July 21, 2023
Strange question coming up, but bear with me…
What are the odds of something happening in the past?
Pretty good, wouldn’t you agree?
I’m joking, of course. Hindsight is the perfect knowledge of the result of some action. And it’s always 20/20. The problem is, no knowledge is ever perfect — even when there’s a lot of data available for the decision in question. (Face it, if you’d have known where Nvidia would be today nine months ago, you’d have been all over it.)
And neither is hindsight much good when you’re surveying the wreckage of some current bad decision.
That makes learning from our mistakes a valuable life skill. But even better is learning from others’ mistakes. (Something I’ve always tried to teach my kids.)
Unfortunately a lot of people have a tough time doing that. There are all kinds of “cognitive biases” that make us, as individuals, discount, forget or ignore past events when considering a decision.
But when it comes to government decisions, they’re in a league of their own…
In your last monthly issue of Streetlight Confidential, I shared my thoughts on the latest economic policy out of Washington… Bidenomics.
The bottom line of Bidenomics is that it’s the government’s effort to implement an “industrial policy” — that is, a massive, targeted spending mission to direct the course of economic growth in the country.
There are literally dozens of examples throughout history of countries where government industrial policies failed spectacularly; from the USSR to Mao to Castro to Venezuela.
Of course looking back at the wreckage of other countries’ past failures has never stopped us before. And it ain’t stopping us now.
Washington’s current attempts to transition the national energy landscape from fossil fuels to renewables, while thought to be admirable by some, is really a ticking time bomb where our entire economy goes.
And since we dipped our toes in last week, I thought it’d be helpful to take a look at a couple real world examples of how centralized “industrial policy” always eventually runs amok resulting in massive deficits/debt, unbridled regulations and ultimately threatens our economy. (All emphases are mine.)
Subsidy Wars: The Race to Nationalize Anything
Here’s a story that longtime readers are probably familiar with…
We’ve been writing in this space about the “crystal ball” that Germany (and the EU in general) has provided the US regarding the outcomes of forcing its green energy program.
Around the turn of the millennium, Germany decided to take the lead in the green energy movement implementing a program they called “Energiewende” (“energy transition” according to Google translate).
The Epoch Times described it as:
…an ambitious program of subsidies for solar panels and wind turbines, coupled with a reduction in coal, oil, and natural gas. After the 2011 nuclear disaster in Fukushima, Japan, Germany decided to also close its nuclear plants.
Mind you, this was all at the direction of the government — in other words, industrial policy. Forgetting that they papered over it by claiming the noble goal of saving the planet, you might wonder how their efforts have progressed?
Twenty years later, in November 2020, a report from the IEEE — the Institute of Electrical and Electronics Engineers — laid out a very objective summary:
In 2000, Germany had an installed capacity of 121 gigawatts and it generated 577 terawatt-hours, which is 54 percent as much as it theoretically could have done (that is, 54 percent was its capacity factor). In 2019, the country produced just 5 percent more (607 TWh), but its installed capacity was 80 percent higher (218.1 GW) because it now had two generating systems.
They were basically using two power systems — one fossil fuel and one green — to generate electricity.
The new system, using intermittent power from wind and solar, accounted for 110 GW, nearly 50 percent of all installed capacity in 2019, but operated with a capacity factor of just 20 percent.
In other words, the green infrastructure doubled their theoretical production with a maximum capacity of 110 GW, but produced just 20 percent of that. As a result, the fossil fuel grid had to produce the balance. And because the German power industry is maintaining (by necessity) TWO grids to power the country, German consumers have unfortunately had to bear the costs…
It costs Germany a great deal to maintain such an excess of installed power. The average cost of electricity for German households has doubled since 2000.
This should be enough to make the US think twice about their all-in green industrial policy. But it gets even better:
We can measure just how far the Energiewende has pushed Germany toward the ultimate goal of decarbonization. In 2000, the country derived nearly 84 percent of its total primary energy from fossil fuels; this share fell to about 78 percent in 2019. If continued, this rate of decline would leave fossil fuels still providing nearly 70 percent of the country’s primary energy supply in 2050.
And the final kicker was that over the same period, without spending hundreds of billions on green infrastructure and ratcheting up the cost of living on unsuspecting American citizens, the US reduced its fossil fuel consumption by nearly 6% — the same as Germany.
Undeterred by Real World Results
Backed by this failure “unconventional” success and now powered by the Paris Climate Accord, the EU basically doubled down on providing funding for the black hole of energy they willfully ignored.
In June of 2020 the European Parliament issued a press release announcing they had defined “green” investments to help increase finance in the area.
The press release announced:
To achieve the goal [net zero emissions by 2050], the EU must invest in new technologies. The European Commission estimates that Europe needs about €260 billion in extra investment every year over the next decade.
Public investment will not suffice and private investors will have to step in to finance climate-friendly projects.
it continued…
This requires clear criteria on what exactly is sustainable and eco-friendly; otherwise, some funding might be directed to “greenwashing” projects that claim to be green, but in reality are not.
Who on earth would try to scam a government funding program meant to do such good work?? (#sarc)
In April of that year, the Council of the European Union published a document that laid out six “environmental objectives.” A venture would qualify as “environmentally sustainable” if they achieve one of the objectives without working counter to any of the others.
Do good in one area. Do no harm in the others. Sounds good.
But serious questions remained, as they always do, about the actual specifics of the criteria. The paper went on:
These should be ready by the end of 2020 for climate change mitigation and adaptation [the first two objectives]. The deadline is the end of 2021 for the other objectives. The rules will apply for each environmental objective one year after the technical criteria have been established.
Imagine waiting six months to a year and a half for the government to figure out if your business qualifies as environmentally sustainable and you qualify for green investment money.
That’s how a government’s industrial policy works…
A Little “Friendly” Competition
No matter, the EU, while burning through money, punishing its citizens financially and arguing over who gets to be an environmentally significant business, continued to pursue its leadership role in the global green movement. But then in 2022, the competition stepped up.
In August of that year, President Biden signed into law his own industrial policy called the Inflation Reduction Act. (The EU has taken somewhat of an issue with it. But more on that in a sec.) News outlets reported with varying degrees of perspective…
Essentially the act spends $433 billion on green energy incentives including tax credits and rebates for those willing to support the cause by producing or buying things that support the fossil-free, electric economy. (Full transparency: Only $369 billion goes toward that. The other $64 billion goes to fund the Affordable Care Act — another program we’ll be paying for forever.)
Let me share a couple more details about this Biden brain-child.
According to the White House’s number-crunchers, the bill will reduce the deficit by $300 billion over the next decade. How does that work? Two ways…
First those doing the math have to make a series of assumptions about what GDP growth and tax revenues will be in the years going forward. Do I need to tell you these estimates can be wildly optimistic?
Second, in every spending bill the government includes something called “pay-fors” — spending cuts or revenue enhancements to offset the money spent in the bill. The majority of the revenue this bill anticipates — $737 billion in all — comes from adjusted corporate taxes, renegotiated prices in the pharmaceutical industry and 80,000 new IRS agents.
Expecting that everyone affected by these changes will willingly kick in their “fair share” is just naive. Enforcement and collections will face some pretty stiff opposition which means that $737 billion isn’t likely to happen.
And independent calculations seem to confirm that. According to Reuters:
“Originally, this was supposed to be a deficit reducer, but now it has flipped. Instead of reducing the debt, it will add to it,” said Kent Smetters, the faculty director of the Penn Wharton Budget Model, which scrutinizes federal spending.
The bill will add $750 billion to the nation’s deficit over ten years, according to Smetters.
And incidentally…
(The Biden administration says that scenario is too bleak, but a White House official acknowledged that reductions to the deficit could take longer than estimated.)
When you’ve got the insiders half-heartedly agreeing with you, you know there’s trouble.
But wait! There’s more…
Not only will the bill not cut the deficit as much as expected (I’ll just assume that the PWBM is overshooting the downside), there’s nothing that caps the spending side of the bill. According to Oilprice.com…
…the subsidies envisaged in the bill are not capped—there is no upper limit. According to Goldman Sachs and Credit Suisse, the Democrat legislators who voted the bill into law underestimated the cost of the subsidy package by as much as 300%.
That means the total price goes up as well…
University of Pennsylvania now estimates U.S. President Joe Biden’s signature law will cost $1.04 trillion over a decade, up from an initial estimate of $384.9 billion.
So we go from a $300 billion deficit reduction to a $1 trillion-plus cost. Let’s not let that stop the government from implementing its industrial policy.
Europe Says “Game On!”
Now let’s go back to the European Union and remember they’ve been invested in becoming the global leaders in green for the last nearly quarter century. This action by the Biden administration was not well received.
In February of this year — in response to the Inflation Reduction Act — they announced a program called the Green Deal Industrial Plan.
The plan is designed to speed up permitting for green projects, loosen rules for state subsidies, retrain workers to enter the green workforce, and lock up trade deals to keep their green supply chains secure.
And there was this…
BRUSSELS, July 6 (Reuters) – Europe will require investments of more than 700 billion euros ($762.44 billion) a year to meet its energy transition goals to combat climate change, the European Union Commission said on Thursday.
“Overall, additional investments of about 620 billion euro ($675.3 billion) annually will be needed to meet the objectives of the Green Deal and of our REPowerEU plan, with an additional 92 billion euros needed to address the objectives of the Net-Zero Industry Act over the 2023-2030 period,” it said in a statement on its 2023 Strategic Foresight Report.
This is the bottom line of governments and their industrial policies.
There is never a recognition of policy failures — even when they’re evident in others attempts to do the same thing. And the only response they have is to double down and spend more money.
The odds are good that in 10 years, if the current administration’s policies continue full speed ahead, we’ll be roughly in the shape of Germany and Europe today. Trillions over budget, trillions more in debt with consumers spending multiples of what they spend today just to live their lives.
Now let’s take a quick look at another piece of Bidenomics’ industrial policy…
Playing Chicken with China
It’s no secret that relations between the US and our chief geopolitical/economic rival, China, have grown tense over the past months.
There was Nancy Pelosi’s unilateral visit to Taiwan which pissed the Chinese off prompting them to cut off high-level communications and undertake military exercises around the Strait of Taiwan.
Then there was the “disagreement” over China’s support of Russia in the war in Ukraine.
And then Biden shot down China’s weather/spy balloon (after it crossed the entire United States and passed over a number of sensitive US military sites).
If all that wasn’t enough, things are about to get crazier.
Back in August 2022, the president signed the Chips and Science Act — a piece of his industrial policy which earmarks $252 billion for semiconductor R&D and production. Biden wants chips made stateside to secure our access to the technology. (Not a bad goal given what became evident during the pandemic lockdowns.) And for a piece of the $252 billion pie, a number of chip manufacturers were happy to oblige.
But then the administration stepped in it again…
WASHINGTON—The U.S. imposed new export restrictions on advanced semiconductors and chip-manufacturing equipment Friday in an effort to prevent American technology from advancing China’s military power.
The rules will require U.S. chip makers to obtain a license from the Commerce Department to export certain chips used in advanced artificial-intelligence calculations and supercomputing—crucial technologies for modern weapons systems, senior administration officials said.
On its face, this may sound sensible. But you have to realize that China makes up roughly 32% of the global chip buying market. That amounted to $180 billion in sales last year. Incentivizing manufacturers to come to the US to produce chips and then restricting them from selling to one-third of the world’s market is a pretty stiff slap in the face.
Nvidia realized this. And they did what any smart company would do.
They pivoted and started producing a chip called the A800 which operated with significantly lower bandwidth than their A100 (the chip most used for AI calculations). Importantly, the performance of the A800 fell below the government’s threshold for dealing with China.
Washington decided that didn’t work either.
Last month they began revising those thresholds to include Nvidia’s new chip.
Closing borders from trade is a loser’s game. And the Biden administration’s move to restrict China’s access to certain technology surrounding AI is a fool’s errand.
In an economy seeking to avoid recession and tame inflation, technology plays a key role. It creates efficiency, can lower costs of production, and do so while improving product quality or quality of life.
This week, ASML, a semiconductor company that supplies lithography systems among other necessary chip making equipment, released a strong earnings report that surpassed expectations. Those earnings were driven by China buying older equipment as it faces restrictions from the U.S.
We’re quickly moving to a situation where companies and countries will find a way. The US was the birthplace of the semiconductor industry. An industry we pretty much gave up in the name of cheaper production costs. Today Taiwan, South Korea and China are all MAJOR players in the chip business.
If US-based companies are restricted from selling to China today, then China will find what they need elsewhere or worse, create the technology themselves. If they choose the latter path, it’ll not only take business away from US companies as China is the world’s largest commercial market for semiconductors, but it also opens Pandora’s box.
China will create its technology unencumbered, and the US may have no idea what China is creating.
Additionally, China is a major source of rare Earth metals, gallium, germanium, and lithium, all of which are much needed in the United States. We see gallium as the next evolution of semiconductors. The irony here is by making this move, the Biden Administration could cut off its nose to spite its face. WIthout gallium, the US may not be able to evolve into the next generation of semiconductor chips that are 10 times faster, 10 times smaller, and 10 times more heat resistant while China will have no problem with the resources needed to evolve their semiconductor technology.
So this industrial policy, designed to keep the US ahead of China, may set us back decades or more all while hurting the economy at the same time.
That’s a scary thought.
Humbly yours,
Tim Collins
Editor, Streetlight Confidential