Is rationality the new stupidity?

On Twitter, I come across dozens of different bad analyzes, especially about economics. This is just one of them:

You might think it’s stupid for people to stockpile things like gas. And, of course, you can also share it and laugh. However, just because you think something is stupid doesn’t make it stupid.

The real stupidity is the actions of policymakers who do not know the customer behavior theory and concepts such as unintended consequences. When you don’t let prices go up, you expect customers to act accordingly:

Here is an article about this topic. Regulations on price gouging made the pandemic worse: “How Price-Gouging Regulation Undermined COVID-19 Mitigation: Evidence of Unintended Consequences.”

The study comparing states with and without price reduction laws between January 22 and May 3, 2020. As a result, it shows that these laws are associated with more physical visits to commercial venues (especially than individuals in the lowest income quartile), as people were frantically looking for sanitizer and other goods in shortage. It would not be an exaggeration to say that this increased exchange increases contacts and infections.

Was the damage done by policymakers limited to this? Over the past year, we have experienced totally scandalous government incompetence. In contrast, the private sector responded very well to the crisis and was way ahead of the state in most areas. This is hardly surprising if we talk specifically for the United States (consider September 2008 and 9/11). Moreover, departments such as TSA and Homeland Security were established after 9/11 and Iraq was invaded, which is even more destructive to the US than 9/11 itself. Likewise, they responded to the 2008 crisis with an incredibly tight monetary policy that caused the NGDP to fall at the sharpest rate in the last 60 years and did more damage than the crisis itself.

Not much has changed in 2020 either. This time, the failures were largely due to regulations and trade policies that slowed the introduction of required tests and reduced protective equipment availability (PPE). They didn’t do anything until it was too late (this still applies to countries like Turkey). You may remember that Trump previously disbanded the federal department, explicitly dealing with pandemics. Likewise, there was a problem with the necessary equipment, such as surgical masks. Then they banned the importation of these masks, set tariffs on the necessary parts for ventilators, even prevented the domestic production of these equipments. Finally, they fought price gouging, which could really help in moments of crisis. The government then prevented market actors from doing the necessary tests for covid-19. There were regulations that deprived the healthcare industry of the workforce needed or prevented it from moving to where it was needed. 

Some of these are obviously the predictable consequences of the Trump administration’s incompetence, but it’s important to remember that the situation in Europe is even worse. And many of the worst decisions came from bureaucracies. Most importantly, governments were unable to show any creative solution or leadership, leaving everything else to the private sector.

What could be the counterarguments?

1. “Yes, governments are incompetent, but if there were another President(e.g., Biden), it would be better responded.”

In fact, most local governments also messed up. At this point, I remember that in the 2008 crisis, people demanded more regulation, even though regulations encouraged loans. People seemed to think the regulations would actually work if the government predicted the crisis. But obviously, if the crisis were predictable, banks wouldn’t be able to make decisions that would cause them to lose hundreds of billions of dollars in the market, right?

2. “But China did well.”

Yes, China controlled the epidemic with ruthless policies, but Taiwan controlled the epidemic more effectively with much more liberal policies.

3. Externality. “Socialization needs to be regulated because of the externality of socialization.”

I strongly agree that social minimization is appropriate during the pandemic, but it is not as obvious as the government seems to be the most appropriate tool to implement it. Governments have and still use quarantines to enforce their political agendas. Giving your freedoms to the government for the sake of security cannot be justified in this way. 

4. Medical research.

This is the strongest argument for state participation. However, this is not about what to do during an epidemic but rather about what to do before an epidemic. Moreover, of course, the private sector also does much medical research. Most of today’s vaccines are due to the private sector’s efforts despite governments’ interventionist policies. This does not mean that the state cannot play a useful role in promoting medical research, but it is an argument against regulations.

Well, let’s get back to the topic. These price control policies created shortages. People can predict this, and they simply act rationally. How can the blindness of policymakers be explained when even the average citizen can predict results?

As for the intentions, the roads of hell are paved with “good intentions,” as is said in many languages. Moreover, as once said, “From the saintly and single-minded idealist to the fanatic is often but a step.” In my opinion, most of the policymakers stand at this point.

The more depressing part is that economists support these policies. Before 2008, there was a grasp of centuries of experience in economics, a number of widely accepted facts, at least among the more elite macroeconomists:

  1. Monetary policy can be quite effective in stimulating a weak economy, even if short-term interest rates are already close to zero.
  2. A much more stimulative monetary policy that included abandoning the gold standard would have prevented the 50% decline in GDP in the early 1930s and, therefore, significantly prevented the Great Depression.
  3. Low-interest rates do not imply easy money, and vice versa.
  4. When both output and inflation drop sharply, the economy suffers from a lack of AD. When the falling output is accompanied by rising inflation, we experience a real (or supply) shock.
  5. Monetary policy should focus on AD.
  6. Massive increases in government spending, taxes, and regulation can hurt the economy but play minor role in the business cycle.
  7. Capital gains or income taxation is undesirable. 
  8. Price gouging is actually a good thing.

I can count more, but I don’t want to.

Now that whole structure looks like it’s in smoke. Instead, we have many nonsenses, such as “monetary policy is not effective at the zero lower bound,” “fiscal policy cannot affect interest rates because interest rates are set by the Fed,” “taxes are what creates inflation,” “printing money does not create inflation,” “interest rates imply the stance of monetary policy.”

What depressed me most is that I cannot see any truth, any empirical evidence that would cause a reasonable economist to abandon these facts. But they did.

This is an age when rationality is the new stupidity. An age in which our experiences are forgotten, truth and sanity are slaughtered, progressive or conservative hooligans drag the world into an impasse in the name of “science” or “people.” Unfortunately, economics is not exempt from that, either.

Oh, I mourn the world we lost. It almost makes me want to cry.

PS: Price gouging can help resources get to the people who need them most.

PPS: Today’s regulations and government intervention are said to be imposed “in the name of science.” Which science?

Notify of
Inline Feedbacks
View all comments