The Single Most Common Economic Fallacy in COVID-19 Reporting

21 min readApr 1, 2020

Last week I shared my curated COVID-19 reading list, which is keeping me relaxed and confident in my belief that we are overreacting. While we should worry about the incursions of civil and economic freedoms being brought about in response, people like Jacob Sullum of Reason and Jeffrey Tucker of AIER are doing a service by calming people down about the virus itself.

Don Boudreaux over at Cafe Hayek also deserves special mention for leading me to most of my trusted sources with his blog’s daily links. It’s hard to keep up with all of the outstanding writing he’s highlighted over the past weeks, including his own increasingly relevant review of Robert Higgs’s Crisis and Leviathan for the American Institute for Economic Research, and a must-read article for the Pittsburgh Tribune-Review on Essential Questions about Essential Medicine.

Twitter has reportedly begun to censor non-certified-expert advice on matters related to the coronavirus, so I will limit this Sunday’s show to the subject of economics and politics where we are still free to opine (for now). I predict that future economics and political science students will look back in horror at this period — not for the mortality rate, which appears to be marginally higher than an average flu season — but for the acquiescence to draconian restrictions, unprecedented spending, and enlargement of state, local and federal bureaucracy (not to mention the failure of basic functions by the existing apparatus, i.e., FDA).

Most media analysis misses what Frédéric Bastiat called “that which is unseen.” Dead bodies being carted away by truck to the morgue is a striking image, and is seen by millions on media loop. Business closures, economic hardship, and looming inflation are harder to see and thus get downplayed in the calculus.

Trump’s “VERY BIG & BOLD” $2 trillion stimulus produces highly visible benefits in the short-term, but the costs are unseen — postponed to be paid by future generations.

Don returned to the show to help me settle the question on all thinking people’s minds: is it worth it?

Is it worth the loss of liberty?

Is it worth trillions in damage to the economy?

Is it worth the separation from friends, family, and the myriad economic relationships that have been severed?

For the sake of argument, Don and I will assume that the more dire predictions about mortality are true.

Join us in asking the hard but important questions on the show of idea — not attitude.

TRANSCRIPT

Bob Zadek: Welcome to the Bob Zadek Show. As a planet, we are going through a singular experience. This is a wonderful learning experience for us all. We have certain theories we carry around in our head about how the government ought to be organized, how our lives ought to be organized, what is important and what is not. And those are theories. They are in our head. They are formed in the abstract.

Here we have a planet-wide test of all of those theories and we are learning an enormous amount about how to organize life on this planet, the relationship between us and our government, us and our family, us and our friends.

It is important to help us understand how to find these lessons because they are right here for the asking. We are all in class together and fortunately we are guided by a cadre of brilliant and thoughtful observers, economists, educators, health professionals to help us sort out the noise from the facts and to see and to present to us all of the lessons that can be learned from this experience.

I am happy to welcome a friend and longtime guest on my show this morning. Don Boudreaux is an economics professor at George Mason University. He is one of my mentors. I cannot start my morning without reading his daily blog Cafe Hayek. A must read every morning. It helps me understand so much about what is going on. Don will share his thoughts with us this morning on the interplay between economics, health, epidemiology, government policy, and the like. Welcome to the show this morning.

Don Boudreaux: Good to be here Bob. If you hear me coughing I don’t have Covid-19, the allergy season is in high form here in the East Coast. So if I sneeze or cough, don’t worry about me. It’s just pollen.

Trade-offs: A Choice Between Quarantine or the Economy?

Bob Zadek: Thanks for telling us that. In what’s going on right now, there has been this apparent tension in the formation of core national, state and local policy. This tension, which you have written about quite a bit between whether we shut down the economy to minimize social interaction so as to slow the spread of the virus, which will have profound, long term economic and health, physical and mental consequences, or do we give some nod to the importance of the economy and not impose through government dictate impose that nobody is allowed to go to work in order to minimize life. And is that a real choice or a false choice?

Don Boudreaux: It is a real choice of tradeoffs. Life is a series of trade-offs and we are confronted now with a huge trade off. In my view, the trade off is being made in a terrible manner. I don’t doubt that the extent to which the government keeps human beings from being in contact with each other will reduce the spread of this and any other communicable disease. However, it also reduces humans’ abilities to engage in productive commerce, which will lead to people becoming less wealthy over time. The evidence is overwhelming that wealth itself, prosperity for the masses, is a huge input into keeping people healthy over time.

What is going on now is that the trade-off is being done exclusively in keeping people away from each other without any consideration being given to the economic consequences. Not only the economic consequences of right now, April 5th, 2020 or Spring 2020, but the economic consequences going forward. As far as I see it, governments around the world, including governments in the United States, national state and local, have taken a sledgehammer to the market economy and nothing good can come from that.

There are disputes and I’m not an epidemiologist, I’m not a natural scientist in a way. I’m not competent to judge just how communicable diseases are, what is the fatality rate of the disease, etc. One thing I do though is that the experts seem to be not so much agreed on this. There’s a lot of dispute in the scientific community about the lethality of Covid-19 and about its communicability. It seems overwhelmingly clear that this disease is not so cataclysmic that the degree of shutting down the economy that we are experiencing now is remotely justified. I’m very pessimistic about what is now happening to the economy right now. I find it sad and scary.

Bob Zadek: You used the word that gets people on the left quite agitated. You use the word “wealth.” I want to just make it clear to our friends out there. We are not talking about a desire to accumulate opulence or a desire to have a nicer car. We are talking about wealth as the tool that drives the economy and which drives all of the human experience. Wealth, a functioning economy, produces everything good we have in the world. So this is not a selfish desire by anybody. It’s not about that. It’s about the economy as a circumstance that drives all human development. That’s what we are wishing was not suppressed by this.

The economy is a functioning system, and once the system stops, it is very hard to restart it. Imagine shutting down a nuclear reactor and then starting it again. You don’t just look for the toggle switch. It is a big complicated deal, fraught with peril and missteps, and I believe that’s the system you are striving not to turn off because turning it back on is expensive and at great cost.

Don Boudreaux: I agree. In fact, the economy compared to a nuclear reactor is far more complex.

When I use the term wealth, I’m not talking about gold-plated jacuzzis or private jets. I’m talking about the ability of ordinary people to have ready access to food, good clothing, good housing, medical care, education, leisure, medicines.

All of these things are what we mean by, prosperity or wealth. All of these things are the product of the cooperation of hundreds of millions of people from around the world. Any of your listeners can just reflect on what he or she is wearing, where he or she is now standing, the last meal he or she ate, the automobile that sits in his or her garage or driveway.

All of these things are produced by millions of strangers. Our economy is so prosperous because it has somehow managed–and it’s managed because the free markets and private property and prices and competition and entrepreneurship — to knit millions of people from around the world together into a vast co-operative, ongoing process of producing the food and the medicines and the housing and the clothing and the entertainment that we all take for granted. Wealth is not a bunch of stuff that is piled up somewhere like in a warehouse. Wealth is constant ongoing human activity where we cooperate with each other, we buy and sell, we work with each other. It’s that cooperation that has now been sledgehammered into a virtual stoppage, and that is what is scary.

People will say, “We have this 1.3 trillion-dollar stimulus here in the United States.” People look at the amount of money that the federal government is going to dispense to them in the form of checks. They can talk about the amount of money that the Federal Reserve will inject into the banking system. Whatever the merits are of any of those policies might be on their own, the fact is that none of those checks, none of that money, is worth anything if there’s nothing real to buy.

If each of us doesn’t have a whole legion, an army of people who are willing to cooperate with us to help us acquire the things that we want… If no one is producing food, then you can have $3 trillion yourself — you’re not going to have any food to eat. If no one is producing clothing. If no one is producing housing, no one is producing fuel. What worries me is we’ve stopped people from engaging in the productive activities that they engage in and no amount of money is going to create the real goods and services that we need in order to sustain our standard of living.

Bob Zadek: No matter how simple you have organized your life. Just think of when you go about your life. You have your favorite dry cleaner, your favorite restaurant. You have found the job that you really like. You have found the car and the medicine that works for you. If you think back all of this is the product of years and years of trial and error and building and finding. You find a spouse that finally is the perfect spouse through trial and error. Imagine if all of a sudden everything you put together in your life to make your life pleasant and efficient and productive gets erased and you have to start from scratch. Go find a new everything and figure it out all over again. And that is 1/1,000,000 of what we’re asking the economy to do, to reshuffle the deck of cards and then try to figure out how to get it back together again. That is a staggering task.

Making Life or Death Choices: A More Common Occurrence than We Think

Bob Zadek: People on the left ask, how can we sacrifice human lives for money? How can a government undertake to keep the economy going, perhaps on a smaller or more thoughtful scale, if that means somebody, probably a senior citizen, more likely than not will die because of that activity. Government makes those choices every minute of the day. We send 20-somethings into war to die, not because we don’t value their life, but because there is a greater good, and the country has decided that certain people just regretfully, will die to preserve some greater good. Isn’t that what’s going on today but without any decision making?

Don Boudreaux: You’re exactly right. To the extent that’s possible, and reasonable people can disagree over exactly what extent it is, the decisions about the degree of risk each individual should take or should be subjected to ought to be left to individuals. We all have different preferences. We have different histories. We are all at different stages in our lives. To the extent that each of us can make a decision about how much risk we want to undertake, that decision does not have to be collectivized. Now I understand that there are some situations in which maybe we do need some sort of collective decision. I want to make the point that people give too little attention to the fact that in a lot of ways ordinary individuals are capable of making these decisions themselves.

The second point is that human life is constantly about making tradeoffs between safety and convenience and prosperity. We all ride in automobiles. I doubt there is a listener right now who doesn’t. Everytime you drive a car you increase your chances of dying a horrible death. We’re making that trade off. The chances of dying go up a little bit, but you do it. Why? Because you want to go to the movies. You want to travel a little bit more quickly to grandma’s house, right? There’s nothing wrong with that, but we make decisions all the time and there’s no escaping it.

When people become less prosperous, they become less healthy. The evidence on that is overwhelming. A less prosperous society, a less healthy person. So the government is making the trade off now by shutting things down.

We want to have fewer Covid-19 deaths, but we’re willing to have more of other sorts of deaths that will come in the future as a result of this shutting down of economic activity. There’s no avoiding the trade off. None of us choose to live in a bubble and none of us think that life is worthwhile if we lived in a bubble that protected us from all risks.

The fact that we all voluntarily subject ourselves to any manner of risks as we go about our daily lives means that of course we are willing to make these trade offs. To the extent that the government has to make the trade offs, and of course it has to make them, it should make the trade offs wisely and well. It should not make them based on ignorance or widespread panic. Panic that is real and panic that the government itself seems to be stoking. There is no avoiding a trade-off.

Bob Zadek: Your reference to driving is very relevant and it makes the point so plainly. Who among us would vote to eliminate driving or to criminalize it and ban cars because we want to save the 45,000 lives a year lost in automobile accidents.

If you vote for continuing driving, you are declaring that you want 55,000 random Americans to die. You are doing so for the selfish reason of your own convenience, but you don’t feel guilty about that.

That is the rational decision to make. If it works for the analogy with driving, then it works for the virus. We have to assume certain risks because the damage to the country is infinitely greater by shutting down the economy than the damage to the country by banning economic activity.

The Governmental Creation of Scarcity: Price Gouging

Bob Zadek: In the national debate between the economist and the epidemiologist, the economists do not get a vote. It seems to be changing, but up to now the economists are told, “Sit down, keep quiet. We have no interest in your point of view about what is best for the country.”

There is so much to learn if we can simply turn on the rational part of our brain and see through the fog of disease. Government has created scarcity of goods and of services. It is astonishing and we have to ask ourselves why.

One of the first experiences we had besides shelter-in-place and limiting people’s right to travel and to work was the advent of price gouging. We have 29 states that actually criminalized price gouging, which is the most perfect example of creating a policy which has the appearance of protecting people, but people are being protected from getting enough of what they need and are willing to pay for. Help us understand briefly how misguided the whole concept of price gouging is and how wrong the government gets that issue.

Don Boudreaux: Governments aren’t good at doing much. One of the things governments are excellent at is creating unnecessary scarcity. No one could possibly beat them. Price gouging, as you point out, is obviously a derogatory term applied to the spike in monetary prices that happen during crisis times. Market prices are not arbitrary. They reflect underlying realities. These realities might not be pleasant. There is an increased demand for various goods and services. Goods such as facemasks and sanitizer, toilet paper, etc.

It doesn’t matter how rational this increased demand is. It’s a reality. On top of that, there is a decreased supply, mostly caused by the fact that now the government is stopping people from going to work to produce these goods. So you get this simultaneous rise in people’s desire to acquire things and a decrease in the production of those things that we need. The higher prices simply reflect that scarcity. When you stop the higher prices from reflecting that scarcity through government dictates, it does several bad things.

The main ill effect of that dictate is that it fails to incentivize suppliers from putting forth the extra effort necessary to produce the goods that are now in higher demand and to actually get those goods to places where consumers buy them. The laws against price gouging, while meant to help consumers, perversely hurt consumers by keeping the supply of the things that they want lower than that supply would be in the absence of the price controls.

The example I always use with my students is that a price is a report. It is an objective report on the scarcity of something. If the New York Times sends a reporter out to observe some event in the Bronx, and let’s say that it is a fire that kills two people, well, the reporter should say, “We had a fire that killed two people.”

Now it is an unhappy event, we wish it wouldn’t have happened, but no one would say, “Oh, you know, let’s have the reporter say it wasn’t a house fire. It was a little campfire and it didn’t kill anyone.”

Everyone understands by writing a false report you don’t change the underlying reality. That’s what these are the laws against price gouging attempt to do. They attempt to fool people into thinking that economic reality is more pleasant than it is. We don’t deal well with reality when we are misled about its current state. Preventing prices from rising to that market clearing level is a way of hiding from consumers and producers the true unfortunate state of the market. And so producers and consumers don’t respond as well as they would if they were fully informed.

Bob Zadek: We all abhor hoarding as being economically wasteful and antisocial if you will. But hoarding means those who are first in line and buy up all of the product because it is cheap and below its market price. Those hoarders and speculators further exacerbate the absence of supply, whereas if the price was the market price, it would be too expensive for the hoarder to buy a whole lot of it and no advantage because you’re paying the real price, not the fake price.

Therefore, hoarding would diminish and it’s more democratic because then everybody has a shot, not just the person who was first in line at getting the product. Also those who need the product the most are willing to pay the most for it and therefore will end up getting it because they will outbid those who need it a bit less.

Prices, Don, as you have taught me so often, is only information produced by independent decision makings of buyers and sellers. Independent people whom we never meet make a decision on what something is worth and that will tell me the value, and value is always relative to something else. So I can allocate resources and get the greatest value for my dollar spent based upon what something is really worth. So price gouging, which is done to “protect people” protects them from getting enough. That’s the protection.

Don Boudreaux: That’s correct. I’ll hire you to be a substitute economics teacher. That was very well said and very accurately.

Bob Zadek: You have written a lot about tariffs where you write beautifully and passionately about the misguided tariff policy of the present administration. But that has been very much in the headlines in the sense of denying us the ability to import essential commodities, whether it’s face masks, ventilators. or perhaps drugs and other such products from China because we have to become self-sufficient, and we cannot buy the cheaper product from a foreign country. That is yet another example of creating a scarcity when one naturally wouldn’t exist and therefore increasing their price. This is another lesson, and the theme of this morning’s show — from the Coronavirus experience, share with us some of your writing about the imposing of tariffs on quote essential products from foreign countries.

Don Boudreaux: A tariff is simply a punitive tax that the government places on its own citizens when citizens buy goods from abroad. It grants monopoly power to domestic producers who have competition from imports. The tariff is designed to make things more scarce because the point of the charge is to raise prices to a higher level in order to allow domestic producers to raise their prices and profits to higher levels. The whole point of the tariff is to create scarcity. I believe that all tariffs are unjustified, but certainly in times of crisis. If there is such a thing as being more unjustified, they are even more unjustified, because we now need as much cooperation from our fellow human beings around the world as we can possibly get.

Americans are about 4% of the world population, 96% of human beings live outside of America. Why should we artificially block ourselves off from 96% of human productive effort, human creativity, human problem solving, ingenuity? That’s what tariffs do.

They block us off for 96% of the world’s problem solving capacity. I just think it’s nuts and crazy.

Certificates of Need: The Competitors Veto

Don Boudreaux: Governments are very adept at creating scarcity. People are worried about hospital bed capacity. Think about this. The United States has had in place since Gerald Ford’s administration a system of certificates of need. In a lot of places, hospitals are not allowed to open up unless they are granted a certificate of need. They need to get permission from the government and to show they need a new hospital. And of course guess who decides whether the new hospital is needed or not? Existing hospitals.

Existing hospitals are not inclined to say that they need more competition, and so we’ve had in place in this country for at least a half of a century a policy that actually artificially restricts the number of the amount of hospitals we have. It restricts the number of hospital beds.

So don’t talk to me about how bad China is in hospital capacity. Don’t talk to me about how foreign trade is. Talk to me first about the inappropriateness of government for decades now artificially restricting the number of hospitals and the size of hospitals in the United States.

That is an artificially created scarcity that is real and that we in fact might be on the verge of paying a very high price for.

Bob Zadek: That’s known as the “competitors veto” where the competitors get to reject and prevent competition. It is so anti-capitalist and anti-free market. It was created during the Nixon administration at first and it was done for a strange reason. They thought we could reduce the cost of healthcare in this country by eliminating excess capacity. Excess capacity is a cost so they said, “Let’s make sure we do not have free-marketeers — capitalists — doing something stupid like building a hospital that nobody needs. What are they doing it for? Recreational reasons? So to prevent them from making that mistake, we will require them to prove it is needed.”

How absurd is that? It’s embarrassing in a country such as ours to have certificate of need statutes. They still exist. They’re alive and well and they dominate certain industries such as the moving industry in Kentucky, West Virginia and the like. They are hotbeds of con-statutes. So you’re exactly right that the government creates that need and always to protect some special interests like the existing hospitals at the expense of all of us citizens out there who have to pay the price.

More Generated Scarcity: Government Test Kits

Bob Zadek: Another example of government-created scarcity is the kerfuffle at the FDA and CDC on the testing and test kits. Tell us about that, briefly.

Don Boudreaux: The current regime we have is a top-down regime. The testing kits have to be approved by our overlords and their mandarins. And unless we get the approval from our overlords and the mandarins, we don’t get access to them. When you get a crisis like Covid-19, when you get a sudden burst of need for testing kits and other supplies, the overlords and mandarins are overworked. They can’t handle the rush. That’s part of it.

Never Letting a Good Crisis Go to Waste: Loss of Freedoms

Bob Zadek: Another important lesson in this experience was written about in a treatise called Crisis and Leviathan by Bob Higgs. During each of these crises, whether you want to go back to 9/11, the government creates new special temporary powers just to get us through. Freedom, with regard to our property or our persons, is taken away. Withholding taxes, like prepaying your taxes before you owe the money which was done to finance World War II. The PATRIOT act took away our freedom and right of privacy; all of the environmental laws are meant to get us through climate change.

Government is using a crisis to take away our freedom, whether it’s with respect to our persons or our property. I defy any of us to name even one example when, after the crisis has passed, the government has returned those freedoms to us. Tell us about this ratchet effect of losing freedom during a crisis and never getting it back after the crisis has passed.

Don Boudreaux:

When people perceive a crisis, they grant to the government more power in order to get through the crisis and typically, immediately following each crisis, the amount of government power that is granted scales back a little bit, but never by as much as it increased. So you get this ratcheting up of government power.

Government uses its increased powers even during non-crisis times to meddle in our lives and in our economy. One of the unfortunate ironies of this fact is that the increased power that was created during crises times and that remains after crises have passed is used during non-crisis times to actually put in place policies that lead to future crises.

Certificate of need regulations are an example of a policy that when first implemented didn’t seem to have problems, but now we come to the Coronavirus issue and we have this crisis of the shortage of hospital beds potentially. This crisis was created in part by the government policy meant to avoid the rising healthcare costs.

We don’t know today when the Coronavirus crisis will pass and when life can begin to start to get back to normal. At some point, presumably it will, and some of the government powers that were accumulated in these past few weeks will be scaled back a bit, but they won’t all go away. There is going to be more government in our lives at the end of this crisis than there was in the beginning of this crisis. Many of those powers you can be sure will be used, some innocently and some not so innocently. But all of these additional powers will be used to make sure that we are more susceptible to crises in the future, which will of course cause another increase in government power when the next crisis hits.

The Writing of History: A Battle of Narratives

Bob Zadek: Some of the most nonsensical economic regulations have been scaled back somewhat quietly. And all of these regulations, which were done for bad economic reasons, are now getting in the way. They are being eliminated because we can’t afford them in times of relative scarcity. So it is like economic regulation is a luxury of the left that now they can’t afford. Who will get to write the economic and social and political history of this crucial watershed event in the history of our country and our planet. What could the alternative versions of that history look like?

Don Boudreaux: That is a vital question. Everybody will be trying to write it. The wordsmiths on the political left will be crafting their narrative in their own way. What they will no doubt say and probably believe, although I know they’re mistaken, is that the crisis was caused by free trade and by too little government regulation. They will claim that the government needs more funds for the FDA and the CDC. They will want more agencies to handle these crises. They will decry federalism and want to centralize more power to Washington to give more powers to the President so he can take more centralized action.

What people who know better should explain is that this crisis is largely exacerbated by government regulations. The certificate of needs, the tariffs, the price gouging, etc. The free market is the single best hope we have to prevent future crises and to deal with any future crises that we might encounter.

Bob Zadek: Would you say that there are certain absolutes that this experience proved in the finest sense of the word? Certain policies were misguided and others would have been better. When you get to write the test textbook in 20 years, is there anything of which this is absolute proof?

Don Boudreaux: I think it’s still playing out Bob. I’m convinced that this $2.3 trillion stimulus is going to lead to inflation because people now have more money to spend but nothing much to spend it on. And so I think what will be proven is that you don’t create prosperity by printing numbers on check merely by injecting money into the banking system. I hope I am wrong.

Related Shows:

Big government can’t save us from coronavirus with Jeffrey Tucker, February 2020
Don Boudreaux on Entrepreneurship, Economic Freedom & Prosperity with Don Boudreaux, May 2015
Legalize Insider Trading with Don Boudreaux, Nov. 2009
Trump’s War on Trade with Don Boudreaux, Sept. 2019
The Second American Revolution with Don Boudreaux, 2011

Originally published at http://www.bobzadek.com on April 1, 2020.