John P. Watkins: COVID-19 and the limit of markets

(Trent Nelson | The Salt Lake Tribune) The children's waiting area at Foothill Dental in Salt Lake City, closed and empty on Tuesday, April 7, 2020.

COVID-19 currently ravaging the world reveals both the limits of market economies and the power of government.

Markets are not alert to external threats, foreign, domestic or microbial. This is government’s role, a role that government has largely failed. Donald Trump refers to himself as a war-time president. He gave an oath, promising to defend the American people against all enemies, domestic and foreign. We should add another enemy: an enemy in the form of a virus.

The Trump administration initially dismissed the threat of a pandemic. The administration focused on expanding free markets domestically, even though it restricted markets internationally. The administration’s efforts to promote markets reveals itself in cutting the budgets of the Center for Disease Control, rolling back environmental regulations, opening the public lands for drilling, cutting business taxes and so on.

Markets, as places where buyers and sellers meet, are wonders of social organization. I don’t have to grow my own food. Instead, I can hunt and gather at the grocery store. I don’t have to walk to the store. Instead, I can drive my car, purchased at the local dealer, assembled in Detroit, made from parts coming from the world over. Markets reduce the costs of providing those things that I could make myself or, more likely, go without.

The virus, in revealing the limits of markets, has also revealed their nature. Markets are more than the exchange of goods and services and the land, labor and capital necessary to make those goods and services. The institutional foundation of the market economy lies in the promises that we make to each other, formalized in contracts.

In taking out a mortgage, financing a car, purchasing goods using credit cards, or financing an education, we receive purchasing power in the present in exchange for promises to our creditors to repay our debts in the future. We assume we will have sufficient income to fulfill our promises.

Employment, too, rests on a series of promises. The butcher, brewer and baker promise to prepare our dinners in exchange for income. The restaurateur likely pays the butcher, the brewer and the baker from a short-term loan provided by the bank, another promise, of course.

COVID-19 has disrupted those promises. The current situation, however, differs from anything preceding it. Stopping the virus’ spread requires social distancing, disrupting markets. Lack of work means a lack of income. Lack of income means unfulfilled promises, prompting people to sell their cars, homes and jewelry to raise cash to meet their obligations. This, in turn, would cause a fall in prices, precipitating a debt-deflation depression.

Preferably, we would just call a moratorium until the pandemic passes, temporarily freezing those promises, providing incomes for essentials. Renters would not have to pay rent, homeowners would not have to pay their mortgage, and so on. Government would still have to provide people money for people to eat, but the promises that we all made before the virus would be frozen.

Instead of a moratorium on promises, the government has chosen to provide money in the form of loans and grants to individuals and businesses enabling them to fulfill their promises.

They say there are no atheists in fox holes. Similarly, there are no free-market capitalists during pandemics. Even Sen. Mike Lee and Utah’s other GOP congressmen advocate bailing outs for oil companies. The primary beneficiaries of government largesse will be the creditors, the landlords and those who have been promised money by the rest of us.

My fear, however, is that many people and small businesses will fall through the cracks. Those who need no protection will be protected. Those needing protection will be ignored. Governments, late to protecting us from the virus, needs to do more to protect us from each other.

John Watkins

John P. Watkins is a professor of economics at Westminster College, Salt Lake City.