Jeremy Arkes on COVID Externalities and Governor Newsom

 

Jeremy Arkes, one of my friends and Navy School colleagues, who is also a friend and colleague of Judith Hermis, submitted the letter he would have sent to Governor Newsom. I did some edits, all of which he accepted, and here is the result.

Dear Governor Newsom,

I would like to offer a counterpoint to the letter that my good friend Judith Hermis sent you regarding your private-gatherings restrictions. As with Judith, I hope you and your family are well, and additionally I hope that you have learned now to avoid large gatherings yourself in order to continue to keep your family and others safe.

One factor that Judith cited was that our “unalienable rights to life, liberty, and the pursuit of happiness” should prevent the government from telling us what we can do in our own private homes. But there are well-known limits to these rights. People might gain happiness from, in their own homes, sacrificing Sagittarians who watch Gary Busey movies. But they are not allowed to do so because that infringes on others’ right to life. This, of course, is one example of many restrictions on what we can do in our pursuit of life, liberty, and happiness. That said, such a restrictive measure as you are imposing does infringe on liberty and, thus, needs some justification.

Such justification might come from the basic economic concept of an externality, which is a case in which decisions by private parties impose costs on (or create benefits for) third parties not engaged in the transaction. And basic economics states that, in the presence of a “negative externality” (where decisions impose costs on others), the free market (consisting of the private decisions of people) leads to a higher quantity of transactions than the quantity that would maximize efficiency.

And so a party that brings multiple households together has the potential to have negative externalities, as there can be huge costs imposed on people not involved in the party (from the party-goers infecting others, who in turn infect others, etc.). The costs are not just deaths and health-care costs, but also the costs associated with being sick and having the long-term complications that some experience from COVID.

The theory behind negative externalities is that a more efficient outcome would occur if the parties involved in the transaction/decision have to bear those costs imposed on others. If the costs imposed on third parties had to be paid for by the party guests, then a more efficient outcome would ensue.  In the textbook theoretical case of a negative externality, with quantifiable costs imposed on third parties, the efficient outcome could come in the form of a tax on the good or service that causes the market participants to bear those costs imposed on others. The size of the tax would be the monetary equivalent of the costs imposed on others. Imposing that tax would cause the number of parties to decrease to the most-efficient quantity. For those for whom the tax would be just a rounding error (e.g., a party at the French Laundry restaurant), the party would go on.  But for others, the tax would dissuade them from their private gatherings.

Unfortunately, the probabilistic nature of COVID infections and deaths, the imprecision of contact-tracing, and the uncertain monetary-equivalent costs of deaths and illnesses make it impossible to fully internalize the costs. And so this health measure you favor could be justified as a method to correct for an externality when no tax-based solution is available. It could actually bring us to a more efficient outcome.

So if anyone opposes your policy, Governor, a good question to ask that person is: At what point would restrictions be okay? If you had a private party and you knew that it would lead to 1,000 people infected and 100 deaths among people not attending the party, would it be okay to have restrictions on such parties? If not, then it seems that society has no safeguards for something that can destroy us. If so, then the problem isn’t that such a measure is antithetical to economic liberty but rather we have different preferences for the level of safety vs. freedom and perhaps different preferences for the certainty of harm that is required before any preventative measures are taken—and, the elected leaders have the right to impose laws that they believe draw the best balance.

I believe that we need to do our best to protect the brave and dedicated doctors, nurses, and elderly-care providers who are risking their health and mental well-being to do their job—a job that the population has made more difficult by the private decisions they have made (e.g., not wearing a mask and congregating in larger-than-advised groups) that has led to the situation we are in today. And the situation today is that it is much more dangerous to engage in the economy than it was at any other point in this pandemic so far. Basically, we need to think the way our military-service members do and make sacrifices to serve people beyond ourselves.

Another important point is that, paradoxically, restrictions on economic activity in the short run could actually lead to greater economic growth in the medium and long term. In my view, most of the economic decline is due to personal decisions of people to be safe rather than the social-distancing and shut-down policies. For example, people are allowed to take flights, and so the ~75% reduction in air travel is due almost entirely to people’s personal decisions not to travel. The bottom line is that the economy can’t return to normal until COVID is reduced to a level at which people feel safe.  (Supporting this point is that Europe, which had COVID under control at the beginning of the summer, had a much more normal summer of economic activity than we had in the U.S., where we never had the virus under control.)

Finally, let me offer a different characterization of those who are okay with the limitations. Judith considered them “the most frightened,” but that seems to be too much of a generalization. (I’ll admit to being one of the “frightened,” as I have mountains to climb and books to write, and I do not want to be thwarted.)  But there are other reasons than being frightened for why people would support such restrictive measures:

(1) They may have a loved one (who depends on them or whom they hope to visit) who is at risk due to being old or immuno-suppressed.

(2) They might (for religious or other reasons) not want to participate in any activity that has the potential to harm other people (whom they know or don’t know).

(3) They may share my view that taking the strong measures and making personal sacrifices to get COVID under control in the short run is what would return the economy back to normal the fastest.

Good luck,

Jeremy Arkes
Another private citizen (some might argue)

 

 

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