US Consumer Prices Miss Expectations For First Time Since October

BY TYLER DURDEN


As anxiety over the timing of the taper (not the if but the when) rise, all eyes are anchored on this morning's CPI (which was expected to rise MoM again but drop marginally on a YoY basis). 

Both headline (+0.3% MoM vs +0.4% MoM exp) and core (+0.1% MoM vs +0.3% MoM exp) CPI printed below expectations but on a YoY basis headline CPI rose 5.3% - as expected.

Source: Bloomberg


That is the 15th straight monthly rise in consumer prices and the fourth straight month above 5% on a YoY basis. 

On a side note, this is the first time MoM CPI printed below expectations since November 2020.

Core CPI slowed from +4.3% YoY to +4.0% YoY (well below the +4.2% YoY exp)...

Source: Bloomberg


Is this merely the Delta variant's impact creating an illusion of 'transitory'?

The index for all items less food and energy rose 0.1 percent in August. 

Indexes that increased over the month include the index for household furnishings and operations, which increased 1.3 percent as the indexes for furniture and bedding and for appliances rose. 

The shelter index increased in August, rising 0.2 percent. 

The indexes for rent and owners’ equivalent rent both rose 0.3 percent over the month, while the index for lodging away from home declined 2.9 percent.


The index for new vehicles continued to rise in August, increasing 1.2 percent after rising 1.7 percent in July. 

The recreation index rose 0.5 percent in August after increasing 0.6 percent the prior month. 

The index for medical care rose 0.2 percent over the month; its component indexes were mixed. 

The hospital services index rose 0.9 percent over the month, while the physicians’ services index was unchanged and the prescription drugs index declined 0.4 percent. 

The indexes for personal care, for communication, and for apparel all increased in August.


Several indexes declined in August.

The index for airline fares fell sharply, decreasing 9.1 percent over the month. 

The index for used cars and trucks declined 1.5 percent in August, ending a series of five consecutive monthly increases. 

The index for motor vehicle insurance fell 2.8 percent in August, the same decline as in July.


Of course, the suppression of (not transitory) CPI OER remains key to pretending this is all under control...


As we noted earlier, this reinforces an issue that we have been flagging for a couple of months: while the debate around inflation seems to be focused on when and how quickly “transitory” factors will normalize, “persistent” inflation has steadily moved up to a historically elevated rate.

Libor replacement reaches Wall Street’s leveraged loan market

Loans to fund buyout of chicken producer Sanderson Farms will be pegged to new Sofr benchmark

Joe Rennison in New York 

Investor appetite will be tested as Bank of America brings to market the first Sofr-based syndicated loan, which will be used to help fund the $4.5bn takeover of Sanderson Farms by Cargill and Continental Grain © AP


Bank of America has started marketing the first leveraged loan tied to the interest rate that is set to replace Libor, in a milestone for the industry as it transitions away from the disgraced lending benchmark.

The US bank has helped tee up a $3.25bn financing package that includes a $750m syndicated loan based on Sofr — the secured overnight financing rate — to fund the $4.5bn takeover of chicken producer Sanderson Farms by Cargill and Continental Grain, according to people involved in the transaction.

The London interbank offered rate, or Libor, has stood for decades as the benchmark for financial markets, including the loan industry. 

But a rate-rigging scandal almost a decade ago tarnished its reputation, leading regulators to call for a replacement. 

The Alternative Reference Rates Committee (ARRC), created by the Federal Reserve, selected Sofr in 2017.

The loan will initially price with an interest rate pegged to Libor, but that rate is set to automatically convert to Sofr on December 31. 

Alongside the syndicated loan, a group of banks led by BofA is also arranging a $750m revolving credit facility and separate bank loans, expected to be pegged to Sofr from their inception, according to a person with knowledge of the financing package.

The deal is being closely followed by participants in the $1.6tn loan market, a critical source of funding for companies and private equity groups looking to finance leveraged buyouts. 

It is likely to be the first of many Sofr-based syndicated loans to hit the market ahead of a year-end deadline, when banks will no longer be able to underwrite loans based on Libor.

The car company Ford is set to secure a revolving credit facility by the end of the month that will also be tied to Sofr, with the credit line coming from a group of banks led by JPMorgan Chase, according to people familiar with the deal. 

The move by Ford was first reported by Bloomberg.

The loan industry has been slow to adopt a replacement to Libor despite the deadline. 

This is in part due to the fact that until recently the industry had not settled on a so-called term rate, which allows companies and traders to agree on interest rates at set dates in the future.

Sofr is a daily interest rate based on transactions in financial markets, in contrast to Libor, which was based on bank submissions of what they thought the rate should be.

Without the understanding of what an interest rate might be several months ahead, companies would be left in the dark as to what they would need to pay each quarter, or half year, in interest.

But in July, the ARRC gave its backing to a forward-looking rate called term-Sofr. The decision paved the way for the loan industry to accelerate the move away from Libor.

The loan to Sanderson Farms intends to use term-Sofr if “administratively feasible” when the conversion takes place at the end of the year, according to a report from research group Covenant Review, which recently wrote about the details of the loan without naming the company involved.

If it is not possible to use term-Sofr, then the loan will revert to the daily Sofr rate. 

Covenant Review declined to comment beyond the content of the report.

BofA declined to comment. 

Cargill and Continental Grain did not immediately respond to requests for comment.

Some Vaccines Last a Lifetime. Here’s Why Covid-19 Shots Don’t.

Researchers have calculated a key number—the threshold of protection—for other vaccines. Covid-19’s is still a mystery.

By Jo Craven McGinty

A healthcare worker prepared a dose of the Pfizer-BioNTech Covid-19 vaccine at a mobile vaccination clinic in Los Angeles last month./ PHOTO: JILL CONNELLY/BLOOMBERG NEWS


Why don’t Covid-19 vaccinations last longer?

Measles shots are good for life, chickenpox immunizations protect for 10 to 20 years, and tetanus jabs last a decade or more. 

But U.S. officials are weighing whether to authorize Covid-19 boosters for vaccinated adults as soon as six months after the initial inoculation.

The goal of a vaccine is to provide the protection afforded by natural infection, but without the risk of serious illness or death.

“A really good vaccine makes it so someone does not get infected even if they are exposed to the virus,” said Rustom Antia, a biology professor at Emory University who studies immune responses. 

“But not all vaccines are ideal.”

The three tiers of defense, he said, include full protection against infection and transmission; protection against serious illness and transmission; or protection against serious illness only.

The effectiveness depends on the magnitude of the immune response a vaccine induces, how fast the resulting antibodies decay, whether the virus or bacteria tend to mutate, and the location of the infection.

The threshold of protection is the level of immunity that’s sufficient to keep from getting sick. 

For every bug, it’s different, and even how it’s determined varies.



“Basically, it’s levels of antibodies or neutralizing antibodies per milliliter of blood,” said Mark Slifka, a professor at Oregon Health & Science University.

(T-cells also contribute to protection, but antibodies are easier to measure.)

A threshold 0.01 international units per milliliter was confirmed for tetanus in 1942 when a pair of German researchers intentionally exposed themselves to the toxin to test the findings of previous animal studies.

“One of them gave himself two lethal doses of tetanus in his thigh, and monitored how well it went,” Dr. Slifka said. 

“His co-author did three lethal doses.”

Neither got sick.

A threshold for measles was pinned down in 1985 after a college dorm was exposed to the disease shortly after a blood drive. 

Researchers checked antibody concentrations in the students’ blood donations and identified 0.02 international units per milliliter as the level needed to prevent infection.

With these diseases, the magnitudes of response to the vaccines combined with the antibodies’ rates of decay produce durable immune responses: Measles antibodies decay slowly. 

Tetanus antibodies decay more quickly, but the vaccine causes the body to produce far more than it needs, offsetting the decline.

“We’re fortunate with tetanus, diphtheria, measles and vaccinia,” Dr. Slifka said. 

“We have identified what the threshold of protection is. 

You track antibody decline over time, and if you know the threshold of protection, you can calculate durability of protection.

With Covid, we don’t know.”

Historically, the most effective vaccines have used replicating viruses, which essentially elicit lifelong immunity.

Measles and chickenpox vaccines use replicating viruses.

Non-replicating vaccines and protein-based vaccines (such as the one for tetanus) don’t last as long, but their effectiveness can be enhanced with the addition of an adjuvant—a substance that enhances the magnitude of the response.

Tetanus and hepatitis A vaccines use an adjuvant.

The Johnson & Johnson and AstraZeneca Covid-19 vaccines use non-replicating adenovirus and don’t contain an adjuvant. 

The Pfizer and Moderna messenger RNA Covid-19 vaccines, which work differently, don’t contain any virus at all. 

Complicating things further, viruses and bacteria that mutate to escape the body’s immune response are harder to control.

Measles, mumps, rubella and chickenpox hardly mutate at all, but at least eight variants of SARS-CoV-2, the virus that causes Covid-19, have been found, according to the British Medical Journal.  

“It does make it more complicated for the vaccine to work,” Dr. Slifka said. 

“You’re chasing multiple targets over time. 

Flu also mutates. 

With flu, we’ve adjusted by making a new flu vaccine each year that as closely as possible matches the new strain of flu.”

Flu vaccines can offer protection for at least six months.

Setting aside the complexities of crafting an effective vaccine to combat a shape-shifting virus, some hope has revolved around the possibility of defeating Covid-19 by achieving herd immunity, but, according to Dr. Antia, the way coronaviruses infect the body makes that challenging.

“Vaccines are very unlikely to lead to long-lasting herd immunity for many respiratory infections,” Dr. Antia said. 

“The herd immunity only lasts for a modest period of time. 

It depends on how fast the virus changes. 

It depends on how fast the immunity wanes.”

Part of the problem is that coronaviruses replicate in both the upper and lower respiratory tracts.

“We have good circulation in our lungs and body, but not on the surfaces of our nostrils,” Dr. Slifka said. 

“We can block severe disease because there are antibodies in the lower respiratory tract.”

But the risk of low-level infections in the upper respiratory tract can persist.

Moving forward, Covid-19 vaccines will be updated to combat variants of the virus, and according to researchers at Imperial College London, the next generation of vaccines might also focus on enhancing immunity in the moist surfaces of the nose and lungs.

In the meantime, avoiding the slippery virus might require another shot. 

‘They Were Bullies’: Inside the Turbulent Origins of the Collapsed Florida Condo

The team that developed Champlain Towers managed to build the condos despite checkered pasts, internal strife and a last-minute change that infuriated leaders in Surfside, Fla.

By Mike Baker and Michael LaForgia

The Champlain Towers South condominium, right, before it partially collapsed in June. Credit...Jeffrey Greenberg/Universal Images Group, via Getty Images


It was in the middle of summer in 1980 when developers raising a pair of luxury condominium towers in Surfside, Fla., went to town officials with an unusual request: 

They wanted to add an extra floor to each building.

The application to go higher was almost unheard-of for an ambitious development whose construction was already well underway. 

The builders had not mentioned the added stories in their original plans. 

It was not clear how much consideration they had given to how the extra floors would affect the structures overall. 

And, most galling for town officials, the added penthouses would violate height limits designed to prevent laid-back Surfside from becoming another Miami Beach.

At one point, the town building department issued a terse stop-work order. 

But records show that in the face of an intense campaign that saw lawyers for the developers threaten lawsuits and argue with officials deep into the night, the opposition folded — and the developers got their way.

Frank Filiberto, who was on the Town Commission at the time, recalled feeling as if the developers regarded him and the other officials as “local yokels.”

“They were bullies,” Mr. Filiberto said. “There was a lot of anger.”

Although there is no indication that the catastrophic collapse of the Champlain Towers South building in June was related to the tacked-on penthouse, the alteration was just one of many contentious parts of a project that was pushed through by aggressive developers at a time when the local government seemed wholly unprepared for a new era of soaring condo projects.

An advertisement for the Champlain Towers that appeared in The Miami Herald in 1980.


Surfside had only a part-time building inspector, George Desharnais, who worked at the same time for Bal Harbour, Bay Harbor Islands and North Bay Village. 

Records show that the Surfside building department delegated inspections of the towers back to the Champlain Towers builders, who tapped their own engineer to sign off on construction work. 

The town manager was unable to resolve the penthouse issue because, just as the issue came before the city, he was arrested on charges — later dismissed — of peeping into the window of a 13-year-old girl and abruptly resigned.

The development team itself had a dubious record. 

The architect had been disciplined previously for designing a building with a sign structure that later collapsed in a hurricane. 

The structural engineer had run into trouble on an earlier project, too, when he signed off on a parking garage with steel reinforcement that was later found to be dangerously insufficient.

The early 1980s was a freewheeling period for construction in the Miami area, known at the time for its uneven enforcement of regulations, but the Champlain Towers project stood apart — both for the tumult that occurred on the job site and the brazenness of the developers behind the project.

Investigators with the National Institute of Standards and Technology are still in the early days of examining the building’s collapse, with ongoing examinations of the integrity of the foundations and the strength of the materials used to support the building. 

The investigation will include a review of how the building was designed and constructed, including the building’s modifications, the agency said on Wednesday.

Troubled pasts

By the late 1970s, Surfside was still a humble corner of South Florida, so popular with Canadian snowbirds looking for a discounted slice of paradise that the town dedicated a week to celebrating the connection. 

Winners of the festival’s beauty pageant could receive a trip to Canada.

One of the Canadians with an eye on the town was the lead developer of Champlain Towers, Nathan Reiber, who brought a grand vision to reshape Surfside’s waterfront at a time when the town was eager to find new sources of tax revenue to keep taxes low for full-time residents. 

As Mr. Reiber’s team filed for the first Champlain Towers permits in August 1979 — with no 13th-story penthouses — city officials were struggling with serious inadequacies in the water and sewer systems that had led to a moratorium on new development.

The Champlain Towers developers came up with a plan: They would provide $200,000 toward the needed upgrades — covering half the cost — if they could get to work on construction. 

The town agreed.

“It was exciting,” said Mitchell Kinzer, who was the mayor at the time. 

“Here we are, little Surfside, a tiny town getting first-class luxury buildings.”

Mr. Reiber pursued the project even as he was dealing with legal troubles in Canada. 

A lawyer from Ontario who had ventured into real estate, Mr. Reiber and two partners were accused by Canadian prosecutors of dodging taxes in the 1970s by plundering the proceeds of coin-operated laundry machines in their buildings in a scheme to lessen their taxable income. 

The prosecutor also accused the group of using the expenses of a fake building project to avoid taxes on some $120,000 in rent payments.

After court proceedings that dragged on for years, Mr. Reiber pleaded guilty to one count of tax evasion in 1996. 

Family members of Mr. Reiber, who died in 2014, did not respond to messages seeking comment.

Mr. Reiber’s lawyer, Stanley J. Levine, also figured prominently in the development of Champlain Towers, handling corporate work for some of the companies involved.

About a decade earlier, Mr. Levine and a member of the Miami Beach City Council had been charged with soliciting an $8,000 bribe from a woman who wanted a zoning variance to build a 47-unit apartment building, according to news coverage from the time. 

The charge was later dropped. Mr. Levine died in 1999, and a member of his family could not be reached for comment.

Allegations of influence-peddling also dogged the Champlain Towers project. 

In early 1980, the developers had made campaign contributions that were significant at the time — $100 to one commissioner, $200 to another. 

Mayor Kinzer objected, and the developers tried to take the money back.

Rick Aiken, the town manager who later had to step down, said the Champlain Towers builders were constantly pressing the town to move faster on permits.

“They’d call me on the phone, want to take me to lunch so that I would push the commission toward giving them a permit,” Mr. Aiken said. 

He told them that they needed to follow the rules, he said, adding that he could not recall any instances of the developers engaging in improper activity.

On Nov. 13, 1979, the town approved the overall plans for the project.

‘Grossly inadequate’

As the construction got underway at the Champlain Towers sites, both at their North and South properties, turmoil was emerging and plans were changing.

By May, the project’s lead contractor, Jorge Batievsky, had resigned. 

He soon filed a lawsuit, though records from the case have since been destroyed and Mr. Batievsky has died.

The developers brought in a new contractor, Alfred Weisbrod, but problems continued.

As the first levels of the South building were rising above the ground, a crane on site collapsed so violently that its steel was contorted, according to archived video. 

A week later, crews discovered that more than $10,000 in wood had been stolen from the site.

But public anticipation was building. 

A newspaper ad for the unfinished buildings claimed that only 27 residences remained available. “Get the best — while they last,” it advised.

By the end of the summer, the developers hired a new permanent contractor, Arnold Neckman, and in August they applied to add the new “penthouse” floor to each property, raising the buildings from 12 stories to 13.

Mehrdad Sasani, a professor of engineering, said the penthouse addition wouldn’t explain the cause of the collapse, but that it could have exacerbated a failure elsewhere. Credit...Maria Alejandra Cardona for The New York Times


The added weight brought by the penthouse had the potential to exacerbate a failure and contribute to the progressive collapse that killed 98 people this year, said Mehrdad Sasani, a professor of civil and environmental engineering at Northeastern University who reviewed the building’s design plans. 

He also said the decision to add a new floor to the top of a previous design was not an accepted practice.

But the penthouse addition would not explain the cause of the collapse, Dr. Sasani said, since buildings are designed with large safety margins. 

“The relative weight of the penthouse compared to the weight of the structure is not so significant that it could have been an initial cause,” Dr. Sasani said.

There is no record of an objection from the architect on the project, William Friedman, or the structural engineer, Sergio Breiterman.

Both had come to the project after some criticism of their past work. 

State regulators suspended Mr. Friedman’s license for six months in 1967 after an investigation determined that he had designed a “grossly inadequate” sign structure that fell over during Hurricane Betsy two years prior, damaging the structure of a Miami commercial building, according to records from the Florida Department of Business and Professional Regulation.

About five years before the Champlain Towers project, Mr. Breiterman had been responsible for inspections on a $5 million parking garage in Coral Gables, where officials later found that the walls in the building lacked steel reinforcing rods that would prevent cars from crashing through, according to a 1976 article in The Miami Herald.

Mr. Breiterman also got the job of inspecting work at Champlain Towers. 

He gave his seal of approval to the work in October 1980, before the penthouse dispute began.

‘A violation of the code’

A month later, in November, the town appeared to approve the added-on penthouse permit, although it is unclear who signed off on the idea. 

Two weeks later, the police chief, serving as the interim town manager, sent a curt memo ordering the contractors to halt work, revoking their penthouse permits.

Chris Jeffers placed flowers on a fence that became a makeshift memorial near the collapse site.Credit...Scott McIntyre for The New York Times


The memo, sternly warning that the penthouses were in fact a violation of Surfside’s codes, came on town letterhead, with the name of Mr. Aiken, the town manager who by that time had been arrested on the peeping charge, crossed off with a series of X’s. (The case against him was later dismissed, with Mr. Aiken saying he had been looking for his dog behind people’s homes.)

Then, a week later, the Town Commission voted to allow the penthouses after all.

Mr. Filiberto, the former commissioner, said he believed that some of the penthouse construction was already completed by then. 

He said the town was left with a tough choice: Grant a variance or order the builder to demolish the penthouse work — and face a lawsuit.

Years later, Mr. Filiberto wondered whether the developers played equally loose with other aspects of the building project. 

“If they are that overt in violating the height orders,” he said, “think about all the little intricacies that go into building the building.”


Adam Playford and Michael Majchrowicz contributed reporting. Jack Begg and Kitty Bennett contributed research.

Mike Baker is the Seattle bureau chief, reporting primarily from the Northwest and Alaska. 

Michael LaForgia is an investigative reporter who previously worked for The Tampa Bay Times and The Palm Beach Post. While in Florida, he twice won the Pulitzer Prize for local reporting. 

Robinhood’s Generosity Isn’t Cheap For Shareholders

Investors are paying a big premium for shares of the free-trading pioneer, whose biggest growth is now coming from crypto

By Telis Demos

Robinhood executives, celebrating their IPO in July, have quickly built a cryptocurrency business. / PHOTO: AMIR HAMJA FOR THE WALL STREET JOURNAL

The stock-trading frenzy seems to be calming down for some of Robinhood Markets HOOD -2.25% ’ customers. 

The same comedown could happen to its shareholders at current prices.

After an extraordinary period that helped propel the company to a public listing, Robinhood’s stock-trading activity is no longer surging. 

Daily average revenue trades in equities not only dropped from the huge first quarter but they were flat from the second quarter a year ago, even as Robinhood added well over 10 million accounts in that time span.

In effect, the average funded account traded stocks roughly half as often in the second quarter as it did in the first quarter, or in the second quarter of last year. 

Equities transaction-based revenue was down from $71 million in the second quarter a year ago to $52 million.

For now, though, cryptocurrency is making up for that. 

Not only did customers trade crypto more often in the second quarter, but it also generated a lot more revenue per trade than in the past. 

Crypto transaction revenue was $5 million in the second quarter of 2020 and exploded to $233 million a year later.

Dogecoin, the Shiba Inu-inspired digital asset, was a big story: It was responsible for 61% of crypto transaction revenue in the second quarter, up from about a third in the first quarter. 

In total, dogecoin was responsible for about a quarter of the $112 average revenue per user in the second quarter. 

It was 6% of the first quarter’s $137.

For Robinhood’s big-picture story, this may be a success: It built a major crypto business in just a year, demonstrating an ability to diversify beyond stock-and-options trading. 

And if crypto is to become a cornerstone of the markets or economy, many investors will see a big opportunity in a firm building a huge base of crypto owners by offering trading commission-free, as it has with stocks and options.



But what should be worrisome for investors in the here-and-now is that crypto also brings more risk at Robinhood’s current market value, which is roughly 20 times consensus 2021 revenue analyst estimates, according to FactSet figures.

Crypto-focused Coinbase Global trades at under 10 times expected 2021 sales. 

That gap likely reflects a mix of beliefs about crypto activity slowing next year, that crypto prices might drop sharply, heightened regulatory risk or concern about how effectively crypto customers can be monetized with other financial products.

Meanwhile, firms such as active-trading platform Interactive Brokers Group and upstart digital financial services company SoFi Technologies also fetch closer to 10 times forward sales. 

So investors may be in a position where at Robinhood’s current price they are either paying for vastly superior growth to peers in its non-crypto businesses or paying a hefty premium for crypto exposure.

A slowdown in trading might not be surprising to investors given the extraordinary levels seen in recent months. 

The numbers in non-crypto trading could perk up as new account holders become more seasoned. 

Or investors might be anticipating growth in another product, such as cash management—or even something yet-to-be rolled out, such as a retirement account or a crypto-related product like a wallet.

But since some of those opportunities are hard-to-quantify, funded account growth has been one way to justify any premium for Robinhood. 

At a fast enough rate in a valuation model, it can make up for whatever the trend might be in revenue-per-user.

In the near term, though, it could be harder to count on the pace of account growth bailing out investors at ever-higher valuations. 

The company has said it expects to add “considerably fewer new funded accounts” in the third quarter versus the second quarter. 

Robinhood shareholders could be exposed if fewer people join its merry band. 

COVID and the Conservative Economic Crack-up

Free-market advocates have been unable to stem the erosion of intellectual and public confidence in their arguments. Two prominent economists, both former Trump administration officials, recently showed that those arguments have now veered into incoherence.

Eric Posner


CHICAGO – A recent commentary in the Wall Street Journal exposes the dark hole into which conservative economic thinking has sunk since the pinnacle of its influence in the 1980s. 

Economists Casey B. Mulligan and Tomas J. Philipson of the University of Chicago, both of whom served in Donald Trump’s administration, have used the COVID-19 pandemic to make the case for abandoning what they see as the conventional wisdom among economists: “that the purpose of government policy is to correct market failures.”

Turning this dictum on its head, they argue that “government policy fails much more frequently” than markets do, and that markets correct government policy by rescuing citizens from the terrible decisions that governments routinely make. 

It thus follows that the COVID-19 pandemic was the result of government policy. 

Either the virus escaped from a Wuhan laboratory that had received US government funding, or it spread because Chinese authorities failed to inform the world in time, and because the US government flipflopped on its messaging about face masks and lockdowns.

Mulligan and Philipson then argue that it was private enterprise that “quickly controlled” the pandemic (all thanks to Trump, of course), even though the virus is still running rampant. 

“Getting the government out of the way was essential,” they write. 

That was “the goal of President Trump’s Operation Warp Speed.”

Operation Warp Speed was indeed a success, but it was also a classic government intervention in the free market. 

Costing more than $10 billion, it was designed to correct a market failure – exactly the opposite of what Mulligan and Philipson claim. 

The market failure was the lack of incentives for private companies to invent and distribute a vaccine, presumably because the costs and risks could not justify the return if they succeeded. 

The government stepped in by throwing money at the companies, guaranteeing a market, and supplying technical advice and coordination.

This intervention was no different in spirit from mask requirements and lockdowns, which also solve a market failure. 

Without government regulation, many individuals and businesses would externalize the risk of passing infections on to others by failing to take adequate precautions.

A market failure occurs whenever a private agent’s actions cause social costs that exceed private costs. 

Such instances are ubiquitous. 

When people are rational and amoral (as economists normally assume), they have every incentive to dump waste in rivers, drive faster than is safe for pedestrians, cyclists, and other drivers, and spread contagious diseases to others if they feel well enough to go out. 

The only thing that prevents market failures is the law, which is created and enforced by government. 

The idea that “government failures” are more common than or worse than market failures is incoherent. 

Without a government, there would be nothing but market failures.

True, governments make mistakes. 

Maybe China did regulate the Wuhan lab insufficiently, or the US government unwisely sent funds to a foreign lab without ascertaining first that it operated safely. 

But what is the alternative? 

There are researchers around the world studying and modifying dangerous viruses in order to develop vaccines and therapies against them. 

When done safely, this work is valuable. 

In a free market for such research and development, the government would impose no safety regulations at all on private labs. 

Researchers (and anyone else) would be allowed to operate however they liked.

Could this really be what Mulligan and Philipson advocate? 

Clearly, the only solution to government failure is better government policy, not no government policy. 

The elimination of government involvement in vaccine research – both to promote and regulate it – would be disastrous.

Mulligan and Philipson might also have argued that the US Food and Drug Administration or the Centers for Disease Control and Prevention should be abolished, or advocated scrapping the enormous range of federal and state laws that public-health authorities used to shut down businesses and impose mask mandates. 

These agencies and statutes allow the government to address problems of public health, including contagious diseases – a market failure par excellence.

FDA emergency authorization has been important for overcoming the doubts of the vaccine-hesitant, while CDC guidelines – as frustrating as they may be – have helped local public-health authorities understand their options. 

These government interventions have been a godsend for businesses, which have relied on them in determining how to treat employees and customers. 

(Contrary to Mulligan and Philipson’s claim, businesses did not figure these things out on their own.)

In a remarkable statement, Mulligan and Philipson write that, “Politicians craft tax policy to favor certain interest groups, but the private sector corrects such failures by substituting to less-taxed activities.” 

This, apparently, is another way that “markets” save us from “government failure.”

But, in fact, when economists use the word “tax,” they are referring not just to levies on income, but, more broadly, to sanctions imposed on polluters, fraudsters, criminals, reckless drivers, financial institutions that risk their customers’ money, and anyone else who causes harm to others. 

When private actors respond by substituting to less-taxed but functionally similar activities, that is called “regulatory arbitrage,” and it is an enormous problem whenever the taxed activity, like pollution, causes harm (as is usually the case).

The “government-bad-market-good” argument had a good run back in the 1980s. 

But it was dealt a body blow by the 2008 financial crisis, when “good” government, led by the US Federal Reserve, rescued financial markets from self-destruction caused by the deregulation promoted by free-market advocates. 

Another blow has come with the pandemic, which itself most likely emerged in a free (wet) market in Wuhan, where people could buy and sell live animals without paying adequate attention to the risk of zoonotic infection.

Government programs and interventions such as mask mandates have helped mitigate the worst effects of the pandemic. 

Trump’s major achievement was using government to create the conditions for rapid vaccine development; his major failure was not going further and undermining efforts by state and local governments to control the pandemic.

Mulligan and Philipson are accomplished economists. 

It is mysterious that they take the worst market failure in decades as an opportunity for arguing that markets solve the problems created by government. 

Redefining a massive government intervention as “getting out of the way of business” seems at best an effort to rationalize their former boss’s political opportunism by treating his multiple failures to use government to address the pandemic as continuous with his one real achievement. 

This kind of argument hardly rescues free-market economics from its latest moral and intellectual failures, and will only sow public confusion as governments gear up to confront another wave of infections.


Eric Posner, a professor at the University of Chicago Law School, is the author of the forthcoming How Antitrust Failed Workers.