While excellent newsletters on specific themes within public policy already exist, this thought letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. Audio narration by Ad-Auris. If this post was forwarded to you and you liked it, consider subscribing. It’s free.
Global Policy Watch: Energy Is FlaggingInsights on burning policy issues from an Indian lens— RSJ Who do you think has a better long-term view of the world? An administration struggling to control inflation and rising oil prices, one that’s facing midterm elections with the lowest approval ratings, or large institutional investors projected to own about 20 per cent of all US listed companies by 2028? I don’t know. I mean, it is conventional wisdom that all that the likes of Blackrock, Vanguard and State Street care about is making profits on their investments. On the other hand, the government is expected to take long-term decisions in the interest of society. But when you own 20 per cent of everything, I would suspect you will conclude there’s no other way to maximise profits except trying to do good for everyone. I mean, there won’t be a lot of arbitrage left anymore in choosing specific industries or sectors. You will have to do ‘sabka saath, sabka vikaas’. No wonder ESG (Environment, Social and Governance) investing has been important for these large institutional investors. That ESG is now a critical agenda tracked by the board of every company because of these investors' efforts. All good. Now, let’s look at the incentives of political parties. It is to win elections. Everything else follows only after you have the keys to power. And elections in democracies are a permanent affair. There’s a key election of some kind happening every other year. Will a political party craft a policy that’s painful in the short run but good in the long run? They do, but it requires a combination of inspiring leadership or ideology, a looming crisis and a powerful communication strategy to walk on this difficult path. That’s rare. Instead, what you have is parties taking the easy, opportunistic way out while hoping it will somehow make sense in the long run. Two Roads DivergedHere are two news items from last week for you. #1: Democrats may be on the verge of passing historic climate legislation after all.
#2: Blackrock warns it will vote against more climate change resolutions
While the US administration is going down the path of spending more on tackling climate change, Blackrock seems to be signalling a u-turn. What Led Them HereSo, back to the question with which we started. Who do you trust is taking a long-term view here? Some context here will help. These moves have come on the back of an energy crisis facing the world today. Most of the commentary on this has attributed this to the Ukraine war and the sanction on Russia that followed. The general view is that this crisis will disappear once the war ends. How true is this? Not very if you look closely. Over the past many years, the energy inventory has been declining because the supply has held flat or gone down while the demand continues to be robust (except for the pandemic blip). The green sources of energy haven’t been able to fill the gap on the supply side. As we have come out of the pandemic, the global demand has gone up (though still below 2019 levels) while the supply isn’t keeping pace. This was even before the Russian invasion. The reasons for this aren’t hard to locate. Conventional energy companies have found it hard to fund new projects because ESG investing norms have made the availability of capital difficult. The so-called ‘extractive industries’ are orphans in capital and debt markets. Most of the growth in energy supplies in the last decade has come from shales. A lot of money was put to work to increase the efficiency of pumping out oil from shales. The three big shale fields in the Permian, the Bakken and the Eagle Ford pumped out enough oil to not have anyone worry about supply shortages anytime in the last decade. But like all good things, we have depleted these fields at rates faster than predicted. There’s been hardly any capacity developed that has backfilled these fields elsewhere. And it is unlikely we will get a second-time lucky so soon in finding rich fields like them. If the market were efficient, we would have seen capital find its way into funding newer sources. But the ESG overdrive led by the Big 3 index funds put up a barrier to that flow. And the energy companies that are making big profits now because of the high prices aren’t themselves putting money into conventional extraction. That would be seen as a negative in the market. So, even they are being constrained by the ESG norms. Into this decadal low in investment in production came the Ukraine war. Things have gone further south since. Europe needs Russian gas, and Putin is enjoying the gradual choking of the supply that will make things worse during the oncoming winter. Only last week, Russia’s Gazprom told its customers in Europe it cannot guarantee gas supplies because of ‘extraordinary’ circumstances. Heh!
To this, add that the US has been depleting its SPR (Special Petroleum Reserves) to boost supply and keep prices under control. Last week it announced another 20 million barrels were released from SPR. But this isn’t sustainable, and it is likely this is the last of it. I don’t know about you, but I think the supply situation looks to worsen in the future. Evaluating the ResponsesNow, look at the two news articles that we started with. After a decade of not adding real capacity to boost energy supply, starving investments in conventional energy, stupidly shutting down nuclear plants and going for investments in wind and solar that are by themselves energy and capital intensive to set up, we are here with two kinds of response. One is from the US government. Instead of finding ways to invest in the sector to solve this crisis is going the other way. Releasing special reserves, cutting taxes on gasoline, placing more restrictions on the conventional energy sector and planning to deficit fund more investments in green energy without a clear answer on how it will help with supply. These will only increase demand in the short term without any corresponding increase in supply to address it. The other is from the face of greedy capitalism, Blackrock, who thinks we might have overdone the ESG investment thesis without fully appreciating the unintended consequences of starving the oil and gas sector of investments. Maybe the rhetoric against conventional energy has gone overboard without an immediate answer to the supply shortfall. So, some calibration is needed now. Else, there will be significant pain ahead with misallocation of investments and a deepening energy crisis. The poor and the developing nations are most affected by higher oil prices. And poverty is worse for climate change. More than fossil fuels. Those then are the two narratives. As London and NYC sweat in an unprecedented heat wave this summer, you know who will win the narrative battle. The war will be lost though. A Framework A Week: Building ModelsTools to help think about public policy— RSJ Last week I came across this piece on ‘Models as mediating instruments’ by Margaret Morrison and Mary S. Morgan. You should read the full chapter. The authors lay out the importance of model building in helping us learn about theories and how they might operate in the world:
And then, they proceed to outline how we should think about developing models that function as autonomous agents and as instruments of investigation of the world. Here’s a short extract from their introduction to model building:
The whole chapter and Mary Morgan’s book (The World in the Model: How Economists Work and Think) is a great tool for building models. India Policy Watch: Hoping Against HopeInsights on burning policy issues in India- Pranay Kotasthane Earlier this week, the union cabinet approved a revival package for the ever-embattled Bharat Sanchar Nigam Limited (BSNL) worth ₹1.64 lakh crores. Let’s analyse this decision ground-up Let’s look at the two stated aims. The first argument is that the presence of BSNL in the telecom market acts as a market balancer; it plays a significant role in providing services to rural areas and during natural disasters. The second argument is that the telecom sector is strategic; hence, BSNL will become the vehicle for the government to “promote indigenous 4G technology development”. In other words, BSNL will have to commission an atmanirbhar 4G technology that Tata Consultancy Services and C-DOT are developing. A part of the bailout—₹22,471 crores—is allocated for capital expenditure on this deployment. For a moment, assume that both objectives are desirable. The question is, are there alternative methods to achieve the two stated objectives? Given the positive externalities of network infrastructure today, government intervention in rural connectivity makes sense. But the instrument required to achieve this objective doesn’t require the government to produce this service by itself through a public sector unit. The same objective could be achieved by a government procurement contract which finances private sector players for capital expenditure on network infrastructure in low-density areas. Think of a non-coercive version of the Regional Air Travel Connectivity Scheme - UDAN, but for mobile connectivity. This method would likely be far cheaper than attempting to revive a government-run company that incurs losses despite playing a game in which the umpire also belongs to the same team. This would be beneficial for the people living in far-flung areas too. Why condemn them to slow 3G services of BSNL when the government can finance private players to provide 4G services instead? Next, consider the strategic necessity argument. 4G was introduced in India a full decade ago. When the world (and India) is commissioning 5G connectivity, an Indian consortium has now done trials for home-grown 4G technology. Granted, that 4G is not going away anytime soon, but why should it now be shoved down BSNL’s throat? To me, it seems like a classic error—a violation of the Tinbergen Rule, which we had discussed in edition #135. The rule says: use one policy instrument for just one target (or as few as possible). Burdening one instrument with several objectives often results in a system that fulfils none. In the current case, it means that BSNL can either be an instrument to connect remote areas or it can be a testbed for indigenous technologies, but not both. To expect it to do both would make things tougher for an already troubled entity. More important, it would be a waste of taxpayers’ hard-earned money. Since allowing adversaries to manage your core networks is a strategic vulnerability, a better alternative would be to give domestic players a target for eliminating Huawei from their 4G networks over time. If the indigenous solution is any good, some players will consider opting for it. The second option is to support the indigenous 4G’s go-to-market programmes in other countries. Either way, the objective can be achieved without hoping against the BSNL hope. Finally, a reminder. The cost to society for one rupee raised by governments in India is ₹3 (Marginal Cost of Public Funds). So, Indians will be incurring nearly ₹5 lakh crores. For comparison, that is nearly 10 per cent of RBI’s foreign exchange reserves in equivalent rupees. Is protecting BSNL really worth this kind of expenditure? Course Advertisement: Admissions for the Sept 2022 cohort of Takshashila’s Graduate Certificate in Public Policy programme are now open! Visit this link to apply.
PolicyWTF: Playing with Fire AgainThis section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?- Pranay Kotasthane A couple of weeks ago, a film poster depicting Kaali Maa began an outrage cycle. As it happens with frightening regularity nowadays, it culminated in a couple of FIRs being filed against the director. Forget the fact that the movie was released in Canada by an Indian citizen from Tamil Nadu; the FIRs were nevertheless registered in Delhi and UP. It’s not worth spending time and energy on these Whack-A-Mole outrages. What concerns me more is the Indian High Commission in Ottawa’s press release. It read:
In the past, the official Indian position would have been to play the matter down and leave the issue to the host country. It is unusual and disappointing for an Indian embassy to act as a messenger for religious groups in other countries. Canadian citizens of the Hindu faith aren’t Indians. This admonishment by an Indian government entity is out of place. I say that the government is playing with fire here because acting on behalf of citizens of other countries—for whatever reason—is a slippery slope. There’s a reason that Indian immigrants are welcomed in many countries. Contrast that with China. The aggressive opposition by some Chinese immigrants against criticisms of the Chinese Communist Party in their host country ends up being detrimental to all Chinese immigrants. It’s in India’s interest that emigrants become trustworthy members of their host community. We shouldn’t go down the path China has. HomeWorkReading and listening recommendations on public policy matters
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