Beat the Press

Beat the press por Dean Baker

Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email roundup of Beat the Press. Please also consider supporting the blog on Patreon.

Neil Irwin had an interesting piece reporting on returns to investors who just held stock index funds over long periods of time. The point of the piece is that people who just held an index, rather than trying to speculate on individual stocks, have seen very healthy returns over the last three decades.

While the basic point is well-taken (most people will lose money by trading, both because they tend not to make the right calls on average and because of the fees associated with trading), there is an important qualification that should be made. Future returns over any long period will depend on the market’s current valuation relative to corporate earnings. This means that in periods where price-to-earnings ratios are high, we can anticipate lower future returns.

Irwin sort of notes this point when he comments that the real (inflation-adjusted) returns for someone who bought in at the peak of the 1990s stock bubble would have averaged just 5.0 percent. This point was not widely recognized at the time. Many of the great minds of the economics profession (e.g. Larry Summers and Martin Feldstein) wanted to put Social Security money in the stock market with an expectation of getting 7.0 percent real returns. (Some of us at the time tried to show why this was not possible given the stock valuations at the time.)

Even the 5.0 percent real return was only possible because of a shift in income from labor to capital during the weak labor market of the Great Recession and a large cut in corporate taxes. The Trump tax cut in 2017 effectively increased after-tax profits by 12 percent. This means, at the same price-to-earnings ratio, stock prices are 12 percent higher than would otherwise be the case, which translates into an increase in stock returns over a 20-year period of roughly 0.5 percentage points annually.

This story is relevant today since price-to-earnings ratios are again extraordinarily high. Robert Shiller’s cyclically adjusted price-to-earnings ratio is now at 33.7. This is below the peak of 45.5 hit in 2000, but still close to twice the long-term average. It is also worth noting that his cyclical adjustment, which compares current market capitalization to the prior ten years’ profits, will understate the PE in a period of slow growth relative to a period of rapid growth. From 1990 to 2000 the economy grew at an average nominal rate of  5.6 percent. By contrast, it has grown at just a 3.5 percent average nominal rate over the last decade. (Nominal GDP is the appropriate measure here since Shiller’s ratio is calculated using nominal numbers.) Adjusting for this difference in growth, the PE today would be very comparable to what it was at the peak of the 1990s stock bubble (in 2000).

This means that investors in stock indexes can expect relatively low returns going forward, especially if some or all of the corporate tax cut put in place under Donald Trump is repealed. That doesn’t mean it is necessarily bad to invest in a stock index, but the returns may not be quite what some people would expect.

Neil Irwin had an interesting piece reporting on returns to investors who just held stock index funds over long periods of time. The point of the piece is that people who just held an index, rather than trying to speculate on individual stocks, have seen very healthy returns over the last three decades.

While the basic point is well-taken (most people will lose money by trading, both because they tend not to make the right calls on average and because of the fees associated with trading), there is an important qualification that should be made. Future returns over any long period will depend on the market’s current valuation relative to corporate earnings. This means that in periods where price-to-earnings ratios are high, we can anticipate lower future returns.

Irwin sort of notes this point when he comments that the real (inflation-adjusted) returns for someone who bought in at the peak of the 1990s stock bubble would have averaged just 5.0 percent. This point was not widely recognized at the time. Many of the great minds of the economics profession (e.g. Larry Summers and Martin Feldstein) wanted to put Social Security money in the stock market with an expectation of getting 7.0 percent real returns. (Some of us at the time tried to show why this was not possible given the stock valuations at the time.)

Even the 5.0 percent real return was only possible because of a shift in income from labor to capital during the weak labor market of the Great Recession and a large cut in corporate taxes. The Trump tax cut in 2017 effectively increased after-tax profits by 12 percent. This means, at the same price-to-earnings ratio, stock prices are 12 percent higher than would otherwise be the case, which translates into an increase in stock returns over a 20-year period of roughly 0.5 percentage points annually.

This story is relevant today since price-to-earnings ratios are again extraordinarily high. Robert Shiller’s cyclically adjusted price-to-earnings ratio is now at 33.7. This is below the peak of 45.5 hit in 2000, but still close to twice the long-term average. It is also worth noting that his cyclical adjustment, which compares current market capitalization to the prior ten years’ profits, will understate the PE in a period of slow growth relative to a period of rapid growth. From 1990 to 2000 the economy grew at an average nominal rate of  5.6 percent. By contrast, it has grown at just a 3.5 percent average nominal rate over the last decade. (Nominal GDP is the appropriate measure here since Shiller’s ratio is calculated using nominal numbers.) Adjusting for this difference in growth, the PE today would be very comparable to what it was at the peak of the 1990s stock bubble (in 2000).

This means that investors in stock indexes can expect relatively low returns going forward, especially if some or all of the corporate tax cut put in place under Donald Trump is repealed. That doesn’t mean it is necessarily bad to invest in a stock index, but the returns may not be quite what some people would expect.

I have written repeatedly on how we should have been looking for a collective solution to the pandemic, where countries open-source their research and allow anyone with manufacturing capacity to produce any treatment, test, or vaccine. (We pay upfront, like with Moderna, for those wondering why anyone would do the work.) Anyhow, we obviously did not go that route under Donald Trump.

Along with many others, I have argued that we should still go this route, sharing all our technology freely, as has been proposed in a WTO resolution put forward by India and South Africa. The U.S. and most European countries have vigorously opposed this measure thus far.

A main argument in the case of vaccines is that the mRNA vaccines (Pfizer and Moderna — the only two approved thus far in the U.S.) involve complex manufacturing processes that cannot easily be replicated. While this is undoubtedly in part true, these vaccines did not exist back in March, yet the companies were able to produce large quantities of their vaccines by October, which suggests that if we started today, we could hugely increase output by October or sooner. Since few people think the worldwide pandemic will be over this year, that still sounds like something worth doing, even if does take eight months to get up and running.

Let’s take the claims about the complexity of the production process for the mRNA vaccines at face value. There is a huge urgency to getting the pandemic under control as quickly as possible. The more the virus spreads, the more it has the opportunity to mutate. It is entirely possible that it will mutate into a strain that is either resistant to the current vaccines, more deadly, or both.

This means that even apart from humanitarian concerns, we have a very strong interest in getting the world vaccinated as quickly as possible to minimize the spread. If our team can’t produce enough vaccines to do the job, as they so energetically insist, then we should turn elsewhere. The obvious alternative would be the two Chinese vaccines, which rely on the old-fashioned dead virus approach. Additional facilities to manufacture these vaccines can presumably be built relatively quickly.

While these vaccines appear to be less effective (they need to be more open with their data), the effectiveness rates reported would still hugely slow the spread. They also would radically reduce the number of severe cases, hospitalizations, and deaths. 

Given the urgency in getting people vaccinated, it seems we should be paying these Chinese manufacturers to ramp up production as quickly as possible. One of the Chinese manufacturers contracted with Brazil to sell its vaccine at a bit more than $2 a dose. Suppose we needed 10 billion doses to vaccinate 5 billion people in the developing world. That would come to $20 billion. That is chump change compared to the trillions of dollars of lost output suffered by the U.S., Europe, and the rest of the world as a result of the pandemic. That is in addition to the millions of lives.

The bottom line is that we need to get people throughout the world vaccinated as quickly as possible. If our manufacturers are not up to the task, we should pay China or anyone else who is. Given the relative cost and benefits, this really should not be a hard call.

I have written repeatedly on how we should have been looking for a collective solution to the pandemic, where countries open-source their research and allow anyone with manufacturing capacity to produce any treatment, test, or vaccine. (We pay upfront, like with Moderna, for those wondering why anyone would do the work.) Anyhow, we obviously did not go that route under Donald Trump.

Along with many others, I have argued that we should still go this route, sharing all our technology freely, as has been proposed in a WTO resolution put forward by India and South Africa. The U.S. and most European countries have vigorously opposed this measure thus far.

A main argument in the case of vaccines is that the mRNA vaccines (Pfizer and Moderna — the only two approved thus far in the U.S.) involve complex manufacturing processes that cannot easily be replicated. While this is undoubtedly in part true, these vaccines did not exist back in March, yet the companies were able to produce large quantities of their vaccines by October, which suggests that if we started today, we could hugely increase output by October or sooner. Since few people think the worldwide pandemic will be over this year, that still sounds like something worth doing, even if does take eight months to get up and running.

Let’s take the claims about the complexity of the production process for the mRNA vaccines at face value. There is a huge urgency to getting the pandemic under control as quickly as possible. The more the virus spreads, the more it has the opportunity to mutate. It is entirely possible that it will mutate into a strain that is either resistant to the current vaccines, more deadly, or both.

This means that even apart from humanitarian concerns, we have a very strong interest in getting the world vaccinated as quickly as possible to minimize the spread. If our team can’t produce enough vaccines to do the job, as they so energetically insist, then we should turn elsewhere. The obvious alternative would be the two Chinese vaccines, which rely on the old-fashioned dead virus approach. Additional facilities to manufacture these vaccines can presumably be built relatively quickly.

While these vaccines appear to be less effective (they need to be more open with their data), the effectiveness rates reported would still hugely slow the spread. They also would radically reduce the number of severe cases, hospitalizations, and deaths. 

Given the urgency in getting people vaccinated, it seems we should be paying these Chinese manufacturers to ramp up production as quickly as possible. One of the Chinese manufacturers contracted with Brazil to sell its vaccine at a bit more than $2 a dose. Suppose we needed 10 billion doses to vaccinate 5 billion people in the developing world. That would come to $20 billion. That is chump change compared to the trillions of dollars of lost output suffered by the U.S., Europe, and the rest of the world as a result of the pandemic. That is in addition to the millions of lives.

The bottom line is that we need to get people throughout the world vaccinated as quickly as possible. If our manufacturers are not up to the task, we should pay China or anyone else who is. Given the relative cost and benefits, this really should not be a hard call.

The stock market tells us about the expected value of future after-tax corporate profits. At least, that is when it tells us anything at all.

That is not radical lefty ranting, that is from the Econ textbook. If the economy is expected to boom next year, because Joe Biden is going to use the revenue from a big corporate profits tax to finance huge investment in green projects, there is no reason to expect the stock market to rise. People will not pay more money for shares of Microsoft, GE, or any other stock because they expect the economy to boom. They will pay more money for shares of the stock in these companies if they expect their after-tax profits to be higher. And if Biden’s tax increase on profits is going to more than offset any plausible increase in profits due to higher sales, then share prices will fall.

Read that again if it is too simple to understand. If the economy booms, but the after-tax profits fall because of higher corporate taxes (or higher wages) the stock market will fall. (This is when the market reflects fundamental values. Often it doesn’t, as in the late 1990s stock bubble.) There is no, as in zero, necessary connection between stock prices and the health of the economy. They do often move together, just like the price of wheat tends to rise with a strong economy, but the stock market is not designed to tell us about the economy. It tells us about after-tax corporate profits: Full Stop.

The reason for this tirade is a NYT column by Farhad Manjoo in which he breaks the news that the stock market no longer tells us about the health of the economy in reference to the GameStop nonsense.

“Indeed, a story that was almost proudly disconnected from the real world, telling us so little about the larger economic forces shaping our lives?

“I’m not just talking about GameStop’s bubbly stock price. I’m talking about the entire bubbly stock market, whose gyrations during the last few decades have made it less and less of a reliable proxy for understanding the health of the economy at large — even if presidents and pundits still point to it as a benchmark that makes a difference in people’s lives.”

Someone has to break the news to Mr. Manjoo, and perhaps the opinion editors at the NYT, that the stock market never told us about the economic well-being of the vast majority of people in the country. Again, think of the stock market like the price of wheat. A strong economy will tend to cause both to rise, but there are plenty of other factors that can rises as well. In the case of the price of wheat, a severe drought or crop failure in a major wheat producer elsewhere in the world will lead to a big jump in the price of wheat. Similarly, a cut in corporate taxes or a weakening of workers’ bargaining power, will typically lead to a rise in stock prices.

The former story is good for wheat farmers, the latter is good news for the small segment of the population that has lots of money in stocks. Neither is good news for the country as a whole. Why is this simple point so hard to understand for people who write about economic issues? 

The stock market tells us about the expected value of future after-tax corporate profits. At least, that is when it tells us anything at all.

That is not radical lefty ranting, that is from the Econ textbook. If the economy is expected to boom next year, because Joe Biden is going to use the revenue from a big corporate profits tax to finance huge investment in green projects, there is no reason to expect the stock market to rise. People will not pay more money for shares of Microsoft, GE, or any other stock because they expect the economy to boom. They will pay more money for shares of the stock in these companies if they expect their after-tax profits to be higher. And if Biden’s tax increase on profits is going to more than offset any plausible increase in profits due to higher sales, then share prices will fall.

Read that again if it is too simple to understand. If the economy booms, but the after-tax profits fall because of higher corporate taxes (or higher wages) the stock market will fall. (This is when the market reflects fundamental values. Often it doesn’t, as in the late 1990s stock bubble.) There is no, as in zero, necessary connection between stock prices and the health of the economy. They do often move together, just like the price of wheat tends to rise with a strong economy, but the stock market is not designed to tell us about the economy. It tells us about after-tax corporate profits: Full Stop.

The reason for this tirade is a NYT column by Farhad Manjoo in which he breaks the news that the stock market no longer tells us about the health of the economy in reference to the GameStop nonsense.

“Indeed, a story that was almost proudly disconnected from the real world, telling us so little about the larger economic forces shaping our lives?

“I’m not just talking about GameStop’s bubbly stock price. I’m talking about the entire bubbly stock market, whose gyrations during the last few decades have made it less and less of a reliable proxy for understanding the health of the economy at large — even if presidents and pundits still point to it as a benchmark that makes a difference in people’s lives.”

Someone has to break the news to Mr. Manjoo, and perhaps the opinion editors at the NYT, that the stock market never told us about the economic well-being of the vast majority of people in the country. Again, think of the stock market like the price of wheat. A strong economy will tend to cause both to rise, but there are plenty of other factors that can rises as well. In the case of the price of wheat, a severe drought or crop failure in a major wheat producer elsewhere in the world will lead to a big jump in the price of wheat. Similarly, a cut in corporate taxes or a weakening of workers’ bargaining power, will typically lead to a rise in stock prices.

The former story is good for wheat farmers, the latter is good news for the small segment of the population that has lots of money in stocks. Neither is good news for the country as a whole. Why is this simple point so hard to understand for people who write about economic issues? 

It’s fair to say that the U.S. performance in dealing with the pandemic has been disastrous. With the effort led by Donald Trump, this is not surprising. His main, if not only, concern was keeping up appearances. Preventing the spread of the pandemic, and needless death, was obviously not part of his agenda.

Unfortunately, many other wealthy countries, like France, Belgium, and Sweden, have not done much better. They don’t have the excuse of having a saboteur in charge who was actively trying to prevent the relevant government agencies from doing their jobs.

Anyhow, I thought it would be worth throwing out a few points about how we should have approached the pandemic. While some of this is 20-20 hindsight, I was making most of these points many months ago. I should add, I claim zero expertise in public health, but I do have some common sense, in spite of my training in economics. Of course, if anyone with expertise in public health wants to correct or expand on any points here, I welcome the opportunity to be educated.

I will break down the discussion into three key areas:

  • Measures to reduce spread;
  • Efforts to develop effective testing, vaccines, and treatments;
  • The distribution of vaccines

The United States has failed horribly in all three areas, but many other countries have not done much better.

 

Containing the Spread

When I look back at what I have been wrong about since the pandemic started, my biggest mistake was in thinking that we could get the pandemic under control after a two or three month shutdown. (I also expected that we would make more progress in treatment. Unfortunately, the ratio of deaths to infections has not changed much since the summer.)

The idea that the shutdowns, followed by effective containment measures, could control the spread should not seem far-fetched. Several European countries did get their infection rates down to very manageable levels after their shutdowns. For example, Denmark, a country with a population of a bit less than 6 million people, had their daily infections below 20 in the summer. At this level, it is possible to do effective contact tracing and arranging for those who have been exposed to be quarantined and/or tested. Several countries in East Asia, such as Japan and South Korea, did even better.

Unfortunately, Denmark, like other European countries, allowed its people to travel freely over the summer. This resulted in many people becoming infected and then spreading the virus when they returned.  

Anyhow, the idea that we would have shutdowns (which can be much better targeted with what we now know) and then have containment measures and testing in place to prevent large-scale spread is clearly a possibility. We completely failed in this effort in the United States, both because we did not implement containment policies and also because we had grossly inadequate testing.

As far as containment, this would require the Centers for Disease Control (CDC), the Occupational Safety and Health Administration (OSHA) and other agencies giving clear guidance and ideally being able to enforce their rules. This mostly did not happen because the Trump administration did not want it to happen. The most important example here was when the CDC tried to produce rules for safe school re-openings, which Trump administration officials then rewrote because they complained that they required too much work.  

In a similar vein, OSHA produced guidance for safe practices in meatpacking plants only after widespread reports of infections and deaths in a number of facilities. Incredibly, it was only last week that OSHA issued general guidance for workplace safety in dealing with the pandemic.

Going along with better guidance on the safe operation of workplaces and businesses, we should have had more aggressive efforts at testing and contact tracing. While some states have taken this effort seriously, the Trump administration was often openly hostile to the idea of more frequent testing. As Donald Trump said on several occasions, if we have less testing, we will identify fewer cases. In an administration in which public appearance was the main priority, not controlling the pandemic, there was little interest in pursuing a policy that would show the problem to be bigger.

In terms of what difference better control can make, Germany has had just over half the death rate (relative to its population) from the pandemic as the United States. Denmark has had less than one third the death rate. Governments that knew what they were doing and took the pandemic seriously kept people from dying.

 

Open-Sourcing Research on Testing, Vaccines, and Treatments

To my view, the biggest failure of policy in the pandemic has been the fact that we gave patent monopolies to the companies developing new tests, treatments, and vaccines. This has led to higher prices and needless shortages of the essential tools for containing the pandemic. This practice is even more frustrating since, in many cases, the government picked up the tab for much or all of the development costs.

I argued, beginning back in March, that we should see the pandemic as a great opportunity for experimenting with open-source research in a context of international cooperation. The idea is that we would negotiate some commitment of funding from each country, based on their GDP and wealth, which would go to support research on developing tests, treatments, and vaccines. All the research findings would be fully open, as would be the results of clinical trials. And, all patents would be in the public domain so that anyone with the necessary manufacturing facilities could produce any of the items developed.[1]

In principle, this would allow for the most rapid progress possible. It also would remove the incentives that patent monopolies give companies to lie about the safety and effectiveness of their products. And, it means that everything that was developed – new tests, treatments, and vaccines – would be cheap. These items are rarely expensive to manufacture, they are only expensive because drug companies have patent monopolies or other types of government protection.

The failure to go this route is hitting home now that much of the world, including the United States and Europe, are facing shortages of vaccines. In the wake of these shortages, we are hearing the response that there is limited manufacturing capacity. This is true, but that is precisely the problem.

If Moderna or Pfizer can each build one or two factories to produce their vaccines, then it was possible to build ten or twenty. If there were inputs in short supply, we could have ramped up production of these inputs. This is why we have the Defense Production Act.

There is no reason that the United States could not have had stockpiles of 300 or 400 million of any vaccine that went into Phase 3 testing, by the time that it was approved. If we had capacity to produce another 100 million or so per month, we could ensure that supply would never be the limit on our ability to vaccinate people.

There is of course the risk that we would have produced 400 million doses of a vaccine that was not approved by the Food and Drug Administration, but so what? With the cost of production around $2 per shot, this would mean throwing $800 million in the garbage. In a context where the pandemic has cost us close to 500,000 lives, and trillions of dollars of lost output, the risk of wasting $800 million looks pretty trivial.

In fact, we should be thinking about the issue on a world scale. That means that we should have been looking to have 1-2 billion doses available when vaccines first were approved by regulatory authorities. This is where international cooperation really would be hugely valuable. In addition to the U.S.-European manufacturers, China, Russia, and India have also developed vaccines.

Two of China’s vaccines have been approved by other countries’ regulatory authorities. Russia’s vaccine has also been approved by regulatory authorities in a number of countries and a recently published article shows it to be highly effective. Russia is currently submitting for approval by the European Union’s regulatory agency. Germany has already expressed a willingness to use the Russian vaccine, if it is approved. Russia indicated it could provide 100 million doses to Europe in the spring.

It is great that these other countries have developed vaccines, but unfortunately, they have not been very forthcoming with their results. The Chinese vaccines seem to be less effective than the vaccines developed by Pfizer and Moderna, but they may nonetheless still be very useful in slowing the spread of pandemic, and perhaps even more importantly, preventing severe cases requiring hospitalization and possibly leading to death.

If we had gone the route of full open-source research, the trial data for these vaccines would be freely available to researchers and clinicians throughout the world. This would both allow governments to make informed choices about which vaccines might be best for their populations (several of the vaccines have the advantage of not requiring freezing, which makes delivery and storage far easier, especially in developing countries) and also for doctors and patients to weigh the relative risks and benefits of the available vaccines.

It is also important to point out in this context that we have a very concrete reason for wanting a quick and successful worldwide vaccine program. We know that the more the virus spreads, the more it mutates. There is a great risk that if the pandemic is allowed to spread unchecked in large parts of the world, that there will be mutations for which the current vaccines are not effective. Even if the vaccines can be adjusted to make them effective, as some scientists have claimed, this would still require the production and distribution of hundreds of millions of new doses of a revised vaccine, with the pandemic spreading widely in the meantime.

We really really do not want to be in a situation where we have to go through this thing a second time. That means we should be very serious about getting the whole world inoculated as quickly as possible, even apart from the humanitarian interest that we should not want to see preventable illness and death anywhere.

 

Distributing the Vaccines

Perhaps the most mind-boggling aspect of the policy response to the pandemic has been the failure of the vaccine distribution process. In the United States we have a fairly straightforward explanation: Donald Trump. Trump made it clear that, under his leadership, the federal government was taking no responsibility for distributing the vaccine. However, even without the leadership of the federal government, it is disturbing that states have not been better in stepping up and filling in the gap.

Even more striking is the fact that United States is actually doing better in its vaccine rollout than countries like France and Germany, which do have national health care systems and generally competent governments. It is astounding that they seem to have been unprepared to deliver vaccines once they had been approved by regulatory authorities. It is striking that these countries did not seem to have plans in place to quickly deliver whatever vaccines they had available.

This means having concrete plans to distribute the vaccine immediately after the regulatory authorities gave the green light. That would mean having stockpiles available near distribution centers. It means picking locations – nursing homes, hospitals, pharmacies, or mass inoculation points at sports stadiums or other facilities – and then ensuring that the necessary personnel are at the site.

We have heard reports of shortages of everything from syringes to personnel trained in giving the shots. We had all fall to ensure that we had plenty of syringes. If enough people had not been trained to administer the shots (we give two million flu shots a day during flu season), then we should have trained more people.[2]

It is truly incredible that states did not make these preparations. Again, having a federal government that was completely AWOL on the vaccine distribution effort was a big handicap, but it is still surprising how most states seem to have fallen down so badly.[3] And, it is very hard to understand how competent governments in Europe seem to have also been unprepared to quickly deliver the vaccine doses that were available.

Conclusion – The World Has Messed Up Big Time in Dealing with the Pandemic

It is hard to look at the track record over the last year and not conclude that governments failed badly in their efforts to control the pandemic. This is partly due to corruption and a failure of imagination, as in the decision not to open-source the development of vaccines, treatments and tests, and partly to a lack of competence, as in the failure to prepare in advance for the distribution of vaccines.

Some countries, especially those in East Asia, have done very well in limiting the spread of the virus and thereby minimizing deaths and economic damage. But few countries elsewhere have much to brag about. Donald Trump is of course a big part of the problem in the United States, but the failure goes well beyond Trump. There should be some real accountability once the pandemic is contained, which hopefully will be soon, if we start doing things right.  

[1] I outline a system of publicly funded drug research in chapter 5 of Rigged.

[2] One of the amazing stories I’ve heard from public health people is that the coronavirus shots take longer to deliver because the shot giver has to make arrangements for a second appointment. If this is actually true, it is incredible that we would waste the time of a person giving shots, by having them make these arrangements, rather than having a separate person who checks people in doing this work.  

[3] One explanation that I have heard is that states delayed making plans because they assumed there would be money for distribution logistics in the second pandemic rescue package that eventually passed at the end of December. The idea was that if they spent funds before the bill passed, they wouldn’t be reimbursed, but if they waited, they could then have the Feds pick up the tab. If this explanation is right, then it shows the enormous cost of the long delay in passing this bill.

It’s fair to say that the U.S. performance in dealing with the pandemic has been disastrous. With the effort led by Donald Trump, this is not surprising. His main, if not only, concern was keeping up appearances. Preventing the spread of the pandemic, and needless death, was obviously not part of his agenda.

Unfortunately, many other wealthy countries, like France, Belgium, and Sweden, have not done much better. They don’t have the excuse of having a saboteur in charge who was actively trying to prevent the relevant government agencies from doing their jobs.

Anyhow, I thought it would be worth throwing out a few points about how we should have approached the pandemic. While some of this is 20-20 hindsight, I was making most of these points many months ago. I should add, I claim zero expertise in public health, but I do have some common sense, in spite of my training in economics. Of course, if anyone with expertise in public health wants to correct or expand on any points here, I welcome the opportunity to be educated.

I will break down the discussion into three key areas:

  • Measures to reduce spread;
  • Efforts to develop effective testing, vaccines, and treatments;
  • The distribution of vaccines

The United States has failed horribly in all three areas, but many other countries have not done much better.

 

Containing the Spread

When I look back at what I have been wrong about since the pandemic started, my biggest mistake was in thinking that we could get the pandemic under control after a two or three month shutdown. (I also expected that we would make more progress in treatment. Unfortunately, the ratio of deaths to infections has not changed much since the summer.)

The idea that the shutdowns, followed by effective containment measures, could control the spread should not seem far-fetched. Several European countries did get their infection rates down to very manageable levels after their shutdowns. For example, Denmark, a country with a population of a bit less than 6 million people, had their daily infections below 20 in the summer. At this level, it is possible to do effective contact tracing and arranging for those who have been exposed to be quarantined and/or tested. Several countries in East Asia, such as Japan and South Korea, did even better.

Unfortunately, Denmark, like other European countries, allowed its people to travel freely over the summer. This resulted in many people becoming infected and then spreading the virus when they returned.  

Anyhow, the idea that we would have shutdowns (which can be much better targeted with what we now know) and then have containment measures and testing in place to prevent large-scale spread is clearly a possibility. We completely failed in this effort in the United States, both because we did not implement containment policies and also because we had grossly inadequate testing.

As far as containment, this would require the Centers for Disease Control (CDC), the Occupational Safety and Health Administration (OSHA) and other agencies giving clear guidance and ideally being able to enforce their rules. This mostly did not happen because the Trump administration did not want it to happen. The most important example here was when the CDC tried to produce rules for safe school re-openings, which Trump administration officials then rewrote because they complained that they required too much work.  

In a similar vein, OSHA produced guidance for safe practices in meatpacking plants only after widespread reports of infections and deaths in a number of facilities. Incredibly, it was only last week that OSHA issued general guidance for workplace safety in dealing with the pandemic.

Going along with better guidance on the safe operation of workplaces and businesses, we should have had more aggressive efforts at testing and contact tracing. While some states have taken this effort seriously, the Trump administration was often openly hostile to the idea of more frequent testing. As Donald Trump said on several occasions, if we have less testing, we will identify fewer cases. In an administration in which public appearance was the main priority, not controlling the pandemic, there was little interest in pursuing a policy that would show the problem to be bigger.

In terms of what difference better control can make, Germany has had just over half the death rate (relative to its population) from the pandemic as the United States. Denmark has had less than one third the death rate. Governments that knew what they were doing and took the pandemic seriously kept people from dying.

 

Open-Sourcing Research on Testing, Vaccines, and Treatments

To my view, the biggest failure of policy in the pandemic has been the fact that we gave patent monopolies to the companies developing new tests, treatments, and vaccines. This has led to higher prices and needless shortages of the essential tools for containing the pandemic. This practice is even more frustrating since, in many cases, the government picked up the tab for much or all of the development costs.

I argued, beginning back in March, that we should see the pandemic as a great opportunity for experimenting with open-source research in a context of international cooperation. The idea is that we would negotiate some commitment of funding from each country, based on their GDP and wealth, which would go to support research on developing tests, treatments, and vaccines. All the research findings would be fully open, as would be the results of clinical trials. And, all patents would be in the public domain so that anyone with the necessary manufacturing facilities could produce any of the items developed.[1]

In principle, this would allow for the most rapid progress possible. It also would remove the incentives that patent monopolies give companies to lie about the safety and effectiveness of their products. And, it means that everything that was developed – new tests, treatments, and vaccines – would be cheap. These items are rarely expensive to manufacture, they are only expensive because drug companies have patent monopolies or other types of government protection.

The failure to go this route is hitting home now that much of the world, including the United States and Europe, are facing shortages of vaccines. In the wake of these shortages, we are hearing the response that there is limited manufacturing capacity. This is true, but that is precisely the problem.

If Moderna or Pfizer can each build one or two factories to produce their vaccines, then it was possible to build ten or twenty. If there were inputs in short supply, we could have ramped up production of these inputs. This is why we have the Defense Production Act.

There is no reason that the United States could not have had stockpiles of 300 or 400 million of any vaccine that went into Phase 3 testing, by the time that it was approved. If we had capacity to produce another 100 million or so per month, we could ensure that supply would never be the limit on our ability to vaccinate people.

There is of course the risk that we would have produced 400 million doses of a vaccine that was not approved by the Food and Drug Administration, but so what? With the cost of production around $2 per shot, this would mean throwing $800 million in the garbage. In a context where the pandemic has cost us close to 500,000 lives, and trillions of dollars of lost output, the risk of wasting $800 million looks pretty trivial.

In fact, we should be thinking about the issue on a world scale. That means that we should have been looking to have 1-2 billion doses available when vaccines first were approved by regulatory authorities. This is where international cooperation really would be hugely valuable. In addition to the U.S.-European manufacturers, China, Russia, and India have also developed vaccines.

Two of China’s vaccines have been approved by other countries’ regulatory authorities. Russia’s vaccine has also been approved by regulatory authorities in a number of countries and a recently published article shows it to be highly effective. Russia is currently submitting for approval by the European Union’s regulatory agency. Germany has already expressed a willingness to use the Russian vaccine, if it is approved. Russia indicated it could provide 100 million doses to Europe in the spring.

It is great that these other countries have developed vaccines, but unfortunately, they have not been very forthcoming with their results. The Chinese vaccines seem to be less effective than the vaccines developed by Pfizer and Moderna, but they may nonetheless still be very useful in slowing the spread of pandemic, and perhaps even more importantly, preventing severe cases requiring hospitalization and possibly leading to death.

If we had gone the route of full open-source research, the trial data for these vaccines would be freely available to researchers and clinicians throughout the world. This would both allow governments to make informed choices about which vaccines might be best for their populations (several of the vaccines have the advantage of not requiring freezing, which makes delivery and storage far easier, especially in developing countries) and also for doctors and patients to weigh the relative risks and benefits of the available vaccines.

It is also important to point out in this context that we have a very concrete reason for wanting a quick and successful worldwide vaccine program. We know that the more the virus spreads, the more it mutates. There is a great risk that if the pandemic is allowed to spread unchecked in large parts of the world, that there will be mutations for which the current vaccines are not effective. Even if the vaccines can be adjusted to make them effective, as some scientists have claimed, this would still require the production and distribution of hundreds of millions of new doses of a revised vaccine, with the pandemic spreading widely in the meantime.

We really really do not want to be in a situation where we have to go through this thing a second time. That means we should be very serious about getting the whole world inoculated as quickly as possible, even apart from the humanitarian interest that we should not want to see preventable illness and death anywhere.

 

Distributing the Vaccines

Perhaps the most mind-boggling aspect of the policy response to the pandemic has been the failure of the vaccine distribution process. In the United States we have a fairly straightforward explanation: Donald Trump. Trump made it clear that, under his leadership, the federal government was taking no responsibility for distributing the vaccine. However, even without the leadership of the federal government, it is disturbing that states have not been better in stepping up and filling in the gap.

Even more striking is the fact that United States is actually doing better in its vaccine rollout than countries like France and Germany, which do have national health care systems and generally competent governments. It is astounding that they seem to have been unprepared to deliver vaccines once they had been approved by regulatory authorities. It is striking that these countries did not seem to have plans in place to quickly deliver whatever vaccines they had available.

This means having concrete plans to distribute the vaccine immediately after the regulatory authorities gave the green light. That would mean having stockpiles available near distribution centers. It means picking locations – nursing homes, hospitals, pharmacies, or mass inoculation points at sports stadiums or other facilities – and then ensuring that the necessary personnel are at the site.

We have heard reports of shortages of everything from syringes to personnel trained in giving the shots. We had all fall to ensure that we had plenty of syringes. If enough people had not been trained to administer the shots (we give two million flu shots a day during flu season), then we should have trained more people.[2]

It is truly incredible that states did not make these preparations. Again, having a federal government that was completely AWOL on the vaccine distribution effort was a big handicap, but it is still surprising how most states seem to have fallen down so badly.[3] And, it is very hard to understand how competent governments in Europe seem to have also been unprepared to quickly deliver the vaccine doses that were available.

Conclusion – The World Has Messed Up Big Time in Dealing with the Pandemic

It is hard to look at the track record over the last year and not conclude that governments failed badly in their efforts to control the pandemic. This is partly due to corruption and a failure of imagination, as in the decision not to open-source the development of vaccines, treatments and tests, and partly to a lack of competence, as in the failure to prepare in advance for the distribution of vaccines.

Some countries, especially those in East Asia, have done very well in limiting the spread of the virus and thereby minimizing deaths and economic damage. But few countries elsewhere have much to brag about. Donald Trump is of course a big part of the problem in the United States, but the failure goes well beyond Trump. There should be some real accountability once the pandemic is contained, which hopefully will be soon, if we start doing things right.  

[1] I outline a system of publicly funded drug research in chapter 5 of Rigged.

[2] One of the amazing stories I’ve heard from public health people is that the coronavirus shots take longer to deliver because the shot giver has to make arrangements for a second appointment. If this is actually true, it is incredible that we would waste the time of a person giving shots, by having them make these arrangements, rather than having a separate person who checks people in doing this work.  

[3] One explanation that I have heard is that states delayed making plans because they assumed there would be money for distribution logistics in the second pandemic rescue package that eventually passed at the end of December. The idea was that if they spent funds before the bill passed, they wouldn’t be reimbursed, but if they waited, they could then have the Feds pick up the tab. If this explanation is right, then it shows the enormous cost of the long delay in passing this bill.

As I understand it, there are many folks out there who think that we saw some major sleaze by the Wall Street big boys, screwing the little guy, when Robinhood stopped taking buy orders on GameStop, as the stock was soaring to record highs. They resumed taking buy orders after a pause of a day or so.

The story is that this allowed for Robinhood’s hedge fund friends to get out of their short positions, thereby saving themselves from huge losses. Yet another case of the big money Wall Street crew ripping off ordinary investors.

I have to admit, I don’t quite see the scandal here. First, the official story from Robinhood was that they needed to raise capital to met SEC leverage requirements. That seems to me to be outwardly plausible, since the company did in fact raise a substantial amount of capital during this brief period.

As far as the claim that they were giving the hedge fund boys time to close out their positions, that is possible, but the stock price fell precipitously during this period. If the hedgies were getting out, this would have meant they were buying to cover their shorts. That should have driven the stock price up, not down. My guess is that most of the hedge funds had closed out their positions when the stock was at $40 or $50, I doubt they still had big bucks in their shorts at the point where it hit $400.

But more importantly, what exactly is the Robinhood/GameStop crew complaining about? During the period of the buying moratorium they still had the opportunity to buy the stock through another platform if they were really dying to do it. But more importantly, the stock price fell by more than $100 a share during this period. If this was due to Robinhood’s moratorium, then the company allowed its clients to buy shares at a huge discount compared to the pre-moratorium price. What is the problem here?

Anyhow, I hate to ruin a good Wall Street scandal, but I would rather focus on real ones.

 

More on the FTT and the GameStop Game

In an earlier post I had said that I didn’t think that a financial transactions tax, of the size generally proposed, would have much impact on the sort of frenzy we saw around GameStop. A friend pointed out to me that Robinhood’s business model depends on passing its order to its partners, who profit by front-running trades and then making kickbacks to Robinhood. In this context, a tax of 0.1 percent (the amount proposed in a bill just put forward by Representative Peter DeFazio) may put Robinhood out of business, since it would likely absorb the full profit on a trade.

That is very plausible, but if we envision people using a platform like Robinhood and trading with low fees, it is still very possible that we could see the same sort of frenzy that we saw last week. In other words, I doubt raising the cost of trades by 0.1 percentage point could stop this sort of mania, although it could slow it down a bit.

Anyhow, as I said in my prior post, there is no reason the government shouldn’t get a few bucks out of the deal. We tax other forms of gambling, why not tax gambling on Wall Street?

 

As I understand it, there are many folks out there who think that we saw some major sleaze by the Wall Street big boys, screwing the little guy, when Robinhood stopped taking buy orders on GameStop, as the stock was soaring to record highs. They resumed taking buy orders after a pause of a day or so.

The story is that this allowed for Robinhood’s hedge fund friends to get out of their short positions, thereby saving themselves from huge losses. Yet another case of the big money Wall Street crew ripping off ordinary investors.

I have to admit, I don’t quite see the scandal here. First, the official story from Robinhood was that they needed to raise capital to met SEC leverage requirements. That seems to me to be outwardly plausible, since the company did in fact raise a substantial amount of capital during this brief period.

As far as the claim that they were giving the hedge fund boys time to close out their positions, that is possible, but the stock price fell precipitously during this period. If the hedgies were getting out, this would have meant they were buying to cover their shorts. That should have driven the stock price up, not down. My guess is that most of the hedge funds had closed out their positions when the stock was at $40 or $50, I doubt they still had big bucks in their shorts at the point where it hit $400.

But more importantly, what exactly is the Robinhood/GameStop crew complaining about? During the period of the buying moratorium they still had the opportunity to buy the stock through another platform if they were really dying to do it. But more importantly, the stock price fell by more than $100 a share during this period. If this was due to Robinhood’s moratorium, then the company allowed its clients to buy shares at a huge discount compared to the pre-moratorium price. What is the problem here?

Anyhow, I hate to ruin a good Wall Street scandal, but I would rather focus on real ones.

 

More on the FTT and the GameStop Game

In an earlier post I had said that I didn’t think that a financial transactions tax, of the size generally proposed, would have much impact on the sort of frenzy we saw around GameStop. A friend pointed out to me that Robinhood’s business model depends on passing its order to its partners, who profit by front-running trades and then making kickbacks to Robinhood. In this context, a tax of 0.1 percent (the amount proposed in a bill just put forward by Representative Peter DeFazio) may put Robinhood out of business, since it would likely absorb the full profit on a trade.

That is very plausible, but if we envision people using a platform like Robinhood and trading with low fees, it is still very possible that we could see the same sort of frenzy that we saw last week. In other words, I doubt raising the cost of trades by 0.1 percentage point could stop this sort of mania, although it could slow it down a bit.

Anyhow, as I said in my prior post, there is no reason the government shouldn’t get a few bucks out of the deal. We tax other forms of gambling, why not tax gambling on Wall Street?

 

The Wall Street crew is furious over the masses at Robinhood and Reddit ruining their games with their mass buying of GameStop, which wiped out the short position of a big hedge fund. The Robinhood/Reddit masses are touting this as a victory over Wall Street. The Wall Street insiders are decrying this effort to turn the market into a casino. It’s worth sorting this one out a bit and answering the question everyone is asking (or should be): would a financial transactions tax fix this problem?

First of all, much has been made of the fact that the hedge fund Melvin Capital was shorting GameStop, as though there is something illicit about shorting a company’s stock. This one requires some closing thinking. In principle, a major purpose of the stock market (we will come back to this) is to assess the true value of a company based on the information that investors collectively bring to the market.

Often this leads people to buy stock with the idea that the price will rise. However, an analysis can also lead investors to conclude that a stock is over-valued. In that case, if they are correct, they will make money by shorting the stock.

Their shorting provides information to the market and brings the price closer to its “true” value (yes, we’re coming back to this) in the same way that an investor’s decision to buy stock brings its price closer to its true value. There is no more reason to be upset about a short position than an investor buying stock.

A short position carries a large inherent risk in a way that buying the stock doesn’t. If an investor buys a stock, the most they can lose is the money they spent on the stock. By contrast, a short position means that an investor has sold a stock with a commitment to buy back the shares at some future point. If the stock price soars, as happened with GameStop, then they can lose many times their initial investment.

For this reason, most investors taking short positions cover their bet in some way. For example, they could purchase a call option at a price that is substantially higher than the price they shorted. This would allow them to limit their losses by exercising the call option.[1]

Covering their bet however also means that they will make less money from their short, if it pays off, since they had to also spend money on this insurance. As a result, some investors don’t cover their short and take the full risk themselves. This seems to have been the case with Melvin Capital.

Holding an uncovered short position leaves an investor exposed to the sort of risk posed by the Robinhood-Reddit gang. When they started buying GameStop, the price began to rise rapidly. This put Melvin Capital more in the hole.

The hedge fund’s creditors wanted them to limit their losses, which meant that they had to rush out and buy shares, covering their position. This sent the price still higher. The net result was that the price rose by more than 1500 percent, from just under $20 a share earlier this month to a peak of over $400 on Wednesday. The price has since fallen some, but it is still hugely above its levels from earlier this month.

What Does It Mean?

Let’s assume that Melvin Capital was right in its assessment of the stock. (I have not studied the market prospects for GameStop, but the attraction of a brick and mortar store selling video games does seem limited.) In effect, we saw a group of small investors manipulating the stock price to the detriment of a high-flying hedge fund.

It’s hard to shed any tears for Melvin Capital. They are supposed to be the grownups in the room. They should have understood the risk of an uncovered short position. If for some reason they chose to take the risk and lost, well them’s the breaks.

What about the idea of people acting collectively to manipulate stock prices? Well, this is bad, but it needs some additional context.

First, the point about it being bad is that there are smaller investors out there who buy and sell stock all the time (e.g. people with 401(k)s), and if they happen to get into the market at a bad time because of this manipulation, this will be bad news for them. To be concrete, suppose some sucker put $10,000 in GameStop when it was at $400 and at this time next month its is back down to $20. They lost 95 percent of their money.

As a practical matter, small investors should never be buying individual stocks, but you can still have a story where the not very sharp manager of a fund held by small investors buys into GameStop at $400. Presumably, that didn’t happen in this case, but it is easy to imagine investors being the victim of smaller manipulations of say 5 or 10 percent.

The GameStop case shows us an example of a large group of small investors acting collectively to manipulate stock prices. We can say this is bad, but what about when a large single investor, who controls billions of dollars of assets, does it themselves?

This is clearly illegal, but it nonetheless happens. In principle an investor can be fined and even imprisoned, but stock manipulation is difficult to detect and prove. The cases that are prosecuted are surely a small subset of the cases that actually occur.

There are also variations of what the Robinhood and Reddit gang pulled. For example, a prominent stock commentator may invest in stocks they tout (or get kickbacks). This was the accusation against Henry Blodget, a prominent stock analyst in the dotcom bubble. It is very hard to distinguish a situation where a commentator is making a pronouncement about a company because it is what they actually believe, from a situation where the comment is due to some carefully concealed financial interest.

Anyhow, long and short, the Robinhood/Reddit gang basically got into the game of stock manipulation. This is not especially to be applauded. They did catch a big hedge fund with its pants down, but many of the people involved are likely to end up losers – the people who bought GameStop at a grossly inflated price.

 

How Do We Fix It and Do We Need To?

It would be good if we could crack down on efforts to manipulate stock prices, whether they come from big actors like hedge funds, corporate CEOs timing their options, or the collective action of small investors. This will always be a difficult task, but unfortunately it is easiest when it is on open display, as appears to have been the case with the Robinhood/Reddit deal.

To be clear, if a group of people debate a company’s value and decide that a stock is grossly under-valued, there is no issue. But, if a group of people collectively say “hey, let’s try to drive up the price of GameStop,” you have a clear case of manipulation.

I’m not advocating a massive crackdown on the Robinhood/Reddit crew, but there should be consequences for this action. And, it would be reasonable to make the companies involved, Robinhood and Reddit, pay the costs. They should not allow their platforms to be used for stock manipulation.

A Financial Transactions Tax to the Rescue?

As a huge fan of financial transactions taxes (FTT), I would love to be able to say that a FTT would stop this sort of game-playing. Unfortunately, this isn’t true. FTTs of the size being discussed would barely place a dent in what we saw with GameStop.

The FTT just introduced by Representative Peter DeFazio is a tax of 0.1 percent. This means that an investor playing with $10,000 would pay $10 in taxes.[2] That isn’t likely to discourage a person determined to get rich while sinking a hedge fund. FTTs are great at limiting high frequency trading, which operates on very low margins, and will reduce the volume of trading more generally, eliminating waste in the financial sector, but they will not have much impact on those looking to make big bets.

One thing that they will do is ensure that the government gets a cut. In this sense, we should think of it as a tax on gambling. Other forms of gambling, like casinos or state lotteries, are subject to very high taxes. It shouldn’t be a big deal to impose a tax of 0.1 percent on Wall Street gambles.

If the Robinhood/Reddit deal ends up leading to an extra $50 billion in trades (a very crude guess), that would net the government $50 million in revenue with the DeFazio FTT in place. That is not big bucks compared to a $5 trillion federal budget (it comes to 0.001 percent), but it is substantial compared to some of the items that are occasionally subject to big political debates.

For example, it’s more than 10 percent of the $450 million that the Federal government is currently spending on the Corporation for Public Broadcasting. It’s roughly 30 percent of the National Endowment for the Arts $170 million annual budget. In short, the money raised by a FTT from this deal would at least allow us to pay for some nice things.

 

The Message of the GameStop Affair for Financial Transactions Taxes

One argument that opponents of FTTs like to make is that they will inhibit the process of “price discovery,” so that the market price of stocks and other assets will be further removed from their true price. In this story, the distortions will cause capital to be more poorly allocated and therefore lead to a less productive economy.

This argument suffers from the fact that relatively little money for investment is raised through the stock market. Usually, initial public offerings are done to allow the original investors to cash out. Established companies raise only small a portion of their investment funds through issuing shares.

However, this episode shows us all the craziness that can have a huge impact on stock prices. Should GameStop be worth $20 a share or $400 a share? That is a huge difference. Let’s imagine that the DeFazio tax could result in GameStop’s price being 5 percent too high or too low for limited period of time. (That would be a huge effect for a tax of 0.1 percent.) We would be talking about a range between $19 and $21. Does anyone still want to tell us that that a FTT will undermine the process of price discovery?

In short, this episode should help us to see the stock market with open eyes. Much of what takes place there is clearly gambling. We let people gamble in other contexts, but we tax it. There is no reason we shouldn’t tax it on Wall Street.

And the idea that it will distort market prices; do you want to tell me how Donald Trump really won the election?

[1] A call option gives an investor the right to buy a stock at a specified price on a specific date. For example, if a stock is currently priced at $20, I can buy a call option that gives me the right to buy the stock at $25 a share on March 31. This means that, if I am shorting the stock, the most I can lose is $5 a share, plus the cost of the call option.  

[2] Senator Bernie Sanders has proposed a tax of 0.5 percent, but that still would likely not have been a major hindrance to the Robinhood/Reddit folks.

The Wall Street crew is furious over the masses at Robinhood and Reddit ruining their games with their mass buying of GameStop, which wiped out the short position of a big hedge fund. The Robinhood/Reddit masses are touting this as a victory over Wall Street. The Wall Street insiders are decrying this effort to turn the market into a casino. It’s worth sorting this one out a bit and answering the question everyone is asking (or should be): would a financial transactions tax fix this problem?

First of all, much has been made of the fact that the hedge fund Melvin Capital was shorting GameStop, as though there is something illicit about shorting a company’s stock. This one requires some closing thinking. In principle, a major purpose of the stock market (we will come back to this) is to assess the true value of a company based on the information that investors collectively bring to the market.

Often this leads people to buy stock with the idea that the price will rise. However, an analysis can also lead investors to conclude that a stock is over-valued. In that case, if they are correct, they will make money by shorting the stock.

Their shorting provides information to the market and brings the price closer to its “true” value (yes, we’re coming back to this) in the same way that an investor’s decision to buy stock brings its price closer to its true value. There is no more reason to be upset about a short position than an investor buying stock.

A short position carries a large inherent risk in a way that buying the stock doesn’t. If an investor buys a stock, the most they can lose is the money they spent on the stock. By contrast, a short position means that an investor has sold a stock with a commitment to buy back the shares at some future point. If the stock price soars, as happened with GameStop, then they can lose many times their initial investment.

For this reason, most investors taking short positions cover their bet in some way. For example, they could purchase a call option at a price that is substantially higher than the price they shorted. This would allow them to limit their losses by exercising the call option.[1]

Covering their bet however also means that they will make less money from their short, if it pays off, since they had to also spend money on this insurance. As a result, some investors don’t cover their short and take the full risk themselves. This seems to have been the case with Melvin Capital.

Holding an uncovered short position leaves an investor exposed to the sort of risk posed by the Robinhood-Reddit gang. When they started buying GameStop, the price began to rise rapidly. This put Melvin Capital more in the hole.

The hedge fund’s creditors wanted them to limit their losses, which meant that they had to rush out and buy shares, covering their position. This sent the price still higher. The net result was that the price rose by more than 1500 percent, from just under $20 a share earlier this month to a peak of over $400 on Wednesday. The price has since fallen some, but it is still hugely above its levels from earlier this month.

What Does It Mean?

Let’s assume that Melvin Capital was right in its assessment of the stock. (I have not studied the market prospects for GameStop, but the attraction of a brick and mortar store selling video games does seem limited.) In effect, we saw a group of small investors manipulating the stock price to the detriment of a high-flying hedge fund.

It’s hard to shed any tears for Melvin Capital. They are supposed to be the grownups in the room. They should have understood the risk of an uncovered short position. If for some reason they chose to take the risk and lost, well them’s the breaks.

What about the idea of people acting collectively to manipulate stock prices? Well, this is bad, but it needs some additional context.

First, the point about it being bad is that there are smaller investors out there who buy and sell stock all the time (e.g. people with 401(k)s), and if they happen to get into the market at a bad time because of this manipulation, this will be bad news for them. To be concrete, suppose some sucker put $10,000 in GameStop when it was at $400 and at this time next month its is back down to $20. They lost 95 percent of their money.

As a practical matter, small investors should never be buying individual stocks, but you can still have a story where the not very sharp manager of a fund held by small investors buys into GameStop at $400. Presumably, that didn’t happen in this case, but it is easy to imagine investors being the victim of smaller manipulations of say 5 or 10 percent.

The GameStop case shows us an example of a large group of small investors acting collectively to manipulate stock prices. We can say this is bad, but what about when a large single investor, who controls billions of dollars of assets, does it themselves?

This is clearly illegal, but it nonetheless happens. In principle an investor can be fined and even imprisoned, but stock manipulation is difficult to detect and prove. The cases that are prosecuted are surely a small subset of the cases that actually occur.

There are also variations of what the Robinhood and Reddit gang pulled. For example, a prominent stock commentator may invest in stocks they tout (or get kickbacks). This was the accusation against Henry Blodget, a prominent stock analyst in the dotcom bubble. It is very hard to distinguish a situation where a commentator is making a pronouncement about a company because it is what they actually believe, from a situation where the comment is due to some carefully concealed financial interest.

Anyhow, long and short, the Robinhood/Reddit gang basically got into the game of stock manipulation. This is not especially to be applauded. They did catch a big hedge fund with its pants down, but many of the people involved are likely to end up losers – the people who bought GameStop at a grossly inflated price.

 

How Do We Fix It and Do We Need To?

It would be good if we could crack down on efforts to manipulate stock prices, whether they come from big actors like hedge funds, corporate CEOs timing their options, or the collective action of small investors. This will always be a difficult task, but unfortunately it is easiest when it is on open display, as appears to have been the case with the Robinhood/Reddit deal.

To be clear, if a group of people debate a company’s value and decide that a stock is grossly under-valued, there is no issue. But, if a group of people collectively say “hey, let’s try to drive up the price of GameStop,” you have a clear case of manipulation.

I’m not advocating a massive crackdown on the Robinhood/Reddit crew, but there should be consequences for this action. And, it would be reasonable to make the companies involved, Robinhood and Reddit, pay the costs. They should not allow their platforms to be used for stock manipulation.

A Financial Transactions Tax to the Rescue?

As a huge fan of financial transactions taxes (FTT), I would love to be able to say that a FTT would stop this sort of game-playing. Unfortunately, this isn’t true. FTTs of the size being discussed would barely place a dent in what we saw with GameStop.

The FTT just introduced by Representative Peter DeFazio is a tax of 0.1 percent. This means that an investor playing with $10,000 would pay $10 in taxes.[2] That isn’t likely to discourage a person determined to get rich while sinking a hedge fund. FTTs are great at limiting high frequency trading, which operates on very low margins, and will reduce the volume of trading more generally, eliminating waste in the financial sector, but they will not have much impact on those looking to make big bets.

One thing that they will do is ensure that the government gets a cut. In this sense, we should think of it as a tax on gambling. Other forms of gambling, like casinos or state lotteries, are subject to very high taxes. It shouldn’t be a big deal to impose a tax of 0.1 percent on Wall Street gambles.

If the Robinhood/Reddit deal ends up leading to an extra $50 billion in trades (a very crude guess), that would net the government $50 million in revenue with the DeFazio FTT in place. That is not big bucks compared to a $5 trillion federal budget (it comes to 0.001 percent), but it is substantial compared to some of the items that are occasionally subject to big political debates.

For example, it’s more than 10 percent of the $450 million that the Federal government is currently spending on the Corporation for Public Broadcasting. It’s roughly 30 percent of the National Endowment for the Arts $170 million annual budget. In short, the money raised by a FTT from this deal would at least allow us to pay for some nice things.

 

The Message of the GameStop Affair for Financial Transactions Taxes

One argument that opponents of FTTs like to make is that they will inhibit the process of “price discovery,” so that the market price of stocks and other assets will be further removed from their true price. In this story, the distortions will cause capital to be more poorly allocated and therefore lead to a less productive economy.

This argument suffers from the fact that relatively little money for investment is raised through the stock market. Usually, initial public offerings are done to allow the original investors to cash out. Established companies raise only small a portion of their investment funds through issuing shares.

However, this episode shows us all the craziness that can have a huge impact on stock prices. Should GameStop be worth $20 a share or $400 a share? That is a huge difference. Let’s imagine that the DeFazio tax could result in GameStop’s price being 5 percent too high or too low for limited period of time. (That would be a huge effect for a tax of 0.1 percent.) We would be talking about a range between $19 and $21. Does anyone still want to tell us that that a FTT will undermine the process of price discovery?

In short, this episode should help us to see the stock market with open eyes. Much of what takes place there is clearly gambling. We let people gamble in other contexts, but we tax it. There is no reason we shouldn’t tax it on Wall Street.

And the idea that it will distort market prices; do you want to tell me how Donald Trump really won the election?

[1] A call option gives an investor the right to buy a stock at a specified price on a specific date. For example, if a stock is currently priced at $20, I can buy a call option that gives me the right to buy the stock at $25 a share on March 31. This means that, if I am shorting the stock, the most I can lose is $5 a share, plus the cost of the call option.  

[2] Senator Bernie Sanders has proposed a tax of 0.5 percent, but that still would likely not have been a major hindrance to the Robinhood/Reddit folks.

This is a Twitter thread from a couple of months back. I thought I would post it here since there may be some interest.

Someone sent me a diatribe from some progressive about the evil of share buybacks. I have a few thoughts.

First the claims: they allow companies to inflate share prices, top management to manipulate share prices to maximize the value of options, divert money from long-term investment, and allow for tax avoidance. I’ll start with the tax story.

Buybacks, as opposed to dividends, do allow shareholders to avoid paying taxes as long as they hold their stock. This is a gift to rich people, but let’s not get carried away on the size of the gift.

First, as many progressives (including me) complain, shares typically turn over very quickly. That is one reason many of us support a financial transactions tax – to reduce the volume of pointless trading.

You don’t get to both complain about shares turning over all the time and that rich people never pay taxes because they hold their shares forever.

It’s true that some rich people do hold their shares until death, but even the Waltons must occasionally sell some shares to cover their living expenses. Anyhow, this is a real issue (could be addressed by taxing unrealized capital gains), but let’s not exaggerate its size.

On the question of long-term investment, I’m not at all impressed with the evidence. Do we think that companies would invest more if they paid out money to shareholders as dividends?

If the point is that the more money companies pay out to shareholders (as either dividends or buybacks), the less they invest, sure that is almost definitionally true. But this begs the question.

Are they paying out money to shareholders because they don’t see good investment opportunities or whether they aren’t taking advantage of good investment opportunities because they are paying out so much money to shareholders? I am strongly inclined to believe the former is the case.

Now let’s ask about inflating the share price. Suppose a stock sells for $100 and it is expected to earn $5 a share until the end of time. What happens if the company uses its full $5 in earnings to buy back stock.

The buyback critics tell us this would drive up the share price. In a limited sense, this will almost certainly be true. Suppose that we now have 5 percent fewer shares outstanding. This means that if we have the same price-to-earnings ratio, then the price per share will be 5 percent higher.

But how is this “inflating” the share price? The price to earnings ratio would be exactly the same after the buyback as before. What’s the problem?

We can tell a story that buybacks actually increase the price-to-earnings ratio. PEs have been unusually high in the last two decades, so this is not an implausible story on its face, even though believers in efficient market theory would say it’s impossible.

If buybacks do in fact drive up PEs, it would benefit top management, who will get more money for their options, and disadvantage future shareholders who will have to pay more money for each dollar of earnings, meaning that they will lower returns on the stock buy.

Current shareholders will be largely indifferent to a rise in PE since they have little reason (apart from tax considerations) to prefer money paid to them in higher share prices as opposed to dividends.

In this story, buybacks are effectively a tool used by top management to gain at the expense of future shareholders, with current shareholders being indifferent.

This raises the last point, top management using buybacks to manipulate stock prices to maximize the value of their options. This strikes me as a very plausible story, but it has important implications.

If top management is manipulating stock prices to increase the value of their options, it implies they are ripping off their companies. After all, if the shareholders wanted the CEO and other top executives to get more money, they could have just paid them more money.

The manipulation story implies that they are taking money that the shareholders, or their agent, the board of directors, did not intend them to have.

The manipulation story also means that the claim that the company is being run to maximize returns to shareholders is not true. In this case, the shareholders should be allies in efforts to rein in CEO pay.

To my view, reining in CEO pay is very important because of the distorting effect it has on pay structures throughout the economy. A world where CEOs get paid $2M (like in the good old days) is very different than today’s world where they get paid $20 M.

This leaves the moral of the evil buyback story as being that we need to crack down on CEOs ripping off their companies and bring their pay down to earth.

This is a Twitter thread from a couple of months back. I thought I would post it here since there may be some interest.

Someone sent me a diatribe from some progressive about the evil of share buybacks. I have a few thoughts.

First the claims: they allow companies to inflate share prices, top management to manipulate share prices to maximize the value of options, divert money from long-term investment, and allow for tax avoidance. I’ll start with the tax story.

Buybacks, as opposed to dividends, do allow shareholders to avoid paying taxes as long as they hold their stock. This is a gift to rich people, but let’s not get carried away on the size of the gift.

First, as many progressives (including me) complain, shares typically turn over very quickly. That is one reason many of us support a financial transactions tax – to reduce the volume of pointless trading.

You don’t get to both complain about shares turning over all the time and that rich people never pay taxes because they hold their shares forever.

It’s true that some rich people do hold their shares until death, but even the Waltons must occasionally sell some shares to cover their living expenses. Anyhow, this is a real issue (could be addressed by taxing unrealized capital gains), but let’s not exaggerate its size.

On the question of long-term investment, I’m not at all impressed with the evidence. Do we think that companies would invest more if they paid out money to shareholders as dividends?

If the point is that the more money companies pay out to shareholders (as either dividends or buybacks), the less they invest, sure that is almost definitionally true. But this begs the question.

Are they paying out money to shareholders because they don’t see good investment opportunities or whether they aren’t taking advantage of good investment opportunities because they are paying out so much money to shareholders? I am strongly inclined to believe the former is the case.

Now let’s ask about inflating the share price. Suppose a stock sells for $100 and it is expected to earn $5 a share until the end of time. What happens if the company uses its full $5 in earnings to buy back stock.

The buyback critics tell us this would drive up the share price. In a limited sense, this will almost certainly be true. Suppose that we now have 5 percent fewer shares outstanding. This means that if we have the same price-to-earnings ratio, then the price per share will be 5 percent higher.

But how is this “inflating” the share price? The price to earnings ratio would be exactly the same after the buyback as before. What’s the problem?

We can tell a story that buybacks actually increase the price-to-earnings ratio. PEs have been unusually high in the last two decades, so this is not an implausible story on its face, even though believers in efficient market theory would say it’s impossible.

If buybacks do in fact drive up PEs, it would benefit top management, who will get more money for their options, and disadvantage future shareholders who will have to pay more money for each dollar of earnings, meaning that they will lower returns on the stock buy.

Current shareholders will be largely indifferent to a rise in PE since they have little reason (apart from tax considerations) to prefer money paid to them in higher share prices as opposed to dividends.

In this story, buybacks are effectively a tool used by top management to gain at the expense of future shareholders, with current shareholders being indifferent.

This raises the last point, top management using buybacks to manipulate stock prices to maximize the value of their options. This strikes me as a very plausible story, but it has important implications.

If top management is manipulating stock prices to increase the value of their options, it implies they are ripping off their companies. After all, if the shareholders wanted the CEO and other top executives to get more money, they could have just paid them more money.

The manipulation story implies that they are taking money that the shareholders, or their agent, the board of directors, did not intend them to have.

The manipulation story also means that the claim that the company is being run to maximize returns to shareholders is not true. In this case, the shareholders should be allies in efforts to rein in CEO pay.

To my view, reining in CEO pay is very important because of the distorting effect it has on pay structures throughout the economy. A world where CEOs get paid $2M (like in the good old days) is very different than today’s world where they get paid $20 M.

This leaves the moral of the evil buyback story as being that we need to crack down on CEOs ripping off their companies and bring their pay down to earth.

President Biden’s proposal to raise the minimum wage to $15 an hour by 2025 is prompting a backlash from the usual suspects. As we hear the cries about how this will be the end of the world for small businesses and lead to massive unemployment, especially for young workers, minorities, and the less-educated, there are a few points worth keeping in mind.

While $15 an hour is a large increase from the current $7.25 an hour, this is because we’ve allowed so much time to pass since the last minimum wage hike. The 12 years since the last increase in the minimum wage is the longest period without a hike since the federal minimum wage was first established in 1938. Few workers are now earning the national minimum wage, both because of market conditions and because many states and cities now have considerably higher minimum wages.

If the minimum wage had just kept pace with prices since its peak value in 1968 it would be over $12 an hour today and around $13.50 by 2025. Keeping the minimum wage rising in step with prices is actually a very modest target. It means that low-wage workers are not sharing in the benefits of economic growth.

From 1938 to 1968 the minimum wage rose in step with productivity growth. This means that as the economy grew and the country became richer, workers at the bottom of the ladder shared in this growth. If the minimum wage had continued to keep pace with productivity growth it would have been over $24 an hour last year and would be close to $30 an hour in 2025.

There has been considerable research on the extent to which the minimum wage leads to job loss. Much recent research finds that even substantial increases in the minimum, such as the $15 an hour minimum wage that is already in place in Seattle, have no effect on employment.[1]

It is worth noting that even the research that finds the minimum wage reduces employment generally finds a relatively modest effect. A recent review article by prominent opponents of the minimum wage found that the median estimate of elasticity was -0.12 for affected workers. This estimate means, for example, that a 10 percent increase in the minimum wage would lead to a reduction in employment among affected workers (e.g. workers with less education or young workers) of 1.2 percent.

It is important to realize that even in this case we are not talking about 1.2 percent of affected workers going unemployed. Low-wage jobs turn over rapidly. For example, in a typical month before the pandemic hit, more than 6.0 percent of the workers in the hotel and restaurant industries lost or left their jobs. If we take the elasticity estimate of -0.12, it would mean that at a point in time we have 1.2 percent fewer people working in the sector as a result of a ten percent increase in the minimum wage.[2]

Carrying out the arithmetic, this means that an average low-wage worker would be putting in 1.2 percent fewer hours in a year, but getting 10 percent more money for each hour they worked. That would mean that they would be pocketing roughly 9.0 percent more in wages each year. And, this calculation assumes there is an employment effect, ignoring considerable evidence that there is none.

A higher minimum wage also has positive societal effects. A recent review of the literature found that a 10 percent increase in the minimum wage would reduce the poverty rate by 5.3 percent. Another study found that a 50 cent increase in the minimum wage reduced the likelihood that formerly incarcerated people would return to prison within a year by 2.8 percent. The long-term effects of these and other benefits are likely to be quite large.

Finally, it is worth remembering that there is a lot of money on the side of those looking to stop minimum wage hikes. This can affect the research on the topic. While few researchers may deliberately cook their results to favor the fast-food industry, they know they can get funding for research that finds a higher minimum wage leads to job loss. There is much less money available for supporting research that finds no effect. (I know that first-hand in my former capacity as co-director of CEPR.)

Probably the clearest case of such bias affecting research findings was a paper by David Neumark and William Wascher, two of the most prominent opponents of higher minimum wages. Neumark and Wascher analyzed data given to them by the Employment Policies Institute (a.k.a. “the evil EPI”), a lobbying group for the restaurant industry. They used this data to replicate a pathbreaking study by economists David Card and Alan Krueger, which found no job loss associated with a minimum wage hike in New Jersey.

Neumark and Wascher’s study found that there was in fact a significant loss of jobs in fast-food restaurants in New Jersey following the minimum wage hike. However, an analysis of the Neumark and Wascher data by John Schmitt found patterns that were not plausible. It was subsequently revealed that an owner of a number of fast-food restaurants in New Jersey and Pennsylvania (the control state) had submitted fake payroll data to the Employment Policy Institute to be used in the study. (There is no reason to believe that Neumark and Wascher realized they were working with fraudulent data.) If the faked data was removed from the analysis, the finding of minimum-wage induced job loss disappeared.

This story should be seen as a warning. Most researchers are honest and will accurately report what they find in their analysis. However, we should realize that there are some pretty big thumbs on the scale in the minimum wage battle, and those thumbs want to show that minimum wage hikes will cause job loss.  

[1] A paper by John Schmitt explains why it could be the case that, contrary to the textbook story, a higher minimum wage may have no effect on employment.

[2] The actual story is a bit more complicated since typically these studies look at a specific type of worker, such as young people or workers with less education. It could be the case that employment in an industry has not changed, but we have seen older or more educated workers replacing younger and less-educated workers.

President Biden’s proposal to raise the minimum wage to $15 an hour by 2025 is prompting a backlash from the usual suspects. As we hear the cries about how this will be the end of the world for small businesses and lead to massive unemployment, especially for young workers, minorities, and the less-educated, there are a few points worth keeping in mind.

While $15 an hour is a large increase from the current $7.25 an hour, this is because we’ve allowed so much time to pass since the last minimum wage hike. The 12 years since the last increase in the minimum wage is the longest period without a hike since the federal minimum wage was first established in 1938. Few workers are now earning the national minimum wage, both because of market conditions and because many states and cities now have considerably higher minimum wages.

If the minimum wage had just kept pace with prices since its peak value in 1968 it would be over $12 an hour today and around $13.50 by 2025. Keeping the minimum wage rising in step with prices is actually a very modest target. It means that low-wage workers are not sharing in the benefits of economic growth.

From 1938 to 1968 the minimum wage rose in step with productivity growth. This means that as the economy grew and the country became richer, workers at the bottom of the ladder shared in this growth. If the minimum wage had continued to keep pace with productivity growth it would have been over $24 an hour last year and would be close to $30 an hour in 2025.

There has been considerable research on the extent to which the minimum wage leads to job loss. Much recent research finds that even substantial increases in the minimum, such as the $15 an hour minimum wage that is already in place in Seattle, have no effect on employment.[1]

It is worth noting that even the research that finds the minimum wage reduces employment generally finds a relatively modest effect. A recent review article by prominent opponents of the minimum wage found that the median estimate of elasticity was -0.12 for affected workers. This estimate means, for example, that a 10 percent increase in the minimum wage would lead to a reduction in employment among affected workers (e.g. workers with less education or young workers) of 1.2 percent.

It is important to realize that even in this case we are not talking about 1.2 percent of affected workers going unemployed. Low-wage jobs turn over rapidly. For example, in a typical month before the pandemic hit, more than 6.0 percent of the workers in the hotel and restaurant industries lost or left their jobs. If we take the elasticity estimate of -0.12, it would mean that at a point in time we have 1.2 percent fewer people working in the sector as a result of a ten percent increase in the minimum wage.[2]

Carrying out the arithmetic, this means that an average low-wage worker would be putting in 1.2 percent fewer hours in a year, but getting 10 percent more money for each hour they worked. That would mean that they would be pocketing roughly 9.0 percent more in wages each year. And, this calculation assumes there is an employment effect, ignoring considerable evidence that there is none.

A higher minimum wage also has positive societal effects. A recent review of the literature found that a 10 percent increase in the minimum wage would reduce the poverty rate by 5.3 percent. Another study found that a 50 cent increase in the minimum wage reduced the likelihood that formerly incarcerated people would return to prison within a year by 2.8 percent. The long-term effects of these and other benefits are likely to be quite large.

Finally, it is worth remembering that there is a lot of money on the side of those looking to stop minimum wage hikes. This can affect the research on the topic. While few researchers may deliberately cook their results to favor the fast-food industry, they know they can get funding for research that finds a higher minimum wage leads to job loss. There is much less money available for supporting research that finds no effect. (I know that first-hand in my former capacity as co-director of CEPR.)

Probably the clearest case of such bias affecting research findings was a paper by David Neumark and William Wascher, two of the most prominent opponents of higher minimum wages. Neumark and Wascher analyzed data given to them by the Employment Policies Institute (a.k.a. “the evil EPI”), a lobbying group for the restaurant industry. They used this data to replicate a pathbreaking study by economists David Card and Alan Krueger, which found no job loss associated with a minimum wage hike in New Jersey.

Neumark and Wascher’s study found that there was in fact a significant loss of jobs in fast-food restaurants in New Jersey following the minimum wage hike. However, an analysis of the Neumark and Wascher data by John Schmitt found patterns that were not plausible. It was subsequently revealed that an owner of a number of fast-food restaurants in New Jersey and Pennsylvania (the control state) had submitted fake payroll data to the Employment Policy Institute to be used in the study. (There is no reason to believe that Neumark and Wascher realized they were working with fraudulent data.) If the faked data was removed from the analysis, the finding of minimum-wage induced job loss disappeared.

This story should be seen as a warning. Most researchers are honest and will accurately report what they find in their analysis. However, we should realize that there are some pretty big thumbs on the scale in the minimum wage battle, and those thumbs want to show that minimum wage hikes will cause job loss.  

[1] A paper by John Schmitt explains why it could be the case that, contrary to the textbook story, a higher minimum wage may have no effect on employment.

[2] The actual story is a bit more complicated since typically these studies look at a specific type of worker, such as young people or workers with less education. It could be the case that employment in an industry has not changed, but we have seen older or more educated workers replacing younger and less-educated workers.

Donald Trump is a person who glories in his own ignorance. He seems to know little about anything and clearly doesn’t care. Any evidence that contradicts his pronouncements is simply “FAKE NEWS.”

Thomas Friedman seems to have the same attitude as he makes grand pronouncements about the economy that are transparently absurd. I discovered this in his latest column, which carried the promising headline, “Made in the U.S.A.: Socialism for the Rich. Capitalism for the Rest.”

It turns out that the gist of Friedman’s “socialism for the rich” is low-interest rates. Following Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, Friedman is upset that we don’t have recessions and have more businesses fail. I am not kidding, he literally says this:

“Meanwhile, he added, as governments keep stepping in to eliminate recessions, downturns no longer play their role of purging the economy of inefficient companies, and recoveries have grown weaker and weaker, with lower productivity growth.”

This statement is bizarre for two reasons. First, productivity growth has been slow since 1973, with the exception of the decade from 1995 to 2005. Interest rates were actually quite high in the 1970s and 1980s, so it seems pretty difficult to blame slow productivity growth on low-interest rates. We also had a very bad recession in both the decade of the 1970s and 1980s. That didn’t seem to do much to boost productivity growth.

The other problem is that productivity has actually soared in the last year, rising 4.0 percent from the third quarter of 2019 to the third quarter of 2020. That’s against a long term trend of growth of less than 1.5 percent. I am always the first to point out that these data are highly erratic, and the last year was obviously an extraordinary one, but it is a bit odd to be yelling about weak productivity growth at a time when we are seeing an extraordinary boom in productivity.

Other parts of the piece make equally little sense. It’s true that low-interest rates generally support higher stock prices, but they have also allowed millions of people to pay less money on their home mortgages and car loans. We have millions of very middle-class homeowners who were able to knock 1-2 percentage points off their mortgage when they refinanced. For someone with a $200,000 mortgage, this comes to $2,000 to $4,000 a year. Maybe that isn’t real money to Thomas Friedman, but that is a very big deal to a family earning $60,000 or $70,000 a year. (Btw, if we are upset that high stock prices lead to greater inequality of wealth, how come no one celebrates the reduction in inequality when stock prices fall?)

Lower rates also allowed for millions of people to buy cars, which also provided a huge boost to the auto industry, creating jobs for workers in the auto industry. And, lower rates allowed for state and local governments to borrow at lower costs, freeing up money for a wide range of social services. Small businesses were also able to borrow at lower rates, either to expand or just survive the pandemic. None of that sounds like socialism for the rich to me.

And, Friedman also gives us this Trumpian gem of illogic:

“Now that so many countries, led by the U.S., have massively increased their debt loads, if we got even a small burst of inflation that drove interest on the 10-year Treasury to 3 percent from 1 percent, the amount of money the U.S. would have to devote to debt servicing would be so enormous that little money might be left for discretionary spending on research, infrastructure or education — or another rainy day.”

Hmmm, the amount devoted to debt service “would be so enormous that little money might be left for discretionary spending on research, infrastructure or education — or another rainy day.”

Let’s bring in Mr. Arithmetic here. Our debt to GDP ratio is roughly 100 percent, give or take a few percentage points. Let’s suppose that the interest rate suddenly rose to 3.0 percent. That would mean that the amount of interest we were paying was equal to 3 percent of GDP. That would make the burden of our debt service a bit less than it was in the early 1990s, which folks may recall was a very prosperous decade.

Furthermore, the interest on our bonds won’t jump all at once, since we have locked in low rates on the long-term bonds we have already issued. Also, more rapid inflation means that the debt to GDP ratio will be falling. Ignoring the effect of compounding, if we see inflation that is two percentage points higher than expected for a decade, that means nominal GDP will be 20 percent higher at the end of this period, and the debt to GDP ratio and the interest burden will be 20 percent lower.

In short, Friedman and his source at Morgan Stanley have no case. But in the Trumpian section of the New York Times, evidence and logic have no place.

 

 

Donald Trump is a person who glories in his own ignorance. He seems to know little about anything and clearly doesn’t care. Any evidence that contradicts his pronouncements is simply “FAKE NEWS.”

Thomas Friedman seems to have the same attitude as he makes grand pronouncements about the economy that are transparently absurd. I discovered this in his latest column, which carried the promising headline, “Made in the U.S.A.: Socialism for the Rich. Capitalism for the Rest.”

It turns out that the gist of Friedman’s “socialism for the rich” is low-interest rates. Following Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, Friedman is upset that we don’t have recessions and have more businesses fail. I am not kidding, he literally says this:

“Meanwhile, he added, as governments keep stepping in to eliminate recessions, downturns no longer play their role of purging the economy of inefficient companies, and recoveries have grown weaker and weaker, with lower productivity growth.”

This statement is bizarre for two reasons. First, productivity growth has been slow since 1973, with the exception of the decade from 1995 to 2005. Interest rates were actually quite high in the 1970s and 1980s, so it seems pretty difficult to blame slow productivity growth on low-interest rates. We also had a very bad recession in both the decade of the 1970s and 1980s. That didn’t seem to do much to boost productivity growth.

The other problem is that productivity has actually soared in the last year, rising 4.0 percent from the third quarter of 2019 to the third quarter of 2020. That’s against a long term trend of growth of less than 1.5 percent. I am always the first to point out that these data are highly erratic, and the last year was obviously an extraordinary one, but it is a bit odd to be yelling about weak productivity growth at a time when we are seeing an extraordinary boom in productivity.

Other parts of the piece make equally little sense. It’s true that low-interest rates generally support higher stock prices, but they have also allowed millions of people to pay less money on their home mortgages and car loans. We have millions of very middle-class homeowners who were able to knock 1-2 percentage points off their mortgage when they refinanced. For someone with a $200,000 mortgage, this comes to $2,000 to $4,000 a year. Maybe that isn’t real money to Thomas Friedman, but that is a very big deal to a family earning $60,000 or $70,000 a year. (Btw, if we are upset that high stock prices lead to greater inequality of wealth, how come no one celebrates the reduction in inequality when stock prices fall?)

Lower rates also allowed for millions of people to buy cars, which also provided a huge boost to the auto industry, creating jobs for workers in the auto industry. And, lower rates allowed for state and local governments to borrow at lower costs, freeing up money for a wide range of social services. Small businesses were also able to borrow at lower rates, either to expand or just survive the pandemic. None of that sounds like socialism for the rich to me.

And, Friedman also gives us this Trumpian gem of illogic:

“Now that so many countries, led by the U.S., have massively increased their debt loads, if we got even a small burst of inflation that drove interest on the 10-year Treasury to 3 percent from 1 percent, the amount of money the U.S. would have to devote to debt servicing would be so enormous that little money might be left for discretionary spending on research, infrastructure or education — or another rainy day.”

Hmmm, the amount devoted to debt service “would be so enormous that little money might be left for discretionary spending on research, infrastructure or education — or another rainy day.”

Let’s bring in Mr. Arithmetic here. Our debt to GDP ratio is roughly 100 percent, give or take a few percentage points. Let’s suppose that the interest rate suddenly rose to 3.0 percent. That would mean that the amount of interest we were paying was equal to 3 percent of GDP. That would make the burden of our debt service a bit less than it was in the early 1990s, which folks may recall was a very prosperous decade.

Furthermore, the interest on our bonds won’t jump all at once, since we have locked in low rates on the long-term bonds we have already issued. Also, more rapid inflation means that the debt to GDP ratio will be falling. Ignoring the effect of compounding, if we see inflation that is two percentage points higher than expected for a decade, that means nominal GDP will be 20 percent higher at the end of this period, and the debt to GDP ratio and the interest burden will be 20 percent lower.

In short, Friedman and his source at Morgan Stanley have no case. But in the Trumpian section of the New York Times, evidence and logic have no place.

 

 

The vaccine rollout process has been painfully slow in the United States. More than 40 days after the first vaccine was approved for emergency use by the Food and Drug Administration, just over 6.0 percent of our population has been vaccinated. And that is with just the first shot, very few having gotten the two shots needed to hit the targeted levels of immunity. Thankfully the pace of the vaccination program is picking up, both as kinks are worked out and now that we have an administration that cares about getting people vaccinated.

But we still have to ask why the process has been so slow. We have an obvious answer in the United States, the Trump administration basically said that distribution wasn’t its problem. As Donald Trump once tweeted, he considered the distribution process the responsibility of the states and gave the order “get it done.”

If we can explain the failure to have more rapid distribution in the United States on Trump’s Keystone Cops crew, what explains the failures in other wealthy countries? As bad as the U.S. has done so far, we have vaccinated a larger share of our population than any country in Europe with the exception of the United Kingdom. That’s right, countries like Denmark, France, and even Germany have done worse in vaccinating their populations than the United States. And these countries ostensibly have competent leaders and all have national health care systems. Nonetheless, they have done worse far worse in the case of France and Germany, than Donald Trump’s clown show.

 

The Vaccine Agenda if Saving Lives Was the Priority

The pandemic is a worldwide crisis, that requires a worldwide solution. This is a classic case where there are enormous benefits from collective action and few downsides. This is not a case, like seizing oil or other natural resources, where if the United States gets more, everyone else gets less and vice-versa. Sharing knowledge about vaccines, treatments, and best practices for prevention is costless and the whole world benefits if the pandemic can be contained as quickly as possible. This point is being driven home as new strains develop through mutation, which may spread more quickly and possibly be more deadly and vaccine-resistant.

The logical path would have been to open-source all research on treatments and vaccines, both so that progress could be made as quickly as possible, and also intellectual property rights would not be an obstacle to large-scale production throughout the world. This would have required some collective agreement where countries agreed to both put up some amount of research funding, presumably based on size and per capita income, and also that all findings, including results from clinical trials, would be quickly posted on the web. This way, the information would be quickly shared so that researchers and public health experts everywhere could benefit.

This sort of international cooperation was obviously not on Donald Trump’s agenda. Mr. “America First!” was not interested in the possibility that we might better be able to tame the pandemic if we acted in cooperation with other countries. But it wasn’t just Donald Trump who rejected the idea of open research and international cooperation, it really wasn’t on the agenda of any prominent politician, including progressives like Bernie Sanders and Elizabeth Warren. It was an issue in the scientific community, but as we know, people in policy circles don’t take science seriously. (I describe a mechanism for advanced funding of open-source research in chapter 5 of Rigged [it’s free].)  

The big problem, of course, is that going this route of open-source research and international cooperation could call into question the merits of patent monopoly financing of prescription drug research. After all, if publicly funded open-source research proved to be the best mechanism for financing the development of drugs and vaccines in a pandemic, maybe this would be the case more generally. And, no one in a position of power in American politics wanted to take this risk of a bad example.  

 

Making the Best of the Single Country Route

If we had gone the route of publicly funded open-source research, then the scientific community would have access to all the clinical trial results of all the vaccines as they become available. This would mean that countries could decide which vaccines they wanted to use based on the data.[1] They could also begin to produce and stockpile large quantities of vaccines, as soon as they entered Phase 3 trials. Incredibly, it seems no country has done this.

While we could not know that a vaccine entering Phase 3 trials will subsequently be shown to be safe and effective, the advantages of having a large stockpile available that can be quickly distributed swamp the potential costs of buying large quantities of a vaccine that is not approved. Suppose the United States had produced 400 million doses of a vaccine that turned out not to be effective. With the production costs of a vaccine at around $2 per shot, this would mean that we had wasted $800 million. With the country seeing more than 4,000 deaths a day at the peak of the pandemic and the economic losses from the pandemic running into the trillions, the risk of spending $800 million on an ineffective vaccine seems rather trivial.  

For whatever reason, no country went this stockpile route. Just to be clear, there was no physical obstacle to producing billions of vaccines by the end of 2020. If we can build one factory to produce these vaccines, we can build ten factories. If some of the inputs are in short supply, we can build more factories to produce the inputs. There may be questions of patent rights, but that is different than a question of physical limitations.

But apart from the physical availability of the vaccines, there is also the issue of distributing the vaccine and actually getting the shots in peoples’ arms. It seems that, rather than making preparations in advance, most governments acted like the approval of the vaccine was a surprise and only began to make plans for distribution after the fact.

This is really mind-boggling. While we could not know the exact date a vaccine would be approved, it was known that several vaccines were approaching the endpoints of their Phase 3 trials. In that situation, it is hard to understand why governments would not have been crafting detailed plans for how they would get the vaccines to people as quickly as possible, once the authorization had been made.

This would have meant pre-positioning stockpiles as close as possible to inoculation locations. These locations should also have been selected in advance, with plans to have the necessary personnel available to oversee and administer the shots. There are reports that there are shortages of people trained in administering the shots. The fall would have been a great time to train enough people to administer the vaccine.

In a normal flu season, close to 2 million shots are given every day, without any heroic efforts by the government. Given the urgency of getting the pandemic under control, it is hard to understand why we could not have administered shots at this pace, if not considerably faster. The fact that it wasn’t just the United States that missed this standard, but also every country in Europe, indicates an enormous failure of public health systems.  

As a result of these failures, we will see millions of preventable infections and tens of thousands of avoidable deaths. We will also see hundreds of billions of dollars of lost economic output, as the pandemic will disrupt the economy for longer than necessary.

 

Will There be a Penalty for Failure?

I raise this issue primarily because I’m fairly confident the answer is no. To be clear, my point is that not being prepared for the mass distribution of vaccines as soon as they were approved was a massive policy failure both in the United States and Europe. I have no idea who was responsible for the failure, but it was presumably several high-level people in each country. In any reasonable world, these people would suffer serious career consequences for not getting the vaccines out quickly.

I am not making this point out of any vindictiveness—I don’t know any of these people—I just want to see high-end workers held to the same job performance standards as those lower down the ladder. The dishwasher that breaks the dishes gets fired. The custodian who doesn’t clean the toilet gets fired. Why doesn’t the person who messes up vaccine distribution pay a price?

Unfortunately, the lack of accountability at the top is the rule, not the exception. To take my favorite example in economics, to my knowledge Carmen Reinhart and Ken Rogoff suffered no consequences (other than embarrassment) for their famous Excel spreadsheet error. To remind people, this was when they produced a paper that purported to show that countries with debt-GDP ratios above 90 percent took a huge hit to GDP growth. It turned out that this result was driven entirely by an error in a spreadsheet. When the error was corrected, the result went away.

Reinhart and Rogoff’s paper was used to justify austerity policies in Europe and the United States. As a result of these policies millions of people needlessly went unemployed and many important areas of social spending, like education and health care, saw serious cuts.

Reinhart and Rogoff’s error was surely an honest mistake (they are both competent economists, who could have come up with much better ways to fake results if that was their intention), but their failure to check their numbers was inexcusable. As they explained after the error was uncovered, the mistake was the result of rushing to finish a paper for a conference presentation.

Mistakes like that happen, and most of us have committed similar errors. That is not a big deal. The big deal was that, as their work was being cited by members of Congress, finance ministers, and central bankers, that it never occurred to them to review their rushed work.  

Should Reinhart and Rogoff have lost their tenured positions at Harvard? Perhaps this would have been appropriate. At the very least, they should have lost their named chairs, after all, many people had their lives ruined in part because they couldn’t be bothered to check their numbers.

 

Accountability for Our Elites

As I have written endlessly, we have seen a massive upward redistribution of income in the United States over the last four decades. Other countries have also seen increases in inequality over this period, although not as large. I have argued that this upward redistribution was by design, not the natural development of the economy, but for this issue, the question of causes is beside the point.

The people who have been able to enjoy rising incomes and financial security over the last four decades ostensibly justify their better position by their greater contribution to the economy and society. But when you mess up in your job in big ways that lead to major costs to the economy and society, that claim doesn’t hold water.

We have seen a massive rise in right-wing populism where large numbers of less-educated workers reject the elites and all their claims about the world. When we have massive elite mess-ups, as we now see with vaccine distribution, and there are zero consequences for those responsible, this has to contribute to the resentment of the less advantaged.

It is appalling that we have structured the economy in such a way that the elites can be protected from consequences for even the most extreme failures. The fact so few elite types even see this as a problem (seen any columns in the NYT calling for firing?) shows that the populists have a real case. The economy is rigged against the left behind, and the people that control major news outlets, which include many self-described liberals or progressives, won’t even talk about it.

[1] China and Russia have not been open with the clinical trial data for their vaccines. Presumably, if they had committed to transparency in an agreement, they would abide by their commitment, but obviously, we cannot be certain this would be the case.

The vaccine rollout process has been painfully slow in the United States. More than 40 days after the first vaccine was approved for emergency use by the Food and Drug Administration, just over 6.0 percent of our population has been vaccinated. And that is with just the first shot, very few having gotten the two shots needed to hit the targeted levels of immunity. Thankfully the pace of the vaccination program is picking up, both as kinks are worked out and now that we have an administration that cares about getting people vaccinated.

But we still have to ask why the process has been so slow. We have an obvious answer in the United States, the Trump administration basically said that distribution wasn’t its problem. As Donald Trump once tweeted, he considered the distribution process the responsibility of the states and gave the order “get it done.”

If we can explain the failure to have more rapid distribution in the United States on Trump’s Keystone Cops crew, what explains the failures in other wealthy countries? As bad as the U.S. has done so far, we have vaccinated a larger share of our population than any country in Europe with the exception of the United Kingdom. That’s right, countries like Denmark, France, and even Germany have done worse in vaccinating their populations than the United States. And these countries ostensibly have competent leaders and all have national health care systems. Nonetheless, they have done worse far worse in the case of France and Germany, than Donald Trump’s clown show.

 

The Vaccine Agenda if Saving Lives Was the Priority

The pandemic is a worldwide crisis, that requires a worldwide solution. This is a classic case where there are enormous benefits from collective action and few downsides. This is not a case, like seizing oil or other natural resources, where if the United States gets more, everyone else gets less and vice-versa. Sharing knowledge about vaccines, treatments, and best practices for prevention is costless and the whole world benefits if the pandemic can be contained as quickly as possible. This point is being driven home as new strains develop through mutation, which may spread more quickly and possibly be more deadly and vaccine-resistant.

The logical path would have been to open-source all research on treatments and vaccines, both so that progress could be made as quickly as possible, and also intellectual property rights would not be an obstacle to large-scale production throughout the world. This would have required some collective agreement where countries agreed to both put up some amount of research funding, presumably based on size and per capita income, and also that all findings, including results from clinical trials, would be quickly posted on the web. This way, the information would be quickly shared so that researchers and public health experts everywhere could benefit.

This sort of international cooperation was obviously not on Donald Trump’s agenda. Mr. “America First!” was not interested in the possibility that we might better be able to tame the pandemic if we acted in cooperation with other countries. But it wasn’t just Donald Trump who rejected the idea of open research and international cooperation, it really wasn’t on the agenda of any prominent politician, including progressives like Bernie Sanders and Elizabeth Warren. It was an issue in the scientific community, but as we know, people in policy circles don’t take science seriously. (I describe a mechanism for advanced funding of open-source research in chapter 5 of Rigged [it’s free].)  

The big problem, of course, is that going this route of open-source research and international cooperation could call into question the merits of patent monopoly financing of prescription drug research. After all, if publicly funded open-source research proved to be the best mechanism for financing the development of drugs and vaccines in a pandemic, maybe this would be the case more generally. And, no one in a position of power in American politics wanted to take this risk of a bad example.  

 

Making the Best of the Single Country Route

If we had gone the route of publicly funded open-source research, then the scientific community would have access to all the clinical trial results of all the vaccines as they become available. This would mean that countries could decide which vaccines they wanted to use based on the data.[1] They could also begin to produce and stockpile large quantities of vaccines, as soon as they entered Phase 3 trials. Incredibly, it seems no country has done this.

While we could not know that a vaccine entering Phase 3 trials will subsequently be shown to be safe and effective, the advantages of having a large stockpile available that can be quickly distributed swamp the potential costs of buying large quantities of a vaccine that is not approved. Suppose the United States had produced 400 million doses of a vaccine that turned out not to be effective. With the production costs of a vaccine at around $2 per shot, this would mean that we had wasted $800 million. With the country seeing more than 4,000 deaths a day at the peak of the pandemic and the economic losses from the pandemic running into the trillions, the risk of spending $800 million on an ineffective vaccine seems rather trivial.  

For whatever reason, no country went this stockpile route. Just to be clear, there was no physical obstacle to producing billions of vaccines by the end of 2020. If we can build one factory to produce these vaccines, we can build ten factories. If some of the inputs are in short supply, we can build more factories to produce the inputs. There may be questions of patent rights, but that is different than a question of physical limitations.

But apart from the physical availability of the vaccines, there is also the issue of distributing the vaccine and actually getting the shots in peoples’ arms. It seems that, rather than making preparations in advance, most governments acted like the approval of the vaccine was a surprise and only began to make plans for distribution after the fact.

This is really mind-boggling. While we could not know the exact date a vaccine would be approved, it was known that several vaccines were approaching the endpoints of their Phase 3 trials. In that situation, it is hard to understand why governments would not have been crafting detailed plans for how they would get the vaccines to people as quickly as possible, once the authorization had been made.

This would have meant pre-positioning stockpiles as close as possible to inoculation locations. These locations should also have been selected in advance, with plans to have the necessary personnel available to oversee and administer the shots. There are reports that there are shortages of people trained in administering the shots. The fall would have been a great time to train enough people to administer the vaccine.

In a normal flu season, close to 2 million shots are given every day, without any heroic efforts by the government. Given the urgency of getting the pandemic under control, it is hard to understand why we could not have administered shots at this pace, if not considerably faster. The fact that it wasn’t just the United States that missed this standard, but also every country in Europe, indicates an enormous failure of public health systems.  

As a result of these failures, we will see millions of preventable infections and tens of thousands of avoidable deaths. We will also see hundreds of billions of dollars of lost economic output, as the pandemic will disrupt the economy for longer than necessary.

 

Will There be a Penalty for Failure?

I raise this issue primarily because I’m fairly confident the answer is no. To be clear, my point is that not being prepared for the mass distribution of vaccines as soon as they were approved was a massive policy failure both in the United States and Europe. I have no idea who was responsible for the failure, but it was presumably several high-level people in each country. In any reasonable world, these people would suffer serious career consequences for not getting the vaccines out quickly.

I am not making this point out of any vindictiveness—I don’t know any of these people—I just want to see high-end workers held to the same job performance standards as those lower down the ladder. The dishwasher that breaks the dishes gets fired. The custodian who doesn’t clean the toilet gets fired. Why doesn’t the person who messes up vaccine distribution pay a price?

Unfortunately, the lack of accountability at the top is the rule, not the exception. To take my favorite example in economics, to my knowledge Carmen Reinhart and Ken Rogoff suffered no consequences (other than embarrassment) for their famous Excel spreadsheet error. To remind people, this was when they produced a paper that purported to show that countries with debt-GDP ratios above 90 percent took a huge hit to GDP growth. It turned out that this result was driven entirely by an error in a spreadsheet. When the error was corrected, the result went away.

Reinhart and Rogoff’s paper was used to justify austerity policies in Europe and the United States. As a result of these policies millions of people needlessly went unemployed and many important areas of social spending, like education and health care, saw serious cuts.

Reinhart and Rogoff’s error was surely an honest mistake (they are both competent economists, who could have come up with much better ways to fake results if that was their intention), but their failure to check their numbers was inexcusable. As they explained after the error was uncovered, the mistake was the result of rushing to finish a paper for a conference presentation.

Mistakes like that happen, and most of us have committed similar errors. That is not a big deal. The big deal was that, as their work was being cited by members of Congress, finance ministers, and central bankers, that it never occurred to them to review their rushed work.  

Should Reinhart and Rogoff have lost their tenured positions at Harvard? Perhaps this would have been appropriate. At the very least, they should have lost their named chairs, after all, many people had their lives ruined in part because they couldn’t be bothered to check their numbers.

 

Accountability for Our Elites

As I have written endlessly, we have seen a massive upward redistribution of income in the United States over the last four decades. Other countries have also seen increases in inequality over this period, although not as large. I have argued that this upward redistribution was by design, not the natural development of the economy, but for this issue, the question of causes is beside the point.

The people who have been able to enjoy rising incomes and financial security over the last four decades ostensibly justify their better position by their greater contribution to the economy and society. But when you mess up in your job in big ways that lead to major costs to the economy and society, that claim doesn’t hold water.

We have seen a massive rise in right-wing populism where large numbers of less-educated workers reject the elites and all their claims about the world. When we have massive elite mess-ups, as we now see with vaccine distribution, and there are zero consequences for those responsible, this has to contribute to the resentment of the less advantaged.

It is appalling that we have structured the economy in such a way that the elites can be protected from consequences for even the most extreme failures. The fact so few elite types even see this as a problem (seen any columns in the NYT calling for firing?) shows that the populists have a real case. The economy is rigged against the left behind, and the people that control major news outlets, which include many self-described liberals or progressives, won’t even talk about it.

[1] China and Russia have not been open with the clinical trial data for their vaccines. Presumably, if they had committed to transparency in an agreement, they would abide by their commitment, but obviously, we cannot be certain this would be the case.

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