Elon Musk dropped an economic truth bomb on Joe Rogan’s podcast a couple of months ago.
“If you don’t make stuff, there’s no stuff.”
Obvious? You’d think so. But, as Musk pointed out, our economic policies throughout the COVID-19 pandemic have ignored that simple truth.
The prevailing assumption is that the government can press “pause” on the economy throughout the pandemic, throwing millions out of work, and then simply tide everyone over with relief checks.
“This notion,” said Musk, “that you can just sort of send checks out to everybody and things will be fine is not true.”
“They’ve become detached from reality,” he added. “You can’t just legislate money and solve these things.”
Musk’s point is indisputable. Government checks are only valuable to the extent that there is enough actual “stuff” (goods and services) available for those dollars to buy. The more you lock down production, the more our stock of “stuff” will shrink, and the more our living standards will worsen. No amount of zeros added to those government checks can change that.
When “stuff” dwindles, printing government checks cannot magically reverse that impoverishment. It can only do two things:
- Shift who gets impoverished by redistributing wealth (that is, access to the remaining “stuff”), and
- Delay the drop in living standards by enabling higher consumer spending.
Higher consumer spending means burning through our remaining “stuff” faster instead of investing it in production. This means even less “stuff” down the road.
It’s like if you lost your job and cheer yourself up by splurging on an expensive new TV. Government checks merely make us feel less poor by inducing us to further impoverish ourselves in reality. It postpones the pain today by condemning us to much greater pain tomorrow.
America has a lot of “stuff” to shift around and burn through, so we can delay the pain of impoverishment for quite a while. The same cannot be said for poor countries, however. People there have so little “stuff” that they feel the pain of production lockdowns immediately.
“If you don’t make the food,” Musk warned months ago, “if you don’t process the food, you don’t transport the food... there’s no stuff.”
And now, for hundreds of millions of people around the world, the stark truth of that statement is manifesting as empty stomachs and ruined lives.
According to
a new report
from World Vision, a global humanitarian organization, as many as 110 million children in Asia alone are facing hunger, and 85 million households across Asia have little or no food stocks as a result of the economic impact of COVID-19 and the lockdowns.
The report also found that as many as eight million children in Asia are being exposed to begging, child labor, and child marriage since parents are unable to buy food in the wake of the coronavirus pandemic.
“Our rapid assessments in countries across Latin America, Sub-Saharan Africa, and Asia show that it’s clear we are on the cusp of a catastrophe for children,” said Norbert Hsu, World Vision’s partnership leader for global impact. “Without urgent action we risk an increase in extreme
poverty
and hunger not seen for decades.”
World Vision’s numbers are no outlier. Similar figures were
recently reported
by the World Bank.
Hsu doesn’t explain precisely what “urgent action” should be taken. It wouldn’t be surprising if it involved massive amounts of foreign aid, the usual remedy prescribed by such organizations.
But international “relief” is not a real solution for them, any more than domestic “relief” is for us. As Musk said, “You can’t just legislate money and solve these things.”
To meet these massive problems without making them worse, we need to come to grips with economic reality: especially the concept of
scarcity
, and how it pertains to production and money.
Only then will we fully understand just what we are setting ourselves up for by locking down the economy indefinitely to combat the pandemic. Only then will we be able to make truly informed judgments about the trade-offs involved.
The crisis facing the global poor is a heart-rending tragedy. It is also an ominous warning, the proverbial canary in a coal mine.
If we keep burning through our “stuff” faster than we’re replacing it, we will eventually descend into an economic crisis that dwarfs what we have been through so far, and our fraying social fabric may not be able to handle it.
Like gravity, scarcity can be denied, but it cannot be defied.
“If you don’t make stuff, there’s no stuff.”
The U.S. economic outlook has darkened in the past month amid renewed lockdowns in some states from surging coronavirus cases, according to economists in a Reuters poll who warned of a high risk the job recovery underway reverses by year-end.
U.S. coronavirus cases approached 4 million on Thursday, with over 2,600 new cases every hour on average, the highest rate in the world, and some state governments have reimposed restrictions aimed at curbing the spread of the virus.
That has raised concerns about the sustainability of the recent rebound in hiring and other economic data, as the world’s largest economy, which was propping up global growth before the pandemic, climbs out of a deep hole.
The July 13-22 poll showed the economy contracted 33.8% last quarter on an annualised basis but while it was expected to bounce back with 17.8% growth this quarter and expand 6.5% in the following three months, that was weaker than the 18.5% and 8.0% respective growth predictions made a month ago...
Goldman recently lowered its Q3 growth forecast to 25%, still well above the poll median, from 33% previously. Several banks have reduced their Q3 forecasts in succession in recent months.
In the latest poll, a majority either downgraded or left their forecasts unchanged from last month, with the magnitude on average of those downgrades much bigger than the upgrades, disputing the “V”-shaped recovery expected by financial markets.
Asked for the worst-case scenario for the world’s largest economy, the median response was for a 40.4% contraction in Q2, no growth in the following two quarters, a 9.0% contraction in 2020 and no growth in 2021.
The wider poll suggested weaker growth next year, with medians downgraded for the first half of 2021 compared with the June poll.
Nearly two-thirds of economists, or 35 of 56 who responded to an additional question, said it would take two or more years for the U.S. economy to reach its pre-COVID-19 levels. The others said it would take place in one to two years, with no respondent predicting it to take less than a year.
Following an unprecedented amount of monetary easing and fiscal spending, discussions about additional government measures are underway.
In the meantime, the Federal Reserve is expected to keep the federal funds rate unchanged at a record low of 0-0.25% until at least 2023. Forecasts for all measures of inflation barely changed in the latest Reuters poll.
“Even as the Fed maintains its ultra-loose policy stance and Congress provides further fiscal support, ongoing social distancing requirements are likely to keep GDP well below its pre-virus trend and the unemployment rate elevated over the coming years,” said Paul Ashworth, chief U.S. economist at Capital Economics.
All but one of 60 economists said the outlook for the strength of the U.S. economic recovery had either remained about the same or worsened over the past month.
Nearly 60%, or 32 of 56 economists, said the risk the job recovery underway reverses by the end of this year was high or very high. Twenty-three said the risk was low, while only one said it was very low.
“Epidemiologists believe there is a strong likelihood of a second wave of infections in the fall/early winter. This is a typical pattern for respiratory infections,” said Daniel Bachman, senior U.S. economist at Deloitte, who forecasts a renewed contraction in the fourth quarter, by 9.8%, the most pessimistic view in the poll.
“It’s not certain such a second wave will occur - but if it does, we believe this could suppress economic activity and give us a negative fourth quarter. Since the epidemiological analysis has the second wave as likely, we include it as an assumption in our baseline forecast.”
