Monday, March 30, 2020

A cautious case for reconsidering the Covid 19 response narrative

In the fight against the Covid 19 pandemic, most countries have gone down the lockdown route, with varying intensities of enforcement. The alternative path of herd immunity or even calibrated spread has fallen by the side, except in some exceptions like Brazil, Sweden, and Netherlands.

Given the overwhelming expert opinion consensus in favour of lockdowns, blanket ones at that, governments in developing countries cannot be faulted at all for having walked the course. Indeed, lockdowns have been the only politically acceptable choice before them.

But it needs to be borne in mind that right now, developing countries are unquestioningly applying a narrative generated from the spread of Covid 19 in developed countries. However, granted that lockdowns may be the only alternative available for Europe and US, is it the wisest option for developing countries like India?

Though I have been sympathetic to an alternative view, it has taken couple of conversations with people who know better to make me confident enough to bite the bullet on this.

From the perspective of developing countries, what do the facts inform? Three in particular deserve attention.

1. The number infected is completely unknown and will remain so for the foreseeable future. It will be all the more so for developing countries. Given resource and state capacity constraints, and practical problems, there are only so many you can test when it comes to these countries. At best, with testing, we can get higher numbers of those identified as positive, but cannot come anywhere close with the actual infected. The denominator in the infection rate calculation will therefore remain heavily suppressed and unknown.

But we do know the numerator, or the deaths, with reasonable certainty. Respiratory infection deaths are very painful and easily observed, and it is impossible for even small outbreaks to go undetected for long in any country.

This means that the graphs of the detected cases that feature in all the several Covid 19 trackers are conveying almost nothing. In fact, they are deeply misleading. Instead, a more relevant decision-support and informative graphic should be one that tracks the progression of deaths from the date of the first death. This generated from here by a friend is what Covid 19 trackers should be reporting.

In my limited searches, I have not been able to see any graphic that assesses the pandemic from this perspective. Actually, even this is deceptive since it does not discount for the higher natural mortality rates in developing compared to developed countries. So death cases are, as of now, perhaps the only reliable metric for assessment of the definitive medical cost of Covid 19. 

2. What do the absolute numbers tell us?  

One can scan the numerous Dashboards around and easily come to the conclusion that the vast majority of cases appear to be concentrated in a band of 35 to 50 degree North latitudes. Something like over 90% of the cases come from this band. Actually, someone could do an analysis of the Pandemic based on the latitudes, and likely find that the vast majority of cases are concentrated within an even smaller latitude band.

Take the most vulnerable Greater China area. The progress of the epidemic, especially in terms of the deaths reported, in countries like Taiwan, Vietnam, Philippines, Indonesia, Thailand, Malaysia etc which routinely receive large pool of Chinese visitors have been strikingly small relative to the  countries like Italy. It is most certain that many of these countries have received more visitors from Wuhan and other affected places in China during the same period, perhaps by orders of magnitude, than either Italy or Spain. Further, the conditions in terms of population density, medical facilities etc in these countries make them far more vulnerable to the spread of a disease than Italy or Spain. Much the same applies to the countries bordering Iran, especially those like Pakistan.  

On the other hand, in case of countries within the latitude band, unlike China and South East Asia, the spread of the disease across neighbouring countries has been consistent. The spread from Italy to Switzerland, which too has similar flow of people, is an illustrative example. In fact, even the small city-states like Luxembourg, San Marino, Andorra etc have not been spared. Even a cursory glance at the data here (say, deaths per million) reveal the point.

Even in Canada, the cases have been in the southern provinces bordering the US. Russia and Scandinavia too have a disproportionately smaller number of cases. 

Take Africa. Thanks to the Belt and Road Initiative, many African countries have large Chinese populations and also receive large numbers of Chinese business visitors. And in terms of physical conditions for the spread of the virus, these countries are among the most hospitable. Besides, all these countries even started taking the problem seriously since only the last few days, leaving enough unfettered runway for the spread of the virus. But we do not have even one example of an eruption comparable (not in absolute terms, but in proportionate terms) to that happening in any country within the band. 

In all the countries outside the band, the overwhelming majority of cases are those who have either themselves returned from the hotspots or are relatives or close contacts of the former. Also, the death cases are predominantly the old and with multiple medical conditions. Preliminary evidence on virulence is encouraging. In fact, this has been very pronounced in the band countries. Less than 4% of the Italian deaths have been below 60 years and the median age has been over 80, and 99.2% of cases had prior illness.

It's just that the data points are so overwhelming in pointing towards a very significant location bias for the virus' infectiousness and virulence. In fact, if you throw data on deaths from all the countries into a graph, it will most likely reveal a clearly diverging group of two trends.

3. If these are the absolute numbers, what about the trends, or the deltas? Unlike couple of weeks back, most countries, including India, are today at a steady state in the pipeline of infections and mortalities. But even with the low baseline flow of cases (there are most certainly far more symptomatic and asymptomatic cases), we are not seeing anything close to a proportionate rate of  consequent fatalities as elsewhere.

Further, even in the many countries outside the band where the first cases were detected as early as late January, the progression has been remarkably muted. Again, in contrast, in many European countries, despite the cases beginning to be detected only in late February, the progression has been exponential. Of course, all this despite the living conditions for spread being more favourable in the former than the latter. 

Furthermore, in countries like India, there has been no perceptible increases in patient load, much less those with respiratory problems, into hospitals. Nor has there been any anecdotal observations about significant rise in such cases. It is very reasonable to argue that, atleast for now, the novel coronavirus has been far less infectious in countries outside the band. 

All these above are stark facts (atleast for now). They stand alongside the models which use data from the countries within the band and form the basis for policy choices by developing countries.

This post will confine to the headline emerging data, and will not go deep into the scientific evidence or economic considerations. For reference, thisthisthisthisthisthis, and this are scientific papers which point to a correlation with temperatures of 7-15 degree centigrade and latitude above 30 degrees North. They also point to coronaviruses as a family always exhibiting seasonality, mainly December-March, and falling after April as temperatures exceed 15 degree centigrade. In the mainstream media, the scientific case has been been covered by the likes of Eran Bendavid and Jay Bhattacharya and Vikram Patel. On the economic costs, please do read this analysis from Pensford Financial (HT: Ananth). This is even more relevant to the developing countries. 

Finally, what's the end-game to a lockdown?

Developed countries will always have end-games. Given the pace at which the transmission has been happening, the virus too will play itself out in the not so distant future. Also, they would have tested enough and identified existing and potential cases, and would also be in a position to isolate them and get on with life, and also do 'whatever it takes' to restore economic normalcy. But this strategy is impossible for developing countries to even think of executing. Not to speak of bearing the exorbitant fiscal costs of relief and recovery.

If we are driven by the risk of uncontrolled community transmission, it is hard to believe that in three weeks or even couple of months countries will be in a position to be able to make a definitive technical choice on this issue. But by then the economic costs and human suffering from a lockdown will start to far outstrip the medical costs. Discontent would have erupted. People will start to feel that it may be better to die of Covid 19 than starvation. That will perhaps finally force the delayed political choice.

It is easy for experts to suggest these measures, which by the way is a staple feed for every bureaucrat worth their salt, but to implement them effectively for several weeks at a national scale is too daunting a challenge in most contexts.

The most likely scenario is that 3-4 weeks into the lockdown, governments in developing countries will find that the trends on infection and death are far smaller than those in the likes of Italy and US. This will be used to phase out the lockdown. But, as the aforementioned analysis shows, this assessment could be made with more or less the same level of confidence/objectivity right now or over the coming week itself. 

This brings to the point of this post. At the outset, the objective is not to dismiss scientific concerns and argue against the lockdown. It is only to highlight that there is atleast as much an objective rationale to argue in favour of alternatives. And it should be a consideration going forward.

The poverty of thought among the so-called experts and opinion makers has been laid bare in this crisis. This is not to blame the scientists and epidemiologists. They are supposed to be scientific and only provide the inputs for decision-makers (like the now famous Dr Anthony Fauci). But even they should take some of the blame for presenting narrow models based on very skewed data as universally applicable models of infection and mortality. But their interpreters (opinion makers and thought leaders) cannot be given any benefit of doubt for mindlessly disseminating information from these models.

Note that this criticism is relevant only for modellers and experts focused on developing countries. The models may hold with a fair degree of accuracy for the countries within the latitude band.

The entire narrative has been constructed on the course that the pandemic has taken in North East Asia, Europe, and US. In the absence of data from elsewhere, the models naturally extrapolate from the trends from these areas. Also this debate in developing countries is being framed narrowly in terms of medical costs, and that too from models with evidence drawn from an arguably different context.

Never mind, even within the band, the example of the Imperial College study illustrates the folly of relying on such models with several limitations to in critical national policy decisions. In fact, today there are so many models that one can find atleast a model to fit any kind of priors you have about the infectiousness of Covid 19. Even mathematicians and physicists have their share of models. Therefore, how is this line of limited models-based reasoning any more objective or scientific than that outlined above making the case for exploring alternative options?

Unfortunately domestic opinion makers and their amplifiers in the media have been co-opted into blindly following the prescriptions of experts and their counterparts from the developed countries. It needs to be borne in mind that for countries in the latitude band, who originate most of the research, the lockdown choice is less under dispute. As with any such public issue nowadays, television talking heads, WhatsApp messages and social media posts have exacerbated the problem. Political leaders have been frightened into submission with dire predictions. The space for weighing the facts and exercising judgement, how decisions of all kinds get made, has almost disappeared. 

If the trends outlined persist by the end of this week, developing countries should consider a recalibration of their response. But, in this environment of fear and universal scaremongering,  amplified by expert opinion, coupled of course with the nightmare scenario of uncontrolled community transmission, governments will be loath to change course on their own. Opinion makers and thought leaders will have to contribute to triggering a debate which engages with these emergent facts and associated questions, thereby creating the conditions for governments to consider making alternative choices. This will help politicians take a call on how much evidence is enough to pivot away from the lockdown approach currently being followed.

To conclude. For now, developing countries have decided on a course, and let's focus on it. But let's also keep track of the trends and reasoning as discussed above. Let opinion makers and thought leaders engage on the issue to bring a greater balance into the mainstream debates on responding to the pandemic so that governments are in a position to take a more objective view and not be dictated by the narratives from developed countries. Given the stakes involved, it is important for governments across developing countries to be ready to revise their priors based on emerging trends from their own contexts.

Update 1 (31.03.2020)

Highlighting the unreliability of the infected numbers
John Ioannidis, a professor of epidemiology at Stanford University, has branded the data we have about the epidemic “utterly unreliable”. “We don’t know if we are failing to capture infections by a factor of three or 300,” he wrote last week. If thousands more people are surviving than we know about, then current mortality rate estimates are too high — perhaps by a large margin.
Similar problems exist with death numbers too,
In the UK, about 150,000 people die every year between January and March. To date, the vast majority of those who have died from Covid-19 in Britain have been aged 70 or older or had serious pre-existing health conditions. What is not clear is how many of those deaths would have occurred anyway if the patients had not contracted Covid-19... Professor Neil Ferguson, director of the MRC Centre for Global Infectious Disease Analysis at Imperial College London, said it was not yet clear how many “excess deaths” caused by coronavirus there would be in the UK. However, he said the proportion of Covid-19 victims who would have died anyway could be “as many as half or two-thirds”.
Sweden and Brazil are two good outlier examples among countries outside the latitude band who have been largely doing business as usual. However, compared to the countries in the band, despite their business as usual approach, their death numbers have been very small. Although when compared to their neighbours Norway, Finland etc and Argentina, Mexico etc respectively, who all have lockdowns or some form of stricter enforcement, they have higher deaths (even if not significantly high). This also means that some form of social distancing (not lockdown) is perhaps appropriate.

Update 2 (15.04.2020)

Ananth points to this study by ETH Zurich. The graphic has something to tell.

These are the updates from ETH. This is the version for April 15, 2020.

Update 3 (15.04.2020)

FT has this long read on epidemiological models,
There was a similar dispute after the 2009 swine flu outbreak when advice based on Imperial’s model was made public by ministers. This described a “reasonable worst-case scenario” in which there could be 65,000 deaths. In practise, there were only 457.
Update 4 (18.04.2020)

It was all along known that the prevalence of infected cases was by orders of magnitude higher and alarmist predictions of infection and death rates were therefore badly off the mark. Highlighting the point comes new evidence from seroprevalence data from Santa Clara County in the US,
We measured the seroprevalence of antibodies to SARS-CoV-2 in Santa Clara County. Methods On 4/3-4/4, 2020, we tested county residents for antibodies to SARS-CoV-2 using a lateral flow immunoassay. Participants were recruited using Facebook ads targeting a representative sample of the county by demographic and geographic characteristics. We report the prevalence of antibodies to SARS-CoV-2 in a sample of 3,330 people, adjusting for zip code, sex, and race/ethnicity. We also adjust for test performance characteristics using 3 different estimates: (i) the test manufacturer's data, (ii) a sample of 37 positive and 30 negative controls tested at Stanford, and (iii) a combination of both. Results The unadjusted prevalence of antibodies to SARS-CoV-2 in Santa Clara County was 1.5% (exact binomial 95CI 1.11-1.97%), and the population-weighted prevalence was 2.81% (95CI 2.24-3.37%). Under the three scenarios for test performance characteristics, the population prevalence of COVID-19 in Santa Clara ranged from 2.49% (95CI 1.80-3.17%) to 4.16% (2.58-5.70%). These prevalence estimates represent a range between 48,000 and 81,000 people infected in Santa Clara County by early April, 50-85-fold more than the number of confirmed cases. The population prevalence of SARS-CoV-2 antibodies in Santa Clara County implies that the infection is much more widespread than indicated by the number of confirmed cases. Population prevalence estimates can now be used to calibrate epidemic and mortality projections.
And this
Based on this seroprevalence data, the authors estimate that in Santa Clara County the true infection fatality rate is somewhere in the range of 0.12% to 0.2%—far closer to seasonal influenza than to the original, case-based estimates.
Update 5 (23.04.2020)

Very good interview of Johan Giesecke, a globally renowned Swedish epidemiologist who is engaged with the Swedish strategy. The summary
  • UK policy on lockdown and other European countries are not evidence-based
  • The correct policy is to protect the old and the frail only
  • This will eventually lead to herd immunity as a “by-product”
  • The initial UK response, before the “180 degree U-turn”, was better
  • The Imperial College paper was “not very good” and he has never seen an unpublished paper have so much policy impact
  • The paper was very much too pessimistic
  • Any such models are a dubious basis for public policy anyway
  • The flattening of the curve is due to the most vulnerable dying first as much as the lockdown
  • The results will eventually be similar for all countries
  • Covid-19 is a “mild disease” and similar to the flu, and it was the novelty of the disease that scared people.
  • The actual fatality rate of Covid-19 is the region of 0.1%
  • At least 50% of the population of both the UK and Sweden will be shown to have already had the disease when mass antibody testing becomes available
Update 6 (06.05.2020)

Neil Ferguson is a remarkable man. He has successfully scare-mongered four times in the last twenty years - mad-cow disease in 2001 (50-150000 human deaths due to BSE predicted, millions of cattle culled, actual human deaths less than 200), bird-flu in 2005 (upto 200 million deaths, a few hundred actually died), swine-flu in 2009 (65,000 deaths in UK, actual was 457), and now Covid 19 (250,000 deaths in UK predicted). His respectability and credibility survived all of them. Amazing!

The 2017-18 flu-season in the US killed over 80,000 people.

Sample this very good cautionary note on the use of models,
When governments design policy based on epidemiological forecasts, their choice of the model to use could be the difference between a mild mitigation strategy and a large proactive intervention, such as the mass slaughter of livestock in the case of Mad Cow Disease or aggressive and wide-scale societal lockdowns in the case of COVID-19. That choice, often made amid severe data limitations, is often presented to the public as an unfortunate but necessary action to forestall an apocalyptic scenario from playing out. But we must also consider the unseen harms incurred when politicians base decisions on a modeled scenario that is not only unlikely but also wildly alarmist and likely exaggerated by the dual temptations of media attention and gaining the ear of politicians. Given the high uncertainties revealed by statistical scrutiny of epidemiological models including among other medical experts, the presumption should go the other way instead. What is warranted is not bold political action in response to speculative models generated with little transparency and dubious suppositions, but rather extreme caution when relying on the very same models to determine policy.
Ananth has a great summary here.

Update 7 (08.05.2020)

Interview of Hendrik Streeck of University Bonn, a virologist who conducted a study of a representative sample population within Germany, 
The headline result is that 15% of that population was infected, which implies an Infection Fatality Rate of 0.36%. This would put him somewhat in the middle of the previous experts we have spoken to. Professor Streeck was keen to point out, however, that he still believes this is a conservative estimate, and thinks it may be closer to 0.24-0.26% and may come down further still as we know more. He published the higher number to err on the side of caution: “it is more important to have the most conservative estimate and see the virus as more dangerous than it is,” he said.

Saturday, March 28, 2020

Covid 19 pandemic weekend link fest

1. Glen Weyl and Jaron Lanier highlights the success of Taiwan, a mix of technology and democracy,
Taiwan’s success has rested on a fusion of technology, activism, and civic participation... This culture of civic technology has proved to be the country’s strongest immune response to the new coronavirus... Bottom-up information sharing, public-private partnerships, “hacktivism” (activism through the building of quick-and-dirty but effective proofs of concept for online public services), and participatory collective action have been central to the country’s success in coordinating a consensual and transparent set of responses to the coronavirus. A recent report from the Stanford University School of Medicine documents 124 distinct interventions that Taiwan implemented with remarkable speed. Many of these interventions bubbled into the public sector through community initiatives, hackathons, and digital deliberation on the vTaiwan digital democracy platform, on which almost half the country’s population participates. (The platform enables large-scale hacktivism, civic deliberation, and scaling up of initiatives in an orderly and largely consensual manner.) A decentralized community of participants used tools such as Slack and HackMD to refine successful projects.
Taiwan's is an impressive achievement. One can never say how much these technology innovations contributed, if at all, to Taiwan's success till now. Even if it did, how much of it was built on the foundations of culture and latent conformism of its democracy.

As a comparator, Singapore's success revolved around good old (and super efficient) physical contact tracing involving detective work by police, officials, and even armed forces. 

2. Good FT article on how Singapore managed to control coronavirus,
The city’s success in dealing with the outbreak is attributed to the government’s speed in imposing border controls soon after the disease first erupted in China, meticulous tracing of known carriers, aggressive testing, a clear public communication strategy and a bit of luck... As soon as information about the disease emerged from Wuhan, the city at the centre of China’s outbreak, Singapore began preparing by ramping up laboratory capacity for mass testing and developing its own test kits. This was seen as instrumental to containing infections and not overwhelming hospitals, a problem faced by countries such as Italy... The country’s business community also moved quickly. Soon after Singapore reported its first cases, banks divided their teams between offices, home working and emergency trading floors, many of which were in an outlying industrial area near the city’s Changi airport... It also learnt from its experience of Sars in 2003, which forced it to strengthen its healthcare system.
But several features, apart from its small size, also make it difficult to replicate elsewhere,
Surveillance cameras, police officers and contact-tracing teams have helped the government find 7,957 close contacts of confirmed cases, who have all been quarantined. The government on Friday launched TraceTogether, an app that uses bluetooth to record distance between users and the duration of their encounters. People consent to give the information, which is encrypted and deleted after 21 days, to the health ministry. The department can contact users in case of “probable contact” with an infected individual. “There’s a higher degree of acceptance of being monitored by the state,” said Chong Ja Ian, associate professor of political science at the NUS. “That makes some of the more invasive methods for contact tracing easier.”
3. Underlining this, this article in Wired talks about the privacy and related challenges with using mobile phones for digital tracking and detection of corona affected.

4. NYT has more modelling of different outbreak scenarios based on a study by researchers at Columbia University.
5. Talking of models here is a list. This is a model from researchers at Oxford. Graphics on the value of early quarantine, infection and mortality rates in US modelled for corona compared to other diseases, modelling in WaPo of the spread of corona under various conditions of quarantine or social distancing, another model in NYT of the spread of the virus under different conditions of response. This models Covid 19 based on the classical infectious disease model.

This is a repository of all models and research related to Covid 19. Btw, there are so many models now, with such varying findings, that you can pick your choice to justify your priors on the strategy to be followed. 

I don't know how many of these modellers have even thought of the unknown unknowns - the role of temperature and humidity, genetic or racial characteristics, pre-exisiting immunities, cultural practices and so on. The one thing to remember is that nobody has a clue about the unknown unknowns in this predictions race. 

On models itself, Mark Buchanan has a cautionary note,
Models of this kind depend on parameters for such things as the incubation period of the virus and when people either with or without symptoms can pass it on to others. The values of these parameters are uncertain. The early U.K. policy was based on the belief that one key parameter — the fraction of hospitalized people needing intensive care — was lower than it turned out to be. Indeed, the actual number seems to be roughly twice as large as initially expected, rendering the earlier modeling results irrelevant... It's particularly easy for policy makers to misuse complicated models. “Modeling — especially complex modeling — can promote something of a fairy-tale state of mind,” says Erica Thompson of the London School of Economics and the London Mathematical Laboratory. “People come to believe that optimal outcomes in a simulation invariably reflect desirable pathways in the real world. But things get lost in the move back to reality.” As a result, she says, much simpler models can be more stable and trustworthy for use in policy making, because it is clearer that they are “only models” and don’t invite misplaced confidence in the details. There's little question that most of the other nations that took more aggressive action against coronavirus also had access to complicated computer models to simulate epidemics. But they seem to have fashioned their policies on the basis of a simpler insight: that epidemics grow exponentially, at least in the early stages following an outbreak, and get harder to control as time goes on.
The example of the Imperial College's model is illuminating. This initial model contributed to the UK's herd immunity approach. Its revision contributed to the reversal of the government's policy. But it now emerges that this revision in turn many have erred excessively on the side of alarm.

6. On an optimistic note, Michael Levitt, the 2013 Nobel laureate and Stanford biophysicist, argues that we may be over-reacting and the toll from the novel coronavirus may not be as large. He bases his assumption on the trends from China where the peaking of the growth rate of the virus happened quickly. He therefore argues that the same could be the case with US and elsewhere.

7. In India, the Kerala government has received much praise for its response with its transparency, constant communication, and painstaking field work. Sample this,
... state's decentralised community-level task force, devised to lend a helping hand for those who are quarantined. Kerala has structured a three-member team in each village, comprising a village's elected representative, a public health worker and a police officer, for monitoring and assisting any need for those in home quarantine.
This is a good description of its economic rescue package. This article highlights how the state has mobilised Kudumbashree women's self help groups to run community kitchens to prepare food for the poor.

This interview of the Kerala Chief Minister is as statesmanly an interview as any. It also clearly indicates the reasons for Kerala's success - being transparent with details, and doing the simple things right. This is another good description of the Kerala response. This describes the state's community kitchens and home delivery which have now been established across all villages and towns.

This is the Kerala government's supply chain and inventory management system which lists over 19000 GST registered traders. This is a very good narrative of the Covid management in Kerala - plain simple and detailed monitoring. This is a summary of the Kerala government's response.

8. This is a good Covid 19 country status monitoring tool. This is the FT's updated corona tracker report. Fascinating graphical illustration here of how the virus spread in South Korea.

9. Politico lists out 34 different ways in which the novel coronavirus outbreak will change the world permanently.

10 Yuval Noah Harari points to two choices faced by the world in the aftermath of the Pandemic,
The first is between totalitarian surveillance and citizen empowerment. The second is between nationalist isolation and global solidarity.
11. Sweden going its own way with herd immunity type approach.

12. China scrambling to recover lost pride with its own corona support diplomacy, "health silk road".

13. Even as countries go the lockdown way, as they perhaps should, Vikram Patel strikes an important cautionary note.
But the one lesson every infectious disease epidemic has taught us is that context matters. Simply put, bugs do not spread the same way everywhere. I vividly recall the hyped pandemic of HIV/AIDS which was predicted to overwhelm India in the late 1990s.
To be fair to governments, especially in countries like India, the possibility of uncontrollable community transmission from not locking down may have been too much to even imagine. And the aggressive public and social media may have forced their hands.

14. Meanwhile the search for Covid 19 drugs goes into top speed.
Scientists are investigating three main types of drugs. The first are antivirals to stop the virus from replicating. Treatment guidelines compiled by the Chinese government during the outbreak include HIV drug combination Kaletra, which US biotech AbbVie recently waived its patents on so it can be made available as a generic; antimalarials such as chloroquine, which generic drugmakers are gearing up to manufacture at scale; and favipiravir, an anti-flu drug from Japan’s Fujifilm... Analysts are eagerly awaiting data from early trials into remdesivir, an antiviral drug that the California-based biotech group developed for Ebola... The second category is anti-inflammatories that treat the lungs after the immune system is overwhelmed. Regeneron and Sanofi have partnered on Kevzara, while Roche has started a trial on Actemra, approved for use on rheumatoid arthritis in 100 countries. The third group are antibody-based treatments, derived either from recovered Covid-19 patients or developed in labs, to be given to the seriously ill or as a temporary prophylactic for healthcare workers. Eli Lilly has paired up with Canadian start-up AbCellera to work on antibodies developed from one of the first US Covid-19 patients, while Japan’s Takeda is developing a new drug derived from the blood plasma of others who have survived the virus.

15. Angela Merkel returns to fight Covid 19.

16. Stanford Medical professors Eran Bendavid and Jay Bhattacharya point to the selection bias introduced by testing and argue that "the true fatality rate is the portion of those infected who die, not the deaths from identified positive cases". Using some available data from China, Italy and Iceland, they argue that the true Covid 19 fatality rate may be lower than 0.1 per cent, that for common flu.

On the same lines, Vikram Patel writes,
the one lesson every infectious disease epidemic has taught us is that context matters. Simply put, bugs do not spread the same way everywhere. I vividly recall the hyped pandemic of HIV/AIDS which was predicted to overwhelm India in the late 1990s.
This interview of Vikram Patel is worth watching.

17. While governments cannot be faulted at all for having resorted to such blanket lockdowns, it is important for the experts and opinion makers to be more careful with their diagnosis and prescriptions.

Right now, we are seeing the application of a narrative generated from the spread of the disease in developed countries to developing countries too. Only time will tell whether this was the right approach or not, not in the idea itself but the degree to which it has been adopted. But for now, given the dominant narrative, governments have no choice. But it is also important for governments in India and elsewhere in developing countries to be ready to revise their priors based on emerging trends from their own contexts.

There is a non-trivial risk that the economic costs from lockdowns can turn out to be higher than the medical costs from business as usual.

18. Finally, this Covid 19 Dashboard of Microsoft is very informative.

Thursday, March 26, 2020

Universities and Covid 19 relief - an illustration of elitism

Marginal Revolution is among the best places on the Net to access links on the latest research and debates in economics. It is also among the best places for a particular world-view and ideology. In sum, it's a great place for information and knowledge. But as a place for practical wisdom of relevance to the real world, it is not. 

Tyler Cowen cautions against the likes of Harvard using its endowment in Covid relief by paying the wages for its hourly workers and providing housing security to its (less well-off) students. 
I support a radical vision of the university as an institution devoted to learning and innovation above all. If a school is successful and fortunate enough to have a significant endowment, I am happy to see that school invest it at (one hopes) high rates of return.
Note what is missing - culture, attitudes, civic-spiritedness, and so on. In sum, what it takes to be a sensitive and productive citizen. I thought universities were supposed to be an immersion in education. And not some instrumental delivery of "learning and innovation".

In fact, on reading the oped, one comes out with a sweepingly reductionist message - universities should focus on imparting knowledge and stay away from charity! 

As we go down the article, even pretensions drop off,
The real contributions of Harvard, MIT and Stanford to the world are not the food-service workers they hire. They are the ideas and innovations produced by its researchers, plus the talented students they educate. Less successful universities also contribute those same broader benefits, even if at a lower scale of effectiveness.
The oped is a digression from the simple issue (that the students etc are agitating for) of engaging in a very specific and limited manner in favour of those unfortunate few affected by a once in a century (or more) event, interventions which would have been in the best traditions of conveying the ethos that these institutions claim to impart to its students, and one which would, even in the most extremely generous case, have been a chump change for the endowments of these Ivy universities. It is a good example of the unwittingly revealed preferences and attitudes of the elites. 

And this is the clincher, one of the best illustrations of the social challenge that US and other developed countries, as well as the rich elsewhere, have today. 
I am saying that their moral obligation to extend charity to those workers is not very strong. Had such charity been prioritized in the past, the U.S. never would have developed and maintained top universities. Part of America’s greatness as a nation, and as an innovator, is its unwillingness to ask anew every day whether its elite accumulations of wealth should be torn down and rededicated to everyday purposes of a supposedly greater benevolence.
This is pure polemic. I don't think it is anybody's cause for an every day introspection about tearing down elite accumulation of wealth. But such reductionist thinking and its dissemination to unsuspecting and impressible students in universities is preventing them from at least enquiring into the forces that are driving today's elite accumulation of wealth, their own role in those forces, its consequences, and how it is coming in the way of equality in access to opportunities itself. If in the process of such introspection, they collectively and on their own volition come to the view that elite accumulation of wealth should be torn down, then so be it. Unfortunately, the problem is that such reductionist teaching is gatekeeping students away from meaningfully engaging with the world at large, except in a narrow technical way in their limited worlds.

Chris Arnade responds to Tyler in a tweet, 
Leave it to an Economist to not see influence of organizations is not just raw sum of their decisions but the culture those decisions reflect Harvard's power isn't just the Profs & students but the culture it steeps them in & advocates for. Such as accepting elitism & inequality.
In the context of economists, see this old tweet by Kaushik Basu,
In an economic crisis to be told that political leaders, instead of professionals with expertise, are taking charge is about as comforting as during a turbulent flight seeing the minister of tourism step out of the cockpit to assure passengers that he is taking over the flying.
Nassim Nicholas Taleb, who himself is not immune from some of the same disease, has a very good counter tweet here.

Another example of the arrogance of an unaccountable economist elite is this. I had written earlier about how India's pre-corona economic problems were made in orthodoxy and a legacy of experts.

When we have teachers like these...

Wednesday, March 25, 2020

Burn the old playbooks - Corona response proposal

Ananth and me have an article in Swarajya about an economic response plan to the Covid 19 pandemic.

The idea is to get ahead of the curve with measures, many of which we are most likely to anyways end up doing as the lockdown prolongs, but with diminished effect.

Consider the context.

Governments face unprecedented economic challenges on multiple fronts. Businesses cannot operate and workers have to isolate themselves at home. But businesses have to be kept solvent, and workers within the labour force. Further, purchasing power for basic necessities has to be supported, and their supply ensured. Furthermore, debtors have to be kept afloat without compromising on the interests of creditors.

The pandemic is a force majeure shock, triggered by non-business or non-economic decisions. Fundamentally, the costs of such shocks cannot be borne by private actors. Only governments can bear them. This is the critical difference between this, and earlier crises induced by economic shocks.

Liquidity support measures, either direct (credit window) or indirect (forbearance), cannot make up for the loss in output and wages due to the pandemic. Someone has to pick up that tab. They will have to be compensated, at least to a reasonable degree, failing which businesses have to close and workers starve. This is the fundamental reality. 

The Big Bazooka cannot be confined to financial market measures. Main Street needs to be bailed out, on both the supply and demand sides simultaneously.

Consider how the Pandemic has upended the normal rules of the game.

In the current circumstances, the lines between business solvency and liquidity have been blurred beyond distinction. After all, if a business shuts down for a couple of weeks, its liquidity dries up and can quickly turn insolvent. 

At a time when economic activities have come to a standstill, merely giving money to people is insufficient. For a start, business activity is facing a lockdown. Consumption decisions have been postponed indefinitely. New projects and investments are frozen not only for now, but for the foreseeable future too. As businesses are closed and people are confined to their houses, and economic activities come to a standstill, the velocity of circulation of money will crumble. 

Measures like tax breaks are unlikely to be effective, besides being a waste of scarce public resources. The beneficiaries of tax breaks are unlikely to be those badly affected, have lower elasticity of consumption, and are in any case unlikely to spend their disposable incomes in these uncertain times. 

And there are likely permanent damages. As businesses close down in large scale, they take down with it a vast associated economic eco-system. Workers exit the labour market and re-entry cannot always be assured. Entrenched economic relationships would have been deeply unsettled, even destroyed. Recovery from this can be very long drawn and painful since re-adjustments can be sticky. 

Even the assessments of the human cognitive biases that underpin financial market transactions have to undergo change. Moral hazard concerns may have to be placed under suspended animation for some time. In case of measures aimed at directly supporting the Main Street, this is not the time to fuss excessively about incentive distortions.

Update 1 (26.03.2020)

More detailed proposals from Vijay Mahajan here, Vivek Kaul here.

Tuesday, March 24, 2020

Corona and world economy - Linkfest I

1. Adam Tooze argues that the Fed should become the global leader of last resort of dollar financing.
For the second time this century, the world is facing an acute shortage of dollar funding. This is a big problem: An enormous amount of global financial activity depends on the use of the dollar. If we are to contain the fallout from the crisis, America’s central bank must act as a lender of last resort not just to America’s financial system but also to the entire world’s. The good news is that the Federal Reserve is taking its responsibility seriously: It is funneling dollars to central banks around the world. But is the Fed fighting the last war?... In 2008 the dollar shortage was confined largely to the banks of Europe and America. That is the Fed’s historic comfort zone, the cradle within which it was born a century ago. The coronavirus crisis explodes that 20th-century framework and poses the question: How does America’s central bank supply dollar liquidity to a polycentric world economy?... 
In 2007, a new type of dollar shortage emerged — not a shortage of official reserves, but a shortage on bank balance sheets. Europe’s banks had taken on huge amounts of American subprime debt...  The Fed responded first by lending money directly to the European banks in New York and then by using the swap lines to funnel dollars to them indirectly by way of their local central banks. For a brief moment in early December 2008, the swap lines to foreign central banks were the largest single item on the Fed’s balance sheet. Altogether 14 banks were attached to the Fed, including major emerging markets like South Korea, Brazil and Mexico, whose banks, like the Europeans’, had joined the dollar-based global financial system. In 2013, the agreement to swap was made permanent. 
How is this time different?
As panic has swept through financial markets in the last two weeks, investors have begun seeking safety in cash — and above all in dollars... on Thursday the Fed widened the swap network to include all 14 of the central banks it supported in 2008... But as the pandemic’s impact on the world economy deepens, will the swap line system of 2008, with its echoes of the Cold War era, still do the job? Three things have changed since 2008. First, dollars are being used on a new scale by new financial actors. Second, the balance of the world economy has further shifted from the European Union-United States-Japan axis toward emerging markets. And third, the politics of the world economy have become far more antagonistic...
In 2008, European megabanks were the problem. Today the pressure is on Japanese and Taiwanese life insurers, pension funds and postal banks, which have made huge purchases of American corporate bonds that are now collapsing in value because of the shutdown of global economic activity. These financial institutions are not umbilically connected to the swap lines in the way that banks in London or Paris were. As the Fed struggles to calm the markets, the last thing it needs is for these institutions to unload their portfolios of American assets... the foreign debts of China’s businesses come to $1.3 trillion. As the global scramble for dollars begins and the American currency rises in value, those debts become less sustainable. That risks unleashing a chain reaction... Now the U.S. Treasury market is shaking, and the relationship between the two counties — in an era of viral conspiracy theories and trade wars — has sharply deteriorated... The last thing the world economy needs is for Beijing to liquidate any of its portfolio. It would be a huge, perhaps politically impossible step to extend a swap line from the Fed to the People’s Bank of China. In its absence, as Brad Setser of the Council on Foreign Relations has suggested, the Fed may need to consider allowing China to borrow against the collateral of its huge Treasury holdings... The outflow from the emerging markets in recent weeks has been more rapid than ever before in history. To stop further losses, it may be necessary to adjust the swap line system. That will require imagination — and if not political cover from the White House and Congress, then at least forbearance.
2. Greg Mankiw outlines what the US should be doing, 
Fiscal policymakers should focus not on aggregate demand but on social insurance. Financial planners tell people to have six months of living expenses in an emergency fund. Sadly, many people do not. Considering the difficulty of identifying the truly needy and the problems inherent in trying to do so, sending every American a $1000 check asap would be a good start. A payroll tax cut makes little sense in this circumstance, because it does nothing for those who can't work. There are times to worry about the growing government debt. This is not one of them. Externalities abound. Helping people over their current economic difficulties may keep more people at home, reducing the spread of the virus. In other words, there are efficiency as well as equity arguments for social insurance. Monetary policy should focus on maintaining liquidity. The Fed's role in setting interest rates is less important than its role as the lender of last resort. If the Fed thinks that its hands are excessively tied in this regard by Dodd-Frank rules, Congress should untie them quickly.
3. Tyler Cowen quotes Scott Ellison who proposes the most radical measure, stopping time itself,
I propose temporarily stopping time. This means that today’s date, Tuesday, March 17th, 2020, will remain the current date until further notice. This also means that everything that happens in time (e.g. mortgage due dates, payrolls, travel bookings, stock market trading, contractor gigs, concerts, sporting events) will be paused. It also means that all of these events remain on the books, and will continue as planned once time is resumed… We’re spending trillions of dollars to keep time going (e.g. sending every American $1,000 so they can pay their rent, sending airlines $50 billion so they can pay their jet notes, providing billions to banks to cover distressed assets), but none of this really relieves the need to keep going out and working and thus further spreading the virus. What’s worse is that, in spending all this money to keep time going, there’s no guarantee that the economy will be there to take back up the baton once government payments stop.
4. John Cochrane talks about stopping time and debt forbearance,
The central problem is really a coordination problem. A owes B money. A is shut down so can't pay. B understands and would be happy to wait until the crisis is over. But B owes C money, so can't wait. And on down the line it goes. It's like daylight savings time. We could individually decide to move things an hour earlier in spring, but mostly A wants to show up at work when B will be there. There are lots of coordination problems like this, and a useful function of government is to solve them. But the economy is not completely shut down. Food and medicine need to keep going, and need to be paid! If we literally stop all payments, shutting down the ATM machines, credit card machines, and salaries of the 80% or so who will keep their jobs, we create an insane mess. So some clocks shut down and some others don't and now you have a mess on your hands... I think really this is a metaphor for widespread forebearance, and we can see a hint of this in what the government is already doing -- no evictions, urging banks to forbear loans, for example. Widespread debt forbearance in crisis is an age-old tradition.
5. Emmanuel Saez and Gabriel Zucman write about governments becoming the buyer of last resort to backstop demand
In the context of this pandemic, we need a new form of social insurance, one that directly targets and works through businesses. The most direct way to provide this insurance is to have the government act as a buyer of last resort. If the government fully replaces the demand that evaporates, each business can keep paying its workers and maintain its capital stock, as if it was operating under business as usual. To see how the notion of a buyer of last resort works, take the case of the airline industry. If demand drops by 80%, the government would compensate this missing demand, in effect buying 80% of plane tickets and maintaining sales constant. This would allow airlines to keep paying their workers and maintain their planes and equipment without risking bankruptcy...

A buyer-of-last resort policy cannot be implemented perfectly, but governments can come close. For the self-employed and workers such as Uber drivers, the government would replace lost earnings; this would be similar to unemployment insurance. For large businesses, government compensation would be conditional on businesses not laying off any workers. It is better for businesses to keep their workers even if they are temporarily idle so that business can resume quickly—without having the rehire new workers—once demand picks up. For government sectors such as education, when schools close, teachers should continue to be paid, and so on.
6. Sometime down the line, as among the first steps in restoration of normalcy, mass testing will have to be an important component. This is especially so given the likelihood of recurrence. Alex Tabarrok argues in favour of mass testing to fix the labour market.

7. John Authers points (HT: Ananth) to parma-bear Albert Edwards to flag whether the corona is the trigger for the great reversal in both equity and bond markets. Edwards' bet has been that the Ice Age will end with the reversal will happen when US yields will join others in the negative territory, stock markets hit lows, and the economy is desperate enough for governments to change track and create inflation by printing money.

This quote of Edwards is spot on
leverage was built up on the premise that nothing bad happens. And something very bad has now happened. Hence many of us believe that central bank actions over the last decade have made the current already bad situation much worse than it otherwise would have been.
And this, his prophecy, pre-corona,
I expected the anger of the populace and the populism it would engender would bring a transition in economic policy away from the increasingly discredited Quantitative Easing (QE), which I believe actually did very little good (in reviving the economy), but much bad (in that it exacerbated wealth and intergenerational inequality - helping to drive the rise in populism). Instead of more QE, I wrote that some variant of Helicopter Money such as the increasingly fashionable Modern Monetary Theory (MMT) would be adopted in some shape or form. It would in effect be the monetisation (of rapidly increasing public sector deficits) in all but name. It would not be announced with great fanfare. It would just be done.
Authers points to what could be the denouement,
With Republicans in Congress anxious to send out checks to all Americans, and Angela Merkel ready to expand the German deficit, it seems as though the case for helicopter money has suddenly become almost the undisputed orthodoxy. And that lines up with the Edwards belief that the regime would be “such a major event that it can only be implemented during a crisis.” The crisis is here, and the synchronized use of fiscal and monetary measures has, in Edwards’ words, begun to cross, if it hasn’t already, the Rubicon. “It was going to happen anyway, but it has come sooner than we expected. What now for The Ice Age?”
8. Rana Faroohar points to the lessons from the US bailout during the GFC which benefited Wall Street, and the largest institutions. Given the nature of the shock, she advocates focusing on poor people and small businesses. This assumes significance since the bailout currently under discussion in the US focuses on large companies.

Anyways, these suggestions are just as relevant for any country now,
Bailouts will again be needed now, given a market downturn that mirrors 1929 and an economic contraction likely to be sharper than during the previous financial crisis. But if we want capitalism and liberal democracy to survive Covid-19, we cannot afford to repeat the mistaken “socialise the losses, privatise the gains” approach used a decade ago. We have to start by protecting individual citizens and consumers... I am for the immediate cash payouts to individuals that have been suggested by many economists. In an ideal world, we would do that by means testing. But there is no time. We can recapture unnecessary payments the other side of the crisis, via the tax code... I would also love to see a federally underwritten three-month moratorium on all rent, mortgage payments and student debt payments, as well as government reimbursement for all healthcare costs associated with the virus....

When it comes to corporate bailouts, small and midsized businesses should come first. Over 96 per cent of them say that they are already feeling the pain of Covid-19, and over half claim they won’t be able to stay in business for more than three months in the current situation, according to a Goldman Sachs survey. They should be given grants, not loans. Many run tight margins as it is, and would not be able to survive any additional debt burden. These small and midsized businesses, which make up 83 per cent of US payrolls, should come first.
Underlining the extraordinary nature of the times, she writes,
Washington should also consider taking preferred equity stakes in such companies. Unlike the bank bailouts of 12 years ago, let’s socialise not just the losses but also the gains.
9. Guy Chazan writes why Kurzarbeit, or shorter work time, may be among Germany's "most successful exports",
Under the scheme, companies hit by a downturn can send their workers home, or radically reduce their hours, and the state will replace a large part of their lost income. A way for firms to hang on to skilled workers during a downturn, it “is one of the reasons why Germany recovered so quickly after the 2008-9 crisis,” said Anke Hassel, professor of public policy at the Hertie School in Berlin. With their tradition of strong welfare states, Denmark, Sweden and Norway have all followed Germany by introducing large subsidies for workers who might otherwise be laid off... Temporarily laid-off workers receive so-called “Kurzarbeitergeld” or “short-work money” from the Federal Labour Office (FLO), the agency which is also responsible for issuing unemployment benefit. The scheme promises them 60 per cent of their pre-crisis pay. Behind the scheme’s success was its well thought-out design: it was ramped up fast in the initial phase of the 2008 crisis “but phased out quickly in the subsequent recovery”, Mr Hijzen said. By contrast, other countries with similar programmes, such as Belgium and Italy, “use them more intensively in good times when they are less needed”. Meanwhile, in the Netherlands, “procedures are too complicated . . . to allow for a rapid take-up during economic crises”.
How are countries adapting it for the present crisis?
Kurzarbeit was one of the first tools the government grasped when the coronavirus crisis began to bite. Earlier this month the Bundestag rushed through legislation to expand the scheme and ease access to Kurzarbeitergeld: from now on, companies can register when just ten per cent of their workforce is impacted by an economic crisis, down from a third previously. The government now expects some 2.35m people to be drawing Kurzarbeitergeld, at a cost to the FLO of €10.05bn. The figure is much higher than the 1.4m who were receiving short-work money at the height of the global financial crisis. But the FLO, which is financed through contributions from workers and employers, has built up reserves of €26bn, much more than it had at the end of the 2000s. Other countries with short-time work schemes have also tweaked their rules since the crisis began. Spain recently modified its ERTE system to ensure that workers temporarily suspended from their jobs can draw around 70 per cent of their salaries as social security. France has also greatly expanded its existing chomage partiel (partial employment) system. Bruno Le Maire, the finance minister, said his €45bn of emergency measures included €8.5bn for two months of such state payments to laid-off workers... The UK is now moving to introduce a similar programme: on Friday, Rishi Sunak, the chancellor, unveiled a coronavirus job-retention scheme under which employers can apply for a grant to cover most of the wages of people who have been furloughed and kept on the payroll, rather than laid off. Such grants, the UK Treasury said, will cover 80 per cent of the salary of such retained workers, up to a total of £2,500 a month.
10. This is a good interview of B Ramkumar of TISS where he talks about the Kerala government's front-loaded spending based economic package.
Kerala’s economic package to address the coronavirus-induced slowdown is primarily counter-cyclical. Its first assumption is that the economic slowdown will be extremely harsh over the next three to six months. This is the period when government action has to actively intervene. So, what Kerala will do is to spend substantially higher – double or triple, depending on the sectors – during the next three months than what it would have spent during the same period in a normal year... other State governments should follow what Kerala has done. State governments can give tax relief to sectors that are acutely affected and spend more in the economy to protect jobs and livelihoods.
11.  Interesting Goldman Sachs analysis in FT of stock-market crashes in response to different types of shocks,
Goldman Sachs’s chief global equity strategist Peter Oppenheimer has tallied 27 bear markets since the 1800s. He found that the average decline is 38 per cent, and that it has on average taken 60 months for US equities to return to their previous peak... “Structural” bear markets, which are triggered by deep-seated economic imbalances and financial bubbles unwinding, have on average meant a 57 per cent slump, and taken 111 months to return to their previous peak. The more garden-variety “cyclical” bear markets, where rising interest rates damp economic activity and depress corporate profits, have typically led to a 31 per cent peak-to-trough drop for the US stock market, and it has on average taken 50 months to recover. Meanwhile, “event-driven” bear markets are those triggered by some kind of one-off shock, such as a war, spiking oil prices, an emerging-markets crisis or a brief financial calamity like the Black Monday crash. This seems to fit the coronavirus scenario best, Mr Oppenheimer argues. Such bear markets on average lead to a more modest 29 per cent decline, and last just 15 months.

12. Among government rescue packages, the German and UK proposals have gone the farthest. Here is the UK package,
The government has placed the economy on a wartime footing to support businesses and people affected by coronavirus, announcing state-backed loans of at least £330bn as the outbreak escalates... The loans, made on “attractive” but unspecified terms, would allow firms to carry out fundamental day-to-day tasks such as paying wages and rent bills and buying stock... the chancellor said he would also provide tax breaks and other measures worth £20bn to protect companies and households suffering amid the economic collapse triggered by the virus. Cash grants worth £25,000 would be made to retail, leisure and hospitality firms to help them survive the period of turbulence. The smallest businesses in the country across all sectors of the economy will be able to seek grants worth £10,000. Business rates – taxes paid on commercial properties – will be scrapped this year for all companies in the retail, leisure and hospitality sectors.
This is in addition to a British version of Kurzarbeit announced in the Budget earlier, whereby government grants will cover 80% of the salary of retained workers, upto a total of £2500 a month. 

The German package goes further, offering to support private companies with government equity infusions,
Mr Olaf Scholz will present plans for a €156bn supplementary budget for 2020 and a new €100bn economic stabilisation fund — to be known in German as the WSF — that can take direct equity stakes in stricken companies. It will also be equipped with €400bn in state guarantees to underwrite the debts of companies affected by the turmoil, bringing its total firepower to €500bn. Mr Scholz also envisages a €100bn government loan to KfW, the state development bank, which has been empowered to provide unlimited cash to businesses struggling with the fallout from the pandemic. Taken together, the supplementary budget, plus the €100bn for the WSF and the €100bn loan to the KfW amount to €356bn — or about 10 per cent of Germany’s GDP. The WSF will be in effect be a “reactivation” of Soffin, a government-backed vehicle set up in 2009 to bail out troubled banks. Soffin currently manages the government’s 15.6 per cent stake in Commerzbank, which it rescued during the global financial crisis. The WSF will not only underwrite companies’ debts but also recapitalise those experiencing financial difficulties due to the coronavirus turmoil, effectively paving the way for a wave of partial state takeovers.
Finally, underlining the extraordinary nature of the times, the US Federal Reserve has assumed the role of lender of last resort for all categories of borrowers, going even beyond what was offered in the 2008 crisis. FT writes,
The Federal Reserve has committed to unlimited purchases of US Treasuries and most mortgage-backed securities, as well a taking a historic step to buy corporate debt, as it seeks to shore up struggling companies and financial markets... The first facility to prop up large employers involves bridge financing for up to four years for investment-grade companies, in exchange for purchases of newly issued corporate debt by the Fed. Businesses could defer principal and interest payment to preserve cash for up to six months, but they would not be allowed to buy back shares or pay dividends if they tap the facility. A second programme would allow the Fed to purchase corporate debt in the secondary market. The Fed also on Monday revived TALF — a facility dating back to the 2008 financial crisis — which gives the Fed the ability to buy securities backed by student, car and credit-card loans, as well as loans to businesses through the Small Business Administration. The US central bank said TALF and the other new programmes combined would provide up to $300bn in financing for “employers, consumers, and businesses”, backed by the US Treasury department, which is offering $30bn in equity from its Exchange Stabilisation Fund to support the measures. Separately, the Fed also expanded existing programmes to ease strains in the markets for municipal debt and the short-term loans known as “commercial paper” and said it would soon announce a “Main Street Business Lending Programme” to lend directly to small businesses.
Edward Harrison (HT: Ananth) puts the Fed's announcement in perspective,
The Fed is essentially putting a floor on multiple asset classes in the money and credit markets. Equities and high yield bonds are not in the mix. The point is that the Fed is saying it will backstop as many investment grade credit markets as it can -- and in unlimited quantities... The Fed is simply trying to prevent a financial crisis... The Fed recognizes that liquidity has dried up everywhere. So it is provide blanket credit support. Think of the Fed as essentially the buyer of last resort for all investment grade credit assets. But, equities and high yield are residual asset classes. And, they are still exposed to the downturn in the real economy and earnings decline. In terms of credit markets, given how many asset classes the Fed is backstopping, think of this as both a backstop and credit easing. But, the reason the Fed is exempting junk bonds from its credit backstop blanket because that is a step too far in terms of credit easing. Equity and high yield bonds are still subject to the risk that residual asset classes have. And their fortunes will depend on the fiscal response.
The Fed has thrown the gauntlet for other central banks to follow. 

13. Adair Turner calls for developed country central banks to print money, 
But with government bond yields close to zero, most developed nations face no short-term financing constraint. For countries with national currencies, central bank monetary financing of temporarily increased fiscal deficits is a feasible option. This would provide strong stimulus without increasing the public debt burden.
He drives home the point about why this crisis is different,
As in the global financial crisis of 2008, we need to understand the balance between the three categories of problems that we face: liquidity, solvency and deficient demand. Liquidity problems in either the financial system or real economy can be offset by forceful central bank action, and several appropriate policy packages have already been announced... these actions can ensure that fundamentally sound businesses are not driven to bankruptcy by a lack of credit. But they will be insufficient to avoid major solvency problems in specific sectors. If bars, restaurants, hotels and airlines have no customers for two months, no amount of cheap credit can prevent eventual bankruptcy. If staff are kept on, corporate losses will accumulate rapidly. If workers are laid off in large numbers, they will cut their spending even on sectors such as online shopping or entertainment that could be buoyant in a stay-at-home economy. Without offsetting action, we will face a deflationary cycle of falling consumption and income. Monetary policy can do almost nothing to offset these dangers; with interest rates already rock bottom, further small cuts will foster neither business investment nor consumer spending. Only fiscal expansion can make a major difference. This mirrors our experience in 2009, when fiscal deficits of more than 10 per cent of gross domestic product in Japan, the US and the UK, and 6 per cent in the eurozone, were essential to avoid a sustained and deep depression.

Monday, March 23, 2020

The challenge facing the Gulf oil economies

If ever there was an example of digging one's grave, Saudi Arabia's decision to open wide its oil taps could count as one. The stream of actions over the last few years - intensification of engagement in Yemen, upping the ante with Iran, blockade of Qatar, murder of Jamal Kashoggi, recurrent internal crackdowns including within the royal family itself, vanity projects like NEOM and ill-thought out economic diversification attempts, and now this even as the world grapples a coronavirus - cannot but not raise questions about the maturity of leadership in the most important Arab country. 

David Fickling points to the challenge faced by the Gulf economies from the low oil prices. On a purely commercial terms, the cost of recovery of Gulf oil, especially Saudi, is so low as to support very low oil prices. 
No one can produce oil as cheaply as Saudi Arabia: It takes just $2.80 to get a barrel out of an existing Saudi Arabian Oil Co. field, compared with about $16 for Exxon Mobil Corp. and more than $20 for Rosneft PJSC.
But that calculation does not take into account the fact that oil surpluses finance their budgets too, and it requires high oil prices. This graphic captures the overall breakeven cost for different countries.
Sample this about the likely impact on the large horde of financial resources accumulated by them,
Take the net financial assets held by Saudi Arabia’s government — central bank reserves, plus sovereign wealth fund assets, minus government debt. These declined to just 0.1% of gross domestic product from 50% over the four years through 2018 as crude plunged from levels of around $100 a barrel at the end of 2014. The kingdom is now likely to be a net debtor for the foreseeable future, even if prices rise back above $80. Over the same four years, net financial assets held by the six Gulf monarchies fell by around half a trillion dollars, to around $2 trillion, according to a study last month by the International Monetary Fund. Even if peak oil demand doesn’t hit until 2040, that remaining sum could be depleted by 2034, according to the Fund. Oil at $20 a barrel would run it down even faster, emptying the coffers as soon as 2027. With oil prices in the range of $50 to $55 a barrel, Saudi Arabia’s international reserves would fall to about five months of import coverage as soon as 2024, according to an IMF report last year. That should be a deeply alarming prospect, bringing the kingdom within months of an unthinkable balance-of-payments crisis and the abandonment of the dollar peg, which has underpinned the global oil trade for a generation. Yet the prices we’re now seeing make this look almost like an optimistic scenario. 
The fiscal positions, represented by the average non-oil primary balance of the GCC countries, stood at a deficit of 44 per cent in 2018, highlighting the magnitude of reliance on oil.
This is the projections about financial wealth of different GCC countries under the benchmark assumption of $55 per barrel (the average price between 1967 and 2018).
In the aftermath of the 2014 oil price shock, many Gulf countries introduced excise and value added taxes and made their first serious attempts at fiscal consolidation. This will have to be deepened and also broadened to include direct taxes. It is no longer a matter of choice, but of timing and that too in the foreseeable future.