We know very well that we’re in a significant recession at present, possibly even a depression.
The definition of that second being a fall in GSP of more than 20% by the usual measure. This is having a terrible effect on the lives of people, as we know. One report has the earnings of the poor in Bangladesh falling by as much as 70%. When the poor are already living close to the income that only just sustains life, this is not an outcome that we are happy with, to put it mildly.
In the short term, of course we just have to put up with it. Wait for the doctors and epidemiologists to tell us when we can open up the economy again, provide what aid we can to those who need it, and so on. The big question though becomes, well, what do we do when it’s all over?
Or rather, how much of what we had will come back when it is? What the post-coronavirus world will be like is the first thing we need to know before deciding whether we’d like to do anything about it.
No one has any experience at all of trying to restart an economy. At least not after a government insisted upon close down -- we don’t for we’ve never had to do this before. So we’ve not got any plans at the back of the cupboard or anything, we’re going to have to just do the best we can. Given that there aren’t any plans, no one can have a plan because no one knows, we’re not going to revive matters by planning, obviously enough.
Another way to put this is that we need to use the experts. So, who are the experts at running factories? At finding the resources to produce things from? At selling or distributing the things made? Well, fairly clearly, the people who know how to do those things are the people who do them.
The people who run factories, the purchasing and sales managers for the other two. The people who don’t know how to do this are the bureaucrats. Thus we are going to tap into the expertise of the people who know what they’re doing, the people who run production and distribution for their living.
That is, a market-based economy is going to recover much better and much faster than a planned one. The reason being simply that the people in those markets are the people with the knowledge.
While we’re interested in the method, we also want to know the destination. How much is this economy going to bounce back, that is? Here we’ve one bit of theory and one observation to aid us.
The theory part is that most recessions are caused by some known factor. Often enough it’s the central bank raising interest rates in order to squeeze inflation out of the system. This has been true of near all post-WWII recessions in the US, for example.
Until now, the big exception was the 2008-09 one, where it was the fall in the housing market, then the collapse of the banking system. The recovery from a recession where we know the cause is thought to be easier and swifter than one where we don’t. Because once the known cause stops then so does the recession.
As and when the central bank lowers interest rates again, the recession ceases and growth returns. It took us much, much, longer after 2008 because this was something new, we didn’t really know how to deal with it, and so had to work out what to do. The same was true of the Great Depression back in the 1930s. That was really, at heart, about the mechanization of agriculture and the electrification of industry. We just didn’t know how to deal with those two massive changes. It took time to work it all out.
So, we know what’s causing this recession, the lockdown. Once we stop the lockdown then we’ll have stopped the recession and growth will return.
We also want to know: How much growth? Will we catch up and then surpass our previous wealth? The answer being, yes, eventually, because technology does march on. But it’ll also happen quite quickly. Which is where our observation comes in.
After WWII, Germany had no economy, not in 1945. Industry had been bombed flat and then bombed again to make the rubble bounce. Yet by 1954 -- and the reform process only started in 1948 -- the country was richer than it had been in 1939. This being proof of one of the great economic contentions, that it is knowing how to do things which is the true economic asset.
We can talk about factories, about land, or capital, but the true source of economic productivity is knowledge. And once we’ve worked out how to do something, even if all that physical capital is destroyed, that knowledge of how to do it remains.
Of course, Covid-19 hasn’t destroyed our physical capital, so we’re not that badly off. But the important point here is that we still know how to do it. We could and did build an economy to the level of late 2019, and all the data and information we need to do it again remains within us as that human capital. So, it’ll be relatively easy to do it again.
The global economy will bounce back, as will the Bangladeshi one. Not for any reason other than that we already know how to do it. It’s only after that we have to go back to the more difficult task of making it better again every year.
The coronavirus recession is bad already, and it’s going to be, in its depth, terrible. But we will recover simply because we’ve already proven we know how to do that.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.
