Life as we knew it is changing fast, almost by the hour. Most of my speaking engagements, which were heavily booked for the foreseeable future, have been cancelled or deferred. All the gigs that my band was booked for have been cancelled until people start returning to the now, empty venues. And, more significantly, the ideologues are giving way to the pragmatists in the policy space. Almost (see below). The sudden realisation that even Germany will now spend large amounts to protect their economy exposes all the lies that have been used in the past (up until about yesterday) to stop governments doing what they should always do – maintain spending levels in the economy to sustain full employment and ensure no-one falls through the cracks and misses out on the material benefits of growth. In the early days of the GFC, I thought that the neoliberal era, supported by the mainstream macroeconomists, might be coming to an end. Maybe I was a decade out in my prediction. Perhaps this crisis, induced by a human sickness, will end the madness that has redistributed massive volumes of income to the top-end-of-town, sustained elevated levels of labour underutilisation and seen the traditional progressive political voices become mouthpieces and even agents for the neoliberal economic lies. I was wrong in 2008 on this score. I hope something good like this comes out of the current disaster. The coronavirus comes on top of already growing dissent over the failure of mainstream economic policy. It will redefine what governments can do with their obvious fiscal capacity and will demonstrate once-and-for-all the lies that the mainstream economists tell about deficits, inflation, interest rates, etc. It will categorically demonstrate the capacity of the currency-issuer. All that will lay the foundation for a better future, if we get beyond this current malaise.
Yesterday in my blog post – The coronavirus crisis – a particular type of shock – Part 1 (March 10, 2020) – I discussed some of the considerations that governments need to take into account when dealing with the economic damage that will result from the coronavirus crisis. I did not consider the health issues because I am unqualified to assess those other than to take into consideration what the health professionals are now saying as they gain more knowledge of the particular disease. In Part 2 today, I extend that discussion and outline some specific issues that bear on the size and design of any fiscal intervention.
Economists like to think in terms of demand and supply. Often by assuming the independence of the two, they make huge errors, none the least being when in the 1930s they advocated wage cuts to cure the unemployment arising from the Great Depression, on the assumption that the cuts would reduce costs for firms and encourage them to hire more. But they failed to understand that economy-wide wage cuts would undermine aggregate spending, upon which production decisions, and, ultimately, employment decisions depended. The coronavirus outbreak is one of those events that emphasises the interdependence between the demand and supply sides of the economy. It is a supply shock – in that it has reduced the growth in output supply as firms stop producing because their workforces are quarantined. And that shock then feeds into a demand impact as the laid off workers lose incomes and reduce their spending accordingly. However, there is also a separate demand shock associated with the crisis, quite apart from the supply impetus. The fear and uncertainty associated with a possible pandemic has meant that consumers are altering their spending patterns rather quickly with airline travel and other such activities falling sharply. So this is a very special type of calamity that doesn’t fit the usual types of shocks that economies endure. And as a consequence, it makes the task of designing an economic policy response rather more difficult. But make no mistake. Fiscal deficits will have to rise substantially for an extended period and governments will have to do things they have never really contemplated before if a deep recession is to be avoided. This is Part 1 of a two-part series of my current assessment of the coronavirus crisis, or whatever you want to call it.