What can COVID-19 teach us about economics? My long-read Q&A with Ryan Bourne | American Enterprise Institute


By James Pethokoukis and Ryan Bourne

The COVID pandemic has taught us a lot about public health, but there have also been plenty of lessons about economics. After all, economics is the study of maximizing well-being in the face of trade-offs. So economists had much to contribute to debates about lockdowns, global trade, and FDA regulations. And now, by thinking critically about the past 18 months, the rest of us can learn a lot about the discipline of economics. That’s the argument made by Ryan Bourne in his new book, Economics in One Virus: An Introduction to Economic Reasoning through COVID-19, which we discussed in a recent podcast interview.

is the R. Evan Scharf Chair for the Public Understanding of Economics at the
Cato Institute. Previously, he was the head of public policy at the Institute
of Economic Affairs and the head of economic research at the Centre for Policy

What follows is a lightly edited transcript of our conversation, including brief portions that were cut from the original podcast. You can download the episode here, and don’t forget to subscribe to my podcast on Apple Podcasts or Stitcher. Tell your friends, leave a review.

Pethokoukis: This book is meant to introduce people to
economics by applying it to the pandemic. So for starters, what do you think
most people commonly misunderstand about economics?

Well, I think the big-picture mistake that people make — and this is not helped
by the way that economics is portrayed in the media — is that they think
economics is primarily about finance, or about just the macroeconomy (GDP
forecasts, unemployment trends, and the like).

reason I wrote this book, really, was just to exemplify the fact that
economics, at its most basic, is actually the evaluation and analysis of human
behavior in a world of constraints. And as a result of a pervasively disruptive
shock to the system like a pandemic, all of us — both at an individual level
and the level of governments — have been having to make a lot of new
consequential decisions about our lives.

those decisions are best understood through the framework of economics, which
provides a framework for thinking about the trade-offs of different decisions —
for thinking about the dynamic and static implications of different choices,
and thinking about how people’s behaviors change when a different policy is

started this book as just 10 essays, at a thousand words each. But as the
pandemic went on, there were just more and more examples that I thought really
exemplified key economic lessons.

How do you think economists view the world versus, say,
epidemiologists? Who do you think did a better job of thinking about this
pandemic and the trade-offs?

think economists by and large have had a reasonably good pandemic. A lot of
economists who understood economic growth (and understood how quickly something
can spread when you have an exponential trend) were able to quickly recognize how
the static trade-offs a lot of people identify — between public health and
economic activity measured by GDP market activity — were not the key things to

think where good economists have probably done better than certain
epidemiologists is in their tendency to think on the margin. They tend to think
of the additional impact of any given decision, as opposed to just the average
impact of a whole bundle of things applied together. So a good economist would
look at something like a lockdown, for example, as a bundle of different
implicit and explicit regulations, and they would try to think about which ones
brought benefits that exceeded costs — and which ones brought costs exceeding
benefits — as a means of trying to refine those lockdowns into something that’s
better for society overall.

Stretches of Manhattans Fifth Avenue remains empty with only taxis, food delivery bikers and occasional vehicles during Covid-19 on Wednesday, April 8, 2020 in New York, NY. Via REUTERS/Jonas Gustavsson/Sipa USA

think epidemiologists are obviously very learned in their approach to modeling
and thinking about disease transmission. But when it comes to the application
of policy, they tend to think much more crudely about bundles of interventions —
stay at home orders, non-essential business closures, and the like — and they
miss that refined analysis that you get from thinking on the margin.

I think one criticism aimed at economics during the
pandemic — especially when people were really worried about shortages of
protective equipment — was to say, “Ah, look what the economists and their
great love of globalization have given us! We can’t make anything in this
country, so now we have to wait for other countries to make our masks, gloves,
and things like that. Thanks a lot, economists.”

And the other criticism was, as you said earlier,
“You guys just care about GDP growth. We need to turn this economy off,
and you guys just keep telling us about trade-offs. You don’t value human

I think both criticisms are misguided. On the first aspect, of course, the
prosperity that comes about from trade, efficiency, and specialization has
facilitated huge relief efforts throughout this pandemic. We’re a lot wealthier
than we otherwise would be, and so you’re able to do more in the way of relief.
And of course, the technologies that have resulted from having an innovative,
dynamic economy have made this past year much more bearable.

difficulty when you think about any trade-off between efficiency and
“resilience” — as a lot of people are framing it — is that it’s very
easy to retrospectively think, “We’d have been much more resilient to this
particular shock if we’d had a whole host of domestic production of certain
medicines, face masks, ventilators, and the like.” The problem is that
catastrophes like this are extremely uncertain in the form that they’re going
to take. They don’t come around particularly often. And when they do, the
contours of them are often very different.

we really knew what the next crisis was going to look like, it might actually
just be cheaper to massively stockpile goods — to take out options and pay
companies to set aside some spare capacity in case we need it in the future — rather
than repatriating a whole bunch of manufacturing capacity. Or, indeed, it could
be better to broaden our free trade horizons with more trade deals to try and
diversify the potential supply of products.

course, the big problem is we don’t know what the next crisis is going to be
and how it’s going to hit. And as a result, if you take this resilience
argument to its logical conclusions, one would have to invest in a whole host
of different capacities to cover every eventuality. That would be extremely
costly. Not just costly in terms of the government-spending implications, but
costly in terms of undermining economic efficiency. So I just don’t accept
their first point — that there’s as clear of a trade-off as those people imply.

the second point, about GDP: I think some economists do fall into the trap of
talking about measured market activity, as if that’s the sum of human welfare.
And clearly in this pandemic, that would lead you to extremely faulty
conclusions. When this crisis hit, all of us reassessed our lives and the
choices that we make day-to-day, including how often we’d see family members
and how we’d go about working in consultation with the businesses or
organizations we work for. And clearly we did that because we thought, in the
context of the pandemic, our welfare was actually enhanced by deciding to dramatically
change our lifestyles.

you just looked at GDP alone, you might have presumed that these things were
dreadful decisions to have made, because we’ve become poorer as a society. But
we made those decisions in the knowledge that the virus was out there. And as a
result, you have to think very carefully about the distinction between GDP —
which over the long term tends to proxy reasonably well for welfare — and our
welfare in this very specific, difficult, and unusual circumstance.

For this resilience-versus-efficiency argument, I don’t
understand why it was a failure of economics and globalization that we didn’t
have enough N95 masks to send a box of them to every American. There have been
countless studies in the 2000s about the risk of some dangerous airborne virus.
I don’t see why this isn’t a real failure of government for not stockpiling an
endless mountain of N95 masks in preparation for a problem. Certainly,
government can’t prepare for all problems — they can’t prepare for the
“unknown unknowns” — but this is something they could’ve done a
better job preparing for.

infectious disease control is supposed to be a core function of government. And
as you say, there have been a host of different failures during this pandemic
that have cost us in terms of lives, liberties, and lost economic activity.

think the political economy can actually explain a lot here. For politicians,
just by virtue of trying to become elected, the electoral incentives point away
from preparing for low-risk — or low-probability, high-risk — events. Quite
often, if you engage in preparation for a pandemic, electors don’t observe it.
Even if the pandemic does hit and the country rides it out relatively well, quite
often a previous politician who might have made the investment 20 years ago
wouldn’t get the credit they deserved. So all of the electoral incentives push
away from preparing for these types of events, as opposed to the alternative:
spending on day-to-day government programs and on transfers.

of course, even when this pandemic did hit, rather than allowing markets to
quickly adjust to providing face masks for all of us, politicians and public
health officials did two things. First of all, a lot of them triggered
anti-price-gouging regulations, which in effect cap prices in many areas and
deter a supply response. Because it’s less profitable for any given company to
provide face masks given the cap on prices, you get sustained shortages.

Via Twenty20

of course, some public health officials like Anthony Fauci went out of their
way and told us to refrain from going out and buying them — in part because
they believed that this thing didn’t transmit asymptomatically, but also
because they thought of markets in a very static sense and thought that us
demanding masks would use them up for healthcare workers.

of course, in a really static sense, me using a face mask today means it’s not
available for use within a healthcare or nursing home setting. But markets are
dynamic. They respond to changes in demand. And if we’d encouraged people to
wear masks sooner, we’d have seen other businesses repurposing their factories
and manufacturing plants to try and meet that demand.

political economy provides a much better, more robust explanation for why
politicians underprepare for things like this. But even when crises do hit,
politicians tend to do things fairly often that deter that within-market
response that we see from entrepreneurs and businesses.

Do you think we know yet whether the lockdowns, given the
health benefits versus the economic costs, were the right thing to do? Do we
have a good handle on that yet?

the literature, my working assumption at the moment is that lockdowns, on the
margin, have both public health benefits and economic costs. But I think that
they’re overrated, both in terms of the costs by their critics and the benefits
by their proponents.

really difficult thing here is that, in order to assess whether lockdowns were
actually worth it, you have to define a counterfactual. And if you look around
the world, even in countries where they didn’t lock down, they’ve tended to
still experience waves of the virus, which suggests that when the virus becomes
highly prevalent, people’s behavior changes pretty dramatically. And as a
result, you see infections — and then deaths — falling, so they don’t reach
herd immunity in one swoop. So in assessing how lockdowns actually operated,
you have to compare it to what you’d have expected to happen if the lockdown
wasn’t there. The problem is that there’s a relationship between the two, of
course. If you do start locking down, then people might expect that, in the
future, whenever things get pretty bad, you would lock down again. And the
absence of any future lockdown might make them overly confident in going about
their business. So first of all, defining the counterfactual is really hard.

in assessing these policies, I think too few people have looked at — or try to
measure the costs associated with — the restrictions of liberties that perhaps
don’t show in GDP. If you miss your grandparents’ funeral as a result of some
regulatory restriction, that wouldn’t show up in GDP. But obviously, it has a
huge welfare cost to you as an individual. I haven’t seen any comprehensive
assessments yet that take this more holistic look at the impacts of lockdowns.

instinct is that they, on the margin, do have both additional costs and
benefits compared to what we would have seen had they not happened. And I also
think, in certain countries at certain times, they were clearly appropriate. In
December in the UK, for example, this variant was just completely out of
control and seemed robust to the near-lockdown measures that were in place
already. So they had to really tighten what they were doing.

other times though, I’ve perceived lockdowns as a sign of failure. Through the
summer months last year, we didn’t use the relative lull in most of the country
to actually institute policies and frameworks — such as rapid testing and
contact tracing — that could have enabled us to try and mitigate this at a much
lower economic cost than the lockdowns entail.

I suppose you could have almost written a book titled
“Economics in One Vaccine” on just the process of getting a vaccine
out, which seemed to arrive a lot faster than many of us expected. What did we
learn from this success?

Well, I did think it was a big success. But I’ve just read Neil Ferguson’s book, Doom, and I was completely unaware of the fact that we actually got a vaccine for the 1957 flu much quicker than we did at this time (though it was much lower efficacy).

I think it is a triumph, given the regulatory environment these days and how
long comparable vaccines have taken in the past. Clearly in this instance,
politicians and the FDA’s hands were forced by the fact that this pandemic was
extremely costly — not just in terms of the lost GDP and the value of lost
lives, but in the value of people’s lost liberties. I remember Trump’s Council
of Economic Advisors calculating at one time that — just looking at the GDP
costs and the losses of life — it was probably $15-20 billion per week this
pandemic was costing. Clearly, anything that on the margin could have brought
forward the end of this pandemic was going to have big economic benefits
(relative to the costs of any advanced manufacturing orders) and was well worth

I think on the margin, things like Operation Warp Speed, clearly did speed this up by covering some of the firms from the manufacturing risks that they faced with a major project like this. Having said that, I think it’s clear in retrospect that there are probably things we could have done to speed this up even more. Human challenge trials — I know Alex Tabarrok has written about these extensively — seem to me to be a relative no-brainer.

What are those?

challenge trials are where you run a vaccine trial by, in effect, deliberately
infecting young and healthy volunteers in return for payments. They agreed to
take part in a trial, they receive a reward for doing so, and you, in essence,
run a vaccine trial with your control and treatment groups extremely quickly,
because you’re assessing these people under controlled conditions in some
medical facility. And if we’d have done that, I think we could have advanced
this by a month or a couple of months. And given the huge economic costs of
this ongoing pandemic, if you could accelerate this by even a couple of months,
that brings with it huge economic welfare gains.

I think my glass is half full on this. Clearly, it is a relative triumph.
Having said that, I think when the retrospectives are written, we’ll realize
there probably are things that we could have done to further speed things up —
not just on the vaccine trials side, but also in terms of using various
economic incentives to try and speed up the manufacturing and rollout process.

Do you think what happened was that our regulatory
agencies worked the way they were supposed to work? Or did the regulatory agencies
realize that doing what it said in the book wasn’t going to work, and they
adapted somehow?

think in certain scenarios, the FDA has adapted to this pandemic. But in other
ways, of course it hasn’t. The frameworks in place for rapid testing, for
example, held things up for a few months, because they were still judging tests
according to ordinary medical diagnostic criteria, rather than seeing these
tests as the thing that people could use at home to try and mitigate the risk
of taking the virus to work.

really depends on the issue that you’re looking at. I don’t think we saw a
pervasive change in attitude among the FDA as an institution. But clearly with
the lead from the federal government, in terms of Operation Warp Speed, people
realized pretty early on that suppressing this was going to be incredibly
difficult in a country like the US. And so the focus all became on producing
the vaccine, and thank goodness it did.

Food and Drug Administration headquarters, in Silver Spring, Maryland. Via REUTERS

It seems to me in these kinds of situations that
economists will think hard about trade-offs and incentives, and they’ll come up
with ideas — like paying people to get vaccinated, or holding a lottery for
those who get vaccinated — to encourage people through incentives. And it
almost seems like there are critics who just don’t like the idea of that. They
don’t naturally gravitate toward those sorts of solutions, which seem to be
fairly straightforward. The solutions seem like basic economics, but they don’t
tend to be embraced as readily as one might think. Is that your perception?

think certain people, particularly in times of crisis, think the use of
financial incentives shouldn’t be necessary, and everybody should just do the
right thing anyway.

Why should a pharmaceutical company make any money? Why
aren’t they just giving this whole thing away?

It’s that type of instinct that ultimately means we don’t tend to experiment as
much as we probably should with these types of policies in extreme scenarios.

we have to think about the marginal impact here. For a lot of people, myself
included, I got the vaccine fairly early on, because I recognized that even
though my own death risk from this is relatively low, I might need it for
engaging in certain activities later on in the year. But I also did want to
mitigate the risk of me spreading the virus to other people. And I suspect the
overwhelming majority of people who have obtained their vaccine shots did so
with that in mind. So what you’re trying to do with the incentives is to flip
the people who are on the margins of those decisions.

Indeed, as we know from your colleague, Scott Gottlieb, one of the rationales for removing face mask mandates — and advising people that face masks won’t be necessary once you’ve got the vaccine — is that one would expect that people who really don’t like wearing face masks quite often tend to be the same sorts of people reluctant to get the vaccines. So within that change of guidance, you’re providing an implicit incentive for them. They’ll get something out of obtaining their dose: more freedom, in terms of the ability to smile at strangers and breathe fresh, clean air. These incentives do work on the margin. It’s well-trialed; I looked into this for an op-ed that I was writing, and there’s a whole host of different things — such as giving gift cards — that are trialed around the world to encourage take-up of flu vaccines and various medical tests. And for almost all of them, they differ in magnitude, but the direction is what one would expect given the financial incentive at play.

And I suppose the people who don’t like the idea that
there are for-profit health care companies — whether it’s the hospitals or, in
this case, pharmaceutical companies — just think these companies should be a
public service, should have just launched this costly effort and made no money.

think that some people think, “Pharmaceutical companies make tons of
profits off of medical devices and drugs ordinarily, so this is their
opportunity to pay back society for the extortion of profits the rest of the
time.” Of course, the opposite is the case. It’s the fact that we have a
system which incentivizes these companies to obtain profit that has left a lot
of them with the capital on hand to make these incredibly risky investments in
projects that have absolutely no guarantee of succeeding.

it’s worth remembering that Pfizer didn’t take any Operation Warp Speed R&D
money. They funded this themselves. According to them, they didn’t want to be
burdened down with the regulatory bureaucracy that came with the strings
attached to the Warp Speed funding. And as a result — or maybe just
coincidentally, but I would argue it probably mattered on the margins — they
were the first successful, high-efficacy vaccine to rolled out in the world.

think there’s a lesson there: We can lament capitalism and flows of capital
across the world, but when push came to shove and there was a real societal
need, a lot of the major pharmaceutical companies stepped forward. Remember: In
a free market economy, obtaining a profit is a reflection of fulfilling a want
or a need in a society in a cost-efficient way.

In the end, what do you think will be the takeaways of
most people from the pandemic?

I would like them to take away is that it’s pretty great to have a
well-functioning market economy that generates lots of innovation and growth,
because a dynamic economy can adjust to changing circumstances.

Do you think that’s what people will take out of this?

hope so, but I’m not sure that they will. Already, we’re getting stories about
whether better performances — in terms of deaths — in East Asian countries
shows that we have tons to learn from them. My own take on that is that a lot
of those countries had experienced pandemic threats relatively recently in the
form of SARS and MERS, so they were just much more alert as a result. South
Korea, for example, experienced a MERS threat in 2015. The government had a
hell of a lot of criticism as a result of its handling of that crisis, and so
they were quite quickly ready with things like contact tracing and the rapid
rollout of testing.

I think there’s a broader positive lesson for those of us that are of a
pro-innovation, free-market bent. Even though there have been a hell of a lot
of political mistakes and bungling through the last 14 months that have made
life much worse than it needed to be, two big things stand out to me.

first is the fact that, as a result of our dynamic, innovative economy, we have
been able to ride this out much more easily than we would have if this had hit,
say, 20-30 years ago. And that’s a reflection of both the technologies that
have been produced in this dynamic economy and the wealth that we have, in
terms of being able to provide relief to people who needed it. The second is
that those same creative tendencies have actually helped us in producing the
high-efficacy vaccines that will enable the end of this pandemic.

And so while certain people can look at coercive societies’ ability to enforce lockdowns in the interim, when you look at the bigger picture, the story is that our increasing wealth and prosperity have actually made us more resilient as a society — in terms of living with a shock like this — and those same creative tendencies are ultimately what got us out of it.

My guest today has been Ryan Bourne. Ryan, thanks for
coming on the podcast.

Thanks a lot.

James Pethokoukis is the Dewitt Wallace Fellow at the American Enterprise Institute, where he writes and edits the AEIdeas blog and hosts a weekly podcast, “Political Economy with James Pethokoukis.” Ryan Bourne is the R. Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute.

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