Macroeconomics and Getting out of the COVID Crisis
The other week, I had the pleasure and honor to write an article with Don Boudreaux in the City Journal.
Our main message is that the economy is not a “GDP factory” (to borrow a brilliant expression from Arnold Kling) and that considering it as such does not help in this time of crisis. The Covid-19 crisis does not change, but rather emphasizes this fact.
Standard macroeconomic thinking is today especially counterproductive. By maintaining the fiction that the economy is a simple GDP machine that will always work as long as it is sufficiently fueled with aggregate demand, attention is diverted away from the problems introduced into the market process by government interventions, as well as by major disruptors, such as Covid-19. The myth is maintained that if government keeps pumping funds into consumers’ hands and businesses’ coffers, all will be okay.
In Europe, for example, attention is focused on devising ways for governments to increase their public debt, without paying higher interest on it. But how will entrepreneurs, workers, and consumers return to their normal activities? Imagining how the provision of some services will work in the future (will movie theaters survive?) is a fascinating intellectual exercise, but one with little practical utility. Solutions will be found by entrepreneurs through trial and error, the same way that progress has always happened. What we need is not more fuel pumped into the GDP machine but assurances that its internal processes aren’t blocked. Governments have purposefully stopped the economy. To get it moving again, we eventually must remove obstacles that keep individuals from participating in market processes, both as consumers and as specialized producers.
Alas, Italy’s “Phase Two” is again all about increasing the budget deficit, whatever the means and possibly with EU aid, and little instead about removing obstacles that keep individuals from participating in the market process. I hope other countries will do better.