On pandemiconomics, part one.

Here’s a continuation of my response to “Just a former student.” JAFS wrote…

I wanted to hear […] your thoughts on how this COVID-19 pandemic will affect our economy. Do you think the government handing out coronavirus stimulus checks was a good idea? Or is increasing our national debt going to end up being a mistake?

The correct answers are, respectively, “I don’t know but I hope so” and “I don’t know but I hope not.” These are the correct answers because I only have intermittent access to the alternate universe where information and judgement are perfect. So allow me to ramble a bit and insult your intelligence by assuming you don’t already know this stuff.

Politically speaking, the government had to hand out stimulus checks. The government shut businesses down left and right, costing millions of people their incomes. Those people have mouths to feed, bills to pay, rent, mortgages, car notes, and so on. The government put them in this situation, or was forced to put them in this situation because of COVID-19, so the government had to make up for it by giving those people cash ASAP. “Do-nothingism,” whether right or wrong, causes politicians to lose their jobs.

Furthermore, by shutting businesses down without due process, I think government is constitutionally bound to compensate people for their losses based on the Fifth and Fourteenth Amendments. Why? Well, there’s a pair of Due Process Clauses in there (I don’t remember hearings or trials before shutting everyone down), there’s the Equal Protection Clause (some folks were forced out of work, others weren’t), I think you could squeeze in that Eminent Domain Clause (“took” property for public purposes, thus must compensate), and there’s a badly underused Privileges and Immunities Clause that I think needs to be dusted off just to make sure it still works.

Economically speaking, it’s a tougher call. I think stimulus is less effective than most economists do, but that doesn’t mean it never works. The downside of stimulus is harder to see than the upside, because the downside takes longer to kick in, and by the time it does there are plenty of other factors to consider and actors to blame for these problems that seem to have come up out of nowhere.

Allow me to continue dodging your question by answering a different one. What are the downsides of stimulus? For starters, every dollar that Uncle Sam spends has to be paid for by taxes, inflation, or borrowing. Taxes make it harder to buy and sell stuff, inflation is a hidden tax because it weakens the dollars in your wallet or bank accounts, and borrowing drives up the national debt, which has to be repaid via taxation or inflation. None of those options are good, but of course they’re not good: this is about the downside, remember? If the taxes, borrowing, and inflation outweigh the good done by the stimulus, then it was a bad call. But that’s a tough judgement to make, costs and benefits take time to become apparent, and they do so unevenly.

Stimulus runs additional risks that I think I can boil down to two more statements:

  • Stimulus runs the risk of encouraging activities that aren’t that valuable anymore. Imagine giving a stimulus check to a buggy-whip manufacturer in the midst of the Model T Ford boom. Or, to work from current events a bit, imagine giving a stimulus check to the owner of a wet market right now. Whether or not wet markets were actually to blame for the outbreak, that wouldn’t make much economic sense, would it?
  • Stimulus also runs the risk of failing to encourage activities that are becoming more valuable. Imagine you get furloughed or fired due to the COVID-19 shutdown, and then Uncle Sam sends a stimulus check. Mightn’t that check make you a little more likely to try to ride out the tough times and resume your old job, and a little less likely to go looking for a job in a growth industry? Say in delivery, or in nursing, or working in an Amazon warehouse?

…so stimulus sometimes allows economic problems to continue, or discourages pursuit of new economic solutions.

I don’t think this stimulus is going to stimulate, but that doesn’t mean it was a mistake. And I will explain why on Thursday because my brain is fried and I need sleep.

3 Comments on “On pandemiconomics, part one.

  1. While there may be some value in stimulus money going towards private debt service – I’ll let the economists figure that one out – I remain convinced that all this demand stimulus is fighting the last economic war. When the supply crunch hits due to sheltering in place, all the extra liquidity is going to cause an inflation spike.

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    • I suspect it will, but it depends on whether A] the extra $$$ offsets the drop in money velocity (if so, inflation is likely) and B] the Fed can recognize and soak up the extra $$$ fast enough as things normalize.

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