Public Opinion on U.S. Trade Policy: Time to Ask Better Questions

Since the early 1970s, as imports of goods and services from lower-wage countries have surged, jobs have been displaced, the real wages of many or most American workers have stagnated or fallen, factories have closed, and mortality rates have risen. In places like the Midwestern “rust belt” and in many rural areas, whole towns have been devastated. A great deal of evidence directly implicates international trade and capital movements.

The reality of mixed effects from trade has become so obvious that few experts, pundits, or politicians now utter the platitudes that once pervaded public discourse: that “we all benefit from trade,” “free trade is good for everyone,” and the like. Yet – despite occasional dissenting voices – pro-trade sentiments continue to dominate mainstream U.S. public discourse under different packaging. Until very recently nearly all prominent economists, media commentators, and (until Trump) national figures in both major political parties embraced free trade agreements, offering little or no compensation for those who lose out. From 1974 until the early 2000s – when they were discontinued – Chicago Council on Global Affairs (formerly Chicago Council on Foreign Relations) surveys of “foreign policy leaders” (public officials, interest group leaders, media commentators, and the like) regularly showed that large majorities of elites favored free trade agreements and few were concerned about job losses. Even late in 2016, during the Trump campaign onslaught against trade agreements, President Barack Obama extolled the benefits of free trade. This consensus regularly found its way into the mass media and public discourse.

Given the pro-trade tilt in what Americans see and hear in the media – and the understandable tendency of people to appreciate the availability of cheap imported goods at Walmart – it is not surprising that simple closed-ended poll questions about “free trade” or “free trade agreements” (including specific agreements like NAFTA and the TPP) have generally shown a high level of support. Most polling organizations have emphasized large majority support for free trade. This has become conventional wisdom. Any complexity, ambivalence, or negativity in Americans’ attitudes about international trade has generally been downplayed or ignored.

The oversimplified conventional wisdom about trade attitudes probably arises partly from relying on closed survey questions that leave little room for ambivalence or complexity. Closed-ended questions are the bread and butter of survey research, but open-ended questions can be useful for gathering a more nuanced understanding of respondent opinions. Spontaneous, open-ended responses may signal the intensity or salience of opinion and can reveal concerns, ideas, beliefs, priorities, and policy preferences that are actually on people’s minds – even if not foreseen by investigators or evoked by closed questions.

As part of a broader study of the roots of right-wing populism (Ferguson et al., 2020 https://www.tandfonline.com/doi/abs/10.1080/08911916.2020.1778861 ), we have found that open-ended responses reveal considerably more complexity – and more ambivalence and negativity – in Americans’ views of international trade than has been inferred from widely cited closed questions. This new INET Working Paper presents our case for this conclusion.

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Globalization and Its Big Data: The Historical Record in Financial Markets

One revolutionary consequence of the expansion of digital technologies is their ability to change the fabric of capitalism: As they harvest enormous amounts of data, “Big Tech” firms are becoming more like banks. For instance, if the traces left by our individual pathways as we navigate the internet reveal more about our ability to repay than our credit score, then chances are that Big Tech firms will be tomorrow’s lenders. The information revolution occurring these days is a revolution of the financial system.

In this new INET Working Paper, we ponder those transformations by adding the perspective of history. As we show, the questions that agitate us today are by no means novel. In fact, data harvesting played a crucial role in bringing about the First Era of financial globalization in the 19^th century. “Big Data,” Victorian style, was a fundamental pillar of the export of capital and it shaped the contours of international lending – who received money, how, and at which price.

We demonstrate this by studying a strange financial institution, which has been often described but never quite understood. An enormous fraction of sovereign debt loans issued in the leading capital markets of the time included perplexing “hypothecations.” Borrowers “pledged” to creditors about anything: Railways, canals, forests, telegraphs, custom revenues, the profit of tobacco monopolies, and even guano, a stinking bird manure which Peru collected in Pacific islands. In London, about half of the sovereign loans issued at the time had such promises. The mystery is that these pledges were not at all enforceable and in practice, when countries defaulted, the assets invariably remained with the defaulter.

Against this backdrop, some authors have suggested that the hypothecations were a scam, intended to lure investors by giving them a false sense of security. But this is inconsistent with the fact that the contracts never claimed that the repossession would ever take place. The prospectuses were quite transparent on the point. Other researchers have hypothesized that perhaps, some of the hypothecations were enforceable. Perhaps export commodities, such as guano, could be seized when they reached foreign ports. In fact, courts of justice ruled that sovereign assets enjoyed immunity, even when aboard a ship in the London docks, within walking distance of the Court of Chancery.

We argue that the clauses were valuable because they were information. While silent on the process whereby the assets would be repossessed, prospectuses were exceedingly detailed when it came to identifying the resource and describing the algorithm whereby information on foreign payments from the sources would be released. Sworn information intermediaries were involved, monitoring the execution of payments from, say, the borrower’s custom house. The funds became traceable in real-time: If for instance the money for the semester’s dividend was not forthcoming by a certain date specified in the contract, the intermediaries would write or telegraph to the agents for the loan London, and the credit event would be documented in the newspapers.

This was tremendously valuable because at the time, except for a few countries, fiscal information was fragmentary at best. If it existed at all, it often arrived with a long lag. In fact, state budgets were not always published and final accounts were even less frequently constructed. The position of the external debt was not known, which is not really surprising in view of the IMF’s own discovery, in the aftermath of the Asian Crisis in 1997, that its debt numbers were seriously wanting. Such abysmal information asymmetries ought to have killed capital exports. But this did not occur because of the hypothecations and, as a result, we find strong evidence of lower interest rates for countries and loans that were hypothecated. We suspect that the effect was even larger on quantities because the technology really threw open new markets that would have probably remained closed otherwise, given their opacity.

Hypothecations forced the inventory of national resources. They encouraged identification of sources of income and the design of policies to valorize them. The numbers delivered in prospectuses were not economic “fundamentals” in the modern sense, though they served a similar function. As we find, the mean ratio between the debt service and the income from the source hovered around 1/2. The use of clauses eased monitoring in yet another way, because each pledge could be cross-checked against past pledges for consistency. Given identified resources, more borrowing would force indebtedness to go up unless other sources of income were identified. But at one point, the inventory would be complete and the sovereign would run short of information to disclose. If investors saw repetition (the repledging of the same asset), they understood that something was going wrong and that the debt was becoming unsustainable.

In the paper, we provide evidence in support of this interpretation of 19th-century capital export as driven by Victorian-style Big Data. Surveying contemporary sources, we show that the incidence of hypothecations increased markedly in countries that had more lacunary fiscal data: For instance, the slower fiscal data was to come, the more likely the country was to rely on hypothecations (See Figure 1). We also show that some opaque countries, such as Brazil could do away with hypothecations because they enjoyed a privileged link with a prestigious underwriter. In the case of Brazil, the identity of the underwriter, who was prestigious and knowledgeable of the country, substituted for disclosure. Finally, we provide evidence of the involvement of lawyers in the drafting of contracts, not in order to trick investors with clever clauses, but because false data was criminalized.

Our contention that data gathering and its harnessing by enterprising financiers shaped the deep transformation of capitalism at that point has important theoretical and policy implications. First, we observe a novel, direct role of collateral pledges as information collection technology, particularly relevant in weak enforcement environments. This squares with (and reinforces evidence of) the disruptive power of Big Tech finance. Indeed, Big Tech firms employ alternative, likely cheaper information technologies and can lend at an advantage, relying less on collateral. Second, our investigation underscores the importance of disclosure algorithms and mechanism designs as key features of information institution-building. We believe that a similar logic is at work today, for instance in the role played by the extensive (and intriguing) use of collateral pledges in Chinese lending to developing countries.

Overall, while multiple authors including Douglass North have theorized the importance of property rights, of the rule of law, and of parliamentary control of the budget when discussing comparative international development, we show that other avenues of development, relying on digital contents, were organized with the help of lawyers, and ended up playing a critical role. That this information accumulated in the markets of capital-exporting countries also sheds light on the relationship that existed between the political economies of data accumulation and political power. These lessons from another Age ought to be carefully considered as new forms of data harvesting are once again on the verge of transforming the world.

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Jim Chanos: China’s “Leveraged Prosperity” Model is Doomed. And That’s Not the Worst.

Renowned short-seller Jim Chanos, founder of Kynikos Associates, is what you might call the “ever-bear” of China. For more than a decade, he has warned that the country was building a real estate-driven economy on a feeble house of cards. He spoke to the Institute for New Economic Thinking’s Lynn Parramore about how he views the chickens coming home to roost as the property giant Evergrande – now the world’s most indebted property developer -- teeters on the verge of collapse.

Lynn Parramore: Back in ’09, when you started looking at China, your real estate analysts alerted you to the mind-boggling amount of real estate overdevelopment there. You warned that this overdevelopment would end badly. After Xi Jinping became president in 2013, you expressed the then-minority view that a different kind of leader had arrived on the scene. What’s your take on what has happened since then?

Jim Chanos: In 2013, we put a slide in our presentation for investors and talks that was very controversial – especially for Chinese nationals. It showed President Xi Jinping in emperor’s garb. People thought we should take it out, that it was offensive. At the time, Xi was widely seen as just the latest in a series of technocrats who had risen through the ranks -- one who would follow along with Deng Xiaoping’s reforms. It’s “capitalism with Chinese characteristics.” It’s okay to get rich as long as the country prospers.

But a few things made us think, no, this guy is different. His first speech in China after becoming president was critical of the Soviet Union for being soft on perestroika. They should have crushed it when they had the chance, he said. Xi then set up an institute to study the Soviet Union’s collapse. That was a red flag to us that he was going to be more hardline than people thought. He went on to do an anti-corruption drive, which people dismissed as a typical settling of scores that Chinese leaders do. But it actually extended beyond that. A couple of years later, he began talking in Puritanical terms about social issues. Again, that was different. Nobody had cared about that stuff for 20 years. Do what you want as long as you don’t question the party. Next, we had the book collecting his speeches and writings, which people could be seen carrying around. He started showing up in military events dressed in Mao jackets. This symbolism isn’t lost in China.

We noticed all this, but the real switch occurred in 2019 when he started going after celebrities like Jack Ma [co-founder of Alibaba]. At that point, it was clear that this president was not stepping down at the end of 10 years. He was taking a much harder line on the “flowers of capitalism,” if you will, than past presidents. In 2021, all of this exploded into the open. There’s been initiative after initiative. Redistributing wealth to the masses. Going after other leaders. Overlaid on top of this is the Evergrande saga.

LP: Let’s talk about Evergrande, the Shenzhen developer whose crisis has got everybody worried. How did things get so bad?

JC: Last year, as the tech crackdown was gaining momentum, Xi’s administration put down a set of rules called the “three red lines.” They were sort of balance sheet financial tests. It was an attempt to deleverage the real estate developers.

LP: Which means he knew something was wrong.

JC: Well, here’s the problem. I always joke that when you have an investment-driven economic model, you know your annual GDP on January 1^st of that year, because you can stick shovels in the ground to make your growth numbers. That’s how the model works. It’s not a consumption-based model. As we now know -- and the Wall Street Journal just had some phenomenal numbers in a recent piece – that real estate construction is now larger than it was when he took office. I would always hear, well, don’t worry: these are smart guys, technocrats who see the problem and will wean themselves off this apartment construction-on-steroids. But they haven’t.

LP: Why haven’t they been able to slow it down?

JC: Since we started following China at the end of ’09, this is the fourth time that they’ve attempted to slow the real estate market down, because they do know that this is going to be basically too big to deal with if it keeps growing at the rate it’s growing. But every time they’ve done it, the economy has hit stall speed very quickly, and they panicked. They went from hitting the breaks to hitting the accelerator. That’s why we’ve seen higher levels of real estate. The idea that “I can’t lose buying apartments” became ingrained with bankers, real estate speculators, and the public.

LP: So with Evergrande, everyone came to expect a bailout?

JC: I think we’re at that crossroads. The problem is that these companies are so much bigger than they were in 2015 or 2011. Can you bail everybody out? In the case of the developers, you have an additional problem. The biggest amount of liabilities is not necessarily to banks and bondholders. It’s to apartment buyers. Here’s why: the Chinese real estate finance system is exactly the opposite of ours. In our system, when there’s a new development, you’re typically required to put 10% down to sign a contract, with the balance due on closing. You go get your financing and your mortgage proceeds pay for the rest of the house or the apartment. In China, you pay upfront. You are extending the developer a loan. So, of the $300 billion in liabilities Evergrande owes, I think the biggest chunk, last time I checked, is basically what we would call a deferred revenue item. It’s money that you took in from people, and you owe them an apartment. And the apartments aren’t done, but the money’s been spent. So the problem is not just bailing people out, but the question of who is going to put up more capital to pay off the retail people that have bought apartments that haven’t gotten anything.

These numbers are big, and Evergrande is not the only one. There are a handful of developers that are missing interest payments and have their bond prices reflecting distress.

LP: How much has corruption played a role in this mess?

JC: That’s a problem with their economic model focusing so much on real estate. Because they don’t have a local tax system, like property taxes, the local governments sell land to pay for local services. But whenever you have private developers buying land from municipalities controlled by one party, yeah, it’s ripe for corruption. We know that’s rampant in China.

LP: How do you view the policy reaction to Evergrande?

JC: So, what do the policymakers do? It’s not a Lehman moment in that there’s not a lot of cross-border interbank lending here. The Chinese system is still pretty much a closed financial system. That’s not the risk. During the Global Financial Crisis [GFC], what brought us to our knees was the liability side of the banks’ books. They couldn’t roll over the loans to each other because no one trusted the assets. Here, it’s the assets. I think that if they try to inflate it again, if they try to bail it out again, we’re only going to be right back in this soup in another two or three years, with even bigger problems.

LP: Is this only a problem with the real estate sector, or is it more extensive?

JC: Based on our analysis of the numbers – and you have to take the Chinese numbers with more than a shaker of salt – we’ve long thought that residential real estate was probably 20% of GDP and that all in, real estate construction and related services was about 25%. Ken Rogoff came out with a study last year that said it was 29%. That’s already a huge amount compared to other countries.

Well, the numbers that the Wall Street Journal just put out were staggering, implying that there were 1.6 million acres of residential real estate under construction. If you do the math, it’s the equivalent of 72 million apartments. We believed that they were selling 20 million a year, but the WSJ story seems to imply that the numbers are actually much, much bigger. That tells me that our numbers and Rogoff’s numbers regarding GDP are probably on the low side. It could be a 30-40% problem, not a 20-25% problem. It’s just magnitudes bigger. We’ve never seen anything like this. And there’s no game plan, no historical analog. Maybe Tokyo in ’89? But this is worse than that. It’s worse than Spain in ’06 or Ireland in ’06. We’ve just never seen an economy this dependent on putting up apartment buildings -- apartments that nobody is residing in. Everybody already has an apartment! These additional ones are second and third apartments at this point, and only for people who can afford them because they’re extremely expensive.

I think the Chinese government has convinced themselves that by borrowing lots of money from their own citizens and elsewhere, that there’s ongoing activity that is sustainable. But as we find out in every real estate bubble that bursts, when your activity is constructing real estate itself and you’re taking capital and turning it into income by paying construction workers and real estate brokers and everybody else, when that activity ends, it goes poof! And there’s no income from the asset you’ve just financed. It’s not like building a factory where you have demand for your products. It’s just apartments sitting empty in Beijing or Shenzhen.

LP: How does this problem relate to Chinese politics?

JC: As all of this is happening on the financial and economic front, along with the crackdown on business elites, we’ve seen a commensurate rise in bellicosity, in saber-rattling toward Taiwan, India, and Tibet. We’ve seen a much more aggressive posture from Xi in relating to the West. Now every day there’s a warning in one of the Chinese Communist Party organs threatening Australia if they come to Taiwan, threatening Japan. I don’t know if the Party is preparing the citizenry for a “them.” Someone to blame.

LP: As we’ve seen with the pandemic already.

JC: Yes, and in the way they’ve treated the West’s outrage about the concentration camps in Xinjiang province. That’s the classic authoritarian move. We know it from our own country. Blame someone. “It’s their fault, not our fault.” We need an enemy. I don’t know how real the saber-rattling is. Is it a distraction from domestic belt-tightening that’s coming? Planting the idea that we’re going through hard times because the whole world is against us? We’ll see. It’s an incredibly interesting time to be watching China.

LP: What does it all mean to the rest of the world?

JC: Again, I think it’s not a financial transmission issue reverberating through the financial systems and markets. I do think that it will affect global growth. China was a full point of the 3% global real growth we’ve had since the GFC. Without China, it’s 2%. So China itself, by growing 7 or 8% a year was a disproportionate amount of global growth. It’s also going to impact what I call Greater China, which is Taiwan, South Korea, Singapore – the areas that trade very actively with China. And it will definitely impact commodity exporters. In this massive build-out, China has continued to suck in iron ore and copper and all kinds of things from a variety of different countries like Brazil and Australia. But I think that the impact might be more political than financial. That’s what worries me.

LP: How would you characterize these worries?

JC: It’s the rise of bellicosity, the rise of a more militant China as the economy and the financial situation has gotten more precarious. That’s a 1930s kind of problem. We know that a rise in authoritarianism and statism around the world was one of the upshots of ’29-’32. You had leaders saying, “I’m the one that can get us out of this problem” and “They are the ones who got us here.” This situation in China is a little bit frightening to the student of history, because there’s no doubt, whether you’re flying over Taiwan airspace or coming close to ships in the South China Sea, that there’s a rise of tensions in and around China. I don’t think it’s a coincidence.

LP: To touch on Xi’s crackdown on the tech industry, how do you view that in the context of the need to lessen this dependency on the real estate sector? Certainly, we can see in our own case with Silicon Valley -- Facebook and so on -- that poorly regulated tech is a problem. But what does Xi’s stance mean in the context of his desire for China to be a leader in innovation, on the cutting edge of technology?

JC: That was always one of the responses to our concerns about the investment-driven model. People said, well, everyone does everything on their smartphone in China. They’re far more advanced in social media than we are and more advanced in payment systems, and so on.

The problem was that, number one, it gave rise to these global tech celebrities, and number two, I think China, or the Party, realized a little bit later than they might have that the control of databases and information that these companies have is certainly a power center. And the one thing that the Communist Party cannot brook is a threat to its control. There are no other political parties, no free press. The only thing that could challenge control is the thing that people said would liberalize China – the internet. Access to the internet, access to ideas, access to global media. People thought these things would democratize China, but Xi is saying no: we’re going to put up a Great Firewall and we’re not going to allow Alibaba to have as much power as the Party.

LP: And it looks like he’s going after the banks next.

JC: The real estate system is so big, and so levered – the banking system has grown with it, of course. It seems to me that Xi is basically going through all the power centers -- technology, finance, etc., and cracking down. He’s making sure his people are completely in charge and that there’s no interference, no other power centers. And it makes me ask why. What’s the end game? I mean, the Party has control of the country for the most part. The citizens understand that. So why? What is coming that he feels he needs to make sure that all of his people are in control? I can’t help but think of Stalin. The end game puzzles me the most. Is it to prepare for a takeover of Taiwan? To be more forceful on the international stage? I don’t know.

LP: What is distinct about China’s vision of capitalism in the context of a one-party system? What are its particular features and challenges?

JC: What distinguishes China and what makes it so unique from my perspective, putting on the financial historian’s hat, is that the speed at which they developed was unprecedented, and the amount of risk they have taken to do that is unprecedented. Their banking system is now the largest in the world. The amount of real estate construction is just completely insane, and until, perhaps, this past 12 months, we haven’t seen a real, serious effort to say, “Maybe we should rethink this fantasy where everybody is going to have six apartments. Maybe we need to do other things in our economy to balance it out.”

How are they going to deal with the transition? Because they’re going to have to do it at some point. I think it’s going to be fascinating to see how they try to get out of it. Do they switch spending to defense spending? Do we get an arms race? Can they keep a closed currency? There are a whole lot of big questions.

They’ve got to make some tough decisions on how the economic model is going to work going forward. In the late ‘80s, everybody thought Japan was going to surpass the U.S., but they had the same problems – a banking system that was bloated, real estate prices too high, too dependent on exports, and they’ve had 30 years of muddling through. The idea that China is going to be growing 6 or 7% while the rest of the world is growing 2% just has to be revisited. It’s not gonna happen. That realization is going to be the bucket of cold water that’s going to force them to rethink next steps. The population has been used to this leveraged prosperity, and everybody has borrowed money to buy real estate. What are the next steps? It’s otherworldly what they have done with real estate. Whatever happens, it’s going to be severe somehow. Whether it’s politically or financially -- whatever it is, it’ll be severe.

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Welcome to the Emergency Room. A Wall Street Honcho Will Decide Your Treatment.

The emergency room. You go there for help when you’re really in trouble or have no place else to turn. But who decides what happens to you there? If you think the answer is “doctors,” think again. Large corporations are increasingly taking over these centers of life and death, and they are focused far less on your health than squeezing as much profit from your situation as possible.

That’s why a growing chorus of physicians, advocates, and patients is sounding the alarm on what they say is a corporate-fueled catastrophe in the making. The pandemic, they warn, has amplified problems rampant in a healthcare system managed not for the benefit of human lives but for the corporations and elite executives who control it. This path, they warn, is both unsustainable and dangerous.

Ground zero for the newest form of greed-driven medicine is hospital emergency rooms.

ER, Wall Street-style

In normal times, 1 in 5 U.S. adults finds themselves in the ER each year for urgent problems like chest pains, severe injuries, and acute infections, as well as mental health issues and substance overdoses (the number went down in the pandemic, but it’s ticking back up). Some end up there because they lack affordable options for addressing less serious problems.

Everyone has a good chance of spending time in the ER at some point, but most Americans would be shocked to learn just how far the tentacles of financialized corporations have reached into trauma centers and triage stations.

You would think doctors would be making the call on whether you get a breathing tube, but executives who control medical staffing contracts have ways of exerting pressure on physicians to do things their way. They can even decide who gets to see a doctor at all. On corporate spreadsheets, your body becomes little more than a source of profits, and medical staff so many tools for extracting it.

Corporate-influenced medicine has been around for a while. There are insurance companies, of course, but since the 1990s, businesses called “contract management groups” (CMGs) have increasingly taken control of staffing hospitals. CMGs originated in doctor-owned companies trying to address a legitimate issue – the headache of ensuring that hospitals are properly staffed 24/7. But the role of these companies soon expanded to things like coding and billing services. The doctors who ran them found out they could make piles of money through these contracts, and it wasn’t long before Big Business saw a pot of gold and came knocking.

Half of all ER doctors are now employed by CMGs. Physicians they employ say they have lost autonomy and can no longer ensure proper patient care.

The first private staffing contractor for an emergency room was EmCare, launched in 1972 in Dallas, Texas to staff Baylor Hospital. By 2005, Emcare was the largest ER outsourcer in the U.S.—and that same year, a private equity firm took it over and bundled it with an ambulance outsourcer. The new company eventually went public in 2013 as Envision Healthcare. Fast forward to 2018, and you find private equity giant KKR buying Envision for nearly $10 billion.

Envision is a corporation that draws vehement criticism, coming under fire for abuses like surprise billing and reducing the quality of patient care. Famed short-seller Jim Chanos described the company to Forbes magazine as a “scam” built on a model of “deception or aggressive use of reimbursement.”

Envision’s main competitor is TeamHealth, which was taken over by the private equity behemoth Blackstone for over $6 billion in 2017. Blackstone is owned by Stephen Schwarzman, who seems to have stepped right out of the movie “Wall Street” -- a poster boy for the “greed is good” mentality. Schwarzman, when he’s not boosting Donald Trump and throwing elaborate parties for himself, describes attempts to raise taxes on firms like his to Adolf Hitler’s invasion of Poland in WWII. (He later apologized after an outcry.)

Sometimes CMGs have a couple of actual physicians at the top (greedy ones making hefty profits, critics say), but their presence is largely a scheme for corporations to get around laws in many states prohibiting business entities from practicing medicine, or owning, investing in, or controlling professional medical practices.

In states without such laws, there is often a lay owner calling the shots at CMGs. The worst-case scenario, say critics, is when a private equity firm takes over.

Private equity firms buy companies hoping to sell them later at a profit – “flipping” them to another buyer. Lately, these corporate entities have been on a spree snapping up healthcare companies, many of which faced have challenges during the pandemic as profits have decreased. Private equity firms are taking over CMGs, nursing homes, physician’s practices, and even hospitals themselves. They’re also gobbling up health care billing management and debt collection systems, just to ensure not a dollar slips away.

The data are still coming in because the phenomenon is new, but research on nursing homes taken by private equity firms shows that patient care takes a nosedive.

Financial titans like Blackstone, The Carlyle Group, and KKR are committed to one thing: ginning up large returns for shareholders. They do so under what economist William Lazonick has criticized as a perverse idea which holds that the sole purpose of corporations is to enrich shareholders – never mind providing anything of value to society, treating workers fairly, or keeping the public safe. Lazonick says that the shareholder value ethos has spread “like a contagion” since the 1980s when it took hold at Harvard Business School. Private equity firms take this destructive ethos to the max, looking for massive returns and almost any cost. “Nobody is protected,” says Lazonick. “The private equity firms are about making money out of money and looking around for any asset, often tearing the asset down.”

Bent on extracting profits from doctors, staff, and patients, private equity executives don’t mind if you’re Democrat or Republican, young or old, rich or poor. They simply want your health issues to translate into money. The tricks they play to make this happen include hiding billing and payments from doctors, pushing medical staff out-of-network so that bills can be inflated, replacing doctors with cheaper non-physician providers, and making sure that medical staff contracts allow the corporation to fire physicians who complain without cause.

A “Seismic Shift” in Medicine

As Gretchen Morgenson and Emmanuelle Saliba reported last year, the private equity phenomenon represents a “seismic shift” in medicine. At the time of their report, Blackstone-owned TeamHealth and KKR-owned Envision Healthcare were already providing staffing for about a third of the country's emergency rooms. Morgenson and Saliba note that during the pandemic, hospitals associated with these financial giants got busy finding ways to cut pay and benefits for medical workers because profits were declining.

Dr. Robert McNamara, Chair of Emergency Medicine at Temple University School of Medicine, is on a crusade against this corporate-driven system, warning that emergency rooms at its mercy are harming patients, abusing medical staff, and exploiting doctors to the point that many are simply quitting the profession. He spoke recently at TakeEMBack, a 2-day virtual conference of physicians, researchers, and other analysts aimed at combatting the growing influence of profit-hungry corporations on the profession he loves.

According to McNamara, the motives of medicine and the motives of for-profit business are simply incompatible. In his view, when a for-profit business controls the doctor’s contract, professional codes of ethics are swept aside. Doctors are prevented from advocating for patients and fired if they dare speak up, without any due process.

Dr. Ming Lin found this out the hard way. He was sacked by Blackstone-backed TeamHealth, which staffed the hospital in Washington where he worked during the pandemic. When Lin complained about inadequate Covid safety measures through internal channels, and later on social media when improvements didn’t come, he was fired. As a physician, Lin thought his mission was to keep patients and staff safe. TeamHealth thought otherwise. He is currently suing.

Physicians working under the corporate model are also routinely prevented from knowing what is billed and collected in their name. When you go to the emergency room, says McNamara, “it’s not a doctor deciding what you are charged. It’s Steve Schwarzman.”

Psychiatrist Wendy Dean, also a participant in the TakeEMBack conference and an expert in workforce stress, said that ER doctors, already stressed long before Covid, are now breaking down. It’s not about individual frailty, she said, but a reaction to an increasingly corporate environment in healthcare that demands that doctors “shift allegiance away from patients.” She describes the stress they endure from the conflict between their duty to patients and what corporations demand as “moral injury,” similar to what soldiers experience when they are asked to do things in opposition to their values. No amount of self-care can fix this: “The only way to solve it is to confront the conflicts of interest,” says Dean.

What to do?

If McNamara could make one change right now, it would be to ensure that information on everything billed out or paid on behalf of doctors would be provided without the physician having to make a request to his or her employer. This would allow doctors to know what patients are being charged and whether these charges are fair. As ProPublica has revealed, Blackstone’s TeamHealth “charges multiples more than the cost of ER care” and the excess money goes to it, not the doctors treating patients.

McNamara says that transparency would also eliminate unethical practices like fee-splitting – the splitting of a physician’s fee with another person or entity, like the manager of a staffing company. Many doctors, he says, have no idea that they are losing 25 to 30% of their fees to business concerns.

McNamara and his colleagues say that Congress and state legislative bodies need to act to wrest control of medicine from corporations. Enforcement of current laws prohibiting doctors from working for laypeople or corporations is needed, along with new regulations in places where they don’t exist. Other strategies to forge a better, safer path forward include unionization, a return to transparent and locally-owned medical groups, informing the public about what’s happening, and coalition building.

Nineteenth-century thinker John Ruskin famously said, “there is no wealth but life.” In his view, true wealth is human well-being. Emergency rooms, the places we turn to for life and health, are increasingly under the influence of what Ruskin called “illth” – economic forces that breed illness and despair. Private equity and corporate-controlled medicine illustrate that from the standpoint of unregulated capitalists, life has little intrinsic value.

Since all of our lives are a stake, maybe it’s time to fight them.

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Mzukisi Qobo: The Old Mantra About Growth Has Reached Exhaustion

In this interview, Dr. Folashadé Soulé and Dr. Camilla Toulmin discuss with Pr. Mzukisi Qobo. Pr Qobo is the Head of the Wits School of Governance, University of Witwatersrand, South Africa. He also serves on President Cyril Ramaphosa’s Economic Advisory Council. In the past, he has held a senior leadership role in government as chief director responsible for developing South Africa’s trade policy at the Department of Trade and Industry. His expertise is in governance, strategy, and political economy. His book, The Political Economy of China-US Relations: Digital Futures and African Agency, will be published by Palgrave Macmillan, 2022.

Let us start with a general question: what is your opinion of how the South African government has handled the COVID crisis so far? South Africa is the African country with the highest official case rate. How do you assess the policies that were implemented to handle the pandemic?

I think we started very late. It was a very long lockdown because it lasted between March and August of last year, and I think that this period should have allowed us and many other countries that were in the lockdown phase an opportunity to build our capabilities, to replenish our resources, to prepare our public health facilities, and to think about a credible plan for how to manage the crisis post-lockdown. I think our responses in the first and the second phase were really poor because we didn't put in place any of the measures that the government said they were going to put in place, because the primary goal of the lockdown was not so much to get rid of the virus, but to enable the public health facilities to manage the numbers. If you prevent people from interacting, you should slow down the rate of infection. But that didn't happen. Instead, what we saw during that period was just a large-scale opportunity for the production of personnel productive equipment that was purchased through private suppliers, and we saw how individuals who were connected to those in government benefited irregularly from that.

So the country's energies got caught up in that tension. Public trust in government declined, and instead of paying full attention to the challenges at hand, we were trying to tackle corruption at the same time. When the second wave hit in December 2020, we were just unable to deal with it. I think many deaths and hospitalizations took place during that period. Then there is the politics of vaccines, and the power play between the pharmaceutical companies and government. Then we got the third wave. Where we kind of did well was in the rollout of the vaccines: we accelerated the rollout and I think now we probably are at above 10% or just under 15% of the population fully vaccinated. Of course, there are a new set of challenges, such as the daily take up of vaccination, which is very slow. The government has again not prepared itself for such eventualities, and we've been unable to go out and persuade people to get vaccinated and maybe induce them with incentives. So overall, it's been a mixed response, but by and large, I think we didn't do great.

There are several debates currently around access to vaccines in Africa, which brings us to the larger question of local manufacturing. South Africa is one of the few African countries that has the capacity to do so. What is your analysis of the lack of local manufacturing on the continent?

I think it's a long overdue question because we've been through multiple episodes of disease on the African continent. The fact that we don't have full manufacturing capabilities is a reflection of our weakness and shows that we are not a resilient continent. We are heavily dependent on others, and that's a function of overall capabilities, such as the number of medical doctors, scientific capabilities, and the delivery mechanisms, like the logistics required to deliver vaccines. I do think that the advanced industrial economies have a heavy responsibility for making vaccines available, because they had promised to donate vaccines via the COVAX facility and there have been very significant delays. Some countries like Canada purchased doses four times what the population required and this set the stage for “vaccine diplomacy” and geopolitical competition between China, Russia, and the US for vaccine distribution. But it also intensified vaccine nationalism.

Regarding manufacturing capacities, it's a very intricate and very complex area. If an individual country develops manufacturing capabilities which rely on exports to other African countries, it presents a problem because there might be no market. Vaccines are both a commodity, but they also save lives. And someone has to pay for them. Governments looking at developing manufacturing capabilities need to weigh up the fiscal capacity of government and the need to promote your own manufacturing. If governments can buy vaccines cheaper from outside the continent, why should they not do that? Yet I still think we need to build our own capabilities, these are the moral tensions. The second reality is that African countries don't have significant scientific capabilities to manufacture vaccines. Just last week, there was an announcement of a major technology transfer initiative to start the early phase of a new vaccine for cancer, in Cape Town which is good.

The simple answer is yes, we should manufacture vaccines in Africa, but we need to be aware of all the complexities entailed in doing so, and the capabilities required. And then the final point is that just about every other country on the continent wants to be a vaccine manufacturer. It's becoming fashionable, so we should find a way to create cross-border supply chains to optimally utilize capacities at different stages of development in various African countries.

It's been interesting learning from our interviewees about the role of other key actors during the COVID pandemic. What has been the role of national government, provincial government, and civil society during the pandemic? If you take a case like Senegal, which has a fairly strong state, we heard a lot about the importance of local associations, very often religious in origin, that played an absolutely vital role, particularly in the first phase.

I think it's an important question. Based on my own observation, I think there's been too great a distance between the state and civil society, and you can see this disjuncture in the narratives about vaccines. Negative messages have evolved and spread in communities and across society about vaccines being poisonous and other myths. We've not been so successful, in working closely with different civic structures, religious leaders and the like, not just in terms of vaccines, but also in terms of helping to build resilience at community level. Many of the most vulnerable communities were heavily affected by lockdown conditions. People live in single-room structures which serve as a kitchen, a bedroom, and living space for a whole family. When you lock people up, that means you force them to be in their homes, but you're not thinking about the differential resources across society. In your head, as a politician and decision-maker, because you live in a comfortable house, you think everyone has a yard to walk around in. I don't think we considered this sufficiently as a society and country. It could have been handled better if government from the outset had worked with community or civic structures that are facing these difficulties. I think we underestimate the extent to which people have been affected psychologically and emotionally by the first phase of the pandemic. We are now countenancing the fourth phase of managing the pandemic in the next few months, but we're not treating any of the ill-effects that emerged from each of the previous phases and trying to build greater resilience. One of the fascinating discussions in South Africa currently is whether we should set up a basic income grant, and what form and shape should that take; but this is happening all in the abstract, not grounded in the realities of what has happened in the last 18 months. We’re not taking into account the depletion of capabilities in communities, job losses and the range of effects that were wrought at a personal, household, and community level. No one wants to think innovatively and creatively, no one wants to shift the box, let alone think outside the box. No one wants to do bold things that have never been done before. Our approach is very linear, which is very sad. What government did well was to work with the private sector on the delivery side. As soon as government agreed to partner with the private sector, they moved really quickly from vaccinating 4% of the population to reach 15% within three to four months. That is not to say working with the private sector is a magic bullet for society, but working with key structures in society, including the private sector, could create much bigger gains for government than trying to do it all on their own.

We are still in the midst of the pandemic, but many governments are already thinking about the post-pandemic world and economic recovery programmes. How does this crisis offer an opportunity to rethink development models on the continent? Regarding health, for instance, more funding for health infrastructure should be at the core of economic policies more generally. Looking at the South African case, and more largely on the continent, how might this crisis be an opportunity to rethink development models?

I certainly agree we should rethink development models. Major crises in history have always forced a rethink in approach, especially in regards to the role of the state, whether it was the depression years of the nineteen-thirties, post-World War two, the recession of the seventies, or during the global financial crisis. A major crisis should force us to rethink how we do things, especially in managing the relationship between the state, market and society. I think these relationships have to be rebalanced all the time. The old mantra about growth has reached exhaustion, and all market actors are going to have to show how they contribute to society, health infrastructure, education, and public services. I think with COVID 19, we are at a crossroads and must re-think economic policy, social policy, and our health infrastructure.

This pandemic came at a time when, in South Africa, we were talking about setting up national health insurance, a programme that had already been delayed for over a decade. It has still not been implemented. One would think that the COVID crisis would force us to get the national health system into shape. I think the crisis gives us a creative opening to experiment with a basic income grant, and other ways to build civic and community capabilities, and not rely narrowly on the market for everything.

The fact that many countries closed their borders means there has been an emphasis on localization, and on self-reliance. In some places, there has also been investment in industrial robotics, instead of shifting supply chain production to areas that have abundance of labour. This is especially apparent in countries like China and elsewhere in Asia, which will make it difficult for African countries to develop manufacturing, so that's the first set of challenges you have.

The second is the whole green transition and risks of a carbon tax adjustment at the border. If African countries still rely on traditional industrialization, their products will attract taxes at the border because their carbon footprint will be deemed too large. We face a real dilemma on the continent, in terms of the pathway to development, and certainly we need to rethink development models, but it's not going to be easy. We should think about reviving agriculture and agro-processing, and areas of the service economy that could help us modernize, but also absorb labour. The major thing we must do is greater investment in education, because as long as education levels aren’t high enough, we are going to lag behind other developing and emerging economies. The world is moving on and you have limited options with low skills. It's easy to talk about industrialization, and new development path pathways, but if you don't have the critical success factors, education being one of those, you simply are not going to compete in this changing world.

Energy is absolutely critical for economic and industrial development. Currently South Africa has massive dependence on coal for energy and industrial production. I know there's been some work done in South Africa on what a just transition would look like. There are massive amounts of labour and capital, and many communities bound up in the current high carbon coal economy. What timeframe do you think South Africa should be thinking about, to try and achieve this remodelling of the whole energy system not only in terms of getting out of fossil fuels, but also expanding energy production so that it becomes available to everybody at reasonable cost?

I don't think it will take less than a generation to achieve a noticeable transition. It's happening in very small steps. Some banks are announcing they will no longer fund coal projects, which is a big step. Companies like Exxaro , which was the second largest coal producer in South Africa, has been making investments in renewable energy in partnership with India’s Tata through their spinoff Cenergie. Also there's a pressure from advanced industrial economies through their support to NGOs in South Africa, which has generated a lot of talk about the green transition in South Africa, but less about what the “just” component of the transition would look like. The bulk of unemployed people in South Africa, unskilled or semi-skilled, belong to labour-intensive sectors in the old industrial economy. And for the longest period of time, since the seventies, the major driver of employment in South Africa has been industry (largely powered by coal-fired power stations), and all the midstream sectors. Now to take that away, you've got to deal with the large section of the population that would be unemployed, and all the social challenges that are associated with it.

There's a lot of talk about climate finance, but it's all just talk, no-one can see the content. Going back to the question of skills, moving people from old industries to a new industrial sector, you've got to go all out in education because the current green jobs are usually unsustainable, and short term in nature. They are like construction jobs. You assemble, with most of the components coming from China, Spain, and Denmark. An important part of sustaining economic prosperity on the back of green transition is for governments to be ready to create incentives and put resources behind such a transition; and place conditionalities for local ownership, training and development, and employment.

Currently there are very few African companies that are manufacturing “green economy” components. We simply are responding to the pressure to reduce our carbon footprint, to meet certain targets, to follow the lead of the EU. No one says we must stick to the old economy, but we've got to be careful about how we pace the transition, and how government, the private sector, and communities work together to solve the real equity challenges that this debate throws into sharp relief.

Let me ask a final question on global governance. Generally, the pandemic has demonstrated that multilateralism is key to address global challenges, but we've also seen some countries prefer bilateralism and nationalism, as you mentioned early on in relation to vaccines. What do you think will be the future of multilateralism after COVID and specifically Africa's place in the international system? I know you have a book coming out soon on China-US relations and the question of agency. How do you think African actors, African governments can exercise more agency in this fragmented world?

I think the world will remain fragmented for a while, for a number of reasons. We really underestimate the extent to which the Trump era eroded goodwill in multilateral processes, because the US has always been, since the end of World War two looked up to as the leading power in underwriting international processes and institutions. Post-Trump, the world has battled to rebuild the multilateral foundations, especially because the relationship between the two largest economies in the world - China and the US - has not improved. Instead, it has continued to weaken. Tensions between the two continue pretty much in the same way as was the case under Trump, except that the tone is slightly more civil. I think the tensions and rivalries are deepening, if you follow the AUSUK submarine story around building military capabilities in Asia Pacific. The flashpoints are going to expand the points of intensity in that relationship. COVID 19 has further driven a wedge between these major powers: the US and China, but also Europe, where the European Union has to think of its future beyond reliance on the US. They have learned a hard lesson under Trump, that you cannot place your faith in the US, because of the nature of their political system, which can bring you a terrible president that takes some crazy positions on international issues. Multilateralism isn't what it used to be because countries are likely to go down regional routes and worry about their more immediate spheres of influence.

The EU is already in good space because they operate in an integrated area. It's not a perfect mechanism, but I think the EU has been a source of resilience for its member countries. It's able to respond pretty quickly to crisis issues, even though they are intense, as for example, in the Eurozone, with the Greek crisis, or to tensions around how countries manage their vaccine supplies, and more recently to issues related to the European economic recovery plan. The tensions are there, but the Union is able to find consensus because everyone knows that if they are invested in the project, it’s good for everyone and no-one would be left behind. I think there's a lot that Africans can learn from that. Our agency is also constrained by the behaviour of our elites, corruption, the weakness in the democratic space in different countries, plus state-society tensions in much of the African continent. Among the things that African countries need to do to bolster their agency, many lie at the domestic level. They've got to get the domestic context right, domestic institutions, inclusive institutions, taking care of the economy, and all those basic elements. Secondly to start to look beyond, not only the domestic setting but be concerned about the country and continent’s interests, Working together to strengthen certain areas, for example the AfCFTA, gives the continent a rare opportunity to develop cross border supply chains, to harmonize regulations around areas related to services, intellectual property investments, and e-commerce, but also to build some of the key institutions, such as the Centre for Disease Control (CDC Africa), to direct resources to rebuild existing institutions some of which have been neglected. Finally in relation to external action, we must take a more pragmatic posture rather than just put all our eggs in the same basket, whether its China or the US. We must diversify our international relations strategy and know that these other countries are not our friends. They are also in search of their own interests. That's how you've got to approach commercial diplomacy or bilateral relations with these countries. And we must start to develop a “One Africa platform”, not on everything, but where it makes sense, especially if by doing so we can derive greater benefits from external engagements. The COVAX and the AU Accelerated programme platform were some of the examples of what is possible, and though I don't think we managed them that well, we have something to build on.

About the COVID-19 and Africa series: a series of conversations conducted by Dr. Folashadé Soulé and Dr. Camilla Toulmin with African/Africa-based economists and development experts about their perspectives on economic transformation and how the COVID situation re-shapes the options and pathways for Africa’s development - in support of INET’s Commission on Global Economic Transformation (CGET)

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When Knightian Uncertainty Becomes Obvious

In his classic 1921 book Risk, Uncertainty, and Profit, Frank Knight argued that “true” uncertainty arises from change that cannot be fully foreseen with probabilistic rules. Knight's profound insight was to focus on the key reason why change is unforeseeable: as time passes, change in the economy’s structure is triggered by events that do not exactly replicate past events. Because these events are (at least partly) “unique,” one cannot fully predict when they will occur or their impact on the consequences of economic decisions. As Karl Popper put it, “quite apart from the fact that we do not know the future, the future is objectively not fixed. The future is open: objectively open.”

It seems self-evident that economic change – and social change more broadly – is triggered by events that are not exact repetitions of events in the past. However, economists have been reluctant to acknowledge that they as well as market participants face unforeseeable change and the “true” uncertainty that Knight identified with such change. Arguably, this reluctance stems from a widespread belief that Knightian uncertainty is incompatible with formal economic theory, and, more importantly, makes economic arguments impossible to confront rigorously with real-world observations. Our new INET Working Paper shows that participants in the stock market do recognize that they face Knightian uncertainty, and provides concrete evidence that researchers can actually arrive at empirical conclusions that matter for explaining daily volatility. We provide one such measure of Knightian uncertainty based on narrative analytics of stock-market news reports over the 200-plus trading days in 2020.

Stock-market volatility has reached ten-year highs since the start of the COVID-19 pandemic. The VIX Chicago Board Options Exchange's Volatility Index spiked in March and October 2020 at levels not seen since the 2008 Global Financial Crisis and 2011 US Fiscal Cliff and Debt Sequestration. The VIX is referred to as the “Fear Index,” because it reflects expected volatility – as measured by underlying S&P500 options prices – and spikes when historically unique events occur that increase the uncertainty of future stock returns. However, major non-repetitive events rarely occur in isolation. Rather, they typically play out simultaneously at the intersection of government policy – as occurred during the pandemic with congressional enactment of major stimulus packages in March and December 2020. Consequently, stock-market volatility depends on the Knightian uncertainty market participants face as a result of the interplay between historic events and public policy.

How, then, can individuals and policymakers assess the impact of historically unique events and government policy on stock-market volatility? The answer, we argue, lies in the degree of expectations concordance across relevant historical events occurring at a point in time. When market participants’ interpretations are more similar in the aggregate, whether bullish or bearish, their views are reinforcing and lead to greater stock-market volatility. Conversely, when interpretations are more conflicting, the views to some extent offset and reduce volatility.

In order to assess expectations concordance, we rely on narrative analytics. By scoring Bloomberg News stock market reports, we are able to identify which historical events are deemed relevant by market participants for expected returns, and which interpretations, bullish versus bearish, were formed in response to each event. No one could have foreseen the COVID-19 pandemic, the importance of congressional stimulus negotiations, or the interpreted impacts on the stock market. Under Knightian uncertainty, narrative analytics provide a way forward. Indeed, there is a growing literature on stock-market narratives and the connection between novel events and the instability of underlying processes driving outcomes (one of us has a forthcoming book in INET’s book series with Cambridge University Press on just this topic).

In our working paper, we find that non-repetitive events mattered for stock market volatility on nearly every trading day in 2020. On some days, major events, such as the pandemic and congressional stimulus negotiations, had positive impacts on price movements; on other days, news was interpreted negatively. We score the bullish and bearish views connected to historic events with +1s and -1s, respectively, which allows us to develop an Expectations Concordance Index (ECI) measuring the degree to which interpretations are more similar across an aggregate of historical events during the 2020 year. Interestingly, we find that when pandemic factors like new cases and death rates increase concurrently with the passage of congressional stimulus packages, stock market volatility is lower as the bearish and bullish views, respectively, somewhat offset. Figure 3 from our paper illustrates this finding of low ECI following the enactment of both stimulus packages.

Results from our empirical analysis show that higher ECI values are significantly connected to higher stock-market volatility. And the results hold for both realized volatility and that implied by the VIX. We also show that ECI (Granger) “causes” the VIX, but not vice versa.

Our paper suggests that standard theories of finance that ignore Knightian uncertainty are grossly incomplete. Stock-market volatility in 2020 depended on the interplay between the unfolding pandemic and the federal government response, which cannot be measured probabilistically. This interplay was particularly pronounced during 2020, but it is always present. Accounting for the effects of Knightian uncertainty will significantly enhance the ability of researchers, regulators, and policymakers to comprehend asset-market dynamics – and social outcomes more broadly – and the impact of state intervention.

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Does America Want a CHIPS for Buybacks Act?

The Semiconductor Industry Association (SIA) is promoting the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act, introduced in Congress in June 2020. An SIA press release describes the bill as “bipartisan legislation that would invest tens of billions of dollars in semiconductor manufacturing incentives and research initiatives over the next 5-10 years to strengthen and sustain American leadership in chip technology, which is essential to our country’s economy and national security.”

On June 8, 2021, the Senate approved $52 billion for the CHIPS for America Act, dedicated to supporting the U.S. semiconductor industry over the next decade. As of this writing, the Act awaits approval in the House of Representatives. Our INET working paper “When the CHIPS are Down,” documents in some detail a curious paradox: Most of the SIA corporate members now lobbying for the CHIPS for America Act have squandered past support that the U.S. semiconductor industry has received from the U.S. government for decades by using their corporate cash to do buybacks to boost their own companies’ stock prices. Among the SIA corporate signatories of a letter to President Biden in February 2021, the five largest stock repurchasers—Intel, IBM, Qualcomm, Texas Instruments, and Broadcom—did a combined $249 billion in buybacks over the decade 2011-2020, equal to 71 percent of their profits and almost five times the subsidies over the next decade for which the SIA is lobbying.

In addition, among the members of the Semiconductors in America Coalition (SIAC), formed specifically in May 2021 to lobby Congress for the passage of the CHIPS for America Act, are Apple, Microsoft, Cisco, and Google. These four firms spent a combined $633 billion on buybacks during 2011-2020. That is about 12 times the government subsidies provided under the CHIPS for America Act to support semiconductor fabrication in the United States in the upcoming decade. Do these companies need $52 billion in subsidies from U.S. taxpayers to give them incentives to invest in semiconductor fabs?

The main purpose of these hundreds of billions of dollars in buybacks has been to give boosts to the stock prices of the repurchasing companies. As a result of buybacks, a company’s stock price increases a) if, as is typically the case, stock traders bid up the price when a company announces a repurchase program giving the CEO and CFO the authority (but not the obligation) to do a certain value of open-market repurchases (say, $10 billion) over a certain time period (say, three years); b) when, at the direction of the CFO, the actual execution of buybacks by the company’s broker on any particular day or series of days increases the market demand for the company’s shares; and c) if, with the release of the company’s quarterly financial report, the increase in the company’s earnings per share (EPS) because of the reduction in shares outstanding prompts stock traders to bid up the price of the company’s stock even more.

From October 2012 through June 2021, Apple alone spent an astounding $444 billion on buybacks, equal to 87 percent of its net income. That is in addition to another $114 billion paid out as dividends, representing an additional 22 percent of net income, over these eight and three-quarter years. With just a fraction of those funds wasted on buybacks, Apple could have invested directly in a state-of-the-art fab to produce its own chips on U.S. soil.

Back in August 2010, electronics journalist Mark LaPedus published a column, addressed to Apple CEO Steve Jobs, entitled “Apple should build a fab.” At the time, Apple was reliant for chip fabrication on its emerging smartphone competitor, Samsung Electronics. LaPedus recognized that “in an age when real men go fabless, I concede it's an unconventional idea. You might think it's absurd. But an Apple A4 fab today could keep the iProduct franchise in hay—and Samsung at bay.”

In August 2011, two months before he passed away, Jobs had handed over the CEO position to Tim Cook, the Apple executive who had added value to the company by outsourcing manufacturing of devices to Hon Hai, enabling the Taiwanese company’s Foxconn subsidiary in China to emerge as the world’s leading electronics manufacturing services provider. Under Cook, Apple shifted its chip-fabrication contract from Samsung to Taiwan Semiconductor Manufacturing Company (TSMC), the pioneer in the “pure play” foundry model, which, largely because of Apple’s contract, is now the world leader.

This past April, TSMC announced plans to invest $100 billion in fabs over the next three years, including a $12-billion 5nm facility in Arizona to fabricate Apple’s M-series processors. In potentially providing $52 billion of taxpayers’ money to support the U.S. semiconductor industry under the CHIPS for America Act, federal lawmakers might contemplate the fact that TSMC’s multiyear investment of $12 billion in a state-of-the-art fab in Arizona pales in comparison to the vast sums that Apple has been routinely spending on buybacks: $73 billion in 2018, $69 billion in 2019, $72 billion in 2020, and $66 billion in the first nine months of 2021. A country, never mind one enormously rich company, could have built a lot of state-of-the-art fabs with all that cash.

As a key part of its trade war with China, one year ago the Trump Administration coerced TSMC to cease manufacturing chips for Huawei Technologies, which had emerged the previous year as the world’s leading smartphone company, ahead of Samsung and Apple. In 2019, Apple had accounted for 24 percent of TSMC’s revenues and Hi-Silicon, Huawei’s wholly-owned chip-design subsidiary, 15 percent. In the third quarter of 2020, TSMC began shipping smartphone chips to the Chinese company produced on the fabricator’s 5nm technology. In that same quarter, 59 percent of TSMC’s revenues came from North America, followed by 22 percent from China. In the fourth quarter of 2020, revenues from North America soared to 73 percent of TSMC’s total, while those from China plummeted to six percent, as TSMC complied with U.S. government directives to cut off Huawei’s chip supply.

At the same time, 5nm wafer revenue, predominantly from the fabrication of the most advanced smartphone processors, which had been zero percent of TSMC’s total in 2Q20 and eight percent in 3Q20, jumped to 20 percent in 4Q20. In supporting TSMC’s revenues and profits by increasing its purchase of 5nm chips, Apple in effect partnered with the U.S. government to demolish the smartphone business of Huawei, its prime global competitor.

The key weapon that the U.S. government used to force TSMC to cut off Huawei was the credible threat that leading U.S. semiconductor equipment companies—most notably Applied Materials, Lam Research, and KLA—would otherwise withhold sales of their critical products to the Taiwanese foundry. These three companies, which rank #1, #3, and #5 respectively in the global chip-equipment industry, grew immensely in the 1990s, with support from Sematech, a non-profit consortium of 14 leading U.S. semiconductor companies that received $500 million from the U.S. government between 1989 and 1996 in response to Japanese competition in the machinery segment of the industry.

During the 1990s and into the 2000s, Applied Materials, Lam Research, and KLA became innovative world leaders by retaining all their profits and reinvesting in productive capabilities. From the mid-2000s, however, they all caught the American financialization disease. Over the decade 2011-2020, the three companies combined did $30 billion in buybacks, equal to 76 percent of their profits, while also distributing 35 percent of profits as dividends. Our research suggests that if these companies remain focused on using their profits to prop up their stock prices, innovative equipment suppliers, most likely based outside the United States, will take over the segment’s top spots in the next decade or two.

In providing the U.S. semiconductor industry with $52 billion in subsidies under the CHIPS for America Act, Congress could require the SIA and SIAC to extract pledges from its member corporations that they will cease doing stock buybacks as open-market repurchases over the next ten years. President Biden should be open to this idea. Exactly five years ago, as vice president in the Obama administration, he published an op-ed in the Wall Street Journal that was highly critical of buybacks, stating that “government should…take a look at regulations that promote share buybacks, tax laws that discourage long-term investment and corporate reporting standards that fail to account for long-run growth. The future of the economy depends on it.” A moratorium on buybacks by U.S. tech companies could also be a first step in rescinding Securities and Exchange Commission Rule 10b-18, which has since 1982 been a major cause of extreme income inequality and loss of global industrial competitiveness in the United States.

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