Health care had a better pandemic than economics

The encouraging news about potential vaccines crowns what seems like a triumphant year for health care’s response to the COVID-19 pandemic. Prevention and treatment have improved substantially and there is now the prospect of effective vaccination delivered in record time.

In fact, the health-care system’s performance, though impressive, was far from perfect. Initial reluctance to restrict travel and the emphasis on hand- sanitizing over masks reflected the difficulty of understanding a new disease. In retrospect, the health- mandated shutdown of non- essential economic activity in the spring was clearly unnecessarily broad, especially for sectors such as natural resources, construction, manufacturing and even retailing. The debate about closures in the second wave is mostly about particular service industries such as bars, restaurants, gyms and schools. Despite the rising number of cases in the second wave, hardly anyone grounded in economics is advocating the sort of shutdown seen in the spring.

In general, however, ministries of health did not use the summer to educate the public about the inevitability of a second wave this fall and did not prepare adequately for testing, tracing or acquiring sufficient protective equipment. To be fair, the medical community has learned from its mistakes and made improvements over the course of the year, which is why the rates of hospitalization and death have not risen in tandem with cases of the virus. But, so far, Big Pharma is the only part of the healthcare supply chain that seems to have performed flawlessly and indeed has exceeded expectations with its vaccines. Not coincidentally, it is also the only part dominated by private-sector firms.

It is hard to be as positive about the economic policy response to the dislocations and losses caused by the pandemic. The costly spring shutdown of the non- essential economy can be partly blamed on government economists not challenging poor medical advice. The subsequent economic response was poorly targeted, unnecessarily expensive and very likely damaging to the long-term growth of incomes. Governments responded to the spring’s economic freefall with broad income support. But generous household income supports hastily adopted during the spring lockdown have largely been kept in place even as parts of the economy reopened. Government aid was not reconfigured to target only those who most needed help. As a result, over one- quarter of federal assistance was paid to people in households earning over $100,000, according to a study by the Fraser Institute. Canada led the way in not just replacing but actually increasing household incomes. This is one reason the International Monetary Fund says the ratio of Canada’s fiscal deficit to its gross domestic product is highest among developed nations this year.

Nor has government come up with effective programs to help specific industries that clearly are struggling to adapt to the requirements for social distancing, such as transportation, hotels, restaurants, office buildings and personal services. Worse, governments did little to reduce or delay the costs they impose on businesses in these industries via property taxes, utility rates, fees and sales and income taxes. It is not surprising that the federal government program for rent relief flopped with landlords, who were being asked to sacrifice income the government did not forego.

While health care proved innovative in responding to the pandemic, economics simply trotted out the same easy- money and deficit- financed policies it has relentlessly pursued since the financial crisis, despite a decade of mediocre results. The result clearly set back the economy in both the short and long term. The unprecedented fiscal and monetary stimulus that did not just replace but enhanced household incomes, still did not fully compensate this year’s losses in GDP and jobs from the pandemic and full recovery is not expected until 2022. Meanwhile, the long- term potential growth of the economy has been compromised, according to the Bank of Canada, mostly due to lower business investment.

Economics does suggest, however, that today’s triumphant tone from the medical community might not be justified over the longer term. One of the great insights of economics is the importance of unintended consequences that only become apparent with the passage of time; indeed, Stanford University economist John Cochrane once said that economics is “best described as a collection of funny stories about unintended consequences.” There may be some distinctly unfunny stories about the long- term consequences of the steps taken to combat the virus, including one million fewer visits to emergency rooms, delayed routine medical appointments, postponed elective surgeries, reduced physical fitness as gyms closed, increased mental stress and substance abuse, and the unknown effect of closing classes on young children. It is possible, in the view of the historian Niall Ferguson, that future analysts will look back on 2020 with bewilderment and ask, “What were they thinking in taking actions that ultimately proved worse than the disease?”

The disorderly response to the COVID-19 pandemic reflects how health-care policy was torn between government’s desire to control the virus and the reality that the success of its policies ultimately depended on businesses innovating and individuals obeying. Governments could dictate which parts of the economy were open and prescribe a host of regulations mandating social distancing and the wearing of face masks, but they counted on individual citizens to follow these dictates and U. S. pharmaceutical giants to develop vaccines. Meanwhile, economic policy relied exclusively on a massive expansion of the role of the state. Worse, the federal government has signalled its intention to use the crisis to refashion and extend government’s role in the economy, just as many governments used the Second World War to entrench the welfare state as a response to the economic insecurity of the 1930s.