Category: Current Affairs

Austin Vernon on the IRA (from my email)

I’ve thought about this some, but honestly some of the subsidies are so mind bogglingly large that I find myself constantly going back to read the rules to make sure I’m not getting it wrong.

So I think the first thing is that the law is not fiscally sustainable because the subsidies are large and uncapped. I would expect it to quickly get into the trillions over the ten year period without adjustments.

One example is that with all the adders, solar panels get a $26/MWh subsidy when using the production tax credit. Lazard says solar can cost as little as $24/MWh in the best spots in its latest release. So it will spark a boom and all kinds of inflation in the solar supply chain, while also favoring utility scale solar over distributed solar since distributed is more hamstrung by regulation so the impact isn’t so dramatic. The process of selling these tax credits can be pretty complicated, though there are provisions to make it slightly easier in the bill. So the finance industry should earn a lot of new business.

Most attention has gone to the factories, but batteries already made sense before the IRA and you can see this in pre IRA announcements. So I think a lot of those factories would have happened, anyway. Car makers like to have their suppliers local and with batteries being such a big portion of cost there was no other way to do it. And naturally these factories are going near car manufacturing regions like the southeast or the upper midwest. There is no reason to ship batteries further than necessary.

Solar panel factories are a different bag of worms. I think we would have gotten more module assembly and possibly more polysilicon. That is because most of the module weight and volume is low value stuff like aluminum or glass that is expensive to ship. And we have restrictions on using Chinese polysilicon from the Uyghur provinces. But wafers and cells would have been slower to come over. Also some module assembly might have been in Mexico instead of the US. Of course these factories are going to states with lower labor costs where it is easier to build, which happen to be Republican. Another wrinkle with solar factories is that they depreciate at an extreme rate. Usually they are obsolete after 2-3 years and need to shut down. So there is a real possibility at the end of the law that you see a massive drop in solar deployment because the inflated supply chain will have to rationalize to non-subsidy conditions and then our factories will not have the revenue to upgrade to the next generation. That will then kill the supplier ecosystem, etc. So the earlier the subsidies get ratcheted down to prevent the boom-bust cycle, the better for long term health. It may also be like the wind PTC a decade ago where things collapsed after lapse of the subsidies and they brought them back.

Hydrogen also has crazy subsidies similar in magnitude to the solar PTC, especially because you can stack the solar PTC on top of the hydrogen one. Who knows where that will show up. But it will be frothy. We should be able to tell how crazy these were because I imagine few other countries will be so generous and we’ll be able to see what use cases happened here that made sense nowhere else. Hydrogen is the lazy answer to decarbonization problems and there is almost always a better way. Free of subsidies hydrogen demand would probably fall because refining lighter fuels like gasoline and diesel is the main use case. I’m optimistic about hydrogen and CO2 feedstocks for chemicals on longer horizons, but the US is the last place they make sense because of our inexpensive natural gas.

So overall you have inflationary/budget pressure on the negative side while support could be relatively bipartisan at the national level because of a climate/economic development alliance. I don’t think local and state will align as well. Probably there will be more local bans if people are building solar to mostly farm subsidies. And state utility regulators and ISOs might resist further solar+wind deployment where the natural gas lobby is strong (you could rename IRA “natural gas demand destruction bill”). The sweet spot would be solar + wind directly powering local industry by providing things like process heat (sorry geothermal!).

Here is the Substack of Austin Vernon.

What have I been thinking about lately?

Robin Hanson asked me this question at lunch last week, and due to the general raucousness of the occasion I didn’t get a chance to answer.  So here is my list of recent questions:

1. How much did the British colonial welfare state for Ceylon in the 1930s help that country and its later social indicators?

1b. How much did it matter that Ceylon was a Crown colony and not part of the Raj?

2. Why has Thailand done considerably better than the other major Buddhist economies?

3. Why are there so few liberal or even technocratic voices in Sri Lanka politics?

3b. How is this consistent with Sri Lanka doing so well on so many social indicators?

4. Why does Qatar seem (at least to me) so much more aesthetic than Dubai?

5. What is the correct Straussian reading of all those 2017 Saudi (and other) demands made on Qatar?

6. To what extent will the developments of the next twenty years favor nations with a lot of scale?

7. Ecuador seems to be moving backwards on the political front, including violence, corruption, and electoral problems.  In the smallest number of dimensions possible, why exactly is this happening?

8. What is the equilibrium, given our current trajectory on drug policy and the rising number of drug-related and also opioid deaths?

9. When generative AI models become better and smarter, how many more people will be interested in incorporating them into their workflows?  Or will most of this happen through a complete turnover of companies and institutions, happening much more slowly over time?

10. Music delivery and distribution mechanisms have changed so many times?  But what exactly will or could succeed music streaming?  When it comes to the economics of music, have we reached “the end of history”?

11. What exactly does one learn that is special when traveling to places that are not at all on the cutting edge?

12. Which exactly are the political economy principles governing the allocation of green energy projects in the IRA?

There are more.

Which countries are the losers in the new mercantilism?

New tax credits for manufacturing batteries, solar-power equipment and other green technology are drawing a flood of capital to the U.S. The European Union is trying to respond with its own green-energy support package. Japan has announced plans for $150 billion of borrowing to finance a wave of investment in green technology. All of them are working to become less dependent on China, which has a big lead in areas including batteries and the minerals to make them.

Now, some smaller players are getting left behind. Many are nimble economies that were on the rise during decades of free trade, but are at a disadvantage in a new era of aggressive industrial policy. Industrialized nations such as the U.K. and Singapore lack the scale to compete against the biggest economic blocs in offering subsidies. Emerging markets such as Indonesia, which had hoped to use its natural resources to climb the economic ladder, are also threatened by the shift.

Here is more from Ballard, Douglas, and Emont at The Wall Street Journal.

Emergent Ventures winners, 28th cohort

Anup Malani and Michael Sonnenschein, Chicago and Los Angeles respectively, repeat winners, now collaborating on a new project of interest.

Jesse Lee, Calgary, to lower the costs on developing safe and effective sugar substitutes.

Russel Ismael, Montreal, just finished as an undergraduate, to develop a new mucoadhesive to improve drug delivery outcomes.

Calix Huang, USC, 18 years old, general career development, AI and start-ups,

Aiden Bai, NYC, 18, “to work more on Million.js, an open source React alternative,” and general career development.  Twitter here.

Shrey Jain, Toronto, AI and cryptography and privacy.

Jonathan Xu, Toronto, currently Singapore, general career support, also with an interest in AI, fMRI, and mind-reading.

Viha Kedia, Dubai/ starting at U. Penn., writing, general career development.

Krishiv Thakuria, entering sophomore in high school, Ontario, Ed tech and general career development.

Alishba Imran, UC Berkeley/Ontario, to study machine learning and robotics and materials, general career development, and for computing time and a home lab.

Jonathan Dockrell, Dublin, to finance a trip to Próspera to meet with prospective venture capitalists for an air rights project.

Nasiyah Isra-Ul, Chesterfield, VA, to write about, promote, and create a documentary about home schooling.

Sarhaan Gulati, Vancouver, to develop drones for Mars.

And the new Ukrainian cohort:

Viktoriia Shcherba, Kyiv, now entering Harris School, University of Chicago, to study economic and political reconstruction.

Dmytro Semykras, Graz, Austria, to develop his career as a pianist.  Here is one recent performance.

Please do note there is some “rationing of cohorts,” so some recent winners are not listed but next time will be.  And those working on talent issues will (in due time) end up in their own cohort.

Diogo Costa on Brazil

From my email, via Gonzalo Schwartz:

The country ranks third globally in consuming information via digital platforms, a landscape that cultivates distrust in public institutions and ignites social unrest. This has fostered a rise in right-wing populism, including the election of former president Jair Bolsonaro, intensifying what Martin Gurri describes as a ‘crisis of authority.’  Efforts to counter this crisis, however, further destabilize Brazil’s democracy. 

Supreme Court Justice Alexandre de Moraes exemplifies this turmoil with his controversial measures, including arbitrary digital content removalousting elected officials, and implementing unprecedented surveillance. Moraes and his peers have been criticized for investigating entrepreneurs and freezing assets over alleged anti-democratic private messagesprobing executives from Google and Telegram for supposed disinformation campaignsrevoking passports of foreign-based journalists, and censoring a film about then-president Jair Bolsonaro. 

The government’s endorsement of these measures amplifies the crisis. It has established a “National Attorney’s Office for the Defense of Democracy” to combat disinformation, while introducing a contested “fact-checking” platform. The Federal Prosecutor’s Office recently requested user data from followers of former President Jair Bolsonaro across major social media platforms to aid their investigation into anti-democratic activities. 

Two key anti-corruption figures, Senator Sergio Moro, an ex-judge, and Representative Deltan Dallagnol, a former prosecutor, are under increased political assault. Accused of colluding in past investigations, they now face political retribution. Dallagnol has already been ousted from Congress by Brazil’s electoral court, and many speculate that Moro will follow suit. Their plight was summed up by President Lula’s statement, “I will only feel well when I f*ck with Moro”. 

These high-profile cases are emblematic of a broader collapse of Brazil’s anti-corruption efforts. Initiatives like Operation Car Wash, which reclaimed R$3.28 billion out of R$6.2 billion in misappropriated funds, are now being undermined by political backlash. This underscores the urgent need for robust institutions that can effectively combat corruption without succumbing to political pressure. 

Brazil’s circumstances resonate regionally due to its leadership role. As Ian Bremmer recently stated, commenting on the Supreme Court making former president Jair Bolsonaro ineligible for the next eight years, “Brazil [is] setting the standard for U.S. democracy”. This political meddling could influence other countries, potentially eroding the rule of law in other democracies. 

Strengthening Brazil’s commitment to the rule of law transcends national borders — it’s a regional imperative. The advantages span from curbing corruption to advancing large infrastructure projects unimpeded by interference, as well as bolstering economic relationships given Brazil’s significant role in regional trade.

*War and Punishment*

The author is Mikhail Zygar, and the subtitle is Putin, Zelensky, and the Path to Russia’s Invasion of Ukraine.  I have to tell you the subtitle put me off and I nearly didn’t buy this one, as too many books in this area repeat the same (by now) old material.  But after some extensive scrutiny in Daunt Books, I decided it was for me.  And I was right.  It is by far the best book on the origins of the war, both historical and conceptual, and for that matter it gives the literary history as well.  Here is one excerpt:

…the Clinton administration’s approach is even blunter: Washington will not discuss anything with Kyiv until Ukraine gives up its Soviet-inherited nuclear arsenal: 176 intercontinental ballistic missiles, able to carry 1,272 nuclear warheads and 2,500 tactical nuclear weapons.  True, Ukraine cannot actually fire them: all the control systems are located in Russia. But Clinton and his diplomats echo the same mantra: any economic aid to Ukraine is contingent on all nuclear weapons being relocated to Russia. Kravchuk tries to resist, demanding compensation and security guarantees, in return.  In the end, Kravchuk gets the promises he wants.

Among many other sections, I enjoyed the discussion of how revolutionary the 1770s were:

But an even more transformative decade is the 1770s, which sees the birth of the global political and geographical structure as we know it today, the start of the Industrial Revolution, and the laying of the foundations of the modern economy.  James Watt invents the steam engine; Adam Smith writes An Inquiry into the Nature and Causes of the Wealth of Nations; Captain James Cook reaches the shores of Australia and New Zealand.  Curiously at the same time a new type of political confrontation emerges — the struggle not for one’s homeland or monarch but also abstract values.  It is the 1770s that give rise to both populism and the liberal idea.

Definitely recommended, this will make my best non-fiction of the year list.

Argentina update, canine Mastiff edition

A far-right libertarian candidate won Argentina’s open presidential primary election on Sunday, a surprising showing for a politician who wants to adopt the U.S. dollar as Argentina’s official currency and embraces comparisons to Donald Trump.

Javier Milei, 52, a congressman, economist and former television pundit, secured 30 percent of the vote with 96 percent of the ballots counted, making him the front-runner for the presidency in the fall general election.

Polls had suggested that Mr. Milei’s support was at about 20 percent, and political analysts had predicted that his radical policy proposals — including abolishing the country’s central bank — would prevent him from attracting many more voters…

Mr. Milei has pitched himself as the radical change that the collapsing Argentine economy needs, and he could be a shock to the system if elected. Besides his ideas about the currency and the central bank, he has proposed drastically lowering taxes and cutting public spending, including by charging people to use the public health care system; closing or privatizing all state-owned enterprises; and eliminating the health, education and environment ministries…

He then thanked his sister, who runs his campaign, and his five Mastiff dogs, each named after a conservative economist.

Here is the full NYT story, and one dog is named after Milton Friedman, one for Murray Rothbard, and two for Robert Lucas, another being named after Conan.  All are clones of the same underlying dog.

I thank MN for the pointer.

The WV Canary in the Coal Mine

West Virginia University has announced a preliminary plan to cut 7% of its faculty and 9% of its majors:

Among the programs recommended for discontinuance, World Languages including all 32 faculty positions. WVU is also recommending the elimination of several programs in the College of Creative Arts, graduate programs in higher education administration and special education.

On twitter there is a lot of bemoaning about the importance of languages but the students are voting with their feet. Indeed, most of these programs are only sustained by foreign language requirements which are increasingly otiose in a world with ubiquitous instant translation. The students are correct, the value of learning a second language has fallen.

Where the ax should fall may be debatable but the ax must fall somewhere because of demographics. College enrollment peaked in 2010 and has since fallen by 15%. What’s going on in WV is thus a reflection of national trends, magnified by West Virginia’s own decline in  population. Full paying foreign students from China are also way down. Now add to declining college demographics, budgets hit by the great recession and then the pandemic. Now add in the rise of online learning which means that universities can outsource low-demand classes to other universities and save money and quite likely increase quality. (Indeed, the local teacher might have been teaching online anyway so why not substitute with a world expert and great teacher who has the backing of an entire team of delivery experts?) Finally, add in the fact that a substantial part of the electorate would like to see a decline in programs they see as politicized.

Put it all together and the only surprise is how long it has taken for the ax to fall. You can be sure, however, that there is more chopping to be done.

The talks from the Civic Future conference on the Great Stagnation

From my email, from Civic Future:

We held our inaugural annual conference The Great Stagnation Summit 2023 last month at the University of Cambridge. Well, you can now watch and listen to videos of the panel discussions on our YouTube channel. We have also made the discussion transcripts available, which you can read using the links below or on the summit page.

Progress: Have we run out of road? – Tyler Cowen (keynote),  David Edgerton, Sam Bowman, Diane Coyle  Video / Transcript

Rekindling Britain’s economic flame – Lord Sainsbury, Andy Haldane, Anton Howes, Deirdre McCloskey, Tim Besley Video / Transcript

Progress on trial – Aria Babu, Nicholas Boys Smith, Matt Ridley, Sam Richards, Inaya Folarin Iman  Video / Transcript

How to be good stewards of progress – James Phillips, Ben Reinhardt, Stian Westlake, Rachel Wolf, Munira Mirza Video / Transcript

Unlocking the Potential – Matt Clifford, Logan Graham, Saffron Huang, Marc Warner, John Thornhill Video / Transcript

Japan estimate of the day

An estimated 42% of adult Japanese women may end up never having children, the Nikkei newspaper reported, citing a soon-to-be-published estimate by a government research group.

In a more optimistic scenario, a quarter of women born in 2005 may end up not having offspring. The midpoint estimate by Japan’s National Institute of Population and Social Security Research calls for a third of them not having children, the newspaper reported Wednesday.

Here is more from Reed Stevenson at Bloomberg.

Fairfax County facts of the day

Northern Virginia might be the safest region in the whole country, based on this Bloomberg analysis of crime and external-cause mortality data. The local commonwealth’s attorney likes to boast that Fairfax is the safest county of its size. Letting more people live there would not change that.

Forty percent of Fairfax residents aged five and older speak a language other than English at home, per the May strategic plan update. The county’s extraordinary ethnic and cultural diversity makes it a paradise for employers and food lovers alike.

That is from Luca Gattoni-Celli, most of the post concerning zoning issues.

Should we now expect a recession?

That is the topic of my latest Bloomberg column, and here is one excerpt:

How worried should we be? There is a common and popular tradition that suggests an economic recovery is a harbinger of bad times. Perhaps a recovery has a kind of expiration date, just like the milk in your refrigerator. After some period of time, it simply goes sour, no matter what you might try to do to keep it fresh.

The good news is that the old macroeconomic saying — “Expansions don’t die of old age” — is basically true. Most academic literature supports that conclusion. There is always a possibility that an expansion can turn into a recession, as remains the case today, but the mere fact of an expansion should not be cause for worry.

In 2010, experts were asking whether the economic recovery would run out of steam. Instead, it continued until Covid intervened — and right before Covid, the economy even accelerated. In 2021, the OECD worried that the US recovery from the pandemic might be slowing down. That worry also turned out to be wrong.

Again, the proper conclusion is not that recession is impossible. It is that recession does not become more probable as the recovery proceeds.

Please do not commit the mood affiliation mistake of taking this as a verdict on the Biden administration, one way or the other.  It has been known for a long time that the influence of the President on the economy is extremely limited.  Furthermore, to the extent the Biden people are Keynesian (and mostly they are), that is the view that implies we should be in a recession right now.  Most likely the ongoing recovery is a mix of underlying positive real economy momentum, and Sargent/Lucas credibility mechanisms for getting the inflation down.

Progress in Sri Lanka

…for Sri Lanka, the only country in the region to default on its official debt amid the economic squeeze caused by the pandemic and the Ukraine war, these are sunny days.

Tourism revenue and remittances from Sri Lankan workers overseas have come roaring back. Inflation, which reached 70% last September, was back down to 6.3% in July. As a result, the Central Bank of Sri Lanka has cut its benchmark interest rate by 4.5 percentage points since June…

To win the IMF’s support, Colombo took hard but much-needed steps to increase fuel and electricity prices as well as raise tax rates and extend the tax net. A new central bank governor raised benchmark interest rates by 8 percentage points over the course of 2022 to try to put a lid on inflation and bring a degree of macroeconomic stability…

The IMF, which approved support for Colombo in March, estimates Sri Lanka’s current-account deficit will be around 1.5% of gross domestic product from this year onward. This would be a manageable and normal level for any developing country that is a net importer of fuel and food.

Here is the full Nikkei story, via AM Livingston.

My views on the UFO hearings

I found them very interesting to watch, and wrote my last Bloomberg column on them.  Here is one excerpt:

I do not think that the US government has the remains of alien spacecraft, for example, including some alien bodies, as claimed by retired Air Force Major David Grusch. But the rest of the evidence was presented in a suitably serious and persuasive manner. It is clear, at least to me, that there is no conspiracy, and the US government is itself puzzled by the data about unidentified anomalous phenomena.

As for the more serious claims:

Members of Congress, to the extent they desire, have independent access to military and intelligence sources. They also have political ambitions, if only to be reelected. So the mere fact of their participation in these hearings shows that UFOs/UAPs are now being taken seriously as an issue.

The Pentagon issued a statement claiming it holds no alien bodies, but it did nothing to contradict the statements of [Ryan] Graves (or others with similar claims, outside the hearings). More broadly, there have been no signs of anyone with eyewitness experience asserting that Graves and the other pilots are unreliable.

As is so often the case, the most notable events are those that did not happen. The most serious claims from the hearings survived unscathed: those about inexplicable phenomena and possible national-security threats, not the hypotheses about alien craft or visits.

And to conclude:

I suspect that, from here on out, this topic will become more popular — and somewhat less respectable. A few years ago, UAPs were an issue on which a few people “in the know” could speculate, secure in the knowledge they weren’t going to receive much publicity or pushback. As the chatter increases, the issue will become more prominent, but at the same time a lot of smart observers will dismiss the whole thing because they heard that someone testified before Congress about seeing dead aliens.

I am well aware that many people may conclude that some US officials, or some parts of the US government, have gone absolutely crazy. But even under that dismissive interpretation, it is likely that there will be further surprises.

I thank commenter Naveen for the point about declining respectability.  A broader question — which I will continue to ponder — is why it is the United States that held these hearings, rather than other nations (NB: I hope you don’t fall for that Twitter map suggesting that UAP sighting are mainly an Anglo phenomenon).