Economist Kevin Warsh takes to the pages of the Wall Street Journal with an op-ed that underscores points I have been emphasizing for months now:
The current economic crisis is principally a supply-side shock to businesses on Main Street. Because of the pandemic and lockdown, workers have been forcibly distanced from their jobs, and new capital has been scared to the sidelines. Service businesses—representing the bulk of the U.S. economy—are at risk of becoming the greatest casualties.
There are downstream effects from the supply shock on aggregate demand, including weak consumer spending, and from the Main Street carnage on listed securities on Wall Street. The bulk of the government’s largesse to date has been devoted downstream. To right the balance—and avoid a slower, weaker recovery—policy makers should direct their attention upstream, to the supply side of the economy and Main Street.
He has three warnings. First, when you’re in a hole stop digging:
First, Congress is understandably tempted to try to re-create the status quo ante. The pandemic wasn’t the fault of our citizens, so shouldn’t government simply and fully replenish the coffers of those harmed, as if the crisis never happened?
That isn’t feasible. The depth and duration of the recession are unknown. Businesses and households can’t be made whole when the economic hole is still deepening. And it is impossible to know what would have happened absent the pandemic. A prosperous future is possible only if capital and labor move with due speed to the business models and jobs of the postpandemic era. American-style dynamism isn’t an obstacle to recovery; it’s the essential element.
The U.S. economy isn’t a pop-up store. It’s a complex organism built on relationships—between supplier and business, employee and employer, customer and company. Relationship capital is the most precious and, at present, the most precarious. As the economy reopens, the after-tax rewards for work and new capital investment should increase. Otherwise, relationships will atrophy and the economy will suffer.
And in this war there have been war profiteers—retailers and 3PLs that have continued operations through the lockdowns unencumbered. They should not remain ignored. Second, vultures always gather around carcasses:
Second, when the government puts out a shingle offering money, the line tends to get long and the opportunity for mischief multiplies. The Treasury and Fed are working in a difficult environment to support businesses affected by the pandemic. They should resist the temptation to play favorites. Bailouts don’t age well, especially when they are bespoke.
The ink of the Cares Act was barely dry before the recriminations against disfavored beneficiaries began. Liquidity for all solvent comers—without fear or favor, without strings or restrictions—should be the guiding ethos. We should trust the good sense of businesses and households to know what to do with the money.
We should not be surprised that when money is thrown from a helicopter that there are those with gathering nets waiting below and, by and large, they aren’t the most needy or deserving of help. And third, there ain’t no such thing as a free lunch:
Third, there are limits to government spending. (Humor me.) The debt markets may seem to have infinite capacity to fund Washington’s fiscal profligacy. But it’s an inopportune time to bet on the perpetual kindness of strangers. Economists didn’t forecast the striking fall in real and nominal interest rates over the past 30 years. Nor is there accord on what would change the direction. The pandemic should remind us of tail risks, including sovereign risk.
The design of Washington’s pandemic response is far more important than its size. The strength of the postpandemic recovery is not chiefly about the magnitude of new government spending. The preoccupation with managing aggregate demand is misplaced, especially in this crisis.
That last is a shot across the bow of the Modern Monetary Theorists who no doubt believe that this is their moment. Sadly, I’m confident that Congress is eager to apply their demand side playbook to the present downturn which is quite different from the sort about which John Maynard Keynes wrote.
