Quantitative-easing our way to another lost decade

It’s now widely accepted that the stall in GDP growth, real wages and overall productivity that characterized the 2010s was the unintended side effect of the U.S.-led fiscal and monetary policy bailouts of 2008 — bailouts that, to be fair, probably did prevent a second Great Depression, but whose unhealthy side effects lingered.

As U.S. policy-makers ponder the same treatment again — but with even larger corporate bailouts and new forms of even cheaper money pumped into the financial system — the global economy is again facing the prospect that rescue from an immediate economic shock will lead to another lost decade. This one will be characterized by: the struggle to unwind a morass of misallocated capital, the need to coddle “zombie companies” whose revenue only slightly exceeds their debt service and widespread reliance on government stimulus that erodes the entrepreneurial spirit and perverts incentives.

As guarantor of the world’s reserve currency, the U.S. dictates the co-ordinated economic and monetary policy responses of most major economies to global crisis, Canada included. So how did the U.S. arrive at a place where, whichever party controls the White House and Congress, the norm during economic crisis and long after is a general expectation of structural corporate welfare?

The answer is two-fold. The first is regulatory capture, the corruption of authority that occurs when a political entity is co-opted to serve a commercial special interest. This viral infection is by no means quarantined to the U.S. political system. It is as old a distortion of government as exists, with outbreaks usually taking the form of aggravated economic rent-seeking by a favoured group (think Big Auto in Detroit in the 1950s).

But regulatory capture itself has taken on a new, super-mutated form, aided and abetted by the hubris of a macroeconomic policy consensus that emerged in the wake of the 2008 financial crisis. Today’s macro consensus holds that the business cycle itself and its rhythm of expansion and contraction along an underlying long-term growth arc is obsolete. The mission of macroeconomics is no longer to smooth busts and booms but to eliminate them entirely. The 2010s, with their consistently anemic wage, GDP and productivity growth, represent the dispiriting success of this new consensus.

That decade was ushered in by modern central banking tools, in the form of perpetually low interest rates and quantitative easing, which preserved inefficient companies in an attempt to forestall economic bust. Fiscal policy tools, in the form of perpetual bailouts, stimulus, tax breaks and subsidies, had the same goal and effect.

The latest program rolled out by the U.S. Federal Reserve takes all this further. It includes purchasing the debt of healthy companies in no need of rescue. This bond-buying represents the end state of regulatory capture. Traditional capture was evidenced by industry-specific targeting (e.g., the auto sector bailout of 2009) but this new superstrain assumes every industry and special interest is vital to the prevention of a bust.

Time was when regulatory capture was thought harmful to a healthy economy. But this new form is considered, not just a necessary evil, but a positive virtue. Policy-makers across the political spectrum believe they are doing the right thing by preventing a painful bust. But economic busts are a necessary outcome of poor resource allocation. When bets fail, companies ought to go bankrupt. In their wake come firesale assets, resourceful and entrepreneurial people looking for new opportunities and investors who have had success before and are now looking for their next project. This process of creative destruction creates room for new businesses and new ideas to thrive, which is the only way to fuel real economic expansion.

No matter the government decision on which businesses should be allowed to open in month six, 12 or 18 of this public health crisis, consumer behaviour will be meaningfully altered. Countless businesses in our communities and around the world are creating new models for the socially distanced age that can and should be emulated. If businesses cannot or will not adapt, the market should be permitted to force them to. The only alternative is another decade of economic paralysis. Matthew Lombardi is a fellow at the Canadian Global Affairs Institute. Max Seltzer is a

strategy consultant.