How Much Should Government ‘Help the Economy’?

March 15, 2020 Updated: March 16, 2020
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Commentary

The coronavirus is disrupting our lives at a dizzying pace.

The NBA, NHL, MLS, and fledgling football league XFL have suspended their seasons. College basketball’s “March Madness” first thought about playing the tournament in the eerie silence of empty arenas, but then just canceled it completely. Tom Hanks has the virus. Broadway is shutting down, and the stock market has been plunging at a sickening pace.

Nothing is normal right now.

Question: What should the federal government do to help us through these challenging times? The difficulty here is that two distinct problems have been conflated. Americans are understandably concerned about dual threats: one to our physical health, the other to our economic well-being.

What the government should do in response to the threat to our health is obvious: marshal and facilitate efforts to contain and treat the virus.

What the government should do in response to the economic threat is much less clear.

There are dozens of suggestions for how the government should cushion the immediate economic impact of the virus and, going forward, avert a recession. The first of those two goals—helping Americans weather the virus-related economic storm—is worthwhile. The second goal—government intervention to ward off a recession—is not.

This is going to take some explaining, so please bear with me. As an economist, I have found that government intervention in economic affairs tends to help special interests while impeding overall economic progress. Yet many people believe that governments are endowed with some sort of superior wisdom that enables them to arrange our economic affairs into a satisfactory order. This is a myth. Look, if governments were that brilliant and competent, the whole world would be socialist today.

Some forms of government aid are more effective than others. Foreign aid provides a helpful object-lesson. Let us compare emergency aid with typical foreign aid designed to boost the economic development of countries.

Emergency aid, such as when the U.S. Navy deployed personnel and medical supplies to people in Indonesia after the devastating 2004 tsunami, saves lives. Even though the constitutionally stipulated purpose of our military forces is to defend American lives, Americans have a generous, compassionate heart, and we don’t begrudge such emergency assistance.

Foreign aid, by contrast, is less effective and less justifiable. Its track record is problematic. In fact, studies by economists such as Zambia’s Dr. Damisa Moyo and Nobel Prize winner Angus Deaton have shown that foreign aid too often has retarded economic progress by bankrolling entrenched governments that are corrupt or inept. The efficacy of foreign aid also is limited by the same problem alluded to above—the superstitious belief that government planners can arrange a successful economic division of labor from the top down.

Now, let’s come back home. Today, with millions of Americans reeling from the economic blows of the virus, what should Uncle Sam do?

Although there will doubtless be opportunistic, wasteful, and cynical political add-ons attached to any relief measures, emergency aid nevertheless is a compassionate step to take. Nobody should suffer eviction or hunger because some virus has shut down their place of employment or left them confined to quarters.

One proviso: Any emergency aid measures should include a sunshine date—e.g., a stipulation that 30 days after the president declares the medical emergency over, the emergency expenditures shall cease.

By contrast, there should be no intervention by either the Federal Reserve or Uncle Sam to try to avert a recession. This sounds harsh and uncaring, but please understand that I don’t like recessions any more than you do. But underlying my position is an inescapable economic truth: A recession is a time of painful, but necessary economic adjustments.

What happens in a recession is that less-efficient businesses fold, releasing their hold on valuable economic inputs (land, labor, and capital). That clears the field for entrepreneurs with new value-creating ideas. Call it the growing pains of capitalism or the cost of creative destruction or bitter medicine, but recessions are necessary for healthy long-term economic growth.

An analogy from the physical world is a useful metaphor. What did this year’s horrific wildfires in Australia have in common with the great conflagration that consumed half of Yellowstone Park in 1988? In both cases, the fires were preceded by well-intended but unwise human intervention.

It had been official policy to diligently extinguish small fires for years and to prohibit the removal of dead plant matter (also known as “kindling”). By preventing periodic smaller fires that would periodically reduce accumulated kindling, the potential for larger fires kept increasing. Eventually, a trigger event would ignite catastrophic fires. Instead of putting up with periodic smaller adjustments that were necessary to the long-term health of forests, human interventions made large conflagrations inevitable.

And so it is in our economy. When government and central bank interventions keep weaker businesses from folding, in the short run, they lessen economic pain. In the long run, however, they trade periodic small adjustments for a much larger, much more painful economic realignment. Postponing necessary adjustments causes eventual much larger adjustments.

Another question: Is the early 2020 stock market rout the beginning of a major recession? Is this “the big one”? It could be. The artificially low interest rates engineered by the Federal Reserve over the past dozen years have provided life support to numerous corporate zombies and financial weaklings. Had interest rates been at more realistic and historic levels (i.e., higher), many of these moribund companies would have given up the ghost long ago and been replaced by vigorous new entrepreneurial ventures.

The current inventory of economic “dead wood” would be much smaller, meaning that the effects of an economic downturn in 2020 would be much less severe than they will be now.

From an economic standpoint, the best thing that government can do in convulsive times like today is to get out of the way and let the invisible coordinating hand of markets sort things out and lay the foundation for a prosperous future.

From a political standpoint, however, America’s political and monetary authorities feel compelled to intervene (especially since this is an election year). They feel this way because most Americans place entirely too much faith in government competence and expect the authorities to act.

Ironically, in carrying out the will of the people, the powers-that-be will impede some of the very adjustments needed to get our economy back on a sound, healthy footing.

Mark Hendrickson, an economist, recently retired from the faculty of Grove City College, where he remains a fellow for economic and social policy at the Institute for Faith and Freedom.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.