WHAT DOES IT MEAN TO BE ECONOMICALLY “WORSE OFF” DURING A PANDEMIC?
An introduction to economic welfare

ECONOMIC LESSON

Economic welfare is a catch-all term for how well people are doing and is a broader conception of well-being than just financial well-being at the household level or GDP at the national level. In regards to the impact of SARS-CoV-2, people’s finances or national GDP can give a misleading impression about what is happening to economic welfare. The pandemic, by constraining people’s choice set, is likely to have made many households and the country much worse off than their finances or GDP alone would suggest, relative to a pre-pandemic world. However, given the reality of the presence of the virus, we might actively prefer to adopt behaviors we’d usually shun that lower our financial well-being or GDP, which suggests these new behaviors serve to enhance our economic welfare in these peculiar circumstances.

ECONOMIC TERMS INTRODUCED

• hazard pay: additional pay for the undertaking or performance of work duties that are dangerous or risky

• wealth: the market value of all the assets someone owes less their debts

• revealed preferences: the idea that people’s behaviors and purchasing habits allow us to infer their true preferences

• utility: the satisfaction we get from consuming certain goods or services, or their usefulness to us

• economic welfare: a synonym for well-being, which includes financial well-being but is a broader term for how we are doing in other ways too

• value is subjective: the idea that value derives not from any intrinsic properties of a good or activity, or the labor that has gone into it, but from individual preferences

• GDP: the annual market value of all final goods and services produced domestically

• social welfare: the economic welfare of the whole community

SHOULD I BE FREE TO RISK INFECTING YOUR GRANDMA WITH A DEADLY VIRUS?
An introduction to externalities

ECONOMIC LESSON

Externalities exist, and sometimes government policies can be used to improve societal outcomes in light of them. However, they are often difficult to correct through policy. In the case of SARS-CoV-2, there are clearly negative externalities associated with activities that spread the virus, but there are also positive externalities from someone recovering and becoming immune to it. This messy reality means that the best approach is likely to depend on the risks of activities and the availability of technologies, such as the timing of vaccines—factors that were inherently uncertain in the early stages of the pandemic. A better framework now is to think in terms of risks and the overall costs and benefits of more marginal approaches to reducing the total economic welfare costs of the virus.

ECONOMIC TERMS INTRODUCED

• externalities: instances where the overall social costs or social benefits of the activity exceed the private costs and benefits but where it is infeasible to set compensation within markets to account for this

• negative externality: costs on third parties that cannot be compensated for within markets

• positive externality: benefits to third parties that cannot be compensated for within markets

• collective action problem: situations where economic actors would be better off cooperating but fail to do so because of individual incentives

DID WE CLOSE DOWN THE ECONOMY?
An introduction to public and private action

ECONOMIC LESSON

Public policies can sometimes cut against the grain of behavior, curbing activities in pursuit of goals that consumers, businesses, and households wouldn’t otherwise seek to pursue. Other times they can be a codification of what we are doing anyway. In the case of shutdowns and SARS-CoV-2, it is clear that businesses and much economic activity were shuttering or constrained through changed private behaviors, even prior to state-government-mandated business closures and stay-at-home orders. Disentangling the impact of the virus on behavior from the impact of government policies on behavior is a key task of economic analysis trying to assess the wisdom of public health interventions.

ECONOMIC TERMS INTRODUCED

• natural experiment: a study in which the treatments imposed on the subjects of the experiment are not decided by policymakers or researchers but rather unexpected or random events. In the case of this chapter, Wisconsinites were subject to both lockdowns and then no lockdowns in quick succession, due to an unexpected state court decision.

• difference in differences estimation: a statistical technique that seeks to estimate the effect of a policy on an outcome by comparing the average change over time in the outcome variable for an area experiencing the policy, compared to the average change over time in a control area that did not implement the policy

HOW MUCH WOULD YOU SPEND TO SAVE MY LIFE?
An introduction to the value of a statistical life

ECONOMIC LESSON

Although it might make us uncomfortable to admit it, public policy cannot eliminate death risks at infinite cost. Economists attempt to assess how much we should be societally willing to sacrifice to reduce the probability of each life lost to a death risk using the “value of a statistical life.” This examines how much private individuals are willing to pay to avoid fatality risks, or how much they would need to be paid to accept those risks, as a basis for answering how we should value reducing fatality risks for public policy decisions. In the case of COVID-19, this allows economists to place a monetary value on the deaths avoided through public health interventions, such as lockdowns. But the very high VSL derived from existing studies of labor markets is unlikely to be appropriate for COVID-19, given how death risks and willingness to pay to avoid death are likely to differ substantially across demographic groups.

ECONOMIC TERMS INTRODUCED

• opportunity cost: the value of the best alternative forgone as a result of a purchase or a decision

• compensating differential: controlling for other pay determinants, the difference in pay necessary to compensate workers for unpleasant or dangerous working environments

• value of a statistical life: the monetary amount that a population would have to be compensated by to tolerate the probability of the loss of one life given an elevated fatality risk to that population

WHEN IS A LOCKDOWN CURE WORSE THAN THE DISEASE?
An introduction to cost-benefit analysis

ECONOMIC LESSON

Cost-benefit analysis is a useful economic technique for considering whether a project improves societal welfare and to compare the societal net benefits of different projects. To do cost-benefit analysis well, we must account for all the direct and indirect impacts of the proposed policy on societal welfare, account for externalities, and ensure that we compare like-with-like in both timeframe and measurement. When it comes to COVID-19, cost-benefit analysis can, in theory, be used to examine the efficacy of lockdowns. However, there are huge uncertainties that make it hard to weigh up the precise costs and benefits of those policies. Even if the societal benefits do appear to exceed the costs on reasonable assumptions, that doesn’t mean the exact contours of the lockdown are “optimal policy.” In an ideal world, we’d find the policy mix that minimizes the overall societal costs of the pandemic.

ECONOMIC TERMS INTRODUCED

• counterfactual: what would have happened in the absence of the policy, which provides a baseline for assessing the policy’s true impact

• cost-benefit analysis: an economic policy evaluation technique that assesses the strengths and weaknesses of a project or policy, seeking to convert (as far as possible) its impacts into monetary values representing the costs and benefits to societal economic welfare

• economic scarring: longer-term damage caused to an individual or an economy’s prospects by a shock or recession

• human capital accumulation: the buildup of a stock of skills, education, work habits, and experience that increases a person’s productive capacity

WHY WAS I BANNED FROM GOING FISHING?
An introduction to thinking on the margin

Once we start thinking on the margin in regard to this pandemic, it is difficult to stop. We start to realize that politicians often talk about the impact of a regulation, such as a mask mandate, as if the alternative is that nobody is wearing masks, when the real marginal impacts of a mandate are the benefits to public health above and beyond the voluntary mask wearing we would see anyway, which we must then compare with the marginal costs of enforcing and policing the law. It took far too long to pivot to thinking about win-win measures that could have increased the ratio of economic welfare to economic risk for any given set of activities, such as mask wearing, better testing regimes, or other low-cost safety measures that helped screen for infectiousness, thus allowing people to undertake economic activities with more confidence. Thinking on the margins gets one infuriated that governors made those early blanket calls to shut down so-called nonessential businesses, rather than thinking about additional risks.

ECONOMIC LESSON

Policymakers often fail to think on the margin—delivering crude bans on activities regarded as “bad,” or endorsing ever-growing subsidies for programs regarded as “good.” Economists, on the other hand, assume the optimal amount of any activity occurs when the marginal benefit is equal to the marginal cost. During this pandemic, many public health interventions showed a failure to think on the margin. Lockdowns banned much activity that barely affected public health but did reduce people’s well-being. Quarantine policies often seemed designed to eliminate the risks of importing the disease entirely, although this is almost certainly economically inefficient. And spending on testing and medical innovations was arguably too low relative to the amount of the relief packages, given the huge marginal social benefits of ending this pandemic sooner.

ECONOMIC TERMS INTRODUCED

• peer effects: an externality effect whereby the actions or characteristics of a surrounding group affect the actions or characteristics of an individual

• thinking on the margin: weighing the costs and benefits of each additional change or action rather than basing decisions on past events or broad rules of behavior

• marginal benefit: the additional benefit from a unit change in an activity

• marginal cost: the additional cost from a unit change in activity

WHAT GOOD IS A PANDEMIC PLAN WITH SO MANY UNKNOWNS?
An introduction to uncertainty and the knowledge problem

Economic Nobel laureate F. A. Hayek famously wrote about what has since been dubbed the knowledge problem that would plague any attempt to plan economic or social affairs for everyone. Yes, he said, if some individual had full information, a complete knowledge of people’s tastes and preferences, and a full understanding of the availability of resources, then at a given point in time they might theoretically be able to compute the best way for society to use its resources. But no government official or politician has such knowledge or will ever be able to obtain it. Our preferences are extremely personal and, as we saw earlier, context-dependent. Knowledge of things such as the availability of workers, the best way to manage individuals, the durability of a specific piece of machinery, or some custom or practice that helps in accomplishing a minor task are dispersed throughout society, with a lot of important information accumulating in our individual brains. Some knowledge is tacit—we learn how to do things but could not possibly articulate it (think about how to catch a ball). This makes the information inherently uncollectible for any planner.

The crucial ingredients for why a market economy tends to work successfully is the harnessing of decentralized knowledge and the built-in feedback mechanisms that encourage effective uses of resources and discourage ineffective or undesired uses. The economy therefore doesn’t require central planning: a free market enables many hyper-localized plans to be tested, some of which succeed and some of which fail.

ECONOMIC LESSON

Policymakers do not have access to full and complete information to generate optimal policy at the best of times, particularly given that so much uncertainty exists when it comes to complex, dynamic relationships among human beings. Obtaining good outcomes requires the harnessing of local knowledge to productive ends and some sort of feedback mechanism to weed out bad ideas—reasons why economists overwhelmingly support a market economy over government planning. When it comes to COVID-19, U.S. policymakers were faced with substantial uncertainty, including about the virus itself, public behavior, economic resilience, and medical innovation. These problems were compounded by the lack of a testing infrastructure to generate useful information and feedback mechanisms to allow the fast adaptation of policy or behavior to new knowledge. In the face of radical uncertainty about future risks, we need broad resilience, not detailed prescriptive plans for what to do when crises hit.

ECONOMIC TERMS INTRODUCED

• knowledge problem: the idea that the information required to effectively plan an economy is dispersed among individual actors and could not possibly be collected by a central authority, not least because a lot of human knowledge is tacit and nearly impossible to articulate

• risk: a description of a situation where we do not know whether a bad outcome will occur but we have sufficient information to accurately assess its probability

• uncertainty: a description of a situation where we lack sufficient information or knowledge to accurately assess the probability of an outcome

WHY DID PROTESTS AND MARCHES NOT LEAD TO OBVIOUS SPIKES IN COVID-19 CASES?
An introduction to endogeneity

ECONOMIC LESSON

Ascertaining whether a policy is successful usually begins with comparing policies across countries or time with the outcome it aims to change. But assessing correlations between a policy and some outcome may lead to faulty policy conclusions if they are interpreted as a causal relationship without thinking hard about the mechanisms or other variables that might drive the results. In the case of COVID-19, assessing lockdowns’ effectiveness by looking at crude death numbers might be misleading if lockdowns were introduced because death numbers were expected to rise, or if we ignore major changes in behavior. Public health interventions themselves might affect the relative risks of different groups becoming infected or dying, which might then get misinterpreted as certain groups being more susceptible to the disease or “at risk.” Likewise, we might overinterpret a falling case fatality rate as evidence of the success of public policy if we ignore omitted variables, such as the ramping up of testing.

ECONOMIC TERMS INTRODUCED

• endogeneity problem: instances where the model in consideration has a faulty view of causation, perhaps because of the omission of some other variable or because the potential direction of causation runs both ways

• simultaneity: situations where the explanatory variable is jointly determined with the dependent variable. For instance, X causes Y, but Y also causes X, leading to a potential bias in estimating the effect of one on the other

• omitted variable bias: situations where failure to account for another variable leads to faulty conclusions about the impact of the variable being examined

• correlation: a statistical measure to describe the size and relationship between two or more variables

• causation: the relationship between cause and effect

WHY COULDN’T I GET A COVID-19 TEST BACK IN FEBRUARY AND MARCH 2020?
An introduction to regulatory tradeoffs

ECONOMIC LESSON

Governments impose regulations with a whole range of aims, from protecting consumers to alleviating environmental damages. Economists often undertake cost-benefit analyses to judge whether such regulations are effective. But one tradeoff that seems common to most regulations is that they restrict businesses’ and individuals’ adaptability to new conditions—they curb within-market innovation, broadly defined. In the case of COVID-19, FDA regulations that were designed to improve the efficacy of diagnostic tests came with the huge cost of deterring and delaying labs from developing them and then holding up the rollout of cheap, rapid strip tests. Policymakers’ decisions to waive much business regulation in light of these extraordinary times is further admission that regulation prevents economic adjustment to new conditions, both during crises and during normal times.

ECONOMIC TERMS INTRODUCED

• market failure: when free-market activity leads to an inefficient outcome for social economic welfare

• government failure: when the cost of a government intervention exceeds the benefits, leading to a less-efficient outcome for economic welfare than a free-market approach or some alternative policy

• innovation: the process of devising a new idea, product, or way of doing things

• permissionless innovation: a policy framework where the default is that innovation is allowed to occur unhindered by government intervention or regulation

• entrepreneurship: the process of discovering new ways of managing, organizing, or combining resources, or of developing new products or services, in the pursuit of profit within markets

WHY WAS THERE NO HAND SANITIZER IN MY PHARMACY FOR MONTHS?
An introduction to the price mechanism

ECONOMIC LESSON

Price changes send messages to consumers and sellers about how much of a good to consume or produce. Rising prices highlight a relative scarcity of the product at the current price: that is, demand exceeds supply. When the price rise is driven by higher demand, this encourages producers to ramp up production and consumers to ration what they buy until there are no ongoing shortages. With regards to COVID-19, by deterring major price increases through anti-price-gouging laws during emergencies, politicians ensured that there were prolonged shortages of important products and that they ended up in places where they were not most highly valued.

ECONOMIC TERMS INTRODUCED

• supply: the goods and services producers are willing and able to take to market

• demand: the goods and services buyers are willing and able to purchase in markets

• price gouging: when a seller increases the price of a good or service to a level higher than what is considered reasonable or fair

DOES THE PANDEMIC SHOW THAT WE NEED MORE U.S.-BASED MANUFACTURING?
An introduction to trade and specialization

ECONOMIC LESSON

Free and open trade makes us richer by facilitating specialization that improves economic efficiency. We see this in our everyday lives, but it is just as true for trade occurring over national borders as it is for trade within a country. In regards to COVID-19, it is increasingly popular to say that the crisis proves the need for more self-sufficiency—that there is a tradeoff between the efficiency that free trade delivers and national resilience. But overt policies to re-shore supply chains risk severely reducing efficiency with no guarantee of actually improving resilience and perhaps even worsening it.

ECONOMIC TERMS INTRODUCED

• specialization: the process of an individual or business choosing to focus on a specific task

• division of labor: the separation of tasks to allow that specialization

• free trade: exchange unhindered by taxes, regulations, or controls; at an international level, trade without tariffs, quotas, or other restrictions

• comparative advantage: in international trade, when one country has a relative efficiency advantage in producing a good or service compared to another country (i.e., it can produce the good at a lower opportunity cost)

• absolute advantage: in international trade, when one country can produce a good or service more efficiently than another (i.e., it can produce the good at a lower absolute cost)

WHY IS THAT GUY IN THE MASK GETTING SO CLOSE?
An introduction to moral hazard

ECONOMIC LESSON

Rules and regulations sometimes inadvertently encourage risky behavior by providing individuals with a sense of security or by incentivizing them to change their behavior in a way that imposes costs on others. When designing rules or policies, it’s important for policymakers to consider these behavioral responses and the risk of moral hazard. In regard to COVID-19, policymakers have had to grapple with these issues when considering policies on facemasks, immunity passports, and vaccines.

ECONOMIC TERMS INTRODUCED

• Peltzman effect: a theory (originally devised in consideration of automobile safety regulation) that people are more likely to engage in risky behavior when safety measures are mandated to reduce the risks to them of an activity

• moral hazard: instances where individuals have an incentive to engage in riskier behavior because they will not bear the full costs of that risk

WHY DID AIRLINES GET A SPECIAL BAILOUT BUT NOT MY INDUSTRY?
An introduction to public choice economics

ECONOMIC LESSON

Political decisions are not made by benevolent social planners attempting to maximize social welfare. They are shaped in part by incentives and the political or electoral goals of politicians and interest groups, just as private sector activities are driven by the interests and incentives faced by businesses and customers. Businesses weigh up decisions to invest in political lobbying or rentseeking behavior by comparing the cost against the likely returns, with some industries better suited to these efforts than others. Politicians’ actions in office are influenced by their own electoral and ideological concerns. When it comes to COVID-19, the priority for lawmakers in dishing out a tailored bailout for airlines highlights the role of these sorts of public choice considerations in political decisionmaking.

ECONOMIC TERMS INTRODUCED

• bailout: government actions, with recourse to taxpayer funds or guarantees, that aim to help a distressed industry or company survive

• precautionary savings: saving that occurs as protection against uncertainty in regard to future income

• creative destruction: the process within a capitalist economy of new companies or ideas cannibalizing existing industries by producing new products, services, or ways of operating that improve efficiency or better meet consumers’ demands

• exogenous shock: an event or development coming from outside of the economic system itself, such as a war, natural disaster, or virus

• endogenous shock: an event or development coming from within the economic system itself, such as a financial crisis caused by bad policy or a period of overexuberance

• public choice economics: the application of the methods of economics to the theory and practice of politics and government

• rent seeking: the practice of businesses or individuals seeking to manipulate the social and political environment to obtain returns without producing new wealth, including lobbying for special privileges

• crony capitalism: an economic system where business success is determined not by providing value to customers but by having close relationships to government

WHY DIDN’T MY WORKERS WANT TO BE REHIRED?
An introduction to incentives

ECONOMIC LESSON

Financial incentives matter. Yes, they are not the only consideration when we make decisions as individuals. But policies that raise the financial payoff for individuals or companies to take a course of action will encourage more of that action on the margin. When it comes to COVID-19, it is important that policymakers assess how the financial incentives incumbent within their policies affect the propensity to engage in actions that enhance public health or economic activity.

ECONOMIC TERMS INTRODUCED

• incentive: a payoff or reward that encourages a particular behavior

• disincentive: a penalty or punishment that discourages a particular behavior

• financial incentive/disincentive: a monetary reward/penalty to encourage/dissuade some particular action

• time inconsistency: instances where incentives, policies, or behaviors that looked optimal in one period become suboptimal in a later period and are therefore abandoned

WHY WEREN’T WE WELL PREPARED FOR THE PANDEMIC?
An introduction to political incentives

ECONOMIC LESSON

Politicians are in the market for votes. They have little incentive to invest sufficiently in preparation for improbable yet highly damaging risks such as pandemics because this does not tend to be electorally advantageous, unlike providing relief when crises occur. Failures in emergencies can see voters punish incumbents, enforcing better preparation for future crises of a similar nature. But the incentive to set aside resources that could benefit taxpayers and interest groups today, in order to insure against threats tomorrow, is weak. In regards to COVID-19, we have seen this clearly, with inadequate institutional preparation going into the crisis and the huge explosion of relief after the crisis hit. Electoral incentives can also explain the initial extreme measures taken to contain the virus and why some politicians were so keen for early reopenings.

ECONOMIC TERMS INTRODUCED

• public goods: goods that are non-rivalrous in consumption (one person’s use does not reduce availability for others) and non-excludable (it is very difficult to prevent someone using it once it’s been produced). These characteristics suggest there might be under-provision in free markets.

• hyperbolic discounting: an identified cognitive bias where people prefer small and immediate rewards rather than larger, later rewards in the short term but are more patient in the longer term

CAN WE REALLY JUST TURN AN ECONOMY OFF AND BACK ON AGAIN?
An introduction to the nature of an economy

ECONOMIC LESSON

Formal market activity, commonly referred to as “the economy,” is, in reality, a complex set of relationships among different actors that determine the consumption and production of goods and services. Since these are shaped by policies, tastes, and work practices, which change all the time, we cannot easily shut down an economy and reopen it in the same form sometime later. In the case of COVID-19, the virus and the policy response to it will change those relationships and where resources are ideally allocated, despite government efforts to protect the economy of March 2020. There are good reasons to suspect that expecting a full V-shaped rebound was always vastly over-optimistic. Instead, the economy is likely to remain below its pre-pandemic potential for some time, particularly while the public health threat remains and activity adjusts to new tastes and business practices.

ECONOMIC TERMS INTRODUCED

• supply-side policies: in the context of this chapter, referring to policies designed to enhance or protect the “productive potential” of the economy—that is, the maximum capacity for the economy to produce goods and services

• demand-side policies: in the context of this chapter, referring to policies to enhance or protect the desire and ability to spend on goods and services

• transaction costs: the added costs of engaging in a market transaction, including search costs, bargaining costs, enforcement costs, oversight costs, and similar costs

• recession: a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales data

• reallocation shock: when an unexpected event hits the economy, causing a large unforeseen change in the allocation of resources or workers into new activities or sectors

CONCLUSION
What Is Economics Good For?

I began this text by defining economics as the study of choices under constraints. Although noneconomists often think of economics as synonymous with finance, or associate it with forecasting GDP or analyzing stock markets, at its most basic, economics is about analyzing human behavior in a world of scarcity and tradeoffs. Economic insights were therefore critically important in a situation where we had to weigh up the benefits of saving lives against our liberties and commercial interests, consider how behavior might change with new knowledge or policy, and decide how to make decisions in a world of uncertainty.

Policymakers have been accused on occasion of being too worried about the economy during this pandemic. Supposedly many of them have, at times, prioritized it over public health efforts. But actual economists recognize that “the economy” should really just be a synonym for our well-being. When we talk about economic health, we should be referring to a broader conception of how we are faring overall rather than only what is happening to GDP. Far from too much focus being put on economics, a lot of the policy mistakes that were made throughout this crisis have occurred precisely because politicians have failed to think about human welfare in the more complete way that a good economist would.

The precise measures taken have been contentious, both because they were unprecedented in their intrusiveness (clearly overreaching often) but also because major crises like this can have much longer-lasting impacts on policy. After wars—which COVID-19 has been analogized to—the size and scope of government never quite seems to fall back to where it was before. People rightly perceived that there was a lot at stake in the response. Some economic historians even believe there is a tradeoff, and that highly coercive governments will tend to deal better with crises such as pandemics, but at the cost of those same coercive tendencies making those countries poorer in normal times and less innovative in finding sustainable solutions to said crises.1 It will be important, then, that any future inquest into the pandemic response doesn’t just assume that other countries’ “better” performance on public health proves the virtues of their forms of government more broadly. Our liberties, and the prosperity they engender, are incredibly precious. If anything, the delicate tradeoffs embedded within this crisis surely show the need for being more discerning about the scope of overall government activity and when it is truly justified for the government to intervene.