Until recently, I’ve always had a lot of respect for the Wall Street Journal, even though I’ve usually disagreed with their editorials. I started reading it while I was an undergrad economics major at the University of Chicago. I read it because the WSJ provided by far the best news coverage of economic issues; it still does. In spite of that, I never agreed with most of their editorials on economic issues (or most other issues, for that matter). However, at least those editorials never seemed to misrepresent the facts or draw unwarranted conclusions from them.
While at UChicago, I was fortunate to take two classes with Professor Milton Friedman. The classes were both on what Friedman called price theory, which is the study of how supply and demand determine prices in individual markets; it’s roughly equivalent to microeconomics in other schools, although there are some important differences.
I loved how Friedman taught price theory. He literally taught it as plane geometry, deriving his conclusions based on changes in supply and demand curves. He dealt with theorems and proofs, although he didn’t usually describe them that way. If you disagreed with something he said, you had to show where in his chain of thinking he made a mistake. And good luck with that! Although I caught him once making a careless calculus mistake, such moments were few and far between.
However, even though he was almost always right in his geometric arguments, when he started to talk about policies (especially in his writings, since the courses I took with him weren’t about policy), he sometimes overlooked considerations that invalidated what he said.
For example, he often pointed out that raising the minimum wage will cause employment to fall. This is because employers will be less inclined to hire new staff members if they become more expensive. However, there are many cases in which raising the minimum wage will not change total employment very much, as well as cases in which the loss of employment is offset by other positive effects.
For example, if the labor market is tight and employers are bidding up wages, raising the minimum wage will have little or no effect, since the average wage is going up anyway. But if business activity is down and workers are competing with each other for jobs, raising the minimum wage will likely cause some employers to hire fewer new employees than they otherwise would.
However, just knowing that employers will hire fewer new employees isn’t reason enough not to raise the minimum wage; policy makers need to have a good estimate of how much new hiring will fall. For example, if the minimum wage goes up ten percent but hiring hardly drops at all, raising it might still be worthwhile, since most workers will be better off, but only a few will be worse off.
On the other hand, if raising the minimum wage by ten percent causes a twenty percent drop in employment (i.e., not only will employers stop new hiring altogether, but they will lay off some current employees rather than pay them higher wages), that would be catastrophic; almost all workers will be worse off. It’s usually impossible to predict the effects of any economic policy change without studying the current environment and recent history (like what happened previously when the minimum wage was raised).
But there was one thing that Friedman (and just about any other economist) was sure was always bad: If property rights are no longer protected, the foundations of free markets are undermined. For example, if a government starts to confiscate property without due legal process, this undermines the basic assumption of economic activity: that a person will be able to spend or save what they have earned through work or investment, after taxes are paid. If you can’t be sure you will keep what you have earned, what’s the point of working or investing? Therefore, both current labor productivity and new investment (which raises labor productivity in the future) will fall. Income, which depends heavily on productivity, will also fall and will stay low.
Unfortunately, the threat that the US government will start confiscating property is no longer theoretical. It happened last week when the current administration stopped development on all large offshore wind farms. The developers have all invested huge amounts of money based on their assumption that the permits they received will allow them to build the projects and reap the returns – after taxes are paid, of course. Now, they face the real prospect that they will lose their entire investment, including the millions of dollars they are losing every day while they’re waiting for a resolution of this matter, probably in the courts (one developer, Dominion Wind, estimated they will lose $5 million per day until the matter is resolved).
One of the first thoughts that came into my mind when I read about the administration’s action was, “What will the WSJ say about this?” Ten or twenty years ago, I wouldn’t have even asked that question, since I’m sure they would have been outraged that this had happened. After all, the WSJ is a conservative newspaper and real conservatives believe in…well, conserving what’s good in our current system. The idea that any administration would blithely break contracts without any judicial process, and the WSJ wouldn’t scream bloody murder, was unthinkable.
That was then, but this is now. Two days after the administration cancelled the leases, the WSJ came out with an editorial[i] that admitted that the administration’s justification for cancelling the projects on national security grounds was weak indeed. The administration refused to say what those grounds are, but a reference was made to unclassified reports that offshore wind turbines might interfere with radar signals in their near vicinity – that is, down at the waterline, not at 35,000 feet. Does the administration think the biggest threat from the Russians is that they’ll send a bunch of small jets – each carrying a small nuclear weapon - across the Atlantic, skimming the tops of the waves? I sincerely doubt anyone is worried about that.
The editorial goes on to describe what must be the real reason for the cancellations: the Biden administration cancelled environmentally damaging oil and gas exploration leases in the Arctic National Wildlife Preserve because they should never have been granted in the first place. Also, during the Biden administration, at least two projects were cancelled by judges that were simply applying the law; evidently, the WSJ thinks Biden should have ignored the Constitution and overruled those judges (the decisions were appealed and upheld by the Circuit Courts).
So let’s be clear: The Wall Street Journal has decided that it’s perfectly acceptable for one administration to cancel contracts – and cause literally hundreds of millions of dollars of investments to be stranded – just because they’re upset with how independent judges ruled on different issues with different litigants during the previous administration.
But there’s another reason why the current administration cancelled the offshore wind farm leases, one that was clear even before this year: It wants to do whatever it can to set back the march to renewable energy. Besides the five offshore leases, it has cancelled many other renewables projects, placed obstacles in the way of others, and made it clear that just about any renewables project is unwelcome today.
In fact, a recent report by Cleanview states that 266 gigawatts of new generation capacity (which equals about 25 percent of current capacity nationwide) has been cancelled this year; all but 5 GW of that is renewable generation. However, the Journal’s editorial staff makes it clear that stopping permitted projects just because they will implement renewable generation is fine with them, no matter what the cost to the economy.
Besides its immorality, there’s a big problem with this position: Today, because of the rapid growth in data centers, the US needs all the generation capacity in can implement - renewable or otherwise – as soon as possible. Renewables generation can be implemented much more quickly than fossil fuel generation, mainly because of the length of time it takes to permit and build gas pipelines. Moreover, renewables projects that are already permitted can be implemented the most quickly of all. Yet these are precisely the projects that are being cancelled today.
At the same time, new data centers are coming online all the time; a number of huge multi-square mile data center projects are either approved or seeking approval. Data center approvals are based on both current generation capacity and capacity that is in progress to be implemented. Since approved in progress generation capacity has fallen by 266 GW this year, and since this equals a quarter of total current capacity, it seems clear that within a couple of years at most there will be widespread shortages of power.
Power shortages can be dealt with in two ways. One is to accept that there will be regular blackouts and brownouts; of course, neither data center operators nor the public will accept this. The other way is to raise prices enough so that some load (demand) will be curtailed. Since data center operators are likely to have a very high threshold for acceptable power price increases, this means the price for all power customers except data centers will have to rise to the point where those users – which include residential users, of course – will have to cut back their power usage by perhaps 25%, to avoid the need for blackouts. Do you think it will be easy for you to cut back on your personal power usage by 25%? I didn’t think so.
Therefore, it seems to me that the only way to deal with this self-created power shortage is to put a nationwide moratorium on new data center approvals, and perhaps to cancel some existing approvals. Is there some other way to address this problem?
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[i] The Journal is behind a paywall. If you want to drop me an email, I’ll send you a PDF of the article.