September 25, 2020

The Capital Letter: Week of September 7

As I wrote last week, it is beginning to seem as if I can begin this letter the same way every Friday:

“Another week has passed in our strange sort of stasis, with no real movement on another stimulus package.”

That is what I wrote last week, and that is what I am writing this week. And to repeat something else I wrote seven days ago — the greater the disruption that will arise out of the failure to pass another stimulus package now, the greater the reckoning that will come later (and don’t get me wrong: I don’t underestimate for a moment the problems that will be caused by all the debt that is being created).

For a more optimistic take, please check out Robert Verbruggen’s note on Capital Matters:

Senate Republicans have now put forward a “skinny” bill priced at $500 billion that would cover only the bare essentials (a $300 weekly boost to unemployment to replace the expired $600 boost, more money for small business, etc.), basically reupping their offer of a piecemeal approach. It’s not even clear this will pass the Senate, and Nancy Pelosi and Chuck Schumer are already insulting the “emaciated” legislation.

Meanwhile, a stopgap $300 unemployment boost that Trump enacted via executive action is running out of money soon — but the economy is improving. Nonfarm employment fell by about 22 million between February and April, but it gained about half of that back by August. The unemployment rate shows a similar rebound, and last month it stood about where it had in late 2011. Things are not good, but they are improving rapidly. . .

At this rate, there will no longer be hordes of unemployed Americans in need of help by the time Congress gets around to helping them.

Meanwhile the stock market swung around this week. As I write (11:45 A.M., Friday) markets are looking a little stronger, but who knows what Monday — or 3:45 P.M. today — will bring.

Turning, as so often, to John Authers at Bloomberg, I was intrigued to read this:

A new trade is under way in markets, based on the belief that “herd immunity” has already been achieved in many large countries, so a return to full normality doesn’t need to await a vaccine.

The question hangs on whether a figure of roughly 20 percent is enough to achieve herd immunity, and Authers, no epidemiologist, describes himself as “not convinced” of the argument, rightly noting that this “is still the subject of fierce debate between scientists.” Stuttaford, no epidemiologist either, would go a little further: I certainly cannot claim to know whether 20 percent (or something like it) is the magic number, although the evidence does increasingly look that way to my untrained eye.

If that does turn out to be the case, the Swedish approach to COVID-19 will be looking very smart indeed, and those who pushed for (or enforced) prolonged and destructive lockdowns will have a lot of explaining to do. And even if it is not the case, that is not the end of the matter: If we are going to have to live with the virus, we must learn to do so intelligently. And there have been times when intelligence has seemed to be in remarkably short supply.

From Business Insider:

New York is allowing indoor dining to reopen at 25% capacity [from September 30], but experts say it won’t be enough to save restaurants. Most restaurants operate on razor-thin margins, and barely eke out a profit even at 100% capacity, Andrew Rigie, the executive director of the New York Hospitality Alliance, told Business Insider. Experts and analysts say that sit-down restaurants won’t be able to generate pre-pandemic levels of sales until a vaccine arrives. “It literally makes no sense to put my life at risk and my staff members at risk for 12 people to come and dine,” said Amanda Cohen, the owner of Dirt Candy restaurant in New York City, told Business Insider.

“Until a vaccine arrives” is an evasion of responsibility, not the basis of policy.

It is worth taking the time to read this Financial Times interview with Anders Tegnell, Sweden’s state epidemiologist.

First some background:

As coronavirus cases rise in pretty much all other European countries, leading to fears of a second wave including in the UK, they have been sinking all summer in Sweden. On a per capita basis, they are now 90 per cent below their peak in late June and under Norway’s and Denmark’s for the first time in five months. Tegnell had told me the first time we spoke in the spring that it would be in the autumn when it became more apparent how successful each country had been.

But when it comes to policymaking, this, in particular, is worth noting (my emphasis added):

Tegnell had a normal Swedish childhood until he was 12 and his family moved to Ethiopia. He says the change of scenery affected him deeply. He met his Dutch wife at university in the US before travelling extensively. Rather than his fight against Ebola in what was then Zaire in 1995, he says his time just before that working on vaccination programmes in Laos for the World Health Organization was the most formative. “I really learned about the importance of broad thinking in public health. I think that’s also partly behind our strategy and also what the agency is doing. We are not just working with communicable diseases, we are working with public health as a whole,” he says.

And, rightly, he takes a broad view of what public health means.


So he looks at schools not just as a place where the virus might spread but also the most important part of health for a young person. “If you succeed there, your life will be good. If you fail, your life is going to be much worse. You’re going to live shorter. You’re going to be poorer. That, of course, is in the back of your head when you start talking about closing schools,” he adds.

And that point does not just apply to schools.

But back to Bloomberg’s Authers. He notes that money is already being allocated in the markets on the assumption that the 20-percent hypothesis is proved correct:

Look at the recent turbulence in tech stocks. Optimism about the pandemic does play into the problems for Big Tech names, which are viewed as benefiting from lockdown conditions. The last few days saw hotels, resorts, and cruise lines sector outperform information technology by enough to break a long-lasting trend.

Meanwhile, keep an eye on what is happening over in Blighty. On Monday, the pound bought $1.33. Now it buys about $1.28.

What is going on?

A tragedy of errors really. Boris Johnson’s Conservative government is making a mess (again) of its response to COVID-19 by proposing a return to a more stringent lockdown regime, while adding insult to injury by proposing a mass-testing regime that appears to be unfeasible as yet, but if and when it is launched could cost as much as £100 billion. This project, apparently, is known as “Operation Moonshot.”

London, we have a problem.

And, oh yes, negotiations over the U.K.’s future trading relationship with the EU once the Brexit transition phase expires at the end of the year are running into a wall, raising the possibility of the hard Brexit that no one should want. One key issue (there are a number, of which the trickiest involves Northern Ireland, but that’s another story): Johnson’s government wants to be free to pursue the sort of industrial policy that worked so well for Britain in the 1970s.


Shameless hypocrites that we are, Capital Matters became Stakeholder Capital Matters for 24 hours by taking Labor Day off, but opened on Tuesday with a call by Marc Busch for a smart approach to the next round of U.S./Japan trade talks, inspired at least partly by the lessons learned (or which ought to have been learned) from the COVID-19 experience:

The U.S. and Japan have an unparalleled opportunity to rewrite the rules on global trade, and by doing so in the midst of a pandemic, help patients gain access to a vaccine when one is ready. Of course, this won’t happen unless U.S. negotiators demand fairer pharmaceutical price-setting practices from their Japanese counterparts.

If Japan can no longer pay below market value for top-notch U.S. pharmaceuticals, Japanese researchers will have to start innovating their own generation of breakthrough medicines. This renewed focus on domestic biopharmaceutical innovation will hopefully turn Japan into a stronger, more responsible world leader in the process.

In the coming months, there will be many political demands made of U.S.–Japan Phase 2. Doctors and scientists are collaborating on a vaccine for COVID-19 on a global scale. Trade needs to be an asset in this endeavor, not a hindrance. U.S.–Japan Phase 2 can be the template . . .

On a less cheery note, Lee Edwards sounded the alarm about a socialist America:

The grassroots efforts of Democratic Socialists of America (DSA) and similar left-wing groups are paying significant dividends. In New York, five statewide candidates for the General Assembly who had been endorsed by DSA all won their primaries. Several had come-from-behind victories because of absentee ballots — a key socialist initiative. At least two self-described democratic socialists not endorsed by DSA also won statewide races.

They ran on platforms that included the Green New Deal, single-payer health care, criminal justice reform, housing for New York State’s 70,000 homeless, affordable housing for the poor, and new taxes on the rich and Wall Street to pay for all of it. Their goal, as set forth in campaign literature, is to “advance a vision for a socialist world.”

Socialists found receptive voters across the country. In Philadelphia, democratic socialist Nikil Saval won the Democratic primary for the state senate. Summer Lee, the first black woman to represent southwestern Pennsylvania in the state senate, won reelection with 75 percent of the vote. In Montana, six “Berniecrats,” backed by Our Revolution, a progressive political action committee, won their primaries. San Francisco elected Chesa Boudin, son of the leftist militants, its district attorney. In the California primary, exit polls revealed that 53 percent of Democrats viewed socialism “favorably.” In Texas, Democratic voters in the primary approved of socialism by 56 percent, a 20-point margin over capitalism.

Socialism is indeed riding a wave of momentum when more Texans than Californians view it favorably . . .

To twist a phrase, it could happen here.

And if some form of socialism does come to the U.S., I suspect that it the impact of automation on employment (and, critically, underemployment) will have something to do with it. Quite what can be done about I don’t know, but in the meantime our chart guru, Joseph Sullivan, analyzed the way the tax code favors robots over humans:

The U.S. tax code’s subsidy for robots has grown over time. Much of the change is due to decreases in the after-tax cost of spending on capital, including robots, while the after-tax cost of spending on labor, composed primarily of individual income and payroll taxes, has stayed relatively constant. All of these tax rates are effective average tax rates: They are total revenues paid under the relevant provisions of the tax code, divided by a measure of the relevant tax base.

If the idiosyncrasies of the U.S. tax code identified by the researchers were artificially abetting the rise of automation in America, then as these government subsidies started to grow, you’d expect the U.S. to adopt robots more rapidly than countries with similar economies. (Under the assumption that the trend in the U.S. tax code’s preference for robots is, within its peer group, relatively unusual.) That is what the figure, based on data from the International Federation of Robotics, shows . . .

Again, I don’t know what can be done about that (or what should be done about that), but Joe’s article makes for an intriguing read.

More reassuringly, Edward Lazear made a case that is made all too rarely these days (something that helps explain those Texan “socialists”): the case that free markets help all income groups improve their economic standing:

Data on standard of living and economic freedom from as many as 161 countries over the last few decades demonstrate that rich and poor alike are economically better off in countries that have free-market economies. One measure of capitalism is the rank of a country on the Fraser Economic Freedom Index, which is a composite of indexes that reflect the use of markets, the lack of regulation, the openness of the economy, and private ownership of capital. Countries that score highest on this index include Singapore, Switzerland, the United States, Ireland, and the United Kingdom. Venezuela has the lowest ranking of all countries on the index. There are a number of similar indexes, which are highly correlated with one another, and the conclusions are insensitive to the choice of index.

The evidence that free markets enhance the well-being of the poor is compelling. Define the rich as the uppermost 10 percent and the poor as the lowest 10 percent of a country’s earners. In countries that rank in the top half on the Economic Freedom Index, the rich have incomes that are on average almost three times as high as the rich in countries that rank in the bottom half of the index. But more striking is that in the free-market half of countries, the income of the poor is almost six times higher than in the more restrictive half. What’s more, within the ranks of the wealthiest half of countries, the poor are more than twice as well off in those that are freer and more market-oriented.

General economic growth tends to benefit all. The income data show conclusively that, as President Kennedy was fond of saying, a rising tide lifts all boats. Among the 161 countries studied, periods of high income growth for the rich also tend to be periods of high income growth for the poor. In 82 percent of the ten-year periods during which wages of the rich grew, so too did wages of the poor. Conversely, the wages of the poor tended not to grow during periods when wages of the rich declined. The movement is general. A 1 percent rise in median income is associated with just over a 1 percent rise in income of the poor and just under a 1 percent rise in income of the rich. The historical record suggests that the poor do not get left behind as economies grow . . .

Steve Hanke, chivalrous as only a knight can be, came to the defense of Judy Shelton, one of President Trump’s nominees for the Board of Governors of the Federal Reserve System:

Former Fed employees and economists are on the warpath because Shelton is not a member of their tribe and does not worship at their altar. She is unabashedly conservative, with a libertarian tilt, rather than liberal or centrist. Economics is not as left-leaning as other social sciences, not to mention the humanities, but conservatives, especially those associated with Trump, face a certain amount of snobbery within the discipline. Shelton has a Ph.D. in business administration from the University of Utah, rather than in economics from one of the nation’s elite universities.

The Fed chairman, Jerome Powell, does not have an economics degree, either. He is a lawyer by training, but his nomination raised few hackles thanks to his reassuringly bland manner and lack of original thought on monetary policy. Shelton has written at length on monetary policy, but unlike many other American economists who have done so, she has never worked for the Fed, and it has never funded her, keeping her independent of the influence typical of those within the Fed’s orbit . . . .

The Fed’s gargantuan and complex asset holdings mean correspondingly greater influence for bureaucrats and less for free markets. Today more than ever, the Fed Board of Governors needs a skeptic who will make it justify the unprecedented scope of its intervention.

As part of his continuing series “Five Questions For…,” Kevin Hassett had five questions for Mick Mulvaney, the U.S. special envoy to Northern Ireland. Mulvaney has also served as acting White House chief of staff, director of the Office of Management and Budget, and acting director of the Consumer Financial Protection Bureau.

Here was one of the questions (and the response):

Q: As budget director, I know you spent a lot of time on the Trump budgets. But did you ever take a look at the Obama budgets that preceded yours? And if you did, did anything stand out?

A: Presidential budgets are really fabulous things. They not only lay out proposed spending levels, but they reflect an administration’s vision, priorities, and, interestingly, predictions. Because they are not one-year documents. The current practice is that every budget projects out ten years.

The Obama/Biden administration rolled out its last budget in early 2016, so it provided some view into what that administration thought the country would look like in 2020 and beyond. And it was bleak: anemic, low-2 percent growth as America got older and less productive; a future of higher taxes and fewer people in the work force. It was the depressing “new normal.”

Shortly after unveiling that final budget, President Obama told us that some jobs “were never coming back,” in part because of automation.

Today on Joe Biden’s website you can read that he “does not accept the defeatist view that the forces of automation and globalization render us helpless to retain well-paid union jobs and create more of them here in America.”

Yet that is exactly what he did accept in 2016. It’s right there in his budget.

Ramesh Ponnuru looked at who should be getting the credit for the strong economy in 2018–19:

Jeanna Smialek and Jim Tankersley write in the New York Times that President Trump takes credit for the good economy of 2018–19 that rightly belongs to the Federal Reserve. They’re right that Trump takes too much credit, as does every president in office during good times. And they are accurately relaying the opinion of a lot of economists and other Fed watchers. But that body of opinion is itself too laudatory toward the central bank.

“By retaining his predecessor’s patient approach to rate increases — and then stopping them altogether as inflation, which the central bank tries to keep under control, hovered at low levels — Mr. Powell’s Fed helped to keep the longest economic expansion in United States history chugging along,” they write. In other words, Powell’s great contribution to the economy was not doing too much harm to it.

The article reflects the conventional view that Fed policy for much of the last decade was accommodative and that Powell deserves praise for withdrawing that accommodation as slowly as he did. Whether Fed policy was accommodative at all, though, depends on what yardstick we use to measure it. Interest rates were low by the standards of the last few decades, and the Fed’s balance sheet was enlarged by asset purchases. But inflation was below the Fed’s announced target for nearly the entire decade, as were inflation expectations. Comparing spending levels to previous expectations also makes money during the period look tight . . .

Not to beat up (again) on Britain’s hapless Tories, but Gautam Kalghatgi was not entirely convinced that they have thought through their Net Zero plans.

Spoiler: They haven’t.


In 2019, Britain’s Conservative government toughened existing climate-change legislation by setting the country the target of net zero carbon emissions by 2050 (the previous target had been 80 percent). There are other yet more ambitious proposals, providing for full decarbonization at even earlier dates, such as Extinction Rebellion’s 2025 and the Green Party’s 2030. In addition, other policies such as banning the sale of new cars and vans with internal-combustion-engines from 2030 are under serious consideration by the government in order to decarbonize transport as part of the overall CO2 target. As discussed below, the challenges of the energy transition required are enormous enough to seem unsurmountable and don’t seem to be sufficiently appreciated by those who set the targets. The scale of the challenge is great. A schedule, a budget, and engineering targets need to be put in place, and the work needs to start immediately, if the government is serious about meeting the targets for zero carbon emissions. It won’t be easy.

Spoiler: That’s an understatement.

Of course, if the British government is really serious about its net zero goal, concrete, time-bound initiatives with clear budget and engineering targets have to be set and implemented. Such targets could include, in the next ten years, reducing energy consumption by 13 percent and at the same time building 13 3-GW nuclear plants or 33,000 offshore 3-MW wind turbines; replacing 10 million gas boilers; building 700,000 public and 7 million private charging points for BEVs; rebuilding the electricity-distribution network appropriately; reducing steel, cement, aviation, and livestock farming by a third; and the list doesn’t stop there. . . . The work has to start immediately and would then have to continue at the same pace for the following two decades. This would force the government to focus on the implications of what has been promised.

Clearly, since no such targets have been announced, it is almost certain that the government will miss its goal to get to net zero carbon emissions by 2050. Meanwhile, vast sums of money and resources will have been spent for little gain and perhaps quite a bit of environmental harm, and a great deal of industrial production will have been outsourced. Soon there will be a realization that net zero will remain out of reach. After that will come the time for creative CO2 accounting, offsets, and apportioning of blame.

By comparison, the Conservatives’ COVID-19 ‘moonshot’ looks like an exercise in hard-headed realism.

In a celebration of the 50th anniversary of the publication of Milton Friedman’s seminal “A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits,” Jon Hartley tried to remind its critics — from Joe Biden to the Business Roundtable(!) — that “putting shareholders first often operates to the benefit — not the detriment — of other stakeholders.”


Establishing the direction in which society should go is the business of government, not business. When it comes to the environment, for instance, it should be up to voters and their elected governments to decide how to price or otherwise police the externalities that a company can generate. Waiting for corporations to act against the interests of their own shareholders’ welfare is neither the right nor the efficient way to go.

That’s not to say that the private sector cannot help resolve problems identified by the voters. More often, given the right incentives, it will do so more efficiently than government ever could in the long run. For instance, electric-car companies such as Tesla build emission-free cars that reduce global emissions, and pharma companies such as Moderna race to build COVID-19 vaccines but still operate under a mandate to maximize shareholder value.

Adam Smith understood this. By directing that his or her company be run “in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention,” an end, however, that is in the broader interest of society.

And Tomas Filipson and Eric Sun asked whether the U.S. had incurred larger COVID losses than countries held up as role models.

Short answer: not if you ask the right question:

The idea that America has incurred larger losses from COVID than any other nation has been widely repeated, but it’s not true. In reality, the United States has incurred smaller COVID losses than many other countries often cast as role models, once the total cost of the disease — in both lost lives and economic activity — is correctly measured and taken into account. A truly scientific approach to evaluating COVID policy relies on quantification of the tradeoffs involved, as opposed to only considering health losses.

The issue is how to measure the quantitative magnitudes of two separate strands of losses, the cost of disease prevention and the cost of the disease itself, to guide policy on minimizing the total impact. Economists routinely quantify and assess tradeoffs between health and other valuable activities to determine overall costs they impose. Doing so does not trivialize human life but acknowledges — as all of us must — that saving lives at any cost is not practical nor desirable . . .

Finally, we produced the Capital Note (our “daily” — well, Monday–Thursday, or this week, Tuesday–Thursday, anyway). Topics covered included: Cities in the post-COVID era, Nikola, LVMH/Tiffany, tech investing, the economics (grim) of the Olympics,  Nikola (again), the CFTC and climate change, the elusive V, and Wall Street and poker.

To sign up for The Capital Letter, follow this link.

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