9 min read

Foundation Pits

"What if we all get lost in thought – who'll be left to act?"

– Management, The Foundation Pit

Joe Manchin's blindsiding performance on Fox News regarding the Build Back Better Act understandably sent plenty of people into a tailspin over the state of the Democratic Party and US politics. The reasons he gave for giving a hard 'no' on the current iteration of what's become the Build Back Better Act, a grabbag of policies, many of which are politically sunsetted for electoral effect to shove more into the bill in one go, were largely baseless. There's no mechanical link between the spending proposed and inflation, particularly for attempts to rein in healthcare and medical costs or else begin to throw federal money at issues like housing where soaring rents bear little relationship to federal deficits and would actually be deflationary. He also offered what was a fairly absurd statement of belief that the energy transition is already happening fast enough as it is, you'd get power grid failures like in California and Texas by dint of excessive green investments, and with an apparently onerous national debt (that's dirt cheap to service at the moment), we need to "save our money to compete against Russia and China." Needless to say his criticisms were largely illogical and quite plainly serve political interests from donors as much as anything else. But Manchin's asks have been relatively consistent – a $1.5 trillion topline (which he moved up to $1.75 trillion) and an expectation that the bill focus on a few priorities and fully fund them rather than the ad hoc approach that would be politically disruptive for state and local governments as well as families. The climate provisions were clearly a source of considerable concern for him given the role of the coal industry in West Virginia, but there were formulations available that would still do a great deal of good that could likely meet what were presumably the conditions he'd attach. A week before he did this, he was still on record supporting $500-600 billion in climate spending.

We all have to feel our feelings these days, but there's still scope for something to pass that has a lot of spending in it. We'll have to see what Biden does next and if he makes the tack towards using executive authority more expansively. What came to mind for me, however, was the way in which the political bottlenecks for major policy changes in the United States remind me of similar problems in Russia. Yes, the political contexts are massively different and I don't mean to conflate what remains a fairly vibrant democracy (with considerable and, in some cases, worsening flaws and minoritarian/authoritarian risks) with the centralized quasi-electoral authoritarianism now in Russia. There's still something to be said for how these types of impasses in which choices aren't taken or are constantly deferred become choices in themselves with potentially devastating, paradoxical, or otherwise unexpected consequences for political economy.

In the Russian context, the chief problem is the centralization of power in the hands of a "collective Putin" and Putin's relative absence from much domestic policymaking since roughly 2012. The recent decision to extend access to Gazprom's pipelines for export to Rosneft and, per more recent reports, another unnamed company was a relatively rare, direct intervention into the upper levels of economic policymaking and consensus building. Generally the opposite tack is taken. Putin avoids weighing in until absolutely necessary and the revealed preferences of macroeconomic and investment policies suggest that when presented a large menu of options, the default consideration is to spend as little as possible. Increases in spending increase graft, are frequently marred by inefficiency, and encourage competition between elites over rents controlled by the state. A recently published survey performed by researchers from the Higher School of Economics and written up in RBK showed that over 70% of state suppliers are forced to pay bribes of various guises when bidding for contracts and the size of these payments is estimated to be worth as much as 6.6 trillion rubles, almost one-third of the 2021 federal budget. These payments are estimated to average about 22.5% of the cost of the entire procurement contract. Businesses are competing by minimizing costs where feasible not to maximize efficiency, but to set more aside to win the contract or, in many cases, recycling monopoly or oligopoly rents accrued on markets where competition is weak into better bids.

Increases in procurements then lead to competition because any relative increase in the level of procurement of capital or finished goods and services above trend requires a ramp up in capacity utilization and/or new investments into capacity. Some of those inputs will be imported, but there's a premium placed on corollary procurements from domestic manufacturers. Stagnant markets with weak institutions then create incentives to defer investment to focus on raiding others' assets, targeting investment to chase new federal support schema as a form of political cover, and so on. All of these bottlenecks appear both horizontally and vertically. Limited interventions from the Kremlin affect company plans as they lobby ministries in Moscow, regional governments, and law enforcement in various guises and, at the same time, are constantly caught out figuring out what other participants in these markets are up to on the basis of usual business competition and out of political concern. Uncertainty kills investment. It pervades the system, also affecting formal institutions regularly forced to defend their turf. Regulatory changes that ignore basic business needs happen in every country to varying degrees. But the rate of change in Russia as an observer often feels closer to making sense of the ongoing bonfire that is Brexit than the decisions taken in the Illinois statehouse or Washington. I won't speak for other European cases. It is, however, my sense that it's more extreme because of the absence of meaningful political weight granted to medium-sized firms.

Uncertainty is, in many respects, the overarching boogeyman for Russian policymakers. The obsession with long-term contracts to achieve price or revenue stability, more recent pivot to fashion an inflationary control schema, and increasingly the shadow of 2024 all speak to immense difficulties coordinating efforts to make systemically significant investments. Opting for stasis, reserve accumulation, and not spending are often portrayed as decisions to play for time. You get the same kind of analysis of Russian foreign policy. This or that decision is taken as maintaining maximum flexibility and keeping options open. That's all well and good, but every time you try to "keep your options open," you're still making a choice that foregoes others. Indeterminacy as an intention is overrated in my view. Domestically, it has limited explanatory power and each choice politically pursued in this vein closes off other means of managing succession, whether that be committing deeply to institutionalization via a party structure (too late now realistically), pursuing greater economic growth with some form of foreign policy recuiellement, imposing capital controls and increasing domestic productive investment, abandoning import substitution and so on. Even if we accept a clean division between the "political" aspects managing turnout and so on from the material concerns of the economy, there are clear linkages between economic policy choices and the regime's preferred voting base. When it comes to foreign policy, these inconsistencies only heighten since the adoption of an indeterminate posture creates uncertainty about intention and credibility for external actors with limited understanding of internal decision-making processes in Russia. Domestic bottlenecks for policy are, in some cases, reflected by this preference for "flexibility" before committing resources. Resources are always scarce, threats constantly perceived, and the costs of inaction steadily increased over time through half-measures chopped down to 'one-sixteenth' measures by their implementation, underfunding, and design.

What's interesting to follow is how the division of power in Washington creates similar problems for social policy initiatives and efforts to accelerate investments into renewable energy, overhaul energy grids, build up public transit, and so on. Yet different analytic frameworks seem to be applied to Russia. It is self-evident for anyone following the debate over Build Back Better who is at least sympathetic to left-leaning demands in the US for an expansive climate agenda and modicum of a social safety net that failing to invest in the economy, families, and public health has disastrous consequences. If geopolitical competition must be the framing for every big ticket item in Washington, in what world is the US better served when it underinvests in basic needs relative to current and potential competitors? Look at one model of the emissions gap between no BBB passing and the bill's passage from Jesse Jenkins:

For Russia, the issue of interest group capture looks quite different than in the United States because the US has much stronger formal institutions. Individual state-owned firms – Gazprom, Rosneft, Rosatom, UAC, and so on – often play politically significant roles providing benefits or social spending in various guises at the regional level. The tax take from extractive industries massively outstrips anything equivalent in the US, though at its pre-COVID peak the oil & gas sector accounted for nearly 8% of national GDP. Governors can be named and dismissed as needed without any elections. Business chambers spend most of their time fighting rapidly moving proposals from within the Kremlin or ministries whereas in the US, there's a bit more of a give and take whereby medium-sized firms often capture statehouses along with large multinational US corporations to fend off regulations that benefit the largest players. At the federal level, it looks a little bit different but the Chamber of Commerce has a fantastic relationship with the Republican Party to kill spending or regulation that harms the oligopolies and business models that work with the chamber pro-actively. In Moscow, those same organizations are trying to lobby ministers, Duma committees, presidential aides, and Putin personally knowing that a political intervention from above can circumvent any formal process.

In Russia, succession and adaptation to the energy transition are somewhat intertwined but suffer from the same problem. The longer investments in infrastructure, low or zero emissions energy, and other reform efforts are deferred or avoided entirely, the greater the opportunity costs and inflationary risks are from even modest increases in consumption and output above trend. You get caught in a deflationary bunker, hacking away with a putter when you need a sand wedge. The centralization of authority that helped strengthen formal institutions in the 2000s has become a liability, even noting the improvements to the administration of state services, digitalization, and so on. I cannot for the life of me understand why so many analyses and commentaries on Russia describe its political system as stable referring to the various ways in which power is recurrently centralized, money hoarded, and domestic threats neutralized without any sense of the costs of these approaches. They accumulate over time. That does not mean some epic collapse due to regime paralysis is an inevitability, but rather that it's a likelier outcome the more rigidly difficult choices about domestic investment, interest group needs, and adaptation to a shifting international economic environmental that will be unfavorable to Russia are not taken.

In an American context, this paralysis isn't due to the centralization of power but rather its diffusion among a terrible cast of veto players for major policy initiatives followed by the threat of its over-centralization. Joe Manchin provides the convenient face of dysfunction, but it's much deeper and broader than one senator doggedly protecting coal jobs or possessed by bizarre notions that Child Tax Credits will be spent on drugs. You have what is currently an opposition party devoid of a clear governing platform with in-built electoral advantages and a set of political coalitions and anxieties onto which more productive economic policies, in most cases more left-leaning but not always, are poorly mapped because of the political communications and constituencies supporting them. It's a perfect generational impasse. What went under-discussed after Biden's eke-it-out victory in 2020 was that members of the Silent Generation and Baby Boomers weren't the majority of the voting public for the first time this century. GenXers are now the swing vote and, funny enough, their politics often overlap with progressive policy priorities but also differ in cultural framing. The domestic political situation in the US has massive foreign policy consequences, but is described in very different terms than in Russia. This paralysis is holding up changes that are widely recognized as necessary, including a national investment drive into renewable energy and the resurrection of a functioning industrial policy and commercialization of various technological innovations made by US firms. No one would pretend that the current landscape in the United States suggests stability. Rather its political system is gummed up due to its instability, electoral flaws, and gerontocratic political parties, only one of which has successfully reinvented itself in the last decade.

From different angles and contexts, both cases of paralysis, indecision, or revealed preferences for indeterminacy aren't laying foundations for future freedom of action. They're more akin to graves, whether that be a future fracture for a regime (though I would never suggest it would lead to anything like a civil war) or the political death of the Democratic Party from its own clumsiness and ineptitude. Opportunity costs need to play a more prominent role in how we talk about Russian political economy. We already make that space appropriately when discussing climate agendas in the United States and elsewhere. That we seemingly struggle to for a regime that is still dependent on extractive industries for its fiscal, macroeconomic, and political bases of support makes little sense, diminishing our capacity to think more than 1 step ahead during crises like the currently worsening specter of offensive operations in Ukraine.