Recovery from the pandemic will require a single-minded focus on maximising growth
Debating those sorts of issues is a luxury. There will be plenty of time for that sort of thing after the crisis has passed. Not just the medical crisis – that should pass soon enough. It is the coming economic crisis that is a far greater problem. Normally during an economic crisis government steps in to prevent some sort of collapse, or attempts to restart a stalling economy. This time, to use that ghastly cliché, is different.
In response to a perceived medical crisis governments around the world have deliberately shut down a significant proportion of economic activity. Now this has been done with varying degrees of severity and varying degrees of success. Time will tell whether or not the lockdown or quarantine strategy has resolved the medical crisis. But the consequence of this policy choice will be to create an economic crisis.
To be clear – the economic crisis has yet to manifest itself.
Yes, a lot of people are off work, sitting at home, binge watching television, probably eating and drinking too much. Some might even be successfully working from home. Some governments are paying wages and guaranteeing loans and forcing people to break and re-enter contracts in an attempt to minimise the economic disruption of the lockdown strategy. That is not the economic crisis.
The economic crisis will only start when the lockdown ends.
Never before in human history has government tried to stop an economy from working and then restart it again. Many policy makers seem to think that the billions of pounds currently being spent to tide people over will be enough to keep things in place and that the economy will simply “snap back” when it is safe for people to return to work.
To take that view is to have a very mechanistic understanding of the economy. Unfortunately the economy is not a machine that can be simply switched off and on at will. The economy is not a computer that one can place into sleep mode and then reactivate when needed. The economy is made up of many millions of individuals going about their daily lives, forming expectations, making plans, and trading and exchanging with each other. We have built up, over time, many structures and institutions to facilitate that behaviour.
The economy that we observe emerges out of all those human plans and interactions. It is the pattern of human action that we see and label “the economy”. Now government can distort that pattern by manipulating monetary instruments, or by spending, and regulation. In times of war, for example, governments distort the economy towards the production of weapons. But an attempt to freeze in place that pattern of human action and then reanimate it at a later time is something very new and different from past attempts to manipulate the economy.
Some RMIT University colleagues and I do not believe it can be done. The pre-COVID world is gone. Many parts of the pre-COVID economy are dead. The economy that emerges from lockdown will be very different from the one that went into lockdown. It will almost certainly be smaller. Recovery will not be V-shaped.
In our new book, Unfreeze: How to Create a High Growth Economy After the Pandemic, we argue that recovery from the COVID-19 pandemic is going to require a single-minded focus on maximising economic growth for a sustained period of time. The usual economic policy tools of low-interest rates and high government spending followed by half-hearted reductions in the rate of spending labelled as austerity will not succeed in restoring pre-COVID levels of prosperity.
Macroeconomic policy tools are exhausted – and frankly discredited too.
Politicians should stand aside and let entrepreneurs restore prosperity. Human ingenuity taking advantage of local knowledge and local opportunity is going to create wealth – not bureaucratic central planning. We advocate five major reforms:
- Make temporary deregulation permanent
- Reimagine labour markets to increase flexibility
- Radically simplify and flatten the tax-system
- Promote entrepreneurial discovery and permissionless innovation
- Greater autonomy for local government
Current government policy and regulation is designed for a pre-COVID economy. Now is the time to ensure that government does not stymie our efforts to create a prosperous post-COVID world.
Sinclair Davidson is Professor of Institutional Economics at RMIT University in Melbourne Australia. Unfreeze: How to Create a High Growth Economy After the Pandemic, by Darcy Allen, Chris Berg, Sinclair Davidson, Aaron Lane and Jason Potts, is published the American Institute for Economic Research.