Streetwise Professor

August 29, 2022

New European Energy Policy Follies: The Inevitable Consequence of Past European Policy Follies

European power prices are going hyperbolic, with day ahead prices in swathes of the continent varying between €660 and €750/MWh.

For those who want to play at home–spot the congestion!

Even more remarkably, Cal 2023 power prices are around €1000/MWh in German and France:

That’s for baseload, folks. 24/7/365. Peak Cal 2023 French power is currently at €1425. Ooh la la!

This has of course set of a flurry of policy proposals.

None of these proposals will mitigate the fundamental problem–energy supply is extremely scarce. Most of these proposals will actually exacerbate the underlying scarcity.

Instead, these proposals are all about how to distribute the cost of scarcity. They are fundamentally redistributive in nature.

The proposals include price controls (natch), windfall profits taxes, and nationalization.

Price controls always exacerbate the scarcity and create actual shortages by encouraging consumption and discouraging production. They will necessitate rationing schemes. In electricity, rationing often involves brownouts and blackouts. Planned blackouts, such as no power availability at all for some hours of the day.

WIndfall profits taxes attempt to capture the surplus of inframarginal (i.e., low cost) suppliers, and redistribute that surplus (somehow) to consumers. Redistributing through subsidized prices exacerbates scarcity because it increases demand.

Windfall profits taxes may otherwise have few distorting effects in the short run, given that supply from the inframarginal firms is likely to be highly inelastic (they basically operate at capacity). (Ironically, the scheme to hit Russia by capping the prices it receives on oil is predicated on a belief that supply is highly inelastic.). However, windfall profits taxes have very deleterious long run incentives. They deprive those who invest in production capacity of the value of those investments precisely when they are greatest (which really distorts investment incentives). Even the risk that windfall taxes will be imposed in the future depresses investment today. Meaning that although such taxes may not do too much damage in the present, they increase the likelihood of future scarcity.

The reach of windfall profits taxes is also limited. Many of the rents resulting from the current world energy situation accrue to input suppliers (e.g., owners of LNG liquefaction capacity, coal miners that export to Europe) who are beyond the reach of grasping European hands via windfall profits taxes. (And are the Norwegians going to transfer wealth to Europe by imposing windfall taxes on their gas production and writing a check to Brussels? As if: the Norwegians are already talking about limiting energy exports to Europe.)

Nationalization can be a crude form of windfall profits tax: nationalizing low cost producers basically seizes their surplus. Nationalization can also be a form of subsidization: seize unprofitable firms, or firms that can only survive by charging very high prices, and sell the output below cost. Losses from below cost sales are socialized via taxpayer support of loss-making nationalized enterprises (which creates deadweight costs through taxation present and future).

Nationalization of course generates future operational and investment inefficiencies due to low power incentives, corruption, etc. Moreover, to the extent that nationalized entities subsidize prices, they will encourage overconsumption, and thereby create true shortages and necessitate rationing.

All of these policies aim to mitigate the pain that power consumers incur by shifting the costs to others–and in the forms of subsidies funded by general taxation, the overlap between those who receive the subsidies and those who pay them is pretty large. But even this transforms a very visible cost into a much less visible one, and thus has its own political benefit.

The Germans–at least the Green Party ministers in the government–are advocating a fundamental change in the market mechanism, specifically, eliminating marginal cost pricing:

“The fact that the highest price is always setting the prices for all other energy forms could be changed,” Economy Minister Robert Habeck, who is also the vice chancellor in the ruling coalition in Berlin, said in an interview with Bloomberg.

“We are working hard to find a new market model,” he said, adding that the government must be mindful not to intervene too much. “We need functioning markets and, at the same time, we need to set the right rules so that positions in the market are not abused.”

Marginal cost pricing is a fundamental economic tenet: price equal to marginal cost gives the right incentives to produce and consume. Below marginal cost pricing (the cost of the most expensive resource sets the price) encourages overconsumption. Further, unless marginal units are compensated there will be underproduction. Both of these create inefficiencies, exacerbate scarcity, and can lead to actual shortages and the necessity of rationing.

On a whiteboard you could draw up a pricing mechanism that perfectly price discriminates by paying each resource its marginal cost. This effectively appropriates all of the producer surplus which can be redistributed to favored political constituencies. But this doesn’t cover fixed costs and a return on capital, which discourages future investment.

Further, classroom whiteboard exercises are usually impossible even to approximate in reality. Knowing what marginal cost is for each resource in a complicated system is a major problem, especially when you take transmission into consideration. The likely outcome would be some sort of kludge with roughly average cost pricing combined with some Rube Goldberg scheme to compensate producers. This whole system would involve massive redistribution and all of the politicking and corruption attendant to it.

The real problem the Europeans have is that they want to kill the market messenger. The market is signaling scarcity. The scarcity is real, and acute, but they no likey! And by the nature of energy production–capital intensive, with moderate to long lead times to enhance capacity–the scarcity will continue for some time, with little the Europeans can do about it.

In other words, they can’t fix their real problem (scarcity), which is the harvest of their previous policy follies. So they are left to find redistributive schemes to allocate the costs in a politically satisfactory way. These redistributive schemes–price ceilings, windfall profits taxes, nationalization, fundamental restructuring of the market mechanism–all tend to exacerbate scarcity in both the short and longer runs.

The fact is, when you’re screwed, you’re screwed. And Europe is well and truly screwed. What is going on in policy circles in Europe right now is figuring out who is going to get screwed hardest, and who is going to get screwed not so much. And there will be substantial costs, both in the short but especially the longer term, as whatever Frankenstein “market” emerges from these frantic policy stopgaps will wreak havoc in the future, and will be very hard to put down.

August 21, 2022

No, Dugin Is Not Putin’s Brain: They Are Products of a Shared History

Filed under: History,Politics,Russia — cpirrong @ 12:40 pm

Yesterday Daria Dugin, the daughter of Russian philosopher and ideologist Alexander Dugin, was killed on a Moscow highway by the detonation of a car bomb. The bomb was apparently intended for her father, who decided at the last minute not to ride with her from an event.

The murder triggered an avalanche of ghoulish, creepy, and frankly disgusting celebration. The only regret that many expressed was that Dugin père was not vaporized. Better luck next time!

The commentary was littered with descriptions of Dugin including “Putin’s brain,” or “Putin’s Rasputin,” and “fascist.” The implication being that Dugin is and has long been Putin’s Svengali, and that Putin has been in Dugin’s thrall. Putin wouldn’t have considered seizing Crimea without Dugin’s suggesting it, dontcha know.

This is illogical, idiocy, and entirely at odds with actual historical facts.

In terms of logic, D saying X and P doing X does not imply that D’s words caused P’s actions.

More generally, to the extent that there are parallels between Dugin’s writings and public statements and Putin’s words and actions, this does not mean that Putin was an acolyte sitting at the master’s feet, an Alexander to Dugin’s Aristotle.

Instead, there is a common root. Dugin’s emphasis on Russian exceptionalism–especially Russians’ supposedly transcendental spiritual mission in existential opposition to a degraded materialist West–and Putin’s expression of similar ideas draws from a very common theme in Russian thought. Think Dostoevsky, for example, or Solzhenitsyn, or the veneration of the supposed “Russian soul.” The examples could be multiplied.

Putin has long sought ideological and philosophical justifications for his politics. Once upon a time–in the mid-2000s, basically–Dugin was the flavor of the month. He was just a fashion that Putin donned for a bit, before moving on. Dugin didn’t shape Putin’s thinking. Instead, Dugin’s thinking was useful to Putin at one time. But the dynamic of Putin’s actions and the logic underlying them are largely independent of Dugin’s writing, and to the extent that they are correlated, it is because they draw inspiration from a common historical source, or from geopolitical forces that Dugin wrote about but did not create. If anything, Putin used Dugin for a while, but Dugin has never used Putin.

Much of Dugin’s writing is rooted in the geopolitical, geographical theories of Mackinder, combined with a distinctly Russian, anti-Western, anti-Enlightenment civilizational perspective. One can explain a lot of what Putin has done, and does, as an expression of the geopolitical and civilizational forces that Dugin wrote about, that doesn’t mean that Putin wouldn’t have done the same thing if Dugin had never existed. In fact, it means the opposite.

In other words, both Dugin’s words and Putin’s actions are the products of common forces and a common history, not the creators thereof.

As for fascism, yes there are points of contact, regarding culture, idealism v. materialism, Romanticism, etc., but the very Russianness of Dugin’s thought makes comparisons to Mussolini let alone Hitler superficial at best, and highly misleading at worst. The historical palette of most American and European commentators is highly limited.

I think of Dugin as the Russian avatar of Huntington’s Clash of Civilizations–and Dugin would probably consider that flattering. The hatred directed at him, and his returning that with interest, reflects that clash.

In other words, like most intellectuals, Dugin isn’t all that important except as an expression and illustration of what produced him. If he had chosen to ride with his daughter yesterday, the future would not have differed a whit, just as he reflected but did not create the past.

If he doesn’t matter, why was he targeted? Well, I am arguing that he shouldn’t matter. That’s different from saying that some people think that he does. The ghoulish gloating and “Putin’s brain” idiocy demonstrates that many do.

Some have weirdly suggested that Putin wants him gone. Er, why? And Putin has found that he can silence opponents by jailing them or tormenting them with judicial processes. No need to create a martyr.

The most likely culprits are Ukrainian. Not necessarily (or even likely) the government. More likely Azov types.

Killing Dugin would perhaps be emotionally satisfying to Ukrainian nationalists, but it would not advance Ukrainian interests in the slightest. Indeed, it would quite likely have the opposite effect, because it would only make the conflict even more existential from the Russian perspective.

August 19, 2022

Putin’s Army Taking It In the Rear

Filed under: Military,Russia — cpirrong @ 5:50 pm

If you would have asked me in February, or even early-March, whose rear areas would be more vulnerable, Ukraine’s or Russia’s, I would have said Ukraine’s without a doubt. Russian airpower would be able to roam at will over the length and breadth of Ukraine, attacking its headquarters, supply areas, and lines of communication. It would also be able to obtain targeting information for its standoff weapons to attack such military resources.

Wrong! Russia’s air campaign has been the dampest of squibs. It’s pathetic, actually. And its standoff weapons (cruise missiles, Iskanders, etc.) have mainly hit civilian areas–apartment buildings, shopping centers, and the like.

In contrast, in recent weeks and days Ukraine has hit numerous Russian rear area targets by a variety of means.

The arrival of HIMARs has allowed the Ukrainians to take out numerous headquarters, including army-level headquarters. (Though to be fair, Russian armies are really just big divisions or at most a corps, compared to WWII antecedents.) HIMARs have also wreaked havoc on Russian ammunition depots vital to their artillery-centric tactics–which is precisely why their assaults in Donbas have ground to a shuddering halt. HIMARs have also inflicted substantial damage on bridges essential to the Russians for supporting their units on the north/west bank of the Dnipro around Kherson.

But the Ukrainians have also mounted several attacks in Russia proper, through means not fully known. In particular, military targets in Belograd oblast have been hit: these include an oil refinery and yet more ammunition dumps.

Some of these attacks appear to have been carried out by helicopters and rockets. But others are more likely the result of sabotage. And recent explosions in Crimea are almost certainly the result of sabotage operations. The most notable occurred at an airbase at Saki which per satellite photographic evidence destroyed nine or ten front line Russian aircraft. But in the last few days there have been explosions at ammunition dumps in Crimea and even in Sevastopol.

One thing I did get kind of right was predicting that the Russians would be vulnerable to partisan and guerrilla activity in their rear areas. But I was only kinda right because I envisioned this would occur after they had rolled across most or all of Ukraine. The fact that even what should be secure Russian and largely Russified areas are at risk is pretty staggering.

At the tactical level, this means that the Russians will have to divert already scarce manpower from the front to secure their rear, thereby reducing their offensive capacity. Guerrilla/commando/partisan warfare is an economy of force tactic, and it will almost certainly perform that function here.

At the strategic level, the impact will be largely psychological. And I don’t say that to diminish its importance. War is often won by breaking an enemy’s morale and psychologically unbalancing him into making mistakes.

The strikes on Crimea are especially salient in this regard given the psychological value of that region to Putin, and to Russians generally. Putin’s bloodless conquest of Crimea is his crowning achievement, and his prowess is severely tarnished if he can’t even defend it from saboteurs and “terrorists” (something else Putin has claimed to vanquish).

Given the neuralgia Putin has about Crimea, it is not beyond the realm of possibility that these attacks, and continued attacks there, will unbalance him sufficiently to induce him to do something rash–and stupid.

The military damage inflicted by some of the Crimea attacks appears to be small (Saki being an exception). But frequently small events can have outsized consequences if they strike at the leadership’s pride.

Consider the 1942 Doolittle Raid, which had virtually no direct military consequences. But striking the Japanese homeland and at least theoretically threatening the life of the Emperor so shocked and humiliated the military and naval leadership who had promised that such a thing was impossible that they launched the Midway operation (because they viewed Midway as the keyhole through which the Americans had gained access to Japanese airspace). The catastrophic failure of that operation was the beginning of the end for Japan.

Partisan/guerrilla/commando operations in Russian rear areas, and especially in Crimea, are deeply humiliating to Putin and the Russian high command. If they continue, and especially if they escalate, honor (one of the main motivators of war, according to Thucidides) will compel Putin to exact revenge. Given that he has proven incapable of doing so against Ukraine conventionally, the forms that revenge could take are sobering.

August 14, 2022

Thank You Kamala!

Filed under: Economics,Politics — cpirrong @ 6:50 pm

Kamala Harris is an idiot. This statement needs no elucidation. It verges on self-evident truth.

The most recent illustration:

Note Kamala’s characteristic redundancy and circularity.

But I have to extend my deepest thanks to Kamala. Before reading that, I didn’t know that my failed NBA dreams were the result of hidden structures of oppression. For if we all have the same capacity, I have the same capacity as, say, Michael Jordan. Meaning that systemic oppression has to be–has to be!–the only reason I am not the GOAT.

My only question no is: whom do I sue?

Sarcasm aside, I am genuinely grateful to Kamala because she said the quiet part out loud, and revealed the premise underlying the entire equity agenda. Namely, that “everyone has the same capacity.”

This is a self-evident untruth. Thus, the equity agenda is built on a lie, and all its assertions and conclusions are therefore false. Kamala has generously put the laser designator on the target that we need to destroy in order to eliminate this pernicious doctrine.

Most philosophies and social theories are built on beliefs about human nature. Arguments over Locke and Hobbes, for example, depend crucially on their contrasting assumptions about human nature. You may disagree with the human nature foundations of this philosophy or theory or that, but usually there is at least a kernel of truth and insight in those that have achieved wide acceptance and which have endured.

But that’s not the case with equity, as revealed by Kamala Harris. It is built on an obviously false model of humanity.

Most clever leftists who advocate the equity agenda obfuscate and obscure the underlying assumption. Kamala is a leftist, but a dim one, so she let the cat out of the bag. And for that we can all extend our hearty thanks.

August 11, 2022

“Inflation Reduction Act”? More Like The Resource Curse on Meth Act.

Filed under: China,Climate Change,Commodities,Economics,Politics — cpirrong @ 11:35 am

The “Inflation Reduction Act” became Joe Biden’s climate and health care bill.

The narrative pivots are truly amazing to watch.

The deeper you dig into the details, the worse it looks. The supersizing of the IRS is one example. And if you believe that the massive expansion in “enforcement” (representing fully half of the $87 billion in increased expenditure) won’t be directed at schlubs like you, well, you’re a schlub and a sucker. The IRS, like federal law enforcement generally, goes after the easy targets. The people without the resources to defend themselves. And given the rampant politicization of all federal bureaucracies with any enforcement powers, if you are an easy and leveraged target. Get some money, damage the deplorables.

As to the climate aspect, it is a massive boondoggle of subsidies of inefficient technologies. We are constantly told (just read Bloomberg, if you can stomach it) that renewables are becoming so so so efficient. OK. Then why do they need massive subsidies to displace putatively inefficient fossil fuels?

And is there any evidence that our Solons have contemplated the systemic impacts of their intervention? In particular, how encouraging electrification generally, and the supply of electricity with renewables, will affect the reliability and indeed the stability of the grid? Of energy supply generally?

Or as another example, have they thought a nanosecond about the environmental and geopolitical consequences of this intervention into the extremely complex energy supply system? I’ve gone on at length before about the environmentally destructive effects of allegedly “green” policies. In a nutshell: mining ain’t green.

I’ve also discussed the geopolitical aspects, specifically the inevitable conflict over mineral resources vital for batteries and electrification generally. This conflict will be with China in particular, and will occur primarily in Africa and South America.

When I originally raised this issue, I received a lot of pushback. Whatever. Just watch. The Scramble for Africa Part Deux is already underway (with Russia as well as China contending with the US).

This benign summary of US policy towards Sub-Saharan Africa conceals more than it reveals. It acknowledges that Africa has 30 percent of the “critical minerals that power our modern world.” It says “[t]he United States will assist African countries to more transparently [sic] leverage their natural resources, including energy resources and critical minerals, for sustainable development while helping to strengthen supply chains that are diverse, open, and predictable.”

Just how is that supposed to work, exactly, in competition with the Chinese (and Russians) who are all about “assisting” rather non-transparently (through bribery and force) African nations exploit their natural resources in ways that are anything but “sustainable,” “diverse,” or “open”? (They are altogether predictable though.)

The logic is inexorable. Western nations hell-bent on the “energy transition” will increase dramatically the demand for resources in poorly governed or ungoverned regions of the world. Given that property rights in these regions are weak (and often non-existent) the competition will not be mediated through markets, but through force and fraud.

Meaning that the unintended–but inevitable–consequence of the compelled transformation of energy supply will be conflict in wretchedly poor areas that will make 19th century British and French struggles in Africa look like child’s play.

Put differently, virtue signaling policies in the West will create massive rents in countries with weak institutions that are especially prone to the most vicious forms of rent seeking. That will work out swell!

Case in point: the looming battle in the Lithium Triangle:

Similar setbacks are occurring around the so-called Lithium Triangle, which overlaps parts of Chile, Bolivia and Argentina. Production has suffered at the hands of leftist governments angling for greater control over the mineral and a bigger share of profits, as well as from environmental concerns and greater activism by local Andean communities who fear being left out while outsiders get rich.

And it’s not just lithium. It’s copper too. And rare earths, and nickel, and on and on.

In other words, we are about to witness the “resource curse” on meth. Massive rent seeking struggles in weak polities, all due to the whims of western elites in the thrall of a theory–and divorced from reality.

And for what? Even if the theory is correct, the impact of things like the “Inflation Reduction Act” on global climate will be virtually immeasurable, in the 100ths of a degree F at most, and perhaps in the 10000s of a degree.

In other words, the intended consequences of this act, and others like it, will be virtually nonexistent, while the unintended consequences will be dire. “Died of a theory” will be literally true–especially for those unfortunate enough to be living atop the resources the demand for which will be stimulated greatly by western elites mesmerized by that theory.

August 7, 2022

Reversal of Polarity: Not Protecting Rednecks From Hate, But Protecting Modern Day Reds From Competition

Filed under: Economics,Politics,Regulation — cpirrong @ 5:33 pm

Missed me on Twitter? Well, probably not, but if so, there’s an explanation. The thumbsuckers on Twitter locked me out for a week for this innocuous (IMO) tweet:

(NB: “Thumb” is a euphemism. Know what I mean? Nudge Nudge. Say no more.)

The beatdown notice came literally within seconds of posting, meaning that the tweet offended Twitter’s algorithms. Who knew they were so solicitous of rednecks’ feelings?

Lesson learned: next time I’ll say “peckerwoods” instead.

I guess Randy Newman must be banned for life, like James Lindsay (with trannies claiming credit for the censorship):

Twitter’s algo also apparently has some logical issues. The phrase “redneck racists” does not imply that all rednecks are racists. Just that there are racists who are rednecks. Does anyone deny this? Actually, does anyone at Twitter deny this? Indeed, I think it is more likely that the average pierced tattooed fascist at Twitter is highly likely to believe that all rednecks are racists. And they think all people like me are rednecks.

Or maybe Twitter is hypersensitive about accusations that leftists can be racists. They probably should be, because as my tweet suggests, leftist racism is pervasive and far more insidious than the traditional peckerwood variety. Insidious because of its fundamental dishonesty. Its condescension. Its manipulative use of blacks in particular to advance its anti-freedom, anti-American agenda. And the fact that leftists hold far more power in 21st century society than some Klansman wannabe.

Case in point: the leftist effort to rename monkeypox, because the name allegedly stigmatizes black people. Well, if your first association with the word “monkey” is black people, who is the racist, exactly?

Ironically, my time in the penalty box coincided with my reading of a Coase essay “The Market for Goods and the Market for Ideas,” and my watching of a documentary on Monty Python. They both demonstrate how much the left has changed from they heyday of American liberalism to today.

Back in the day, the liberals–the 1960s establishment left (not the New Left)–were the defenders of free speech, not its sworn enemies, as the left is today. The ACLU was all about free speech then: it is all about suppressing it now.

The Python documentary covered the controversy over The Life of Brian, which, among other things, resulted in its censorship in South Carolina at the behest of Strom Thurmond. The documentary showed earnest young liberals protesting the censorship, and defending free speech.

You know that their modern day successors hate free speech, and are the prime supporters of censorship on campus and throughout society generally.

The Coase essay is of particular interest, because he was trying to explain why the left of his day were anti-economic freedom (“market for goods”), but near absolutists on freedom of speech (“market for ideas”). His explanation was that liberals had a vested interest in freedom of speech since they were disproportionately represented in media and academia.

Well, they are even more dominant in the commanding heights of speech today than they were in 1974, when Coase wrote. (In the American Economic Review, I might add. The thought of anything similar appearing in the AER today would be ludicrous. In fact, the thought of anybody like Coase being a leading light in economics today is ludicrous).

So what explains the undeniable shift in attitude from pro-free speech to ardently anti-free speech in the space of 50 years, in the face of the strengthening of the force that Coase identified as the driver of pro-free speech attitudes?

Well, I hypothesize that it is exactly the overwhelming dominance that exists in traditional fora today, combined with the emergence of non-traditional outlets in the internet age. Although liberals held the upper hand in the 1960s, they did not have a monopoly over traditional media or academia then. The environment was more competitive, and liberals thought that they could prevail in that competition and feared they would be squelched to prevent them from prevailing. So they supported free speech because they thought that it worked to their competitive strength.

Now, however, they have a virtual monopoly over print media, television, and academia. They dominate social media, but they face more competition there. So their economic, social, and political interests have flipped: they benefit from suppressing competition, rather than encouraging it.

And as is the case with the regulation of the “market for goods,” vested interests in the “market for ideas” conspire with government in order to advance those interests. The unseemly–and almost certainly unconstitutional–collaboration between the United States government in particular and social media companies is not at all different from the collusion between industry and government to suppress entry and competition that is at the root of Stigler’s now 51 year old article on the economics of regulation.

In a nutshell, the Old Left was in favor of free speech because they believed it worked to their competitive advantage. The New Left hates free speech because they believe it works to their competitive detriment.

This reversal of polarity has nothing to do with principle. It is about power, pure and simple. The “principles” are purely instrumental, and intended to advance the political and social interests of a particular class. The censorship of some peripheral figure over a mild comment indicates how dominant that class is, and how sensitive it is to the maintenance of its dominance. Not a sparrow falls, as it were.

In other words, this isn’t about protecting rednecks from hateful comments: it’s about protecting the social dominance of today’s reds.

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