Is there a way to fight inflation/recession with minimum blowback? Yes.
The point is, the strategy needed is one that contrasts with the “standard” technique. In China, the US and most other places, the correct (or at least a better one than the current) one conflicts with what I here label ideology, or politics or special-interest demands.
Ideology, or better said, ideas – insubstantial habits of mind that often stand in sharp contrast with common sense – rule the world.
John Maynard Keynes said: “Ideas shape the course of history.… Practical men who believe themselves to be quite exempt from any intellectual influence are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.”
I don’t assume that the leaders of the US and China are madmen in authority. I think they are quite ordinary men who rely on quite ordinary ideas to guide their actions. But in China and the US, the plain evidence before our own eyes tells us that economic curatives from a few years back are not working well. Crowds in the streets and electoral surprises are plain facts that tell all the world: “Come up with something better.”
There are two standard anti-inflation policies that are unfortunately being applied around the world. Both are intended to “apply the brakes” to an over-speeding economy. They are higher interest rates to reduce speculative, unnecessary and unwise investment, and higher taxes to reduce over-enthusiastic, overcapacity spending on the part of both investors and consumers.
The standard anti-recession policies, also applied nearly everywhere, are stimulative spending, tax cuts and specialized easy money (these days applied at the same time as “tight money” in the form high interest rates) in the form of bailout or rescue money supplied to businesses and handed out to ordinary citizens in order to help them with Covid-related problems and with high, unaffordable prices.
Confusingly, in Canada, some Covid “free money” given to individuals (who lack the political power to resist) is now being taxed back.
These two classes of “anti-problem” policies applied to recession/inflation are incompatible.
First, let us understand why the two standard anti-inflation policies are no good for today’s problem, which is “rec-flation” (R/I), a combination of recession and inflation. Simple inflation for which the standard curative policies are designed are used to cool off an “overheated” economy. They address a situation in which the economic engine is attempting to run too fast, at a rate beyond its capacity.
There are many words for this state of affairs: The economy is over-stimulated; a (for example) wartime economy cannot produce both guns and butter; a speculative fever in the stock market has created imaginary wealth that props up unsustainable demands on an already fully employed economy, etc.
Toward a less rule-based order
The magical strategy capable of fixing R/I may be summed up in just two words: reduced regulation. But the actions that are required by those two words are by no means easy or simple to bring about.
In China, and other places where government controls many economic decisions and stands ready to intervene in what, for the sake of convenience remains temporarily outside its reach, the idea that such extensive all-encompassing economic influence may be counterproductive of the need to maintain growth and stimulate innovation is unwelcome to the economic players who operate the levers of power and influence.
In the US the “urgent need to save the planet” idea has also induced government to regulate economic behavior otherwise considered quite benign – like dairy farming where cows give off “problem” gas – or driving fast, high-horsepower noisy cars just for the fun of it – more gas problems – has led “grandma” government to say “no no.”
Whatever else is going on in both cases, consumers and producers are thwarted, blocked and denied opportunities to improve their general happiness or utility and are forced to accept lower profits from regulated activities. It means lowered real income, which for economists at least, is measured in terms of utility, profit and the general happiness that comes to ordinary citizens when they are allowed to do what they most prefer to do.
Recession/inflation is a big problem. Covid was a big problem. When well-meaning (not necessarily madmen) policymakers in authority, guided by ideas they believe worked in the past, confront big problems with big regulations, they make big mistakes.
In the US, schoolchildren – those whose schools were not closed – had to wear masks. Nearsighted kids with eyeglasses saw the world in a fog, and kids with hearing problems could not lip-read. It has turned out that school-age kids were quite unlikely to get Covid, with or without masks.
In China, pursuit of the idea-dream of zero Covid led to lockdowns whose downstream severity proved to be worse than the marginal reduction in Covid they may or may not have brought about.
As I write this article, The New York Times just published a piece suggesting that, in order to offset global warming, citizens of the US should have fewer children!
In all these cases, less is almost certainly better than more.
Less US regulation – for example government getting “out of the road” of domestic fossil-fuel extraction and use – is a policy easily reversed and needing no prodding. Present policy that includes going to the Middle East and Venezuela to get replacements for US-generated oil means global totals of use and production won’t change, but US recession/inflation will get worse as domestic investment is thwarted and US energy prices stay high.
In China, letting up on harsh lockdowns will diminish the motive citizens have to go to the streets.
Why are leaders so unwilling to let go of policies that may have the legitimacy that comes from history or from scribblers from past ages? It is the greatest of the seven deadly sins: pride.
Leaders may think – mistakenly – they will lose face if they have to say: “I made a mistake.” But it is better than having a modern-day Talleyrand tell them (I alter his line a bit): “Your pride allowed a mere mistake to mature into a dangerous blunder.”
Tom Velk is a libertarian-leaning American economist who writes and lives in Montreal, Canada. He has served as visiting professor at the Board of Governors of the US Federal Reserve system, at the US Congress and as the chairman of the North American Studies program at McGill University and a professor in that university’s Economics Department.