Category: Current Affairs

Trading on terror

Recent scholarship shows that informed traders increasingly disguise trades in economically linked securities such as exchange-traded funds (ETFs). Linking that work to longstanding literature on financial markets’ reactions to military conflict, we document a significant spike in short selling in the principal Israeli-company ETF days before the October 7 Hamas attack. The short selling that day far exceeded the short selling that occurred during numerous other periods of crisis, including the recession following the financial crisis, the 2014 Israel-Gaza war, and the COVID-19 pandemic. Similarly, we identify increases in short selling before the attack in dozens of Israeli companies traded in Tel Aviv. For one Israeli company alone, 4.43 million new shares sold short over the September 14 to October 5 period yielded profits (or avoided losses) of 3.2 billion NIS on that additional short selling. Although we see no aggregate increase in shorting of Israeli companies on U.S. exchanges, we do identify a sharp and unusual increase, just before the attacks, in trading in risky short-dated options on these companies expiring just after the attacks. We identify similar patterns in the Israeli ETF at times when it was reported that Hamas was planning to execute a similar attack as in October. Our findings suggest that traders informed about the coming attacks profited from these tragic events, and consistent with prior literature we show that trading of this kind occurs in gaps in U.S. and international enforcement of legal prohibitions on informed trading. We contribute to the growing literature on trading related to geopolitical events and offer suggestions for policymakers concerned about profitable trading on the basis of information about coming military conflict.

That is from a new paper by Robert J. Jackson, Jr. and Joshua Mitts.  Via the excellent Jordan Schneider.

Debunked?: Possibly the study is quite wrong.

Don’t Let the FDA Regulate Lab Tests!

I have been warning about the FDA’s power grab over lab developed tests. Lab developed tests have never been FDA regulated except briefly during the pandemic emergency when such regulation led to catastrophic consequences. Catastrophic consequences that had been predicted in advanced by Paul Clement and Lawrence Tribe. Despite this, for reasons I do not understand, the FDA plan is marching forward but many other people are starting to warn of dire consequences. Here, for example, is the executive summary from a letter by ARUP Laboratories, a non-profit enterprise of the University of Utah Department of Pathology:

ARUP urges the FDA to withdraw the proposed rule:

  • The FDA proposal will reduce, an in many cases eliminate, access to safe and essential testing services, particularly for patients with rare diseases.
  • Laboratory-developed tests are not devices as defined by the Medical Device Amendments of 1976, nor are clinical laboratories acting as manufacturers.
  • The FDA does not have the statutory authority to regulate laboratory-developed tests.
  • The FDA does not have the authority to regulate states, or state-owned entities. This is particularly relevant for the proposed rule regarding academic medical centers.
  • The FDA’s regulatory impact analysis is flawed in its design, source information, methods. and conclusions, and it systematically overestimates purported benefits of the proposed rule and dramatically underestimates its cost to society, the healthcare industry, and the ability to provide ongoing essential laboratory services to patients.
  • The proposed rule would significantly limit the ability of clinical laboratories to respond quickly to future pandemic, chemical, and/or radiologic public health threats.
  • The proposed rule would not be easily implementable, and it would create an insurmountable backlog of submissions that would hinder diagnostic innovation.
  • The proposed rule limits the practice of laboratory medicine.
  • The FDA has not evaluated less restrictive, easily administered alternatives, such as CLIA reform. This is particularly relevant for common test modifications used in most hospital and academic medical center settings.”

Here is the American Hospital Association:

…we strongly believe that the FDA should not apply its device regulations to hospital and health system LDTs. These tests are not devices; rather, they are diagnostic tools developed and used in the context of patient care. As such, regulating them using the device regulatory framework would have an unquestionably negative impact on patients’ access to essential testing. It would also disrupt medical innovation in a field demonstrating tremendous benefits to patients and providers.

Here is Mass General Brigham, a non-profit hospital system, affiliated with Harvard, and the largest hospital-based research enterprise in the United States:

…we are concerned with the heavy regulatory burden of this proposal. In implementing any regulatory structure, policymakers must consider if the benefits outweigh the costs. Given that FDA predicts 50 percent of tests would require premarket review, and 5 percent will require premarket approval, we have serious concerns that the costs may outweigh the benefits. Given that many LDTs are hospital-based and will never be commercialized, hospitals will have little incentive or ability to develop future LDTs under this proposed rule as they will have little to no opportunity to offset the costs associated with these new regulatory requirements. We are concerned that the regulatory burden could have significant implications on responsible innovation especially for LDTs targeting rare conditions, or public health emergencies.

Two U.S. public lab directors personally reached out to me to ask me amplify the warning. Consider it amplified!

Today is the last day for public comment. Get your comments in!

South Korea projection of the day

…South Korea is distinctive in that it slipped into below-replacement territory in the 1980s but lately has been falling even more — dropping below one child per woman in 2018, to 0.8 after the pandemic, and now, in provisional data for both the second and third quarters of 2023, to just 0.7 births per woman.

It’s worth unpacking what that means. A country that sustained a birthrate at that level would have, for every 200 people in one generation, 70 people in the next one, a depopulation exceeding what the Black Death delivered to Europe in the 14th century. Run the experiment through a second generational turnover, and your original 200-person population falls below 25. Run it again, and you’re nearing the kind of population crash caused by the fictional superflu in Stephen King’s “The Stand.”

That is from Ross Douthat at the NYT.  We don’t want that lit-up map of North vs. South Korea to flip now, do we?

My excellent Conversation with John Gray

I had been wanting to do this one for a while, and now it exists.  Here is the audio and transcript, here is the episode summary:

Tyler and John sat down to discuss his latest book, including who he thinks will carry on his work, what young people should learn if liberalism is dead, whether modern physics allows for true atheism, what in Eastern Orthodoxy attracts him, the benefits of pessimism, what philanthropic cause he’d invest a billion dollars in, under what circumstances he’d sacrifice his life, what he makes of UFOs, the current renaissance in film and books, whether Monty Python is still funny, how Herman Melville influenced him, who first spotted his talent, his most unusual work habit, what he’ll do next, and more.

Excerpt:

COWEN: Do you think that being pessimistic gives you pleasure? Or what’s the return in it from a purely pragmatic point of view?

GRAY: You are well prepared for events. You don’t expect —

COWEN: It’s a preemption, right? You become addicted to preempting bad news with pessimism.

GRAY: No, no. When something comes along which contradicts my expectations, I’m pleasantly surprised. I get pleasant surprises. Whereas, if you are an adamant optimist, you must be in torment every time you turn the news on because the same old follies, the same old crimes, the same old atrocities, the same old hatreds just repeat themselves over and over again. I’m not surprised by that at all. That’s like the weather. It’s like living in a science fiction environment in which it rains nearly all of the time, but from time to time it stops and there’s beautiful sunlight.

If you think that basically there is beautiful sunlight all the time, but you’re just living in a small patch of it, most of your life will be spent in frustration. If you think the other way around, as I do, your life will be peppered, speckled with moments in which what you expect doesn’t happen, but something better happens.

COWEN: Why can’t one just build things and be resiliently optimistic in a pragmatic, cautionary sense, and take comfort in the fact that you would rather have the problems of the world today than, say, the problems of the world in the year 1000? It’s not absolute optimism where you attach to the mood qua mood, but you simply want to do things and draw a positive energy from that, and it’s self-reinforcing. Why isn’t that a better view than what you’re calling pessimism?

And:

COWEN: Under what circumstances would you be willing to sacrifice your life? Or for what?

GRAY: Not for humanity, that’s for sure.

Recommended, interesting throughout.  John is one of the smartest and best read thinkers and writers.  He even has an answer ready for why he isn’t short the market.  And don’t forget John’s new book — I read all of them — New Leviathans: Thoughts After Liberalism.

Why Housing is Unaffordable: The Elasticity of Supply

We have a great new MRU video on housing and why it’s so expensive in many dynamic cities. The video is a good introduction to the economics and also to the politics of housing supply. A highlight is a wonderful animation illustrating how increasing demand coupled with inelastic supply leads to competitive bidding among buyers, driving up prices. Anyone teaching economics should take a look.

Of course, the video pairs perfectly with our textbook, Modern Principles. Indeed, this is the initial video in a two-part series exploring the elasticity of supply, transforming a traditionally mundane topic into a relevant and fun discussion. Check it out!

The Big Fail

The Big Fail, Joe Nocera and Bethany McLean’s new book about the pandemic, is an angry book. Rightly so. It decries the way the bien pensant, the self-righteously conventional, were able to sideline, suppress and belittle other voices as unscientific, fraudulent purveyors of misinformation. The Big Fail gives the other voices their hearing— Martin Kulldorff, Sunetra Gupta, Jay Bhattacharya and Emily Oster are recast not as villains but as heroes; as is Ron DeSantis who is given credit for bucking the conventional during the pandemic (Nocera and McLean wonder what happened to the data-driven DeSantis, as do I.)

Amazingly, even as highly-qualified epidemiologists and economists were labelled “anti-science” for not following the party line, the biggest policy of them all, lockdowns, had little to no scientific backing:

…[lockdowns] became the default strategy for most of the rest of the world. Even though they had never been used before to fight a pandemic, even though their effectiveness had never been studied, and even though they were criticized as authoritarian overreach—despite all that, the entire world, with a few notable exceptions, was soon locking down its citizens with varying degrees of severity.

In the United States, lockdowns became equated with “following the science.” It was anything but. Yes, there were computer models suggesting lockdowns would be effective, but there were never any actual scientific studies supporting the strategy. It was a giant experiment, one that would bring devastating social and economic consequences.

The narrative lined up “scientific experts” against “deniers, fauxers, and herders” with the scientific experts united on the pro-lockdown side (the following has no indent but draws from an earlier post). But let’s consider. In Europe one country above all others followed the “ideal” of an expert-led pandemic response. A country where the public health authority was free from interference from politicians. A country where the public had tremendous trust in the state. A country where the public were committed to collective solidarity and public welfare. That country, of course, was Sweden. Yet in Sweden the highly regarded Public Health Agency, led by state epidemiologist Anders Tegnell, an expert in infectious diseases, opposed lockdowns, travel restrictions, and the general use of masks.

It’s important to understand that Tegnell wasn’t an outsider marching to his own drummer, anti-lockdown was probably the dominant expert opinion prior to COVID. In a 2006 review of pandemic policy, for example, four highly-regarded experts argued:

It is difficult to identify circumstances in the past half-century when large-scale quarantine has been effectively used in the control of any disease. The negative consequences of large-scale quarantine are so extreme (forced confinement of sick people with the well; complete restriction of movement of large populations; difficulty in getting critical supplies, medicines, and food to people inside the quarantine zone) that this mitigation measure should be eliminated from serious consideration.

Travel restrictions, such as closing airports and screening travelers at borders, have historically been ineffective.

….a policy calling for communitywide cancellation of public events seems inadvisable.

The authors included Thomas V. Inglesby, the Director of the Johns Hopkins Center for Health Security, one of the most highly respected centers for infectious diseases in the world, and D.A. Henderson, the legendary epidemiologist widely credited with eliminating smallpox from the planet.

Nocera and McLean also remind us of the insanity of the mask debate, especially in the later years of the pandemic.

But by the spring of 2022, the CDC had dropped its mask recommendations–except, incredibly, for children five and under, who again, were the least likely to be infected.

…Once again it was Brown University economist Emily Oster who pointed out how foolish this policy was…The headline was blunt: Masking Policy is Incredibly Irrational Right Now. In this article she noted that even as the CDC had dropped its indoor mask requirements for kids six and older, it continued to maintain the policy for younger children. “Some parents of young kids have been driven insane by this policy,” Oster wrote, “I sympathize–because the policy is completely insane…”

As usual, her critics jumped all over her. As usual, she was right.

Naturally, I don’t agree with everything in the Big Fail. Nocera and McLean, for example, are very negative on the role of private equity in hospitals and nursing homes. My view is that any theory of what is wrong with American health care is true because American health care is wrong in every possible way. Still, I don’t see private equity as a driving force. It’s easy to find examples where private equity owned nursing homes performed poorly but so did many other nursing homes. More systematic analyses find that PE owned nursing homes performed about the same, worse or better than other nursing homes. Personally, I’d bet on about the same overall. Covid in the Nursing Homes: The US Experience (open), my paper with Markus Bjoerkheim, shows that what mattered more than anything else was simply community spread (see also this paper for the ways in which I disagreed with the GBD approach). More generally, my paper with Robert Omberg, Is it possible to prepare for a pandemic? (open) finds that nations with universal health care, for example, didn’t have fewer excess deaths.

The bottom line is that vaccines worked and everything else was a sideshow. Had we approved the vaccines even 5 weeks earlier and delivered them to the nursing homes, we could have saved 14,000 lives and had we vaccinated nursing home residents just 10 weeks earlier, before the vaccine was approved, as Deborah Birx had proposed, we might have saved 40,000 lives. Nevertheless, Operation Warp Speed was the shining jewel of the pandemic. The lesson is that we should fund further vaccine R&D, create a library of prototype vaccines against potential pandemic threats, streamline our regulatory systems for rapid response, agree now on protocols for human challenge trials and keep warm rapid development systems so that we can produce vaccines not in 11 months but in 100 days.

The Big Fail does a great service in critiquing those who stifled debate and in demanding a full public accounting of what happened–an accounting that  has yet to take place.

Addendum 1: I have reviewed most of the big books on the pandemic including the National Covid Commission’s Lessons from the COVID WAR, Scott Gottlieb’s Uncontrolled Spread, Michael Lewis’s The Premonition, Andy Slavitt’s Preventable and Abutaleb and Paletta’s Nightmare Scenario.

Addendum 2: I also liked Nocera and McLean’s All the Devils are Here on the financial crisis. Sad to say that the titles could be swapped without loss of validity.

Canada Poaches Talent that Competes with American Workers

As I wrote earlier, Canada is poaching talent that should be American! A new working paper by Agostina Brinatti (on the job market) and Xing Guo studies this in detail. The paper first documents that Canada attracted more immigrants when America shut the door but then it traces the consequences through the growth in Canadian firms and on through international trade to American firms and workers. Computer scientists were especially affected by the US policy and the bottom line is that when the US started to deny many more H-1B visas computer scientists went to Canada, increasing the creation of Canadian businesses, jobs and exports. American computer scientists gained because they had less competition but they gained less than the direct effect because they faced more Canadian imports. Moreover, other lower-skilled Americans were harmed because they had fewer higher-skilled workers to work with.

By the end of 2018, there was a decrease of 140,000 H-1B approvals (relative to trend) and an unprecedented spike in H-1B denial rates. Denial rates increased from about 6% in 2016 to 16% in 2018….Immediately following this policy change, Canada experienced a surge in the number of skilled immigrant admissions, equivalent to 76,000 additional admissions in the period between 2018 and 2019. This inflow represents 3.5% of the stock of college-educated immigrants in Canada, or about 2% of all workers in the high-skilled service sector.

…Our event-study estimates imply that a 10 percentage point increase in H-1B denial rates increases Canadian applications by 30%. A back of-the-envelope calculation suggests that for every four forgone H-1B visas, there is an associated increase of one Canadian application.

[the inflow was especially large in computer science]….This inflow decreases the welfare of Canadian computer scientists because they are relatively close substitutes to the incoming immigrants. However, the inflow increases the welfare of workers in other occupations because Canadian sectors expand, especially high-skilled service sectors. For instance, in these sectors, the welfare of computer scientists decreases by 2.9% and that of lower-skilled workers increases by 0.9% approximately.

In the U.S., immigrant labor decreases by 1.6% and is particularly pronounced among computer scientists. As a result, we find that the drop in U.S. approval rates benefits primarily American computer scientists but tend to harm American workers employed in other occupations, especially if their sector contract. For instance, computer scientists in high-skilled service sectors experience a 0.7% welfare increase, while lower-skilled workers experience a 0.3% welfare decrease. These effects on American workers include both direct and indirect effects.

Addendum: Tyler reminds us that in the long-run, immigrants who get Canadian citizenship may immigrate to America! The basic point that Canada and the US are in a more or less free trade area is well taken and so we can thank Canada for making US immigration policy less harmful than it might otherwise be. Still, I’d rather see fewer artificial barriers distorting the allocation of talent.

The Geert Wilders victory, and more

Wilders won resoundingly in the Netherlands, and polled much stronger after October 7.  Yesterday there were anti-immigrant riots in Dublin, typically a relatively open city (most likely an Algerian migrant stabbed several people).  The “far right” party in Austria is very popular, AfD is doing well in Germany, and France could flip.  Italy already is there, noting that actual governance has not been so different under Meloni.   The Sweden Democrats are part of the ruling coalition.  That is a lot of the core EU group, plus Ireland and Sweden.  And maybe I have forgotten somebody.

Note to media: Since they keep winning elections, or at least placing well, you can’t call them “far right” any more!  How about “deep center”?

In the New World, Milei won in Argentina, Bukele is extremely popular in El Salvador, and Trump is ahead of Biden in most polls.  Even the Kiwis moved to the right, albeit in a mild-mannered way.  Chile rejected a far left constitution, and Australia voted down one version of indigenous rights, not wanting to put them in the constitution.  Petro is unpopular in Colombia and may not finish out his term.

A few observations:

1. If you can’t talk about/think about/write about these developments without perpetually moralizing, it is hard to be an intelligent commentator today.

2. If your main theory here is “racism,” your contribution to the discourse probably is negative.  That said, I strongly feel that the events of the last ten or so years should cause us to upgrade our estimates of how much racism is in the world, and in a highly unfortunate manner. That is still a bad dominant explanation for what is going on in the [new] “deep center.”

3. For all the talk of why Biden’s position in the polls is so weak, I don’t see enough talk of “much of the world is moving in a right-wing direction, and global sweeps in ideology are difficult to counter” as a critical explanation.  If true, that makes it much harder for Biden to mount a comeback.

4. For the most part, these movements are not “my kind of right-wing.

5. These trends still carry a lot of momentum.  And given that immigration is not about to turn into a political winner, you should be all the more concerned about the pending fertility crisis.

6. I was right when I argued a few years ago that “Wokeism has peaked.”

Liz Truss tax cutting ideas already are coming to fruition in the UK

Many also heard distinct echoes of Truss’ favorite mantra in the chancellor’s constant talk of the need for “growth.”

Bravo to Rishi Sunak, the Politico article outlines some of the politics behind all this.  Here is NYT detail on the tax cuts themselves.  People hate it when I say this, but the reign of Liz Truss remains underrated, and she also has been the victim of a rather extreme media and also social media misogyny.  I would note, however, that tax cuts only make sense when followed up by further growth-enhancing policies.

England is underrated, a continuing series

The UK has said it will refrain from regulating the British artificial intelligence sector, even as the EU, US and China push forward with new measures.  The UK’s first minister for AI and intellectual property, Viscount Jonathan Camrose, said at a Financial Times conference on Thursday that there would be no UK law on AI “in the short term” because the government was concerned that heavy-handed regulation could curb industry growth.

Here is more from the FT.  And also from the FT: “UK approves Crispr gene editing therapy in global first.

Pharmaceutical Price Controls and the Marshmallow Test

The pharmaceutical market is in turmoil. On the one hand we have what looks like a golden age of medicine with millions of lives saved by COVID vaccines, a leap in mRNA technology, excellent new obesity and blood sugar drugs, breakthroughs in cancer treatments and more. On the other hand, the Inflation Reduction Act includes the most extensive price controls on pharmaceuticals we have ever seen in the United States.

In Washington-speak the “Inflation Reduction Act” requires HHS to “negotiate” drug prices for Medicare Part D and Part B to establish a maximum “fair” price. In reality there is no negotiation–firms who refuse to negotiate are hit with huge taxes. The “negotiation,” if you want to call it that, is “your money or your life” and fairness has little to do with it. The IRA also requires very costly inflation rebates, i.e. a price control/tax. In essence, the IRA is a taking; for drugs with a large Medicare market it is similar to abrogating patents to 9 years for small molecule drugs and 13 years for biologics. For the included drugs there will be a significant reduction in revenues. Moreover, we don’t yet know whether the plan will be extended to more and more drugs. There is significant uncertainty affecting the entire market. What will be situation in 10 years? Will the US be like Europe?

Our government is failing the marshmallow test, big time.

Reduced revenues mean less R&D. The value of extending life is very high and so in my view medical R&D is underprovided. Thus, price controls are taking us in the wrong direction.

The positive effects of price controls are immediate and easy to see: Prices are reduced.

The negative effects of price controls take time and are harder to see. Namely:

  • Fewer drugs for Medicare market.
  • Less research on post-approval indications and confirmatory trials.
  • Reduced incentive for generics to enter quickly.
  • Most importantly: Less R&D spending leading to fewer new drugs, a reduced pharmaceutical armory, lower life expectancy and higher morbidity. By one calculation, ~135 fewer new drugs through to 2039 (see also here and here and here and here).
  • Fewer new drugs means more spending on physicians and hospitals so in the long run price controls may not even save money! (Most prescriptions are for generics. Drugs fall greatly in price when they go generic but physicians and hospitals never go generic!)

Price controls are a classic example of political myopia. Price controls, like rent controls and deficit financing, have modest benefits now and big future costs and thus they are supported by politicians who want to be elected now. Unfortunately, current citizens don’t forecast the future well and future citizens don’t have a vote so it’s easy to create big future costs without engaging an opposition.

The emergence of groundbreaking pharmaceuticals and the increasing implementation of price controls are probably related trends. Everyone wants the great new pharmaceuticals without paying for them. We need to think more long-term–we have much more to gain from a continuing flow of new pharmaceuticals than from lower prices on the last generation. Don’t forget that children who fail the marshmallow test do less well later in life. Well, our government is failing the marshmallow test, big time.

Pharmaceutical price controls driven by myopia and the failure to delay gratification are greatly harming future patients.

Should I keep an eye on Spain? (from my email)

Keep an eye on Spain. What is happening politically is very serious and the tension is increasing.

Fernando Savater: Spain is formally a democracy, sure, but it is ceasing at a forced march from being a rule of law state.

https://theobjective.com/elsubjetivo/opinion/2023-11-05/resignados-sumisos-luchar-sanchez/

Felix de Azúa: The reactionary left will face the coup right with a predictable result: economic ruin and institutional chaos.

https://theobjective.com/elsubjetivo/opinion/2023-11-11/irse-preparando-sanchez/

…Felipe González is very worried, as well.

https://www.youtube.com/watch?v=g5fAXnrMHuI

That is all from Mario Abbagliati.