In this interview, we explore Dr. Hanke’s recent research on the effects of covid policies and his continued work on money and interest.
The Misesian: Your lecture for the Austrian Economics Research Conference this year drew from three new books you’ve published in the past three years: Did Lockdowns Work? (2023; coauthored with Jonas Herby and Lars Jonung); Capital, Interest, and Waiting (2024; coauthored with Leland Yeager); and Making Money Work (available May 6; coauthored with Matt Sekerke). The first looks at the effect of the covid lockdowns. Let’s begin with that one, since this spring marks the fifth anniversary of the lockdowns.
There were many reasons to oppose the lockdowns, as they were an enormous violation of property rights. To counter this opposition, the supporters of lockdowns often took the consequentialist view that lockdowns were justified because they would save lives. In your book, you take an extensive look at the data and conclude that this claim simply isn’t true. What data did you look at to determine if the lockdowns delivered on the lockdowners’ claim? Did lockdowns really save lives?
Steve Hanke: Not at all. Indeed, our meta-analysis supports the conclusion that lockdowns in the spring of 2020 had little to no effect on covid-19 mortality.
Allow me to first place our research in context. The path that led to our meta-analysis of the effects of lockdowns (also referred to as “covid restrictions,” and “social distancing measures”) on covid-19 mortality began in Sweden.
Early in the pandemic, Sweden embraced a relatively laissez-faire approach to the coronavirus with remarkably few mandatory restrictions compared to the international pattern. The response was based on advice and recommendations concerning individual behavior rather than on binding compulsory measures. As it turns out, Sweden’s approach with few restrictions on the individual right of free movement ran counter to the more authoritarian approaches to the pandemic that were taken in other countries.
Sweden’s approach was, in large part, a product of its constitution, which guarantees to all Swedes the right of free movement. In addition to that constitutional constraint, Sweden’s state epidemiologist until 2022, Anders Tegnell, respected the constitution and embraced a herd immunity approach. As a result, a firestorm of criticism was levelled at Sweden. As it would later turn out, Sweden had by far the lowest rate of excess mortality in eurozone countries from 2020 to 2022.
Sweden’s response led me and my longtime collaborator Lars Jonung to the following question: Do lockdowns reduce mortality, and if so, to what extent?
In our search for experts who could answer that question, Jonung became aware of ongoing research by Jonas Herby in Denmark. Shortly thereafter Jonung, Herby, and I decided that the best way to address the question would be to conduct a meta-analysis. In our study, we defined a lockdown as the imposition of at least one compulsory nonpharmaceutical intervention (NPI). We employed a systematic search and screening procedure that identified 19,646 studies that could potentially answer our question. After three levels of screening, 32 studies qualified.
Of those, 22 studies contained estimates that could be converted into standardized measures for inclusion in the meta-analysis. The studies can be separated into three groups: lockdown stringency index studies, shelter-in-place order (SIPO) studies, and specific NPI studies.
The stringency index studies found that the average lockdown in Europe and the United States in the spring of 2020 only reduced covid-19 mortality by 3.2%. This translates into approximately 6,000 avoided deaths in Europe and 4,000 in the United States.
SIPOs were also relatively ineffective in the spring of 2020, only reducing covid-19 mortality by 2.0%. This translates into approximately 4,000 avoided deaths in Europe and 3,000 in the United States.
Based on specific NPIs, we estimate that the average lockdown in Europe and the United States in the spring of 2020 reduced covid- 19 mortality by 10.7%. This translates into approximately 23,000 avoided deaths in Europe and 16,000 in the United States.
In comparison, there are approximately 72,000 flu deaths in Europe and 38,000 in the United States each year.
The results of our meta-analysis support the conclusion that lockdowns in the spring of 2020 had little to no effect on covid-19 mortality, which is consistent with the view that voluntary changes in behavior, such as social distancing, played an important role in mitigating the pandemic.
The bombshell results of our study, which was published in 2023, when many lockdowns were still in place, meant that we experienced significant backlash and censorship. Such unjust censorship was reminiscent of what is described in chapter 11 of Friedrich Hayek’s The Road to Serfdom, “The End of Truth.”
For those who value liberty, our findings will be sobering, if not depressing. The covid-19 pandemic gave rise to widespread lockdowns and some of the greatest peacetime infringements on personal liberties in history. We find that these infringements generated negligible public health benefits while imposing massive costs on society. A cost–benefit analysis suggests that lockdowns represented a global policy failure of gigantic proportions.
TM: Naturally, there are going to be huge side effects to a policy like lockdowns. What were the overall effects of the lockdowns on the economy and our standard of living?
SH: A growing body of research argues that lockdowns have had devastating and far-reaching effects. They have severely reduced economic activity, raised unemployment, caused many enterprise bankruptcies, and significantly increased government debt. And they have contributed to rising inequality in a number of ways.
In addition to their immediate economic impact, lockdowns reduced the time children spent in school, decreasing the extent of education and therefore reducing investment in human capital. They increased mental disorders and domestic violence, and caused significant quality-of-life losses.
Lockdowns have also reduced personal freedom, caused political unrest, strengthened authoritarian tendencies, increased government corruption, and undermined liberal democracy.
Noncovid excess deaths during the pandemic are the clearest indicator of the costs lockdowns imposed on society. Casey Mulligan and Robert Arnott examined this in a 2022 NBER working paper, “Non-Covid Excess Deaths, 2020–21: Collateral Damage of Policy Choices?” They found that from April 2020 through the end of 2021, noncovid deaths in the US occurred at an average annual rate of 97,000 in excess of previous trends. They split this number into categories including hypertension and heart disease, diabetes and obesity, drug-induced causes, and homicides and motor vehicle fatalities—all of which were above their previous trends.
Lockdowns were a massive mistake, but they happened because epidemiologists and public health researchers had the ears of policymakers. Indeed, epidemiologists’ models, or as I like to call them, fear machines, generated mass hysteria yet turned out to be entirely inaccurate. Remember the infamous Imperial College London covid report, which concluded that the US would incur 2.2 million deaths in the absence of lockdowns?
Comparing the results of our study with the wild predictions of Imperial College London highlights the importance of accurate measurement.
TM: Your second book, Capital, Interest, and Waiting, was coauthored with the late Leland Yeager, a longtime friend of many Austrian School scholars, and like you, a longtime Associated Scholar of the Mises Institute. It was one of Yeager’s final collaborations. How did this partnership come about?
SH: I first met Leland in the summer of 1967, when I attended a summer program at the University of Virginia. The program was offered to young faculty with an interest in free-market economics. I qualified because I had recently joined the faculty of the Colorado School of Mines. What a program it was. The “big guns” lectured. They included Armen Alchian, Bill Allen, Bill Breit, Jim Buchanan, Warren Nutter, Gordon Tullock, and Leland Yeager.
Leland presented the lectures on international trade. I can still recall them. He arrived fully prepared and ready to go—armed with a yardstick. Yes, a yardstick, which Leland used to draw complicated trade diagrams. And, typical of Leland, he did so with great precision. Indeed, Leland is the only professor I have ever observed who could, and did, draw picture-perfect diagrams on a chalkboard. Even while lecturing, Leland was a careful and precise scholar.
For over 50 years, Leland and I remained in contact. Beginning around 1976, we engaged in what became a rather intense collaboration on capital and interest theory, with an emphasis on the importance of “waiting” as a factor of production and “interest” as its price. I primarily served as Leland’s sounding board and reviewed his notes and manuscript drafts.
As time passed, our interactions on this research program became more intense. Leland regularly complained about his age and a growing number of ailments. These complaints were always made in the context of Leland’s worries that he would not be able to finish this book. And they always ended with Leland’s request that I finish the manuscript if he did not make it to the finish line.
Seventeen days before he met the grim reaper, Leland wrote to me: “According to my trust and will, as I said before, you as coauthor will have complete discretion about format (ranging from the whole book to one or more articles) and about how to list our names.”
After Leland went to the other side, Luis Dopico, a former student of Leland’s and a trustee of his estate, and I immediately set out to put Leland’s affairs in order. This was a big task, but it was made easier because Leland left detailed instructions on how he wanted us to proceed. Eventually, I received large boxes of materials and computer disks that contained an array of notes, draft material, and reference books.
As it turned out, the materials, which had been produced over some 40 years, were in total disorder and, in many cases, quite incomplete. To organize things, my chief of staff, Christopher Arena, spent weeks sorting and organizing materials so that we could assess whether a book manuscript could be produced.
After Christopher’s painstaking work was completed, it was determined that a book manuscript would be possible but that an enormous amount of work would be required to put the materials Leland had drafted into shape.
Fortunately, Spencer Ryan, one of my most senior assistants, was willing to help in my final push to produce a book-length manuscript.
It required a good bit of effort—all told, it took about four years—but it was a labor of love.
TM: One often sees interest described, not quite accurately, as “the price of money.” In this book, you describe interest more as a payment for “waiting.” What do you mean by this?
SH: Capital theory is notorious for being the most controversial area of economics, because it holds the key to profits. “Capital” is at the center of the inquiry into the laws of production and distribution in a capitalist economy. This explains why all the high priests of economic theory, particularly the Austrians, have grappled with capital theory.
Our book is a comprehensive history of thought. Leland and I simplify capital and interest theory, tie it in better with general micro theory, and resurrect the view that the interest rate is the price of waiting and that waiting is a factor of production.
With this framework, we sort out many puzzles and problems in capital theory. These include the Cambridge capital controversies, the reswitching paradox, and measuring roundaboutness, the last of which will be of particular interest to Austrian-style thinkers. A substantial portion of the book is devoted to policy, such as how our findings can be applied to yield curve theory and monetary policy.
We were not the first to recognize waiting as a factor of production. Some notable proponents include the likes of Turgot (1727–81), Knut Wicksell (1851–1926), Gustav Cassel (1866– 1945), Joseph Schumpeter (1883–1950), Frank Knight (1885–1972), Walter Eucken (1891– 1950), Abba Lerner (1903–82), Maurice Allais (1911–2010), Robert Dorfman (1916–2002), and Murray Rothbard (1926–95). Many heavyweights objected, too, including Eugen von Böhm- Bawerk (1851–1914), Irving Fisher (1867–1947), and Friedrich Hayek (1899–1992).
While many other economists have identified waiting as a factor of production, in our book we have fully developed the idea and its consequences. Waiting is the service performed by holding financial assets instead of selling them and devoting the proceeds to current consumption or to other exercises of command over resources. Waiting has the dimension of value over time.
To call waiting a factor of production in no way implies that reality embraces a specific small number of distinct factors and that waiting, like labor, is one of them. Waiting is performed in many ways, with different durations and degrees of risk and so forth, just as labor comes in different forms and is performed in different conditions and paid at different rates. Just what to treat as a factor is a question of convenience in each particular context.
The same is true of production functions. Should a firm’s production function count machinery used as an input, or should machinery be broken down into the land use, labor, and waiting that went into making it? Either choice could be legitimate, but not both at the same time. Again, reality does not dictate the answer; the choice depends on context and convenience.
The interest on a loan and the ratio between annual net rental payments and an asset’s price are forms of an interest rate pervading the entire economy; equivalently, there is a pervasive agio, or price premium, of present over future goods. All are forms of the price received for waiting—for tying up wealth instead of using it for consumption or other current purposes.
TM: The subtitle of your latest book, Making Money Work, to be released in April, is How to Rewrite the Rules of Our Financial System. What do you identify as the biggest shortcomings of our current financial system? What is the most important problem that needs fixing?
SH: Many of the problems with our current financial system stem from the global financial crisis of 2007–9 (GFC), which precipitated a deep recession and a comprehensive reckoning with the risks taken by the world’s largest universal banks.
Less obviously, the GFC introduced a major disruption of the conditions by which money is supplied to the wider economy. Commercial banks’ ability to create credit was restrained by new lending guidelines and increases in their capital and liquidity buffers, and the production of money-like instruments by financial intermediaries in the so-called shadow banking sector was sharply curtailed.
Money matters more than most people—even most economists—think it does. Economists take for granted the idea that monetary policy only affects nominal values (prices and wages), not real economic activity. This is not the case: different economic sectors and strata of the population have different levels of access to the purchasing power created by bank lending. This gives the Federal Reserve the capacity to be an engine of inequality.
For example, take the Federal Reserve’s excessive money printing during the pandemic. The transmission mechanism of monetary policy roughly dictates that changes in the money supply are followed by changes in asset prices in 1–9 months’ time, changes in real economic activity in 6–18 months’ time, and finally changes in the price level in 12–24 months’ time.
Thanks to the Fed’s helicopter money drops beginning with covid, the annual growth rate of the US broad money supply peaked at 18.1% per year in May 2021. Lo and behold, the transmission mechanism followed—the S&P 500 reached a local maximum in December 2021 (6 months later), and inflation peaked at 9.1% per year in July 2022 (14 months later).
What was the result? Wealth inequality skyrocketed. In March 2020, billionaires’ wealth amounted to 13.6% of GDP. In November 2024, that number stood at 21.2%—a 7.6 percentage point increase.
The money supply is created and destroyed privately by commercial banks and publicly by the government, with the commercial banks being the elephant in the room. In consequence, the amount of money created and its distribution are influenced far more by banking regulations than by short-term interest rates.
Banking regulation is a slow-moving variable (relative to the eight Federal Open Market Committee meetings every year) that explains the distortions created by the monetary system. As a result, we argue that bank regulation—in effect regulation of the creation of credit—needs to be a central focus in monetary policy.
Modern banks are a combination of a commercial bank (the “banking book”) and investment banking services (the “trading book”) housed in a holding company. The activities of a profit-maximizing modern bank look quite different from those of a profit-maximizing commercial bank.
With these enterprise structures, neither the Basel III endgame defeated in 2024 nor the ham-fisted Dodd-Frank Act, nor the unrestrained deregulatory impulses of the Trump administration represents a constructive future for bank regulation. It would be much better to split the banking book and the trading book, to split the regulatory regime along the same lines, and to determine an adequate level of capital for each.
We also take a close look at the housing market and real estate finance. Lately, there has been much ado about the possible privatization of Fannie Mae and Freddie Mac, which were essentially nationalized in 2008.
Fannie Mae and Freddie Mac are particularly egregious examples of institutions that bind the financial system to real estate. Thanks to the privileges afforded to them under the government’s umbrella, Fannie Mae and Freddie Mac have also been allowed to marginalize commercial banks’ mortgage lending.
While they should be privatized, this should occur only after they are relieved of government support and of their roles in official housing policy, and when their obligations no longer share the privileges of Treasury obligations (low credit risk weights and acceptability at the Federal Reserve). Stopping short of this would hand enormous unearned rents to their shareholders. When they are privatized, they should be on an even footing with commercial banks.
With that all said, the main thrust of the book is that commercial banks should be placed back at the center of the economy. Since the GFC, private money creation—or the money created by commercial banks—has been gradually squeezed out of the financial system by the public money creation of the Federal Reserve, wrongheaded liquidity and capital regulations, and the bloated real estate finance of government-sponsored Fannie Mae and Freddie Mac.
