Tuesday, 19 May 2020

This time, recovery will be different.


The economic crash was already baked in before the virus arrived. It was already going to be bad. The shortest ever recent recession, in 1980, lasted for six months. And this one -- the popping of the "everything bubble" was already going to be big.
"Coronavirus is acting as a red herring," Jesse Colombo told FOX Business. "People are thinking things are falling apart because of the coronavirus. It’s just the pin that burst that bubble." ...
Colombo predicts that hard times for American businesses and layoffs for American workers because of bubbles bursting.
"Since the global financial crisis of 2008, the world has taken on almost 100 trillion dollars of new debt. We threw another debt party and made all the same mistakes," Colombo said. "We kicked the can down the road, and now we can’t kick it any longer."
But this time it's different! That's what they always say. Hopefully.

Yes, this time the recovery will be different. Because this time the virus has made everything very different indeed.

In every recession, or what we used to call a depression, whole industries are wiped out. But remember that a depression is actually the recovery phase of the economic cycle. When everything being done that can't be done profitably any more (or on which too many resources have already been wasted) is flushed out, and we can all get on with doing those things that more people do want (and that make more profits, therefore), that's when a new normal can be arrived at.

But what's really different this time is what many of those most profitable things will be. Going by what happened under our house arrest, that's possibly things like takeaway food instead of eating in. Online shopping. Netflix. New gizmos to make your home and living spaces work better (time to upgrade that stereo; replace the garage-door opener; install that new wall heater; erect that backyard swing set). Safer consumption. More courier delivery. During a normal recession, almost all industries experience decline. But not this one. (Zoom shareholders will be celebrating even as we speak!)

And consumption patterns will change. NZers can't travel overseas (and tourists can't come here) but will NZers see their country before leaving home, and fill that gap? So more camping gear? More boats? Will more folk renovate their current home instead of buying anew? Will we want bigger homes, the better to self-isolate again? More home offices being used?

With reduced consumption there is at least more saving. And more saving makes more new investment possible in these new lines, and in new lines like them. And, just as Jean Baptiste Say could have told us (and did) there will be no recovery without production. Even the new money creation pumping out of central banks right now still relies upon existing production to pay for it all.
But increasing the number of units of the particular item used as money does not, in itself, increase the physical quantities of all the other goods that people want to acquire through exchange to satisfy their wants and desires. These other goods that people actually want must be produced, manufactured, transported and made ready in the forms and at the places desired by members of society. They do not fall from the sky and do not miraculously appear by waving pieces of paper money (or their electronic and computer equivalents) above your head after offering some incantation to the “manna from heaven” god.
As they say, "even a sack of gold is not the same as a stock of desired goods."

But you can't produce anything if you're still locked up, either. Even in a time of plague, which this is, production still needs to happen somehow. To produce, you have to be free. And as long as governments everywhere are closing borders and paying everyone to tread water, it will take time to establish which directions people can and will be going in.

A government can do a lot to discourage recovery. But what can they do to help? Putting us all on welfare? Micro-managing production and supply chains? Redirecting resources to proven losers? Picking winners and preserving privilege? Printing money and funding cronies?

We could do worse than to learn from how Germany arose after the absolute destruction and devastation of the war. It was a miracle, but not one that government created by paying favours to businesses. The German economic miracle was founded on a principles-based approach distilled into what economist Walter Eucken called "seven principles of the social market economy":
  1. a functioning price system; the only way to judge what is wanted and in which quantities is to leave price signals alone so entrepreneurs can read them and plan appropriately;
  2. monetary stability; so prices can rise and fall as they need to, and interest rates can send their own special price signals undistorted by central bank meddling;
  3. open markets; so producers are all free to produce and trade and employ, and to keep the fruits thereof;
  4. freedom of contract, such that all voluntary agreements are honoured;
  5. liability for one's actions and commitments; especially important now (and with all appropriate due process) when something we do can severely damage another's health;
  6. steadiness of economic policy; the steadier the better, and the more manageable for everyone; predictable policy means entrepreneurs' planning can be longer-range, with greater time horizons, and greater productivity.
Economist Oliver Hartwich, who was born and grew up in Germany, and now lives in New Zealand, reckons these seven principles are as relevant to us today down here in New Zealand as they were to a Germany climbing out of the destruction of war. "If we follow these principles," he says, "we can build New Zealand's recovery and bring prosperity to all New Zealanders."
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[Hat tip Richard Ebeling, Oliver Hartwich, and Scott Sumner -- even though his recommendations are mostly appalling.]

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