As we both know, there are such lovely plans for how the economy is going to be after the COVID-19 virus pandemic. It will supposedly be more fair, less capitalist, more green, and generally more fluffy in every manner. You and I, us realists, we’ve got to tell them all that it ain’t gonna be so.
If we change how the economy works, it’s not going to bounce back. If it doesn’t bounce back, then we’re all very, very much poorer. No, I don’t think being poorer is either more fluffy or desirable, either.
It’s difficult to know how deep this economic crater is going to be, but an entirely reasonable estimate is that gross domestic product is going to fall by about 25% at the bottom of the downturn. Now, GDP isn’t everything, of course, but it is everything economic. More importantly, it’s precisely and exactly equal to all production, or all income, or all consumption — each of the three equaling either of the other two by definition.
If GDP falls by 25%, that means that there’s a quarter less production. It means that all incomes, all added together, must have fallen by 25%. It means that we can only consume, in aggregate, three-quarters of what we used to. It really does mean that there are only three beef patties to put into two Big Macs instead of four.
We can’t solve this by taking all the money off the rich, because that’s just money. Our problem is that we’re asking, “Where’s the beef?” not, “How do we pay for it?” The rich aren’t noted for their piles of ground cow, after all. The same is true with incomes. We can’t just go get it from the capitalists. The capital share of the economy (after depreciation) isn’t as large as 25% of the economy. And if there’s just less stuff around, then we all get to consume less — we’re poorer. A smaller GDP just means we’re all poorer because less GDP and being poorer are the same thing. There’s less stuff for each of us.
Sure, it’s predicted that the economy will all bounce back. But note something about bounces: In economies, they only take you back to where you were. It’s not possible to say this time we’re going to do it differently and still have that leap back to former riches. Because different is, well, it’s different.
If we’re going to try and grow the economy in some new manner — green, fair, communal, even socialist — then we’re going to have to work out how to do it, not leap straight back to the old way of doing things. This is what the insistence is. But if we’ve got to figure out that new way, then we’re back with the growth rates we used to have, that 2% and 3% a year kind, not the 20% and 25% kind of a bounce back.
We can have a new economy arising from our pit of despair and have slow growth, or we can have the old one back from the slough of despond and grow quickly. Those are the only two choices. Fast growth and doing it differently are not compatible desires.
It’s even possible that a friend or two on the Left will say that it’s worth being a bit poorer for everything to be a bit more fair. At which point, we’ve really got to emphasize to them that a quarter less of everything really is less of everything.
Which 25% of healthcare do they want to do away with? Heck, which quarter of government should we dump? (Don’t get me started, I’ve some great ideas there.) If all incomes have just fallen by 25%, then when do the state and federal workers all take that quarter of wages pay cut? Which 75% of the things you used to get to do are you going to keep? Because you’re not going to be able to have the other part of it, it doesn’t exist anymore.
A quarter fall in GDP really just does mean there’s that portion of everything that doesn’t exist anymore. This isn’t about money either, nor the distribution of it. It’s not been produced so it can’t be consumed, and our real incomes are, by definition, what we get to partake of.
We have two choices here. We can be new and different and poor, or go back to the old ways, get rich again, then figure it out. Once that lefty friend understands that poorer really does mean less government, perhaps they’ll even agree.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at the Continental Telegraph.
