COVID evokes economic lessons – Twin Cities

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If you understand a few principles of economics, you can see these principles play out in your personal life every day. I said that in microeconomics classes for 40 years. And that was certainly true over the past two weeks as we contracted and recovered from COVID-19.

Edward Lotterman

One such simple principle is that of “changes in demand”. Demand is a price-quantity relationship – how many units of something will consumers buy at each of a wide price range? At any time, if producers raise prices, they will sell less and if they lower prices, they will sell more.

A principle of “demand displacement” is different. He notes that as relevant circumstances change, consumers will buy larger or smaller quantities than before at each of the same prices. A producer can keep prices fixed, but will sell more units if demand “moves right” and less if it “moves left”. The words “shift”, “right” and “left” refer to the movements on the diagram of supply and demand force fed to every student of economics.

In the real world, COVID shifted the demand for masks to the right – people wanted to buy a lot more masks at every possible price. Over time, supply has also shifted to the right, with production increasing in response to demand. But for months at the start of the pandemic, we were in a seemingly anomalous situation where producers could charge more and sell even more masks. This is an example in economics when there are “lags” in dynamic markets, supply and demand often cannot change instantaneously.

However, the offer may eventually change. At first, drugs that mitigated the effects of COVID, such as Remdesivir, were in short supply. But now, 27 months later, positive tests have been requested from our doctors and supplies of the treatment drug Paxlovid were ready in nearby pharmacies within hours.

As markets adjust, prices can fall for a variety of reasons. One is “lower average fixed costs”. The largest components of the cost of almost all prescription (non-prescription) drugs are those of research and development as well as obtaining regulatory approvals. These are “fixed costs” – those that are the same whether selling 1,000 doses or 1 billion doses. A lump sum divided by a thousand can be huge. Divide it by a billion and it’s tiny. The “average fixed cost” per unit is decreasing, and so are, presumably, prices.

Understand that this is different from the often misused term “economies of scale”. This refers to a situation where the “average variable costs” per unit, such as raw materials, labor, etc., used in actual production, decrease as plant size increases. When pharmaceutical companies shifted away from other product lines to produce COVID-related vaccines and drugs, they realized economies of scale.

Huge sums of money – some governments, other companies – have been poured into accelerated research programs to develop vaccines and antiviral drugs. This is an example of “induced innovation,” an idea explored by University of Minnesota applied economics professor Vernon Ruttan, who used it to explain innovations in agricultural technology in poor countries. Still underestimated, induced innovation is a fancy theory of how the squeaky wheel gets the grease.

Japanese pilots who crashed into Allied ships during World War II induced an innovation in “solid-state electronics” needed for the Proximity Fuse, a miniature radar in an anti-aircraft fuse the size of a coke can. This led to the transistor and integrated circuit boards that we use today in our phones, computers, and cars.

The need for effective vaccines has also advanced our fundamental understanding of coronaviruses. This is a big part of why my wife and I have weathered COVID so well. But the basic science involved goes beyond this specific virus. It will advance the control of other viruses and improve understanding of fundamental cell biochemistry. mRNA technology, for example, is a big leap in itself.

There is also a macroeconomic problem in all this. Gross domestic product, the measure of the dollar value of the production of “final goods” over a period of time, is a key indicator, though it is often overused and misunderstood. But the dollar value of a good, or the quantity produced, can be a poor indicator of how much something is really making people better off.

My 51 year old father had a heart attack on February 12, 1950, when I was 10 weeks in utero. Dr. Van Solkema came to the house, said my dad was having a heart attack and he needed to rest until he came back to check up in the morning. At that time, my father was dead. Today, paramedics would have had my dad downtown in minutes and a stent or two would have been inserted within hours. My father would have been home in a few days and back as general foreman of the chair factory in a week.

As the only measure of this, GDP would only consider the cost of two doctor visits in 1950 versus one ER visit and stent insertions in 2022 and show an increase in the value of output. But that figure would underestimate the relative value to society of a child growing up with or without a father and perhaps some 30 additional years of work and community contribution by a very able person. Ironically, as stents and catheter-based heart valve repairs replaced many open-heart surgeries, GDP fell because the newer, more efficient and less invasive procedures cost less than open-heart procedures. So less “added value” for society in monetary terms, but much more in human terms.

My grandmother died, leaving seven children under the age of 20, during the “Spanish flu” epidemic of 1918-1920, when the house had been fumigated by burning sulphur. The extent to which the costs of one vaccination plus two boosters plus five days of Paxlovid for her grandson exceeded the cost of sulfur is the tabulated increase in GDP over a century.

This underestimated “dollar value” of real benefits to society is not limited to health. In 1963, when Joe, our mechanic, reported to fellow coffee drinkers that the factory tires on the Volkswagen Lotterman’s kids drove to school had done over 21,000 miles, that was the talk of the Leader Cafe. A new Galaxy 500 could get 16,000.

My first printer, a nine-pin Epson, cost $400 in 1986. We recently replaced a $400 Canon copy-scan-print combo bought during the George W. Bush administration with a model half as big and more performance that costs $270. GDP fell even before adjusting to inflation, but benefits were obtained.

All this does not mean that GDP is useless, just that it should be understood and used wisely.

There are several other economic lessons to be learned from the pandemic, such as subsidized vaccines and booster shots that we’ve all received, but these are boxes of public policy worms that deserve their own column.

St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.

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