In an Epidemic, Individuals are not Plants

An econometric study by Austan Goolsbee and Chad Syverson of the University of Chicago estimates that the lockdowns imposed by state and local governments may have been responsible for only 7% of the drop in economic activity. Most of the impact came from individuals who decided to avoid crowded places, as can be seen by comparing traffic in shops that were not under lockdown orders and those that were.

This is consistent with a basic economic idea: individuals respond to incentives (here, the fear of being infected), even in the absence of coercion. People are not just plants.

The authors used a database of cellphone data on foot traffic spanning contiguous counties subjected to different or differently-timed legal restrictions from March 1 to May 16. The data comprise more than 2.25 million business locations. (Note that the study tracks only foot traffic for consumption purchase, not traffic for work purposes.)

The main results of this working paper:

The results indicate that legal shutdown orders account for a modest share of the massive overall changes in consumer behavior. Total foot traffic fell by more than 60 percentage points, but legal restrictions explain only around 7 percentage points of that. … The vast majority of the decline was due to consumers choosing of their own volition to avoid commercial activity.

The authors conclude:

The COVID-19 crisis led to an enormous reduction in economic activity. We estimate that the vast majority of this drop is due to individuals’ voluntary decisions to disengage from commerce rather than government-imposed restrictions on activity.

It is not clear how these conclusions fit into the current neglect of social distanciation rules and the resurgence of infections in many states where the lockdowns were ended, but they still suggest that an epidemic will, to a certain degree, be attenuated by the private means used by individuals to protect themselves.

In an older paper, Tomas Philippon, also of the University of Chicago, reached a similar conclusion (“Economic Epidemiology and Infectious Diseases,” in A.J. Culyer and J.P. Newhouse, Editors, Handbook of Health Economics, Vol. 1 [Elsevier Science B.V., 2000]):

Incentives for prevention make epidemics self-limiting, because the prevalence of a disease raises the incentives for preventive behavior. … The economic approach yields the insight that public intervention often provides less benefit than predicted by epidemiology, because private incentives counteract its effects.

We may add that, in the case of Covid-19, government intervention often generated perverse incentives. For example, public health agencies long claimed that wearing masks was useless for the general public. We may hypothesize that this detrimental advice was motivated by the shortage of masks (and other personal protective equipment) created by governments’ own price-controls and their efforts to commandeer the consequently insufficient quantity supplied. (On these shortages, I have written a number of posts starting with one on March 6, “Don’t Confuse Shortage and Smurfage.”)

 

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Guest Contribution: “Covid-induced precautionary saving in the US: the role of unemployment rate”

Today, we are pleased to present a guest contribution written by Valerio Ercolani, from the Directorate General for Economics, Statistics and Research at the Bank of Italy. The views expressed in this note represent that of the author and not necessarily reflect those of Bank of Italy. Last months saw an unprecedented rise in the […]

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It’s a Wonderful Loaf!

Why don’t we wonder enough about the marvels of markets? How do markets enable peaceful, productive, global cooperation?

 

In this episode, EconTalk host Russ Roberts introduces and reads his poetic tribute to the rich idea of spontaneous order, “It’s a Wonderful Loaf”. The poem and its animated video version are the backdrop for Don Boudreaux, Michael Munger, and Roberts to discuss the awesomeness of markets, and reasons that the concept is elusive for many people. Labor market consequences and price control disasters evidenced by Venezuela’s bare shelves are some of the topics that are touched on as common unintended consequences of government regulation. 

 

 

1- Consider the examples of emergent order such as traffic, cities, language, law etc. What are other examples of “the result of human action, but not the execution of any human design” as described by Adam Ferguson in 1782? Are markets a unique example of this profound social process?

 

2- Is it the incredible complexity of markets or the human tendency to look for or assume conscious design around us that confounds the concept of spontaneous order? Or is it both? What single insight would you hope students gain from “It’s a Wonderful Loaf” when it is used as a classroom educational tool?

 

3- Does Roberts pose a strong argument in support of those who claim to believe in markets as a pricing mechanism yet still advocate for “all kinds of regulation”? What are other ideas for addressing those” left behind” by a market system?

 

4- How does Michael Munger’s argument for Basic Guaranteed Income support, complement, or allow labor markets and free trade to flourish? 

 

5- If market processes were better understood, would market failures be dealt with differently?  Would destructive price controls cease?  What point is made to differentiate market imperfections as catalysts for innovation from market failures as negative outcomes to be remedied?

 

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