We will get back to normality, eventually
Most macroeconomics is rubbish, more an attempt to impose an ideological bias onto a chaotic reality than anything else. Much microeconomics is a useful description of how humans interact with reality and its incentives. Note, though, the use of the words “most” and “much” there. In our current troubles, parts of macroeconomics -- plus the more usual micro-stuff -- are useful.
We’re in a horrendous recession, one not really caused by the coronavirus but one prompted by reactions to it. Closing down swathes of the economy in order to stop people dying is worthwhile even as the amount depends upon how much is closing down and how many people don’t die. My own opinion, and it is purely opinion, is that too much avoidance of mortality has been going on.
For example, closing European clothing shops, on its own, is a reasonable response. The side effect that this puts one million Bangladeshis out of work -- and some will die as a result even though we’ll never know who or even how many -- as the factories close might well be too high a price to pay.
Macroeconomics is an attempt to study the behaviour of entire economies and recessions are obviously a part of that. So, what do we know, can we know, about the recession that has just hit us all?
The most important thing is that where we know why a recession has hit us, the recession doesn’t last all that long. For, obviously enough, if we remove the thing that caused the recession, then the recession stops and growth resumes. For most recessions, we do know as well.
Usually it’s the central bank raising interest rates in order to reduce inflation. Once inflation is reduced, interest rates come back down again and we’re out of that economic downturn.
Sometimes however it is’'t. Like the 2008/09 recession, we had the entire financial system falling over. We’d not seen this in modern times -- it was rather common before the invention of central banks -- and so didn’t really know what to do. Thus the recovery took a long time and some places still haven’t quite recovered. Real wages in the UK only just reached pre-Great Crash levels in the past year for example.
Or the Great Depression -- as Keynes pointed out sure there was the stock market crash in 1929 and so on but that wasn’t the real problem. Instead, the economy was undergoing wrenching changes, the mechanization of agriculture and electrification of industry, and we simply didn’t know what to do with all that extra labour. It took time to work out what should happen thus the recovery was slow.
But we know what happened this year. A pandemic led to us closing down large portions of the economy. Once we stop the closedowns then the recovery will take place.
We can see this too. We have various statistics from inside China, for example. No, not government ones that we might think about believing or not, but regular surveys of purchasing managers for example. Everything that is made is made out of something.
So, if we ask people what they’re buying this month to be made into something next we’re going to get a pretty good handle on what output will be next month. Such PMI surveys are common across the large economies around the world. Those for China are at present showing that this month production is above what it was last.
That is, the recovery is starting at least. We’re not back to the starting level of output yet, not at all, but it’s getting better, not either getting worse or staying at the subdued levels.
Such surveys for the US and UK are showing that things are still getting worse -- that seems logical, given that the virus arrived later and the lockdowns started a month or two later as well. But we can use China as our guide as to what is going to happen given that they’ve had the same problem and the same economic shutdown.
That is, the recession will be over and recovery will come.
We can use less official data too, just observe incidents. There is news that Germany is to allow small establishments to reopen -- the beginning of the process of ending that shutdown. We can even see those first signs in Bangladesh.
We’ve had the most almighty interruption, yes, but it is ending and we will get back to normality, even if we’ll be slightly poorer for a year or three.
That is, recessions do end -- assuming we don’t do anything silly like create a permanent one by instituting a socialist economy or the like -- and growth resumes. Soon enough we get past our starting point and are richer than we ever were. The more we know about why we had the recession in the first place the faster this happens.
This is why the usual estimations are that GDP in the US, or UK say, will fall by as much as 25% in this three month period but only by 2% to 4% over the year as a whole. By the middle of 2021 or so we’ll be richer than we were in 2019.
That is, in economic terms and economic terms only, we can say that Covid-19 is a disaster but not a catastrophe.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.