The week of February 21: the need to reconnect energy policy with geopolitical reality, antitrust, Ukraine, inflation, and much, much more.
Before we dive into this week’s Capital Letter, a reminder: NRI’s biennial regional seminars are back, in Newport Beach (March 2) and Menlo Park (March 3). Please scroll down for more details.
As Russia moved closer to a full-scale attack on Ukraine, John Kerry, President Biden’s special presidential envoy for climate, worried that a real war might draw attention from the war that really mattered: the war on climate change.
I hope President Putin will help us to stay on track with what we need to do for the climate.
If by “us” Kerry is including Putin, he is delusional. To Putin, the way that the reckless “race to net zero” inhibits Western oil and gas production will be a gift that keeps giving. Theoretically, the transition away from fossil fuels will, in time, deprive Russia of an important export market, but the magic phrase is “in time.” For all sorts of reasons, including (I suspect) mounting political discontent, the transition is likely to take considerably longer than its proponents will like. Nevertheless, it has already increased Putin’s leverage over the West. To the extent that it is contributing to higher energy prices, it is also giving Putin a budget boost — handy when he has a war to fight.
Kerry has a track record when it comes to comments such as these. In November, the New York Post reported that he had “sidestepped” a question about China’s use of slave labor during the COP26 U.N. climate-change conference. It was not, he said, his “lane.” But humiliating himself — and the U.S. — in this way will achieve nothing. Beijing is fully aware of the strategic advantage to be won by letting America drag itself down with its climate policies. China will proceed at a more leisurely pace.
The Guardian (January 26):
China’s ambitious low-carbon goals will not be realised easily and should not come at the expense of energy and food security or the “normal life” of ordinary people, its president, Xi Jinping, has said, signalling a more cautious approach to the climate emergency [Yes, it’s The Guardian] as the economy slows.
China, the world’s biggest source of greenhouse gas emissions, has been under pressure to “enhance ambition” and take more drastic action to tackle global heating. In the past two years, Beijing has also made a number of pledges to show its commitment.
But as the economy slows, China is worried about the risk to jobs and growth . . .
Late on Monday, Xi told Communist party leaders that China needed to “overcome the notion of rapid success” and proceed gradually. “Reducing emissions is not about reducing productivity, and it is not about not emitting at all, either,” he was quoted as saying by the state news agency Xinhua.
“We must stick to the overall planning and ensure energy security, industrial supply chain security and food security at the same time as cutting carbon emissions . . .
The cautious tone, according to Yan Qin, a lead analyst at Refinitiv financial analysis in Norway, has emerged since late last year, when China experienced a sudden power shortage that affected millions of households. “This in practice means less restrictions on fossil fuel. For example the policy goal in the 14th five-year plan is only to limit growth in coal consumption.”
Once again, we are reminded that the West’s supposed moral leadership on the climate issue is not proving particularly persuasive. That in turn again raises the question of how much difference its climate policies will actually make to, well, the climate.
Oh yes, there’s this (via Reuters):
Russia has agreed a 30-year contract to supply gas to China via a new pipeline and will settle the new gas sales in euros, bolstering an energy alliance with Beijing amid Moscow’s strained ties with the West over Ukraine and other issues.
Gazprom, which has a monopoly on Russian gas exports by pipeline, agreed to supply Chinese state energy major CNPC with 10 billion cubic metres of gas a year, the Russian firm and a Beijing-based industry official said.
Russia is already China’s third largest supplier of natural gas.
If the West is to improve its ability to stand up to Putin, it must strengthen the credibility of NATO’s deterrent, but it will also need to address non-military vulnerabilities. One of the most obvious of those is European energy dependence on Russia.
To be clear, this is by far from being the West’s only area of vulnerability, and it is not only within European NATO that such vulnerabilities lie (thus the U.S. needs to address how reliant it has become on Russia for, say, titanium — a key metal in aerospace production — or certain gases used in chip production). Meanwhile, the dependence of certain EU countries on Russian gas has already held back the Western response to the attack on Ukraine. It will also undermine the ability of either the EU or NATO to unite behind a strong, sustained response if Putin ratchets matters up still further, let alone if he just sticks with any new status quo that he has imposed on Ukraine.
The first step in reducing this dependence must be to avoid making it any worse. That means suspending any plans to shut down existing (non-Russian) sources of energy. Germany, for example, should not close its remaining three nuclear-power stations this year (and, if it is technically possible, it should reopen the three that it shut down at the end of 2021).
On top of that, other Western countries, including the U.S., should follow France’s lead and either expand or relaunch their nuclear-power programs. But there should be no illusions about how long such an effort will take (or how much it will cost) to make a difference. This is not a quick solution, and nor, incidentally, is doubling down on renewables. Making matters worse, renewables continue to be dogged by technological problems, often related to intermittency (the sun doesn’t always shine, nor does the wind always blow), which have yet to be solved.
The best solution for now is to encourage increased oil and gas production from existing and new fields on both sides of the Atlantic. Europeans need to get over their fear of fracking. And there must be more investment in the infrastructure — from pipelines to LNG facilities — that can ensure that the best use is made of the fossil-fuel resources that we do have. All this will take time. Ending Europe’s dependence on Russia is not an overnight project whatever route is taken, but this will be the quickest, and most economically feasible way of reaching this goal. Climate campaigners and environmentalists will not be thrilled, but, as was noted in a recent NR editorial, they like to emphasize that we have only one planet. True enough, but they “would do well to remember that Putin’s Russia is currently fighting a war over a part of that planet.”
If it is any comfort to them, there is nothing implicit in a re-emphasis on oil and gas that excludes investing in the development of more-effective renewables or other low or zero emission technologies. That’s a worthwhile use of funds, but it too will take a while to generate results. In the meantime, reorganizing energy supplies around technologies that are not yet ready for primetime continues to be a massive misallocation of capital, with consequences that are bad for consumers, business, and our geopolitical interests. Under the circumstances, it has been reassuring that in its proposed taxonomy for sustainable activities, the EU Commission not only recognizes that nuclear energy is “green,” but also accepts that, subject to various conditions, natural gas can be green too, part of a bridge to a net-zero future. Brussels now needs to endorse a bridge away from Putin dependence.
Obviously, there will be little chance of any material increase in oil and gas production unless fossil-fuel companies (and those who either invest or lend in them) see the opportunity of a decent return. Of late, capital has been flowing away from the sector. Sometimes this has been for conventional business reasons, but in other cases it is due to fears of unfavorable legislative or regulatory change, fears that need to be rendered groundless. The decision by an increasing number of large investment managers to double up as climate activists is also having an effect. If the threat posed by Putin is not enough to make such activist investors rethink their stance (it might not be: Some of them seem happy enough with Xi’s China), then their clients should do what they should have already done by now — take their business elsewhere. Those who stick with them should be asked whether they are willing to sacrifice investment return for “socially responsible” reasons. If they are, fine, but being subject to that risk should not be a default option.
The choice, in the end, is stark. The West can either reconnect its approach to energy with geopolitical reality, or it can persist with its reckless climate policies — policies that do a lot for Putin, and next to nothing for the climate — and await the consequences.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 55th episode David is joined by Dr. Samuel Gregg of the Acton Institute for a robust conversation on “common good” conservatism, economic nationalism, and the frustrations with a market economy so prevalent on the political right these days. A little history, a little political science, a little philosophy, and just enough ecumenical theology to keep you coming back for more!
The Return of the Regional Seminars
As briefly noted above, National Review Institute is back on the road with its biennial Regional Seminars. This year’s series, titled “Creating Opportunity,” will feature panel discussions and one-on-one conversations that make the moral and practical case for free enterprise.
Notable speakers include William B. Allen, David L. Bahnsen, Jack Brewer, Dale R. Brott, John Buser, Veronique De Rugy, Kevin Hassett, Pano Kanelos, Rich Lowry, Karol Markowicz, Andrew C. McCarthy, Andrew Puzder, Amity Shlaes, Kevin D. Williamson and, less notable, me.
The series of half-day conferences is slated for seven cities across the country: Palm Beach, Newport Beach, Silicon Valley, Dallas, Houston, Chicago, and New York City.
We hope you will join us. You can learn more and purchase tickets here.
Thomas L. Rhodes Fellowship
The Rhodes Fellowship is made available to a new or recent college graduate, up to age 25 (when initially applying) who shows interest and capability in writing on, broadly speaking, current affairs, but with a focus on finance, business, taxation, fiscal policy, economics, and the workings of the free market . . .
Interested? More details here.
The Capital Matters week that was . . .
In June 2021, Meta (then known as Facebook) hit $1 trillion in market capitalization for the first time. Now, the company’s market cap stands around $565 billion, approximately 60 percent of what it did just seven months ago.
This example ought to be a teachable moment for those antitrust crusaders in Congress who want to break up companies larger than a government-determined size. Instead of legislating based on market cap, lawmakers should focus on ensuring antitrust law remains narrowly tailored to the interests of American consumers.
Our nation’s biopharmaceutical companies are a great American success story. They are the world leaders in discovering the drugs and vaccines that are generating the cures and treatments for diseases that plague humanity. Strong U.S. government protection for patents and less-intrusive regulation than is found overseas have sparked the massive volume of R&D that has brought forth this bounty. What’s more, the biopharma sector is responsible for more than 4 million good American jobs and contributes over $1.1 trillion annually to the U.S. economy.
The “warp speed” development in 2020 of Covid-19 vaccines and the imminent release of effective Covid antiviral drugs are just two of the many path-finding achievements by American biopharma firms. But a government crackdown on biopharma mergers led by the Federal Trade Commission (FTC) could undermine future accomplishments, harming the American economy and American (and foreign) patients alike . . .
A new mantra is permeating Washington when it comes to regulating businesses: “Big is bad.” Another way of saying this is: “Successful is bad.” You can make a profit, but not too much profit — whatever that means.
This rallying cry has gripped politicians on both sides of the aisle, from the liberal senator Elizabeth Warren to the conservative senator Josh Hawley. Some in Congress are now targeting companies they see as using their market power to raise prices on consumers and crush their competition. If their efforts succeed, these self-styled trustbusters will bust America’s economy . . .
Congress should not order the FTC to police self-preferencing when the agency barely has the resources to fulfill its more salient responsibilities. The FTC already plays vital roles in the U.S. economy, reviewing mergers, promulgating rules, and, above all else, protecting consumers. Realistically, the agency lacks the resources to fulfill these responsibilities while also attempting to police the novel and amorphous “crime” of self-preferencing.
In fact, the jury is still out on whether self-preferencing even harms consumers at all. At the end of the day, Congress must not distract the FTC from its core mission by mandating that it enforce dubious prohibitions against our most innovative firms . . .
In 2012, Mario Draghi was president of the European Central Bank, and during a visit to London, he made a speech that was a turning point in the fight to save the euro. In particular, it was these words that did the trick:
Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.
We could argue about the extent to which the ECB stuck within its mandate, but, with those words and the policies that followed, Draghi, a well-respected figure in the financial markets, rescued the embattled single currency. Whether that currency, in the form it then was (and still is) should have been rescued is a different question. Spoiler: No.
Time moves on, and in 2019 Draghi was appointed as, essentially, Italy’s technocratic prime minister.
But while Draghi considered that the euro was worth saving, whatever it takes, the same, clearly, is very far from the case when it comes to Ukraine . . .
Well, I hadn’t expected German chancellor Olaf Scholz to respond to Russia’s further move into Ukraine with anything as decisive as actually freezing the Nord Stream 2 pipeline-approval process. That process still had some months to go, which meant that he had a certain amount of time to dodge this step.
CNN’s International Climate Editor, Angela Dewan, reckons that the Nord Stream 2 is “politically dead.” While that’s true in the immediate future, I’m not sure (sadly) that that is necessarily the case over the longer term, even if the combination of Russian aggression and Scholz’s decision will force a fresh debate in Germany on a project that looked (to me) likely to quietly slide toward final approval . . .
I am a debt worrywart, but I try to avoid the “every issue is ultimately my issue” mode of analysis, the kind of thing that causes Senator Rubio to insist that protecting Florida sugar barons is a matter of national security.
But public debt is a matter of national security. It is for the Russians, anyway.
Perhaps I am wildly off-base and Andrew Stuttaford or somebody else could set me straight on this, but the Biden administration’s targeting the sovereign debt of Russia — a country whose government routinely runs small surpluses and has no urgent need to borrow money — doesn’t seem likely to accomplish very much, especially if oil prices continue to rise. Moscow has many vulnerabilities, but an inability to balance the books does not seem to be one of them — upsides of being a vicious police state and all that . . .
Deepening trade ties is often seen as a way of reducing the chance of a conflict between two countries. Maybe, but I suspect that to think so risks muddling correlation with causation. Either way, deepening of trade relations between the West and Russia (at least in certain areas) may well have increased the risk of a dangerous and destabilizing conflict between Russia and a third country (Ukraine). After all, Putin has good reason to believe that the dependency created by these deeper trade ties means that any sanctions imposed in response to his moves against Ukraine will only go so far, and that the resulting relatively limited price is worth paying. We have yet to see how bad the consequences of that belief will turn out to be.
Beyond that, there is the wider question of how wise it is for the U.S. (or, more generally, the West) to become dependent in any important strategic sense on a country that is either unfriendly or showing clear signs of moving in that direction.
That’s a question that ought to answer itself. But that does not appear to have been the case when it comes to trade with Russia . . .
As we have again been horribly reminded, the use of force and coercion to this end does have a place in the 21st century. However, faith in the notion that that sort of thing was behind us helps explain why some EU countries, notably Germany and Italy, became so dangerously dependent on Russian natural gas, even after the course on which Putin had embarked had already become all too evident. And, as I highlighted in a post on Wednesday, that dependency is not confined to gas, nor is it confined to the EU. The U.S. has also become overly reliant on Russia as a supplier of products — such as titanium used in aerospace manufacture or gases critical to chip production — in areas where it is extremely unwise to have done so (a dependence that will be increased if Russia controls Ukraine after the invasion) . . .
It seems that the environmentalist movement in the U.S. believes that it’s possible to completely overhaul the electrical grid without building anything. Or at least, that’s what its actions imply.
The Wall Street Journal ran two pieces on this subject recently. The first is a news piece about New York’s plan to run a 339-mile transmission line from hydropower plants in Quebec to New York City. But the environmental permitting process has led the project to take 17 years, and possibly longer . . .
In one of the orders issued under the act, the government sought to cut off the flow of money being raised through online platforms in support of what it has now implied is an illegal protest.
The language in the order is alarmingly broad. It applies to a wide class of financial institutions with Canadian operations, including banks and fundraising platforms, even those that deal in cryptocurrencies. These institutions are required to freeze assets held by any “designated person” and report account, transaction, and identity information to the federal police and intelligence services.
It gets worse. The order defines a “designated person” as “any individual or entity that is engaged, directly or indirectly” in the Ottawa protest — or, presumably, related border protests at several border crossings, which had largely been cleared before the invocation of the act. To top it all off, the order grants financial institutions immunity from any civil liability as a result of complying with its terms.
It is hard to overstate how draconian this is . . .
On February 9, I wrote about how port congestion seemed to be reaching a plateau. The evidence to support that conclusion was the line of ships waiting for a berth at Los Angeles/Long Beach, which had seen a steep decline for the first time in a while. Unlike in the past, it seems that was not due to changing the way ships are counted, and the decline is genuine.
In the past few weeks, however, we’ve seen that that decline does not correspond with overall improvements in the supply-chain situation . . .
Trump cut taxes for the lower half of Americans in the Tax Cuts and Jobs Act (TCJA). He doubled the standard deduction. He doubled the child tax credit. He cut tax rates for everyone. He lowered the corporate-income-tax rate (which cuts taxes across the board, since people and not companies pay taxes). The Joint Tax Committee analysis found that the average federal tax rate (all taxes combined) for all income tiers declined under the TCJA. The share of taxes paid by millionaires actually increased.
Say what you want about him, but Donald Trump never accused a day laborer or a McDonald’s employee of not having “skin in the game” because they didn’t make enough to pay federal income taxes. More to the point, there is zero interest among Senate Republicans in reversing this tax relief, most notably including Senator Scott himself. Perhaps the political-consultant class who advised Senator Scott on this ill-advised project should have thought of that.
Strategic error aside, it simply is not true that federal-income-tax non-payers lack “skin in the game.” It was wrong when Mitt Romney said it in 2012, and it’s even more wrong when Senator Rick Scott said it this week. These households send a lot of money to the government in the form of payroll taxes, excise taxes, and the incidence of the corporate-income tax (which they “pay” in the form of lower wages and higher prices). This is to say nothing of the local property taxes on their homes, their state income and sales taxes, and so on. The fact they may not pay federal income tax in a given year is a red herring . . .
School choice is becoming mainstream, and that’s great news. But before long, states will also need to grapple with updating school-finance formulas that fail to fund all kids fairly, are too reliant on local taxes, and don’t easily accommodate student movement between schools.
States that are new to this high level of interest in school choice should pay attention to what’s going on in Arizona. Arizona has a long legacy of education freedom and has pioneered many important policies to expand school choice, including education savings accounts, state-backed private-school scholarships, a strong charter-school sector, and a robust open enrollment policy. Unfortunately, Arizona’s K–12 education-funding system still lacks the student-centered funding mechanisms crucial to sustaining educational freedom. Other states can expect similar issues if they don’t modernize their funding systems . . .
In 1978, Congress passed the Airline Deregulation Act with huge bipartisan majorities. President Carter signed it into law. It did the impossible: It abolished a federal government agency. The Civil Aeronautics Board was no more, the industry was opened up to price competition, and flying was no longer a rich man’s privilege.
In saying this was Stephen Breyer’s true legacy, I’m being a bit facetious, but only a little bit. As airline analyst Michael Derchin wrote in the Wall Street Journal recently, Breyer himself “has cited his research for the Airline Deregulation Act as among his best and most significant work.” And for good reason. Derchin records the numbers . . .
Not only does government lack incentives to make sure money is well spent, it also has many incentives that encourage money to be spent poorly. Government faces no consequences for wasting money; in fact, it often wastes money on purpose to please interest groups. Members of Congress know that “Buy America” requirements lead to waste, but they also know which companies in their districts benefit from them, and that’s more important to their political support. And it all comes naturally when spending other people’s money.
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