One would think that, in the case of an economic shock such as a pandemic, an economy would suffer less damage and recover more rapidly the greater its level of economic freedom and the more flexible it is. To the typical economist, this seems rather obvious in theory. But is it empirically confirmed?
Worse than the current COVID-19 pandemic, the influenza pandemic that started in 1918 infected half a billion individuals or one-third of the world population and killed 50 million.
In a recent paper “Economic Freedom and the Economic Consequences of the 1918 Pandemic” (SSRN, May 2020), two young economists, Vincent Geloso (King’s University College, Ontario) and Jamie Bologna Pavlik (Texas Tech University) provide an empirical confirmation that economic freedom dampened the effects of the 1918 pandemic. They analyze 20 countries where, over the period 1901 to 1929, estimates of economic freedom are available as well as data on deaths from the pandemic (and from WWII, to avoid this confounding factor). They regress the levels or growth of real GDP per capita on these variables. They admit that the small number of countries in the sample represent “the main downside of [their] approach.”
Economic freedom is measured by a long-term index (going back to 1850 in some cases) developed by Leandro Prados de la Escosura of the Universidad Carlos III in Madrid and similar to the contemporary Economic Freedom of the World Index by the Fraser Institute. In both cases, the score of economic freedom can run from zero to a maximum of 10.
Geloso and Bologna Pavlik’s econometric estimates are generally highly statistically significant, especially in their main specification. They show that
countries with higher levels of economic freedom suffered substantially less from the pandemic … [H]igher levels of economic freedom mitigate the effect of the crisis. In terms of magnitude, an extra point [on 10] of economic liberty offsets roughly 16% of the [economic] effect of an extra flu death per 100,000 persons.
Another very interesting, but not surprising, result is that it is general regulation and restrictions to international trade that interfered most with the maintenance and recovery of GDP per capita.
A longer version of the article will be published in Contemporary Economic Policy. The revised paper further shows that democracy had a much smaller effect than economic freedom in mitigating the economic impact of the pandemic.
Let me add that the importance of economic freedom in mitigating the impact of the 1918 pandemic suggests that the American economy (and most if not all other economies in the world) would have weathered Covid-19 much better if prices had not been controlled because they would have rationed quantity demanded (better than queues), incited producers to increase quantity supplied, and thus prevented shortages. In America, the majority of states have “price gouging” laws that prevent prices from increasing once an emergency is declared. At the federal level, the Defense Production Act, invoked by President Donald Trump on March 18, has also contributed to the shortages. (I have a number of Econlog posts on this topic.)
READER COMMENTS
Mark Brady
Jul 23 2020 at 8:58pm
And if there hadn’t been a world war, there would very likely have been no devastating pandemic.
Pierre Lemieux
Jul 23 2020 at 9:14pm
Yes. I think that Geloso and Bologna Pavlik’s results incorporate this possibility by including the war deaths in the regression, but I don’t know to which extent.
Matthias Görgens
Jul 25 2020 at 11:18pm
The specific mutation and path of spread wouldn’t have occurred without the war, obviously.
But some other pandemic might have spread at some slighlty different time.
Wars are a great spreader of plagues, but they are not strictly necessary.
Craig
Jul 23 2020 at 10:20pm
I have fortunately never had to mentally grapple with such a health crisis and I have been waffling, will likely to continue to waffle and will probably now go to the Waffle House for breakfast. Its hard, personally I’ve adopted a stoic approach to work, work, and work some more and control that which I can actually control. With respect to the future, I also waffle between being hopeful and optimistic for the future and pessimistic about the future in my next breath.
In 1918 the general ability to come to grip with such a pandemic was much more limited. Today is a much different situation. The enemy is known, its genome has been mapped and it is squarely in the crosshairs of the global pharmaceutical industry.
Right now still in the midst of the crisis if I were to suggest the response was impressive, many would disagree and those suffering would likely disagree. However, as I write this there are more than a few vaccine candidates, most notably the two from Oxford and Moderna which seem like they have a shot at being effective.
The reason I have often waffled towards your approach here, Professor, is because I have seen the resilience of markets under trying circumstances from Chucky Cheese offering pizza for delivery to my daughter’s rhinestone studied facemask. On the contrary, I have seen a sketchy government response that has put me in fear for the US dollar as I scratch my head watching the Republicans and Democrats continue their now deadly game of political trench warfare.
But my genuine sense is that the government has fundamentally delayed the ability of the global pharmaceutical industry from getting us a desperately needed vaccine. Indeed, I would suggest that but for government the pandemic would already be over.
Pierre Lemieux
Jul 23 2020 at 11:24pm
@Craig: You are right that there are both reasons for optimism and reasons for pessimism. As you hint at, the entrepreneurial spirit that persists in this country is of the first sort. My own little experience is that, as the time came to switch the snow tires on my pickup for regular tires in late March, I got an email from my car dealer explaining that, forbidden to open their doors, they were offering to send a guy to pick up customers’ cars at home (to pick up my pickup, in my case) and return it when the work is done. Indeed, a guy came at home, left me a loaner (the car he had come with), and returned my pickup after a couple of hours. And they had promised to disinfect the places that the driver would have touched. All that for $78, including a basic inspection of the truck. “We are trying to stay in business,” they told me on the phone.
I was also impressed by all these small restaurants who improvised curb service, some using phone apps for the first time.
Thomas Hutcheson
Jul 24 2020 at 11:30am
To react to a pandemic (or any other new negative externality) requires flexibility to respond to incentives to take account of the difference between individually optimizing behavior and that which internalizes the externality.
Pierre Lemieux
Jul 25 2020 at 1:37pm
@Thomas Hutcheson: Thanks for making this point, an important one and a normal reaction for an economist ever since Pigou. Yet, externalities are the economist’s sirens and he should have himself tied up to the mast of his ship not to yield to their mesmerizing song. One problem with externalities, as pointed out by Coase and by Buchanan (and Stubblebine), is they are symmetric (or reciprocal). The potentially infected individual who goes shopping without a mask transmits a negative externality to the infection-susceptible individual (although, mind you, nothing forbids the latter to wear a mask to protect himself). But if this infection-susceptible individual—call him Joe—“closes the economy” in some way to protect himself, he also submits the non-mask-wearing shoppers and all those who will be negatively impacted to a negative externality. Whether Joe is one person or a minority or even the majority makes little or no difference.
To counter that Joe should make a cost-benefit analysis to make sure that his benefits from the economic ban are higher than the externalities he imposes on others is, when you think about it, a heroic claim. To dismiss it, one must explain, at the minimum, why Anthony de Jasay is wrong when he writes:
It is not easy to demonstrate how that is wrong.