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Fiscal Rules Do Not Undermine Investment, But Government Profligacy Does

To prevent public debt from soaring in the wake of the global financial crisis in 2009, Germany has enshrined a “debt brake” in its constitution. The…



To prevent public debt from soaring in the wake of the global financial crisis in 2009, Germany has enshrined a “debt brake” in its constitution. The debt brake sets strict limits on federal public debt levels and restrains government borrowing. This fiscal rule has served its purpose, and public debt has been on a downward path, dropping by about 15 percentage points of gross domestic product (GDP) since its introduction. Yet the government suspended it during the pandemic and raised an extra €370 billion of debt in 2020 and 2021. It also tried to circumvent this rule on several occasions by setting up off-balance sheet funds, such as a €100 billion special fund for military spending during the war in Ukraine.

In 2022, the German parliament decided to shift about €60 billion from the unused debt contracted during the covid-19 crisis into a new climate fund to finance Germany’s green transition. However, to everyone’s surprise, the Federal Constitutional Court ruled this move illegal, leaving politicians scratching their heads on how to pay for the planned lavish green subsidies. Instead of realizing that the financing shortage is primarily due to a bloated welfare system and stagnating economy, green and leftist politicians are blaming the debt brake and trying to get rid of it.

Rules Can Improve Fiscal Performance

The German debt brake limits the net structural borrowing of the federal government to 0.35 percent of GDP per year but retains some flexibility by allowing additional borrowing during economic downturns. In addition, the rule can be suspended in case of natural disasters or emergency situations, as it was done from 2020 to 2022 because of the pandemic. The German debt brake is much stricter than the European Union’s fiscal framework, which allows for a structural deficit of 3 percent of GDP per year. The German fiscal rule is one of the most stringent in the world, both because of its tight numerical target and the constitution anchor.

Switzerland had also introduced a hard debt brake more than twenty years ago. The rule was approved by a large majority of voters in a constitutional referendum and subsequently served as a blueprint for the German rule. Moreover, the Swiss cantons benefit from a long tradition of fiscal rules and decentralized fiscal autonomy. Another case in point is Sweden, which also has a strict fiscal framework based on numerical rules, such as a structural surplus budget target of one-third of a percent of GDP and a public debt ceiling of 35 percent of GDP.

Over the past thirty years, fiscal rules have become very popular, and the number of countries that have introduced them surged from less than ten in 1990 to over a hundred by 2021, according to the International Monetary Fund (IMF). The adoption of fiscal rules has often been driven by financial and economic crises that triggered sharp rises of public debt. Several EU countries have adopted national rules in parallel with the common EU fiscal framework.

With such a high number of countries using fiscal rules, one may wonder why government debt has ballooned around the world in recent years. The answer is simple: the design of the fiscal rules is key, and in many countries, the rules are either too soft or their implementation is too lax. Fiscal rules are effective only when they come with a strong political commitment, a robust legal basis to ensure adequate enforcement, and strict monitoring by independent fiscal institutions.

A survey by the Swiss Federal Finance Administration concluded that rules improve fiscal performance in terms of better budget balances, lower debt, and reduced spending volatility. In addition, empirical research showed that fiscal rules are associated with more-accurate budget forecasts and improved sovereign bond ratings. This explains why even countries with softer fiscal rules, such as Australia and the Netherlands, still benefit from better medium-term budget planning and improved fiscal outcomes. In recent years, public debt has declined to moderate levels in Germany and other countries with fiscal rules—despite the pandemic and war in Ukraine—whereas it has grown to very high levels in the United States and the United Kingdom (Figure 1). As a matter of fact, the US Government Accountability Office recommends that the US introduces strict fiscal rules as well to correct its “unsustainable long-term fiscal path.”

Figure 1: Government debt

Source: Data from the “World Economic Outlook Database,” International Monetary Fund, accessed January 31, 2024.


Fiscal Rules Do Not Undermine Public Investment

Despite its success, the debt brake has ended up under strong criticism from both mainstream pundits and leftist politicians in Germany. They describe it as “overzealous” and a “straitjacket” on public investment, endangering the greening and modernization of the economy. For quite some time, the debt brake has been a scapegoat for Germany’s underinvestment in infrastructure—railways, bridges, schools, and digital infrastructure.

However, this is not true. First, the €60 billion represents only about 1.5 percent of GDP and is hardly a game changer in a country like Germany where government spends a whopping 50 percent of GDP. Second, if Germany cannot finance public investment within this huge budget envelope, then the problem lies elsewhere—bloated government consumption, excessive social spending, heavy bureaucracy, and environmental regulations.

As a counterexample, in Korea, public investment relative to GDP is more than double than in Germany while total government spending is about half (i.e., 25 percent of GDP), and there is not much complaint about Korea’s infrastructure. Third, the German fiscal rule is quite flexible as it pursues a structural deficit target over the business cycle and allows for escape clauses in case of emergency so that it does not penalize investment in times of fiscal adjustment.

In principle, fiscal rules are not an obstacle to public investment. They only ensure that the latter is financed in a transparent way by tax revenues and not by government deficits and runaway debt. The same survey by the Swiss Federal Finance Administration showed that a majority of the reviewed studies suggests that fiscal rules may undermine public investment only if they are rigidly applied whereas fiscal rules with built-in flexibility do not undermine public investment. It can actually be argued that by disciplining current consumption, reducing the debt burden, and minimizing the cost of capital, fiscal rules provide more leeway for investments, both public and private. Figure 2 shows that countries with strict fiscal rules like Switzerland and Sweden actually have higher public investments than the more profligate UK and the US, while Germany does not lag behind by much.

Figure 2: Public investment

Source: Data from “Government at a Glance 2023,” Organisation for Economic Co-operation and Development, accessed January 31, 2024.


Public versus Market Investment

One key element that the majority of mainstream pundits seems to ignore is that not all public investment is useful and productive. As a matter of fact, public investment can be quite wasteful if it is politically motivated, poorly planned, bureaucratically managed, and subjected to fraud and corruption. According to the IMF, countries waste on average about a third of their infrastructure spending due to inefficiencies, and the loss can go up to half in low-income countries. According to Murray Rothbard, public investment represents a diversion of economic resources from their most valued uses as determined by individuals in the market process. By misallocating factors of production, the social and economic usefulness of government spending can be negative in many instances.

Public investment inefficiencies are certainly more limited in the case of Germany than in low-income countries. However, in this case, the transition of Germany to carbon neutrality by 2045 is by all means a politically motivated project. Its scientific justification and proposed policy actions are highly debatable and have nothing to do with consumer preferences. Most “green investments” are in reality a pile of subsidies for electric vehicle and battery factories, charging infrastructure, bike lanes, hydrogen production capacities, and other projects that individuals would not otherwise undertake freely.

In addition, the democratic foundation of this mega country project is very flimsy. The green transition comes with a huge price tag, estimated at about €6 trillion or 150 percent of GDP. It would normally require a popular vote via referendum, rather than implementation via top-down decisions by politicians close to the Green Party. The Green Party won a mere 15 percent of votes in the last elections, and its support has eroded ever since. On the other hand, similar to the Swiss, the majority of Germans support the debt brake, according to a survey by the broadcaster ZDF.

It is probably high time for the German political elites to acknowledge that their overambitious green agenda is hardly affordable given the country’s weak growth potential and the massive burden of its welfare state. Instead of removing the debt brake and financing the huge cost of the green transition through the back door, they should rather ask directly for public approval in a democratic way.

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide…



Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide Black Lives Matter riots in the summer of 2020, some elite colleges and universities shredded testing requirements for admission. Several years later, the test-optional admission has yet to produce the promising results for racial and class-based equity that many woke academic institutions wished.

The failure of test-optional admission policies has forced Dartmouth College to reinstate standardized test scores for admission starting next year. This should never have been eliminated, as merit will always prevail. 

"Nearly four years later, having studied the role of testing in our admissions process as well as its value as a predictor of student success at Dartmouth, we are removing the extended pause and reactivating the standardized testing requirement for undergraduate admission, effective with the Class of 2029," Dartmouth wrote in a press release Monday morning. 

"For Dartmouth, the evidence supporting our reactivation of a required testing policy is clear. Our bottom line is simple: we believe a standardized testing requirement will improve—not detract from—our ability to bring the most promising and diverse students to our campus," the elite college said. 

Who would've thought eliminating standardized tests for admission because a fringe minority said they were instruments of racism and a biased system was ever a good idea? 

Also, it doesn't take a rocket scientist to figure this out. More from Dartmouth, who commissioned the research: 

They also found that test scores represent an especially valuable tool to identify high-achieving applicants from low and middle-income backgrounds; who are first-generation college-bound; as well as students from urban and rural backgrounds.

All the colleges and universities that quickly adopted test-optional admissions in 2020 experienced a surge in applications. Perhaps the push for test-optional was under the guise of woke equality but was nothing more than protecting the bottom line for these institutions. 

A glimpse of sanity returns to woke schools: Admit qualified kids. Next up is corporate America and all tiers of the US government. 

Tyler Durden Mon, 02/05/2024 - 17:20

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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…



To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….



Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 


About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. 

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