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.