How to structure public spending so it actually does some good

I have an article up at the American Institute for Economic Research explaining how idiotic a “stimulus” at this time is: A Classical Economic Response to the Coronavirus Recession. It takes as read that we are going to have a massive amount of public spending, and given that as the certainty, how to do it with minimal economic damage. That we are even having a lock-down is also taken as read since others have already made that decision. This is the central point made in the article.

Let me take you back to the economics before Keynes, to when economists understood the nature of the cycle.

Recessions in those days were rightly understood as due to structural faults in the economy. A recession occurred when the bits did not properly mesh. Some parts of the economy were no longer able to run at a profit because of structural changes in the economy, sometimes on the demand side but more often on the supply side. There, therefore, needed to be some shifts in the entire apparatus of production. What turned the adjustment process into a recession occurred when the adjustment process required was too large to occur as in normal times when as one business would close down another would open.

During recessions, for whatever the reason might be, the number of businesses closing would exceed the number opening, and along with the slowing of production in total, there would be a rise in unemployment. If ever there has been a downturn that cannot in any way be explained as a fall in demand it is the forced closures that have followed the coronavirus panic. The downturn is entirely structural in nature. That is why when I hear discussions of the need for a stimulus I am even more than usual amazed at how beyond sense economic policy has become. What is needed, and what is largely being done, are measures to hold both capital and labour in place until the closures are brought to an end.

The last thing we need now is a Keynesian-type “stimulus” where government spending on wasteful junk takes over from actual productive firms.

But the policy everywhere is never let a crisis go to waste. It is not you and me the political class are thinking about, but themselves in how they can use the crisis to benefit themselves. You just have to hope against all likelihood that the damage done is kept to a minimum.

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14 Responses to How to structure public spending so it actually does some good

  1. Elderly White Man From Skipton

    Seems we are not seeing the same packages. The US package is financing jobs and companies in place. That is, it aims to do exactly what Kates says is required. The Australian package is smaller but is equally explicit about supporting employment and businesses in place. Given the displacement of so many in hotels, airlines, services and so on the extensions on unemployment benefits is consistent with a broad effort to hold up the economy while the disease takes its course.
    Funny how ideology can get in the way of facts.

  2. Zatara

    There, therefore, needed to be some shifts in the entire apparatus of production.

    A complete shutdown of production provides the perfect opportunity for a ‘reset’ as has been called for by many market watchers of late. Yes, it will also trim off deadwood, the companies whose business plans or operating procedures had them barely surviving pre-virus.

    But it’s not unreasonable to expect industry to come back leaner and meaner after the shock of the COVID-19 caused economic/market meltdown.

    Meanwhile, national policy that keeps people fed and housed while industry sorts itself out seems quite wise.

  3. flyingduk

    What is needed, and what is largely being done, are measures to hold both capital and labour in place until the closures are brought to an end.

    What is needed is an end to the closures. We didnt save for a rainy day, so we dont have the option to bunker down and eat our emergency rations. We need to run through the fire, now, to get to the other side.

  4. min

    Sorry I am a psychologist not an economist . I can see benefit of keeping supply up but what demand will there be if we are all locked up? As I have just given up trying to order shopping on Woollies line for oldies please do not suggest online.
    At least though I can have a nice hairdo

  5. Rayvic

    One has to ask why the Australian government is doing the Keynesian thing by paying $500 (or whatever the amount is) to existing welfare recipients such as pensioners. The money would be better directed to aid for worthy stressed service providers.

  6. Elderly White Man From Skipton

    What is needed is an end to the closures.
    Duk: the closures are a clinical response. If you engage with any of the clinical information you will see that the transmission of this disease is exponential. That is: there’s no running through fire option.
    Rayvic: The Government is paying enhanced Newstart because a huge number of people are out of work who would normally have perfectly good jobs.

  7. Shaun

    Of course there is a running through the fire option. Australia did not have Covid-19. It was imported and as all the domestic people now have to go through hoops and shutdown, follow procedures etc to slow the virus, the government is going to allow international citizens to return to our country over the coming months which I would assume will continue to import the virus. There is no point in anyone locally doing anything if the virus is going to be allowed to still come into our country from outside for months to come. The option of running through the fire is to stay open for business, look after the weak and elderly, keep our international borders shut (I mean shut, nothing in) and get it over and done as quick as possible. There will be deaths, sickness, etc but no-one bats an eyelid normally when people die and get sick. Smokers die and go to hospital every year by the thousands, smokers have had measures on them to keep their distance from others and where they can smoke, but the government doesn’t put cigarettes on lockdown and ban them, they continually allow it to happen knowing thousands in high risk categories will die or get seriously ill.

  8. John Smith101

    The last thing we need now is a Keynesian-type “stimulus” where government spending on wasteful junk takes over from actual productive firms.
    . . . . .
    But the policy everywhere is never let a crisis go to waste. It is not you and me the political class are thinking about, but themselves in how they can use the crisis to benefit themselves. You just have to hope against all likelihood that the damage done is kept to a minimum.
    See: NESARA Act (National Economic Security and Reformation Act). Download available.

    NESARA (points to consider in bold with regard to recovery of ‘stimulus’ costs,; applies to the US but model most likely global):
    Provides major benefits to Americans in the world
    Forgives credit card, mortgage, and other bank debt due to illegal banking and government activities
    Abolishes income tax
    Abolishes IRS; creates flat rate non-essential “new items only” sales tax revenue for government.
    Increases benefits to senior citizens
    Returns constitutional law.
    Establishes new Presidential and Congressional elections within 120 days after NESARA’s announcement.
    Monitors elections and prevents illegal election activities of special interest groups.

    Creates new US currency, “rainbow currency” backed by gold, silver and platinum precious metals.
    Returns constitutional law to all courts and legal matters.
    Initiates new US Treasury bank system in alignment with constitutional law
    Eliminates the Federal Reserve System

    Restores financial privacy.
    Retains all judges and attorneys in constitutional law.
    Ceases all aggressive US government military actions worldwide.
    Establishes peace throughout the world

    Initiates first phase of worldwide prosperity distribution of vast wealth which has been accumulating for many decades [See here]
    Releases enormous sums of money for humanitarian purposes.
    Enables the release of new technologies such as alternative energy devices.

  9. flyingduk

    Duk: the closures are a clinical response. If you engage with any of the clinical information you will see that the transmission of this disease is exponential. That is: there’s no running through fire option.

    I *have* engaged in the clinical information (I am an anaesthetist, I will drafted as an intensivist once this gets bad). I am also a military doctor who has been to war, so I know that casualties are necessary in war, and that the fastest way to defeat is to have your supply lines cut. Our current strategy combines the worst of both worlds: concentrating on minimising casualties, AND cutting our own supply lines. Its a guaranteed route to defeat.

  10. Elderly White Man From Skipton

    Duk: Given your expertise, can you please explain what the run through the fire entails? (I gather, given the military analogy, it entails “casualties, but you have not explained what is the efficacious method.
    Clinicians I know and have heard speak first hand – especially those expert in immunology and emergency medicine- have been unanimous is asserting that the primary task was to reduce human to human transmission, trace infection, isolate the infected and bring the trajectory of transmissions down to a low level.
    As it happens I was in Singapore when the outbreak began and had a first hand discussion with a senior immunologist about their plans, which were informed by the SARS experience. Essentially, lots of tracing, speedy isolation.

  11. Iampeter

    This is not “classic economics.”

    The last thing we need now is a Keynesian-type “stimulus” where government spending on wasteful junk takes over from actual productive firms.

    That describes ALL public spending by definition.

    The only solution is to phase out “public spending.”

    If you’re not pushing for some form of this phase out then you’re not a classic economist nor a capitalist.

  12. John A

    John Smith101 #3379079, posted on March 27, 2020, at 2:10 pm

    Releases enormous sums of money for humanitarian purposes.
    Enables the release of new technologies such as alternative energy devices.

    Uh-oh! As soon as someone talks about humanitarian purposes, I think of the warning by CS Lewis:
    Paraphrase:
    There is no tyranny so bad or so thorough as the one perpetrated for the good of another person. Because the perpetrator will be morally impelled to “do it for your own good”

  13. flyingduk

    Duk: Given your expertise, can you please explain what the run through the fire entails? (I gather, given the military analogy, it entails “casualties, but you have not explained what is the efficacious method.

    Run through the fire means keep the economy open and let the virus rip through. Yes this will entail more deaths, but it will also get it over with quickly and avoid completely trashing the economy and the lives of all who survive. Whilst everyone is talking about the benefit of shutting down the economy (fewer deaths), no one is talking about the cost of doing it (destroying the economy), the value of those lives saved (generally small or even negative, given the typical age and co-morbidities of those who die) or the fact that we didn’t bother to save for this rainy day prior. Its a bit like saying we need to lower the speed limit to 10km/h to reduce the road toll, without bothering to mention the adverse effect on transport. The current strategy entails shutting down the economy for months in order to keep alive a cohort of people who are largely old, sick, obese or otherwise dependent, and we have to burn the furniture to do it. In war I don’t think that is a winning strategy. Even if it was, it isn’t an option open to us because we don’t have a pool of savings to fund it. You can’t bunker down and eat your emergency food if you didn’t build a bunker and stock it with food.

  14. John Smith101

    Because the perpetrator will be morally impelled to “do it for your own good.”

    That aspect concerns me too, John A. However, the NESARA Act was passed by Bill Clinton, so there is that to consider.

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