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The world this week
Apr 2nd 2020 edition
Apr 2nd 2020
Scientists advising the American government about the covid-19 outbreak predicted that between 100,000 and 240,000 Americans could die, even with partial lockdowns and social-distancing measures in place. Donald Trump warned his compatriots “to be prepared for the hard days that lie ahead”. The United States now has more reported infections than any other country. New York city has recorded more deaths from the coronavirus than all but half a dozen countries. Lagging behind other states, Florida at last ordered people to stay at home. See article.
Fortress China
With most of its newly confirmed cases of covid-19 now being found among travellers from abroad, China closed its borders to most foreigners. On a visit to Zhejiang province, President Xi Jinping said curbing imported cases, which mostly involve returning Chinese citizens, had become the “most important” task in the country’s fight against the virus and could remain so “for a long period”. State media coverage of the trip showed Mr Xi without a mask; he had always worn one on previous outings during the crisis.
Fights broke out on the border between Hubei and Jiangxi provinces after Hubei allowed people to move freely across it for the first time in two months. In many parts of China Hubei residents are treated as potential carriers of the virus.
India’s prime minister, Narendra Modi, apologised for the suffering he caused by locking down the country with so little preparation. Millions of migrant workers struggled to get home to their villages. Many crowded into transport hubs, making social distancing impossible. Videos emerged of police beating people who broke the quarantine laws. See article.
Japan reaffirmed its 2015 goal to reduce greenhouse-gas emissions by 26% by 2030 based on levels from 2013, disappointing environmentalists who want it to cut deeper and faster. Japan is the only g7 country still building coal-fired power stations.
Meanwhile, this November’s un climate-change summit, cop26, was postponed until next year. The talks, which are expected to speed up action on reducing emissions, will still take place in Glasgow.
A narco state
America charged Venezuela’s dictator, Nicolás Maduro, and 14 other members of his regime with drug-trafficking, money-laundering and “narco-terrorism”. The State Department offered a reward of $15m for information leading to Mr Maduro’s arrest. The indictments allege that he co-founded the “cartel of the suns”, which sought to flood America with cocaine. The State Department later said America would lift sanctions on Venezuela if it agreed to its framework for restoring democracy. See article.
The eln, a guerrilla group in Colombia, declared a one-month ceasefire starting on April 1st. It called the decision a “humanitarian gesture” in response to the covid-19 pandemic. The eln killed more than 20 cadets at a police academy in Bogotá in January 2019.
Nothing will stop them
Fighting in Yemen continued despite calls for a truce to fight covid-19 instead. Saudi Arabia, which supports the Yemeni government, said it intercepted missiles launched by Houthi rebels towards Saudi territory. The Saudi-led coalition then bombed targets in Sana’a, the Yemeni capital. Yemen has not yet recorded any cases of covid-19.
Israel’s prime minister, Binyamin Netanyahu, self-isolated after an aide tested positive for covid-19. Mr Netanyahu himself tested negative (though the health minister came down with the disease). He is in talks with Benny Gantz, the leader of the opposition, over forming a unity government. See article.
Ethiopia postponed parliamentary elections scheduled for the end of August because of covid-19. The poll will be the first test of the popularity of Abiy Ahmed, a reformist prime minister, who assumed the role in 2018 after the resignation of his predecessor.
Opposition parties in Guinea rejected the result of a constitutional referendum that could allow President Alpha Condé to run for a third term of five years, saying it was marred by violence. Electoral officials said 91% of votes cast were in favour of the new constitution.
Grasping an opportunity
Hungary, which has been dismantling checks and balances on the executive for a decade, passed a covid-19 emergency law that gives Viktor Orban the power to rule by decree as prime minister. The opposition says the country has become a dictatorship. But the eu did not criticise Hungary by name, and the European People’s Party, the eu-level group that includes Mr Orban’s Fidesz party, made no move to expel it. See article.
European leaders were at loggerheads over the issuance of so-called coronabonds, government bonds jointly guaranteed by all countries of the euro zone. Rich northern countries have refused to countenance these, but a group of nine mainly southern countries are warning of economic calamity and threats to the single currency if they are not created.
Coronavirus briefs
Boris Johnson contracted covid-19, the first political leader of a country to do so. The British prime minister is self-isolating at Number 10.
Austria made it compulsory to wear face masks in supermarkets. The Czech Republic and Slovakia have put similar measures in place.
The captain of an American aircraft-carrier docked in Guam asked the navy for help following an outbreak of covid-19 on board. Around 100 sailors on the uss Theodore Roosevelt have tested positive for the new coronavirus.
The world’s biggest condom-maker, which is based in Malaysia, warned of a global shortage because it has had to shut factories. Forecasters have already predicted a baby boom because of couples staying at home.
The Wimbledon tennis tournament was cancelled.
Business this week
The world this week
Apr 2nd 2020 edition
Apr 2nd 2020
After a few days of relative calm, stockmarkets were once again beset by volatile trading. Many global markets recorded their worst quarter since the start of the financial crisis in 2008. The s&p 500 fell by 20% over the three months; the Dow Jones Industrial Average was down by 23%. London’s ftse 100 dropped by 25%, its worst quarter since 1987. Commodity prices also slumped. The price of Brent crude oil plunged by 55% in March, but rose this week amid hopes that Saudi Arabia and Russia might end their price war.
We’re all in this together
The European Central Bank told banks in the euro zone to suspend dividend payments so that they can increase their lending capacity. After the Bank of England mooted similar rules, big British banks did the same. Non-financial companies are under no such obligation. Shell took out a $12bn credit facility, which should ensure it continues its shareholder dividends.
With investors flocking to the haven of the dollar, the Federal Reserve created a new facility to help many foreign central banks access the greenback and stabilise the market.
The British government expanded its rescue package for workers and companies to include paying employers’ national-insurance and statutory pension contributions up to a wage cap of £2,500 ($3,100) a month.
India’s central bank announced a raft of measures to help exporters and state governments. This came after it cut its benchmark interest rate by three-quarters of a percentage point, to 4.4%.
More than 80 emerging-market economies have turned to the imf for help in recent weeks, according to the fund, and more are likely to follow suit. Its current estimate for the finance needs of emerging markets is $2.5trn. See article.
China’s official manufacturing index rose sharply in March, bouncing back from a record low in February. The national statistics agency said that more than half of the businesses it surveyed had resumed production, though the situation was still far from normal. Similar indices for Japan, South Korea and other Asian countries pointed to sharp contractions in their factory output.
Australia tightened its rules on foreign takeovers amid concern that businesses struggling because of covid-19 restrictions, particularly in the airline industry, could be snapped up cheaply.
New York’s attorney-general reportedly asked Zoom to beef up its security and privacy procedures. Now that most office workers are based at home demand for the videoconference app has soared. The fbi warned separately that it had received many reports of Zoombombing, where online meetings are hijacked by trolls to display pornographic or hate images.
Using civil-defence powers enacted during the Korean war, Donald Trump ordered General Motors to start making hospital ventilators, and criticised the carmaker for being slow in its response and wanting “top dollar”. gm had already begun working on plans to produce the life-saving machines.
Under pressure from American sanctions, Rosneft, a Russian oil firm, sold its assets in Venezuela to the Russian government. See article.
More American retailers who have had to close their stores during the coronavirus outbreak forced their shop workers to take a leave of absence. Gap said it was “pausing” staff pay but would continue to offer benefits. Macy’s, which was struggling before the crisis, told its 125,000 employees that it would continue to pay health insurance until at least the end of May.
OneWeb, a startup seeking to provide cheap internet connectivity through a network of satellites, filed for bankruptcy protection pending a sale of the business. It blamed covid-19, having reportedly failed to secure a loan from SoftBank, one of its investors. Meanwhile, it emerged that SoftBank has pulled out of a deal to buy back $3bn-worth of shares from investors in WeWork, a startup that saw its planned ipo implode last year.
Xerox abandoned its $30bn hostile takeover bid for HP because of market uncertainty.
How to spend it
March was the best month on record for British supermarkets, with sales rising by a fifth compared with the same month in 2019, according to retail research. Sales of frozen food were up by 84% (Iceland’s revenue rose the most among the big chains). With pubs closed, alcohol sales jumped by an intoxicating 67%. An analysis of global search trends over March showed a sharp rise of interest in eco toilet paper, bidets, weights equipment and bulk ammunition.
A grim calculus
Covid-19 presents stark choices between life, death and the economy
The trade-offs required by the pandemic will get even harder
Leaders
Apr 2nd 2020 edition
Apr 2nd 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub
Imagine having two critically ill patients but just one ventilator. That is the choice which could confront hospital staff in New York, Paris and London in the coming weeks, just as it has in Lombardy and Madrid. Triage demands agonising decisions (see Briefing). Medics have to say who will be treated and who must go without: who might live and who will probably die.
The pandemic that is raging across the world heaps one such miserable choice upon another. Should medical resources go to covid-19 patients or those suffering from other diseases? Some unemployment and bankruptcy is a price worth paying, but how much? If extreme social distancing fails to stop the disease, how long should it persist?
The governor of New York, Andrew Cuomo, has declared that “We’re not going to put a dollar figure on human life.” It was meant as a rallying-cry from a courageous man whose state is overwhelmed. Yet by brushing trade-offs aside, Mr Cuomo was in fact advocating a choice—one that does not begin to reckon with the litany of consequences among his wider community. It sounds hard-hearted but a dollar figure on life, or at least some way of thinking systematically, is precisely what leaders will need if they are to see their way through the harrowing months to come. As in that hospital ward, trade-offs are unavoidable.
Their complexity is growing as more countries are stricken by covid-19. In the week to April 1st the tally of reported cases doubled: it is now nearing 1m. America has logged well over 200,000 cases and has seen 55% more deaths than China. On March 30th President Donald Trump warned of “three weeks like we’ve never seen before”. The strain on America’s health system may not peak for some weeks (see article). The presidential task-force has predicted that the pandemic will cost at least 100,000-240,000 American lives.
Just now the effort to fight the virus seems all-consuming. India declared a 21-day lockdown starting on March 24th. Having insisted that it was all but immune to a covid-19 outbreak, Russia has ordered a severe lockdown, with the threat of seven years’ prison for gross violations of the quarantine. Some 250m Americans have been told to stay at home. Each country is striking a different trade-off—and not all of them make sense.
In India the Modi government decided that its priority was speed. Perhaps as a result it has fatally bungled the shutdown. It did not think about migrant workers who have streamed out of the cities, spreading the disease among themselves and carrying it back to their villages (see article). In addition, the lockdown will be harder to pull off than in rich countries, because the state’s capacity is more limited. India is aiming to slow its epidemic, delaying cases to when new treatments are available and its health-care system is better prepared. But hundreds of millions of Indians have few or no savings to fall back on and the state cannot afford to support them month after month. India has a young population, which may help. But it also has crowded slums where distancing and handwashing are hard. If the lockdown cannot be sustained, the disease will start to spread again.
Russia’s trade-off is different. Clear, trusted communications have helped ensure that people comply with health measures in countries like Singapore and Taiwan. But Vladimir Putin has been preoccupied with extending his rule and using covid-19 in his propaganda campaign against the West. Now that the virus has struck, he is more concerned with minimising political damage and suppressing information than leading his country out of a crisis. That trade-off suits Mr Putin, but not his people.
America is different, too. Like India, it has shut down its economy, but it is spending heavily to help save businesses from bankruptcy and to support the income of workers who are being laid off in devastating numbers (see article).
For two weeks Mr Trump speculated that the cure might be worse than the “problem itself”. Putting a dollar figure on life shows he was wrong. Shutting the economy will cause huge economic damage. Models suggest that letting covid-19 burn through the population would do less, but lead to perhaps 1m extra deaths. You can make a full accounting, using the age-adjusted official value of each life saved. This suggests that attempting to mitigate the disease is worth $60,000 to each American household. Some see Mr Trump’s formulation itself as mistaken. But that is a comforting delusion. There really is a trade-off, and for America today the cost of a shutdown is far outweighed by the lives saved. However, America is fortunate to be rich. If India’s lockdown fails to stop the spread of the disease its choice will, tragically, point the other way.
Wherever you look, covid-19 throws up a miasma of such trade-offs. When Florida and New York take different approaches, that favours innovation and programmes matched to local preferences. But it also risks the mistakes of one state spilling over into others (see Lexington). When China shuts its borders to foreigners almost completely, it stops imported infections but it also hobbles foreign businesses. A huge effort to make and distribute covid-19 vaccines will save lives, but it may affect programmes that protect children against measles and polio.
How should you think about these trade-offs? The first principle is to be systematic. The $60,000 benefit to American households, as in all cost-of-life calculations, is not real cash but an accounting measure that helps compare very different things such as lives, jobs and contending moral and social values in a complex society. The bigger the crisis, the more important such measurements are. When one child is stuck down a well the desire to help without limits will prevail—and so it should. But in a war or a pandemic leaders cannot escape the fact that every course of action will impose vast social and economic costs. To be responsible, you have to stack each against the other.
Hard-headed is not hard-hearted
A second principle is to help those on the losing side of sensible trade-offs. Workers sacked in forced shutdowns deserve extra help; children who no longer get meals at schools need to be given food. Likewise, society must help the young after the pandemic has abated. Although the disease threatens them less severely, most of the burden will fall on them, both today and in the future, as countries pay off their extra borrowing.
A third principle is that countries must adapt. The balance of costs and benefits will change as the pandemic unfolds. Lockdowns buy time, an invaluable commodity. When they are lifted, covid-19 will spread again among people who are still susceptible. But societies can prepare in a way that they never did for the first wave, by equipping health systems with more beds, ventilators and staff. They can study new ways to treat the disease and recruit an army of testing and tracing teams to snuff out new clusters. All that lowers the cost of opening up the economy.
Perhaps, though, no new treatments will be found and test-and-trace will fail. By the summer, economies will have suffered double-digit drops in quarterly gdp. People will have endured months indoors, hurting both social cohesion and their mental health. Year-long lockdowns would cost America and the euro zone a third or so of gdp. Markets would tumble and investments be delayed. The capacity of the economy would wither as innovation stalled and skills decayed. Eventually, even if many people are dying, the cost of distancing could outweigh the benefits. That is a side to the trade-offs that nobody is yet ready to admit. ■
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Bottomless Pit, inc
Bail-outs are inevitable—and toxic
How to design corporate bail-outs to protect taxpayers
Leaders
Apr 4th 2020 edition
Apr 4th 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub
In the past month the biggest business handout in history has begun. The goal of helping firms survive temporary lockdowns is sensible, but it is hard not to feel uneasy (see article). At least $8trn of state loans and goodies have been promised to private firms in America and Europe, roughly equivalent to all their profits over the past two years. Over half a million European firms have applied for payroll subsidies. Some of these handouts will involve grubby choices: Boeing, embroiled in the 737 max crashes, might get billions of taxpayer dollars. Broad rescue schemes could also leave a legacy of indebted, ossified firms that impede the eventual recovery. Speed is essential, but governments also need a clearer framework to organise the jumble of schemes, protect taxpayers and preserve the economy’s dynamism.
That $8trn is a big number, and includes state and central-bank loans, guarantees and temporary subsidies to keep paying inactive workers. The total running costs of all American and euro-zone non-financial firms (excluding payments to each other) are $13.5trn a year, of which $11.6trn is wages. But there is still no guarantee that this mountain of money can prevent chaos. Firms also need to refinance $4trn of bonds in the next 24 months, and debt markets are still wary about racier borrowers. Carnival, a cruise line, has issued bonds at a crushing 11.5% interest rate. The plethora of support schemes—there are at least ten in America, with different eligibility rules—will baffle some firms and exclude others. A quarter of listed Western firms are heavily indebted, and if those facing slumping demand gorge on state loans they may wreck their balance-sheets. For a few giants the potential losses are so big that they alone could impose a significant burden on the state. Volkswagen says it is burning through $2.2bn of cash every week.
Ideally private investors would swoop in—Warren Buffett is sitting on $125bn of spare funds and Blackstone’s funds have $151bn. But the duration of lockdowns is unclear, so they may be reluctant. As a result, alongside widely available cheap state loans, bespoke state bail-outs are starting. America’s latest stimulus package earmarks at least $50bn for the airlines and other firms vital for “national security” (Boeing and chums). Germany has loaned $2bn to tui, a travel firm, and Singapore’s sovereign fund, Temasek, has bought more shares in Singapore Airlines.
Such bespoke deals are easy to sign but often go sour. Uncle Sam lost over $10bn on the General Motors rescue of 2009 and the Wall Street bank bail-outs left an especially bitter taste. Negotiations can be hijacked by politicians who want pork or sway over firms’ strategies. If bailed-out firms end up indebted and burdened by long-term job guarantees, the economy can become ossified, sapping productivity. And it is unfair to ask well-run firms to compete with state-backed rivals.
What to do? Governments need to offer support for business in an integrated way. There should be blanket offers to all firms of cheap loans and help in paying the wages of inactive staff for three to six months with few strings attached. This is what the $8trn of loans and guarantees mostly try to do, but there are gaps and doubts about how small firms will get cash. One answer is making sure banks have the resources to lend—even if this means suspending their dividends, as Britain did this week. The goal should be to freeze most of the economy temporarily, until the lockdowns ease.
In time, though, more ruthlessness will be necessary. The cost of extending unlimited credit to all firms is unsustainable and the economy must eventually adjust to new circumstances: for example, e-commerce firms need more workers whereas cinemas may never fully recover (see Schumpeter). Assistance beyond six months should be limited to firms that provide essential services—such as telecoms, utilities or payments—or are at the centre of critical industrial supply chains. These firms may be eligible for long-term loans but they must come at a price, in the form of equity stakes for the taxpayer. A rough yardstick is that for every $100 of long-term loans, taxpayers should get $10 of equity. If these firms are already heavily indebted there is no point in crippling them further. Instead, creditors must take a big haircut.
Lastly, governments should not interfere in other ways. There will be populist calls to force airlines to give more legroom, car firms to build electric charging-points and manufacturers to build factories in rustbelts. But bail-outs of individual firms are a bad mechanism for dealing with these issues. The one rule that governments should impose is to ban firms getting bespoke deals from paying cash to shareholders through dividends and buy-backs until state loans are repaid.
This year will see state intervention in business on an unprecedented scale. With luck it will not be remembered as the year in which dynamism and free markets died. ■
Winners from the pandemic
Big tech’s covid-19 opportunity
Tech giants are thriving in the corona crisis. They should seize the moment to detoxify their relationship with society
Leaders
Apr 4th 2020 edition
Apr 4th 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub
The pandemic will have many losers, but it already has one clear winner: big tech. The large digital platforms, including Alphabet and Facebook, will come out of the crisis even stronger. They should use this good fortune to reset their sometimes testy relations with their users. Otherwise big government, the other beneficiary of the covid calamity, is likely to do it for them.
Demand for online services has exploded and the infrastructure behind the internet has proved to be admirably reliable (see article). Newcomers such as Slack and Zoom, which help businesses operate remotely, have become household names. And although some tech supply chains are creaking and online advertising spending has dipped, overall the big five firms are seeing surging demand.
Facebook has said that messaging activity has increased by 50% in those countries hit hard by the virus. Amazon is planning to hire 100,000 new staff to keep up with higher e-commerce orders. The big tech firms are also a bastion of financial stability: together Alphabet, Amazon, Apple, Facebook and Microsoft have $570bn of gross cash on their balance-sheets. Shares in these firms have outperformed the market since late January.
Just as the big firms are standing even taller, many of the tech industry’s younger, smaller firms are being crushed in the worst slump since the dotcom crash 20 years ago (see Briefing). Even before the coronavirus hit, trouble was brewing in the land of unicorns, as tech startups worth more than $1bn are called. Among many firms catering to consumers, the strategy of growing at all costs, known as “blitzscaling”, had turned out to be flawed. Some firms, particularly those stuffed with capital by SoftBank’s $100bn Vision Fund, had already started laying off people. All this will make it easier for the big firms to hire the best talent. Collapsing firms could be snapped up by the tech giants.
If that happens, the odds are that regulators will do little or nothing to stop a round of consolidation. In America antitrust investigations against Alphabet, Google’s parent, and Facebook have essentially been put on hold, as officials deal with other priorities and refrain from destabilising firms during a crisis. A new federal privacy law seems further away than ever. Even tech sceptics in the European Union want to rethink their approach to regulating artificial intelligence (ai). In an abrupt twist, “surveillance capitalism”, as critics call big tech’s business practices, is no longer seen as exploitative, but essential to tackle the virus. And no one is complaining about Facebook and Google zealously taking down misinformation about covid-19, and increasingly relying on ai to do so. Yet, before the pandemic, such activity would have triggered howls of outrage over censorship and bias.
In fact, more than ever it is clear that big tech firms act as vital utilities. Therein lies the trap, because almost everywhere other utilities, such as water or electricity, are heavily regulated and have their prices and profits capped. Once this crisis passes, startled citizens and newly emboldened governments could make a push for the state to have similar control over big tech.
The companies seem to sense this danger. Their best defence is to propose a new deal to the citizens of the world. That means clear and verifiable rules on how they publish and moderate content, helping users own, control and profit from their own data; as well as fair treatment of competitors that use their platforms. This approach may even be more profitable in the long run. Today the most valuable firm in America is Microsoft, which has been revived by building a reputation for being trustworthy. It is an example that the other big tech platforms—or digital utilities, as they are about to become known—should follow. ■
Gas, guns and guerrillas
Jihadists threaten Mozambique’s new gasfields
The government’s response to a mysterious revolt is cruel and ineffective
Leaders
Apr 2nd 2020 edition
Apr 2nd 2020
Many kinds of misfortune make a country prone to conflict; Mozambique has them all. It is poor. frelimo, its ruling party, is predatory and corrupt. Much of its vast territory is barely governed at all. It has a recent history of civil war: a 15-year inferno that ended in 1992 and cost perhaps 1m lives, and a milder six-year uprising involving the same rebel group, renamo, which formally ended last year. Into this explosive mix, two blazing matches have been tossed: jihadist terror and the discovery of natural gas.
As we report this week, a poorly understood insurgency is spreading in Cabo Delgado, a province in northern Mozambique (see article). So far the conflict has killed more than 1,000 people, aid workers estimate, and forced at least 100,000 to flee their homes. Recent weeks have seen some of the boldest attacks yet. Young men with guns and Islamist slogans are not merely burning villages and beheading people. They have also started to capture towns, albeit temporarily, slaughtering government forces and then retreating to the bush.
On March 23rd they briefly overran Mocimboa da Praia, a transport hub near what may be Africa’s largest-ever gas project. The huge reserves off the coast of Cabo Delgado have attracted pledges of investment worth tens of billions of dollars from multinational firms. Gas gives Mozambique the hope of a more prosperous future—but also a prize worth fighting over. Already insecurity, as well as covid-19 and low oil prices, are slowing exploration. If Mozambique wants to realise its dream of becoming “Africa’s Qatar”, it must pacify Cabo Delgado.
To do so it must be honest. The government describes the uprising as a foreign conspiracy to keep the country poor. That is nonsense. Although there are indeed foreign preachers and fighters among the jihadists, the insurgency is mostly local in origin, born of marginalisation. Muslims are a minority in Mozambique, and the largely Muslim north, which is far from the capital, has long been neglected. It is only in the past year that the jihadists there have formally affiliated to Islamic State, and it is not clear that is supplies it with much besides inspiration.
The government’s counter-insurgency tactics are inept, too. It has so far relied on ill-trained conscripts, thuggish police and Russian mercenaries. It has rounded up young men on the flimsiest evidence and beaten or summarily shot them, according to Human Rights Watch, an ngo. Such brutality alienates the population. It has locked up journalists who report on the conflict and threatened aid workers who air grievances. This constricts the flow of accurate information. A better approach would involve properly paid and trained troops, who speak local languages and respect human rights, as well as schemes that deal with the province’s poverty and inequality.
Neighbours, especially South Africa, the biggest regional power, and Tanzania, which borders Cabo Delgado, should press the Mozambican government to behave better. They should also share intelligence with it. Right now they are preoccupied by covid-19, but the insurgency will probably outlast the pandemic. A summit about Islamist violence scheduled for May should go ahead, albeit virtually. Western countries should tell Mozambique to let aid agencies and journalists do their jobs.
Things don’t have to fall apart
Energy firms, which include giants such as ExxonMobil and Total, could do more as well. They have sought to cocoon themselves from the violence by hiring private-security firms. That is not enough. Their projects will remain insecure unless they can show that the benefits of their investments flow to ordinary Mozambicans, not just the frelimo elite. If Mozambique were to fall apart again, it would be a tragedy. If jihadism were to take root, it could spread to neighbouring countries, as it has in the Sahel. Mozambique, and Africa, deserve better. ■
Rosneft’s sleight of hand
Why Putin’s favourite oil firm dumped its Venezuelan assets
Russian taxpayers are left holding the can
Leaders
Apr 2nd 2020 edition
Apr 2nd 2020
Rosneft is responsible for 40% of Russia’s oil output, but it is much more than just another oil firm. A large chunk of its shares are owned by the Russian state. Its boss, Igor Sechin, is one of Vladimir Putin’s closest henchmen. A former spook, like the Russian president, he has been at the big man’s side since the 1990s. In 2004-06 Rosneft gobbled up the remains of Yukos, Russia’s largest private oil firm, which was dismembered after its boss challenged Mr Putin. Since then Rosneft has been both a tool of Kremlin power and a driver of policy in its own right. Bear this in mind when trying to make sense of the announcement, on March 28th, that it has sold all its Venezuelan assets to an unnamed Russian government entity.
For years the Kremlin has propped up Venezuela’s dictatorship, first under Hugo Chávez, then under his protégé, Nicolás Maduro. Russia has supplied loans, weapons and, lately, mercenaries to keep the regime in power, largely to annoy the United States. America, like many democracies, does not recognise the election-stealing Mr Maduro as Venezuela’s president, and has slapped severe sanctions on his country. Last week it unsealed indictments of Mr Maduro and his cronies for alleged drug-trafficking (see article). Mr Sechin calculates that, if America supports democracies in Russia’s backyard, Russia should support despots in America’s.
Rosneft’s role in all this has been to practise bare-knuckle petropolitics. It has traded Venezuelan oil to help Mr Maduro get around American sanctions. Rosneft lent his government $6.5bn in 2014-18, to be repaid in oil. At the end of last year it was still owed at least $800m, though the figures are murky.
Thanks to a low oil price, sanctions and the Maduro regime’s spectacular corruption and ineptitude, Venezuela is in no position to repay all its debts. But this is not too much of a problem for Rosneft, since it can dump its Venezuelan assets on to Russian taxpayers. They will no doubt be delighted to hear that they have paid for this with 9.6% of Rosneft’s own shares (worth more than $4bn), thus reducing their stake to just over 40%. The deal gives Mr Sechin ever tighter control of the firm. Minority shareholders, including bp and Qatar’s sovereign-wealth fund, which each hold just under 20%, have yet to comment.
The main aim of the deal, it seems, is to help Rosneft escape the consequences of doing business with a pariah. Over the past two months America has penalised the company’s trading arms for handling Venezuelan oil. These sanctions are global in scope and affect its customers, too. Sinochem International, the trading arm of a Chinese state-owned refinery, has rejected Rosneft’s oil. The Kremlin’s solution is to distance Rosneft from Venezuela while reassuring the Venezuelan kleptocracy that it still has Russia’s backing. “I received a message from brother president Vladimir Putin who ratified his comprehensive strategic support for all areas of our [relationship],” tweeted Mr Maduro.
These shenanigans come at a turbulent time in the oil markets. The price of crude has fallen by half in the past month, as covid-19 has crushed demand and Saudi Arabia has opened its taps to punish Russia for refusing to extend an opec deal to curb production. The Kremlin would like cheap oil to drive American shale producers, whose costs are higher, out of business. This is a risky game. Russia has alienated the Saudis, who might draw closer to America as a result. Rosneft can survive oil at $25 a barrel. But under Russian law the royalties it pays to the Russian state fall sharply as the oil price slides. As covid-19 spreads in Russia, Mr Putin will have to draw on the country’s reserves to help ordinary people cope. Mr Sechin’s sleight of hand has solved a problem for Rosneft, but not for Russia. ■
Between tragedies and statistics
The hard choices covid policymakers face
Epidemiological models are among their only guides
Briefing
Apr 4th 2020 edition
Apr 4th 2020
WASHINGTON, DC
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub
“We have no choice,” said President Donald Trump on March 30th, after announcing that federal guidelines on social distancing would remain in force until the end of April. “Modelling…shows the peak in fatalities will not arrive for another two weeks. The same modelling also shows that, by very vigorously following these guidelines, we could save more than 1 million American lives.”
Epidemiological models are not the only reason why many countries around the world, and many states in America, are now in some form of lockdown. That China, where the outbreak started, pursued such a policy with an abandon never seen before, and subsequently reported spectacular falls in the rate of new infections, is doubtless another reason. So are the grim scenes from countries where the spread of the virus was not interrupted early enough. By April 1st Italy had seen almost four times as many deaths as China.
The power of the models has been that they capture what has just been seen in these countries and provide a quantitative picture of what may be seen tomorrow—or in alternative tomorrows. They have both made clear how bad things could get and offered some sense of the respite which different interventions can offer. Faced with experts saying, quietly but with good evidence, that a lockdown will save umpty-hundred-thousand lives, it is hard for a politician to answer “At what cost?”
What is more, when the epidemiologists reply “Not our department”, the economists to whom the buck then passes are not necessarily much more help. Estimates of the costs of the interventions now in place are all large, but they vary widely (see article). A proper assessment requires knowing how well the measures will work, how long they will last and how they will be ended—thus returning the question to the realm of public-health policy.
But as time goes on, “at what cost” will become easier to voice, and harder to duck. “We have no choice” will no longer be enough; as the disruptive effects of social-distancing measures and lockdowns mount there will be hard choices to make, and they will need to be justified economically as well as in terms of public health. How is that to be done?
Epidemiological models come in two types. The first seeks to capture the basic mechanisms by which diseases spread in a set of interlinked equations. In the classic version of this approach each person is considered either susceptible, exposed, infectious or recovered from the disease. The number in each group evolves with the numbers in one or more of the other groups according to strict mathematical rules (see chart 1). In simple versions of such models the population is uniform; in more elaborate versions, such as the one from Imperial College London, which has influenced policy in Britain and elsewhere, the population is subdivided by age, gender, occupation and so on.
The second type of model makes no claim to capture the underlying dynamics. They are instead based on what is essentially a sophisticated form of moving average, predicting things about next week (such as how many new infections there will be) based mostly on what happened this week, a little bit on what happened last week, and a smidgen on what happened before that. This approach is used to forecast the course of epidemics such as the seasonal flu, using patterns seen in epidemics that have already run their course to predict what will come next. Over the short term they can work pretty well, providing more actionable insights than mechanistic models. Over the long term they remain, at best, a work in progress.
All the models are beset by insufficient data when faced with covid-19. There is still a lot of uncertainty about how much transmission occurs in different age groups and how infectious people can be before they have symptoms; that makes the links between the different equations in the mechanistic models hard to define properly. Statistical models lack the data from previous epidemics that make them reliable when staying a few steps ahead of the flu.
Obedient to controlling hands
This causes problems. The Dutch started expanding their intensive-care capacity on the basis of a model which, until March 19th, expected intensive-care stays to last ten days. Having seen what was happening in hospitals, the modellers lengthened that to 23 days, and the authorities worry about running out of beds by April 6th. Unsettling news; but better known in advance than discovered the day before.
If more data improve models, so does allowing people to look under their bonnets. The Dutch have published the details of the model they are using; so has New Zealand. As well as allowing for expert critique, it is a valuable way of building up public trust.
As models become more important and more scrutinised, discrepancies between their purported results will become apparent. One way to deal with divergence is to bring together the results of various different but comparable models. In Britain, the government convened a committee of modelling experts who weighed the collective wisdom from various models of the covid-19 epidemic. America’s task force for the epidemic recently held a meeting of modelling experts to assess the range of their results.
Another way to try to get at the combined expertise of the field is simply to ask the practitioners. Nicholas Reich of the University of Massachusetts, Amherst, and his colleague Thomas McAndrew have used a questionnaire to ask a panel of experts on epidemics, including many who make models, how they expect the pandemic to evolve. This sounds crude compared with differential equations and statistical regressions, but in some ways it is more sophisticated. Asked what they were basing their responses on, the experts said it was about one-third the results of specific models and about two-thirds experience and intuition. This offers a way to take the models seriously, but not literally, by systematically tapping the tacit knowledge of those who work with them.
In studies run over the course of two flu seasons, such a panel of experts was consistently better at predicting what was coming over the next few weeks than the best computational models. Unfortunately, like their models, the experts have not seen a covid outbreak before, which calls the value of their experience into at least a little doubt. But it is interesting, given Mr Trump’s commitment to just another month of social distancing, that they do not expect a peak in the American epidemic until May (see chart 2).
Though the models differ in various respects, the sort of action taken on their advice has so far been pretty similar around the world. This does not mean the resultant policies have been wise; the way that India implemented its lockdown seems all but certain to have exacerbated the already devastating threat that covid-19 poses there. And there are some outliers, such as the Netherlands and, particularly, Sweden, where policies are notably less strict than in neighbouring countries.
Attempts to argue that the costs of such action could be far greater than the cost of letting the disease run its course have, on the other hand, failed to gain much traction. When looking for intellectual support, their proponents have turned not to epidemiologists but to analyses by scholars in other fields, such as Richard Epstein, a lawyer at the Hoover Institute at Stanford, and Philip Thomas, a professor of risk management at the University of Bristol. These did not convince many experts.
April is the cruellest month
Even if they had, it might have been in vain. The argument for zeal in the struggle against covid-19 goes beyond economic logic. It depends on a more primal politics of survival; hence the frequent comparison with total war. Even as he talked of saving a million lives, Mr Trump had to warn America of 100,000 to 200,000 deaths—estimates that easily outstrip the number of American troops lost in Vietnam. To have continued along a far worse trajectory would have been all but impossible.
What is more, a government trying to privilege the health of its economy over the health of its citizenry would in all likelihood end up with neither. In the absence of mandated mitigation policies, many people would nonetheless reduce the time they spend out of the home working and consuming in order to limit their exposure to the virus. (Cinemas in South Korea, where the epidemic seems more or less under control, have not been closed by the government—but they are still short of customers.) There would be effects on production, too, with many firms hard put to continue business as usual as some workers fell ill (as is happening in health care today) and others stayed away (as isn’t).
This is one reason why, in the acute phase of the epidemic, a comparison of costs and benefits comes down clearly on the side of action along the lines being taken in many countries. The economy takes a big hit—but it would take a hit from the disease too. What is more, saving lives is not just good for the people concerned, their friends and family, their employers and their compatriots’ sense of national worth. It has substantial economic benefits.
Michael Greenstone and Vishan Nigam, both of the University of Chicago, have studied a model of America’s covid-19 epidemic in which, if the government took no action, over 3m would die. If fairly minimal social distancing is put in place, that total drops by 1.7m. Leaving the death toll at 1.5m makes that a tragically underpowered response. But it still brings huge economic benefits. Age-adjusted estimates of the value of the lives saved, such as those used when assessing the benefits of environmental regulations, make those 1.7m people worth about $8trn: nearly 40% of gdp.
Those sceptical of the costs of current policies argue that they, too, want to save lives. The models used to forecast gdp on the basis of leading indicators such as surveys of sentiment, unemployment claims and construction starts are no better prepared for covid-19 than epidemiological models are, and their conclusions should be appropriately salinated. But even if predictions of annualised gdp losses of 30% over the first half of the year in some hard-hit economies prove wide of the mark, the abrupt slowdown will be unprecedented.
Lost business activity will mean lost incomes and bankrupt firms and households. That will entail not just widespread misery, but ill health and death. Some sceptics of mitigation efforts, like George Loewenstein, an economist at Carnegie Mellon University, in Pittsburgh, draw an analogy to the “deaths of despair”—from suicide and alcohol and drug abuse—in regions and demographic groups which have suffered from declining economic fortunes in recent decades.
The general belief that increases in gdp are good for people’s health—which is true up to a point, though not straightforwardly so in rich countries—definitely suggests that an economic contraction will increase the burden of disease. And there is good reason to worry both about the mental-health effects of lockdown (see article) and the likelihood that it will lead to higher levels of domestic abuse. But detailed research on the health effects of downturns suggests that they are not nearly so negative as you might think, especially when it comes to death. Counterintuitive as it may be, the economic evidence indicates that mortality is procyclical: it rises in periods of economic growth and declines during downturns.
And the profit and loss
A study of economic activity and mortality in Europe between 1970 and 2007 found that a 1% increase in unemployment was associated with a 0.79% rise in suicides among people under the age of 65 and a comparable rise in deaths from homicide, but a decline in traffic deaths of 1.39% and effectively no change in mortality from all causes (see chart 3). A study published in 2000 by Christopher Ruhm, now at the University of Virginia, found that in America a 1% rise in unemployment was associated with a 1.3% increase in suicides, but a decline in cardiovascular deaths of 0.5%, in road deaths of 3.0%, and in deaths from all causes of 0.5%. In the Great Depression, the biggest downturn in both output and employment America has ever witnessed, overall mortality fell.
Some research suggests that the procyclical link between strong economic growth and higher mortality has weakened in recent decades. But that is a long way from finding that it has reversed. What is more, the effects of downturns on health seem contingent on policy. Work published by the oecd, a group of mostly rich countries, found that some worsening health outcomes seen in the aftermath of the financial crisis were due not to the downturn, but to the reductions in health-care provision that came about as a result of the government austerity which went with it. Increased spending on programmes that help people get jobs, on the other hand, seems to reduce the effect of unemployment on suicides. The fact that some of the people now arguing that the exorbitant costs of decisive action against covid-19 will lead to poorer public health in the future were, after the financial crisis, supporters of an austerity which had the same effect is not without its irony.
But if the argument that the cure might be worse than the disease has not held up so far, the story still has a long way to go. The huge costs of shutting down a significant fraction of the economy will increase with time. And as the death rates plateau and then fall back, the trade-offs—in terms of economics, public health, social solidarity and stability and more—that come with lockdowns, the closure of bars, pubs and restaurants, shuttered football clubs and cabin fever will become harder to calculate.
It is then that both politicians and the public are likely to begin to see things differently. David Ropeik, a risk-perception consultant, says that people’s willingness to abide by restrictions depends both on their sense of self-preservation and on a sense of altruism. As their perception of the risks the disease poses both to themselves and others begins to fall, seclusion will irk them more.
It is also at this point that one can expect calls to restart the economy to become clamorous. In Germany, where the curve of the disease has started to flatten, Armin Laschet, the premier of North Rhine-Westphalia, Germany’s largest and second-most-covid-afflicted state, has said it should no longer be out of bounds to talk about an exit strategy. Angela Merkel, the chancellor—a role Mr Laschet is keen to inherit—said on March 26th there should be no discussion of such things until the doubling time for the number of cases in the country had stretched beyond ten days. When she was speaking, it was four days. Now it is close to eight.
When the restrictions are lessened it will not be a simple matter of “declaring victory and going home”, the strategy for getting out of the Vietnam war advocated by Senator Richard Russell. One of the fundamental predictions of the mechanistic models is that to put an epidemic firmly behind you, you have to get rid of the susceptible part of the population. Vaccination can bring that about. Making it harder for the disease to spread, as social distancing does, leaves the susceptible population just as vulnerable to getting exposed and infected as it was before when restrictions are lifted.
This does not mean that countries have to continue in lockdown until there is a vaccine. It means that when they relax constraints, they must have a plan. The rudiments of such a plan would be to ease the pressure step by step, not all at once, and to put in place a programme for picking up new cases and people who have been in contact with them as quickly as possible. How countries trace cases will depend, in part, on how low they were able to get the level of the virus in the population and how able, or inclined, they are to erode their citizens’ privacy. How they relax constraints will depend to some extent on modelling.
Cécile Viboud of America’s National Institutes of Health argues that if you can make mechanistic models sufficiently fine-grained they will help you understand the effectiveness of different social-distancing measures. That sounds like the sort of knowledge that governments considering which restrictions to loosen, or tighten back up, might find valuable. The ability to compare the outcomes in countries following different strategies could also help. David Spiegelhalter, a statistician at the University of Cambridge, says the differences between Norway, which is conforming to the lockdowns seen in most of the rest of Europe, and Sweden, which is not, provide a “fantastic experiment” with which to probe the various models.
But the fact that it is possible to build things like how much time particular types of people spend in the pub into models does not necessarily mean that the models will represent the world better as a result. For what they say on such subjects to be trustworthy the new parameters on pubs and such like must be calibrated against the real world; and the more parameters are in play, the harder that is. People can change so many behaviours in response to restrictions imposed and removed that the uncertainties will “balloon” over time, says Mr Reich.
The human engine waits
Some will see this as a reason to push ahead with calibration and other improvements. Others may see it as a reason to put off the risks associated with letting the virus out of the bag for as long as possible. Longer restrictions would give governments more time to put in place measures for testing people and tracking contacts. If they force many companies into bankruptcy, they will give others time to find workarounds and new types of automation that make the restrictions less onerous as time goes by.
Advocates of keeping things in check for as long as possible can point to a new paper by Sergio Correia, of the Federal Reserve Board, Stephan Luck, of the Federal Reserve Bank of New York, and Emil Verner, of mit, which takes a city-by-city look at the effects of the flu pandemic of 1918-19 on the American economy. They find that the longer and more zealously a city worked to stem the flu’s spread, the better its subsequent economic performance. A new analysis by economists at the University of Wyoming suggests much the same should be true today.
The flu, though, mostly killed workers in their prime, and the service industries which dominate the modern economy may not respond as the manufacturing industries of a century ago. What is more, in some places the pressure to get the economy moving again may be irresistible. According to Goldman Sachs, a bank, Italy’s debts could reach 160% of gdp by the end of the year—the sort of number that precedes panics in bond markets. The euro zone could forestall such a crisis by turning Italian debt into liabilities shared all its members—something the European Central Bank is already doing, to a limited extent, by buying Italian bonds. But resistance from Germany and the Netherlands is limiting further movement in that direction. There could come a time when Italy felt forced to relax its restrictions to someone else’s schedule rather than leave the euro.
There is also a worry that, the longer the economy is suppressed, the more long-lasting structural damage is done to it. Workers suffering long bouts of unemployment may find that their skills erode and their connections to the workforce weaken, and that they are less likely to re-enter the labour force and find good work after the downturn has ended. Older workers may be less inclined to move or retrain, and more ready to enter early retirement. Such “scarring” would make the losses from the restrictions on economic life more than just a one-off: they would become a lasting blight. That said, the potential for such scarring can be reduced by programmes designed to get more people back into the labour force.
In the end, just as lockdowns, for all that their virtues were underlined by the modellers’ grim visions, spread around the world largely by emulation, they may be lifted in a similar manner. If one country eases restrictions, sees its economy roar back to life and manages to keep the rate at which its still-susceptible population gets infected low, you can be sure that others will follow suit. ■
Triage under trial
The tough ethical decisions doctors face with covid-19
When the concept of trade-offs is all too real
Briefing
Apr 2nd 2020 edition
Apr 2nd 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub
It was Dominique-Jean Larrey, a rugged French military surgeon in Napoleon’s Grande Armée, who came up with the system of triage. On the battlefield Larrey, who tended to the wounded at the battle of Waterloo, had to determine which soldiers needed medical attention most urgently, regardless of their military rank. In doing so he came up with the concept of distinguishing between urgent and non-urgent patients. Triage, from the French trier (“separate out”) remains as useful today as it was in the Napoleonic campaigns.
Yet most doctors today have rarely been in battlefield conditions. The covid-19 pandemic has changed that. In Italy there are reports of doctors weeping in hospital hallways because of the choices they have to make. In America and Europe many doctors are faced with terrible decisions about how to allocate scarce resources such as beds, intensive care, and ventilators. In the Netherlands, for example, hospitals are expected to be at full capacity by April 6th; two patients have already been sent to Germany. In some countries, new guidelines over how to distinguish between patients are being hastily drawn up.
One general solution, proffered by both moral philosophers and physicians, is to make sure that resources—in this case staff, supplies and equipment—are directed to the patients who have the greatest chances of successful treatment, and who have the greatest life expectancy. But beyond such a seemingly simple utilitarian solution lie some brutal decisions.
Take the shortage of ventilators. Many patients hospitalised with covid-19 will need one eventually. Provide it too early, and someone else does without. When it is truly needed, though, it will be needed quickly. A paper in the New England Journal of Medicine says that when ventilators are withdrawn from patients dependent on them, they will “die within minutes”.
The decision over whether or not to ventilate then becomes a decision between life or death. If a young patient arrives needing a ventilator, and none are available, there is a chance that one will be removed from someone else who is identified as being less likely to survive. In extreme situations, it may even be taken from someone who might survive but who is expected to live for a shorter length of time. Such frameworks do not favour older patients or those with health problems.
Ventilation is actually hard for the body to take. It is difficult for older patients to survive on it for two or three weeks—the length of time it would take for them to recover from covid-19. In ordinary situations, an effort would be made to keep the patient alive until it becomes obviously futile. In some hospitals that is no longer possible.
Italian doctors say that it helps if the framework for distinguishing between patients is decided in advance, and patients and families are properly informed. It also helps if someone else, other than front-line doctors, makes the difficult decisions. That leaves doctors free to appeal a decision if they think it has been made in error. In America many states have strategies for rationing resources; this is performed by a triage officer or committee in a hospital.
In some places, preparation of new triage guidelines is under way. In Canada a framework is being developed and vetted by government lawyers and regulators, according to Ross Upshur, a professor at the Dalla Lana School of Public Health in Toronto. In Britain, the development of guidelines has been painful. The National Institute for Health and Care Excellence, a government body, recommends that decisions about admission to critical care should be made on the basis of the potential for medical benefit. Since issuing that advice it has, though, clarified that a generic frailty index included in its guidelines should not be used for younger people or those with learning disabilities. On April 1st the British Medical Association, the doctors’ trade union, stepped into the breach, making clear the trade-offs: “there is no ethically significant difference between decisions to withhold life-sustaining treatment or to withdraw it, other clinically relevant factors being equal.”
Whether on the battlefield or in a crowded icu, humans tend to be inclined to treat others according to need and their chances of survival. That framework seems broadly morally acceptable. Even so, it will involve many heart-wrenching decisions along the way.
Exit unicorns, pursued by bears
Technology startups are headed for a fall
The consequences will not all be bad
Briefing
Apr 4th 2020 edition
Apr 4th 2020
SAN FRANCISCO
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For a sense of how covid-19 is affecting the world’s technology “unicorns”, as privately held firms worth $1bn or more have come to be known, consider two of them. Lime, a scooter-rental firm valued at $2.4bn, has halted its services in Europe and America, where most citizens have been told to stay off the streets. DoorDash, a $13bn food-delivery company, has suddenly found itself useful to a self-isolating society as a whole, not just couch potatoes; deliveries have surged.
On the surface, DoorDash stands to benefit from the pandemic, and Lime to suffer. In fact, the coronavirus may prove more indiscriminate than that. It strikes at a time when many of the world’s 450-odd unicorns were looking ropy. Their perpetually loss-making business models—only a small proportion are in the black—were increasingly being questioned. So were their exuberant valuations, which added up to perhaps $1.3trn globally. A reckoning was afoot; some unicorns would “go under”, Dara Khosrowshahi, boss of Uber, a ride-hailing giant which relinquished its unicorn status by going public last year, told The Economist on March 2nd.
Among investors, “fear of missing out” has been giving way to “fear of looking stupid”, says Alfred Lin, a partner at Sequoia Capital, a venerable Silicon Valley venture-capital (vc) firm. Plenty have given up trying to do new deals; instead they are trying to save old ones. One firm is telling its companies to expect 30% less revenue in the next two quarters and to cut costs accordingly. On March 5th Sequoia put out a memo entitled “Coronavirus: The Black Swan of 2020” warning that the outbreak will depress startups’ growth and calling on its portfolio firms (one of which is DoorDash) to rein in costs, conserve cash and brace for capital scarcity.
Most telling, the gospel of growth at all cost has gone out of the window. After years of initial public offerings (ipos) being done without much focus on profits, “path to profitability” is the new watchword, says Ryan Dzierniejko of Skadden, Arps, Slate, Meagher & Flom, a law firm. “The law of economic gravity has returned as it does every decade or so,” says Michael Moritz, another Sequoia partner. For some unicorns, dispensing with eight flavours of sparkling water and five selections of Thai curry may be a good start, he adds.
The unicorn reality check was under way before America declared a national state of emergency over covid-19 on March 13th. Venture capitalists reckoned that a third of American unicorns would thrive, a third would disappoint and a third would be taken over or die. As investors the world over scurry to safe assets amid a market meltdown, Mr Khosrowshahi’s prediction may come true faster than he thought. Some discern an echo of the dotcom bubble, which burst 20 years ago. Others are more sanguine. Whoever is right, startup pastures that emerge in the aftermath will look very different to today’s.
Unicorns have come a long way since Aileen Lee, founder of Cowboy Ventures, a vc firm, coined the term in 2013, to convey wonder and rarity. Nowadays every startup wants to be one, for bragging rights and to hire the cleverest coders. “For millennials and Gen Zs being a unicorn became a filter,” says Jeff Maggioncalda, ceo of Coursera, a unicorn that offers online learning courses and university degree programmes. A small Austin-based scooter startup called itself, simply, Unicorn; the attempt to leverage nominative determinism failed when the firm went bust in December after spending all its cash on Google and Facebook ads.
For the past decade huge sums from sovereign-wealth funds, mutual funds and hedge funds poured, directly or via vc firms, into startups that were unicorns or, their backers believed, might be one soon. Total annual vc investment in America leapt from $32bn in 2009 to $121bn in 2018. Some $822bn has flowed into American startups since 2010. About as much has gone to those in the rest of the world. Fat cheques allowed cash-burning firms to put off facing the scrutiny of public markets, with their pesky insistence on earnings.
The euphoria began to ebb last year. First, in May, Uber’s blockbuster ipo priced at a 30% discount to what the company’s investment bankers had promised. Today its market capitalisation is $43bn, more than a third below what it was on its first day of trading. Unicorn ipos of Lyft, Uber’s main rival, and of Slack, a corporate-messaging service, disappointed. Then, in October, WeWork, a supposedly “techie” office-rental group, scrapped its ipo after it became clear that investors had no appetite for shares in a firm that lost as much money as it generated in revenues. Its valuation was cut from $47bn to less than $8bn.
Other debacles followed. Brandless, an online retailer that sold unbranded products for a fixed $3, folded in February. Zume, a firm selling robot-made pizzas, shut its main business in January. Both, as well as WeWork, were backed by the $100bn Vision Fund, the opaque vc vehicle of SoftBank, a Japanese tech conglomerate, and its boss, Son Masayoshi. OneWeb, a British satellite-internet startup formerly valued at $3.3bn and also backed by Mr Son, has filed for bankruptcy.
After the WeWork fiasco smart vc money turned more cautious, particularly with regard to Vision Fund firms: they went from garnering praise to seeming problematic. Now investors, customers and suppliers “think you must be a crappy company” if you were backed by the fund, says the boss of one, who keeps assuring them “we are not the next WeWork”. A Vision Fund spokesperson says: “We’re sorry to hear it. That has not been our experience with our other founders.”
In fact the malaise extends well beyond Mr Son’s empire. In the last quarter of 2019 American venture-backed firms raised 16% less capital than in the previous quarter and big funding rounds—over $100m—fell by a third. Last year China, home to four of the world’s ten most richly valued unicorns, entered a “capital winter”, as investors turned against firms handing out huge subsidies to consumers in a reckless pursuit of customers. Some Chinese unicorns went bust, including Tuandaiwang, a peer-to-peer lender once valued at $1.4bn.
The coronavirus shock comes at a time when most tech unicorns were already exhibiting underlying health problems. Some, most notoriously WeWork, never really deserved the label in the first place. Their businesses had at best a tenuous claim to techiness—and so to the “flywheel” effect behind the likes of Amazon or Facebook, in which a large user base makes them more attractive to more users, and so on. Other companies are bona fide technology firms but, like Uber or Lyft, find that digital flywheels gum up. And too many unicorns rest on shaky and opaque financial structures that may exaggerate their lofty valuations.
Start with “fake tech”. These include capital-intensive firms such as WeWork (where accommodating more customers means leasing more office space) and direct-to-consumer retailers such as Casper, which sells snazzy bedding. “We consider ourselves a tech company first,” declared its co-founder, Neil Parikh, in 2016. Stockmarket investors considered it a mattress retailer. In February it listed at $575m, less than half its $1.1bn private valuation.
Pie in the sky
Zume, recounts a vc investor close to it, “only used to talk about the robots, never about the pizza”. When its lorries rounded corners, melted mozzarella ran everywhere. “When we ordered a margherita,” the investor remembers, “it tasted bad.”
Some proper tech unicorns nevertheless discovered that in the physical world, where many at least partially reside, flywheels encounter friction. In theory their markets are almost limitless, with nearly half of humanity carrying a smartphone. Their business models, like Uber’s, enjoy certain network effects: demand from more riders in a given city lures more drivers to the platform; more drivers in turn attract more riders by making rides easier and cheaper to hail. And they can lower upfront costs by outsourcing things like accounting and data storage to the cloud.
The trouble is that, in practice, variable costs—subsidies paid to drivers to generate business, say—rise with every new customer. People “thought software changes everything”, says Aaron Levie, co-founder of Box, a listed enterprise cloud firm. But in many cases the digital platform is only a small part of the cost structure: “The physical assets stay expensive.”
No network effects means lower barriers to entry for rivals. The flywheel breaks down because riders have no reason to favour an Uber over a Lyft. Most will go for whichever is cheaper—which leads both firms to fight for customers with cut-price rides subsidised by their vc backers’ cash. In the words of Marco Zappacosta, co-founder of Thumbtack, a local-services marketplace, “Some companies ended up selling $1 for 80 cents.”
Randy Komisar of Kleiner Perkins, a big vc firm, offers an alternative rule of thumb. For a unicorn to count as genuinely “tech”—and therefore profitably scalable—its actual product must be technology, he says; “it can’t just be using technology.” Businesses selling physical goods or services often don’t make the cut. Those providing cloud-based services, especially to corporations—like Snowflake (which helps firms warehouse data in the cloud) or PagerDuty (which assists companies’ digital operations)—do. It helps that, like Slack and Zoom, a video-conferencing firm that also went public last year, they are coronavirus-proof. Indeed, lockdowns are boosting their business by pushing firms to move more functions online.
That is not to say that the consumer internet is dead. Airbnb, a home-sharing website, has seen bookings fall by 40% in big European cities as the pandemic halted trips. It may delay its ipo, which was expected to be this year’s biggest. But despite racking up losses of late, it is well-managed, cash-rich and, thanks to an unmatched global reach that puts up a high barrier to entry, likely to make money again once people get back to travelling.
Neil Shen of Sequoia Capital China says that investors still believe in the ability of some Chinese firms, especially $10bn-plus “super-unicorns”, to dominate their giant home market. Meituan-Dianping, a food-delivery firm, and Pinduoduo, an e-commerce site, were criticised for losing money ahead of their ipos in 2018. Both ex-unicorns have since taken off. On March 30th Meituan even reported a quarterly profit (though it warned of a coronavirus hit in the coming months). One promising candidate to follow in their footsteps is ByteDance, the parent company of TikTok, a hit video-sharing app—and, with a valuation of $75bn, the world’s biggest unicorn (in which the Vision Fund also has a stake).
The complex and opaque financial practices behind the calculation of unicorns’ valuations are the third pre-existing condition that afflicts most of them—including those which pass Mr Komisar’s test, boast solid business models and hold enough cash to tide them over a rough few months or more. These conditions lead firms to overstate their value in two main ways.
The first has to do with ownership structure. A private firm’s headline valuation is the product of the number of shares and the price per share at the last funding round. But shares issued in later rounds often have downside protections such as seniority over other investors and ipo return guarantees. These lower the value of common equity issued in previous rounds. In 2018 Ilya Strebulaev of the Stanford Graduate School of Business examined the legal terms of 135 unicorns’ various share classes and found that firms were overstating their valuations by 48% on average.
The second issue is one of governance. Recent years have seen frequent use of “inside rounds”, in which existing backers stump up more money. These can be a vote of confidence from people who know a business well. But they are also a way for vc firms to mark up their portfolios, generating higher internal rates of return that are more attractive to institutional investors (and form the basis on which many partners get paid). According to Mike Cagney, co-founder of three fintech unicorns, SoFi, Provenance and Figure, an unwritten vc rule advises against a firm which led one investment round in a startup leading the next. That inside rounds have become more common in recent years creates a credibility issue for Silicon Valley, he says.
As a result of such finagling, of the roughly 200 American unicorns probably only half merit the moniker, reckons one veteran founder. Although the frequency of “down rounds”, in which valuations fall rather than rise, does not yet appear to have increased, activity in the opaque secondary market for unicorn shares suggests that a repricing is under way.
Sellers in such marketplaces (chiefly company insiders and vc firms seeking an early exit) appear to outnumber buyers in transactions involving such darlings as Grab, a $14bn Singaporean ride-hailing group, and Didi Chuxing, a Chinese rival. Phil Haslett of EquityZen, one such marketplace in New York, revealed in March that shares in many big private startups were changing hands at roughly 25% below their most recent funding round, in part as rank-and-file employees lined up to cash in. The trend has intensified as virus-linked uncertainty pummels risky assets.
These ructions point to one certainty: a shake-out looms. Firms that have most to lose from virus-related measures are shedding workers. Even before covid-19, Lime laid off 14% of its staff and exited a dozen cities. On March 27th Bird, a rival, announced that it was sacking a third of its workers to conserve cash. In all, unicorns have trimmed their payrolls by several thousand people. That is probably not the end of retrenchment. Workers who remain are seeing the value of their shares dwindle and prospects of an ipo windfall recede. Even viable listings are on ice until the markets’ pandemic fever breaks.
In the meantime, the unicorn world is astir with talk of consolidation. SoftBank has reportedly long wanted DoorDash and Uber Eats to merge. A tie-up now looks appetising. The Japanese firm may once again try to combine Grab and Gojek, a rival in Indonesia, where a price war is leading both to lose perhaps $200m a month. In America Uber may try to woo Lyft, whose share price has fallen faster than its own.
Not so tasty anymore
Selling to strategic buyers offers another way out. In February Intuit, a financial-software giant, bought Credit Karma, a personal-finance portal, for $7bn. Many potential acquirers are, however, hoarding cash until the pandemic passes.
The uglies are coming
If all else fails, “sell it to one of the big uglies”, says one vc chief. The “uglies” in question—Apple, Microsoft, Alphabet, Amazon and Facebook—are collectively sitting on more than $570bn of gross cash. In normal times regulators would balk at a takeover by one of the tech giants. But these are not normal times. As a painful recession looms, preserving jobs—including not just those of well-paid coders but of the much larger army of gig-economy workers—may override antitrust concerns.
Even if some unicorns are spared—through mergers, acquisitions or just good fortune—the coronavirus is certain to ravage the herd. It will probably put the term itself, which has come to denote excess and broken promises, out to pasture. A new word may be needed, says Mr Khosrowshahi, to describe what is left. ■
Uniting the states
Covid-19 and America’s political system
How will a decentralised country that spans a continent fight what is now the world’s largest outbreak?
United States
Apr 2nd 2020 edition
Apr 2nd 2020
NEW YORK AND WASHINGTON, DC
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub
Having sailed past the Statue of Liberty, the USNS Comfort docked at a pier on the west side of Manhattan. The spot where cruise ships once picked up passengers for the Caribbean now holds a naval hospital ship with the capacity to treat 1,000 patients—all to relieve the hospitals of New York City struggling with rampaging covid-19. Eager passers-by thronged to the shoreline to photograph the Comfort, briefly disregarding the advice to distance themselves from strangers.
New York City has become the desperate centre of the epidemic in America, with a quarter of the country’s cases. Although the caseload is projected to get worse, hospitals are already on the brink. As Eric Wei, the chief quality officer of the state’s public hospitals, says: “The indicators I’m looking at are flashing red.”
On a recent morning, nurses and staff wept as they walked into Elmhurst hospital in Queens, which has been flooded with patients. They fretted about shortages of masks, gloves and ventilators. Some hospitals have resorted to hooking two patients up to the same ventilator, which ought to work but is not what they are designed for. James Gasperino, the head of critical care at Brooklyn Hospital Centre, is discussing rationing care with the ethics committee. One field hospital has been set up in Central Park, another at Flushing Meadows. Kiosks around the empty streets display ads aimed at retired health-care workers, asking them to help. New York University is offering medical students early graduation if they enlist in the effort. About 70,000 such workers have volunteered so far.
Unfortunately these scenes could well be repeated elsewhere in America. New hotspots of infection, with rapidly growing case-counts, include Chicago, Detroit and New Orleans. Smaller towns are not immune either: Albany, New York, and Albany, Georgia, are both struggling with outbreaks. Successful containment will require weeks of lockdown. Whether that will work depends on whether America’s many moving parts—federal agencies, states, cities, school districts and hospital systems—can become more disciplined.
President Donald Trump once suggested that America would be open for business by Easter. Since then, the country has overtaken China and everywhere in the rich world in terms of confirmed cases. The rise has not halted: as of April 1st America had 217,000 positive tests (the true number of cases will be far higher) and 5,140 deaths. Over the past two weeks, confirmed cases and deaths have been growing at a daily rate of 26% and 30%, respectively. The scientists advising the president are now suggesting that between 100,000 and 240,000 Americans will die even if current social-distancing measures are kept in place.
Facing these statistics, Mr Trump extended advice on social distancing for a month. The president, having once claimed that the first 15 cases would soon go “down to close to zero” now says that his administration will have done “a very good job” if deaths are kept below 200,000.
Already, most Americans are taking extraordinary precautions. Three-quarters of the country has been advised to stay at home. Almost all schools are closed. Yet the projections of 100,000 or more deaths over the course of the epidemic are conditional on continuing this effort for weeks, months even. They surge above 1m if restrictions are prematurely relaxed.
All national epidemics are made up of many local epidemics, each with its own trajectory. The Institute for Health Metrics and Evaluation (ihme), a well-respected research group, has forecast that the apex of New York’s cases will come on April 9th, when 11,600 intensive-care beds will be needed (compared with the 718 available in normal times) and when deaths could peak above 800 a day. The worst times for other states will come later. California is projected to experience the greatest number of daily hospitalisations on April 28th; for Virginia, that point would not arrive until May 20th. Though the dragged-out epidemic means longer disruption to the economy and ordinary lives, it also makes the disease easier to fight. Although ihme’s modelling suggests cases in New York will overwhelm its medical capacity several times over, California and Virginia are not, as yet, projected to have such difficulty.
Public-health authority in America is devolved to the states. The federal government provides cash and guidance, but its legal oversight is largely limited to movement between states (such as on aeroplanes). As a result, governors and mayors are the primary deciders on whether to close schools, gyms and museums and when to lift shelter-in-place orders. The decentralised response will mean that some states fare better than others.
California and Washington, states that saw some of the first cases in the country, installed relatively stringent measures early and have seen a slower growth in caseloads than other states that acted later (see chart). Borders between states are unlikely to be shut. That suggests one shortcoming of the federalised system: laxer controls in one state risk recrudescence in others.
Yet so far the decentralised system has also been a saving grace. Were matters entirely in the hands of the federal government, which botched the initial phase of the epidemic, things could have been much worse. A faulty test design and weeks of bureaucratic red tape blinded public-health authorities at a critical moment. At the same time, Mr Trump was downplaying the risk, and the coronavirus task-force he set up suffered from infighting.
If states like California and Washington had not acted when they did, their hospitals might already be overwhelmed. Even until recently Mr Trump has been squabbling with Democratic governors he sees as insufficiently deferential and grateful, like Gretchen Whitmer in Michigan (“way in over her head”, he tweeted on March 27th ) and Andrew Cuomo of New York (“I think New York should be fine, based on the numbers that we see, they should have more than enough,” Mr Trump said on March 30th). But unlike the pseudo-crises of his administration, this real one cannot be badgered or blustered into submission.
Epidemiologists and, now, the White House think that America will remain closed for at least the next few weeks, its economy mothballed. Before states can relax restrictions, their epidemic curves must be bent. “The best thing we can do for the economy is get the virus under control […] And then we can open the economy back slowly and systematically, and have a much better chance that it remains open,” says Ashish Jha of the Harvard Global Health Institute. There must be sustained declines in new infections over a long period, perhaps two weeks. There must also be enough testing capacity to contain new clusters. After lagging behind, America is now consistently testing 100,000 people a day. Still, three times as many tests may be needed, says Dr Jha, to trace all the contacts of the newly infected and for random sampling. And hospitals must have the capacity to absorb the added demand that relaxation of social distancing could bring. It is possible to do all this in a month. But it is more likely that Mr Trump will have to extend his directives beyond May 1st.■
Motion sickness
Democrats seem to take social distancing more seriously than Republicans
GPS data from mobile phones reveal how Americans are moving
United States
Apr 4th 2020 edition
Apr 4th 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub
“America is all about speed; hot, nasty, bad-ass speed,” runs a line from a 2006 film, “Talladega Nights”, supposedly quoting Eleanor Roosevelt. Restricting Americans’ freedom of movement was always going to be hard. gps data show how hard. They also suggest a worrying partisanship.
The evidence comes from a company called Unacast, founded by two Norwegians in New York in 2014. It aggregates location data from mobile phones to track and analyse people’s movements on behalf of retailers and property companies. Such data become available when users download, say, restaurant-finding apps. This makes it possible to measure the total distance logged on mobile phones by county, state and nation.
The most interesting data are those from state and county levels. In Nevada people halved the total distance they travelled between February 28th and March 27th. In Wyoming they travelled around more. (The average national reduction was 30%). The biggest declines in distance were in the north-east and Pacific coast. In the South, Midwest and Plains states declines have been modest.
There are several reasons. Midwestern and Plains states have relatively few cases of covid-19. This may make people take the crisis less seriously. They are also sparsely populated. When your nearest neighbour is a mile away, you may think you are self-isolating already.
But the Unacast data suggest that politics is also playing a role. All the states where people have cut travel by more than 44% are Democratic (that is, they voted for Hillary Clinton). Of the 25 states where people have cut back by 29% or less, all but three voted Republican. The pattern is repeated at county level. In Florida, people in Democratic counties on the Atlantic coast, such as Miami-Dade and St. Johns, have restricted their movements more than those in Republican-counties on the Gulf coast and in the Panhandle.
Democrats seem to be taking the crisis more seriously than Republicans. In a poll by the Pew Research Centre, 59% of Democrats said covid-19 is a major threat to the health of Americans; only 33% of Republicans said that. The Unacast data suggest people are acting on their opinions, risking infection from, and spreading, a virus that has killed more Americans than the 9/11 attacks.
Trough to peak
How high will unemployment in America go?
The financial crisis looks a better reference point than the Depression
United States
Apr 1st 2020 edition
Apr 1st 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
In august 2005 the unemployment rate in Louisiana was 5.4%, close to its all-time low. Then Hurricane Katrina hit. The storm destroyed some firms, while others were forced to close permanently. Within a month, Louisiana’s unemployment rate had more than doubled.
Now America as a whole faces a similar shock. From a five-decade low, early data suggest unemployment is shooting upwards, as the onrushing coronavirus pandemic forces the economy to shut down. Millions of Americans are filing for financial assistance. The jobs report for March, published shortly after The Economist went to press, is a flavour of what is to come—though because the survey focused on early to mid-March, before the lockdowns really got going, it is likely to give a misleadingly rosy view of the true situation. How bad could the labour market get?
gdp growth and the unemployment rate tend to move in opposite directions. Unemployment hit an all-time high of around 25% during the Great Depression (see chart). The coronavirus-induced shutdowns are expected to lead to a year-on-year gdp decline of about 10% in the second quarter of this year. Such a steep fall in economic output implies an unemployment rate of about 9% in that quarter, based on past relationships, which would be roughly in line with the peak reached during the financial crisis of 2007-09.
But the coronavirus epidemic is not like past recessions. For one thing, hiring could be even lower than is typical. Delivery firms notwithstanding, surveys suggest that firms’ hiring intentions are as low or lower than they were in 2008. And applying for a job is especially difficult with cities in lockdown. Even without a single virus-induced layoff, hiring freezes would lead to sharply rising unemployment. For instance, young people entering the labour market for the first time now would struggle to find work.
The decline in gdp associated with the lockdowns is also particularly concentrated in labour-intensive industries such as leisure and hospitality. Mark Zandi of Moody’s Analytics, a research firm, calculates that more than 30m American jobs are highly vulnerable to closures associated with covid-19. Were they all to disappear, unemployment would probably rise above 20%. Research published by the Federal Reserve Bank of St Louis is even gloomier. It suggests that close to 50m Americans could lose their jobs in the second quarter of this year—enough to push the unemployment rate above 30%.
The numbers will probably not get that bad. In part that is a matter of statistical definitions. To be officially classified as unemployed, jobless folk need to be “actively seeking work”—which is rather difficult in the current circumstances. Some people could end up being counted as “economically inactive” rather than unemployed, which would hold down the official unemployment rate (a similar phenomenon occurred in Louisiana after Katrina).
America’s economic-stimulus bill will be a more genuine check on rising joblessness. The $350bn (1.6% of gdp) set aside for small firms’ costs is enough to cover the compensation of all at-risk workers for perhaps seven weeks, according to our calculations, making it less likely that bosses will let them go. Other measures in the package should support consumption, and thus demand for labour. In a report published on March 31st Goldman Sachs, a bank, argued that unemployment will peak in the third quarter of this year at nearly 15%—an estimate that is roughly in line with those of other forecasters.
A big jump in unemployment is less of a problem if it quickly falls once the lockdown ends. Louisiana offers an encouraging precedent. After a few bad months in late 2005, the state’s unemployment rate dropped almost as sharply as it had risen, falling in line with the rest of the country. Whether the economy will prove so elastic this time is another matter. Travellers and restaurant-goers will be cautious until some sort of vaccine or treatment is widely available; social-distancing rules, even if relaxed, will continue for some time. Goldman Sachs’s researchers reckon that it will take until 2023 for unemployment to fall back below 4%. The lockdowns should be temporary, but the economic consequences will feel much more permanent.■
Petri-dish democracy
Wisconsin’s chaotic elections
Local squabbles prefigure a national debate
United States
Apr 4th 2020 edition
Apr 4th 2020
CHICAGO
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
Fourteen states have postponed primaries because of coronavirus. Although voters in Alaska and Wyoming will carry on in April, their primaries now involve only postal ballots. So what’s special about Wisconsin? As The Economist went to press the Badger State was still planning to hold its spring elections as usual, including voting in person, on April 7th. The contests are for the Democratic presidential nominee and also for local offices and the state Supreme Court.
Officials are not blasé about the pandemic. A “safer at home” order from the governor, Tony Evers, is keeping most people in their houses while shutting schools, businesses and more. “When you close bars in Wisconsin, you know it’s gotten serious,” says a parched resident. Nor is it certain the elections will be held. On April 1st a federal judge began hearing a case—combining various lawsuits—that could decide how and when polling happens. An appeal is likely, so a decision could drift towards the eve of voting.
Worsening public-health and practical troubles are overtaking the legal arguments. An assessment on March 30th found that more than half of all the state’s counties lack the required number of staff to run polling stations. The National Guard may have to make up a shortfall of almost 7,000 workers, replacing volunteers who typically are elderly and at risk of infection. In Milwaukee, which is holding a mayoral race, perhaps a dozen polling stations can be manned, not the usual 180. One political observer calls it “an unholy mess”.
What is baffling is how debate about holding the vote has dragged on. Officially Democrats, including Mr Evers, would back postponement of the state’s primary, although some worry that the pandemic could turn out to be worse later. In reality, most would prefer a wholesale switch to postal voting. Mr Evers last week called for officials to send each registered voter an absentee ballot, just in case. More than 1m voters have applied for them anyway, up from 250,000 in the spring election of 2016. The Democratic Party expects a surge in turnout, which, along with early voting, typically helps their side.
But the governor cannot make any change without the nod of Republicans, who run the legislature. They are not affected by the Democratic primary contest but are concerned about elections for hundreds of municipal officials, from county boards to councillors and mayors of cities, and most of all a tantalising election of a state Supreme Court justice. No plan exists for what to do about these if voting were put off. “Election law everywhere has never seriously considered holding an election in the middle of a contagious virus,” says Charles Franklin of Marquette University.
Republicans oppose ending in-person voting, likening any change to poll-rigging. Not coincidentally, they rely on older, small-town and rural voters who, polls suggest, are less fearful of the pandemic. “Our electorate is more likely to show on election day,” says Brian Reisinger, a conservative lawyer. Without them, his party would struggle against Democrats’ expected support from absentee and early voters.
Why does this matter? Interest in the presidential primary has waned, although Joe Biden will be road-testing his strength in blue-collar parts of a crucial swing state. It is the court race that really sets Wisconsin political hearts aflutter. Conservatives have a 5-2 advantage on the bench, but one of their incumbents is up for re-election in a tight race. The equivalent contest last year was decided by fewer than 6,000 votes.
That judicial race is politically important because of two significant cases on the court’s docket. It may rule, possibly before November, on whether 200,000 supposedly out-of-date registered names can be purged from the voting roll, and on what kind of voter ids should be acceptable at polling stations. Democrats fear this could hurt them. The court will also have a big say on redistricting plans next year. Republicans fret that a new liberal-minded judge might press the court to unpick earlier reforms, perhaps to restore some powers stripped from public-sector unions.
Wisconsin’s experience also sheds light on what it means to campaign and, perhaps, vote in the midst of a pandemic. A battle is looming in many states on how much to extend postal voting. Democrats are keen. Republicans say changes to electoral practice, especially during a campaign, are unacceptable. Ben Wikler, who leads the Democrats in Wisconsin, says Republicans want to “disenfranchise” voters with over-strict rules on postal ballots. His state has long been “a Petri dish for seeing how the gop behaves” everywhere, he says.
Marquette’s Mr Franklin draws lessons for other states. “Wisconsin is a peek into the future,” he says, a reminder to other states to “make decisions sooner”, to get bipartisan agreement on basic matters like how to run an election and to give officials time and money to print, distribute and count a huge pile of absentee ballots. Parties, too, have to think about how they can reach voters at home when knocking on doors is off-limits. Wisconsin’s Democrats have the additional challenge of rethinking their plans for Milwaukee to host 50,000 people at the party’s national convention in July. The pandemic looks likely to strike down that event, too. ■
Reade’s digest
How to weigh an allegation of assault against Joe Biden
Democrats who thought Brett Kavanaugh should not be on the Supreme Court are ignoring Mr Biden’s accuser
United States
Apr 4th 2020 edition
Apr 4th 2020
WASHINGTON, DC
In march 2019, about a month before Joe Biden began his presidential campaign, a former state representative from Nevada, Lucy Flores, accused him of unwanted kissing, touching and hair-sniffing. Several other women—including Tara Reade, who worked for then-Senator Biden for nine months in 1992 and 1993—subsequently made similar complaints, prompting Mr Biden to release an apologetic video in which he acknowledged that “the boundaries of protecting personal space have been reset and I get it.” Recently, however, Ms Reade has levelled a more serious charge.
In an interview broadcast on March 25th she said that Mr Biden touched her in ways that made her feel “like an inanimate object”. She said that one day a scheduler in Mr Biden’s office told her to bring the senator his gym bag. When she did, he allegedly held her against a wall and put his hands up her skirt. When she pulled away, she says Mr Biden said, “Come on, man, I heard you liked me.” Ms Reade says that she was later moved to a windowless office and frozen out.
Mr Biden’s campaign denies the accusation. Marianne Baker, his executive assistant at the time, says she had “absolutely no knowledge or memory of Ms Reade’s accounting of events, which would have left a searing impression on me.” Sceptics have pointed out inconsistencies in Ms Reade’s testimony (which are not uncommon in stories of sexual assault), her history of floridly praising Russia and Vladimir Putin, and her support for Bernie Sanders.
Ms Reade sought help from the time’s up Legal Defense Fund, which helps victims of sexual harassment. She could not find a lawyer to take her case, and the outfit does not offer public-relations help to accusers without lawyers. Some cite that, and the fact that the pr firm affiliated with the fund is run by a Biden adviser, as evidence of a stitch-up.
The fund replies that the pr firm in question did not know about Ms Reade until journalists started calling. The fund worried about getting involved in a case against Mr Biden because tax-exempt non-profits are barred from political campaigns. And Ms Reade was interested less in going after Mr Biden than in those accusing her of being a Russian agent, which is outside the fund’s purview.
The most striking thing about Ms Reade’s story may be the silence with which it has been greeted—particularly from some of those who argued that a sexual-assault allegation should disqualify Brett Kavanaugh from the Supreme Court. That may stem partly from the difficulty of vetting her story. There were no witnesses, though Ms Reade says she told her brother and a friend. But Mr Biden may have to answer questions eventually. Donald Trump’s supporters may wave away dozens of allegations of sexual misconduct and assault. Mr Biden probably does not have that luxury.
Send the marines
The US Marine Corps sheds its tanks and returns to its naval roots
After decades as dirt sailors, the marines are getting back to salt water
United States
Apr 2nd 2020 edition
Apr 2nd 2020
The official hymn of the United States Marine Corps, a jaunty tune written by Jacques Offenbach in 1867, proudly declares that “From the Halls of Montezuma/ To the shores of Tripoli/ We fight our country’s battles/ In the air, on land, and sea”. But despite their naval origins and ethos, America’s marines have spent most of the past two decades waging war in the deserts, mountains and cities of Iraq and Afghanistan. On March 26th General David Berger, the corps’s commandant, proposed a radical transformation of the force into America’s first line of defence in the Pacific.
The Marine Corps emerged out of the Continental Marines, the naval infantry force raised in 1775 by the American colonies during the revolutionary war against Britain. As soldiers who were deployed at sea, they served as raiding parties and an insurance policy against mutiny by press-ganged sailors. Over the next century they acquired a legendary reputation for far-flung campaigns.
The marines’ publicity bureau, established before the first world war, carefully cultivated an image of an elite force with a macho, Spartan streak. That reputation was bolstered by their starring role in the brutal island-hopping battles against Japan during the second world war.
The image of seafaring, beach-storming warriors blurred after the terrorist attacks of September 11th 2001, when the marines turned from a naval strike force into a duplicate army tasked with weeding out insurgents in grinding land campaigns. The result, says Mark Folse of the us Naval Academy, who served as an enlisted marine in Iraq and Afghanistan, is “an entire generation of marines who have little to no experience of the navy.”
Then the wheels of American strategy turned again. In 2018 the Pentagon published a new national defence strategy which declared that “great power competition” with Russia and China would be the priority. A series of war games showed that China’s precision missiles would make it much harder for America to fight its way into the western Pacific, says General Berger. On becoming commandant in July, he published guidance calling for radical change. “Visions of a massed naval armada nine nautical miles offshore in the South China Sea preparing to launch the landing force...are impractical and unreasonable,” he warned. Junior marine officers, writing in War on the Rocks, a website, pressed their superiors for change.
The ten-year “force design” released last week offers it. It is at once a return to the corps’s naval roots, and a drastic revamp. It aims to cut the corps down to 170,000 personnel while slashing artillery and aircraft, with the number of f-35 jets falling by over a third. Most drastically, marines will get rid of all their tanks. In their place comes a commando-like infantry force with nimbler weapons: drone squadrons will double in number and rocket batteries will triple.
The idea is that in a war with China, America’s hulking aircraft carriers might be pushed far out to sea by the threat of missiles. But groups of 50 to 150 marines, wielding armed drones, rockets and anti-ship missiles, could get up close, fanning out on islands along and inside the chain from Japan to the Philippines. Like a high-tech echo of the insurgents they once fought, they would jump from one makeshift base to another every couple of days to avoid being spotted and targeted, says General Berger. They could identify targets for more distant ships and warplanes, or pepper the Chinese fleet with fire themselves—dispersed, island-hopping warfare to stop any attack in its tracks.
Some worry that this would be a dramatic change for a service that has proudly served as a jack-of-all-trades for presidents in a pinch. Seven hundred marines have been stationed in Norway since 2018 and in January thousands were hurriedly sent to the Middle East amid tensions with Iran.
“The marines used to lean towards versatility as a virtue, covering many middle threats,” says Frank Hoffman of the National Defence University. “This force design is optimised for deterrence in one location. It’s not a force for Donbas, Lebanon or Syria.” General Berger insists that is not so: “We know we never choose the crisis.” Missile-toting commandos dotted around rugged outposts would be “very applicable anywhere”, he argues, from the Arctic to the Strait of Hormuz.
Buy-in from the navy is especially important. The plan depends on tight integration with the marines’ sister service, not least because the corps does not own its own warships. The number of American ships—the navy is set on 355—is less important, notes Chris Brose of Anduril Industries, a former staff director for the Senate Armed Services Committee. Whether a weapon is fired from a marine squad or navy destroyer thousands of miles away is irrelevant, he says, as long as they are integrated and add up to a greater capability.
Congress will also take some persuading. “It won’t be Democrats versus Republicans,” says Mike Gallagher, a Republican congressman and former marine officer who serves on the House Armed Services Committee. “I think it will be entirely generational. The younger members, particularly those who have served, are embracing these changes, and are more than willing to divest ourselves of legacy capabilities, even at the cost to our own districts. The older members…will be loth to embrace change, particularly when it affects things that are produced in their districts.” ■
Lexington
Ron DeSantis is Donald Trump’s and the coronavirus’s favourite governor
A shadow over the Sunshine State
United States
Apr 2nd 2020 edition
Apr 2nd 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For our coronavirus tracker and more coverage, see our hub
Thomas jefferson’s dictum that good governance comes “not by the consolidation or concentration of powers, but by their distribution” has never looked more apposite. While the administration has floundered against the coronavirus, most state governors have stepped up.
Andrew Cuomo of New York is the pandemic’s breakout star. His grimly informative press briefings are a reminder of what sanity in high office looks like. His approval rating is nearly 90%. But Jay Inslee of Washington state, Gavin Newsom of California, Larry Hogan of Maryland and Mike DeWine of Ohio, two Democrats and two Republicans, have been similarly impressive. All were shuttering businesses and enforcing social distancing while Donald Trump questioned whether the pandemic was much of a thing.
Mr Newsom’s prompt action may have spared California the level of crisis Mr Cuomo is facing. Mr Hogan, chair of the National Governors’ Association, suggested he would keep Maryland locked down even if Mr Trump ordered him not to: “You can’t put a time-frame on saving people’s lives.” Yet there is an exception to this pattern. In Florida, a state with a large, unusually mobile population and more old people than almost any other, Ron DeSantis seems to have taken his public-health advice from the president.
The image of American hubris against the coronavirus is of Florida’s beaches packed with Spring Breakers. Mr DeSantis had refused to close them—thereby drawing instant comparisons with the mayor of Amity Island in the “Jaws” films. A heat map of the cell-phone signals emitted by a crowd of fun-seekers on Fort Lauderdale beach—almost two months after America had recorded its first coronavirus case—suggests they have since fanned out all across America.
Florida alone had over 7,000 confirmed coronavirus cases at the time of writing and the number was doubling every three-to-four days. But most of its businesses were still free to operate, Mr DeSantis having refused to lock the state down. Under mounting pressure from anxious Floridians, he said he would do so from April 3rd, fully two weeks after Mr Newsom.
To idle millions of workers is no small decision. Yet the 41-year-old Mr DeSantis has denied himself the benefit of the doubt with a wretchedly political performance. His daily messaging has been neurotically in step with the White House, not Florida’s public-health experts. This makes his slowness to act look designed to placate a president who—until this week—was liable to take any economy-dampening measure as a personal affront.
Mr DeSantis meanwhile aped the president’s histrionics by ordering senseless roadblocks to catch infected New Yorkers, warning cruise ships not to land sick “foreigners” and lambasting critical journalists. In one way, his tactics worked. Where Mr Cuomo claims to have received a fraction of the medical supplies he has requested from the federal government, Florida has got every mask and ventilator it has asked for. Even so, Mr DeSantis’s pandemic response has looked increasingly reckless. It also indicates how Mr Trump is—and is not—changing his party.
The contrasting performances of Mr DeWine and Mr DeSantis, both of whom took office last year, are no accident. The 73-year-old Ohioan won election based on a record for pragmatism accrued during four decades in public life. Mr DeSantis entered Florida’s Republican governor’s primary as an undistinguished, little-known congressman. He won it by proclaiming his devotion to Mr Trump, who promptly endorsed him, thereby knocking out the DeWine equivalent, Florida’s respected agriculture commissioner.
Eschewing dull policy talk (to the extent that some questioned whether he even had a platform), Mr DeSantis copied Mr Trump’s campaign tactics, too. He warned Floridians not to “monkey this up” by electing his African-American opponent, Andrew Gillum. He derided Congresswoman Alexandria Ocasio-Cortez, a hate-figure on the right, as “this girl…or whatever she is”. His obsequiousness towards Mr Trump was so extreme that he made a joke of it in a campaign ad that depicted him teaching his infant children Trump slogans, while building a wall out of toy bricks.
Anyone might think he was a diehard economic populist. On the contrary, Mr DeSantis is a pretty standard-issue small-government conservative, albeit with a pragmatic streak of his own. For example, he has sought to redress the environmental vandalism of his predecessor, Rick Scott, by appointing high-level science and climate-resilience advisers and investing in watershed conservation. This has won him plaudits across the political divide—even as Mr Trump has periodically called on him to honour his debt to the president. Last year Mr DeSantis passed legislation to ban havens for illegal immigrants known as “sanctuary cities”. In a state where a fifth of the population is foreign-born, this was divisive—and also unnecessary. There were not any in Florida.
DeSantis Spiritus
For all the disruption to conservatism he promised, Mr Trump has changed it at an elite level remarkably little. He has promoted opportunists such as Mr DeSantis, willing to ingratiate themselves to him, not populist firebrands. This is at least better than it might have been (remember Steve Bannon?). So, it must be said, is Mr DeSantis: his pre-pandemic governorship was far better than his campaign gave reason to expect. Even so, the virus has exposed the weakness of a patronage system with Mr Trump at its apex.
Mr DeWine is able to compensate for Mr Trump’s shortcomings because he owes him nothing. Mr DeSantis owes him everything—which forces him to accentuate them. Much good may that do him.
Floridians appear to be turning against him. They of all Americans recognise a bungled disaster response. Meanwhile Mr Trump, having at last recognised the disaster America faces, is making nice with all the governors. He says they are America’s front line. This suggests he means to blame them for what is to come.■
Great white night
Governments are once again splurging to keep big companies afloat
Authorities ponder which companies to bail out—and how
Business
Apr 4th 2020 edition
Apr 4th 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
Managers are encouraged to set enough aside for a rainy day. The covid-19 cloudburst means even the most prudent companies are rapidly exhausting their cash. Many will need a bigger umbrella that only the state can proffer.
The size of antiviral economic measures agreed so far is breathtaking. On March 27th President Donald Trump signed off on a record $2trn stimulus, which includes loan guarantees that could fund more than twice as much in corporate borrowing. Britain, France, Germany, Italy and Spain have their own “bazookas”, worth hundreds of billions. Who exactly will need help, how much and in what form is not yet entirely clear. But the contours of arguably the biggest corporate rescue in history are taking shape.
Some industries are seeking bespoke packages. First up, airlines. Those with stronger balance-sheets, such as Australia’s Qantas and iag, owner of British Airways, would be just as happy if weaker rivals disappeared. But the International Air Transport Association, the global trade body, warns the pandemic will cut industry revenues in 2020 by $252bn, or 44%, relative to last year’s. Its members have cancelled 2m flights. Roughly 35-45% of airline costs are fixed, and so cannot be cut quickly, reckon analysts at Citigroup, a bank. Delta, an American carrier, says it is losing around $50m a day.
Some flag-carriers have already been bailed out: Alitalia has been nationalised (again), Dubai has rescued Emirates and Singapore Airlines raised equity with the backing of Temasek, the city-state’s sovereign-wealth fund. tui, a German tour operator with its own aeroplanes, received €1.8bn ($2bn) in state-backed loans.
In America, where two-thirds of global airline profits are made, vigorous lobbying helped carriers secure their own tailored package. A $50bn mix of loans and grants has been earmarked to keep them aloft. They will be eligible for support worth six months of payroll, far more than other businesses. American Airlines said it was expecting $12bn from the government. Carriers have agreed to retain staff until October, slash salaries of top brass and halt shareholder payouts until late 2021. Some may have to give the government a slice of shares (or securities that convert into them) in exchange for cash, though precise terms have yet to be spelled out.
The only other American businesses entitled to their own pot of cash were those deemed “critical to maintain national security”. That sounds like a euphemism for Boeing, America’s troubled aircraft-maker (see article). But other industries will no doubt claim the “critical” label for themselves. Oil producers, reeling from low crude prices, are said to be trying.
Elsewhere, some carmakers are liable to make a similar case. Like airlines, they are household names that sit at the heart of complex ecosystems with millions of employees. Governments ignore their pleas, should these come, at their peril. And come they may: demand for cars may slide by around a sixth this year and is unlikely to recover fast. Germany’s Volkswagen says it is losing €2bn a week. Like Renault of France and others, it has furloughed workers through state schemes. Car companies have 4-10 weeks of cash on hand, maybe double that if they tap credit lines, according to Jefferies, a bank. That may not be enough to ride out the crisis unaided.
The financial sector is the other traditional, if less beloved, candidate for state support. Insurers’ liability to covid-19 is, for instance, still unclear. Politicians in America are urging insurance firms to indemnify holders of policies protecting against business interruptions. The companies say these do not cover pandemics, and claim they could be on the hook for losses nearing $400bn a month if forced to do so. States including Ohio and Massachusetts are mulling bills that would compel payouts (see article). These would have to be accompanied by a rescue package. At least banks look more solid, thanks to regulations enacted in the wake of the financial meltdown in 2007-09. For once they may be part of the solution, not the problem: governments are using them as a conduit for state-guaranteed loans.
Support which banks, and any other business, will readily accept is coming in the form of relaxed regulations. Lenders are being offered capital relief in Europe and America. Countries from France to South Korea have banned investors from betting on share-price falls, to many a ceo’s delight. Some environmental regulations in America have been waived. European airlines get to keep valuable slots at airports even though they are not using them as required. Steven Mnuchin, America’s treasury secretary, has said the aid is predicated on three months of stoppages. It is anyone’s guess if that will be enough.
Much of the government largesse will be spread among millions of small businesses. Shuttered pizza joints, gyms, florists and the like are facing months of lost revenue. Few voters object to public money being used to pay laid-off or furloughed workers directly, as in Europe, or, as in America, to provide grants for firms that keep staff (see Schumpeter).
In fact, programmes which authorities have sold as a way to save mom-and-pop shops may also help big business. In Germany Adidas, a giant maker of sports gear, tried to use a measure designed to tide over small firms to suspend rental payments for some of its shops (it reversed course after the news leaked). American hotel chains won the right to treat each location as a separate business—and with it access to bail-outs designed for firms with fewer than 500 employees.
Many stronger firms would prefer a private-sector rescuer. Those with solid balance-sheets in Europe and America raised $316bn from investment-grade bonds in March, according to Dealogic, a data provider. Although some racier blue-chip firms must pay high coupons, for many yields remain reasonable (see chart).
Some companies with iffier prospects can get their hands on cash, too. Carnival, a cruise-line operator whose share price is down by 83% this year, is raising $4bn through a sale of bonds (in part by mortgaging its ships) as well as fresh equity. Markets are charging a hefty price for this support. So long as they remain willing to shore up corporations on the brink, taxpayers may be spared big payouts—and governments, blushes for helping out unloved big business.■
Up in the air
Boeing ponders its bail-out options
The aircraft-maker can survive for now but will eventually need to raise cash
Business
Apr 4th 2020 edition
Apr 4th 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
The coronavirus laid many of Boeing’s airline customers low—literally, for many have suspended flights. Fears about the giant’s fate, already uncertain because of the year-long grounding of its best-selling 737 max jet after two fatal crashes, became so rife that last month Goldman Sachs, a bank, felt compelled to stress that it “will remain a going concern”. The company itself insists likewise. It is probably right—the question is not whether it will survive but how.
Boeing has a safety net. A third of revenues in 2019 came from its defence arm, which, with its services division, will bring in $5bn in profits this year, reckons Bernstein, a research firm. It has cash on its balance-sheet, the balance of a $14bn credit line and has suspended its dividend. Dave Calhoun, Boeing’s new boss, says that the firm has $15bn in liquidity.
Jefferies, a bank, estimates that the company burns through $4.3bn of cash a month with a complete suspension of deliveries. So it may need government help if the crisis drags out. Lucky, then, that Congress folded its plea for assistance for American aviation into a $2trn stimulus package. This includes $25bn for carriers and $17bn for firms “critical to maintaining national security” (ie, Boeing). The terms are unclear and talks ongoing. But Steve Mnuchin, the treasury secretary, has hinted that help would come with strings—including an equity stake for the state.
Boeing is unwilling to entertain this (for now). It may prefer to try to tap $454bn set aside in the stimulus for loans and guarantees to big firms, which would not involve giving up equity. Mr Calhoun says his company can raise money in the market. But the terms would be onerous. Despite recent improvements, its ten-year bonds trade below par and the cost of insuring its debt against default remains high.
Boeing hopes that business will bounce back quickly; it has been reluctant to furlough workers, notes Ken Herbert of Canaccord Genuity, a bank. It intends to restart making the 737 max in May (slowly at first). Goldman Sachs reckons that even if it delivers only half the planes planned for this year it will have the liquidity to cover a “deeply negative” cashflow. But airlines may not return to normal service for months, depressing sales. Mr Calhoun may have to pick between a bitter market rescue and an unsavoury government one.■
Aaaaand cut!
Disney and its rivals star in a real-life disaster movie
And you thought streaming wars were disruptive
Business
Apr 2nd 2020 edition
Apr 2nd 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
The empty freeways of Los Angeles look like a scene from a disaster movie. For many Hollywood bosses, that is how things feel. With one in three people in the world subject to social-distancing rules, boxoffice takings in 2020 have collapsed. Television is bracing for revenue-starved advertisers to rein in spending. Shooting on productions slated for 2021 has ceased, portending an unpleasant sequel next year.
Covid-19 comes at a tumultuous time for show business. A five-year, $650bn investment binge was already reshaping it for the age of video-streaming. Debts taken on by giant media groups such as at&t, Comcast, Disney and Viacomcbs—which owe more than $350bn between them—look less sustainable now that their sales have sunk. Even Netflix, whose streaming-only offering is less vulnerable to lockdowns, is not immune. The pandemic will leave scars. It may claim a few victims, too.
Theatrical releases, which studios use to recoup blockbusters’ vast production costs, have all but stopped. Disney’s “Onward”, out on March 6th, has grossed one-fifth of its hoped-for $500m worldwide. Many premieres have moved partly or wholly online. Comcast’s nbcUniversal will start streaming “Trolls World Tour” on April 10th, the same day it opens in the few unshuttered cinemas. Paramount Pictures (part of Viacomcbs) has sold “The Lovebirds”, once scheduled for a cinema run, to Netflix. Releases held until the pandemic ends may find fewer cinemas to screen them. amc, the world’s largest chain, which lost money in two of the past three years as audiences chose their couch over a night out, is teetering. Cineworld, the second-biggest, has said that in the (“unlikely”) worst-case scenario it may fold.
The small screen has its own problems. Nielsen, a research company, finds that in past lockdowns, such as during Hurricane Harvey, time spent in front of the tv rose by up to 60%. In parts of Italy quarantine boosted tv ratings, according to Auditel, another research firm. Yet this may not help networks. For one thing, they too face a drought of content. itv, Britain’s biggest commercial broadcaster, has stopped filming its soap opera, “Coronation Street”, and is airing three episodes a week, not the usual six. American networks have built up an inventory fearing a writers’ strike this year, but it will only last until the summer.
Even if people tune in to reruns tv finances will be under strain. As their own revenues evaporate and their customers cannot shop, advertisers are pulling commercials. Ad bonanzas have been postponed (Olympics) or cancelled (Wimbledon). Suspension of live sport has deprived pay-tv operators such as Disney’s espn and Sky, a European giant belonging to Comcast, of their last big remaining attraction. Some firms, like Sky, have allowed customers to pause sports subscriptions or offered access to other paid programming in their place. espn is airing repeats of classic matches, plus offbeat fare like dodgeball and arm-wrestling. Neither tactic is likely to arrest the slide in the share of households with pay-tv, down from almost 90% in 2010 to 65% in America.
Streaming offers some respite. Netflix’s share price, up by 15% this year, looks buoyant amid a market rout. It claims to have enough fresh content to last a few months. Subscription growth for all the big streamers has soared by double digits from week to week since lockdowns kicked in, estimates Antenna, a data company. After its European launch in March Disney’s new platform, Disney+, was downloaded more than 5m times in just days. at&t and Comcast hope for similar success when they launch (paid) hbo Max and (ad-supported) Peacock, respectively, later this year.
But an uptick in streaming revenue may not offset the losses from other businesses. Netflix, which has none, is running out of new eyeballs to attract in the West; nearly half of American households already subscribe. Keeping those it has may require serving up new shows—which it cannot produce. Lockdowns are unlikely to bring in new viewers in poorer countries, where streaming remains a luxury, especially as mass joblessness looms.
The revenue squeeze also comes after a period of heavy borrowing by media firms, as they raced to create or buy spectacular content. At the end of last year at&t was on the hook for some $190bn, including $17bn which comes due this year and next. Comcast owed more than $100bn, Disney $47bn and Viacomcbs $21bn. With outstanding debt of $16bn, or nearly six times gross operating earnings, Netflix is even more leveraged. In March Disney raised $6bn in a new debt offering, for “general corporate purposes”, including paying down debts. Viacomcbs has announced a $2.5bn bond to shore up its balance-sheet. at&t has put off a planned $4bn share buy-back.
Most firms have warned of adverse effects on business, without putting a figure on it. at&t and Comcast, which own not just content but the “pipes” through which it is delivered, can count on revenues from self-isolating broadband users, many of whom are upgrading to faster speeds. A pipeless Disney faces the biggest broadside: to the box-office, espn, its stores and theme parks.
This has led to speculation of a takeover. Bernie McTernan of Rosenblatt, a financial-services firm, has suggested that Apple, with some $200bn in gross cash, might buy Disney, whose market value has sunk to about $180bn. The tech giant might like the look of Disney assets such as Lucasfilm (which makes “Star Wars”) and Marvel, says Rich Greenfield of LightShed Partners, a research firm, to complement its lacklustre Apple tv+ library. But, he adds, a buy-out would also land it with businesses in which it has little interest, such as theme parks, gift shops and television networks. The drama that plays out in media markets in the next year may turn out to be more exciting than the blockbusters not hitting screens near you. ■
Indestructible
Huawei reports resilient results
Neither American sanctions nor covid-19 seem able to slow its rise much
Business
Apr 4th 2020 edition
Apr 4th 2020
NEW YORK
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
Eric xu, one of Huawei’s three rotating chairmen, did not hold back. “Nonstop pressure from the us government, in a deliberate attempt to spread disinformation, has put our company under the spotlight,” he wrote in the firm’s annual report, released on March 31st. This was meant to explain why the telecoms-equipment giant missed its revenue target of $135bn by $12bn.
America has barred exports of some American technology to the Chinese champion. It is threatening to impose further sanctions soon and has tried, with mixed success, to strong-arm American allies to reject Huawei’s next-generation 5g-networking kit.
For all Mr Xu’s outrage, the results were rather impressive. Revenues rose by 19% year on year. They have more than doubled in four years. Net profit rose by nearly 6% to 63bn yuan ($8.8bn). The firm’s cashflow from operations rose by 22% year on year, to 91bn yuan.
The firm responded to America’s assault by redoubling its efforts at “indigenous innovation”, through which it sources and invents as much as it can in China. This will not be easy. Though its premium smartphones now have fewer American parts, its overall use of American inputs actually rose last year to nearly $19bn, from $11bn in 2018.
On the bright side, its kit remains popular outside America. Although American measures limited its use of Google’s Android smartphone operating system, its consumer-business group increased sales by 34%, to 467bn yuan, owing to strength in China and emerging markets. Its 5g gear is more advanced and less costly than offerings from European rivals, Ericsson and Nokia. Huawei now boasts over 90 5g contracts worldwide, half of them in Europe.
Duncan Clark of bda China, a consultancy, likens Huawei to the villainous robots in “Terminator” films: not just indestructible but “able to rebuild itself after any attempt to take it down”. Even covid-19 may not slow it down. As more people Zoom to work, governments everywhere covet the sort of zippy mobile networks Huawei helps build.
Bartleby
Jobs for jailbirds
Getting prisoners into work seems to reduce reoffending
Business
Apr 4th 2020 edition
Apr 4th 2020
Aconvicted thief is sent to prison and struggles to adjust to his new environment until his culinary talents are discovered. By a very roundabout route, his kitchen skills lead to his rehabilitation. That is the plot of “Paddington 2”, a family film from 2017. It might also serve as the template for Clink. The charity trains prisoners in hospitality and catering, and ran five restaurants and cafés in Britain before the national lockdown brought about by the covid-19 pandemic. It trained 441 prisoners last year. They achieved 225 educational certificates. Over 280 employers have agreed to hire Clink graduates. Some ex-convicts have gone on to become head chefs at hotels.
Prisons are in the news because of the threat covid-19 poses to people locked up in a confined space. Some have been released early. But in normal times, which will one day return, getting prisoners back to work is one of the best ways to help their rehabilitation. A study by the Justice Data Lab, a British government body, conducted between 2009 and 2016 showed that 15% of Clink alumni reoffended, compared with 22% for other jailbirds with similar records.
Clink is not alone. Take Ali Niaz, a former drug dealer who managed to get an a-level in business during his time in prison. After his release, and a course at Madingley Hall in Cambridge, he became a business and life coach. He also runs a social enterprise helping ex-offenders and set up the Feel Good Bakery, where ex-prisoners make sandwiches for office workers (or did until the pandemic, though it is still paying its staff).
Mr Niaz received help from the Responsible Business Initiative for Justice (rbij), a transatlantic charity run by Celia Ouellette, a former death-row lawyer in America. She points out that 2.2m Americans, the population of a large metropolis, are locked up. America also has perhaps 5m ex-offenders. rbij helps businesses trying to employ both groups.
One of those is Televerde, a call-centre operator from Arizona. Ron Bell, its founder, was involved in prison administration and got a contract with the state of Arizona to provide work and training for female inmates. Now the company operates seven call centres in women’s correctional facilities, focusing on business-to-business marketing and sales. The women work 40 hours a week: part of their wage goes toward their upkeep, part can be spent in prison and the rest goes into a savings account for when they get out.
Around 40% of people at the Televerde corporate office are ex-prisoners. Some released on Friday start work there the next Monday. One former inmate, Michelle Cirocco, who has been with the company for 21 years, has held high executive positions, in charge of marketing and corporate social responsibility.
Not everyone who worked for Televerde while inside will find a job at headquarters when they leave. But the skills they learn are still useful; a study by Arizona State University shows that 94% of ex-Televerde workers have jobs after five years, earning 3.7 times the average wage for former convicts. In Ohio Dan Meyer runs Nehemiah Manufacturing, which was created ten years ago specifically to hire what he calls “second-chance citizens”—not just prisoners but people with a history of drug and alcohol abuse, and those from homeless shelters. The company licenses small brands from multinationals such as Pampers Kandoo, a line of products for toddlers. It employs 180 people, of whom 130 are in the “second chance” category.
Mr Meyer found that getting a job is not the only challenge for those released from prison. They also need help with housing and child care, which is why Nehemiah has employed three social workers. New staff are initially hired for three to six months and around 30-40% drop out in that period. But once they are hired full-time, the turnover rate is only 15%, which he says is low by industry standards. Many of the workers have drug-related problems and the company operates random drug-testing. If employees fail a test, they are offered rehab.
Nehemiah cannot employ all of Ohio’s second-chancers. So Mr Meyer created the Beacon of Hope business alliance. In total, the alliance has 80 members, including Kroger, a supermarket chain. Collectively, they have hired 600 vulnerable people.
Writing individuals off for life is not just callous. It also is economically inefficient. Society will be better if more jailbirds find jobs—be they those released early because of covid-19 or those still serving time.
Schumpeter
From “you’re fired” to “you’re furloughed”
Should American job cullers become more European in the crisis?
Business
Apr 4th 2020 edition
Apr 4th 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
In mid-february Hilton, a hotelier, and its employees had something to celebrate. For the second year running the company came top in Fortune magazine’s list of best American companies to work for. The perks provided to its 62,000 direct employees in America included extended parental leave, Under Armour-branded uniforms and facilities to let travelling staff ship breast milk home. A mere six weeks later, on March 26th, tens of thousands of those pampered employees were given notice that they would be thrown out of work because of the covid-19 pandemic. That was the day weekly jobless claims in America spiked by 1,000% to 3.3m.
The stratospheric surge of Americans seeking unemployment benefits contrasts with the situation in western Europe. Companies there are struggling just as hard but many are keeping workers on the books at reduced pay. That is a familiar story. In times of economic upheaval, European firms rely extensively on schemes in which the government picks up part of the wage bill, such as Germany’s Kurzarbeit, France’s chômage partiel and Italy’s cassa integrazione. Traditionally, America has shunned such feather-bedding. From frontier days its labour laws have given employers leave to cull jobs almost at will. Not for nothing did the country elect a president whose catchphrase was “You’re fired!”
In the current crisis it may seem fair to ask American firms to take a more European approach. After all, business activity has collapsed not because of slothful work habits, but because governments have ordered people to stay at home. This is not a slump that needs to be fixed with an orgy of creative destruction in the jobs market. And however deep the downturn, the rebound could be relatively quick. If so, it makes sense for companies and employees to maintain ties, so that production can resume briskly when things improve.
Yet one feature of this crisis in fact makes it all the more important to maintain flexible labour practices: the jobs market has bifurcated. In industries that bring people together, such as hotels, airlines, casinos and restaurants, demand for workers has collapsed. Those that provide access to health care (such as hospitals), staples (supermarkets) or services catering to those stuck at home (e-commerce) are clamouring for more staff. For all the merits of Europe’s labour-support programmes, the risk is that they last too long and dissuade workers from switching to industries where their help is badly needed.
Already the response of American firms to the jobs crisis is taking an unfamiliar route. Though many of the small businesses that provide about half of private-sector employment in America were quickly forced to let workers go to survive, the government has stepped in to ease the pain. Its $2trn support programme has temporarily increased unemployment benefits. A $350bn lifeline to small businesses within the stimulus package encourages them to cling on to staff if they can.
Some bigger American firms, such as Hilton, its rivals like Hyatt and Marriott, and retailers such as Macy’s and Gap, are taking a different tack. Instead of sacking staff, they have announced that tens of thousands of their employees will be furloughed, which in America means being put on unpaid leave. Crucially, the furloughed workers get to keep their company health insurance. They can also, in most cases, claim unemployment benefits. To ease resentments, those who remain in work, including executives, will suffer pay cuts.
The use of furloughs represents a change from previous slumps, says Sandra Sucher of Harvard Business School. Common in Europe during the financial crisis of 2007-09, they were barely used in America. Since then, however, many American firms who laid off workers found subsequent rehiring so difficult that they are loth to suffer the ordeal again, she says.
Another difference with past recessions is the way American firms are encouraging inactive workers to switch jobs to fill temporary vacancies in other industries. Hilton, for instance, is helping its suspended workers to apply for jobs at e-commerce firms like Amazon. This may help keep the labour market relatively fluid at a time of severe stress. (Amid employee absences and increased orders, some workers at Amazon, for instance, are demanding better conditions.) It is also well-suited to the time horizons of the pandemic. As social-distancing measures recede, some of the disease-specific demand for labour will ebb, enabling workers to return to their old jobs.
From pulling pints to pulling up potatoes
This is where Europe could learn something from America. Some industries have far too many workers, whereas others do not have enough. Airline employees are needed to work in hospitals, and rural bar staff could helpfully be dragooned into farmwork amid a shortage of migrant labour. But European countries’ schemes for subsidising the wages of furloughed workers often do not make it easy for them to take new jobs, even temporarily, and sometimes discourage it. As Giuseppe Moscarini of Yale University says, support for workers should not preclude labour mobility, even if it encourages them to maintain ties with their existing employers.
Both American and European labour policies have their pros and cons. In America rapid shake-outs in jobs markets help good firms grow and bad firms shrink, promoting dynamism. In Europe worker protections can reduce the devastating toll on employees and their families caused by slumps, but can slow the pace of recovery. American left-wingers believe that more European-style treatment of workers is long overdue—and will cheer examples of companies volunteering to furlough workers rather than fire them. But if America and Europe want to ensure that hospitals are staffed, deliveries are made and food is on the table, they must remember that flexibility, as well as some security, is essential. ■
Stringent and stingy
Emerging-market lockdowns match rich-world ones. The handouts do not
Few emerging-economy governments can afford a generous fiscal response
Finance and economics
Apr 4th 2020 edition
Apr 4th 2020
HONG KONG
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
When the global financial crisis struck emerging economies in 2008, two kinds of exodus ensued. Footloose capital fled their financial markets and migrant labour left their cities for the bosom of their hometowns and villages. Since the “coronacrisis” struck, the first exodus has recurred on an unprecedented scale: foreigners took over $83bn out of emerging-market shares and bonds in March, according to the Institute of International Finance, a banking association, the largest monthly outflow on record. But the exodus of labour has been hampered by governments’ efforts to shut down transport and lock down populations, in order to slow the spread of covid-19.
At least 27 emerging economies have imposed nationwide restrictions on movement, according to a tally kept by Thomas Hale and Samuel Webster of the Blavatnik School of Government at Oxford University. Vietnam became the latest candidate for the list, requiring its citizens to stay home until April 16th. Pakistan’s prime minister, Imran Khan, once warned that a lockdown would bring hunger and ruin. But even Pakistan “has swiftly moved from we can’t afford lockdown, to we can’t afford not to lock down,” notes Charlie Robertson of Renaissance Capital, an investment bank.
All countries have spared “essential” goods and services from restrictions. But what counts as essential? India’s list, derived from a law passed in 1955, at first failed to mention feminine-hygiene products, causing confusion. South Africa scrambled to add toothpaste and baby products to a list of “basic goods” that had omitted them. There have been errors of inclusion too. Days into its lockdown, South Africa’s government discovered that some pubs had been mistakenly awarded certificates to operate.
Even industries deemed essential can suffer from broader restrictions. One pharmaceutical plant in northern India says it can produce, but not ship, its wares. A maker of medicine capsules eventually won approval to keep operating. But by then some of its employees had left town and others were scared to return to work.
Whereas previous crises have imposed a financial constraint on economic activity, this disaster has imposed a “physical constraint”, points out Alberto Ramos of Goldman Sachs, a bank. He expects Latin America to suffer its worst contraction since the second world war, exceeding even its debt crisis of the 1980s. Much depends on how long the lockdowns last. India’s is due to be lifted on April 15th, but restrictions may linger in states with high numbers of infections, points out Priyanka Kishore of Oxford Economics. Several of those states, including Maharashtra and Karnataka, are among the biggest contributors to India’s economy. If 60% of the country remains locked down until the end of April, she calculates, up to 10% of India’s gdp in the second quarter could be lost.
The lockdowns in many emerging markets are as tough as in the rich world, or more so, suggests an index created by Mr Hale and Mr Webster measuring the “stringency” of a government’s response to the pandemic. But unlike their richer counterparts, few emerging-economy governments can match this stringency with an equally generous fiscal response, according to numbers collated by Sherillyn Raga of the Overseas Development Institute, a think-tank (see chart).
Malaysia may be one exception. It has unveiled a relief package with a face value of over 16% of gdp, including loan guarantees, wage subsidies and even free internet during the period of social distancing. Not many other emerging economies can enact anything similar. India, for example, has announced a plan to help the poor worth 1.7trn rupees ($23bn), only about 0.8% of gdp. Even that includes previously budgeted outlays that will merely be spent sooner. South Africa’s fiscal response has been inhibited by rising borrowing costs. Last week Moody’s became the last of the big three credit-rating agencies to strip it of its investment-grade status, calculating that the government’s budget deficit this fiscal year would exceed 8% of gdp and that its debt, including its guarantees to state-owned enterprises, would rise from 69% of gdp to 91% by 2023.
Central banks have been a little more adventurous, cutting interest rates despite the slump in emerging-market currencies. Some, including those in Colombia and South Africa, will emulate America’s Federal Reserve by buying government bonds in the open market to reduce volatility. Indonesia will cut out the middleman: new rules allow its central bank to, in extremis, buy bonds directly from the treasury.
But no emerging market, almost by definition, can afford to ignore its exchange rate entirely. Russia’s central bank, for example, recently refrained from cutting interest rates because the rouble has tumbled so dramatically in the wake of the country’s oil-price war with Saudi Arabia. The tussle caused oil prices to dip below $20 a barrel this week, according to America’s benchmark, for the first time since 2002.
In some countries (such as Argentina), governments still have substantial foreign-currency debt. In others, companies do (Turkey). And in still others (South Africa), a large share of local-currency debt is held by foreigners, who will be reluctant to roll over their holdings if the currency becomes unmoored.
In order to measure countries’ vulnerability, analysts at Morgan Stanley, a bank, have calculated the amount of hard currency emerging economies would need to service their foreign debt this year and cover their trade balance, if oil prices remain low, remittances from overseas workers drop by 25%, export earnings from tourism and travel disappear, and foreigners dump a third of their holdings of shares and bonds. They then compare this amount to these countries’ foreign-exchange reserves (see chart). Many emerging economies would lack enough reserves to meet their needs, leaving them reliant on further foreign borrowing in hostile markets.
In such circumstances, some emerging economies will turn to the imf. Indeed the fund says over 80 countries have already asked for some form of help in recent weeks. Others may extend their lockdowns into the financial realm. In a report published on March 30th the United Nations Conference on Trade and Development argued that some countries should impose capital controls, with the imf’s blessing, to “curtail the surge in outflows”. Having prevented labour from moving freely within their borders, some overstretched emerging markets may now be tempted to stop capital moving freely across them. ■
Bills, bills, bills
What missed rent and mortgage payments mean for the financial system
April 1st was payday—and the day that big bills were due
Finance and economics
Apr 4th 2020 edition
Apr 4th 2020
NEW YORK
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
To most working Americans, the first of the month brings both joy and sorrow. It is payday, but also when rent and mortgage payments—their biggest bills—are due. Businesses must shell out wages and rent from revenues earned over the past month. This April 1st is likely to have been even crueller than usual. The government’s efforts to contain the spread of covid-19 have forced retailers to close shop and led to millions of workers losing their jobs. Many households and firms will struggle to pay what they owe. If rent and mortgage payments stop, the financial system risks seizing up.
The bill is huge. Around two-thirds of America’s 120m households own their homes. Together they owed around $11trn in mortgages at the end of 2019. Their monthly payments depend on their deposits and their interest rates, but using national averages as a guide suggests that around $52bn might have been due on April 1st. Another 43m households rent. Zillow, a property firm, estimates that they paid $43bn a month to landlords in 2019.
Few firms own their offices or shops, instead renting from commercial landlords. Green Street Advisors, a property-research company, estimates that total office rent exceeds $10bn a month. Monthly retail rents are worth another $20bn, according to Marcus & Millichap, a commercial-property services and consulting firm.
All told, households and firms owe around $125bn. How much of that might go unpaid? It seems likely that the 3.3m workers who signed up for unemployment benefits in the week to March 21st will have also sought relief from their landlords or their banks. Economists at the University of Chicago reckon that two-thirds of Americans cannot work entirely from home. Many may lose some pay as a result.
Some businesses might be able to keep earning even while their offices are shut. Retailers less so. A slew have already said that they won’t cough up. Nike, a sportswear-maker, says it will service half its rent this month. The Cheesecake Factory, a restaurant chain, plans to pay nothing at all.
The damage done to the financial system depends in large part on how flexible landlords and creditors can be. Government intervention should allow many households to postpone payments. The vast majority of residential mortgages are held, or backed, by government-sponsored entities (gses), like Fannie Mae and Freddie Mac (see chart). The government has ordered these to grant forbearance to homeowners, and has imposed a moratorium on foreclosures. The Federal Reserve will buy unlimited quantities of mortgage-backed securities (mbs) issued by gses. Small residential landlords should also be well-supported by such measures. These own the majority of rental properties and owe $4.3trn in mortgages.
The commercial sector, though, has less flexibility. Most mortgages for retail and office spaces, which are worth a combined $3trn, are taken out by professional landlords. They are usually owed to one of four groups: banks, life insurers, the holders of commercial mbs or real-estate investment trusts (reits). Renegotiating payments with banks and insurers, which lend using their balance-sheets, might be manageable. But a quarter of commercial mortgages are owed tombs holders and to reits, which are less flexible. The commercial mbs market is governed by rigid rules; reits are highly leveraged and will quickly suffer if payments stop.
Some middlemen are also being affected in unforeseen ways. For instance, mortgage-service providers—which originate loans and collect payments from homeowners for a fee—complain that they are running short of cash. They typically bet on rising interest rates by short-selling mbs, thereby hedging the risk they take when locking in rates for new customers. But as part of its response to the pandemic, the Fed is buying mbs so quickly that the providers are facing margin calls on the losses on their hedges, before the loans for which they have locked in the rates can be issued. With help from the Fed and the government, many homeowners will be able to delay repayments. Some of the corporate links in the chain may not be so lucky. ■
Buttonwood
The departing boss of Norway’s oil fund on building an asset manager
Norges Bank Investment Management is the world’s single largest owner of equities
Finance and economics
Apr 4th 2020 edition
Apr 4th 2020
There is a point in a conversation with Yngve Slyngstad when he invokes Bjorn Borg, the Nordic tennis star of the 1970s. The Borg approach—make sure you don’t lose; above all, be solid—is one Mr Slyngstad has instilled in Norges Bank Investment Management (nbim), the organisation he has run since 2008 from within Norway’s central bank. Its target, to beat a benchmark by 0.25 percentage points a year, is modest. But meeting it has led to immodest wealth.
Mr Slyngstad is to step down later this year when Nicolai Tangen, a London-based hedge-fund manager, takes his place in Oslo. The departing boss resigned in October, 50 years to the day after Norway first struck oil. The same day Norway’s oil fund passed Nkr10trn ($900bn) in value. It is the world’s largest single owner of equities. On average it owns 1.5% of every listed firm globally.
This seemed improbable when Mr Slyngstad joined in 1998. The price of oil was falling towards $10 a barrel. The idea of an oil-reserve fund seemed risible. Yet Mr Slyngstad left a well-paid job in the private sector. What attracted him was autonomy. He and his senior colleagues used it to build a fund manager based on sound principles. Discipline, solidity, minimising errors—these Borg-like tenets are difficult to follow when managing a portfolio. But they are key to investing success.
Norway’s oil fund was set up in 1996. Its founding stemmed from an awareness that oil-producing countries run into trouble. One trap is the “resource curse”, the corruption that mineral wealth often fosters. Another is “Dutch disease”—currency appreciation that then retards the progress of other export industries. The fund is primarily a means to smooth the effect of volatile oil revenues on the government’s budget. All oil revenue is paid into it. It then makes a steady contribution to the budget. A decade-long oil boom created a windfall. The fund came to be seen in a new light, as an endowment for future generations. At its peak last year, it was worth around three times Norway’s annual gdp.
Its wealth is also the fruit of judicious investment. Mr Slyngstad was brought in to build the fund’s equities arm; until then all the money had been in bonds. In principle, a long-horizon investor should tilt towards riskier shares. But even the best principles can be hard to follow. This became clear soon after Mr Slyngstad was made boss. The fund had raised the equity share of its portfolio from 40% towards 60% during 2008. The timing looked bad. The stockmarket crashed in the autumn. A rally in the fund’s bond holdings limited the damage. Still, the fund lost 23%.
There was then a tough decision to make. The principles of the fund called for rebalancing: selling bonds that had gone up in value to buy shares that had become cheaper, thus reaching the 60% equity weight. It takes stomach to buy assets that others are fleeing from. Some funds suspended their rebalancing rules. Was there hesitation? “Yes, of course,” says Mr Slyngstad. It was a big political risk. If the stockmarket did not revive, there would be a reckoning. Even so, the finance ministry gave its blessing. “We ended up buying $175bn of equities, 0.5% of the market, during a huge crisis.” This set the fund up nicely for the ten-year bull market that followed. Rebalancing is now hard-wired into its processes. There are times, such as now, when shares have again fallen a long way and it is easy to lose your nerve. It is usually the worst time to do so.
The fund’s long-term focus means it can be bold during crises. But there are also constraints that do not apply to other investors. The need for transparency rules out dabbling in private-equity funds. nbim has been a pioneer in socially responsible investment. This might look like Nordic do-goodery and a sop to posturing politicians. But the approach is hard-headed. A lot of decisions to exclude stocks are taken with an eye to long-term returns. Coal shares, for instance, are out because the business does not appear to have a lasting future. Companies in emerging markets that do not pass muster on corporate governance are avoided. In general this has been a way to improve returns.
The tennis analogy is: stay on your baseline; eliminate basic errors; be solid first—and only then, be smart. You will win in the long term. A lot of fund managers see a risk to their careers in looking too far into the future. They may lose clients in the meantime. Things are different at Norway’s oil fund. “The career risk”, says Mr Slyngstad, “is not to implement the strategy.”
Lonely work
How Allianz is dealing with market turmoil
Europe’s largest insurer is exposed through its life-insurance and its asset-management arms
Finance and economics
Apr 4th 2020 edition
Apr 4th 2020
BERLIN
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
Oliver bäte still goes to his office every day on Munich’s Königinstrasse, next to the English Garden, but it is mostly empty. “You are always alone as a ceo,” says the boss of Allianz, who took the reins of the 130-year-old insurance giant in 2015. And never more so than during a pandemic, when you are in charge of 147,000 employees in over 70 countries, who are looking after hundreds of thousands of customers, many of whom are in financial despair because of covid-19. “Italy is overwhelmed,” says Mr Bäte. Only 30 of its several thousand employees in Milan are at the office.
The company will support clients wherever it can, says Mr Bäte. He is frequently on the phone with officials in Brussels and Berlin, discussing ways to help governments marshal money for programmes to support small and midsized companies.
Thousands of firms are looking to their insurers, as well as the state, to cover some of the costs of shutting down. But neither property-and-casualty nor life-insurance policies generally cover pandemics. This is mainly because the risk is huge and unpredictable, but also because such policies were not until now much in demand. Allianz covers certain elements of a pandemic, such as business interruption for two weeks. But it can only underwrite slices of the risk, says Mr Bäte. Otherwise even the strongest insurer would go bust.
Legal wrangles over policy exclusions loom over the industry. State lawmakers in America (where insurance is regulated at state level) have proposed new laws to force insurers to pay billions of dollars for business interruptions related to mandatory shutdowns. The issue is simmering in Europe, too—though fewer cases are likely to end up in court. Politicians are also urging insurers to lower premiums in other business lines, for instance car insurance, or to divert profits from these to help stricken corporate policyholders. Insurers can make more money than usual from motor policies during lockdowns, since quieter roads mean fewer accidents.
Allianz has many more immediate concerns. As the owner of Euler Hermes, a big provider of credit insurance—which firms buy to protect receivables from loss—Allianz is directly exposed to rising corporate defaults. Mr Bäte vows to try to keep small businesses going by not making drastic cuts to the credit lines it offers with such policies. France is set to offer a reinsurance backstop to limit potential losses for credit insurers that help keep covid-stricken firms afloat; Germany may follow suit.
Allianz’s huge asset-management arm—the world’s second-largest active fund manager—is heavily exposed to the carnage, too. The business, which comprises pimco, a bond-fund giant, and the smaller Allianz Global Investors, oversees some $2.3trn and generates up to a quarter of group profits. It had a very good January and February, but in March it was “like turning a light switch off”, says Jackie Hunt, who leads the division. Clients rushed to redeem funds, especially in fixed income, after stockmarkets plummeted (Mr Bäte says Allianz beat an “early” retreat from American equities). Hedging has become more difficult. The cost of protection for a book of variable annuities, for instance, “shot through the roof”, says Mr Bäte. “It’s a hundred million here, a hundred million there.”
Allianz is exposed to markets both in its life-insurance business, as an investor of clients’ premiums, and as an earner of fund-management fees. Ms Hunt thinks the crisis will speed up the move from active to passive management in equities and squeeze fee margins. Yet she insists that this is a time when active managers prove their value, especially in fixed income.
When time allows, Mr Bäte says, he is pushing on with a plan to slim Allianz down and increase efficiency by embracing ai and machine learning. He estimates that up to half of his working day is taken up with covid-related issues. The outlook is unclear: for now, he says, he is not pondering a profit warning. He is preparing for an annual general meeting on May 6th, which for the first time will take place virtually. It will be a lonely day for the gregarious former McKinsey consultant.
Free exchange
What China’s interest-rate muddle says about its financial system
Ask a Chinese economist what the benchmark rate is, and brace yourself for an avalanche of numbers
Finance and economics
Apr 2nd 2020 edition
Apr 2nd 2020
In 1979, when Paul Volcker started jacking up interest rates to quell inflation in America, China launched a radical experiment of its own: it created commercial banks. Deng Xiaoping was trying to steer the country away from central planning. Four decades on, Mr Volcker’s job long done, China’s transition is still unfolding. For evidence of this, look at its interest-rate muddle amid the coronavirus-induced slowdown. Ask a Chinese economist what the benchmark rate is today—a simple question in most countries—and brace yourself for an avalanche of acronyms and numbers.
There are, to name the main contenders, the one-year deposit rate (now 1.5%), the seven-day reverse-repurchase rate (known as the dr007, 2.2%), the medium-term lending facility (mlf, 3.15%) and the one-year loan prime rate (lpr, 4.05%). Each, depending on one’s focus, has a claim to benchmark status. Sorting through all these rates is not merely an exercise in banking esoterica. It is a window into how China manages its financial system.
Start with the basics. China’s central bank is highly interventionist, by design. For years it set loan quotas for banks, told them what sectors to support and dictated the rates at which they took deposits or extended loans. To varying degrees, it still wields these powers. But with the economy ever bigger, Chinese officials know such a broad remit is untenable. So their goal, first declared a quarter-century ago, is interest-rate liberalisation: to let banks make their own decisions. In a fully liberalised system, the People’s Bank of China would focus on a single rate that anchors the economy, adjusting it as needed—the Platonic ideal of any central bank.
Over the past few years China seemed to make strides in this direction. The central bank began phasing out its fixed lending and deposit rates. In their place it emphasised more flexible rates. It developed a wide corridor for guiding rates, anchored by the dr007 (the rate at which banks lend to each other) and the mlf (a monthly open-market facility). Meanwhile the lpr, the rate for lending to prime customers, became the new standard for all loans. Its pricing was based on the mlf, which in turn reflected the dr007. It might sound like a right mess. But squint hard enough and it looks like modern central banking: the People’s Bank keeps interest rates within a target range by managing the level of cash in the financial system.
Yet the covid-19 crisis has shown that this is only part of the story. The central bank has cut its newer, more flexible rates to lower lending costs. But the current debate, fuelled by the central bank itself, is over when it will cut the benchmark deposit rate—that is, one of the traditional fixed rates. That makes it clear that interest rates in China are not yet liberalised. The central bank still has a firm grip on rates paid to savers (the benchmark deposit rate) and a strong, if more nuanced, hold on lending rates (the dr007-mlf-lpr alphabet soup).
Why is it so hard for the government to let go? The explanation can be found in two striking facts about Chinese interest rates. First, they are much lower than one would expect for an economy growing so quickly, coronavirus notwithstanding. The real one-year deposit rate is negative. This is not new. China has long been an exemplar of financial repression, limiting savers’ returns in order to make cheap funds available to finance sky-high investment.
Second, despite the low interest rates, Chinese banks are immensely profitable. According to the latest data, they account for 17% of the market capitalisation of the domestic stockmarket but 39% of the profits of all listed firms. The secret of their success is the spread between what they pay savers and charge borrowers, or the net interest margin. It is not that they are so brilliant at managing their books. Rather, the lack of true rate liberalisation assures them a net interest margin of two percentage points.
Thank a banker
Their giant profits mean that banks are often a lightning-rod for criticism in China (evidence that in these troubled times, more still unites the world than divides it). In a report in February, the People’s Bank mounted a defence. Fully 60% of banks’ profits go to replenishing their capital, which lets them extend more loans to businesses and households. Everyone thus benefits, it argued.
In the Chinese context it has a point. Where banks go, so goes the economy. Banks’ assets are worth 175% of gdp, more than in any other country, according to a core measure used by the World Bank (see chart). Many analysts think that China’s banks can expand their loans by about 10% a year while making big enough returns to preserve their capital buffers. In a normal year these new loans would be expected to generate economic growth of about 6%, with a mild rise in total indebtedness. The link between lending and growth is a closed loop that works, assuming no major capital outflows and no sustained declines in asset quality.
Even the coronavirus shock need not break this loop. Of course growth has suffered. But because credit demand is determined by the volume of investment approved by the government, and not animal spirits, loans might accelerate. Such state-led lending is likely to lower efficiency, but that is a long-term problem.
True rate liberalisation constitutes a bigger short-term threat. China got a taste of that over the past decade. The rise of more investment options for savers, such as online money-market funds, forced banks to compete more for deposits. They got around rate caps by marketing investment products with higher yields. But higher funding costs led them to find riskier clients and to increase their own leverage. The dangers were made plain last year when the government helped to rescue three overextended, if peripheral, banks.
So in the name of financial de-risking, regulators have steadily pushed banks back towards the plain-vanilla business of taking deposits and extending loans. Hence the pressure on the central bank to cut deposit rates at the same time as it lowers lending rates. This way, the closed loop—from new loans to new deposits to bank profits, and around to new loans again—will remain intact. And the liberalisation of China’s banking system can wait for a sunnier day, as it always has—and, as a cynic might say, always will. ■
The coronavirus pandemic
An antibody test for the novel coronavirus will soon be available
Use it wisely
Science and technology
Apr 2nd 2020 edition
Apr 2nd 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
When a new virus invades the human body, the immune system leaps into action. First to the scene are antibody molecules of a type called immunoglobulin m (igm). These bind with proteins on a virus’s surface, disabling it and marking it for destruction by cells called macrophages. A few days later the system produces a second type of antibody, immunoglobulin g (igg), to continue the fight. igms are short-lived. They stick around in the bloodstream for three or four weeks before disappearing. iggs, however, are the basis for a much longer-term form of immunity. This can last for many years, or even a lifetime.
Kits that test for these two types of antibodies when they have been raised specifically by sars-cov-2 should soon become available. The virus causing the covid-19 is already being detected with genetic tests, which look directly for current signs of infection in nasal or throat swabs. Tests to detect antibodies will also be able to identify those who have had infections in the past and may now be immune. In the short term, this will be important because it will permit the authorities to identify who may return to their jobs without risk of infecting others. That is particularly valuable in the cases of doctors, nurses and the numerous other health-care workers needed to look after those who are seriously ill. It will also help in the longer run, by revealing how far the virus has spread through a population, and thus whether or not herd immunity is likely to have built up. Herd immunity is the point where insufficient infectible individuals remain in a population for a virus to be able to find new hosts easily, and it is therefore safe to lift social-distancing and stay-at-home rules.
sars-cov-2 antibody tests have already been deployed in limited numbers in China, Singapore and South Korea. Several Western governments, including those of America and Britain, have been buying up millions of surplus antibody tests from China for use in their own countries. Several other types of these tests have also been developed by companies around the world. None, however, has yet been approved for widespread use—for, though such tests are reasonably easy to manufacture, ensuring that they give useful and reliable results is taking a lot of effort.
Each different design of test uses its own recipe of chemicals and processes. Physically, however, many resemble the self-contained plastic sticks employed in the version made by Biopanda Reagents, a British firm. A user first pricks a fingertip. Then he or she introduces a few drops of blood into an opening at one end of the stick. Inside, the blood goes through a series of chemical processes that can identify particular antibodies. It takes around 15 minutes to get a result, and this is displayed in a similar fashion to that used by a typical pregnancy test—the positive identification of an antibody resulting in a coloured line next to its label on the test stick.
There are three interesting signals. A solitary positive for igm means the person has had a very recent (potentially current) infection. Positives for both igm and igg mean the user was infected some time within the past month. A positive for igg alone means that the infection occurred more than a month ago, and the user should now be immune to a repeat of it. (A negative result probably means no infection, though it could also mean that it is too early in the course of an infection for antibodies to have appeared, since the first igms typically turn up only 7-10 days after an infection has begun.)
Before regulators can approve a test for widespread use, they need to validate it. How useful it is can be summarised by two numbers determined during this validation: its sensitivity and its specificity.
A test’s sensitivity refers to how good it is at detecting the thing it is meant to detect—in this case the igm and igg antibodies associated with sars-cov-2. A sensitivity of 95% means that, from 100 blood samples known (by other means, such as previous genetic testing) to be infected, the test will reliably tag 95 correctly as having the pertinent antibodies. The remaining five would be identified as having no antibodies present—in other words they would be false negatives.
The other significant number, a test’s specificity, measures how good that test is at detecting only the antibodies it is meant to detect. There are seven human coronaviruses and, ideally, a test would detect only antibodies produced in response to sars-cov-2. A test with 98% specificity means that, of 100 known uninfected blood samples, 98 will come back (correctly) as negative and the final two will come back (falsely) as positive. Such false positives could have many causes. A common one is cross-reaction, in which a test responds to the wrong antibodies.
To work out a test’s sensitivity and specificity, it needs to be checked against hundreds of samples of known status. Given the novelty of sars-cov-2, and therefore the lack of easy access to relevant blood samples, this takes time. The British and American authorities are assessing several tests, but have released no validation data as yet, and have been tight-lipped about when they will do so.
Sense and specificity
An ideal test would be 100% sensitive and 100% specific. In reality, there will always be a trade-off between the two. Make a test acutely sensitive, so that it gives a positive signal with even the tiniest amounts of a relevant antibody present, and it will get less specific. This is because such a fine chemical hair-trigger is likely to be set off by antibodies similar to, but not identical with the target. And vice versa.
This trade-off is not always a bad thing, for it allows different sorts of test to be used in different circumstances. For example, if the intention of testing is to identify doctors and nurses who have antibodies to sars-cov-2, so that they can safely return to work with infected patients, because they are themselves now immune to infection, then the most important thing is for a test to have a low rate of false positives. In other words, it needs a high specificity.
By contrast, if the idea is to gather transmission data, sensitivity is the priority. If someone were identified as having had an infection, further tests could trace which of that person’s acquaintances were also infected, or had once been infected and were now immune. In these circumstances, a few false positives would not be a disaster. They would probably show up eventually, because those around the allegedly infected individual would not be infected as often as expected. A false negative, though, would mean lost information and a consequent lack of contact-tracing. That would be significant.
Testing of this sort will let doctors understand how a local cluster of infections grows, and therefore what action to take in order to break the chain (meaning, in practice, who needs to be quarantined). This kind of contact-tracing and isolation has been employed to great effect in South Korea through the use of genetic tests for the virus. Antibody tests will enhance the process, by capturing data on those infected in the past as well as the present.
Children are another group who could profitably be monitored using antibody tests. It is now well established that they are less likely than adults to present the symptoms of covid-19, and rarely suffer severe disease. It remains unclear, though, to what degree they are being infected “silently”, and are thus able to pass the infection on to others around them while apparently remaining healthy themselves. Antibody tests will reveal a fuller picture.
Antibody tests will no doubt also be in demand from members of the public wanting to know their immune status—for their peace of mind if nothing else. This might be cause for conflict. Even when they are cleared for general use it will take time for manufacturers to ramp up the production of tests, and those working in health care and one or two other important areas, like teaching, policing and delivering groceries to stores and markets, will surely be at the head of the queue to be tested. It is therefore hardly surprising that unvalidated kits, purportedly for domestic use, are already being offered for sale by unscrupulous online suppliers. Britain’s medical regulator, for one, has had to take down several fraudulent websites and is warning people not to use any home-testing kits they find being sold online.
Even when more kits do become available (and with due acknowledgment to the different putative uses of different sorts of test) the next goal for most countries after protecting crucial members of the workforce will be population-level surveillance. This will, as a by-product, provide information to individual members of the public. But its primary purpose will be to track how the epidemic is progressing.
One of the most important elements of this analysis will be determining the rate of silent infection—with all the implications that brings for herd immunity. Comparing recent test data from the Netherlands and Iceland hints at the gap in current knowledge of just how much silent infection there may be. Both countries use genetic testing for the virus, but the Netherlands only tests those with severe symptoms of covid-19, whereas Iceland has been testing widely, even people without symptoms. Unsurprisingly, but crucially, the Icelandic approach has revealed far more infections in younger people than the Dutch one (see chart). Moreover, according to Kari Stefansson, who is leading the Icelandic project, 50% of those who have tested positive reported no symptoms.
Silence is not golden
Mass testing will be laborious. It will mean taking regular blood samples from millions of people, even though the actual analysis will be done by robots in centralised high-throughput laboratories. To save effort, such projects might piggyback on a country’s blood-transfusion services, for donated blood is already subject to rigorous screening for pathogens.
German scientists have announced plans to start, this month, a reasonably large-scale surveillance project. It will monitor blood samples taken regularly from 100,000 participants. Those proving immune may be given a certificate exempting them from restrictions on working or travelling. If nothing else, that would certainly be an incentive to sign up. ■
The coronavirus pandemic
Formula 1 comes up with a breathing machine for covid-19 patients
Racing-car engineers are applying their expertise to medicine
Science and technology
Apr 4th 2020 edition
Apr 4th 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
The seven Formula 1 teams in Britain have high-tech engineering centres stuffed with the latest production equipment. And they employ hundreds of staff with the talent to use this gear to design, test and manufacture parts rapidly, in the days between races. With the season suspended, they have been collaborating on ways to help produce ventilators, which are needed urgently to treat patients suffering from covid-19. This week one team, Mercedes-amg, obtained approval for a device which it can quickly manufacture by the thousand.
The machine is not a ventilator, but a breathing aid of a type known as a continuous-positive-airway-pressure (cpap) device. These are typically used to assist people who have breathing problems to sleep more soundly. The machine delivers air at slightly above atmospheric pressure via a mask placed over the nose and mouth. This helps keep open the alveoli of the lungs. (These are the sacs from which blood absorbs oxygen, and into which it dumps carbon dioxide.) That reduces the effort of breathing. Additional oxygen can also be added. According to reports from Italy, around half of patients given cpap treatment have avoided the need for invasive mechanical ventilation, in which a tube is inserted down a patient’s throat.
Mercedes-amg worked with a team at University College, London, to take apart, copy and improve an off-patent cpap machine in a matter of days. As it was based on an existing design the British government’s medical regulator was able to fast-track approval. The team also worked with Oxford Optronix, a small British firm that makes oxygen monitors. The first 100 devices have now been delivered to University College Hospital and other London hospitals for clinical trials. These are expected to take three or four days. If they are successful, the team reckons it can make 1,000 of the cpap machines a day at its base near Northampton, and distribute them thence to other hospitals around the country.
“The speed with which the team developed the device is remarkable,” reckons Duncan Young, a professor of intensive-care medicine at Oxford University, who is not part of the project. Patients too unwell for simple oxygen masks, but not ill enough to need a ventilator, can be treated with a cpap machine, says Dr Young. This could, he adds, save lives by freeing up ventilators for those in urgent need of them.
Covid-19 and telecoms
Can mobile networks handle becoming stay-at-home networks?
Or will rapidly increasing demand overwhelm them?
Science and technology
Apr 4th 2020 edition
Apr 4th 2020
Editor’s note: The Economist is making some of its most important coverage of the covid-19 pandemic freely available to readers of The Economist Today, our daily newsletter. To receive it, register here. For more coverage, see our coronavirus hub
As countries across the rich world placed themselves under restriction over the course of March, journalists there turned to the question on everyone’s lips: “will the coronavirus break the internet?” For them, the answer in the main is “no”. Most broadband networks are built for peak evening usage, when lots of people settle in for a session of hd streaming. Even widespread, daylong videoconferencing and online gaming do not come close to that level of data consumption. The internet, as one infrastructure provider puts it, was “built for this”.
Such sangfroid does not, however, apply if your internet connection is mobile. And in the poorer parts of the planet that is generally the case. Indeed, most of the 4bn or so people who use the internet today do so via mobile connections rather than land-lines. As countries such as India, South Africa and those in South-East Asia start staying at home they are turning to their phones for entertainment, for communication and for work. With little fixed-line capacity to fall back on, the load on local mobile networks is immense.
A mobile-data connection runs as a radio signal from a phone to the local base-station. Thence it links up, via optical fibre or a microwave connection, with the network’s core, which is connected to the wider internet. If too many people try to connect simultaneously to the same base station, that station will be overwhelmed, causing calls to drop, data-transfer speeds to slow and tempers to rise.
Even some rich countries are suffering in this regard. According to James Barford of Enders Analysis, a British research firm, Telefónica Spain has seen a 30% surge in data traffic and Telecom Italia reports a 10% rise. Download speeds in Italy have also declined, according to OpenSignal, a network-analytics firm.
Elsewhere, things are worse still. Some networks have seen internet use rise by as much as 80% says Bhaskar Gorti of Nokia, which makes networking equipment and helps operators manage their systems. Mobile networks are constantly being upgraded, and have assumptions of double-digit growth baked into them. But those assumptions are for growth over the course of months or years, not days.
So far, network operators have proved equal to the task. But things could deteriorate. Routine maintenance will suffer as engineers go off sick or are forced to self-isolate. There will be less capacity for emergency maintenance. Far-off base stations will become harder to reach. And on top of all this, demands on networks will probably rise. More people will discover video chatting. As television broadcasters struggle to provide fresh entertainment, people will turn to streaming in ever greater numbers. All of these things will add to congestion. The longer that stay-at-home orders remain in place, the more likely it is that some networks will fall over.
Mobile operators and regulators are not standing around waiting for such failures, though. In several countries, including Spain, mobile operators have asked users to reduce their data consumption. Others are trying novel ideas. Kenya has fast-tracked Google’s Loon project, which will provide 4g signals from high-altitude balloons. In India, where data consumption is up 30% and speeds down 20%, operators are contemplating joining forces, to ease each other’s peaks. European and other regulators have asked the big streaming services—Netflix, Amazon, YouTube—to reduce the quality of their videos, in a bid to free up capacity. America has granted its networks additional radio spectrum on a temporary basis, and several other countries are in the process of doing the same.
Around a third of the planet’s inhabitants are now stuck at home. That is bad enough—for morale, for businesses and for countries’ economies. For those people to lose in addition what is, for many of them, their only connection to the wider world just makes it worse. ■
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