Relevant and even prescient commentary on news, politics and the economy.

CDC Early Release – Syndrome Coronavirus 2

High Contagiousness and Rapid Spread of Severe Acute Respiratory Syndrome Coronavirus 2,” CDC, Emerging Infectious Diseases

Doing my usual morning reading, I ran across a comment concerning an early release article by the CDC which as the CDC points out is not considered to be a final versions. I believe what is important about the preliminary information is the increase of R-naught from 2.3 to 5.7. By now I believe you know what R-naught means; but, I will repeat it anyways. R-naught reflects the potential number of people who are infected by one contagious person. The abstract also emphasizes continued active surveillance, contact tracing, quarantine, and early ‘strong’ social distancing efforts are needed to stop transmission of the virus.

Meanwhile our president wants to open up the country come May as some states have just started to initiate “stay at home” policies, and other states have yet to implement stay at home policies. Our leaders Washington D.C. are also pushing “herd immunity” which I believe is influencing our president’s desire to open up for business come May. A post by Yves Smith at Naked Capitalism  develops the theory of “herd immunity” as briefly explained by one of the NC readers;

“The herd is allowed to be infected and then observed the course of the disease. Those left are either immune to the disease or robust enough to fight off the infection. This immunity of course applies only to the given pathogen and can’t be easily generalized. This is not usually a strategy adopted for human beings.

The term is usually used in the context of the introduction of a vaccine where you are creating, to the extent you can, herd immunity. You then observe how well the vaccine works. If the vaccine works, you have created herd immunity for a certain period of time, a period associated with the pathogen and the immune system’s response to it. It will be different for each pathogen. For standard flu, it appears to be about a year. For covid-19, no one seems to know.”

Dominic Cummings, the promoter of herd immunity in England has come down with Coronavirus and has of yet has not returned to Downing Street after quarantining himself a week ago. That is as it should be, if a countries leader is to promote herd immunity to open an economy or keep an economy open as he did, they should lead the way and set the example for the rest of the herd. Dominic Cummings is a Boris Johnson advisor. It is doubtful we shall see many of our leaders lighting the way for us as examples.

In any case read the abstract (after the leap) and view the chart I posted. There is more information and charts in the article itself which will shed more light on the Coronavirus.

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Canceling Student Loan Debt Petition

Alan Collinge of the Student Loan Justice Org. has a petition promoting the cancellation of Student Loan Debt. When Angry Bear ran (April 1) his commentary on Student Loan Debt asking for signatures, there were 161,000 signatures on the petition. A couple of days later, the number of signatures was approaching 200,000 Today, I was advised, they now have 211,000 signatures.

If the Fed will be supporting the asset-backed markets, the primary corporate bond markets, the secondary corporate bond markets. The Fed will also purchase of Treasuries, mortgage backed securities in vast amounts. Fannie Mae and Freddie Mac also made some announcements. There were also rumors of a special carve-out just for Boeing and GE even though Boeing refusing to give an ownership  stake to the Fed. At the least, the Fed could discount the price paid and sell back at market.

The issue for Alan, the Student Loan Justice Org, and its members is; why not bail out people with excessive student loan debt much of which is the result of interest from forbearance, penalties, etc.?

The student loan justice.org is needs your help by your signing the President Trump: Cancel Student Loans NOW petition. Please join student loan justice.org and the 211,000 (up from 161,000) signers of the petition calling for President Trump to prioritize canceling student loan debt. Doing such would cause many citizens burdened with debt to be more productive promoting economic growth.

Angry Bear has posted Alan’s words over the years on Student Loans and the resulting Student Loan debt to which there is no bankruptcy relief; the same relief our president has enjoyed multiple times, also abused by corporations who gambled on Wall Street, and used in every day by businesses, unions, and ordinary citizens caught up in bad economies. There is a large economic potential benefit to freeing them from the loan debt so as to be more productive.

Read the petition and if you can spare a signature, please add your name.

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A last look at the 2009 – 2020 expansion

A last look at the 2009 – 2020 expansion by New Deal democrat

All of the most important economic from February has been reported. Since that was the last month before coronavirus derailed everything, I thought I would take a look back and see what shape the economy was in just before the moment of impact.

As usual, the 4 coincident indicators that the NBER usually looks for in determining whether the economy is in expansion or contraction are: industrial production, nonfarm payrolls, real sales, and real personal income minus government transfer receipts. Here’s what they look like through February, with each normed to a level of 100 as of August 2019, first in a longer term view:

And now focused on the past year:

Note that all 4 flattened or rolled over at the outset of the 2008 recession. In 2016, production turned down and income flattened, but both jobs and sales continued to increase. In the latter part of 2019 into early 2020, production and sales turned down, but jobs and income continued to increase.

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Weekly Indicators for March 23 – 27 at Seeking Alpha

Weekly Indicators for March 23 – 27 at Seeking Alpha by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

As you might expect, almost all of the “hard” indicators have crashed. What sticks out is that consumer spending, as measured by chain store sales, has not – even though one week ago the coronavirus restrictions were very much in place in many regions.

As usual, clicking over and reading will bring you thoroughly up to date. It also helps reward me for my efforts, especially now that I have cut back on posting there in order to spend a lot of time documenting what is happening and what is likely to happen going forward with the coronavirus pandemic.

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Mass testing for Covid-19: economics, politics, and policy options

The Covid-19 epidemic is creating a painful dilemma for policymakers.  On the one hand, we need to practice social distancing to keep people healthy and to prevent our hospitals from being overwhelmed.  Unfortunately, this strategy is causing a severe economic contraction as people avoid contact with others.

An ideal response to this dilemma would have three basic components.  First, we would implement a hard, nation-wide lockdown to slow the spread of Covid-19.  This would “flatten the curve” and save lives by preventing hospitals from being inundated with patients in the next few weeks.  It would also buy time to put in place the testing, prevention, and surveillance measures we will need to start cautiously re-opening our economy.  Putting these measures in place should be the second element of our strategy.  Finally, as Paul Romer and Alan Garber argue, we need a major effort to increase our capacity to test for Covid-19, and to produce masks, gloves, and other forms of personal protective equipment (PPE) by an order of magnitude or more.  The ability to do mass testing and to provide masks and other PPE to most Americans will substantially reduce the risk that the epidemic drags on for many months and leads to an economic catastrophe.  (For further discussions, see here, here, and here.)

In this essay I explain why it is important to massively increase our ability to produce Covid-19 tests and PPE.  I also discuss how this can be done, considering the apparent reluctance of the Trump administration to lead this effort.  I make four basic points.

First, the ability to test millions of people daily for Covid-19 and to produce PPE for millions of Americans will require a large up-front capital investment by manufacturers that may turn out to be unneeded, but this investment is socially justified to lessen the risk of a severe and protracted economic shutdown.

Second, without firm contractual commitments from the government, businesses will not invest at the scale required to ensure that we can avoid a disaster.  Several factors will deter adequate investment by industry; the most important is probably the risk that the epidemic will abate and they will not be able to recover their investment costs.  The government can overcome this problem by agreeing to pay companies for tests and PPE even if the epidemic abates, by subsidizing investment in the capacity to produce tests and PPE, etc.  The critical point is that the government needs to make binding commitments NOW, it cannot wait to see if the epidemic can be brought under control using other means.  Valuable time has already been lost.

Third, the powers that the President has under the Defense Production Act to directly control the use of resources are not particularly useful if our goal is to spur investment in the capacity to produce tests and PPE.  We need to give firms incentives to invest in new capacity using contracts, competitions, and similar tools.

Fourth, an ambitious effort to expand production of tests and PPE will inevitably lead to genuine contracting failures and to situations that create the perception of failure.  Trump is clearly anxious to avoid setting ambitious goals and taking actions that might later be used to criticize him.  In response, Congressional Democrats want to force Trump to exercise his powers under the Defense Production Act.

This is a mistake.  Trump would likely veto any bill that tried to force him to act, and, in any event, it is very difficult for Congress to force a reluctant President to act.  Fortunately, there is no need for contracting efforts to be directed by the President.  Rather than trying to force a reluctant Trump to exercise his contracting powers under the DPA, Congress should either delegate the power to an agency, or it should create incentives itself, directly.  I will sketch out how this can be done.  The same point applies to efforts to organize mass testing, the distribution of equipment, and other activities where direct commands are an effective means of achieving our goals:  Congress should accept that Trump is unwilling (and arguably unable) to lead these efforts and try to work around him in ways that he can accept.

Mass testing and distribution of PPE mitigate the risk of economic disaster

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A Dog that Didn’t Bark

The USA is about to experience the largest fiscal policy shift since World War II. The House is debating whether to add $ 2,200,000,000,000 to the Federal Budget Deficit (counting loans as if they were expenses because that’s what they do). There appears to be a near consensus as all are speaking in favor. It is just possible to guess which are Republicans

I’m sure there is a similar near consensus that Rep Thomas Masie of Kentucky, who made them fly to DC by threatening to call a quorum, is a jerk (the Rep. is short for reprehensible). I don’t really wonder if someone is going to get knifed in the members only men’s room.

The Supply of Treasury securities is about to experience the largest shock in history. So what is happening to the price in anticipation of the huge supply shock ?

Quick find the shift from arguing about $ 2.5 billion vs 8.5 billion to arguing about $ 100 billion more to discussing $ 1800 billion more to approving $ 2200 billion more on the graph.

The rate is not quite at the all time record low, but it is close. One might argue that a huge Federal Debt will crowd out investment, beause it will create an illusion of wealth which makes people consumer more so the Fed will have to achieve high real interest rates in order to keep the economy from overheating. One can argue that the huge debt will cause high inflation (perhaps because the Federal Government is the world’s main dollar debtor and can make the dollar worth as little as they want) which will imply high nominal interest rates.

But one will not be able to convince investors of this. the invisible bond vigilantes clearly have got their hands on Harry Potter’s invisibility cloak.

This isn’t even a matter of much debate (except for Massie). It is clear that stimulus will help the USA and also, in particular, the GOP. When the interests of the USA and the GOP allign there is (almost) no debate, because Democrats care about the country and not just about hurting the other party. In 2009 Republicans demonstrated that they were partisans not patriots. Today, Democrats are demonstrating they are patriots more than they are partisans.

Many economists (some winners of the Nobel memorial prize) should admit that they were totally wrong. But of course they won’t.

Some economists whose response to the horrible Trump tax cut was more debt no problem can say “I told you so”

I told you so.

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Business interruption insurance and pandemics

Not surprisingly, many business owners are upset to discover that their business interruption policies do not cover losses due to pandemics.  Although it is easy enough to understand their frustration, it is important to understand the underlying economics.  (Full disclosure, I worked in the property casualty industry for many years.)

The main business of insurance companies is risk pooling.  They take premiums from (say) large numbers of drivers, and then use those premiums to pay claims for the small number of drivers who have accidents each year.  What is essential to the viability of this business model is that risks are uncorrelated or independent:  the chance that you have an auto accident must be largely independent of the risk that your neighbors do.  If everyone has an accident at the same time, the premiums everyone pays will not come close to covering the accident losses.  To some extent, of course, losses are correlated, and this can result in losses to insurance companies and their investors.  For example, when it snows accidents go up and losses rise.  Insurance company investors can bear these risks.  Some losses that are correlated locally can be spread globally.  This is what happens with the losses caused by hurricanes and earthquakes – they are pooled across the globe by reinsurance companies.  But if losses are too widespread, large, and highly correlated they cannot be insured using the standard logic of insurance.  My guess is that pandemic losses from business interruption fall into this category.

I haven’t seen an analysis, but I suspect that an effort to force companies to pay business interruption claims would impair or bankrupt many insurers and reinsurers.

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The corporate bailout

The Senate economic rescue package contains $500 billion for bailouts of large corporations.  Much commentary has focused on the lack of accountability, but the bigger issue is simply the massive waste of taxpayer dollars.  From the WAPO:

In a Tuesday interview on Fox, Boeing chief executive Dave Calhoun said he would not be willing to give the government an equity stake in the company in exchange for a bailout, implying the company would only accept assistance on its own terms. President Trump has said he would support the idea, suggested by his economic adviser, of taking an equity stake in companies that receive assistance in the package.

“If they force it, we just look at all the other options, and we’ve got plenty of them,” Calhoun said.

Why are we giving them money?

It’s not clear how the bailout provisions will work, at least to me.  There will be loans and perhaps some equity investments.  But Delta stock is up 50% over two days; Boeing is as well.  Between the two of them this represents roughly $35 billion in market capitalization, a gift to their shareholders.  Maybe some of this is based on optimism about the general economic benefit of the stimulus, but the $35 billion number may also be an understatement of the true give-away, because part of the Senate bailout package was priced in more than two days ago, and some of it may not be fully priced in yet.  Much will depend on the terms and conditions attached to loans and investments; it is not clear to me that the law will require the government to drive a hard bargain or even has enforceable provisions regarding disclosure.

And let’s be clear that there are no benefits at all for taxpayers from these bailouts.  We have a well-functioning bankruptcy system in this country that would prevent a failure of either company from harming the broader economy.  If we don’t trust the bankruptcy system, or want to protect unionized workers, we could allow existing shareholders to keep a small fraction of the value of the companies and let the government own the rest, in exchange for an equity investment in these companies.  These bailouts represent a giveaway to powerful constituents, pure and simple.

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Insider trading by members of Congress

The recent insider trading by members of Congress (notably but not exclusively by Senator Burr) is appalling.  One policy response – advocated for by Elizabeth Warren – would prohibit MOCs from investing in the stock of individual companies, requiring them instead to invest in mutual funds.  This would prevent the type of corruption evident in the Chris Collins case.  However, under this proposal MOCs could still have cashed out of stock funds and moved into bond funds based on their advance knowledge of the coming epidemic.

An alternative or complementary approach would be to require MOCs to place their buy and sell orders in advance – say, 6 or 12 months in advance.  This would prevent them from trading on private information, such as classified briefings about the likely economic impact of the covid-19 epidemic.  A similar rule could also be imposed on corporate insiders to (largely) eliminate insider trading and perhaps reduce incentives to manipulate financial statements.  (Executives would still have an incentive to pump up the stock price prior to an announced sale date and to lower it prior to an announced purchase, but at least other investors would be aware of their incentive to do so.)

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Let’s get real about coronavirus testing . . .

We do not know how severe the covid-19 epidemic will be or how much economic and social pain it will cause, but it clearly has the potential to kill hundreds of thousands or even millions of Americans, and the economic consequences could include a deep recession and even a financial crisis that will cause misery to tens of millions of people.

Testing is key to getting the epidemic under control, and it is not clear to me that policymakers are being nearly as aggressive about expanding testing capacity as they should be.  Think of two alternative testing strategies.  One strategy is to selectively test people who have symptoms or who may have been exposed to someone with the disease.  The alternative strategy is to develop the ability to do mass screenings for the virus among the general population.  (There are various intermediate strategies one can imagine, such as doing mass screenings in local areas with a high incidence of disease.)  Of course, selective testing is the place to start, but the ability to do mass screenings would allow us to pro-actively identify and isolate almost all carriers and would thus avoid the need for widespread social isolation which is wreaking havoc on the economy.  Selective screenings, in contrast, may or may not be able to contain the epidemic sufficiently to allow normal economic activity to resume.

I am not sure what is being done to expand our testing capacity, but if we want to develop the ability to do mass screenings, we need to make it a priority nowThe government will need to contract with equipment manufacturers and other suppliers (of reagents, swabs, protective gear, etc.) for large capacity commitments on a short timeline.  I have no idea what this would cost or even if it is feasible, but if there is even a small chance that the epidemic will last for six months or return next winter, it seems that a $10 or $20 billion investment in testing capacity would be short money.

The Democrats should jump on this as they take up the next coronavirus response bill.  Not only is it good policy, it will give them an opportunity to highlight the fumbling, timid response of the Trump administration to the crisis.

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