Stimulating demand won’t assist a V-shape recovery

Total economic ignoramuses, epitomised by Dan Andrews, see the economy as automatically producing no matter what measures the government takes to prevent this. Such views are unmoored from reality but, such outriders aside, within the plurality of views on how we proceed with the COVID-19 policy solutions there is one basic dichotomy.

Those occupying the citadels of power in the Treasury and RBA basically believe we need stimuluses to get the economy going again.  From their Keynesian training they see the need to ensure enough helicopter money lands on the economy to ignite demand, encourage more investment and set in train a self-propelling recovery. Some of them see this as an opportunity to “encourage” a shift towards the green carbon free energy supply which, for two decades in some cases, they have promoting as more efficient and lower cost.

An excellent riposte to the stimulus approach is offered by Cato’s Alan Reynolds who points out it did not work in the US earlier this year and never works.

This basic philosophy stresses the need to ensure the supply side is unblocked. It is promoted in Australia by, among others, Sinclair, Judith, Nick Cater and of course Henry Ergas and Steve Kates. All see the need to re-open the economy quickly and to do so in a way that dismantles some of the with the corrosive regulatory measures that have done so much to hold back the economy. The rationale for any funding for those who have lost their jobs is not to create demand but to cushion hardship and prevent the atrophying supply capacity.

I express my own support for this perspective in The Spectator today.  But this identifies one area where I differ from some with whom I share the same basic views.  This is in the scope for rapid recovery.  Drawing off the experiences from other disastrous dislocations World War II and Communism, it seems to me that there is a difference between the financial ruination governments create and the physical destruction of productive assets and skills.

What we have seen with even the most draconian shutdowns is productive capacity impaired by not being augmented as it would previously have been but not destroyed.  Many owners will face bankruptcy but the facilities remain in place.  Unfortunately, the conditions of flexibility and deregulated labour and capital are far less prevalent in today’s economy than previously.  As a result, a dole-induced reluctance of unemployed people to seek work in areas like fruit picking is already evident.  To the degree to which such generous soft-mattress measures are kept in place the recovery will be retarded.

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18 Responses to Stimulating demand won’t assist a V-shape recovery

  1. Colin Suttie

    The very last word of your post pretty much sums up the whole situation.

  2. Biota

    What was the stimulus that created demand for the iPhone and caused Steve Jobs to immediately go about designing and producing?

  3. Rob

    No doubt the generous cash “stimulus” gifts to pensioners will be sitting in bank accounts alongside the cash that would have been spent on interstate holidays, cinemas, coffee shop and restaurant visits, poker machines, fuel and other motor vehicle expenses (including car wash visits in Victoria), and even golf and other sporting activity. None of this amounts to retail activity deferred, all of it is retail activity totally lost.
    By the time the geniuses who control us start backing off, these unlucky / lucky pensioners may have enough accumulated cash to enjoy an overseas holiday.
    That’d be a double whammy for our staggering economy

  4. Watch Your Back

    I agree with you Alan. There could or could have been a strong V shaped recovery. Myself and others have pointed to the Wirtschaftswunder, or the 1920s or 1951. The problem I see is that amount of damage caused by lockdowns is getting worse. This has now been a running sore for 5 months and counting.

    I’m seeing various predictions that a third of restaurants won’t reopen, that furloughed workers will lose their jobs and at best become freelancers in an overcrowded market. In the UK, the over 50s will struggle with hundreds of thousands unlikely to work ever again. People are now at risk of losing their houses. So, while I was phlegmatic in April, I’m now scunnered.

    I blame governments for this mess, and so I fully expect them to help people in the here and now, through to January. Abandoning those losing businesses, their jobs, savings, houses would be unconscionable.

    As you say, this is not ‘stimulas’ but help and some liquidity.

    As for the virus, it is clear just about everywhere but in Victoria, the land of bullies and imbeciles, that it is less deadly than feared. The whole thing’s been a fuck up.

  5. Roger W

    Isn’t this what Trump has done with the cutting of so many regulations, and with the payroll tax relief he has currently instigated?

  6. MatrixTransform

    Their demand side idiocy aside, the ability to come back after this crap is over depends on more than just the ability or solvency. It is also to a large degree the willingness to poor capital into such a capricious environment.

    Many of the costs in bearing this farce are effectively obligation transfers from business to business and represent financial destruction on a grand scale.

    We, for instance have investments currently bringing in barely enough to cover outgoings all the while propping up zombie tenants. Our company has cash, but we are expected to burn through it all.

    and for what? This wont be over when they say it is … it’ll be over when I’m ready to take risk again.

    I expect I’m not alone.

    what’s the disincentive for VikGov? .. are we sure this isn’t exactly what the Andrew’s govt wants?

  7. Squirrel

    Funny thing, but “animal spirits” don’t go quite so well in a world with curfews, “permitted jobs” and a half-baked UBI.

  8. Entropy

    We will end up with a universal basic income and many will never have a job in their lives

  9. NoFixedAddress

    when I’m ready to take risk again.

    And that really is a big deal for a lot of people MT.

    All the very best for your future.

  10. MatrixTransform

    when the money flows again … where will it come from Dan?

  11. MatrixTransform

    Dan’s deceit is not yet complete

  12. HT

    I know shit about economics. I need to sell my house in Mar/Apr next year. Whats the market going to look like (◔_◔)

  13. HT

    Watch Your Back
    #3543993, posted on August 11, 2020 at 3:25 pm

    The whole thing’s been a fuck up.

    Sums it up nicely. Succinct. Fulsome. Accurate.

  14. Mark M

    via instapundit:

    DO YOU PRONOUNCE IT KEYNES OR KEYNES?: Sam Gregg has an excellent review of a new book about John Maynard Keynes and his awful legacy. Key point at the end:

    [W]hile good economics and good economic policy are important, they are not enough. The vision-thing matters. Keynes understood the importance of this and, I would argue, comprehensively outmatched his free market opponents in this area. As progressives understand better than most people, if you win the vision game, you likely win everything else. This is the lesson that Keynes offers to market liberals in our time. The bigger question is how many are willing to learn.

  15. Keynes as in “rains”.

    I pronounce it “magic pudding economics”.

  16. Matrix Transform:

    We, for instance have investments currently bringing in barely enough to cover outgoings all the while propping up zombie tenants. Our company has cash, but we are expected to burn through it all.
    and for what? This wont be over when they say it is … it’ll be over when I’m ready to take risk again.

    One of the (many) things I harp on about here is Sovereign Risk.
    We don’t seem to be able to employ bureaucrats who understand the term.
    Maybe after Fat Albert gets through suing the WA government for $30 Billion, they’ll get the message that when you are supposed to have paperwork done by the deadline date, it can have consequences.
    But for small businesses, remember you are a Class Enemy – kulak. It’s not going to get better.
    Dan intends to destroy the sector to make sure you don’t blemish the socialist miracle he will create. Of course he hasn’t yet realised he needs the taxes the small businesses provide for the dole he will have to give out for the wukkas he throws onto the heap. Or does his union mates realise the unemployed don’t pay Union Dues?

  17. John A

    All see the need to re-open the economy quickly and to do so in a way that dismantles some of the corrosive regulatory measures that have done so much to hold back the economy.

    Those in the citadels of power as you call them cannot see the noses in front of their faces.

    They have applied regulatory blockages to large parts of the economy but want to “restart” it by throwing paper around (both in the form of currency and as electrons).

    Behind their thinking, I perceive at least two fallacies:-
    a) the notion that governments “run the country” and “operate the economic levers” – first elucidated by Paul Keating, who was taught by Gough Whitlam. The Whitlam governments were the major catalyst for this shift in thinking from serving the people of the Commonwealth to “running the country”
    b) the utterly bankrupt idea that somehow economic activity can be delineated into “essential” and “non-essential” categories so that “non-essential” activities and services can be shut off and readily restarted later, without damaging the rest. The economy is so diverse and inter-related that such ideas can only be held, with the aid of substantial cognitive dissonance, by non-essential people such as elites and politicians. 🙂

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