The US CDC estimates that SARS-CoV-2 has infected more than 100 million Americans, and evidence is mounting that natural immunity is at least as protective as vaccination. Yet public health leadership says everyone needs the vaccine. Jennifer Block investigates
When the vaccine rollout began in mid-December 2020, more than one quarter of Americans—91 million—had been infected with SARS-CoV-2, according to a US Centers for Disease Control and Prevention (CDC) estimate.1 As of this May, that proportion had risen to more than a third of the population, including 44% of adults aged 18-59 (table 1)
The substantial number of infections, coupled with the increasing scientific evidence that natural immunity was durable, led some medical observers to ask why natural immunity didn’t seem to be factored into decisions about prioritising vaccination.234
“The CDC could say [to people who had recovered], very well grounded in excellent data, that you should wait 8 months,” Monica Gandhi, an infectious disease specialist at University of California San Francisco, told Medpage Today in January. She suggested authorities ask people to “please wait your turn.”4
Others, such as Icahn School of Medicine virologist and researcher Florian Krammer, argued for one dose in those who had recovered. “This would also spare individuals from unnecessary pain when getting the second dose and it would free up additional vaccine doses,” he told the New York Times.5
“Many of us were saying let’s use [the vaccine] to save lives, not to vaccinate people already immune,” says Marty Makary, a professor of health policy and management at Johns Hopkins University.
Still, the CDC instructed everyone, regardless of previous infection, to get fully vaccinated as soon as they were eligible: natural immunity “varies from person to person” and “experts do not yet know how long someone is protected,” the agency stated on its website in January.6 By June, a Kaiser Family Foundation survey found that 57% of those previously infected got vaccinated.7
As more US employers, local governments, and educational institutions issue vaccine mandates that make no exception for those who have had covid-19,8 questions remain about the science and ethics of treating this group of people as equally vulnerable to the virus—or as equally threatening to those vulnerable to covid-19—and to what extent politics has played a role.
The evidence
“Starting from back in November, we’ve had a lot of really important studies that showed us that memory B cells and memory T cells were forming in response to natural infection,” says Gandhi. Studies are also showing, she says, that these memory cells will respond by producing antibodies to the variants at hand.91011
Gandhi included a list of some 20 references on natural immunity to covid in a long Twitter thread supporting the durability of both vaccine and infection induced immunity.12 “I stopped adding papers to it in December because it was getting so long,” she tells The BMJ.
But the studies kept coming. A National Institutes of Health (NIH) funded study from La Jolla Institute for Immunology found “durable immune responses” in 95% of the 200 participants up to eight months after infection.13 One of the largest studies to date, published in Science in February 2021, found that although antibodies declined over 8 months, memory B cells increased over time, and the half life of memory CD8+ and CD4+ T cells suggests a steady presence.9
Real world data have also been supportive.14 Several studies (in Qatar,15 England,16 Israel,17 and the US18) have found infection rates at equally low levels among people who are fully vaccinated and those who have previously had covid-19. Cleveland Clinic surveyed its more than 50 000 employees to compare four groups based on history of SARS-CoV-2 infection and vaccination status.18 Not one of over 1300 unvaccinated employees who had been previously infected tested positive during the five months of the study. Researchers concluded that that cohort “are unlikely to benefit from covid-19 vaccination.” In Israel, researchers accessed a database of the entire population to compare the efficacy of vaccination with previous infection and found nearly identical numbers. “Our results question the need to vaccinate previously infected individuals,” they concluded.17
As covid cases surged in Israel this summer, the Ministry of Health reported the numbers by immunity status. Between 5 July and 3 August, just 1% of weekly new cases were in people who had previously had covid-19. Given that 6% of the population are previously infected and unvaccinated, “these numbers look very low,” says Dvir Aran, a biomedical data scientist at the Technion–Israel Institute of Technology, who has been analysing Israeli data on vaccine effectiveness and provided weekly ministry reports to The BMJ. While Aran is cautious about drawing definitive conclusions, he acknowledged “the data suggest that the recovered have better protection than people who were vaccinated.”
But as the delta variant and rising case counts have the US on edge, renewed vaccination incentives and mandates apply regardless of infection history.8 To attend Harvard University or a Foo Fighters concert or enter indoor venues in San Francisco and New York City, you need proof of vaccination. The ire being directed at people who are unvaccinated is also indiscriminate—and emanating from America’s highest office. In a recent speech to federal intelligence employees who, along with all federal workers, will be required to get vaccinated or submit to regular testing, President Biden left no room for those questioning the public health necessity or personal benefit of vaccinating people who have had covid-19: “We have a pandemic because of the unvaccinated ... So, get vaccinated. If you haven’t, you’re not nearly as smart as I said you were.”
Staying firm
Other countries do give past infection some immunological currency. Israel recommends that people who have had covid-19 wait three months before getting one mRNA vaccine dose and offers a “green pass” (vaccine passport) to those with a positive serological result regardless of vaccination.19 In the European Union, people are eligible for an EU digital covid certificate after a single dose of an mRNA vaccine if they have had a positive test result within the past six months, allowing travel between 27 EU member states.20 In the UK, people with a positive polymerase chain reaction (PCR) test result can obtain the NHS covid pass up until 180 days after infection.21
Although it’s too soon to say whether these systems are working smoothly or mitigating spread, the US has no category for people who have been infected. The CDC still recommends a full vaccination dose for all, which is now being mirrored in mandates. A spokesperson told The BMJ that “the immune response from vaccination is more predictable” and that based on current evidence, antibody responses after infection “vary widely by individual,” though studies are ongoing to “learn how much protection antibodies from infection may provide and how long that protection lasts.”
In June, Peter Marks, director of the Food and Drug Administration’s Center for Biologics Evaluation and Research, which regulates vaccines, went a step further and stated: “We do know that the immunity after vaccination is better than the immunity after natural infection.” In an email, an FDA spokesperson said Marks’s comment was based on a laboratory study of the binding breadth of Moderna vaccine induced antibodies.22 The research did not measure any clinical outcomes. Marks added, referring to antibodies, that “generally the immunity after natural infection tends to wane after about 90 days.”23
“It appears from the literature that natural infection provides immunity, but that immunity is seemingly not as strong and may not be as long lasting as that provided by the vaccine,” Alfred Sommer, dean emeritus of the Johns Hopkins Bloomberg School of Public Health tells The BMJ.
But not everyone agrees with this interpretation. “The data we have right now suggests that there probably isn’t a whole lot of difference” in terms of immunity to the spike protein, says Matthew Memoli, director of the Laboratory of Infectious Diseases Clinical Studies at the NIH, who spoke to The BMJ in a personal capacity.
Memoli highlights real world data such as the Cleveland Clinic study18 and points out that while “vaccines are focused on only that tiny portion of immunity that can be induced” by the spike, someone who has had covid-19 was exposed to the whole virus, “which would likely offer a broader based immunity” that would be more protective against variants. The laboratory study offered by the FDA22 “only has to do with very specific antibodies to a very specific region of the virus [the spike],” says Memoli. “Claiming this as data supporting that vaccines are better than natural immunity is shortsighted and demonstrates a lack of understanding of the complexity of immunity to respiratory viruses.”
Antibodies
Much of the debate pivots on the importance of sustained antibody protection. In April, Anthony Fauci told US radio host Maria Hinajosa that people who have had covid-19 (including Hinajosa) still need to be “boosted” by vaccination because “your antibodies will go sky high.”
“That’s still what we’re hearing from Dr Fauci—he’s a strong believer that higher antibody titres are going to be more protective against the variants,” says Jeffrey Klausner, a clinical professor of preventive medicine at the University of Southern California and former CDC medical officer, who has spoken out in favour of treating prior infection as equivalent to vaccination, with “the same societal status.”3 Klausner conducted a systematic review of 10 studies on reinfection and concluded that the “protective effect” of a previous infection “is high and similar to the protective effect of vaccination.”
In vaccine trials, antibodies are higher in participants who were seropositive at baseline than in those who were seronegative.24 However, Memoli questions the importance: “We don’t know that that means it’s better protection.”
Former CDC director Tom Frieden, a proponent of universal vaccination, echoes that uncertainty: “We don’t know that antibody level is what determines protection.”
Gandhi and others have been urging reporters away from antibodies as the defining metric of immunity. “It is accurate that your antibodies will go down” after natural infection, she says—that’s how the immune system works. If antibodies didn’t clear from our bloodstream after we recover from a respiratory infection, “our blood would be thick as molasses.”
“The real memory in our immune system resides in the [T and B] cells, not in the antibodies themselves,” says Patrick Whelan, a paediatric rheumatologist at University of California, Los Angeles. He points out that his sickest covid-19 patients in intensive care, including children with multisystem inflammatory syndrome, have “had loads of antibodies ... So the question is, why didn’t they protect them?”
Antonio Bertoletti, a professor of infectious disease at Duke-NUS Medical School in Singapore, has conducted research that indicates T cells may be more important than antibodies. Comparing the T cell response in people with symptomatic versus asymptomatic covid-19, Bertoletti’s team found them to be identical, suggesting that the severity of infection does not predict strength of resulting immunity and that people with asymptomatic infections “mount a highly functional virus specific cellular immune response.”25
Already complicated rollout
While some argue that the pandemic strategy should not be “one size fits all,” and that natural immunity should count, other public health experts say universal vaccination is a more quantifiable, predictable, reliable, and feasible way to protect the population.
Frieden told The BMJ that the question of leveraging natural immunity is a “reasonable discussion,” one he had raised informally with the CDC at start of rollout. “I thought from a rational standpoint, with limited vaccine available, why don’t you have the option” for people with previous infection to defer until there was more supply, he says. “I think that would have been a rational policy. It would have also made rollout, which was already too complicated, even more complicated.”
Most infections were never diagnosed, Frieden points out, and many people may have assumed they had been infected when they hadn’t. Add to that false positive results, he says. Had the CDC given different directives and vaccine schedules based on prior infection, it “wouldn’t have done much good and might have done some harm.”
Klausner, who is also a medical director of a US testing and vaccine distribution company, says he initiated conversations about offering a fingerprick antibody screen for people with suspected exposure before vaccination, so that doses could be used more judiciously. But “everyone concluded it was just too complicated.”
“It’s a lot easier to put a shot in their arm,” says Sommer. “To do a PCR test or to do an antibody test and then to process it and then to get the information to them and then to let them think about it—it’s a lot easier to just give them the damn vaccine.” In public health, “the primary objective is to protect as many people as you can,” he says. “It’s called collective insurance, and I think it’s irresponsible from a public health perspective to let people pick and choose what they want to do.”
But Klausner, Gandhi, and others raise the question of fairness for the millions of Americans who already have records of positive covid test results—the basis for “recovered” status in Europe—and equity for those at risk who are waiting to get their first dose (an argument being raised anew as US officials announce boosters while the virus spreads in countries lacking vaccine supply). For people who did not have a confirmed positive result but suspected previous infection, reliable antibody tests have been accessible “at least since April,” according to Klausner, though in May, the FDA announced that “antibody tests should not be used to evaluate a person’s level of immunity or protection from covid-19 at any time.”26
Unlike Europe, the US doesn’t have a national certificate or vaccination requirement, so defenders of natural immunity have simply advocated for more targeted recommendations and screening availability—and that mandates allow for exemptions. Logistics aside, a recognition of existing immunity would have fundamentally changed the target vaccination calculations and would also affect the calculations on boosters. “As we continued to put effort into vaccination and set targets, it became apparent to me that people were forgetting that herd immunity is formed by both natural immunity and vaccine immunity,” says Klausner.
Gandhi thinks logistics is only part of the story. “There’s a very clear message out there that ‘OK, well natural infection does cause immunity but it’s still better to get vaccinated,’ and that message is not based on data,” says Gandhi. “There’s something political going on around that.”
Politics of natural immunity
Early in the pandemic, the question of natural immunity was on the mind of Ezekiel Emanuel, a bioethicist at the University of Pennsylvania and senior fellow at the liberal think tank Center for American Progress, who later became a covid adviser to President Biden. He emailed Fauci before dawn on 4 March 2020. Within a few hours, Fauci wrote back: “you would assume that their [sic] would be substantial immunity post infection.”27
That was before natural immunity started to be promoted by Republic politicians. In May 2020, Kentucky senator and physician Rand Paul asserted that since he already had the virus, he didn’t need to wear a mask. He has been the most vocal since, arguing that his immunity exempted him from vaccination. Wisconsin senator Ron Johnson and Kentucky representative Thomas Massie have also spoken out. And then there was President Trump, who tweeted last October that his recovery from covid-19 rendered him “immune” (which Twitter labelled “misleading and potentially harmful information”).
Another polarising factor may have been the Great Barrington declaration of October 2020, which argued for a less restrictive pandemic strategy that would help build herd immunity through natural infections in people at minimal risk.28 The John Snow memorandum, written in response (with signatories including Rochelle Walensky, who went on to head the CDC), stated “there is no evidence for lasting protective immunity to SARS-CoV-2 following natural infection.”29 That statement has a footnote to a study of people who had recovered from covid-19, showing that blood antibody levels wane over time.
More recently, the CDC made headlines with an observational study aiming to characterise the protection a vaccine might give to people with past infections. Comparing 246 Kentuckians who had subsequent reinfections with 492 controls who had not, the CDC concluded that those who were unvaccinated had more than twice the odds of reinfection.30 The study notes the limitation that the vaccinated are “possibly less likely to get tested. Therefore, the association of reinfection and lack of vaccination might be overestimated.” In announcing the study, Walensky stated: “If you have had covid-19 before, please still get vaccinated.”31
“If you listen to the language of our public health officials, they talk about the vaccinated and the unvaccinated,” Makary tells The BMJ. “If we want to be scientific, we should talk about the immune and the non-immune.” There’s a significant portion of the population, Makary says, who are saying, “‘Hey, wait, I’ve had [covid].’ And they’ve been blown off and dismissed.”
Different risk-benefit analysis?
For Frieden, vaccinating people who have already had covid-19 is, ultimately, the most responsible policy right now. “There’s no doubt that natural infection does provide significant immunity for many people, but we’re operating in an environment of imperfect information, and in that environment the precautionary principle applies—better safe than sorry.”
“In public health you are always dealing with some level of unknown,” says Sommer. “But the bottom line is you want to save lives, and you have to do what the present evidence, as weak as it is, suggests is the strongest defence with the least amount of harm.”
But others are less certain.
“If natural immunity is strongly protective, as the evidence to date suggests it is, then vaccinating people who have had covid-19 would seem to offer nothing or very little to benefit, logically leaving only harms—both the harms we already know about as well as those still unknown,” says Christine Stabell Benn, vaccinologist and professor in global health at the University of Southern Denmark. The CDC has acknowledged the small but serious risks of heart inflammation and blood clots after vaccination, especially in younger people. The real risk in vaccinating people who have had covid-19 “is of doing more harm than good,” she says.
A large study in the UK32 and another that surveyed people internationally33 found that people with a history of SARS-CoV-2 infection experienced greater rates of side effects after vaccination. Among 2000 people who completed an online survey after vaccination, those with a history of covid-19 were 56% more likely to experience a severe side effect that required hospital care.33
Patrick Whelan, of UCLA, says the “sky high” antibodies after vaccination in people who were previously infected may have contributed to these systemic side effects. “Most people who were previously ill with covid-19 have antibodies against the spike protein. If they are subsequently vaccinated, those antibodies and the products of the vaccine can form what are called immune complexes,” he explains, which may get deposited in places like the joints, meninges, and even kidneys, creating symptoms.
Other studies suggest that a two dose regimen may be counterproductive.34 One found that in people with past infections, the first dose boosted T cells and antibodies but that the second dose seemed to indicate an “exhaustion,” and in some cases even a deletion, of T cells.34 “I’m not here to say that it’s harmful,” says Bertoletti, who coauthored the study, “but at the moment all the data are telling us that it doesn’t make any sense to give a second vaccination dose in the very short term to someone who was already infected. Their immune response is already very high.”
Despite the extensive global spread of the virus, the previously infected population “hasn’t been studied well as a group,” says Whelan. Memoli says he is also unaware of any studies examining the specific risks of vaccination for that group. Still, the US public health messaging has been firm and consistent: everyone should get a full vaccine dose.
“When the vaccine was rolled out the goal should have been to focus on people at risk, and that should still be the focus,” says Memoli. Such risk stratification may have complicated logistics, but it would also require more nuanced messaging. “A lot of public health people have this notion that if the public is told that there’s even the slightest bit of uncertainty about a vaccine, then they won’t get it,” he says. For Memoli, this reflects a bygone paternalism. “I always think it’s much better to be very clear and honest about what we do and don’t know, what the risks and benefits are, and allow people to make decisions for themselves.”
INDIA IPPON DESU
Saturday, September 25, 2021
HSBC bet the bank on China, now its paying the price
Posted on September 24, 2021 by Nick Corbishley
The UK’s biggest bank is exposed to Evergrande and the Chinese real estate market. It’s also trapped in the middle of an escalating economic war between the world’s two superpowers.
“I’d be naive to think that the turmoil in the market doesn’t have the potential to have second-order and third-order impact. Clearly with the changes that are taking place in the Evergrande situation, it’s concerning,” HSBC CEO Noel Quinn said on Wednesday at a Bank of America conference. In a webcast on HSBC’s website Quinn said he saw no reason to worry about HSBC’s loan exposure to Chinese commercial real estate, referring to a review of the bank’s provisions for distressed loans in the sector.
«You wouldn’t have seen anything in that, that indicated we were concerned about our CRE exposure in China».
HSBC’s asset management arm is among the largest foreign holders of Evergrande debt, with a little over $200 million of its dollar bonds, according to a fund analysis report by Morningstar. And dollar bondholders seem to be pretty low down in the pecking order of creditors. Today (Friday), Evergrande missed an interest deadline on a dollar-denominated bond worth $83.5 million without even issuing a public statement. The firm, now in uncharted waters, enters a 30-day grace period. If it doesn’t make the payment in that time, it will have defaulted.
Doubling Down
Interestingly, some banks, including HSBC, have been doubling down on Evergrande’s debt even as concerns about the company’s financial health grew, perhaps in the (seemingly mistaken) belief that when push came to shove Beijing would bail them out. Morningstar Direct data found that three Asian high-yield funds, belonging to UBS, HSBC and Blackrock, have been accumulating more units of Evergrande bonds over the past year. As the FT reported Thursday, the growing crisis at Evergrande is also sparking a sharp sell off of other high-risk Asian bonds, to which HSBC is also probably exposed. Real estate makes up 42% Asia’s high-yield bond market, with most of the borrowing coming from China.
Big developers such as Fantasia, R&F, Suna, China Aoyuan are already in big trouble. This is causing difficulties for some of the Chinese banks that have helped finance the sector’s last two decades of high-octane growth and unfettered speculation. Those banks, with some 50 trillion yuan ($7.7 trillion) of outstanding loans to developers and home buyers, have already been hit by a surge in defaults as authorities have escalated their curbs on the real estate sector, reports Bloomberg.
In late August ICBC said that its non-performing loans to real estate companies almost doubled in the first half of the year, while troubled loans to the sector at China Construction Bank jumped by 28 percent. China Merchants Bank recorded an almost four-fold jump in bad loans to real estate. It’s hard to imagine that HSBC is totally immune to these developments. It clearly has exposure to China’s real estate market, including to buyers of uncompleted Evergrande residential projects. It is also probably no coincidence that HSBC’s shares have fallen 8% over the past four months, as Evergrande’s crisis has intensified.
But HSBC’s problems in China extend far beyond its exposure to Evergrande and the Chinese real estate market. HSBC’s biggest problem is arguably political, or to be more precise geopolitical.
Betting the Bank on China
Over the course of the last five or so years HSBC has bet the bank (pun intended) on China’s fast-growth economy while staging a strategic retreat from other markets. But China’s economy is beginning to look a bit fragile, as the Chinese government tries to stabilise the onshore property market, which is likely to be a long, slow, painful process. Also looking increasingly fragile is HSBC’s position in Hong Kong and mainland China
Despite being headquartered in the UK, HSBC is first and foremost an Asian bank — and always has been. Like its UK-based arch-rival Standard Chartered, it cut its teeth in Greater China in the 19th century (largely laundering the proceeds from the British East Indian company’s opium trade). And it remains a primarily Asian bank today. In 2020, its Mainland and Hong Kong operations accounted for 39% of its annual $50 billion in revenue, while the United Kingdom, its second largest market, brought in 28%.
The bank announced earlier this year plans to sell off its retail banking units in France and the United States and scale back its presence in some emerging markets in order to accelerate its eastward pivot. But there’s one big problem with this plan, as I reported for WOLF STREET in July: its success rests squarely on the bank’s ability to maintain good relations with the Chinese government, while also keeping the governments of the US and the UK on its side. In the middle of ratcheting tensions between China and the US (and by extension the UK), that is proving to be a tough proposition.
As geopolitical tensions have escalated between the US and China, HSBC has had to walk a tightrope in its relations with China on the one hand and Washington and London on the other. The lenders’ travails reveal a core challenge for multinational firms operating in China: the market is vital to their growth prospects, but Western firms doing business there increasingly risk being mired in the ratcheting tensions between Beijing and the West.
Like Standard Chartered, HSBC has thrown its support behind China’s imposition of security legislation on Hong Kong. It has frozen the assets of pro-democracy politicians and protesters, at the behest of Beijing. The bank has complied with just about everything Beijing has asked of it. But it’s still in Beijing’s bad books, partly no doubt due to the fact that it is, officially speaking, a UK-based bank, and the UK just signed a security pact with the US and Australia aimed at countering Chinese influence in the Asia Pacific.
Also, China still hasn’t fully forgiven HSBC for ratting out Chinese telecom giant Huawei to the U.S. Department of Justice for breaching U.S. sanctions on Iran. The information provided by HSBC led to the arrest of Meng Wanzhou, Huawei’s chief financial officer and daughter of the company’s founder, in Vancouver in 2018. Coincidentally, she was released just today and will be able to return to China after almost three years under house arrest. HSBC representatives claimed that they had little choice but to cooperate with the U.S. investigation — a legacy of the bank’s highly controversial deferred prosecution agreement with the DOJ in 2012, after being found guilty of breaching sanctions and laundering money for Mexican drug cartels.
In recent months Beijing has expressed its displeasure with the bank by allegedly ceasing one-on-one meetings with senior HSBC bankers as well as sidelining HSBC’s investment banking operations in China. In total, Reuters identified nine state-owned enterprises that have ended or cut back on their business with HSBC as a result of the bank’s falling out of favor with Beijing.
Anti-Sanctions Law
China has also introduced new anti-sanctions legislation aimed at counteracting what it perceives as Western economic bullying. The new law allows authorities to punish companies that comply with foreign sanctions. As The Diplomat notes, it is not the first to take such action. The EU has also enacted policies specifically aimed at circumventing certain sanctions regimes. The passage of China’s new laws, in June, does however suggest that life is going to get even more difficult for Western “companies that have a large market presence within China”:
Some of the potential responses spelled out in the new legislation are asset freezes, visa bans, business prohibitions, or deportations. One provision that has attracted particular attention is the ability for such measures to target not merely the entity complying with foreign sanctions or the policymakers that designed them, but family members of those parties or corporate leaders in their individual capacities as well. Further, those enforcing Western sanctions in China can be subject to lawsuits by Chinese companies that are harmed. In those instances, the pressure will be on top brass at multinational corporations with large scales of business in China to decide whether or not to comply with Western sanctions targeted at Chinese entities. In terms of the direct effects this may have on businesses, only time will tell. It is possible that the countermeasures may primarily target foreign politicians that hammer sanctions through legislative houses rather than corporate executives, but that is far from a certainty.
Given the flexibility of the policy and its discretionary implementation, it is quite possible that the overall level of enforcement may reflect the ebbs and flows of a given bilateral relationship. Additionally, it will be much tougher for enterprises that rely heavily on the Chinese market in driving revenue growth to avoid considering the potential impact of complying with sanctions against Chinese entities. The carrot of the Chinese marketplace may end up proving large and sweet enough to induce some businesses to either pressure their home states to relent on sanctions or elect not to enforce them in practice on Chinese soil. It is further possible we could see some large multinationals attempt to separate their China division from their other subgroups through complex corporate structures that might be able to weave around the sanctions. Of course, all of those seemingly crafty moves would run the risk of blowback back home and potential repercussions for noncompliance. All of this represents a delicate balancing act that must take into consideration the specific circumstances faced by an individual enterprise.
China’s anti-sanction legislation was first introduced on the mainland in June. It was scheduled to be extended to Hong Kong and Macau in August, sparking fears about the effects it would have on Hong Kong’s standing as a global business hub. In the end, Beijing put the plans on hold, apparently out of concern about the potential economic impact. But the reprieve is likely to be only temporary.
Just today, China’s Foreign Ministry released a fact sheet outlining 102 examples of US interference in China’s Hong Kong affairs since 2019, including imposing sanctions, smearing the Hong Kong government and police force and shielding and supporting anti-China forces that attempted to destabilize Hong Kong. According to Global Times, an outlet closely tied to the Chinese Communist Party, the fact sheet demonstrates the need for the anti-sanctions legislation: “since the US used legal means to interfere in Hong Kong affairs, Hong Kong needs to resort to the same means to protect itself and national security.”
Clearly relations between China and the US are not getting any better. If Evergrande does default on its US dollar bonds, leaving foreign investors including big banks holding the bag, they’re going to get even worse. And the worse they get, the harder it will become for HSBC (and other Western banks and companies with a large market presence in China) to keep both sides of the escalating economic war between Beijing and Washington happy.
The UK’s biggest bank is exposed to Evergrande and the Chinese real estate market. It’s also trapped in the middle of an escalating economic war between the world’s two superpowers.
“I’d be naive to think that the turmoil in the market doesn’t have the potential to have second-order and third-order impact. Clearly with the changes that are taking place in the Evergrande situation, it’s concerning,” HSBC CEO Noel Quinn said on Wednesday at a Bank of America conference. In a webcast on HSBC’s website Quinn said he saw no reason to worry about HSBC’s loan exposure to Chinese commercial real estate, referring to a review of the bank’s provisions for distressed loans in the sector.
«You wouldn’t have seen anything in that, that indicated we were concerned about our CRE exposure in China».
HSBC’s asset management arm is among the largest foreign holders of Evergrande debt, with a little over $200 million of its dollar bonds, according to a fund analysis report by Morningstar. And dollar bondholders seem to be pretty low down in the pecking order of creditors. Today (Friday), Evergrande missed an interest deadline on a dollar-denominated bond worth $83.5 million without even issuing a public statement. The firm, now in uncharted waters, enters a 30-day grace period. If it doesn’t make the payment in that time, it will have defaulted.
Doubling Down
Interestingly, some banks, including HSBC, have been doubling down on Evergrande’s debt even as concerns about the company’s financial health grew, perhaps in the (seemingly mistaken) belief that when push came to shove Beijing would bail them out. Morningstar Direct data found that three Asian high-yield funds, belonging to UBS, HSBC and Blackrock, have been accumulating more units of Evergrande bonds over the past year. As the FT reported Thursday, the growing crisis at Evergrande is also sparking a sharp sell off of other high-risk Asian bonds, to which HSBC is also probably exposed. Real estate makes up 42% Asia’s high-yield bond market, with most of the borrowing coming from China.
Big developers such as Fantasia, R&F, Suna, China Aoyuan are already in big trouble. This is causing difficulties for some of the Chinese banks that have helped finance the sector’s last two decades of high-octane growth and unfettered speculation. Those banks, with some 50 trillion yuan ($7.7 trillion) of outstanding loans to developers and home buyers, have already been hit by a surge in defaults as authorities have escalated their curbs on the real estate sector, reports Bloomberg.
In late August ICBC said that its non-performing loans to real estate companies almost doubled in the first half of the year, while troubled loans to the sector at China Construction Bank jumped by 28 percent. China Merchants Bank recorded an almost four-fold jump in bad loans to real estate. It’s hard to imagine that HSBC is totally immune to these developments. It clearly has exposure to China’s real estate market, including to buyers of uncompleted Evergrande residential projects. It is also probably no coincidence that HSBC’s shares have fallen 8% over the past four months, as Evergrande’s crisis has intensified.
But HSBC’s problems in China extend far beyond its exposure to Evergrande and the Chinese real estate market. HSBC’s biggest problem is arguably political, or to be more precise geopolitical.
Betting the Bank on China
Over the course of the last five or so years HSBC has bet the bank (pun intended) on China’s fast-growth economy while staging a strategic retreat from other markets. But China’s economy is beginning to look a bit fragile, as the Chinese government tries to stabilise the onshore property market, which is likely to be a long, slow, painful process. Also looking increasingly fragile is HSBC’s position in Hong Kong and mainland China
Despite being headquartered in the UK, HSBC is first and foremost an Asian bank — and always has been. Like its UK-based arch-rival Standard Chartered, it cut its teeth in Greater China in the 19th century (largely laundering the proceeds from the British East Indian company’s opium trade). And it remains a primarily Asian bank today. In 2020, its Mainland and Hong Kong operations accounted for 39% of its annual $50 billion in revenue, while the United Kingdom, its second largest market, brought in 28%.
The bank announced earlier this year plans to sell off its retail banking units in France and the United States and scale back its presence in some emerging markets in order to accelerate its eastward pivot. But there’s one big problem with this plan, as I reported for WOLF STREET in July: its success rests squarely on the bank’s ability to maintain good relations with the Chinese government, while also keeping the governments of the US and the UK on its side. In the middle of ratcheting tensions between China and the US (and by extension the UK), that is proving to be a tough proposition.
As geopolitical tensions have escalated between the US and China, HSBC has had to walk a tightrope in its relations with China on the one hand and Washington and London on the other. The lenders’ travails reveal a core challenge for multinational firms operating in China: the market is vital to their growth prospects, but Western firms doing business there increasingly risk being mired in the ratcheting tensions between Beijing and the West.
Like Standard Chartered, HSBC has thrown its support behind China’s imposition of security legislation on Hong Kong. It has frozen the assets of pro-democracy politicians and protesters, at the behest of Beijing. The bank has complied with just about everything Beijing has asked of it. But it’s still in Beijing’s bad books, partly no doubt due to the fact that it is, officially speaking, a UK-based bank, and the UK just signed a security pact with the US and Australia aimed at countering Chinese influence in the Asia Pacific.
Also, China still hasn’t fully forgiven HSBC for ratting out Chinese telecom giant Huawei to the U.S. Department of Justice for breaching U.S. sanctions on Iran. The information provided by HSBC led to the arrest of Meng Wanzhou, Huawei’s chief financial officer and daughter of the company’s founder, in Vancouver in 2018. Coincidentally, she was released just today and will be able to return to China after almost three years under house arrest. HSBC representatives claimed that they had little choice but to cooperate with the U.S. investigation — a legacy of the bank’s highly controversial deferred prosecution agreement with the DOJ in 2012, after being found guilty of breaching sanctions and laundering money for Mexican drug cartels.
In recent months Beijing has expressed its displeasure with the bank by allegedly ceasing one-on-one meetings with senior HSBC bankers as well as sidelining HSBC’s investment banking operations in China. In total, Reuters identified nine state-owned enterprises that have ended or cut back on their business with HSBC as a result of the bank’s falling out of favor with Beijing.
Anti-Sanctions Law
China has also introduced new anti-sanctions legislation aimed at counteracting what it perceives as Western economic bullying. The new law allows authorities to punish companies that comply with foreign sanctions. As The Diplomat notes, it is not the first to take such action. The EU has also enacted policies specifically aimed at circumventing certain sanctions regimes. The passage of China’s new laws, in June, does however suggest that life is going to get even more difficult for Western “companies that have a large market presence within China”:
Some of the potential responses spelled out in the new legislation are asset freezes, visa bans, business prohibitions, or deportations. One provision that has attracted particular attention is the ability for such measures to target not merely the entity complying with foreign sanctions or the policymakers that designed them, but family members of those parties or corporate leaders in their individual capacities as well. Further, those enforcing Western sanctions in China can be subject to lawsuits by Chinese companies that are harmed. In those instances, the pressure will be on top brass at multinational corporations with large scales of business in China to decide whether or not to comply with Western sanctions targeted at Chinese entities. In terms of the direct effects this may have on businesses, only time will tell. It is possible that the countermeasures may primarily target foreign politicians that hammer sanctions through legislative houses rather than corporate executives, but that is far from a certainty.
Given the flexibility of the policy and its discretionary implementation, it is quite possible that the overall level of enforcement may reflect the ebbs and flows of a given bilateral relationship. Additionally, it will be much tougher for enterprises that rely heavily on the Chinese market in driving revenue growth to avoid considering the potential impact of complying with sanctions against Chinese entities. The carrot of the Chinese marketplace may end up proving large and sweet enough to induce some businesses to either pressure their home states to relent on sanctions or elect not to enforce them in practice on Chinese soil. It is further possible we could see some large multinationals attempt to separate their China division from their other subgroups through complex corporate structures that might be able to weave around the sanctions. Of course, all of those seemingly crafty moves would run the risk of blowback back home and potential repercussions for noncompliance. All of this represents a delicate balancing act that must take into consideration the specific circumstances faced by an individual enterprise.
China’s anti-sanction legislation was first introduced on the mainland in June. It was scheduled to be extended to Hong Kong and Macau in August, sparking fears about the effects it would have on Hong Kong’s standing as a global business hub. In the end, Beijing put the plans on hold, apparently out of concern about the potential economic impact. But the reprieve is likely to be only temporary.
Just today, China’s Foreign Ministry released a fact sheet outlining 102 examples of US interference in China’s Hong Kong affairs since 2019, including imposing sanctions, smearing the Hong Kong government and police force and shielding and supporting anti-China forces that attempted to destabilize Hong Kong. According to Global Times, an outlet closely tied to the Chinese Communist Party, the fact sheet demonstrates the need for the anti-sanctions legislation: “since the US used legal means to interfere in Hong Kong affairs, Hong Kong needs to resort to the same means to protect itself and national security.”
Clearly relations between China and the US are not getting any better. If Evergrande does default on its US dollar bonds, leaving foreign investors including big banks holding the bag, they’re going to get even worse. And the worse they get, the harder it will become for HSBC (and other Western banks and companies with a large market presence in China) to keep both sides of the escalating economic war between Beijing and Washington happy.
When McDonalds came to Denmark
Posted on September 25, 2021 by Yves Smith
Yves here. Forgive me if you were already well versed in how Danish workers brought McDonalds to heel, but I wasn’t, and the account is instructive. It shows what solidarity looks like, an orientation that was never that strong in the US to begin with and has been weakened even further by attacks on labor rights and neliberalism fraying community ties.
By Matt Bruenig, a lawyer, policy analyst, and founder of the People’s Policy Project. Originally published at his website
Every few months, a prominent person or publication points out that McDonalds workers in Denmark receive $22 per hour, 6 weeks of vacation, and sick pay. This compensation comes on top of the general slate of social benefits in Denmark, which includes child allowances, health care, child care, paid leave, retirement, and education through college, among other things.
In these discussions, relatively little is said about how this all came to be. This is sad because it’s a good story and because the story provides a good window into why Nordic labor markets are the way they are.
McDonalds opened its first store in Denmark in 1981. At that point, it was operating in over 20 countries and had successfully avoided unions in all but one, Sweden.
When McDonalds arrived in Denmark, the labor market was governed by a set of sectoral labor agreements that established the wages and conditions for all the workers in a given sector. Under the prevailing norms, McDonalds should have adhered to the hotel and restaurant union agreement. But they didn’t have to do so, legally speaking. The union agreement is not binding on sector employers in the same way that a contract is. You can’t sue a company for ignoring it. It is strictly “voluntary.”
McDonalds decided not to follow the union agreement and thus set up its own pay levels and work rules instead. This was a departure, not just from what Danish companies did, but even from what other similar foreign companies did. For example, Burger King, which is identical to McDonalds in all relevant respects, decided to follow the union agreement when it came to Denmark a few years earlier.
Naturally, this decision from McDonalds drew the attention of the Danish labor movement. According to the press reports, the struggle to get McDonalds to follow the hotel and restaurant workers agreement began in 1982, but the efforts were very slow at first. McDonalds maintained that it had a principled position against unions and negotiations and press overtures were unable to move them off that position.
In late 1988 and early 1989, the unions decided enough was enough and called sympathy strikes in adjacent industries in order to cripple McDonalds operations. Sixteen different sector unions participated in the sympathy strikes.
Dockworkers refused to unload containers that had McDonalds equipment in them. Printers refused to supply printed materials to the stores, such as menus and cups. Construction workers refused to build McDonalds stores and even stopped construction on a store that was already in progress but not yet complete. The typographers union refused to place McDonalds advertisements in publications, which eliminated the company’s print advertisement presence. Truckers refused to deliver food and beer to McDonalds. Food and beverage workers that worked at facilities that prepared food for the stores refused to work on McDonalds products.
In addition to wreaking havoc on McDonalds supply chains, the unions engaged in picketing and leaflet campaigns in front of McDonalds locations, urging consumers to boycott the company.
Once the sympathy strikes got going, McDonalds folded pretty quickly and decided to start following the hotel and restaurant agreement in 1989.
This is why McDonalds workers in Denmark are paid $22 per hour.
I bring this up because people say a lot of things about the economies of the Nordic countries and why they are so much more equal than ours. In this discussion, certainly the presence of unions and sector bargaining comes up, but rarely do you get a discussion of just how radically powerful and organized the Nordic unions are and have been. If you didn’t know better, you’d think the Nordic labor market is the way it is because all of the employers and workers came together and agreed that their system is better for everyone. And while it’s true of course that, on a day-to-day basis, labor relations in the countries are peaceful, lurking behind that peace is often a credible threat that the unions will crush an employer that steps out of line, not just by striking at one site or at one company, but by striking every single thing that the company touches.
We saw this most recently in Finland in 2019 when the state-owned postal service decided to cut the pay of 700 package handlers by moving them to a different sector agreement than the one they were currently being paid under. The unions responded by striking airlines, ferries, buses, trains, and ports. In the aftermath of these strikes, the pay cuts were reversed and the prime minister of the country resigned.
When I bring this up, people sometimes respond by saying that these kinds of strikes are illegal in the US. This is a true and worthwhile bit of information, but insofar as it is meant to imply that the different legal environment is what accounts for the labor radicalism, this obviously has things backwards. The laws aren’t driving the labor radicalism, but rather the labor radicalism is driving the laws.
We can see this clearly in another recent example, this time from Finland in 2018. There, the conservative government was preparing to pass a law that would make it easier for employers with 20 or fewer employees to fire workers. The stated purpose of this was to stimulate hiring by making it easier to fire and thus less risky to hire — the usual stuff.
The Finnish labor movement did not like this idea and called a massive political strike that sidelined workers in a bunch of different sectors. In response to the strike wave, the government changedthe bill so it only applied to employers with 10 or fewer employees. The strikes continued and they changed the bill again, this time so it just stated generally that courts should consider an employer’s size when adjudicating wrongful dismissal cases. This was acceptable to the unions since, according to them at least, Finnish courts already do this and so the bill was basically moot. So they stopped striking.
One can only imagine what would happen if the Finnish government tried to ban sympathy strikes in the same way the US government has here.
If we are ever going to get to Nordic levels of equality, it is really hard to imagine doing it without building a similarly powerful labor movement. You can certainly get some of the way there, such as by copying certain welfare programs, but without the unions, you’ll always be missing a key piece. And while legal and policy reforms can help build the labor movement some, the power of organized labor is not ultimately rooted in the state, but rather in the ability to halt production and wreak havoc even when the state is aligned against it.
McDonalds doesn’t pay Danes high wages because of a statutory wage floor or even because the state stepped in to enforce a collective bargaining agreement. They pay high wages because back in the 1980s, Danish unions flipped a switch and turned the whole business off, and McDonalds doesn’t want to find out whether they would do it again.
This is where we need to get to.
Yves here. Forgive me if you were already well versed in how Danish workers brought McDonalds to heel, but I wasn’t, and the account is instructive. It shows what solidarity looks like, an orientation that was never that strong in the US to begin with and has been weakened even further by attacks on labor rights and neliberalism fraying community ties.
By Matt Bruenig, a lawyer, policy analyst, and founder of the People’s Policy Project. Originally published at his website
Every few months, a prominent person or publication points out that McDonalds workers in Denmark receive $22 per hour, 6 weeks of vacation, and sick pay. This compensation comes on top of the general slate of social benefits in Denmark, which includes child allowances, health care, child care, paid leave, retirement, and education through college, among other things.
In these discussions, relatively little is said about how this all came to be. This is sad because it’s a good story and because the story provides a good window into why Nordic labor markets are the way they are.
McDonalds opened its first store in Denmark in 1981. At that point, it was operating in over 20 countries and had successfully avoided unions in all but one, Sweden.
When McDonalds arrived in Denmark, the labor market was governed by a set of sectoral labor agreements that established the wages and conditions for all the workers in a given sector. Under the prevailing norms, McDonalds should have adhered to the hotel and restaurant union agreement. But they didn’t have to do so, legally speaking. The union agreement is not binding on sector employers in the same way that a contract is. You can’t sue a company for ignoring it. It is strictly “voluntary.”
McDonalds decided not to follow the union agreement and thus set up its own pay levels and work rules instead. This was a departure, not just from what Danish companies did, but even from what other similar foreign companies did. For example, Burger King, which is identical to McDonalds in all relevant respects, decided to follow the union agreement when it came to Denmark a few years earlier.
Naturally, this decision from McDonalds drew the attention of the Danish labor movement. According to the press reports, the struggle to get McDonalds to follow the hotel and restaurant workers agreement began in 1982, but the efforts were very slow at first. McDonalds maintained that it had a principled position against unions and negotiations and press overtures were unable to move them off that position.
In late 1988 and early 1989, the unions decided enough was enough and called sympathy strikes in adjacent industries in order to cripple McDonalds operations. Sixteen different sector unions participated in the sympathy strikes.
Dockworkers refused to unload containers that had McDonalds equipment in them. Printers refused to supply printed materials to the stores, such as menus and cups. Construction workers refused to build McDonalds stores and even stopped construction on a store that was already in progress but not yet complete. The typographers union refused to place McDonalds advertisements in publications, which eliminated the company’s print advertisement presence. Truckers refused to deliver food and beer to McDonalds. Food and beverage workers that worked at facilities that prepared food for the stores refused to work on McDonalds products.
In addition to wreaking havoc on McDonalds supply chains, the unions engaged in picketing and leaflet campaigns in front of McDonalds locations, urging consumers to boycott the company.
Once the sympathy strikes got going, McDonalds folded pretty quickly and decided to start following the hotel and restaurant agreement in 1989.
This is why McDonalds workers in Denmark are paid $22 per hour.
I bring this up because people say a lot of things about the economies of the Nordic countries and why they are so much more equal than ours. In this discussion, certainly the presence of unions and sector bargaining comes up, but rarely do you get a discussion of just how radically powerful and organized the Nordic unions are and have been. If you didn’t know better, you’d think the Nordic labor market is the way it is because all of the employers and workers came together and agreed that their system is better for everyone. And while it’s true of course that, on a day-to-day basis, labor relations in the countries are peaceful, lurking behind that peace is often a credible threat that the unions will crush an employer that steps out of line, not just by striking at one site or at one company, but by striking every single thing that the company touches.
We saw this most recently in Finland in 2019 when the state-owned postal service decided to cut the pay of 700 package handlers by moving them to a different sector agreement than the one they were currently being paid under. The unions responded by striking airlines, ferries, buses, trains, and ports. In the aftermath of these strikes, the pay cuts were reversed and the prime minister of the country resigned.
When I bring this up, people sometimes respond by saying that these kinds of strikes are illegal in the US. This is a true and worthwhile bit of information, but insofar as it is meant to imply that the different legal environment is what accounts for the labor radicalism, this obviously has things backwards. The laws aren’t driving the labor radicalism, but rather the labor radicalism is driving the laws.
We can see this clearly in another recent example, this time from Finland in 2018. There, the conservative government was preparing to pass a law that would make it easier for employers with 20 or fewer employees to fire workers. The stated purpose of this was to stimulate hiring by making it easier to fire and thus less risky to hire — the usual stuff.
The Finnish labor movement did not like this idea and called a massive political strike that sidelined workers in a bunch of different sectors. In response to the strike wave, the government changedthe bill so it only applied to employers with 10 or fewer employees. The strikes continued and they changed the bill again, this time so it just stated generally that courts should consider an employer’s size when adjudicating wrongful dismissal cases. This was acceptable to the unions since, according to them at least, Finnish courts already do this and so the bill was basically moot. So they stopped striking.
One can only imagine what would happen if the Finnish government tried to ban sympathy strikes in the same way the US government has here.
If we are ever going to get to Nordic levels of equality, it is really hard to imagine doing it without building a similarly powerful labor movement. You can certainly get some of the way there, such as by copying certain welfare programs, but without the unions, you’ll always be missing a key piece. And while legal and policy reforms can help build the labor movement some, the power of organized labor is not ultimately rooted in the state, but rather in the ability to halt production and wreak havoc even when the state is aligned against it.
McDonalds doesn’t pay Danes high wages because of a statutory wage floor or even because the state stepped in to enforce a collective bargaining agreement. They pay high wages because back in the 1980s, Danish unions flipped a switch and turned the whole business off, and McDonalds doesn’t want to find out whether they would do it again.
This is where we need to get to.
Wednesday, September 22, 2021
Thursday, September 02, 2021
Has Australia Traded Away Too Much Liberty ?
How long can a democracy maintain emergency restrictions and still call itself a free country?
By Conor Friedersdorf
In a bid to keep the coronavirus out of the country, Australia’s federal and state governments imposed draconian restrictions on its citizens. Prime Minister Scott Morrison knows that the burden is too heavy. “This is not a sustainable way to live in this country,” he recently declared. One prominent civil libertarian summed up the rules by lamenting, “We’ve never seen anything like this in our lifetimes.”
Up to now one of Earth’s freest societies, Australia has become a hermit continent. How long can a country maintain emergency restrictions on its citizens’ lives while still calling itself a liberal democracy?
Australia has been testing the limits.
Before 2020, the idea of Australia all but forbidding its citizens from leaving the country, a restriction associated with Communist regimes, was unthinkable. Today, it is a widely accepted policy. “Australia’s borders are currently closed and international travel from Australia remains strictly controlled to help prevent the spread of COVID-19,” a government website declares. “International travel from Australia is only available if you are exempt or you have been granted an individual exemption.” The rule is enforced despite assurances on another government website, dedicated to setting forth Australia’s human-rights-treaty obligations, that the freedom to leave a country “cannot be made dependent on establishing a purpose or reason for leaving.”
The nation’s high court struck down a challenge to the country’s COVID-19 restrictions. “It may be accepted that the travel restrictions are harsh. It may also be accepted that they intrude upon individual rights,” it ruled. “But Parliament was aware of that.” Until last month, Australians who are residents of foreign countries were exempt from the rule so they could return to their residence. But the government tightened the restrictions further, trapping many of them in the country too.
Intrastate travel within Australia is also severely restricted. And the government of South Australia, one of the country’s six states, developed and is now testing an app as Orwellian as any in the free world to enforce its quarantine rules. People in South Australia will be forced to download an app that combines facial recognition and geolocation. The state will text them at random times, and thereafter they will have 15 minutes to take a picture of their face in the location where they are supposed to be. Should they fail, the local police department will be sent to follow up in person. “We don’t tell them how often or when, on a random basis they have to reply within 15 minutes,” Premier Steven Marshall explained. “I think every South Australian should feel pretty proud that we are the national pilot for the home-based quarantine app.”
Other states also curtailed their citizens’ liberty in the name of safety. The state of Victoria announced a curfew and suspended its Parliament for key parts of the pandemic. “To put this in context, federal and state parliaments sat during both world wars and the Spanish Flu, and curfews have never been imposed,” the scholar John Lee observed in an article for the Brookings Institution. “In responding to a question about whether he had gone too far with respect to imposing a curfew (avoiding the question of why a curfew was needed when no other state had one), Victorian Premier Daniel Andrews replied: ‘it is not about human rights. It is about human life.’”
In New South Wales, Police Minister David Elliott defended the deployment of the Australian military to enforce lockdowns, telling the BBC that some residents of the state thought “the rules didn’t apply to them.” In Sydney, where more than 5 million people have been in lockdown for more than two months, and Melbourne, the country’s second-biggest city, anti-lockdown protests were banned, and when dissenters gathered anyway, hundreds were arrested and fined, Reuters reported.
Australia is undoubtedly a democracy, with multiple political parties, regular elections, and the peaceful transfer of power. But if a country indefinitely forbids its own citizens from leaving its borders, strands tens of thousands of its citizens abroad, puts strict rules on intrastate travel, prohibits citizens from leaving home without an excuse from an official government list, mandates masks even when people are outdoors and socially distanced, deploys the military to enforce those rules, bans protest, and arrests and fines dissenters, is that country still a liberal democracy?
Enduring rules of that sort would certainly render a country a police state. In year two of the pandemic, with COVID-19 now thought to be endemic, rather than a temporary emergency the nation could avoid, how much time must pass before we must regard Australia as illiberal and unfree?
To give Australia’s approach its due, temporary restrictions on liberty were far more defensible early in the pandemic, when many countries locked down and scientists understood little about COVID-19’s attributes or trajectory. Australian leaders hoped to “flatten the curve” of infection in an effort to prevent overcrowded hospitals and degraded care, and the higher death rates that would follow. The country was also betting that, within a time period short enough that restrictions could be sustained, scientists would develop a vaccine that protected against morbidity and mortality.
As it turned out, the bet paid off. Had it behaved rationally and adequately valued liberty, a rich nation like Australia would have spent lavishly—before knowing which vaccines would turn out to be most effective—to secure an adequate supply of many options for its people. It could afford to eat the cost of any extra doses and donate them to poorer countries. Australia then could have marshaled its military and civil society to vaccinate the nation as quickly as possible, lifted restrictions more fully than Europe and the United States did, and argued that the combination of fewer deaths and the more rapid return to normalcy made their approach a net win.
Instead, Australia invested inadequately in vaccines and, once it acquired doses, was too slow to get them into arms. “Of the 16 million doses of the AstraZeneca vaccine that have been released to the government by manufacturer CSL, only about 8 million have gone into the arms of Australians,” The Age reported on August 21, citing concern about blood clots and a widespread preference for the Pfizer vaccine. “A further 1.6 million doses have been sent offshore to help regional neighbours such as Papua New Guinea, Fiji and East Timor tackle COVID-19. But about 6 million doses are yet to be used, even as more than half the nation is in lockdown due to outbreaks of the highly infectious Delta variant.” Australia’s low infection and death rates, which the country achieved both by being surrounded by water and by adopting harsh restrictions on liberty, seemed to sap its urgency when it came time to vaccinate—even though that lack of urgency meant months more of basic human rights being abrogated. In hindsight, more urgency to get jabs in arms to end the restrictions would have saved lives, because the country would have been better protected against the unexpected Delta variant.
In return for trading away their liberty, Australians gained a huge safety dividend. COVID-19 has killed 194 of every 100,000 Americans, 77 of every 100,000 Israelis, and only four of every 100,000 Australians. That low death toll is a tremendous upside. What remains to be seen is whether Australia can maintain that performance without permanently ending core attributes of life in a liberal democracy, including freedom of movement, peaceable assembly, and basic privacy.
If the country quickly reinstates its citizens’ pre-pandemic liberties, it can argue that the loss of liberty was only temporary (though some restrictions, such as a prohibition on leaving the country, would still seem needless if the goal was minimizing the spread of COVID-19 in the country). And if Australia’s death rate remains lower than Israel’s or America’s, Australian leaders can plausibly tell their citizens that the deprivation was worth it. If not, supporters will have a much harder time defending a record that includes handcuffing a small group of teenagers after they gathered for an outdoor hangout.
More important than whether or not the past can be justified is what the country does from now on. Promising murmurs are coming from some politicians. “New South Wales state Premier Gladys Berejiklian vowed to reopen the state once 70% of those 16 and older get vaccinated,” Reuters reported Sunday. “No matter what the case numbers are doing … double-dose 70% in NSW means freedom for those who are vaccinated." But in Victoria, the country’s next-most-populous state, the news organization reports that “Premier Daniel Andrews said his state’s lockdown, due to end on Thursday, will be extended, but would not say for how long.”
Because of its geography, Australia is a neighbor and an observer of authoritarian countries as varied as China and Singapore. But its own fate, too, may turn on whether its people crave the feeling of safety and security that orders from the top confer, or whether they want to be free.
By Conor Friedersdorf
In a bid to keep the coronavirus out of the country, Australia’s federal and state governments imposed draconian restrictions on its citizens. Prime Minister Scott Morrison knows that the burden is too heavy. “This is not a sustainable way to live in this country,” he recently declared. One prominent civil libertarian summed up the rules by lamenting, “We’ve never seen anything like this in our lifetimes.”
Up to now one of Earth’s freest societies, Australia has become a hermit continent. How long can a country maintain emergency restrictions on its citizens’ lives while still calling itself a liberal democracy?
Australia has been testing the limits.
Before 2020, the idea of Australia all but forbidding its citizens from leaving the country, a restriction associated with Communist regimes, was unthinkable. Today, it is a widely accepted policy. “Australia’s borders are currently closed and international travel from Australia remains strictly controlled to help prevent the spread of COVID-19,” a government website declares. “International travel from Australia is only available if you are exempt or you have been granted an individual exemption.” The rule is enforced despite assurances on another government website, dedicated to setting forth Australia’s human-rights-treaty obligations, that the freedom to leave a country “cannot be made dependent on establishing a purpose or reason for leaving.”
The nation’s high court struck down a challenge to the country’s COVID-19 restrictions. “It may be accepted that the travel restrictions are harsh. It may also be accepted that they intrude upon individual rights,” it ruled. “But Parliament was aware of that.” Until last month, Australians who are residents of foreign countries were exempt from the rule so they could return to their residence. But the government tightened the restrictions further, trapping many of them in the country too.
Intrastate travel within Australia is also severely restricted. And the government of South Australia, one of the country’s six states, developed and is now testing an app as Orwellian as any in the free world to enforce its quarantine rules. People in South Australia will be forced to download an app that combines facial recognition and geolocation. The state will text them at random times, and thereafter they will have 15 minutes to take a picture of their face in the location where they are supposed to be. Should they fail, the local police department will be sent to follow up in person. “We don’t tell them how often or when, on a random basis they have to reply within 15 minutes,” Premier Steven Marshall explained. “I think every South Australian should feel pretty proud that we are the national pilot for the home-based quarantine app.”
Other states also curtailed their citizens’ liberty in the name of safety. The state of Victoria announced a curfew and suspended its Parliament for key parts of the pandemic. “To put this in context, federal and state parliaments sat during both world wars and the Spanish Flu, and curfews have never been imposed,” the scholar John Lee observed in an article for the Brookings Institution. “In responding to a question about whether he had gone too far with respect to imposing a curfew (avoiding the question of why a curfew was needed when no other state had one), Victorian Premier Daniel Andrews replied: ‘it is not about human rights. It is about human life.’”
In New South Wales, Police Minister David Elliott defended the deployment of the Australian military to enforce lockdowns, telling the BBC that some residents of the state thought “the rules didn’t apply to them.” In Sydney, where more than 5 million people have been in lockdown for more than two months, and Melbourne, the country’s second-biggest city, anti-lockdown protests were banned, and when dissenters gathered anyway, hundreds were arrested and fined, Reuters reported.
Australia is undoubtedly a democracy, with multiple political parties, regular elections, and the peaceful transfer of power. But if a country indefinitely forbids its own citizens from leaving its borders, strands tens of thousands of its citizens abroad, puts strict rules on intrastate travel, prohibits citizens from leaving home without an excuse from an official government list, mandates masks even when people are outdoors and socially distanced, deploys the military to enforce those rules, bans protest, and arrests and fines dissenters, is that country still a liberal democracy?
Enduring rules of that sort would certainly render a country a police state. In year two of the pandemic, with COVID-19 now thought to be endemic, rather than a temporary emergency the nation could avoid, how much time must pass before we must regard Australia as illiberal and unfree?
To give Australia’s approach its due, temporary restrictions on liberty were far more defensible early in the pandemic, when many countries locked down and scientists understood little about COVID-19’s attributes or trajectory. Australian leaders hoped to “flatten the curve” of infection in an effort to prevent overcrowded hospitals and degraded care, and the higher death rates that would follow. The country was also betting that, within a time period short enough that restrictions could be sustained, scientists would develop a vaccine that protected against morbidity and mortality.
As it turned out, the bet paid off. Had it behaved rationally and adequately valued liberty, a rich nation like Australia would have spent lavishly—before knowing which vaccines would turn out to be most effective—to secure an adequate supply of many options for its people. It could afford to eat the cost of any extra doses and donate them to poorer countries. Australia then could have marshaled its military and civil society to vaccinate the nation as quickly as possible, lifted restrictions more fully than Europe and the United States did, and argued that the combination of fewer deaths and the more rapid return to normalcy made their approach a net win.
Instead, Australia invested inadequately in vaccines and, once it acquired doses, was too slow to get them into arms. “Of the 16 million doses of the AstraZeneca vaccine that have been released to the government by manufacturer CSL, only about 8 million have gone into the arms of Australians,” The Age reported on August 21, citing concern about blood clots and a widespread preference for the Pfizer vaccine. “A further 1.6 million doses have been sent offshore to help regional neighbours such as Papua New Guinea, Fiji and East Timor tackle COVID-19. But about 6 million doses are yet to be used, even as more than half the nation is in lockdown due to outbreaks of the highly infectious Delta variant.” Australia’s low infection and death rates, which the country achieved both by being surrounded by water and by adopting harsh restrictions on liberty, seemed to sap its urgency when it came time to vaccinate—even though that lack of urgency meant months more of basic human rights being abrogated. In hindsight, more urgency to get jabs in arms to end the restrictions would have saved lives, because the country would have been better protected against the unexpected Delta variant.
In return for trading away their liberty, Australians gained a huge safety dividend. COVID-19 has killed 194 of every 100,000 Americans, 77 of every 100,000 Israelis, and only four of every 100,000 Australians. That low death toll is a tremendous upside. What remains to be seen is whether Australia can maintain that performance without permanently ending core attributes of life in a liberal democracy, including freedom of movement, peaceable assembly, and basic privacy.
If the country quickly reinstates its citizens’ pre-pandemic liberties, it can argue that the loss of liberty was only temporary (though some restrictions, such as a prohibition on leaving the country, would still seem needless if the goal was minimizing the spread of COVID-19 in the country). And if Australia’s death rate remains lower than Israel’s or America’s, Australian leaders can plausibly tell their citizens that the deprivation was worth it. If not, supporters will have a much harder time defending a record that includes handcuffing a small group of teenagers after they gathered for an outdoor hangout.
More important than whether or not the past can be justified is what the country does from now on. Promising murmurs are coming from some politicians. “New South Wales state Premier Gladys Berejiklian vowed to reopen the state once 70% of those 16 and older get vaccinated,” Reuters reported Sunday. “No matter what the case numbers are doing … double-dose 70% in NSW means freedom for those who are vaccinated." But in Victoria, the country’s next-most-populous state, the news organization reports that “Premier Daniel Andrews said his state’s lockdown, due to end on Thursday, will be extended, but would not say for how long.”
Because of its geography, Australia is a neighbor and an observer of authoritarian countries as varied as China and Singapore. But its own fate, too, may turn on whether its people crave the feeling of safety and security that orders from the top confer, or whether they want to be free.
High Fuel Prices and Oil Bonds - Vivek Kaul
Explained: Why the Govt is Misleading Us on High Fuel Prices and Oil Bonds
The reason why doesn’t matter. The only thing that matters is controlling the narrative – Fabian Nicieza in Suburban Dicks.
Over the last few years, several government ministers have blamed the oil bonds issued during the era of the previous United Progressive Alliance (UPA) government, for the high petrol and diesel prices, which have prevailed for a while now.
The then oil minister Dharmendra Pradhan had tweeted in 2018 that: “The country and our OMCs [oil marketing companies} are also yet to recover from the shock of Oil Bonds worth Rs 1.4 Lakh Crores issued during the UPA regime.”
The finance minister Nirmala Sitharaman rblamed the oil bonds for the high prices of petrol and diesel, in a recent statement. This is not true. I have explained this issue in great detail on earlier occasions. Nevertheless, I will try and offer a broader summary here, before getting on to the new points I want to make.
Oil bonds were largely issued by the previous UPA government. This was done in order to compensate oil marketing companies, like Indian Oil, Bharat Petroleum and Hindustan Petroleum, for selling petrol, diesel, kerosene and domestic cooking gas, at a price which wasn’t monetarily feasible for them.
The argument offered by the National Democratic Alliance (NDA) government is that since interest has to be paid on these bonds and that these bonds have to be repaid, the government needs to charge a high excise duty on petrol and diesel. This leads to high petrol and diesel prices.
In that sense, the NDA government and you and me are paying for the sins of the UPA government. This argument is never made in as clear words as I am making it here. Things are left vague enough for people to fill in the gaps and make their own WhatsApp forwards.
As of March 2014, before the NDA government came to power, the total oil bonds outstanding stood at Rs 1,34,423 crore. By March 2015, this had come down to Rs 1,30,923 crore, which is where it has stayed up until March 2021.
This means that between end March 2015 and end March 2021, no oil bonds matured and hence, the NDA government didn’t need to repay a single rupee of oil bonds. Of course, interest had to be paid on these bonds. An interest of Rs 9,990 crore has to be paid on these bonds every year. This means, over a period of six years, between end March 2015 and end March 2021, the government has paid Rs 59,940 crore as interest on these bonds.
During the same period, it earned Rs 14,60,036 crore as excise duty on petroleum products. As the government told the Lok Sabha in early August this year: “Central excise duty is contributed largely by Petrol and Diesel.” So, excise duty earned on the sale of petrol and diesel makes up for a bulk of the excise duty earned on sale of petroleum products.
In total, during this period, 4.1% of the excise duty collected on petroleum products has gone towards paying interest on oil bonds. In 2020-21, this stood at just 2.7% (Rs 9,990 crore of interest against excise duty of Rs 3,71,726 crore earned on petroleum products).
In fact, if were to look at excise duty collected on just petrol and diesel, between end March 2015 and end March 2021, it amounts to around Rs 13.7 lakh crore. The interest paid on oil bonds amounts to 4.4% of this amount.
In 2021-22, the current financial year, Rs 10,000 crore worth of oil bonds are maturing and hence, need to be repaid. The interest that needs to be paid on the oil bonds during the year should amount to around Rs 9,500 crore. So, during 2020-21, around Rs 19,500 crore will be needed by the government to service these bonds.
In an answer provided to the Lok Sabha recently, the government had said that the total excise duty earned on petrol and diesel, between April and June this year, had stood at Rs 94,181 crore.
Given that, the second Covid wave was on during this period, and that it would have negatively impacted the consumption of petrol and diesel to some extent, it is safe to say that if excise duty on petrol and diesel continue to be where they are, the total collections this year can easily touch Rs 4 lakh crore. Of course, the collections on petroleum products will be even greater.
Rs 19,500 crore works to around 4.9% of Rs 4 lakh crore. So, the government is likely to spend one-twentieth of the excise duty earned on petrol and diesel, in servicing the oil bonds (both repaying maturing bonds and paying interest on the outstanding bonds).
The remaining bonds worth Rs 1,20,923 crore (Rs 1,30,923 crore minus Rs 10,000 crore worth of bonds maturing this year), will mature between November 2023 and March 2026.
The other argument that is being made is that the government needs to save money in order to repay these bonds in the years to come. It is worth clarifying here that the government meets the expenditure of a given year from the revenue earned during that year. Hence, bonds maturing in 2023, 2024, 2025 and 2026, will be repaid using taxes earned during that year. This nullifies the argument about the government having to save in order to repay these bonds.
Hence, the entire argument that the oil bonds have led to a situation where the government has had to charge a high excise duty on petrol and diesel, is totally wrong. In fact, as I have explained earlier, the reason for this lies in the fall of corporate tax collections.
In 2018-19, the total corporate tax or the income tax paid by corporates had stood at Rs 6.64 lakh crore. This fell to Rs 5.57 lakh crore in 2019-20. It fell further to Rs 4.57 lakh crore in 2020-21.
This fall was on account of the base rate of corporate tax being cut from 30% to 22% in September 2019. It can also be argued that Covid must have led to lower profits for corporates in 2020-21 and hence, lower corporate tax collections for the government.
Data from the Centre for Monitoring Indian Economy tells us that in 2020-21, the net profit of listed corporates (more than 5,000 companies) increased by 120.3% in comparison to 2019-20. So, Covid didn’t impact profits among the listed corporates. While net profit went up by 120.3%, the corporate tax paid by these companies went up just 13.9%.
Covid has negatively impacted smaller businesses and that must have impacted corporate tax collections to a certain extent. But a bulk of the fall in corporate tax collections seems to have come from a lower rate of tax. This has been compensated through higher excise duty on petrol and diesel.
In 2018-19, excise duty earned on petroleum products by the central government brought in Rs 2.14 lakh crore. This jumped to Rs 3.72 lakh crore in 2020-21, thanks to a higher excise duty on petrol and diesel.
The corporate tax cut was supposed to boost consumption and lead to an increase in corporate investment. But that hasn’t really happened. Expecting consumption to increase thanks to lower corporate taxes was kite-flying at its very best.
Consumption increases when people see the prospect of earning more money, not when corporate taxes go down. Investment, for a whole host of reasons, has been down in the dumps for close to a decade now,. I shall not go into these reasons in detail here, having dealt with this issue on multiple occasions in the past.
This has created a communication problem around high petrol and diesel prices for a government obsessed with managing the narrative.
In their book Nudge—The Final Edition, Richard Thaler and Cass Sunstein talk about the publicity principle, originally elucidated by the philosopher John Rawls. As Thaler and Sunstein write: “If a firm or government adopts a policy that it could not easily defend publicly, it stands to face considerable embarrassment, and perhaps much worse, if the policy and its grounds are disclosed [emphasis added].”
This is precisely the problem with the entire messaging around the issue of high petrol and diesel prices. The only reason for this is the high excise duty on petrol and diesel, in order to compensate for lower corporate tax collections.
The excise duty on petrol has gone up from Rs 9.48 per litre in October 2014 to Rs 32.90 per litre currently, a jump of close to 250%. A bulk of this increase of around Rs 10 per litre has happened in the last one year. A similar story has played out with diesel, with excise duty going up from Rs 3.56 per litre in October 2014 to Rs 31.80 per litre currently, a jump of close to 800%. (I would like to thank Chintan Patel for providing this information by using the central government notifications on excise duty on petrol and diesel).
Of course, this is not something that a narrative obsessed government can admit to. This would mean telling the world at large that the common man is being made to pay for lower corporate taxes. This has led to the entire narrative around oil bonds and they having to be repaid and interest having to be paid on them, and that leading to a higher excise duty on petrol and diesel, and hence, higher pump prices of fuel.
This is a narrative that can be easily sold on WhatsApp, given that most people don’t have the time to check the facts of any argument and buy anything that is sent to them over the world’s newest and the most happening university.
As Thomas Sowell writes in Knowledge and Decisions:
“To exhort the individual citizen to make investments in knowledge comparable to those of lobbyists and political crusaders (both of whom have much lower costs per unit of personal benefit) is to urge him to behaviour that is irrational, if not physically impossible in a twenty-four hour day.”
This is something that the current government is making use of and projecting a narrative that wrongly blames the past government for high fuel prices.
As Thaler and Sunstein write: “Organizations of all forms should respect people, and if they adopt policies that they could not and would not defend in public, they fail to show that respect. Instead, they treat citizens as tools for their own use or manipulation [emphasis added].”
This is precisely what is happening.
The interesting thing is that the government has given the more or less the right reason behind high fuel prices in an answer to a question raised in the Lok Sabha. As it said: “The excise duty rates on petroleum products are calibrated from time to time with the objective of generating resources for infrastructure and other developmental items of expenditure, taking into account all relevant factors and keeping in view the prevailing fiscal situation.”
Every government has the right to tax the citizens in different ways. This answer tells us precisely that. Of course, explaining the rationale behind the tax is not always that straightforward.
The reason why doesn’t matter. The only thing that matters is controlling the narrative – Fabian Nicieza in Suburban Dicks.
Over the last few years, several government ministers have blamed the oil bonds issued during the era of the previous United Progressive Alliance (UPA) government, for the high petrol and diesel prices, which have prevailed for a while now.
The then oil minister Dharmendra Pradhan had tweeted in 2018 that: “The country and our OMCs [oil marketing companies} are also yet to recover from the shock of Oil Bonds worth Rs 1.4 Lakh Crores issued during the UPA regime.”
The finance minister Nirmala Sitharaman rblamed the oil bonds for the high prices of petrol and diesel, in a recent statement. This is not true. I have explained this issue in great detail on earlier occasions. Nevertheless, I will try and offer a broader summary here, before getting on to the new points I want to make.
Oil bonds were largely issued by the previous UPA government. This was done in order to compensate oil marketing companies, like Indian Oil, Bharat Petroleum and Hindustan Petroleum, for selling petrol, diesel, kerosene and domestic cooking gas, at a price which wasn’t monetarily feasible for them.
The argument offered by the National Democratic Alliance (NDA) government is that since interest has to be paid on these bonds and that these bonds have to be repaid, the government needs to charge a high excise duty on petrol and diesel. This leads to high petrol and diesel prices.
In that sense, the NDA government and you and me are paying for the sins of the UPA government. This argument is never made in as clear words as I am making it here. Things are left vague enough for people to fill in the gaps and make their own WhatsApp forwards.
As of March 2014, before the NDA government came to power, the total oil bonds outstanding stood at Rs 1,34,423 crore. By March 2015, this had come down to Rs 1,30,923 crore, which is where it has stayed up until March 2021.
This means that between end March 2015 and end March 2021, no oil bonds matured and hence, the NDA government didn’t need to repay a single rupee of oil bonds. Of course, interest had to be paid on these bonds. An interest of Rs 9,990 crore has to be paid on these bonds every year. This means, over a period of six years, between end March 2015 and end March 2021, the government has paid Rs 59,940 crore as interest on these bonds.
During the same period, it earned Rs 14,60,036 crore as excise duty on petroleum products. As the government told the Lok Sabha in early August this year: “Central excise duty is contributed largely by Petrol and Diesel.” So, excise duty earned on the sale of petrol and diesel makes up for a bulk of the excise duty earned on sale of petroleum products.
In total, during this period, 4.1% of the excise duty collected on petroleum products has gone towards paying interest on oil bonds. In 2020-21, this stood at just 2.7% (Rs 9,990 crore of interest against excise duty of Rs 3,71,726 crore earned on petroleum products).
In fact, if were to look at excise duty collected on just petrol and diesel, between end March 2015 and end March 2021, it amounts to around Rs 13.7 lakh crore. The interest paid on oil bonds amounts to 4.4% of this amount.
In 2021-22, the current financial year, Rs 10,000 crore worth of oil bonds are maturing and hence, need to be repaid. The interest that needs to be paid on the oil bonds during the year should amount to around Rs 9,500 crore. So, during 2020-21, around Rs 19,500 crore will be needed by the government to service these bonds.
In an answer provided to the Lok Sabha recently, the government had said that the total excise duty earned on petrol and diesel, between April and June this year, had stood at Rs 94,181 crore.
Given that, the second Covid wave was on during this period, and that it would have negatively impacted the consumption of petrol and diesel to some extent, it is safe to say that if excise duty on petrol and diesel continue to be where they are, the total collections this year can easily touch Rs 4 lakh crore. Of course, the collections on petroleum products will be even greater.
Rs 19,500 crore works to around 4.9% of Rs 4 lakh crore. So, the government is likely to spend one-twentieth of the excise duty earned on petrol and diesel, in servicing the oil bonds (both repaying maturing bonds and paying interest on the outstanding bonds).
The remaining bonds worth Rs 1,20,923 crore (Rs 1,30,923 crore minus Rs 10,000 crore worth of bonds maturing this year), will mature between November 2023 and March 2026.
The other argument that is being made is that the government needs to save money in order to repay these bonds in the years to come. It is worth clarifying here that the government meets the expenditure of a given year from the revenue earned during that year. Hence, bonds maturing in 2023, 2024, 2025 and 2026, will be repaid using taxes earned during that year. This nullifies the argument about the government having to save in order to repay these bonds.
Hence, the entire argument that the oil bonds have led to a situation where the government has had to charge a high excise duty on petrol and diesel, is totally wrong. In fact, as I have explained earlier, the reason for this lies in the fall of corporate tax collections.
In 2018-19, the total corporate tax or the income tax paid by corporates had stood at Rs 6.64 lakh crore. This fell to Rs 5.57 lakh crore in 2019-20. It fell further to Rs 4.57 lakh crore in 2020-21.
This fall was on account of the base rate of corporate tax being cut from 30% to 22% in September 2019. It can also be argued that Covid must have led to lower profits for corporates in 2020-21 and hence, lower corporate tax collections for the government.
Data from the Centre for Monitoring Indian Economy tells us that in 2020-21, the net profit of listed corporates (more than 5,000 companies) increased by 120.3% in comparison to 2019-20. So, Covid didn’t impact profits among the listed corporates. While net profit went up by 120.3%, the corporate tax paid by these companies went up just 13.9%.
Covid has negatively impacted smaller businesses and that must have impacted corporate tax collections to a certain extent. But a bulk of the fall in corporate tax collections seems to have come from a lower rate of tax. This has been compensated through higher excise duty on petrol and diesel.
In 2018-19, excise duty earned on petroleum products by the central government brought in Rs 2.14 lakh crore. This jumped to Rs 3.72 lakh crore in 2020-21, thanks to a higher excise duty on petrol and diesel.
The corporate tax cut was supposed to boost consumption and lead to an increase in corporate investment. But that hasn’t really happened. Expecting consumption to increase thanks to lower corporate taxes was kite-flying at its very best.
Consumption increases when people see the prospect of earning more money, not when corporate taxes go down. Investment, for a whole host of reasons, has been down in the dumps for close to a decade now,. I shall not go into these reasons in detail here, having dealt with this issue on multiple occasions in the past.
This has created a communication problem around high petrol and diesel prices for a government obsessed with managing the narrative.
In their book Nudge—The Final Edition, Richard Thaler and Cass Sunstein talk about the publicity principle, originally elucidated by the philosopher John Rawls. As Thaler and Sunstein write: “If a firm or government adopts a policy that it could not easily defend publicly, it stands to face considerable embarrassment, and perhaps much worse, if the policy and its grounds are disclosed [emphasis added].”
This is precisely the problem with the entire messaging around the issue of high petrol and diesel prices. The only reason for this is the high excise duty on petrol and diesel, in order to compensate for lower corporate tax collections.
The excise duty on petrol has gone up from Rs 9.48 per litre in October 2014 to Rs 32.90 per litre currently, a jump of close to 250%. A bulk of this increase of around Rs 10 per litre has happened in the last one year. A similar story has played out with diesel, with excise duty going up from Rs 3.56 per litre in October 2014 to Rs 31.80 per litre currently, a jump of close to 800%. (I would like to thank Chintan Patel for providing this information by using the central government notifications on excise duty on petrol and diesel).
Of course, this is not something that a narrative obsessed government can admit to. This would mean telling the world at large that the common man is being made to pay for lower corporate taxes. This has led to the entire narrative around oil bonds and they having to be repaid and interest having to be paid on them, and that leading to a higher excise duty on petrol and diesel, and hence, higher pump prices of fuel.
This is a narrative that can be easily sold on WhatsApp, given that most people don’t have the time to check the facts of any argument and buy anything that is sent to them over the world’s newest and the most happening university.
As Thomas Sowell writes in Knowledge and Decisions:
“To exhort the individual citizen to make investments in knowledge comparable to those of lobbyists and political crusaders (both of whom have much lower costs per unit of personal benefit) is to urge him to behaviour that is irrational, if not physically impossible in a twenty-four hour day.”
This is something that the current government is making use of and projecting a narrative that wrongly blames the past government for high fuel prices.
As Thaler and Sunstein write: “Organizations of all forms should respect people, and if they adopt policies that they could not and would not defend in public, they fail to show that respect. Instead, they treat citizens as tools for their own use or manipulation [emphasis added].”
This is precisely what is happening.
The interesting thing is that the government has given the more or less the right reason behind high fuel prices in an answer to a question raised in the Lok Sabha. As it said: “The excise duty rates on petroleum products are calibrated from time to time with the objective of generating resources for infrastructure and other developmental items of expenditure, taking into account all relevant factors and keeping in view the prevailing fiscal situation.”
Every government has the right to tax the citizens in different ways. This answer tells us precisely that. Of course, explaining the rationale behind the tax is not always that straightforward.
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