Economics in One Virus

An Introduction to Economic Reasoning through COVID-19

Ryan A. Bourne

• Publisher: Cato Institute
• Year: 2021
• ISBN:
  9781952223075
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

"A truly excellent book that explains where our pandemic response went wrong, and how we can understand those failings using the tools of economics." —Tyler Cowen, Holbert L. Harris Chair of Economics at George Mason University and coauthor of the blog Marginal Revolution

Have you ever stopped to wonder why hand sanitizer was missing from your pharmacy for months after the COVID-19 pandemic hit? Why some employers and employees were arguing over workers being re-hired during the first COVID-19 lockdown? Why passenger airlines were able to get their own ring-fenced bailout from Congress?

Economics in One Virus answers all these pandemic-related questions and many more, drawing on the dramatic events of 2020 to bring to life some of the most important principles of economic thought. Packed with supporting data and the best new academic evidence, those uninitiated in economics will be given a crash-course in the subject through the applied case-study of the COVID-19 pandemic, to help explain everything from why the U.S. was underprepared for the pandemic to how economists go about valuing the lives saved from lockdowns.

After digesting this highly readable, fast-paced, and provocative virus-themed economic tour, readers will be able to make much better sense of the events that they've lived through. Perhaps more importantly, the insights on everything from the role of the price mechanism to trade and specialization will grant even those wholly new to economics the skills to think like an economist in their own lives and when evaluating the choices of their political leaders.

1

WHAT DOES IT MEAN TO BE ECONOMICALLY “WORSE OFF” DURING A PANDEMIC?

An introduction to economic welfare

To say COVID-19 has had differential impacts on families’ economic situations would be a gross understatement.

For some families whose members’ jobs were unaffected, work continued even during the most restrictive periods of lockdown. The only difference was less eating out and travel and more sourdough baking and Zoom happy hours.

Wages actually rose initially for workers in high-demand grocery retail and delivery companies, for example, with certain companies offering compensation—or hazard pay—for employees willing to bear the risk of contracting the virus at work.¹

Households with workers in leisure and hospitality were at the other end of the spectrum. The number of positions in that broad industry fell 47 percent across the United States in April 2020 alone—a decline of a massive 7.7 million jobs.²

Heartrending stories about family businesses struggling could be heard everywhere. One owner of a rafting company told me they had had 97 percent of their capacity booked for summer when they were shut down by the National Park Service because of SARS-CoV-2 just before their season started. Unlike some inner-city restaurants that can pivot to take-out services, there is little company owners like this could do except refund customers, hope they rebook in the future, and struggle to survive in the interim.

Unsurprisingly, given the initial hunkering down at home and forced closure of businesses across the country, most indicators used for families’ economic well-being turned sharply negative after the pandemic hit.

More representative data for the whole population show this clearly. Work by the Pew Research Center from April 2020 suggested that 43 percent of American adults saw someone in their household lose a job or take a pay cut due to the outbreak.³ Some could weather that storm more easily than others. Just 23 percent of low-income households sailed into the crisis with rainy-day funds that could help cover their expenses for three months, for example, compared with 75 percent of upper-income Americans.

There was a major policy response to all this devastation, too, however: Congress plowed $2.2 trillion into a relief bill that massively expanded unemployment insurance, sent out $1,200 checks to more than 80 percent of tax filers, and provided hundreds of billions of dollars in support to businesses to maintain payroll.⁴ Large numbers of households gained a lot from these programs, others gained little, and future taxpayers were made worse off. The net effect on families’ finances from all these impacts is heavily dependent on their personal circumstances.

The economic impacts of the pandemic are complex and multifaceted. Yet what is clear is that, whether we are discussing financial well-being or job security, plenty of people have struggled during this crisis on what we’d consider conventional economic indicators. That is what made one phone conversation I had back in April 2020 all the more surprising.

Your Bank Balance and Economic Welfare

It was late in the evening and I was on a call to a UK friend, whom I’ll call “Dave” to protect his identity. Now Dave is a big consumer of news. He was well aware of the headlines about the sorts of broad economic impacts we’ve discussed, which were also afflicting Britain. Back then, the UK was in a government-mandated lockdown similar to much of the United States.

Yet as we discussed the economic fallout from the crisis, he made quite a remarkable claim. When I asked him how he, personally, was coping, Dave confidently and unambiguously claimed that he was actually “economically better off” as a result of this pandemic.

Dave isn’t a hand-sanitizer manufacturer or an epidemiologist who’s being hired by a top consultancy to model the path of the virus. He’s neither a friend of Joe Exotic from the popular documentary Tiger King, able to profit from lucrative TV gigs, nor is he an Amazon worker who gained from the company’s temporary hazard pay policy. In short, there was little reason to assume the pandemic would be economically good for him.

So I was somewhat taken aback by his remark. He was the first person I heard who claimed to be better off as a result of a global pandemic that had put people around the world under effective house arrest and generated huge job losses. So I pressed him to explain exactly what he meant.

“Well,” he replied, “my spending—on restaurants, going to the cinema, buying tickets to football [soccer] matches—has fallen dramatically. Outside of basic bills, my outgoings, I reckon, have fallen by 70 percent or more. Yet I’m getting the same wages, as I can work from home. So I’m actually saving far more money than I was before the lockdown. I looked at my bank balance the other day and I was shocked by how much was in there. I’m much, much better off than I would have been.”

I had no reason to doubt Dave when he claimed he had more wealth than before this crisis. That is, because he was lucky enough to have enjoyed steady wages from employment, his spending decline and lack of need to borrow meant that his extra savings grew; as a result, the total value of all his assets had grown while his debts remained steady. On paper, then, he was indeed a financially wealthier man than if this crash hadn’t occurred. In that sense, he was, by one definition, financially better off.

But did he feel better off? “Absolutely not,” he replied. Dave is a social guy. He usually plays on a rugby team and goes to the gym, bars, restaurants, and the movie theater regularly. I could tell from his social media presence that he was bored stiff during the full lockdown period. He was pining for the pandemic to be over. So how would an economist reconcile his feelings with the claim he was “economically better off”? Isn’t this a case of there being a clear disconnect between economics and reality?

Well, no. For despite people constantly conflating economics with money, economics does not, in fact, start and end with our bank balance, or even our wages. Remember what I said in the introduction? Economics is really about choices. One pretty obvious consequence of both the virus itself and the drastic policies used to contain it is that we have faced a much more limited range of choices about how to live our lives during this pandemic. These constraints undoubtedly made Dave worse off.

It Matters Who Decides

Economists’ starting point is usually that individuals are the best judges of what is good for them. Our actions tend to represent what we prefer to do, given the circumstances, financial constraints, and time constraints we face (economists call these actions our revealed preferences). In economic jargon, we assume that people seek to maximize their utility—that is, they try to get the highest possible value from their actions—including in their day-to-day decisions.

Think about going to an ice cream parlor. If I were asked to pick two scoops of ice cream and our seller had all the flavors in the world available, I might choose to have one pistachio and one hazelnut—my favorite combination. It would be pretty reasonable to assume then, that this combination, under these circumstances, showed the choice that maximized my well-being from eating ice cream on that particular day.

But suppose instead that I’d walked into the shop and the seller told me he only had peanut butter, a flavor that I detested, but that it was government orders that I instead buy three scoops, even though, faced with the unpleasant option available, I’d prefer to not spend the money at all.

It should be obvious that in some “real” sense, I’d be worse off in this situation than before: I am being forced to consume a flavor I dislike, even though that’s not how I’d best like to use my money. That I end up with more ice cream doesn’t compensate for that in terms of my overall well-being.

A similar phenomenon explains what went on with Dave and this pandemic. At least in part, he was being forced by circumstance into behaviors he’d usually reject. Just as my buying more ice cream when made to doesn’t make me better off, the fact that Dave saved more and became financially wealthier when circumstances and policy forced him to didn’t make him better off either.

Dave was in an unusual position. He had always had the option to live the lockdown lifestyle, if he had wanted to. His job allowed him to have worked from anywhere, including home. Nothing stopped him from staying in except to visit the grocery store once per week and to exercise once per day before the pandemic hit. There was no law that said he couldn’t have lived this way and saved the extra money, thus becoming better off in the financial sense.

But despite having that option, he rejected it. He actively chose to spend that money on going to restaurants, to the movies, or on vacations, rather than save it. He wanted to hang out with family members and friends and to play rugby on the weekends. Faced with the choice of watching savings accumulate in his bank balance, or living more for today, he chose the latter.

In economic terms then, the pandemic overall has clearly made Dave worse off than before because he has been forced into a lifestyle and wealth combination that he would ideally prefer to reject. His personal economic welfare (a term economists use to mean how well someone is doing) fell, even though his bank balance was healthier. He was economically poorer than he was pre-virus, despite the status of his finances.

Our Ideal Choices Are Context-Dependent

Now, of course, Dave’s choices were personal to him. Economists recognize that value is subjective—that the value of any good, service, or time to us is determined by our individual judgment of how far the product or action goes toward meeting our own needs.

In simple terms, although Dave was worse off with this new combination of lifestyle and wealth than before the pandemic, that doesn’t mean that everyone who might have been financially healthier would have preferred their old lives back. Others might not have previously had the option of living the way they did under lockdowns and found they actually preferred that lifestyle. Perhaps, for example, the lockdown enabled them to spend more time with their children in the mornings, which they valued highly and which they couldn’t conceivably have enjoyed before.

But there is another piece to this jigsaw puzzle in thinking about what enhances Dave’s well-being. Dave’s preferences were also context-dependent. Although he might have preferred to live his old lifestyle rather than his pandemic one with the virus absent, that need not mean he’d have preferred to live his old lifestyle in the presence of the virus, which imposes new risks.

Just as I might decide it is best for me to eat peanut butter ice cream if I were starving and there is no other food store open, Dave may have made very different decisions to maximize his well-being when a potentially deadly virus was on the loose than he would have made in the pre-pandemic world.

With the virus around, it may well have improved his economic welfare somewhat (relative to the even bigger fall in welfare he’d face from not changing his behavior at all) to sacrifice rugby and avoid seeing his grandparents for a while, because he valued both his health and the lives of his loved ones highly. Our preferred choices, in other words, are contingent on circumstances and the constraints these circumstances bring.

Dave may well have preferred to live the hermit lifestyle of lockdown given the existence of the virus even if governments hadn’t mandated it, and even if this was a lifestyle he had rejected beforehand. When the world around us changes, the rational choices we may make about how to behave change too.

The really important point here, though, is that economic welfare is clearly not the same as financial well-being, even though the two are often used synonymously in public debate. “The economy” is, in fact, “us” and the choices we make. It is not just about our incomes or even formal activity that occurs in markets with prices.

Aggregating to the level of the whole economy, a country’s economic welfare is therefore a much broader conception than just dollars and cents, or gross domestic product (GDP)—a measure of the value of all final goods and services produced domestically. Although GDP may be a reasonable enough guide to the path of a country’s economic welfare over long periods of time, it can prove inadequate and misleading in circumstances like this when the constraints on our decisions have fundamentally changed.

Nationally, for example, when talking about how much worse off we are as a result of the pandemic writ large, commentators often use GDP as a proxy—a close-enough measurement—for our decline in well-being. But as we’ve highlighted, households became much worse off for reasons other than the fall in market production, because of the health impacts on those affected, the liberties they lost, and the nonmarket activities they no longer felt safe engaging in due to the virus.

Think about how much worse off you felt by not seeing family, not being able to help out with a charity, losing time as a single person to find a partner, or the missed chances to develop your sports skills during those early phases in the pandemic.

None of these things appear in measured GDP—economists consider most of them “nonmarket leisure”—but not being able to do them clearly has a large cost to your economic welfare. You’d have paid money to maintain these freedoms if you could have done so safely. The decline in GDP during the crisis compared with before the crisis is therefore just a subset of the bigger loss of social economic welfare—the economic welfare of the whole community—that we have endured as a result of this pandemic.⁵

Yet just as GDP ignores the value of the broader losses to economic welfare arising from living with the virus, its fall also partly reflects new choices we choose to make to avoid a yet greater fall in economic welfare coming from lost lives and heartache...