Planning for catastrophes

It is hard to plan for catastrophes. They come in many varieties. Today we are focused on a global pandemic. Perhaps next, an asteroid will whack the planet. Electric power grids could go down. The digital payment networks might fail or maybe the global Internet. Nuclear disaster could hit. Global warming could cut off food supplies. Or a different pandemic might arise. Even for a given risk it is hard to know how it will play out and therefore how we could plan for it. Very thoughtful economists, who have studied catastrophes, assumed that pandemics would not have any effect on the economy beyond causing deaths.

It appears that most governments did not plan, or plan well, for dealing with the interrelated health and economic consequences of a global pandemic. That might have been the right choice at the time. The cost of getting prepared could have outweighed the benefits of having readied for an event that probably would not happen. And whose contours would be so uncertain that it would have been hard to even know what solutions to consider.

Unfortunately, the economic literature on catastrophes points to another possibility. Governments may have reacted rationally, but badly, to the fact that the expected political and professional benefits of planning for improbable future events are infinitesimal. Even though the expected social benefits, taken across all possible catastrophes and accounting for costs of unmitigated ones, are likely to be quite high.

That is a scary thought. We have known for some time that the development of modern technologies, and greater global density of connections, have increased the risk of worldwide catastrophes. There is a higher cumulative probability of catastrophes with much higher costs. It is possible that governments have developed plans, based on war games, and hidden away in vaults, for dealing with the fulsome effects of other catastrophes. A reasonable concern from recent events, however, is that governments have underinvested in avoiding catastrophes and plans for mitigating their consequences.

Hopefully, the shock of massive deaths and economic collapse will energize governments into better long-term planning for catastrophes and not just efforts, such as stockpiling facemasks and ventilators for the next pandemic, which probably will not be the next catastrophe. Governments need to prepare for specific types of catastrophes to avoid them and mitigate them if they occur. But, since each is improbable, we could achieve significant efficiencies by identifying common economic, health, and social breakdowns across catastrophes and develop policies that could be put into place quickly to mitigate the effects of these breakdowns. While it is early to draw lessons from the current pandemic it appears that interdisciplinary teams are sorely needed. Together, epidemiologists, economists, and other experts might have connected the dots between pandemic, lockdown, and economic collapse and devised better coordinated solutions.

Different parts of governments have roles to play in preparing for catastrophes, and that brings us to competition authorities. Aside from their day-to-day responsibilities enforcing the antitrust laws, compared to most other parts of governments, they have deep institutional knowledge of markets and experience in using economic analysis and evidence-based methods. They can play important roles in mitigating the effects of catastrophes even though they will almost always be peripheral players.

Competition law has long recognized the trade-offs between procompetitive efficiencies and anticompetitive effects. Authorities have the experience in balancing these considerations. They can be nimble in using their prosecutorial discretion in what to challenge. Some have been quick in warning companies against using the current crisis as an opportunity to violate the antitrust laws while at same time ensuring firms that they will be flexible in the time of crisis. They have sensibly adjusted assessments of error costs of under- or overenforcement.

This seems reactive, though, and developed on the fly. Like other parts of the government, competition authorities need to invest more in planning for catastrophes to provide the best help when needed. They should have best practices in place for dealing with collaboration among competitors, mergers, and abuse in times of catastrophe even if those practices need to be adjusted to the particularities of the crisis at hand. The answer to why not wait is the same as for more critical parts of government: it pays to prepare for low probability events that can impose massive costs.

Catastrophes can increase the incentives for firms to engage in anticompetitive behaviour such as forming cartels to restrict output of products that have become more precious and whose market demand is more inelastic. They can also increase the likelihood of unfair, deceptive, and fraudulent business practices that are under the purview of authorities responsible for consumer protection. Some have alerted firms that the authorities are being especially vigilant and will be tough on lawbreakers. Whether they have the resources to really do so in times of catastrophe is unclear. At the same time, catastrophes may increase the cost of detecting and stopping firms from engaging in bad behaviour. Competition authorities, and consumer protection agencies, may need to invoke tougher penalties in times of catastrophe to account for the higher likelihood, greater cost, and lower likelihood of detection of harmful behaviour. Proper planning may require seeking legislation to provide these powers.

Antitrust authorities sometimes engage in competition advocacy to steer other parts of government away from policies—existing ones, and proposed interventions—that harm competition. While their voices may not be welcome in the time of catastrophe, they are sorely needed. Things move quickly. Policy-makers do not have time to consider unintended consequences on competitive markets or they may lack the expertise. Industry bailouts, for example, may result in consolidations that could result in long-run economic inefficiency, or provide an opportunity to reduce competitive impediments in return for government funds.

We can generally count on the price mechanism to allocate resources to their highest valued uses and to provide signals to firms on where to invest. In times of catastrophe traditional markets may not work well. Some catastrophes could cripple the ability to make transactions based on pecuniary prices, resulting in the need for some forms of barter. For others, society may decide that it is not desirable to allocate certain scarce resources based on the willingness, and ability, to pay. Economists have developed significant expertise (market design) in matching supply and demand without prices. Competition authorities, tapping into their knowledge of markets and economic expertise, could help guide the preparation of non-price market design that could be deployed, by other branches of government, when necessary in times of catastrophe. A simple example involves price gouging. If we are not going to allocate precious goods based mainly on price, we should deploy the next best alternative for deciding who gets what and ensuring adequate investment in supply. We can do better than price caps and queues.

Of course, these calls for planning for avoidance and mitigation always occur when a catastrophe is upon us. Then things get better and interest wanes. Perhaps this time it is different.