A Wall Street Journal news article by David Harrison claims, “State and local government spending and employment levels didn’t fully recover from the 2007-09 recession until last fall, a decade after the downturn ended and only a few months before the coronavirus led to a new round of cuts.” The article reiterates, “Public spending and employment didn’t return to their previous peaks until last fall.”
With regard to spending, those statements are in error and the WSJ should run a correction.
Figure 1 shows total state and local government spending from Bureau of Economic Analysis national income Table 3.3 in raw or nominal dollars. Spending grew during the 2000s, hit $2.4 trillion in 2009 and flat‐lined for a few years, then began growing again to reach $3.1 trillion by 2019.
The WSJ was likely referring to real or inflation‐adjusted spending, but the article does not say that. In Figure 2, I’ve converted spending to 2019 dollars using BEA’s state‐local deflator. Real spending spiked in 2009 and then dipped a bit below the pre‐recession level. Spending then began growing again and eclipsed the 2009 peak by 2016.
The WSJ article includes a chart showing state‐local government employment dipping from a 2009 peak of 19.8 million to a trough of 19.1 million, then rising to 19.9 million earlier this year. The government workforce was thus trimmed 4 percent before expanding again. Why is that a big deal? Why shouldn’t governments tighten their belts during slowdowns just as individuals and businesses do?
Over the longer term, shouldn’t governments be improving their productivity to provide services at lower costs with fewer workers? Shouldn’t computer advances be making, for example, policing more efficient allowing us to shrink police department bureaucracies? The private sector continually strives to do more with less and improves its productivity steadily over time.
News stories in the Wall Street Journal often tilt Keynesian. Higher government spending is presented as helping the economy, while spending restraint harms it. The state budget story quotes a Harvard economist claiming that the economy gains up to $2 for every $1 of state spending—the WSJ calls this a “principle.” But it’s not a principle, it’s a theory. An alternative theory—which the reporter should have noted—is that there is no free lunch, that government spending results in harmful extractions from the private sector and overall reductions in GDP.
The WSJ story quotes Fed chairman Jerome Powell saying, “We have the evidence of the global financial crisis and the years afterward where state and local government layoffs and lack of hiring did weigh on economic growth.”
Powell is being naive. I suspect he is thinking about state‐local government output or valued‐added portion of GDP (in Table 1.1.5). He’s implying that if that portion isn’t growing, then GDP must fall. But that is one‐sided accounting. State‐local governments fund their GDP portion by taking resources from the private sector, so if the state‐local portion is cut, then more resources stay in the private sector and support private‐sector expansion.
(In referring to “spending,” the WSJ story is probably also referring to government output or value added. But that is only a portion of total state‐local government spending).
The real issue is whether resources add more value in the government sector or the private sector at the margin. If state‐local cuts eliminate low‐value activities allowing resources to be used for higher‐value private activities, then the cuts that Powell worries about would add to GDP, not reduce it. If state governments hire more computer experts to code expanded subsidy programs, those experts are not available to help private high‐tech firms expand.
To sum up, news stories in the WSJ and elsewhere often assume that government spending grows the economy and they quote Keynesian analysts supportive of that theory. Many reporters and analysts seem to naively assume that since government value‐added is a component of GDP, then government cuts automatically reduce GDP. But that ignores where governments get their resources—the private sector. Generally, when governments expand, the private sector contracts.
What is the proper size of government to maximize GDP? That is a complex question because we cannot rely on markets to discover the answer, as we can for, say, the proper size of the beer industry in GDP. We don’t know the marginal value of adding dollars for public schools and fighter jets versus leaving the dollars in the private sector to fund car manufacturing and wheat production. But we do know that there is a trade-off—that there is no free lunch as news stories on government spending often assume.
These issues of proper government size are discussed in this study.
Reasons against federal bail‐outs of state and local governments are discussed here.
Ed Clark, the 1980 Libertarian Party presidential nominee, turns 90 years old on May 4. Now that Rep. Justin Amash has thrown his hat into the ring for the 2020 nomination, I thought I’d offer some reminiscences about the earlier campaign.
In my misguided youth I was a teenage Young Democrat, a College Republican, and a young adult Libertarian Party activist, before I gave up politics for ideas and policy. In 1978, a few years out of college, I left my conservative job to become co‐manager of Ed Clark’s campaign for Governor of California on the Libertarian ticket. (He was actually on the ballot as an independent because it was much easier to get ballot status that way.)
As I wrote in the Encyclopedia of Libertarianism, Clark was a corporate attorney in New York and Los Angeles. He opposed the Vietnam War while remaining a Republican, but when President Richard Nixon imposed wage and price controls in 1971, he joined the Libertarian Party and quickly became a member of its national committee and California State Chair. As one of the most successful and articulate professionals in the fledgling party, he was persuaded to run for governor in 1978.
A political campaign with co‐managers sounds like a recipe for disaster. It wasn’t, for two reasons: because libertarian impresario Ed Crane hovered over the campaign as Chairman and guiding light, and because the two managers had entirely different skills. I was the words‐and‐policy guy, and Bob Costello was the people‐and‐organization guy, and even in a two‐desk office we actually managed to stay out of each other’s way.
Clark spent two months campaigning, with Bob and me scrambling to set up schedules. Mostly he stayed in the big cities of San Diego, Los Angeles, San Francisco, and Sacramento, plus one trip through Bakersfield, Fresno, and Stockton in the Central Valley. We had enough money for radio ads. They were very policy‐oriented, addressing school choice, busing, victimless crimes, the antigay Briggs Initiative, and the tax‐cutting Proposition 13, which only Clark of all the gubernatorial candidates had supported enthusiastically before it passed overwhelmingly. We also got enough last‐minute money to run some full‐page newspaper ads and put together a half‐hour interview (with then‐Reason columnist Tom Hazlett) that ran in major markets. (I wrote recently on Facebook about how I also directed actor Orson Bean in a couple of Clark commercials.)
In the end Clark got 5.46 percent of the vote, which we thought was pretty good for a candidate no one had heard of before the campaign and who had minimal money. We got the most votes in populous Los Angeles and Orange counties, but Clark’s percentages in both counties were below the state average. He did best in rural Nevada County, where there was a strong local organization, and in Kern County, where the Bakersfield Californian endorsed him and then actually ran news stories about him for a week — as newspapers always do for the Republican and Democratic candidates. And even one on‐the‐trail feature story, which began (if I recall) “He has the charisma of John F. Kennedy and the verbal agility of Bill Buckley.” Which might just be a description that no candidate could live up to. With that minimal coverage he got almost twice his statewide average in Kern County. Good thing we made that one trip to Bakersfield, where he met with the paper’s editorial board. He also did well in the San Francisco suburbs and in the northern counties of Humboldt, Mendocino, and Trinity — known as the “Emerald Triangle” for their widespread pot growing. Probably should have taken a campaign swing up that way.Read the rest of this post »
As the $2.2 trillion CARES Act sailed through Congress, the general mood was that money had to get out the door as quickly as possible to provide relief for households and businesses.
Details were of second‐order importance – lawmakers simply wanted dollars flowing to businesses through loans and payroll support, to households through checks, and to those laid off because of COVID-19 through more generous unemployment insurance benefits. One might say Congress threw everything but the kitchen sink at the relief effort, in the hope that at least one program would cover everyone suffering.
Well, it turns out there are unintended consequences of throwing dollars through programs with different aims simultaneously. One obvious example is how the more generous benefits for unemployment insurance and the small business‐focused Paycheck Protection Program come into conflict.
The CARES Act’s Pandemic Unemployment Assistance waived job‐search requirements for unemployment insurance and hugely expanded eligibility for those affected by the pandemic. Most importantly, the federal government agreed to pay anybody eligible $600 per week on top of their state unemployment insurance benefits.
As a result, many workers would now be better off out of work than in work, even more so given going to work brought greater risk of contracting the virus. Senator Lindsey Graham, and several commentators, pointed this out as a problem at the time. But his concerns were largely dismissed — paying people to stop activity was seen as a feature, not a bug.
At the same time, the recently expanded Paycheck Protection Program aimed to supply small businesses, hospitality industry companies, and some other eligible businesses with federal guaranteed loans to cover costs, such as payroll, rent, and utilities. But the main aim of the program was for businesses to keep employees on payroll. To do this, businesses were given a financial incentive: the loans would be forgiven if the business avoided cuts to headcount or curbs on wages over eight weeks after funds were dispersed. The more payroll outlays fell, the smaller the part of the loan forgiven.
Can you spot the problem businesses face yet?
Employees might often find themselves financially better off in the short‐term if they are laid off. But if employers want to have the PPP loan forgiven, they have to avoid having reduced headcount. Some employees are urging employers to lay them off, while many employers are desperate to retain or quickly rehire those same workers to keep their businesses viable through a forgiven loan.
Now, employees can’t just leave the business unilaterally to start claiming unemployment insurance. At least in theory, they must be fired. But what we are seeing is that these laws combined are putting business owners in a very difficult position.
CNBC reports on a spa owner informing her staff of success in obtaining a PPP loan, for example:
When Black‐Lewis convened a virtual employee meeting to explain her good fortune, she expected jubilation and relief that paychecks would resume in full even though the staff — primarily hourly employees — couldn’t work.
She got a different reaction.
“It was a firestorm of hatred about the situation,” Black‐Lewis said.
The animosity is an unintended consequence of the $2.2 trillion coronavirus relief package enacted last month.
The anger came from employees who’d determined they’d make more money by collecting unemployment benefits than their normal paychecks.
On Twitter, one business owner said that he tried to keep a skeleton food service going, but workers were anxious about interacting with each other, so he laid them off so they could claim unemployment insurance. Yet that made applying for PPP problematic, because he would have had to rehire staff who currently would prefer not to work. So he passed up on the PPP, meaning he is still facing bills with no assistance. NPR reports too of a coffee shop owner in Harlan, Ky. who closed her doors after employees urged her to lay them off so that they could obtain unemployment insurance.
Meanwhile, business owner Kurt Huffman wrote for the Wall Street Journal:
…we realized that we needed to hire back some of our staff to help with the demand. That proved harder than we expected.
We started making the calls last week, just as our furloughed employees began receiving weekly Federal Pandemic Unemployment Compensation checks of $600 under the Cares Act. When we asked our employees to come back, almost all said, “No thanks.” If they return to work, they’ll have to take a pay cut.
More generous unemployment insurance, in other words, is making laid off workers less likely to accept re‐hiring and current employees more likely to request employers lay them off. But PPP loan forgiveness for businesses is conditional on them not reducing headcount or wages by June 30th. So businesses suffer financially for doing what is financially better for many of its employees. The two programs directly clash in terms of incentives and are producing discord in the businesses Congress sought to keep mothballed.
Plenty of evidence suggests Americans have gotten worse at correctly estimating market prices over the past five decades. Reviewing the history of the one‐bid “Contestant’s Row” game on The Price Is Right since 1972, economist Jonathan Hartley found that contestants’ underestimates of prices have gotten larger over time. One potential cause, Hartley mused, was that new technologies, such as price comparison websites, mean people have less need to track closely nowadays. So we pay less attention to prices and how they change.
Which is curious, because, as this pandemic rolls on, lots of the public and politicians suddenly find themselves not just experts in what market prices are, but also what they should be. By all accounts, the Virginia Attorney General’s office has received more than 400 complaints about “price‐gouging” during the pandemic – that is, instances where prices for “necessary goods and services” have been deemed by members of the public to be much higher than prior to the emergency. Twitter is full of complaints about prices being charged for hand sanitizer and masks, but also entertainment goods, with anger at Nintendo Switches being sold for as much as $900.
Lots of states already have anti‐price gouging laws for emergency situations. But with stories about packets of Purrell Hand Sanitizers, usually around $10–12, selling for as much $350, national politicians are now keen to step in. Congressman Jerrold Nadler (D-NY) and colleagues in the House want a nationwide anti‐price gouging law giving the Federal Trade Commission powers to punish companies if their product price today “grossly exceeds” either the price at the end of last year, their competitors’ prices, or a price sufficient to account for any increased costs the business faces. Democratic Senators Kamala Harris and Elizabeth Warren, meanwhile, want a national law that bans price increases of more than 10 percent during national emergencies.
The implicit message of such proposed laws is clear: market prices set prior to emergencies are good, fair and reasonable; market‐set prices after the onset of one are bad, unfair and unreasonable. At least, that is, if they go up significantly. When prices plunge, as they have for flights, restaurant food, and clothing during this crisis, nobody seems to believe that consumers are gouging or swindling companies. Our politicians have very asymmetric thinking.
It is as if lawmakers such as Warren and Harris believe supply and demand cease to play a role in determining prices once a government emergency is declared. That changes in prices after that point cannot possibly reflect major changes in the availability or want and need for the goods but are completely determined by greedy companies or hoarders fixing prices in pursuit of a quick buck or to account for changing costs. That assumption shows a fundamental misunderstanding about what prices are and why they change.
Such thinking is especially misguided during COVID-19, of course, because shutdowns and changed consumer behaviors have seen dramatic shifts in supply and demand across many sectors. In some states, for example, governors have banned the sale of “nonessential” items, such as seeds for growing plants, within supermarkets. More importantly, in light of the virus itself, consumers want (or in some cases need) more masks and hand sanitizers to protect themselves. This surge in demand is the primary cause of apparent near‐term “shortages” in stores, but also the reason why some sellers are able to charge much higher prices online.
Ordinarily, market prices would rise in light of such increased demand. This would discourage some purchasers from overbuying and encourage sellers or hoarders to bring more supply to serve the market. Overall sales would rise but, importantly, over time, the greater profitability from selling, say, face masks, would encourage other potential new suppliers to enter the market and ramp up production too. The higher prices, in other words, would encourage more face masks than there otherwise would be, at least after a while. This could be particularly important if this crisis rolls on for months and months.
Now, in reality, some major retailers do not like the reputational damage that comes with seeing prices of important goods rise in the middle of a pandemic. So, they keep them artificially low, sometimes even discounting the products. Hence why shelves lay empty in major stores and why, increasingly, we see small sellers able to charge extremely high prices to people who really value the products in the online market. Warren and Harris may wish this away, but these prices reflect the new reality of supply and demand – remember, to charge a high price, you have to have willing buyers.
By imposing anti‐price gouging laws then, Warren and Harris aim to quash this escape valve through the force of law. The result will be greater shortages and sustained empty shelves in situations where new demand would have pushed market prices up by more than 10 percent. Instead, goods will be allocated not by willingness to pay, but to those in the right place at the right time. Hoarding will be encouraged. And most worryingly: fewer new entrepreneurs will serve the market or think about developing systems for “option ready supply” ahead of any similar future crisis.
In the Price is Right game, of course, contestants win if they make the closest guess to the real price, without going a cent over. Warren and Harris, in effect, want to tell us that anything up to 10 percent above a pre‐crisis price is a “real” price and anything above that during a crisis is illegitimate. This arbitrary approach has no basis in economics and could do real harm to the ongoing availability of highly demanded goods.
Second in a series (first is here):
* For me, the week’s high and low morale‐wise came on the same day in contrasting stories from stricken New York City. The high came with reports of how an estimated 500 EMS crew members from around the country and their vehicles have converged on Gotham from points including Kalamazoo, Mich., Fergus Falls, Minn., and Florida to help the city handle an emergency medical call volume running far above normal. As one who’s lived much of my life in the greater New York area and remembers similar help in the days after 9/11, it means a lot to me to see these heroes taking real risks to come to the aid of the city, not because they have to but because they want to.
The low point came the same day when I read that New York City Mayor Bill de Blasio in an official statement had “called on the federal government to institute an essential draft of all private medical personnel to help in the fight against COVID-19.” The mayor’s office later confirmed to J.D. Tuccille of Reason that he had conscription in mind. Happily, de Blasio’s call for the use of coercion found few echoes, perhaps because it would be such a brutal assault on individual liberty, perhaps because the mayor’s own reputation for handling the virus stands so very low that hardly anyone is looking to take advice from him. (De Blasio also figured in last week’s notebook when he threatened to close down rule‐breaking synagogues “permanently.”)
* Chris Edwards wrote Wednesday about the battles in which the federal government (as well as some state governments, like those of New Jersey and New York) have stepped in to intercept and requisition supplies of key medical supplies needed in the crisis, from ventilators to personal protective equipment (PPE) to testing supplies. The phenomenon here — local hospitals, businesses, and communities trying to do the right thing for their patients and employees, then finding their carefully developed lines of supply commandeered — reminds me of a famous passage from Ludwig von Mises’s Human Action, about how central planning is inconsistent with the capacity of smaller entities and individuals to plan out their own futures. “The alternative is not plan or no plan. The question is whose planning? Should each member of society plan for himself, or should a benevolent government alone plan for them all?”
* Last week I mentioned a seemingly wacky idea about using the crisis as an excuse to ban tobacco and vape devices. Now the New York Times is promoting that idea, in a discussion that makes zero mention of the implications of creating a gigantic new covert black market as well as, of course, zero mention of the concept of freedom.
* I’ll end on a more positive note with an anecdote from the serious 1957 Asian flu outbreak about vaccinologist Maurice Hilleman, who per his compelling Wikipedia biography “is credited with saving more lives than any other medical scientist of the 20th century.” Per a Tyler Cowen commenter, “Hilleman took a step that seems unbelievable in the bureaucratically hardened, litigious society of today. He bypassed [the federal department that is now HHS] and contacted the heads of the 6 U.S. vaccine manufacturers directly. His message was simple. ‘Don’t kill your roosters.’” Why were the roosters important? Follow the link and see.
Looking for intellectual stimulation while you’re stuck at home? Why not take a short course in the history of liberty?
The Encyclopedia of Libertarianism, published in 2008 in hard copy, is now available free online at Libertarianism.org. The Encyclopedia includes more than 300 succinct, original articles on libertarian ideas, institutions, and thinkers. Contributors include James Buchanan, Richard Epstein, Tyler Cowen, Randy Barnett, Ellen Frankel Paul, Deirdre McCloskey, and more than 100 other scholars.
In an interesting discussion of social change and especially the best ways to spread classical liberal ideas at Liberty Fund’s Online Library of Liberty, historian David M. Hart had high praise for the Encyclopedia:
The Encyclopedia of Libertarianism provides an excellent survey of the key movements, individuals, and events in the evolution of the classical liberal movement….
One should begin with Steve Davies’ “General Introduction,” pp. xxv‐xxxvii, which is an excellent survey of the ideas, movements, and key events in the development of liberty, then read some of the articles on specific historical periods, movements, schools of thought, and individuals.
He goes on to suggest specific articles in the Encyclopedia that are “essential reading” for understanding “successful radical change in ideas and political and economic structures, in both a pro‐liberty and anti‐liberty direction.” Here’s his guide to learning about the history of liberty in the Encyclopedia of Libertarianism:
- The Ancient World
- “Liberty in the Ancient World”
- Medieval Period
- “Scholastics — School of Salamanca”
- Reformation & Renaissance
- “Classical Republicanism”
- “Dutch Republic”
- The 17th Century
- “English Civil Wars”
- “The Levellers”
- “John Milton” & “Puritanism”
- “Glorious Revolution”
- “John Locke” & “Algernon Sidney”
- The 18th Century
- 18thC Commonwealthmen — “Cato’s Letters”
- The Scottish Enlightenment
- “Adam Smith”, “Adam Ferguson” & “David Hume”
- The French Enlightenment
- “Physiocracy” — “Turgot”
- “Montesquieu” & “Voltaire”
- “American Revolution”
- “Declaration of Independence” — “Thomas Jefferson” & “Thomas Paine”
- “Constitution, U.S.” — “James Madison”
- “Bill of Rights, U.S.”
- “French Revolution”
- “Declaration of the Rights of Man and of the Citizen”
- The 19th Century
- “Classical Liberalism” — the English School
- “Philosophic Radicals”
- “Utilitarianism” — “Jeremy Bentham”
- “Classical Economics” — “John Stuart Mill”
- “Classical Liberalism” — the French School
- “Jean‐Baptiste Say” & “Benjamin Constant”
- “Charles Comte” & “Charles Dunoyer”
- “Frédéric Bastiat” & “Gustave de Molinari”
- Free Trade Movement
- “Anti‐Corn Law League” — “John Bright” & “Richard Cobden”
- “Feminism and Women’s Rights”
- “Mary Wollstonecraft”
- Abolition of Slavery — “Abolitionism”
- “William Wilberforce”
- “William Lloyd Garrison” & “John Brown”
- “Frederick Douglass” & “Lysander Spooner”
- [The Radical Individualists]
- “Thomas Hodgskin”, “Herbert Spencer”, & “Auberon Herbert”
- The “Austrian School of Economics” I
- 1st generation — “Carl Menger”, “Eugen von Böhm‐Bawerk”
- interwar years — “Ludwig von Mises”, “Friedrich Hayek”
- Post‐World War 2 Renaissance
- “Mont Pelerin Society” — “Friedrich Hayek”, “Milton Friedman”, “Karl Popper”, “James Buchanan”
- Institute for Economic Affairs (IEA) & “Antony Fisher”
- Foundation for Economic Education (FEE) & “Leonard Read”
- Institute for Humane Studies & “F.A. Harper”
- The Austrian School of Economics II
- post‐WW2 2nd generation — “Ludwig von Mises”, “Friedrich Hayek”, “Murray N. Rothbard”, “Israel Kirzner”
- “Chicago School of Economics” & “Milton Friedman”
- “Objectivism” & “Ayn Rand”
- “Public Choice Economics” & “James Buchanan”
I could add more essays to his list, but I’ll restrain myself to just one: Along with the essays on the Constitution and James Madison, read “Federalists Versus Anti‐Federalists” by Jeffrey Rogers Hummel.
By the way, you can still get the beautiful hardcover edition if you prefer real books, for yourself or as a gift.
Human life is highly valuable. Basic economic reasoning therefore suggests that, given the risks of COVID-19 to vulnerable populations, we should be willing to withstand large economic costs to prevent the risk of substantial numbers of deaths. This is particularly true if most of those economic costs are temporary.
They highlight estimates suggesting that the estimated value of a statistical life (commonly around $9.3 million) and a quality-adjusted-life year ($129,000) tend to be high. They show that modeling from the CDC and Imperial College suggests a high loss of U.S. life if no action is taken to stop the spread of COVID-19. They work out the value of additional lost lives if no government action is taken to avoid the worst-case scenarios where hospitals are over-capacity, with shortages of ICU beds. They conclude that we should be willing to incur trillions, and potentially tens of trillions, of lost economic output to ensure these lives are saved.
Such simple analysis, though, largely tells us one thing: that inaction could be highly costly. Yet nobody is credibly suggesting today that we “do nothing.” What usually makes economists worth their salt is their ability to think on the margin, and to judge alternative realistic scenarios. Economists need to start being economists again.
Michael Greenstone and Vishan Nigam’s work, for example, estimates that social distancing measures alone (7 day isolation for those with symptoms, 14 day isolation for their family, and infrequent social contact with over 70-year olds for 4 months) could save up to 1.7 million U.S. lives over the next six months relative to doing nothing, providing $8 trillion in benefits.
That figure is sensitive to assumptions about the virus's spread and death rates taken from the Imperial paper. It would be much lower at $3.6 trillion if the peak of daily deaths was 60 percent lower. But, still, even this suggests we should be willing to tolerate medium-term losses of up to 16 percent of today’s GDP to save those lives. Though economists do expect GDP to collapse significantly in Q2, most expect it to rebound strongly whenever the public health issue ends. So, taking this social distancing action looks cost-effective in the medium-term.
Now, one can quibble with the assumptions of such analysis. My real problem though is that too few economists are then asking follow-up questions about the wisdom of additional policy:
- If this is broadly right, what are the net impacts of “nonessential business” closures or shelter-at-home orders? Are these more suppressive measures, in isolation, cost-effective?
- Are they even optimal from a public health perspective, given the larger economic pain and the likelihood of an infection peak if they are released abruptly?
- What if even stronger constraints on economic activity like this risk a financial crisis or widespread business failures that simple social distancing or contact tracing would not?
- After what length of time would such suppressive measures be cost ineffective?
- How does the potential for a vaccine change any of these considerations?
- Would any of these actions be bettered by throwing tons of resources simply into repeat COVID-19 and antibody testing for the whole population, combined with social distancing for those infected?
- Are there some industries caught up in the nonessential business closures we are seeing where the output costs of closures are high and the benefits in terms of reduced risk of infection low? Why aren't these excluded? Are their big behavioral benefits to be seen to be all in it together?
I don’t know all the answers. What I do know is that we seem to be locked in an inane debate about whether what we are doing is better than nothing. We should instead be focused on which policies minimize the combined long-term health and economic costs of this pandemic. Just because lives are valuable, and so action to save them is better than inaction, doesn’t mean specific lockdowns or shelter-at-home orders are optimal policy. We want to find the most cost-effective way of dealing with the public health crisis to enable economic activity to return to normal.
In fact, big errors of thinking abound on all sides in this debate, from the “whatever it takes” crowd right through to the “cure is worse than the disease” view. So here’s some questions you should ask when you read commentators or economists comparing economic costs and healthcare benefits of certain actions:
- Are they comparing realistic alternative scenarios, or just “a particular action” vs. “complete inaction”?
- What assumption for death rates are they using, given this parameter is highly uncertain? (Hopefully greater testing will improve our knowledge in the very near future, and could help avert prolonged economic mistakes).
- How much do they value a human life? Does their assumption vary with age, rather than just presuming all human lives are of equal value?
- Are they seeking to account for a fairly comprehensive measure of costs and benefits for different scenarios? For example, potential lung damage for survivors of COVID-19, mental and physical health costs of shutdowns, risks of economic contagion, and the economic consequences of widespread bankruptcies?
- Do they correctly recognize that it’s likely that many producers and consumers would still restrict their activity to avoid the virus before an effective treatment, vaccine or herd immunity is developed, even if government policy changed?
- Over what time period are they comparing the value of any lives saved against GDP lost? It would be wrong, for example, to compare the value of lives lost against the decline in GDP for this quarter, given economists fully expect GDP to bounce back strongly as things begin to normalize. In fact, some historical analyses find public health policies with bigger short-term costs can produce better long-term economic performance.
- Are they comparing apples with apples? Lots of economists seem to be comparing the value of lives saved against GDP lost. But the value of human life is a welfare measure - it incorporates the benefits an individual expects to derive from his or her own life, including leisure time, friendships, and consumption. GDP, in contrast, just measures lost output. Shouldn’t we also account for the lost value of our liberties? Casey Mulligan has valiantly tried to assess broader losses to our economic welfare from lockdowns, such as not being able to participate in our preferred leisure activities, or experiencing worse schooling. These are real costs too.
Yes, all this makes analysis more complicated. But policymakers are currently making huge decisions fundamentally altering the health and economic well-being of all of us. Economic cost-benefit analysis is made for trying to compare the cost-effectiveness of different policy options. It's time to move the debate on from straw man discussions of "action" vs. "inaction" to assess what’s next.