Hope from the left

One ray of hope in the current political scene comes from the land of deep blue.  However one views the immense expenditure on solar panels, windmills and electric cars, (produced in the US by US union labor, of course), plus forced electrification of heat and cooking, a portion of the blue-state left has noticed that this program cannot possibly work given laws and regulations that have basically shut down all new construction. And a substantial reform may follow.  

I am prodded to write by Ezra Kleins' interesting oped in the New York Times, "What the Hell Happened to the California of the ’50s and ’60s?," a question repeatedly asked to Governor Gavin Newsom. The answer is, of course "you happened to it." For those who don't know, California in the 50s and 60s was famous for quickly building new dams, aqueducts, freeways, a superb public education system, and more.   

Gavin Newsom states the issue well. 

"..we need to build. You can’t be serious about climate and the environment without reforming permitting and procurement in this state.”

You can't be serious about business, housing, transportation, wildfire control, water, and a whole lot else without reforming permitting and procurement, but heck it's a start. 

Hitting these [climate] goals requires California to almost quadruple the amount of electricity it can generate — and shift what it now gets from polluting fuels to clean sources. That means turning huge areas of land over to solar farms, wind turbines and geothermal systems.

or, heaven forbid, nuclear, which among other things works at night.  I don't think most of San Francisco's progressive gentry really understand how massive their envisioned "transition" really is. 

It means building the transmission lines to move that energy from where it’s made to where it’s needed. It means dotting the landscape with enough electric vehicle charging stations to make the state’s proposed ban on cars with internal combustion engines possible. Taken as a whole, it’s a construction task bigger than anything the state has ever attempted, and it needs to be completed at a speed that nothing in the state’s recent history suggests is possible....John Podesta, a senior adviser to President Biden on clean energy, said in a speech last month. “We got so good at stopping projects that we forgot how to build things in America.”

Newsom:

“I watched as a mayor and then a lieutenant governor and now governor as years became decades on high-speed rail,” he said. “People are losing trust and confidence in our ability to build big things.

Losing? That train left long ago, unlike the high speed one. 

The part that really caught my eye: Klein complains that Newsom's current proposal is 

 a collection of mostly modest, numbingly specific policies. When a lawsuit is brought under the California Environmental Quality Act, should all emails sent between agency staff members be part of the record or only those communications seen by the decision makers? Should environmental litigation be confined to 270 days for certain classes of infrastructure? Should the California Department of Transportation contract jobs out by type, or does it need to run a new contracting process for each task? Should 15 endangered species currently classified as fully protected be reclassified as threatened to make building near them less onerous? And on it goes.

Maybe, as Klein suggests, this is a measure of the bill being small and marginal. But I think the point is deeper: this is what regulatory reform is all about. Which is why regulatory reform is so hard. "Stimulus" is easy to understand: Hand out money. Regulatory reform, especially reform to stop the litany of lawsuits and dozens of veto points which are the central problem in the US, is all about the mind-numbing details.  "should all emails sent between agency staff members be part of the record" sounds like a mind-numbing detail. But think how these lawsuits work. Is discovery and testimony going to allow this entire record to be searched for an email where staffer Jane writes to staffer Bob one line that can be used to restart the whole proceedings? "Only" 270 days rather than 10 years? That matters a lot. Contracting process, which can be the basis for a lawsuit. 

I'll retell a joke. Fixing regulation is a Marie-Kondo job; long hard and unpleasant, each drawer at a time. 

The article is also interesting on the fight within the left. There is really a deep philosophical divide. On the one hand are basically technocrats who really do see climate as an issue, and want to do something about it. They believe their own ideology that time matters too. If it takes 10 years to permit every high power line, Al Gore's oceans will boil before anything gets done. 

On the other side are basically conservatives and degrowthers. "Conservative" really is the appropriate word -- people who want to keep things exactly the way they are with no building anything new. Save our neighborhoods they say, though those were built willy nilly by developers in the 1950s. (Palo Alto now applies historic preservation to 1950s tract houses, and forbids second stories in those neighborhoods to preserve the look and feel. How can you not call this "conservative?") "Degrowth" is a self-chosen word for the Greta Thunberg branch of the environmental movement. Less, especially less for the lower classes, not really for us who jet around the world to climate conferences. Certainly do not allow the teeming billions of India and Africa to approach our prosperity. I think "deliberate impoverishment" is a better word. Some of it has an Amish view of technology as evil. And some is, I guess, just habit, we've been saying no to everything since 1968, why stop now. 

Klein characterizes the opponents: 

More than 100 environmental groups — including the Sierra Club of California and The Environmental Defense Center — are joining to fight a package Newsom designed to make it easier to build infrastructure in California.

... opposition groups say that moving so fast “excludes the public and stakeholders and avoids open and transparent deliberation of important and complicated policies.”

...The California Environmental Justice Alliance sent me a statement that said, in bold type, “Requiring a court to resolve an action within 270 days to the extent feasible is harmful to low-income and EJ” — which stands for environmental justice — “communities.” It doesn’t get much clearer than that.

I am delighted to see in the New York Times, finally, the word "communities" adorned with scare quotes. But there is the tension: You can't both be really serious that climate change is a looming existential threat to humanity that demands an end to carbon emission by year 20X in the near future, and the view that in 270 days we cannot possibly figure out how to do so in a way that protects "communities." Climate must not really be that bad, or perhaps it was just an unserious talking point in a larger political project. 

These are the beginning stages of a transition from a liberalism that spends to a liberalism that builds. It’s going to be messy. Until now, progressives have been mostly united in the fight against climate change. They wanted more money for clean energy and more ambitious targets for phasing out fossil fuels and got them. Now that new energy system needs to be built, and fast. And progressives are nowhere near agreement on how to do that.

The last three sentences are telling. Did they really want just to announce goals and spend a few hundred billions and feel good? Or did they actually want all the windmills, solar cells, and power lines involved?  

But the fight isn’t just about this package. Everyone involved believes there are many permitting reforms yet to come, as the world warms and the clock ticks down on California’s goals and the federal government begins to apply more pressure.

Once something becomes partisan in the US, it freezes and little gets done. I am hopeful here, because it plays out within one party. California is a one-party state, but that does not put it above politics. It does mean that progress is more likely. Can we hope that "a liberalism that builds," in reasonable time and somewhat less than astronomical cost, projects that might be actually useful, could emerge from all this? 

In the larger picture, a movement among good progressive democrats in places like California has figured out that if we want more housing at more reasonable prices, just letting people build houses might be a good idea. Houses, apartments, any houses and apartments, not just dollops of incredible expensive government-allocated ("affordable") and homeless housing. This is the YIMBY movement in California. It is sadly instantly opposed by Republicans, but maybe that's for the better given how reviled that brand is in Sacramento. And it is also making slow headway. 

The perennial fantasy

Two attacks, and one defense, of classical liberal ideas appeared over the weekend. "War and Pandemic Highlight Shortcomings of the Free-Market Consensus" announces Patricia Cohen on p.1 of the New York Times news section.  As if the Times had ever been part of such a "consensus." And Deirdre McCloskey reviews Simon Johnson and Daron Acemoglu's "Power and Progress," whose central argument is, per Deirdre, "The state, they argue, can do a better job than the market of selecting technologies and making investments to implement them." (I have not yet read the book. This is a review of the review only.) 

I'll give away the punchline. The case for free markets never was their perfection. The case for free markets always was centuries of experience with the failures of the only alternative, state control. Free markets are, as the saying goes, the worst system; except for all the others. 

In this sense the classic teaching of economics does  a disservice. We start with the theorem that free competitive markets can equal -- only equal -- the allocation of an omniscient benevolent planner. But then from week 2 on we study market imperfections -- externalities, increasing returns, asymmetric information -- under which markets are imperfect, and the hypothetical planner can do better. Regulate, it follows. Except econ 101 spends zero time on our extensive experience with just how well -- how badly -- actual planners and regulators do. That messy experience underlies our prosperity, and prospects for its continuance. 

Starting with Ms. Cohen at the Times, 

The economic conventions that policymakers had relied on since the Berlin Wall fell more than 30 years ago — the unfailing superiority of open markets, liberalized trade and maximum efficiency — look to be running off the rails.

During the Covid-19 pandemic, the ceaseless drive to integrate the global economy and reduce costs left health care workers without face masks and medical gloves, carmakers without semiconductors, sawmills without lumber and sneaker buyers without Nikes.

That there ever was a "consensus" in favor of "the unfailing superiority of open markets, liberalized trade and maximum efficiency" seems a mighty strange memory. But if the Times wants to think now that's what they thought then, I'm happy to rewrite a little history. 

Face masks? The face mask snafu in the pandemic is now, in the Times' rather hilarious memory, the prime example of how a free and unfettered market fails. It was  a result of "the ceaseless drive to integrate the global economy and reduce costs?" 

(Here, I have a second complaint -- the ceaseless drive to remove subjects from sentences. Who is doing this "ceaseless drive?" Where is the great conspiracy, the secret meeting of old white men "driving" the economy? Nowhere. That's the point of free markets.)

The free market has a plan, imperfect as it might be, for masks in a pandemic. Prices rise. People who really want and need masks -- doctors, nurses, police -- pay what it takes to get them. People who don't really need them -- nursery schools -- look at the price, think about the benefit, and say, "maybe not," or take other measures. People reuse masks. Producers, seeing high prices, work day and night to produce more masks. Others, knowing that every 10 years there is a spike in prices, pay the costs of storing masks to make great profits when the time comes. 

The actual story of masks in the pandemic is the exact opposite. Price controls, of course. Instantly, governments started prosecuting businesses for "price gouging" who dared to raise the price of toilet paper. Governments redistribute income; markets allocate resources efficiently. As usual, the desire to redistribute tiny amounts of income to those willing to stand in line to get toilet paper won out. An entrepreneur tried to start producing masks. The FDA shut him down. (I hope I recall that story right, send comments if not.) China wanted to ship us masks. Yes, China the new villain of globalization gone mad. But their masks were certified and labeled by EU rules, not US rules, so like baby formula they couldn't be imported and sold. 

More deeply, even I, devoted free-marketer; even at the late night beer sessions at the CATO institute, nobody puts mask distribution in a pandemic as the first job of free markets. There is supposed to be a public health function of government; infectuous diseases are something of an externality; safety protocols in government labs doing government funded research are not a free-market function. As we look at the covid catastrophe, do we not see failures of government all over the place, not failures of some hypothetical free market? California even had mobile hospitals after H1N1. Governor Brown shut them down to save money for his high speed train. We might as well blame free markets for the lines at the DMV.  

The idea that trade and shared economic interests would prevent military conflicts was trampled last year under the boots of Russian soldiers in Ukraine.

Does anyone think a prime function of free market economics is to stops wars, usually prosecuted by, eh, governments? The standard history of WWI is enough. We do allege that free markets, and free markets alone, make a country wealthy enough to fight and win wars, if the country has the will and desire to do so. The US and NATO military budget vs. Russia's, larger by a factor of 10 at least, seems to bear that out, along with the much greater quality of our weapons.  Heaven help us militarily once the protectionists lead us to state-directed penury. 

inflation, thought to be safely stored away with disco album collections, returned with a vengeance.

Did anyone every vaguely hint that inflation control is a function of free markets? Inflation comes from government monetary and fiscal policy.  

And increasing bouts of extreme weather that destroyed crops, forced migrations and halted power plants has illustrated that the market’s invisible hand was not protecting the planet.

Doe the Times even vaguely think of news as fact not narrative? There have been a lot of migrations. "Forced?" Many due to violence, poverty, ill government. None due to temperature. Halted power plants (more passive voice)? Yes, it was that pesky unfettered free market that shut down power plants... 

The favored economic road map helped produce fabulous wealth, lift hundreds of millions of people out of poverty and spur wondrous technological advances.

Well, a peek of sunlight, an actual correct fact! 

But there were stunning failures as well. Globalization hastened climate change and deepened inequalities. 

More fact free narrative spinning. How are "inequalities" plural? Globalization brought the sharpest decline in global inequality in the history of our species. Perhaps it "hastened climate change" in that if China had stayed desperately poor they wouldn't be building a new coal fired power plant a week. US emissions went down because of... choose 1: enlightened policy 2: fracking, a shift to natural gas made only possible by the curious US property rights system absent in Europe, and pretty much over the dead body of the entire energy regulatory apparatus. 

***

Meanwhile over at WSJ, Deirdre is in classic form. (Again, I have not read the book, so this is Deirdre coverage.) The paragraph that caught my attention and demanded a blog post: 

We need [according to Acemoglu and Johnson] ... the legislation currently being pushed by left and right to try again the policies of antitrust, trade protection, minimum wage and, above all, subsidy for certain technologies. Messrs. Acemoglu and Johnson are especially eager to regulate digital technologies such as artificial intelligence. “Technology should be steered in a direction that best uses a workforce’s skills,” they write, “and education should . . . adapt to new skill requirements.” How the administrators of the Economic Development Administration at the Department of Commerce would know the new direction to steer, or the new skills required, remains a sacred mystery.

"Technology should be steered." There it is, the full glory of the regulatory passive voice. Steered by who? Deirdre answers the question with that gem of rhetoric, specificity.  "Administrators of the Economic Development Administration at the Department of Commerce" for example. 

The theme uniting the two essays: If there is one lesson of the last 20 years it is this: The catastrophic failure of our government institutions. From bungled wars, a snafu of financial regulation in 2008 just now repeated in FTX, SVB, and inflation the evident collapse of the FDA CDC and plain commonsense in the pandemic, the free market is bravely forestalling a collapse of government (and associated, i.e. universities) institutions. 

we need the state to use its powers “to induce the private sector to move away from excessive automation and surveillance, and toward more worker-friendly technologies.” Fear of surveillance is a major theme of the book; therefore “antitrust should be considered as a complementary tool to the more fundamental aim of redirecting technology away from automation, surveillance, data collection, and digital advertising.”

The question what institution has the technical competence to do this seems to be begging.  

“Government subsidies for developing more socially beneficial technologies,” the authors declare, “are one of the most powerful means of redirecting technology in a market economy.” 

Well, interpreting the sentence literally,  you have to give it to them. Government subsidies are powerful means of "redirecting technology." Usually to ratholes. 

Messrs. Acemoglu and Johnson warmly admire the U.S. Progressive Movement of the late 19th century as a model for their statism: experts taking child-citizens in hand.

Their chapters then skip briskly through history...seeking to show how at each turn new innovations tended to empower certain sections of society at the expense of others. The “power” that concerns them, in other words, is private power.

This is, in fact, the central question dividing free-marketers and others. Private power being subject to competition, we worry more about state power. The essence of state power is monopoly, and a monopoly of coercion, fundamentally violence.  

The heart of the book is that technological gains create winners and losers, and Acemoglu and Johnson want that directed by a nebulous bureaucracy. Which will somehow never be infected by, oh, Republicans, or turn in to the endless stagnation of most of the last millennium which actually did pursue policies that forbade technological improvement in order to sustain the incomes of incumbents. Deirdre, who coined the lovely phrase "trade tested betterment" takes it on. 

 During the past two centuries, the world has become radically better off, by fully 3,000% inflation adjusted. Even over the past two decades the lives of the poor have improved. The “great enrichment” after 1800 and its resulting superabundance has brought us out of misery. Even the poor workers who did not benefit in the short run have done so enormously in the long run. In 1960, 4 billion of the 5 billion people on the planet lived on $2 a day. Now it’s fallen to 1 billion out of 8, and the income average is $50 a day. The state didn’t do it, and forcing short-run egalitarianism or handing power to the Office of Economic Development can kill it, as it regularly has. Messrs. Acemoglu and Johnson see great imperfections in the overwhelmingly private sources of the enrichment. With such imperfections, who needs perfection?

Another way to see the problem is to remember the common sense, refined in Economics 101 and Biology 101, of entry at the smell of profit. ...The great fortunes they deprecate have the economic function of encouraging entry into the economy by other entrepreneurs who want to get rich. This competition cheapens goods and services, which then accrues to the poor as immense increases in real income.

Many fortunes, for instance, were made by the invention of the downtown department store. The profit attracted suburban competitors, and at the mall the department-store model began to fail. Jeff Bezos reinvented the mail-order catalog. He is imitated, and the fortunes are dissipated in enormous benefit to consumers called workers. 

.... It’s what happened and happens in a liberal economy.

The book uses a lot of history, surveyed by McCloskey. As before, it's criticized a bit as history lite. The history Deirdre covers has the usual imperfections of the free market. 

I wonder if the book has any history of success of this plan, of governments successfully guiding technological transformations to protect the rights and incomes of incumbents, without in the process killing technical change.  Governments habitually screw up basics like rent control. Figuring out what new technology will do is pretty much beyond the capacity of private investors and book-writing economists. The  idea that bureaucracy has the capacity to figure out not just what new technology will work, but to guide its social and distributional consequences seems... far beyond the historical record of bureaucratic accomplishment. But I am straying beyond my promise to review the review, not the book, before reading the latter. 

****

I recognize the desire on both sides. Partisan politics needs "new" ideas and a "new" propaganda. In particular, the right is aching for something shiny and new that it can sell to voters, which it regards with the same sort of noblesse-oblige intellectual disdain as the left does. Mind the store, mend the institutions, freedom, rights, opportunity and make your own prosperity are, apparently, not sexy enough. So both sides need new initiatives, expanded governments, to excite the rabble. But we're not here to supply that demand, merely to meditate on actual cause-and-effect truth of what works. Beware the temptation. 

Update:  In retrospect, perhaps the issue is much simpler. The bulk of economic regulation serves exactly the purpose McCloskey basically alleges of Acemoglu and Johnson: Preserve rents of incumbents against the threats of technological improvements. From medieval guilds to trade protection to taxis vs. Ubers, that is really its main function. So we have an extensive bureaucracy that is very good at it, and extensive experience of just how well it works. Which is, very well, at protecting rents and stifling growth.  

The barn door

Kevin Warsh has a nice WSJ oped warning of financial problems to come.  The major point of this essay: "countercyclical capital buffers" are another bright regulatory idea of the 2010s that now has fallen flat. 

As in previous posts, a lot of banks have lost asset value equal or greater than their entire equity due to plain vanilla interest rate risk. The ones that haven't run are now staying afloat only because you and me keep our deposits there at ridiculously low interest rates. Commercial real estate may be next. Perhaps I'm over-influenced by the zombie-apocalypse goings on in San Francisco -- $755 million default on the Hilton and Parc 55, $558 million default on the whole Westfield mall after Nordstrom departed and on and on. How much of this debt is parked in regional banks? I would have assumed that the Fed's regulatory army could see something so obvious coming, but since they completely missed plain vanilla interest rate risk, and the fact that you don't have to stand in line any more to run on your bank, who knows?

So, banks are at risk; the Fed now knows it, and is reportedly worried that more interest rates to lower inflation will cause more problems. To some extent that's a feature not a bug -- the whole theory behind the Fed lowering inflation is that higher interest rates "cool economic activity," i.e. make banks hesitant to lend, people lose their jobs, and through the Phillips curve (?) inflation comes down. But the Fed wants a minor contraction, not full-on 2008. (That did bring inflation down though!) 

I don't agree with all of Kevin's essay, but I always cherry pick wisdom where I find it, and there is plenty. On what to do: 

Ms. Yellen and the other policy makers on the Financial Stability Oversight Council should take immediate action to mitigate these risks. They should promote the private recapitalization of small and midsize banks so they survive and thrive.

Yes! But. I'm a capital hawk -- my answer is always "more." But we shouldn't be here in the first place. 

Repeating a complaint I've been making for a while, everything since the great treasury market bailout of March 2020 reveals how utterly broken the premises and promises of post-2008 financial regulation are. One of the most popular ideas was "countercyclical capital buffers." A nice explainer from Kaitlyn Hoevelmann at the St. Louis Fed (picked because it came up first on a Google search), 

"A countercyclical capital buffer would raise banks’ capital requirements during economic expansions, with banks required to maintain a higher capital-to-asset ratio when the economy is performing well and loan volumes are growing rapidly.  " 

Well, that makes sense, doesn't it? Buy insurance on a clear day, not when the forest fire is half a mile upwind. 

More deeply, remember "capital" is not "reserves" or "liquid assets." "Capital" is one way banks have of getting money, by selling stock, rather than selling bonds or taking deposits. (There is lots of confusion on this point. If someone says "hold" capital that's a sign of confusion.) It has the unique advantage that equity holders can't run to get their money out at any time. In bad times, the stock price goes down and there's nothing they can do about it. But also obviously, it's a lot easier to sell bank stock for a high price in good times than it is just after it has been revealed that the bank has lost a huge amount of money, i.e. like now.  

Why don't banks naturally issue more equity in good times? Well, because buying insurance is expensive, and most of all there is no deposit insurance or too big to fail guarantee subsidizing stock. So banks always leverage as much as they can. Behavioralists will add that bankers get over enthusiastic and happy to take risks in good times. Why don't regulators demand more capital in good times, so banks are ready for the bad times ahead? That's the natural idea of "countercyclical capital buffers." And after 2008, all worthy opinion said regulators should do that. Only some cynical types like me opined that the regulators will be just as human, just as behavioral, just as procyclically risk averse, just as prey to political pressures in the future as they were in the past. 

And so it has turned out. Despite 15 years of writing about procyclical capital, of "managing the credit cycle," here we are again -- no great amounts of capital issued in the good times, and now we want banks to do it when they're already in trouble, and anyone buying bank stock will be providing money that first of all goes to bail out depositors and other debt holders. As the ship is sinking, go on amazon to buy lifeboats. Just as in 2008, regulators will be demanding capital in bad times, after the horse has left the barn. So, the answer has to be, more capital always! 

Kevin has more good points:  

Bank regulators have long looked askance at capital from asset managers and private equity firms, among others. But this is no time for luxury beliefs.

Capital is capital, even from disparaged sources. 

Policy makers should also green-light consolidation among small, midsize and even larger regional banks. I recognize concerns about market power. But the largest banks have already secured a privileged position with their “too big to fail” status. Hundreds of banks need larger, stronger franchises to compete against them, especially in an uncertain economy. Banks need prompt regulatory approval to be confident that proposed mergers will close. Better to allow bank mergers before weak institutions approach the clutches of the Federal Deposit Insurance Corp.’s resolution process. Voluntary mergers at market prices are preferable to rushed government auctions that involve large taxpayer losses and destruction of significant franchise value.

It is a bit funny to see the Administration against all mergers, and then when a bank fails, Chase gets to swallow up failing banks with government sweeteners. Big is bad is another luxury belief. 

Yes, banks are uncompetitive. Look at the interest on your deposits (mine, Chase, 0.01%) and you'll see it just as clearly as you can see lack of competition in a medical bill. But most of that competition comes from regulation, not evil behavior. As per Kevin: 

The past decade’s regulatory policies have undermined competition and weakened resiliency in the banking business. 

A final nice point: 

The Fed’s flawed inflation forecasts in the past couple of years are a lesson in risk management. Policy makers shouldn’t bet all their chips on hopes for low prices or anything else. Better to evaluate the likely costs if the forecast turns out to be wrong.

Maybe the lesson of the massive failure to forecast inflation is that inflation is just bloody hard to forecast. Rather than spend a lot of effort improving the forecast, spend effort recognizing the uncertainty of any forecast, and being ready to react to contingencies as they arise. (I'm repeating myself, but that's the blogger's prerogative.)