If economics-minded policy-makers rules made decisions in response to the pandemic, what might they do differently, and why? Peter Boettke and Benjamin Powell suggest some answers to that question in "The political economy of the COVID‐19 pandemic" (Southern Economic Journal, April 2021, pp. 1090-1106).
Their paper leads off a symposium on the topic. I'll list all the papers in the symposium below. I'm told that they are all freely available online now, and for the next few weeks, so if you don't have library access to the journal, you might want to check them out sooner rather than later. Boettke and Powell write:
[F]rom the perspective of promoting overall societal well‐being, we believe that governments in the United States and around the world made significant errors in their policy response to the COVID‐19 pandemic. ... [A] political economy perspective challenges the assumptions of omniscience and benevolence of all actors—politicians, regulators, scientists, and members of the public—in response to the pandemic. We live in an imperfect world, populated by imperfect beings, who interact in imperfect institutional environments ...
What are some ways in which pandemic policies based in micro theory and welfare economics might differ from the policies actually used? The potential answers seems to me both of interest in themselves, but also a good live subject for classroom discussions and writing exercises.
For example, when discussing the subject of how policymakers should respond to negative externalities, a general principle is that there are a wide array of possible responses, and the least-cost response should be selected. If one thinks of society as divided into the elderly and non-elderly, for example, it seems plausible that the lowest social cost response to COVID-19would involve restrictions on the elderly. Boettke and Powell write:
The activities of the young and healthy impose a negative health externality on the old and infirm. But it is equally true that if the activities of the young are restricted because of the presence of the old and infirm, this latter group has imposed a negative externality on the young and healthy. If transactions costs were low, the Coase theorem would dictate that it would not matter to which party the rights to activity or restriction were assigned, as bargaining would reach the efficient outcome. However, in the case of COVID‐19, and large populations, it is quite clear that transactions costs of bargaining would be prohibitive. Thus, the standard law and economics approach would recommend assigning rights such that the least cost mitigator bears the burden of adjusting to the externality. In the case of COVID‐19, it is clear that the low opportunity cost mitigators are the old and infirm. Thus, Coasean economics would recommend allowing the activities of the young and healthy to impose externalities on the old and infirm, not the other way around. Lockdowns and stay at home orders get the allocation of rights exactly backwards and result in large inefficiencies because costs are disproportionately borne by the high cost mitigators.
Another common insight from economics is that those closest to the externality typically know the most about how to respond. In the case of pollution control, for example, there is a standard argument for using a pollution tax or marketable pollution permits, rather than trying to draw up command-and-control rules for every smokestack or pollution source. Have those creating pollution bear the cost, and they will have an incentive to find ways to reduce those costs.
Of course, the response of most states and localities to COVID-19 was very much a command-and-control response, with extensive and ever-changing rules about outdoors and indoors, about restaurants, parks, and churches, about what businesses or school could be open under what conditions. As the authors write: "The thousands upon thousands of varied restrictions are too numerous and diverse for us to comprehensively categorize here. But their sheer number and variability make it obvious that these command and control regulations are not in any way promoting a cost minimizing form of transmission mitigation." The alternative might have been to categorize activities according to their chance of spreading COVID-19, and then impose a tax for participating in such activities.
The marginal costs of reducing risk‐generating activities are really just the inverse of the subjective marginal benefits of engaging in myriad social interactions in the market place, civil society, families, politics, religious communities, and recreation. No regulator is going to know the value of these diverse activities to those engaged in them. Economists have long appreciated that, in the presence of heterogenous mitigation costs, command and control regulation of much simpler pollution mitigation is less efficient than a pollution tax, because firms know their mitigation costs better than regulators. That informational asymmetry between the economist regulator and people regulated is even greater in this case. Thus, an efficiency maximizing economist policy advisor would recommend leaving people free to choose activities for themselves, while imposing a tax on activities set to reduce the marginal benefit of engaging in activities, proportional to increased risk of COVID‐19 transmission.
Another policy option would be for the government to subsidize activities that would reduce the spread of the externality: for example, "government funding to expand hospital capacity and the purchase of supplies and equipment, and research funding to speed the discovery of new medical treatments and vaccines. They could also include removal of regulatory barriers that impede medical capacity and the development of medicines and vaccines. Unlike efficient policies related to the mitigation activities that risk disease transmission, governments have undertaken these policies to varying degrees."
But the interesting observation here is that the size of government activities that focused directly on reducing the disease was dwarfed by the size of payments the government made to affected individuals and businesses. For example, the government put $10 billion into the Warp Speed program to produce vaccines and guarantee that certain volumes would be purchased, but has spent trillions of dollars--more than a hundred times more--on payments that do not directly reduce the risk of transmission.
A final example involves decisions about who would get the vaccine first. For example, should it go to "essential workers"? Or to the elderly or those with greater vulnerability to the disease? Who defines these groups? Will lotteries be involved at certain stages? By the time all the rules are argued over, spelled out, and then enforced, an obvious question (to economists) is whether a more flexible and market-oriented system might work better. The authors write:
Even if policymakers cared more about the welfare of the people that guidelines currently prioritize for vaccination, they could design policy better than the CDC guidelines by allocating a re‐sellable right to receive the vaccination, rather than the vaccination itself. Those prioritized individuals who resell the right will, through their actions, indicate that they are even better off, and the transfers of the right to higher value vaccinators would promote greater efficiency too. No politicians are considering such policies.
What's interesting to me is not that the economics answers here are obviously "right"--one can certainly point out tradeoffs that would be involved--but that the tradeoffs were barely noticed or discussed as real options. Boettke and Powell point out some underlying issues here of political economy. For example, public health officials "re not necessarily untruthful, but they will be biased against committing an error of over optimism—no forecast or treatment protocol or vaccine will be championed that underestimates the downside risk. Better for them to commit errors of over‐pessimism."
The combination of media and public attention in the social media age does not seem predisposed to calm consideration of tradeoffs, either. Instead, tradeoffs are typically presented as involving "good people," who are judged leniently , and "bad people," who are judged harshly. The authors write:
One implication is that fair and balanced reporting may be too boring to grab the attention of the median listener/viewer/reader. Rather than nuanced and subtle discussion of trade‐offs, and the calm calculation of risk, we get extreme projections of nothing here or catastrophe awaits. And, of course, those incentives for attracting an audience have grown more intense in the last decade with traditional print media competing with online sources. ...
Both politicians and the mainstream media have kept much of the populace in such an alarmed state throughout the pandemic, which has allowed both paternalistic interventions and created bottom up parentalist demands for such interventions, which have nothing to do with efficiently correcting a market failure.
Here's the full Table of Contents for the symposium. Again, I'm told that all the articles will be open access for the next few weeks:
Timothy Taylor is an American economist. He is managing editor of the Journal of Economic Perspectives, a quarterly academic journal produced at Macalester College and published by the American Economic Association. Taylor received his Bachelor of Arts degree from Haverford College and a master's degree in economics from Stanford University. At Stanford, he was winner of the award for excellent teaching in a large class (more than 30 students) given by the Associated Students of Stanford University. At Minnesota, he was named a Distinguished Lecturer by the Department of Economics and voted Teacher of the Year by the master's degree students at the Hubert H. Humphrey Institute of Public Affairs. Taylor has been a guest speaker for groups of teachers of high school economics, visiting diplomats from eastern Europe, talk-radio shows, and community groups. From 1989 to 1997, Professor Taylor wrote an economics opinion column for the San Jose Mercury-News. He has published multiple lectures on economics through The Teaching Company. With Rudolph Penner and Isabel Sawhill, he is co-author of Updating America's Social Contract (2000), whose first chapter provided an early radical centrist perspective, "An Agenda for the Radical Middle". Taylor is also the author of The Instant Economist: Everything You Need to Know About How the Economy Works, published by the Penguin Group in 2012. The fourth edition of Taylor's Principles of Economics textbook was published by Textbook Media in 2017.