How to structure public spending so it actually does some good

I have an article up at the American Institute for Economic Research explaining how idiotic a “stimulus” at this time is: A Classical Economic Response to the Coronavirus Recession. It takes as read that we are going to have a massive amount of public spending, and given that as the certainty, how to do it with minimal economic damage. That we are even having a lock-down is also taken as read since others have already made that decision. This is the central point made in the article.

Let me take you back to the economics before Keynes, to when economists understood the nature of the cycle.

Recessions in those days were rightly understood as due to structural faults in the economy. A recession occurred when the bits did not properly mesh. Some parts of the economy were no longer able to run at a profit because of structural changes in the economy, sometimes on the demand side but more often on the supply side. There, therefore, needed to be some shifts in the entire apparatus of production. What turned the adjustment process into a recession occurred when the adjustment process required was too large to occur as in normal times when as one business would close down another would open.

During recessions, for whatever the reason might be, the number of businesses closing would exceed the number opening, and along with the slowing of production in total, there would be a rise in unemployment. If ever there has been a downturn that cannot in any way be explained as a fall in demand it is the forced closures that have followed the coronavirus panic. The downturn is entirely structural in nature. That is why when I hear discussions of the need for a stimulus I am even more than usual amazed at how beyond sense economic policy has become. What is needed, and what is largely being done, are measures to hold both capital and labour in place until the closures are brought to an end.

The last thing we need now is a Keynesian-type “stimulus” where government spending on wasteful junk takes over from actual productive firms.

But the policy everywhere is never let a crisis go to waste. It is not you and me the political class are thinking about, but themselves in how they can use the crisis to benefit themselves. You just have to hope against all likelihood that the damage done is kept to a minimum.

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