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