Tag Archives: Knowledge Problem

A Fiscal Real-Bills Doctrine? No Such Thing As Painless Inflation Tax

14 Tuesday Jun 2022

Posted by in Fiscal policy, Inflation, Uncategorized

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A remarkable proposal made recently by Representative Ro Khanna (D -CA) would have the Biden Administration impose price controls, which would be bad enough. Khanna also would like the federal government to cover the inflation losses incurred by Americans by having it directly purchase certain goods and services and resell them “cheap” to consumers. In fairness, Khanna says the government should attempt to take advantage of dips in prices for oil, food commodities, and perhaps other necessities, which of course would limit or reverse downward price changes. When asked about Khanna’s proposal, Pete Buttigieg, Joe Biden’s Transportation Secretary, replied that there were great ideas coming out of Congress and the Administration should consider them. Anyway, the idea is so bad that it deserves a more thorough examination.

Central Planners Have No Clothes

First, such a program would represent a massive expansion in the scope of government. It would also present ample opportunities for graft and cronyism, as federal dollars filter through the administrative layers necessary to manage the purchases and distribution of goods. Furthermore, price and quantity would then be shaded by a heavy political component, often taking precedence over real demand and cost considerations. And that’s beyond the crippling “knowledge problem” that plagues all efforts at central planning.

One of the most destructive aspects of allowing government to absorb a greater share of total spending is that government is not invested with the same budgetary discipline as private buyers. Take no comfort in the notion that the government might prove expert at timing these purchases to leverage price dips. Remember that government always spends “other people’s money”, whether it comes from tax proceeds, lenders, or the printing press (and hence future consumers, who have absolutely no agency in the matter). Hence, price incentives take on less urgency, while political incentives gain prominence. The loss of price sensitivity means that government expenditures are likely to inflate more readily than private expenditures. This is all the more critical at a time when inflation is becoming embedded in expectations and pricing decisions. Khanna thus proposes an inflation “solution” that puts less price-sensitive bureaucrats in charge of actual purchases. That’s a prescription for failure.

If anyone in Biden’s White House is seriously considering a program of this kind, and let’s hope they’re not, they should at least be aware that direct subsidies for the purchase of key goods would be far more efficient. It’s also possible to hedge the risk of future price increases on commodities markets, perhaps simply distributing hedging gains to consumers when they pay off. However, having the federal government participate as a major player in commodities options and futures is probably not on the table at this point … and I shudder to think of it, but it might be more efficient than Khanna’s vision.

A Fiscal Real Bills Doctrine

Khanna’s program would almost surely cause inflation to accelerate. Inflation itself a form of taxation imposed by profligate governments, though it’s an inefficient tax since it creates greater uncertainty. Higher prices deflate the real value of most government debt (borrowed from the public), assets fixed in nominal value, and incomes. Read on, but this program would have the government pay your inflation tax for you by inflating some more. Does this sound like a vicious circle?

Khanna’s concept of inflation-relief is a fiscal reimagining of a long-discredited monetary theory called the “Real Bills Doctrine”. According to this doctrine, rising prices and costs necessitate additional money creation so that businesses have the liquidity to pay the bills associated with ongoing productive efforts. The “real” part is a reference to the link between business expenses and actual production, despite the fact that those bills are expressed in nominal terms. The result of this policy is a cycle of ever-higher inflation, as ever-more money is printed. This was the policy utilized by the Reichsbank in Weimar Germany during its hyperinflation of 1922-23. It’s really quite astonishing that anyone ever thought such a policy was helpful!

In Khanna’s version of the doctrine, the government spends to relieve cost pressure faced by consumers, so the rationale has nothing to do with productive effort.

Financing and the Central Bank Response

It’s reasonable to ask how these outlays would be financed. In all likelihood, the U.S. Treasury would borrow the funds at interest rates now at 10-15 year highs, which have risen in part to compensate investors for higher inflation.

My bet is that Khanna imagines the Fed would simply “print” money (i.e., buy the new government debt floated by the Treasury to pay for the program). This is the prescription of so-called Modern Monetary Theory, whose adherents have either forgotten or have never learned that money growth and inflation is a costly and regressive form of taxation.

Most economists would say the response of the Federal Reserve to this fiscal stimulus would bear on whether it really ignites additional inflationary pressure. Of course, rather than borrowing, Congress could always vote to levy higher taxes on the public in order to pay the public’s inflation tax burden! But then what’s the point? Well, taxing at least has the virtue of not fueling still higher inflation, and the Fed would not have a role to play.

But if the government simply borrows instead, it adds to the already bloated supply of government debt held by the public. This borrowing is likely to put more upward pressure on interest rates, and the federal government’s mounting interest expense requires more financing. What then might the Fed do?

The Fed is an independent, quasi-government entity, so it would not have to accommodate the additional spending by printing money (buying the new Treasury debt). Either way, investors are increasingly skeptical that the growing debt burden will ever be reversed via future surpluses. The fiscal theory of the price level holds that something must reduce the real value of government debt (in order to satisfy the long-term fiscal budget constraint). That “something” is a higher price level. This position is not universally accepted, and some would contend that if the Fed simply set a nominal GDP growth target and stuck to it, accelerating inflation would not have to follow from Khanna’s policy. The same if the Fed could stick to a symmetric average inflation target, but they certainly haven’t been up to that task. Hoping the Fed would fully assert its independence in a fiscal hurricane is probably wishful thinking.

Conclusion

There are no choke points in the supply chain for bad ideas on the left wing of the Democratic Party, and they are dominating party centrists in terms of messaging. The answer, it seems, is always more government. High inflation is very costly, but the best policy is to rein it in, and that requires budgetary and monetary discipline. Attempts to make high inflation “painless” are misguided in the first instance because they short-circuit consumer price responses and substitution, which help restrain prices. Second, the presumption that an inflation tax can be “painless” is an invitation to fiscal debauchery. Third, expansive government brings out hoards of rent seekers instigating corruption and waste. Finally, mounting public debt is unlikely to be offset by future surpluses, and that is the ultimate admission of Modern Monetary Theory. A fiscal real bills doctrine would be an additional expression of this lunacy. To suggest otherwise is either sheer stupidity or an exercise in gaslighting. You can’t inflate away the pain of an inflation tax.

Break the Market, Blame It, Then Break It Some More

28 Sunday Nov 2021

Posted by in Energy, Environmental Fascism, Free markets, Uncategorized

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Much of what is labeled market failure is a consequence of government failure, or rather, failure caused by misguided public intervention, not just in individual markets but in the economy more generally. Misguided efforts to correct perceived excesses in pricing are often the problem, but there are myriad cases of regulatory overreach, ham-handed application of taxes and subsidies for various enterprises, and widespread cronyism. But it is often convenient for politicians to appear as if they are doing something, which makes activism and active blame of private enterprise a tempting path. The Biden Administration’s energy crisis offers a case in point. First, a digression on the efficiency of free markets. Skip the next two sections to get straight to Biden’s mess.

Behold the Bounty

I always spent part of the first class session teaching Principles of Economics on some incredible things that happen each and every day. Most college freshmen seem to take them for granted: the endless variety of goods that arrive on shelves each day; the ongoing flow of services, many appearing like magic at the flick of a switch; the high degree of coincidence between specific wants and all these fresh supplies; the variety and flow of raw materials and skills that are brought to bear; the fantastic array of sophisticated equipment deployed to assist in these efforts; and the massive social coordination necessary to accomplish all this. How does it all happen? Who collects all the information on what is wanted, and by whom? On the feasibility of actually producing and distributing various things? What miracle computer processes the vast set of information guiding these decisions and actions? Does some superior intelligence within an agency plan all this stuff?

The answer is simple. The seemingly infinite set of knowledge is marshaled, and all these tasks are performed, by the greatest institution of social cooperation to ever emerge: decentralized, free markets! Buying decisions are guided by individual needs and wants. Production and selling decisions are guided by resource availability and technology. And all sides react to evolving prices. Preferences, resources, and technology are in a constant state of flux, but prices react, signaling producers and consumers to make individual adjustments that correct larger imbalances. It is tempting to describe the process as the evolving solution to a gigantic set of dynamic equations.

The Impossible Conceit

No human planner or government agency is capable of solving this problem as seamlessly and efficiently as markets, nor can they hope to achieve the surplus welfare that redound to buyers and sellers in markets. Central planners or intervening authorities cannot possess the knowledge and coordinating power of the market mechanism. That doesn’t mean markets are “perfect”, of course. Things like external costs and benefits, dominant sellers, and asymmetric information can cause market outcomes to deviate from the competitive “ideal”. Inequities can arise from some of these imperfections as well.

What can be much worse is the damage to market performance caused by government policy. Usually the intent is to “correct” imperfections, and the rationale might be defensible. The knowledge to do it very well is often lacking, however. Taxes, subsidies, regulations, tariffs, quotas, capital controls, and manipulation of interest rates (and monetary and credit aggregates) are very general categories of distortion caused by the public sector. Then there is competition for resources via government procurement, which is frequently graft-ridden or price-insensitive.

Many public interventions create advantages for large sellers, leading to greater market concentration. This might best serve the private political power of the wealthy or might convey advantages to investments that happen to be in vogue among the political class. These are the true roots of fascism, which leverages coercive state power for the benefit of private interests.

Energy Vampires

Now we have the curious case of the Biden Administration and it’s purposeful disruption of energy markets in an effort to incentivize a hurried transition from fossil fuels to renewable energy. As I described in a recent post on stagflation,

“… Biden took several steps to hamstring the domestic fossil fuel industry at a time when the economy was still recovering from the pandemic. This included revoking permits for the Keystone pipeline, a ban on drilling on federal lands and federally-controlled waters in the Gulf, shutting down production on some private lands on the pretext of enforcing the Endangered Species Act, and capping methane emissions by oil and gas producers. And all that was apparently just a start.

As Mark Theisen notes, when you promise to destroy a particular industry, as Joe Biden has, by taxing and regulating it to death, who wants to invest in or even maintain production facilities? Some leftists with apparent influence on the administration are threatening penalties against the industry up to and including prosecution for ‘crimes against humanity’!”

In addition to killing Keystone, there remains a strong possibility that Biden will shut down the Line 5 pipeline in Michigan, and there are other pipelines currently under federal review. Biden’s EPA also conducted a purge of science advisors considered “too friendly” to oil and gas industry. This was intertwined with a “review” of new methane rules, which harm smaller, independent oil and gas drillers disproportionately.

Joe Biden’s “Build Back Better” (BBB) legislation, as clumsy in policy as it is in name, introduces a number of “Green New Deal” provisions that would further disadvantage the production and use of fossil fuels. Hart Energy provides descriptions of various tax changes that appeared in the Treasury’s so-called “Greenbook”, a collection of revenue proposals, many of which appear in the BBB legislation that recently passed in the House. These include rollbacks of various deductions for drilling costs, depletion allowances, and recovery rules, as well as hikes in certain excise taxes as well as taxes on foreign oil income. And all this while granting generous subsidies to intermittent and otherwise uneconomic technologies that happen to be in political favor. This is a fine payoff for cronies having invested significantly in these rent seeking opportunities. While the bill still faces an uphill fight in the Senate, apparently Biden has executive orders, held in abeyance, that would inflict more pain on consumers and producers of fossil fuels.

Biden’s energy policies are obviously intended to reduce supplies of oil, gas, and other fossil fuels. Prices have responded, as Green notes:

“Gas is up an average of 57% this year, with corresponding increases of 44% for diesel and a whopping 60% for fuel oil.”

The upward price pressure is not limited to petroleum: electricity rates are jumping as well. Consumers and shippers have noticed. In fact, while Biden crows about wanting “the rich” to pay for BBB, his energy policies are steeply regressive in their impact, as energy absorbs a much larger share of budgets among the poor than the rich. This is politically suicidal, but Biden’s advisors have chosen a most cynical tact as the reality has dawned on them.

Abusive Victim Blaming

Who to blame? After the predictable results of cramping domestic production and attacking fossil fuel producers, the Biden team naturally blames them for rising prices! “Price gouging” is a charge made by political opportunists and those who lack an understanding of how markets allocate scarce resources. More severe scarcity means that prices must rise to ration available quantities and to incentivize those capable of bringing forth additional product under difficult circumstances. That is how a market is supposed to function, and it mitigates scarcity!

But here comes the mendacious and Bumbling Buster Biden. He wants antitrust authorities at the FTC to investigate oil pricing. Again from Stephen Green:

“… the Biden Administration has decided to launch a vindictive legal campaign against oil producers in order to deflect blame for the results of Biden’s policies: Biden’s Solution to Rising Gas Prices Appears to Be Accusing Oil Companies of Price Gouging.”

There’s nothing quite like a threat to market participants to prevent the price mechanism from performing its proper social function. But a failure to price rationally is a prescription for more severe shortages.

Biden has also ordered the Strategic Petroleum Reserve (SPR) to release 50 million barrels of oil, a move that replaces a total of 2.75 days of monthly consumption in the U.S. The SPR is supposed to be drawn upon only in the case of emergencies like natural disasters, so this draw-down is as irresponsible as it is impotent. In fact, OPEC is prepared to offset the SPR release with a production cut. Biden has resorted to begging OPEC to increase production, which is pathetic because the U.S. was a net exporter of oil not long ago … until Biden took charge.

Conclusion

Properly stated, the challenge mounted against markets as an institution is not that they fall short of “perfection”. It is that some other system would lead to superior results in terms of efficiency and/or equity. Central planning, including the kind exercised by the Biden Administration in it’s hurried and foolish effort to tear down and remake the energy economy, is not even a serious candidate on either count.

Granted, there is a long history of subsidies to the oil and gas sector. I cannot defend those, but the development of the technology (even fracking) largely preceded the fruits of the industry’s rent seeking. At this point, green fuels receive far more subsidies (despite some claims to the contrary). Furthermore, the primacy of fossil fuels was not achieved by tearing down competing technologies and infrastructure. In contrast, the current round of central planning requires destruction of entire sectors of the economy that could otherwise produce efficiently for the foreseeable future, if left unmolested.

The Biden Administration has adopted the radical green agenda. Their playbook calls for a severe tilting of price incentives in favor uneconomic, renewable energy sources, despite the economy’s heretofore sensible reliance on plentiful fossil fuels. It’s no surprise that Biden’s policy is unpopular across the economic spectrum. His natural inclination is to blame a competitive industry victimized by his policy. It’s a futile attempt to avoid accountability, as if he thinks doubling down on the fascism will help convince the electorate that oil and gas producers dreamt up this new, nefarious strategy of overcharging customers. People aren’t that dumb, but it’s typical for the elitist Left presume otherwise.

COVID Interventions: Costly, Deadly, and Ineffective

14 Monday Dec 2020

Posted by in Coronavirus, Liberty, Lockdowns, Public Health

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What does it take to shake people out of their statist stupor? Evidently, the sweet “logic” of universal confinement is very appealing to the prescriptive mindset of busybodies everywhere, who anxiously wag their fingers at those whom they view as insufficiently frightened. As difficult as it is for these shrieking, authoritarian curs to fathom, measures like lockdowns, restrictions on business activity, school closures, and mandates on behavior have at best a limited impact on the spread of the coronavirus, and they are enormously costly in terms of economic well-being and many dimensions of public health. Yet the storm of propaganda to the contrary continues. Media outlets routinely run scare stories, dwelling on rising case numbers but ignoring them when they fall; they emphasize inflated measures of pandemic severity; certain researchers and so-called health experts can’t learn the lessons that are plain in the data; and too many public officials feel compelled to assert presumed but unconstitutional powers. At least the World Health Organization has managed to see things clearly, but many don’t want to listen.

I’ll be the first to say I thought the federalist approach to COVID policy was commendable: allow states and local governments to craft policies appropriate to local conditions and political preferences, rather than have the federal government dictate a one-size-fits-all policy. I haven’t wavered in that assessment, but let’s just say I expected more variety. What I failed to appreciate was the extent to which state and local leaders are captive to provincial busybodies, mavens of precautionary excess, and fraudulent claims to scientific wisdom.

Of course, it should be obvious that the “knowledge problem” articulated by Friedrich Hayek is just as dangerous at low-levels of government as it is in a central Leviathan. And it’s not just a knowledge problem, but a political problem: officials become panicked because they fear bad outcomes will spell doom for their careers. Politicians are particularly prone to the hazards of “do-somethingism”, especially if they have willing, status-seeking “experts” to back them up. But as Scott Sumner says:

“When issues strongly impact society, the science no longer ‘speaks for itself’.

Well, the science is not quite as clear as the “follow-the-science” crowd would have you believe. And unfortunately, public officials have little interest in sober assessments of the unintended effects of lockdown policy.

In my last post, I presented a simple framework for thinking about the benefits and costs of lockdown measures, or non-pharmaceutical interventions (NPIs). I also emphasized the knowledge problem: even if there is some point at which NPI stringencies are “optimized”, government does not possess the knowledge to find that point. It lacks detailed information on both the costs and benefits of NPIs, but individual actors know their own tolerance for risk, and they surely have some sense of the risks they pose to others in their normal course of affairs. While voluntary precautions might be imperfect, they accomplish much of what interventionists hope will be gained via coercion. But, in an effort to “sell” NPIs to constituents and assert their authority, officials vastly over-estimate benefits of NPIs and under-estimate the costs.

NPI Stringency and COVID Outcomes

Let’s take a look at a measure of the strength of NPIs by state — the University of Oxford Stringency Index — and compare those to CDC all-cause excess deaths in each state. If it’s hard to read, try clicking on the image or turn your phone sideways. This plot covers outcomes through mid-November:

The chart doesn’t suggest any benefit to the imposition of greater restrictions, or more stringent NPIs. In fact, the truth is that people will do most of the work on their own based on perceptions of risk. That’s partly because government restrictions add little risk mitigation to what can be accomplished by voluntary social distancing and other precautions.

Here’s a similar chart with cross-country comparisons, though the data here ended in early October (I apologize for the fuzzy image):

But what about reverse causality? Maybe the imposition of stringency was a response to more severe contagions. Now that the virus has swept most of the U.S and Europe in three distinct waves, and given the variety and timing of NPIs that have been tried, it’s harder to make that argument. States like South Dakota have done fairly well with low stringency, while states like New Jersey with high stringency have fared poorly. The charts above provide multiple pair-wise examples and counter-examples of states or countries having faced hard waves with different results.

But let’s look at a few specific situations.

The countries shown above have converged somewhat over the past month: Sweden’s daily deaths have risen while the others have declined to greater or lesser degrees, but the implications for mask usage are unaltered.

And of course we have this gem, predicated on the mental gymnastics lockdown enthusiasts are fond of performing:

But seriously, it’s been a typical pattern: cases rise to a point at which officials muster the political will to impose restrictions, often well after the “exponential” phase of the wave or even the peak has passed. For the sake of argument, if we were to stipulate that lockdowns save lives, it would take time for these measures to mitigate new infections, time for some of the infected individuals to become symptomatic, and more time for diagnosis. For the lockdown arguments to be persuasive, the implementation of NPIs would have to precede the point at which the growth of cases begins to decline by a few weeks. That’s something we’ve seldom observed, but officials always seem to take credit for the inevitable decline in cases.

More informed lockdown proponents have been hanging their hats on this paper in Nature by Seth Flaxman, et al, published in July. As Philippe LeMoine has shown, however, Flaxman and his coauthors essentially assumed their result. After a fairly exhaustive analysis, Lemoine, a man who understands sophisticated mathematics, offers these damning comments:

“Their paper is a prime example of propaganda masquerading as science that weaponizes complicated mathematics to promote questionable policies. Complicated mathematics always impresses people because they don’t understand it and it makes the analysis look scientific, but often it’s used to launder totally implausible assumptions, which anyone could recognize as such if they were stated in plain language. I think it’s exactly what happened with Flaxman et al.’s paper, which has been used as a cudgel to defend lockdowns, even though it has no practical relevance whatsoever.”

The Economic Costs of Stringency

So the benefits of stringent lockdowns in terms of averting sickness and death from COVID are speculative at best. What about the costs of lockdowns? We can start with their negative impact on economic activity:

That’s a pretty bad reflection on NPI stringency. In the U.S, a 10% decline in GDP in 2020 amounts to about $2.1 trillion in lost goods and services. That’s just for starters. The many destroyed businesses and livelihoods carry an ongoing cost that could take years to fade, as this graphic on permanent business closures shows:

If you’re wondering about the distributional effects of lockdowns, here’s more bad news:

It’s possible to do many high-paying jobs from home. Not so for blue-collar workers. And distributional effects by size of enterprise are also heavily-skewed in favor of big companies. Within the retail industry, big-box stores are often designated as “essential”, while small shops and restaurants are not. The restaurant industry has been destroyed in many areas, inflicting a huge blow to owners and workers. This despite evidence from contact tracing showing that restaurants and bars account for a very small share of transmission. To add insult to injury, many restaurants invested heavily in safety measures and equipment to facilitate new, safer ways of doing business, only to be double-crossed by officials like Andrew Cuomo and Eric Garcetti, who later shut them down.

Public Health Costs of Stringency

Lives are lost due to lockdowns, but here’s a little exercise for the sake of argument: The life value implied by individual willingness-to-pay for risk reduction comes in at less than $4 million. Even if the supposed 300,000 COVID deaths had all been saved by lockdowns, that would have amounted to a value of $1.2 trillion, about half of the GDP loss indicated above. Of course, it would be outrageously generous to concede that lives saved by NPI’s have approached 300,000, so lockdowns fall far short at the very outset of any cost-benefit comparison, even if we value individual lives at far more than $4 million.

As AJ Kay says, the social and human costs go far beyond economic losses:

I cited specific examples of losses in many of these categories in an earlier post. But for the moment, instead of focusing on causes of death, take a look at this table provided by Justin Hart showing a measure of non-COVID excess deaths by age group in the far right-hand column:

The numbers here are derived by averaging deaths by age group over the previous five years and subtracting COVID deaths in each group. I believe Hart’s numbers go through November. Of greatest interest here is the fact that younger age groups, having far less risk of death from COVID than older age groups, have suffered large numbers of excess deaths NOT attributed to COVID. As Hart notes later in his thread:

These deaths are a tragic consequence of lockdowns.

Educational Costs of Stringency

Many schools have been closed to in-person instruction during the pandemic, leading to severe disruptions to the education f children. This report from the Fairfax County, VA School District is indicative, and it is extremely disheartening. The report includes the following table:

Note the deterioration for disabled students, English learners, and the economically disadvantaged. The surfeit of failing grades is especially damaging to groups already struggling in school relative to their peers, such as blacks and Hispanics. Not only has the disruption to in-person instruction been disastrous to many students and their futures; it has also yielded little benefit in mitigating the contagion. A recent study in The Lancet confirms once again that transmission is low in educational settings. Also see here and here for more evidence on that point.

Conclusion

It’s clear that the “follow-the-science” mantra as a rationale for stringent NPIs was always a fraud, as was the knee-jerk response from those who conflated lockdowns with “leadership”. Such was the wrongheaded and ultimately deadly pressure to “do something”. We can be thankful that pressure was resisted at the federal level by President Trump. The extraordinary damage inflicted by ongoing NPIs was quite foreseeable, but there is one more very ominous implication. I’ll allow J.D. Tucille to sum that up with some of the pointed quotes he provides:

“‘The first global pandemic of the digital age has accelerated the international adoption of surveillance and public security technologies, normalising new forms of widespread, overt state surveillance,’ warned Kelsey Munro and Danielle Cave of the Australian Strategic Policy Institute’s Cyber Policy Centre last month.

‘Numerous governments have used the COVID-pandemic to repress expression in violation of their obligations under human rights law,’ United Nations Special Rapporteur on Freedom of Expression David Kaye noted in July.

‘For authoritarian-minded leaders, the coronavirus crisis is offering a convenient pretext to silence critics and consolidate power,’ Human Rights Watch warned back in April.

There’s widespread agreement, then, that government officials around the world are exploiting the pandemic to expand their power and to suppress opposition. That’s the case not only among the usual suspects where authorities don’t pretend to take elections and civil liberties seriously, but also in countries that are traditionally considered ‘free.’ … It’s wildly optimistic to expect that newly acquired surveillance tools and enforcement powers will simply evaporate once COVID-19 is sent on its way. The post-pandemic new normal is almost certain to be more authoritarian than what went before.”

COVID Externalities: the Costs and Benefits of Intervention

13 Sunday Dec 2020

Posted by in Coronavirus, Public Health, Social Costs

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This post offers a simple representation of the argument against public non-pharmaceutical interventions (NPIs) to subdue the COVID-19 pandemic. The chart below features two lines, one representing the presumed life-saving benefits of lockdown measures or NPI stringency, and another representing the costs inflicted by those measures. The values on the axes here are not critical, though measures of stringency exist (e.g., the University of Oxford Stringency Index) and take values from zero to 100.

The benefits of lives saved due to NPI stringency are assigned a value on the vertical axis, as are the costs of lives lost due to deferred health care, isolation, and other stressors caused by stringency. In addition, there are the more straightforward losses caused by suspending economic activity, which should be included in costs.

One can think of the benefits curve as representing gains from forcing individuals, via lockdown measures, to internalize the external costs of risk inflicted on others. However, this curve captures only benefits incremental to those achieved through voluntary action. Thus, NPI benefits include only extra gains from coercing individuals to internalize risks, while losses from NPI stringency are captured by the cost curve.

My contention is that the benefits of stringency diminish and may in fact turn down at some point, and that costs always increase in the level of stringency. In the chart, for what it’s worth, the “optimal” level of stringency would be at a value of 2, where the difference between total benefits and total costs is maximized (and where the benefits of incremental stringency are equal to the marginal costs or losses). However, I am not convinced that the benefits of lockdown measures ever exceed costs, as they do in the chart above. That is, voluntary action may be sufficient. But if the benefits of NPIs do exceed costs, it’s likely to be only at low levels of stringency.

To the extent that people are aware of the pandemic and recognize risk, the external costs of possible infectiousness are already internalized to some degree. Moreover, there is mutual risk in most interactions, and all individuals face risks that are proportional to those to which they expose others: if your contacts are more varied and your interactions are more frequent and intimate, you face correspondingly higher risks yourself. After all, in a pandemic, an individual’s failure to exercise caution may lead to a very hard internalization of costs if an infection strikes them. This mutuality is an element absent from most situations involving externalities. And to the extent that you take voluntary precautions, you and your contacts both benefit. Nevertheless, I concede that there are individuals who face less risk themselves (the young or healthy) but who might behave recklessly, and they might not internalize all risk for which they are responsible. Yes, stringency may have benefits, but that does not mean it has net benefits.

Even if there is some meaningful point at which NPIs are “optimized”, government does not possess the knowledge required to find that point. It lacks detailed knowledge of both costs and benefits of NPIs. This is a manifestation of the “knowledge problem” articulated by Friedrich Hayek, which hampers all efforts at central planning. In contrast, individual actors know their own tolerance for risk, and they surely have some sense of the risks they create in their normal course of affairs. And again, there is a strong degree of proportionality and voluntary internalization of mutual risks.

While relying on voluntary action is economically inefficient relative to an ideal, full-information and perfectly altruistic solution, it is at least based on information that individuals possess: their own risk profile and risk preferences. In contrast, government does not possess information necessary to impose rules in an optimal way, and those rules are rife with unintended consequences and costs inflicted on individuals.

My next post will present empirical evidence of the weakness of lockdown measures in curbing the coronavirus as well as the high costs of those measures. The coronavirus is a serious infection, but it is not terribly deadly or damaging to the longer-term health of the vast majority of people. This, in and of itself, should be sufficient to demonstrate that the array of non-pharmaceutical interventions imposed in the U.S. and abroad were and are not worthwhile. People are capable of assessing risks for themselves. The externality argument, that NPIs are necessary because people do not adequately assess the risk they pose to others, relies on an authority’s ability to assess that risk, and they invariably go overboard on interventions for which they underestimate costs. COVID is not serious enough to justify a surrender of our constitutional rights, and like every concession to government authority, those rights will be difficult to recover.