By Kevin D. Gomez In the one area Cuba has the wherewithal to come out on top, it has failed. Cuba’s socialism is no healthcare unicorn. Instead, we have a raging bull rearing its ugly head. The island nation’s leaders know it and are cracking down with predictable force. In response to the #SOSCuba protests, […]
Cuba’s Health Care Fiasco Demonstrates Failure to Embrace Markets
Overall hot-takeaway:
Presidents don’t matter. The government spends a lot of money. Older people are expensive. But, one day you’ll be old and expensive as well. So, have more kids to increase the income-earning population. We’re actually getting richer. But, we also like to buy a bunch of shit, which makes us feel poor.
An interview piece on Healthline has a few experts discussing the coronavirus. One health historian claims that “In 1918-19, the seasonal influenza eventually tapered off on its own. Everything I understand about our current situation is that is unlikely.” Another expert claims that “We haven’t done a good job so far containing the virus. We have to be very careful. We cannot sustain this level of mortality.”
I have two questions. Why did the flu pandemic of 1918-1919 taper off on its own, but the coronavirus cannot? And, why is this level of mortality not sustainable when the “seasonal” Spanish Flu lasted 14 months and took a total of 20 million (maybe even 50 million) lives, worldwide?
We are 6 months into the COVID-19 pandemic. Currently, we are at 750,000 total deaths worldwide. At the current rate of 6,500 deaths per day, we will have reached a total of 2,420,500 lives lost in 14 months. The thought that this level of mortality is “not sustainable” makes me question what the word “sustainable” actually means. If the world was able to withstand the Spanish flu with the horribly tragic numbers of upwards of 50 million lives lost, how are we not able to withstand the current numbers today? We’re here aren’t we? Yelling, typing, protesting, and ravaging our political and social institutions with more vitality than I can remember, but I digress.
If we look solely at the US, the Spanish flu claimed 675,000 lives in 14 months. Since March, we are at 166,000. It has been 163 days since the outset of the pandemic. We can calculate a back-of-the-envelope average of 1,019 deaths per day. If we continue at that rate, we would reach 427,980 deaths at the end of 14 months, which are 420 days in total–247,020 deaths less than in 1919. And, this is assuming that we stay at that heightened average daily rate of deaths. The graphs below shows that this rate of death is unlikely with the extreme bending of the curve for virtually every single country.
Furthermore, if we include population comparisons, COVID-19 becomes much milder relative to the Spanish flu. In 1917, one year before the Spanish flu hit, the world population was at 1.9 billion and the United States was at 100 million. Today, the population of the world is more than 7.6 billion and the US has reached more than 330 million.
These numbers mean that 1.6% to 2.6% (20 million to 50 million) of the world population was killed by the Spanish flu. COVID-19, if it continues on the track of claiming 6,500 deaths per day for 14 months will have killed 0.03% of the world population. The difference is more than 193%!
On top of these numbers, we have our technological and medical advances. Today, we can share information with the click of a button, we can “socially distance” a bit more easily, and we have the tools to monitor our health more effectively. We have improved processes of hygeine and sanitation. Modern advances such as clean running water, air conditioning, and the automobile are staples in the large majority of households in the US. Our modern financial system, despite its flaws, has been able to combat the downturn in aggregate demand with cash stimuli to keep families afloat.
Even with these modern advances not being around during the Spanish flu, the US experienced a period of unprecedented growth. New technologies, political institutions, and wealth exploded in the West. Though much of this growth was focused in the US, today, it may be safe to consider that countries like India and China will see economic growth after this calamitous blip in human history.
So, why is it that we can’t handle this pandemic, but we handled the Spanish flu, which was, statistically, more devastating by at least one order of magnitude? I know they are different, but why must we all sing to the same tune? It’s not obvious to me that the fear-mongering is not completely the result of it being an election year. Help me believe. I really want to.
It is hard to say with any certainty, though my best guess would be no in the short run and probably in the long-run. In the short-run, say, five to 18 months, the aggregated price level will likely experience very little inflation. The long run, however, might be a different story, especially with healthcare.
Price levels should increase with the massive increase in the money supply (liquidity) and government spending. The reason that happens is that these mechanisms mainly increase the demand for goods and services. By printing money, the money ends up in wallets, and these folks now feel as if they have “extra” money to spend on things.
Though this works on paper, it’s harder to see play out in real life. It all comes down to whether individuals and firms will see these new dollars as “extra” or if they decide to save or pay off debts instead. So, it all depends on the “velocity” of money, or how quickly money exchanges in the economy. After the Financial Crisis of 2008/09, we didn’t see an uptick, despite all this liquidity in the marketplace. Granted, the Great Recession was the result of a credit crisis, not a liquidity crisis, like it was during the Great Depression. Nonetheless, banks were afraid to lend, and people were afraid to spend.
The same thing might happen this time around. Just because businesses begin to reopen, doesn’t mean that people will all of a sudden flock to the stores and go back to spending as usual. It is starting to look like there will be a prolonged return to normality, which may take several years for us to figure out the “new” normal. There’s been extensive discussion of the “shape” of the recovery going from U-shaped, to V-shaped, to W-shaped, and now to the Nike “swoosh” shape.
So, when thinking about whether or not prices will increase, we have to analyze what has been happening on both the demand side and the supply side of different industries.
Technology – decreasing now, decreasing later
The technology sector is poised to be able to make huge gains from this crisis. For one, we have seen many of the tech companies see windfall profits as we have transitioned to online and remote work. These industries can undoubtedly increase their prices, and we would pay them. However, these firms have low marginal costs. That is, any pricing over $1 is profitable for many established tech companies.
Though these companies can increase their prices, it makes more sense to try and retain all of the new customers they have recently acquired.
Automobiles – decreasing now, increasing later
Cars and trucks are a good indicator of what’s to come. New cars, used cars, rentals, everything is down to record lows. Demand has decreased substantially. Moreover, “plans to purchases a vehicle in the next five months declined 34% in April.” There is also an excess supply of used cars. So prices for automobiles have seen a substantial decrease. When businesses begin to reopen, we may see some folks racing to their nearest dealership to take advantage of the deals. These consumers will likely reduce the excess supply and increase prices, but not any higher than they were pre-COVID.
In fact, due to COVID perhaps restructuring the labor force a little bit, there may be an ample supply of unemployed workers looking for jobs, which may push wages down, and thus, allow for cars to sell at a lower price. Since it costs less to make cars, we can charge less to sell them.
Energy – decreasing now, increasing later
On the other hand, we are experiencing meager prices for oil and gas. With such low prices, this may increase the demand for cars, particularly trucks and SUVs. It all depends on how long we have the supply glut.
As airlines pick back up and we start driving to work and all over the place, we’ll likely see the prices rebound. But, as mentioned, this will be a slow process, especially since a good part of the oil price decline has been a supply glut that was unrelated to the COVID-19 pandemic.
Food – Increasing now, decreasing later
Food supply chains have seen an enormous disruption, namely those that deal with both grocery stores and restaurants. Meatpacking firms have experienced a detrimental blow due to COVID infections, reducing the supply, and pushing prices up. Moreover, packaging requirements make it hard to merely direct food that was to be sent to restaurants over to grocery stores. As a result, beef prices are at record highs. Chicken is still relatively steady but pushing for higher prices. Eggs have seen a considerable price increase. Pork has also seen a rise.
Furthermore, the demand for foods that don’t go to restaurants has increased substantially. Think macaroni and cheese, frozen foods, canned goods, and snacks (I’ve been buying way more Oreos as a result of the lockdowns). These foods are experiencing an increase in prices now but may see a reduction as people start going back to work.
As the meat processing plants begin to recoup their labor force, the supply of processed meat will increase again and push prices down. Importantly, as schools reopen, this will help soften the food glut we are now experiencing, especially at lower prices. Hopefully, some of the regulatory barriers that have softened to allow the supply chain to redirect food to grocery stores will help.
Something that may come out of this COVID crisis might be investments in further automating the food processing system. So, this will likely also reduce prices.
Education – I dunno
Universities are suffering severe losses in tuition revenue. Usually, recessions cause the demand for a college education to increase. Moreover, easy access to tuition assistance in the form of subsidized and unsubsidized loans flame that demand. On top of that, as all levels of government allocate more funds toward unemployment and COVID relief, this will reduce public funds that are allocated toward education, thus pushing tuition prices up even more.
However, this time it might be different. If universities have to transition to more online classes, enrollments will decline. We already see it. People go to college, not only to get a degree but for the college experience. How long will it take to get fans back into the Doak football stadium? With such low enrollments, the rate of tuition growth will likely slow down if it doesn’t go negative.
Moreover, with the transition to online learning, how many firms will be happy with certifications that are obtained outside of the traditional university setting?
Healthcare – increasing now, increasing later
I can’t see any reason healthcare costs will decrease. COVID-19 has not only hurt the healthcare system, but it has also caused other treatments to be delayed. This “pent-up” demand will unleash and push health care prices through the roof. Because of the lockdowns and the halting of “elective” procedures, health care consumers have delayed prescriptions, treatments, and other health care services. This will cause health care issues down the line and will flood the system again.
We will likely see this play out most tangibly in our insurance premiums in the coming year.
Housing – decrease now, decrease later, and maybe increase after a while
Housing prices are predicted to fall a few percentage points in 2020 and will probably not increase until the end of 2021. Lower prices and friendly interest rates are a boon to buyers. But, buyers have experienced a tremendous loss in income. Perhaps, many homeowners have attempted to refinance their homes at lower interest rates. Granted due to COVID lockdowns, the refinancing process has been a hassle for many. But, once businesses start reopening, we’ll see these refinances happen quite rapidly. The uptick in refinances will put upward pressure on interest rates which should slow down housing sales even further.
In sum
Indeed, a reopening of businesses may increase the demand for those goods and services that were temporarily shut down. However, depending on the gravity of the loss of income, the demand increase for these “nonessentials” may not be enough to increase prices. Prices should stay relatively low relative to pre-COVID levels and will likely increase at the tail end of the swoosh.
If you know Spanish, watch the video: https://www.facebook.com/watch/?v=873589819731339
The woman in the video and still image above, Lola, provides a moving soliloquy regarding the ongoing pandemic. She opens with the realization that “common sense” is not as common as we think. She goes on to say that those who have common sense are worthy of admiration because it’s so hard to find these days.
Her sarcastic tone is about the absurd claims being made by Cubans on the island regarding the COVID-19 pandemic. They will make claims like, “Your president (Donald Trump) is setting up dump trucks outside all of the hospitals because so many people are have died. Your health system can’t handle all the sick and dying!” Solicitously, these folks ask, “Are you doing OK in those grim conditions?”
Uh, what?
Yes, we are in a health crisis. Many people are dying. There are a ton of old and sick people not only in the US but in the whole world. We’re in a scary situation.
However, the concern over the well-being of friends and family members in the US amid the crisis is misplaced. Despite the health care system’s current state of over-capacity, it beats out Cuba’s system by much more than a longshot. The health crisis of the US emerged quickly and is most likely short-lived. Hospitals are immaculately clean, have staff who are well-trained, and are, during normal times, filled with the resources necessary to address virtually any health issue effectively.
Besides, folks in the US have the capacity to actually assist the health system. We have easy-access to masks, hand sanitizer, and a multitude of goods necessary to combat the pandemic and overcome the lockdowns with ease.
Not in Cuba.
Cubans are stuffed in a multi-generational household because nobody has the means to buy a house of their own. Your home is also falling apart because there are no tools or supplies to repair anything. If you are one of the lucky few to have a car, it’s at least 40 years old, and there’s no gasoline to fill it up. Going to a grocery store is out of the question as there are none. Before, during, and after the crisis, you will continue to wait in line for your scant ration of essentials each month.
In the US, we can take $50 to the store and buy whatever we need or–wait for it–want. Gasp! Plenty of stores are open during a pandemic with people buying more toilet paper than they need and all the food they could possibly hoard in their modern refrigerators. Not to mention, Amazon and the many other online retailers that will deliver virtually any product we need to our doorstep.
Allow us, citizens of developed countries, to take the punch on this one. We are doing alright during this crisis. But how about Cubans?
Hospitals in Cuba would not even come close to passing a regulatory audit performed by the Department of Health and Human Services, let alone during a pandemic. Cuban hospitals are short of countless resources. Well-trained doctors are limited continuously in their ability to treat patients because of the conditions of their clinics. Cuba is not a great place to live, as evidenced by the swaths of people escaping by any means available.
For more than 60 years, Cubans have been enduring a crisis. Many of them are oblivious to this reality due to the stringent control the government has over the Cuban media. But, many of them stubbornly perpetuate Cuban propaganda, knowing otherwise.
I witnessed this bizarreness when I met extended family members visiting from Cuba. They matter-of-factly say to me, “Oh, well I don’t have to buy a house, like you guys. My government provides a house for me,” and other ridiculous claims. They’ll be amazed when walking into a grocery store, visiting Disney World, or hopping into a nice car to go anywhere, and still speak of Castro as if he was a god.
They exalt the ideology and glorify the very leaders that have kept them in this relative misery for decades. And, this is what brings the woman to tears. Not only are Cubans thoroughly brainwashed, but they are also afraid to say, “We were wrong. This life does suck. Socialism doesn’t work.”
However, this behavior is not all that surprising. The cost of speaking out against the government in Cuba is still very high. Whenever a Cuban dissident makes a little noise, they disappear. The exchange of ideas is not allowed, especially if those ideas are in any way a threat to socialism.
This post is a message of gratitude toward the political and economic institutions of the US. And, a reminder that “common sense” is not as common as we believe. It’s not only a rarity in Cuba where it is actively suppressed but increasingly uncommon among Americans, where free-speech is a pillar of the society.
The COVID-19 pandemic is being used as a weapon to push the US closer to the Cuban way of life. The current health crisis is “proof” that our healthcare system requires some drastic reform. Folks are calling for the immediate adoption of socialist policies like “Covidcare for All,” a public job security program, and universal basic income. Moreover, “tax the wealthy!” of their “excess profits” that are to be arbitrarily decided by the state.
If we desire for poverty to be eradicated, and standards of living to increase for everyone, policies that move us closer to socialism are not the way to go. This was common sense, even if we skipped out on political economy 101. Our parents knew it. The Chinese know it, for crying out loud!
But, it seems like we have forgotten. So, as a reminder, take Lola’s words to heart: “If in the US you come down with a stuffy nose, in Cuba, you’re getting pneumonia.”
As we undergo measures of dealing with a completely exogenous–external–shock, this is like a dream-come-true scenario for teaching economics. For the time being, we no longer need to conjure up abstract stories to drive the point of the law of demand or how prices tend to find some equilibrium. We don’t have to explain the marvel of the division of labor, specialization, and comparative advantage. The corona virus pandemic is like a one-stop-shop for such material!
The COVID-19 pandemic of 2020 is rich with economic lessons, from why toilet paper is currently being bought in seemingly irrational amounts to what happens when everyone is forced to drastically reduce interacting with each other in person. Importantly, big decisions are being made under tons of uncertainty, by a bunch of people in different institutional environments, with varying levels of expertise, for a whole bunch of people whose livelihoods are at stake. Thus, not only are there great lessons and fantastic analytical commentary to be made after the fact, economics can help inform the actual process!
But, it’s hard for people to hear about economics over the noise of panic.
People are rational. At least, that’s the premise on which economists base their models of human cooperation. This means that the actions individuals take are based on perceived relative costs and benefits. We add perceived and relative because we all value things differently, and the costs and benefits are subject to change under different constraints, respectively. These cost-benefit calculations, often subconscious, guide our decision-making process. But, we often make the wrong calculations, especially during panics.
Economics is often thought to be too analytical and logical. Though it certainly can be, individuals who use the economic way of thinking about the world might have an advantage during crises. They are inclined to think about the trade-offs or the unseen costs of our actions.
“In the sphere of economics an action, a habit, an institution or a law engenders not just one effect but a series of effects. Of these effects only the first is immediate; it is revealed simultaneously with its cause, it is seen. The others merely occur successively, they are not seen; we are lucky if we foresee them.
The entire difference between a bad and a good Economist is apparent here. A bad one relies on the visible effect while the good one takes account both of the effect one can see and of those one must foresee.
However, the difference between these is huge, for it almost always happens that when the immediate consequence is favorable the later consequences are disastrous, and vice versa. From which it follows that a bad Economist will pursue a small current benefit that is followed by a large disadvantage in the future, while a true Economist will pursue a large benefit in the future at the risk of suffering a small disadvantage immediately.”
Bastiat, Frederic. 1850. What is Seen and What is Unseen. https://oll.libertyfund.org/pages/wswns
Many economists are aiming to be what Bastiat calls “true economists” by foreseeing the severe costs of quarantines and other heavy-handed measures used to mitigate the pandemic. Because many of these costs are unseen, it’s hard for panicked individuals to waste a breath on seriously considering the effects of a potential overreaction.
Moreover, what is “seen” are real-time death counts on hundreds of different websites. These graphs are televised, have flooded social media news feeds, and completely taken over the conversation. Elegantly presented death tolls, and their purported rates, are incredibly emotive. As normal, feeling, humans, it’s easy to be captured by a phenomenon that is murdering people in real-time, in front of our faces…well, our screens. Health care providers certainly see the effects in their faces as hospitals scramble with the increase and demand and limited capacity. In other words, it’s easy to panic. And, once we’re in panic mode, it’s fight or flight. Forward-looking reason seemingly disappears.
The “unseen” costs are the compounding effects each minute of forced quarantine has on the market economy. The financial crisis and subsequent long-term unemployment are estimated to have killed 500,000 people. Keep in mind that at its peak, the US reached an unemployment rate of a whopping 10 percent in 2010. Since then, it has steadily improved to 3.4 percent. Preliminary unemployment estimates as a result of the corona virus are massive, from 9 percent to upwards of 20 percent. The coming layoffs for countless low-income workers, tipped workers, and workers living paycheck to paycheck, will be fatal. What’s more is that forcing the move to remote work, will have lasting effects and may contribute to long-term unemployment as the economy begins to restructure.
This is only the tip of the iceberg. Will the poor attempt at “flattening the curve” force health care providers to make life-threatening trade-offs for a longer period of time? What are the effects of the shutdown on human capital formation in schools? How long could the federal government safety net of extreme deficit spending be sustained? Should we consider the thought that perhaps multiple trillion dollar stimulus packages may have some long-term effects?
Regardless of political leanings, we should welcome the economic way of thinking to the conversation. Instead of screaming that “individuals who think a massive shutdown might be a terrible idea aren’t considering the loss of life at hand,” why not believe they, too, are interested in saving lives?
The consideration of alternatives should not minimize the gravity of the situation. Real people are getting sick. Real people are in serious danger from being infected. The COVID-19 pandemic is not a joke. And, that’s the point. Because serious decision-making is happening, understanding and addressing the costs are of paramount importance.
Economics, if taught well, should have a life-changing impact on a student. It forces the student to hold back their repugnance and attempt to look at both explicit, or seen costs, and the implicit, unseen costs, as objectively as possible, and apply theories of exchange to different phenomena. Claims like the optimal number of genocides in the world is greater than zero, that kidneys bought and sold on the market saves more lives, and that we should legalize the hunting of rhinos to keep them from going extinct, will undoubtedly elicit an emotional response. But, that’s the beauty of the economic way of thinking. It is both obvious and startling. It can bring out the color in the harmless mundane and, at the same time, help sharpen decision-making under high-stress, high-stakes, and scarce conditions such as the COVID-19 pandemic.
Perhaps, individuals equipped with the tools of economics have trained for this real-life shock. They are trying to add the disastrous and likely fatal consequences they foresee to the conversation. Sometimes they have to scream.
It’s just hard to scream louder than the panicked.
Question
Based on your political beliefs, would you never have implemented a quarantine and left it up to people to self-quarantine? If no, do you agree with all the government interventions that have been rolled out and/or are about to be rolled out in order to help individuals/businesses/industries affected by the quarantine? Please frame both in context of how they are consistent with your overall political/economic views or why this would be an exception if they’re not consistent with your general views.
Tl;dr
If I were the ruler of the galaxies, I would have never implemented a quarantine and left it up to people to self-quarantine.
I can’t entirely agree with the government interventions that have been rolled out or are about to be rolled out. There are some measures, though, with which I agree. Namely, the removal of the bureaucratic barriers that hinder markets from working more efficiently like testing regulations, occupational licensing, allowing for alternative supply chains to obtain resources, etc.
Context
I would let the market handle the issue at hand. The main problem with the COVID-19 pandemic is not the virus, per se, but the changes in relative scarcity caused by the virus. To me, the biggest scarcity issue is not the lack of hospital beds or test kits, but knowledge. The “knowledge problem” is that there is no centralized repository of knowledge, even if the CDC, FDA, or other government agency claims to be in that role. Knowledge is diffused among many people and is incredibly messy. The same nugget of information can appear to be contradictory to different people under different circumstances. The market mechanism, or price system, works because of the knowledge problem, not despite.
In a perfect (libertarian) world, the media would report on the new concern from a trusted, privately-run nonprofit research institute that looks at pandemics. The Pandemonia Institute would be among several research institutes that have access to reported medical data, of course, via online medical records. As the media reports and concern increases, medical experts would suggest self-quarantine while the mitigation/suppression options begin to emerge. From there, we would see cooperation at the localized level, communities, and up, to address the epidemic at hand. Businesses would continue to run, as usual, making the necessary adjustments. Given how the particular virus is affecting different demographics, responses should be different for different communities. So the localized cooperation should be the best, at least from an epistemological perspective.
We’re not in a perfect world. We have a government that, throughout history, has exercised both edges of its sword. This fact is the libertarian concern. On one side, the monopoly on force has, in theory, reduced the destructiveness of violent organizations competing for market share. The other sharp edge has allowed the state to expand in power and scope, brewing and exasperating societal iniquities while often getting in the way of good, ole civil society.
We also have a state that has always jumped in at any crisis, from legitimate to completely made-up, like Trump’s “Border Crisis.” The government MUST do something. Not because it will help, but because its constituents demand it out of uncertainty and fear, and because it is the opportunity to increase government scope–every government official’s desire.
Herein lies the problem.
We have to be cautious of the institutional environment behind particular epistemic systems, or arrangements of the gathering and formation of knowledge. Koppl (2006) states that “epistemic systems are social processes viewed from the perspective of their tendency to help or frustrate the production of truth.” When it comes to the institutional environment of governments, disseminating truth might run into some roadblocks.
Let’s agree on a few points:
1) Public servants are self-interested.
2) Medical and other government “experts” are also subject to the institutional incentives of engaging with said civil servants.
3) Even with voters sharing a common interest–“BEAT THE VIRUS!”–they are ignorant of the right way to reach that goal. To be sure, they are rationally ignorant of virtually all public policy questions as the costs of being informed outweigh the benefits.
4) And, there is a tendency for both laypersons and experts to “adjust their opinions away from the obvious truth in order to conform to majority opinion” (Koppl 2006).
Reasonable, right?
Not only are we, as constituents, pretty ignorant on the whole issue, so is the government (and its respective medical experts). Because the data we have is unreliable and biased, we lack the evidence that shows whether mandatory lockdowns and quarantines will, indeed, work to mitigate or suppress the pandemic. It is not biased out of malice, but out of the current scarce conditions where we don’t have the testing capabilities to capture a good sample of the infected population. “We don’t know if we are off by a factor of three or 300.”
In other words, it is by no means clear that quarantining measures being implemented by governments are less costly than simply allowing markets to share information, allocate testing equipment, and mitigate the result of the virus spread without massive disruptions to people’s lives.
Given that lack of evidence, the state is still quick to action and quick to disregard the economic and social tradeoffs. How will shutting down schools help solve a problem of which we have such terrible data? Especially, when students, who may very well be infected, might now be at home with an elderly family member?
What about the economic implications of completely shutting down businesses? We do not have the appropriate cost/benefit analysis to make these types of heavy-handed calls. In other words, will the mandatory quarantines end up being worse than taking a more level-headed, and localized approach to the situation?
The state, however, is borne out of its ability to capitalize on its power and mobilize society. Unfortunately, it doesn’t have to prove that it’s done the necessary due diligence to take any action it decides to take. Fear and panic can grant it the appropriate authority.
The measures employed by the government, however, are expected. Given that we expect the government to act swiftly and with a heavy hand, there are less terrible ways of doing things. Professor Tyler Cowen lays out a few public policy proposals to help during the crisis in this document. Many of the policy suggestions involve removing or relaxing annoying restrictions that have typically hindered the allocation of goods and services like tariffs/taxes, labor laws, and price controls. It also includes reasonable “state capacity” suggestions like encouraging innovation via prizes and idea protections. And, finally, unemployment insurance and loan contract extensions to help those who are, for now, unable to participate in the market economy.
These suggestions do not necessarily fall outside of the “libertarian purview” because the current state was and continues to be built outside of the libertarian purview. The US government makes up about a fifth of the country’s gross domestic product. So, it makes sense to use the government’s capabilities to help soften the blow and encourage the rebounding of productivity as opposed to merely sitting idle. It might also be important to note that some, if not most, of the fragility in the market economy is due to previous government action.
The Fed’s preemptive actions are not likely to stimulate the economy. In a world of meager interest rates, an expansionary policy will have little effect. As a result, we are left with government stimulus packages. Some of these might work, but many will not.
In sum
From a practical libertarian standpoint, the main concern with the intervention is the government’s role after we’ve “defeated” the virus. I wouldn’t be surprised if a new agency pops up that performs medical testing at airports or large gatherings. In the name of national security, it will double down on surveillance, giving the state more control over our personal lives and medical data. Though presented innocuously, it has the potential of serious infringement of liberty for a variety of different groups of people.
To be sure, several deregulatory measures are in line with the libertarian ideal of progressing toward a freer society. Our health care system, as expensive as it is, is better able to handle the capacity than other developed countries around the world. What’s more, is that it would be able to handle this overwhelming demand even more by removing the bureaucratic barriers in the way of biomedical manufacturers producing and distributing equipment around the country. As Jeffrey Tucker points out, “had we left this issue entirely to the private sector, which would have brought a Coronavirus test to you as quickly as you can order a pizza.”
If we come out of this crisis with industries deregulated, we should be able to swallow the massive deficit spending to curb the economic disruption as a result of the current quarantining measures.
On social media, people are up in arms with how the government is quick to take care of the filthy wealthy bankers and don’t care at all about the working-class folk. “Oh, so the government can inject $1.5 Trillion in an instant to save the banks but can’t provide free healthcare to the 99 percent or free college education to its citizens. DISGUSTING!”
These types of comments show a lack of understanding of financial markets and are simply wrong. The Fed injection is an effort to make sure the bank or financial institution where your money is deposited is there when you want it. It is not merely to make sure the wolves of Wall Street don’t go hungry—it’s to make sure you don’t go hungry.
The Federal Reserve or the “Fed” is the central bank of the United States. This entity is purposely separated from the government to avoid political influence. The Fed is a bank. And, like any bank, it does not give money to any firm or individual. It is the mediator between borrowers and savers, of which are banks or the U.S. government.
The three primary functions of the Fed are:
When we see headlines of the Fed “injecting” money into the financial system or “Wall Street,” they are not giving money to Wall Street. The Fed has bought short-term Treasury bills, which are government bonds or IOUs, from banks. The banks then use this money to loan out at lower interest rates (because the supply of money has just increased). The lower interest rates are supposed to incentivize borrowing, which keeps businesses and individuals investing in productive stuff.
The intended outcome of this “$1.5 Trillion Fed Injection” is that you, the 99 percent, get to keep your job.
Monetary policy refers to the actions taken by the Fed. Fiscal policy, however, applies to actions taken by the government. We can shout, “Disgusting! Unbelievable! I…I, just CAN’T,” when the government starts to enact fiscal policy by injecting cash into their preferred industries. We can then wonder why that money isn’t going toward healthcare, education, paid-leave, daycare, farms, ice cream shops, toilet paper, or any other industry to which you believe we are righteously entitled.
In 2009, the government and the Fed engaged in policies to help the economy facing a downward spiral. The Fed aimed to battle the contracting economy by buying government securities, or bonds, to increase the money supply. But, when that expansionary monetary policy proved not to be enough, the government injected cash, in the form of fiscal policy, into the banks with the Troubled Assets Relief Program (TARP).
Both organizations were trying to help the average American citizen, and both were trying to do the right thing. There is a difference, though.
The Fed is a nonprofit organization, but makes a profit as any other bank does, buy paying savers lower than they charge borrowers. Notice how, when you save your money at the bank, the interest rate is lower than when you go to the bank to borrow the money? That difference is the profit, which goes toward operational expenses and then back to the Treasury Department, since the Fed doesn’t keep any of its earnings, and used toward government expenditures and reducing the federal debt.
Outside of the excess profit from the Fed, governments do not make a profit. They don’t “produce” anything. The government’s money comes from taxpayers. When the government buys or provides anything to individuals, firms, or industries, it must obtain those funds from taxpayers. Given that it’s hard to take the money from you at once without guns coming out, they’ll borrow it from future taxpayers–the older you, your children, and your children’s children.
So, no. The government isn’t giving money to anyone with the $1.5 Trillion injection from the Fed. Rest assured, the government will engage in fiscal policy pretty soon. For example, the payroll tax suspension proposed by the president could dwarf the fiscal measures taken in 2009. Billions of dollars will be spent to combat COVID-19 and the subsequent economic implications. Some of these expenditures will help! But, some will be a complete waste of money and maybe perpetuate the problem. And, given it’s an election year, you can bet your money on the government taking drastic measures in the attempt to make sure we are all fat and happy. Time will tell.
This stuff is complicated, even for economists. There is enough ignorant hysteria with the pandemic. Adding an extra dose of ignorant hysteria will certainly not help the situation.
Since the Bronze Age, men have been rocking belts. For most of its history, belts are a practical accessory, meant to hold weapons. Today, we’ve moved passed that and now wear belts because it makes us look fashionable and keeps our pants from falling. I guess that’s practical, right?
What does this have to do with economics? Well, belts are a result of the market process–so it has everything to do with economics.
However, this post is mainly inspired by one concept: the elasticity of demand. The elasticity of demand is the measure of how responsive consumers are to changes in price. If the price of table salt were to increase from $1.99 to $6.99, there would be very few consumers, on the margin, who do not buy the salt because of the price increase. This phenomenon describes a relatively inelastic good. If the price of a slice of pizza, however, increases from $1.99 to $6.99, many consumers will likely curb back on buying the pizza and will look for a better deal elsewhere.
After I showered at the gym and changed into my work attire, I realized I had forgotten a belt. What’s more, I had an important meeting scheduled at 9 am.
So, at 8:45 am, I need a belt. What are my options?
I spent $35 on a Creighton belt when I have plenty of belts to choose from at my house! Am I crazy? Wait…don’t answer that.
Reflecting on my belt purchases, I came to the realization that I buy most of my belts this way. My demand for belts is relatively inelastic. The vast majority of my belt purchases come from an immediate, dire need. Very seldom do I shop for a belt. I have bought belts at hotels (super expensive), university bookstores (also expensive), and on the way to a wedding to which I’m already 15 minutes late.
Given my situation—my pants will fall, or I’ll look funny in formal attire without a belt—changes in the price of the belt won’t deter my purchasing of the belt, by that much, on the margin. Honestly, I probably would have still bought the belt at the bookstore this morning if it was priced at $70—100% more expensive!
This is my experience, but could it be applied to the market for belts as a whole? I can’t be the only guy who purchases his belts last minute. I would speculate that most men purchase their belts at the last minute.
Belts are a fantastic example of a type of good that has a relatively inelastic demand curve. Belts:
Because they have these inelastic characteristics, retailers can price them with a pretty high markup. If you go on Amazon, however, belts are priced a little more reasonably. Online, you have time to shop and compare and will likely accept the 2-day “free shipping.” At the store, we need this belt right now.
If you think shopping online is convenient, well, you’re right. However, it isn’t as convenient as a brick and mortar store right next to your job or the conference you are attending. We pay for that convenience via higher prices.
After chatting this up with some economists, I was reminded that we could get around the retailer opportunism by merely buying the expensive belt and returning it when we’re done. Next time, “Hi, I’d like to return this item. It didn’t fit.”
Ah, I’m kidding. God, in all His Glory, might whip me with His belt if He finds out that I returned the belt.
Inspired by a podcast at MacroMusings, let’s talk about growth.
Alex Tabarrok and Tyler Cowen, co-authors of a couple of excellent textbooks on the principles of economics, discuss what they mean by “cutting edge” growth and “catching up” growth.
The reason for this distinction arises because of the claim that particular institutions promote economic growth. However, we see countries like Libya, Cambodia, and China experience very high economic growth with institutions that are very different from the United States. Libya and Cambodia are two of the most corrupt countries in the world, while China is ranked 87 out of 180 in the Corruptions Perceptions Index. They claim to be “democracies” yet, there is little political stability. China is not a democracy at all and still boasts one of the highest growth rates in the world.
There’s something missing in the formula. Tabarrok attributes this phenomenon to the two distinctions of economic growth: “cutting edge” v. “catching up”. The United States has strong institutions such as political stability, relatively free markets, private property rights, little (blatant) corruption, the rule of law, and so forth. These institutions foster economic growth. But the growth rates are slower in the US because economic growth has to come from innovations.
I’ve caught a few episodes of the latest Master Chef, and it got me thinking about growth in the kitchen. Imagine you are 20 years old and you have no idea how to boil water, let alone cook a simple scrambled eggs breakfast. How long do you think it would take to learn how to cook the staples like chicken, rice, beans, pasta, eggs, even steak? A week? Maybe two?
Actually, not that long.
This short time is “catching up” growth. You don’t need to experiment with foods and figure out how to cook them for the first time. You simply follow time-tested and established recipes step-by-step to learn how to cook. If you imitate how somebody cooks any of those staples, you’ll learn how to do it very quickly. You can pick up different techniques pretty quickly. Like, if you heat a pan and put raw food on it, it will magically become cooked. Surprise!
But what happens when you are a solid cook? Yeah, like when family won’t kick you out of the kitchen when you decide to cook or when friends want to come over when they hear you are making a meal. Your ability to improve starts to slow down. You start to experiment with different flavors, cuisines and food items. Sooner or later, “elevating” your dishes become hard to tell.
The finalists on the last few shows of Master Chef are all cooks who can make a delicious meal. They are pretty much at the top of their cooking game. Their improvements are minimal. Host Gordon Ramsay is all about the “finesse.” It’s not merely about getting something tasty on a plate. It’s about the presentation, combination of flavors, and creativity that goes into the culinary experience. Ramsay and the other judges critique these dishes for points most of us don’t care about.
Pushing the envelope in the kitchen is very slow, in part due to the trial and error process necessary to come up with something good and new to the world. This is “cutting edge” growth, creating new ideas and products that add value to the world. The United States’ slow growth is attributed to the fact that its growth comes from innovations, not merely imitating others.
Coming up with new dishes is a much slower process than learning how to make Granny’s home-cooked meals. China is quickly learning all of Uncle Sam’s dishes. At some point, their growth will slow down, and both countries will have to come up with new recipes. And, that’s easier said than done, just ask the Master Chefs.
ReasonablEconomics 