Covid-19 has killed the supply-side economy. I’m sorry, Friedmanites, but it’s true.
The idea that as long as we cut taxes, cut regulations, and lower interest rates, any economy can recover from any recession is something that should have gone the way of the iPod, but for some reason it’s stuck in the Ivory Tower. University of Chicago, conservative think tanks and those completely disconnected from reality. Until now.
The reason I say this is because in the last six months liberals and conservatives around the world have joined together to create trillion-dollar stimulus packages designed to give people money. While some see this policy as madness – “How can the government just hand out money?!” – It has been hugely effective in stemming the economic fallout from Covid-19, so effective that central banks are asking politicians to do it again.
Now it took us a while to get here. It took a crisis like Covid for our conservative friends to understand that cutting personal income taxes doesn’t work if you don’t have a job, that deregulation doesn’t work when companies go bankrupt, and that when interest rates can’t be lowered they’re already at the zero lower bound. . But still, they finally saw the light. What we’re in for is a demand shock — the biggest the world has seen since the Great Depression — and the free market won’t save us. In fact, allowing the market to run unhindered will impose more pain on millions of people and drag our economy deeper. We need government intervention—lots of government intervention—and Milton Friedman would say the same thing if he were alive today.
The Great Recession should have been proof enough of the loss of supply-side logic, but whether Republicans in the US realize how ineffective payroll taxes will be in the fight against Covid, the Tories in the UK begrudgingly approve fiscal stimulus to the tune of 8 percent of UK GDP, or institutions like the World Bank and IMF While economists agree Washington’s austerity may not work in our current predicament, policymakers everywhere have said in one way or another that supply-side solutions don’t work in deep recessions, and they’re right.
So now that the supply-side economy is dead, we can finally start building real solutions. Getting out of this mess will require trillions more in stimulus, an effective vaccine and a global mask mandate. Until we can safely go to work, shop, eat, and send our children to school, our government must guide us through this uncomfortable transition. Governments need to alert us to vaccine development, mandate once vaccines are made, and micromanage municipalities by providing timely updates on reported coronavirus cases. Finally, and perhaps most importantly, when and where will we need financial support for it
Fortunately, though, it’s pretty cheap for governments to borrow right now so it’s pretty cost-effective to do all these things. But what would be costly is too much focus on deficits and debt and not enough on the general welfare of the public. Austerity will only slow the development of a vaccine, strain output and employment, and increase anxiety. The data backs this up because almost every economic model—from the IMF to the United Nations to Wall Street—shows that the less we spend now, the more we’ll spend on unemployment benefits, food assistance, housing vouchers, and health care in the years to come. And our economy is unlikely to return to a path of steady growth and provide enough tax revenue to maintain debt sustainability.
It will be difficult to get through. There is no question about it. But there are many things we can do to make our situation a little more tolerable, and it’s the government’s job to do those things, not the free market.
The supply-side is dead. Long live the claim side.