Economics for other people

(credit: Lenny DiFranza CC BY/Flickr)

Two core economics concepts are crucial to our decisions, and even more so if they affect others than just ourselves

Late last Sunday, May 31st, my wife’s friend Linda got a surprise from the UK government. Since the beginning of the lockdown, she and her husband Tom, together with 2.5 million others who were deemed “clinically extremely vulnerable” to COVID-19, had been advised to stay at home 100% of the time – i.e., unlike others, not even go to shops or pharmacies or exercise. Now, after having been shielding in this way for nearly ten weeks, from the next day Linda would be allowed to go outside once per day, as long as she kept at least the UK safe distance of 2 metres from anyone other than her husband.

For someone with more than a passing interest in decision making (like your correspondent), both this decision and its timing provided food for thought. What was behind the decision? Why was it made now? What were the cost and benefits involved, and for whom? Two key economics concepts can help us understand.

Not everyone was comfortable to venture out straight away. Some people still feel the risk of getting infected, however much lower than ten weeks ago, was too high. But on Tuesday morning at 5am, for the first time in more than two months, Linda and Tom went out and enjoyed the new old freedom of going for a long walk. Few people normally get up this early, so the fact that they took this costly action reveals their preference: they indicated they were prepared to give up a good few hours of sleep in order to be able to have that walk in safety. For our friends, the decision was clearly a good one, and an overdue one.

Trading off costs and benefits

When the government recommended certain people to stay indoors (and the rest to only go out for very specific reasons and in very restricted ways), it made a trade-off. It had to “flatten the curve” to prevent the healthcare system to become overwhelmed with COVID-19 patients. That came with a price tag: the economic consequences of such a lockdown are, by all accounts, huge. But the social and economic consequences of hundreds of thousands of deaths, too, would have been huge. Working out this trade-off is complex, and it is not the topic of this article.

It also meant personal trade-offs. While staying at home 24 hours a day poses less risk, or at least no more risk of contagion than leaving one’s home, it also involves making a substantial sacrifice. Ask yourself how much you would need to be paid not to go out at all for ten weeks – I bet it is not a trivially small amount. Was this a good trade-off? Naturally, most vulnerable people did not know what the exact risk of going out for a walk would have been, but instead relied on (and accepted) the government’s judgement that it was high enough to justify such extreme shielding.

Now, under the new guidance, a walk clearly no longer poses sufficient risk to warrant shielding. But what has really changed?

The announcement refers to the “decrease of the COVID-19 disease levels over the last few weeks”. Disease levels is a vague term, but the key data – deaths, hospitalizations and new cases – have indeed been steadily decreasing since late April. Does this mean going for a walk is now less risky? That is far from obvious – if, as the present guidance suggests, you take care not to get closer than 2m to anyone who might be infectious, the total number of deaths or cases is really of no relevance.

So, if the risk is not demonstrably lower than before, then one can wonder whether it really ever was high enough to justify the advice to 2.5 million people to stay indoors 24/7, and not even go out for a walk at 5am. Is this paternalism going too far?

Decisions made by policymakers are often paternalistic, and so by definition affect others, namely the citizens (on whose behalf they are taken). The question is whether the trade-offs in these decisions take into account the costs and benefits to the citizens affected. If the risk of going outdoors was always as low as presently, then the cost of avoiding it, the sacrifice of being locked up for weeks, may well have been excessive. If policymakers mistakenly (perhaps even arrogantly) assume they properly understand the consequences of a decision to the citizens, and fail to verify their assumption, the trade-off they make on behalf of those citizens will be wrong.

The dreaded externality

Still, there was a change in the guidance. It came ten weeks after the start of the lockdown, when the number of COVID-19 deaths was doubling every 2-3 days. Perhaps it was understandable at the time that the government, having decided that everyone needed to stay at home except to get essential provisions and to exercise, wanted to provide extra protection to the clinically extremely vulnerable. But at what point could they have chosen to relax the guidance and allow these people to have a safe stroll? Did they really not know until May 31st that they could issue the new guidance without expose them unduly? Or was it an afterthought?

It is unlikely that the grounds for the decision to ease the restrictions for vulnerable people were only known on the day the new guidance was announced. If concern for their wellbeing had been a priority, then it would have been issued much earlier. By leaving it, for whatever reason, so late, the government deprived vulnerable people of the opportunity to go for a walk for several weeks.

Unlike the original guidance, which involved an explicit trade-off between risk and sacrifice made on behalf of vulnerable people, the timing of the easing of the guidance (i.e., the decision when to decide) represents what economists call an externality: a decision that has (often negative) consequences on a party that is affected but not involved. Not having to take the trouble of revised guidance until later was a benefit of sorts for the government with lots on its mind, but the corresponding cost of having to remain locked in for longer was borne by the citizens.

Such externalities are common in decisions made by policymakers. Sometimes, they are inevitable, for example, the disruption and annoyance the construction of a motorway imposes on local residents. Sometimes they are the consequence of neglect or ignorance.

Whether policymakers themselves will reflect on the poor treatment clinically extremely vulnerable have experienced as a result of their trade-offs and the externalities they impose is an open question. But it is not just policymakers who make decisions on behalf of others, or who impose externalities on them. We make decisions for others, too, for example as parents, as teachers, as carers, or as supervisors at work.  And we make choices where others who are not involved still bear the cost – when we behave selfishly on the road, when we noisily leave the pub at midnight, or when we leave our dirty coffee mug in the sink at work and leave the washing up to someone else.

Perhaps we can draw a lesson from the story of Linda and Tom, and try to have a little more regard for others when we make choices.

About koenfucius

Wisdom or koenfusion? Maybe the difference is not that big.
This entry was posted in Behavioural economics, Economics, politics, Psychology, Society and tagged , . Bookmark the permalink.

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