Post #866: Externality theory of government and private enterprise behavior with respect to COVID-19

Posted on October 15, 2020

This was going to be a long, boring post about economics.  So let me see if I can cut to the chase.

There’s a huge and obvious difference between what (some) private enterprises are doing in response to COVID-19, and what most governments are doing.

Look at how strict most successful colleges are being, with respect to students.  And here, I’ll use my daughter’s college as the example.  Mask use is rigidly enforced, no exceptions.  Social distancing, ditto.  Testing and repeat testing are mandatory, not optional.  Quarantine upon infection is mandatory and closely monitored.  Large gatherings are banned, with a system in place to catch violators.  Risky behavior is banned, and authorities actively seek to identify rule breakers and isolate them from the rest of (college) society.

In terms of COVID-19 regulation and enforcement, Red China has nothing on William and Mary.  Maybe they wear a nicer velvet glove at the Ancient and Honorable College.  But make no mistake about the iron fist.

Contrast this with our government rules, even in a well-governed state such as Virginia.  Sure, we have a mask mandate, of sorts, but nobody enforces it.  Have you heard of even a single person being fined for failure to wear a mask?  (Enforcement is via local public health departments, not via police.)  Laws against mass gatherings are simply not enforced, for the most part.  Ditto for laws regarding quarantine.  Occasionally, a venue that egregiously violates the social-distancing rules will be temporarily shut down.  But compared to private enterprise, our rules boil down to “let’s all try to play nice together”.

I think that difference in behavior is due to what economists call “externalities”.  Or, more to the point, our universal tendency to undervalue externalities. You can see a brief definition of externality here, but it boils down to: You cause something that end up being somebody else’s problem.  And you don’t have to pay for it.

Places that fully internalize the harm from COVID-19 — where spread of disease within an organization directly and profoundly impacts the bottom line — those are places that are laser-focused on preventing spread of disease.  So, where the harm from disease spread is internalized, you find people taking this seriously.  If a college messes this up badly enough, that’s the end of in-person college for that semester.  By contrast, places where the fallout from spread of disease is somebody else’s problem — where there is no direct link between an entity spreading disease and that same entity suffering significant economic harm — those tend to be entities with weak to nonexistent mandatory practices to prevent disease spread.

That is my theory, it is mine, and belongs to me and I own it, and what it is too.

A key point here is that, in general, Republicans don’t believe in externalities.  Or, at least, modern Republicans don’t.  Or don’t believe that they matter much.  Or something.  The idea that transactions other than market transactions matter just does not seem to impinge upon their thinking. Or, equivalently, that if money didn’t change hands, the value of the transaction is given a default value of zero.  (The sole exception is a legal setting, such as a tort case, where a judge or jury determines the monetary value to assign to an injurious-but-otherwise-uncompensated transaction.)

And, of course, the heart and soul of public health is externalities.  That’s the difference between Infectious Disease as a specialty, and Public Health as a specialty.  Public health is largely about trying to prevent the involuntary risk and harm that result when individuals expose others to infectious diseases.  It’s about putting a value on the harm that you do to others, by spreading disease, and then taking steps to minimize that harm.

And so, under this theory, Republicans as a party really and truly are clueless when it comes to public health.   They literally don’t understand it, because, by and large, they don’t recognize the concept of externalities as a central tenet of their ideology.  In fact, I’d say that as a whole, they work to reject any notion of it (e.g., pollution, global warming, and so on).

To a public health official, a pandemic is about people harming other people by spreading disease.  And so the goal for rational public health policy is to value that harm, and take steps up to the point where the cost of prevention exceeds the cost of harm prevented.  And so, dealing that that rationally requires acknowledging that an epidemic is all about externalities. 

Republicans, by contrast, are not allowed to think in terms of externalities.  That leaves them with far more primitive notions of what a pandemic is.  To them, at root, a pandemic is an act of God.  Or an act of Nature.  It’s just something that happens. The (default) dollar value assigned to it is therefore zero.

And, more to the point, to the Republicans of today, a pandemic is not something to which the standard economic cost-benefit calculus can be applied.  Because they are ideologically blind to the value of externalities, they can’t assign a dollar value to them, even roughly.  Even in theory.

The result is that they behave in a way that is the complete opposite of a well-run business organization that internalizes those costs.  Such as a well-run college.  Or nursing home.  Or, to a degree, meat-packing plant.  All of which have adopted vastly more stringent approaches to infection control than has any state or local government.

To the point where they backed, and apparently continue to back, approaches to this pandemic that are hugely economically inefficient.  And here, I’ll refer you back to Post #571, and my crude characterization of “herd immunity with no shutdown” as a proposed strategy for dealing with the pandemic, as follows:

So let me make you an offer.

If you let your child (or, possibly, grandchild) die a slow painful death, in the next couple of months, I’ll give you a brand new luxury SUV.   

Do we have a deal? 

No?  Well, suppose I make it a nice new house instead?  Do we have a deal yet?

If not, you’re beginning to understand what’s missing in a strategy that focuses solely on lost GDP  ...

Economists have a word for that:  Inefficient.  That would be an economically inefficient decision. 

And yet, apparently, herd immunity is still in play, in parts of the current Administration.  Despite the fact that it is an economically inefficient strategy (as defined in that posting).  Because Republicans are trained to think that a pandemic, and dying from a pandemic, is somehow an Act of God.

Well, that, plus the fact that none of them appears to be capable of doing even basic arithmetic.  And so none of them seems to realize just how many years it would take to achieve herd immunity by spreading infection (Post #799).



Which brings me back to South Dakota.  They’re now above 70 new cases per day per 100,000, and together with North Dakota, seem to be setting new records for rate of infection just about every day.

And yet, there’s no mandatory mask ordinance.  And clearly no sort of shut-down or stay-at-home orders.  And probably never will be.  Because if a pandemic is an Act of God, and you can’t place a value on the fact that person A infects person B, then you have no ideological basis for taking action.

To put this bluntly — for the handful who have bothered to skim to this point — failure of national and state Republican leadership in dealing with the pandemic is truly a failure of their ideology, in this context.  Their blindness to the value of externalities means that they really, truly don’t understand what public health is all about.  They don’t correctly value the involuntary harm caused by public transmission of disease, but instead, conceive of it as more-or-less an Act of God.  (My point is, they assign zero earthly dollars to it.)  That leads to economically inefficient decision-making.  And, unsurprisingly, based on that ideology, they’ve managed to fumble just about every public health aspect of this pandemic.

And once you get to that conclusion, the constant denial of reality by die-hard Republicans snaps into focus.  Who could possibly fail to be impressed when the Governor of South Dakota, when faced with the current very high rates of COVID-19 infection, blamed it on increased testing (Post #864).  Pulled a page out of the standard Republican playbook, even though the last Republican governor to try that line of baloney in the context of a surge in cases had to eat his words just nine days later (again, Post #864).  And when the state next door — with a virtually identical rise in cases — was down to its last handful of ICU beds.

(That is, in addition to insisting that stay-at-home orders and such are “useless”, rejecting the notion that a week-long 500,000 person party during a pandemic could possibly have any negative public health consequences, and, of course, insisting that there’s no evidence that wearing masks reduces transmission of disease.)

That is her theory, it is hers, and belongs to her and she owns it, and she’s  damned proud if it, too.

I wonder how the South Dakota governor’s campaign to lure new businesses to that state (referenced just above) based on their lack of COVID-19 controls is going?  I wonder if she’ll learn anything from that market test?  Odds are, I would bet not.  As an economist, it always amazes me how people will ignore the judgment of the market when it pleases them to.

The bottom line is that because Republicans don’t value externalities, they are incapable of grasping solutions that make sense and that fit within the limits of their ideology.  But they can’t say, our ideology is the problem here.  They can’t say, here’s a problem that our ideology prevents us from addressing.  So, instead, they say, well, see, there is no problem. 

It’s all perfectly logical.  In its own way.