As real as it gets

From the June 2020 print edition

This is the second column I have written since COVID-19 struck. Two months ago (it was late March), I predicted that we would have “turned the corner” on the pandemic in a few weeks. By that, I meant that the strict lockdown would have lasted as long as it took to flatten the curve, and we would have been back to something akin to a “new normal” by late April. Boy, was I wrong! As I write, it’s June and for all intents and purposes, North America remains shut down. The schools aren’t back and won’t be until September at the earliest – and that’s the best bellwether for “normalcy” I can come up with.

Two months ago, I was reasonably hopeful that things would turn out well, at least in the long run.
I believed that North America would have recognized the folly of its “globalization” ways, and understood that we have something unique, something special, on this continent. There would be serious discussions about how to bring the supply chain back home, leading to real economic growth and full em­ployment.

However, if those discussions are taking place, they are taking place behind very firmly closed doors. It seems to me that the political classes on both sides of the 49th parallel are floundering, unable to formulate policy past next week.

It wasn’t long into the health crisis that I started to fear that the economic crisis would dwarf the pandemic. This seems to have come to pass. North American GDP could contract by 33 per cent. Unemployment is skyrocketing.

So far, we’ve seen the job losses mostly in the cohorts we would describe as “lower” and “lower-middle” class. You may be familiar with the phrase “trickle-down economics”. What we’ll see in the months to come is “trickle-up unemployment” as businesses look to slash costs. Middle and senior managers are skating on the thinnest of ice. Things will get far worse on the employment front before they get better.

Real business cycle
There is an economic theory you may not have heard of called real business cycle (RBC) theory. It goes like this: expansions and contractions result from “real” causes, such as changes in technology or, as in this case, a pandemic that led to a government-imposed lockdown. RBC theory suggests that if left to its own devices, the economy adjusts relatively quickly, getting back to something close to full employment, sooner rather than later.

Deadening the pain
However, one of the central tenets of RBC theory is that government should not intervene with discretionary monetary and fiscal policy. There is a compelling argument that because government fiat caused this economic disaster, nit should try to buffer its citizens from the shock. In other words,
if there would ever be a justification for government intervention, this was it. This made and still makes sense to me. But there’s a pretty good comparison for government intervention and the use
of a powerful drug like morphine: it deadens the pain right now, but it’s easy to get hooked.

Interest rates in the developed world are basically zero. Great Britain for the first time issued debt with negative yields. The US government has already committed trillions of dollars to fiscal stimulus and, trust me, in an election year this is only the tip of the iceberg. On a weekly basis the Canadian government announces new ways to give away money. Put this together and you see that the plan seems to be to inflate our way out of this mess.

Those schooled in economics may have noted the internal contradiction in the preceding paragraph. Negative interest rates imply deflation. Printing an endless amount of money should be inflationary. What I fear is that we will experience the worst of both worlds: Wage deflation given the excess supply in the labour market, coupled with asset inflation. This is what we saw in the aftermath of the 2008-09 financial crisis.

The stock market soared, bonds and real estate rallied, and the average working man and woman was left behind.

That’s not good. And I fear it will be even worse than that this time around. There was a global pandemic that had to be dealt with, no question about that. When Donald Trump referred to it as “war”, I didn’t hear any disagreement. But instead of fighting, the developed world turtled. We shut everything down without adequately considering what the longer-term consequences would be and then the lockdown was kept in place far longer than necessary. Our bankers and politicians screwed up. Instead of clearly articulating that temporary measures were necessary, they went into panic mode, dealing with each situation on an ad hoc basis. What is coming down the road are real economic problems – inflation and stagnation that will take a generation to address.

Toronto-based Michael Hlinka provides business commentary to CBC Radio One and a column syndicated across the CBC network.