The week of February 14: a central planner (possibly) for the Fed, debt, tax, inflation, and more.
Before we dive into this week’s Capital Letter, a reminder: NRI’s biennial regional seminars are back, in Newport Beach (March 2) and Menlo Park (March 3). Please scroll down for more details.
Forget polls that show widespread enthusiasm for the transition to net-zero greenhouse-gas emissions. If they lack a supplementary question asking what people are willing, directly or indirectly, to pay for it, they are worth as little as, well, whatever people might be prepared to pay for this transition.
From 2019 (via Reuters):
Nearly 70 percent of Americans, including a majority of Republicans, want the United States to take “aggressive” action to combat climate change – but only a third would support an extra tax of $100 a year to help, according to a Reuters/Ipsos poll released Wednesday.
Even if we assume that the $100 has increased since then, it won’t have increased by anything like enough to fund the sort of tax increases — and the costs will not be confined to higher taxes — that will be required if the rush to net zero by mid-century is to be achieved.
That means that, as the cost of net zero becomes more apparent (as is already happening in Europe) there may be political trouble ahead. And that is why, as I’ve mentioned (repeatedly) before, such an effort is being made to remove climate policy from the democratic political process and put instead in the hands of (unelected) regulators, (unelected) investment managers, and (unelected) corporate chieftains.
But, so far as the latter two are concerned, the private sector may not always do what is expected of it. It would take, as the saying goes, a heart of stone to read this story from the Financial Times without laughing:
A UN-backed green investment fund is on the brink of failure three months after its launch during the Glasgow climate summit because institutions including big banks never delivered expected seed funding.
The MSCI Global Climate Select exchange traded fund was unveiled in early November. Trading under the ticker NTZO, it excludes fossil fuel companies and boosts holdings of companies with lower carbon emissions.
The fund has amassed less than $2mn and is likely to be wound down as soon as the end of March without further investment, said Ethan Powell, founder of Dallas-based Impact Shares, the fund manager. He said Impact Shares has been spending about $25,000 a month to manage the ETF.
The case illustrates how corporate organising to combat climate change can fall short when capital is needed . . .
Possibly because those responsible for private capital know full well that the returns on such investments may not be quite as great as advertised (I touched on this during last week’s Capital Letter), climate policy-makers would like to add a little regulatory pressure to ensure that, nevertheless, they do the “right thing.” So far as central banks are concerned, they are, in the name of reducing the supposedly systemic but essentially bogus financial risk (in any realistic sense of that word) posed by climate change (regulatory risk is a different matter), gearing up to apply that pressure to the banks they supervise. The idea? To reduce the flow of capital to oil and gas companies or, at the very least, make it more expensive.
This helps explain why President Biden has nominated Sarah Bloom Raskin to serve as the Fed’s vice chairman for supervision. I first wrote about the Raskin nomination in mid January:
The Wall Street Journal’s editorial board explains that President Biden “has a chance to remake the Federal Reserve Board of Governors by filling multiple vacancies.” It adds, not unfairly, that “this is especially important given inflation’s breakout, yet Mr. Biden’s latest nominees seem less worried about prices than pushing progressive policies that aren’t the Fed’s job.” Mission creep, in other words. And a spot of mission neglect, too . . .
And then again on February 1:
If there’s a time for the Fed to be sticking to its core role, it is surely now (inflation and all that) — but there is, in my view, a wider issue at stake. If there is to be any “reimagining of the economy,” that is what elections, not regulators, are for . . .
The headline for that piece included the phrase that Raskin’s nomination was “not a great idea.” It still isn’t.
Economist John Cochrane has been keeping a close eye on the nomination and returned to the fray the other day:
I previously praised Raskin for the clarity of her statements. Unlike most others in this game, she straightforwardly advocated the Fed starve fossil fuel companies of money in the name of climate. For example:
“We must rebuild with an economy where the values of sustainability are explicitly embedded in market valuation,” she wrote. This will require “our financial regulatory bodies to do all they can—which turns out to be a lot—to bring about the adoption of practices and policies that will allocate capital and align portfolios toward sustainable investments that do not depend on carbon and fossil fuels.”
Good. Let’s stop pretending there is some “climate risk” and talk honestly.
As Bloomberg reports, she is furiously backpedaling
“The Federal Reserve does not engage in credit allocation and does not choose the borrowers to whom banks extend credit,” she wrote.
But she did see some potential for the Fed to act, particularly in analyzing the climate risks facing supervised institutions.
Those financial risks “might include disorderly price adjustments in various asset classes; potential disruptions in proper functioning of financial markets; and rapid changes in policy, technology, and consumer preferences that markets have not anticipated.”
This seems like more climate-risk boilerplate.
But the last paragraph here caught my eye, and is the point of this blog post. Read it closely. This is supposed to reassure us? Forget climate. The future head banking regulator thinks the Fed actually has the capacity and mandate to try to foresee and do something about “disorderly price adjustments” in “various asset classes” — that means all over the financial system including stocks — “potential disruptions” and best of all “rapid changes in policy, technology, and consumer preferences that markets have not anticipated”
Really? This is, remember, the same institution that was completely surprised by inflation, completely surprised by a pandemic (we’ve never had those before, have we?) and completely surprised that mortgages and mortgage-backed securities might melt down.
The gap between aspiring technocrats’ view of their all-seeing knowledge, control, and reality seems pretty large! If the stability of the financial system depends on Fed appointees clairvoyantly foreseeing “rapid changes in policy, technology, and consumer preferences” that banks don’t even consider as risk-management possibilities . . . heaven help us.
If we were going to be honest about “asset classes” that might have “disorderly price adjustments” due to “rapid changes in policy” (subsidies end, midterm elections,) and consumer preferences, should we just maybe look at vastly over-priced, no revenue in sight, heavily subsidized, ESG labeled, regulator-approved green stocks, bonds, venture, and bank lending? Are we not even possibly heading towards another Fannie and Freddy, only this time subsidized green boondoggles? If “markets” aren’t “valuing” green investments correctly, isn’t it remotely possible that they are valuing them too much?
I touched on that topic in last week’s Capital Letter, except that the comparison I drew was with the dot-com bubble, and, indeed, I highlighted one sector (wind energy) where stocks had run into difficulty. I could also have added, say, some of the electrical-vehicle stocks (in many ways a better example).
CNBC (February 8):
EV start-ups Nikola, Lordstown Motors, Canoo, Faraday Future, Fisker and Lucid Group all went public through SPAC deals over the last two years.
All of their shares have fallen by double-digits so far this year and are trading at or near 52 week lows.
All but two, Fisker and Faraday Future, have disclosed federal investigation.
That sounds a bit “disorderly” to me and, yes, a bit dot com, too.
The current state of play is that the Raskin nomination is stuck.
The Wall Street Journal:
This week, Republicans lawmakers united in opposition to Ms. Raskin refused to attend a crucial committee vote. That deprived Democrats of a quorum needed to advance her along with four other Fed nominees to the full Senate, including Chairman Jerome Powell . . .
Since leaving the Obama administration, Ms. Raskin has become a darling of progressive Democrats for statements such as a New York Times opinion article in May 2020 that criticized emergency-lending backstops created by the Fed to thaw frozen corporate-bond markets.
“There is no indication that the value of fossil fuel assets is ever going to return. It’s one of the worst investments there is, and yet this is one that the Fed has picked,” said Ms. Raskin in a video produced by the Years Project, an advocacy group that calls for more action to address climate change.
We don’t make stock calls here at Capital Matters, but so far that hasn’t proved to be the greatest piece of investment advice.
Seeking Alpha (February 16):
The oil and gas sector is now up 23.5% YTD compared with a 6.9% loss in the broader S&P 500.
The Financial Times (December 30):
As of December 29, US giants Exxon and Chevron had added 48 per cent and 40 per cent respectively in 2021. The duo have helped power global energy equity funds past many of the hundreds of US and European sustainable funds as defined by Morningstar, a data provider.
The iShares MSCI global energy producers exchange-traded fund is up 37 per cent to December 29, outperforming the largest US ESG fund — the $31.8bn Parnassus Core Equity fund – which is up 28 per cent. The largest iShares ESG fund run by giant fund manager BlackRock has also trailed, up 30 per cent.
That relative performance can go into reverse — stocks go up, stocks go down — but it is a reminder that central planners (which is what, essentially, Raskin is) should not be in the capital-allocation business.
But that is where she wants to be, however much she has recently denied it. Writing in the Washington Post, Sebastian Mallaby noted how, last year, Raskin had written
a column in the Financial Times that she probably regrets. Lamenting that the United States had been slow to tackle climate change, she proposed a way for the nation to “leapfrog into global leadership.” The trick, she argued, is to harness the potential of financial regulation. Because Congress is missing in action, the Fed and other banking overseers should fill the climate policy vacuum.
To quote Mrs. Thatcher, “no, no, no.”
If Congress is “missing in action” that is, however awkwardly, the result of a democratic choice. It is not for bureaucrats to step in to “fix” what they perceive as the failures of the electorate.
And it is worth noting where Mallaby is coming from:
There is, as Raskin urged, a respectable case for this position. Climate change is such a serious threat that any government agency with the power to effect change arguably has a responsibility to do so. Moreover, climate change presents financial risks. Banks may lend to companies that go bust because of fires or floods, or because green regulations eventually upend their business models. In the pursuit of financial stability, regulators can plausibly require lenders to hold sufficient capital reserves to absorb climate-related losses. As Raskin points out, central banks in Europe have incorporated such risks into their work. Their governments generally support this.
To the extent that the euro-zone governments do support this, a case can be made that this has some democratic legitimacy, but only if those making it are prepared to concede that central-bank independence is a sham.
And, as for those financial risks, I can again only refer you to John Cochrane’s article for Capital Matters, or the talk he gave to, uh, the European Central Bank.
But back to Mallaby:
The United States isn’t Europe. Because there is no political consensus on climate policy in Congress, Raskin’s proposal to pursue climate policy by other means is seductive. But precisely because climate policy is so politically fraught, the Fed cannot wade into these waters without getting caught in the crosscurrents. Apolitical, effective public agencies are a national asset. But if their mandates stretch too much, they become political and ineffective.
The merits of Raskin’s mandate-stretching proposal therefore come down to a risk-reward calculus. How big is the risk of politicizing the Fed? How big is the reward in terms of climate policy?
Let’s start with the reward prospects. In theory, if the Fed ups the capital costs of lending to businesses with climate exposure, it will speed movement toward a green economy. In practice, this strategy is unlikely to work because money is fungible. If banks lend less to dirty companies, other kinds of financiers will fill the gap. The Economist reports that $60 billion of fossil-fuel-related assets have been snapped up by private equity firms in the past two years alone.
If the climate gains from Raskin’s policy are modest, the risks are larger than she acknowledges. The Senate action this week was something of a wake-up call. The 12 Republicans proceeded with their boycott even though it obstructed the confirmation of four other Fed leaders, including Jerome H. Powell, whose appointment to a second term as Fed chair has been welcomed by both parties. They went ahead, moreover, even though the timing could not have been worse. Inflation is at its highest level in four decades.
Which gets to the chief worry about Raskin’s climate position. Ever since Fed chairs Paul A. Volcker and Alan Greenspan tamed inflation, the Fed’s credibility has been riding high, and its independence could mostly be taken for granted. . . . Today, with inflation at 7.5 percent, Fed independence will be newly strained. As it raises interest rates, it is bound to be attacked — both for the resulting economic slowdown and for failing to hit the brakes earlier . . .
Determined central bankers can resist these attacks by wrapping themselves in the mantle of apolitical stability. They stand for sound money and sound banks, and in the end few politicians can be against either of these propositions. But if central bankers are perceived to stray into politics, this defense will be undone. Raskin’s proposed expansion of the Fed’s mandate is well intentioned, to be sure. The timing, however, is terrible.
Do I think that Raskin’s plans are well intentioned? Not so much. They are little more than the wish list of a central planner on the make. They are the product of hubris, not benevolence and, if implemented, they would damage the Fed, the economy, and our democracy. And, yes, the timing is terrible, but then there is no good time for plans such as these.
Raskin’s is not a nomination that should succeed.
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 54th episode David is joined by business reporter Christopher Leonard, whose new bestselling book, The Lords of Easy Money, is the talk of the town when it comes to monetary finance. David and Christopher explore the Fed’s post-financial-crisis policy framework, what it meant when the Covid moment came, and most importantly, what it all means for the future. Their talk is fair-minded, earnest, and informative, and will leave you not only understanding the Fed better, but understanding the risks embedded in our economy that few people want to talk about at parties.
The Return of the Regional Seminars
As briefly noted above, National Review Institute is back on the road with its biennial Regional Seminars. This year’s series, titled “Creating Opportunity,” will feature panel discussions and one-on-one conversations that make the moral and practical case for free enterprise.
Notable speakers include William B. Allen, David L. Bahnsen, Jack Brewer, Dale R. Brott, John Buser, Veronique De Rugy, Kevin Hassett, Pano Kanelos, Rich Lowry, Karol Markowicz, Andrew C. McCarthy, Andrew Puzder, Amity Shlaes, Kevin D. Williamson and, less notable, me.
The series of half-day conferences is slated for seven cities across the country: Palm Beach, Newport Beach, Silicon Valley, Dallas, Houston, Chicago, and New York City.
We are currently rearranging the date of our seminar in Palm Beach, but in the meantime seminars will be held in Newport Beach, California, on March 2, and Menlo Park, California, on March 3.
We hope you will join us. You can learn more and purchase tickets here.
The Capital Matters week that was . . .
In the past, America was able to get its public debt back under control. Why do we struggle to do so today?
Partly it is because legislators, including many conservatives, have few incentives to do so. Diminishing the public debt today through real spending cuts would mean real reductions in ongoing big-ticket federal programs: i.e., income security, Social Security, health, Medicare, etc. Selling that to the millions of Americans — including many conservative Americans — who benefit from one or more of these outlays is hard.
But this also indicates that, for all our government-skeptic rhetoric, Americans have become habituated to the state’s permanently undertaking many activities that go far beyond any reasonable conception of limited government. Even worse, we don’t want to acknowledge the cost. Hence, while many Americans might accept the need for debt reduction in theory, they don’t want restraints applied to the particular programs that benefit them or people that they know and love . . .
Under the program, taxpayers were to create an account with ID.me, which advertises itself as a secure digital-ID network designed to provide identity authentication and verification to users. According to the IRS’s website, the ID-verification elements needed to access your account included your name, email address, SSN, and a photo ID, such as a driver’s license or passport. In addition, you would be required to provide — get this —“a selfie,” which would then be cross-checked with the photo ID on file.
Make no mistake about it. This is not just about ID-theft protection. The IRS document describing the program confirms that the system uses, among other things, GPS and biometrics technology “in the event of an investigation into a user.” Apparently there is no limit to the scope of that investigation; once the IRS has your selfie, the agency can use it as it pleases . . .
The ultimate solution to the problem of IRS incompetence is to make the agency less important by simplifying our endlessly complex tax code. Filing a tax return does not need to be a dreadful and confusing experience. Every twist and turn on every tax form is a new opportunity for the IRS to screw something up. They’ve demonstrated their incompetence for years. It’s time to stop giving them so many chances . . .
Drum misses the overall point of my post: The tax code should be simpler. The IRS does not make the tax code. It enforces the tax code as written by Congress. The IRS should not need so many employees in the first place because Congress should simplify the tax code. That was what I was arguing, as any plain reading of the post would indicate. Despite a few helpful moves in the Tax Cuts and Jobs Act, such as increasing the standard deduction so fewer taxpayers need to itemize, the tax code remains far too complex, which makes the IRS’s job more difficult than it should be.
It does also happen to be true that the IRS is poorly run, a fact that Drum does not dispute since it is based on information from the Office of the Taxpayer Advocate (which is within the IRS) and the experience of pretty much anyone who has ever had to deal with the agency. The proximate cause of my post was a Capital Matters article from Daniel J. Pilla, which is about the terrible proposal to further empower that poorly run agency with facial-recognition technology to verify identity and aid investigations that the agency undertakes. Drum was noticeably silent on whether he thinks that is a good idea . . .
As everyone surely knows by now, the EU’s dependency on Russian gas is likely to mean that its response to any Russian “incursion” into Ukraine is likely to be noisy, but largely symbolic.
As I mentioned the other day, there’s also an issue with aluminum.
And then there’s this twist (via John Dizard in the Financial Times) . . .
Today, Russia supplies just over half of all natural gas consumed in Germany, where gas is critical for home-heating as well as industry. The Nord Stream pipeline that opened in 2011 increased Germany’s dependence on Russia, and the Nord Stream 2 pipeline now under construction will increase it even more.
Given who Vladimir Putin is, the foreign policy he is pursuing, and the fact that he has previously cut gas supplies (to Ukraine and Eastern Europe) for political reasons, how did Germany ever get into his clutches in this way? Given German and Russian history, who were the officials who did not understand that this would end in disaster? Who were the people in charge that approved all the plans and investments that made this possible?
Let’s put aside the fact that BBB is only deficit-reducing if you take every budget gimmick the Democrats put in it at face value and believe their claims about the tax gap, and the true debt added by making BBB permanent would be $3 trillion over the next ten years. And let’s put aside that there is no report from the Joint Committee on Taxation that says BBB would reduce the debt by $1 trillion 20 years from now. And let’s put aside the fact that there is no BBB to speak of at the moment because Joe Manchin has repeatedly said he won’t support anything resembling what the House passed last year.
Pelosi is trying to have it both ways on the debt and inflation. If she’s concerned about government debt creating inflationary pressure, why did she champion the American Rescue Plan? That piece of legislation, as Brian Riedl noted in December, will add $1.9 trillion to the debt and even led left-leaning economists to warn of its inflationary impact. And that was passed without the veneer of being “paid for” — it was loud-and-proud deficit spending . . .
With inflation clocking in at 7.5 percent in 2021, the highest rate in 40 years, the Biden administration is fond of pointing fingers at the pandemic. But that’s only part of the story — and the White House knows it.
If pandemic-related supply-chain disruptions and demand distortions were the only factors driving inflation, then inflation in the United States would be roughly on par with inflation in other developed economies, all of which are dealing with post-pandemic conditions. But it’s not. Inflation is significantly higher in the U.S. than it is in the U.K., Canada, or the European Union . . .
Vance Ginn and Alexander Salter:
The U.S. is trapped in a vortex of money mischief and fiscal folly. The problem is bad federal policy. Without binding rules on irresponsible spending and money-printing, American households and businesses will continue to suffer.
Since the onset of the Covid-19 pandemic, the Fed’s excessive money creation has been a major driver of inflation. Prices across the economy have surged, reducing the dollar’s purchasing power. The most popular measure of inflation is the consumer price index. It’s up 7.5 percent year-over-year. The Fed’s preferred measure, called the personal consumption expenditures price index, has risen at 5.8 percent year-over-year. Both are 40-year highs.
Inflation is a tax. It transfers resources from users of dollars to printers of dollars. When the government prints money it gains purchasing power, but this comes at the expense of depreciated cash balances elsewhere in the economy. While Uncle Sam undoubtedly needs revenue, this stealth-redistribution is unfair and inefficient. However, Congress lacks the political will to raise revenue honestly by raising taxes. This brings us to the second source of inflation: massive deficit spending.
The Fed is in the driver’s seat, but Congress is riding shotgun . . .
Peter Sepp and John Hendrickson:
This year is shaping up to be a big one for tax relief. From Mississippi to Kansas to Virginia to Iowa, elected officials are taking many paths to make taxes less burdensome. But they should all bear one thing in mind: Without spending discipline, sound tax policy is impossible to maintain over the long term. Government officials at both the state and federal levels have been trying for years to tax and spend their way to fiscal success. This is no way to build a stable fiscal house. Luckily, some states this year are exploring the kinds of strong budgetary rules that create the conditions for prosperity.
Numerous state legislatures across the nation will be considering tax-rate reductions . . .
The Gas Tax
From the White House today:
“Climate change is a code red for our nation — and we have no time to waste. That’s why today, my Administration is announcing new actions that will reduce emissions across the industrial sector and create good-paying, union jobs.”
Then again, with midterms ahead, there may be a code redder . . .
In 1933, Franklin Roosevelt used emergency powers to seize all gold in private hands in the United States in order to fortify the Federal Reserve — but technological changes have made such schemes more insidious. Paper money can be stuffed into mattresses, and coins can be buried in coffee cans. But when money is electronic and the information architecture enabling most financial transactions is heavily regulated and easily subjected to invasive surveillance, then financial regulators enjoy powers that no FDR — or Napoleon, or Lenin — ever dreamt of possessing. The opportunities for mischief are serious and worrisome — and so are the opportunities for tyranny.
Activists who have tried to use politicized financial regulation to undermine the Second Amendment, to take one example, never seem to think about how the same tactics could be used against the First Amendment: The New York Times may enjoy the protection of the Bill of Rights, but without access to banking and commerce, that constitutional right cannot be effectively acted upon, and, hence, may as well not exist as a practical matter. Try running a newspaper or a political party with no bank account . . .
Whatever its role in “our national conversation,” it is important to note that MMT is widely rejected by mainstream economists because it is invalid, even incoherent, as a scientific theory.
Even moderate left-leaning economists oppose MMT. Lawrence Summers called it “a recipe for disaster.” Nobel Prize winner Paul Krugman described the theory as “just obviously infeasible.” Contrary to Smialek, Jason Furman argues that “MMT has actually had relatively little influence on the political system.”
No academic papers on MMT have been published in major economics journals. This is important because there is no systematically laid-out theory of MMT to criticize. Instead, defenders of MMT engage in repeated bait-and-switch arguments which, as Krugman explains, make the core propositions of MMT difficult to identify and impossible to refute . . .
No one should deny for a moment that the pandemic posed a serious challenge. However, beyond what seemed (to me) to be a fairly obvious need for an initial (and probably brief) lockdown while an attempt was made to get the measure of this new disease, the current inflationary surge is in part a reflection of the fact that too many governments failed to do much in the way of (to use an off-puttingly chilly term) a cost–benefit analysis before letting their authoritarian reflexes take over. There was an excuse for that in the early weeks of the pandemic, but diminishingly so thereafter. It should, by the way, be stressed that the cost side of that equation was much more than financial. The lockdowns (and their less draconian variants) came at a human cost, too, not least in terms of physical and mental health, something that their advocates often seemed to downplay.
Today’s environment is also a reminder of something else that those orchestrating the coercive side of the response to Covid-19 appeared too ready to brush aside. The consequences of their actions were bound to include the unpredictable, including a strong likelihood of unknown as well as known unknowns. That called for more humility and more flexibility than has — shall we say — always been on display.
But back to that expensive beer . . .
For all the faults (including, of course, no small amount of bias) in the way that Big Tech handles speech, the European experience (think of Germany’s notorious social-media law) ought — First Amendment or no First Amendment — to act as a sharp warning to those in this country who would use the state to dilute the free-speech protections embedded in the way that the American Internet now operates.
Amid troubling supply-chain disruptions and the highest rates of inflation our nation has seen in four decades, it’s odd that Congress has chosen to take aim at a fully functioning and efficient sector of our economy. Nevertheless, policy-makers have their sights set on the tech industry by means of antitrust reform. The most popular bill to this end is the American Innovation and Choice Online Act, co-sponsored by Senators Amy Klobuchar (D., Minn.) and Chuck Grassley (R., Iowa). That this effort has won a degree of bipartisan support does not make it any less strange.
Nor does it necessarily make it a good idea. To be sure, Big Tech has its critics, but rather than breaking up some of this country’s most successful and yes, innovative, companies, our legislators should focus on Americans’ primary digital concerns: data privacy and federal data-privacy legislation . . .
China has no feasible way to meet its climate goals without simply turning things off. Green-energy technology can’t generate nearly enough power to meet the country’s needs, and those needs are growing every day. When the world isn’t paying attention, it just ignores its international commitments. But with the Olympics, everyone’s eyes are on China. Like a child frantically cleaning his room when he hears his parents coming down the hallway, the CCP ordered its industries to stop for a bit so air quality would improve to international standards.
Despite Xi’s supposed commitment to environmentalism, expect the smog to return once the Olympics are over. But it’s impossible to just shut down production for over a month and expect no disruptions. Everstream warns its customers about “potential shortages and delivery delays from Chinese suppliers, with recommendations to consider suppliers in alternate geographies.”
As previously mentioned, though, many of these issues involve natural endowments. China happens to have a lot of minerals, and there’s not a lot we can do about that. So American carmakers and electronics companies, in many cases, are just going to have to wait.
Free Markets and America
Five years ago on February 17, 2017, I received a phone call conveying the sad news that the theologian and economic thinker Michael Novak had died. A man with an astonishing range of interests who participated in events ranging from Vatican II to the Reagan Revolution, Novak was most famous for his book The Spirit of Democratic Capitalism, whose 40th anniversary occurs this year.
A bestseller that won enormous attention from religious and secular audiences at the time, Novak’s book changed the way that many religious believers — Jewish, Evangelical, and Catholic — thought about free markets. But it wasn’t only a major blow to the lazy assumption that being religious meant that you had to be on the economic left. It also challenged many free-marketers to look beyond their comfort zone of the utility calculus and to provide a richer normative case for economic freedom.
There was, however, another dimension of The Spirit that didn’t receive as much attention but that is especially relevant for our time: one in which some on the American right have become skeptical of free markets and enamored with alternatives such as corporatism, or even decided that they want to use the administrative state as a force for good. This concerns Novak’s conviction that a commitment to economic liberty was deeply woven into America’s identity in ways quite unlike what happened in any other nation . . .
In a recent Wall Street Journal op-ed, a venture capital investor in the e-commerce firms Deliverr and Wish calls for breaking up Amazon because of its alleged predatory pricing. Although it’s tempting to dismiss that charge as a competitor’s sour grapes, it would be better to refute the argument on its merits, lest someone picks it up and runs with it.
The case for predatory pricing against the tech giant is as follows: Amazon is subsidizing low prices on its e-commerce platform and in third-party logistics with profits from its cloud-computing division, Amazon Web Services (AWS). This will ultimately (so the argument runs) drive competitors out of business, which will allow Amazon to raise prices.
Note that even if this theory is correct, consumers are benefiting on the front end from lower prices and expanded logistics . . .