A Few Quick Announcements

By James

As I wrote a couple of years ago, I don’t post here anymore. I just have a couple of updates for people who subscribe and may be interested in my work.

I upgraded my personal website to the 21st century.
I have a new book! The Fear of Too Much Justice: Race, Poverty, and the Persistence of Inequality in the Criminal Courts is coming out on June 20 from the New Press. My co-author is Stephen Bright, a legendary death penalty lawyer (with a 4–0 record in Supreme Court cases), longtime director of the Southern Center for Human Rights, and one of my professors at Yale Law School. You can read more at the book website or you can pre-order it via the New Press site (or directly from your favorite retail monopolist, of course).
I used to tweet about everything I wrote, but I may stop doing that as Twitter continues its descent into oblivion. So the best way to keep track of what I write is probably to subscribe to my Medium page here. If you don’t want to give Medium your information, you can get an RSS feed of my stories, or you could bookmark the page itself. Or you could follow me on Facebook. I will try to put a quick post there if I write something that is published someplace else.

Letter to Treasury Secretary Janet Yellen: In Support of a Price Cap on Russian Oil Exports

The Honorable Janet L. Yellen

U.S. Department of Treasury

1500 Pennsylvania Ave., NW

Washington, D.C. 20220

October 11, 2022

Dear Secretary Yellen:

We are a group of economists with expertise in oil markets, international trade, and political economy, writing to express our support for the proposed price cap on Russian seaborne oil exports.

As envisaged by the G7, the price cap would set a maximum price that Russian oil could be traded in conjunction with G7 services. This price, set in dollars, would be substantially below the world price, yet above the marginal cost of production in Russia. To use US, UK, EU, and allied financial services (such as insurance, credit, and payments), market participants will need to attest that all qualifying purchases are at or below this threshold.

Given the importance of participating countries for global finance and for shipping, compliance with this cap will create pressure for a lower price on Russian oil moved by tanker. While we do not expect all trades will be performed under the price cap, its existence should materially increase the bargaining power of private and public sector entities that buy Russian oil.

The price cap maintains economic incentives for Russia to produce current volumes. In April 2020, when the price of the Brent benchmark was close to $20, Russia continued to supply oil to world markets, because that price was above the cost of production in many or most existing Russian oil fields. Russian has little or no available onshore storage, and since shutting down and restarting oil fields is expensive and risky, it was more profitable for Russia to continue producing in the presence of low prices. The price of Brent now is around $96 per barrel, but Russia receives significantly less due to the “Urals discount”. This discount is caused by the perceived stigma of buying Russian products for some customers; they decline to bid for Russian oil, which reduces effective demand and lowers the price that the remaining customers need to pay.

The oil price cap proposal would effectively institutionalize the Urals discount and consequently further lower the dollar value of the Russian government’s primary revenue stream.

Under its Sixth Package of Sanctions, the European Union has already adopted a complete ban on using European financial services to transport Russian crude and petroleum products to any destination, along with a complete embargo on EU imports of Russian oil. These measures are due to go into effect on December 5^th.

If the EU implements these measures without a price cap, we would expect the supply of oil to the world market to decline – and benchmark oil prices (e.g., Brent) to rise.

The US and its allies are likely better off with a price cap on Russian oil, and we are encouraged that the EU is making progress on including the price cap in its next round of sanctions. If the world price of oil rises and the cap is effective, Russia will not receive any windfall. And the cap stands a good chance of lowering Russian revenue even if formal participation is limited – by strengthening the negotiating position for anyone willing to buy Russian oil.

According to the IEA, Russian oil exports were 7.6 million barrels per day in August, down only slightly (390 kb/d) from pre-war levels. With revenue from coal and natural gas exports likely to decline and not rebound soon, the Russian government needs substantial oil revenue (in dollars) to pay its bills and keep the ruble from collapsing. The price cap as proposed gives the Russian government the incentive to continue to supply the world market but reduces the revenue available to fund their brutal war in Ukraine.

For these reasons, we support the implementation of the price cap and are hopeful that you and your international colleagues will make progress implementing it soon.

Yours sincerely,

Simon Johnson, Sloan School of Management, MIT

Daniel Berkowitz, Department of Economics, University of Pittsburgh

Severin Borenstein, Haas School of Business, University of California, Berkeley

Steve Cicala, Department of Economics, Tufts University

Kimberly Clausing, UCLA School of Law

Anastassia Fedyk, Haas School of Business, University of California, Berkeley

Jason Furman, Department of Economics and John F. Kennedy School of Government, Harvard University

Luis Garicano, Visiting Professor of Economics, Columbia Business School

Yuriy Gorodnichenko, Department of Economics, University of California, Berkeley

Ryan Kellogg, Harris School of Public Policy, University of Chicago

Christopher Knittel, Sloan School of Management, MIT

Michael Kremer, Department of Economics and Harris School of Public Policy, University of Chicago

Lukasz Rachel, Department of Economics, University College London

Kenneth Rogoff, Department of Economics, Harvard University

Carl Shapiro, Haas School of Business, University of California, Berkeley

Robert S. Pindyck, Sloan School of Management, MIT

Rick Van der Ploeg, Department of Economics, University of Oxford

[Letter updated on October 13, 2022; adding Michael Kremer]

Assessment: Stacey Abrams’ Budget Plan

By Simon Johnson, Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan School of Management

The plan is based on sound economic and fiscal assumptions and allows for the implementation of policy initiatives without tax increases.

This note provides my assessment of the financial viability of Stacey Abrams’ budget plan for the state of Georgia through fiscal 2028. This assessment was carried out at the request of the Stacey Abrams campaign for Georgia’s governor.

Stacey Abrams’ budget plan is fiscally prudent. The plan is based on sound economic and fiscal assumptions and allows for the implementation of Abrams’ proposed policy initiatives without the need for tax increases.

The most important assumption underlying the budget plan is the projected growth in tax revenues, which in turn depends on the state’s economic outlook. Between fiscal 2023 and fiscal 2028, Abrams expects state tax revenues to grow by 4.6% per annum, in nominal terms. This projection incorporates changes in the state’s tax code resulting from the implementation of House Bill 1437 during the budget horizon. Following its initial implementation in 2024, the tax cuts by House Bill 1437 are triggered only after specified budget benchmarks are achieved, which is not expected until fiscal 2028.

The anticipated growth in tax revenues between fiscal 2023 and fiscal 2028 is consistent with the 4.9% per annum growth in Georgia’s tax revenues over the past quarter century and 7.4% per annum growth over the past decade (see Table 1 below; all figures are in current dollars). This is consistent with reasonable expectations for the continued robust growth of Georgia’s economy. For example, in a recent economic forecast, Dr. Rajeev Dhawan, Director of the Georgia State University Economic Forecasting Center, expects personal income growth of close to 6% per annum through calendar year 2024, and gross state product growth of about the same during the period.

It is important to note that the national and Georgia economies are not expected to suffer a severe recession during the budget horizon, although the economy’s growth is expected to materially weaken through calendar year 2023. However, the impact of the weaker economy on nominal tax revenue growth is mitigated in part by the expected high inflation during the next two years. Inflation is projected to steadily moderate, but it is unlikely to be quickly fall back in line with the Federal Reserve’s inflation target of 2% (measured by the national core consumer expenditure deflator).

Abrams’ policy initiatives would be incorporated into the budget by fiscal 2027. The costliest proposal is to increase salaries for teachers and law enforcement. For teachers, the cost is spread over four years, with the first $2,750 increase in annual pay occurring in fiscal 2024. By fiscal 2027, the entire proposed $11,000 annual salary increase would be in place. The budget cost for these higher salaries increases from just over $400 million in fiscal 2024 to $1.6 billion when fully implemented in fiscal 2027. Law enforcement salaries increase by $6,000 in fiscal 2024 and again in fiscal 2025 at a budget cost of $155 million by fiscal 2025. The cost of Abrams’ proposed expansion of Medicaid coverage is also significant, estimated at $297 million in FY 2024 and growing between $16 million and $18 million yearly after that.

Given the expected tax revenue growth in Abrams’ budget plan and the amount of the state’s current undesignated reserves, the costs of Abrams’ policy initiatives are adequately funded through the budget horizon. In other words, the state will have enough revenue to cover her policy initiatives while also maintaining an adequate reserve with no tax increases.

In addition, there is a substantial cushion provided by currently available reserves. According to the State Accounting Office FY 2022 Report on Revenues and Reserves, the state ended Fiscal Year 2022 with a General Fund balance of $11.82 billion, of which $5.24 billion constitutes the revenue shortfall reserve, which is constitutionally capped at 15% of prior year revenues. This leaves $6.58 billion in undesignated reserves, which are available for appropriation. The Abrams budget plan assumes that the undesignated reserve will fund the gas tax suspension through December 2022 (costing $1.6 billion), that the Abrams proposed tax rebate is implemented ($1 billion), and that the Abrams FY 2024 budget initiatives are funded ($1 billion).

The undesignated reserve will then total roughly $3 billion, allowing for $900 million to fully fund Abram’s budget initiatives in FY 2025 through FY 2027. In FY 2028 the budget will no longer be supplemented with undesignated reserve revenues.

While there is significant uncertainty in any economic and budget projection, the Abrams budget plan for Georgia is appropriately prudent and does not rest on overly optimistic revenue assumptions. The Abrams budget plan strikes a reasonable balance between fiscal prudence and expanding the state’s support for a range of initiatives, without raising taxes.

Table 1: Historical Revenue Growth
FY 1998	$ 11,718,182,319		FY 2011	$ 16,558,647,528	8.8%
FY 1999	$ 12,696,109,796	8.3%	FY 2012	$ 17,269,975,474	4.3%
FY 2000	$ 13,781,937,492	8.6%	FY 2013	$ 18,295,858,589	5.9%
FY 2001	$ 14,688,987,803	6.6%	FY 2014	$ 19,167,806,643	4.8%
FY 2002	$ 14,005,479,208	-4.7%	FY 2015	$ 20,434,743,033	6.6%
FY 2003	$ 13,624,846,657	-2.7%	FY 2016	$ 22,237,392,599	8.8%
FY 2004	$ 14,584,644,741	7.0%	FY 2017	$ 23,268,421,512	4.6%
FY 2005	$ 15,813,996,667	8.4%	FY 2018	$ 24,319,869,276	4.5%
FY 2006	$ 17,338,759,588	9.6%	FY 2019	$ 25,571,064,702	5.1%
FY 2007	$ 18,840,441,639	8.7%	FY 2020	$ 25,478,916,446	-0.4%
FY 2008	$ 18,727,812,623	-0.6%	FY 2021	$ 28,591,830,272	12.2%
FY 2009	$ 16,766,661,804	-10.5%	FY 2022	$ 34,934,855,313	22.2%
FY 2010	$ 15,215,790,786	-9.2%

Imposing Sanctions on Russian Energy Exports

March 3, 2022: By Oleg Ustenko, economic advisor to the president of Ukraine, and Simon Johnson, MIT. Contact: sjohnson@mit.edu. This post is taken from a one page memo, currently circulating.

Sanctions imposed in response to Russia’s invasion of Ukraine are not degrading Russian energy production capacity or putting enough pressure on Russian financial markets.

On the contrary, the price of Brent crude has risen from $80 at the end of 2021 to $90 pre-invasion and reached $113 per barrel today.

The discount on Urals crude relative to Brent has widened since the invasion, but the net price to Russian exporters has still increased by $5-10 per barrel.

IEA reports daily Russian oil export volume is steady at 5 million barrels per day, so oil revenues are up $50-100 million PER DAY since February 24^th.

Russian gas exports to Europe have not been impacted: “the export value of Russian piped gas to the EU alone amounts to USD 400 million per day”.

Total Russian energy exports are generating $1.1 billion per day according to the IEA. This has increased, not decreased, since the invasion began.

The Russian current account surplus in January 2022 was $19 billion, about 50% higher than usual for that month.

The latest sanctions created a positive terms of trade shock for Russia, with a rise in the price of its exports relative to its imports. The only way to put real pressure on Russian public finances is to buy a lot less oil and gas from Russia. Even better: stop all purchases from and payments to Russia.

Recommendations

The US should impose full sanctions, including secondary sanctions, on all Russian oil and gas exports. As a major exporter of refined products made from Russian oil, Belarus also needs to be sanctioned fully.
IEA estimates that oil production around the world can be boosted quickly. Additional world supply can add at least 3 million barrels a day if other producers are persuaded to support the US lead. To the extent Russia can sell on grey markets, this will be at a steep discount. World oil supply will remain about the same, but with significantly less revenue for the Russian government to use in destroying Ukraine and threatening the world.
These measures will encourage the EU to significantly reduce its use of Russian gas, both immediately and through 2022. Energy conservation and development of alternative supplies should also be pursued as a top priority, as suggested by the IEA and Bruegel (two papers). Reducing gas purchases from Russia is essential for global security and any resumption of regional stability.

Quick Housekeeping Note

By James Kwak

I’ve been asked if you can sign up for email notifications when I write stories on Medium. Apparently you can, but the option is a bit buried. (One of the nice things about Medium is the clean interface. One downside of that clean interface is that sometimes you have to go looking for things.)

If you’re on my main page (jamesykwak.medium.com), you have to click on About at the top.

Then you get to this page, and at the bottom there’s a link to an email subscription form.

I hope that helps.

Moving On

By James Kwak

I’ve decided not to post on The Baseline Scenario anymore. I’ve thought about this on and off during the several years that the site has been mostly dormant, but I never pulled the trigger, mainly because this blog still has thousands of email subscribers and an unknown number of followers on Facebook. But I obviously haven’t been into blogging for a long time now, and it feels weird to continue using a platform whose peak was in 2010 and 2011 (when we were regularly listed, with reason, as one of the most important finance and economics blogs on the Internet). As you’ve probably noticed, Facebook, Twitter, and the consolidation of media platforms (the Times, the Atlantic, Slate, Vox, etc.) has killed off most independent blogging. In addition, while Simon and I rarely disagree on anything, we tend to care and write about different things, as evidenced by our latest books—his on investing in science and technology to create better jobs, mine on partisan politics and expanding the welfare state. Both of us also write about issues that have strayed far from the original focus that drew in our core readers—primarily, the financial crisis and financial regulation. For example, the book I’m working on now is about injustice in the criminal legal system.

I owe this blog a lot. Without the blog, there would have been no “Quiet Coup” and hence no 13 Bankers, which got me fifteen minutes of fame, an academic job, and a new career that has lasted a decade so far. There would not have been the day that Larry Summers sent an email to the National Economic Council staff saying that The Baseline Scenario was required reading. I would not have met some good friends, some of whom have gone on to be far more influential than I ever was.

The blog itself will stay up indefinitely, taking up space on the Internet. Simon may choose to post here in the future, so don’t cancel your email subscription if you have one.

I will continue to write, occasionally at least. The primary place I will post things is Medium; you can find me at https://jamesykwak.medium.com/. For a while I’ve been posting articles in both locations, there and here. I just posted an article about this year’s presidential election that you can read on Medium. I’d be flattered if you decided to follow me there. I also have a Twitter account, of course; I spend little time on Twitter (because it’s awful), but links to things that I write get posted there. I have no plans to use Facebook (because it’s also awful).

Good bye, and thank you for reading.

Leverage

By James Kwak

One of Congress’s top priorities this week and next is to pass some kind of funding bill that will keep the federal government operating past December 11. There are basically two ways this could happen. Option A is that Congress could pass a continuing resolution that maintains funding at current levels until, say, the end of January—that is, when we’ll have a new Congress and a new administration. Option B is to pass an omnibus fiscal year 2021 spending bill that determines discretionary spending levels through September of next year when the federal government’s fiscal year ends.

The Democratic leadership apparently is pushing for Option B because—well, probably because they think it’s the responsible thing to do and will make them look good with that tiny but all-important segment of voters who know the difference between a continuing resolution and a proper appropriations bill. But, in doing so, they could be throwing away one of the few levers that Democrats will have to actually accomplish anything during the next congressional term.

The point is that government funding measures are must-pass bills. No one likes a government shutdown, and historically Democrats have been able to pin most of the blame for them on Republicans, dating back to 1995, when Bill Clinton successfully portrayed Newt Gingrich as a zealot who was out to slash Medicare (which he was). If Jon Ossoff and Raphael Warnock come through in Georgia on January 5, Democrats will have majorities in both houses of Congress for the first time since 2010—but such razor-thin minorities that Joe Manchin is already rubbing his hands with glee at the prospect of becoming the most important person on Capitol Hill.

In this context, an omnibus budget reconciliation bill could represent one of the Biden administration’s few real chances to pass anything through Congress. Bills passed through reconciliation are not subject to the Senate filibuster (which isn’t going away, regardless of what you think about it), which means they only need a bare majority. The need to avert a government shutdown creates the pressure to bring people (the so-called moderates) to the table to come to a deal. Now, Joe Manchin isn’t suddenly going to become a sponsor of the Green New Deal because the Democrats have a majority in the Senate—he’s going to extract everything he can in exchange for his vote. But there is still a lot that Democrats could accomplish in an omnibus spending bill: money for the DOJ Civil Rights Division, money for the EPA, money for election protection, money for low-income housing, and so on. This is an opportunity to dictate discretionary spending priorities a full eight months earlier than we would otherwise be able to do. And would you rather negotiate with Manchin or with Mitch McConnell?

And yet the Democratic leadership in Congress seems inclined to give up the potential chance to write their own appropriations bill in January in exchange for a bill that they have to negotiate with McConnell and . . . Donald J. Trump. (The vague new COVID-19 stimulus bill that people are talking about is currently being positioned as a separate piece of legislation—which makes sense because it’s toxic to most Republicans.) It’s almost as if they don’t want the opportunity to govern. Sure, Ossoff and Warnock could lose in January, but we would still be in a stronger position than we are now, with Biden in the White House.

During the next two years, we are going to have precious few chances to pass any kind of meaningful legislation. Why are we throwing one of them away?

The COVID-19 Economy: What Can We Do?

By James Kwak

Today, the Washington Post’s Outlook section published my article on the future of the American economy in the wake of the pandemic. They invited me to write it because of my earlier blog post on “Winners and Losers.” (Hey, despite all appearances, maybe blogs are still worth writing.)

The article is pretty gloomy. The short summary is that the COVID-19 pandemic will accelerate and reinforce the two primary economic trends of our time: consolidation and inequality. At this moment, I believe that more strongly than when I originally drafted the article two months ago. It seems to me that, as a society, we are caught between two unacceptable outcomes: either we reopen elementary schools (at least) so that parents can go to work, adding fuel to the epidemiological fire that is already burning throughout much of the country; or we keep schools closed and millions of predominantly low-income workers lose their jobs because they have to take care of their children. Choosing between your job and your children is not something that should happen in a supposedly rich society, yet there we are.

A few friends have asked me what I think the solution is. Here are the last three paragraphs of my first draft, which ended up on the cutting room floor:

Continue reading “The COVID-19 Economy: What Can We Do?” →

COVID-19: Winners and Losers

By James Kwak

I think it’s highly likely that the dust will clear eventually and that our economy will come back to life at some point in the next two or three years. I know there are certain disaster scenarios that can’t be ruled out, but I think they are unlikely. I’m not going to guess when things will return to a semblance of normal. Really, no one knows.

urban-731498_1280 — Photo by Free-Photos from Pixabay

The question for now is: what will that economy look like?

Continue reading “COVID-19: Winners and Losers” →

COVID-19: Inequality

By James Kwak

By some measures, in the short term, COVID-19 will surely reduce inequality of wealth, and probably inequality of income as well. As a purely mechanical matter, the rich have a lot more money to lose when the stock market crashes and most sectors of the economy grind to a halt.

sparkling-wine-1030754_1280 — Photo by Free-Photos from Pixabay

At the same time, however, this pandemic is throwing into stark relief how unequal the lives of Americans are today. Most of the upper-middle class and rich seem to fall into one of two categories. Those without children in the house trade suggestions on how to fill their time: virtual happy hours, virtual yoga, free streaming opera, binge TV-watching, etc. Those with children in the house trade suggestions on how to keep said children occupied so that we can get anything done or have any time to ourselves: educational apps and websites, home science experiments, live streaming from zoos and aquariums, etc.

There are exceptions, of course. Doctors generally make comfortable livings, and many of them are currently facing difficult working conditions and high risk of infection to save as many lives as possible. But the most difficult thing many rich people have to endure is figuring out how to get a Peapod or Instacart delivery slot, or finding a good recipe for canned tuna.

Continue reading “COVID-19: Inequality” →

COVID-19: The Butcher, the Brewer, and the Baker

By James Kwak

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

—Adam Smith, The Wealth of Nations

aperitif-2027177_1280 — Image by Mandy Fontana from Pixabay

This is the most famous line from the most famous justification of market capitalism. Smith’s point is that it is individual self-interest that drives the economy. In the next paragraph, he goes on to describe how gains from trade explain the division of labor in a modern economy:

“The certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he may have occasion for, encourages every man to apply himself to a particular occupation, and to cultivate and bring to perfection whatever talent or genius he may possess for that particular species of business.”

As I’ve said before, “whenever the butcher, the brewer, the baker, or the invisible hand is invoked, the reader should hear alarm bells going off.” The COVID-19 pandemic provides a particularly stark demonstration of the problems with Smith’s comforting fable and how it is used in contemporary politics.

Continue reading “COVID-19: The Butcher, the Brewer, and the Baker” →

COVID-19: The Statistics of Social Distancing

By James Kwak

It seems that social distancing is the primary strategy for slowing the propagation rate of COVID-19. That and widespread testing are the key tools for containing an outbreak, for reasons discussed repeatedly in the media.

cathedral-square-592752_1280 — Photo by Hans Braxmeier from Pixabay

But does it work? Or, more to the point, how well do different degrees of social distancing work? How strict does it need to be, and how tightly does it need to be enforced? It seems to me that this is an important and at least theoretically answerable question.

Thanks to ubiquitous commercial and government surveillance, there are staggeringly comprehensive databases of exactly where people are at all times. Google has one, for example. Picture for yourself an enormous aerial picture of some metropolitan area with a dot for every person’s location; then picture those dots moving around as time passes. That’s more or less what is available. (Some people are blocking their location data, and some people don’t have ~~personal surveillance devices~~ smart phones. But there are certainly enough people transmitting their location to do the analysis discussed below.)

Continue reading “COVID-19: The Statistics of Social Distancing” →

COVID-19: Not One Penny

By James Kwak

The airline industry is trying to hold up the federal government for $29 billion in grants and another $29 billion in loans. They threaten that if they don’t get the grants they will lay off employees, and that if they don’t get the loans they will use their remaining cash on dividends and stock buybacks.

galleon-1666084_1280 — Photo by Júlia Orige from Pixabay

First of all, the second threat is staggering in its audacity. At current course and speed, the airlines will go bankrupt. When you are in financial distress, the last thing you should do is take your scarce cash and hand it to your shareholders. That meets at least the spirit, and perhaps the letter, of a fraudulent conveyance in bankruptcy law. But it represents the pinnacle of the idea of shareholder capitalism: screw the workers, screw the creditors, just take the money and run.

More importantly: the federal government should not give the airline industry a single penny either in grant aid or in sweetheart loans. I understand the economic challenges here. Thousands of workers are at risk of losing their jobs and not being to pay for food or rent in the midst of the greatest crisis of our lifetimes. To the extent we want to help them, the top priority is to give money directly to them.

Continue reading “COVID-19: Not One Penny” →

COVID-19: Who Bears the Losses?

By James Kwak

Our business and household sectors are losing lots of money every day, and will continue to lose money for the foreseeable future. People no longer spend money at restaurants. Restaurant owners can no longer pay the rent or pay back their business loans. Restaurants fire their workers, who lose their paychecks and can no longer pay their rent, or their credit card bills, or their student debt. In an economic crisis like this, the overriding question is: who ultimately bears the losses?

We’ve been through this before. In the 2008 financial crisis, we applied the usual rules of capitalism—unless you were a large bank. Businesses failed and their owners (including shareholders, for corporations) were wiped out. Renters were evicted. Homeowners lost their houses. Investment funds that had bought mortgage-backed securities and collateralized debt obligations lost their money. Workers lost their pensions. Small banks were shut down by the FDIC. Big banks, however, got unlimited cheap credit from the Federal Reserve to stay afloat, thanks the the people we all know.

Continue reading “COVID-19: Who Bears the Losses?” →

Thoughts About COVID-19: PPE

By James Kwak

PPE, as we now know, stands for Personal Protective Equipment, like face masks and gloves. Right now there isn’t enough of it, and that’s one of the constraints on being able to test people, which is one of the biggest problems we face.

49432443047_59acec5a6c_k — Photo by ehpien (CC BY-NC-ND 2.0)

The only point I want me make here is this: This is how capitalism is supposed to work. If you’re a for-profit healthcare provider—or any kind of provider that is trying to provide the most value, however defined, with limited resources— you are not going to stock up on enough PPE to handle every possible scenario you might face. This is what management consultants and business school professors have been saying for decades. PPE, like inventory, is a form of working capital. If you can reduce the amount of working capital you need, you can translate that dollar-for-dollar into cash for your shareholders—or, if you’re a non-profit, into clinics for poor people, salaries for your executives, or that next gorgeous building you’re going to put up. Excess working capital is pure inefficiency.

Continue reading “Thoughts About COVID-19: PPE” →