Tuesday, August 03, 2021

Economic Theory Shows that People Will Make Choices that Worsen the Pandemic (a Verdict classic)

Note to readers: The column below was first published on Verdict almost exactly a year ago, on August 6, 2020.  I am republishing it today because various Republicans (especially the governors of Texas and Florida) are cynically relying on simplistic economic arguments to justify not requiring masks, vaccinations, or anything else, even as the Delta variant devastates those states (and others).  In the column, I explain why even the most basic economic theory shows that "the invisible hand" of aggregated individual choice will most definitely not lead to the best public health outcome in a pandemic. 
 
 
by Neil H. Buchanan

As I write these words, the Trump White House and Republicans in the Senate are holding America hostage to an economic orthodoxy that they simultaneously misunderstand and misapply. Tens of millions of people are anxiously waiting to find out whether they will be able to pay for food and shelter next week and next month, but Republicans have decided to punish them lest Americans become lazy slobs.

I wish I were exaggerating, but I most definitely am not. Notwithstanding the worst economic upheaval in ninety years, the Republicans to a man (and the very occasional woman) have stuck to their guns (pun intended) and are doing everything they can to insult their constituents and make the economy even worse. This is a result of economic illiteracy, and it is not only unconscionable but amounts to political malpractice.

That illiteracy, however, goes deeper than it might seem. It is not only Republicans’ typical panic over helping people in need, along with a huge dollop of anti-government fervor, that is causing them to catapult us into a dystopic fantasy world. Republicans actually do not even understand that the field of economics does not reduce to the lesson that “markets are good, so free choice is great.”

I am an economist who is very much on the record as a skeptical critic of my field. There is a lot wrong with the way economics departments have twisted the standards of research in the past three or four decades, and I would be the last person to say that economics is an objective science.

Even so, there are some lessons from economics that have stood the test of time; and the most important of those lessons is that Adam Smith’s famous “invisible hand”—the idea that people acting in their own self-interest unintentionally make decisions that in the aggregate maximize human welfare—is at best true in only limited instances and with enormous caveats. We cannot simply “get the government out of the way” and assume that selfish people will converge on the best outcome.

And that is especially true of personal decisions during a public health crisis. Whereas it is one thing to count on people to choose among, say, competing brands of ketchup without government intervention (conveniently ignoring, of course, the Health Department’s essential enforcement of food safety rules), it is quite another to count on people to act in ways that will reduce the spread of a deadly disease.

Here, I will briefly explain why the Republicans’ talking points that currently dominate the headlines (regarding unemployment benefits and government spending) are wrong. I need not take much time doing so, however, because plenty of other writers have already exposed the lunacy of those points.

What does call for a somewhat longer analysis is the idea that Adam Smith’s Invisible Hand is somehow all that one needs to know in order to organize society. Yes, sometimes decisions made by millions of people lead to surprisingly coherent outcomes. Unfortunately, in our current situation, they are instead leading to chaos and death.

The Undeserving Unemployed?

The key sticking point in the current negotiations in Washington is that Republicans are absolutely opposed to, as they put it with a collective smirk, “paying people not to work.” They point out that the CARES Act, which Congress passed earlier this year but that has now expired, included benefits for unemployed workers that added up to more money than a few workers had been making when they were still working.

This, Republican fundamentalists insist, is nothing less than a subsidy for laziness. Why, they ask, would anyone go back to a job when they can make more money by sitting at home? Surely, we must give people an incentive to work, right?

There is a kind of touching naivete about that claim, at least in the sense that it is an argument that my undergraduate students found appealing during the first week of Basic Economics. But Republicans are grownups (at least chronologically), so their insistence on believing this simplistic story is no longer cute. Indeed, it has disastrous consequences.

Most importantly, economists have been studying whether there is any evidence that might cause us to believe that workers in 2020 are refusing to take jobs because those sweet unemployment checks are too good to give up. Those studies overwhelmingly find that this is simply not happening. But why not?

For one thing, recipients of unemployment benefits lose those benefits—not just the CARES Act’s six-hundred-dollar add-on, but the entire benefit—if they refuse to go back to work. That is how the system has always been structured, and if anything, we should be giving people more of an opportunity to refuse to work due to health concerns during the current pandemic; but we are not.

But the more obvious point is that there are no jobs to which the workers could return. Thirty million Americans have lost their jobs this year, and only a few million jobs are now open at any given moment (with those few jobs taking a few weeks or months to fill, due to the time it takes to screen and hire people). People are not going back to work because there is no work, not because they want to make a killing on unemployment benefits.

Moreover, this idea that workers will make such a simple calculation—“If I accept this job, it will pay me less today than I would receive on unemployment today”—ignores the fact that workers know that they are better off as soon as they can get back to work. The shorter is the hole in their work history, the better their résumé will look in the future.

And even more important, a worker who says that she would rather take in a few dollars more on unemployment does so knowing that the unemployment benefits are time-limited. People understand that they are better off taking a job, even one that for the time being results in a slight reduction in personal income, because they cannot count on being able to find a job when the benefits are ultimately cut off.

Remember also that this hypothetical situation—workers who actually receive more monthly income from enhanced unemployment benefits than from working—is a tiny fraction of the labor force, conjured up as a talking point by Republicans. For most people, working for a paycheck is better both in the short term and in the long term. The immediate problem is that they need money on which to live until jobs again become available.

Whether it is the standard conservative line that “people need incentives to work” or Ivanka Trump’s condescending and ridiculous “find something new” twist on that idea, the claim that people are choosing not to work in 2020 is unsupported by both logic and evidence. Indeed, it does not even pass the laugh test.

The Republicans’ other main talking point in the current negotiations is that this is all too expensive and will lead to a horrible increase in government debt. Because I discussed that very topic in three columns here on Verdict only a few months ago (here, here, and here), I will limit myself today to saying that we actually cannot afford not to spend money to keep people fed and in their homes. This is a case in which doing the compassionate thing is exactly the same as doing the economically smart thing.

What About the Power of Self-Interest?

Most of the Republicans in the Senate, I suspect, truly know nothing about economics, and they merely learn the simplistic talking points that their staffs distribute to them. But one senator, Kentucky’s Rand Paul, fancies himself quite the economics savant, having learned some libertarian dogma that he robotically applies indiscriminately to nearly every situation. Unless he is telling women what they can do with their bodies or saying that men can only marry women, Paul’s default is to say that everyone should simply be allowed to do whatever they want to do.

Although that claim is ultimately based on an adolescent notion of personal freedom—“No one can tell me what to do!”—Paul dresses up his petulance in the garb of deep economic insight. It would actually be possible to feel embarrassment for him if only he were not doing this with such obvious malevolence.

The most recent example of Paul’s pseudo-economic grandstanding set a new standard for absurdity. Like most Republicans, Paul is committed to parroting Donald Trump’s rejection of the advice of medical experts who tell them inconvenient things. Dr. Anthony Fauci, the nation’s leading expert on infectious diseases, has come in for some especially harsh treatment from Trump and his enablers.

But what made Paul’s attack on Fauci notable was that it was not merely a statement that Fauci is saying things that Republicans do not want to hear but that Fauci is supposedly being a bossy know-it-all. Why is it bad for an expert in the field to share his expertise and to make recommendations based on science and, you know, facts? Rand Paul was happy to explain this to Dr. Fauci:

I think government health experts during this pandemic need to show caution in their prognostications. It’s important to realize that if society meekly submits to an expert, and that expert is wrong, a great deal of harm may occur when we allow one man’s policy or one group of small men and women to be foisted on an entire nation.

So the lesson is that we should not “meekly submit to an expert,” right? Apparently not, because Paul then decided to invoke an expert of his own, the late Austrian economist Friedrich von Hayek:

Hayek had it right: Only decentralized power and decision-making, based on millions of individualized situations, can arrive at what risks and behaviors each individual should choose. That’s what America was founded on—not a herd with a couple of people in Washington all telling us what to do, and we like sheep blindly follow.

In its way, this is actually somewhat impressive. Paul managed to dress up gutter-level populism—“Get those pointy-headed Washington bureaucrats off my back”—as economic theory. Sure, he was telling an expert on infectious diseases to listen to a different expert and to meekly submit to Hayek’s supposed insights (as Paul misapplied them to epidemiology), but that in itself is so brazen and hypocritical that it cannot help but leave an impression.

But hypocrisy aside, the substantive point is that Paul’s rendition of Hayekian anti-government orthodoxy is simply not the state of the art in economic knowledge. Indeed, it never was.

Students who bother to pay attention after the first two weeks of undergraduate economics quickly find that there are entire subfields of economics devoted to understanding when and why “decentralized power and decision-making, based on millions of individualized situations” most definitely does not result in better outcomes than expert decision-making can provide.

Consider a famous (among economists) model that was developed by one of the profession’s all-time greats, Harold Hotelling, in 1929. What is now known as “Hotelling’s Law” is based on a fascinatingly simple example. Imagine that two shops will do business on a street, each selling the same product (bottled water near a beach, say). Hotelling showed that decentralized decision-making will result in the shops being set up next to each other in the exact middle of the street, because at any other location, one of the competitors would be able to gain market share by leaving the other competitor with the short end of the street. The two leapfrog each other until both sit side-by-side at the midpoint of the street.

Why is that bad? If the two shops were owned by one person—or if they were licensed by a government—they would be located at the one-quarter and three-quarter marks along the street, because that would minimize the distance that people would have to walk in order to buy a bottle of water. Note that, without “central planning,” both shops end up selling no more water (and maybe less) than they would under a government mandate, but their self-interested competitive moves make everyone else worse off without making the shop owners better off.

That stylized example is merely the tip of the iceberg when it comes to economic insights about the potentially negative consequences of unbridled self-interest. Indeed, even conservative economists try to determine how to prevent people’s selfish decisions from destroying the environment, disagreeing with liberal economists on the preferred policies but agreeing that a purely Hayekian mosh pit would be, to use one of economists’ favorite words, suboptimal.

And what about the current public health crisis? Given that the market for health care in general represents one of the most well-known situations in which private self-interest can destroy the public interest (after all, even many Republicans admit that we need to prevent profit-seeking insurers from denying coverage for preexisting conditions), it should hardly be surprising that Senator Paul’s blind faith in individual decision-making is spectacularly ill-suited to our current situation.

We know that people in a stadium will stand up to gain a better view, which forces other people to stand up as well, with the net result being that the average person has not improved her line of sight, but everyone ends up standing rather than sitting. Even more basically, we know that every individual will find it in her own self-interest to litter, because “I’m just one person, and it’s just one plastic bottle.”

When people refuse to wear masks, they are saying that they are certain that they are not causing a problem, because they are sure that they are not carrying the virus and they find it more convenient to go without a mask. But they cannot know that they are virus-free, and even those who know they could have the virus might decide (as Paul himself did earlier this year) to go ahead and expose other people to potentially deadly infection. “It’s probably no big deal, and I’m just one person.”

When students return to campuses this Fall, each one of them will be making those kinds of decisions a million times a day. “I want to go to a bar, but I’ll mask up and practice social distancing, so it’s OK. … Well, some people aren’t wearing masks, so I guess I don’t need to. … Am I standing six feet away from that person? Well, I’m sure five feet is fine, or four. And I do want to make sure that no one cuts in front of me in line, so I’d better stand closer.”

This is something that conservatives often claim to care about, that is, the classic slippery slope. Each individual has a reason to cut corners, and then everyone else cuts a corner, too. The award-winning economist George Akerlof showed, in his brilliant “market for lemons” model, that even used-car sellers who do not want to sell substandard cars will be driven by competition to the point where the only cars available for sale are of the lowest quality.

The examples could go on and on, but the point is that only the most blind ideologue—which Rand Paul has shown himself to be, again and again—would think to quote Hayek for the proposition that Adam Smith’s Invisible Hand is all that is needed to deal with a pandemic. Even Adam Smith did not believe that to be true.

Republicans are fond of presenting themselves as the party that believes in cold-blooded economic logic. “We’re not actually unsympathetic to unemployed people, but we know that being good to them is bad economics.” The problem is that Republicans never learned enough economics to know what they do not know. Economics is a lot more sophisticated than they are.