Piketty: What to do with Covid debt? [feedly]

What to do with Covid debt?
https://www.lemonde.fr/blog/piketty/2020/10/13/what-to-do-with-covid-debt/

Thomas Piketty

How are States going to deal with the accumulation of public debt generated by the Covid crisis? For many, the answer is clear: central banks will take on their balance sheets a growing share of the debts, and everything will be settled. In reality, things are more complex. Money is part of the solution but will not be enough. Sooner or later, the wealthiest will have to be called upon.

Let's recap. In 2020, money creation has taken on unprecedented proportions. The Federal Reserve's balance sheet jumped from $4159 billion as of February 24 to $7056 billion as of  September 28, or nearly $3 trillion in monetary injection in 7 months, which has never been seen before. The balance sheet of the Eurosystem (the network of central banks piloted by the ECB) rose from 4692 billion euros on 28 February to 6705 billion on 2 October, an increase of 2000 billion. In relation to the GDP of the euro zone, the Eurosystem's balance sheet, which had already risen from 10% to 40% of GDP between 2008 and 2018, has just jumped to almost 60% between February and October 2020.

What is all this money used for? In calm weather, central banks are content to make short-term loans to ensure the liquidity of the system. As the inflow and outflow of money in and out of the various private banks never balance exactly to the day, the central banks lend for a few days, amounts which the institutions then repay.

Following the 2008 crisis, central banks started lending money at increasingly longer maturities (a few weeks, then a few months, or even several years) in order to reassure financial players, who were petrified at the idea that their gambling partners would go bankrupt. And there was a lot to be done, because, for lack of adequate regulation, financial gambling has become a gigantic planetary casino over the last few decades. Everyone has started lending and borrowing in unprecedented proportions, with the result that the total private financial assets and liabilities held by banks, companies and households now exceed 1000% of GDP in rich countries (without even including derivative securities), compared to 200% in the 1970s. Real wealth (i.e. the net worth of real estate and businesses) has also increased from 300% to 500% of GDP, but much less strongly, illustrating the financialisation of the economy.  In a way, the balance sheets of central banks have only followed (slightly later) the explosion of private balance sheets, in order to preserve their capacity to act in the face of the markets.

The new activism of the central banks has also allowed them to buy back a growing share of public debt securities, while bringing interest rates down to zero. The ECB already held 20% of the public debt of the euro zone at the beginning of 2020, and could hold nearly 30% by the end of the year. A similar development is taking place in the United States.

As it is unlikely that the ECB or the Fed will ever decide to put these securities back on the markets or to demand their repayment, the decision to no longer count them in the total public debt could be taken now. If registration of this guarantee in legal form is desired, which would be preferable, then this might take a little more time and debate.

The most important question is the following: should we continue along this path, and can we envisage that central banks will in future hold 50% and then 100% of public debts, thereby lightening the financial burden on States? From a technical point of view, this would not pose any problem. The difficulty is that by resolving the question of public debt on one hand, this policy creates other difficulties elsewhere, particularly in terms of increasing inequalities of wealth. The orgy of money creation and the purchase of financial securities in fact leads to an increase in stock and property prices, which contributes to the enrichment of the richest. For small savers, zero or negative interest rates are not necessarily good news. But for those who can afford to borrow at low rates and who have the financial, legal and tax expertise to find the right investments, excellent returns are possible. According to Challenges, France's 500 largest fortunes have thus risen from €210 to €730 billion between 2010 and 2020 (from 10% to 30% of GDP). Such a development is socially and politically unsustainable.

It would be different if monetary creation, instead of fuelling the financial bubble, were mobilised to finance a real social and ecological recovery, i.e. by assuming strong job creation and wage increases in hospitals, schools, thermal efficiency and local services. This would alleviate debt while reducing inequalities, investing in sectors useful for the future and shifting inflation from asset prices to wages and goods and services.

However, this would not be a miracle solution either. As soon as inflation becomes substantial again (say 3%-4% per year), we would have to put a stop to money creation and use fiscal means. The whole history of public debt shows this: money alone cannot offer a peaceful solution to a problem of this magnitude, because it leads in one way or another to uncontrolled distributive consequences. It was by resorting to exceptional levies on the better-off that the large public debts of the post-war period were extinguished and that the social and productive pact of the following decades was rebuilt. Let's bet that the same will be true in the future.

 

Notes on the sources:

On central bank balance sheets, see also this tribune and Capital and ideology (chapter 13)

Balance sheet ECB : 4692 billions € on 28/2/2020, 6705 billions € on 2/10/2020

(39% GDP, 56% GDP)

https://www.ecb.europa.eu/press/pr/wfs/2020/html/ecb.fst200303.en.html

https://www.ecb.europa.eu/press/pr/wfs/2020/html/ecb.fst201007.en.html

This is due both to the new asset purchasing programme (PEPP, Pandemic emergency purchase programme) and to the increased used of old ones (in particular PSPP, Public sector purchase programme). See here the decomposition by country (alway with ECB capital keys as target, anchored upon national GDPs): https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html

GDP 2019 Eurozone (12 000 billions euros) EU 27 (14 000 billions euros) (market prices): https://ec.europa.eu/eurostat/databrowser/view/tec00001/default/table

Balance sheet Fed : 4159 billions $ on 24/2/2020, 7056 billions $ on 28/9/2020

(19% GDP, 33,0% GDP)

https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm

BEA US GDP : 21 400 billions $ 2019

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Tim Taylor: A Nobel Prize for Auction Theory: Paul Milgrom and Robert Wilson [feedly]

A Nobel Prize for Auction Theory: Paul Milgrom and Robert Wilson
https://conversableeconomist.blogspot.com/2020/10/a-nobel-prize-for-auction-theory-paul.html

Auctions are widely used throughout the economy. The big auction houses like Christie's and Sotheby's are well-known for selling famous art, and many people have either attended a live auction at a fund-raising event or a flea market or participated in an online auction at a site like eBay. But the behind-the-scenes uses of auctions are far more important. The right for online advertising to appear on your screen is sold in an auction format. When the US government borrows money by selling Treasury debt, it does so in an auction format. When electricity providers sign contracts to purchase electricity from electricity producers, they often use an auction format to do so. Some of the proposals for a buying and selling permits to emit carbon, as a mechanism for the gradual reduction of carbon emissions, would auction off the right to emit carbon. 

One useful property of auctions is that in a number of settings they can discipline the public sector to make decisions based on economic values, rather than favoritism. For example, when a city wants to sign a contract with a company that will pick up the garbage from households, companies can submit bids--rather than having a city council choose the company run by someone's favorite uncle. When the US government wants to give companies the right to drill in certain areas for offshore oil, or wishes to allocate radio spectrum for use by phone companies, it can auction off the rights rather than handing them out to whatever company has the best behind-the-scenes lobbyists.  In many countries, auctions are used to privatize selling off a formerly government-owned company.

But the bad thing about auctions is that (like all market mechanisms), they can go sideways and produce undesirable results in certain settings. The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2020--commonly known as the Nobel Prize in economics, was awarded to Paul R. Milgrom and Robert B. Wilson "for improvements to auction theory and inventions of new auction formats." For some years now, the Nobel committee has also published a couple of useful reports with each award, one aimed a a popular audience and one with more econo-speak, jargon, and technical detail. I'll quote here from both reports: "Popular science background: The quest for the perfect auction" and "Scientific Background: Improvements to auction theory and inventions of new auction formats." 

A useful starting point is to recognize that auctions can have a wide array of formats. Most people are used to the idea of an auction where an auctioneer presides over a room of people who call out bids, until no one is willing to call out a higher bid. But auctions don't need to work in that way. 

An "English auction" is one where the bids are ascending, until a highest bid is reached. A "Dutch auction"--which is commonly used to sell about 20 million fresh flowers per day--starts with a high bid and then declines, so that the first person to speak up wins. In an open-outcry auction, the bid are heard by everyone, but in a sealed-bid auction, the bids are private. Some auctions have only one round of bidding; others may eliminate some bidders after one round but proceed through multiple rounds. In "first-price" auctions, the winner pays what they bid; in "second-price" auctions, the winner instead pays whatever was bi by the runner up. 

In some auctions the value of what is being bid on is mostly a "private value" to the bidders (the Nobel committee suggests thinking about bidding on dinner with a Nobel economist as an example, but you may prefer to substitute a celebrity of your choice), but in other cases, like bidding on an offshore oil lease, the value of the object is at least to some extent a "common value," because any oil that is found will be sold at the global market price. In some auctions, the bidders may have detailed private information about what is being sold (say, in the case where a house is being sold but you are allowed to do your own inspection before bidding), while in other auctions the information about the object being auctioned may be mostly public. 

In short, there is no single perfect auction. Instead, thinking about how auctions work means considering for any specific context how auction rules and format in that situation, given what determines the value of the auctioned objects and what what kind of information and uncertainty bidders might have. 

If the auction rules aren't set up appropriately, the results can go sideways. For some example, Paul Klemperer wrote a some years back on the subject of "What Really Matters in Auction Design." 

One of his examples was about what happened in 1991, when the UK used a process of sealed-bid auctions to see what company would be allowed to provide television services in certain areas. Klemperer writes: 

The 1991 U.K. sale of television franchises by a sealed-bid auction is a dramatic example While the regions in the South and Southeast, Southwest, East, Wales and West, Northeast and Yorkshire all sold in the range of 9.36 to 15.88 pounds per head of population, the only—and therefore winning—bid for the Midlands region was made by the incumbent firm and was just one-twentieth of one penny (!) per head of population. Much the same happened in Scotland, where the only bidder for the Central region generously bid one-seventh of one penny per capita. What had happened was that bidders were required to provide very detailed region-specific programming plans. In each of these two regions, the only bidder figured out that no one else had developed such a plan.

Another problem arises if the bidders find a way to signal each other to hold prices down. In some cases, the bidders can use the bidding process itself to send messages. Here's an example from Klemperer: 

In a multilicense U.S. spectrum auction in 1996–1997, U.S. West was competing vigorously with McLeod for lot number 378: a license in Rochester, Minnesota. Although most bids in the auction had been in exact thousands of dollars, U.S. West bid $313,378 and $62,378 for two licenses in Iowa in which it had earlier shown no interest, overbidding McLeod, who had seemed to be the uncontested high bidder for these licenses. McLeod got the point that it was being punished for competing in Rochester and dropped out of that market. Since McLeod made subsequent higher bids on the Iowa licenses, the "punishment" bids cost U.S. West nothing (Cramton and Schwartz, 1999).

Notice that the bids from U.S. West ended in the number 378, which was the lot number where the company wanted McLeod to back off. 

Of course, concerns like these have obvious answers. For example, set a "reserve price" or a minimum price that needs to be bid for the object, so no one gets it for (nearly) free. Also, set a rule that all bids need to be in certain fixed amounts, and that increases in bids also need to be in fixed amounts. But making these points both raises practical questions of how this should be done, and also shows some ways in which the practical rules of auctions can matter a lot. 

A more subtle but well-known problem with auctions is called the "winner's curse." It was first documented in the context of bidding by companies for off-shore oil leases. An analysis of the bids, along with how much oil was later discovered in the area, found that the "winner" of these auctions was on average losing money. The reason is that each individual company was forming its own guess about how much oil was on the site. Naturally, some companies would be more optimistic than others, and the most over-optimistic company of all was likely to bid highest and "win" the auction. A problem is that once bidders in an auction become aware of the risk of the winner's curse, they may become very reluctant to bid, so that the bids stop representing the actual estimates of value. 

In professional sports, this kind of scenario often plays out when free agents try to encourage bidding among teams for their services. From the player point of view, it only takes one high-end bidder, a bidder who perhaps is ignoring the winner's curse, to get a great contract. But many teams may decide to avoid the risk of overpaying and the winner's curse by not bidding at all. 

There are various possible responses to a winner's curse in an auction format. One is to find ways for the bidders to collect more private information, so that they can be more confident in their bidding. Another is a "second-price" auction, where the winner pays the price of the second-highest bidder. This format provides some protection against the winner's curse: that is, everyone can feel free to bid as high as they would like, knowing that if they are way out of line with the second-price bid, they will only have to pay the second-price bid. If a second-price bid greatly reduces concerns about the winner's curse and leads to more aggressive bidding, it can (counterintuitively) end up raising more money than a first-price auction. 

The auctions that most people participate in are "private-value auctions," where the issue is just how much do you want it--because you are planning to use it rather than to resell it. In this setting, a live auctioneer tries to get people emotionally involved in how much they want something, and in this sense to get them to pay more than they had perhaps planned to pay beforehand. As Ambrose Bierce wrote in his Devil's Dictionary published back in 1906: "AUCTIONEER, n. The man who proclaims with a hammer that he has picked a pocket with his tongue."

But auctions for oil leases, spectrum rights, privatized companies, Treasury debt, an so on have some element of being "common value" auctions, where the value of what is being sold will be similar across  potential buyers. As the Nobel committee writes: "Robert Wilson was the first to create a framework for the analysis of auctions with common values, and to describe how bidders behave in such circumstances. In three classic papers from the 1960s and 1970s, he described the optimal bidding strategy for a first-price auction when the true value is uncertain. Participants will bid lower than their best estimate of the value, to avoid making a bad deal and thus be afflicted by the winner's curse. His analysis also shows that with greater uncertainty, bidders will be more cautious and the final price will be lower. Finally, Wilson shows that the  problems caused by the winner's curse are even greater when some bidders have better information than others. Those who are at an information disadvantage will then bid even lower or completely abstain from participating in the auction."

But when you think about it, many of these "common value" auctions actually have a mixture of private values as well. For example, consider bidding on an offshore oil lease. The value of any oil discovered may be a common value. But each individual company may have specific technology for discovering or extracting oil that works better in some situations that others. Some companies may also already be operating nearby, or have facilities nearby. In short, lots of real-world auctions are a mixture of private and common values. As the Nobel committee writes: 

In most auctions, the bidders have both private and common values. Suppose you are thinking about bidding in an auction for an apartment or a house; your willingness to pay then depends on your private value (how much you appreciate its condition, floor plan and location) and your estimate of the common value (how much you might be able to sell it for in the future). An energy company that bids on the right to extract natural gas is concerned with both the size of the gas reservoir (a common value) and the cost of extracting the gas (a private value, as the cost depends on the technology available to the company). A bank that bids for government bonds considers the future market interest rate (a common value) and the number of their customers who want to buy bonds (a private value). ... The person who finally cracked this nut was Paul Milgrom, in a handful of papers published around 1980. ... This particular result reflects a general principle: an auction format provides higher revenue the stronger the link between the bids and the bidders' private information. Therefore, the seller has an interest in providing participants with as much information as possible about the object's value before the bidding starts. For example, the seller of a house can expect a higher final price if the bidders have access to an (independent) expert valuation before bidding starts.

In addition, Milgrom has participated in setting up new kinds of auctions. When auctioning radio spectrum to telecommunications providers, for example, how much you are willing to bid for rights in one geographic area may be linked whether you own the rights in an adjoining area. Thus, rather than auctioning off each geographic area separately--which can lead problems of collusion between bidders-- it makes sense to design a Simultaneous Multiple Round Auction, which starts with low prices and allows repeated bids across many areas, so that geographic patterns of ownership can evolve in a single process. There is also a Combinatorial Clock Auction, in which bidders might choose to bid on overall "packages" of frequencies, rather than bidding separately on each license. Milgrom also was a leading developer of the Incentive Auction, which the Nobel committee describes in this way;

The resulting new Incentive auction was adopted by the FCC in 2017. This design combines two separate but interdependent auctions. The first is a reverse auction that determines a price at which the remaining over-the-air broadcasters voluntarily relinquish their existing spectrum-usage rights. The second is a forward auction of the freed-up spectrum. In 2017, the reverse auction removed 14 channels from broadcast use, at a cost of $10.1 billion. The forward auction sold 70 MHz of wireless internet licenses for $19.8 billion, and created 14 MHz of surplus spectrum. The two stages of the incentive auction thus generated just below $10 billion to U.S. taxpayers, freed up considerable spectrum for future use, and presumably raised the expected surpluses of sellers as well as buyers.

The economic theory of auctions is clearly tied up in intimate ways with the practice and design of real-world auctions. More broadly, close analysis of buyers and sellers in the structured environment of auctions can also offer broader insights into how non-auction markets work as well. After all, in some ways a competitive market is just an informal auction with sellers offering bids hoping to get a higher price and buyers making offers hoping to get a lower price. 

For more from Milgrom and Wilson on auctions and related economics, here are some articles from the Journal of Economic Perspectives, where I work as Managing Editor. 

• Milgrom, Paul. 1989. "Auctions and Bidding: A Primer." Journal of Economic Perspectives, 3 (3): 3-22.
• Milgrom, Paul. 2008. "What the Seller Won't Tell You: Persuasion and Disclosure in Markets." Journal of Economic Perspectives, 22 (2): 115-131.
• Roth, Alvin E., and Robert B. Wilson. 2019. "How Market Design Emerged from Game Theory: A Mutual Interview." Journal of Economic Perspectives, 33 (3): 118-43.

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China Bolsters Its Dominance of Global Trade [feedly]

China Bolsters Its Dominance of Global Trade
https://www.bloomberg.com/news/articles/2020-10-13/china-bolsters-global-trade-dominance-by-surviving-virus-trump

Supply Lines is a daily newsletter that tracks Covid-19's impact on trade. Sign up here, and subscribe to our Covid-19 podcast for the latest news and analysis on the pandemic.

China is cementing its status as the world's dominant trading nation, confounding warnings that a once in a century pandemic combined with simmering tensions with the U.S. would derail that status.

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Surging global demand for everything from hazmat suits to work-from-home technology has allowed China, which contained the virus months ago, to capture record market share of global exports by quickly reopening its factories while the rest of the world grappled with lockdowns. It's a striking reversal from the first two months of the year when China's exports contracted by 17.1%.

It's also an outcome that underscores the nation's enduring role in manufacturing even amid simmering tensions with the U.S. that have fueled talk of shifting supply chains. For all the tariffs levied by the Trump administration, monthly sales to the U.S. remain robust.

Anti-Covid Demand

China's exports of personal protective equipment, WFH devices jumped

Source: General Administration of Customs, Bloomberg

"China's export performance during this crisis is indeed a proof of its solid status as the world's factory," said Yao Wei, China economist at Societe Generale SA. "It is reliable, as the quick and effective containment of the outbreak in China allowed its manufacturing sector to resume operations way ahead of others."

The bumper performance was reflected in government data for September which showed exports rose for the fourth straight month while imports surged. Li Kuiwen, a spokesperson for the General Administration of Customs, told reporters that China's overall share of world trade hit a record in the seven months to July, citing demand that included health-care equipment and technology.

What Bloomberg's Economists Say

"Looking ahead, we expect exports to continue to pick up on a year-on-year basis in the months ahead. But we think headwinds may strengthen, due to renewed outbreaks of Covid-19 in Europe and potential risks to trade related to the deterioration in U.S.-China relations. We expect imports to continue to register year-on-year growth, though the pace may slow."

Click here to read the full report.

-- David Qu, China economist

The question is whether this is as good as it gets given the resurgent virus in Europe and elsewhere that threatens another cycle of stop-start economic activity that will complicate the global recovery. China has also lost some of its early advantage as production recovered in rival trading partners as lockdowns were eased.

"China's export growth will fade eventually when world production catches up," Chi Lo, Greater China economist at BNP Paribas Asset Management told Bloomberg Television.

There are other complications too. The better economic performance has bolstered the yuan, which hit an 18-month high last week before the government took measures to cool it. China's current account is now firmly back in surplus after a brief flirtation with deficit, a long-standing imbalance often criticized for its global ramifications.

Rising Share

China's export share in global trade gained amid pandemic

Source: Bloomberg Economics

For now, the picture is upbeat. Exports grew 9.9% in dollar terms in September from a year earlier, while imports rose 13.2%, the customs administration said Tuesday. That left a trade surplus of $37 billion for the month. Economists had forecast that exports would increase by 10% while imports would edge up 0.4%.

"Renewed virus outbreaks in trading partners will be a challenge, but shipments of products benefiting from virus-related demand should continue to hold up," said Louis Kuijs, an economist at Oxford Economics.

The China figures gel with an improving global outlook, for now. The World Trade Organization expects global merchandise trade to fall by 9.2% this year from 2019, compared with the 12.9% drop projected in April. All 10 gauges on the Bloomberg Trade Tracker fit in their "normal" ranges, starting in early September.

The pick-up in China's imports also suggests a steady domestic recovery is gaining traction, a view that was further bolstered by data released Tuesday showing demand for cars continues to go from strength to strength with deliveries of sedans, SUVs, minivans and multipurpose vehicles jumping 7.4% in September from a year earlier.

Geopolitical tensions were probably one reason for the imports bump as technology firms stockpiled key components ahead of the imposition of sanctions on telecommunications firm Huawei Technologies Co. Purchases from Taiwan jumped 35.8%, while imports from Japan and South Korea rose 13.4% and 17.2% respectively.

That vulnerability is spurring China's government to push for self reliance in critical areas of the economy. In a sweep through China's southern manufacturing powerhouse of Guangdong, President Xi Jinping urged a greater focus on quality to overcome increased global uncertainty and doubled down on a message of "self-reliance".

"Currently, we are experiencing changes unseen in a century, and we need to set ourselves on a path to higher quality self-reliance," Xi told workers at a Shenzhen factory that makes advanced ceramics for most major Chinese mobile phone makers.

Xi is slated to outline his latest policies Wednesday in a speech in Shenzhen to mark to 40th anniversary of the city's establishment as a special economic zone.

— With assistance by Enda Curran, Lin Zhu, and Miao Han

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The Washington Post Has Never Heard of the International Monetary Fund [feedly]

The Washington Post Has Never Heard of the International Monetary Fund
http://feedproxy.google.com/~r/beat_the_press/~3/GbI5kjDipKE/

That would seem to be the case from reading the paper's editorial on the need to take steps to reduce extreme poverty in developing countries. The editorial never once mentions the proposal before the International Monetary Fund to substantially increase the special drawing rights available to developing countries.

This measure, which has the support of the I.M.F. leadership, and most of its member states (but not the Trump administration), would give the developing countries resources to help their economies recover from the pandemic. It is surprising that the Post would not mention it in an editorial on reducing world poverty.

It is also worth noting that the Trump  method of pursuing a vaccine, with grants of patent monopolies, rather than an open collaborative effort, is likely to make it more difficult for developing countries to get access to a vaccine. While this route does contribute to the upward distribution of income, it is not an efficient way to develop a vaccine. It does appear as though China is at least partially filling the gap created by the Trump administration going this route. 

The post The Washington Post Has Never Heard of the International Monetary Fund appeared first on Center for Economic and Policy Research.

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China Backs Indonesia to Become Vaccine Hub of Southeast Asia [feedly]

China Backs Indonesia to Become Vaccine Hub of Southeast Asia
https://www.bloomberg.com/news/articles/2020-10-11/china-backs-indonesia-to-become-vaccine-hub-of-southeast-asia

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Waiting for a Vaccine: Killing for Inequality [feedly]

Omigod: The vaccine battle is finally bringing Dean Baker's longstanding -- formerly thought quixotic -- complaint about patent monopolies making a mockery of big business "pro innovation" hype, into the spotlight and hotspot ---- where China's vaccine response is set to humiliate the giant US pharmaceuticals. 

Waiting for a Vaccine: Killing for Inequality
http://feedproxy.google.com/~r/beat_the_press/~3/db66vE41bII/

 -- via my feedly newsfeed

I have been harping on the fact that it is very likely China will be mass producing and distributing a vaccine at least a month, and quite possibly several months, before the United States. This should make people very angry.

Even a month's delay is likely to mean tens of thousands of avoidable deaths and hundreds of thousands of avoidable infections. And, it adds a month to the time period before we can get back to living normal lives. Of course, the delay could end up being many months, since we still have no idea how the clinical trials will turn out for the leading U.S. contenders.

We are in the situation where we can be waiting several months for a vaccine, after one has already been demonstrated to be safe and effective, because the Trump administration opted to pursue a route of patent monopoly research, as opposed to open-source collaborative research. If Trump had gone the latter route, as soon as China, or anyone, had a vaccine, everyone would have a vaccine, or at least everyone able to manufacture it.

 

Patent Monopoly Financing Versus Open Source

Since people seem to find the alternative to Trump's patent monopoly approach confusing, let me outline it simply, so that people can see what is at issue. As it turned out, Trump quite explicitly turned the development of a vaccine into a race. He created "Operation Warp Speed," to which he committed more than $10 billion of public funds. This effort is supposed to develop both vaccines and treatments for the coronavirus.

The funding takes a variety of forms. Several companies received some upfront funding, but are relying primarily on advance purchase agreements for an effective vaccine. For example, Pfizer signed a contract that commits the government to buying 100 million doses for $1.95 billion ($19.50 per shot), if it has a successful vaccine.

By contrast, Moderna relied largely on upfront funding, getting $483 million for its pre-clinical research and phase 1 and 2 trials, and then another $472 million to cover the cost of its phase 3 trials. Incredibly, after largely picking up Moderna's development costs, the government is also allowing Moderna to have a patent monopoly on its vaccine. This means it will effectively be paying Moderna twice, first with the direct funding then a second time by allowing it to charge monopoly prices on its vaccine.

This nationalistic patent monopoly route was the one Trump choose to pursue. It should be mentioned there was little visible opposition from leading Democrats in Congress.

But, we could have taken a different route. We could have looked to pool research, not just nationally, but internationally. This would mean that all research findings would be posted on the web as soon as practical and that any patents would be placed in the public domain so that everyone could take advantage of them.

We were actually seeing this sort of cooperation in the early days of the pandemic, which allowed scientists to gain an understanding of the virus more quickly than if we had followed the path of patent monopoly supported research. This path of cooperation could have continued, if Operation Warp Speed had been structured differently. Instead of paying for the research costs of a company like Moderna, and then telling them they could get a patent monopoly so that they could charge whatever they want, we could have made the condition of the funding that all its findings would be fully public and patents would be in the public domain.

Since some folks have a hard time understanding what incentive Moderna would have if they weren't getting a patent monopoly, let me explain: they would be getting paid.

Just as most of us work for money, not patent monopolies, Moderna and other drug companies developing vaccines or treatments would be getting paid directly for their research. Their incentive would be that they presumably want to continue to get paid. If they went two or three months and had nothing to show, then they would not continue to get paid.

This is the idea of working for money. I thought that most economists were familiar with it, but when it comes to financing drug research, they seem to view it as an alien concept.[1]

Anyhow, if we committed $10 billion for open research, presumably we would want comparable commitments (adjusted for size and wealth) from other countries. For example, Germany, which has an economy that is roughly one fifth the size of the U.S. economy, would be expected to commit to paying $2 billion to support open research. China would also be expected to make a commitment that was comparable relative to its GDP, although as a much poorer country (on a per person basis), perhaps the commitment would only be half as large relative to its economy.

If we had leadership in the United States that was committed to pursuing a path of open research, then presumably it would be possible to quickly work out a deal that countries were reasonably satisfied with. It doesn't matter that a deal may not make everyone perfectly happy. Lots of things are happening in the pandemic and the response that are far from perfectly fair. Such is life.

Anyhow, in this world of open research, if it turned out that China's vaccines were showing more promise earlier than the ones developed by Pfizer and Moderna and other U.S. companies, we would be able to manufacture and mass distribute their vaccines, as soon as the Food and Drug Administration (FDA) approved them. No one would need permission from China since the research was open, anyone could manufacture the vaccines who had the capability.

Just to be clear, using a Chinese vaccine does not mean accepting China's safety standards. The FDA would make its own determination of a vaccine's safety and effectiveness based on the data from the clinical trials. If it could not be confident that the data supported approval, then it would not be granted, just as is the case with any domestic vaccine or drug.

If we had gone this route, if the Chinese vaccines are shown to be safe and effective before the vaccines developed by U.S. companies, we would not be left waiting. If China, or any other country had a vaccine, we would as well. This system still leaves a problem for developing countries who lack manufacturing capabilities, but at least intellectual property concerns would not be preventing people from getting a vaccine or treatment.

 

Open Research and Inequality

It is hard to understand how, not just mainstream Democrats, but even progressive leaders like Senators Bernie Sanders, Elizabeth Warren, and Representative Alexandra Ocasio-Cortez, were not pushing for an open research response to the pandemic. This almost certainly would have given us a vaccine more quickly.

However, an open research approach to the pandemic also could have been a very important model for biomedical research more generally. If we went a route of financing research upfront and putting all patents in the public domain, it could save us $400 billion a year on prescription drug spending. This comes to more than $3,000 per household. It is more than twice the size of the Trump tax cut. This is real money.

Patent monopolies also have a lot to do with inequality. We are often told that technology is a big part of the story of upward redistribution over the last four decades. While this story is frequently exaggerated, insofar as it is true, it is because we have designed patent and copyright laws so that some people can get very rich at the expense of everyone else. Bill Gates would still be working for a living if the government did not give Microsoft patent and copyright monopolies on its software.

It is more than a bit bizarre that political figures who devote so much effort to combatting inequality look the other way when we design a pandemic health care research plan that both slows research progress and gives more money to those at the top.

It's fine to have progressive taxes, but it is even better to structure the market so that we don't have so much inequality in the first place. If the minimum wage had kept pace with productivity since its 1968 peak, it would be $24 an hour today. That would be a hugely different world.

While it would be great if we could raise the minimum wage to $24 an hour, we can't do that without changing many of the rules that allow so much income to be redistributed upward. The current system of patents and copyrights is a really big part of that story. In the case of the pandemic, it is not just leading to inequality, it is also costing people's health and their lives. Progressives should be paying attention.    

[1] I discuss in chapter 5 of Rigged how this sort of system can be structured in a more systematic way (it's free). But in the context of dealing with the pandemic emergency, the arrangements would have to be somewhat ad hoc, as is already the case with Operation Warp Speed.

The post Waiting for a Vaccine: Killing for Inequality appeared first on Center for Economic and Policy Research.

Branko Milanovic: Was Novel Born and Died with the Bourgeois Society? [feedly]

Was Novel Born and Died with the Bourgeois Society?
https://www.globalpolicyjournal.com/blog/09/10/2020/was-novel-born-and-died-bourgeois-society

Branko Milanovic argues that, in some cases, literature can help shed light on how inequality was historically understood and felt.

Can we use literature to learn more about inequality? Yes, I think we can, and, as some of my readers know, I did exactly that in "The haves and the have-nots" which open with the discussion of Jane Austen's "Pride and Prejudice" (in terms of the monetary advantage for Elizabeth to marry Mr. Darcy) and of Tolstoy's "Anna Karenina".  Piketty has used later the same idea in his "Capital in the 21st century" adding Balzac—who by the way was cited by Marx for precisely the same reason: as an extraordinary chronicler of life in a bourgeois society.

Recently, Dan Shaviro published "Literature and inequality", a book in which he looked at the social structures of England and France (in the 19th century) and the United States (in the 19th and 20th) as revealed by nine books, beginning with the inevitable Jane Austen, going through Balzac, Stendhal, Dickens, Trollope, EM Forster, Mark Twain, Dudley Warner, Edith Wharton and Theodore Dreiser. I have reviewed the first part of the book here and the second part here. On October 15, Dan is planning an online book vernissage to which I am very much looking forward.

As the luck would have it, I took from my shelf a couple of days ago John Lukacs's "The future of history", a nice little book of essays about history written by one of foremost US historians of the World War II. I read it when it was published, almost ten years ago, and I planned to read (for the reasons entirely unrelated to the topic I am discussing here) my book notes and comments only. But what attracted my attention was Lukacs's discussion of the relationship between history and literature. He asks the same question as the one I asked in the beginning of this post: can we learn something about history of a given era by reading good literature?

Lukacs's answer is, "yes". Not only can we learn about how people might have felt about a historical event, whether they even knew they were participants or witnesses to such an event, but good literature, as Lukacs writes, is like good history. When you read it you are not supposed to feel that you know the outcome; it has to be open-ended, to always keep the full breadth of possibilities that exist in the present, but which we, looking at what used to be present, know did not materialize. Thus, Lukacs writes,  literature and history are symbiotic. This is very much the point that I think all of us who hold that you can learn about societies and their inequality from novels would agree.

But then Lukacs makes an additional intriguing point. Noticing that the birth of the novel was in the mid-18th century, contemporaneously with the Industrial Revolution, and that its peak was probably in the 19th century Europe, and noticing also that the type of society-revealing novel that both he and economists have in mind, has become much rarer now, Lukacs asks: has novel died at the same time as the bourgeois class-compartmentalized society dissolved?

He uses the fact noticed by many that around the turn of the 20th  century, novels became much more focused on individual experiences which did not necessarily have much to do with the surrounding society. It is not that Julien Sorel or Emma Bovary were not focused on themselves. But that self was described as it navigated and struggled in the world riven with greed, arrivisme, social mimicry, and class divisions. So the self was seen against the background of society. At times that  background moved even upfront, became the real topic of the book (which may be the case with Dickens, for example). But in the novels of the early 20th century and increasingly afterwards, Lukacs writes, the societal background recedes: what we see is mostly an individual with his issues, family, friends, sex, love, depression. Grand societal themes raised by the past literature are gone.

This is indeed what I noticed when, emboldened by the success of using Jane Austen and Tolstoy to throw light on English and Russian society of the early 19th  century, I started looking around, and asking my friends and students, to find similar novels in other settings and languages. The results were disappointing. Societies that were less developed and commercialized than the 19th  century Europe did not (understandably) produce such novels:  if monetization is quasi non-existent, how can you quantify social positions, incomes, wealth? Novelists are not going to impute incomes the way that economists impute the value of own produced goods to farmers in household surveys. On the other hand, Western societies of the mid-20th century and later did not seem, for the reasons Lukacs mentions, to care much for that kind of literature either.

I have not followed contemporary literature (contemporary meaning, written in the past 30 years) partly for that very reason, so I relied more on the judgment of others. But they too seemed at a loss of finding novels from which one could glean social inequality, or even more generally social issues linked with  inheritance, position in society, class distinctions, and even money. So we ended with a very meager yield.

Lukacs provides an answer to that dearth. In his view, the dissolution of classes and of typical bourgeois societies made novels of the type that I was looking for irrelevant. Society decomposed into individuals, not in classes. The subject matter of literature became individual issues, not class issues.

Now, one further element (never thought of by Lukacs, I am sure) lends credence to his explanation. Political economy stopped looking at social inequality through the lens of class, which it did from Quesnay through  Adam Smith and  Ricardo all the way to Marx. It did so precisely around the same time as classical novel disappeared. It was Pareto at the turn of the 20th century who introduced for the first time, studying fiscal data from a number of German and Italian cities and states, interpersonal income inequality. From Pareto onward, we ceased to deal with capitalists, workers, and landlords; we began to deal with individuals, some rich, others poor. The class analysis was definitely pushed out, so much so that in the second half of the 20th century, especially in the United States, even the mention of class in an economic paper would immediately classify you as an unreconstructed Marxist.

It dawned on me that this was not a coincidence: the death of the classical novel, the dissolution of the class structure of the bourgeois society, and the end of a political economy where the subjects were classes in favor of "agents" might have all been related.

But now as the importance of capital incomes increases, and capitalist societies grow increasingly stratified, with the rich attempting to confer and transmit all the advantages to their offspring, may not both the class analysis in economics and the classical novel make a comeback

 -- via my feedly newsfeed