Taking on the Behavioral Economics of Fear

The coronavirus is a human health tragedy. Its initial economic consequence is a supply shock that is disrupting consumer access to everything from ibuprofen to smart phones. We’re now confronting a wave of behavioral economics of fear unseen in modern times.

Hoarding-driven price gouging is the historical response to a supply shock. Today we are witnessing consumers cleaning out store shelves for toilet paper, hand sanitizers and bottled water. We see items like Purell selling for over $100 a bottle. 

Soon we will have evidence of the next supply shock impact: a fall in demand driven by fear. In the case of coronavirus, fear is causing people and businesses to avoid purchasing services like travel or dining – which could have a huge impact on the most vulnerable in our society. Fear is driving people and businesses to avoid our workplaces. Combined, this will generate a fall in employment.

If sustained over a long enough time period, this current crisis will create a recession. The economic policy question is: What can be done to mitigate it?

Addressing the emerging behavioral economics of fear

Fear is economic cancer. Fear defined both the Great Depression and the Great Recession of 2008. The economic lesson learned is that prosperity will not return until consumer and investor fears are addressed. In the Great Depression, this was achieved through aggressive public policies that created Social Security and Federal Deposit Insurance. The fear of a banking system collapse during the Great Recession was mitigated through bank bailout funding. 

Example steps for addressing fear in the wake of coronavirus would be:

• A massive commitment to a national system offering coronavirus screening to all Americans
• Developing an emergency production and supply plan to ensure every American’s access to face masks if they become ill.
• Implementing rationing of hand sanitizers to ensure its availability to all at traditional prices
• A FEMA type response for infection hot spots that supplies quarantine facilities and service provider protective gear.

The key point is not what these steps achieve. Rather their value, if the steps are credible, will be fear reduction.

Taking on the looming recession

The first step in addressing a potential recessions is a national health commitment to containing the spread of coronavirus and allaying fears. The second is to accept that monetary and fiscal policy alone are not solutions. The traditional recession-fighting economic tools of lowering interest rates and massive federal deficit spending to spark growth have been squandered by the current administration.

Innovation and productivity are the last remaining tools that can restore our economy. This path is enhanced through public policies that promote technology innovations that generate productivity growth.

Encouraging innovation and productivity can help overcome economic threats

To be clear, let’s not minimize the ongoing public health concerns. But in the long term, assuming success in containing the human health impacts and fears over coronavirus, there are many public policy changes that would open the flood gates to innovation and productivity. Many are tied to removing existing monopoly and oligopoly barriers that limit innovation and productivity growth. The following are two public policy ideas that could help dramatically increase consumer spending power, accelerate innovation and enhance economic productivity.

Cost of service internet and cellular pricing

Today’s internet and cellular service prices and accessibility is based on a laissez faire empowerment of monopoly and oligopoly providers. Their “service bundling” successfully maintains their revenues and customer retention at the expense of consumers seeking lower prices and technology innovations. At a time when more workers will be told to work from home, shifting internet and cellular pricing to a regulated cost of service model, while also opening these markets to consumer-centric service options, will lower consumer prices, increase consumer access to technology innovation and increase human productivity generated by the consumer’s accelerated technology adoption.

Implement a 50 percent electric utility excise tax

Renewable energy is a breakthrough technology delivering least-cost electricity. Now battery prices are falling toward economic viability as a peak power alternative to natural gas fired power plants.

However, utilities are capturing these technology-created cost savings for themselves rather than using them to lower electric bills. Utility tariffs and rules that limit consumer-owned access to solar and restrict consumers from using batteries to buy electricity during the day when prices are low to avoid buying electricity when prices are higher.

Traditional state utility commissions have proven themselves to be too slow in adopting technology innovation and too protective of utility revenues. A federal 50 percent excise tax on profits for utilities that fail to generate 50 percent of their electricity from renewables and fail to offer consumers unrestricted economic use of consumer-owned solar power and battery storage systems would incentivize aggressive utility reforms. The result to start, would be lower electric bills, which would help leave more cash in consumers’ bank accounts. Other benefits, of course, would be increased energy efficiency, lower healthcare costs achieved through reduced pollution and faster adoption of smart building technologies that enhance occupant productivity.

The bottom line

These public policy examples capture both the opportunity and challenge using innovation and productivity to grow the economy past a potential recession. The backlash from monopolies and oligopolies will be harsh and huge. The question will be whether the pain of the emerging recession, combined with a lack of fiscal and monetary options, create a window of public policy opportunity. If it does, then the lasting economic legacy of this current crisis could be a sustainable path to economic growth, improved human health and a decline in climate changing pollution.

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