Managing and Mismanaging the Covid Shock

An important lesson from both economic analysis and economic history is that when people are relatively unregulated and free to adjust, they can adjust quickly to various economic shocks, even large ones. But when governments heavily regulate people’s economic activities, these governments slow and often prevent adjustments. The good news is that in 2020, the federal government and many state and local governments have temporarily relaxed regulations to make adjustment easier. The bad news is that many of these same governments have added regulations that make adjustments difficult or impossible. And the further bad news is that many pre-existing regulations have not been loosened and, therefore, act to slow adjustment. One of the most extreme regulations is the Food and Drug Administration’s heavy requirements that limit testing for the Covid-19 disease.

This is from “Managing (and Mismanaging) the “Covid Shock,” my latest article on Defining Ideas, October 22, 2020.

Another excerpt:

However, there’s a responsible solution for restaurants and bars that want to serve drinks: insist that they serve people outside and insist that they require people to stay seated and socially distanced. But governments seem to have problems with letting people have fun. The California Department of Alcoholic Beverage Control insists that bars may open only if they offer “bona fide meals.” Those meals cannot be pre-packaged sandwiches and salads, side dishes like fries and chicken wings, bagged pretzels or popcorn, or, the horror, dessert.

And then one of the worst:

In the midst of a pandemic, one of the things we would like most to know is whether we have the virus. Testing can tell us that. But existing tests are expensive. After recently traveling, I decided, at my wife’s urging, to get tested. I paid $180 for results within twenty-four hours and got them in six hours. I can afford that. But that’s a lot of money for many people, and six hours is still a lot of time. Wouldn’t it be nice if we could have even cheaper tests that we can conduct on ourselves and get fast results? That way, each of us would know whether to isolate or go to work, bars, football games, or restaurants.

Actually, we can, but we may not, because the FDA stops us. These tests cost under $10 and give results within fifteen minutes. But the FDA won’t allow them because they’re not as accurate as tests it does allow.

Read the whole thing.

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Private Firms Cannot Censor

 

It has been commonplace lately to complain about censorship conducted by Twitter, Facebook, and YouTube.

Here’s the problem: they can’t censor. What they can do, and do do, is prevent users from posting things.

Do they have an agenda? Sure they do. And it often sucks.

But that doesn’t mean that what they’re doing is censorship.

George Washington University law professor Jonathan Turley, whom I respect a lot, writes:

Xi’s coughs came to mind as Twitter and Facebook prevented Americans from being able to read the New York Post’s explosive allegations of influence-peddling by Hunter Biden through their sites.

Notice how Turley misstates the issue to make his point. Twitter and Facebook did not prevent Americans from being able to read the New York Post. The New York Post has a presence on the web and people who are not particularly facile with the web, and that includes me, found it easily. Moreover, what Twitter didn’t take account of is the “Streisand Effect.” My guess is that even more people saw the Post article because of Twitter’s thumb on the scale.

But even if the reference had been to something not on the web so that people would have had huge difficulty in finding it, that doesn’t mean that Twitter censored.

I gave a talk at a Hillsdale College event in Omaha earlier this month and on the panel with me were Dr. Jay Bhattacharya and Dr. James Todaro. Both were excellent. Dr. Todaro was a last-minute replacement and a fine replacement he was. He laid out how he had smelled a rat in the Lancet study of hydroxychloroquine. That was the study that purported to show that hydoxychloroquine actually was unsafe (as opposed to ineffective) for people with COVID-19. He investigated and, lo and behold, found a rat. Lancet retracted the study.

Dr. Todaro noted that after Elon Musk posted Todaro’s findings on Twitter, he had tens of millions of views. Then Twitter took it down.

Dr. Todaro noted other similar incidents, specifically the Bakersfield doctors and the White Coat Summit. Both were on YouTube and YouTube took them down. Dr. Todaro said that this was censorship.

Each speaker was given a minute to respond to the other speakers and I took my minute to take issue with Dr. Todaro’s claim. I granted that what happened sucked and that the social media decision makers who took these things down acted badly. But, I said, they weren’t censoring. Then I said:

Hillsdale College did not invite a Marxist to be on this panel. Does anyone hear think that Hillsdale is censoring? No. Hillsdale is using its private property as it wishes. Moreover, if James is saying that he wants the government to step in to deal with this censorship, I can almost guarantee that he’ll like the result even less.

 

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Henderson on Nobel Winners in Wall Street Journal

In its technical paper justifying the awards, the Nobel Committee points out a major problem with using taxes to fund government programs: taxation distorts. The term economists use is “deadweight loss,” a loss that is not offset by a gain to anyone. Economists have estimated that raising $1 in taxes doesn’t cost society only $1; it costs somewhere between $1.17 and $1.56. The extra 17 to 56 cents is deadweight loss. The committee notes that by auctioning off major electromagnetic assets, the federal government avoided having to tax as much.

This isn’t to say that the ideal auction is one that maximizes government revenue. One way to maximize auction revenue is for the FCC to act like a monopolist and hold spectrum off the market. But what matters most is that spectrum gets into the hands of the most-productive users. As former FCC chief economist Thomas Hazlett, now at Clemson University, and his co-author Roberto E. Muñoz of the Universidad Técnica Federico Santa María have pointed out, the gains from efficient allocation swamp the gains in government revenue. The 2017 wireless spectrum auction, for example, redirected spectrum from broadcast television to cellphone companies. If you’re reading this on a cellphone, you can thank Messrs. Milgrom and Wilson.

This is from David R. Henderson, “Thank These Nobel Laureates for Your Cellphone,” Wall Street Journal, October 12, 2020 (October 13 print edition.)

Under my contract, I’m allowed to quote 2 paragraphs from my article.  I’ll post the whole thing in 30 days.

By the way, as an economist friend pointed out on Facebook, I was one of the few to note the potential conflict of interest in Milgrom both helping design the auction and consulting to a company that bid in the auction. I responded that I wouldn’t be a good card-carrying economist if I hadn’t noted that. Economics is all about incentives. As I wrote in “Hooked on Economics,” Chapter 2 of The Joy of Freedom: An Economist’s Odyssey, I noted in all my reading of economics while a math major and then in all of my reading post-Bachelor of Science and pre-UCLA graduate school that the unifying theme was incentives.

 

Here’s the article on “Auctions” in David R. Henderson, ed., The Concise Encyclopedia of Economics.

HT to Alex Tabarrok and Lynne Kiesling for giving a quick read to my draft before I sent it to the Wall Street Journal. Also to my wife, Rena Henderson, for a quick edit. All of them turned it around in less than 25 minutes. Also thanks to Tom Hazlett for checking the paragraph on his findings. He did so while waiting to board a flight.

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A Straight Line from Friedman to the White House?

I’ve missed this article by Martin Wolf, hosted by Pro Market in the context of the debate over the 50th anniversary of Milton Friedman’s New York Times piece on corporate social responsibility. Wolf starts by saying that he “used to think Milton Friedman was right. But I have changed my mind.” That he changed his mind is no big surprise, as he moved from being a free trader in the early 2000s to being a staunch proponent of whatever kind of government interventionism in recent years.

What is interesting, however, is Wolf’s argument. He changed his mind, he writes, because he doesn’t “believe in the contractarian view of the firm” any more. Corporations, writes Wolf, “are powerful entities able to exercise immense influence within society. Since corporations have been told that their only responsibility is to make profits and this has been internalized within their operations, the result is that society, including in particular its notionally democratic politics, is dominated by feral institutions.”

For the British journalist, Friedman’s point that corporations should play within the rules of the game is naive, as they contribute to writing the rules of the game and they do so by lobbying governments and their regulators so that they act in their interest. This is why, Wolf maintains, “there is a direct line from Milton Friedman to Donald Trump.”

Here comes this astonishing way of reasoning:

Why is this? Consider how one goes about persuading people to accept Milton Friedman’s libertarian economic ideas when, in practice, they shift economic rents upwards and desperation downwards. In a universal-suffrage democracy, it is impossible. Such libertarians are a minority. To win, they have to embrace ancillary causes such as culture wars, racism, misogyny, nativism, xenophobia, and that good old standby: nationalism. Much of this has of course been sotto voce and so plausibly deniable: “No, we are not in favor of discrimination, but your precious freedom does indeed include the right to discriminate.”

The financial crisis and bailout of those whose behavior caused it made selling the deregulated free-market even harder, as Mitt Romney’s 2012 failure showed. Afterward, it became politically necessary for libertarians embedded within the Republican Party to double down on those ancillary causes. Trump was simply the political entrepreneur best suited to do this. A natural demagogue, he was perfectly comfortable saying out loud what his predecessors had said quietly or let others say for them. This is why his supporters claim that “he says it like it is.” Those desperately-needed voters loved him for it because he respects their rage. Of course, his nativism, nationalism, protectionism, demagoguery, lying and now open assault on the notion of a fair election is a bit uncomfortable for corporate elites. But, if he gives them lower taxes and sweeping de-regulation, how many really care? If the result is to poison democratic politics forever, again, who cares?

So, to return to my main point: one cannot get away with stating that corporations should play by the rules when they create the rules they play by. The system for creating the rules of the game is corrupt.

When Friedman was referring to the “rules of the game,” he was likely thinking of the broader and more general principles of a liberal polity and of free competition: don’t hurt people and don’t steal their stuff, to quote the effective title of a book by Matt Kibbe. He was certainly not thinking of legislation à la cart and special privileges, that Friedman vehemently opposed. Moreover, in Capitalism and Freedom, where Friedman further elaborates his argument against the notion that corporations ought to have any “social responsibility” duty, he argues clearly that “if economic power is joined to political power, concentration seems almost inevitable. On the other hand, if economic power is kept in separate hands from political power, it can serve as a check and a counter to political power.”

Friedman, and libertarians at large, argue for a separation of government and business as clear as the separation between the church and the state. I’d like to have the reaction of some American friends, but I find the description of libertarians jumping on the Trump bandwagon quite laughable. If anything, perhaps the opposite has happened: that libertarians have emphasized their differences with the current US administration, focusing on matters that alienated them Republican support. Think about Cato’s top-notch work on immigration. Protectionism is a red flag for libertarians and that brought them to strongly distance themselves from the Trump camp. If you google Donald Trump and Milton Friedman, other than Wolf’s piece you’ll see things like this popping up.

In short, Wolf accuses Friedman of being blind to the issue of crony capitalism and to have a following which includes people eager to compromise for the sake of immediate political goals. The second claim would be an interesting matter of investigation. The first is plainly wrong.

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Enriques on Friedman

Fifty years have passed since Milton Friedman’s article in the New York Times Magazine on “The Social Responsibility of Business.” This anniversary has been widely remembered- though perhaps more vilified than celebrated ( David Henderson was among those celebrating it, here).

 

As Friedman is considered such a champion of “shareholder value”, I found very interesting that Luca Enriques, on Promarket, comments that ‘Friedman’s essay assigned a totally passive role to what he calls the corporation’s “owners” or “the employers”—that is, the shareholders. They are merely the beneficiaries of directors’ duty to increase profits, but they have no role to play in pursuing that very goal other than (as he notes in passing) when they elect the board.’Friedman’s article (actually, he was restating ideas he had put forward before in Capitalism and Freedom) is supposed to be at the heart of a theory of “shareholder value” which many, on the left and also the corporatist right, nowadays oppose. Friedman’s point was mainly that businesses should focus on making profit for their shareholders. The main reason for that is what I’d call transparency: assessing the performance of a business’ managers in reaching this goal is a much more straightforward affair. Other standards tend to be more opaque, and more difficult to assess, giving managers more latitude vis-à-vis the owners of the company. Of course Friedman is often misinterpreted as if he maintained that corporations should be focused on making profits regardless of the law, of basic human rights, et cetera. He did not. Friedman claimed that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.” He never thought companies could do anything beyond the rules of the game.

Instead, as Enriques writes:

When Friedman wrote his piece, the shareholders of US companies were mostly individuals and rarely voted at annual meetings other than to rubber-stamp managers’ proposals. Today, a large majority of listed firms’ shares are held by institutional investors—that is, managers of other people’s funds. Institutions have become key players at US (as well as non-US) listed corporations (e.g., this OECD study with data from across the world), because they regularly vote portfolio shares at shareholder meetings. And their pro-management vote is nowadays anything but certain.

Read the whole thing. Though the corporate world has changed in the last fifty years, significantly, Enriques maintains that Friedman’s paper ‘still provides a useful framework for understanding the implications of managing companies for one purpose or another. And perhaps also for answering the reframed question of whether corporate managers should cater to the preferences of their portfolio-value-maximizing indexing investors when making decisions on behalf of their corporations.”

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Two Cheers for Small Business

We live in societies where we see a “near-universal appreciation for the aesthetic benefits of a thriving small business community,” but almost no empathy for small business owners. This is an interesting point made by Will Collins in an article published by The American Conservative and that makes use of James C. Scott’s work.

Collins is thinking of the recent riots in the US which, as you would expect from riots, resulted in physical damages and looting at the expense of restaurants and shops. If many left-leaning commentators typically express enthusiasm for “neighborhood restaurants, locally-sourced produce, and independent bookstores”, “in the wake of the riots, however, condemnations of looting and arson have been strangely muted”.

Though you may detect in the article a hint of nostalgia for a world of smaller shops and a certain antipathy towards big retailers, I think Collins has a point in highlighting that our societies tend to foster “a culture inimical to the character of the independent business owner.” The US is, or at least used to be, different the most European states in that regard, but certainly on my side of the pond there was a good deal of antipathy for shopkeepers. I was always struck by how it was common to refer to Margaret Thatcher with a certain disdain as “the daughter of a grocer”. You would expect that even people who deeply disagree with her would celebrate the upward social mobility and the achievement of somebody who comes out of a “petty bourgeois” environment. Not quite. The petty bourgeoisie is considered rather crass and vulgar, petty, a collection of prudes. The pursuit of money, an utter necessity for somebody who lives out of the oranges or the shirts she manages to sell, is seen as incompatible with higher pursuits.

The great enemy of small business is red tape. It seems to me that those having a strong “appreciation for the aesthetic benefits of a thriving small business community” tend to think of it as a fish tank , which shall be preserved as it is, with exactly those fishes it came with. They take a static view of their community and care about it not changing. They are not sympathetic, instead, with people who are trying to set up a small firm or shop, that is: with more people trying to find meaning in the “zone of personal autonomy” that their shop comes to represent.

Collins also makes a point many are making about the future of cities should Internet commerce take over the world. Will neighbourhoods simply be empty? As “small businesses help keep neighborhoods safe by attracting foot traffic and providing “eyes on the street” to informally monitor public spaces”, are we going to see crime spiking, as shops close? I tend to believe shops will be more resilient than people think. For one thing, somebody may be willing to buy an iPod online, but not necessarily her apparel or her medicines. Niche and highly specialised activities can benefit from personal contacts and handshakes (whenever we’ll go back to shaking hands). But also, for example, immigrants may prefer to go to small groceries run by people in their own community. Foodshops and small restaurants and takeaways can take over from shops that cannot compete with online retail. We will see. Cities are so central in our civilisation because, clearly, they are good at adapting to changing human needs. Still, the pandemic drove many to predict the end of the office as we know it, and thus to people preferring to live in suburban areas, fearing new pandemics and the consequent lockdowns, instead of in city centres. We will see. One interesting feature of crises like Covid19 is that they leave our imagination unbridled, but also, in the midst of an emergency, my impression is that we tend to overestimate changes that will be permanent and underestimate changes that will be transient.

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Interesting Airline Pricing

I had an interesting experience with airline pricing in the last 2.5 weeks. About 2.5 weeks ago, I got on line with United, the airline I usually use to go to Winnipeg. (From there, I drive 3 hours to Minaki, Ontario.) I wanted to go to Winnipeg on or about July 9.

But I got a surprise. The airline literally wouldn’t let me reserve anything in July. I don’t just mean anything to Winnipeg. I mean anything anywhere. I hadn’t seen that before. You might think that I could reserve first class and pay a ton of money. But no.

So I figured that I didn’t really need to fly out of Monterey. I could take a shuttle to SFO, fly Delta to Minneapolis, and then connect to Winnipeg. So I got on Delta’s site. When I put in the details, it had no flights to MSP connecting to Winnipeg.

Then I went to Expedia and voila: I found a reasonably priced flight, about $550, and a reasonable time to leave and arrive in Winnipeg.

Expedia allowed a full refund if I cancelled within 24 hours. So I reserved and the next day decided to go ahead.

Then, a few days later, after a long discussion with my wife, I decided not to go. (Because of Prime Minister Donald J. Trudeau’s travel restrictions, he couldn’t keep me, a Canadian, out of Canada, but he could insist that I go for at least 15 days and quarantine for 14 of them. It would have been very hard for my wife to have me gone that long.) I made that decision after the 24-hour period and so I canceled, leaving about $550 “in the bank” for a future flight on Delta.

So here’s what I think happened. Delta has a 100% refund policy for its seats. But with people’s travel plans so up in the air, so to speak, Delta realized that with lots of cancellations it could have a tiny revenue stream. So it achieved some revenue stability by selling a higher than usual percent of seats to Expedia, which has no 100% refund policy. Delta could keep its reputation for refunds. Expedia, which is one of many resellers and doesn’t have the same incentive to establish a reputation for refunds (and is upfront about the fact of no refunds) makes some money as well.

I have no upset about this. I just find it fascinating.

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