Deputy Director of the Master's Degree in Economics and Political Science at ESEADE.
LOS MERCADOS – At the extreme of freedom restriction, the economic destruction is gigantic.
“A government cannot make a man richer, but it can make him poorer.” Ludwig von Mises
Finally, after approximately 120 days, the strict quarantine that still applied to the Buenos Aires Metropolitan Area was ended. As they had been doing, in a joint conference, the President, the Head of Government of Buenos Aires Autonomous City and the Governor of Buenos Aires Province, announced that as of July 17 and until August 2, a stage of gradual relaxation of the economic and social activities.
Individual freedom very timidly began to regain some of the lost ground.
It was curious for everyone, but especially for journalism and the Kirchnerist militancy (which had taken up the cause of the quarantine and defended it in the media and social networks) that the government loosen it just when cases were increasing in the country. Looking at the 3-day moving average, the latest data available shows 116 confirmed deaths from COVID, a record number so far. In the case of infections, the number on July 25 was 6,127, another record.
Why is this happening? If we listen to the words of Horacio Rodríguez Larreta, who spoke of “an integral look” and of preserving “freedom”, we have a clue. But even clearer was his Minister of Health, Fernán Quirós, who maintained in dialogue with Ernesto Tenembaum that although the quarantine could serve to contain the pandemic, it was also necessary to look at other things, such as its effect on the economy, its effect on the mental health, and its effect on freedom.
Incredibly, what some “antiquarantine freaks” argued very early today has become part of the official discourse.
Now, what lessons can be learned, at least in the field of economics, after 120 days of confinement? The short answer is that less economic freedom equals greater poverty.
Lack of freedom and its impact on growth
In a note that I wrote at the beginning of this long period of confinement, I tried to take a liberal position on the drastic official measure, which required that we all stay in our homes.
After reviewing some of the writings of Adam Smith, Ludwig von Mises and recognizing a role for the state in responding to shocks as exceptional as wars, earthquakes or pandemics, I finally stopped on the economic chapter. There I wrote:
“… Liberalism will be vindicated once again by this situation.
It is that if there is something in which liberals of all colors and slopes agree, it is in the following: as long as the state imposes regulations that affect incentives, the economy will not grow.
It is easy to understand that when a government prohibits economic activity with mandatory quarantines, this affects the incentives to invest and produce. It is that, basically, doing so would imply breaking the law.
Now what emerges from these laws, and which no one in their right mind has even tried to discuss, is that they will impose economic costs that can be enormous.
And that is what will justifiably begin to be discussed in a few days. If the cost of the economic stop is greater than the cost / risk of a great spread of the disease.
But however that discussion turns out, liberals calling for a small state to promote economic development will have been right again. Laws to prevent contagion are contained within the liberal theoretical framework and so is the economic cost that these laws will impose.
Quarantine or pandemic
What came next was indeed what was anticipated. Those of us who criticized the quarantine were told that we were on the side of death. Then the argument changed, and it was sought to establish that the economic crisis was not the result of the quarantine, but of the pandemic itself that scared people and made them stop consuming.
While acknowledging that obviousness, that the pandemic itself would generate economic costs, the “anti quarantine” warned about the additional damage that this measure would bring.
A recent study from the University of Chicago shed some light on this debate. The study found that of the drop in consumer traffic – which was an average 60% in the US states that were analyzed – only a portion was explained by government demands to “stay at home.” Specifically, only 7 out of 60 points would be the responsibility of the government. The rest is the fault of fear.
However, they did find that the quarantine had significant effects in changing the direction of consumption. For example, they found that everything that consumption fell in gyms, theaters, bars and confectioneries, was gained by the supermarket and general stores.
In light of these data, we can say that while that 7% may seem small, for some businesses it may be the difference between survival or closure. On the other hand, we can also affirm that many businesses in some specific sectors will close their doors forever exclusively as a consequence of the quarantine.
In the Argentine case, moreover, there are data that show that the quarantine was indeed decisive for the economic debacle to occur.
During the month of March, when the quarantine occupied only the last 10 days of the month, the annual production drop was 16.5%. In April, when it was total for the entire month and for the entire country, the drop was 33.4% (double). In May, however, with less compliance with the decree, and with some relaxation in some provinces, the drop was less, 26.4%.
The same can be corroborated by looking at the numbers of tax collection, car production or the monthly estimator of economic activity. Regarding the latter, a correlation is also observed between the magnitude of the fall in Argentina, and smaller falls in Chile or Brazil, where the confinement was less demanding.
More freedom, more progress
With the evidence in hand, it was the government itself that decided to move to a phase where care against COVID falls more on individual responsibility than on such restrictive measures.
The lesson that even they seem to have learned is that if there is no freedom to work, undertake and produce, the economy not only does not grow, but it can collapse like never before in history.
But there is something else to be learned: that quarantine is not the only hurdle facing the economy. In fact, quarantine is an example of the maximum possible obstacle that can be imposed on a group of economic agents. But the truth is that there are many other restrictions, especially in Argentina, that stop its growth, such as high taxes, regulations, bureaucratic procedures, authorizations and trade barriers.
The lesson we must take from this long period of confinement, then, is simple. Without freedom there is no economic growth. And for the economy to grow, the end of the quarantine is only the first step.
