As epidemiologists scramble to mitigate the impact of the coronavirus pandemic on public health, economists are evaluating its impact on the global economy. Experts in both fields absorb the flurry of data, interpret it through their scientific training and the lens of similar historical events, and endeavor to recommend a path forward. Yet everyone knows that ultimately we are in unchartered waters, and possible outcomes vary widely.
As an economist, I am stunned by the nearly 10 million jobless claims in the United States over the past two weeks. But the dramatic monetary and fiscal reactions are nearly as stunning as the loss of jobs. As society grapples with the economic whiplash of employment collapse and the accompanying federal response, it’s important to assess what is occurring in light of first principles.
The Acton Institute is built around 10 Core Principles. The first two (Dignity of the Person and Social Nature of the Person) are perhaps the most important ones to consider during a pandemic. But when it comes to evaluating the economic plunge and the state’s instinctive—or perhaps knee-jerk—responses, three other principles are particularly relevant: 1) Creation of Wealth, 2) Economic Liberty, and 3) Economic Value. A proper understanding of these principles enables us to better appraise the Federal Reserve’s monetary actions and the federal government’s fiscal “stimulus.”
First, let’s consider Acton’s Core Principle on the Creation of Wealth. Wealth—at least that form of wealth measured by marketplace activity—is created through mutually beneficial commercial exchange. Increasing wealth, also known as economic growth, is driven by many things: the division of labor, innovation and entrepreneurship, investments in physical and human capital, advances in technology, a stable monetary system, and free trade. What all these factors have in common is this: Each of them facilitates an increase in productivity in the creation of goods and services. They are all critical factors in wealth creation. Leveraging these factors to their maximum extent best occurs under conditions where human rights (i.e., the right to life, liberty, and property) are respected in an environment of political stability and economic freedom.
This brings us to the second principle in our list: Economic Liberty. Economic Liberty is essential to foster what Nobel Prize-winning economist Edmund Phelps calls an environment of economic dynamism and vitalism. For obvious reasons, this pandemic has restricted our economic liberty—although substantial debate remains about the degree to which that liberty ought to be curtailed to flatten the curve of critical cases. While many states are essentially locking down all business activity not deemed essential to sustain life and health, other countries, such as Sweden, are far less aggressive in their response. While it remains to be seen which approach will be most effective in balancing the epidemiological and economic risks, no country can flourish with systematic and sustained restrictions on Economic Liberty—as the current economic devastation makes clear.
Grasping these fundamental concepts enables us to better evaluate monetary and fiscal policy actions, because these policy tools are effective only insofar as they contribute to wealth creation and economic liberty. It is easier to see how the Federal Reserve’s current monetary actions might promote this in the short run: If the banking system seizes up, mutually beneficial commercial exchange does, too. Apart from aggressive central bank action, the probability of another banking collapse and corresponding depression is, well … non-zero, to put it mildly.
However, there is a long-run problem to consider. The Federal Reserve’s recent deployment of emergency tools must eventually be unwound, and any exit strategy is fraught with significant risks of its own. Of themselves, rock-bottom interest rates, suspension of reserve requirements, and endless fiat money created via novel asset purchases are decidedly not wealth creation. Furthermore, a strong case can be made that such actions in the past have exacerbated economic risk and actually harmed the Creation of Wealth in the long run through moral hazard, distortion of intertemporal exchange, and abetting systematic malinvestment.
The same considerations hold true with fiscal policy. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes this curious label for Title 1: “Keeping American Workers Paid and Employed Act.” Why is it curious? Because the word “paid” is superfluous—or at least it should be. Although there is undoubtedly a humanitarian motive underlying the desire to keep American workers “paid,” simply paying workers is not wealth creation any more than printing money is. Indeed, no amount of emergency loans to businesses, relief checks to the unemployed, or bailouts for other entities creates wealth.
The Creation of Wealth requires actual productive activity. A rapid-fire fiscal spending binge, no matter how well-intended, is ripe for crony capitalism and special interest rent-seeking at the expense of future generations. Reasonable people can debate the propriety and effectiveness of various monetary and fiscal attempts to mitigate the tremendous economic damage triggered by a pandemic. But no reasonable person can equate fiat money creation or fiat paychecks with wealth creation.
Finally, consider the principle of Economic Value. Economic Value is inherently subjective—and distinct, though not necessarily separate, from objective moral value. Economic Value, as we ordinarily conceive of it, arises in the marketplace of exchange and is measured through the price system. Macroeconomic statistics such as the GDP measure the productive activity taking place in the economy and thereby measure Economic Value in the aggregate. But this does not imply that human flourishing is fully captured by these macroeconomic statistics. The surge in unemployment and corresponding nosedive in GDP is inflicting real human costs, just as the coronavirus is.
Nevertheless, it is important to recognize that not all Economic Value is priced in the marketplace. Human solidarity, serving one another without an expectation of compensation or reciprocal exchange, and spending more time with family are also manifestations of Economic Value that are never captured by macroeconomic statistics. One excellent example of this is retired healthcare workers volunteering to fight the coronavirus—many of whom will not be paid. Though the heroic actions of unpaid volunteers will not be captured in the employment and GDP statistics, those volunteers are generating true Economic Value in service to their fellow citizens.
The coronavirus’s human toll is already immense, and it remains to be seen how much additional economic damage the pandemic will cause. Epidemiologists know that the coronavirus is best fought on the basis of a sound understanding of the science of virology. Likewise, the economic fallout is best averted on the basis of a sound understanding of economic principles. Acton’s Core Principles of Creation of Wealth, Economic Liberty, and Economic Value are an excellent place to start.
(Photo credit: Treasury Secretary Steve Mnuchin gives a press conference on the economic stimulus in response to COVID-19. The White House. This photo has been cropped. Public domain.)