Prairie du Chien Selects Jill Karofsky Over David Kelly!

I have previously posted on the highly swingy politicsal nature of southwestern Wisconsin, symbolized by the town there at the mouth of the Wisconsin River, French-founded Prairie du Chien (named for an Indian cheif, it turns out, who was "Dog of the Prairie" in English).  It seems that how SW Wixsonsin goes, so goes the whole state, at least in 2012, 2016, and 2018.

Now we can add an election in 2020, that for a seat on the state Supreme Court, where liberal Dem Jill Karofsky from Madison clobbered incumbent super conservative Justic David Kelly by 11%.  And, yes, SW Wisconsin went for her, along with some areas not expected, such as traditionally conservative counties in the Northeast that contain Green Bay, Appleton, and Oshkosh.  Milwaukee suburbs still went for Kelly, bur Karofsky made gains there.

Of course this election was marked by major GOP efforts to suppress voting, restricting absentee ballots (a move backed 5-4 by the SCOTUS)  and with only 5 out of 180 polls open for voting in Milwaukee, source of the largest Dem voting base in the state.  But even with covid-19, long lines formed there, and many observers think the GOP shot itself in the foot with its restriictive moves, angering Dem-leaning voters who turned out indroves, despite the health danger.

An amusing tidbit is that now GOPs are saying it was all a plot by Dems (probably Obama in the background) urging Bernie Sanders to stay in the race through Wisconsin, something many observers had long predicted since his losses on Super Tuesday.  Maybe that made some difference, although personally I think it is the Prairie du Chien Effect.

Barkley Rosser

From Social Distance to Social Justice: An Unsolved Riddle

In the last two weeks of March and the first week of April, 2020 16.5 million new claims for unemployment were filed in the U.S. After the novel coronavirus is successfully contained some but not all of those jobs will return. The post-pandemic economy will not be the same as the economy before and to assume a return to business-as-usual economic growth would be folly.

There will need to be immediate share-the-work policies along with basic income guarantees. These must be viewed not as temporary measures to be abandoned as soon as "normality" returns but as transitional steps toward an entirely new regime of work, income and common wealth. Addressing climate change has momentarily taken a back seat to the urgent immediacy of the pandemic. But the irreversible long-term consequences of failing to free ourselves from the fossil-fueled treadmill of growth will make Covid-19 seem like a flash in the pan.

Corporate Bond Spreads and the Pandemic

The St. Louis FED has an economics blog:

The ongoing COVID-19 pandemic has caused significant disruption in economic activity across the globe. Financial markets, in particular, have experienced surges in volatility that had not been seen since the 2007-09 financial crisis … The figure below plots the median value for our measure of credit spreads (the difference between a corporate bond’s yield and a benchmark interest rate on U.S. government securities) at the daily frequency, since the beginning of the year ... The figure highlights two important dates. The first one is Feb. 28, when stock markets experienced the largest single week declines since the 2008 financial crisis. While the median spread had been stable at around 100 basis points since the beginning of the year, it started rising around this date, as financial market turmoil became more evident. The second line corresponds to March 23, the day when the Fed announced a series of new measures to support the economy.

The post discusses the role of monetary policy. I could object that this first chart fails to distinguish between credit spreads on corporate bonds with high credit ratings versus credit spreads on corporate bonds with lower credit ratings. Except the authors present more detail information:

The figures below plot the median and standard deviation of credit spreads for three groups of bonds: Those with high ratings (A- and above) Those with medium ratings (between BBB and BB-) Those with low ratings (B+ and below, including unrated)

While credit spreads are not quite as high as they were during late 2008 and early 2009, this spike in credit spreads is something we should continue to monitor.

World Chess Championship Ends

The two best chess players in the world faced off this month, undeterred by lockdowns, travel bans or any other restrictions.  They never had to see each other either.

It helped that they were both computer programs.  The former champ, Stockfish, is the strongest of the traditional type of program, designed by humans and invested with all the fine points of judgment the best human players can translate into code.  Because of its tremendous calculating abilities, it is rated far higher than the top flesh and blood competitors: 3600 to 2800+ for Magnus Carlsen and his closest challengers.  (The numbers are measured on the Elo scale, named for physicist and chess enthusiast Arpad Elo, who developed it over 50 years ago.  Players' scores rise and fall based on how they do against other rated players.  I had the pleasure, long ago, of sipping homemade cordial at Arpad's modest home in Milwaukee.)

But the new top performer is lc0, Leela Chess Zero, a pure implementation of machine learning.  No one told it how to calculate or evaluate; it played millions of games with itself and learned through experience how to make the best moves.  As a result, it has odd blindspots (poor appreciation for fortresses, for instance) but also finds strategies no human would ever consider.  It has a rating a little higher than Stockfish's, and the gap will be wider still after the latest match.

They played 200 games.  Most were drawn, but Leela came out on top, 106-94.  The format was a series of two-game mini-matches in which the opening moves were preselected, and the programs had a chance to play the resulting position once from each side.  (One opening was botched by the organizers; it incorporated a blunder that, at this level, ensured a win for Black.  This didn't change the final spread, but it effectively made the match 198 games rather than 200.)

You can see the whole match here.  Make sure you click on "View Crosstable".  If you see nothing else, check out game 169, which I predict will be regarded as some kind of watershed.  Stockfish, with superhuman calculation chops, rated over 700 points higher than the nearest human, thought it had a pull when it made its 15th move, simultaneously threatening a bishop and a pawn.  Then Leela came back with 16. f5, and immediately Stockfish re-evaluated, its assessment dropping radically.  If computers can have an "ooooh shit" moment, this was it.  And the move can only be called extraordinary.  Leela simply gives up the bishop with no clear followup or compensation, yet somehow, several moves later, Stockfish finds there is simply no defense.

This game is amazing in its own right, but it also expresses the "romanticism" of Leela's self-taught playing style.  She is cavalier about material, much preferring easier play and more scope for her pieces to having more "stuff".  She can't be bothered to keep track of who has the most pawns, and she makes exchange sacrifices with abandon.  If god has come down from silicon heaven to show us how the game should be played, she turns out to a lot wilder than we expected.

Trump All Over The Place On Oil Prices

Indeed, are we surprised? But POTUS has reached a new level of hypocrisy on all this.

So a while ago when oil prices began falling sharply, Trump bragged about how much this was going to help consumers, and he should get credit for it, of course.

More recently, since WTI crude and even Brent fell below $30 per barrel (with WTI just over 20 right now, and Brent just over 30), he became worried about his pals in the oil patches of Texas, Oklahoma, and North Dakota, with Putin and MbS openly declaring they want to put US frackers out of business, oh dear.  So Trump piled in to strong arm Putin and MbS into supposedly making a production cut deal, maybe 10 mbpd, although unclear either of them actually following through solidly (and some others, such as Oman, pumping it up all the way). This got about a day or two's worth of a blip in the prices.

But now we find out that Trump has not agreed to any cuts in US production, and the prices have proceeded to plunge again, for better or worse.

This has led to something almost unheard of in more than half a century, the Texas Railroad Commission.  It has authority over number of days oil can be pumped in Texas, and it and its equivalent in Oklahoma are apparently contemplating intervening and on their own to reduce production in their states in order to try to prop up prices.  There was a time, back in the 1950s, when the Texas RR Commission was effectively OPEC, controlling global marginal production. That has not been the case for many decades, but who knows, maybe they will be back.

But then maybe Trump will not like this, given his recent claims about having "absolute authority" over all state entities and actors.  As it is, on this, he does not seem to know what  he wants.  But what can one expect from somebody who one minute is declaring himself free of "all responsibility" but the next is claiming "absolute authority"?

Barkley Rosser

Pandemic Panorama

"The helpless fixation on notions of security and property deriving from past decades keeps the average citizen from perceiving the quite remarkable stabilities of an entirely new kind that underlie the present situation." -- Walter Benjamin

Vor Dem Maskenball (with updates) -- Max Beckmann, 1922

The contemporary relevance of the section titled "Imperial Panorama: A Tour of German Inflation" from Walter Benjamin's One-Way Street never ceases to astonish me. Yesterday I finally understood what Benjamin meant by "German inflation." I had mistaken it for the name of an event, like "Great Depression" or "World War I" that referred to a monetary phenomenon in the Friedmanite sense of "inflation is always and everywhere a monetary phenomenon." I had attributed to it an ironic, metaphorical sense in which the "stupidity and cowardice" with which the German bourgeoisie insensibly confronted the "silent, invisible power" was "like" the rapidly evaporating value of the banknotes.

But no. The German inflation was not a metaphor for cultural impotence. It was not an event or a monetary phenomenon. The German inflation was literally that cultural impasse, that ineffectual nostalgia for foregone "stabilities" that had benefited those pining for them. Benjamin's "Imperial Panorama" was a diagnosis that "inflation is always and everywhere a cultural phenomenon."

Who knew that the economists have been lying to us about inflation? If prices go up by ten percent and wages go up by ten percent, that is inflation. If prices go up by five percent and wages don't go up at all -- voila! no inflation! "Austerity" policies, in which the price of previously public goods goes up by infinity, is not inflation -- because it is "anti-inflation."

In this cultural diagnosis of inflation, the hyper-inflation of 1923 was not something that came out of the blue in the 1920s. Nor were the printing of banknotes, the financing of the war or the demand of the Allies for reparations the cause. They were symptoms that aggravated the malaise. The inflationary die was cast long before the war.

"things can't go on like this"

CNN’s Slavish Service to Trump

I had to do a double-take when I saw this news item.  First came the headline, “Pence won't let public health officials appear on CNN unless Trump's disinfo briefings run in full”.  I thought, this is horrible: the administration is holding Fauci and Birx hostage to force CNN to cover not only them but also Trump in his daily blatherings.  But no, it was exactly the other way around.  Pence was keeping them from being interviewed on CNN unless the network also covered their regular briefings.  What CNN has been doing instead is broadcasting the Trump portion and then cutting away when people who actually have something to say step forward.

Bad enough that Trump has a high profile daily outlet for his ravings; it’s incredible the media would treat this as news and CDC updates as disposable filler.  I guess they think they are doing the guy a favor by giving him free media so he doesn’t have to buy as much.

This has been a peeve of mine for some time; see here and here.  We expect Fox to offer itself as a mouthpiece for Trump, but why should the self-designated “enlightened” wing of journalism be just as craven?  Yes, the owners care more about ratings than the political consequences of their coverage, but why do working journalists go along without a peep?  What would it take to get through to them?

Why was the PREDICT Program Suspended Last Fall?

A discussion from October 29, 2019:

A crucial federal program tracking dangerous diseases is shutting down. Predict, a pandemic preparedness program, thrived under Bush and Obama. Now it’s canceled … Ever since the 2005 H5N1 bird flu scare, the US Agency for International Development (USAID) has run a project to track and research these diseases, called Predict. At a cost of $207 million during its existence, the program has collected more than 100,000 samples and found nearly 1,000 novel viruses, including a new Ebola virus ... But on Friday, the New York Times reported that the US government is shutting down the program. According to its former director Dennis Carroll, the program enjoyed enthusiastic support under Bush and Obama, but “things got complicated” in the last few years until the program “essentially collapsed.” … That’s a shame, and it’s indicative of a bigger problem. While pandemics make the news when they happen, efforts to understand, predict, and prevent them are underfunded. The US government has several agencies that do work on pandemic preparedness, but experts say that much more leadership in the area is needed … Predict’s mission, according to USAID, is “detection and discovery of zoonotic” — that is, animal-originating — “diseases at the wildlife-human interface.” Anywhere where wild animals live in close contact with humans, there’s potential for disease transmission. Humans can kill and eat wild animals, exposing themselves to diseases.

Another story from early February:

Shutdown of PREDICT Infectious Disease Program Challenged by Senators Warren and King … The joint letter follows-up on a November request from Senator King, who asked for information on USAID’s decision to end PREDICT. In response to Senator King’s initial letter, USAID indicated that it intends to initiate a successor project – but just two months away from the project’s March 2020 closure, no additional details regarding this replacement have been released.

A more recent discussion:

The severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2) pandemic began only a few weeks after the end of PREDICT-2, the last-standing United States Agency for International Development (USAID) Emerging Pandemic Threats funding programme, which supported a decade of virology, ecology, and epidemiology around the world. Since 2009, PREDICT worked with more than 60 countries to build capacity and strengthen zoonotic pathogen surveillance, and identified at least 931 novel virus species from 145 000 samples of wildlife, livestock, and humans. The end of PREDICT leaves the closely connected Global Virome Project and a much broader coalition of multidisciplinary research in the lurch; one virologist observed to The New York Times that “PREDICT needed to go on for 20 years, not 10”. Despite a lack of immediate causation, the coincidental timing with the emergence of COVID-19 has not gone unnoticed, especially on social media; the issue even gained traction in the 2020 Democratic Party presidential primaries, with Senator Elizabeth Warren's plan for COVID-19 response explicitly mentioning the need to restore PREDICT.

Senator Warren was right about the need to restore this program. More needs to be asked as what on earth was the White House thinking last fall?

Lessons from the Pandemic

First, all who produce things we need or want are “essential workers”.  Health care practitioners are essential, but so are the people who stock pharmacies and grocery and hardware stores or staff customer service phone lines.  Truck drivers are essential.  Farmworkers who pick the crops we plan on eating are too.  Nothing demonstrates whose work matters in this world better than a pandemic that threatens to pull them off the job.

Second, because they are essential, whatever these workers need is what we all need.  If they need a bus to get to work, we all need that bus.  If they need childcare, we all need it.  Obviously, if they need healthcare or time to stay home and get over an illness or tend to their kids, that’s our need too.  And if they need a paycheck that provides secure housing, covers their expenses and gives them a chance to recharge their batteries periodically, we all need them to have it.

A virus does not respect the boundary of skin, the line we draw between ourselves and others.  It tells us that “we” is not just an idea or an attitude, but real economic and physical interconnection.  It’s true that we are not all in the same boat, that the burden of this pandemic falls unequally according to how much money we have, what neighborhood we live in and how much respect we get from those with power over us.  But those inequalities were always in front of us if we were willing to look.  It’s the interconnectedness that is suddenly starkly visible.

Something Good From The Pandemic? Maybe A Cease Fire In Yemen

Yes, in the midst of deaths and deep recession there may be someting good that may come from this pandemic.  Saudi Arabia's leaders have announced a cease fire in Yemen after five years of war, one also accepted by its ally, the recognized government there.  Unfortunately so far the Houthi enemies of the Saudis and the recognized government have not so far accepted this proposed cease fire, and in fact it is not the first time the Saudis have called for one, with the previous efforts having failed.

However, this time maybe it will stick.  So far there are no officially recognized cases of covid-19 in Yemen.  But tens of thousands of Yemenis are returning home from KSA, thrown out as low oil prices have strained the Saudi economy, with the numerous Yemeni guest workers taking the hit, Yemenis being the only non-Saudis allowed to come and go without getting visas, so easy come and easy go.  In KSA there are now over 3,000 recognized cases while in Yemen more than half the health infrastructure has been destroyed by the Saudis in the war.  Yemen is facing a potentially disastrous situation.

A further aspect of this on the Saudi side is that 150 members of the Saudi royal family have apparently become infected.  Most of these are in the lesser branches, with the family now ridiculously large at about 15,000, of whom about 2,000 are "core."  But in fact some serious "senior" members have fallen ill, with perhaps the most prominent (and seriously ill) is the powerful governor of Riyadh province, which contains the capital city, Faisal bin Bandar bin Abdulaziz, a nephew of King Salman, who is reportedly hiding on an island in the Red Sea, with de factoo ruler Crown Prince MbS also in seclusion somewhere.  This seems to have spooked the Saudi leadership so that even if the Houthis do not like what is being offered, the Saudis may simply stand down.

The virus may be bringing about peace in a long-suffering nation. Let us hope so.

Barkley Rosser

Remdesivir and Transfer Pricing III

Robert Waldmann posted his Remdesivir III:

I do not understand the need for “evidence-based medicine” or rather I do not understand how the phrase is used by doctors. There is no evidence that Covid 19 patients (without heart disease) do better without Chloroquine. I learn that “evidence based medicine” does not imply choosing the therapy that a fair balance of evidence suggests is best for the patient. Pharmaceuticals are presumed guilty until proven safe and effective. The evidence is treated as evidence in a criminal trial with the burden of proof on the pharmaceutical.

Back on March 2, he wrote:

I think that aside from the trials, Remdesivir should be given to patients and contacts of patients. It is known to be safe (from the trial which shows that it doesn’t cure Ebola). Also a whole lot of it should be produced starting a month ago.

Remdesivir is undergoing phase III trials in rapid fire fashion with some promising results. I have such hopes that I’ve been writing on the transfer pricing implications. But a little news on this production issue:

Mr O'Day said that Gilead has had to “effectively start from ground zero in ramping up our supplies” to meet demand for the agent. He said: “As soon as we knew that remdesivir may have potential in treating the novel coronavirus, our teams began to establish a supply chain for large-scale production.” One of these challenges of producing large quantities of the agent is the length of time it takes to produce remdesivir, he said, noting that the complex chemical reactions take “several weeks to complete.” After investing in ways to reduce the production timeline, Gilead has been able to cut the end-to-end manufacturing process in half, down to around six months. As well as repurposing some of its own facilities, the company has increased its network of external manufacturing partners to meet anticipated demand. Existing supplies of the therapy amount to 1.5 million individual doses, roughly 140,000 treatment courses, and the company has committed to providing the entirety of the existing supply for free. Mr O'Day said: “Providing our existing supplies at no charge is the right thing to do, to facilitate access to patients as quickly as possible and in recognition of the public emergency posed by this pandemic.” The firm has set a goal of producing more than 500,000 treatment courses by October and more than 1 million treatment courses by the end of the year, working with pharmaceutical and chemical manufacturers. I

f we need 10 doses per patient, having 1.5 million doses now and only another 1 million by year end translates into being able to treat 250 thousand patients this year. I agree with Robert that we need to push production as soon and as fast as possible. Gilead has produced some of its other life saving treatments using third party contract manufacturers in the past. The following passage is from their 2013 10-K filing, which was the last year before their Hep C product started dominated what was basically a company that designed and distributed HIV products:

We contract with third parties to manufacture certain products for clinical and commercial purposes, including Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Hepsera, Emtriva, Tybost, Vitekta, Sovaldi, Ranexa, AmBisome, Cayston and Vistide. We generally use multiple third-party contract manufacturers to manufacture the active pharmaceutical ingredients in our products. We are the exclusive manufacturer of ambrisentan, the active pharmaceutical ingredient of Letairis, although another supplier is qualified to make the active pharmaceutical ingredient in Letairis. We also rely on third-party contract manufacturers to manufacture our tablet or capsule products. For example, we use multiple third-party contract manufacturers to tablet Stribild, Complera/Eviplera, Atripla, Truvada, Viread, Tybost, Vitekta, Sovaldi, Letairis, Hepsera and Ranexa. Emtriva encapsulation is also completed by third-party contract manufacturers.

Back then manufacturing costs represented 25 percent of revenues. We know in the next couple of years, the share of manufacturing costs for the Hep C products were a mere 5 percent of revenues in part because these new products commanded incredibly high prices. If Remdesivir turns out to be successful, the world will want a lot of it. How it will be priced and exactly where it will be produced is still open to question but Robert and I want to see a lot of production going on even if that production is turned over to Gilead’s “external manufacturing partners”. Now a brief comment on intercompany pricing. Let’s suppose that a lot of these products are produced in places like China and India (and let’s hope we do not get a stupid Trump trade war). If the manufacturing facilities are related party manufacturers, you can count on the local income tax authorities wanting as much profit in their local jurisdiction as possible. A fair question would be to inquire what is the arm’s length price? A natural answer would be to look at what is being paid to the third party manufacturers. The alternative would be some sort of cost plus approach. But what markup should one pick? I have seen credible analyzes that put the markup as low as 10 percent but there are other situations where a biopharma contract manufacturer receives cost plus 25 percent. Such a transfer pricing controversy might be an interesting exercise in the future but for now let’s hope this treatment works and if so – let’s get busy manufacturing it!

Philip W. Anderson, RIP

1977 physics Nobel Prize winner Philip Warren Anderson has died at a Princeton nursing home at age 96, cause not reported.  He received his prize for work in "condensed matter physics," a label he coined.  His work, done at Bell Labs (later he was at Princeton U.), had relevance for the functioning of circuits in computers and other important uses.  He also did important work on antiferromagnetism, the Higgs particle, spin glassses, and several other topics, with several effects named for him ("Anderson localization effcct," "Higgs-Andrson effect").  I am not going to get into the detailed physics of any of these, but he is of interest here because he has had interactions with econoimists as well, with his work on spin glasses in particular important for work in econophysics..

Let me note now a broader debate he was involved with, that over "reductionism" in physics, particularly over particle physics, although this is a debate that goes far beyond physics into many other disciplines, certainly including economics. Some would say his position was "holistic," although he apparently preferred "anti-reductionist."  The reductionist position in particle physics argued that the key to understanding reality is to understand the functioning of its micro-level parts, in this case individual particles and the fundamental parts they are made of.  A major debater with him on this was the late (also Nobelist) Murray Gell-Mann of Caltech, who introduced the word "quark" into particle physics from James Joyce's Finnegan's Wake for a fundamental sub-particle, and also drew from Buddhism the phrase "Eightfold Way" to describe the emerging consensus view on particle physics.

To further this discussion I shall quote two paragraphs from the obituary for him by Martin Weil that appeared in today's Washington Post that followed mention of this debate (although it did not name Gell-Mann or anybody else besides Anderson himself):

"In his career, he became identified with a phrase he developed: 'More is different." A play on other expressions involving the significance of 'more," it represented a view of physical reality that emphasized the unknown possibilities that were offered by complex systems of particles.

In this, he was regarded as an apostle of complexity, of ths sort of behavior that has come to be studiied in chaos theory, in shich an array of particles, each understood individually, can in the aggregate produce behavior of an unpredictable nature."

This is then followed in the obit by a a disccussion of the specific work that won him his Nobel, the "Anderson localization effect," which I shall not describe in any detail here.

The final paragraph of the abit is the following:

"His interst in compleixty and his aversion to reductionism led him to to help found the Santa Fe Instiitute, with its concern for interdisciplinary work."

That is what especially interests me, as that is a favorite place of mine, although I never met him.

What is not in the obit but I think is important is who the other main co-founders were, two fellow Nobelists.  One was Gell-Mann, mentioned above, Anderson's debating partner in the reductionism debate in particle physics.  This indicates at least an acknowledgement by Gell-Mann that Anderson was at least partly right, and Gell-Mann would go on to be a major participant at SFI (no, I never met him either, although my brother-in-law, Michael Werner, knew him at Caltech).

The third co-founder, also a Nobelist and no longer among the living, was someone also associated with a potentially reductionist view of reality, general equilibrium theory in economics.  That was Kenneth Arrow, whom I did know.  As with Gell-Mann, this also was a case of someone associated with a strongly reductionist view recognizing the importance of the antii-reductionist view.  All of these now dead great intellectuals will be sorely missed.

In any case, for now, RIP Philip Anderson.

Barkley Rosser

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

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.

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.