The week of September 13: climate policy and Europe’s energy crunch, inflation, taxation, and much more.
Much of last week’s Capital Letter was focused on the growing energy crunch in Europe — a crunch that has something (but not everything) to do with needlessly destructive climate policies, and has, quite clearly, lessons for the U.S.
Anyone who reached the end of that part of the Letter — it was lengthy, but this week’s is longer still: If it was about something more entertaining Peter Jackson would be thinking about a trilogy — will not be surprised to discover that the situation has not gotten any better.
European power prices have spiraled to multi-year highs on a variety of factors in recent weeks, ranging from extremely strong commodity and carbon prices to low wind output.
What’s more, the record run in energy prices is not expected to end any time soon, with energy analysts warning market nervousness is likely to persist throughout winter.
The October gas price at the Dutch TTF hub, a European benchmark, was seen to climb to a record high of 79 euros ($93.31) a megawatt-hour on Wednesday. The contract has risen more than 250% since January, according to Reuters, while benchmark power contracts in France and Germany have both doubled.
In the U.K., where electricity bills are now the most expensive in Europe, power prices have soared amid the country’s high dependence on gas and renewables to generate electricity.
And the impact of climate policies? Well, start with the quick reference to “carbon prices” in the CNBC report. Carbon prices reflect the “market” created by the EU’s insistence that certain industries are required to have a permit for every tonne of various greenhouse gases (including CO2) that they emit each year. Under this regime, known as the European Trading System (ETS), they are given an allowance (which is steadily being reduced). If their emissions exceed that allowance, they will have to buy extra permits (EUAs — European Union Allowances) on the market. The supply of permits is not unlimited. Companies subject to this regime, which emit greenhouse gases for which they do not have a permit will pay a fine of €100 per tonne (metric ton), which can be compared with a current EUA price of roughly €60 per tonne. Among the sectors — which account for some 40 percent of the bloc’s emissions — caught within the ETS is electricity generation.
The EU’s Commission — i.e., its bureaucracy — describes the ETS in this way:
The EU ETS works on the ‘cap and trade’ principle. A cap is set on the total amount of certain greenhouse gases that can be emitted by the installations covered by the system. The cap is reduced over time so that total emissions fall.
Within the cap, installations buy or receive emissions allowances, which they can trade with one another as needed. The limit on the total number of allowances available ensures that they have a value.
After each year, an installation must surrender enough allowances to cover fully its emissions, otherwise heavy fines are imposed. If an installation reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another installation that is short of allowances.
Trading brings flexibility that ensures emissions are cut where it costs least to do so. A robust carbon price also promotes investment in innovative, low-carbon technologies.
Prices are certainly “robust” at the moment.
Back to CNBC (my emphasis added):
British day-ahead electricity prices rose nearly 19% to reach 475 pounds ($656.5) on Wednesday, Reuters reported. The contract was already trading near record highs shortly after a fire at a U.K.-France power link cut electricity imports to Britain.
“By far the biggest factor is gas prices,” Glenn Rickson, head of European power analysis at S&P Global Platts Analytics, told CNBC via email.
Higher [natural] gas prices have also been a “big driver” in lifting carbon and coal prices to record highs too, Rickson said, although he noted there are other supporting factors at play, such as low wind generation and nuclear plant unavailability across the continent.
Carbon prices in Europe have nearly trebled this year as the European Union reduces the supply of emissions credits.The EU’s benchmark carbon price climbed above 60 euros per metric ton for the first time ever in recent weeks, trading slightly below this threshold on Thursday.
An increase in the cost of natural gas used to generate electricity can (obviously) mean higher electricity prices, which will already have been boosted by the cost of emissions certificates. When renewable or other non-greenhouse-gas-emitting sources of power (nuclear) fail to deliver what is expected of them, the increase in demand for gas will, in all probability, increase the demand for permits and thus, in all probability, their price. The consumer is effectively hit twice. The ratchet doesn’t stop there, however. If, as now, a shortage of gas pushes the gas price up, that makes coal-fired generation more price competitive. However coal-generated power is roughly twice as carbon-intensive as electricity generated by natural gas. Increasing use of coal will push up demand for both coal and permits and thus (again, in all probability) push up the price of both. If that happens, however, the all-in price for coal-generated electricity may then rise to the extent that gas again becomes competitive, even though it is still expensive. Utilities will then increase their buying of gas, pushing up gas prices still further, and on and on we go.
Please keep in mind that the market in EUAs can also be used for more than immediate needs. Sometimes this is merely a matter of emitters engaging in what are effectively hedging operations, sometimes . . .
There is also evidence of compliance buyers (e.g. European utilities) purchasing EUAs on a forward basis to try and lock in positive margins on coal & lignite assets.
Part of the move higher in EUA prices has been driven by a surge in demand from non-compliance entities, loosely termed as ‘speculative buyers’. This for example includes funds & financial institutions ‘front-running’ compliance demand (e.g. from power generators) in the anticipation of selling for a profit into rising prices across Phase 4 (2021-30).
Bloomberg (also from March):
The European Union needs to analyze the impact of investor speculation on the world’s biggest carbon market when reforming the program, Denmark’s Climate Minister Dan Jorgensen said.
Permits to pollute in the EU Emissions Trading System jumped to a record 41.04 euros Wednesday, extending their gains to 50% in the past six months. The prospects of stricter climate goals under the European Green Deal and higher prices has lured new financial investors, including hedge funds.
This whole “market,” one in essence based on bureaucratic diktats, is, in many ways, a facsimile of the real thing, but if it starts showing too many signs of operating in ways that markets should (by attracting speculators) that won’t do at all . . .
But back to natural gas. Why have prices increased? I discussed this at some length in last week’s Capital Letter, but CNBC provides a brief recap. As you can see, it is not all about climate policy, far from it.
European gas prices have accelerated since the start of April, when unseasonably cold weather conditions meant Europe’s gas in storage dipped below the pre-pandemic five-year average, indicating a potential supply crunch.
Europe has since struggled to bring gas supplies that are necessary for the winter period back to where they should be. An economic rebound as countries eased Covid-19 restrictions also coincided with higher-than-expected demand that led to a shortage of gas.
This deficit is “making the market nervous as we approach winter,” Stefan Konstantinov, senior analyst at ICIS Energy, a commodity intelligence service, told CNBC. “That is coupled with the very significant competition for LNG supplies from Asia and South America, which is driving gas prices up.”
Further to this, Russia has been seen to slow its delivery of piped natural gas to the region, raising questions about whether this may be a deliberate move to bolster its case for starting flows via Nord Stream 2.
As I noted last week, there may be other reasons for the Russians behaving in the way that they are, but still . . .
As it is (via Bloomberg on September 15):
Anticipation of an imminent start of the Nord Stream 2 pipeline from Russia to Germany has evaporated. The German regulator said it has until January to decide on the project certification, while state-controlled exporter Gazprom PJSC admitted the link won’t start flowing gas from Oct. 1, even as the Kremlin said a quick start of the project would ease the European gas crisis.
In the U.K., the position has been made far worse by low gas production this year and the failure of the wind to, well, blow. Wind accounted for about a quarter of the U.K.’s power last year, and that share can rise.
“If there was enough wind, it could maybe meet more than half or two-thirds of U.K. power demand on a relatively low power demand day. But instead what we are seeing is that actually we’ve got no wind and we are forced to fire up polluting coal-fired generation.”
“At first glance, that doesn’t tally up with the government’s ambition to decarbonize. But this is very much driven by the intermittent nature of renewables: both wind and solar,” [Konstantinov] added.
To repeat another point I have made before, resilience needs to be a vital element in any energy-supply system. That is, to put it mildly, difficult to reconcile with the intermittent nature of renewables.
On Wednesday (Bloomberg reported): “Wind generation only accounted for 5% of supplies late on Wednesday, while gas made up more than 60% of the U.K. total.”
Some of the deficit can, in the U.K.’s case (and elsewhere), be made up by coal-fired generation albeit with the complications described above. But then (via CNBC):
The U.K. has committed to phasing out coal power completely by Oct. 2024 to cut carbon emissions.
What about nuclear?
By 2024 five of the U.K.’s eight nuclear plants will be halted permanently.
On September 15 Michael Shellenberger tweeted:
When I was in the in UK 2 years ago the country’s leading experts assured me that Britain didn’t need another 2 GW nuclear plant because wind energy was cheap and, in a pinch, they could just import power from France. Now, the wind’s barely blowing & the interconnect has failed.
(Do read the whole darkly amusing thread that follows this first volley.)
The interconnect (with France) has failed? Not quite, but close enough.
A large fire at Britain’s main electricity subsea cable will reduce imports from France until the end of March, National Grid has warned, triggering fears over tight supplies at a time when power prices have surged to record highs.
The FTSE 100 energy company said on Wednesday morning that a blaze had broken out at Sellindge near Ashford in Kent, where underground cables that are part of the IFA1 interconnector link up to a converter station. Emergency services have been in attendance most of the day.
Natural gas prices in the UK, which had hit record highs in recent weeks, soared more than 18 per cent on the news, with traders calculating that gas-fired power stations would need to run harder in coming weeks — and potentially months — to compensate for the loss of imports.
At £1.89 a therm, gas prices are more than double the level they traded at just two months ago and more than five times last September’s level.
The IFA1 interconnector has been used to import electricity from France, generated largely by nuclear power, to balance the UK grid, since it opened in 1986. It was only operating at half capacity at the time of the fire because of planned maintenance work . . .
Well, it may not have had to, but it has. Governed by a Conservative Party that quite some time ago lost most of the grip it once had on reality, the U.K. has devised an ETS of its own. Adding an extra twist of the knife, carbon prices have been higher in the U.K. than in the EU for most of the year, although they are at roughly similar levels now.
Seemingly unaware of the existence of Zoom, Britain will be hosting COP-26, the next climate jamboree, in November, something of which Boris Johnson, an enthusiastic green these days, is inordinately, pompously, proud. It will be awkward if this jamboree takes place in the middle of a major crisis over energy prices — and perhaps not just over prices.
Soaring gas prices have forced the closure of two large UK fertiliser plants, sparking warnings of a looming shortage of ammonium nitrate that could hit food supplies as record energy prices start to reverberate through the global economy.
New York-listed CF Industries Holdings, one of the world’s biggest fertiliser groups, said it did “not have an estimate for when production will resume” at its plants in Teesside and Cheshire in the north of England, which supply roughly 40 per cent of the UK fertiliser market and employ about 600 people.
Europe’s soaring energy markets are exposing the risk of power blackouts this winter, especially if freezing weather worsens the region’s already exceptionally low natural gas inventories, according to Goldman Sachs Group Inc . . .
The European Union’s climate czar said Tuesday the 27-nation bloc should ensure that the most vulnerable people won’t pay the heaviest price of the green transition, and pledged measures guaranteeing equal burden-sharing across society, amid a global surge of energy prices.
“The one thing we cannot afford is for the social side to be opposed to the climate side. I see this threat very clearly now that we have a discussion about the price hike in the energy sector,” said Frans Timmermans, the European Commission vice president in charge of climate issues.
As the global demand for gas has soared, energy prices have surged across Europe at a time when the EU is pushing for a quick phasing-out of coal and the development of sustainable sources of energy. Carbon prices have rocketed in recent months, having an impact on electricity bills.
“Only about one fifth of the price increase can be attributed to Co2 prices rising. The other is simply a consequence of shortage in the market,” said Timmermans, noting that prices for renewables have kept low and stable.
When the renewables work, that is.
It would also have been interesting to see what adding back in the cost of subsidies (paid, in the end, by taxpayers) would have done to those supposedly “low” renewables prices. Timmermans could have elaborated on the way that broader climate policy in countries such as Germany (although there Merkel’s characteristically cowardly switch away from nuclear power has made a bad situation worse), has been pushing up energy costs for quite some time now. Oddly, he didn’t.
There’s also the question of whether European opposition to fracking (even if fracking was never going to lead to the bonanza seen in the U.S.) might have contributed something to the current gas crunch. Meanwhile the phasing out of coal-fired plants is shrinking access to an alternative source of supply when gas prices soar. Then, to return to the topic of nuclear energy: It may have been a bugbear of environmentalists since long before the climate panic (and not only in Germany), but once the power stations themselves are built, nuclear is a zero-emission energy source. Nuclear power could be of considerable assistance in maintaining economic growth during (and after) any energy transition. That economic growth is needed to create the wealth that, sensibly deployed, would provide us with the technologies and the resilience that a changing climate might require — but this sort of thinking remains largely taboo for reasons better explained by psychiatry than science, and by the religious factors (yes, really) that I discuss below.
For his part, Timmermans admitted
that the green transition, he said, is “gonna be bloody hard, and nobody should have any illusions that this is going to be easy.” But he urged lawmakers to avoid the “trap” of talking “all the time about the cost of the transition and avoiding to talk about the cost of non-transition.”
The costs of non-transition may well be rather less than Timmermans would have voters believe, whether economically or otherwise. But even if the IPCC’s models are to be the basis of how we proceed, the costs of transition would be much lower if the EU (and other climate policy-makers) were to emphasize, at least for now, adaptation and increased resilience over the approach currently being taken, as well as increased use of nuclear energy and treating natural gas as, at a minimum, a “transitional” fuel.
David Sheppard, writing in the Financial Times:
A few years ago, gas was seen as a ‘bridge’ fuel between fossil fuels and renewable energy. But it has increasingly come under fire from activists and investors alike.
This is not a climate (sorry) designed to encourage energy companies at least in Western Europe — and, the way things may be going, the U.S. — wanting to invest money into bringing new natural-gas supplies online.
Back to Sheppard:
The [natural gas] industry argues that this [the attacks upon it] are wrong-headed and [have] restricted new supplies that could actually help cut emissions by replacing coal, which produces about twice as much CO2 when burnt. But observers also note that there is not yet anywhere near enough renewable capacity, even in countries such as the UK, to keep the lights on without gas as part of the energy mix.
“That’s the tragedy right now of the supply of gas being restrained by being lumped in with coal and oil by climate activists,” said Andy Calitz, a former Royal Dutch Shell executive who is secretary-general of the International Gas Union.
“The outcome will be that the climate curve is slower to turn, if you don’t have enough gas to replace coal,” he said. “If this continues, the consequences will be felt in either unaffordable prices for energy or in energy insecurity in the forms of lack of availability.”
Instead of looking at these alternative approaches, the EU, the U.K., and, soon enough, the U.S., seem set on what is looking more and more like a headlong rush into disaster.
To understand why this might be, it is important to understand that for many climate warriors a “bloody hard” transition is a feature, not a bug.
I wrote about this a week or so back:
Concentrating on resilience and adaptation do not follow the millenarian narrative that is an unmistakable subtext of the message now being sent out by many climate warriors, whether inside government, linked to government, or outside it. Underpinned by the expectation of apocalypse, this narrative, which has repeatedly demonstrated its dangerously persuasive power over the centuries, is based on the thought that a wicked humanity faces punishment and must, with the assistance of a morally superior, enlightened vanguard, be made to change its dreadful (often self-indulgent) behavior. Adaptation and resilience, by contrast, offer the prospect that our species will muddle on through, living pretty much as it has been doing, except even better, and without donning the hairshirt integral to so many climate warriors’ faith. Theirs has the characteristics of a religion, and there is little that is original about it. Pointless asceticism comes with the territory.
Questioning whether those setting the climate agenda are going about things the right way is not a matter of climate “denial,” but simple common sense. It is not, however, a conversation that the climate establishment wants to have. Fundamentalists are like that.
They may not want to have that conversation, but, as winter approaches, the growing crisis in Europe suggests that it is a conversation that may be difficult to avoid.
“This is going to be a political autumn crisis,” said Dieter Helm, professor of economic policy at Oxford University and energy policy adviser to the government. “It goes together with the delusion that people have that net zero is almost costless. It isn’t.”
Helm may well be right, and if that crisis forces the U.K. government to level up with the electorate about the true cost of net zero, it will be a crisis worth having. The consequences will be worth watching.
In the meantime, here are a few more stories.
A senior US energy adviser has warned that “lives are at stake” in Europe this winter as the continent heads into the season with low gas stockpiles and the threat of reduced supply.
Amos Hochstein, senior adviser for energy security at President Joe Biden’s state department, said Russia had “under supplied the market compared to its traditional supplies” and contributed to the highest prices on record . . .
The Italian government is planning to use public funds to reduce the impact of surging gas prices on consumers’ electricity bills, according to people familiar with the matter.
Prime Minister Mario Draghi’s administration has already spent about 1.2 billion euros ($1.4 billion) to mitigate the spike in power prices in the second quarter and is set to continue using the same mechanism, the people said, asking not to be identified discussing private conversations. That round of intervention cut the increase in electricity prices to 9% compared with 20% before the state stepped in.
Ecological Transition Minister Roberto Cingolani said on Monday that he expects power prices to increase by 40% in the third quarter. To finance the intervention, Italy is planning to use revenue from the European Union’s emission trading system, which is managed by the finance ministry, the people said.
To cut the electricity price to consumers, the Italian government — which doesn’t have a lot of money to spare — will raid the system partly responsible for increasing that price. I know environmentalists like to promote a “circular economy,” but . . .
In Spain, the government is facing a political crisis caused by record-breaking power prices — which have tripled to €172.78 per megawatt-hour over the last half-year. On Tuesday it approved measures to lower bills with temporary tax cuts, limiting the amount that prices can rise, and clawing back about €2.5 billion in utilities’ profits to redistribute to consumers. The goal is to keep bills about where they were in 2018.
“We are going to reduce the profits of energy companies and redirect the benefits to consumers,” Prime Minister Pedro Sánchez said.
Outraged nuclear power companies threatened to shut down their reactors — which supply about a fifth of the country’s power — early if the government goes ahead with its plan.
So, the Spanish government is threatening to turn on the providers of the nuclear energy that could be part of the solution to the mess in which Europe now finds itself.
Perfect, just perfect.
As mentioned at the beginning, there’s a lesson from all this for the Biden administration. Unfortunately, I’m not convinced it agrees.
The Capital Record
We released the latest of a series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 35th episode David and well-known free-market pundit, Stephen Moore, go round and round about the present state of affairs — from spending to tax increases to a growing Fed to the disincentives created by statist thinking. Do elected officials and Wall Street success stories both suffer from the same affliction? Namely, a low regard for, or poor understanding of, the very thing that makes markets work to begin with? It’s a hard-hitting discussion across a multitude of topics you won’t want to miss.
And the Capital Matters week that was . . .
The Vaccine Mandate
COVID-19 has had massive effects on the U.S. economy, and lingering cases have clearly been a negative in the numbers lately. Which raises the question: Will the vaccine mandate, however unpopular, have positive economic effects? Or will it cause disgruntled workers to quit their jobs and push the numbers in the opposite direction? . . .
The most far-reaching and questionable part of the Biden administration’s six-pronged COVID-19 Action Plan directs the Department of Labor’s Occupational Safety and Health Administration (OSHA) to issue an emergency temporary standard (ETS) mandating that private employers with 100 or more employees ensure that all employees are fully vaccinated or undergo weekly negative COVID-19 tests with potentially hefty fines for each violation. While the specific ETS provisions and requirements are as yet unknown, this new directive — which will affect more than 80 million private-sector workers — is probably yet another episode of legally unauthorized Biden overreach that could impair economic growth.
Vaccination is the most effective way to limit the spread of the virus that causes COVID-19 and to mitigate the severity of the disease. As I discussed in an October 2020 study for the Competitive Enterprise Institute, well-established precedent gives states broad authority to issue vaccine mandates. Employers also have the ability — subject to compliance with various anti-discrimination statutes and the Americans With Disabilities Act — to require employee vaccinations. The pertinent question is: Does the federal government have authority to require employers to ensure their employees are vaccinated? . . .
Last Thursday, Texas’s Governor Greg Abbott signed into law a social-media bill that aims to protect Texans from viewpoint-based censorship by social-media companies. Texas is now the second state this year — following Florida — to pass a law of this kind. Yet unlike Florida’s law — which was swiftly enjoined by a federal district court, over potential First Amendment violations — Texas’s is carefully constructed to avoid legal challenges. So while the Sunshine State’s efforts to take action against Big Tech are admirable, its approach should not be replicated. States should instead look to Texas . . .
In late June, when D.C. District Court threw out the Federal Trade Commission’s (FTC) first complaint against Facebook, Senator Elizabeth Warren tweeted, “Anybody on the internet knows that Facebook has monopoly power. They control 85% of social network traffic, bulldoze competition, and undermine our democracy. We need stronger antitrust laws to #BreakUpBigTech.”
Putting aside the irony of using Twitter to rant against an alleged social-media monopoly, Warren’s reaction highlighted a recurring theme of Big Tech antitrust debates. Proponents of trustbusting have predetermined the conclusion — they just know that these businesses are monopolies and engaged in anticompetitive conduct. And if the FTC or other competition agencies cannot provide evidence of that to the necessary standards of current law? Then the laws must be wrong!
Until new legislation is passed, though, the FTC must prove that Facebook has broken existing statutes. That means showing that Facebook is a monopoly in its relevant product market and then proving its exclusionary conduct. Sadly, a similar conclusion-first, evidence-second approach is forcing the agency into all sorts of contortions . . .
The August inflation report, released today, doesn’t tell us much about whether inflation is here to stay or transitory.
The headlines aren’t sure what to make of it. “Inflation Eased in August, Though Still High,” says the Wall Street Journal. “Inflation Cooled Last Month. It’s Still Running High,” says Barron’s. “Consumer prices are up slightly in August in measure of slowing inflation,” says UPI.
Some people are very sure in their conclusions, however. John Catsimatidis tells Fox Business that “inflation is here to stay.” TD Bank’s William Fink writes at MarketWatch that inflation will be cut in half to 2.5 percent by the end of the year.
What’s really going on? It’s not totally clear . . .
The tax-writing House Ways and Means Committee’s Democratic majority on Sunday night released $3.5 trillion of new or higher taxes on American workers, business owners, and savers. This package of tax increases is intended to pay for the spending explosion that House speaker Nancy Pelosi (D., Calif.) and Senate majority leader Chuck Schumer (D., N.Y.) have planned (the budget resolution bill written by Senate Budget Committee chairman Bernie Sanders of Vermont). Whether it will pass muster with vulnerable House Democrats or in-cycle Senate Democrats (each of these groups is up for reelection in less than 14 months), to say nothing of the ever-skeptical Senate Democrats Joe Manchin of West Virginia and Kirsten Sinema of Arizona, is another matter entirely.
What does this $3.5 trillion tax increase do, and how would it impact your life? . . .
Alexandria Ocasio-Cortez donned an elegant gown with the slogan “tax the rich” painted on the back at the Met Gala in New York, where guests selected by Vogue’s Anna Wintour ponied up around $35,000 a pop for tickets. The scene was reminiscent of Tom Wolfe’s “Radical Chic” — though rather than being guests of the well-heeled in Park Avenue duplexes, today’s revolutionaries own luxury condos and drive around in government-subsidized electric cars that most Americans could never afford.
My first question, though, is: Who doesn’t want to “tax the rich”? Judging from my social-media feed, there seems to be a growing segment of people under the impression that the wealthy pay little or nothing in taxes. When you ask Americans if they support a wealth tax, a majority support the idea. One recent poll found that 80 percent of voters were annoyed that corporations and the wealthy don’t pay their “fair share.”
Polls rarely ask these people what a “fair share” looks like . . .
Consider the apparatchik of the moment, Representative Alexandria Ocasio-Cortez, and her big night at the Met Gala. To say that it was in bad taste to wear a white dress emblazoned with the words “Tax the Rich” to a party with a $30,000 cover charge misses the point — the New York Democrat was in costume, like Lil Nas X in his C-3PO outfit and Kim Kardashian dressed as what she is thinking about. The issue isn’t raising revenue for federal programs. The issue is that Alexandria Ocasio-Cortez looks good in white — it is her color, as you can tell from her many white dresses, her white Tesla, and her white neighbors. (Of course she lives in an apartment building called “Agora at the Collective,” straight out of Stuff White People Like.) She holds an elected office, but mainly she is a celebrity and a social-media influencer. Of course she likes a party. Of course she likes having her picture taken. Why wouldn’t she?
She can wear her “Tax the Rich” dress all she likes, because Wall Street has Senator Chuck Schumer around to make sure that doesn’t happen. Senator Schumer talks as good a class-war game as any other blossom in that half-organized bouquet of bungholes he calls his political party. But, somehow, he never gets around to acting on it . . .
President Biden promised not to raise taxes on people making less than $400,000 per year. He has actually said that the middle class would see a tax cut under his “Build Back Better” agenda, and that “all of it” — that’s 100 percent, for those of you keeping score at home — “will be paid for by the wealthy paying their fair share.”
That is, unless you make choices that progressives disapprove of. Then, no matter how much money you make, you’re apparently fair game for a tax increase . . .
As fewer American workers join unions, Democrats want to create a new tax deduction for union members.
According to the Ways and Means Committee’s summary of the Democrats’ proposals, Section 138514, located in Part 5 of Subtitle I (that’s the letter I, not a Roman numeral; it’s the ninth subtitle), would create a $250 above-the-line tax deduction for union dues starting next year. “Above-the-line” means the deduction could be taken by all taxpayers, even those who take the standard deduction and don’t itemize. Overall, according to the Joint Committee on Taxation’s estimates, the deduction would add up to $4.3 billion over the next ten years.
Union dues haven’t been tax-deductible at all since the Tax Cuts and Jobs Act passed in 2017. Supporters of the Democrats’ proposal may argue they are simply restoring a tax deduction that was previously available, but that’s not quite right.
Most important, using up all the “tax the rich” options for the president’s new proposals would leave the wealthy unable to close the underlying — and unsustainable — $112 trillion in baseline deficits over the next 30 years, or finance progressive fantasies such as Medicare for All and the Green New Deal. Which means — just as Presidents Clinton and Obama discovered — promises of no new middle-class taxes will likely be revisited sooner rather than later.
Progressives are already lining up the arguments. They tell us that the middle class wants aggressive new spending on health care, education, infrastructure, family leave, child tax credits, and Social Security. The $11,400 in total pandemic relief checks for the typical family of four means they won’t even notice a middle-class tax increase. Two decades of middle-class tax relief has reduced the middle-earning quintile family’s average federal income tax rate to 0.5 percent (10 percent including payroll and other taxes). A value-added tax (essentially a complicated form of a national sales tax) will be hidden in higher prices . . .
Following El Salvador’s disastrous Bitcoin rollout on September 7, President Nayib Bukele, feeling the heat, has recycled one of his favorite Bitcoin sermons. He claims that Bitcoin will result in a dramatic reduction in the cost of transmitting remittances to Salvadorans. This sermon, if true, would be a big-ticket item for Salvadorans. Remittances make up 24 percent of El Salvador’s gross domestic product, the highest percentage of any country in the Western Hemisphere. But there’s just a little problem with the sermon. It’s not based on the facts.
Unfortunately, but somewhat predictably, the press has fallen for Bukele’s bunkum hook, line, and sinker. It reports on cherry-picked instances of high remittance fees and claims that the Bitcoin Law will cost traditional money-transfer companies such as Western Union millions in lost business. But remember my 95 percent rule: 95 percent of what you read in the financial press is either wrong or irrelevant. Indeed, it’s time to stop listening to Bukele and to start following the data . . .
Economic statistics rarely deepen the sense of drama behind headlines. The Taliban’s new cache of American arms may be an exception. Each of the Taliban’s new American-made M4 assault rifles costs more than a year of per capita output in Afghanistan. The Taliban now cruise in some of the 4,700 Humvees transferred by the U.S. to Afghanistan between 2017 and 2019. Twenty thousand Humvees would cost the whole country’s annual GDP. The arms transfer that occurred as the U.S. withdrew and American-aligned Afghan forces surrendered in a haste really is as enormous as it seems. Relative to the size of the local economy, as the chart below shows, it’s the largest transfer of weapons the world has witnessed in decades . . .
The first step to solving any problem is admitting that you have one. And the United States definitely has a spending problem.
Sadly, no one in Washington wants to admit it.
But refusing to accept reality does not make it go away; reality has a tendency to reassert itself at inconvenient times. And the reality is this: The United States is the most indebted entity in the history of the world. As of January 1, 2021, the federal debt topped $28 trillion: that’s twenty-eight million million, or $28,000,000,000,000. (Unless otherwise noted, all data in this article come from the St. Louis Fed.) That is an increase of nearly $5 trillion in the last twelve months, and a nearly $14 trillion increase over the last ten years. For context, the public debt did not reach $14 trillion until 2010, meaning that we have added as much debt to our national ledger in the last decade as we did in the first 221 years as a country. None of this includes the trillions more that Congress appears intent on spending on “infrastructure” both “hard” and “soft,” whatever those terms may mean.
The debt is out of control because spending is out of control. In four of the last five fiscal quarters, the United States spent, on an annualized basis, at least $7.2 trillion, and as much as $9.1 trillion. Yes, much of that was in response to the pandemic (though even more was in response to the government’s response to the pandemic). But even before the pandemic, in 2019, we were spending nearly $5 trillion annually. Do you feel like you are getting $5 trillion worth of value from your federal government each year? Neither do I.
Treasury Secretary Janet Yellen continues to urge Congress to raise the national debt limit, arguing that delays will harm the U.S. economy, destabilize global financial markets, and be costly to taxpayers. While there are serious implications from hitting the debt limit, the root cause of the problem is the bipartisan spending profligacy that’s occurred over the past two decades. And this excessive spending, indeed, harms the U.S. economy, contributes to global-capital-market distortions, and is costly to taxpayers.
Back in 2019, the federal government spent $4.4 trillion, which amounted to 21 percent of GDP. As Senator majority leader Chuck Schumer has rightly noted, a lot of this spending occurred under President Trump, whose administration oversaw a significant increase in the total federal debt. But this also occurred under President Obama, who increased the federal debt by $8.6 trillion.
Added to this spending was the $5 trillion that the federal government spent in response to COVID-19 in 2020 and 2021. As a result, total federal government spending temporarily spiked to 31.2 percent of GDP in 2020 and will be an estimated 32.9 percent of GDP in 2021.
Veronique de Rugy:
Last week, I commented elsewhere that NPR had a sloppy piece of reporting on Hurricane Ida and climate. This week, it’s the Wall Street Journal that seems to confuse reporting with printing the talking points they get from government agencies. See for instance, this piece about president Biden’s pick for the top Export-Import Bank job . . .
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