Externalities and Our Children

The reason why things don’t work properly is that the right people are not in politics. Of course, what you think are the right people is not necessarily what your neighbor thinks, so ultimately the problem is a lack of national unity. What is needed is that we share the same values under democratic political leadership. And even this is not enough. Every voter must spend at least as much time studying every major political issue as he spends buying a new car. Add inclusivity to all this, and the proliferation of externalities would become solvable. If we are one, there cannot be anything external to us (reminder: the main characteristic of externalities is that they are external to the market). With more Alexandria Occasio-Cortezs and more Sidney Powells in politics, with more knowledgeable and devoted bureaucrats, we could hope that greedy consumers would stop gouging businesses, that rational policies would prevail, and that people with good union jobs would work selflessly for our children.

My readers will understand that the model of the state adumbrated above is poles apart from any defensible political and social theory. We may say it’s balderdash. It’s an excuse to playfully mark the 2021 April Fools’ Day (check this link to the Encyclopedia Britannica and you will see what the fish has to do with all that).


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The Pandemic in Europe and America

The pandemic evolution now appears to be more worrying in Europe than in America, as illustrated by the graph below reproduced from yesterday’s Wall Street Journal (Marcus Walker, Bertrand Benoit, and Stacy Meichtry, “Europe Confronts a Covid-19 Rebound as Vaccine Hopes Recede,” March 12, 2021). In France, for example, after two very long and restrictive (even tyrannical) national lockdowns, ICUs are close to 80% capacity. The Wall Street Journal explains:

Europe’s efforts continue to suffer from the EU’s slowness in procuring and approving vaccines, production delays at vaccine makers, and bureaucratic holdups in injecting available doses.

The “production delays at vaccine makers” are most likely due to the fact that the EU government has not purchased them in time while, of course, there as in America, individuals and private organizations cannot purchase them.

Those who have read Ayn Rand’s famous novel may wonder if Atlas is shrugging more visibly in Europe than in America. As for those Europeans who put all their faith in an omniscient and all-powerful welfare state, they seem deeply disappointed (although they may be asking for more). In Germany, 30% don’t trust the competence of Angela Merkel’s center-right government and trust even less her center-left parliamentary allies.

The progression of new covid variants in Europe may be an immediate culprit, but a major reason for that is that European governments, under the punctilious EU government, have been slower than the US government in making vaccines widely available to the public.

Yet, the vaccine rollout in America has not been a marvel of federal or state planning. Four months after Pfizer announced the completion of its clinical trial, three months and a half after it started delivering doses to the United States, and three months after the vaccine was approved by the FDA, only 10% of Americans are fully vaccinated and another 10% have received a first dose (according to data from the Wall Street Journal). As far as we can see, this was, although not exactly warp speed, fast enough to prevent the variants from outrunning the building of herd immunity. This relative American success was achieved with much fewer restrictions to individual liberties than in most European countries. Federalism and popular resistance have been a big advantage.

It is notable that Pfizer and its partner BioNTech were not full-fledged participants in Operation Warp Speed. Pfizer did not accept research funding to develop its vaccine. The New York Times explained (“Was the Pfizer Vaccine Part of the Government’s Operation Warp Speed?” November 10, 2020):

In July [2020], Pfizer got a $1.95 billion deal with the government’s Operation Warp Speed, the multiagency effort to rush a vaccine to market, to deliver 100 million doses of the vaccine. The arrangement is an advance-purchase agreement, meaning that the company won’t get paid until they deliver the vaccines. Pfizer did not accept federal funding to help develop or manufacture the vaccine, unlike front-runners Moderna and AstraZeneca.

Pfizer CEO Albert Bourla made that clear (see “Leading Covid-9 Vaccine Makers Pfizer and Moderna Decline Invitations to White Summit ‘Vaccine Summit’,” Stat, December 7, 2020):

Bourla later defended the decision to decline federal research and development funding, citing a desire to “liberate our scientists from any bureaucracy” and “keep Pfizer out of politics.”

Except perhaps for that, the pandemic does not provide a strong confirmation of the benefits of American free enterprise. There may be more free enterprise in America than in Europe, but it’s a matter of degree. In America too, the distribution of the vaccines has been basically a governmental affair. And think about the “price-gouging” laws that have prevented market price adjustments in 42 states, not counting the Defense Production Act at the federal level. (See Rik Chakraborti and Gavin Roberts, “Anti-Gouging Laws, Shortages, and Covid-19,” Journal of Private Enterprise 35:4 (2020), pp. 1-20.)

Perhaps the administrative-welfare state, in both Europe and America, is not as good as we thought?


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Chart of the WeekHow e-Government Services Can Pay Dividends

By Ali Al-Sadiq The ability to renew your passport or driver’s license, pay a tax bill, or access government data with the click of a button or swipe of a screen, anytime and anywhere, has grown more important during the COVID-19 pandemic to prevent the spread of the virus. Beyond the obvious efficiency and transparency […]

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Vaccine Adventures

Following up on information that Covid-19 vaccines were available there, I walked into the small Maine pharmacy. I saw nobody inside, not even at the cash register. I continued to the back of the store: nobody manned the two counters of the pharmacist’s hideout. I stood in front of one. After just a few minutes, an employee appeared on the other side.

“Could I see the pharmacist?” I asked.

The pharmacist came.

“I have been told that you have Covid vaccines,” I said.

“We have a waiting list,” she replied.

I asked to be put on it but she would not, or could not, tell me when they were likely to phone me for an appointment. I recognized something like the Canadian health system, under which I lived for decades.

“Is it a matter of days, weeks, months, or years,” I asked.

“Days. At least.”

That looked good, except for the “at least.” In some of the on-line and mortar-and-brick places, there is not even a queue you can get at the back of.

At this stage, the actual vaccines don’t seem to be the problem. In the United States, the manufacturers have delivered twice as many vaccines as have been administered. According to the Wall Street Journal (Jared S. Hopkins and Arian Camp-Flores, “Demand for Covid-19 Vaccines Overwhelms State Health Providers,” February 8, 2021),

[a]lthough state officials often cite limited vaccine supply, manufacturers are producing largely on schedule. Pfizer Inc. and Moderna Inc. since December have supplied about 60 million doses, nearly one-third of the 200 million the companies together must deliver by the end of March.

State governments are supposed to distribute the vaccines that the federal government, after literally monopolizing the market, makes available to them. The length of the queues varies from place to place, perhaps depending partly on the success of whatever entrepreneurship can creep into what is basically a socialized distribution system. One Missouri hospital has a waiting list of 100,000 names and no vaccine left. Queues are not an efficient way to ration demand.

In the former Soviet Union, the government always had an excuse for shortages. The real problem was different: no private property, no market prices to signal scarcities, and no free entrepreneurship to respond to the signals.

In America, once the federal government has purchased them, the Covid vaccines are priced at zero, which implies that government allocation is required. At a zero price, demand is much larger than the quantity that bureaucrats can supply. The fee governments pay providers (hospitals, pharmacies, and such) for administering the vaccines may not be higher than the latter’s cost. For example, Medicare pays about $40 for administering the two doses of the currently available vaccines. In a flash of economic realism, Joe Biden has expressed some concern that this fee may not be sufficient.

It is no consolation that all governments in the “free” world have adopted similar policies. No “American exceptionalism” here.

For Soviet agricultural production, the weather was often the excuse. For Covid vaccines, we are told that “the supply chain” and logistics are the problem. The Wall Street Journal‘s Jennifer Smith reported (“Mass Vaccination Sites Will Mean Scaling Up Logistics Coordination,” January 30, 2021):

Other local health departments might need information technology help to cope with overwhelmed appointment systems, or assistance with planning and sourcing the labor, supplies and procedures needed to administer hundreds of shots a day. “People underestimate that this is a massive logistics operation,” Dr. Wen said. “That type of expertise is often missing in state and local public health.”

But except for governments—that is, political and bureaucratic processes—that should not be an unsurmountable logistics problem. Private businesses without central coordination produce and deliver the food, in innumerable configurations, for the daily meals of 320 million Americans. Recall the Russian official who, shortly after the collapse of the Soviet Union, asked British economist Paul Seabright, “Who is in charge of the supply of bread to the population of London?”

In 2020, Amazon shipped 4.5 billion packages to American consumers—more than 12 million per day. The UPS hub in Louisville, Kentucky has a five-million-square-foot facility for sorting and treating more than 400,000 packages or documents per day. The hub sees 387 inbound or outbound flights daily from the company’s fleet of nearly 600 aircraft. What is more impressive is to think of the millions of individuals around the country and around the world who work in long and diverse supply chains to provide the equipment and inputs necessary for UPS’s operations. We are reminded of Leonard Read 1958 essay I, Pencil, which explains how the manufacture of a simple pencil requires the voluntary cooperation of a multitude of individuals producing, without a mastermind, the zinc, the copper, the graphite, and the equipment to make pencils out of that, and all the equipment for producing that equipment, and so on.

Although working under no central direction, these innumerable people who contribute to the production of pencils or UPS’s equipment and supplies are coordinated by markets (supply and demand) and the prices that signal what is needed where.

Compare this to the federal government’s “centralized system to order, distribute, and track COVID-19 vaccines” in which “all vaccines will be ordered through the CDC” (see the description by Anthony Fauci’s shop: COVID-19 Vaccine Questions and Answers, accessed February 10, 2021), the price for the final consumer is zero, and providers are paid fees determined by bureaucrats. No wonder the distribution runs into problems. The contrary would be surprising.

Note that the vaccine could still be free for the final customer if the federal government had simply subsidized consumers for their vaccine purchases (with vouchers, for example) and had let markets, entrepreneurship, competition, and prices distribute the stuff. And it wouldn’t take ages, luck, and some humility to put one’s hands on the thing—or one’s arm under the syringe.

The consumer who wants a vaccine gets a small taste of what French philosopher Raymond Ruyer, in his 1969 book Éloge de la société de consommation (In Praise of the Consumer Society), described as the difference between a market economy, where the consumer is sovereign, and a planned economy, where the producer runs the show (under government’s control):

In a market economy, demand gives orders and supply is supplicant . . . In a planned economy, supply give orders and demand is supplicant.

« Dans l’économie de marché, la demande est impérieuse, et l’offre suppliante (the supply is supplying). Dans l’économie planifiée, l’offre est impérieuse, et la demande suppliante. »


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Free Enterprise: A Daring New Year Wish

A December 28 report in the Wall Street Journal illustrates (again) how a wish for free enterprise in America is not like carrying coals to Newcastle (see Charles Passy, “New York to Penalize Health-Care Providers $1 Million for Covid-19 Vaccine Fraud“). For Mr. Cuomo, who drinks at the zeitgeist of our times, “fraud” simply means what the government does not like. A few excerpts:

New York Gov. Andrew Cuomo said Monday he will sign an executive order to penalize health-care providers that administer the Covid-19 vaccine without following state prioritization protocols. … Mr. Cuomo, a Democrat, said that providers that ignore this will face fines of up to $1 million and a revocation of all state licenses. …

State Health Commissioner Dr. Howard Zucker said over the weekend that ParCare was being investigated by the state police for possibly obtaining the vaccine fraudulently and then transferring it to other parts of the state and administering it to the public without paying heed to the prioritization rules. …

Mr. Cuomo said he wasn’t surprised that issues are already arising with health-care providers potentially violating state mandates with vaccine prioritization.

“You’re going to see more and more of this. The vaccine is a valuable commodity,” he said.

The first two paragraphs cannot but remind us of the old USSR government, the mother of all persecut0rs of those who don’t respect “state prioritazition protocols.” Why shouldn’t groceries, say, be allowed to ignore  “state prioritazition protocols” on food allocation? But fascism may be a more relevant reference than communism since the former allowed more tightly-controlled private businesses than the latter, as Lawrence Dennis argued.

The last two paragraphs remind us that, indeed, any commodity that many people consider valuable and which the state tries to control is going soon be the object of smuggling—what statocrats call “fraud”—for the benefit of individuals who want it and are willing to pay for it.

Should vaccines first go to cops or to teachers? To the old or to the young? There is no way for a government planner to make an efficient decision on this if only because there are some among individual teachers and some among the old who would be willing to sacrifice more to be vaccinated than other members of the groups to which the state arbitrarily identifies them. What if Google wants to buy vaccines for all its employees? What if a charitable organization wants to purchase some for its poor clientèle? As my co-blogger Scott Sumner just argued, the price mechanism is more efficient and even more just (if we want to jump in the undecided philosophical debates that have been raging for 25 centuries) than decisions made by politicians and bureaucrats.

Moreover, if the available vaccines were sold to the highest bidders (like beef, cars, or shoes) noting would (or, in the current emergency, should) prohibit the government from bidding in the same market, but without prohibiting others to do the same. The market exclusion that the governor of New York advocates seems alas natural to most people. It always strikes me how inclusion-obsessed activists work to exclude so many people.

The current situation is economically inefficient, morally questionable if not absurd, and dangerous for social peace. The federal government distributes the vaccines to the state governments, with all the vagaries of state distribution systems. State governments then add another layer, albeit variable, of inefficiency and authoritarianism by deciding who among their citizens will get the vaccine and who will, in the best case, have to wait their turn. (See Dan Frosch, Elizabeth Findell, and Peter Loftus, “As Covid-19 Vaccins Roll Out, States to Determine Who Gets Shots First,” December 9, 2020.)

Yet, isn’t an emergency situation like a pandemic different? A long (classical) liberal tradition from Adam Smith to Friedrich Hayek or Milton Friedman would answer yes. But—and here lies the big difference—liberals would not forbid free markets and voluntary cooperation to coexist with justifiable government intervention. A free market will insure, through the profit motive, that more vaccines are available, while not banning the free expression of individual preferences according to different personal circumstances. As I just argued, the government could bid against its own citizens, as when it buys anything (including labor services) on the market, but without prohibiting them from outbidding it.

Classical liberals and many more radical libertarians share a common ideal: the presumption of liberty, which can only be overcome when restrictions are necessary to protect liberty itself, or something to that effect. In a major crisis (and Covid-19 is probably one), such restrictions may be warranted if they don’t seriously undermine liberty—for now or for the future. This being said, there is room for disagreement in the liberal-libertarian tent. (In a Café Hayek post of yesterday, Don Boudreaux articulates a libertarian position on the conditions of the presumption of liberty.)

Everybody in the tent must wish that economic freedom and free enterprise will not continue to be so tightly shackled in 2021.


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What is Really New in Fintech

By Arnoud Boot, Peter Hoffmann, Luc Laeven, Lev Ratnovski The financial industry is undergoing rapid technological change. Traditional banks face competition from online start-ups with no physical branches. Social media and other digital platforms are expanding into payments and credit. The increase in demand for digital services triggered by COVID-19 is turbo-charging this transformation. The […]

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Glaciers of Global Finance: The Currency Composition of Central Banks’ Reserve Holdings

By Alina Iancu, Neil Meads, Martin Mühleisen, Yiqun Wu The currencies that are being held by central banks as foreign exchange reserves have remained largely steady over decades. Changes in the composition of these holdings can, at best, be described as glacial in pace. But geopolitical shifts and technological revolutions are reshaping the global economy […]

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The Populists and Napoléon

One of the many fascinating observations in Charles Postel’s The Populist Vision (Oxford University Press, 2007, p. 164) is the sweet spot that American populists of the late 19th century generally had for emperor Napoléon Bonaparte, the French dictator at the beginning of the century:

In the 1890s, a Napoleon revival spread in the United States, as many Americans hoped for a strong man to deliver the nation from its multiple ills. Reporting on the so-called “Napoleon craze,” Century magazine reported that “the interest in Napoleon has recently had a revival that is phenomenal in its extent and intensity.” Muckraking journalist Ida M. Tarbell and Princeton Professor William Milligan Sloane contributed serialized Napoleon biographies in the Century and McClure’s Magazine. Politicians preened themselves in Napoleon’s image. Harper’s Weekly reported that then Ohio governor William McKinley, known as “the Napoleon of Protection,” also “looks like Napoleon and knows it.” The fascination with the French emperor corresponded to a broad discontent with corrupt and impotent political institutions, as well as strong currents of militarism and nationalism in American public life. The Populists were not immune to these currents. Tom Watson [a politician and writer of the times] and the Populists, however, were drawn less to military valor and patriotic glory than to the example of Napoleon’s administrative systems and energized state power. … In Watson’s treatment, Napoleon towers as “the peerless developer, organizer, [and] administrator,” who had applied the science of government to build a centralized and rational system of law and education, the Bank of France, and a strong state. … The general, Watson noted, was a “master builder” with “modern tone.”

Contrary to today’s populists in America and in other countries, the American populists of the late 19th century believed in science and experts as Enlightenment people did in the previous century. Yet, both kinds of populism–the old one and the new one–are similar in favoring state intervention. In the old American populism, authoritarian experts and science represented rationality, hence the reverence for Napoleon; today’s populists prefer authoritarian politicians and their intuitions.

Library of Congress, http://loc.gov/pictures/resource/cph.3a14529/

In its military version, the American infatuation with Napoleon appears to go back at least to the Civil War as illustrated above by the picture of General George B. McClellan in a typical Napoleonic pose. The Library of Congress says that McClellan was popularly known as the “little Napoleon.” General Ulysses S. Grant stroke the same pose. Craig Walenta, a frequent commenter on this blog, brought these pictures and others to my attention.

A Napoleonic infatuation is not surprising. Since the “will of the people” does not exist and is unknowable, populists have to find a dear leader to incarnate it. (See “What Is Populism? The People V. the People,” Econlog, September 11, 2020.)


PS: I owe the Postel book reference to Jeff Hummel who, besides being a scholarly economist, is a walking encyclopedia on American history.


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Together Again: Physical Distancing on the Decline

Era Dabla-Norris, Frederico Lima, and Hibah Khan Earlier this year, stringent lockdowns and uncertainty about the severity and transmission of COVID-19 led to the widespread adoption of physical distancing measures across the world. However, as COVID-19 outbreaks began to ebb and lockdowns eased over the summer, measures tracking mobility, such as Google Community Mobility Reports, […]

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Why Shortages Are Not More Widespread

Many grocery items are still in shortage in the sense that they are absent from the shelves even if some buyers would be willing to pay more to have them available. The Wall Street Journal asked the question last week, “Why Are Some Groceries Still So Hard to Find During Covid?” The newspaper’s big-data analysis concludes that at least half the grocery shortages persist:

During the peak shopping spree at the end of March, stores ran out of 13% of their items on average. Now, roughly 10% of items remain out of stock, compared with a normal range of 5% to 7% before the pandemic.

The WSJ story does not explain why that happens. It also happens in many other sectors of the economy. A few days ago, for example, the same newspaper had a story titled, “Why Is It Hard to Get a Rapid Covid-19 Test? The Machines Are in Short Supply” (August 12).

Economic analysis can help. “Shopping spree” is less than half the answer.

The main reason, of course, is that, under the so-called “price gouging” laws that exist in the majority of American states, price controls kicked in when states of emergency were declared. They were reinforced by the invocation of the federal Defense Production Act. The price caps had the effect of both increasing quantity demanded (why not hoard paper toilet if it remains cheap and people can panic?) and discouraging domestic suppliers from increasing quantity supplied (which is subject to increasing marginal cost). The result was shortages, a situation where goods are cheap but unavailable or available only at the end of a queue—weeks or months of waiting in this case. (I wrote a number of Econlog posts on this; my last one was “Good Government Greed, Bad Economic Freedom.”)

News media (and even many economists!) ignore supply and demand when they are blinded by sudden emergencies or by their redistribution values. In reality, emergency is a constant feature of consumer demand and it is by using price signals that the market satisfies demand without shortages. Of course, very short and localized “shortages” happen all the time—until the supply truck comes back to the grocery store, as suggested by the 5%-7% normally missing items on the shelves of a given grocery store at any point of time. There are random variations around just-in-time deliveries. (The 5-7% estimate still seems a bit high to me compared to the free market as we have experienced it in normal times.)

The shortages continue because, in most states, emergency declarations seem to have been extended and the federal Defense Production Act (which controls the prices of medical supplies and PPE) remains in force. One must look at prices, which would normally clear the market without authoritarian interference. If prices are prevented from clearing the market, waiting lines appear. It took four months to receive the freezer you ordered in March for roughly the same reason that it took 8 to 12 years in the former Soviet Union to receive a car: price signals were dampened or silenced.

A joke attributed to Donald Reagan went as follows:

In the Soviet Union, there is a ten year wait to buy a car. So a buyer comes, pays a deposit and then the fellow who is in charge tells him: “OK, come back in ten years to get your car.”

“Morning or afternoon?”

“Ten years from now—what difference does it make?”

“Well, the plumber is coming in the morning.”

We are not there yet. Still, what’s surprising is not that shortages are still around but that that they are not more widespread given the legal risk in letting prices clear the market. One reason is that prices have increased, if only stealthily. Price-gouging laws often allow for unequal and arbitrary enforcement by using vague words such as “excessive” or “unconscionable” prices. These laws may allow price increases if upstream costs have increased. Many items in the consumer price index did increase between March and June: the price of food at home increase 4.3%, which incorporates price increases of 10.3% for meats, poultry, fish, and eggs, within which beef and veal increased 20.4%. (Slight decreases in July made a dent in the upward trend.) Farmers seem to be more immune to the heavy and arbitrary hand of the state.

Suppliers tried and still try, unconsciously or not, to hide the price increases that allow them to continue satisfying consumer demand. Many tricks are available up to a point, a point at which shortages begin. For example, retailers eliminate or reduce promotions (“two for the price of one”). They sell products in larger containers, toilet paper in larger rolls, or ammo in 500-round orders instead of 50-round boxes. They stock only their most profitable items, clearing shelf space of the others. As time passes, reductions in quality become another possibility.

The reduction in the diversity of consumer offerings is another way to reduce suppliers’ marginal cost, compensating partly for capped prices. The non-compensated part is the remaining shortage. Moreover, consumers who would be willing to pay more for a slightly different product and don’t get it are victims of an invisible shortage. This reduction in diversity was noticed in a previous Wall Street Journal story, “Why the American Consumer Has Fewer Choices—Maybe for Good” (June 27, 2020). As of June, the typical IGA store carried only 4 varieties of toilet paper instead of 40 in pre-pandemic (that is, pre-price-control) times. Harley Davidson cut some models from its list. Smucker paused production of reduced-sugar Uncrustables. The average number of different items sold in grocery stores was down 7.3%.

Microeconomic theory shows that as time passes enough for plant or store size to increase, marginal cost will decrease by switching to the long-run supply curve. This has the potential to partly alleviate the shortage—and of course totally solve it if prices are liberated. What will happen in the long run thus depends on the extent to which governments will continue to interfere with prices. Disguising the problem by replacing price analysis by supply-chains talk is a dead-end street.

Perhaps even more worrying is the question of the extent to which formal price controls are reinforced by the cries against “price gouging” that rise from the populace. Large companies are the most vulnerable as they would probably be crucified on the public place, besides being liable to prosecution, if they were seen as trying to “profit from an emergency”—even if, by not profiting from the emergency, they make it worse. To which extent the main impetus comes from Leviathan or from a socialist-minded populace or from straight ignorance is an important question to understand how state power grows.


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