By Noah Dawson
Maybe I just watched too much Star Trek as a kid, but I’m generally an optimist. I like to believe in the goodness of humans and I’m a strong critic of modern popular misanthropy. As such, I tend to have a propensity against fear mongering and panic. Still, I must admit the truth: the economy is sick. The COVID-19 sickness afflicting humanity is currently triggering an economic downturn, but the roots run far, far deeper than that, and I worry that we are about to see an economy worse than we have seen in decades.
First, let’s touch on some of the economic issues specifically relating to the COVID-19 pandemic. To begin, I feel the need to clarify a point that many are getting wrong. The panic buying/hoarding of goods is not irrational, strictly speaking. It is stupid, it is short sighted, but it most certainly is not an example of people acting irrationally. To explain, we must understand what classical economists meant by the assumption of rationality, which is the assumption most economy theory is based on. In colloquial usage, the term “ration” does indeed offer up connotations of intelligence and good decision making, but in the technical usage, it simply means that an agent is choosing their actions based on what they believe will best accomplish their self selected ends, with the ultimate end being what is often called happiness, or, as Mises put it in ‘Human Action,’ “strictly speaking the end, goal, or aim of any action is always the relief from a felt uneasiness.” This definition of rational does not imply that the means chosen will actually be the most effective possible ends to achieve the sought after end, nor does it mean that the ends chosen will actually be the most effective possible ends to achieve the ultimate end. In fact, it does not even mean that the means chosen will ever accomplish the ends sought after. So, when shoppers in a panic buy large quantities of toilet paper, they are doing so because they believe that having toilet paper will relieve the uneasiness of a lack of toilet paper and that panic buying large quantities is the best available option to achieve that end. Still, I expect to continue hearing from ignorant modern-day hipster ‘economists’ that the fundamental assumption of rationality must be questioned.
Now if my pedantry about the technical use of economic terms hasn’t already given the reader a disdain for me, there is still hope my next argument might: We desperately need to repeal laws against “price-gouging,” which are better described as “price-fixing” laws or “laws against economics.” Though the recent waves of panic buying are indeed stupid, the fact remains that there is currently a massive increase in demand for numerous goods. In a typical market model, supply is upward sloping and demand is downward sloping on a graph where price is the vertical axis and quantity is the horizontal axis. Where the two meet is the equilibrium price and quantity. When demand increases, the demand curve translates to the right, moving the equilibrium price and quantity up. However, if laws are put into place artificially suppressing the market price to the original equilibrium price, the quantity supplied will remain the same as the initial equilibrium quantity and the quantity demanded will actually surpass even the new and higher quantity demanded. With quantity supplied now being lower than quantity demanded, a shortage occurs. If no price fixing measures are in place, the quantity supplied and demanded will be in harmony at equilibrium. The increase in price further acts as a signal to producers to increase supply to meet demand, the price will begin to fall again. Without such a price signal in place, producers may still try to increase supply due to the obvious market demand, but it will necessarily be less efficient than if the price signal were accurate. This is in fact a small-scale version of the inefficiencies that plague centrally planned economies.
Of course, with these discussions inevitably come discussions of hoarders attempting to buy up local supply in anticipation of increased market demand in order to engage in monopolistic behavior. Here, I think it’s worth noting that such activity is stupid, irresponsible, and even a bad investment. To begin with, such activity does great harm to one’s public image, meaning that even if any short term gains are made, they will likely not overcome the lifetime of lost opportunities brought by a tarnished public perception. This is seen today with images of hoarders being shared virally all over the internet. Even ignoring this aspect of this issue, it’s still a bad investment. With any investment comes risk, and with this particular investment, I personally feel the rewards do not merit the taking on of the risk associated. In this case, the risk is that producers will not increase competing supply before all enough merchandise is sold to cover the lost profits of selling at competitive prices. To successfully navigate such risks involves having a working knowledge of all of the supply lines of the merchandise being hoarded and the exact nature of the spike in demand. For anyone who is able to navigate that risk, there are much more rewarding investments to be made that don’t involve a tarnished public image.
But let’s look at the wider picture. We are, in my view, experiencing the beginning phases of a large market correction. The economy had been good for the last few years, but it was also, like is usually the case, too good to be true. Following the housing crash of 2007, the Federal Reserve lowered interest rates to zero. Then they kept it at zero. They finally began to slowly raise the target rate at the end of 2015, but it never got back to pre-recession levels. The economy of the last decade has been riding a wave of easy credit, and a correction has been due for some time. Add to that the spending policies of the current and previous administrations, and the picture becomes clear. There is a lot of wealth in the economy today that is illusory. Almost a year ago, we received a sobering reminder of what is to come, when 10 year and 3 month treasury bond yields inverted. Such inversions tend to be harbingers of recession, usually occurring about one year ahead of recession. Here we are. One year later.
But things get worse. Already, the Fed has cut interest rates back to zero. The Trump administration is even entertaining the possibility of bailouts, including potentially giving everyone a $1,000 check to stimulate the economy. What will the Fed and the government try next as conditions worsen? It seems inevitable that they will have to resort to even more drastic measures than what was done in 2008, and the drastic measures then are what set us up for this downturn. When the economy eventually recovers, it will only be a matter of time before the next bigger dip. Unless we drastically change the way we handle economic downturns, this cycle of deeper and deeper recessions may continue well into the future, until we reach a point where we can’t dig ourselves out of the hole.
I hope it does not come to that. I have confidence we can overcome this, but that might just be my naive optimism.
Provided