• Robert MacCulloch

What Explains NZ's Virus Response?

Several prominent Kiwi economists are arguing that the stringent lock-downs in NZ cannot be justified on the grounds of cost-benefit analysis (CBA). What is the view of DownToEarth Kiwi? The best explanation for our lock-downs is perhaps to be found more in psychology than the cold mathematical arithmetic of CBA.

One reason maybe a view held by the government that health and well-being should be prioritized over GDP. A caveat is that our health system costs around $20 billion per year to maintain, funded out of taxation. Richer countries have more money to spend on health and generally have better health outcomes than poor countries. So in the long run a good health system needs a healthy economy.

A second reason may have been to avoid 'regret based anger'. Regret theory is big these days. It's based on the idea that people anticipate regret if they make the wrong choice and consider this anticipation when making decisions. Assume you are leader of a country, facing the following dilemma. The Treasury tells you that a less stringent lock-down would be better for the economy and help save jobs. However you also know it would raise the chance of a major virus outbreak. Should that happen, the public will be angry. Really angry. They will regret not adopting the more stringent approach and blame you for the (with-the-benefit-of hindsight) mistake. What would be your decision?

A third reason relates to fear. After the Great Depression, President Roosevelt famously declared "We have nothing to fear but fear itself". Fear can be paralyzing - and at times irrational - as alluded to by the President. Fear over what could happen should the virus break out may be a powerful emotion that has led people to err on the safest option.

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