European Central Bank headquarters in Frankfurt, Germany. (Ralph Orlowski/Reuters)
The week of December 13: Climate policy, ‘socially responsible’ investment, China, taxation, and much, much more.
Awise person told me recently that the Capital Letter tended to be on the bleak side, and, oh yes, was rather long. He wasn’t wrong, but does that mean it can be compared to some of the great works of 19th-century Russian literature? No? The absence of axe murders, I suppose. Oh well, I’ll leave the clickbait to Dostoevsky.
So, for a change this week I’ll highlight two somewhat (these things are relative) cheerier stories. What’s more, neither of them involves the Fed — although the central bank did take a step in the right direction on Wednesday. It cannot get out of the QE business too soon.
However, one of the things that the Fed has been getting wrong of late is the way that it is getting itself involved in climate-related regulation, an example of mission creep that is an abuse of the considerable independence that it has been given. That it is giving itself permission to do so on the basis of the supposed risk posed by a changing climate to the financial system does nothing for the central bank’s good name. As economist John Cochrane has argued for Capital Matters (and elsewhere) this notion of financial risk (which should not be confused with the broader risks that may come with a changing climate) rests on — how to put this — flimsy intellectual foundations. The name of the game, however, is straightforward: it is to increase the cost of capital for fossil-fuel companies by, through pressure on their lenders, increasing their cost of capital.
The Fed, to its credit (and probably thanks in no small part to Powell) was relatively late to start down this route. The European Central Bank (ECB), a highly politicized institution, was, predictably, far quicker of the mark, something that makes this news report (my first cheerier tale) all the more surprising.
Bloomberg (my emphasis added):
The newest member of the European Central Bank’s Supervisory Board says climate considerations shouldn’t play a role in deciding how much capital banks should hold against potential future losses.
Anneli Tuominen, who was named on Thursday to succeed Finnish countryman Pentti Hakkarainen, says she’s against using capital rebates as an incentive for green lending, as the European Union is considering. The EU is also mulling harsher requirements for lending to polluters.
“Capital requirements should always be risk-based and not be influenced by political decisions,” Tuominen said by phone after her appointment. Banks “need to take a longer-term view to the shift to the carbon neutral era, and be able to analyze and stress test their business and loan portfolio.”
I doubt that she will change the course on which the ECB is set (despite the wise words of advice John Cochrane gave the institution a year or so ago). After all, here is Christine Lagarde, the ECB’s president in July 2020:
Asked whether the pandemic could dilute the importance of green issues, the ECB president said that “those who would be tempted by that option would live to regret it”. She added: “I have children, I have grandchildren. I just don’t want to face those beautiful eyes, asking me and others: ‘What have you done?’”
Tuominen, incidentally, has been director general of the Finnish Financial Supervisory Authority — the body responsible for overseeing the Finnish financial sector — since 2007. She knows what she is talking about.
Tuominen’s selection brings the ECB-appointed representatives to gender parity, though most members on the board remain male.
Bloomberg’s gonna Bloomberg.
The other positive piece of news comes, unusually, from the FT’s relentlessly preachy “Moral Money.” In a post on Friday, I discussed a story in that section in which the writer(s) clearly shared a prominent activist’s disappointment that more investment-management groups were not voting the right way (unspecified, but I think we can guess what the right way would be) on “environmental and social issues.” Before joining Mr. Burns for a chuckle and champagne, however, note that these supposedly delinquent managers were, in the case of European asset managers, supporting nearly two-thirds of such resolutions, while their U.S. counterparts did so in 39 percent of cases, bad news for those of their clients who had hoped that those who managed their money would be focused solely on investment return.
Read on, however, to the next (far happier) story in the same section and there was this written by Tamami Shimizuishi:
Asian technology companies are lagging their western counterparts on green commitments, a new report shows.
Greenpeace East Asia examined the climate actions of the top 30 technology companies on the continent. Sony, Japan’s tech giant, obtained the highest score, but the grade was nothing to be proud of: C+.
A company’s proper function in all but a very limited (and very specific) number of cases should be to generate shareholder return (see Milton Friedman for details). If Sony’s C+ recognized some sort of attempt to subordinate that objective to climate-related priorities determined by the likes of Greenpeace (rather than laws passed by democratically elected legislators) then the only reason that the C+ was “nothing to be proud of” was that the score was too high, not too low.
Samsung Electronics, Xiaomi, and Alibaba were among the lowest scoring groups in the ranking, all receiving a D or D-. The last two of those three companies are, I note, Chinese, hardly the first reminder that Western efforts aimed at tackling problems related (or potentially related) to climate change need to reflect the reality that large parts of the world, most notably (but not exclusively) in China and India, do not share the same set of priorities as those in the West. That means that the West’s headlong and ill-considered “race” to net zero is not only economically, politically, and socially destructive, but makes very little sense if limiting the impact of carbon emissions on climate is the goal: It would be much better to put a far greater emphasis on adaptation (a good deal of which, such as boosting coastal cities’ flood defenses, would involve spending money that would be well spent anyway), and, say, on pivoting to nuclear energy and away from reliance on renewable technologies that (as yet) do not appear to be ready for prime time.
But back to Moral Money:
Among all the companies examined only half have issued net zero or carbon neutrality pledges. And only three companies — Japan’s Sony, Toshiba and Hitachi — have included supply chain emissions in their greenhouse gas reduction targets. Meanwhile, most big US tech companies, including Apple, Amazon and Microsoft, have already set Scope 3 targets. The last time Greenpeace conducted similar research on the US companies (in 2017), Apple and Google received an A grade while Microsoft and Amazon were rated B and C respectively.
Amazon for the win!
Keep in mind the comment that “most” big U.S. tech companies have already set “Scope 3 targets,” and then note this somewhat grudging admission:
While investors are pushing the ESG fight forward, it is worth noting that outside the natural resources industry, a vast majority of businesses’ emissions come from their supply chain, or scope 3 emissions. When polled, investors rank reducing scope 3 emissions as the second lowest priority on the list.
“Pushing the ESG fight forward.”
Moral Money’s gonna moral money (ESG — assessing companies, at least in part, by how they measure up against certain environmental, social, and governance benchmarks — is a particularly virulent variant of “socially responsible” investment), but it is also “worth noting” that, judging by the chart accompanying the piece, barely a third of investors who care (or say they care) about ESG would choose to put a priority on Scope 3 emissions, which is even more broadly defined than the FT would suggest. Why, then, have most U.S. Big Tech targets set targets in this area?
But back to the FT:
Ruiqi Ye, climate and energy project manager at Greenpeace East Asia, said Asian companies have been slow with their climate actions due to “a lack of external pressure and incentives to switch to renewable energy in the region”. But the situation has changed rapidly since 2020, when the Chinese, Japanese and South Korean governments all committed to achieving net zero by mid-century.
I think we know the value of that Chinese commitment.
As for Japan, well, here’s the Financial Times from July:
The ex-chair of the board of the world’s largest pension fund, who oversaw its $1.7tn portfolio as it became a pioneer of responsible investment, has warned the institution to remember its core duty to Japanese pensioners: returns.
“The GPIF [Government Pension Investment Fund] must always go back to its investment purpose,” says Eiji Hirano, who stood down from the job three months ago. His comments reflect concerns that too great a focus on environmental, social and governance (ESG) standards can add risk, including a possible collision between the law and the investment philosophy under the GPIF’s previous regime.
According to the law under which the GPIF operates, it must invest with the sole purpose of benefiting Japanese citizens through the returns generated. And Hirano says GPIF is well aware of that obligation — emphasising that he does not think it has strayed from that principle since he left.
Or Philip Patrick, writing in the Spectator in November:
Fumio Kishida, the newly-installed Japanese prime minister, could have been forgiven for giving COP26 a miss. The opening ceremony in Glasgow coincided with the general election he was fighting back home. But Kishida, having won the election, did make the trip, where he gave a speech broadly but not unreservedly supportive of international efforts to cut Co2 emissions. The reward for his restrained tone and tepid assurances? Japan was named ‘fossil of the day’ by the Climate Action Network group, an ‘honour’ bestowed on countries deemed insufficiently devoted to the cause.
Kishida’s specific crime was that while he did promise substantial financial aid to developing nations in Asia to work on low emission energy technologies, he didn’t confirm whether Japan would be phasing out coal production any time soon. Nor did he repeat previously stated (by his predecessor Yoshihide Suga) net-zero emissions pledges.
Suspicions, or hopes – depending on your viewpoint – are growing that Kishida’s administration will be one of the developed world’s most sceptical on climate change and will push back against the commitments made by [his predecessor Yoshihide] Suga. One of Kishida’s first acts after winning the election was to enact a small-scale purge of the greenest members of the party hierarchy. This included environment minister Shinjiro Koizumi, to whom the figure of 46 per cent – Japan’s ambitious Co2 reduction target (by 2030 from 2013 levels) – had come in a ‘vision’.
A distinctive Japanese position may be forming on climate change, which the thoughtful and diplomatic Fumio Kishida is well suited to represent. It amounts to this: making supportive noises that chime with the international mood music, while, in reality, moving cautiously, with a close watch being kept on the home economy.
It’s a subtle, grown up approach . . .
It’s clearly too much to hope for anything like that in the West.
Meanwhile, via Bloomberg from the beginning of this month:
It’s been less than a month since world leaders pledged to combat climate change at the COP26 summit in Glasgow, yet Japan is already showing signs of putting the brakes on divestment from fossil fuels.
Government officials have been quietly urging trading houses, refiners and utilities to slow down their move away from fossil fuels, and even encouraging new investments in oil-and-gas projects, according to people within the Japanese government and industry, who requested anonymity as the talks are private.
The officials are concerned about the long-term supply of traditional fuels as the world doubles down on renewable energy, the people said. The import-dependent nation wants to avoid a potential shortage of fuel this winter, as well as during future cold spells, after a deficit last year sparked fears of nationwide blackouts . . .
Perhaps Tokyo might like to send some words of advice to the U.K., which is currently set on perhaps the most self-destructive approach to net zero on earth.
And South Korea?
Energy Tracker Asia:
While others run, South Korea seems to stroll towards its net-zero by 2050 goal. However, with the latest green deals, the local government shows ambition to change the country’s trajectory and notably speed up its renewable energy transition.
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 47th episode David is joined by Žilvinas Šilėnas (his friends call him “Z”), the president of the Foundation for Economic Education (FEE). Z is a two-time Templeton Freedom Award winner and was the longtime president of the Lithuanian Free Market Institute. He shares an opposition to socialist and Marxist ideas, not merely from believing in the superior ideas of freedom and exchange, but also from living with the horrors of Eastern-bloc central planning for most of his life. Join David and Z as they dive into one man’s personal journey from command/control to freedom and prosperity. Also learn how Z and the good folks at FEE believe that there is an effective way of communicating the ideas of liberty economics to the younger generation.
The Capital Matters week that was . . .
Despite rising shelter costs, the Biden administration has shockingly doubled the tariff on Canadian softwood lumber to 17.9 percent from the current rate of 8.99 percent. This tariff hike will almost surely be passed on to consumers in the form of higher lumber and housing prices and will almost certainly exacerbate current supply-chain problems. Just as lumber prices are beginning to fall from the all-time highs reached this past summer, the Biden tariffs will almost certainly slow the process. Worse, White House policy looks likely to set off a broader trade dispute with Canada. On Friday, Canada’s deputy prime minister threatened retaliatory tariffs on the auto sector and “and several other sectors of the U.S. economy.”
Softwood lumber has been the focus of a long-standing trade dispute between Canada and the U.S . . .
“Socially Responsible” Investment
Economic policy is changing fast in Washington, and your retirement account may soon experience the whiplash. One of the best policies enacted by the previous administration was a rule that made it clear to the people who manage pension funds that, when selecting investments, they need to prioritize returns for beneficiaries instead of pursuing their own political agendas. Unfortunately, Joe Biden’s Department of Labor is currently in the middle of repealing that rule. This effort, while obscure to the average American, is part of a much larger effort to redefine the world of saving and investing to permanently serve progressive policy goals. That should alarm not just conservatives, but anyone who wants to be able to enjoy a comfortable retirement someday . . .
It is, I think, suggestive of something that so much “climate action” depends on spending, directly or indirectly, other people’s money without the degree of consent and/or democratic approval that ought to be expected given the sums involved (something, incidentally, that also holds true for the expensive burden that will be heaped on companies and individuals as a result of climate-related regulatory action). This also applies in many areas of finance, not least in the way that investor funds, retirement savings, and monies earmarked for pensions are increasingly being deployed . . .
From the Financial Times’ nauseatingly named “Moral Money”:
The world’s biggest money managers have been talking an increasingly impressive game when it comes to their environmental and social impact. But when it comes to using their votes to drive action, there is a marked transatlantic divide.
Definitions of “increasingly impressive” may differ.
Money managers are, for the most, managing other people’s money. And unless those other people have specifically requested that their money be invested in a way that takes into account environmental and social impact even if it hurts return (spoiler: over time it almost certainly will), then the money managers’ job is solely to manage that money in a way that generates maximum risk-appropriate return. And that’s it. There is nothing remotely impressive about using other people’s money to pursue a social or political agenda to which they may not subscribe . . .
With port congestion harming America’s supply chains, a bill to reform ocean shipping might seem like a solution to what ails us. But the OSRA isn’t it. The bill is nonresponsive to the causes of our current problems, and if it has any effect at all on port congestion, it might make it worse . . .
In a new report out today, the Republicans on the Joint Economic Committee have provided a way forward on supply chains that addresses some of the root causes of America’s transportation inefficiencies. The report, authored by senior economist Jackie Benson, advocates port automation, deregulation, and worker flexibility.
You know it’s serious because it also advocates repealing the Jones Act . . .
The whole point of industrial policy is that it is conducted without regard to economic efficiency. Remember: The debate over economic models was productive because both sides agreed on the standard of success. Capitalists and socialists insisted that theirs was the efficient system, which made efficiency the goal. That’s not the case anymore. National conservatives are forthright in their belief that economic efficiency and the national interest diverge. It’s the latter they’re trying to achieve. While their intermediate objectives differ — some want industrial policy for national-security reasons, others for supporting American families, and more still, because they think it might build a winning political coalition — they agree that manufacturing employment and output should be higher than they are now.
There isn’t a Hayekian knowledge problem here. If the government wants to increase the number of factory workers or the output of domestic auto manufacturers, it can. But it won’t be easy. Especially at the industry level, many complex interdependencies exist among production technology, substitutability of labor and capital, and market prices. While subsidies seem like an obvious choice, they could very well backfire. Acquiring good information is costly, even more so for distant bureaucrats than firms and households. For these reasons (and many others), I’m against industrial policy (with the possible exception of tailored security measures). But this isn’t to claim that the knowledge problem makes industrial policy impossible. “It’s hard” and “It cannot be done” are categorically different statements . . .
Build Back Better
President Biden is facing an unusual problem: His economic advisers may have been right about some things. Among them is that lower child-care costs can lower inflation by allowing more parents to work rather than stay home. A decline in the overall cost of labor could reduce consumer prices. President Biden himself, his Council of Economic Advisers, his director of the National Economic Council, and his secretary of transportation have all voiced some version of this notion. President Biden’s problem? The Build Back Better Act passed by the U.S. House of Representatives would significantly raise rather than lower child-care costs. If the Biden administration’s own reasoning about child care’s role in inflation is correct, then the Build Back Better Act is inflationary . . .
I’m still pretty confident that inflation will ease off from its current high levels in due course, if not to the levels we were seeing a couple of years ago.
But the term “in due course” is doing quite a bit of work here. Producer prices provided the latest grim set of numbers today . . .
The IRS has released tax data for the 2019 tax year, and they show what IRS tax data always show: The federal income tax is already very progressive.
From a National Taxpayers Union Foundation (NTUF) report:
“This latest release of IRS data shows that the top 25 percent of earners paid nearly 87 percent of all income taxes in 2019. Lower income earners are largely spared from income taxes with the bottom 50 percent of earners owing just three percent of the national share.”
Politicians talk of people paying their fair share in taxes. What counts as fair is subjective, and part of the job of legislatures is to decide how people ought to be taxed. Many congresses over many years have made our federal income tax very progressive, and it remains that way today . . .
“Build Back Better”, the federal spending plan recently passed by the House, has a provision in it that is clearly a piece of political theater. Among other things, the bill sets out to change the rules surrounding Roth IRAs, including a strong retrospective element, which seems to have been inspired by one particular person for whom the Left has — how to put it — very little affection: Peter Thiel . . .
As the Delta variant surges in various locales and the new Omicron variant expands around the globe, public officials are beginning to reimpose Covid-19 restrictions. The Food and Drug Administration, though, seems to lack the same sense of urgency.
The agency is considering two new antiviral pills that have been found to cut Covid-19 hospitalizations and deaths in people treated soon after they become symptomatic. If authorized, the pills would enable early Covid-19 to be treated at home with a five-day course of treatment — a marked improvement upon the treatments that are presently on offer . . .
Having floated a possible export ban on crude oil as a trial balloon last month, the Biden administration earlier this week abandoned the idea, as opposition emerged quickly from Democrats in oil-producing districts.
But the mere fact that this proposal received serious consideration illustrates three eternal truths about Beltway policy-making . . .
Earlier this year, I surveyed the record of the consulting firm McKinsey. A stint at McKinsey is a common item on the résumés of many who end up influential in other parts of society. McKinsey’s business model tends toward a kind of soulless technocracy that can make it so attractive to the morally uncertain products of our higher-education system who emerge from said system sure primarily of one thing: that they should be telling people what to do. (Transportation secretary Pete Buttigieg being the quintessential example.)
These are only two of the reasons why, as I wrote in May, “a commitment to free markets in the abstract does not oblige conservatives to defend McKinsey in particular.” Additional reasons to be uncomfortable with McKinsey arise from its record of dealing with foreign governments. Such dealings have been nefarious in multiple countries, but nowhere worse than in China . . .
There can be little doubt (surely) by now that China is aiming to be the most powerful country in the world. Dreams that growing prosperity would make Beijing want to play nice have proved to be just that, dreams.
And no small part of China’s push toward that goal will be in the technological side. As Xi has put it:
Technological innovation has become the main battleground of the global playing field, and competition for tech dominance will grow unprecedentedly fierce.
It will, it has, and China is doing rather well at it . . .
Marc Joffe and Daniel Tenreiro:
The long-anticipated default of China’s most indebted property developer finally came to fruition last week. Evergrande Group will have to restructure some of its $300 billion in liabilities, of which $19 billion are international bonds. While the firm’s bonds have steadily plummeted over the past few months, investors do not appear to be anticipating significant knock-on effects from the insolvency. Indeed, some firms see the default as a buying opportunity.
While an outright collapse of China’s property sector looks unlikely, even an orderly unwinding of the highly indebted property sector carries underappreciated risks to foreign investors. Evergrande’s default — the latest in a series of similar solvency issues at Chinese property developers including Fantasia, Huarong, HNA, and Ping An — could hit local-government bonds and Chinese holdings of U.S. assets . . .
Please note that this will be the last Capital Letter of 2021. In the meantime, in the spirit of the season, be sure to (re)watch It’s a Wonderful Life, marveling, as you do, at the entrepreneurial verve of Mr. Potter, the film’s true hero. I wrote about him back in 2001:
If It’s a Wonderful Life is the New World’s answer to A Christmas Carol, then Potter is its Scrooge, but he is a very American Scrooge, bigger, badder, and bolder than his cold-crabbed counterpart across the Atlantic. To start with, he likes a bit of luxury. Potter will spend money, so long as it is on himself. From what we read about Scrooge, we know that he was prepared to lavish little on heating (“[he] had a very small fire”) and not much on accommodation (“a gloomy suite of rooms” in an office building, apparently). Potter, by contrast lives in some splendor. He employs a manservant and dresses stylishly. In his office there is a large bust of Napoleon. Potter is a man who likes to dream.
We never discover the full extent of his business activities, but it is obvious that, locally, he is the economically dominant figure (“This town is no place for any man unless he is prepared to crawl to Potter”) and it has to be admitted (although in Capra’s biased script no one ever does) that, with the help of his wealth, Bedford Falls has become a pleasant, if slightly dull place. These days this crippled Croesus would be praised as a role model and profiled in People as an inspiration to the “physically challenged.” Without even the help of the ADA, Potter has triumphed over disability and made a large fortune. He is a lender of last resort, and, for some poorer citizens, a landlord. Of course there are complaints about the standards of his rental property, but what tenant does not like to grumble?
He is not, it is clear, overly sentimental (“I am an old man and most people hate me, but I don’t like them either, so that makes it even”). A Rumsfeld in a Rockwell town, Potter is not a man to mince words. References to the “rabble” and the need for working-class thrift would point to politics that are reassuringly conservative if not exactly compassionate. His approach to commerce is sound. Charity and business should not be muddled up, credit must be checked and loans repaid. Like Warren Buffett, he is a longer term, contrarian investor, prepared even (at a price) to back Bedford Falls’ failing banks in a moment of crisis. Unlike Scrooge he will reward a potentially valuable hire. The deal Potter offered George Bailey, $20,000 a year for three years, was extraordinarily generous, unthinkable from miserly Ebenezer, an employer who begrudged his clerk a lump of coal. Given the opportunity, in that alternative timeline where George Bailey never lived, the energetic and enterprising Potter even manages to transform his sleepy hometown from a PBS sort of place into a WB city, the glamorous, glittering Pottersville, a Yankee Las Vegas complete with Midnight Club (Dancing!), Bamboo Room (Cocktails!), and burlesque (20 gorgeous girls!) . . .
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