The economy after the epidemic

There is now talk about the need for a widespread period of austerity after the economic shock of the epidemic. Such a policy could not be more wrong. It is exactly what is not required. Those who advocate it could not be more wrong. It is time to think outside the box which has constrained economic thinking since 1945. Keynesian theory identified what he called ‘shortage of aggregate demand’. Wages are apparently too low to enable people to purchase everything that they produce. If you stop and think about that, it is an absurd proposition, but leave it to one side for the moment.

From 1945 until 1974 the ‘solution’ was monetary expansion, which gave rise to accelerating inflation, a housing price bubble (in reality a land price bubble) and a crash, precipitated by the oil crisis. Recovery eventually occurred by bank deregulation, which resulted in another land price bubble and the crash of 1992. Further expansion of credit generated a recovery of sorts, resulting in a third land price bubble and the crash of 2008. This was eventually addressed by quantitative easing, ie more expansion of debt, which has kept the land price bubble inflated, now disguised under the label of ‘asset bubble’. The financial system is fundamentally unstable; the coronavirus epidemic just dislodged the house of cards.

The apparent shortage of aggregate demand was, long before Keynes, identified as the supply-side blockage caused because the land market is dysfunctional. Rents and land prices never fall to market-clearing levels, as is obvious from the forest of estate agents’ boards to be seen in most town centres and industrial estates around the country. Given that no business can operate without suitable premises and that a major constraint on is the limitations of those premises and lack of availability of better, it should not be hard to understand that dysfunctionality of the land market is a constraint.
A further issue is the shape of the tax system, with its focus on labour-related taxation; these taxes are in reality a burden on employers and are an important reason why wages cannot drop to market-clearing levels. Here we have a second supply-side blockage.

Getting the economy back on course is in principle simple: it is a matter of mobilising resources as quickly as possible. The easiest way to do this is for governments to inject the money directly into the economy. If the additional money is backed as the Rentenmark was, then there will be no inflation; the Rentenmark, was the monetary device devised by Hjalmar Schacht to stop the hyperinflation of 1922-3, with complete success.