Category: Government

Conflicts of interest in government

I want my government to be run as efficiently as possible for the benefit of all of us. Appointing people to run it with experience in what they oversee contributes to that objective. Conflicts of interest–serving the interests of friends and former associates rather than the interests of the general public –detract from that objective. Hiring bankers to supervise banks, for example, draws on those most knowledgeable about the banking risks needing supervision, but they are also the most vulnerable to conflicts of interest. What should we do about this dilemma?

President elect Joe Biden’s choice to run his Office of Management and Budget: “’Neera Tanden has spent the last decade raising money from the top companies and highest-net-worth individuals in the country, which is a bit at odds with what Biden pitched during the campaign,’ said Matt Bruenig, president of the People’s Policy Project, a left-wing think tank that accepts only small donations.”  On the other hand, “Tanden’s experience leading CAP, which publishes policy recommendations for many domestic and foreign issues, has given her the policy chops needed to lead OMB, Ettlinger said.” Michael Ettlinger, is director of the University of New Hampshire’s Carsey School of Public Policy and a former vice president for economic policy at CAP.  “Neera Tanden-Biden-OMB-CAP”

The authors of the above Washington Post article note with alarm that CAP (Center for American Progress) has received contributions from the likes of Facebook, Bain Capital, Blackstone, Evercore, Walmart, CareFirst BlueCross BlueShield, defense contractor Northrop Grumman and for-profit college operator DeVry Education Group. Though I have not checked, I would not be surprised to find the same author’s urging such companies to shift from seeking shareholder value to stakeholder value by making just such contributions.

How can we maximize the benefits while minimizing the risks of appointing experienced people to positions in government? Our constitution provides one element of a resolution of this conflict by dividing the legislative function from the administrative function between Congress and the White House.  The administration’s regulators are implementing the laws passed by Congress, which provides some checks and balances. Nonetheless, the programs and financing approved by Congress can potentially benefit the friends of congressmen and women. Boeing moved its headquarters from Seattle to Chicago and disbursed its manufacturing facilities from the Seattle area to as many congressional districts as possible to increase congressional votes for its projects not because of economic factors.

Another element of protection is the adherence to transparent bidding and contracting standards when awarding government business to private firms. When designing the taxes to finance government, economist push the principle of economic neutrality (not favoring one market activity over another). Though the tax reforms of 2017 (the so-called Tax Cuts and Jobs Act of 2017) made our income taxes more neutral, many special subsidies remain in our tax laws and the special interests that benefit lobby hard to keep them. “Next up-tax-reform”  “Tax reform and the press”

But regulation potentially offers the most corruptive powers of government to deliver favors to the private sector. We benefit from regulations that help keep products and working conditions safe. But it is easy for regulations to slide into protecting incumbents from competition from challengers. This is a pronounced feature of professional licensing. “Cato: Professional Licensure and Quality”

In short, keeping government activities in the service of the public interest is challenging and requires constant vigilance. By far the most effective approach is to tightly limit government involvement in the economy to the minimum truly necessary for a well-functioning free society. Hire people with the experience to know what they are doing and to do it efficiently but limit the government’s role in the economy to what only government can effectively do.  In establishing the legal and regulatory foundation for private economic activity, limit it to the essentials–the foundation–so that the superstructure can be competitively built by innovative private individuals.

Our national defense is clearly a necessary government responsibility. Thus the “military/industrial complex” is and will remain a problem. The incentives for this industry are particularly dangerous because these firms benefit from the wars we have been fighting all over the place.  It is rather like keeping off those extra pounds that those of us who enjoy good food must struggle with eternally. It is a never ending battle, but losing it would be the death of us.

The Thanksgiving Revolt

Sadly, Thanksgiving and healthcare more generally has been politicized (or “weaponized” as I said in a report to the UNDP with regard to the monetary system in Yemen–my advice was that nothing as important as the monetary system should be weaponized). Why are normally sensible (I am being generous on this day of giving thanks) people behaving like rebellious teenagers? Among other reasons, I think, it is in part because they are being treated like children. We can demand that our children do this or that (at least when we don’t have the time or patience to explain why they should do this or that as part of preparing them to become adults).

Mature, independent minded adults (i.e., typical Americans) bristle when told that they must stay home, or cancel Thanksgiving dinner and other social activities, even when they suspect that it is the prudent thing to do. Our government should not be dictating our behavior in a free society. There are exceptions, of course, for the protection of the rest of us. We are (or should be) free to do what we like as long as we do not infringe on the right and ability of others to do the same. For example, we don’t permit people infected with communicable diseases to wander around in public endangering the rest of us–quarantining those with active cases of Covid-19 is properly required.

We each have our own assessment of the risks of infection and our own willingness to take risks.  We should be free to make our own decisions about what to do (as long as we are not endangering others–yes you should wear a face mask if you go out).

What should the government’s role be? The government should provide the best information available on what those risks are and how best to mitigate them. Not everyone agrees on what the data says.  Where that is the case, the government (CDC basically) should be honest about the disagreement and the basis of the government’s consensus judgement. This is a constructive, helpful role and a proper way of dealing with adults. Somehow too many political types have acquired the tone of voice with which one might speak to children. And if that weren’t bad enough the government provides conflicting information. Fortunately, our stable genius is no longer listened to and his quack remedies will fade from our memories.

We need an honest and less intrusive government that advises rather than dictates. We need fellow citizens who civilly share their views with us while respecting, even if not necessarily agreeing with, ours. We have a long way to go but let’s rally and raise above the muck we are in.  Oh yes, and happy Thanksgiving.

Thanksgiving Proclamation, 3 October 1789

Thanksgiving Proclamation

[New York, 3 October 1789]

By the President of the United States of America. a Proclamation.

Whereas it is the duty of all Nations to acknowledge the providence of Almighty God, to obey his will, to be grateful for his benefits, and humbly to implore his protection and favor—and whereas both Houses of Congress have by their joint Committee requested me “to recommend to the People of the United States a day of public thanksgiving and prayer to be observed by acknowledging with grateful hearts the many signal favors of Almighty God especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness.”

Now therefore I do recommend and assign Thursday the 26th day of November next to be devoted by the People of these States to the service of that great and glorious Being, who is the beneficent Author of all the good that was, that is, or that will be—That we may then all unite in rendering unto him our sincere and humble thanks—for his kind care and protection of the People of this Country previous to their becoming a Nation—for the signal and manifold mercies, and the favorable interpositions of his Providence which we experienced in the course and conclusion of the late war—for the great degree of tranquillity, union, and plenty, which we have since enjoyed—for the peaceable and rational manner, in which we have been enabled to establish constitutions of government for our safety and happiness, and particularly the national One now lately instituted—for the civil and religious liberty with which we are blessed; and the means we have of acquiring and diffusing useful knowledge; and in general for all the great and various favors which he hath been pleased to confer upon us.

and also that we may then unite in most humbly offering our prayers and supplications to the great Lord and Ruler of Nations and beseech him to pardon our national and other transgressions—to enable us all, whether in public or private stations, to perform our several and relative duties properly and punctually—to render our national government a blessing to all the people, by constantly being a Government of wise, just, and constitutional laws, discreetly and faithfully executed and obeyed—to protect and guide all Sovereigns and Nations (especially such as have shewn kindness unto us) and to bless them with good government, peace, and concord—To promote the knowledge and practice of true religion and virtue, and the encrease of science among them and us—and generally to grant unto all Mankind such a degree of temporal prosperity as he alone knows to be best.

Given under my hand at the City of New-York the third day of October in the year of our Lord 1789.

Go: Washington

Unions vs the Gig Economy

Americans largely support and benefit from a political/legal environment conducive to individual freedom and active entrepreneurship.  However, within that broad consensus, views vary over how large and prescriptive the role of government and mandatory bodies should be.  Should only doctors, lawyers, plumbers and hairdressers licensed by the state be allowed to provide their services?  Few things capture this difference more clearly and dramatically than whether cab drivers must be employees of the cab company or can work as little or as much as they chose as independent contractors– company employees or gig workers (uber drivers).

Licensed professionals, like union members, can help promote and certify a minimum standard of training and confidence. But historically they have also sheltered their members from competition. Unions provide a number of services to their members, but their overriding purpose is to confront employers with a united front from workers on wages and working conditions. They understandably exist to serve the interests of their members.  While the commercial success of the companies’ union workers work for is also in the interest of these workers in the long run (if companies are not profitable they cannot provide jobs and/or good wages) it is more remote from workers’ immediate interests.

Gig workers are independent contractors who individually agree with an employer (such as Uber or Lyft) on wages, hours, and working conditions. In fact, Uber and Lyft drivers decide on their own, hour by hour whether and when to work. Their financial reward rests more directly on satisfying their customers.  The brand name Uber or Lyft must also insure a minimum standard of service to their riders (quality and cleanliness of the car and honesty and politeness of the driver, etc.). https://wcoats.blog/2014/12/18/free-markets-uber-alles/

The incentives confronting union workers and gig workers thus differ. Union works, in the first instance, by confronting their employers seeking better working conditions and pay (wages and benefits) while gig workers are competing with other drivers to please their customers. The results can be mixed but the difference between a ride with a yellow cab driver and a Lyft driver can be rather dramatic. I never had a yellow cab driver leap out of the spotlessly clean car to open my door saying: “I hope that you enjoyed your ride.” But while Uber and Lyft provide us with better and cheaper rides, they also provide drivers with more and better options of when and where they work.  Some want to work only a few extra hours after a regular job. Some choose to put in long hours when in need of extra money. Like most transactions in a free market both drivers and riders benefit–its win, win.

My experiences with unions have not been good. My father was a Shell Oil union member.  His union went on strike long ago when my mother was pregnant with my younger brother. After a few months on strike it was growing obvious (according to my father) that it would end soon in failure from the union perspective. The union bosses feared that my father and others would return to work before the union had formally given up. They came to our house and told my pregnant mother that it would be quite unhealthy for her if my father returned to work.

While a student at the U of C Berkeley I had taken jobs for three summers with Shell Oil, one of the perks they give their workers’ children. Two summers were roustabouting in the oil fields of Kern County, California with regular Shell employees who never spoke of labor relations with the company. Instead they talked about their families and non-work activities.  The middle of the three summers with Shell, I was assigned to the supply yard behind Shell’s Kern County headquarters. I assisted the one employee there who loaded pipes and other oil field equipment onto trucks that then delivered the equipment to the fields I had worked in the summer before. Much of the time the two of us just hung out there waiting for the next truck, very unlike digging ditches to repair leaking pipes as I had done the previous summer in 112-degree summer heat. We drove around in the small portable crane used for loading the trucks. The entire time my “companion,” an avid union member, complained about how Shell Oil was exploiting us. After a few weeks I dreaded having to be around him.

After my brother and sister and I were out of the house my mother went back to school, first to finish high school and then to college and a teaching degree. She became a highly successful grammar schoolteacher who specialized in taking on (and taming) problem students. She complained frequently at the attitude and self-protective behavior of the teachers’ union members that was far more interested in protecting mediocre teachers than in teaching students.  Michelle Rhee only turned around the education system in Washington DC when she was able to break the strangle hold of the teacher’s union.

More recently we have seen yet again the destructive role of police unions in protecting bad cops in connection with the death of George Floyd in Minneapolis. “Police-unions-minneapolis-kroll” Much has been written about how deals with police unions has thwarted needed reforms in policing. There seemed to be broad nonpartisan support for such reforms before the “defund the police” nonsense killed it.

But there is a surprising bit of good news from the election earlier this month beyond replacing Trump.  In California, for example, the state was attempting to apply a law regulating employment (AB-5) to contract Uber and Lyft drivers, demanding that they be treated as employees rather than contractors. This would have destroyed Uber and Lyft’s business models and was strongly opposed by them and their drivers. “California’s Public Utilities Commission said in an order Tuesday [June 9, 2020] that Uber and Lyft drivers are “presumed to be employees” under AB-5, the state’s new gig work law.” “Uber-Lyft-drivers-declared-employees-by-California-regulators”  California voters rejected this union effort to kill the market for gig drivers.

As The Wall Street Journal put it: “Democrats and unions in California are shell-shocked. Voters last Tuesday rejected a referendum that would have allowed racial preferences in state hiring and college admissions, defeated a massive business property tax hike, and rescued tens of thousands of gig economy jobs.” https://www.wsj.com/articles/californias-progressive-thumping-11605136309?st=ra1kvgf2okxr35j&reflink=article_email_share

The following description of Proposition 22 appeared on California ballets:

PROP 22

EXEMPTS APP-BASED TRANSPORTATION AND DELIVERY COMPANIES FROM PROVIDING EMPLOYEE BENEFITS TO CERTAIN DRIVERS. INITIATIVE STATUTE.

SUMMARY

Put on the Ballot by Petition Signatures

Classifies app-based drivers as “independent contractors,” instead of “employees,” and provides independent-contractor drivers other compensation, unless certain criteria are met. Fiscal Impact: Minor increase in state income taxes paid by rideshare and delivery company drivers and investors.

WHAT YOUR VOTE MEANS

YES A YES vote on this measure means: App-based rideshare and delivery companies could hire drivers as independent contractors. Drivers could decide when, where, and how much to work but would not get standard benefits and protections that businesses must provide employees. 

NO A NO vote on this measure means: App-based rideshare and delivery companies would have to hire drivers as employees if the courts say that a recent state law makes drivers employees. Drivers would have less choice about when, where, and how much to work but would get standard benefits and protections that businesses must provide employees.

Proposition 22 passed with a 58.6% majority in a state that rejected Donald Trump by a wide margin (64% for Biden and 34% for Trump). This result is consistent with what I hope is true, namely that a majority of voters voted against Trump rather than embracing the more government dominated management of our lives promoted by the “socialist” wing of the Democratic party. With the more skillful and predictable management of a Biden administration and a Republican controlled Senate to block any excessive expansions of government, we might be lucky enough to keep the good measures taken over the past four years (tax reform, reduction of excessive regulations, strengthening the courts, and no new wars) and get rid of the anti-market, protectionist, executive overreach, and internationally disruptive measures of an ineffective and dishonest bully.

Saving our free society

The vast majority of every new generation want to make society a better place. They support policies that they believe will contribute to making society fairer and “nicer.” As they age their altruism may tilt toward self-enrichment and self-protection at the expense of fairness (cronyism), but initially their motives are pure. The key issue is what policies they believe will help make society a better place. “The-search-of-purpose-nature-and-nurture-genes-and-culture”

We can be thankful that American voters in throwing out a dishonest, divisive, egomaniac didn’t endorse the socialist wing of the Democratic Party.  We seem to have moved back to the broad center.  “Dan Mitchell–a victory for Biden-a defeat for the left”  It is hard to know where to look for and find the truth today, and our society will suffer because of that.  But as we review and debate the policy proposals of a Biden administration, we must remember that we are all looking for the truth about what will make our society better (fairer, freer, and more virtuous).  We must listen to each other’s concerns and carefully evaluate each other’s proposals. But we have a duty to ourselves and our neighbors to study history for what has worked and what hasn’t and to do our best to understand why limited government and maximum reliance on our own decisions and the decisions of our neighbors is the best framework in which to help make society better.

The growing number of today’s youth who look favorably at socialism (whatever they understand that to be) is worrying because it reflects an incorrect assessment of what socialism has always delivered. To today’s youth: If you really care about making society better, take the time to study the history of socialism and learn why it failed and is bound to fail and why societies that are freer and law abiding are both more virtuous and more prosperous. “Socialism-as-seen-by-millennials”

Saving the American Dream

The American Dream is under attack.

“The American Dream is the belief that anyone, regardless of where they were born or what class they were born into, can attain their own version of success in a society where upward mobility is possible for everyone. The American Dream is achieved through sacrifice, risk-taking, and hard work….” “The American Dream is to succeed by work, rather than by birth”. The Dream has attracted the world’s best and brightest to our shores making America the world’s leading economic powerhouse and enabling us to live freely as we each determine what we are willing to work for, for ourselves and our families.

Historically, individuals have been limited in what they could achieve by where they were born in society, by their parent’s position in life, and by who they knew. Companies of individuals were limited by the restrictions placed on them by their governments, often by the protections from competition government granted their friends (crony capitalism). Such traditional societies limited the freedom and ambitions of its citizens and limited the productivity of its human and physical resources. In short, traditional societies were keep poorer than they would have been if their citizens had been freer to innovate and compete.

The American Dream is now under attack by Donald Trump’s trade protectionism, crony capitalist government favoritism, immigration walls, and weakening of the international rule of law that has extended the benefits of specialization and trade globally. It is also being attacked by Alexandria Ocasio-Cortez’s (LOC’s) vision of state leadership and control of production and a new generation of idealistic, but uninformed, voters who mean well but have missed the lessons of socialism’s failures. If we are to save the conditions in the United States in which the American Dream still lives, we must better understand what has led so many Americans to vote against it.

I am sure that the answers to that question are many and complex, but broadly speaking two stand out in my mind, both of which point to the measures needed to restore support for the dream.

The first is to better educate the public, especially its younger members, about the conditions that allow and encourage a productive, innovative economy. This includes understanding the proper role of government in protecting private property, enforcing contracts, maintaining public safety (the rule of law) and in providing the public infrastructure that facilitates private activities and commerce (the commons of public goods). It includes the lessons of why all socialist economies have failed as a result of the corrupting incentives of state direction of economic activity rather than the competitive search by profit seeking private enterprises for better ways to serve the public.

The second answer concerns the adequacy and efficiency of our social safety net. The American Dream concerns individuals who take responsibility for their own well-being. While on average this has opened the way for most to prosper to the extent of their talents and energy, some will, often through no fault of their own, fail and fall off the tightrope. Society has an interest (even beyond the obvious humanitarian one) in softening the fall. It has an interest in an effective social safety net. 

Some–those who have not understood the lessons of socialism’s failures–have looked to trade and immigration restriction to prevent them from losing their jobs. They object to the economic benefits of free trade when it means that they must look for a new job (however, most manufacturing job losses in the U.S. have resulted from technical progress and the resulting increase in productivity rather than from cross border trade). “Econ-101-trade-in-very-simple-terms”  “Trade-protection-and-corruption” Those with such views have supported Trump’s anti free market policies. They have been attracted by Trump’s “I win you lose, us vs them” rhetoric.

AOC and her friends point to the widening income inequality–the dramatic increase in the incomes of the wealthiest and the stagnation of the incomes of the middle class in recent years–and demand income redistribution. But she fails to understand that it has been the growth of government’s role in the economy and the incentives in big government toward corruption and crony capitalism (protectionism for the wealthy) that have reduced competition and protected the position and markets of the biggest companies with friends in government. Socialism would make those incentives even stronger.

America’s dynamism and success reflects the creative destruction of risk-taking entrepreneurs and their hard-working employees.  https://economics.mit.edu/files/1785  However, the workers whose jobs are displaced by new products and new technologies may need help in finding and retraining for new jobs. They may need financial assistance in between (unemployment insurance). If nothing else, this may be the cost of their support for such a dynamic system.  Our social safety net sometimes provides poor incentives and sometimes has holes. It is time to seriously consider replacing it with a less intrusive and more comprehensive Universal Basic Income.  “Our-social-safety-net”  “Replacing-Social-Security-with-a-Universal-Basic-Income”

The American Dream–the foundation of our freedom and affluence–is under attack from the left and the right. We should fight to preserve (or restore) it.

Buy American

Buy American is un-American. Much if not most of what we already buy is American, meaning made in America. Though it would be rather challenging to identify products (leaving aside services) that are 100 percent made in American, i.e. that do not have at least some components produced abroad, 85% of U.S. GDP is domestically produced. So why is the slogan “buy American” un-American?

Buy American has several understandings. There are laws, such as the Buy American Act of 1933, that require the U.S. government to give preference to American goods and services over others in its purchases. To the extent such laws have any effect, they require the purchase of goods and services that would not otherwise be chosen–that would not otherwise meet the test of the best value for the taxpayers’ dollars. This law aims to protect American jobs. This, of course, is a misunderstanding of the reality. Buy American, when it changes behavior at all, protects some undeserving jobs at the expense of other jobs that are worth keeping.  It protects jobs producing goods and services that would not otherwise be profitable. In short, it keeps American workers employed in activities that are less productive than would otherwise be the case. In the long run, it does not increase employment but rather reallocates workers to less productive tasks. In short, buy American lowers our standard of living. Thus, we can be thankful that it only requires 51% domestic content to qualify as “American.”

So why does our current government adopt such policies? For the same reason we have slapped a tariff on Canadian steel. It is not to make the American economy more productive or to keep it fully employed (which it already was when President Trump imposed such a tariff for “national security” reasons (I kid you not).  Rather, like other “protectionist” measures, it is to protect the jobs of particular, favored industries or workers, or what you might call political corruption.  Such favored industries are not competitive without such protection or why bother.

Beyond the legal requirement for government to Buy American, the plea to the general public is voluntary.  But why should we purchase products that we otherwise would not have (because they were more expensive or inferior)?  As with government buying American, the effect is to draw workers into activities at which they are less productive than they would have been otherwise. So “Buy American” is un-American because, if taken seriously, it would lower our standard of living and is contrary to the free market and entrepreneurial spirit that has made America the prosperous society that it is.

Are Venture Capitalists racists?

Shifting sovereignty from Kings to the people, was the beginning of human flourishing. In the United States, in its constitution the people returned only those powers to their government necessary to protect their wellbeing. The right to and protection of ones honestly acquired property is an essential aspect of this arrangement. This includes, of course, the right to invest our property anyway we choose.

Venture capitalists are those wealthy people who choose to take great risks in the prospect of large gains by investing in “startups” that have not yet established their profitability.  Put differently venture capitalists are prepared to finance an unproven idea/product/service that might gain public approval, i.e. might become profitable, though most of them fail.  As consumers we have benefited enormously from goods and services my parents never would have even imagined that a few wealthy investors took a chance on.

So the idea that the government might need to enact laws to insure that a venture capitalist’s investments do not reflect racial bias is shocking at several levels. “In the clubby world of venture capitalists, who spent $130 billion in the United States last year and helped anoint the world’s four most valuable companies and countless other successful start-ups, there is effectively no legal backstop that ensures people of color have an equal opportunity to share in its wealth creation.”   “Black-entrepreneurs-venture-capital”

First of all is the right of these investors to their property. They can give it all to their daughters if they want to.  Marxists and other egalitarians reject such a right but that would throw away the whole basis of the wealth our capitalist system has created that Marxists would like to redistribute.  But I want to focus on why capitalism minimizes the role of bias in our economic decisions.  This was explored long ago by Nobel Lauriat Gary Becker in his famous 1976 book on the Economics of Discrimination.

Becker’s basic point is that if your economic decision is influenced by racial or sexual or any other non-economic bias it will cost you money, i.e. you will make less than you otherwise would have.  If you hire a man when a woman was better qualified, he will contribute less to your company’s income than would have the woman, thus you pay a financial price for your bias. The same is true if you hire a white person when a black one was better qualified, etc.

The purpose of venture capitalist investments is to make a bundle by funding the next great idea. Most will fail but one or two turn into Facebook, or Amazon.  It may well be that a venture capitalist systematically under rates the potential of black entrepreneurs, i.e. that he suffers racial bias.  But in that case he will be less successful in his investments.  Capitalism will punish him for his prejudices and diminish his importance as a venture capitalist because it will diminish his wealth. None the less, an Irish venture capitalist may well bias her investments toward fellow Irishmen and a black venture capitalist may risk an extra break for a fellow black. But the profit motive of capitalism will discourage departures from objective evaluations of investment prospects.

The idea that a law should forbid or discourage racial or sexual bias when venture capitalists decide in what to invest is without merit.  Moreover, it is hard to imagine what such a law would look like and/or on what basis a government bureaucrat would overrule and direct the placement of a private investor’s chose of investments.

To peak briefly at the other–entrepreneurial–side of the equation, the unbiased opportunity provided by capitalism has attracted many foreigner entrepreneurs to our shores.  Steve Jobs (Apple, NeXT, Pixar), who was adopted at birth, was the son of Joanne Schieble who was Swiss-American and Abdulfattah “John” Jandali who was Syrian.  Steve Wozniak, Apple cofounder, was the son of Polish and Swiss-German parents.  Sergey Brin cofounder of Google/Alphabet escaped from the Soviet Union.  The famous architect, I.M. Pei, immigrated from China.  “How-12-immigrant-entrepreneurs-have-made-america-great”

The order to reopen–who gives it?

Like all of us, President Trump is eager to reopen the economy. Does he have the authority to do so or do state governors? Fortunately, neither can force us to start eating out again, or return to our offices. We remain a country where those decisions rest with each of us individually (or jointly with your boss with regard to returning to your office, shop or factory). That means that those parts of the economy that have shut down will get going again when the affected businesses have taken measures to protect their customers and employees sufficient to regain their customers’ trust that they are safe places to visit. But as I argued last month, that should always have been the basis of social interactions.  “Beating-covid-19: Compulsion-or-Persuasion-and-guidance”

The broad-based, blunt instrument of sheltering at home unless your activities are vital (says who?) is imposing staggering damage to the economy.  The best way to minimize that damage is to restore public trust as quickly as possible that those with it are being isolated and treated.  A blanket shut down of non-essential activities is not the best approach. Each of us in our personal situation can better determine where we feel safe to go than can a government agency.  However, some of us will not give sufficient weight to the dangers of exposing our friends and the general public to the disease if we might have it.  Public policy should educate the public to the dangers of covid-19 and how best to protect ourselves and should minimize the financial incentive to continue working when sick. State coercion (mandatory quarantines) should only be applied to those testing positive for the virus.  This approach will allow all firms and stores to operate whose employees and customers judge them to be safe and will give businesses maximum incentive to make themselves safe.

Covid-19 will be around for at least another year or two until an effective vaccine is available and then distributed to more than 60 percent of the world population. The most effective way to contain its spread in the interim is to undertake widespread, quick, and accurate testing and to quarantine those who test positive with efficient contact tracing.  Adding the newly available tests for antibodies indicating immunity to the virus will identify those who are no longer susceptible to acquiring or spreading the disease. They should be safe in public.  Other corona viruses have created immunity in those who have had them and SARS-CoV-2 is expected to do the same, though this has not yet been established.

The U.S. has belatedly increased its testing for the virus. Initially it impeded the development and supply of test kits. As of April 16, the U.S. has tested 10,266 people per million while Germany has tested twice that. The U.S. by that date had 105 deaths per million while Germany had less than half that.  The Food and Drug Administration (FDA) should get out of the way and allow profit seeking entrepreneurs to flood the market with test kits.  The government should focus its (our) money on a large increase in testing for the virus and quarantining those testing positive and those they contacted and should offer significant financial prizes for an effective vaccine and for the development (or discovery) of effective treatments. Unlike patents as an incentive, this will encourage collaboration and knowledge sharing among those attempting to develop treatments.

On April 16 President Trump outlined guidance for the phased reopening of closed businesses and activities that is consistent with the approach outline above.  The government’s traditional public health role is important. But much more discretion should be given to individual case by case judgements about risks and entrepreneurial initiatives about remedies rather than broad based government edicts.

We will not return and cannot be required to return to the public square until we believe it is safe to do so. Individual shops and firms have a financial incentive to find convincing approaches to being safe and will get there quicker than even the best-intentioned government official issuing instructions and mandates. The government has an important role to play in fighting this virus and facilitating our return to normal life, but it should remove impediments it often creates to the private sector’s management of the related risks and the huge and unnecessary damage it imposes on the economy.

Econ 101: covid-19 resource priorities

U.S. cases of covid-19 (those testing positive for the virus that causes it) continue their exponential growth exceeding 333,000 on April 5 with over 9,500 associated deaths. In a few days some hospitals will run out of the protective equipment and ventilators needed by their staff and patients.  How should the existing stock of these items be allocated to the most urgent and/or “worthy” uses and how should the inadequate supply be most effectively augmented?  Should a central authority (the “government”) choose who gets them or should the highest bidder in the market?  Should new supplies be demanded by the government employing the Defense Production Act of 1950, or should producers respond to the profits of higher prices? Should we follow the socialist or the capitalist approach?

In normal times (which these are not) the demand for hospital supplies is met by a competitive market of producers in response to prices offered by hospitals. In a well-functioning economy these prices reflect the cost of producing them and a modest profit sufficient to attract the desired supply. In this way scarce resources (the supply of any resource, starting with labor time, is limited) are allocated to their most valued uses as measured by what people are willing to pay for them. Because of the rapid and dramatic increase in the need for face masks (N95), and other protective gear needed by doctors and nurses the current supply does not satisfy the demand. This includes both emergency stocks and the flow of newly produced supplies.  Unbelievably some hospitals are preventing doctors from wearing appropriate protective gear at the detriment of their own safety and the future supply of doctors. “Doctors-say-hospitals-are-stopping-them-from-wearing-masks”  In Italy the shortage of ventilators is already causing doctors to deny them to those most likely to die in order to make them available to those more likely to live with their assistance (triage).

How should this inadequate stock of equipment be allocated among those demanding it, all of whom cannot be satisfied?  The two broad classes of approaches to allocating the existing supply until it can be increased are for a government body to determine who needs it most according to some politically accepted criteria or for market suppliers to allocate it to the highest bidders. Many books have been written to document why market allocation (capitalism) has dramatically outperformed government allocation (socialism) thus lifting most of the world’s population out of dire poverty (over 90% by 2009). But what about the emergency situation we are now in with the exponential spread of a new virus that is about ten times as deadly as the annual flu?

“The governors of New York, Texas, Illinois and other states have said they are competing with the federal government and other states in a mad scramble for lifesaving supplies such as surgical masks, N95 respirators, isolation gowns and ventilators that are widely drained or out of stock.” .” “Gouged-prices-middlemen-medical-supply-chaos-why-governors-are-so-upset-with-trump”

The oversight of healthcare delivery in the U.S. resides in the states and municipalities rather than the Federal government. However, the Federal government does support medical research and provides health guidance to the states.  Of the approximately 5,100 hospitals in the United States the Federal government owns about 200, primarily for its military and veterans. It also maintains its own emergency stockpile of medical equipment for its hospitals and to backstop shortages in state and private hospitals. In principle the Federal government could set standards for which of these non-Federal hospitals would benefit most from being allocated ventilators and other equipment from the Federal stockpile if their own supplies become inadequate. It might even dictate how private market supply would be allocated in the event of shortages.

Government allocation carries a larger risk of political and personal corruption factors influencing resource allocation than does market allocation. While the private market is not without corrupt players, the bottom line of needing to attract and satisfy customers who have other options in order to make a profit to stay in business disciplines private suppliers and tends to weed out crooks. A company’s reputation for honesty and product quality is a critical part of its staying in business. Poorly performing companies go out of business, while poorly performing and/or corrupt governments rarely do. New York governor Andrew Cuomo’s request to President Trump for help with its shortage of ventilators and other medical supplies met with pandemic expert Jared Kushner’s rebuttal that the governor was over estimating New York’s needs and that more ventilators should be allocated elsewhere.  Nothing political here. Move along.

Another and potentially more damaging potential of government allocation concerns the U.S. government’s “competition” with other countries for the scare supplies. “The White House late Thursday ordered Minnesota mask manufacturer 3M to prioritize U.S. orders over foreign demand, using its authority under the Defense Production Act, or DPA, to try to ease critical shortages of N95 masks at U.S. hospitals.

“The Trump administration has asked 3M to stop exporting the masks to Canada and Latin America, and to import more from 3M’s factories in China, the company said Friday…. At the same time, officials in Berlin criticized the United States on Friday over what they said was the diversion of 200,000 masks that were en route from China…. These are things that Americans rely on,” Trudeau said, “and it would be a mistake to create blockages or reduce the amount of back-and-forth trade of essential goods and services, including medical goods, across our border.” “White-House-scrambles-scoop-up-medical-supplies-angering-canada-germany”

“Canadian Prime Minister Justin Trudeau said his government has been ‘forcefully’ reminding American counterparts that trade ‘goes both ways across the border.’  Thousands of nurses in Windsor, Ontario, he noted, travel to Detroit each day to work in hospitals there. Several of them have since tested positive for covid-19.” These steps are incredibly short-sighted as is Trump’s trade policy in general. As the biggest and strongest country in the word, the U.S. should be engaging with the rest of the world to lead a cooperative approach to fighting covid-19 rather than throwing its weight around because, at the moment, it still can. These are the sorts of behavior that can lead to war.

Following quickly on the heels of allocating the existing stockpile of equipment, is the closely related question of how to increase and allocate the supply going forward as quickly as possible.  Market allocation of the existing stock prioritizes those willing to pay the most as an indication of the intensity of their need (or who has more money to spend, but the wealthy always have a greater impact on allocation whether through government or the market). Established firms aim to maximize their profit over time and will take into account their long run relationship with regular customers when agreeing on prices for the existing supply. This limits so called “price gouging”, but the prospect of higher prices accelerates the market’s supply response. Many governors instead “pleaded for the White House to invoke the Defense Production Act, the legislation that would compel American companies to make critical supplies.” “Gouged-prices-middlemen-medical-supply-chaos-why-governors-are-so-upset-with-trump”

While history clearly demonstrates that market allocation is superior to government command of the economy, it struggles in current emergency circumstances even if or when government interference is removed (such as the government’s interference with market development and supply of covid-19 test kits).  Knowledge is essential for good decision making.  A virtue of market allocation is that knowledge that is impossible  to properly centralize in socialist economies can be exploited in decentralized individual decision making in response to market generated prices that match supply with demand (See F. A. Hayek’s “The_Fatal_Conceit”).  Markets rely on trust that is built in various ways from experience. The Internet reports reviews of products by users. Uber drivers are rated by riders. Company reputations are carefully built and protected.

In the current sudden surge in demand for certain medical supplies the system is overloaded, and hospitals search beyond their usual suppliers. New marketers emerge to help hospitals find new suppliers. The reliability and quality of the supplied products lack market experience and feedback.  Governments can play a supportive role by requiring transparency about product contents and/or performance but can also get in the way if regulations are more costly than their benefits.  “’The dynamic of the market is very weird at this point,’ said Andrew Stroup, a co-founder of Project N95, a nonprofit clearinghouse working to connect hospitals with suppliers. The group has received more than 2,000 requests from health-care institutions searching for more than 110 million pieces of personal protective equipment.”   “Gouged-prices-middlemen-medical-supply-chaos-why-governors-are-so-upset-with-trump”

In the imperfect world we all live in we would do best to maximize the role of private entrepreneurs and firms to develop and supply the best possible products, limiting the government’s role to protecting private property and contract enforcement, and establishing standards that help promote consumer confidence and trust in suppliers. Private, profit motivated producers maximize their profits by best surviving and satisfying the desires of their customers.

Beating covid-19: Compulsion or Persuasion and Guidance

March 31, 2020

The number of deaths in the U.S. from covid-19 have doubled every three days over the last 22 days amounting to 3,141 by the end of March 30. At that point there were 163,788 confirmed cases (those testing positive for the virus).  https://www.ft.com/coronavirus-latest  The actual number of cases is thought to be considerably larger but remains undetected because of limited viral testing.  America’s overall strategy for containing the virus is to isolate those infected in order to stop or slow its spread until a vaccine can be developed, tested for safety and effectiveness, manufactured and administered (one to two years after the discovery of the vaccine, with luck) or until enough of the population has acquired immunity as the result of surviving from the disease (herd immunization), i.e., almost everyone who gets it. The details of the approach vary from community to community.

The virus that causes covid-19 is spread from person to person. It can be picked up from surfaces touched by a sick person, coughed or sneezed into the air within six or so feet or by direct contact, but it can only enter one’s body via the month, nose or eyes.  “Prevent-getting-sick/how-covid-spreads”  “Protecting-yourself-from-coronavirus”  Thus those who test positive for the virus should be isolated from the rest of us (quarantined) and the rest of us should self-isolate if we experience symptoms of the disease. To protect ourselves from picking up the virus and bringing it to our faces we can reduce our social interactions (work from home, avoid public gatherings such as religious services, and restaurants, bars and public entertainment). Two measures are more important than any others: test as many people as possible in order to detect and isolate those with the virus and wash our hands with soap frequently.  The President’s coronavirus-guidelines for American

These measures can be imposed by government decree and enforcement by the state or can be urged by public education and voluntary individual actions. On March 17 the Governor of Virginia explained why he had not ordered restaurants and bars to close. “Northam said too many Virginia residents rely on restaurants for their meals to justify ordering they shut down.”  “Northam-adopts-10-person-standard-opposes-closing-restaurants”  For the United States as a whole and for most communities (public health services are administered by cities and states) the restrictions on our activities are voluntary. The specific guidance or rules are determined locally, thus providing useful data on which approaches work best.

As in Singapore, S. Korea, Japan, Hong Kong, Sweden and a few other countries, business closures in the U.S. have generally been voluntary until March 30. But unlike these countries, which have successfully kept death rates relatively low, the U.S. failed to undertake significant testing for the virus for more than two months after the outbreak of the disease in Wuhan, China. After the tenth death, the death rate from covid-19 in the U.S. has doubled every three days and passed the number of 9/11 deaths on March 30. On March 30, the Governor of Maryland, followed by the Governor of Virginia and the Mayor of the District of Columbia, made shelter in place mandatory: “We Are No Longer Asking Or Suggesting That Marylanders Stay Home, We Are Directing Them To Do So.” “As-covid-19-crisis-escalates-in-capital-region-governor-hogan-issues-stay-at-home-order-effective-tonight”

There is general agreement that testing should be pursued vigorously and those testing positive should be quarantined and their contacts tested, etc. This buys time to better prepare for the increased demand for medical care that will be needed and to develop treatments and vaccines. Though many will die needlessly in the U.S. because of a several months late start with such a program, the question remains which policy to follow for everyone else going forward.  Should it be government mandates to shut most things down and keep everyone home (or at least try to), or should we rely on the choices of each individual for how best to protect themselves and their loved ones while carrying on with their lives? What are the matrixes by which that choice should be judged? “This-pro-trump-coastal-community-in-florida-hit-early-by-virus-sits-at-emotional-nexus-of-national-debate-over-reopening-economy-amid-health-crisis”

In my opinion maximizing individual choices about how to respond to the epidemic is both more effective and more in keeping with America’s freedom loving culture. By more effective I mean that it will best slow the spread of the disease with minimal damage to the economy and the quality of our lives. We each have a strong incentive to protect ourselves from contracting the virus. We also care about protecting others from exposure (most strongly our families and loved ones) but can be deterred from that goal by the loss of income if we stay home. The CARES Acted signed into law a few days ago is meant to compensate firms that shut down temporarily and workers who stay home temporarily and thus to better align the incentives to protect others with the financial consequences.

We protect ourselves and others by diligently adhering to enhanced hygiene practices (frequent hand washing) and by reducing unnecessary social contacts (no hand shaking etc.). As with most everything else in life we are each better able to determine how best to balance the risks of social interactions (whether to work from home or in the office) with safer isolation, than are government officials making general rules for everyone.  The countries that have adopted this approach have left their citizens free to go to work or restaurants but undertaken extensive educational programs on the best practices to protect against transmission of the virus. “South-korea-keeps-covid-19-at-bay-without-a-total-lockdown”

South Korea, Singapore, Taiwan and other countries taking this approach provide their citizens with honest information needed by them to evaluate the risks of different choices. This includes information on who is infected and identifying infection hot spots. In the U.S. a person’s health status is private. But when a person carries a contagious disease into the public, his/her condition should be made known to those who risk exposure.  “Coronavirus-data-privacy”

Government mandates to shelter in place or cease many business activity will become increasingly difficult to enforce (have you watched the “Steven Soderbergh movie Contagion”). Persuading the public to adjust their behavior in ways that slow the virus’s spread and providing helpful guidance on how best to do so until a vaccine is found or most of the population becomes immune would be both more effective and more politically popular.