Six ideas can summarize any basic economics course. They also can describe our response to the coronavirus pandemic.
1. Opportunity Cost
This is the big picture. Because the opportunity cost of a decision is what you decided not to do, choosing is always refusing. With coronavirus policy, some say we are choosing between the economy and safety– our wealth or our health.
We’ve looked at a study from economist Austin Goolsbee. He and others have shown us statistically it’s not the lockdowns that slow the economy. It is the fear of illness. So, rather than a tradeoff, our health will fuel our wealth during the pandemic.
Defined economically, demand is an entire schedule of price quantity pairs. It is what we are willing and able to buy at each price. Naturally, thinking of saving money, we are willing and able to buy more at lower prices.
Now with the coronavirus, our demand has shifted. Whether looking at the U.S., India, the U.K. or Canada, demand for groceries, household goods, and medicines is up. The surveys took place on June 27th.
Defined economically, supply is an entire schedule of price quantity pairs. It is what producers are willing and able to provide at each price. Naturally, thinking of potential profits, they are willing and able to make more available at higher prices.
Now, with the coronavirus, supply has shifted. One example is the rerouting of the supply of food and paper goods from bulk buying institutions to individual households.
At econlife, toilet paper was one example. Imagine a fork in the road for our toilet paper supply. A part of it goes to commercial establishments from one group of paper mills. Those shipments typically move on huge pallets with more “utilitarian” recycled paper in larger rolls. Meanwhile, what we buy in the supermarket is typically 100 percent virgin fiber. It feels and looks better.
We could say that one market is commercial and the other is consumer. The problem though is that each has a different supply chain. Toilet paper is not alone. The bananas destined for restaurants and school cafeterias are smaller than what we buy in grocery stores. Indeed, all that used to flow through our restaurant and institutional supply chains have nowhere to go.
4. Monetary Policy
A country’s monetary policy relates to its supply of money and credit. During normal times, the money and credit supply matter. They matter because there needs to be a balance between what we can spend and what we produce. Sort of like the Goldilocks and the Three Bears, if there is too much to spend then prices rise. If there is too little, then we diminish production. The goal is “just right.”
It used to be simple to explain the Federal Reserve’s monetary policy . The Fed raises and lowers the discount rate that it charges banks for loans. it targets interest rates and the money supply by buying and selling government securities. And rarely, it changes financial institutions’ reserve requirements.
Now, because of the coronavirus, the Fed has become a lender of last resort by providing loans to banks so that they can loan money to you and me. Also, they are buying assets that help money market funds deal with withdrawals. In addition, the Fed is helping to implement the CARES Act stimulus programs and helping riskier businesses borrow money.
5. Fiscal Policy
Congress and the President are responsible for the spending, taxes, and borrowing that we call fiscal policy. During the pandemic, the fiscal policy headline has been the March 27, 2020 CARES Act. The following Wall Street Journal graphic makes it look very neat and clean. We should note that it was not.
But this was the plan for the Coronavirus Aid, Relief, and Economic Security Act:
6. International Trade
When it comes to medical supplies, international trade is especially relevant.
In 2018, the medical supplies we need for COVID-19 represented many billions of dollars of world trade: However, buying what we need for the COVID-19 pandemic has become increasingly difficult. By March 21st, 54 governments had declared export restrictions. The curbs included bans, government approvals, more stringent licensing rules, and state agencies cornering the market. All are examples of obstacles that block foreign purchases.
Globalization helps to increase our medical equipment supply. Even if restrictions temporarily increase local availability, ultimately, manufacturers have less incentive to ramp up production because their market is limited. Furthermore, the expense of restrictions can be costly for governments that need to allocate limited finances toward fighting the outbreak. Most crucially though, export curbs diminish the cooperation and trust that can help everyone.
And of course, I think of David Ricardo’s comparative advantage. Here, he would surely hope that nations with the lowest opportunity cost produce masks or ventilators. Only then will we optimize the worldwide output that we so badly need.
Our Bottom Line: Behavioral Economics
If we dug more deeply into each of our six ideas, we would see the change in our behavior. Nobel Laureate Richard Thaler would say that we are receiving nudges. Those tiny shoves are incentives that have transformed our daily lives.
My sources and more: Thanks to WSJ’s Andy Kessler for giving me the idea for this post. From there, I’ve returned to past econlife posts.