Thoughts for August 7, 2022
Good afternoon. Today’s topics are the Inflation Reduction Act, bottom trawling, Ayman al-Zawahiri, democracy as a term, US-China relations, and the state of the economy.
Inflation Reduction Act
As of this writing, the Senate has just passed the Inflation Reduction Act after voting on amendments, so it now looks that it will become law. Here are some more thoughts on it.
Last week I noted that Senator Manchin wanted regulatory reform as part of the deal for his support on the IRA, but that was not in the bill, and I asked for some clarification. A reader did just that. Under Senate rules, the details of which I don’t fully understand, reconciliation can only be used for taxing or spending provisions, and not other kinds of policy changes such as permitting reform. Without reconciliation, 60 votes would be needed to break a filibuster, which is not in the cards. Thanks Naor for the clarification.
Some details emerged last week on what such an agreement might look like (Washington Post article and Twitter thread). In separate news, Machin joined with Senate Republicans to pass a permitting reform bill, though the bill will almost certainly not pass in the House, and if it did, it would face a likely veto. I am left wondering, if this really was the deal, how Senator Schumer could uphold his end of the bargain on a separate permitting bill. Christian Britschgi thinks the provisions may be inadequate.
What emissions reductions should be expected from this bill? Last week I mentioned the analysis from the Rhodium Group; there are also analyses from Energy Innovation and the Repeat Project (the upcoming analysis from Jesse Jenkins that he promised), which all seem to forecast roughly the same reductions. Repeat forecasts a 6.3 billion ton reduction over the next decade, better than the 5 billion that Jesse guessimated on Twitter. For $369 billion, that’s a carbon abatement cost of about $59/ton. Again, not great, and not bad. Mainstream estimates of the social cost of carbon are typically between $50/ton and $100/ton.
But can we really trust these estimates? That’s the question Roger Pielke Jr. asks. The problem is that these models are opaque, and it’s not clear the mechanism by which the IRA would really reduce emissions. It is also unclear what effects are and are not accounted for. Energy Innovation’s model is open-source but not layperson friendly. Repeat’s report includes the disclaimer, “Several constraints that are difficult to model may limit these growth rates in practice”, highlighting permitting issues, workforce expansion, and the expansion of the grid and CO2 transport. It doesn’t mention commodity prices. The International Energy Agency has released another report on the challenges of expanding mining of critical minerals, especially lithium, to accommodate growing demand for low-carbon energy.
On the climate provisions, I have mixed feelings about this. I appreciate that the IRA makes an effort to be technologically broad-based. For instance, by Repeat’s estimates, the IRA could be decisive in carbon capture and sequestration picking up.
But the IRA will be severely handicapped by protectionism, and this, together with the emphasis on spending and tax breaks, creates a high risk of cronyism.
On the non-climate provisions, my reaction is more decisively negative. Last week I mentioned the economic risk of a corporate minimum tax and the disingenuity of squaring this with a pledge not to raise taxes on people earning less than $400,000/year. There is a provision to save on drug costs by allowing Medicare to negotiate drug prices, but as this report explains, such a provision is a de facto price control that will result in fewer drugs being developed. See also this negative analysis by Chris Pope and this by Jonathan Bydlak. Oh, and the Inflation Reduction Act will most likely not reduce inflation.
Bottom Trawling
Bottom trawling is a method of fishing that scrapes a net on the seafloor. Bottom trawling comprises about 28% of seafood wild catch (which in turn is a little less than the seafood produced from aquaculture). Bottom trawling is particularly controversial because it results in a high discard rate (organisms that are caught but not commercially desired) and causes ecological damage in benthic habitats. By disturbing sequestered carbon on the sea floor, bottom trawling has been estimated to cause 1.47 billion tons of CO2 emissions per year, comparable to global aviation. For these reasons, many environmental organizations are pushing for bans, or at least restrictions such as better gear, on bottom trawling.
Given that bottom trawling is both widespread and controversial, I assume there must be an economic rationale that keeps it going. But that assumption might not always be good. This paper finds that the fishing industry in Norway would benefit financially by expanding creel fishing (an alternative method that doesn’t involve seafloor scraping) at the expense of trawling. This paper gives a positive assessment of the economics, and this one a negative assessment. This paper gives what one might expect from an environmental analysis: there is economic rationale for bottom trawling, but if the value of ecosystem services is included, it is better to end the practice in the study area (Europe). I have my questions about how reliable these ecosystem service valuation numbers are, but that’s what we have.
Fishing is highly subsidized, and this paper argues that a substantial portion of high seas fishing (outside of any country’s exclusive economic zone), especially bottom trawling, would be uneconomical without subsidies. Earlier this year, the World Trade Organization agreed to end fishing subsidies. This sounds very encouraging. I am still actively working on the topic, and getting a handle of the subsidy question is my next task.
Al-Zawahiri
One encouraging piece of news this week was the death of Ayman al-Zawahiri in an airstrike in Afghanistan. Al-Zawahiri was a cofounder of Al Qaeda and the leader of the organization from Osama bin Laden’s death in 2011 until last week.
Al-Zawahiri also represented an important link to the development of Islamist ideology. A key mentor of his was the fellow Egyptian Sayyid Qutb, who was in the United States from 1948-1950 and while there developed an intense dislike of American culture. Qutb returned to Egypt, founded the Muslim Brotherhood, developed his version of the idea of jihad and Islamism, and was executed in 1966 by the Nasser regime, which Qutb opposed for being secular and too Western in orientation. Qutb’s story is profiled in Adam Curtis’ work, The Power of Nightmares. Al-Zawahiri was influenced as a youth by Qutb’s work and founded his own terror cell at that time.
It is debated how much of a threat Al Qaeda still poses. One may hope that the threat is diminished by the leader’s death and the severing of a key link to Islamist thought.
Democracy as a Term
I have discussed several times the phenomenon of democratic backsliding, such as discussed by Freedom House. But Freedom House, and the conception of democracy they use, is subject to plenty of criticism. This article alleges that Freedom House has conflated reasonable ideological disagreements as anti-democratic threats and in ways that fit with leftwing ideology. Still, I used Freedom House’s figures mostly for lack of good alternatives.
Still, there has been a growing level of alarm among Democratic activists that “our democracy” is in danger, and in ways that should raise concern. This article from The Atlantic is a good example. Its policy prescriptions are as follows.
The wish list from several democracy experts I spoke with is long, and includes passing the Electoral Count Act, creating a constitutional right to vote, reforming districting so more elections are competitive, establishing a nonpartisan national election-management body, electing the president via popular vote, reducing the gap in representation between states like California and Wyoming, introducing some level of proportional representation or multimember districts, aggressively regulating campaign spending and the role of money in politics, and enforcing an upper age limit for Supreme Court justices. But virtually all of those ideas are currently political fantasies.
Some of these ideas may be good, others not so much. But do they sound anything like a serious response to a serious anti-democratic threat, or do they sound like ordinary partisanship? I’ll leave this as a rhetorical question.
Another example of partisan use of language comes in much of the reaction to the recent Dobbs decision of the Supreme Court. Read the article if you really want to know what it argues, but just to highlight one problem, there is a tendency to conflate democracy with majoritarianism, or the idea that majority opinion should always prevail in public policy. Beyond the fact that populists often claim majority support in ways that are dubious, the United States is not, has never been, and was never intended to be a strictly majoritarian system. James Madison in Federalist #10 is probably still the best exposition of the principle of the need to balance popular will with protection of individual rights and the localization of concerns.
For all the rhetoric, it is not at all clear that the Democratic Party is any better on democracy than the Republican Party. Mirroring baseless Republican talking points about rampant “voter fraud” are Democratic concerns about “voter suppression”, such as in the histrionic reaction to last year’s election law in Georgia or the mailbox removal thing. In what should be obviously reminiscent of Donald Trump’s claim of election fraud after the 2020 election, Stacey Abrams, who lost the 2018 gubernatorial election in Georgia, claims that she legitimately won, but that the election was stolen by widespread voter suppression. There is no credible evidence to support this claim as far as I know, and these voter suppression stories undermine faith in the electoral process such as much as voter fraud conspiracy theories.
Both major parties support strict ballot access laws that limit the potential for independent and third party candidates. Given that most elections in the United States occur where one party is dominant, this state of affairs amounts to de facto single party rule.
In truly Putin-like cynicism, the Democratic Congressional Campaign Committee spent $435,000 on ads to boost John Gibbs, a 2020 election truther and purveyor of other conspiracy theories, over Peter Meijer, evidently for no purpose other than to make the general election easier. I hope Gibbs wins the general. Not because I think he would be any good, but because I don’t want to see stunts like this pay off. Such actions obviously don’t indicate a belief that protecting “our democracy” is a major concern.
If one is a party activist, one probably believes several things.
There are substantive differences between the parties on issues.
Your preferred party is good on the issues and the other party is bad.
The issues are of existential importance.
If you believe these things, then there is logic behind the “win at all costs” mentality behind Stacey Abrams’ voter suppression claims, the DCCC’s dishonest stunt, or the January 6 attack. If you don’t, then these things don’t look good.
Democratization is well-correlated with other measures of human well-being, including economic freedom, wealth, and basic rights, and defending democracy truly is important. It is for this reason that the lack of a credible pro-democracy movement in the United States is disturbing. Such a movement would focus on real threats to democracy, such as imperialism from the communist Chinese government or the fascist Russian government.
US-China Relations
Speaking of China, Nancy Pelosi’s visit to Taiwan and China’s hysterical reaction have been very much in the news. The visit seems to have been mostly well-received (outside of Beijing), and it is necessary, given last year’s debacle in Afghanistan and the Biden Administration’s tepid defense of Ukraine, to reassure allies and adversaries that the United States will defend allies.
But the symbolism of Pelosi’s visit means little if not backed by substance. For that, as Caspian Report explains, there are two initiatives that have been made public this year and comprise the basis of President Biden’s efforts to respond to China. The first is the Partnership for Global Infrastructure and Investment, a response to China’s Belt and Road Initiative that aims to mobilize $600 billion by 2027 for global infrastructure projects. The second is the Indo-Pacific Economic Framework for Prosperity, a sort of reincarnation of the Trans-Pacific Partnership from which the United States withdrew in 2017. The IPEF is not in itself a free trade agreement, but it is hoped to be the basis for future tariff reduction negotiations.
I haven’t looked at great detail at the PGII and IPEF, and if I did I’m sure I would find plenty to quibble about. But in general they seem to be good initiatives, and exactly the kind of positive-sum competition with China that the current situation calls for.
As discussed previously, China faces serious demographic and debt challenges, and there seems to be growing realization within the upper echelons of the Chinese Communist Party that time is not on their side. The 2020s could therefore be a perilous decade, as the Chinese leadership sees their window of opportunity closing and feels compelled to act aggressively.
State of the Economy
As discussed previously, I am skeptical of the notion that there is a “labor shortage”—at the very least I could like to see a more accurate term to describe the present situation—but I will admit that low unemployment figures are a compelling piece of evidence for a tight labor market. The current unemployment rate of 3.5% and recent strong jobs report are all the more remarkable in light of the maybe-kinda recession that the United States is now in. What’s going on here?
This paper argues that the working-age foreign-born population in the United States dropped 2 million people due to COVID-19 travel restrictions and visa restrictions that were instituted in response, and that this is the main reason for the shift in labor market dynamics. A recent report, looking at Southern California in particular, blames the troubles on population aging, a lack of affordable housing, and restrictions on gig work caused by AB 32 and other labor market constraints.
Due to population aging, a combination of low unemployment and low growth looks like it may be the norm going forward. Japan has had both since the 1990s.
Keynesian, which could be called demand-side economics, became dominant in the Great Depression as governments sought to figure out how so many factories and workers could be idled. Keynesian has its liberal (government spending) and conservative (tax cuts) variants, the latter of which is sometimes mistakenly called supply-side economics. Keynesian struggles to explain the stagflation—the simultaneous occurrence of inflation and economic stagnation—of the 1970s, and it should have been abandoned then. But it wasn’t, and Washington is still locked in a mindset that the proper way to improve the economy is through spending and tax cuts. We see this mindset in the Inflation Reduction Act, as discussed above. A true supply-side economics would emphasize things such as deregulation, trade, and immigration, as these would boost the economy’s productive capacity, but it does not appear that the political system has much appetite for this at present.
The impulse toward protectionism will be a major drag on the economy. For the life of me I cannot understand the logic behind the idea that reshoring production and eschewing trade will boost either growth or resilience. The baby formula fiasco should be a clear illustration of why this idea is a folly. But protectionism and (I’m sorry to readers who are eating right now) industrial policy are in vogue. Consider the bipartisan support for the recent CHIPS and Science Act. The bill isn’t all bad, but it takes advantage of national security concerns and domestic manufacturing interests to give subsidies that are little more than corporate welfare.