Streetwise Professor

July 30, 2023

A Coda On Benavides Justice

Filed under: Politics — cpirrong @ 4:31 pm

One of the crimes Hunter surely should be on the hook for is violation of the Foreign Agents Registration Act, or FARA.

Now, FARA is a classic example of a Benavides Hammer: it is employed selectively, only against regime enemies (e.g., Paul Manfort, Rudy Giuliani’s partners, associates of Michael Flynn, and now Biden accuser Gal Luft), but never against its friends. Hence, it is a law that should be eliminated. That said, its highly selective application illustrates perfectly the politicization of justice in the United States.

The Luft prosecution is particularly astounding given that (a) it occurred shortly after he leveled accusations against Biden père et fils, and (b) it involved work on behalf of a Chinese company–CEFC–from which Luft received chump change, and Hunter received millions. Indeed, it is the company that Hunter was shaking down when he claimed that his father was sitting at his side. Luft’s crime?: arranging for the placement of an op-ed.

So Luft violated FARA, but Hunter didn’t? Sure! Pull the other one! It plays Jingle Bells!

Of course, a FARA prosecution of Hunter would be particularly threatening to Joe, for it would open doors for questioning whom Hunter was “lobbying.” Can’t have that now, can we?

For My Friends–Everything. For My Enemies–The Law!

Filed under: Politics — cpirrong @ 2:03 pm

This maxim of Peruvian dictator Óscar R. Benavides is now, alas, a fitting description of justice, such as it is, in the United States in 2023. The evidence is everywhere.

It is no more evident than in the contrast between the DoJ’s kid glove treatment of Hunter Biden and its Javert-like pursuit of Trump and anyone remotely in the Trump orbit, no matter how insignificant.

The DoJ negotiated a plea deal with Hunter that was, by the admission of the “prosecutor” himself, unprecedented. In a sneaky move, the DoJ entered into a plea agreement with Biden on tax charges (which were comically light, in view of his conduct), and a parallel diversion agreement on gun charges.

I say sneaky because (a) the diversion agreement was basically a get out of jail card for Biden on any charges, past, present, or future, and (b) the diversion agreement was not directly subject to the judge’s approval.

It was, however, contingent upon her approval of the related plea deal. When she asked whether the diversion agreement basically baptized Hunter, the prosecutor, clearly recognizing how absurd the deal would appear if he answered truthfully, said no. At which point Hunter’s attorney lost his shit and said the deal was off.

But for the judge’s curiosity, Hunter would have skated. He supposedly went home to LA “crestfallen.” Well, wouldn’t you be? After all, after the deal imploded like a Titan submersible and Hunter was forced to plead not guilty, the judge ordered Biden to abstain from drugs and alcohol. Oh! The humanity!

Hunter and his flacks apparently forgot the Chicago Way: for a fix to work, the judge has to be in on the fix! Duh! (Cf. Operation Greylord.)

Hunter should have hired a First Ward lawyer. Maybe he plans to sue for legal malpractice.

Speaking of legal malpractice, one of Hunter’s lawyers allegedly contacted the judge’s clerk, representing herself as the staffer of a Republican congressman who had submitted an amicus brief containing documentation of the true scale and scope of Hunter’s misconduct. The lawyer persuaded the clerk that the documentation had been submitted in error, and should be removed from the docket. The clerk complied.

When the congressman found out, he lost it. A kerfuffle ensued. The judge demanded an explanation. Biden’s defense team said it was a “miscommunication.”

Miscommunication my ass.

The judge has barred future communication with the clerk, but I guarantee if it had been your lawyers, and not Hunter’s lawyers from a white shoe firm like Latham and Watkins, disbarment proceedings would have commenced apace.

But it gets better! Saturday–yes, Saturday–DoJ lawyers requested that a judge execute orders to imprison Hunter’s (and TBH, Joe’s) former business partner Devon Archer. Why the haste?

Well, not to be all cynical or anything–heaven forfend!–but Devon is scheduled to spill the beans on Joe’s complicity with Hunter’s dirty foreign dealings before a House committee tomorrow.

How mafia-like is that? (I emphasized “Saturday” because off-hours work is not the DC way: I’ve often said the the most dangerous place in the world is in front of a federal office at 5:01 PM. At least it was pre-COVID when they actually did show up for work.)

The DoJ’s uncharacteristically generous deal to Hunter

and its haste to jail Archer are clearly intended to protect Joe. I mean, it is beyond obvious that Jose was at the center of the web of shell companies that Hunter wove over the years. And what did Hunter have to offer Ukrainian, Russian, Romanian, and Chinese crooks other than access to Joe? Stevie Wonder and Ray Charles could see the connection.

Further, Joe miraculously received $9,490,857 from one LLC (CapriCeltic) during 11 months in 2017, and $557,882 from another (Giacoppa) in 9 months.

Mind you, 2017 was the first year of operation of these “companies.” Some startups! Unicorns for sure, right?

Please tell me why in the name of God no one can ask these simple questions of Biden or even his pathetic hacks, the clownish Karine Jean-Pierre and the oleaginous John Kirby?:

  • What activities did Capri Celtic and Giacoppa engage in?
  • What was the total income of these companies in 2017? In subsequent years?
  • What did Joe Biden do to “earn” over $10 million from these “companies”? Did he invest? How much? When? Did he provide services? What services? When? (NB: this income was received almost immediately after his term as VP ended.). Who were the other beneficiaries of these companies? How much were they paid? For what?

This is not complicated. Just open the books.

But nobody in DC–least of all the “democracy dies in darkness” crowd in the media–is asking for this basic, basic information.

This whole charade has deeply, deeply discredited the DoJ, especially when it is contrasted with its zeal in other prosecutions. (Hint, hint: nudge, nudge.)

It is clear that the DoJ operates under the Benavides Rules. Everything for Biden, his family, and the Democrats: the federal law, in all its draconian terror, for its enemies.

July 24, 2023

Deflated Thinking on Inflation

Filed under: Economics,Politics — cpirrong @ 12:15 pm

When inflation reared its ugly head in 2021, the administration, and various running dog economists, pronounced that it was “transitory.” Then in a defeat for Team Transitory, it lasted for months and months, before beginning to abate in recent months. But now TT is declaring victory–“See! It was transitory after all! It just lasted a little longer than we expected.” (Redolent of “two weeks to flatten the curve”, no?)

No, actually. This reflects the sloppy thinking about and descriptions of inflation.

This is something of a pet peeve of mine, probably originating from a standard Chicago econ prelim exam question back in the day (when inflation was last a big deal) about the difference between a one-time increase in the price level and inflation.

The argument that the transitory people (read that how you wish!) made was that the spike in prices in 2021 was due to an adverse supply shock–a shift of the aggregate supply curve to the left, for you Keynesian types–due to COVID. Once the supply shock ended, they said, inflation would end.

Wrong! The end of the supposed supply shock should have caused the AS curve to shift back to the right, leading not just to an end of inflation, but an actual decrease in the price level, i.e., a deflationary period. That is, the supply shock should have led to a one time increase in the price level (smeared out over time due to price stickiness) followed by a one time decrease in the price level (smeared out over time due to price stickiness.) with the price level ending up roughly equal to its pre-shock level.

An increase in the price level, followed by an abatement in the rate of increase but no decline in the price level–which is what we have experience recently–is contrary to the predictions of the mental model that TT relied on. We have had a permanent increase in the price level.

The pattern we have observed is in fact much more in keeping with the predictions of the Fiscal Theory of the Price Level (developed initially by Thomas Sargent: advanced students can tackle John Cochrane’s recent excellent book on the subject–great timing, John!)–something that the administration and its acolytes are desperate to deny. In that theory, a large increase in government expenditure–like that which occurred during the COVID policy botch, and a whole-of-government botch it was–unaccompanied by a belief that the government would run larger surpluses in the future to pay for it, leads to a permanent increase in the price level. That is, government spending excess caused the large and permanent increases in prices.

In a model with completely flexible prices and one-period government debt, the price level jumps up at the time of the fiscal shock and stays there. In a more realistic model with sticky prices and long-term government debt, the increase in the price level is spread out over time, leading to a period of month-on-month inflation, with the rate of inflation damping out as the fiscal shock recedes further into the past and the price level reaches that consistent with the new level of government debt that results from the spending shock.

That’s pretty much what we’ve observed in the past couple of years.

So the good news is that the impact of past policy blunders on the price level is abating. The bad news is that the price level impact has not gone away and will not go away. The worse news is that the deflated thinking about inflation that pervades the conventional wisdom not only fails to understand what the policy error was, but aggressively denies it. Which means that it is all the more likely to be repeated.

The wrong war, at the wrong place, at the wrong time, and with the wrong enemy, 2023 Edition

Filed under: China,History,Military,Politics,Russia — cpirrong @ 11:32 am

There is considerable angst over the glacial pace of the Ukrainian counteroffensive. This angst is a product of unrealistic hopes and expectations derived from totally different circumstances.

The unrealistic expectations derived from the stunning success of the Ukrainians last year, around Kharkiv/Kharkov and Kherson. These successes were rooted in Russian errors. The Russians overextended themselves in their initial offensive in 2022, leaving open flanks and exhausted forces that made them extremely vulnerable to Ukrainian attacks. The Russian situation last summer was in many respects comparable to the Ukrainian situation in 2014, when they overextended themselves in pushing at separatist forces, leaving them open to a devastating attack by Russian forces.

(Both episodes remind me of a maxim my mother uttered during one of our many tours of Civil War battlefields (she was a saint to take me on so many): “Nobody ever won a battle, but some people sure lost one.”)

Circumstances are totally different now. The Russians had ample time to dig in extensively, and in particular, sow extensive minefields. It’s a totally different proposition attacking deep, heavily mined defenses than pouncing on the flanks of demoralized, exhausted troops in the open.

The Ukrainians, Zelensky in particular, have been damning the West vitriolically for failure to provide enough of, well, everything. Sorry, but “enough of everything” would really mean deployment of several American heavy divisions, and most importantly, a good chunk of the USAF. American doctrine for attacking prepared defenses involves an extended period of intense air attack to degrade them, followed by assaults by heavy divisions (i.e., divisions other than the 82nd and 101st, and 10th Mountain), supported by continued air attacks and massive artillery.

Not happening in Ukraine. Never was going to happen. Never will happen.

I am a Patton fan, but this quote from the movie is wildly incorrect:

Fixed fortifications, huh? Monuments to the stupidity of man. When mountain ranges and oceans could be overcome anything built by man can be overcome.

As Patton surely knew, history is replete of examples of the power of fixed fortifications. Ironically this statement was made about the fortifications at Metz, which stymied Patton for months. (And it is amusing that in the same film Patton gives a tour of the fortifications of Malta, and describes how the Knights of Malta used them to stop the Turks.)

Given these realities, the Ukrainians have adapted. They are gnawing through some of the minefields (at non-trivial cost), but are also executing WWI-like trench raids to attrit front line units and deep strikes with drones and Western-supplied weapons (notably HIMARS and StormShadow) to undermine Russian logistics.

This has some chance of succeeding–eventually. Chewing a wide enough gap may permit a breakout, with someplace like Tokmak playing the part of St. Lo. Russian reserves and operational mobility are likely inadequate to contain such a breakout–if it can be engineered. With “engineering” being the operative word, because making the gap that could be exploited is first and foremost a combat engineering task.

But nothing will happen quickly, if it happens at all.

In the meantime, both sides are acting like exhausted fighters in a no-holds brawl, with attacks on civilian and infrastructure targets being the equivalent of eye-gouging and ear-biting. The Russian attacks on Ukrainian grain-exporting capacity are the most prominent example of this.

(NB, especially to people like supposed commodities expert Javier Blas. The first thing that pops into the minds of most when attacks on Ukrainian grain-handling infrastructure is wheat. But Ukraine is a much bigger player in corn than wheat.)

And these attacks carry the risk of dramatically escalating the conflict. Today Russia extended its missile attacks westward from Odesa/Odessa to the banks of the Danube, and executed a strike that landed ~100 meters from Romanian territory. That is, Nato territory.

All this raises the question: what’s the point? And I don’t mean the point for Russia and Ukraine, or more particularly their governments. I mean for the interests of the United States.

A strong case can be made that the US has already achieved–courtesy of tens of thousands of Ukrainian lives and tens of billions of American dollars–about all of the conceivable strategic benefits of this war. Courtesy of Putin’s idiocy, Russian military capacity has been (a) dramatically reduced, and (b) shown to have been not that great in the first place. The threat to Europe posed by Russia (which (b) suggests was not that serious in the first place) has been neutered, at the cost of increasing the US’s vulnerability in a more vital theater–Asia. Good strategic thinking should not focus on making the rubble bounce, but should pocket gains in eastern Europe and focus on Asia.

So rather than acceding to Zelensky’s ever greater demands, the message to him should be: take half a loaf, and make a deal. For the sake of your people.

But that is not the attitude of America’s (and most of Europe’s) ruling class. They are monomaniacally focused not just on restoring pre-2014 borders, but crushing Putin and transforming the Russian state. As illustrated by this:

Vladimir Kara-Murza writes: There is only one outcome of this conflict that would be in the interests of the free world, of Ukraine and, ultimately, of the Russian people: resounding defeat for Putin, to be followed by political change in Russia and a Marshall Plan-type international assistance program both to rebuild Ukraine and to help post-Putin Russia build a functioning democracy so that it never again becomes a threat to its own people or its neighbors. That is the only way to make sure Europe can finally become whole, free and at peace — and stay that way.

Sounds great! How is that going to happen, exactly, Vlad baby? Especially the part about “build[ing] a functioning democracy so that it never again becomes a threat to its own people or its neighbors”?

This reminds me of a statement that I saw from China today, about how government policy makers promised to “optimize and adjust policies” in response to the real estate meltdown. Optimization is not a plan–it is an aspiration. Almost to a person the policy establishments in the US and Europe are hooked on a categorically, metaphysically unachievable aspiration and are willing to spend countless lives and dollars in the futile attempt to achieve it.

These people believe in fairy tales. Murderous fairy tales that cannot possibly come true.

In an ironic twist, a war in Europe (not Asia) is now “The wrong war, at the wrong place, at the wrong time, and with the wrong enemy.” (I’m not a big Omar Bradley fan, but he got that one right.) But our policy “elites”–of both parties–are hyper-focused on the wrong war. (Why that is is a story for another, and probably much longer post.)

War and geopolitics require cold-blooded calculations. The cold-blooded calculation for the United States is definitely not to dream of magically transforming a notoriously intractable and autocratic society into Switzerland with nukes. (The possession of nukes in itself making such a transformation wholly fantastical.) It is instead to push for an outcome that satisfies none of the combatants–and indeed infuriates them–and shift focus from eastward to westward. Don’t fight the last war. Prepare for the new one–in order to prevent it.

July 14, 2023

The Hydrogen Economy, or The Hindenberg Economy? Or, Gosplan Goes Gassy

Filed under: Climate Change,Commodities,Economics,Energy,Politics,Regulation — cpirrong @ 12:32 pm

The Biden administration, courtesy of the delusionally titled Inflation Reduction Act, has made a huge spending commitment on alternative fuels, and in particular “clean” hydrogen, i.e., hydrogen not produced from fossil fuels (such as methane). Most of the “green” hydrogen stimulus involves supply-side subsidies (especially a $3/kg production tax credit, but also loans to be doled out by the administrative state). The Infrastructure Law sets aside funds for hydrogen electrolysis and hydrogen “hubs” (like that just announced for Germany). The administration is also attempting to make “the economic case for demand-side support,” such power purchase agreements (PPAs), contracts-for-differences (CFDs), advanced market commitments (made by whom?), and prizes (funded by whom?).

It’s hard to know where to begin in criticizing this mess. The biggest problem is that it attempts to address the climate issue (which I will take as a given, focusing on means not ends) by picking technologies. This almost never ends well. First, there is the knowledge problem–bureaucratic governments do not possess the information to make these technology choices. Second, there is the rent seeking/corruption problem–which exacerbates the knowledge problem, as interested parties exploit the ignorance of bureaucrats and funders, and their political connections, to induce investments based not on their economic virtues but instead on political influence.

There are also serious doubts about whether hydrogen qua hydrogen is the right alternative fuel given that it poses numerous problems and costs. The first is that using renewable energy to produce green hydrogen is extremely expensive. The second is that, well, hydrogen is highly explosive: I distinctly remember my 8th grade science teacher, Mr. Fisch, using electrolysis to fill a test tube with hydrogen, putting in a piece of chalk, then lighting a match to set off an explosion that sent the chalk flying across the room. You didn’t have Mr. Fisch as a teacher, but perhaps you’ve heard of the Hindenberg:

Explosiveness creates hazards, of course, and mitigation of them is expensive. Hydrogen is also extremely expensive to transport and store and requires a new and distinct transportation and storage system.

We are talking trillions of dollars to create “the hydrogen economy”–something even its boosters admit. Hell, they brag about it.

Hydrogen “carried” with carbon, in the form of ammonia or methanol, pose fewer problems (although ammonia in particular is nasty stuff). They are also costly, and it is clearly uncertain whether “green” forms of these hydrogen carriers are economical ways to reduce carbon emissions from fuels for transportation and power generation.

But the administration (and Europe too) have gone all in on hydrogen. Why? Maybe because their extreme antipathy towards carbon leads them to disdain fuels with any carbon in them.

Having chosen its technology, for better or more likely worse, now the administration is focused on how to force its adoption. The supply-side incentives are clear enough, so now there is a pivot to the demand-side, as expressed in the appallingly shoddy Council of Economic Advisors document linked above.

According to the CEA–and not just the CEA, as will be seen shortly–the problem is that “[r]eal or perceived risks around clean energy projects can raise the cost of accessing capital,  which could slow the rate at which projects like those in the hydrogen hubs program achieve commercialization..”

Well, I should hope so! That is, I should hope that risks are taken into account when allocating capital!

John Kerry flogged the risk issue on MSNBC (h/t Powerline):

“What’s preventing it is, to some degree, fear, uncertainty about the marketplace. People who manage very significant amounts of money have a fiduciary responsibility, an obligation to the people they manage it for not to lose the money, but to produce returns on that investment. Pension funds, many of them, are very careful about those investments in order to make certain they have the money to pay out to the pensioners who work for that money all their lives. So, there are tricky components of making sure that you have taken the risk away from these investments. And energy, which is what the climate crisis is all about, it’s about energy, it’s about how we fuel our homes, how we heat our homes, how we light our factories, how we drive and go from place to place.”

Damn those money managers for taking into account the risks and rewards of the money their investors entrust to them! Don’t they understand that John Effing Kerry knows what is right for humanity????? After all, he flies around the world in a private jet sharing his wisdom (and then dissembles about it before Congress).

I loved this part: “So, there are tricky components of making sure that you have taken the risk away from these investments.” Does John Kerry have a magic box into which he can make the risks disappear? Do tell!

Of course he doesn’t. What he means, clearly, is that the government must somehow absorb the risks inherent in the technology that they have already decided upon–apparently without analyzing those risks fully or carefully, or wondering whether maybe these damned investors might know something they don’t. (Of course they don’t wonder that! They are all knowing, right?)

At least the CEA attempts to put lipstick on the pig and raise some economic arguments to justify the need for demand-side support. There are market failures! Government never fails, but markets do, right?

In my experience the concept of market failure is most likely to be advanced when the market fails to do what someone thinks should be done, or wants to be done, based on their own vision. That is, when the market disagrees with someone, the market has failed! Especially when that someone is a member of what Thomas Sowell calls “The Anointed.”

The CEA basically cites to some theoretical possibilities. At the core of their argument is that learning by doing, including learning-by-doing that “spills over” among companies, can lead to inefficient investment. The CEA advances a couple of reasons.

One is a contracting failure. LBD–moving down the learning curve–reduces costs, meaning that prices are expected to fall. So, according the CEA, potential buyers are unwilling to enter into long term contracts for fear of agreeing to pay a price that will turn out to be too high: “if rapid declines in technology costs are expected, the willingness of private sector end-users to seek out such contracts with clean energy developers will be limited” (emphasis added). Without such contracts, hydrogen project developers can’t secure financing, so plants won’t get built, no learning takes place, and costs don’t fall. The Curly Equilibrium, in other words:

Really? If costs are expected to fall, market participants can enter contracts with de-escalator clauses, i.e., contractual prices that fall over time. Apparently the CEA only envisions contracts at a fixed price that extends through the life of the contract. But even then, given anticipated cost declines, the developer would be willing to sell at a price below the initial cost, basically, at the average cost expected over the life of the contract.

The CEA mentions the risks of of the magnitude of cost declines, but again, that should be a material consideration in any contracting and investment decision. Is the CEA arguing that the risk compensation demanded by borrowers will be excessive? They don’t say so explicitly, but that’s what you would need to argue that the prices in these contracts would be “too low” and thereby stymie investment.

I’d also note that indexed prices, widely used in a variety of commodity off-take agreements, eliminate the risk to buyers of locking in too high a price. They also address the asymmetric information problem that the CEA frets about. If the developer has better information about the likely trajectory of price declines, then yes, buyers looking at fixed price deals or deals with mechanical (non-market based) price de-escalators face a “winners’ curse” problem: the developer will agree to terms that overestimate his (better) forecast of future prices, and reject deals that underestimate.

I think in fact that the issue is that there is considerable uncertainty among all parties, developers and buyers alike, regarding what the future cost trajectory will look like. That is, there is a real risk here, and that risk should be taken into consideration when deciding whether hydrogen investments make sense. And market participants are far better at assessing the risks, and the pricing of those risks, than the government, which is clearly taking a “Damn the risks, full speed ahead!” Approach.

Sorry, but John Kerry et al don’t inspire confidence like Admiral Farragut at Mobile Bay.

One of the proposals under discussion is Contracts for Differences (“CFDs”) in which the government would (perhaps through a non-profit intermediary) provide a guaranteed revenue stream to a developer and absorb the price risk. To work, CFDs require indexing to some market price–and the market price for H2 hasn’t really been created. Further, they require some mechanism to set the guaranteed price, a non-trivial task given the very information asymmetries that the CEA worries about. The government-appointed third party (or the government for that matter) will certainly be the less informed party in any negotiations with developers, and will almost certainly overpay. (Not that they will mind–not their money!) Meaning that the asymmetric information problem the CEA frets about is present in spades in one of their preferred means of addressing it. Further, CFDs have already presented performance issues, with the sellers (those getting the guaranteed revenue stream) treating these contracts like options rather than forwards, and spurning their CFD commitments when market prices rise above the guaranteed price (as has happened with with generators in the UK when power prices spiked).

The CEA also invokes capital market imperfections also driven by asymmetric information that may impede financing if developers know more about the economics of projects than the financiers. This is a hoary old story that has been used to identify alleged market failures since time immemorial. So long ago, in fact, that when Stigler wrote “Imperfections in the Capital Market” (JPE) 56 years ago, he (in typical Stigler fashion) drolly started thus: “The adult economist, once the subject is called to his attention, will recall the frequency and variety of contexts in which he has encountered ‘imperfections-in-the-capital market.'” That is, “capital market imperfections” were an old joke decades ago.

Here’s another one, George! Based on long experience, George was a skeptic. Based on even longer experience, I am too, in this case in particular.

And let’s look at the empirical record. Learning by doing is a ubiquitous phenomenon. Dynamically declining costs in industries with potential information asymmetries abound. Yet industries have developed and thrived nonetheless.

Some examples.

I recently finished a piece describing extensive learning-by-doing in the shale industry, including evidence of learning spillovers and dynamic cost reductions. Yet, the shale sector has not faced problems getting capital or expanding rapidly. Hell, if anything, a common criticism is that shale drillers have obtained too much capital and drilled too much, not that they are starved for capital and drilled too little.

Does the CEA (or John Kerry!) believe the shale sector in the US is too small?

Insofar as spillovers is concerned, the fact that the costs of firm A decline when firm B produces more output is a necessary, but not a sufficient condition for an externality. One plausible outcome in oil (as identified in a paper on LBD in conventional drilling by Kellogg in the QJE) is that service firms are the ones that do the learning, and capture and internalize it.

LBD is well-documented for computer chips, which have seen relentless cost and price declines over the years. Yet computer chip factories have been built, and companies especially in the US and Asia have attracted the capital necessary to build these very expensive facilities and build new chip lines nonetheless. (In this industry too, there have been chronic complaints about overcapacity, rather than undercapacity. I am not commenting on the validity of those complaints, just noting that their existence contradicts the notion that dynamic scale economies and price declines due to LBD starve an industry of capital.)

The LNG industry has many of the characteristics that the CEA attributes to hydrogen. Yet this industry has expanded apace for well over 50 years now.

I viewed a presentation by DOE people today in which LNG was raised several times, and as an example not to be followed. DOE advisor Leslie Biddle (ex-Goldman) mentioned LNG several times (“I keep going back to the LNG analogy”), and in a negative way. LNG took 30 years to move to a traded market, dontcha know. And we don’t have that time! We need to create such a market in a year! (DOE’s Undersecretary for Infrastructure David Crane was more generous, giving us all of 5 years.) (Crane was also hyping the idea of hydrogen for everything, including home heating–apparently oblivious to the fact that even Net Zero fanatical Britain has just recently determined that H2 is too dangerous to heat homes.)

In the context of the discussion of a grand government plan to transform the energy system, I couldn’t help but think of Gosplan, or Stalin’s race to industrialization (e.g., the Magnitogorsk Steel Factory). We will inevitably–inevitably–meet the “Dizzy With Success” phase in hydrogen, mark my words.

I note that LNG production grew substantially before it became a traded market, which actually undercuts Biddle’s argument. Even though there was not a liquid traded market for LNG in the first decades of its growth and development, long term contracts, usually using crude (no pun intended) indexing features (like tying prices to Brent), contracts were agreed to, financing was obtained on the backs of these contracts, and liquefaction plants were built.

Oil refining faced many of the conditions that worries the CEA about hydrogen. Kerosene was a radical product early on, with a lot of uncertainty about market adoption. But Rockefeller dramatically expanded output and reduced costs: the cost of kerosene by 2/3rds in 10 years (1870-1880), in large part due to extensive learning and research on all aspects of the value chain. Standard Oil’s supposedly predatory acquisitions of were actually ways by which SO’s knowledge could be combined with physical assets to improve their efficiency.

The co-evolution of gasoline refining and the adoption of the automobile represents another example of investment and falling prices in a new market in a capital intensive industry.

I note that the early refining examples occurred when capital markets were far less developed than is currently the case. I further note that large energy firms (IOCs and NOCs like Aramco in particular) can potentially finance hydrogen (and other alternative energy projects) with cash flows generated by their legacy fossil fuel investments: this would largely eliminate any asymmetric information problem between developer and financier (because the developer is the financier) and developer and customer (because the developer could finance without securing a long term price commitment).

Another example. Electricity generation. Beginning with its inception in the early-1880s, electricity generation was highly technologically dynamic, with substantially declining costs. Yet in a few short years most urban areas in the US were electrified, with numerous private companies competing with government utilities. This was another industry in which overbuilding, rather than under-building, was widely discussed. The movement to price regulation occurred well after the industry developed, and was a reaction to intense price competition: regulation effectively cartelized electricity generation.

One more. Aircraft. LBD was first identified in the production of airframes. This phenomenon was first documented by Wright in 1936, and was subsequently observed in myriad other industries (e.g., Liberty Ship construction in WWII). LBD and the associated cost declines have continued in aircraft construction ever since. And aircraft have been built and aircraft manufacturers have been able to attract the capital to design and build new aircraft that benefit from these cost declines.

In the face of all these examples, the CEA and others making these market failure arguments should identify an industry that died aborning due to the alleged chicken-or-egg problem that makes demand side support of hydrogen investment necessary.

The CEA document has echoes of some rather common, but unpersuasive, arguments for government support of industry, such as the infant industry argument and the big push development literature. The latter has been demolished by practical experience: the list of its dismal failures is far too long. There are more than echoes of this discredited approach in the CEA document. It links to a paper that credulously recycles the old, bad, discredited theories.

What is amazing about the infant industry argument is how often it is invoked, and how little empirical evidence supports it. One of the few empirical papers, that of Krueger and Tuncer, rejects the argument in the case of Turkey.

A paper by Juhasz is often touted to support the theory. It shows that after the stimulus of the cotton spinning industry in France due to Napoleon’s Continental system, post-1815 the industry was competitive with the British, indicating that it had moved down the learning curve. Again, at most this identifies a necessary condition for protection–learning–but not a sufficient one. Even if LBD occurs, and even if there are spillovers, the cost of protection may exceed the benefits. A simple story demonstrates this. If the protected industry achieves cost parity with the first-mover (e.g., the UK in cotton), the protected firms merely displace firms in the first-mover country, leaving post-parity total costs unchanged. So in equilibrium, protection is costly but generates no benefits.

All in all, the CEA document reminds me of a rather conventional undergraduate econ paper, repeating textbook wisdom about externalities and market failures. It completely ignores the Coasean insight that market contracting methods are far more sophisticated than those in the textbooks, and that market participants have incentives to find clever ways to contract around what would be market failures if market transactions were limited to the forms considered in textbooks. It also ignores the historical record.

In other words, rather than writing off the difficulties of securing “bankable” contracts to secure funding for H2 developments to “market failures” or the excessive risk aversion of market participants, the government should step back and consider whether this alleged hesitation reflects a more sober and informed evaluation of risks than our betters in DC have undertaken.

I crack myself up sometimes.

In sum, the administration’s entire approach to hydrogen is utterly flawed. It attempts to pick technologies based on a pretense of knowledge it does not possess. It views flashing red lights warning of risks as signals to be suppressed rather than considered when making policy and investment choices. It engages in simplistic analyses of how real markets work, and how they have worked historically, to conclude that market failures requiring government intervention to fix abound in hydrogen.

All of these government failures could be eliminated by cutting the Gordion Knot, pricing carbon, and letting markets and private enterprise develop the technologies, products, contracting practices, and market mechanisms to trade off efficiently the benefits of reducing CO2 emissions. Decentralized mechanisms discover and utilize information, including information about new technologies, far more efficiently than governments. Decentralized mechanisms incentivize learning and innovation–including contracting and organizational innovations that can be instrumental in developing and adopting new technologies, products, and techniques.

In the case of hydrogen, pure or “contaminated” with carbon, priced carbon would address the problems that the CEA frets about, in particular the contracting problem. A carbon price would make it straightforward to index prices in contracts. A formula related to NG prices (because blue hydrogen is likely to drive the price of hydrogen at the margin, and because methane is likely to be the substitute at the margin for H2 in many applications) and the cost of carbon would send the appropriate signals and eliminate the need to fix prices in advance.

What the price of carbon should be and how it should be determined is a whole other question. But it would be far more productive, and not just in regards to hydrogen, to focus on that problem rather than leaving it to the John Kerrys of the world to pick technologies and then devise the coercive mechanisms necessary to force the adoption of those technologies.

Alas, we are on the latter path. And it will not take us to a good place. Probably figuratively, and perhaps literally, to the fate of the Hindenberg.

July 4, 2023

Salem and Gomorrah: America at 247

Filed under: History,Politics — cpirrong @ 2:34 pm

Today is Independence Day, but for me it is more an occasion of resignation (or melancholy even) than celebration, because the chasm separating the present America from that envisioned in the Declaration is vast, and growing by the day.

The bedrock ideals in the Declaration were individual liberty; emancipation from government tyranny; natural rights possessed by all individuals; and self-government. 247 years later, all of these ideals are widely scorned by the ruling classes, and are as a result are becoming progressively further from realization.

I use the word “progressively” deliberately: for progressivism–especially in its most current guise–is directly responsible for the assault on these ideals. 21st century progressives do not revere the ideals in the Declaration–they revile them. (And it has always been so for progressives–cf. Woodrow Wilson).

Individualism has been replaced by collectivism and identitarianism. Individualism is anathematized as white privilege, and the fact that those who met in Philadelphia in 1776 (and in 1787) were white, and in some cases held slaves, is considered proof of the illegitimacy–and indeed the evil–of the Founding.

The concept of natural rights possessed by all individuals equally is also an anathema to progressives, who elevate group and tribe over individuals, and who believe that members of some tribes are more equal than others, and have claims on others due to iniquities allegedly inflicted on the long dead members of one tribe by the long dead members of the other tribe. Guilt and punishment have become collectivized, and unmoored from individual conduct.

The 21st century state exercises vastly more tyrannical power over virtually every aspect of our lives than George III or Lord North could have even imagined in 1776. Relatedly, as for self-government, the colossus of the administrative state is almost totally unchecked by the branches of government that are supposed to be accountable to the people. Taxation without representation has been replaced by regulation (of the most minute details of our lives) without representation. Parliament on the Thames in the age of sail was never so remote to the average American as a regulatory agency on the Potomac in the days of the Internet.

The progressive march through the institutions, which began at the dawn of the 20th century, has accelerated greatly in the first quarter of the 21st. The institution with which I am most closely affiliated–academia–seems to me to be beyond saving. Tragically, an institution which has been of deep interest and importance to me–the US military–is on its way to joining academia as a lost cause.

I am tempted to say that these developments are un-American. But alas, although they are anti-American to the extent that “American” is identified with the ideals of the Founding, they are largely Made in the USA. A la Pogo, we have met the enemy, and he is us. Or at least, he is some of us, and that some hold the whip hand.

In many respects, as this article argues, progressivism–especially in its current Woke form–is just the current manifestation of the Puritanism which in many guises (including guises assumed by those who would consider themselves anything but puritanical) has been a catalyst for change and a source of social conflict in America for almost exactly 400 years. (I have made a similar point from time to time). And Puritanism is pretty damned American–or at least, has been a pretty damned important part of America from the first English colonization of the continent.

Like Puritanism, modern progressivism is extremely judgmental. It is Manichean. It is censorious. It divides people into the elect and the damned. It erects its own (now virtual) pillories. It ostracizes and banishes. It is uncompromising and unforgiving. It definitely does not believe in “live and let live.” It is prone to intense moral panics (cf. the Salem Witch Trials then, COVID or the Russians today). It is intensely self-righteous–and hence intensely hypocritical. Completely divorced from Calvinist religion, yes, but essentially Calvinist in spirit and mindset and conduct.

But it is worse than Calvinism qua Calvinism, because at least the original Calvinists had the fear of God in them, and thus from time to time had to question whether they really were doing God’s work. Modern progressives, secular to the core, have no God to fear and hence are immune from doubt. Meaning that they coerce without qualm. Indeed, they coerce with intense self-righteousness.

Mencken famously said that “Puritanism is the haunting fear that someone, somewhere, may be happy.” I don’t think that’s quite right. Puritanism is the haunting fear that someone, somewhere, is doing something to make the Puritan unhappy–combined with the conviction that the Puritan has the absolute right to find, root out, and punish this transgression. But Mencken’s formulation and mine share one very important implication: the Puritan doesn’t want to leave anyone alone.

And what is “the pursuit of happiness” other than the desire to be left alone to behave by his or her lights? That is something that Puritans old and new just cannot abide.

In its original incarnation, Puritanism contributed to the social dynamic that ultimately led to the Declaration of Independence. The Puritans came to American shores, of course, to escape English royal and religious tyranny, and thus had a spirit of independence that intersected in some ways with the spirit of independence from English tyranny that gave birth to the Revolution. But that historically contingent confluence of interests belies a fundamentally different conception of the meaning and political implications of the word “independence.”

21st century America can be described as Salem and Gomorrah. Hardly a happy combination, and certainly not a combination that Thomas Jefferson et al strove to achieve when they pledged their lives, fortunes, and sacred honor 247 years ago today. Hence the mixed emotions which the Fourth of July evokes in this 21st century American. Reverence for what might have been, resignation at what has actually grown from the seed planted centuries ago.

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