COVID-19 Policy: A Failure of Economic Thinking

A host of policy decisions by politicians and regulators made the COVID-19 crisis worse, whether by facilitating the wider spread of the disease or harming economic welfare unnecessarily. Behind many bad calls lay a failure to think as a good economist would.

January 28, 2021 • Pandemics and Policy
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COVID-19 Policy: A Failure of Economic Thinking

A host of policy decisions by politicians and regulators made the COVID-19 crisis worse, whether by facilitating the wider spread of the disease or harming economic welfare unnecessarily. Behind many bad calls lay a failure to think as a good economist would.

January 28, 2021 • Pandemics and Policy

Introduction

This essay is a part of the Pandemics and Policy series.

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When devising COVID‐​19‐​related policy, federal and state policymakers should

  • think clearly about the costs and benefits of regulations that slow the rollout of medical innovations;
  • avoid needlessly banning activities or mandating actions that harm economic welfare for little public health benefit;
  • articulate clear and consistent public health messages about the risks of COVID-19 to avoid sharply fluctuating attitudes to risk;
  • prioritize policies that will accelerate the end of the pandemic rather than merely provide relief from its effects;
  • avoid thinking of product markets as zero‐​sum in formulating public health guidance;
  • repeal state‐​level anti‐​price‐​gouging laws and other sector‐​specific price controls; and
  • avoid “sicken‐​thy‐​neighbor” trade policies.

Much has been written about how the U.S. governments’ failures to prepare, and policy missteps since the pandemic began, have exacerbated COVID-19’s toll in terms of lives lost and economic harm. Columnists regularly denounced former President Donald Trump and claimed his poor leadership worsened outcomes. Combined “informed conventional wisdom” holds that better preparation and a more attentive response from Trump and state governors would have avoided much of the harm suffered in the United States.

The relative success of South Korea, Taiwan, Australia, and New Zealand suggests that good policy and effective leadership can make a real difference. Even so, the conventional wisdom fails to explain one crucial factor that underpins why many bad decisions in the United States have been made: faulty economic thinking on behalf of U.S. policymakers.

When economics is discussed during this pandemic, it’s usually in relation to unemployment numbers, forecasts for gross domestic product, or the debate around an appropriate fiscal policy response. But at its most basic, economics is about analyzing choices made under constraints. Politicians and government agencies made a vast range of public health decisions this past year that violated principles that good economists take for granted. These decisions made the public health and economic welfare impacts of the pandemic worse than they needed to be. In that sense, the poor response to COVID-19 represents a failure to think economically.

These errors were not deliberate. Policymakers were working under extreme pressure and, at the start of the pandemic especially, were faced with radical uncertainty. But the combined results of the errors were devastating. Together, they meant an initial spread of the disease far worse than otherwise; an impaired adjustment to our living with the pandemic; volatile behavioral change from the public; shortages of products that could help contain the virus; heightened skepticism about the efficacy of helpful, voluntary behavioral changes; and distrust in public health officials.

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Failure to Think through the Appropriate Costs and Benefits of Policies

Economists think about the costs and benefits of actions relative to inaction. Sadly, government agencies massively misjudged the relative costs and benefits of certain diagnostic testing regulations, worsening the spread of COVID-19 early in the pandemic.

The emergency use authorization process from the Food and Drug Administration (FDA) hampered the introduction of novel polymerise chain reaction (PCR) COVID-19 diagnostic tests at the start of the pandemic. The rationale was that tests without very high accuracy could mislead public health efforts about the state of the pandemic. Though this was an understandable concern, a basic cost‐​benefit analysis would have shown it to be misguided.

The United States had a narrow window to head off community spread and the subsequent devastating consequences. The benefits of widespread testing in terms of catching more cases early was therefore very large, even if an imperfect test showed some false positives. More testing would have helped isolate more of those infected and, since it would have been easier at that stage to follow up with contact tracing, would have provided more information about where (geographically and spatially) infections were occurring. On the margin, this action would have lessened the probability of needing costly lockdown policies later, bringing large gains in the form of maintaining economic activity.

The costs of being permissive on new applications for diagnostic tests, on the other hand, were low, because the alternative to imperfect tests was a lack of testing and the virus spreading unchecked. In declining to approve tests because of fears about their accuracy, policymakers were endorsing a regime where lots of people faced a test of zero accuracy: not having one. That meant vastly more “false negatives”—people going about their lives while unknowingly infected—and “false positives”—people having to act as if they were infected because they did not have any confidence in knowing whether they were.

As economist Casey Mulligan explained, the large costs of this sort of delay on medical innovations during a devastating pandemic make reaching for perfect efficacy foolish. This is especially true of diagnostic testing. Journalist Ed Yong described the failure to deliver early testing as “the original sin of America’s pandemic failure.” He concludes that if “the country could have accurately tracked the spread of the virus, hospitals could have executed their pandemic plans, girding themselves by allocating treatment rooms, ordering extra supplies, tagging in personnel, or assigning specific facilities to deal with COVID-19 cases.” Unbelievably, working diagnostic tests developed in the United States were used in Sierra Leone before they were used at home.

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Falling for the Nirvana Fallacy

Wrapped up in the testing debacle is a second economic mistake—regulators falling for the “nirvana fallacy.” Economist Harold Demsetz coined the phrase to describe when “public policy economics implicitly presents the relevant choice as between an ideal norm and an existing ‘imperfect’ institutional arrangement.”

In this instance, the FDA was implicitly comparing the likely imperfect accuracy of newly developed tests against a very high efficacy threshold, ignoring that the real‐​world alternative at that time was an absence of testing.

Even after months of enduring this hard lesson, however, the FDA made a similar nirvana fallacy mistake with rapid, at‐​home saliva tests by insisting that the tests meet the same sensitivity standards as applied to existing PCR tests.

On the face of it, this sounded reasonable—why would you want to greenlight a test that would identify fewer infections than tests that have already passed the threshold? But this ignored the other advantages of these novel tests in terms of being able to reduce the transmission of COVID-19.

First, these rapid tests were much cheaper, meaning that they could be undertaken more regularly for a given testing budget, particularly to identify asymptomatic cases. Second, because they could provide results more rapidly (often within 15 minutes), they provided a faster signal to those testing positive to isolate.

By insisting on very high sensitivity, regulators were ignoring these clear advantages. Instead, they implicitly assumed that we could have the advantages of rapid testing along with the highest standards of accuracy—a “nirvana” that was unavailable at the time.

Yes, ideally, a saliva test would maintain its rapid processing time and cost while also being more sensitive. But as economists Alex Tabarrok, Joshua Gans, and some scientists outlined, for any given dollar expenditure, there were clear advantages to a testing regime based on rapid tests allowing swift isolation of those testing positive. The worry about missing infections because of the rapid tests’ lower sensitivity was also overblown given that rapid tests were likely to pick up those who were infectious at the time, which is the most important group to isolate.

At the very least, businesses, universities, and families could have used rapid tests sooner for screening purposes to allow more commercial and social activity. But, again, regulators delayed this possibility, allowing the pursuit of perfection to be the enemy of the good. We continue to suffer as a result, as many people spread the disease unknowingly for days before their PCR test results come back or else steer clear of engaging in economic or social life when they are not infected.

Failure to Think on the Margin

Through the COVID-19 crisis, politicians and public health regulators have regularly failed to “think on the margin”—that is, to consider how each additional public health intervention or piece of guidance might individually affect the transmission of the virus and economic activity, rather than seeing public health measures as bundles of regulations.

The original state‐​level lockdowns were incredibly crude, with stay‐​at‐​home orders and nonessential business closures banning much activity irrespective of its risk of spreading the disease. Some of the public health interventions imposed large costs for little additional public health gain. The marginal impact of stay‐​at‐​home orders banning activities such as fishing, or regulations in some states prohibiting the sale of “nonessential items” within open stores, clearly harmed economic activity for little public health benefit, thus lowering economic welfare.

In thinking through whether to impose lockdown‐​like policies, we often see policymakers make too little attempt to strip regulations or public health interventions into their individual components to assess their marginal impacts on overall welfare. Where such assessments have been made, economists have found that nonessential business closures may have been self‐​defeating when placed on top of stay‐​at‐​home orders in the initial spring outbreak.

Work since then has used phone tracking mobility data for 98 million people in 10 major cities in the early months of the pandemic as inputs into epidemiological models. The expected infections generated from the model reflected the trajectory of real cases reasonably well, suggesting that a small number of “points of interest,” such as restaurants, gyms, coffee shops, or religious gatherings, may have been associated with seeding an overwhelming majority of infections.

The study also found that grocery stores in lower‐​income areas appeared to see higher transmission of the virus than high‐​income areas, which it explained as being caused by stores in poorer areas getting more crowded relative to store size.

The implication is that restricting maximum occupancy, encouraging better ventilation, or using targeted closures of all these places would have been more effective and less economically harmful than constraining people’s mobility uniformly using stay‐​at‐​home orders.

Trying to Fine‐​Tune Behavior

Politicians in some states have tried to “fine‐​tune” our behavior to control the spread of the virus by switching on and off their so‐​called nonpharmaceutical interventions, including regulations on businesses, nonessential business closures, and stay‐​at‐​home orders.

As the Financial Times’ Chris Giles wrote, in the 1960s it was economic conventional wisdom that government macroeconomic policy could be altered delicately to keep inflation and unemployment in balance. We learned from the rough experience of the 1970s that this was a false choice—ending up with both high inflation and high unemployment.

But during this pandemic, politicians have tried something similar: thinking they can turn stay‐​at‐​home and business regulations on and off to try to keep the reproduction rate of the virus at one or below and trade this off against reviving economic activity. Unfortunately, in many places at many times, they have likewise ended up with both widespread prevalence of the virus and, ultimately, depressed economic activity.

Some of the reasons for this failure would be familiar to economists versed in the failure of Keynesian fiscal policy:

  • The absence of widespread and rapid testing meant that policymakers were often working with out‐​of‐​date or inaccurate information about COVID-19 transmission, meaning that they did not time their interventions appropriately.
  • What looked like optimal policy in balancing concerns on one day may have turned out to be suboptimal policy in retrospect because of the way the virus spreads rapidly.
  • Government policy changes themselves create behavioral reactions, as individuals and families internalize messages about the state of the pandemic. For example, if governments set the expectation that they will lock down the economy whenever the virus is out of control, then, on the margin, times without lockdowns will be regarded as “safe” to engage in activity, potentially setting off more interactions and transmission of the virus.

The bottom line is that policymakers might have achieved better results if they had focused on clearer sustained rules and guidance with the aim of keeping the reproduction rate of the disease below one, rather than attempting to micromanage the path of the pandemic in response to changes in the prevalence of the disease.

Just as Keynesian economists focus too much on short‐​run boosts to the economy via government spending, too many policymakers overly focused on the role of nonpharmaceutical interventions in controlling the pandemic. They would have been better served by focusing earlier on measures that could have eased any tradeoffs between economic activity and disease prevalence by allowing more activity to occur safely—measures such as guidance on mask wearing, better ventilation, removing regulations inhibiting outdoor activity, and removing barriers to medical innovations that allow screening for infectious cases.

A Fiscal Response for a Conventional Recession

Much of Congress’s fiscal response to COVID-19 has been standard Keynesian demand‐​side “stimulus,” predicated on the belief that government spending or transfers can revive economic activity by encouraging people to spend.

Targeted relief to industries and households adversely affected by the pandemic could feasibly help maintain existing jobs or prevent evictions. In doing so, it could help avoid cutbacks in spending caused by job losses or the search costs of people seeking new jobs after the pandemic passes. Yet, overall, the federal government has put too much emphasis on shoveling federal dollars around—exemplified best by the large “stimulus” checks sent to over 80 percent of American adults.

These types of policies misdiagnose the key economic problem caused by the pandemic. The primary issue is not depressed consumer spending due to people’s concern for their incomes. Rather, the prevalence of the disease depressed activity across many industries because of people’s natural concern for their health or government restrictions on businesses’ operations.

State‐​level evidence clearly shows that the sharpest downturns in consumer spending occurred prior to the initial lockdowns; spending then partially recovered before lockdowns were lifted. This suggests that people adjusted their consumption behavior according to news about the virus’s prevalence—updating their perception of risks—and that over time people found new activities to substitute for those shuttered.

Yet without the virus ever being suppressed in the United States, as it has been for long periods of time in, say, South Korea, economic activity was always going to remain depressed. Even 10 months after the pandemic began, consumer spending nationwide was down 2.8 percent compared with January 2020 (7.2 percent in high‐​income zip codes), and the number of small businesses open is 30 percent lower. That spending downturn is most acute for sectors such as entertainment, transport, and restaurants and especially strong in high‐​income counties. What we have here is not a story about incomes being insufficient to maintain consumption but a story about people being unable or unwilling to spend because of the risks associated with the virus.

As Nobel Prize–winning economist Paul Romer explained, if we really want to see a rapid economic rebound, we must deal with the underlying issue: the virus. “Too many people were fighting the last war and not recognizing the new circumstances we were facing,” he said in an interview. Calls for more and more “stimulus” missed the point, he said, adding that “because of this virus, it was doomed to fail.” A bigger “stimulus” was available in the form of committing resources, or removing barriers, to speed up medical innovations such as vaccines, testing, and treatments to reduce the costs of the pandemic and allow a more rapid normalization of life.

Yes, the federal government has spent some money on things that could help, including testing, personal protective equipment, and research and development funds and advanced orders for vaccines as part of the Operation Warp Speed. However, it failed to remove barriers preventing a mass rapid testing regime or effective contact‐​tracing programs. Even as high‐​efficacy vaccines were being rolled out, politicians passed a second broad economic stimulus package that was extraordinarily heavy on relief, including sending another round of checks to households. Analysis from the Committee for a Responsible Federal Budget shows that only $51 billion of the estimated $935 billion fiscal cost of that bill was accounted for by spending on vaccines, testing, and contact tracing. Yet, by ending this costly pandemic sooner, any spending measure that could grease wheels for the vaccine rollout would have much larger economic benefits than anything cash transfers could achieve.

Thinking Markets Are Zero‐​Sum

Most politicians and public health experts now recommend wearing masks. But in February and March 2020, health officials such as Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, and surgeon general Dr. Jerome Adams advised against the general public wearing facemasks, despite them being a relatively low‐​cost way of potentially protecting people from infection.

As Cato’s Peter Van Doren explained, this advice was given in part because scientists, at the time, assumed that the virus was transmitted by those already presenting with symptoms. Mask wearing for people without symptoms was therefore thought pointless.

Yet that doesn’t explain why Fauci and Adams actively told people to not wear masks, despite them being a low‐​cost way for individuals to protect themselves from a potential risk. Fauci and Adams worried that heightened demand for masks would create shortages of surgical and N95 masks among health care professionals, who really did need them.

This line of thinking proved costly on two levels. In terms of public health, the risks associated with mask wearing were extremely asymmetric. There was little cost to an individual wearing one but potentially a large benefit to individuals protecting themselves against even the potential of asymptomatic transmission, which abundant evidence now suggests could be an important cause of the virus spreading. Ultimately then, presuming this advice was heeded by significant numbers of people, Fauci and Adams’ faulty initial position on the science meant a worse spread of the disease, at least on the margin.

More pertinently, the policy mistake arose because Fauci and Adams wrongly thought of mask markets as zero‐​sum and the number of facemasks in circulation irrevocably fixed, meaning that one person using one left fewer for others. In fact, markets are adaptive and dynamic. A recommendation to wear masks would have led to a lot of enterprising, including people making masks at home and businesses finding innovative ways to protect people. Meanwhile, if demand had surged and prices rose, there would have been a strong incentive for new producers to enter the sector. Shortages wouldn’t have lasted long.

More recent evidence suggests that the failure of public health officials to think like economists in recognizing how suppliers would respond caused needless pain and suffering. Evidence from Canada and Germany suggests that greater mask wearing earlier in the pandemic (which would have surely occurred if government health experts had remained neutral) could have reduced infections and, ultimately, deaths. Yes, there are still doubts about masks’ overall public health benefits given that scientists now believe aerosol transmission could be the primary way the virus spreads. That means we should worry about a Peltzman effect—people presuming that they are safe when wearing masks and so engaging in prolonged indoor contact in badly ventilated spaces, leaving themselves at risk.

But this reflects bad government guidance on how the coronavirus spreads rather than the marginal benefit of widespread mask wearing. Public health officials’ decision to explicitly advise against mask wearing on spurious economic grounds ultimately made it harder to obtain public buy‐​in for the behavior. The suspicion that they told a “noble lie” to avoid health care shortages also likely undermined trust in their later pronouncements, to the detriment of public health.

Sicken‐​Thy‐​Neighbor Trade Policy

Governments worldwide, including the United States, implemented export restrictions on personal protective equipment and medical gear after the pandemic hit. As with public health officials’ statements on masks, this scramble to hold onto resources was shortsighted, with policy set as if the availability of the products or components for medical goods and pharmaceuticals were fixed.

In adopting such controls, policymakers made the global battle against the virus more difficult. First, they ignored that medical and pharmaceutical supply chains create interdependencies between countries; we don’t produce or manufacture all our own medical goods or their components—nor would it be sensible to do so. Sicken‐​thy‐​neighbor protectionism by one country therefore leads to retaliatory protectionism, making every country worse off by preventing them from easily obtaining the equipment needed to mitigate the impact of the disease.

Second, as Tabarrok explained, banning exports restricts the effective size of the market for U.S.-produced medical products. That in turn deters companies from investing more in facilities and equipment to ramp up production, reducing the availability of these products at home and abroad. This could be even more damaging in the longer term, if the expectation of similar policies in the future reduces investment in so‐​called option‐​ready supply ahead of the next pandemic.

Killing the Price Messenger

Anti‐​price‐​gouging laws and other price controls that politicians have upheld or imposed during this pandemic created prolonged shortages of certain goods and hindered our ability to adapt to this pandemic.

The COVID-19 crisis fundamentally altered supply and demand patterns in product markets, with initial demand spikes for medical and cleaning products, home foods, and domestic variants of products such as toilet paper. In other sectors, such as meatpacking, the virus itself hampered production. More broadly, government responses to the pandemic worldwide saw supply chains disrupted and businesses operating under a cloud of uncertainty.

These dynamics would be expected to lead to rising prices in many sectors. But when driven by rising demand, the price rises themselves help alleviate some of the disruption, because they simultaneously deter the over‐​purchase of the products while providing incentives for hoarders to sell their stocks. Higher prices also encourage existing producers to ramp up production and new suppliers to enter the market.

Yet policymakers deterred this adjustment through state anti‐​price‐​gouging statutes that effectively capped prices of some important products. This ensured ongoing shortages because of hoarding and a tardy supply response to new demand.

By focusing on the observable aim of keeping prices low, perhaps because major price rises during emergencies are considered “unfair,” policymakers disincentivized more production of the very goods in short supply (e.g., hand sanitizer and toilet paper). The result was empty shelves and longer delays in fulfilling demand.

Conclusion

A host of policy decisions by politicians and regulators made the COVID-19 crisis worse, whether by facilitating the wider spread of the disease or harming economic welfare unnecessarily.

But contra the conventional wisdom, those mistakes weren’t simply the result of poor preparation or insufficient seriousness on the part of policymakers. Instead, behind many bad calls lay a failure to think as a good economist would.

In particular, policymakers failed to carefully consider the costs and benefits of regulations, fell for the nirvana fallacy in setting thresholds for medical innovations, failed to disaggregate their major interventions into individual components, ignored how their decisions would change people’s behavior, wrongly thought of mask markets as zero‐​sum, and killed off incentives to expand production of much‐​needed goods with price and export controls.

COVID-19 may well reflect a failure of leadership and public health preparation. But our experience also reflects faulty economic thinking.

About the Author
Ryan Bourne

R. Evan Scharf Chair for the Public Understanding of Economics