Governments always tilt too far toward action

Coronavirus cases are increasing in Ontario and the provincial government is again cracking down on people’s freedoms and businesses’ ability to operate. Having in mid-september reduced maximum private gathering sizes to 10 people indoors or 25 outdoors (down from 50 indoors or 100 outdoors), last week the government announced a package of new measures, including: tighter restrictions on the capacity inside restaurants, bars, event facilities and gyms in Toronto, Peel and Ottawa; a mandate that restaurants and bars in those regions collect each customer’s name and contact information; and a delay of at least four weeks on any further business reopenings across the province.

These measures may help reduce the spread of the disease but for those looking for an appropriate balance between the virus, on the one hand, and the economy and personal freedoms, on the other, the government policy deck is stacked in favour of overreaction and over- restriction.

In the first place, the costs of heavier restrictions are almost certainly understated. They are less visible and longer- term than the costs of additional coronavirus cases. To take one example, the restrictions will undoubtedly cause a reduction in business investment. People who spent decades building up equity in their businesses had it wiped out in just months because the government declared an emergency and forced them to close. They were initially told the restrictions were a one- off and if they could hold on for a month or two without running out of cash, things would start returning to normal.

That wasn’t true. The government is now swinging into reverse and reimposing restrictions, showing that the initial lockdown was not a one- off, after all. And now that the precedent has been set, people know that the next time there is a pandemic or similar emergency, governments will have little compunction in shutting everything down and again wiping out billions of dollars of equity. That understanding is bound to have a lasting effect in discouraging entrepreneurship and investment.

There are also more immediate and visible deleterious effects from government restrictions. In addition to the massive unemployment and economic insecurity, there are: increased mental health problems; delayed surgeries and other medical procedures; substantial inconvenience in daily living; and the erosion of personal freedoms. But the costs of all these things are harder to quantify and often less widely reported than the sometimes very dramatic spread of the coronavirus.

Politicians imposing the restrictions may also give too little consideration to the economic harm of their policies if — as most people tend to do — they project their own health- versus- economy trade- off preferences onto others. Several million Canadians lost their jobs as a result of the lockdowns, and even after an impressive rebound, employment was still more than one million jobs lower in August than it had been in February. But none of the jobs lost or still at risk because of lockdown restrictions belongs to the politicians imposing them. Nor have any politicians taken pay cuts to help out with their organization’s bottom line, as many private- sector workers have been asked, and have agreed, to do.

While most politicians probably underestimate the costs of government efforts to control the virus, the benefits of such efforts are very likely overestimated. Governments are dedicating significant resources to contact tracing, but as a Stanford University medical professor and a University of Waterloo economist have argued in Inference: International Review of Science, contact tracing efforts are likely to be “ultimately futile.” Contact tracing combined with heavy fines for illegally large gatherings — in Ontario, organizers of such gatherings face minimum fines of $ 10,000 while participants are fined $ 750 — strongly discourage anybody who has attended such a gathering from getting tested for the virus. By creating incentives to avoid testing, some government efforts may actually accelerate instead of slow the spread of coronavirus.

There are also, unfortunately, powerful political incentives for politicians to be seen doing lots instead of doing little, and a permanent temptation to exercise more power instead of less. If they don’t act, people always conclude, it’s not because they have thought carefully and concluded any action on their part is as likely to do harm as good, it’s because “they don’t care.” This syndrome was also seen during the 2008- 09 recession, when, in hindsight, given the ineffectiveness of government action in hastening the recovery, it seems clear the federal and provincial governments should mainly have let the private sector recover on its own, including via bankruptcies and the reallocation of assets to healthier firms. But instead, because of political pressures to “do something,” they ramped up the economic interventionism, diverting resources away from the private sector and racking up mountains of debt.

The parallels between the current pandemic and the 2008- 09 recession obviously are not exact. There is a public- health role for governments. Unlike in 200809, governments should do more than nothing to battle the crisis. But they need to find a better balance between virus control and collateral economic damage and resist their natural inclinations to overreact, over-restrict, and — especially in the case of the federal government — overspend.

the costs of heavier restrictions are almost certainly understated.