Texans in the Cold: A Few Completely Random Thoughts

Houston is the “energy capital of the world.” It is home to 4,600 energy-related firms, according to the Greater Houston Partnership. We have the expertise in our own backyard to ensure energy reliability for the state. However, Texas’s leaders have chosen to prioritize profit over people. When there are no regulations requiring power plants to winterize, and the generous tax abatements they receive don’t have those requirements, it creates an incentive not to do so for once-in-a-decade storms. The added cost of preparing a plant for extreme weather would cause the price of electricity provided to be higher, thus making the responsible plant operator unable to compete in a market where these costs are often skipped. — Heather Golden, “Failing Government, Freezing Texans”, The Bulwark

When a deep freeze shut down half the power generation capacity in Texas this week, the wholesale price of electricity exploded 10,000 per cent, with the financial consequences now being felt all the way from individual households to huge European energy companies. Astronomical bills face customers who opted for floating-rate contracts tied to wholesale prices in the state’s freewheeling electric market.

The wholesale power price was at the maximum allowable $9,000 a megawatt hour for five days from last Sunday. For a household, that translates to a $9 a kilowatt-hour electricity rate, compared with a typical cost of 12 cents.


In Burleson, a suburb of Fort Worth, Valerie Williams has been charged more than $6,000 by her electricity retailer Griddy to power her 1,400 sq ft home over the past few days. As the storm approached, Griddy told its customers to switch to more typical fixed-rate plans from other providers, but not everyone did, since there was little indication of just how extreme prices would become.

Griddy was charging her credit card multiple times a day, Williams said. She struggled to find a new provider during the crisis before finally identifying one that would switch her service on Friday. “I’m guessing it will be close to $7,000 by the time we get moved,” she said of her bill. . . .

On Friday, the city council in Denton, Texas, met to approve emergency borrowing to cover $300m the city-owned utility would pay Ercot this week — more than quadruple its purchases in full-year 2020. — “Freeze Sends Prices Soaring: Grid Operator Ercot Requires Billions in Payments”, Financial Times

The idea behind Texas energy policy was that a deregulated market didn’t require any oversight to protect the system from crisis, because profit-maximizing utilities would build in robust excess capacity to take advantage of possible price spikes. But they didn’t, even though the price spike has been incredible. — Paul Krugman

Yes, there are numerous places where Smith deplores the impact of government, and specifically the effects of intrusive regulation on trade . . . . But overall the view of Smith as anti-government seriously mistakes him. . . .He was quite clear that markets — and indeed society as a whole — are generally sustained by trust and confidence, and that for these and other things they rely on external institutions, notably of law and government, for their viability. By contrast, if merchants are left entirely to their own devices, the result is corrosive. He robustly asserts that “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”. No one who has read Smith closely can rationally believe he is an out-and-out free-marketeer. — Jesse Norman, Adam Smith: Father of Economics

The divide in our politics isn’t between proponents of big vs. small government. It’s between those trying to use government to help people and those who just want to troll the other side. When we elect responsible people, we end pandemics. When we don’t, people freeze to death. — Rep. Tom Malinowski (D-NJ)

As Different Kinds of Capitalism Take Over the World

The New York Review of Books comes in the mail every few weeks. I’ve never been tempted to switch to a digital subscription, partly out of habit, but also because the version on paper is good for reading and also good for looking at. For one thing, I’d miss the book advertisements, which don’t appear online. A yearly subscription to the paper edition is kind of expensive, but we still have libraries and you can still buy a single copy (although those are kind of expensive too). What I didn’t know until just now is that in addition to a regular digital subscription, you can get a Kindle subscription for the low, low price of $3.49 a month (which translates to $2.09 per issue). The world’s richest capitalist is a money grubber (even now!) who treats some of his employees very badly, but he’s made life easier at times.

I’d provide a link to an excellent article in the September 24th NYRB but, except for the latest edition, all of their articles are behind a paywall. The article is “Can We Fix Capitalism?” by Robert Kuttner. Here’s a bit of the article, which is worth reading all the way through:

For enthusiasts of capitalism, democracy and the market are said to be handmaidens. Both depend on the rule of law. Both express aspects of liberty, prizing opportunity and mobility. During the era of classical liberalism, which began in the late eighteenth century, free commerce and political freedom advanced in tandem. Monarchies gave way to republican rule; open markets replaced royal monopolies and inherited privileges. For about a century the franchise gradually expanded, and markets became the primary mode of commerce. The brand of democratic capitalism that emerged in the West after World War II included not just those earlier hallmarks but such liberal values as tolerance, compromise, and enlarged civic participation, as well as regulatory and social welfare policies to buffer the less savory tendencies of markets. Modern capitalism reflected a grand social bargain.

When communism collapsed in 1989, the fall of the Berlin Wall was heralded as ushering in a golden age in which liberal capitalism would be triumphant. Needless to say, things haven’t worked out quite as expected. The social compromises of the postwar welfare state have given way to more primitive forms of capitalism that in turn invite angry reactions by the citizenry. Demagogues have channeled this anger. Today, some form of capitalism is ascendant nearly everywhere. But liberal democracy is in big trouble.

Instead of creating a new golden age, corrupted capitalism has produced alliances between autocrats and oligarchs, epitomized by the regimes of Putin and Txxxx, who both reinforce societies that were already becoming less liberal and more unequal. This is the pattern not just in countries with weak or nonexistent democratic traditions, notably Russia and China, but in the very heartland of liberal democracy, the United States of America. Contrary to standard assumptions about liberalism, autocratic capitalism also coexists and interacts with enlarged global trade, making it harder to defend living standards in democratic nations that once protected their workers and citizens by regulating markets.

In a cycle of reactivity, ordinary people turn not to social democracy—now at its weakest point since World War II—but to the vicarious and counterfeit satisfactions of extreme nationalism. That in turn permits autocrats to pose as populist champions of a mystical People, diverting attention from the economy’s concentrated wealth and rigged rules. This unexpected twist in the fraught relationship between democracy and capitalism is the signal event in the political economy of our age.

In Capitalism, Alone, the economist Branko Milanovic tries to make sense of what has occurred and what the future holds. . . . Milanovic chronicles the rise of authoritarian capitalism, both in nations that once epitomized liberal capitalism such as the US and in countries like China, which are partly capitalist but show no signs of turning liberal. Until recently, as the China scholar James Mann has observed, the widespread hope was that as China’s economy became more capitalistic, the country would become “more like us.” The reality is that we are becoming more like China. . . . 

Milanovic’s first section, on liberal capitalism, offers a smart assessment of how it once worked and why it is now under siege. In the heyday of managed, meritocratic capitalism, societies relied on several mechanisms to equalize income and opportunity. For Milanovic, “strong trade unions, mass education, high taxes, and large government transfers” were essential components. All of these have lost traction as capital has gained more power relative to labor, and globalization has spawned competition to cut taxes, slash wages, and reduce regulation. . . . 

Liberal capitalism, Milanovic concludes, is “reneging on some crucial aspects of [its] implicit value system” via “the creation of a self-perpetuating upper class.” That trend in turn threatens liberal capitalism’s own survival, and makes it less appealing as a model for the rest of the world. . . . 

While Chinese political capitalism is an economic triumph, Russia’s is not. Post-Soviet Russia is basically a petro-state. Its economy has largely failed to generate consumer export industries, the mainstay of China’s success. Vladimir Putin has an understanding with the oligarchs; they can pursue corrupt enterprises as long as they throw some graft his way and don’t make trouble for the regime. His net worth is said to be around $200 billion. In a taxonomy of capitalisms, it would have been interesting to have Milanovic’s insights on why the Russian brand of autocratic capitalism fails while China’s succeeds. . . . 

The most provocative part of the book is the section in which Milanovic addresses a dilemma with no intuitively correct answer: Should we look at the issue of economic inequality as a national or a global question? Most economists and concerned citizens assess it nationally. As Americans, we are troubled that our country has become one of economic extremes. Milanovic insists that the proper lens is global. Income inequality has increased within nearly every nation for the past three decades, substantially driven by globalization. Yet the rise of China, which lifted hundreds of millions of people out of poverty, has rendered the world as a whole more equal.

This cheerful formulation, however, sidesteps the issue of how globalization promotes inequality within nations and thus undermines national democracy. The increased entry of low-wage goods renders high-wage manufacturing labor in wealthy countries uncompetitive. Meanwhile, the greater license for capital in a globalized world promotes deregulation, corruption, the hiding of assets, and exorbitant income for capitalists. The result: greater disparities of income and wealth at both the top and the bottom, and unequal power to make the rules—producing yet more inequality. The consequences for political democracy are grave. As Louis Brandeis was said to have remarked, “We may have democracy, or we may have wealth concentrated in the hands of a few, but we can’t have both.”

Milanovic tends to dismiss the effect of globalization on wealth concentration and democracy within countries in favor of celebrating the rise of China as a gain for global equality. China’s rising GDP, as he points out, has been responsible for about 95 percent of the global reduction in extreme poverty as defined by the World Bank. Milanovic quotes the egalitarian philosopher John Rawls, who argues that if we didn’t know in advance where we would stand in the income hierarchy, we’d favor an income distribution far more equal than the one we have. Why, Milanovic demands, should that principle be applied nationally and not globally? As Rawlsians, don’t we care about the world’s poor and not just the poor in our own land? It’s a good question.

One persuasive rejoinder has been offered by the Harvard economist Dani Rodrik. Nations, he points out, are where policies are made. If we are going to have a socially tolerable income distribution within the polity, that project must be pursued nationally, since there is no global government and no global citizenship. There is an inevitable tension, Rodrik writes, between the policy sovereignty of democratic nations and the logic of globalization. He is emphatic on what should take priority: “Democracies have the right to protect their social arrangements, and when this right clashes with the requirements of the global economy, it is the latter that should give way.”

Continue reading

The Great Reversal: How America Gave Up On Free Markets by Thomas Philippon

Why do Americans pay more than Europeans or Asians for cellphone service that isn’t even as good as theirs? That’s a question Thomas Philippon, a professor of finance at New York University and an adviser to the Federal Reserve Bank of New York, asked himself one day. He attempts to answer the question in this book. His answers aren’t encouraging.

Philippon says he will offer three main arguments:

One: Competition has declined in most sectors of the US economy. Measuring competition is easier said than done, for we can find only imperfect proxies. We will look at prices, profit rates, and market shares. None is perfect, but together they can form a convincing picture.

Two: The lack of competition is explained largely by policy choices, influenced by lobbying and campaign fiance contributions. We will look at the dollars spent by every US corporation over the past twenty years to lobby their regulators, their senators, their congressmen, and members of key committees, as well as to finance federal and state elections. We will show how these efforts distort free markets: … corporate lobbying and campaign finance contributions lead to barriers to entry and regulations that protect large incumbents, weaker antitrust enforcement, and weaker growth of small and medium-sized firms.

Three: The consequences of a lack of competition are lower wages, lower investment, lower productivity, lower growth, and more inequality. We will examine how the decline in competition across industries has effects that reach into the wallets and bank accounts of everyday Americans. We will also demonstrate why lower competition leads to less of the sort of thing that we traditionally associate with growing economies: investment, technological advancement, and rising wages [9].

The author explains that economists look at three main variables “to assess the degree of competition in an industry”:

…the degree of concentration (that is, whether there are lots of small firms or whether the industry is dominated by a few large firms); the profits that these firms are making, and the prices that customers pay….The bad kind [of concentration] occurs when incumbents in an industry are allowed to block the entry of competitors, to collude, or to merge for the primary purpose of increasing their power over market-wide pricing…[25].

In most US industries, market shares have become more concentrated and more persistent. Industry leaders are less likely to be challenged and replaced than they were twenty years ago. At the same tine, their profit margins have increased [60].

The Great Reversal is filled with data and references to journal articles, but the material is presented in digestible form (the more technical explanations are marked off from the main text). One result of all the data and all the related concepts is that the book is a kind of introduction to economics. I came away with a much better understanding of the work economists do when they look for patterns in all the buying and selling a society does.

I also came away convinced that things will only get worse — there will be less competition and more inequality — unless we reform our political culture. I already knew that American political campaigns are incredibly expensive compared to campaigns in Europe. But on average 50 times as expensive? I didn’t realize that the European Union now does a better job insuring competition than we do. As Sen. Elizabeth Warren emphasizes, we need big, structural change if we’re going to increase competition, reduce inequality and deal with the major challenge of global warming.

The book’s title, The Great Reversal, refers to the fact that the US economy used to work better for society as a whole. The data shows that it was mainly in the last twenty years that competition seriously declined. Can the reversal be reversed in the next twenty?

However, after spending “hundreds of hours researching and writing this book”, the author was surprised to realize “how fragile free markets really are”:

We take them for granted, but history demonstrates that they are more the exception than the rule. Free markets are supposed to discipline private companies, but today, many private companies have grown so dominant that the can get away with bad service, high prices, and deficient privacy safeguards. Only two decades ago, the United States was effectively the land of free markets and a leader in … antitrust policy. If America wants to lead once more in this realm, it must remember its own history and relearn the lessons it successfully taught the rest of the world [287-288].

One of Those Charts

The last time we had a big overhaul of the federal tax code was in 1986. Back then, the poorest 90 percent of the population owned 3 1/2 times as much as the richest 1/10th of 1 percent. I’ll say that again. In 1986, the net worth of the least wealthy 90% of Americans was 3.5 times the net worth of the richest 0.1%.

That’s not the America we live in today. As of 2013, the richest 1/10th of 1 percent owned as much as the poorest 90 percent. To repeat: the net worth of the richest 0.1% was the same as the net worth of the poorest 90%. 


I’m sure the red line goes even higher now and the blue line goes lower. We should keep this astounding economic inequality in mind when we have the opportunity to vote eleven months from now. That will be eleven months after the Republicans ram through another overhaul of the tax code, one that helps the richest Americans get even richer.

My Country, ‘Tis of Thee

I was thinking about writing a post based on recent statements by Sen. Orrin Hatch (Republican, Utah) and Sen. Charles Grassley (Republican, Iowa), but an actual writer beat me to it.

From Paul Waldman of The Washington Post:

With Republicans well on their way to passing a dramatic overhaul of the tax code, they have presented to the public a sweeping, comprehensive vision not just of what taxes should look like, but of what government is there for, what our obligations are to one another, and even how each of us should think about our value as human beings. This is a moment of uncommon clarity.

…. Let’s start with Iowa’s Chuck Grassley, who made this comment on the estate tax:

“I think not having the estate tax recognizes the people that are investing,” Grassley said, “as opposed to those that are just spending every darn penny they have, whether it’s on booze or women or movies.”

Right now, the first $5.5 million of any estate is not subject to the tax. Because of that, fewer than one in 500 estates owes any tax at all. So Grassley is saying that 99.8 percent of Americans lead contemptible lives of waste and folly, while only that remaining sliver of the extra-wealthy have shown the virtue that should win their heirs the ability not to pay taxes on the fortunes bequeathed to them. The Senate bill would double the tax’s exemption, while the House bill would eliminate the tax entirely; depending on how the final version turns out, Eric Trump may finally be free of the fear that he’ll have to pay taxes on his inheritance.

Now let’s turn to Utah’s Orrin Hatch, who explained why, despite his support of a bill offering trillions of dollars in tax breaks to the wealthy and corporations, we absolutely must start slashing the social safety net immediately:

“I have a rough time wanting to spend billions and billions and trillions of dollars to help people who won’t help themselves, won’t lift a finger, and expect the federal government to do everything.”

… There isn’t much political advantage in saying that if you die with less than $5.5 million in assets, like nearly all Americans do, that means you were lazy and self-indulgent, while only the wealthy have proven their moral worth by the size of their bank accounts. So when someone says something like that, you can be pretty sure he’s expressing his actual beliefs….

Those are value judgments, rooted in how Republicans tend to view the worth of different people. They operate on the presumption that the economic system is fair, and the results of that system provide a measure of different people’s virtue. If you’re rich — even if you got rich by choosing the right parents — they presume that you deserve to be taxed as lightly as possible, while if you’re in need of the kinds of help we offer low-income people, then it reflects a moral failing. If we give you any help at all, it should be as grudging as possible, accompanied by stern lectures and even rituals of humiliation like drug tests.

Their tax bill, and their upcoming assault on the safety net, will weave these principles more deeply into our laws. And these principles are their real rationale; ignore all the practical claims they make about the explosion of economic growth these tax cuts will supposedly produce, and how the benefits will trickle down to everyone, and how it will all pay for itself. Those arguments are transparently bogus. A recent survey of 38 prominent economists found that only one said the tax bill would significantly increase growth…

Confronted with this comprehensive debunking of their practical claims, Republicans are undeterred and undaunted. That’s because they’re driven by a moral imperative, one that says that no matter what effect cutting taxes on the wealthy and corporations might have on the economy, it’s just the right thing to do. It rewards the virtuous, and you can tell who the virtuous are by how much money they have. If you’re asking why they wrote the bill the way they did, that’s just about all you need to know.

Meanwhile, our law-and-order president (sexual predator D. Trump) has endorsed former judge Roy Moore, who will probably join Grassley and Hatch in the Senate later this month:


My country, ’tis of thee,
Sweet land of liberty,
Of thee I sing….