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An extended look at jobless claims, and a note about payrolls

(Dan here…better late than not)

by New Deal democrat

An extended look at jobless claims, and a note about payrolls

Let’s take an extended look at jobless claims, with a side note about payrolls.

First, I have started to monitor initial jobless claims to see if there are any signs of stress.

My two thresholds are:1. If the four week average on claims is more than 10% above its expansion low.
2. If the YoY% change in the monthly average turns higher.Here’s this week’s update.

Initial jobless claims last week were 215,000. This is in the lower part of its range for the past 18 months. As of this week, the four week average is 6.5% above its recent low:

Additionally, the YoY change remains -1,500 below where it was last year:

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“pruning the tree when spring starts”

End of month July and Pfizer is spinning off Upjohn to generic drug/device company Mylan NV. Pfizer bought 57% of the unnamed (mid – 2020) new company. This move comes under Pfizer CEO Albert Bourla who took over the reins from Ian Read in January, 2019. Bourla has been with Pfizer for 25 years. Before becoming the CEO, Bourla was the Chief Operating Officer (COO) overseeing the company’s commercial strategy, manufacturing, and global product development functions.

CEO Bourla has been making strategic moves following what he has called a “pruning the tree when spring starts and Pfizer is in the spring of high growth” strategy. What caught my eye is this one comment in the Wall Street Journal about remaking Pfizer into a company focused on patent-protected prescription medicines with the potential for significant sales growth from a more diversified but slower-growing player. To me, this translate into a; “hey the Mylan EpiPen strategy worked, lets do the same with other products” strategy.

To date, he has overseen a restructuring at the company and made smaller deals to boost Pfizer’s pipeline of cancer and other drugs under development. Still not the biggest deal which would make Pfizer a giant. He has been guiding the combining of a division selling Advil, vitamins, bathroom found meds with GlaxoSmithKline PLC’s own consumer-health business to be spun off in a joint venture. Nothing earth-shattering there.

CEO Bourla focus for Pfizer on higher profit, exclusive, prescription drugs while moving the rest of its lower profit operations into other ventures. Off-patent drugs such as Lipitor and Viagra having lower profit margins would be targeted for joint ventures and Pfizer would still retain sizeable amounts of cash flow from these drugs to fund R&D. Pfizer is shifting the declining brands to Upjohn. The intent is to consolidate this business with Upjohn and merge Upjohn with the EpiPen company Mylan and rename the two.

The new Pittsburgh – based unnamed company is expected to be among the world’s largest sellers of generic and off-patent medicines with more than $19 billion in yearly sales. Pfizer Shareholders will own 57% of the new company and Mylan shareholders would the rest. Pfizer would be paid $12 billion raised from new debt acquired from the joint venture. Upjohn would return to the US from its corporate base in Shanghai, a reversal of its earlier inversion.

To me, this is a strategic move along the lines of Pfizer selling off the marketing of EpiPen to Mylan and keeping the manufacturing of it. Pfizer owned Meridian Medical Technologies manufactured EpiPen for Mylan and it will now be a part of the sale to Mylan. EpiPen was a huge success story for Mylan. A quadrant strategy of milking of a cash cow to fund new ventures.

Including EpiPen, “Mylan’s operating profit for its Specialty segment grew from about 35% in 2012 to roughly 60% in the second quarter of 2016.” Most of this can be traced back to the change in design of the EpiPen (cap) , exclusivity of it due to design changes which was covered by patents, and the rejection of Teva’s generic by the FDA due to a difference in application.

Add to this strategy story, Eli Lilly’s Alex Azar’s success profiteering off of the decades old diabetes drug Humalog and one can begin is imagine what the new “unnamed” company’s role will be under CEO Albert Bourla’s direction . . . more of the same.

In its analysis, World Health Organization determined the expenditure of one dollar in R&D being covered by $14.50 profit for cancer pharmaceuticals or more than enough to recoup expenditures for R&D and provide a healthy return for investors. The generics Upjohn will acquire have more than paid back the costs of R&D and are more than likely to be in a decline in producing profits. The question then becomes how to enhance the return on these generics.

Mylan changed Pfizer’s EpiPen design to achieve patented exclusivity. Teva could not duplicate it as a generic because patients could not use the Mylan instructions in applying the Teva generic. According to FDA’a rules, the Teva product could not be cast as a generic for the Mylan EpiPen in the marketplace as it could “not” be used in the same manner..

EIi Lilly’s Humalog, same formulation as what was made decades ago. The list price for one vial of Humalog has nearly tripled over the last decade. No new and improved or patent changes. Lilly appears to be taking increased profits from the price changes and passing on a larger slice to Pharmaceutical Benefit Managers to gain preference by healthcare insurance plans represented by the PBMs.

The same at the other diabetes med manufacturers Sanofi and Novo. Sanofi, a diabetes drug manufacturer and competitor to Eli Lilly gave insurers and pharmacy benefit managers rebates totaling more than half of its gross sales in the U.S. last year, resulting in net price declines across its portfolio despite list price hikes taken on dozens of its prescription products.

What is occurring is “shadow pricing” increases where one company raises pricing and the others follow.

A lawsuit filed in 2017 alleged three companies (Eli Lilly, Novo Nordisk, and Sanofi) intentionally raised the list prices on their drugs to gain favorable treatment from pharmacy benefit managers, who work with health insurers and drug makers and help decide how a drug will be covered on a list of approved drugs. Insurance companies do not pay manufacturer list pricing. The PBMs negotiate a rebate to the insurance companies from which they take a portion of it for themselves. The insured gets the net price after Rebates are paid to insurance company minus the PBM bonus for negotiated price.

It is in this circus of net profits after rebates and bonuses, I believe the Upjohn/Mylan “nameless” new company battle will be fought to increase Pfizer’s profit. This is not like the EpiPen medical device where a change in design of the pen can be made and a new patent secured. Some drugs may be changed which would result in a new patent. I suspect much of Upjohn/Mylan product profit improvement will be fought by getting preference from Pharmacy Benefit Managers.

CEO Albert Bourla will be watching the new company to see how successful they are in creating preference with PBMs and the resulting profit.

Why are our drugs so Costly? Watch the YouTube Presentation to Understand why Drugs are so Expensive to You.

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On Appeasement

On Appeasement

Sometimes on Sundays I leave the dreary world of economics behind and write of broader things.

Since most tomes covering American history have an underlying sunny optimism that is nowhere appropriate for our times, recently I’ve been reading more world history having to do with the rise of fascism or fall of democracy. Several of those books have been disappointing: they are thorough blow by blow descriptions, without organizing the material enough – or simply not including any material – to make a judgment about the underlying dynamics.

On such book is Tim Bouverie’s “Appeasement,” which as is obvious from the title, chronicle’s the UK’s, and in particular Neville Chamberlain’s, policies towards the rise of Hitler Germany in the 1930s.

There are three important issues with regard to the policy of Appeasement:

1. Was it at any point appropriate? (a question I never would have even included before reading this book)
2. Was it, at least temporarily, a necessary evil?
3. Did Chamberlain use it to “buy time” for the UK to re-arm in order to fight a war with Germany?

Only the second question gets an adequate answer from Bouverie’s book.

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Digital Sales Tax v. Tariffs on French Wine

Digital Sales Tax v. Tariffs on French Wine

Even before Donald Trump departed for the G7 in Biarritz France, he threatened another trade war this time with the host country over the digital sales tax:

U.S. President Donald Trump on Friday reiterated criticism of a French proposal to levy a tax aimed at big U.S. technology companies and threatened again to retaliate by taxing French wine. Speaking to reporters at the White House before leaving for a Group of Seven summit in France, Trump said he is not a “big fan” of tech companies but “those are great American companies and frankly I don’t want France going out and taxing our companies.” “And if they do that … we’ll be taxing their wine like they’ve never seen before,” he said.

A tariff on French wine might help New York’s Finger Lake area as well as California wine makers so maybe Trump is hoping to win over California and New York in the 2020 election. Or maybe Trump does not know that some states impose digital sales taxes:

The sales tax laws have been updated to include digital goods and services in different ways across the different US states, and the application of these laws has been troublesome for most state and local governments. Quick Stats: There are 27 states that tax digital products. There are 23 states that do not tax digital products. 5 states do not have a retail sales tax at all; these include, Alaska, Delaware, Montana, New Hampshire and Oregon. For the states that tax digital products, the tax rate varies from 1% to 7%, depending upon the state and the type of digital good.

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Prudence, Vice and Misery

In his newly published Limits: Why Malthus Was Wrong and Why Environmentalists Should Care, Giorgos Kallis challenges what has become the conventional perversion of Robert Malthus’s economic argument. Far from being a “prophet of doom” predicting the inevitable overshoot by population growth of food supplies, Malthus was an advocate of industrial progress as the antidote to a providential discrepancy between the tendency of humans to reproduce and the capacity of the land to feed them. The theodicy of Malthus’s position was explicit and undisguised: “Evil exists in the world not to create despair but activity.”

At the core of the misinterpretation of Malthus is his famous comparison between the tendency for population to increase at a geometrical rate (1, 2, 4. 8. 16…) but for subsistence to increase at only an arithmetical rate (1, 2, 3, 4, 5…). Much of subsequent debate focused on the validity and/or logical consistency of this comparison rather than the conclusions it was intended to support.

What Malthus was trying to show, however, was not that population inevitably will outrun subsistence but that the presumed tendency of population to outrun subsistence constitutes an incentive to industry unless that incentive is blunted by public assistance. For his part, Malthus was remarkably sanguine about the controversy generated by such a rash assertion:

It has been said that I have written a quarto volume to prove, that population increases in a geometrical, and food in an arithmetical ratio; but this is not quite true. The first of these propositions I considered as proved the moment the American increase was related, and the second proposition as soon as it was enunciated. The chief object of my work was to enquire, what effects those laws, which I considered as established in the first six pages, had produced, and were likely to produce, on society; a subject not very readily exhausted.

Defenders of Malthus argue that he meant those propositions only as tendencies, which he subsequently qualified by talking about the actual checks that occur on population. However, the rest of his discussion of “a subject not very readily exhausted” is predicated on the truth of ever-present threat of scarcity presumably demonstrated by those propositions. The logical inconsistency of comparing a constrained tendency of increase in food with an unconstrained one for population can’t be readily dismissed.

Classical political economy readily incorporated the drift of Malthus’s scarcity argument into it’s theory of wages, setting aside quibbles about geometrical and arithmetical tendencies. This is the notorious wages-fund doctrine used to argue for the futility of collective action to raise wages. The defunct doctrine is what underlies the unshakable conviction of “Econ 101” devotees that raising the minimum wage will increase unemployment.

One of the circumstances that no doubt focused a good deal of anxiety on over-population was the emergence of “neo-Malthusianism” in the early 19th century. Neo-Malthusianism is a bit of a misnomer to the extent that it offered a solution to the population problem that Malthus himself expressly rejected as immoral and improper — namely contraception. In Illustrations and Proofs of the Principles of Population (1822), Francis Place directly addressed what “Mr. Malthus seems to shrink from discussing…” Actually, Malthus didn’t shrink from discussing contraception, he rejected it unequivocally:

I have never adverted to the check suggested by Condorcet without the most marked disapprobation. Indeed I should always particularly reprobate any artificial and unnatural modes of checking population, both on account of their immorality and their tendency to remove a necessary stimulus to industry.

Nancy Folbre gives a brilliant account of this mostly unheralded episode in Chapter 8, “Self-love, Triumphant” of Sex, Lust and Gender: A History of Economic Ideas. Folbre points out that a year after Place published his Illustrations, he followed up with illegal and “obscene” handbills titled, “To the Married of Both Sexes,” in which he described a method of birth control. Seventeen-year old John Stuart Mill was arrested for distributing one of those handbills.

By the late 1860s, “Malthusianism” had become the discrete euphemism used to refer to advocacy of those “odious doctrines” and “monstrous propositions” that sheltered “under the phrase ‘limiting the number of children born…'”

So, why was Malthus wrong and why should environmentalists care? To begin with, Kallis points out that Malthus equated happiness with exponential population growth. “‘The happiness of a country,’ Malthus writes, ‘depends upon the degree in which the yearly increase in food approaches to the yearly increase of an unrestricted population.'”

Secondly, Malthus’s formula proclaimed a principle of scarcity as a law of nature. In this view, scarcity is inevitable because human desires are unlimited. As Kallis says, this is the “conception of nature that lies at the heart of modern economics and, to an extent, environmentalism.” Malthus was thus not a prophet of doom, but of perpetual growth — growth of production to feed an ever growing population.

Many environmentalists, Kallis argues, have largely adopted the neo-Malthusian side of the coin. Mid-20th century neo-Malthusian Paul Ehrlich raised the specter of an apocalyptic “Population Bomb.” Garrett Hardin advocated lifeboat ethics and coercive restriction on population. Hardin occupied the margin where environmentalist neo-Malthusianism shaded over into political white nationalism.

Neo-Malthusianism concedes the scarcity principal that is central to Malthus and to modern growth economics. Kallis offers an analysis that views scarcity as an artifact of a particular historical culture rather than as a law of nature. As a counter-example to the modern culture of insatiable consumption and growth, Kallis posits the ancient Greeks as cultivating limits as a path to self-awareness and fulfillment. This is not to say that the remedy for climate change is for everyone to suddenly adopt ancient Greek traditions and rituals. It is only to show that Malthus’s logically flawed model of geometric and arithmetic progression doesn’t have to be the only game in town.

This post is a sequel to my earlier Goats and Dogs, Eco-Fascism and Liberal Taboos. I am thinking of re-working the two parts into a comprehensive whole but in the meanwhile will leave it to the reader to discover or disregard the linkages between them.

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Not doomed yet v.2.0: beware recession porn

Not doomed yet v.2.0: beware recession porn

Way back when I first started writing online almost 15 years ago, my very first post on Daily Kos was a little note called “Not Doomed Yet.”  It was pretty pathetic compared with the standards of my writing since the Great Recession, but the point of it was, back in 2005, that the conditions necessary for an economic downturn hadn’t quite happened yet.

Needless to say, it went nowhere. To the contrary, my big recollection is that my posts that got the most attention by far were the ones I wrote once I did see that a recession looked baked in the cake. The simple fact is, when it comes to online clicks and reads, DOOOM sells.

This is a timely reminder, because I have noticed across a variety of platforms in which the economy is discussed, including back at Daily Kos, but also including financial sites and Twitter feeds, a surge in recession porn, I.e., why we are DOOOMED. Usually although not always this is because people have suddenly discovered that whatever portion of the Treasury yield curve they have focused upon has an infallible record of predicting the end of the world.

Now, over a year ago I forecast a sharp slowdown during this year. Over six months ago I went on “recession watch” with a starting date of Q4. So I’ve seen this coming for a long time.  But I am disappointed to remind you, once again, that we are Not Doomed Yet.

There are at least three reasons for that.

 

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Record Income Taxes?

Record Income Taxes?

I should read more posts from Kevin Drum:

The Yahoo News reporter comes close to explaining what happened by noting that there were more returns in 2018 than 2017. As you might guess, this happens every year as the US population increases. So let’s take a look at personal income tax receipts adjusted for inflation and population growth … In reality, income tax receipts were down 2.6 percent in 2018 compared to 2017. What this means, unsurprisingly, is that when you cut tax rates you get less revenue. When you fail to account for things like inflation and population growth, nearly every year is an “all-time high.” But that’s meaningless.

Let’s turn to BEA Table 3.2. Federal Government Current Receipts and Expenditures. Personal current taxes (nominal) rose from $1613 billion in 2017 to $1620 billion in 2018 but current tax receipts fell from $2019 billion in 2017 to $1956 billion. You see our Yahoo News reporter was omitting the drop in corporate profits taxes which fell from $251 billion in 2017 to $147 billion in 2018. So even in nominal terms, we saw a decline in tax revenues. Kevin continues:

Someday our nation’s press is going to stop producing innumerate pieces on the economy and learn how to do simple adjustments that tell the real story of what’s going on.

Maybe our Yahoo News reporter can take this additional information on taxes and recast the absolute nominal figures into real per capita terms for us!

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Why the revised Q2 GDP report next week may be the most important release in 10 years

by New Deal democrat

Why the revised Q2 GDP report next week may be the most important release in 10 years

Last Thursday there were major backward revisions to unit labor costs. Since corporate profits deflated by unit labor costs are a long leading indicator, this had a big negative effect on the forecast for the next six months or so. Corporate profits for Q2 of this year will be released next week as part of the first revision of the GDP report, and because of the effect on the forecast, might be the most portentous report in 10 years.

This post is up at Seeking Alpha.

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Cheerleading for Austerity

Cheerleading for Austerity

Not content to follow a news strategy that maximizes Trump’s prospects for re-election, the New York Times leads today with a story that combines economic illiteracy and reactionary scaremongering in a preview of what we’re likely to see in the 2020 presidential race.

“Budget Deficit Is Set to Surge Past $1 Trillion” screams the headline, and the article throws around a mix of dollar estimates and vague statements about growth trends, leavened with quotes from budget scolds from both Republican and Democratic sides of the aisle.  (That shows balance, right?)  After terrorizing us with visions of a tide of red ink, the article concludes with a ray of sunshine in the form of prospects for a Grand Bargain under a lame duck Trump that would cut benefit programs like Social Security and Medicare to put us once again on a stable path.

Where to begin?  Should we start by mentioning that nowhere in this lead article does it give the single most relevant statistic, the ratio of the federal budget deficit to the size of the overall economy—the money part, GDP.  The raw size of the deficit itself is meaningless, and the trillion dollar line is meaningless squared.  As Dean Baker likes to say, the article shows its respect for our powers of thought by informing us the deficit is a Very Big Number.  Scared yet?

Measurement aside, the article simply assumes that “large” deficits are unsustainable and bad, and that only irresponsible political motives prevent action on them.  In the name of a nebulous, unspecified Evil of Debt, the population of the US must be subjected to a regime of austerity, beginning with cuts in the programs many depend on to keep themselves and family members out of poverty.  Worse, it opines, Democrats will run for office next year on a platform of spending increases, demonstrating they are the party of ruin.  We can only hope, goes the argument, that they are just saying these things to get votes from the gullible public, and once in power they will join the deficit-cutting crusade.

No reason is given for the assumed Evil of Debt, and it’s no surprise, since it’s based on ignorance, willful or otherwise.  To begin with, federal debt is denominated entirely in US dollars, so servicing is not a problem.  Countries that borrow in foreign currencies, like Greece (which had no control over the euro) and Argentina, can default; that’s not a problem for the US.  Second, government debt is private wealth, and the relevant question is whether there are too many or too few government bonds in private portfolios.  If private wealth holders are satiated with public debt and prefer other securities, it would be a problem.  But that would be a world in which interest rates on the debt would be high in order to sell them, and rates are about as low as they can go without flipping negative (as they have elsewhere).

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