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Doing Bad by Doing Good during the COVID-19 Pandemic

The COVID-19 pandemic raises a range of issues regarding government responses to public health crises. Among other things, it highlights the relationship between health-related policies and the economic costs of those policies, the limits of what public policy can hope to achieve, how different institutional arrangements facilitate or prevent coordination to address health crises, and the possibility of negative unintended consequences. Let’s consider each of these topics in turn with particular focus on the value added by the mundane economic way of thinking.

“Doing Bad By Doing Good” Book Panel

The Nature of the Economic Problem

Public health crises, such as the COVID-19 pandemic, are fundamentally economic problems. There is a tendency to decouple economic problems from what are viewed as the human aspects of the crisis. But these two issues are inseparable. To understand why, consider the fundamental and ubiquitous economic problem — coordination needs to take place given scarce resources (i.e. we can’t have everything we want) to best satisfy a multiplicity of diverse ends.

What economics makes clear is that people don’t value only health, but also food, shelter, financial security, entertainment, and a host of other things. And within each of such categories people differ in the specifics of what they value. Consider, for example, health in the context of the coronavirus. Those who are at higher risk for severe illness may value avoiding contracting coronavirus while others, who are at lower risk for severe illness, may be less concerned about this aspect of their health. The COVID-19 pandemic may change the way people weigh actions within, and across, the various categories of ends, but it does not change the fact that they desire a multitude of ends and that their desires differ from the desires of their friends, neighbors, and fellow citizens.

In the realm of public policy, the multiplicity of ends is disregarded for top-down policies focused on pursuing certain aspects of one, or a few, of these categories. Government policies typically treat people as homogeneous actors in pursuit of a single end. For example, in response to COVID-19, state governments have imposed uniform laws that apply to everyone in the same way whether they are high-risk or low-risk and whether they live in high-density urban areas or low-density rural areas. Moreover, the single hierarchy of ends determined by policymakers replaces the diversity of ends pursued by private people as government dictates limit what people can and cannot do.

Note that even within a single category, such as health, the issue of determining specifics is extremely complex and involves difficult tradeoffs. For example, there are a limited number of hospital beds that can be allocated to sick patients. If these beds are allocated solely to treating patients suffering from coronavirus, they cannot simultaneously be used to assist those suffering from other medical issues. The decision to emphasize the treatment of COVID-19 patients means that fewer patients suffering from other medical issues, such as strokes and heart attacks, will be treated. As this trade-off makes crystal clear, the existence of scarcity means that the human and economic aspects of health issues cannot be separated.

Appreciating the economic problem focuses attention on what public policy can hope to accomplish. What government policy can do is focus resources on increasing certain outputs for certain uses as pre-determined by policymakers. That is, they can transform the economic problem — how to coordinate scarce resources across a multitude of diverse uses to achieve a diversity of ends — into a technological problem of using resources to achieve a single end. Policymakers may decide that they want more health care resources dedicated to the coronavirus. They can then use their political power to implement policies to achieve that end. And where successful, the amount of pre-determined outputs — e.g., resources available to treat coronavirus patients — will increase.

Alternative Institutional Processes of Coordination

Appreciating the limits of what government policy can accomplish says nothing about how policy decisions emerge. When thinking about alternative means of coordination, we can envision three institutional arrangements: priced markets, non-priced private environments, and political processes.

In market settings, people rely on competitive, market-determined prices as an aid to allocate scarce resources to their highest valued uses. Market prices capture the opportunity cost of scarce resources which enables people to gauge the expected value of alternative resources uses. In conjunction with feedback from profits and losses, resources tend to be (re)allocated to new and better uses to satisfy the wide diversity of ends held by consumers.

A second alternative is coordination through non-priced interactions between private people. This includes the operations of private non-profit organizations as well as social entrepreneurs who devise and experiment with solutions to collective action problems. While these settings lack the signals of market prices and profit and loss, and hence the overall efficiency of markets, alternative feedback mechanisms, such as reputation networks and citizen participation through co-production, can potentially serve as a means of coordinating activities to improve human wellbeing.[1]

A final alternative is to rely on political institutions to solve the coordination problem associated with public health crises. Political institutions obtain resources by taxing the private sector or issuing debt and then creating policies intended to improve social welfare. Broadly speaking, there are two models of the government policy creation process.

The first model is what James Buchanan termed the “fiscal brain” view of the state.[2] The fiscal brain model views government as a type of supercomputer which effortlessly allocates resources to maximize social welfare. This model treats the state as a unitary actor which is assumed to possess the knowledge necessary to optimize revenue and expenditures in order to maximize social welfare. From this perspective, public policy is a purely technocratic allocation problem. In the context of health crises, this model appreciates that trade-offs exist between health and other areas of life but assumes that “the state” possesses the knowledge of these trade-offs and the ability to optimize social welfare in a benevolent, frictionless, and efficient manner. This optimization takes place both across different categories of ends — health, shelter, food, etc. — as well as within each category.

Like the fiscal brain model of government identified by Buchanan, there exists a “public health brain” which assumes that the state maximizes responses to public health crises. This model holds that “the state,” as a benevolent social planner, has the knowledge to both identify public health issues — situations that cannot be sufficiently addressed by private actors in market or non-market settings — and to resolve those issues in a manner that is economically superior to what would have occurred otherwise. Indeed, the standard treatment of the economics of infectious diseases models the situation as a standard public good problem and then seeks the optimal design and allocation of resources to maximize social welfare by a benevolent social planner.[3]

An alternative model, what Buchanan termed the “individualistic view,” treats “the state” as an organizational form that is populated by the same individuals who operate in other institutional settings (i.e. market and non-priced environments). In this mode, the state is not a unitary actor but rather a set of institutions populated by human beings. The focus here is not on agent type, which is assumed to be the same as in other settings, but instead on the epistemic and incentive properties generated by the political institutional environment.

The public health brain model views government action as benevolent and other-regarding, hence government’s ability to solve collective action problems where these alternative arrangements fail. The individualistic view, in contrast, appreciates that government policies emerge in a context of intense competition over the control and allocation of resources and the content of policy. Rather than replacing competition with benevolence, relying on political mechanisms simply shifts competition from one sphere (private markets or non-priced environments) to the political realm. Political competition takes place on a variety of margins — between various government agencies and between different levels of government as parties jockey to control the flow and allocation of monetary resources. Some examples from the COVID-19 pandemic will illustrate these dynamics.

In the United States, the government response to the COVID-19 pandemic has been characterized by conflicts between the Trump administration and state governors over testing capacity as it relates to lifting restrictions on economic activity. President Trump has repeatedly clashed with government medical advisors about specifics related to policies addressing the pandemic. As these examples suggest, contrary to the view that political actors work together to benevolently advance some notion of the “public interest,” the reality is that politics and policymaking emerges from a highly competitive process where some win at the expense of others as each party pursues their goals which conflict with those of others.

Further intensifying this competition are special interest groups, which refer to collections of voters who join together in the pursuit of a shared goal. The issue with special interest groups is that, where successful, they can influence policy in a manner that concentrates benefits on their members while dispersing costs onto non-members. Special interest groups actively attempt to influence political processes to secure these benefits. At the same time, politicians cater to these special interests when it benefits them personally. This runs counter to the romantic notion of a benevolent social planner who seeks to maximize social welfare. To provide an illustration, consider the U.S. government’s first stimulus bill of $2 trillion. Among other things the bill included a number of provisions which benefit special interests and which have nothing to do with addressing the COVID-19 crises. Instead, politicians and special interests viewed the public health crises as an opportunity to secure narrow benefits in the name of policies passed in the public interest.

Yet another friction in democratic politics is government bureaucracies. Bureaus tend to suffer from inertia in response to changing conditions because they don’t face strong incentives to adapt in the absence of profit and loss feedback. Note that this inertia does not assume, or require, malevolence on the part of bureaucrats. Instead, it is the result of the epistemic constraints and incentives created by the bureaucratic organizational form.

Bureaucrats with very limited knowledge of the world (as is the case with all people) are tasked with designing and implementing far-reaching policies for a constantly evolving set of overlapping complex systems. By the time a policy is designed and implemented to address one set of circumstances, conditions have changed. Once in place, existing rules and regulations are often slow to change or to be removed. This stickiness is evident in the case of pre-crisis regulations which often hamper effective responses to crisis situations. For example, in the case of the COVID-19 pandemic, pre-existing regulations in the United States greatly slowed the ability to shift and increase production of basic items, such as masks and tests. The problems caused by these regulations were compounded by the inability of the Center for Disease Control (CDC) to quickly produce a test kit due to violations of laboratory standards resulting in cross-contamination of the test components.

Taken together, the realities of politics provide insight into why governments might fail to successfully achieve effective increases in outputs to attain pre-determined ends even though this falls within the theoretical limits of what political institutions can potentially achieve.


Harming those in Need

As Henry Hazlitt noted, “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”[4] This is especially important in the context of health crises since government efforts to alleviate suffering may not only fail to achieve their goals but may lead to additional suffering. Unintended consequences emerge because policymaking takes place in complex systems that cannot be fully understood due to limits on human reason. The result is that the design and implementation of policy is relatively simple compared to the complexity of the system being intervened upon.

Complex systems are characterized by interconnections between elements such that changes in one part of the system will lead to unintended changes in other parts of the system. Moreover, complex systems demonstrate characteristics and patterns of behavior that differ from those of the individual elements of the system. This stands in contrast to simple, linear-type arrangements where changes in outputs are directly proportional to changes in inputs. In contrast to complex-systems type thinking, such linear-type thinking treats elements as if they were isolated, meaning that changes to some elements do not unintentionally affect other elements.

The government’s response to the COVID-19 pandemic is just one example of linear thinking. It seeks to control, shape, and influence overlapping complex systems by focusing on certain pre-determined outputs and uniform strategies. On some margins these efforts have generated the intended outcome, but they have also generated numerous negative unintended consequences. Consider the following examples.

In line with CDC guidelines, many U.S. state governors directed hospitals to postpone elective treatments and surgeries. The justification for this policy was to protect health workers from unnecessary exposure to coronavirus while simultaneously increasing the capacity of hospitals to treat patients suffering from the virus. This had the devastating effect of placing hospitals throughout the country, which are reliant on elective procedures for a significant portion of their revenue, in financial distress. This has been especially troubling for rural hospitals, many of which were on shaky financial ground before the pandemic. The immediate goal of increasing hospital capacity to combat coronavirus has had the unintentional consequences of threatening the long-term viability of health care provision in parts of the country. The government’s policy toward hospitals has also devastated the lives of many healthcare workers, with 1.4 million health-related jobs lost over the March to early May time period. In this case, protecting health-care workers from the potential risks of coronavirus, as well as the desire to increase outputs dedicated to treating the virus, has harmed the well-being of health care workers on non-coronavirus margins — both in terms of short-term financial insecurity and in terms of longer-term career options and trajectories.

Other examples abound. Stay-at-home orders can contribute to the exacerbation of mental health issues and to instances of domestic violence as victims are in close proximity to their abusers. In the United States the number of childhood vaccines for other diseases has fallen in the wake of the national emergency declaration. This will have long-lasting health effects as kids contract diseases that otherwise could have been avoided. Unintended consequences are not just domestic. According to one prediction, between now and 2025, up to 6.3 million more people globally will develop tuberculosis (TB) with 1.4 million more expected to die because of cases that go undiagnosed or untreated during the COVID-19 lockdown. The United Nations predicts that the economic consequences of the pandemic and response in developed countries will increase extreme poverty around the world and cause an estimated 34 million people to fall below the extreme poverty line in 2020.

Of course, caution must be exercised in making direct causal claims. Not all these negative effects are directly attributed to government policy. Even absent government policies the pandemic would cause people to change their behaviors which could lead to negative outcomes in the aforementioned areas. That said, these examples illustrate how government policies which are intended to alleviate suffering on some margins can potentially contribute to increasing suffering on other margins. Government policies which limit economic activity, for instance, are going to have real and long-lasting effects both domestically and internationally. Government’s declaration of a national emergency combined with strongly emphasizing the risks of coronavirus are going to influence the way people change their behavior and lead to negative unintended consequences on other margins.

A final, and rarely mentioned, category of negative unintended consequences deserves mention. In order for government dictates regrading coronavirus to achieve their desired ends, they require compliance. This compliance can be voluntary, but where it is not, it requires enforcement through force or the threat of force. This grants significant discretionary power to those in government. In numerous cases, such as in China, Russia, South Korea, and Israel, governments have employed wide-spread surveillance to track and monitor the spread of the virus. While this can produce benefits in terms of tracking the virus, it also enhances and entrenches a surveillance apparatus that can be used by governments in the future for non-coronavirus, and potentially nefarious, purposes.


More generally, the response of governments around the world to coronavirus, both in authoritarian and democratic regimes, has led to the rise of “pandemic police states” which rely on widespread surveillance, social control, and violence to enforce state mandates.[5] The effects of these policies and programs will likely be long-lasting as crises have historically led to permanent increases in the scale and scope of state power.[6] Where this happens, efforts to combat a bad situation in the present may lead to long-term losses in freedom and liberty as political power expands at the expense of the social power possessed by individuals.

Reflections on the Hayek Program with Peter Boettke and Christopher Coyne

Conclusion

While crises create a situation of rapid flux, the realities of economics remain stable and constant. Scarce resources limit our ability to achieve all desired ends. Limits on human reason regarding the use of those scarce resources constrains what can be accomplished through design and control. Incentives are central for both determining how people use scarce resources and for thinking about how people will respond to various mandates. Comparative institutional analysis is central for thinking about the epistemic and incentive characteristics of different institutional and organizational arrangements. Appreciating the seen and the unseen effects of policies is crucial to ensuring that actions don’t do more harm than good. The main takeaway is that mundane economics is a crucial part of the toolkit for ensuring that human suffering is limited rather than compounded.

Read More:

Learn about the Hayek Program’s Community & Crisis research project and submit a research proposal to get involved.

More Commentary on the COVID-19 Pandemic:

Author:

Christopher J. Coyne is a professor of economics and director of graduate studies at George Mason University and the associate director of the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics and the F. A. Harper Professor of Economics at the Mercatus Center at George Mason University.

Notes:

[1] See Virgil Henry Storr, Stefanie Haeffele-Balch, and Laura E. Grube, Community Revival in the Wake of Disaster (New York: Palgrave Macmillan, 2015); Emily Chamlee-Wright, The Cultural and Political Economy of Recovery: Social Learning in a post-disaster environment (New York: Routledge, 2010).

[2] James Buchanan, “The Pure Theory of Government Finance: A Suggested Approach,” Journal of Political Economy 56, no. 6 (1949): 496–505.

[3] Ramanan Laxminarayan and Anup Malani, “The Economics of Infectious Diseases.” In Sherry Giled and Peter C. Smith, eds., The Oxford Handbook of Health Economics (Oxford: Oxford University Press, 2011).

[4] Henry Hazlitt, Economics in One Lesson the Shortest and Surest Way to Understand Basic Economics (New York: Three Rivers Press, 1979).

[5] Christopher J. Coyne and Yuliya Yatsyshina, “Pandemic Police States,” SSRN Working Paper, 2020, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3598643.

[6] Robert Higgs, Crisis and Leviathan: Critical Episodes in the Growth of American Government, (Oxford: Oxford University Press, 1987).

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