Friday, April 3, 2020

The D Word

Yes, depression, and not the psychological type, although the economic type leads to the psychological type, whether ot not it is the other  way around (see Keynes' "animal spirits).

I often make fun of Robert J. Samuelson in the Washington Post, but in Washington Post today he raised the possibility that we are going into a depression, not just a bad recession.  On TV this evening I heard Austen Goolsby throw it out as well.  I suspect we are going to hear it a lot more.

The problem is not just that we have seen the highest increase in joblessness ever, but the increasing prospect that there will not be a quick recovery once the virus is under control. This is partly due to the global nature of this pandemic and the economic decline that has come with it. 

A sign of what may be coming is what is going on in China.  The virus seems to be under control, despite some doubts about their numbers and new cases happening due to people arriving there.  But they have been to get their economy started up again, even in Wuhan. Supposedly 98% of firms have restarted.  But there are problems.  One is that many such places are missing crucial workers still under quarantine somewhere  or other.  Then there is the other side of this, the demand side.  China expects to sell goods through exports, but other countries are not buying.  And also domestic consumers are not buying either out of fear and low income.  Apparently there are factories running machines and using power even though they are not producing anything just to please the government that is making these claims of 98% of firms operating, but this seems to be an exaggeration.

Clearly at least on the demand side getting money to people and businesses through easy credit and a large fiscal stimulus are the obvious things to try to avoud this D outcome.  But Samuelson fears that they may be insufficient to this current situation, with no obvious alternative.  I fear he might be right on this one

Barkley Rosser

Thursday, April 2, 2020

The Climate Crisis and the Green New Deal

The Covid-19 pandemic won’t last forever, and at some point we will have to return to figuring out how to respond to the climate crisis.  (What a depressing opening line.  No, I have no desire to live in a world of permanent crisis.)  Is the answer a Green New Deal?  Challenge has just published my analysis of this; you can find the link here.

Abstract: The Green New Deal, an attractive agenda of increased investment in energy efficiency and renewable energy sources, is not remotely sufficient to stabilize global warming at a non-catastrophic level. Such a policy needs to be accompanied by direct measures to curtail the use of fossil fuels, although this may complicate the intended messaging.

Wednesday, April 1, 2020

Credit Spreads: Comparing COVID-19 to the Collapse of Lehman Brothers

On March 18, Reuters noted something I have been following of late:
Concerns about the impact of the coronavirus on corporate America's balance sheets has tripled the premium investors are demanding to hold even the highest-rated corporate bonds. The difference between the average yield of investment-grade U.S. bonds over virtually risk-free Treasuries widened to 303 basis points (bps) on Wednesday, according to the ICE/BofA investment grade index. That's up from 101 bps at the start of the year and the highest since July 2009, For riskier high-yield securities, the average spread over Treasuries on Wednesday was 904 bps, the highest since October 2011, and more than 2-1/2 times the rate at the start of the year, using the ICE/BofA high-yield index ... This hit to earnings has come at a time when U.S. corporate debt is near all-time highs, as is the size of the so-called triple-B segment of the market - companies one notch above junk status.
The spread between long-term corporate bond rates with credit rating BBB and long-term government bond rates jumped very quickly to almost 4%, which was not quite as high as the 5% or more spreads observed after the collapse of Lehman Brothers. FRED provides a series entitled ICE BofA BBB US Corporate Index Option-Adjusted Spread that dates back to 1997 when this spread was modest. It hit sort of a tidal wave during the turn of the millennium with the collapse of the internet/computer/telecommunication boom and a host of notorious bankruptcies. What happened after the collapse of Lehman Brothers was a tsunami. I did find some Thomson Reuters discussion entitled the implications of the credit crunch for intercompany loans, which talked about market interest rates as of February 2009:
Spreads for even AAA-rated long-term corporate debt, however, have recently been higher than 100 basis points, while spreads for borrowers with lower credit ratings have been much higher.
Its figure 2 shows that the spread for BBB-rate long-term corporate debt jumped to above 500 basis points. The thrust of this paper seems to be that U.S. affiliates were about to incur a lot of intercompany debt with their foreign parents. The recent Reuters story alludes to the potential need for U.S. companies for debt as we work through this COVID-19 crisis. It is ironic that the OECD just released its Transfer Pricing Guidance on Financial Transactions, which spends 46 pages making basic economic issues as convoluted as possible. But that is what international tax attorneys do. Cutting past all the legalese blah, blah, blah – it does make the important point that estimating a borrower’s credit rating is both controversial and challenging. But once one estimates a credit rating – which is a letter grade – it needs to be translated into a numerical credit spread. As the tsunami following the collapse of Lehman Brothers showed – credit spreads can jump very quickly. It seems the COVID-19 crisis is following suit.

Tuesday, March 31, 2020

In 2020 A March Of Madness

Just before the end of February, President Trump declared that there were only 15 Covid-19 cases in the US, and that "they will soon go to zero."  Deaths have now passed 3,000 and yesterday Trump declared that because we might have had over 2 million dead if nothing had been done, it would show "we did a good job" if deaths kept to "only" 100,000 to 200,000.  To do this "good job" he has extended his "social distancing" policy to the end of April rather than Easter, April 12 (my birthday). Also yesterday Virginia Governor Ralph Northam intensified a stay-at-home policy and extended it to June 10, the longest such period of any state.  All this on the next-to-last day of a month with more dramatic changees for the world than any in a long time, certainly more than any that I can remember in my nearly 72 years.

Probably the closest rival I can remember is September, 2011, which also changed the world, although that all happened on one day.  This has been day after day, with the US death toll now surpassing that of 9/11.  I think to match this month one has to go back to September 1939 or maybe August 1914, or maybe October 1918 when the Spanish flu epidemic reached its maximum death rate in the US just before WW I ended.  In any case, when I think of the beginning of this month it seems like another era, way more than a year ago.

On March 1 Marina and I were in Boston attending the Eastern Economic Association meetings.  The day before, Leap Day, Bernie Sanders had a 15,000 person rally on the Boston Common, with local media accurately forecasting he would defeat local Senator Elizabeth Warren, and although he had been surging since South Carolina they did not see that Biden would beat Bernie there, along with a lot of other states on Super Tuesday, March 3, so long ago, after which Bernie fell.  There were no limits on the voting on Super Tuesday, but there was no audience for the two-man debate the following Monday, and the Ohio primary got postponed on March 10, as Biden sealed his new lead, how long ago it seems and how little we care about that then-so-important Dem candidate race.

At the meetings there were signs of the pandemic, but they were from abroad.  Participants from China and Italy were absent, including the discussant for my paper from Taiwan, which has had one of the most effective efforts to resist the virus in the world.  But for most of us it was far away, and there was no sign at all of the deep recession that has now enveloped not just the US but most of the world.. As it was, on March 1 we went to Chinatown partly out of sympathy due to anti-Asian American prejudice (not many people there) and ate well.  We then saw a concert of Bloch sacred music in Old South Church, which was packed.  None of that now.

Although I saw that things were going to get worse, things were still mostly nirmal that next week, aside from the excitement over Super Tuesday, still so important. We had classes at James Madison University (JMU).  On Thursday, March 5 I even had an outside speaker in, Barry Ickes of Penn State speaking on ""25 Years of Transition in Russia." We shook hands, sort ot looking at each other a bit ironically. That was the last time I have shaken anybody's hand, and I have no idea when will be the next time.  Both of us were looking at spring break the next week, and neither of us was expecting that our schools would not open the following week, but of course that was the end of both of our schools being open for live classes, although in the case of JMU initially during the following week the word was that we would take only a two week break and students would be back on campus as of this week. But, of course, that was not to be. We are online for the rest of the semester.

Now Marina and I had seen far enough ahead to cancel our original spring break plans.  She has never been on the African continent and long been curious about Egypt (I was there in 1982 once). So we were planning to go to Cairo, but canceled.  This was before learning of the outbreak of cases on Nile cruisers (which we were not planning to do), but instead pulled out because of fear of not being able to fly back to the US.  We were to fly Turkish Airlines through Istanbul, and feared that the US might block return flights because of Iranians going through the Istanbul Airport, with Iran already suffering from an outbreak of the virus.  Marina was also planning to fly to Moscow to visit her mother, March 18-30, but of course that would not remotely happen with no planes going at all then.

So instead we drove to Ocean City, MD for a low key off-season visit, not having been there before. Not many people around but some places open..  I did foresee that barbers and massage people would probably be shutting down.  So I got a haircut and we both got massages.  We did not raise the issue of pandemic, but it was clear these people were unaware of what was coming.  They weere looking forward to the front of the season starting with St. Patrick's Day coming.  There was to be a parade on Saturday, the 14th, which did not happen.  We had a good time and drove home acrross the Chesapeake bridge-tunnel on Thursday, March 12, stopping in Charlottesville to eat at Light Alley, a restaurant we had long wanted to eat at, and bought a bunch of stuff at the Wegmann's there, observing panic buying of toilet paper, which we mostly laughed about.

I think it was the next day, Friday the 13th, that things crucially shifted, particularly because this was when finally Trump began to change his tune from "this is a Dem hoax" to "this is a real problem," although he continued to throw out inaccurate and confusing lines.  This was also when the events came down that I think really made most American people suddenly start to take it seriously.  The NBA shut down, and after a few days, March Madness was called off.  This really hit home, sports, especially March Madness. And then it came out that Tom Hanks was infected, America's Everyman.

Even so it seemed that the tightening of social distancing and shutdowns was a gradual and rolling process.  So near us ia farmer's market on Saturdays.  On Saturday March 14 it was fully operational, although there was a lot of worrying among customers about what was coming.  The following Saturday it was on, but many vendors were absent, and it was surrounded by a tape, with someone at the only entrance making sure no more than 10 people were inside.  This past Saturday, March 28, it was totally closed and will be for some time.  Also, on Sat. March 21 after going to the market we went to a place for gelato and could go in and sit down, although most such places were not so open.  By March 28, it was only open for curbside pickups after calling in.

Despite Northam's announcement yesterday, there are still more places at least somewhat open here in Harrisonburg. But more and more places are just totally closed and fewer and fewer people are out and about .  We are steadily moving deeper and deeper into much more serious shutdowns.  And a next door neighbor informed us that a member of their walking club is infected.  It is here, and it is close.

So, indeed, it has been quite a month of madness, a steadily increasing shutdown and isolation going far beyond what I at least could foresee at the beginning of the month, and I think we were more up on this than lots of people.  The world has changed, and it will probably not go back again fully to what it was before this hit.

And to all of you, on the even of April Fool's Day, take care and keep washing those hands.

Barkley Rosser

Remdesivir and Transfer Pricing Part II

Now that I sketched out the transfer pricing for Gilead Sciences with respect to their successful HIV and Hep C products (as much as I can say based on publicly available information), it is time to speculate a bit on how Remdesivir may play out. There is a lot we do not know including whether this treatment receives regulatory approval and how it will be priced if it does. Note for example this story:
More than 150 organisations and individuals on Monday urged US biotechnology firm Gilead not to enforce exclusivity over a drug that might be used to treat COVID-19 patients. In an open letter, 145 non-governmental organisations, including Doctors Without Borders (MSF) and Oxfam, and 12 individuals claimed Gilead Sciences held primary patents of remdesivir in more than 70 countries. That meant they could block generic development of the drug until 2031. The open letter to Gilead chief executive Daniel O'Day was circulated by MSF. "We write to request that Gilead take immediate actions to ensure rapid availability, affordability and accessibility of its experimental therapy remdesivir for the treatment of COVID-19, pending the results of the clinical trials demonstrating its efficacy," it said.
There are 2 separate issues. If Gilead Sciences told other manufacturers not to produce remdesivir, this would cost lives. But let’s note Gilead has historically relied on third party contract manufacturers. So the real issue seems to be pricing. I’m sure we can design policies where Gilead would have the incentives to produce like crazy. Of course, there remains the policy question of how much we are willing to pay biopharma multinationals for life savings treatments? Please bear with me as I go through the various discussions of what may be a fast moving set of phase III trials and appears to be hope that this treatment may become part of how we overcome COVID-19. BTW – I agree the scientific success and the pricing issues trump the transfer pricing issues and I also agree that these critically important issues frame any debate on how any profits Gilead may receive become allocated across taxable jurisdictions. The first thing to realize that Gilead had developed this treatment originally for Ebola but that did not work out but they started testing it all over the world for COVID-19:
As the Covid-19 death toll keeps climbing in the U.S. and around the world, hundreds of patients in life-threatening condition are taking a “last-resort” unapproved antiviral drug called Remdesivir under a special FDA program. On Tuesday, The Centers for Disease Control and Prevention (CDC) Director Robert Redfield told a House appropriations panel that a number of people in Washington state, the area hit hardest by the coronavirus, have been treated with Remdesivir, made by Gilead Sciences, through FDA’s compassionate use program … Gilead’s Remdesivir was first tested on patients in Wuhan, China, where the epidemic erupted, last month as part of a Phase 3 study. Clinical trials were later expanded to Europe and Japan after the World Health Organization (WHO) said last month that the drug might be the “only one drug right now that we think may have real efficacy” in treating Covid-19. Gilead is expecting trial results from the experiment in China as early as April.
Who owns the phase II rights is not discussed here but who ultimately pays for these phase III trials in China, Europe, and the U.S. could be a very big deal from a transfer pricing perspective if this treatment gets regulatory approval. But what is this FDA’s compassionate use program? Gilead is working closely with global health authorities to respond to the novel coronavirus (COVID-19) outbreak through the appropriate experimental use of the investigational compound remdesivir. Together with the U.S. Food and Drug Administration (FDA), Centers for Disease Control and Prevention (CDC), Department of Health and Human Services (DHHS), National Institute of Allergies and Infectious Diseases (NIAID) and Department of Defense (DoD) - CBRN Medical; the China CDC and National Medical Product Administration (NMPA); the World Health Organization (WHO); and researchers and clinicians across Europe and Asia; Gilead is focused on contributing our antiviral expertise and resources to help patients and communities fighting COVID-19. Gilead is getting a lot of patients inflicted with COVID-19 as basically experiments (dare I say lab rats) for their phase III testing so giving their treatment away for now should help their long-term prospects. We also heard a lot about this being an orphan drug:
Gilead Sciences Inc on Wednesday took the unusual step of asking the U.S. Food and Drug Administration to rescind a controversial orphan drug designation the agency had granted for the biotech company’s potential coronavirus treatment remdesivir just 48 hours earlier…The company was criticized by lawmakers and patient advocates after receiving the orphan designation on Monday for the experimental antiviral drug, saying it was taking advantage of the rapidly accelerating health crisis…. Orphan status is granted by the FDA to encourage development of drugs for rare conditions. The designation comes with a seven-year marketing exclusivity period if the drug is approved, and other benefits such as potentially faster approvals.
COVID-19 is not a rare disease but I suspect the FDA really wanted to accelerate the phase III trials for obvious reason. Of course, “marketing exclusivity” is a polite way of saying Gilead would not face unfettered competition. I suspect Gilead will rely on a host of third party contract manufacturers to gear up production as fast as possible. The contract manufacturers will like be paid a competitive price. The real issue is how will Gilead as the owner of intangibles as well as the distributor price its treatment? The profits from mere distribution will likely be modest but the profits attributable to any marketing and product intangibles could potentially be more substantial if this product succeeds. That is the key transfer pricing issue and how would reasonably deal with this issue depend on a lot of information not yet in the public domain. I suspect China, the U.S., and Europe as well as the rest of the world are more consumed with getting an effective treatment. Pricing issues come next and this worrying about how any profits get taxed on a worldwide basis is a tertiary concern. But if this all works out – at least we have hopefully laid a foundation for this last concern.

Monday, March 30, 2020

Is Pompeo The Worst Secretary Of State Ever?

This is the title of a column in today's Washington Post by Jackson Diehl.  His answer is an unequivocal "yes," and I must say on thinking about it I know of no others clearly worse than him, maybe not even any  as bad as him.

Diehl focuses on some general incompetence but then focuses on two specific issues that I have posted on here previously.  The most important one, which is getting more serious by the minute, involves Iran.  It is increasingly clear that Pompeo is probably the lead figure in pushing for heightening sanctions on Iran and also increasing the chance of war with them.  He was a key player in Trump's initial exit from the JCPOA nuclear agreement and has argued that making it harder for Iran to get medical equiopment even as they face a deepening epidmci with thousands dying will bring them to the negotiating table or even lead to regime change.  There is no evidence of any of that, just an immoral making many more people die awful deaths.

He is also apparently a key figure in labeling Covid-19 "the Chinese virus" or "Wuhan virus."  Trump has said he won't call it those things anymore, apparently being told that this has been leading to attacks on Asian Americans.  But Pompeo continues to push this line for no obviously good reason.

Indeed this last matter ties to a more general complaint byDiehl, that aisde from just being plain outright evil, Pompeo is also incompetent at just very basic stuff.  So this week there was a conference call among the foreign ministers of the G7.  This should have been a boilerplate affair, with them coming together to combat the pandemic.  But in fact the whole thing was a flop with no resolutions. Why? Pompeo apparenly kept insisting the the disease be called the "Wuhan virus" with no other G7 foreign minister willing to do so.  But Pompeo trashed the entire meeting over this idiocy.

He also ran to Afghanistan to supposedly negotiate a deal between the two canddidates for president who are in a deadlock.  He failed there to get anybody to do anything.

Finally we have another conference call that failed, this one among various figures from the G20, currently being led by Saudi Arabia and its awful Crown Prince MbS. Again, a move to coordinate the fight against the virus should have been the top priority, but Pompeo decided to demand of MbS that he stop pumping so muvh oil since the crah in oil prices is hurting a lot of US-based oil companies that support Trump. Again, this went nowhere and his move annoyed MbS so much that the meeting ended with nothing done at all.

Maybe there has been a worse US Secretary of State, but if anybody has a candidate, this pile of horrible actions, most of them just in the last week or so, will be hard to match.  He needs to go.

Barkley Rosser

Richard Epstein: Peak Dishonesty

Epstein is the doyen of libertarian legal theorists.  Larry Tisch Professor of law at NYU and a senior fellow at the Hoover Institution, he has vast influence throughout the conservative world, including the White House.

His latest jag is calling for an early end to isolation policies to contain the coronavirus.  In a nutshell, his argument is that the virus responsible for this pandemic exhibits a range of toxicities, and that evolutionary forces will naturally and fairly quickly shift this distribution toward milder strains.  He claims that happened earlier with HIV, which is now (in his view) no longer much of a threat.  He thinks epidemiologists are essentially charlatans, promulgating an approach to modeling viral transmission and severity that ignores his superior understanding.

He was interviewed by Isaac Chotiner of the New Yorker (hat tip: David Dayen), who gave him a hard time about his self-certainty that he is right and all the health professionals are wrong.  But that’s not what I want to talk about.

Here is an excerpt from the transcript as published by the New Yorker:
Epstein: ....I do think that the tendency to weaken is there, and I’m willing to bet a great deal of money on it, in the sense that I think that this is right. And I think that the standard models that are put forward by the epidemiologists that have no built-in behavioral response to it— 
Chotiner: And you’re not an epidemiologist, correct? 
Epstein: No, I’m trained in all of these things. I’ve done a lot of work in these particular areas. And one of the things that is most annoying about this debate is you see all sorts of people putting up expertise on these subjects, but they won’t let anybody question their particular judgment. One of the things you get as a lawyer is a skill of cross-examination. I spent an enormous amount of time over my career teaching medical people about some of this stuff, and their great strengths are procedures and diagnoses in the cases. Their great weakness is understanding general-equilibrium theory.
That last sentence brought back memories.

I was in a small conference with Epstein in Prague back in 1996.  We were sitting next to each other on a bus that was taking us from one venue to another.  I was interested in how a libertarian like Epstein would react to developments in economics that undermined faith in an invisible hand, so I asked him about two findings in modern general equilibrium theory, the Sonnenschein-Mantel-Debreu analysis of path dependence in out-of-equilibrium adjustment and the complexity-related work on multiple equilibria, basins of attraction, etc.  Both essentially say that, even if you accept the efficiency-equals-optimality framework and assume no market failure of any sort, general equilibrium is arbitrary with respect to global efficiency criteria.  In other words, the drift of economic theory since the 1970s is: don’t depend on an invisible hand.

So I briefly referenced these developments and asked him how they affected the libertarian argument.  His reply was brief: “Who cares about general equilibrium theory any more?”

That’s a direct quote.  I didn’t have a recorder handy, but the words were blunt and memorable.  Whatever else it communicated, it quickly shut down our conversation.

So now Epstein claims his superior understanding of general equilibrium theory is what elevates him over the public health establishment—as if the public health schools in major universities weren’t packed with economics PhDs.  And as if he weren’t willing to dismiss the entire field when confronted with evidence that it doesn’t back him up.

Saturday, March 28, 2020

Remdesivir and Transfer Pricing

Gilead Sciences is conducting phase III trials to explore whether this treatment – which did not turn out to be effective against Ebola – might be effective in treating COVID-19. We all hope it will be and if it does pass phase III trials, national income tax authorities will later have to address the transfer pricing implications of any profits Gilead Sciences generates. This blog post is the first of two with this one setting up some basic transfer pricing principles by noting Gilead’s previous wonder treatments – its recent successes in treating Hepatitis C and its HIV treatments introduced a generation ago. My next blog post will discuss Remdesivir. Gilead was first to market with a treatment they called Sovaldi, which was their Hep C treatment based on sofosbuvir developed through phase II clinical trials by Pharmasset in 2011 for $11 billion. While Gilead was hopeful that its phase III efforts would lead to a successful and highly profitable treatment, the market place in 2011 worried that they had overpaid for an unproven treatment, which could also have competition. Matthew Herper noted in 2014 how this product launch did incredibly well after a rather fast process of obtaining regulatory approval in the U.S.:
Gilead's launch of Sovaldi is looking like the fastest drug launch ever. Hepatitis C afflicts an estimated 3 million Americans. The chart below, from ISI Group analyst Mark Schoenebaum, tracks the number of Sovaldi prescriptions written by doctors according to data tracker IMS Health (this is labeled as TRx) against the launch of Vertex's Incivek, another hepatitis C drug that was until now the fastest drug launch ever, and against the combination of Incivek and Merck's competing drug, Victrelis. Schoenebaum also draws in his own forecast of what Sovaldi would have to do to reach $5 billion in sales in its first year on the market. That's right -- I said $5 billion. And Sovaldi (the red line) is way, way ahead of that forecast. In fact, the prescription numbers seem to be going straight up. There are still reasons some investors might question Gilead's valuation. It may be that there are fewer hepatitis C patients than drug companies and public health officials think. It may be that Gilead gets blowback for the high cost of the drug -- $84,000 per course. It may be that other entrants, from AbbVie or Merck, for instance, will prove good enough or inexpensive enough to take market share or even force a price war. It's possible that insurance companies will push back.But having a product that is selling fast is a good problem to have.
In fact, its Hep C sales for 2014 were $12 billion, which matched sales of its other products. And at a price = $1000 per day for84 days, Gilead Sciences was generating profit margins near 85 percent. And yes they got “blowback from Americans for Tax Fairness (ATF):
Prescription drug maker Gilead Sciences is raking in billions of dollars a year in windfall profits from public health programs and consumers for exorbitantly priced hepatitis C (HCV) medications developed with taxpayer dollars. It then shifts those profits to offshore tax havens, allowing it to dodge nearly $10 billion in U.S. taxes by the end of 2015. Taxpayers subsidized the development of Gilead’s HCV drugs, yet now pay sky high prices for them through Medicare, Medicaid, the Department of Veterans Affairs, private insurance and from their own pockets. The Food and Drug Administration assures Gilead’s products are safe, and the American patent and legal systems ensure that the corporation’s huge profits are protected. But despite all the benefits Gilead has received from taxpayers, Congress maintains a loophole-ridden tax system that has allowed the company to dodge taxes that pay for those benefits, leaving other taxpayers to pick up its tab. California-based Gilead is the sixth most valuable pharmaceutical company in the world, with a market value of $146 billion last year.1 Its enormous profits come primarily from two life-saving HCV drugs. Sovaldi went on the market in December 2013 at a cost of $1,000 per pill, or $84,000 for a full 12-week treatment. The actual manufacturing cost for a 12-week course of Sovaldi has been estimated at between $100 and $1,400. A combination treatment known as Harvoni, which pairs Sovaldi with another drug, debuted a year later at $1,125 per pill, or $94,500 for a full treatment. Competition and negotiations with purchasers have since forced the price of Gilead’s drugs down significantly from their original list prices, but the prices are still high enough to be considered profiteering and to cause hardship for consumers. And in June, 2016, the company announced that it would be pricing its newest HCV drug, Epclusa, at almost $75,000 per treatment, or about $900 per pill.
I’m not about to defend this pricing of these treatments except to say the other biopharmas entered the Hep C market with their own products forcing down these initial high prices and lowering Gilead’s stock valuation. Before Solvaldi, Gilead’s market valuation was approximately $30 billion largely reflecting its successful HIV products introduced a generation ago. Yes the effect of the Hep C products did for a short while cause the stock price to rise to $117 per share (that $146 billion valuation), which only shows the risk Gilead Sciences took on buying Pharmasset paid off like a lottery ticket that hit the Megaball! The later competition from the other Hep C treatments, however, depressed Hep C sales and profits margins such that this stock price had fallen to around $60 per share. But this post is all about transfer pricing so back to the ATF report:
Gilead’s sales and profits have soared since its two life-enhancing HCV treatments came to market while its tax rate has plummeted. Gilead’s worldwide revenues recently tripled—from $11.2 billion in 2013 to $32.6 billion in 2015. (Sovaldi and Harvoni combined represented 56% of total revenue in 2014 and 2015, with nearly $32 billion in sales.) Corporate pretax profits soared even more: rising from $4.2 billion to $21.7 billion from 2013 to 2015, a five-fold increase. By 2015, Gilead’s after-tax profit margin was an astonishing 55%. Unfortunately for U.S. taxpayers, over the same period Gilead’s worldwide effective tax rate plummeted by 40%—dropping from 27.3% in 2013 to 16.4% in 2015.
But of course sales and profit margins increased tremendously – the Hep C products were very successful in 2014 and 2015. OK – 16.4% effective tax rate is an interesting statistic. But why not examine Gilead’s 10-K filing? For example, its subsidiaries include Gilead Ireland Research UC which is the entity that paid Pharmasset $11 billion. As such, the Irish affiliate owns at least the phase II rights to the Hep C products under the arm’s length standard. The 10-K is also a treasure trove on financial information including sales and profits by product and by region. It turns out that 40 percent of Gilead’s income was sourced to the U.S. parent during 2014 and 2015. Of course, this contrast with the fact that 60 percent of Gilead’s income was sourced to the U.S. before 2014 when their HIV products were driving its financials. More on these products can be found here:
For more than a decade, Gilead Sciences has been a leader in the development of antiretroviral therapy for HIV/AIDS. Gilead researchers have developed 11 commercially available HIV medications and are advancing a robust pipeline of next-generation therapeutic options. Recognizing that the greatest need for HIV treatment is in the least-developed parts of the world, the company has put in place innovative programs and partnerships to expand global access to its medicines. Today, 12.6 million people are receiving Gilead HIV therapies in low- and middle-income countries.
The phase II rights to these HIV products were developed in the U.S. while that Irish affiliate incurred the European phase III trials as well as the upfront marketing costs. For the HIV products, all profits generated on U.S. sales would be sourced to the U.S. parent while profits on sales in Europe would be split among the U.S. parent and the Irish affiliate, which likely explains why 60 percent of worldwide profits before 2014 were U.S. sourced. The Hep C business of course is quite different as the Irish affiliate owns the phase II rights. But interestingly most of Gilead’s Hep C sales are to U.S. patients, which begs the question how should these profits be sourced. It is difficult to answer that question, however, without knowing who paid for the U.S. phase III trials and upfront marketing. Which is to say I’m not necessarily that the ATF report is all nonsense as I trust Econospeak readers know I’ve never been a corporate homey. I’m just saying that appropriate allocation of worldwide profits under the arm’s length standard requires more information than this ATF report developed. And of course, this post is really just transfer pricing background for my follow-up post on Remdesivir. Stay tuned!

Wednesday, March 25, 2020

Congress and the Fed Could Ensure Universal Protection During the Pandemic

No matter how well or poorly the federal government addresses the overall economic crisis, millions of vulnerable people will be left unprotected.  Homeless people, incarcerated people, immigrants, people in fringe, off-the-books employment like day labor—unless steps are taken that specifically target them, they are staring into the abyss.

This is fundamentally a local problem.  States, counties and cities know where the needs are.  They have existing ties through social service agencies and their connections to nonprofits.  This is where the expertise lies, but their budgets, lean in good times, are in free-fall right now.

The solution is straightforward.  Congress should authorize the Federal Reserve to purchase specially designated state and municipal bonds floated for the specific purpose of serving the health, housing, food and other essential needs of vulnerable populations.  There should be no limit to the amount that can be borrowed.  And the Fed should purchase these bonds with the intention of retiring them.  Effectively, the Fed would be using its money-creating power to finance social protection at the local level.

This facility can be created immediately, with auditing to follow when practicable.  There should be no delay in meeting the urgent human needs that will otherwise go unaddressed by more conventional policies.

Monday, March 23, 2020

AFL-CIO has a Plan

From the AFL-CIO website:


  • Streamline approaches for allocating and distributing personal protective equipment to working people in greatest need.
  • Issue a workplace safety standard to protect front-line workers and other at-risk workers from infectious diseases.
  • Provide workplace controls, protocols, training and personal protective equipment.
  • Provide clear, protective federal guidance for different groups of workers with different needs.
  • Increase funding for the Occupational Safety and Health Administration and Mine Safety and Health Administration for additional inspectors and health specialists, and for developing and implementing an infectious disease standard.
  • Guarantee 14 days of paid sick leave for all working people.
  • Provide federal resources and guidance to increase capacity of the health care system, including hospital beds.
  • Use emergency federal authority to expand production of medical supplies and equipment.
  • Increase capacity to provide testing for everyone, starting with a priority for front-line workers that includes health care workers, firefighters and paramedics.
  • Provide testing, treatment and vaccination (once approved) at no cost.
  • Emergency federal subsidy of premiums for multiemployer health plans.
  • Remove barriers to testing, treatment and benefits for immigrant workers.
  • Reimagine the unemployment insurance system by dramatically broadening eligibility and increasing both benefit levels and administrative funding.
  • In addition to paid sick days, guarantee 12 weeks of paid leave.
  • A federal COBRA subsidy of 100% for workers who lose jobs or hours.
  • Provide relief for payment on rent, mortgages and student loans.
  • Issue a moratorium on foreclosures, evictions and student loan defaults.
  • Increase funding and remove restrictions on the Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), Special Supplemental Nutrition Program for Women, Infants and Children (WIC), and the school lunch program.
  • Severely impacted sectors include airlines, other transportation, construction, retail, manufacturing, entertainment and hospitality.
  • The federal government should offer to assume payroll costs of idle or hibernating firms to ensure they stay in business and workers stay employed.
  • Additional targeted assistance to private firms in particular sectors should be conditioned on providing paid sick days, with no layoffs, pay cuts, benefit cuts, outsourcing, reopening of union contracts, abrogating union contracts in bankruptcy or stock buybacks, and including workers on corporate boards.
  • Provide aid to workers’ pension funds comparable to the aid available to business.
  • Provide funding for public transit and Amtrak to keep workers on the job, and financial relief and flexibility for the U.S. Postal Service.
  • Provide federal funding for the full cost of Medicaid for one year.
  • Provide federal grants to state and local governments equal to 7% of state and local revenues totaling more than $175 billion.
  • Pass the Students in Response to Coronavirus Act (H.R. 6275).
  • Reauthorize the Surface Transportation Act.
  • Pass a $1 trillion infrastructure package.
  • Pass the Protecting the Right to Organize Act and guarantee comparable rights and protections for public employees.

The Mankiw CV Plan

Greg Mankiw has posted a suggestion for delivering money to people that targets the benefit to those who need it the most.  The idea is clever:

1. Pay people the benefit B.  (This could be spread over many weeks or months.)  Everyone gets the same B.

2. Next year at tax time, compute the ratio r Y(2020)/Y(2019), the ratio of each filer’s 2020 income, net of B, to their 2019 income and capped at 1.  Impose a surcharge of rB on tax liability.  This way people would pay back a proportion of B based on how much they needed it.  If their 2020 income was greater than or equal to 2019, r = 1 and they would repay B in its entirety.  If their 2020 income was zero, r = 0 and there is no surcharge.  (And no tax at all for that matter.)  Partial income losses would lie in between.

Clever and well-intended, but there are problems.

First, what’s income?  Does it include capital gains and losses?  If so, everyone who has a substantial chunk of financial assets will be able to claim zero income in 2020.  What about business losses?  Clearly, if income is defined expansively, as it should be for tax purposes, those who derive income from capital will come out ahead of those who rely on labor.

Second, how will repayment work?  For low to moderate income people who keep their jobs, tax liability for 2020 may be immense—a large proportion of their annual income.  Yes, if such people save all their B they can just apply it to next year’s payment, but how likely is that?  In practical terms, if the country is facing a wave of enforcement actions and bankruptcies a year from now, the repayment mechanism is likely to be abandoned.

Third, what are the incentives?  Mankiw predictably worries about labor supply, but I think the bigger problem is the immense incentive to work off the books.  Instead of saving only your fractional tax rate when you transact in cash, now you will add the savings on your surcharge.  No one who can escape official scrutiny will report any payments or receipts.  If your goal was to drive as much of the economy underground as quickly as possible, you would have succeeded.

I appreciate Mankiw’s attempt to tie provision of government support to the level of need.  One of the virtues of universal, untargeted social insurance, however, is that it requires a smaller enforcement apparatus and doesn’t turn people who play by the rules into suckers.

Sunday, March 22, 2020

The Oil Price War

One consequence of the emerging global Covid-19 recession has been that it has helped push world oil prices down from the $60-70 per barrel range near rhw beginning of 2020 to $23.12 for West Texas Crude and $29.00 for Brent Crude, levels not seen since the end of 2008. But part of why that decline has been so sharp and deep has been thet Saudi Arabia has increased production while Russia has kept up production, despite the Saudis demanding that they cut production.  So there is an oil price war going on.

Of course this will tend to cushion the recession for oil consumers.  But the US has become a small net oil exporter, and reports have it that a subsidiary reason for the Saudis and Russians getting into this price war has been to tank the US fracking industry in oil and natural gas, which by most reports cannot dsurvive if precies remain as low as they are now.  So while US oil products buyers may be better off, the recession in oil producing parts of the US will be made worse.  It  should be kept in mind that a non-trivial parrt of the US economic growh in 2017 was a major increase in fracking activity, with half the increase in capital investment coming frmo that sector alone.  The damage to oil production in the US will probably exceed the benefits from lower prices at the pump in the US.

A curious corollary to this is that the leaders of both Russia and Saudi Arabia have made serious moves to enhance and expand their own power.  In Russia, Putin has moved to change the constitution so that instead of having to step down as president, he can run again twice more, keeping him still in as late as 2036, by which time he will be 84.  This still needs to pass a referendum, but few doubt that it will fail to do so, despite reported declines in Putin's popularity.

In Saudi Arabia, Crown Prince Mohammed bin Salman (MbS) has had several rivals arrested on charges of treason, which can bring the death penalty.  One arrested is the former crown prince, Mohammed bin Nayef, whom MbS forcibly removed in a coup supported by Trump.  Another is an uncle of his, Ahmed bin Abdulaziz, one of the few remaining brothers of MbS's father, with the line of succession having previously gone through them.  The charges are clearly trumped up, with Mohammed bin Nayef having been under house arrest since he was removed from power, and Ahmed bin Abdulaaziz having been very careful to avoid any public criticism of MbS.  But not good enough, they both need to be decapitated.

On Thursday Trump made an effort to prop prices ip  by announcing that the US would purchae 30 mbpd, and the pricce did rise about 25% that day, only fall back again the next day, with West Texas reportedly going below $20 at ibe point.  There is some ability to do this, although with limits as there is only about a 150 million barrels excess capacity in the US Strategic Petroleum Reserve, about one and a half days worth of global production, with about a fifth of that already gone.  There are definite limits to how much Trump can do on this.

But what this shows is Trump's priorities.  When the price decline first started Trump bragged that it would help US consumers, but now that the US oil companies have complained to him, he has shown where his interests lie, and this in the face of the need for massive spending to help defeat the Covid-19 pandemic.  Trump's priorities here are seriously messed up.

Addendum: I have just read that it is not just the Saudis, but that UAE, Kuwait, and Russia are all ramping up oil production.  This is not out of trying to crash the US fracking sector or anybody else in particular, but simply to maintain revenues in the face of declining prices, which is, of course, a destabilizing positive feedback effect in the short run: more production will drive prices down further, with people talking abou $10 per barrel and even lower possibly.  Costs are so low in the Persian Gulf that even at such prices they can operate in the black. But many of them, especially Saudi Arabia, have gotten overly puffed budgets based on much higher oil prices, and KSA in particular is on the verge of becoming a net debtor nation. A third of their budget is military/security. Expect some serious cutbacks in that, which is welcome.

Barkley Rosser

Friday, March 20, 2020

The Hammer and the Dance

Ordinarily, I would give some sort of summary of the Big Idea I am referencing. In this case, I will link to the essay, Coronavirus: The Hammer and the Dance What the Next 18 Months Can Look Like, if Leaders Buy Us Time, by Tomas Pueyo and say you must read it to get what I am talking about. O.K., in simplest terms, Pueyo outlines what is likely to happen with a do-nothing strategy, a mitigation strategy and a third strategy that he calls the "hammer and the dance."

Long story short: mitigation won't cut it.

This calls for a climate change paradigm check. The discourse has been all about mitigation for three decades and here we are in 2020 emitting -- up to a moment ago -- more carbon dioxide than ever. Here's the good news: our response to Covid-19 is going to cut our carbon dioxide emissions -- proving we can do it! How? By setting a target for gradual reduction of carbon dioxide emissions? Hell no! By locking down the fucking system.

Long story short: mitigation hasn't cut it for climate change.

Maybe it's time to go "hammer and dance" with fossil fuels. PULL THE PLUG on all non-essential fossil fuel consumption and only resume the associated economic activities when they can be carried out by solar or wind power.

For a Universal Debt and Rental Moratorium

Incomes are collapsing throughout the economy, and both businesses and individuals face a crisis in meeting fixed payments they can’t control.  The most direct step we can take is to temporarily suspend these payment obligations.

Suppose the government were to announce that, starting immediately, all stipulated debt and real estate rental payments were to be suspended for all borrowers and renters.  This moratorium could have an ending date of, say, two months in the future, with the option of extending it if circumstances require.  No interest would accrue to any of these obligations; in effect, we would be stopping the clock on them for a period of time.

Of course, if nothing else were done this would shut down the credit and rental systems completely for the duration of the moratorium, so a stipulation would have to be added that it applies only to debt or rental obligations established at the time of the announcement.  We’d all have to keep two sets of books, one for pre-announcement loans and rentals, the other for post.

International obligations are somewhat more complicated, but the economic heft of the US is great enough that these conditions could probably be imposed unilaterally on foreign counterparties, especially if the logic of this step persuaded other countries to adopt a similar course of action.

A debt moratorium would dampen some channels of financial instability and provide greater security for most participants in the economy.  By itself, however, it would not address the gaping hole in the real economy caused by shutting down whole sectors of goods and services production.  That requires other forms of stimulus.

Thursday, March 19, 2020

Some Ideas for Pandeminomics

The starting point for all of what follows is that government, if it has the will to act, is currently in the driver’s seat.  Much of the private sector is facing a terrifying confluence of crunches: supply breakdowns, demand falling off a cliff for many goods and services, and a looming shortfall of liquidity to service debt.  A wide swath of business is on the ropes and needs a rescue from government.  This puts the power in our hands if we can wield it.  Of course, with Republican dominance in Washington and the continued loyalty of the Democratic Party to the liberal wing of the plutocracy, the likelihood that we will take advantage of this moment is small.  Still, the opportunity is there, and that’s the basis for thinking ambitiously.

1. Debt-equity buyouts.  There’s a lot of business debt, and borrowers face a crisis as their earnings tumble.  Andrew Ross Sorkin proposes a scheme in which the government would offer no-interest bridge loans to any and all comers, with repayment delayed until after the immediate crisis abates.  The key condition, and just about the only one, is that recipients commit to retaining 90% of their pre-virus workforce.  Dean Baker would go further and provide direct bailout support in exchange for quid pro quo’s, like zeroing out shareholders and limiting CEO pay.

Here is another idea.  Have the government offer to purchase any and all outstanding corporate debt, converting it into an equity stake.  Wipe the debt off the books and take a public ownership position instead, which could be used to pursue objectives, like cutting pay at the top and expanding worker benefits, that the vast majority of Americans support.

2. Public voucher purchases.  For the small business and self-employed sector, particularly in services, I like the Saez-Zucman idea of having the government serve as buyer of last resort.  Specifically, I would set up a public fund to enable the government—perhaps at state and local levels—purchase vouchers for future goods.  A massage therapist, for example, could sell a quantity of vouchers for future massage sessions, providing an income stream to make it through the quarantine.  When the crisis recedes, the government would distribute these vouchers to the public, either through a highly discounted sale or even free distribution.  Perhaps the vouchers could be for steep discounts, say 80%, off the posted price to all for a bit of post-virus income as well.

3. Medicare for All.  Free testing and treatment for coronavirus should be instituted universally and  immediately.  But there is plenty of evidence that comorbidity and -mortality is a big problem: the virus especially endangers victims who have other conditions, which means that expedited treatment of respiratory, cardiovascular and other diseases should also be on the agenda.  Ultimately, any argument for saving lives in the face of the coronavirus can be made for saving lives from other risks, so public payment for all significant health expenses and not just the coronavirus should be on the table.

4. Revenue sharing.  After decades of fiscal constriction, state and local governments have been stretched to the bone.  This has become apparent in the current crisis, with the limited surge capacity of local health and other services.  On top of this we are certainly going to see a plunge in revenues as the economy freezes up.  Only the federal government can borrow freely, backed by the bond-purchasing power of the Fed.  This means it is the responsibility of Washington to backstop the states and lower jurisdictions, so services can be maintained or expanded as needed.

5. Paid leave.  The equivocations of Congress on this front are shameful.  All workers who are unable to go to work, whether because of an illness in the family, lack of school for their kids, the suspension of public transportation or any other health-related reason, should receive this benefit, no matter how large or small their employer.

6. Expanded unemployment.  The US has one of the weakest unemployment insurance systems in the developed world, regularly reimbursing less than half the income of less than half the unemployed.  Now is the time to bring America up to code.

7. Fee and dividend: pay it forward.  Cash payments to the public are already planned, and much of the debate is about their size.  Here is a different approach.  If we are serious about climate change, we will have to adopt a program to limit carbon emissions as soon as possible.  There are only two ways to do this, a tax on them or a system in which a permit is required to bring fossil energy into the economy.  If the permits are auctioned off, as they need to be, either option will result in a flow of carbon money from the public to the government.  (I’m strongly in favor of the permit approach, but that’s a story for another day.)  The best thinking on this issue points to the strong desirability of returning this money back to the public in the form of an equal per capita rebate.

So why not begin setting up this system now, but start the rebate immediately while phasing in the carbon pricing a year or so later to provide a financial injection?  One recent study found (by extrapolation) that a $100 per metric ton carbon price would generate over $800 in annual rebates to each citizen of the US.  For a household of four this would mean more than $3200 per year.  Why not simply transfer this amount to each of us now as a way to introduce the full program?  (I realize that excluding non-citizens is a problem, but the specifics of how to address it would take us too far into the weeds right now.)

8. Coordinated renter/homeowner support.  We are seeing many local and state-level initiatives to prohibit eviction of renters during the current crunch, and this should be extended nationwide.  At the same time, if renters are temporarily released from the obligation to pay rent but noncommercial landlords, like families that rent out a flat so their home can be affordable, are held to every penny of their mortgage, a crisis ensues—one that isn’t in the interest of either renter or owner.  It’s important, then, for measures to protect renters to be accompanied by similar measures to suspend or reduce mortgage payments.  This can be done only at the national level.  In fact, mortgage relief was originally intended to be a component of the post-2008 stimulus program, but it was never taken seriously by either political party.  This time around we should make up for past errors.

This is what occurs to me after a day of reading virus commentary.