Economics in One Virus

0:00:07.2 Aaron Powell: Welcome to Free Thoughts. I’m Aaron Powell.

0:00:09.6 Trevor Burrus: And I’m Trevor Burrus.

0:00:11.0 Aaron Powell: Our guest today is Ryan Bourne. He occupies the R. Evan Scharf, Chair for the Public Understanding of Economics at the Cato Institute, and he is the author of the new book, Economics in One Virus: An Introduction to Economic Reasoning Through covid-​19. Welcome back to the show, Ryan.

0:00:27.0 Ryan Bourne: Great to be with you.

0:00:28.5 Aaron Powell: I’ve gotta ask, isn’t it maybe a little ghoulish to use the pandemic to talk about economics or advance an economic agenda?

0:00:41.5 Ryan Bourne: Well, I think economics, as we broadly define it, is basically just about the study, the social-​science study of human beings making choices under constraints, and when a major event like a pandemic hits, with the pervasive disruption all that causes, we have to make a range of consequential decisions, an individual basis and a public policy basis, which require thinking about trade-​offs, thinking about the unintended consequences of those decisions, and so making economic judgments. So while I agree with you that on the one hand, this is clearly first and foremost a public-​health problem, and there are value sets beyond economics that we’d want to consider in confronting a problem like this. I think economics is the kinda study of those choices, it’s kinda inescapable in making sure that we make good decisions when an emergency like this hits.

0:01:42.7 Trevor Burrus: What is the… You’re doing a reference. I think for anyone who is not aware of the title, what is the title referring to?

0:01:50.0 Ryan Bourne: Economics in One Virus is a play on a famous book by Henry Hazlitt, which is Economics in One Lesson. Economics in One Lesson tried to portray, in Henry’s view, the most important kinda lesson in economics is that when considering a decision or an action, we have to think about not just the scene or observe consequences, but the unseen and unobserved consequences.

0:02:13.5 Ryan Bourne: And he explained that lesson through a range of different case studies in what truly is a classic economic text. My book is attempting to do something different, it’s trying to provide readers with a whistle-​stop tour of a whole range of different economic principles and ideas, but through the one case study, the broad case study of the pandemic. That’s why it’s a play on that title.

0:02:38.8 Aaron Powell: We’ve talked a lot about the effects of the pandemic on the economy broadly, but it’s been a little bit odd and complicated because on the one hand, a lot of people lost their jobs or had their income reduced, but on the other hand, the stock market, it went down initially, but it has been on a record setting upwards tear ever since, and many of us who didn’t lose our jobs are feeling financially pretty okay, because if nothing else, our expenses may have gone down while our incomes remained the same. And so if we’re talking about the impact on economic welfare of the last year of the virus, how do we go about measuring that, given this complexity of experience?

0:03:30.4 Ryan Bourne: Well, it’s incredibly difficult to measure, and that’s one reason why ordinarily, particularly a libertarian economist wouldn’t attempt to taut up social welfare as a function, because clearly the way that people value different things, the consumption of different goods and services, the liberties is incredibly subjective. So it’s incredibly difficult to sum that up across a population, but what a lot of people do when they talk about economics is they describe it as if economics is essentially just the same as people’s financial situations, and clearly our financial situations as individuals in households or as a country overall is an important component of our well being, but our well-​being is enhanced by a whole range of things that don’t crop up in our personal finances or GDP. So in thinking about this as a kind of economic shock, yes, we have to consider what has happened to GDP and people’s personal finances, but we also have to try to account for the value of the lost liberties as a result of this pandemic. And also the economic welfare costs of the health aspects of the pandemic, because we know from behaviour in markets, that people highly value their health and they have a highly value of their lives because when they’re willing to trade off aspects of their health or risks of death in work, they require quite high degrees of compensation to account for those extra risks that they are bearing.

0:05:14.8 Ryan Bourne: So in thinking about the overall economic welfare consequences of this pandemic, we have to think about not just the lost out, but the lost value of the liberties and the economic welfare costs more broadly defined of the health consequences of the pandemic.

0:05:31.8 Trevor Burrus: So at the beginning of the pandemic, a little bit more than a year ago, right now. It was a very uncertain time, and you weren’t sure what people, whether you were dangerous or what people in your life could be dangerous, or who you could be endangering, which seems like by itself just a really good reason to just isolate. And you talk about that in terms of an externality, which we usually think about as like if you use the word “factories polluting” and things like this, so you could become an externality, but the thing I thought was interesting is… Isn’t that always true with disease, there nothing was really that different about covid-​19 in that way.

0:06:12.6 Ryan Bourne: To a certain extent as a society, we’ve accepted the risks of cold and flu and other viruses like that, there’s an inherent understanding that we have the right to go about our lives, and that if we do contract to them, that’s the risks that we take. I think where covid is concerned, the health consequences and the broader effects on those who catch the disease are on average a lot more severe than flu.

0:06:42.3 Ryan Bourne: There’s a debate around the exact number, but when you try and compare like with like on the infection fatality rate, most of the data that I’ve seen suggest that it’s 10 to 20 times more deadly than an ordinary flu across the population as a whole. So I think this is a bigger problem. But as you say, there’s a fundamental framework through which we can look at this from that externality perspective. And the thorny issue that we’re talking about here is a range of us engaging in social activities, and me and you might decide to meet for a pint or something, Trevor, and we acknowledge the risks that we’re facing, but as a result of that meeting, we could then risk passing on the virus, infecting others who were not party to that initial meeting, so we impose risk on third parties. And this is more difficult than many other externality problems because we actually can spread the virus when we’re asymptomatic or presymptomatic, so we don’t really… Unless we have widespread testing of everybody every day, we don’t really know who is infected, and so trying to come to some sort of agreement whereby we can compensate those that we’re putting at risk is really impossible.

0:07:57.0 Ryan Bourne: Human networks are incredibly dense and overlapping, and so we have this big general externality problem of this disease at a societal level. And sometimes quite often, markets can find innovative ways of dealing with externality problems if we… In lots of cases, if we… If property rights are assigned, we can come to some sort of compensation and judgments within markets, but this is a lot more difficult because as I say, quite often we don’t know who actually has the disease in the first place, and even when you do catch the disease, you don’t know who you’ve caught it from, so it’s quite difficult to assign the rights, and as a broader collective action problem, if you were, in a sense that society on the whole would probably be better if everybody stuck to some basic rules which would enable us both to continue living our lives normally, but following these basic rules, and avoid catching the disease. The issue with that, though, is that it’s incredibly difficult to make sure that everybody sticks to those rules, and when the prevalence of the disease is low, we each have an individual incentive to be a bit more daring in our behaviour, but because this thing can spread at an exponential rate, if we act relatively normally, things can go rapidly downhill if we don’t all stick to those rules.

0:09:28.8 Ryan Bourne: So I’m not pretending there’s any easy answers here, but the case for some degree of coercion in trying to make sure that we all collectively stick to rules is a lot stronger than perhaps for many other externality problems that policymakers then use to justify government action. Of course, the extent of that coercive behaviour and the forms in which it should take are a lot more debatable, and there’s really mixed evidence on the different measures that have been used by governments around the world to try to deal with this problem.

0:10:04.3 Trevor Burrus: The other aspect of externalities, which you mentioned, and these are maybe ironic or paradoxical when it comes to covid-​19, but people talk about negative externalities, like I discussed, pollution from a factory, but there are positive externalities. I remember one of my professors always said, “Being beautiful is a positive externality, and maybe if people should walk up and pay you because you exude beauty or smelling nice.” But there’s another one that comes with covid-​19, which is actually contributing to herd immunity. So how do you weigh those two sides of being dangerous, but if you get the disease and recover, you’re now a benefit to society.

0:10:43.2 Ryan Bourne: Well, clearly having immunity to a disease does exhibit positive externalities, and that’s the whole reason why governments go about subsidizing or encouraging vaccinations, it’s exactly the same logic, and it’s why one of the potential end points for this crisis. Well, the only endpoint, I guess, eventually, is a degree of herd immunity, when we get to such a level of immunity that transmission stays relatively constant, we get the occasional outbreak, but at a societal level, we don’t have these massive outbreaks that we’ve been seeing over the past year or so. And it’s incredibly difficult. Clearly, clearly, once people who have recovered from the disease, that that is a positive for society in the sense that they’re able to engage in more activities safely, in theory, they can serve other’s needs, and it’s one less vector for spreading the disease from there in terms of that individual. Now, is there a way that we could harness that power and think is… We’ll try and expand the positive externalities and minimize the negative externalities?

0:11:55.4 Ryan Bourne: Well, some economists quite early on talked about this in a similar way to the Great Barrington declaration, you had MIT’s Daron Acemoglu, published a paper where he said, “In an ideal world, we’d have much stronger constrictions on those who are highly at risk from the disease, and we’d allow more ordinary behaviour among those at lower personal risk who’d perhaps be more likely in net terms to exhibit positive externalities through the pandemic.” The problem is, as I have alluded to earlier, society is this dense combination of interlocking networks, and dividing people up between those most likely to provide net positive externalities and net negative externalities is incredibly difficult in reality. People live in multi-​generational households, a lot of people do jobs where they serve people in other risk groups, and it’s proven even in countries that have gone down the root of trying to a certain extent to deliver focused protection for those most highly at risk, it proves incredibly difficult to protect those individuals in a situation where prevalence of the disease is high in the broader community, so even why I think that’s a theoretically interesting argument, I don’t think that thinking of this as that type of optimization problem, which economists are sometimes prone to do, gets us very far in thinking about good policy in this pandemic.

0:13:31.5 Aaron Powell: As we talk about vaccines and approaching herd immunity, right now, in the United States, there are some worrying signs, but overall, things feel far more hopeful than they have at probably any time in the last year, all of us know lots of people who are getting vaccinated, if we’re not vaccinated ourselves, and the total number of people immune to this disease is going up at millions per day. At the same time we see these outbreaks, Michigan, as we’re recording this is skyrocketing, and so there are lots of calls to, in various places, return to strictly-​enforced measures of social distancing, masking, closing restaurants, potentially lockdowns and so on, and that was a running theme throughout the last year, but what’s the relationship between how we behave and these government policies? Do lockdowns actually do anything as far as changing our behaviour or do they tend to follow along on the behaviour people are already engaging in.

0:14:41.0 Ryan Bourne: Well, I think the net effect of lockdowns is context and time-​specific, if you look across the world as a whole, there doesn’t seem to be anywhere, even in countries that didn’t lockdown where you get a escalating outbreak riding the wave through to a point where the country gets herd immunity and then the disease fizzles out. Now that appears to suggest that once the prevalence of the disease gets high enough in the community, people change their behaviour drastically, and as a result of that, the transmission rate of the virus falls. We get those waves that we’ve seen in infection rates and deaths. So somebody who is opposed to lockdowns would look at that and say, “See behaviour changes on its own.” The issue is that the stage at which the prevalence threshold of the disease at which behaviour changes dramatically appears to be quite a movable feast, it appears different within states and countries and across different countries, over time, depending on the context.

0:15:47.0 Ryan Bourne: My instinct is… You’ve mentioned the relationship between lockdowns and voluntary action, my instinct actually is that… Last spring when this virus first hit, commentators who are both opposed to lockdowns vociferously and those that strongly supported them, overrated lockdowns in terms of their impacts, I think there was huge voluntary changes to behaviour, people spending much more time at home, not visiting certain outlets in those early days, and that actually the private, voluntary behavioural response led the public in many respects. There’s been some good work by economist Austin Goolsbee on this at the University of Chicago, he reckons that there was a downturn to the extent of 60 percentage points in consumer traffic fall across businesses as a whole, and that legal restrictions, if you compare, commuting zones with state and county boundaries with different policy regimes, you can get some variation, legal restrictions explain only about 7 percentage points of those 60 percentage points, so quite a small component.

0:17:00.0 Ryan Bourne: My instincts therefore are the lockdowns on the margin do you have an impact in terms of further constraining our behaviour, how could they not… In many respects, there’s bound to be some people who would be willing to continue to engage in activities absent lockdowns. But certainly in those early days, they were a small component of the overall behavioural response that we saw as a result of the virus. Now, that doesn’t mean they’re not important. It could be that that is the straw that breaks the camel’s back in terms of reducing the transmission rate of the virus below one, and so leading to a downturn in infections and deaths. Since then, I think that the evidence is much more messy. If you look at individual states, the relationship between states that have used lockdown measures in the period, say from May last year through to today, and their performance in terms of infections and deaths, there isn’t really any clear evidence that we can take away from that.

0:18:05.5 Ryan Bourne: But I think on the margins, I think lockdowns do have an impact in terms of the public health effects, but of course, we have to balance that with the fact that they’re incredibly crude impositions, and for the same reasons, they have an impacts on the public health side, they also come with very, very large economic costs too. And so just to take this back a step, I don’t think anyone in this debate would look across countries over the past year and say, “If we could go back and start this again, the optimal response would have been use of on-​off use of lockdowns through the last year.” I think clearly, when you look at what other countries, particularly countries like Korea, Taiwan, some other East Asian countries have done, that has clearly been preferable both in terms of performance on public health and performance on economic activity and liberties too. But we have to judge individual lockdowns in the context and time of which they occur.

0:19:10.8 Trevor Burrus: You used the word a couple of times, “margins,” which some of our listeners may not be familiar with, but in this context is a good teaching lesson as the whole book is about. What is marginal thinking in the economic sense, thinking on the margins, and why does that matter? It’s interesting when you talk about how much did the lockdown laws affect people’s behaviour, but I was thinking, “Well, the same question could be asked about murder laws, our murder laws. The primary reason people don’t commit murder are the punishment for murder.” It’s the same basic idea, correct?

0:19:49.0 Ryan Bourne: Yeah, so when we’re talking about thinking on the margin, we’re really saying that you should judge an imposition or policy in this regard in terms of its impact over and above the counterfactual that we’re dealing with. So a good way to think about this is… That I describe in the book actually, is road-​building. We can look back at the economic effects of roads that have previously been built, and a lot of people, when they’re trying to make the case for these big infrastructure projects that the likes of Joe Biden are now pushing, they will say, “The building of the interstate highway system massively improved productivity, and so GDP growth across the US.” Okay, fine, we can argue about the underlying economics of that, but that doesn’t really tell us much about what the net economic impact of a new road will be. That you have one highway system doesn’t mean that you need to build another one, or that second highway system will have the same economic impacts as the first.

0:20:49.1 Ryan Bourne: And this is crucial to thinking about lockdowns and thinking about the individual regulations that implicitly make up lockdowns, because some of them in isolation will clearly have net positive marginal impacts, and some of them clearly will have net negative marginal impact. So I don’t believe, for example, that one implicit regulation wrapped up in stay-​at-​home orders is that you shouldn’t travel across the state to go and stay in your second home that might be empty. Now that clearly has barely any public health benefit, but does come with a cost to the individual in terms of not being able to perhaps move to somewhere where they’d be more comfortable staying for the duration of that lockdown. And when we think about lockdowns as those bundles of implicit regulations, there’s clearly a lot of things that could’ve been stripped out of them, which have net negative consequences for society.

0:21:45.4 Aaron Powell: When we’re weighing these policies, and we’re looking at the cost to society of different options for reducing deaths, one of the… To get back to the ghoulish question, one of the potentially ghoulish things we have to look at is, how do we trade off lives saved against, say, economic costs or liberty costs or other things that we might find valuable, because we could? Obviously, there are ways that we could have prevented all or most covid deaths, but they would’ve been… We could’ve locked everyone in individual rooms for a year, but we’re not willing to bear that cost. What does economics tell us about making that kind of unfortunate calculus?

0:22:38.7 Ryan Bourne: Well, economics in theory is well placed to make these kind of judgements because we use quite often cost-​benefit analysis as part of our toolkit, where we try and broadly define all the economic welfare costs of a particular decision and weigh that against all the economic welfare benefits of that particular decision. And if the benefits exceed the cost, then we know that the project is sound and worth considering. Of course, you have to think carefully that a benefit-​cost ratio is above one, and so the project is sound on benefit-​cost grounds doesn’t mean that it would be the optimal policy. It might be that there’s a completely different set of proposals that could achieve a higher benefit-​to-​cost ratio. But when thinking about this covid crisis, although that framework is a useful starting point, there are a range of quite big difficulties in working out the cost and benefits in reality. So working out the benefits of, say, a social distancing restriction mandated by the government, one would have to try and consider, first of all, how many lives or what health impact that regulation would have on the margin, and to do that, well, you have to define the counterfactual of what would happen absent that measure.

0:24:13.8 Ryan Bourne: You also then have to apply a valuation of the value of the number of statistical lives in that framework that you’d be saving, which is itself quite a controversial area of economics. Economists tend to think that the value of statistical life… So that is the value of mitigating a death risk through a regulation, say. They tend to value each individual life in that regard quite highly, but there’s a wide range of values the economists would calculate depending on how you go about doing it. And then on the cost side, of course, you have the same issues in many ways. You have to try and ascertain what the baseline downturn, say, in GDP would be as a result of people voluntarily adjusting to this virus, and try and work out what the marginal impact of any new restriction on top of that voluntary behavioural change would be. And of course, you have to try and account for the losses of liberties, which have very subjective values. If I was to miss the funeral of an important family member as a result of a lockdown regulation, that clearly would have a very high personal cost to me. Looking at GDP or something like that alone wouldn’t account for this cost.

0:25:41.2 Ryan Bourne: Now, those are incredibly subjective. Policymakers are particularly well placed in terms of calculating them, but if they’re gonna decide on these major consequential decisions that have massive costs and massive benefits, they should at least try to consider some sorta valuation of those lost liberties as well. So I guess to answer your question, Aaron, we do have frameworks as economists for trying to think about these things, and they usually apply to much smaller projects such as the economic case for building a new bridge. A lot of these issues become much more difficult to calculate in reality when you’re talking about society-​wide restrictions during an emergency-​pandemic scenario.

0:26:26.5 Trevor Burrus: Back to the ghoulishness issue, it seems that valuing a statistical life is a little ghoulish, and maybe this is why economists don’t make many friends at parties or something, because they break everything down in that way. But you mentioned that the value of going to a loved one’s funeral is subjective, and it could be very high, but isn’t the value of a family member to someone just something you can’t really put a price tag on? Why would you even try to do that?

0:26:54.8 Ryan Bourne: Well, inevitably, we have to try to do it when we’re thinking about public policy decisions because we’re not talking about individual valuations, we’re talking about how much cost should other people in society outside of your family bear for the imposition of some sorta regulation on their lives? Now, the way that economists tend to do this is to look at people’s willingness to pay in labour markets. So in a lot of jobs, for example, where there’s an elevated mortality risk, perhaps you’re doing a job where you’re having to climb skyscrapers or you’re working in a dangerous mine or whatever, there’s quite often what economists would describe as a compensating differential. So relative to other jobs in similar fields, but aren’t quite as dangerous, an individual would tend to be paid a premium to work in a more dangerous job. And this variation between the elevated risk of death in the job and the extra amount that somebody has to be paid to compensate them for taking that job can be used to calculate across all workers in that industry the amount that they collectively would have to be paid in order to compensate them for the statistical risk of one person dying.

0:28:18.8 Ryan Bourne: So I know that sounds like a mouthful, but what we are talking about when we talk about a value of the statistical life, is the amount that a group in society would have to be paid collectively to bear the cost of a risk, which would likely lead to any given member of that group dying. Now that’s not the same as a valuation of a human life, that say, we collectively need to be paid 10 million to risk somebody in society potentially dying because of an elevated mortality risk doesn’t mean that any given person would accept $10 million in return for certain death. But when we’re thinking about public-​policy decisions, we have to try and account for the value of mitigating death risks, and that’s the way the economists try to calculate them. Now, are those appropriate? When are those labour market study values appropriate when thinking through an issue like covid-​19? There might be reasons to think that actually, those valuations that we take from labour market studies are too high. A lot of those valuations come from trade-​offs for working-​age people.

0:29:36.4 Ryan Bourne: Older people tend to have much more varied willingness to pay valuations than working-​age people that are often in quite similar cohorts within a particular industry, and we know that the death risks associated with covid-​19 are massively higher for the elderly than the young. So I guess what I’m trying to say is, when we’re making public-​policy decisions, we can’t act as if every individual life is of infinite value, otherwise we would all be at home stuck in those bubbles that Aaron talked about. So we have to find some way of trading things off. The value of a statistical life provides a framework for thinking through the valuations associated with reducing death risks. Whether the exact figure that we commonly hear is right, given the populations affected, I’m less certain about.

0:30:39.0 Aaron Powell: With the really striking things this last year, watching the pandemic unfold and our response to it, adapt to that, is not just how little we know and how much we continue to not know about the specific nature of the virus and its spread, but also the economic consequences, the social consequences, but two, how much what we thought we knew at any given time turned out to be wrong, it turned out to change. And this would seem to cause a tremendous problem for any sorta centralized response to this. If you’re the government and you have to figure out what policies to adopt, you have to operate on the knowledge you have, and that knowledge might be wrong or it might change tomorrow. And this is a country of hundreds of millions of people in lots of different circumstances, as we talked about. This sounds a lot like the knowledge problem in economics that we libertarians love to talk about. So what is that, and how does that apply to the covid situation?

0:32:00.0 Ryan Bourne: Yeah, that’s a great question. So one could always imagine, in a static world, in theory, if somebody was able to collect all the information about the way that we live our lives and our preferences and our abilities to produce, and our productivity and everything else, you could insert all of those values into a computer and come up with the best way of perhaps, in this case, minimizing deaths, or in other cases, generating the most economic output. In reality, of course, a lot of the things that are inherent in why we’re productive as individuals entail incredibly local knowledge. The best way to manage us as individuals, or experiencing, dealing with particular situations that might only arise on occasions, but perhaps most importantly, the fact that society in reality is dynamic. We’re not just static atoms affected by outside forces. In reality, we’re continually adapting to the circumstances around us, and we’re pretty entrepreneurial in the broadest sense of the term. We’re testing out new things constantly and realizing that we have preferences when new goods become available that we didn’t even know existed before.

0:33:21.0 Ryan Bourne: So you’re right, Aaron. This is an incredibly… This makes a challenge like covid-​19 incredibly difficult for policymakers to deal with. Initially they were dealing with the fact that there was a huge uncertainty about the virus itself, how this thing was transmitted. We sometimes forget that in those early days, there was much less discussion of this being an airborne virus, and more discussion of handwashing as a key way of preventing this from spreading. We didn’t really know…

0:33:51.0 Trevor Burrus: The days when I was wiping down my groceries. You mean those days?

0:33:53.5 Ryan Bourne: Exactly, yeah.

0:33:55.1 Trevor Burrus: We were wiping down our deliveries and all that type of stuff.

0:33:57.0 Ryan Bourne: And when we were all going to the stores looking for hand sanitizer. There was much less obvious knowledge about whether in the future a vaccine or therapeutics, decent therapeutics, were gonna be available. We didn’t know how individuals or we collectively would actually react when having a lot of these social distancing regulations imposed upon us. And as a result of that, this produces a big problem, one issue with this is that unlike within market activity, government activity doesn’t tend to have those mechanisms inherent within it for rapid error correction when things are clearly wrong, for adjusting quickly, because we don’t have those responses through changed consumer behaviour and prices that we see in ordinary markets. And I think this is evident in some of the mistakes that have been made through this pandemic, which I’m sure we will talk about in more detail. But I think the main lesson from all of this is that there are probably areas where public officials can try to propagate the information to the best of their abilities at given times, and they should be honest and outline where there’s uncertainty.

0:35:28.2 Ryan Bourne: But I think at a localized level, they should as far as possible allow adaptation and try and remove barriers to us adjusting our lives to try and deal with a new situation. So they’ve done that to a certain extent. We’ve had to remove a whole raft of different regulations on industries to allow industries to move into new sectors, distilleries becoming hand-​sanitizer manufacturers. We’ve had to allow… Which is positive in the longer term too, but there’s been much more in the way of telehealth as a result of temporary deregulations of the provision of healthcare and a whole range of other things. And I think that is representative of this broader issue that when a crisis like this hits, the most powerful tool that we have as a society as a whole, is our ability to adapt to the new circumstances. And while public policy can play a role in shaping that, evidently, I think it’s much better for policymakers to try and set the broad principles or the basic information, and then allow individuals and businesses to try and adjust as best they can given the local knowledge that they have of their particular situation.

0:36:49.5 Trevor Burrus: As is so often the case when something big like this happens, you get competing sides who come in and say, “The government is the one that’s gonna fix this, and did fix it,” and then maybe the libertarians say, “Oh no, the free market is gonna be the one to fix it, and it was the one that ultimately fixed it.” In some regards, you talked about some of these regulations, you mentioned a few of them that were harmful to at least adjustment, but there were some that came out of the FDA in terms of just the way that we were able to achieve testing, and you write about that in the book. But they’re still seemingly dragging their feet on for home testing. Why did that take so long?

0:37:31.2 Ryan Bourne: Well, I think there’s inertia in any public body, but I think behind those mistakes was just a fundamental error of economic reasoning. And that error essentially was to incorrectly define the counterfactual as I described earlier, and as a result, to miscalculate the costs and benefits of the regulations as they stood. So when the pandemic hit, the FDA introduced its emergency-​use authorization procedure for the tests, which actually threw up new hurdles to a lot of labs who would ordinarily be able to undertake PCR tests from doing them. But the reason why they introduced that was because they were worried that if those tests were slightly inaccurate, it would give public health officials a false impression of the state of the pandemic. Well, of course, that is something that one should be worried about. We obviously all in an ideal world want more accurate tests, but at the time, the alternative that we faced to having slightly inaccurate tests was actually having no tests.

0:38:37.2 Ryan Bourne: And as a result of having no tests, or at least very few tests available to the population as a whole at that time, tons of people were walking around as false negatives. They had the disease, were infected with it without realizing it, and ultimately as a result of not being able to isolate more of those individuals early on, we all then have to live our lives as if we were false positives, as if everybody that we came across potentially was infected with the disease, even though the vast majority of them weren’t. So I think that was a really costly first mistake in the pandemic. Some people have described it as the original sin that made everything else more difficult. I’m not sure that testing ever would’ve been the silver bullet in the United States simply because I think the community spread of the disease was probably higher than we had expected, but that initial where it took the South Korean option of the test-​and-​trace approach to this pandemic off the table straight away, and downstream of that, introduced a whole range of the problems that we’ve seen since then.

0:39:38.5 Ryan Bourne: Now you mentioned, Trevor, that we didn’t learn from that mistake and up until very, very recently, the FDA was still holding back the approval of rapid home tests in part because they were judging them as a diagnostic tool for… A diagnostic test for the disease, for infection, as opposed to treating them as a broader public health measure that could help on the margin. If we’d have been able to undertake more of these tests, which everybody knows, are less sensitive than the PCR tests, that means you probably get more false negatives, people who are actually infected who don’t show up on these tests yet. That is a problem with these tests, relative to PCR tests, but the alternative to most people when they wake up and decide to do a test is not a PCR test, being able to be done straight away and being able to isolate soon afterwards, it’s seeing how they feel, judging whether they’ve got a temperature. And then deciding whether they should go about their work. So on the margin, I think these rapid at-​home tests, as we’ve seen at certain universities and within the MBA and other organizations with regular testing, I think could have helped isolate more infectious people more quickly than otherwise, and at a community level could have helped reduce transmission of the disease, and as a result, led to more activities being undertaken relatively safely.

0:41:12.4 Ryan Bourne: But that was taken off the table because these tests were judged in the same way as ordinary diagnostic tools as opposed to them being a community disease management tool.

0:41:25.0 Ryan Bourne: And you see this mistake, this implicit calculation of the costs and benefits as a result of not defining the counterfactual again and again and again through this. You could talk about the failure to approve the AstraZeneca vaccine more recently, for example. There were some problems in some of the early trials of AstraZeneca, and the FDA weren’t happy with the way that they reported their data, but on the margin, were the benefits of making them undertake a domestic US trial really worth the costs of not getting those extra doses in arms and getting more people in the US a degree of protection from this virus? I don’t see how those marginal benefits could, even in theory, overcome the large marginal costs of the extra infections and deaths that we’ve seen. So we see this problem being repeated again and again through this pandemic.

0:42:18.0 Trevor Burrus: That’s an interesting one ’cause it was somewhat of a disturbing report, I felt like, shortly after they announced the first vaccine, that it came out that the vaccine actually existed in January of 2020. It was invented within days. And that raises this question of, did the FDA really just harm ultimately having that negative by delaying this? Can you imagine if we were all getting vaccinated in March, March a year ago? Does that say bad for what the FDA does in general, that it’s overly risk-​averse all the time, but especially in situations like this?

0:43:00.9 Ryan Bourne: Well, we’ve seen an announcement today that actually, as a consequence of a lot of these changes to regulations and the speeding up that we have seen in this past year, it appears that there’s been dramatic progress in provisions of a potential vaccine for HIV, which suggests that some of those costs from the precautionary behaviour that we’ve seen have had big societal consequences even prior to this pandemic. Now I can understand in part why. Even though things have been sped up, and I think on the margin, Operation Warp Speed probably did help speed things up and the FDA evidently have been working with these companies to try and streamline some of the ordinary trial procedures. I think that there are concerns that people would’ve had if there had been a vaccine available within a couple of months, but there are things that we could’ve done in terms of speeding up further. If we rethought our ethical and regulatory frameworks around human challenge trials and allowed young and healthy individuals to participate in being paid an amount to bear the risk of being deliberately infected with the virus as part of the vaccine trial, we could’ve potentially brought this forward a few extra months, and a few extra months in terms of the roll-​out of this vaccine, given the large ongoing economic and public health costs could’ve been pretty dramatic in terms of its net benefits for society.

0:44:35.4 Ryan Bourne: But I’ll just reiterate, I do think that this was more of a thorny issue for policymakers in the sense that a vaccine is no good if people aren’t willing to take it, and I think if it had been available within a month or two, even though it was produced pretty early and appears to have been safe from pretty early on, there may have been a consequence in terms of a much less willingness to take it. So there is a degree of a trade-​off there, but yes, Trevor, you’re right, I think this episode does prove that a lot of the precautionary behaviour that we see does have much bigger social costs. And I would also say it highlights a degree of parochialism as well because this trial data was interpreted very differently from many other public-​health agencies and vaccine and drug regulators around the world. And I don’t really understand why they couldn’t be more coordination in terms of picking up the phone and talking through some of the issues with them, which presumably to an extent was going on, as opposed to making the company rerun in AstraZeneca’s case, the whole trial in the United States, holding things up for months and months and months.

0:45:49.3 Aaron Powell: Early on we saw a lot of shortages. Toilet paper, and also hand sanitizer was quite hard to get, masks were also hard to get. And one of the results of that was that when you could find them, they were hugely expensive. If you went on Amazon, hand sanitizer was at a crazy high cost, toilet paper as well. Third-​party sellers popped up to provide it at what looked like ludicrous prices, and there was a lot of concern about this, this price gouging, that this was people taking advantage of our sudden need for these products. Is that bad? Is it bad when sellers jack up prices like that? Are they screwing all of us?

0:46:33.7 Ryan Bourne: Well, I think it’s just reflective of the reality of the situation. Now, every market is very, very different. I think in the case of toilet paper that you mentioned, for example, the big issue there is that we were, as a result of spending far less time at work and far more time at home, we were not demanding the commercial-​grade toilet paper, which is usually lower quality, but were willing to accept when we go to the bathroom at work and were substituting our demand for the stuff at home. So there’s that big demand shift, and actually it was quite difficult for producers to reorient production, quite often different producers of the different types of toilet paper. So there were near-​term shortages whilst some of the home toilet paper producers had to ramp up their operations, which is why we saw short-​term shortages on the shelves. Prices are governed by supply and demand. We talk as if companies can charge whatever they like for their goods and services. They can only charge what people are willing to pay. And as a result of this crisis, a whole range of products were in much higher demand than they were previously.

0:47:50.3 Ryan Bourne: Now, what would happen ordinarily in that scenario, is a rising price would occur. People would notice… Producers would notice that rising price. Some of the people who had newly demanded, say, hand sanitizer would think, “The price is a bit higher now. I’m not sure that I really need to buy two whole packets of this stuff. Maybe I’ll just stick to one, or maybe I’ll just stick to a couple for my handbag.” So they’d be offsetting reduction in the quantity demanded, which would partially ameliorate that initial increase in demand. And some of the suppliers would think, “Well, as a result of this higher price, we’re potentially gonna make a bigger markup on each individual order, so actually it might be worth us economically paying our staff overtime, running the machines hotter, perhaps even investing in a couple of different machines to meet this new demand.” Now as a society, at a societal level, there’s gonna be near-​term shortages, but that price rise over time leads to the amelioration of the shortages on shelves. There’s overall more traded, but at higher prices, and in time one would imagine that companies will enter the market and invest in the production such that prices would come back down.

0:49:20.6 Ryan Bourne: Now, what have we seen in this crisis? Well, there’s two things really that have resulted in a situation where we had sustained shortages, and then very high prices online. Firms for a long time, particularly the big retail outlets and the big pharmacies, have been worried about the reputational consequences of being seen to hike prices of particular goods in demand in emergencies. We see this always with hurricanes and storms everywhere. Big companies like Walmart, they think it would be a hit to their reputation to raise prices, so they don’t tend to raise prices. They tend to then bring supply in from nearby areas to try and deal with any near-​term shortages that we’ve seen. In this situation, though, the pandemic was affecting the country as a whole, so we can see those offsetting effects from elsewhere. So a combination of companies being unwilling to raise prices through their reputational impact drove a lot of activity to these less liquid markets online, so we saw the higher prices. But then on top of that, of course, we have state-​level anti-​price gouging laws which seek to punish companies that sometimes raise prices above a particular level, and sometimes they’re not clear as to exactly what degree of price rises are allowed.

0:50:49.9 Ryan Bourne: And as a result of that, on the margin, at least fewer companies are willing to enter the sector and provide the extra supply to meet that demand, so we see sustained shortages. So to answer your question more directly, Aaron, I don’t have a view of whether… I don’t have a value-​judgment view of whether it’s good or not. I just see the price changes as a reflection of the reality of the situation. And if we want to suppress that price message and pretend that everything is fine and everybody will be able to fulfil their demands at ordinary prices, then we’re gonna see sustained shortages.

0:51:30.3 Trevor Burrus: Given all these lessons, one of the things that has seemed to come up in this discussion is we made mistakes, we did some things correctly, sometimes we made the same mistake a bunch of times being overly cautious with the FDA, perhaps, overly imposing lockdowns, maybe. So what do we do? What do we learn? Are you optimistic that we’ve learned, if another pandemic hits… I mean, we’re not outta this one yet, but it seems like there’s a light at the end of the tunnel. If another pandemic hits in 2030, do you think that we’ll have better lessons or does the machinery of government and human behaviour run the same playbook over and over again?

0:52:12.3 Ryan Bourne: Well, it depends, I think, on the contours of the pandemic. I think if we were to be hit with a very, very similar virus, then we probably would see a better response next time in part because the political incentives have changed, there’d be big political costs to not fighting the last war after this and ensuring the testing regulatory framework was better. There’ll probably be a whole bunch of demands after this for governments to invest in excess capacity of the production of face masks and ventilators and a whole range of other things that would’ve been useful in hindsight to have in this crisis, but which we didn’t early on. But of course, if the next pandemic or the next crisis that hits is very different in nature, I don’t see any inherent reason why this experience would make us better prepared for that. There’s a big economic literature which actually shows that the political incentives to prepare for low-​probability, high-​risk events is incredibly low, and in part that’s because of elections.

0:53:24.3 Ryan Bourne: If you look, there’s been some fun papers that have looked at whether politicians are rewarded for making preparatory investments in things that would help when crises like hurricanes or tornadoes or things like that hit. And what that literature tends to find is that we as electors don’t reward those that invest in the preparation in part because we don’t observe it, or a crisis doesn’t actually occur, or if it does occur, we just presume that things would’ve been fine anyway, but we do tend to reward politicians that, when it does hit, provide us with extensive relief and take emergency actions quickly. So I suspect the… Thinking through those political incentives, I think coming out of this, there’ll probably be lots of different commissions and retrospective analyses that will look at the individual decisions that have been made and highlight where there’ve been mistakes. We will then spend vast amounts trying to correct those observable mistakes, but a lot of them have been very… Regulatory and testing issues aside, a lot of them have been very specific to the circumstances of this pandemic.

0:54:46.6 Ryan Bourne: And the key lesson that I think should be taken away from this is that real resilience comes from our ability to quickly adapt to very, very different situations. So if the next pandemic, as I say, is very similar to this, then just like some of the East Asian countries that have experienced SARS and MERS have seemed to deal better with this crisis, I think we would be better placed in 2030. The problem is crises have a tendency not to replicate the thing that has just happened, and if something very different will occur, say something that affects the domestic situation more than the international situation, then it might turn out that investing in a whole bunch of capacity onshore in the United States actually leaves us more vulnerable to the next crisis and not better prepared for it.

0:55:49.5 Aaron Powell: Thank you for listening. If you enjoyed Free Thoughts, make sure to rate and review us in Apple Podcasts or in your favourite podcast app. Free Thoughts is produced by Landry Ayres. If you’d like to learn more about libertarianism, visit us on the web at www​.lib​er​tar​i​an​ism​.org.