Tue. Mar 2nd, 2021


British Prime Minister Boris Johnson holds a media briefing on the coronavirus pandemic at Downing Street in London, England, January 15, 2021. (Dominic Lipinski/PA Wire/Pool via Reuters)

Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: climate follies, minimum-wage follies, “robber baron” myths, Crocs’ pandemic surge, and COVID-19’s long-term economic scarring. To sign up for the Capital Note, follow this link.

Reining in the Economy, Not the Climate
British Prime Minister Boris Johnson, a politician not famous for his fondness for detail, accuracy, or practicality has been promising economic recovery, deregulation, and one of the most aggressive greenhouse-gas-reduction programs in the world. That the third objective will be difficult to reconcile with the first two is ignored, denied or, indeed, brushed aside amid claims of a green-jobs bonanza:

The UK’s path to meeting this target is backed by the Prime Minister’s Ten Point Plan for a green industrial revolution, which will create and support up to 250,000 British jobs by 2030. The plan sets out ambitious policies and investment, with the potential to deliver over £40 billion of private investment by 2030 . . .

I suppose Brits should be grateful that Johnson has a “ten point” rather than a “five year” plan. Progress!

As is so often the case, greenery goes hand in hand with corporatism with Johnson talking about “uniting businesses, academics, NGOs and local communities in a common goal to go further and faster to tackle climate change.”

“Stakeholders” all.

The individual, meanwhile, is just expected to follow instructions. In November, it was announced that the U.K. “plans to ban sales of diesel and petrol [gasoline] cars from 2030”, ten years earlier than was initially envisaged (the target date had already been brought forward to 2035). The original scheme — none too rational in the first place — was crowned with a fool’s cap, in that the ban was also to include hybrids. That cap is still there but has been allowed to slip a little.

What Car? (November 18, 2020):

While the ban has been brought forward again, hybrid cars that can operate for “substantial” distances on pure electric power will get a stay of execution until 2035. What constitutes substantial has yet to be defined.

But now reality bites.

The Guardian:

The future of Vauxhall’s UK car production will depend on government support after the “brutal” decision to ban the sale of new petrol and diesel cars from 2030, according to the boss of Stellantis, the newly formed carmaker.

Stellantis was officially created on Saturday after the completion of the merger between Fiat Chrysler Automobiles and Peugeot, the owner of the Vauxhall brand. The merger, first announced in October 2019, has created a global automotive giant with 400,000 employees and 14 brands, but its completion has also refocused the spotlight on its plant in Ellesmere Port, one of Vauxhall’s two remaining British factories.

Carlos Tavares, installed as Stellantis chief executive after leading Peugeot into the merger, said a final decision on whether to invest in production of a new car at Ellesmere Port will be made “within a few weeks”. He added a clear warning that the future of UK production “depends on the UK government’s willingness to protect some kind of an automotive industry in its own country.”

However, Tavares suggested the UK ban on petrol and diesel cars had made it more difficult to invest in the Ellesmere Port plant in the Wirral, even though the Brexit deal reached on Christmas Eve removed the threat of tariffs or quotas on most car exports from the UK. There are about 1,100 workers at Ellesmere Port manufacturing the Astra car.

The UK announced in November that it will ban the sale of pure internal combustion engine cars by 2030 to try to cut carbon dioxide emissions that cause global heating. The ban was brought forward from 2040, to the delight of environmental campaigners, but the change infuriated the car companies who still make big profits from selling petrol and diesel cars.

“If you change, brutally, the rules and if you restrict the rules for business then there is at one point in time a problem,” Tavares said. “The more that we put stringent objectives on the automotive industry the more you get close to that limit.”

It should be stressed that the U.K. is not the only country going down this route. France will be banning all but electric cars by 2040, and Germany, Ireland and the Netherlands will (like the U.K.) be doing so by 2030.

However, the U.K. has an additional self-imposed problem, which Tavares did not hesitate to point out:

Tavares added that the UK faced stiff competition from factories in the EU for electric vehicle investment. It would make sense to locate an electric vehicle factory closer to the larger EU market, he said.

Rather than choose something akin to the Norway option, retaining participation in the European Economic Area, the Single Market encompassing the EU, and three non-EU states (including Norway), the Conservatives opted for a very hard Brexit, a curious decision that makes the coming of a supposed green boom even less credible than it already is. Tariffs may not, in this case, be a problem, but a rather more treacherous obstacle, non-tariff barriers, will be.

At this point, American readers may be asking themselves why they should care about the contradictions inherent in what passes for a British prime minister’s economic policy. Well, to start with, our new president has made it clear that climate change will be an element that is central to his policies — and, unlike Johnson, he is not pretending that deregulation is any part of his agenda. In fact, he is promising the opposite.

And so far as “climate” is concerned, rejoining the Paris Agreement is only the beginning. Even that (mistaken) act did not stand alone.

The New York Times:

President Joseph R. Biden Jr. on Wednesday recommitted the United States to the Paris climate agreement, the international accord designed to avert catastrophic global warming, and ordered federal agencies to start reviewing and reinstating more than 100 environmental regulations that were weakened or rolled back by former President Donald J. Trump . . .

“We’re going to combat climate change in a way we have not before,” Mr. Biden said in the Oval Office on Wednesday evening, just before signing the executive orders. Even so, he cautioned: “They are just executive actions. They are important but we’re going to need legislation for a lot of the things we’re going to do.”

But in the meantime, take a look at this, via TechCrunch:

While the Biden Administration is being celebrated for its decision to rejoin the Paris Agreement in one of its first executive orders after President Joe Biden was sworn in, it wasn’t the biggest step the administration took to advance its climate agenda.

Instead it was a move to get to the basics of monitoring and accounting, of metrics and dashboards. While companies track their revenues and expenses and monitor for all sorts of risks, impacts from climate change and emissions aren’t tracked in the same way. Now, in the same way there are general principles for accounting for finance, there will be principals for accounting for the impact of climate through what’s called the social cost of carbon.

Among the flurry of paperwork coming from Biden’s desk were Executive Orders calling for a review of Trump era rule-making around the environment and the reinstitution of strict standards for fuel economy, methane emissions, appliance and building efficiency, and overall emissions. But even these steps are likely to pale in significance to the fifth section of the ninth executive order to be announced by the new White House . . .

The specific section of the order addressing accounting and accountability calls for a working group to come up with three metrics: the social cost of carbon (SCC), the social cost of nitrous oxide (SCN) and the social cost of methane (SCM) that will be used to estimate the monetized damages associated with increases in greenhouse gas emissions.

As the executive order notes, “[an] accurate social cost is essential for agencies to accurately determine the social benefits of reducing greenhouse gas emissions when conducting cost-benefit analyses of regulatory and other actions.” What the Administration is doing is attempting to provide a financial figure for the damages wrought by greenhouse gas emissions in terms of rising interest rates, and the destroyed farmland and infrastructure caused by natural disasters linked to global climate change.

These kinds of benchmarks aren’t flashy, but they are concrete ways to determine accountability. That accountability will become critical as the country takes steps to meet the targets set in the Paris Agreement. It also gives companies looking to address their emissions footprints an economic framework to point to as they talk to their investors and the public . . .

The calculations that go into producing these metrics will, in their own way, almost certainly be a marvel (read that word in any way you choose), but they will also be manna for lawyers, other regulators, and, of course, the rent-seekers (who include lawyers and those staffing regulatory agencies) who are already doing so well out of the interlinked ideologies of “socially responsible” investing and stakeholder capitalism.

Whether this will do anything to rein in the climate is doubtful (and, no, I am a lukewarmer, not a “denier”), but it will rein in the economy.

The jobs that are going to be lost as a result of Biden’s decision to rescind the necessary consents for the construction of the Keystone XL pipeline will only be the first casualties of the president’s (allegedly) green agenda.

Around the Web
Some Consequences of the Minimum Wage

The Grumpy Economist (John Cochrane):

A near universal fallacy is to treat people in any group as identical, to have one stereotype in mind and apply that to the entire category. Minimum wages advocates often paint a picture of the sole breadwinner of a family valiantly struggling to provide on the low wages. Doesn’t she deserve more? Well yes, we all deserve more, but that emotional appeal does not make the minimum wage a good idea.

Not all minimum wage workers are the same.  Some are young kids who need some slack from employers as they learn about showing up on time, being polite to customers. Some are ex-cons, recovering drug addicts, homeless needing a job so they can pay rent, or others with a spotty record, needing an employer who will take a chance on them. Some are recent immigrants, who don’t speak English very well or understand American workplace culture. Many have complex family responsibilities, which means they can’t take higher paid jobs with more rigid schedules. Some are old people, with health problems, who have social security and Medicare but want a little extra cash — Walmart greeters. A vanishingly small number are the stereotype, sole breadwinner of a family with children who if single has regular childcare and can work an 8-hour shift on a regular basis . . .

Since about forever, young unskilled and poorly socialized people have worked for a while at low or no wages while they pick up skills. Historically it was understood, and part of the employer’s obligation to give them skills and training as part of the deal, to “teach them the trade.” This still happens. Hang out at any small business, and see a teenager sweeping up and learning a lot about how the world works. For rich white college kids, it’s called internships. The minimum wage, restrictions on gig work, and other labor force interventions saying employers must offer either 8 hours full time work with benefits or nothing, cut off this long-standing institution for those on the lower end of the labor market.

So the main effect of minimum wages is to encourage, nay to force, employers to be more picky about who they hire. It benefits the few who are already good workers and can put up with a harder, less flexible schedule, fewer other benefits, and so forth. It hurts the others, many of whom miss the second chance, the on-ramp to legal work.

It’s not so much about how many jobs there are. It’s about who gets them.

“Robber Baron” Myths

On the site today, Veronique de Rugy mourns the economist Jerry Ellig and links to this piece he co-wrote for the Wall Street Journal with Phil Gramm back in 2010.

Here’s an extract:

If the Gilded Age was plagued by anticompetitive behavior, the data should show output falling and prices rising in monopolized industries. In a 1985 study, economist Thomas DiLorenzo tested this hypothesis for industries accused of being monopolistic during the debate on the Sherman Antitrust Act of 1890. He found that output in those industries actually increased by an average of 175% from 1880-90—seven times the growth rate of real gross national product. On average, prices in the so-called monopolized industries fell three times as fast as the consumer-price index. When it comes to the progressive itch to attack large firms, a famous line comes to mind: “Ignorance lies not in the things you don’t know, but in the things you know that ain’t so!”

Steel output grew by 242% from 1880-90, but during the 10 years after the Sherman Act, it grew by only 135%. Other “monopolized” industries with large differences in growth rates in the decades before and after the Sherman Act include copper (330% vs. 133%), petroleum (74% vs. 39%), refined sugar (65% vs. 48%) and cigars and cigarettes (121% vs. 40%).

Prices tell a similar story. On average, in the industries for which data are available, inflation-adjusted prices fell at a faster rate, or rose at a slower rate, in the decade before the Sherman Act than in the decade after it. The real price of steel rails fell by 43% from 1880-90, but fell by only 0.7% from 1890 to 1900. The wholesale price of sugar fell 22.4% from 1880-90 but fell by only 6.1% from 1890-1900. A similar pattern played out for copper, pig iron and anthracite coal.

Read the whole thing, and then ponder the war on big tech, the new “robber barons”, I am told by both Left and some on the Right.

Crocs’ Pandemic Surge

The Hustle:

Crocs are like the Uggs of summer. No one actually thinks they look good, but Crocs’ comfort and creativity have driven sales of 600m+ pairs.

The company is now watching double-digit growth, partnerships with A-list celebrities, and the Supreme-ization of its brand take flight.

This is per NDP Group, which specified that between March and October, while dress shoe sales sunk 60%, slipper and clogs sales surged 70% and 22% respectively, the latter driven by Crocs.

Some of this is down to CEO Andrew Rees:

Rees’ strategy to improve manufacturing, close underperforming stores, and make Crocs “cool” again turned the company into one of the world’s largest and fastest-growing athletic footwear brands:

Revenue from Jibbitz — the $4 insertable charms for Crocs’ 26 holes that parents used to buy for kids but are now worn by the likes of LeBron — doubled in 2020 and could account for 6.5% of revenue in 2022 . . .

Random Walk
COVID-19 and Risk Assessment

In a Capital Letter back in August I referred to work by Julian Kozlowski of the St. Louis Fed that (to oversimplify) demonstrated that one of the ways that the financial crisis had depressed economic growth was that it led companies to revaluate risk. The “impossible” had happened, and the fear that it could happen again either deterred investment or led companies to demand a higher potential rate of return before putting their dollars to work.

So, will COVID-19 have a similar effect?

Mr. Kozlowski returns with further commentary, and it does not make for a reassuring read.

An extract:

What are the long-run economic costs of COVID-19? While the virus will eventually pass, an event of this magnitude could leave lasting effects. A shift in confidence and fear could prevent firms and consumers from rebounding to their old investment and spending habits. A recent paper (Kozlowski, Veldkamp, and Venkateswaran, 2020a) formalizes this discussion and quantifies these effects. The authors use a standard economic and epidemiological framework, with one novel channel: a “scarring effect.” Scarring is a persistent change in beliefs about the probability of an extreme, negative shock to the economy.

Perception can be everything: People observe new events and use these experiences to inform their expectations. For example, if you haven’t seen many pandemics, you think pandemics are rare. However, when you see a pandemic, you come to believe that pandemics are not as rare as you previously thought…

Consciously or not, we all use past events to inform our beliefs, like econometricians do. Rare events are those for which we have little data. In turn, the scarcity of data makes new rare events particularly informative, so rare events trigger larger belief revisions. Furthermore, because it will take many more observations of non-rare events to convince someone that a rare event really is unlikely, these changes in expectations are particularly persistent.

The work by Kozlowski, Veldkamp, and Venkateswaran (2020a) embeds a belief-updating tool in a macroeconomic model with epidemics. Belief updating can generate large and persistent economic losses well after an epidemic is over because agents think that epidemics are more likely after seeing one . . .

The negative economic effects of the pandemic come from two sources: capital obsolescence and belief scarring. The pandemic and lockdowns forced consumers to work and consume differently, which can generate persistent changes in tastes and habits for years to come. Capital obsolescence reflects this long-lasting change in the economic value of installed capital. For example, in the post-pandemic world there might be more online shopping instead of in-store purchases. Hence, some installed capital, for example, commercial real estate such as shopping malls, could become obsolete…

Beliefs scarring explains most of the long-term costs. For example, in the post-pandemic world, investors in leisure and hospitality, such as restaurant owners, will take into account the risk of future pandemics and lockdowns and the associated economic costs . . .

— A.S.

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