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The great Dr. Thomas Sowell

One of the great scholars of law & economics turns 90 years old today. In his long and distinguished career, Thomas Sowell has written over 40 books and countless opinion columns. He has been a professor of economics and a long-time Senior Fellow at the Hoover Institution. He received a National Humanities Medal in 2002 for a lifetime of scholarship, which has only continued since then. His ability to look at issues with an international perspective, using the analytical tools of economics to better understand institutions, is an inspiration to us at the International Center for Law & Economics.

Here, almost as a blog post festschrift as a long-time reader of his works, I want to briefly write about how Sowell’s voluminous writings on visions, law, race, and economics could be the basis for a positive agenda to achieve a greater measure of racial justice in the United States.

The Importance of Visions

One of the most important aspects of Sowell’s work is his ability to distill wide-ranging issues into debates involving different mental models, or a “Conflict of Visions.” He calls one vision the “tragic” or “constrained” vision, which sees all humans as inherently limited in knowledge, wisdom, and virtue, and fundamentally self-interested even at their best. The other vision is the “utopian” or “unconstrained” vision, which sees human limitations as artifacts of social arrangements and cultures, and that there are some capable by virtue of superior knowledge and morality that can redesign society to create a better world. 

An implication of the constrained vision is that the difference in knowledge and virtue between the best and the worst in society is actually quite small. As a result, no one person or group of people can be trusted with redesigning institutions which have spontaneously evolved. The best we can hope for is institutions that reasonably deter bad conduct and allow people the freedom to solve their own problems. 

An important implication of the unconstrained vision, on the other hand,  is that there are some who because of superior enlightenment, which Sowell calls the “Vision of the Anointed,” can redesign institutions to fundamentally change human nature, which is seen as malleable. Institutions are far more often seen as the result of deliberate human design and choice, and that failures to change them to be more just or equal is a result of immorality or lack of will.

The importance of visions to how we view things like justice and institutions makes all the difference. In the constrained view, institutions like language, culture, and even much of the law result from the “spontaneous ordering” that is the result of human action but not of human design. Limited government, markets, and tradition are all important in helping individuals coordinate action. Markets work because self-interested individuals benefit when they serve others. There are no solutions to difficult societal problems, including racism, only trade-offs. 

But in the unconstrained view, limits on government power are seen as impediments to public-spirited experts creating a better society. Markets, traditions, and cultures are to be redesigned from the top down by those who are forward-looking, relying on their articulated reason. There is a belief that solutions could be imposed if only there is sufficient political will and the right people in charge. When it comes to an issue like racism, those who are sufficiently “woke” should be in charge of redesigning institutions to provide for a solution to things like systemic racism.

For Sowell, what he calls “traditional justice” is achieved by processes that hold people accountable for harms to others. Its focus is on flesh-and-blood human beings, not abstractions like all men or blacks versus whites. Differences in outcomes are not just or unjust, by this point of view, what is important is that the processes are just. These processes should focus on institutional incentives of participants. Reforms should be careful not to upset important incentive structures which have evolved over time as the best way for limited human beings to coordinate behavior.

The “Quest for Cosmic Justice,” on the other hand, flows from the unconstrained vision. Cosmic justice sees disparities between abstract groups, like whites and blacks, as unjust and in need of correction. If results from impartial processes like markets or law result in disparities, those with an unconstrained vision often see those processes as themselves racist. The conclusion is that the law should intervene to create better outcomes. This presumes considerable knowledge and morality on behalf of those who are in charge of the interventions. 

For Sowell, a large part of his research project has been showing that those with the unconstrained vision often harm those they are proclaiming the intention to help in their quest for cosmic justice. 

A Constrained Vision of Racial Justice

Sowell has written quite a lot on race, culture, intellectuals, economics, and public policy. One of the main thrusts of his argument about race is that attempts at cosmic justice often harm living flesh-and-blood individuals in the name of intertemporal abstractions like “social justice” for black Americans. Sowell nowhere denies that racism is an important component of understanding the history of black Americans. But his constant challenge is that racism can’t be the only variable which explains disparities. Sowell points to the importance of culture and education in building human capital to be successful in market economies. Without taking those other variables into account, there is no way to determine the extent that racism is the cause of disparities. 

This has important implications for achieving racial justice today. When it comes to policies pursued in the name of racial justice, Sowell has argued that many programs often harm not only members of disfavored groups, but the members of the favored groups.

For instance, Sowell has argued that affirmative action actually harms not only flesh-and-blood white and Asian-Americans who are passed over, but also harms those African-Americans who are “mismatched” in their educational endeavors and end up failing or dropping out of schools when they could have been much better served by attending schools where they would have been very successful. Another example Sowell often points to is minimum wage legislation, which is often justified in the name of helping the downtrodden, but has the effect of harming low-skilled workers by increasing unemployment, most especially young African-American males. 

Any attempts at achieving racial justice, in terms of correcting historical injustices, must take into account how changes in processes could actually end up hurting flesh-and-blood human beings, especially when those harmed are black Americans. 

A Positive Agenda for Policy Reform

In Sowell’s constrained vision, a large part of the equation for African-American improvement is going to be cultural change. However, white Americans should not think that this means they have no responsibility in working towards racial justice. A positive agenda must take into consideration real harms experienced by African-Americans due to government action (and inaction). Thus, traditional justice demands institutional reforms, and in some cases, recompense.

The policy part of this equation outlined below is motivated by traditional justice concerns that hold people accountable under the rule of law for violations of constitutional rights and promotes institutional reforms to more properly align incentives. 

What follows below are policy proposals aimed at achieving a greater degree of racial justice for black Americans, but fundamentally informed by the constrained vision and traditional justice concerns outlined by Sowell. Most of these proposals are not on issues Sowell has written a lot on. In fact, some proposals may actually not be something he would support, but are—in my opinion—consistent with the constrained vision and traditional justice.

Reparations for Historical Rights Violations

Sowell once wrote this in regards to reparations for black Americans:

Nevertheless, it remains painfully clear that those people who were torn from their homes in Africa in centuries past and forcibly brought across the Atlantic in chains suffered not only horribly, but unjustly. Were they and their captors still alive, the reparations and retribution owed would be staggering. Time and death, however, cheat us of such opportunities for justice, however galling that may be. We can, of course, create new injustices among our flesh-and-blood contemporaries for the sake of symbolic expiation, so that the son or daughter of a black doctor or executive can get into an elite college ahead of the son or daughter of a white factory worker or farmer, but only believers in the vision of cosmic justice are likely to take moral solace from that. We can only make our choices among alternatives actually available, and rectifying the past is not one of those options.

In other words, if the victims and perpetrators of injustice are no longer alive, it is not just to hold entire members of respective races accountable for crimes which they did not commit. However, this would presumably leave open the possibility of applying traditional justice concepts in those cases where death has not cheated us.

For instance, there are still black Americans alive who suffered from Jim Crow, as well as children and family members of those lynched. While it is too little, too late, it seems consistent with traditional justice to still seek out and prosecute criminally perpetrators who committed heinous acts but a few generations ago against still living victims. This is not unprecedented. Old Nazis are still prosecuted for crimes against Jews. A similar thing could be done in the United States.

Similarly, civil rights lawsuits for the damages caused by Jim Crow could be another way to recompense those who were harmed. Alternatively, it could be done by legislation. The Civil Liberties Act of 1988 was passed under President Reagan and gave living Japanese Americans who were interned during World War II some limited reparations. A similar system could be set up for living victims of Jim Crow. 

Statutes of limitations may need to be changed to facilitate these criminal prosecutions and civil rights lawsuits, but it is quite clearly consistent with the idea of holding flesh-and-blood persons accountable for their unlawful actions.

Holding flesh-and-blood perpetrators accountable for rights violations should not be confused with the cosmic justice idea—that Sowell consistently decries—that says intertemporal abstractions can be held accountable for crimes. In other words, this is not holding “whites” accountable for all historical injustices to “blacks.” This is specifically giving redress to victims and deterring future bad conduct.  

End Qualified Immunity

Another way to promote racial justice consistent with the constrained vision is to end one of the Warren Court’s egregious examples of judicial activism: qualified immunity. Qualified immunity is nowhere mentioned in the statute for civil rights, 42 USC § 1983. As Sowell argues in his writings, judges in the constrained vision are supposed to declare what the law is, not what they believe it should be, unlike those in the unconstrained vision who—according to Sowell— believe they have the right to amend the laws through judicial edict. The introduction of qualified immunity into the law by the activist Warren Court should be overturned.

Currently, qualified immunity effectively subsidizes police brutality, to the detriment of all Americans, but disproportionately affecting black Americans. The law & economics case against qualified immunity is pretty straightforward: 

In a civil rights lawsuit, the goal is to make the victim (or their families) of a rights violation whole by monetary damages. From a legal perspective, this is necessary to give the victim justice. From an economic perspective this is necessary to deter future bad conduct and properly align ex ante incentives going forward. Under a well-functioning system, juries would, after hearing all the evidence, make a decision about whether constitutional rights were violated and the extent of damages. A functioning system of settlements would result as a common law develops determining what counts as reasonable or unreasonable uses of force. This doesn’t mean plaintiffs always win, either. Officers may be determined to be acting reasonably under the circumstances once all the evidence is presented to a jury.

However, one of the greatest obstacles to holding police officers accountable in misconduct cases is the doctrine of qualified immunity… courts have widely expanded its scope to the point that qualified immunity is now protecting officers even when their conduct violates the law, as long as the officers weren’t on clear notice from specific judicial precedent that what they did was illegal when they did it… This standard has predictably led to a situation where officer misconduct which judges and juries would likely find egregious never makes it to court. The Cato Institute’s website Unlawful Shield details many cases where federal courts found an officer’s conduct was illegal yet nonetheless protected by qualified immunity.

Immunity of this nature has profound consequences on the incentive structure facing police officers. Police officers, as well as the departments that employ them, are insufficiently accountable when gross misconduct does not get past a motion to dismiss for qualified immunity… The result is to encourage police officers to take insufficient care when making the choice about the level of force to use. 

Those with a constrained vision focus on processes and incentives. In this case, it is police officers who have insufficient incentives to take reasonable care when they receive qualified immunity for their conduct.

End the Drug War

While not something he has written a lot on, Sowell has argued for the decriminalization of drugs, comparing the War on Drugs to the earlier attempts at Prohibition of alcohol. This is consistent with the constrained vision, which cares about the institutional incentives created by law. 

Interestingly, work by Michelle Alexander in the second chapter of The New Jim Crow is largely consistent with Sowell’s point of view. There she argued the institutional incentives of police departments were systematically changed when the drug war was ramped up. 

Alexander asks a question which is right in line with the constrained vision:

[I]t is fair to wonder why the police would choose to arrest such an astonishing percentage of the American public for minor drug crimes. The fact that police are legally allowed to engage in a wholesale roundup of nonviolent drug offenders does not answer the question why they would choose to do so, particularly when most police departments have far more serious crimes to prevent and solve. Why would police prioritize drug-law enforcement? Drug use and abuse is nothing new; in fact, it was on the decline, not on the rise, when the War on Drugs began.

Alexander locates the impetus for ramping up the drug war in federal subsidies:

In 1988, at the behest of the Reagan administration, Congress revised the program that provides federal aid to law enforcement, renaming it the Edward Byrne Memorial State and Local Law Enforcement Assistance Program after a New York City police officer who was shot to death while guarding the home of a drug-case witness. The Byrne program was designed to encourage every federal grant recipient to help fight the War on Drugs. Millions of dollars in federal aid have been offered to state and local law enforcement agencies willing to wage the war. By the late 1990s, the overwhelming majority of state and local police forces in the country had availed themselves of the newly available resources and added a significant military component to buttress their drug-war operations. 

On top of that, police departments were benefited by civil asset forfeiture:

As if the free military equipment, training, and cash grants were not enough, the Reagan administration provided law enforcement with yet another financial incentive to devote extraordinary resources to drug law enforcement, rather than more serious crimes: state and local law enforcement agencies were granted the authority to keep, for their own use, the vast majority of cash and assets they seize when waging the drug war. This dramatic change in policy gave state and local police an enormous stake in the War on Drugs—not in its success, but in its perpetual existence. Suddenly, police departments were capable of increasing the size of their budgets, quite substantially, simply by taking the cash, cars, and homes of people suspected of drug use or sales. Because those who were targeted were typically poor or of moderate means, they often lacked the resources to hire an attorney or pay the considerable court costs. As a result, most people who had their cash or property seized did not challenge the government’s action, especially because the government could retaliate by filing criminal charges—baseless or not.

As Alexander notes, black Americans (and other minorities) were largely targeted in this ramped up War on Drugs, noting the drug war’s effects have been to disproportionately imprison black Americans even though drug usage and sales are relatively similar across races. Police officers have incredible discretion in determining who to investigate and bring charges against. When it comes to the drug war, this discretion is magnified because the activity is largely consensual, meaning officers can’t rely on victims to come to them to start an investigation. Alexander finds the reason the criminal justice system has targeted black Americans is because of implicit bias in police officers, prosecutors, and judges, which mirrors the bias shown in media coverage and in larger white American society. 

Anyone inspired by Sowell would need to determine whether this is because of racism or some other variable. It is important to note here that Sowell never denies that racism exists or is a real problem in American society. But he does challenge us to determine whether this alone is the cause of disparities. Here, Alexander makes a strong case that it is implicit racism that causes the disparities in enforcement of the War on Drugs. A race-neutral explanation could be as follows, even though it still suggests ending the War on Drugs: the enforcement costs against those unable to afford to challenge the system are lower. And black Americans are disproportionately represented among the poor in this country. As will be discussed below in the section on reforming indigent criminal defense, most prosecutions are initiated against defendants who can’t afford a lawyer. The result could be racially disparate even without a racist motivation. 

Regardless of whether racism is the variable that explains the disparate impact of the War on Drugs, it should be ended. This may be an area where traditional and cosmic justice concerns can be united in an effort to reform the criminal justice system.

Reform Indigent Criminal Defense

A related aspect of how the criminal justice system has created a real barrier for far too many black Americans is the often poor quality of indigent criminal defense. Indigent defense is a large part of criminal defense in this country since a very high number of criminal prosecutions are initiated against those who are often too poor to afford a lawyer (roughly 80%). Since black Americans are disproportionately represented among the indigent and those in the criminal justice system, it should be no surprise that black Americans are disproportionately represented by public defenders in this country.

According to the constrained vision, it is important to look at the institutional incentives of public defenders. Considering the extremely high societal costs of false convictions, it is important to get these incentives right.

David Friedman and Stephen Schulhofer’s seminal article exploring the law & economics of indigent criminal defense highlighted the conflict of interest inherent in government choosing who represents criminal defendants when the government is in charge of prosecuting. They analyzed each of the models used in the United States for indigent defense from an economic point of view and found each wanting. On top of that, there is also a calculation problem inherent in government-run public defender’s offices whereby defendants may be systematically deprived of viable defense strategies because of a lack of price signals. 

An interesting alternative proposed by Friedman and Schulhofer is a voucher system. This is similar to the voucher system Sowell has often touted for education. The idea would be that indigent criminal defendants get to pick the lawyer of their choosing that is part of the voucher program. The government would subsidize the provision of indigent defense, in this model, but would not actually pick the lawyer or run the public defender organization. Incentives would be more closely aligned between the defendant and counsel. 

Conclusion

While much more could be said consistent with the constrained vision that could help flesh-and-blood black Americans, including abolishing occupational licensing, ending wage controls, promoting school choice, and ending counterproductive welfare policies, this is enough for now. Racial justice demands holding rights violators accountable and making victims whole. Racial justice also means reforming institutions to make sure incentives are right to deter conduct which harms black Americans. However, the growing desire to do something to promote racial justice in this country should not fall into the trap of cosmic justice thinking, which often ends up hurting flesh-and-blood people of all races in the present in the name of intertemporal abstractions. 

Happy 90th birthday to one of the greatest law & economics scholars ever, Dr. Thomas Sowell. 

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Eric Fruits, (Chief Economist, International Center for Law & Economics).]

Earlier this week, merger talks between Uber and food delivery service Grubhub surfaced. House Antitrust Subcommittee Chairman David N. Cicilline quickly reacted to the news:

Americans are struggling to put food on the table, and locally owned businesses are doing everything possible to keep serving people in our communities, even under great duress. Uber is a notoriously predatory company that has long denied its drivers a living wage. Its attempt to acquire Grubhub—which has a history of exploiting local restaurants through deceptive tactics and extortionate fees—marks a new low in pandemic profiteering. We cannot allow these corporations to monopolize food delivery, especially amid a crisis that is rendering American families and local restaurants more dependent than ever on these very services. This deal underscores the urgency for a merger moratorium, which I and several of my colleagues have been urging our caucus to support.

Pandemic profiteering rolls nicely off the tongue, and we’re sure to see that phrase much more over the next year or so. 

Grubhub shares jumped 29% Tuesday, the day the merger talks came to light, shown in the figure below. The Wall Street Journal reports companies are considering a deal that would value Grubhub stock at around 1.9 Uber shares, or $60-65 dollars a share, based on Thursday’s price.

But is that “pandemic profiteering?”

After Amazon announced its intended acquisition of Whole Foods, the grocer’s stock price soared by 27%. Rep. Cicilline voiced some convoluted concerns about that merger, but said nothing about profiteering at the time. Different times, different messaging.

Rep. Cicilline and others have been calling for a merger moratorium during the pandemic and used the Uber/Grubhub announcement as Exhibit A in his indictment of merger activity.

A moratorium would make things much easier for regulators. No more fighting over relevant markets, no HHI calculations, no experts debating SSNIPs or GUPPIs, no worries over consumer welfare, no failing firm defenses. Just a clear, brightline “NO!”

Even before the pandemic, it was well known that the food delivery industry was due for a shakeout. NPR reports, even as the business is growing, none of the top food-delivery apps are turning a profit, with one analyst concluding consolidation was “inevitable.” Thus, even if a moratorium slowed or stopped the Uber/Grubhub merger, at some point a merger in the industry will happen and the U.S. antitrust authorities will have to evaluate it.

First, we have to ask, “What’s the relevant market?” The government has a history of defining relevant markets so narrowly that just about any merger can be challenged. For example, for the scuttled Whole Foods/Wild Oats merger, the FTC famously narrowed the market to “premium natural and organic supermarkets.” Surely, similar mental gymnastics will be used for any merger involving food delivery services.

While food delivery has grown in popularity over the past few years, delivery represents less than 10% of U.S. food service sales. While Rep. Cicilline may be correct that families and local restaurants are “more dependent than ever” on food delivery, delivery is only a small fraction of a large market. Even a monopoly of food delivery service would not confer market power on the restaurant and food service industry.

No reasonable person would claim an Uber/Grubhub merger would increase market power in the restaurant and food service industry. But, it might convey market power in the food delivery market. Much attention is paid to the “Big Four”–DoorDash, Grubhub, Uber Eats, and Postmates. But, these platform delivery services are part of the larger food service delivery market, of which platforms account for about half of the industry’s revenues. Pizza accounts for the largest share of restaurant-to-consumer delivery.

This raises the big question of what is the relevant market: Is it the entire food delivery sector, or just the platform-to-consumer sector? 

Based on the information in the figure below, defining the market narrowly would place an Uber/Grubhub merger squarely in the “presumed to be likely to enhance market power” category.

  • 2016 HHI: <3,175
  • 2018 HHI: <1,474
  • 2020 HHI: <2,249 pre-merger; <4,153 post-merger

Alternatively, defining the market to encompass all food delivery would cut the platforms’ shares roughly in half and the merger would be unlikely to harm competition, based on HHI. Choosing the relevant market is, well, relevant.

The Second Measure data suggests that concentration in the platform delivery sector decreased with the entry of Uber Eats, but subsequently increased with DoorDash’s rising share–which included the acquisition of Caviar from Square.

(NB: There seems to be a significant mismatch in the delivery revenue data. Statista reports platform delivery revenues increased by about 40% from 2018 to 2020, but Second Measure indicates revenues have more than doubled.) 

Geoffrey Manne, in an earlier post points out “while national concentration does appear to be increasing in some sectors of the economy, it’s not actually so clear that the same is true for local concentration — which is often the relevant antitrust market.” That may be the case here.

The figure below is a sample of platform delivery shares by city. I added data from an earlier study of 2017 shares. In all but two metro areas, Uber and Grubhub’s combined market share declined from 2017 to 2020. In Boston, the combined shares did not change and in Los Angeles, the combined shares increased by 1%.

(NB: There are some serious problems with this data, notably that it leaves out the restaurant-to-consumer sector and assumes the entire platform-to-consumer sector is comprised of only the “Big Four.”)

Platform-to-consumer delivery is a complex two-sided market in which the platforms link, and compete for, both restaurants and consumers. Platforms compete for restaurants, drivers, and consumers. Restaurants have a choice of using multiple platforms or entering into exclusive arrangements. Many drivers work for multiple platforms, and many consumers use multiple platforms. 

Fundamentally, the rise of platform-to-consumer is an evolution in vertical integration. Restaurants can choose to offer no delivery, use their own in-house delivery drivers, or use a third party delivery service. Every platform faces competition from in-house delivery, placing a limit on their ability to raise prices to restaurants and consumers.

The choice of delivery is not an either-or decision. For example, many pizza restaurants who have their own delivery drivers also use platform delivery service. Their own drivers may serve a limited geographic area, but the platforms allow the restaurant to expand its geographic reach, thereby increasing its sales. Even so, the platforms face competition from in-house delivery.

Mergers or other forms of shake out in the food delivery industry are inevitable. Mergers will raise important questions about relevant product and geographic markets as well as competition in two-sided markets. While there is a real risk of harm to restaurants, drivers, and consumers, there is also a real possibility of welfare enhancing efficiencies. These questions will never be addressed with an across-the-board merger moratorium.

In the wake of the launch of Facebook’s content oversight board, Republican Senator Josh Hawley and FCC Commissioner Brendan Carr, among others, have taken to Twitter to levy criticisms at the firm and, in the process, demonstrate just how far the Right has strayed from its first principles around free speech and private property. For his part, Commissioner Carr’s thread makes the case that the members of the board are highly partisan and mostly left-wing and can’t be trusted with the responsibility of oversight. While Senator Hawley took the approach that the Board’s very existence is just further evidence of the need to break Facebook up. 

Both Hawley and Carr have been lauded in rightwing circles, but in reality their positions contradict conservative notions of the free speech and private property protections given by the First Amendment.  

This blog post serves as a sequel to a post I wrote last year here at TOTM explaining how There’s nothing “conservative” about Trump’s views on free speech and the regulation of social media. As I wrote there:

I have noted in several places before that there is a conflict of visions when it comes to whether the First Amendment protects a negative or positive conception of free speech. For those unfamiliar with the distinction: it comes from philosopher Isaiah Berlin, who identified negative liberty as freedom from external interference, and positive liberty as freedom to do something, including having the power and resources necessary to do that thing. Discussions of the First Amendment’s protection of free speech often elide over this distinction.

With respect to speech, the negative conception of liberty recognizes that individual property owners can control what is said on their property, for example. To force property owners to allow speakers/speech on their property that they don’t desire would actually be a violation of their liberty — what the Supreme Court calls “compelled speech.” The First Amendment, consistent with this view, generally protects speech from government interference (with very few, narrow exceptions), while allowing private regulation of speech (again, with very few, narrow exceptions).

Commissioner Carr’s complaint and Senator Hawley’s antitrust approach of breaking up Facebook has much more in common with the views traditionally held by left-wing Democrats on the need for the government to regulate private actors in order to promote speech interests. Originalists and law & economics scholars, on the other hand, have consistently taken the opposite point of view that the First Amendment protects against government infringement of speech interests, including protecting the right to editorial discretion. While there is clearly a conflict of visions in First Amendment jurisprudence, the conservative (and, in my view, correct) point of view should not be jettisoned by Republicans to achieve short-term political gains.

The First Amendment restricts government action, not private action

The First Amendment, by its very text, only applies to government action: “Congress shall make no law . . . abridging the freedom of speech.” This applies to the “State[s]” through the Fourteenth Amendment. There is extreme difficulty in finding any textual hook to say the First Amendment protects against private action, like that of Facebook. 

Originalists have consistently agreed. Most recently, in Manhattan Community Access Corp. v. Halleck, Justice Kavanaugh—on behalf of the conservative bloc and the Court—wrote:

Ratified in 1791, the First Amendment provides in relevant part that “Congress shall make no law . . . abridging the freedom of speech.” Ratified in 1868, the Fourteenth Amendment makes the First Amendment’s Free Speech Clause applicable against the States: “No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law . . . .” §1. The text and original meaning of those Amendments, as well as this Court’s longstanding precedents, establish that the Free Speech Clause prohibits only governmental abridgment of speech. The Free Speech Clause does not prohibit private abridgment of speech… In accord with the text and structure of the Constitution, this Court’s state-action doctrine distinguishes the government from individuals and private entities. By enforcing that constitutional boundary between the governmental and the private, the state-action doctrine protects a robust sphere of individual liberty. (Emphasis added).

This was true at the adoption of the First Amendment and remains true today in a high-tech world. Federal district courts have consistently dismissed First Amendment lawsuits against Facebook on the grounds there is no state action. 

For instance, in Nyawba v. Facebook, the plaintiff initiated a civil rights lawsuit against Facebook for restricting his use of the platform. The U.S. District Court for the Southern District of Texas dismissed the case, noting 

Because the First Amendment governs only governmental restrictions on speech, Nyabwa has not stated a cause of action against FaceBook… Like his free speech claims, Nyabwa’s claims for violation of his right of association and violation of his due process rights are claims that may be vindicated against governmental actors pursuant to § 1983, but not a private entity such as FaceBook.

Similarly, in Young v. Facebook, the U.S. District Court for the Northern District of California rejected a claim that Facebook violated the First Amendment by deactivating the plaintiff’s Facebook page. The court declined to subject Facebook to the First Amendment analysis, stating that “because Young has not alleged any action under color of state law, she fails to state a claim under § 1983.”

The First Amendment restricts antitrust actions against Facebook, not Facebook’s editorial discretion over its platform

Far from restricting Facebook, the First Amendment actually restricts government actions aimed at platforms like Facebook when they engage in editorial discretion by moderating content. If an antitrust plaintiff was to act on the impulse to “break up” Facebook because of alleged political bias in its editorial discretion, the lawsuit would be running headlong into the First Amendment’s protections.

There is no basis for concluding online platforms do not have editorial discretion under the law. In fact, the position of Facebook here is very similar to the newspaper in Miami Herald Publishing Co. v. Tornillo, in which the Supreme Court considered a state law giving candidates for public office a right to reply in newspapers to editorials written about them. The Florida Supreme Court upheld the statute, finding it furthered the “broad societal interest in the free flow of information to the public.” The U.S. Supreme Court, despite noting the level of concentration in the newspaper industry, nonetheless reversed. The Court explicitly found the newspaper had a First Amendment right to editorial discretion:

The choice of material to go into a newspaper, and the decisions made as to limitations on the size and content of the paper, and treatment of public issues and public officials — whether fair or unfair — constitute the exercise of editorial control and judgment. It has yet to be demonstrated how governmental regulation of this crucial process can be exercised consistent with First Amendment guarantees of a free press as they have evolved to this time. 

Online platforms have the same First Amendment protections for editorial discretion. For instance, in both Search King v. Google and Langdon v. Google, two different federal district courts ruled Google’s search results are subject to First Amendment protections, both citing Tornillo

In Zhang v. Baidu.com, another district court went so far as to grant a Chinese search engine the right to editorial discretion in limiting access to democracy movements in China. The court found that the search engine “inevitably make[s] editorial judgments about what information (or kinds of information) to include in the results and how and where to display that information.” Much like the search engine in Zhang, Facebook is clearly making editorial judgments about what information shows up in newsfeed and where to display it. 

None of this changes because the generally applicable law is antitrust rather than some other form of regulation. For instance, in Tornillo, the Supreme Court took pains to distinguish the case from an earlier antitrust case against newspapers, Associated Press v. United States, which found that there was no broad exemption from antitrust under the First Amendment.

The Court foresaw the problems relating to government-enforced access as early as its decision in Associated Press v. United States, supra. There it carefully contrasted the private “compulsion to print” called for by the Association’s bylaws with the provisions of the District Court decree against appellants which “does not compel AP or its members to permit publication of anything which their `reason’ tells them should not be published.”

In other words, the Tornillo and Associated Press establish the government may not compel speech through regulation, including an antitrust remedy. 

Once it is conceded that there is a speech interest here, the government must justify the use of antitrust law to compel Facebook to display the speech of users in the newsfeeds of others under the strict scrutiny test of the First Amendment. In other words, the use of antitrust law must be narrowly tailored to a compelling government interest. Even taking for granted that there may be a compelling government interest in facilitating a free and open platform (which is by no means certain), it is clear that this would not be narrowly tailored action. 

First, “breaking up” Facebook is clearly overbroad as compared to the goal of promoting free speech on the platform. There is no need to break it up just because it has an Oversight Board that engages in editorial responsibilities. There are many less restrictive means, including market competition, which has greatly expanded consumer choice for communications and connections. Second, antitrust does not even really have a remedy for free speech issues complained of here, as it would require courts to engage in long-term oversight and engage in compelled speech foreclosed by Associated Press

Note that this makes good sense from a law & economics perspective. Platforms like Facebook should be free to regulate the speech on their platforms as they see fit and consumers are free to decide which platforms they wish to use based upon that information. While there are certainly network effects to social media, the plethora of options currently available with low switching costs suggests that there is no basis for antitrust action against Facebook because consumers are unable to speak. In other words, the least restrictive means test of the First Amendment is best fulfilled by market competition in this case.

If there were a basis for antitrust intervention against Facebook, either through merger review or as a standalone monopoly claim, the underlying issue would be harm to competition. While this would have implications for speech concerns (which may be incorporated into an analysis through quality-adjusted price), it is inconceivable how an antitrust remedy could be formed on speech issues consistent with the First Amendment. 

Conclusion

Despite now well-worn complaints by so-called conservatives in and out of the government about the baneful influence of Facebook and other Big Tech companies, the First Amendment forecloses government actions to violate the editorial discretion of these companies. Even if Commissioner Carr is right, this latest call for antitrust enforcement against Facebook by Senator Hawley should be rejected for principled conservative reasons.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Eline Chivot, (Senior Policy Analyst, Center for Data Innovation, Information Technology and Innovation Foundation.).]

As the COVID-19 outbreak led to the shutdown of many stores, e-commerce and brick-and-mortar shops have been stepping up efforts to facilitate online deliveries while ensuring their workers’ safety. Without online retail, lockdown conditions would have been less tolerable, and confinement measures less sustainable. Yet a recent French court’s ruling on Amazon seems to be a justification for making life more difficult for some of these businesses and more inconvenient for people by limiting consumer choice. But in a context that calls for as much support to economic activity and consumer welfare as possible, that makes little sense. In fact, the court’s decision is symptomatic of how countries use industrial policy to treat certain companies with double standards.

On April 24, Amazon lost its appeal of a French court order requiring the platform to stop delivering “non-essential items” until it evaluates workers’ risk of coronavirus exposure in its six French warehouses. The online retailer is now facing penalties of about 100,000 euros (about $110,000) per delivery, and was given 48 hours to reduce its warehouse activities and operations. 

But the complexity of logistics would make it difficult to adjust and limit deliveries to just “essential items.” Given the novelty of the situation, there were no official, precise, and pre-determined lists in place, nor was there clarity about who gets to decide, nor was there a common understanding of what customers would consider essential services or goods. As a result, Amazon temporarily closed its six French distribution centers, and is now shipping to its French customers from its warehouses in other European countries. If France wants to apply such measure for worker safety in this time of crisis, that’s clearly its right. But the requirement should apply to all online retailers equally, not just to the American company Amazon.

The court’s decision was made on the grounds that Amazon had not implemented sufficient safety measures for its workers. The turnaround last week of trade unions (who had initiated the complaints against Amazon and called for the shutdown of its facilities) and their proposition to “gradually” resume operations speak volume. Like many other companies, Amazon had  invested in additional safety measures for its employees during the crisis, distributed masks and gloves to its workers, had taken their temperatures before their shifts, had built testing capacity, and proactively decided to prioritize the delivery of essential goods. Like many other companies, Amazon had to rapidly cope with unprecedented circumstances it wasn’t prepared to handle, while having to juggle a surge in online orders during lockdowns and make do with some governments’ unclear guidance regarding safety measures.

But France has long prioritized worker welfare over broad economic welfare—which includes worker welfare, but also consumer welfare and economic growth. Yet, in this case, that prioritization seems to only apply to Amazon. French retailers like Fnac, Cdiscount, Spartoo, and La Redoute did not face the same degree of judicial scrutiny despite similar complaints about distribution centers. Nor did they have to restrict their deliveries to “essential goods.” But in France, it seems, what is good for French geese isn’t good for U.S. ganders. In fact, the real issue appears to be the French application of industrial policy.  According to a union representative of Fnac, this is about “preventing Amazon from gaining market share over French retailers during lockdown,” so that the latter can reap the benefits. Using the crisis as an excuse to restructure the French retail sector is certainly one creative application of industrial policy.

Moreover, by applying these restrictions (either just to Amazon or across all retailers who engage in e-commerce), the French government is deepening the economic crisis. The restrictions it has imposed on Amazon are likely to accentuate the losses many French small- and medium-sized companies are already facing because of the COVID-19 crisis, while also having longer-term negative consequences for its logistics network in France. Many such firms rely on Amazon’s platform to sell, ship, and develop their business, and now have to turn to more expensive delivery services. In addition, the reduction in activity by its distribution centers could force Amazon to furlough many of its 9,300 French workers.

According to the unions, Amazon’s activity is judged “nonessential to the life of the country.” Never mind that Amazon partners with French retailers like Casino and is rescuing brands like Deliveroo during the crisis. In addition, online companies like Amazon, HelloFresh and Instacart hired more workers to manage growing demands during the crisis, while others had to furlough or layoff their staff. Beyond, French brands will need economically robust allies like Amazon to compete with Chinese state-backed giants like Alibaba that are expanding their footprint in European markets, and that have come under fire for dubious workplace practices.  

Finally, the French court’s decision is an inconvenience to the 22.2 million people in France who order via Amazon, depend on efficient home deliveries to cope with strict confinement measures, and are now being told what is essential or not. With Amazon relying on other European warehouses for deliveries and being forced to limit them to items such as IT products, health and nutrition items, food, and pet food, consumers will be faced with delayed deliveries and reduced access to product variety. The court’s decision also hurts many French merchants who use Amazon for warehousing and fulfillment, as they are effectively locked out of accessing their stock. 

Non-discrimination is, or least should be, a core principle of rule-of-law nations. It appears that, at least in this case, France does not think it should apply to non-French firms.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Eric Fruits, (Chief Economist, International Center for Law & Economics).]

In an earlier TOTM post, we argued as the economy emerges from the COVID-19 crisis, perhaps the best policy would allow properly motivated firms and households to themselves balance the benefits, costs, and risks of transitioning to “business as usual.” 

Sometimes, however, well meaning government policies disrupt the balance and realign motivations.

Our post contrasted firms who determined they could remain open by undertaking mitigation efforts with those who determined they could not safely remain open. One of these latter firms was Portland-based ChefStable, which operates more than 20 restaurants and bars. Kurt Huffman, the owner of ChefStable, shut down all the company’s properties one day before the Oregon governor issued her “Stay home, stay safe” order.

An unintended consequence

In a recent Wall Street Journal op-ed, Mr. Huffman reports his business was able to shift to carryout and delivery, which ended up being more successful than anticipated. So successful, in fact, that he needed to bring back some of the laid-off employees. That’s when he ran into one of the stimulus package’s unintended—but not unanticipated—consequences of providing federal-level payments on top of existing state-level guarantees:

We started making the calls last week, just as our furloughed employees began receiving weekly Federal Pandemic Unemployment Compensation checks of $600 under the Cares Act. When we asked our employees to come back, almost all said, “No thanks.” If they return to work, they’ll have to take a pay cut.

***

But as of this week, that same employee receives $1,016 a week, or $376 more than he made as a full time employee. Why on earth would he want to come back to work?

Mr. Huffman’s not alone. NPR reports on a Kentucky coffee shop owner who faces the same difficulty keeping her employees at work:

“The very people we hired have now asked us to be laid off,” Marietta wrote in a blog post. “Not because they did not like their jobs or because they did not want to work, but because it would cost them literally hundreds of dollars per week to be employed.”

With the federal government now offering $600 a week on top of the state’s unemployment benefits, she recognized her former employees could make more money staying home than they did on the job.

Or, a fully intended consequence

The NPR piece indicates the Trump administration opted for the relatively straightforward (if not simplistic) unemployment payments as a way to get the money to unemployed workers as quickly as possible.

On the other hand, maybe the unemployment premium was not an unintended consequence. Perhaps, there was some intention.

If the purpose of the stay-at-home orders is to “flatten the curve” and slow the spread of the coronavirus, then it can be argued the purpose of the stimulus spending is to mitigate some of the economic costs. 

If this is the case, it can also be argued that the unemployment premium paid by the federal government was designed to encourage people to stay at home and delay returning to work. In fact, it may be more effective than a bunch of loophole laden employment regulations that would require an army of enforcers.

Mr. Huffman seems confident his employees will be ready to return to work in August, when the premium runs out. John Cochrane, however, is not so confident, writing on his blog, “Hint to Mr. Huffman: I would not bet too much that this deadline is not extended.”

With the administration’s state-by-state phased re-opening of the economy, the unemployment premium payments could be tweaked so only residents in states in Phase 1 or 2 would be eligible to receive the premium payments.

Of course, this tweak would unleash its own unintended consequences. In particular, it would encourage some states to slow walk the re-opening of their economies as a way to extract more federal money for their residents. My wild guess: The slow walking states will be the same states who have been most affected by the state and local tax deductibility provisions in the Tax Cuts and Jobs Act.

As with all government policies, the unemployment provisions in the COVID-19 stimulus raise the age old question: If a policy generates unintended consequences that are not unanticipated, can those consequences really be unintended?

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Miranda Perry Fleischer, (Professor Law and Co-Director of Tax Programs at the University of San Diego School of Law); and Matt Zwolinski (Professor of Philosophy, University of San Diego; founder and director, USD Center for Ethics, Economics, and Public Policy; founder and contributor, Bleeding Heart Libertarians Blog)

This week, Americans began receiving cold, hard cash from the government. Meant to cushion the economic fallout of Covid-19, the CARES Act provides households with relief payments of up to $1200 per adult and $500 per child. As we have written elsewhere, direct cash transfers are the simplest, least paternalistic, and most efficient way to protect Americans’ economic health – pandemic or not. The idea of simply giving people money has deep historical and wide ideological roots, culminating in Andrew Yang’s popularization of a universal basic income (“UBI”) during his now-suspended presidential campaign. The CARES Act relief provisions embody some of the potential benefits of a UBI, but nevertheless fail in key ways to deliver its true promise.

Provide Cash, No-Strings-Attached

Most promisingly, the relief payments are no-strings-attached. Recipients can use them as they – not the government – think best, be it for rent, food, or a laptop for a child to learn remotely. This freedom is a welcome departure from most current aid programs, which are often in-kind or restricted transfers. Kansas prohibits welfare recipients from using benefits at movie theaters and swimming pools. SNAP recipients cannot purchase “hot food” such as a ready-to-eat roasted chicken; California has a 17-page pamphlet identifying which foods users of Women, Infants and Children (“WIC”) benefits can buy (for example, white eggs but not brown). 

These restrictions arise from a distrust of beneficiaries. Yet numerous studies show that recipients of cash transfers do not waste benefits on alcohol, drugs or gambling. Instead, beneficiaries in developing countries purchase livestock, metal roofs, or healthier food. In wealthier countries, cash transfers are associated with improvements in infant health, better nutrition, higher test scores, more schooling, and lower rates of arrest for young adults – all of which suggest beneficiaries do not waste cash.

Avoid Asset Tests

A second positive of the relief payments is that they eschew asset tests, unlike many welfare programs. For example, a family can lose hundreds of dollars of SNAP benefits if their countable assets exceed $2,250. Such limits act as an implicit wealth tax and discourage lower-income individuals from saving. Indeed, some recipients report engaging in transactions like buying furniture on lay-away (which does not count) to avoid the asset limits. Lower-income individuals, for whom a car repair bill or traffic ticket can lead to financial ruin, should be encouraged to – not penalized for – saving for a rainy day.

Don’t Worry So Much about the Labor Market  

A third pro is that the direct relief payments are not tied to a showing of desert. They do not require one to work, be looking for work, or show that one is either unable to work or engaged in a substitute such as child care or school. Again, this contrasts with most current welfare programs. SNAP requires able-bodied childless adults to work or participate in training or education 80 hours a month. Supplemental Security Income requires non-elderly recipients to prove that they are blind or disabled. Nor do the relief payments require recipients to pass a drug test, or prove they have no criminal record.

As with spending restrictions, these requirements display distrust of beneficiaries. The fear is that “money for nothing” will encourage low-income individuals to leave their jobs en masse. But this fear, too, is largely overblown. Although past experiments with unconditional transfers show that total work hours drop, the bulk of this drop is from teenagers staying in school longer, new mothers delaying entrance into the workforce, and primary earners reducing their hours from say, 60 to 50 hours a week. We could also imagine UBI recipients spending time volunteering, engaging in the arts, or taking care of friends and relatives. None of these are necessarily bad things.

Don’t Limit Aid to the “Deserving”

On these three counts, the CARES Act embraces the promise of a UBI. But the CARES Act departs from key aspects of a well-designed, true UBI. Most importantly, the size of the relief payments – one-time transfers of $1200 per adult – pale in comparison to the Act’s enhanced unemployment benefits of $600/week. This mismatch underscores how deeply ingrained our country’s obsession with helping only the “deserving” poor is and how narrowly “desert” is defined. The Act’s most generous aid is limited to individuals with pre-existing connections to the formal labor market who leave under very specific conditions. Someone who cannot work because they are caring for a family member sick with COVID-19 qualifies, but not an adult child who left a job months ago to care for an aging parent with Alzheimer’s. A parent who cannot work because her child’s school was cancelled due to the pandemic qualifies, but not a parent who hasn’t worked the past couple years due to the lack of affordable child care. And because unemployment benefits not only turn on being previously employed but also rise the higher one’s past wages were, this mismatch magnifies that our safety net helps the slightly poor much more than the very poorest among us. 

Don’t Impose Bureaucratic Hurdles

The botched roll-out of the enhanced unemployment benefits illustrates another downside to targeting aid only to the “deserving”: It is far more complicated than giving aid to all who need it. Guidance for self-employed workers (newly eligible for such benefits) is still forthcoming. Individuals with more than one employer before the crisis struggle to input multiple jobs in the system, even though their benefits increase as their past wages do. Even college graduates have trouble completing the clunky forms; a friend who teaches yoga had to choose between “aqua fitness instructor” and “physical education” when listing her job. 

These frustrations are just another example of the government’s ineptitude at determining who is and is not work capable – even in good times. Often, the very people that can navigate the system to convince the government they are unable to work are actually the most work-capable. Those least capable of work, unable to navigate the system, receive nothing. And as millions of Americans spend countless hours on the phone and navigating crashing websites, they are learning what has been painfully obvious to many lower-income individuals for years – the government often puts insurmountable barriers in the way of even the “deserving poor.” These barriers – numerous office visits, lengthy forms, drug tests – are sometimes so time consuming that beneficiaries must choose between obtaining benefits to which they are legally entitled and applying for jobs or working extra hours. Lesson one from the CARES Act is that universal payments, paid to all, avoid these pitfalls. 

Don’t Means Test Up Front

The CARES Act contains three other flaws that a well-designed UBI would also fix. First, the structure of the cash transfers highlights the drawbacks of upfront means testing. In an attempt to limit aid to Americans in financial distress, the $1200 relief payments begin to phase-out at five cents on the dollar when income exceeds a certain threshold: $75,000 for childless, single individuals and $150,000 for married couples. The catch is that for most Americans, their 2019 or 2018 incomes will determine whether their relief payments phase-out – and therefore how much aid they receive now, in 2020. In a world where 22 million Americans have filed for unemployment in the past month, looking to one or two-year old data to determine need is meaningless. Many Americans whose pre-pandemic incomes exceeded the threshold are now struggling to make mortgage payments and put food on the table, but will receive little or no direct cash aid under the CARES Act until April of 2021.

This absurdity magnifies a problem inherent in ex ante means tests. Often, one’s past financial status does not tell us much about an individual’s current needs. This is particularly true when incomes fluctuate from period to period, as is the case with many lower-income workers. Imagine a fast food worker and SNAP beneficiary whose schedule changes month to month, if not week to week. If she is lucky enough to work a lot in November, she may see her December SNAP benefits reduced. But what if her boss gives her fewer shifts in December? Both her paycheck and her SNAP benefits will be lower in December, leaving her struggling.

The solution is to send cash to all Americans, and recapture the transfer through the income tax system. Mathematically, an ex post tax is exactly the same as an ex ante phase out. Consider the CARES Act. A childless single individual with an income of $85,000 is $10,000 over the threshold, reducing her benefit by $500 and netting her $700. Giving her a check for $1200 and taxing her an additional 5% on income above $75,000 also nets her $700. As a practical matter, however, an ex post tax is more accurate because hindsight is 20-20. Lesson two from the CARES Act is that universal payments offset by taxes are superior to ex ante means-testing.

Provide Regular Payments

Third, the CARES Act provides one lump sum payment, with struggling Americans wondering whether Congress will act again. This is a missed opportunity: Studies show that families receiving SNAP benefits face challenges planning for even a month at a time. Lesson three is that guaranteed monthly or bi-weekly payments – as a true UBI would provide — would help households plan and provide some peace of mind amidst this uncertainty.

Provide Equal Payments to Children and Adults

Finally, the CARES Act provides a smaller benefit to children than adults. This is nonsensical. A single parent with two children faces greater hardship than a married couple with one child, as she has the same number of mouths to feed with fewer earners. Further, social science evidence suggests that augmenting family income has positive long-run consequences for children. Lesson four from the CARES Act – the empirical case for a UBI is strongest for families with children.

It’s Better to Be Overly, not Underly, Generous

The Act’s direct cash payments are a step in the right direction. But they demonstrate that not all cash assistance plans are created equal. Uniform and periodic payments to all – regardless of age and one’s relationship to the workforce – is the best way to protect Americans’ economic health, pandemic or not. This is not the time to be stingy or moralistic in our assistance. Better to err on the side of being overly generous now, especially when we can correct that error later through the tax system. Errors that result in withholding aid from those who need it, alas, might not be so easy to correct.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Tim Brennan, (Professor, Economics & Public Policy, University of Maryland; former FCC; former FTC).]

Observers on TOTM and elsewhere have pointed out the importance of preserving patent rights as pharmaceutical and biotechnology companies pursue development of treatments for, and better vaccines against,  Covid-19. As the benefits of these treatments could reach into the trillions of dollars (see here for a casual estimate and here for a more serious one), it is hard to imagine a level of reward for successful innovations that is too high.

On the other hand, as these and other commentaries suggest if only implicitly, the high social value of a coronavirus treatment or vaccine may well lead to calls to limit the ability to profit from a patent. It is easy to imagine that a developer of a vaccine will not be able to charge the patent-protected price (note avoidance of the term “monopoly”). It almost certainly will not be able to do so if it cannot use price discrimination in order to allow those lacking the means to pay a uniform higher price to get the vaccine.

However, there is an alternative to patents that have not received much attention in the policy discussion—having the government (Treasury, NIH, CDC) offer a prize in exchange for open access to a successful vaccine or treatment. Prizes are not new; they go back at least to the early 18th century, when Britain offered a prize for improvements in clock accuracy to facilitate ocean-going navigation. Many prizes have been offered by the private sector, both for their own use—Netflix offering a prize for improvements to its movie recommendation algorithm—and to altruistically promote innovation. Charles Lindbergh’s 1927 first solo transatlantic flight, and previous attempts by others, were motivated at least in part by a $25,000 prize offered by a New York hotel owner. 

In light of the net benefits of an improved vaccine, indicated perhaps by the level of spending in enacted and proposed stimulus and rescue programs, a prize of, oh, $25 billion is practically chump change. But would a prize make sense here?

I and two former colleagues at Resources for the Future, Molly Macauley and Kate Whitefoot, analyzed the use of prizes in comparison to patents and other methods to solicit and procure innovation.  This work was inspired by Molly’s interest in NASA’s use of prizes to induce innovations in space exploration equipment. On the theory side, we were interested because models of patents typically treat patents as prizes—the successful innovator gets $X in expected profit—and thus were unable to explain why one might want to choose prizes rather than patents and vice versa

When is a prize a “prize”?

The answer to this question requires being clear on what I mean by a prize. A familiar type of prize is the “best” of something, from first prize in the middle school science fair to the Academy Award for Best Picture. This is not the kind of prize I’m talking about with regard to coming up with a treatment for or vaccine against Covid-19. (George Mason’s Mercatus Center is offering prizes of this sort for things like $50,000 for “best coronavirus policy writing” to $500,000 for “best effort to find a treatment rapidly”; h/t to Geoff Manne.) Rather, it is a prize for being first to achieve a specific outcome, for example, a solo flight across the Atlantic Ocean. 

A necessary component of such prizes is a winning condition, specified in advance. For example, the $10 million Ansari X Prize to promote commercial space travel was not awarded just for some general demonstration of feasibility that pleased a set of judges. Rather, it specifically went to the first team that could “carry three people 100 kilometers above the earth’s surface twice within two weeks.”  Contestants knew what they had to do, and there was no dispute when the winner met the criterion for getting the prize.

Prizes or patents?

The need for a winning condition highlights one of the two main criteria affecting the choice of patents or prizes: advance knowledge of the specific goal. Economy-wide, the advantage of patents over prizes is that entrepreneurial innovators are rewarded for coming up with sufficiently novel products or processes of value. Knowledge regarding what is worth innovative effort is decentralized and often tacit. On the other hand, if a funder, including the government, knows what it wants sufficiently well that it can specify a winning condition, a prize can be sensible as a way to focus innovative effort toward that desired objective.

The second criterion for choosing between patents and prizes is more subtle. Someone undertaking research effort to come up with a patent bears two risks. The first is the risk that the effort will not be successful, not just overall but in being the first to be able to file for a patent. That risk is essentially shared by those pursuing a prize, where being first involves not filing for a patent but meeting the winning condition. However, patent seekers bear another risk, which is how much the patent will be worth if they win it. Prize seekers do not bear that risk, as the prize is specified in advance. (Economic models of patent activity tend to ignore this variation.) Thus, a prize may induce more risk-averse innovators to compete for the prize.

Assuming a winning condition for a Covid-19 treatment or vaccine can be specified in advance—I leave that to the medical people—our present public health dilemma could be well suited for a prize. As observed earlier, with both net benefits and already made public spending responses in the trillions of dollars, such a prize could and should be quite large. That may be a difficult to sell politically but, as also observed earlier, the government may not be able to commit credibly to allow a patent winner to exploit the treatment or vaccine’s economic value.

Design issues, TBD

If prizes become an appealing way to encourage Covid-19 mitigation innovations, a few design issues remain on the table.

One is whether to have intermediate prizes, with their own winning conditions, to narrow down the field of contestants to those with more promising approaches. One would need some sort of winning condition for this, of course. A second is whether the innovation will be achieved more quickly by allowing contestants to combine efforts. The virtues of competition may be outweighed by being able to hedge bets rather than risk being stuck going down a blind alley.

A third is whether to go with winner-take-all or have second or third prizes. One advantage of multiple prizes is that it can mitigate some risk to innovators, at a potential cost of reducing the effort to win. However, one could imagine here that someone other than the winner might come up with a treatment or vaccine that does better than the winner but was found after the winner met the condition. This leads to a fourth policy choice—should contestants, the winner or others, retain patents, even if the winning treatment of vaccine is freely licensed, to be made available at marginal cost.

All of these choices, along with the choice of whether to offer a prize and what that prize should be, are matters of medical and pharmaceutical judgment. But economics does highlight the potential advantages of a prize and suggest that it may deserve some attention as other policy judgments are being made. 

 

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Thomas W. Hazlett, (Hugh H. Macaulay Endowed Professor of Economics, John E. Walker Department of Economics Clemson University)

The brutal toll of the coronavirus pandemic has delivered dramatic public policies. The United States has closed institutions, banned crowds, postponed non-emergency medical procedures and instituted social distancing. All to “flatten the curve” of illness. The measures are expensive, but there is no obvious way to better save lives.

There is evidence that, even without the antivirals or vaccines we hope come soon, we are limiting the spread of COVID-19. Daily death totals for the world appear to be leveling; the most severely impacted countries, Italy and Spain, are seeing declines; the top U.S. hotspot, New York, appears to be peaking (and net new coronavirus hospital admissions fell substantially yesterday). I hope that, looking back, these inferences look reasonable.

But of course I do. Is that rational introspection, or confirmation bias? To try to know, we should look about to see how others are addressing this challenge, and how well they are doing. There are experiments being run, in real time on actual economies, and diversity of results is one of the few blessings conveyed by our coronavirus demon.

Differing approaches to mitigating externalities around the world

It strikes many as entirely off-topic to discuss the efficiency of our measures, as though only the most expensive, draconian remedies work. There is a tendency to stress how little room for optionality there exists. Exhortation seems to be the strategy. No doubt, we are confronted by a classic “public good” challenge, where individuals may impose costs on others. Not intentionally, but perhaps through actions that are short-sighted. If a neighbor fails to take “due care” they needlessly endanger others. To overcome such free riding, we “rally ‘round the flag” to condemn anti-social behavior. That is a community survival trait.

And entirely compatible with the pursuit of efficient rules. Shuttering the marketplace and freezing personal mobility imposes harsh hardships; they are, unsurprisingly, resisted. It is stunning how rapidly our Conventional Wisdom has changed, but as recently as January 29 N.Y. Times’ tech columnist Farhad Manjoo warned us to slow down, to “Beware the Pandemic Panic.” He echoed the World Health Organization’s view that the threat was meek and that we ought focus on “not the illness itself but the amped-up, ill-considered way our frightened world might respond to it.” (See Jonathan Tobin’s nice overview of the errors made, left and right, in the run-up to the lock-down. It notes Manjoo’s reversal in the Times, Feb. 26.) 

When the disease seemed less, we were reluctant to impose costs; as the threat loomed larger, we rushed to make up for lost time. We now pay the price for acting late, but without perfect foresight – our perennial state – that insight does not much help us today or prep us for tomorrow. Keen observation of more efficient ways, and robust public discussion, will. 

Sweden has adopted the hygiene and separation practices familiar to Americans. But the government has stopped short of mandates imposed elsewhere. While college courses have rolled over to the Internet, Sweden has not closed schools for students 16 and under. Bars and restaurants remain open, with gatherings up to 50 approved (the US President has asked crowds to be kept to 10 or less). Life seems almost normal to many – Americans might pay a ton for that. Still, substantial macroeconomic costs remain.  One estimate predicts a 4% decline in 2020 GDP, beating expectations for Europe but similar to U.S. forecasts (see Goldman Sachs’ March 26 report with 2020 U.S. GDP growth projection of -3.8% and -9% for European markets.) Alas, the Swedish fatality rate, population adjusted, is higher than its Scandinavian peers and (as of April 7) about one-half higher than the U.S. See Table.

 COVID-19 Fatality Rates per Million Population, Selected Countries (4.7.20)

CountryDeaths/mil.Days since 1/mil.Daily GrowthGeo. Avg. Weekly Growth/day 
USA38.6161.181.19
Italy284.3351.041.05
Spain298.2271.051.08
Czech Rep.8.2101.131.16
Sweden57.2191.241.19
Switzerland95.6251.071.10
U.K.92.9201.151.19
France154.2251.161.17
Germany24.2171.111.15
Singapore1.131.01.0
S. Korea3.7291.031.02
Japan<1n/an/an/a

Source: https://91-divoc.com/pages/covid-visualization/

The Czech Republic – with a much lower COVID-19 mortality rate – innovated. The Czechs imposed the standard hygiene and social distancing practices, but added a twist: every person, when in public, is obligated to wear a face mask. It need not be medical grade. This sidestep not only spares supplies for crucial medical professionals, who work in close proximity to patients infected with coronavirus, it has unleashed a popular movement to sew home-made masks. That has jump-started social norms to reduce infections by wearing protective gear. And its simple logic is compelling: you protect me, I protect you.

Of course, the masks do not block one hundred percent of potential transmissions – perhaps no more than two-thirds, under favorable conditions, according to a 2013 study in the journal Disaster Medicine and Public Health Preparedness, Testing Homemade Masks for Efficacy: Would they Protect in an Influenza Pandemic?. The findings, showing results for filtering effectiveness using different materials masks, are given in the Table below. They suggest that (a) no masks are perfectly effective in blocking all tiny particles, including infectious biological matter; (b) surgical masks are relatively effective; (c) homemade masks are less effective, but much better than nothing – and should be used in conjunction with other (distancing, hygiene, etc.) practices. Where surgical masks are too expensive or unavailable, cotton face masks (sewn with multiple layers) or vacuum bags (if you can snag them) are useful substitutes. Their role is to suppress rates of disease progression, bending the curve and managing the pandemic.

The decision to encourage and then require masks (with an order effective midnight March 18) led to an enthusiastic campaign to make stylish, personalized gear – soon posted on Insta. It channeled the desire of citizens to both battle coronavirus and yet to continue living their lives. Mask wearing then further served as a reminder to observe additional rules of separation, while discouraging people from touching their face. A video on the virus went viral. It’s beautifully logical and upbeat, as global emergency crisis responses go. Judge for yourself

No doubt more research should be performed; an entire industry of PhD theses from epidemiology to sociology to public health may homestead this topic in the post-Coronavirus world. But we also must pay attention to our experimental results in real time. The Demonstration Effect is, and should be, powerful. Countries such as Slovakia and Belgium saw the Czech Republic’s approach, relative openness (low-cost mitigation), and superior survival rates, and quickly adopted similar policies. 

The U.S. rationale for discouraging mask use

U.S. policy makers initially shielded themselves from the face mask question by issuing the “institutional no.”[1] The American public was instructed by the Center for Disease Control (CDC) to refrain from wearing masks save in the instance where they were infected. There were three reasons. First, that wearing masks would actually harm healthy people not impacted with COVID-19. Second, the masks were ineffective in shielding small aerosol particles, particularly since non-professionals would not wear them properly. Third, the limited supply of high-quality, medical grade face masks should be reserved for doctors, nurses, and other health care workers who, by the nature of their tasks, could not observe “social distancing” or otherwise avoid infected COVID-19 patients. 

The third rationale had an advantage over the first two as not being false. But by the logic used to prioritize medical professional mask protections, buttressed by a modicum of public education, the rest of us would be likely to benefit, as well. The CDC was arguing magnitude and rankings (OK), and then configuring the effectiveness arguments to justify the rankings (not OK). It was a blunder, squandering precious time and undercutting agency credibility.  Moreover, the administrative edict pretended to be scientific when it was crafting (bad) economics. The Czechs and many Asian countries discovered (as disaster preparedness research had already found) that ad hoc masks work reasonably cheaply, quickly and well, and that the population can be protected to a non-trivial degree by producing their own. No need to steal N-95 respirators from frontline warriors; we’ll just make more (lower quality) protection devices.

Tip your cap to the Czech Republic. The story busted out. On March 30, The Guardian wrote: “Czechs get to work making masks after government decree: Czech Republic and Slovakia are only countries in Europe to make coronavirus mask-wearing mandatory.” By April 2, Dr. Ronald Depinho, a former president of M.D. Anderson, was editorializing: “Every American should wear a face mask to defeat Covid-19.” His empirical take was informed by a graphic (popularly Tweeted) showing fatality rates across countries – in general, the mask wearing societies of Asia (Japan, South Korean, Singapore, Taiwan) were seen to be doing relatively well in limiting the COVID-19 carnage. 

Face Masks As Pandemic Defense (4.2.20) Source: STAT

Human experiments are often considered cruel. But when they are run, let us learn from them.  

 U.S. about-face on mask use

And so the U.S. policy flipped. As per TIME:

On April 3, President Trump announced that the CDC now recommends that the general population wear non-medical masks—meaning fabric that covers one’s nose and mouth, like bandanas or cut T-shirts—when they must leave their homes to go to places like the grocery store. The measure is voluntary. The mayors of Los Angeles and New York City have already made similar recommendations. In other parts of the country, it’s not voluntary: for example, officials in Laredo, Texas have said they can fine people up to $1,000 when residents do not wear a face covering in public.

Kudos to the agency. Mistakes will be made, and it’s a great idea to fix them. But it is also instructive to see where the policy was on March 4, when TIME ran a story on how the CDC was having to combat widespread public demand for masks. There had been a retail run on masks, wiping out inventories at stores, Amazon and everywhere else; many healthy people were ignoring the request not to mask up in public; celebrities like Gwyneth Paltrow and Bella Hadid were posting their pix online. And here’s the chilling part, and it’s sadly symptomatic: the magazine fully took the agency’s side on the science and had no trouble finding additional expert authority to suppress the urge to investigate. Instead, the issue was settled by decree and then embellished as factual necessity:

“It seems kind of intuitively obvious that if you put something—whether it’s a scarf or a mask—in front of your nose and mouth, that will filter out some of these viruses that are floating around out there,” says Dr. William Schaffner, professor of medicine in the division of infectious diseases at Vanderbilt University. The only problem: that’s not likely to be effective against respiratory illnesses like the flu and COVID-19. If it were, “the CDC would have recommended it years ago,” he says. “It doesn’t, because it makes science-based recommendations.”

About that, TIME wrote: “The science, according to the CDC, says that surgical masks won’t stop the wearer from inhaling small airborne particles, which can cause infection. Nor do these masks form a snug seal around the face.” The harm was not simply a run on supplies that would deprive health workers of necessary protective gear.

“Seriously people- STOP BUYING MASKS!” tweeted Dr. Jerome Adams, the U.S. Surgeon General, on Feb. 29. “They are NOT effective in preventing general public… Adams said that wearing a mask can even increase your risk of getting the virus.

This extended into the psychological realm:

Lynn Bufka, a clinical psychologist and senior director for practice, research and policy at the American Psychological Association, suspects that people are clinging to masks for the same reason they knock on wood or avoid walking under ladders. “Even if experts are saying it’s really not going to make a difference, a little [part of] people’s brains is thinking, well, it’s not going to hurt. Maybe it’ll cut my risk just a little bit, so it’s worth it to wear a mask,” she says. In that sense, wearing a mask is a “superstitious behavior”…

Earth to Experts: superstitions run in multiple directions. See: the current view of the CDC as a correction of their previous one. And note the new TIME, quoting quite a different expert view on April 6.

“Now with the realization that there are individuals who are asymptomatic, and those asymptomatic individuals can spread infection, it’s hard to make the recommendation that only ill individuals wear masks in the community setting for protection, because it’s not clear who is ill and who is not,” says Allison Aiello, a professor of epidemiology at the University of North Carolina at Chapel Hill’s Gillings School of Global Public Health, who has researched the efficacy of masks.

Another conventional view that COVID-19 spread needed person-to-person contact, touching or close-in exchange (via coughing, breathing). But now it appears to be the case that the virus hangs around in the air, and that dosing (how much you inhale) matters greatly. A well person who encounters a passing microbe might catch a mild case of COVID-19, whereas sitting next to an infected person for five hours on a bus or airplane will trigger severe infection. In this environment, the logic for masks swells.

Scientific inquiry continues. The World Health Organization posted (March 27) that there was insufficient evidence to say whether COVID-19 travels airborne for any distance. What is the action take-away? Nature (April 2) puts the state of debate like this:

[E]xperts that work on airborne respiratory illnesses and aerosols say that gathering unequivocal evidence for airborne transmission could take years and cost lives. We shouldn’t “let perfect be the enemy of convincing”, says Michael Osterholm, an infectious-disease epidemiologist at the University of Minnesota in Minneapolis. “In the mind of scientists working on this, there’s absolutely no doubt that the virus spreads in the air,” says aerosol scientist Lidia Morawska at the Queensland University of Technology in Brisbane, Australia. “This is a no-brainer.”

Nature notes that those working in the area recommended masks as a policy response. 

Challenge the orthodoxy of the expert class, encourage intellectual diversity

Challenging orthodoxy is key to science; how else are errors uncovered or innovations discovered? On the frontiers there cannot be utter consensus. If there is, the thinkers have yet to probe nearly far enough. Safi Bakhall, in his remarkable Loonshots: Nurturing the Crazy Ideas that Win Wars, Cure Diseases and Transform Industries (2019), quotes Nobel Laureate in Medicine, Sir James Black: “it’s not a good drug unless it’s been killed at least three times” (45).  The history of progress is pocked with failure, dispute, and persistence. Only then does a great breakthrough survive the Three Deaths.

Professor Zeynep Tufekci, of Information Sciences at the University of North Carolina, came to see her research to suggest that lives could be saved by the mass market adoption of simple, non-medical masks in the United States. She broke the ice on the N.Y. Times op-ed page with her March 17 gem: “Why Telling People They Don’t Need Masks Backfired: To help manage the shortage, the authorities sent a message that made them untrustworthy.” 

Dr. Zeynep Tufekci, a professor of information science who specializes in the social effects of technology.

She put pieces of the puzzle together and made rational comparisons:

[P]laces like Hong Kong and Taiwan that jumped to action early with social distancing and universal mask wearing have the pandemic under much greater control, despite having significant travel from mainland China. Hong Kong health officials credit universal mask wearing as part of the solution and recommend universal mask wearing. In fact, Taiwan responded to the coronavirus by immediately ramping up mask production.

I’d wager Zeynep deserves a promotion, if not a Medal of Freedom. Because the fear is that this sort of commentary in the public forum will spark the opposite reaction. She believed, based on her scholarly study, that mass mask adoption might save lives, but cost her own, academically speaking. In a nifty interview with tech explainer Ben Thompson published April 2 on Stratechery,[2] Zeynep confides in how her thinking progressed. 

I watched somewhat flabbergasted over the next few months as the recommendation not to wear masks got harder and harder. Instead of getting softer as the epidemic became a pandemic and saying, well, we should see, we should reevaluate, I started seeing all these messages, like people wouldn’t know how to wear masks and they would infect themselves more and also there is a big shortage of masks, and that all came together in a very frustrating moment for me. The idea that people wouldn’t figure out how to wear a surgical mask or N95s, which are those medical grade masks that we’re now reserving only for hospitals and medical workers, is kind of ridiculous. People don’t wash their hands correctly either, right? So when the pandemic hit, we have songs to get people to wash them for the right amount and we teach them how, people can obviously learn how to wear masks correctly. And as you know, people in Hong Kong can do it, in Taiwan can do it.

But I wanted somebody else from the medical fields to write this. I wanted an epidemiologist, I wanted a virologist to come out and say, look, all these health authorities in Hong Kong and Taiwan, in South Korea, in Japan where it’s kind of customary, there are all these places with lower spread… You don’t even know if you’re sick, so the recommendation of wear this if you’re sick made no sense.

So here’s how I came to write it, even though it wasn’t my place to write this, and I really kind of dragged my foot a little bit, because… I’m not an epidemiologist. I don’t have a degree in virology, I’m not the person: I wrote it because none of the doctors could write it…. I said we have to talk about this, we have to change this conversation… So I wrote the piece pretty much making the case against what was then the CDC and the World Health Organization guidelines, and I braced for the biggest backlash of my life… and I thought, I’m going to get in so much trouble over this, I’m going to be canceled, I’m going to have the huge backlash… I thought this might be the end of my writing career as I knew it… but I just have to say this, I have to say my truth.

I hope Zeynep remains asymptomatic. No – actually, I hope she is a star. If she survives and flourishes, maybe diversity of thought, and alert empirical analysis, comparing realistic options during real-time social stress, can make a splash. If so, I hope it becomes airborne.


[1] The term is attributed to Amazon CEO Jeff Bezos in Brad Stone, “The Everything Store: Jeff Bezos in the Age of Amazon” (2013). It refers to the tendency of any organization, particularly large and complicated ones, to reflexively dismiss new ideas and their sources. It is a twist on the classic NIH (Not Invented Here) problem.

[2] Subscription-required – I recommend it.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Tim Brennan, (Professor, Economics & Public Policy, University of Maryland; former FCC; former FTC).]

Thinking about how to think about the coronavirus situation I keep coming back to three economic ideas that seem distinct but end up being related. First, a back of the envelope calculation suggests shutting down the economy for a while to reduce the spread of Covid-19. This leads to my second point, that political viability, if not simple fairness, dictates that the winners compensate the losers. The extent of both of these forces my main point, to understand why we can’t just “get the prices right” and let the market take care of it. Insisting that the market works in this situation could undercut the very strong arguments for why we should defer to markets in the vast majority of circumstances.

Is taking action worth it?

The first question is whether shutting down the economy to reduce the spread of Covid-19 is a good bet. Being an economist, I turn to benefit-cost analysis (BCA). All I can offer here is a back-of-the-envelope calculation, which may be an insult to envelopes. (This paper has a more serious calculation with qualitatively similar findings.) With all caveats recognized, the willingness to pay of an average person in the US to social distancing and closure policies, WTP, is

        WTP = X% times Y% times VSL,

where X% is the fraction of the population that might be seriously affected, Y% is the reduction in the likelihood of death for this population from these policies, and VSL is the “value of statistical life” used in BCA calculations, in the ballpark of $9.5M.

For X%, take the percentage of the population over 65 (a demographic including me). This is around 16%. I’m not an epidemiologist, so for Y%, the reduced likelihood of death (either from reduced transmission or reduced hospital overload), I can only speculate. Say it’s 1%, which naively seems pretty small. Even with that, the average willingness to pay would be

        WTP = 16% times 1% times $9.5M = $15,200.

Multiply that by a US population of roughly 330M gives a total national WTP of just over $5 trillion, or about 23% of GDP. Using conventional measures, this looks like a good trade in an aggregate benefit-cost sense, even leaving out willingness to pay to reduce the likelihood of feeling sick and the benefits to those younger than 65. Of course, among the caveats is not just whether to impose distancing and closures, but how long to have them (number of weeks), how severe they should be (gathering size limits, coverage of commercial establishments), and where they should be imposed (closing schools, colleges).  

Actual, not just hypothetical, compensation

The justification for using BCA is that the winners could compensate the losers. In the coronavirus setting, the equity considerations are profound. Especially when I remember that GDP is not a measure of consumer surplus, I ask myself how many months of the disruption (and not just lost wages) from unemployment should low-income waiters, cab drivers, hotel cleaners, and the like bear to reduce my over-65 likelihood of dying. 

Consequently, an important component of this policy to respect equity and quite possibly obtaining public acceptance is that the losers be compensated. In that respect, the justification for packages such as the proposal working (as I write) through Congress is not stimulus—after all, it’s  harder to spend money these days—as much as compensating those who’ve lost jobs as a result of this policy. Stimulus can come when the economy is ready to be jump-started.

Markets don’t always work, perhaps like now 

This brings me to a final point—why is this a public policy matter? My answer to almost any policy question is the glib “just get the prices right and the market will take care of it.” That doesn’t seem all that popular now. Part of that is the politics of fairness: Should the wealthy get the ventilators? Should hoarding of hand sanitizer be rewarded? But much of it may be a useful reminder that markets do not work seamlessly and instantaneously, and may not be the best allocation mechanism in critical times.

That markets are not always best should be a familiar theme to TOTM readers. The cost of using markets is the centerpiece for Ronald Coase’s 1937 Nature of the Firm and 1960 Problem of Social Cost justification for allocation through the courts. Many of us, including me on TOTM, have invoked these arguments to argue against public interventions in the structure of firms, particularly antitrust actions regarding vertical integration. Another common theme is that the common law tends toward efficiency because of the market-like evolutionary processes in property, tort, and contract case law.

This perspective is a useful reminder that the benefits of markets should always be “compared to what?” In one familiar case, the benefits of markets are clear when compared to the snail’s pace, limited information, and political manipulability of administrative price setting. But when one is talking about national emergencies and the inelastic demands, distributional consequences, and the lack of time for the price mechanism to work its wonders, one can understand and justify the use of the plethora of mandates currently imposed or contemplated. 

The common law also appears not to be a good alternative. One can imagine the litigation nightmare if everyone who got the virus attempted to identify and sue some defendant for damages. A similar nightmare awaits if courts were tasked with determning how the risk of a pandemic would have been allocated were contracts ideal.

Much of this may be belaboring the obvious. My concern is that if those of us who appreciate the virtues of markets exaggerate their applicability, those skeptical of markets may use this episode to say that markets inherently fail and more of the economy should be publicly administered. Better to rely on facts rather than ideology, and to regard the current situation as the awful but justifiable exception that proves the general rule.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Sam Bowman, (Director of Competition Policy, ICLE).]

No support package for workers and businesses during the coronavirus shutdown can be comprehensive. In the UK, for example, the government is offering to pay 80% of the wages of furloughed workers, but this will not apply to self-employed people or many gig economy workers, and so far it’s been hard to think of a way of giving them equivalent support. It’s likely that the bill going through Congress will have similar issues.

Whether or not solutions are found for these problems, it may be worth putting in place what you might call a ‘backstop’ policy that allows people to access money in case they cannot access it through the other policies that are being put into place. This doesn’t need to provide equivalent support to other packages, just to ensure that everyone has access to the money they need during the shutdown to pay their bills and rent, and cover other essential costs. The aim here is just to keep everyone afloat.

One mechanism for doing this might be to offer income-contingent loans to anyone currently resident in the country during the shutdown period. These are loans whose repayment is determined by the borrower’s income later on, and are how students in the UK and Australia pay for university. 

In the UK, for example, under the current student loan repayment terms, once a student has graduated, their earnings above a certain income threshold (currently £25,716/year) are taxed at 9% to repay the loan. So, if I earn £30,000/year and have a loan to repay, I pay an additional £385.56/year to repay the loan (9% of the £4,284 I’m earning above the income threshold); if I earn £40,000/year, I pay an additional £1,285.56/year. The loan incurs an annual interest rate equal to an annual measure of inflation plus 3%. Once you have paid off the loan, no more repayments are taken, and any amount still unpaid thirty years after the loan was first taken out is written off.

In practice, these terms mean that there is a significant subsidy to university students, most of whom never pay off the full amount. Under a less generous repayment scheme that was in place until recently, with a lower income threshold for repayment, out of every £1 borrowed by students the long-run cost to the government was 43.3p. This is regarded by many as a feature of the system rather than a bug, because of the belief that university education has positive externalities, and because this approach pools some of the risk associated with pursuing a graduate-level career (the risk of ending up with a low-paid job despite having spent a lot on your education, for example).

For loans available to the wider public, a different set of repayment criteria could apply. We could allow anyone who has filed a W-2 or 1099 tax statement in the past eighteen months (or filed a self-assessment tax return in the UK) to borrow up to something around 20% of median national annual income, to be paid back via an extra few percentage points on their federal income tax or, in the UK, National Insurance contributions over the following ten years, with the rate returning to normal after they have paid off the loan. Some other provision may have to be made for people approaching retirement.

With a low, inflation-indexed interest rate, this would allow people who need funds to access them, but make it mostly pointless for anyone who did not need to borrow. 

If, like student tuition fees, loans were written off after a certain period, low earners would probably never pay back the entirety of the ‘loan’ – as a one-off transfer (ie, one that does not distort work or savings incentives for recipients) to low paid people, this is probably not a bad thing. Most people, though, would pay back as and when they were able to. For self-employed people in particular, it could be a valuable source of liquidity during an unexpected period where they cannot work. Overall, it would function as a cash transfer to lower earners, and a liquidity injection for everyone else who takes advantage of the scheme.

This would have advantages over money being given to every US or UK citizen, as some have proposed, because most of the money being given out would be repaid, so the net burden on taxpayers would be lower and so the deadweight losses created by the additional tax needed to pay for it would be smaller. But you would also eliminate the need for means-testing, relying on self-selection instead.

The biggest obstacle to rolling something like this out may be administrative. However, if the government committed to setting up something like this, banks and credit card companies may be willing to step in in the short-run to issue short-term loans in the knowledge that people could be able to repay them once the government scheme was set up. To facilitate this, the government could guarantee the loans made by banks and credit card companies now, then allow people to opt into the income-contingent loans later, so there was no need for legislation immediately.

Speed is extremely important in helping people plug the gaps in their finances. As a complement to the government’s other plans, income-contingent loans to groups like self-employed people may be a useful way of catching people who would otherwise fall through the cracks.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Mark Jamison, (Director and Gunter Professor, Public Utility Research Center, University of Florida and Visiting Scholar with the American Enterprise Institute.).]

The economic impacts of the coronavirus pandemic, and of the government responses to it, are significant and could be staggering, especially for small businesses. Goldman Sachs estimates a potential 24% drop in US GDP for the second quarter of 2020 and a 4% decline for the year. Its small business survey found that a little over half of small businesses might last for less than three months in this economic downturn. Small business employs nearly 60 million people in the US. How many will be out of work this year is anyone’s guess, but the number will be large.

What should small businesses do? First, focus on staying in business because their customers and employees need them to be healthy when the economy begins to recover. That will certainly mean slowing down business activity and decreasing payroll to manage losses, and managing liquidity.

Second, look for opportunities in the present crisis. Consumers are slowing their spending, but they will spend for things they still need and need now. And there will be new demand for things they didn’t need much before, like more transportation of food, support for health needs, and crisis management. Which business sectors will recover first? Those whose downturns represented delayed demand, such as postponed repairs and business travel, rather than evaporated demand, such as luxury items.

Third, they can watch for and take advantage of government support programs. Many programs simply provide low-cost loans, which do not solve the small-business problem of customers not buying: Borrowing money to meet payroll for idle workers simply delays business closure and makes bankruptcy more likely. But some grants and tax breaks are under discussion (see below).

Fourth, they can renegotiate loans and contracts. One of the mistakes lenders made in the past is holding stressed borrowers’ feet to the fire, which only led to more, and more costly loan defaults. At least some lenders have learned. So lenders and some suppliers might be willing to receive some payments rather than none.

What should government do? Unfortunately, Washington seems to think that so-called stimulus spending is the cure for any economic downturn. This isn’t true. I’ll explain why below, but let me first get to what is more productive. 

The major problem is that customers are unable to buy and businesses are unable to produce because of the responses to the coronavirus. Sometimes transactions are impossible, but there are times where buying and selling is simply made more costly by the pandemic and the government responses. So government support for the economy should address these problems directly.

For buyers, government officials should recognize that buying is hard and costly for them. So policies should include improving their abilities to buy during this time. Sales tax holidays, especially on healthcare, food, and transportation would be helpful. 

Waivers of postal fees would make e-commerce cheaper. And temporary support for fixed costs, such as mortgages, would free money for other things. Tax breaks for the gig economy would lower service costs and provide new employment opportunities. And tax credits for durables like home improvements would lower costs of social distancing.

But the better opportunities for government impact are on the business side because small business affects both the supply of services and the incomes of consumers.

For small business policy, my American Enterprise Institute colleagues Glenn Hubbard and Michael Strain have done the most thoughtful work that I have seen. They note that the problems for small businesses are that they do not have enough business activity to meet payroll and other bills. This means that “(t)he goal should be to replace a large portion of the revenue (not just the payroll expenses) those businesses would have generated in the absence of being shut down due to the coronavirus.” 

They suggest policies to replace 80 percent of the small business revenue loss. How? By providing grants in the form of government-backed commercial loans that are forgiven if the business continues and maintains payroll, subject to workers being allowed to quit if they find better opportunities. 

What else might work? Tax breaks that lower business costs. These can be breaks in payroll taxes, marginal income tax rates, equipment purchases, permitting, etc., including tax holidays. Rollback of current business losses would trigger tax refunds that improve businesses finances. 

One of the least useful ideas for small businesses is interest-free loans. These might be great for large businesses who are largely managing their financial positions. But such loans fail to address the basic small business problem of keeping the doors open when customers aren’t buying.

Finally, why doesn’t traditional stimulus work, even in other times of economic downturn? Traditional spending-based stimulus assumes that the economic problem is that people want to build things, but not buy them. That’s not a very good assumption. Especially today, where the problems are the higher cost of buying, or perhaps the impossibility of buying with social distancing, and the higher costs of doing businesses. Keeping businesses in business is the key to supporting the economy. 

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Brent Skorup, (Senior Research Fellow, Mercatus Center, George Mason University).]

One of the most visible economic effects of the COVID-19 spread is the decrease in airline customers. Alec Stapp alerted me to the recent outrage over “ghost flights,” where airlines fly nearly empty planes to maintain their “slots.” 

The airline industry is unfortunately in economic freefall as governments prohibit and travelers pull back on air travel. When the health and industry crises pass, lawmakers will have an opportunity to evaluate the mistakes of the past when it comes to airport congestion and airspace design.

This issue of ghost flights pops up occasionally and offers a lesson in the problems with government rationing of public resources. In this case, the public resource are airport slots: designated times, say, 15 or 30 minutes, a plane may takeoff or land at an airport. (Last week US and EU regulators temporarily waived the use-it-or-lose it rule for slots to mitigate the embarrassing cost and environmental damage caused by forcing airlines to fly empty planes.)

The slots at major hubs at peak times of day are extremely scarce–there’s only so many hours in a day. Today, slot assignment are administratively rationed in a way that favors large, incumbent airlines. As the Wall Street Journal summarized last year,

For decades, airlines have largely divided runway access between themselves at twice-yearly meetings run by the IATA (an airline trade group).

Airport slots are property. They’re valuable. They can be defined, partitioned, leased, put up as collateral, and, in the US, they can be sold and transferred within or between airports.

You just can’t call slots property. Many lawmakers, regulators, and airline representatives refuse to acknowledge the obvious. Stating that slots are valuable public property would make clear the anticompetitive waste that the 40-year slot assignment experiment generates. 

Like many government programs, the slot rationing began in the US as a temporary program decades ago as a response to congestion at New York airports. Slots are currently used to ration access at LGA, JFK, and DCA. And while they don’t use formal slot rationing, the FAA also rations access at four other busy airports: ORD, Newark, LAX, and SFO.

Fortunately, cracks are starting to form. In 2008, at the tailend of the Bush administration, the FAA proposed to auction some slots in New York City’s three airports. The plan was delayed by litigation from incumbent airlines and an adverse finding from the GAO. With a change in administration, the Obama FAA rescinded the plan in 2009.

Before the Obama FAA recission, the mask slipped a bit in the GAO’s criticism of the slot auction plan: 

FAA’s argument that slots are property proves too much—it suggests that the agency has been improperly giving away potentially millions of dollars of federal property, for no compensation, since it created the slot system in 1968.

Gulp.

Though the GAO helped scuttle the plan, the damage has been done. The idea has now entered public policy discourse: giving away valuable public property is precisely what’s going on. 

The implicit was made explicit in 2011 when, despite spiking the Bush FAA plan, the Obama FAA auctioned two dozen high-value slots. (The reversal and lack of controversy is puzzling to me.) Delta and US Airways wanted to swap some 160 slots at New York and DC airports. As a condition of the mega-swap, the Obama FAA required they divest 24 slots at those popular airports, which the agency auctioned to new entrants. Seven low-fare airlines bid in the auction and Jetblue and WestJet won the divested slots, paying about $90 million combined

The older fictions are rapidly eroding. There is an active secondary market in slots in some nations and when prices are released it becomes clear that the legacy rationing amounts to public property setasides to insiders. In 2016 it leaked, for instance, that an airline paid £58 million for a pair of take-off and landing slots at Heathrow. Other slot sales are in the tens of millions of dollars.

The 2011 FAA auctions and the loosening of rules globally around slot sales signal that the competition benefits from slot markets are too obvious to ignore. Competition from new entry drives down airfare and increases the number of flights.

For instance, a few months ago researchers used a booking app to scour 50 trillion flight itineraries to see new entrants’ effect on airline ticket prices between 2017 and 2019. As the Wall Street Journal reported, the entry of a low-fare carrier reduced ticket prices by 17% on average. The bigger effect was on output–new entry led to a 30% YoY increase in flights.

It’s becoming harder to justify the legacy view, which allow incumbent airlines to dominate the slot allocations via international conferences and national regulations that require “grandfather” slot usage. In a separate article last year, the Wall Street Journal reported that airlines are reluctantly ceding more power to airports in the assignment of slots. This is another signal in the long-running tug-of-war between airports and airlines. Airports generally want to open slots for new competitors–incumbent airlines do not.

The reason for the change of heart? The Journal says,

Airlines and airports reached the deal in part because of concerns governments should start to sell slots.

Gulp. Ghost flights are a government failure but a rational response to governments withholding the benefits of property from airlines. The slot rationing system encourages flying uneconomical flights, smaller planes, and excess carbon emissions. The COVID-19 crisis allowed the public a glimpse at the dysfunctional system. It won’t be easy, but aviation regulators worldwide need to assess slots policy and airspace access before the administrative rationing system spreads to the emerging urban air mobility and drone delivery markets.