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:

PRIORITIES OF THE LABOR MOVEMENT TO ADDRESS THE CORONAVIRUS:

PROTECT FRONT-LINE WORKERS
  • 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.
MITIGATE THE BROADER PUBLIC HEALTH CRISIS
  • 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.
SUSTAIN PEOPLE THROUGH THE CRISIS
  • 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.
SUSTAIN WORKERS IN SEVERELY AFFECTED SECTORS
  • 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.
SUSTAIN STATE AND LOCAL GOVERNMENTS
  • 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).
REBUILD THE ECONOMY AND PUT PEOPLE BACK TO WORK
  • 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.

Has the FDA Approved a COVID-19 Treatment?

Before I note perhaps the most irresponsible comment from Donald Trump today, let me note I strongly support research into finding an effective treatment. Pardon me for saying the obvious as certain Trump cheerleaders are not accusing people like me as wanting massive deaths just to make their fearless “leader” look bad. Of course, these Trump sycophants have a long history of being utterly disgusting so let’s move on by noting a great post from Robert Waldmann:
I think that it is important to get the FDA out of the way (by executive order if necessary) ... I think there should be mass production and use of Remdesivir starting on the 5th of March
Robert notes that I have been following Gilead Sciences phase III trials of this potential treatment as well as their stock price, which can be seen as an indicator of the market’s view on the probability of eventual success. Its stock has been up somewhat of late but they note they are not quite there yet. Under Menzie Chinn’s place, I also provided this link:
French manufacturer Sanofi has said it could hypothetically offer enough doses of Plaquenil – a drug containing the molecule hydroxychloroquine – to treat up to 300,000 people if necessary. Chloroquine is normally used mainly to prevent and treat malaria, and also to treat auto-immune conditions such as Lupus and rheumatoid arthritis. In China, ongoing Covid-19 clinical trials have successfully used chloroquine phosphate and hydroxychloroquine to treat coronavirus patients. In France, renowned research professor Didier Raoult – who had been tasked by the French government to research possible treatments of Covid-19 – this week posted a video detailing “promising” results of a chloroquine trial of 24 Covid-19 patients in France. Professor Raoult – from infectious diseases institute l’Institut Hospitalo-Universitaire (IHU) Méditerranée Infection in Marseille (Bouches-du-Rhône, Provence-Alpes-Côte d’Azur) – said that the infected patients he had treated with the drug chloroquine (under the name Plaquenil) had seen a rapid and effective speeding up of their healing process. They also saw a sharp decrease in the amount of time they remained contagious, he said. Yesterday (Tuesday March 17), government spokesperson Sibeth Ndiaye said that similar clinical trials would now be extended to more patients, but said that there is currently no definite “scientific proof” that the treatment works. She said: “[New trials] will be completed by a team independent of Professor Raoult.” Some experts have warned of the dangers of authorising the use of chloroquine too quickly, in the absence of wider studies, and said that the side effects of chloroquine can be severe, especially in the case of overdose.
The last sentence is key in seeing why what Trump said today was beyond irresponsible:
President Trump confirmed Thursday morning the FDA’s rapid approval of a drug called ‘Chloroquine’ to be prescribed to help treat patients suffering from the Coronavirus.
Of course, the FDA has corrected this lie by noting that they have approved further clinical trials. But this important distinction is lost on people who listen to Sean Hannity as well as all those other Trump cheerleaders. Update: A report on the stock price movements yesterday for Gilead Sciences:
On the stock market today, GILD stock surged as much as 8.2% on Trump's statement during a press conference that its experimental coronavirus treatment is "essentially approved." But shares didn't hold after Hahn cautioned the testing process is far from complete. It's possible to have the "right drug" but the "wrong dose," Hahn said during the briefing at the White House. "That can cause more harm than good." Shares of GILD ended the day down 1.1% at 78.55.
The investors who paid $81 a share earlier yesterday should sue Donald Trump for his misleading statements.

Wednesday, March 18, 2020

The Coming Fiscal Crisis Of State And Local Governments

Yesterday my wife Marina and I mt with our personal attorney, a close friend also, to fix  some loose ends in our wills due to some recent family deaths, as well the current situation.  He also happens to sit on the Harrisonburg City Council, as well as having been Mayor for awhile and a longtime member of the city Planning Commission, someone whose competence we have great respect for.  Anyway, he noted that on April 14 the City Manager is to present a proposed budget to the City Council, and that it will have a giant hole in it given that taxes on restaurants are a significant source of revenues for the city, and while not completely shut down, restaurants are now seriously restricted in their activity, not to mention that students will not be returning this semester, and they provide a lot of business.  In short, the city will face sever budgetary problems as the now occurring recession proceeds.  It is not only Harrisonburg that faces this problem, but probably just about every state and municipality in the United States.

Obviously this is currently low on the priority list of most people, and while Congress has now voted for a stimulus bill that will help out indiviuals and businesses, and another may be on the way, so far there  has not been a whisper regarding a likely need to help out state and local governments, who, after all, contribute more to the US GDP (and employment) than does the federal government, which mostly just ransfers money, except for the DOD in substantial terms.  The problem is that unlike the federal government, nearly all state and local governments face balanced budget rules for their current activities, with most needing to pass bond referenda for specific projects in order to borrow money.  So when the revenues fall short, which they shortly will start to do for all these state governments, they will face the choice of cutting spending and laying off workers or raising taxes on populations facing sharply reduced incomes and employment.  The sooner the federal government recognizes this and starts to do something, the better, although probably for now natonal politicians are hoping this will all be over before too much damage happens to the local governments, to the extent they are thinking about this at all, which I doubt.

I note that in the Great Recession, this problem was recognized, and the 2009 fiscal stimulus plan by Obama included as about a third of its spending the distribution to state and local governments of revenue  sharing.  This did help out their  problems that arose at that time.  Doing so again I think would be wise, but again, for the moment this problem is under the radar at the national level.

Barkley Rosser

Has The Ukrainian Anti-Corruption Campaign Come To An End?

Quite possibly.

In today's Washington Post, p. A8, Robin Dixon and David L. Stern report that President Voloymyr Zelensky has removed anti-corruption General Prosecutor Ruslan Ryaboshapka and is replacing him with Uryna Venedkiktova.  She is associated with the oligarch Ihor Kolomoisky, who has long been the main backer of President Zelensky and who had his control of a major bank removed previously.  Observers have long viewed Zelensky''s connection with Kolomoisky as a danger point in his up-until-now largely successful anti-corruption campaign, which had given much hope to many in Ukraine, where in the last year the economy had grown at a stron 4 percent annual rate.  Some obserers say that if Ryaboshapka had been able to last another six months, his removals of corrupt prosecutors could have reached a critical mass that would have been irreversible.  But he stepped on too many powerful toes whose feet walked to Zelensky to pressure him to stop the campaign.  The new appointee claims that "the law will be obeyed," but most observers are not optimistic.

Obviously this has implications for the relations between Trump and Zelensky.  With Biden now the presumptive Dem nominee, and Trump and Guliani having long pushed Zelensky to bring back corrupt prosecutors who had been removed and were playing along with the efforts to smear Biden, it may be that this new move will be followed by Zelensky moving to help Trump out in his efforts, although that may not necessarily be the case.  In any case, observers now fear that the General Prosecutor's office will return to what it has been before, a conduit for the president to prosecute personal enemies and opponents.  Whatever happens between Zelensky and Trump, this is not a good sign for the future of Ukraine.

Barkley Rosser

Monday, March 16, 2020

To Slow Spread Of Coronovirus, End Iran Sancttions

On 3/13/20 in Foreign Policy Focus, Ariel Gold and Medea Benjamin argue that to improve the global coronavirus problem, sanctions on Iran should be lifted, quite aside from the fact they should never have been imposed in the first place as Iran was adhering to the JCPOA nuclear deal.

The effect of the sanctions has been to tank the Iranian economy, including its health care sector, much worsening the coronavirus epidemic in Iran, thus making it more likely to spread to the global pandemic. The Iranian rial has fallen by 80 percent, making it far harder to purchase medical equipment from abroad.  This has not only aggravated the coronavirus situation but also that of many other diseases as well. As of March 13, there were 11,362 reported cases and 514 deaths.

Of course this is aggravated by the Iranian regime imitating those of China (initially) and the US (until very recently) in denying the conditions in their country and being slow to act with testing and other measures. But the bad behavior of the regime does not justify the US and others acting to worsen the health crisis in Iran, which makes it more likely to spread its problems elsewhere as well.

Barkley Rosser

Saturday, March 14, 2020

Benefit-Cost Analysis and the Coronavirus


We are in the middle of a flurry of decision-making on how to deal with COVID-19.  After much resistance, officials are now canceling public events, closing schools and discouraging other activities that put us in contact with each other.  Travel restrictions and possible shutdowns of workplaces, as we’ve seen in Italy, may be up next.

It’s interesting we haven’t heard anything about benefit-cost analysis in all this.  Nearly all economists profess to think that BCA is the single best decision method.  Almost every introductory economics textbook is built around benefit-cost thinking, and for decades federal regulations have mandated BCA for proposals with significant economic impacts.

But now we are facing immense choices—what could have a more drastic impact than shutting down most of the economy by fiat?—and BCA is nowhere to be found.

As a public service, here’s a quick and dirty.  Coronavirus policy is primarily about saving lives, right?  So, if you believe in this sort of thing, the official “value of a statistical life” (VSL) as determined by the Environmental Protection Agency is $7.4 million.  According to BCA wisdom, we should spend up to this amount to save the life of a currently unknown (statistical) person, but not a penny more.*

In order to get a first impression, suppose the more stringent measures proposed will shave 1% off US GDP for the year.  Based on last year’s figure, that would eliminate $214 billion in economic value.  Using the value of life metric, that means we shouldn’t do this unless we expect to save at least 28,919 lives.  If not, let’em die.

Actually, I think it’s likely that we will see even greater economic costs from stringent social distancing policies, especially taking into account that the economy would probably have grown by a couple percent or so this year had the virus not struck.  Maybe these actions would pass the BCA test, maybe not.

Personally, I think it would be madness to stick a monetary value on people’s lives and base our policy choices on whether the dollars on one side of the ledger outweigh those on the other.  I wrote a book about that a while ago.  The considerations that lead us to think primarily in public health terms at a time like this apply just as well to other issues, from food safety to climate change.  The economists who crank out monetary values of life and believe all choices should be based on benefit-cost thinking have not yet had the integrity to step forward and make their case.  This silence speaks volumes.

*On a technical point, economists at EPA and elsewhere argue that the VSL should vary based on the population at risk.  Since mortality from the novel coronavirus is higher for those in the highest age brackets, and death from the disease would eliminate fewer years of life for them than for younger people, their VSL should be lower.  It may also be the case that mortality will be lower among those with higher incomes, who can afford better preventive measures and treatment, further depressing the relevant VSL metric.  But these considerations would require even more lives saved to justify the expense.

Europe’s Response to Coronavirus and the Implications for the U.S.

As I listened to the morning news about the coronavirus crisis, I was reminded of this critique of the Eurozone:
In a recent conference, the distinguished economist Paul Krugman repeated the oft-heard critique that the eurozone is not an optimal currency area. Waltraud Schelkle disagrees with this characterisation, and argues that no country or group of countries represents an optimal currency area – one region or country always loses out from a single monetary policy. But countries can use fiscal, social and regulatory policies to overcome these difficulties. When Americans criticise the eurozone’s currency policies, she writes, they are forgetting the US dollar’s shaky start and the adjustments which had to be made to the financial system in the 19th century.
Why mention the optimal currency area debate in reference to this health crisis? This morning I heard statements like this one:
By contrast, the coronavirus crisis has started to look more like the European migration and financial crises: a symptom of globalization that can’t be held back where it started. The exploding outbreak around the Continent — officially declared a pandemic by the World Health Organization on Wednesday — highlights both the promises and limitations of the European Union: a single, largely borderless market made up of 27 countries, each with their own governments, electorates, bureaucracies, health care systems and, as has become painfully obvious, national interests. For weeks, officials in Brussels and national capitals have called for pan-European coordination. Yet even as Italy, the bloc’s third largest economy, embraces a made-in-China solution — putting the entire country under preventative lockdown — the modus operandi across the EU remains fragmented and reactive.
The United State of America like the European Union as we are a single borderless market made up of 50 states. One would hope we would have pursued for a pan-America coordinated response but until yesterday we saw leadership at the state level but not much from the Administration:
States are scrambling to prepare and respond to the coronavirus outbreak, petitioning Washington for changes to federal health insurance programs that could help them save lives ... With thousands of Americans infected and dozens dead, the Trump administration has yet to find a way to effectively test for the presence of the novel coronavirus. But it’s the President’s ongoing refusal to declare an emergency over the disaster — which would unleash aid, funds, and FEMA — which continues to hamper state-level planning… Medicaid Health Plans of America, the program’s trade association, issued a statement on Wednesday demanding that CMS set consistent guidance for state departments of health that would include waiving cost sharing for people who are testing for or have been diagnosed with COVID-19 … Different states have addressed the crisis differently.
We should applaud our local governments as well as the prudent responses of private sector agents like the professional sports team. We should also be glad that this White House decided to finally shown a wee bit of belated leadership. But the delay in declaring a national emergency has been incredibly costly to both the economy as well as the health of many of our citizens. But this is what we get when we elect a President who does not like agencies like FEMA or the Pandemic Task Force.

Friday, March 13, 2020

What Might That Compromise On Health Care Between Biden And Bernie Look Like?

As discussed in an earlier post it looks like there is an as yet undetermined compromise between the ACA plus public option with some other items supported by Joe Biden that unfortunately lacks the crucial matter of universal health care coverage (although he professes to support such) with the single payer plan supported by Bernie Sanders, somewhat modeled on the system of Canada, although more generous and less open to private insurance than Canada's but definitely including universal coverage.  Obviously Biden's plan has the problem of lacking universal coverage while that of Bernie appears to call for the end of private insurance, which might save money but also seems to be unpopular and thus damages his potential electability.

It certainly looks like a possible compromise should be out there, and according to polls of Kaiser, such a compromise that has a mixed public/private system with universal coverage is well ahead of all other alternatives in the eyes of the US population.  And, indeed, the vast majority of other high income nations have just such a system.  They are the ones that are not the UK or Canada or US, pretty much all the others, although they have wide variations among them of their systems.  The Obama admin sort of tried to get there by imposing the individual mandate to ty to get everybody covered, but it was unpopular from the start and never seriusly enforced, before the Trump admin got rid of it.

So here is a bit of coverage of what is out there in nations that have mixed systems and universal coverage, noting that it is much easier for all of them to manage it compared to the US given their lower costs.  So some look like what ACA almost was, essentially an enforced individual mandate system although with varying patterns of subsidies and backups for the backup public health care system. Among the highly rated systems the Netherlands and Switzerland fit this pattern with Switzerland having more of a private system while the Netherlands has more of a public one.  Switizerland's reuqires higher co-payments, much like what came out of Obamacare/ACA, although Switzerland does have that universsal coverage.

Most of the other systems have larger public portions, although with private elements in various ways.  Let me note as simply one example the widely praised system of France.  The payment is upfront, labeled as an insurance premium but essentially a tax, and individual mandate if you will, but enforced.  With that one has a choice of vsrious systems.   Three are public, with the dominant one covering 84% of the ppulatoin while the other two cover another 12%. The remainder are covered by various non-profit private plans. People using one of the public plans can also get supplemtnal privare insurance from one of those non-profits, and the ultimate divide is 78% public and 22% private in terms of the provision of insurance. The whole thing costs 11.3% of GDP compared to the 17.1% in the US for health care.  And, of course, France does much better on botom line life expectancy and other health outcomes than the US, although apparently the system has been suffering in recent years from some doctor shortages and is probably not the top rated in the world as it once was.

But then, all systems are imperfect, even if so many of them seem to do better than that in the US.  Somehow it does not seem that it should be so difficult to get to one of these intermediate systems that are so pupular among Americans, but somehow for now no presidential candidate is proposing.

Barkley Rosser


Thursday, March 12, 2020

Are US Treasuries Really Facing A "Liquidity Crunch"?

That is what I just saw on an internet report, with 30-year Treauries supposedly especiallly hard hit. Rather stunning was a figure showing trading costs, which have supposedly massively spiked in the last week or so, reaching the highest levels since 2008.  Apparently this may be tied to exceptionally high volatility in the bond markets, especially the long term ones, which may explain it, although this has not bee much reported, I guess with so much attention on the volatile and mostly crashing stock markets.

What makes me wonder about this is that usually a lack of liquitdity results in higher yields on bonds, but this report also noted that in the last few days we saw for the first time ever the entire U Treasuries yield curve below 1 percent.  Indeed, I am under the impression that the old "safe haven effect" is operating, with foreign money flowing into US securities for safety.  But this report claims that people trying to sell 30 year bonds in particular have been having trouble finding buyers.  I confess that all this does not seem to hold together, although it may be that there have been brief moments of such lack of liquidity interspersed with periods of lots of it. 

Needless to say, the US Treasuries market is about as foundational to the entire global financial system as any market.  If somehow it seizes up in a serious way, the situation is going to get far worse in the financial markets and the economy than anybody has been talking about so far.

Barkley Rosser

Wednesday, March 11, 2020

McCoy Tyner Dies, RIP

Several days ago, McCoy Tyner died at age 81.  He was one of the greatest living jazz pianists at the time of his death, with perhaps only Keith Jarrett his serious rival, although others might beg to differ.

He was most  famous for having been the pianist in John Coltane's "classic quartet," along with Jimmy Garrison on bass and Elvin Jones on drums.  Their most famous album was "A Love Supreme," one of the greatest jazz albums of them all.  He also produced a prodigious body of excellent work after he left that group, and was active up until near his death.  In later years he sometimes played with Coltrane's son, Ravi.  He had known John Coltraane from when they were both young in Philadephia before they became jazz musicians.

I saw him perform several times over the years, although when I saw Coltrane, Tyner was no longer in the group.  The last time I saw him was just a few years ago at the Blue Note in New York (he lived in New Jersey).  He had to be helped to walk to the piano, which we were sitting very close to (and even spoke with him briefly) but once he started playing ne was all there, those strong pounding chords mixing with his fine lyricism.  He was immensely influential, but there will be none like him.

RIP, McCoy Tyner.

Barkley Rosser

How Low Can You Go?

This is not a prediction. Only an observation. From 1952 to 1996, U.S. nominal net worth of households and non-profits tracked nominal GDP pretty closely. Net worth remained pretty close to 15 times GDP. That consistent relationship ended after 1997. In the third quarter of 2007, net worth was nearly 20 times GDP but by the second quarter of 2009 it had reverted to just 17 times GDP. One might argue that it was roughly 15 times what trend GDP would have been at that time.

In the second quarter of 2019, net worth was 21 times GDP  or about 28% above the historical norm from 1952 to 1996. To revert to that historical norm would entail a loss of asset valuation of around $32 trillion.


 

Sunday, March 8, 2020

Why International Womens' Day Barely Celebrated In US Despite Starting In US

Today, March 8, is International Womens' Day, recognized as such by the United Nations since 1975.  But probably a majority of American women have never even heard of it, much less celebrate it.  There have been marches on it (or around it) here in Harrisonburg, VA for the last four years, but these have been small and led by women born outside the US, with most of the native born participants highly educated and very progressive politically, the latter very much the case for most native born American women who celebrate it, although it is gradually getting more celebrated here.  But it started here.  What happened?

The first International Womens' Day celebration happened on February 28, 1909 in New York City, organized by the Socialist Party of the US at the behest of Teresa Malkiel.  The following year, Clara Zetkin from the US got the Second Socialist International to adopt it as a day to be celebrated, although without a specific date set.  It was in 1914 in Germany that it began to be celebrated on March 8, which spred from there to be the day, with the US Socialist Party slow to move to that date, and it never really spreading beyond its original leftist circles in the US.

What really reinfoced that is that it became a major holiday within the international communist movement.  This came about after Russian women in then Petrograd (later Leningrad and still later back to its original name, St. Petersburg) demonstrated against the tsarist government's keeping Russia in WW I.  Famously they were banging on pots and pans as they marched in the streets.  Tsar Nicholas II called on troops to suppress them, but the troops ended up siding with the women, and four days later the tsarist government fell, replaced by a socialist regime eventually led by Alexander Kerensky.  While it was March 8 outside Russia, it was February 24 in Russia, still on the Julian calendar.  Hence tis was known as the February Revolution.

On November 7, still in October on the Julian calendar, the Bolsheviks under Lenin overthrew the Kerensky government, an event officially known as The Great October Socialist Revolution.  But as its precursor, the Bolsheviks would officially celebrate March 8 after they switched calendars as International Womens' Day, with it becoming a full holiday in 1965.  After that it would spread into other Communist Parties, with the Chinese one celebrating it from 1922 onwaed.  Needless to say, along with its origins in the Socialist Party, led to it not ever becoming a general holiday or celebration in the US, and knowledge of it being actively suppressed as time went on.  It was only after 1967 that  it began to get somewhat recognized in the US, but still remains not widely known.

Anyway, happy International Womens' Day, everybody!

Barkley Rosser

Saturday, March 7, 2020

Ranking Health Care Systems By Country

As promised earlier, I am going to provide several lists of rankings of nations by the supposed quality of their health care systems. For only one of these do I have a breakdown for specific aspects.  Given that the US generally does not do well on any of these, I do note that studies have shown the US is especcially good for certain cancers, especially colon, wiith France and Japan its main rivals on that one. We are also tops for various unusual elective surgeries that are expensive.

Also for this list I note that pretty much all of the nations appearing have universal coverage except the US.  UK has full-blown socialized mediicine with health care workers central government employees.  Canada and Taiwan are supposedly single payer, with South Korea having close to such a system.  Several Nordic nations have single payer for service, but not a full system.  But then Canada does not have a full system with all the private supplemental insurance there.  The rest are all some public/private mixe, with several major nations having it about three to one public to private.

The most widely cited ranking, and the most complete, is that of the World Health Organization.  But it is also now 20 years old. Anyway, here are its top ten, with Canada coming in 21st, Denmark 34the, US 35th, and Cuba, 36th:

1. France
2. Italy
3. San Marino (yes, this is a thorough list)
4. Andorra
5. Malta
6. Singapore (this one is actually 3 to 1 private to public, but has universal coverage)
7. Spain
8. Oman
9. Austria
10. Japan (which has the world's longest life expectancy)

Then we have a list from International.Insurance.co, with only 11 nations listed:

1. UK
2. Australia
3. Netherlands
4. New Zealand and Norway
6. Sweden and Switzerland
8. Germany
9. Canada
10. France
11. US

World Population Review lists the following nations as having good systems, but does not say that this llist's order indicates anything, and the following discussion starts with Switzerland first and then moves to Finland, which is not on the list, so unclear what is what, although this one does have Canada at the front of the list whose meaning is unclear. Anyway, no numbers, but here is the list in order, for what that is worth, which does not include the US:

Canada
Qatar
France
Norway
New Zealand
Germnay
Hong Kong
Netherlands
Switzerland
Singapore
Luxembourg
Japan
Sweden

Here is a list from Numbeo, clearly ranked, a  long list that I shall only show the top 10 for, with Canada at #24 and the US not even on the list.  This one is more Asia-centric:

1. Taiwan (which has handled the coronovirus especially well by many reports)
2. South Korea
3. Japan
4. Denmark
5. France
6. Spain
7. Austria
8. Thailand
9. Australia
10. Finland

Here is a list of the top 10 from the Cigna insurnce company (again, no US):

1. Denmark
2. Sweden
3. Canada
4. UK
5. Germany
6. Netherlands
7. Australia
8. France
9. Austria
10. New Zealand

Finally I show one from soething calling itself Health Care Tracking, which shows top 10 for both ovwrall as well as some specific cattegories.  I show the overall and then mention thr tops and bottome for a few categories:

Overall
1. Netherlands
2. Australia
3. Sweden
4. Japan
5. Austria
6. Comparable Countries
7. Germany
8. France
9. UK
10. US (only list where US beats Canada apparently, although maybe it is in #7)

For lab delays, The US is the worst and Canada is third worst.  Best three are Germany, France, and Netherlands.

For quick access to a physician (which many in the US thinik we are great at), Canada is the worst (10th), followed by Sweden, and then the US (8th worst out of 10).  The best Netherlands and Australia.

Finally we have amount of use of emergency rooms. On that Canada is tops followed by the US. Least use is Germany, Australia, and the Netherlands.

So, hard to come to any conclusoins on this.  Again, the US does pretty badly on many things. Canada easily ahead of it except for curiously these last two items and generally a pretty good performer (possibly #1 foro World Populaton Review and definitely #3 according to Cigna), but there are also some systems that are usually ahead of it, easily figured out from looking at these lists.

Taiwan may be evidence of serious success with single payer (I do not know details of system there), and the socialized medicine of UK gets wildly different rankings, tops on two lists but then substantially lower on others.  I suspect those where it is tops are looking at expenses for patients where those are especially low in UK.  Costs are ovrall lower there, with lower health care worker pay.  In UK health care spending is only 8% of GDP while it ranges between 10-12% for most of the European nations on these lists as well as Canada, while the US is way ahead of the others at our ridiculous 17%. 

What we clearly need is universality and lower costs, with it unclear that either the Bernie or Biden plans bring us both of those, although both improve on our current system, which is also better than the pre-Obama system, which it seems Trump is trying to take us back to with the GOP-states lawsuit against ACA backed by the Trump DOJ now sitting at the SCOTUS.

Barklley Rosser