Imagine waking up this morning as the Minister of National Economy in any mid-sized economy in the Americas, Europe or Africa!
Your previous concerns over developing access to startup grants for SMEs or the presentation of your country’s digital economy strategy at next year’s World Economic Forum all seems like a distant memory.
Your national economy is tottering on the edge of economic oblivion and everyone is looking at you to do something… anything… to save it.
Mindblowing economic numbers are coming at you thick and fast: projected unemployment and benefit claimant figures are dire, stocks markets have cratered, bond yields are creeping up, the price of essential commodities priced in dollars is beginning to rise, and speculators are sniffing around the currency.
And it’s not just the numbers. Real lives are at stake. Businesses built up over decades, livelihoods, production of essential supplies, pensions, savings, the functioning of essential services, life and death matters. Meanwhile imports of essential goods and raw materials are drying up, and what remains of national production appears to be threatened by a shortage of materials.
So what to do?
The first thing to realise is that the pain will have to be felt somewhere.
The idea that only medical workers and supermarket assistants are ‘essential workers’ is a patent nonsense.
A global population of seven billion plus doesn’t get fed and watered without a lot of stuff getting grown, designed, made, transported, bought and sold.
The work that really matters for people’s survival can’t be done from home (unless you live on a farm, and even farmers would not last very long without their agricultural machinery repair technician and cattle trucking friends.)
So, what are the main options that you have at this point?
Option one: get the printing presses rolling.
Whether it’s called “quantitative easing” or “unlimited bond purchases”, it amounts to the same thing: increasing the money supply, then using the funds to provide unemployment benefits or universal basic income, to compensate for the loss of taxation revenue, or to increase spending on security and medical care.
In the short term, as households and companies look to strengthen their cash position, these measures might seem to have a small positive effect, but foreign holders of your bonds will quickly take note of your ‘stimulus’ measures, triggering a massive selloff. Now your Government’s fiscal position is worsening by the day, and the only way to respond is more money printing. In response, everyone is now trying to dump your currency. Even households are trying to convert their cash and savings into real money like gold and silver, or else into foreign currency, land, art, food, or anything that allows for a modicum of wealth preservation. Very quickly, you are in Zimbabwe or Wiemar territory (take your pick!) and your reputation as either the worst or the last finance minister in your republic’s history is cemented for all time.
Bizarrely, this appears to be the option being favoured by most Western economic policymakers at the moment. This is a class which believes that economic pain is like a can that can endlessly be kicked down the path. They have learnt well from the US Greatest Generation and the Boomers who wracked up over $23 trillion in national debt, and who expect their kids and grandkids to pay it off in the never-never. Policymakers across the West are in thrall to the illusion of the ‘Central Bank free lunch’. In 2020, the scales will be pulled away from their eyes.
Option two: go full Mao.
“Clearly, by not having inventories of billions of extra disposable facemasks, the free market failed us. What were they thinking!? Didn’t corporations anticipate that there would be a once-in-a-hundred-years pandemic that would send demand for mobile ventilators through the roof? To the barricades!”
So, the Government steps in and takes over the means of production. What remains of the country’s industrial sector after years of production being offshored to Vietnam and Cambodia is repurposed from making high-end industrial components, the purpose of which no one bothers to check out, into mass producing facemasks and hand sanitiser. Soon facemasks are pouring out by the billion.
“But what about advanced hospital equipment? We need that and don’t have any money to buy it now on the international markets, because no one will extend us a credit line. No, we shall have to make those too. Patents, pah. Stuff your patents! What do you mean that we don’t have enough semiconductors? Well, make those too! What do you mean we can’t source the raw materials because foreign countries are furious that we nationalised their assets?! …”
And so goes every descent into communism. Worse, the kulaks are not thrilled at having their wealth destroyed, their assets seized, and being made to work as slave labour in pandemic conditions. And so, as every communist regime must, we have to go full authoritarian to achieve our desired aims.
As with every regime that has a monopoly on the ends, it soon acquires a complimentary monopoly on the means. The twentieth century gave us a hundred million reasons not to repeat the communistic experiment. Western countries come closest to communism in wartime, but in a pandemic, there will be no victor’s bounty.
Option three: The Big Bounce.
The Big Bounce forms part of a cyclic model of the Universe whereby it undergoes periodic Big Crunches and Big Bangs. Under the Big Bounce option, the economy would be allowed to collapse in epic fashion, but absent intervention, there would be a subsequent epic rebound. Beyond the spending required for an aggressive, intelligent pandemic response, the Government’s key economic task would be to defend trust in the currency and public finances.
This would mean transferring the pain of the depression on to those living off the Government’s largesse. Wages for those in the non-productive part of the economy would go down. Pensions would drop to survival levels. Non-medical public sector workers would take massive haircuts. (University lecturers who believe that austerity is evil would be given particularly harsh paycuts, or ideally sacked.) Benefits would be slashed. Government would trim its own spending to the absolute minimum. No lavish infrastructure projects. No vanity sporting events. Taxes, flattened and lowered, particularly for national producers. National production, encouraged, but not commandeered. Banks, allowed to crash. Likewise, financial service companies. Banks would go under, but the government might consider seeding several dozen new industrial banks. The airlines would all go bust, of course, but new and better Bransons would appear. The free market would hold forth. Anyone willing to make stuff under pandemic conditions would be able to secure lavish rewards. And the Government’s sole tasks would be national security, law and order, pandemic spending, and defence of the currency and the state treasury.
Under this scenario, there would be innumerable business collapses, but also the flowering of a large number of new enterprises. The financial sector would talk of carnage, but enterprising financial sector businesses would flood back in. Some of those that risked working would die, others would make fortunes. Those that braved it out in self-isolation would have enough for ‘eat and heat’, but nothing more. The pain would be sharper, but shorter. This is the nature of the Big Bounce.
Update: For the Big Bounce to work, foreign ownership of land and of businesses would have to be temporarily outlawed, and the land restrictions and certain business class restrictions would be retained indefinitely. Economic nationalism max would be the order of the day.
Of course, in a democracy, this is a hard sell, but, as Argentina or Zimbabwe can attest, the consequences of defaulting on your sovereign debt or letting your currency fail are long, slow and also painful. Most people would rather have their sticking plasters or bandaids prised off gently than whipped off quickly. The hashtag #ToryGenocide was briefly trending on Twitter following – wait for it – a few extra days delay in shutting the schools. Across the West populaces are angry and sanctimonious: even with bellies full, they still sit at home “cursing their God and their king”, in the words of Isaiah. Their appetite for tough love measures is pretty thin.
Russia in the early 2010s sought to defend the ruble, defend the treasury and defend public finances in response to Western sanctions, and was able to defend itself against economic shutdown. This approach has much to commend it. Russia has also protected the parts of its economy necessary for national defence, another lesson that is fast becoming applicable across the Americas, Africa and Europe.
The leaders we need are smart, muscular and principled, yet given the choice, we vote for wet fish offering us free stuff and fairy tales. We should not pretend that option three would not be extremely hard on those currently dependent on state aid. It would be. It would be extremely hard.
The elderly, the newly unemployed, and those currently on benefits would suffer as they struggle to adapt to a new normal where the state is not providing ‘enough’, and they would be thrown increasingly on the mercy and kindness of their churches, friends and neighbours. Banks and businesses used to corporate welfare would discover that they are no longer too big to fail. The alternatives however will simply kick their pain and ours down the road.
Other things in Western economies must change fast too. There is too much cartelisation, too much tax avoidance, and too much regulatory capture. Complexity and loopholes should be aggressively reduced. There should be bans on usurious lending. We should return to sound money. Treasuries should rely more on customs and tarriffs for income. And better regulation should punish those that trade unethically, immorally or in opposition to the national interest.
But to argue that capitalism or the free market is to blame for this crisis is also a mistake. Many Western democracies have such bloated welfare and warfare states that they are barely distinguishable from communist countries. The governments of the United Kingdom and Canada had higher general government final consumption expenditure as a percentage of GDP than China or Vietnam.1
While the picture on the current pandemic is rapidly changing, as a preliminary judgement, it does seem that countries with advanced domestic production capacity – and smart, transparent, patriotic and aggressive governance and policy approaches – are those which are having the most success.
But our Minister is not in South Korea. And the tidal wave of second-order economic effects are coming his way regardless. And none of the options on the table look pretty.
Picture by Anders Zorn, ‘Tiggare i Sevilla’, 1881. Cropped. Public domain.