I have a confession to make. The events of the past few weeks surrounding COVID-19 have really frustrated me.
I’m not the only one. The politicians and media are frustrated that people aren’t following the guidelines or taking this pandemic seriously. Those who have lost their jobs are frustrated that the government isn’t doing more to help them. My frustration is over the troubling level of economic ignorance being displayed by politicians and citizens alike. In fact, I think this crisis was largely preventable had it not been for this ignorance.
We are told that the problem we are facing is a deadly virus that will be difficult to contain. But the more pressing concern is that this pandemic will likely be far worse than it could have been due to shortages of testing kits, protective equipment, ventilators and hospital beds. What’s regrettable is that these shortages are easily avoidable, and only persist as a direct result of poor government policies. And although these policies span over multiple jurisdictions, their common feature is that they all betray an ignorance of basic economics. A few particularly egregious examples should help to illustrate this point.
1. Price Gouging Laws
In the face of rising demand many people denounce price gouging because they see it as a merciless exploitation of desperate consumers. But when we consider the economic principles involved, we realize that higher prices are actually beneficial because they conserve resources and encourage production. Unfortunately many politicians seem to lack this understanding, so they impose price ceilings that cause shortages of everything from toilet paper to medical supplies. These shortages could be largely mitigated, but only if we first overcome our shortage of economic literacy.
To illustrate the subjectivity of these laws, consider that it is standard practice in many industries to pay employees up to double their hourly wage whenever they work overtime. Employees eagerly expect the extra money and gladly take advantage of their employer when their services are in high demand. In this context most people acknowledge that when demand for labor increases it makes sense for the price to increase, even by a significant margin. You could say the workers are “exploiting” their employer’s desperation for staff, but really they are just offering their services at the new market price. Likewise, higher prices for any product are just the natural result of an increase in demand or decrease in supply. Price gouging might be more sudden, but that doesn’t make it any less legitimate.
2. Excessive FDA Regulations
Although many regulations are made with good intentions, they often make things worse. The stated purpose may be to improve the quality of the product, but the result is that products become significantly more expensive and take far longer to produce than they would in a free market. Furthermore, products that would be on the margin without the regulations are now impossible to produce profitably, so there will inevitably be less production and more scarcity.
FDA red tape in particular has crippled the market’s efforts to respond to this pandemic. These regulations have hindered the production and distribution of thousands of ventilators, masks and testing kits, while other regulations have restricted the availability of hospital beds. Some of these regulations have even been waived to expedite the development of these products, raising long overdue questions as to whether they were really needed in the first place.
The market is fully capable of responding to this crisis if only the government would let it. But until that happens people could very well die from a shortage of medical supplies, not because they couldn’t be produced, but simply because they weren’t approved. If we want to avoid this we need to understand that bureaucracy is more than a mere annoyance. And we need to vociferously oppose regulations knowing that lives are on the line.
Protectionist policies seem to be especially popular during desperate times. Usually these policies are about protecting domestic producers by restricting imports, but recently we’ve also seen attempts to limit exports as governments scramble to keep medical supplies within their own borders.
A lot of people seem drawn to the idea that their nation should be self-sufficient. There’s this pervasive notion that “we” need to protect “our people” and rely on “our own” suppliers. But I would say it’s lamentable that such tribalism still plagues economic considerations. Nationalism may be alluring, but it displays a worrisome ignorance of the division of labor and gives rise to an ill-informed rejection of free trade.
A proper understanding of economics informs us that free trade is a key driver of efficiency, since it encourages individuals and businesses (not nations) to produce goods and services according to their comparative advantage. Thus, when trade is restricted by protectionist policies, consumers ultimately bear the cost of the resulting inefficiency.
We live in a time when international free trade has never been more important. The global division of labor is essential for our way of being and you can’t just ignore it away. Governments may try to produce most of their supplies domestically but it will be drastically less efficient (and thus slower and more expensive) than if they allowed individuals to trade freely in an open market.
The Root of the Problem
In the coming months thousands of deaths will be blamed on COVID-19, but the virus will only be the proximate cause. The root cause will likely be the shortages and inefficiencies that are created by poor policies, which in turn stem from the ineptitude of the politicians and the economic illiteracy of the average citizen. Ultimately, it is ignorance that will be responsible for these deaths.
So while a vaccine for the virus would be great, what we really need is a cure for our ignorance. But that kind of cure can’t be developed in labs and offices by researchers and scientists. It must be produced by writers and teachers.
Because if ignorance is the disease then education is the cure.