Power lines in Hinsdale, N.H., lead away from the Vermont Yankee nuclear power plant in Vernon, Vt., in 2013. (Brian Snyder/Reuters)We should remain optimistic about the future of nuclear energy in America. NRPLUS MEMBER ARTICLE L ast week, the future of nuclear energy got an immense boost. U.S. officials greenlit America’s first-ever commercial small modular reactor, to be constructed in eastern Idaho by a company called NuScale Power. The first will be built by 2029, with eleven more to follow by 2030. Nuclear energy already provides 20 percent of American energy production, representing 60 percent of all clean energy in this country. Yet nuclear energy has stalled for several decades now, having fallen by 9 percent in terms of global energy generation since 2006. Of the 60 plants in operation in the United States, nine have already announced that they are closing, 16 are “at risk” of closure, and five are already gone. Together, this represents 15 percent of all carbon-free energy production in America. Advertisement Yet NuScale Power’s recently approved design marks a landmark achievement for the future of nuclear energy: the move towards smaller, more high-tech nuclear reactors — a type dominated by private-sector competition. These small modular reactors (SMRs) represent a real chance for energy innovation in the United States, and an opportunity to lead the world. As we increasingly seek to move away from fossil fuels and toward carbon-free forms of energy, SMRs will play a crucial role. We simply cannot rely on renewables such as solar and wind energy alone yet, meaning that competitive, new-generation reactors can fill that gap and reverse the trend of nuclear decline. Not everyone is convinced by the potential of SMRs. One of the most common criticisms is that it is still very expensive, and that it will take decades to achieve any viable commercialization — with numbers such as $11.5 billion and 25 years being thrown around. Advertisement This interpretation, however, assumes that the government is leading the charge on these new-generation nuclear plants. Indeed, the old model of state-led nuclear research, demonstration, and commercialization, propelled by the Department of Energy, can be cumbersome, inefficient, and costly. But the opposite is true for SMRs. Advanced-reactor development and innovation is in fact being led by the private sector and supported with smart investments at key junctions by federal policies, such as the Nuclear Energy Leadership Act. As showcased by the Breakthrough Institute’s “How to Make Nuclear Innovative” report, these smaller, more entrepreneurial firms are leading on advanced nuclear innovation, far outpacing typical government timelines. Their success now depends on whether they can easily access initial markets to sell their energy. It would be eminently sensible for local, state, and federal governments to aid that transition. Advertisement It’s clear why SMRs are seen as attractive investments by the private sector. Because of their smaller size, most SMR parts can be factory-made off-site, and then shipped to the reactor’s location. Smaller reactors also require less funding for the first build, making them more economically viable investments for a wider range of utility companies. Moreover, their smaller scale also vastly simplifies the engineering, helping make the reactor easier to model and safer, as well as speeding up the licensing and commercialization processes. Advances in computing technology can also simplify, cheapen, and accelerate the plant-modeling process through high-tech simulations. Advertisement Smaller, advanced nuclear reactors also provide more options than larger, conventional ones. For example, they are much easier to place than larger plants. This could overcome the challenges of transporting energy over large distances. These challenges have hamstrung the potential of renewable-energy sources such as wind and solar, which require long-distance transmission lines to transport generated energy from remote locations to urban centers. Small modular reactors can be sited where energy is needed, from urban centers to far-flung mining communities in Alaska. Their small size makes SMRs more flexible than larger reactors as well. For example, where large reactors typically follow a standard size and output, SMRs can be scaled and adapted to the local energy needs where they are sited. As the U.S. slowly decommissions all of its coal-fired plants, an additional benefit of smaller reactors is that they can actually directly take the place of such decommissioned coal plants, located on previously developed plots of land that are no longer in use — also known as brownfield sites. 90 percent of these coal plants are considered “small” in size, under 500 MWe (megawatt electric) and many as low as 100. SMRs are defined as nuclear energy reactors below 300 MWe and could fit there; large reactors operate at over 1000 MWe. Advertisement Advertisement Because of their scalability, moreover, SMRs can implement designs that track energy demand, and respond accordingly with maximum economic efficiency. This could usefully complement renewable-energy development, which is inherently unreliable due to the intermittent nature of sun and wind. As such, nuclear could provide the base-load energy to the grid, and then adapt to demand as and when it rises or declines. The widespread economic and environmental benefits of SMRs suggest that the government should support the private sector in its innovation drive by not getting in the way aside from targeted and specific support. With the right policies in place, these new SMRs will not only assure future abundant energy, but they will also create an entirely new industry of exportable technological innovation. SMRs such as NuScale’s could create 7,000 jobs, generate $1 billion in annual sales, and power over 50,000 homes, according to one study. It is therefore crucial that we continue to encourage the private sector to pursue new-generation nuclear innovation. We should reform and modernize the licensing process to adapt to the changing nature of small-scale nuclear startups. We should also pursue more public-private partnerships, in which our national laboratory system gives private nuclear startups access to technical resources, necessary equipment, and detailed expertise. This should be accompanied by further targeted R&D funding, along the lines of the Nuclear Energy Leadership Act. Last week’s groundbreaking approval of the first-ever commercial small modular reactor in the United States fits a wider trend of private-sector leadership on nuclear innovation. We should strive to harness this further, and to remain optimistic about the future of nuclear energy in America.
( geckophotos/Getty Images)Welcome to the Capital Note, a newsletter about finance and economics. On the abbreviated — Daniel Tenreiro is caught up in other projects — menu today: Debt and the waste of windfalls, the lockdown reflex, oil tankers as warehouses, green protectionism, and the (partial) vindication of October. Debt and ComplacencyWhen I read stories such as this, I begin to feel very uneasy. The Wall Street Journal The cost of servicing the nation’s growing debt load is shrinking despite a historic rise in government red ink this year, suggesting the U.S. still has room to borrow to fight the coronavirus pandemic. Demand for safe Treasury assets has kept interest rates near historic lows this year, pushing net interest costs down by 10% from October through August, the Treasury Department said Friday. . . . The Congressional Budget Office last week said debt as a share of economic output is set to approach 100% for fiscal year 2020, compared with 79.2% last year, and hit 108.9% by the end of the next decade. Despite the rising red ink, however, CBO lowered its projections for interest costs over the next decade by $2.2 trillion from its forecast in March, reflecting lower-than-expected interest rates. “The idea that we’ve done all this spending and our debt service is actually lower than it was in the pre-pandemic baseline is a remarkable testament to, in my view, how much more fiscal space you get when you have really low interest rates,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, a Washington think tank. Don’t get me wrong, the fact that we can fund all the spending that is currently taking place in order to help manage the effects of COVID-19 and — let’s be honest about this — the measures taken to combat it is welcome. The alternative does not bear thinking about. Its consequences would be political as well as economic and they would be dire. Advertisement That the U.S. has been able to do this is a testimony both to the strong deflationary impulses evident since the financial crisis as well, in the background, to the advantages of the dollar’s status as the reserve currency, a status enhanced by the less-than-compelling fiscal position of many other major economies. To twist an old quotation, there is something to be said for being one of the healthier horses in the glue factory. Advertisement Advertisement That said, it is hard not to think that these low rates are (to borrowers) something of a windfall, and windfalls are — to put it gently — not always used as wisely as they might be by governments. Advertisement The sad saga of the euro zone provides an example of this. Many of the countries that signed up for the single currency saw a dramatic fall in borrowing costs, which could, at least in theory, either have been used to pare back existing accumulated borrowing or, where the fiscal balance was already in decent shape, been treated as a windfall rather than a license to let rip. That’s not what happened (for a number of reasons), and the result, for some countries, was catastrophe, made infinitely worse by the fact that each country’s borrowing was now in the euro, a “foreign” currency (a problem that the U.S., a borrower in dollars, does not have). To oversimplify, they could not print their way out of trouble. But in the end, no country can print its way out of trouble indefinitely. So, on that cheery note, let’s turn to Arnold Kling, writing in Law & Liberty. Kling cites IMF economists Carmen M. Reinhart and M. Belen Sbrancia, who have written: Throughout history, debt/GDP ratios have been reduced by (i) economic growth; (ii) substantive fiscal adjustment/austerity plans; (iii) explicit default or restructuring of private and/or public debt; (iv) a surprise burst in inflation; and (v) a steady dosage of financial repression accompanied by an equally steady dosage of inflation. Kling also quotes “the grumpy economist,” John Cochrane, who, displaying remarkable powers of understatement, has this to say: The US grew out of WWII debt by not borrowing any more, by decades of fiscal probity, and by strong supply-side growth in a deregulated economy. We have none of these reassurances going forward. Nope. Kling: The prospects for a repeat of the post-World War II experience of falling debt/GDP ratios are poor. Economic growth over the past 50 years has remained well below the levels achieved in the 1950s and 1960s. Social Security no longer contributes to the surplus, because the ratio of beneficiaries to workers is much higher than it was back then. Also, Medicare has become another large strain on fiscal resources. Finally, the willingness of leaders in Washington to forego current desires in order to maintain fiscal discipline has evaporated. Yup. Kling: If neither economic growth nor primary surpluses are likely to emerge to bring down the debt/GDP ratio, that leaves the other options discussed by Reinhart and Sbrancia: hard default; soft default via surprise inflation; and financial repression with well-anticipated inflation. In Kling’s view, which (to repeat myself) is well worth reading, the most likely outcome is inflation. As he observes, that is not what’s in the forecasts, but: In my view, all attempts to predict inflation using mechanical rules fail. They fail because inflation depends on the habits, norms, and expectations of the public at large. If people are habituated to low inflation, then attempts by the Fed to nudge up the inflation rate will not work. In fact, over the last decade, inflation has almost always come in under the Fed’s announced targets. Conversely, if people believe that inflation will be high and variable, then they try their best to protect against this: they shorten the term of agreements; they incorporate cost-of-living escalators into labor bargains; they minimize their holdings of currency or other non-interest-bearing assets. In the United States, we last saw these behaviors in the high-inflation era of the 1970s. They served to reinforce the high-inflation regime, and it took the entire decade of the 1980s to return to an era of low and stable inflation. Because of the importance of expectations of inflation that are embedded in habits and norms, an economy will tend to gravitate toward one of two regimes: a low-inflation regime, in which inflation is low and steady; or a high-inflation regime, in which inflation is high and variable. A scenario that I find plausible is that by 2030 the United States will have transitioned to a high-inflation regime. The Federal Reserve will be powerless to prevent such a transition. If it attempts contractionary policies, the interest rate on government debt will go up. With the debt/GDP ratio as high as it is, this would threaten a fiscal crisis by sharply raising the amount of tax revenue that has to be devoted to making interest payments. If instead, the Fed seeks to hold down the government’s interest costs, it will have to do so by making massive new purchases of government bonds, thereby putting more monetary fuel onto the inflationary fire. Time will tell whether Kling is right, but however this all spins out, it is hard to see how (in his words) “the debt/GDP ratio is going to come down in a benign fashion.” Advertisement One final thought on borrowing costs. I have never forgotten attending a talk given by a (now deceased) Wall Street titan a decade or so ago. The topic was U.S. government debt, and although he made no predictions as to when investors would lose patience, but he did predict that when they did, it would be very sudden and very sharp. Depressed, I talked to the titan’s stepson a day or so later. Advertisement “Ah, you’ve heard ‘the talk,’ as we call it in the family.” “Yes, I have. Not good.” “No.” Happy Monday! — A.S. Around the WebWolfgang Münchau in the Financial Times: The infection rate in Sweden also showed strong geographical variation. Most of the Swedish cases were concentrated in two regions, including Stockholm. Meanwhile, the southern Swedish city Malmö is close to the Danish capital, Copenhagen, separated by the narrow Oresund Strait. Malmö’s rates look good by comparison with Copenhagen, even though the two operated under different lockdown regimes. I don’t know why regional gaps were so strong, and my interlocutors in Sweden do not either. If you want to make grand pronouncements about Swedish lockdown policies and infection rates, you should probably make an effort to understand this first. Policy in times of Covid-19 amounts to decision-making under extreme uncertainty. The latest Swedish numbers do not prove or disprove anything. But before policymakers order something as extreme as another lockdown, they should have had incontrovertible statistical evidence, not just a bunch of numbers that feed their confirmation bias. As long as statistical doubt persists, we certainly do not want to do this twice. A lockdown is an extreme policy measure and its consequences will not become apparent for some time. I have no doubt that it will end up increasing inequality. Unemployment and corporate insolvencies will rise once the support measures are withdrawn. Although stock market indices have fallen and recovered, these are just averages. Behind them stand huge shifts of capital from old to new sectors. If people continue to work from home, this will boost residential and rural areas at the expense of city centres and shift resources from commercial to residential property. I consider the lockdown reflex as currently the biggest threat to western capitalist democracies . . . The “lockdown reflex” is a very good phrase indeed. Oil tankers as warehouses… Bloomberg: Some of the world’s biggest oil traders are gearing up for a possible resurgence of a coronavirus-induced glut of crude and fuels, snapping up giant tankers for months-long charters so that they can be ready to store excess barrels if necessary. The chartering spree is likely to alarm Saudi Arabia, Russia and their allies as it indicates that the oil traders believe the crude market is moving into a surplus after OPEC+ managed to create a deficit earlier this summer with its output cuts. Trafigura Group, the world’s second-largest independent oil trader, in recent days booked about a dozen supertankers that can hold a total of 24 million barrels of oil, according to people familiar with the matter. All in, about 18 similar charters have been arranged with Royal Dutch Shell Plc, Vitol Group and Lukoil among those also hiring the vessels, according to shipbrokers’ lists of bookings seen by Bloomberg. State-controlled China National Chemical Corporation Ltd, known as ChemChina, has also joined, the lists show. EURACTIV: The European Union will press China to aim for climate neutrality by 2060 or eventually face punitive carbon tariffs during a summit on Monday (14 September) aimed at concluding a bilateral trade agreement by the end of the year. At the summit, Europeans will also push Beijing to peak its global warming emissions by 2025 and commit to stop all investments in new coal-fired power stations, whether at home or abroad, EU officials said. The climate talks are part of a wider bilateral trade and investment agenda that Brussels hopes will help restore a level playing field between EU companies and state-owned Chinese firms that are not subject to the same CO2 emission obligations… Advertisement Advertisement “China has committed to peak its emissions by 2030,” a senior EU official remarked. “We think it’s far too late, we suggest 2025.” Failing to do so would eventually push the EU side to impose punitive carbon tariffs on Chinese firms in order to restore a level playing field with European companies, which will face ever-stricter emission standards in the coming years because of the bloc’s increased level of ambition, EU officials explained. “We’ve already had this discussion with our Chinese friends” as well as other nations, the official said in reference to the EU’s planned border adjustment mechanism, or carbon border tax. Although there is no decision yet on the shape or features of the tax, the official said that “some parameters” were already clear: first, the Commission “will make a proposal” and “it will be aimed at putting imported products on the same level as domestic products” with a view to restoring fair competition between EU and foreign manufacturers. China may or may not talk a good game (we will see), but I doubt that it will blink. Green can be a good color for camouflage, not least for protectionism, and that, clearly, is the direction in which the EU is going. And as the EURACTIV report makes clear, it won’t only be directed at Brussels’ “Chinese friends.” Random WalkOctober acquitted (but there’s a catch) From Investopedia: The October effect is a perceived market anomaly that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological expectation rather than an actual phenomenon as most statistics go against the theory. Some investors may be nervous during October because the dates of some large historical market crashes occurred during this month. The magic word there is “perceived.” Brian Sozzi, writing for Yahoo!Finance at the end of August: September tends to be a weak month for stocks historically. In fact, according to LPL Financial, September has been the worst-performing month for markets, on average, since 1950. The S&P 500 has dropped about 1% on average that month since 1950, LPL Financial data shows. The only other month to notch a drop on average (and a minuscule one at that) going back to 1950 is August. On the other hand, October is not entirely in the clear: LPL Financial says the S&P 500 has dropped nearly 1% in election years [in October] dating back to 1950. That makes October the worst month for markets in an election year. Once again, happy Monday! — A.S. To sign up for the Capital Note, follow this link.
A robot works alongside an employee on the assembly line at Glory Ltd. in Kazo, Japan, in 2015. (Issei Kato/Reuters)Coronavirus relief stalled and lockdowns continue, socialists and robots on the rise, and more. As I wrote last week, it is beginning to seem as if I can begin this letter the same way every Friday: “Another week has passed in our strange sort of stasis, with no real movement on another stimulus package.” That is what I wrote last week, and that is what I am writing this week. And to repeat something else I wrote seven days ago — the greater the disruption that will arise out of the failure to pass another stimulus package now, the greater the reckoning that will come later (and don’t get me wrong: I don’t underestimate for a moment the problems that will be caused by all the debt that is being created). For a more optimistic take, please check out Robert Verbruggen’s note on Capital Matters: Senate Republicans have now put forward a “skinny” bill priced at $500 billion that would cover only the bare essentials (a $300 weekly boost to unemployment to replace the expired $600 boost, more money for small business, etc.), basically reupping their offer of a piecemeal approach. It’s not even clear this will pass the Senate, and Nancy Pelosi and Chuck Schumer are already insulting the “emaciated” legislation. Meanwhile, a stopgap $300 unemployment boost that Trump enacted via executive action is running out of money soon — but the economy is improving. Nonfarm employment fell by about 22 million between February and April, but it gained about half of that back by August. The unemployment rate shows a similar rebound, and last month it stood about where it had in late 2011. Things are not good, but they are improving rapidly. . . At this rate, there will no longer be hordes of unemployed Americans in need of help by the time Congress gets around to helping them. Meanwhile the stock market swung around this week. As I write (11:45 A.M., Friday) markets are looking a little stronger, but who knows what Monday — or 3:45 P.M. today — will bring. Turning, as so often, to John Authers at Bloomberg, I was intrigued to read this: A new trade is under way in markets, based on the belief that “herd immunity” has already been achieved in many large countries, so a return to full normality doesn’t need to await a vaccine. The question hangs on whether a figure of roughly 20 percent is enough to achieve herd immunity, and Authers, no epidemiologist, describes himself as “not convinced” of the argument, rightly noting that this “is still the subject of fierce debate between scientists.” Stuttaford, no epidemiologist either, would go a little further: I certainly cannot claim to know whether 20 percent (or something like it) is the magic number, although the evidence does increasingly look that way to my untrained eye. If that does turn out to be the case, the Swedish approach to COVID-19 will be looking very smart indeed, and those who pushed for (or enforced) prolonged and destructive lockdowns will have a lot of explaining to do. And even if it is not the case, that is not the end of the matter: If we are going to have to live with the virus, we must learn to do so intelligently. And there have been times when intelligence has seemed to be in remarkably short supply. From Business Insider: New York is allowing indoor dining to reopen at 25% capacity [from September 30], but experts say it won’t be enough to save restaurants. Most restaurants operate on razor-thin margins, and barely eke out a profit even at 100% capacity, Andrew Rigie, the executive director of the New York Hospitality Alliance, told Business Insider. Experts and analysts say that sit-down restaurants won’t be able to generate pre-pandemic levels of sales until a vaccine arrives. “It literally makes no sense to put my life at risk and my staff members at risk for 12 people to come and dine,” said Amanda Cohen, the owner of Dirt Candy restaurant in New York City, told Business Insider. “Until a vaccine arrives” is an evasion of responsibility, not the basis of policy. It is worth taking the time to read this Financial Times interview with Anders Tegnell, Sweden’s state epidemiologist. First some background: As coronavirus cases rise in pretty much all other European countries, leading to fears of a second wave including in the UK, they have been sinking all summer in Sweden. On a per capita basis, they are now 90 per cent below their peak in late June and under Norway’s and Denmark’s for the first time in five months. Tegnell had told me the first time we spoke in the spring that it would be in the autumn when it became more apparent how successful each country had been. But when it comes to policymaking, this, in particular, is worth noting (my emphasis added): Tegnell had a normal Swedish childhood until he was 12 and his family moved to Ethiopia. He says the change of scenery affected him deeply. He met his Dutch wife at university in the US before travelling extensively. Rather than his fight against Ebola in what was then Zaire in 1995, he says his time just before that working on vaccination programmes in Laos for the World Health Organization was the most formative. “I really learned about the importance of broad thinking in public health. I think that’s also partly behind our strategy and also what the agency is doing. We are not just working with communicable diseases, we are working with public health as a whole,” he says. And, rightly, he takes a broad view of what public health means. Thus: So he looks at schools not just as a place where the virus might spread but also the most important part of health for a young person. “If you succeed there, your life will be good. If you fail, your life is going to be much worse. You’re going to live shorter. You’re going to be poorer. That, of course, is in the back of your head when you start talking about closing schools,” he adds. And that point does not just apply to schools. But back to Bloomberg’s Authers. He notes that money is already being allocated in the markets on the assumption that the 20-percent hypothesis is proved correct: Look at the recent turbulence in tech stocks. Optimism about the pandemic does play into the problems for Big Tech names, which are viewed as benefiting from lockdown conditions. The last few days saw hotels, resorts, and cruise lines sector outperform information technology by enough to break a long-lasting trend. Meanwhile, keep an eye on what is happening over in Blighty. On Monday, the pound bought $1.33. Now it buys about $1.28. What is going on? Advertisement Advertisement A tragedy of errors really. Boris Johnson’s Conservative government is making a mess (again) of its response to COVID-19 by proposing a return to a more stringent lockdown regime, while adding insult to injury by proposing a mass-testing regime that appears to be unfeasible as yet, but if and when it is launched could cost as much as £100 billion. This project, apparently, is known as “Operation Moonshot.” Advertisement London, we have a problem. And, oh yes, negotiations over the U.K.’s future trading relationship with the EU once the Brexit transition phase expires at the end of the year are running into a wall, raising the possibility of the hard Brexit that no one should want. One key issue (there are a number, of which the trickiest involves Northern Ireland, but that’s another story): Johnson’s government wants to be free to pursue the sort of industrial policy that worked so well for Britain in the 1970s. #Sarcasm Shameless hypocrites that we are, Capital Matters became Stakeholder Capital Matters for 24 hours by taking Labor Day off, but opened on Tuesday with a call by Marc Busch for a smart approach to the next round of U.S./Japan trade talks, inspired at least partly by the lessons learned (or which ought to have been learned) from the COVID-19 experience: The U.S. and Japan have an unparalleled opportunity to rewrite the rules on global trade, and by doing so in the midst of a pandemic, help patients gain access to a vaccine when one is ready. Of course, this won’t happen unless U.S. negotiators demand fairer pharmaceutical price-setting practices from their Japanese counterparts. If Japan can no longer pay below market value for top-notch U.S. pharmaceuticals, Japanese researchers will have to start innovating their own generation of breakthrough medicines. This renewed focus on domestic biopharmaceutical innovation will hopefully turn Japan into a stronger, more responsible world leader in the process. In the coming months, there will be many political demands made of U.S.–Japan Phase 2. Doctors and scientists are collaborating on a vaccine for COVID-19 on a global scale. Trade needs to be an asset in this endeavor, not a hindrance. U.S.–Japan Phase 2 can be the template . . . On a less cheery note, Lee Edwards sounded the alarm about a socialist America: The grassroots efforts of Democratic Socialists of America (DSA) and similar left-wing groups are paying significant dividends. In New York, five statewide candidates for the General Assembly who had been endorsed by DSA all won their primaries. Several had come-from-behind victories because of absentee ballots — a key socialist initiative. At least two self-described democratic socialists not endorsed by DSA also won statewide races. They ran on platforms that included the Green New Deal, single-payer health care, criminal justice reform, housing for New York State’s 70,000 homeless, affordable housing for the poor, and new taxes on the rich and Wall Street to pay for all of it. Their goal, as set forth in campaign literature, is to “advance a vision for a socialist world.” Socialists found receptive voters across the country. In Philadelphia, democratic socialist Nikil Saval won the Democratic primary for the state senate. Summer Lee, the first black woman to represent southwestern Pennsylvania in the state senate, won reelection with 75 percent of the vote. In Montana, six “Berniecrats,” backed by Our Revolution, a progressive political action committee, won their primaries. San Francisco elected Chesa Boudin, son of the leftist militants, its district attorney. In the California primary, exit polls revealed that 53 percent of Democrats viewed socialism “favorably.” In Texas, Democratic voters in the primary approved of socialism by 56 percent, a 20-point margin over capitalism. Socialism is indeed riding a wave of momentum when more Texans than Californians view it favorably . . . To twist a phrase, it could happen here. And if some form of socialism does come to the U.S., I suspect that it the impact of automation on employment (and, critically, underemployment) will have something to do with it. Quite what can be done about I don’t know, but in the meantime our chart guru, Joseph Sullivan, analyzed the way the tax code favors robots over humans: The U.S. tax code’s subsidy for robots has grown over time. Much of the change is due to decreases in the after-tax cost of spending on capital, including robots, while the after-tax cost of spending on labor, composed primarily of individual income and payroll taxes, has stayed relatively constant. All of these tax rates are effective average tax rates: They are total revenues paid under the relevant provisions of the tax code, divided by a measure of the relevant tax base. If the idiosyncrasies of the U.S. tax code identified by the researchers were artificially abetting the rise of automation in America, then as these government subsidies started to grow, you’d expect the U.S. to adopt robots more rapidly than countries with similar economies. (Under the assumption that the trend in the U.S. tax code’s preference for robots is, within its peer group, relatively unusual.) That is what the figure, based on data from the International Federation of Robotics, shows . . . Again, I don’t know what can be done about that (or what should be done about that), but Joe’s article makes for an intriguing read. More reassuringly, Edward Lazear made a case that is made all too rarely these days (something that helps explain those Texan “socialists”): the case that free markets help all income groups improve their economic standing: Data on standard of living and economic freedom from as many as 161 countries over the last few decades demonstrate that rich and poor alike are economically better off in countries that have free-market economies. One measure of capitalism is the rank of a country on the Fraser Economic Freedom Index, which is a composite of indexes that reflect the use of markets, the lack of regulation, the openness of the economy, and private ownership of capital. Countries that score highest on this index include Singapore, Switzerland, the United States, Ireland, and the United Kingdom. Venezuela has the lowest ranking of all countries on the index. There are a number of similar indexes, which are highly correlated with one another, and the conclusions are insensitive to the choice of index. The evidence that free markets enhance the well-being of the poor is compelling. Define the rich as the uppermost 10 percent and the poor as the lowest 10 percent of a country’s earners. In countries that rank in the top half on the Economic Freedom Index, the rich have incomes that are on average almost three times as high as the rich in countries that rank in the bottom half of the index. But more striking is that in the free-market half of countries, the income of the poor is almost six times higher than in the more restrictive half. What’s more, within the ranks of the wealthiest half of countries, the poor are more than twice as well off in those that are freer and more market-oriented. General economic growth tends to benefit all. The income data show conclusively that, as President Kennedy was fond of saying, a rising tide lifts all boats. Among the 161 countries studied, periods of high income growth for the rich also tend to be periods of high income growth for the poor. In 82 percent of the ten-year periods during which wages of the rich grew, so too did wages of the poor. Conversely, the wages of the poor tended not to grow during periods when wages of the rich declined. The movement is general. A 1 percent rise in median income is associated with just over a 1 percent rise in income of the poor and just under a 1 percent rise in income of the rich. The historical record suggests that the poor do not get left behind as economies grow . . . Steve Hanke, chivalrous as only a knight can be, came to the defense of Judy Shelton, one of President Trump’s nominees for the Board of Governors of the Federal Reserve System: Former Fed employees and economists are on the warpath because Shelton is not a member of their tribe and does not worship at their altar. She is unabashedly conservative, with a libertarian tilt, rather than liberal or centrist. Economics is not as left-leaning as other social sciences, not to mention the humanities, but conservatives, especially those associated with Trump, face a certain amount of snobbery within the discipline. Shelton has a Ph.D. in business administration from the University of Utah, rather than in economics from one of the nation’s elite universities. The Fed chairman, Jerome Powell, does not have an economics degree, either. He is a lawyer by training, but his nomination raised few hackles thanks to his reassuringly bland manner and lack of original thought on monetary policy. Shelton has written at length on monetary policy, but unlike many other American economists who have done so, she has never worked for the Fed, and it has never funded her, keeping her independent of the influence typical of those within the Fed’s orbit . . . . The Fed’s gargantuan and complex asset holdings mean correspondingly greater influence for bureaucrats and less for free markets. Today more than ever, the Fed Board of Governors needs a skeptic who will make it justify the unprecedented scope of its intervention. As part of his continuing series “Five Questions For…,” Kevin Hassett had five questions for Mick Mulvaney, the U.S. special envoy to Northern Ireland. Mulvaney has also served as acting White House chief of staff, director of the Office of Management and Budget, and acting director of the Consumer Financial Protection Bureau. Here was one of the questions (and the response): Q: As budget director, I know you spent a lot of time on the Trump budgets. But did you ever take a look at the Obama budgets that preceded yours? And if you did, did anything stand out? A: Presidential budgets are really fabulous things. They not only lay out proposed spending levels, but they reflect an administration’s vision, priorities, and, interestingly, predictions. Because they are not one-year documents. The current practice is that every budget projects out ten years. The Obama/Biden administration rolled out its last budget in early 2016, so it provided some view into what that administration thought the country would look like in 2020 and beyond. And it was bleak: anemic, low-2 percent growth as America got older and less productive; a future of higher taxes and fewer people in the work force. It was the depressing “new normal.” Shortly after unveiling that final budget, President Obama told us that some jobs “were never coming back,” in part because of automation. Today on Joe Biden’s website you can read that he “does not accept the defeatist view that the forces of automation and globalization render us helpless to retain well-paid union jobs and create more of them here in America.” Yet that is exactly what he did accept in 2016. It’s right there in his budget. Ramesh Ponnuru looked at who should be getting the credit for the strong economy in 2018–19: Jeanna Smialek and Jim Tankersley write in the New York Times that President Trump takes credit for the good economy of 2018–19 that rightly belongs to the Federal Reserve. They’re right that Trump takes too much credit, as does every president in office during good times. And they are accurately relaying the opinion of a lot of economists and other Fed watchers. But that body of opinion is itself too laudatory toward the central bank. “By retaining his predecessor’s patient approach to rate increases — and then stopping them altogether as inflation, which the central bank tries to keep under control, hovered at low levels — Mr. Powell’s Fed helped to keep the longest economic expansion in United States history chugging along,” they write. In other words, Powell’s great contribution to the economy was not doing too much harm to it. The article reflects the conventional view that Fed policy for much of the last decade was accommodative and that Powell deserves praise for withdrawing that accommodation as slowly as he did. Whether Fed policy was accommodative at all, though, depends on what yardstick we use to measure it. Interest rates were low by the standards of the last few decades, and the Fed’s balance sheet was enlarged by asset purchases. But inflation was below the Fed’s announced target for nearly the entire decade, as were inflation expectations. Comparing spending levels to previous expectations also makes money during the period look tight . . . Not to beat up (again) on Britain’s hapless Tories, but Gautam Kalghatgi was not entirely convinced that they have thought through their Net Zero plans. Spoiler: They haven’t. Kalghatgi: In 2019, Britain’s Conservative government toughened existing climate-change legislation by setting the country the target of net zero carbon emissions by 2050 (the previous target had been 80 percent). There are other yet more ambitious proposals, providing for full decarbonization at even earlier dates, such as Extinction Rebellion’s 2025 and the Green Party’s 2030. In addition, other policies such as banning the sale of new cars and vans with internal-combustion-engines from 2030 are under serious consideration by the government in order to decarbonize transport as part of the overall CO2 target. As discussed below, the challenges of the energy transition required are enormous enough to seem unsurmountable and don’t seem to be sufficiently appreciated by those who set the targets. The scale of the challenge is great. A schedule, a budget, and engineering targets need to be put in place, and the work needs to start immediately, if the government is serious about meeting the targets for zero carbon emissions. It won’t be easy. Spoiler: That’s an understatement. Of course, if the British government is really serious about its net zero goal, concrete, time-bound initiatives with clear budget and engineering targets have to be set and implemented. Such targets could include, in the next ten years, reducing energy consumption by 13 percent and at the same time building 13 3-GW nuclear plants or 33,000 offshore 3-MW wind turbines; replacing 10 million gas boilers; building 700,000 public and 7 million private charging points for BEVs; rebuilding the electricity-distribution network appropriately; reducing steel, cement, aviation, and livestock farming by a third; and the list doesn’t stop there. . . . The work has to start immediately and would then have to continue at the same pace for the following two decades. This would force the government to focus on the implications of what has been promised. Clearly, since no such targets have been announced, it is almost certain that the government will miss its goal to get to net zero carbon emissions by 2050. Meanwhile, vast sums of money and resources will have been spent for little gain and perhaps quite a bit of environmental harm, and a great deal of industrial production will have been outsourced. Soon there will be a realization that net zero will remain out of reach. After that will come the time for creative CO2 accounting, offsets, and apportioning of blame. By comparison, the Conservatives’ COVID-19 ‘moonshot’ looks like an exercise in hard-headed realism. In a celebration of the 50th anniversary of the publication of Milton Friedman’s seminal “A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits,” Jon Hartley tried to remind its critics — from Joe Biden to the Business Roundtable(!) — that “putting shareholders first often operates to the benefit — not the detriment — of other stakeholders.” But: Establishing the direction in which society should go is the business of government, not business. When it comes to the environment, for instance, it should be up to voters and their elected governments to decide how to price or otherwise police the externalities that a company can generate. Waiting for corporations to act against the interests of their own shareholders’ welfare is neither the right nor the efficient way to go. That’s not to say that the private sector cannot help resolve problems identified by the voters. More often, given the right incentives, it will do so more efficiently than government ever could in the long run. For instance, electric-car companies such as Tesla build emission-free cars that reduce global emissions, and pharma companies such as Moderna race to build COVID-19 vaccines but still operate under a mandate to maximize shareholder value. Adam Smith understood this. By directing that his or her company be run “in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention,” an end, however, that is in the broader interest of society. And Tomas Filipson and Eric Sun asked whether the U.S. had incurred larger COVID losses than countries held up as role models. Short answer: not if you ask the right question: The idea that America has incurred larger losses from COVID than any other nation has been widely repeated, but it’s not true. In reality, the United States has incurred smaller COVID losses than many other countries often cast as role models, once the total cost of the disease — in both lost lives and economic activity — is correctly measured and taken into account. A truly scientific approach to evaluating COVID policy relies on quantification of the tradeoffs involved, as opposed to only considering health losses. The issue is how to measure the quantitative magnitudes of two separate strands of losses, the cost of disease prevention and the cost of the disease itself, to guide policy on minimizing the total impact. Economists routinely quantify and assess tradeoffs between health and other valuable activities to determine overall costs they impose. Doing so does not trivialize human life but acknowledges — as all of us must — that saving lives at any cost is not practical nor desirable . . . Finally, we produced the Capital Note (our “daily” — well, Monday–Thursday, or this week, Tuesday–Thursday, anyway). Topics covered included: Cities in the post-COVID era, Nikola, LVMH/Tiffany, tech investing, the economics (grim) of the Olympics, Nikola (again), the CFTC and climate change, the elusive V, and Wall Street and poker. To sign up for The Capital Letter, follow this link. Andrew Stuttaford is a contributing editor of National Review, for which he has been writing since the early 1990s.
Coronavirus relief, aluminum tariffs, California taxes, and more.
On capitalism, taxes, and the very rich
Employment numbers, a macro renaissance, and a look back at Black Wednesday.
One big problem: Nearby states such as Nevada have no income tax at all.
College freshman who attend fall classes, either in person or remotely, will benefit from smaller class sizes and fewer competitors when they enter the job market.
USO, SRI, and BRT.
At this point, it’s still a game of chicken between the state and the company.
Allowing retail investors to have access to private-equity funds will improve economic mobility.
Public officials and the media should frame risks in a practical, comprehensible manner.