Power & Market

Professor Peter Klein and I give an Austrian take on the economics of the shutdown in a discussion with Tom Woods.

In the of light of the COVID-19 pandemic almost every government in the world has (once again) denounced so-called "price gouging." Politicians both to the left and right really think that with outlawing price gouging, they can save the consumer from the greedy gougers that are willing to take advantage and exploit consumers.

Price gouging is defined as the practice of raising a products price to an "unfair" or "excessive" level during a crisis or an emergency. However, anyone can understand that the law itself is very troubling since it remains unclear how high is "too high." Of course, it ultimately depends on the arbitrary decision of the almighty bureaucrats and their own concept of how prices and markets should work.

They make the mistake of ignoring what a price really means. Price is a signal we use to understand how much do consumers really value a certain good. Value, as Ludwig Von Mises pointed out, is subjective the value of a good or service  varies greatly by time and place. Again, value doesn’t exist in things themselves, but is formed in the minds of human beings. For example, a bottle of water has way bigger value for a person that is trapped in the Sahara desert rather to a person that has drinkable water from his tap in his house.

What we have here is a simple supply and demand. The demand is surging while on the other hand the supply (at least short term) is dwindling. High prices affect how the sellers and buyers act. For the consumer, they reduce the rising demand while encouraging conservation. By doing so these prices allow these products to be bought by other people that value them more and therefore are willing to pay more. Especially in a time of crisis, many people may want a specific product, but if prices don't go up, those who are most in need are unlikely to even have the option of buying what they need most. Those items will have been hoarded by others because the goods remained at such a low price. 

As we can see from today’s world, this is exactly the case, with goods like hand sanitizers and toilet paper being emptied from their shelves in just a matter of minutes. The beauty of the price system is that when unhampered,  it manages to allocate resources to those who truly value them more. And those who value them more are often those with the greatest need.  If people are willing to pay more than they would usually pay for a product that doesn’t mean that they are exploited. In reality it means that they value more Product ‘X’ for the “Y’ money they gave up. If they didn’t then the transaction would never take place.

Many places are now restricting purchases on items like hand sanitizers to two or three per person. But these rules can easily be bypassed through multiple store visits. Rationing favors also the wealthy and people that have the proper connections in the black market. Banning price "gouging" hurts people even more. When free pricing isn't allowed, goods usually end up with people that are lucky to show up first and that's often people with the best access to transportation and free time. There is nothing moral about that in reality it hurts people even more by destroying the incentives for conservation.

For many Americans, the FDA has taken on a sort of mystique as the gold standard of medical guidance—similar to the emotional connection many Britons feel for the National Health Service (NHS). Unfortunately, both of these government bureaucracies actively undermine the healthcare systems of their nation. As the continuing coronavirus places a larger microscope on the agency’s actions, hopefully more are waking up to the costs inherent to their management.

From the beginning of this battle, the FDA has slowed American medical companies' ability to respond at full capacity.

For example, it was FDA regulations that significantly slowed the creation of testing kits in the early days of the crisis. While the CDC’s government labs were creating fatally flawed COVID-19 tests, private labs were desperately trying to receive waivers to ramp up their own efforts. On Feburary 24, the US Association of Public Health Laboratories made desperate appeals to get into the game. Although the FDA tweaked its rule five days later to allow labs to begin testing kits (though it still barred their active use without approval), it wasn’t until March 16 that the FDA finally removed its grasp on the private sector and allowed labs get approval through state agencies.

The impact was immediate:

Source: Twitter, @noahopinion.

In the words of Balaji S. Srinivasan, a Peter Theil-ally who interviewed with the administration in 2017 to lead the agency, “FDA’s initial delay set the US back six weeks, blinding us to the scale of the epidemic, and turning a containable epidemic into a crisis.”

While the FDA has taken its foot off the hose of testing production, it continues to restrict their uses. Earlier this week, the FDA took the position that their policy changes will not apply to at-home testing. This decision has forced labs that have developed and produced such products to shutdown distribution that was already underway. The bureaucratic freeze on testing forces Americans into hospitals, clinics, and other testing centers. As Srinivasan notes, this decision openly promotes greater spread:

FDA is trying to shut down at-home testing! Here’s why that’s a bad idea:

1) Hospital visits themselves can cause infections.

2) Many errors in at-home sample collection can be detected with positive/negative controls, in which case the result is a retest — rather than no test! https://t.co/U7ehGpllq0

— Balaji S. Srinivasan (@balajis) March 23, 2020

Yes, at-home sample collection (eg nasal swab) will have higher error rate than if done by a nurse.

But you can detect many of these errors at the lab, and send a retest if necessary. And iterate on sample collection kit.

What you get: more testing, less nosocomial infections.

— Balaji S. Srinivasan (@balajis) March 23, 2020

Let’s remember that the alternative to at-home testing is standing in a COVID19 testing line.

That’s basically a COVID19 meetup and a great way to *create* positives.

By stopping at-home testing, FDA is forcing you to risk your life to get tested.https://t.co/ypPm5tPR4g https://t.co/nAWST0KVvo

— Balaji S. Srinivasan (@balajis) March 23, 2020

This is not the only example this week of the FDA undermining recovery efforts. Recently Elon Musk acquired a stock of a 1,000 respirators. Unfortunately on Monday, the shipment ended up being stalled at LAX by none other than the FDA.

With the focus now on treatments and preventative measures, the FDA continues to be an anchor dragging down the ability of the American private sector to innovate our way out of a crisis.

Trump has famously pushed a mix of antimalaria medicine and Z-Packs as a potential treatment. Although the media have tried to attack the president for offering unqualified medical advice, his medical advice has been supported by studies in countries outside the FDA’s restrictive regime. As the Wall Street Journal reports:

A more recent French study used the drug in combination with azithromycin. Most Americans know azithromycin as the brand name Zithromax Z-Pak, prescribed for upper respiratory infections. The Z-Pak alone doesn’t appear to help fight Covid-19, and the findings of combination treatment are preliminary.

But researchers in France treated a small number of patients with both hydroxychloroquine and a Z-Pak, and 100% of them were cured by day six of treatment. Compare that with 57.1% of patients treated with hydroxychloroquine alone, and 12.5% of patients who received neither.

This is not the first time that FDA red tape has allowed Europe to lead in health treatment. The overbearing American regulations have even pushed US athletes overseas for rehab treatments and other basic health needs.

As the Trump administration continues to indicate that they are pushing away from a total-lockdown approach to the virus and toward opening the American economy back up, breaking down the American bureaucratic machine is going to be vital to minimizing the already catastrophic damage done.

Hopefully, a silver lining of this current crisis will be an American awakening to what has long been clear: the costs of the FDA bureaucracy is a far greater public health risk than any of the advantages that it claims to provide. It’s past time to scrap the agency altogether. 

The Black Death ravaged Europe, starting in Italy, in the middle of the 14th century. Substantial percentages of entire populations died---estimates range between thirty and sixty percent. Maybe 75 to 200 million people.

Would it have made any difference for overall living standards if Spain could have tapped on its subsequent influx of gold from Central and South America? That is, would the substantial increase in the money supply have somehow mitigated the adverse economic consequences of the plague?

The short answer: No. Production had declined because there weren’t as many people around to produce. More gold would be chasing fewer goods and services, a sure-fire recipe for inflation. Indeed, prices would have risen without the new gold, because the same amount of money would be chasing fewer goods and services. More gold would mean even higher prices. There is no evidence that inflation is a source of higher productivity, then or now.

The Spanish were the first bringing the gold to Europe. They would have been “first-spenders.” They, in effect, would be the beneficiary of what is called an “inflation tax on money” or “seigniorage.” This is how governments throughout history have been able to command resources by printing and spending new money.

In other words, the gold-influx redistributes claims over a shrunken economic pie from the rest of Europe to the Spanish. Sure, people would have had more money but the Black Death shrunk the pie, regardless of how much new money they have.

Enter a Virus

Jumping forward almost seven centuries, what parallels can we draw between the Black Death and the coronavirus? The fatality rates are obviously different, but that’s beyond the focus of what follows. The COVI-19 virus has resulted in production facilities being shut down, movement of people is restricted, and people are urged to “stay home.” This shrinks the economic pie. People aren’t dying, but because they’re not producing they’re "dead" economically.

Amazingly, the government’s response to the shrunken economic pie parallels my experiment with the Black Death. Like dogs returning to their vomit, government does what it does best: spend other peoples’ money for the supposed benefit of yet other people. Like the new gold, The Federal Reserve System floods the economy with new money and competition ensues to come up with spending boondoggles.

Oh, sure, handing out billions of dollars via various spending boondoggles ostensibly targeted at those hit hard by the decline in national income may give the impression of having avoided the cost. Ditto for having the Federal Reserve System flood the economy with new money.

No matter how you slice it, however, the pie is still smaller. That won’t change until production facilities reopen and people are allowed to move around. At best, the boondoggles and new money redistribute claims over the now smaller economic pie. They don’t avoid the cost of lost production.

The boondoggles do provide political cover for those enacting them. An electorate unschooled in economics falls for their hook, line, and sinker---seemingly every time. So it is with our government’s attempt to offset the consequences of shutting down economic activity. Lots of pomp and circumstance signifying nothing save the creation of yet more spending constituencies feeding at the public trough.