When There Wasn't Enough Hand Sanitizer, Distilleries Stepped Up. Now They're Facing $14,060 FDA Fees.

Distilleries just learned that to cap off a brutal year, the FDA is charging them a fee normally reserved for drug manufacturing facilities.

By Jacob Grier of Reason.

"For many American craft distillers, 2020 was already one of their worst years ever. The COVID-19-related closure of tasting rooms and cocktail bars, loss of tourism, and inability to offer in-store sampling slashed their sales revenue and cut them off from their customers. Then this week, just as it seemed they'd made it through the worst of a terrible year, the Food and Drug Administration (FDA) had one more surprise in store: The agency delivered notice to distilleries that had produced hand sanitizer in the early days of the pandemic that they now owe an unexpected fee to the government of more than $14,000.

"I was in literal disbelief when I read it yesterday," says Aaron Bergh, president and distiller at Calwise Spirits in Paso Robles, California. "I had to confirm with my attorney this morning that it's true." The surprise fee caught distillers completely off guard, throwing the already suffering industry into confusion.

When the onset of the pandemic led to a massive increase in demand for hand sanitizer this spring, many distilleries stepped up to alleviate the sudden shortage. The main ingredient in sanitizer is ethanol, which they are in the business of making, albeit typically in more fun and tasty formats. More than 800 distilleries pivoted from spirits to sanitizer, offering it for sale or in many cases donating it to their communities free of charge. Their prompt action helped ensure supplies of sanitizer when it was otherwise unobtainable.

(Even then, the FDA needlessly complicated things, imposing additional requirements on top of guidelines published by the World Health Organization for emergency production. The FDA's mandate that all alcohol used in sanitizer first be denatured—rendering it undrinkable—created a bottleneck that raised costs for distillers and slowed production.)

Producing sanitizer is viewed as a point of pride in the distilling business, a way that they were able to help their communities in a fearful time of crisis. 

Now, however, that good deed is being punished with unanticipated fees by the FDA. "I compare it to surprise medical billing," says Becky Harris, president of the American Craft Spirits Association (ACSA) and of Catoctin Creek Distilling in Purcellville, Virginia.

At issue is a provision of the CARES Act that reformed regulation of non-prescription drugs. Under the revised law, distilleries that produced sanitizer have been classified as "over-the-counter drug monograph facilities." The CARES Act also enacted user fees on these facilities to fund the FDA's regulatory activities. For small distillers, that means ending the year with a surprise bill for $14,060 due on February 11.

"People are incredibly anxious," Harris says. "We have been dealing with tons of phone calls talking to individual members and state guilds to tell them what we know and what we don't know."

Harris and the ACSA have spent the day trying to learn more details about the law and the FDA's intentions, but the combination of the holidays and the pandemic makes this a difficult time to reach anyone. "We recognize that this bill [the CARES ACT] was not written specifically for the issue of sanitizer," Harris says. "The problem that we have right now is that [the fee assessment] is going out to a whole lot of small businesses who are struggling in the pandemic."

Bergh's CalWise Spirits is a typical example. He says that his distillery produced 5,000 gallons of hand sanitizer, with distribution prioritized to medical workers and others on the frontlines of the pandemic response. "Some of my hand sanitizer was donated," he said in a statement today. "The rest was sold at a fraction of the market price. My goal was to get as much out as I could, at as low of a price as I could, while being able to bring my furloughed employees back to work. The hand sanitizer business saved me from bankruptcy—but I didn't make an enormous profit."

Potentially compounding the impact of the fee is that it is determined by registration as an OTC (over-the-counter) monograph drug production facility in the previous calendar year. That means that distilleries not only have to contend with this year's fee; if they fail to update their status with the FDA by tomorrow, they may be liable for an additional fee in 2022 as well.

For now, Harris is advising members not to pay the fee right away. "We want to push back on this," she says. She's hopeful that if the FDA has some discretion as to the applicability of the fee, that they will exercise it to exclude distilleries, most of which no longer produce sanitizer and have no intention of continuing to do so now that the emergency shortage has passed. Currently, however, the FDA's website explicitly notes that facilities that produced sanitizer under the agency's temporary COVID-19 policy are not exempt. Reason's inquiry with the FDA has yet to receive a detailed response, but we will update if we receive one.

Paying a surprise $14,000 bill would be a challenge for small businesses in any year, but it's a particular challenge for craft distilleries in 2020. An industry survey conducted earlier this year by the Distilled Spirits Council of the United States and the American Distilling Institute projected that sales revenue at craft distilleries would decline by more than $700 million this year, amounting to approximately 40 percent of their sales.

For many distillers, the unexpected fee assessment from the FDA thus arrives as one more substantial blow in an already devastating year. "If you were making sanitizer for your community at a limited capacity, this should not be something you have to deal with," says Harris. "It will be a slap in the face to make it through all of this and then get hit with this bill.""

How scammers siphoned $36B in fraudulent unemployment payments from US

By Nick Penzenstadler, USA TODAY. Excerpt:

"In a Zoom session with the camera turned off, Mayowa describes how he scoops up U.S. unemployment benefits fattened by COVID-19 relief, an international imposter attack that has contributed to at least $36 billion being siphoned away from out-of-work Americans. 

Mayowa is an engineering student in Nigeria who estimates he’s made about $50,000 since the pandemic began. After compiling a list of real people, he turns to databases of hacked information that charge $2 in cryptocurrency to link that name to a date of birth and Social Security number. 

In most states that information is all it takes to file for unemployment. Even when state applications require additional verification, a little more money spent on sites such as FamilyTreeNow and TruthFinder provides answers – your mother’s maiden name, where you were born, your high school mascot. Mayowa said he is successful about one in six times he files a claim. 

“Once we have that information, it’s over,” Mayowa said. “It’s easy money.” 

Mayowa agreed to take USA TODAY inside the fraud in an interview arranged by security firm Agari, using only his first name to hide his identity. The security company gives him another source of cash: It pays him in Bitcoin to provide information about active scams.

Coronavirus-era unemployment fraud was first identified in the state of Washington in May and since has spread to all 50 states, skipping to new targets as government agencies plug holes exposed by the massive scams. Mayowa and his crew of foreign scammers focused in November on Hawaii, Florida and Pennsylvania.

In addition to the crushing volume of legitimate claims during COVID-19 and public pressure to speed up payments, mobile banking apps and prepaid debit cards issued by some state unemployment offices paved the way for fraud this year, security experts said.

The step-by-step playbook the scammers follow is shared on Telegram, an app that provides cloud-based anonymous messaging and acts as an internet bulletin board of tips and questions.

Asked whether he feels bad about stealing from unemployed Americans, Mayowa pointed out that 70% of his peers in school are working the scams as side hustles, too.  

“No, no remorse,” Mayowa said. “We don’t know them. We don’t know who they are; it’s nobody.” 

States for years had prepared for low-level fraud, focusing on whether actual state residents filing for unemployment were telling the truth. The recent wave of imposter fraud – including from overseas – caught them off guard. 

In Washington, alarms began flashing red for Suzi LeVine on May 12. It was 10 p.m. and the message was clear: We are under attack. 

The commissioner of the state’s unemployment system knew claims were increasing as the pandemic and its economic devastation spread. But suddenly claims were 10-fold what LeVine expected.  

Things got crazy quickly. Within two weeks of CARES Act funding enriching weekly benefits, $600 million had been bled from the state system – roughly 8% of the $8.6 billion paid over the summer. The state pulled the plug on all payments for two days while it struggled to figure out what was happening. 

Eventually, the state’s computers started to flag anomalies: out-of-state banks, duplicate email addresses and multiple names using the same bank accounts. But there and elsewhere, antiquated state computer systems failed to flag foreign IP addresses, repeated computer serial numbers and techniques to mask that number.

Washington generally sees a few dozen fraudulent claims from imposters a year. Since March, the state has identified 122,000. 

“When you consider the policy factors accelerating benefits and getting them to the neediest people and the expanded $600 available … we had the perfect storm,” said LeVine, who served as ambassador to Switzerland during the Obama administration. “They have been lying in wait for this moment.”

Washington should’ve been a wakeup call for every other state. Instead, it took some states six months or more to introduce new two-factor authentication systems and third-party ID verification tools and to block suspicious addresses. Many also began relying more heavily on a national shared database to detect suspicious actors.

A failure to move quickly combined with the ingenuity of the scammers has allowed the fraud to continue rippling across the country, contributing to delays in payments to out-of-work Americans, according to Michele Evermore, a policy analyst at the National Employment Law Project."

Mask Mandates: Do They Work? Are There Better Ways to Control COVID-19 Outbreaks?

By Doug Badger and Norbert Michel of The Heritage Foundation.

"A surge in COVID-19 cases in the United States and Europe has prompted calls for a national mask mandate here in America. Advocates of government edicts have asserted that these would bring the pandemic “under control” in a matter of weeks. The authors of this Backgrounder found that 97 of the 100 counties with the most confirmed cases had mask mandates. Nor did a national mask mandate prevent a surge in Italy. These findings do not deny the efficacy of mask-wearing, nor should they discourage the practice. Instead, they point to the inadequacy of public health strategies that rely too heavily on lockdowns and mask mandates. Governments should undertake more effective interventions, such as specifically protecting nursing home residents, enabling nationwide screening through use of rapid self-tests, and establishing voluntary isolation centers where infected people can recover, rather than exposing their families to infection."

The COVID-19 Pandemic Has Not Crushed State and Local Government Tax Revenues

The Census Bureau finds state and local governments collected $1.12 trillion in tax revenue during the first nine months of 2020, just $8 billion less than the same period in 2019.

By Marc Joffe of Reason.

"The Census Bureau just reported that state and local governments collected $1.12 trillion in tax revenue during the first nine months of the 2020 calendar year, which is just $8 billion less than they collected during the same period in 2019. It’s clear that the worst-case forecasts estimating how badly the coronavirus pandemic would hit state coffers have thankfully not come to pass.

The new Census Bureau data also raises questions about the need for the proposed $160 billion state and local aid package that the Trump administration and members of Congress have been debating in recent weeks.

Census data are provided on a lagged basis, so it will be a few months until we know how state and local revenues held up during the fourth quarter of 2020. But some entities, including the state of California, publish monthly updates. In the 2020 calendar-year-to-date, California’s general fund revenues are running $2.1 billion (1.6 percent) above the 2019 levels.

The accompanying chart shows California’s general fund revenue collections for the first 11 months of 2020 versus the same period in 2019.

The full calendar year totals include the economically strong pre-COVID-19 pandemic months of January and February. If we just look at the March through November period, revenues were down $2.2 billion (2.1 percent).

While this is admittedly a significant revenue hit, state revenue declines of this magnitude have not historically elicited state bailouts or federal stimulus packages.

For the fiscal year to date, California’s revenue collections are running $12.4 billion above the state’s dismal projection issued back in May, when state officials feared the coronavirus pandemic and economic shutdowns would crush its economy. California’s revenue has exceeded its forecasts for each of the five months of the fiscal year 2020-2021, which started on July 1, 2020.

Of course, there is no guarantee that state revenues will continue to outperform expectations going forward. Another recent surge in COVID-19 cases and stricter public heath orders could impact sales tax revenues and employment. But since unemployment has been concentrated among lower-income workers during the pandemic, its effect on income tax revenues has been relatively small given the state’s progressive tax rates. Further, these revenue losses could be offset by unanticipated capital gains tax revenue arising from strong tech company performances and the successful initial public offerings this month by Airbnb, DoorDash, and other California-based startups.

While the state of California and many other government entities are seeing 2020 revenues running close to or prior calendar year levels, a few governments including those heavily dependent on travel and tourism are suffering steep revenue declines.

For example, Anaheim, California, has suffered an 89 percent reduction in its transient occupancy tax revenue compared to the same period last year due to the pandemic and state government-mandated closure of Disneyland.

Similarly, public transit systems across the state have also suffered sharp reductions in farebox revenue, but, because mass transit operations are generally operated by special purpose governments like the Bay Area Rapid Transit District (BART), they fall outside the universe of governments eligible for the recently proposed $160 billion federal aid package.

Because state and local governments lack the federal government’s ability to offset deficits with newly created money, their best practice is to build up liquid reserves to cushion them against contingencies. Prior to the COVID-19 recession, many state and local governments had built up considerable reserves. According to the National Association of State Budget Officers (NASBO), the 50 states had accumulated a combined $113.2 billion in rainy day funds and general fund reserves at the end of their 2019 fiscal years. A Reason Foundation review of 9,000 general-purpose local government financial statements found an additional $94 billion of unrestricted general fund balances. Taken as a whole, then, the state and local government sector entered the crisis with a $200 billion cash cushion—significantly more than the current 2020 revenue decline reported by the Census Bureau.

Contrary to some of the dire economic forecasts made early on during this coronavirus pandemic, state and local revenue losses thus far have been limited. Likewise, last month President-Elect Joe Biden expressed fears that local governments might have to lay off first responders due to budget shortfalls, but it is clear state and local governments have experienced smaller tax revenue losses than projected.

While the longer-term fiscal impacts of COVID-19 and this recession are unknown, a small number of governments have taken very significant revenue hits, and costs for things like unemployment insurance are certainly higher than expected this year, most state and local agencies should be able to offset their relatively minor tax revenue losses by drawing down reserves and selectively trimming costs."

Studies find having COVID-19 may protect against reinfection

By MARILYNN MARCHIONE of AP.

"Two new studies give encouraging evidence that having COVID-19 may offer some protection against future infections. Researchers found that people who made antibodies to the coronavirus were much less likely to test positive again for up to six months and maybe longer.

The results bode well for vaccines, which provoke the immune system to make antibodies — substances that attach to a virus and help it be eliminated.

Researchers found that people with antibodies from natural infections were “at much lower risk ... on the order of the same kind of protection you’d get from an effective vaccine,” of getting the virus again, said Dr. Ned Sharpless, director of the U.S. National Cancer Institute.

“It’s very, very rare” to get reinfected, he said.

The institute’s study had nothing to do with cancer — many federal researchers have shifted to coronavirus work because of the pandemic.

Both studies used two types of tests. One is a blood test for antibodies, which can linger for many months after infection. The other type of test uses nasal or other samples to detect the virus itself or bits of it, suggesting current or recent infection.

One study, published Wednesday by the New England Journal of Medicine, involved more than 12,500 health workers at Oxford University Hospitals in the United Kingdom. Among the 1,265 who had coronavirus antibodies at the outset, only two had positive results on tests to detect active infection in the following six months and neither developed symptoms.

That contrasts with the 11,364 workers who initially did not have antibodies; 223 of them tested positive for infection in the roughly six months that followed.

The National Cancer Institute study involved more than 3 million people who had antibody tests from two private labs in the United States. Only 0.3% of those who initially had antibodies later tested positive for the coronavirus, compared with 3% of those who lacked such antibodies.

“It’s very gratifying” to see that the Oxford researchers saw the same risk reduction — 10 times less likely to have a second infection if antibodies were present, Sharpless said.

His institute’s report was posted on a website scientists use to share research and is under review at a major medical journal.

The findings are “not a surprise ... but it’s really reassuring because it tells people that immunity to the virus is common,” said Joshua Wolf, an infectious disease specialist at St. Jude Children’s Research Hospital in Memphis who had no role in either study.

Antibodies themselves may not be giving the protection, they might just be a sign that other parts of the immune system, such as T cells, are able to fight off any new exposures to the virus, he said.

“We don’t know how long-lasting this immunity is,” Wolf added. Cases of people getting COVID-19 more than once have been confirmed, so “people still need to protect themselves and others by preventing reinfection.”"

Has Restaurants' Role in Spreading COVID-19 Been Exaggerated?

The evidence is limited and mixed, but data from New York, Minnesota, and California suggest that restaurants there account for a small share of infections.

By Jacob Sullum of Reason.

"When he blocked enforcement of state and local bans on indoor and outdoor dining in San Diego County last week, Superior Court Judge Joel Wohlfeil cited a lack of evidence that restaurants following COVID-19 safeguards, such as occupancy limits and physical distancing, posed a significant public health risk. Politicians and public health officials tend to assume that dining out is an important source of coronavirus transmission. But while the evidence is limited and mixed, data from New York, Minnesota, and California suggest that restaurants' role in the epidemic has been exaggerated in at least some parts of the country.

New York Gov. Andrew Cuomo, who allowed indoor dining in New York City to resume at the end of September, shut it down again last week. Yet the statewide contact tracing data that Cuomo released on December 11 indicate that restaurants account for a very small share of COVID-19 infections. According to Cuomo's numbers, which are based on 46,000 cases since September, just 1.4 percent of infections were traced to "restaurants and bars." That finding is similar to data from Minnesota, where Gov. Tim Walz banned indoor and outdoor dining at a time when 1.7 percent of COVID-19 cases were associated with restaurants.

The percentages reported for retailers, gyms, and "hair & personal care" in New York were even tinier: 0.6 percent, 0.14 percent, and 0.06 percent, respectively. But all of these sources paled in comparison with "household/social gatherings," which accounted for 74 percent of the cases.

Cuomo's numbers did not indicate what share of the cases associated with restaurants and other businesses involved customers rather than employees. But data from Los Angeles County—the most populous local jurisdiction in the country, with 10 million residents—shed some light on that question. The Los Angeles County Department of Public Health reports 500 COVID-19 clusters involving three or more laboratory-confirmed cases in nonresidential settings. About 40 of those (8 percent) involved restaurants, with the number of cases ranging from three to 12. But all of the cases involved employees rather than diners.

In late October, by contrast, Los Angeles County Public Health Director Barbara Ferrer said "we've…seen somewhere between 10 and 15 percent of our cases being connected to a dining experience." A month later, the ABC station in Los Angeles reported, based on county data, that "restaurants have been linked to less than 4% of coronavirus outbreaks in non-residential settings."

The difference between "cases" and "outbreaks" may explain some of that gap. But during a press briefing on November 23, Ferrer conceded that estimating the contribution of particular infection sources is an iffy proposition. "I wish we could answer this question," she said. "I think people would feel better if we could say with certainty where people got infected, but we just can't."

California Gov. Gavin Newsom banned indoor dining in Los Angeles County at the beginning of July. Last month the county imposed a ban on outdoor dining that was blocked earlier this month by Superior Court Judge James Chalfant, who said it was "not grounded in science, evidence, or logic." But by then, Los Angeles County was subject to a state ban on outdoor dining that kicks in when a region's available ICU capacity drops below 15 percent.

California Health and Human Services Secretary Mark Ghaly has admitted that the ban was not based on evidence that outdoor dining was playing a significant role in spreading COVID-19. Ghaly said the policy is "not a comment on the relative safety of outdoor dining" but is instead aimed at discouraging Californians from leaving home.

Judge Wohlfeil did not merely question the ban on outdoor dining. He said neither San Diego County nor state officials had presented any evidence that indoor dining, when operated in compliance with occupancy limits and other COVID-19 safeguards, was contributing to the local spread of the disease either.

The San Diego County Health and Human Services Agency reports that "bars and restaurants" accounted for 9.2 percent of "potential community exposure settings" mentioned by people who tested positive for COVID-19 in interviews conducted from June 5 to December 12. But the agency does not break out restaurants as a separate category, and it adds this caveat: "Potential community exposure settings are defined as indoor or outdoor locations in which cases came within 6 feet of anyone who was not a household member for at least 15 minutes during the 2-14 days prior to symptom onset, even if the case wore a mask or facial covering. Potential exposure settings are places case-patients visited during their exposure period, not confirmed sources of infection. Persons may have visited more than one location."

Most people (54 percent) did not mention any potential exposure settings, while less than 5 percent mentioned "group gatherings." The latter result is surprising, given that New York found "household/social gatherings" accounted for three-quarters of cases. Although people might be reluctant to admit getting together with members of other households, it is not clear why they would be especially reluctant in San Diego County. Maybe New York's contact tracers are simply better at eliciting that information.

The evidence implicating restaurant dining in the spread of COVID-19 is largely indirect. A study of 10 states that the Centers for Disease Control and Prevention published in September, for example, found that people who tested positive for COVID-19 in July were more than twice as likely as control subjects who had tested negative to report visiting a restaurant in the two weeks prior to symptom onset. "Exposures and activities where mask use and social distancing are difficult to maintain, including going to places that offer on-site eating or drinking, might be important risk factors for acquiring COVID-19," the researchers concluded.

The study found "no significant differences" between cases and controls with regard to several other possible risk factors, including shopping, spending time in an office, visiting a salon, going to a gym, visiting a bar or coffeeshop, attending church, using public transportation, and gathering with others in a home, whether the number of people was fewer or greater than 10. So if this study implicates restaurants, it also seems to absolve those other settings, which many politicians believe are risky enough to justify government restrictions. The finding regarding social gatherings is especially puzzling in light of New York's data.

A PLoS One study published in October looked at interstate differences in case numbers and trends during the early stages of the epidemic last spring. The researchers found that "early social distancing restrictions, particularly on restaurant operations, [were] correlated with increased doubling times"—i.e., how long it took for the number of confirmed cases to double. Leaving aside the difficulty of disentangling causation from correlation, this study is not directly relevant to the question currently facing policy makers: whether allowing restaurants to operate with "social distancing restrictions" and other safeguards poses an intolerable risk.

Similarly, a Stanford University model based on mobility data projects how infections tied to particular business categories "would increase if we returned this category to pre-pandemic levels of mobility without taking additional precautions like increased mask-wearing or occupancy caps." According to the model, "reopening full-service restaurants has the largest predicted impact on infections, due to the large number of restaurants as well as their high visit densities and long dwell times." Fitness centers are the second most significant contributor to disease spread in this model.

Again, these projections counterfactually assume that restaurants and other businesses will operate as they did prior to the pandemic. They also focus on public "points of interest," meaning they exclude the private gatherings that New York found accounted for the vast majority of infections. The fact that restaurants and gyms following COVID-19 precautions accounted for a very small or negligible share of cases traced in New York suggests that such businesses can operate without contributing much to the spread of COVID-19.

Restaurants may be a more significant source of virus transmission in other jurisdictions. In Houston, where restaurants have been allowed to operate indoors at 75 percent of capacity since mid-September (compared to 25 percent in New York City prior to last week's ban), 8.7 percent of people who tested positive for COVID-19 have reported restaurants as a potential source of exposure in interviews conducted since June 1.

During her presentation in October, Ferrer claimed that in Louisiana, "25 percent of cases had their origins in bars and restaurants." That figure, which was reported in August, excludes outbreaks in "congregate settings" such as nursing homes and prisons, which together account for a large share of infections. Leaving out those sources, according to the latest data from Louisiana, restaurants have accounted for 7 percent of cases.

Ferrer also claimed that "in Maryland, 12 percent of cases were traced back to restaurants." The actual finding, which Gov. Larry Hogan reported in late July based on "recent interviews conducted with COVID-19 patients," was that 12 percent of them were employed by restaurants. Hogan also said 23 percent of the COVID-positive people who were interviewed reported eating in restaurants, which does not necessarily mean that is where they were infected. By comparison, 54 percent of the interviewees said they worked outside their homes, and 39 percent said they had visited stores—both of which Hogan likewise described as "higher-risk locations."

California HealthLine notes that contact tracing varies widely across the country and is woefully inadequate in many places, which makes it hard to get a handle on the role that restaurants (or other sources) are playing in virus transmission. State and local restrictions on restaurants also vary widely, which compounds the difficulty. In the absence of better data, politicians continue to issue edicts that wreck businesses without any confidence that it will do much good."

Free trade and property rights increase foreign direct investment

By Ilija Stojanovic. He is a member of the Editorial Board of Science Journal of Business and Management (SJBM) and Scientific Committee for the REDETE scientific conference. He is currently at the Al Ghurair University Dubai.

Abstract:

"Global competitiveness position is perceived as a highly relevant enabler for attracting foreign direct investments. Our study goes beyond this well-known fact to understand whether economic freedom indicators are relevant cause for global competitiveness in attracting foreign direct investments and how this relationship behaves in different conditions of political stability. We focused our empirical study to mediating and moderating processes through which global competitiveness is linked with FDI. We developed and tested a second stage moderated parallel mediation model to observe mediating effects of economic freedom and moderating effects of political stability. Our research was focused on mediating effects of several indicators of Economic Freedom including Size of Government, Legal System & Property Rights, Sound Money, Freedom to trade internationally and Regulation. The findings indicate that Legal System & Property Rights and Freedom to trade internationally have positive conditional indirect effects within the model. Freedom to trade internationally is a much more sensible mediator variable in case of different levels of political stability while Legal System & Property Rights is not significantly affected by political stability, strengthening economic freedom in these two dimensions provides an enhanced effect of existing competitiveness on FDI growth. We recognized that political stability has no influence on the indirect effects between competitiveness and inward FDI produced by Legal System & Property Rights, as one of the dimensions of economic freedom. Therefore, to attract FDI in unstable political conditions is very useful to establish a proper legal system and adequate protection of property rights. In such a legal environment, foreign investors will feel comfortable regardless of the political risks in the country. Freedom to trade internationally is a much more sensible mediator variable under the influence of political instability."

Schumpeter on motivation in a socialist system

In Capitalism, Socialism and Democracy, Schumpeter said that motivation would not be a problem. The planners would set compensation levels to get people to work hard enough and efficiently enough. Even using prizes or medals would help if monetary compensation was not very high. He also thought that bureaucracy would be reasonable efficient.

So it is interesting to see Robert Heilbroner in his essay Socialism that he says motivation was the problem:

"The effects of the “bureaucratization of economic life” are dramatically related in The Turning Point, a scathing attack on the realities of socialist economic planning by two Soviet economists, Nikolai Smelev and Vladimir Popov, that gives examples of the planning process in actual operation. In 1982, to stimulate the production of gloves from moleskins, the Soviet government raised the price it was willing to pay for moleskins from twenty to fifty kopecks per pelt. Smelev and Popov noted:

State purchases increased, and now all the distribution centers are filled with these pelts. Industry is unable to use them all, and they often rot in warehouses before they can be processed. The Ministry of Light Industry has already requested Goskomtsen [the State Committee on Prices] twice to lower prices, but “the question has not been decided” yet. This is not surprising. Its members are too busy to decide. They have no time: besides setting prices on these pelts, they have to keep track of another 24 million prices. And how can they possibly know how much to lower the price today, so they won’t have to raise it tomorrow?

This story speaks volumes about the problem of a centrally planned system. The crucial missing element is not so much “information,” as Mises and Hayek argued, as it is the motivation to act on information. After all, the inventories of moleskins did tell the planners that their production was at first too low and then too high. What was missing was the willingness—better yet, the necessity—to respond to the signals of changing inventories. A capitalist firm responds to changing prices because failure to do so will cause it to lose money. A socialist ministry ignores changing inventories because bureaucrats learn that doing something is more likely to get them in trouble than doing nothing, unless doing nothing results in absolute disaster."

Again, Schumpeter thought that the planners could get factory managers and bureaucrats to work hard and efficiently through the right mix of monetary and non-monetary awards, but who set the compensation for the planners themselves?

Was it the Politburo? Perhaps they did not have enough information to set the right compensation levels for the planners to get them to work properly (which, in turn, would mean setting prices properly).

Schumpeter even said that in capitalism (as of the 1940s) "having to pay for one's mistakes with one's own money is passing anyhow" and "responsibility that exists in the large-scale corporation could no doubt be reproduced in a socialist society."

So this motivation problem that Heilbroner mentions was not supposed to happen according to Schumpeter. But it did.

Who set the compensation level (both monetary and non-monetary) for the members on the State Committee on Prices? Theoretically, if that compensation level is set just right (as supposed by Schumpeter), you would get a good result. 

But maybe it was still just an information problem (as Hayek and Mises would say) because no one knew enough to incentivize the Price Committee members to do the "right" thing.

The Best Part of the Coronavirus Relief Bill

By John Taylor.

"As the Wall Street Journal reported and I tweeted yesterday, Senators Chuck Schumer and Patrick Toomey made important news when they agreed that with the new Coronavirus relief legislation, “the $429 billion would be revoked and the Fed wouldn’t be able to replicate identical emergency lending programs next year without congressional approval”

This is a welcome development because it is a start on the best monetary road back to a stronger economy. With the vaccines on the way and with markets functioning again, this is the time for the Fed to get back to a more rules-based monetary policy that it was moving toward before the pandemic struck.  

This favorable development owes much to the outspoken insistence and careful reasoning of Senator Toomey. He argued that the Fed’s new direct lending programs enacted earlier this year were not needed going forward, and that their very existence blurred in dangerous ways the operation of fiscal and monetary policy. As Toomey explained on Squawk Box this morning in an interview with Becky Quick, “These facilities were always intended to be temporary…. Their purpose was to restore normal functioning in the private capital and lending markets.”

He then explained that questionable interpretations of the legislation had been recently put forward raising doubts about this temporary status. So he took action, and he drafted legislative language to clarify the situation in the coronavirus relief bill. The concern was that monetary policy would become an instrument of fiscal policy to the severe detriment to good economic policy and thereby threaten a return to a strong, low-unemployment, low-inflation economy. With new legislative language, he said, “The good news is these programs will be the temporary facilities they were intended to be.”

 As an editorial in the Wall Street Journal said today: “The best provision in the bill is the limit on potential abuse by the Biden Treasury and Federal Reserve. Credit here to Pennsylvania Sen. Pat Toomey, who held firm on limiting the Fed’s maneuvering room without a new act of Congress.”

I hope this action is an important down payment on a return to a more strategic monetary policy going forward. As far as we can tell, the impetus for this change did not come from the Fed. But it is good news for the Fed that members of congress are supporting a more rules-based monetary policy, and they may even have some help next year from the Administration over at the Treasury."

Larry Summers on the cash payments

See From Marginal Revolution.

"The data are striking. Total employee compensation is now running only about $30 billion per month behind the pre-Covid baseline. Measures in the congressional stimulus bill to strengthen unemployment insurance and to support business will add about $150 billion a month to household income in order to replace all this loss.

The question is whether there is a rationale for further tax rebate of more than $200 billion a month over the next quarter. This would represent additional support equal to an additional seven times the loss of household wage and salary income over the next quarter.

Here is the full Bloomberg piece, file under “questions that are rarely asked.”"

People respond rationally to Covid-19

See Drink Your Coffee, Be Considerate, and Fight Covid-19 By Byron B. Carson, III. He has a Ph.D. in Economics from George Mason University. Excerpt:

"People even respond rationally as Covid-19 cases and deaths rise. Studies are still emerging (here, here, and here) that suggest people are responsive, but we can also observe Google Mobility Reports that show changes in mobility—from time spent at home to transit stations and one’s workplace—that correspond with changes in the extent and severity of Covid-19. That is, presented with information indicating higher rates of Covid-19 cases and deaths, people became more cautious in their interactions with other people—especially during the first couple months of 2020. 

Elsewhere, I detail some of these responses in the form of individual behaviors like social distancing and mask-wearing, to altering production processes and innovative means of prevention, to the creation and adoption of public health rules. Aside from the NBA bubble, another fascinating story that indicates how individuals behave marginally comes from South Korea. Because of an intrusive testing and reporting program, which many consider to be a violation of privacy, people acquired more information about where potentially infected people had recently been. With such information others were able to make their own choices regarding whether they wanted to visit those places. 

To some extent, these responses to infectious diseases are not surprising as they show individuals act on the margin—just like when they have their morning coffee. However, much of our commentary and policies regarding Covid-19 seem to completely ignore such logic regarding the rationality of individuals. 

Covid-19 Lockdowns and Absolute Thinking

There are legitimate reasons to think lockdowns, stay-at-home orders, banning large gatherings, school closures, etc., lower transmission and mortality rates (here, here, and here), but the effect of those policies are overstated because they do not consider the marginal behaviors people engage in, let alone the innovative solutions they can devise.

Furthermore, it is not clear that the policies seen over the last year across the United States are a net benefit even if they lower transmission and mortality rates of Covid-19. That is, we might lower Covid-19 transmission, but we also impose additional burdens on individuals. 

What if there was a way to achieve the same amount of Covid-19 transmission and to lower the economic and psychological burden of lockdowns? That policy would be superior to lockdowns. Unfortunately, our standard policies do not allow for the discovery of such solutions.

A New Marginalist Revolution?

Our old friend marginalism, however, can offer some solutions. Just as the advent of marginalism heralded a new age for economic science in the late 19th century—you’d know that marginalism solved the diamond-water paradox if you read your history of economic thought—so too can it help resolve our current policy troubles with Covid-19. 

Instead of enacting blunt policies that merely forbid some predefined behaviors, let people innovate. 

The kind of innovations we want right now—solutions that encourage preventative behavior and normal activity—are not going to come from the halls of public health departments. Those officials—as experienced and informed as they are—cannot access the knowledge of what people value or how they perceive the world around them. This is a knowledge problem issue, not a they are out-of-touch issue. While the out-of-touch aspect is troubling in our age of equality, especially when politicians break Covid-19 protocols, the former issue poses a serious limitation about what we think is possible and relevant. As much as we might like them to be a source of knowledge, expertise, and guidance, public health officials cannot be considerate of the values we hold when we make choices.

Instead of banning indoor dining, for example, allow the owners and managers of restaurants the opportunity to find relevant solutions. Facing the prospect of the loss of a majority of their customers and net revenue—granted, this has already happened—surely restaurateurs would be willing to consider ways to keep customers safe and keep them dining and follow through with those plans.

Yes, this too is marginal thinking: the marginal benefit of constructing an outdoor space outweighs the marginal cost. See how useful it is!

Indeed, restaurateurs could expand their space, construct temporary rooms, build outdoor dining areas, develop novel social distancing techniques, expand hours, etc. People who actually face the threat of closure or are losing their livelihoods are in a much better position to devise appropriate responses.

Banning indoor dining is utterly uncreative in light of these potential solutions. The public health policy pertaining to restaurants and recurring large groups should be to require a response plan and report it. I bet restaurateurs and others would oblige. By the way, many colleges and universities already did this earlier in the summer (here is one set of public health guidelines in Virginia)."