The Capital Letter: Week of November 9
At the time of writing (1:50 p.m.), the Dow, S&P and even the tech-heavy NASDAQ Composite are up and, in the case of the former duo, look like ending in positive territory for the second consecutive week. The NASDAQ, however, has had a rougher time. The announcement of Pfizer’s COVID-19 vaccine encouraged investors to move out of pandemic plays, many of which, such as Zoom (at the time of writing, off around 20 percent since last Friday), are tech based. Equally, the argument that the high valuation of some of the top tech names could be justified by the defensive qualities they had shown during the pandemic looked a little less convincing to investors now focused on the fact that the economy might soon benefit from a literal, as opposed to metaphorical, injection. To take just two examples, Amazon and Google are currently down on the week.
But it is well worth remembering that rescue is a way off yet. The Economist published a useful piece on the Pfizer vaccine (more accurately, the vaccine is the product of a partnership between Pfizer and BioNTech, a German biotech company), which also contained this piece of encouraging commentary:
Richard Hatchett, the head of CEPI [the Coalition for Epidemic Preparedness Innovations] says Pfizer’s positive results increase the probability that other covid vaccines will be successful, too. They show that an MRNA vaccine can work, which is good news for Moderna [another company with a possible vaccine in the works]; they also show that targeting the spike protein pays off . . .
But a lot of questions remain. As The Economist points out, there are still safety trials to be completed (even under the current accelerated regulatory regime) and there are a lot of questions still to be answered. Does the vaccine offer “sterilizing immunity” (in other words does it combat the disease in a patient and render him or her non-infectious)? Does it provide long-term protection? How well does it work with the elderly, who tend to be less responsive to vaccination but have proved to be dangerously susceptible to COVID-19?
There’s also this:
The Pfizer, AstraZeneca and Moderna vaccines all require two jabs weeks apart. A one-and-done vaccine, which is what J&J hopes for, makes setting up a vaccination programme far simpler. It also means a given number of doses will go a lot further.
The next hurdle is regulatory:
[Pfizer] says that no serious safety concerns have arisen during the trial. But the vaccine will come with side-effects, at least for some, and the company will only be in a position to request approval for the vaccine on an “emergency use” basis after it has two months of safety data showing such effects to be manageable. That requirement looks likely to be met in time for an application in the third week of November.
But in an era when the precautionary principle runs amok, I couldn’t help noticing this:
Marcus Schabacker, the boss of the Emergency Care Research Institute, an American organisation focused on the quality and safety of medical practices, thinks six months of follow-up data ought to be scrutinised, not just two, before final decisions are made on deploying the vaccine.
Under the current extraordinary circumstances, two, I think, will have to do.
Roll-out of the vaccine is, inevitably, going to take some time:
Pfizer says it will only be able to make enough vaccine to inoculate 25m people in 2020. Up to 1.3bn doses are possible, in theory, next year—enough for another 650m people. If other vaccines are approved then the supply will increase. In even the most optimistic scenarios, though, [CEPI’s] Dr Hatchett expects demand to exceed supply throughout 2021.
And then there are logistical challenges.
The vaccine news airlines have been waiting for arrived this week, raising hopes for a recovery in passenger air travel — but only if the crippled industry can muster the resources to deliver billions of life-saving doses to the world.
The challenge is enormous: Just providing a single dose to the world’s 7.8 billion people would fill 8,000 747 freighter planes, says the International Air Transport Association (IATA).
The problem: Most cargo flies in the belly-holds of passenger aircraft — not on cargo planes — and one in four airplanes have been grounded during the pandemic because people aren’t flying.
An added complication: The Pfizer-BioNTech vaccine (and similar ones) would require ultra-cold temperatures throughout the supply chain.
For all that, the darkest nightmare will be the political, social, and economic consequences should something prove wrong with this vaccine. I would rather not contemplate that possibility for now, as it does seem reasonable (particularly with other vaccines advancing in the pipeline) to think that we can borrow Churchill’s words and dare to hope that while “it is not even the beginning of the end . . . it is, perhaps, the end of the beginning.” The Economist (and I would recommend reading the whole report: for all my grumbles about the magazine’s Davos-turn, it does still occasionally turn out remarkable pieces of work, and this is one of them) is somewhat more optimistic: “a more normal form of life looks unlikely to be too long delayed.”
That, I think, depends. There is a danger that the arrival of this vaccine may encourage governments to adopt even more draconian policies than those they are already considering in response to the pandemic’s current resurgence. After all, if there are just a few more months to wait, why not lockdown hard?
The answer to that is that, for the vast majority of people (even if everything goes well) there will be many more months to wait, and even just “a few” months will be too many. As I remarked in yesterday’s Capital Note:
To be sure, the news that a vaccine is on the way is immensely encouraging, but telling locked-down businesses that all they have to do is wait for its arrival is akin to telling a drowning man to hold off on his drowning until the lifeguard eventually arrives.
Let’s look at a few indicators. Yes, jobless claims are coming down and the number of job openings has been rising, but (via Axios):
A staggering number of Americans continue to fall into a troubling labor market category: out of work for so long that regular unemployment programs have expired. And, that number is rising.
What it means: People are falling off the state unemployment rolls and likely getting work. But that’s being offset by people who are falling off because they are simply no longer eligible to collect state unemployment.
What they’re saying: “The decline in continuing claims exaggerates the improvement in total employment,” Conrad DeQuadros, an economist at Brean Economics, wrote in a note.
By the numbers: Roughly 160,000 more people moved onto PEUC in the week ending Oct. 24, bringing the total number of claimants to 4.1 million, according to the Department of Labor.
What to watch: Over half a million people are tapping Extended Benefits, an option for eligible unemployed workers in most states that have exhausted regular state and PEUC benefits — 21,000 fewer people than last week.
Just about everywhere we look there are other signs of strain, whether it is the mounting crisis in commercial real estate (something that we have discussed before), or indicated in stories such as this one (from The Wall Street Journal earlier this week, my emphasis added):
Big banks also have more deposits than they know what to do with—a more consistent catalyst for deposit-rate cuts this year, analysts said.
Deposits began flooding into commercial banks in the spring, when the economy shut down to battle the coronavirus pandemic. Loan demand at many banks stalled at the same time, meaning banks have fewer and less lucrative opportunities for putting their deposits to work . . .
The level of reserves kept by lenders at their regional Fed banks has ballooned alongside bank deposits. Banks stash deposits at the Fed when they have more than enough to fund operations including lending . . .
“Deposit growth has been off the chart but there’s not a lot of loan demand out there…”
Already-low deposit rates at bricks-and-mortar banks have trended downward along with those at online banks. The average rate on savings accounts at U.S. banks stands at 0.08%, down from 0.1% in early spring, according to Bankrate.com, a personal-finance website.
“Banks are trying to get rid of deposits,” said Gary Zimmerman, founder of MaxMyInterest, which matches bank customers with higher-yield accounts. “The only way they know how to do that is lowering rates and hoping people go away.”
That doesn’t look like a sign of confidence to me.
While, as noted above (and there are plenty of others to choose from), there are encouraging signs of recovery, a coronavirus winter is coming, a winter that, as discussed in yesterday’s Capital Note, may be made far worse by government overreaction.
Here’s the New York Post:
Joe Biden’s COVID-19 Advisory Board looks pretty . . . sick.
One of his top guys wants a six-week national lockdown, with mass borrowing to pay all the sidelined workers. Another wanted the country to go on lockdown for 18 months — and doesn’t believe life is worth living after age 75.
Biden adviser Michael Osterholm said Wednesday that locking down America for four to six weeks is needed while we wait for a vaccine to begin rolling out . . .
Osterholm was arguing for a strict lockdown back at the start of August, when cases weren’t on the rise as they are now. He co-authored a New York Times piece, “Here’s How to Crush the Virus Until Vaccines Arrive,” that argued, “We should mandate sheltering in place for everyone but the truly essential workers.”
Biden adviser Ezekiel Emanuel would go further. He argued months ago that the nation needs to be locked down for at least a year and a half, until a vaccine is widely available. Yet his predictions have been way off: He said in March there would likely be 100 million Americans infected with COVID by late April. In mid-November, the nation’s seen a total of 10.5 million cases.
I discussed Osterholm’s grotesquely irresponsible ideas yesterday. I left Emanuel as an insanity for another time.
That Biden is picking people like these to advise him on the challenge posed by the pandemic is alarming. It seems as if his innate preference for command and control may well override what continues to be needed, an attempt to “live with” the virus. Such an attempt will involve dealing with the uncomfortable reality that difficult trade-offs will have to be made, a reality that Biden might prefer either to reject or, perhaps, even, refuse to face. What’s more, those trade-offs will have to be made until a vaccine or vaccines are widely available. Simply locking down and waiting for Pfizer is not an answer, but an evasion. And it is not only an evasion. It is an invitation to catastrophe.
We opened the week on Capital Matters early, on Sunday, with Kelsey Bolar celebrating the fact that, thanks to the passing of California’s Proposition 22, Uber, Lyft and other ridesharing companies had managed to win exemption from the state’s “Assembly Bill 5 (AB5), a California law that imposed some of the most significant restrictions on independent contractors in American history,” something that we have discussed at some length on Capital Matters.
Bolar:
The law has been so devastating on the state’s gig economy, dozens of politically connected professions — musicians, translators, writers, producers, and photographers — have successfully lobbied for exemptions. The fight for special exemptions isn’t cheap: Uber, Lyft, Postmates, Instacart, and DoorDash spent a whopping $200 million to support Proposition 22.
While it’s nice that industries with big microphones and deep pockets were able to successfully lobby for carve-outs, the devastating effects of AB5 persist for thousands of independent workers and small-business owners throughout the state.
Monica Wyman, a wedding florist in southern California, is one of them. . . .
Continuing our look at how the states voted down ballot, Brad Polumbo turned his attention to California’s Proposition 21:
Proposition 21 asked Golden State voters whether cities should be allowed to impose rent controls on housing that had been occupied for more than 15 years. Under the status quo, rent “stabilization” policies, which limit rent increases, are allowed. But this ballot measure would have allowed localities to institute rent freezes . . .
The campaign was rooted in emotional appeal and calls for empathy. But with nearly 60 percent against the referendum, Californians wisely saw through the rhetoric and recognized rent control for the fallacy that it is. . . .
Mike Watson worried that Florida was ignoring a different Californian lesson:
Raising the minimum wage is a popular solution; the Democratic Party platform calls for a federal minimum wage of $15 an hour by 2026, but this election Florida just approved increasing its minimum wage to the same level by the same time in a referendum while also voting for Mr. Trump. Unfortunately, another ballot measure in California shows that there is only so much that this approach can put right.
Information technology has not just made automation more effective; it has also made part-time and contracted work more efficient. Employers can find freelancers or contract out work much more easily than before, and some companies such as Uber and Lyft have built huge businesses around their small armies of contracted workers. This “gig economy” gives companies, workers, and customers greater flexibility, but it has also devastated some industries, particularly taxi drivers.
In California, which already has a $15 minimum hourly wage, the legislature decided that the gig economy is inadequate for workers, so it extended employment regulations to cover contracted labor. This measure was aimed at the tech companies, but has impacted journalists, photographers, musicians, and members of other professions, too. The legislature has since added carveouts for some favored groups, but not tech companies. In response, Silicon Valley persuaded Californians to pass a referendum (Prop 22) exempting driver apps from the new rules. As a result, there is now one set of rules for powerful constituencies, and another for everyone else. Instead of reducing inequality, California has embedded it.
California reveals the dead end ahead for the current system of worker protections. Regulations that make workers more expensive create incentives for companies to automate their positions away. Legislatures can double down, but they cannot make bankrupt ideas profitable. To give the working class a chance in the future economy, we need a new strategy.
As a lover of the southwest, I, meanwhile, was disappointed by Arizona:
I put up a couple of posts last month about the possibility that Arizona might, by approving Proposition 208 in this November’s vote, impose a sharp tax increase on, of course, “the rich.” It was, I argued, a measure, perhaps, of that state’s changing politics that such an item was on the agenda.
Well, Arizonans finally really did it. Maniacs!
The Goldwater Institute’s Victor Riches, who was, I suspect, even more disappointed than I, provided some local insight into what had gone wrong:
Since 2010, Arizona’s population has increased by an astounding 16 percent, with approximately one million new residents moving to the state over the past ten years. Many of these transplants (nearly 30 percent) hail from California — and who can blame them for migrating to a more hospitable economic environment? The cost of living in Los Angeles is 67 percent higher than in Phoenix, and the cost of homeownership is nearly 200 percent higher. For many Californians, Arizona has provided a safe haven for those who can no longer afford to live in their own state.
The same holds true for most other people who have migrated to Arizona in hopes of escaping high housing and living costs. Behind California, these states include Washington, Illinois, and Colorado, and Texas. (Notably, of these top five, Texas is the only Republican state). Indeed, these migrations have dramatically altered the political landscape of the state.
The result of this population boom is that there are 51,000 more registered Democrats than Republicans since 2016, and 49,000 more independents — most of whom say they lean toward the left. Considering the last permanent tax increase to come before Arizona voters was in 2012 (which failed by a two-thirds margin), it’s not hard to decipher the significance of these shifting population trends. Unfortunately, most people moving to Arizona are not doing so to escape the politics of their home state, but rather the housing costs therein. Most of these transplants simply don’t see the intrinsic connection between the two — and so their liberal proclivities accompany them when they move.
Perhaps an even more important factor in explaining the success of Prop 208 is the sheer amount of money spent on its behalf. The final tally appears to be upwards of $25 million — the most money ever spent in support of an Arizona initiative, by a wide margin.
Had this obscene dollar amount been the result of a groundswell of grassroots support, it would have been more difficult to begrudge the passage of Prop 208 — even for those of us who were opposed to it. However, this is far from the case. In a classic example of “good for thee but not for me,” almost none of the funding in support of the tax increase came from people who will have to live with its consequences. In fact, less than one percent of all contributions in support of Prop 208 came from individual Arizona donors.
On a happier note, the Illinois Policy Institute’s Adam Schuster reported on the failure of his state’s ludicrously named “Fair Tax” proposal:
[O]n November 3, Illinois voters finally drew a line, making it clear they want state leaders to focus on serious fiscal reforms. The 55 percent who rejected a progressive income tax (the “Fair Tax”) also provided an answer for why they stay: It was Illinois politicians who ruined state finances, not them, and they are not willing to give up the fight to fix those finances. A state constitutional amendment to allow real pension reform is the only way to win that fight.
A happier note, but:
Instead of getting the message, Governor J. B. Pritzker (the most prominent backer of the Fair Tax) has so far promised only more of the same. The day after the election, the governor said he would look to slash spending on services by up to 15 percent across the board. Not only that; a 20 percent tax increase on everyone — the middle class, the poor, and small businesses included — was still on the table.
Paying more to get less is exactly the status quo voters rejected when they turned down the Fair Tax . . .
Ils n’ont rien appris, ni rien oublié (as various people have said in various ways at various times).
Robert Verbruggen examined President Trump’s deregulatory record:
Now that Trump seems to be headed out the door, the time is ripe to take stock of where we really ended up. A new paper released by the Penn Program on Regulation looks past the administration’s big claims about how many regulations it’s killed to the underlying data, asserting that Trump has accomplished much less in this realm than he and his surrogates claim. Meanwhile, the Mercatus Center and the Competitive Enterprise Institute, both libertarian think tanks, have been keeping tabs on the numbers as well, providing a handy way to check the academics’ claims.
My takeaway from the data is this: There is definitely a “Trump effect” on regulation. He killed or withdrew some preexisting regulations, added new ones more slowly than previous presidents had, and left us less regulated than Hillary Clinton would have. Yet it’s more accurate to say that he slammed on the brakes, stopping regulation from moving forward, than it is to say he put the car in reverse and truly deregulated. . . .
That tourist of economic disaster, Steve Hanke, turned up (figuratively speaking) in Turkey:
Since Erdogan took over Turkey’s presidential reins in August 2014, the lira has shed 75 percent of its value against the U.S. dollar. And, since the first of this year, the lira has depreciated by 30 percent against the greenback. Today, inflation in Turkey is soaring at 49.60 percent per year by my measure. My measurement, which employs high-frequency data and the use of Purchasing Power Parity theory, is more than four times Turkey’s official annual inflation rate of 11.89 percent per year.
Steve’s answer:
All Erdogan has to do is follow the instructions for establishing a gold-backed currency board that are contained in my book Gelişmekte Olan Ülkeler İçin Para Kurullari, which was published in Ankara in December 2019.
A currency board is a monetary institution (or a set of laws that govern a central bank) that issues a domestic currency that is freely convertible at an absolutely fixed exchange rate with a foreign anchor currency. Under a currency-board arrangement, there are no capital controls. The domestic currency, which is issued by a currency board, is backed 100 percent with anchor currency reserves, so the local currency is simply a clone of its anchor currency.
For over 170 years, currency boards have had a perfect record. In total, there have been over 70 — none have failed. Even the North Russian currency board, which was designed by John Maynard Keynes in 1918 during the Russian Civil War, never faltered.
To make the Turkish lira as good as gold, Erdogan should announce that Turkey will install a gold-backed currency board. With a Turkish currency board, the lira would be tied to gold at a fixed exchange rate, and the lira would be fully backed by gold reserves. Gold is particularly attractive for countries such as Turkey because it is not issued by a sovereign and is highly revered by Turks. So, like gold, the lira would become an international currency that holds its purchasing power over time. Indeed, the lira would be as good as gold.
If Erdogan wants to save the Turkish lira and economy, he must go for gold.
Capital Matters! Come for the tax fights, stay for the North Russian Currency Board.
Or Mars . . .
Capital Matters’ free market space guru, Alexander William Salter, was able to reassure our Martian friends (?) that Elon Musk was not planning an empire on the red planet:
One of Musk’s ambitions is to create a settlement on Mars. In Musk’s vision, much of the infrastructure for the settlement, including Internet via Starlink, will be supplied by SpaceX itself. That includes governance: the rules dictating how the intrepid Martian explorers will live together. In fact, SpaceX’s legal team is currently working on a Martian constitution…
This science-fiction-esque plan predictably led observers to decry the prospect of corporate domination of space. “Elon Musk plans to get to Mars first, and that means he can quickly establish a fiefdom where he makes his own rules by a first-come, first-serve system,” complains Caroline Delbert at Popular Mechanics. Legal experts weighed in soon after, claiming that this language violates international law. The smart set seems more than happy to cast Musk in the role of Hugo Drax, the tech-savvy Bond villain who sought space power to control humanity.
However, the situation is much more complicated than it seems. There are genuine ambiguities in international space law that create interpretive wiggle room for Musk and other would-be Martian settlers . . .
[I]t’s clear Musk isn’t initiating some plot to dominate the solar system. Instead, he’s taking the very prudent step of recognizing that international space law is largely undeveloped and anticipating the kinds of governance arrangements that can help mankind become an interplanetary species. Obviously, any extraterrestrial settlement will require a much thicker set of rules governing natural and juridical persons than the narrow “shalts” and “shalt nots” in the Outer Space Treaty. Private entities — yes, even for-profit businesses — will necessarily be important constitutional entrepreneurs in space.
Henrique Schneider sent a warning (which Washington would do well to heed) about the way that the EU is weaponizing antitrust — as a protectionist device.
[M]ulti-sided businesses, or platforms, are focused on building and facilitating a network. So digital, or online, platforms usually do not own the means of production. Rather, they connect the owners or producers with those in need of a product or service. Connectivity, and with it, market coverage, is the core of their business model.
The less-benevolent interpretation is that EU institutions and member-state governments understand the economics of these businesses very well. They just choose to disregard it in order to advance a politico-economic aim — protectionism. The EU might be an advocate for free-market exchange among its member countries, but where “third countries” are concerned, it is an entirely different matter, other than to the extent provided for separate treaties.
While the EU tends to make relatively little use of tariffs to protect its markets, it has proved deft at using non-tariff barriers, notably regulation — such as labor or environmental law or licensing requirements — to ringfence its internal market. More recently, the EU Commission (its bureaucracy) has been trying to co-opt antitrust for the same purposes.
And when it comes to the latter, it comes as little surprise that the main targets of the European Commission’s weaponized antitrust are non-EU firms, such as Google and Facebook. To be fair, if unkind, it might be argued in Brussels’s defense that there are no EU-based big-tech corporations or platforms for the commission to go after.
That said, the conspicuous absence of digital innovators in the EU contains its own message, as it owes at least something to existing protectionism by the EU. By creating barriers against outside competitors to challenge European firms, EU regulation effectively curbs domestic innovation, too, and now it wants to raise those barriers still higher.
Antitrust is meant to stimulate competition. Weaponizing it to pursue mercantilist ends would appear to be the antithesis of that aim, and yet that appears to be the direction that the commission is taking. If the result it is to leave the EU to develop “champions” behind a protective wall — the result will be stagnation, not innovation . . .
For Attorney General Barr to act as a co-belligerent alongside the EU in its war on American success seems . . . counterintuitive.
Steve Hanke checked out the Global Index of Economic Mentality (GIEM):
GIEM scores measure the public’s embrace of the idea of economic freedom. A high GIEM score indicates that citizens in a particular country support the idea that their government should not play a major role in directing or regulating economic activity or in redistributing income. Citizens of high-scoring countries typically back an institutional framework that prioritizes private initiative, free competition, and personal responsibility — in short, a system of free enterprise.
Out of the 74 countries covered, New Zealand comes out on top with the highest score on the inaugural Global Index of Economic Mentality, followed by the Czech Republic, Sweden, the United States, and Denmark. This year’s lowest scorer is Bosnia, preceded by Bangladesh, Myanmar, Montenegro, and Azerbaijan.
Steve has explanations for some of the more surprising results, but this, in particular, caught my attention:
If we look at country-by-country demographics, there is not much difference between the economic mentality of those over 40 years old and under 40 years old for most countries. But there are notable exceptions. The countries with the most significant difference in economic mentality between the two age groups are the United States, New Zealand, and Australia. In these countries, the younger generations possess a significantly weaker attachment to free-market ideas than do older generations, with the U.S. as the most extreme case. It makes one wonder what brand of economics is being peddled in high schools and universities in the United States, New Zealand, and Australia.
Quite.
The Senate is getting ready to vote next week to confirm Judy Shelton, Donald Trump’s nominee to the Federal Reserve board.
Ramesh Ponnuru has his doubts:
Judy Shelton . . . has spent most of her career urging that monetary policy be ever tighter but has very recently aligned herself instead with the completely opposite views of President Trump. The Fed is already falling short of what it should be doing to stabilize the economy in the wake of this year’s contraction, and there’s a risk that confirming Shelton would tilt it further in the wrong direction.
Those Republican senators who believe their party needs to do more for workers ought to consider whether her confirmation — a vote could come next week — would serve that goal.
All being well, we will be running two pieces (one in favor, one against) on this nomination early next week.
Ramesh also has his doubts about a Deutsche Bank strategist’s idea that a special tax should be put on working from home.
Well, “has his doubts” is an understatement:
Here’s how it would work:
“[T]he tax will only apply outside the times when the government advises people to work from home (of course, the self-employed and those on low incomes can be excluded). The tax itself will be paid by the employer if it does not provide a worker with a permanent desk. If it does, and the staff member chooses to work from home, the employee will pay the tax out of their salary for each day they work from home. This can be audited by coordinating with company travel and technology systems.”
So, easy-peasy. Not an administrative nightmare at all.
Moving on, what’s the justification for this tax? It’s not at all clear.
The dissection that follows is pitiless, and, I thought, too savage (in a clinical sort of way) for a weekly letter that may be read by the young.
Let’s just say that Ramesh ends it like this:
All in all, this tax seems like a bad idea.
Finally, we produced the Capital Note (our “daily” — well, Monday-Thursday, anyway). Topics covered included what the vaccine news means for markets, how to distribute the vaccine, and how the vaccine could have come quicker, the EU taking on Amazon, the greening of the Fed, Argentina and Lucy’s football, a REIT mess, the business of witchcraft, the Treasury market’s plumbing, the implications of a stalled IPO for China’s tech industry, Ackman’s Big Short 2.0, a bleak economic outlook for Germany, a look at the history of innovation in China, a lockdown update, blunted razors, two German shambles, and digitizing trust.
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