The Capital Letter: Regulators, Electric Vehicles & More


Federal Reserve Board governor Lael Brainard speaks at Harvard University in Cambridge, Mass., March 1, 2017. (Brian Snyder/Reuters)

The week of March 1: the march of the regulators, electric vehicles, policing the menu and much, much more.]

The fondness of the Biden administration for rule by regulation is hardly a secret by now, and, when it comes to telling corporations that they should run themselves according to the precepts of stakeholder capitalism, the regulatory route comes with an added advantage.

To be sure, many companies, particularly larger ones, are already falling into line without any pressure from the state, because it suits the interests of managers (shareholders can be such a demanding bunch) and/or because they have been pushed to do so by a handful of large investment managers who can see the opportunity that “socially responsible” investing (SRI), an investment philosophy intertwined with stakeholder capitalism, represents for them, if not for their clients.

Other managements, however, would prefer to continue to run their businesses for the benefit of the shareholders (a stance, incidentally, that is rather more sophisticated than the usual Gekko caricature). Forcing such businesspeople to change their ways through legislation might be tricky, even in the current political environment. While SRI will continue to spread through the private sector, many in Washington, D.C., would like this “progress” to move forward at a faster clip. If that is to happen, regulation will have to play a central role.

Key regulators seem only too happy to oblige. The last few months have seen a “greening” of the Fed that shows little sign of slowing down. On the contrary . . .

From the Financial Times last month:

After years of silence on the topic, the Fed has started to put climate issues centre stage. Shortly after Biden won the election, the central bank highlighted climate change as a threat to financial stability and moved to join the Network for Greening the Financial System, a consortium of central banks dedicated to supporting the goals of the Paris climate accord.

Now with Trump out of office and the Biden administration pushing hard to make up lost ground in the climate fight, Fed officials are speaking out more explicitly about climate risk and how they intend to take action.

“Financial institutions that do not put in place frameworks to measure, monitor, and manage climate-related risks could face outsized losses on climate-sensitive assets caused by environmental shifts, by a disorderly transition to a low-carbon economy, or by a combination of both,” said Federal Reserve governor Lael Brainard, at the Institute of International Finance’s inaugural climate finance summit yesterday.

Brainard is wrong, but in two different ways. The idea that climate change represents a material risk to the financial system at any time in the reasonably near future is laughable. I will turn, as I so often do, to the talk given by economist John Cochrane to a conference organized by the European Central Bank (ECB) last fall:

Let me point out the unclothed emperor: climate change does not pose any financial risk at the one-, five-, or even ten-year horizon at which one can conceivably assess the risk to bank assets. Repeating the contrary in speeches does not make it so.

Risk means variance, unforeseen events. We know exactly where the climate is going in the next five to ten years. Hurricanes and floods, though influenced by climate change, are well modeled for the next five to ten years. Advanced economies and financial systems are remarkably impervious to weather. Relative market demand for fossil vs. alternative energy is as easy or hard to forecast as anything else in the economy. Exxon bonds are factually safer, financially, than Tesla bonds, and easier to value. The main risk to fossil fuel companies is that regulators will destroy them, as the ECB proposes to do, a risk regulators themselves control. And political risk is a standard part of bond valuation.

That banks are risky because of exposure to carbon-emitting companies; that carbon-emitting company debt is financially risky because of unexpected changes in climate, in ways that conventional risk measures do not capture; that banks need to be regulated away from that exposure because of risk to the financial system—all this is nonsense. (And even if it were not nonsense, regulating bank liabilities away from short term debt and towards more equity would be a more effective solution to the financial problem.)

The real aim of the emerging central-bank game is two-fold. Firstly, to increase the cost of capital for climate sinners by “discouraging” banks from lending to them and secondly, by mandating disclosure of such risks (and you can be sure that claims that they are minimal will not be acceptable) as a means to give climate warriors information that they can then use as a cudgel against financial institutions lending to the wrong sort of clients. Such a disclosure regime would be designed to help activists, not shareholders. It would have nothing to do with “risk.”

The biggest risk to those climate sinners (specifically the fossil-fuel companies) may well come from the steps that regulators may take against them, a fact with more than a hint of a circular argument about it.

Then there’s Brainard’s reference to the risk posed by a “disorderly” transition to a low-carbon economy, whatever she means by that. If there is to be a transition to a low-carbon economy it would best be achieved in (so to speak) a “disorderly” fashion, without the command-and-control measures that much of the establishment now appear to favor, measures that are almost guaranteed to prove immensely destructive. Those who think otherwise should take a look at California or Germany’s disastrous Energiewende. The contribution of government should consist of some support for basic research, the odd legislative nudge, and the big bucks should go toward infrastructure programs to toughen our resilience to “weather,” whatever the climate may do: sea defenses for low-lying cities, winterizing the Texas grid, and so on. Much of the spending in that last category would likely pay for itself within a relatively short time.

But Brainard and her colleagues at the Fed are not just talking the talk.

From a Reuters report a week or two before:

The U.S. Federal Reserve is tapping a senior official to lead a new team focused specifically on financial risks posed by climate change, the central bank announced Monday.

Kevin Stiroh, who previously led bank supervision at the New York Fed, will lead the newly-formed “Supervision Climate Committee,” which gathers senior Fed officials to study what climate change could mean for banks and financial markets.

Appropriate answers only, I suspect, will again be expected.

It is also worth paying attention to this, from that FT article:

A significant issue highlighted by all of these parties is the lack of consistent data, and the Fed’s Brainard indicated that the US should consider making climate disclosures mandatory for companies.

“Current voluntary disclosure practices are an important first step, but they are prone to variable quality, incompleteness, and a lack of actionable data,” she added. “Ultimately, moving towards standardised, reliable and mandatory disclosures could provide better access to the data required to appropriately manage risks.”

Sure enough, the SEC has now weighed in.

From S&P Global:

The current voluntary disclosure regime for climate and other sustainability issues in the U.S. has failed to produce the level of consistent, comprehensive and comparable information that investors need, U.S. Securities and Exchange Commission Acting Chair Allison Lee said at a March 1 CERAWeek conference hosted by IHS Markit.

Lee, who recently launched a review of corporate climate disclosures at the agency, said that the voluntary framework of competing and sometimes conflicting standards has shortcomings.

“When you have a voluntary framework, not everyone discloses, and that means significant gaps. It can mean an unlevel playing field for many businesses and it also means inconsistencies among those who do disclose,” said Lee. “So investors can’t really compare across businesses, across the industries … and sometimes they can’t even compare with respect to a single business that might choose different things to disclose at different times.”

Moreover, companies are reporting in different ways ranging from traditional SEC filings to “something that looks almost like an ad brochure,” Lee said. As such, she asked, “how can investors be confident that the information is reliable?”

“So I don’t think it’s realistic necessarily to think about achieving those goals through a voluntary regime,” she added.

Lee went on to note that the level of financial reporting in the U.S. today was not achieved through voluntary standards. She acknowledged that not all disagreements will be resolved over the right path forward, but that some level of a healthy debate can be useful.

The SEC has taken the first steps toward developing a framework for climate and ESG disclosures. The next question, said Lee, is what would be the right approach and “how can we, as regulators, add value.”

As for how the SEC might harmonize standards with the ones being developed or already in existence in other parts of the world, Lee said the SEC needs to work internationally toward some common principles that will serve as a baseline.

At one level that makes sense. What makes for a good ESG (SRI shorthand for seeing how a company measures up against certain “environmental,” “social,” and “governance” yardsticks) performance is currently being interpreted in many different ways. (There is also, for that matter, a decent argument that the “E” and “S” can sometimes clash.) It is not unreasonable that investors wanting to invest on the basis (even if only in part) of ESG credentials should be able to find them set out on a consistent basis. Indeed, there may be other investors who might regard a company’s focus on ESG (as a group: good “G,” governance, would seem to be a plus wherever an investor is coming from) as a reason not to invest, and so would regard such disclosures as a useful red flag.

At the same time, insisting that all companies should be obliged to disclose in considerable detail what they are doing with regard to ESG is a step too far (there are, as it happens, some fairly undemanding requirements already in place). But it is hard to read the discussions surrounding this issue without thinking that this is the direction in which the latest crop of regulators would like to go:

The Hill:

The Securities and Exchange Commission (SEC) announced Thursday it will form a task force to weed out misconduct involving environment, social and governance (ESG) regulations and investment products.

The SEC’s new Climate and ESG Task Force — part of the agency’s enforcement division — will focus on making sure publicly traded companies, investment advisers and funds comply with ESG-related disclosure rules.

“Climate risks and sustainability are critical issues for the investing public and our capital markets,” said acting Chairwoman Allison Herren Lee, a Democratic commissioner appointed by President Biden to temporarily lead the agency until his nominee for chairman, Gary Gensler, is confirmed.

The ESG task force is the SEC’s latest step toward ramping up its enforcement of climate-related rules and oversight of the investment industry’s response to several rising trends.

Investment funds and products focused on companies with strong ESG track records have proliferated as a growing number of investors prioritize their portfolio’s impact on climate change, racial equity and other prominent issues.

Democratic lawmakers, environmentalists and advocates for tougher financial rules have also called on the SEC to boost scrutiny of climate disclosure compliance after years of neglect under chairmen from both parties.

“Proactively addressing emerging disclosure gaps that threaten investors and the market has always been core to the SEC’s mission,” said acting Deputy Director of Enforcement Kelly L. Gibson, the task force’s leader.

“This task force brings together a broad array of experience and expertise, which will allow us to better police the market, pursue misconduct, and protect investors,” Gibson added.

The SEC also hired last month Satyam Khanna, a former commission and Treasury Department staffer, as the agency’s first senior policy adviser for climate and ESG . . .

To the extent that they apply to all companies, the underlying aim will be to use disclosure not for the purposes of investor protection, but, one way or another, to ensure that every public company is browbeaten into ideological conformity.

Beyond that, it is easy to see that mandated disclosure of what companies are doing might well become, in time, the basis for setting standards for what they should be doing. And the more that the ability to impose that requirement is within the power of regulators alone (as opposed to having to involve legislators), the greater the likelihood that this will take place.

All in all, this does not look like good news for those shareholders who prefer to focus on profitability, return on capital and other such ancient metrics.

And it won’t be too great for the economy either.

The Capital Record
We recently launched a new series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which will appear 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 seventh episode, Art Laffer joined David to discuss 50 years in the evolution of economic thought.

And the Capital Matters week that was . . .
Returning to the topic of regulation, we began the week with the Manhattan Institute’s Randall Lutter querying a rule introduced in the waning days of the Trump administration:

In the final weeks of Trump’s presidency, his administration issued several “midnight regulations,” including a new rule from the Environmental Protection Agency (EPA) tightening the clearance levels for the amount of lead allowed to remain in dust on floors and windowsills in buildings after certain lead-based paint activities. While it seems reasonable, the new rule imposes costs on owners of older residential properties beyond what is necessary to meet the EPA’s dust-lead hazard standard, adding to pressures to replace older low-cost housing. It should be reconsidered . . .

Senator Joni Ernst and Tom Schatz warned about the return of earmarks:

Congress isn’t even waiting to lift the decade-long moratorium on earmarking before starting to pig out.

Look no further than the $1.9 trillion bill being touted by Democrats as the latest response to the COVID pandemic — a proposal that’s being fast-tracked through both chambers. Tucked within its nearly 600 pages are a number of pet projects — also known as “earmarks” — that have absolutely nothing to do with COVID. Take, for example, the $1.5 million set aside for a bridge connecting New York and Canada. Elsewhere you will find a cleverly worded provision that earmarks $140 million for a subway from San Francisco to Silicon Valley. These projects will benefit the Democratic leaders of the Senate and House.

This is precisely how earmarking works. Secret spending is dropped into a “must-pass” bill at the behest of powerful politicians and is typically totally unrelated to the merits of the project or the purpose of the legislation.

House Appropriations Committee chair Rosa DeLauro (D., Conn.) and Senate Appropriations Committee chairman Patrick Leahy (D., Vt.) claim that earmarks will be restored with more transparency and limitations on where the money can be directed. But putting lipstick on earmarks does not prevent them from being good old-fashioned pork-barrel spending and the most corrupt, costly, and inequitable practice in the history of Congress . . .

The Manhattan Institute’s Brian Riedl agreed, sending out a “Dear Congress” letter to warn what it could mean:

Congress banned earmarks in 2011. Yet a decade later, many inexplicably want to resuscitate pork. Colleagues claim that this time you can control it. You can limit the number of the earmarks, be more transparent, and even forbid for-profit businesses. We’ve seen these promises before. They won’t last.

Yes, I get it: You know your district’s needs better than some distant bureaucrat. But since most lawmakers have not served under open earmarks, let’s examine how they will dominate your job . . .

Benjamin Zycher was not enthused by Minnesota’s plans to encourage the take-up of electric vehicles:

Electric vehicles are all the rage, in particular among public officials who do not have to face voters. Not so much among consumers, who know their individual needs and strive to make purchase decisions that satisfy them. These realities explain why the proponents of policies forcing ever more EVs upon the market prefer to implement such requirements in ways insulated from democratic accountability.

That is an accurate summary of the current political campaign in Minnesota to expand by regulatory fiat the market for EVs, by requiring that auto dealers in the state sell a certain number of them or face a penalty, moving the state toward California’s “zero emissions” automotive standard. The proposed mandate would engender massive dislocation and increased costs in the state’s transportation and agricultural sectors, adverse effects that would be borne by virtually every resident in the state. It would also create a series of large and adverse environmental impacts that the proponents of this change prefer not to discuss. Finally, it is easy to suspect that one key objective behind the mandate is to force a shift of population and economic activity away from rural, exurban, and suburban regions in the state toward urban areas, thus creating a massive transfer of wealth from residents, business owners, and workers in the former regions toward those in the latter.

The usual climate “crisis” justification for the EV mandate does not withstand scrutiny . . .

There’s a surprise!

Meanwhile, out of sheer mean-spiritedness, I note this from Seeking Alpha:

Most electric vehicle stocks have slowed dramatically following Nikola’s bust and TSLA’s ascendence to the S&P 500. While I believe that electric vehicles will become increasingly popular, EV equities seem to be universally overvalued – making them potentially deadly investments today.

Meanwhile, red-eyed from exhaustion yet grimly determined, Isaac Schorr finds the worst thing in Biden’s $1.9 trillion “rescue” package, no mean task:

If you were to design a legislative provision outrageous enough to inspire another Tea Party-style political uprising, you would be hard-pressed to do better than section 5111 of the American Rescue Plan Act of 2021.

President Biden’s $1.9 trillion coronavirus relief clunker is full of items with perverse incentives (long-term unemployment top-offs and blue-state pension-fund bailouts) and others that are just obviously injurious (a federal minimum-wage hike which the Congressional Budget Office says would cost 1.4 million jobs). But nothing quite compares to its “Emergency Federal Employee Leave Fund” for the righteous indignation it should arouse in most Americans.

The provision sets aside money for a leave program that would allow any federal worker not working for the military to take up to 15 weeks of paid leave and collect up to $21,000 ($1,400 a week) between whenever the bill is passed and September 30, 2021, if the pandemic has had certain deleterious effects on their lives. Some are not entirely unreasonable. For example, you can access the leave fund while you are bedridden with the disease itself, or if you are caring for a family member who is. Others are worthy of a squint and head shake — employees could conceivably take the day to get vaccinated while pulling in a cool $35 an hour. And then there’s the pièce de résistance of these goodies; it also applies to any federal worker who:

“. . . is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, if the school of such son or daughter requires or makes optional a virtual learning instruction model or requires or makes optional a hybrid of in-person and virtual learning instruction models, or the child care provider of such son or daughter is unavailable, due to COVID–19 precautions.” . . .

The government looks after its own.

Speaking of child care, Brad Polumbo highlighted an overlooked consequence of a $15 minimum wage:

Finding affordable child care is already a struggle for millions of Americans: It’s a consistent problem that sucks up huge chunks of limited household budgets and sometimes limits the ability of parents to work. According to Child Care Aware of America, child care costs an average of $9,100 to $9,600 per year nationwide, albeit with significant variations across different states and ages.

Many families spend from 10 to 30 percent of their income on childcare alone.

Child care is already difficult to afford, but would become much more so if the “Fight for $15” were successful, according to the Heritage Foundation’s Rachel Grezler. In a new study, Grezler concludes that because child care is a labor-intensive industry in which the hourly median wage is only $11.65, a $15 federal minimum wage will impose a massive increase in labor costs on child-care providers. The nature of this business means that employers are unable to do much about the size of their workforce in response to increased labor costs. Instead, providers will respond with massive price hikes.

“Childcare costs would increase by an average of 21 percent — an extra $3,728 per year for two children — and up to 43 percent, or more than $6,000, in some states,” Grezler reports. “The impacts would be greatest in lower-cost areas; in Louisiana, Oklahoma, and Mississippi, costs would surge between 37 percent and 43 percent.”

In all, ten states would see at least a 30 percent increase in child-care costs . . .

George Leef warned about the likelihood of inflation:

“Progressives” maintain that the federal government can spend without limit and not affect the value of the dollar. They have a bunch of lapdog economists who take a “Don’t worry, be happy” approach to the vast expansion of federal spending and debt.

A dissenter is Alex J. Pollock. In this Law & Liberty essay, he argues that there is much more than “a chance” of rising inflation. I particularly enjoyed his swipe at Modern Monetary Theory, which he calls “Modern” Monetary Theory, since governments have been creating money to cover their profligate expenditures for a long, long time.

His essay is loaded with history and common sense . . .

Ramesh Ponnuru was somewhat more reassuring:

The market expectation of inflation over the next five years remains well below the Fed’s target. (Remember, CPI inflation usually runs higher than PCE inflation.) The trend also looks different. Expected inflation, adjusting for liquidity, was 1.83 percent at the end of 2019. It plunged during the pandemic — all versions of the data show that — but it has not fully recovered. (David Beckworth and I wrote as much in the New York Times recently.)

If we believe a) that market expectations of future inflation are more likely to be correct than the theories of any group of commentators, even highly informed ones, and b) that this method of adjustment to yield differentials gives us as good an estimate of market expectations as we have, then it follows that we don’t have any more reason for anxiety about high inflation than we had at the end of 2019 — when there was a lot less of it. And even if we doubt both of those premises, the yield differential, with no adjustment for liquidity, doesn’t give us a positive reason for that anxiety. The concern that high inflation is on the way is based, at least in part, on a statistical mistake.

Robert VerBruggen raised three “practical questions” concerning Elizabeth Warren’s proposed wealth tax.

Here’s one of them:

How much money the tax would raise. Saez and Zucman put the number at about $3 trillion over ten years, rising to $4 trillion if the 6 percent tax goes into effect. Those numbers are in the ballpark of a single year’s total federal tax collections — so it’s a nontrivial boost to revenue.

Of course, if Saez and Zucman are wrong about the amount of evasion and avoidance, especially after Congress has had its way with the policy, they’ll be wrong about this as well. Other revenues will also decline if the tax reduces economic growth, as some analysts predict.

There’s also the issue of what the tax would do to wealth over the long term. A 2 to 3 percent tax probably wouldn’t stop rich people’s wealth from growing — even relatively safe investments can earn that much — but 6 percent is pushing it. Saez and Zucman themselves write that the wealth of the folks on the Forbes 400 is growing at about 7 percent annually after inflation. If we pass a high enough wealth tax and use it to fund social programs, we could end up reducing wealth over time and needing to find other funding for the programs.

But Robert doesn’t overlook the philosophical objections either.

Conservatives tend to recoil at this kind of thing for a number of reasons. For one, the federal government already taxes people’s money as it comes in, through taxes on income, capital gains, inherited estates, etc. A wealth tax hits people merely for keeping their money after it’s already been taxed, which just seems wrong.

Indeed it does.

I wrote a piece designed to show just how far “socially responsible” investors are prepared to go in their efforts to control behavior:

A genuinely “responsible” investment system is one that maximizes (on a risk-adjusted basis) the economic return to those who have entrusted their savings to it, or who are relying on it to provide for their retirement. Whether that return is generated by short-term trading or investing for the long term ought to be irrelevant. What is more, it should not be up to money managers (other than of funds specifically and freely chosen by their clients for this purpose) to spend other people’s money on whatever someone (who?) has concluded is in the “long-term interests” of society and the environment. In a properly functioning democracy, there are other avenues for that, not that this seems to bother Tesco’s activist shareholders, who have (the Financial Times relates):

“introduced a vote at Tesco’s annual meeting calling on the company, which controls about 27 per cent of the UK grocery market, to disclose what percentage of its food and non-alcoholic drink sales by volume are made up of healthier products, as defined by the UK Department of Health. . ..

The shareholders, who oversee £140bn in assets, along with 101 retail shareholders, called on Tesco to develop a strategy to significantly increase healthy food sales by 2030 and publish an annual review of progress from 2022 onwards.

They added that consumer trends to buy healthier products and government efforts to combat obesity could pose a financial risk to Tesco if it does not take action.

Stephen Power from Jesuits in Britain said a “handful of companies are continuing to fuel a deadly obesity crisis.””

You must have expected that the word “crisis” would make an appearance in a report such as this.

H. L. Mencken:

“The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.’”

If the claim of crisis should come as no surprise, the unconcealed contempt for the capability of adults to decide things for themselves is startling. To assert that their buying choices and even, I assume, how much food they choose to heap onto their plates, are driven by the machinations of a “handful of companies” is remarkably insulting . . .

Beth Akers argued that that there is already an alternative to massive student-loan cancellation:

The notion of student-loan cancellations has been capturing the attention of politicians and those in the realm of higher-education policy for well over a year now. Despite the popularity of this hugely regressive idea, it’s a terrible one. Thankfully, there’s a better, more moderate way to address federal student debt. And it’s hiding in plain sight.

Income-driven repayment (IDR), an existing set of programs that function somewhat poorly, can be improved to ensure that not a single borrower will ever have to make an unaffordable payment on federal student loans. Under IDR, monthly payments are tied to a borrower’s income and unaffordable balances are ultimately forgiven. IDR accomplishes this in a way that minimizes moral hazard and delivers benefits in a true progressive manner — with more benefits going to people who invested in a college degree, and took on debt to do so, but didn’t see the return they were promised in the form of a high-paying job. IDR also makes college more accessible to children in low-income families, in effect enabling higher education to function as a mechanism for social mobility . . .

David Harsanyi found something rotten in Alexandria Ocasio-Cortez’s “Danish” arguments for a higher minimum wage:

Then there is the matter of what exactly $45,000 — the salary an employee making $22 an hour on a full-time basis would earn — means in each country. Denmark can afford its system because high taxes are paid by all its citizens, not just the wealthy. Not only do Danish fast-food employees making $45,000 hand over around half their earnings to the government, they pay a 25 percent value-added tax on most purchases, as well as a number of other levies. In return, Danes are afforded all kinds of government-provided services. Presumably, Ocasio-Cortez approves of this arrangement. Either way, Americans whose eyes light up at the prospect of making $22 per hour should know that nearly $11 of that goes straight to the state.

Further, how much does a hamburger cost in Denmark? Spoiler: considerably more. If the federal government forced fast-food chains to start paying employees $22 per hour, and giving them six weeks paid vacation, and health care, and all the other goodies that progressive want to compel companies to offer, American consumers should be prepared to pay more for food or to be served by robots . . .

Douglas Carr looked at our current, um, generously valued stock market, and came to this conclusion:

The Fed’s December plan was to hold rates at rock bottom levels until unemployment is minimized and inflation surpasses 2 percent, which they expected to take 3 years. Should housing prices continue to appreciate at recent rates, three more years of maximum stimulus would put them well into the GFC danger zone.

The pandemic recovery is moving faster than the Fed and many other forecasters expected. In March 2020, the Fed forecast a 6.5 percent decline for the year. Forecasters surveyed in May by the Philadelphia Fed expected a 5.6 percent decline. 2020’s downturn was 3.5 percent, and these same forecasters expect growth over 4 percent for 2021, so overall recovery is in sight.

The financial markets are already beginning to bring forward their expectations of when the Fed will begin raising rates (about two years), and it would not surprise if this start anticipating an even closer date in due course. . More years of maximum stimulus would further inflate the stock market bubble and possibly create an even more lethal housing bubble as well.

The Fed has been determined to see unemployment all the way down before any tightening, a worthy goal, but even a mild downturn in the wake of a bursting the stock market bubble would have grave consequences following so closely after the pandemic. Creation of another housing bubble would be catastrophic.

Depressed business and labor sectors may not fully recover this year, but all the monetary stimulus in the world won’t convert airplanes, bars, and restaurants into homes, nor flight crew and serving staff into home builders, nor into other booming sectors. When the pandemic permits, cash savings are extremely high, and there is plenty of pent-up demand for these people and their services.

Single-minded focus on just one goal ignores monetary policy’s significant time lags and complex effects throughout an economy. Now is the time for the Fed to plan to stabilize policy and the markets, and this must be carefully communicated and executed to minimize volatility such as 2013’s “taper tantrum.”

While inflation may pop up in the short-term as recovery continues, long-term inflation has been in forty-year decline, so it is unlikely to pose a major problem. The biggest economic risk is financial instability, and, despite its great initial work stanching the pandemic panic, right now the biggest financial instability risk is . . . the Fed.

Jim Geraghty wrote about (American) corporate hypocrisy when it comes to China:

A friend and longtime reader writes in, responding to yesterday’s Morning Jolt about how corporate America is likely to avert its eyes from a Chinese court ruling that homosexuality is a mental disorder, and asks, “What should people do when such profound hypocrisy is evident? Do we just hunker down and hope for the best?”

This is where I could tell you to boycott companies that do business with China . . . which would be a lot. But the debate of “how should the U.S. respond to China?” is not ending anytime soon, and this kind of ludicrous hypocrisy strengthens the argument of those of us who want America’s current approach to change, and an outcome somewhere well short of a shooting war but for the U.S. to be clear-eyed, brutally honest, and unflinching in standing up for its values while dealing with the most powerful authoritarian regime on the planet.

First, it helps us push back against the notion that leaders of American or multinational corporations have some sort of unique moral authority about social policies or have earned our deference to their perspectives on political issues. For a long while, well-known corporate executives have been describing themselves as “global change agents” and all kinds of other feel-good titles that make it sound like they’re primarily interested in building a better world, and that their company’s massive sales and profits just happen to be an inadvertent side effect of that.

That’s mostly nonsense. Starbucks is here to sell coffee. Nike is here to sell sneakers and apparel. Disney is here to monetize your kid’s childhood. The fact that these companies roar when discussing U.S. policies but lose their voices over any of China’s actions — even genocide, never mind legally comparing homosexuality to mental illness — demonstrates that these companies are willing to “stand up for their values” on gay rights, human rights, and police brutality, right up until the moment it gets expensive. Heads of companies are not in their positions because they have a demonstrated record of wisdom and balancing moral needs and foreign policy realities; they’re in the executive suite because they’re good at helping their companies make money. Tim Cook is not the Dalai Lama, Mike Bloomberg is not the pope, and Robert Iger is not a diplomat, no matter what he thinks. These business executives haven’t earned any deference when it comes to their assessment of China . . .

Adam Schuster of the Illinois Policy Institute, had some less than flattering things to say about Governor Pritzker’s plans for his state’s budget:

Much of the focus on the government’s response to the COVID-19 pandemic has been centered on policy-makers inside the Beltway. Illinois governor J.B. Pritzker recently attempted to change that. Speaking in his State of the State budget address, Pritzker spun a yarn about Illinois’ national leadership throughout the pandemic and cast himself as the hero in a budget story about balance and sacrifice.

It has a nice plot, but reality tells a different story. Indeed, the governor’s third annual budget proposal protects his political allies at the expense of taxpayers and people who depend on vital government services, all to close a self-inflicted deficit of $5.5 billion.

Pritzker’s budget includes nine tax hikes worth nearly $1 billion, most of which target businesses still trying to survive after a year’s worth of shutdowns and uncertainty during the global crisis. The governor’s administration is branding these tax increases as “closing corporate tax loopholes,” but none of the credits or exemptions that the budget proposes to reduce or eliminate can be fairly or accurately characterized as “loopholes” at all. Some are hardly even about corporations . . .

Steve Hanke urged policy-makers not to be tempted to push the dollar down:

President Biden should ignore pleas to tank the dollar in the interest of closing the U.S. trade and current-account deficits. The U.S. current-account deficit is solely a function of the savings deficiency in the U.S., in which the government’s fiscal deficit is the proverbial elephant in the room. And how is the current-account deficit financed?

Well, it turns out that foreigners who generate savings surpluses and current-account surpluses finance U.S. deficits. It is clear, therefore, that current-account balances represent nothing more than a measure of the international trade in savings.

What’s more, the Biden administration’s fiscal policies, which promise massive fiscal deficits as far as the eye can see, will result in huge trade and current-account deficits as far as the eye can see. The U.S. current-account deficit will therefore not only continue to be made in the good old U.S.A., but it will be greatly enlarged by the Biden administration.

The good news, however, is that the U.S. has been able to finance its deficits with relative ease. Indeed, foreigners are more than willing to park their savings in dollar-denominated assets. This is a tribute to the dollar’s role as the world’s reserve currency, America’s creditworthiness, and the effectiveness of U.S. corporate governance.

The level of intellectual confusion that surrounds the strange world of international-trade policy is stunning. We have irrefutable arguments and evidence to explain why a country’s external balance is determined domestically, not by foreigners or the value of the dollar relative to its currency. In spite of the facts, many still believe that the strength of the U.S. dollar explains America’s external deficit. As a result, and as the history of trade policy shows, it’s difficult to change false beliefs with facts . . .

Finally, we produced the Capital Note, our “daily” (well, Tuesday–Friday, anyway). Topics covered included: the SPAC craze continues, an ill-fated Softbank investment, the Carlos Ghosn plot thickens, a closer look at the nuances of blank-check companies, Warren’s wealth tax, SPAC glamor, Puff Bar’s defiance, Subway’s sandwich deal, autocatalytic inflation, the reflation, mortgage rates rise, Deliveroo’s IPO, a look at equity duration during a pandemic, inflation fears, the economics of space, another Argentinian default (maybe), Tesla’s nickel scoop, and rich witches, dragon witches, treasure hunters, and the rise of capitalism.





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