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During traditional recessions we witness a reluctance or inability of people to spend money because they are unemployed, or because they fear the future and so hoard their money. No such clear “demand-side” shock is what we have now, although this kind of demand-side problem will likely arise as a follow-on consequence. Instead, what we have now is a situation in which people who still have jobs, cash, and a desire to spend nevertheless don’t spend because they are avoiding physical contact with others. Americans don’t want to get sick, and they don’t want to get other people sick. At the same time, we have federal, state, and local governments trying to limit the spread of the virus by restricting consumption and asking, among other things, restaurants to reduce their services and banning gatherings larger than 50 people.
This source of reluctance to spend and government requirements to stop consuming are not what John Maynard Keynes, Milton Friedman, F. A. Hayek, or other economists theorized about when they searched for better ways for governments to respond to recessions.
Bryan Caplan, much like Vero (above), points out the unprecedented nature of the economic problems caused, and likely about to be caused, by COVID-19 [3]. (I’m somewhat – but not much – less pessimistic than is Bryan.)
Federal money is on its way. On Tuesday the administration proposed a nearly $1 trillion stimulus. But the economy needs a wiser deployment of limited resources than just a cash dump. First, not even the U.S. government has infinite resources. Its unique ability to borrow even when nobody else can borrow, and to promise eventual repayment by taxation, is a treasured but finite resource. When a crisis comes in which even the Treasury can’t borrow, we are in for a true catastrophe.
Second, this isn’t the last virus. What we do now sets the precedent for what we will do in deadlier pandemics to come. Overall, our society will transfer savings from those who have it to those who need it, via markets, Treasury debt, taxation or force. But we must do it in a way that allows savers to reappear in the next crisis, to buy Treasury bonds, forbear loans and provide liquidity.
Mark Perry reminds us of the folly of “anti-price-gouging” legislation [5].
John Stossel, too, weighs in against the absurdity of “anti-price-gouging” legislation [6]. A slice:
Prices should rise during emergencies. That’s because prices aren’t just money; they are signals, information. They tell suppliers what their customers want most.
Entrepreneurs then make more of them and work hard to get them to the people who need them most. If “anti-gouging” laws don’t crush these incentives, prices quickly fall to normal levels.