean higher overall tax bills for many of the biggest tech companies, with more of the payments potentially going to countries in Europe, and less to the U.S. There would be a silver lining for the tech firms: The removal of digital-services taxes that have been applied to big tech companies in the past couple of years in several European countries, including France, Italy and the U.K. The G-7 committed to the coordinated removal of such taxes as part of its deal. Tech companies are willing to trade slightly higher taxes for an unwinding of that growing patchwork of national taxes targeting their digital services. Perhaps some large tech companies are willing to make such a trade, but this would effectively be a deal made with American taxpayer money to make it easier for the government to raise more from all U.S. companies, big or small. Much of that bill will in turn be passed on to individuals, as shareholders, and/or consumers (higher prices), and/or employees (lower salaries), who would thus be paying to fund a scheme that will end up costing them even more money. There have been more enticing offers. Back to the WSJ again: The reallocation of profits to places where products are consumed will only apply to the roughly 100 largest companies with profit margins over 10%— with some industries like agriculture, banking and the oil industry potentially carved out in part because their income isn’t as mobile. It isn’t clear how the 10%-margin rule would be applied. Amazon.com Inc. has a profit margin below that level, but officials and lobbyists have said they expect at least some of the company’s profit—likely at its profitable cloud division, Amazon Web Services—to be subject to the new reallocations. One way to do that: apply the rule to each business unit rather than parent companies. And the minimum tax itself? The WSJ: Each country [passes] laws to ensure that companies headquartered there pay a minimum tax of at least 15% in each of the nations in which they operate. Companies that paid less would make up the difference to their home countries. If adopted widely, such a rule could reduce the incentive for companies to set up subsidiaries in tax havens. How widely this rule will be adopted (if at all) has yet to be seen. Back in April, I thought that the chances were remote. They are clearly now less remote than they were, but this proposal will still be a hard sell to many countries, not all of them in the Caribbean. There’s Ireland, for example. RTE: [Irish] Minister for Finance Paschal Donohoe said any final deal on reforming global corporation tax rules must meet the needs of both small and large countries. “It is in everyone’s interest to achieve a sustainable, ambitious and equitable agreement on the international tax architecture,” said Mr Donohoe, who has expressed reservations about how a deal could damage the draw of Ireland’s 12.5% rate. “I look forward now to engaging in the discussions at OECD. There are 139 countries at the table, and any agreement will have to meet the needs of small and large countries, developed and developing.” It’s not hard to understand those “reservations.” The Irish Times: Ireland could lose up to a fifth of its corporate tax revenue under a proposal agreed by G7 finance ministers on Saturday, Minister for Finance Paschal Donohoe has warned. But he said that such a loss of revenue – about €2 billion a year – was already built in to the Government’s economic assumptions. The likely loss to the exchequer of between €2 billion to €2.4 billion is equivalent to a fifth of the State’s annual corporate tax revenue. It is about two thirds of the total housing budget for this year or about a quarter of the annual education budget. That’s a lot to be “built in.” How many small countries will Biden be prepared to bully to get his way? Around the WebSentences I never expected to see in the Wall Street Journal: “Apes who missed on $GME! Listen up, $CLOV is ready to lift off!” wrote one user who goes by u/pvr90 on Tuesday. Ape is a nickname for buyers of AMC Entertainment Holdings Inc. shares, which have been among the most actively traded meme stocks in recent weeks. Background: Shares of Clover Health Investments Corp. soared after emerging as the latest target for retail traders on Reddit forums. The healthcare company’s share price rose as much as 109% Tuesday before retreating but remained up over 70%. That follows a 32% jump Monday. It is currently being bought and sold above $20 a share, while it was valued at $7.64 at the end of last month. Over 125 million shares were traded Monday, nearly an eightfold increase from Friday. Debt: Why Japan is different: John Cochrane notes that “Japan has huge debts and no crisis or inflation (so far). Doesn’t that prove the US can borrow a ton more money painlessly?” Spoiler: No. In a postscript Cochrane explains why Japan, which has a debt/GDP ratio of 256 percent (in at No. 2, lagging Venezuela, but ahead of Sudan!) does not provide an example that the U.S. can follow: Japan’s debt is long-term, held by domestic people, pensions and central bank. US debt is short-term, held by foreign central banks and financial institutions. Our debt is much more prone to run, and a rise in interest rates will feed quickly into the budget. Japan also has accumulated assets from trade surpluses; we have the opposite. Japan’s debt is held by old people and subject to estate tax. A lot of Japanese hold bank accounts, as mutual funds and similar investment vehicles familiar in the US are less prevalent. Bank accounts flow in to reserves, backed by Treasury debt. More importantly, Japan does not have looming unfunded Social Security and Medicare, underfunded pensions, contingent liabilities (Fannie and Freddy guarantee most home mortgages, who is going to pay student loans?) bailout guarantees and more. Sustainability is about debt vs. ability to repay; about future deficits;  not debt alone. Corporate virtue signaling (exceptions may apply): It’s always entertaining to contrast the woke talk on the part of a growing number of players on Wall Street with their attitudes to doing business in China. One or two names stand out in this report from The Economist: Zhang Kun is the rock star of Chinese fund management. His name often makes headlines; whole articles are dedicated to his investment calls. Investors vie to get into his funds, one of which has reportedly delivered a return of 700% since it was launched eight years ago. He is among a growing number of managers who generate more hype than the firms that employ them. With personalities like Mr Zhang on its payroll, E-Fund, a state-owned investment group, hardly needs to advertise. Now a swathe of foreign firms hopes to take on Mr Zhang and his ilk by entering China’s asset-management industry. Last month Goldman Sachs, a Wall Street bank, announced a wealth-management venture with ICBC, China’s largest commercial lender by assets. BlackRock, a giant American asset manager, will join forces with China Construction Bank (CCB). Amundi, a French firm, has linked up with Bank of China and Schroders, a British investment group, with China’s Bank of Communications. In March JPMorgan Asset Management said it would buy a 10% stake in China Merchant Bank’s wealth business. Nearly 20 global investors are setting up fund-management firms; others are launching private securities funds. I cannot, of course, think which those names might be. Random WalkTextual investment: Robin Wrigglesworth in the Financial Times: It is true that corporate reports contain verbiage that would make even a journalist blush. But instead of heaping scorn on these reports, savvy investors should embrace this admittedly waffly textual information as a potential gold mine that can finally be mined with modern technology . . . The swelling volume of corporate statements means that no one can realistically consume everything. In the US, the “risk factors” section of annual reports has alone almost tripled in length since 2006 and now averages more than 11,000 words, according to a recent report by S&P Global. Still there are valuable signals hidden within even the subtlest changes, notes Frank Zhao, an analyst at S&P’s Market Intelligence team. The tool to glean tradable signals from textual noise is known as ‘‘natural language processing”, an increasingly popular field of artificial intelligence that involves teaching machines how to read and understand the intricacies of human language. NLP allows tracts of previously recondite non-numeric “unstructured” data to be systematically harvested and analysed at dizzying speeds…. Quarterly and annual reports are now generally released in a machine-friendly format, but they are the tip of the iceberg of written information that investors can rummage around for valuable signals. Transcripts of management calls with analysts or TV interviews with chief executives, newspaper reports, central bank speeches or even social media chatter can all be mined. The finance industry loves its buzzwords, and anything to do with artificial intelligence is particularly hot these days, and should be treated warily. But we might be at the beginning of a textual investing revolution that could upend the industry. — A.S. To sign up for the Capital Note, follow this link.

Jobs and Inflation

The Federal Reserve building in Washington, D.C., May 1, 2020. (Kevin Lamarque/Reuters) The week of May 31: jobs and inflation, the infrastructure binge, digital currency, and much, much more. I had hoped that this letter would be an opportunity to revert to the meme (stolen joke), with an erudite discussion of the AMC phenomenon and the market of the apes, but I have a suspicion that Daniel Tenreiro is writing on something related to that at just this moment. So I will leave you for now with this splendid piece (click on the link) of investment analysis and trudge wearily over to the jobs report, and more to the point, inflation. In an earlier post, I described the jobs report as “something for everyone.” And by that I meant that the May number (559,000) was better than April’s (278,000), but worse than expectations (~ 650,000). That provided ammunition to those who argue that the Fed should keep on doing what it’s doing (too much, since you asked) and pleased the stock markets. That mix meant that President Biden was able to boast that the job creation was “due in no small part to the bold action we took with the American Rescue Plan,” while his supporters could make the case that still more needed to be done — bring on the trillions! It’s a good rule that not too much should be made of monthly data, even more so when they are being distorted by a pandemic, but it was also worth noting the acceleration in wage gains, which, as CNBC reported “rose 2% year over year from being up just 0.4% in April.” CNBC continued: Economists had largely been dismissive of average hourly earnings numbers for much of the post-pandemic period, noting that the bulk of hires came from higher-earning positions, which made wages look like they were rising for everyone but left many low-wage workers out of gains. With the return of more hospitality workers in May, the numbers are more relevant now and indicative of rising wage pressures across the economy, not just for higher earners. Some economists fear that increasing wages could lead to further inflation, and they blame enhanced unemployment benefits for causing a “labor shortage” that forced huge companies such as Bank of America and McDonald’s to raise their hourly minimum wage. Economically speaking, there can be “good” and “bad” reasons for wage increases, but I don’t think that that is the way that Joe Biden looks at it. Back to CNBC: When it comes to the economy we’re building, rising wages aren’t a bug, they’re a feature,” [Biden] said during a speech in Ohio last week. That does not suggest to me that the president will regard wage inflation as a reason to change course. In a post yesterday, Michael Strain noted the amount of the workforce that was remaining on the sidelines. As he argued, that will sort itself in due course, “last most through the summer,” but: Even if workers return at faster rates in the fall, the potential of significant wage pressures growing over the summer is concerning because it could boost consumer prices. If upcoming inflation data show consumer prices growing above 4 percent, many will be alarmed. And that “alarm” is not something anyone should want to see. Inflationary fears have a way of creating inflation, not least because of the way they tend to be echoed in wage increases. That’s one reason why it is worth watching household expectations about inflation. Here’s CNBC from three weeks ago: As the economy reopens in the wake of the coronavirus crisis, more Americans expect inflation to increase over the next few years. Overall, the expectation is that the inflation rate would be up to 3.4% one year from now — its highest level since September 2013 — and at 3.1% three years from now, according to the Federal Reserve Bank of New York’s Survey of Consumer Expectations for April. I wouldn’t say that those are dramatic numbers, and the fact that those expectations are for inflation to decline after a post-pandemic spike is reassuring, but, then again, inflationary expectations can turn on a depreciating dime. Meanwhile, in an article for Bloomberg, Richard Cookson observes that the supply-chain disruptions often singled out as prominent culprits for the current inflationary surge may not be as temporary as is often assumed: There’s no evidence that supply blockages are loosening. Company inventories are at rock bottom. Every corporate survey, including this week’s manufacturing and non-manufacturing ISMs, shows huge worries about rising costs. The same is true of services. Paul Hannon, in the Wall Street Journal: Producers of oil and other commodities responded to the slump in demand during the early months of the pandemic by cutting back on their output. In a typical economic slowdown, it would have taken many months for demand to rebound. But during the pandemic households have adapted to working, educating their children and entertaining themselves from home by buying a range of durable goods, including electronic devices and furniture. That mismatch between unexpectedly high demand and reduced supply has led to shortages of many of the things that factories need to make their products. Surveys of purchasing managers at factories around the world that were released Tuesday showed that activity rose at the fastest rate in 11 years during May, but the waiting times for delivery of needed supplies were the longest in the survey’s history. Factories reported that the prices they paid for inputs rose at the fastest pace in over a decade, while the prices they charged rose at the fastest pace on record. Markets will respond (indeed rising prices are part of that response), but when it comes to supply, can they respond quickly enough? Also writing for Bloomberg, Bill Dudley (a former president of the New York Fed, among many other accomplishments), turned his attention to the prospects for inflation. Dudley notes that Fed officials believe that “the current inflationary surge” is “transitory” (an adjective which we will be hearing more and more in the months to come). In Dudley’s view: For the temporary price acceleration to become persistent, three things must happen. First, employers must demand more workers, in a big and sustained way. Second, the increased demand for labor must push up wage inflation to the point where it cannot be absorbed by higher productivity growth or lower profit margins. Third, people’s expectations for future inflation must climb further. Without such an increase in inflation expectations, a tight labor market alone would be insufficient to trigger an upward spiral in which rising wages and prices reinforce one another. True enough. That said, he is relatively relaxed about the prospects for now, arguing that there’s plenty to suggest that “the current sharp rise in inflation will subside over the next year as supply-chain issues get resolved.” But: There’s reason to be concerned that the temporary nature of the spike will also prove to be transitory. In the longer term, the country still faces the confluence of expansionary fiscal and monetary policy. The Biden administration is pursuing an infrastructure bill and other legislation that will pile on added stimulus. Households have done enough saving during the pandemic to sustain spending long after the fiscal impulse ends. And the Fed has committed to keeping short-term interest rates at zero until the economy has achieved maximum employment and inflation has reached at least 2% and is expected to stay above 2% for some time. In other words, the Fed — according to its own policies — is likely to act too late to prevent the economy from overheating. So no matter what prices do this year, the risk of higher inflation down the road remains elevated . . . Much is being made of how calm financial markets still appear to be about inflation (indeed Dudley makes that point): Prices in the Treasury market suggest investors expect inflation to average a bit more than 2% over the five years starting in mid-2026. This is close to what such markets have implied over the past decade, and means only that the Fed is succeeding in bringing expectations closer to its 2% long-term inflation target. I have my doubts how “real” those prices are, thanks to the effect on the Fed’s operations in the bond market, but it is undeniable that there are bond investors out there prepared (for now) to lend to Uncle Sam, a deadbeat in the making if ever I saw one, for ten years at 1.55 percent (admittedly a far higher number than the rock bottom lows we saw a few months ago) a fact that remains, to me, remarkable. We can talk about the increasing interest that some institutional investors are showing in residential housing — and what that might mean — on another occasion. Nevertheless, where we have seen concern in the financial markets over inflation it has been (for the most part) indirect, dominated by worries over the implications of the fear of inflation on the Fed’s policies, policies that are currently doing a great deal to boost the price of financial assets to levels that would be hard to justify in the absence of Jay Powell’s free-spending ways. Yet an interesting article by John Authers in Bloomberg (yes, I read a lot of Bloomberg) suggests that investors may be less complacent than some believe: Something interesting has happened to the relationship in the last few months. While this isn’t because of some iron-clad affinity between stocks and bonds, it does tell us something about a factor that affects both: inflation. For the last three months, there has been the strongest positive correlation between bonds and stocks (meaning that their prices move in the same direction, and bond yields move in the opposite direction to share prices) in this century. For most of the time since the internet bubble burst, there has been a negative correlation; bond yields have tended to move in the same direction as share prices. Why might this tell us something about inflation? Scanning the charts over the long term, we see that the correlation was positive from the late 1960s through until the late 1990s, before falling sharply after the bubble burst. After that, the correlation was consistently negative, until now. The period during which the correlation was positive stretches from the era when the Bretton Woods partial tie of currencies to the dollar and to gold was coming apart, through to the round of financial crises in the late 1990s which reached their most frightening moment when the Federal Reserve under Alan Greenspan cut rates in the wake of the Long-Term Capital Management meltdown. During this period, inflation seemed a significant concern. Before, the tie to gold tended to keep inflation concerns under control. After LTCM, and the melt-up and asset price collapse that followed, fear of inflation went off the agenda almost completely. The Fed was acting to avert deflation, which Japan had shown could be a real possibility. Inflation was a consummation devoutly to be wished. So, stocks and bonds were positively correlated during the era when inflation was a real concern, but negatively correlated in the periods before and after . . . It’s well worth taking time to read the whole thing. But I shouldn’t end on such a bleak note. From the Financial Times: Larry Fink, BlackRock’s chief executive [yes, that Larry Fink], has been vocal in pushing companies to agree to a net-zero carbon target by 2050. But there is good reason not to move too quickly, the head of the world’s largest asset manager said. Accelerating the race to green the economy would raise the prospect of higher inflation and pose a major policy challenge for many countries, Fink said in remarks at the Deutsche Bank global financial services conference. Citing the example of airlines (biofuels are 50 to 60 per cent more expensive than current carbon based sources), Fink said a mandate to go green quickly would result in higher ticket prices. This would ultimately prove too disruptive for the economy and would not fly politically given the likelihood of “displaced jobs and deepening regional inequalities”. It would take a heart of stone not to laugh. #inline-newsletter-nloptin-60bbb7d1703a4 .inline-newsletter-subscribe__cta label { font-size: 1.2rem; line-height: 1.5rem; color: #000000; } #inline-newsletter-nloptin-60bbb7d1703a4 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60bbb7d1703a4 { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60bbb7d1703a4 .inline-newsletter-subscribe__email-submit { border-color: #e92131; background-color: #e92131; color: #ffffff; } #inline-newsletter-nloptin-60bbb7d170793 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #000000; } #inline-newsletter-nloptin-60bbb7d170793 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60bbb7d170793 { background-color: #ffffff; border-width: 1px; } #inline-newsletter-nloptin-60bbb7d170793 .inline-newsletter-subscribe__email-submit { border-color: #eba605; background-color: #eba605; color: #ffffff; } #inline-newsletter-nloptin-60bbb7d1708ae .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #dd9933; } #inline-newsletter-nloptin-60bbb7d1708ae .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.5rem; color: #2d2d2d; } #inline-newsletter-nloptin-60bbb7d1708ae { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60bbb7d1708ae .inline-newsletter-subscribe__email-submit { border-color: #dd9933; background-color: #dd9933; color: #ffffff; } #inline-newsletter-nloptin-60bbb7d170a22 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #0f733c; } #inline-newsletter-nloptin-60bbb7d170a22 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60bbb7d170a22 { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60bbb7d170a22 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } #inline-newsletter-nloptin-60bbb7d170b1e .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #0f733c; } #inline-newsletter-nloptin-60bbb7d170b1e .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60bbb7d170b1e { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60bbb7d170b1e .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } The FT: “The transition has to be fair and just,” said Fink. “We do not have the technology yet” for a smooth transition. “This is a big policy issue” in terms of whether regulators and governments “accept more inflation to go green”. “We do not have the technology yet.” Oh. And will regulators and governments “accept more inflation to go green”? In their current frame of mind, yes. So, I ended up on a bleak note after all. The Capital Record We released the latest of a 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 20th episode David was joined once again by Dr. Art Laffer, who shares with David fond memories of the recently deceased grandfather of supply-side economics, Dr. Robert Mundell. And the Capital Matters week that was . . . Ransomware With memories of the Colonial Pipeline ransomware episode still fresh (the great meat hack still lay ahead), David Eisner compared the threat from ransomware with that from the Barbary pirates. His conclusion: America today faces the modern equivalent of the Barbary pirates. And, similar to the Barbary pirates, today’s hackers often operate with the support or cover of hostile powers. The wisdom of our Founding Fathers should not go ignored. Although most of President Biden’s May 12 executive order was already U.S. government policy, his call to strengthen the cybersecurity of government and its contractors is a correct one. As the administration has correctly indicated, the trade-offs for private companies are complex, and government should generally continue to defer to the decisions of their owners and boards. While Europe has a history, going back to the Crusades, of attempting negotiation and paying tribute, and some colonial leaders (such as Adams) preferred this route, most of our Founding Fathers were resolute in their opposition. American policy today should not waver in its opposition to negotiating with terrorists and paying cyber ransom. Our Founding Fathers did not do it. Neither should we. Cale Clingenpeel: The rising costs of cyberattacks, the associated negative externalities, and the particular interest in protecting critical infrastructure present the federal government with an important role in enhancing cybersecurity. In 2018, the Trump administration issued for the first time in 15 years a National Cyber Strategy. The strategy outlined a number of priorities that could help close the private cybersecurity investment gap. These priorities include incentivizing cybersecurity investments, improving cyberattack reporting, and expanding and equipping a highly skilled cybersecurity workforce. Additionally, the CEA identified information sharing and transparency, cybersecurity standards, and investment in cybersecurity research and development as important areas for federal policy to address. The Biden administration should build on the Trump administration’s strategy to confront the rising security and economic threat of cyberattacks. Although the ransom decision itself might be a “private sector decision,” cybersecurity is a common good that requires prioritization by the federal government. Greenery Jordan McGillis looked at the way that the dependence on certain metals that will have to accompany the current energy “transition” will not only leave us strategically exposed, but won’t be that good for the environment either: On environmental matters, the IEA report lands body blow after body blow, with its hardest punches pertaining to mineral requirements. Electric vehicles, such as the F-150 Lightning the president hopped into, require six times more mineral inputs than comparable internal-combustion vehicles do. The average EV needs over 200 kilograms of minerals, with graphite (over 50 kg), copper (over 50 kg), nickel and manganese (combined over 50 kg) being at the top of the list. The mineral requirement for the average conventional vehicle is less than 40 kg total, most of it being copper. On electricity generation, the IEA says that “while solar PV plants and wind farms do not require fuels to operate, they generally require more materials than fossil fuel–based counterparts for construction.” Per megawatt, the IEA data show, offshore wind requires about 8,000 kg of copper and 5,000 kg of zinc; onshore wind requires about 3,000 kg of copper and 5,000 kg of zinc; and solar requires about 3,000 kg of copper and 3,000 kg of silicon. Meanwhile, nuclear requires less than 2,000 kg of copper and less than 6,000 kg of minerals total; coal requires around 3,000 kg of minerals; and natural gas requires less than 2,000 kg per megawatt. Moreover, according to the IEA, the mining and processing of resources for allegedly clean energy involve substantial environmental harm, including water contamination, intensifying of water stress in arid regions, adverse impacts on biodiversity, and the generation of toxic and radioactive material. And then, as Helen Raleigh pointed out, there is the little matter of forced labor: China dominates the global supply chain for solar power and is the leading exporter of solar panels and critical components for making solar panels. For instance, about 95 percent of solar modules rely on one mineral — solar-grade polysilicon, and China produces 80 percent of the world supply of polysilicon. Xinjiang alone is responsible for 45 percent of the world’s supply of polysilicon. Such a high level of production requires a significant supply of labor. The Sheffield Hallam University report, titled “In Broad Daylight: Uyghur Forced Labor and Global Solar Supply Chains,” shows how China’s booming solar industry has been tainted by the forced labor of Uyghurs and other minorities in Xinjiang . . . Brad Polumbo on electric-vehicle subsidies: Regardless of party affiliation, few Americans support taxpayer subsidies for the rich and well-off. But if you look closely at his plans for electric vehicles, that’s exactly what President Biden is currently promoting. The president included a whopping $174 billion for electric-vehicle subsidies in his $2 trillion “infrastructure” proposal. And in a recent speech, Biden argued that “the future of the auto industry is electric. . . . There’s no turning back.” He went on to insist that “we have to look forward. . . . That means new purchasing incentives for consumers to buy clean vehicles like the electric Ford 150 — a union-made product — right here in America.” This vision of government-led innovation spurring a green-technology renaissance to the benefit of all sounds nice, at least at first glance. But the truth is Biden’s proposed “green” spending binge amounts to nothing more than a taxpayer-financed handout to environmentally conscious rich people . . . $6 Trillion! John Fund: It’s ironic that De­moc­rats are now throwing Obama under a bus and agreeing he had a rotten record on the economy, with his policies causing a “five-year recession.” That five-year recession was one of the longest in modern times — a mini-depression. Back in 2009, the Democrats promised that their “shovel-ready” projects would cause annual growth of 4 percent or more. But they never came close. Indeed, it was Vice President Joe Biden who a decade ago promised a “summer of recovery” that never arrived. So Democrats believe their nearly $1 trillion of borrowing and wasteful spending in 2009 tanked the economy but that $6 trillion will now deliver economic prosperity. Good luck with that . . . Robert VerBruggen looked at the winners from the four rescue/stimulus packages so far (admittedly three passed under Trump, and, so far, the one from Biden): To date, Congress has passed four COVID-relief bills: the CARES Act, the Families First Coronavirus Response Act, the Response and Relief Act, and the American Rescue Plan. President Trump signed the first three, President Biden the last. Combined, these bills sent about $900 billion to lower-level governments, primarily states and localities. A new study from Jeffrey Clemens and Stan Veuger looks into where this money went and finds two major patterns. First, small states made out quite nicely, probably thanks to their overrepresentation in Congress relative to their population. Some of the formulas used to provide these funds even had “floors” — meaning every state was guaranteed a certain minimum amount of money that did not depend on its size. In general, if a state has one extra congressperson per million residents, including senators, it got an extra $670 to $780 per capita. (As the authors note, this is the difference between Montana and Arkansas: The former has three congresspeople to represent 1 million people, or three per million, while the latter has six congresspeople for 3 million residents, or two per million.) Second, Biden’s bill, but not the three passed through a divided Congress last year, show a big partisan skew, worth about $300 per capita for a state with an entirely Democratic congressional delegation (relative to a state with a fully Republican delegation). This comes from a skew in the funding formulas coupled with the huge size of the bailout given — which was not necessary, given the better-than-expected fiscal condition of states this year . . . Dominic Pino was unimpressed by talk of a high-speed rail network for New England: If you only listened to rail advocates, you’d think Western Europe and Asia are the only places in the world with developed economies. Canada and Australia also have developed economies, and they don’t have high-speed rail. Their transportation systems are based on highways and airplanes. Sound familiar? The United States is geographically much more similar to Canada and Australia than it is to Western Europe or Asia. We have very low population density and a very large amount of land. Our situation, like Canada’s and Australia’s, is not well suited for passenger rail. That doesn’t make us, or them, less competitive economically . . . Contrary to what you might expect, environmentalists are some of rail’s foremost opponents. Let’s grant the emissions-reduction point in its entirety. That still leaves construction. Environmentalists aren’t big fans of new construction projects, no matter what they are, but especially ones that seek to cut straight lines through nature. This project wants to build a tunnel across the Long Island Sound to connect Ronkonkoma, N.Y., directly with New Haven, Conn. Are we supposed to believe that the Sierra Club and Greenpeace folks in Connecticut and New York State are just going to be alright with that? And even if they were, the environmental-review process with the state and federal governments would make Kafka wince. The communities the North Atlantic Rail people should be most worried about are not the poor neighborhoods, but the rich ones. It’s been hard enough building high-speed rail through the middle of nowhere in California. Good luck building it through some of the densest and wealthiest neighborhoods in America. The North Atlantic Rail Initiative also brags that the $105 billion it’s requesting “would represent just 5% of a $2 trillion infrastructure program.” Just five percent! Imagine if it were a $20 trillion infrastructure program, then it would only be 0.5 percent! Though this proposal is entertaining, it should not be entertained by Congress. Brian Riedl on the infrastructure binge: For lawmakers, nothing is easier than spending money without paying for it. Deficit spending buys support among its recipients and allows lawmakers to appear compassionate, all while dumping the cost on the unborn or those too young to vote. Despite having built a $22 trillion national debt with this formula, budget deficits still leave many voters feeling guilty about robbing from their kids. Ambitious politicians, therefore, seek to invent justifications to make such spending appear responsible. Many embrace the Keynesian notion that government spending is a perpetual-motion machine that creates substantial new economic activity out of thin air. More recently, advocates of the “Modern Monetary Theory” have contended that the government printing press can finance a nearly unlimited spending spree — a crank concept with little peer-reviewed research and almost zero support among academic economists. This approach has been embraced by big spenders seeking to slap an academic veneer on the same old borrow-and-spend pandering. And then there is the classic justification that “investment” spending need not be paid for because the attendant economic growth will pay for its cost, or at least make the borrowing more affordable. Senator Brian Schatz (D., Hawaii) recently embraced this case, tweeting: “We should deficit finance infrastructure. Money is cheap, and the things being built last for 30 or 50 or 100 years, so it should be amortized over that period This ‘pay for’ thing is nuts. You just shouldn’t pay cash for infrastructure in a low interest rate environment.” Where to even begin? Tax Victor Riches saw an opportunity for Arizona’s Governor Ducey: Whereas most of Arizona’s governors have fallen somewhere between unremarkable and abysmal, Governor Ducey has the opportunity to break this mold and leave a permanent, positive mark on the state. This is where his second opportunity to make history lies: in tackling Arizona’s antiquated tax code — one made much worse by the recent passage of Proposition 208. For the uninitiated, Prop 208 was billed as a tax on “millionaires” designed to provide additional money to the state’s K–12 education system. In actuality, the measure nearly doubles the income taxes on individuals and small businesses who have the audacity to make more than $250,000 a year. Unsurprisingly, Prop 208 contained little in the way of accountability measures to ensure that the confiscated dollars would be wisely spent. Rather, like crossing the event horizon of a black hole, once your income crosses the 208 threshold it simply disappears, never to be seen again. Prop 208’s effects were felt immediately, with Arizona instantly joining the ranks of states with the worst top marginal-tax rates, far surpassing all its neighbors not named California. At the Goldwater Institute, we’ve challenged the constitutionality of Prop 208 and are now awaiting a decision from the state’s supreme court. A victory is critical to the state’s ability to attract job creators. In fact, an in-depth study published by Goldwater Institute found that, if left unchallenged, the measure would result in the loss of over 100,000 jobs as well as a significant loss of revenue to local and state coffers. However, even with a court victory, Arizona would still have four separate income-tax brackets, coupled with — once city and locality sales taxes are thrown in — an already high sales tax . . . The Perils of Forecasting Dominic Pino on why doomsayers tend to have the upper hand: In the Winter 1981 issue of The Public Interest, Simon wrote the article “Global Confusion, 1980: A Hard Look at the Global 2000 Report.” In that article, based on his then-forthcoming book The Ultimate Resource, Simon presents copious evidence on why the population doomsayers were wrong. But he also points to some of the dynamics that give doomsayers the upper hand in public discourse. One factor is reflected in the somewhat defensive tone in the last paragraph in Simon’s introduction. He confidently asserts that the evidence demonstrates that population growth will not ruin the planet, but he feels the need to clarify: Please note that I am not saying that all is well now, and I do not promise that all will be rosy in the future. Children are hungry and sick; people live lives of physical and intellectual poverty, and lack of opportunity; some new pollution may indeed do us all in. It’s hard to be optimistic when the prevailing narrative is pessimistic because that can come across as being dismissive of suffering. Presenting the case that a problem is not as bad as it may initially seem puts the presenter on defense right away. The doomsayers can be on offense all the time. You never hear someone predicting catastrophe clarify by saying, “Please note that it might not be as bad as I’m saying it will be.” . . . Digital Currency Paul Jossey: Recent volatility in cryptocurrencies such as Bitcoin, Ether, and Dogecoin has emboldened the Biden administration and congressional Democrats to call for government regulation of digital currencies. Senate Banking Committee chairman Sherrod Brown (D., Ohio) fired off a scathing letter on May 19 to President Biden’s acting comptroller of the currency urging him to scrap a Trump-administration policy granting limited-purpose bank charters to some cryptocurrency firms. Bank charters should not be granted to firms involved with such “risky and unproven digital assets,” he wrote. Yet Brown and others ostensibly concerned about cryptocurrency risks want the Federal Reserve to charge ahead with its own “central bank digital currency” (CBDC). In a March letter, Brown urged the Fed to “lead the way” on CBDCs while restricting private cryptocurrencies. Brown proclaimed that “the Fed must not stop at regulating a privately issued digital currency. It must go further and explore a publicly issued digital dollar.” Dubbed the “digital dollar” by some proponents (including Brown) and “Fedcoin” by other supporters, a CBDC would extend government control over the creation of the money supply — which it already has through interest-rate setting and other monetary tools — to control over which businesses and individuals U.S. currency is distributed to . . . The Economy As mentioned above, I concluded that the jobs report had something for everyone, if not necessarily in a good way, while Michael Strain, again as referred to above, discussed the question of those workers opting (for now) to remain on the sidelines: Policymakers should be looking for ways to relax constraints on people returning to work. Republican governors are doing that by opting out of the $300 unemployment benefit supplement, but more can be done. Long spells out of the labor force are bad for workers. In slack labor markets, employers are reluctant to hire workers who have been out of work for long periods of time. Long-term nonemployed workers see their professional networks weaken and their skills deteriorate. There is good evidence that workers’ health outcomes suffer during long periods of unemployment. It would be better for the economy if workers were returning, yes — and it would also be much better for workers themselves to avoid long spells of nonemployment. Workers sitting on the sidelines is a serious issue. More is at stake than a bumpy economic ride. Robert VerBruggen: It’s not that no one’s hiring, as anyone who’s driven past businesses lately can attest. It’s also not a failure of companies to try to make attractive offers: Wages are growing at a healthy clip. Businesses want workers, are willing to pay for them, and indeed are working their existing employees longer hours to keep up. Yet job growth keeps coming in weaker than expected, and labor-force participation actually ticked down slightly in May. Job-wise, we’re significantly behind the projections the Congressional Budget Office issued before the last round of “stimulus.” It sure sounds to me like that $300-per-week boost to unemployment benefits, which pays about 40 percent of workers more than they made while working, might be having some bad effects. About half the states are opting out of this boost — which otherwise won’t end until September — and we’ll know soon if their decision produces results. Meanwhile, Congress should at least give another look to Senator Ben Sasse’s “signing bonus” idea. The Democrats will never yank the existing benefit boost, but they should at least balance it out with an incentive to get back to work. History (and More) Philip Magness and Alexander Salter: Thinkpieces lamenting the state of constitutional government are a dime a dozen. If only we embraced a correct reading of the Constitution (the various schools of originalist thought seem promising), we could get America back on track: “The Constitution has not failed; the Constitution has never been tried!” But it has been tried. The Constitution did exactly what some of its most ambitious proponents hoped it would: It laid the foundations for an imperial fiscal-military state. Conservatives and libertarians rightly bemoan excessive centralization under a ravenous Leviathan. If they realized that’s a feature, not a bug, of the constitutional system, perhaps we could finally do something about it . . .

A Loss for Shell (and You)

An oil tank truck fills the pumps at a Shell petrol station in Sao Paulo, Brazil, May 31, 2019. (Nacho Doce/Reuters) Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: Shell’s legal defeat, Biden and Arctic oil, Putin and Arctic oil, Putin and coal, and the ransomware negotiator. To sign up for the Capital Note, follow this link. Hollowing out ShellI spent a lot of the most recent Capital Letter looking at the attack on three oil companies — Exxon, Chevron and Royal Dutch Shell. Exxon and Chevron had to deal with shareholder activism, but Shell had to face the wrath of a Dutch judge. To borrow (again!) from the Financial Times report on the case: A court has ordered Royal Dutch Shell to accelerate its strategy for the energy transition by making steeper and quicker cuts to greenhouse gas emissions than it had planned. The landmark ruling could spur legal cases against other oil and gas companies, as well as other big corporate polluters . . . The judge in the district court in The Hague ruled on Wednesday that Shell must cut its net carbon emissions by 45 per cent by 2030 against 2019 levels on an absolute basis, in line with a global push to prevent temperatures rising more than 1.5C above preindustrial levels. The judge said the company had violated a duty of care obligation regarding the human rights of those affected by climate change. This, I wrote, was “junk law . . . a reminder of how, in the hands of a politicized judiciary, human rights can mean whatever some judge can want it to mean.” I cannot say that I have changed my view since then. Back to the FT (my emphasis added): Previous climate cases have largely been focused on liability suits, forcing oil companies to pay damages for past behaviour. But Wednesday’s first-of-a-kind ruling demands a change in Shell’s strategy for the future, setting a precedent not just for energy companies but all big greenhouse gas emitters. It could herald a wave of this new style of litigation . . . The Anglo-Dutch oil major plans to appeal the ruling in the next three months, with the process potentially taking several years. Despite this, and the court’s view that Shell’s current carbon dioxide emissions are not “unlawful”, the company is obliged to act now on the judge’s decision. “The order will be declared provisionally enforceable,” the court said, adding that it was up to the company to “design” how it implements the emissions cuts. One of the characteristics of the climate warriors now helping steer what is rapidly becoming a corporatist regime in the West is the way that they are bypassing the democratic process, whether it is by regulation, international “cooperation”, “lawmaking” via activist shareholders, or with the help of judges making things up as they go along. Writing in The Daily Telegraph, Ambrose Evans-Pritchard: Environmentalists should think twice before celebrating the week that shook Big Oil to the core. Green activist victories against Shell, ExxonMobil, and Chevron are pregnant with unintended consequences. One of them is to interfere with future crude supply just as the market tightens ineluctably as a result of declining oil wells and chronic lack of past investment, increasing the risk of a violent price spike in the early 2020s and a disruptive shock before the world has reduced its economic dependency on oil. The assault on well-regulated oil and gas companies in the West – the best already committed to net-zero – is a gift to Opec, Russia, and the authoritarian rentier petro-states. Vladimir Putin can expect more revenues to rebuild his military machine. Mohammad bin Salman gets a breather for the Wahhabi model. Iran’s Ayatollahs will sleep easier. It is also a gift to state-owned energy groups such as Brazil’s Petrobras, denounced by ecologists as a patronage machine for a corrupt political elite, and certainly not entertaining drastic cuts in output. Few of these companies are so constrained by activist pressures or so reliant on global capital markets (green enforcers, these days). They are less likely to channel their profits into renewables and green hydrogen. To the extent that the latest court rulings and shareholder coups become the pattern for Big Oil in the West, the effect will be to drive down their global share of crude production over the course of this decade. The Shell saga is the most unsettling of the three episodes last week. (For sake of disclosure I own shares.) It was ordered by a district court in the Hague last Wednesday to slash emissions 45pc by 2030 in line with United Nations guidance, including the “Scope 3” [For a discussion on Scope 3, go here] emissions of hypothetical drivers who burn their petrol. Others will surely follow because copycat suits are proliferating. “All the majors will now have to let their oil production decline. People are pencilling in a 3pc decline per annum for Shell, from 1pc to 2pc previously, which was already a striking number,” said Jean-Louis Le Mee from the hedge fund Westbeck Capital. On the other side of the ledger, oil demand is inelastic and will rapidly rebound to 100m barrels a day (b/d) as economies reopen and jets fly again. Fuel dependency in transport is sticky. Sales of electric vehicles may well go parabolic by 2024 as they hit purchase cost parity but right now the total fleet of fossil cars, vans, and trucks is still growing by about 50m a year. Oil and gas use in plastics will continue much as before unless we ban the activities that depend on them, and that would be a blunt method. Note that carbon-fibre composites make aircraft lighter, and therefore cut emissions, ceteris paribus. Russia and the Opec cartel will gain market share and political leverage over core energy supplies. Over time they may regain a stranglehold over the pricing mechanism, with echoes of the 1970s. “If you make it impossible for Western oil and gas companies to operate, that hands a huge bonanza to some much worse climate laggards,” said Michael Liebreich, the founder of Bloomberg New Energy Finance. The likelihood that Biden’s plans are going to end up in a reenactment of the 1970s seems to be growing, not least when it comes to energy. It was unfair (if tempting to some) to draw comparisons between the gas crunch seen in the wake of the Colonial pipeline affair and the gas shortages of the disco era, but such comparisons will be entirely uncalled for if the president’s reckless climate policies (which are, adding futility to stupidity, not likely to have much of an impact on the climate anyway) hand an immense energy advantage to some of the most sinister regimes on the planet. To cripple the U.S. both at home and abroad for next to no return seems . . . unwise, but that appears to be the course on which the White House now seems set. #inline-newsletter-nloptin-60b8c76476a6e .inline-newsletter-subscribe__cta label { font-size: 1.2rem; line-height: 1.5rem; color: #000000; } #inline-newsletter-nloptin-60b8c76476a6e .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60b8c76476a6e { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60b8c76476a6e .inline-newsletter-subscribe__email-submit { border-color: #e92131; background-color: #e92131; color: #ffffff; } #inline-newsletter-nloptin-60b8c76476dd5 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #000000; } #inline-newsletter-nloptin-60b8c76476dd5 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60b8c76476dd5 { background-color: #ffffff; border-width: 1px; } #inline-newsletter-nloptin-60b8c76476dd5 .inline-newsletter-subscribe__email-submit { border-color: #eba605; background-color: #eba605; color: #ffffff; } #inline-newsletter-nloptin-60b8c76476f5b .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #dd9933; } #inline-newsletter-nloptin-60b8c76476f5b .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.5rem; color: #2d2d2d; } #inline-newsletter-nloptin-60b8c76476f5b { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60b8c76476f5b .inline-newsletter-subscribe__email-submit { border-color: #dd9933; background-color: #dd9933; color: #ffffff; } #inline-newsletter-nloptin-60b8c76477050 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #0f733c; } #inline-newsletter-nloptin-60b8c76477050 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60b8c76477050 { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60b8c76477050 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } #inline-newsletter-nloptin-60b8c76477135 .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #0f733c; } #inline-newsletter-nloptin-60b8c76477135 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60b8c76477135 { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60b8c76477135 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } While these fears are not specifically expressed in a recent Reuters report that followed the Exxon and Chevron votes, and Shell ruling, the underlying message is not so different: Climate activists who scored big against Western majors last week had some unlikely cheerleaders in the oil capitals of Saudi Arabia, Abu Dhabi and Russia. Defeats in the courtroom and boardroom mean Royal Dutch Shell, ExxonMobil and Chevron are all under pressure to cut carbon emissions faster. That’s good news for the likes of Saudi Arabia’s national oil company Saudi Aramco, Abu Dhabi National Oil Company and Russia’s Gazprom and Rosneft. It means more business for them and the Saudi-led Organization of the Petroleum Exporting Countries (OPEC). “Oil and gas demand is far from peaking and supplies will be needed, but international oil companies will not be allowed to invest in this environment, meaning national oil companies have to step in,” said Amrita Sen from Energy Aspects consultancy… “It looks like the West will have to rely more on what it calls “hostile regimes” for its supply,” joked a high-level executive from Russia’s Gazprom oil and gas group, referring to energy companies around the world owned completely or mostly by the state. “Joked.” Back to Evans-Pritchard, who describes himself, incidentally, as “a strong advocate of net-zero,” believing, remarkably, that “it makes society richer, quickens economic growth, and with scale will cut energy costs for the poor.” He is on stronger ground when he hits out at the Dutch judge’s tortured reasoning and “cowboy legalism.” More importantly, he understands that: Prescriptive policy of this kind by judges has become a bad Western habit – indeed, it is endemic – and clashes with the constitutional basis of liberal democracy. It trespasses on what used to be deemed the proper role of legislatures and elected governments. So far as corporatists and climate warriors are concerned, this is a feature, not a bug. And there is just one other thing, the increasing political pressure on major oil companies to lower their production is going, Evans-Pritchard reports, could easily lead to a squeeze on the oil price: “It is really shocking that no one seems to be doing any maths on the supply front. Record oil prices in the next three to four years look not only possible but probable,” said Mr Le Mee. Predicting the oil price is a perilous business, but if I had to guess, the extent of the pain that may well be inflicted by the climate warriors’ run of victories not just on Western oil companies, but on Western economies and on the consumers who live in them is difficult to overestimate. So, no, it wasn’t just Shell that lost that court case. There will in, all likelihood, be an appeal, but there will also be other cases, many of them, and even their possibility will have a significant chilling effect on investment in new production by companies that are, generally, responsibly run. It’s far better, apparently, to leave the job to the Russians, the Saudis, and the rest . . . Around the WebShot . . . The Financial Times: The Biden administration has announced it will suspend the Arctic oil drilling rights sold in the last days of Donald Trump’s presidency, reversing a signature policy of the previous White House and handing a victory to environmentalists. In his first day as president, Joe Biden directed the interior department to review oil and gas activity in the Arctic National Wildlife Refuge, one of the largest areas of untouched wilderness in the US. On Tuesday, the department said the licences would be halted pending an environmental and legal review . . . Chaser . . . The Barents Observer: There is still a thick layer of sea-ice in the Yenisey Bay. But ships have still made their way to the coast of the Taymyr Peninsula and set ashore about 20,000 tons of construction materials. The shipments to the remote location mark the start of construction of what ultimately will become Russia’s biggest oil terminal in the Arctic. Included in the materials are heavy machinery, housing modules, communication equipment and other goods needed for the building of a project working village . . . According to [Russian oil company] Rosneft, Sever Bay terminal has been fully approved by the authorities, and engineers will soon start hydrotechnical works in the nearby waters and construction of port installations on the shore. The terminal is a key component in Vostok Oil, the huge project that already by year 2024 is to deliver 25 million tons of oil. By 2030, the volumes will increase to 100 million tons per year. It is to be exported both westwards to European markets and eastwards to the Asia-Pacific region. Second chaser . . . The oil company argues that the Vostok Oil is “environmentally friendly,” and that it has “a very small hydrocarbon footprint”. Furthermore, the oil installations will reportedly be powered by wind turbines and associated gas. Say what you will, someone in Moscow has a sense of humor. Oh yes . . . Gizmodo: The proposed project is dauntingly huge. Rosneft said that it anticipates exporting 25 million tons of oil a year by 2024, 50 million tons by 2027, and 115 million tons by 2030. (The company plans to make 15 entirely new towns for the estimated 400,000 workers needed.) And while we are on the topic of Russia and climate change . . . Bloomberg Green (my emphasis added): European governments are drawing up plans to phase out coal, U.S. coal-fired power plants are being shuttered as prices of clean energy plummet, and new Asian projects are being scrapped as lenders back away from the dirtiest fossil fuel. And Russia? President Vladimir Putin’s government is spending more than $10 billion on railroad upgrades that will help boost exports of the commodity. Authorities will use prisoners to help speed the work, reviving a reviled Soviet-era tradition.The project to modernize and expand railroads that run to Russia’s Far Eastern ports is part of a broader push to make the nation among the last standing in fossil fuel exports as other countries switch to greener alternatives. The government is betting that coal consumption will continue to rise in big Asian markets like China even as it dries up elsewhere . . . Putin will doubtless be grateful for the western climate campaigners for the contribution they will be making to ensure this project’s profitability. Random WalkRansomware negotiator: Rachel Monroe writing in the New Yorker: The F.B.I. advises victims to avoid negotiating with hackers, arguing that paying ransoms incentivizes criminal behavior. This puts victims in a tricky position. “To just tell a hospital that they can’t pay—I’m just incredulous at the notion,” Philip Reiner, the C.E.O. of the nonprofit Institute for Security and Technology, told me. “What do you expect them to do, just shut down and let people die?” Organizations that don’t pay ransoms can spend months rebuilding their systems; if customer data are stolen and leaked as part of an attack, they may be fined by regulators. In 2018, the city of Atlanta declined to pay a ransom of approximately fifty thousand dollars. Instead, in an effort to recover from the attack, it spent more than two million dollars on crisis P.R., digital forensics, and consulting. For every ransomware case that makes the news, there are many more small and medium-sized companies that prefer to keep breaches under wraps, and more than half of them pay their hackers, according to data from the cybersecurity firm Kaspersky. For the past year, Minder, who is forty-four years old, has been managing the fraught discussions between companies and hackers as a ransomware negotiator, a role that didn’t exist only a few years ago. The half-dozen ransomware-negotiation specialists, and the insurance companies they regularly partner with, help people navigate the world of cyber extortion. But they’ve also been accused of abetting crime by facilitating payments to hackers. Still, with ransomware on the rise, they have no lack of clients . . . — A.S. To sign up for the Capital Note, follow this link.

The Ratchet Tightens — Oil Companies’ Bad Wednesday (and Yours)

Logo of Exxon Mobil Corporation on a monitor above the floor of the New York Stock Exchange. (File photo/Reuters) The week of May 24: climate change and corporatism, inventing an economic crisis, woke capital, and more. A few days ago I quoted this from an article by Ross Clark in The Spectator: It is steadily becoming apparent just how politically costly the net zero commitment could be. When environmental issues are expressed in general terms, people tend to fall on the side of taking action; when the consequences for them personally are explained to them, it tends to be a very different matter. And then I added this: For some U.S. polling data on this question, go here. An extract: “When asked about willingness to spend out-of-pocket to mitigate climate change, 35 percent of respondents said they would not spend a dollar. Fifteen percent said they would spend up to $10 of their own money on climate change policies.” There is a good reason that those pushing the current climate agenda are doing so in a way that bypasses the regular democratic process so far as they can possibly can. The extent to which manmade climate change is a threat may or may not be a matter of debate. (To give my customary disclaimer, I am a lukewarmer myself.) Some say that it is not up for discussion. I would disagree. However, what to do about climate change most certainly can (and should) be a topic of debate, but that too is an argument that climate warriors want to dodge. Instead, many of them are aiming to force through a command-and-control agenda that has rather less to do with the climate and rather more with their personal ambitions and psychological obsessions, motives that would not look too good if exposed to proper democratic scrutiny. Thus the importance to them of keeping as much as possible of the decision-making on climate-related issues away from the ballot box. It is just so much safer to rely on a corporatist stitch-up, largely unaccountable regulators (private and public), executive orders and, of course, lawfare. And that brings me to the oil companies’ bad week. In an op-ed, the Wall Street Journal provided some context, focusing on the events at Exxon’s annual shareholders meeting on Wednesday: The usual suspects are casting Exxon Mobil’s partial defeat in a proxy shareholder battle on Wednesday as a Waterloo for fossil fuels. Sorry — the vote is a reflection of the enormous political pressure and financial leverage of government pension funds, proxy advisers and asset managers like BlackRock that want to be seen as virtuous to the progressives who are now in power. It would be an exaggeration to claim that this vote represented a “Waterloo” for fossil fuels or, more accurately, for Western fossil-fuel companies, but it was certainly a bad day for them, a harbinger, I suspect, of things to come. The WSJ is, however, possibly too optimistic (if that’s the word) about the motivation of some of those pension funds, proxy advisers, and asset managers. If they were wanting to win favor with those now running the show in Washington, that would be merely routinely cynical sycophancy. But this is hard to square with the fact that these groups have been set on this course for years now — years that included the Trump presidency. Some, of course, may genuinely believe that they are doing the right thing, but many others are playing a game designed to ensure that they will share in the rewards that a corporatist state has to offer. To take a step back, those who voted for the “outsider” slate in the Exxon proxy battle were doing their bit for stakeholder capitalism. There are many ways to define that term, but a starting point might be these words from Larry Fink, BlackRock’s CEO, in 2018: To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. That sounds rather more benign than it is. As I wrote in July: The wider vision underlying stakeholder capitalism is one in which different interest groups such as employers, employees, and consumers collaborate in pursuit of mutually (if sometimes mysteriously) agreed objectives under the supervision of the state. It would never be quite post-democratic, not quite, in any likely American form, but what it would be is a variety of corporatism. Corporatism takes many, many forms. It can range from the relatively (relatively) benign — it runs through European Christian Democracy, and it can be detected in early-20th-century American Progressivism — to the infinitely more heavy-handed. It has been an important element in the theory, if not the practice, of some variants of fascism, most notably in Mussolini’s Italy, but not only there. Corporatism takes as its starting point the idea that society is best run through its leading interest groups, either alongside the ballot box, or, under fascism, in place of it . . . But back to the WSJ: The San Francisco-based hedge fund Engine No. 1 formed in November of last year and set out to overhaul Exxon’s board. Its goal: Make the biggest U.S. oil and gas company “transition” out of its legacy business. The fund enlisted big public pension funds and exploited the pandemic’s ravages . . . Ah yes, public pension funds, which generally owe a significant part of their funding to taxpayers and are ultimately underwritten by them. It is true that there is an investment case — albeit not the best investment case — for reducing exposure to fossil-fuel companies, but it is not much of a stretch to think that the “enlisted” were driven more by political than financial concerns. And to the extent that that is the case, should they be playing political games with taxpayers’ money? The WSJ: Low-income countries will need oil and gas to modernize and replace dirtier energy sources like coal and wood, as Nigeria’s Vice President Oluyemi Osinbajo explained last week at a Columbia Global Energy Summit. Liberals in wealthy countries including the U.S. want to ban the internal-combustion engine. But Nigeria’s poor won’t be buying Teslas. This is why Exxon’s European rivals are continuing to develop new oil and gas projects. Russia has no intention of scaling back its investments. Even Canada’s biggest pension funds are boosting investment in oil sands producers as prices recover from the pandemic. Exxon’s stock, by the way, is up 42% this year. Engine No. 1 saw an opening with the pandemic and took it. A preliminary vote count on Wednesday showed that shareholders backed at least two of its four board candidates. But who are these shareholders? Big union pension funds like Calstrs and asset managers like BlackRock. . . . Proxy adviser duopolists Glass Lewis and Institutional Shareholder Services, which make recommendations to institutional investors on how to vote, also lent their support to Exxon’s opponents. This wasn’t a revolt by retail investors against fossil fuels. It was a progressive political coup. Exxon won’t benefit if it exits its legacy business and dives head-long into renewable development where it has no expertise. Fossil fuels aren’t going away, and Exxon won’t prosper if it acts like they will. The whole question of the role of proxy advisers is an interesting one, and, writing for Capital Matters a few weeks ago, Paul Rose looked at it quite a bit more detail. Here is an extract: Proxy advisers, of course, must respond to the demands of their customers. But not all institutional investors utilize these firms in the same way, or with the same interests. The largest fund families have in-house teams dedicated to shareholder-voting issues and utilize proxy advisers mainly to gather information. Many other institutional investors, however, do not perceive that informed shareholder-voting offers a competitive advantage — especially index funds, which operate on a low-cost business model owing to fierce price competition. These are our robovoters. Conversely, some institutional investors pay particular attention to shareholder-voting matters but are focused on issues beyond share value — notably, specialized “social investing” funds and pension funds with captive capital, especially public pension funds controlled by partisan elected officials. Empirical evidence suggests that socially oriented investors have successfully captured proxy-advisory firms’ voting recommendations; in a study last fall, University of Southern California professor John G. Matsusaka and researcher Chong Shu found that proxy-advisory firms have tended to “tilt their advice away from policies that maximize issuer value toward policies that give more weight to social issues.” The apparent capture of proxy-advisory firms’ voting recommendations highlights the risks inherent in institutional investor robovoting. The most influential shareholders in shaping proxy advisers’ views may be those institutional investors who are least concerned with maximizing shareholder returns. But as proxy advisers adopt these views, the robovotes follow. Individual investors, many of whom are principally worried about building a nest egg for retirement, are left holding the bag. And the costs may be real: Another recent study by Chong Shu found that stock prices drop when ISS changes a voting recommendation to match the preferences of investors it is trying to retain as clients . . . Earlier, Rose had explained what he meant by robovoters: ISS and Glass Lewis are each owned by private-equity firms and together control more than 90 percent of the proxy advisory market. Last year, 114 institutional investors voted in lockstep with one of these two major proxy advisers. These “robovoting” institutional investors collectively managed more than $5 trillion in assets . . . If proxy-advisory firms cannot be trusted to prioritize the economic interests of their clients, can some of the largest institutional investors? After all, more and more of these funds are turning to various forms of “socially responsible” investment (SRI) as one of their governing principles rather than as a way of running specific funds aimed at investors who have chosen to have their money run that way for ethical considerations, no matter if it costs them some return. However, a common argument made by some large investment-management firms now pushing SRI products (it is, of course, only a coincidence that they often carry higher fees), notably a variant — to add some more initials to the mix — known as ESG (ESG measures how companies measure up against certain environmental, social, and governance yardsticks), is that it is possible to do well by doing good. They maintain that doing (supposedly) the right thing, notably where the climate is concerned, will reduce risk and enhance return. Let us just say that that remains to be seen. Those interested in the question (and much more do with SRI) should check out Capitalism, Socialism and ESG by Rupert Darwall (full disclosure: an old friend), but here’s a not entirely irrelevant extract: Advocates of ESG delivering superior investment performance (“risk/return ESG”) must assume that the stock market doesn’t behave as modern finance theory suggests it will. It is not sufficient merely to assert, as Al Gore does, that companies incorporating ESG considerations into their business are more profitable. Proponents of risk/return ESG conflate “evidence of a relationship between an ESG factor and firm performance with evidence that such a relationship, if it exists, can be exploited by an investor for profit,” argue law professors Schanzenbach and Sitkoff in a 2020 paper. For the risk/return ESG hypothesis to hold, it is necessary that the stock market systematically fails to fully incorporate information on this superior performance into stock prices. Once the market has fully incorporated such information, the outperformance of ESG-favored stocks (by generating above-average risk-adjusted returns) will cease. As the market incorporates relevant ESG data into stock prices, the discount rate (the return required by investors) for highly rated ESG companies will fall, and that for low-rated ones will rise, leading to rising stock prices of ESG companies and falling prices of low-rated ESG stocks. Cornell and Damodaran explain the process: “During the adjustment period the highly rated ESG stocks will outperform the low ESG stocks, but that is a one-time adjustment effect. Once prices reach equilibrium, the value of high ESG stocks will be greater and the expected returns they offer will be less. In equilibrium, highly rated ESG stocks will have greater values, but investors will have to be satisfied with lower expected returns.” After this one-off adjustment, the higher discount rate of low-rated ESG stocks implies that they offer higher returns, while the higher ratings of ESG-favored stocks mean that they offer investors lower expected returns. In the words of Nobel laureate Eugene Fama, widely recognized as the father of the efficient market hypothesis: “lower costs of capital for E&S [environmental and social] accredited firms mean that for E&S investors, virtue is its own reward since investors get lower expected returns from the shares of virtuous firms.” Put all this together, and the backstory to what happened at Exxon begins to look rather more complicated than some of its many cheerleaders would have you believe. And Chevron did not have a great Wednesday either. The Financial Times: A big majority of Chevron shareholders [61 percent according to a preliminary tally] voted for a resolution calling for the US supermajor to “substantially reduce” its scope 3 emissions, or those from the products it produces. The company said it would “carefully consider” the result. Keep an eye on the notion of “scope 3” emissions. The concept goes significantly further than the FT’s wording might suggest and gives an idea of the all-embracing ambitions of the climate warriors. GHG Insight explains: What are Scope 3 emissions? They are indirect greenhouse gas emissions resulting from the organisation’s operations.  They also can be described in value chain terms as upstream and downstream activities.  Examples of upstream Scope 3 emissions sources are; business travel by means not owned or controlled by an organisation, waste disposal and purchased goods & services.  Examples of downstream Scope 3 emissions sources are; processing of sold products, use of sold products and the end-of-life treatment of sold products. It can also include employee commuting, business travel, and, well you get the picture. And for more insight in how far the climate warriors want to go, check out the IEA’s Net Zero by 2050: A Roadmap for the Global Energy Sector. The IEA, I should say, (to quote Wikipedia), is a Paris-based autonomous intergovernmental organisation established in the framework of the Organisation for Economic Co-operation and Development (OECD) in 1974 in the wake of the 1973 oil crisis.[1] The IEA was initially dedicated to responding to physical disruptions in the supply of oil, as well as serving as an information source on statistics about the international oil market and other energy sectors. It is best known for the publication of its annual World Energy Outlook. To reconcile its “roadmap” with the preservation of a market economy, prosperity and, for that matter, liberal democracy will be a . . . challenge. Also, on Wednesday, the judiciary struck: The Financial Times: A court has ordered Royal Dutch Shell to accelerate its strategy for the energy transition by making steeper and quicker cuts to greenhouse gas emissions than it had planned. The landmark ruling could spur legal cases against other oil and gas companies, as well as other big corporate polluters.. The judge in the district court in The Hague ruled on Wednesday that Shell must cut its net carbon emissions by 45 per cent by 2030 against 2019 levels on an absolute basis, in line with a global push to prevent temperatures rising more than 1.5C above preindustrial levels. The judge said the company had violated a duty of care obligation regarding the human rights of those affected by climate change. Junk law, in other words. And a reminder of how, in the hands of a politicized judiciary, human rights can mean whatever some judge can want it to mean. Back to the FT (my emphasis added): Previous climate cases have largely been focused on liability suits, forcing oil companies to pay damages for past behaviour. But Wednesday’s first-of-a-kind ruling demands a change in Shell’s strategy for the future, setting a precedent not just for energy companies but all big greenhouse gas emitters. It could herald a wave of this new style of litigation . . . The Anglo-Dutch oil major plans to appeal the ruling in the next three months, with the process potentially taking several years. Despite this, and the court’s view that Shell’s current carbon dioxide emissions are not “unlawful”, the company is obliged to act now on the judge’s decision. “The order will be declared provisionally enforceable,” the court said, adding that it was up to the company to “design” how it implements the emissions cuts. And that is how the corporatist state works. It is not hard to see where this is all going, and it’s bad for free markets, bad for property rights, bad for individual rights, and bad for the prospects for billions of people. Apart from that, Wednesday went well. The Capital Record We released the latest of a 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 19th episode David talked to Strategas Research CEO Jason Trennert for a thorough discussion on the state of free enterprise, the state of money supply, and the real benchmark for measuring inflation in a year. And the Capital Matters week that was . . . Land of Disenchantment The week began with Paul Gessing looking at “the “donut hole” in the otherwise fast-growing Southwest — [his] home state of New Mexico”: One might expect that having two national nuclear labs — along with their highly educated and well-paid employees — would be a ticket to economic prosperity. Add, too, the billions of dollars in annual tax payments and the jobs and economic activity they bring, and it would seem to most outsiders that New Mexico should be the richest state in the region. But it turns out that having sound, free-market public policies trumps massive federal “investment” and natural-resource wealth. New Mexico’s lack of economic freedom is a direct result of the state’s political leadership not wanting to do the hard work of adopting the free-market policies that would make New Mexico competitive with its neighbors. Woke Capital Charles and Jerry Bowyer thought that AT&T’s CEO might be treading where he should not: Mr. Stankey then provided an excellent example of why companies should not be involved in controversial political and social debates that have nothing to do with their business, saying that he thinks “society, and frankly AT&T, functions best when we can collectively find the center on issues. And finding that center is important to AT&T, AT&T’s employees’ long-term interest, the long-term health of this company.” The legislation AT&T supports, the donations it makes, and the social-media campaigns it runs do not even touch “the center.” The center was the Religious Freedom Restoration Act, a bipartisan piece of legislation introduced in the House and Senate by Democrats, passed with near-unanimous support, and signed into law by President Clinton. That law is specifically overruled by the Equality Act, which received the enthusiastic support of AT&T. Mr. Stankey’s justifications for AT&T’s political expeditions are contradictory. We are in a particularly contentious political moment, and yet companies still need to publicly advocate for and against various political causes? Why, exactly? What benefits do AT&T shareholders get from all this? Mr. Stankey did an excellent job summarizing why it is particularly perilous for corporations to be involved in politics at the moment. Surely the logical conclusion is then to drop the politics and focus on business? By its management’s own admission, AT&T is spending a lot of time on politics, which they acknowledge is not their day job. Our question is very simple: Why not just get back to your day job? Jerry talked some more about this here. Philip Klein discussed the challenges that woke capitalism is posing to unity on the right: There have always been tensions among different factions on the right. Sometimes the debates have boiled down to emphasis, with more economically minded conservatives wishing that Republicans would downplay social issues, and social conservatives often feeling neglected whenever the party gained power. There have also been fierce debates over whether — and to what extent — it is appropriate to use government to promote moral values. Despite these very real debates, the movement remained largely intact for decades. Yet the phenomenon of “woke capitalism” presents a much different and more acute threat to conservative cohesion than even Trump did. In the past, it was easy enough for conservatives to unify when the enemies in the culture war were Washington, Hollywood, the media, and academia. But with large businesses increasingly viewed as the enforcement arm of the cultural Left, the competing schools of conservatism are moving beyond tension and toward direct conflict. When companies try to bludgeon a state over laws passed by its Republican legislature, it’s hard to convince angry conservatives that they should oppose retaliatory action. When conservatives heed the calls to form their own social-media platform, only to see it crippled by powerful tech companies, lectures about free-market principles carry little resonance. When conservative books are being eliminated from the largest online bookseller without explanation, it’s hard to clap back with “Start your own Amazon!” . . . Taxation Jon Hartley was unimpressed by arguments for a financial-transactions tax: Last month Senator Brian Schatz (D., Hawaii) introduced a bill in Congress to pass a financial-transactions tax (FTT) at the federal level. An FTT would effectively act as a 0.1 percent levy per trade on all financial transactions (e.g., stock and bond trades). Further to the right, Oren Cass — the founder and executive director of the think tank American Compass — has argued that policymakers “should consider . . . imposing a financial-transactions tax on asset exchanges in the secondary market.” In an interview with Bloomberg, Cass suggested that some congressional Republicans had indicated privately that they would be receptive to such a tax. If so, that’s disappointing. Considering the FTT purely as a revenue-raising mechanism (although, to be fair, many of its advocates see it as a punitive measure to limit what they see as “unproductive” economic behavior), it is likely to raise less money than hoped. Instead, FTTs often encourage exchanges to move and institutions to reroute their trades, while middle-class retail investors end up facing a large degree of the tax incidence in the form of higher transaction costs. Some New York State and New Jersey lawmakers have also been advocating an FTT, prompting the president of the New York Stock Exchange (NYSE) to threaten that the Big Board could leave New York and relocate its servers from New Jersey to a more welcoming destination if the Garden State went through with plans to introduce an FTT there. The truth of the matter is FTTs (or “Tobin Taxes,” as named after Yale economist James Tobin, who recommended a federal FTT in 1972 amid the collapse of the Bretton Woods system), have a long international history and a very poor track record . . . Douglas Carr pointed out the impact of higher corporate taxes on investment (spoiler: not good): However economists come out on corporate taxes, there is near unanimity that investment benefits an economy and its workers. Economic fundamentals identify four basic sources of economic growth — labor, knowledge, capital investment, and land, including natural resources. They’re not making more land. Labor population grows slowly and needs other sources of growth to increase incomes.  Technological progress generally requires capital investment. In the short to medium term, we must rely on investment to grow the economy, jobs, and incomes. There used to be bipartisan understanding of investment’s importance. The former Democratic senator, Treasury secretary, and vice-presidential candidate Lloyd Bentsen was, his press secretary told the Washington Post in 1992, “a strong believer in the need to spur investment, to spur savings.” The author of that Post piece also noted that Bentsen had been an “early advocate of a plan to sharply reduce corporate income tax obligations.” The depth of economic understanding and dedication to the nation’s overall prosperity that once characterized at least part of the Democratic side has now been overwhelmed by “progressive” ideology. Its partisans are engaged, whether as a matter of sincere belief or simple opportunism, in a push designed to secure political advantage by dividing Americans, taking “aim at income inequality,” by targeting wealth both directly and indirectly through the corporate-income-tax hikes, regardless of the adverse economic consequences. Tax proposals should be evaluated not by their effect on interest groups or income brackets but by their impact on economic growth as a whole. Corporate-tax hikes may hurt the rich, but they also hurt workers, by reducing investment. Economic health and citizens’ welfare should be the goals that matter. There is no moderation in meeting the Biden proposal halfway. The best course is to further cut corporate taxes, moving us from the average of advanced economies to the forefront, to spur, not stifle, our recovery . . . Thomas Sowell Wall Street Journal columnist Jason Riley has just published Maverick: A Biography of Thomas Sowell, the definitive account of the life of Hoover senior fellow Thomas Sowell. In a wide-ranging interview, Peter Robinson and Riley discussed the events and people that helped Sowell become one of the most important American voices on cultural, economic, and racial matters of the last 50 years. Climate Change I reported on some of the increasingly visible costs of Britain’s trudge to net zero and suggested that, given President Biden’s wish to take the same path, it would “be worth Americans’ while to keep an eye on Britain’s trudge to the solar-powered uplands.” Jakob Puckett argued that cleaning up energy should be given a hand up, not a handout: In debating President Biden’s trillion-dollar proposals to spend on clean energy, many take for granted that the only way to support the environment is through subsidies. But it doesn’t have to be this way. Rather than spend money blindly on projects designed more to grab headlines than to garner reasonable support, policy-makers should pursue market-based policies that tackle specific challenges facing our clean-energy transition. Instead of relying on market-distorting subsidies, clean-energy supporters can take advantage of several financial tools to give clean energy a hand up, rather than a handout . . . Another Bad Idea from Illinois Governor Pritzker Adam Schuster contrasted Illinois governor’s Pritzker support for the SALT deduction on the one hand, and a tax credit designed to help poorer families to send their children to a private school of their choice on the other: The scholarship program Pritzker wants to gut helps families within 300 percent of the federal poverty line attend a private school of their choice, prioritizing the neediest students first. Forty-nine percent of kids who participate in the Invest in Kids program are black or Hispanic, and the average annual household income of participants is $38,000. For many recipients, it represents an otherwise unattainable opportunity to improve their education. Donors to the program receive a credit against state taxes worth 75 percent of their donation, up to a maximum of $1 million. Pritzker says he can raise $14 million by reducing it to 40 percent, which would inevitably shrink the funds available to low-income kids and parents. On the other hand, SALT is a tax credit that has historically benefited the very wealthy in high-tax states, such as Illinois, by reducing federal taxes owed by the same amount of state taxes paid . . . Inventing a Crisis Kevin Williamson took aim at the way that the Biden administration was talking up a crisis to justify a spending binge: The priorities coming from the Biden administration and congressional Democrats are would-be solutions to problems we don’t currently have — slow growth, high unemployment — that would raise the risks associated with the problems we do have: high levels of public debt, soaring commodities prices, and a Consumer Price Index that is rising faster than it has in more than a decade. None of these alone presents a sky-is-falling, code-red situation — though that national debt will eventually be a problem, almost inevitably — but why go out of your way to make things worse, and possibly much worse, in order to mitigate troubles that already are abating? What is at play here is the usual politics of catastrophe. And you know that it’s just politics because the wish-list is always the same — only the crises change: war, “inequality,” climate change, etc. . . . And, in a similar vein, Dominic Pino highlighted the pickup in consumer spending: Talk of a “V-shaped recovery” dominated much of the early economic analysis of the coronavirus pandemic. That hasn’t happened for all economic indicators, but it has for one: consumer spending. The Commerce Department released the consumer spending data for April today, and it was 0.5 percent higher than in March. As this graph shows, consumer spending had already recovered to pre-pandemic levels in January of this year. It now appears to be back on, or slightly above, its pre-pandemic trend. It’s not a perfect V, but it’s about as close as you’ll get in the wild . . . Meanwhile, John McCormack wondered whether the government’s $300/week unemployment insurance top-up was hurting employment rates: Opponents of extending the unemployment bonus say that the United States is now experiencing the very predictable results of a government policy that allows many Americans to make more money by remaining unemployed than from working. The April jobs report, released on May 7, found that the economy only gained 266,000 jobs that month — far short of economists’ forecasts that America would gain 1 million jobs as it rebounded from the pandemic. According to the Bureau of Labor Statistics, there were 7.4 million job openings at the end of February, and the number has continued to grow. “People are pro-work, but they’re also rational, and they’re not going to take a pay cut to go take a job,” Nebraska GOP senator Ben Sasse tells National Review. “So a lot of people would like to be going back to work, but they have this perverse choice between doing the thing that’s best for their family in the short-term and doing the thing that’s the right way to contribute to society in the long-term.” . . . To sign up for the Capital Letter, follow this link.

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Ten GOP Senators Announce Support for Infrastructure Compromise

(rarrarorro/Getty Images) A bipartisan group of 20 senators, including ten Republicans, announced their support for a compromise framework on infrastructure on Wednesday. Details of the framework were not immediately available, although the cost of the potential bill would be $1.2 trillion over eight years, according to CNN. The backing of ten GOP senators could give the potential bill a filibuster-proof majority in the Senate, if all 50 Democrats vote in favor. “We support this bipartisan framework that provides an historic investment in our nation’s core infrastructure needs without raising taxes,” the group said in a statement. “We look forward to working with our Republican and Democratic colleagues to develop legislation based on this framework to address America’s critical infrastructure challenges.” Twenty senators from both parties announce support for $1.2T, eight-year bipartisan infrastructure outline pic.twitter.com/0aTxnBGwzM — Manu Raju (@mkraju) June 16, 2021 #inline-newsletter-nloptin-60ca7567c905d .inline-newsletter-subscribe__cta label { font-size: 1.2rem; line-height: 1.5rem; color: #000000; } #inline-newsletter-nloptin-60ca7567c905d .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60ca7567c905d { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60ca7567c905d .inline-newsletter-subscribe__email-submit { border-color: #e92131; background-color: #e92131; color: #ffffff; } #inline-newsletter-nloptin-60ca7567c9471 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #000000; } #inline-newsletter-nloptin-60ca7567c9471 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #000000; } #inline-newsletter-nloptin-60ca7567c9471 { background-color: #ffffff; border-width: 1px; } #inline-newsletter-nloptin-60ca7567c9471 .inline-newsletter-subscribe__email-submit { border-color: #eba605; background-color: #eba605; color: #ffffff; } #inline-newsletter-nloptin-60ca7567c96a3 .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #dd9933; } #inline-newsletter-nloptin-60ca7567c96a3 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.5rem; color: #2d2d2d; } #inline-newsletter-nloptin-60ca7567c96a3 { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60ca7567c96a3 .inline-newsletter-subscribe__email-submit { border-color: #dd9933; background-color: #dd9933; color: #ffffff; } #inline-newsletter-nloptin-60ca7567c9845 .inline-newsletter-subscribe__cta label { font-size: 1.5rem; line-height: 1.7rem; color: #0f733c; } #inline-newsletter-nloptin-60ca7567c9845 .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60ca7567c9845 { background-color: #ffffff; border-width: 1px; border-color: #cccccc; } #inline-newsletter-nloptin-60ca7567c9845 .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } #inline-newsletter-nloptin-60ca7567c999e .inline-newsletter-subscribe__cta label { font-size: 1.3rem; line-height: 1.5rem; color: #0f733c; } #inline-newsletter-nloptin-60ca7567c999e .inline-newsletter-subscribe__cta p { font-size: 1.05rem; line-height: 1.45rem; color: #2d2d2d; } #inline-newsletter-nloptin-60ca7567c999e { background-color: #ffffff; border-width: 1px; border-color: #999999; } #inline-newsletter-nloptin-60ca7567c999e .inline-newsletter-subscribe__email-submit { border-color: #0f733c; background-color: #0f733c; color: #ffffff; } President Biden initially proposed a $2 trillion infrastructure plan that includes funding for bridges, roads, and railways, and a national network of charging stations for electric vehicles, among other provisions. Republicans have attempted to lower the price tag on the bill and have insisted that legislation not include tax increases. Additionally, the GOP senators have strived to keep former President Trump’s 2017 tax reform measures in place. Democrats have explored options for passing an infrastructure bill via budget reconciliation rules, which allow certain pieces of legislation to pass the Senate via a simple majority vote instead of a filibuster-proof 60 votes. However, Senator Joe Manchin (D., W.Va.) cautioned against using budget reconciliation to pass an infrastructure bill in comments to NBC earlier this month. “Are you ready to go it alone with just Democrats?” reporter Garrett Haake asked Manchin. “No. I don’t think we should. I really don’t,” Manchin responded. “Right now, basically, we need to be bipartisan.” Send a tip to the news team at NR.
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