Faculty Q&A: The economic impact of the pandemic


In the last month and half, the world’s economy has been roiled by the coronavirus pandemic, as governments issued various orders that impacted “essential” and “non-essential” businesses, guidelines that changed consumer behavior and released billions and trillions in emergency funding.

The stock market is volatile, unemployment is hitting depression-level numbers and Americans are divided over the wisdom of getting back to work or continuing the pause to limit the spread of the virus. With so much uncertainty, we decided to ask one of our faculty experts, Assistant Professor of Economics Dr. Caleb Fuller ’13, some questions about the economic impact of the pandemic.

Fuller agreed, but offered a few caveats. “First … I’m no more an expert on most aspects of this crisis than anyone else,” he said. “One thing economics teaches us is humility because the social order is a complex system—it can’t be fully ascertained by any single person.”

“Second, in economics, it’s important to distinguish between “pattern predictions” and “point predictions,” he explained. Pattern predictions are based in universal economic laws and generally expressed in “if x, then y” terms. They suggest the general direction of a relationship. Point predictions add a quantitative magnitude to that direction, which can change from moment to moment. “We can use economics to generate pattern predictions, but not point predictions,” Fuller said.

“Third, economics is not a normative discipline, which means it can’t tell us what we should or shouldn’t do. It helps reveal what some of the relevant trade-offs might be, but a discipline like ethics is required to determine how we 'ought' to negotiate those trade-offs. Simply noting that there are unseen costs associated with a policy isn’t the same thing as condemning a policy—but economic analysis certainly helps us gain a clearer grasp of what trade-offs we’re facing.”

With that out of the way, Fuller offers some thoughts about economics in the time of Covid 19 in response to our questions:

A month into this crisis, with most of the world’s economy on hold or in disarray and millions of people effectively quarantined, what do you make of the situation?

At the root of economic thinking is the idea of trade-offs. Regardless of one’s opinion about lockdowns, it would be shortsighted to ignore the fact that such impositions do have costs. That might sound cliché, but the implications are profound because costs are borne by human beings. One popular way of framing our current moment is that the trade-off we face is between the health of “the economy” vs. “human lives.” At best, this is a highly misleading way of thinking of the current situation. “The economy” is not some mysterious thing that’s “out there”—instead, it’s the system by which human beings repeatedly satisfy their goals and objectives. To hamstring “the economy” is to impede people’s abilities to achieve whatever their objectives are – providing for one’s family, improving one’s quality of life and even spending time in leisurely pursuits all require real resources. 

When an economy is subjected to restrictions, wealth – the means by which people achieve their objectives – is destroyed. This is important because historically, absolutely nothing has been a bigger killer of mankind than poverty. It’s even somewhat superficial to identify disease and starvation as the true killers because these become far less of a scourge at higher levels of wealth. There will be deaths that result from the response to coronavirus, but which aren’t counted in the official coronavirus death toll. The more obvious cases will be people who avoid the hospital while having a stroke. Other slightly less obvious cases include someone who can no longer afford their prescription medicines or can no longer afford to eat as nutritious a diet. But economics is about helping us see the unseen. The economist Paul Frijters asks us to wonder about the person who dies years from now because they’re driving on a road for which maintenance funds were unavailable. These deaths are analogous to the additional deaths, documented by economist Richard McKenzie, that occurred in the years following the 9/11 attacks. Those attacks, and the subsequent policy response by the TSA, raised the full cost of flying, which sent people to the interstate highways, a far more dangerous mode of transportation than flying. We could see something like this again if there were new regulations stipulating, for example, that passengers’ temperatures be taken before boarding a plane.

Unfortunately, these sorts of “unseen” deaths are highly dispersed, and most people won’t attribute them to a policy response from years earlier. But that doesn’t make them less real or less tragic.

What is the impact of governmental mandates that have shut down some businesses as “non-essential” and kept others open – and busy – as “essential?” Does the government have any business making those distinctions during a national emergency?

From the perspective of economic theory, the distinction between “essential” and “non-essential” business is entirely arbitrary. To me, this policy belies at least two misunderstandings of the social order. First, it ignores the fact that the value which consumers derive from goods is subjective. No government bureaucrat (or anyone else) is capable of grasping what goods are the most “important” to us. We reveal this by our own decisions to purchase or refrain from purchasing goods.

Second, the distinction between “essential” and “non-essential” businesses  ignores the fact that the social order is a highly complex system. In order to enjoy our remarkable standard of living, we rely on an extensive division of labor, which contains millions of goods, tasks and production processes. Interrupting this complex system at any point will certainly have ripple effects on supply chains throughout the economy—including for those businesses deemed “essential.” For example, hospitals require tens of thousands of products to operate optimally, and many of these products are produced by “non-essential” businesses. Related, someone who loses their income because their “non-essential” business was shuttered will find themselves less capable of buying “essentials” such as food or medicine.

The federal government has gotten very involved in trying to blunt the economic impact of the lockdown with free money for businesses and individuals, what’s wrong – or right – about that?

Because economics is not normative, it can’t tell us whether a given public policy is “right” or “wrong,” but it can at least tell us about some of the likely effects.

There’s no such thing as a free lunch. Creating new pieces of paper money can’t increase the number of real economic goods that allow consumers to satisfy their ends. If creating wealth were that simple, we wouldn’t need to wait for a crisis to do it. To pay for such stimulus, government is issuing new debt, which tends to “crowd out” investment undertaken by private actors. Private investors tend to flock into the relatively less risky government bonds, which leaves fewer savings available for private projects. In this case, as an attempt to mitigate that outcome, government is also “monetizing” the debt, meaning that new money is being created to buy a least some of this debt. In the long-run, this risks rising prices.

It’s not politically palatable to suggest, but these sorts of bailouts generally increase the fragility of the economic system. Producers come to anticipate these sorts of responses by government (the technical economic term here is that bailouts create “moral hazard”), and anticipating bailouts, firms undertake riskier investment. They also fail to make their own provisions for these sorts of exigencies. When a similar crisis strikes next time, firms are less able to weather the storm without receiving public assistance—which always ultimately comes out of the taxpayer’s pocket. But this sort of long-term thinking is virtually never part of political discourse. One of the hard lessons of economics is that there really are no such things as “solutions,” only “trade-offs.”

While it’s true that millions of small businesses are understandably struggling, it’s also true that many others are struggling to keep up with a newfound surge in demand for their products. While demand has shifted away from some things like movie theaters, it has shifted to other things such as the services provided by companies like Netflix. And while many are concerned about the ability of individuals and small businesses to service their debts without aid, creditors also recognize that it’s probably in their own best interests to re-negotiate many of these debt contracts.

What’s the best-case – or worst-case – scenarios for recovery?

The famous philosopher, John Stuart Mill, once remarked on “the great rapidity with which countries recover from a state of devastation; the disappearance, in a short time, of all the traces of the mischiefs done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.” (“Principles of Political Economy,” published in 1848).

However, this rebound is no by means automatically guaranteed. It’s highly dependent on the context in which entrepreneurs are permitted to act. When entrepreneurs operate in the context of strong private property rights, their actions are guided by the lure of profits and the discipline of losses. When arising from market prices, profits and losses are critical signals informing entrepreneurs about which goods and services are most urgently demanded by consumers. They also guide entrepreneurial decision-making regarding the least wasteful ways of satisfying these demands. This institutional context of private property rights is thus critical for us to experience the rapid “bounce-back” that Mill famously observed.

I’ll give one reason for pessimism and one reason for optimism about the hoped-for recovery. One reason for some pessimism as pertains to rapid recovery is that, worldwide, governments have seized a tremendous number of powers during the crisis that they did not previously possess. Interestingly, as the economists Christian Bjǿrnskov and Stefan Voigt have recently shown empirically, the coronavirus power grab has been more dramatic in democracies than it has been in autocracies.

The distinguished economic historian Robert Higgs has documented in his classic history of the American economy, “Crisis and Leviathan,” that government power grabs are the norm, rather than the exception, during times of crisis. Higgs further describes how these power grabs tend to have “staying power.” Once a crisis is resolved, the pattern is for government to relinquish some, but not all, of the new powers it has assumed. Higgs describes this phenomenon as the “Ratchet Effect,” and it’s the reason why crises tend to precipitate increases in both the size (that is, budgets) and scope (that is, the number of tasks) of governments. Many of the new interventions have the potential to impede entrepreneurs’ abilities to satisfy consumer demands.

However, there is also at least one reason for optimism, at least if governments don’t significantly interfere with entrepreneurs. The recovery from downturns, such as the typical recession caused by monetary meddling (the 2008 financial crisis is a great example), can often be long and painful. This is because those sorts of downturns are precipitated by monetary policy which misleads entrepreneurs into making widespread poor investments. During the recovery period, those investments must be liquidated, and many real resources in the form of capital goods are squandered forever. That’s not the case here. The “real” economy – capital goods, factories, laborers – is still pretty much intact in this case. Coronavirus didn’t cause significant, widespread malinvestments, as monetary policy is capable of doing. This gives us at least one reason to think that lifting the lockdown could lead to fairly rapid recovery.

Are there ways public policy has impeded the response to coronavirus?

At least in the United States, there have been many public policy responses which have both made life more challenging for the average consumer and have also impeded our ability to effectively respond to the pandemic.

In the US, there are emergency-time provisions that allow for the enactment of price controls on goods which are deemed essential. These price ceilings prevent the price of a good rising to the level it would reach under the new market conditions. While well-intentioned, these policies fail to recognize that prices aren’t arbitrary numbers—they’re critical for balancing the limited availability of a good against its increased desirability during crisis times. Letting the price of goods like toilet paper or hand sanitizer rise to reflect the increased demand would fulfill two critical functions. First, it would incentivize consumers to economize on these goods—to refrain from wasteful use or needless hoarding. Second, it would incentivize producers to work overtime to increase the quantities of these goods which are available to consumers. By suppressing the price, we’ve instead faced empty shelves and sluggish responses by producers.

When it comes to effectively countering the virus, the U.S. Food and Drug Administration has, at times, impeded the response of private actors. For example, the FDA for weeks prevented private parties from supplying coronavirus test kits to hospitals that were short on these critical tests. 

Is there any economic upside to this?

On the whole, there are no “economic upsides” to wars, natural disasters, or pandemics. That’s not to say that some people don’t personally benefit from these events – they undoubtedly do. But society is left less prosperous by these occurrences all the same. Doubtless, we’ll hear reports of some new innovation that resulted from the coronavirus pandemic. The benefits of innovation born of desperation is also a commonplace argument during war times, but it commits the “Broken Window Fallacy” that Frederic Bastiat so eloquently explained 170 years ago. The key to understanding why any such innovations are not a net boon to us is that such reasoning overlooks the bedrock economic concept of opportunity costs. What might have been done with the resources (including labor) devoted to this innovation if they didn’t have to be allocated to addressing the pandemic? That’s a question that we can’t answer because the world misses out on certain innovations or additional existing products and services that will never see the light of day. Ultimately, if disasters like hurricanes or pandemics, made humans better off, we wouldn’t be beholden to their (random) timing – we have the technology to, of course, manufacture such disasters intentionally. But suggesting such a thing is, of course, not only ethically bankrupt but economically absurd!

Faculty Q&A: The economic impact of the pandemic

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