To get out of this pit, we’re gonna have to think like central planners
In the space of a few weeks, Australia transformed into a command economy.
Businesses are told whether or not they can open and how they should operate, consumers are subject to formal and informal rationing, workers are encouraged to stay home or, in the case of teachers, to report until. ‘now regardless of the risk.
All of this is taking place in the context of what is supposed to be a market economy, where businesses are supposed to live or die depending on their ability to meet the needs of consumers, and where the unemployed are supposed to find jobs or live. poverty.
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The economy we thought we were living in is one in which individual issues are dealt with on a case-by-case basis, without anything remotely resembling an overall plan.
Over the next two weeks at least, as the economy lockdown is complete, policy will be crafted as it goes.
But then, it will be time to think about the future and how we will deal with the consequences of the managed economy that we have created. We are unlikely to be able to return to the economy that existed a month ago.
Indeed, the catastrophic bushfire season, now driven from our minds by COVID-19, has demonstrated that we cannot continue as we have.
Economists think like planners
In thinking about how to deal with the crisis in the medium term, it helps to adopt the perspective of a central planner.
Surprisingly, perhaps, this is something economists do on a regular basis, even though almost none of us support comprehensive central planning.
The idea, when faced with an economic problem like unemployment, is to ask how a fully informed and purely benevolent social planner could deal with it. (To avoid arguing over comparative systems, economists most often prefer the term “social planner” to “central planner”)
No omniscient and benevolent planner exists or is likely to be, but we can use the ideal planned solution as a benchmark against which to compare market results.
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A famous conclusion of mainstream economics, with the grandiose title of the second fundamental theorem of welfare economics, asserts that under ideal conditions and with the right initial distribution of property rights, perfectly competitive markets can reproduce any outcome that could be chosen by a social planner.
But, like omniscient and benevolent social planners, perfectly competitive markets do not exist in reality. Economic analysis therefore consists of comparing the results of the market to the unattainable ideal of the perfect social planner, and then considering policy changes that may bring the economy closer to the ideal.
How would a planner think
How might a social planner respond to the COVID-19 crisis and the lockdowns it necessitated?
The planner would start with an assessment of the resources available to the community and the technology available, which in turn would determine the set of goods and services that could be produced.
After selecting a particular set of goods and services, the planner would decide who should get them, subject to various constraints of feasibility and equity.
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In this way of thinking, the need for lockdown in response to COVID-19 represents a step backwards in technology, making it impossible for the economy to produce services like dining and travel.
As a result, the planner is faced with a number of issues.
First, what can be produced in place of these lost services? We can think of examples like take out instead of dining out and teleconferencing instead of travel. These replacements will help partially offset the shock of the lockdown, but not completely.
Next, the planner must consider the workers and input suppliers who produce the lost services.
Can they be reused elsewhere in the economy? And if yes, how? Assuming the lockdown will last for months rather than years, it seems likely that only limited redeployment will be possible.
Who should bear the losses?
However, some sectors of the economy, such as international travel, are likely to be significantly reduced in the years to come. Subsectors like cruises may never recover. In this case, workers and resources must move to other areas of production.
The final and most critical question for the planner is: who should bear the loss associated with the crisis?
In a market economy, those outside the affected industry have to do without restaurant meals and other services, but can move their spending elsewhere or save and spend it later. The loss is borne by workers who lose their jobs and employers who go bankrupt.
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A social planner would like to distribute the losses more evenly.
In the absence of the ideal social planner, the options available to policymakers fall into three broad categories
unemployment benefits and business assistance, which require resource transfers from the rest of the community (unlike a normal recession, the unemployed cannot be easily mobilized)
requirements for private creditors such as banks and landlords to remit or defer payments
public ownership of businesses, staff retention and operating at a loss, which must be supported by the community as a whole
To get the mix right, we need to take the time after the immediate crisis to think about what a planner would do.
John Quiggin’s latest book is called Economics in Two Lessons: Why Markets Work So Well and How They Can Fail So Bad.