National Post (National Edition)

The ‘fairy tale’ of pandemic stimulus

- JOHN ROBSON

When’s the last time you were sick and someone said “borrow money and call me in the morning?” Strangely, it was today. With the COVID-19 pandemic, everyone’s telling government­s to “stimulate” something called “the economy” through deficits and interest rate cuts so we won’t have less wealth just because people can’t go to work and create it.

Economic theory might not be top of mind. But how many games of solitaire can you play? So, economics is divided into “micro,” the study of what real people actually do, and “macro,” the study of a mysterious purple dragon called GDP that hovers in the sky somewhere.

Stop with the red jack on black queen and listen. There’s no such thing as “the economy” apart from the sum of all the wealth individual­s create, less what they use up.

So you can’t lose money on every sale and make it up on volume. And when many people are too sick to work, or too quarantine­d, it doesn’t “cause” a recession. It is a recession. Less total wealth is being created. As NBC News observed with some bafflement, “If stores cut hours excessivel­y, or if hourly employees such as shelf stockers or cashiers self-quarantine and don’t show up for work, lines could grow, one retail consultant said.”

Thank goodness for consultant­s. But here’s the stinger: unless government multiplies loaves and fishes or cures the sick, it cannot “stimulate” the “economy” in a pandemic.

My colleague John Ivison just described “a consensus across the political divide that the government needs to step forward — Alberta Premier Jason Kenney said Canada needs fiscal stimulus in the range of one per cent of GDP, or $20 billion.” But if people aren’t working due to disease, how does government piling up debt help?

Or slashing interest rates so we can pile up debt? It might help cover the bills while you can’t earn money. But since you’re worse off, and nobody’s better off, how does it levitate the purple dragon?

Take watching baseball on TV. Please, you may say. But some really like to and now can’t. And what can a rate cut do? Beguile someone into borrowing vast sums to start another league? Ridiculous.

Hence this stunned New York Times story: “Trading was halted as U.S. stocks dropped eight per cent at the open, despite an extraordin­ary move by the Fed (that) failed to prevent more investor panic. Investors were confronted with weak economic readings out of both China and the United States.” It’s not panic, it’s rational, because being sick is bad.

If you want subsidies to help people make ends meet until the quarantine­s end, please be very clear: are you suggesting government­s take money from some people with enough and give it to others without, or create it from thin air?

If the latter, why just $20 billion? Ivison said, “It would have been preferable if the deficit were not nearly $30 billion before the crisis hit.” But if deficits stimulate the economy, why isn’t it good they’re already big and growing?

There’s no micro argument for deficits. Sure, if the government borrows a dollar and hands it to someone who spends it, a storekeepe­r and factory worker are “stimulated” into selling and making. But the person the government borrows it from necessaril­y does not spend that same dollar, so it immediatel­y cancels out. Dang.

Ah, say the macro-sages. Never mind tedious individual­s with their bad breath and baggy clothes. Y=C+I+G+(X-M), a set of abstractio­ns more real than reality. If G goes up, Y goes up, even if total individual productive activity goes down. Abracadabr­a. See the purple dragon soar.

Where did this fairy tale come from? Before the 1930s only monetary cranks like William Jennings (Free Silver) Bryan and Social Credit thought the government had magic power to create prosperity. But the experience of the New Deal and the impenetrab­le wizardry of John Maynard (Free Money) Keynes persuaded us deficit spending could “stimulate” this famous “economy” … until the late 1970s taught us reckless borrowing was as dumb as it sounded.

Undaunted, we flipped through the government’s spell-book until we found … aaaack. Free Silver again. Monetary crankery became orthodoxy except instead of pushing out money backed by silver, pushing it out backed by nothing would make us all rich.

Look, if I gave passing strangers $500 bills from our Monopoly game all that would happen is we couldn’t play Monopoly. More Benjamins chasing less stuff doesn’t make us rich. More stuff does. Period.

The real value of many suspended activities might be smaller than macroecono­mists think, especially government activities. And telecommut­ing may lessen the impact. But if we’re not out brewing coffee and hammering nails we’re worse off. And last time I looked, it wasn’t government­s that cured the sick and fed multitudes from a basket of fish.

HOW DOES GOVERNMENT PILING UP DEBT HELP? — JOHN ROBSON

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Jason Kenney
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