Putting Down a Marker

Economists John Greenwood and Steve H. Hanke put down a marker in their op-ed in the Wall Street Journal. Inflation will be transitory but it won’t be transitory transitory:

Let’s take a look at the U.S. bathtub. During the early months of the Covid-19 pandemic, the faucet was wide open. Between December 2019 and August 2021, the U.S. money supply, measured by M2, grew by $5.5 trillion, a stunning 35.7% increase in only a year and a half, driven primarily by the Fed’s purchases of Treasurys and mortgage-backed securities. In light of anticipated Federal Reserve tapering, we estimate that by the end of 2024 the money supply will grow another $5.1 trillion.

Out of the total $10.6 trillion in new money, real GDP growth will drain roughly $1.4 trillion. Another $1 trillion will flow down the money demand drain. Since the amount of money flowing into the bathtub far exceeds the two outflows, the excess money in the tub—around $8.2 trillion—will hit the inflation overflow drain.

The huge monetary expansion—$5.5 trillion already in the bathtub—is starting to reach the overflow. Persistent, not transitory, inflation will be with us for the next two to three years.

The rest of the op-ed is devoted to their bathtub metaphor for money and inflation. Money pour in through the faucet and drains out via economic growth, money that the public wishes to hold relative to its income, and inflation.

If they’re correct, what’s the right policy response? And an additional extra credit question: can the president’s party hold onto their razor-thin majorities in Congress with the right policy response?

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The Supply Chain Snafu Is Not Transitory

In an op-ed in the Washington Post Daniel Yergin and Peter Tirschwell explain what it will take to end the supply chain snarl-up:

The causes of this maelstrom are deeper-seated than any 90-day cure can address. During the pandemic, locked-down consumers, unable to go to stores, switched to e-commerce. Four to six years of anticipated e-commerce growth has been compressed into one year. All those personal computers, toys, power tools and Pelotons are typically shipped via container, mainly from Asia. Shipments into the United States surged.

The causes of this maelstrom are deeper-seated than any 90-day cure can address. During the pandemic, locked-down consumers, unable to go to stores, switched to e-commerce. Four to six years of anticipated e-commerce growth has been compressed into one year. All those personal computers, toys, power tools and Pelotons are typically shipped via container, mainly from Asia. Shipments into the United States surged.

What would need to happen to change the situation?

Distribution centers would need to be open 24/7 to receive trucks, but the centers typically are not. Expanding port hours accomplishes little if the truckers can’t drop off containers at distributions centers that are not open at night.

The continuing disruption is generating various legislative proposals, but they can’t address the sources of the imbalance. Lasting solutions instead must come from two elusive things: “more” and “less.”

More as in more workers — not a simple fix, because a shortfall in workers is bedeviling the entire U.S. economy.

Less as in an easing of consumer demand. That would relieve pressure on the entire system and help return it to balance.

That sounds a lot like the “lower your expectations” advice that’s been widely scoffed at.

I would add that “more workers” sounds a lot easier than it actually is. A “longshoreman” in the Port of Los Angeles or Port of Long Beach (those account for half of U. S. merchandise imports) is not a guy with a cargo hook. He (or she) is a highly-skilled operator of one of the largest robots in the world. Think the kaiju in the movie Pacific Rim and you’ve pretty much got it. They earn upwards of $100K per year and it takes years of training.

About 30 years ago I recall sitting in the boardroom of a major New York bank and being informed by top management that they had no intention of automating some of their processes because that made you dependent on the more skilled employees that requires. That’s one of the things that’s causing our present problems—we’re dependent on people with skills and experience who belong to a notoriously protective union.

With respect to long haul truckers, not only are the hours, working conditions, and pay lousy but I suspect it’s getting harder to find people who don’t test positive for drug use every year.

Meanwhile in China they actually have fully automated “lights out” ports. We should, too, but that will provoke an incredible battle.


How to Reduce Emissions

In his most recent Washington Post column Fareed Zakaria proposes something sensible:

A serious energy strategy would recognize that the most important task is to reduce carbon emissions fast. In the short term, the simplest way to do this is to move from coal to natural gas, which cuts carbon emissions almost by half. In fact, most of the reduction in the United States’ carbon dioxide emissions between 2005 and 2019 was because of the switch from coal to gas, with coal being the biggest producer of carbon dioxide emissions of the three main fossil fuels.

But there is even lower-hanging fruit. The journal Environmental Research Letters did a study of more than 29,000 fossil-fuel power plants worldwide and found that just 5 percent of them were responsible for 73 percent of global emissions from electricity. We could easily pay to convert those roughly 1,400 plants and reap a huge windfall in the reduction of carbon emissions. And the International Energy Agency estimates that over 70 percent of the methane leakage from oil and gas production can be stopped by using existing technologies.

That’s a strategy recognizeable to anyone familiar with the process of optimization: optimize first where there are the most benefits from optimization. How much could be achieved by doing that? According to the study he cites 25% of all emissions in power generation. Here’s a map of the top emitters:

Those red lines are the worst of the worst. Where are they? Poland, India, South Korea, Taiwan, China, Germany, Japan. We have our own major emitters, too, but none in the top ten. That list has remained remarkably stable over the last decade.

There’s another interesting table in the linked source which the authors refer to as “Gini coefficients for disproportionality in plant-level CO2 emissions for the ten nations with the highest CO2 emissions”. Translation: how much worse are the worst emitters in a given country as compared with the best. As should be surprising to no one the top countries in that list are China, the U. S., India, Japan, Russia. In other words as a matter of policy our near term strategy should consist of

  1. Producing more natural gas.
  2. Either shutting down the power generation facilities here in the U. S. that produce the most emissions or converting them to natural gas.
  3. Reduce imports from countries that aren’t modernizing their energy production. Tariffs are one way of doing that.

Another Mismatch

In a valedictory to a long-serving member of the House who has announced his retirement, Albert Hunt includes this interesting quote in his piece at The Hill:

I interviewed Price the day after his retirement announcement. He recalled, with fondness, those salad days when he first arrived in the late 1980s.

Since then, the House, he says, “has changed in major ways: some positive, others not so much.”

The positive is that it’s a much more inclusive, diverse place, especially the Democrats: “We have become small d in that sense.”

The “not so much” is the deep polarization and emphasis on grandstanding rhetoric over legislative achievement. “When I arrived, members came to get something done; now many see the House as a platform for their own pursuits, a stepping stone.”

Price doesn’t exempt some in his own party but believes there’s “asymmetrical polarization.” When Newt Gingrich, in 1995, became the first Republican Speaker in more than 40 years, he adapted the same political guerrilla tactics that were so successful on the campaign trail to the House leadership.

It has gotten worse, Price says, with the Tea Party and Trump takeover of the GOP: “The politics of the Republican base are driving it further to the right; this no longer is a center-right party. They drove away two Speakers, and we have a much more divided chamber.”

I agree with his marking of the point of inflection in American politics as Newt Gingrich’s term as House Speaker. I also agree that there is more diversity of opinion among Democrats than among Republicans.

I disagree with any notion that this is a recent phenomenon. After all it was a century ago that, when asked if were a member of an organized political party, Will Rogers responded in the negative that he was a Democrat. And Bill Clinton’s remark about Republicans wanting to fall in line while Democrats wanted to fall in love?

I also disagree strongly with his admiration of Speaker Pelosi. If you don’t like Trump, you should not like Pelosi: one of the factors that led to Trump was Speaker Pelosi’s rejection of compromise and narrow majoritarian approach to the House.


The Death of Strategic Ambiguity

Much is being made of President Biden’s remarks regarding Taiwan yesterday. From Reuters:

BALTIMORE, Oct 21 (Reuters) – The United States would come to Taiwan’s defense and has a commitment to defend the island China claims as its own, U.S. President Joe Biden said on Thursday, though the White House said later there was no change in policy towards the island.

“Yes, we have a commitment to do that,” Biden said at a CNN town hall when asked if the United States would come to the defense of Taiwan, which has complained of mounting military and political pressure from Beijing to accept Chinese sovereignty.

While Washington is required by law to provide Taiwan with the means to defend itself, it has long followed a policy of “strategic ambiguity” on whether it would intervene militarily to protect Taiwan in the event of a Chinese attack.

On the one hand that would appear to be a change in U. S. policy, away from “strategic ambiguity”. On the other hand it’s almost verbatim what President Bush said back in 2001. I thought it was imprudent then and I think that strategic ambiguity was a better policy. But I think we can now pronounce the policy officially dead.

Things are different than they were in 2001. China is assuming a “near peer” status, some would even say their forces are superior to ours. Why poke the bear? I can only speculate that President Biden sees some need to reassure Taiwan. I’m unconvinced that’s the right policy.


Selecting Mitigation Strategies

Bjørn Lomborg, the bête noire of climate change activists, has an op-ed in the Wall Street Journal in which he suggests that mitigation strategies other than those being proposed by activists as better suited to the situation we face:

Adaptation doesn’t make the cost of global warming go away entirely, but it does reduce it dramatically. Higher temperatures will shrink harvests if farmers keep growing the same crops, but they’re likely to adapt by growing other varieties or different plants altogether. Corn production in North America has shifted away from the Southeast toward the Upper Midwest, where farmers take advantage of longer growing seasons and less-frequent extreme heat. When sea levels rise, governments build defenses—like the levees, flood walls and drainage systems that protected New Orleans from much of Hurricane Ida’s ferocity this year.

Nonetheless, many in the media push unrealistic projections of climate catastrophes, while ignoring adaptation. A new study documents how the biggest bias in studies on the rise of sea levels is their tendency to ignore human adaptation, exaggerating flood risks in 2100 by as much as 1,300 times. It is also evident in the breathless tone of most reporting: The Washington Post frets that sea level rise could “make 187 million people homeless,” CNN fears an “underwater future,” and USA Today agonizes over tens of trillions of dollars in projected annual flood damage. All three rely on studies that implausibly assume no society across the world will make any adaptation whatever for the rest of the century. This isn’t reporting but scaremongering.

You can see how far from reality these sorts of projections are in one heavily cited study, depicted in the graph nearby If you assume no society will adapt to any sea-level rise between now and 2100, you’ll find that vast areas of the world will be routinely flooded, causing $55 trillion in damage annually in 2100 (expressed in 2005 dollars), or about 5% of global gross domestic product. But as the study emphasizes, “in reality, societies are likely to adapt.”

By raising the height of dikes, the study shows that humanity can negate almost all that terrible projected damage by 2100. Only 15,000 people would be flooded every year, which is a remarkable improvement compared with the 3.4 million people flooded in 2000. The total cost of damage, investments in new dikes, and maintenance costs of existing dikes will fall sixfold between now and 2100 to 0.008% of world GDP.

The prevailing narrative in the media is between “denialists” on the one hand and “warmists” on the other, yin and yang, evil vs. good. Although he’s sometimes characterized as a “denialist”, I think his view is a bit more nuanced than that. He doesn’t question anthropogenic global warming as such but rather the time and degree projections and the mitigation strategies being proposed.

My own view is that I think that diverse sources of power are a good idea with nuclear providing a lot more baseline power than is presently the case and that carbon capture and sequestration is probably a better strategy than austerity. Easier to sell, too. I also remain skeptical that the production of electric vehicles can be scaled up to the level and at the rate necessary but that’s another subject.

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Not News or…

I think they kind of buried the lede in this piece by Justin Rowlatt and Tom Gerken at BBC/i> on countries lobbying the Intergovernmental Panel on Climate Change:

A huge leak of documents seen by BBC News shows how countries are trying to change a crucial scientific report on how to tackle climate change.

The leak reveals Saudi Arabia, Japan and Australia are among countries asking the UN to play down the need to move rapidly away from fossil fuels.

It also shows some wealthy nations are questioning paying more to poorer states to move to greener technologies.

This “lobbying” raises questions for the COP26 climate summit in November.

The short version is that fossil fuel-producing countries or major users of fossil fuels want the UN to downplay climate change understandably enough. To my eye the lede is that these UN reports are produced after extensive lobbying. Kind of throws a damper on the notion of these agencies as technocratic in nature, doesn’t it?


More About the Labor Mismatch

I found this piece by Dominick Reuter at Business Insider interesting:

So Holz, a former food-service worker and charter-boat crewman, decided to run an experiment.

On September 1, he sent job applications to a pair of restaurants that had been particularly public about their staffing challenges.

Then, he widened the test and spent the remainder of the month applying to jobs — mostly at employers vocal about a lack of workers — and tracking his journey in a spreadsheet.

Two weeks and 28 applications later, he had just nine email responses, one follow-up phone call, and one interview with a construction company that advertised a full-time job focused on site cleanup paying $10 an hour.

But Holz said the construction company instead tried to offer Florida’s minimum wage of $8.65 to start, even though the wage was scheduled to increase to $10 an hour on September 30. He added that it wanted full-time availability, while scheduling only part time until Holz gained seniority.

Holz said he wasn’t applying for any roles he didn’t qualify for.

Some jobs “wanted a high-school diploma,” he said. “Some wanted retail experience,” he added. “Most of them either said ‘willing to train’ or ‘minimum experience,’ and none of them were over $12 an hour.”

Anecdotal but interesting. I wish Mr. Holz had provided more details about the applications he made. It’s possible he included some disqualifying item, whether accidentally or deliberately. For example, he might have included enough details that the total amount of time he reported having worked gave away that he was a 37 year old looking for an entry level job which might have raised some eyebrows.

But it does provide a little evidence for my speculation that a certain number of the jobs being advertised are fishing expeditions.

I’m not sure how one would go about quantifying that or testing it other than the method Mr. Holz used.


The Basic Problem

I have a basic problem with Jeff Webb’s observations at Human Events:

While the idea of supply chain is often associated with manufacturing and the required parts needed to assemble something, the concept is much broader and simpler than that. Simply put, the supply chain (think visually of an actual linked chain) is every part of the process that gets what is needed to arrive at its final destination. That final destination is different for every participant in the economic product or service life cycle.

The Nobel Prize winning economist and champion of free enterprise, Milton Friedman, used to famously refer to the short, fable-like story known as “I, Pencil” written by Leonard Read and published in 1958. In that clever piece, Read traces the family tree of a typical wooden pencil. He mentions all the raw material required, the parts of the world from which they are mined or harvested, and how they are assembled. His point, which Freidman took to a much higher level, was that no one person in the world could make, or knew how to make, a pencil. Only a free marketplace could get all of the necessary components delivered to the final manufacturing point.

Wood, metal, graphite, the harvesting and refining of those items, the shipments of the various parts, and so on, are all part of the supply chain. For the pencil manufacturing company, the supply chain end point is the one at which all of the components necessary to make that pencil arrive. For the consumer who wants to buy a pencil, the supply chain ends when the pencil is placed on the store shelf for their purchase.

Use your imagination and you can instantly see how complex this is even for something as basic as a wooden pencil. Now, extend that to millions of products needed all over the world to produce necessities like food, gasoline, and appliances. Further complicate with the fact that the components for all of them come from all different parts of the world. The complexity is overwhelming. How, might you ask, can anyone figure out how to solve these problems.

The answer is that they can’t. The point Read was making and the point that Freidman rode to fame was that no central planner, no bureaucracy, no star chamber, no politician, can figure out how to choreograph a supply chain. It defies central design. It needs to be developed by individual participants in the marketplace, each acting in their own self-interest, and each finding a way to get that pencil to the shelf without ever necessarily envisioning a pencil.

Said differently, government can’t make pencils and it can’t stock shelves with bread. It can only cause people to wear out pencils filling out forms and create lines of people waiting for bread. Transportation Secretary Pete Buttigieg says that this supply chain problem could last for “years and years.” Years and years? We’ll starve! Buttigieg personifies the general level of incompetency throughout the Biden administration. The last thing we need to do is to deploy that incompetency to solve supply chain problems.

which is that it’s a free flight of fancy, a fantasy. When was this time when private businesses managed their own supply chains without any government involvement? Hint: not in my lifetime which is getting to be nearly a century. It wasn’t 2019 or 1979 or even in 1958 when the article to which Mr. Webb refers was written. The late Dr. Friedman couldn’t even remember such a time. We had them but you need to go back to the 19th century when things were much, much simpler to find them.

The alternatives aren’t limited to a free and unfettered private enterprise on the one hand and centralized planning on the other. That is what is called in the trade the “tertium non datur fallacy”. The challenge lies not in freeing private enterprise to do what only it can do but in having appropriate regulations coupled with incentives to ensure that private enterprises will indeed do what they are better at than government.

No, we shouldn’t have a centrally planned economy but we shouldn’t have laissez-faire capitalism, either. The right solution is the messy, imperfect working of government together with private businesses that constantly needs readjustment and retuning.


Think Strategically

I wanted to pass along the conclusion of strategist James Holmes’s reaction to China’s having tested a hypersonic missile system:

Such are the vagaries of strategy in the second nuclear age. More and more competitors of different shapes, sizes, and strategic cultures join the nuclear-weapons club, complicating the geometry of deterrence. And as newcomers join the club, oldtimers from the first nuclear age, a.k.a. the Cold War, ponder whether to reduce, hold static, or expand their nuclear inventories.

Asymmetry and complexity abound.

And yet. Strategy is a process of interaction among antagonists bent on imposing their will on rivals, preferably without resorting to armed force, but resorting to force should they feel driven to it. A seesaw, back-and-forth dynamic characterizes strategic competition as the parties to the competition try to outdo one another. China’s nuclear-capable hypersonic missile appears impressive from the sketchy information available to date.

There is no cause for panic. Let’s think strategically, allocate resources, and reply to the China challenge.

My own view is congruent with that but somewhat different. Walt Kelly said it best: we have met the enemy and he is us. I am a lot less concerned about the “China challenge” than Dr. Holmes and much more concerned about the forces within the United States that prevent us from doing the things we need to do. They extend from Ike’s “military-industrial complex” to the massive complex of social services NGOs which live one government grant to the next to business executives who refuse to employ sufficient digital security on their businesses’s networks because it would cost too much (in one way or another) or elect to move manufacturing facilities offshore to save a few pennies on the dollar to progressives in Congress for whom military spending is an impediment to their spending what they want to domestically to hawks who never met a challenge they didn’t want to apply military force to solve. That conflict is a multi-front one which will be difficult to wage.