Matters must be left alone after the initial crisis is past
Now that we’ve actually seen what Covid-19 does to an economy we can try to discuss the economics of Covid-19. The whole experience being one of those arguments against a planned economy of course -- how can you plan when you don’t know what the heck is about to happen?
The first thing we know now is that there was no option in which there was going to be no effect. It might well be true that we deal with influenza outbreaks (like, say, 1957, or 1968) without the same economic disruption but that just wasn’t going to happen this time. Even if the coronavirus was, as a disease, like those influenzas, it still wasn’t going to happen that way.
We, our reactions, were different this time around. We can see that from the example of Sweden, which didn’t close down its economy and yet has suffered still significant economic damage. People changed their behaviour, there was going to be an economic hit whatever government did.
Different counties have locked down economies to different extents and the mixture of how well those dealt with the disease is still under discussion. At this point we really, simply, do not know. We do know that some economies suffered much greater losses of output, the larger the lockdown the worse -- as we would expect of course.
What we really want to know though is where do we go from here? What we do next always being more interesting as a question than what did we just do? The big secret here being that we’ve actually got two recessions here, each of which requires different treatment.
The first one is that general collapse of the economy. Some of which is caused by our own reaction to the disease, some by the varied lockdowns and deliberate closing of economies. Calling such a shuddering halt to the economy leads to the possibility of not just a recession but a full blown depression.
A loss of 20% and more of GDP that leads for years, possibly a decade or more. The spiral downwards becomes self-reinforcing. As we all see that times are hard, we hunker down, don’t spend, don’t invest, try to save. This is individually rational but as Keynes pointed out, spells doom for the future of the economy as a whole.
The solution here is simply to throw money at it. Doesn’t particularly matter, in the macroeconomic sense, how or in what manner either. Whether it’s wage support, higher unemployment pay, just cheques to everyone in the country, all paid for with borrowing, or creating new money, all of these have shown themselves to work.
Economies like the US and UK have, as soon as the lockdown finished, been showing extremely rapid economic growth. Both have made back perhaps two thirds of the losses already. Which is good, we like this, but it’s not the entire solution.
For there’s that behaviour change from us. The world has changed -- we’re just not going to gather in crowds like we did only months ago. Or we might, but it’ll be a few years before we do. Which is our second recession here. The last bit of the recovery if you like. There are things that we’re not going to be doing like we used to. Other things that we will do as we didn’t.
The economic problem here being that it takes time to move from the one to the other. Those who used to work doing the old things need to redeploy in providing those new, for example. We’re also not quite sure what those new things are going to be. Sure, we know in general -- more online shopping, less physical -- but not how much, or exactly what, in which quantity, and so on. This new part of the economy is going to be emergent from our changes in behaviour.
This all makes economic policy-making something of a confusion. For the policy to beat the first part, the depression, is just pumping money out there. The second is more difficult. For example, giving people more money to spend does stop that collapse. But it doesn’t aid us in moving people from old work to new in the slightest.
Further, high unemployment pay, or paying companies to keep jobs going, aids in stopping the depression. But it actually works against the necessary reorganization of work and production in that second part. So, it’s necessary to cease the widespread support -- but not too soon of course -- so that the full recovery can take place. If you like, someone who is sick needs bed rest and that’s fine, but at some point they’ve got to get up and going again otherwise they will never fully recover.
That is, there does come a time when we’ve got to allow companies to fail, jobs to be lost. For the world has changed, some things just aren’t going to be done the old ways any more. We have two separate economic problems that is, each requiring, in turn, different economic policies. Yes, significant support for the economy at one point. But then it’s necessary to cut it loose and leave the market to redistribute production and labour.
The difficult trick is not so much exactly when this is done, but who is going to have the courage to do it. Politics, of course, attracting those who always think that government should be doing more even when, as here, the correct answer is that less must be done, matters must, in order to heal properly, be left alone after the initial crisis is past.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.